Business context and reporting period
Deluxe Corporation filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2020. Its four reportable segments are Payments, Cloud Solutions, Promotional Solutions and Checks. Results were significantly affected by COVID-19, particularly lower demand in Promotional Solutions, Checks and Cloud Solutions.
Key financial metrics
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $410.4 | $494.0 | $896.8 | $993.1 |
| Gross profit / margin | $248.1 / 60.5% | $291.5 / 59.0% | $532.5 / 59.4% | $590.9 / 59.5% |
| Operating income (loss) | $24.3 | $51.8 | $(36.5) | $115.6 |
| Net income (loss) attributable to Deluxe | $14.9 | $32.6 | $(45.3) | $73.8 |
| Diluted EPS | $0.35 | $0.75 | $(1.10) | $1.68 |
| Adjusted diluted EPS (non-GAAP) | $1.15 | $1.64 | $2.24 | $3.18 |
| Adjusted EBITDA / margin (non-GAAP) | $83.8 / 20.4% | $117.5 / 23.8% | $167.2 / 18.6% | $231.2 / 23.3% |
| Operating cash flow | Not separately stated | Not separately stated | $109.6 | $105.1 |
| Free cash flow (non-GAAP) | Not separately stated | Not separately stated | $82.6 | $72.8 |
At June 30, cash and cash equivalents were $372.0 million and long-term debt was $1.14 billion. Shareholders’ equity was $485.3 million. The company reported only $4.6 million of net borrowing availability under its $1.15 billion revolving facility at quarter-end, after letters of credit. In July, it repaid $100 million, bringing reported availability to $104.6 million and debt to approximately $1.04 billion.
Material changes versus the prior comparable period
- Q2 revenue declined 16.9% year over year; first-half revenue fell 9.7%. The company attributed the declines mainly to pandemic-related volume reductions, alongside ongoing secular declines in checks and forms and lower web-hosting revenue.
- Segment Q2 revenue was Payments $72.2 million (+12.6%), Cloud Solutions $53.9 million (−31.7%), Promotional Solutions $117.9 million (−24.2%) and Checks $166.4 million (−14.9%). Payments growth reflected treasury management wins; Promotional Solutions included $26 million of PPE sales.
- Q2 adjusted EBITDA declined 28.7%, while its margin fell 3.4 percentage points. First-half adjusted EBITDA declined 27.7%, and its margin fell 4.7 points. Adjusted metrics are non-GAAP and exclude specified items.
- First-half results included $95.2 million of asset impairment charges, principally goodwill and other assets in Promotional Solutions and Cloud Solutions. This contributed to the first-half GAAP net loss.
- Debt increased by $256.5 million from year-end, following a $238 million March draw on the revolving facility in response to pandemic uncertainty. First-half financing cash flow also reflected reduced share repurchases.
Outlook, management commentary, risks and unusual items
- Deluxe withheld detailed 2020 financial guidance, citing significant uncertainty. Management anticipated a slight revenue improvement in the second half compared with Q2, absent worsening economic impacts.
- Management expected Payments to grow year over year, with some margin pressure from client onboarding; Cloud Solutions revenue to continue declining with a possible later-year recovery; Promotional Solutions to remain highly exposed to the downturn; and Checks to partially track economic recovery before returning to secular declines in 2021.
- COVID-19 effects remained uncertain, with potential further revenue deterioration, bad-debt expense, asset impairment and liquidity impacts. The company said additional impairment charges could be required. It reported $59.1 million of distributor loans and notes receivable, with an $11.7 million expected-credit-loss allowance; a significant portion of the 2020 bad-debt expense related to an underperforming distributor.
- Management said operating cash, cash on hand and credit-facility availability were expected to support operations and commitments for the next 12 months, and reported compliance with debt covenants at June 30 and expected ongoing compliance. The facility requires a maximum leverage ratio of 3.5 and minimum interest-coverage ratio of 3.0; covenant headroom was not clearly quantified in the filing.
- Cost actions included temporary salary reductions, furloughs, project delays and facility closures. Salary reductions ended July 1; about 250 employees were exited in late June. Closure of 20 facilities was expected to generate approximately $6 million in annual savings once complete. The company expected most severance payments by year-end.
- The regular quarterly dividend was approved for payment in September 2020, but future dividends remain subject to board approval. Share repurchases were suspended for Q2, with lower repurchases planned for 2020. Legal liabilities and known environmental indemnification liabilities were described as not material, though litigation outcomes remain uncertain.
Most important facts for investors to verify
- Whether the anticipated second-half recovery materialized, particularly in Promotional Solutions, Cloud Solutions and Checks, and how much PPE revenue was temporary.
- Whether operating cash flow remains adequate after temporary pandemic measures and deferred federal tax payments; first-half cash flow benefited from CARES Act tax-payment delays.
- Available borrowing capacity after the July repayment, covenant compliance and headroom, and the company’s ability to refinance or meet obligations as the facility approaches its March 2023 maturity.
- Whether distributor credit losses or COVID-related asset impairment assumptions require additional charges.
- The extent to which restructuring, facility closures and strategic investments deliver expected savings without impairing service or growth.