DELUXE CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) includes the following sections:
•Executive Overview that discusses what we do, our operating results at a high
level and our financial outlook for the upcoming year;
•Consolidated Results of Operations; Restructuring, Integration and Other Costs;
and Segment Results that includes a more detailed discussion of our revenue and
expenses;
•Cash Flows and Liquidity, Capital Resources and Other Financial Position
Information that discusses key aspects of our cash flows, financial commitments,
capital structure and financial position; and
•Critical Accounting Estimates that discusses the estimates that involve a
significant level of uncertainty and have had or are reasonably likely to have a
material impact on our financial condition or results of operations.
Please note that this MD&A discussion contains forward-looking statements that
involve risks and uncertainties. Part I, Item 1A of this report outlines known
material risks and important information to consider when evaluating our
forward-looking statements. The Private Securities Litigation Reform Act of 1995
(the "Reform Act") provides a "safe harbor" for forward-looking
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statements to encourage companies to provide prospective information. When we
use the words or phrases "should result," "believe," "intend," "plan," "are
expected to," "targeted," "will continue," "will approximate," "is anticipated,"
"estimate," "project," "outlook," "forecast" or similar expressions in this
Annual Report on Form 10-K, in future filings with the Securities and Exchange
Commission , in our press releases, investor presentations and in oral statements
made by our representatives, they indicate forward-looking statements within the
meaning of the Reform Act.
This MD&A includes financial information prepared in accordance with accounting
principles generally accepted in the U.S. ("GAAP"). In addition, we discuss free
cash flow, net debt, liquidity, adjusted diluted earnings per share (EPS) and
consolidated adjusted earnings before interest, taxes, depreciation and
amortization (EBITDA), all of which are non-GAAP financial measures. We believe
that these non-GAAP financial measures, when reviewed in conjunction with GAAP
financial measures, can provide useful information to assist investors in
analyzing our current period operating performance and in assessing our future
operating performance. For this reason, our internal management reporting also
includes these financial measures, which should be considered in addition to,
and not as superior to or as a substitute for, GAAP financial measures. We
strongly encourage investors and shareholders to review our financial statements
and publicly-filed reports in their entirety and not to rely on any single
financial measure. Our non-GAAP financial measures may not be comparable to
similarly titled measures used by other companies and therefore, may not result
in useful comparisons. The reconciliation of our non-GAAP financial measures to
the most directly comparable GAAP financial measures can be found in
Consolidated Results of Operations.
Revision - During the second quarter of 2021, we identified errors in the
calculations of the goodwill impairment charges recorded during the third
quarter of 2019 and the first quarter of 2020, resulting in an understatement of
the goodwill impairment charges and net losses and an overstatement of goodwill.
The errors in our calculations resulted from the erroneous application of the
simultaneous equation method, which effectively grosses up the goodwill
impairment charge to account for the related income tax benefit, so that the
resulting carrying value does not exceed the calculated fair value. We have
corrected the errors by revising the consolidated financial statements presented
herein. Further information regarding the errors can be found under the caption
"Note 1: Significant Accounting Policies" of the Notes to Consolidated Financial
Statements appearing in Part II, Item 8 of this report.
EXECUTIVE OVERVIEW
Recent acquisition - On June 1, 2021 , we acquired all of the equity of First
American Payment Systems, L.P. (First American) in a cash transaction for $958.5
million , net of cash, cash equivalents, restricted cash and restricted cash
equivalents acquired, subject to customary adjustments under the terms of the
acquisition agreement. First American is a large-scale payments technology
company that provides partners and merchants with comprehensive in-store, online
and mobile payment solutions. The results of First American are included in our
Payments segment and included revenue of $195.0 million and a contribution of
$39.1 million to Payments adjusted EBITDA for 2021. The acquisition was funded
with cash on hand and proceeds from new debt. Further information regarding the
acquisition can be found under the caption "Note 6: Acquisitions" and further
information regarding our debt can be found under the caption "Note 14: Debt,"
both of which appear in the Notes to Consolidated Financial Statements appearing
in Part II, Item 8 of this report.
COVID-19 impact - The COVID-19 pandemic began to impact our operations late in
the first quarter of 2020. While we believe revenue in 2020 benefited from
sales-driven growth, it was not sufficient to overcome the impact of the
pandemic, which negatively affected volumes for our Promotional Solutions
promotional products, personal and business checks and Cloud Solutions
data-driven marketing solutions. Despite the challenges of the pandemic,
adjusted EBITDA margin for 2020 was 20.4%, in line with our annual expectations
prior to the pandemic.
The impact of the pandemic continued in the first quarter of 2021 and was the
main driver of the 9.3% decrease in revenue, as compared to the first quarter of
2020. During the remainder of 2021, we saw some recovery in revenue volumes as
the impacts of the pandemic lessened and our customers resumed some of their
marketing and promotional activities as government restrictions were lifted and
vaccines became widely available. Also contributing to the increase in
data-driven marketing revenue was the continuation of low interest rates and an
improving credit risk environment, which drove increased marketing efforts by
our banking and mortgage lending customers. Business check volumes also
continued to recover and within Payments, we resumed many of our new customer
implementations that had been delayed, in part, due to impacts of the pandemic.
Despite the continuing challenges of the pandemic, net income improved for 2021,
as compared to 2020, and adjusted EBITDA margin for 2021 remained strong at
20.2%. Future impacts of the pandemic on our results of operations remain
uncertain, as increases in infection rates and/or new variants of the virus
could impact our customers' activities and our revenue volumes. Impacts of the
COVID-19 pandemic on our supply chain have not had a significant impact on our
results of operations to-date. However, with recent stresses on the global
supply change and labor market, we can provide no assurance that we would be
able to obtain alternative sources of supply if one of our vendors was unable to
perform or that an alternative source of supply could be obtained at current
prices. During 2021, we experienced inflationary pressures on hourly wages,
materials and delivery as a result of economic conditions. We implemented
targeted price increases in all of our segments late in 2021 in response to the
inflationary pressures.
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Cash flows and liquidity - Cash provided by operations remained strong in 2021,
decreasing only $6.7 million , as compared to 2020, despite increased investments
in software-as-a-service (SaaS) solutions we are utilizing throughout the
company, including a new enterprise resource planning system, as well as a $23.8
million increase in interest payments related to debt issued to complete the
First American acquisition, $18.9 million of transaction costs related to the
acquisition, the continued secular decline in checks and business forms, and
temporary actions taken in 2020 to maintain liquidity at the onset of the
COVID-19 pandemic. We were able to substantially offset these impacts through
the contribution of First American's operations, some recovery of the 2020
volume declines driven by the COVID-19 pandemic, numerous cost savings actions
and a reduction in restructuring and integration costs. Free cash flow for 2021
decreased $53.2 million , as compared to 2020, reflecting a $46.5 million
increase in purchases of capital assets, as we continued investments to support
our long-term growth, including technology platform modernization initiatives.
Total debt as of December 31, 2021 was $1.68 billion , reflecting the additional
debt we incurred in the second quarter of 2021 to complete the First American
acquisition. During the second half of 2021, our strong cash flow and the
repatriation of cash from our Canadian subsidiaries allowed us to complete net
debt repayments of $152.9 million . Net debt as of December 31, 2021 was $1.64
billion . We held cash and cash equivalents of $41.2 million as of December 31,
2021 , and liquidity was $403.9 million . Our capital allocation priorities are to
responsibly invest in growth, pay our dividend, reduce debt and return value to
our shareholders. We will continue to evaluate share repurchases on an
opportunistic basis.
2021 results vs. 2020 - Numerous factors drove the increase in net income for
2021, as compared to 2020. The primary factor was a decrease in pretax asset
impairment charges of $101.7 million , as compared to 2020. Other factors that
increased net income included:
•revenue growth from new business in all of our segments, reflecting the success
of our One Deluxe strategy, as well as some recovery from the impacts of the
COVID-19 pandemic;
•actions taken to reduce costs as we continually evaluate our cost structure;
•a
•an
Partially offsetting these increases in net income were the following factors:
•the continuing secular decline in checks, business forms and some Promotional Solutions business accessories, as well as the 2020 decision to exit certain product lines within Cloud Solutions;
•a
•increased investments in our growth, primarily costs related to sales and financial management tools;
•an increase in acquisition amortization of
•acquisition transaction costs of
•a year-over-year impact of approximately$15.0 million from temporary actions taken in response to the COVID-19 pandemic in 2020, including savings from a temporary salary reduction, furloughs and other actions, net of incremental costs we incurred in 2020 related to our response to the pandemic;
•inflationary pressures on hourly wages, materials and delivery; and
•additional income tax expense of
Diluted EPS of$1.45 for 2021, as compared to$0.11 for 2020, reflects the increase in net income as described in the preceding paragraphs, partially offset by higher average shares outstanding in 2021. Adjusted diluted EPS for 2021 was$4.88 , compared to$5.08 for 2020, and excludes the impact of non-cash items or items that we believe are not indicative of our current period operating performance. The decrease in adjusted diluted EPS was driven primarily by the continuing secular decline in checks, business forms and some business accessories; the increase in interest expense resulting from debt issued to complete the First American acquisition; increased investments in our growth, primarily costs related to sales and financial management tools; the benefit in the prior year of temporary actions taken in response to the COVID-19 pandemic; inflationary pressures on hourly wages, materials and delivery; and tax expense related to the repatriation of cash from our Canadian subsidiaries. These decreases in adjusted EPS were partially offset by the contribution from First American, as adjusted diluted EPS excludes the associated acquisition amortization of$29.5 million for 2021. In addition, adjusted diluted EPS benefited from the impact of new business in all of our segments, some recovery from the impacts of the COVID-19 pandemic, various cost savings actions across 26 -------------------------------------------------------------------------------- functional areas, price increases in response to the current inflationary environment and lower bad debt expense for 2021. A reconciliation of diluted earnings (loss) per share to adjusted diluted EPS can be found in Consolidated Results of Operations. Asset impairment charges - Net income for 2020 included asset impairment charges of$101.7 million , or$1.53 per diluted share. The impairment charges related primarily to the goodwill of our Promotional Solutions and Cloud Solutions Web Hosting reporting units, as well as certain intangibles in our Cloud Solutions Web Hosting reporting unit, and resulted primarily from the estimated impacts of the COVID-19 pandemic on our results of operations. Net loss for 2019 included asset impairment charges of$421.1 million , or$8.49 per diluted share. These impairment charges related to the goodwill of our former Small Business Services Web Services and Financial Services Data-Driven Marketing reporting units, as well as certain intangibles, primarily in our former Small Business Services Web Services reporting unit. Further information regarding these impairment charges can be found under the caption "Note 8: Fair Value Measurements" in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report and in Critical Accounting Policies.
"One Deluxe" Strategy
A detailed discussion of our strategy can be found in Part I, Item 1 of this report. We continue to be encouraged by the success of our One Deluxe strategy. We have made significant progress in the integration of our various technology platforms, developed an enterprise-class sales organization, assembled a talented management team, and built an organization focused on developing new and improved products. As a result, we are seeing the positive impact of new client wins in all of our segments and we determined that we were positioned to augment our business through meaningful acquisitions. As such, we completed the acquisition of First American onJune 1, 2021 . We believe that First American's end-to-end payments technology platform is providing significant leverage that will continue to accelerate organic revenue growth.
Outlook for 2022
We expect revenue to increase 8% to 10% for 2022, including a full year of revenue from First American, as compared to 2021 revenue of$2.02 billion , and we expect that adjusted EBITDA margin for 2022 will be approximately 20.0%, as compared to 20.2% for 2021. We expect that our adjusted EBITDA margin for the first quarter of the year will be lower, with improving margins as the year progresses, primarily driven by the timing of certain employee benefit costs and seasonality for some of our products and services. These estimates are subject to, among other things, the macroeconomic unknowns associated with the COVID-19 pandemic, including the Omicron variant, as well as anticipated continued supply chain constraints, labor supply issues and inflation. As ofDecember 31, 2021 , we held cash and cash equivalents of$41.2 million and$362.6 million was available for borrowing under our revolving credit facility. We anticipate that capital expenditures will be approximately$105.0 million in 2022, as compared to$109.1 million for 2021, as we continue with important innovation investments and building scale across our product categories. We also expect that we will continue to pay our regular quarterly dividend. However, dividends are approved by our board of directors each quarter and thus, are subject to change. We anticipate that net cash generated by operations, along with cash and cash equivalents on hand and availability under our credit facility, will be sufficient to support our operations, including our contractual obligations and debt service requirements, for the next 12 months. We were in compliance with our debt covenants as ofDecember 31, 2021 , and we anticipate that we will remain in compliance with our debt covenants throughout 2022. CONSOLIDATED RESULTS OF OPERATIONS Consolidated Revenue Change (in thousands) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019 Total revenue$ 2,022,197 $ 1,790,781 $ 2,008,715 12.9% (10.8%) The increase in total revenue for 2021, as compared to 2020, was driven, in part, by the First American acquisition, which contributed revenue of$195.0 million for 2021. In addition, revenue benefited from new clients in all of our segments, reflecting the success of our One Deluxe strategy, and we experienced some recovery of volume declines resulting from the impact of the COVID-19 pandemic, as discussed in Executive Overview. Also contributing to the revenue increase was increased data-driven marketing revenue within Cloud Solutions, resulting in part, from the continuation of low interest rates and an improving credit risk environment, which drove increased marketing efforts by our banking and mortgage lending customers. Revenue also benefited from price increases in response to the current inflationary environment, primarily in our Checks and Promotional Solutions segments. Partially offsetting these increases in revenue was the continuing secular decline in order volume for checks, business forms and some business accessories, and sales of personal protective equipment (PPE) decreased 27 --------------------------------------------------------------------------------
approximately
The decrease in total revenue for 2020, as compared to 2019, was driven primarily by volume declines resulting from the impact of the COVID-19 pandemic, primarily in our Promotional Solutions, Checks and Cloud Solutions segments. In addition, revenue continued to be impacted by the secular decline in order volume for checks and business forms. Cloud Solutions web and hosted solutions revenue also declined, due to our decision in the third quarter of 2019 to exit certain customer contracts, the loss of certain large customers in the third quarter of 2019 as they elected to in-source certain of the services we provide, and more recent decisions to exit certain product lines. These decreases in revenue were partially offset by growth of 16.8% in treasury management revenue within our Payments segment, driven primarily by lockbox processing outsourcing deals signed in the fourth quarter of 2019 and new client wins. We also generated new revenue of$31.0 million from sales of PPE in the Promotional Solutions segment in 2020. In addition, revenue benefited from new data-driven marketing campaigns and growth in pay-for-performance marketing campaigns in our Cloud Solutions segment prior to the commencement of the COVID-19 pandemic. Service revenue represented 38.5% of total revenue in 2021, 31.3% in 2020 and 29.8% in 2019. We do not manage our business based on product versus service revenue. Instead, we analyze our revenue based on the product and service offerings shown under the caption "Note 18: Business Segment Information" in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report. Our revenue mix by business segment was follows: 2021 2020 2019 Payments 25.2 % 16.9 % 13.4 % Cloud Solutions 13.0 % 14.1 % 15.9 % Promotional Solutions 27.0 % 29.6 % 31.9 % Checks 34.8 % 39.4 % 38.8 % Total revenue 100.0 % 100.0 % 100.0 % Consolidated Cost of Revenue Change (in thousands) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019 Total cost of revenue$ 884,270 $ 730,771 $ 812,935 21.0% (10.1%) Total cost of revenue as a percentage of total revenue 43.7 % 40.8 % 40.5 % 2.9 pt. 0.3 pt. Cost of revenue consists primarily of raw materials used to manufacture our products, shipping and handling costs, third-party costs for outsourced products and services, payroll and related expenses, information technology costs, depreciation and amortization of assets used in the production process and in support of digital service offerings, and related overhead. The increase in total cost of revenue for 2021, as compared to 2020, was driven, in part, by the additional costs resulting from the First American acquisition of$116.3 million , including acquisition amortization, as well as the increase in revenue resulting from new client wins in all of our segments and some recovery of volume declines driven by the impact of the COVID-19 pandemic. In addition, we experienced inflationary pressures on hourly wages, materials and delivery, and the mix of data-driven marketing clients also impacted total cost of revenue. Partially offsetting these increases in total cost of revenue were reduced revenue volumes from the continuing secular decline in checks, business forms and some business accessories, as well as the decline in PPE revenue volume in 2021 and our 2020 decision to exit certain product lines within Cloud Solutions' web and hosted solutions. In addition, obsolete inventory expense decreased$3.2 million in 2021, primarily in Promotional Solutions. Total cost of revenue as a percentage of total revenue increased, as compared to 2020, driven by the First American acquisition, including acquisition amortization, the inflationary pressures on our costs and client mix. These impacts were partially offset by price increases implemented in response to the current inflationary environment. The decrease in total cost of revenue for 2020, as compared to 2019, was primarily attributable to the decrease in revenue volume resulting from the COVID-19 impact. In addition, cost of revenue decreased as a result of the continued secular decline in checks and business forms, as well as the decline in web and hosted solutions revenue driven by the events of the third quarter of 2019 outlined in our discussion of consolidated revenue. Benefits from cost reductions and efficiencies in our fulfillment area, unrelated to our response to the COVID-19 pandemic, reduced cost of revenue approximately$7.5 million in 2020, while actions taken to reduce costs in response to COVID-19 reduced cost of revenue approximately$6.0 million in 2020. Partially offsetting these decreases in cost of revenue were costs related to the new revenue from PPE sales in 2020, costs related to treasury management deals signed in the fourth quarter of 2019, incremental costs driven by our response to the COVID-19 pandemic of approximately$6.0 million , and a$4.9 million increase in obsolete inventory expense in 2020, primarily in Promotional Solutions. Total cost of revenue as a percentage of total revenue increased slightly, as compared to 2019, as 28 -------------------------------------------------------------------------------- costs related to the new treasury management clients were partially offset by the loss of lower margin revenue driven by the impacts of COVID-19, as well as the benefits of our cost reduction initiatives.
Consolidated Selling, General & Administrative (SG&A) Expense
Change
(in thousands) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
SG&A expense $ 941,023 $ 841,658 $ 891,693 11.8% (5.6%)
SG&A expense as a percentage of total
revenue 46.5 % 47.0 % 44.4 % (0.5) pt. 2.6 pt.
The increase in SG&A expense for 2021, as compared to 2020, was driven, in part,
by the operating costs of First American of $46.1 million for 2021, as well as
related acquisition transaction costs of $18.9 million . Additionally, expense
for SaaS solutions that we are utilizing, primarily related to sales and
financial management tools, increased as we continue to invest in our growth
strategy, and commission expense increased as a result of some recovery of
volume declines driven by the impact of the COVID-19 pandemic and revenue
generated by new clients, primarily in our Checks segment. Also, SG&A expense
increased due to a year-over-year impact of approximately $15.0 million from
temporary actions taken in response to the COVID-19 pandemic in 2020, including
savings from a temporary salary reduction, furloughs and other actions, net of
incremental costs we incurred in 2020 related to our response to the pandemic.
Partially offsetting these increases in SG&A expense were various cost reduction
actions, including efficiencies in sales, marketing and our corporate support
functions. In addition, bad debt expense decreased $11.4 million , primarily due
to allowances recorded in 2020 related to notes receivable from our Promotional
Solutions distributors, as well as trade accounts receivable. Commission expense
related to sales of PPE also decreased along with the lower sales volume in
2021.
The decrease in SG&A expense for 2020, as compared to 2019, was driven by lower
commissions on the lower order volume resulting from the impacts of the COVID-19
pandemic, as well as the benefit of organizational actions taken in response to
COVID-19, including the temporary salary reductions and the suspension of the
401(k) plan employer matching contribution. These actions lowered SG&A expense
approximately $27.0 million in 2020. Also lowering SG&A expense were various
cost reduction actions that were unrelated to our response to the COVID-19
pandemic, including advertising expense reductions and other efficiencies in
sales, marketing and our corporate support functions. These decreases in SG&A
expense were partially offset by investments of approximately $50.0 million in
2020 in support of our One Deluxe strategy. These costs related to treasury
management outsourcing deals signed in the fourth quarter of 2019 and various
other expenses related to our initiatives, including transforming our brand and
our website and expanding our sales capabilities, as well as ongoing new costs
related to SaaS solutions we are employing throughout the company. In addition,
we incurred commission expense related to new revenue from the sales of PPE
during 2020. We also recorded bad debt expense of $5.4 million in our
Promotional Solutions segment related to notes receivable from our distributors,
primarily one distributor that was underperforming prior to the commencement of
the COVID-19 pandemic. Total SG&A expense as a percentage of revenue increased
for 2020, as compared to 2019, as revenue declines and investments in our
transformation more than offset the benefit of cost reductions.
In addition to the above factors, SG&A expense was also impacted by changes in the following items in each year:
Change
(in thousands) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Acquisition amortization (SG&A
portion) $ 67,498 $ 42,955
27,549 20,341 17,751 7,208 2,590
Legal-related costs (benefit) 2,443 (2,164) 6,420 4,607 (8,584)
CEO transition costs - (30) 9,390 30 (9,420)
Restructuring and Integration Expense
Change
2020 vs.
(in thousands) 2021 2020 2019 2021 vs. 2020 2019
Restructuring and integration expense $ 54,750 $ 75,874
Over the past 3 years, we have been pursuing several initiatives designed to
focus our business behind our growth strategy and to increase our efficiency.
Further information can be found under Restructuring, Integration and Other
Costs.
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Change
(in thousands) 2021 2020 2019 2021
vs. 2020 2020 vs. 2019
Asset impairment charges $ -
We did not record any asset impairment charges during 2021. Further information regarding the asset impairment charges in 2020 and 2019 can be found under the caption "Note 8: Fair Value Measurements" in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report and in Critical Accounting Policies. During 2020, we recorded asset impairment charges of$101.7 million , related primarily to the goodwill of our Promotional Solutions and Cloud Solutions Web Hosting reporting units and amortizable intangibles of our Cloud Solutions Web Hosting reporting unit, resulting primarily from the estimated impact of the COVID-19 pandemic on the operating results of these businesses. During 2019, we recorded asset impairment charges of$421.1 million related primarily to the goodwill of our former Financial Services Data-Driven Marketing and Small Business Services Web Hosting reporting units, as well as certain amortizable intangible assets of the Small Business Services Web Hosting reporting unit. Interest Expense Change (in thousands) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019 Interest expense$ 55,554 $ 23,140 $ 34,682 140.1% (33.3%) Weighted-average debt outstanding 1,402,970 1,016,896 925,715 38.0% 9.8% Weighted-average interest rate 3.60 % 2.12 % 3.54 % 1.48 pt. (1.42) pt. The increase in interest expense for 2021, as compared to 2020, was driven primarily by the increase in our weighted-average interest rate in 2021, due in part to the$500.0 million notes issued inJune 2021 with an interest rate of 8.0%. The increase in the amount of debt outstanding driven by the issuance of debt to fund the First American acquisition also negatively impacted interest expense. Further information regarding our debt can be found under the caption "Note 14: Debt" in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report. The decrease in interest expense for 2020, as compared to 2019, was primarily driven by our lower weighted-average interest rate in 2020, partially offset by our higher weighted-average debt level in 2020, as we borrowed additional funds for a period of time at the outset of the COVID-19 pandemic to ensure liquidity. Income Tax Provision Change (in thousands) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019 Income tax provision$ 31,031 $ 21,468 $ 8,039 44.5% 167.0% Effective tax rate 33.1 % 80.1 % (3.7 %) (47.0) pt. 83.8 pt. The decrease in our effective income tax rate for 2021, as compared to 2020, was largely due to the impact of the nondeductible portion of the goodwill impairment charges in the first quarter of 2020, which lowered our 2021 effective income tax rate by 46.8 points, as compared to 2020. In addition, the tax impact of share-based compensation resulted in a 7.6 point decrease in our effective income tax rate. Partially offsetting these decreases in our effective income tax rate was a 4.9 point increase resulting from the repatriation of cash from our Canadian subsidiaries during the fourth quarter of 2021, as well as nondeductible acquisition costs related to the First American acquisition, which increased our effective tax rate by 1.5 points in 2021. Information regarding other factors that impacted our effective income tax rates can be found under the caption: "Note 10: Income Tax Provision" in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report. Our effective income tax rates in 2020 and 2019 were significantly impacted by the asset impairment charges in both periods, coupled with their impact on the amount of pretax income (loss) and the nondeductible portion of the impairment charges. The non-deductible portion of goodwill impairment charges drove a 72.4 point increase in our tax rate in 2020 and the tax impact of share-based compensation resulted in a 9.5 point increase, as compared to 2019. In addition, during the third quarter of 2019, we placed a full valuation allowance of$8.4 million on the intangible-related deferred tax asset generated by the impairment of intangible assets located inAustralia , which was the main driver of the 4.8 point increase in our tax rate in 2020 30 -------------------------------------------------------------------------------- attributable to changes in our valuation allowances. Partially offsetting these increases in our effective tax rate was a 2.6 decrease in our state income tax rate. Information regarding other factors that impacted our effective income tax rates can be found under the caption "Note 10: Income Tax Provision" in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report.
Net Income (Loss) / Diluted Earnings (Loss) per Share
Change
(in thousands, except per share
amounts) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Net income (loss) $ 62,772 $ 5,335 $ (223,779) 1,076.6 % 102.4 %
Diluted earnings (loss) per share 1.45 0.11 (5.20) 1,218.2 % 102.1 %
Adjusted diluted EPS(1) 4.88 5.08 6.82 (3.9 %) (25.5 %)
(1) Information regarding the calculation of adjusted diluted EPS can be found in the following section entitled Reconciliation of Non-GAAP Financial Measures.
The increases in net income and diluted EPS and the decrease in adjusted diluted EPS for 2021, as compared to 2020, were driven by the factors outlined in Executive Overview - 2021 results vs. 2020.
The increases in net income and diluted EPS for 2020, as compared to 2019, were driven by numerous factors, the largest of which was a decrease in pretax asset impairment charges of$319.3 million , as compared to 2019. Other factors that increased net income included:
•actions taken to reduce costs in line with reduced revenue and the continuing
evaluation of our cost structure, including savings of approximately
•revenue growth in certain of our business lines, including increased treasury management revenue, increases in certain data-driven marketing campaigns in the first quarter of 2020 prior to the commencement of the impact of the COVID-19 pandemic, and new revenue from sales of PPE in 2020;
•a decrease in acquisition amortization of
•a decrease in interest expense of
•a decrease in certain legal-related expenses of
•the absence of non-recurring CEO transition costs in 2020, as compared to
Partially offsetting these increases in net income were the following factors:
•the loss of revenue resulting from the impact of the COVID-19 pandemic;
•various investments of approximately$50.0 million , in the aggregate, to advance our One Deluxe strategy, including costs related to treasury management deals signed in the fourth quarter of 2019 and various information technology, sales, finance and human capital investments; •the continuing secular decline in checks and business forms, the loss of web hosting revenue in the third quarter of 2019 and the decision to exit certain product lines within Cloud Solutions; •incremental costs of approximately$8.0 million resulting from our response to the COVID-19 pandemic, including aHero Pay premium provided to employees working on-site during the second quarter of 2020, costs related to enabling employees to work from home and additional facility cleaning costs; and
•a
Diluted EPS of$0.11 for 2020, as compared to diluted loss per share of$5.20 for 2019, reflects the increase in net income described in the preceding paragraphs, as well as lower average shares outstanding in 2020. Adjusted diluted EPS for 2020 was$5.08 , compared to$6.82 for 2019, and excludes the impact of non-cash items or items that we believe are not indicative of ongoing operations. The decrease in adjusted EPS for 2020, as compared to 2019, was driven, in large part, by the impact of the COVID-19 pandemic, as well as investments in our One Deluxe strategy and the continuing secular decline in checks and business forms. These decreases were partially offset by various cost savings initiatives, growth in treasury management 31 --------------------------------------------------------------------------------
revenue and the decrease in interest expense in 2020. A reconciliation of diluted earnings (loss) per share to adjusted diluted EPS can be found in the following section entitled Reconciliation of Non-GAAP Financial Measures.
Adjusted EBITDA
Change
(in thousands) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Adjusted EBITDA $ 407,765 $ 364,542 $ 480,866 11.9% (24.2%)
Adjusted EBITDA as a percentage of
total revenue (adjusted EBITDA margin) 20.2 % 20.4 % 23.9 % (0.2) pt. (3.5) pt.
Adjusted EBITDA margin was virtually unchanged for 2021, as compared to 2020.
Adjusted EBITDA for 2021 benefited from the contribution from the First American
acquisition of $39.1 million , new client wins in all of our segments, the
continuing revenue volume recovery from the impacts of the COVID-19 pandemic,
actions taken to reduce costs as we continue to evaluate our cost structure,
price increases in response to the current inflationary environment and the
$11.4 million reduction in bad debt expense. Partially offsetting these
increases in adjusted EBITDA were increased expense for our SaaS solutions,
primarily related to sales and financial management tools we are utilizing to
advance our growth strategy, the continuing secular decline in checks, business
forms and some business accessories, the net benefit in the prior year from
temporary actions taken in response to the COVID-19 pandemic, the 2020 decision
to exit certain product lines within Cloud Solutions and inflationary pressures
on hourly wages, materials and delivery.
The decrease in adjusted EBITDA for 2020, as compared to 2019, was driven
primarily by the impact of the COVID-19 pandemic. In addition, adjusted EBITDA
was negatively impacted by mix changes resulting from the contraction of legacy
products and services, primarily checks and business forms, and the loss of web
and hosted solutions revenue driven by the events of the third quarter of 2019
outlined in our discussion of consolidated revenue. We also continued to advance
our transformation in line with our One Deluxe strategy by investing in various
activities such as transforming our brand and our website and expanding our
sales capabilities, as well as incurring ongoing new costs related to SaaS
solutions we are employing throughout the company. We also incurred expenses
related to treasury management deals signed in the fourth quarter of 2019, as
well as investments in our client operations area that included human capital
investments and other costs related to on-boarding new clients. Additionally,
during 2020, we incurred incremental costs resulting from our response to the
COVID-19 pandemic of approximately $8.0 million , and we recorded bad debt
expense of $5.4 million related to notes receivable from our distributors. These
decreases in adjusted EBITDA were partially offset by actions taken to reduce
costs in line with the reduced revenue, including savings of approximately $33.0
million from the temporary salary reductions, suspension of the 401(k) plan
employer matching contribution, furloughs and other actions. In addition, we
realized the benefit of various cost reductions unrelated to our response to the
COVID-19 pandemic, primarily in our sales, marketing and fulfillment
organizations, as we continued to develop our post-COVID-19 operating model.
Reconciliation of Non-GAAP Financial Measures
Free cash flow - We define free cash flow as net cash provided by operating activities less purchases of capital assets. We believe that free cash flow is an important indicator of cash available for debt service and for shareholders, after making capital investments to maintain or expand our asset base. Free cash flow is limited and not all of our free cash flow is available for discretionary spending, as we may have mandatory debt payments and other cash requirements that must be deducted from our cash available for future use. We believe that the measure of free cash flow provides an additional metric to compare cash generated by operations on a consistent basis and to provide insight into the cash flow available to fund items such as dividends, mandatory and discretionary debt reduction, acquisitions or other strategic investments, and share repurchases.
Net cash provided by operating activities for the years ended
(in thousands) 2021 2020
2019
Net cash provided by operating activities
$ 286,653 Purchases of capital assets (109,140) (62,638) (66,595) Free cash flow$ 101,681 $ 154,915 $ 220,058 Net debt - Management believes that net debt is an important measure to monitor leverage and to evaluate the balance sheet. In calculating net debt, cash and cash equivalents are subtracted from total debt because they could be used to reduce our debt obligations. A limitation associated with using net debt is that it subtracts cash and cash equivalents, and therefore, may imply that management intends to use cash and cash equivalents to reduce outstanding debt. In addition, net debt suggests that our debt obligations are less than the most comparable GAAP measure indicates. 32 -------------------------------------------------------------------------------- Total debt reconciles to net debt as follows as ofDecember 31 : (in thousands) 2021 2020 Total debt$ 1,682,949 $ 840,000 Cash and cash equivalents (41,231) (123,122) Net debt$ 1,641,718 $ 716,878 Liquidity - We define liquidity as cash and cash equivalents plus the amount available for borrowing under our revolving credit facility. We consider liquidity to be an important metric for demonstrating the amount of cash that is available or that could be available on short notice. This financial measure is not a substitute for GAAP liquidity measures. Instead, we believe that this measurement enhances investors' understanding of the funds that are currently available. Liquidity was as follows as ofDecember 31 : (in thousands) 2021 2020 Cash and cash equivalents$ 41,231 $ 123,122 Amount available for borrowing under revolving credit facility 362,619 302,342 Liquidity$ 403,850 $ 425,464 Adjusted diluted EPS - By excluding the impact of non-cash items or items that we believe are not indicative of current period operating performance, we believe that adjusted diluted EPS provides useful comparable information to assist in analyzing our current period operating performance and in assessing our future operating performance. As such, adjusted diluted EPS is one of the key financial performance metrics we use to assess the operating results and performance of the business and to identify strategies to improve performance. It is reasonable to expect that one or more of the excluded items will occur in future periods, but the amounts recognized may vary significantly. 33 --------------------------------------------------------------------------------
Diluted earnings (loss) per share for the years ended
(in thousands, except per share amounts) 2021 2020 2019 Net income (loss)$ 62,772 $ 5,335 $ (223,779) Net income attributable to non-controlling interest (139) (91) - Net income (loss) attributable to Deluxe 62,633 5,244 (223,779) Asset impairment charges - 101,749 421,090 Acquisition amortization 82,915 55,867 70,720 Restructuring, integration and other costs 58,947 80,665 79,511 CEO transition costs(1) - (30) 9,390 Share-based compensation expense 29,477 21,824 19,138 Acquisition transaction costs 18,913 8 215 Certain legal-related expense (benefit) 2,443 (2,164) 6,420 Loss on sales of businesses and customer lists - 1,846 124 Adjustments, pre-tax 192,695 259,765 606,608 Income tax provision impact of pre-tax adjustments(2) (45,783) (50,153) (88,096) Adjustments, net of tax 146,912 209,612 518,512 Adjusted net income attributable to Deluxe 209,545 214,856 294,733 Income allocated to participating securities (156) (77) (414)
Re-measurement of share-based awards classified as liabilities
(448) (803) 64
Adjusted income attributable to Deluxe available to common shareholders
$ 208,941
Weighted-average shares and potential common shares outstanding
42,827 42,142 43,029
Adjustment(3) (16) (27) 158
Adjusted weighted-average shares and potential
common shares outstanding 42,811 42,115 43,187
GAAP diluted earnings (loss) per share $ 1.45 $ 0.11 $ (5.20)
Adjustments, net of tax 3.43 4.97 12.02
Adjusted diluted EPS $ 4.88 $ 5.08 $ 6.82 (1) In 2019, includes share-based compensation expense related to the modification of certain awards in conjunction with our CEO transition.
(2) The tax effect of the pretax adjustments considers the tax treatment and related tax rate(s) that apply to each adjustment in the applicable tax jurisdiction(s). Generally, this results in a tax impact that approximates theU.S. effective tax rate for each adjustment. However, the tax impact of certain adjustments, such as asset impairment charges, share-based compensation expense and CEO transition costs, depends on whether the amounts are deductible in the respective tax jurisdictions and the applicable effective tax rate(s) in those jurisdictions.
(3) The total of weighted-average shares and potential common shares outstanding used in the calculations of adjusted diluted EPS differs from the GAAP calculations due to differences in the amount of dilutive shares in each calculation.
Adjusted EBITDA and adjusted EBITDA margin - We believe that adjusted EBITDA and
adjusted EBITDA margin are useful in evaluating our operating performance, as
they eliminate the effect of interest expense, income taxes, the accounting
effects of capital investments (i.e., depreciation and amortization) and certain
items, as presented below, that may vary for companies for reasons unrelated to
current period operating performance. In addition, management utilizes these
measures to assess the operating results and performance of the business, to
perform analytical comparisons and to identify strategies to improve
performance. We also believe that an increasing adjusted EBITDA and adjusted
EBITDA margin depict an increase in the value of the company. We do not consider
adjusted EBITDA to be a measure of cash flow, as it does not consider certain
cash requirements such as interest, income taxes, debt service payments or
capital investments.
We have not reconciled our adjusted EBITDA margin outlook guidance for 2022 to
the directly comparable GAAP financial measure because we do not
provide outlook guidance for net income or the reconciling items between net
income and adjusted EBITDA. Because of the substantial uncertainty and
variability surrounding certain of these forward-looking reconciling items,
including asset impairment charges, restructuring, integration and other costs,
and certain legal-related expenses, a reconciliation of the non-GAAP financial
measure outlook guidance to the corresponding GAAP measure is not available
without unreasonable effort. The probable significance of certain of these
reconciling items is high and, based on historical experience, could be
material.
34
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Net income (loss) for the years ended
(in thousands) 2021 2020 2019 Net income (loss)$ 62,772 $ 5,335 $ (223,779) Non-controlling interest (139) (91) - Depreciation and amortization expense 148,767 110,792 126,036 Interest expense 55,554 23,140 34,682 Income tax provision 31,031 21,468 8,039 Asset impairment charges - 101,749 421,090 Restructuring, integration and other costs 58,947 80,665 79,511 CEO transition costs(1) - (30) 9,390 Share-based compensation expense 29,477 21,824 19,138 Acquisition transaction costs 18,913 8 215 Certain legal-related expense (benefit) 2,443 (2,164) 6,420 Loss on sales of businesses and customer lists - 1,846 124 Adjusted EBITDA$ 407,765 $ 364,542 $ 480,866 Adjusted EBITDA as a percentage of total revenue (adjusted EBITDA margin) 20.2 % 20.4 % 23.9 %
(1) In 2019, includes share-based compensation expense related to the modification of certain awards in conjunction with our CEO transition.
RESTRUCTURING, INTEGRATION AND OTHER COSTS
Restructuring and integration expense consists of costs related to the
consolidation and migration of certain applications and processes, including our
financial and sales management systems. It also includes costs related to the
integration of acquired businesses into our systems and processes. These costs
primarily consist of information technology consulting, project management
services and internal labor, as well as other costs associated with our
initiatives, such as training, travel and relocation and costs associated with
facility closures. In addition, we recorded employee severance costs related to
these initiatives, as well as our ongoing cost reduction initiatives across
functional areas. Further information regarding restructuring and integration
expense can be found under the caption "Note 9: Restructuring and Integration
Expense" in the Notes to Consolidated Financial Statements appearing in Part II,
Item 8 of this report. In addition to restructuring and integration expense, we
also recognized certain business transformation costs during 2020 and 2019
related to optimizing our business processes in line with our growth strategy.
The majority of the employee reductions included in our restructuring and
integration accruals as of December 31, 2021 are expected to be completed in the
first quarter of 2022, and we expect most of the related severance payments to
be paid in the first half of 2022. As a result of our employee reductions, we
realized cost savings of approximately $40.0 million in SG&A expense and $1.0
million in total cost of revenue in 2021. For those employee reductions included
in our restructuring and integration accruals through December 31, 2021 , we
expect to realize cost savings of approximately $19.0 million in SG&A expense in
2022, in comparison to our 2021 results of operations. Note that these labor
savings were, and will continue to be, partially offset by increased labor and
other costs, including costs associated with new employees as we restructure
certain activities and strive for the optimal mix of employee skill sets that
will support our growth strategy. In addition, as we continued to evaluate our
real estate footprint, we closed 16 facilities during 2021. We anticipate
annualized cost savings of approximately $8.0 million from these closures, with
approximately $3.0 million realized during 2021.
CEO transition costs - In 2018, we announced the retirement of our former CEO.
In connection with the transition, we incurred various costs, including
retention payments to certain members of our management team, consulting fees
related to the evaluation of our strategy and our current CEO's signing bonus.
These costs totaled $9.4 million for 2019 and are included in SG&A expense on
the consolidated statement of loss.
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SEGMENT RESULTS
We operate 4 reportable business segments: Payments, Cloud Solutions,
Promotional Solutions and Checks. These segments are generally organized by
product type and reflect the way we currently manage the company. The financial
information presented below for our reportable business segments is consistent
with that presented under the caption "Note 18: Business Segment Information" in
the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of
this report, where information regarding revenue for our product and service
offerings can also be found.
Payments
Results for our Payments segment were as follows:
Change
(in thousands) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Total revenue $ 510,359 $ 301,901 $ 269,573 69.0% 12.0%
Adjusted EBITDA 105,576 68,117 74,384 55.0% (8.4%)
Adjusted EBITDA margin 20.7 % 22.6 % 27.6 % (1.9) pt. (5.0) pt.
The increase in total revenue for 2021, as compared to 2020, was driven by
revenue of $195.0 million from the First American acquisition, as well as growth
in our core payments businesses, primarily digital payments, receivables
management and lockbox processing. We continued with new customer
implementations, some of which had been delayed, in part, due to impacts of the
COVID-19 pandemic. Revenue also benefited from minimal price increases late in
the year in response to the current inflationary environment. Longer term, we
expect high single-digit revenue growth for this segment.
The increase in adjusted EBITDA for 2021, as compared to 2020, was driven by the
contribution of $39.1 million from the First American acquisition, as well as
the revenue growth in our core payments businesses. In addition, adjusted EBITDA
benefited from various cost reduction actions and the price increases late in
the year. These increases in adjusted EBITDA were partially offset by continued
sales and information technology investments, the benefit in the prior year of
temporary salary and other cost reductions in response to the COVID-19 pandemic,
and inflationary pressures on our cost structure, primarily labor costs in our
lockbox processing business. Adjusted EBITDA margin decreased for 2021, as
compared to 2020, as the investments in the business and the inflationary
pressures exceeded the benefit of the revenue increases. For 2022, we expect
adjusted EBITDA margin to continue to be in the low 20% range.
The increase in total revenue for 2020, as compared to 2019, was driven by an
increase in treasury management revenue of 16.8%, related primarily to lockbox
processing outsourcing deals signed in the fourth quarter of 2019 and other
client wins. Partially offsetting this increase in revenue was a decline in
payroll services revenue, primarily driven by the negative impact of the
COVID-19 pandemic on our small business customers. Revenue for the fourth
quarter of 2020 was impacted by customer implementation delays attributable to
the COVID-19 pandemic.
The decrease in adjusted EBITDA for 2020, as compared to 2019, was primarily
driven by increased costs in support of our One Deluxe strategy, including costs
related to the lockbox processing outsourcing deals signed in the fourth quarter
of 2019, as well as investments in our client operations area that included
human capital investments and other costs related to on-boarding new clients. In
addition, adjusted EBITDA was negatively impacted by the COVID-19 pandemic, as
payroll revenue declined and we incurred incremental costs, including the Hero
Pay premium we paid to employees working on-site during the second quarter of
2020. These impacts were partially offset by revenue from the lockbox processing
outsourcing deals and temporary actions taken to reduce costs in response to the
COVID-19 pandemic. Adjusted EBITDA margin decreased for 2020, as compared to
2019, as a result of the investments we made in this business and
COVID-19-related delays in new customer implementations.
Cloud Solutions
Results for our Cloud Solutions segment were as follows:
Change
(in thousands) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Total revenue $ 262,310 $ 252,773 $ 318,383 3.8% (20.6%)
Adjusted EBITDA 70,172 61,580 77,199 14.0% (20.2%)
Adjusted EBITDA margin 26.8 % 24.4 % 24.2 % 2.4 pt. 0.2 pt.
36-------------------------------------------------------------------------------- The increase in total revenue for 2021, as compared to 2020, was driven by growth in data-driven marketing revenue resulting from new client wins and from increased marketing efforts by our banking and mortgage lending customers due, in part, to the continuation of low interest rates and an improving credit risk environment. Data-driven marketing revenue also increased as many of our customers reactivated marketing campaigns that had been put on hold due to the COVID-19 pandemic. Overall, data-driven marketing revenue increased 26.5% for 2021, as compared to 2020. Within the web and hosted solutions business, our 2020 decision to exit certain product lines resulted in a revenue decline of$19.9 million for 2021, as compared to 2020. We continue to add new data-driven marketing clients, which will benefit revenue going forward, and for 2022, we expect mid-single digit revenue growth to continue. Adjusted EBITDA and adjusted EBITDA margin for 2021 increased compared to 2020, due to the revenue growth, as well as various cost reduction actions to bring expenses in line with our post-COVID-19 operating model. In addition, adjusted EBITDA benefited from the timing and type of customer marketing campaigns in each period. Partially offsetting these increases in adjusted EBITDA was the benefit in the prior year of temporary salary and other reductions we implemented in response to the COVID-19 pandemic. For 2022, we expect adjusted EBITDA margin to be in the low-to-mid 20% range. The decrease in total revenue for 2020, as compared to 2019, was driven by the impact of the COVID-19 pandemic, primarily in data-driven marketing solutions as clients suspended their marketing campaigns, with some impact on web and hosted solutions as well. Data-driven marketing revenue for the fourth quarter of 2020 remained stable, as compared to the third quarter of 2020, as financial institutions slowly reactivated data-driven marketing analytics and campaigns in the second half of the year. Web and hosted solutions revenue declined, as compared to 2019, due to our decision in the third quarter of 2019 to exit certain customer contracts, the loss of certain large customers in the third quarter of 2019 as they elected to in-source some of the services we provide, and more recent decisions to exit certain product lines. Partially offsetting these decreases was a$7.0 million increase in data-driven marketing revenue in the first quarter of 2020, prior to the commencement of the COVID-19 pandemic, driven by new campaigns and growth in pay-for-performance marketing campaigns. The decrease in adjusted EBITDA for 2020, as compared to 2019, was primarily due to the impact of the COVID-19 pandemic and increased information technology costs in support of our One Deluxe strategy, as well as the loss of web hosting revenue related to the events that occurred in the third quarter of 2019. Partially offsetting these declines in adjusted EBITDA were various cost reductions unrelated to our response to the COVID-19 pandemic, primarily reductions in sales and marketing costs, and the benefit of temporary actions taken in response to the pandemic. Adjusted EBITDA also benefited from the increase in data-driven marketing revenue in the first quarter of 2020, prior to the commencement of the COVID-19 pandemic. Adjusted EBITDA margin increased slightly for 2020, as compared to 2019, as cost reductions outpaced the revenue decline and revenue mix was favorable in 2020.
Promotional Solutions
Results for our Promotional Solutions segment were as follows:
Change
(in thousands) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Total revenue $ 546,473 $ 529,649 $ 640,892 3.2% (17.4%)
Adjusted EBITDA 85,384 66,620 101,293 28.2% (34.2%)
Adjusted EBITDA margin 15.6 % 12.6 % 15.8 % 3.0 pt. (3.2) pt.
The increase in total revenue for 2021, as compared to 2020, was driven by some
recovery of volume declines resulting from the impact of the COVID-19 pandemic,
as our business customers began to resume a more normal level of activity.
Additionally, revenue benefited from new clients and price increases in response
to the current inflationary environment. Partially offsetting these revenue
increases was the continuing secular decline in business forms and some
accessories, and sales of PPE decreased approximately $22.0 million for 2021, as
compared to 2020. We are anticipating revenue growth in the low-single digits
for 2022.
The increases in adjusted EBITDA and adjusted EBITDA margin for 2021, as
compared to 2020, were driven by the benefit of new clients, some recovery of
volume declines resulting from the impact of the COVID-19 pandemic, and lower
bad debt expense related to notes receivable from distributors and trade
accounts receivable. In addition, adjusted EBITDA benefited from price increases
in response to the current inflationary environment, various cost reduction
actions and lower expense for obsolete inventory in 2021. These increases in
adjusted EBITDA were partially offset by various information technology
investments, the benefit in the prior year of temporary salary and other cost
reductions in response to the COVID-19 pandemic, and inflationary pressures on
hourly wages, materials and delivery. For 2022, we anticipate a slightly
improved adjusted EBITDA margin resulting from value realization and
merchandising optimization initiatives.
The decrease in total revenue for 2020, as compared to 2019, was driven
primarily by the impact of the COVID-19 pandemic, as our customers reacted to
the economic environment, and demand for marketing and promotional products
declined sharply, as our customers stopped virtually all promotional activities
in response to the pandemic. The continuing
37
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secular decline in business forms and some accessories also negatively impacted
revenue. Partially offsetting these volume declines was new revenue of $31.0
million from sales of PPE during 2020.
The decrease in adjusted EBITDA for 2020, as compared to 2019, was driven
primarily by the loss of revenue resulting from the COVID-19 pandemic,
investments in support of our One Deluxe strategy, primarily information
technology and sales force expenses, and the continuing secular decline in
business forms and some accessories. In addition, we recorded bad debt expense
of $5.4 million during 2020, related to notes receivable from our distributors,
primarily one that was underperforming prior to the commencement of the COVID-19
pandemic, and expense for obsolete inventory was higher in 2020. These decreases
in adjusted EBITDA were partially offset by the benefit of temporary actions
taken in response to the COVID-19 pandemic, other cost reduction actions,
primarily related to sales, marketing and fulfillment costs, and the sales of
PPE in 2020. Adjusted EBITDA margin for 2020 decreased, as compared to 2019, as
the revenue decline, investments in our transformation, and bad debt and
obsolete inventory expense more than offset the benefit of temporary actions
taken in response to the COVID-19 pandemic and the other cost savings realized.
Checks
Results for our Checks segment were as follows:
Change
(in thousands) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Total revenue $ 703,055 $ 706,458 $ 779,867 (0.5%) (9.4%)
Adjusted EBITDA 324,224 341,705 402,662 (5.1%) (15.1%)
Adjusted EBITDA margin 46.1 % 48.4 % 51.6 % (2.3) pt. (3.2) pt.
The decrease in total revenue for 2021, as compared to 2020, was driven
primarily by the expected continuing secular decline in checks. Partially
offsetting this impact was some recovery of volume declines resulting from the
impact of the COVID-19 pandemic, primarily business check volumes, as well as
price increases in response to the current inflationary environment and the
impact of new client wins. In 2022, we anticipate that the revenue decline rate
will be in the low single digits.
The decreases in adjusted EBITDA and adjusted EBITDA margin for 2021, as
compared to 2020, were driven by information technology investments, including
new print-on-demand technology, costs of on-boarding new clients and
inflationary pressures on hourly wages, materials and delivery. These decreases
were partially offset by various cost reduction initiatives and lower bad debt
expense for 2021.
The decrease in total revenue for 2020, as compared to 2019, was driven
primarily by the impact of the COVID-19 pandemic, which resulted in a decline in
business and personal check usage stemming from the slowdown in the economy. The
continuing secular decline in checks also contributed to the revenue decline,
partially offset by nominal price increases.
The decrease in adjusted EBITDA for 2020, as compared to 2019, was driven by the
loss of revenue resulting from the COVID-19 pandemic and the secular decline in
checks, as well as referral costs and investments in support of our One Deluxe
strategy, primarily information technology expenses. Partially offsetting these
decreases in adjusted EBITDA were various cost reductions unrelated to our
response to the COVID-19 pandemic, primarily sales, marketing and fulfillment
costs, and the benefit of temporary actions taken in response to the COVID-19
pandemic. Adjusted EBITDA margin for 2020 decreased as compared to 2019, as the
impact of the revenue decline and investments in the business exceeded the
impact of our cost saving initiatives.
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CASH FLOWS AND LIQUIDITY
As of December 31, 2021 , we held cash and cash equivalents of $41.2 million , as
well as restricted cash and restricted cash equivalents included in funds held
for customers and in other non-current assets of $244.3 million . The following
table shows our cash flow activity for the past 3 years, and should be read in
conjunction with the consolidated statements of cash flows appearing in Part II,
Item 8 of this report.
Change
(in thousands) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Net cash provided by operating
activities $ 210,821 $
217,553
(1,066,601) (56,093) (72,397) (1,010,508) 16,304
Net cash provided (used) by financing
activities 912,961 (110,555) (190,148) 1,023,516 79,593
Effect of exchange rate change on cash,
cash equivalents, restricted cash and
restricted cash equivalents (1,099) 3,693 5,444 (4,792) (1,751)
Net change in cash, cash equivalents,
restricted cash and restricted cash
equivalents $ 56,082 $ 54,598 $ 29,552 $ 1,484 $ 25,046
Free cash flow(1) $ 101,681 $ 154,915 $ 220,058 $ (53,234) $ (65,143) (1) See Reconciliation of Non-GAAP Financial Measures within the Consolidated Results of Operations section, which illustrates how we calculate free cash flow.
Net cash provided by operating activities decreased$6.7 million for 2021, as compared to 2020, driven primarily by investments in our business, including transaction costs related to the acquisition of First American and increased subscription and implementation costs related to SaaS solutions we are utilizing, including a new enterprise resource planning system. Additionally, operating cash flow was negatively impacted by the continuing secular decline in checks, business forms and some business accessories, a$23.8 million increase in interest payments, driven by the debt issued to complete the First American acquisition, and the prior year benefited from the deferral of federal payroll tax payments under the CARES Act, a portion of which was paid during 2021. The prior year also benefited from temporary salary and other cost reductions implemented in response to the COVID-19 pandemic. These decreases in operating cash flow were substantially offset by the contribution from First American's operations, improved working capital management, the benefit of new clients, some recovery of revenue declines from the COVID-19 pandemic and various cost saving actions. Additionally, performance-based compensation payments decreased$8.6 million , based on our 2020 performance. Net cash provided by operating activities decreased$69.1 million for 2020, as compared to 2019, driven primarily by the loss of revenue resulting from the COVID-19 pandemic, increased investments in support of our One Deluxe strategy, the continuing secular decline in checks and business forms, and changes in the timing of certain working capital items, such as inventory purchases and payments on accounts payable. These decreases in operating cash flow were partially offset by a$36.1 million reduction in income tax payments resulting from lower taxable income, cost reduction actions taken in response to the COVID-19 pandemic, such as temporary salary reductions, delays inU.S. federal payroll tax payments of$14.3 million allowed under the CARES Act, and a legal-related settlement of$12.5 million in 2019 that was accrued in the previous year. Included in net cash provided by operating activities were the following operating cash outflows: Change 2021 vs. 2020 vs. (in thousands) 2021 2020 2019 2020 2019 Medical benefit payments$ 50,918 $ 43,419 $ 41,714 $ 7,499 $ 1,705 Interest payments 46,621 22,853 33,227 23,768 (10,374) Prepaid product discount payments 40,920 33,613 25,637 7,307 7,976 Income tax payments 18,761 24,701 60,764 (5,940) (36,063) Performance-based compensation payments(1) 12,192 20,832 23,583 (8,640) (2,751) Severance payments 10,202 14,289 10,585 (4,087) 3,704
(1) Amounts reflect compensation based on total company performance.
Net cash used by investing activities for 2021 was$1,010.5 million higher than 2020, driven primarily by the acquisition of First American. In addition, purchases of capital assets increased$46.5 million , as we continued investments to support our long- 39 --------------------------------------------------------------------------------
term growth, including technology platform modernization initiatives, and
proceeds from sales of facilities decreased
Net cash used by investing activities for 2020 was$16.3 million lower than 2019, driven primarily by proceeds from the sale of facilities of$9.7 million in 2020, an$8.3 million reduction in payments for acquisitions and a reduction in capital purchases of$4.0 million , partially offset by purchases of small business distributor customer lists of$11.1 million in 2020. Further information regarding our 2019 acquisitions can be found under the caption "Note 6: Acquisitions" in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report. Net cash provided by financing activities for 2021 was$1,023.5 million higher than 2020, driven by net proceeds from the debt we issued to complete the First American acquisition. Also contributing to the increase was the net change in customer funds obligations in each period, which is discussed further in Other Financial Position Information. In addition, common share repurchases decreased$14.0 million , as we suspended our share repurchase program in the second quarter of 2020 in response to the COVID-19 pandemic, and proceeds from issuing shares increased$13.1 million , as certain employees of First American purchased our stock in conjunction with the acquisition in the second quarter of 2021. Net cash used by financing activities for 2020 was$79.6 million lower than 2019, due primarily to a decrease in common share repurchases of$104.5 million . To maintain liquidity during the COVID-19 pandemic, we did not repurchase any of our common shares during the last 3 quarters of 2020. Partially offsetting this decrease in cash used by financing activities was a net increase in payments on long-term debt of$17.0 million and the net change in customer funds obligations in each period.
Significant cash transactions, excluding those related to operating activities, for each period were as follows:
Change
2020 vs.
(in thousands) 2021 2020 2019 2021 vs. 2020 2019
Payments for acquisitions, net of cash,
cash equivalents, restricted cash and
restricted cash equivalents acquired $ (958,514) $
-
(109,140) (62,638) (66,595) (46,502) 3,957
Cash dividends paid to shareholders (51,654) (50,746) (51,742) (908) 996
Payments for debt issuance costs (18,153) - - (18,153) -
Purchases of customer lists (2,759) (11,082) - 8,323 (11,082)
Payments for common shares repurchased - (14,000) (118,547) 14,000 104,547
Net change in debt 854,974 (43,500) (26,500) 898,474 (17,000)
Net change in customer funds obligations 126,703 (168) 12,598 126,871 (12,766)
Proceeds from issuing shares 16,843 3,747 3,198 13,096 549
Proceeds from sale of facilities 2,648 9,713 - (7,065) 9,713
40-------------------------------------------------------------------------------- During the fourth quarter of 2021, we repatriated accumulated foreign earnings of$85.3 million held in cash by our Canadian subsidiaries. We decided to complete the repatriation due, in part, to changes in Canadian law announced during 2021 and the reorganization of our capital structure inJune 2021 . We utilized this cash to reduce our outstanding debt. The associated tax expense of$4.6 million was included in our income tax provision for the fourth quarter of 2021. During 2022, we will begin repatriating Canadian current year earnings on an annual basis, as we believe the accumulated and remaining cash of our Canadian subsidiaries is sufficient to meet their working capital needs. We intend to utilize the repatriated earnings to reduce our outstanding debt. The historical unremitted Canadian earnings as ofDecember 31, 2021 , as well as the accumulated and future unremitted earnings of our non-Canadian foreign subsidiaries, will continue to be reinvested indefinitely in the operations of those subsidiaries. Deferred income taxes have not been recognized on these earnings as ofDecember 31, 2021 . If we were to repatriate all foreign cash and cash equivalents into theU.S. at one time, we estimate we would incur a foreign withholding tax liability of approximately$2.0 million . As ofDecember 31, 2021 , the amount of cash and cash equivalents held by our foreign subsidiaries was$47.8 million , primarily inCanada . In assessing our cash needs, we must consider our debt service requirements, lease obligations, other contractual commitments and contingent liabilities. Information regarding the maturities of our long-term debt, our operating and finance lease obligations and contingent liabilities can be found under the captions "Note 14: Debt," "Note 15: Leases" and "Note 16: Other Commitments and Contingencies," all of which appear in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report. In addition, we have executed contracts with third-party service providers, primarily for information technology services, including cloud computing and professional services agreements related to the modernization of our technology platform, as well as agreements for outsourcing services, the purchase of data, and payment acceptance services. These contracts obligate us to pay approximately$140.0 million in total, with approximately$55.0 million due during 2022,$50.0 million due during 2023 and the remainder due through 2027. As ofDecember 31, 2021 ,$362.6 million was available for borrowing under our revolving credit facility. We anticipate that net cash generated by operations, along with cash and cash equivalents on hand and availability under our credit facility, will be sufficient to support our operations, including our contractual obligations and our debt service requirements, for the next 12 months. We anticipate that we will continue to pay our regular quarterly dividend. However, dividends are approved by our board of directors each quarter and thus, are subject to change. CAPITAL RESOURCES The principal amount of our debt obligations was$1.7 billion as ofDecember 31, 2021 , an increase of$862.1 million fromDecember 31, 2020 . Further information concerning our outstanding debt, including our debt service obligations, can be found under the caption "Note 14: Debt" in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report.
Our capital structure for each period was as follows:
December 31, 2021 December 31, 2020
Period-end interest Period-end interest
(in thousands) Amount rate Amount rate Change
Fixed interest rate(1) $ 700,000 6.9 % $ 200,000 3.3 % $ 500,000
Floating interest rate 1,002,125 2.4 % 640,000 1.6 % 362,125
Total debt principal 1,702,125 4.2 % 840,000 2.0 % 862,125
Shareholders' equity 574,598 513,392 61,206
Total capital $ 2,276,723 $ 1,353,392 $ 923,331
(1) The fixed interest rate amount includes the amount of our variable-rate debt
that is subject to an interest rate swap agreement. The related interest rate
includes the fixed rate under the swap of 1.798% plus the credit facility spread
due on all amounts outstanding under the credit facility agreement.
In October 2018 , our board of directors authorized the repurchase of up to
$500.0 million of our common stock. This authorization has no expiration date.
We have not repurchased any shares since the first quarter of 2020, when we
suspended share repurchases in order to maintain liquidity during the COVID-19
pandemic. As of December 31, 2021 , $287.5 million remained available for
repurchase under the authorization. Information regarding changes in
shareholders' equity can be found in the consolidated statements of
shareholders' equity appearing in Part II, Item 8 of this report.
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As of December 31, 2021 , total commitments under our revolving credit facility
were $500.0 million and the credit facility matures in June 2026 . Our quarterly
commitment fee ranges from 0.25% to 0.35%, based on our total leverage ratio, as
defined in the credit agreement. Further information regarding the terms and
maturities of our debt, as well as our debt covenants, can be found under the
caption "Note 14: Debt" in the Notes to Consolidated Financial Statements
appearing in Part II, Item 8 of this report. Under the terms of our credit
facility, if our consolidated total leverage ratio exceeds 2.75 to 1.00, the
aggregate annual amount of permitted dividends and share repurchases is limited
to $60.0 million . We were in compliance with our debt covenants as of
December 31, 2021 , and we anticipate that we will remain in compliance with our
debt covenants throughout the next 12 months.
As of
(in thousands) Total available Revolving credit facility commitment$ 500,000 Amount drawn on revolving credit facility (130,000) Outstanding letters of credit(1) (7,381)
Net available for borrowing as of
(1) We use standby letters of credit primarily to collateralize certain
obligations related to our self-insured workers' compensation claims, as well as
claims for environmental matters, as required by certain states. These letters
of credit reduce the amount available for borrowing under our revolving credit
facility.
OTHER FINANCIAL POSITION INFORMATION
Information concerning items comprising selected captions on our consolidated
balance sheets can be found under the caption "Note 3: Supplemental Balance
Sheet and Cash Flow Information" and information regarding the impact of the
First American acquisition on our consolidated balance sheet as of December 31,
2021 can be found under the caption "Note 6: Acquisitions," both of which appear
in the Notes to Consolidated Financial Statements appearing in Part II, Item 8
of this report.
Funds held for customers - Funds held for customers of $254.8 million as of
December 31, 2021 increased $135.0 million from December 31, 2020 , while the
related liability for funds held for customers of $256.3 million as of
December 31, 2021 increased $138.6 million from December 31, 2020 . These
increases were driven by the acquisition of First American during 2021. Funds
held for customers as of the acquisition date were $7.9 million . The remainder
of the increase was due to the seasonal nature of a portion of First American's
business, under which property tax payments are collected in December and paid
on behalf of customers the following quarter.
Finance lease - During the third quarter of 2021, a lease for our headquarters
facility located in Minnesota commenced and was recorded on the consolidated
balance sheet as a finance lease. The lease resulted in an increase in property,
plant and equipment and an increase in lease obligations of $26.9 million .
Further information regarding our finance leases, including their maturities,
can be found under the caption "Note 15: Leases" in the Notes to Consolidated
Financial Statements appearing in Part II, Item 8 of this report.
Prepaid product discounts - Other non-current assets include prepaid product
discounts that are recorded upon contract execution and are generally amortized
on the straight-line basis as reductions of revenue over the related contract
term. Changes in prepaid product discounts during the past 3 years can be found
under the caption "Note 3: Supplemental Balance Sheet and Cash Flow Information"
in the Notes to Consolidated Financial Statements appearing in Part II, Item 8
of this report. Cash payments made for prepaid product discounts were $40.9
million for 2021, $33.6 million for 2020 and $25.6 million for 2019.
The number of checks being written has been declining, which has contributed to
increased competitive pressure when attempting to retain or acquire clients.
Both the number of financial institution clients requesting prepaid product
discount payments and the amount of the payments has fluctuated from year to
year. Although we anticipate that we will selectively continue to make these
payments, we cannot quantify future amounts with certainty. The amount paid
depends on numerous factors, such as the number and timing of contract
executions and renewals, competitors' actions, overall product discount levels
and the structure of up-front product discount payments versus providing higher
discount levels throughout the term of the contract.
Liabilities for prepaid product discounts are recorded upon contract execution.
These obligations are monitored for each contract and are adjusted as payments
are made. Prepaid product discounts due within the next year are included in
accrued liabilities on the consolidated balance sheets and were $11.9 million as
of December 31, 2021 and $14.4 million as of December 31, 2020 .
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CRITICAL ACCOUNTING ESTIMATES
Our critical accounting estimates are those that are most important to the
portrayal of our financial condition and results of operations, or which place
the most significant demands on management's judgment about the effect of
matters that are inherently uncertain, and the impact of different estimates or
assumptions could be material to our financial condition or results of
operations. Our MD&A discussion is based upon our consolidated financial
statements, which have been prepared in accordance with GAAP. Our accounting
policies are discussed under the caption "Note 1: Significant Accounting
Policies" in the Notes to Consolidated Financial Statements appearing in Part
II, Item 8 of this report. We review the accounting policies used in reporting
our financial results on a regular basis. The preparation of our financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses and the related disclosure
of contingent assets and liabilities. We base our estimates on historical
experience and on various other factors and assumptions that we believe are
reasonable under the circumstances, the result of which forms the basis for
making judgments about the carrying values of assets and liabilities. In some
instances, we reasonably could have used different accounting estimates and, in
other instances, changes in the accounting estimates are reasonably likely to
occur from period to period. Accordingly, actual results may differ from our
estimates. Significant estimates and judgments are reviewed by management on an
ongoing basis and by the audit committee of our board of directors at the end of
each quarter prior to the public release of our financial results.
Goodwill Impairment
As ofDecember 31, 2021 , goodwill totaled$1.43 billion , which represented 46.5% of our total assets.Goodwill is tested for impairment on an annual basis as ofJuly 31 , or more frequently if events occur or circumstances change that would indicate a possible impairment. To analyze goodwill for impairment, we must assign our goodwill to individual reporting units. Identification of reporting units includes an analysis of the components that comprise each of our operating segments, which considers, among other things, the manner in which we operate our business and the availability of discrete financial information. Components of an operating segment are aggregated to form a reporting unit if the components have similar economic characteristics. We periodically review our reporting units to ensure that they continue to reflect the manner in which we operate our business. When completing our annual goodwill impairment analysis, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after this qualitative assessment, we determine it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the quantitative impairment test is unnecessary. In completing the 2021 annual impairment analysis of goodwill as ofJuly 31, 2021 , we elected to perform qualitative analyses for all of our reporting units. These qualitative analyses evaluated factors, including, but not limited to, economic, market and industry conditions, cost factors and the overall financial performance of the reporting units. We also considered the most recent quantitative analyses completed in prior periods. In completing these assessments, we noted no changes in events or circumstances that indicated that it was more likely than not that the fair value of any reporting unit was less than its carrying amount. As such, no goodwill impairment charges were recorded as a result of our 2021 annual impairment analysis. When performing a quantitative analysis of goodwill, we first compare the carrying value of the reporting unit, including goodwill, to its estimated fair value. Carrying value is based on the assets and liabilities associated with the operations of the reporting unit, which often requires the allocation of shared and corporate items among reporting units. We utilize a discounted cash flow model to calculate the estimated fair value of a reporting unit. This approach is a valuation technique under which we estimate future cash flows using the reporting unit's financial forecast from the perspective of an unrelated market participant. Using historical trending and internal forecasting techniques, we project revenue and apply our fixed and variable cost experience rates to the projected revenue to arrive at the future cash flows. A terminal value is then applied to the projected cash flow stream. Future estimated cash flows are discounted to their present value to calculate the estimated fair value. The discount rate used is the market-value-weighted average of our estimated cost of capital derived using both known and estimated customary market metrics. In determining the estimated fair values of our reporting units, we are required to estimate a number of factors, including revenue growth rates, terminal growth rates, direct costs, the discount rate and the allocation of shared and corporate items. When completing a quantitative analysis for all of our reporting units, the summation of our reporting units' fair values is compared to our consolidated fair value, as indicated by our market capitalization, to evaluate the reasonableness of our calculations.
While we did not record any goodwill impairment charges during 2021, we did record significant goodwill impairment charges during 2020 and 2019.
2020 goodwill impairment charges - During the first quarter of 2020, when theWorld Health Organization (WHO ) classified the COVID-19 outbreak as a pandemic, we observed a decline in the market valuation of our common shares and we determined that the global response to the pandemic negatively impacted our estimates of expected future cash flows. We concluded that a triggering event had occurred for 2 of our reporting units and as such, we completed quantitative goodwill impairment analyses for our Promotional Solutions and Cloud Solutions Web Hosting reporting units as ofMarch 31, 2020 . Our 43 -------------------------------------------------------------------------------- analyses indicated that the goodwill of our Promotional Solutions reporting unit was partially impaired and the goodwill of our Cloud Solutions Web Hosting reporting unit was fully impaired, and we recorded goodwill impairment charges of$67.1 million and$4.3 million , respectively. The impairment charges were measured as the amount by which the reporting units' carrying values exceeded their estimated fair values, limited to the carrying amount of goodwill. After the impairment charges,$59.0 million of goodwill remained in the Promotional Solutions reporting unit as of the measurement date. Our impairment analyses were based on assumptions made using the best information available at the time, including the performance of our reporting units subsequent to theWHO declaration of a pandemic and available economic forecasts. These assumptions anticipated a sharp decline in gross domestic product and a material decline in the number of small businesses. The sweeping nature of the pandemic made it extremely difficult to predict how our business and operations would be affected in the longer term. To the extent our assumptions differ from actual events, we may be required to record additional asset impairment charges. Our impairment assessments are sensitive to changes in forecasted revenues and expenses, as well as our selected discount rate. For theMarch 31, 2020 assessment of our Promotional Solutions reporting unit, holding all other assumptions constant, if we assumed revenue in each year was 10% higher than we estimated, our goodwill impairment charge would have been approximately$18.0 million less, and if we assumed revenue in each year was 10% lower than we estimated, our goodwill impairment charge would have been approximately$18.0 million more. If we assumed our expenses, as a percentage of revenue, were 100 basis points lower in each year, our goodwill impairment charge would have been approximately$39.0 million less, and if we assumed our expenses, as a percentage of revenue, were 100 basis points higher in each year, our goodwill impairment charge would have been approximately$39.0 million more. If we assumed our selected discount rate of 12% was 100 basis points lower, our goodwill impairment charge would have been approximately$21.0 million less, and if we assumed the discount rate was 100 basis points higher, our goodwill impairment charge would have been approximately$17.0 million more. 2019 goodwill impairment charges - Our quantitative analyses of goodwill as ofJuly 31, 2019 indicated that the goodwill of our former Financial Services Data-Driven Marketing reporting unit was partially impaired and the goodwill of our former Small Business Services Web Services reporting unit was fully impaired. As such, we recorded pretax goodwill impairment charges of$145.6 million and$242.3 million , respectively. Both impairment charges resulted from a combination of triggering events and circumstances, including underperformance against 2019 expectations and the original acquisition business case assumptions, driven substantially by our decision in the third quarter of 2019 to exit certain customer contracts, the loss of certain large customers in the third quarter of 2019 as they elected to in-source some of the services we provide, and the sustained decline in our stock price. The impairment charges were measured as the amount by which the reporting units' carrying values exceeded their estimated fair values, limited to the carrying amount of goodwill. After the impairment charges,$40.8 million of goodwill remained in the former Financial Services Data-Driven Marketing reporting unit. For our former Financial Services Data-Driven Marketing reporting unit, holding all other assumptions constant, if we assumed revenue in each year was 10% higher than we estimated, our impairment charge would have been approximately$16.0 million less, and if we assumed revenue in each year was 10% lower than we estimated, our impairment charge would have been approximately$17.0 million more. If we assumed our expenses, as a percentage of revenue, were 200 basis points lower in each year, our impairment charge would have been approximately$28.0 million less, and if we assumed our expenses, as a percentage of revenue, were 200 basis points higher in each year, our impairment charge would have been approximately$30.0 million more. If we assumed our selected discount rate of 12% was 200 basis points lower, our impairment charge would have been approximately$43.0 million less, and if we assumed the discount rate was 200 basis points higher, our impairment charge would have been approximately$28.0 million more. In the case of our former Small Business Services Web Services reporting unit, holding all other assumptions constant, if we assumed revenue in each year was 10% higher than we estimated, our impairment charge would have been approximately$6.0 million less. If we assumed our expenses, as a percentage of revenue, were 200 basis points lower in each year, our impairment charge would have been approximately$35.0 million less, and if we assumed our selected discount rate of 12% was 200 basis points lower, our impairment charge would have been approximately$12.0 million less. Further information regarding all of our goodwill impairment analyses can be found under the caption "Note 8: Fair Value Measurements" in the Notes to Consolidated Financial Statements appearing in Item II, Part 8 of this report. Evaluations of asset impairment require us to make assumptions about future events, market conditions and financial performance over the life of the asset being evaluated. These assumptions require significant judgment and actual results may vary from our assumptions. For example, if our stock price were to further decline over a sustained period, if a further downturn in economic conditions were to negatively affect our actual and forecasted operating results, if we were to change our business strategies and/or the allocation of resources, if we were to lose significant customers, if competition were to materially increase, or if order volume declines for checks and business forms were to materially accelerate, these situations could indicate a decline in the fair value of one or more of our reporting units. This may require us to record additional impairment charges for a portion of goodwill or other assets. 44 --------------------------------------------------------------------------------
Business Combinations
We allocate the purchase price of acquired businesses to the estimated fair values of the assets acquired and liabilities assumed as of the date of the acquisition. The calculations used to determine the fair value of the long-lived assets acquired, primarily intangible assets, can be complex and require significant judgment. We weigh many factors when completing these estimates, including, but not limited to, the nature of the acquired company's business; its competitive position, strengths, and challenges; its historical financial position and performance; estimated customer retention rates; discount rates; and future plans for the combined entity. We may also engage independent valuation specialists, when necessary, to assist in the fair value calculations for significant acquired long-lived assets. We generally estimate the fair value of acquired customer lists using the multi-period excess earnings method. This valuation model estimates revenues and cash flows derived from the asset and then deducts portions of the cash flow that can be attributed to supporting assets, such as a trade name or fixed assets, that contributed to the generation of the cash flows. The resulting cash flow, which is attributable solely to the customer list asset, is then discounted at a rate of return commensurate with the risk of the asset to calculate a present value. The fair value of acquired customer lists may also be estimated by discounting the estimated cash flows expected to be generated by the assets. During 2021, we also utilized the multi-period excess earnings method to estimate the fair value of acquired partner relationship intangible assets. Key assumptions used in these calculations include same-customer revenue, merchant and partner growth rates; estimated earnings; estimated customer and partner retention rates, based on the acquirees' historical information; and the discount rate. The fair value of acquired trade names and technology is estimated, at times, using the relief from royalty method, which calculates the cost savings associated with owning rather than licensing the assets. Assumed royalty rates are applied to projected revenue for the estimated remaining useful lives of the assets to estimate the royalty savings. Royalty rates are selected based on the attributes of the asset, including its recognition and reputation in the industry, and in the case of trade names, with consideration of the specific profitability of the products sold under a trade name and supporting assets. The fair value of acquired technology may also be estimated using the cost of reproduction method under which the primary components of the technology are identified and the estimated cost to reproduce the technology is calculated based on historical data provided by the acquiree. The excess of the purchase price over the estimated fair value of the net assets acquired is recorded as goodwill.Goodwill is not amortized, but is subject to impairment testing on at least an annual basis. We are also required to estimate the useful lives of the acquired intangible assets, which determines the amount of acquisition-related amortization expense we will record in future periods. Each reporting period, we evaluate the remaining useful lives of our amortizable intangibles to determine whether events or circumstances warrant a revision to the remaining period of amortization. While we use our best estimates and assumptions, our fair value estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to 1 year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Any adjustments required after the measurement period are recorded in the consolidated statements of income (loss). The judgments required in determining the estimated fair values and expected useful lives assigned to each class of assets and liabilities acquired can significantly affect net income. For example, different classes of assets will have different useful lives. Consequently, to the extent a longer-lived asset is ascribed greater value than a shorter-lived asset, net income in a given period may be higher. Additionally, assigning a lower value to amortizable intangibles would result in a higher amount assigned to goodwill. As goodwill is not amortized, this would benefit net income in a given period, although goodwill is subject to annual impairment analysis.
Revenue Recognition
Product revenue is recognized when control of the goods is transferred to our
customers, in an amount that reflects the consideration we expect to be entitled
to in exchange for those goods. In most cases, control is transferred when
products are shipped. We recognize the vast majority of our service revenue as
the services are provided. The majority of our contracts are for the shipment of
tangible products or the delivery of services that have a single performance
obligation or include multiple performance obligations where control is
transferred at the same time. Many of our financial institution contracts
require prepaid product discounts in the form of cash payments we make to our
financial institution clients. These prepaid product discounts are included in
other non-current assets on our consolidated balance sheets and are generally
amortized as reductions of revenue on the straight-line basis over the contract
term. Sales tax collected concurrent with revenue-producing activities is
excluded from revenue. Amounts billed to customers for shipping and handling are
included in revenue, while the related costs incurred for shipping and handling
are reflected in cost of products and are accrued when the related revenue is
recognized.
When another party is involved in providing goods or services to a customer, we
must determine whether our obligation is to provide the specified good or
service itself (i.e., we are the principal in the transaction) or to arrange for
that good or service to be provided by the other party (i.e., we are an agent in
the transaction). When we are responsible for satisfying a performance
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obligation, based on our ability to control the product or service provided, we
are considered the principal and revenue is recognized for the gross amount of
consideration. When the other party is primarily responsible for satisfying a
performance obligation, we are considered the agent and revenue is recognized in
the amount of any fee or commission to which we are entitled. We sell certain
products and services through a network of distributors. We have determined that
we are the principal in these transactions, and revenue is recorded for the
gross amount of consideration.
Certain costs incurred to obtain customer contracts are required to be
recognized as assets and amortized consistent with the transfer of goods or
services to the customer. As such, we defer costs related to obtaining check
supply, treasury management solutions and merchant services contracts. These
amounts, which totaled $18.0 million as of December 31, 2021 , are included in
other non-current assets and are amortized on the straight-line basis as SG&A
expense. Amortization of these amounts on the straight-line basis approximates
the timing of the transfer of goods or services to the customer. Generally,
these amounts are being amortized over periods of 2 to 5 years. We expense these
costs as incurred when the amortization period would have been 1 year or less.
Accounting for customer contracts can be complex and may involve the use of
various techniques to estimate total contract revenue. Estimates related to
variable consideration are based on various assumptions to project the outcome
of future events. We review and update our contract-related estimates regularly,
and we do not anticipate that revisions to our estimates would have a material
effect on our results of operations, financial position or cash flows.
New Accounting Pronouncements
Information regarding the accounting pronouncements adopted during 2021 can be found under the caption "Note 2: New Accounting Pronouncements" in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report.
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