Our 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 our Annual Report on Form
10-K for the year ended December 31, 2021 (the "2021 Form 10-K") outlines known
material risks and important information to consider when evaluating our
forward-looking statements and is incorporated into this Item 2 of this report
on Form 10-Q as if fully stated herein. The Private Securities Litigation Reform
Act of 1995 (the "Reform Act") provides a "safe harbor" for forward-looking
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
Quarterly Report on Form 10-Q, 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"),
consolidated adjusted earnings before interest, taxes, depreciation and
amortization ("adjusted EBITDA") and consolidated adjusted EBITDA margin, 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.
EXECUTIVE OVERVIEW
We help businesses deepen customer relationships through trusted,
technology-enabled solutions that help businesses pay and get paid, accelerate
growth and operate more efficiently. Our solutions include merchant services,
marketing services and data analytics, treasury management solutions, website
development and hosting, promotional products, and fraud and payroll solutions,
as well as customized checks and business forms. We support millions of small
businesses, thousands of financial institutions and hundreds of the world's
largest consumer brands, while processing approximately $3.0 trillion in annual
payment volume. Our reach, scale and distribution channels position us to be a
trusted business partner for our customers.
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. 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 contributed incremental revenue of $144.2 million and incremental
adjusted EBITDA of $30.2 million for the first nine months of 2022. 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" in the Notes to Consolidated Financial Statements appearing in the
2021 Form 10-K and under the caption "Note 6: Acquisition and Divestitures" in
the Condensed Notes to Unaudited Consolidated Financial Statements appearing in
Part I, Item 1 of this report. Information regarding our debt can be found under
the caption "Note 12: Debt" in the Condensed Notes to Unaudited Consolidated
Financial Statements appearing in Part I, Item 1 of this report.
Recent market conditions - The impact of the global coronavirus ("COVID-19")
pandemic on our business and historical results of operations can be found in
the Executive Overview section appearing in Part II, Item 7 of the 2021 Form
10-K. The
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environment surrounding COVID-19 and any countermeasures taken to reduce its
spread may impact our future performance and remains difficult to predict.
In 2021, we began experiencing increased inflationary pressures on our labor,
delivery and material costs. In response to the inflationary environment, we
began implementing targeted price increases in all of our segments in late 2021.
Despite the price changes, we continue to experience strong revenue volumes,
demonstrating the strength of our business and the continued strong demand for
our products. During 2022, we began experiencing some supply disruptions
impacting certain higher margin printed products in our Promotional Solutions
segment. We continue to closely monitor our supply chain to promptly address any
further delays or disruptions, and we did see some improvement in the third
quarter of 2022. We have also been experiencing labor supply issues in certain
portions of the business. It remains difficult to estimate the severity and
duration of the current inflationary environment or supply chain and labor
issues on our business, financial position or results of operations.
In 2022, our interest expense began increasing as a result of the rising
interest rate environment. We executed an interest rate swap during the third
quarter of 2022 to effectively convert an additional $300.0 million of our
variable-rate debt to a fixed rate. As of September 30, 2022, nearly 60% of our
debt was fixed rate, which will partially insulate us from future interest rate
increases.
Cash flows and liquidity - Cash provided by operating activities for the first
nine months of 2022 decreased $25.8 million as compared to the first nine months
of 2021. The decrease reflects a $32.8 million increase in interest payments as
a result of debt issued to complete the First American acquisition and rising
interest rates, as well as a $22.8 million increase in employee cash bonus
payments related to our 2021 operating performance. During 2021, a portion of
our cash bonuses were paid in the form of restricted stock units and the bonus
payments in 2021 were unusually low because of the impact of the COVID-19
pandemic on our 2020 performance. Operating cash flow was also negatively
impacted by a $17.7 million increase in income tax payments, as well as
inflationary pressures, supply chain disruptions in our Promotional Solutions
segment, and the continuing secular decline in checks, business forms and some
business accessories. The increase in income tax payments was primarily driven
by the provisions of the Tax Cuts and Jobs Act of 2017 that became effective in
2022 and that require the capitalization of research and development and cloud
computing arrangement expenditures for income tax purposes. We were able to
substantially offset these decreases in operating cash flow through the
incremental contribution of the First American acquisition, price increases in
response to the current inflationary environment, continued cost saving actions,
and revenue growth from new business and strong demand for our products. In
addition, we incurred acquisition transaction costs of $18.8 million for the
first nine months of 2021 related to the First American acquisition that did not
recur in 2022. Free cash flow decreased $18.2 million for the first nine months
of 2022, as compared to the first nine months of 2021. During the third quarter
of 2022, we retired $25.0 million of our $500.0 million senior, unsecured notes,
realizing a pretax gain of $1.7 million. Total debt was $1.67 billion and net
debt was $1.63 billion as of September 30, 2022. We held cash and cash
equivalents of $45.5 million as of September 30, 2022, and liquidity was $327.7
million. Our capital allocation priorities are to responsibly invest in growth,
pay our dividend, reduce debt and return value to our shareholders.
2022 earnings vs. 2021 - Multiple factors drove the decrease in net income for
the first nine months of 2022, as compared to the first nine months of 2021,
including:
•a $29.9 million increase in interest expense resulting from debt issued to
complete the First American acquisition and the effect of increasing interest
rates on our variable-rate debt;
•increased transformational investments, primarily costs related to our
technology infrastructure, as well as an increase in restructuring and
integration costs of $8.6 million;
•inflationary pressures on hourly wages, materials and delivery and supply chain
disruptions within the Promotional Solutions segment that impacted certain of
our higher margin printed products during 2022;
•a $12.9 million increase in acquisition amortization, driven primarily by the
First American acquisition; and
•the continuing secular decline in checks, business forms and some Promotional
Solutions business accessories.
Partially offsetting these decreases in net income were the following factors:
•price increases in response to the current inflationary environment;
•pretax gains of $19.3 million from the sale of businesses and a facility during
the first nine months of 2022;
•acquisition transaction costs of $18.8 million for the first nine months of
2021 related to the First American acquisition that did not recur in 2022;
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•actions taken to reduce costs as we continually evaluate our cost structure,
including workforce adjustments, real estate rationalization and marketing
optimization; and
•revenue growth from new business in all of our segments and strong ongoing
demand for our products, reflecting the continued success of our One Deluxe
strategy.
Diluted EPS of $1.06 for the first nine months of 2022, as compared to $1.13 for
the first nine months of 2021, reflects the decrease in net income as described
in the preceding paragraphs, as well as higher average shares outstanding in
2022. Adjusted diluted EPS for the first nine months of 2022 was $3.04 compared
to $3.62 for the first nine months of 2021, 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 by the
increase in interest expense resulting from the debt issued to complete the
First American acquisition and the effect of increasing interest rates on our
variable-rate debt, increased transformational investments, inflationary
pressures on our cost structure, Promotional Solutions supply chain disruptions
and the continuing secular decline in checks, business forms and some business
accessories. These decreases in adjusted EPS were partially offset by price
increases in response to the current inflationary environment and the
contribution from First American, as adjusted EPS excludes the associated
acquisition amortization of $35.2 million for the first nine months of 2022
compared to $15.9 million for the first nine months of 2021. In addition,
adjusted EPS benefited from various cost saving actions across functional areas,
as well as revenue growth from new business in all of our segments and strong
ongoing demand for our products. A reconciliation of diluted EPS to adjusted
diluted EPS can be found in Consolidated Results of Operations.
"One Deluxe" Strategy
A detailed discussion of our strategy can be found in Part I, Item 1 of the 2021
Form 10-K. 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 have realized the benefit
of significant new client wins in all of our segments. We also completed the
acquisition of First American in June 2021, and we believe that First American's
end-to-end payments technology platform is providing significant leverage that
will continue to accelerate organic revenue growth. Since the acquisition and
the implementation of our One Deluxe model, First American revenue growth has
been exceeding our expectations.
Divestitures - In May 2022, we completed the sale of our Australian web hosting
business for cash proceeds of $17.6 million, net of costs of the sale. This
business generated annual revenue in our Cloud Solutions segment of $23.8
million during 2021, and we recognized a pretax gain of $15.2 million on this
sale during the second quarter of 2022. The assets and liabilities sold were not
significant to our consolidated balance sheet.
In April 2022, we sold the assets of our Promotional Solutions strategic
sourcing business and in August 2022, we sold the assets of our Promotional
Solutions retail packaging business. These businesses generated annual revenue
of approximately $29.0 million during 2021. Neither the gain on these sales nor
the assets and liabilities sold were significant to our consolidated financial
statements.
We believe that the sale of these businesses allows us to focus our resources on
the key growth areas of payments and data, while allowing us to optimize our
operations.
Outlook for 2022
We expect revenue to increase 8% to 10% for 2022, including a full year of
revenue from First American and the impact of business exits, as compared to
revenue of $2.022 billion for 2021. Business exits are expected to reduce full
year 2022 revenue growth by approximately 2.0 percentage points. We expect that
adjusted EBITDA margin for the full year will be approximately 18.5% to 19.0%,
as compared to 20.2% for 2021. These estimates are subject to, among other
things, uncertain macroeconomic conditions, labor supply issues, inflation and
the impact of divestitures.
As of September 30, 2022, we held cash and cash equivalents of $45.5 million and
$282.2 million was available for borrowing under our revolving credit facility.
We anticipate that capital expenditures will be approximately $105.0 million for
the full year, 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 of September 30, 2022, and we
anticipate that we will remain in compliance with our debt covenants throughout
the next 12 months.
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