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, capital structure and
financial position;
•Off-Balance Sheet Arrangements, Guarantees and Contractual Obligations that
discusses our financial commitments; and
•Critical Accounting Policies that discusses the policies we believe are most
important to understanding the assumptions and judgments underlying our
financial statements.
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, 2020 (the 2020 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) 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
period 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.
24
--------------------------------------------------------------------------------
EXECUTIVE OVERVIEW
COVID-19 impact - The COVID-19 pandemic began to impact our operations late in
the first quarter of 2020. Information regarding the impact in 2020, as well as
actions we took in response, can be found under the caption "Executive Overview"
in Part II, Item 7 of the 2020 Form 10-K.
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. Within Promotional Solutions, many of our business customers continued to
be impacted by their customers' and governmental responses to the pandemic.
Demand for promotional products has declined, as many of our customers reduced
or stopped virtually all promotional activities while their business activities
are limited. The decline in travel and event cancellations also has reduced
promotional spending. In Checks, both business and personal check volumes
declined as a result of the slowdown in the economy. The impact in Cloud
Solutions was driven primarily by a decline in data-driven marketing solutions,
as some clients suspended or reduced their marketing campaigns during this
period of uncertainty. We did see some recovery in data-driven marketing revenue
during the first quarter of 2021, with an increase of 11.3% as compared to the
fourth quarter of 2020. This resulted, 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.
Despite the continuing challenges of the pandemic, net income improved in the
first quarter of 2021, as compared to the first quarter of 2020, and adjusted
EBITDA margin was 20.5% for the first quarter of 2021, in line with our annual
expectations prior to the pandemic. Cash provided by operating activities
increased $13.1 million in the first quarter of 2021, as compared to the first
quarter of 2020, and free cash flow increased $5.7 million. Total debt at the
end of the quarter remained unchanged from the beginning of the year, and net
debt as of March 31, 2021 was the lowest since June 30, 2018. We held cash and
cash equivalents of $125.4 million as of March 31, 2021, and liquidity was
$427.8 million. Our priority is to maintain our financial strength, while
simultaneously continuing our business transformation. We are continuing
important systems implementation work and capital projects, including our
enterprise resource planning and sales technology implementations. We also
continue to pay our regular quarterly dividend of $0.30 per share.
2021 results vs. 2020 - Numerous factors drove the increase in net income for
the first quarter of 2021, as compared to the first quarter of 2020. The primary
factor was a decrease in asset impairment charges of $90.3 million, as compared
to 2020. Other factors that increased net income included:
•actions taken to reduce costs in line with reduced revenues and the continuing
evaluation of our cost structure, including savings of approximately $2.8
million from the suspension of the 401(k) plan employer matching contribution
implemented in response to the COVID-19 pandemic;
•a $7.7 million decrease in bad debt expense, primarily driven by allowances
recorded in the first quarter of 2020 related to notes receivable from our
Promotional Solutions distributors;
•revenue growth in certain business lines, including some recovery of
data-driven marketing revenue and increased treasury management revenue; and
•a $4.4 million decrease in restructuring, integration and other costs.
Partially offsetting these increases in net income were the following factors:
•the continuing secular decline in checks and business forms and the 2020
decision to exit certain product lines within Cloud Solutions;
•the loss of revenue resulting from the impact of the COVID-19 pandemic;
•a $3.1 million increase in share-based compensation expense; and
•acquisition transaction costs of $2.8 million in 2021.
Diluted EPS of $0.57 for the first quarter of 2021, as compared to diluted loss
per share of $1.45 for the first quarter of 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 the first quarter
of 2021 was $1.26, compared to $1.08 for the first quarter of 2020, and excludes
the impact of non-cash items or items that we believe are not indicative of
ongoing operations. The increase in adjusted EPS for the first quarter of 2021,
as compared to the first quarter of 2020, was driven primarily by various cost
savings actions across functional areas, as well as the lower bad debt expense
and revenue growth in certain business lines. These increases were partially
offset by the continuing secular decline in checks and business forms and the
impact of the COVID-19
25
--------------------------------------------------------------------------------
pandemic. A reconciliation of diluted earnings (loss) per share to adjusted
diluted EPS can be found in Consolidated Results of Operations.
Asset impairment charges - Net loss for the first quarter of 2020 included
pretax asset impairment charges of $90.3 million, or $1.81 per share. The
impairment charges related primarily to the goodwill of our Promotional
Solutions and Cloud Solutions Web Hosting reporting units, as well as
amortizable intangibles of our Cloud Solutions Web Hosting reporting unit.
Further information regarding these impairment charges can be found under the
caption "Note 7: Fair Value Measurements" of the Condensed Notes to Unaudited
Consolidated Financial Statements appearing in Part I, Item 1 of this report and
under the caption "Critical Accounting Policies" in Part II, Item 7 of the 2020
Form 10-K.
"One Deluxe" Strategy
A detailed discussion of our strategy can be found in Part I, Item 1 of the 2020
Form 10-K. We continue to be encouraged by the success to-date of our One Deluxe
strategy. We have made significant progress in the integration of our various
technology platforms, we have developed an enterprise-class sales organization,
we have built a talented management team and we have strengthened our balance
sheet. We have also built an organization focused on developing new and improved
products. With all of these achievements, we determined that we are ready to
augment our business through meaningful acquisitions.
On April 21, 2021, we entered into an Agreement and Plan of Merger under which
First American Payment Systems, L.P. (First American), will become our
wholly-owned subsidiary. First American is a large-scale payments technology
company that provides partners and merchants with comprehensive in-store, online
and mobile payment solutions. The aggregate purchase price payable on the
closing date is $960.0 million in cash, subject to customary adjustments for
cash, debt, net working capital, transaction expenses and certain tax benefits.
The transaction provides an end-to-end payments technology platform, which we
believe will provide significant leverage to accelerate organic growth. First
American generated revenue of approximately $290.0 million during 2020. We
expect to finance the transaction with a combination of cash on hand and
proceeds from new debt. In connection with the merger, we have obtained a $2.2
billion financing commitment from a group of lenders. We expect the acquisition
will close during the second quarter of 2021, pending customary regulatory
approvals and closing conditions. The results of operations for First American
will be included in our Payments segment from the date of acquisition. Further
information regarding this transaction can be found under the caption "Note 16:
Subsequent Event" of the Condensed Notes to Unaudited Consolidated Financial
Statements appearing in Part I, Item 1 of this report.
Outlook for 2021
Our outlook for 2021 does not include the impact of the First American
transaction, which we expect to close during the second quarter of 2021. While
the overall economic recovery in 2021 remains uncertain, we believe that we will
generate sales-driven revenue growth during 2021 in the range of 0% to 2%,
primarily driven by the combination of our sales performance and expected steady
macroeconomic recovery from the COVID-19 pandemic. We expect to exit the year
with revenue growth in the mid-single digits, and we expect that adjusted EBITDA
margin for the full year will be between 20% and 21%, at the lower end of our
long-term target range. We anticipate that our annual effective tax rate for
2021 will be approximately 25%.
As of March 31, 2021, we held cash and cash equivalents of $125.4 million and
$302.3 million was available for borrowing under our revolving credit facility.
We anticipate that capital expenditures will be approximately $90.0 million in
2021, as we continue with important transformation work, innovation investments
and building future 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 and debt service requirements for the next
12 months, including costs of the additional debt we expect to incur in
conjunction with the merger with First American. We were in compliance with our
debt covenants as of March 31, 2021, and we anticipate that we will remain in
compliance with our debt covenants throughout the next 12 months.
CONSOLIDATED RESULTS OF OPERATIONS
Consolidated Revenue
Quarter Ended March 31,
(in thousands) 2021 2020 Change
Total revenue $ 441,264 $ 486,423 (9.3%)
26
--------------------------------------------------------------------------------
The decrease in total revenue for the first quarter of 2021, as compared to the
first quarter of 2020, was driven primarily by volume declines resulting from
the impact of the COVID-19 pandemic, primarily in our Promotional Solutions,
Cloud Solutions and Checks segments, as discussed in Executive Overview. Revenue
also continued to be impacted by the secular decline in order volume for checks
and business forms. In addition, Cloud Solutions web and hosted solutions
revenue declined approximately $6.8 million in the first quarter of 2021 due to
our 2020 decision to exit certain product lines. Partially offsetting these
revenue declines was an increase in Cloud Solutions data-driven marketing
revenue, 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. In addition, Payments treasury
management revenue increased 4.0% compared to the first quarter of 2020.
Service revenue represented 32.2% of total revenue for the first quarter of 2021
and 32.0% for the first quarter of 2020. 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 14: Business
Segment Information" in the Condensed Notes to Unaudited Consolidated Financial
Statements appearing in Part I, Item 1 of this report. Our revenue mix by
business segment was as follows:
© Edgar Online, source Glimpses
DELUXE CORPORATION 
