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DELUXE CORPORATION

(DLX)
  Report
Delayed Quote. Delayed Nyse - 12/03 04:10:00 pm
33.64 USD   -1.00%
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DELUXE : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

08/06/2021 | 03:01pm EST

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. Updates to the risk factors discussed in the 2020 Form 10-K are included in Part II, Item IA of this report on Form 10-Q. 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 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

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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. Prior periods not presented herein will be revised, as applicable, in future filings. Further information regarding the errors can be found under the caption "Note 1: Consolidated Financial Statements" of the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report.


                               EXECUTIVE OVERVIEW


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 $956.7 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 $27.3 million and a contribution of $5.1 million to Payments adjusted EBITDA for the second quarter of 2021. The acquisition was funded with cash on hand and proceeds from new debt. Further information about the acquisition can be found under the caption "Note 6: Acquisition" and further information regarding our debt can be found under the caption "Note 12: Debt," both of which appear in the Condensed Notes to Unaudited Consolidated Financial Statements in Part I, Item 1 of this report.

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 to the pandemic, 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. During the second quarter of 2021, we saw some recovery in revenue volumes as the impacts of the pandemic lessened, primarily within marketing and promotional solutions, data-driven marketing and business checks. Our customers resumed some of their marketing and promotional activities as government restrictions were lifted and vaccines became more 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. Future impacts of the pandemic on our results of operations remain uncertain, as recent increases in infection rates could impact our customers' activities and our revenue volumes.

Despite the continuing challenges of the pandemic, net income improved for the first half of 2021, as compared to the first half of 2020, and adjusted EBITDA margin remained strong at 20.4% for the first half of 2021. Cash provided by operating activities decreased $25.8 million for the first half of 2021, as compared to the first half of 2020, driven by investments in our business, including transaction costs related to the acquisition of First American and investments in software-as-a-service (SaaS) solutions we are utilizing, including a new enterprise resource planning system. Additionally, the prior year benefited from the deferral of federal payroll and income tax payments under the CARES Act and temporary salary and other cost reductions implemented in response to the COVID-19 pandemic. Free cash flow decreased $45.4 million for the first half of 2021, as compared to the first half of 2020, including a $19.5 million increase in purchases of capital assets, as we continue investments to support our long-term growth. Total debt as of June 30, 2021 was $1.833 billion, reflecting the additional debt we incurred to complete the First American acquisition. Net debt as of June 30, 2021 was $1.67 billion. We held cash and cash equivalents of $163.3 million as of June 30, 2021, and liquidity was $455.8 million. Our capital allocation priorities are to responsibly invest in growth, pay down debt and return value to shareholders. We will evaluate future share repurchases on an opportunistic basis. In July 2021, we prepaid $24.0 million of the obligation under our term loan facility.

2021 results vs. 2020 - Numerous factors drove the increase in net income for the first half of 2021, as compared to the first half of 2020. The primary factor was a decrease in asset impairment charges of $99.0 million, as compared to 2020. Other factors that increased net income included:

•revenue growth in all of our segments in the second quarter of 2021, reflecting some recovery from the impacts of the COVID-19 pandemic, as well as new business;

•actions taken to reduce costs in line with revenues and the continuing evaluation of our cost structure;


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•a $12.9 million decrease in restructuring, integration and other costs; and

•a $12.4 million decrease in bad debt expense, primarily driven by allowances recorded in 2020 related to notes receivable from our Promotional Solutions distributors, as well as trade accounts receivable.

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;

•acquisition transaction costs of $18.6 million in 2021 related to the First American acquisition;

•the benefit in the prior year from actions taken in response to the COVID-19 pandemic, including savings of approximately $10.0 million from a temporary salary reduction and furloughs;

•increased investments in our growth, primarily costs related to sales and financial management tools;

•the impact of the COVID-19 pandemic on our revenue volumes for the first quarter of 2021, as compared to the first quarter of 2020; and

•a $5.3 million increase in share-based compensation expense.

Diluted EPS of $0.85 for the first half of 2021, as compared to diluted loss per share of $1.18 for the first half 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 half of 2021 was $2.51, compared to $2.24 for the first half 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 diluted EPS was driven primarily by continuing recovery in the second quarter of 2021 of reduced revenue volumes from the impact of the COVID-19 pandemic, as well as various cost savings actions across functional areas and lower bad debt expense. These increases were partially offset by the continuing secular decline in checks and business forms, the benefit in the prior year of temporary actions taken in response to the COVID-19 pandemic, various investments in our growth and the negative impact of the COVID-19 pandemic on our first quarter revenue volumes. 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 half of 2020 included pretax asset impairment charges of $99.0 million, or $1.50 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 8: 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 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. With these achievements, we determined that we were positioned to augment our business through meaningful acquisitions. As such, we completed the acquisition of First American on June 1, 2021. We believe First American's end-to-end payments technology platform will provide significant leverage to accelerate organic growth.

Outlook for 2021

With the acquisition of First American, we expect our revenue to increase 10% to 12% in 2021, up from our prior estimate of 0% to 2%. We expect that our adjusted EBITDA margin for the full year will be between 20% and 21%, with the fourth quarter expected to be stronger than the third quarter. We anticipate that our adjusted annual effective tax rate for 2021 will be approximately 25.0%. These estimates assume a continued economic recovery and are subject to, among other things, the macroeconomic unknowns associated with the COVID-19 pandemic, including the Delta variant, as well as potential supply chain constraints, labor supply issues and inflation.

As of June 30, 2021, we held cash and cash equivalents of $163.3 million and $292.5 million was available for borrowing under our revolving credit facility. We anticipate that capital expenditures will be between $95.0 million and $105.0 million in 2021, as we continue with important transformation work, 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

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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. We were in compliance with our debt covenants as of June 30, 2021, and we anticipate that we will remain in compliance with our debt covenants throughout the next 12 months.

© Edgar Online, source Glimpses

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