Business Wire | Jul 30, 2020 04:06PM EDT

Deluxe Reports Solid Second Quarter 2020 Performance and Declares Regular Dividend

Jul. 30, 2020

SHOREVIEW, Minn.--(BUSINESS WIRE)--Jul. 30, 2020--Deluxe (NYSE: DLX), a Trusted Business Technology(tm) company, today reported operating results for its second quarter ended June 30, 2020.

"Deluxe delivered stronger than expected second quarter performance. Our cash flow from operations exceeded last year's quarterly performance, enabling us to pay down $100 million on the revolving credit facility in July, and declare our regular dividend. Our reported revenue partially recovered from the April low, declining $84 million for the second quarter as compared to last year. We believe the company continued its historic sales-driven revenue growth from the first quarter, excluding our estimate of COVID-19 impact. GAAP margins stabilized and Adjusted EBITDA margins rebounded to our pre-COVID-19 range," said Barry McCarthy, President & CEO of Deluxe. "Our sales-driven 'One Deluxe' transformation is working too. We signed 4 of our top 25 prospects and further built our already strong sales pipeline. Our robust financial health has proven to be a significant competitive advantage in these wins," added McCarthy.

McCarthy continued, "We are grateful to our fellow Deluxers who have unfailingly provided selfless service to our customers as COVID-19 unfolded. We have proven we are agile and innovative at all levels, further evidence our 'One Deluxe' strategy is working. We are a trusted business technology company with the ability to generate strong revenue with healthy margins and are confident we will deliver strong shareholder value over the long-term."

Second Quarter 2020 Financial and Segment Highlights

2^nd Quarter 2^nd Quarter

2020 2019 % Change

Revenue $410.4 million $494.0 million (16.9 %)

Net Income $14.9 million $32.6 million (54.3 %)

Adjusted EBITDA $83.8 million $117.5 million (28.7 %)

Diluted EPS - GAAP $0.35 $0.75 (53.3 %)

Adjusted Diluted EPS $1.15 $1.64 (29.9 %)

* Revenue was $83.6 million lower than last year. COVID-19 negatively impacted our results in the quarter, primarily across our Promotional Solutions, Cloud Solutions and Check segments. * The Payments segment delivered strong revenue growth of 12.6% over the same period last year, benefiting from Treasury Management revenue growth of 20.5% in the second quarter driven primarily by previously announced and continuing business wins. * Net income decreased $17.7 million, driven primarily by the challenging business environment resulting from COVID-19, previously disclosed investments in the Company's business transformation and a pretax asset impairment charge of $4.9 million related to management's ongoing rationalization of the Company's real estate footprint. * Adjusted EBITDA declined by $33.7 million compared to the prior year quarter, while adjusted EBITDA margin improved from the first quarter 2020 by 330 basis points to 20.4%. * Cash flow from operations for the period ending June 30, 2020 was $109.7 million and capital expenditures were $27.1 million. Free cash flow, defined as cash provided by operating activities, less capital expenditures, was $82.6 million, an improvement of $9.8 million as compared to last year. * Cash flow from operations was negatively impacted by the same factors that impacted net income, but was offset by steps taken to maintain liquidity, including various expense reductions and delays in U.S federal income and payroll tax payments provided for under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. * At the end of the second quarter, the Company had $1.14 billion of total debt outstanding under its revolving credit facility, compared to $883.5 million at the beginning of 2020. * Cash and cash equivalents were $372.0 million at the end of the quarter, resulting in net debt of $768.0 million, a two-year low. Net debt is a non-GAAP financial measure as defined in the reconciliation tables attached. * As a result of this strong liquidity position, the Company made the decision in July to paydown $100.0 million of debt under its revolving credit facility. The Company's outstanding balance under this facility was $1.04 billion as of July 17, 2020.

Outlook

Due to the significant ongoing uncertainties in the macro-economic environment, the Company previously withdrew its 2020 outlook, and is not providing third quarter or full year financial guidance at this time.

Observations and Expectations:

* Slight sequential total revenue improvement from the second quarter in the back half of the year; * Payments segment expected to continue to experience year-over-year revenue growth, driven by new client wins and strong demand for our services; margin compression is expected from significant new customer on-boarding expense and COVID-19-related delay in some customers' initiatives; * Cloud Solutions segment revenue expected to track with the overall recovery for small businesses, slightly recovering sequentially as the year progresses; this assumes normal demand for data-driven marketing services returns towards the end of the year; * Promotional Solutions segment has added new products to offset COVID-related declines; expecting revenue to slightly improve sequentially over the remainder of the year; and * Checks segment expected to decline at a lesser rate in the second half of the year, improving sequentially for the remainder of the year.

Capital Allocation and DividendThe Company's Board of Directors approved a regular quarterly dividend of $0.30 per share on all outstanding shares of the Company. The dividend will be payable on September 8, 2020 to all shareholders of record as of the close of business on August 24, 2020.

Earnings Call InformationA live conference call will be held today at 4:45 p.m. ET (3:45 p.m. CT) to review the financial results. Listeners can access the call by dialing 1-651-247-0252 (access code 6675834). A presentation also will be available via a webcast on the investor relations website at www.deluxe.com/investor. Alternatively, an audio replay of the call will be available after 8:00 p.m. ET and through midnight on August 6, 2020 by dialing 1-404-537-3406 (access code 6675834).

About DeluxeDeluxe is a Trusted Business Technology(tm) company that champions business so communities thrive. Our solutions help businesses pay and get paid, accelerate growth and operate more efficiently. For more than 100 years, we've been helping businesses succeed at all stages of their lifecycle, from start-up to maturity. Our unparalleled global scale supporting approximately 4.5 million small businesses, over 4,000 financial institutions and hundreds of the world's largest consumer brands uniquely positions Deluxe to be our customers' most trusted business partner. To learn how we can help your business, visit us at www.deluxe.com, www.facebook.com/deluxecorp, www.linkedin.com/company/deluxe, or www.twitter.com/deluxecorp.

Forward-Looking StatementsStatements made in this release concerning Deluxe, the Company's or management's intentions, expectations, outlook or predictions about future results or events are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements reflect management's current intentions or beliefs and are subject to risks and uncertainties that could cause actual results or events to vary from stated expectations, which variations could be material and adverse. Factors that could produce such a variation include, but are not limited to, the following: potential continuing negative impacts from pandemic health issues, such as the coronavirus / COVID-19, along with the impact of government stay-at-home orders or other similar directives on our future financial results of operations, our future financial condition, and our ability to continue business activities in affected regions; the impact that further deterioration or prolonged softness in the economy may have on demand for the Company's products and services; the Company's ability to execute its transformational strategy and to realize the intended benefits; the inherent unreliability of earnings, revenue and cash flow predictions due to numerous factors, many of which are beyond the Company's control; declining demand for the Company's checks, check-related products and services and business forms; risks that the Company's strategies intended to drive sustained revenue and earnings growth, despite the continuing decline in checks and forms, are delayed or unsuccessful; intense competition; continued consolidation of financial institutions and/or additional bank failures, thereby reducing the number of potential customers and referral sources and increasing downward pressure on the Company's revenue and gross profit; the risk that future acquisitions will not be consummated; risks that any such acquisitions do not produce the anticipated results or synergies; risks that the Company's cost reduction initiatives will be delayed or unsuccessful; performance shortfalls by one or more of the Company's major suppliers, licensors or service providers; unanticipated delays, costs and expenses in the development and marketing of products and services, including web services and financial technology and treasury management solutions; the failure of such products and services to deliver the expected revenues and other financial targets; risks related to security breaches, computer malware or other cyber-attacks; risks of interruptions to the Company's website operations or information technology systems; risks of unfavorable outcomes and the costs to defend litigation and other disputes; and the impact of governmental laws and regulations. The Company's cash dividends are declared by the Board of Directors on a current basis and therefore may be subject to change. The Company's forward-looking statements speak only as of the time made, and management assumes no obligation to publicly update any such statements. Additional information concerning these and other factors that could cause actual results and events to differ materially from the Company's current expectations are contained in the Company's Form 10-K for the year ended December 31, 2019 and in the Company's Form 10-Q for the quarter ended March 31, 2020.

DELUXE CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF INCOME (LOSS)

(in millions, except per share amounts)

(Unaudited)

Quarter Ended Six Months Ended

June 30, June 30,

2020 2019 2020 2019

Product revenue $278.7 $347.1 $609.4 $697.6

Service revenue 131.7 146.9 287.4 295.5

Total revenue 410.4 494.0 896.8 993.1

Cost of products (102.9 ) (133.8 ) (224.4 ) (265.1 )

Cost of services (59.4 ) (68.7 ) (139.9 ) (137.1 )

Total cost of revenue (162.3 ) (202.5 ) (364.3 ) (402.2 )

Gross profit 248.1 291.5 532.5 590.9

Selling, general and administrative (198.5 ) (222.4 ) (435.8 ) (452.5 )expense

Restructuring and integration expense (20.4 ) (17.3 ) (38.0 ) (22.8 )

Asset impairment charges (4.9 ) - (95.2 ) -

Operating income (loss) 24.3 51.8 (36.5 ) 115.6

Interest expense (6.1 ) (9.2 ) (13.2 ) (18.5 )

Other income 1.8 2.2 6.3 3.9

Income (loss) before income taxes 20.0 44.8 (43.4 ) 101.0

Income tax provision (5.1 ) (12.2 ) (1.9 ) (27.2 )

Net income (loss) $14.9 $32.6 ($45.3 ) $73.8

Weighted average dilutive shares 41.9 43.6 42.0 43.8 outstanding

Diluted earnings (loss) per share $0.35 $0.75 ($1.10 ) $1.68

Adjusted diluted earnings per share 1.15 1.64 2.24 3.18

Capital expenditures 20.7 17.7 27.1 32.3

Depreciation and amortization expense 26.7 32.5 55.1 64.9

EBITDA 52.8 86.5 24.9 184.4

Adjusted EBITDA 83.8 117.5 167.2 231.2

DELUXE CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS

(dollars and shares in millions)

(Unaudited)

June 30, December June 30, 31,

2020 2019 2019

Cash and cash equivalents $372.0 $73.6 $66.7

Other current assets 344.3 398.6 378.3

Property, plant & equipment 77.9 96.5 91.5

Operating lease assets 45.0 44.4 44.0

Intangibles 230.7 276.1 325.7

Goodwill 736.8 804.5 1,158.8

Other non-current assets 253.4 249.6 249.0

Total assets $2,060.1 $1,943.3 $2,314.0



Total current liabilities $358.5 $407.9 $349.6

Long-term debt 1,140.0 883.5 951.0

Non-current operating lease liabilities 34.2 33.6 33.5

Deferred income taxes 3.3 14.9 51.9

Other non-current liabilities 38.8 32.5 33.9

Shareholders' equity 485.3 570.9 894.1

Total liabilities and shareholders' $2,060.1 $1,943.3 $2,314.0 equity

Shares outstanding 41.9 42.1 42.9

Number of employees 6,623 6,352 6,485

DELUXE CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(in millions)

(Unaudited)

Six Months Ended June 30,

2020 2019

Cash provided (used) by:

Operating activities:

Net (loss) income ($45.3 ) $73.8

Depreciation and amortization of intangibles 55.1 64.9

Asset impairment charges 95.2 -

Prepaid product discount payments (15.8 ) (16.2 )

Other 20.5 (17.4 )

Total operating activities 109.7 105.1

Investing activities:

Purchases of capital assets (27.1 ) (32.3 )

Other 1.8 (0.5 )

Total investing activities (25.3 ) (32.8 )

Financing activities:

Net change in debt 256.5 41.0

Dividends (25.5 ) (26.2 )

Share repurchases (14.0 ) (78.9 )

Shares issued under employee plans 2.4 1.6

Net change in customer funds obligations (31.4 ) (10.7 )

Other (2.4 ) (4.3 )

Total financing activities 185.6 (77.5 )

Effect of exchange rate change on cash, cash equivalents, (6.5 ) 4.0 restricted cash and restricted cash equivalents

Net change in cash, cash equivalents, restricted cash and 263.5 (1.2 )restricted cash equivalents

Cash, cash equivalents, restricted cash and restricted 174.8 145.3 cash equivalents, beginning of year

Cash, cash equivalents, restricted cash and restricted $438.3 $144.1 cash equivalents, end of period

Free cash flow $82.6 $72.8

DELUXE CORPORATION

SEGMENT INFORMATION

(In millions)

(Unaudited)

Quarter Ended Six Months Ended

June 30, June 30,

2020 2019 2020 2019

Revenue:

Payments $72.2 $64.1 $149.2 $129.3

Cloud Solutions 53.9 78.9 129.9 157.2

Promotional Solutions 117.9 155.6 260.7 311.4

Checks 166.4 195.4 357.0 395.2

Total $410.4 $494.0 $896.8 $993.1

Adjusted EBITDA:

Payments $15.6 $18.0 $33.6 $34.8

Cloud Solutions 14.1 19.1 29.1 36.2

Promotional Solutions 13.9 22.3 25.1 45.9

Checks 82.7 99.8 173.4 202.1

Corporate (42.5 ) (41.7 ) (94.0 ) (87.8 )

Total $83.8 $117.5 $167.2 $231.2

Adjusted EBITDA Margin:

Payments 21.6 % 28.1 % 22.5 % 26.9 %

Cloud Solutions 26.2 % 24.2 % 22.4 % 23.0 %

Promotional Solutions 11.8 % 14.3 % 9.6 % 14.7 %

Checks 49.7 % 51.1 % 48.6 % 51.1 %

Total 20.4 % 23.8 % 18.6 % 23.3 %



Effective January 1, 2020, the Company reorganized its operations into four reportable business segments based on its product and service offerings. In addition, management began utilizing Adjusted EBITDA to determine the allocation of Company resources and to assess segment operating performance. Adjusted EBITDA is the measure of segment performance presented in the Company's Form 10-Q for the quarter ended March 31, 2020 in accordance with Accounting Standards Codification 280. Corporate consists of those costs that are not directly attributable to a business segment, primarily marketing, accounting, information technology, facilities, executive management, legal, tax and treasury costs that support the corporate function. Corporate also includes other income. Prior period information has been revised to reflect these changes. A reconciliation of net income (loss) to total Adjusted EBITDA can be found later in this release.

DELUXE CORPORATION RECONCILIATION OF GAAP TO NON-GAAP MEASURES(in millions) (Unaudited)

EBITDA AND ADJUSTED EBITDA

Management discloses EBITDA and Adjusted EBITDA because it believes they are useful in evaluating the Company's operating performance, as the calculations eliminate the effect of interest expense, income taxes, the accounting effects of capital investments (i.e., depreciation and amortization) and in the case of Adjusted EBITDA, certain items, as presented below, that may vary for companies for reasons unrelated to overall operating performance. In addition, management utilizes Adjusted EBITDA to assess the operating results and performance of the business, to perform analytical comparisons and to identify strategies to improve performance. Management also believes that an increasing EBITDA and Adjusted EBITDA depict an increase in the value of the company. Management does not consider EBITDA and Adjusted EBITDA to be measures of cash flow, as they do not consider certain cash requirements such as interest, income taxes, debt service payments or capital investments. Management does not consider EBITDA or Adjusted EBITDA to be substitutes for operating income or net income. Instead, management believes that EBITDA and Adjusted EBITDA are useful performance measures that should be considered in addition to GAAP performance measures.

Quarter Ended Six Months Ended

June 30, June 30,

2020 2019 2020 2019

Net income (loss) $14.9 $32.6 ($45.3 ) $73.8

Interest expense 6.1 9.2 13.2 18.5

Income tax provision 5.1 12.2 1.9 27.2

Depreciation and amortization expense 26.7 32.5 55.1 64.9

EBITDA 52.8 86.5 24.9 184.4

Asset impairment charges 4.9 - 95.2 -

Restructuring, integration and other 20.5 17.7 40.1 24.0 costs

CEO transition costs 0.2 1.9 - 7.4

Share-based compensation expense 5.4 5.4 9.1 8.7

Acquisition transaction costs - - - 0.2

Certain legal-related expense - 6.0 (2.1 ) 6.4

Loss on sales of customer lists - - - 0.1

Adjusted EBITDA $83.8 $117.5 $167.2 $231.2

DELUXE CORPORATION RECONCILIATION OF GAAP TO NON-GAAP MEASURES (continued)(in millions) (Unaudited)

ADJUSTED DILUTED EPS

By excluding the impact of non-cash items or items that may not be indicative of ongoing operations, management believes that Adjusted Diluted EPS provides useful comparable information to assist in analyzing the Company's current and future operating performance. As such, Adjusted Diluted EPS is one of the key financial performance metrics used 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. Management does not consider Adjusted Diluted EPS to be a substitute for GAAP performance measures, but believes that it is a useful performance measure that should be considered in addition to GAAP performance measures.

Quarter Ended Six Months Ended

June 30, June 30,

2020 2019 2020 2019

Net income (loss) $14.9 $32.6 ($45.3 ) $73.8

Asset impairment charges 4.9 - 95.2 -

Acquisition amortization 13.7 18.8 28.4 37.8

Restructuring, integration and other 20.5 17.7 40.1 24.0 costs

CEO transition costs 0.2 1.9 - 7.4

Share-based compensation expense 5.4 5.4 9.1 8.7

Acquisition transaction costs - - - 0.2

Certain legal-related expense - 6.0 (2.1 ) 6.4

Loss on sales of customer lists - - - 0.1

Adjustments, pre-tax 44.7 49.8 170.7 84.6

Income tax provision impact of pre-tax (11.2 ) (10.9 ) (30.3 ) (18.9 )adjustments^(1)

Adjustments, net of tax 33.5 38.9 140.4 65.7

Adjusted net income 48.4 71.5 95.1 139.5

Income allocated to participating - - (0.1 ) (0.2 )securities

Re-measurement of share-based awards - (0.1 ) (0.8 ) - classified as liabilities

Adjusted income available to common $48.4 $71.4 $94.2 $139.3 shareholders



GAAP Diluted EPS $0.35 $0.75 ($1.10 ) $1.68

Adjustments, net of tax 0.80 0.89 3.34 1.50

Adjusted Diluted EPS^(2) $1.15 $1.64 $2.24 $3.18

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^ the U.S. effective tax rate for each adjustment. However, the tax impact(1) 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.



The total of weighted-average shares and potential common shares outstanding used in the calculation of adjusted diluted EPS for the six^ months ended June 30, 2020 was 132 thousand shares higher than that used(2) in the GAAP diluted loss per share calculation. Because of the net loss in the first half of 2020, the GAAP calculation excluded a higher number of share-based compensation awards that were antidilutive.

DELUXE CORPORATION RECONCILIATION OF GAAP TO NON-GAAP MEASURES (continued)(in millions) (Unaudited) NET DEBT

Net debt is not a GAAP financial measure. Nevertheless, management believes that net debt is an important measure to monitor leverage and evaluate the balance sheet. In calculating net debt, cash and cash equivalents are subtracted from total debt because they could be used to reduce the Company's 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 and that there is less Company debt than the most comparable GAAP measure indicates.

June 30, 2020 December 31, 2019 June 30, 2019

Total debt $1,140.0 $883.5 $951.0

Cash and cash equivalents (372.0 ) (73.6 ) (66.7 )

Net debt $768.0 $809.9 $884.3



FREE CASH FLOW

Management believes 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 the Company's asset base. Free cash flow is limited and not all of the Company's free cash flow is available for discretionary spending, as the Company may have mandatory debt payments and other cash requirements that must be deducted from its cash available for future use. Free cash flow is not a substitute for GAAP liquidity measures. Instead, management believes that this measurement 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 share repurchases, dividends, mandatory and discretionary debt reduction and acquisitions or other strategic investments.

Six Months Ended

June 30,

2020 2019

Net cash provided by operating activities $109.7 $105.1

Purchases of capital assets (27.1 ) (32.3 )

Free cash flow $82.6 $72.8

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CONTACT: Jane Elliott, Chief Communications and HR Officer 770-833-3500 investorrelations@Deluxe.com

CONTACT: Cam Potts, VP, Communications 651-233-7735 Cameron.Potts@Deluxe.com