Document/ExhibitDescriptionPagesSize 1: 10-Q Deluxe Corporation 10-Q 09.30.2022 HTML 2.39M
2: EX-10.1 Material Contract HTML 102K
3: EX-31.1 Certification -- §302 - SOA'02 HTML 24K
4: EX-31.2 Certification -- §302 - SOA'02 HTML 24K
5: EX-32.1 Certification -- §906 - SOA'02 HTML 21K
11: R1 Document HTML 72K
12: R2 Consolidated Balance Sheets (Unaudited) HTML 135K
13: R3 Consolidated Balance Sheets (Unaudited) HTML 33K
(Parentheticals)
14: R4 Consolidated Statements of Comprehensive Income HTML 118K
(Unaudited)
15: R5 Consolidated Statements of Shareholders' Equity HTML 103K
(Unaudited)
16: R6 Consolidated Statements of Shareholders' Equity HTML 22K
(Unaudited) (Parentheticals)
17: R7 Consolidated Statements of Cash Flows (Unaudited) HTML 116K
18: R8 Consolidated financial statements HTML 25K
19: R9 New accounting pronouncement HTML 32K
20: R10 Supplemental balance sheet and cash flow HTML 207K
information
21: R11 Earnings per share HTML 62K
22: R12 Other comprehensive income HTML 74K
23: R13 Acquisition and divestitures HTML 63K
24: R14 Derivative financial instruments HTML 34K
25: R15 Fair value measurements HTML 72K
26: R16 Restructuring and integration expense HTML 53K
27: R17 Income tax provision HTML 39K
28: R18 Postretirement benefits HTML 39K
29: R19 Debt HTML 61K
30: R20 Other commitments and contingencies HTML 29K
31: R21 Shareholders' equity HTML 26K
32: R22 Business segment information HTML 213K
33: R23 Consolidated financial statements (Policies) HTML 22K
34: R24 Supplemental balance sheet and cash flow HTML 238K
information (Tables)
35: R25 Earnings per share (Tables) HTML 61K
36: R26 Other comprehensive income (Tables) HTML 75K
37: R27 Acquisition and divestitures (Tables) HTML 62K
38: R28 Fair value measurements (Tables) HTML 67K
39: R29 Restructuring and integration expense (Tables) HTML 53K
40: R30 Income tax provision (Tables) HTML 36K
41: R31 Postretirement benefits (Tables) HTML 35K
42: R32 Debt (Tables) HTML 56K
43: R33 Business segment information (Tables) HTML 212K
44: R34 Supplemental balance sheet and cash flow HTML 40K
information (Trade Accounts Receivable, Allowance
for Credit Losses) (Details)
45: R35 Supplemental balance sheet and cash flow HTML 42K
information (Inventories and Supplies) (Details)
46: R36 Supplemental balance sheet and cash flow HTML 57K
information (Available-For-Sale Debt Securities)
(Details)
47: R37 Supplemental balance sheet and cash flow HTML 27K
information (Revenue in Excess of Billings)
(Details)
48: R38 Supplemental balance sheet and cash flow HTML 72K
information (Intangibles) (Details)
49: R39 Supplemental balance sheet and cash flow HTML 51K
information (Goodwill) (Details)
50: R40 Supplemental balance sheet and cash flow HTML 89K
information (Other Non-Current Assets) (Details)
51: R41 Supplemental balance sheet and cash flow HTML 71K
information (Other) (Details)
52: R42 Earnings per share (Details) HTML 90K
53: R43 Other comprehensive income (Reclassification HTML 60K
Adjustments) (Details)
54: R44 Other comprehensive income (Accumulated Other HTML 60K
Comprehensive Loss) (Details)
55: R45 Acquisition and divestitures (Details) HTML 160K
56: R46 Derivative financial instruments (Details) HTML 33K
57: R47 Fair value measurements (Details) HTML 94K
58: R48 Restructuring and integration expense (Details) HTML 39K
59: R49 Restructuring and integration expense (Accruals) HTML 33K
(Details)
60: R50 Income tax provision (Details) HTML 50K
61: R51 Postretirement benefits (Details) HTML 36K
62: R52 Debt (Details) HTML 156K
63: R53 Other commitments and contingencies (Details) HTML 25K
64: R54 Shareholders' equity (Details) HTML 30K
65: R55 Business segment information (Details) HTML 72K
66: R56 Business segment information (Disaggregated HTML 80K
Revenue Information) (Details)
69: XML IDEA XML File -- Filing Summary XML 127K
67: XML XBRL Instance -- dlx-20220930_htm XML 3.24M
68: EXCEL IDEA Workbook of Financial Reports XLSX 148K
7: EX-101.CAL XBRL Calculations -- dlx-20220930_cal XML 246K
8: EX-101.DEF XBRL Definitions -- dlx-20220930_def XML 588K
9: EX-101.LAB XBRL Labels -- dlx-20220930_lab XML 1.67M
10: EX-101.PRE XBRL Presentations -- dlx-20220930_pre XML 957K
6: EX-101.SCH XBRL Schema -- dlx-20220930 XSD 138K
70: JSON XBRL Instance as JSON Data -- MetaLinks 440± 661K
71: ZIP XBRL Zipped Folder -- 0000027996-22-000206-xbrl Zip 510K
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section
12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
iCommon Stock, par value $1.00 per share
iDLX
iNYSE
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒iYes ☐ No
Indicate by check mark whether
the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). ☒iYes ☐ No
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
iLarge Accelerated
Filer
☒
Accelerated Filer
☐
Non-accelerated Filer
☐
Smaller Reporting Company
i☐
Emerging Growth Company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
i☐
Yes ☒ No
The number of shares outstanding of registrant’s common stock as of October 26, 2022 was i43,136,109.
See
Condensed Notes to Unaudited Consolidated Financial Statements
5
DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine
Months Ended September 30,
(in thousands)
2022
2021
Cash flows from operating activities:
Net income
$
i46,536
$
i48,955
Adjustments
to reconcile net income to net cash provided by operating activities:
Depreciation
i18,595
i14,536
Amortization
of intangibles
i110,353
i88,393
Operating
lease expense
i14,397
i12,897
Amortization
of prepaid product discounts
i26,258
i23,425
Deferred
income taxes
(i21,791)
i13,733
Employee
share-based compensation expense
i18,766
i21,801
Gain
on sale of businesses and facility
(i19,331)
i—
Other
non-cash items, net
i22,940
i10,459
Changes
in assets and liabilities, net of effect of acquisition:
Trade accounts receivable
(i878)
i15,164
Inventories
and supplies
(i14,540)
i3,787
Other
current assets
(i11,826)
(i27,495)
Payments
for cloud computing arrangement implementation costs
(i16,608)
(i27,989)
Other
non-current assets
(i11,808)
(i7,832)
Accounts
payable
(i1,090)
i8,538
Prepaid
product discount payments
(i23,920)
(i27,049)
Other
accrued and non-current liabilities
(i12,635)
(i22,094)
Net
cash provided by operating activities
i123,418
i149,229
Cash
flows from investing activities:
Purchases of capital assets
(i73,454)
(i81,081)
Payment
for acquisition, net of cash, cash equivalents, restricted cash and restricted cash equivalents acquired
i—
(i956,717)
Proceeds
from sale of businesses and facility
i25,248
i2,648
Other
(i1,144)
(i1,211)
Net
cash used by investing activities
(i49,350)
(i1,036,361)
Cash
flows from financing activities:
Proceeds from issuing long-term debt and swingline loans
i511,000
i1,852,850
Payments
on long-term debt and swingline loans
(i524,175)
(i903,438)
Payments
for debt issuance costs
i—
(i18,153)
Net
change in customer funds obligations
(i88,079)
i14,913
Proceeds
from issuing shares
i2,383
i16,031
Employee
taxes paid for shares withheld
(i5,597)
(i4,634)
Cash
dividends paid to shareholders
(i39,613)
(i38,695)
Other
(i5,480)
(i7,254)
Net
cash (used) provided by financing activities
(i149,561)
i911,620
Effect
of exchange rate change on cash, cash equivalents, restricted cash and restricted cash equivalents
(i14,107)
(i793)
Net
change in cash, cash equivalents, restricted cash and restricted cash equivalents
(i89,600)
i23,695
Cash,
cash equivalents, restricted cash and restricted cash equivalents, beginning of year
i285,491
i229,409
Cash,
cash equivalents, restricted cash and restricted cash equivalents, end of period (Note 3)
$
i195,891
$
i253,104
See
Condensed Notes to Unaudited Consolidated Financial Statements
6
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
NOTE 1: CONSOLIDATED FINANCIAL STATEMENTS
i
The
consolidated balance sheet as of September 30, 2022, the consolidated statements of comprehensive income for the quarters and nine monthsended September 30, 2022 and 2021, the consolidated statements of shareholders’ equity for the quarters and nine months ended September 30, 2022 and 2021 and the consolidated statements of cash flows for the nine months ended September 30, 2022 and 2021 are unaudited. The consolidated balance sheet as of December 31, 2021 was derived from audited consolidated financial statements, but does not
include all disclosures required by U.S. generally accepted accounting principles (GAAP). In the opinion of management, all adjustments necessary for a fair statement of the consolidated financial statements are included. Adjustments consist only of normal recurring items, except for any items discussed in the notes below. Interim results are not necessarily indicative of results for a full year or future results. The consolidated financial statements and notes are presented in accordance with instructions for Form 10-Q and do not contain certain information included in our annual consolidated financial statements and notes. The consolidated financial statements and notes appearing in this report should be read in conjunction with the consolidated audited financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2021 (the "2021 Form 10-K").
The
preparation of our consolidated financial statements requires us to make certain estimates and assumptions affecting the amounts reported in the consolidated financial statements and related notes. We base our estimates on historical experience and on various other factors and assumptions that we believe are reasonable, the results of which form the basis for making judgments about the carrying values of our assets, liabilities, revenues and expenses and the related disclosure of contingent assets and liabilities. Actual results may differ significantly from our estimates and assumptions.
iComparability
– The consolidated statement of cash flows for the nine months ended September 30, 2021 has been modified to conform to the current year presentation. We presented payments for cloud computing arrangement implementation costs separately within cash flows from operating activities. Previously, this amount was included in other non-current assets. Also, we included purchases of and proceeds from customer funds marketable securities within other investing activities. Previously, these amounts were presented separately.
/
NOTE
2: NEW ACCOUNTING PRONOUNCEMENT
iIn March 2022, the Financial Accounting Standards Board issued Accounting Standards Update No. 2022-02, Troubled Debt Restructurings and Vintage Disclosures. The standard modifies the accounting for troubled debt restructurings by creditors and modifies certain disclosure requirements. The guidance will be applied prospectively, with the exception of the recognition and measurement of troubled debt
restructurings, for which we may elect to apply a modified retrospective transition method. The standard is effective for us on January 1, 2023, and we do not expect its adoption to have a significant impact on our financial position or results of operations.
NOTE 3: SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION
ii
Trade
accounts receivable – Net trade accounts receivable was comprised of the following:
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Amortization of intangibles was $i35,855 for the quarter ended September 30, 2022, $i36,570
for the quarter ended September 30, 2021, $i110,353 for the nine months ended September 30, 2022 and $i88,393
for the nine months ended September 30, 2021. iBased on the intangibles in service as of September 30, 2022, estimated future amortization expense is as follows:
(in
thousands)
Estimated amortization expense
Remainder of 2022
$
i37,168
2023
i120,753
2024
i81,627
2025
i48,639
2026
i45,553
i
We
acquire and develop internal-use software in the normal course of business. We also, at times, purchase customer list and partner relationship assets. The following intangibles were capitalized during the nine months ended September 30, 2022:
(in thousands)
Amount
Weighted-average amortization period (in years)
Internal-use
software
$
i55,776
i3
Customer
lists/relationships
i18,924
i6
Partner
relationships
i1,304
i2
Acquired
intangibles
$
i76,004
i4
/
i
Goodwill– Changes in goodwill by reportable segment and in total were as follows for the nine months ended September 30, 2022:
(2) Amount includes the non-current portion of loans and notes receivable. The current portion of these receivables is included in other current assets on the consolidated balance sheets and was $i992 as of September 30, 2022 and $i1,317
as of December 31, 2021.
/
i
Changes in the allowance for credit losses related to loans and notes receivable from distributors were as follows for the nine months ended September 30, 2022 and 2021:
We categorize loans and notes receivable into risk categories based on information about the ability of borrowers to service their debt, including current financial information, historical payment experience, current economic trends and other factors. The highest quality receivables are assigned a 1-2 internal grade. Those that have a potential weakness requiring management's attention are assigned a 3-4 internal grade.
iThe
following table presents loans and notes receivable from distributors, including the current portion, by credit quality indicator and by year of origination, as of September 30, 2022. There were iiino//
write-offs or recoveries recorded during the nine months ended September 30, 2022.
Loans
and notes receivable from distributors amortized cost basis by origination year
(in thousands)
2020
2019
2018
2017
Prior
Total
Risk rating:
1-2
internal grade
$
i1,172
$
i443
$
i4,247
$
i8,720
$
i985
$
i15,567
3-4
internal grade
i—
i2,599
i—
i—
i—
i2,599
Loans
and notes receivable
$
i1,172
$
i3,042
$
i4,247
$
i8,720
$
i985
$
i18,166
/
11
DELUXE
CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
i
Changes in prepaid product discounts during the nine months ended September 30, 2022 and 2021 were as follows:
Nine
Months Ended September 30,
(in thousands)
2022
2021
Balance, beginning of year
$
i56,527
$
i50,602
Additions(1)
i18,721
i24,284
Amortization
(i26,258)
(i23,425)
Other
(i399)
(i191)
Balance,
end of period
$
i48,591
$
i51,270
(1)
Prepaid product discounts are generally accrued upon contract execution. Cash payments for prepaid product discounts were $i23,920 for the nine months ended September 30, 2022 and $i27,049
for the nine months ended September 30, 2021.
/
i
Accrued liabilities – Accrued liabilities were comprised of the following:
Supplemental
cash flow information– The reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents to the consolidated balance sheets was as follows:
Restricted
cash and restricted cash equivalents included in funds held for customers
i147,614
i129,180
Non-current
restricted cash included in other non-current assets
i2,742
i2,860
Total
cash, cash equivalents, restricted cash and restricted cash equivalents
$
i195,891
$
i253,104
/
12
DELUXE
CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
NOTE 4: EARNINGS PER SHARE
ii
The
following table reflects the calculation of basic and diluted earnings per share. During each period, certain stock options, as noted below, were excluded from the calculation of diluted earnings per share because their effect would have been antidilutive.
Quarter Ended September
30,
Nine Months Ended September 30,
(in thousands, except per share amounts)
2022
2021
2022
2021
Earnings per share – basic:
Net
income
$
i14,760
$
i12,501
$
i46,536
$
i48,955
Net
income attributable to non-controlling interest
(i35)
(i37)
(i106)
(i99)
Net
income attributable to Deluxe
i14,725
i12,464
i46,430
i48,856
Income
allocated to participating securities
(i10)
(i9)
(i33)
(i36)
Income
attributable to Deluxe available to common shareholders
$
i14,715
$
i12,455
$
i46,397
$
i48,820
Weighted-average
shares outstanding
i43,116
i42,574
i42,974
i42,294
Earnings
per share – basic
$
i0.34
$
i0.29
$
i1.08
$
i1.15
Earnings
per share – diluted:
Net income
$
i14,760
$
i12,501
$
i46,536
$
i48,955
Net
income attributable to non-controlling interest
(i35)
(i37)
(i106)
(i99)
Net
income attributable to Deluxe
i14,725
i12,464
i46,430
i48,856
Income
allocated to participating securities
i—
(i9)
(i22)
(i27)
Re-measurement
of share-based awards classified as liabilities
(i162)
(i329)
(i507)
(i329)
Income
attributable to Deluxe available to common shareholders
$
i14,563
$
i12,126
$
i45,901
$
i48,500
Weighted-average
shares outstanding
i43,116
i42,574
i42,974
i42,294
Dilutive
impact of potential common shares
i234
i457
i310
i453
Weighted-average
shares and potential common shares outstanding
i43,350
i43,031
i43,284
i42,747
Earnings
per share – diluted
$
i0.34
$
i0.28
$
i1.06
$
i1.13
Antidilutive
options excluded from calculation
i1,815
i2,314
i1,815
i2,314
//
13
DELUXE
CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
NOTE 5: OTHER COMPREHENSIVE INCOME
ii
Reclassification
adjustments– Information regarding amounts reclassified from accumulated other comprehensive loss to net income was as follows:
Accumulated other comprehensive loss components
Amounts
reclassified from accumulated other comprehensive loss
Affected line item in consolidated statements of comprehensive income
Quarter Ended September 30,
Nine Months Ended September 30,
(in thousands)
2022
2021
2022
2021
Amortization
of postretirement benefit plan items:
Prior service credit
$
i355
$
i355
$
i1,066
$
i1,066
Other
income
Net actuarial loss
(i225)
(i407)
(i674)
(i1,221)
Other
income
Total amortization
i130
(i52)
i392
(i155)
Other
income
Tax expense
(i79)
(i30)
(i237)
(i93)
Income
tax provision
Amortization of postretirement benefit plan items, net of tax
i51
(i82)
i155
(i248)
Net
income
Realized loss on debt securities
i—
i—
(i8)
i—
Revenue
Tax
benefit
i—
i—
i2
i—
Income
tax provision
Realized loss on debt securities, net of tax
i—
i—
(i6)
i—
Net
income
Realized gain (loss) on cash flow hedges
i53
(i371)
(i412)
(i1,035)
Interest
expense
Tax (expense) benefit
(i15)
i97
i109
i271
Income
tax provision
Realized gain (loss) on cash flow hedges, net of tax
i38
(i274)
(i303)
(i764)
Net
income
Currency translation adjustment(1)
i—
i—
(i5,550)
i—
Gain
on sale of businesses and facility
Total reclassifications, net of tax
$
i89
$
(i356)
$
(i5,704)
$
(i1,012)
(1)
Relates to the sale of our Australian web hosting business during the quarter ended June 30, 2022. Further information can be found in Note 6.
/
i
Accumulated other comprehensive loss– Changes
in the components of accumulated other comprehensive loss during the nine months ended September 30, 2022 were as follows:
(1)
Other comprehensive loss before reclassifications is net of an income tax benefit of $i197.
(2) Other comprehensive income before reclassifications is net of income tax expense of $i1,701.
//
14
DELUXE
CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
NOTE 6: ACQUISITION AND DIVESTITURES
i
Acquisition
– On June 1, 2021, we acquired all of the equity of First American Payment Systems, L.P. (First American). Further information regarding this acquisition can be found under the caption "Note 6: Acquisitions" in the Notes to Consolidated Financial Statements appearing in the 2021 Form 10-K. During the quarter ended June 30, 2022, we finalized the purchase price allocation for this acquisition and we recorded measurement-period adjustments that increased deferred income tax liabilities by $ii1,343/,
with a corresponding offset to goodwill.
i
The final allocation of the First American purchase price to the assets acquired and liabilities assumed was as follows:
(in thousands)
Purchase
price allocation
Trade accounts receivable
$
i27,296
Other current assets
i8,533
Property,
plant and equipment
i9,873
Operating lease assets
i24,396
Intangible
assets:
Customer relationships
i127,000
Partner relationships
i72,000
Technology-based
intangibles
i65,000
Trade names
i21,000
Internal-use
software
i6,111
Total intangible assets
i291,111
Goodwill
i728,516
Other-non-current
assets
i350
Accounts payable
(i18,475)
Funds
held for customers
(i9,428)
Accrued liabilities
(i23,460)
Operating
lease liabilities, non-current
(i21,316)
Deferred income taxes
(i54,506)
Other
non-current liabilities
(i4,376)
Payments for acquisition, net of cash, cash equivalents, restricted cash and restricted cash equivalents acquired of $i15,841
$
i958,514
Further
information regarding the acquired First American intangibles can be found under the caption "Note 3: Supplemental Balance Sheet and Cash Flow Information" and "Note 8: Fair Value Measurements," both of which are included in the Notes to Consolidated Financial Statements appearing in the 2021 Form 10-K.
First American acquisition transaction costs are included in selling, general and administrative (SG&A) expense in the consolidated statements of comprehensive income and were $i208
for the quarter ended September 30, 2021 and $i18,816 for the nine months ended September 30, 2021. Operating results for First American were as follows for the nine months ended September 30:
Nine
Months Ended September 30,
(in thousands)
2022
2021
Revenue
$
i259,724
$
i109,828
Net
income attributable to Deluxe
i2,902
i824
/
The
above results include restructuring and integration costs of $i5,209 for the nine months ended September 30, 2022.
/
15
DELUXE
CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Pro forma financial information – During the first quarter of 2022, we identified errors in the previously reported pro forma results of operations related to the First American acquisition. These errors related to the amount of historical First American revenue and net income (loss) included for the pre-acquisition periods, as well as errors in the adjustments related to the amortization of acquired intangibles, interest expense on the acquisition financing and transaction costs.
For the quarter and six months ended June
30, 2021 and the nine months ended September 30, 2021, these corrections decreased pro forma revenue by $iii27,595//
from the amounts previously reported. For the years ended December 31, 2021 and 2020, these corrections decreased pro forma revenue by $i26,335 and $i3,027,
respectively, from the amounts previously reported. iThe corrections to adjusted pro forma net income (loss) attributable to Deluxe from the amounts previously reported were as follows:
(in thousands)
Increase
(decrease) in pro forma net income attributable to Deluxe
The
following unaudited pro forma financial information summarizes our consolidated results of operations as though the First American acquisition occurred on January 1, 2020:
(1)
Only net income attributable to Deluxe was revised for the quarter ended September 30, 2021.
/
The unaudited pro forma financial information was prepared in accordance with our accounting policies, which can be found under the caption "Note 1: Significant Accounting Policies" in the Notes to Consolidated Financial Statements appearing in the 2021 Form 10-K. The pro forma information includes adjustments to reflect the additional amortization that would have been recorded assuming the fair value adjustments to intangible assets had been applied from January 1, 2020. The pro forma information also includes adjustments
to reflect the additional interest expense on the debt we issued to fund the acquisition, and the acquisition transaction costs we incurred during 2021 are reflected in the 2020 pro forma results.
This pro forma financial information is for informational purposes only. It does not reflect the integration of the businesses or any synergies that may result from the acquisition. As such, it is not indicative of the results of operations that would have been achieved had the acquisition been consummated on January 1, 2020. In addition, the pro forma amounts are not indicative of future operating results.
Divestitures –In May 2022, we completed the sale of our Australian web hosting business
for cash proceeds of $i17,620, net of costs of the sale. This business generated annual revenue in our Cloud Solutions segment of $i23,766 for 2021. During the quarter ended
June 30, 2022, we recognized a pretax gain of $i15,166 on this sale. 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 $i29,000
during 2021. Neither the gain on these sales nor the assets and liabilities sold were significant to our consolidated financial statements.
16
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
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.
Facility
sale –In May 2022, we sold our former facility located in Lancaster, California for cash proceeds of $i6,929, net of costs of the sale, and we recognized a pretax gain on the sale of $i2,361
during the quarter ended June 30, 2022. The sale was a result of our continued real estate rationalization process.
NOTE 7: DERIVATIVE FINANCIAL INSTRUMENTS
i
As
part of our interest rate risk management strategy, we entered into interest rate swaps, which we designated as cash flow hedges, to mitigate variability in interest payments on a portion of our variable-rate debt (Note 12). Information regarding our cash flow hedges was as follows:
Changes in the fair values of the interest rate swaps are recorded in accumulated other comprehensive loss on the consolidated balance sheets and are subsequently
reclassified to interest expense as interest payments are made on the variable-rate debt. The fair values of the derivatives are calculated based on the prevailing LIBOR rate curve on the date of measurement. The cash flow hedges were fully effective as of September 30, 2022 and December 31, 2021, and their impact on consolidated net income and our consolidated statements of cash flows was not significant. We also expect that the amount that will be reclassified to interest expense during the next 12 months will not be significant.
/
17
DELUXE
CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
NOTE 8: FAIR VALUE MEASUREMENTS
i
2022 annual goodwill impairment analysis –
Our impairment of goodwill policy can be found under the caption "Note 1: Significant Accounting Policies" in the Notes to Consolidated Financial Statements appearing in the 2021 Form 10-K. This policy explains our methodology for assessing the impairment of goodwill.
In completing the 2022 annual impairment analysis of goodwill as of July 31, 2022, we elected to perform qualitative analyses for all of our reporting units, with the exception of our Cloud Data Analytics reporting unit. 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. The quantitative analysis of our Cloud Data Analytics reporting unit indicated that the estimated fair value of this reporting unit exceeded its carrying value by approximately $i46,000, or by i39%
above the carrying value of its net assets. As such, no goodwill impairment charges were recorded as a result of our annual impairment analysis.
Recurring fair value measurements – Funds held for customers included available-for-sale debt securities (Note 3). These securities included a mutual fund investment that invests in Canadian and provincial government securities and as of December 31, 2021, also included an investment in a Canadian guaranteed investment certificate (GIC) with an original maturity of i2
years. The GIC investment matured during the quarter ended June 30, 2022. The mutual fund investment is not traded in an active market and its fair value is determined by obtaining quoted prices in active markets for the underlying securities held by the fund. The cost of the GIC approximated its fair value, based on estimates using current market rates offered for deposits with similar remaining maturities. Unrealized gains and losses, net of tax, are included in accumulated other comprehensive loss on the consolidated balance sheets. The cost of securities sold is determined using the average cost method. Realized gains and losses are included in revenue on the consolidated statements of comprehensive income and were not significant during the quarters and nine months ended September 30, 2022 and 2021.
i
Information
regarding the fair values of our financial instruments was as follows:
Quoted prices in active markets for identical assets (Level 1)
Significant other observable inputs (Level 2)
Significant unobservable inputs (Level 3)
(in thousands)
Balance sheet location
Carrying
value
Fair value
Measured at fair value through comprehensive income:
Available-for-sale
debt securities
Funds held for customers
$
i13,307
$
i13,307
$
—
$
i13,307
$
—
Derivative
liability (Note 7)
Other non-current liabilities
(i3,028)
(i3,028)
—
(i3,028)
—
Amortized
cost:
Cash
Cash and cash equivalents
i41,231
i41,231
i41,231
—
—
Cash
Funds
held for customers
i241,488
i241,488
i241,488
—
—
Cash
Other
non-current assets
i2,772
i2,772
i2,772
—
—
Loans
and notes receivable from distributors
Other current and non-current assets
i21,518
i22,344
—
—
i22,344
Long-term
debt
Current portion of long-term debt and long-term debt
i1,682,949
i1,728,515
—
i1,728,515
—
NOTE
9: RESTRUCTURING AND INTEGRATION EXPENSE
i
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 consist primarily of information technology consulting, project management services and internal labor,
as well as other costs associated with our initiatives, such as training, travel, 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. We are currently pursuing several initiatives designed to support our growth strategy and to increase our efficiency. Restructuring and integration expense is not allocated to our reportable business segments.
i
Restructuring
and integration expense is reflected on the consolidated statements of comprehensive income as follows:
Quarter Ended September 30,
Nine Months Ended September
30,
(in thousands)
2022
2021
2022
2021
Total cost of revenue
$
i131
$
i1,559
$
i216
$
i3,073
Operating
expenses
i15,188
i12,335
i46,614
i38,012
Restructuring
and integration expense
$
i15,319
$
i13,894
$
i46,830
$
i41,085
//
19
DELUXE
CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Restructuring and integration expense for each period was comprised of the following:
Quarter
Ended September 30,
Nine Months Ended September 30,
(in thousands)
2022
2021
2022
2021
External consulting fees
$
i7,670
$
i6,432
$
i24,670
$
i19,355
Internal
labor
i1,877
i1,756
i6,177
i6,276
Employee
severance benefits
i3,826
i1,293
i8,232
i3,167
Other
i1,946
i4,413
i7,751
i12,287
Restructuring
and integration expense
$
i15,319
$
i13,894
$
i46,830
$
i41,085
Our
restructuring and integration accruals are included in accrued liabilities on the consolidated balance sheets and represent expected cash payments required to satisfy the remaining severance obligations to those employees already terminated and those expected to be terminated under our various initiatives. The majority of the employee reductions and the related severance payments are expected to be completed by mid-2023.
i
Changes in our restructuring and integration accruals were as follows:
The charges and reversals presented in the rollforward of our restructuring and integration accruals do not include
items charged directly to expense as incurred, as those items are not reflected in accrued liabilities on the consolidated balance sheets.
NOTE 10: INCOME TAX PROVISION
ii
The
effective tax rate on pretax income reconciles to the U.S. federal statutory tax rate as follows:
State
income tax expense, net of federal income tax benefit
i2.8
%
i2.4
%
Non-deductible
executive compensation
i2.2
%
i1.7
%
Foreign
tax rate differences
i1.5
%
i1.7
%
Tax
on repatriation of foreign earnings
i1.5
%
i4.9
%
Non-deductible
acquisition costs
i0.1
%
i1.5
%
Sale
of business (Note 6)
(i12.5
%)
i—
Research
and development tax credit
(i1.0
%)
(i0.9
%)
Other
(i0.2
%)
(i0.2
%)
Effective
tax rate
i29.6
%
i33.1
%
//
20
DELUXE
CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
In May 2022, we completed the sale of our Australian web hosting business, and we recognized a capital loss on the transaction for tax purposes. We recorded a valuation allowance for the portion of the capital loss carryover we do not currently expect to realize.
NOTE 11: POSTRETIREMENT BENEFITS
i
We
have historically provided certain health care benefits for eligible retired U.S. employees. In addition to our retiree health care plan, we also have a U.S. supplemental executive retirement plan. Further information regarding our postretirement benefit plans can be found under the caption “Note 13: Postretirement Benefits” in the Notes to Consolidated Financial Statements appearing in the 2021 Form 10-K.
i
Postretirement benefit income is included in other income on the consolidated statements of comprehensive income and consisted of the following
components:
Credit facility – In June 2021, we executed a senior, secured credit facility consisting of a revolving
credit facility with commitments of $i500,000 and a $i1,155,000 term loan facility. The revolving credit facility includes a $i40,000
swingline sub-facility and a $i25,000 letter of credit sub-facility. Proceeds from the credit facility were used to terminate our previous credit facility agreement and to fund the acquisition of First American (Note 6). Loans under the revolving credit facility may be borrowed, repaid and re-borrowed until June 1, 2026, at which time all amounts borrowed must be repaid. The term loan facility will be repaid in equal quarterly installments of $iii14,438//
through June 30, 2023, $iiiiiii21,656//////
from September 30, 2023 through June 30, 2025, and $iii28,875//
from September 30, 2025 through March 31, 2026. The remaining balance is due on June 1, 2026. The term loan facility also includes mandatory prepayment requirements related to asset sales, new debt (other than permitted debt) and excess cash flow, subject to certain limitations. No premium or penalty is payable in connection with any mandatory or voluntary prepayment of the term loan facility.
Interest is payable under the credit facility at a fluctuating rate of interest determined by reference to the eurodollar rate plus an applicable margin ranging from i1.5%
to i2.5%, depending on our consolidated total leverage ratio, as defined in the credit agreement. A commitment fee is payable on the unused portion of the revolving credit facility at a rate ranging from i0.25%
to i0.35%, depending on our consolidated total leverage ratio. Amounts outstanding under the credit facility had a weighted-average interest rate of i5.30% as of
September 30, 2022 and i2.67% as of December 31, 2021, including the impact of interest rate swaps that effectively convert $i500,000
of our variable-rate debt to fixed rate debt. Further information regarding the interest rate swaps can be found in Note 7.
Borrowings under the credit facility are collateralized by substantially all of the present and future tangible and intangible personal property held by us and our subsidiaries that have guaranteed our obligations under the credit facility, subject to certain exceptions. The credit agreement contains customary covenants regarding limits on levels of indebtedness, liens, mergers, certain asset dispositions, changes in business, advances, investments, loans and restricted payments. The covenants are subject to a number of limitations and exceptions set forth in the credit agreement. iThe
credit agreement also includes requirements regarding our consolidated total leverage ratio and our consolidated secured leverage ratio, as defined in the credit agreement. These ratios may not equal or exceed the following amounts during the periods indicated:
In addition, we are required to maintain a minimum interest coverage ratio of at least i3.00 to 1.00 throughout the remaining term of the credit facility. Failure to meet any of the above requirements would result in an event of default that would allow lenders to declare amounts outstanding immediately due and payable and would allow the lenders to enforce their interests against collateral pledged if we are unable to settle the amounts outstanding. We were in compliance with all debt covenants
as of September 30, 2022.
The credit agreement contains customary representations and warranties and, as a condition to borrowing, requires that all such representations and warranties be true and correct in all material respects on the date of each borrowing, including representations as to no material adverse change in our business, assets, operations or financial condition. If our consolidated total leverage ratio exceeds i2.75
to 1.00, the aggregate annual amount of permitted dividends and share repurchases is limited to $i60,000.
22
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per
share amounts)
i
Daily average amounts outstanding under our current and previous credit agreements were as follows:
(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.
/
Senior unsecured notes– In June 2021, we issued $i500,000 of i8.0%
senior, unsecured notes that mature in June 2029. The notes were issued via a private placement under Rule 144A of the Securities Act of 1933. Proceeds from the offering, net of discount and offering costs, were $i490,741, resulting in an effective interest rate of i8.3%.
The net proceeds from the notes were used to fund the acquisition of First American in June 2021 (Note 6). Interest payments are due each June and December. During the quarter ended September 30, 2022, we settled $i25,000 of these notes via open market purchases. We realized a pretax gain of $ii1,726/
on these debt retirements that is included in interest expense in the consolidated statements of comprehensive income for the quarter and nine months ended September 30, 2022.
The indenture governing the notes contains covenants that limit our ability and the ability of our restricted subsidiaries to, among other things, incur additional indebtedness and liens, issue redeemable stock and preferred stock, pay dividends and distributions, make loans and investments and consolidate or merge or sell all or substantially all of our assets.
NOTE
13: OTHER COMMITMENTS AND CONTINGENCIES
i
Indemnifications– In the normal course of business, we periodically enter into agreements that incorporate general indemnification language. These indemnification provisions generally encompass third-party claims arising from our products and services, including, without limitation, service failures, breach of security, intellectual property rights, governmental regulations
and/or employment-related matters. Performance under these indemnities would generally be triggered by our breach of the terms of the contract. In disposing of assets or businesses, we often provide representations, warranties and/or indemnities to cover various risks, including, for example, unknown damage to the assets, environmental risks involved in the sale of real estate, liability to investigate and remediate environmental contamination at waste disposal sites and manufacturing facilities, and unidentified tax liabilities and legal matters related to periods prior to disposition. We do not have the ability to estimate the potential liability from such indemnities because they relate to unknown conditions. However, we do not believe that any liability under these indemnities would have a material adverse effect on our financial position, annual results of operations or annual
cash flows. We have recorded liabilities for known indemnifications related to environmental matters. These liabilities were not significant as of September 30, 2022 or December 31, 2021.
First American indemnification– Pursuant to the First American acquisition agreement, we are entitled to limited indemnification for certain expenses and losses, if any, that may be incurred after the consummation of the transaction that arise out of certain matters, including a Federal Trade Commission (FTC) investigation initiated in December 2019 seeking information to determine whether certain subsidiaries of First American may have engaged in conduct prohibited
by the Federal Trade Commission Act, the Fair Credit Reporting Act or the Duties of Furnishers of Information. As fully set forth in the merger agreement, our rights to indemnification for any such expenses and losses are limited to the amount of an indemnity holdback, which is our sole recourse for any such losses.
The First American subsidiaries entered into a Stipulated Order for Permanent Injunction, Monetary Judgment, and Other Relief (the “Order”) with the FTC, which was approved by the FTC on July 29, 2022. The parties subsequently entered into an amended Order. Pursuant to the Order, among other things, the First American defendants are required to pay $i4,900
to the FTC within i7 days of the entry of the Order. The First American defendants also agreed to certain injunctive relief. The above
/
23
DELUXE CORPORATION
CONDENSED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
description is qualified in its entirety to the terms of the Order, which was filed as Exhibit 10.1 to the Current Report on Form 8-K that we filed on July 29, 2022. The revised Order is attached as Exhibit 10.1 to this report. The payment of the above-referenced amount, together with post-closing expenses that we and First American incurred in connection with this matter, will be withdrawn from the holdback referenced above. As such, the payment of such amount will not have a material impact on our consolidated financial statements.
Self-insurance– We are self-insured for certain costs, primarily workers' compensation claims and medical and dental benefits for active employees and those employees on long-term disability. The liabilities associated with these items represent our best estimate of the ultimate obligations for reported claims plus those incurred, but not reported, and totaled $i10,130 as of September 30, 2022 and $i7,401
as of December 31, 2021. These accruals are included in accrued liabilities and other non-current liabilities on the consolidated balance sheets. Our workers' compensation liability is recorded at present value. The difference between the discounted and undiscounted liability was not significant as of September 30, 2022 or December 31, 2021.
Our self-insurance liabilities are estimated, in part, by considering historical claims experience, demographic factors and other actuarial assumptions. The estimated accruals for these liabilities could be significantly affected if future events and claims differ from these assumptions and historical trends.
Litigation– Recorded liabilities for legal matters, as well as related charges recorded in each period, were not material to our financial position, results of operations or liquidity during the periods presented, and we do not believe that any of the currently identified claims or litigation will materially affect our financial position, results of operations or liquidity, upon resolution. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. If an unfavorable ruling were to occur, it may cause a material adverse impact on our financial position, results of operations or liquidity in the period in which the ruling occurs or in future periods.
NOTE
14: SHAREHOLDERS' EQUITY
iIn October 2018, our board of directors authorized the repurchase of up to $i500,000
of our common stock. This authorization has no expiration date. iiNo/
shares were repurchased under this authorization during the nine months ended September 30, 2022 or September 30, 2021, and $i287,452 remained available for repurchase as of September 30, 2022. During the quarter ended June 30, 2021, we issued i294
thousand shares to employees of First American in conjunction with the acquisition (Note 6), resulting in cash proceeds of $i13,000 during the second quarter of 2021./
NOTE
15: BUSINESS SEGMENT INFORMATION
i
We operate ii4/
reportable segments, generally organized by product type, as follows:
•Payments – This segment includes our merchant in-store, online and mobile payment solutions; treasury management solutions, including remittance and lockbox processing, remote deposit capture, receivables management, payment processing and paperless treasury management; payroll and disbursement services, including Deluxe Payment Exchange; and fraud and security services.
•Cloud Solutions – This segment includes data-driven marketing solutions; hosted solutions, including digital engagement, logo design, financial institution profitability reporting and business incorporation services; and web hosting and design services.
•Promotional
Solutions – This segment includes business forms, accessories, advertising specialties and promotional apparel.
•Checks – This segment includes printed business and personal checks.
The accounting policies of the segments are the same as those described in the Notes to Consolidated Financial Statements included in the 2021 Form 10-K. We allocate corporate costs for our shared services functions to our business segments when the costs are directly attributable to a segment. This includes certain sales and marketing, human resources, supply chain, real estate, finance, information technology and legal costs. Costs that are not directly attributable to a business segment are reported as Corporate operations and consist primarily of marketing,
accounting, information technology, facilities, executive management and legal, tax and treasury costs that support the corporate function. Corporate operations also includes other income. All of our segments operate primarily in the U.S., with some operations in Canada. In addition, Cloud Solutions has
/
24
DELUXE CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
operations
in portions of Europe, as well as partners in Central and South America, and had operations in Australia until May 2022 when this business was sold (Note 6).
Our chief operating decision maker (i.e., our Chief Executive Officer) reviews earnings before interest, taxes, depreciation and amortization (EBITDA) on an adjusted basis for each segment when deciding how to allocate resources and to assess segment operating performance. Adjusted EBITDA for each segment excludes depreciation and amortization expense, interest expense, income tax expense and certain other amounts, which may include, from time to time: asset impairment charges; restructuring, integration and other costs; share-based compensation expense; acquisition transaction costs; certain legal-related expense; and gains or losses on sales of businesses and long-lived assets. Our Chief Executive Officer does not review segment asset information
when making investment or operating decisions regarding our reportable business segments.
i
Segment information for the quarters and nine months ended September 30, 2022 and 2021 was as follows:
Quarter
Ended September 30,
Nine Months Ended September 30,
(in thousands)
2022
2021
2022
2021
Payments:
Revenue
$
i169,787
$
i160,268
$
i507,149
$
i343,045
Adjusted
EBITDA
i36,184
i31,598
i107,605
i71,125
Cloud
Solutions:
Revenue
i66,739
i69,497
i204,824
i199,784
Adjusted
EBITDA
i16,034
i19,036
i50,869
i55,047
Promotional
Solutions:
Revenue
i136,081
i130,330
i408,600
i389,825
Adjusted
EBITDA
i18,255
i17,673
i49,795
i56,804
Checks:
Revenue
i182,431
i172,046
i553,433
i518,968
Adjusted
EBITDA
i80,478
i77,254
i245,838
i240,979
Total
segment:
Revenue
$
i555,038
$
i532,141
$
i1,674,006
$
i1,451,622
Adjusted
EBITDA
i150,951
i145,561
i454,107
i423,955
/
i
The
following table presents a reconciliation of total segment adjusted EBITDA to consolidated income before income taxes:
Quarter Ended September 30,
Nine Months Ended September 30,
(in
thousands)
2022
2021
2022
2021
Total segment adjusted EBITDA
$
i150,951
$
i145,561
$
i454,107
$
i423,955
Corporate
operations
(i46,359)
(i42,832)
(i148,159)
(i133,259)
Depreciation
and amortization expense
(i42,304)
(i41,906)
(i128,948)
(i102,929)
Interest
expense
(i23,799)
(i21,494)
(i65,471)
(i35,548)
Net
income attributable to non-controlling interest
i35
i37
i106
i99
Restructuring,
integration and other costs
(i15,319)
(i13,894)
(i46,830)
(i41,085)
Share-based
compensation expense
(i5,728)
(i7,434)
(i18,766)
(i21,801)
Acquisition
transaction costs
(i51)
(i208)
(i112)
(i18,816)
Certain
legal-related benefit (expense)
i1,659
(i638)
i814
(i941)
Gain
on sale of businesses and facility
i1,804
i—
i19,331
i—
Income
before income taxes
$
i20,889
$
i17,192
$
i66,072
$
i69,675
/
25
DELUXE
CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
i
The following tables present revenue disaggregated by our product and service offerings:
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
28
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;
29
•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.
30
CONSOLIDATED RESULTS OF OPERATIONS
Consolidated
Revenue
Quarter Ended September 30,
Nine
Months Ended September 30,
(in thousands)
2022
2021
Change
2022
2021
Change
Total revenue
$
555,038
$
532,141
4.3%
$
1,674,006
$
1,451,622
15.3%
The
increases in total revenue for the third quarter and first nine months of 2022, as compared to the same periods in 2021, were driven, in part, by revenue growth from new business in all of our segments and strong ongoing demand for our products, reflecting the success of our One Deluxe strategy. Price increases in response to the current inflationary environment also contributed to the revenue increase, primarily in our Checks and Promotional Solutions segments. For the first nine months of 2022, the revenue increase also reflected the acquisition and strong performance of First American, which contributed incremental revenue of $144.2 million for the first nine months of 2022. Partially offsetting these increases in revenue was the continuing secular decline in order volume for checks, business forms and some Promotional Solutions business accessories, as well as the divestitures discussed in Executive Overview, which resulted
in a decrease in revenue of $11.6 million for the third quarter of 2022 and $19.0 million for the first nine months of 2022.
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 15: 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:
Total
cost of revenue as a percentage of total revenue
46.2
%
45.9
%
0.3 pts.
46.0
%
43.3
%
2.7 pts.
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 increases in total cost of revenue for the third quarter and first nine months of 2022, as compared to the same periods in 2021, were driven, in part, by the revenue growth noted above, and we experienced some inflationary pressures on hourly wages, materials and delivery. For the first nine months of 2022, the increase in total cost of revenue also reflected incremental costs resulting from the First American acquisition of $88.7 million, including acquisition amortization. Partially offsetting these increases in total cost of revenue was reduced revenue volume from the continuing secular decline in checks, business forms and some Promotional
Solutions business accessories, and Promotional Solutions was impacted by supply chain disruptions for certain higher margin print products, although there were improvements in supply availability in the third quarter of 2022, as compared to the second quarter of 2022.
For the third quarter of 2022, total cost of revenue as a percentage of total revenue increased only slightly as compared to the third quarter of 2021, as the inflationary impacts and unfavorable changes in product mix noted above were offset by our pricing actions. For the first nine months of 2022, total cost of revenue as a percentage of total revenue increased as compared to the first nine months of 2021, as the inflationary impacts and unfavorable changes in product mix noted above exceeded the
31
benefit
of our price increases. For the first nine months of 2022, the impact of the First American acquisition, including acquisition amortization, also increased total cost of revenue as a percentage of total revenue.
Consolidated Selling, General & Administrative (SG&A) Expense
Quarter
Ended September 30,
Nine Months Ended September 30,
(in thousands)
2022
2021
Change
2022
2021
Change
SG&A expense
$
243,816
$
239,251
1.9%
$
753,140
$
685,593
9.9%
SG&A
expense as a percentage of total revenue
43.9
%
45.0
%
(1.1) pts.
45.0
%
47.2
%
(2.2) pts.
The increases in SG&A expense for the third quarter and first nine months of 2022, as compared to the same periods in 2021,
were driven, in part, by increased costs related to our continued transformational investments, primarily investments in our technology infrastructure, including sales and financial management tools, and commission expense increased, primarily as a result of increased volume from new clients in our Checks segment. For the first nine months of 2022, the increase in SG&A expense also reflected the incremental operating costs of First American of $30.6 million. The First American acquisition also drove an increase in acquisition amortization of $19.3 million for the first nine months of 2022, as compared to the first nine months of 2021, and bad debt expense increased $5.2 million for the first nine months of 2022, driven by reserve reversals in 2021 as the impact of the COVID-19 pandemic lessened. Partially offsetting these increases in SG&A expense were various cost reduction actions, including workforce adjustments, real estate rationalization and marketing
optimization, and during the first nine months of 2021, we incurred acquisition transaction costs of $18.8 million that did not recur in 2022.
Restructuring and Integration Expense
Quarter
Ended September 30,
Nine Months Ended September 30,
(in thousands)
2022
2021
Change
2022
2021
Change
Restructuring and integration expense
$
15,188
$
12,335
$
2,853
$
46,614
$
38,012
$
8,602
We
continue to pursue several initiatives designed to focus our business behind our growth strategy, to increase our efficiency and to integrate acquired businesses. The amount of restructuring and integration expense is expected to vary from period to period as we execute these initiatives. Further information regarding these costs can be found in Restructuring, Integration and Other Costs in this MD&A discussion.
Gain on Sale of Businesses and Facility
Quarter
Ended September 30,
Nine Months Ended September 30,
(in thousands)
2022
2021
Change
2022
2021
Change
Gain on sale of businesses and facility
$
1,804
$
—
$
1,804
$
19,331
$
—
$
19,331
As
discussed in Executive Overview, during the third quarter of 2022, we sold the assets of our Promotional Solutions retail packaging business, and during the second quarter of 2022, we completed the sale of our Australian web hosting business and a former facility. Net cash proceeds from these sales were $25.2 million during the first nine months of 2022.
Interest Expense
Quarter
Ended September 30,
Nine Months Ended September 30,
(in thousands)
2022
2021
Change
2022
2021
Change
Interest expense
$
23,799
$
21,494
10.7%
$
65,471
$
35,548
84.2%
Weighted-average
debt outstanding
1,944,604
1,833,408
6.1%
1,974,445
1,286,368
53.5%
Weighted-average interest rate
5.6
%
4.1
%
1.5
pts.
5.0
%
3.3
%
1.7 pts.
The increase in interest expense for the third quarter of 2022, as compared to the third quarter of 2021, was due to the rising interest rate environment, as well as the increase in weighted-average debt outstanding as we funded operations and investments.
32
The
increase in interest expense for the first nine months of 2022, as compared to the first nine months of 2021, was due primarily to the increase in the amount of debt outstanding in 2022, driven by the issuance of debt to fund the First American acquisition in June 2021. Also negatively impacting interest expense for the first nine months of 2022 was the increase in our weighted-average interest rate, due to the $500.0 million notes we issued in June 2021 with an interest rate of 8.0% and the rising interest rate environment. Further 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. Based on the daily average amount of variable-rate debt outstanding during the first nine months of 2022, a one percentage point change in the weighted-average interest rate would have resulted in a $7.3 million change in interest expense.
Income
Tax Provision
Quarter Ended September 30,
Nine
Months Ended September 30,
(in thousands)
2022
2021
Change
2022
2021
Change
Income tax provision
$
6,129
$
4,691
30.7%
$
19,536
$
20,720
(5.7%)
Effective
income tax rate
29.3
%
27.3
%
2.0 pts.
29.6
%
29.7
%
(0.1) pts.
The increase in our effective income tax rate for the third quarter of 2022, as compared to the third quarter of 2021, was driven primarily by an increase in the
tax impact of share-based compensation and the impact of the repatriation of current year earnings from our Canadian subsidiaries in 2022.
The slight decrease in our effective income tax rate for the first nine months of 2022, as compared to the first nine months of 2021, was driven primarily by the impact of the sale of our Australian web hosting business. For tax purposes, we recognized a capital loss on the transaction, and we recorded a valuation allowance for the portion of the capital loss carryover we do not currently expect to realize. These impacts reduced income tax expense $1.6 million for the first nine months of 2022, reducing our effective income tax rate by 2.3 points. In addition, nondeductible acquisition transaction costs in 2021 increased our 2021 tax rate by 2.8 points. These
decreases in our effective income tax rate were offset by a 3.2 point increase in the tax impact of share-based compensation and a 1.5 point increase from the repatriation of current year earnings from our Canadian subsidiaries.
Net Income / Diluted Earnings Per Share
Quarter
Ended September 30,
Nine Months Ended September 30,
(in thousands, except per share amounts)
2022
2021
Change
2022
2021
Change
Net income
$
14,760
$
12,501
18.1%
$
46,536
$
48,955
(4.9%)
Diluted
earnings per share
0.34
0.28
21.4%
1.06
1.13
(6.2%)
Adjusted diluted EPS(1)
0.99
1.10
(10.0%)
3.04
3.62
(16.0%)
(1)
Information regarding the calculation of adjusted diluted EPS can be found in the following section entitled Reconciliation of Non-GAAP Financial Measures.
Multiple factors drove the increases in net income and diluted EPS for the third quarter of 2022, as compared to the third quarter of 2021, including the benefit of price increases, actions taken to reduce costs, and revenue growth from new business in all of our segments and strong ongoing demand for our products, as well as a $3.5 million decrease in acquisition amortization and a $2.3 million year-over-year benefit in 2022 related to certain legal-related expenses. Partially offsetting these increases in net income and diluted EPS were inflationary pressures and increased transformational investments. Also, net income was impacted by an unfavorable change in product mix driven by the impact of
Promotional Solutions supply chain disruptions for certain higher margin printed products and growth in Cloud Solutions's data-driven marketing revenue combined with declines in the higher margin web hosting business. In addition, net income and diluted EPS were negatively impacted by the continuing secular decline in certain of our products and a $2.3 million increase in interest expense.
The decrease in adjusted EPS for the third quarter of 2022, as compared to the third quarter of 2021, was driven primarily by inflationary pressures on our cost structure, increased transformational investments, unfavorable product mix, the continuing secular decline in certain of our products and the increase in interest expense. These decreases in adjusted EPS were partially offset by the benefit of price increases, cost saving actions, and the revenue growth from new business and strong demand for
our products.
The decreases in net income, diluted EPS and adjusted diluted EPS for the first nine months of 2022, as compared to the first nine months of 2021, were driven by the factors outlined in Executive Overview - 2022earnings vs. 2021.
33
Adjusted EBITDA
Quarter
Ended September 30,
Nine Months Ended September 30,
(in thousands)
2022
2021
Change
2022
2021
Change
Adjusted EBITDA(1)
$
104,592
$
102,729
1.8%
$
305,948
$
290,696
5.2%
Adjusted
EBITDA as a percentage of total revenue (adjusted EBITDA margin)(1)
18.8
%
19.3
%
(0.5) pts.
18.3
%
20.0
%
(1.7) pts.
(1) Information regarding the calculation of adjusted
EBITDA and adjusted EBITDA margin can be found in the following section entitled Reconciliation of Non-GAAP Financial Measures.
The increases in adjusted EBITDA for the third quarter and first nine months of 2022, as compared to the same periods in 2021, were driven by price increases, actions taken to reduce costs as we continually evaluate our cost structure, and revenue growth from new business in all of our segments and strong ongoing demand for our products. For the first nine months of 2022, the increase in adjusted EBITDA also reflected the incremental contribution from the First American acquisition of $30.2 million. Partially offsetting these increases in adjusted EBITDA were inflationary pressures on hourly wages, materials and delivery; increased costs related to our continued transformational investments, primarily investments in our technology infrastructure,
including sales and financial management tools; an unfavorable change in product mix driven by the impact of Promotional Solutions supply chain disruptions for certain higher margin printed products and growth in Cloud Solutions's data-driven marketing revenue combined with declines in the higher margin web hosting business; and the continuing secular decline in checks, business forms and some business accessories.
Adjusted EBITDA margin decreased for the third quarter and first nine months of 2022, as compared to the same periods in 2021, driven by inflationary pressures, planned technology investments and the unfavorable product mix. These decreases in adjusted EBITDA margin were partially offset by price increases, cost saving actions and operating leverage from the revenue growth. For the third quarter of 2022, our pricing actions substantially offset the impacts of inflation and
the unfavorable changes in product mix.
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. A limitation of using the free cash flow measure is that 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 reconciles to free cash flow as follows:
Nine Months Ended September 30,
(in
thousands)
2022
2021
Net cash provided by operating activities
$
123,418
$
149,229
Purchases of capital assets
(73,454)
(81,081)
Free cash flow
$
49,964
$
68,148
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.
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:
Amount available for borrowing under revolving credit facility
282,177
362,619
Liquidity
$
327,712
$
403,850
35
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.
Diluted EPS reconciles to adjusted diluted EPS as follows:
Quarter
Ended September 30,
Nine Months Ended September 30,
(in thousands, except per share amounts)
2022
2021
2022
2021
Net income
$
14,760
$
12,501
$
46,536
$
48,955
Net
income attributable to non-controlling interest
(35)
(37)
(106)
(99)
Net income attributable to Deluxe
14,725
12,464
46,430
48,856
Acquisition
amortization
21,704
25,202
68,665
55,730
Restructuring, integration and other costs
15,319
13,894
46,830
41,085
Share-based
compensation expense
5,728
7,434
18,766
21,801
Acquisition transaction costs
51
208
112
18,816
Certain
legal-related (benefit) expense
(1,659)
638
(814)
941
Gain on sale of businesses and facility
(1,804)
—
(19,331)
—
Gain
on debt retirements
(1,726)
—
(1,726)
—
Adjustments, pretax
37,613
47,376
112,502
138,373
Income
tax provision impact of pretax adjustments(1)
(9,187)
(12,027)
(25,280)
(32,199)
Income tax impact of sale of business (2)
(2)
—
(1,552)
—
Adjustments,
net of tax
28,424
35,349
85,670
106,174
Adjusted net income attributable to Deluxe
43,149
47,813
132,100
155,030
Income
allocated to participating securities
—
(35)
(65)
(116)
Re-measurement of share-based awards classified as liabilities
(167)
(339)
(522)
(339)
Adjusted
income attributable to Deluxe available to common shareholders
$
42,982
$
47,439
$
131,513
$
154,575
Weighted
average shares and potential common shares outstanding
43,350
43,031
43,284
42,747
Adjustment(3)
—
—
—
(11)
Adjusted
weighted average shares and potential common shares outstanding
43,350
43,031
43,284
42,736
GAAP diluted EPS
$
0.34
$
0.28
$
1.06
$
1.13
Adjustments,
net of tax
0.65
0.82
1.98
2.49
Adjusted diluted EPS
$
0.99
$
1.10
$
3.04
$
3.62
(1)
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 of certain adjustments, such as share-based compensation expense, depends on whether the amounts are deductible in the respective tax jurisdictions and the applicable effective tax rate(s) in those jurisdictions.
(2) Represents the recognition of a capital loss carryover arising from the sale of our Australian web hosting business, partially offset by a related valuation allowance for the portion of the carryover we do not currently expect to realize.
(3) The total of
weighted-average shares and potential common shares outstanding used in the calculation of adjusted diluted EPS for the first nine months of 2021 differs from the GAAP calculation due to differences in the amount of dilutive securities 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
36
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 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 the forward-looking reconciling items, including asset impairment charges; restructuring, integration and other costs; gains and losses on sales of businesses and facilities; 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.
Net income reconciles to adjusted EBITDA and adjusted EBITDA margin as follows:
Quarter
Ended September 30,
Nine Months Ended September 30,
(in thousands)
2022
2021
2022
2021
Net income
$
14,760
$
12,501
$
46,536
$
48,955
Net
income attributable to non-controlling interest
(35)
(37)
(106)
(99)
Depreciation and amortization expense
42,304
41,906
128,948
102,929
Interest
expense
23,799
21,494
65,471
35,548
Income tax provision
6,129
4,691
19,536
20,720
Restructuring,
integration and other costs
15,319
13,894
46,830
41,085
Share-based compensation expense
5,728
7,434
18,766
21,801
Acquisition
transaction costs
51
208
112
18,816
Certain legal-related (benefit) expense
(1,659)
638
(814)
941
Gain
on sale of businesses and facility
(1,804)
—
(19,331)
—
Adjusted EBITDA
$
104,592
$
102,729
$
305,948
$
290,696
Adjusted
EBITDA margin
18.8
%
19.3
%
18.3
%
20.0
%
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 consist primarily of information technology consulting, project management services and internal labor, as well as other costs associated with our initiatives, such as training, travel, 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 Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report.
The
majority of the employee reductions included in our restructuring and integration accruals as of September 30, 2022, as well as the related severance payments, are expected to be completed by mid-2023. As a result of our employee reductions, we expect to realize cost savings of approximately $20.0 million in SG&A expense in 2022, in comparison to our 2021 results of operations. In addition, we anticipate cost savings from facility closures of approximately $4.0 million in 2022, in comparison to our 2021 results of operations. Note that these savings may be 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 continue to support our growth strategy.
37
SEGMENT
RESULTS
We operate 4 reportable segments: Payments, Cloud Solutions, Promotional Solutions and Checks. These segments are generally organized by product type and reflect the way we manage the company. The financial information presented below for our reportable business segments is consistent with that presented under the caption "Note 15: Business Segment Information" in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report, where information regarding revenue from our various product and service offerings can also be found.
Payments
Results for our Payments segment were as follows:
Quarter
Ended September 30,
Nine Months Ended September 30,
(in thousands)
2022
2021
Change
2022
2021
Change
Total revenue
$
169,787
$
160,268
5.9%
$
507,149
$
343,045
47.8%
Adjusted
EBITDA
36,184
31,598
14.5%
107,605
71,125
51.3%
Adjusted EBITDA margin
21.3
%
19.7
%
1.6
pts.
21.2
%
20.7
%
0.5 pts.
The increases in total revenue for the third quarter and first nine months of 2022, as compared to the same periods in 2021, were driven, in part, by volume increases in our major payments products, primarily lockbox processing services and digital payments, as well as growth in merchant services. Revenue also benefited from price increases in response to the current inflationary environment. For the first nine months of 2022, the revenue increase also reflected the acquisition and strong performance of First American, which
contributed incremental revenue of $144.2 million for the first nine months of 2022. Longer term, we expect high single digit percentage revenue growth for this segment.
The increases in adjusted EBITDA for the third quarter and first nine months of 2022, as compared to the same periods in 2021, were driven, in part, by price increases and the revenue growth in our payments and merchant services businesses. In addition, for the first nine months of 2022, adjusted EBITDA benefited from the incremental contribution of the First American acquisition of $30.2 million. These increases in adjusted EBITDA were partially offset by continued sales and information technology investments and inflationary pressures on our cost structure, primarily labor costs in our lockbox processing business. Adjusted EBITDA margin increased in both periods, as compared to 2021, as the benefit of the revenue increases
exceeded the impact of the investments in the business and the inflationary pressures. For the full year, we expect adjusted EBITDA margin to be in the low 20% range.
Cloud Solutions
Results for our Cloud Solutions segment were as follows:
Quarter
Ended September 30,
Nine Months Ended September 30,
(in thousands)
2022
2021
Change
2022
2021
Change
Total revenue
$
66,739
$
69,497
(4.0%)
$
204,824
$
199,784
2.5%
Adjusted
EBITDA
16,034
19,036
(15.8%)
50,869
55,047
(7.6%)
Adjusted EBITDA margin
24.0
%
27.4
%
(3.4)
pts.
24.8
%
27.6
%
(2.8) pts.
The decrease in total revenue for the third quarter of 2022, as compared to the third quarter of 2021, was driven by the sale of our Australian web hosting business in the second quarter of 2022, which resulted in a a $5.9 million reduction in revenue, as well as customer churn in our North American web hosting business. Partially offsetting these decreases in revenue was growth in data-driven marketing of $5.0 million for the third quarter of 2022, driven by relationship expansion with key customers and sales wins resulting,
in part, from technology investments that made the platform easier for our customers to use.
The increase in total revenue for the first nine months of 2022, as compared to the first nine months of 2021, was driven by growth in data-driven marketing of $19.2 million for the first nine months of 2022, resulting from relationship expansion with key clients, sales wins and increased marketing spend by our customers. Partially offsetting the revenue increases was the sale of our Australian web hosting business, which resulted in a $9.9 million revenue reduction for the first nine months of 2022, and customer churn in our North American web hosting business. We expect a low single digit percentage revenue decline for the full year, reflecting a decrease of $16.0 million from the business divestiture.
Adjusted
EBITDA decreased for the third quarter and first nine months of 2022, as compared to the same periods in 2021, driven by the sale of the Australian web hosting business and investments in our data-driven marketing platform, partially offset
38
by the growth in data-driven marketing revenue. Adjusted EBITDA margin decreased in both periods, as compared to 2021, driven by changes in product mix resulting from growth in data-driven marketing combined with declines in the higher margin web hosting business, as well as the platform investments in the data-driven marketing business. We expect that adjusted EBITDA margin for the full year will be in the low to mid-20% range.
Promotional
Solutions
Results for our Promotional Solutions segment were as follows:
Quarter
Ended September 30,
Nine Months Ended September 30,
(in thousands)
2022
2021
Change
2022
2021
Change
Total revenue
$
136,081
$
130,330
4.4%
$
408,600
$
389,825
4.8%
Adjusted
EBITDA
18,255
17,673
3.3%
49,795
56,804
(12.3%)
Adjusted EBITDA margin
13.4
%
13.6
%
(0.2)
pts.
12.2
%
14.6
%
(2.4) pts.
The increases in total revenue for the third quarter and first nine months of 2022, as compared to the same periods in 2021, were driven primarily by the impact of new clients, relationship expansion with existing clients, price increases in response to the current inflationary environment, and strong ongoing demand for our promotional and apparel products. Partially offsetting these revenue increases were lower sales of certain printed products due to supply chain disruptions, as well as the continuing secular
decline in business forms and some accessories. As discussed in Executive Overview, we sold our strategic sourcing business during the second quarter of 2022 and our retail packaging business during the third quarter of 2022. These divestitures resulted in a revenue decline of $5.7 million for the third quarter of 2022 and $9.1 million for the first nine months of 2022. We expect that revenue for the full year will decline approximately $15.5 million as a result of these business exits.
The increase in adjusted EBITDA for the third quarter of 2022, as compared to the third quarter of 2021, was driven by price increases and the revenue growth noted above, partially offset by inflationary pressures on materials and delivery and supply chain disruptions for certain higher margin printed products as a result of paper and other supply disruptions.
Adjusted
EBITDA for the first nine months of 2022 decreased compared to the first nine months of 2021, driven by inflationary pressures on materials and delivery and supply chain disruptions for certain printed products, partially offset by price increases in response to the current inflationary environment and the revenue growth noted above.
Adjusted EBITDA margin decreased slightly for the third quarter of 2022, as compared to the third quarter of 2021, as inflationary cost pressures and supply chain disruptions were substantially offset by price increases. Adjusted EBITDA margin for the third quarter of 2022 increased from 10.5% in the second quarter of 2022, as we benefited from improvements in supply availability and pricing actions began to offset inflationary cost pressures.
Adjusted EBITDA margin decreased
for the first nine months of 2022, as compared to the first nine months of 2021, as the impact of inflation and supply chain disruptions for certain higher margin printed products exceeded the impact of the price increases and revenue growth. We anticipate a higher adjusted EBITDA margin in the fourth quarter of 2022, as compared to the third quarter of 2022, due to further improvements in supply availability, operational improvement initiatives and our typical seasonal patterns.
Checks
Results for our Checks segment were as follows:
Quarter
Ended September 30,
Nine Months Ended September 30,
(in thousands)
2022
2021
Change
2022
2021
Change
Total revenue
$
182,431
$
172,046
6.0%
$
553,433
$
518,968
6.6%
Adjusted
EBITDA
80,478
77,254
4.2%
245,838
240,979
2.0%
Adjusted EBITDA margin
44.1
%
44.9
%
(0.8)
pts.
44.4
%
46.4
%
(2.0) pts.
The increases in total revenue for the third quarter and first nine months of 2022, as compared to the same periods in 2021, were driven primarily by the impact of new client wins, price increases and strong demand for business checks. These increases in revenue were partially offset by the continuing secular decline in overall check volumes. We anticipate that the percentage revenue decline for the fourth quarter of 2022, as compared to the fourth quarter of 2021, will be consistent with previous secular declines,
as we have now lapped the benefit of new clients that were onboarded beginning late in the third quarter of 2021.
39
The increases in adjusted EBITDA for the third quarter and first nine months of 2022, as compared to the same periods in 2021, were driven by the price increases, cost saving actions, the impact of new clients and strong demand for business checks, partially offset by inflationary pressures on delivery and materials and the secular decline in overall check volumes. Adjusted EBITDA margin decreased in both periods, as compared to 2021, as inflationary cost pressures and the addition of lower margin new clients exceeded the benefit of the pricing and cost savings actions. We expect
margins for this business to remain in the mid-40% range.
CASH FLOWS AND LIQUIDITY
As of September 30, 2022, we held cash and cash equivalents of $45.5 million, as well as restricted cash and restricted cash equivalents included in funds held for customers and other non-current assets of $150.4 million. The following table shows our cash flow activity for the nine months ended September 30, 2022 and 2021
and should be read in conjunction with the consolidated statements of cash flows appearing in Part I, Item 1 of this report.
Nine Months Ended September 30,
(in
thousands)
2022
2021
Change
Net cash provided by operating activities
$
123,418
$
149,229
$
(25,811)
Net
cash used by investing activities
(49,350)
(1,036,361)
987,011
Net cash (used) provided by financing activities
(149,561)
911,620
(1,061,181)
Effect
of exchange rate change on cash, cash equivalents, restricted cash and restricted cash equivalents
(14,107)
(793)
(13,314)
Net change in cash, cash equivalents, restricted cash and restricted cash equivalents
$
(89,600)
$
23,695
$
(113,295)
Free
cash flow(1)
$
49,964
$
68,148
$
(18,184)
(1) See Reconciliation of Non-GAAP Financial Measures within the Consolidated Results of Operations section,
which defines and illustrates how we calculate free cash flow.
Net cash provided by operating activities decreased $25.8 million for the first nine months of 2022, as compared to the first nine months of 2021, driven by 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, 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 from 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.
Included in net cash provided by operating activities were the following
operating cash outflows:
Nine Months Ended September 30,
(in thousands)
2022
2021
Change
Interest
payments
$
50,986
$
18,179
$
32,807
Performance-based compensation payments(1)
34,972
12,192
22,780
Income tax
payments
34,515
16,768
17,747
Prepaid product discount payments
23,920
27,049
(3,129)
Payments for cloud computing arrangement implementation costs
16,608
27,989
(11,381)
Severance
payments
7,502
8,632
(1,130)
(1) Amounts reflect compensation based on total company performance.
40
Net cash used by investing activities for the first nine months of 2022 was $987.0 million lower than the first nine months of 2021, driven by the acquisition of First American in 2021 and proceeds
of $25.2 million from sales of businesses and a facility during 2022.
Net cash used by financing activities for the first nine months of 2022 was $1,061.2 million higher than the first nine months of 2021, driven by the net proceeds from debt issued in 2021 to fund the First American acquisition, as well as the net change in customer funds obligations in each period, primarily related to the portion of First American's business under which property tax payments are collected in December and are paid on behalf of customers in the following quarter. In addition, proceeds from issuing shares were $13.6 million lower in 2022, as certain employees of First American purchased our stock during 2021 in conjunction with the acquisition.
Significant cash transactions, excluding those related to operating activities,
for each period were as follows:
Nine Months Ended September 30,
(in thousands)
2022
2021
Change
Net
change in debt
$
(13,175)
$
949,412
$
(962,587)
Net change in customer funds obligations
(88,079)
14,913
(102,992)
Purchases of capital assets
(73,454)
(81,081)
7,627
Cash
dividends paid to shareholders
(39,613)
(38,695)
(918)
Payments for debt issuance costs
—
(18,153)
18,153
Proceeds from sale of businesses and facility
25,248
2,648
22,600
Proceeds
from issuing shares
2,383
16,031
(13,648)
As of September 30, 2022, our foreign subsidiaries held cash and cash equivalents of $45.4 million. During 2022, we began repatriating Canadian current year earnings, as we believe
the accumulated and remaining cash of our Canadian subsidiaries is sufficient to meet their working capital needs. We intend to use the repatriated earnings to reduce outstanding debt. The historical unremitted Canadian earnings as of December 31, 2021, as well as the accumulated and future unremitted earnings of our European subsidiaries, will continue to be reinvested indefinitely in the operations of those subsidiaries. Deferred income taxes have not been recognized on these earnings as of September 30, 2022. If we were to repatriate our foreign cash and cash equivalents into the U.S. at one time, we
estimate that we would incur a foreign withholding tax liability of approximately $1.8 million, notwithstanding any tax planning strategies that might be available.
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 and our contingent liabilities can be found under the captions “Note 12: Debt” and "Note 13: Other Commitments and Contingencies," both of which appear in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report. Information regarding our lease obligations can be found under the caption "Note 15: Leases" in the Notes to Consolidated Financial Statements appearing in the 2021 Form 10-K, and information regarding our contractual obligations can
be found in the MD&A section of the 2021 Form 10-K, under the section entitled Cash Flows and Liquidity. There were no significant changes in our lease or contractual obligations during the first nine months of 2022.
As of September 30, 2022, $282.2 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 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 $1.69 billion as of September 30, 2022 and $1.70 billion as of December 31, 2021. Further information concerning our outstanding debt, including our debt service obligations, 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.
41
Our capital structure for each period was as follows:
(1)
The fixed interest rate amount includes the amount of our variable-rate debt that is subject to interest rate swap agreements. The related interest rate includes the fixed rate under the swaps plus the credit facility spread due on all amounts outstanding under our credit facility.
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 under this authorization since the first quarter of 2020, when we suspended share repurchases in order to maintain liquidity during the COVID-19 pandemic. As of September 30, 2022, $287.5 million remained available for repurchase under this authorization. Information regarding changes in shareholders' equity can be found in the consolidated statements of shareholders'
equity appearing in Part I, Item 1 of this report.
As of September 30, 2022, total commitments under our revolving credit facility were $500.0 million. 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 12: Debt" in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 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 September 30,
2022, and we anticipate that we will remain in compliance with our debt covenants throughout the next 12 months.
As of September 30, 2022, amounts available for borrowing under our revolving credit facility were as follows:
(1) We use standby letters of credit to collateralize certain obligations related primarily 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" appearing in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report.
Funds held for customers – Funds held for customers of $155.6 million as of September 30, 2022 decreased $99.2 million from December 31, 2021, and the related current liability for funds held for customers of $155.4 million as of September 30, 2022 decreased $100.9 million from
December 31, 2021. These decreases were driven by the seasonal nature of a portion of First American's business under which property tax payments are collected in December and are paid on behalf of customers the following year.
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.
42
Changes
in prepaid product discounts during the nine months ended September 30, 2022 and 2021 can be found under the caption "Note 3: Supplemental Balance Sheet and Cash Flow Information" in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report. Cash payments for prepaid product discounts were $23.9 million for the first nine months of 2022 and $27.0 million for the first nine months of 2021.
The number of checks 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 discount payments due within the next year are included in accrued liabilities on the consolidated balance sheets. These accruals were $6.6 million as of September 30, 2022 and $11.9 million as of December 31, 2021.
CRITICAL ACCOUNTING ESTIMATES
A description of our critical accounting estimates was provided in the MD&A section of the 2021 Form 10-K. There were no changes in the determination of these estimates during the
first nine months of 2022. Information regarding the annual goodwill impairment analysis completed during the third quarter of 2022 can be found under the caption "Note 8: Fair Value Measurements" in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report.
New accounting pronouncement – Information regarding the new accounting pronouncement that we have not yet adopted can be found under the caption “Note 2: New Accounting Pronouncement” in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk – We are exposed to changes in interest rates primarily as a result of the borrowing activities used to support our capital structure, maintain liquidity and fund business operations and investments. We do not enter into financial instruments for speculative or trading purposes. The nature and amount of debt outstanding can be expected to vary as a result of future business requirements, market conditions and other factors.
Interest is payable on amounts outstanding under our credit facility at a fluctuating rate of interest determined by reference to the eurodollar rate plus an applicable margin ranging from 1.5% to 2.5%, depending on our total leverage ratio,
as defined in
43
the credit agreement. We also had $475.0 million of 8.0% senior, unsecured notes outstanding as of September 30, 2022. Including the related discount and debt issuance costs, the effective interest rate on these notes is 8.3%.
(1)
The carrying amount has been reduced by unamortized discount and debt issuance costs of $15.8 million.
(2) For the amounts outstanding under our credit facility agreement, fair value approximates carrying value because the interest rate is variable and reflects current market rates. The fair value of the senior, unsecured notes is based on quoted prices in active markets for the identical liability when traded as an asset.
(3) The interest rate presented for total debt includes the impact of the interest rate swaps discussed below.
As part of our interest rate risk management strategy, we entered into interest rate swaps, which we designated as cash flow hedges,
to mitigate variability in interest payments on a portion of our variable-rate debt. The interest rate swaps effectively convert $500.0 million of variable-rate debt to a fixed rate. Further information regarding the interest rate swaps can be found under the caption "Note 7: Derivatives" in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report. Changes in the fair value of the interest rate swaps are recorded in accumulated other comprehensive loss on the consolidated balance sheets and are subsequently reclassified to interest expense as interest payments are made on the variable-rate debt. The fair value of the swaps was $3.8 million as of September 30, 2022 and was included in other current and other non-current assets on the consolidated balance sheet. The fair value of the swap held at December 31, 2021
was $3.0 million and was included in other non-current liabilities on the consolidated balance sheet.
Based on the daily average amount of variable-rate debt outstanding during the first nine months of 2022, a one percentage point change in the weighted-average interest rate would have resulted in a $7.3 million change in interest expense.
Our credit agreement matures on June 1, 2026, at which time any amounts outstanding under the revolving credit facility must be repaid. The term loan facility requires periodic principal payments through June 1, 2026, and the senior, unsecured notes mature in June 2029. Information regarding the maturities of our long-term 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.
Foreign currency exchange rate risk – We are exposed to changes in foreign currency exchange rates. Investments in, loans and advances to foreign subsidiaries and branches, as well as the operations of these businesses, are denominated in foreign currencies, primarily Canadian dollars. The effect of exchange rate changes is not expected to have a significant impact on our earnings and cash flows, as our foreign operations represent a relatively small portion of our business. We have not entered into hedges against changes in foreign currency exchange rates.
ITEM
4. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures – As of the end of the period covered by this report, September 30, 2022 (the Evaluation Date), we carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file
or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in applicable rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
(b) Internal Control Over Financial Reporting – There were no changes in our internal control over financial reporting identified in connection with our evaluation during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
44
PART
II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We record accruals with respect to identified claims or lawsuits when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Claims and lawsuits are reviewed quarterly and provisions are taken or adjusted to reflect the status of a particular matter. We believe the recorded reserves in our consolidated financial statements are adequate in light of the probable and estimable outcomes. As of September 30, 2022, recorded
liabilities were not material to our financial position, results of operations or liquidity, and we do not believe that any of the currently identified claims or litigation will materially affect our financial position, results of operations or liquidity upon resolution. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. If an unfavorable ruling were to occur, it may cause a material adverse impact on our financial position, results of operations or liquidity in the period in which the ruling occurs or in future periods.
ITEM 1A. RISK FACTORS
Our
risk factors are outlined in Part I, Item 1A of the 2021 Form 10-K. There have been no significant changes in these risk factors since we filed the 2021 Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table shows purchases of our common stock that were completed during the third quarter of 2022:
Period
Total
number of shares purchased(1)
Average price paid per share(1)
Total number of shares purchased as part of publicly announced plans or programs
Approximate dollar value of shares that may yet be purchased under the plans or programs(2)
(1)
Under the terms of our 2022 Stock Incentive Plan, as well as our previous long-term incentive plans, participants may surrender shares that would otherwise be issued under equity-based awards to cover the withholding taxes due as a result of the exercising or vesting of such awards. During the third quarter of 2022, we withheld 10,570 shares in conjunction with the vesting and exercise of equity-based awards.
(2) 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. No shares were repurchased under this authorization during the third quarter of 2022 and $287.5 million remained available for repurchase as of September 30, 2022.
XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
Cover page
interactive data file (formatted as Inline XBRL and contained in Exhibit 101)
46
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
