10-K: Annual report pursuant to Section 13 and 15(d)
Published on February 28, 2022
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended | |||||
Commission file number: 1-7945
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
(Zip Code) |
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Registrant’s telephone number, including area code: (651 ) 483-7111
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☑ Yes ☐ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☑ No
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. ☑ Yes ☐ 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 for such shorter period that the registrant was required to submit such files). ☑ Yes ☐ 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.
| Accelerated Filer | ☐ | ||||||||||
| Non-accelerated Filer | ☐ | Smaller Reporting Company | |||||||||
| Emerging Growth Company | |||||||||||
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☑ No
The aggregate market value of the voting stock held by non-affiliates of the registrant is $2,015,934,270 based on the last sales price of the registrant's common stock on the New York Stock Exchange on June 30, 2021. The number of outstanding shares of the registrant's common stock as of February 9, 2022 was 42,790,216 .
Documents Incorporated by Reference: Portions of our definitive proxy statement to be filed within 120 days after our fiscal year-end are incorporated by reference in Part III.
DELUXE CORPORATION
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2021
TABLE OF CONTENTS
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PART I
Please note that this Annual Report on Form 10-K contains statements that may constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Forward-looking statements include information concerning future strategic objectives, business prospects, anticipated savings, financial results (including earnings, liquidity, cash flow and capital expenditures), industry or market conditions, demand for our products and services, acquisitions and divestitures, anticipated results of litigation, regulatory developments or general economic conditions. Part I, Item 1A of this report outlines known material risks and important information to consider when evaluating our forward-looking statements. 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 Annual Report on Form 10-K, 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.
| ITEM 1. BUSINESS | ||
| OUR BUSINESS | ||
Over 105 years ago, Deluxe Corporation began providing payment solutions. Our longevity is a testament to our innovation, our ability to evolve with our customers and the trust they place in us. We are transforming from a check printing company to a Trusted Payments and Business TechnologyTM company that champions business so communities thrive. Our solutions help businesses pay and get paid, accelerate growth and operate more efficiently. We support millions of small businesses, thousands of financial institutions and hundreds of the world's largest consumer brands, while processing approximately $3 trillion in annual payment volume. We operate primarily in the U.S., but we also sell our products and services in Canada, Australia and portions of Europe and South America. We operate 4 business segments that are generally organized by product type. These segments provide the following products and services:
| Business Segment | Category | Percentage of 2021 consolidated revenue | Description | |||||||||||||||||
| Payments | Merchant services and other payment solutions | 13.6 | % | Merchant in-store, online and mobile payment solutions; payables as a service, including eChecks, Medical Payment Exchange and Deluxe Payment Exchange; payroll and human resources services; fraud and security services | ||||||||||||||||
| Treasury management solutions | 11.6 | % | Receivables as a service, including remittance and lockbox processing, remote deposit capture, receivables management, payment acceptance | |||||||||||||||||
| Total | 25.2 | % | ||||||||||||||||||
| Cloud Solutions | Data-driven marketing solutions | 7.5 | % | Solutions for marketing business-to-business and business-to-consumer | ||||||||||||||||
| Web and hosted solutions | 5.5 | % | Web hosting and software-as-a-service (SaaS) solutions, including web design, logo design, financial institution profitability reporting, business incorporation services | |||||||||||||||||
| Total | 13.0 | % | ||||||||||||||||||
| Promotional Solutions | Forms and other products | 14.7 | % | Business forms and accessories, including envelopes, labels, stationery and more | ||||||||||||||||
| Marketing and promotional solutions | 12.3 | % | Advertising specialties, promotional apparel, retail packaging | |||||||||||||||||
| Total | 27.0 | % | ||||||||||||||||||
| Checks | Checks | 34.8 | % | Printed business and personal checks | ||||||||||||||||
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| OUR STRATEGY | ||
Our vision is to be a trusted leader in payments and data. To realize this vision, we will continue to leverage our strengths:
•Our customers – our products and services are utilized by customers of all sizes and maturities. We continue to benefit from a long heritage of offering trusted service to our customers, which in turn, fuels meaningful cash flow that is redeployed to invest in other areas of the company.
•World class payments and data products and platforms – we continue to make investments to build market-leading payments and data products and platforms that are proprietary to Deluxe, encouraging our customers to build their businesses on our platforms for the long-term.
•Scale – we believe our volumes for many of our service offerings enable us to offer per-unit costs and reliability superior to our competitors. We continue to focus on scaling our technology and product management capabilities.
•Recurring and reoccurring revenue – we will continue to focus on offering products and integrated platforms that generate recurring and reoccurring revenue streams.
•Sales and distribution channels – we have extensive market reach, with millions of small business and consumer customers and thousands of financial institution clients. We plan to continue to deploy our resources, including our sales force and our various strategic relationships, to cost-effectively reach customers.
Over the past 3 years, we made significant progress in the implementation of our "One Deluxe" strategy, moving from a traditional manufacturing “company of companies” to a more technologically-focused “company of products.” We continued to integrate the numerous technology platforms we acquired over the years through our various acquisitions, working toward a common, modern technology platform. Particularly, we have focused on employing world-class sales technology that provides a unified view of our customers, enabling us to bring the best of Deluxe to all of our customers. We also 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, and we determined that we are well positioned to augment our business through meaningful acquisitions. In June 2021, we completed the acquisition of First American Payment Systems, L.P. (First American), a large-scale payments technology company that provides partners and merchants with comprehensive in-store, online and mobile payment solutions. This acquisition enables us to expand significantly in the fast-growing payments sector, a sector known for generating significant recurring revenues and cash flows, and revenue from our Payments segment now rivals that of our Checks segment. Since the acquisition, the First American business has been growing faster than its historical pace, as we have leveraged our strong sales organization and trusted client relationships. We now have an even stronger foundation from which to pursue future acquisitions that will allow us to potentially realize significant revenue synergies, and we believe that our combined scaled back-end processing will readily support incremental volume.
At the same time that we have been investing in our business, we continued efforts to lower costs and simplify and eliminate duplicative processes. During 2021, we continued to review our real estate footprint and we closed 16 facilities, in addition to the 24 facilities we closed during 2020. We are continually refining our operating model to match expected customer needs and anticipated volumes, as well as to gain efficiencies.
| IMPACT OF THE COVID-19 PANDEMIC | ||
Since early 2020, the world has been, and continues to be, impacted by the coronavirus (COVID-19) and its variants. The pandemic has had widespread, rapidly-evolving and unpredictable impacts on global society, economies, financial markets and business practices. Measures to prevent its spread have impacted us in a number of ways, including an initial reduction in revenues in all of our segments while our customers limited certain of their activities, limited in-person contact with current and potential clients and the shifting of conferences and other sales and marketing events to virtual events. We are continually reviewing our policies and procedures as we navigate through the pandemic. Certain of our employees have continued to work from our facilities throughout the pandemic, where we adopted health screening, implemented social distancing and personal protective equipment requirements, enhanced cleaning and sanitation procedures, and modified workspaces to reduce the potential for disease transmission. For those employees who were working from home, we have reopened our facilities and are encouraging employees to work in a hybrid environment, where employees have the flexibility to work when and where they are comfortable and most productive, while encouraging a collaborative environment.
Our revenue began to recover in the second half of 2021, as our customers began to resume a more normal level of activity. We believe that the COVID-19 pandemic will continue to impact our business operations, including our employees, customers, partners and communities, and there is substantial ongoing uncertainty as to the nature and degree of its continued effects over time. The extent of additional adverse impacts on our financial condition and results of operations will be dictated by
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the currently unknowable duration and severity of COVID-19 and its variants, the impact of governmental actions imposed in response to the pandemic, and individuals' and companies’ risk tolerance regarding health matters going forward. Please refer to the Risk Factors discussion appearing in Part I, Item 1A of this report for a discussion of these factors and other risks affecting our business, financial position, results of operations and prospects.
| SALES AND MARKETING | ||
Everyone sells at Deluxe. We employ a comprehensive "One Deluxe" go-to-market approach, deploying a unified sales team with a complete view of our customer relationships, with the goal of bringing the best of Deluxe to every customer. Our customers rely on our solutions and platforms at all stages of their lifecycle, from start-up to maturity (as illustrated below), allowing our business segments to help each other deliver greater value for our customers and enabling our customers to build their businesses on our platforms for the long-term.
Note: Illustration is not indicative of our full set of products and services.
We employ a multi-channel, demand-generation sales and marketing approach. This includes our enterprise account model, under which our sales force sells directly to financial institutions and major global brands. We also sell our products and services through scalable partnerships, enabling us to cost-effectively reach customers, specifically leveraging our financial institution partnerships, our e-commerce assets and other strategic partnerships. In addition, millions of in-bound customer contacts buying or re-ordering our products and services provide extensive cross-sell opportunities.
| INDUSTRY TRENDS AND OUR COMPETITION | ||
Payment solutions, including checks
The payments industry continues to expand and evolve, with digital payment vehicles and transaction volumes growing around the world. The industry is continuously changing, highly innovative and increasingly subject to regulatory scrutiny and oversight. The challenge for payment providers is to continually modernize their infrastructure to support new service offerings and to identify new revenue streams, as well as to invest in cloud computing and other digital technologies to more rapidly address evolving customer preferences. This pace of change puts pressure on payment providers to transform and adapt in order to remain competitive.
Competition in the payments industry is intense. We are competing against numerous financial technology (Fintech) companies, including independent payment processors, credit card processing firms and treasury management service providers, as well as financial institution in-house capabilities. Volume is the key to staying cost-competitive, as it allows us to drive scale in our operations, and breadth of services is critical to staying relevant to customers. We believe our competitive advantages are: our scalable platform, extensive distribution channels, superior end-customer experience, frictionless payments (i.e., non-disruptive for payer, and payment choices for payee), automated receivables management, strong balance sheet and trusted and respected brand. We also believe there is growth potential for our Medical Payments Exchange (MPX) and Deluxe Payments Exchange (DPX) platforms, which convert paper checks to digital payments.
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Our Checks business remains an important part of our strategy. We believe there will continue to be demand for personal and business checks for the foreseeable future. However, the total number of checks written in the U.S. has been in decline since the mid-1990s. The cash flow generated by our Checks business partially self-funds our growth investments. Our check programs are also an important source of lead generation for cost-effective cross-selling of other products and services.
Our Checks business faces significant competition from another large check printer in our traditional financial institution sales channel, direct mail and internet-based sellers of personal and business checks, check printing software vendors and certain significant retailers. Pricing continues to be competitive in our financial institution sales channel, as financial institutions seek to maintain their previous levels of profitability, even as check usage declines. We believe our competitive advantages come from our design and customization options, our quality and service, the trust our customers have in us and our strong financial position. In addition, we are implementing new digital and print-on-demand technology that we believe will allow us to implement new customer requirements faster and expand our premium check and overall print design options.
Cloud Solutions
Data-driven marketing – With increased competition among businesses to target and engage new and existing customers, the use of data-driven marketing has continued to increase and evolve. Competition in this industry is intense, with a wide variety of companies in the data solutions space, including advertising agencies, marketing technology firms, data aggregators and brokers, and source data providers. Adapting to new technology is a key challenge in this industry, along with hiring and retaining the right people. We must continually adapt to the changing needs of our customers and expand our offerings to provide a greater breadth of services.
We believe we have significant growth opportunity in this market. We continue to simplify and integrate our separate businesses operating in this market, monetize the significant amount of data we process across the company, invest in technologies, such as artificial intelligence and machine learning, and consolidate our data infrastructure to reduce costs. We also believe that our pay-for-performance offerings provide us a competitive advantage.
Web and hosted solutions – The market for web hosting services is highly competitive and commoditized. As such, significant spending on product development and customer acquisition is required to compete in this space, and value-added services differentiate the competition. The markets for our hosted SaaS solutions, including web design, logo design and business incorporation services, are also large, dynamic and highly competitive, with dominant integrated players, as well as niche providers. We believe that it is easy to find our service offerings online, they are simple to use and they are competitively priced. We also believe that we will better compete in these markets as we continue to optimize our suite of solutions to deliver more integrated offerings.
Promotional Solutions
The market for business forms and certain business accessories has been declining for several years, as continual technological improvements have provided businesses with alternative means to execute and record business transactions. Greater acceptance of electronic signatures has also contributed to the overall decline in printed products. The markets for business forms and promotional products are highly competitive and fragmented. Current and potential competitors include traditional storefront printing companies, office superstores, wholesale printers, online printing companies, small business product resellers and providers of custom apparel and gifts. We believe that our competitive advantages include our multi-channel experience, ease of use, deep sources of supply and branded merchandise. We also believe that, by expanding our product set and driving integration of physical and digital solutions, we will transition this segment to a technology-driven business that can respond quickly to market opportunities and differentiate us from our competitors.
| OUR OPERATIONS / SUSTAINABLE PRACTICES | ||
We continue our focus on improving the customer experience by providing excellent service and quality, while increasing our productivity and reducing our costs. We accomplish this by embedding lean operating principles into our processes, while emphasizing a culture of continuous improvement. We have a shared services approach, which allows our businesses to leverage shared facilities to optimize capacity utilization and to enhance operational excellence. We continue to reduce costs by utilizing our assets and technologies more efficiently and by enabling employees to better leverage their capabilities and talents.
We take our commitment to sustainability seriously, focusing on 5 specific areas:
•Energy – We were an early adopter of energy savings, and energy use in our facilities has declined 48% since 2007. We purchase green power for use in our facilities and we now produce all checks for financial institution customers using renewable energy. Over the years, we have dedicated capital to various projects in our facilities, including humidification, lighting and HVAC and control system retrofits, which have decreased our North American energy use and carbon footprint significantly. We implemented many of these same concepts during the recent construction of our
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new facilities in Atlanta and Minneapolis, including LED lighting, daylight harvesting strategies, optimized HVAC systems and material selections that reduce carbon input and increase recycled content.
•Transportation – We have taken steps to reduce the miles we transport our products and we have converted from truck to rail where possible to reduce carbon emissions. We changed the vehicles in our car fleet to a more fuel-efficient model, which saves approximately 27,000 gallons of fuel and reduces our C02 emissions by approximately 525,000 pounds in one year.
•Waste – We are focused on understanding the waste stream in each of our facilities, with the goal of reducing the amount of waste we generate and recycling as much of our waste stream as possible. We have moved from volume inventories of custom inks to mixing systems. This has greatly reduced waste stream processing, with better response times for customers. We plan to eliminate 100 conventional and digital presses and move to 6 large-scale variable, digital presses by 2023. We have already eliminated 60 of those 100 conventional presses in the last five years and have migrated more work to digital presses.
•Materials – Over 90% of our check and forms paper is purchased from Forest Stewardship Council-certified supplier mills. In addition, our vinyl checkbook covers are produced using a minimum of 45% post-industrial recycled material. We also employ rigorous recycling efforts, and we now remove on average over 4,800 tons of paper, 440 tons of cardboard, 65 tons of metal, and 53 tons of plastic out of landfills each year by being diligent through the segregation of our waste streams.
•Carbon – We continue to review every aspect of our business, from the materials we use in products to how we manage facilities, to the role we play in communities, to ensure our growth stems from sustainable practices. For several years, we have purchased wind energy credits to help support and enable the renewable energy industry and offset 80% of our U.S. electricity consumption.
Protecting the environment and our shared future is key to our business and to delivering the products our customers need. Our focus on sustainability also saves money for us and our clients as our operations continue to make ongoing efficiency gains.
| CYBERSECURITY | ||
We are a trusted partner to enterprises of all sizes, and this is a responsibility we take seriously. The secure and uninterrupted operation of our networks and systems, as well as the processing, maintenance and confidentiality of the sensitive information that resides on our systems, is critical to our business operations and strategy. Each year, we process hundreds of millions of records containing data related to individuals and businesses. In addition, many of our products are hosted solutions, and the amount of data we store for our customers on our servers, including personal, important business and other potentially sensitive information, has been increasing. Technology-based organizations such as ours are vulnerable to targeted attacks aimed at exploiting network and system applications or weaknesses. A successful cyberattack could result in the disclosure or misuse of sensitive business and personal information and data, cause interruptions in our operations, damage our reputation and deter clients and consumers from ordering our products and services. It could also result in litigation, the termination of client contracts, government inquiries and/or enforcement actions.
We have implemented a risk-based information/cybersecurity program dedicated to protecting our data and solutions. Our privacy policies, together with associated controls and procedures, provide a comprehensive framework to inform and guide the handling of data. These programs dovetail with our information security program in a manner designed to ensure that any data we handle remains protected. We employ an in-depth defensive strategy, utilizing the concept of security layers and the CIA (confidential, integrity and availability) triad model. Our information security program is led by our Chief Information Security Officer and the Information Security department, which establishes the policies, standards and strategies to manage security risk. We devote significant resources to addressing security vulnerabilities through enhancing security and reliability features in our products and services, reviewing and auditing our systems against independent security control frameworks, such as ISO 27001, and performing regular segment and company-wide risk assessments that include company and industry threat data and security maturity assessments, and which inform our annual and multi-year cybersecurity strategies and our product security plans.
We have an Enterprise Risk Management Committee that is led by our Assurance and Risk Advisory Services group, our Chief Financial Officer and our Chief Administrative Officer, with participation from our executive leadership team and senior-level staff, including our Chief Compliance Officer and our Chief Information Security Officer. This committee assesses and monitors our top enterprise risks, including cybersecurity, and provides quarterly updates to our board of directors. Our Chief Information Security Officer also provides periodic updates to our board of directors, which is responsible for ensuring we have implemented appropriate risk mitigation strategies, systems, processes and controls.
In the event a cybersecurity incident is identified, our Cyber Security Incident Response team will act in accordance with our Incident and Crisis Management Program to ensure communication to our executive leadership team and to coordinate the
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response to any incident. Our Chief Executive Officer, Chief Financial Officer, General Counsel, Chief Information Security Officer and Chief Compliance Officer are responsible for assessing such incidents for materiality, ensuring that any required notification or communication occurs and determining, among other things, whether any prohibition on the trading of our common stock by insiders should be imposed prior to the disclosure of information about a material cybersecurity event. We maintain cybersecurity insurance coverage that insures us for costs resulting from cyber attacks, although this coverage may not reimburse us for all losses.
For more information on risks related to data security, see Item 1A, "Operational Risks – Security breaches, computer malware or other cyberattacks involving the confidential information of our customers, employees or business partners could substantially damage our reputation, subject us to litigation and enforcement actions, and substantially harm our business and results of operations."
| OUR MATERIALS, SUPPLIES AND SERVICE PROVIDERS | ||
The principal materials used in producing our main products are paper, plastics, ink, corrugated packaging and printing plate material, which we purchase from various sources. We also purchase stock business forms and promotional apparel produced by third parties. In addition, we have entered into agreements with third-party providers for delivery services and information technology services, including telecommunications, network server and transaction processing services, as well as various other services. We also rely on third parties to provide a portion of the data used to maintain our proprietary and non-proprietary databases, including credit and non-credit data from the national credit bureaus and other data brokers.
During 2021, we engaged a third-party global sourcing group to help manage our supply chain. We believe that in the event one of our vendors fails to perform, we would be able to obtain an alternative source of supply. However, with recent stresses on the global supply change and labor market, we are taking steps to secure multiple sources of supply for certain of the materials and services we utilize. We can provide no assurance that we would be able to obtain an alternative source of supply, or that such supply could be obtained at current prices.
| OUR HUMAN CAPITAL | ||
Our most valuable asset is our employee-owners. As of December 31, 2021, we had 6,313 employees. Approximately 98% of our team is full-time employees, with 58% representing non-exempt roles working in production, processing or call center functions. We employ 5,645 employees in the United States, 551 employees in Canada and 117 employees in Australia and Europe. We are proud of our strong history of positive, productive employee relations. None of our employees are currently represented by labor unions.
The foundation of our continuing success as a Trusted Payments and Business TechnologyTM company is our ability to attract and retain diverse, exceptional and motivated talent. We accomplish this by providing a culture of inclusion, diversity, equity, development, opportunity and empowerment.
Results-Driven, Community-Focused, Collaborative Culture
We focus on creating an environment where our employee-owners, also known as Deluxers, feel respected and valued, and where they can contribute to their full potential. To this end, an important component of our strategy is that all North American employees are granted restricted stock unit awards. The heritage of the company also reflects deep-seated roots in community support and volunteerism, which is reflected in our purpose statement: “Champions for business so communities thrive.” Additionally, our values focus on delivering results:
•Customers First
•Earn Trust
•Innovation
•Grit and Perseverance
•Power of One
In an effort to continue to improve our culture and engagement, we provide learning and development at all levels of the organization on a variety of topics, including, leadership development, mentoring and inclusion, diversity and equity (ID&E). We also strive to drive high engagement and according to the last engagement survey conducted, 78% of employees believe Deluxe is a great place to work. We continue to focus on training and development programs and transparent communication channels through change pulse checks, surveys, senior leadership forums and employee resource groups.
Inclusion, Diversity and Equity
We embrace ID&E in our workforce, customers and partners, valuing their unique backgrounds, experiences, thoughts and talents. Our mission is to empower all employees to bring their full authentic selves to work and to foster an environment that
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reflects the diverse communities we serve. We strive to cultivate a culture and vision that supports and enhances our ability to recruit, develop and retain diverse talent at every level. We provide our customers, partners, and shareholders information about our ID&E program and our activities supporting social justice within the communities we serve. In addition, we are focused on furthering our ID&E initiatives throughout our business and have, among other things, created an ID&E council that is sponsored by our Chief Communications and Human Resources Officer and our Chief Revenue Officer. This council is comprised of employee-owners across multiple functions and business segments. Its top priorities include implementing a comprehensive ID&E learning and development plan to build awareness and drive inclusive behaviors; further developing our diversity pipeline through hiring, mentoring and coaching; and establishing goals and metrics to ensure progress.
As of December 31, 2021, our total workforce was approximately 56% female and 44% male. Our team members located in the United States were comprised of approximately 56% white, 16% Black or African American, 11% Hispanic or Latino, 10% Asian American and 7% other. We continue to focus our development and ID&E programs on growing the number of female and minorities represented in leadership roles.
Health, Wellness and Safety
Creating a culture where all employee-owners feel supported and valued is paramount to our strategy. We continue to monitor developments with the ongoing COVID-19 pandemic and its variants, and we continue to take steps to ensure the safety of our employees and business partners. We also continue to provide a competitive benefits package focused on fostering work/life integration. These benefits range from standard medical, dental, life and disability insurance to programs that provide additional support for our employees' mental, physical, financial and social wellbeing. We provide various time-off programs, including volunteer time-off, paid parental leave and paid sabbaticals. These are just a few of the benefits we offer our full- and part-time employees.
Community Engagement
Our employee-owners believe in the power of connection, of activity and of giving back to the communities we serve. That is why we have created multiple initiatives that focus on supporting our communities, both financially and with time and talent, including providing 3 paid days off to employees each year so that they can volunteer in their communities. We also continue to support the Deluxe Corporation Foundation, which focuses on long-term solutions that help people, businesses and communities thrive and grow, and we have long-term partnerships with United Way®, Junior Achievement USA®, National Urban League, Inc., the National Civil Rights Museum, and other organizations. We continue to deliver on our promise to invest time, talent and financial resources to improve ID&E in the communities we serve, as it is essential to be invested and involved to attract and retain employees of the highest caliber.
| SEASONALITY | ||
Historically, we have experienced seasonal trends with some of our products and services. For example, Promotional Solutions holiday card and retail packaging sales and revenues from certain marketing services in Cloud Solutions are typically stronger in the fourth quarter of the year due to the holiday season, while sales of Promotional Solutions tax forms are stronger in the first and fourth quarters of the year. Our customers' marketing campaign cycles may also result in some revenue fluctuations for these segments. Additionally, there is a seasonal aspect to our employee benefit costs, as employees typically do not utilize as much paid time off in the first quarter of the year as they do later in the year, which negatively impacts our margins for the first quarter of the year.
| GOVERNMENT REGULATION | ||
We are subject to numerous international, federal, state and local laws and regulations that affect our business activities in several areas, including, but not limited to, labor, advertising, taxation, data privacy and security, digital content, consumer reports, consumer protection, merchant processing, online payment services, real estate, e-commerce, intellectual property, health care, environmental matters, and workplace health and safety. Additionally, in response to the COVID-19 pandemic, local, state, national and international governments and health authorities have, at times, established myriad new laws, rules, regulations and orders applicable to us, many of which are required to be implemented within a very short timeframe. The complexity of complying with existing and new laws and regulations is significant, and regulators may adopt new laws or regulations at any time.
For more specific information about the effects of government regulation on our business, see Item 1A, "Legal and Compliance Risks – Governmental regulation is continuously evolving and could limit or harm our business." We believe that the impact on our capital expenditures and earnings of complying with government regulations will not be materially different in the upcoming year than it was in 2021.
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| AVAILABLE INFORMATION | ||
We make available, without charge, through our investor relations website, www.deluxe.com/investor-relations, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed or furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after these items are electronically filed with or furnished to the SEC. These reports can also be accessed via the SEC website, www.sec.gov.
A printed copy of this report may be obtained without charge by calling 651-787-1068, by sending a written request to the attention of Investor Relations, Deluxe Corporation, P.O. Box 419061, Rancho Cordova, California 95741, or by sending an email request to investor.relations@deluxe.com.
Further information about Deluxe Corporation is also available at www.deluxe.com, www.facebook.com/deluxecorp, www.linkedin.com/company/deluxe and www.twitter.com/deluxe. The content of these websites is not incorporated by reference in this Annual Report on Form 10-K or in any other report or document we file with the Securities and Exchange Commission.
| OUR CODE OF ETHICS AND CORPORATE GOVERNANCE GUIDELINES | ||
We have adopted a Code of Business Ethics that applies to all of our employees and our board of directors. The Code of Business Ethics is available on our investor relations website, www.deluxe.com/investor-relations, and also can be obtained free of charge upon written request to the attention of Investor Relations, Deluxe Corporation, P.O. Box 419061, Rancho Cordova, California 95741. Any changes or waivers of the Code of Business Ethics will be disclosed on our website. In addition, our Corporate Governance Guidelines and the charters of the Audit, Compensation, Corporate Governance and Finance Committees of our board of directors are available on our website, www.deluxe.com/investor-relations, or upon written request.
| INFORMATION ABOUT OUR EXECUTIVE OFFICERS | ||
Our executive officers are appointed by the board of directors each year. The following summarizes our executive officers and their positions.
| Name | Age | Present Position | Executive Officer Since | ||||||||
| Barry McCarthy | 58 | President and Chief Executive Officer | 2018 | ||||||||
| Scott Bomar | 50 | Senior Vice President, Chief Financial Officer | 2021 | ||||||||
| Garry Capers, Jr. | 45 | Senior Vice President, Division President, Cloud Solutions and Promotional Solutions | 2019 | ||||||||
| Jeffrey Cotter | 54 | Senior Vice President, Chief Administrative Officer and General Counsel |
2018 | ||||||||
| Jane Elliott | 55 | Senior Vice President, Chief Communications and Human Resources Officer | 2019 | ||||||||
| Tracey Engelhardt | 57 | Senior Vice President, Division President, Checks | 2012 | ||||||||
| Michael Mathews | 49 | Senior Vice President, Chief Information Officer | 2013 | ||||||||
| Amanda Parrilli | 43 | Senior Vice President, Strategy, Transformation and Business Development | 2019 | ||||||||
| Michael Reed | 50 | Senior Vice President, Division President, Payments | 2019 | ||||||||
| Thomas Riccio | 48 | Senior Vice President, Chief Delivery and Supply Chain Officer | 2019 | ||||||||
| Christopher Thomas | 53 | Senior Vice President, Chief Revenue Officer | 2019 | ||||||||
Barry McCarthy joined us in November 2018 as President and Chief Executive Officer. Prior to joining us, Mr. McCarthy served in various senior executive positions, most recently, from November 2014 to November 2018, as Executive Vice President and Head of Network and Security Solutions, a segment of publicly traded First Data Corporation, a financial services company, now part of Fiserv, Inc.
Scott Bomar joined us in June 2021 as Senior Vice President, Chief Financial Officer. Prior to joining us, Mr. Bomar held several positions with The Home Depot, Inc., including Senior Vice President, Home Services from December 2018 to June 2021 and Vice President and Treasurer from November 2016 to December 2018.
Garry Capers, Jr. joined us in September 2019 as Senior Vice President, Division President, Cloud Solutions, and in November 2021, added the Promotional Solutions segment to his responsibilities. Prior to joining us, Mr. Capers was employed
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by Automatic Data Processing, Inc., a provider of human resources management software and services, from January 2017 to September 2019, most recently as Senior Vice President, General Manager, National Account Services Comprehensive Outsourcing Services and Operations.
Jeffrey Cotter was named Chief Administrative Officer in January 2019. Mr. Cotter joined us in June 2018 as Senior Vice President, General Counsel. Prior to joining us, Mr. Cotter served as Senior Vice President and General Counsel for Tennant Company, a provider of cleaning products and solutions, from September 2017 to June 2018. From June 2008 to April 2017, Mr. Cotter served as Vice President, General Counsel for G&K Services, Inc., a provider of branded uniform and facility services programs.
Jane Elliott joined us in April 2019 as Senior Vice President, Chief Human Resources Officer, and in June 2020, was named Chief Communications and Human Resources Officer. Prior to joining us, Ms. Elliott was employed by Global Payments Inc., a financial technology services provider, where she served as Executive Vice President and Chief Administrative Officer from January 2016 to March 2018.
Tracey Engelhardt was named Senior Vice President, Division President, Checks in October 2019. From March 2017 to October 2019, Ms. Engelhardt served as Senior Vice President, Direct-to-Consumer, and from July 2012 to March 2017, she served as Vice President, Direct-to-Consumer.
Michael Mathews was named Senior Vice President, Chief Information Officer in March 2017. Mr. Mathews joined us in May 2013 as Vice President, Chief Information Officer.
Amanda Parrilli was named Senior Vice President, New Business Development and Strategy in October 2019, and in June 2020, she added Transformation to her responsibilities. Ms. Parrilli joined us in February 2019 as Vice President, Strategy. Prior to joining us, Ms. Parrilli held several positions at The Home Depot, Inc. from July 2014 to February 2019, including Senior Director, Services Lead Generation; Director, Home Decorators Strategy; and Director, Strategic Business Development.
Michael Reed joined us in November 2019 as Senior Vice President, Division President, Payments. Prior to joining us, Mr. Reed served as Managing Director, Global Payments and Product for Barclays Bank Plc in London from September 2018 to November 2019. From January 2015 to August 2018, Mr. Reed served as Managing Director at BofA Merrill Lynch Merchant Services (Europe) Limited, the European subsidiary of Banc of America Merchant Services, LLC.
Thomas Riccio was named Chief Delivery and Supply Chain Officer in November 2021. Mr. Riccio joined us in September 2019 and served as Senior Vice President, Division President, Promotional Solutions until November 2021. Prior to joining us, Mr. Riccio was employed by Office Depot, Inc., a provider of business services and supplies, serving as Senior Vice President, Business Solutions Division from July 2017 to July 2019 and as Vice President, Sales and Strategic Initiatives, Business Solutions Division from December 2013 to July 2017.
Christopher Thomas joined us in July 2019 as Senior Vice President, Chief Revenue Officer. Prior to joining us, Mr. Thomas served as Senior Vice President, Solutioning and Commercial Functions for DXC Technology Company, an information technology solutions provider, from April 2017 to July 2019. From September 2014 to April 2017, Mr. Thomas served as Senior Vice President, Solutioning and Sales Support for HP Inc., a global technology company.
| ITEM 1A. RISK FACTORS | ||||||||||||||
We routinely encounter and address risks, many of which could cause our future results to be materially different than we currently anticipate. These risks include, but are not limited to, the principal factors listed below and the other matters set forth in this Annual Report on Form 10-K. We place no priority or likelihood based on these descriptions or order of presentation. We are also subject to general risks and uncertainties that affect many other companies, including overall economic, industry and market conditions. Additional risks not presently known to us, or that we currently believe are immaterial, may also adversely affect us. You should carefully consider all of these risks and uncertainties before investing in our common stock.
| RISKS RELATED TO THE COVID-19 PANDEMIC | ||
The impact of the COVID-19 pandemic has adversely affected, and may continue to adversely affect, our business, financial condition and results of operations.
The COVID-19 pandemic began to impact our operations late in the first quarter of 2020. The impact of lost revenue was primarily driven by decreased demand in our Promotional Solutions, Checks and Cloud Solutions segments, and later in 2020 and 2021, our Payments segment experienced delays in new client implementations because of the impacts of the pandemic. Our revenue began to recover in the second half of 2021, as our customers began to resume a more normal level of activity. We
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believe that the pandemic will continue to impact our business operations, including our employees, customers, partners and communities, but there is substantial uncertainty as to the nature and degree of its continued effects over time.
Beginning in March 2020, all of our employees who had the ability to work from home did so. The success of our work-from-home model allowed us to accelerate certain site closures. Although our facilities re-opened in late 2021, a portion of our employees now work remotely on a permanent basis and many others work remotely for portions of each work week, which increases our cybersecurity and data security risk. Changes in the scope and severity of the pandemic may cause us to once again close certain of our facilities to protect the health of our employees, as a result of disruptions in the operation of our supply chain, or in response to a prolonged decrease in demand for our products and services. Disruptions caused by future facility closures, along with the subsequent reintroduction of employees back into the workplace, could introduce operational risks, negatively impact productivity or result in claims by employees.
The continued spread of COVID-19 has resulted in significant economic uncertainty and the global macroeconomic effects of the pandemic may persist for an indefinite period. We cannot predict the pace at which economic factors will improve or the impact a prolonged downturn in the economy would have on our business, financial condition and results of operations. In addition, in response to the pandemic, local, state, national and international governments and health authorities have, at times, established myriad new laws, rules, regulations and orders applicable to us. These emergency enactments evolve rapidly and the complexity of complying with COVID-19 specific regulations is significant.
The sweeping nature of the pandemic makes it extremely difficult to predict how our business and operations will be affected in the longer term. The extent to which the COVID-19 pandemic impacts our business depends on future developments, many of which are unknown, such as: the severity and duration of the pandemic, including the impact of COVID-19 variants; governmental, business and individuals' actions in response to the pandemic; vaccination rates; and the resulting impact on economic activity and the financial markets. Even after the COVID-19 pandemic has subsided, we may experience material and adverse impacts to our business as a result of the virus’s global economic impact, including a potential shift in our revenue mix as demand may change in a post-COVID environment, the availability of credit, bankruptcies or insolvencies of customers, and recession or economic downturn. There are no comparable recent events that provide guidance as to the effect the COVID-19 pandemic may have, and, as a result, the ultimate impact of the pandemic is highly uncertain and subject to change.
Other cascading effects of the COVID-19 pandemic that are not currently foreseeable could materially increase our costs, negatively impact our revenue and adversely impact our results of operations and liquidity, possibly to a significant degree. We cannot predict the severity or duration of any such impacts. The pandemic could have the effect of heightening or exacerbating many of the other risks described in this Risk Factors discussion. COVID-19-related impacts on the preparation of our consolidated financial statements are addressed under the caption: "Note 19: Risks and Uncertainties" in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report.
| STRATEGIC RISKS | ||
If our long-term growth strategy is not successful, our business and financial results would be adversely impacted.
Our vision is to be a trusted leader in payments and data. Further information about our strategy can be found under the caption "Our Strategy" appearing in Part I, Item 1 of this report. We may not achieve our long-term objectives, and investments in our business may fail to impact our financial results as anticipated. Our strategic plan could fall short of our expectations for many reasons, including, among others:
•our failure to generate profitable revenue growth;
•our inability to acquire new customers, retain our current customers and sell more products and services to current and new customers;
•our failure to fully utilize new sales technology that enables a single view of our customers;
•our inability to implement additional improvements to our technology infrastructure, our digital services offerings and other key assets to increase efficiency, enhance our competitive advantage and scale our operations;
•our failure to develop new products and services;
•our failure to effectively manage the growth, expanding complexity and pace of change of our business and operations;
•our inability to effectively operate, integrate or leverage businesses we acquire;
•the failure of new products and services to achieve widespread customer acceptance;
•our inability to promote, strengthen and protect our brand;
•an unfavorable change in demand for checks or other products;
•our failure to attract and retain skilled talent to execute our strategy and sustain our growth;
•unanticipated changes in our business, markets, industry or the competitive landscape; and
•general economic conditions.
We can provide no assurance that our strategy will be successful, either in the short term or in the long term, that it will generate a positive return on our investment or that it will not materially reduce our adjusted earnings before interest, taxes,
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depreciation and amortization (adjusted EBITDA) margins. If our strategy is not successful, or if there is market perception that our strategy is not successful, our reputation and brand may be damaged and our stock price may fall.
If we are unable to attract and retain customers in a cost-effective manner or effectively operate a multichannel customer experience, our business and results of operations would be adversely affected.
Our success depends on our ability to attract new and returning customers in a cost-effective manner. We use a variety of methods to promote our products and services, including a direct sales force, partner referrals, email marketing, purchased search results from online search engines, direct mail advertising, broadcast media, advertising banners, social media and other online links. Certain of these methods may become less effective or more expensive. For example, our response rates for direct mail advertising have been decreasing for some time, internet search engines could modify their algorithms or increase prices for purchased search results or certain partner referrals could decline. Because we offer a diverse portfolio of products and services, we may also face challenges in increasing customer awareness of all of our offerings. Efforts to expand customer awareness of our diverse range of products and services may result in increased marketing expense and may fail to generate additional revenue.
We continually evaluate and modify our marketing and sales efforts to achieve the most effective mix of promotional methods. Competitive pressure may inhibit our ability to reflect increased costs in the prices of our products and services and/or new marketing strategies may not be successful. Either of these occurrences would have an adverse impact on our ability to compete and our results of operations would be adversely affected. In addition, when our check supply contracts expire, customers have the ability to renegotiate their contracts with us or to consider changing suppliers. Failure to achieve favorable contract renewals and/or to obtain new check supply customers would result in decreased revenue.
Additionally, we believe we must maintain a relevant, multichannel experience in order to attract and retain customers. Customers expect to have the ability to choose their method of ordering, whether via the mail, computer, phone or mobile device. Although we are constantly making investments to update our technology, we cannot predict the success of these investments. Multichannel marketing is rapidly evolving and we must keep pace with the changing expectations of our customers and new developments by our competitors. If we are unable to implement improvements to our customer-facing technology in a timely manner, or if our customer-facing technology does not function as designed, we could find it increasingly difficult to attract new and returning visitors, which would result in decreased revenue.
We face intense competition from other business enterprises, and we expect that competition will continue to increase.
Competition in the payments industry is intense. We are competing against numerous financial technology (Fintech) companies, including independent payment processors, credit card processing firms and treasury management service providers, as well as financial institution in-house capabilities. Volume is the key to staying cost-competitive, and breadth of services is critical to staying relevant to customers. In addition, although we are a leading check printer in the U.S., we face considerable competition in the check printing portion of the payments industry from another large check printer in our traditional financial institution sales channel, from direct mail and internet-based sellers of personal and business checks, from check printing software vendors and from certain significant retailers. Pricing continues to be competitive in our financial institution sales channel, as financial institutions seek to maintain their previous levels of profitability, even as check usage declines.
Within our Cloud Solutions segment, competition for our data-driven marketing services is intense, with a wide variety of companies in the data solutions space, including advertising agencies, marketing technology firms, data aggregators and brokers, and source data providers. Adapting to new technology is a key challenge in this business, along with hiring and retaining the right people. The market for our web hosting services is also highly competitive and commoditized. As such, significant spending on product development and customer acquisition is required to compete in this space, and value-added services differentiate the competition. The markets for our hosted software-as-a-service (SaaS) solutions, including web design, logo design and business incorporation services, are also large, dynamic and highly competitive, with dominant integrated players, as well as niche providers.
Within our Promotional Solutions segment, the markets for business forms and promotional products are intensely competitive and highly fragmented. Current and potential competitors include traditional storefront printing companies, office superstores, wholesale printers, online printing companies, small business product resellers and providers of custom apparel and gifts. The competitive landscape for online suppliers continues to be challenging as new internet businesses are introduced.
We can provide no assurance that we will be able to compete effectively against current and future competitors. Our competitors may develop better products or technologies and may be able to adapt more quickly to new or emerging technologies and changes in customer requirements. Continued competition could result in price reductions, reduced profit margins and/or loss of customers, all of which would have an adverse effect on our results of operations and cash flows.
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If we do not adapt to changes in technology in a timely and cost-effective manner, our ability to sustain and grow our business could be adversely affected.
Rapid, significant, and disruptive technological changes impact the industries in which we operate, including changes in payment and internet browser technologies and the use of artificial intelligence and machine learning, as well as developments in technologies supporting our regulatory and compliance obligations and in-store, digital, mobile and social commerce. The introduction of competing products and services using new technologies, the evolution of industry standards or the introduction of more attractive products or services, including continued increases in the digitization of payments, could make some of our products and services less desirable, or even obsolete. These potential changes are magnified by the intense competition we face. To be successful, our technology-based products and services must keep pace with technological developments and evolving industry standards, address the ever-changing and increasingly sophisticated needs of our customers, and achieve market acceptance. Additionally, we must differentiate our service offerings from those of our competitors and from the in-house capabilities of our customers. We could lose current and potential customers if we are unable to develop products and services that meet changing demands in a timely manner. Additionally, we must continue to develop our skills, tools and capabilities to capitalize on existing and emerging technologies, and this requires significant investment, takes considerable time and ultimately, may not be successful. Any of the foregoing risks could result in harm to our business and results of operations.
We may be unable to successfully integrate past and future acquisitions and realize the anticipated benefits of the transactions.
We have completed many acquisitions during the past several years, including the acquisition of First American in June 2021, which was the largest acquisition in our history. In addition, we purchased the operations of several small business distributors with the intention of growing revenue in our enterprise accounts and dealer channels. We are currently devoting significant management attention and resources to integrating the business practices and operations of First American and our previous acquisitions. The integration of any acquisition involves numerous risks, including, among others:
•the inability to successfully combine the businesses in a manner that permits us to achieve the revenue synergies and cost savings anticipated to result from the acquisition, which would result in the anticipated benefits of the acquisition not being realized in the anticipated timeframe or at all;
•difficulties and/or delays in assimilating operations and ensuring that a strong system of information security and controls is in place;
•the complexities of integrating a company with different products, services, markets and customers;
•performance shortfalls due to the diversion of management's attention from other business concerns;
•lost sales and customers as a result of certain customers, retail partners, financial institutions or other third parties deciding not to do business with us;
•unanticipated integration costs;
•complexities associated with implementing necessary controls for the acquired business activities to address our requirements as a public company;
•difficulties in identifying and eliminating redundant and underperforming functions and assets;
•the complexities of assimilating the acquired business into our corporate culture and management philosophies;
•unidentified issues not discovered during our due diligence process, including product or service quality issues, intellectual property issues and tax or legal contingencies;
•failure to address legacy distributor account protection rights; and
•loss of key employees.
One or more of these factors could impact our ability to successfully operate, integrate or leverage an acquisition and could materially and adversely affect our business and financial results.
We have indicated that we plan to supplement sales-driven revenue growth with strategically targeted acquisitions over time. The time and expense associated with finding suitable businesses, technologies or services to acquire can be disruptive to our ongoing business and may divert management’s attention. We cannot predict whether suitable acquisition candidates can be identified or acquired on acceptable terms or whether any acquired products, technologies or businesses will contribute to our revenue or earnings to any material extent. We may need to seek additional financing for larger acquisitions, which would increase our debt obligations and may not be available on terms that are favorable to us. Additionally, acquisitions may result in additional contingent liabilities, additional amortization expense and/or future non-cash asset impairment charges related to acquired intangible assets and goodwill, and thus, could adversely affect our business, results of operations and financial condition.
The use of checks and forms is declining and we may be unable to offset the decline with profitable revenue growth.
Checks continue to be a significant portion of our business, accounting for 34.8% of our consolidated revenue in 2021, and providing a significant amount of the cash flows we invest in our growth businesses, although we anticipate that in 2022, our Payments segment will equal our Checks segment in terms of revenue. We sell checks for personal and business use and believe that there will continue to be demand for personal and business checks for the foreseeable future, although the total number of checks written in the U.S. has been in decline since the mid-1990s. We expect that the number of checks written will
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continue to decline due to the digitization of payments, including debit cards, credit cards, direct deposit, wire transfers, and other payment solutions, such as PayPal®, Apple Pay®, Square®, Zelle®, Venmo®, as well as cryptocurrencies. In addition, the RTP® system run by The Clearing House Payments Company, LLC is a real-time payments system that currently reaches approximately 60% of U.S. bank accounts. The U.S. Federal Reserve has announced that it plans to develop its own real-time payments system, FedNowSM, with an expected launch in 2023.
The rate and the extent to which digital payments will replace checks, whether as a result of legislative developments, changing payment systems, personal preference or otherwise, cannot be predicted with certainty. Increased use of alternative payment methods, or our inability to successfully offset the secular decline in check usage with new check supply clients or other sources of revenue, would have an adverse effect on our business, cash flows and results of operations.
The use of business forms has also been declining. Continual technological improvements, including the lower price and higher performance capabilities of personal computers, printers and mobile devices, have provided small business customers with alternative means to execute and record business transactions. Additionally, electronic transaction systems, off-the-shelf business software applications, web-based solutions and mobile applications have been designed to replace preprinted business forms. Greater acceptance of electronic signatures also has contributed to the overall secular decline in printed products. It is difficult to predict the pace at which these alternative products and services will replace standardized business forms. If small business preferences change rapidly and we are unable to develop new products and services with comparable operating margins, our results of operations would be adversely affected.
Our business depends on our strong and trusted brand, and any failure to maintain, protect and enhance our brand would hurt our business.
We have developed a strong and trusted brand that has contributed significantly to the success of our business. We believe that maintaining and promoting our brand in a cost-effective manner is critical to achieving widespread acceptance of our products and services and expanding our base of customers. We believe that the importance of brand recognition and trust is particularly essential for the success of our various service offerings because of the level of competition for these services. Customer awareness of our brand, as well as the perceived value of our brand, depends largely on the success of our marketing efforts and on our ability to continue to provide useful, reliable, secure and innovative products and services, as well as our ability to maintain trust and be a technology leader. If we fail to successfully promote and maintain our brand or if we incur excessive expenses in this effort, our business could be materially and adversely affected. There is also the risk that adverse publicity, whether or not justified, could adversely affect our business. If our business partners or key employees are the subject of adverse news reports or negative publicity, our reputation may be tarnished and our results of operations could be adversely affected.
A component of our brand promotion strategy is building on our relationship of trust with our customers, which we believe can be achieved by providing a high-quality customer experience. We have invested, and will continue to invest, resources in website development, design and technology, and customer service and production operations. Our ability to provide a high-quality customer experience is also dependent on external factors, including the reliability and performance of our suppliers, telecommunications providers and third-party carriers. Our brand value also depends on our ability to protect and use our customers' data in a manner that meets expectations. The failure of our brand promotion activities to meet our expectations or our failure to provide a high-quality customer experience for any reason could adversely affect our ability to attract new customers and maintain customer relationships, which would adversely harm our business and results of operations.
Our cost reduction initiatives may not be successful.
Intense competition, secular declines in the use of checks and business forms and the commoditization of web services compels us to continually improve our operating efficiency in order to maintain or improve profitability. Cost reduction initiatives have required, and will continue to require, up-front expenditures related to various actions, such as redesigning and streamlining processes, consolidating information technology platforms, standardizing technology applications, further enhancing our strategic supplier sourcing arrangements, improving real estate utilization and funding employee severance benefits. We can provide no assurance that we will achieve future cost reductions or that we will do so without incurring unexpected or greater than anticipated expenditures. Moreover, we may find that we are unable to achieve business simplification and/or cost reduction goals without disrupting our business, negatively impacting efforts to grow our business or reducing the effectiveness of our sustainability practices. As a result, we may choose to delay or forgo certain cost reductions as business conditions require. Failure to continue to improve our operating efficiency and to generate adequate savings to fund necessary investments could adversely affect our business if we are unable to remain competitive.
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| OPERATIONAL RISKS | ||
Security breaches, computer malware or other cyberattacks involving the confidential information of our customers, employees or business partners could substantially damage our reputation, subject us to litigation and enforcement actions, and substantially harm our business and results of operations.
Information security risks have increased in recent years, in part because of the proliferation of new technologies and an increase in remote work arrangements, as well as the increased sophistication and activities of hackers, terrorists and activists. In addition, our information security risks have increased with the acquisition of companies with their own technologies, which we continue to integrate into our systems and processes. We use internet-based channels that collect customers’ financial account and payment information, as well as other sensitive information, including proprietary business information and personally identifiable information of our customers, employees, contractors, suppliers and business partners. Each year, we process hundreds of millions of records containing data related to individuals and businesses. We also provide services that are instrumental in supporting our customers and their businesses, such as website/email hosting and remittance processing. Cybersecurity is one of the top risks identified by our Enterprise Risk Management Committee, as technology-based organizations such as ours are vulnerable to targeted attacks aimed at exploiting network and system weaknesses.
The secure and uninterrupted operation of our networks and systems, as well as the processing, maintenance and confidentiality of the sensitive information that resides on our systems, is critical to our business operations and strategy. We have a risk-based information/cybersecurity program dedicated to protecting our data and solutions. We employ a defensive in-depth strategy, utilizing the concept of security layers and the CIA (confidential, integrity and availability) triad model. Computer systems and networks are, by nature, vulnerable to unauthorized access. An accidental or willful security breach could result in unauthorized access and/or use of customer information, including consumers' personally identifiable information or, in some cases, the protected health information of certain individuals. Our security measures could be breached by third-party action, computer viruses, accidents, employee or contractor error, or malfeasance by rogue employees. In addition, we depend on a number of third parties, including vendors, developers and partners, that are critical to our business and to which we may grant access to our customer or employee data. While we conduct due diligence on these third parties with respect to their security and business controls, we rely on them to effectively monitor and oversee these control measures. Individuals or third parties may be able to circumvent controls and/or exploit vulnerabilities that may exist, resulting in the disclosure or misuse of sensitive business and personal customer or employee information and data.
Because techniques used to obtain unauthorized access, disable or degrade service, or sabotage computer systems change frequently, may be difficult to detect immediately, and generally are not recognized until they are launched against a target, we may be unable to implement adequate preventive measures. Unauthorized parties may also attempt to gain access to our systems or facilities through various means, including hacking into our systems or facilities, fraud, trickery or other means of deceiving employees and contractors. We have experienced external internet-based attacks by threat actors aimed at disrupting internet traffic and/or attempting to place illegal or abusive content on our or our customers’ websites. Additionally, our customers and employees have been and will continue to be targeted by threat actors using social engineering techniques to obtain confidential information or using fraudulent "phishing" emails to introduce malware into the environment. To-date, these various threats and incidents have not materially impacted our customers, our business or our financial results. However, our technologies, systems and networks are likely to be the target of future attacks due to the increasing threat landscape for all technology businesses, and we can provide no assurance that future incidents will not be material.
Despite our significant cybersecurity systems and processes, a party that is able to circumvent our security measures could misappropriate our, our customers' or our partners' personal and proprietary information, cause interruption in our operations, damage our computers or those of our users, or otherwise damage our reputation, all of which could deter clients and consumers from ordering our products and services and result in the termination of client contracts. Additionally, it is possible that there could be vulnerabilities that impact large segments of mobile, computer or server architecture. Any of these events would adversely affect our business, financial condition and results of operations.
In addition, if we were to experience a material information security breach, we may be required to expend significant amounts of management time and financial resources to remedy, protect against or mitigate the effects of the breach, and we may not be able to remedy the situation in a timely manner, or at all. Furthermore, under payment card association rules and our contracts with debit and credit card processors, if there is a breach of payment card information that we store or that is stored by third parties with which we do business, we could be liable to the payment card issuing banks for their cost of issuing new cards and other related expenses. We could also lose our ability to accept and process credit and debit card payments, which would likely result in the loss of customers and the inability to attract new customers. We could also be exposed to time-consuming and expensive litigation, government inquiries and/or enforcement actions. If we are unsuccessful in defending a claim regarding information security breaches, we may be forced to pay damages, penalties and fines, and our insurance coverage may not be adequate to compensate us fully for any losses that may occur. Contractual provisions with third parties, including cloud service providers, may limit our ability to recover losses resulting from the security breach of a business partner.
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There are international, federal and state laws and regulations requiring companies to notify individuals of information security breaches involving their personal data, the cost of which would negatively affect our financial results. These mandatory disclosures regarding an information security breach often lead to widespread negative publicity. If we were required to make such a disclosure, it may cause our clients and customers to lose confidence in the effectiveness of our information security measures. Likewise, general publicity regarding information security breaches at other companies could lead to the perception among the general public that e-commerce is not secure. This could decrease traffic to our websites, negatively affect our financial results and limit future business opportunities.
Interruptions to our website operations or information technology systems, or failure to maintain our information technology platforms, could damage our reputation and harm our business.
The satisfactory performance, reliability and availability of our information technology systems, and those of our third-party service providers, is critical to our reputation and our ability to attract and retain customers. We could experience temporary interruptions in our websites, transaction and payment processing systems, network infrastructure, service technologies, printing production facilities or customer service operations for a variety of reasons, including, among others, human error, software errors or design faults, security breaches, power loss, telecommunications failures, equipment failures, electrical disruptions, labor issues, vandalism, fire, flood, extreme weather, terrorism and other events beyond our control.
One of the cornerstones of our growth strategy is investment in our information technology infrastructure. We have invested, and will continue to invest, significant resources to build out, maintain and improve our technology platforms and to integrate our various businesses. Any disruptions, delays or deficiencies in the design, implementation or operation of our systems, particularly any disruptions, delays or deficiencies that impact our operations, could adversely affect our ability to effectively run and manage our business. Frequent or persistent interruptions in our operations could cause customers to believe that our products and services are unreliable, leading them to switch to our competitors or to avoid our products and services.
In recent years, we shifted a substantial portion of our applications to a cloud-based environment. While we maintain redundant systems and backup databases and applications software to ensure continuous access to cloud services, it is possible that access to our software capabilities could be interrupted and our disaster recovery planning may not account for all eventualities. The failure of our systems could interfere with the delivery of products and services to our customers, impede our customers' ability to do business and result in the loss or corruption of critical data. In addition to the potential loss of customers, we may be required to incur additional development costs and divert technical and other resources, and we may be the subject of negative publicity and/or liability claims.
If any of our significant information technology systems suffer severe damage, disruption or shutdown, and our disaster recovery and business continuity plans do not effectively resolve the issue in a timely manner, our results of operations would be adversely affected, and our business interruption insurance coverage may not be adequate to compensate us fully for any losses we may incur. Moreover, to the extent that any system failure or similar event results in damages to our customers or contractual counterparties, these customers and contractual counterparties could seek compensation from us for their losses, and those claims, even if unsuccessful, would likely be time-consuming and costly for us to address.
We rely on third parties and their systems for a variety of services, including significant information technology services, and the failure of these third parties to provide these services could disrupt our business.
We have entered into agreements with third-party providers for information technology services, including telecommunications, network server, cloud computing and transaction processing services. In addition, we have agreements with companies to provide services related to our online payment solutions, including financial institutions that provide clearing services in connection with our merchant services settlement activities, and we have outsourced certain activities, including our sourcing and procurement function. A service provider's ability to provide services could be disrupted for a variety of reasons, including, among others, human error, software errors or design faults, security breaches, power loss, telecommunications failures, equipment failures, electrical disruptions, labor issues, vandalism, fire, flood, extreme weather, terrorism and other events beyond their control. In the event that one or more of our service providers is unable to provide adequate or timely services, our ability to deliver products and services to our customers could be adversely affected. Although we believe we have taken reasonable steps to protect our business through contractual arrangements with our service providers, we cannot completely eliminate the risk of disruption in service. Any significant disruption could harm our business, including damage to our brand and loss of customers. Additionally, although we believe that most of these services are available from numerous sources, a failure to perform by one or more of our service providers could cause a material disruption in our business while we obtain an alternative service provider. The use of substitute third-party providers could also result in increased expense. Additionally, while we have policies and procedures for managing these relationships, they inherently involve a lesser degree of control over business operations, governance and compliance, thereby potentially increasing our financial, legal, reputational and operational risk.
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If we are unable to attract, motivate and retain key personnel and other qualified employees, our business and results of operations could be adversely impacted.
We operate in a rapidly changing technological environment that requires a wide ranging set of expertise and intellectual capital. To successfully compete and grow, we must recruit, develop, motivate and retain personnel who can provide the needed expertise across the organization. In addition, we must develop our personnel to fulfill succession plans capable of maintaining continuity in the midst of the inevitable unpredictability of human capital.
Competition for employees is intense, even more so in the current challenging labor market. We have implemented various human capital initiatives, including employee wellness initiatives, the introduction of employee resource groups and a revised performance management process, to make Deluxe an attractive place to work. However, as many of our employees have been working remotely for some time due to the COVID-19 pandemic and remote working arrangements have become more widely accepted, it is more challenging for us to maintain and enhance our corporate culture and to navigate the flexible working arrangements that employees may demand. Our work environment may not meet the needs or expectations of our employees or may be perceived as less favorable compared to other companies' polices, which could negatively impact our ability to hire and retain qualified personnel. We can provide no assurance that key personnel, including our executive officers, will continue to be employed, or that in the event we have to replace key employees, that labor costs will not increase. Failure to retain or attract key personnel could have a material adverse effect on our business, financial condition and results of operations.
Increases in prices and declines in the availability of materials and other services have adversely affected, and could continue to adversely affect, our operating results.
We are subject to risks associated with the cost and availability of paper, plastics, ink, retail packaging supplies, promotional materials, merchant services point-of-sale equipment and other raw materials, as well as various third-party services we utilize, including delivery services. In addition, from time-to-time, the card networks, including Visa® and Mastercard®, increase the fees that they charge processors. Increased levels of inflation during 2021 have resulted in cost increases for certain of the materials and services we utilize, and inflationary pressures could continue. Further, the COVID-19 pandemic and responses to it have affected the movement of goods and services worldwide, and the Russia-Ukraine dispute could cause further disruption. Although we have not experienced a material negative impact from supply chain issues to date, we are taking steps to secure multiple sources of supply for certain of the materials and services we utilize.
Paper costs represent a significant portion of our materials expense. Paper is a commodity and its price has been subject to volatility due to supply and demand in the marketplace, as well as volatility in the raw material and other costs incurred by paper suppliers. There are also relatively few paper suppliers and these suppliers are under financial pressure as paper use declines. As such, when our suppliers increase paper prices, we may not be able to obtain better pricing from alternative suppliers.
We depend upon third-party providers for delivery services and for certain outsourced products. Events resulting in the inability of these third parties to perform their obligations, such as work slowdowns, extended labor strikes, labor shortages or inclement weather, could adversely impact our results of operations by requiring us to secure alternate providers at higher costs. Postal rates are dependent on the operating efficiency of the U.S. Postal Service (USPS) and on legislative mandates imposed upon the USPS. Postal rates have increased in recent years and the USPS has incurred significant financial losses. This may result in continued changes to the breadth and/or frequency of USPS mail delivery services. In addition, fuel costs have fluctuated over the past several years and could increase as a result of the Russia-Ukraine dispute. Increased fuel costs increase the costs we incur to deliver products to our customers, as well as the price we pay for outsourced products.
Competitive pressures and/or contractual arrangements may inhibit our ability to reflect increased costs in the price of our products and services. Any of the foregoing risks could result in harm to our business and results of operations.
We are subject to customer payment-related risks and payment card network rules, which could adversely affect our business and financial results.
We may be liable for fraudulent transactions conducted on our websites, such as the use of stolen credit card numbers, and we have potential liability for fraudulent electronic payment transactions or credits initiated by merchants or others. While we do have safeguards in place, we cannot prevent all fraudulent transactions. To date, we have not incurred significant losses from payment-related fraud. However, such transactions negatively impact our results of operations and could subject us to penalties from payment card networks for inadequate fraud protection.
In addition, changes to the payment card networks' rules or how they are interpreted could have a significant impact on our business and financial results. For example, changes in the rules regarding chargebacks may affect our ability to dispute chargebacks and the amount of losses we incur from chargebacks. Changes in network rules may also increase the cost of, impose restrictions on, or otherwise impact the development of, our retail point-of-sale solutions, which may negatively affect their deployment and adoption. Any changes to or interpretations of the network rules that are inconsistent with the way we currently operate may require us to make changes to our business that could be costly or difficult to implement and that could adversely affect our results of operations.
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Revenue from the sale of services to merchants that accept Visa and Mastercard are dependent upon our continued Visa and Mastercard registrations, financial institution sponsorship and, in some cases, continued membership in certain card networks.
In order to provide our Visa and Mastercard transaction processing services, we must be either a direct member or be registered as a merchant processor or service provider of Visa and Mastercard. Registration as a merchant processor or service provider is dependent upon our being sponsored by members of each organization in certain jurisdictions. If our sponsor financial institution in any market should stop providing sponsorship for us, we would need to find another financial institution to provide those services or we would need to attain direct membership with the card networks, either of which could prove to be difficult and expensive. If we are unable to find a replacement financial institution to provide sponsorship or attain direct membership, we may no longer be able to provide processing services to affected customers, which would negatively affect our business and results of operations. In addition, some agreements with our financial institution sponsors give them substantial discretion in approving certain aspects of our business practices, including our solicitation, application and qualification procedures for merchants and the terms of our agreements with merchants. Our sponsors' discretionary actions under these agreements could have a material adverse effect on our business and results of operations.
If we fail to comply with the applicable requirements of the card networks, the card networks could seek to fine us, suspend us or terminate our registrations or membership. The termination of our registrations or our membership or our status as a service provider or a merchant processor would have a material adverse effect on our business, financial condition and results of operations. If a merchant or an independent sales organization (ISO) customer fails to comply with the applicable requirements of the card associations and networks, we or the merchant or ISO could be subject to a variety of fines or penalties that may be levied by the card associations or networks. If we cannot collect or pursue collection of such amounts from the applicable merchant or ISO, we may have to bear the cost of such fines or penalties, negatively impacting our results of operations.
| LEGAL AND COMPLIANCE RISKS | ||
Governmental regulation is continuously evolving and could limit or harm our business.
We are subject to numerous international, federal, state and local laws and regulations that affect our business activities in several areas, including, but not limited to, labor, advertising, taxation, data privacy and security, digital content, consumer reports, consumer protection, merchant processing, online payment services, real estate, e-commerce, intellectual property, health care, environmental matters, and workplace health and safety. Additionally, in response to the COVID-19 pandemic, local, state, national and international governments and health authorities have, at times, established myriad new laws, rules, regulations and orders applicable to us, many of which are required to be implemented within a very short timeframe. The complexity of complying with existing and new laws and regulations is significant, and regulators may adopt new laws or regulations at any time.
The various regulatory requirements to which we are subject could impose significant limitations on our business activities, require changes to our business, restrict our use or storage of personal information, or cause changes in our customers' purchasing behavior, which may make our business more costly and/or less efficient and may require us to modify our current or future products, services, systems or processes. We cannot quantify or predict with any certainty the likely impact of such changes on our business, prospects, financial condition or results of operations.
Portions of our business operate within highly regulated industries and our business results could be significantly affected by the laws and regulations to which we are subject. For example, international, federal and state laws and regulations regarding the protection of certain consumer information require us to develop, implement and maintain policies and procedures to protect the security and confidentiality of consumers' nonpublic personal information. Portions of our business are subject to regulations affecting payment processing, including merchant processing, ACH, remote deposit capture and lockbox services. These laws and regulations require us to develop, implement, and maintain certain policies and procedures related to payments. We are also subject to additional requirements in certain of our contracts with financial institution clients and communications service providers, which are often more restrictive than the regulations, as well as confidentiality clauses in certain of our contracts related to small businesses’ customer information. These regulations and agreements typically limit our ability to use or disclose nonpublic personal information for other than the purposes originally intended, which could limit business opportunities. Proposed privacy and cybersecurity regulations may also increase the cost of compliance for the protection of collected data. The complexity of compliance with these various regulations may increase our cost of doing business and may affect our clients, reducing their discretionary spending and thus, reducing their capacity to purchase our products and services.
Due to our increased use of the internet for sales and marketing, laws specifically governing digital commerce, the internet, mobile applications, search engine optimization, behavioral advertising, privacy and email marketing may have an impact on our business. Existing and future laws governing issues such as digital and social marketing, privacy, consumer protection or commercial email may limit our ability to market and provide our products and services. Changing data protection regulations may increase the cost of compliance in servicing domestic and international markets for our wholesale and retail
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business services channels. More restrictive legislation, such as new privacy laws, search engine marketing restrictions, “anti-spam” regulations or email privacy rules, could decrease marketing opportunities, decrease traffic to our websites and/or increase the cost of obtaining new customers.
Because of additional regulatory costs, financial institutions may continue to put significant pricing pressure on their suppliers, including their check and service providers. The increase in cost and profit pressure may also lead to further consolidation of financial institutions. Additionally, some financial institutions do not permit offers of add-on services, such as bundled products, fraud/identity protection or expedited check delivery, to their customers. It would have an adverse impact on our results of operations if we were unable to market such services to consumers or small businesses through the majority of our financial institution clients. Additionally, as our product and service offerings become more technologically focused, and with expanded regulatory expectations for supervision of third-party service providers, additional portions of our business could become subject to direct federal regulation and/or examination. This would increase our cost of doing business and could slow our ability to introduce new products and services and otherwise adapt to a rapidly changing business environment.
Third-party claims could result in costly and distracting litigation and, in the event of an unfavorable outcome, could have an adverse effect on our business, financial condition and results of operations.
From time to time, we are involved in claims, litigation and other proceedings related to the conduct of our business, including purported class action litigation. Such legal proceedings may include claims related to our employment practices; claims alleging breach of contractual obligations; claims asserting deceptive, unfair or illegal business practices; claims alleging violations of consumer protection-oriented laws; claims related to legacy distributor account protection rights; or claims related to environmental matters. In addition, third parties may assert patent and other intellectual property infringement claims against us and/or our clients, which could include aggressive and opportunistic enforcement of patents by non-practicing entities. Any such claims could result in litigation against us and could also result in proceedings being brought against us by various federal and state agencies that regulate our businesses. The number and significance of these claims and proceedings has increased as our businesses have evolved and expanded in scope. These claims, whether successful or not, could divert management's attention, result in costly and time-consuming litigation, or both. Accruals for identified claims or lawsuits are established based on our best estimates of the probable liability. However, we cannot accurately predict the ultimate outcome of any such proceedings due to the inherent uncertainties of litigation and other dispute resolution mechanisms. Any unfavorable outcome of a material claim or material litigation could require the payment of monetary damages or fines, attorneys' fees or costly and undesirable changes to our products, features or business practices, which would result in a material adverse effect on our business, financial condition and results of operations.
A pending investigation by the Federal Trade Commission into certain business practices of First American could materially and adversely affect our business.
Three operating subsidiaries of First American received separate Civil Investigative Demands dated December 27, 2019 from the Federal Trade Commission (the FTC) requesting information and documents to determine whether the subsidiaries may have engaged in conduct prohibited by the Federal Trade Commission Act, the Fair Credit Reporting Act or the Duties of Furnishers of Information. The FTC has not yet made a final determination in this matter, and we are currently unable to predict the ultimate outcome of its investigation, or the eventual scope of damages, fines, restitution, or other equitable monetary relief that the FTC might seek to impose.
We are entitled to limited indemnification under the merger agreement related to the acquisition of First American for certain expenses and losses, if any, that may be incurred with respect to certain matters, including the FTC investigation. The right to indemnification for any such expenses and losses is limited to the amount of an indemnity holdback and, except in the case of fraud, is our sole recourse for such losses. There can be no assurance that such indemnification will be sufficient to address all losses that may arise from such matters, or that the FTC’s pending investigation will not result in findings or alleged violations of laws that could lead to enforcement actions, proceedings or litigation, whether by the FTC, injunctive relief, other state or federal agencies, or other parties. The imposition of damages, fines, restitution, other equitable monetary relief or changes required to our business practices or operations could materially and adversely affect our business, financial condition, results of operations or reputation.
We may be unable to protect our rights in intellectual property, which could harm our business and ability to compete.
We rely on a combination of trademark and copyright laws, trade secret and patent protection, and confidentiality and license agreements to protect our trademarks, software and other intellectual property. These protective measures afford only limited protection. Despite our efforts to protect our intellectual property, third parties may infringe or misappropriate our intellectual property or otherwise independently develop substantially equivalent products or services that do not infringe on our intellectual property rights. Policing unauthorized use of our intellectual property is difficult. We may be required to spend significant resources to protect our trade secrets and to monitor and police our intellectual property rights. The loss of intellectual property protection or the inability to secure or enforce intellectual property protection could harm our business and ability to compete.
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Activities of our customers or the content of their websites could damage our reputation and/or adversely affect our financial results.
As a provider of domain name registration, web hosting services and customized business products, we may be subject to potential liability for the activities of our customers on or in connection with their domain names or websites, for the data they store on our servers, including information accessible through the "dark web," or for images or content that we produce on their behalf. Customers may also launch distributed denial of service attacks or malicious executables, such as viruses, worms or trojan horses, from our servers. Although our agreements with our customers prohibit illegal use of our products and services and permit us to take appropriate action for such use, customers may nonetheless engage in prohibited activities or upload or store content with us in violation of applicable law. Our reputation may be negatively impacted by the actions of customers that are deemed to be hostile, offensive or inappropriate, or that infringe the copyright or trademark of another party. The safeguards we have established may not be sufficient to avoid harm to our reputation, especially if the inappropriate activities are high profile.
Laws relating to the liability of online services companies for information, such as online content disseminated through their services, are subject to frequent challenges. Claims may be made against online services companies by parties who disagree with the content. Where the online content is accessed on the internet outside of the U.S., challenges may be brought under foreign laws that do not provide the same protections for online services companies as in the U.S. These challenges in either U.S. or foreign jurisdictions may give rise to legal claims alleging defamation, libel, invasion of privacy, negligence or copyright or trademark infringement, based on the nature and content of the materials disseminated through our services. Certain of our products and services include content generated by users of our online services. Although this content is not generated by us, claims of defamation or other injury may be made against us for that content. If such claims are successful, our financial results would be adversely affected. Even if the claims do not result in litigation or are resolved in our favor, the time and resources necessary to resolve them could divert management’s attention and adversely affect our business and financial results.
| FINANCIAL RISKS | ||
Economic conditions, including continuing impacts of the COVID-19 pandemic, may adversely affect trends in business and consumer spending, which may adversely impact demand for our products and services.
Economic conditions have affected, and will continue to affect, our results of operations and financial position. Current and future economic conditions that affect inflation, business and consumer spending, including levels of business and consumer confidence, unemployment levels, consumer spending and the availability of credit, as well as uncertainty or volatility in our customers' businesses, may adversely affect our business and results of operations. A challenging economic environment could cause existing and potential customers to not purchase or to delay purchasing our products and services. Continued inflationary pressures could negatively impact our customers' ability to purchase our products and services, thereby negatively impacting our revenue and results of operations.
A significant portion of our business relies on small business spending. We believe that small businesses are more likely to be significantly affected by economic conditions than larger, more established companies. During a sluggish economy, it may be more difficult for small businesses to obtain credit and they may choose to spend their limited funds on items other than our products and services. As such, the level of small business confidence, the rate of small business formations and closures, and the availability of credit to small businesses all impact our business.
A significant portion of our business also relies upon the health of the financial services industry. As a result of global economic conditions in past years, a number of financial institutions sought additional capital, merged with other financial institutions and, in some cases, failed. The failure of one or more of our larger financial institution clients, or large portions of our customer base, could adversely affect our operating results. In addition to the possibility of losing a significant client, the inability to recover prepaid product discount payments made to one or more of our larger financial institution clients, or the inability to collect accounts receivable or contractually required contract termination payments, could have a significant negative impact on our results of operations.
There may also be an increase in financial institution mergers and acquisitions during periods of economic uncertainty or as a result of other factors affecting the financial services industry. Such an increase could adversely affect our operating results. Often the newly combined entity seeks to reduce costs by leveraging economies of scale in purchasing, including its check supply and business services contracts. This results in providers competing intensely on price in order to retain not only their previous business with one of the financial institutions, but also to gain the business of the other party in the combined entity. Although we devote considerable effort toward the development of a competitively-priced, high-quality selection of products and services for the financial services industry, there can be no assurance that significant financial institution clients will be retained or that the impact of the loss of a significant client can be offset through the addition of new clients or by expanded sales to our remaining clients.
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Global events, such as the COVID-19 pandemic and the actions taken in response to it, as well as the Russia-Ukraine dispute, have significantly increased economic uncertainty. Given the ongoing and dynamic nature of these events, we cannot predict the impact on our business, financial position or results of operations. Even after such impacts subside, the U.S. economy may experience a recession, and our business could be adversely affected by a prolonged recession.
Asset impairment charges would have a negative impact on our results of operations.
Goodwill represented 46.5% of our total assets as of December 31, 2021. On at least an annual basis, we assess whether the carrying value of goodwill is impaired. This analysis considers several factors, including economic, market and industry conditions. Circumstances that could indicate a decline in the fair value of one or more of our reporting units include, but are not limited to, the following:
•a downturn in economic conditions that negatively affects our actual and forecasted operating results;
•changes in our business strategy, structure and/or the allocation of resources;
•the failure of our growth strategy;
•the inability of our acquisitions to achieve expected operating results;
•changes in market conditions, including increased competition;
•the loss of significant customers;
•a decline in our stock price for a sustained period; or
•a material acceleration of order volume declines for checks and business forms.
Such situations may require us to record an impairment charge for a portion of goodwill. We are also required to assess the carrying value of other long-lived assets, including intangible assets and assets held for sale. Information regarding our 2021 impairment analyses can be found under the caption "Note 8: Fair Value Measurements" in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report. We have, in the past, and may again in the future, be required to write-down the value of some of our assets, and these write-downs have been, and could in the future be, material to our results of operations. If we are required to record additional asset impairment charges for any reason, our consolidated results of operations would be adversely affected.
Our variable-rate indebtedness exposes us to interest rate risk.
The majority of the borrowings under our credit facility, including our secured term loan facility, are subject to variable rates of interest and expose us to interest rate risk. If interest rates were to increase, our interest expense would increase, negatively affecting earnings and reducing cash flows available for working capital, capital expenditures and other investments. As of December 31, 2021, we had $1.0 billion of variable-rate debt outstanding.
| ITEM 1B. UNRESOLVED STAFF COMMENTS | ||
None.
| ITEM 2. PROPERTIES | ||
As of December 31, 2021, we occupied 50 facilities throughout the U.S., 6 facilities in Canada, 2 facilities in Europe and 1 facility in Australia, where we conduct printing and fulfillment, payment processing, call center, data center and administrative functions, including facilities obtained as part of the acquisition of First American Payment Systems, L.P. in June 2021. Because of our shared services approach to most of our business functions, many of our facilities are utilized for the benefit of more than one of our business segments. Approximately 15% of our facilities are owned, while the remaining 85% are leased. Our facilities have a combined floor space of approximately 2.3 million square feet. None of our owned properties are mortgaged or held subject to any significant encumbrance. We believe that existing leases will be renegotiated as they expire or that suitable alternative properties will be leased on acceptable terms. We also believe that our properties are sufficiently maintained and are adequate and suitable for our business needs as presently conducted. We closed 16 facilities during 2021, as we continued to assess our real estate footprint. A majority of the impacted employees transitioned to a work-from-home environment. Additionally, during 2021, the leases on new facilities in Minnesota and Georgia commenced, which house our corporate headquarters and our technology innovation center, respectively.
| ITEM 3. LEGAL PROCEEDINGS | ||
We record provisions 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
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adequate in light of the probable and estimable outcomes. 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 4. MINE SAFETY DISCLOSURES | ||
Not applicable.
PART II
| ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES | ||
Our common stock is traded on the New York Stock Exchange under the symbol DLX. Dividends are declared by our board of directors on a quarterly basis, and therefore, are subject to change. As of December 31, 2021, the number of shareholders of record was 5,248, excluding shareholders whose shares are held in the name of various dealers, clearing agencies, banks, brokers and other fiduciaries.
The following table shows purchases of our common stock that were completed during the fourth quarter of 2021:
| 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 |
Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs(2)
|
||||||||||||||||||||||
|
October 1, 2021 –
October 31, 2021
|
2,502 | $ | 37.28 | — | 287,452,394 | |||||||||||||||||||||
| November 1, 2021 – November 30, 2021 |
21,677 | 35.71 | — | 287,452,394 | ||||||||||||||||||||||
| December 1, 2021 – December 31, 2021 |
14,575 | 32.11 | — | 287,452,394 | ||||||||||||||||||||||
| Total | 38,754 | 34.46 | — | 287,452,394 | ||||||||||||||||||||||
(1) Under the terms of our 2020 Long-Term 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 exercise or vesting of such awards. During the fourth quarter of 2021, we withheld 38,754 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 fourth quarter of 2021 and $287.5 million remained available for repurchase as of December 31, 2021.
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The table below compares the cumulative total shareholder return on our common stock for the last five fiscal years with the cumulative total return of the S&P MidCap 400 Index and the Dow Jones U.S. Support Services (DJUSIS) Index.
| COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN | ||
| ASSUMES INITIAL INVESTMENT OF $100 | ||
| DECEMBER 2021 | ||
The graph assumes that $100 was invested on December 31, 2016 in each of Deluxe common stock, the S&P MidCap 400 Index and the DJUSIS Index, and that all dividends were reinvested.
Note: Index Data: Copyright Standard and Poor's, Inc. Used with permission. All rights reserved.
Note: Index Data: Copyright Dow Jones, Inc. Used with permission. All rights reserved.
| ITEM 6. [RESERVED] | ||
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
| ||
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 this report outlines known material risks and important information to consider when evaluating our forward-looking statements. The Private Securities Litigation Reform Act of 1995 (the "Reform Act") provides a “safe harbor” for forward-looking
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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 Annual Report on Form 10-K, in future filings with the Securities and Exchange Commission, in our press releases, investor presentations and in oral statements made by our representatives, they indicate forward-looking statements within the meaning of the Reform Act.
This MD&A includes financial information prepared in accordance with accounting principles generally accepted in the U.S. ("GAAP"). In addition, we discuss free cash flow, net debt, liquidity, adjusted diluted earnings per share (EPS) and consolidated adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), all of which are non-GAAP financial measures. We believe that these non-GAAP financial measures, when reviewed in conjunction with GAAP financial measures, can provide useful information to assist investors in analyzing our current period operating performance and in assessing our future operating performance. For this reason, our internal management reporting also includes these financial measures, which should be considered in addition to, and not as superior to or as a substitute for, GAAP financial measures. We strongly encourage investors and shareholders to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure. Our non-GAAP financial measures may not be comparable to similarly titled measures used by other companies and therefore, may not result in useful comparisons. The reconciliation of our non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in Consolidated Results of Operations.
Revision – During the second quarter of 2021, we identified errors in the calculations of the goodwill impairment charges recorded during the third quarter of 2019 and the first quarter of 2020, resulting in an understatement of the goodwill impairment charges and net losses and an overstatement of goodwill. The errors in our calculations resulted from the erroneous application of the simultaneous equation method, which effectively grosses up the goodwill impairment charge to account for the related income tax benefit, so that the resulting carrying value does not exceed the calculated fair value. We have corrected the errors by revising the consolidated financial statements presented herein. Further information regarding the errors can be found under the caption "Note 1: Significant Accounting Policies" of the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report.
| EXECUTIVE OVERVIEW | ||
Recent 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, subject to customary adjustments under the terms of the acquisition agreement. First American is a large-scale payments technology company that provides partners and merchants with comprehensive in-store, online and mobile payment solutions. The results of First American are included in our Payments segment and included revenue of $195.0 million and a contribution of $39.1 million to Payments adjusted EBITDA for 2021. 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" and further information regarding our debt can be found under the caption "Note 14: Debt," both of which appear in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report.
COVID-19 impact – The COVID-19 pandemic began to impact our operations late in the first quarter of 2020. While we believe revenue in 2020 benefited from sales-driven growth, it was not sufficient to overcome the impact of the pandemic, which negatively affected volumes for our Promotional Solutions promotional products, personal and business checks and Cloud Solutions data-driven marketing solutions. Despite the challenges of the pandemic, adjusted EBITDA margin for 2020 was 20.4%, in line with our annual expectations prior to the pandemic.
The impact of the pandemic continued in the first quarter of 2021 and was the main driver of the 9.3% decrease in revenue, as compared to the first quarter of 2020. During the remainder of 2021, we saw some recovery in revenue volumes as the impacts of the pandemic lessened and our customers resumed some of their marketing and promotional activities as government restrictions were lifted and vaccines became widely available. Also contributing to the increase in data-driven marketing revenue was the continuation of low interest rates and an improving credit risk environment, which drove increased marketing efforts by our banking and mortgage lending customers. Business check volumes also continued to recover and within Payments, we resumed many of our new customer implementations that had been delayed, in part, due to impacts of the pandemic. Despite the continuing challenges of the pandemic, net income improved for 2021, as compared to 2020, and adjusted EBITDA margin for 2021 remained strong at 20.2%. Future impacts of the pandemic on our results of operations remain uncertain, as increases in infection rates and/or new variants of the virus could impact our customers' activities and our revenue volumes. Impacts of the COVID-19 pandemic on our supply chain have not had a significant impact on our results of operations to-date. However, with recent stresses on the global supply change and labor market, we can provide no assurance that we would be able to obtain alternative sources of supply if one of our vendors was unable to perform or that an alternative source of supply could be obtained at current prices. During 2021, we experienced inflationary pressures on hourly wages, materials and delivery as a result of economic conditions. We implemented targeted price increases in all of our segments late in 2021 in response to the inflationary pressures.
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Cash flows and liquidity – Cash provided by operations remained strong in 2021, decreasing only $6.7 million, as compared to 2020, despite increased investments in software-as-a-service (SaaS) solutions we are utilizing throughout the company, including a new enterprise resource planning system, as well as a $23.8 million increase in interest payments related to debt issued to complete the First American acquisition, $18.9 million of transaction costs related to the acquisition, the continued secular decline in checks and business forms, and temporary actions taken in 2020 to maintain liquidity at the onset of the COVID-19 pandemic. We were able to substantially offset these impacts through the contribution of First American's operations, some recovery of the 2020 volume declines driven by the COVID-19 pandemic, numerous cost savings actions and a reduction in restructuring and integration costs. Free cash flow for 2021 decreased $53.2 million, as compared to 2020, reflecting a $46.5 million increase in purchases of capital assets, as we continued investments to support our long-term growth, including technology platform modernization initiatives. Total debt as of December 31, 2021 was $1.68 billion, reflecting the additional debt we incurred in the second quarter of 2021 to complete the First American acquisition. During the second half of 2021, our strong cash flow and the repatriation of cash from our Canadian subsidiaries allowed us to complete net debt repayments of $152.9 million. Net debt as of December 31, 2021 was $1.64 billion. We held cash and cash equivalents of $41.2 million as of December 31, 2021, and liquidity was $403.9 million. Our capital allocation priorities are to responsibly invest in growth, pay our dividend, reduce debt and return value to our shareholders. We will continue to evaluate share repurchases on an opportunistic basis.
2021 results vs. 2020 – Numerous factors drove the increase in net income for 2021, as compared to 2020. The primary factor was a decrease in pretax asset impairment charges of $101.7 million, as compared to 2020. Other factors that increased net income included:
•revenue growth from new business in all of our segments, reflecting the success of our One Deluxe strategy, as well as some recovery from the impacts of the COVID-19 pandemic;
•actions taken to reduce costs as we continually evaluate our cost structure;
•a $21.7 million decrease in restructuring, integration and other costs;
•price increases in response to the current inflationary environment; and
•an $11.4 million decrease in bad debt expense, primarily driven by allowances recorded in 2020 related to notes receivable from our Promotional Solutions distributors, as well as trade accounts receivable.
Partially offsetting these increases in net income were the following factors:
•the continuing secular decline in checks, business forms and some Promotional Solutions business accessories, as well as the 2020 decision to exit certain product lines within Cloud Solutions;
•a $32.4 million increase in interest expense related to debt issued to complete the First American acquisition;
•increased investments in our growth, primarily costs related to sales and financial management tools;
•an increase in acquisition amortization of $27.0 million, driven by the First American acquisition;
•acquisition transaction costs of $18.9 million in 2021 related to the First American acquisition;
•a year-over-year impact of approximately $15.0 million from temporary actions taken in response to the COVID-19 pandemic in 2020, including savings from a temporary salary reduction, furloughs and other actions, net of incremental costs we incurred in 2020 related to our response to the pandemic;
•inflationary pressures on hourly wages, materials and delivery; and
•additional income tax expense of $4.6 million related to the repatriation of cash from our Canadian subsidiaries.
Diluted EPS of $1.45 for 2021, as compared to $0.11 for 2020, reflects the increase in net income as described in the preceding paragraphs, partially offset by higher average shares outstanding in 2021. Adjusted diluted EPS for 2021 was $4.88, compared to $5.08 for 2020, 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 primarily by the continuing secular decline in checks, business forms and some business accessories; the increase in interest expense resulting from debt issued to complete the First American acquisition; increased investments in our growth, primarily costs related to sales and financial management tools; the benefit in the prior year of temporary actions taken in response to the COVID-19 pandemic; inflationary pressures on hourly wages, materials and delivery; and tax expense related to the repatriation of cash from our Canadian subsidiaries. These decreases in adjusted EPS were partially offset by the contribution from First American, as adjusted diluted EPS excludes the associated acquisition amortization of $29.5 million for 2021. In addition, adjusted diluted EPS benefited from the impact of new business in all of our segments, some recovery from the impacts of the COVID-19 pandemic, various cost savings actions across
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functional areas, price increases in response to the current inflationary environment and lower bad debt expense for 2021. A reconciliation of diluted earnings (loss) per share to adjusted diluted EPS can be found in Consolidated Results of Operations.
Asset impairment charges – Net income for 2020 included asset impairment charges of $101.7 million, or $1.53 per diluted share. The impairment charges related primarily to the goodwill of our Promotional Solutions and Cloud Solutions Web Hosting reporting units, as well as certain intangibles in our Cloud Solutions Web Hosting reporting unit, and resulted primarily from the estimated impacts of the COVID-19 pandemic on our results of operations. Net loss for 2019 included asset impairment charges of $421.1 million, or $8.49 per diluted share. These impairment charges related to the goodwill of our former Small Business Services Web Services and Financial Services Data-Driven Marketing reporting units, as well as certain intangibles, primarily in our former Small Business Services Web Services reporting unit. Further information regarding these impairment charges can be found under the caption "Note 8: Fair Value Measurements" in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report and in Critical Accounting Policies.
"One Deluxe" Strategy
A detailed discussion of our strategy can be found in Part I, Item 1 of this report. We continue to be encouraged by the success of our One Deluxe strategy. We have made significant progress in the integration of our various technology platforms, developed an enterprise-class sales organization, assembled a talented management team, and built an organization focused on developing new and improved products. As a result, we are seeing the positive impact of new client wins in all of our segments and we determined that we were positioned to augment our business through meaningful acquisitions. As such, we completed the acquisition of First American on June 1, 2021. We believe that First American's end-to-end payments technology platform is providing significant leverage that will continue to accelerate organic revenue growth.
Outlook for 2022
We expect revenue to increase 8% to 10% for 2022, including a full year of revenue from First American, as compared to 2021 revenue of $2.02 billion, and we expect that adjusted EBITDA margin for 2022 will be approximately 20.0%, as compared to 20.2% for 2021. We expect that our adjusted EBITDA margin for the first quarter of the year will be lower, with improving margins as the year progresses, primarily driven by the timing of certain employee benefit costs and seasonality for some of our products and services. These estimates are subject to, among other things, the macroeconomic unknowns associated with the COVID-19 pandemic, including the Omicron variant, as well as anticipated continued supply chain constraints, labor supply issues and inflation.
As of December 31, 2021, we held cash and cash equivalents of $41.2 million and $362.6 million was available for borrowing under our revolving credit facility. We anticipate that capital expenditures will be approximately $105.0 million in 2022, 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 December 31, 2021, and we anticipate that we will remain in compliance with our debt covenants throughout 2022.
| CONSOLIDATED RESULTS OF OPERATIONS | ||
Consolidated Revenue
| Change | ||||||||||||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | 2019 | 2021 vs. 2020 | 2020 vs. 2019 | |||||||||||||||||||||||||||
| Total revenue | $ | 2,022,197 | $ | 1,790,781 | $ | 2,008,715 | 12.9% | (10.8%) | ||||||||||||||||||||||||
The increase in total revenue for 2021, as compared to 2020, was driven, in part, by the First American acquisition, which contributed revenue of $195.0 million for 2021. In addition, revenue benefited from new clients in all of our segments, reflecting the success of our One Deluxe strategy, and we experienced some recovery of volume declines resulting from the impact of the COVID-19 pandemic, as discussed in Executive Overview. Also contributing to the revenue increase was increased data-driven marketing revenue within Cloud Solutions, resulting in part, from the continuation of low interest rates and an improving credit risk environment, which drove increased marketing efforts by our banking and mortgage lending customers. Revenue also benefited from price increases in response to the current inflationary environment, primarily in our Checks and Promotional Solutions segments. Partially offsetting these increases in revenue was the continuing secular decline in order volume for checks, business forms and some business accessories, and sales of personal protective equipment (PPE) decreased
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approximately $22.0 million for 2021, as compared to 2020. Within Cloud Solutions' web and hosted solutions revenue, our 2020 decision to exit certain product lines resulted in a revenue decline of $19.9 million for 2021, as compared to 2020.
The decrease in total revenue for 2020, as compared to 2019, was driven primarily by volume declines resulting from the impact of the COVID-19 pandemic, primarily in our Promotional Solutions, Checks and Cloud Solutions segments. In addition, revenue continued to be impacted by the secular decline in order volume for checks and business forms. Cloud Solutions web and hosted solutions revenue also declined, due to our decision in the third quarter of 2019 to exit certain customer contracts, the loss of certain large customers in the third quarter of 2019 as they elected to in-source certain of the services we provide, and more recent decisions to exit certain product lines. These decreases in revenue were partially offset by growth of 16.8% in treasury management revenue within our Payments segment, driven primarily by lockbox processing outsourcing deals signed in the fourth quarter of 2019 and new client wins. We also generated new revenue of $31.0 million from sales of PPE in the Promotional Solutions segment in 2020. In addition, revenue benefited from new data-driven marketing campaigns and growth in pay-for-performance marketing campaigns in our Cloud Solutions segment prior to the commencement of the COVID-19 pandemic.
Service revenue represented 38.5% of total revenue in 2021, 31.3% in 2020 and 29.8% in 2019. 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 18: Business Segment Information" in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report. Our revenue mix by business segment was follows:
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Payments | 25.2 | % | 16.9 | % | 13.4 | % | ||||||||||||||
| Cloud Solutions | 13.0 | % | 14.1 | % | 15.9 | % | ||||||||||||||
| Promotional Solutions | 27.0 | % | 29.6 | % | 31.9 | % | ||||||||||||||
| Checks | 34.8 | % | 39.4 | % | 38.8 | % | ||||||||||||||
Total revenue |
100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||
Consolidated Cost of Revenue
| Change | ||||||||||||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | 2019 | 2021 vs. 2020 | 2020 vs. 2019 | |||||||||||||||||||||||||||
| Total cost of revenue | $ | 884,270 | $ | 730,771 | $ | 812,935 | 21.0% | (10.1%) | ||||||||||||||||||||||||
| Total cost of revenue as a percentage of total revenue | 43.7 | % | 40.8 | % | 40.5 | % | 2.9 pt. | 0.3 pt. | ||||||||||||||||||||||||
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 increase in total cost of revenue for 2021, as compared to 2020, was driven, in part, by the additional costs resulting from the First American acquisition of $116.3 million, including acquisition amortization, as well as the increase in revenue resulting from new client wins in all of our segments and some recovery of volume declines driven by the impact of the COVID-19 pandemic. In addition, we experienced inflationary pressures on hourly wages, materials and delivery, and the mix of data-driven marketing clients also impacted total cost of revenue. Partially offsetting these increases in total cost of revenue were reduced revenue volumes from the continuing secular decline in checks, business forms and some business accessories, as well as the decline in PPE revenue volume in 2021 and our 2020 decision to exit certain product lines within Cloud Solutions' web and hosted solutions. In addition, obsolete inventory expense decreased $3.2 million in 2021, primarily in Promotional Solutions. Total cost of revenue as a percentage of total revenue increased, as compared to 2020, driven by the First American acquisition, including acquisition amortization, the inflationary pressures on our costs and client mix. These impacts were partially offset by price increases implemented in response to the current inflationary environment.
The decrease in total cost of revenue for 2020, as compared to 2019, was primarily attributable to the decrease in revenue volume resulting from the COVID-19 impact. In addition, cost of revenue decreased as a result of the continued secular decline in checks and business forms, as well as the decline in web and hosted solutions revenue driven by the events of the third quarter of 2019 outlined in our discussion of consolidated revenue. Benefits from cost reductions and efficiencies in our fulfillment area, unrelated to our response to the COVID-19 pandemic, reduced cost of revenue approximately $7.5 million in 2020, while actions taken to reduce costs in response to COVID-19 reduced cost of revenue approximately $6.0 million in 2020. Partially offsetting these decreases in cost of revenue were costs related to the new revenue from PPE sales in 2020, costs related to treasury management deals signed in the fourth quarter of 2019, incremental costs driven by our response to the COVID-19 pandemic of approximately $6.0 million, and a $4.9 million increase in obsolete inventory expense in 2020, primarily in Promotional Solutions. Total cost of revenue as a percentage of total revenue increased slightly, as compared to 2019, as
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costs related to the new treasury management clients were partially offset by the loss of lower margin revenue driven by the impacts of COVID-19, as well as the benefits of our cost reduction initiatives.
Consolidated Selling, General & Administrative (SG&A) Expense
| Change | ||||||||||||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | 2019 | 2021 vs. 2020 | 2020 vs. 2019 | |||||||||||||||||||||||||||
| SG&A expense | $ | 941,023 | $ | 841,658 | $ | 891,693 | 11.8% | (5.6%) | ||||||||||||||||||||||||
| SG&A expense as a percentage of total revenue | 46.5 | % | 47.0 | % | 44.4 | % | (0.5) pt. | 2.6 pt. | ||||||||||||||||||||||||
The increase in SG&A expense for 2021, as compared to 2020, was driven, in part, by the operating costs of First American of $46.1 million for 2021, as well as related acquisition transaction costs of $18.9 million. Additionally, expense for SaaS solutions that we are utilizing, primarily related to sales and financial management tools, increased as we continue to invest in our growth strategy, and commission expense increased as a result of some recovery of volume declines driven by the impact of the COVID-19 pandemic and revenue generated by new clients, primarily in our Checks segment. Also, SG&A expense increased due to a year-over-year impact of approximately $15.0 million from temporary actions taken in response to the COVID-19 pandemic in 2020, including savings from a temporary salary reduction, furloughs and other actions, net of incremental costs we incurred in 2020 related to our response to the pandemic. Partially offsetting these increases in SG&A expense were various cost reduction actions, including efficiencies in sales, marketing and our corporate support functions. In addition, bad debt expense decreased $11.4 million, primarily due to allowances recorded in 2020 related to notes receivable from our Promotional Solutions distributors, as well as trade accounts receivable. Commission expense related to sales of PPE also decreased along with the lower sales volume in 2021.
The decrease in SG&A expense for 2020, as compared to 2019, was driven by lower commissions on the lower order volume resulting from the impacts of the COVID-19 pandemic, as well as the benefit of organizational actions taken in response to COVID-19, including the temporary salary reductions and the suspension of the 401(k) plan employer matching contribution. These actions lowered SG&A expense approximately $27.0 million in 2020. Also lowering SG&A expense were various cost reduction actions that were unrelated to our response to the COVID-19 pandemic, including advertising expense reductions and other efficiencies in sales, marketing and our corporate support functions. These decreases in SG&A expense were partially offset by investments of approximately $50.0 million in 2020 in support of our One Deluxe strategy. These costs related to treasury management outsourcing deals signed in the fourth quarter of 2019 and various other expenses related to our initiatives, including transforming our brand and our website and expanding our sales capabilities, as well as ongoing new costs related to SaaS solutions we are employing throughout the company. In addition, we incurred commission expense related to new revenue from the sales of PPE during 2020. We also recorded bad debt expense of $5.4 million in our Promotional Solutions segment related to notes receivable from our distributors, primarily one distributor that was underperforming prior to the commencement of the COVID-19 pandemic. Total SG&A expense as a percentage of revenue increased for 2020, as compared to 2019, as revenue declines and investments in our transformation more than offset the benefit of cost reductions.
In addition to the above factors, SG&A expense was also impacted by changes in the following items in each year:
| Change | ||||||||||||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | 2019 | 2021 vs. 2020 | 2020 vs. 2019 | |||||||||||||||||||||||||||
| Acquisition amortization (SG&A portion) | $ | 67,498 | $ | 42,955 | $ | 59,108 | $ | 24,543 | $ | (16,153) | ||||||||||||||||||||||
| Share-based compensation (SG&A portion) | 27,549 | 20,341 | 17,751 | 7,208 | 2,590 | |||||||||||||||||||||||||||
| Legal-related costs (benefit) | 2,443 | (2,164) | 6,420 | 4,607 | (8,584) | |||||||||||||||||||||||||||
| CEO transition costs | — | (30) | 9,390 | 30 | (9,420) | |||||||||||||||||||||||||||
Restructuring and Integration Expense
| Change | ||||||||||||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | 2019 | 2021 vs. 2020 | 2020 vs. 2019 | |||||||||||||||||||||||||||
| Restructuring and integration expense | $ | 54,750 | $ | 75,874 | $ | 71,248 | $ | (21,124) | $ | 4,626 | ||||||||||||||||||||||
Over the past 3 years, we have been pursuing several initiatives designed to focus our business behind our growth strategy and to increase our efficiency. Further information can be found under Restructuring, Integration and Other Costs.
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Asset Impairment Charges
| Change | ||||||||||||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | 2019 | 2021 vs. 2020 | 2020 vs. 2019 | |||||||||||||||||||||||||||
| Asset impairment charges | $ | — | $ | 101,749 | $ | 421,090 | $ | (101,749) | $ | (319,341) | ||||||||||||||||||||||
We did not record any asset impairment charges during 2021. Further information regarding the asset impairment charges in 2020 and 2019 can be found under the caption "Note 8: Fair Value Measurements" in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report and in Critical Accounting Policies.
During 2020, we recorded asset impairment charges of $101.7 million, related primarily to the goodwill of our Promotional Solutions and Cloud Solutions Web Hosting reporting units and amortizable intangibles of our Cloud Solutions Web Hosting reporting unit, resulting primarily from the estimated impact of the COVID-19 pandemic on the operating results of these businesses.
During 2019, we recorded asset impairment charges of $421.1 million related primarily to the goodwill of our former Financial Services Data-Driven Marketing and Small Business Services Web Hosting reporting units, as well as certain amortizable intangible assets of the Small Business Services Web Hosting reporting unit.
Interest Expense
| Change | ||||||||||||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | 2019 | 2021 vs. 2020 | 2020 vs. 2019 | |||||||||||||||||||||||||||
| Interest expense | $ | 55,554 | $ | 23,140 | $ | 34,682 | 140.1% | (33.3%) | ||||||||||||||||||||||||
| Weighted-average debt outstanding | 1,402,970 | 1,016,896 | 925,715 | 38.0% | 9.8% | |||||||||||||||||||||||||||
| Weighted-average interest rate | 3.60 | % | 2.12 | % | 3.54 | % | 1.48 pt. | (1.42) pt. | ||||||||||||||||||||||||
The increase in interest expense for 2021, as compared to 2020, was driven primarily by the increase in our weighted-average interest rate in 2021, due in part to the $500.0 million notes issued in June 2021 with an interest rate of 8.0%. The increase in the amount of debt outstanding driven by the issuance of debt to fund the First American acquisition also negatively impacted interest expense. Further information regarding our debt can be found under the caption "Note 14: Debt" in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report.
The decrease in interest expense for 2020, as compared to 2019, was primarily driven by our lower weighted-average interest rate in 2020, partially offset by our higher weighted-average debt level in 2020, as we borrowed additional funds for a period of time at the outset of the COVID-19 pandemic to ensure liquidity.
Income Tax Provision
| Change | ||||||||||||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | 2019 | 2021 vs. 2020 | 2020 vs. 2019 | |||||||||||||||||||||||||||
| Income tax provision | $ | 31,031 | $ | 21,468 | $ | 8,039 | 44.5% | 167.0% | ||||||||||||||||||||||||
| Effective tax rate | 33.1 | % | 80.1 | % | (3.7 | %) | (47.0) pt. | 83.8 pt. | ||||||||||||||||||||||||
The decrease in our effective income tax rate for 2021, as compared to 2020, was largely due to the impact of the nondeductible portion of the goodwill impairment charges in the first quarter of 2020, which lowered our 2021 effective income tax rate by 46.8 points, as compared to 2020. In addition, the tax impact of share-based compensation resulted in a 7.6 point decrease in our effective income tax rate. Partially offsetting these decreases in our effective income tax rate was a 4.9 point increase resulting from the repatriation of cash from our Canadian subsidiaries during the fourth quarter of 2021, as well as nondeductible acquisition costs related to the First American acquisition, which increased our effective tax rate by 1.5 points in 2021. Information regarding other factors that impacted our effective income tax rates can be found under the caption: "Note 10: Income Tax Provision" in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report.
Our effective income tax rates in 2020 and 2019 were significantly impacted by the asset impairment charges in both periods, coupled with their impact on the amount of pretax income (loss) and the nondeductible portion of the impairment charges. The non-deductible portion of goodwill impairment charges drove a 72.4 point increase in our tax rate in 2020 and the tax impact of share-based compensation resulted in a 9.5 point increase, as compared to 2019. In addition, during the third quarter of 2019, we placed a full valuation allowance of $8.4 million on the intangible-related deferred tax asset generated by the impairment of intangible assets located in Australia, which was the main driver of the 4.8 point increase in our tax rate in 2020
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attributable to changes in our valuation allowances. Partially offsetting these increases in our effective tax rate was a 2.6 decrease in our state income tax rate. Information regarding other factors that impacted our effective income tax rates can be found under the caption "Note 10: Income Tax Provision" in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report.
Net Income (Loss) / Diluted Earnings (Loss) per Share
| Change | ||||||||||||||||||||||||||||||||
| (in thousands, except per share amounts) | 2021 | 2020 | 2019 | 2021 vs. 2020 | 2020 vs. 2019 | |||||||||||||||||||||||||||
| Net income (loss) | $ | 62,772 | $ | 5,335 | $ | (223,779) | 1,076.6 | % | 102.4 | % | ||||||||||||||||||||||
| Diluted earnings (loss) per share | 1.45 | 0.11 | (5.20) | 1,218.2 | % | 102.1 | % | |||||||||||||||||||||||||
Adjusted diluted EPS(1)
|
4.88 | 5.08 | 6.82 | (3.9 | %) | (25.5 | %) | |||||||||||||||||||||||||
(1) Information regarding the calculation of adjusted diluted EPS can be found in the following section entitled Reconciliation of Non-GAAP Financial Measures.
The increases in net income and diluted EPS and the decrease in adjusted diluted EPS for 2021, as compared to 2020, were driven by the factors outlined in Executive Overview – 2021 results vs. 2020.
The increases in net income and diluted EPS for 2020, as compared to 2019, were driven by numerous factors, the largest of which was a decrease in pretax asset impairment charges of $319.3 million, as compared to 2019. Other factors that increased net income included:
•actions taken to reduce costs in line with reduced revenue and the continuing evaluation of our cost structure, including savings of approximately $33.0 million from the temporary salary reductions, suspension of the 401(k) plan employer matching contribution, discretionary spending reductions and furloughs;
•revenue growth in certain of our business lines, including increased treasury management revenue, increases in certain data-driven marketing campaigns in the first quarter of 2020 prior to the commencement of the impact of the COVID-19 pandemic, and new revenue from sales of PPE in 2020;
•a decrease in acquisition amortization of $14.9 million, driven in part by previous asset impairment charges;
•a decrease in interest expense of $11.5 million, driven by our lower weighted-average interest rate;
•a decrease in certain legal-related expenses of $8.6 million; and
•the absence of non-recurring CEO transition costs in 2020, as compared to $9.4 million in 2019.
Partially offsetting these increases in net income were the following factors:
•the loss of revenue resulting from the impact of the COVID-19 pandemic;
•various investments of approximately $50.0 million, in the aggregate, to advance our One Deluxe strategy, including costs related to treasury management deals signed in the fourth quarter of 2019 and various information technology, sales, finance and human capital investments;
•the continuing secular decline in checks and business forms, the loss of web hosting revenue in the third quarter of 2019 and the decision to exit certain product lines within Cloud Solutions;
•incremental costs of approximately $8.0 million resulting from our response to the COVID-19 pandemic, including a Hero Pay premium provided to employees working on-site during the second quarter of 2020, costs related to enabling employees to work from home and additional facility cleaning costs; and
•a $5.4 million increase in bad debt expense in 2020 related to notes receivable from our Promotional Solutions distributors.
Diluted EPS of $0.11 for 2020, as compared to diluted loss per share of $5.20 for 2019, reflects the increase in net income described in the preceding paragraphs, as well as lower average shares outstanding in 2020. Adjusted diluted EPS for 2020 was $5.08, compared to $6.82 for 2019, and excludes the impact of non-cash items or items that we believe are not indicative of ongoing operations. The decrease in adjusted EPS for 2020, as compared to 2019, was driven, in large part, by the impact of the COVID-19 pandemic, as well as investments in our One Deluxe strategy and the continuing secular decline in checks and business forms. These decreases were partially offset by various cost savings initiatives, growth in treasury management
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revenue and the decrease in interest expense in 2020. A reconciliation of diluted earnings (loss) per share to adjusted diluted EPS can be found in the following section entitled Reconciliation of Non-GAAP Financial Measures.
Adjusted EBITDA
| Change | ||||||||||||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | 2019 | 2021 vs. 2020 | 2020 vs. 2019 | |||||||||||||||||||||||||||
| Adjusted EBITDA | $ | 407,765 | $ | 364,542 | $ | 480,866 | 11.9% | (24.2%) | ||||||||||||||||||||||||
| Adjusted EBITDA as a percentage of total revenue (adjusted EBITDA margin) | 20.2 | % | 20.4 | % | 23.9 | % | (0.2) pt. | (3.5) pt. | ||||||||||||||||||||||||
Adjusted EBITDA margin was virtually unchanged for 2021, as compared to 2020. Adjusted EBITDA for 2021 benefited from the contribution from the First American acquisition of $39.1 million, new client wins in all of our segments, the continuing revenue volume recovery from the impacts of the COVID-19 pandemic, actions taken to reduce costs as we continue to evaluate our cost structure, price increases in response to the current inflationary environment and the $11.4 million reduction in bad debt expense. Partially offsetting these increases in adjusted EBITDA were increased expense for our SaaS solutions, primarily related to sales and financial management tools we are utilizing to advance our growth strategy, the continuing secular decline in checks, business forms and some business accessories, the net benefit in the prior year from temporary actions taken in response to the COVID-19 pandemic, the 2020 decision to exit certain product lines within Cloud Solutions and inflationary pressures on hourly wages, materials and delivery.
The decrease in adjusted EBITDA for 2020, as compared to 2019, was driven primarily by the impact of the COVID-19 pandemic. In addition, adjusted EBITDA was negatively impacted by mix changes resulting from the contraction of legacy products and services, primarily checks and business forms, and the loss of web and hosted solutions revenue driven by the events of the third quarter of 2019 outlined in our discussion of consolidated revenue. We also continued to advance our transformation in line with our One Deluxe strategy by investing in various activities such as transforming our brand and our website and expanding our sales capabilities, as well as incurring ongoing new costs related to SaaS solutions we are employing throughout the company. We also incurred expenses related to treasury management deals signed in the fourth quarter of 2019, as well as investments in our client operations area that included human capital investments and other costs related to on-boarding new clients. Additionally, during 2020, we incurred incremental costs resulting from our response to the COVID-19 pandemic of approximately $8.0 million, and we recorded bad debt expense of $5.4 million related to notes receivable from our distributors. These decreases in adjusted EBITDA were partially offset by actions taken to reduce costs in line with the reduced revenue, including savings of approximately $33.0 million from the temporary salary reductions, suspension of the 401(k) plan employer matching contribution, furloughs and other actions. In addition, we realized the benefit of various cost reductions unrelated to our response to the COVID-19 pandemic, primarily in our sales, marketing and fulfillment organizations, as we continued to develop our post-COVID-19 operating model.
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. Free cash flow is limited and 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 for the years ended December 31 reconciles to free cash flow as follows:
| (in thousands) | 2021 | 2020 | 2019 | |||||||||||||||||
| Net cash provided by operating activities | $ | 210,821 | $ | 217,553 | $ | 286,653 | ||||||||||||||
| Purchases of capital assets | (109,140) | (62,638) | (66,595) | |||||||||||||||||
| Free cash flow | $ | 101,681 | $ | 154,915 | $ | 220,058 | ||||||||||||||
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.
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Total debt reconciles to net debt as follows as of December 31:
| (in thousands) | 2021 | 2020 | ||||||||||||
| Total debt | $ | 1,682,949 | $ | 840,000 | ||||||||||
| Cash and cash equivalents | (41,231) | (123,122) | ||||||||||||
| Net debt | $ | 1,641,718 | $ | 716,878 | ||||||||||
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 as of December 31:
| (in thousands) | 2021 | 2020 | |||||||||
| Cash and cash equivalents | $ | 41,231 | $ | 123,122 | |||||||
| Amount available for borrowing under revolving credit facility | 362,619 | 302,342 | |||||||||
| Liquidity | $ | 403,850 | $ | 425,464 | |||||||
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.
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Diluted earnings (loss) per share for the years ended December 31 reconciles to adjusted diluted EPS as follows:
| (in thousands, except per share amounts) | 2021 | 2020 | 2019 | |||||||||||||||||
| Net income (loss) | $ | 62,772 | $ | 5,335 | $ | (223,779) | ||||||||||||||
| Net income attributable to non-controlling interest | (139) | (91) | — | |||||||||||||||||
| Net income (loss) attributable to Deluxe | 62,633 | 5,244 | (223,779) | |||||||||||||||||
| Asset impairment charges | — | 101,749 | 421,090 | |||||||||||||||||
| Acquisition amortization | 82,915 | 55,867 | 70,720 | |||||||||||||||||
| Restructuring, integration and other costs | 58,947 | 80,665 | 79,511 | |||||||||||||||||
CEO transition costs(1)
|
— | (30) | 9,390 | |||||||||||||||||
| Share-based compensation expense | 29,477 | 21,824 | 19,138 | |||||||||||||||||
| Acquisition transaction costs | 18,913 | 8 | 215 | |||||||||||||||||
| Certain legal-related expense (benefit) | 2,443 | (2,164) | 6,420 | |||||||||||||||||
| Loss on sales of businesses and customer lists | — | 1,846 | 124 | |||||||||||||||||
| Adjustments, pre-tax | 192,695 | 259,765 | 606,608 | |||||||||||||||||
Income tax provision impact of pre-tax adjustments(2)
|
(45,783) | (50,153) | (88,096) | |||||||||||||||||
| Adjustments, net of tax | 146,912 | 209,612 | 518,512 | |||||||||||||||||
| Adjusted net income attributable to Deluxe | 209,545 | 214,856 | 294,733 | |||||||||||||||||
| Income allocated to participating securities | (156) | (77) | (414) | |||||||||||||||||
| Re-measurement of share-based awards classified as liabilities | (448) | (803) | 64 | |||||||||||||||||
| Adjusted income attributable to Deluxe available to common shareholders | $ | 208,941 | $ | 213,976 | $ | 294,383 | ||||||||||||||
| Weighted-average shares and potential common shares outstanding | 42,827 | 42,142 | 43,029 | |||||||||||||||||
Adjustment(3)
|
(16) | (27) | 158 | |||||||||||||||||
| Adjusted weighted-average shares and potential common shares outstanding | 42,811 | 42,115 | 43,187 | |||||||||||||||||
| GAAP diluted earnings (loss) per share | $ | 1.45 | $ | 0.11 | $ | (5.20) | ||||||||||||||
| Adjustments, net of tax | 3.43 | 4.97 | 12.02 | |||||||||||||||||
| Adjusted diluted EPS | $ | 4.88 | $ | 5.08 | $ | 6.82 | ||||||||||||||
(1) In 2019, includes share-based compensation expense related to the modification of certain awards in conjunction with our CEO transition.
(2) 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 asset impairment charges, share-based compensation expense and CEO transition costs, depends on whether the amounts are deductible in the respective tax jurisdictions and the applicable effective tax rate(s) in those jurisdictions.
(3) The total of weighted-average shares and potential common shares outstanding used in the calculations of adjusted diluted EPS differs from the GAAP calculations due to differences in the amount of dilutive shares 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 companies for 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 guidance 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 these forward-looking reconciling items, including asset impairment charges, restructuring, integration and other costs, 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.
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Net income (loss) for the years ended December 31 reconciles to adjusted EBITDA and adjusted EBITDA margin as follows:
| (in thousands) | 2021 | 2020 | 2019 | |||||||||||||||||
| Net income (loss) | $ | 62,772 | $ | 5,335 | $ | (223,779) | ||||||||||||||
| Non-controlling interest | (139) | (91) | — | |||||||||||||||||
| Depreciation and amortization expense | 148,767 | 110,792 | 126,036 | |||||||||||||||||
| Interest expense | 55,554 | 23,140 | 34,682 | |||||||||||||||||
| Income tax provision | 31,031 | 21,468 | 8,039 | |||||||||||||||||
| Asset impairment charges | — | 101,749 | 421,090 | |||||||||||||||||
| Restructuring, integration and other costs | 58,947 | 80,665 | 79,511 | |||||||||||||||||
CEO transition costs(1)
|
— | (30) | 9,390 | |||||||||||||||||
| Share-based compensation expense | 29,477 | 21,824 | 19,138 | |||||||||||||||||
| Acquisition transaction costs | 18,913 | 8 | 215 | |||||||||||||||||
| Certain legal-related expense (benefit) | 2,443 | (2,164) | 6,420 | |||||||||||||||||
| Loss on sales of businesses and customer lists | — | 1,846 | 124 | |||||||||||||||||
| Adjusted EBITDA | $ | 407,765 | $ | 364,542 | $ | 480,866 | ||||||||||||||
|
Adjusted EBITDA as a percentage of total revenue (adjusted EBITDA margin)
|
20.2 | % | 20.4 | % | 23.9 | % | ||||||||||||||
(1) In 2019, includes share-based compensation expense related to the modification of certain awards in conjunction with our CEO transition.
| 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 primarily consist of information technology consulting, project management services and internal labor, as well as other costs associated with our initiatives, such as training, travel and 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 Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report. In addition to restructuring and integration expense, we also recognized certain business transformation costs during 2020 and 2019 related to optimizing our business processes in line with our growth strategy.
The majority of the employee reductions included in our restructuring and integration accruals as of December 31, 2021 are expected to be completed in the first quarter of 2022, and we expect most of the related severance payments to be paid in the first half of 2022. As a result of our employee reductions, we realized cost savings of approximately $40.0 million in SG&A expense and $1.0 million in total cost of revenue in 2021. For those employee reductions included in our restructuring and integration accruals through December 31, 2021, we expect to realize cost savings of approximately $19.0 million in SG&A expense in 2022, in comparison to our 2021 results of operations. Note that these labor savings were, and will continue to be, partially 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 support our growth strategy. In addition, as we continued to evaluate our real estate footprint, we closed 16 facilities during 2021. We anticipate annualized cost savings of approximately $8.0 million from these closures, with approximately $3.0 million realized during 2021.
CEO transition costs – In 2018, we announced the retirement of our former CEO. In connection with the transition, we incurred various costs, including retention payments to certain members of our management team, consulting fees related to the evaluation of our strategy and our current CEO's signing bonus. These costs totaled $9.4 million for 2019 and are included in SG&A expense on the consolidated statement of loss.
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| SEGMENT RESULTS | ||
We operate 4 reportable business segments: Payments, Cloud Solutions, Promotional Solutions and Checks. These segments are generally organized by product type and reflect the way we currently manage the company. The financial information presented below for our reportable business segments is consistent with that presented under the caption “Note 18: Business Segment Information” in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report, where information regarding revenue for our product and service offerings can also be found.
Payments
Results for our Payments segment were as follows:
| Change | ||||||||||||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | 2019 | 2021 vs. 2020 | 2020 vs. 2019 | |||||||||||||||||||||||||||
| Total revenue | $ | 510,359 | $ | 301,901 | $ | 269,573 | 69.0% | 12.0% | ||||||||||||||||||||||||
| Adjusted EBITDA | 105,576 | 68,117 | 74,384 | 55.0% | (8.4%) | |||||||||||||||||||||||||||
| Adjusted EBITDA margin | 20.7 | % | 22.6 | % | 27.6 | % | (1.9) pt. | (5.0) pt. | ||||||||||||||||||||||||
The increase in total revenue for 2021, as compared to 2020, was driven by revenue of $195.0 million from the First American acquisition, as well as growth in our core payments businesses, primarily digital payments, receivables management and lockbox processing. We continued with new customer implementations, some of which had been delayed, in part, due to impacts of the COVID-19 pandemic. Revenue also benefited from minimal price increases late in the year in response to the current inflationary environment. Longer term, we expect high single-digit revenue growth for this segment.
The increase in adjusted EBITDA for 2021, as compared to 2020, was driven by the contribution of $39.1 million from the First American acquisition, as well as the revenue growth in our core payments businesses. In addition, adjusted EBITDA benefited from various cost reduction actions and the price increases late in the year. These increases in adjusted EBITDA were partially offset by continued sales and information technology investments, the benefit in the prior year of temporary salary and other cost reductions in response to the COVID-19 pandemic, and inflationary pressures on our cost structure, primarily labor costs in our lockbox processing business. Adjusted EBITDA margin decreased for 2021, as compared to 2020, as the investments in the business and the inflationary pressures exceeded the benefit of the revenue increases. For 2022, we expect adjusted EBITDA margin to continue to be in the low 20% range.
The increase in total revenue for 2020, as compared to 2019, was driven by an increase in treasury management revenue of 16.8%, related primarily to lockbox processing outsourcing deals signed in the fourth quarter of 2019 and other client wins. Partially offsetting this increase in revenue was a decline in payroll services revenue, primarily driven by the negative impact of the COVID-19 pandemic on our small business customers. Revenue for the fourth quarter of 2020 was impacted by customer implementation delays attributable to the COVID-19 pandemic.
The decrease in adjusted EBITDA for 2020, as compared to 2019, was primarily driven by increased costs in support of our One Deluxe strategy, including costs related to the lockbox processing outsourcing deals signed in the fourth quarter of 2019, as well as investments in our client operations area that included human capital investments and other costs related to on-boarding new clients. In addition, adjusted EBITDA was negatively impacted by the COVID-19 pandemic, as payroll revenue declined and we incurred incremental costs, including the Hero Pay premium we paid to employees working on-site during the second quarter of 2020. These impacts were partially offset by revenue from the lockbox processing outsourcing deals and temporary actions taken to reduce costs in response to the COVID-19 pandemic. Adjusted EBITDA margin decreased for 2020, as compared to 2019, as a result of the investments we made in this business and COVID-19-related delays in new customer implementations.
Cloud Solutions
Results for our Cloud Solutions segment were as follows:
| Change | ||||||||||||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | 2019 | 2021 vs. 2020 | 2020 vs. 2019 | |||||||||||||||||||||||||||
| Total revenue | $ | 262,310 | $ | 252,773 | $ | 318,383 | 3.8% | (20.6%) | ||||||||||||||||||||||||
| Adjusted EBITDA | 70,172 | 61,580 | 77,199 | 14.0% | (20.2%) | |||||||||||||||||||||||||||
| Adjusted EBITDA margin | 26.8 | % | 24.4 | % | 24.2 | % | 2.4 pt. | 0.2 pt. | ||||||||||||||||||||||||
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The increase in total revenue for 2021, as compared to 2020, was driven by growth in data-driven marketing revenue resulting from new client wins and from increased marketing efforts by our banking and mortgage lending customers due, in part, to the continuation of low interest rates and an improving credit risk environment. Data-driven marketing revenue also increased as many of our customers reactivated marketing campaigns that had been put on hold due to the COVID-19 pandemic. Overall, data-driven marketing revenue increased 26.5% for 2021, as compared to 2020. Within the web and hosted solutions business, our 2020 decision to exit certain product lines resulted in a revenue decline of $19.9 million for 2021, as compared to 2020. We continue to add new data-driven marketing clients, which will benefit revenue going forward, and for 2022, we expect mid-single digit revenue growth to continue.
Adjusted EBITDA and adjusted EBITDA margin for 2021 increased compared to 2020, due to the revenue growth, as well as various cost reduction actions to bring expenses in line with our post-COVID-19 operating model. In addition, adjusted EBITDA benefited from the timing and type of customer marketing campaigns in each period. Partially offsetting these increases in adjusted EBITDA was the benefit in the prior year of temporary salary and other reductions we implemented in response to the COVID-19 pandemic. For 2022, we expect adjusted EBITDA margin to be in the low-to-mid 20% range.
The decrease in total revenue for 2020, as compared to 2019, was driven by the impact of the COVID-19 pandemic, primarily in data-driven marketing solutions as clients suspended their marketing campaigns, with some impact on web and hosted solutions as well. Data-driven marketing revenue for the fourth quarter of 2020 remained stable, as compared to the third quarter of 2020, as financial institutions slowly reactivated data-driven marketing analytics and campaigns in the second half of the year. Web and hosted solutions revenue declined, as compared to 2019, due to our decision in the third quarter of 2019 to exit certain customer contracts, the loss of certain large customers in the third quarter of 2019 as they elected to in-source some of the services we provide, and more recent decisions to exit certain product lines. Partially offsetting these decreases was a $7.0 million increase in data-driven marketing revenue in the first quarter of 2020, prior to the commencement of the COVID-19 pandemic, driven by new campaigns and growth in pay-for-performance marketing campaigns.
The decrease in adjusted EBITDA for 2020, as compared to 2019, was primarily due to the impact of the COVID-19 pandemic and increased information technology costs in support of our One Deluxe strategy, as well as the loss of web hosting revenue related to the events that occurred in the third quarter of 2019. Partially offsetting these declines in adjusted EBITDA were various cost reductions unrelated to our response to the COVID-19 pandemic, primarily reductions in sales and marketing costs, and the benefit of temporary actions taken in response to the pandemic. Adjusted EBITDA also benefited from the increase in data-driven marketing revenue in the first quarter of 2020, prior to the commencement of the COVID-19 pandemic. Adjusted EBITDA margin increased slightly for 2020, as compared to 2019, as cost reductions outpaced the revenue decline and revenue mix was favorable in 2020.
Promotional Solutions
Results for our Promotional Solutions segment were as follows:
| Change | ||||||||||||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | 2019 | 2021 vs. 2020 | 2020 vs. 2019 | |||||||||||||||||||||||||||
| Total revenue | $ | 546,473 | $ | 529,649 | $ | 640,892 | 3.2% | (17.4%) | ||||||||||||||||||||||||
| Adjusted EBITDA | 85,384 | 66,620 | 101,293 | 28.2% | (34.2%) | |||||||||||||||||||||||||||
| Adjusted EBITDA margin | 15.6 | % | 12.6 | % | 15.8 | % | 3.0 pt. | (3.2) pt. | ||||||||||||||||||||||||
The increase in total revenue for 2021, as compared to 2020, was driven by some recovery of volume declines resulting from the impact of the COVID-19 pandemic, as our business customers began to resume a more normal level of activity. Additionally, revenue benefited from new clients and price increases in response to the current inflationary environment. Partially offsetting these revenue increases was the continuing secular decline in business forms and some accessories, and sales of PPE decreased approximately $22.0 million for 2021, as compared to 2020. We are anticipating revenue growth in the low-single digits for 2022.
The increases in adjusted EBITDA and adjusted EBITDA margin for 2021, as compared to 2020, were driven by the benefit of new clients, some recovery of volume declines resulting from the impact of the COVID-19 pandemic, and lower bad debt expense related to notes receivable from distributors and trade accounts receivable. In addition, adjusted EBITDA benefited from price increases in response to the current inflationary environment, various cost reduction actions and lower expense for obsolete inventory in 2021. These increases in adjusted EBITDA were partially offset by various information technology investments, the benefit in the prior year of temporary salary and other cost reductions in response to the COVID-19 pandemic, and inflationary pressures on hourly wages, materials and delivery. For 2022, we anticipate a slightly improved adjusted EBITDA margin resulting from value realization and merchandising optimization initiatives.
The decrease in total revenue for 2020, as compared to 2019, was driven primarily by the impact of the COVID-19 pandemic, as our customers reacted to the economic environment, and demand for marketing and promotional products declined sharply, as our customers stopped virtually all promotional activities in response to the pandemic. The continuing
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secular decline in business forms and some accessories also negatively impacted revenue. Partially offsetting these volume declines was new revenue of $31.0 million from sales of PPE during 2020.
The decrease in adjusted EBITDA for 2020, as compared to 2019, was driven primarily by the loss of revenue resulting from the COVID-19 pandemic, investments in support of our One Deluxe strategy, primarily information technology and sales force expenses, and the continuing secular decline in business forms and some accessories. In addition, we recorded bad debt expense of $5.4 million during 2020, related to notes receivable from our distributors, primarily one that was underperforming prior to the commencement of the COVID-19 pandemic, and expense for obsolete inventory was higher in 2020. These decreases in adjusted EBITDA were partially offset by the benefit of temporary actions taken in response to the COVID-19 pandemic, other cost reduction actions, primarily related to sales, marketing and fulfillment costs, and the sales of PPE in 2020. Adjusted EBITDA margin for 2020 decreased, as compared to 2019, as the revenue decline, investments in our transformation, and bad debt and obsolete inventory expense more than offset the benefit of temporary actions taken in response to the COVID-19 pandemic and the other cost savings realized.
Checks
Results for our Checks segment were as follows:
| Change | ||||||||||||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | 2019 | 2021 vs. 2020 | 2020 vs. 2019 | |||||||||||||||||||||||||||
| Total revenue | $ | 703,055 | $ | 706,458 | $ | 779,867 | (0.5%) | (9.4%) | ||||||||||||||||||||||||
| Adjusted EBITDA | 324,224 | 341,705 | 402,662 | (5.1%) | (15.1%) | |||||||||||||||||||||||||||
| Adjusted EBITDA margin | 46.1 | % | 48.4 | % | 51.6 | % | (2.3) pt. | (3.2) pt. | ||||||||||||||||||||||||
The decrease in total revenue for 2021, as compared to 2020, was driven primarily by the expected continuing secular decline in checks. Partially offsetting this impact was some recovery of volume declines resulting from the impact of the COVID-19 pandemic, primarily business check volumes, as well as price increases in response to the current inflationary environment and the impact of new client wins. In 2022, we anticipate that the revenue decline rate will be in the low single digits.
The decreases in adjusted EBITDA and adjusted EBITDA margin for 2021, as compared to 2020, were driven by information technology investments, including new print-on-demand technology, costs of on-boarding new clients and inflationary pressures on hourly wages, materials and delivery. These decreases were partially offset by various cost reduction initiatives and lower bad debt expense for 2021.
The decrease in total revenue for 2020, as compared to 2019, was driven primarily by the impact of the COVID-19 pandemic, which resulted in a decline in business and personal check usage stemming from the slowdown in the economy. The continuing secular decline in checks also contributed to the revenue decline, partially offset by nominal price increases.
The decrease in adjusted EBITDA for 2020, as compared to 2019, was driven by the loss of revenue resulting from the COVID-19 pandemic and the secular decline in checks, as well as referral costs and investments in support of our One Deluxe strategy, primarily information technology expenses. Partially offsetting these decreases in adjusted EBITDA were various cost reductions unrelated to our response to the COVID-19 pandemic, primarily sales, marketing and fulfillment costs, and the benefit of temporary actions taken in response to the COVID-19 pandemic. Adjusted EBITDA margin for 2020 decreased as compared to 2019, as the impact of the revenue decline and investments in the business exceeded the impact of our cost saving initiatives.
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| CASH FLOWS AND LIQUIDITY | ||
As of December 31, 2021, we held cash and cash equivalents of $41.2 million, as well as restricted cash and restricted cash equivalents included in funds held for customers and in other non-current assets of $244.3 million. The following table shows our cash flow activity for the past 3 years, and should be read in conjunction with the consolidated statements of cash flows appearing in Part II, Item 8 of this report.
| Change | ||||||||||||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | 2019 | 2021 vs. 2020 | 2020 vs. 2019 | |||||||||||||||||||||||||||
Net cash provided by operating activities |
$ | 210,821 | $ | 217,553 | $ | 286,653 | $ | (6,732) | $ | (69,100) | ||||||||||||||||||||||
Net cash used by investing activities |
(1,066,601) | (56,093) | (72,397) | (1,010,508) | 16,304 | |||||||||||||||||||||||||||
Net cash provided (used) by financing activities |
912,961 | (110,555) | (190,148) | 1,023,516 | 79,593 | |||||||||||||||||||||||||||
Effect of exchange rate change on cash, cash equivalents, restricted cash and restricted cash equivalents |
(1,099) | 3,693 | 5,444 | (4,792) | (1,751) | |||||||||||||||||||||||||||
Net change in cash, cash equivalents, restricted cash and restricted cash equivalents |
$ | 56,082 | $ | 54,598 | $ | 29,552 | $ | 1,484 | $ | 25,046 | ||||||||||||||||||||||
Free cash flow(1)
|
$ | 101,681 | $ | 154,915 | $ | 220,058 | $ | (53,234) | $ | (65,143) | ||||||||||||||||||||||
(1) See Reconciliation of Non-GAAP Financial Measures within the Consolidated Results of Operations section, which illustrates how we calculate free cash flow.
Net cash provided by operating activities decreased $6.7 million for 2021, as compared to 2020, driven primarily by investments in our business, including transaction costs related to the acquisition of First American and increased subscription and implementation costs related to SaaS solutions we are utilizing, including a new enterprise resource planning system. Additionally, operating cash flow was negatively impacted by the continuing secular decline in checks, business forms and some business accessories, a $23.8 million increase in interest payments, driven by the debt issued to complete the First American acquisition, and the prior year benefited from the deferral of federal payroll tax payments under the CARES Act, a portion of which was paid during 2021. The prior year also benefited from temporary salary and other cost reductions implemented in response to the COVID-19 pandemic. These decreases in operating cash flow were substantially offset by the contribution from First American's operations, improved working capital management, the benefit of new clients, some recovery of revenue declines from the COVID-19 pandemic and various cost saving actions. Additionally, performance-based compensation payments decreased $8.6 million, based on our 2020 performance.
Net cash provided by operating activities decreased $69.1 million for 2020, as compared to 2019, driven primarily by the loss of revenue resulting from the COVID-19 pandemic, increased investments in support of our One Deluxe strategy, the continuing secular decline in checks and business forms, and changes in the timing of certain working capital items, such as inventory purchases and payments on accounts payable. These decreases in operating cash flow were partially offset by a $36.1 million reduction in income tax payments resulting from lower taxable income, cost reduction actions taken in response to the COVID-19 pandemic, such as temporary salary reductions, delays in U.S. federal payroll tax payments of $14.3 million allowed under the CARES Act, and a legal-related settlement of $12.5 million in 2019 that was accrued in the previous year.
Included in net cash provided by operating activities were the following operating cash outflows:
| Change | ||||||||||||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | 2019 | 2021 vs. 2020 | 2020 vs. 2019 | |||||||||||||||||||||||||||
Medical benefit payments |
$ | 50,918 | $ | 43,419 | $ | 41,714 | $ | 7,499 | $ | 1,705 | ||||||||||||||||||||||
| Interest payments | 46,621 | 22,853 | 33,227 | 23,768 | (10,374) | |||||||||||||||||||||||||||
| Prepaid product discount payments | 40,920 | 33,613 | 25,637 | 7,307 | 7,976 | |||||||||||||||||||||||||||
| Income tax payments | 18,761 | 24,701 | 60,764 | (5,940) | (36,063) | |||||||||||||||||||||||||||
Performance-based compensation payments(1)
|
12,192 | 20,832 | 23,583 | (8,640) | (2,751) | |||||||||||||||||||||||||||
| Severance payments | 10,202 | 14,289 | 10,585 | (4,087) | 3,704 | |||||||||||||||||||||||||||
(1) Amounts reflect compensation based on total company performance.
Net cash used by investing activities for 2021 was $1,010.5 million higher than 2020, driven primarily by the acquisition of First American. In addition, purchases of capital assets increased $46.5 million, as we continued investments to support our long-
39
term growth, including technology platform modernization initiatives, and proceeds from sales of facilities decreased $7.1 million, related to the evaluation of our real estate footprint.
Net cash used by investing activities for 2020 was $16.3 million lower than 2019, driven primarily by proceeds from the sale of facilities of $9.7 million in 2020, an $8.3 million reduction in payments for acquisitions and a reduction in capital purchases of $4.0 million, partially offset by purchases of small business distributor customer lists of $11.1 million in 2020. Further information regarding our 2019 acquisitions can be found under the caption "Note 6: Acquisitions" in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report.
Net cash provided by financing activities for 2021 was $1,023.5 million higher than 2020, driven by net proceeds from the debt we issued to complete the First American acquisition. Also contributing to the increase was the net change in customer funds obligations in each period, which is discussed further in Other Financial Position Information. In addition, common share repurchases decreased $14.0 million, as we suspended our share repurchase program in the second quarter of 2020 in response to the COVID-19 pandemic, and proceeds from issuing shares increased $13.1 million, as certain employees of First American purchased our stock in conjunction with the acquisition in the second quarter of 2021.
Net cash used by financing activities for 2020 was $79.6 million lower than 2019, due primarily to a decrease in common share repurchases of $104.5 million. To maintain liquidity during the COVID-19 pandemic, we did not repurchase any of our common shares during the last 3 quarters of 2020. Partially offsetting this decrease in cash used by financing activities was a net increase in payments on long-term debt of $17.0 million and the net change in customer funds obligations in each period.
Significant cash transactions, excluding those related to operating activities, for each period were as follows:
| Change | ||||||||||||||||||||||||||||||||