PART I
Item 1. Business.
Deluxe Corporation was founded in 1915 and was incorporatedPlease note that this Annual Report on Form 10-K contains statements that may constitute “forward-looking statements” under the lawsPrivate 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. Because actual results may differ materially from those expressed or implied by these forward-looking statements, we caution readers not to place undue reliance on these statements. Our business, financial condition, cash flows and operating results are influenced by many factors, which are often beyond our control, that can cause actual results to differ from those expressed or implied by the forward-looking statements. 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 ("SEC"), in our press releases, investor presentations and in oral statements made by our representatives, they indicate forward-looking statements within the meaning of the StateReform Act. Readers are cautioned that all forward-looking statements are based on current expectations and estimates and apply only as of Minnesota in 1920. Our principal corporate offices are located at 3680 Victoria Street North, Shoreview, Minnesota 55126-2966. Our main telephone number is (651) 483-7111 and our web address is www.deluxe.com.the date of this report. We assume no obligation to update this information.
COMPANY OVERVIEW
Over 100
More than 105 years ago, Deluxe Corporation began providing payment solutions. Our longevity is a testament to our innovation, and our ability to evolve with our customers. Overcustomers, and the past several years, wetrust they place in us. We have transformed from being primarilyto a check printingmodern payments and data company to providing a diverse selectionthat champions business so communities thrive. We support millions of products and services. Our vision is to be the best at helping small businesses, andthousands of financial institutions grow and we have become a trusted partner to small businesses and an integral parthundreds of the financial services industry.world's largest consumer brands. We provide a selection of customer life cycle management solutions that helpsell our customers acquire and engage their customers across multiple channels. To promote and sell a wide range of products and services primarily in North America, and we use printedoperate 4 business segments that are generally organized by product type. These segments provide the following products and electronic marketing; a direct sales force; referrals from financial institutions, telecommunication clients and other partners; networks of distributors and independent dealers; and an outbound telemarketing group. Overservices:
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Business Segment | | Category | | Percentage of 2023 consolidated revenue | | Description |
Payments | | Merchant services and other payment solutions | | 20.5 | % | | Merchant in-store, online and mobile payment solutions; payables as a service, including eChecks, Medical Payment Exchange and Deluxe Payment Exchange; and payroll and human resources services |
| Treasury management solutions | | 11.0 | % | | Automated receivables technology, including remittance and lockbox processing, remote deposit capture and cash application, as well as payment acceptance solutions |
| Total | | 31.5 | % | | |
Data Solutions | | Data-driven marketing solutions | | 8.8 | % | | Solutions for marketing business-to-business and business-to-consumer |
| Web and hosted solutions | | 2.1 | % | | Web-based solutions, including financial institution profitability reporting and business incorporation services, and our former web hosting and logo design businesses that were fully divested in June 2023 |
| | Total | | 10.9 | % | | |
Promotional Solutions | | Marketing and promotional solutions | | 12.7 | % | | Business forms and accessories, including envelopes, labels, stationery and more |
| Forms and other products | | 12.0 | % | | Advertising specialties, promotional apparel and print services |
| | Total | | 24.7 | % | | |
Checks | | Checks | | 32.9 | % | | Printed business and personal checks |
During the past 24 months, our Small Business Services segment has provided products and services2 years, we made strategic decisions to approximately 4.4 million small business customers and our Direct Checks segment has provided products and services to more than 5.1 million consumers. Through our Financial Services segment, we provide products and services to approximately 4,900 financial institution clients.
Our product and service offerings are comprised of the following:
Checks – We remain one of the largest providers of checks in the United States. During 2017, checks represented 39%exit certain of our Small Business Services segment's revenue, 43% ofbusinesses. During 2022, we sold our Financial Services segment's revenue and 84% of our Direct Checks segment's revenue.
Marketing solutions and other services (MOS) – We offer products and services designed to meet our customers’ sales and marketing needs,Data Solutions Australian web hosting business, as well as variousour Promotional Solutions strategic sourcing and retail packaging businesses. During 2023, we sold our North American web hosting and logo design businesses, completing our exit from the web hosting space. Also during 2023, we executed agreements to exit our Payments payroll and human resources services business by allowing for the conversion of our U.S. and Canadian customers to other service offerings. providers. We expect these conversions will be completed during 2024.
During the first quarter of 2024, we realigned our organizational structure to better reflect our portfolio mix and offerings, and we updated our reportable segments to correspond with these changes. We did not operate under the new segment structure during 2023, and we continued to allocate resources and assess performance based on our current reportable segment structure.
Our marketing products include digital printingrealigned reportable segments for the quarter ending March 31, 2024 are as follows:
•Merchant Services – This segment includes the electronic credit and web-to-print solutions such as business cards, print marketing, promotional goodsdebit card authorization and apparel. Our webpayment systems and processing services offerings include logo design; hosting, domain namethat we provide primarily to small and web design services; search engine optimization;medium-sized retail and marketing programs, including email, mobile and social media. We also offer fraud protection and security services, online and offline payroll services, and electronic checks ("eChecks"). Our Financial Servicesservice businesses.
•B2B Payments – This segment also offers a selection of financial technology ("FinTech") solutions. These solutions include data-driven marketing solutions, including outsourced marketing campaign targeting and execution;includes treasury management solutions, including accounts receivableremittance and lockbox processing, remote deposit capture, automated receivables management, payment processing and remote deposit capture; and digital engagement solutions, including loyalty and rewards programs. During 2017, MOS represented 34% of our Small Business Services segment's revenue, 55% of our Financial Services segment's revenue and 11% of our Direct Checks segment's revenue.
Forms – Our Small Business Services segment is a leading provider of printed forms to small businesses, including deposit tickets, billing forms, work orders, job proposals, purchase orders, invoices and personnel forms. This segment also offers computer forms compatible with accounting software packages commonly used by small businesses. Forms sold by our Financial Services and Direct Checks segments include deposit tickets and check registers.
Accessories and other products – Small Business Services offers products designed to provide small business owners with the customized documents necessary to efficiently manage their business, including envelopes, office supplies, ink stamps and labels. Our Financial Services and Direct Checks segments offer checkbook covers, labels and ink stamps.
Revenue, by product and service category, as a percentage of consolidated revenue for the years ended December 31 was as follows:
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| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
Checks | | 43.3 | % | | 46.8 | % | | 49.3 | % | | 52.0 | % | | 55.8 | % |
Marketing solutions and other services | | 38.4 | % | | 33.4 | % | | 30.0 | % | | 25.5 | % | | 21.6 | % |
Forms | | 10.8 | % | | 11.6 | % | | 12.2 | % | | 13.0 | % | | 12.7 | % |
Accessories and other products | | 7.5 | % | | 8.2 | % | | 8.5 | % | | 9.5 | % | | 9.9 | % |
Total revenue | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
BUSINESS SEGMENTS
Our business segments are generally organized by the type of customer served and reflect the way we manage the company. Additional information concerning our segments appears under the caption “Note 16: Business segment information” of the Notes to Consolidated Financial Statements appearing in Item 8 of this report.
Small Business Services
Small Business Services operates under various brands, including Deluxe®, Safeguard®, PsPrint®, Hostopia®, Aplus.net®, VerticalResponse®,Digital Pacific®, Inkhead®, PAYweb® and Payce®, among others. This is our largest segment in terms of revenue and operating income and we are concentrating on profitably growing this segment. Small Business Services strives to be a leading supplier to small businesses,cash application, as well as partnersautomated payables management, including Medical Payment Exchange and channels that support small businesses, by providing personalized products and services that help them operate and market their businesses.Deluxe Payment Exchange.
•Data Solutions – This segment sells productsincludes data-driven marketing solutions, financial institution profitability reporting and services to small businesses in North America, Australiabusiness incorporation services.
•Print – This segment includes printed personal and portions of South Americabusiness checks, printed business forms, business accessories and Europe.promotional products.
Small Business Services' products are distributed through multiple channels. Our primary customer acquisition methods are direct response mail and internet advertising; referrals from financial institutions, telecommunications clients and other partners; affiliate relationships; networks of distributors and independent dealers; a direct sales force that focuses on selling to and through major accounts; and an outbound telemarketing group. Customer service for initial order support, product reorders and routine service is provided by a network of call center representatives located in the United States, Canada and Australia.
Our Small Business Services strategies are as follows:
Effectively acquireenterprise strategy is simple: to utilize the cash flows, customer relationships and retain customers by optimizing each ofbrand equity from our sales channels;
Expand sales of higherprint businesses to drive profitable organic growth and recurring MOS offerings;
Increase our share of the amount small businesses spend on the types of products and services in our portfolio through increased brand awareness, channel coverage, and improved customer acquisition; and
Continue to optimize our cost and expense structure.
To support our strategies and to reposition Small Business Services as not just a provider of business checks and printed forms, but also as a provider of higher growth MOS offerings, we have two strategic focusother businesses. We are implementing this strategy with strong execution in 3 core areas:
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* | Improve the digital marketing customer experience and cross-sell across all customers and channels, including through our integrated Deluxe Marketing Suite, while continuing to build partnerships and explore acquisition opportunities. |
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* | Accelerate our brand awareness transformation, building a clear linkage between marketing and revenue-generating capabilities. |
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* | Focus on scaling payroll services and continue to evaluate early stage businesses and other operational annuity growth solutions. |
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2. | Payments and marketing solutions: |
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* | Focus on core check retention and acquisition and on developing incremental retail customer acquisition channels. |
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* | Profitably scale integrated marketing-on-demand solutions, with the largest opportunity in major accounts. |
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* | Optimize electronic payment solutions with a focus on building opportunities with financial institutions, medical and insurance payment processors, accounting services and software providers, and other document management and payment solution companies. |
In support of our strategies, we expect to continue identifying opportunities to expand sales to our existing customers and to acquire new customers, including the small business customer referrals we receive through our Deluxe Business Advantage® program. This program provides a fast and simple way for financial institutions to offer expanded personalized service to small businesses. Our relationships with financial institutions are important in helping us more deeply serve unique customer segments such as contractors, retailers and professional services firms. In addition, we expect to continue to acquire customers through our affiliate partners, telecommunications clients, media partners and major account clients. We invest in our e-commerce and technology platforms to increase opportunities to market and sell online, and we utilize various marketing channels, including internet, direct mail solicitations and television. Our distributor and dealer networks and our major accounts channel increase our distribution reach through dedicated “feet on the street,” resellers and partner operations, and allow us to increase sales to existing customers and acquire new customers via multiple methods.
We continuously evaluate ways to strengthen1. cross-selling across our portfolio of products and services through acquisitions, partnershipsvia our One Deluxe go-to-market model,
2. operational efficiency, and internal development. In recent years,
3. a disciplined capital allocation framework.
The actions we have acquiredtaken since we began our transformation in 2019 allowed us to pivot from a numberlegacy check printer into a modern payments and data company. We divested non-strategic businesses, and the remainder of businessesour business experienced its third consecutive year of growth in 2023, with profits growing faster than revenue. Our largest cash generator, Checks, is outperforming the market, while holding margins steady in the mid-40% range.
Having laid this groundwork, we have confidence in our ability to deliver greater shareholder return through our focus on growth in payments and data. We recently announced our North Star program, the goal of which is to further drive shareholder value by (1) expanding our earnings before interest, taxes, depreciation and amortization ("EBITDA") growth trajectory, (2) driving increased cash flow, (3) paying down debt, and (4) improving our leverage ratio. North Star is an integrated, multi-year plan that is a mix of cost reduction and growth initiatives, with the mix skewing toward cost reductions. On the cost side, much of the work is an evolution of our organizational design and ongoing infrastructure and operations transformation. We have expandedalready completed our MOS offerings, including technology-based solutionsinitial organizational redesign, combining like-for-like roles, reducing layers and expanding spans of control. As we begin 2024, we are using technology and process automation to digitize and streamline our processes, and we are continuing to drive scale in our operations by consolidating many of our back-office functions, improving our marketing and sales capabilities, and leveraging the global labor market. On the revenue side, we are focused on priorities such as webbuilding our integrated software channel in merchant services, payroll services, web-to-print capabilities, internet marketing servicesexpanding our data business to serve additional industry verticals, and eChecks. Sales of these higher growth products and services are expected to represent an increasing portionevaluating pricing opportunities. All of our revenue. Additional information concerning our acquisitions appears under the caption “Note 5: Acquisitions” of the Notes to
Consolidated Financial Statements appearing in Item 8 of this report. In addition, we track innovations within the marketplace coming from competitors, best-of-breed companies and evolving technology products and communities. When making decisions regarding the technologies and methodologies to employ within our product and service areas, we incorporate leading new techniques when theyNorth Star investments must meet our fundamental need for scale, performance, flexibilityinternal hurdle rate and security. generate a higher return than other uses of capital, such as paying down debt. The overall North Star program targets a $100 million run-rate improvement in free cash flow and an $80 million run-rate improvement in adjusted EBITDA by 2026. North Star is a critical next step to accelerate our shift into a profitable modern payments and data company.
We also monitor feedback fromemploy a "One Deluxe" go-to-market model, deploying dedicated sales teams across our customer channelsbusiness segments to ensure we are offeringleverage the expertise within each segment to meet our customers' needs. We listen to our customers and their needs first. Then we bring the best of Deluxe to solve their problems. This results in deeper customer relationships, and we move
from being a transactional vendor to a trusted partner. Then, as the relationship deepens, we uncover even more opportunities for future growth, giving us the opportunity to sell additional products and featuresservices. Our business segments help each other deliver greater value for our customers, want.enabling our customers to build their businesses on our platforms for the long-term.
We continue our efforts within Small Business Servicesemploy a multi-channel sales and marketing approach, selling directly to simplify processes, eliminate complexity and lower costs. Small Business Services outsources the production of many of its products, including certain business forms, promotional products and apparel. In conjunction with our cost reduction initiatives, we strive to further enhance our strategic supplier sourcing arrangements. In addition, the expertise we have developed in logistics, productivity and inventory management has allowed us to reduce the number of facilities we operate, while still meeting customer requirements. During 2017, we closed a retail packaging sales location in Dallas, Texas. During 2016, we closed a call center located in Los Angeles, California, a warehouse located in Houston, Texas and a facility housing general office space in Burnsville, Minnesota. During 2015, we closed a facility located in American Fork, Utah that housed a call center and administrative functions, as well as a call center located in Charlotte, North Carolina and a sales facility located in Venice, California. The operations of these facilities were integrated into existing Small Business Services operations.
Financial Services
Financial Services' products and services are sold primarily through a direct sales force, which executes product and service supply contracts with our financial institution clients, including banks, credit unions and financial services companies. Building on our long-standing reputation in the financial services industry as a leading check provider, we have expanded our offerings to include a growing selection of software and cloud-based products and services designed to help financial institutions better address the needs of their customers throughout the customer life cycle. Our sales force is selling these life cycle management solutions through our existing financial institution customer channel to existing clients and to new clients. In addition, certain of our service offerings, such as digital engagement solutions, are sold to clients other than financial institutions.
Our Financial Services strategies are as follows:
Expand sales of higher growth MOS offerings that differentiate us from the competition;
Optimize core check revenue streams and acquire new clients; and
Continue to optimize our cost and expense structure.
We have two focus areas that support our Financial Services strategies:
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1. | Data-driven marketing solutions: |
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* | Leverage data-driven analytics and marketing capabilities to grow financial institution depository and lending products, and assess new acquisitions. |
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2. | Treasury management solutions: |
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* | Profitably scale our treasury management solutions. |
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* | Further integrate previous acquisitions and execute additional acquisitions. |
Despite the decline in check usage, checks continue to be an important source of revenue. Our check supply contracts usually range in duration from 3 to 6 years. As part of our check programs, we provide enhanced services such as customized reporting, file management, expedited account conversion support, fraud protection services, new account support, trackable delivery and billing services. Consumers typically submit their check order to their financial institution, which then forwards the order to us. However, consumers may also submit their check orders over the phone or internet. We process the order and ship it directly to the consumer.major global brands. We also continue to leverage our Deluxe Business Advantage program, which is designed to maximize financial institution business check programs. It offers many of the products and services of our Small Business Services segment to the small business customers of financial institutions through a number of service level options. The revenue from the products and services sold through this program is reflected in our Small Business Services segment.
In our ongoing efforts to expand our client relationships with relevant growth services, we offer several solutions designed to help financial institutions operate more effectively and better address the needs of their customers throughout the customer life cycle. All of these offerings build on our reputation as a longstanding and trusted partner of financial institutions, especially when it comes to outsourced solutions and securely managing sensitive customer data. Our service offerings include the following:
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• | Deluxe Marketing Solutions – a variety of direct marketing solutions that help financial institutions acquire new customers, deepen existing customer relationships and retain customers. These offerings leverage data and analytics to help our clients execute marketing campaigns for deposit and lending products across multiple contact channels, including direct mail, email, online and other digital media. These offerings were augmented by the December 2016 acquisition of FMCG, a provider of data-driven marketing solutions for financial institutions, and the October 2015 acquisition of Datamyx®, a software-as-a-service data and analytics platform focused on marketing programs for lending products.
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Deluxe Treasury Management – comprehensive treasury management solutions, including accounts receivable processing and remote deposit capture, available at the customer site and as software-as-a-service and business process outsourced deployment models. These solutions include the offerings of RDM Corporation, which was acquired in April 2017, Data Support Systems, which was acquired in October 2016, and FISC Solutions, which was acquired in December 2015.
Deluxe Rewards – a loyalty and rewards platform that offers multiple touch points that enable our clients to have ongoing engagement with their customers.
Deluxe Strategic Sourcing – a comprehensive, outsourced service that enables financial institutions to improve efficiency, financial controls and pricing compared to self-managing multiple supplier relationships.
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• | Banker's Dashboard® – online financial management tools that provide financial institutions with comprehensive daily insights into their financial picture.
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• | Provent® – a comprehensive suite of identity protection services largely complementary to our check offerings.
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We continue to advance our MOS offerings both via acquisitions and internal development. In recent years, we have acquired a number of businesses that have expanded our MOS offerings, including data and analytics-driven marketing solutions and treasury management solutions. Sales of these higher growth services are expected to represent an increasing portion of our revenue. Additional information concerning our acquisitions appears under the caption “Note 5: Acquisitions” of the Notes to Consolidated Financial Statements appearing in Item 8 of this report. We expect that providing a growing selection of products and services will offset the impacts of the decline in check usage and the continued pricing pressure we are experiencing in our check programs. As such, we focus on accelerating the pace at which we introduce new products and services, utilizing client feedback and market research to identify client needs and gaps. We have also invested in extending the Deluxe brand to increase brand awareness and loyalty in the financial services market beyond check-related solutions.
Financial Services continues to simplify processes, eliminate complexity and lower costs. During 2017, we closed administrative facilities located in Omaha, Nebraska and Lincoln, Nebraska. During 2016, we closed a warehouse located in Nashville, Tennessee and during 2015, we closed a call center located in Plymouth, Michigan, as well as a warehouse located in Livonia, Michigan. The operations of these facilities were integrated into existing Financial Services operations.
Direct Checks
Direct Checks is the nation's leading direct-to-consumer check supplier, selling under various brand names, including Checks Unlimited®, Designer Checks®, Checks.com®, Check Gallery®, The Styles Check Company®, and Artistic Checks®, among others.
We use a variety of direct marketing techniques to acquire new customers, including newspaper inserts, in-package advertising, statement stuffers and co-op advertising. We also use search engine marketing and search engine optimization strategies to direct traffic to our websites, which include: checksunlimited.com, designerchecks.com, checks.com, 4checks.com, checkgallery.com, styleschecks.com, and artisticchecks.com, among others.
Direct Checks competes primarily on price and design. We believe that pricing in the direct-to-consumer channel is generally lower than retail prices charged to consumers in the financial institution channel. We compete on design by seeking to offer the most attractive selection of images with high consumer appeal, many of which are licensed from well-known artists and organizations.
Our Direct Checks strategies are as follows:
Maximize the lifetime value of customers by selling new features, accessories and products;
Continue to optimize our cost and expense structure; and
Optimize cash flow.
We marketsell our products and services through targeted advertising, focusingscalable partnerships, enabling us to cost-effectively reach customers, specifically leveraging our financial institution and other strategic partnerships. In addition, millions of in-bound customer contacts buying or reordering our products and services provide extensive cross-sell opportunities.
Payments merchant services
We provide a full range of payment processing services primarily to small and medium-sized retail and service businesses, including nonprofit organizations. These services include credit card, debit card and electronic benefit transaction processing; check guarantee and conversion; and point-of-sale (“POS”) equipment leasing. The majority of merchant services revenue is generated by services priced as a percentage of transaction value or a specified fee per transaction, depending on the internet channel.payment type or the market. We distribute our services through multiple sales channels, processing approximately $40 billion in annual transaction volume. Payments are processed using a variety of methods, including in-person and online, and via recurring payments.
This market 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 is to continually modernize our technology to support new service offerings and to identify new revenue streams, as well as to invest in digital technologies to more rapidly address evolving customer preferences. Competition in the merchant services industry is intense. We are competing against numerous financial technology ("Fintech") companies, including independent payment processors and credit card processing firms, as well as financial institution in-house capabilities.
Volume is key to remaining 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 people, our infrastructure and our relationships. Many of our employees are experts in the industry and have been with the company for many years. Additionally, we own the majority of our technology rather than leasing it, specifically our gateways, merchant onboarding, risk management, clearing and settlement technologies. This allows us to launch new products and services faster and to have scalability in our cost structure.
Going forward, our focus in this business is to gain share by offering more omnichannel and embedded services to our merchants and growing our integrated software partnerships.
Payments treasury management solutions
We help businesses pay and get paid. Our solutions reconcile and manage our customers' invoices with all types and channels of payments, including paper and digital payments. Our software and workflow tools automatically reconcile millions of payments, and we seamlessly integrate those payments with our customers' accounting software. After years of solving the complexity of lockbox processes, our software and workflow tools are embedded within our customers' systems, and more than 70% of the top 200 financial institutions use our item processing capabilities. We expect that delivering a comprehensive platform to address customer needs in the order-to-cash cycle will generate growth in this business. This includes services such as exception processing, cash application and collections. With the expansion of additional features and functionalities, we expect to drive meaningful value for our customers. Over time, we expect to move from our traditional service set focused on item processing, such as lockbox and remote deposit capture, to services focused on accounts receivable and accounts payable automation through software solutions.
Our competition in this industry is primarily large, diversified software and service companies and independent suppliers of software products. Existing and potential financial institution clients may also develop and use their own in-house systems. We believe our competitive advantages are our expertise, strong relationships and innovative solutions, and we estimate that a sizeable portion of the potential market remains untapped.
Going forward, our focus in this business is continued expansion of our integrated receivables and exception management tools, gaining efficiencies in our item processing businesses, and expanding revenue from our investments in accounts receivable and accounts payable solutions.
Data Solutions data-driven marketing
We leverage data and analytics to help our clients acquire more customers through end-to-end targeted marketing campaigns. Our ability to target consumer and business audiences means that marketing recipients are less likely to skip the ad in their inbox or throw away a mailed product offer, and that translates into material growth for our clients.
We believe that few of our marketing competitors truly serve our core market well, and our competitive advantages are our data and top-level talent. We have one of the industry’s largest repositories of data, with nearly 100 contributing sources, including credit bureaus, leading property data aggregators, and behavioral and trigger-based data providers. We then integrate these data sets into a unified data library. Our investment in a flexible, modern, cloud-based infrastructure has allowed us to do this at a pace that was previously not possible. Our people transform this data into actionable marketing audiences for our clients. We recruit from top schools and train our professionals to utilize advanced analytics to deliver fully integrated marketing campaigns.
Going forward, we believe there is significant opportunity for growth in this business. Marketers are under pressure to further leverage their investments by demonstrating measurability through scientific, data-driven marketing. The banking industry is currently our largest customer segment, given the respected Deluxe brand and our historical relationships with financial institutions. However, we are increasing efforts to win in verticals outside the traditional banking space to complement our recent wins in the telco, utilities, e-commerce, retail and smart home industries.
Promotional Solutions and Checks
We print business and consumer checks that we distribute through banks and direct channels. Although check usage has been declining since the 1990s, checks remain a payment necessity for millions of consumers and businesses. According to our research, checks remain the most common payment method for non-payroll payments for mid-sized businesses (i.e., those with annual revenue between $5 million and $500 million). We meet that market need by shipping over 90,000 packages of checks every day. Checks are complemented by our promotional products business. This business has sales and operating synergies with checks, providing items such as forms, envelopes and deposit tickets, which are often printed on the same equipment. We also support our print customers by selling relationship-deepening products, such as branding solutions and marketing materials. The experienced talent, client-focused approach, strong foundation of credibility, brand reputation and durable cash flows within our print businesses support our strategy of growth in payments and data.
Our check 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. The market for business forms and certain business accessories has also 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 are our people, product accuracy, security features, quality and service, long-standing financial institution relationships, and digital print-on-demand technology that allows us to implement new customer requirements faster and expand our premium check and overall print design options.
Going forward, we will continue to explore avenuesinvest in print efficiencies and process improvements to expand sales to existing customers through sales of accessoriesmaintain margins, and other check-relatedwe will prioritize higher margin promotional products and services. One such example is the check protection service we offer in partnership with EZShield, Inc., which provides reimbursement to consumers for losses resulting from forged signatures or endorsements and alteredthat complement checks. As in our other two business segments, Direct Checks continues to simplify processes, eliminate complexity and lower costs. We continue to identify additional opportunities to lower our cost and expense structure in all functional areas, particularly in the areas of marketing and fulfillment.
MANUFACTURING AND FULFILLMENT/SUSTAINABLE PRACTICES
We continue to focus on improving the customer experience by providing excellent service and quality, while increasing our productivity and reducing costs and increasing productivity.our costs. We accomplishdo this by embedding lean operating principles in allinto our processes, while emphasizing a culture of continuous improvement. Under this approach, employees work together to produce products, rather than working on
individual tasks in a linear fashion. Because employees assume more ownership of the end product, we experience improved qualityimprovement and productivity, as well as lower costs.
innovation. We continue to sponsor “sustainability” initiatives that encompass environmentally-friendly practices. We have aligned with suppliers that promote sustainable business practices and we seek opportunities to eliminate wasted material, reduce cycle times and use more environmentally-friendly materials. More than 90% of our check and form paper is purchased from Forest Stewardship Council certified supplier mills and we use environmentally-friendly janitorial supplies. Our sustainability initiatives have also benefited our results of operations over the past several years as we focus on reducing our consumption of water, electricity and natural gas, and improving our transportation efficiency. We continue efforts to reduce solid waste sent to landfills, and we have been a member of the Environmental Protection Agency's Green Power Leadership Club since 2010. The renewable energy that we purchased during 2017 amounted to approximately 82% of our annual United States electricity needs.
Our expertise in logistics, productivity and inventory management has allowed us to reduce the number of production facilities we operate, while still meeting customer requirements. During 2017, we closed our Westlake Village, California fulfillment operation, during 2016, we moved production out of our Lancaster, California manufacturing facility, and during 2015, we closed our Plymouth, Michigan and Burnsville, Minnesota fulfillment operations. These operations were moved to other existing locations.
We haveutilize a shared services approach, which allows our 3 business segmentsbusinesses to leverage shared manufacturing facilities, to optimize capacity utilization and to enhance operational excellenceexcellence. Objectives for our operations include focusing on process efficiency by reengineering our ways of working, using intelligent automation and foster a cultureother tools, and continuing to build better tools to enable us to more effectively target potential customers with our sales and marketing efforts.
One example of continuous improvement.putting these objectives into action is the investment we made in our print infrastructure over the past 2 years. We implemented equipment that enables what the industry refers to as “Print On Demand,” which allows us to continue to reduce costs by utilizing our assetsoffer customers the same choices, with less waste, labor and printing technologies more efficiently and by enabling employees to better leverage their capabilities and talents.
INDUSTRY OVERVIEW
Checks
According to the Federal Reserve study released in December 2016, debit card, credit card and ACH payments all exceeded the number of checks written in 2015. Approximately 19.4 billion checks were written in 2015, accounting for approximately 13% of all non-cash payment transactions.inventory. This is a reduction from the Federal Reserve Study released in December 2013 when checks written accounted for approximately 17% of all non-cash payment transactions. Checks written includes check payments and checks converted to ACH payments, which uses the check as a source document to initiate the ACH payment. The Federal Reserve estimates that checks written declined at an annual rate of approximately 4.8% between 2012 and 2015, a slower decline than the 8.8% annual decline documented between 2009 and 2012. In December 2017, the Federal Reserve released a supplement to its 2016 study. This supplement did not update the data regarding checks written; however, it did indicate that the annual decline in check payments was 3.1% between 2012 and 2015, lower than the December 2016 estimate of 4.4%. In 2018, we anticipate check orders to decline approximately 7%, slightly higher than our 2017 decline rate. We expect that the number of checks written will continue to decline due to the increasing use of alternative payment methods, including credit cards, debit cards, direct deposit, wire and ACH transfers, and internet-based bill paying services, as well as automated teller machines.
In addition, steps have been taken in the development of a real-time payments system in the United States. The Federal Reserve established the Faster Payments Task Force with the objective of identifying and evaluating approaches for implementing a faster payments system. In late 2017, The Clearing House Payments Company, LLC (TCH) implemented a clearing and settlement system allowing consumers and businesses to send and receive payments in real-time directly from their accounts at financial institutions. The National Automated Clearing House Association (NACHA) adopted Same-Day ACH rules to speed up the processing of ACH payments and systems such as Zelle®, Venmo®, Apple Pay® and various other mobile applications allow individuals to transfer funds to other users. In addition, cryptocurrencies have been gaining acceptance in the marketplace. We cannot predict the rate and the extent to which alternative payment methods will achieve acceptance and replace checks, whether as a result of legislative developments, changing payment systems, personal preferences or otherwise.
In addition to the shift to electronic payment methods, consumer spending, employment levels, and housing stock and starts also impact the number of checks consumers use. We estimate that the 2017 growth rates for consumer spending and private sector employment most likely had a neutral impactbuilds on our personal check businesses. An increasestrong position in housing stock and starts has a positive impact on the number of checks purchased, as new households typically are in need of new checks. According to statistics released by the United States Census Bureau in January 2018, housing units completed during 2017 increased almost 9% as compared to 2016. We cannot predict whether these economic trends will improve, stay the same or worsen in the near future.
Small Business Customers
According to data published by the United States Census Bureau, there were approximately 31 million small businesses in the United States in 2015, defined as independent businesses having fewer than 500 employees. According to data published
by Statistics Canada, there were approximately 4 million small businesses in Canada in 2016, defined as employer businesses with fewer than 100 employees.
In recent years, we believe the economy negatively impacted our operating results and/or our growth opportunities in our Small Business Services segment. We believe 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 small businesses may choose to spend their limited funds on items other than our products and services. In addition, the December 2017 repeal of net neutrality rules could negatively affect our small business customers. If small businesses are forced to pay higher fees to maintain adequate speeds for their websites, it could reduce their spending on our products and services. The National Federation of Independent Business (NFIB) publishes the results of quarterly surveys which provide an indication of small business owners' view of economic conditions. The index of small business optimism published by the NFIB in December 2017 was 104.9, down slightly from 105.8 in December 2016. For 2017, the average index was 104.8, up significantly from the 96.3 average in 2016. At the same time, the net percent of small business owners expecting general business conditions to be better in 6 months declined to 37% in December 2017, as compared to 50% in December 2016. Although there continues to be some optimism from small business owners, including some belief that they will benefit from federal tax reform under the Tax Cuts and Jobs Act of 2017, we cannot predict whether sustainable positive trends will translate into economic growth. We also cannot predict whether economic trends will improve, stay the same or worsen in the near future.
Sales of business checks and forms have been declining, and we expect this trend to continue. In addition to the decrease in the use of checks due to the availability of alternative payment methods, continual technological improvements have provided small business customers with alternative means to execute and record business transactions. For example, because of the lower price and higher performance capabilities of personal computers, printers and mobile devices, small businesses now have alternate means to print many business forms. Additionally, electronic transaction systems, off-the-shelf business software applications, web-based solutions and mobile applications have been designed to replace pre-printed business forms. Greater acceptance of electronic signatures also contributes to the overall decline in printed products. It is difficult to predict the pace at which these alternative products and services will achieve widespread acceptance and replace standardized business forms.
Financial Institution Clients
Checks are most commonly ordered through financial institutions, including banks, credit unions and other financial services companies. As such, several developments related to financial institutions have affected the check printing portionspace, allowing us to manage our margins and to redirect cost savings into our payments and data businesses. Maximizing our
technology is also key to executing our strategy. We are responsibly expanding our technology investment in our growth businesses by creating a digital-first platform that is cloud-based, data driven and built with scalable components. This enables growth by allowing us to build and commercialize our products more rapidly. We are also replacing legacy systems and processes with digital solutions. This optimizes margins by reducing labor and system costs, while also improving employee and customer experiences. The mission of our operations is to focus on efficiency first, but always in service of our customers and business partners.
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ENVIRONMENTAL, SOCIAL AND GOVERNANCE PRACTICES |
We have implemented a stakeholder-focused environmental, social and governance ("ESG") program to meet the payments industry.needs and expectations of regulators, customers, shareholders and employees. We devote significant resources to addressing ESG throughout the company, including responsible process improvement efforts, enhancing our commitments to diversity, equity, inclusion and belonging (“DEIB”) through our DEIB Council and employee resource groups, promoting community awareness, giving back through our volunteer time off program, and continually improving our cybersecurity and privacy processes and controls to keep our data safe. We measure our ESG goals and impacts through yearly strategic assessments that keep us accountable and inform our annual and multi-year ESG strategies.
Financial institutions seekSustainability is also embedded into our operational model. We take sustainability seriously and focus on the following areas:
•Energy – We implemented several energy-saving measures during the construction of our hub facilities in Atlanta and Minneapolis, including installing LED lighting, utilizing daylight harvesting strategies and optimized HVAC systems, and selecting materials that reduce carbon input and increase recycled content.
•Waste– We are focused on understanding the waste stream in our facilities, with the goal of reducing the amount of waste we generate and recycling as much of our waste stream as is practical. For example, we have moved from volume inventories of custom inks to maintain the profits they have historically generatedutilizing onsite mixing systems, which has reduced waste stream processing, with an added benefit of better response times for customers.
•Materials – Over 90% of our check and forms paper is purchased from their check programs, despite the decline in check usage. This continues to put significant pricing pressure on check printers.Forest Stewardship Council-certified supplier mills. In addition, the numberour vinyl checkbook covers are produced using a minimum of potential financial institution clients45% post-industrial recycled material. We also employ recycling efforts that allow us to divert more of our waste out of landfills by being diligent in the United States is declining. According to statistics currently available online fromsegregation of our waste streams.
•Carbon – We continually review our business operations, including the Federal Deposit Insurance Corporationmaterials we use, how we manage our facilities and the Credit Union National Association,role we play in communities, to ensure our growth includes sustainable practices.
Protecting the number of financial institutions has been declining for many years. When financial institutions consolidate through mergers and acquisitions, often the newly combined entity seeks to reduce costs by leveraging economies of scale in purchasing, including its check supply contracts. This results in check 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 financial institution in the merger/acquisition. Financial institution mergers and acquisitions can also impact the duration of our contracts. Normally, the length of our supply contracts with financial institutions ranges from 3 to 6 years. However, contracts may be renegotiated or bought out mid-term due to a consolidation of financial institutions. Banks, especially larger ones, may request prepaid product discounts in the form of cash incentives payable at the beginning of a contract. These contract acquisition payments negatively impact check producers' cash flows at the beginning of these contracts. To the extent financial institution failures and consolidations impact large portions of our customer base, this could have a significant impact on our financial institution check programs.
Direct Mail Response Rates
Direct Checks and portions of Small Business Services have, at times, experienced declines in response rates related to direct mail promotional materials. While we believe that media response rates have declined across a wide variety of products and services, we believe that the declines we have experienced are also attributable to the decline in check usage, the gradual obsolescence of standardized forms and the increasing use of e-commerce by both consumers and small businesses. We continually evaluate and redirect our marketing techniques in order to utilize the most effective and affordable advertising media.
Competition
Suppliers of small business services and supplies are highly fragmented and geographically dispersed, with many small local suppliers, large national retailers and internet-based providers. In these markets, the competitive factors influencing a customer's purchase decision are breadth and quality of product and service offerings, ease of use of web and other services, price, speed of delivery, convenience, the responsiveness and quality of customer support, and past experience with the supplier. Our primary competitors include traditional storefront printing companies; office superstores; companies offering website design and hosting and domain name registration; wholesale printers; online printing companies; email and social media marketing services companies; small business products and services resellers; media directory providers; and online and off-line suppliers of custom apparel, promotional products and customized gifts. Additionally, the competitive landscape for online small business suppliers continues to be challenging as new internet businesses are introduced and traditional businesses establish an online presence. We believe we are well-positioned in this competitive landscape through our broad customer base, including limited international expansion in web services, the breadth of our small business product and service offerings, multiple distribution channels, established relationships with our financial institution and telecommunications clients and other partners, competitive pricing tiers, ease of use of our web and other services, high quality and dependable service.
In the check printing portion of the payments industry, we face considerable competition 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 some retailers. We expect competition to remain intense as check usage continues to decline. Moreover, the check product must compete with alternative payment methods, including credit cards, debit cards, direct deposit, wire transfers, internet-based bill paying services and digital wallet applications, as well as automated teller machines. The principal factors on which we compete are product and service breadth, price, quality and check merchandising program management. We believe the key items which differentiate us from our competition include our fully automated flat check delivery package, our online performance dashboard and portal analytics tools for financial institution branches, our personalized customer call center experience,environment and our Deluxe Business Advantage program, which provides a fastshared future is key to our business and simple way for financial institutions to offer expanded personalized service to small businesses. In addition, to providedelivering the products our small business customers with an online payment solution, our Small Business Services segment offers eChecks.need.
At times, check suppliers have reduced the prices of their products during the supplier selection process in an attempt to gain greater volume. The corresponding pricing pressure has negatively impacted our profit margins. Pricing pressure will continue to impact our results of operations through lower pricing levels or client losses. Additionally, product discounts in the form of cash incentives payable to financial institutions upon contract execution are a common practice within the industry. Both the number of financial institutions requesting these payments and the size of the payments has fluctuated in recent years. These up-front payments negatively impact check printers' cash flows at the beginning of the contracts, so we attempt to minimize them by structuring new contracts with alternative incentives throughout the duration of the contract. | | |
OUR MATERIALS, SUPPLIES AND SERVICE PROVIDERS |
Our Financial Services MOS offerings also face intense competition, including competition from financial institution core banking software providers, advertising agencies, providers of data and analytics marketing solutions, and numerous financial technology services providers offering services such as customer and account acquisition, fraud and security risk management, receivables management and treasury support services, and rewards and loyalty solutions. We expect the intensity of competition to increase from established and emerging financial technology companies. The competitive factors affecting Financial Services MOS offerings include breadth and quality of services, ease of use, price, solution completeness, responsiveness and quality of customer support, as well as the ability to manage end-to-end financial institution processes.
Seasonality
We experience seasonal trends in sales of some of our products. For example, holiday card and retail packaging sales and revenues from rewards and loyalty solutions, as well as search and email marketing, are typically stronger in the fourth quarter of the year due to the holiday season. Sales of tax forms are stronger in the first and fourth quarters of the year, and check sales for our Direct Checks segment have historically been stronger in the first quarter of the year. In addition, we may experience some fluctuations in revenue driven by our customers' marketing campaign cycles.
Materials, Supplies and Service Providers
The principal materials used in producing our main products are paper, plastics, ink, cartonscorrugated packaging and printing plate material, which we purchase from various sources. We also purchase stock business forms and promotional apparel produced by third parties. We believe thatIn addition, we will be able to obtain an adequate supply of materials from current or alternative suppliers.
We have entered into agreements with third-party providers for delivery services and information technology services, including telecommunications, and network server and transaction processing services, as well as various other services. We also rely uponon 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.
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, we have taken steps to secure multiple sources of supply for certain of the materials and services we utilize, including those related to certain printed products in our Promotional Solutions segment. We can provide no assurance that we would be able to obtain an alternative source of supply, ifor that such supply could be obtained at current prices, in the event one or more of our service providers failedvendors fails to perform.
Governmental RegulationOur most valuable asset is our employee-owners. As of December 31, 2023, we had 5,170 employees, with 4,870 employees in the United States and 300 employees in Canada. 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 modern payments and data 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 employees, also known as Deluxers, feel respected and valued, and where they can contribute to their full potential. To this end, a key component of our strategy is that all of our employees are granted restricted stock unit awards, making them employee-owners. Our heritage 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
To continue improving our culture and engagement, we provide employee learning and development at all levels of the organization on a variety of topics, including, leadership development, mentoring, and DEIB initiatives. We continue our focus on training and development programs and transparent communication channels through change pulse checks, employee surveys, senior leadership forums and employee resource groups.
Diversity, Equity, Inclusion and Belonging
We embrace DEIB in our workforce, customers and partners, valuing everyone's unique background, 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 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 DEIB program and our activities supporting the communities we serve. In addition, we are focused on furthering our DEIB initiatives throughout our business and have, among other things, created a DEIB council that is sponsored by our Chief Human Resources Officer. This council is comprised of employees from multiple functions and business segments. Its top priorities include managing a comprehensive DEIB learning and development plan to build awareness and drive inclusive behaviors, and further developing our diversity pipeline through hiring, mentoring and coaching.
As of December 31, 2023, our total workforce was approximately 57% female and 43% male. Our team members located in the United States were comprised of approximately 50% white, 18% Black or African American, 12% Hispanic or Latino, 11% Asian American and 9% other. We continue to focus our development and DEIB programs on growing the number of female and minorities represented in leadership roles.
Under the board’s oversight and guidance, we have taken significant actions to enhance our diverse and inclusive culture, protect and train our employees, and maintain our reputation as a great place to work. We continually strive to improve the attraction, retention, and advancement of diverse employees to grow and retain talent that represents the communities in which we operate. Below are recent examples of our commitment to DEIB:
•33% of our directors identify as from diverse backgrounds, including the independent chair of our board of directors, who is a woman of color.
•We offer 10 employee resource groups ("ERGs"), including African American, Pacific Islander Middle Eastern Asian, disabled, Hispanic and Latino, veteran, LGBTQ+, parent and women.
•In both 2022 and 2023, The Human Rights Campaign Foundation’s Corporate Equality Index recognized us as a Best Place to Work for LGBTQ+ Equality.
•In 2023, for the 15th consecutive year, we were included on the honor roll for Gender Diversity in Executive Roles and Board of Directors published by Twin Cities Business.
•In 2023, we were named a VETS Indexes 3 Star Employer for our commitment to recruiting, hiring and developing our veterans and military connected community.
Health, Wellness and Safety
Creating a culture where all employees feel supported and valued is paramount to our strategy, 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. Well-being in our organization is enabled by our commitment to provide resources and
support for our employees, allowing them to deliver for customers and shareholders. We offer several programs to benefit our employees and support work environments that encourage growth, innovation and productivity. 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 paid parental leave and infertility, adoption and surrogacy assistance. We partner with Care.com® to offer services for employees to find tutors, nannies, children’s daycare and eldercare, and we offer an employee assistance program that provides employees with confidential counseling. We also offer employees tuition and travel assistance, and qualified long-term employees have the opportunity to take a sabbatical. Beginning in 2023, we began offering unlimited flexible time off to our salaried employees. By enabling our employees to thrive in their personal lives, we provide tools for our employees to best deliver for customers and shareholders while at work.
Community Engagement
Our employees believe in the power of connection, of activity and of giving back to the communities we serve. Our partnerships and charitable work in the communities we serve are an integral part of our core values. This spirit of community is felt throughout our organization and is fostered by our paid volunteer time off ("VTO") program for employees, which provides 3 paid VTO days per year. It is also reflected in our partnership with the Deluxe Foundation, which enables employees to donate to not-for-profit organizations of their choosing and receive a matching donation, dollar for dollar, up to $2,000 per year. Our commitment goes beyond monetary donations. Several of our top executives serve on boards for major not-for-profit organizations and other community organizations that align with our company values of diversity, rebuilding communities and education.
We continue our commitment to enriching our communities in the following ways:
•Since 1992, we have partnered with Junior Achievement USA® chapters in our local communities to inspire and prepare young people to succeed. We support Junior Achievement’s mission through foundation grants, awareness and employee volunteers.
•We have partnered with the American Red Cross® for decades, organizing blood drives at our locations and hosting fundraisers and bake sales to help fund the American Red Cross mission of preventing and alleviating human suffering in the face of emergencies.
•In 2023, 580 Deluxe volunteers from Minneapolis, Atlanta, Kansas City and Fort Worth packed 120,000 meals that were donated to local food shelves.
•Our employees donated $221,000 to nonprofit organizations in 2023.
•In 2023, our employees contributed approximately 22,000 hours to our local communities through our VTO program.
Historically, we have experienced seasonal trends with certain of our products and services. For example, Promotional Solutions holiday card revenue is 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. Within our Data Solutions segment, our customers' marketing campaign cycles result in revenue fluctuations throughout the year, typically with less revenue in the fourth quarter of the year.
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. The costcomplexity of complying with theseexisting 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 our business is operated in substantial compliance with all applicable laws and regulations. Further information regarding the impact of specific laws and regulations can be found in Item 1A of this report. At this time, we are not aware of any changes in laws or regulations that will have a significant impact on our business during 2018,capital expenditures and earnings of complying with the exception of the Tax Cuts and Jobs Act that was enacted in December 2017 (the 2017 Act). We expect that our annual effective income tax rate for 2018government regulations will not be approximately 25% and we expect that our total tax payments in 2018 will be approximately $25.0 million less than in 2017, driven primarily by the 2017 Act.
Intellectual Property
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, either of which may adversely impact our results of operations. In addition, we may be the target of aggressive and opportunistic enforcement of patents by third parties, including non-practicing entities.
EMPLOYEES
As of December 31, 2017, we employed 5,119 employeesmaterially different in the United States, 657 employeesupcoming year than it was in Canada and 110 employees in Australia and Europe. None of our employees are represented by labor unions, and we consider our employee relations to be good.2023.
AVAILABILITY OF COMMISSION FILINGS
We make available, without charge, through our investor relations website, Deluxe.com/investor,www.investors.deluxe.com, 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, sec.gov, or via the SEC's Public Reference Room located at 100 F Street N.E., Washington, D.C. 20549. Information concerning the operation of the SEC's Public Reference Room can be obtained by calling 1-800-SEC-0330.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 64235, St. Paul, Minnesota 55164-0235,818095, Cleveland, Ohio 44181, or by sending an email request to investorrelations@deluxe.com.investor.relations@deluxe.com.
Further information about Deluxe Corporation is also available at Deluxe.com, facebook.com/www.deluxe.com, www.facebook.com/deluxecorp, www.linkedin.com/company/deluxe and twitter.com/deluxecorp.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 SEC.
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OUR CODE OF ETHICS AND CORPORATE GOVERNANCE GUIDELINES |
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, Deluxe.com/investor,www.investors.deluxe.com, and also can be obtained free of charge upon written request to the attention of Investor Relations, Deluxe Corporation, P.O. Box 64235, St. Paul, Minnesota 55164-0235.818095, Cleveland, Ohio 44181. 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 and Finance, Compensation and Talent, and Corporate Governance and Finance Committees of our board of directors are available on our website, www.investors.deluxe.com, or upon written request.
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INFORMATION ABOUT OUR EXECUTIVE OFFICERS |
EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers are electedappointed by the board of directors each year. The following summarizes our executive officers and their positions.
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Name | Age | Present Position | Executive Officer Since |
Barry McCarthy | 60 | President and Chief Executive Officer | 2018 |
William "Chip" Zint | 39 | Senior Vice President, Chief Financial Officer | 2022 |
Debra Bradford | 65 | Senior Vice President, Division President, Merchant Services | 2023 |
Garry Capers, Jr. | 47 | Senior Vice President, Chief Operations Officer | 2019 |
Jeffrey Cotter | 56 | Senior Vice President, Chief Administrative Officer and General Counsel | 2018 |
Tracey Engelhardt | 59 | Senior Vice President, Division President, Print | 2012 |
Jean Herrick | 55 | Senior Vice President, Chief Human Resources Officer | 2022 |
Yogaraj "Yogs" Jayaprakasam | 46 | Senior Vice President, Chief Technology and Digital Officer | 2022 |
Barry McCarthy joined us in November 2018 as President and Chief Executive Officer.
Chip Zintjoined us in August 2020 as Vice President of Corporate Finance and was named Senior Vice President, Chief Financial Officer in October 2022. Prior to joining us, Mr. Zint held several positions with NCR Corporation, an enterprise technology provider, most recently as Vice President of Finance and Chief Financial Officer of Hardware from January 2019 to July 2020 and Vice President, Corporate Financial Planning and Analysis from May 2017 to January 2019.
Debra Bradford joined us in June 2021 as President and Chief Financial Officer of First American Payment Systems, L.P., a position she held since March 2008. Ms. Bradford was named President, Merchant Services in July 2023.
Garry Capers, Jr. was named Chief Operations Officer in July 2023. Mr. Capers joined us in September 2019 as President, Data Solutions, and in November 2021, added the Promotional Solutions segment to his responsibilities. Prior to joining us, Mr. Capers was employed 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.
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Name | Age | Present Position | Executive Officer Since |
Lee Schram | 56 | Chief Executive Officer | 2006 |
Pete Godich | 53 | Senior Vice President, Fulfillment | 2008 |
Julie Loosbrock | 58 | Senior Vice President, Human Resources | 2008 |
Malcolm McRoberts | 53 | Senior Vice President, Small Business Services | 2008 |
John Filby | 55 | Senior Vice President, Financial Services | 2012 |
Tracey Engelhardt | 53 | Senior Vice President, Direct-to-Consumer | 2012 |
Michael Mathews | 45 | Senior Vice President, Chief Information Officer | 2013 |
Amanda Brinkman | 38 | Vice President, Chief Brand and Communications Officer | 2014 |
Keith Bush | 47 | Senior Vice President, Chief Financial Officer | 2017 |
Jeffrey Cotter was named Chief Administrative Officer in January 2019. Mr. Cotter joined us in June 2018 as Senior Vice President, General Counsel.
Lee Schram
Tracey Engelhardt haswas named President, Print in July 2023. Ms. Engelhardt was named Senior Vice President, Checks in October 2019 and in May 2022, she added Chief of Operations to her responsibilities. From March 2017 to October 2019, Ms. Engelhardt served as Chief Executive Officer since joining us in May 2006.Senior Vice President, Direct-to-Consumer.
Pete GodichJean Herrick was named Senior Vice President, FulfillmentChief Human Resources Officer in March 2011.
Julie Loosbrock was named SeniorJune 2022. From January 2016 to June 2022, Ms. Herrick served as Vice President, Human ResourcesResources.
Yogs Jayaprakasam joined us in September 2008.
Malcolm McRoberts was named Senior Vice President, Small Business Services in February 2011.
John Filby was named Senior Vice President, Financial Services in April 2012.
Tracey Engelhardt was named Senior Vice President, Direct-to-Consumer in March 2017. From July 2012 to March 2017, Ms. Engelhardt servedMay 2022 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 InformationTechnology and Digital Officer. Prior to joining us, Mr. Mathews servedJayaprakasam held several positions with American Express Company, most recently as Senior Vice President, StrategyUnit Chief Information Officer for the Global and Enterprise ProgramsLarge Client Group and head of engineering for UnitedHealth GroupB2B Digital Payments from July 2009June 2021 to May 2013. UnitedHealth Group is a publicly traded diversified health and well-being company that provides health care coverage and benefits services and information and technology-enabled health services.
Amanda Brinkman joined us in January 20142022. Mr. Jayaprakasam also served American Express Company as Vice President, Chief BrandEnterprise Platforms for Sales, Marketing and Communications Officer. PriorData Platforms from May 2020 to joining us, Ms. Brinkman was self-employed, operating her own brand agency from January 2013 to December 2013.
Keith Bush joined us in March 2017June 2021, and as Senior Vice President, Chief Financial Officer. PriorEnterprise Platforms for Sales and Marketing from November 2017 to joining us, Mr. Bush was self-employed as a consultantMay 2020.
We routinely encounter and address risks, many of which could cause our future results to the airline industry from July 2016 to March 2017. From June 2009 through July 2016, Mr. Bush served as Senior Vice President, Finance for American Airlines.
Item 1A. Risk Factors.
Our business, prospects, results of operations, financial condition and cash flows could be adversely affected by various risks and uncertainties.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 have disclosed all known material risks.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 or other securities.stock.
The following important factors could cause
If our actual results to differ materially from the statements we make from time to time regarding our expected future results, including, butlong-term growth strategy is not limited to, forecasts regarding revenue, earnings per share, cash provided by operating activities and expected cost savings. Any forecast reflects various assumptions that are subject to significant uncertainties and, as a matter of course, may prove to be incorrect. Further, the achievement of any forecast depends on numerous factors that are beyond our control. Consequently, we caution investors that forward-looking statements are predictions based on our current expectations about future events and are not guarantees of future performance. The variation of actual results or events from such statements may be material and adverse. You are cautioned not to base your entire analysis ofsuccessful, our business and prospects upon isolated statements,financial results would be adversely impacted.
Our strategy is to utilize the cash flows, customer relationships and are encouragedbrand equity from our print businesses to usedrive profitable organic growth in our payments and data businesses. Further information about our strategy can be found under the entire mixcaption "Our Strategy" appearing in Part I, Item 1 of historical and forward-looking information made available by us, and other information affecting us and our products and services, including the following factors.
this report. We may not be successful at implementing our growth strategies.
We continue to execute strategies intended to drive sustained revenue and earnings growth with a focus on increasing marketing solutions and other services revenue, particularly treasury management, data-driven marketing solutions and web services. We believe these revenue streams represent our most significant growth opportunity. We have invested and plan to continue investing in several key enablers to achieve our strategies, including strengtheninglong-term objectives, and investments in our portfolio of products and services, particularly technology-based solutions; investing in acquisitions; attracting and retaining customers; scalingbusiness may fail to impact our service offerings; enhancing brand awareness and positioning; growing our major accounts and dealer networks; and improving the customer experience.financial results as anticipated. Our business strategiesstrategic plan could fall short of our expectations for many reasons, including, among others:
•our failure to generate profitable revenue growth;
•our failureinability to acquire new customers, retain our current customers and sell more products and services to current and new customers;
our inability to identify suitable acquisition candidates or to complete acquisitions on acceptable terms;
our failure to effectively operate, integrate or leverage the businesses we acquire;
the failure of our digital services and products to achieve widespread customer acceptance;
our inability to promote, strengthen and protect our brand;
•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 unexpected 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.
In addition, we are focused on targeting our financial technology ("FinTech") solutions to larger financial institutions. These FinTech offerings include data-driven marketing solutions, including outsourced marketing campaign targeting and execution; treasury management solutions; and digital engagement solutions, including loyalty and rewards programs. If we are able to increase sales of these services to larger financial institutions, we may experience fluctuations in revenue driven by our clients' marketing campaign cycles. This may adversely affect our ability to accurately predict the timing of revenues and to meet short-term expectations of operating results. The resulting customer concentration could also increase our sensitivity to any material, adverse developments affecting our significant customers, and our top customers’ purchasing power could, in some cases, give them the ability to make greater demands with regard to pricing and contractual terms in general.
We can provide no assurance that our growth strategiesstrategy will be successful, either in the short-termshort term or in the long-term,long term, that theyit will generate a positive return on our investment or that theyit will not materially reduce our operatingadjusted earnings before interest, taxes, depreciation and amortization ("adjusted EBITDA") margins. Additionally, ifIf our strategies arestrategy is not successful, or if there is market perception that our strategies arestrategy is not successful, our reputation and brand may be damaged and our stock price may decline.fall.
If we are unable to attract and retain customers in a cost-effective manner or effectively develop and 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 mail advertising,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. The profitabilityCertain of our Direct Checks segment depends in large part on our ability to secure adequate advertising media placements at acceptable rates. We can provide no assurance regarding the future cost, effectiveness and/these methods may become less effective or availability of suitable advertising media. Additionally, our Direct Checks segment and portions of our Small Business Services segment have, at times, experienced declines inmore expensive. For example, response rates related tofor direct mail promotional materials. Whileadvertising 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 believe that media response rates have declined acrossoffer a wide varietydiverse portfolio of products and services, we believe that the declines we have experienced aremay also attributableface challenges in increasing customer awareness of all of our offerings. Efforts to the decline in check usage, the gradual obsolescenceexpand customer awareness of standardized formsour diverse range of products and the increasing use of e-commerce by both consumersservices may result in increased marketing expense and small businesses. In an attemptmay fail to offset these impacts, wegenerate additional revenue.
We continually evaluate and modify our marketing and sales efforts and continue to shift a greater portionachieve the most effective mix of our advertising investment to the internet.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. We can provide no assurance that we will be ableEither of these occurrences would have an adverse impact on our ability to offset a decline in response rates, even with additional marketingcompete and sales efforts.
In addition to print and email advertising, many customers come to our websites through internet search engines. If the search engines on which we rely modify their algorithms or terminate their relationship with us, fewer customers may be directed to our websites. As we analyze our overall advertising strategy, we may be forced to resort to more costly resources to replace lost internet traffic, which would adversely affect our results of operations.operations would be adversely affected. In addition, when our check supply contracts expire, customers have the cost of purchased search engine listings will likely increase as demand for them continuesability to grow, and further cost increases could negatively affect our profitability.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.
WeAdditionally, we believe we must maintain a relevant, multichannel experience for ourin order to attract and retain customers. Customers expect to be ablehave the ability to order products and services from us however they please,choose their method of ordering, whether that is via the mail, land-linecomputer, phone computer, tablet or
mobile phone. In particular, smart phones and tablet computing devices are increasingly being used as the primary means for accessing the internet and conducting e-commerce. Designing and purchasing custom products on mobile devices is more difficult than doing so with a traditional computer due to limited screen sizes, bandwidth and other variables. Beyond these difficulties, the development of mobile-oriented user interfaces and other technologies is complex and expensive. We are also dependent on the functionality of our systems with web browsers, mobile devices and operating systems that are controlled by third parties. These parties frequently introduce new devices, and from time to time they may introduce new operating systems or modify existing ones. Network carriers may also impact the ability to access specified content on mobile devices, and with the repeal of net neutrality rules in December 2017, network carriers could, at their discretion, negatively impact the speeds of our websites. In this situation, it may be necessary to pay additional fees for higher internet speeds, which could negatively affect our profitability.
device. Although we are constantly making investments to updateinvesting in our technology,user experience, 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 repeatreturning visitors, to our websites and convert these visitors to customers, which would result in decreased revenue.
TheWe face intense competition from other businesses, 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 remaining 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 and related products portion of the payments industry is mature,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 Data Solutions segment, our data-driven marketing services face competition from 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 declining.a key challenge in this business, along with hiring and retaining the right people.
CheckWithin 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 businesses enter the space.
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.
If we do not adapt to changes in technology in a timely and cost-effective manner, we could lose clients or have trouble attracting new clients, and our ability to grow may be limited.
Rapid, significant, and disruptive technological changes impact the markets for our products and services, 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. Our ability to enhance our current products and services and to develop and introduce innovative products and services will significantly affect our future success. The impact is 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, results of operations and growth prospects.
The use of checks and business 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. Revenue generated by the sale of checks was 43%business, accounting for 32.9% of our consolidated revenue in 2017.2023, and providing a significant amount of the cash flows we invest in our growth businesses. We sell checks for personal and small business use and believe that there will continue to be a substantial demand for thesepersonal and business checks for the foreseeable future, although the total number of checks written in the United StatesU.S. has been in decline since the mid-1990's. According to the most recent Federal Reserve study released in December 2016, the total number of checks written declined 4.8% each year between 2012 and 2015.1990s. We believeexpect that the number of checks written will continue to decline due to the increasing usedigitization of alternative payment methods,payments, including creditdebit cards, debitcredit cards, direct deposit, wire and ACH transfers, and internet-based bill paying services,other payment solutions, such as PayPal®, Apple Pay®, Square®, Zelle®,and Venmo®, as well as automated teller machines.
cryptocurrencies. In addition, steps have been taken in the development of a real-time payments RTP® system in the United States. The Federal Reserve established the Faster Payments Task Force with the objective of identifying and evaluating approaches for implementing a faster payments system. In late 2017,run by The Clearing House Payments Company, LLC (TCH) implementedis a clearingreal-time payments system that currently reaches approximately 65% of U.S. bank accounts, and settlementthe U.S. Federal Reserve's real-time payments system, allowing consumers and businesses to send and receive payments in real-time directly from their accounts at financial institutions. The National Automated Clearing House Association (NACHA) adopted Same-Day ACH rules to speed up the processing of ACH payments and systems such as ZelleFedNow®, Venmo®, Apple Pay® and various other mobile applications allow individuals to transfer funds to other users. In addition, cryptocurrencies have been gaining acceptancewent live in the marketplace.July 2023.
The rate and the extent to which alternative payment methodsdigital payments will achieve acceptance and replace checks, whether as a result of legislative developments, changing payment systems, personal preference or otherwise, cannot be predicted with certainty. A surge in the popularityIncreased use of any of these alternative payment methods, or our inability to successfully offset the secular decline in checks with new check usage withsupply clients or other sources of revenue, would have an adverse effect on our business, cash flows and results of operations.
Small Business Services' standardized business forms and related products face technological obsolescence and changing customer preferences.
Revenue generated by the saleThe use of business forms was 11% of our consolidated revenue in 2017.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. For example, because of the lower price and higher performance capabilities of personal computers, printers and mobile devices, small businesses now have alternate means to print many business forms. Additionally, electronic transaction systems, off-the-shelf business software applications, web-based solutions and mobile applications have been designed to replace pre-printedpreprinted business forms. Greater acceptance of electronic signatures also contributeshas contributed to the overall secular decline in printed products. It is difficult to predict the pace at which these alternative products and services will achieve widespread acceptance and 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 face intensehave 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, expanding our base of customers, and attracting and retaining top talent. 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, our ability to continue to provide useful, reliable, secure and innovative products and services, and 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 all areasthis 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, 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 the 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 we expect thatresults of operations.
Our cost reduction initiatives may not be successful.
Intense competition and secular declines in the use of checks and business forms compels us to continually improve our operating efficiency in order to maintain or improve profitability. Cost reduction initiatives have required, and will continue to increase.
Although we are one of the leading check printers in the United States, we face considerable competition. In additionrequire, up-front expenditures related to competition from alternative payment methods, we also face intense competition 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 some retailers. In addition, the suppliers of small business and financial services products and services are intensely competitive, highly fragmented and geographically dispersed. Current and potential competitors for our Small Business Services segment include traditional storefront printing companies; office superstores; companies offering website design and hosting and domain name registration; wholesale printers; online printing companies; email and social media marketing services companies; small business products and services resellers; media directory providers; and offline and online suppliers of custom apparel, promotional products and customized gifts. Additionally, the
competitive landscape for online small business suppliers continues to be challenging as new internet businesses are introduced and traditional businesses establish an online presence. Current and potential competitors for Financial Services service offerings include financial institution core banking software providers, advertising agencies, providers of data and analytics marketing solutions, and numerous FinTech service providers offering servicesvarious actions, such as customerredesigning and account acquisition, fraudstreamlining processes, standardizing technology applications, further enhancing our strategic supplier sourcing arrangements, improving real estate utilization and security risk management, receivables management and treasury support services, and rewards and loyalty solutions. In addition, many of our potential financial institution clients have historically developed their key applications in-house and thus, we must compete with their in-house capacities. For financial institutions, switching from one vendor to another can be a significant undertaking, with some potential clients perceiving disadvantages such as loss of accustomed functionality, conversion costs and business disruption. Through our ongoing efforts to expand well beyond our legacy check-related products, we strive to overcome this resistance to changing vendors. We offer several solutions designed to help financial institutions operate more effectively and better address the needs of their customers throughout the customer life cycle, building on our reputation as a longstanding and trusted partner of financial institutions. However, our clients may continue to be reluctant to change suppliers and they may be hesitant to rely on outsourced solutions.
funding employee severance benefits. We can provide no assurance that we will be able to compete effectively against current andachieve future competitors. In recent years, our revenue has benefited from price increases in all 3 of our business segments. Pricing is becoming more competitive for product and service providers, as the internet allows customers to easily compare prices. Pricing also 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 can provide no assurancecost 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.
We may be ableunable to increase pricessuccessfully identify future acquisitions, integrate past and future acquisitions or realize the anticipated benefits of the transactions.
We have completed many acquisitions, including the acquisition of First American Payment Systems, L.P. in June 2021, which was the largest acquisition in our history. In addition, we have, at times, purchased the operations of small business distributors with the intention of growing revenue in our dealer channels. We have devoted significant management attention and resources to integrating the business practices and operations of our 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, which would result in the future while remaining competitive. Continued competitionanticipated 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 may 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 such financing may not be available on terms that are favorable to us. Additionally, acquisitions may result in price reductions, reduced profit margins, lossadditional 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 customersoperations and an increase in up-front cash paymentsfinancial condition.
Our inability to financial institutions upon contract executioncomplete certain divestitures or renewal, allthe effects of which woulddivesting a business could have ana material adverse effect on our business and financial results.
From time to time, we may divest businesses that do not meet our strategic objectives. For instance, we recently completed the exit from our web hosting business, and we are in the process of exiting our payroll and human resources services business. We may not be able to complete desired divestitures on favorable terms. Losses on the sales of, or lost earnings from, those businesses could negatively affect our profitability and margins. Additionally, we may incur asset impairment charges related to potential divestitures that reduce our profitability.
Our divestiture activities may also present operational risks, including the diversion of management's attention from our other businesses, difficulties separating personnel and systems, the need to provide transition services to buyers, adverse effects on existing business relationships with suppliers and customers, and indemnities and potential disputes with the buyers. Any of these factors could adversely affect our business, results of operations and cash flows.financial condition.
Security breaches, computer malware or other cyber attackscyberattacks 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 reputationbusiness and business.results of operations.
Information security risks have increased in recent years, in part because of the proliferation of new technologies and increased use of the internet,an increase in remote work arrangements, as well as the increased sophistication and activities of hackers, terrorists and activists, some of which may be linked to hostile nation-state actors.activists. We use internet-based channels that collect customers’ financial account and credit cardpayment information, as well as other sensitive information, including proprietary business information and personally identifiable information of our customers, employees, contractors, suppliers and business partners. WeEach year, we process hundreds of millions of records containing data related to individuals and small businesses. We also provide services that are instrumental in supporting our customers and their businesses, such as merchant services 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 processing and maintenance of thissensitive information that resides on our systems, is critical to our business operations and strategy. We rely on varioushave a risk-based information/cybersecurity program dedicated to protecting our data and solutions. We employ a defense-in-depth strategy, utilizing the concept of security procedures and systems to ensure the secure storage and transmission of information, including encryption and authentication technology licensed from third parties. Computer networkslayers and the internetCIA (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.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. 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.
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. We have established a vendor security program that assesses the risk of these partners, and certain of our third-party relationships are subject to security requirements as specified in written contracts. However, we cannot control the actions of our third-party providers, and any cyberattacks or security breaches they experience could adversely affect our ability to service our customers or otherwise conduct our business.
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 distributed denial of service attacks by hackers 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 partiesthreat actors using social engineering techniques to obtain confidential information or using fraudulent "phishing" emails to misappropriate personal information or to introduce viruses or other malware through "trojan horse" programs to our users' computers.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 of a similar result in the future.that future incidents will not be material.
Although we invest in a system of information securityDespite our significant cybersecurity systems and controls,processes, a party that is able to circumventcircumvents our security measures could misappropriate our own, our customers' or our customers'partners' personal andor 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 could impact large segments of mobile, computer or server architecture. Any of these events would adversely affect our business, financial condition and financial results. results of operations.
In addition, if we were to experience ana 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 effecteffects 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 lawsuitclaim 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 which would have an adverse effect on our financial results.a business partner.
There are international, federal and state laws and international lawsregulations requiring companies to notify individuals of information security breaches involving their personal data, the cost of which couldwould 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 the failure to maintain our information technology platform,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: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. Furthermore, asIn addition, certain of the services we focusdeliver to the payments technology market are designed to process complex transactions and deliver reports and other information on those transactions, all at very high volumes and processing speeds. Any failure to deliver an effective and secure product or any performance issue that arises with a new product or service could result in significant processing or reporting errors or other losses.
We have invested, and will continue to invest, significant resources onto build out, maintain and improve our growth strategies, we have reduced our investmenttechnology platforms. Any disruptions, delays or deficiencies in the developmentdesign, implementation or operation of our legacy systems, particularly any disruptions, delays or deficiencies that supportimpact our checksoperations, could adversely affect our ability to effectively run and forms businesses, with a focus on sustainingmanage our business. Frequent or persistent interruptions in our operations could cause customers to believe that our products and maintaining such systems. These legacy systems operate with minimalservices are unreliable, leading them to switch to our competitors or no vendor support, contain hardwareto avoid our products and software that we are not able to update and are difficult to maintain, yet any interruption caused by a failure or breach of these systems could create disruption in the core businesses that generate a declining portion of our revenue. In addition, our technology, infrastructure and processes may contain undetected errors or design faults that may cause our websites or operating systems to fail. Over the past two years, we shifted aservices.
A substantial portion of our applications toreside in a private cloud-based environment. While we maintain redundant systems and backup databases and applications software designed to ensureprovide 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, allclaims.
If any of which would adversely affect our reputation and operating results.
In addition, our continued development and implementation of new generation software solutions andsignificant information technology infrastructure may take longer than originally expectedsystems suffer severe damage, disruption or shutdown, and requireour disaster recovery and business continuity plans do not effectively resolve the acquisition of additional personnel and other resources, which may adversely affectissue in a timely manner, our business, results of operations would be adversely affected, and financial condition. Any inability to deploy new generation information technology throughout our organization would result in our operating multiple platforms, which would increase costs.
We face uncertainty regarding the success of recent and future acquisitions, which could have an adverse impact on our operating results.
We have acquired over 25 companies in the last 3 years, the details of which appear under the caption “Note 5: Acquisitions” of the Notes to Consolidated Financial Statements appearing in Item 8 of this report. We have invested in acquisitions that offer marketing solutions and other services and that extend the range of products and services we offer to financial institutions and small businesses, including treasury management and data-driven marketing solutions. In addition, over the past several years, we have purchased the operations of many small business distributors with the intention of growing revenue in our major accounts and dealer channels. The integration of any acquisition involves numerous risks, including, among others:
difficulties and/or delays in assimilating operations, products and services, including effectively scaling revenue and ensuring a strong system of information security and controls is in place;
failure to realize expected synergies and savings or to achieve projected profitability levels on a sustained basis;
diversion of management's attention from other business concerns and risks of managing an increasingly diverse set of products and services across expanded and new industries;
unanticipated integration costs;
difficulty in maintaining controls, procedures and policies, especially when the acquired business was a non-public company andinterruption insurance coverage may not have employedbe adequate to compensate us fully for any losses we may incur. Moreover, to the same rigorextent that any system failure or similar event results in these areas as required for a publicly traded company;
decisions bydamages to our customers or thecontractual counterparties, those customers of the acquired businessand 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 temporarily or permanently seek alternate suppliers;address.
difficulty in assimilating the acquired business into our corporate culture;
failure to address legacy distributor account protection rights;
unidentified issues not discovered during our due diligence process, including product or service quality issues, intellectual property issues and tax or legal contingencies; 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 negatively affect our results of operations.
We expect to continue to invest in acquisitions. 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 acquiredrely 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 financing for larger acquisitions, which would increase our debt obligations and may not be available on terms that are favorable to us. Additionally, significant acquisitions typically result in additional contingent liabilities and/or additional amortization expense related to acquired intangible assets, and thus, could adversely affect our business, results of operations and financial condition.
We may not succeed in promoting and strengthening our brand, which could prevent us from acquiring customers and increasing revenue.
The success of our businesses depends, in part, on our ability to attract new and repeat customers. For this reason, a component of our business strategy is the promotion and strengthening of the Deluxe brand. We believe that the importance of brand recognition is essential for the success of our 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, will depend largely on the success of our marketing efforts and our ability to provide a consistent, high quality customer experience. To promote our brand, we have incurred, and will continue to incur, expense related to advertising and other marketing efforts. We can provide no assurance that these efforts will be successful or that our revenue will increase at a level commensurate with our marketing expenditures. There is also the risk that negative information about Deluxe, even if based on rumor or misunderstanding, could adversely affect our business. In early 2018, we entered into a partnership with television personality Ty Pennington, who will appear in our online series, Small Business Revolution – Main Street. Previously, we had a partnership with Robert Herjavec of the television show Shark Tank, and his episodes of the Small Business Revolution series remain available online. If our business partners are the subject of adverse news reports or negative publicity, such events could reduce the effectiveness of our partnerships, which in turn, could adversely affect our business and results of operations.
A component of our brand promotion strategy is establishing a 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. If we are unable to provide a high-quality customer experience for any reason, our reputation may be harmed and our efforts to develop brand loyalty could be adversely impacted. The failure of our brand promotion activities to meet our expectations could adversely affect our ability to attract new customers and maintain customer relationships, adversely harming our business and results of operations.
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.
Changes in the nature of technology solutions used by small businessesthird parties and their customers may occur rapidly. In addition, the marketssystems for manya variety of the services, provided by our Financial Services segment are characterized by constant technological changes. The introduction of competing products and services using new technologies, the evolution of industry standards or the introduction of more attractive products or services could make some or all 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. We could lose current and potential customers if we are unable to develop products and services that meet these changing demands in a timely manner. Additionally, our operating results could be adversely affected if we are required to incur substantial costs to keep pace with technological advances.
If third-party providers of certainincluding significant information technology needs are unableservices, and the failure of these third parties to provide services, our business could be disrupted and the cost of suchthese services could increase.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 such asrelated to our online payment solutions.solutions, including financial institutions that provide clearing services in connection with our merchant services settlement activities, and we have outsourced certain activities, including portions of our finance and procurement functions. A service provider's ability to provide services could be disrupted for a variety of reasons, including, unauthorized access, computer viruses, accidentalamong others, human error, software errors or intentional actions,design faults, security breaches, power loss, telecommunications failures, equipment failures, electrical disruptions, orlabor issues, vandalism, fire, flood, extreme weather, terrorism and other conditions.events beyond their control. In the event that one or more of our service providers is unable to provide adequate or timely information technology 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 information technologymost 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 source of supply.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.
Asset impairment charges would have a negative impact on our consolidated results of operations.
GoodwillIf we are unable to attract, motivate and an indefinite-lived trade name represented 52% of our total assets as of December 31, 2017. On at least an annual basis, we assess whether the carrying value of these assets is impaired. This analysis considers factors including, but not limited to, economic, marketretain key personnel 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 decline in our stock price for a sustained period;
a downturn in economic conditions that negatively affects our actual and forecasted operating results;
a material acceleration of order volume declines for our Direct Checks segment;
the failure of recent acquisitions to achieve expected operating results; or
changes inother qualified employees, our business strategies.
Such situations may require us to record an impairment charge for a portion of goodwill and/or our indefinite-lived trade name. For example, during 2017, we recorded a goodwill impairment charge of $28.4 million related to our Small Business Services Safeguard reporting unit. The impairment analysis of this reporting unit, which incorporated the results of the annual strategic planning process, indicated lowered projected long-term revenue growth and profitability levels resulting from changes in market trends and the mix of products and services sold, including the continuing decline in checks and forms. We are also required to assess the carrying value of other long-lived assets, including amortizable intangibles and assets held for sale. If we were required to record additional asset impairment charges for any reason, our consolidated results of operations wouldcould be adversely affected.impacted.
Our variable-rate indebtedness exposesWe 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. We have implemented various human capital initiatives, including employee wellness initiatives, employee resource groups and a revised performance management process, to make Deluxe an attractive place to work. As remote working arrangements have become more widely accepted, it is more challenging for us to interest rate riskmaintain and enhance our credit facility matures in February 2019.
Borrowings under our credit facility are subjectcorporate culture and 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 fornavigate the flexible working capital, capital expenditures and acquisitions.
arrangements that employees may demand. Our credit facility matures in February 2019. As such, we will need to repay, refinance, replacework environment may not meet the needs or otherwise extend the maturityexpectations of our credit facility. Ouremployees or may be perceived as less favorable compared to other companies' polices, which could negatively impact our ability to do so will be dependent on, among other things, business conditions, our financial performancehire and the general condition of the financial markets. If a financial disruption were to occur at the time that we are required to repay, refinance or replace indebtedness outstanding under our credit facility, we could be forced to undertake alternate financings under current market terms, negotiate for an extension of the maturity of the credit facility or sell assets and delay capital expenditures in order to generate proceeds that could be used to repay our indebtedness.retain qualified personnel. We can provide no assurance that key personnel, including our executive officers, will continue to be employed, or that in the termsevent 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, promotional materials, merchant services point-of-sale equipment and other raw materials, as well as various third-party services we utilize, including delivery and data provider 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 have resulted in cost increases for certain of the materials and services we utilize. Inflationary pressures could continue into fiscal 2024, and this trend could have a material adverse impact if inflation rates significantly exceed our ability to achieve price increases or if such price increases adversely impact demand for our products. We have, at times, experienced supply chain disruptions, including impacts on the supply of certain printed products in our Promotional Solutions segment, and continuing global unrest could cause further disruption in the global supply chain. We continue to closely monitor our supply chain to promptly address any new debt agreementsdelays or disruptions, but we can provide no assurance that our ability to provide products to our customers will not be adversely impacted if our supply chain is compromised.
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 favorablewell 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. Increases in 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 material 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.
We also may be liable if our merchants or other parties that have obligations to deliver goods or services to cardholders fail to satisfy their obligations. For example, we may be subject to contingent liability for transactions originally acquired by us that are disputed by the cardholder and charged back to the merchants or other parties. These disputes could arise from fraud, misuse, unintentional use, settlement delay or failure, insufficiency of funds, returns, a failure to perform a service, or other reasons. If we are unable to collect this amount from the merchant or other party because of the merchant’s or other party’s insolvency or other reasons, we will bear the loss for the amount of the refund paid to the cardholder. Although we have an active
program to manage our credit risk, a default on such obligations by one or more of our merchants or others could have a material adverse effect on our business, results of operations and financial condition.
In addition, in order to provide our transaction processing services, we are registered with Visa and Mastercard and other networks as members or service providers for member institutions. As such, we are subject to card association and network rules. 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.
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 under our current credit facility,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 operationsoperations. 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 cash flow.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.
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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. In addition, legal or regulatory measures to address climate change may impact us in the near future. The costcomplexity of complying with theseexisting and new laws and regulations is significant. In addition,significant, and regulators may adopt new laws or regulations at any time, including triggering enforcement actions, or their interpretation of existing laws may change and/or differ from ours. Thesetime.
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 state and internationalstate 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 payment processing.payments. We are also subject to additional requirements in certain of our contracts with financial institution clients and communications service providers, whichthat 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 cyber securityprivacy and cybersecurity regulations may also increase the cost of compliance for the protection of nonpublic personal information.collected data. The complexity of compliance with these various regulations may increase our cost of doing business and may affect our financial institution clients, reducing their discretionary spending and thus, reducing their capacity to purchase our products and services.
Due to our increasingincreased 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 net neutrality, 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 business services channels. More restrictive legislation,rules, such as new privacy laws, consumer protection “dark patterns” restrictions, 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 are warydo not permit offers of offering add-on services, such as bundled products, fraud/identity protection or expedited check delivery, or rewards programs, 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.
We are subject to environmental risks which, if realized, could have an adverse impact on our operating results. Our printing facilities are subject to many federal, state and local regulations designed to protect the environment, including those related to air emissions, wastewater discharge, waste disposal, and remediation of contaminated sites. We have sold former printing facilities to third parties and, in some instances, have agreed to indemnify the buyer of the facility for certain environmental liabilities. Unforeseen conditions at current or former facilities could result in additional liability and expense beyond our insurance coverage.
Sales and other tax collection requirements could have an adverse effect on our business. We currently collect sales, use and similar taxes in jurisdictions where our legal entities have a physical presence, in accordance with landmark decisions of the United States Supreme Court. States and local jurisdictions have begun enacting legislation requiring collection beyond our current practices. This potential increased cost to our customers may discourage them from purchasing our products and services, which would have an adverse effect on our business. Furthermore, if one or more state or local jurisdictions successfully asserts that we should have collected sales or other taxes in the past, but did not, we could incur a substantial liability for uncollected taxes. In addition, federal and state income tax laws and regulations are subject to change and could impact our consolidated results of operations and financial position. Federal tax reform legislation, which was enacted in December 2017 as the Tax Cuts and Jobs Act (the 2017 Act), resulted in a reduction in our 2017 income tax expense of approximately $20.5 million. We expect that our annual effective income tax rate for 2018 will be approximately 25% and we expect that our total tax payments in 2018 will be approximately $25.0 million less than in 2017, driven primarily by the 2017 Act.
Economic conditions could have an adverse effect on operating results in each of our business segments.
Economic conditions have affected, and will continue to affect, our results of operations and financial position. Current and future economic conditions that affect consumer and business spending, including unemployment levels, the availability of credit, and small business confidence, as well as the financial condition and growth prospects of our customers, may adversely affect our business and results of operations.
A significant portion of our business relies on small business spending. As such, the level of small business confidence and the rate of small business formations and closures impact our business. We believe small businesses are more likely to be significantly affected by economic downturns than larger, more established companies. During a sluggish economy, it may be more difficult for small businesses to obtain credit and small businesses may choose to spend their limited funds on items other than our products and services. The National Federation of Independent Business (NFIB) publishes the results of monthly surveys that provide an indication of small business owners' view of economic conditions. The index of small business optimism published by the NFIB in December 2017 was 104.9, down slightly from 105.8 in December 2016. For 2017, the average index was 104.8, up significantly from the 96.3 average in 2016. At the same time, the net percent of small business owners expecting general business conditions to be better in 6 months declined to 37% in December 2017, as compared to 50% in December 2016. Although there continues to be some optimism from small business owners, including some belief that they will benefit from federal tax reform under the Tax Cuts and Jobs Act of 2017, we cannot predict whether sustainable positive trends will translate into economic growth. Within our personal check printing businesses, consumer spending, employment levels, and housing stock and starts impact the number of checks consumers use. We estimate that the 2017 growth rates for consumer spending and private sector employment most likely had a neutral impact on our personal check businesses. An increase in housing stock and starts has a positive impact on the number of checks purchased, as new households typically are in need of new checks. According to statistics released by the United States Census Bureau in January 2018, housing units completed during 2017 increased almost 9% as compared to 2016. We cannot predict whether these economic trends will improve, stay the same or worsen in the near future.
As a result of global economic conditions in recent years, a number of financial institutions sought additional capital, merged with other financial institutions and, in some cases, failed. This turmoil in the financial services industry affected and may continue to affect our results of operations. 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 contract acquisition 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. 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 merger/acquisition. In addition, we are focused on targeting our FinTech solutions to larger financial institutions. The resulting customer concentration could increase our sensitivity to any material, adverse developments affecting our significant customers, including adverse economic conditions. 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.
A deterioration in financial markets and/or in general business conditions in 2018 would negatively affect our operating results.
If we are unable to attract and retain key personnel and other qualified employees, our business could suffer.
The success of our business depends on the contributions and abilities of key employees, especially in our digital services businesses and specifically in sales, marketing, product management, data analytics and information technology. If we are unable to retain our existing employees and/or attract qualified personnel, we may not be able to grow and manage our business effectively. We can provide no assurance that we will be successful in attracting and retaining such personnel.
The cost and availability of materials, delivery services and energy could 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, other raw materials, delivery services and energy. Paper costs represent a significant portion of our materials cost. 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 our 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. Historically, we have not been negatively impacted by paper shortages because of our relationships with paper suppliers. However, we can provide no assurance that we will be able to purchase sufficient quantities of paper if such a shortage were to occur.
We depend upon third-party providers for delivery services and for outsourced products and services. Events resulting in the inability of these service providers to perform their obligations, such as work slowdowns or extended labor strikes, 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 United States 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 changes to the breadth and/or frequency of USPS mail delivery services in the future. In addition, fuel costs have fluctuated over the past several years. Increased fuel costs can increase the costs we incur to deliver products to our customers, as well as the price we pay for outsourced products and services. Competitive pressures and/or contractual arrangements may inhibit our ability to reflect increased costs in the price of our products.
The failure to reduce costs could have an adverse impact on our operating results.
Intense competition, declines in the use of checks and business forms, the commoditization of web services, and sluggish economic conditions compel us to continually improve our operating efficiency in order to maintain or improve profitability. We have significantly reduced costs over the past several years, primarily within sales, marketing, service fulfillment and operational support, as well as our shared services functions, including product fulfillment, information technology, real estate, finance and human resources. We realized net cost reductions of approximately $45.0 million in 2017, as compared to our 2016 results of operations, and we will continue to explore ways to simplify our business processes and reduce our cost and expense structure. Cost reduction initiatives have required and will continue to require up-front expenditures related to items 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 and, as a result, may choose to delay or forgo certain cost reductions as business conditions require. Failure to continue to improve our operating efficiency could adversely affect our business if we are unable to remain competitive.
We could lose access to data sources which could harm our ability to provide certain of our products and services.
We rely upon data from external sources to maintain our proprietary and non-proprietary databases, including data received from customers, strategic partners and various government and public record sources. This data includes credit and non-credit data from the national credit bureaus and other data brokers. Although we have not experienced material issues in this regard, our data sources could stop providing data, they could provide untimely data, or they could fail to adhere to our quality control standards, causing us to incur additional expense to appropriately utilize the data. In addition, our data sources could increase the costs of their data for a variety of reasons, including legislatively or judicially imposed restrictions on use, a perception that our systems are insecure, or for competitive reasons.
If a substantial number of data sources or certain key data sources were to withdraw their services, if we were to lose access to data due to government regulation, if we were to lose exclusive right to the use of data, or if the collection of data were to become uneconomical, our ability to provide our products and services could be negatively impacted. We can provide no assurance that we would be able to identify and contract with suitable alternative data suppliers and integrate these data sources into our product and service offerings.
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 relatingrelated 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; or claims alleging violations of consumer protection-oriented laws.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 business.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 estimatesestimate of ourthe 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.
We are subject to customer payment-related risks, which could adversely affect our business and financial results.
We accept payments for our products and services on our websites by a variety of methods, including credit and debit cards, checks and wire transfers. For debit and credit cards, we pay interchange and other fees that may increase over time. We are also subject to payment card association operating rules and requirements, including Payment Card Industry Data Security Standards, a set of security standards designed to ensure that all companies that accept, process, store or transmit credit card information maintain a secure environment. These rules and requirements have changed over time and could change in the future or be reinterpreted to make it more costly, more difficult or impossible for us to comply. If we fail to comply with these rules and requirements, we may be subject to fines and/or higher transaction fees. Any changes could increase our cost of compliance, which would negatively affect our financial results. We could also lose our ability to accept credit and debit card payments from our customers, which would likely result in the loss of customers and the inability to attract new customers.
In addition, we may be liable for fraudulent transactions conducted on our websites, such as the use of stolen credit card numbers. 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 associations for inadequate fraud protection.
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.
Economic conditions 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 decline in the valuesignificant portion of our postretirement medical plan assets and/orbusiness 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 increaseportion of our business also relies upon the health of the financial services industry. As a result of global economic conditions in thepast years, a number of participantsfinancial institutions sought additional capital, merged with other financial institutions and, in some cases, failed. The failure of one or more of our postretirement medical planlarger 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 negative impact on our results of operations.
There may also be an increase in financial institution mergers and cash flows.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.
The fairGlobal events, such as outbreaks of illnesses, pandemics like COVID-19, or other political and economic instability, significantly increase 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 46.4% of our total assets as of December 31, 2023. On at least an annual basis, we assess whether the carrying value of our postretirement medical plan assetsgoodwill is subject to various risks,impaired. This analysis considers several factors, including credit, interesteconomic, market and overall market volatility risk. If the equity markets were to experienceindustry conditions. Circumstances that could indicate a significant decline in value, the fair value of our plan assets would decrease. This would affect the funded status of our plan and result in higher postretirement benefit expense in the future. Although our obligation is limited to funding benefits as they become payable, future declines in the fair value of one or more of our planreporting 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 or 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. Information regarding our 2023 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.
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 continue to increase, our interest expense would increase, negatively affecting earnings and reducing cash flows available for working capital, capital expenditures and other investments. To address the risk associated with variable-rate debt, we entered into interest rate swaps to convert a portion of our variable-rate debt to a fixed rate. As of December 31, 2023, $357.5 million of our outstanding debt was subject to variable interest rates.
| | |
ITEM 1B. UNRESOLVED STAFF COMMENTS |
None.
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, certain 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 needtermination of client contracts, government inquiries and/or enforcement actions. Any of these events could have a material adverse effect on our business, prospects, results of operations and/or financial position.
We have implemented a risk-based information/cybersecurity program dedicated to contribute increased amountsprotecting our data and solutions. Our privacy policies, together with associated controls and procedures, provide a comprehensive framework to inform and guide the handling of cashdata. We employ a defense-in-depth 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 ("CISO") and the Information Security department, which establishes the policies, standards and strategies to fund benefits payable under the plan.
manage security risk. The CISO has more than two decades of experience with global technology organizations across multiple industries. We devote significant resources to addressing security vulnerabilities through enhancing security and reliability features in our products and services, providing employee security training, monitoring our operations 24 hours a day and 7 days a week, reviewing and auditing our systems against independent security control frameworks, and performing security maturity assessments. We may, from time to time, engage third-party consultants, legal advisors or audit firms in evaluating and testing our risk management systems and assessing and remediating certain potential cybersecurity incidents. These assessments inform our annual and multi-year cybersecurity strategies and our product security plans. In addition, our operations depend on a number of participants in our postretirement medical plan could increase significantly. For the 2018 plan year, 43.8% of those eligible to participate in our postretirement medical plan have elected not to participate. If a significant portion of those not participating were to opt-inthird parties, including vendors, developers and partners, that are critical to our plan,business and to which we may grant access to our benefit obligation would increase,customer or employee data. We conduct due diligence on these third parties with respect to their security and business controls, and we have established monitoring procedures in an effort to mitigate risks related to data breaches or other security incidents originating from these third parties.
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 the CISO. This committee assesses and monitors our top enterprise risks, including cybersecurity, and provides quarterly updates to the board of directors. Our CISO also provides periodic updates to the finance and audit committee of the board of directors, which would resultis responsible for ensuring that we have implemented appropriate risk reviews and discusses, with management and the board, our financial and enterprise risk assessment and risk management practices and policies, as well as reports to the board any material risks identified in increased expense. Althoughthe course of performing its responsibilities.
In the event a cybersecurity incident is identified, our plan is currently overfunded,Cybersecurity Incident Response team will act in accordance with our incident management plans to communicate to our executive leadership team and to coordinate the response to any incident. Our Chief Executive Officer, Chief Financial Officer, General Counsel, Chief Technology and Digital Officer, CISO 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 significant increasematerial cybersecurity event. We maintain cybersecurity insurance coverage that insures us for costs resulting from cyberattacks, although this coverage may not reimburse us for all losses.
As of the date of this report, we are not aware of any cybersecurity incidents that have materially affected or are reasonably likely to materially affect our business strategy, results of operations or financial condition and that are required to be reported in plan participantsthis Form 10-K. For further discussion of the risks associated with cybersecurity incidents see Item 1A, "Operational Risks – Security breaches, computer malware or other cyberattacks involving the confidential information of our customers, employees or business partners could also requiresubstantially damage our reputation, subject us to contribute increased amountslitigation and enforcement actions, and substantially harm our business and results of cash to fund benefits payable under the plan.operations."
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our principal executive office is an owned property located in Shoreview, Minnesota. As of December 31, 2017,2023, we occupied 6537 facilities throughout the United States, 7U.S. and 3 facilities in Canada, 2 facilities in Europe and a facility in Australia where we conduct printing and fulfillment, payment processing, call center, data center and administrative functions. 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 20% of our facilities are owned, while the remaining 80% are leased. TheseOur facilities have a combined floor space of approximately 3.02 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 reduced the number of facilities by 13 during 2023, driven by the continued assessment of our real estate footprint and business exits.
Item 3. Legal Proceedings. | | |
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 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. | | |
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.
| | |
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 currentquarterly basis, and therefore, are subject to change in the future.change. As of December 31, 2017,2023, the number of shareholders of record was 6,491. The table below shows4,897, excluding shareholders whose shares are held in the per share price rangesname of various dealers, clearing agencies, banks, brokers and other fiduciaries.
In October 2018, our board of directors authorized the repurchase of up to $500.0 million of our common stock for the past two fiscal years as quoted on the New York Stock Exchange, as well as the quarterly dividend amount for each period.
|
| | | | | | | | | | | | | | | | |
| | | | Stock price |
| | Dividend | | High | | Low | | Close |
2017 | | | | | | | | |
Quarter 4 | | $ | 0.30 |
| | $ | 77.36 |
| | $ | 66.98 |
| | $ | 76.84 |
|
Quarter 3 | | 0.30 |
| | 74.60 |
| | 67.01 |
| | 72.96 |
|
Quarter 2 | | 0.30 |
| | 74.13 |
| | 66.43 |
| | 69.22 |
|
Quarter 1 | | 0.30 |
| | 75.94 |
| | 69.93 |
| | 72.17 |
|
2016 | | | | | | | | |
Quarter 4 | | $ | 0.30 |
| | $ | 73.42 |
| | $ | 59.47 |
| | $ | 71.61 |
|
Quarter 3 | | 0.30 |
| | 70.26 |
| | 64.78 |
| | 66.82 |
|
Quarter 2 | | 0.30 |
| | 67.81 |
| | 59.83 |
| | 66.37 |
|
Quarter 1 | | 0.30 |
| | 62.77 |
| | 49.46 |
| | 62.49 |
|
The following table shows purchases of our own equity securities, based on trade date, whichstock. This authorization has no expiration date. No shares were completedrepurchased under this authorization during the fourth quarter of 2017:
|
| | | | | | | | | | | | | | |
Period | | Total number of shares purchased | | Average price paid per share | | Total number of shares purchased as part of publicly announced plans or programs | | Maximum approximate dollar value of shares that may yet be purchased under the plans or programs |
October 1, 2017 - October 31, 2017 | | 14,400 |
| | $ | 69.37 |
| | 14,400 |
| | $ | 253,657,577 |
|
November 1, 2017 - November 30, 2017 | | 170,300 |
| | 68.89 |
| | 170,300 |
| | 241,926,212 |
|
December 1, 2017 - December 31, 2017 | | 30,716 |
| | 71.62 |
| | 30,716 |
| | 239,726,484 |
|
Total | | 215,416 |
| | 69.31 |
| | 215,416 |
| | 239,726,484 |
|
In May 2016, our board of directors approved an authorization for the repurchase of up to $300.0 million of our common stock, effective at the conclusion of a previous authorization. This authorization has no expiration date2023 and $239.7$287.5 million remained available for purchaserepurchase as of December 31, 2017.2023.
While not considered repurchases of shares, we do at times withhold 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
2017, we withheld 36,154 shares in conjunction with the vesting and exercise of equity-based awards.
There are currently no limitations on the amount of dividends and share repurchases under the terms of our credit agreement. However, if our leverage ratio, defined as total debt less unrestricted cash to earnings before interest, taxes, depreciation and amortization (EBITDA), should exceed 2.75 to 1, there would be an annual limitation on the amount of dividends and share repurchases under the terms of this agreement.
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)("DJUSIS") Index.
Comparison of Five-Year Cumulative Total Return | | |
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN |
ASSUMES INITIAL INVESTMENT OF $100 |
DECEMBER 2023 |
Assumes Initial Investment of $100
December 2017
The graph assumes that $100 was invested on December 31, 20122018 in each of Deluxe common stock, the S&P MidCap 400 Index and the DJUSIS Index, and that all dividends were reinvested.
Prepared by: Zack's Investment Research, Inc. Used with permission. All rights reserved. Copyright 1980-2024.
Index Data: Copyright Standard and Poor's, Inc. Used with permission. All rights reserved.
Item 6. Selected Financial Data.
Index Data: Copyright Dow Jones, Inc. Used with permission. All rights reserved.
The following table shows certain selected financial data for the five years ended December 31, 2017. This information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations appearing in Item 7 of this report and our consolidated financial statements appearing in Item 8 of this report. These items include discussion of various factors that affect the comparability of the selected financial data, including the Tax Cuts and Jobs Act of 2017, asset impairment charges and business acquisitions. Historical results are not necessarily indicative of future results.
|
| | | | | | | | | | | | | | | | | | | | |
(dollars and orders in thousands, except per share and per order amounts) | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
Statement of Income Data: | | | | | | | | | | |
Total revenue | | $ | 1,965,556 |
| | $ | 1,849,062 |
| | $ | 1,772,817 |
| | $ | 1,674,082 |
| | $ | 1,584,824 |
|
As a percentage of total revenue: | | | | | | | | | | |
Gross profit | | 62.2 | % | | 63.9 | % | | 63.9 | % | | 63.8 | % | | 64.6 | % |
Selling, general and administrative expense | | 42.2 | % | | 43.6 | % | | 43.7 | % | | 43.0 | % | | 43.6 | % |
Operating income | | 16.8 | % | | 19.9 | % | | 20.0 | % | | 19.9 | % | | 20.1 | % |
Operating income | | $ | 331,192 |
| | $ | 368,727 |
| | $ | 354,331 |
| | $ | 332,633 |
| | $ | 317,914 |
|
Net income: | | 230,155 |
| | 229,382 |
| | 218,629 |
| | 199,794 |
| | 186,652 |
|
Per share - basic | | 4.75 |
| | 4.68 |
| | 4.39 |
| | 3.99 |
| | 3.68 |
|
Per share - diluted | | 4.72 |
| | 4.65 |
| | 4.36 |
| | 3.96 |
| | 3.65 |
|
Cash dividends per share | | 1.20 |
| | 1.20 |
| | 1.20 |
| | 1.15 |
| | 1.00 |
|
Balance Sheet Data: | | | | | | | | | | |
Cash and cash equivalents | | $ | 59,240 |
| | $ | 76,574 |
| | $ | 62,427 |
| | $ | 61,541 |
| | $ | 121,089 |
|
Return on average assets(1) | | 10.5 | % | | 11.4 | % | | 12.4 | % | | 12.3 | % | | 12.6 | % |
Total assets | | $ | 2,208,827 |
| | $ | 2,184,338 |
| | $ | 1,842,153 |
| | $ | 1,683,682 |
| | $ | 1,563,887 |
|
Long-term obligations(2) | | 709,300 |
| | 758,648 |
| | 629,018 |
| | 549,603 |
| | 635,062 |
|
Statement of Cash Flows Data: | | | | | | | | | | |
Net cash provided by operating activities | | $ | 338,431 |
| | $ | 319,312 |
| | $ | 309,631 |
| | $ | 285,098 |
| | $ | 263,729 |
|
Net cash used by investing activities | | (180,891 | ) | | (310,786 | ) | | (251,140 | ) | | (136,043 | ) | | (101,050 | ) |
Net cash (used) provided by financing activities | | (176,949 | ) | | 4,275 |
| | (48,387 | ) | | (204,048 | ) | | (84,524 | ) |
Purchases of capital assets | | (47,450 | ) | | (46,614 | ) | | (43,261 | ) | | (41,119 | ) | | (37,459 | ) |
Payments for acquisitions, net of cash acquired | | (139,223 | ) | | (270,939 | ) | | (212,990 | ) | | (105,029 | ) | | (69,709 | ) |
Payments for common shares repurchased | | (65,000 | ) | | (55,224 | ) | | (59,952 | ) | | (60,119 | ) | | (48,798 | ) |
Other Data: | | | | | | | | | | |
Orders(3) | | 49,981 |
| | 52,176 |
| | 53,138 |
| | 52,632 |
| | 52,584 |
|
Revenue per order(3) | | $ | 39.33 |
| | $ | 35.44 |
| | $ | 33.36 |
| | $ | 31.81 |
| | $ | 30.14 |
|
Number of employees | | 5,886 |
| | 6,026 |
| | 5,874 |
| | 5,830 |
| | 5,575 |
|
Number of printing facilities(4) | | 11 |
| | 12 |
| | 11 |
| | 11 |
| | 12 |
|
Number of call center facilities(4) | | 26 |
| | 26 |
| | 14 |
| | 16 |
| | 16 |
|
(1) Return on average assets is calculated as net income divided by average assets for the period.
| | |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
(2) Long-term obligations includes the current and long-term portions of our debt obligations, including capital leases. We had no short-term borrowings outstanding as of December 31 for any of the periods presented. As such, these amounts also represent our total debt obligations.
(3) Orders is our company-wide measure of volume and includes both products and services.
(4) As of December 31, 2017, we had 2 facilities that contain both printing and call center functions and thus, are included in both captions. We had 40 additional facilities which house small customer fulfillment operations and general office space. This information excludes facilities associated with businesses held for sale as of each date. Further information regarding assets held for sale can be found under the caption "Note 2: Supplemental balance sheet and cash flow information" of the Notes to Consolidated Financial Statements appearing in Item 8 of this report.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Our Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)("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.year;
•Consolidated Results of Operations,Operations; Restructuring Costsand Integration Expense; and Segment Results that includes a more detailed discussion of our revenue and expenses.expenses;
•Cash Flows and Liquidity and Capital Resources and Other Financial Position Information that discusses key aspects of our cash flows, financial commitments, capital structure and financial position.position; and
Off-Balance Sheet Arrangements, Guarantees and Contractual Obligations that discusses our financial commitments.
•Critical Accounting Policies Estimates that discusses the policies we believeestimates that involve a significant level of uncertainty and have had or are importantreasonably likely to understanding the assumptions and judgments underlyinghave a material impact on our financial statements.condition or results of operations.
You shouldPlease note that this MD&A discussion contains forward-looking statements that involve risks and uncertainties. Please seePart I, Item 1A of this report foroutlines 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)"Reform Act") provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information. We are filing this cautionary statement in connection with the Reform Act. 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 ("SEC"), 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.
EXECUTIVE OVERVIEW
This MD&A includes financial information prepared in accordance with accounting principles generally accepted in the U.S. ("GAAP"). In addition, we discuss free cash flow, net debt, liquidity, adjusted diluted earnings per share ("EPS"), consolidated adjusted earnings before interest, taxes, depreciation and amortization ("adjusted EBITDA") and consolidated adjusted EBITDA margin, all of which are non-GAAP financial measures. We believe that these non-GAAP financial measures, when reviewed in conjunction with GAAP financial measures, can provide useful information to assist investors in analyzing our current period operating performance and in assessing our future operating performance. For this reason, our internal management reporting also includes these financial measures, which should be considered in addition to, and not as superior to or as a substitute for, GAAP financial measures. We strongly encourage investors and shareholders to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure. Our non-GAAP financial measures may not be comparable to similarly titled measures used by other companies and therefore, may not result in useful comparisons. The reconciliation of our non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in Consolidated Results of Operations.
The following discussion and analysis provides information we believe to be relevant to understanding our financial condition and results of operations. This discussion focuses on our financial results for the years ended December 31, 2023 and December 31, 2022. A discussion of our results of operations for the year ended December 31, 2022, as compared to the year ended December 31, 2021, is included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022 ("the 2022 Form 10-K"), filed with the SEC on February 24, 2023, and is incorporated by reference into this Form 10-K. You should read the following discussion and analysis in conjunction with our consolidated financial statements and related notes presented in Part II, Item 8 of this report.
We help businesses deepen customer relationships through trusted, technology-enabled solutions that help our customers acquirebusinesses pay and engage their customers across multiple channels,get paid, accelerate growth and operate more efficiently. Our solutions include merchant services, marketing services and data analytics, treasury management solutions, promotional products, and fraud and security solutions, as well as operate theircustomized checks and business forms. We support millions of small businesses, efficiently and effectively. To promote and sell a wide rangethousands of products and services, we use printed and electronic marketing; a direct sales force; referrals from financial institutions telecommunication clients and other partners; networks of Safeguard® distributors and independent dealers; and an outbound telemarketing group. Over the past 24 months, our Small Business Services segment has provided products and services to approximately 4.4 million small business customers and our Direct Checks segment has provided products and services to more than 5.1 million consumers. Through our Financial Services segment, we provide products and services to approximately 4,900 financial institution clients. We operate primarily in the United States. Small Business Services also has operations in Canada, Australia and portions of Europe.
Our product and service offerings are comprisedhundreds of the following:
Checks –world’s largest consumer brands. We remain one of the largest providers of checks in the United States. During 2017, checks represented 39% of our Small Business Services segment's revenue, 43% of our Financial Services segment's revenue and 84% of our Direct Checks segment's revenue.
Marketing solutions and other services(MOS) – We offer products and services designed to meet our customers’ sales and marketing needs, as well as various other service offerings. Our marketing products include digital printing and web-to-print solutions such as business cards, print marketing, promotional goods and apparel. Our web services offerings include logo design; hosting, domain name and web design services; search engine optimization; and marketing programs, including email, mobile and social media. Weare also offer fraud protection and security services, online and offline payroll services, and electronic checks ("eChecks"). Our Financial Services segment also offers a selection of financial technology ("FinTech") solutions. These solutions include data-driven marketing solutions, including outsourced marketing campaign targeting and execution; treasury management solutions, including accounts receivable processing and remote deposit capture; and digital engagement solutions, including loyalty and rewards programs. During 2017, MOS represented 34% of our Small Business Services segment's revenue, 55% of our Financial Services segment's revenue and 11% of our Direct Checks segment's revenue.
Forms – Our Small Business Services segment is a leading provider of printed formschecks and accessories sold directly to small businesses, including deposit tickets, billing forms,consumers. Our reach, scale and distribution channels position us to be a trusted business partner for our customers.
Our Strategy
A detailed discussion of our strategy can be found in Part I, Item 1 of this report. During the first quarter of 2023, we completed our 3-year corporate infrastructure modernization program with the implementation of the final major phase of our enterprise resource planning ("ERP") system. This effort required significant investment and management attention over the past 3 years. We expect that the new platform will now drive additional cost improvements and scale. We also made significant progress in our ongoing lockbox improvement efforts within our Payments segment, continuing to consolidate sites and shift work orders, job proposals, purchase orders, invoicesto optimize our operations. Having substantially completed our infrastructure modernization initiatives, we have shifted our focus to growth investments, primarily in Payments and personnel forms. ThisData Solutions, so that we can continue to drive scale, with the goal of growing profits faster than revenue. During 2023, adjusted EBITDA margin increased as compared to the prior year, as our operations continued to benefit from our disciplined pricing actions and overall cost management. We recently announced our North Star program, the goal of which is to further drive shareholder value by (1) expanding our EBITDA growth trajectory, (2) driving increased cash flow, (3) paying down debt, and (4) improving our leverage ratio. Further information can be found in Restructuring and Integration Expense.
During the first quarter of 2024, we realigned our organizational structure to better reflect our portfolio mix and offerings, and we updated our reportable segments to correspond with these changes. We did not operate under the new segment also offers computer forms compatible with accounting software packages commonly used by small businesses. Forms sold bystructure during 2023, and we continued to allocate resources and assess performance based on our Financial Services and Direct Checkscurrent reportable segment structure. Information regarding our realigned reportable segments include deposit tickets and check registers.for the quarter ending March 31, 2024 can be found in Part I, Item 1 of this report.
Accessories and other productsDivestitures / business exits – Small Business Services offers products designed to provide small business owners withIn June 2023, we completed the customized documents necessary to efficiently manage their business including envelopes, office supplies, ink stamps and labels. Our Financial Services and Direct Checks segments offer checkbook covers, labels and ink stamps.
Throughout the past several years, we have focused on opportunities to increase revenue and operating income despite the continuing decline in check and forms usage. These opportunities have included new product and service offerings, brand awareness and positioning initiatives, investing in technology for our service offerings, enhancing our information technology
capabilities and infrastructure, improving customer segmentation, extending the reachsale of our sales channel,North American web hosting and reducing costs.logo design businesses. These businesses generated annual revenue of approximately $66 million during 2022, primarily in our Data Solutions segment. In addition,September and December 2023, we investedexecuted agreements allowing for the conversion of our U.S. and Canadian payroll and human resources services customers to other service providers. These businesses generated annual revenue of approximately $27 million in various acquisitionsthe Payments segment during 2023.
In May 2022, we completed the sale of our Australian web hosting business, and we also sold our Promotional Solutions strategic sourcing and retail packaging businesses during 2022. These businesses generated annual revenue of approximately $24 million in our Data Solutions segment and approximately $29 million in our Promotional Solutions segment during 2021.
We believe that extendthese business exits allow us to focus our resources on the rangekey growth areas of productspayments and services we offerdata, while allowing us to optimize our customers, primarily MOS offerings. Information about our acquisitionsoperations. Further information regarding these business exits can be found under the caption "Note 5: Acquisitions" of6: Acquisition and Divestitures" in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report. During 2018, we plan to continue our focus in these areas, with an emphasis on profitable revenue growth
2023 Financial Results
Cash flows and increasing the mix of MOS revenue, primarily data-driven marketing, treasury management and web services. We also plan to assess acquisitions that complement our large customer bases, with a focus on MOS offerings. We believe we have reached a turning point where revenue from our MOS offerings will grow at a faster rate going forward, augmented by acquisitions. MOS revenue was 40.0% of consolidated revenue in the fourth quarter of 2017. A more detailed discussion of our business strategies can be found under the caption "Business Segments" appearing in Item 1 of this report.
Earnings for 2017, as compared to 2016, increased due to price increases, a $20.5 million benefit from federal tax reform under the Tax Cuts and Jobs Act of 2017, continuing initiatives to reduce our cost structure, primarily within our sales, marketing and fulfillment organizations, and aggregate gains of $8.7 million from the sale of businesses within Small Business Services. These increases in earnings were partially offset by pre-tax asset impairment charges of $54.9 million in 2017, volume reductions for personal and business checks due primarily to the continuing decline in check and forms usage, increased incentive compensation expense and higher material and delivery rates in 2017.
Business Challenges/Market Risks
Our business, consolidated results of operations, financial condition and cash flows could be adversely affected by various risks and uncertainties. We have disclosed all known material risks in Item 1A of this report, including discussion of the declining market for checks and business forms, competition, factors affecting our financial institution clients, data security risks, risks related to acquisitions, the impact of economic conditions and the ability to attract and retain key employees. All of these factors could cause our actual results to differ materially from the statements we make from time to time regarding our expected future results, including, but not limited to, forecasts regarding estimated revenue, MOS revenue, earnings per share, cash liquidity – Cash provided by operating activities for 2023 increased $6.8 million as compared to 2022, driven by positive changes in working capital, pricing and expected cost savings.
Cost Reduction Initiatives
For several years, we have been pursuing cost reductionsaving actions, and business simplification initiatives, including: reducing shareda decrease of $9.5 million in payments for cloud computing implementation costs related to the implementation of our ERP system, which was completed in early 2023. Growth in data-driven marketing and merchant services infrastructure costs; streamlining our call center and fulfillment activities; eliminating system and work stream redundancies; and strengthening our abilityrevenue also contributed to quickly develop new products and services and bring them to market. We have also standardized products and services and improved the sourcing of third-party goods and services. Asincrease in operating cash flow. Partially offsetting these increases in operating cash flow was a $28.4 million increase in interest payments as a result of all of these efforts, we realized net cost savings of approximately $45.0 million during 2017, as compared to our 2016 results of operations, generated primarily by our sales, marketing and fulfillment organizations. Approximately 75% of these savings impacted selling, general and administrative (SG&A) expense, with the remaining 25% affecting total cost of revenue. We anticipate that we will realize additional net cost reductions of approximately $50.0 million in 2018, as compared to our 2017 results of operations, which will also be generated primarily by our sales, marketing and fulfillment organizations. In sales and marketing, we plan to focus on sales channel optimization, platform and tool consolidation, and leveraging sales and marketing efficiencies, including integrating recent acquisitions. In fulfillment, we expect to continue our lean initiatives, reduce direct and indirect spend, drive delivery technology and process efficiencies, and continue with other supply chain improvements and efficiencies. We also expect to better leverage our information technology platform. Approximately 75% of our 2018 savings are expected to impact SG&A expense, with the remaining 25% expected to impact total cost of revenue.
Outlook for 2018
We anticipate that consolidated revenue will be between $2.065 billion and $2.105 billion for 2018, compared to $1.966 billion for 2017. In Small Business Services, we expect revenue to increase between 4% and 5% compared to 2017 revenue of $1.240 billion. Volume declines in core business products are expected to be more than offset by growth in our online, dealer and major accounts channels, price increases, increased revenue from our MOS offerings and continued tuck-in acquisitions. In Financial Services, we expect revenue to increase between 11% and 16% compared to 2017 revenue of $585.3 million. We expect increased revenue from MOS, including data-driven marketing solutions and treasury management solutions,rising interest rates, as well as continued acquisitions. Our outlook includes incremental revenue from the acquisition of RDM Corporationa $9.5 million increase in the second quarter of 2017. We expect these revenue increases to be partially offset by year-over-year secular check order declines of approximately 7%, the expected loss of about $10.0 million in Deluxe Rewards revenue primarily due to the loss of Verizon Communications Inc. as a customer, and we expect some impact from pricing pressure in our check programs. In Direct Checks, we expect revenue to decline approximately 11% compared to 2017 revenue of $140.5 million, driven primarily by secular check order volume declines resulting from reduced check usage.
We expect that 2018 diluted earnings per share will be between $5.42 and $5.67, compared to $4.72 for 2017. Our 2018 outlook includes estimated charges of $0.13 per share for integration costs, primarilyemployee bonus payments related to data-driven marketing, treasury management and web services offerings. Earnings per share for 2017 included total net charges of $0.55 per share for asset impairment charges, restructuring and integration costs and transaction costs related to acquisitions, partially offset by a benefit from federal tax reform under the Tax Cuts and Jobs Act of 2017. We expect that the benefits of additional cost reduction
activities will be partially offset by the continuing decline in check and forms usage and continued investments in growth opportunities, particularly in talent, technology and process improvements to accelerate data-driven marketing and treasury management revenue and to drive development innovation in our treasury management infrastructure. We also expect material costs and delivery rates to increase in 2018. We estimate that our annual effective tax rate for 2018 will be approximately 25%.
We anticipate that net cash provided by operating activities will be between $360.0 million and $380.0 million in 2018, compared to $338.4 million in 2017, driven by stronger2022 operating performance and a decrease of approximately $25.0$9.3 million increase in income tax payments driven, primarilyin large part, by the Tax Cutstiming of our federal tax payments. Operating cash flow was also negatively impacted by the continuing secular decline in checks, business forms and Jobs Actcertain Promotional Solutions business accessories, inflationary pressures on hourly wages, materials and delivery, and the impact of 2017,business exits. Free cash flow increased $10.7 million for 2023, as compared to 2022. Total debt was $1.59 billion and net debt was $1.52 billion as of December 31, 2023. We held cash and cash equivalents of $72.0 million as of December 31, 2023, and liquidity was $312.5 million. Our capital allocation priorities are to reduce our debt and net leverage, deliver high return internal investments and pay our dividend. We continue to responsibly invest the free cash flow generated by our Checks and Promotional Solutions businesses into Payments and Data Solutions, businesses that we believe can generate more robust growth over time. A reconciliation of free cash flow, net debt and liquidity to the comparable GAAP financial measures can be found in Consolidated Results of Operations.
2023 earnings vs. 2022 – Multiple factors drove the decrease in net income for 2023, as compared to 2022, including:
•increased investments in the business, primarily costs related to our technology infrastructure and a $27.3 million increase in restructuring and integration expense as we continue to take actions to grow earnings and optimize our cost structure;
•a $31.2 million increase in interest expense resulting from increasing interest rates on our variable-rate debt;
•the continuing secular decline in checks, business forms and some Promotional Solutions business accessories;
•inflationary pressures on hourly wages, materials and delivery; and
•the impact of business exits.
Partially offsetting these decreases in net income were the following factors:
•price increases in response to the inflationary environment;
•the benefit of actions taken to reduce costs, including workforce adjustments, marketing optimization and real estate rationalization;
•a $15.7 million decrease in acquisition amortization, as certain of our assets are amortized using accelerated methods; and
•a $13.1 million increase in gain on sale of businesses and long-lived assets, driven by our business exit activity.
Diluted EPS of $0.59 for 2023, as compared to $1.50 for 2022, reflects the decrease in net income as described in the preceding paragraphs, as well as higher average shares outstanding in 2023. Adjusted diluted EPS for 2023 was $3.32 compared to $4.08 for 2022, and excludes the impact of non-cash items or items that we believe are not indicative of our current period operating performance. The decrease in adjusted diluted EPS was driven by the increase in interest expense resulting from the effect of increasing interest rates on our variable-rate debt, increased investments in the business, inflationary pressures on our cost structure, the continuing secular decline in checks, business forms and some business accessories, and the impact of business exits. These decreases in adjusted diluted EPS were partially offset by higherprice increases in response to the inflationary environment and the benefit of various cost saving actions across functional areas. A reconciliation of diluted EPS to adjusted diluted EPS can be found in Consolidated Results of Operations.
Recent market conditions– Interest expense has increased as a result of the rising interest and medical payments. We anticipate contract acquisition payments of approximately $27.0 million in 2018, and we estimate that capital spending will be approximately $55.0 million in 2018 as we plan to accelerate investments in key revenue growth initiatives and order fulfillment and information technology infrastructure.
We believe that cash generated by operating activities, along with availability under our revolving credit facility, will be sufficient to support our operations in 2018, including dividend payments, capital expenditures, and required debt principal and interest payments, as well as likely acquisitions. We also believe we have access to capital markets should additional cash be necessary to fund acquisitions that exceed amounts available under our credit facility.rate environment. As of December 31, 2017, $101.62023, we held interest rate swaps that effectively convert $771.7 million of our variable-rate debt to a fixed rate. As
a result, 78% of our debt had a fixed interest rate of 7.0% as of December 31, 2023, which partially insulates us from future interest rate increases.
We continue to monitor inflationary pressures on our labor, delivery and material costs. In response to the inflationary environment, we implemented targeted price increases in all of our segments. Despite the price changes, we continue to experience healthy revenue volumes, demonstrating the strength of our business and continued demand for our products. We have, at times, experienced some supply disruptions impacting certain printed products in our Promotional Solutions segment. We continue to closely monitor our supply chain to avoid delays or disruptions. We have also experienced labor supply issues in certain portions of our business. It remains difficult to estimate the severity and duration of the inflationary environment or supply chain and labor issues on our business, financial position or results of operations.
The disruptions to some regional financial institutions earlier in the year had no impact on our business or results of operations. We do not bank with any of the directly affected financial institutions, and they collectively represent an immaterial portion of our revenue. Additionally, we have very little customer concentration risk, and we believe our diversified customer base positions us well going forward.
Outlook for 2024
We expect that revenue for 2024 will be between $2.14 billion and $2.18 billion, as compared to 2023 revenue of $2.19 billion. The 2023 amount included revenue of approximately $56 million that will not recur in 2024 due to business exits. We expect that adjusted EBITDA for 2024 will be between $400 million and $420 million, as compared to $417 million for 2023. The 2023 amount included adjusted EBITDA of approximately $26 million that will not recur in 2024 due to business exits. These estimates are subject to, among other things, prevailing macroeconomic conditions, global unrest, labor supply issues, inflation and the impact of business exits.
As of December 31, 2023, we held cash and cash equivalents of $72.0 million and $240.5 million was available for borrowing under our revolving credit facility. We expect to maintain a disciplined approach to capital deployment that focuses on our need to continue investing in initiatives to drive revenue growth, including acquisitions. We anticipate that capital expenditures will be approximately $100 million in 2024, as compared to $100.7 million for 2023, as we continue with important innovation investments and building scale across our board of directorsproduct categories. We also expect that we will maintaincontinue to pay our current dividend level.regular quarterly dividend. However, dividends are approved by theour board of directors on a quarterly basis,each quarter and thus, are subject to change. To the extent we generate excessWe anticipate that net cash we plan to opportunistically repurchase common shares and/or reduce the amounts outstanding under our credit facility.
As of December 31, 2017, $707.9 million was outstandinggenerated by operations, along with cash and cash equivalents on hand and availability under our credit facility, agreement that matureswill be sufficient to support our operations, including our contractual obligations and debt service requirements, for the next 12 months, as well as our long-term capital requirements. We were in February 2019. We plan to obtain a new multi-year credit facility to refinance the amount outstanding under the current credit facility and to satisfy those obligations. We have been successful in obtaining long-term financingcompliance with terms and in amounts adequate to meet our objectives in the past,debt covenants as of December 31, 2023, and we expect to execute the new credit facilityanticipate that we will remain in the first half of 2018.compliance with our debt covenants throughout 2024.
| | |
CONSOLIDATED RESULTS OF OPERATIONS |
CONSOLIDATED RESULTS OF OPERATIONS
Consolidated Revenue
|
| | | | | | | | | | | | | | | | |
| | | | | | | | Change |
(in thousands, except per order amounts) | | 2017 | | 2016 | | 2015 | | 2017 vs. 2016 | | 2016 vs. 2015 |
Total revenue | | $ | 1,965,556 |
| | $ | 1,849,062 |
| | $ | 1,772,817 |
| | 6.3% | | 4.3% |
Orders | | 49,981 |
| | 52,176 |
| | 53,138 |
| | (4.2%) | | (1.8%) |
Revenue per order | | $ | 39.33 |
| | $ | 35.44 |
| | $ | 33.36 |
| | 11.0% | | 6.2% |
| | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | 2023 | | 2022 | | | | Change | | |
Total revenue | | $ | 2,192,260 | | | $ | 2,238,010 | | | | | (2.0%) | | |
The increasedecrease in total revenue in each of the past 2 yearsfor 2023, as compared to 2022, was driven, in part, by incrementalthe business exits discussed in Executive Overview, which resulted in a decrease in revenue from acquired businesses of approximately $173.0$52 million in 2017 and $114.0 million in 2016,for 2023, as well as price increasesthe continuing secular decline in all of our segments. Information regarding our acquisitions can be found under the caption "Note 5: Acquisitions" of the Notes to Consolidated Financial Statements appearing in Item 8 of this report.order volume for checks, business forms and some Promotional Solutions business accessories. These increasesdecreases in revenue were partially offset by lower order volume for both personalprice increases in response to the inflationary environment, primarily in our Promotional Solutions and business checks,Checks segments, as well as formsgrowth from new business and accessories sold by Small Business Services. In addition, revenue declined due to continued pricing allowances within Financial Services.
favorable volumes for data-driven marketing and merchant services.
Service revenue represented
25.2% of total revenue in 2017, 20.3% in 2016 and 18.1% in 2015. As such, the majority of our revenue is generated by product sales.
We do not manage our business based on product versus service revenue. Instead, we analyze our products and servicesrevenue based on the following categories:
|
| | | | | | | | | | | | | |
| | | | | | | | Change |
| | 2017 | | 2016 | | 2015 | | 2017 vs. 2016 | | 2016 vs. 2015 |
Checks | | 43.3 | % | | 46.8 | % | | 49.3 | % | | (3.5) pt. | | (2.5) pt. |
Marketing solutions and other services | | 38.4 | % | | 33.4 | % | | 30.0 | % | | 5.0 pt. | | 3.4 pt. |
Forms | | 10.8 | % | | 11.6 | % | | 12.2 | % | | (0.8) pt. | | (0.6) pt. |
Accessories and other products | | 7.5 | % | | 8.2 | % | | 8.5 | % | | (0.7) pt. | | (0.3) pt. |
Total revenue | | 100.0 | % | | 100.0 | % | | 100.0 | % | | — | | — |
The number of orders decreased in each of the past 2 years driven by the impact of the continuing decline in check and forms usage, partially offset by growth in MOS, including the impact of acquisitions. Revenue per order increased in each of the
past 2 years primarily due to the benefit of price increases and favorable product and service offerings shown under the caption "Note 17: Business Segment Information" in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report. Our revenue mix partially offset by the impact of continued pricing allowances in Financial Services.business segment was as follows:
| | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | |
Payments | | 31.5 | % | | 30.3 | % | | |
Data Solutions | | 10.9 | % | | 11.9 | % | | |
Promotional Solutions | | 24.7 | % | | 25.2 | % | | |
Checks | | 32.9 | % | | 32.6 | % | | |
Total revenue | | 100.0 | % | | 100.0 | % | | |
Consolidated Cost of Revenue | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | 2023 | | 2022 | | | | Change | | |
Total cost of revenue | | $ | 1,029,577 | | | $ | 1,032,116 | | | | | (0.2%) | | |
Total cost of revenue as a percentage of total revenue | | 47.0 | % | | 46.1 | % | | | | 0.9 pt. | | |
|
| | | | | | | | | | | | | | | | |
| | | | Change |
(in thousands) | | 2017 | | 2016 | | 2015 | | 2017 vs. 2016 | | 2016 vs. 2015 |
Total cost of revenue | | $ | 742,090 |
| | $ | 667,241 |
| | $ | 639,209 |
| | 11.2% | | 4.4% |
Total cost of revenue as a percentage of total revenue | | 37.8 | % | | 36.1 | % | | 36.1 | % | | 1.7 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 increasedecrease in total cost of revenue for 2017,2023, as compared to 2016,2022, was primarily attributable todriven by reduced revenue volume from the increasecontinuing secular decline in revenue, including incremental costschecks, business forms and some Promotional Solutions business accessories, as well as a decrease of approximately $101.0$27 million for acquired businesses. In addition, delivery rates and material costs increased in 2017.from the business exits discussed under Executive Overview. Partially offsetting these increasesdecreases in total cost of revenue was the impact of lower order volume for both personalinflationary pressures on hourly wages, materials and business checks,delivery, as well as forms and accessories sold by Small Business Services,the revenue growth from new business and favorable product mix.volumes, primarily data-driven marketing and merchant services. In addition, totalinvestments in the business increased, including some cost of revenue decreased approximately $11.0 million duepressures in our Payments lockbox business earlier in the year as we continued to manufacturing efficienciesconsolidate these operations. Restructuring and other benefits resulting from our continued cost reduction initiatives.
The increaseintegration expense included in total cost of revenue increased $11.6 million as we continued to pursue cost reductions and growth initiatives.
Total cost of revenue as a percentage of total revenue for 2016,2023 increased as compared to 2015, was primarily attributable to2022, as the inflationary impacts, investments in the business and restructuring and integration expense more than offset the benefit of our increase in revenue, including incremental costs of approximately $61.0 million for acquired businesses. In addition, delivery rates and material costs increased in 2016. Partially offsetting these increases in total cost of revenue was the impact of lower order volume for both personal and business checks, as well as forms and accessories sold by Small Business Services. In addition, total cost of revenue decreased approximately $15.0 million during 2016 due to manufacturing efficiencies and other benefits resulting from our continued cost reduction initiatives.pricing actions.
Consolidated Selling, General & Administrative ("SG&A") Expense
| | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | 2023 | | 2022 | | | | Change | | |
SG&A expense | | $ | 956,068 | | | $ | 993,250 | | | | | (3.7%) | | |
SG&A expense as a percentage of total revenue | | 43.6 | % | | 44.4 | % | | | | (0.8) pt. | | |
|
| | | | | | | | | | | | | | | | |
| | | | Change |
(in thousands) | | 2017 | | 2016 | | 2015 | | 2017 vs. 2016 | | 2016 vs. 2015 |
SG&A expense | | $ | 828,832 |
| | $ | 805,970 |
| | $ | 774,859 |
| | 2.8% | | 4.0% |
SG&A expense as a percentage of total revenue | | 42.2 | % | | 43.6 | % | | 43.7 | % | | (1.4) pt. | | (0.1) pt. |
The increasedecrease in SG&A expense for 2017,2023, as compared to 2016,2022, was driven, primarilyin part, by incremental operating expenses of acquired businesses of approximately $63.0 million,various cost reduction actions, including workforce adjustments, marketing optimization and real estate rationalization, as well as an increase in incentive compensation expense a decrease related to the business exits discussed under Executive Overview of approximately $5.0$15 million and investmentsfor 2023. Additionally, acquisition amortization decreased $15.0 million in various revenue growth opportunities, including marketing investments and higher financial institution commission rates.2023, as certain of our intangible assets are amortized using accelerated methods. These increasesdecreases in SG&A expense were partially offset by variousincreased costs related to our continued investments in the business, primarily related to our technology infrastructure.
Total SG&A expense as a percentage of total revenue for 2023 decreased as compared to 2022, as the impact of price increases, our cost reduction actions and the decrease in acquisition amortization more than offset the impact of investments in the business.
Restructuring and Integration Expense
| | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | 2023 | | 2022 | | | | Change | | |
Restructuring and integration expense | | $ | 78,245 | | | $ | 62,529 | | | | | $ | 15,716 | | | |
We continue to pursue several initiatives designed to focus our business behind our growth strategy and to increase our efficiency. The amount of approximately $34.0 million, primarily within our salesrestructuring and marketing organizations, an $8.7 million gainintegration expense is expected to vary from the sale of businesses within our Small Business Services segment and lower legal costs.period to period as we execute these initiatives. Further information regarding the business salesthese costs can be found in Restructuring and Integration Expense in this MD&A discussion.
Gain on Sale of Businesses and Long-Lived Assets | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | 2023 | | 2022 | | | | Change | | |
Gain on sale of businesses and long-lived assets | | $ | 32,421 | | | $ | 19,331 | | | | | $ | 13,090 | | | |
As discussed in Executive Overview, during 2023, we completed the discussionsale of assets held forour North American web hosting and logo design businesses, recognized income from actions related to the decision to exit our payroll and human resources services business, and sold 2 facilities. During 2022, we completed the sale of our Australian web hosting business, our Promotional Solutions retail packaging and strategic sourcing businesses, and a facility. Net cash proceeds from these transactions were $53.6 million during 2023 and $25.2 million during 2022. Further information regarding these business exits can be found under the caption "Note 2: Supplemental balance sheet6: Acquisition and cash flow information" ofDivestitures" in the Notes to Consolidated Financial Statements appearing in Item 8 of this report.
The increase in SG&A expense for 2016, as compared to 2015, was driven primarily by incremental operating expenses of $51.0 million for acquired businesses, as well as investments in various revenue growth opportunities, and an increase in medical costs of approximately $3.0 million. These increases were partially offset by various expense reduction initiatives of approximately $35.0 million, primarily within our sales and marketing organizations, as well as a decrease of approximately $6.0 million in incentive compensation expense.
Net Restructuring Charges
|
| | | | | | | | | | | | | | | | | | | | |
| | | | Change |
(in thousands) | | 2017 | | 2016 | | 2015 | | 2017 vs. 2016 | | 2016 vs. 2015 |
Net restructuring charges | | $ | 8,562 |
| | $ | 7,124 |
| | $ | 4,418 |
| | $ | 1,438 |
| | $ | 2,706 |
|
We recorded restructuring charges and reversals related to the cost reduction initiatives discussed under ExecutiveOverview. The net charges for each period primarily relate to costs of our restructuring and integration activities such as employee severance benefits, information technology costs, employee and equipment moves, training and travel. In addition to the restructuring charges shown here, restructuring charges of $0.6 million in 2017 and 2016 and $1.8 million in 2015 were
included within total cost of revenue in our consolidated statements of income. Further information can be found under Restructuring Costs.
Asset Impairment Charges
|
| | | | | | | | | | | | | | | | | | | | |
| | | | Change |
(in thousands) | | 2017 | | 2016 | | 2015 | | 2017 vs. 2016 | | 2016 vs. 2015 |
Asset impairment charges | | $ | 54,880 |
| | $ | — |
| | $ | — |
| | $ | 54,880 |
| | $ | — |
|
During the third quarter of 2017, we recorded pre-tax asset impairment charges of $46.6 million within Small Business Services related to goodwill, the discontinued NEBS trade name and other non-current assets, primarily internal-use software. Further information regarding these charges can be found under the caption "Note 7: Fair value measurements" of the Notes to Consolidated Financial Statements appearing in Item 8 of this report. Also during 2017, we recorded pre-tax asset impairment charges of $8.3 million related to a small business distributor that was sold during the second quarter of 2017. Further information regarding these charges can be found in the discussion of assets held for sale under the caption "Note 2: Supplemental balance sheet and cash flow information" of the Notes to Consolidated Financial Statements appearing inPart II, Item 8 of this report.
Loss on Early Debt Extinguishment
|
| | | | | | | | | | | | | | | | | | | | |
| | | | Change |
(in thousands) | | 2017 | | 2016 | | 2015 | | 2017 vs. 2016 | | 2016 vs. 2015 |
Loss on early debt extinguishment | | $ | — |
| | $ | 7,858 |
| | $ | 8,917 |
| | $ | (7,858 | ) | | $ | (1,059 | ) |
During the fourth quarter of 2016, we retired all $200.0 million of our 6.0% senior notes due in November 2020, realizing a pre-tax loss of $7.9 million, consisting of a contractual call premium and the write-off of related debt issuance costs. To fund the retirement, we amended the credit agreement governing our credit facility to include a new term loan facility. Further information regarding the term loan facility can be found under the caption "Note 13: Debt and lease obligations" of the Notes to Consolidated Financial Statements appearing in Item 8 of this report.
During the first quarter of 2015, we retired all $200.0 million of our 7.0% senior notes due in March 2019, realizing a pre-tax loss of $8.9 million, consisting of a contractual call premium and the write-off of related debt issuance costs. We funded the retirement utilizing our revolving credit facility and a short-term bank loan that we repaid in December 2015.
Interest Expense
| | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | 2023 | | 2022 | | | | Change | | |
Interest expense | | $ | 125,643 | | | $ | 94,454 | | | | | 33.0% | | |
Weighted-average debt outstanding | | 1,676,858 | | | 1,682,676 | | | | | (0.3%) | | |
Weighted-average interest rate | | 7.06 | % | | 5.19 | % | | | | 1.87 pt. | | |
|
| | | | | | | | | | | | | | | | |
| | | | Change |
(in thousands) | | 2017 | | 2016 | | 2015 | | 2017 vs. 2016 | | 2016 vs. 2015 |
Interest expense | | $ | 21,359 |
| | $ | 22,302 |
| | $ | 20,299 |
| | (4.2%) | | 9.9% |
Weighted-average debt outstanding | | 754,289 |
| | 620,357 |
| | 560,070 |
| | 21.6% | | 10.8% |
Weighted-average interest rate | | 2.55 | % | | 2.85 | % | | 3.22 | % | | (0.30) pt. | | (0.37) pt. |
The decrease in interest expense for 2017, as compared to 2016, was primarily driven by our lower weighted-average interest rate in 2017 resulting from the fourth quarter 2016 retirement of long-term debt that carried a higher interest rate. In addition, 2016 included a charge to interest expense of $2.8 million resulting from the write-off of the fair value adjustment to hedged long-term debt when the debt was retired during the fourth quarter of 2016. Partially offsetting this decrease in interest expense was our higher weighted-average debt level during 2017.
The increase in interest expense for 2016,2023, as compared to 2015,2022, was attributabledue primarily to interest expense of $2.8 million resulting from the write-off of the fair value adjustment to hedged long-term debt when the debt was retired during 2016. In addition, our weighted-average debt outstanding increased during 2016. Partially offsetting these increases in interest expense was the decreaseincrease in our weighted-average interest rate driven by the rising interest rate environment. Based on the amount of variable-rate debt outstanding as of December 31, 2023, a one percentage point change in the weighted-average interest rate would result in a $4 million change in interest expense for 2024.
Income Tax Provision
| | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | 2023 | | 2022 | | | | Change | | |
Income tax provision | | $ | 13,572 | | | $ | 18,848 | | | | | (28.0%) | | |
Effective tax rate | | 34.1 | % | | 22.3 | % | | | | 11.8 pt. | | |
The increase in the effective income tax rate for 2023, as compared to 2015,2022, was driven primarily by an increase of 7.8 points related to the repatriation of foreign earnings and the change in our foreign effective tax rate, as well as a 3.9 point increase driven by return-to-provision adjustments and a 3.5 point increase related to the tax impact of share-based compensation. These increases in our effective income tax rate were partially offset by a benefit of 4.1 points from the impacts of business exits, including related changes in the deferred tax valuation allowance. 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 / Diluted Earnings per Share
| | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands, except per share amounts) | | 2023 | | 2022 | | | | Change | | |
Net income | | $ | 26,227 | | | $ | 65,530 | | | | | (60.0 | %) | | |
Diluted earnings per share | | 0.59 | | | 1.50 | | | | | (60.7 | %) | | |
Adjusted diluted EPS(1) | | 3.32 | | | 4.08 | | | | | (18.6 | %) | | |
(1) Information regarding the calculation of adjusted diluted EPS can be found in the following section entitled Reconciliation of Non-GAAP Financial Measures.
The decreases in net income, diluted EPS and adjusted diluted EPS for 2023, as compared to 2022, were driven by the March 2015 retirementfactors outlined in Executive Overview – 2023 results vs. 2022.
Adjusted EBITDA
| | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | 2023 | | 2022 | | | | Change | | |
Adjusted EBITDA(1) | | $ | 417,135 | | | $ | 418,130 | | | | | (0.2%) | | |
Adjusted EBITDA as a percentage of total revenue (adjusted EBITDA margin)(1) | | 19.0 | % | | 18.7 | % | | | | 0.3 pt. | | |
(1) Information regarding the calculation of long-termadjusted EBITDA and adjusted EBITDA margin can be found in the following section entitled Reconciliation of Non-GAAP Financial Measures.
The slight decrease in adjusted EBITDA for 2023, as compared to 2022, was driven primarily by increased costs related to our continued investments in the business, primarily inefficiencies related to the consolidation of our Payments lockbox business earlier in the year and costs related to our technology infrastructure, as well as inflationary pressures on hourly wages, materials and delivery. Also reducing adjusted EBITDA was the continuing secular decline in checks, business forms and some business accessories, and the business exits discussed under Executive Overview reduced adjusted EBITDA approximately $14 million in 2023. Partially offsetting these decreases in adjusted EBITDA were price increases in response to the inflationary environment, the benefit of actions taken to reduce costs as we continually evaluate our cost structure, and the growth in data-driven marketing and merchant services revenue.
Adjusted EBITDA margin increased for 2023, as compared to 2022, driven by price increases, the benefit of cost saving actions and operating leverage, partially offset by inflationary pressures and our continued investments in the business.
Reconciliation of Non-GAAP Financial Measures
Free cash flow – We define free cash flow as net cash provided by operating activities less purchases of capital assets. We believe that free cash flow is an important indicator of cash available for debt service and for shareholders, after making capital investments to maintain or expand our asset base. A limitation of using the free cash flow measure is that not all of our free cash flow is available for discretionary spending, as we may have mandatory debt payments and other cash requirements that must be deducted from our cash available for future use. We believe that the measure of free cash flow provides an additional metric to compare cash generated by operations on a consistent basis and to provide insight into the cash flow available to fund items such as dividends, mandatory and discretionary debt reduction, acquisitions or other strategic investments, and share repurchases.
Net cash provided by operating activities for the years ended December 31 reconciles to free cash flow as follows:
| | | | | | | | | | | | | | | | |
(in thousands) | | 2023 | | 2022 | | |
Net cash provided by operating activities | | $ | 198,367 | | | $ | 191,531 | | | |
Purchases of capital assets | | (100,747) | | | (104,598) | | | |
Free cash flow | | $ | 97,620 | | | $ | 86,933 | | | |
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 an interest rateusing 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.
Total debt reconciles to net debt as follows as of 7.0%. This debt was replaced with borrowingsDecember 31:
| | | | | | | | | | | | | | |
(in thousands) | | 2023 | | 2022 |
Total debt | | $ | 1,592,851 | | | $ | 1,644,276 | |
Cash and cash equivalents | | (71,962) | | | (40,435) | |
Net debt | | $ | 1,520,889 | | | $ | 1,603,841 | |
Liquidity – We define liquidity as cash and cash equivalents plus the amount available for borrowing under our revolving credit facility, which hadfacility. 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 weighted-average interest ratesubstitute for GAAP liquidity measures. Instead, we believe that this measurement enhances investors' understanding of 1.9% during 2016.the funds that are currently available.
Liquidity was as follows as of December 31:
Income Tax Provision | | | | | | | | | | | |
(in thousands) | 2023 | | 2022 |
Cash and cash equivalents | $ | 71,962 | | | $ | 40,435 | |
Amount available for borrowing under revolving credit facility | 240,514 | | | 295,177 | |
Liquidity | $ | 312,476 | | | $ | 335,612 | |
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.
|
| | | | | | | | | | | | | | | | |
| | | | Change |
(in thousands) | | 2017 | | 2016 | | 2015 | | 2017 vs. 2016 | | 2016 vs. 2015 |
Income tax provision | | $ | 82,672 |
| | $ | 111,004 |
| | $ | 109,318 |
| | (25.5%) | | 1.5% |
Effective tax rate | | 26.4 | % | | 32.6 | % | | 33.3 | % | | (6.2) pt. | | (0.7) pt. |
Diluted earnings per share for the years ended December 31 reconciles to adjusted diluted EPS as follows:
| | | | | | | | | | | | | | | | |
(in thousands, except per share amounts) | | 2023 | | 2022 | | |
Net income | | $ | 26,227 | | | $ | 65,530 | | | |
Net income attributable to non-controlling interest | | (107) | | | (135) | | | |
Net income attributable to Deluxe | | 26,120 | | | 65,395 | | | |
Acquisition amortization | | 74,839 | | | 90,588 | | | |
Accelerated amortization | | 2,500 | | | — | | | |
Restructuring and integration expense | | 90,475 | | | 63,136 | | | |
Share-based compensation expense | | 20,525 | | | 23,676 | | | |
Acquisition transaction costs | | — | | | 130 | | | |
Certain legal-related expense (benefit) | | 2,195 | | | (730) | | | |
Gain on sale of businesses and long-lived assets | | (32,421) | | | (19,331) | | | |
Loss on sale of investment securities | | 1,323 | | | — | | | |
Gain on debt retirements | | — | | | (1,726) | | | |
Adjustments, pretax | | 159,436 | | | 155,743 | | | |
Income tax provision impact of pretax adjustments(1) | | (39,684) | | | (43,854) | | | |
Adjustments, net of tax | | 119,752 | | | 111,889 | | | |
Adjusted net income attributable to Deluxe | | 145,872 | | | 177,284 | | | |
Income allocated to participating securities | | — | | | (98) | | | |
Re-measurement of share-based awards classified as liabilities | | (20) | | | (512) | | | |
Adjusted income attributable to Deluxe available to common shareholders | | $ | 145,852 | | | $ | 176,674 | | | |
| | | | | | |
Weighted-average shares and potential common shares outstanding | | 43,843 | | | 43,310 | | | |
Adjustment(2) | | 46 | | | — | | | |
Adjusted weighted-average shares and potential common shares outstanding | | 43,889 | | | 43,310 | | | |
| | | | | | |
GAAP diluted earnings per share | | $ | 0.59 | | | $ | 1.50 | | | |
Adjustments, net of tax | | 2.73 | | | 2.58 | | | |
Adjusted diluted EPS | | $ | 3.32 | | | $ | 4.08 | | | |
(1)The decreasetax effect of the pretax adjustments considers the tax treatment and related tax rate(s) that apply to each adjustment in ourthe applicable tax jurisdiction(s). Generally, this results in a tax impact that approximates the U.S. effective tax rate for 2017, as compared to 2016, was driven primarily byeach adjustment. However, the tax impact of federalcertain adjustments, such as share-based compensation expense and gains on sales of businesses, depends on whether the amounts are deductible in the respective tax reform underjurisdictions and the Tax Cuts and Jobs Act of 2017, which reduced income tax expense $20.5 million and reduced ourapplicable effective tax rate 6.6 points.rate(s) in those jurisdictions.
(2) The total of weighted-average shares and potential common shares outstanding used in the calculation of adjusted diluted EPS differs from the GAAP calculation due to differences in the amount of dilutive securities in each calculation.
Adjusted EBITDA and adjusted EBITDA margin – We believe that adjusted EBITDA and adjusted EBITDA margin are useful in evaluating our operating performance, as they eliminate the effect of interest expense, income taxes, the accounting effects of capital investments (i.e., depreciation and amortization) and certain items, as presented below, that may vary for 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 outlook for 2023 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 and integration expense; gains and losses on sales of businesses and long-lived assets; and certain legal-related expenses, a reconciliation of the non-GAAP financial measure outlook guidance to the corresponding GAAP measure is not available without unreasonable effort. The probable significance of certain of these reconciling items is high and, based on historical experience, could be material.
Net income for the years ended December 31 reconciles to adjusted EBITDA and adjusted EBITDA margin as follows:
| | | | | | | | | | | | | | | | |
(in thousands) | | 2023 | | 2022 | | |
Net income | | $ | 26,227 | | | $ | 65,530 | | | |
Non-controlling interest | | (107) | | | (135) | | | |
Depreciation and amortization expense | | 169,703 | | | 172,552 | | | |
Interest expense | | 125,643 | | | 94,454 | | | |
Income tax provision | | 13,572 | | | 18,848 | | | |
Restructuring and integration expense | | 90,475 | | | 63,136 | | | |
Share-based compensation expense | | 20,525 | | | 23,676 | | | |
Acquisition transaction costs | | — | | | 130 | | | |
Certain legal-related expense (benefit) | | 2,195 | | | (730) | | | |
Gain on sale of businesses and long-lived assets | | (32,421) | | | (19,331) | | | |
Loss on sale of investment securities | | 1,323 | | | — | | | |
Adjusted EBITDA | | $ | 417,135 | | | $ | 418,130 | | | |
Adjusted EBITDA margin | | 19.0 | % | | 18.7 | % | | |
| | |
RESTRUCTURING AND INTEGRATION EXPENSE |
Restructuring and integration expense consists of costs related to initiatives to drive earnings and cash flow growth and also includes costs related to the consolidation and migration of certain applications and processes, including our financial management system. These costs consist primarily of consulting, project management services and internal labor, as well as other costs associated with our initiatives, such as costs related to facility closures and consolidations. In addition, we have recorded employee severance costs across functional areas.
We are currently pursuing several initiatives designed to support our growth strategy and to increase our efficiency, including several initiatives that we collectively refer to as our North Star program. The goal of these initiatives is to further drive shareholder value by (1) expanding our EBITDA growth trajectory, (2) increasing cash flow, (3) paying down debt, and (4) improving our leverage ratio. Our various initiatives include a balanced mix of structural cost reductions focused on organizational structure, processes and operational improvements, in addition to workstreams to drive revenue growth. We have already combined like-for-like capabilities, reduced management layers and consolidated core operations to run more efficiently and to create the ability to invest in high impact talent to accelerate our growth businesses of payments and data. The associated costs, which consisted primarily of consulting and severance costs, drove the increase in restructuring and integration expense during 2023. Further information regarding the impact of this legislationrestructuring and integration expense can be found under the caption "Note 9: Income tax provision" ofRestructuring and Integration Expense" in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report. Also reducing our effective tax rate in 2017 was the impact of the asset impairment charges recorded during 2017 related to a small business distributor that was sold during the second quarter of 2017. These impairment charges reduced the book basis of the assets relative to our tax basis in the stock of the small business distributor, which increased the related deferred tax asset $1.7 million. In addition, we reversed tax reserves upon the completion of audit activity during 2017. Partially offsetting these decreases in our effective tax rate was the impact of the goodwill impairment charge in 2017, which increased our effective tax rate 1.5 points.
We expect that our effective tax rate for 2018 will be approximately 25%.
The decrease in our effective tax rate for 2016, as compared to 2015, was primarily due to the tax impact of stock-based compensation, which reduced income tax expense $4.0 million for 2016 and reduced our effective tax rate 1.2 points. In addition, our effective tax rate for 2016 included the benefitbenefits of the reversalvarious North Star initiatives will ramp up over the coming quarters. The overall program targets a $100 million run-rate improvement in free cash flow and an $80 million run-rate improvement in adjusted EBITDA by 2026. Through December 31, 2023, we incurred related restructuring and integration expense of a foreign valuation allowance of $0.5 million. Partially offsetting these decreases in our effective tax rate for 2016 was a lower production activities deductionapproximately $45 million, and a higher state income tax rate in 2016, as well as a higher benefit in 2015 relatedwe expect to company-owned life insurance policies.
RESTRUCTURING COSTS
We have recorded expenses relatedincur an additional $70 million to our restructuring activities, including accruals consisting primarily of$90 million over the next 2 years. These charges will include employee severance, benefits, as well as costs that are expensed when incurred, including information technology costs, employeeprofessional services fees and equipment moves, training and travel. Our restructuring activities are driven by our cost reduction and integration initiatives, including employee reductions in various functional areas, as well as the closing of facilities. During 2017, we closed a retail packaging sales location, a fulfillment facility and 2 administrative facilities. During 2016, we closed a printing facility, a call center, 2 warehouses and a facility housing general office space, and during 2015, we closed 2 call centers, a sales office, a warehouse, a fulfillment facility and a facility that contained both fulfillment and call center functions. Restructuring costs have been reduced by the reversal of severance accruals when fewer employees receive severance benefits than originally estimated.other restructuring-related charges.
Net restructuring charges for the years ended December 31 were as follows:
|
| | | | | | | | | | | | |
(dollars in thousands) | | 2017 | | 2016 | | 2015 |
Severance accruals | | $ | 7,843 |
| | $ | 7,217 |
| | $ | 5,891 |
|
Severance reversals | | (667 | ) | | (864 | ) | | (1,197 | ) |
Operating lease obligations | | 23 |
| | 59 |
| | 338 |
|
Net restructuring accruals | | 7,199 |
| | 6,412 |
|
| 5,032 |
|
Other costs | | 1,931 |
| | 1,359 |
| | 1,202 |
|
Net restructuring charges | | $ | 9,130 |
| | $ | 7,771 |
|
| $ | 6,234 |
|
Number of employees included in severance accruals | | 200 |
| | 265 |
| | 290 |
|
The majority of the employee reductions included in our restructuring and integration accruals as of December 31, 2023, as well as the related severance payments, are expected to be completed by mid-2018, and we expect most of the related severance payments to be paid by the third quarter of 2018, utilizing cash from operations.
mid-2024. As a result of our employee reductions, and facility closings,including those related to our North Star program, we realized cost savings of approximately $2.0$7 million in total cost of revenuesales and $16.0$25 million in SG&A expense in 2017,2023, in comparison to our 20162022 results of operations, which represents a portion of the approximately $45.0 million of total net costoperations. For those employee reductions we realizedincluded in 2017. In 2018,our restructuring and integration accruals through December 31, 2023, we expect to realize annual cost savings of approximately $2.0$8 million in total cost of revenuesales and $11.0$25 million in SG&A expense in 2024, in comparison to our 20172023 results of operations. In addition, we realized cost savings from facility closures of approximately $3 million in 2023, in comparison to our 2022 results of operations, which represents a portionand we anticipate savings of the estimated $50.0approximately $3 million in 2024, in comparison to our 2023 results of total net cost reductions we expect to realize in 2018. Expense reductions consist primarily ofoperations. Note that these savings may be offset by increased labor and facility costs. Information aboutother costs, including inflationary impacts and investments in the other initiatives drivingbusiness.
As of December 31, 2023, we operated 4 reportable business segments: Payments, Data Solutions, Promotional Solutions and Checks. These segments were generally organized by product type and reflected the way we managed the company. The financial information presented below for our cost savings can be found in reportable business segments is consistent with that presented
Executive Overview.
Further information regarding our restructuring charges can be found under the caption “Note 8: Restructuring charges” of17: Business Segment Information” in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report.
SEGMENT RESULTS
Additional financialreport, where information regarding revenue for our business segments appears under the caption “Note 16: Business segment information” of the Notes to Consolidated Financial Statements appearing in Item 8 of this report.product and service offerings can also be found.
Small Business ServicesPayments
This segment's products and services are promoted through direct response mail and internet advertising; referrals from financial institutions, telecommunications clients and other partners; networks of Safeguard distributors and independent dealers; a direct sales force that focuses on selling to and through major accounts; and an outbound telemarketing group. Results for thisour Payments segment were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | 2023 | | 2022 | | | | Change | | |
Total revenue | | $ | 690,704 | | | $ | 678,580 | | | | | 1.8% | | |
Adjusted EBITDA | | 152,798 | | | 144,605 | | | | | 5.7% | | |
Adjusted EBITDA margin | | 22.1 | % | | 21.3 | % | | | | 0.8 pt. | | |
|
| | | | | | | | | | | | | | | | |
| | | | | | | | Change |
(in thousands) | | 2017 | | 2016 | | 2015 | | 2017 vs. 2016 | | 2016 vs. 2015 |
Total revenue | | $ | 1,239,739 |
| | $ | 1,195,743 |
| | $ | 1,151,916 |
| | 3.7% | | 3.8% |
Operating income | | 182,807 |
| | 208,789 |
| | 203,933 |
| | (12.4%) | | 2.4% |
Operating margin | | 14.7 | % | | 17.5 | % | | 17.7 | % | | (2.8) pt. | | (0.2) pt. |
The increase in total revenue for 2017,2023, as compared to 2016,2022, was due to an increase in merchant services revenue of 4.8%, driven by incrementalstrong merchant fees and volume. Treasury management revenue was flat year-over-year as price increases in response to the inflationary environment were offset by the impact of non-recurring revenue in the prior year and continued demand softness for lockbox services. For 2024, we expect mid-single digit percentage revenue growth for this segment.
The increase in adjusted EBITDA for 2023, as compared to 2022, was primarily driven by the revenue growth in merchant services, benefits from acquired businesses of approximately $56.0 million,operational improvements across our lockbox sites, and price increases in response to the inflationary environment. These increases in adjusted EBITDA were partially offset by continued information technology investments and inflationary pressures on labor costs, as well as the benefit of price increases. Information aboutlower lockbox services volume. For 2024, we expect adjusted EBITDA margin to continue in the low to mid 20% range.
Data Solutions
Results for our acquisitions can be found under the caption “Note 5: Acquisitions” of the Notes to Consolidated Financial Statements appearing in Item 8 of this report. These increases in revenueData Solutions segment were partially offset by lower order volume, primarily related to checks, forms and accessories, as check and forms usage continues to decline, as well as the strategic decision to eliminate low margin business.follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | 2023 | | 2022 | | | | Change | | |
Total revenue | | $ | 238,817 | | | $ | 267,525 | | | | | (10.7%) | | |
Adjusted EBITDA | | 55,700 | | | 68,214 | | | | | (18.3%) | | |
Adjusted EBITDA margin | | 23.3 | % | | 25.5 | % | | | | (2.2) pt. | | |
The decrease in operating income and operating margintotal revenue for 2017,2023, as compared to 2016,2022, was primarilydriven by the business exits discussed in Executive Overview, which resulted in a reduction in revenue of approximately $38 million for 2023. In addition, revenue from our North American web hosting business prior to the divestiture declined due to pre-tax asset impairment charges of $54.9 million related to goodwill, the discontinued NEBS trade name, a small business distributor that was sold during the second quarter of 2017, and other non-current assets, primarily internal-use software. These charges reduced operating margin 4.4 points for 2017. Further information regarding these charges can be found under the caption "Note 7: Fair value measurements" of the Notes to Consolidated Financial Statements appearing in Item 8 of this report. In addition, operating income was impacted by lower order volume for checks, forms and accessories; investments in various revenue growth opportunities, including marketing investments and higher financial institution commission rates; higher incentive compensation expense; and increased material and delivery rates.continuing customer churn. Partially offsetting these decreases in operating income were price increasesrevenue was an increase in data-driven marketing revenue of $15 million for 2023, as demand increased for our marketing services in support of banks attracting low-cost deposits and benefitsexpansion of business banking account offerings. This increase was partially offset by the impact of certain of our cost reduction initiatives,customer's marketing campaigns being pulled into the fourth quarter of 2022. For 2024, we expect that revenue will decline approximately $27 million as a result of the business exits and that the remainder of the business will deliver mid-single digit percentage revenue growth.
The decrease in adjusted EBITDA for 2023, as compared to 2022, was driven by the business exits discussed under Executive Overview, which reduced adjusted EBITDA by approximately $13 million for 2023, as well as gainsthe decrease in North American web hosting revenue prior to the divestiture. These decreases in adjusted EBITDA were partially offset by the growth in data-driven marketing and the benefit of $8.7various cost reduction actions. Adjusted EBITDA margin decreased for 2023, as compared to 2022, as the shift toward data-driven marketing revenue was offset by expense management. For 2024, we expect that adjusted EBITDA will decline approximately $9 million fromdue to business exits, and we expect that adjusted EBITDA margin will be in the sale of businesseslow 20% range.
Promotional Solutions
Results for our Promotional Solutions segment were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | 2023 | | 2022 | | | | Change | | |
Total revenue | | $ | 541,650 | | | $ | 562,917 | | | | | (3.8%) | | |
Adjusted EBITDA | | 80,751 | | | 79,549 | | | | | 1.5% | | |
Adjusted EBITDA margin | | 14.9 | % | | 14.1 | % | | | | 0.8 pt. | | |
The decrease in 2017. Further information regardingtotal revenue for 2023, as compared to 2022, was driven primarily by the continuing secular decline in business forms and some accessories and some demand softness in our distributor network. Additionally, the business sales can be foundexits discussed in the discussion of assets held for sale under the caption "Note 2: Supplemental balance sheet and cash flow information" of the Notes to Consolidated Financial Statements appearing in Item 8 of this report. The results of acquired businessesExecutive Overview resulted in a slight increaserevenue decline of approximately $13 million for 2023. Partially offsetting these decreases in operating income for 2017, including acquisition-related amortization, but resultedrevenue was the impact of price increases in response to the inflationary environment, new clients and relationship expansion with existing clients. For 2024, we expect a 0.9 point decrease in operating margin for 2017.low to mid single digit percentage revenue decline.
The increase in total revenueadjusted EBITDA for 2016,2023, as compared to 2015,2022, was driven primarily by incremental revenue of approximately $75.0 million from acquired businesses, as well as the benefit of price increases. Further information about our acquisitions can be found under the caption “Note 5: Acquisitions” of the Notes to Consolidated Financial Statements appearing in Item 8 of this report. These increases in revenue were partially offset by lower order volume, primarily related to business checks, forms and accessories, as check and forms usage continues to decline.cost reduction actions. In addition, revenue declined due to an unfavorable currency exchange rate impact of approximately $3.0 million.
The increase in operating income for 2016, as compared to 2015, was primarily due to price increases, benefits of our cost reduction initiativeswe are taking a more focused approach and lower incentive compensation expense.targeting products with better margins. Partially offsetting these increases in operating incomeadjusted EBITDA were inflationary pressures on materials and delivery, the continuing secular decline in business forms and some accessories, and some demand softness in our distributor network. Adjusted EBITDA margin increased delivery ratesfor 2023, as compared to 2022, as price increases, the benefit of cost reduction actions and material costs in 2016, higher medical costs and an increase in commission expense of approximately $2.0 million due primarily to increased financial institution commission rates. Whileour focus on products with better margins more than offset the impact of acquired businesses was slightly positiveinflationary pressures. For 2024, we expect the adjusted EBITDA margin percentage to operating income for 2016, operating margin decreased 1.1 points for 2016 due to acquired businesses.
Financial Services
remain in the mid-teens.
Financial Services' products and services are sold primarily through a direct sales force, which executes product and service supply contracts with our financial institution clients, including banks, credit unions and financial services companies.
Checks
Results for
thisour Checks segment were as follows:
| | | | | | | | | | Change |
(in thousands) | | 2017 | | 2016 | | 2015 | | 2017 vs. 2016 | | 2016 vs. 2015 |
(in thousands) | |
(in thousands) | |
Total revenue | | $ | 585,275 |
| | $ | 499,976 |
| | $ | 455,390 |
| | 17.1% | | 9.8% |
Operating income | | 101,644 |
| | 106,820 |
| | 91,539 |
| | (4.8%) | | 16.7% |
Operating margin | | 17.4 | % | | 21.4 | % | | 20.1 | % | | (4.0) pt. | | 1.3 pt. |
Total revenue | |
Total revenue | |
Adjusted EBITDA | |
Adjusted EBITDA | |
Adjusted EBITDA | |
Adjusted EBITDA margin | |
Adjusted EBITDA margin | |
Adjusted EBITDA margin | |
The increase in revenue for 2017, as compared to 2016, was driven by growth in MOS revenue of approximately $106.0 million, primarily from incremental revenue from acquired businesses of approximately $117.0 million. The increase from acquisitions was partially offset by a decrease in Deluxe Rewards revenue of approximately $9.0 million driven primarily by pricing adjustments and the loss of Verizon Communications Inc. as a customer. Further information about our acquisitions can be found under the caption “Note 5: Acquisitions” of the Notes to Consolidated Financial Statements appearing in Item 8 of this report. In addition, revenue benefited from price increases. Partially offsetting these revenue increases was lower check order volume due to the continued decline in check usage, as well as the impact of continued pricing allowances.
The decrease in operating income and operating margintotal revenue for 2017,2023, as compared to 2016,2022, was driven primarily dueby the continuing secular decline in overall check volumes, partially offset by price increases in response to the impact of lowerinflationary environment. For 2024, we expect the percentage revenue decline to be in the low to mid single digits, consistent with our long-term expectations.
Adjusted EBITDA for 2023 was flat as compared to 2022, as the secular decline in overall check order volume; continued pricing allowances; higher incentive compensation expense; increasedvolumes and inflationary pressures on delivery and material rates; and the decline in Deluxe Rewards revenue. Partially offsetting these decreases in operating incomematerials were offset by price increases and the benefit of our continuing cost reduction initiatives. While acquired businesses contributed approximately $7.0 million to operating income in 2017, including acquisition-related amortization, operatingsaving actions. Adjusted EBITDA margin decreased 3.0 points for 2017 due to acquired businesses.
The increase in revenue for 2016,2023 increased as compared to 2015, was driven2022, as inflationary cost pressures were more than offset by growth in MOS revenue of approximately $48.0 million for 2016, including incremental revenue from acquired businesses of approximately $39.0 million, as well as growth of approximately $8.0 million in revenue from treasury management solutions. Further information about our acquisitions can be found under the caption “Note 5: Acquisitions” of the Notes to Consolidated Financial Statements appearing in Item 8 of this report. In addition, revenue benefited from previous price increases. Partially offsetting these revenue increases was lower check order volume due to the continued decline in check usage, as well as the impact of continued pricing allowances.
The increase in operating income and operating margin for 2016, as compared to 2015, was primarily due to previous price increases, the benefit of our continuingthe pricing and cost reduction initiatives, compensation expensesaving actions. For 2024, we expect adjusted EBITDA margin to remain in 2015 of approximately $4.0 million for an earn-out agreement related to a 2013 acquisition and lower incentive compensation expense. Partially offsetting these increases in operating income was the impact of lower check order volume, continued pricing allowances, investments in revenue growth opportunities and increased delivery, material and medical costs in 2016. Additionally, transaction costs related to acquisitions increased approximately $3.0 million in 2016 due to costs associated with the acquisition of FMCG in December 2016, and restructuring costs increased approximately $1.0 million. Further information regarding restructuring costs can be found under mid 40% range.
Restructuring Costs. While the impact of acquired businesses was slightly positive to operating income for 2016, including acquisition-related amortization, operating margin decreased 1.5 points for 2016 due to acquired businesses.
Direct Checks sells products and services directly to consumers using direct marketing, including print advertising and search engine marketing and optimization strategies. Direct Checks sells under various brand names, including Checks Unlimited®, Designer Checks®, Checks.com®, Check Gallery®, The Styles Check Company®, and Artistic Checks®, among others. Results for this segment were as follows:
|
| | | | | | | | | | | | | | | | |
| | | | | | | | Change |
(in thousands) | | 2017 | | 2016 | | 2015 | | 2017 vs. 2016 | | 2016 vs. 2015 |
Total revenue | | $ | 140,542 |
| | $ | 153,343 |
| | $ | 165,511 |
| | (8.3%) | | (7.4%) |
Operating income | | 46,741 |
| | 53,118 |
| | 58,859 |
| | (12.0%) | | (9.8%) |
Operating margin | | 33.3 | % | | 34.6 | % | | 35.6 | % | | (1.3) pt. | | (1.0) pt. |
The decrease in revenue for 2017, as compared to 2016, was primarily due to a reduction in orders stemming from the continued decline in check usage. Partially offsetting the volume decline was higher revenue per order, driven by price increases and various sales initiatives.
The decrease in operating income and operating margin for 2017, as compared to 2016, was due primarily to lower order volume and increased delivery and material costs in 2017. These decreases in operating income were partially offset by benefits from our cost reduction initiatives, including lower advertising expense driven by changes in circulation intended to maximize response rates, and higher revenue per order.
The decrease in revenue for 2016, as compared to 2015, was primarily due to a reduction in orders stemming from the continued decline in check usage. Partially offsetting the volume decline was higher revenue per order, primarily driven by an improved call center incentive plan.
The decrease in operating income and operating margin for 2016, as compared to 2015, was due primarily to lower order volume and increased delivery rates and material costs in 2016. These decreases in operating income were partially offset by benefits from our cost reduction initiatives, including lower advertising expense, as well as higher revenue per order.
CASH FLOWS AND LIQUIDITY
As of December 31, 2017,2023, we held cash and cash equivalents of $59.2$72.0 million,. as well as restricted cash and restricted cash equivalents included in funds held for customers and in other non-current assets of $386.1 million. The following table shows our cash flow activity for the last 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) | | 2017 | | 2016 | | 2015 | | 2017 vs. 2016 | | 2016 vs. 2015 |
Net cash provided by operating activities | | $ | 338,431 |
| | $ | 319,312 |
| | $ | 309,631 |
| | $ | 19,119 |
| | $ | 9,681 |
|
Net cash used by investing activities | | (180,891 | ) | | (310,786 | ) | | (251,140 | ) | | 129,895 |
| | (59,646 | ) |
Net cash (used) provided by financing activities | | (176,949 | ) | | 4,275 |
| | (48,387 | ) | | (181,224 | ) | | 52,662 |
|
Effect of exchange rate change on cash | | 2,075 |
| | 1,346 |
| | (9,218 | ) | | 729 |
| | 10,564 |
|
Net change in cash and cash equivalents | | $ | (17,334 | ) | | $ | 14,147 |
|
| $ | 886 |
| | $ | (31,481 | ) | | $ | 13,261 |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | 2023 | | 2022 | | | | Change | | |
Net cash provided by operating activities | | $ | 198,367 | | | $ | 191,531 | | | | | $ | 6,836 | | | |
Net cash used by investing activities | | (43,305) | | | (80,325) | | | | | 37,020 | | | |
Net cash used by financing activities | | (37,679) | | | (48,601) | | | | | 10,922 | | | |
Effect of exchange rate change on cash, cash equivalents, restricted cash and restricted cash equivalents | | 3,235 | | | (10,681) | | | | | 13,916 | | | |
Net change in cash, cash equivalents, restricted cash and restricted cash equivalents | | $ | 120,618 | | | $ | 51,924 | | | | | $ | 68,694 | | | |
Free cash flow(1) | | $ | 97,620 | | | $ | 86,933 | | | | | $ | 10,687 | | | |
The $19.1 million increase in net
(1) See Reconciliation of Non-GAAP Financial Measures within the Consolidated Results of Operations section, which defines and illustrates how we calculate free cash flow.
Cash provided by operating activities for 2017,2023 increased $6.8 million as compared to 2016, was primarily due to cash generated2022, driven by operations, an $11.6positive changes in working capital, pricing and cost saving actions, and a decrease of $9.5 million decrease in payments for incentive compensation and the payment in 2016 of an incentivecloud computing implementation costs related to a 2013 acquisition. Thesethe implementation of our financial management system, which was completed in early 2023. Growth in data-driven marketing and merchant services revenue also contributed to the increase in operating cash flow. Partially offsetting these increases in netoperating cash provided byflow was a $28.4 million increase in interest payments as a result of rising interest rates, as well as a $9.5 million increase in employee bonus payments related to our 2022 operating activities were partially offset byperformance and a $27.6$9.3 million increase in income tax payments as well as higher contract acquisition payments.
The $9.7 million increasedriven, in net cash providedlarge part, by operating activities for 2016, as compared to 2015, was primarily due to stronger operating performance and a $13.7 million decrease in incomethe timing of our federal tax payments. These increasesOperating cash flow was also negatively impacted by the continuing secular decline in net cash provided by operating activities were partially offset by a $10.3 million increase in contract acquisition payments, a $7.5 million increase in medical benefit paymentschecks, business forms and certain Promotional Solutions business accessories, inflationary pressures on hourly wages, materials and delivery, and the payment in 2016impact of a $5.4 million incentive related to a 2013 acquisition. The increase in medical benefit payments was due to increased medical costs in 2016, as well as the use in 2015 of the remaining assets of the trust we used to fund medical benefits, which was discontinued effective December 31, 2015.business exits.
Included in net cash provided by operating activities were the following operating cash outflows:
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Change |
(in thousands) | | 2017 | | 2016 | | 2015 | | 2017 vs. 2016 | | 2016 vs. 2015 |
Income tax payments | | $ | 124,878 |
| | $ | 97,309 |
| | $ | 110,999 |
| | $ | 27,569 |
| | $ | (13,690 | ) |
Medical benefit payments(1) | | 38,806 |
| | 35,217 |
| | 27,764 |
| | 3,589 |
| | 7,453 |
|
Contract acquisition payments | | 27,079 |
| | 23,068 |
| | 12,806 |
| | 4,011 |
| | 10,262 |
|
Incentive compensation payments(2) | | 21,174 |
| | 32,792 |
| | 31,046 |
| | (11,618 | ) | | 1,746 |
|
Interest payments | | 19,465 |
| | 20,975 |
| | 24,286 |
| | (1,510 | ) | | (3,311 | ) |
Severance payments | | 6,981 |
| | 5,938 |
| | 5,172 |
| | 1,043 |
| | 766 |
|
Incentive payment related to previous acquisition | | — |
| | 5,434 |
| | — |
| | (5,434 | ) | | 5,434 |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | 2023 | | 2022 | | | | Change | | |
Interest payments | | $ | 115,556 | | | $ | 87,108 | | | | | $ | 28,448 | | | |
Income tax payments | | 47,945 | | | 38,629 | | | | | 9,316 | | | |
Performance-based compensation payments(1) | | 44,483 | | | 34,972 | | | | | 9,511 | | | |
Prepaid product discount payments | | 28,535 | | | 30,603 | | | | | (2,068) | | | |
Severance payments | | 16,942 | | | 9,973 | | | | | 6,969 | | | |
Payments for cloud computing arrangement implementation costs | | 9,118 | | | 18,649 | | | | | (9,531) | | | |
(1) For 2015, this amount represents payments made to fund our voluntary employee beneficiary association (VEBA) trust used to pay medical benefits, as well as retiree medical benefits paid from company funds. The VEBA trust was discontinued effective December 31, 2015. For 2017 and 2016, this amount represents cash payments made directly to medical service providers for employee medical benefits, as well as retiree medical benefits paid from company funds.
(2) (1) Amounts reflect paymentscompensation based on total company and segment performance.
Net cash used by investing activities in 2017for 2023 was $129.9$37.0 million lower than in 2016,2022, driven primarily by a decrease in payments for acquisitions of $131.7 million. In 2017, we made aggregate payments for acquisitions of $139.2$28.4 million net of cash acquired, compared to aggregate payments for acquisitions of $270.9 million in 2016, net of cash acquired. Information regarding our acquisitions can be found under the caption “Note 5: Acquisitions” of the Notes to Consolidated Financial Statements appearing in the Item 8 of this report.
Net cash used by investing activities in 2016 was $59.6 million higher than in 2015, driven primarily by an increase in payments for acquisitionsproceeds from sales of $57.9 million. In 2016, we made aggregate payments for acquisitions of $270.9 million, net of cash acquired, compared to aggregate payments for acquisitions of $213.0 million in 2015, net of cash acquired. Information regarding our acquisitions can be found under the caption “Note 5: Acquisitions” of the Notes to Consolidated Financial Statements appearing in the Item 8 of this report.businesses and long-lived assets.
Net cash used by financing activities for 2023 was $10.9 million lower than 2022, driven by the net change in 2017 was $181.2 millioncustomer funds obligations in each period, partially offset by higher thanpayments of debt during 2023 enabled, in 2016, due primarily to a net increase in payments on long-term debt of $168.0 million, a $9.8 million increase in share repurchases and a $3.8 million increase in employee taxes paid for shares withheld related to stock-based compensation activity.part, by the proceeds received from business exits during 2023.
Net cash provided by financing activities in 2016 was $52.7 million higher than in 2015, due primarily to an increase in net borrowings of $50.9 million, which were used primarily for acquisitions and share repurchases. In addition, payments for share repurchases were $4.7 million less in 2016.
Significant cash transactions, excluding those related to operating activities, for each period were as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Change |
(in thousands) | | 2017 | | 2016 | | 2015 | | 2017 vs. 2016 | | 2016 vs. 2015 |
Payments for acquisitions, net of cash acquired | | $ | (139,223 | ) | | $ | (270,939 | ) | | $ | (212,990 | ) | | $ | 131,716 |
| | $ | (57,949 | ) |
Payments for common shares repurchased | | (65,000 | ) | | (55,224 | ) | | (59,952 | ) | | (9,776 | ) | | 4,728 |
|
Cash dividends paid to shareholders | | (58,098 | ) | | (58,720 | ) | | (59,755 | ) | | 622 |
| | 1,035 |
|
Net change in debt | | (51,165 | ) | | 116,811 |
| | 65,938 |
| | (167,976 | ) | | 50,873 |
|
Purchases of capital assets | | (47,450 | ) | | (46,614 | ) | | (43,261 | ) | | (836 | ) | | (3,353 | ) |
Proceeds from issuing shares under employee plans | | 9,033 |
| | 9,114 |
| | 5,895 |
| | (81 | ) | | 3,219 |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | 2023 | | 2022 | | | | Change | | |
Purchases of capital assets | | $ | (100,747) | | | $ | (104,598) | | | | | $ | 3,851 | | | |
Net change in debt | | (55,188) | | | (40,613) | | | | | (14,575) | | | |
Cash dividends paid to shareholders | | (53,325) | | | (52,647) | | | | | (678) | | | |
Net change in customer funds obligations | | 79,063 | | | 56,426 | | | | | 22,637 | | | |
Proceeds from sale of businesses and long-lived assets | | 53,635 | | | 25,248 | | | | | 28,387 | | | |
We anticipate that net
In assessing our cash provided byneeds, we must consider our debt service requirements, lease obligations, other contractual commitments and contingent liabilities. Information regarding the maturities of our long-term debt, our operating activities willand finance lease obligations and contingent liabilities can be between $360.0 millionfound under the captions "Note 13: Debt," "Note 14: Leases" and $380.0 million"Note 15: Other Commitments and Contingencies," all of which appear in 2018, comparedthe Notes to $338.4 millionConsolidated Financial Statements appearing in 2017, driven by stronger operating performancePart II, Item 8 of this report. In addition, we have executed contracts with third-party service providers, primarily for information technology services, including cloud computing and a decrease in income tax payments of approximately $25.0 million driven primarily by the Tax Cuts and Jobs Act of 2017, partially offset by higher interest and medical payments. We anticipate that net cash generated by operating activities in 2018, along with availability underprofessional services agreements related to our revolving credit facility, will be utilized for dividend payments, capital expenditures of approximately $55.0 million, and required debt principal and interest payments,various restructuring initiatives, as well as likely acquisitions. We intendagreements for outsourced services, the purchase of data, and payment acceptance services. These contracts obligate us to focus our capital spending on key revenue growth initiativespay approximately $230 million in total, with approximately $100 million due during 2024, $50 million due during 2025 and investments in order fulfillment and information technology infrastructure. the remainder due through 2028.
As of December 31, 2017, $101.62023, $240.5 million was available for borrowing under our revolving credit facility. To the extent we generate excessWe anticipate that net cash we plan to opportunistically repurchase common shares and/or reduce the amount outstanding under our credit facility agreement.
As of December 31, 2017, we intend to indefinitely reinvest the undistributed earnings of our subsidiaries located outside of the United States and, therefore, no deferred income taxes have been recognized for the tax effects of repatriation. After enactment of the Tax Cuts and Jobs Act of 2017, the tax effects would generally be limited to foreign withholding taxes on any distributions. As of December 31, 2017, the amount ofgenerated by operations, along with cash and cash equivalents held by our foreign subsidiaries was $40.0 million, primarily in Canada. If we were to repatriate all of our foreign cashon hand and cash equivalents into the United States at one time, we would incur a tax liability of approximately $2.0 million, based on current tax laws.
We believe that cash generated by operating activities, along with availability under our revolving credit facility, will be sufficient to support our operations, in 2018, including dividend payments, capital expenditures, requiredour contractual obligations and our debt principal and interest payments, and periodic share repurchases,service requirements, for the next 12 months, as well as likely acquisitions.our long-term capital requirements. We also believeanticipate that we have accesswill continue to capital markets should additional cash be necessarypay our regular quarterly dividend. However, dividends are approved by our board of directors each quarter and thus, are subject to fund acquisitions that exceed amounts available underchange.
The principal amount of our credit facility. Asdebt obligations was $1.60 billion as of December 31, 2017, $707.9 million was outstanding under our credit facility agreement that matures in February 2019. We plan to obtain a new multi-year credit facility to refinance amounts outstanding under the current credit facility2023 and to satisfy those obligations. We have been successful in obtaining long-term financing with terms and in amounts adequate to meet our objectives in the past, and we expect to execute the new credit facility in the first half of 2018.
CAPITAL RESOURCES
Our total debt was $709.3 million$1.66 billion as of December 31, 2017, a decrease of $49.3 million from December 31, 2016.2022. Further information concerning our outstanding debt, including our debt service obligations, can be found under the caption "Note 13: Debt and lease obligations” ofDebt” in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report. Information regarding our debt service obligations can be found under
Off-Balance Sheet Arrangements, Guarantees and Contractual Obligations.
Our capital structure for each period was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2023 | | December 31, 2022 | | |
(in thousands) | | Amount | | Period-end interest rate | | Amount | | Period-end interest rate | | Change |
Fixed interest rate(1) | | $ | 1,246,659 | | | 7.0 | % | | $ | 975,000 | | | 6.6 | % | | $ | 271,659 | |
Floating interest rate | | 357,528 | | | 7.9 | % | | 684,375 | | | 6.6 | % | | (326,847) | |
Total debt principal | | 1,604,187 | | | 7.2 | % | | 1,659,375 | | | 6.6 | % | | (55,188) | |
Shareholders’ equity | | 604,616 | | | | | 604,224 | | | | | 392 | |
Total capital | | $ | 2,208,803 | | | | | $ | 2,263,599 | | | | | $ | (54,796) | |
|
| | | | | | | | | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 | | |
(in thousands) | | Amount | | Weighted- average interest rate | | Amount | | Weighted- average interest rate | | Change |
Fixed interest rate | | $ | 1,914 |
| | 2.0 | % | | $ | 1,685 |
| | 2.0 | % | | $ | 229 |
|
Floating interest rate | | 707,386 |
| | 3.0 | % | | 756,963 |
| | 2.2 | % | | (49,577 | ) |
Total debt | | 709,300 |
| | 3.0 | % | | 758,648 |
| | 2.2 | % | | (49,348 | ) |
Shareholders’ equity | | 1,015,013 |
| | |
| | 880,970 |
| | |
| | 134,043 |
|
Total capital | | $ | 1,724,313 |
| | |
| | $ | 1,639,618 |
| | |
| | $ | 84,695 |
|
During 2017, we repurchased a total of 0.9 million shares(1) The fixed interest rate amount includes the amount of our common stock for $65.0 million. We had anvariable-rate debt that is subject to interest rate swap agreements. The related interest rate includes the fixed rate under the swaps plus the credit facility spread due on all amounts outstanding authorization fromunder our credit facility.
In October 2018, our board of directors to purchase up to 10 million shares of our common stock. We completed the purchase of all of the remaining shares under this authorization during the first quarter of 2017. In May 2016, our board of directors approved an additional authorization forauthorized the repurchase of up to $300.0$500.0 million of our common stock, effective at the conclusion of our previous authorization.stock. This additional authorization has no expiration date and $239.7date. We have not repurchased any shares under this authorization since the first quarter of 2020. As of December 31, 2023, $287.5 million remained available for purchaserepurchase under this authorization as of December 31, 2017.the authorization. Information regarding changes in shareholders' equity can be found in the consolidated statements of shareholders' equity appearing in Part II, Item 8 of this report.
As of December 31, 2017, we had a $525.0 million2023, total commitments under our revolving credit facility that matures in February 2019.were $500.0 million. Our quarterly commitment fee ranges from 0.20%0.25% to 0.40%0.35%, based on our total leverage ratio. During 2016, we amended the credit agreement governing our credit facility to include a variable rate term loan facility in the aggregate amount of $330.0 million. We borrowed the full amount during the fourth quarter of 2016, using the proceeds to retire our senior notes due in 2020 and to partially fund the acquisition of FMCG in December 2016. The term loan facility matures in February 2019 and requires periodic principal payments throughout the term of the loan. Interest is paid weekly and we may prepay the term loan facility in full or in part at our discretion. Amounts repaid may not be reborrowed.
Borrowings under the credit facility agreement are collateralized by substantially all of our personal and intangible property. The credit agreement governing the credit facility contains customary covenants regarding limits on levels of subsidiary indebtedness and capital expenditures, liens, investments, acquisitions, certain mergers, certain asset sales outside the ordinary course of business, and change in controlratio, as defined in the credit agreement. The agreement also contains financialFurther information regarding the terms and maturities of our debt, as well as our debt covenants, regarding our leverage ratio, interest coverage and liquidity.can be found under the caption "Note 13: Debt" in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report. We were in compliance with allour debt covenants as of December 31, 2017,2023, and we expect toanticipate that we will remain in compliance with theseour debt covenants throughout 2018. Our credit facility matures in February 2019. We plan to obtain a new multi-year credit facility to refinance amounts outstanding under the current credit facility and to satisfy those obligations. We have been successful in obtaining long-term financing with terms and in amounts adequate to meet our objectives in the past, and we expect to execute the new credit facility in the first half of 2018.2024.
As of December 31, 2017,2023, amounts were available for borrowing under our revolving credit facility as follows:
|
| | | |
(in thousands) | Total available |
Revolving credit facility commitment | $ | 525,000 |
|
Amount drawn on revolving credit facility | (413,000 | ) |
Outstanding letters of credit(1) | (10,361 | ) |
Net available for borrowing as of December 31, 2017 | $ | 101,639 |
|
| | | | | |
(in thousands) | Total available |
Revolving credit facility commitment | $ | 500,000 | |
Amount drawn on revolving credit facility | (252,000) | |
Outstanding letters of credit(1) | (7,486) | |
Net available for borrowing as of December 31, 2023 | $ | 240,514 | |
(1) We use standby letters of credit primarily to collateralize certain obligations related to our self-insured workers' compensation claims, as well as claims for environmental matters, as required by certain states. These letters of credit reduce the amount available for borrowing under our revolving credit facility.
OTHER FINANCIAL POSITION INFORMATION
Information concerning items comprising selected captions on our consolidated balance sheets can be found under the caption "Note 2: Supplemental balance sheet and cash flow information" of the Notes to Consolidated Financial Statements appearing in Item 8 of this report.
| | |
CRITICAL ACCOUNTING ESTIMATES |
Acquisitions
– The impact of acquisitions on our consolidated balance sheets can be found under the caption "Note 5: Acquisitions" of the Notes to Consolidated Financial Statements appearing in Item 8 of this report.
Contract acquisition costs – Other non-current assets include contract acquisition costs of our Financial Services segment. These costs, which are essentially pre-paid product discounts, are recorded as non-current assets upon contract execution and are amortized, generally on the straight-line basis, as reductions of revenue over the related contract term. Changes in contract acquisition costs during the past 3 years can be found under the caption "Note 2: Supplemental balance sheet and cash flow information" of the Notes to Consolidated Financial Statements appearing in Item 8 of this report. Cash payments made for contract acquisition costs were $27.1 million for 2017, $23.1 million for 2016 and $12.8 million for 2015. We anticipate cash payments of approximately $27.0 million in 2018.
The number of checks being written has been declining, which has contributed to increased competitive pressure when attempting to retain or acquire clients. Both the number of financial institution clients requesting contract acquisition payments and the amount of the payments has fluctuated from year to year. Although we anticipate that we will selectively continue to make contract acquisition payments, we cannot quantify future amounts with certainty. The amount paid depends on numerous factors, including the number and timing of contract executions and renewals, competitors’ actions, overall product discount levels and the structure of up-front product discount payments versus providing higher discount levels throughout the term of the contract.
Liabilities for contract acquisition payments are recorded upon contract execution. These obligations are monitored for each contract and are adjusted as payments are made. Contract acquisition payments due within the next year are included in accrued liabilities in our consolidated balance sheets. These accruals were $11.7 million as of December 31, 2017 and $12.4 million as of December 31, 2016. Accruals for contract acquisition payments included in other non-current liabilities in our consolidated balance sheets were $21.7 million as of December 31, 2017 and $29.9 million as of December 31, 2016.
Deferred income taxes – Net deferred tax liabilities of $49.1 million as of December 31, 2017, decreased $34.5 million from December 31, 2016. In addition to the changes attributable to the calculation of temporary differences between the financial reporting basis of assets and liabilities and their respective tax reporting bases, the carrying amount of deferred income taxes was affected by the Tax Cuts and Jobs Act, which was enacted in December 2017. This legislation permanently lowered the federal statutory tax rate from 35% to 21%. As such, we were required to remeasure our deferred income taxes at the new tax rate. This remeasurement resulted in a decrease in our net deferred tax liabilities of approximately $26.0 million.
OFF-BALANCE SHEET ARRANGEMENTS, GUARANTEES AND CONTRACTUAL OBLIGATIONS
It is not our general business practice to enter into off-balance sheet arrangements or to guarantee the performance of third parties. In the normal course of business we periodically enter into agreements that incorporate general indemnification language. These indemnifications encompass third-party claims arising from our products and services, including, without limitation, service failures, breach of security, intellectual property rights, governmental regulations and/or employment-related matters. Performance under these indemnities would generally be triggered by our breach of the terms of the contract. In disposing of assets or businesses, we often provide representations, warranties and/or indemnities to cover various risks, including, for example, unknown damage to the assets, environmental risks involved in the sale of real estate, liability to investigate and remediate environmental contamination at waste disposal sites and manufacturing facilities, and unidentified tax liabilities and legal fees related to periods prior to disposition. We do not have the ability to estimate the potential liability from such indemnities because they relate to unknown conditions. However, we do not believe that any liability under these indemnities would have a material adverse effect on our financial position, annual results of operations or annual cash flows. We
have recorded liabilities for known indemnifications related to environmental matters. Further information regarding our environmental liabilities, as well as liabilities related to self-insurance and litigation, can be found under the caption “Note 14: Other commitments and contingencies” of the Notes to Consolidated Financial Statements appearing in the Item 8 of this report.
We are not engaged in any transactions, arrangements or other relationships with unconsolidated entities or other third parties that are reasonably likely to have a material effect on our liquidity or on our access to, or requirements for, capital resources. We have not established any special purpose entities nor have we entered into any material related party transactions during the past 3 years.
As of December 31, 2017, our contractual obligations were as follows: |
| | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Total | | 2018 | | 2019 and 2020 | | 2021 and 2022 | | 2023 and thereafter |
Long-term debt | | $ | 707,938 |
| | $ | 43,313 |
| | $ | 664,625 |
| | $ | — |
| | $ | — |
|
Lease obligations | | 32,956 |
| | 11,620 |
| | 16,093 |
| | 3,504 |
| | 1,739 |
|
Purchase obligations | | 53,911 |
| | 30,247 |
| | 20,712 |
| | 2,952 |
| | — |
|
Other non-current liabilities(1) | | 73,856 |
| | 40,343 |
| | 24,160 |
| | 6,711 |
| | 2,642 |
|
Total contractual obligations | | $ | 868,661 |
| | $ | 125,523 |
| | $ | 725,590 |
| | $ | 13,167 |
| | $ | 4,381 |
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(1) Includes interest of $1.4 million related primarily to accrued contingent consideration which is recorded in the consolidated balance sheets at estimated fair value. This interest will be accrued in future periods as accretion expense.
Purchase obligations include amounts due under contracts with third-party service providers. These contracts are primarily for information technology services and Direct Checks direct mail advertising agreements. We routinely issue purchase orders to numerous vendors for the purchase of inventory and other supplies. These purchase orders are not included in the purchase obligations presented here, as our business partners typically allow us to cancel these purchase orders as necessary to accommodate business needs. Of the purchase obligations included in the table above, $13.5 million allow for early termination upon the payment of early termination fees. If we were to terminate these agreements, we would have incurred early termination fees of $13.6 million as of December 31, 2017.
Of the $52.2 million reported as other non-current liabilities in our consolidated balance sheet as of December 31, 2017, $20.1 million is excluded from the obligations shown in the table above. The excluded amounts, including the current portion of each liability, are comprised primarily of the following:
Payments for uncertain tax positions – Due to the nature of the underlying liabilities and the extended time frame often needed to resolve income tax uncertainties, we cannot make reliable estimates of the amount or timing of cash payments that may be required to settle these liabilities. Our liability for uncertain tax positions, including accrued interest and penalties, was $4.8 million as of December 31, 2017, excluding tax benefits of deductible interest and the federal benefit of deductible state income tax.
A portion of the amount due under our deferred compensation plan – Under this plan, some employees may begin receiving payments upon the termination of employment or disability, and we cannot predict when these events will occur. As such, $3.4 million of our deferred compensation liability as of December 31, 2017 is excluded from the obligations shown in the table above.
Other non-current liabilities which are not settled in cash, such as deferred revenue and incentive compensation that will be settled by issuing shares of our common stock.
The table of contractual obligations does not include the following:
Benefit payments for our postretirement benefit plan – We have the option of paying benefits from the accumulated assets of the plan or from the general funds of the company. Additionally, we expect the plan assets to earn income over time. As such, we cannot predict when or if payments from our general funds will be required. We anticipate that we will utilize plan assets to pay a majority of our benefits during 2018. Our postretirement benefit plan was overfunded $39.8 million as of December 31, 2017.
Income tax payments, which are dependent upon our taxable income.
CRITICAL ACCOUNTING POLICIES
Our critical accounting policiesestimates are those that are most important to the portrayal of our financial condition and results of operations, or which place the most significant demands on management's judgment about the effect of matters that are inherently uncertain, and the impact of different estimates or assumptions could be material to our financial condition or results of operations.
Management's Our MD&A discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles (GAAP) in the United States.GAAP. Our accounting policies are discussed under the caption “Note 1: Significant accounting policies” ofAccounting Policies” in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report. We review the accounting policies used in reporting our financial results on a regular basis. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other factors and assumptions that we believe are reasonable under the circumstances, the result of which forms the basis for making judgments about the carrying values of assets and liabilities. In some instances, we reasonably could have used different accounting estimates and, in other instances, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results may differ from our estimates. Significant estimates and judgments utilized are reviewed by management on an ongoing basis and by the auditAudit and Finance committee of our board of directors at the end of each quarter prior to the public release of our financial results.
Revenue Recognition
Product revenue is recognized when control of the goods is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods. In most cases, control is transferred when products are shipped. We recognize the vast majority of our service revenue as the services are provided. The majority of our contracts are for the shipment of tangible products or the delivery of services that have a single performance obligation or include multiple performance obligations where control is transferred at the same time. Certain of our financial institution contracts require prepaid product discounts in the form of cash payments we make to our financial institution clients. These prepaid product discounts are included in other non-current assets on our consolidated balance sheets and are generally amortized as reductions of revenue on the straight-line basis over the contract term. Sales tax collected concurrent with revenue-producing activities is excluded from revenue. Amounts billed to customers for shipping and handling are included in revenue, while the related costs incurred for shipping and handling are reflected in cost of products and are accrued when the related revenue is recognized.
When preparinganother party is involved in providing goods or services to a customer, we must determine whether our consolidatedobligation is to provide the specified good or service itself (i.e., we are the principal in the transaction) or to arrange for that good or service to be provided by the other party (i.e., we are an agent in the transaction). When we are responsible for satisfying a performance obligation, based on our ability to control the product or service provided, we are considered the principal and revenue is recognized for the gross amount of consideration. When the other party is primarily responsible for satisfying a performance obligation, we are considered the agent and revenue is recognized in the amount of any fee or commission to which we are entitled. We sell certain products and services through a network of distributors. We have determined that we are the principal in these transactions, and revenue is recorded for the gross amount of consideration.
Certain costs incurred to obtain customer contracts are required to be recognized as assets and amortized consistent with the transfer of goods or services to the customer. As such, we defer costs related to obtaining check supply, treasury management solution and merchant services contracts. These amounts, which totaled $21.1 million as of December 31, 2023, are included in other non-current assets and are amortized on the straight-line basis as SG&A expense. Amortization of these amounts on the straight-line basis approximates the timing of the transfer of goods or services to the customer. Generally, these amounts are being amortized over periods of 2 to 5 years. We expense these costs as incurred when the amortization period would have been 1 year or less.
Accounting for customer contracts can be complex and may involve the use of various techniques to estimate total contract revenue. Estimates related to variable consideration are based on various assumptions to project the outcome of future events. We review and update our contract-related estimates regularly, and we do not anticipate that revisions to our estimates would have a material effect on our results of operations, financial statements,position or cash flows.
Goodwill Impairment
As of December 31, 2023, goodwill totaled $1.43 billion, which represented 46.4% of our total assets. Goodwill is tested for impairment on an annual basis as of July 31, or more frequently if events occur or circumstances change that would indicate a possible impairment.
To analyze goodwill for impairment, we must assign our goodwill to individual reporting units. Identification of reporting units includes an analysis of the components that comprise each of our operating segments, which considers, among other things, the manner in which we operate our business and the availability of discrete financial information. Components of an operating segment are aggregated to form a reporting unit if the components have similar economic characteristics. We periodically review our reporting units to ensure that they continue to reflect the manner in which we operate our business.
When completing our annual goodwill impairment analysis, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after this qualitative assessment, we determine it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the quantitative impairment test is unnecessary. In completing the 2023 annual impairment analysis of goodwill as of July 31, 2023, we elected to perform qualitative analyses for all of our reporting units. These qualitative analyses evaluated factors, including, but not limited to, economic, market and industry conditions, cost factors and the overall financial performance of the reporting units. We also considered the most recent quantitative analyses completed in prior periods. In completing these assessments, we noted no changes in events or circumstances that indicated that it was more likely than not that the fair value of any reporting unit was less than its carrying amount. As such, no goodwill impairment charges were recorded as a result of our 2023 annual impairment analysis.
When performing a quantitative analysis of goodwill, we first compare the carrying value of the reporting unit, including goodwill, to its estimated fair value. Carrying value is based on the assets and liabilities associated with the operations of the reporting unit, which often requires the allocation of shared and corporate items among reporting units. We utilize a discounted cash flow model to calculate the estimated fair value of a reporting unit. This approach is a valuation technique under which we estimate future cash flows using the reporting unit's financial forecast from the perspective of an unrelated market participant. Using historical trending and internal forecasting techniques, we project revenue and apply our fixed and variable cost
experience rates to the projected revenue to arrive at the future cash flows. A terminal value is then applied to the projected cash flow stream. Future estimated cash flows are discounted to their present value to calculate the estimated fair value. The discount rate used is the market-value-weighted average of our estimated cost of capital derived using both known and estimated customary market metrics. In determining the estimated fair values of our reporting units, we are required to estimate our income taxes in eacha number of factors, including revenue growth rates, terminal growth rates, direct costs, the jurisdictions in which we operate. This process involves estimating our actual current tax expense based on expected taxable income, statutory tax rates, tax credits allowed in the various jurisdictions in which we operate,discount rate and risks associated with uncertain tax positions, together with assessing temporary and permanent differences resulting from the differing treatment of certain items between income tax return and financial reporting requirements. In interim reporting periods, we use an estimate of our annual effective tax rate based on the facts available at the time. Changes in the jurisdictional mix or the estimated amount of annual pre-tax income could impact our estimated effective tax rate in interim periods. The actual effective income tax rate is calculated at the end of the year.
We recognize deferred tax assets and liabilities for temporary differences using the enacted tax rates and laws that will be in effect when we expect the temporary differences to reverse. We must assess the likelihood that our deferred tax assets will be realized through future taxable income, and to the extent we believe that realization is not likely, we must establish a valuation allowance against those deferred tax assets. Significant judgment is required in evaluating our tax positions, and in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We had net deferred tax liabilities of $49.1 million as of December 31, 2017, including valuation allowances of $1.5 million. The valuation allowances related primarily to capital loss carryforwards in Canada and net operating loss carryforwards in various state jurisdictions that we do not currently expect to fully realize.
We are subject to tax audits in numerous domestic and foreign tax jurisdictions. Tax audits are often complex and can require several years to complete. In the normal course of business, we are subject to challenges from the Internal Revenue Service (IRS) and other tax authorities regarding the amount of taxes due. These challenges may alter the timing or amount of taxable income or deductions, or the allocation of income among tax jurisdictions. We recognizeshared and corporate items. When completing a quantitative analysis for all of our reporting units, the benefitssummation of tax return positions inour reporting units' fair values is compared to our consolidated fair value, as indicated by our market capitalization, to evaluate the financial statements when they are more-likely-than-not to be sustained by the taxing authorities based solely on the technical meritsreasonableness of the position. If the recognition threshold is met, the tax benefit is measured and recognized as the largest amount of tax benefit that, in our judgment, is greater than 50% likely to be realized. As of December 31, 2017, our liability for uncertain tax positions, including accrued interest and penalties, was $4.8 million, excluding tax benefits of deductible interest and the federal benefit of deductible state income tax. calculations.
Further information regarding all of our unrecognized tax benefitsgoodwill impairment analyses can be found under the caption “Note 9: Income tax provision” of"Note 8: Fair Value Measurements"in the Notes to Consolidated Financial Statements appearing in Item II, Part 8 of this report. The ultimate outcomeEvaluations of tax mattersasset impairment require us to make assumptions about future events, market conditions and financial performance over the life of the asset being evaluated. These assumptions require significant judgment and actual results may differvary from our estimatesassumptions. For example, if our stock price were to further decline over a sustained period, if a further downturn in economic conditions were to negatively affect our actual and assumptions. Unfavorable settlementforecasted operating results, if we were to change our business strategies and/or the allocation of any particular issue would require the use of cashresources, if we were to lose significant customers, if competition were to materially increase, or if order volume declines for checks and business forms were to materially accelerate, these situations could result in increased income tax expense. Favorable resolution would result in reduced income tax expense.
On December 22, 2017, United States tax reform was signed into law as the Tax Cuts and Jobs Act (the 2017 Act). This legislation includedindicate a broad range of tax reforms, including changes to corporate tax rates, business deductions and international tax provisions. The tax effects of changes in tax laws or rates must be recognizeddecline in the period in which the law is enacted. As such, this legislation resulted in a net benefitfair value of approximately $20.5 million to our 2017 income tax provision. This amount included the net tax benefit from the remeasurement of deferred income taxes to the new federal statutory tax rate of 21%, which is effective for us on January 1, 2018, and revised state income tax rates for those states we expect to follow the provisions of the 2017 Act, partially offset by the establishment of a liability for toll charges related to undistributed foreign earnings and profits.
Reasonable estimates were used in determining many components of the impact of the 2017 Act, including our 2017 deferred activity and the amount of post-1986 foreign deferred earnings subject to the toll charge. We are still analyzing certain aspects of the 2017 Act and refining our calculations, which could potentially affect the measurementone or more of our deferred tax balances and the amount of the toll charge liability, and ultimately causereporting units. This may require us to revise our initial estimates in future periods. In addition, changes in interpretations, assumptions and guidance regarding the new tax legislation, as well as the potentialrecord additional impairment charges for technical corrections to the 2017 Act, could have a material impact on our effective tax rate in future periods.portion of goodwill or other assets.
In order to complete our accountingAs discussed under Executive Overview, during 2023, we executed agreements allowing for the 2017 Act, which we expectconversion of our U.S. and Canadian payroll and human resources services customers to finalize by the fourth quarterother service providers. These businesses comprise a reporting unit that had a goodwill balance of 2018, the following specific items need to be completed or addressed:
Issuance of state-by-state guidance regarding conformity with or decoupling from the 2017 Act.
Finalize the calculation of post-1986 foreign deferred earnings, which are subject to the toll charge, and determine our ability to beneficially claim a foreign tax credit resulting from the income inclusion.
Where pertinent, adjust to clarifications and guidance regarding other aspects of the 2017 Act, including those related to executive compensation.
As$7.7 million as of December 31, 2017, we intend to indefinitely reinvest the undistributed earnings of our subsidiaries located outside of the United States and, therefore, no deferred income taxes have been recognized2023. We evaluated this goodwill for the tax effects of repatriation. After enactment of the 2017 Act, the tax effects would generally be limited to foreign withholding taxes on any distributions. Asimpairment as of December 31, 2017, the amount of cash2023, and, cash equivalents held by our foreign subsidiaries was $40.0 million, primarily in Canada. If we were to repatriate all of our foreign cash and cash equivalents into the United States at one time, we would incur a tax liability of approximately $2.0 million, based on current tax laws.our quantitative analysis, we concluded that it was not impaired as of that date. In conjunction with our phased transition out of these businesses, we expect that this goodwill will be fully impaired in 2024, at the point when the remaining cash flows generated by these businesses in 2024 no longer support the carrying value of the reporting unit.
A one-percentage-point change in our effective income tax rate would have resulted in a $3.1 million change in income tax expense for 2017. The determination of our provision for income taxes, deferred income taxes and unrecognized tax positions requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. As such, the amounts reflected in our consolidated financial statements may require adjustment in the future as additional facts become known or circumstances change. If actual results differ from estimated amounts, our effective income tax rate and related tax balances would be affected.
Business CombinationsRevenue Recognition
We allocate the purchase price of acquired businesses to the estimated fair valuesProduct revenue is recognized when control of the assets acquired and liabilities assumedgoods is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods. In most cases, control is transferred when products are shipped. We recognize the vast majority of our service revenue as the services are provided. The majority of the date of the acquisition. The calculations used to determine the fair value of the long-lived assets acquired, primarily intangible assets, can be complex and require significant judgment. We weigh many factors when completing these estimates including, but not limited to, the nature of the acquired company’s business; its competitive position, strengths, and challenges; its historical financial position and performance; estimated customer retention rates; discount rates; and future plansour contracts are for the combined entity. We may also engage independent valuation specialists, when necessary, to assistshipment of tangible products or the delivery of services that have a single performance obligation or include multiple performance obligations where control is transferred at the same time. Certain of our financial institution contracts require prepaid product discounts in the fair value calculations for significant acquired long-lived assets.
Weform of cash payments we make to our financial institution clients. These prepaid product discounts are included in other non-current assets on our consolidated balance sheets and are generally estimate the fair valueamortized as reductions of acquired customer lists using the multi-period excess earnings method. This valuation model estimates revenues and cash flows derived from the asset and then deducts portions of the cash flow that can be attributed to supporting assets, such as a brand name or fixed assets, that contributed to the generation of the cash flows. The resulting cash flow, which is attributable solely to the customer list asset, is then discounted at a rate of return commensurate with the risk of the asset to calculate a present value. The fair value of acquired customer lists may also be estimated by discounting the estimated cash flows expected to be generated by the assets. Assumptions used in these calculations include same-customer revenue growth rates and estimated customer retention rates based on the acquirees' historical information. The fair value of acquired technologystraight-line basis over the contract term. Sales tax collected concurrent with revenue-producing activities is estimated, at times, usingexcluded from revenue. Amounts billed to customers for shipping and handling are included in revenue, while the relief from royalty method, which calculates the cost savings associated with owning rather than licensing the technology. Assumed royalty ratesrelated costs incurred for shipping and handling are applied to the projected revenues for the remaining useful life of the technology to estimate the royalty savings. The fair value of acquired technology may also be estimated using thereflected in cost of reproduction method under whichproducts and are accrued when the primary components ofrelated revenue is recognized.
When another party is involved in providing goods or services to a customer, we must determine whether our obligation is to provide the technologyspecified good or service itself (i.e., we are identified and the estimated costprincipal in the transaction) or to reproduce the technology is calculated based on historical dataarrange for that good or service to be provided by the acquirees. We estimateother party (i.e., we are an agent in the fair value of liabilitiestransaction). When we are responsible for contingent consideration by discounting to present value the probability-weighted contingent payments expected to be made. Assumptions used in these calculations include discount rates, projected financial results of the acquired businessessatisfying a performance obligation, based on our most recent internal forecasts,ability to control the product or service provided, we are considered the principal and factors indicatingrevenue is recognized for the probabilitygross amount of achievingconsideration. When the forecasted results. The excess ofother party is primarily responsible for satisfying a performance obligation, we are considered the purchase price over the estimated fair value of the net assets acquiredagent and revenue is recorded as goodwill. Goodwill is not amortized, but is subject to impairment testing on at least an annual basis.
We are also required to estimate the useful lives of the acquired intangible assets, which determinesrecognized in the amount of acquisition-related amortization expenseany fee or commission to which we will recordare entitled. We sell certain products and services through a network of distributors. We have determined that we are the principal in future periods. Each reporting period, we evaluatethese transactions, and revenue is recorded for the remaining useful livesgross amount of our amortizable intangiblesconsideration.
Certain costs incurred to determine whether eventsobtain customer contracts are required to be recognized as assets and amortized consistent with the transfer of goods or circumstances warrant a revisionservices to the remaining period of amortization.
Whilecustomer. As such, we use our best estimatesdefer costs related to obtaining check supply, treasury management solution and assumptions, our fair value estimates are inherently uncertain and subject to refinement. As a result, during the measurement period,merchant services contracts. These amounts, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Any adjustments required after the measurement period are recorded in the consolidated statements of income.
The judgments required in determining the estimated fair values and expected useful lives assigned to each class of assets and liabilities acquired can significantly affect net income. For example, different classes of assets will have useful lives that differ. Consequently, to the extent a longer-lived asset is ascribed greater value than a shorter-lived asset, net income in a given period may be higher. Additionally, assigning a lower value to amortizable intangibles would result in a higher amount
assigned to goodwill. As goodwill is not amortized, this would benefit net income in a given period, although goodwill is subject to annual impairment analysis.
Impairment of Goodwill and Indefinite-Lived Trade Name
Goodwill and our indefinite-lived trade name totaled $1,150.0$21.1 million as of December 31, 2017,2023, are included in other non-current assets and are amortized on the straight-line basis as SG&A expense. Amortization of these amounts on the straight-line basis approximates the timing of the transfer of goods or services to the customer. Generally, these amounts are being amortized over periods of 2 to 5 years. We expense these costs as incurred when the amortization period would have been 1 year or less.
Accounting for customer contracts can be complex and may involve the use of various techniques to estimate total contract revenue. Estimates related to variable consideration are based on various assumptions to project the outcome of future events. We review and update our contract-related estimates regularly, and we do not anticipate that revisions to our estimates would have a material effect on our results of operations, financial position or cash flows.
Goodwill Impairment
As of December 31, 2023, goodwill totaled $1.43 billion, which represented 52.1%46.4% of our total assets. These assets areGoodwill is tested for impairment on an annual basis as of July 31, or more frequently if events occur or circumstances change that couldwould indicate a possible impairment. In addition to the required impairment analyses, we regularly evaluate the remaining useful life of our indefinite-lived trade name to determine whether events and circumstances continue to support an indefinite useful life. If we would determine that this asset has a finite useful life, we would test the asset for impairment and then amortize the asset's remaining carrying value over its estimated remaining useful life.
To analyze goodwill for impairment, we must assign our goodwill to individual reporting units. Identification of reporting units includes an analysis of the components that comprise each of our operating segments, which considers, among other things, the manner in which we operate our business and the availability of discrete financial information. Components of an operating segment are aggregated to form onea reporting unit if the components have similar economic characteristics. We periodically review our reporting units to ensure that they continue to reflect the manner in which we operate our business.
2017When completing our annual goodwill impairment analysis, – In conjunction with our annual strategic planning process during we have the third quarteroption to first assess qualitative factors to determine whether the existence of 2017, we made various changesevents or circumstances leads to our internal reporting structure. As a result, we reassessed our operating segments and determineddetermination that no changes were required in our reportable operating segments. We also reassessed our previously determined reporting units and concludedit is more likely than not that a realignmentthe fair value of a portionreporting unit is less than its carrying amount. If, after this qualitative assessment, we determine it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the quantitative impairment test is unnecessary. In completing the 2023 annual impairment analysis of goodwill as of July 31, 2023, we elected to perform qualitative analyses for all of our reporting units was required. As such, we reallocated the carrying value of goodwill to our revised reporting units based on their relative fair values. We analyzed goodwill for impairment immediately prior to this realignment by performing qualitative analyses for our Small Business Services reporting units and quantitative analyses for our Financial Services and Direct Checks reporting units. TheThese qualitative analyses evaluated factors, including, but not limited to, economic, market and industry conditions, cost factors and the overall financial performance of the reporting units. We also considered the lastmost recent quantitative analysis we completed.analyses completed in prior periods. In completing these assessments, we noted no changes in events or circumstances that indicated that it was more likely than not that the fair value of any reporting unit was less than its carrying amount, with the exceptionamount. As such, no goodwill impairment charges were recorded as a result of our Small Business Services Safeguard reporting unit. The analysis of this reporting unit, which incorporated the results of the2023 annual strategic planning process, indicated lowered projected long-term revenue growth and profitability levels resulting from changes in market trends and the mix of products and services sold, including the continuing decline in check and forms usage. As a result, we completed impairment analyses of the long-term assets of this reporting unit, excluding goodwill, and concluded that these assets were not impaired. We then completed the quantitative analysis of the reporting unit. This quantitative analysis indicated that this reporting unit's goodwill was fully impaired and resulted in a non-cash pre-tax goodwill impairment charge of $28.4 million during the third quarter of 2017. The impairment charge was measured as the amount by which the reporting unit's carrying value exceeded its estimated fair value. Immediately subsequent to the realignment of our reporting unit structure, we completedanalysis.
When performing a quantitative analysis for all of our reporting units to which goodwill is assigned. This quantitative analysis as of July 31, 2017 indicated that the estimated fair values of our reporting units exceeded their carrying values by approximate amounts between $64.0 million and $1.41 billion, or by amounts between 36% and 314% above the carrying values of their net assets. The reporting unit with the smallest difference between carrying value and fair value is our Web Services reporting unit. A large portion of this reporting unit consists of businesses that were acquired during 2017, and growing our web services offerings is a focus of our growth strategy. However, if our recent acquisitions were to fail to achieve expected operating results or if we were to change our business strategies, this could result in a decline in the fair value of this reporting unit. Total goodwill for this reporting unit was $159.4 million as of the date of the 2017 assessment.
In completing the quantitative analyses of goodwill, we first comparedcompare the carrying value of the reporting unit, including goodwill, to its estimated fair value. Carrying value is based on the assets and liabilities associated with the operations of the reporting unit, which often requires the allocation of shared orand corporate items among reporting units. In calculatingWe utilize a discounted cash flow model to calculate the estimated fair value we used the income approach. The incomeof a reporting unit. This approach is a valuation technique under which we estimatedestimate future cash flows using the reporting unit's financial forecast from the perspective of an unrelated market participant. Using historical trending and internal forecasting techniques, we projectedproject revenue and appliedapply our fixed and variable cost
experience rates to the projected revenue to arrive at the future cash flows. A terminal value wasis then applied to the projected cash flow stream. Future estimated cash flows wereare discounted to their present value to calculate the estimated fair value. The discount rate used wasis the market-value-weighted average of our estimated cost of capital derived using both known and estimated customary market metrics. In determining the estimated fair valuevalues of aour reporting unit,units, we are required to estimate a number of factors, including projected operating results,revenue growth rates, terminal growth rates, economic conditions, anticipated future cash flows,direct costs, the discount rate and the allocation of shared orand corporate items. When completing a quantitative analysis for all of our reporting units, the summation of our reporting units' fair values is compared to our consolidated fair value, as indicated by our market capitalization, to evaluate the reasonableness of our calculations.
2016 and 2015Further information regarding all of our goodwill impairment analyses can be found under the caption "Note 8: Fair Value Measurements" – In completingin the 2016 and 2015 annual goodwill impairment analyses, we electedNotes to perform a qualitative assessment for all of our reporting units to which goodwill was assigned, with one exception. We elected to perform a quantitative analysis for ourConsolidated Financial Services Commercial reporting unit. This reporting unit was acquired subsequent to our 2014 annual impairment analysis and the quantitative analysis completed as of July 31, 2015
indicated that the estimated fair valueStatements appearing in Item II, Part 8 of this reporting unit exceeded its carrying value by approximately 13%. The quantitative assessment completed for this reporting unit as of July 31, 2016 indicated that its estimated fair value exceeded its carrying value by approximately 49%. Total goodwill for this reporting unit was approximately $45.0 million as of the date of our 2016 assessment.
The qualitative analyses for our other reporting units completed during 2016 and 2015 evaluated factors including, but not limited to, economic, market and industry conditions, cost factors and the overall financial performance of the reporting units. We also considered the quantitative analysis we completed as of July 31, 2014 in which the estimated fair values of our reporting units' net assets exceeded their carrying values by approximate amounts between $74.0 million and $1.13 billion, or by amounts between 47% and 482% above the carrying values of their net assets. In completing these assessments, we noted no changes in events or circumstances which indicated that is was more likely than not that the fair value of any reporting unit was less than its carrying amount.
Indefinite-lived trade name – The estimate of fair value for our indefinite-lived trade name is based on the relief from royalty method, which calculates the cost savings associated with owning rather than licensing the trade name. An assumed royalty rate is applied to forecasted revenue and the resulting cash flows are discounted. If the estimated fair value is less than the carrying value of the asset, an impairment loss would be recognized for the difference. The annual impairment analysis completed during 2017 indicated that the estimated fair value of our indefinite-lived trade name exceeded its carrying value of $19.1 million by approximately $16.0 million. In this analysis, we assumed a discount rate of 10.0% and a royalty rate of 1.0%. A one-half percentage point increase in the discount rate would reduce the indicated fair value of the asset by approximately $2.0 million and a one-half percentage point decrease in the royalty rate would reduce the indicated fair value of the asset by approximately $17.0 million.
report. Evaluations of asset impairment require us to make assumptions about future events, market conditions and financial performance over the life of the asset being evaluated. These assumptions require significant judgment and actual results may differvary from our assumptions. For example, if our stock price were to further decline forover a sustained period, if a further downturn in economic conditions were to negatively affect our actual and forecasted operating results, if order volume declines for our Direct Checks segment were to materially accelerate, if recent acquisitions were to fail to achieve expected operating results, or if we were to change our business strategies and/or the allocation of resources, if we were to lose significant customers, if competition were to materially increase, or if order volume declines for checks and business forms were to materially accelerate, these situations could indicate a decline in the fair value of one or more of our reporting units. This may require us to record anadditional impairment chargecharges for a portion of goodwill and/or our indefinite-lived trade name or other assets.
As discussed under Executive Overview, during 2023, we executed agreements allowing for the conversion of our U.S. and Canadian payroll and human resources services customers to other service providers. These businesses comprise a reporting unit that had a goodwill balance of $7.7 million as of December 31, 2023. We evaluated this goodwill for impairment as of December 31, 2023, and, based on our quantitative analysis, we concluded that it was not impaired as of that date. In conjunction with our phased transition out of these businesses, we expect that this goodwill will be fully impaired in 2024, at the point when the remaining cash flows generated by these businesses in 2024 no longer support the carrying value of the reporting unit.
Revenue Recognition
In general,Product revenue is recognized when (1) persuasive evidencecontrol of the goods is transferred to our customers, in an arrangement exists, (2) delivery has occurred oramount that reflects the consideration we expect to be entitled to in exchange for those goods. In most cases, control is transferred when products are shipped. We recognize the vast majority of our service revenue as the services have been rendered, (3) the sales price is fixed or determinable, and (4) collectibility is reasonably assured. Revenue is presented in our consolidated statements of income net of rebates, discounts, amortization of contract acquisition costs and sales tax.
Product revenue –are provided. The majority of our revenuescontracts are generatedfor the shipment of tangible products or the delivery of services that have a single performance obligation or include multiple performance obligations where control is transferred at the same time. Certain of our financial institution contracts require prepaid product discounts in the form of cash payments we make to our financial institution clients. These prepaid product discounts are included in other non-current assets on our consolidated balance sheets and are generally amortized as reductions of revenue on the straight-line basis over the contract term. Sales tax collected concurrent with revenue-producing activities is excluded from the sale of products for which revenue is recognized upon shipment or customer receipt, based upon the transfer of title. Product revenue includes amountsrevenue. Amounts billed to customers for shipping and handling and pass-throughare included in revenue, while the related costs such as marketing materials for which our financial institution clients reimburse us. Costs incurred for shipping and handling and pass-through costs are reflected in cost of products. For sales with a right of return, we record a reserve for estimated sales returns based on historical experience.
We enter into contractual agreements with financial institution clients for rebates on certain products we sell. We record these amounts as reductions of revenue in the consolidated statements of income and asare accrued liabilities in the consolidated balance sheets when the related revenue is recorded. At timesrecognized.
When another party is involved in providing goods or services to a customer, we may also sell products at discounted pricesmust determine whether our obligation is to provide the specified good or provide free productsservice itself (i.e., we are the principal in the transaction) or to customers when they purchasearrange for that good or service to be provided by the other party (i.e., we are an agent in the transaction). When we are responsible for satisfying a specified product. Discountsperformance obligation, based on our ability to control the product or service provided, we are recorded as reductions of revenue whenconsidered the relatedprincipal and revenue is recorded. The costrecognized for the gross amount of freeconsideration. When the other party is primarily responsible for satisfying a performance obligation, we are considered the agent and revenue is recognized in the amount of any fee or commission to which we are entitled. We sell certain products and services through a network of distributors. We have determined that we are the principal in these transactions, and revenue is recorded as cost of products when the revenue for the related order is recorded.
gross amount of consideration.
Service revenue
– Our
Certain costs incurred to obtain customer contracts are required to be recognized as assets and amortized consistent with the transfer of goods or services consist primarily of web design, hosting and other web services; fraud prevention; marketing services, including email, mobile, social media and other self-service marketing solutions, as well as data-driven marketing solutions;to the customer. As such, we defer costs related to obtaining check supply, treasury management solutions; financial institution customer acquisitionsolution and loyalty programs; payroll services;merchant services contracts. These amounts, which totaled $21.1 million as of December 31, 2023, are included in other non-current assets and logo design. We recognize the majority of these service revenues as the services are provided. In some situations, our web hosting and applications services are billed on a quarterly, semi-annual or annual basis. When a customer pays in advance for services, we defer the revenue and recognize it as the services are performed. Up-front set-up fees related to our treasury management solutions are deferred and recognized as revenueamortized on the straight-line basis overas SG&A expense. Amortization of these amounts on the termstraight-line basis approximates the timing of the customer relationship. Deferred revenue is included in accrued liabilities and other non-current liabilities intransfer of goods or services to the consolidated balance sheets.customer. Generally, these amounts are being amortized over periods of 2 to 5 years. We expense these costs as incurred when the amortization period would have been 1 year or less.
Accounting for customer contracts can be complex and may involve the use of various techniques to estimate total contract revenue. Estimates related to variable consideration are based on various assumptions to project the outcome of future events. We review and update our contract-related estimates regularly, and we do not anticipate that revisions to our estimates would have a material effect on our results of operations, financial position or cash flows.
Service revenue, percentage-of-completion method
Goodwill Impairment
– A portion
As of December 31, 2023, goodwill totaled $1.43 billion, which represented 46.4% of our revenue from treasury management solutions resultstotal assets. Goodwill is tested for impairment on an annual basis as of July 31, or more frequently if events occur or circumstances change that would indicate a possible impairment.
To analyze goodwill for impairment, we must assign our goodwill to individual reporting units. Identification of reporting units includes an analysis of the components that comprise each of our operating segments, which considers, among other things, the manner in which we operate our business and the availability of discrete financial information. Components of an operating segment are aggregated to form a reporting unit if the components have similar economic characteristics. We periodically review our reporting units to ensure that they continue to reflect the manner in which we operate our business.
When completing our annual goodwill impairment analysis, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after this qualitative assessment, we determine it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the quantitative impairment test is unnecessary. In completing the 2023 annual impairment analysis of goodwill as of July 31, 2023, we elected to perform qualitative analyses for all of our reporting units. These qualitative analyses evaluated factors, including, but not limited to, economic, market and industry conditions, cost factors and the overall financial performance of the reporting units. We also considered the most recent quantitative analyses completed in prior periods. In completing these assessments, we noted no changes in events or circumstances that indicated that it was more likely than not that the fair value of any reporting unit was less than its carrying amount. As such, no goodwill impairment charges were recorded as a result of our 2023 annual impairment analysis.
When performing a quantitative analysis of goodwill, we first compare the carrying value of the reporting unit, including goodwill, to its estimated fair value. Carrying value is based on the assets and liabilities associated with the operations of the reporting unit, which often requires the allocation of shared and corporate items among reporting units. We utilize a discounted cash flow model to calculate the estimated fair value of a reporting unit. This approach is a valuation technique under which we estimate future cash flows using the reporting unit's financial forecast from the saleperspective of bundled arrangements that may include hardware, softwarean unrelated market participant. Using historical trending and professional services. As these arrangements involve customizationinternal forecasting techniques, we project revenue and modificationapply our fixed and variable cost
experience rates to the projected revenue to arrive at the future cash flows. A terminal value is then applied to the projected cash flow stream. Future estimated cash flows are discounted to their present value to calculate the estimated fair value. The discount rate used is the market-value-weighted average of the software, we recognize revenues from these contractsour estimated cost of capital derived using the
percentage-of-completion method of accounting, which involves calculating the percentage of services provided during the reporting period compared with the total estimated services to be provided over the duration of the contract. Estimates of total contract revenues and costs are continuously monitored during the term of the contract, and recorded revenuesboth known and estimated customary market metrics. In determining the estimated fair values of our reporting units, we are required to estimate a number of factors, including revenue growth rates, terminal growth rates, direct costs, are subject to revision as the contract progresses. Such revisions may result in increases or decreases in revenuesdiscount rate and expensesthe allocation of shared and are reflected incorporate items. When completing a quantitative analysis for all of our reporting units, the consolidated statementssummation of income in the periods in which they are first identified. Revisions to these estimates during 2017 were not significantour reporting units' fair values is compared to our consolidated resultsfair value, as indicated by our market capitalization, to evaluate the reasonableness of operations. If our estimates indicate that a contract loss will occur, a loss provision is recorded in the period in which the loss first becomes probable and reasonably estimable. Contract losses are determined to be the amount by which the estimated total direct and indirect costs of the contract exceed the estimated total revenues that will be generated by the contract.
calculations.
Contract termination payments
– At times, a financial institution client may terminate its contract with us prior to the end of the contract term. In substantiallyFurther information regarding all of these cases, the financial institution is contractually required to remit a contract termination payment. Such payments are recorded as revenue when the termination agreement is executed, provided that we have no further service or contractual obligations, and collection of the funds is assured. If we have a continuing service obligation following the execution of a contract termination agreement, we record the related revenue over the remaining service period.
Gross vs. net revenue recognition – Certain revenue streams require judgment to determine if revenue should be recorded on a gross basis or net of related costs. Reported revenue for our Financial Services segment does not reflect the full retail price paid by end-consumers to their financial institutions. Instead, revenue reflects the amounts paid to us by our financial institution clients. Revenue generated by our Safeguarddistributors within the Small Business Services segment is generally recorded on a gross basis, with commissions paid to our distributors included in SG&A expense. As part of our rewards, incentive and loyalty programs, we receive payments from consumers or our clients for the products and services we provide, including hotel stays, gift cards and merchandise such as apparel, electronics, and clothing. This revenue is recorded net of the related fulfillment costs.
Postretirement Benefit Plan
Detailed information regarding our postretirement benefit plan, including a description of the plan, its related future cash flows, plan assets and the actuarial assumptions used in accounting for the plan,goodwill impairment analyses can be found under the caption “Note 12: Postretirement benefits” of"Note 8: Fair Value Measurements"in the Notes to Consolidated Financial Statements appearing in Item II, Part 8 of this report.
We recorded net postretirement benefit income Evaluations of $2.0 million for 2017, $1.8 million for 2016asset impairment require us to make assumptions about future events, market conditions and $2.7 million for 2015. Our business segments recorded postretirement benefit income in cost of revenue and in SG&A expense, based onfinancial performance over the composition of their workforces. Effective January 1, 2018, we will adopt Accounting Standards Update No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This standard requires that the entire amount of our net postretirement benefit income be recorded in the non-operating sectionlife of the statements of income, as there is no service cost associated with our plans.
Our postretirement benefit income and obligation are calculated utilizing various actuarial assumptions and methodologies.asset being evaluated. These assumptions include, but are not limitedrequire significant judgment and actual results may vary from our assumptions. For example, if our stock price were to further decline over a sustained period, if a further downturn in economic conditions were to negatively affect our actual and forecasted operating results, if we were to change our business strategies and/or the discount rate, the expected long-term rateallocation of return on plan assets, the expected health care cost trend rate and the average remaining life expectancy of plan participants. We analyze the assumptions used each year whenresources, if we complete our actuarial valuation of the plan. The effects of changeswere to our assumptions are recognized immediately on the consolidated balance sheets, but are generally amortized into earnings over future periods, with the deferred amount recorded in accumulated other comprehensive loss. If the assumptions utilized in determining our postretirement benefit income and obligation differ from actual events, our results of operations for future periods are impacted.
Discount rate – The discount rate is usedlose significant customers, if competition were to reflect the time value of money. It is the assumed rate at which future postretirement benefits could be effectively settled. The discount rate assumption is based on the rates of return on high-quality, fixed-income instruments currently available whose cash flows approximate the timing and amount of expected benefit payments. Effective December 31, 2015, we changed the method we use to determine the discount rate used in calculating the interest component of net periodic benefit income. Instead of using a single weighted-average discount rate, we elected to utilize a full yield curve approach by applying separate discount rates to each future projected benefit payment based on time until payment. We made this change to provide a more precise measurement of interest costs by improving the correlation between projected cash flows and the corresponding yield curve rates. This change did not affect the measurement of our total benefit obligation, but reduced the interest component of net periodic benefit income $0.9 million for 2016. This is a change in accounting estimate, and accordingly, we accounted for it on a prospective basis.
Our accumulated postretirement benefit obligation as of December 31, 2017, was $87.6 million. In measuring this obligation, we assumed a discount rate of 3.46%. A 0.25 point change in the discount rate wouldmaterially increase, or decrease our postretirement benefit obligation by approximately $1.7 million.
Expected long-term rate of return on plan assets – The long-term rate of return on plan assets reflects the average rate of earnings expected on the funds invested or to be invested to provideif order volume declines for expected benefit payments. In determining this rate, we
utilize our historical returnschecks and then adjust these returns for estimated inflation and projected market returns. Our inflation assumption is primarily based on analysis of historical inflation data. As of December 31, 2017, the fair value of our plan assets was $127.4 million. In measuring net postretirement benefit income for 2017, we assumed an expected long-term rate of return on plan assets of 6.25%. A 0.25 point change in this assumption would increase or decrease our annual postretirement benefit income by approximately $0.3 million.
Expected health care cost trend rate – The health care cost trend rate represents the expected annual rate of change in the cost of health care benefits currently provided due to factors other than changes in the demographics of plan participants. In measuring the accumulated postretirement benefit obligation as of December 31, 2017, our initial health care inflation rate was assumed to be 7.90% for participants under the age of 65 and 9.10% for participants age 65 and older. Our ultimate health care inflation rate was assumed to be 4.5% in 2025 and beyond for all participants. A one-percentage-point change in the health care cost trend rates would have the following effects:
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(in thousands) | | One-percentage-point increase | | One-percentage-point decrease |
Effect on total of service and interest cost | | $ | 48 |
| | $ | (45 | ) |
Effect on benefit obligation | | 1,402 |
| | (1,314 | ) |
Average remaining life expectancy of plan participants – In determining the average remaining life expectancy of plan participants, our actuaries use a mortality table that includes estimated death rates for each age. We are currently using the RP-2014 mortality table with fully generational projection scale MP-2017.
When actual events differ from our assumptions or when we change the assumptions used, an unrecognized actuarial gain or loss results. The gain or loss is recognized immediately in the consolidated balance sheets within accumulated comprehensive loss and is amortized into postretirement benefit income over the average remaining life expectancy of inactive plan participants, as a large percentage of our plan participants are classified as inactive. This amortization period was 14.7 years as of December 31, 2017.
The fair value of our postretirement benefit plan assets is subject to various risks, including credit, interest and overall market volatility risks. If the equity marketsbusiness forms were to experiencematerially accelerate, these situations could indicate a significant decline in value, the fair value of our plan assets would decrease. This would affect the funded status of our plan and result in higher postretirement benefit expense in the future. Although our obligation is limited to funding benefits as they become payable, future declines in the fair value of one or more of our planreporting units. This may require us to record additional impairment charges for a portion of goodwill or other assets.
As discussed under Executive Overview, during 2023, we executed agreements allowing for the conversion of our U.S. and Canadian payroll and human resources services customers to other service providers. These businesses comprise a reporting unit that had a goodwill balance of $7.7 million as of December 31, 2023. We evaluated this goodwill for impairment as of December 31, 2023, and, based on our quantitative analysis, we concluded that it was not impaired as of that date. In conjunction with our phased transition out of these businesses, we expect that this goodwill will be fully impaired in 2024, at the point when the remaining cash flows generated by these businesses in 2024 no longer support the carrying value of the reporting unit.
Business Combinations
We allocate the purchase price of acquired businesses to the estimated fair values of the assets couldacquired and liabilities assumed as of the date of the acquisition. The calculations used to determine the fair value of the long-lived assets acquired, primarily intangible assets, can be complex and require significant judgment. We weigh many factors when completing these estimates, including, but not limited to, the nature of the acquired company’s business; its competitive position, strengths and challenges; its historical financial position and performance; estimated customer retention rates; discount rates; and future plans for the combined entity. We may also engage independent valuation specialists, when necessary, to assist in the fair value calculations for significant acquired long-lived assets.
We generally estimate the fair value of acquired customer lists using the multi-period excess earnings method. This valuation model estimates revenues and cash flows derived from the asset and then deducts portions of the cash flow that can be attributed to supporting assets, such as a trade name or fixed assets, that contributed to the generation of the cash flows. The resulting cash flow, which is attributable solely to the customer list asset, is then discounted at a rate of return commensurate with the risk of the asset to calculate a present value. The fair value of acquired customer lists may also be estimated by discounting the estimated cash flows expected to be generated by the assets. During 2021, we also utilized the multi-period excess earnings method to estimate the fair value of acquired partner relationship intangible assets. Key assumptions used in these calculations include same-customer revenue, merchant and partner growth rates; estimated earnings; estimated customer and partner retention rates, based on the acquirees' historical information; and the discount rate.
The fair value of acquired trade names and technology is estimated, at times, using the relief from royalty method, which calculates the cost savings associated with owning rather than licensing the assets. Assumed royalty rates are applied to projected revenue for the estimated remaining useful lives of the assets to estimate the royalty savings. Royalty rates are selected based on the attributes of the asset, including its recognition and reputation in the industry, and in the case of trade names, with consideration of the specific profitability of the products sold under a trade name and supporting assets. The fair value of acquired technology may also be estimated using the cost of reproduction method under which the primary components of the technology are identified and the estimated cost to reproduce the technology is calculated based on historical data provided by the acquiree.
The excess of the purchase price over the estimated fair value of the net assets acquired is recorded as goodwill. Goodwill is not amortized, but is subject to impairment testing on at least an annual basis.
We are also required to estimate the useful lives of the acquired intangible assets, which determines the amount of acquisition-related amortization expense we will record in future periods. Each reporting period, we evaluate the remaining useful lives of our amortizable intangibles to determine whether events or circumstances warrant a revision to the remaining period of amortization.
While we use our best estimates and assumptions, our fair value estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to 1 year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Any adjustments required after the measurement period are recorded in the consolidated statements of income.
The judgments required in determining the estimated fair values and expected useful lives assigned to each class of assets and liabilities acquired can significantly affect net income. For example, different classes of assets will have different useful lives. Consequently, to the extent a longer-lived asset is ascribed greater value than a shorter-lived asset, net income in a given period may be higher. Additionally, assigning a lower value to amortizable intangibles would result in the needa higher amount assigned to contribute increased amounts of cashgoodwill. As goodwill is not amortized, this would benefit net income in a given period, although goodwill is subject to fund benefits payable under the plan. We utilized plan assets to pay a significant portion of benefits during annual impairment analysis.
2017, and we anticipate that we will utilize plan assets to pay a significant portion of benefits during 2018.
New Accounting Pronouncements
Information regarding the accounting pronouncements adopted during 2017 and those not yet adopted can be found under the caption “Note 1: Significant accounting policies” of2: New Accounting Pronouncements” in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest rate risk – We are exposed to changes in interest rates primarily as a result of the borrowing activities used to support our capital structure, maintain liquidity and fund business operations.operations and investments. We do not enter into financial instruments for speculative or trading purposes. The nature and amount of debt outstanding can be expected to vary as a result of future business requirements, market conditions and other factors.
Interest is payable on amounts outstanding under our credit facility at a fluctuating rate of interest determined by reference to the Secured Overnight Financing Rate ("SOFR") plus an applicable margin ranging from 1.5% to 2.5%, depending on our total leverage ratio, as defined in the credit agreement. We also had $475.0 million of 8.0% senior, unsecured notes outstanding as of December 31, 2023. Including the related discount and debt issuance costs, the effective interest rate on these notes is 8.3%.
As of December 31, 2017,2023, our total debt outstanding was comprised of the following:as follows:
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(in thousands) | | Carrying amount(1) | | Fair value(2) | | Interest rate(3) |
Senior, secured term loan facility | | $ | 872,408 | | | $ | 877,187 | | | 6.8 | % |
Senior, unsecured notes | | 468,443 | | | 424,841 | | | 8.0 | % |
Amounts drawn on revolving credit facility | | 252,000 | | | 252,000 | | | 6.8 | % |
Total debt | | $ | 1,592,851 | | | $ | 1,554,028 | | | 7.2 | % |
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(in thousands) | | Carrying amount | | Fair value(1) | | Weighted-average interest rate |
Amount drawn on revolving credit facility | | $ | 413,000 |
| | $ | 413,000 |
| | 3.0 | % |
Amount outstanding under term loan facility | | 294,386 |
| | 294,938 |
| | 3.0 | % |
Capital lease obligations | | 1,914 |
| | 1,914 |
| | 2.0 | % |
Total debt | | $ | 709,300 |
| | $ | 709,852 |
| | 3.0 | % |
(1) The carrying amount has been reduced by unamortized discount and debt issuance costs of $11.3 million.
(2) For the amounts reportedoutstanding under our credit facility agreement, fair value approximates carrying value because the interest rate is variable and reflects current market rates. The fair value of the senior, unsecured notes is based on quoted prices in active markets for the identical liability when traded as an asset.
(3) The interest rate presented for total debt includes the impact of the interest rate swaps discussed below.
As part of our interest rate risk management strategy, we entered into interest rate swaps, which we designated as cash flow hedges, to mitigate variability in interest payments on a portion of our variable-rate debt. The interest rate swaps effectively convert $771.7 million of variable-rate debt to a fixed rate. Further information regarding the interest rate swaps can be found under the caption "Note 7: Derivative Financial Instruments" in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report. Changes in the fair value of the interest rate swaps are recorded in accumulated other comprehensive loss on the consolidated balance sheets for amounts drawn under our revolving credit facility and our term loan facility, excluding unamortized debt issuance costs, approximate fair value because ourare subsequently reclassified to interest ratesexpense as interest payments are variable and reflect current market rates. Capital lease obligations are presented at their carrying amount.made on the variable-rate debt.
Amounts drawn on our revolving credit facility and our term loan facility mature in February 2019. Our capital lease obligations are due through September 2021. As our credit facility matures in February 2019, we expect that we will enter into a new credit facility agreement in the first half of 2018.
Based on the daily average amount of variable-rate debt outstanding variable rate debt in our portfolio,as of December 31, 2023, a one-percentage-pointone percentage point change in ourthe weighted-average interest ratesrate would have resultedresult in a$7.5 million change in interest expense forof approximately $4 million in 2024.
Our credit agreement matures on June 1, 2026, at which time any amounts outstanding under the revolving credit facility must be repaid. The term loan facility requires periodic principal payments through June 1, 2026, and the senior, unsecured notes mature in June 2029. Information regarding the maturities of our long-term debt can be found under the caption "Note 13: Debt" in the Condensed Notes to Unaudited Consolidated Financial Statements appearing in Part I, Item 1 of this report.
Foreign currency exchange rate risk 2017– .
We are exposed to changes in foreign currency exchange rates. Investments in, and loans and advances to, foreign subsidiaries and branches, as well as the operations of these businesses, are denominated in foreign currencies, primarily Canadian and Australian dollars. The effect of exchange rate changes is expected to have a minimal impact on our earnings and cash flows, as our foreign operations represent a relatively small portion of our business. We have not entered into hedges against changes in foreign currency exchange rates.
Item 8. Financial Statements and Supplementary Data. | | |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Report of Independent Registered Public Accounting Firm
To theBoard of Directors and Shareholders of Deluxe Corporation:Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Deluxe Corporation and its subsidiaries (the “Company”) as of December 31, 20172023 and 2016,2022, and the related consolidated statements of income, of comprehensive income, shareholders’of shareholders' equity and of cash flows for each of the three years in the period ended December 31, 2017,2023, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2017,2023, based on criteria established in Internal Control - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20172023 and 2016, 2022, and the results of theirits operations and theirits cash flows for each of the three years in the period ended December 31, 20172023 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2023, based on criteria established in Internal Control - Integrated Framework(2013)issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management'sManagement’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidatedfinancial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidatedfinancial statements included performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidatedfinancial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidatedfinancial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or
disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition
As described in Notes 1 and 17 to the consolidated financial statements, product and service revenue of $1,258 million and $935 million, respectively, for the year ended December 31, 2023, are disaggregated by seven product and service offerings including checks, merchant services and other payment solutions, marketing and promotional solutions, forms and other products, treasury management solutions, data-driven marketing solutions, and web and hosted solutions. Product revenue is recognized when control of the goods is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods. In most cases, control is transferred when products are shipped. The Company recognizes the vast majority of service revenue as services are provided. The majority of the Company’s contracts are for the shipment of tangible products or the delivery of services that have a single performance obligation or include multiple performance obligations where control is transferred at the same time.
The principal consideration for our determination that performing procedures relating to revenue recognition is a critical audit matter is a high degree of auditor effort in performing procedures related to the Company’s revenue recognition.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process. These procedures also included, among others, testing, on a sample basis, whether the criteria for revenue recognition have been met by obtaining and inspecting source documents, including customer order information, the related customer contract, invoices, proof of shipment or delivery and cash receipts, as applicable.
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 23, 2018
22, 2024
We have served as the Company’s auditor since 2001.
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DELUXE CORPORATION CONSOLIDATED BALANCE SHEETS |
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(in thousands, except share par value) | | December 31, 2023 | | December 31, 2022 |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents, including securities carried at fair value of $22,000 and $5,000, respectively | | $ | 71,962 | | | $ | 40,435 | |
Trade accounts receivable, net of allowance for credit losses | | 191,005 | | | 206,617 | |
Inventories and supplies, net of reserve | | 42,088 | | | 52,267 | |
Funds held for customers, including securities carried at fair value of $8,126 as of December 31, 2022 | | 383,134 | | | 302,291 | |
Prepaid expenses | | 30,116 | | | 36,642 | |
Revenue in excess of billings | | 26,107 | | | 38,761 | |
Other current assets | | 16,576 | | | 27,024 | |
Total current assets | | 760,988 | | | 704,037 | |
Deferred income taxes | | 8,694 | | | 1,956 | |
Long-term investments | | 61,924 | | | 47,783 | |
Property, plant and equipment, net of accumulated depreciation | | 116,539 | | | 124,894 | |
Operating lease assets | | 58,961 | | | 47,132 | |
Intangibles, net of accumulated amortization | | 391,744 | | | 458,979 | |
Goodwill | | 1,430,590 | | | 1,431,385 | |
Other non-current assets | | 251,182 | | | 260,354 | |
Total assets | | $ | 3,080,622 | | | $ | 3,076,520 | |
| | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | |
Current liabilities: | | | | |
Accounts payable | | $ | 154,863 | | | $ | 157,055 | |
Funds held for customers | | 386,622 | | | 305,138 | |
Accrued liabilities | | 191,427 | | | 218,404 | |
Current portion of long-term debt | | 86,153 | | | 71,748 | |
Total current liabilities | | 819,065 | | | 752,345 | |
Long-term debt | | 1,506,698 | | | 1,572,528 | |
Operating lease liabilities | | 58,840 | | | 48,925 | |
Deferred income taxes | | 22,649 | | | 45,510 | |
Other non-current liabilities | | 68,754 | | | 52,988 | |
Commitments and contingencies (Notes 10, 14 and 15) | | | | |
Shareholders’ equity: | | | | |
Common shares $1 par value (authorized: 500,000 shares; outstanding: December 31, 2023 – 43,743; December 31, 2022 – 43,204) | | 43,743 | | | 43,204 | |
Additional paid-in capital | | 99,141 | | | 79,234 | |
Retained earnings | | 491,238 | | | 518,635 | |
Accumulated other comprehensive loss | | (30,028) | | | (37,264) | |
Non-controlling interest | | 522 | | | 415 | |
Total shareholders’ equity | | 604,616 | | | 604,224 | |
Total liabilities and shareholders’ equity | | $ | 3,080,622 | | | $ | 3,076,520 | |
DELUXE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share par value)
|
| | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 59,240 |
| | $ | 76,574 |
|
Trade accounts receivable, net of allowances for uncollectible accounts | | 149,844 |
| | 152,649 |
|
Inventories and supplies | | 42,249 |
| | 40,182 |
|
Funds held for customers | | 86,192 |
| | 87,823 |
|
Other current assets | | 55,441 |
| | 41,002 |
|
Total current assets | | 392,966 |
| | 398,230 |
|
Deferred income taxes | | 1,428 |
| | 1,605 |
|
Long-term investments | | 42,607 |
| | 42,240 |
|
Property, plant and equipment, net of accumulated depreciation | | 84,638 |
| | 86,896 |
|
Assets held for sale | | 12,232 |
| | 14,568 |
|
Intangibles, net of accumulated amortization | | 384,266 |
| | 409,781 |
|
Goodwill | | 1,130,934 |
| | 1,105,956 |
|
Other non-current assets | | 159,756 |
| | 125,062 |
|
Total assets | | $ | 2,208,827 |
| | $ | 2,184,338 |
|
| | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | |
| | |
|
Current liabilities: | | |
| | |
|
Accounts payable | | $ | 104,477 |
| | $ | 106,793 |
|
Accrued liabilities | | 277,253 |
| | 273,049 |
|
Long-term debt due within one year | | 44,040 |
| | 35,842 |
|
Total current liabilities | | 425,770 |
| | 415,684 |
|
Long-term debt | | 665,260 |
| | 722,806 |
|
Deferred income taxes | | 50,543 |
| | 85,172 |
|
Other non-current liabilities | | 52,241 |
| | 79,706 |
|
Commitments and contingencies (Notes 9, 13 and 14) | |
|
| |
|
|
Shareholders’ equity: | | |
| | |
|
Common shares $1 par value (authorized: 500,000 shares; outstanding: December 31, 2017 – 47,953; December 31, 2016 – 48,546) | | 47,953 |
| | 48,546 |
|
Retained earnings | | 1,004,657 |
| | 882,795 |
|
Accumulated other comprehensive loss | | (37,597 | ) | | (50,371 | ) |
Total shareholders’ equity | | 1,015,013 |
| | 880,970 |
|
Total liabilities and shareholders’ equity | | $ | 2,208,827 |
| | $ | 2,184,338 |
|
See Notes to Consolidated Financial Statements
DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Product revenue | | $ | 1,469,854 |
| | $ | 1,472,882 |
| | $ | 1,451,994 |
|
Service revenue | | 495,702 |
| | 376,180 |
| | 320,823 |
|
Total revenue | | 1,965,556 |
| | 1,849,062 |
| | 1,772,817 |
|
Cost of products | | (529,088 | ) | | (534,390 | ) | | (526,307 | ) |
Cost of services | | (213,002 | ) | | (132,851 | ) | | (112,902 | ) |
Total cost of revenue | | (742,090 | ) | | (667,241 | ) | | (639,209 | ) |
Gross profit | | 1,223,466 |
| | 1,181,821 |
| | 1,133,608 |
|
Selling, general and administrative expense | | (828,832 | ) | | (805,970 | ) | | (774,859 | ) |
Net restructuring charges | | (8,562 | ) | | (7,124 | ) | | (4,418 | ) |
Asset impairment charges | | (54,880 | ) | | — |
| | — |
|
Operating income | | 331,192 |
|
| 368,727 |
| | 354,331 |
|
Loss on early debt extinguishment | | — |
| | (7,858 | ) | | (8,917 | ) |
Interest expense | | (21,359 | ) | | (22,302 | ) | | (20,299 | ) |
Other income | | 2,994 |
| | 1,819 |
| | 2,832 |
|
Income before income taxes | | 312,827 |
| | 340,386 |
| | 327,947 |
|
Income tax provision | | (82,672 | ) | | (111,004 | ) | | (109,318 | ) |
Net income | | $ | 230,155 |
| | $ | 229,382 |
| | $ | 218,629 |
|
Basic earnings per share | | $ | 4.75 |
| | $ | 4.68 |
| | $ | 4.39 |
|
Diluted earnings per share | | 4.72 |
| | 4.65 |
| | 4.36 |
|
Cash dividends per share | | 1.20 |
| | 1.20 |
| | 1.20 |
|
| | |
DELUXE CORPORATION CONSOLIDATED STATEMENTS OF INCOME |
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in thousands, except per share amounts) | | 2023 | | 2022 | | 2021 |
Product revenue | | $ | 1,257,600 | | | $ | 1,286,197 | | | $ | 1,244,529 | |
Service revenue | | 934,660 | | | 951,813 | | | 777,668 | |
Total revenue | | 2,192,260 | | | 2,238,010 | | | 2,022,197 | |
Cost of products | | (486,029) | | | (470,237) | | | (450,880) | |
Cost of services | | (543,548) | | | (561,879) | | | (433,390) | |
Total cost of revenue | | (1,029,577) | | | (1,032,116) | | | (884,270) | |
Gross profit | | 1,162,683 | | | 1,205,894 | | | 1,137,927 | |
Selling, general and administrative expense | | (956,068) | | | (993,250) | | | (941,023) | |
Restructuring and integration expense | | (78,245) | | | (62,529) | | | (54,750) | |
Gain on sale of businesses and long-lived assets | | 32,421 | | | 19,331 | | | — | |
| | | | | | |
Operating income | | 160,791 | | | 169,446 | | | 142,154 | |
Interest expense | | (125,643) | | | (94,454) | | | (55,554) | |
Other income, net | | 4,651 | | | 9,386 | | | 7,203 | |
Income before income taxes | | 39,799 | | | 84,378 | | | 93,803 | |
Income tax provision | | (13,572) | | | (18,848) | | | (31,031) | |
Net income | | 26,227 | | | 65,530 | | | 62,772 | |
Net income attributable to non-controlling interest | | (107) | | | (135) | | | (139) | |
Net income attributable to Deluxe | | $ | 26,120 | | | $ | 65,395 | | | $ | 62,633 | |
Basic earnings per share | | $ | 0.60 | | | $ | 1.52 | | | $ | 1.48 | |
Diluted earnings per share | | 0.59 | | | 1.50 | | | 1.45 | |
See Notes to Consolidated Financial Statements
DELUXE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Net income | | $ | 230,155 |
| | $ | 229,382 |
| | $ | 218,629 |
|
Other comprehensive income (loss), net of tax: | | | | | | |
Postretirement benefit plans: | | | | | | |
Net actuarial gain (loss) arising during the year | | 7,011 |
| | 1,486 |
| | (7,666 | ) |
Less reclassification of amounts from other comprehensive loss to net income: | | | | | | |
Amortization of prior service credit | | (1,049 | ) | | (866 | ) | | (867 | ) |
Amortization of net actuarial loss | | 2,893 |
| | 2,518 |
| | 2,116 |
|
Postretirement benefit plans | | 8,855 |
| | 3,138 |
| | (6,417 | ) |
Unrealized holding (losses) gains on securities arising during the year | | (109 | ) | | (99 | ) | | 11 |
|
Unrealized foreign currency translation adjustment | | 4,028 |
| | 1,793 |
| | (12,459 | ) |
Other comprehensive income (loss) | | 12,774 |
| | 4,832 |
| | (18,865 | ) |
Comprehensive income | | $ | 242,929 |
| | $ | 234,214 |
| | $ | 199,764 |
|
| | | | | | |
Income tax (expense) benefit of other comprehensive income (loss) included in above amounts: | | | | | | |
Postretirement benefit plans: | | | | | | |
Net actuarial gain (loss) arising during the year | | $ | (2,465 | ) | | $ | (952 | ) | | $ | 4,906 |
|
Less reclassification of amounts from other comprehensive loss to net income: | | | | | | |
Amortization of prior service credit | | 372 |
| | 555 |
| | 554 |
|
Amortization of net actuarial loss | | (744 | ) | | (1,279 | ) | | (1,004 | ) |
Postretirement benefit plans | | (2,837 | ) | | (1,676 | ) | | 4,456 |
|
Unrealized holding (losses) gains on securities arising during the year | | 38 |
| | 35 |
| | (4 | ) |
Total net tax (expense) benefit included in other comprehensive income (loss) | | $ | (2,799 | ) | | $ | (1,641 | ) | | $ | 4,452 |
|
| | |
DELUXE CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME |
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in thousands) | | 2023 | | 2022 | | 2021 |
Net income | | $ | 26,227 | | | $ | 65,530 | | | $ | 62,772 | |
Other comprehensive income (loss), net of tax: | | | | | | |
Postretirement benefit plans: | | | | | | |
Net actuarial gain (loss) arising during the year | | 6,263 | | | (11,235) | | | 6,194 | |
Less reclassification of amounts to net income: | | | | | | |
Amortization of prior service credit | | (1,037) | | | (1,042) | | | (1,050) | |
Amortization of net actuarial loss | | 1,822 | | | 836 | | | 1,381 | |
Postretirement benefit plans | | 7,048 | | | (11,441) | | | 6,525 | |
Interest rate swaps: | | | | | | |
Unrealized (loss) gain arising during the year | | (524) | | | 4,869 | | | 2,067 | |
Reclassification of realized (gain) loss to net income | | (2,355) | | | (15) | | | 1,023 | |
Interest rate swaps | | (2,879) | | | 4,854 | | | 3,090 | |
Debt securities: | | | | | | |
Unrealized holding loss arising during the year | | (183) | | | (571) | | | (254) | |
Reclassification of realized loss to net income | | 1,092 | | | 6 | | | — | |
Debt securities | | 909 | | | (565) | | | (254) | |
Foreign currency translation adjustment: | | | | | | |
Unrealized foreign currency translation gain (loss) arising during the year | | 1,295 | | | (4,170) | | | 580 | |
Reclassification of foreign currency translation loss to net income | | 863 | | | 5,550 | | | — | |
Foreign currency translation adjustment | | 2,158 | | | 1,380 | | | 580 | |
Other comprehensive income (loss) | | 7,236 | | | (5,772) | | | 9,941 | |
Comprehensive income | | 33,463 | | | 59,758 | | | 72,713 | |
Comprehensive income attributable to non-controlling interest | | (107) | | | (135) | | | (139) | |
Comprehensive income attributable to Deluxe | | $ | 33,356 | | | $ | 59,623 | | | $ | 72,574 | |
| | | | | | |
Income tax (expense) benefit of other comprehensive income (loss) included in above amounts: | | | | | | |
Postretirement benefit plans: | | | | | | |
Net actuarial gain (loss) arising during the year | | $ | (2,298) | | | $ | 4,090 | | | $ | (2,186) | |
Less reclassification of amounts to net income: | | | | | | |
Amortization of prior service credit | | 384 | | | 379 | | | 371 | |
Amortization of net actuarial loss | | (451) | | | (64) | | | (248) | |
Postretirement benefit plans | | (2,365) | | | 4,405 | | | (2,063) | |
Interest rate swaps: | | | | | | |
Unrealized (loss) gain arising during the year | | 194 | | | (1,771) | | | (731) | |
Reclassification of realized (gain) loss to net income | | 872 | | | 5 | | | (361) | |
Interest rate swaps | | 1,066 | | | (1,766) | | | (1,092) | |
Debt securities: | | | | | | |
Unrealized holding loss arising during the year | | 63 | | | 197 | | | 88 | |
Reclassification of realized loss to net income | | (376) | | | (2) | | | — | |
Debt securities | | (313) | | | 195 | | | 88 | |
Total net tax (expense) benefit | | $ | (1,612) | | | $ | 2,834 | | | $ | (3,067) | |
See Notes to Consolidated Financial Statements