# DELUXE CORP (DLX) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from DELUXE CORP's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/27996/000002799624000065/dlx-20231231.htm
Accession: 0000027996-24-000065
Filing date: 2024-02-22
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/DLX/
All MD&A years: /company/DLX/mda/
Previous year: /company/DLX/mda/fy2022/ (FY 2022)
Next year: /company/DLX/mda/fy2024/ (FY 2024)

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") includes the following sections:

•Executive Overview that discusses what we do, our operating results at a high level and our financial outlook for the upcoming year;

•Consolidated Results of Operations; Restructuring and Integration Expense; and Segment Results that includes a more detailed discussion of our revenue and expenses;

•Cash Flows and Liquidity and Capital Resources that discusses key aspects of our cash flows, financial commitments, capital structure and financial position; and

•Critical Accounting Estimates that discusses the estimates that involve a significant level of uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations.

Please note that this MD&A discussion contains forward-looking statements that involve risks and uncertainties. Part I, Item 1A of this report outlines known material risks and important information to consider when evaluating our forward-looking

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statements. The Private Securities Litigation Reform Act of 1995 (the "Reform Act") provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information. When we use the words or phrases “should result,” “believe,” “intend,” “plan,” “are expected to,” “targeted,” “will continue,” “will approximate,” “is anticipated,” “estimate,” “project,” “outlook,” "forecast" or similar expressions in this 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.

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.

EXECUTIVE OVERVIEW

We help businesses deepen customer relationships through trusted, technology-enabled solutions that help businesses pay and get paid, accelerate growth and operate more efficiently. Our solutions include merchant services, marketing services and data analytics, treasury management solutions, promotional products, and fraud and security solutions, as well as customized checks and business forms. We support millions of small businesses, thousands of financial institutions and hundreds of the world’s largest consumer brands. We are also a leading provider of checks and accessories sold directly to 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 to optimize our operations. Having substantially completed our infrastructure modernization initiatives, we have shifted our focus to growth investments, primarily in Payments and Data 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 structure during 2023, and we continued to allocate resources and assess performance based on our current reportable segment structure. Information regarding our realigned reportable segments for the quarter ending March 31, 2024 can be found in Part I, Item 1 of this report.

Divestitures / business exits – In June 2023, we completed the sale of our North American web hosting and logo design businesses. These businesses generated annual revenue of approximately $66 million during 2022, primarily in our Data Solutions segment. In September and December 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 generated annual revenue of approximately $27 million in the Payments segment during 2023.

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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 these business exits allow us to focus our resources on the key growth areas of payments and data, while allowing us to optimize our operations. Further information regarding these business exits can be found under the caption "Note 6: Acquisition and Divestitures" in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report.

2023 Financial Results

Cash flows and 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 cost saving actions, and a 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 revenue also contributed to the increase 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 rising interest rates, as well as a $9.5 million increase in employee bonus payments related to our 2022 operating performance and a $9.3 million increase in income tax payments driven, in large part, by the timing of our federal tax payments. Operating cash flow was also negatively impacted by the continuing secular decline in checks, business forms and certain Promotional Solutions business accessories, inflationary pressures on hourly wages, materials and delivery, and the impact of 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 price 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 rate environment. As of December 31, 2023, we held interest rate swaps that effectively convert $771.7 million of our variable-rate debt to a fixed rate. As

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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 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 product categories. We also expect that we will continue to pay our regular quarterly dividend. However, dividends are approved by our board of directors each quarter and thus, are subject to change. We anticipate that net cash generated by operations, along with cash and cash equivalents on hand and availability under our credit facility, will be sufficient to support our operations, including our contractual obligations and debt service requirements, for the next 12 months, as well as our long-term capital requirements. We were in compliance with our debt covenants as of December 31, 2023, and we anticipate that we will remain in compliance with our debt covenants throughout 2024.

CONSOLIDATED RESULTS OF OPERATIONS

Consolidated Revenue

[[GREPCENT_TABLE]]
[["(in thousands)","","2023","","2022","","","","Change"],["Total revenue","","$","2,192,260","","","$","2,238,010","","","","","(2.0%)"]]
[[/GREPCENT_TABLE]]

The decrease in total revenue for 2023, as compared to 2022, was driven, in part, by the business exits discussed in Executive Overview, which resulted in a decrease in revenue of approximately $52 million for 2023, as well as the continuing secular decline in order volume for checks, business forms and some Promotional Solutions business accessories. These decreases in revenue were partially offset by price increases in response to the inflationary environment, primarily in our Promotional Solutions and Checks segments, as well as growth from new business and favorable volumes for data-driven marketing and merchant services.

We do not manage our business based on product versus service revenue. Instead, we analyze our revenue based on the product and service offerings shown under the caption "Note 17: Business Segment Information" in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report. Our revenue mix by business segment was as follows:

[[GREPCENT_TABLE]]
[["","","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","%"]]
[[/GREPCENT_TABLE]]

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Consolidated Cost of Revenue

[[GREPCENT_TABLE]]
[["(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."]]
[[/GREPCENT_TABLE]]

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 decrease in total cost of revenue for 2023, as compared to 2022, was driven by reduced revenue volume from the continuing secular decline in checks, business forms and some Promotional Solutions business accessories, as well as a decrease of approximately $27 million from the business exits discussed under Executive Overview. Partially offsetting these decreases in total cost of revenue was inflationary pressures on hourly wages, materials and delivery, as well as the revenue growth from new business and favorable volumes, primarily data-driven marketing and merchant services. In addition, investments in the business increased, including some cost pressures in our Payments lockbox business earlier in the year as we continued to consolidate these operations. Restructuring and integration 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 2023 increased as compared to 2022, as the inflationary impacts, investments in the business and restructuring and integration expense more than offset the benefit of our pricing actions.

Consolidated Selling, General & Administrative ("SG&A") Expense

[[GREPCENT_TABLE]]
[["(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."]]
[[/GREPCENT_TABLE]]

The decrease in SG&A expense for 2023, as compared to 2022, was driven, in part, by various cost reduction actions, including workforce adjustments, marketing optimization and real estate rationalization, as well as a decrease related to the business exits discussed under Executive Overview of approximately $15 million for 2023. Additionally, acquisition amortization decreased $15.0 million in 2023, as certain of our intangible assets are amortized using accelerated methods. These decreases in SG&A expense were partially offset by increased 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

[[GREPCENT_TABLE]]
[["(in thousands)","","2023","","2022","","","","Change"],["Restructuring and integration expense","","$","78,245","","","$","62,529","","","","","$","15,716"]]
[[/GREPCENT_TABLE]]

We continue to pursue several initiatives designed to focus our business behind our growth strategy and to increase our efficiency. The amount of restructuring and integration expense is expected to vary from period to period as we execute these initiatives. Further information regarding these costs can be found in Restructuring and Integration Expense in this MD&A discussion.

Gain on Sale of Businesses and Long-Lived Assets

[[GREPCENT_TABLE]]
[["(in thousands)","","2023","","2022","","","","Change"],["Gain on sale of businesses and long-lived assets","","$","32,421","","","$","19,331","","","","","$","13,090"]]
[[/GREPCENT_TABLE]]

As discussed in Executive Overview, during 2023, we completed the sale of our 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 6: Acquisition and Divestitures" in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report.

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Interest Expense

[[GREPCENT_TABLE]]
[["(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."]]
[[/GREPCENT_TABLE]]

The increase in interest expense for 2023, as compared to 2022, was due primarily to the increase 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

[[GREPCENT_TABLE]]
[["(in thousands)","","2023","","2022","","","","Change"],["Income tax provision","","$","13,572","","","$","18,848","","","","","(28.0%)"],["Effective tax rate","","34.1","%","","22.3","%","","","","11.8 pt."]]
[[/GREPCENT_TABLE]]

The increase in the effective income tax rate for 2023, as compared to 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

[[GREPCENT_TABLE]]
[["(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","%)"]]
[[/GREPCENT_TABLE]]

(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 factors outlined in Executive Overview – 2023 results vs. 2022.

Adjusted EBITDA

[[GREPCENT_TABLE]]
[["(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."]]
[[/GREPCENT_TABLE]]

(1) Information regarding the calculation of adjusted EBITDA and adjusted EBITDA margin can be found in the following section entitled Reconciliation of Non-GAAP Financial Measures.

The 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.

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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:

[[GREPCENT_TABLE]]
[["(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"]]
[[/GREPCENT_TABLE]]

Net debt – Management believes that net debt is an important measure to monitor leverage and to evaluate the balance sheet. In calculating net debt, cash and cash equivalents are subtracted from total debt because they could be used to reduce our debt obligations. A limitation associated with using net debt is that it subtracts cash and cash equivalents, and therefore, may imply that management intends to use cash and cash equivalents to reduce outstanding debt. In addition, net debt suggests that our debt obligations are less than the most comparable GAAP measure indicates.

Total debt reconciles to net debt as follows as of December 31:

[[GREPCENT_TABLE]]
[["(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"]]
[[/GREPCENT_TABLE]]

Liquidity – We define liquidity as cash and cash equivalents plus the amount available for borrowing under our revolving credit facility. We consider liquidity to be an important metric for demonstrating the amount of cash that is available or that could be available on short notice. This financial measure is not a substitute for GAAP liquidity measures. Instead, we believe that this measurement enhances investors' understanding of the funds that are currently available.

Liquidity was as follows as of December 31:

[[GREPCENT_TABLE]]
[["(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"]]
[[/GREPCENT_TABLE]]

Adjusted diluted EPS – By excluding the impact of non-cash items or items that we believe are not indicative of current period operating performance, we believe that adjusted diluted EPS provides useful comparable information to assist in analyzing our current period operating performance and in assessing our future operating performance. As such, adjusted diluted EPS is one of the key financial performance metrics we use to assess the operating results and performance of the business and to identify strategies to improve performance. It is reasonable to expect that one or more of the excluded items will occur in future periods, but the amounts recognized may vary significantly.

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Diluted earnings per share for the years ended December 31 reconciles to adjusted diluted EPS as follows:

[[GREPCENT_TABLE]]
[["(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","","","\u2014"],["Restructuring and integration expense","","90,475","","","63,136"],["Share-based compensation expense","","20,525","","","23,676"],["Acquisition transaction costs","","\u2014","","","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","","","\u2014"],["Gain on debt retirements","","\u2014","","","(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","","\u2014","","","(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","","","\u2014"],["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"]]
[[/GREPCENT_TABLE]]

(1) The tax effect of the pretax adjustments considers the tax treatment and related tax rate(s) that apply to each adjustment in the applicable tax jurisdiction(s). Generally, this results in a tax impact that approximates the U.S. effective tax rate for each adjustment. However, the tax impact of certain adjustments, such as share-based compensation expense and gains on sales of businesses, depends on whether the amounts are deductible in the respective tax jurisdictions and the applicable effective tax 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.

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Net income for the years ended December 31 reconciles to adjusted EBITDA and adjusted EBITDA margin as follows:

[[GREPCENT_TABLE]]
[["(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","","\u2014","","","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","","","\u2014"],["Adjusted EBITDA","","$","417,135","","","$","418,130"],["Adjusted EBITDA margin","","19.0","%","","18.7","%"]]
[[/GREPCENT_TABLE]]

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 restructuring and integration expense can be found under the caption "Note 9: Restructuring and Integration Expense" in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report.

We expect that the benefits of the various 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 approximately $45 million, and we expect to incur an additional $70 million to $90 million over the next 2 years. These charges will include employee severance, professional services fees and other restructuring-related charges.

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-2024. As a result of our employee reductions, including those related to our North Star program, we realized cost savings of approximately $7 million in cost of sales and $25 million in SG&A expense in 2023, in comparison to our 2022 results of operations. For those employee reductions included in our restructuring and integration accruals through December 31, 2023, we expect to realize annual cost savings of approximately $8 million in cost of sales and $25 million in SG&A expense in 2024, in comparison to our 2023 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, and we anticipate savings of approximately $3 million in 2024, in comparison to our 2023 results of operations. Note that these savings may be offset by increased labor and other costs, including inflationary impacts and investments in the business.

SEGMENT RESULTS

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 reportable business segments is consistent with that presented

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under the caption “Note 17: Business Segment Information” in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report, where information regarding revenue for our product and service offerings can also be found.

Payments

Results for our Payments segment were as follows:

[[GREPCENT_TABLE]]
[["(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."]]
[[/GREPCENT_TABLE]]

The increase in total revenue for 2023, as compared to 2022, was due to an increase in merchant services revenue of 4.8%, driven by strong 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 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 lower lockbox services volume. For 2024, we expect adjusted EBITDA margin to continue in the low to mid 20% range.

Data Solutions

Results for our Data Solutions segment were as follows:

[[GREPCENT_TABLE]]
[["(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."]]
[[/GREPCENT_TABLE]]

The decrease in total revenue for 2023, as compared to 2022, was driven 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 continuing customer churn. Partially offsetting these decreases in revenue 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 expansion of business banking account offerings. This increase was partially offset by the impact of certain of our 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 the 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 various 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 due to business exits, and we expect that adjusted EBITDA margin will be in the low 20% range.

Promotional Solutions

Results for our Promotional Solutions segment were as follows:

[[GREPCENT_TABLE]]
[["(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."]]
[[/GREPCENT_TABLE]]

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The decrease in total 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 exits discussed in Executive Overview resulted in a revenue decline of approximately $13 million for 2023. Partially offsetting these decreases in revenue 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 low to mid single digit percentage revenue decline.

The increase in adjusted EBITDA for 2023, as compared to 2022, was driven primarily by price increases and cost reduction actions. In addition, we are taking a more focused approach and targeting products with better margins. Partially offsetting these increases in adjusted 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 for 2023, as compared to 2022, as price increases, the benefit of cost reduction actions and our focus on products with better margins more than offset the impact of inflationary pressures. For 2024, we expect the adjusted EBITDA margin percentage to remain in the mid-teens.

Checks

Results for our Checks segment were as follows:

[[GREPCENT_TABLE]]
[["(in thousands)","","2023","","2022","","","","Change"],["Total revenue","","$","721,089","","","$","728,988","","","","","(1.1%)"],["Adjusted EBITDA","","320,333","","","320,498","","","","","(0.1%)"],["Adjusted EBITDA margin","","44.4","%","","44.0","%","","","","0.4 pt."]]
[[/GREPCENT_TABLE]]

The decrease in total revenue for 2023, as compared to 2022, was driven primarily by the continuing secular decline in overall check volumes, partially offset by price increases in response to the inflationary 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 volumes and inflationary pressures on delivery and materials were offset by price increases and the benefit of cost saving actions. Adjusted EBITDA margin for 2023 increased as compared to 2022, as inflationary cost pressures were more than offset by the benefit of the pricing and cost saving actions. For 2024, we expect adjusted EBITDA margin to remain in the mid 40% range.

CASH FLOWS AND LIQUIDITY

As of December 31, 2023, we held cash and cash equivalents of $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 should be read in conjunction with the consolidated statements of cash flows appearing in Part II, Item 8 of this report.

[[GREPCENT_TABLE]]
[["(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"]]
[[/GREPCENT_TABLE]]

(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 2023 increased $6.8 million as compared to 2022, driven by positive changes in working capital, pricing and cost saving actions, and a decrease of $9.5 million in payments for cloud computing implementation costs related to the 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 operating cash flow 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 performance and a $9.3 million increase in income tax payments driven, in large part, by the timing of our federal tax payments. Operating cash flow was also negatively impacted by the continuing secular decline in checks, business forms and certain Promotional Solutions business accessories, inflationary pressures on hourly wages, materials and delivery, and the impact of business exits.

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Included in net cash provided by operating activities were the following operating cash outflows:

[[GREPCENT_TABLE]]
[["(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)"]]
[[/GREPCENT_TABLE]]

(1) Amounts reflect compensation based on total company and segment performance.

Net cash used by investing activities for 2023 was $37.0 million lower than 2022, driven primarily by a $28.4 million increase in proceeds from sales of 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 customer funds obligations in each period, partially offset by higher payments of debt during 2023 enabled, in part, by the proceeds received from business exits during 2023.

Significant cash transactions, excluding those related to operating activities, for each period were as follows:

[[GREPCENT_TABLE]]
[["(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"]]
[[/GREPCENT_TABLE]]

In assessing our cash needs, we must consider our debt service requirements, lease obligations, other contractual commitments and contingent liabilities. Information regarding the maturities of our long-term debt, our operating and finance lease obligations and contingent liabilities can be found under the captions "Note 13: Debt," "Note 14: Leases" and "Note 15: Other Commitments and Contingencies," all of which appear in the Notes to Consolidated Financial Statements appearing in Part 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 professional services agreements related to our various restructuring initiatives, as well as agreements for outsourced services, the purchase of data, and payment acceptance services. These contracts obligate us to pay approximately $230 million in total, with approximately $100 million due during 2024, $50 million due during 2025 and the remainder due through 2028.

As of December 31, 2023, $240.5 million was available for borrowing under our revolving credit facility. We anticipate that net cash generated by operations, along with cash and cash equivalents on hand and availability under our credit facility, will be sufficient to support our operations, including our contractual obligations and our debt service requirements, for the next 12 months, as well as our long-term capital requirements. We anticipate that we will continue to pay our regular quarterly dividend. However, dividends are approved by our board of directors each quarter and thus, are subject to change.

CAPITAL RESOURCES

The principal amount of our debt obligations was $1.60 billion as of December 31, 2023 and $1.66 billion as of December 31, 2022. Further information concerning our outstanding debt, including our debt service obligations, 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.

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Our capital structure for each period was as follows:

[[GREPCENT_TABLE]]
[["","","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","%","","$","271,659"],["Floating interest rate","","357,528","","","7.9","%","","684,375","","","6.6","%","","(326,847)"],["Total debt principal","","1,604,187","","","7.2","%","","1,659,375","","","6.6","%","","(55,188)"],["Shareholders\u2019 equity","","604,616","","","","","604,224","","","","","392"],["Total capital","","$","2,208,803","","","","","$","2,263,599","","","","","$","(54,796)"]]
[[/GREPCENT_TABLE]]

(1) The fixed interest rate amount includes the amount of our variable-rate debt that is subject to interest rate swap agreements. The related interest rate includes the fixed rate under the swaps plus the credit facility spread due on all amounts outstanding under our credit facility.

In October 2018, our board of directors authorized the repurchase of up to $500.0 million of our common stock. This authorization has no expiration date. We have not repurchased any shares under this authorization since the first quarter of 2020. As of December 31, 2023, $287.5 million remained available for repurchase under 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, 2023, total commitments under our revolving credit facility were $500.0 million. Our quarterly commitment fee ranges from 0.25% to 0.35%, based on our total leverage ratio, as defined in the credit agreement. Further information regarding the terms and maturities of our debt, as well as our debt covenants, can be found under the caption "Note 13: Debt" in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report. We were in compliance with our debt covenants as of December 31, 2023, and we anticipate that we will remain in compliance with our debt covenants throughout 2024.

As of December 31, 2023, amounts were available for borrowing under our revolving credit facility as follows:

[[GREPCENT_TABLE]]
[["(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"]]
[[/GREPCENT_TABLE]]

(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.

CRITICAL ACCOUNTING ESTIMATES

Our critical accounting estimates 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. Our MD&A discussion is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. Our accounting policies are discussed under the caption “Note 1: Significant Accounting 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 are reviewed by management on an ongoing basis and by the Audit and Finance committee of our board of directors at the end of each quarter prior to the public release of our financial results.

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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 another party is involved in providing goods or services to a customer, we must determine whether our obligation 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 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

36

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 a number of factors, including revenue growth rates, terminal growth rates, direct costs, the discount rate and the allocation of shared and 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.

Further information regarding all of our goodwill impairment analyses can be found under the caption "Note 8: Fair Value Measurements" in the Notes to Consolidated Financial Statements appearing in Item II, Part 8 of this 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 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 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 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 acquired 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.

37

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 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.

New Accounting Pronouncements

Information regarding accounting pronouncements not yet adopted can be found under the caption “Note 2: New Accounting Pronouncements” in the Notes to Consolidated Financial Statements appearing in Part II, Item 8 of this report.