Donnelley Financial Solutions, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. All dollar amounts are in millions, except per-share data. DFIN provides regulatory filing and deal solutions through software, tech-enabled services, and print and distribution. Management describes a continuing client shift toward software and digital workflows, away from physical print.
Financial performance
| Metric | Q3 2023 | Q3 2022 | First nine months 2023 | First nine months 2022 |
|---|---|---|---|---|
| Net sales | $180.0 | $188.7 | $620.7 | $665.9 |
| Income from operations | $29.8 | $26.7 | $100.2 | $127.9 |
| Operating margin | 16.6% | 14.1% | 16.1% | 19.2% |
| Net earnings | $18.1 | $19.2 | $71.6 | $91.6 |
| Diluted EPS | $0.60 | $0.62 | $2.36 | $2.81 |
| Operating cash flow | — | $49.2 | $76.9 | |
| Capital expenditures | — | $43.0 | $39.4 |
Q3 gross margin was approximately 60.6%, versus 55.5% a year earlier; nine-month gross margin was approximately 58.2%, versus 55.8%. Margins are calculated from reported sales and cost of sales. Adjusted EBITDA, a non-GAAP measure, was $49.4 million in Q3 versus $45.3 million, and $166.1 million for nine months versus $179.0 million.
Revenue mix and period changes
- Q3 sales fell 4.6%; for nine months they fell 6.8%. Management attributed the declines mainly to lower capital-markets transaction and compliance volumes. The nine-month comparison also reflects lower investment-company compliance volumes.
- Software solutions sales increased 5.3% in Q3 and 3.8% year to date, supported by price increases and higher product volumes. Tech-enabled services declined 8.0% and 15.7%, respectively; print and distribution declined 17.0% and 2.9%.
- Q3 operating income rose 11.6%, with cost controls and lower selling, incentive-compensation, and restructuring costs more than offsetting lower volumes and higher depreciation and amortization. Nine-month operating income fell 21.7%, reflecting lower volumes, unfavorable mix, higher bad-debt expense, depreciation and amortization, and restructuring charges.
- Interest expense rose to $4.1 million in Q3 from $2.3 million, and to $12.2 million for nine months from $5.9 million, largely due to higher variable rates and, year to date, higher average revolving borrowings. Nine-month investment and other income included $6.9 million of realized gains on equity-security sales.
Financial position and liquidity
- At September 30, 2023, cash was $11.7 million, total debt was $165.9 million, and total liabilities were $454.0 million. Cash was $34.2 million and debt $169.2 million at December 31, 2022.
- Current assets were $229.9 million and current liabilities $196.8 million. DFIN reported $257.5 million of unused revolving-facility availability and $269.2 million of net available liquidity, including cash.
- Nine-month operating cash flow decreased to $49.2 million, primarily due to lower earnings, working-capital timing (including receivables and supplier payments), and higher interest paid. Investing activities used $33.1 million; financing activities used $38.7 million.
- Debt comprised a $125.0 million Term Loan A and $41.5 million drawn on a $300 million revolver. The company reported covenant compliance at quarter-end; the facilities mature May 27, 2026. Weighted-average borrowing rates for the first nine months were 6.8% on the term loan and 7.2% on the revolver.
Outlook, risks and unusual items
- No company-wide earnings or revenue guidance is provided in the filing. Management expects 2023 capital expenditures of approximately $60 million, substantially related to software development.
- DFIN expects the SEC Tailored Shareholder Reports rule, with compliance required beginning July 24, 2024, to support increased Arc Suite software and related filing revenue from the second half of 2024.
- Management highlights capital-markets cyclicality, transaction-volume sensitivity, seasonality, competition and clients’ increasing ability to file autonomously. Other identified risks include cybersecurity and data protection, client retention, technology adoption, economic and regulatory changes, and access to capital markets. Management states that it expects covenant compliance to continue, but weaker markets or demand could affect future compliance.
- Restructuring charges were $8.4 million for nine months, including $7.9 million of termination costs for approximately 150 employees, substantially all expected to be terminated by December 31, 2023. Q3 restructuring and other charges were a net credit of $0.3 million.
- In Q2 2023, DFIN shortened the estimated remaining useful life of customer-relationship intangibles from 11 years to 2 years, increasing amortization. The proposed $13.0 million land sale remained subject to buyer entitlements and customary closing conditions; completion is not assured. Management says ordinary-course litigation and preference-payment matters are not expected to have a material effect.
- The filing identifies no material changes to the prior annual report’s risk factors or market-risk disclosures. Disclosure controls were considered effective at September 30, 2023; a new quote-to-cash process and systems implementation is underway.
Key facts for investors to verify
- Whether capital-markets transaction volumes recover, and whether software growth and pricing offset continued declines in services and print.
- Cash conversion and receivables collections, given the year-to-date operating cash-flow decline and higher bad-debt provision.
- Debt costs, revolver usage and covenant headroom under weaker operating conditions.
- Progress and costs of the workforce restructuring, software investment, and quote-to-cash implementation.
- Timing and commercial impact of the Tailored Shareholder Reports rule, and whether the contingent land sale closes.