Donnelley Financial Solutions, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports fourth-quarter results; amounts below are in U.S. dollars unless noted.
Business context
DFIN provides regulatory filing, transaction, software, technology-enabled, print and distribution solutions to capital-markets clients and investment companies. Its strategy emphasizes software and recurring revenue as clients move toward digital workflows and away from printed materials. In 2020, software solutions generated $200.2 million of sales, or about 22% of total revenue; print and distribution generated $285.1 million, or about 32%.
Financial performance
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue | $894.5 million | $874.7 million |
| Gross profit / gross margin | $398.5 million / 44.5% | $332.3 million / 38.0% |
| Operating income (margin) | $3.6 million (0.4%) | $78.5 million (9.0%) |
| Net income (loss) | $(25.9) million | $37.6 million |
| Diluted EPS | $(0.76) | $1.10 |
| Operating cash flow | $154.2 million | $54.5 million |
| Capital expenditures | $31.1 million | $44.8 million |
| Adjusted EBITDA (non-GAAP) | $173.4 million | $137.0 million |
Fourth-quarter 2020 revenue was $210.3 million, operating loss was $27.4 million and net loss was $35.8 million. The filing provides no clear fourth-quarter prior-year comparison in the presented interim table.
At year-end, cash was $73.6 million, current assets were $267.2 million and current liabilities were $238.5 million. Long-term debt carrying value was $230.5 million, representing $233.0 million of 8.25% senior notes due in 2024. The $300 million revolving facility was undrawn; stated net available liquidity, including cash, was $373.6 million. Management reported compliance with debt covenants.
Material changes and unusual items
- Revenue grew 2.3%: tech-enabled services rose 12.2% to $409.2 million and software solutions rose 5.8% to $200.2 million; print and distribution fell 11.1% to $285.1 million.
- Operating income declined 95.4% amid $79.2 million of restructuring, impairment and other charges, versus $13.6 million in 2019. Charges included a $40.6 million non-cash goodwill impairment that eliminated IC-CCM goodwill, $18.2 million of lease-asset impairment and $15.6 million of employee termination costs affecting about 470 employees.
- SG&A included a $19.0 million charge for potential multiemployer pension-plan obligations connected to LSC’s bankruptcy and a $5.2 million estimated sales-tax exposure.
- Operating cash flow increased by $99.7 million, but the company cited working-capital timing, including increased accrued liabilities, as a contributor. Cash interest paid was $24.5 million.
- DFIN repurchased and retired $67.0 million face amount of notes and repurchased $11.8 million of common stock during 2020.
Outlook, commentary and risks
For 2021, management expected revenue to decline, primarily because SEC Rule 30e-3 and Rule 498A reduce printed shareholder materials and DFIN is exiting certain print relationships. Lower traditional capital-markets transaction and compliance volumes were also expected, partly offset by software growth. Management anticipated modest margin improvement, lower operating cash flow and approximately $45 million of capital expenditures, chiefly for software investment. No numerical revenue or earnings guidance was provided.
COVID-19 disrupted transactional activity, especially in the first half; management said markets stabilized in the third quarter. The pandemic’s further effects remained uncertain. Other principal risks include transactional-market volatility, client retention and self-service alternatives, competition and pricing pressure, cybersecurity and data protection, regulatory changes, and dependence on vendors and technology.
The LSC-related pension matter remains uncertain: DFIN and RRD were unable to agree on allocation in mediation and expected arbitration. DFIN had accrued $15.2 million at year-end; it could not reasonably estimate maximum exposure. The filing also describes two cyber incidents in 2019 and 2020 involving unauthorized viewing of client information, which the company believed was limited to the affected systems.
Most important facts for investors to verify
- Whether software growth and planned investments can offset expected print declines and weaker traditional compliance or transaction activity.
- How much of the strong 2020 operating cash flow reflects sustainable performance versus timing of supplier payments, collections and accrued liabilities.
- The final allocation and potential total cost of the LSC multiemployer pension liabilities after arbitration, and any additional sales-tax exposure.
- Whether IC-CCM performance, goodwill impairment assumptions and the remaining $103.7 million of CM-SS goodwill warrant continued scrutiny.
- Progress on 2021 revenue, margins, cash flow and capital spending against management’s stated outlook.
Audit and controls: Deloitte issued an unqualified opinion on the financial statements and internal controls. The auditors identified revenue estimates for unbilled receivables and contract assets and goodwill impairment assessments as critical audit matters.