Donnelley Financial Solutions, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited results; dollar amounts are in millions unless otherwise noted.
Business context
DFIN provides regulatory filing, deal-management, software, technology-enabled services, and print and distribution solutions. Customers are shifting toward software and digital delivery and away from physical printing. Results are exposed to capital-markets transaction activity, economic conditions, and regulatory changes. The company reorganized its reporting into four operating segments in Q1 2020; prior-period segment data was recast.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $209.5 | $195.9 | $684.2 | $684.4 |
| Income from operations | $15.2 | $32.1 | $31.0 | $72.1 |
| Net earnings | $7.1 | $14.7 | $9.9 | $30.6 |
| Diluted EPS | $0.21 | $0.43 | $0.29 | $0.89 |
| Operating cash flow | Not separately presented for the quarter | $52.5 | $(4.2) |
- Q3 sales rose 6.9%; nine-month sales were essentially flat. Q3 tech-enabled services grew 24.6% and software solutions 9.7%, while print and distribution fell 17.6%. For the nine months, tech-enabled services and software grew 7.6% and 5.0%, respectively; print and distribution declined 10.7%.
- Operating margin was approximately 7.3% in Q3 2020 versus 16.4% a year earlier, and 4.5% for the first nine months versus 10.5%. Management attributed the profit decline to the prior-year building-sale gain, higher restructuring and impairment charges, multiemployer pension-plan costs, incentive compensation, and healthcare costs.
- Q3 2019 included a $19.2 million gain on sale of a building. Q3 2020 included $7.0 million of restructuring, impairment and other charges. Nine-month charges were $35.2 million, including $17.6 million of impairments and $15.0 million of employee termination costs related to approximately 490 employees.
- Adjusted EBITDA, a non-GAAP measure, was $47.6 million in Q3 2020 versus $31.1 million in Q3 2019, and $138.5 million for the first nine months versus $110.9 million. The filing cautions that this measure is not a substitute for GAAP results and may not be comparable across companies.
Cash, debt and liquidity
- Cash was $40.9 million at September 30, 2020, compared with $17.2 million at December 31, 2019. Nine-month operating cash flow was $52.5 million; the improvement from the prior-year period reflected lower tax and interest payments and the timing of supplier payments, partly offset by slower customer collections.
- Capital expenditures were $24.5 million for the first nine months; management expected approximately $30 million for full-year 2020.
- Long-term debt was $291.9 million: $233.0 million of 8.25% senior notes due 2024 and $61.5 million drawn on the revolving facility, net of debt issuance costs. The company retired $67.0 million in notes during 2020.
- Revolver availability was $238.5 million; reported net available liquidity, including cash, was $279.4 million. DFIN reported compliance with debt covenants at quarter-end and expected continued compliance, while warning that weaker markets or demand could affect future compliance.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management said capital-markets activity had begun to stabilize in Q3 and transaction offerings increased, but future COVID-19 effects remained uncertain. The company reported $0.9 million of net incremental COVID-19 expenses for the first nine months.
- SEC Rule 30e-3 and Rule 498A are expected to reduce print volumes beginning in 2021 and beyond. DFIN expects potential offsets from software and related filing services, including ArcFiling and ArcPro. The company also expected increased XBRL services following applicable Inline XBRL requirements.
- DFIN accrued $15.5 million for potential multiemployer pension-plan withdrawal liabilities connected to LSC Communications’ bankruptcy and interim shared payments with R.R. Donnelley. Mediation did not resolve the allocation; arbitration was anticipated. The maximum potential loss could not be reasonably estimated, and actual liability may differ materially.
- DFIN recorded a $2.7 million contingent liability for estimated sales-tax exposures in certain jurisdictions. Goodwill impairment testing found no impairment, but the Investment Companies—Compliance and Communications Management reporting unit had only approximately 3% fair-value headroom; a 1% increase in its discount rate would bring estimated fair value close to book value.
- COVID-19, transaction-market volatility, customer spending, regulatory-driven print declines, cyber and data-security risks, and the pension-liability allocation remain important uncertainties. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether transaction-market recovery and software growth can offset continued print declines and COVID-19-related uncertainty.
- The final allocation and potential total cost of the multiemployer pension liabilities after arbitration.
- Customer collections and receivables: receivables were $217.0 million at quarter-end, including $62.4 million of unbilled receivables.
- Progress against the expected $30 million 2020 capital-expenditure plan and the company’s ability to maintain covenant compliance.
- Whether the IC-CCM unit’s limited goodwill valuation cushion changes as regulatory and operating conditions evolve.