Donnelley Financial Solutions, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context
DFIN provides regulatory filing, deal-management, SaaS, technology-enabled, print and distribution solutions to corporate and investment-market clients. Its two reportable segments are U.S. and International. The company is shifting toward software and technology offerings, including ActiveDisclosure, FundSuiteArc and Venue. The Language Solutions business was sold in July 2018; eBrevia, acquired in December 2018, adds contract analytics capabilities.
Financial performance and liquidity
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $874.7 | $963.0 | Down 9.2% |
| Income from operations | $78.5 | $121.1 | Down 35.2% |
| Net earnings | $37.6 | $73.6 | Down 48.9% |
| Diluted earnings per share | $1.10 | $2.16 | Down $1.06 |
| Net cash provided by operating activities | $54.5 | $66.3 | Down $11.8 |
| Non-GAAP adjusted EBITDA | $137.0 | $154.9 | Down 11.6% |
Services sales fell 10.4% to $554.0; products sales fell 7.0% to $320.7. Management attributed the sales decline to the Language Solutions disposition, lower capital-markets transaction and compliance volumes, and foreign exchange, partly offset by SaaS growth, mutual-fund print volumes and eBrevia. Operating income included a $19.2 net gain on a building sale in 2019; the 2018 comparison included a $53.8 gain on the Language Solutions sale. Adjusted EBITDA is a non-GAAP measure and should not be treated as a substitute for GAAP results.
Fourth-quarter 2019 net sales were $190.3, operating income $6.4 and net earnings $7.0, compared with $200.3, $3.4 and a $1.0 net loss, respectively, in fourth-quarter 2018.
The U.S. segment generated $761.4 of sales and $113.5 of operating income, for a 14.9% operating margin, versus 16.5% in 2018. International sales were $113.3, down 25.1%, and the segment recorded an operating loss of $2.3, compared with income of $31.6 in 2018; the prior-year figure included Language Solutions sale gains.
Cash and cash equivalents were $17.2 at year-end, down from $47.3. Net available liquidity was $248.8, comprising $231.6 of revolver availability and $17.2 of cash. Operating cash flow was $54.5; capital expenditures were $44.8. Total assets were $886.9 and total liabilities $618.3.
Debt at year-end comprised $300.0 of 8.25% senior unsecured notes due October 2024; the remaining $72.5 term-loan balance was repaid during 2019. There were no revolver borrowings at year-end. The company reported compliance with debt covenants. It reported $296.0 of long-term debt net of unamortized issuance costs.
Material changes and unusual items
- Sales decreased $88.3 year over year, including $41.8 attributable to the Language Solutions sale and $3.0 to foreign-exchange movements.
- SG&A declined 20.3% to $205.8, reflecting cost controls, lower transaction and disposition-related expenses, and the divested business. Restructuring, impairment and other charges rose to $13.6, including $9.1 of employee termination costs for 271 employees.
- The company repaid the term loan and recognized a $4.1 loss on debt extinguishment. Other notable 2019 items included a $13.6 gain on an equity investment, a $2.0 investment impairment and a $3.9 non-cash pension settlement charge.
- DFIN adopted lease accounting guidance effective January 1, 2019, recognizing operating lease right-of-use assets and liabilities. At year-end, right-of-use assets were $80.7 and lease liabilities were $80.5.
- Two cyber incidents occurred in 2019, one involving a commercial partner and one involving DFIN credentials. The company said unauthorized viewing was limited to the affected systems and that it contacted impacted customers as appropriate.
Outlook, risks and contingencies
For 2020, management expected net sales to be relatively flat versus 2019: SaaS growth was expected to be offset by declines in print-related sales. It anticipated margin improvement from mix and cost controls, lower cash interest expense, and capital expenditures of approximately $35.0, versus $44.8 in 2019. These are forward-looking expectations, not guarantees.
Key risks include volatile capital-markets transaction volumes, client retention and pricing pressure, competitors and clients’ ability to file autonomously, and the execution risk of the SaaS transition. The company also highlighted cybersecurity and privacy exposure, regulatory changes, foreign-exchange and international operating risks, and pension funding sensitivity. SEC Rule 30e-3 permits electronic shareholder-report delivery; DFIN expected lower print volumes from 2021 as electronic delivery becomes the default for participating funds.
The company reported no material off-balance-sheet arrangements. Management believed ordinary-course litigation and preference claims would not materially affect results, financial position or cash flows. The 2019 goodwill test found no impairment, although Investment Markets’ estimated fair value exceeded carrying value by approximately 10%, leaving less cushion than the other reporting units. The board authorized a $25.0 million share-repurchase program on February 4, 2020, after the fiscal year-end. Deloitte issued an unqualified opinion on the financial statements and internal controls; management also concluded disclosure controls and internal control over financial reporting were effective as of year-end.
Most important facts for investors to verify
- Whether SaaS growth can offset ongoing declines in print, compliance and capital-markets transaction revenue, and whether 2020 margin improvement materialized.
- How much of reported earnings and adjusted EBITDA reflects recurring operations versus the building-sale and equity-investment gains, restructuring costs and other unusual items.
- Cash generation, working-capital needs and the capacity to service the $300.0 million notes, including the 2024 maturity and covenant headroom.
- Progress in International segment performance and the Investment Markets goodwill cushion, particularly if volumes, regulation or profitability weaken.
- Developments related to the disclosed cyber incidents, customer or regulatory claims, and the expected effect of electronic delivery on print revenue.