Donnelley Financial Solutions, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Amounts are in millions of dollars except per-share data. The company, a financial communications and compliance-services provider, became independent of R.R. Donnelley (RRD) on October 1, 2016; therefore, 2016 comparative results include pre-separation combined reporting and allocated parent-company costs.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $290.2 | $298.0 | $557.5 | $538.1 |
| Operating income | $42.9 | $59.0 | $70.1 | $81.5 |
| Operating margin | 14.8% | 19.8% | 12.6% | 15.1% |
| Net earnings | $18.8 | $36.3 | $28.1 | $49.7 |
| Diluted EPS | $0.57 | $1.12 | $0.86 | $1.53 |
| Net cash used in operating activities | Not presented by quarter | $(39.4) | $(33.6) |
Q2 services sales rose 1.3% to $177.1, while products sales fell 8.1% to $113.1. For the first half, services sales increased 5.2% and products sales 1.3%. Non-GAAP adjusted EBITDA was $63.9 in Q2 versus $71.8, and $108.9 for the first half versus $104.7. The company cautions that this non-GAAP measure has limitations and may not be comparable across companies.
At June 30, cash was $8.1, current assets $320.1 and current liabilities $187.4. Total debt carrying value was $525.9, comprising a $230.4 term loan, $300.0 of 8.25% senior notes due 2024 and $6.0 drawn on the revolver, less unamortized issuance costs. Net available liquidity was $222.4, including $214.3 of revolver availability. The company reported compliance with debt covenants. First-half capital expenditures were $12.0; management expected full-year 2017 capital expenditures of $30–$35.
Material changes and drivers
- Q2 sales declined 2.6%, reflecting lower capital-markets transaction volumes, partly offset by growth in mutual-fund print and print-related services and capital-markets compliance. Foreign exchange reduced Q2 sales by $2.4.
- Q2 operating income declined 27.3%; first-half operating income fell 14.0%. Lower transaction volumes, higher independent-company costs, restructuring charges and spin-off expenses weighed on results.
- Q2 interest expense increased to $11.0 from $0.1; first-half expense was $22.1 versus $0.4, primarily reflecting debt issued in connection with the separation. The $68.0 separation-related payment from RRD and $18.8 of company share-sale proceeds were used to reduce debt.
- First-half operating cash use worsened to $39.4, driven in part by interest payments and timing of customer receipts. Receivables increased to $257.1 from $156.2 at year-end, while cash declined to $8.1 from $36.2.
- U.S. Q2 sales decreased 7.7%, with capital markets down 16.7%; International sales rose 34.7%, including the effect of higher transaction, mutual-fund and virtual-data-room volumes. First-half International operating margin declined to 7.1% from 9.0%.
Outlook, risks and unusual items
- No revenue or earnings forecast is provided in the supplied filing text. Management cited market volatility and transaction cyclicality, increasing competition and technology-driven changes, and efforts to grow recurring-revenue services.
- Restructuring, impairment and other charges were $3.2 in Q2 and $7.0 for the first half. First-half charges included $4.8 for employee terminations affecting 148 employees, $1.9 of lease and other restructuring costs, and $0.2 of impairment. Some lease-related payments may continue through 2026; ultimate costs may depend on subleasing and market conditions.
- Key risks include dependence on capital-markets activity, digital alternatives and autonomous filing tools, cybersecurity and protection of client data, retaining clients and employees, foreign exchange, and the costs and obligations of operating independently. Covenant compliance could be affected by weaker markets or demand.
- Ordinary-course litigation and potential bankruptcy preference claims were disclosed; management did not expect their resolution to materially affect results, financial position or cash flows. Management reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether receivables collection and operating cash flow improve, given the substantial first-half cash use and increased receivables.
- Whether transaction-related weakness, particularly in U.S. capital markets, persists and how recurring services offset it.
- Progress on standalone-company costs, restructuring benefits and remaining spin-off expenses.
- Debt reduction, interest burden, revolver availability and continued covenant compliance.
- Actual 2017 capital expenditures versus the stated $30–$35 expectation, and any change in liquidity or outlook.