Donnelley Financial Solutions, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; unaudited. DFIN provides regulatory filing, deal, software, technology-enabled, and print and distribution solutions to capital markets and investment-company clients. Amounts are in millions except per-share data.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $242.1 | $266.2 | $440.7 | $477.2 |
| Operating income | $55.6 | $65.9 | $70.4 | $101.2 |
| Operating margin | 23.0% | 24.8% | 16.0% | 21.2% |
| Net earnings | $37.7 | $46.0 | $53.5 | $72.4 |
| Diluted EPS | $1.24 | $1.42 | $1.76 | $2.17 |
| Adjusted EBITDA (non-GAAP) | $74.3 | $82.6 | $116.7 | $133.7 |
Revenue fell 9.1% in Q2 and 7.6% year to date. Tech-enabled services declined 21.6% in Q2 and 18.7% year to date; software solutions grew 5.7% and 3.1%, respectively, while print and distribution increased modestly. DFIN attributed the overall decline mainly to lower capital-markets transaction volumes, with software pricing and volumes partly offsetting the weakness. Operating income and earnings also fell, reflecting lower sales, unfavorable mix, higher depreciation and amortization, and higher bad-debt expense. H1 results additionally included higher restructuring charges.
Gross margin, calculated as revenue less cost of sales, was approximately 59.4% in Q2 versus 58.0% a year earlier, and 57.2% for the first half versus 55.9%. Consolidated operating margin nonetheless declined as operating expenses and lower revenue weighed on results.
Cash flow, debt, and liquidity
- H1 operating cash flow was negative $31.3, compared with negative $6.4 in 2022. Management cited timing of receivable collections and supplier payments, lower earnings, and higher interest paid. Receivables used $86.7 of operating cash.
- H1 investing cash flow was negative $13.9, including $23.8 of capital expenditures and $9.9 of cash proceeds from investment sales. Management expected 2023 capital expenditures of approximately $60.
- H1 financing cash flow was positive $30.0. At June 30, cash was $19.4; long-term debt was $219.8, up from $169.2 at year-end 2022. Debt comprised a $125.0 term loan and $95.5 drawn on the revolving facility. Net debt was approximately $200.4.
- Revolver availability was $203.5; cash plus availability totaled $222.9. DFIN reported compliance with debt covenants and expected continued compliance, while cautioning that weaker markets or demand could affect future compliance. The $300.0 revolving facility matures May 27, 2026.
- Interest expense, net rose to $4.6 in Q2 from $2.1 and to $8.1 for H1 from $3.6. The company transitioned its credit facilities from LIBOR to SOFR; weighted-average H1 borrowing rates were 6.5% for the term loan and 7.1% for the revolver.
Material changes, outlook, and risks
- Capital Markets — Compliance and Communications Management, the largest segment, had Q2 revenue of $122.9, down 18.1%; H1 revenue was $217.0, down 14.4%. Transaction volumes were the primary pressure. Software-solutions revenue grew in both customer markets.
- DFIN recorded $8.7 of restructuring, impairment, and other charges in H1, including $8.5 of termination costs for approximately 150 employees, primarily tied to capital-markets reorganization; substantially all affected employees were expected to be terminated by year-end. Q2 included a $2.2 net restructuring credit, mainly from reversals of estimated severance.
- Investment-security sales generated a $6.9 realized gain in H1. This boosted investment and other income and should be distinguished from recurring operating performance.
- Management expects the SEC’s Tailored Shareholder Reports requirements, with compliance beginning July 24, 2024, to support higher Arc Suite software and related filing revenue beginning in the second half of 2024. No specific full-year revenue or earnings guidance is provided in the filing text.
- Key risks include transaction-market volatility and seasonality, client adoption of self-service filing technologies, competition, cybersecurity and data protection, economic and regulatory changes, and the possibility that weaker demand could affect covenant compliance. Management said litigation and preference-payment matters were not expected to have a material effect.
- A land parcel held for sale remained on the balance sheet at $2.6; a proposed $13.0 sale remained subject to due diligence, entitlements, and customary closing conditions.
- Management concluded disclosure controls were effective as of June 30, 2023; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Whether capital-markets transaction volumes recover, and how that affects tech-enabled services revenue and margins.
- Whether software growth and the anticipated 2024 Tailored Shareholder Reports opportunity offset continued pressure in services and print.
- Receivables collection trends, bad-debt expense, and the cash-flow impact of working-capital timing.
- Debt levels, borrowing costs, revolver availability, and continued covenant compliance under weaker operating scenarios.
- Execution and costs of the workforce restructuring, and the extent to which H1 earnings benefited from the one-time $6.9 investment gain.
- Completion and timing of the proposed land sale; the filing does not establish that the transaction will close.