Donnelley Financial Solutions, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Unaudited results; amounts in millions except per-share data. DFIN provides regulatory filing, compliance, software-as-a-service (SaaS), deal-management, print and distribution solutions.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $195.9 | $216.9 | $684.4 | $762.7 |
| Income from operations | $32.1 | $62.1 | $72.1 | $117.7 |
| Net earnings | $14.7 | $48.0 | $30.6 | $74.6 |
| Diluted EPS | $0.43 | $1.40 | $0.89 | $2.19 |
| Non-GAAP adjusted EBITDA | $31.1 | $31.3 | $110.9 | $135.5 |
- Q3 sales declined 9.7% year over year; services fell 5.8% and products 16.5%. For the first nine months, sales declined 10.3%.
- Calculated GAAP operating margin was approximately 16.4% in Q3 versus 28.6% a year earlier, and 10.5% year to date versus 15.4%. Comparisons were materially affected by prior-period gains.
- Operating cash flow was a use of $4.2 for the first nine months, versus a source of $10.4 in 2018. Investing activities used $9.4; financing activities used $1.5. Capital expenditures were $35.1.
- At September 30, cash and cash equivalents were $32.1; current assets were $268.0 and current liabilities $193.5. Long-term debt was $364.1, comprising $300.0 of 8.25% notes due 2024 and a term loan with $71.5 carrying value.
- No revolving-facility borrowings were outstanding. Covenant-limited availability was $155.4; reported net available liquidity, including cash, was $187.5. DFIN reported compliance with debt covenants.
Changes and drivers
- Management attributed the sales decline mainly to lower mutual-fund print and related services, fewer capital-markets transactions and compliance volumes, and the 2018 sale of Language Solutions. SaaS growth, particularly FundSuiteArc and ActiveDisclosure, and the eBrevia acquisition partly offset declines.
- Q3 2019 included a $19.2 gain on a building sale; Q3 2018 included a $53.5 gain on the Language Solutions sale and an $11.8 gain on an equity investment. These unusual items make headline earnings and operating-profit comparisons less representative of recurring performance.
- For the nine months, other operating income included the $19.2 building-sale gain and a $2.8 loss related to the prior-year Language Solutions disposition. The 2018 period included the $53.5 Language Solutions gain and $11.8 equity-investment gain.
- SG&A fell to $46.2 in Q3 from $62.6, and to $159.0 year to date from $203.8, reflecting lower disposition and spin-off costs, lower incentive compensation and cost-control initiatives. Restructuring and other charges rose to $8.7 year to date, including termination costs for 235 employees and $0.4 of software impairment.
- Q3 effective tax rate was 38.8%, versus 29.1%; year-to-date rate was 35.0%, versus 29.7%. DFIN cited an International-segment valuation allowance and Treasury clarifications concerning the Tax Act.
Liquidity, outlook and risks
- Management said existing cash, operating cash flows and the revolving facility were expected to support operations, investment, debt service, acquisitions and restructuring. It expected 2019 capital expenditures of approximately $45.0, compared with $37.1 in 2018.
- DFIN expected increased SaaS revenue from new registered-investment-company filing requirements. It also anticipated that SEC Rule 30e-3 could reduce printed shareholder-report volumes beginning in 2021.
- The company highlighted transaction-market cyclicality, competition and technology-driven customer self-service as risks to demand. Other stated risks include security or data-protection failures, client retention, international and currency exposure, access to capital, and successful integration of acquisitions.
- Operating leases were brought onto the balance sheet upon adoption of the new lease standard in 2019; at September 30, lease liabilities totaled $86.1. The building sale-leaseback generated the $19.2 gain and involved an operating lease through 2029, with an option to terminate after three years.
- Management said ordinary-course litigation and bankruptcy-related preference claims were not expected to materially affect results, financial position or cash flows. The filing reported no material changes to previously disclosed risk factors and no significant change in market risk.
Investor verification priorities
- Assess revenue trends and recurring SaaS growth against continuing weakness in transaction activity and print-related offerings.
- Separate recurring operating performance from the building-sale gain, prior-period Language Solutions and equity-investment gains, and other restructuring or transaction costs; review the non-GAAP EBITDA reconciliation.
- Evaluate operating cash conversion, working-capital movements and the planned $45.0 of 2019 capital expenditures.
- Confirm covenant headroom, debt service burden and actual availability under the revolving facility; availability is constrained by covenants despite no outstanding revolver borrowings.
- Monitor the effects of Rule 30e-3 on print volumes, the International segment’s losses and valuation allowance, and remaining eBrevia contingent consideration and purchase-accounting estimates.