Donnelley Financial Solutions, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited results are compared with the corresponding 2021 periods. DFIN provides regulatory filing, software, technology-enabled services, and print and distribution solutions.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $188.7M | $247.7M | $665.9M | $760.5M |
| Operating income | $26.7M | $65.0M | $127.9M | $177.9M |
| Operating margin | 14.1% | 26.2% | 19.2% | 23.4% |
| Net earnings | $19.2M | $42.2M | $91.6M | $120.3M |
| Diluted EPS | $0.62 | $1.22 | $2.81 | $3.48 |
| Adjusted EBITDA (non-GAAP) | $45.3M | $82.5M | $179.0M | $233.5M |
Q3 gross margin was approximately 55.5%, versus 62.4% a year earlier; nine-month gross margin was approximately 55.8%, versus 57.8%. Tech-enabled services revenue fell 38.5% in Q3 and 20.8% year to date; software solutions grew 0.3% in Q3 and 7.5% year to date; print and distribution declined 12.4% and 16.0%, respectively.
For the nine months, operating cash flow was $76.9M (down from $103.2M); capital expenditures were $39.4M (up from $28.2M). Cash declined to $10.8M from $54.5M at year-end 2021. Long-term debt was $191.7M, including $125.0M of term-loan borrowings and $67.5M drawn on the revolving facility. Revolver availability was $232.5M; reported net available liquidity, including cash, was $243.3M.
Changes and management commentary
- Revenue fell 23.8% in Q3 and 12.4% for the first nine months. Management attributed the decline mainly to weaker capital-markets transactional volumes; Q3 operating income fell 58.9%, with lower volume and unfavorable mix.
- Nine-month revenue also reflected reduced print demand following SEC Rules 30e-3 and 498A. DFIN said it does not anticipate additional material impacts from those rules in 2023. Management highlighted software growth, including Arc Suite and ActiveDisclosure, and a longer-term shift by clients toward software and away from print.
- The company repurchased $138.8M of shares in the first nine months, including $150.0M of total cash outflows for repurchases and employee award-related share withholding. The remaining program authorization was $137.9M at September 30.
- Management expects 2022 capital expenditures of approximately $50M–$55M. The filing gives no broader earnings or revenue guidance.
Liquidity, debt, risks, and unusual items
- DFIN reported compliance with debt covenants at quarter-end and expected continued compliance, while noting that weaker economic conditions or demand could affect future compliance. The credit agreement includes leverage and interest-coverage tests and restricts certain actions.
- Q3 restructuring charges were $2.6M; nine-month charges were $4.6M, including employee termination costs associated primarily with reorganizing capital-markets operations and relocating a digital-print facility. Approximately 80 employees were affected year to date, with most expected to be terminated by December 31, 2022.
- A land parcel held for sale at a $2.6M carrying value is subject to an August 2022 sale agreement for $13.0M. Closing depends on due diligence, entitlements, and customary conditions; completion is not assured.
- Management identified exposure to transactional-market volatility, economic and financial-market uncertainty, seasonality, competition and autonomous filing technologies, cybersecurity and data protection, client retention, and COVID-19-related uncertainty. It also cited possible obligations related to former affiliate LSC’s multiemployer pension plans.
- Ordinary-course litigation and potential bankruptcy-related preference claims were disclosed; management did not expect their resolution to materially affect results, financial position, or cash flows. No material changes to reported risk factors or internal controls were noted.
Investor verification priorities
- Assess whether capital-markets transactional volumes recover and how further weakness could affect high-margin services and operating results.
- Track software revenue growth and whether it can offset continuing declines in print and tech-enabled transactional services.
- Reconcile the sharp reduction in cash with share repurchases, borrowing activity, and capital investment; monitor revolver usage and covenant headroom.
- Verify realization and timing of the proposed $13.0M land sale, and review the assumptions and exclusions in non-GAAP Adjusted EBITDA.
- Monitor bad-debt provisions, receivables, and restructuring execution; the allowance for expected credit losses rose to $17.5M from $12.7M at year-end 2021.