Donnelley Financial Solutions, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Financial statements are unaudited; amounts are in millions except per-share data. DFIN provides software, technology-enabled services, and print and distribution solutions for regulatory compliance and capital-markets transactions.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $266.2 | $267.5 | $477.2 | $512.8 |
| Income from operations | $65.9 | $62.0 | $101.2 | $112.9 |
| Net earnings | $46.0 | $42.9 | $72.4 | $78.1 |
| Diluted EPS | $1.42 | $1.24 | $2.17 | $2.26 |
| Operating margin | 24.8% | 23.2% | 21.2% | 22.0% |
| Adjusted EBITDA (non-GAAP) | $82.6 | $79.9 | $133.7 | $151.0 |
Q2 sales decreased 0.5%, while operating income increased 6.3% and net earnings rose 7.2%. For the first half, sales declined 6.9%, operating income fell 10.4%, and net earnings fell 7.3%. Lower interest expense helped earnings: net interest expense was $2.1 million in Q2 and $3.6 million year to date, down from $5.9 million and $11.2 million, respectively, in 2021.
Q2 sales by offering were tech-enabled services $133.3 million (down 0.5%), software solutions $71.6 million (up 7.5%), and print and distribution $61.3 million (down 8.4%). First-half amounts were $225.0 million (down 10.9%), $141.4 million (up 11.4%), and $110.8 million (down 16.9%), respectively. Software growth included ActiveDisclosure and Arc Suite; lower print demand reflected regulatory changes, while lower transactional activity weighed on services.
Cash flow and liquidity: First-half operating cash flow was negative $6.4 million, versus negative $7.7 million. Capital expenditures were $24.8 million, yielding calculated free cash flow of negative $31.2 million (operating cash flow less capital expenditures), compared with negative $25.4 million in 2021. Cash declined to $17.8 million from $54.5 million at year-end 2021. DFIN reported $190.0 million of revolving-credit availability and $207.8 million of net available liquidity, including cash. Current assets were $318.4 million and current liabilities $236.4 million.
Debt: Total long-term debt carrying value was $234.1 million at June 30, 2022, including $125.0 million on the Term Loan A and $110.0 million drawn on the $300 million revolving facility. The revolver was undrawn at year-end 2021. DFIN said it was in compliance with debt covenants and expected to remain compliant, while noting that weaker markets or demand could affect future compliance.
Material changes and drivers
- Q2 operating income improved on cost controls and lower restructuring charges, partly offset by weaker capital-markets transaction volumes. The first-half operating-income decline reflected lower sales and unfavorable mix, partly offset by cost controls, lower incentive compensation, and a $7.5 million reduction in expense related to the LSC multiemployer pension obligation.
- Capital Markets–Compliance and Communications Management first-half sales fell 13.0%, primarily from lower transaction volumes; Investment Companies software sales rose 13.0%. Print volumes continued to decline as clients shifted toward electronic delivery.
- Share repurchases totaled $106.5 million under the program in the first half; total treasury-share repurchases and related employee-award withholding cash outflows were $116.6 million. Remaining program authorization was $58.6 million at June 30.
- A buyer terminated the agreement to purchase DFIN’s land before receiving construction entitlements. The land was reclassified to property, plant and equipment; DFIN recorded $0.2 million of income from the forfeited deposit.
Outlook, risks, and contingencies
- Management forecast full-year 2022 capital expenditures of approximately $50–$55 million. No full-year revenue or earnings guidance is provided in the filing text.
- Management described liquidity as sufficient for operations and investment and expected covenant compliance, subject to operating and market conditions.
- Management expects the effects of SEC Rules 30e-3 and 498A to continue shifting investment-company communications away from print and toward software during 2022. The company’s strategy emphasizes software investment and recurring revenue, alongside service capabilities.
- Capital-markets transaction and Venue activity is cyclical and sensitive to economic conditions, market volatility, regulation, politics, and geopolitical events. Other disclosed risks include COVID-19 effects, competition and technology adoption, client retention, cybersecurity and data protection, foreign exchange, and employee-benefit costs.
- DFIN reported no material changes to the risk factors in its 2021 Form 10-K. Management stated that ordinary-course litigation and bankruptcy-related preference claims were not expected to materially affect results, financial position, or cash flows.
Important facts for investors to verify
- Whether software growth and cost controls can offset continued declines in transaction-driven services and printed communications.
- Receivables and working-capital conversion: accounts receivable was $273.4 million, including $92.4 million of unbilled receivables, up from $46.7 million at year-end 2021.
- Debt and liquidity trends, including the $110.0 million revolver balance, floating-rate exposure, covenant headroom, and the effect of ongoing share repurchases.
- Execution of the $50–$55 million capital-expenditure plan and whether software investment produces sustained revenue and margin growth.
- Progress and cash costs of restructuring actions covering approximately 70 employees, most expected to be terminated by December 31, 2022.