Donnelley Financial Solutions, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Amounts are in millions of dollars except per-share data. DFIN provides regulatory filing, deal-management and compliance solutions through software, technology-enabled services, and print and distribution.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $247.7 | $209.5 | $760.5 | $684.2 |
| Income from operations | $65.0 | $15.2 | $177.9 | $31.0 |
| Net earnings | $42.2 | $7.1 | $120.3 | $9.9 |
| Diluted EPS | $1.22 | $0.21 | $3.48 | $0.29 |
| Operating margin | 26.2% | 7.3% | 23.4% | 4.5% |
- Q3 sales increased 18.2%; tech-enabled services rose 36.0% and software solutions rose 35.6%, while print and distribution declined 32.7%.
- For the first nine months, sales increased 11.2%; tech-enabled services grew 30.7% and software solutions 34.4%, offset in part by a 28.2% print and distribution decline.
- Q3 gross profit was $154.6 million, or approximately 62.4% of sales, compared with $97.0 million, or 46.3%, a year earlier. Operating profit growth reflected higher volumes, favorable mix, print-platform savings, lower restructuring charges and lower LSC pension-obligation expense.
- SG&A rose 23.8% in Q3 to $77.0 million and 17.5% year to date to $225.6 million, reflecting higher selling, incentive-compensation and, year to date, share-based compensation costs.
- Reported Q3 and nine-month adjusted EBITDA, a non-GAAP measure, was $82.5 million and $233.5 million, respectively, versus $47.6 million and $138.5 million. The company cautions that this measure has limitations and may not be comparable across companies.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $103.2 million, up from $52.5 million. Capital expenditures were $28.2 million, implying operating cash flow less capital expenditures of approximately $75.0 million. Management expected full-year 2021 capital expenditures of approximately $45 million.
- Cash at September 30 was $122.9 million. Current assets were $394.9 million and current liabilities $318.6 million.
- Reported debt was $231.0 million: $40.5 million classified as short-term and $190.5 million long-term. No revolver borrowings were outstanding; $297.7 million remained available after letters of credit. Reported net available liquidity, including cash, was $420.6 million.
- Subsequent to quarter-end, DFIN drew $200 million under its delayed-draw term loan and redeemed the remaining $233 million of 8.25% senior notes on October 15, 2021, paying a 102.063% redemption price plus accrued interest. It prepaid $45 million of the term loan in October and expected to record a $6.8 million pretax extinguishment loss in Q4. The revolver maturity was extended to May 2026; credit-facility covenants include leverage and interest-coverage tests.
Material changes and management commentary
- Management attributed stronger results primarily to a recovery in capital-markets transactional and compliance volumes and higher Venue, Arc Suite, ActiveDisclosure, ArcDigital and ArcPro software volumes. Capital Markets–Compliance and Communications Management sales rose 48.3% in Q3; Investment Companies–Compliance and Communications Management sales fell 42.4%.
- SEC Rule 30e-3 and Rule 498A are shifting investment-company communications away from print. DFIN expects lower printed shareholder-report and prospectus volumes, alongside increased demand for related ArcDigital and ArcPro software.
- Management cited cost savings from print-platform consolidation and cost controls. The company recorded $6.9 million in restructuring, impairment and other charges for the nine months, including $3.2 million for termination costs affecting approximately 170 employees and a $2.8 million impairment tied to planned building demolition.
Outlook, risks and contingencies
- The filing gives no specific revenue or earnings guidance. It does state expected 2021 capital expenditures of approximately $45 million.
- Management says transactional and Venue activity is cyclical and sensitive to economic conditions, market volatility, regulation and pandemic developments. COVID-19 could again disrupt clients, vendors or operations and affect demand, liquidity and results.
- DFIN and R.R. Donnelley remain jointly and severally liable for certain multiemployer pension obligations assigned to LSC Communications. After settlements covering two plans, DFIN accrued $5.8 million for remaining contingent exposure and shared payments. Final allocation was subject to arbitration, expected in Q4 2021; the maximum potential loss could not be reasonably estimated.
- The company accrued $3.7 million for estimated sales-tax exposures. Management said ordinary-course litigation and preference claims were not expected to have a material effect.
- A proposed land sale for $12.5 million, potentially $12.9 million if DFIN performs building demolition, remained subject to due diligence, entitlements and other closing conditions. The company recorded a $2.8 million noncash impairment related to the building.
- Management reported compliance with debt covenants and effective disclosure controls as of September 30, 2021. It warned that weaker market conditions or demand could affect future covenant compliance.
Important facts for investors to verify
- Whether the strong capital-markets activity and software growth persisted after Q3, and how seasonal transaction volumes affect comparability.
- The ongoing revenue and earnings impact of print declines under Rules 30e-3 and 498A versus growth in software products.
- Post-quarter debt balances, interest costs, repayment schedule and covenant headroom following the note redemption and term-loan prepayment.
- The final allocation and cash cost of the LSC multiemployer pension liabilities after arbitration, plus any effect of other participating employers’ financial condition.
- Whether the land sale closed and whether the stated sale proceeds and demolition costs were realized.