Donnelley Financial Solutions, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparative period is Q1 2018. Figures are in millions of dollars except per-share data. DFIN provides regulatory filing, SaaS, technology-enabled, print and deal-management solutions. Results are unaudited, and management cautions that interim results are not necessarily indicative of the full year.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Services net sales | $127.9 | $159.5 |
| Products net sales | $101.7 | $95.7 |
| Total net sales | $229.6 | $255.2 |
| Income from operations | $6.6 | $19.4 |
| Operating margin | 2.9% | 7.6% |
| Net income (loss) | $(1.4) | $7.7 |
| Diluted EPS | $(0.04) | $0.23 |
| Non-GAAP adjusted EBITDA | $23.7 | $40.8 |
| Net cash used in operating activities | $(68.3) | $(53.6) |
Total sales fell 10.0%. Services sales declined 19.8%, while products sales rose 6.3%. Gross margin, calculated as sales less cost of sales, was approximately 33.0%, compared with 37.9% in Q1 2018. Interest expense, net, was $8.9 versus $9.0. The income tax line was a $0.3 benefit, compared with $3.5 expense; the reported effective tax rate was 17.6% versus 31.3%.
Cash, debt and liquidity
- Cash and equivalents were $10.5 at March 31, down from $47.3 at December 31, 2018.
- Operating cash use was $68.3; investing cash use was $17.1, including $15.1 of capital expenditures; financing provided $47.1. Receivables and tax-payment timing were significant cash-flow factors.
- Reported debt was $411.7, up from $362.7 at year-end, including $300.0 of 8.25% senior notes due 2024, $71.4 of term-loan debt and $48.5 drawn on the revolving facility. Cash-adjusted debt was approximately $401.2, excluding lease liabilities.
- Operating lease liabilities were $96.3 at quarter-end. Adoption of the new lease standard on January 1, 2019 added a $100.8 right-of-use asset and $101.6 lease liability; comparative periods were not restated.
- Management reported $112.6 of current revolving-facility availability and $123.1 of net available liquidity including cash. DFIN was in compliance with debt covenants and expected to remain compliant, subject to operating and market conditions.
Material changes and drivers
- Management attributed the $25.6 sales decline partly to the 2018 Language Solutions divestiture, which reduced Q1 2019 sales by $18.8, and lower capital-markets transaction activity, primarily associated with the U.S. government shutdown in January 2019.
- Service sales also reflected lower mutual-fund print-related services. Growth in ActiveDisclosure and FundSuiteArc SaaS, higher mutual-fund print volumes—including a special proxy project—and higher capital-markets compliance volumes partly offset declines.
- Operating income fell $12.8. Management cited lower transaction and mutual-fund service volumes and unfavorable mix; lower spin-off-related costs partially offset these pressures. SG&A declined to $54.9 from $66.1, while restructuring and other charges increased to $2.1 from $0.7.
- U.S. segment sales were $202.8, down 4.8%, and operating income was $21.3 versus $26.4. International sales were $26.8, down 36.3%; the segment moved to a $3.3 operating loss from $2.5 income, reflecting divestiture, lower transaction activity, restructuring and higher allocated IT expense.
- Q1 restructuring charges included $2.0 for termination costs covering 72 employees, substantially all terminated by quarter-end, and $0.1 of other charges. The company also reported $1.0 of investor-related expenses.
Outlook, risks and contingencies
- No full-year revenue or earnings guidance is provided in the filing. DFIN expects 2019 capital expenditures of approximately $40–$45, versus $37.1 in 2018.
- Management expects increased services revenue from more frequent investment-company filings under SEC rules, including N-PORT. It expects Rule 30e-3 electronic delivery to reduce printed shareholder-report volumes from 2021 onward.
- Key risks include capital-markets and economic volatility, competition and technology-driven client self-service, customer retention, cybersecurity and data protection, and execution and integration of acquisitions. The company also cited possible future covenant pressure if market conditions or demand deteriorate. It reported no material changes to the risk factors in its 2018 Form 10-K.
- Ordinary-course litigation and potential bankruptcy preference claims were described; management did not expect their resolution to materially affect results, financial position or cash flows.
- eBrevia’s acquisition accounting remained preliminary, including deferred-tax valuations; up to $3.5 of contingent consideration may be payable depending on performance targets. Management stated disclosure controls were effective and reported no materially affecting change in internal control during the quarter.
Most important facts for investors to verify
- How much of the sales and profit decline reflects the Language Solutions divestiture and temporary shutdown-related transaction weakness versus ongoing business trends.
- Whether SaaS growth and investment-market filing demand can offset lower print and transaction-related activity, including the expected impact of electronic delivery beginning in 2021.
- Cash conversion and liquidity: operating cash outflow, sharply lower quarter-end cash, revolver usage, and covenant headroom.
- The sustainability of reported earnings and adjusted EBITDA, including the impact of unfavorable mix, restructuring, investor-related costs and other exclusions from the non-GAAP measure.