Donnelley Financial Solutions, Inc. — 2018 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2018; it also reports unaudited fourth-quarter results. DFIN provides regulatory filing, deal-management, SaaS, technology-enabled, print and distribution solutions to companies and regulated investment firms. Its segments are U.S. and International. Results include the sale of Language Solutions in July 2018 and the acquisition of eBrevia in December.
Key financial metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | $963.0 million | $1,004.9 million |
| Services sales | $618.0 million | $632.1 million |
| Products sales | $345.0 million | $372.8 million |
| Income from operations | $121.1 million | $95.7 million |
| Net earnings | $73.6 million | $9.7 million |
| Diluted earnings per share | $2.16 | $0.29 |
| Operating cash flow | $66.3 million | $91.4 million |
| Capital expenditures | $37.1 million | $27.8 million |
| Cash and cash equivalents at year-end | $47.3 million | $52.0 million |
| Long-term debt carrying value | $362.7 million | $458.3 million |
Net sales declined 4.2%. Operating income included a $53.8 million gain on the Language Solutions sale; net earnings also benefited from equity-investment gains, including an $11.8 million gain on equity securities and a $1.8 million remeasurement gain on DFIN’s prior eBrevia investment. Net interest expense was $36.7 million, down from $42.9 million. The effective tax rate was 28.3%, compared with 82.7% in 2017, when Tax Act-related charges substantially raised the rate.
Non-GAAP adjusted EBITDA was $154.9 million, versus $170.8 million in 2017. The filing cautions that this non-GAAP measure is not a substitute for GAAP results and may not be comparable with similarly titled measures at other companies.
Fourth quarter: Sales were $200.3 million, compared with $224.8 million in Q4 2017. Operating income was $3.4 million versus $10.1 million; DFIN recorded a net loss of $1.0 million, compared with a $23.7 million net loss. Quarterly results included $0.3 million of the Language Solutions sale gain.
Year-end liquidity was $302.0 million, comprising $47.3 million cash and $254.7 million available under the revolving facility. No revolver borrowings were outstanding. The company reported $372.5 million of contractual debt principal, including $300 million of 8.25% senior notes due in 2024 and $72.5 million of term-loan principal scheduled for 2023. DFIN reported compliance with debt covenants at year-end.
Material changes versus the prior comparable period
- Sales fell by $41.9 million, mainly because of the Language Solutions divestiture and lower capital-markets compliance, mutual-fund print and related volumes. Growth in FundSuiteArc, Venue virtual data rooms and ActiveDisclosure, as well as higher capital-markets transaction volumes, partly offset the decline.
- Products sales declined 7.5%; services sales declined 2.2%. SG&A increased 9.3% to $258.2 million, primarily reflecting spin-off transition/system implementation and divestiture-related expenses.
- Operating income rose 26.5%, but the increase was principally attributable to the divestiture gain. Operating cash flow decreased $25.1 million, which management attributed to customer and supplier payment timing and higher incentive-compensation payments, partly offset by lower tax and interest payments.
- Debt carrying value fell by $95.6 million year over year. DFIN used approximately $60 million of Language Solutions sale proceeds to repay term-loan debt and reported $97.5 million in payments on long-term debt during 2018.
- DFIN acquired eBrevia for a stated purchase price of $23.2 million, net of cash acquired, including estimated contingent consideration. The preliminary purchase-price allocation included $12.8 million goodwill; the company paid $12.5 million net cash during 2018.
Outlook, commentary, risks and unusual items
- For 2019, management expected sales to decrease slightly, reflecting the Language Solutions sale, with SaaS growth and the eBrevia acquisition providing offsets. The outlook assumed a challenging capital-markets environment in Q1 and more normalized levels for the rest of the year; management did not expect foreign exchange to have a significant impact.
- Management expected restructuring and cost-control actions to benefit operating earnings and cash flow in 2019 and future years, with lower interest expense also expected to support operating cash flow. Planned 2019 capital expenditures were $40–$45 million. Spin-off transition expenses were expected to continue, though to decline from 2018.
- Key business risks include volatile transaction markets, competitive and pricing pressure, customers’ ability to self-file using new technology, print-volume declines, cybersecurity and data-protection threats, privacy regulation, and the ability to retain customers and employees. The company cited the late-2018/early-2019 U.S. government shutdown as a disruption to IPO and public-debt markets.
- SEC Rule 30e-3 permits electronic delivery of certain investment-company shareholder reports; default electronic distribution was scheduled to begin in 2021 after a transition period. DFIN expected this to reduce printed report volumes thereafter. New Form N-PORT filing deadlines were scheduled to begin in April 2019; DFIN expected the increased filing frequency to support services revenue.
- DFIN planned to adopt the new lease-accounting standard in Q1 2019 and expected a significant increase in reported assets and liabilities from operating leases, with no significant income-statement effect expected for existing operating leases. The filing lists $119.6 million of undiscounted operating-lease commitments in its contractual-obligations table.
- The filing describes ordinary-course litigation, bankruptcy-related preference claims and other contingencies; management did not expect their resolution to materially affect results, financial position or cash flows. The eBrevia purchase-price allocation remained preliminary. No goodwill impairment was recorded in 2018.
Important facts for investors to verify
- How much of 2018 earnings and operating-margin improvement reflects recurring operations rather than the divestiture and investment gains; reconcile GAAP results with adjusted EBITDA.
- Whether SaaS growth can offset continued weakness in print and compliance volumes, and whether 2019 sales follow the stated outlook.
- Cash conversion and debt-service capacity, including the decline in operating cash flow, capital spending, debt maturities, interest costs and covenant headroom.
- Progress integrating eBrevia and realizing the expected benefits, including final purchase accounting and any contingent consideration.
- The effects of electronic delivery rules, lease-accounting adoption, transaction-market conditions and cybersecurity/privacy risks.
- The filing reports effective management and auditor assessments of internal control over financial reporting; review the audited statements and notes for the full accounting, tax, pension, lease and contingency disclosures.