Donnelley Financial Solutions, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual filing; fourth-quarter results are included in the unaudited quarterly information. The company provides financial communications, regulatory filing, content management, data-room, investment-market, language and analytics services and products. It became independent of R.R. Donnelley (RRD) on October 1, 2016, so prior-period figures include pre-separation carve-out reporting and may not be fully comparable.
Financial performance
| Metric | 2017 | 2016 | Change / context |
|---|---|---|---|
| Net sales | $1,004.9 million | $983.5 million | Up 2.2% |
| Services sales | $632.1 million | $598.6 million | Up 5.6% |
| Products sales | $372.8 million | $384.9 million | Down 3.1% |
| Income from operations | $99.0 million | $106.0 million | Down 6.6%; operating margin was approximately 9.9% versus 10.8% |
| Net earnings | $9.7 million | $59.1 million | Down 83.6%; diluted EPS was $0.29 versus $1.80 |
| Adjusted EBITDA (non-GAAP) | $174.1 million | $162.1 million | Up 7.4%; excludes specified items and is not a GAAP measure |
| Cash from operating activities | $91.4 million | $106.0 million | Down $14.6 million |
| Capital expenditures | $27.8 million | $26.2 million | Operating cash flow less capex was $63.6 million, versus $79.8 million |
| Cash and cash equivalents | $52.0 million | $36.2 million | Up $15.8 million |
| Long-term debt, net carrying value | $458.3 million | $587.0 million | Debt principal was $470.0 million at year-end; no revolver borrowings |
Gross profit, calculated as net sales less cost of sales, was $383.5 million in 2017 and $364.5 million in 2016; the corresponding margins were approximately 38.2% and 37.1%. Current assets were $270.1 million and current liabilities $187.0 million at year-end, a current ratio of approximately 1.44. The company reported $300.0 million of available revolving credit and $352.0 million of net available liquidity, including cash.
Material changes and drivers
- Sales growth reflected higher mutual-fund activity, capital-markets compliance, virtual data-room services, translation and content-management volumes. Lower capital-markets transaction and healthcare volumes, investment-market price pressure and foreign exchange partly offset growth.
- U.S. segment sales were nearly flat at $847.9 million, while operating income rose to $127.6 million and margin improved to 15.0% from 14.0%. International sales grew 13.5% to $157.0 million, but operating income fell 25.0% to $7.2 million and margin declined to 4.6% from 6.9%.
- Operating income fell despite sales growth, reflecting lower transactional and healthcare print volumes and higher costs of operating independently, including compensation, selling, technology and separation-related expenses. SG&A rose 11.0% to $232.9 million.
- Net interest expense increased to $42.9 million from $11.7 million, primarily due to debt issued in connection with the separation. The company repaid $133.0 million of long-term debt during 2017 and repriced its term loan in October, reducing its rate to LIBOR plus 3.0% with a 0.75% LIBOR floor.
- The effective tax rate rose to 82.7% from 37.3%. 2017 included provisional Tax Act charges of $14.2 million for the transition tax on foreign earnings and $8.2 million from remeasurement of U.S. deferred tax assets. Fourth-quarter net loss was $23.7 million, compared with a $0.8 million loss in fourth-quarter 2016.
Outlook, risks and unusual items
- Management expected 2018 sales to increase slightly, primarily from software growth, assuming a stable capital-markets environment and no significant foreign-exchange impact. Planned 2018 capital expenditures were $40 million to $45 million. Management expected restructuring actions to benefit future operating earnings and cash flow to benefit from cost controls, lower interest expense and a lower U.S. corporate tax rate.
- Management estimated a 2018 effective tax rate of 29% to 32% before discrete items. The Tax Act accounting was provisional and subject to refinement; the company planned to pay its estimated transition-tax liability in installments over eight years.
- Restructuring, impairment and other charges totaled $7.1 million, including $6.4 million of termination costs for 192 employees. Spin-off-related expenses were $16.5 million. No goodwill impairment was recorded; noncash leasehold-improvement impairment was $0.2 million.
- Adoption of the new revenue-recognition standard in 2018 was not expected to materially change timing for most revenue, but was expected to accelerate recognition for certain performance obligations and invoiced inventory, and defer some virtual data-room revenue.
- Key risks include transaction-market cyclicality, competition and pricing pressure, clients’ ability to self-file, technology and product execution, cybersecurity and privacy compliance (including GDPR), foreign-exchange exposure, employee and client retention, and costs and operational dependencies arising from the separation. Debt covenants constrain financial flexibility; the company reported compliance at year-end and expected to remain compliant, subject to operating conditions.
- The company reported no material off-balance-sheet arrangements other than operating leases. It disclosed ordinary-course litigation and bankruptcy preference claims, which management did not expect to have a material effect. It paid no cash dividends and did not repurchase shares in the fourth quarter.
Important facts for investors to verify
- Whether 2018 software-led sales growth and the expected margin and cash-flow benefits from cost actions materialized.
- How much of 2017’s sharp earnings decline reflects recurring operating and interest costs versus provisional Tax Act charges and separation expenses.
- Debt repayment capacity, covenant headroom, variable-rate exposure and the maturity profile, including the $300 million notes due in 2024.
- Actual impact of revenue-standard adoption, especially timing changes for data-room services and multi-obligation arrangements.
- Whether separation-related transition costs and reliance on former parent services ended as planned, and whether restructuring delivered expected savings.
- Potential exposure from cybersecurity, privacy regulation, client retention, transaction-market volatility and international operations.