Donnelley Financial Solutions, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; unaudited. Unless noted otherwise, figures are in millions of dollars. DFIN provides regulatory filing, deal-management, SaaS, technology-enabled services, and print solutions. It reports U.S. and International segments.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $258.9 | $290.6 | $488.5 | $545.8 |
| Income from operations | $33.4 | $36.2 | $40.0 | $55.6 |
| Net earnings | $17.3 | $18.9 | $15.9 | $26.6 |
| Diluted EPS | $0.51 | $0.56 | $0.47 | $0.78 |
| Net cash used in operating activities | — | $(65.3) | $(50.2) | |
| Capital expenditures | — | $26.2 | $15.6 |
- Q2 sales fell 10.9% year over year; services declined 14.2% and products 4.9%. Operating margin was 12.9% versus 12.5%; net margin was 6.7% versus 6.5%.
- For the first half, sales fell 10.5%, operating income 28.1%, and net earnings 40.2%. Operating margin declined to 8.2% from 10.2%.
- Non-GAAP adjusted EBITDA was $56.1 million in Q2 versus $63.4 million, and $79.8 million for the first half versus $104.2 million. The company cautions this non-GAAP measure is not a substitute for GAAP results and may not be comparable across companies.
- Operating cash outflow increased year over year, principally reflecting timing of tax and supplier payments. First-half operating cash flow less capital expenditures was negative $91.5 million, a simple calculation from reported figures.
Balance sheet and liquidity
- At June 30, 2019, cash was $9.5 million, current assets $300.9 million, and current liabilities $201.2 million. Receivables rose to $260.7 million from $172.9 million at year-end 2018.
- Reported long-term debt was $419.1 million, up from $362.7 million at December 31, 2018; this included $55.5 million outstanding on the revolving facility. The debt table reports $428.0 million of contractual principal, before unamortized costs and discounts. Cash-adjusted reported debt was approximately $409.6 million.
- Revolver availability after covenant-based reductions and borrowings was $79.2 million; including cash, net available liquidity was $88.7 million. DFIN reported compliance with debt covenants at quarter-end and said it expected continued compliance, while warning that weaker markets or demand could affect future compliance.
- DFIN adopted lease accounting on January 1, 2019, recognizing $100.8 million of operating-lease right-of-use assets and $101.6 million of lease liabilities at adoption. At June 30, lease liabilities were $85.3 million.
Material changes and unusual items
- Management attributed the sales decline to the July 2018 sale of Language Solutions, lower capital-markets transaction and compliance volumes, and lower commercial-print activity. Q2 sales were also affected by $1.1 million of foreign-exchange headwinds.
- Growth in SaaS offerings, particularly ActiveDisclosure and FundSuiteArc, the eBrevia acquisition, and higher mutual-fund print volumes partly offset declines. U.S. Investment Markets sales rose 3.7% in Q2; Capital Markets sales fell 11.3%.
- The company recorded a $2.8 million charge for estimated amounts related to the Language Solutions divestiture. Restructuring charges were $3.8 million in Q2 and $5.8 million for the first half, primarily for employee terminations; 164 employees were included in first-half charges.
- SG&A fell materially year over year, in part because of lower spin-off-related costs, divestiture effects, and cost controls. The much lower first-half 2018 comparison included $16.2 million of spin-off-related expenses.
- International segment sales fell 30.7% for the first half, and the segment recorded a $1.7 million operating loss, versus $4.1 million of operating income in the prior-year period.
- eBrevia acquisition accounting remained preliminary. Potential contingent consideration to former owners is up to $3.5 million; its estimated fair value was $0.8 million at June 30.
Outlook, risks, and contingencies
- No full-year revenue or earnings guidance is provided in the supplied filing text. DFIN expected 2019 capital expenditures of approximately $40–45 million, compared with $37.1 million in 2018, for digital printers and software development.
- Management described SaaS and recurring-revenue growth as a strategic focus. It expected N-PORT filing requirements to support SaaS revenue, while SEC Rule 30e-3 could reduce printed shareholder-report volumes beginning in 2021.
- Key risks include volatile capital-markets transaction activity, intense competition and technology-driven client self-service, cybersecurity and data protection, client retention, execution and integration of acquisitions, international currency and economic conditions, and access to capital. Future government shutdowns could also disrupt markets and filings.
- Ordinary-course litigation and potential recovery of certain pre-bankruptcy payments were disclosed; management did not expect their resolution to materially affect results, financial position, or cash flows. DFIN reported no material changes to previously disclosed risk factors, no significant change in market risk, and effective disclosure controls as of June 30.
Important facts for investors to verify
- Whether lower transaction and compliance volumes persist, and how much of reported sales declines reflects the divestiture versus underlying business trends.
- Receivables growth, collection timing, and the cash-flow impact of working-capital movements.
- Debt covenant headroom, the limited $79.2 million of current revolver availability, and the company’s ability to sustain liquidity if operating cash outflows continue.
- Progress in SaaS growth and eBrevia integration, and the extent to which these offerings offset declining print and transaction activity.
- The final eBrevia purchase-price allocation, contingent consideration, and any further costs associated with the Language Solutions divestiture and restructuring.