Donnelley Financial Solutions, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Unaudited results; amounts in millions except per-share data. The company provides financial communications, regulatory compliance, workflow, data-room and analytics services, as well as printed products.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $216.9 | $222.6 | $762.7 | $780.1 |
| Income from operations | $62.1 | $17.2 | $117.7 | $85.6 |
| Net earnings | $48.0 | $5.3 | $74.6 | $33.4 |
| Diluted earnings per share | $1.40 | $0.16 | $2.19 | $1.01 |
| Net cash from operations | — | $10.4 | $33.7 |
- Q3 sales declined 2.6%; services sales fell 1.3% and products sales fell 4.7%. Nine-month sales declined 2.2%, as service growth was outweighed by a 10.3% drop in product sales.
- Q3 operating margin was 28.6% versus 7.7%; nine-month margin was 15.4% versus 11.0%. The comparisons are materially affected by the $53.5 gain on the Language Solutions sale. Excluding that gain, Q3 operating income was approximately $8.6 and nine-month operating income approximately $64.2.
- Gross margin, calculated from reported sales less cost of sales, was approximately 38.5% in Q3 versus 36.8%; for nine months it was approximately 40.0% versus 38.1%.
- Non-GAAP adjusted EBITDA was $31.3 in Q3 versus $31.5 and $135.5 for nine months versus $138.7. The measure excludes, among other items, the divestiture and equity-investment gains, and is not a GAAP measure.
- Cash from operations fell to $10.4 for the first nine months, with management citing payment timing and higher incentive compensation, partly offset by lower tax and interest payments. Capital expenditures were $22.8.
- At September 30, cash was $56.2; current assets were $307.9 and current liabilities $204.8. Reported long-term debt was $397.2, net of issuance costs; contractual principal was $407.5. The $300.0 senior notes carry an 8.25% coupon and mature in 2024; the term loan had $107.5 principal outstanding. No revolver borrowings were outstanding.
Material changes and unusual items
- On July 22, 2018, the company sold Language Solutions for net proceeds of approximately $77.5 and recorded a $53.5 gain. Approximately $60.0 of proceeds was used to repay term-loan debt. The divested business contributed to the year-over-year sales decline.
- Investment and other income included an $11.8 gain on equity securities, of which $9.4 was unrealized on securities still held at period end. Together with the disposal gain, this substantially increased reported earnings.
- Debt declined from $458.3 at December 31, 2017 to $397.2 reported at September 30, 2018, primarily reflecting scheduled repayments and the sale-related term-loan paydown. Net interest expense also declined year over year.
- Sales trends were mixed: higher capital-markets transactions and SaaS solutions, including FundSuiteArc and ActiveDisclosure, partly offset lower compliance, mutual-fund, healthcare and commercial-print volumes. Q3 U.S. capital-markets sales rose 9.3%, while investment-markets sales fell 6.5%.
- Adoption of the new revenue-recognition standard affected reported timing and classification; reported Q3 net sales were $2.5 lower and nine-month sales $0.8 lower than under the previous standard.
Liquidity, outlook and risks
- Management reported $209.1 of revolver availability after covenant-based limits and total net available liquidity of $265.3, including cash. The company was in covenant compliance and expected to remain so, while cautioning that weaker markets or demand could affect future compliance.
- Management expected 2018 capital expenditures of approximately $35–$40, compared with $27.8 in 2017. No specific revenue or earnings guidance was provided in the supplied filing text.
- The company expects growth opportunities from SaaS and regulatory filing requirements, including N-PORT filings. It expects Rule 30e-3 electronic delivery to reduce printed shareholder-report volumes beginning in 2021.
- Risks include transaction-market cyclicality, increasing competition and technology-led client self-service, client retention, cybersecurity and data protection, and execution of the transition to stand-alone systems. The new global financial reporting system was implemented during Q3; management said disclosure controls were effective, but identified implementation and control risks.
- Most transition-services arrangements ended September 30, 2018, though certain IT services may continue for up to 36 months after the 2016 separation. The company expects adoption of lease accounting in Q1 2019 to significantly increase reported assets and liabilities.
- Management said ordinary-course litigation and bankruptcy-related preference claims were not expected to have a material effect. Lease-termination payments may continue through 2021, and recoveries or additional charges could vary with market conditions and subleasing.
Investor verification priorities
- Assess underlying earnings and margins excluding the $53.5 disposal gain and $11.8 equity-investment gain; compare with adjusted EBITDA and its exclusions.
- Reconcile cash generation with net earnings, working-capital movements, capital expenditures and the $77.1 cash-flow proceeds from the sale.
- Confirm debt repayment, contractual principal, revolver availability and covenant headroom; reported debt is net of issuance costs and differs from face principal.
- Track recurring SaaS and transaction growth against persistent declines in print, compliance and investment-markets volumes after the Language Solutions divestiture.
- Review the 2019 lease-accounting balance-sheet effect, new-system control monitoring, and any changes in tax estimates or foreign-cash repatriation plans.