Donnelley Financial Solutions, Inc. — FY2022 Form 10-K
Business context and reporting period. DFIN provides software, technology-enabled services, and print and distribution solutions for regulatory compliance and financial transactions. This annual report covers the fiscal year ended December 31, 2022; fourth-quarter figures are also reported. Amounts are in U.S. dollars.
Financial performance
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Net sales | $833.6 million | $993.3 million | Down 16.1% |
| Operating income | $145.0 million | $219.3 million | Down 33.9% |
| Operating margin | 17.4% | 22.1% | Down 4.7 percentage points |
| Net earnings | $102.5 million | $145.9 million | Down 29.7% |
| Diluted earnings per share | $3.17 | $4.14 | Down 23.4% |
| Adjusted EBITDA (non-GAAP) | $218.3 million | $294.8 million | Down 26.0% |
| Operating cash flow | $150.2 million | $180.0 million | Down $29.8 million |
| Capital expenditures | $54.2 million | $42.3 million | Up $11.9 million |
Revenue by offering: tech-enabled services were $380.9 million, down 26.7%; software solutions were $279.6 million, up 3.6%; and print and distribution were $173.1 million, down 15.1%. The filing attributes the overall sales decline chiefly to lower capital-markets transaction volumes and reduced print requirements following SEC Rules 30e-3 and 498A.
Fourth-quarter 2022 net sales were $167.7 million, operating income $17.1 million, and net earnings $10.9 million, or $0.36 diluted EPS. The supplied filing text does not provide a clear fourth-quarter 2021 comparison. Annual operating cash flow less capital expenditures was approximately $96.0 million.
Liquidity, debt, and capital allocation
- At December 31, 2022, cash and cash equivalents were $34.2 million, total assets $828.3 million, and total liabilities $498.8 million.
- Long-term debt was $169.2 million, comprising a $125.0 million Term Loan A balance and $45.0 million drawn on the revolving facility, net of debt issuance costs. Cash-adjusted debt was approximately $135.0 million.
- The $300 million revolving facility had $255.0 million available; reported net available liquidity, including cash, was $289.2 million. DFIN was in compliance with debt covenants at year-end.
- DFIN repurchased $152.5 million of shares under its repurchase program in 2022 and spent $164.7 million in total on treasury-share repurchases, including shares withheld for employee awards. Remaining program authorization was $124.3 million at year-end.
- Operating cash flow fell year over year, principally reflecting lower earnings and an unfavorable change in accrued liabilities. Investing cash outflow was $50.9 million and financing cash outflow was $121.1 million.
Material changes and management commentary
- Capital Markets–Compliance and Communications Management sales declined 26.9% to $410.3 million, primarily because of lower transaction volumes; operating margin fell to 32.0% from 43.2%.
- Investment Companies–Software Solutions sales rose 11.7% to $99.4 million, with operating margin increasing to 22.0% from 10.0%, driven mainly by higher Arc Suite product volumes.
- Investment Companies–Compliance and Communications Management sales declined 11.2% to $143.7 million as regulatory changes reduced print volumes, but operating margin improved to 24.8% from 9.3%, reflecting favorable mix and print-platform cost savings.
- Capital Markets–Software Solutions sales were nearly flat at $180.2 million; operating margin decreased to 7.5% from 16.8%, reflecting mix, development costs, depreciation and overhead allocation.
- DFIN completed consolidation of its print platform and reported $7.7 million of restructuring, impairment and other charges in 2022, including $6.8 million of termination costs for approximately 130 employees. It sold its Edgar Online business for $3.3 million net proceeds, recording a $0.7 million loss.
Outlook, risks, and contingencies
- Management expects 2023 capital expenditures of approximately $60 million, primarily for software investment. No specific 2023 revenue or earnings guidance is provided in the supplied text.
- DFIN expects the SEC Tailored Shareholder Reports rule to support increased Arc Suite software and related filing revenue beginning in 2024; compliance is required starting July 24, 2024. Management does not anticipate a material 2023 impact from Rules 30e-3 or 498A.
- Key risks include transaction-market volatility, client retention and pricing competition, clients bringing filing work in-house, technology execution, cybersecurity and data privacy, and continued decline in print demand. Paper sourcing may remain difficult and more expensive in 2023, although the company says such costs are typically recovered through pricing.
- The company and R.R. Donnelley remain jointly and severally liable for certain multiemployer pension obligations associated with former affiliates. DFIN reported $11.0 million of total MEPP liabilities at year-end, including $9.4 million related to its share of LSC obligations; additional payments could arise if RRD does not meet its obligations.
- Management stated it expects to remain in covenant compliance, but warned that weaker markets, demand, or higher interest rates could affect future compliance. The company reported $438 million of future contractual and other obligations, with approximately $156 million due in 2023.
- Other notable items: the 2022 allowance for expected receivable losses increased to $17.1 million from $12.7 million, including an $8.4 million provision charged to expense. The auditor identified valuation of unbilled receivables and contract assets as a critical audit matter. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Confirm the trend in capital-markets transaction volumes and whether software growth can offset lower transaction-related services and print revenue.
- Track software segment margins and development spending against the planned $60 million of 2023 capital expenditures.
- Review cash conversion, receivable-loss provisions, and the assumptions behind unbilled receivables and contract assets.
- Monitor debt balances, variable-rate interest expense, covenant headroom, and the company’s use of cash for repurchases versus investment and debt reduction.
- Assess the timing and commercial impact of the Tailored Shareholder Reports rule, and potential exposure to multiemployer pension obligations and other contingencies.