Donnelley Financial Solutions, Inc. — Q1 2022 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2022, compared with Q1 2021. DFIN provides regulatory filing, deal-management and compliance solutions through software, technology-enabled services, and print and distribution. Management describes a continuing shift toward software and digital delivery and away from printed materials.
Financial results
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $211.0 million | $245.3 million | Down 14.0% |
| Income from operations | $35.3 million | $50.9 million | Down 30.6% |
| Operating margin | 16.7% | 20.7% | Down 4.0 percentage points |
| Net earnings | $26.4 million | $35.2 million | Down 25.0% |
| Diluted EPS | $0.77 | $1.02 | Down 24.5% |
| Adjusted EBITDA (non-GAAP) | $51.1 million | $71.1 million | Down 28.1% |
| Cash used in operating activities | $52.2 million | $38.3 million | Greater outflow |
| Capital expenditures | $9.9 million | $8.0 million | Up $1.9 million |
Revenue by offering: tech-enabled services fell 22.6% to $91.7 million; software solutions rose 15.8% to $69.8 million; and print and distribution fell 25.6% to $49.5 million. Gross profit was $112.1 million, implying a 53.1% gross margin, versus $135.0 million and 55.0% in Q1 2021. Net margin was 12.5%, compared with 14.4%.
Segment performance was mixed. Capital Markets—Compliance and Communications Management sales declined 25.2% to $103.6 million and operating income declined 51.1% to $28.9 million, mainly on lower transaction volume and unfavorable mix. Capital Markets—Software Solutions sales increased 16.1% to $44.7 million, but operating income fell to $4.3 million. Investment Companies—Software Solutions sales rose 15.1% to $25.1 million and operating income increased to $6.2 million. Investment Companies—Compliance and Communications Management sales declined 19.1% to $37.6 million, while operating income rose to $8.1 million.
Cash, debt and liquidity
Cash and cash equivalents were $10.4 million at March 31, 2022, down from $54.5 million at year-end 2021. Operating cash outflow included higher incentive and commission payments and a reduction in accrued liabilities; the company also spent $9.9 million on capital expenditures. Current assets were $264.2 million and current liabilities $203.0 million, giving working capital of $61.2 million.
Long-term debt, net of issuance costs, was $194.1 million, versus $124.0 million at December 31, 2021. This comprised a $125 million term loan and $70 million drawn on the revolving facility. The company reported $227.9 million of revolver availability and $238.3 million of net available liquidity, including cash. It was in compliance with debt covenants at quarter-end and said it expected to remain compliant, while cautioning that weaker market conditions or demand could affect future compliance.
Changes, outlook and risks
- Management attributed the revenue decline chiefly to lower capital-markets transaction volumes and lower print volumes, including reduced print requirements under SEC Rule 30e-3. Higher software volumes in ActiveDisclosure, Arc Suite and Venue partly offset those declines.
- Operating income also reflected unfavorable sales mix. Lower SG&A, including a $7.3 million reduction in expense related to the LSC multiemployer pension plans obligation and lower incentive compensation, partially offset the decline.
- Interest expense fell to $1.5 million from $5.3 million, primarily because the 8.25% senior notes were repaid in Q4 2021 and the term loan carried a lower rate.
- Management estimated 2022 capital expenditures of $50–$55 million and was evaluating additional software investments that could add $10–$15 million. No full-year revenue or earnings guidance was provided in the supplied filing text.
- The company recorded $1.8 million of restructuring and other charges, including $1.6 million of termination costs affecting approximately 60 employees, primarily related to capital-markets software reorganization and relocation of a digital-print facility.
- Risks highlighted include transaction-market volatility, continued COVID-19 effects, competition and client adoption of self-service technology, cybersecurity and data protection, regulatory changes, and possible pressure on covenant compliance. The company said there were no material changes to the risk factors in its 2021 Form 10-K.
- A proposed sale of land for $12.9 million remained subject to due diligence, entitlements and customary closing conditions; completion was not assured. Management said ordinary-course litigation and preference claims were not expected to have a material effect.
Important facts for investors to verify
- Whether capital-markets transaction volumes recover and software growth can offset persistent declines in services and print.
- Whether segment profitability and consolidated margins stabilize after the sharp drop in Capital Markets—Compliance and Communications Management results.
- Cash generation, planned capital spending, share repurchases and revolver usage; quarter-end cash was $10.4 million while Q1 operating cash flow was negative $52.2 million.
- Debt covenant headroom under weaker operating conditions, given $194.1 million of reported long-term debt and $70 million drawn on the revolver.
- Progress on the land sale and restructuring actions, and any subsequent developments affecting costs or liquidity.