Donnelley Financial Solutions, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. DFIN provides regulatory filing, deal, software, technology-enabled services, and print and distribution solutions to capital-markets and investment-company clients.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $220.7 million | $229.6 million |
| Gross profit (sales less cost of sales) | $84.4 million; 38.2% margin | $75.7 million; 33.0% margin |
| Operating income; operating margin | $11.9 million; 5.4% | $6.6 million; 2.9% |
| Net earnings (loss) | $4.1 million; $0.12 per diluted share | $(1.4) million; $(0.04) per diluted share |
| Adjusted EBITDA (non-GAAP) | $30.1 million | $23.7 million |
| Cash used in operating activities | $(37.1) million | $(68.3) million |
- Revenue mix: tech-enabled services $81.9 million (down 1.6%); software solutions $47.3 million (up 5.8%); print and distribution $91.5 million (down 10.0%).
- Interest expense, net was $4.6 million versus $8.9 million, including a $2.3 million pre-tax gain on extinguishing debt. The effective tax rate was 46.8%; management cited inability to recognize tax benefits on certain losses.
- Capital expenditures were $6.9 million. Management expected approximately $30 million of capital expenditures for 2020.
Balance sheet, debt and liquidity
- At March 31, cash and equivalents were $7.7 million, total assets $934.8 million, total liabilities $667.7 million, and equity $267.1 million. Cash was $17.2 million at December 31, 2019.
- Long-term debt was $336.6 million, net of unamortized issuance costs, versus $296.0 million at year-end. DFIN retired $66.5 million face value of its 8.25% notes and had $106.0 million drawn on its revolving facility.
- Revolver availability was $194.0 million; cash plus availability was $201.7 million. DFIN reported compliance with debt covenants and expected to remain compliant, while warning that weaker market conditions or demand could affect future compliance.
- Operating cash use improved from the prior year, but remained substantial. Receivables consumed $55.7 million of operating cash; cash taxes paid fell to $2.0 million from $13.8 million.
Material changes and management commentary
- Sales declined $8.9 million, or 3.9%, year over year. Management attributed the decrease mainly to lower mutual-fund compliance and transaction printing, lower commercial printing, and lower capital-markets transactional printing. Higher FundSuiteArc and ActiveDisclosure volumes partly offset declines.
- Operating income rose $5.3 million, which management attributed to favorable sales mix and cost-control initiatives. SG&A increased 3.8%, driven principally by higher healthcare claims; SG&A was 25.8% of sales, up from 23.9%.
- Segment results were mixed: Capital Markets—Compliance and Communications Management sales fell 2.8%, while operating income rose to $21.4 million; Investment Companies—Compliance and Communications Management sales fell 10.4% and operating income fell to $2.1 million. Software-solutions sales rose in both Capital Markets and Investment Companies.
- DFIN realigned its operating segments into four reportable segments. Prior-period segment information was reclassified; management said the change did not affect consolidated financial statements.
- Restructuring and other charges were $3.1 million, including $1.6 million for termination costs covering 51 employees and $1.5 million primarily related to the segment realignment. COVID-19-related incremental expenses were $0.8 million.
Outlook, risks and contingencies
- DFIN provided no specific revenue or earnings guidance. Management said COVID-19 had adversely affected financial condition and performance, with the extent and duration of effects uncertain. Disrupted financial markets were hurting transactional offerings, and the negative impact was expected to continue. Cost reductions were intended to mitigate lower revenue.
- Management identified risks from reduced or deferred client spending, lower IPO and other transaction activity, operational disruption to employees and vendors, and potential effects on productivity, customer service and retention. The company noted it could not predict the pandemic’s ultimate impact.
- Regulatory changes present both risks and opportunities: DFIN expects Rule 30e-3 to reduce printed shareholder-report volumes from 2021 onward, and expects new variable-annuity and life-insurance prospectus rules to reduce print volumes but increase ArcPro and related filing revenue.
- Goodwill impairment testing found no impairment. However, the Investment Companies—Compliance and Communications Management reporting unit had only about 3% fair-value cushion over book value; a 1% increase in its 12% discount rate would bring estimated fair value approximately to book value. COVID-19, weaker volumes, pricing, regulation, or software performance could prompt impairment in future periods.
- Management said ordinary-course litigation and bankruptcy-related preference claims were not expected to have a material effect. No material change to previously disclosed market risks was reported.
Most important facts for investors to verify
- Whether COVID-19 and market disruption further reduce transactional and print revenue, and whether cost controls can offset that decline.
- Whether cash generation improves as receivables and unbilled balances evolve; unbilled receivables rose to $76.0 million from $33.5 million at year-end.
- Debt, revolver availability, covenant headroom, and the effect of continued share repurchases on liquidity; Q1 repurchases under the $25 million authorization totaled $3.8 million.
- Whether Investment Companies—Compliance and Communications Management approaches or falls below its narrow goodwill impairment cushion.
- Whether anticipated regulatory-driven print declines are offset by growth in software and related filing solutions.