Donnelley Financial Solutions, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; financial figures are unaudited and in millions of dollars except per-share data. Donnelley Financial provides financial communications, compliance, transaction, data and analytics, printing, and language services. It became an independent public company on October 1, 2016. The 2016 comparison is a combined pre-Separation period, with certain costs allocated by R.R. Donnelley (RRD), so comparisons with 2017 standalone results are affected by the change in corporate structure.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Services net sales | $154.0 | $139.8 | +10.2% |
| Products net sales | $113.3 | $100.3 | +13.0% |
| Total net sales | $267.3 | $240.1 | +11.3% |
| Income from operations | $27.2 | $22.5 | +20.9% |
| Operating margin | 10.2% | 9.4% | +0.8 percentage points |
| Interest expense, net | $11.1 | $0.3 | +$10.8 |
| Earnings before taxes | $16.1 | $22.2 | -27.5% |
| Income tax expense / effective rate | $6.8 / 42.2% | $8.8 / 39.6% | Rate increased |
| Net earnings | $9.3 | $13.4 | -30.6% |
| Diluted earnings per share | $0.28 | $0.41 | -$0.13 |
| Non-GAAP adjusted EBITDA | $45.0 | $32.9 | +$12.1 |
Sales growth reflected higher capital-markets transaction volumes, mutual-fund print, virtual data room services, and mutual-fund content management. Management cited favorable mix and cost controls for improved operating margin. Higher standalone-company expenses, including selling, compensation, and Separation-related costs, partly offset those gains. Interest expense increased substantially because of debt issued in connection with the Separation; the effective tax rate also rose due to foreign income mix and certain nondeductible U.S. expenses.
Segments and material changes
- U.S.: Sales of $230.4, up 10.7%; operating income of $37.0 versus $22.0, with margin rising to 16.1% from 10.6%. Growth was led by capital-markets transactions, mutual-fund print and content management, and virtual data rooms.
- International: Sales of $36.9, up 15.3% (including a $1.3 foreign-exchange headwind); operating income fell to $0.2 from $3.0 and margin declined to 0.5% from 9.4%. The filing attributes the decline primarily to higher allocated expenses, including information technology costs.
- SG&A increased 15.7% to $56.7, and restructuring, impairment and other charges rose to $3.8 from $0.6. The 2017 charges included $3.3 for termination costs affecting 87 employees.
- Management reported $2.7 of Separation-related transaction expenses in Q1 2017. Adjusted EBITDA is a non-GAAP measure; the filing cautions it is not a substitute for GAAP results and may not be comparable across companies.
Cash flow, debt and liquidity
- Operating cash flow was negative $38.2, compared with negative $43.7 a year earlier. The company cited timing of supplier, employee, and customer payments and higher interest payments. Accounts receivable changes used $66.7 of cash.
- Investing cash flow was negative $7.5, including $4.3 of capital expenditures and a $3.4 investment purchase. Financing cash flow was positive $21.6, including $20.0 net revolving-facility borrowings and $3.1 of net Separation-related transfers.
- Cash and cash equivalents were $12.3 at March 31, down from $36.2 at year-end 2016. Current assets were $374.6 and current liabilities $201.1.
- Reported long-term debt was $607.5, comprising a term loan, $300.0 of 8.25% senior notes due 2024, and $20.0 drawn on the revolving facility, net of unamortized issuance costs. Contractual principal debt was $620.0. The term loan matures in 2023 and the revolver in 2021.
- Revolver availability was $170.3; together with cash, reported net available liquidity was $182.6. The company was in compliance with debt covenants at quarter-end and said it expected to remain compliant, while warning weaker demand or economic conditions could affect future compliance.
- On April 3, 2017, after quarter-end, the company received $68.0 from RRD under the Separation agreement and used it to repay term-loan debt. This subsequent event is not reflected in March 31 cash or debt balances.
Outlook, risks and other notable items
- No specific revenue or earnings guidance was provided. Management expected 2017 capital expenditures of approximately $30–$35, compared with $26.2 in 2016, and stated it believed liquidity was sufficient for operations and investment.
- Management highlighted transaction-market and economic volatility, technology-driven competition and electronic/self-service filing, pricing pressure, client retention, cybersecurity and data protection, and the costs and execution risks of operating independently after the Separation.
- Transition-service and commercial arrangements with RRD and LSC generally run for up to 24 months after the Separation. Related-party balances included $85.0 receivable and $27.8 payable to RRD and LSC combined at March 31.
- The company disclosed ordinary-course litigation and potential bankruptcy preference claims; management did not expect their resolution to materially affect results, financial position, or cash flows. No material changes to previously disclosed risk factors were reported.
- Management concluded disclosure controls were effective at March 31, 2017. The company early adopted the simplified goodwill impairment standard in Q1; adoption did not materially affect its financial statements.
Important facts for investors to verify
- Whether the strong sales growth and U.S. margin improvement persist, particularly through seasonal filing periods and changing transaction volumes.
- Whether International profitability recovers and how standalone costs, restructuring, and RRD/LSC transition arrangements affect ongoing margins.
- Working-capital conversion: operating cash flow remained negative and receivables drove a significant cash outflow.
- Debt reduction following the $68.0 post-quarter-end payment, future interest costs, revolver availability, and continued covenant compliance.
- The basis and exclusions in adjusted EBITDA, and the comparability limitations of the pre-Separation 2016 results.