Donnelley Financial Solutions, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unaudited results; comparisons are with the corresponding 2020 periods. DFIN provides regulatory filing and deal solutions through software, technology-enabled services, and print and distribution.
Financial performance
| Metric ($ millions, except per-share data) | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 |
|---|---|---|---|---|
| Net sales | 267.5 | 254.0 | 512.8 | 474.7 |
| Income from operations | 62.0 | 3.9 | 112.9 | 15.8 |
| Net earnings (loss) | 42.9 | (1.3) | 78.1 | 2.8 |
| Diluted EPS | $1.24 | $(0.04) | $2.26 | $0.08 |
| Adjusted EBITDA (non-GAAP) | 79.9 | 60.8 | 151.0 | 90.9 |
- Q2 sales rose 5.3%; H1 sales rose 8.0%. Software solutions grew 39.9% in Q2 and 33.7% in H1; tech-enabled services grew 16.1% and 28.0%, respectively. Print and distribution declined 26.5% in Q2 and 26.9% in H1.
- Approximate gross margin was 56.1% in Q2 versus 45.9% a year earlier, and 55.6% in H1 versus 42.3%. Operating margin was 23.2% versus 1.5% in Q2, and 22.0% versus 3.3% in H1.
- Profit improvement reflected higher capital-markets transaction and compliance volumes, software growth, favorable mix, cost controls, lower depreciation and amortization, and substantially lower restructuring and impairment charges. Q2 2020 included $12.1 million of lease-asset impairment; H1 2020 included $28.2 million of restructuring, impairment and other charges versus $3.6 million in H1 2021.
- SG&A increased 3.2% in Q2 and 14.5% in H1, including higher incentive compensation and selling costs. The reported effective tax rate was 25.5% in Q2 and 24.9% in H1; equity-award vesting adjustments contributed to the lower H1 rate versus 2020.
Cash flow, balance sheet and debt
- H1 operating cash flow was negative $7.7 million, an improvement from negative $23.9 million. Capital expenditures were $17.7 million, producing approximately negative $25.4 million of operating cash flow less capex.
- Cash declined from $73.6 million at year-end 2020 to $39.9 million at June 30, 2021. Receivables, net, increased to $266.0 million from $173.5 million; unbilled receivables rose to $92.9 million from $39.1 million, and contract assets to $31.0 million from $18.5 million.
- Total debt was $240.9 million, including $233.0 million of 8.25% senior notes due October 2024 and $10.0 million drawn on the revolver, net of unamortized issuance costs. Cash less reported debt was approximately negative $201 million.
- Following the May 2021 credit agreement amendment, the $300 million revolver matures May 27, 2026. At quarter-end, available revolver capacity was $287.7 million and reported net available liquidity, including cash, was $327.6 million. DFIN reported covenant compliance and expected continued compliance based on management’s estimates.
- H1 financing cash flow was negative $9.9 million, including $19.1 million of treasury-share repurchases and share-related withholding, partly offset by net revolver borrowings. H1 investing cash flow was negative $17.7 million.
Business changes, outlook and risks
- Growth was led by capital-markets activity and Venue, Arc Suite, ActiveDisclosure, ArcDigital and ArcPro. Investment Companies—Compliance and Communications Management sales fell 44.2% in Q2 and 41.0% in H1, principally as SEC Rules 30e-3 and 498A reduce printed shareholder-report and prospectus volumes.
- Management expected a significant decline in printed annual and semiannual shareholder reports in 2021 and beyond, with increased ArcDigital revenue; it also expected lower printed prospectus volumes and increased ArcPro and related filing revenue. No consolidated earnings or revenue guidance was provided in the supplied filing text. Management forecast approximately $45 million of 2021 capital expenditures.
- Capital-markets revenue is transaction-sensitive and seasonal. COVID-19-related uncertainty could affect customers, transaction activity, staffing, vendors, costs and liquidity. Management said transaction activity had stabilized after the 2020 disruption but remained uncertain.
- DFIN recorded approximately $2.9 million of H1 2021 employee termination costs for about 170 employees, substantially all expected to be terminated by year-end, primarily associated with the SEC rule changes. The comparable H1 2020 restructuring and impairment charges were substantially higher.
- DFIN and R.R. Donnelley settled obligations with two multiemployer pension funds in Q2; arbitration over final allocation of remaining LSC-related liabilities was expected in H2 2021. DFIN had $5.9 million accrued at June 30 and said maximum potential loss could not be reasonably estimated.
- Other contingencies included an estimated $4.1 million sales-tax exposure. Management stated ordinary-course litigation and preference matters were not expected to have a material effect. The filing reported no material changes to previously disclosed risk factors or market risks.
Investor verification points
- Assess whether software and capital-markets growth can offset structurally declining print volumes and seasonality.
- Track receivables, unbilled balances, collections and operating cash conversion against reported earnings.
- Review the remaining LSC pension liability, arbitration outcome and any resulting cash or reserve adjustments.
- Confirm revolver availability, covenant headroom and the potential use and terms of the delayed-draw term loan to refinance or repurchase 2024 notes.
- Compare future print declines, ArcDigital/ArcPro adoption, and actual 2021 capital spending with management’s stated expectations.