Donnelley Financial Solutions, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. Comparisons are with Q1 2020 unless otherwise noted. DFIN provides regulatory filing, deal, software, technology-enabled, and print and distribution solutions. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $245.3 | $220.7 | +11.1% |
| Operating income | $50.9 | $11.9 | +$39.0 |
| Net earnings | $35.2 | $4.1 | +$31.1 |
| Diluted EPS | $1.02 | $0.12 | +$0.90 |
| Adjusted EBITDA (non-GAAP) | $71.1 | $30.1 | +$41.0 |
| Cash from operating activities | $(38.3) | $(37.1) | $1.2 more used |
Revenue by offering: tech-enabled services $118.5 (+44.7%); software solutions $60.3 (+27.5%); print and distribution $66.5 (−27.3%). Gross profit was $135.0, or approximately 55.0% of revenue, versus $84.4, or 38.2%. Operating margin was approximately 20.7% versus 5.4%; net margin was approximately 14.3% versus 1.9%.
Management attributed improved operating results primarily to higher capital-markets transaction volumes, increased software volumes, favorable sales mix, and cost savings. SG&A rose 28.9% to $73.5, including a $7.3 charge related to multiemployer pension obligations, as well as higher selling and incentive compensation costs. The effective tax rate was 24.1%, versus 46.8%, partly reflecting a favorable discrete tax adjustment related to employee equity awards.
Balance sheet, debt, and liquidity
- Cash was $38.5 at March 31, 2021, down from $73.6 at year-end 2020. Total assets were $900.1 and total liabilities $624.1.
- Long-term debt carrying value was $252.7, including $233.0 of 8.25% senior notes due October 2024 and $22.0 drawn on the revolving facility, net of unamortized issuance costs. The revolving facility matures December 2023.
- Revolver availability was $278.0; cash plus availability resulted in reported net available liquidity of $316.5. DFIN reported compliance with debt covenants at quarter-end.
- Investing cash outflow was $8.0, primarily capital expenditures. Management expected 2021 capital expenditures of approximately $45.
Material changes and operating trends
- Capital Markets—Compliance and Communications Management revenue increased 39.8% to $138.5, primarily on higher transaction volumes; operating income rose to $59.1 from $21.4.
- Capital Markets—Software Solutions revenue rose 23.4% to $38.5. Investment Companies—Software Solutions revenue rose 35.4% to $21.8.
- Investment Companies—Compliance and Communications Management revenue declined 37.4% to $46.5, mainly from lower mutual-fund and commercial print volumes. Segment operating income nevertheless rose to $6.3 from $2.1, supported by print-platform savings and mix.
- Operating cash use remained substantial despite higher earnings. Working-capital movements included a $63.1 use from accounts receivable and a $12.7 use from prepaid and other current assets.
- DFIN repurchased 126,682 shares under its program for $3.4 during the quarter and reported $46.7 remaining authorization at March 31. Total cash outflow for share repurchases and equity-award-related repurchases was $11.2.
Outlook, risks, and contingencies
- No quantified revenue or earnings guidance was provided. Management expected approximately $45 of capital expenditures in 2021, continued declines in print volumes, and growth in ArcPro software and related filings as insurance clients adopt SEC Rule 498A.
- SEC Rule 30e-3’s electronic-delivery option began default implementation in 2021; DFIN expected this to reduce printed shareholder-report volumes. The company also anticipated lower printed prospectus volumes from Rule 498A, alongside potential software-related revenue growth.
- COVID-19 effects remain uncertain. Transactional volumes had recovered from earlier disruption, but renewed outbreaks or restrictions could affect customer demand, operations, liquidity, and results. Transaction-dependent Capital Markets revenue is inherently volatile and seasonal.
- DFIN and R.R. Donnelley are jointly and severally liable for certain legacy LSC multiemployer pension obligations, although allocation was assigned to LSC under separation agreements. Arbitration over allocation began in March 2021; settlements with two funds were reached in March and April. DFIN accrued $21.5 at March 31, and stated that maximum potential loss could not be reasonably estimated. The quarter included a $7.3 related expense.
- A separate estimated sales-tax contingency was $5.3 at March 31. Management stated ordinary-course litigation and preference-item matters were not expected to have a material effect.
- Other risks include the secular shift away from print, competition and technology change, cybersecurity and data protection, customer retention, economic and market volatility, and the possibility of future covenant-compliance pressure if demand or economic conditions weaken.
Most important facts for investors to verify
- Whether the strong revenue and margin gains persist, especially as transaction volumes fluctuate and print revenue continues to decline.
- How much of the earnings improvement reflects sustainable operating performance versus mix, cost actions, tax effects, and unusual items; note adjusted EBITDA is non-GAAP.
- Receivables, unbilled balances, and cash conversion: receivables rose to $235.3 from $173.5, while operating cash flow was negative $38.3.
- The final allocation and cash cost of the LSC pension obligations, including arbitration outcomes and settlement payments.
- Debt covenant headroom, revolving-facility availability, and the capacity to fund capital expenditures, repurchases, and other obligations.
- Actual adoption and financial effects of electronic-delivery regulations, including whether expected software growth offsets print declines.