Donnelley Financial Solutions, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless noted. Amounts are in millions of dollars except per-share data. The company provides financial communications, compliance, software, data and analytics, language, and print services.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Services sales | $159.5 | $154.0 | +3.6% |
| Products sales | $95.7 | $113.3 | -15.5% |
| Total net sales | $255.2 | $267.3 | -4.5% |
| Income from operations | $19.4 | $26.4 | -26.5% |
| Net earnings | $7.7 | $9.3 | -17.2% |
| Diluted EPS | $0.23 | $0.28 | Down $0.05 |
| Adjusted EBITDA (non-GAAP) | $40.3 | $44.2 | -8.8% |
Operating income declined as lower sales volumes and increased spin-off-related costs more than offset cost controls and lower restructuring charges. SG&A rose 15.0% to $66.1, including $7.8 of spin-off-related transaction expenses, versus $2.7 a year earlier. Net interest expense fell to $9.0 from $11.1, primarily due to lower average debt. The effective tax rate was 31.3%, versus 42.2%, largely reflecting the U.S. Tax Act.
Cash flow, debt and liquidity
- Operating cash flow was negative $53.6, compared with negative $38.2. The company cited higher incentive-compensation payments; receivables increased substantially during the quarter.
- Investing cash outflow was $6.4, including $6.4 of capital expenditures. Financing provided $20.4, including $88.0 of revolver borrowings and $68.0 of repayments.
- Cash was $12.1 at March 31, down from $52.0 at year-end. Current assets were $297.8 and current liabilities $179.2.
- Carrying value of long-term debt was $478.8; contractual principal totaled $490.0: $300.0 of 8.25% senior notes due 2024, $170.0 under the term loan, and $20.0 drawn on the revolver.
- Revolver availability was $199.8 after covenant-related reductions and borrowings; reported net available liquidity, including cash, was $211.9. The company reported compliance with debt covenants at quarter-end.
Material changes and reporting matters
- U.S. sales fell 7.5% to $213.1, chiefly due to lower mutual-fund print and capital-markets compliance and transaction volumes. U.S. operating margin fell to 12.4% from 16.1%; management attributed 3.0 percentage points of the decline to higher spin-off costs.
- International sales rose 14.1% to $42.1, including favorable foreign exchange, and operating margin improved to 5.9% from 0.5% on higher volume, mix and lower restructuring charges.
- Revenue from services grew with translation and virtual data-room demand, while product sales were pressured by lower mutual-fund print and capital-markets compliance volumes. Foreign exchange added $2.5 to total sales, according to management.
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method; prior-year figures were not restated. Adoption increased Q1 reported sales by $1.6 and net earnings by $1.6 versus the prior revenue standard, and increased opening retained earnings by $0.9. It accelerated recognition for some arrangements and inventory, while deferring certain virtual data-room revenue.
- Q1 restructuring and other charges were $0.7, compared with $3.8 a year earlier. The 2017 charges included termination costs for 87 employees.
Outlook, risks and contingencies
- No full-year revenue or earnings guidance is provided in the supplied filing text. Management expects 2018 capital expenditures of approximately $40–$45, compared with $27.8 in 2017, and says available liquidity is sufficient for operations and planned investment.
- Management identifies market and transaction-volume volatility, digital substitution and competition, client retention, technology execution, cybersecurity and data protection, foreign exchange, and standalone-company costs as risks. Peak filing periods also create staffing and operating demands.
- The company said it expected to remain within debt covenants based on its 2018 estimates, while warning that weaker markets or demand could affect future compliance.
- Tax Act accounting remained subject to refinement: the company recorded a $0.4 reduction to its estimated transition-tax liability in Q1 and was still completing its analysis of transition tax, deferred taxes and possible repatriation. It estimated $0.4 of 2018 GILTI tax in its annual effective-tax-rate calculation.
- Ordinary-course litigation and potential customer bankruptcy preference claims were disclosed; management did not expect their resolution to materially affect results, financial position or cash flows. Lease-termination payments may continue through 2021, and ultimate costs could be affected by market conditions and subleasing.
Important facts for investors to verify
- Whether lower U.S. mutual-fund print and compliance volumes persist, and whether services growth can offset further product-sales declines.
- How much of elevated SG&A reflects temporary spin-off costs, and whether those expenses decline as the company completes its transition to standalone operations.
- Cash conversion and working-capital trends, particularly receivables and incentive-compensation payments, alongside planned capital spending.
- Revolver availability, covenant headroom and debt repayment progress under weaker operating scenarios.
- Final Tax Act accounting and any effects of ASC 606 timing differences on comparisons with prior periods.