Donnelley Financial Solutions, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparative period is Q1 2022. DFIN provides software, technology-enabled services, and print and distribution solutions for regulatory compliance and capital-markets transactions.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Revenue | $198.6 million | $211.0 million; down 5.9% |
| Operating income | $14.8 million; 7.5% margin | $35.3 million; 16.7% margin |
| Net earnings | $15.8 million | $26.4 million; down 40.2% |
| Diluted EPS | $0.52 | $0.77 |
| Adjusted EBITDA (non-GAAP) | $42.4 million | $51.1 million |
| Operating cash flow | $(51.5) million | $(52.2) million |
| Cash and cash equivalents | $28.8 million | $34.2 million at December 31, 2022 |
| Long-term debt | $234.8 million | $169.2 million at December 31, 2022 |
Gross profit was $108.3 million, or approximately 54.5% of revenue, compared with $112.1 million, or approximately 53.1%, in Q1 2022. Cash used in investing activities was $1.7 million, including $10.6 million of capital expenditures, partly offset by $8.9 million of cash proceeds from an investment sale. Financing activities provided $47.7 million. Current assets were $266.4 million and current liabilities were $201.7 million at quarter-end.
At March 31, DFIN reported $110.5 million drawn on its $300 million revolving facility, $189.5 million of stated remaining availability, and net available liquidity of $218.3 million including cash. The company reported compliance with debt covenants.
Changes versus the prior comparable period
- Revenue declined primarily because of lower capital-markets transactional volumes. Tech-enabled services revenue fell 14.5% to $78.4 million; software solutions rose 0.4% to $70.1 million; print and distribution rose 1.2% to $50.1 million.
- Operating income fell 58.1%. Management attributed the decline to lower volumes, unfavorable sales mix, higher technology infrastructure expense, and higher restructuring charges, partly offset by cost controls.
- Restructuring, impairment and other charges increased to $10.9 million from $1.8 million, including $10.8 million of termination costs associated with approximately 150 employees, substantially all expected to be terminated by year-end 2023.
- Investment and other income included a $6.7 million net realized gain on the sale of an equity investment. Higher average revolving borrowings and higher variable rates contributed to net interest expense rising to $3.5 million from $1.5 million.
- Revolving-facility borrowings rose from $45.0 million at year-end 2022 to $110.5 million at March 31, 2023. Q1 cash used in operations remained substantial, with receivables timing and accrued-liability movements among the drivers.
Outlook, management commentary and risks
- No specific full-year revenue or earnings guidance is provided in the filing. DFIN expects 2023 capital expenditures of approximately $60 million, substantially focused on software development.
- Management says it believes liquidity is sufficient for operations and investment. It expects to remain in covenant compliance, but warns that weaker economic conditions or demand could affect future compliance.
- DFIN describes capital-markets transaction and Venue activity as sensitive to economic activity, interest rates, market volatility, regulation and geopolitical conditions. Quarterly and annual filing cycles, plus investment-company reporting peaks in Q2, create seasonality.
- Management is emphasizing software and recurring revenue as clients shift toward digital workflows and away from physical distribution. The SEC’s Tailored Shareholder Reports rule requires compliance beginning July 24, 2024; DFIN expects related Arc Suite and filing revenue growth beginning in the second half of 2024.
- Key disclosed risks include competition and client adoption of technology, cybersecurity and data protection, customer retention, economic and transaction-volume volatility, interest-rate and capital-market access risks, and foreign-exchange exposure. Management reported no material change to the risk factors in its 2022 Form 10-K.
- A land sale agreement for $13.0 million remained subject to due diligence, entitlements and customary closing conditions; completion is not assured. Management said ordinary-course litigation and potential bankruptcy preference claims are not expected to have a material effect.
- Management reported disclosure controls were effective at March 31, 2023, with no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Assess whether the decline in capital-markets transaction volumes and tech-enabled services revenue persists, and whether software growth offsets it.
- Track operating margins, restructuring costs, technology spending, and execution of the workforce reductions.
- Monitor operating cash conversion, receivables and contract-asset balances, and the increase in revolving borrowings and interest costs.
- Verify progress toward the stated $60 million full-year capital expenditure plan and the expected 2024 Tailored Shareholder Reports-related opportunity.
- Review covenant headroom and liquidity if demand weakens; confirm the status and proceeds of the pending land sale.
- Reconcile share repurchase disclosures: the filing reports $18.4 million of total Q1 treasury-share repurchases in cash flows, including employee award withholding, while the stock repurchase program separately reports 33,568 shares repurchased for $1.3 million.