Donnelley Financial Solutions, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unless noted otherwise, amounts are in U.S. dollars and millions. The filing is unaudited.
Business context and reporting period
DFIN provides regulatory filing, deal-management, software, technology-enabled services, and print and distribution solutions. Its four reportable segments are Capital Markets and Investment Companies, each split between Software Solutions and Compliance and Communications Management. The filing notes a longer-term shift from physical print toward digital services and software. Segment reporting was realigned in Q1 2020; prior-period segment data was recast.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $254.0 | $258.9 | $474.7 | $488.5 |
| Gross profit / margin | $116.5 / 45.9% | $109.9 / 42.4% | $200.9 / 42.3% | $185.6 / 38.0% |
| Operating income / margin | $3.9 / 1.5% | $33.4 / 12.9% | $15.8 / 3.3% | $40.0 / 8.2% |
| Net income (loss) | $(1.3) | $17.3 | $2.8 | $15.9 |
| Diluted EPS | $(0.04) | $0.51 | $0.08 | $0.47 |
| Adjusted EBITDA (non-GAAP) | $60.8 | $56.1 | $90.9 | $79.8 |
Gross profit and margins above are calculated from reported net sales less cost of sales. Adjusted EBITDA is a non-GAAP measure and includes specified exclusions; it should not be treated as a substitute for GAAP results.
- Revenue mix: Q2 tech-enabled services rose 1.8% to $115.4; software solutions declined 0.4% to $47.6; print and distribution fell 6.9% to $91.0. For the first half, print and distribution declined 8.5% to $182.5, while software solutions increased 2.6% to $94.9.
- Cash flow: First-half operating cash outflow was $23.9, versus $65.3 outflow a year earlier. Investing cash outflow was $4.2 and financing cash inflow was $49.5; cash increased $20.2 to $37.4. Lower tax payments and timing of supplier payments helped operating cash flow; $1.2 of net cash taxes were paid versus $17.6 in the prior-year period.
- Liquidity: At June 30, cash was $37.4 and reported revolver availability was $180.0, yielding net available liquidity of $217.4. The company reported compliance with debt covenants and said it expected to remain compliant, while noting that weaker markets or demand could affect future compliance.
- Debt: Carrying value of total debt was $350.7, comprising $233.5 of 8.25% senior notes due 2024 and $120.0 of revolver borrowings, net of debt issuance costs; $0.5 was classified as current. Debt increased from $296.0 at year-end 2019. The company repurchased and retired $66.5 of notes in Q1, recognizing a $2.3 pre-tax extinguishment gain. The revolver matures in December 2023.
- Balance sheet: Total assets were $963.8 and total liabilities were $693.4 at June 30, 2020. Receivables, net, were $250.4 versus $161.4 at year-end; the expected-loss allowance rose to $11.5 from $7.7.
Material changes versus prior comparable periods
- Q2 sales decreased 1.9%; first-half sales decreased 2.8%. Management attributed declines mainly to lower print volumes and weaker transaction-related activity, partly offset by higher capital-markets tech-enabled services and software volumes.
- Q2 operating income fell 88.3% and first-half operating income fell 60.5%. Higher restructuring, impairment and other charges, the $12.3 multiemployer pension-plan charge, and lower volumes weighed on results. Cost-control initiatives and lower cost of sales partly offset the declines.
- Q2 restructuring, impairment and other charges were $25.1, including $12.3 for employee terminations affecting approximately 460 employees and a $12.1 impairment of lease right-of-use assets. First-half charges were $28.2.
- Interest expense declined to $6.3 in Q2 from $9.1, and to $10.9 for the first half from $18.0, reflecting prior term-loan repayment, note retirement, and lower-rate revolver borrowing.
- First-half capital expenditures were $15.7 versus $26.2. Management expected 2020 capital expenditures of approximately $30.
Outlook, commentary, risks and unusual items
- COVID-19: Management said the pandemic adversely affected financial performance and disrupted global transaction markets; the ultimate effect on demand, operations, liquidity, and results remained uncertain. The company reported $1.9 of net incremental COVID-related expenses in the first half and expected further such costs, with the future impact not predictable.
- Regulatory and print-volume changes: Management expects SEC Rule 30e-3 to reduce printed shareholder-report volumes beginning in 2021. Rule 498A is also expected to reduce printed prospectus volumes in 2021 and beyond, while potentially supporting software and filing revenue. Management also anticipated increased XBRL-related revenue from investment-company filing requirements. These are expectations, not quantified guidance.
- Multiemployer pension exposure: Following LSC Communications’ Chapter 11 filing and missed payments, DFIN and R.R. Donnelley remained jointly and severally liable for certain obligations assigned to LSC. The filing estimates LSC’s assigned obligation at approximately $103 undiscounted, or $57 discounted, payable through 2034. DFIN recorded $12.3 in Q2, including a $10.2 contingent liability at the low end of the potential range and $2.1 for its estimated share of payments pending allocation. The maximum potential loss could not be reasonably estimated. DFIN and RRD agreed in July 2020 to mediation and, if needed, arbitration on allocation.
- Impairment sensitivity: No goodwill impairment was recorded. However, the Investment Companies–Compliance and Communications Management reporting unit had only about 3% fair-value cushion over carrying value; a 1 percentage-point increase in its 12% discount rate would have reduced fair value to approximately carrying value.
- Other unusual items: The company suspended the planned sale of a real estate property because of pandemic-related market uncertainty and reclassified it from held-for-sale assets. It sold an equity investment for $12.8, approximately its carrying value. The company authorized a $25.0 share-repurchase program; first-half open-market repurchases were $3.8, with none in Q2.
- Guidance: The filing provides an approximate 2020 capital-expenditure expectation of $30 but no clear full-year revenue or earnings guidance.
Important facts for investors to verify
- Whether transaction volumes, software growth, and cost controls can offset continuing print declines and pandemic-related demand volatility.
- The final allocation and potential cash burden of the multiemployer pension obligations after mediation or arbitration, including any exposure beyond the $12.3 recorded.
- Liquidity, working-capital collection trends, and covenant headroom if receivables remain elevated or operating cash flow stays negative.
- Whether the low goodwill valuation cushion in Investment Companies–Compliance and Communications Management changes as regulatory and market assumptions evolve.
- Actual timing and extent of print-volume reductions from SEC rules, and whether anticipated software and XBRL growth offsets them.