Business context and reporting period
Donnelley Financial Solutions, Inc. (DFIN) filed its first annual report as an independent, publicly traded company for the fiscal year ended December 31, 2016. R.R. Donnelley & Sons Company (RRD) completed the spin-off on October 1, 2016; the common stock began NYSE trading as DFIN on October 3. Pre-spin-off results are combined historical carve-out financials and may not reflect the costs or results DFIN would have had as a standalone company.
DFIN provides financial communications, regulatory compliance, transaction, data and analytics, translation, and print services. Its reportable segments are U.S. and International.
Financial performance
Amounts are in millions, except per-share data. Fiscal 2016 includes the full year; fourth-quarter figures are identified separately.
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net sales | $983.5 | $1,049.5 | Down $66.0 (6.3%) |
| Services sales | $598.6 | $628.6 | Down 4.8% |
| Products sales | $384.9 | $420.9 | Down 8.6% |
| Income from operations | $106.0 | $172.7 | Down 38.6% |
| Net earnings | $59.1 | $104.3 | Down 43.3% |
| Diluted earnings per share | $1.80 | $3.22 | Down $1.42 |
| Operating cash flow | $106.0 | $120.9 | Down $14.9 |
| Capital expenditures | $26.2 | $27.1 | Down $0.9 |
Operating margin was approximately 10.8% in 2016 versus 16.5% in 2015; net margin was approximately 6.0% versus 9.9%, calculated from reported figures. Management’s non-GAAP adjusted EBITDA was $162.1 million versus $220.4 million. This measure excludes specified items and is not a GAAP substitute.
In the fourth quarter, net sales were $221.0 million versus $238.6 million, income from operations was $6.5 million versus $38.1 million, and DFIN recorded a net loss of $0.8 million versus net earnings of $23.2 million. The filing does not provide a clear standalone fourth-quarter cash-flow value.
At December 31, 2016, total assets were $978.9 million, total liabilities were $867.8 million, and equity was $111.1 million. Reported long-term debt, net of issuance costs, was $587.0 million. Cash and cash equivalents were $36.2 million. Revolver availability was $153.7 million, giving reported net available liquidity of $189.9 million. DFIN was in compliance with debt covenants at year-end.
DFIN reported an underfunded pension position of $57.5 million and an other postretirement benefit liability of $1.2 million at year-end. Goodwill was $446.4 million; no goodwill impairment was recorded in 2016.
Material changes versus the prior comparable period
- Sales fell mainly because of lower capital-markets transaction and compliance volumes, lower print volume, and investment-markets price pressure. Growth in virtual data rooms, translation, and mutual-fund content-management services partly offset the declines. Foreign exchange reduced sales by $5.4 million.
- U.S. segment sales declined 6.2% to $845.2 million; operating margin fell to 14.0% from 17.8%. International sales declined 7.0% to $138.3 million; operating margin fell to 6.9% from 10.3%.
- Operating income was pressured by lower volumes and unfavorable mix, wage and other inflation, and standalone-company and spin-off costs. SG&A rose 5.3% to $209.8 million; interest expense rose to $11.7 million from $1.1 million following debt issuance.
- Operating cash flow declined, reflecting lower profitability, pension-allocation changes, and payment timing, partly offset by collection timing.
- Year-end debt increased substantially from the prior-year carve-out position as DFIN established standalone financing. The balance sheet also reflects pension liabilities transferred from RRD upon separation.
Outlook, risks and unusual items
Management expected restructuring actions, including actions taken in 2017, to benefit operating earnings in 2017 and later years. It expected 2017 operating cash flow to benefit from improved profitability, organic sales growth, and cost controls, but said increased interest payments were expected to more than offset those cash-flow increases. Planned 2017 capital expenditures were $30 million to $35 million. Expected 2017 pension and other postretirement contributions were approximately $2.3 million.
DFIN expected significant spin-off-related and transition expenses in 2017, including information-technology costs. RRD was required to pay DFIN $68.0 million by April 1, 2017; DFIN planned to use the proceeds to reduce term-loan debt. Transition-services and commercial arrangements with RRD and LSC generally extend for up to 24 months after separation.
Key risks include sensitivity of transactional revenue to financial-market activity; competition, pricing pressure, and clients’ ability to file documents themselves; cybersecurity, confidentiality, and service interruptions; client retention and referral dependence; and higher standalone operating and vendor costs. Leverage, restrictive debt covenants, variable interest rates, pension funding, and foreign-exchange exposure also pose risks. The spin-off’s tax-free treatment depends on the accuracy of representations and compliance with post-separation restrictions; certain actions could trigger indemnification obligations or limit strategic and capital-raising options.
DFIN issued $300 million of 8.25% senior notes due 2024 and entered a $350 million secured term-loan facility and a $300 million revolving facility. The term loan matures in 2023 and the revolver in 2021. The filing reports no revolver borrowings at year-end. No cash dividends were paid, and none were anticipated in the foreseeable future. Management concluded disclosure controls were effective; the 10-K did not include management’s or the auditor’s assessment of internal control over financial reporting under the new-public-company transition relief.
Unusual items include $4.9 million of spin-off-related expenses and $5.4 million of restructuring, impairment, and other charges in 2016. The 2014 comparison included a $95.7 million pension-settlement charge, which materially affects multi-year comparisons.
Most important facts for investors to verify
- Whether sales and operating margins stabilize after the 2016 declines, particularly capital-markets transaction and print volumes.
- Actual 2017 standalone, transition, and technology costs, and whether restructuring and organic-growth expectations translate into improved operating results and cash flow.
- Debt-service capacity, covenant headroom, variable-rate exposure, and application of the $68.0 million RRD payment to term-loan repayment.
- Final pension-asset allocation transferred from RRD and any resulting balance-sheet adjustment or contribution requirements.
- Progress in replacing RRD/LSC services and systems before transition arrangements expire, including the impact on costs and client service.
- Resolution of spin-off tax matters, related-party balances and obligations, and the timing of RRD’s planned disposal of its retained DFIN shares.