UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2019March 31, 2020
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 1-37728
Donnelley Financial Solutions, Inc.
(Exact name of registrant as specified in its charter)
Delaware |
| 36-4829638 | |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) | |
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35 West Wacker Drive, Chicago, Illinois |
| 60601 | |
(Address of principal executive offices) |
| (Zip code) |
(844) 866-4337
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class |
| Trading Symbol(s) |
| Name of each exchange on which registered | |
Common Stock (Par Value $0.01) |
| DFIN |
| NYSE |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated filer |
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Non-Accelerated filer |
| ☐ |
| Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
As of July 26, 2019, 34.3 millionApril 30, 2020, 33,733,441 shares of common stock were outstanding.
DONNELLEY FINANCIAL SOLUTIONS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019MARCH 31, 2020
TABLE OF CONTENTS
Part I | |||
FINANCIAL INFORMATION |
| Page | |
Item 1: | Condensed Consolidated Financial Statements (unaudited) |
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| 3 | ||
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| 4 | |
| Condensed Consolidated Balance Sheets as of |
| 5 |
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| 6 | |
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| 7 | ||
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8 | |||
Item 2: | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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24 | |||
Item 3: |
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40 | |||
Item 4: |
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Part II | |||||
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Item 1: |
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Item 1A: |
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Item 2: |
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Item 3: |
| 42 | |||
Item 4: |
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Item 5: |
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Item 6: |
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Donnelley Financial Solutions, Inc. and Subsidiaries (“DFIN”)
Condensed Consolidated Statements of Operations
For the Three and Six Months Ended June 30, 2019 and 2018
(in millions, except per share data)
(UNAUDITED)
| Three Months Ended |
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| Six Months Ended |
| ||||||||||
| June 30, |
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| June 30, |
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| 2019 |
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| 2018 |
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| 2019 |
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| 2018 |
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Services net sales | $ | 161.2 |
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| $ | 187.9 |
|
| $ | 289.1 |
|
| $ | 347.4 |
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Products net sales |
| 97.7 |
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| 102.7 |
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| 199.4 |
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| 198.4 |
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Total net sales |
| 258.9 |
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| 290.6 |
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| 488.5 |
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| 545.8 |
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Services cost of sales (exclusive of depreciation and amortization) |
| 75.6 |
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| 92.0 |
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| 151.0 |
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| 177.9 |
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Products cost of sales (exclusive of depreciation and amortization) |
| 73.4 |
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| 73.6 |
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| 151.9 |
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| 146.3 |
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Total cost of sales |
| 149.0 |
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| 165.6 |
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| 302.9 |
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| 324.2 |
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Selling, general and administrative expenses (exclusive of depreciation and amortization) |
| 57.9 |
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| 75.1 |
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| 112.8 |
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| 141.2 |
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Restructuring, impairment and other charges-net |
| 3.8 |
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| 2.6 |
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| 5.9 |
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| 3.3 |
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Depreciation and amortization |
| 12.0 |
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| 11.1 |
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| 24.1 |
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| 21.5 |
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Other operating loss |
| 2.8 |
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| — |
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| 2.8 |
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| — |
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Income from operations |
| 33.4 |
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| 36.2 |
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| 40.0 |
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| 55.6 |
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Interest expense-net |
| 9.1 |
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| 9.8 |
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| 18.0 |
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| 18.8 |
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Investment and other income-net |
| (0.5 | ) |
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| (0.8 | ) |
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| (1.1 | ) |
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| (1.6 | ) |
Earnings before income taxes |
| 24.8 |
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| 27.2 |
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| 23.1 |
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| 38.4 |
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Income tax expense |
| 7.5 |
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| 8.3 |
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| 7.2 |
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| 11.8 |
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Net earnings | $ | 17.3 |
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| $ | 18.9 |
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| $ | 15.9 |
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| $ | 26.6 |
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Net earnings per share (Note 10): |
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Basic net earnings per share |
| 0.51 |
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| 0.56 |
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| 0.47 |
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| 0.79 |
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Diluted net earnings per share |
| 0.51 |
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| 0.56 |
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| 0.47 |
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| 0.78 |
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Weighted average number of common shares outstanding |
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Basic |
| 34.1 |
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| 33.8 |
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| 34.0 |
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| 33.7 |
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Diluted |
| 34.2 |
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| 34.0 |
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| 34.1 |
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| 33.9 |
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| Three Months Ended March 31, |
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| 2020 |
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| 2019 |
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Net sales |
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Tech-enabled services | $ | 81.9 |
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| $ | 83.2 |
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Software solutions |
| 47.3 |
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| 44.7 |
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Print and distribution |
| 91.5 |
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| 101.7 |
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Total net sales |
| 220.7 |
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| 229.6 |
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Cost of sales (1) |
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Tech-enabled services |
| 42.8 |
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| 48.8 |
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Software solutions |
| 24.8 |
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| 26.6 |
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Print and distribution |
| 68.7 |
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| 78.5 |
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Total cost of sales |
| 136.3 |
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| 153.9 |
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Selling, general and administrative expenses (1) |
| 57.0 |
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| 54.9 |
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Depreciation and amortization |
| 12.4 |
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| 12.1 |
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Restructuring, impairment and other charges, net |
| 3.1 |
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| 2.1 |
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Income from operations |
| 11.9 |
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| 6.6 |
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Interest expense, net |
| 4.6 |
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| 8.9 |
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Investment and other income, net |
| (0.4 | ) |
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| (0.6 | ) |
Earnings (loss) before income taxes |
| 7.7 |
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| (1.7 | ) |
Income tax expense (benefit) |
| 3.6 |
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| (0.3 | ) |
Net earnings (loss) | $ | 4.1 |
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| $ | (1.4 | ) |
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Net earnings (loss) per share: |
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Basic | $ | 0.12 |
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| $ | (0.04 | ) |
Diluted | $ | 0.12 |
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| $ | (0.04 | ) |
Weighted average number of common shares outstanding: |
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Basic |
| 34.2 |
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| 34.0 |
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Diluted |
| 34.3 |
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| 34.0 |
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____________
(1) | Exclusive of depreciation and amortization |
See Notes to Unaudited Condensed Consolidated Financial Statements
Donnelley Financial Solutions, Inc. and Subsidiaries (“DFIN”)
Condensed Consolidated Statements of Comprehensive Income
For the Three and Six Months Ended June 30, 2019 and 2018
(in millions)
(UNAUDITED)
| Three Months Ended |
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| Six Months Ended |
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| June 30, |
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| June 30, |
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| 2019 |
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| 2018 |
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| 2019 |
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| 2018 |
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Net earnings | $ | 17.3 |
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| $ | 18.9 |
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| $ | 15.9 |
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| $ | 26.6 |
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Other comprehensive income, net of tax: |
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Translation adjustments |
| 0.5 |
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| (3.4 | ) |
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| 2.7 |
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| (2.7 | ) |
Adjustment for net periodic pension and other postretirement benefits plan cost |
| 0.3 |
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| 0.5 |
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| 0.7 |
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| 1.0 |
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Other comprehensive income (loss), net of tax |
| 0.8 |
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| (2.9 | ) |
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| 3.4 |
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| (1.7 | ) |
Comprehensive income | $ | 18.1 |
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| $ | 16.0 |
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| $ | 19.3 |
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| $ | 24.9 |
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See Notes to Unaudited Condensed Consolidated Financial Statements
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| Three Months Ended March 31, |
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| 2020 |
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| 2019 |
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| Net earnings (loss) | $ | 4.1 |
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| $ | (1.4 | ) |
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| Other comprehensive (loss) income, net of tax: |
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| Translation adjustments |
| (2.8 | ) |
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| 2.2 |
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| Adjustment for net periodic pension and other postretirement benefits plan |
| 0.6 |
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| 0.4 |
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| Other comprehensive (loss) income, net of tax |
| (2.2 | ) |
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| 2.6 |
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| Comprehensive income | $ | 1.9 |
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| $ | 1.2 |
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Donnelley Financial Solutions, Inc. and Subsidiaries (“DFIN”)
Condensed Consolidated Balance Sheets
As of June 30, 2019 and December 31, 2018
(in millions, except per share data)
(UNAUDITED)
|
| June 30, |
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| December 31, |
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| 2019 |
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| 2018 |
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ASSETS |
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Cash and cash equivalents |
| $ | 9.5 |
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| $ | 47.3 |
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Receivables, less allowances for doubtful accounts of $10.7 in 2019 (2018 - $7.9) |
|
| 260.7 |
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| 172.9 |
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Inventories |
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| 13.0 |
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| 12.1 |
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Prepaid expenses and other current assets |
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| 17.7 |
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| 16.7 |
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Total current assets |
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| 300.9 |
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| 249.0 |
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Property, plant and equipment-net |
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| 37.0 |
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| 32.2 |
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Right-of-use assets |
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| 84.4 |
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| — |
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Software-net |
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| 51.6 |
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| 47.8 |
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Goodwill |
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| 450.3 |
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| 450.0 |
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Other intangible assets-net |
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| 30.0 |
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| 37.2 |
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Deferred income taxes |
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| 14.3 |
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| 9.7 |
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Other noncurrent assets |
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| 40.6 |
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| 42.8 |
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Total assets |
| $ | 1,009.1 |
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| $ | 868.7 |
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LIABILITIES |
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Accounts payable |
| $ | 78.0 |
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| $ | 72.4 |
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Accrued liabilities |
|
| 123.2 |
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| 126.0 |
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Total current liabilities |
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| 201.2 |
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| 198.4 |
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Long-term debt (Note 13) |
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| 419.1 |
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| 362.7 |
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Deferred compensation liabilities |
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| 19.9 |
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| 19.5 |
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Pension and other postretirement benefits plan liabilities |
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| 49.0 |
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| 51.3 |
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Noncurrent lease liabilities |
|
| 62.8 |
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|
| — |
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Other noncurrent liabilities |
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| 8.0 |
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| 10.8 |
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Total liabilities |
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| 760.0 |
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| 642.7 |
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Commitments and Contingencies (Note 14) |
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EQUITY |
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Preferred stock, $0.01 par value |
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Authorized: 1.0 shares; Issued: None |
|
| — |
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| — |
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Common stock, $0.01 par value |
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Authorized: 65.0 shares; |
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Issued: 34.5 shares in 2019 (2018 - 34.2 shares) |
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| 0.3 |
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| 0.3 |
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Treasury stock, at cost: 0.2 shares in 2019 (2018 - 0.1 shares) |
|
| (3.7 | ) |
|
| (2.4 | ) |
Additional paid-in-capital |
|
| 221.6 |
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| 216.5 |
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Retained earnings |
|
| 110.2 |
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|
| 94.3 |
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Accumulated other comprehensive loss |
|
| (79.3 | ) |
|
| (82.7 | ) |
Total equity |
|
| 249.1 |
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|
| 226.0 |
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Total liabilities and equity |
| $ | 1,009.1 |
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| $ | 868.7 |
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See Notes to Unaudited Condensed Consolidated Financial Statements
Donnelley Financial Solutions, Inc. and Subsidiaries (“DFIN”)
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2019 and 2018Balance Sheets
(in millions)millions, except per share data)
(UNAUDITED)
| Six Months Ended |
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| June 30, |
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| 2019 |
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| 2018 |
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OPERATING ACTIVITIES |
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Net earnings | $ | 15.9 |
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| $ | 26.6 |
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Adjustments to reconcile net earnings to net cash used in operating activities: |
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Depreciation and amortization |
| 24.1 |
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| 21.5 |
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Provision for doubtful accounts receivable |
| 3.2 |
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| 3.5 |
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Share-based compensation |
| 5.1 |
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| 5.1 |
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Deferred income taxes |
| (4.8 | ) |
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| 1.7 |
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Net pension plan income |
| (1.0 | ) |
|
| (1.6 | ) |
Other |
| 18.3 |
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| 1.7 |
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Changes in operating assets and liabilities - net of acquisitions: |
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Accounts receivable – net |
| (90.7 | ) |
|
| (102.1 | ) |
Inventories |
| (0.9 | ) |
|
| (4.8 | ) |
Prepaid expenses and other current assets |
| (0.9 | ) |
|
| 0.8 |
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Accounts payable |
| 6.1 |
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|
| 13.3 |
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Income taxes payable and receivable |
| (5.2 | ) |
|
| 3.9 |
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Accrued liabilities and other |
| (34.1 | ) |
|
| (18.3 | ) |
Pension and other postretirement benefits plan contributions |
| (0.4 | ) |
|
| (1.5 | ) |
Net cash used in operating activities |
| (65.3 | ) |
|
| (50.2 | ) |
INVESTING ACTIVITIES |
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Capital expenditures |
| (26.2 | ) |
|
| (15.6 | ) |
Acquisition of business, net of cash acquired |
| (2.6 | ) |
|
| — |
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Other investing activities |
| 0.1 |
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|
| — |
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Net cash used in investing activities |
| (28.7 | ) |
|
| (15.6 | ) |
FINANCING ACTIVITIES |
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Revolving facility borrowings |
| 337.0 |
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| 206.5 |
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Payments on revolving facility borrowings |
| (281.5 | ) |
|
| (179.5 | ) |
Proceeds from the issuance of common stock |
| — |
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| 1.2 |
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Treasury share repurchases |
| (1.3 | ) |
|
| (0.8 | ) |
Debt issuance costs |
| (0.2 | ) |
|
| — |
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Net cash provided by financing activities |
| 54.0 |
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|
| 27.4 |
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Effect of exchange rate on cash and cash equivalents |
| 2.2 |
|
|
| (1.8 | ) |
Net decrease in cash and cash equivalents |
| (37.8 | ) |
|
| (40.2 | ) |
Cash and cash equivalents at beginning of year |
| 47.3 |
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|
| 52.0 |
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Cash and cash equivalents at end of period | $ | 9.5 |
|
| $ | 11.8 |
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Supplemental cash flow information |
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Income taxes paid | $ | 17.6 |
|
| $ | 6.1 |
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Interest paid | $ | 16.5 |
|
| $ | 17.8 |
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| March 31, 2020 |
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| December 31, 2019 |
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ASSETS |
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Cash and cash equivalents |
| $ | 7.7 |
|
| $ | 17.2 |
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Receivables, less allowances for expected losses of $9.7 in 2020 (2019 - $7.7) |
|
| 214.6 |
|
|
| 161.4 |
|
Inventories |
|
| 15.2 |
|
|
| 11.1 |
|
Prepaid expenses and other current assets |
|
| 21.2 |
|
|
| 15.9 |
|
Assets held for sale |
|
| 5.6 |
|
|
| 5.6 |
|
Total current assets |
|
| 264.3 |
|
|
| 211.2 |
|
Property, plant and equipment, net |
|
| 16.5 |
|
|
| 17.5 |
|
Right-of-use assets |
|
| 80.3 |
|
|
| 80.7 |
|
Software, net |
|
| 55.2 |
|
|
| 55.0 |
|
Goodwill |
|
| 449.7 |
|
|
| 450.3 |
|
Other intangible assets, net |
|
| 18.4 |
|
|
| 21.9 |
|
Deferred income taxes, net |
|
| 9.1 |
|
|
| 9.0 |
|
Other noncurrent assets |
|
| 41.3 |
|
|
| 41.3 |
|
Total assets |
| $ | 934.8 |
|
| $ | 886.9 |
|
LIABILITIES |
|
|
|
|
|
|
|
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Accounts payable |
| $ | 72.1 |
|
| $ | 58.5 |
|
Accrued liabilities |
|
| 120.0 |
|
|
| 121.0 |
|
Total current liabilities |
|
| 192.1 |
|
|
| 179.5 |
|
Long-term debt |
|
| 336.6 |
|
|
| 296.0 |
|
Deferred compensation liabilities |
|
| 18.8 |
|
|
| 20.0 |
|
Pension and other postretirement benefits plan liabilities |
|
| 57.2 |
|
|
| 58.8 |
|
Noncurrent lease liabilities |
|
| 57.8 |
|
|
| 57.9 |
|
Other noncurrent liabilities |
|
| 5.2 |
|
|
| 6.1 |
|
Total liabilities |
|
| 667.7 |
|
|
| 618.3 |
|
Commitments and Contingencies (Note 7) |
|
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|
EQUITY |
|
|
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Preferred stock, $0.01 par value |
|
|
|
|
|
|
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|
Authorized: 1.0 shares; Issued: NaN |
|
| — |
|
|
| — |
|
Common stock, $0.01 par value |
|
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Authorized: 65.0 shares; |
|
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Issued and outstanding: 34.8 shares and 33.8 shares in 2020 (2019 - 34.5 shares and 34.2 shares) |
|
| 0.3 |
|
|
| 0.3 |
|
Treasury stock, at cost: 1.0 shares in 2020 (2019 - 0.3 shares) |
|
| (9.4 | ) |
|
| (4.2 | ) |
Additional paid-in-capital |
|
| 227.5 |
|
|
| 225.2 |
|
Retained earnings |
|
| 135.5 |
|
|
| 131.9 |
|
Accumulated other comprehensive loss |
|
| (86.8 | ) |
|
| (84.6 | ) |
Total equity |
|
| 267.1 |
|
|
| 268.6 |
|
Total liabilities and equity |
| $ | 934.8 |
|
| $ | 886.9 |
|
See Notes to Unaudited Condensed Consolidated Financial Statements
Donnelley Financial Solutions, Inc. and Subsidiaries (“DFIN”)
Condensed Consolidated Statements of Cash Flows
(in millions)
(UNAUDITED)
| Three Months Ended March 31, |
| |||||
| 2020 |
|
| 2019 |
| ||
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
Net earnings (loss) | $ | 4.1 |
|
| $ | (1.4 | ) |
Adjustments to reconcile net earnings (loss) to net cash used in operating activities: |
|
|
|
|
|
|
|
Depreciation and amortization |
| 12.4 |
|
|
| 12.1 |
|
Provision for expected losses on accounts receivable |
| 1.6 |
|
|
| 1.0 |
|
Share-based compensation |
| 2.3 |
|
|
| 1.5 |
|
Gain on debt extinguishment |
| (2.3 | ) |
|
| — |
|
Deferred income taxes |
| (0.5 | ) |
|
| (2.8 | ) |
Net pension plan income |
| (0.5 | ) |
|
| (0.5 | ) |
Amortization of right-of-use assets |
| 5.8 |
|
|
| 5.7 |
|
Other |
| 0.1 |
|
|
| 2.0 |
|
Changes in operating assets and liabilities - net of acquisitions: |
|
|
|
|
|
|
|
Accounts receivable, net |
| (55.7 | ) |
|
| (63.6 | ) |
Inventories |
| (4.2 | ) |
|
| (2.7 | ) |
Prepaid expenses and other current assets |
| (4.7 | ) |
|
| (3.2 | ) |
Accounts payable |
| 12.5 |
|
|
| 23.9 |
|
Income taxes payable and receivable |
| 2.1 |
|
|
| (11.3 | ) |
Accrued liabilities and other |
| (4.0 | ) |
|
| (23.3 | ) |
Lease liabilities |
| (5.9 | ) |
|
| (5.5 | ) |
Pension and other postretirement benefits plan contributions |
| (0.2 | ) |
|
| (0.2 | ) |
Net cash used in operating activities |
| (37.1 | ) |
|
| (68.3 | ) |
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
Capital expenditures |
| (6.9 | ) |
|
| (15.1 | ) |
Acquisition of business, net of cash acquired |
| — |
|
|
| (2.2 | ) |
Purchase of investment |
| (1.3 | ) |
|
| — |
|
Other investing activities |
| — |
|
|
| 0.2 |
|
Net cash used in investing activities |
| (8.2 | ) |
|
| (17.1 | ) |
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
Revolving facility borrowings |
| 146.5 |
|
|
| 178.5 |
|
Payments on revolving facility borrowings |
| (40.5 | ) |
|
| (130.0 | ) |
Payments on long-term debt |
| (63.3 | ) |
|
| — |
|
Treasury share repurchases |
| (5.2 | ) |
|
| (1.2 | ) |
Debt issuance costs |
| — |
|
|
| (0.2 | ) |
Net cash provided by financing activities |
| 37.5 |
|
|
| 47.1 |
|
Effect of exchange rate on cash and cash equivalents |
| (1.7 | ) |
|
| 1.5 |
|
Net decrease in cash and cash equivalents |
| (9.5 | ) |
|
| (36.8 | ) |
Cash and cash equivalents at beginning of year |
| 17.2 |
|
|
| 47.3 |
|
Cash and cash equivalents at end of period | $ | 7.7 |
|
| $ | 10.5 |
|
Supplemental cash flow information |
|
|
|
|
|
|
|
Income taxes paid (net of refunds) | $ | 2.0 |
|
| $ | 13.8 |
|
Interest paid | $ | 2.6 |
|
| $ | 1.5 |
|
See Notes to Unaudited Condensed Consolidated Financial Statements
Donnelley Financial Solutions, Inc. and Subsidiaries (“DFIN”)
Condensed Consolidated Statements of Changes in Stockholders’ Equity
For the Three Months Ended June 30,March 31, 2020 and 2019 and 2018
(in millions)
(UNAUDITED)
| Common Stock |
|
| Treasury Stock |
|
| Additional Paid-in- Capital |
|
| Retained Earnings |
|
| Accumulated Other Comprehensive Loss |
|
| Total Equity |
| |||||||||||||||||||||||||||||||||||||||||||||
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Balance at March 31, 2019 |
| 34.4 |
|
| $ | 0.3 |
|
|
| 0.2 |
|
| $ | (3.6 | ) |
| $ | 218.0 |
|
| $ | 92.9 |
|
| $ | (80.1 | ) |
| $ | 227.5 |
| |||||||||||||||||||||||||||||||
Net earnings |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 17.3 |
|
|
| — |
|
|
| 17.3 |
| |||||||||||||||||||||||||||||||
Other comprehensive income |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 0.8 |
|
|
| 0.8 |
| |||||||||||||||||||||||||||||||
Share-based compensation |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3.6 |
|
|
| — |
|
|
| — |
|
|
| 3.6 |
| |||||||||||||||||||||||||||||||
Issuance of share-based awards, net of withholdings and other |
| 0.1 |
|
|
| — |
|
|
| — |
|
|
| (0.1) |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (0.1) |
| |||||||||||||||||||||||||||||||
Balance at June 30, 2019 |
| 34.5 |
|
| $ | 0.3 |
|
|
| 0.2 |
|
| $ | (3.7 | ) |
| $ | 221.6 |
|
| $ | 110.2 |
|
| $ | (79.3 | ) |
| $ | 249.1 |
| |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Common Stock |
|
| Treasury Stock |
|
| Additional Paid-in- Capital |
|
| Retained Earnings |
|
| Accumulated Other Comprehensive Loss |
|
| Total Equity |
| Common Stock |
|
| Treasury Stock |
|
| Additional Paid-in-Capital |
|
| Retained Earnings |
|
| Accumulated Other Comprehensive Loss |
|
| Total Equity |
| ||||||||||||||||||||||||||||
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Balance at March 31, 2018 |
| 34.0 |
|
| $ | 0.3 |
|
|
| 0.1 |
|
| $ | (1.7 | ) |
| $ | 208.9 |
|
| $ | 17.5 |
|
| $ | (63.4 | ) |
| $ | 161.6 |
| |||||||||||||||||||||||||||||||
Balance at December 31, 2019 |
| 34.5 |
|
| $ | 0.3 |
|
|
| 0.3 |
|
| $ | (4.2 | ) |
| $ | 225.2 |
|
| $ | 131.9 |
|
| $ | (84.6 | ) |
| $ | 268.6 |
| |||||||||||||||||||||||||||||||
Net earnings |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 18.9 |
|
|
| — |
|
|
| 18.9 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4.1 |
|
|
| — |
|
|
| 4.1 |
|
Other comprehensive income |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2.9 | ) |
|
| (2.9 | ) | |||||||||||||||||||||||||||||||
Other comprehensive loss |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2.2 | ) |
|
| (2.2 | ) | |||||||||||||||||||||||||||||||
Adoption of ASU 2016-13 |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (0.5 | ) |
|
| — |
|
|
| (0.5 | ) | |||||||||||||||||||||||||||||||
Share-based compensation |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3.3 |
|
|
| — |
|
|
| — |
|
|
| 3.3 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2.3 |
|
|
| — |
|
|
| — |
|
|
| 2.3 |
|
Common stock repurchases |
| — |
|
|
| — |
|
|
| 0.6 |
|
|
| (3.8 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3.8 | ) | |||||||||||||||||||||||||||||||
Issuance of share-based awards, net of withholdings and other |
| 0.1 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (0.1 | ) |
|
| — |
|
|
| — |
|
|
| (0.1 | ) |
| 0.3 |
|
|
| — |
|
|
| 0.1 |
|
|
| (1.4 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1.4 | ) |
Balance at June 30, 2018 |
| 34.1 |
|
| $ | 0.3 |
|
|
| 0.1 |
|
| $ | (1.7 | ) |
| $ | 212.1 |
|
| $ | 36.4 |
|
| $ | (66.3 | ) |
| $ | 180.8 |
| |||||||||||||||||||||||||||||||
Balance at March 31, 2020 |
| 34.8 |
|
| $ | 0.3 |
|
|
| 1.0 |
|
| $ | (9.4 | ) |
| $ | 227.5 |
|
| $ | 135.5 |
|
| $ | (86.8 | ) |
| $ | 267.1 |
| |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Common Stock |
|
| Treasury Stock |
|
| Additional Paid-in-Capital |
|
| Retained Earnings |
|
| Accumulated Other Comprehensive Loss |
|
| Total Equity |
| ||||||||||||||
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Balance at December 31, 2018 |
| 34.2 |
|
| $ | 0.3 |
|
|
| 0.1 |
|
| $ | (2.4 | ) |
| $ | 216.5 |
|
| $ | 94.3 |
|
| $ | (82.7 | ) |
| $ | 226.0 |
|
Net loss |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1.4 | ) |
|
| — |
|
|
| (1.4 | ) |
Other comprehensive income |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2.6 |
|
|
| 2.6 |
|
Share-based compensation |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1.5 |
|
|
| — |
|
|
| — |
|
|
| 1.5 |
|
Issuance of share-based awards, net of withholdings and other |
| 0.2 |
|
|
| — |
|
|
| 0.1 |
|
|
| (1.2 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1.2 | ) |
Balance at March 31, 2019 |
| 34.4 |
|
| $ | 0.3 |
|
|
| 0.2 |
|
| $ | (3.6 | ) |
| $ | 218.0 |
|
| $ | 92.9 |
|
| $ | (80.1 | ) |
| $ | 227.5 |
|
See Notes to Unaudited Condensed Consolidated Financial Statements
Donnelley Financial Solutions, Inc. and Subsidiaries (“DFIN”)
Condensed Consolidated Statements of Equity
For the Six Months Ended June 30, 2019 and 2018
(in millions)
(UNAUDITED)
| Common Stock |
|
| Treasury Stock |
|
| Additional Paid-in- Capital |
|
| Retained Earnings |
|
| Accumulated Other Comprehensive Loss |
|
| Total Equity |
| ||||||||||||||
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Balance at December 31, 2018 |
| 34.2 |
|
| $ | 0.3 |
|
|
| 0.1 |
|
| $ | (2.4 | ) |
| $ | 216.5 |
|
| $ | 94.3 |
|
| $ | (82.7 | ) |
| $ | 226.0 |
|
Net earnings |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 15.9 |
|
|
| — |
|
|
| 15.9 |
|
Other comprehensive income |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3.4 |
|
|
| 3.4 |
|
Share-based compensation |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5.1 |
|
|
| — |
|
|
| — |
|
|
| 5.1 |
|
Issuance of share-based awards, net of withholdings and other |
| 0.3 |
|
|
| — |
|
|
| 0.1 |
|
|
| (1.3 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1.3 | ) |
Balance at June 30, 2019 |
| 34.5 |
|
| $ | 0.3 |
|
|
| 0.2 |
|
| $ | (3.7 | ) |
| $ | 221.6 |
|
| $ | 110.2 |
|
| $ | (79.3 | ) |
| $ | 249.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Common Stock |
|
| Treasury Stock |
|
| Additional Paid-in- Capital |
|
| Retained Earnings |
|
| Accumulated Other Comprehensive Loss |
|
| Total Equity |
| ||||||||||||||
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Balance at December 31, 2017 |
| 33.8 |
|
| $ | 0.3 |
|
|
| — |
|
| $ | (0.9 | ) |
| $ | 205.7 |
|
| $ | 8.9 |
|
| $ | (64.6 | ) |
| $ | 149.4 |
|
Net earnings |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 26.6 |
|
|
| — |
|
|
| 26.6 |
|
Other comprehensive income |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1.7 | ) |
|
| (1.7 | ) |
Adoption of ASU 2014-09 |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 0.9 |
|
|
| — |
|
|
| 0.9 |
|
Share-based compensation |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5.1 |
|
|
| — |
|
|
| — |
|
|
| 5.1 |
|
Issuance of share-based awards, net of withholdings and other |
| 0.3 |
|
|
| — |
|
|
| 0.1 |
|
|
| (0.8 | ) |
|
| 1.3 |
|
|
| — |
|
|
| — |
|
|
| 0.5 |
|
Balance at June 30, 2018 |
| 34.1 |
|
| $ | 0.3 |
|
|
| 0.1 |
|
| $ | (1.7 | ) |
| $ | 212.1 |
|
| $ | 36.4 |
|
| $ | (66.3 | ) |
| $ | 180.8 |
|
8
Donnelley Financial Solutions, Inc.
Notes to the Unaudited Condensed Consolidated Financial Statements
(in millions, except per share data, unless otherwise indicated)
Note 1. Overview, and Basis of Presentation and Significant Accounting Policies
Description of Business
Donnelley Financial Solutions, Inc. and subsidiaries (“DFIN,” or the “Company”) is a leading global risk and compliance solutions company. The Company provides regulatory filing and deal solutions via its software-as-a-service (“SaaS”),software technology-enabled services and print and distribution solutions to public and private companies, mutual funds and other regulated investment firms, to serve theirits clients’ regulatory and compliance needs. DFIN helps its clients comply with applicable regulations where and how they want to work in a digital world, providing numerous solutions tailored to each client’s precise needs. The prevailing trend is toward clients choosing to utilize the Company’s software solutions, in conjunction with its tech-enabled services, to meet their document and filing needs, while at the same time shifting away from physical print and distribution of documents, except for cases where it is still regulatorily required or requested by shareholders.
For corporate clients within its capital markets offerings, the Company offers technology-enabled filing solutions that allow U.S. public companies to comply with applicable U.S. Securities and Exchange Commission (“SEC”) regulations including filing agent services, digital document creation and online content management tools that support their corporate financial transactions and regulatory reporting; solutions to facilitate clients’ communications with their shareholders; and virtual data rooms and other deal management solutions. For the investment markets,companies, including alternative investmentmutual fund and insurancealternative investment companies, the Company provides technology-enabled filing solutions including cloud-based tools for creating and filing high-quality regulatory documents andas well as solutions for investors designed to improve the speed and accuracy of their access to investment information. Throughout a company’s life cycle, theThe Company serves its clients’ regulatory and compliance needs.needs throughout their respective life cycles.
Services and Products
The Company separately reports its net sales and related cost of sales for its software solutions, tech-enabled services and print and distribution offerings. The Company’s deep industrysoftware solutions consist of Venue® Virtual Data Room (“Venue”), ActiveDisclosure, eBrevia, FundSuiteArc, and regulatory expertiseothers. The Company’s tech-enabled services offerings consist of document composition, compliance-related SEC’s Electronic Data Gathering, Analysis, and a commitmentRetrieval (“EDGAR”) filing services and transaction solutions. The Company’s print and distribution offerings primarily consist of conventional and digital printed products and the related shipping.
Segments
In the first quarter of 2020, management realigned the Company’s operating segments to exceptional service guides our clientsreflect changes in the manner in which the chief operating decision maker assesses information for decision-making purposes. The Company’s 4 operating and reportable segments are: Capital Markets – Software Solutions (“CM-SS”), Capital Markets – Compliance and Communications Management (“CM-CCM”), Investment Companies – Software Solutions (“IC-SS”), and Investment Companies – Compliance and Communications Management (“IC-CCM”). Corporate is not an operating segment and consists primarily of unallocated selling, general and administrative (“SG&A”) activities and associated expenses. All prior year amounts have been reclassified to navigate a high-stakes and ever-changing regulatory environment.conform to the Company’s current reporting structure. See Note 13, Segment Information, for additional information.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statementsUnaudited Condensed Consolidated Financial Statements include the accounts of DFIN and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the rules and regulations of the SEC. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The financial data presented herein should be read in conjunction with the audited consolidated and combined financial statements and accompanying notes included in the Company’s latest Annual Report on Form 10-K for the year ended December 31, 20182019 filed with the SEC on February 27, 2019.26, 2020 (the “Annual Report”). In the opinion of management, the financial data presented includes all adjustments necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented. Results of interim periods should not be considered indicative of the results for the full year. These unaudited condensed
Certain previously reported amounts have been reclassified to conform to the current presentation, there was no impact on the Company’s previously reported consolidated interimstatements of operations, statements of comprehensive income, balance sheets, statements of cash flows or statements of changes in stockholders’ equity.
8
Donnelley Financial Solutions, Inc. and Subsidiaries (“DFIN”)
Notes to the Unaudited Condensed Consolidated Financial Statements (continued)
(in millions, except per share data, unless otherwise indicated)
Significant Accounting Policies
Use of Estimates—The preparation of financial statements includein conformity with GAAP requires the extensive use of management’s estimates and assumptions of management that affect the reported amounts of assets and liabilities as well as disclosures of contingent assets and liabilities at the date of the financial statements and the reported inamounts of revenue and expenses during the unaudited condensed consolidated financial statements.reporting periods. Actual results could differ from these estimates. The Company’s significant accounting policies and critical estimates are disclosed in the Company’s Annual Report.
ChangesPrepaid Expenses—As of March 31, 2020 and December 31, 2019, prepaid expenses were $13.8 million and $9.6 million, respectively.
Inventory—The components of the Company’s inventories stated at the lower of cost or market, net of excess and obsolescence reserves for raw materials, at March 31, 2020 and December 31, 2019 were as follows:
| March 31, 2020 |
|
| December 31, 2019 |
| ||
Raw materials and manufacturing supplies | $ | 6.7 |
|
| $ | 3.9 |
|
Work in process |
| 8.5 |
|
|
| 7.2 |
|
Total | $ | 15.2 |
|
| $ | 11.1 |
|
Property, Plant and Equipment—The components of the Company’s property, plant and equipment, net at March 31, 2020 and December 31, 2019 were as follows:
| March 31, 2020 |
|
| December 31, 2019 |
| ||
Land | $ | 0.3 |
|
| $ | 0.3 |
|
Buildings |
| 27.1 |
|
|
| 26.8 |
|
Machinery and equipment |
| 112.0 |
|
|
| 111.9 |
|
|
| 139.4 |
|
|
| 139.0 |
|
Less: Accumulated depreciation |
| (122.9 | ) |
|
| (121.5 | ) |
Total | $ | 16.5 |
|
| $ | 17.5 |
|
Depreciation expense was $1.7 million and $1.5 million for the three months ended March 31, 2020 and 2019, respectively.
Assets Held for Sale—As of March 31, 2020 and December 31, 2019, the Company had one real estate property, primarily consisting of land and an office building, held for sale with a carrying value of $5.6 million.
Software—Capitalized software development costs are amortized over their estimated useful life using the straight-line method, up to a maximum of three years. Amortization expense related to internally-developed software, excluding amortization expense related to other intangible assets, was $7.3 million and $6.9 million for the three months ended March 31, 2020 and 2019, respectively.
Investments—The carrying value of the Company’s investments in Presentationequity securities was $25.2 million at both March 31, 2020 and December 31, 2019. The Company measures its equity securities that do not have a readily determinable fair value, at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The Company performs an assessment on a quarterly basis to determine whether triggering events for impairment exist and to identify any observable price changes. During the three months ended March 31, 2020, there were no events or changes in circumstances that suggested an impairment or an observable price change of any of these investments resulting from an orderly transaction for the identical or a similar investment.
Certain prior year amounts have been restated to conform
9
Donnelley Financial Solutions, Inc. and Subsidiaries (“DFIN”)
Notes to the Unaudited Condensed Consolidated Financial Statements (continued)
(in millions, except per share data, unless otherwise indicated)
Recently Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which replaces the incurred loss model with a current expected credit loss (“CECL”) model and requires consideration of a broader range of reasonable and supportable information to explain credit loss estimates. This standard applies to financial assets, measured at amortized cost, including loans, held-to-maturity debt securities, net investments in leases and trade accounts receivable. The guidance must be adopted using a modified retrospective transition method through a cumulative-effect adjustment to retained earnings in the period of adoption.
On January 1, 2020, the Company adopted the standard and recorded a $0.5 million cumulative-effect adjustment to retained earnings. The Company’s credit loss reserves primarily relate to trade receivables, unbilled receivables and contract assets. The Company establishes provisions at differing rates, which are region or country-specific, and are based upon the age of the trade receivable, the Company’s historical collection experience in each region or country and lines of business, where appropriate. Provisions for unbilled receivables and contract assets are established based on rates which management believes to be appropriate considering its historical experience. Specific customer provisions are made when a review of significant outstanding amounts, utilizing information about customer creditworthiness and current reporting unit structure. Dueeconomic trends, indicates that collection is doubtful.
Transactions affecting the current expected credit loss reserve during the three months ended March 31, 2020 were as follows:
| March 31, 2020 |
| |
Balance, beginning of year | $ | 7.7 |
|
Adoption of ASU 2016-13 |
| 0.5 |
|
Provisions charged to expense and reclassifications |
| 2.3 |
|
Write-offs and other |
| (0.8 | ) |
Balance, end of period (a) | $ | 9.7 |
|
_____________
(a) As of March 31, 2020, the CECL reserve balance is comprised of an $8.8 million provision for accounts receivable and a $0.9 million provision for unbilled receivables and contract assets, all of which are included in receivables, net on the Unaudited Condensed Consolidated Balance Sheet. As of December 31, 2019, prior to the saleadoption of ASU 2016-13, the reserve balance was comprised of a $7.7 million allowance for doubtful accounts.
In August 2018, the FASB issued ASU No. 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40).” The standard requires a customer in a hosting arrangement that is a service contract to follow the internal-use software guidance to determine which implementation costs to capitalize as an asset related to the service contract and to expense the capitalized implementation costs over the term of the Languagehosting arrangement. The standard is effective for fiscal years beginning after December 15, 2019, and the interim periods within those fiscal years. The Company adopted the amendment prospectively on January 1, 2020. The adoption of the standard did not have a material impact on the Company’s condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), which provides optional guidance for a limited period of time to use optional expedients and exceptions for applying U.S. GAAP to contracts and other transactions affected by reference rate reform, if certain criteria are met. The amendments in ASU 2020-04 apply only to contracts and other transactions that reference the London Inter-bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. Generally, the expedients and exceptions provided by ASU 2020-04 would only be allowed for contract modifications made prior to December 31, 2022. The Company is currently evaluating the impact the adoption of this standard will have on its condensed consolidated financial statements.
10
Donnelley Financial Solutions, business in 2018, the Company made changesInc. and Subsidiaries (“DFIN”)
Notes to the reporting units within the U.S. segment. The former Language Solutions and other reporting unit has been renamed “Language Solutions.” Certain results previously included within the former Language Solutions and other reporting unit are now included within the Investment Markets reporting unit.Unaudited Condensed Consolidated Financial Statements (continued)
(in millions, except per share data, unless otherwise indicated)
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which modifies ASC 740, Income Taxes, to simplify the accounting for income taxes by removing certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. ASU 2019-12 also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. The Company is currently evaluating the impact the adoption of this standard will have on its condensed consolidated financial statements.
Note 2. Revenue
Revenue Recognition
The Company manages highly-customized data and materials, such as Exchange Act, Securities Act and Investment Company Act filings with the SEC on behalf of its customers pursuant to the Securities Act of 1933, as amended (the “Securities Act”), the Securities Act of 1934, as amended (the “Exchange Act”), and the Securities Act of 1940, as amended (the “Investment Act”), manages virtual data rooms and performs XBRL and related services. Clients are provided with EDGAR filing services, XBRL compliance services and translation, editing, interpreting, proof-reading and multilingual typesetting services, among others. The Company’s SaaS offeringssoftware solutions include the Venue, Virtual Data Room (“Venue”), the FundSuiteArc software platform, ActiveDisclosure and data and analytics, among others.
Substantially all of the Company’s revenue is derived from contracts with an initial expected duration of one year or less. Generally, customer payment is due within ten days upon invoicing.
9
Donnelley Financial Solutions, Inc.
Notes to the Unaudited Condensed Consolidated Financial Statements
(in millions, except per share data, unless otherwise indicated)
Revenue is recognized upon transfer of control of promised services or products to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those services or products. The Company’s arrangements with customers often include promises to transfer multiple services or products to a customer. Determining whether services and products are considered distinct performance obligations that should be accounted for separately requires significant judgment. Certain customer arrangements have multiple performance obligations as certain promises are both capable of being distinct and are distinct within the context of the contract. Other customer arrangements have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts, and therefore are not distinct.
Revenue for the Company’s tech-enabled services, software solutions and productsprint and distribution offerings is recognized either over time or at a point in time, as outlined below.
Over time
The Company recognizes revenue for certain services over time.time:
| • | The Company’s |
11 Donnelley Financial Solutions, Inc. and Subsidiaries (“DFIN”) Notes to the Unaudited Condensed Consolidated Financial Statements (continued) (in millions, except per share data, unless otherwise indicated)
|
|
|
Point in time
All remainingCertain revenue arrangements, primarily for tech-enabled services and print and distribution offerings, are generally recognized at a point in time and are primarily invoiced upon completion of all services or upon shipment to the customer.
| • | Certain |
| • | Revenue for arrangements which include assisting customers in completing regulatory filings for transactions, such as mergers and acquisitions or other public capital market transactions, is recognized upon completion of all |
| • | Revenue for arrangements without a regulatory filing generally have a single performance |
| • | Warehousing, fulfillment services and shipping and handling are each separate performance obligations. As a result, when the Company provides warehousing and future fulfillment services, revenue for the composition services performed and printing of the product is recognized upon completion of the performance obligation(s), as control of the inventory has transferred to the customer and the inventory is being stored at the customer’s request. |
Because substantially all of the Company’s products are customized, product returns are not significant; however, the Company accrues for the estimated amount of customer credits at the time of sale.
The Company records deferred revenue when amounts are invoiced but the revenue recognition criteria are not yet met. Such revenue is recognized when all criteria are subsequently met.
10
Donnelley Financial Solutions, Inc.
Notes to the Unaudited Condensed Consolidated Financial Statements
(in millions, except per share data, unless otherwise indicated)
Certain revenues earned by the Company require significant judgment to determine if revenue should be recorded gross, as a principal, or net of related costs, as an agent. Billings for shipping and handling costs as well as certain postage costs, and out-of-pocket expenses are recorded gross. Revenue is not recognized for customer-supplied postage. The Company’s printing operations process paper that may be supplied directly by customers or may be purchased by the Company from third parties and sold to customers. Revenue is not recognized for customer-supplied paper, however, revenues for Company-supplied paper are recognized on a gross basis. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to authorities.
Disaggregation of revenue
The following tables disaggregate revenue by reporting unit and timing of revenue recognition for the three and six months ended June 30, 2019 and 2018:
| Three Months Ended June 30, 2019 |
| |||||||||
| Point in time |
|
| Over time |
|
| Total |
| |||
U.S. |
|
|
|
|
|
|
|
|
|
|
|
Capital Markets | $ | 102.6 |
|
| $ | 25.7 |
|
| $ | 128.3 |
|
Investment Markets |
| 80.9 |
|
|
| 14.0 |
|
|
| 94.9 |
|
Total U.S. |
| 183.5 |
|
|
| 39.7 |
|
|
| 223.2 |
|
International |
| 28.6 |
|
|
| 7.1 |
|
|
| 35.7 |
|
Total net sales | $ | 212.1 |
|
| $ | 46.8 |
|
| $ | 258.9 |
|
| Three Months Ended June 30, 2018 |
| |||||||||
| Point in time |
|
| Over time |
|
| Total |
| |||
U.S. |
|
|
|
|
|
|
|
|
|
|
|
Capital Markets | $ | 120.5 |
|
| $ | 24.1 |
|
| $ | 144.6 |
|
Investment Markets* |
| 78.1 |
|
|
| 13.4 |
|
|
| 91.5 |
|
Language Solutions* |
| 6.4 |
|
|
| — |
|
|
| 6.4 |
|
Total U.S. |
| 205.0 |
|
|
| 37.5 |
|
|
| 242.5 |
|
International |
| 43.3 |
|
|
| 4.8 |
|
|
| 48.1 |
|
Total net sales | $ | 248.3 |
|
| $ | 42.3 |
|
| $ | 290.6 |
|
| Six Months Ended June 30, 2019 |
| |||||||||
| Point in time |
|
| Over time |
|
| Total |
| |||
U.S. |
|
|
|
|
|
|
|
|
|
|
|
Capital Markets | $ | 187.6 |
|
| $ | 50.4 |
|
| $ | 238.0 |
|
Investment Markets |
| 161.4 |
|
|
| 26.6 |
|
|
| 188.0 |
|
Total U.S. |
| 349.0 |
|
|
| 77.0 |
|
|
| 426.0 |
|
International |
| 49.7 |
|
|
| 12.8 |
|
|
| 62.5 |
|
Total net sales | $ | 398.7 |
|
| $ | 89.8 |
|
| $ | 488.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended June 30, 2018 |
| |||||||||
| Point in time |
|
| Over time |
|
| Total |
| |||
U.S. |
|
|
|
|
|
|
|
|
|
|
|
Capital Markets | $ | 214.0 |
|
| $ | 48.1 |
|
| $ | 262.1 |
|
Investment Markets* |
| 154.1 |
|
|
| 26.9 |
|
|
| 181.0 |
|
Language Solutions* |
| 12.5 |
|
|
| — |
|
|
| 12.5 |
|
Total U.S. |
| 380.6 |
|
|
| 75.0 |
|
|
| 455.6 |
|
International |
| 81.2 |
|
|
| 9.0 |
|
|
| 90.2 |
|
Total net sales | $ | 461.8 |
|
| $ | 84.0 |
|
| $ | 545.8 |
|
* Certain prior year amounts were restated to conform to the Company’s current reporting unit structure.
1112
Donnelley Financial Solutions, Inc. and Subsidiaries (“DFIN”)
Notes to the Unaudited Condensed Consolidated Financial Statements (continued)
(in millions, except per share data, unless otherwise indicated)
Contract BalancesDisaggregation of revenue
The following table disaggregates revenue between tech-enabled services, software solutions and print and distribution by reportable segment:
| Three Months Ended March 31, |
| |||||||||||||||||||||||||||||
| 2020 |
|
| 2019 |
| ||||||||||||||||||||||||||
| Tech-enabled Services |
|
| Software Solutions |
|
| Print and Distribution |
|
| Total |
|
| Tech-enabled Services |
|
| Software Solutions |
|
| Print and Distribution |
|
| Total |
| ||||||||
Capital Markets - Software Solutions | $ | — |
|
| $ | 31.2 |
|
| $ | — |
|
| $ | 31.2 |
|
| $ | — |
|
| $ | 30.5 |
|
| $ | — |
|
| $ | 30.5 |
|
Capital Markets - Compliance and Communications Management |
| 57.9 |
|
|
| — |
|
|
| 41.2 |
|
|
| 99.1 |
|
|
| 59.5 |
|
|
| — |
|
|
| 42.5 |
|
|
| 102.0 |
|
Investment Companies - Software Solutions |
| — |
|
|
| 16.1 |
|
|
| — |
|
|
| 16.1 |
|
|
| — |
|
|
| 14.2 |
|
|
| — |
|
|
| 14.2 |
|
Investment Companies - Compliance and Communications Management |
| 24.0 |
|
|
| — |
|
|
| 50.3 |
|
|
| 74.3 |
|
|
| 23.7 |
|
|
| — |
|
|
| 59.2 |
|
|
| 82.9 |
|
Total net sales | $ | 81.9 |
|
| $ | 47.3 |
|
| $ | 91.5 |
|
| $ | 220.7 |
|
| $ | 83.2 |
|
| $ | 44.7 |
|
| $ | 101.7 |
|
| $ | 229.6 |
|
Unbilled Receivables and Contract Balances
The timing of revenue recognition may differ from the timing of invoicing customers and these timing differences result in unbilled receivables, contract assets or contract liabilities. Contract assets represent revenue recognized for performance obligations completed before an unconditional right to payment exists, and therefore invoicing has not yet occurred. Contract assetsUnbilled receivables are recorded when there is an unconditional right to payment and invoicing has not yet occurred. Unbilled receivables were $8.2$76.0 million at June 30, 2019March 31, 2020 and $8.7$33.5 million at December 31, 2018,2019. Contract assets were $14.5 million at March 31, 2020 and $8.9 million at December 31, 2019, respectively. Generally, the contract assets balance is impacted by the recognition of additional contract assets, offset by amounts invoiced to customers. For the sixthree months ended June 30, 2019,March 31, 2020, final amounts invoiced to customers exceeded estimates of standalone selling price as of January 1,December 31, 2019 for the related arrangements by approximately $1.4$0.1 million. ContractUnbilled receivables and contract assets are included in accounts receivable on the condensed consolidated balance sheet.Unaudited Condensed Consolidated Balance Sheets.
Contract liabilities consist of deferred revenue and progress billings which are included in accrued liabilities on the condensed consolidated balance sheet.Unaudited Condensed Consolidated Balance Sheets. Changes in contract liabilities for the sixthree months ended June 30,March 31, 2020 and 2019, and 2018, respectively, were as follows:
Balance at January 1, 2019 | $ | 12.0 |
| |||
Balance at January 1, 2020 | $ | 13.1 |
| |||
Deferral of revenue |
| 25.1 |
|
| 11.2 |
|
Revenue recognized |
| (25.2 | ) |
| (9.6 | ) |
Balance at June 30, 2019 | $ | 11.9 |
| |||
Balance at March 31, 2020 | $ | 14.7 |
|
Balance at January 1, 2018 | $ | 14.2 |
|
Deferral of revenue |
| 22.8 |
|
Revenue recognized |
| (23.8 | ) |
Reclassified to liabilities held for sale |
| (1.7 | ) |
Balance at June 30, 2018 | $ | 11.5 |
|
Balance at January 1, 2019 | $ | 12.0 |
|
Deferral of revenue |
| 12.2 |
|
Revenue recognized |
| (12.6 | ) |
Balance at March 31, 2019 | $ | 11.6 |
|
Note 3. Acquisitions and Dispositions
Acquisition
On December 18, 2018, the Company acquired eBrevia, a leading provider of artificial intelligence-based data extraction and contract analytics software solutions. The eBrevia technology provides leading enterprise contract review and analysis solutions, leveraging machine learning to produce faster and more accurate results. eBrevia's software, which extracts and summarizes key legal provisions and other information, can be used in due diligence, contract management, lease abstraction and document drafting. The acquisition enhances the Company’s Venue Deal Solutions offerings to provide clients with secure data aggregation, due diligence, compliance and risk management solutions. The Company previously held a 12.8% investment in eBrevia prior to the acquisition. The purchase price for the remaining equity of eBrevia, which includes the Company’s estimate of contingent consideration, was $23.3 million, net of cash acquired of $0.2 million. $1.8 million of the purchase price, excluding contingent consideration and amounts held in escrow, remains payable as of June 30, 2019. The fair value of the Company’s previously held investment was $3.3 million, resulting in the recognition of a $1.8 million gain, which is reflected in investment and other income in the consolidated statements of operations for the year ended December 31, 2018. The fair value of the previously held investment was determined based on the purchase price paid for the remaining equity less an estimated control premium. The former owners of eBrevia, excluding the Company, may receive additional contingent consideration of up to $3.5 million in cash subject to eBrevia achieving certain financial targets during the twenty-four months post acquisition. As of the acquisition date and June 30, 2019, the Company estimated the fair value of contingent consideration to be $0.8 million using a probability weighting of the potential payouts. Subsequent changes in the estimated contingent consideration from the final purchase price allocation will be recognized in the Company’s consolidated statement of operations. The operations of eBrevia are included within the Capital Markets reporting unit in the U.S. segment.
During the three and six months ended June 30, 2019, there were no acquisition-related expenses. For the three and six months ended June 30, 2018, the Company recorded $0.3 million and $0.5 million, respectively, of acquisition-related expenses associated with acquisitions completed or contemplated within selling, general and administrative expenses in the condensed consolidated statement of operations.
The eBrevia acquisition was recorded by allocating the cost of the acquisition to the assets acquired, including other intangible assets, based on their estimated fair values at the acquisition date. The excess of the cost of the acquisition over the net amounts assigned to the fair value of the assets acquired was recorded as goodwill.
There is no tax deductible goodwill related to the eBrevia acquisition.
1213
Donnelley Financial Solutions, Inc. and Subsidiaries (“DFIN”)
Notes to the Unaudited Condensed Consolidated Financial Statements (continued)
(in millions, except per share data, unless otherwise indicated)
The purchase price allocation for eBrevia is preliminary as the Company is still in the process of obtaining data to finalize the estimated fair values of certain deferred tax account balances. The final purchase price allocation may differ from what is currently reflected in the consolidated financial statements. Based on the current valuation, the preliminary purchase price allocation for this acquisition is as follows:
Accounts receivable | $ | 0.3 |
|
Other intangible assets |
| 11.4 |
|
Software |
| 0.8 |
|
Goodwill |
| 12.9 |
|
Accounts payable and accrued liabilities |
| (0.4 | ) |
Deferred taxes-net |
| (1.7 | ) |
Total purchase price-net of cash acquired |
| 23.3 |
|
Less: fair value of the Company's previously held investment in eBrevia |
| (3.3 | ) |
Less: fair value of contingent consideration |
| (0.8 | ) |
Less: payable for initial consideration |
| (1.8 | ) |
Less: amounts held in escrow and liabilities assumed |
| (2.2 | ) |
Net cash paid | $ | 15.2 |
|
Disposition
On July 22, 2018, the Company sold its Language Solutions business, which helped companies adapt their business content into different languages for specific countries, markets and regions, for net proceeds of $77.5 million in cash, all of which was received as of December 31, 2018, resulting in a gain of $53.8 million, which was recognized in other operating income in the consolidated statement of operations for the year ended December 31, 2018. During the three and six months ended June 30, 2019, the Company recognized a $2.8 million loss in other operating loss in the consolidated statement of operations for the estimated payment of amounts related to the disposition of the Language Solutions business. Language Solutions' operating results were included within the Language Solutions reporting unit within the U.S. segment as well as the International segment.
Note 4. Inventories
The components of the Company’s inventories, net of excess and obsolescence reserves for raw materials, at June 30, 2019 and December 31, 2018 were as follows:
| June 30, 2019 |
|
| December 31, 2018 |
| ||
Raw materials and manufacturing supplies | $ | 4.1 |
|
| $ | 4.0 |
|
Work in process |
| 8.9 |
|
|
| 8.1 |
|
Total | $ | 13.0 |
|
| $ | 12.1 |
|
Note 5. Property, Plant and Equipment
The components of the Company’s property, plant and equipment at June 30, 2019 and December 31, 2018 were as follows:
| June 30, 2019 |
|
| December 31, 2018 |
| ||
Land | $ | 10.0 |
|
| $ | 10.0 |
|
Buildings |
| 37.7 |
|
|
| 36.2 |
|
Machinery and equipment |
| 112.9 |
|
|
| 106.3 |
|
|
| 160.6 |
|
|
| 152.5 |
|
Less: Accumulated depreciation |
| (123.6 | ) |
|
| (120.3 | ) |
Total | $ | 37.0 |
|
| $ | 32.2 |
|
Depreciation expense was $1.8 million and $1.9 million for the three months ended June 30, 2019 and 2018, respectively, and $3.3 million and $3.8 million for the six months ended June 30, 2019 and 2018.
13
Donnelley Financial Solutions, Inc.
Notes to the Unaudited Condensed Consolidated Financial Statements
(in millions, except per share data, unless otherwise indicated)
Note 6.3. Goodwill and Other Intangible Assets
As discussed in Note 1, Overview, Basis of Presentation and Significant Accounting Policies, during the first quarter of 2020, management realigned the Company’s operating segments. DFIN’s 4 operating segments are the same as its reporting units: CM-SS; CM-CCM; IC-SS; IC-CCM (“Current Structure”). The changes inCompany previously had 3 reporting units: Capital Markets, Investment Markets and International (“Previous Structure”), that each had goodwill.
As a result of the new segmentation, a goodwill impairment analysis was completed for the Previous Structure, before the reallocation of goodwill to the Current Structure. Each of the reporting units under the Previous Structure was reviewed for impairment using a quantitative assessment, where the estimated fair value of each reporting unit was compared to its carrying amount, including goodwill. The Company did not recognize any goodwill impairment as the estimated fair values of all reporting units exceeded their respective carrying amounts. In addition to the impairment analysis under the Previous Structure, a goodwill impairment analysis was completed under the Current Structure and 0 goodwill impairment was recognized as the estimated fair values of all reporting units exceeded their respective carrying amounts. Goodwill was reassigned to the Current Structure using a relative fair value approach.
The balances of goodwill by segment for the six months ended June 30, 2019 were as follows:are presented below:
| U.S. |
|
| International |
|
| Total |
| |||
Net book value as of December 31, 2018 | $ | 438.5 |
|
| $ | 11.5 |
|
| $ | 450.0 |
|
Purchase accounting adjustments |
| 0.1 |
|
|
| — |
|
|
| 0.1 |
|
Foreign exchange and other adjustments |
| — |
|
|
| 0.2 |
|
|
| 0.2 |
|
Net book value as of June 30, 2019 | $ | 438.6 |
|
| $ | 11.7 |
|
| $ | 450.3 |
|
| March 31, 2020 |
| |
Capital Markets - Software Solutions | $ | 103.6 |
|
Capital Markets - Compliance and Communication Management |
| 252.5 |
|
Investment Companies - Software Solutions |
| 53.0 |
|
Investment Companies - Compliance and Communication Management |
| 40.6 |
|
Total | $ | 449.7 |
|
The components of other intangible assets at June 30, 2019March 31, 2020 and December 31, 20182019 were as follows:
| June 30, 2019 |
|
| December 31, 2018 |
| ||||||||||||||||||
| Gross |
|
|
|
|
|
|
|
|
|
| Gross |
|
|
|
|
|
|
|
|
| ||
| Carrying |
|
| Accumulated |
|
| Net Book |
|
| Carrying |
|
| Accumulated |
|
| Net Book |
| ||||||
| Amount |
|
| Amortization |
|
| Value |
|
| Amount |
|
| Amortization |
|
| Value |
| ||||||
Customer relationships | $ | 149.6 |
|
| $ | (120.5 | ) |
| $ | 29.1 |
|
| $ | 149.3 |
|
| $ | (113.1 | ) |
| $ | 36.2 |
|
Trade names |
| 3.9 |
|
|
| (3.0 | ) |
|
| 0.9 |
|
|
| 3.9 |
|
|
| (2.9 | ) |
|
| 1.0 |
|
Total other intangible assets | $ | 153.5 |
|
| $ | (123.5 | ) |
| $ | 30.0 |
|
| $ | 153.2 |
|
| $ | (116.0 | ) |
| $ | 37.2 |
|
| March 31, 2020 |
|
| December 31, 2019 |
| ||||||||||||||||||||||||||
| Gross Carrying Amount |
|
| Accumulated Impairment Charges |
|
| Accumulated Amortization |
|
| Net Book Value |
|
| Gross Carrying Amount |
|
| Accumulated Impairment Charges |
|
| Accumulated Amortization |
|
| Net Book Value |
| ||||||||
Customer relationships (useful life of 10-15 years) | $ | 148.6 |
|
| $ | (1.0 | ) |
| $ | (130.0 | ) |
| $ | 17.6 |
|
| $ | 149.8 |
|
| $ | (1.0 | ) |
| $ | (127.7 | ) |
| $ | 21.1 |
|
Trade names (useful life of 5 years) |
| 3.9 |
|
|
| — |
|
|
| (3.1 | ) |
|
| 0.8 |
|
|
| 3.9 |
|
|
| — |
|
|
| (3.1 | ) |
|
| 0.8 |
|
Total other intangible assets | $ | 152.5 |
|
| $ | (1.0 | ) |
| $ | (133.1 | ) |
| $ | 18.4 |
|
| $ | 153.7 |
|
| $ | (1.0 | ) |
| $ | (130.8 | ) |
| $ | 21.9 |
|
Amortization expense for other intangible assets was $3.6$3.4 million and $3.5$3.7 million for the three months ended June 30,March 31, 2020 and 2019, and 2018, respectively, and $7.3 million and $6.9 million forrespectively. The weighted-average remaining useful life of the six months ended June 30, 2019 and 2018, respectively.unamortized intangible assets as of March 31, 2020 is approximately seven years.
The following table outlines the estimated annual amortization expense related to other intangible assets as of June 30, 2019:assets:
For the year ending December 31, | Amount |
| Amount |
| ||
2019 | $ | 14.6 |
| |||
2020 |
| 13.0 |
| |||
2020 (excluding the three months ended March 31, 2020) | $ | 8.9 |
| |||
2021 |
| 0.9 |
|
| 0.9 |
|
2022 |
| 0.9 |
|
| 0.9 |
|
2023 |
| 0.9 |
|
| 0.9 |
|
2024 and thereafter |
| 7.0 |
| |||
2024 |
| 0.7 |
| |||
2025 and thereafter |
| 6.1 |
| |||
Total | $ | 37.3 |
| $ | 18.4 |
|
14
Donnelley Financial Solutions, Inc. and Subsidiaries (“DFIN”)
Notes to the Unaudited Condensed Consolidated Financial Statements (continued)
(in millions, except per share data, unless otherwise indicated)
Note 7.4. Leases
In February 2016, the FASB issued Accounting Standards Update No. 2016-02 “Leases (Topic 842)” (“ASU 2016-02”), which requires lessees to put most leases on the balance sheet but recognize expense on the income statement in a manner similar to current accounting. For lessors, ASU 2016-02 also modifies the classification criteria and the accounting for sales-type and direct financing leases. On January 1, 2019, the Company adopted the standard and all related amendments, using the optional transition method applied to leases at the adoption date. The comparative periods have not been restated and continue to be reported under the accounting standards in effect for those periods.
The Company elected the optional package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs. The Company also elected the practical expedient to not separate lease components from non-lease components for real estate leases. As a result of the adoption of ASU 2016-02, the Company recognized a lease liability of $101.6 million and a right-of-use (“ROU”) asset of $100.8 million for operating leases at January 1, 2019.
The Company has operating leases for certain service centers, office space, warehouses and equipment. Operating lease ROU assetsThe Company paid $6.8 million and $6.6 million related to its operating lease liabilities are recognized based on the present value of future minimum lease payments over the lease term at commencement date. Upon adoption of ASU 2016-02, ROU assets were adjusted for deferred rent, restructuring liabilities, prepaids and favorable/onerous lease balances as of January 1, 2019. Lease expense is recognized on a straight-line basis over the expected lease term. The Company’s incremental borrowing rate is used in determining the present value of future payments at the commencement date of the lease, or for the adoption of ASU 2016-02, at January 1, 2019. Balances related to operating leases are included in ROU assets, accrued liabilitiesthree months ended March 31, 2020 and noncurrent lease liabilities on the condensed consolidated balance sheet.
14
Donnelley Financial Solutions, Inc.
Notes to the Unaudited Condensed Consolidated Financial Statements
(in millions, except per share data, unless otherwise indicated)
All real estate leases are recorded on the balance sheet. Equipment and other non-real estate leases with an initial term of twelve months or less are not recorded on the balance sheet. Lease agreements for some locations provide for rent escalations and renewal options. Lease terms include the option to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Certain real estate leases require payment for taxes, insurance and maintenance which are considered non-lease components. The Company accounts for real estate leases and the related fixed non-lease components together as a single component.
The Company determines if an arrangement is a lease at inception. The Company must consider whether the contract conveys the right to control the use of an identified asset. Certain arrangements require significant judgment to determine if an asset is specified in the contract and if the Company directs how and for what purpose the asset is used during the term of the contract.
The Company has non-cancelable sublease rental arrangements which did not reduce the future maturities of the operating lease liabilities at June 30,March 31, 2019, and did not reduce future rental commitments at December 31, 2018.
respectively.
The components of lease expense for the three and six months ended June 30,March 31, 2020 and 2019 were as follows:
| Three months ended |
|
| Six months ended |
| Three Months Ended March 31, |
| |||||||
| June 30, 2019 |
|
| June 30, 2019 |
| 2020 |
|
| 2019 |
| ||||
Operating lease expense | $ | 6.4 |
|
| $ | 13.2 |
| $ | 6.7 |
|
| $ | 6.8 |
|
Sublease income |
| (1.7 | ) |
|
| (2.5 | ) |
| (1.3 | ) |
|
| (0.8 | ) |
Net lease expense | $ | 4.7 |
|
| $ | 10.7 |
| $ | 5.4 |
|
| $ | 6.0 |
|
Other information related to operating leases as of and forThe Company’s lease liabilities are presented within the six months ended June 30, 2019 wereCompany’s Unaudited Condensed Consolidated Balance Sheets as follows:
|
| |
|
| |
|
|
|
| March 31, 2020 |
|
| December 31, 2019 |
| ||
Accrued liabilities | $ | 22.1 |
|
| $ | 22.6 |
|
Noncurrent lease liabilities |
| 57.8 |
|
|
| 57.9 |
|
Total | $ | 79.9 |
|
| $ | 80.5 |
|
| Six months ended |
| |
Lease Liabilities | June 30, 2019 |
| |
Cash paid related to lease liabilities | $ | 13.7 |
|
Non-cash disclosure: |
|
|
|
Increase in lease liabilities due to new ROU assets | $ | 2.3 |
|
Decrease in lease liabilities due to lease modifications and remeasurements |
| (7.6 | ) |
Maturities of lease liabilities for operating leases as of June 30, 2019 were as follows:
| Amount |
| |
2019 (a) | $ | 13.8 |
|
2020 |
| 23.7 |
|
2021 |
| 18.6 |
|
2022 |
| 14.2 |
|
2023 |
| 10.0 |
|
2024 and thereafter |
| 16.4 |
|
Total lease payments |
| 96.7 |
|
Less: Interest |
| (11.4 | ) |
Present value of lease liabilities | $ | 85.3 |
|
|
|
As of June 30, 2019 |
|
|
|
Accrued liabilities | $ | 22.5 |
|
Noncurrent lease liabilities |
| 62.8 |
|
Total | $ | 85.3 |
|
15
Donnelley Financial Solutions, Inc.
Notes to the Unaudited Condensed Consolidated Financial Statements
(in millions, except per share data, unless otherwise indicated)
Disclosures related to periods prior to adoption of ASU 2016-02
Future minimum rental commitments under non-cancellable operating leases as of December 31, 2018 were expected to be as follows:
Year ended December 31 | Amount |
| |
2019 | $ | 26.4 |
|
2020 |
| 22.6 |
|
2021 |
| 16.6 |
|
2022 |
| 10.9 |
|
2023 |
| 8.7 |
|
2024 and thereafter |
| 16.3 |
|
Total | $ | 101.5 |
|
Rent expense for facilities in use and equipment was $6.2 million and $12.6 million for the three and six months ended June 30, 2018, respectively.
Note 8.5. Restructuring, Impairment and Other Charges
Restructuring, Impairment and Other Charges recognized in Results of Operations
For the three months ended June 30,March 31, 2020 and 2019, and 2018, the Company recorded the following net restructuring charges:
Three Months Ended |
| Employee |
|
| Total Restructuring |
|
|
|
|
| ||
June 30, 2019 |
| Terminations |
|
| Charges |
|
| Total |
| |||
U.S. |
| $ | 2.7 |
|
| $ | 2.7 |
|
| $ | 2.7 |
|
International |
|
| 0.4 |
|
|
| 0.4 |
|
|
| 0.4 |
|
Corporate |
|
| 0.7 |
|
|
| 0.7 |
|
|
| 0.7 |
|
Total |
| $ | 3.8 |
|
| $ | 3.8 |
|
| $ | 3.8 |
|
Three Months Ended |
| Employee |
|
| Other Restructuring |
|
| Total Restructuring |
|
|
|
|
| |||
June 30, 2018 |
| Terminations |
|
| Charges |
|
| Charges |
|
| Total |
| ||||
U.S. |
| $ | 0.4 |
|
| $ | 0.2 |
|
| $ | 0.6 |
|
| $ | 0.6 |
|
International |
|
| 1.9 |
|
|
| — |
|
|
| 1.9 |
|
|
| 1.9 |
|
Corporate |
|
| 0.1 |
|
|
| — |
|
|
| 0.1 |
|
|
| 0.1 |
|
Total |
| $ | 2.4 |
|
| $ | 0.2 |
|
| $ | 2.6 |
|
| $ | 2.6 |
|
For the six months ended June 30, 2019 and 2018, the Company recorded the following net restructuring and other charges:
Six Months Ended |
| Employee |
|
| Total Restructuring |
|
| Other |
|
|
|
|
| |||
June 30, 2019 |
| Terminations |
|
| Charges |
|
| Charges |
|
| Total |
| ||||
U.S. |
| $ | 3.2 |
|
| $ | 3.2 |
|
| $ | 0.1 |
|
| $ | 3.3 |
|
International |
|
| 1.0 |
|
|
| 1.0 |
|
|
| — |
|
|
| 1.0 |
|
Corporate |
|
| 1.6 |
|
|
| 1.6 |
|
|
| — |
|
|
| 1.6 |
|
Total |
| $ | 5.8 |
|
| $ | 5.8 |
|
| $ | 0.1 |
|
| $ | 5.9 |
|
Three Months Ended March 31, 2020 |
|
| Total Restructuring Charges |
|
| Other Charges |
|
| Total |
| |||
Capital Markets - Software Solutions |
|
| $ | 0.3 |
|
| $ | — |
|
| $ | 0.3 |
|
Capital Markets - Compliance and Communication Management |
|
|
| 0.4 |
|
|
| 0.1 |
|
|
| 0.5 |
|
Investment Companies - Software Solutions |
|
|
| 0.3 |
|
|
| — |
|
|
| 0.3 |
|
Investment Companies - Compliance and Communication Management |
|
|
| 0.4 |
|
|
| — |
|
|
| 0.4 |
|
Corporate |
|
|
| 0.2 |
|
|
| 1.4 |
|
|
| 1.6 |
|
Total |
|
| $ | 1.6 |
|
| $ | 1.5 |
|
| $ | 3.1 |
|
Six Months Ended |
| Employee |
|
| Other Restructuring |
|
| Total Restructuring |
|
| Other |
|
|
|
|
| ||||
June 30, 2018 |
| Terminations |
|
| Charges |
|
| Charges |
|
| Charges |
|
| Total |
| |||||
U.S. |
| $ | 0.5 |
|
| $ | 0.7 |
|
| $ | 1.2 |
|
| $ | 0.1 |
|
| $ | 1.3 |
|
International |
|
| 1.8 |
|
|
| — |
|
|
| 1.8 |
|
|
| — |
|
|
| 1.8 |
|
Corporate |
|
| 0.2 |
|
|
| — |
|
|
| 0.2 |
|
|
| — |
|
|
| 0.2 |
|
Total |
| $ | 2.5 |
|
| $ | 0.7 |
|
| $ | 3.2 |
|
| $ | 0.1 |
|
| $ | 3.3 |
|
Three Months Ended March 31, 2019 |
|
| Total Restructuring Charges |
|
| Other Charges |
|
| Total |
| |||
Capital Markets - Software Solutions |
|
| $ | 0.3 |
|
| $ | — |
|
| $ | 0.3 |
|
Capital Markets - Compliance and Communication Management |
|
|
| 0.8 |
|
|
| 0.1 |
|
|
| 0.9 |
|
Investment Companies - Software Solutions |
|
|
| 0.1 |
|
|
| — |
|
|
| 0.1 |
|
Investment Companies - Compliance and Communication Management |
|
|
| 0.4 |
|
|
| — |
|
|
| 0.4 |
|
Corporate |
|
|
| 0.4 |
|
|
| — |
|
|
| 0.4 |
|
Total |
|
| $ | 2.0 |
|
| $ | 0.1 |
|
| $ | 2.1 |
|
For the three months ended March 31, 2020, the Company recorded net restructuring charges of $1.6 million for employee termination costs for 51 employees, substantially all of whom were terminated as of March 31, 2020. These charges primarily related to the reorganization of certain operations. For the three months ended March 31, 2020, the Company also incurred $1.5 million of other charges, primarily related to the realignment of the Company’s operating segments, as further described in Note 13, Segment Information.
1615
Donnelley Financial Solutions, Inc. and Subsidiaries (“DFIN”)
Notes to the Unaudited Condensed Consolidated Financial Statements (continued)
(in millions, except per share data, unless otherwise indicated)
For the three and six months ended June 30,March 31, 2019, the Company recorded net restructuring charges of $3.8$2.0 million and $5.8 million, respectively, for employee termination costs for 16472 employees, substantially all of whom were terminated as of June 30,March 31, 2019. These charges primarily related to the reorganization of certain operations. For the six months ended June 30, 2019, the Company also incurred $0.1 million for other charges associated with Company’s decision to withdraw in 2013 from certain multi-employer pension plans serving facilities that continued to operate.
For the three and six months ended June 30, 2018, the Company recorded net restructuring charges of $2.4 million and $2.5 million, respectively, for employee termination costs for 47 employees, all of whom were terminated as of June 30, 2019. These charges primarily related to the reorganization of certain operations. Additionally, the Company incurred net lease termination and other restructuring cost of $0.2 million and $0.7 million, respectively, for the three and six months ended June 30, 2018.
Restructuring Reserve
The restructuring reserve as of December 31, 20182019 and June 30, 2019,March 31, 2020, and changes during the sixthree months ended June 30, 2019,March 31, 2020, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| December 31, |
|
| Restructuring |
|
|
|
|
|
| Adoption of |
|
| Cash |
|
| June 30, |
| ||||||
| 2018 |
|
| Charges |
|
| Reversals |
|
| ASU 2016-02 |
|
| Paid |
|
| 2019 |
| |||||||
Employee terminations | $ | 0.4 |
|
| $ | 5.9 |
|
| $ | (0.1 | ) |
| $ | — |
|
| $ | (3.3 | ) |
| $ | 2.9 |
| |
Lease terminations |
| 1.1 |
|
|
| — |
|
|
| — |
|
|
| (1.1 | ) |
|
| — |
|
|
| — |
| |
Other |
| 0.2 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 0.2 |
| |
Total | $ | 1.7 |
|
| $ | 5.9 |
|
| $ | (0.1 | ) |
| $ | (1.1 | ) |
| $ | (3.3 | ) |
| $ | 3.1 |
|
| December 31, 2019 |
|
| Restructuring Charges |
|
| Reversals |
|
| Cash Paid |
|
| March 31, 2020 |
| |||||
Employee terminations | $ | 1.9 |
|
| $ | 1.7 |
|
| $ | (0.1 | ) |
| $ | (1.6 | ) |
| $ | 1.9 |
|
The current portion of restructuring reserves of $3.0$1.8 million at June 30, 2019March 31, 2020 was included in accrued liabilities, while the long-term portion of $0.1 million was included in other noncurrent liabilities at June 30, 2019.March 31, 2020.
The Company anticipates that payments associated with the employee terminations reflected in the table above will be substantially completed by December 31, 2019.2020.
The restructuring liabilities classified as “lease terminations” consisted of lease terminations, other facility closing costs and contract termination costs. Upon adoption of ASU 2016-02, the restructuring liabilities as of January 1, 2019 were recorded as a reduction to the related ROU assets recorded on January 1, 2019. Refer to Note 7, Leases, for further information.
Note 9.6. Retirement Plans
The components of the estimated net pension plan income for DFIN’sthe Company’s pension plans for the three and six months ended June 30,March 31, 2020 and 2019 and 2018 were as follows:
| Three Months Ended |
|
| Six Months Ended |
| Three Months Ended March 31, |
| |||||||||||||||
| June 30, |
|
| June 30, |
| 2020 |
|
| 2019 |
| ||||||||||||
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| |||||||||||
Pension expense (income) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Interest cost | $ | 2.7 |
|
| $ | 2.5 |
|
| $ | 5.5 |
|
| $ | 5.1 |
| $ | 2.2 |
|
| $ | 2.8 |
|
Expected return on assets |
| (3.7 | ) |
|
| (4.0 | ) |
|
| (7.4 | ) |
|
| (8.0 | ) |
| (3.5 | ) |
|
| (3.7 | ) |
Amortization, net |
| 0.5 |
|
|
| 0.7 |
|
|
| 0.9 |
|
|
| 1.3 |
|
| 0.8 |
|
|
| 0.4 |
|
Net pension income | $ | (0.5 | ) |
| $ | (0.8 | ) |
| $ | (1.0 | ) |
| $ | (1.6 | ) | $ | (0.5 | ) |
| $ | (0.5 | ) |
Note 7. Commitments and Contingencies
Litigation
From time to time, the Company’s customers and others file voluntary petitions for reorganization under United States bankruptcy laws. In such cases, certain pre-petition payments received by the Company from these parties could be considered preference items and subject to return. In addition, the Company may be party to certain litigation arising in the ordinary course of business. Management believes that the final resolution of these preference items and litigation will not have a material effect on the Company’s consolidated results of operations, financial position or cash flows.
Note 10. Earnings per Share8. Debt
The Company’s debt as of March 31, 2020 and December 31, 2019 consisted of the following:
| March 31, 2020 |
|
| December 31, 2019 |
| ||
8.25% senior notes due October 15, 2024 | $ | 233.5 |
|
| $ | 300.0 |
|
Borrowings under the Revolving Facility |
| 106.0 |
|
|
| — |
|
Unamortized debt issuance costs |
| (2.9 | ) |
|
| (4.0 | ) |
Total long-term debt | $ | 336.6 |
|
| $ | 296.0 |
|
Maturities—At March 31, 2020, the Company’s long-term debt was comprised of the 8.25% senior unsecured notes due October 15, 2024 (“Notes”) and borrowings under the Revolving Facility, as defined below.
Basic earnings per share is calculated by dividing net earnings by the weighted average number of common shares outstanding for the period. In computing diluted earnings per share, basic earnings per share is adjusted for the assumed issuance of all potentially dilutive share-based awards, including stock options, restricted stock units, performance share units and restricted stock.
1716
Donnelley Financial Solutions, Inc. and Subsidiaries (“DFIN”)
Notes to the Unaudited Condensed Consolidated Financial Statements (continued)
(in millions, except per share data, unless otherwise indicated)
Fair Value—The fair value of the Notes, which was determined using the market approach based upon interest rates available to the Company for borrowings with similar terms and maturities, was determined to be Level 2 under the fair value hierarchy. The fair value of the Company’s Notes was $212.0 and $308.4 million at March 31, 2020 and December 31, 2019, respectively.
8.25% Senior Notes Due 2024—In the first quarter of 2020, the Company purchased and retired $66.5 million (notional amount) of the Notes at an average price of 95.25 and recognized a pre-tax gain on the extinguishment of debt of $2.3 million, which was net of unamortized debt issuance costs, and is recorded within interest expense, net in the Unaudited Condensed Consolidated Statements of Operations.
The Company’s share-based compensation planNotes, with interest payable semi-annually on April 15 and October 15, were issued pursuant to an indenture where certain wholly-owned domestic subsidiaries of the Company guarantee the Notes (the “Guarantors”). The Notes are jointly and severally guaranteed, on an unsecured basis, by the Guarantors, which are comprised of each of the Company’s existing and future direct and indirect wholly-owned U.S. subsidiaries that guarantee the Company’s obligations under the Credit Facilities. The Notes are not guaranteed by the Company’s foreign subsidiaries or unrestricted subsidiaries. The Notes and the related guarantees will be the Company and the Guarantors’, respective, senior unsecured obligations and rank equally in right of payment to all present and future senior debt, including the obligations under the Company’s Credit Facilities, senior in right of payment to all present and future subordinated debt, and effectively subordinated in right of payment to any of the Company and the Guarantors’ secured debt, to the extent of the value of the assets securing such debt. The indenture governing the Notes contains certain covenants applicable to the Company and its restricted subsidiaries, including limitations on: (1) liens; (2) indebtedness; (3) mergers, consolidations and acquisitions; (4) sales, transfers and other dispositions of assets; (5) loans and other investments; (6) dividends and other distributions, stock repurchases and redemptions and other restricted payments; (7) restrictions affecting subsidiaries; (8) transactions with affiliates; and (9) designations of unrestricted subsidiaries. Each of these covenants is subject to important exceptions and qualifications.
Credit Agreement—On September 30, 2016, the Company entered into a Credit Agreement, as amended (“the Credit Agreement”) by and among the Company, the lenders party thereto from time to time and JP Morgan Chase Bank, N.A., as administrative agent. The Credit Agreement provides for a $350.0 million senior secured term loan B facility (the “Term Loan Credit Facility”) and a $300.0 million senior secured revolving credit facility (the “Revolving Facility”, and, together with the Term Loan Credit Facility, the “Credit Facilities”). The Credit Agreement contains a number of covenants, including a minimum Interest Coverage Ratio and a maximum Leverage Ratio, as defined in and calculated pursuant to the Credit Agreement, that, in part, restrict the Company’s ability to incur additional indebtedness, create liens, engage in mergers and consolidations, make restricted payments and dispose of certain assets. The Credit Agreement generally allows annual dividend payments of up to $20.0 million in the aggregate. As of December 31, 2019, the Company paid off its Term Loan Credit Facility.
Revolving Credit Facility—On December 18, 2018, the Company entered into a second amendment to the Credit Agreement which it may grant future awards,extended the maturity date of the Revolving Facility to December 18, 2023. As of March 31, 2020, there was $106.0 million of borrowings outstanding under the Revolving Facility. The weighted average interest rate on borrowings under the Revolving Facility was 3.8% and 5.1% for the three months ended March 31, 2020 and 2019, respectively.
The following table summarizes interest expense, net included in the Unaudited Condensed Consolidated Statements of Operations:
| Three Months Ended March 31, |
| |||||
| 2020 |
|
| 2019 |
| ||
Interest incurred | $ | 6.9 |
|
| $ | 8.9 |
|
Less: Gain on debt extinguishment |
| (2.3 | ) |
|
| — |
|
Interest expense, net | $ | 4.6 |
|
| $ | 8.9 |
|
17
Donnelley Financial Solutions, Inc. Amended and Restated 2016 Performance Incentive Plan (as amended,Subsidiaries (“DFIN”)
Notes to the “2016 PIP”), was approved by the Board of Directors to provide incentives to key employees of the Company. Awards under the 2016 PIP may include, cash or stock bonuses, stock options, stock appreciation rights, restricted stock or restricted stock units (“RSUs”). In addition, non-employee members of the Board of Directors may receive awards under the 2016 PIP. On May 30, 2019, the Board of Directors authorized 3.4 million additional shares of common stock for issuance under the 2016 PIP. At June 30, 2019, there were 3.1 million remaining shares of common stock authorized and available for grant under the 2016 PIP.Unaudited Condensed Consolidated Financial Statements (continued)
The reconciliation of the numerator and denominator of the basic and diluted earnings(in millions, except per share calculation and the anti-dilutive share-based awards for the three and six months ended June 30, 2019 and 2018 were as follows:data, unless otherwise indicated)
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
| June 30 |
|
| June 30 |
| ||||||||||
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Net earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic | $ | 0.51 |
|
| $ | 0.56 |
|
| $ | 0.47 |
|
| $ | 0.79 |
|
Diluted | $ | 0.51 |
|
| $ | 0.56 |
|
| $ | 0.47 |
|
| $ | 0.78 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings | $ | 17.3 |
|
| $ | 18.9 |
|
| $ | 15.9 |
|
| $ | 26.6 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding |
| 34.1 |
|
|
| 33.8 |
|
|
| 34.0 |
|
|
| 33.7 |
|
Dilutive awards |
| 0.1 |
|
|
| 0.2 |
|
|
| 0.1 |
|
|
| 0.2 |
|
Diluted weighted average number of common shares outstanding |
| 34.2 |
|
|
| 34.0 |
|
|
| 34.1 |
|
|
| 33.9 |
|
Weighted average number of anti-dilutive share-based awards: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units |
| 0.3 |
|
|
| 0.2 |
|
|
| 0.4 |
|
|
| 0.4 |
|
Stock options |
| 0.8 |
|
|
| 0.6 |
|
|
| 0.8 |
|
|
| 0.6 |
|
Total |
| 1.1 |
|
|
| 0.8 |
|
|
| 1.2 |
|
|
| 1.0 |
|
Note 9. Earnings per Share
Basic earnings (loss) per share is calculated by dividing net earnings (loss) by the weighted average number of common shares outstanding for the period. In computing diluted earnings per share, basic earnings per share is adjusted for the assumed issuance of all potentially dilutive share-based awards, including stock options, restricted stock units, performance share units and restricted stock.
The reconciliation of the numerator and denominator of the basic and diluted earnings (loss) per share calculation and the anti-dilutive share-based awards for the three months ended March 31, 2020 and 2019 were as follows:
| Three Months Ended March 31, |
| |||||
| 2020 |
|
| 2019 |
| ||
Net earnings (loss) per share: |
|
|
|
|
|
|
|
Basic | $ | 0.12 |
|
| $ | (0.04 | ) |
Diluted | $ | 0.12 |
|
| $ | (0.04 | ) |
Numerator: |
|
|
|
|
|
|
|
Net earnings (loss) | $ | 4.1 |
|
| $ | (1.4 | ) |
Denominator: |
|
|
|
|
|
|
|
Weighted average number of common shares outstanding |
| 34.2 |
|
|
| 34.0 |
|
Dilutive awards |
| 0.1 |
|
|
| — |
|
Diluted weighted average number of common shares outstanding |
| 34.3 |
|
|
| 34.0 |
|
Weighted average number of anti-dilutive share-based awards: |
|
|
|
|
|
|
|
Restricted stock units |
| 0.9 |
|
|
| 0.1 |
|
Stock options |
| 0.8 |
|
|
| 0.7 |
|
Total |
| 1.7 |
|
|
| 0.8 |
|
Note 10. Share-Based Compensation
The Company’s share-based compensation plan under which it may grant future awards, the Donnelley Financial Solutions, Inc. Amended and Restated 2016 Performance Incentive Plan (“2016 PIP”), was approved by the Board of Directors (the “Board”) and the Company’s shareholders on May 18, 2017, and provides incentives to key employees of the Company. Awards under the 2016 PIP may include cash or stock bonuses, stock options, stock appreciation rights, restricted stock, performance share units (“PSUs”), performance cash awards or restricted stock units (“RSUs”). In addition, non-employee members of the Board may receive awards under the 2016 PIP. On May 30, 2019, the Company’s shareholders voted to approve 3.4 million additional shares of common stock for issuance under the 2016 PIP. At March 31, 2020, there were 1.8 million remaining shares of common stock authorized and available for grant under the 2016 PIP.
The Company recognizes compensation expense for the share-based awards based on estimated grant date fair values as well as certain assumptions, as further disclosed in Note 18, Share-Based Compensation, of the Company’s Annual Report.
Total compensation expense related to all share-based compensation plans was $2.3 million and $1.5 million for the three months ended March 31, 2020 and 2019, respectively. The income tax benefit related to share-based compensation expense was $0.1 million and $0.4 million, respectively. As of March 31, 2020, $20.8 million of total unrecognized expense related to share-based compensation awards is expected to be recognized over a weighted-average period of 2.4 years.
18
Donnelley Financial Solutions, Inc. and Subsidiaries (“DFIN”)
Notes to the Unaudited Condensed Consolidated Financial Statements (continued)
(in millions, except per share data, unless otherwise indicated)
Stock Options
There were 0 stock options granted during the three months ended March 31, 2020. A summary of activity and weighted average exercise prices related to the stock options were as follows:
| Shares Under Option (thousands) |
|
| Weighted Average Exercise Price |
| ||
Outstanding at December 31, 2019 |
| 796 |
|
| $ | 19.83 |
|
Cancelled/forfeited/expired |
| (52 | ) |
|
| 33.52 |
|
Outstanding at March 31, 2020 |
| 744 |
|
| $ | 18.89 |
|
Vested and expected to vest at March 31, 2020 |
| 728 |
|
| $ | 18.93 |
|
Vested at March 31, 2020 |
| 416 |
|
| $ | 20.45 |
|
As of March 31, 2020, $1.7 million of unrecognized compensation expense related to stock options is expected to be recognized over a weighted average period of 2.1 years.
Restricted Stock Units
RSU awards as of December 31, 2019 and March 31, 2020 and changes during the three months ended March 31, 2020, were as follows:
| Shares (thousands) |
|
| Weighted Average Grant Date Fair Value |
| ||
Nonvested at December 31, 2019 |
| 870 |
|
| $ | 15.79 |
|
Granted |
| 911 |
|
|
| 8.98 |
|
Vested |
| (296 | ) |
|
| 17.33 |
|
Forfeited |
| (23 | ) |
|
| 12.15 |
|
Nonvested at March 31, 2020 |
| 1,462 |
|
| $ | 11.30 |
|
As of March 31, 2020, $13.9 million of unrecognized compensation expense related to RSUs is expected to be recognized over a weighted-average period of 2.4 years.
Performance Share Units
PSU awards as of December 31, 2019 and March 31, 2020 and changes during the three months ended March 31, 2020, were as follows:
| Shares (thousands) |
|
| Weighted Average Grant Date Fair Value |
| ||
Nonvested at December 31, 2019 |
| 537 |
|
| $ | 15.81 |
|
Granted |
| 346 |
|
|
| 8.98 |
|
Vested |
| (25 | ) |
|
| 21.40 |
|
Nonvested at March 31, 2020 |
| 858 |
|
| $ | 12.91 |
|
During the three months ended March 31, 2020, 345,900 PSUs were granted to certain executive officers and senior management, payable upon the achievement of certain established performance targets. The total potential payout for awards granted during the three months ended March 31, 2020, ranges from 0 to 691,800 shares.
Compensation expense related to PSUs granted in 2020, 2019, and 2018 is recognized based on 100%, 66% 43% attainment of the targeted performance metrics or approximately 346,000, 199,000, and 89,000 shares, for each respective period. As of March 31, 2020, $5.2 million of unrecognized compensation expense related to PSUs is expected to be recognized over a weighted average period of 2.4 years.
19
Donnelley Financial Solutions, Inc. and Subsidiaries (“DFIN”)
Notes to the Unaudited Condensed Consolidated Financial Statements (continued)
(in millions, except per share data, unless otherwise indicated)
Note 11. Capital Stock
The Company has 65 million shares of $0.01 par value common stock for issuance. DFIN’s common stock is currently traded under the ticker symbol “DFIN” on the New York Stock Exchange.
The Company has 1 million shares of $0.01 par value preferred stock authorized for issuance. The Board may divide the preferred stock into one or more series and fix the redemption, dividend, voting, conversion, sinking fund, liquidation and other rights. The Company has no present plans to issue any preferred stock.
Common Stock Repurchase—On February 4, 2020, the Board authorized a stock repurchase program, under which the Company is authorized to repurchase up to $25.0 million of its outstanding common stock from time to time in one or more transactions on the open market or in privately negotiated purchases in accordance with all applicable securities laws and regulations and all repurchases in the open market will be made in compliance with Rule 10b-18 under the Exchange Act. The timing and amount of any shares repurchased will be determined by the Company based on its evaluation of market conditions and other factors. Repurchases may also be made under a Rule 10b5-1 plan, which would permit shares to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws. The stock repurchase program will be effective through December 31, 2021, however, it may be suspended or discontinued at any time.
During the first quarter of 2020, the Company repurchased 615,896 shares in open market transactions for $3.8 million at an average price of $6.19 per share. As of March 31, 2020, the remaining authorized amount under the current authorization was approximately $21.2 million.
Note 12. Comprehensive Income
The components of other comprehensive income and income tax expense allocated to each component for the three and six months ended June 30,March 31, 2020 and 2019 and 2018 were as follows:
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||||||||||
| June 30, 2019 |
|
| June 30, 2019 |
| ||||||||||||||||||
| Before Tax |
|
| Income Tax |
|
| Net of Tax |
|
| Before Tax |
|
| Income Tax |
|
| Net of Tax |
| ||||||
| Amount |
|
| Expense |
|
| Amount |
|
| Amount |
|
| Expense |
|
| Amount |
| ||||||
Translation adjustments | $ | 0.5 |
|
| $ | — |
|
| $ | 0.5 |
|
| $ | 2.7 |
|
| $ | — |
|
| $ | 2.7 |
|
Adjustment for net periodic pension plan and other postretirement benefits plan cost |
| 0.4 |
|
|
| 0.1 |
|
|
| 0.3 |
|
|
| 1.0 |
|
|
| 0.3 |
|
|
| 0.7 |
|
Other comprehensive income | $ | 0.9 |
|
| $ | 0.1 |
|
| $ | 0.8 |
|
| $ | 3.7 |
|
| $ | 0.3 |
|
| $ | 3.4 |
|
| Three Months Ended March 31, 2020 |
|
| |||||||||
| Before Tax Amount |
|
| Income Tax Expense |
|
| Net of Tax Amount |
|
| |||
Translation adjustments | $ | (2.8 | ) |
| $ | — |
|
| $ | (2.8 | ) |
|
Adjustment for net periodic pension plan and other postretirement benefits plan |
| 0.8 |
|
|
| 0.2 |
|
|
| 0.6 |
|
|
Other comprehensive loss | $ | (2.0 | ) |
| $ | 0.2 |
|
| $ | (2.2 | ) |
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||||||||||
| June 30, 2018 |
|
| June 30, 2018 |
| ||||||||||||||||||
| Before Tax |
|
| Income Tax |
|
| Net of Tax |
|
| Before Tax |
|
| Income Tax |
|
| Net of Tax |
| ||||||
| Amount |
|
| Expense |
|
| Amount |
|
| Amount |
|
| Expense |
|
| Amount |
| ||||||
Translation adjustments | $ | (3.4 | ) |
| $ | — |
|
| $ | (3.4 | ) |
| $ | (2.7 | ) |
| $ | — |
|
| $ | (2.7 | ) |
Adjustment for net periodic pension plan and other postretirement benefits plan cost |
| 0.7 |
|
|
| 0.2 |
|
|
| 0.5 |
|
|
| 1.3 |
|
|
| 0.3 |
|
|
| 1.0 |
|
Other comprehensive (loss) income | $ | (2.7 | ) |
| $ | 0.2 |
|
| $ | (2.9 | ) |
| $ | (1.4 | ) |
| $ | 0.3 |
|
| $ | (1.7 | ) |
| Three Months Ended March 31, 2019 |
| |||||||||
| Before Tax Amount |
|
| Income Tax Expense |
|
| Net of Tax Amount |
| |||
Translation adjustments | $ | 2.2 |
|
| $ | — |
|
| $ | 2.2 |
|
Adjustment for net periodic pension plan and other postretirement benefits plan |
| 0.6 |
|
|
| 0.2 |
|
|
| 0.4 |
|
Other comprehensive income | $ | 2.8 |
|
| $ | 0.2 |
|
| $ | 2.6 |
|
18Accumulated other comprehensive loss by component as of December 31, 2019 and March 31, 2020 were as follows:
| Pension and Other Postretirement Benefits Plan Cost |
|
| Translation Adjustments |
|
| Total |
| |||
Balance at December 31, 2019 | $ | (70.9 | ) |
| $ | (13.7 | ) |
| $ | (84.6 | ) |
Other comprehensive income before reclassifications |
| — |
|
|
| (2.8 | ) |
|
| (2.8 | ) |
Amounts reclassified from accumulated other comprehensive loss |
| 0.6 |
|
|
| — |
|
|
| 0.6 |
|
Net change in accumulated other comprehensive loss |
| 0.6 |
|
|
| (2.8 | ) |
|
| (2.2 | ) |
Balance at March 31, 2020 | $ | (70.3 | ) |
| $ | (16.5 | ) |
| $ | (86.8 | ) |
20
Donnelley Financial Solutions, Inc. and Subsidiaries (“DFIN”)
Notes to the Unaudited Condensed Consolidated Financial Statements (continued)
(in millions, except per share data, unless otherwise indicated)
Accumulated other comprehensive loss by component as of December 31, 2018 and June 30, 2019 were as follows:
| Pension and Other Postretirement Benefits Plan Cost |
|
| Translation Adjustments |
|
| Total |
| |||
Balance at December 31, 2018 | $ | (66.0 | ) |
| $ | (16.7 | ) |
| $ | (82.7 | ) |
Other comprehensive income before reclassifications |
| 0.1 |
|
|
| 2.7 |
|
|
| 2.8 |
|
Amounts reclassified from accumulated other comprehensive loss |
| 0.6 |
|
|
| — |
|
|
| 0.6 |
|
Net change in accumulated other comprehensive loss |
| 0.7 |
|
|
| 2.7 |
|
|
| 3.4 |
|
Balance at June 30, 2019 | $ | (65.3 | ) |
| $ | (14.0 | ) |
| $ | (79.3 | ) |
Accumulated other comprehensive loss by component as of December 31, 20172018 and June 30, 2018March 31, 2019 were as follows:
| Pension and Other Postretirement Benefits Plan Cost |
|
| Translation Adjustments |
|
| Total |
| Pension and Other Postretirement Benefits Plan Cost |
|
| Translation Adjustments |
|
| Total |
| ||||||
Balance at December 31, 2017 | $ | (52.9 | ) |
| $ | (11.7 | ) |
| $ | (64.6 | ) | |||||||||||
Balance at December 31, 2018 | $ | (66.0 | ) |
| $ | (16.7 | ) |
| $ | (82.7 | ) | |||||||||||
Other comprehensive income before reclassifications |
| — |
|
|
| (2.7 | ) |
|
| (2.7 | ) |
| 0.1 |
|
|
| 2.2 |
|
|
| 2.3 |
|
Amounts reclassified from accumulated other comprehensive loss |
| 1.0 |
|
|
| — |
|
|
| 1.0 |
|
| 0.3 |
|
|
| — |
|
|
| 0.3 |
|
Net change in accumulated other comprehensive loss |
| 1.0 |
|
|
| (2.7 | ) |
|
| (1.7 | ) |
| 0.4 |
|
|
| 2.2 |
|
|
| 2.6 |
|
Balance at June 30, 2018 | $ | (51.9 | ) |
| $ | (14.4 | ) |
| $ | (66.3 | ) | |||||||||||
Balance at March 31, 2019 | $ | (65.6 | ) |
| $ | (14.5 | ) |
| $ | (80.1 | ) |
Reclassifications from accumulated other comprehensive loss for the three and six months ended June 30,March 31, 2020 and 2019 and 2018 were as follows:
| Three Months Ended |
|
| Six Months Ended |
| Classification in the Condensed | ||||||||||||||||||
| June 30, |
|
| June 30, |
| Consolidated | Three Months Ended March 31, |
| Classification in the Condensed Consolidated Statements of Operations | |||||||||||||||
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| Statements of Operations | 2020 |
|
| 2019 |
|
| ||||||
Amortization of pension and other postretirement benefits plan cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss | $ | 0.5 |
|
| $ | 0.7 |
|
| $ | 0.9 |
|
| $ | 1.3 |
| (a) | $ | 0.8 |
|
| $ | 0.4 |
| (a) |
Reclassifications before tax |
| 0.5 |
|
|
| 0.7 |
|
|
| 0.9 |
|
|
| 1.3 |
|
|
| 0.8 |
|
|
| 0.4 |
|
|
Income tax expense |
| 0.2 |
|
|
| 0.2 |
|
|
| 0.3 |
|
|
| 0.3 |
|
|
| 0.2 |
|
|
| 0.1 |
|
|
Reclassifications, net of tax | $ | 0.3 |
|
| $ | 0.5 |
|
| $ | 0.6 |
|
| $ | 1.0 |
|
| $ | 0.6 |
|
| $ | 0.3 |
|
|
_____________
(a) |
|
Note 12. Segment Information
The Company’s segments are summarized below:
United States
The U.S. segment serves capital market and investment market clients in the U.S. by delivering products and services to help create, manage, and deliver, accurate and timely financial communications to investors and regulators. The Company also provides virtual data rooms to facilitate the deal management requirements of capital markets and mergers and acquisitions transactions, and provides data and analytics services that help professionals uncover intelligence from disclosures contained within public filings made with the SEC. The U.S. segment also includes commercial print. In addition, the U.S. segment included language solutions capabilities, through which the Company translated documents and created content in up to 140 different languages for its clients.*
1921
Donnelley Financial Solutions, Inc. and Subsidiaries (“DFIN”)
Notes to the Unaudited Condensed Consolidated Financial Statements (continued)
(in millions, except per share data, unless otherwise indicated)
International
The International segment includes the Company’s operations in Asia, Europe, Canada and Latin America. The international business is primarily focused on working with international capital markets clients on capital markets offerings and regulatory compliance related activities into or within the United States. In addition, the international segment provided language translation services and shareholder communication services to investment market clients.*
*The Company sold its Language Solutions business on July 22, 2018. Refer to Note 3, Acquisitions and Dispositions, for further information.
Corporate
Corporate consists of unallocated general and administrative activities and associated expenses including, in part, executive, legal, finance, communications and certain facility costs. In addition, certain costs and earnings of employee benefit plans, such as pension and other postretirement benefit plan expense (income) and allocated costs for share-based compensation, are included in Corporate and not allocated to the operating segments.
Information by Segment
The Company has disclosed income (loss) from operations as the primary measure of segment earnings (loss). This is the measure of profitability used by the Company’s chief operating decision-maker and is most consistent with the presentation of profitability reported within the consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
| Income (Loss) |
|
| Depreciation |
|
|
|
|
| ||
| Total |
|
| Intersegment |
|
| Net |
|
| from |
|
| and |
|
| Capital |
| ||||||
| Sales |
|
| Sales |
|
| Sales |
|
| Operations |
|
| Amortization |
|
| Expenditures |
| ||||||
Three Months Ended June 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. | $ | 225.2 |
|
| $ | (2.0 | ) |
| $ | 223.2 |
|
| $ | 40.4 |
|
| $ | 10.1 |
|
| $ | 10.7 |
|
International |
| 36.2 |
|
|
| (0.5 | ) |
|
| 35.7 |
|
|
| 1.6 |
|
|
| 1.8 |
|
|
| 0.1 |
|
Total operating segments |
| 261.4 |
|
|
| (2.5 | ) |
|
| 258.9 |
|
|
| 42.0 |
|
|
| 11.9 |
|
|
| 10.8 |
|
Corporate |
| — |
|
|
| — |
|
|
| — |
|
|
| (8.6 | ) |
|
| 0.1 |
|
|
| 0.3 |
|
Total operations | $ | 261.4 |
|
| $ | (2.5 | ) |
| $ | 258.9 |
|
| $ | 33.4 |
|
| $ | 12.0 |
|
| $ | 11.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income (Loss) |
|
| Depreciation |
|
|
|
|
| ||
| Total |
|
| Intersegment |
|
| Net |
|
| from |
|
| and |
|
| Capital |
| ||||||
| Sales |
|
| Sales |
|
| Sales |
|
| Operations |
|
| Amortization |
|
| Expenditures |
| ||||||
Three Months Ended June 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. | $ | 246.2 |
|
| $ | (3.7 | ) |
| $ | 242.5 |
|
| $ | 46.9 |
|
| $ | 9.5 |
|
| $ | 8.3 |
|
International |
| 48.5 |
|
|
| (0.4 | ) |
|
| 48.1 |
|
|
| 1.6 |
|
|
| 1.4 |
|
|
| 0.8 |
|
Total operating segments |
| 294.7 |
|
|
| (4.1 | ) |
|
| 290.6 |
|
|
| 48.5 |
|
|
| 10.9 |
|
|
| 9.1 |
|
Corporate |
| — |
|
|
| — |
|
|
| — |
|
|
| (12.3 | ) |
|
| 0.2 |
|
|
| 0.1 |
|
Total operations | $ | 294.7 |
|
| $ | (4.1 | ) |
| $ | 290.6 |
|
| $ | 36.2 |
|
| $ | 11.1 |
|
| $ | 9.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income (Loss) |
|
|
|
|
|
| Depreciation |
|
|
|
|
| ||
| Total |
|
| Intersegment |
|
| Net |
|
| from |
|
| Assets of |
|
| and |
|
| Capital |
| |||||||
| Sales |
|
| Sales |
|
| Sales |
|
| Operations |
|
| Operations |
|
| Amortization |
|
| Expenditures |
| |||||||
Six Months Ended June 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. | $ | 430.1 |
|
| $ | (4.1 | ) |
| $ | 426.0 |
|
| $ | 61.7 |
|
| $ | 805.7 |
|
| $ | 20.4 |
|
| $ | 25.7 |
|
International |
| 63.5 |
|
|
| (1.0 | ) |
|
| 62.5 |
|
|
| (1.7 | ) |
|
| 95.7 |
|
|
| 3.4 |
|
|
| 0.1 |
|
Total operating segments |
| 493.6 |
|
|
| (5.1 | ) |
|
| 488.5 |
|
|
| 60.0 |
|
|
| 901.4 |
|
|
| 23.8 |
|
|
| 25.8 |
|
Corporate |
| — |
|
|
| — |
|
|
| — |
|
|
| (20.0 | ) |
|
| 107.7 |
|
|
| 0.3 |
|
|
| 0.4 |
|
Total operations | $ | 493.6 |
|
| $ | (5.1 | ) |
| $ | 488.5 |
|
| $ | 40.0 |
|
| $ | 1,009.1 |
|
| $ | 24.1 |
|
| $ | 26.2 |
|
20
Donnelley Financial Solutions, Inc.
Notes to the Unaudited Condensed Consolidated Financial Statements
(in millions, except per share data, unless otherwise indicated)
|
|
|
|
|
|
|
|
|
|
|
|
| Income (Loss) |
|
|
|
|
|
| Depreciation |
|
|
|
|
| ||
| Total |
|
| Intersegment |
|
| Net |
|
| from |
|
| Assets of |
|
| and |
|
| Capital |
| |||||||
| Sales |
|
| Sales |
|
| Sales |
|
| Operations |
|
| Operations |
|
| Amortization |
|
| Expenditures |
| |||||||
Six Months Ended June 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. | $ | 460.8 |
|
| $ | (5.2 | ) |
| $ | 455.6 |
|
| $ | 73.3 |
|
| $ | 726.5 |
|
| $ | 18.4 |
|
| $ | 14.4 |
|
International |
| 91.2 |
|
|
| (1.0 | ) |
|
| 90.2 |
|
|
| 4.1 |
|
|
| 102.9 |
|
|
| 2.8 |
|
|
| 0.9 |
|
Total operating segments |
| 552.0 |
|
|
| (6.2 | ) |
|
| 545.8 |
|
|
| 77.4 |
|
|
| 829.4 |
|
|
| 21.2 |
|
|
| 15.3 |
|
Corporate |
| — |
|
|
| — |
|
|
| — |
|
|
| (21.8 | ) |
|
| 99.8 |
|
|
| 0.3 |
|
|
| 0.3 |
|
Total operations | $ | 552.0 |
|
| $ | (6.2 | ) |
| $ | 545.8 |
|
| $ | 55.6 |
|
| $ | 929.2 |
|
| $ | 21.5 |
|
| $ | 15.6 |
|
Note 13. Debt
The Company’s debt as of June 30, 2019 and December 31, 2018 consisted of the following:
| June 30, |
|
| December 31, |
| ||
| 2019 |
|
| 2018 |
| ||
8.25% senior notes due October 15, 2024 | $ | 300.0 |
|
| $ | 300.0 |
|
Term Loan Credit Facility |
| 71.4 |
|
|
| 71.3 |
|
Borrowings under the Revolving Facility |
| 55.5 |
|
|
| — |
|
Unamortized debt issuance costs |
| (7.8 | ) |
|
| (8.6 | ) |
Total debt |
| 419.1 |
|
|
| 362.7 |
|
Less: current portion |
| — |
|
|
| — |
|
Long-term debt | $ | 419.1 |
|
| $ | 362.7 |
|
The fair value of the senior notes, which was determined using the market approach based upon interest rates available to the Company for borrowings with similar terms and maturities, was determined to be Level 2 under the fair value hierarchy. The fair value of the Company’s senior notes was $311.1 million and $298.1 million at June 30, 2019 and December 31, 2018, respectively.
The Company has a Credit Agreement (“the Credit Agreement”) which provides for a $350.0 million senior secured term loan B facility (the “Term Loan Credit Facility”) and a $300.0 million senior secured revolving credit facility (the “Revolving Facility”, and, together with the Term Loan Credit Facility, the “Credit Facilities”). The Credit Agreement contains a number of covenants, including a minimum Interest Coverage Ratio and a maximum Leverage Ratio, as defined in and calculated pursuant to the Credit Agreement, that, in part, restrict the Company’s ability to incur additional indebtedness, create liens, engage in mergers and consolidations, make restricted payments and dispose of certain assets. The Credit Agreement generally allows annual dividend payments of up to $20.0 million in the aggregate.
On December 18, 2018, the Company entered into a second amendment to the Credit Agreement which extended the maturity date of the Revolving Facility to December 18, 2023, reduced the interest rate margin percentages and facility fees applicable to the Revolving Facility, increased the allowable annual dividends from $15.0 million to $20.0 million in the aggregate and modified the financial maintenance and negative covenants in the Credit Agreement. As of June 30, 2019, there was $55.5 million of outstanding borrowings under the Revolving Facility.
The weighted average interest rate on borrowings under the Revolving Facility was 5.0% and 4.5% for the six months ended June 30, 2019 and 2018, respectively.
21
Donnelley Financial Solutions, Inc.
Notes to the Unaudited Condensed Consolidated Financial Statements
(in millions, except per share data, unless otherwise indicated)
The Company’s 8.25% senior unsecured notes due October 15, 2024 (the “Notes”) were issued pursuant to an indenture where certain wholly-owned domestic subsidiaries of the Company guarantee the Notes (the “Guarantors”). The Notes are jointly and severally guaranteed, on an unsecured basis, by the Guarantors, which are comprised of each of the Company’s existing and future direct and indirect wholly-owned U.S. subsidiaries that guarantee the Company’s obligations under the Credit Facilities. The Notes are not guaranteed by the Company’s foreign subsidiaries or unrestricted subsidiaries. The Notes and the related guarantees will be the Company and the Guarantors’, respective, senior unsecured obligations and will rank equally in right of payment to all present and future senior debt, including the obligations under the Company’s Credit Facilities, senior in right of payment to all present and future subordinated debt, and effectively subordinated in right of payment to any of the Company and the Guarantors’ secured debt, to the extent of the value of the assets securing such debt. The indenture governing the Notes contains certain covenants applicable to the Company and its restricted subsidiaries, including limitations on: (1) liens; (2) indebtedness; (3) mergers, consolidations and acquisitions; (4) sales, transfers and other dispositions of assets; (5) loans and other investments; (6) dividends and other distributions, stock repurchases and redemptions and other restricted payments; (7) restrictions affecting subsidiaries; (8) transactions with affiliates; and (9) designations of unrestricted subsidiaries. Each of these covenants is subject to important exceptions and qualifications.
Note 14. Commitments and Contingencies13. Segment Information
Litigation
From time to time,In the first quarter of 2020, management realigned the Company’s customersoperating segments to reflect changes in the manner in which the chief operating decision maker assesses information for decision-making purposes. All prior year amounts related to segments have been reclassified to conform to the Company’s current reporting structure. There is no impact on the Company’s previously reported consolidated statements of operations, statements of comprehensive income, balance sheets, statements of cash flows or statements of changes in stockholders’ equity as a result of the new segmentation.
The Company operates its business through 4 operating and others file voluntary petitionsreportable segments: Capital Markets – Software Solutions, Capital Markets – Compliance and Communications Management, Investment Companies – Software Solutions, and Investment Companies – Compliance and Communications Management. Corporate is not an operating segment and consists primarily of unallocated SG&A activities and associated expenses, as further described below.
Capital Markets
The Company provides software solutions, technology-enabled services and print and distribution solutions to public and private companies for reorganization under United States bankruptcy laws. In such cases, certain pre-petition payments received by the Company from these parties could be considered preference itemsdeal solutions and compliance to companies that are or preparing to become subject to return.the filing and reporting requirements of the Securities Act and the Exchange Act. Capital markets’ clients leverage the Company’s software offerings, proprietary technology, deep industry expertise and experience to successfully navigate the SEC’s specified file formats when submitting compliance documents through the EDGAR system for their transactional and ongoing compliance needs. The Company assists its capital markets clients throughout the course of public and private business transactions; mergers and acquisitions, initial public offerings (“IPOs”), debt offerings and other similar transactions. In addition, the Company may be partyprovides clients with compliance solutions to certain litigation arising inprepare their ongoing required Exchange Act filings that are compatible with the ordinary courseSEC’s EDGAR system, most notably Form 10-K, Form 10-Q, Form 8-K and Proxy Form DEF 14A. The Company’s operating segments associated with its capital markets services and products offerings are as follows:
Capital Markets – Software Solutions—The Company provides software solutions to public and private companies to help manage public and private transaction processes; extract data and analyze contracts; collaborate; and tag, validate and file SEC documents.
Capital Markets – Compliance & Communications Management—The Company provides technology-enabled services and print and distribution solutions to public and private companies for deal solutions and SEC compliance requirements.
Investment Companies
The Company provides software solutions, technology-enabled services and print, distribution and fulfillment solutions to its investment companies clients that are subject to the filing and reporting requirements of business. Management believes that the final resolutionInvestment Act, primarily mutual fund companies, alternative investment companies, insurance companies and third-party fund administrators. The Company’s suite of these preference itemssolutions enables its investment company clients to comply with applicable ongoing SEC regulations, as well as to create, manage, and litigation will not have a material effect ondeliver accurate and timely financial communications to investors and regulators. The Company also provides pre- and post-enrollment information to healthcare providers. Investment company clients leverage the Company’s consolidated results of operations, financial position or cash flows.proprietary technology, deep industry expertise and experience to successfully navigate the SEC’s specified file formats when submitting compliance documents through the EDGAR system. The Company’s operating segments associated with its investment companies services and products offerings are as follows:
Note 15. New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, which requires lesseesInvestment Companies – Software Solutions—The Company provides software solutions that enable clients to put most leases on the balance sheet but recognize expense on the income statementstore and manage compliance and regulatory information in a manner similarself-service, central repository for documents to be easily accessed, assembled, edited, translated, rendered and submitted to regulators.
Investment Companies – Compliance & Communications Management—The Company provides its investment company clients technology-enabled solutions to prepare and file registration forms, as well as XBRL-formatted filings pursuant to the former accounting standard. The Company adoptedInvestment Act, through the standard and all related amendments on January 1, 2019 using the optional transition method. The comparative periods have not been restated and continue to be reported under the accounting standards in effect for those periods. Refer to Note 7, Leases, for further information.
Note 16. Guarantor Financial Information
As described in Note 13, Debt, on September 30, 2016,SEC’s EDGAR system. In addition, the Company issued the Notes. The Guarantors of the Notes, Donnelley Financial, LLCprovides print and DFS International Holding, Inc., entered into an agreement pursuantdistribution solutions for its clients to which each agreed to guarantee the Company’s obligations under the Notes. All guarantees are full and unconditional and joint and several. The Guarantors are 100% directly owned subsidiaries of the Company.
The guarantee of the Notes by a subsidiary guarantor will be automatically released under certain situations, including upon the sale or disposition of such subsidiary guarantor to a person that is not DFIN or a subsidiary guarantor of the Notes, the liquidation or dissolution of such subsidiary guarantor, and if such subsidiary guarantor is released from its guarantee obligations under the Company’s Credit Facilities.
The following tables set forth condensed consolidating statements of income for the three and six months ended June 30, 2019 and 2018, condensed consolidating statements of financial position as of June 30, 2019 and December 31, 2018, and condensed consolidating statements of cash flows for the six months ended June 30, 2019 and 2018. The principal consolidating adjustments are to eliminate the investment in subsidiaries and intercompany balances and transactions. For purposes of the tables below, the Company is referred to as “Parent” and the Guarantors are referred to as “Guarantor Subsidiaries.”
communicate with their investors.
22
Donnelley Financial Solutions, Inc. and Subsidiaries (“DFIN”)
Notes to the Unaudited Condensed Consolidated Financial Statements
(in millions, except per share data, unless otherwise indicated)
Condensed Consolidating Statements of Operations
For the Three Months Ended June 30, 2019
| Parent |
|
| Guarantor Subsidiaries |
|
| Non-guarantor Subsidiaries |
|
| Eliminations |
|
| Consolidated |
| |||||
Services net sales | $ | — |
|
| $ | 136.5 |
|
| $ | 26.3 |
|
| $ | (1.6 | ) |
| $ | 161.2 |
|
Products net sales |
| — |
|
|
| 88.7 |
|
|
| 9.9 |
|
|
| (0.9 | ) |
|
| 97.7 |
|
Total net sales |
| — |
|
|
| 225.2 |
|
|
| 36.2 |
|
|
| (2.5 | ) |
|
| 258.9 |
|
Services cost of sales (exclusive of depreciation and amortization) |
| — |
|
|
| 58.9 |
|
|
| 18.1 |
|
|
| (1.4 | ) |
|
| 75.6 |
|
Products cost of sales (exclusive of depreciation and amortization) |
| — |
|
|
| 68.6 |
|
|
| 5.9 |
|
|
| (1.1 | ) |
|
| 73.4 |
|
Total cost of sales |
| — |
|
|
| 127.5 |
|
|
| 24.0 |
|
|
| (2.5 | ) |
|
| 149.0 |
|
Selling, general and administrative expenses (exclusive of depreciation and amortization) |
| — |
|
|
| 50.8 |
|
|
| 7.1 |
|
|
| — |
|
|
| 57.9 |
|
Restructuring, impairment and other charges-net |
| — |
|
|
| 3.4 |
|
|
| 0.4 |
|
|
| — |
|
|
| 3.8 |
|
Depreciation and amortization |
| — |
|
|
| 10.2 |
|
|
| 1.8 |
|
|
| — |
|
|
| 12.0 |
|
Other operating loss |
| — |
|
|
| 1.2 |
|
|
| 1.6 |
|
|
| — |
|
|
| 2.8 |
|
Income from operations |
| — |
|
|
| 32.1 |
|
|
| 1.3 |
|
|
| — |
|
|
| 33.4 |
|
Interest expense (income)-net |
| 9.4 |
|
|
| (0.1 | ) |
|
| (0.2 | ) |
|
| — |
|
|
| 9.1 |
|
Intercompany interest (income) expense-net |
| (5.7 | ) |
|
| 5.7 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Investment and other income-net |
| — |
|
|
| (0.5 | ) |
|
| — |
|
|
| — |
|
|
| (0.5 | ) |
(Loss) earnings before income taxes and equity in net income of subsidiaries |
| (3.7 | ) |
|
| 27.0 |
|
|
| 1.5 |
|
|
| — |
|
|
| 24.8 |
|
Income tax (benefit) expense |
| (1.6 | ) |
|
| 9.0 |
|
|
| 0.1 |
|
|
| — |
|
|
| 7.5 |
|
(Loss) earnings before equity in net income of subsidiaries |
| (2.1 | ) |
|
| 18.0 |
|
|
| 1.4 |
|
|
| — |
|
|
| 17.3 |
|
Equity in net income of subsidiaries |
| 19.4 |
|
|
| 1.4 |
|
|
| — |
|
|
| (20.8 | ) |
|
| — |
|
Net earnings | $ | 17.3 |
|
| $ | 19.4 |
|
| $ | 1.4 |
|
| $ | (20.8 | ) |
| $ | 17.3 |
|
Comprehensive income | $ | 18.1 |
|
| $ | 20.3 |
|
| $ | 1.9 |
|
| $ | (22.2 | ) |
| $ | 18.1 |
|
23
Donnelley Financial Solutions, Inc.
Notes to the Unaudited Condensed Consolidated Financial Statements
(in millions, except per share data, unless otherwise indicated)
Condensed Consolidating Statements of Operations
For the Six Months Ended June 30, 2019
| Parent |
|
| Guarantor Subsidiaries |
|
| Non-guarantor Subsidiaries |
|
| Eliminations |
|
| Consolidated |
| |||||
Services net sales | $ | — |
|
| $ | 246.3 |
|
| $ | 45.9 |
|
| $ | (3.1 | ) |
| $ | 289.1 |
|
Products net sales |
| — |
|
|
| 183.8 |
|
|
| 17.6 |
|
|
| (2.0 | ) |
|
| 199.4 |
|
Total net sales |
| — |
|
|
| 430.1 |
|
|
| 63.5 |
|
|
| (5.1 | ) |
|
| 488.5 |
|
Services cost of sales (exclusive of depreciation and amortization) |
| — |
|
|
| 121.5 |
|
|
| 32.2 |
|
|
| (2.7 | ) |
|
| 151.0 |
|
Products cost of sales (exclusive of depreciation and amortization) |
| — |
|
|
| 141.7 |
|
|
| 12.6 |
|
|
| (2.4 | ) |
|
| 151.9 |
|
Total cost of sales |
| — |
|
|
| 263.2 |
|
|
| 44.8 |
|
|
| (5.1 | ) |
|
| 302.9 |
|
Selling, general and administrative expenses (exclusive of depreciation and amortization) |
| — |
|
|
| 98.0 |
|
|
| 14.8 |
|
|
| — |
|
|
| 112.8 |
|
Restructuring, impairment and other charges-net |
| — |
|
|
| 4.9 |
|
|
| 1.0 |
|
|
| — |
|
|
| 5.9 |
|
Depreciation and amortization |
| — |
|
|
| 20.7 |
|
|
| 3.4 |
|
|
| — |
|
|
| 24.1 |
|
Other operating loss |
| — |
|
|
| 1.2 |
|
|
| 1.6 |
|
|
| — |
|
|
| 2.8 |
|
Income (loss) from operations |
| — |
|
|
| 42.1 |
|
|
| (2.1 | ) |
|
| — |
|
|
| 40.0 |
|
Interest expense (income)-net |
| 18.6 |
|
|
| (0.1 | ) |
|
| (0.5 | ) |
|
| — |
|
|
| 18.0 |
|
Intercompany interest (income) expense-net |
| (11.5 | ) |
|
| 11.5 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Investment and other income-net |
| — |
|
|
| (1.1 | ) |
|
| — |
|
|
| — |
|
|
| (1.1 | ) |
(Loss) earnings before income taxes and equity in net income of subsidiaries |
| (7.1 | ) |
|
| 31.8 |
|
|
| (1.6 | ) |
|
| — |
|
|
| 23.1 |
|
Income tax (benefit) expense |
| (2.2 | ) |
|
| 9.9 |
|
|
| (0.5 | ) |
|
| — |
|
|
| 7.2 |
|
(Loss) earnings before equity in net income of subsidiaries |
| (4.9 | ) |
|
| 21.9 |
|
|
| (1.1 | ) |
|
| — |
|
|
| 15.9 |
|
Equity in net income of subsidiaries |
| 20.8 |
|
|
| (1.1 | ) |
|
| — |
|
|
| (19.7 | ) |
|
| — |
|
Net earnings (loss) | $ | 15.9 |
|
| $ | 20.8 |
|
| $ | (1.1 | ) |
| $ | (19.7 | ) |
| $ | 15.9 |
|
Comprehensive income | $ | 19.3 |
|
| $ | 24.2 |
|
| $ | 1.6 |
|
| $ | (25.8 | ) |
| $ | 19.3 |
|
24
Donnelley Financial Solutions, Inc.
Notes to the Unaudited Condensed Consolidated Financial Statements (continued)
(in millions, except per share data, unless otherwise indicated)
Condensed Consolidating StatementsCorporate
Corporate consists of Operationsunallocated SG&A activities and associated expenses including, in part, executive, legal, finance, marketing, communications and certain facility costs. In addition, certain costs and earnings of employee benefit plans, such as pension and other postretirement benefit plan expense (income) and share-based compensation, are included in Corporate and are not allocated to the operating segments.
ForInformation by Segment
The Company has disclosed income (loss) from operations as the Three Months Ended June 30, 2018primary measure of segment earnings (loss). This is the measure of profitability used by the Company’s chief operating decision maker and is most consistent with the presentation of profitability reported within the condensed consolidated financial statements.
| Parent |
|
| Guarantor Subsidiaries |
|
| Non-guarantor Subsidiaries |
|
| Eliminations |
|
| Consolidated |
| |||||
Services net sales | $ | — |
|
| $ | 153.4 |
|
| $ | 37.1 |
|
| $ | (2.6 | ) |
| $ | 187.9 |
|
Products net sales |
| — |
|
|
| 92.8 |
|
|
| 11.4 |
|
|
| (1.5 | ) |
|
| 102.7 |
|
Total net sales |
| — |
|
|
| 246.2 |
|
|
| 48.5 |
|
|
| (4.1 | ) |
|
| 290.6 |
|
Services cost of sales (exclusive of depreciation and amortization) |
| — |
|
|
| 69.0 |
|
|
| 25.1 |
|
|
| (2.1 | ) |
|
| 92.0 |
|
Products cost of sales (exclusive of depreciation and amortization) |
| — |
|
|
| 67.8 |
|
|
| 7.8 |
|
|
| (2.0 | ) |
|
| 73.6 |
|
Total cost of sales |
| — |
|
|
| 136.8 |
|
|
| 32.9 |
|
|
| (4.1 | ) |
|
| 165.6 |
|
Selling, general and administrative expenses (exclusive of depreciation and amortization) |
| — |
|
|
| 64.4 |
|
|
| 10.7 |
|
|
| — |
|
|
| 75.1 |
|
Restructuring, impairment and other charges-net |
| — |
|
|
| 0.7 |
|
|
| 1.9 |
|
|
| — |
|
|
| 2.6 |
|
Depreciation and amortization |
| — |
|
|
| 9.7 |
|
|
| 1.4 |
|
|
| — |
|
|
| 11.1 |
|
Income from operations |
| — |
|
|
| 34.6 |
|
|
| 1.6 |
|
|
| — |
|
|
| 36.2 |
|
Interest expense (income)-net |
| 10.1 |
|
|
| (0.1 | ) |
|
| (0.2 | ) |
|
| — |
|
|
| 9.8 |
|
Intercompany interest (income) expense-net |
| (6.7 | ) |
|
| 6.7 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Investment and other income-net |
| — |
|
|
| (0.8 | ) |
|
| — |
|
|
| — |
|
|
| (0.8 | ) |
Earnings (loss) before income taxes and equity in net income of subsidiaries |
| (3.4 | ) |
|
| 28.8 |
|
|
| 1.8 |
|
|
| — |
|
|
| 27.2 |
|
Income tax (benefit) expense |
| (1.0 | ) |
|
| 8.8 |
|
|
| 0.5 |
|
|
| — |
|
|
| 8.3 |
|
Earnings (loss) before equity in net income of subsidiaries |
| (2.4 | ) |
|
| 20.0 |
|
|
| 1.3 |
|
|
| — |
|
|
| 18.9 |
|
Equity in net income of subsidiaries |
| 21.3 |
|
|
| 1.3 |
|
|
| — |
|
|
| (22.6 | ) |
|
| — |
|
Net earnings | $ | 18.9 |
|
| $ | 21.3 |
|
| $ | 1.3 |
|
| $ | (22.6 | ) |
| $ | 18.9 |
|
Comprehensive income (loss) | $ | 16.0 |
|
| $ | 18.3 |
|
| $ | (2.2 | ) |
| $ | (16.1 | ) |
| $ | 16.0 |
|
25
Donnelley Financial Solutions, Inc.
Notes to the Unaudited Condensed Consolidated Financial Statements
(in millions, except per share data, unless otherwise indicated)
Condensed Consolidating Statements of Operations
For the Six Months Ended June 30, 2018
| Parent |
|
| Guarantor Subsidiaries |
|
| Non-guarantor Subsidiaries |
|
| Eliminations |
|
| Consolidated |
| |||||
Services net sales | $ | — |
|
| $ | 282.1 |
|
| $ | 69.2 |
|
| $ | (3.9 | ) |
| $ | 347.4 |
|
Products net sales |
| — |
|
|
| 178.7 |
|
|
| 22.0 |
|
|
| (2.3 | ) |
|
| 198.4 |
|
Total net sales |
| — |
|
|
| 460.8 |
|
|
| 91.2 |
|
|
| (6.2 | ) |
|
| 545.8 |
|
Services cost of sales (exclusive of depreciation and amortization) |
| — |
|
|
| 136.5 |
|
|
| 44.7 |
|
|
| (3.3 | ) |
|
| 177.9 |
|
Products cost of sales (exclusive of depreciation and amortization) |
| — |
|
|
| 132.9 |
|
|
| 16.3 |
|
|
| (2.9 | ) |
|
| 146.3 |
|
Total cost of sales |
| — |
|
|
| 269.4 |
|
|
| 61.0 |
|
|
| (6.2 | ) |
|
| 324.2 |
|
Selling, general and administrative expenses (exclusive of depreciation and amortization) |
| — |
|
|
| 119.7 |
|
|
| 21.5 |
|
|
| — |
|
|
| 141.2 |
|
Restructuring, impairment and other charges-net |
| — |
|
|
| 1.5 |
|
|
| 1.8 |
|
|
| — |
|
|
| 3.3 |
|
Depreciation and amortization |
| — |
|
|
| 18.7 |
|
|
| 2.8 |
|
|
| — |
|
|
| 21.5 |
|
Income from operations |
| — |
|
|
| 51.5 |
|
|
| 4.1 |
|
|
| — |
|
|
| 55.6 |
|
Interest expense (income)-net |
| 19.3 |
|
|
| (0.3 | ) |
|
| (0.2 | ) |
|
| — |
|
|
| 18.8 |
|
Intercompany interest (income) expense-net |
| (13.3 | ) |
|
| 13.3 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Investment and other income-net |
| — |
|
|
| (1.6 | ) |
|
| — |
|
|
| — |
|
|
| (1.6 | ) |
(Loss) earnings before income taxes and equity in net income of subsidiaries |
| (6.0 | ) |
|
| 40.1 |
|
|
| 4.3 |
|
|
| — |
|
|
| 38.4 |
|
Income tax (benefit) expense |
| (1.8 | ) |
|
| 12.3 |
|
|
| 1.3 |
|
|
| — |
|
|
| 11.8 |
|
(Loss) earnings before equity in net income of subsidiaries |
| (4.2 | ) |
|
| 27.8 |
|
|
| 3.0 |
|
|
| — |
|
|
| 26.6 |
|
Equity in net income of subsidiaries |
| 30.8 |
|
|
| 3.0 |
|
|
| — |
|
|
| (33.8 | ) |
|
| — |
|
Net earnings | $ | 26.6 |
|
| $ | 30.8 |
|
| $ | 3.0 |
|
| $ | (33.8 | ) |
| $ | 26.6 |
|
Comprehensive income | $ | 24.9 |
|
| $ | 29.1 |
|
| $ | 0.2 |
|
| $ | (29.3 | ) |
| $ | 24.9 |
|
| Total Net Sales |
|
| Income (Loss) from Operations |
|
| Assets(1) |
|
| Depreciation and Amortization |
|
| Capital Expenditures |
| |||||
Three Months Ended March 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Markets - Software Solutions | $ | 31.2 |
|
| $ | 1.8 |
|
| $ | 163.9 |
|
| $ | 3.1 |
|
| $ | 3.3 |
|
Capital Markets - Compliance and Communication Management |
| 99.1 |
|
|
| 21.4 |
|
|
| 447.6 |
|
|
| 4.0 |
|
|
| 0.2 |
|
Investment Companies - Software Solutions |
| 16.1 |
|
|
| 0.1 |
|
|
| 98.3 |
|
|
| 2.9 |
|
|
| 2.8 |
|
Investment Companies - Compliance and Communication Management |
| 74.3 |
|
|
| 2.1 |
|
|
| 141.7 |
|
|
| 2.4 |
|
|
| — |
|
Total operating segments |
| 220.7 |
|
|
| 25.4 |
|
|
| 851.5 |
|
|
| 12.4 |
|
|
| 6.3 |
|
Corporate |
| — |
|
|
| (13.5 | ) |
|
| 83.3 |
|
|
| — |
|
|
| 0.6 |
|
Total | $ | 220.7 |
|
| $ | 11.9 |
|
| $ | 934.8 |
|
| $ | 12.4 |
|
| $ | 6.9 |
|
| Total Net Sales |
|
| Income (Loss) from Operations |
|
| Assets(1) |
|
| Depreciation and Amortization |
|
| Capital Expenditures |
| |||||
Three Months Ended March 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Markets - Software Solutions | $ | 30.5 |
|
| $ | 0.1 |
|
| $ | 160.8 |
|
| $ | 3.1 |
|
| $ | 3.3 |
|
Capital Markets - Compliance and Communication Management |
| 102.0 |
|
|
| 14.7 |
|
|
| 484.1 |
|
|
| 3.5 |
|
|
| 1.7 |
|
Investment Companies - Software Solutions |
| 14.2 |
|
|
| (3.7 | ) |
|
| 105.9 |
|
|
| 3.4 |
|
|
| 4.1 |
|
Investment Companies - Compliance and Communication Management |
| 82.9 |
|
|
| 6.7 |
|
|
| 160.7 |
|
|
| 2.1 |
|
|
| 5.9 |
|
Total operating segments |
| 229.6 |
|
|
| 17.8 |
|
|
| 911.5 |
|
|
| 12.1 |
|
|
| 15.0 |
|
Corporate |
| — |
|
|
| (11.2 | ) |
|
| 90.9 |
|
|
| — |
|
|
| 0.1 |
|
Total | $ | 229.6 |
|
| $ | 6.6 |
|
| $ | 1,002.4 |
|
| $ | 12.1 |
|
| $ | 15.1 |
|
__________________________
(1) | Certain assets are recorded within a segment based on predominant usage, however as they benefit more than one segment, the related operating expenses are allocated between segments. |
26
Donnelley Financial Solutions, Inc.
Notes toCorporate assets primarily consisted of the Unaudited Condensed Consolidated Financial Statements
(in millions, except per share data, unless otherwise indicated)
Condensed Consolidating Balance Sheet
As of June 30, 2019following items:
| Parent |
|
| Guarantor Subsidiaries |
|
| Non-guarantor Subsidiaries |
|
| Eliminations |
|
| Consolidated |
| |||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents | $ | 0.3 |
|
| $ | 3.7 |
|
| $ | 5.5 |
|
| $ | — |
|
| $ | 9.5 |
|
Receivables, less allowances |
| — |
|
|
| 214.9 |
|
|
| 45.8 |
|
|
| — |
|
|
| 260.7 |
|
Intercompany receivables |
| — |
|
|
| 44.6 |
|
|
| — |
|
|
| (44.6 | ) |
|
| — |
|
Intercompany short-term note receivable-net |
| — |
|
|
| — |
|
|
| 7.0 |
|
|
| (7.0 | ) |
|
| — |
|
Inventories |
| — |
|
|
| 10.9 |
|
|
| 2.1 |
|
|
| — |
|
|
| 13.0 |
|
Prepaid expenses and other current assets |
| 1.6 |
|
|
| 12.8 |
|
|
| 3.3 |
|
|
| — |
|
|
| 17.7 |
|
Total current assets |
| 1.9 |
|
|
| 286.9 |
|
|
| 63.7 |
|
|
| (51.6 | ) |
|
| 300.9 |
|
Property, plant and equipment-net |
| — |
|
|
| 34.6 |
|
|
| 2.4 |
|
|
| — |
|
|
| 37.0 |
|
Right-of-use assets |
| — |
|
|
| 69.0 |
|
|
| 15.4 |
|
|
| — |
|
|
| 84.4 |
|
Software-net |
| — |
|
|
| 51.6 |
|
|
| — |
|
|
| — |
|
|
| 51.6 |
|
Goodwill |
| — |
|
|
| 438.6 |
|
|
| 11.7 |
|
|
| — |
|
|
| 450.3 |
|
Other intangible assets-net |
| — |
|
|
| 26.5 |
|
|
| 3.5 |
|
|
| — |
|
|
| 30.0 |
|
Deferred income taxes |
| — |
|
|
| 12.7 |
|
|
| 3.3 |
|
|
| (1.7 | ) |
|
| 14.3 |
|
Intercompany long-term note receivable |
| 298.0 |
|
|
| — |
|
|
| — |
|
|
| (298.0 | ) |
|
| — |
|
Other noncurrent assets |
| 3.4 |
|
|
| 33.1 |
|
|
| 4.1 |
|
|
| — |
|
|
| 40.6 |
|
Investments in consolidated subsidiaries |
| 418.2 |
|
|
| 54.1 |
|
|
| — |
|
|
| (472.3 | ) |
|
| — |
|
Total assets | $ | 721.5 |
|
| $ | 1,007.1 |
|
| $ | 104.1 |
|
| $ | (823.6 | ) |
| $ | 1,009.1 |
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable | $ | — |
|
| $ | 62.6 |
|
| $ | 15.4 |
|
| $ | — |
|
| $ | 78.0 |
|
Intercompany payables |
| 40.3 |
|
|
| 0.1 |
|
|
| 4.2 |
|
|
| (44.6 | ) |
|
| — |
|
Intercompany short-term note payable-net |
| 7.0 |
|
|
| — |
|
|
| — |
|
|
| (7.0 | ) |
|
| — |
|
Accrued liabilities |
| 3.3 |
|
|
| 101.3 |
|
|
| 18.6 |
|
|
| — |
|
|
| 123.2 |
|
Total current liabilities |
| 50.6 |
|
|
| 164.0 |
|
|
| 38.2 |
|
|
| (51.6 | ) |
|
| 201.2 |
|
Long-term debt |
| 419.1 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 419.1 |
|
Intercompany long-term note payable |
| — |
|
|
| 298.0 |
|
|
| — |
|
|
| (298.0 | ) |
|
| — |
|
Deferred compensation liabilities |
| — |
|
|
| 19.9 |
|
|
| — |
|
|
| — |
|
|
| 19.9 |
|
Pension and other postretirement benefits plan liabilities |
| — |
|
|
| 48.0 |
|
|
| 1.0 |
|
|
| — |
|
|
| 49.0 |
|
Noncurrent lease liabilities |
| — |
|
|
| 52.8 |
|
|
| 10.0 |
|
|
| — |
|
|
| 62.8 |
|
Other noncurrent liabilities |
| 2.7 |
|
|
| 6.2 |
|
|
| 0.8 |
|
|
| (1.7 | ) |
|
| 8.0 |
|
Total liabilities |
| 472.4 |
|
|
| 588.9 |
|
|
| 50.0 |
|
|
| (351.3 | ) |
|
| 760.0 |
|
Total equity |
| 249.1 |
|
|
| 418.2 |
|
|
| 54.1 |
|
|
| (472.3 | ) |
|
| 249.1 |
|
Total liabilities and equity | $ | 721.5 |
|
| $ | 1,007.1 |
|
| $ | 104.1 |
|
| $ | (823.6 | ) |
| $ | 1,009.1 |
|
| March 31, 2020 |
|
| December 31, 2019 |
| ||
Cash and cash equivalents | $ | 7.7 |
|
| $ | 17.2 |
|
Prepaid expenses and other current assets |
| 14.4 |
|
|
| 11.7 |
|
Right-of-use assets |
| 11.0 |
|
|
| 11.5 |
|
Deferred income taxes, net of valuation allowance |
| 9.1 |
|
|
| 9.0 |
|
Other noncurrent assets |
| 34.4 |
|
|
| 34.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
Donnelley Financial Solutions, Inc.
Notes to the Unaudited Condensed Consolidated Financial Statements
(in millions, except per share data, unless otherwise indicated)
Condensed Consolidating Balance Sheet
As of December 31, 2018
| Parent |
|
| Guarantor Subsidiaries |
|
| Non-guarantor Subsidiaries |
|
| Eliminations |
|
| Consolidated |
| ||||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents | $ | 24.9 |
|
| $ | 5.0 |
|
| $ | 17.4 |
|
| $ | — |
|
| $ | 47.3 |
| |
Receivables, less allowances |
| — |
|
|
| 141.6 |
|
|
| 31.3 |
|
|
| — |
|
|
| 172.9 |
| |
Intercompany receivables |
| — |
|
|
| 123.6 |
|
|
| — |
|
|
| (123.6 | ) |
|
| — |
| |
Intercompany short-term note receivable-net |
| — |
|
|
| — |
|
|
| 60.5 |
|
|
| (60.5 | ) |
|
| — |
| |
Inventories |
| — |
|
|
| 10.4 |
|
|
| 1.7 |
|
|
| — |
|
|
| 12.1 |
| |
Prepaid expenses and other current assets |
| — |
|
|
| 13.5 |
|
|
| 3.2 |
|
|
| — |
|
|
| 16.7 |
| |
Total current assets |
| 24.9 |
|
|
| 294.1 |
|
|
| 114.1 |
|
|
| (184.1 | ) |
|
| 249.0 |
| |
Property, plant and equipment-net |
| — |
|
|
| 29.3 |
|
|
| 2.9 |
|
|
| — |
|
|
| 32.2 |
| |
Software-net |
| — |
|
|
| 47.8 |
|
|
| — |
|
|
| — |
|
|
| 47.8 |
| |
Goodwill |
| — |
|
|
| 438.5 |
|
|
| 11.5 |
|
|
| — |
|
|
| 450.0 |
| |
Other intangible assets-net |
| — |
|
|
| 32.6 |
|
|
| 4.6 |
|
|
| — |
|
|
| 37.2 |
| |
Deferred income taxes |
| — |
|
|
| 37.2 |
|
|
| 2.4 |
|
|
| (29.9 | ) |
|
| 9.7 |
| |
Intercompany long-term note receivable |
| 298.0 |
|
|
| — |
|
|
| — |
|
|
| (298.0 | ) |
|
| — |
| |
Other noncurrent assets |
| 3.6 |
|
|
| 35.1 |
|
|
| 4.1 |
|
|
| — |
|
|
| 42.8 |
| |
Investments in consolidated subsidiaries |
| 445.9 |
|
|
| 106.0 |
|
|
| — |
|
|
| (551.9 | ) |
|
| — |
| |
Total assets | $ | 772.4 |
|
| $ | 1,020.6 |
|
| $ | 139.6 |
|
| $ | (1,063.9 | ) |
| $ | 868.7 |
| |
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Accounts payable | $ | — |
|
| $ | 61.0 |
|
| $ | 11.4 |
|
| $ | — |
|
| $ | 72.4 |
| |
Intercompany payables |
| 120.9 |
|
|
| — |
|
|
| 2.7 |
|
|
| (123.6 | ) |
|
| — |
| |
Intercompany short-term note payable-net |
| 60.0 |
|
|
| 0.5 |
|
|
| — |
|
|
| (60.5 | ) |
|
| — |
| |
Accrued liabilities |
| 0.1 |
|
|
| 109.2 |
|
|
| 16.7 |
|
|
| — |
|
|
| 126.0 |
| |
Total current liabilities |
| 181.0 |
|
|
| 170.7 |
|
|
| 30.8 |
|
|
| (184.1 | ) |
|
| 198.4 |
| |
Long-term debt |
| 362.7 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 362.7 |
| |
Intercompany long-term note payable |
| — |
|
|
| 298.0 |
|
|
| — |
|
|
| (298.0 | ) |
|
| — |
| |
Deferred compensation liabilities |
| — |
|
|
| 19.5 |
|
|
| — |
|
|
| — |
|
|
| 19.5 |
| |
Pension and other postretirement benefits plan liabilities |
| — |
|
|
| 50.3 |
|
|
| 1.0 |
|
|
| — |
|
|
| 51.3 |
| |
Other noncurrent liabilities |
| 2.7 |
|
|
| 36.2 |
|
|
| 1.8 |
|
|
| (29.9 | ) |
|
| 10.8 |
| |
Total liabilities |
| 546.4 |
|
|
| 574.7 |
|
|
| 33.6 |
|
|
| (512.0 | ) |
|
| 642.7 |
| |
Total equity |
| 226.0 |
|
|
| 445.9 |
|
|
| 106.0 |
|
|
| (551.9 | ) |
|
| 226.0 |
| |
Total liabilities and equity | $ | 772.4 |
|
| $ | 1,020.6 |
|
| $ | 139.6 |
|
| $ | (1,063.9 | ) |
| $ | 868.7 |
|
28
Donnelley Financial Solutions, Inc.
Notes to the Unaudited Condensed Consolidated Financial Statements
(in millions, except per share data, unless otherwise indicated)
Condensed Consolidating Statements of Cash Flows
For the Six Months Ended June 30, 2019
| Parent |
|
| Guarantor Subsidiaries |
|
| Non-guarantor Subsidiaries |
|
| Eliminations |
|
| Consolidated |
| |||||
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities | $ | (25.1 | ) |
| $ | 27.3 |
|
| $ | (14.4 | ) |
| $ | (53.1 | ) |
| $ | (65.3 | ) |
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
| — |
|
|
| (26.1 | ) |
|
| (0.1 | ) |
|
| — |
|
|
| (26.2 | ) |
Acquisition of business, net of cash acquired |
| — |
|
|
| (2.6 | ) |
|
| — |
|
|
| — |
|
|
| (2.6 | ) |
Intercompany note receivable, net |
| — |
|
|
| — |
|
|
| 53.5 |
|
|
| (53.5 | ) |
|
| — |
|
Other investing activities |
| — |
|
|
| 0.1 |
|
|
| — |
|
|
| — |
|
|
| 0.1 |
|
Net cash (used in) provided by investing activities |
| — |
|
|
| (28.6 | ) |
|
| 53.4 |
|
|
| (53.5 | ) |
|
| (28.7 | ) |
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving facility borrowings |
| 337.0 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 337.0 |
|
Payments on revolving facility borrowings |
| (281.5 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (281.5 | ) |
Intercompany note payable, net |
| (53.5 | ) |
|
| — |
|
|
| — |
|
|
| 53.5 |
|
|
| — |
|
Dividends paid to Parent |
| — |
|
|
| — |
|
|
| (53.1 | ) |
|
| 53.1 |
|
|
| — |
|
Treasury stock repurchases |
| (1.3 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1.3 | ) |
Debt issuance costs |
| (0.2 | ) |
|
| — |
|
|
|
|
|
|
|
|
|
|
| (0.2 | ) |
Net cash provided by (used in) financing activities |
| 0.5 |
|
|
| — |
|
|
| (53.1 | ) |
|
| 106.6 |
|
|
| 54.0 |
|
Effect of exchange rate on cash and cash equivalents |
| — |
|
|
| — |
|
|
| 2.2 |
|
|
| — |
|
|
| 2.2 |
|
Net decrease in cash and cash equivalents |
| (24.6 | ) |
|
| (1.3 | ) |
|
| (11.9 | ) |
|
| — |
|
|
| (37.8 | ) |
Cash and cash equivalents at beginning of year |
| 24.9 |
|
|
| 5.0 |
|
|
| 17.4 |
|
|
| — |
|
|
| 47.3 |
|
Cash and cash equivalents at end of period | $ | 0.3 |
|
| $ | 3.7 |
|
| $ | 5.5 |
|
| $ | — |
|
| $ | 9.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
Donnelley Financial Solutions, Inc.
Notes to the Unaudited Condensed Consolidated Financial Statements
(in millions, except per share data, unless otherwise indicated)
Condensed Consolidating Statements of Cash Flows
For the Six Months Ended June 30, 2018
| Parent |
|
| Guarantor Subsidiaries |
|
| Non-guarantor Subsidiaries |
|
| Eliminations |
|
| Consolidated |
| |||||
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities | $ | (24.2 | ) |
| $ | (10.3 | ) |
| $ | (15.7 | ) |
| $ | — |
|
| $ | (50.2 | ) |
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
| — |
|
|
| (14.7 | ) |
|
| (0.9 | ) |
|
| — |
|
|
| (15.6 | ) |
Intercompany note receivable, net |
| — |
|
|
| — |
|
|
| 11.5 |
|
|
| (11.5 | ) |
|
| — |
|
Other investing activities |
| — |
|
|
| (0.6 | ) |
|
| — |
|
|
| 0.6 |
|
|
| — |
|
Net cash (used in) provided by investing activities |
| — |
|
|
| (15.3 | ) |
|
| 10.6 |
|
|
| (10.9 | ) |
|
| (15.6 | ) |
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving facility borrowings |
| 206.5 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 206.5 |
|
Payments on revolving facility borrowings |
| (179.5 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (179.5 | ) |
Intercompany note payable, net |
| (11.5 | ) |
|
| — |
|
|
| — |
|
|
| 11.5 |
|
|
| — |
|
Proceeds from the issuance of common stock |
| 1.2 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1.2 |
|
Treasury stock repurchases |
| (0.8 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (0.8 | ) |
Other financing activities |
| — |
|
|
| — |
|
|
| 0.6 |
|
|
| (0.6 | ) |
|
| — |
|
Net cash provided by financing activities |
| 15.9 |
|
|
| — |
|
|
| 0.6 |
|
|
| 10.9 |
|
|
| 27.4 |
|
Effect of exchange rate on cash and cash equivalents |
| — |
|
|
| — |
|
|
| (1.8 | ) |
|
| — |
|
|
| (1.8 | ) |
Net decrease in cash and cash equivalents |
| (8.3 | ) |
|
| (25.6 | ) |
|
| (6.3 | ) |
|
| — |
|
|
| (40.2 | ) |
Cash and cash equivalents at beginning of year |
| 8.3 |
|
|
| 27.9 |
|
|
| 15.8 |
|
|
| — |
|
|
| 52.0 |
|
Cash and cash equivalents at end of period | $ | — |
|
| $ | 2.3 |
|
| $ | 9.5 |
|
| $ | — |
|
| $ | 11.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental non-cash disclosure: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany debt allocation | $ | (376.0 | ) |
| $ | 376.0 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Company Overview
As used in this management’s discussion and analysis, unless otherwise specified or the context otherwise requires, the “Company,” “DFIN,” “we,” “our,” and “us” refer to Donnelley Financial Solutions, Inc. (“DFIN,” orand its consolidated subsidiaries. This discussion and analysis should be read in conjunction with the “Company”)Company’s unaudited condensed consolidated financial statements and accompanying notes as well as the Company’s audited consolidated financial statements for the year ended December 31, 2019.
Company Overview
DFIN is a leading global risk and compliance solutions company. The Company provides regulatory filing and deal solutions via its software-as-a-service (“SaaS”),software technology-enabled services and print and distribution solutions to public and private companies, mutual funds and other regulated investment firms, to serve theirits clients’ regulatory and compliance needs. DFIN helps its clients comply with applicable regulations where and how they want to work in a digital world, providing numerous solutions tailored to each client’s precise needs. The prevailing trend is toward clients choosing to utilize the Company’s software solutions, in conjunction with its tech-enabled services, to meet their document and filing needs, while at the same time shifting away from physical print and distribution of documents, except for cases where it is still regulatorily required or requested by shareholders.
For corporate clients within its capital markets offerings, the Company offers technology-enabled filing solutions that allow U.S. public companies to comply with applicable U.S. Securities and Exchange Commission (“SEC”) regulations. The Company’s services includeregulations including filing agent services, digital document creation and online content management tools that support their corporate financial transactions and regulatory reporting. The Company providesreporting; solutions to facilitate clients’ communications with their shareholders; and virtual data rooms and other deal management solutions. For the investment markets,companies, including alternative investmentmutual fund and insurancealternative investment companies, the Company provides technology-enabled filing solutions including cloud-based tools for creating and filing high-quality regulatory documents andas well as solutions for investors designed to improve the speed of access to and accuracy of their access to investment information. Throughout a company’s life cycle, theThe Company serves its clients’ regulatory and compliance needs. The Company’s deep industryneeds throughout their respective life cycles.
Technological advancements, regulatory changes, and regulatory expertise and a commitment to exceptional service guides our clients to navigate a high-stakes and ever-changing regulatory environment.
Segments
The Company operates in two business segments:
|
|
|
|
*The Company sold its Language Solutions business on July 22, 2018. Refer to Note 3, Acquisitions and Dispositions, to the Unaudited Condensed Consolidated Financial Statements. Due to the sale of the Language Solutions business, the Company made changes to the reporting units within the U.S. segment. The former Language Solutions and other reporting unit has been renamed “Language Solutions.” Certain results previously included within the former Language Solutions and other reporting unit are now included within the Investment Markets reporting unit. Prior year amountsevolving workflow preferences, have been restated to conformled to the Company’s current reporting unit structure.
The Company reports certain unallocated general and administrative activities and associated expenses within “Corporate”, including, in part, executive, legal, finance, marketing and certain facility costs. In addition, certain costs and earningsclients managing more of employee benefit plans, such as pension income and share-based compensation, are included in Corporate and are not allocated to the reportable segments.
Forfinancial disclosure process themselves, changing the marketplace for the Company’s financial resultsservices and products. DFIN’s strategy in its Software Solutions segments (CM-SS and IC-SS, as defined below) aligns with the presentation of certain other financial informationchanging marketplace by segment, see Note 12, Segment Information, to the Unaudited Condensed Consolidated Financial Statements.
Products and Services
The Company separately reports its net sales and related cost of sales for its products and services offerings. The Company’s services offerings consist of document composition, compliance related EDGAR filing services, transaction solutions, language solutions, andfocusing the Company’s SaaSinvestments and resources in its advanced software solutions, including Venueprimarily ActiveDisclosure, FundSuiteArc and Venue® Virtual Data Room (“Venue”), FundSuiteArc, ActiveDisclosure and EDGAR Online, among others. The Company’s product offerings primarily consist of conventional and digital printed products and related shipping costs.
Executive Overview
Second Quarter Overview
Net sales decreased by $31.7 million, or 10.9%, for the second quarter of 2019 compared to the same period in the prior year, including a $1.1 million, or 0.4%, decrease due to changes in foreign exchange rates. Net sales decreased $19.8 million due to the impact of the sale of the Language Solutions business in July 2018. In addition, net sales decreased due to lower capital markets transactions and compliance volumes. The decrease in net sales was partially offset by higher volumes in mutual fund print and growth in SaaS solutions, primarily in ActiveDisclosure, as wellwhile making targeted investments, such as the Company’s acquisition of eBrevia to further broaden its solution set. In its Compliance & Communications Management segments (CM-CCM and growth in FundSuiteArc.
OUTLOOK
Competition
Technological and regulatory changes, including the electronic distribution of documents, continue to impact the market for our products and services. In addition toIC-CCM, as defined below), the Company’s ongoing innovation instrategy focuses on maintaining its SaaS solutions, one of the Company’s competitive strengths is that it offers a wide array of communications products, compliance services, a global platform, exceptional sales and service and regulatory domain expertise, which provide differentiated solutions for its clients.
The global risk and compliance industry, in general, is highly competitive and barriers to entry have decreased as a result of technology innovation. Despite some consolidation in recent years, the industry remains highly fragmented in the United States and even more so internationally with many in-country alternative providers. The Company expects competition to increase from existing competitors, as well as new and emerging market entrants. In addition, as the Company expands its product and service offerings, it may face competition from new and existing competitors. The Company competes primarily on product quality and functionality, service levels, subject matter regulatory expertise, security, price and reputation.
The impact of digital technologies has impacted many of the products and markets in which the Company competes, most acutely in the Company’s mutual fund, variable annuity and public company compliance business offerings. While the Company offersmarket-leading position by offering a high-touch, service orientedservice-oriented experience, technology changes have provided alternatives to the Company’s clients that allow them to manage moreusing its unique combination of the financial disclosure process themselves. The Company has invested in its own SaaS solutions, ActiveDisclosure, FundSuiteArc and Venue to serve clients and increase retention and has invested to expand capabilities and address new market sectors. The future impact of technology on the business is difficult to predict and could result in additional expenditures to restructure impacted operations or develop new technologies. In addition, the Company has made targeted acquisitions and investments in its existing business to offer clients innovativetech-enabled services and solutions, including acquisitions of eBreviaprint and EDGAR Online and investments in AuditBoard, Mediant and Peloton that support the Company’s position as a technology service leader in this evolving industry.
The Company’s competitors for SEC filing services for public company compliance clients include full service financial communications providers, technology point solution providers focused on financial communications and general technology providers. The Company’s competitors for SEC filing services for investment markets clients include full service traditional providers, small niche technology providers and local and regional print providers that bid against the Company for printing, mailing and fulfillment services.distribution capabilities.
Market Volatility/Cyclicality
The Company isCompany’s Capital Markets segments (CM-SS and CM-CCM), in particular, are subject to market volatility in the United States and world economy, as the success of the transactional offeringand Venue offerings is largelyhighly dependent on the global market for IPOs,initial public offerings (“IPOs”), secondary offerings, mergers and acquisitions (“M&A”), public and private debt offerings, leveraged buyouts, spinouts and other transactions. A variety of factors impact the global markets for transactions, including economic activity levels, market volatility, the regulatory and political environment. Recently,environment, civil unrest and global pandemics, amongst others. The global transactional markets have been and continue to be disrupted due to the U.S. IPOCOVID-19 pandemic and its impacts to the overall economy and market volatility. Due to the significant net sales and public debt market were disrupted by the U.S. federal government shutdown that occurredprofitability derived from December 2018 to January 2019. Future government shutdowns could affect volatility of any of these markets. The International segment is particularly susceptible to capitaltransactional and Venue offerings, market volatility as most of the International business is capital markets transaction focused.can lead to uneven financial performance when comparing to previous periods. The Company mitigates somea portion of that risk by offering services in higher demand during a down market, like document management tools for the bankruptcy/restructuring process, and also by moving upstream from the filing process with products like Venue, the Company’s data room solution. The Company also attempts to balance this volatility through its compliance offerings, supporting the quarterly/quarterly and annual public company reporting processprocesses through its EDGAR filing services and ActiveDisclosure, product,as well as its investment marketscompanies regulatory and shareholder communications offering and continues to expand into adjacent growth businesses like data and analytics, which has recurring revenues and is not as susceptible to market volatility and cycles. The quarterly/annual public company reporting process work also subjects the Company to filing seasonality shortly after the end of each fiscal quarter, with peak periods during the course of the year. The seasonality and associated operational implications include the need to increase staff during peakofferings, including FundSuiteArc.
periods through a combined strategy of hiring additional full-timeServices and temporary personnel, increasing the premium time of existing staff, and outsourcing production for a number of services. Additionally, clients and their financial advisors have begun to increasingly rely on web-based services which allow clients to autonomously file and distribute compliance documents with regulatory agencies, such as the SEC. While the Company believes that its ActiveDisclosure and FundSuiteArc solutions are competitive in this space, competitors are continuing to develop technologies that aim to improve clients’ ability to autonomously produce and file documents to meet their regulatory obligations. Products
The Company continues to remain focused on driving recurring revenue to mitigate market volatility.separately reports its net sales and related cost of sales for its software solutions, tech-enabled services and print and distribution offerings. The Company’s software solutions consist of Venue, ActiveDisclosure, eBrevia, FundSuiteArc, and others. The Company’s tech-enabled services offerings consist of document composition, compliance-related SEC’s Electronic Data Gathering, Analysis, and Retrieval (“EDGAR”) filing services and transaction solutions. The Company’s print and distribution offerings primarily consist of conventional and digital printed products and the related shipping.
Regulatory ImpactDevelopments
The SEC is adopting new rules and forms andas well as amending existing rules and forms to modernize the reporting and disclosure of information by registered investment companies. These changes are driving significant regulatory changes which impact the Company’s customers within its Investment MarketsCompanies business. OnAs further disclosed in the Company’s Annual Report, on October 13, 2016, the SEC adopted a new N-PORT filing requirement, which requires certain registered investment companies to report information about their portfolio in XML, a structured data format, on a monthly basis, replacing what was previously a quarterly filing requirement. This rule also includes an annual N-CEN filing in XML, replacing a semi-annual filing requirement. Compliance dates depend on asset size and began as soon as June 1, 2018 for larger funds. The first N-PORT filing deadlines began in April 2019.2019 for larger funds with over $1 billion in assets and, beginning in April 2020, smaller funds began filing N-PORT on a quarterly basis. The Company’s ArcFiling software solution supports both filings. The Company expects an increase in SaaS revenue due to the increase in the frequency of filings for registered investment companies.
On June 5, 2018, the SEC adopted Rule 30e-3 which provides certain registered investment companies with an option to electronically deliver shareholder reports and other materials rather than providing such reports in paper. Investors who prefer to receive reports in paper will continue to receive them in that format. While Rule 30e-3 was effective January 1, 2019, default electronic distribution pursuant to the rule will begin on January 1, 2021 due to a 24-month transition period, during which registered investment companies must notify investors of the upcoming change in transmission format of shareholder reports. The Company expects a decline in the volume of printed annual and semi-annual shareholder reports in 2021 and beyond as a result of Rule 30e-3.
Raw MaterialsOn March 11, 2020, the SEC announced that it has adopted a new rule 498A under the Securities Act of 1933, as amended (the “Securities Act”) and related regulatory amendments permitting variable annuity and variable life insurance contracts to use a more concise summary prospectus to provide disclosures to investors. More detailed information about the variable annuity or variable life insurance contract will be available online, and an investor can now choose to have that information delivered on paper. The new rule and related form amendments will become effective on July 1, 2020 with compliance required by January 1, 2022. The Company expects the majority of its insurance customers will adopt the rule by early 2021. As a result, the Company expects a decline in printed prospectus volume in 2021 and beyond. Based on the requirements of the rule, the Company is also expecting an increase in revenue from the ArcPro software solution and related regulatory filings.
Segments
In the first quarter of 2020, management realigned the Company’s operating segments to reflect changes in the manner in which the chief operating decision maker assesses information for decision-making purposes. The Company’s four operating and reportable segments are: Capital Markets – Software Solutions (“CM-SS”), Capital Markets – Compliance and Communications Management (“CM-CCM”), Investment Companies – Software Solutions (“IC-SS”), and Investment Companies – Compliance and Communications Management (“IC-CCM”). Corporate is not an operating segment and consists primarily of unallocated selling, general and administrative (“SG&A”) activities and associated expenses, as further described below.
All prior year amounts related to segments have been reclassified to conform to the Company’s current reporting structure. There is no impact on the Company’s previously reported consolidated statements of operations, statements of comprehensive income, balance sheets, statements of cash flows or statements of changes in stockholders’ equity as a result of the new segmentation. For the Company’s financial results and the presentation of certain other financial information by segment, see Note 13, Segment Information, to the Unaudited Condensed Consolidated Financial Statements.
Capital Markets
The primary raw materialsCompany provides software solutions, technology-enabled services and print and distribution solutions to public and private companies for deal solutions and compliance to companies that are or preparing to become subject to the filing and reporting requirements of the Securities Act and the Securities Act of 1934, as amended (the “Exchange Act”). Capital markets’ clients leverage the Company’s software offerings, proprietary technology, deep industry expertise and experience to successfully navigate the SEC’s specified file formats when submitting compliance documents through the EDGAR system for their transactional and ongoing compliance needs. The Company assists its capital markets clients throughout the course of public and private business transactions; M&A, IPOs, debt offerings and other similar transactions. In addition, the Company provides clients with compliance solutions to prepare their ongoing required Exchange Act filings that are compatible with the SEC’s EDGAR system, most notably Form 10-K, Form 10-Q, Form 8-K and Proxy Form DEF 14A. The Company’s operating segments associated with its capital markets services and products offerings are as follows:
Capital Markets – Software Solutions—The Company provides software solutions to its capital markets clients through its CM-SS segment. The Company’s Venue solution is a highly secure data room platform that allows clients to share confidential information in real-time throughout the transaction lifecycle. Clients can maintain control over sensitive data when conducting due diligence for M&A, raising capital for an IPO or developing a document repository. Specifically, companies have used Venue to securely organize, manage, distribute and track corporate governance, financing, legal and other documents in an online workspace accessible to internal and outside advisors. Via integration with the Company’s eBrevia solution, Venue can use artificial intelligence to analyze documents to help clients better understand their content and make informed decisions.
The Company’s cloud-based ActiveDisclosure platform provides clients with end-to-end solutions to collaborate, tag, validate and file with the SEC efficiently. By leveraging its browser-enabled platform, ActiveDisclosure brings teams together across departments, functions and geographies in real time to create and edit Word, Excel or PowerPoint documents across devices, simultaneously. When combined with ActiveLink, a synchronous updating tool, ActiveDisclosure seamlessly flows changes throughout an entire document automatically, reducing risk and providing additional assurance to clients.
The Company’s EDGAR® Online solution delivers intelligent solutions in financial disclosures, creating and distributing company data and public filings for equities, mutual funds and other publicly traded assets.
Capital Markets – Compliance & Communications Management—The CM-CCM segment provides technology-enabled services and print and distribution solutions for its capital markets clients. In addition, the Company offers clients the use of private conferencing facilities in most major cities in the U.S. and international jurisdictions to maintain confidentiality in deal negotiations and provide clients a place to host in-person working groups to meet, strategize and prepare documents for the transactional deal stream.
Investment Companies
The Company provides software solutions, technology-enabled services and print, distribution and fulfillment solutions to its investment companies clients that are subject to the filing and reporting requirements of the Securities Act of 1940, as amended (the “Investment Act”), primarily mutual fund companies, alternative investment companies, insurance companies and third-party fund administrators. The Company’s printed products are papersuite of solutions enables its investment company clients to comply with applicable ongoing SEC regulations, as well as to create, manage, and ink.deliver accurate and timely financial communications to investors and regulators. The paperCompany also provides pre- and ink are sourced from a small set of select supplierspost-enrollment information to ensure consistent quality that meetshealthcare providers. Investment company clients leverage the Company’s proprietary technology, deep industry expertise and experience to successfully navigate the SEC’s specified file formats when submitting compliance documents through the EDGAR system. The Company’s operating segments associated with its investment companies services and products offerings are as follows:
Investment Companies – Software Solutions—The Company provides software products to its investment companies clients through its IC-SS segment. The Company’s proprietary FundSuiteArc software platform provides clients with a comprehensive suite of cloud-based solutions and services that store and manage information in a self-service, central repository for compliance and regulatory documents to be easily accessed, assembled, edited, translated, rendered and submitted to regulators. FundSuiteArc offers cloud-based solutions featuring automation and single-source data validation that streamlines processes and drives efficiency for clients. FundSuiteArc includes ArcFiling, ArcReporting, ArcPro, and ArcRegulatory.
Investment Companies – Compliance & Communications Management—Through its IC-CCM segment, the Company provides its investment companies clients with technology-enabled solutions for creating and filing high-quality regulatory documents and solutions for investor communications, as well as the eXtensible Business Reporting Language (“XBRL”)-formatted filings pursuant to the Investment Act, through the SEC’s EDGAR system.
The IC-CCM segment also provides turnkey proxy services, including discovery, planning and implementation, print and mail management, solicitation, tabulation services, shareholder meeting review and expert support.
Corporate
The Company reports certain unallocated SG&A activities and associated expenses within Corporate, including, in part, executive, legal, finance, marketing, communications and certain facility costs. In addition, certain costs and earnings of employee benefit plans, such as pension and other postretirement benefit plan expense (income) and share-based compensation, are included in Corporate and are not allocated to the operating segments.
Executive Overview
First Quarter Overview
Net sales decreased by $8.9 million, or 3.9%, to $220.7 million from $229.6 million for the first quarter of 2020 compared to the same period in the prior year, including a $0.5 million, or 0.2%, decrease due to changes in foreign exchange rates. Net sales decreased primarily due to lower mutual funds compliance and transaction print, lower commercial print and lower capital markets transactional print, partially offset by higher FundSuiteArc and ActiveDisclosure volumes.
Income from operations for the first quarter of 2020 increased by $5.3 million, or 80.3%, to $11.9 million from $6.6 million for the three months ended March 31, 2019, primarily due to the favorable sales mix and the impact from cost control initiatives.
COVID-19
In December 2019, a novel strain of coronavirus, currently known as COVID-19 (“COVID-19”), was identified in China and has since extensively impacted the global health and economic environment. On March 11, 2020, the World Health Organization (“WHO”) characterized COVID-19 as a pandemic. Although COVID-19 has adversely impacted the Company’s financial condition, results of operations and overall financial performance, expectationsthe extent of that impact is currently uncertain and providesdepends on factors including the impact on the Company’s customers, employees and vendors.
The COVID-19 pandemic may have a material adverse impact on the Company’s customers’ financial results, which may force the Company’s clients to alter their plans for purchasing the Company’s services and products. In addition, the global markets have been and continue to be disrupted due to the COVID-19 pandemic, which has negatively impacted the Company’s transactional offerings and that negative impact is expected to continue. Some of this volatility is mitigated through the Company’s compliance offerings, supporting the quarterly and annual public company reporting processes, as well as its investment companies regulatory and shareholder communications offerings. If the Company’s customers reduce, defer or cancel their spending with DFIN, it would materially adversely impact the Company’s business, results of operations and overall financial performance.
Some of the Company’s operations also have been affected by a range of external factors related to the COVID-19 pandemic that are not within the Company’s control. For example, many jurisdictions have imposed a wide range of restrictions on the physical movement of the Company’s employees and vendors to limit the spread of COVID-19. If the COVID-19 pandemic has a substantial impact on the Company’s or vendors’ employee attendance or productivity, the Company’s operations are expected to be adversely affected, and in turn the Company’s results of operations and overall financial performance would be harmed. Furthermore, the Company’s insurance costs may increase.
The Company has taken numerous steps, and will continue to take further actions, in its response to the COVID-19 pandemic. The Company has implemented business continuity plans and has instructed all employees that can work from home to do so, has implemented travel restrictions and has conducted virtual customer and employee meetings. These decisions may delay or reduce sales and harm productivity and collaboration. The Company has also incurred $0.8 million of supply. incremental expenses as a result of the COVID-19 pandemic during the three months ended March 31, 2020, including incremental vendor costs, premium wages paid to certain employees as well as costs to clean and disinfect the Company’s facilities more frequently. The Company expects to continue to incur such costs in future periods, however, the impact of such costs on the Company’s financial condition, results of operations and overall financial performance cannot be predicted at this time. The Company is also working closely with its clients to support them as they implement their own contingency plans, helping them access the Company’s services and products and continue to meet their regulatory requirements.
The Company believes that implementing cost reduction efforts will help mitigate the riskimpact that reduced revenues will have on 2020 income from operations. The Company has reduced expenses and may take further actions that alter its business operations as the situation evolves. The ultimate impact of incurring material losses as a resultthe COVID-19 pandemic and the effects on the Company’s business, financial condition, liquidity, and financial results cannot be predicted at this time. Refer to “Risk Factors” for further discussion of a shortage in raw materials is unlikely and that the losses, if any, would not have a materially negative impact of the COVID-19 pandemic on the Company’s business.
Distribution
The Company’s products are distributed to end-users through the U.S or foreign postal services, through retail channels, electronically or by direct shipment to customer facilities.
Significant Accounting Policies and Critical EstimatesFinancial Review
The preparation of financial statements in conformity with GAAPaccounting principles generally accepted in the United States (“GAAP”) requires the extensive use of management’s estimates and assumptions that affect the reported amounts of assets and liabilities and disclosureas well as disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates. The Company’s significant accounting policies and critical estimates are disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018,2019, as filed with the SEC on February 27, 2019.
Financial Review26, 2020 (the “Annual Report”).
In the financial review that follows, the Company discusses its unaudited condensed consolidated results of operations, cash flows and certain other information. This discussion should be read in conjunction with the Company’s Unaudited Condensed Consolidated Financial Statements and the related notes.
Results of Operations for the Three Months Ended June 30, 2019months ended March 31, 2020 as Compared to the Three Months Ended June 30, 2018months ended March 31, 2019
The following table shows the results of operations for the three months ended June 30, 2019March 31, 2020 and 2018:
March 31, 2019:
| 2019 |
|
| 2018 |
|
| $ Change |
|
| % Change |
| ||||
| (in millions, except percentages) |
| |||||||||||||
Services net sales | $ | 161.2 |
|
| $ | 187.9 |
|
| $ | (26.7 | ) |
|
| (14.2 | %) |
Products net sales |
| 97.7 |
|
|
| 102.7 |
|
|
| (5.0 | ) |
|
| (4.9 | %) |
Net sales |
| 258.9 |
|
|
| 290.6 |
|
|
| (31.7 | ) |
|
| (10.9 | %) |
Services cost of sales (exclusive of depreciation and amortization) |
| 75.6 |
|
|
| 92.0 |
|
|
| (16.4 | ) |
|
| (17.8 | %) |
Products cost of sales (exclusive of depreciation and amortization) |
| 73.4 |
|
|
| 73.6 |
|
|
| (0.2 | ) |
|
| (0.3 | %) |
Cost of sales |
| 149.0 |
|
|
| 165.6 |
|
|
| (16.6 | ) |
|
| (10.0 | %) |
Selling, general and administrative expenses (exclusive of depreciation and amortization) |
| 57.9 |
|
|
| 75.1 |
|
|
| (17.2 | ) |
|
| (22.9 | %) |
Restructuring, impairment and other charges-net |
| 3.8 |
|
|
| 2.6 |
|
|
| 1.2 |
|
|
| 46.2 | % |
Depreciation and amortization |
| 12.0 |
|
|
| 11.1 |
|
|
| 0.9 |
|
|
| 8.1 | % |
Other operating loss |
| 2.8 |
|
|
| — |
|
|
| 2.8 |
|
|
| 100.0 | % |
Income from operations | $ | 33.4 |
|
| $ | 36.2 |
|
| $ | (2.8 | ) |
|
| (7.7 | %) |
|
| Three Months Ended March 31, |
| |||||||||||||
|
| 2020 |
|
| 2019 |
|
| $ Change |
|
| % Change |
| ||||
| (in millions, except percentages) |
| ||||||||||||||
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tech-enabled services |
| $ | 81.9 |
|
| $ | 83.2 |
|
| $ | (1.3 | ) |
|
| (1.6 | %) |
Software solutions |
|
| 47.3 |
|
|
| 44.7 |
|
|
| 2.6 |
|
|
| 5.8 | % |
Print and distribution |
|
| 91.5 |
|
|
| 101.7 |
|
|
| (10.2 | ) |
|
| (10.0 | %) |
Total net sales |
|
| 220.7 |
|
|
| 229.6 |
|
|
| (8.9 | ) |
|
| (3.9 | %) |
Cost of sales (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tech-enabled services |
|
| 42.8 |
|
|
| 48.8 |
|
|
| (6.0 | ) |
|
| (12.3 | %) |
Software solutions |
|
| 24.8 |
|
|
| 26.6 |
|
|
| (1.8 | ) |
|
| (6.8 | %) |
Print and distribution |
|
| 68.7 |
|
|
| 78.5 |
|
|
| (9.8 | ) |
|
| (12.5 | %) |
Total cost of sales |
|
| 136.3 |
|
|
| 153.9 |
|
|
| (17.6 | ) |
|
| (11.4 | %) |
Selling, general and administrative expenses (1) |
|
| 57.0 |
|
|
| 54.9 |
|
|
| 2.1 |
|
|
| 3.8 | % |
Depreciation and amortization |
|
| 12.4 |
|
|
| 12.1 |
|
|
| 0.3 |
|
|
| 2.5 | % |
Restructuring, impairment and other charges, net |
|
| 3.1 |
|
|
| 2.1 |
|
|
| 1.0 |
|
|
| 47.6 | % |
Income from operations |
|
| 11.9 |
|
|
| 6.6 |
|
|
| 5.3 |
|
|
| 80.3 | % |
Interest expense, net |
|
| 4.6 |
|
|
| 8.9 |
|
|
| (4.3 | ) |
|
| (48.3 | %) |
Investment and other income, net |
|
| (0.4 | ) |
|
| (0.6 | ) |
|
| 0.2 |
|
|
| (33.3 | %) |
Earnings (loss) before income taxes |
|
| 7.7 |
|
|
| (1.7 | ) |
|
| 9.4 |
|
| nm |
| |
Income tax expense (benefit) |
|
| 3.6 |
|
|
| (0.3 | ) |
|
| 3.9 |
|
| nm |
| |
Net earnings (loss) |
| $ | 4.1 |
|
| $ | (1.4 | ) |
| $ | 5.5 |
|
| nm |
|
________________
(1) | Exclusive of depreciation and amortization. |
nm – Not meaningful
Consolidated
Net sales of tech-enabled services for the three months ended June 30, 2019March 31, 2020 decreased $26.7$1.3 million, or 14.2%1.6%, to $161.2$81.9 million, versus the three months ended June 30, 2018, including a $0.7 million, or 0.4%, decrease due to changes in foreign exchange rates.March 31, 2019. Net sales of services decreased $19.8 million due to the July 2018 sale of the Language Solutions business. In addition, net sales oftech-enabled services decreased due to lower capital markets transactionstransactional and compliance volumes, partially offset by growth in SaaS solutions, primarily in ActiveDisclosure, as well as the acquisition of eBrevia and growth in FundSuiteArc.volumes.
Net sales of productssoftware solutions for the three months ended June 30, 2019 decreased $5.0March 31, 2020 increased $2.6 million, or 4.9%5.8%, to $97.7$47.3 million versus the three months ended June 30, 2018, including a $0.4 million, or 0.4%, decrease due to changes in foreign exchange rates.March 31, 2019. Net sales of products decreasedsoftware solutions increased primarily due to lower capital markets compliancehigher FundSuiteArc and transactions volumesActiveDisclosure volumes.
Net sales of print and lower commercial print volumes, partially offset by higher volumes in mutual fund print.
Services cost of sales decreased $16.4 million, or 17.8%,distribution for the three months ended June 30, 2019March 31, 2020 decreased $10.2 million, or 10.0%, to $91.5 million versus the three months ended June 30, 2018, primarilyMarch 31, 2019. Net sales of print and distribution decreased due to the impact from the sale of the Language Solutions business. In addition,lower mutual funds compliance and transactional print, lower commercial print and lower capital markets transactional print.
Tech-enabled services cost of sales decreased due to lower volumes in capital markets transactions and compliance and cost control initiatives. As a percentage of net sales, services cost of sales decreased 2.1% primarily due to favorable mix and cost control initiatives.
Products cost of sales decreased $0.2 million, or 0.3%, for the three months ended June 30, 2019, versus the three months ended June 30, 2018. Products cost of salesMarch 31, 2020 decreased due to lower capital markets compliance and transactions volumes and commercial print volumes, partially offset by higher mutual fund print volumes. As a percentage of net sales, products cost of sales increased 3.4%, primarily due to unfavorable mix.
Selling, general and administrative expenses decreased $17.2$6.0 million, or 22.9%12.3%, to $57.9$42.8 million, for the three months ended June 30, 2019, as compared to the three months ended June 30, 2018,March 31, 2019, primarily due to lower spin-off related transaction expenses, the impact from the sale of the Language Solutions businesslower volumes and cost control initiatives. As a percentage of tech-enabled services net sales, selling, general, and administrative expensestech-enabled services cost of sales decreased from 25.8% for the three months June 30, 2018 to 22.4% for the three months ended June 30, 2019, primarily due to lower spin-off related transaction expenses and6.4% as a result of cost control initiatives.
For the three months ended June 30, 2019, the Company recorded net restructuring, impairment and other chargesSoftware solutions cost of $3.8sales decreased $1.8 million, as comparedor 6.8%, to net restructuring, impairment and other charges of $2.6$24.8 million, for the three months ended June 30, 2018. InMarch 31, 2020 versus the three months ended March 31, 2019, these charges included $3.8 millionprimarily due to the impact of employee termination costs for 96 employees. In 2018, these charges included $2.4 millioncost control initiatives. As a percentage of employee termination costs for 47 employeessoftware solutions net sales, software solutions cost of sales decreased 7.1% as a result of cost control initiatives.
Print and $0.2 milliondistribution cost of lease termination and other restructuring costs.
Depreciation and amortization increased $0.9sales decreased $9.8 million, or 8.1%12.5%, to $12.0$68.7 million, for the three months ended June 30, 2019March 31, 2020 versus the three months ended March 31, 2019. Print and distribution cost of sales decreased due to the lower volumes and cost control initiatives. As a percentage of print and distribution net sales, print and distribution cost of sales decreased 2.1% as a result of cost control initiatives.
SG&A expenses increased $2.1 million, or 3.8%, to $57.0 million, for the three months ended March 31, 2020, as compared to the three months ended June 30, 2018.March 31, 2019, primarily due to higher healthcare benefit claims. As a percentage of net sales, SG&A expenses increased from 23.9% for the three months ended March 31, 2019 to 25.8% for the three months ended March 31, 2020 due to higher healthcare benefit claims and higher commission expenses due to sales mix.
Depreciation and amortization increased $0.3 million, or 2.5%, to $12.4 million for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. Depreciation and amortization included $3.6$3.4 million and $3.5$3.7 million of amortization of other intangible assets related to customer relationships and a tradename for the three months ended June 30,March 31, 2020 and 2019, respectively.
Restructuring, impairment and 2018, respectively.
Other operating lossother charges, net for the three months ended June 30, 2019March 31, 2020, were $3.1 million, as compared to $2.1 million for the three months ended March 31, 2019. In 2020, these charges included $2.8$1.6 million recognized for the estimated payment employee termination costs of amounts51 employees, substantially all of whom were terminated as of March 31, 2020, and $1.5 million for other charges primarily related to the 2018 dispositionrealignment of the Language Solutions business. Company’s operating segments. In 2019, these charges included $2.0 million of employee termination costs for 72 employees, substantially all of whom were terminated as of March 31, 2019.
Income from operations for the three months ended June 30, 2019 decreased $2.8March 31, 2020 increased $5.3 million, or 7.7%80.3%, to $33.4$11.9 million versus the three months ended June 30, 2018,March 31, 2019, primarily due to lower capital markets transactionsthe favorable sales mix and compliance volumes, partially offset by higher mutual fund volumes, lower spin-off related transaction expenses andthe impact from the cost control initiatives.
| 2019 |
|
| 2018 |
|
| $ Change |
|
| % Change |
| ||||
| (in millions, except percentages) |
| |||||||||||||
Interest expense-net | $ | 9.1 |
|
| $ | 9.8 |
|
| $ | (0.7 | ) |
|
| (7.1 | %) |
Net interestInterest expense, net decreased $0.7$4.3 million to $4.6 million for the three months ended June 30,March 31, 2020 versus the same period in 2019, compareddue to the payoff of the Company’s term loan credit facility in 2019 and the $2.3 million gain on debt extinguishment during three months ended March 31, 2020, as further described in Note 8, Debt, partially replaced by the Revolving Facility (as defined below) that carries a lower interest rate.
Investment and other income, net for both the three months ended June 30, 2018 due to a decrease in average outstanding debt.March 31, 2020 and the three months ended March 31, 2019primarily consisted of net pension plan income.
| 2019 |
|
| 2018 |
|
| $ Change |
|
| % Change |
| ||||
| (in millions, except percentages) |
| |||||||||||||
Earnings before income taxes | $ | 24.8 |
|
| $ | 27.2 |
|
| $ | (2.4 | ) |
|
| (8.8 | %) |
Income tax expense |
| 7.5 |
|
|
| 8.3 |
|
|
| (0.8 | ) |
|
| (9.6 | %) |
Effective income tax rate |
| 30.2 | % |
|
| 30.5 | % |
|
|
|
|
|
|
|
|
The effective income tax rate was 30.2%46.8% for the three months ended June 30, 2019March 31, 2020 compared to 30.5%17.6% for the three months ended June 30, 2018.
March 31, 2019. The effective income tax rate for the three months ended March 31, 2020 was primarily driven by the Company’s inability to recognize a tax benefit on certain losses. The effective income tax rate for the three months ended March 31, 2019 reflects lower earnings as well as a decrease in the taxation of certain foreign earnings.
Information by Segment
The following tables summarize net sales, income (loss) from operations and certain items impacting comparability within each of the operating segments and Corporate.
U.S.Capital Markets – Software Solutions
| Three Months Ended June 30, |
|
| Three Months Ended March 31, |
|
|
|
|
|
|
|
|
| ||||||||||
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
|
| $ Change |
|
| % Change |
| ||||||
| (in millions, except percentages) |
|
| (in millions, except percentages) |
| ||||||||||||||||||
Net sales | $ | 223.2 |
|
| $ | 242.5 |
|
| $ | 31.2 |
|
| $ | 30.5 |
|
| $ | 0.7 |
|
|
| 2.3 | % |
Income from operations |
| 40.4 |
|
|
| 46.9 |
|
|
| 1.8 |
|
|
| 0.1 |
|
|
| 1.7 |
|
| nm |
| |
Operating margin |
| 18.1 | % |
|
| 19.3 | % |
|
| 5.8 | % |
|
| 0.3 | % |
|
|
|
|
|
|
|
|
Restructuring, impairment and other charges-net |
| 2.7 |
|
|
| 0.6 |
| ||||||||||||||||
Loss on sale of Language Solutions business |
| 1.2 |
|
|
| — |
| ||||||||||||||||
Spin-off related transaction expenses |
| — |
|
|
| 7.7 |
| ||||||||||||||||
Items impacting comparability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Restructuring, impairment and other charges, net |
|
| 0.3 |
|
|
| 0.3 |
|
|
| — |
|
|
| — |
|
________________
| Net Sales for the Three Months |
|
|
|
|
|
|
|
|
| |||||
| Ended June 30, |
|
|
|
|
|
|
|
|
| |||||
Reporting unit | 2019 |
|
| 2018 |
|
| $ Change |
|
| % Change |
| ||||
| (in millions, except percentages) |
| |||||||||||||
Capital Markets | $ | 128.3 |
|
| $ | 144.6 |
|
| $ | (16.3 | ) |
|
| (11.3 | %) |
Investment Markets* |
| 94.9 |
|
|
| 91.5 |
|
|
| 3.4 |
|
|
| 3.7 | % |
Language Solutions* |
| — |
|
|
| 6.4 |
|
|
| (6.4 | ) |
|
| (100.0 | %) |
Total U.S. | $ | 223.2 |
|
| $ | 242.5 |
|
| $ | (19.3 | ) |
|
| (8.0 | %) |
nm – Not meaningful
*Certain prior year amounts were restated to conform to the Company’s current reporting unit structure.
Net sales for the U.S. segment for the three months ended June 30, 2019March 31, 2020 were $223.2$31.2 million, a decreasean increase of $19.3$0.7 million, or 8.0%2.3%, compared to the three months ended June 30, 2018.March 31, 2019. Net sales decreased due to lower capital markets transaction volumes, the sale of the Language Solutions business, lower capital markets compliance volumes and lower commercial print volumes, partially offset by higher mutual fund print volumes and growth in SaaS solutions,increased primarily due to higher ActiveDisclosure and the acquisition of eBrevia. An analysis of net sales by reporting unit follows:volumes.
|
|
|
|
|
|
U.S. segment incomeIncome from operations decreased $6.5increased $1.7 million or 13.9%,to $1.8 million for the three months ended June 30, 2019March 31, 2020 as compared to the three months ended June 30, 2018March 31, 2019, primarily due to the impact of cost control initiatives.
Operating margins increased from 0.3% for the three months ended March 31, 2019 to 5.8% for the three months ended March 31, 2020 primarily due to cost control initiatives.
Capital Markets – Compliance and Communication Management
|
| Three Months Ended March 31, |
|
|
|
|
|
|
|
|
| |||||
|
| 2020 |
|
| 2019 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in millions, except percentages) |
| |||||||||||||
Net sales |
| $ | 99.1 |
|
| $ | 102.0 |
|
| $ | (2.9 | ) |
|
| (2.8 | %) |
Income from operations |
|
| 21.4 |
|
|
| 14.7 |
|
|
| 6.7 |
|
|
| 45.6 | % |
Operating margin |
|
| 21.6 | % |
|
| 14.4 | % |
|
|
|
|
|
|
|
|
Items impacting comparability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring, impairment and other charges, net |
|
| 0.5 |
|
|
| 0.9 |
|
|
| (0.4 | ) |
|
| (44.4 | %) |
COVID-19 related expenses |
|
| 0.3 |
|
|
| — |
|
|
| 0.3 |
|
| nm |
|
_____________
nm – Not meaningful
Net sales for the three months ended March 31, 2020 were $99.1 million, a decrease of $2.9 million, or 2.8%, compared to the three months ended March 31, 2019 primarily due to lower transactional and compliance volumes.
Income from operations increased $6.7 million, or 45.6%, to $21.4 million compared to the three months ended March 31, 2019, primarily due to cost control initiatives and a favorable sales mix.
Operating margins increased from 14.4% for the three months ended March 31, 2019 to 21.6% for the three months ended March 31, 2020 primarily due to cost control initiatives and a favorable sales mix.
Investment Companies – Software Solutions
|
| Three Months Ended March 31, |
|
|
|
|
|
|
|
|
| |||||
|
| 2020 |
|
| 2019 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in millions, except percentages) |
| |||||||||||||
Net sales |
| $ | 16.1 |
|
| $ | 14.2 |
|
| $ | 1.9 |
|
|
| 13.4 | % |
Income (loss) from operations |
|
| 0.1 |
|
|
| (3.7 | ) |
|
| 3.8 |
|
| nm |
| |
Operating margin |
|
| 0.6 | % |
|
| (26.1 | %) |
|
|
|
|
|
|
|
|
Items impacting comparability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring, impairment and other charges, net |
|
| 0.3 |
|
|
| 0.1 |
|
|
| 0.2 |
|
| nm |
|
________________
nm – Not meaningful
Net sales for the three months ended March 31, 2020 were $16.1 million, an increase of $1.9 million, or 13.4%, compared to the three months ended March 31, 2019 primarily due to higher FundSuiteArc volumes.
Income from operations increased $3.8 million, or 102.7%, to $0.1 million compared to an operating loss of $3.7 million for the three months ended March 31, 2019, primarily due to cost control initiatives and higher sales volumes.
Operating margins increased from a negative margin of 26.1% for the three months ended March 31, 2019 to 0.6% for the three months ended March 31, 2020 primarily due to cost control initiatives.
Investment Companies – Compliance and Communication Management
|
| Three Months Ended March 31, |
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| 2020 |
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| 2019 |
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| $ Change |
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| % Change |
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| (in millions, except percentages) |
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Net sales |
| $ | 74.3 |
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| $ | 82.9 |
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| $ | (8.6 | ) |
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| (10.4 | %) |
Income from operations |
|
| 2.1 |
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| 6.7 |
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| (4.6 | ) |
|
| (68.7 | %) |
Operating margin |
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| 2.8 | % |
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| 8.1 | % |
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Items impacting comparability |
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Restructuring, impairment and other charges, net |
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| 0.4 |
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| 0.4 |
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|
| — |
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|
| — |
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COVID-19 related expenses |
|
| 0.5 |
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|
| — |
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| 0.5 |
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| nm |
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________________
nm – Not meaningful
Net sales for the three months ended March 31, 2020 were $74.3 million, a decrease of $8.6 million, or 10.4%, compared to the three months ended March 31, 2019 primarily due to lower mutual funds compliance and transactional volumes and lower commercial print volumes.
Income from operations decreased $4.6 million, or 68.7%, to $2.1 million compared to the three months ended March 31, 2019, primarily due to the impact of lower net sales volumes unfavorable mix and higher restructuring, impairment and other charges,COVID-19 related expenses, partially offset by lower spin-off related transaction expenses and cost control initiatives.
Operating margins decreased from 19.3%8.1% for the three months ended June 30, 2018March 31, 2019 to 18.1%2.8% for the three months ended June 30, 2019March 31, 2020 primarily due to unfavorable mix. Operating margins were also impacted by higher restructuring, impairment and other charges, which negatively impacted margins by 1.0 percentage points, and the estimated payment of amounts related to the 2018 sale of the Language Solutions business which negatively impacted margins by 0.5 percentage points,lower sales volume, partially offset by lower spin-off related transaction expenses, which favorably impacted margins by 3.2 percentage points.
International
| Three Months Ended June 30, |
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| 2019 |
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| 2018 |
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| (in millions, except percentages) |
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Net sales | $ | 35.7 |
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| $ | 48.1 |
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Income from operations |
| 1.6 |
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|
| 1.6 |
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Operating margin |
| 4.5 | % |
|
| 3.3 | % |
Loss on sale of Language Solutions business |
| 1.6 |
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|
| — |
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Restructuring, impairment and other charges-net |
| 0.4 |
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| 1.9 |
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Net sales for the International segment for the three months ended June 30, 2019 were $35.7 million, a decrease of $12.4 million, or 25.8%, compared to the three months ended June 30, 2018 including a $1.1 million, or 2.3%, decrease due to changes in foreign exchange rates. Net sales decreased $13.4 million due to the sale of the Language Solutions business. Net sales also decreased due to lower mutual funds volumes, partially offset by higher capital markets transactions and FundSuiteArc volumes.
International segment income from operations for the three months ended June 30, 2019 remained flat as compared to the three months ended June 30, 2018. Income from operations for the three months ended June 30, 2019 was unfavorably impacted by lower mutual funds and capital markets compliance volumes, the impact of the estimated payment of amounts related to the 2018 sale of the Language Solutions business and an increase in information technology expenses allocated to the International segment, offset by lower restructuring, impairment and other charges, higher FundSuiteArc volumes and cost control initiatives.
Operating margins increased from 3.3% for the three months ended June 30, 2018 to 4.5% for the three months ended June 30, 2019 due to lower restructuring, impairment and other charges which favorably impacted margins by 2.8 percentage points, partially offset by the impact of the loss on the sale of the Language Solutions business which negatively impacted margins by 4.4 percentage points and higher information technology expenses allocated to the International segment.
Corporate
The following table summarizes unallocated operating expenses and certain items impacting comparability within the activities presented as Corporate:
| Three Months Ended June 30, |
| Three Months Ended March 31, |
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| 2019 |
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| 2018 |
| 2020 |
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| 2019 |
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| (in millions) |
| (in millions) |
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Operating expenses | $ | 8.6 |
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| $ | 12.3 |
| $ | 13.5 |
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| $ | 11.2 |
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Items impacting comparability |
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Share-based compensation expense |
| 3.6 |
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| 3.3 |
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| 2.3 |
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| 1.5 |
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Restructuring, impairment and other charges-net |
| 0.7 |
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| 0.1 |
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Restructuring, impairment and other charges, net |
| 1.6 |
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| 0.4 |
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eBrevia contingent consideration |
| (0.4 | ) |
|
| — |
| |||||||
Investor-related expenses |
| 0.5 |
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|
| — |
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| — |
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| 1.0 |
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Spin-off related transaction expenses |
| — |
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| 0.7 |
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| — |
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| 0.4 |
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Disposition-related expenses |
| — |
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| 1.5 |
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Acquisition-related expenses |
| — |
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| 0.3 |
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Corporate operating expenses for the three months ended June 30, 2019 decreased $3.7March 31, 2020 increased $2.3 million, or 20.5%, versus the same period in 2018 primarily due to a decrease in disposition-related expenses and spin-off related transaction expenses, partially offset by higher restructuring, impairment and other charges and investor-related expenses.
Results of Operations for the Six Months Ended June 30, 2019 as Compared to the Six Months Ended June 30, 2018
The following table shows the results of operations for the six months ended June 30, 2019 and 2018:
| 2019 |
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| 2018 |
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| $ Change |
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| % Change |
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| (in millions, except percentages) |
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Services net sales | $ | 289.1 |
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| $ | 347.4 |
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| $ | (58.3 | ) |
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| (16.8 | %) |
Products net sales |
| 199.4 |
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| 198.4 |
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| 1.0 |
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| 0.5 | % |
Net sales |
| 488.5 |
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| 545.8 |
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| (57.3 | ) |
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| (10.5 | %) |
Services cost of sales (exclusive of depreciation and amortization) |
| 151.0 |
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| 177.9 |
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| (26.9 | ) |
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| (15.1 | %) |
Products cost of sales (exclusive of depreciation and amortization) |
| 151.9 |
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| 146.3 |
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| 5.6 |
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| 3.8 | % |
Cost of sales |
| 302.9 |
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| 324.2 |
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| (21.3 | ) |
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| (6.6 | %) |
Selling, general and administrative expenses (exclusive of depreciation and amortization) |
| 112.8 |
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| 141.2 |
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| (28.4 | ) |
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| (20.1 | %) |
Restructuring, impairment and other charges-net |
| 5.9 |
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| 3.3 |
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| 2.6 |
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| 78.8 | % |
Depreciation and amortization |
| 24.1 |
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| 21.5 |
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| 2.6 |
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| 12.1 | % |
Other operating loss |
| 2.8 |
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| — |
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| 2.8 |
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| 100.0 | % |
Income from operations | $ | 40.0 |
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| $ | 55.6 |
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| $ | (15.6 | ) |
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| (28.1 | %) |
Consolidated
Net sales of services for the six months ended June 30, 2019 decreased $58.3 million, or 16.8%, to $289.1 million, versus the six months ended June 30, 2018, including a $1.5 million, or 0.4%, decrease due to changes in foreign exchange rates. Net sales of services decreased $38.6 million due to the sale of the Language Solutions business. In addition, net sales of services decreased due to lower volumes in capital markets transactions, mutual fund print-related services and capital markets compliance, partially offset by growth in SaaS solutions, primarily in ActiveDisclosure, as well as the acquisition of eBrevia and growth in FundSuiteArc.
Net sales of products for the six months ended June 30, 2019 increased $1.0 million, or 0.5%, to $199.4 million versus the six months ended June 30, 2018, including a $0.7 million, or 0.4%, decrease due to changes in foreign exchange rates. Net sales of products increased due to higher volumes in mutual fund print, partially driven by a special proxy project. The increase in net sales was partially offset by lower capital markets transactions and commercial print volumes.
Services cost of sales for the six months ended June 30, 2019 decreased $26.9 million, or 15.1%, compared to the six months ended June 30, 2018, primarily due to the impact from the sale of the Language Solutions business. In addition, services cost of sales decreased due to lower capital markets transactions, mutual fund print-related services and capital markets compliance volumes and cost control initiatives. As a percentage of net sales, services cost of sales increased 1.0% primarily due to unfavorable mix.
Products cost of sales increased $5.6 million, or 3.8%, for the six months ended June 30, 2019, versus the six months ended June 30, 2018. Products cost of sales increased due to higher mutual fund print volumes, partially offset by lower capital markets transactions and commercial print volumes. As a percentage of net sales, products cost of sales increased 2.5% primarily due to unfavorable mix.
Selling, general and administrative expenses decreased $28.4 million, or 20.1%, to $112.8 million, for the six months ended June 30, 2019, as compared to the six months ended June 30, 2018, primarily due to lower spin-off related transaction expenses, the impact from the sale of the Language Solutions business, lower selling expenses and cost control initiatives, partially offset by higher restructuring, impairment and other charges, higher incentive compensation expense and investor-related expenses. As a percentage of net sales, selling, general, and administrative expenses decreased from 25.9% for the six months ended June 30, 2018 to 23.1% for the six months ended June 30, 2019 primarily due to lower spin-off related transaction expenses and cost control initiatives.
For the six months ended June 30, 2019, the Company recorded net restructuring, impairment and other charges of $5.9 million, as compared to $3.3 million for the six months ended June 30, 2018. In 2019, these charges included $5.8 million of employee termination costs for 164 employees. In 2018, these charges included $2.5 million of employee termination costs for 47 employees and $0.7 million of lease termination and other restructuring costs.
Depreciation and amortization increased $2.6 million, or 12.1%, to $24.1 million for the six months ended June 30, 2019 compared to the six months ended June 30, 2018. Depreciation and amortization included $7.3 million and $6.9 million of amortization of other intangible assets related to customer relationships and a tradename for the six months ended June 30, 2019 and 2018, respectively.
Other operating loss for the six months ended June 30, 2019 included $2.8 million recognized for the estimated payment of amounts related to the disposition of the Language Solutions business.
Income from operations for the six months ended June 30, 2019 decreased $15.6 million, or 28.1%, to $40.0 million versus the six months ended June 30, 2018, primarily due to lower capital markets transactions and compliance volumes, partially offset by an increase in mutual fund print volumes and lower spin-off related transaction expenses.
| 2019 |
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| 2018 |
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| $ Change |
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| % Change |
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| (in millions, except percentages) |
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Interest expense-net | $ | 18.0 |
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| $ | 18.8 |
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| $ | (0.8 | ) |
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| (4.3 | %) |
Net interest expense decreased $0.8 million for the six months ended June 30, 2019 versus the same period in 2018, due to a decrease in average outstanding debt.
| 2019 |
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| 2018 |
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| $ Change |
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| % Change |
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| (in millions, except percentages) |
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Earnings before income taxes | $ | 23.1 |
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| $ | 38.4 |
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| $ | (15.3 | ) |
|
| (39.8 | %) |
Income tax expense |
| 7.2 |
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| 11.8 |
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| (4.6 | ) |
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| (39.0 | %) |
Effective income tax rate |
| 31.2 | % |
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| 30.7 | % |
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The effective income tax rate was 31.2% for the six months ended June 30, 2019 compared to 30.7% for the six months ended June 30, 2018. The effective income tax rate for the six months ended June 30, 2019 reflects an increase in state tax expense and a decrease for the foreign derived intangible income deduction.
Information by Segment
The following tables summarize net sales, income (loss) from operations and certain items impacting comparability within each of the operating segments and Corporate.
U.S.
| Six Months Ended June 30, |
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| 2019 |
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| 2018 |
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| (in millions, except percentages) |
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Net sales | $ | 426.0 |
|
| $ | 455.6 |
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Income from operations |
| 61.7 |
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|
| 73.3 |
|
Operating margin |
| 14.5 | % |
|
| 16.1 | % |
Restructuring, impairment and other charges-net |
| 3.3 |
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| 1.3 |
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Loss on sale of Language Solutions business |
| 1.2 |
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|
| — |
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Spin-off related transaction expenses |
| — |
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| 14.0 |
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| Net Sales for the Six Months |
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| |||||
| Ended June 30, |
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Reporting unit | 2019 |
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| 2018 |
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| $ Change |
| % Change |
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| (in millions, except percentages) |
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Capital Markets | $ | 238.0 |
|
| $ | 262.1 |
|
| $ | (24.1 | ) |
| (9.2 | %) |
Investment Markets* |
| 188.0 |
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|
| 181.0 |
|
|
| 7.0 |
|
| 3.9 | % |
Language Solutions* |
| — |
|
|
| 12.5 |
|
|
| (12.5 | ) |
| (100.0 | %) |
Total U.S. | $ | 426.0 |
|
| $ | 455.6 |
|
| $ | (29.6 | ) |
| (6.5 | %) |
*Certain prior year amounts were restated to conform to the Company’s current reporting unit structure.
Net sales for the U.S. segment for the six months ended June 30, 2019 were $426.0 million, a decrease of $29.6 million, or 6.5%, compared to the six months ended June 30, 2018. Net sales decreased due to lower capital markets transaction volumes, the sale of the Language Solutions business and lower volumes in capital markets compliance and commercial print, partially offset by higher mutual fund print volumes and growth in SaaS solutions, primarily ActiveDisclosure and the acquisition of eBrevia. An analysis of net sales by reporting unit follows:
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U.S. segment income from operations decreased $11.6 million, or 15.8%, for the six months ended June 30, 2019 as compared to the six months ended June 30, 2018, primarily due to the impact of lower net sales volumes, unfavorable mix and higher restructuring, impairment and other charges, partially offset by lower spin-off related transaction expenses and cost control initiatives.
Operating margins decreased from 16.1% for the six months ended June 30, 2018 to 14.5% for the six months ended June 30, 2019 of which 0.5 percentage points was due to higher restructuring, impairment and other charges, and 0.3 percentage points was due to the estimated payment of amounts related to the 2018 salenet as a result of the Language Solutions business. Operating margins were favorably impacted by lower spin-off related transaction expenses which impacted margins by 3.1 percentage points and cost control initiatives.
International
| Six Months Ended June 30, |
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| 2019 |
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| 2018 |
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| (in millions, except percentages) |
| |||||
Net sales | $ | 62.5 |
|
| $ | 90.2 |
|
(Loss) income from operations |
| (1.7 | ) |
|
| 4.1 |
|
Operating margin |
| (2.7 | %) |
|
| 4.5 | % |
Loss on sale of Language Solutions business |
| 1.6 |
|
|
| — |
|
Restructuring, impairment and other charges-net |
| 1.0 |
|
|
| 1.8 |
|
Net sales for the International segment for the six months ended June 30, 2019 were $62.5 million, a decrease of $27.7 million, or 30.7%, compared to the six months ended June 30, 2018 including a $2.2 million, or 2.4%, decrease due to changes in foreign exchange rates. Net sales decreased $26.1 million due to the salerealignment of the Language Solutions business. Net sales also decreased due to lower capital markets transactionsCompany’s operating segments as well as higher healthcare benefit claims and mutual fund volumes,higher share-based compensation expense, partially offset by higher FundSuiteArc volumes.
International segment income from operations decreased $5.8 million compared to the six months ended June 30, 2018, primarily due to lower capital markets transaction and mutual fund volumes, an increase in information technology expenses allocated to the International segment and the impact of the estimated payment of amounts related to the 2018 sale of the Language Solutions business, partially offset by higher FundSuiteArc volumes.
Operating margins decreased from 4.5% for the six months ended June 30, 2018 to negative 2.7% for the six months ended June 30, 2019 due to unfavorable mix, higher information technology expenses allocated to the International segment and the impact of the loss on the sale of the Language Solutions business which negatively impacted margins by 2.5 percentage points.
Corporate
The following table summarizes unallocated operating expenses and certain items impacting comparability within the activities presented as Corporate:investor-related expenses.
| Six Months Ended June 30, |
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| 2019 |
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| 2018 |
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| (in millions) |
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Operating expenses | $ | 20.0 |
|
| $ | 21.8 |
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Share-based compensation expense |
| 5.1 |
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|
| 5.1 |
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Restructuring, impairment and other charges-net |
| 1.6 |
|
|
| 0.2 |
|
Investor-related expenses |
| 1.5 |
|
|
| — |
|
Spin-off related transaction expenses |
| 0.4 |
|
|
| 2.2 |
|
Acquisition-related expenses |
| — |
|
|
| 0.5 |
|
Disposition-related expenses |
| — |
|
|
| 2.0 |
|
Corporate operating expenses for the six months ended June 30, 2019 decreased $1.8 million versus the same period in 2018 due to lower disposition-related expenses and spin-off related transaction expenses, partially offset by an increase in investor-related expenses, incentive compensation expense and restructuring, impairment and other charges.
Non-GAAP Measures
The Company believes that certain Non-GAAP measures, such as Non-GAAP adjusted EBITDA (“Adjusted EBITDA”), provide useful information about the Company’s operating results and enhance the overall ability to assess the Company’s financial performance. The Company uses these measures, together with other measures of performance under GAAP, to compare the relative performance of operations in planning, budgeting and reviewing the performance of its business. Non-GAAP adjustedAdjusted EBITDA allows investors to make a more meaningful comparison between the Company’s core business operating results over different periods of time. The Company believes that Non-GAAP adjustedAdjusted EBITDA, when viewed with the Company’s results under GAAP and the accompanying reconciliations, provides useful information about the Company’s business without regard to potential distortions. By eliminating potential differences in results of operations between periods caused by factors such as depreciation and amortization methods, historic cost and age of assets, restructuring, impairment and other charges, acquisition-related expenses and gain or loss on certain equity investments and asset sales, the Company believes that Non-GAAP adjustedAdjusted EBITDA can provide a useful additional basis for comparing the current performance of the underlying operations being evaluated.
Non-GAAP adjustedAdjusted EBITDA is not presented in accordance with GAAP and has important limitations as an analytical tool. These measures should not be considered as a substitute for analysis of the Company’s results as reported under GAAP. In addition, these measures are defined differently by different companies in our industry and, accordingly, such measures may not be comparable to similarly-titled measures of other companies.
In addition to the factors listed above, the following items are excluded from Non-GAAP adjustedAdjusted EBITDA:
| • | Share-based compensation expense. Although share-based compensation is a key incentive offered to certain of the Company’s employees, business performance is evaluated excluding share-based compensation expenses. Depending upon the size, timing and the terms of grants, non-cash compensation expense may vary but will recur in future periods. |
| • | COVID-19 related expenses. Incremental expenses incurred as a result of the COVID-19 pandemic, including incremental vendor costs, premium wages paid to certain employees and additional costs to clean and disinfect the Company’s facilities more frequently. |
• | Investor-related expenses. Expenses incurred related to non-routine investor matters, which include third-party advisory and consulting fees and legal fees. |
| • | Spin-off related transaction expenses. The Company has incurred expenses related to the |
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|
A reconciliation of GAAP net earnings (loss) to Non-GAAP adjustedAdjusted EBITDA for the three and six months ended June 30,March 31, 2020 and 2019 and 2018 for these adjustments is presented in the following table:
| Three Months Ended June 30, |
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| Six Months Ended June 30, |
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| 2019 |
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| 2018 |
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| 2019 |
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| 2018 |
| ||||
| (in millions) |
| |||||||||||||
Net earnings | $ | 17.3 |
|
| $ | 18.9 |
|
| $ | 15.9 |
|
| $ | 26.6 |
|
Restructuring, impairment and other charges—net |
| 3.8 |
|
|
| 2.6 |
|
|
| 5.9 |
|
|
| 3.3 |
|
Share-based compensation expense | 3.6 |
|
|
| 3.3 |
|
|
| 5.1 |
|
|
| 5.1 |
| |
Loss on sale of Language Solutions business |
| 2.8 |
|
|
| — |
|
|
| 2.8 |
|
|
| — |
|
Investor-related expenses |
| 0.5 |
|
|
| — |
|
|
| 1.5 |
|
|
| — |
|
Spin-off related transaction expenses |
| — |
|
|
| 8.4 |
|
|
| 0.4 |
|
|
| 16.2 |
|
Disposition-related expenses |
| — |
|
|
| 1.5 |
|
|
| — |
|
|
| 2.0 |
|
Acquisition-related expenses |
| — |
|
|
| 0.3 |
|
|
| — |
|
|
| 0.5 |
|
Depreciation and amortization |
| 12.0 |
|
|
| 11.1 |
|
|
| 24.1 |
|
|
| 21.5 |
|
Interest expense—net |
| 9.1 |
|
|
| 9.8 |
|
|
| 18.0 |
|
|
| 18.8 |
|
Investment and other income—net |
| (0.5 | ) |
|
| (0.8 | ) |
|
| (1.1 | ) |
|
| (1.6 | ) |
Income tax expense |
| 7.5 |
|
|
| 8.3 |
|
|
| 7.2 |
|
|
| 11.8 |
|
Non-GAAP adjusted EBITDA | $ | 56.1 |
|
| $ | 63.4 |
|
| $ | 79.8 |
|
| $ | 104.2 |
|
| Three Months Ended March 31, |
| |||||
| 2020 |
|
| 2019 |
| ||
| (in millions) |
| |||||
Net earnings (loss) | $ | 4.1 |
|
| $ | (1.4 | ) |
Restructuring, impairment and other charges, net |
| 3.1 |
|
|
| 2.1 |
|
Share-based compensation expense |
| 2.3 |
|
|
| 1.5 |
|
COVID-19 related expenses |
| 0.8 |
|
|
| — |
|
eBrevia contingent consideration |
| (0.4 | ) |
|
| — |
|
Investor-related expenses |
| — |
|
|
| 1.0 |
|
Spin-off related transaction expenses |
| — |
|
|
| 0.4 |
|
Depreciation and amortization |
| 12.4 |
|
|
| 12.1 |
|
Interest expense, net |
| 4.6 |
|
|
| 8.9 |
|
Investment and other income, net |
| (0.4 | ) |
|
| (0.6 | ) |
Income tax expense (benefit) |
| 3.6 |
|
|
| (0.3 | ) |
Adjusted EBITDA | $ | 30.1 |
|
| $ | 23.7 |
|
2019 Restructuring, impairment and other charges—net. charges, net—The three months ended June 30, 2019March 31, 2020 included $3.8$1.6 million for employee termination costs.costs and $1.5 million for other charges, primarily related to the realignment of the Company’s operating segments. The sixthree months ended June 30,March 31, 2019 included $5.8$2.0 million for employee termination costs and $0.1 million for other charges associated with the Company’s decision to withdraw in 2013 from certain multi-employer pension plans serving facilities that continued to operate.
2018 Restructuring, impairment and other charges—net. The three months ended June 30, 2018 included $2.4 million for employee termination costs and $0.2 million of lease termination and other restructuring costs. The six months ended June 30, 2018 included $2.5 million for employee termination costs, $0.7 million of lease termination costs and other restructuring costs and $0.1 million for other charges associated with the Company’s decision to withdraw in 2013 from certain multi-employer pension plans serving facilities that continued to operate.charges.
Share-based compensation expense. expense—Included pre-tax charges of $3.6$2.3 million and $3.3$1.5 million for the three months ended June 30,March 31, 2020 and 2019, and 2018, respectively, and $5.1 million for both the six months ended June 30, 2019 and 2018.respectively.
Loss on sale of Language Solutions business. COVID-19 related expenses—Included pre-tax charges of $2.8$0.8 million for the three and six months ended June 30, 2019March 31, 2020, primarily related to incremental vendor costs and premium wages paid to certain employees.
eBrevia contingent consideration—Included a gain of $0.4 million for the three months ended March 31, 2020 as a result of a decrease in the estimated payment of amounts relatedcontingent consideration to be paid to the July 2018 dispositionformer owners of the Language Solutions business.eBrevia.
Investor-related expenses. expenses—Included pre-tax charges of $0.5 million and $1.5$1.0 million related to non-routine investor matters for the three and six months ended June 30, 2019. These expenses includeMarch 31, 2019, primarily third-party advisory, and consulting fees and legal fees.
Spin-off related transaction expenses. expenses—Included pre-tax charges of $0.4 million for the sixthree months ended June 30,March 31, 2019 primarily related to third-party consulting fees. The three and six months ended June 30, 2018 included pre-tax charges of $8.4 million and $16.2 million, respectively, related to third-party consulting fees, information technology expenses, legal fees and other costs related to the Separation.
Disposition-related expenses. Included pre-tax charges of $1.5 million and $2.0 million related to the disposition of the Language Solutions business, primarily related to legal fees, third party advisory and consulting fees and other costs for the three and six months ended June 30, 2018, respectively.
Acquisition-related expenses. Included pre-tax charges of $0.3 million and $0.5 million primarily related to legal expenses for the three and six months ended June 30, 2018, respectively, associated with completed or contemplated acquisitions.
Liquidity and Capital Resources
The Company believes it has sufficient liquidity to support its ongoing operations and to invest in future growth to create value for its shareholders. Cash on hand, operating cash flows and the Company’s $300.0 million senior secured revolving credit facility (the “Revolving Facility”) are the primary sources of liquidity and are expected to be used for, among other things, payment of interest and principal on the Company’s debt obligations, capital expenditures necessary to support productivity improvement and growth, acquisitions and completion of restructuring programs.
The following describesCompany maintains cash pooling structures that enable participating international locations to draw on the pools’ cash resources to meet local liquidity needs. Foreign cash balances may be loaned from certain cash pools to U.S. operating entities on a temporary basis in order to reduce the Company’s cash flowsshort-term borrowing costs or for the six months ended June 30, 2019 and 2018.
Cash Flows Used in Operating Activities
Operating cash inflows are largely attributable to sales of the Company’s services and products. Operating cash outflows are largely attributable to recurring expenditures for labor, rent, raw materials and other operating activities.
Net cash used in operating activities was $65.3 million for the six months ended June 30, 2019 compared to $50.2 million net used in operating activities for the six months ended June 30, 2018. The increase in net cash used in operating activities reflected timing differences in payments related to taxes and the timing of supplier payments.
Cash Flows Used in Investing Activities
Net cash used in investing activities was $28.7 million for the six months ended June 30, 2019 compared to net cash used in investing activities of $15.6 million for the six months ended June 30, 2018. Capital expenditures were $26.2 million during the six months ended June 30, 2019, an increase of $10.6 million as compared to the six months ended June 30, 2018. The increase in capital expenditures was primarily driven by an investment in digital printers and additional investments in software development during the six months ended June 30, 2019.purposes. The Company expects that capital expenditures for 2019 will be approximately $40.0 million to $45.0 million, compared to $37.1 million in 2018.
Cash Flows Provided by Financing Activities
Net cash provided by financing activities for the six months ended June 30, 2019 was $54.0 million compared to $27.4 million for the six months ended June 30, 2018. During the six months ended June 30, 2019, the Company received $337.0 million of proceeds from revolving facility borrowings, partially offset by $281.5 million of payments on revolving facility borrowings. During the six months ended June 30, 2018, the Company received $206.5 million of proceeds from revolving facility borrowings, offset by $179.5 million of payments on revolving facility borrowings.
Liquidity
Cash and cash equivalents of $9.5 million at June 30, 2019 included $4.0 million in the U.S. and $5.5 million at international locations. As a result of the transition tax incurred pursuant to the Tax Act, the Company now has the ability to repatriate any previously taxed foreign cash associated with the foreign earnings subject to the U.S. parent with minimal tax consequences. The Company maintains its assertion of indefinite reinvestment on all foreign earnings and other outside basis differences to indicate that the Company remains indefinitely reinvested in operations outside of the U.S. with the exception of the previously taxed foreign cash already subject to U.S. tax. The Company repatriated excess cash at its foreign subsidiaries to the U.S. during the six monthsyear ended June 30,December 31, 2019 and will evaluate its abilitydoes not plan to make additional cash repatriations during 2020.
Cash and cash equivalents of $7.7 million at March 31, 2020 included $3.4 million in the fourth quarterU.S. and $4.3 million at international locations.
The following describes the Company’s cash flows for the three months ended March 31, 2020 and 2019.
| Three Months Ended March 31, |
| |||||
| 2020 |
|
| 2019 |
| ||
| (in millions) |
| |||||
Net cash used in operating activities | $ | (37.1 | ) |
| $ | (68.3 | ) |
Net cash used in investing activities |
| (8.2 | ) |
|
| (17.1 | ) |
Net cash provided by financing activities |
| 37.5 |
|
|
| 47.1 |
|
Effect of exchange rate on cash and cash equivalents |
| (1.7 | ) |
|
| 1.5 |
|
Net decrease in cash and cash equivalents | $ | (9.5 | ) |
| $ | (36.8 | ) |
Cash Flows Used in Operating Activities
Operating cash inflows are largely attributable to sales of the Company’s services and products as well as recurring expenditures for labor, rent, raw materials and other operating activities.
Net cash used in operating activities was $37.1 million for the three months ended March 31, 2020 compared to $68.3 million for the three months ended March 31, 2019. The Company recorded deferreddecrease in cash used in operating activities of $31.2 million was primarily due to favorable operating results and a decrease in income taxes attributablepaid. Cash paid for income taxes, net of refunds, decreased by $11.8 million to $2.0 million for the three months ended March 31, 2020, from $13.8 million for the three months ended March 31, 2019, due primarily to the book-over-tax outside basis differencespayment of taxes in its foreign subsidiaries2019 on the gain from the 2018 sale of the Language Solutions business. Accounts receivable decreased operating cash flows by $55.7 million for the excessthree months ended March 31, 2020, as compared to $63.6 million for the three months ended March 31, 2019 due to increased collection efforts and the timing of customer payments in the three months ended March 31, 2020. Accounts payable and accrued liabilities and other increased operating cash repatriatedflows by $8.5 million for the three months ended March 31, 2020, as compared to a $0.6 million increase in operating cash flows for the three months ended March 31, 2019, primarily due to the timing of June 30, 2019.supplier payments.
Cash Flows Used in Investing Activities
Net cash used in investing activities was $8.2 million for the three months ended March 31, 2020, and primarily consisted of capital expenditures of $6.9 million, mostly driven by investment in software development. The Company expects that capital expenditures for 2020 will be approximately $30.0 million.
Net cash used in investing activities was $17.1 million for the three months ended March 31, 2019, and primarily consisted of capital expenditures of $15.1 million, mostly driven by an investment in digital printers and investments in software development.
On December 18, 2018, Cash Flows Provided by Financing Activities
Net cash provided by financing activities for the three months ended March 31, 2020 was $37.5 million. During the three months ended March 31, 2020,the Company entered into a second amendment to the Credit Agreement which extended the maturity datereceived $146.5 million of proceeds from the Revolving Facility to December 18, 2023, reduced the interest rate margin percentages and facility fees applicable toborrowings, partially offset by $40.5 million of payments on the Revolving Facility increasedborrowings, as well as utilized $63.3 million for the allowable annual dividendspurchase and retirement of certain of the Company’s Notes. The Company’s common stock repurchases for the three months ended March 31, 2020 totaled $5.2 million.
Net cash provided by financing activities was $47.1 million for the three months ended March 31, 2019. During the three months ended March 31, 2019, the Company received $178.5 million of proceeds from $15.0the Revolving Facility borrowings, partially offset by $130.0 million to $20.0 million inof payments on the aggregate and modifiedRevolving Facility borrowings. The Company’s common stock repurchases for the financial maintenance and negative covenants in the Credit Agreement.three months ended March 31, 2019 totaled $1.2 million.
Debt
The Company’s debt maturity schedule as of June 30,March 31, 2020 and December 31, 2019 is shown inconsisted of the table below:following (in millions):
| Debt Maturity Schedule |
| ||||||||||||||||||||
| Total |
| 2019 |
| 2020 |
| 2021 |
| 2022 |
| 2023 |
| Thereafter |
| ||||||||
Notes (a) | $ | 300.0 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 300.0 |
| |
Borrowings under the Term Loan Credit Facility (b) |
| 72.5 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 72.5 |
|
| — |
| |
Borrowings under the Revolving Facility |
| 55.5 |
|
|
|
|
| — |
|
| — |
|
| — |
|
| 55.5 |
|
| — |
| |
Total | $ | 428.0 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 128.0 |
| $ | 300.0 |
|
|
|
|
|
| March 31, 2020 |
|
| December 31, 2019 |
| ||
8.25% senior notes due October 15, 2024 | $ | 233.5 |
|
| $ | 300.0 |
|
Borrowings under the Revolving Facility |
| 106.0 |
|
|
| — |
|
Unamortized debt issuance costs |
| (2.9 | ) |
|
| (4.0 | ) |
Total long-term debt | $ | 336.6 |
|
| $ | 296.0 |
|
8.25% Senior Notes Due 2024— On September 30, 2016, DFIN (the “Parent”) issued $300.0 million of 8.25% senior unsecured notes due October 15, 2024 (the “Notes”). The Company’s Notes, with interest payable semi-annually on April 15 and October 15, were issued pursuant to an indenture (the “Indenture”) where certain wholly-owned domestic subsidiaries of the Company guarantee the Notes (the “Guarantors”). In the first quarter of 2020, the Company purchased and retired $66.5 million (notional amount) of the Notes at an average price of 95.25 and recognized a pre-tax gain on the extinguishment of debt of $2.3 million, which was net of unamortized debt issuance costs, and is recorded within interest expense, net in the Unaudited Condensed Consolidated Statements of Operations.
The Notes are fully and unconditionally as well as jointly and severally guaranteed, on an unsecured basis, by the Guarantors, which are comprised of each of the Company’s existing and future direct and indirect wholly-owned U.S. subsidiaries that guarantee the Company’s obligations under the Credit Facilities, including Donnelley Financial, LLC and DFS International Holding, Inc. The Notes are not guaranteed by the Company’s foreign subsidiaries or unrestricted subsidiaries (“Nonguarantors”). The Indenture governing the Notes contains certain covenants applicable to the Company and its restricted subsidiaries, including limitations on: (1) liens; (2) indebtedness; (3) mergers, consolidations and acquisitions; (4) sales, transfers and other dispositions of assets; (5) loans and other investments; (6) dividends and other distributions, stock repurchases and redemptions and other restricted payments; (7) restrictions affecting subsidiaries; (8) transactions with affiliates; and (9) designations of unrestricted subsidiaries. Each of these covenants is subject to important exceptions and qualifications.
The Notes and the related guarantees are the Company and the Guarantors’, respective, senior unsecured obligations and rank equally in right of payment to all present and future senior debt, including the obligations under the Company’s Credit Facilities, senior in right of payment to all present and future subordinated debt, and effectively subordinated in right of payment to any of the Company and the Guarantors’ secured debt, to the extent of the value of the assets securing such debt.
The guarantee of the Notes by a subsidiary guarantor will be automatically released under certain situations, including upon the sale or disposition of such subsidiary guarantor to a person that is not DFIN or a subsidiary guarantor of the notes, the liquidation or dissolution of such subsidiary guarantor, and if such subsidiary guarantor is released from its guarantee obligations under the Company’s Credit Facilities.
The following summarized financial information of both the Parent and the Guarantors is presented on a combined basis; intercompany balances and transactions between the Parent and the Guarantors have been eliminated and the summarized financial information does not reflect investments of the Parent or the Guarantors in Nonguarantors. The Parent’s or Guarantor’s amounts due from, amounts due to, and transactions with Nonguarantor are disclosed below:
| March 31, 2020 |
|
| December 31, 2019 |
| ||
| (in millions) |
| |||||
Current assets | $ | 222.6 |
|
| $ | 169.5 |
|
Noncurrent assets |
| 1,028.3 |
|
|
| 1,034.8 |
|
Current liabilities |
| 172.7 |
|
|
| 165.2 |
|
Noncurrent liabilities |
| 464.2 |
|
|
| 431.1 |
|
| Three Months Ended |
| |
| March 31, 2020 |
| |
| (in millions) |
| |
Total net sales | $ | 198.7 |
|
Total cost of sales |
| 122.3 |
|
Income from operations |
| 14.2 |
|
Net earnings |
| 5.3 |
|
During the three months ended March 31, 2020, Nonguarantors intercompany revenue and cost of sales totaled $2.6 million each. As of March 31, 2020, and December 31, 2019, an intercompany short-term note receivable due to Nonguarantors from the Parent totaled $4.0 million and $12.0 million, respectively.
Credit Agreement—The Credit Agreement contains a number of covenants, including, but not limited to, a minimum Interest Coverage Ratio and the Consolidated Net Leverage Ratio, as defined in and calculated pursuant to the Credit Agreement, that, in part, restrict the Company’s ability to incur additional indebtedness, create liens, engage in mergers and consolidations, make restricted payments and dispose of certain assets. The Credit Agreement generally allows annual dividend payments of up to $20.0 million in aggregate, though additional dividends may be allowed subject to certain conditions. Each of these covenants is subject to important exceptions and qualifications.
The indenture governing the Notes contains certain covenants applicable to the Company and its restricted subsidiaries, including limitations on: (1) liens; (2) indebtedness; (3) mergers, consolidations and acquisitions; (4) sales, transfers and other dispositions of assets; (5) loans and other investments; (6) dividends and other distributions, stock repurchases and redemptions and other restricted payments; (7) restrictions affecting subsidiaries; (8) transactions with affiliates; and (9) designations of unrestricted subsidiaries. Each of these covenants is subject to important exceptions and qualifications.
As of June 30, 2019, there was $55.5 million ofMarch 31, 2020, outstanding borrowings under the Revolving Facility. Facility totaled $106.0 million. The maturity date of the Revolving Facility is December 18, 2023. Based on the Company’s results of operations for the twelve months ended June 30, 2019March 31, 2020 and existing debt, the Company would have had the ability to utilize an incremental $79.2$194.0 million of the $300.0 million Revolving Facility and not have been in violation of the terms of the agreement. The current availability under the Revolving Facility and net available liquidity as of June 30, 2019 March 31, 2020is shown in the table below:
|
| June 30, 2019 |
| March 31, 2020 |
| ||
Availability |
| (in millions) |
| (in millions) |
| ||
Revolving Facility |
| $ | 300.0 |
| $ | 300.0 |
|
Availability reduction from covenants |
|
| 165.3 |
|
| — |
|
|
| $ | 134.7 |
| $ | 300.0 |
|
Usage |
|
|
|
|
|
|
|
Borrowings under the Revolving Facility |
|
| 55.5 |
|
| 106.0 |
|
Impact on availability related to outstanding letters of credit |
|
| — |
|
| — |
|
|
| $ | 55.5 |
| $ | 106.0 |
|
|
|
|
|
|
|
|
|
Current availability at June 30, 2019 |
| $ | 79.2 |
| |||
Current availability at March 31, 2020 | $ | 194.0 |
| ||||
Cash |
|
| 9.5 |
|
| 7.7 |
|
Net Available Liquidity |
| $ | 88.7 |
| $ | 201.7 |
|
The Company was in compliance with its debt covenants as of June 30, 2019,March 31, 2020, and expects to remain in compliance based on management’s estimates of operating and financial results for 20192020 and the foreseeable future. However, declines in market and economic conditions or demand for certain of the Company’s productsservices and servicesproducts could impact the Company’s ability to remain in compliance with its debt covenants in future periods. As of June 30, 2019, the Company met all the conditions required to borrow under the Credit Agreement and management expects the Company to continue to meet the applicable borrowing conditions.
The failure of a financial institution supporting the Revolving Facility would reduce the size of the Company’s committed facility unless a replacement institution was added. As of June 30, 2019,March 31, 2020, the Revolving Facility is supported by sixteen U.S. and international financial institutions.
As of June 30, 2019,March 31, 2020, the Company had $2.9$3.8 million in outstanding letters of credit and bank guarantees, of which none reduced the availability under the Revolving Facility. As of March 31, 2020, the Company met all the conditions required to borrow under the Revolving Facility, and management expects the Company to continue to meet the applicable borrowing conditions.
Acquisitions and Dispositions
The Company’s acquisition of eBrevia closed on December 18, 2018. During the six months ended June 30, 2019 and the year ended December 31, 2018,2019, the Company paid $2.6an additional $4.5 million and $12.5 million, net of cash acquired, respectively, forrelated to the acquisition of eBrevia. $1.8 million of the purchase price, excluding contingent consideration, was payable as of June 30, 2019 and is expected to be paid during 2019.eBrevia; $1.9 million of the purchase price related to the amounts held in escrow was payable as of June 30, 2019 March 31, 2020and is expected to be paid during 2020.
Risk Management
The Company is exposed to interest rate risk on its variable debt. At June 30, 2019, the Company’s exposure to rate fluctuations on variable-interest borrowings was $128.0 million.
The Company assesses market risk based on changes in interest rates utilizing a sensitivity analysis that measures the potential loss in earnings, fair values and cash flows based on a hypothetical 10% change in interest rates. Using this sensitivity analysis, such changes would not have a material effect on interest income or expense and cash flows. A hypothetical 10% change in yield would change the fair values of fixed-rate debt at June 30, 2019 by approximately $9.6 million, or 3.2%.
The Company is exposed to the impact of foreign currency fluctuations in certain countries in which it operates. The exposure to foreign currency movements is limited in many countries because the operating revenues and expenses of its various subsidiaries and business units are substantially in the local currency of the country in which they operate. To the extent that borrowings, sales, purchases, revenues, expenses or other transactions are not in the local currency of the subsidiary, the Company is exposed to currency risk and may enter into foreign exchange spot and forward contracts to hedge the currency risk. The Company does not use derivative financial instruments for trading or speculative purposes.
OTHER INFORMATION
Litigation and Contingent Liabilities
For a discussion of certain litigation involving the Company, see Note 14,7, Commitments and Contingencies, to the Unaudited Condensed Consolidated Financial Statements.
Critical Accounting Policies and Estimates
The Company has updated its accounting policies related to valuation reserves associated with accounts receivable in conjunction with the adoption of ASU 2016-13, as further described in Note 1, Overview, Basis of Presentation and Significant Accounting Policies, to the Unaudited Condensed Consolidated Financial Statements. Except for the adoption of ASU 2016-13, there were no other changes to critical accounting policies and estimates from those disclosed in “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” of the Annual Report.
Goodwill
As discussed in Note 1, Overview, Basis of Presentation and Significant Accounting Policies, to the Unaudited Condensed Consolidated Financial Statements, during the first quarter of 2020, management realigned the Company’s operating segments. DFIN’s four operating and reportable segments are the same as its reporting units: CM-SS; CM-CCM; IC-SS; and IC-CCM (“Current Structure”). The Company previously had three reporting units: Capital Markets, Investment Markets and International (“Previous Structure”), that each had goodwill.
As a result of the new segmentation, a goodwill impairment analysis was completed for the Previous Structure, before the reallocation of goodwill to the Current Structure. Each of the reporting units under the Previous Structure were reviewed for impairment as of March 31, 2020 using a quantitative assessment, where the estimated fair value of each reporting unit was compared to its carrying amount, including goodwill. If the carrying amount (“book value”) of a reporting unit exceeds its estimated fair value, an impairment loss is generally recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. As a result of the March 31, 2020 goodwill impairment analysis under the Previous Structure, the Company did not recognize any goodwill impairment as the estimated fair values of all reporting units exceeded their respective carrying amounts.
In addition to the impairment analysis under the Previous Structure, a goodwill impairment analysis was completed under the Current Structure. Goodwill was also reassigned within the Current Structure using a relative fair value approach.
Quantitative Assessment—The analysis performed included estimating the fair value of each reporting unit using both the income and market approaches. The income approach requires management to estimate a number of factors for each reporting unit, including projected future operating results, economic projections, anticipating future cash flows, discount rates and the allocation of shared or corporate items. The market approach estimates fair value using comparable marketplace fair value data from within a comparable industry grouping. The Company weighted both the income and market approach equally to estimate the concluded fair value of each reporting unit.
The determination of fair value in the quantitative assessment requires the Company to make significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to: the selection of appropriate peer group companies; the discount rate; terminal growth rates; and forecasts of revenue; operating income; depreciation and amortization; restructuring charges and capital expenditures.
Goodwill Impairment Assumptions—Although the Company believes its estimates of fair value are reasonable, actual financial results could differ from those estimates due to the inherent uncertainty involved in making such estimates. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on either the fair value of the reporting units, the amount of goodwill impairment charge, or both.
One measure of the sensitivity of the amount of goodwill impairment charges to key assumptions is the amount by which each reporting unit “passed” (fair value exceeds carrying amount, a “cushion”) or “failed” (the carrying amount exceeds fair value) the quantitative assessment.
As a result of the March 31, 2020 goodwill impairment analysis under the Current Structure, the Company did not recognize any goodwill impairment as the estimated fair values of all reporting units exceeded their respective carrying amounts. CM-SS, CM-CCM and IC-SS all had fair values far in excess of book values; however, the IC-CCM reporting unit’s fair value exceeded its book value by approximately 3%. The small amount of cushion between book value and fair value of the IC-CCM reporting unit is primarily driven by the projected negative impact of regulatory developments for certain services and products. As of March 31, 2020, goodwill allocated to the IC-CCM reporting unit was $40.6 million.
Generally, changes in estimates of expected future cash flows would have a similar effect on the estimated fair value of the reporting unit. That is, a 1.0% decrease in estimated annual future cash flows would decrease the estimated fair value of the reporting unit by approximately 1.0%. The estimated long-term net sales growth rate can have a significant impact on the estimated future cash flows, and therefore, the fair value of each reporting unit. Holding all other assumptions constant, a 1.0% decrease in the long-term net sales growth rate would not have resulted in an impairment loss for any of the Company’s reporting units. Of the other key assumptions that impact the estimated fair values, most reporting units have the greatest sensitivity to changes in the estimated discount rate. The discount rate for the IC-CCM reporting unit was 12.0%. Holding all other assumptions constant, a 1.0% increase in the estimated discount rate would have resulted in the fair value of the IC-CCM reporting unit approximating its book value. A 1.0% increase in the discount rate would not have resulted in an impairment for any of the other reporting units under the Current Structure.
The Company believes its estimates of future cash flows and discount rates are reasonable, but future changes in the underlying assumptions could occur due to the inherent uncertainty in making such estimates. Additionally, the COVID-19 pandemic has created significant uncertainty in the macroeconomic and business outlook. Further price deterioration, lower volumes, additional unfavorable regulatory developments or lower than expected profitability of software products still in development could have a significant impact on the fair values of the reporting units. Further declines in the Company’s operating results due to challenging economic conditions, an unfavorable industry or macroeconomic development or other adverse changes in market conditions could change one of the critical assumptions or estimates the Company uses to calculate the fair value of its reporting units which could result in a decrease in fair value and require the Company to record a goodwill impairment charge in future periods.
The Company performs its goodwill impairment tests annually as of October 31 or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company also performs an interim review for indicators of impairment each quarter to assess whether an interim impairment review is required for any reporting unit.
New Accounting Pronouncements and Pending Accounting Standards
Recently issued accounting standards and their estimated effect on the Company’s condensed consolidated financial statements are described in Note 15,1, NewOverview, Basis of Presentation and Significant Accounting PronouncementsPolicies, to the Unaudited Condensed Consolidated Financial Statements.
CAUTIONARY STATEMENT
The Company has made forward-looking statements in this Quarterly Report on Form 10-Q within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 that are subject to risks and uncertainties. These statements are based on the beliefs and assumptions of the Company. Generally, forward-looking statements include information concerning possible or assumed future actions, events, or results of operations of the Company.
These statements may include words such as “anticipates,” “estimates,” “expects,” “projects,” “forecasts,” “intends,” “plans,” “continues,” “believes,” “may,” “will,” “goals” and variations of such words and similar expressions are intended to identify ourthe Company’s forward-looking statements.
Forward-looking statements are not guarantees of performance. The following important factors, in addition to those discussed elsewhere in this Quarterly Report on Form 10-Q, could cause ourthe Company’s actual results to differ materially from those indicated in any such forward-looking statements. These factors include, but are not limited to:
• | the adverse impacts of the COVID-19 pandemic and other global public health epidemics on the Company’s business and operations, including demand for DFIN services and products, and the Company’s ability to effectively manage the impacts of the coronavirus on its business operations; |
| • | the volatility of the global economy and financial markets, and its impact on transactional volume; |
| • | failure to offer high quality customer support and services; |
| • | the retention of existing, and continued attraction of additional |
| • | the growth of new technologies with which |
| • |
|
| • |
|
| the competitive market for |
| • | the ability to gain client acceptance of |
| • | delay in market acceptance of |
| • | failure to maintain the confidentiality, integrity and availability of |
| • | failure to properly use and protect client and employee information and data; |
| • | the effect of a material breach of security or other performance issues of any of |
| • | factors that affect client demand, including changes in economic conditions, national or international regulations and clients’ budgetary constraints; |
| • |
|
| • | the effect of increasing costs of providing healthcare and other benefits to |
| • | changes in the availability or costs of key materials (such as ink and paper) or in prices received for the sale of by-products; |
| • | failure to protect |
| • | failure to successfully integrate acquired |
| • | availability to maintain |
| • | the retention of existing, and continued attraction of, key employees, including management; |
| • | the effects of operating in international markets, including fluctuations in currency exchange rates; and |
| • | the effect of economic and political conditions on a regional, national or international |
|
|
|
|
|
|
Because forward-looking statements are subject to assumptions and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Undue reliance should not be placed on such statements, which speak only as of the date of this document or the date of any document that may be incorporated by reference into this document.
Consequently, readers of the Quarterly Report on Form 10-Q should consider these forward lookingforward-looking statements only as the Company’s current plans, estimates and beliefs. The Company does not undertake and specifically declines any obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect future events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. The Company undertakes no obligation to update or revise any forward-looking statements in this Quarterly Report on Form 10-Q to reflect any new events or any change in conditions or circumstances.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Refer to Item 2 of Part I under “Risk Management.” There have been no significant changes to the Company’s market risk since December 31, 2018. For a discussion of exposure to market risk, refer to Part II, Item 7A – Quantitative and Qualitative Disclosures about Market Risk, ofpreviously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC on February 27, 2019.Report.
Item 4. Controls and Procedures
(a) | Disclosure controls and procedures. |
Management, together with the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(b) and Rule 15d-15(e) of the Securities Exchange Act of 1934) as of June 30, 2019.March 31, 2020. Based on that evaluation the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2019.March 31, 2020.
(b) | Changes in internal control over financial reporting. |
There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2019March 31, 2020 that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
For a discussion of certain litigation involving the Company, see Note 14,7, Commitments and Contingencies, to the Unaudited Condensed Consolidated Financial Statements.
Item 1A. Risk Factors
There have beenwere no material changes during the first quarter of 2020 to the risk factors disclosedidentified in the Company’s Annual Report, on Form 10-Kexcept as noted below.
The current COVID-19 pandemic and other global public health epidemics may materially adversely impact the Company’s business, its future results of operations and its overall financial performance.
The Company’s business could be materially adversely affected by the risk, or the public perception of risk, related to a pandemic or widespread health crisis, such as the current COVID-19 pandemic. A significant outbreak of epidemic, pandemic, or contagious diseases in the human population resulting in a widespread health crisis that adversely affect the broader economies and financial markets will also adversely impact the overall demand environment for DFIN’s services and products. The current global health crisis caused by COVID-19 has adversely affected the year ended December 31, 2018,Company’s workforce and clients, as filedwell as economies and financial markets globally, leading to an economic downturn. A recession is expected to adversely impact the global market for IPOs and other financial transactions, adversely affecting the demand for DFIN’s services and products (see the Company’s Risk Factor “A significant part of the Company’s business is derived from the use of DFIN’s services and products in connection with financial and strategic business transactions. Trends that affect the volume of these transactions may negatively impact the demand for DFIN’s services and products.” in the Company’s Annual Report), and those adverse effects may be material. In addition, any preventative or protective actions that governments implement or that the Company takes in respect of a global health crises such as COVID-19, such as travel restrictions, quarantines or site closures, may interfere with the SECability of the Company’s employees and vendors to perform their respective responsibilities and obligations relative to the conduct of DFIN’s business. Such results could have a material adverse effect on February 27, 2019.DFIN’s operations, business, financial condition, results of operations, or cash flows. For example, when both the State of New Jersey and the Commonwealth of Pennsylvania enacted stay at home orders, the Company was deemed essential and continued to operate, but there can be no assurances that the operations will continue to be deemed essential both in those locations and in other jurisdictions in which the Company or its vendors operate and are allowed to remain operational. In addition, the Company uses vendors in multiple countries to fulfill the global demand for its services. When global lockdowns were ordered by many governments in March, many of the Company’s vendors had to rapidly transition to work from home, creating process inefficiencies. If the Company is not able to meet its client’s work requirements in a timely fashion or at all, the Company’s business, reputation and ability to retain clients would be adversely affected.
The Company is unable to accurately predict the ultimate impact of the current COVID-19 pandemic due to various uncertainties, including the ultimate geographic spread of the virus, the severity of the virus, the duration of the outbreak, actions that may be taken by governmental authorities to contain the virus and any economic recession resulting from the pandemic. The Company closely monitors the impact of the COVID-19 pandemic, continually assessing its potential effects on its business. The extent to which the Company’s results are affected by COVID-19 will largely depend on future developments which cannot be accurately predicted and are uncertain, but the COVID-19 pandemic or the perception of its effects could have a material adverse effect on DFIN’s business, financial condition, results of operations, or cash flows. Refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations—COVID-19 for additional information.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES | ISSUER PURCHASES OF EQUITY SECURITIES |
| ISSUER PURCHASES OF EQUITY SECURITIES |
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Period | Total Number of Shares Purchased (a) |
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| Average Price Paid per Share |
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| Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
| Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs |
| Total Number of Shares Purchased (a) |
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| Average Price Paid per Share |
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| Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
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| Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs (b) |
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April 1, 2019 - April 30, 2019 | — |
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| $ | — |
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| — |
| $ | — |
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May 1, 2019 - May 31, 2019 |
| 1,528 |
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| 12.33 |
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| — |
| $ | — |
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June 1, 2019 - June 30, 2019 |
| 3,722 |
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| 14.30 |
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| — |
| $ | — |
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January 1, 2020 - January 31, 2020 |
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| $ | — |
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February 1, 2020 - February 29, 2020 |
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| $ | — |
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March 1, 2020 - March 31, 2020 |
| 781,365 |
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| $ | 6.71 |
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| 615,896 |
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| $ | 21,190,644 |
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Total |
| 5,250 |
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| $ | 13.73 |
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| 781,365 |
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| $ | 6.71 |
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| 615,896 |
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| $ | 21,190,644 |
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(a) |
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(b) | On February 4, 2020, the Board authorized a stock repurchase program, under which the Company is authorized to repurchase up to $25.0 million of its outstanding common stock from time to time in one or more transactions on the open market or in privately negotiated purchases in accordance with all applicable securities laws and regulations and all repurchases in the open market will be made in compliance with Rule 10b-18 under the Exchange Act. The timing and amount of any shares repurchased will be determined by the Company based on its evaluation of market conditions and other factors. Repurchases may also be made under a Rule 10b5-1 plan, which would permit shares to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws. The stock repurchase program will be effective through December 31, 2021, however, it may be suspended or discontinued at any time. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
3.1 |
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4.1 |
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14.1 |
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32.1 |
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101.INS |
| Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
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101.SCH |
| Inline XBRL Taxonomy Extension Schema Document | |
101.CAL |
| Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF |
| Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB |
| Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE |
| Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104
The cover page for the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, has been formatted in Inline XBRL.
* | Management contract or compensatory plan or arrangement. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DONNELLEY FINANCIAL SOLUTIONS, INC. | |||
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By: |
| /s/ DAVID A. GARDELLA | |
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| David A. Gardella | |
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| Executive Vice President and Chief Financial Officer |
Date: August 1, 2019May 7, 2020
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