Donnelley Financial Solutions(DFIN) - 2019 Q3 - Quarterly Report

Part I - Financial Information Item 1: Condensed Consolidated Financial Statements (unaudited) The company presents its unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2019 Condensed Consolidated Statements of Operations Net sales and net earnings declined for both the third quarter and nine-month period of 2019 compared to 2018 Key Financial Metrics | Financial Metric | Q3 2019 (M) | Q3 2018 (M) | 9 Months 2019 (M) | 9 Months 2018 (M) | | :--- | :--- | :--- | :--- | :--- | | Total Net Sales | $195.9 | $216.9 | $684.4 | $762.7 | | Income from Operations | $32.1 | $62.1 | $72.1 | $117.7 | | Net Earnings | $14.7 | $48.0 | $30.6 | $74.6 | | Diluted EPS | $0.43 | $1.40 | $0.89 | $2.19 | Condensed Consolidated Balance Sheets Total assets, liabilities, and equity all increased as of September 30, 2019, compared to year-end 2018 Key Balance Sheet Items | Balance Sheet Item | Sep 30, 2019 (M) | Dec 31, 2018 (M) | | :--- | :--- | :--- | | Total Current Assets | $268.0 | $249.0 | | Total Assets | $962.3 | $868.7 | | Total Current Liabilities | $193.5 | $198.4 | | Long-term Debt | $364.1 | $362.7 | | Total Liabilities | $696.2 | $642.7 | | Total Equity | $266.1 | $226.0 | Condensed Consolidated Statements of Cash Flows Cash from operations turned negative while cash used in investing and financing activities decreased for the nine months ended September 30, 2019 Cash Flow Summary | Cash Flow Activity (9 Months Ended Sep 30) | 2019 (M) | 2018 (M) | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(4.2) | $10.4 | | Net cash (used in) provided by investing activities | $(9.4) | $57.4 | | Net cash used in financing activities | $(1.5) | $(62.1) | | Net (decrease) increase in cash | $(12.9) | $4.2 | Notes to Condensed Consolidated Financial Statements Notes detail key events including the eBrevia acquisition, Language Solutions disposition, and adoption of a new lease accounting standard - On December 18, 2018, the company acquired eBrevia, a provider of AI-based data extraction and contract analytics software, for a purchase price of $23.3 million[53] - On July 22, 2018, the company sold its Language Solutions business for net proceeds of $77.5 million, resulting in a gain of $53.8 million recognized in 2018[58] - The company adopted the new lease accounting standard (ASU 2016-02) on January 1, 2019, resulting in the recognition of a right-of-use (ROU) asset of $100.8 million and a lease liability of $101.6 million[66][67] - For the nine months ended September 30, 2019, the company recorded net restructuring charges of $8.2 million, primarily for employee termination costs affecting 235 employees[81] Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management analyzes the decline in Q3 2019 net sales, segment performance, and non-GAAP measures, confirming sufficient liquidity Results of Operations Consolidated net sales and operating income declined in Q3 and the first nine months of 2019 due to lower volumes and asset sales Quarterly Performance Comparison | Metric (Q3 2019 vs Q3 2018) | Q3 2019 (M) | Q3 2018 (M) | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $195.9 | $216.9 | (9.7%) | | Income from Operations | $32.1 | $62.1 | (48.3%) | Year-to-Date Performance Comparison | Metric (9 Months 2019 vs 9 Months 2018) | 9M 2019 (M) | 9M 2018 (M) | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $684.4 | $762.7 | (10.3%) | | Income from Operations | $72.1 | $117.7 | (38.7%) | - Q3 2019 operating income included a $19.2 million gain from a building sale, while Q3 2018 included a $53.5 million gain from the sale of the Language Solutions business, significantly affecting year-over-year comparability[172][173] Information by Segment Both U.S. and International segment sales declined in Q3 2019, while corporate operating expenses were significantly reduced U.S. Segment Quarterly Net Sales | U.S. Segment Net Sales (Q3) | 2019 (M) | 2018 (M) | % Change | | :--- | :--- | :--- | :--- | | Capital Markets | $97.1 | $102.5 | (5.3%) | | Investment Markets | $76.6 | $81.8 | (6.4%) | | Total U.S. | $173.7 | $185.5 | (6.4%) | - International segment net sales for Q3 2019 decreased by $9.2 million (29.3%) year-over-year, impacted by lower capital markets volumes and a $2.0 million decrease from the sale of the Language Solutions business[184] - Corporate operating expenses for Q3 2019 decreased by $7.1 million compared to Q3 2018, mainly due to reduced disposition-related expenses, lower incentive compensation, and fewer spin-off transaction expenses[187] Non-GAAP Measures Non-GAAP adjusted EBITDA remained flat for Q3 2019 but decreased for the nine-month period compared to the prior year Reconciliation of Net Earnings to Non-GAAP Adjusted EBITDA | Reconciliation to Non-GAAP Adjusted EBITDA | Q3 2019 (M) | Q3 2018 (M) | 9 Months 2019 (M) | 9 Months 2018 (M) | | :--- | :--- | :--- | :--- | :--- | | Net Earnings (GAAP) | $14.7 | $48.0 | $30.6 | $74.6 | | Adjustments (Net) | $16.4 | $(16.7) | $80.3 | $60.9 | | Non-GAAP Adjusted EBITDA | $31.1 | $31.3 | $110.9 | $135.5 | Liquidity and Capital Resources The company maintains sufficient liquidity through cash and its credit facility despite negative operating cash flow and increased capital expenditures - As of September 30, 2019, the company had $32.1 million in cash and cash equivalents and net available liquidity of $187.5 million, including availability under its revolving facility[236][242] - Capital expenditures for the first nine months of 2019 were $35.1 million, an increase of $12.3 million from the prior year, primarily due to investments in digital printers and software development[234] - The company was in compliance with all debt covenants as of September 30, 2019[242] Item 3: Quantitative and Qualitative Disclosure About Market Risk The company's market risk profile, primarily from interest rates and foreign currency, has not materially changed since year-end 2018 - There have been no significant changes to the Company's market risk since December 31, 2018[258] - The company is exposed to interest rate risk on $72.5 million of variable-interest borrowings as of September 30, 2019[246] Item 4: Controls and Procedures Management confirmed the effectiveness of disclosure controls and procedures with no material changes to internal controls during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2019[260] - No material changes to internal control over financial reporting occurred during the quarter ended September 30, 2019[261] Part II - Other Information Item 1: Legal Proceedings Ongoing litigation from ordinary business is not expected to have a material financial impact on the company - Management does not expect litigation arising from the ordinary course of business to have a material effect on the Company's financial position or cash flows[111][263] Item 1A: Risk Factors No material changes have occurred to the risk factors disclosed in the 2018 Annual Report on Form 10-K - No material changes to the risk factors disclosed in the Company's 2018 Form 10-K have occurred[264] Item 2: Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased a small number of shares to satisfy employee tax liabilities from vested equity awards - In August 2019, the company purchased 2,830 shares at an average price of $12.09 per share to satisfy tax liabilities upon the vesting of equity awards[266] Item 6: Exhibits This section lists all exhibits filed with the Form 10-Q, including certifications and various agreements