Donnelley Financial Solutions(DFIN) - 2020 Q3 - Quarterly Report

Part I: Financial Information Item 1: Condensed Consolidated Financial Statements (unaudited) Unaudited condensed consolidated financial statements for Q3 and nine months ended September 30, 2020, reflect the company's performance and Q1 2020 segment realignment Condensed Consolidated Statements of Operations Q3 2020 net sales increased to $209.5 million, but net earnings significantly decreased to $7.1 million due to higher restructuring and a prior-year gain Consolidated Statements of Operations Highlights (in millions) | Metric | Q3 2020 | Q3 2019 | 9 Months 2020 | 9 Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Total net sales | $209.5 | $195.9 | $684.2 | $684.4 | | Tech-enabled services | $104.5 | $83.9 | $301.8 | $280.5 | | Software solutions | $51.1 | $46.6 | $146.0 | $139.1 | | Print and distribution | $53.9 | $65.4 | $236.4 | $264.8 | | Income from operations | $15.2 | $32.1 | $31.0 | $72.1 | | Net earnings | $7.1 | $14.7 | $9.9 | $30.6 | | Diluted EPS | $0.21 | $0.43 | $0.29 | $0.89 | Condensed Consolidated Balance Sheets As of September 30, 2020, total assets increased to $930.3 million from year-end 2019, with total liabilities also rising and equity seeing a modest increase Balance Sheet Highlights (in millions) | Metric | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total current assets | $297.6 | $211.2 | | Cash and cash equivalents | $40.9 | $17.2 | | Goodwill | $450.1 | $450.3 | | Total assets | $930.3 | $886.9 | | Total current liabilities | $207.6 | $179.5 | | Long-term debt | $291.9 | $296.0 | | Total liabilities | $652.6 | $618.3 | | Total equity | $277.7 | $268.6 | Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities significantly improved to $52.5 million for the nine months ended September 30, 2020, leading to a $23.7 million increase in cash and cash equivalents Cash Flow Summary for Nine Months Ended Sep 30 (in millions) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $52.5 | $(4.2) | | Net cash used in investing activities | $(13.2) | $(9.4) | | Net cash used in financing activities | $(14.5) | $(1.5) | | Net increase (decrease) in cash | $23.7 | $(12.9) | Notes to Condensed Consolidated Financial Statements Notes detail accounting policies, Q1 2020 segment realignment, revenue recognition, goodwill, restructuring charges, and debt, including a contingent liability from LSC bankruptcy - In Q1 2020, the company realigned its operating segments into four new reportable segments: 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)[31] - The company recorded net restructuring charges of $15.0 million for the first nine months of 2020 due to anticipated impacts of SEC Rule 30e-3 and Rule 498A on future print volumes[75] - A contingent liability of $15.5 million was accrued as of September 30, 2020, for multiemployer pension plan (MEPP) liabilities following the LSC Communications, Inc. bankruptcy[84] - During the first nine months of 2020, the company repurchased $67.0 million (notional amount) of its 8.25% senior notes, recognizing a pre-tax gain of $2.3 million on debt extinguishment[90][187] Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q3 2020 performance, noting a 6.9% net sales increase but significant declines in income and earnings due to prior-year gains, LSC pension charges, and restructuring costs Executive Overview and Key Developments Q3 2020 net sales rose 6.9% to $209.5 million, but income from operations fell 52.6% due to a prior-year gain and new LSC pension charges, prompting restructuring for future SEC rule impacts - Q3 2020 income from operations decreased by $16.9 million, primarily due to a $19.2 million net gain from a building sale in Q3 2019, $5.8 million in LSC multiemployer pension plan charges, and $4.2 million in higher restructuring charges[144] - The company accrued $15.5 million as of September 30, 2020, for its estimated share of Multiemployer Pension Plan (MEPP) liabilities following the LSC Communications bankruptcy[156] - The company expects a decline in printed shareholder reports and prospectus volumes from 2021 due to SEC Rule 30e-3 and Rule 498A implementation[128][130] Results of Operations Consolidated Q3 2020 net sales grew 6.9% driven by Tech-enabled services and Software solutions, while CM-CCM segment operating income significantly increased, offsetting IC-CCM's decline due to a prior-year gain absence Net Sales by Offering (Q3 2020 vs Q3 2019, in millions) | Offering | Q3 2020 | Q3 2019 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Tech-enabled services | $104.5 | $83.9 | $20.6 | 24.6% | | Software solutions | $51.1 | $46.6 | $4.5 | 9.7% | | Print and distribution | $53.9 | $65.4 | $(11.5) | (17.6%) | | Total net sales | $209.5 | $195.9 | $13.6 | 6.9% | - SG&A expense for Q3 2020 increased by $16.0 million (34.6%) YoY, primarily due to a $5.8 million LSC pension obligation charge, higher incentive compensation, and a $2.7 million non-income tax charge[169] Segment Income from Operations (Q3 2020 vs Q3 2019, in millions) | Segment | Q3 2020 | Q3 2019 | | :--- | :--- | :--- | | Capital Markets - Software Solutions | $2.1 | $2.8 | | Capital Markets - Compliance and Communication Management | $37.2 | $16.8 | | Investment Companies - Software Solutions | $(0.8) | $(1.7) | | Investment Companies - Compliance and Communication Management | $(0.9) | $20.1 | | Corporate (Expenses) | $(22.4) | $(5.9) | Non-GAAP Measures Adjusted EBITDA, a key non-GAAP measure, increased to $47.6 million in Q3 2020 and $138.5 million for the nine months, reflecting adjustments for restructuring, LSC pension obligations, and a prior-year gain Reconciliation of Net Earnings to Adjusted EBITDA (in millions) | Metric | Q3 2020 | Q3 2019 | 9 Months 2020 | 9 Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Net earnings | $7.1 | $14.7 | $9.9 | $30.6 | | Restructuring, impairment, etc. | $7.0 | $2.8 | $35.2 | $8.7 | | LSC multiemployer pension plans obligation | $5.8 | — | $18.1 | — | | Depreciation and amortization | $12.6 | $12.7 | $39.7 | $36.8 | | Interest expense, net | $5.9 | $8.6 | $16.8 | $26.6 | | Income tax expense | $2.6 | $9.3 | $5.6 | $16.5 | | Net gain on sale of building | — | $(19.2) | — | $(19.2) | | Other Adjustments | $6.6 | $2.2 | $13.2 | $10.9 | | Adjusted EBITDA | $47.6 | $31.1 | $138.5 | $110.9 | Liquidity and Capital Resources The company maintains sufficient liquidity with $40.9 million cash and $238.5 million available under its revolving credit facility, totaling $279.4 million net available liquidity, while remaining compliant with debt covenants - Net cash from operating activities improved to $52.5 million for the first nine months of 2020, compared to a $4.2 million use in the prior-year period, due to lower tax and interest payments[242] - Capital expenditures for 2020 are expected to be approximately $30 million, primarily for software development[243] Net Available Liquidity as of Sep 30, 2020 (in millions) | Item | Amount | | :--- | :--- | | Revolving Facility Availability | $300.0 | | Less: Borrowings Outstanding | $(61.5) | | Current Availability | $238.5 | | Add: Cash | $40.9 | | Net Available Liquidity | $279.4 | Critical Accounting Policies and Estimates Critical accounting policies include goodwill valuation, with no impairment recognized after Q1 2020 segment realignment, though the IC-CCM reporting unit's fair value cushion was only 3%, indicating sensitivity to future cash flow changes - A goodwill impairment test as of March 31, 2020, under the new segment structure, resulted in no impairment, but the IC-CCM reporting unit had a narrow cushion, with fair value exceeding book value by only 3%[272] - The IC-CCM reporting unit, holding $40.6 million in goodwill, is sensitive to assumption changes; a 1.0% increase in the discount rate would have made its fair value approximate its book value[272][274] Item 3: Quantitative and Qualitative Disclosure About Market Risk No significant changes to the company's market risk exposures have occurred since the last Annual Report on Form 10-K - There have been no significant changes to the Company's market risk since the last Annual Report[283] Item 4: Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2020, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2020[285] - No changes occurred during the quarter that materially affected the company's internal control over financial reporting[286] Part II: Other Information Item 1: Legal Proceedings This section refers to Note 7 of the financial statements for details on legal proceedings, primarily concerning the contingent liability for LSC multiemployer pension plans - For discussion of legal proceedings, the report refers to Note 7, Commitments and Contingencies[288] Item 1A: Risk Factors No material changes to the risk factors previously disclosed in the Annual Report and prior 2020 Quarterly Reports are reported - There were no material changes to the risk factors identified in the Company's Annual Report or previous 2020 Quarterly Reports[289] Item 2: Unregistered Sales of Equity Securities and Use of Proceeds During Q3 2020, the company repurchased 446,614 shares at an average of $11.54 per share, with $16.1 million remaining for future repurchases under the authorized program Issuer Purchases of Equity Securities (Q3 2020) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Jul 2020 | — | — | | Aug 2020 | 2,742 | $12.13 | | Sep 2020 | 443,872 | $11.54 | | Total | 446,614 | $11.54 | - As of September 30, 2020, $16.1 million remained authorized for future repurchases under the stock repurchase program, effective through December 31, 2021[291][101] Item 6: Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, debt agreements, compensation plans, and required certifications