Donnelley Financial Solutions(DFIN) - 2020 Q4 - Annual Report

Part I Business DFIN provides global risk and compliance solutions, strategically shifting towards software while realigning its operating segments to enhance focus on capital markets and investment companies Company Overview & Strategy - DFIN is a global risk and compliance solutions company providing software, tech-enabled services, and print/distribution solutions for regulatory filings and corporate transactions[12] - The company's strategy is to focus investments in its advanced software solutions (ActiveDisclosure®, Arc Suite, Venue®) while maintaining a high-touch service model in its traditional compliance and communications management segments[14] - The market trend is shifting towards clients using DFIN's software solutions and tech-enabled services, with a move away from physical print and distribution unless required by regulation[12] Capital Markets Solutions - DFIN provides solutions for public and private companies to comply with SEC regulations for both transactional events (M&A, IPOs, SPACs) and ongoing compliance filings (10-K, 10-Q, Proxy)[15] 2020 Capital Markets Net Sales Breakdown | Category | Percentage of Net Sales | | :--- | :--- | | Transactional | ~51% | | Compliance | ~25% | | Software Solutions | ~24% | - Key software offerings for Capital Markets include[17][18][22]: - ActiveDisclosure®: A cloud-based platform for collaborative SEC filing creation and submission - Venue® Virtual Data Room: A secure platform for sharing confidential information during M&A and IPOs, integrated with AI-powered contract analytics from eBrevia - eBrevia: An AI solution for data extraction and contract analysis Investment Companies Solutions - DFIN serves mutual funds, alternative investment, and insurance-investment companies with solutions for regulatory compliance under the Investment Company Act of 1940 and European/Canadian regulations[29] 2020 Investment Companies Net Sales Breakdown | Category | Percentage of Net Sales | | :--- | :--- | | Compliance | ~76% | | Software Solutions | ~20% | | Transactional | ~4% | - The proprietary Arc Suite software platform is a key offering, providing a cloud-based suite for managing, assembling, and filing regulatory documents[31] Segments - In Q1 2020, DFIN realigned its business into four reportable segments to provide greater visibility into its software and service-based offerings, with all prior period data reclassified accordingly[34][36] - The four segments are[37][38][39][40]: - Capital Markets – Software Solutions (CM-SS): Includes Venue, ActiveDisclosure, eBrevia, and EDGAR Online - Capital Markets – Compliance & Communications Management (CM-CCM): Tech-enabled services and print/distribution for deal and compliance needs - Investment Companies – Software Solutions (IC-SS): The Arc Suite platform - Investment Companies – Compliance & Communications Management (IC-CCM): Tech-enabled regulatory filing, XBRL, and proxy services Company History & Key Transactions - DFIN became an independent public company on October 1, 2016, following a spin-off from R.R. Donnelley & Sons Company (RRD)[43] - The company sold its Language Solutions business on July 22, 2018[45] - On December 18, 2018, DFIN acquired eBrevia, a provider of AI-based data extraction and contract analytics software, to enhance its Venue data room offerings[46] Markets, Competition, and Technology - The global risk and compliance industry is highly competitive and fragmented, with decreasing barriers to entry due to technology innovation[48] - DFIN competes on product quality, service, regulatory expertise, security, price, and reputation against full-service providers, technology point solutions, and general tech providers[48][50] - The company has invested in its own software solutions (ActiveDisclosure, Arc Suite, Venue) and made strategic acquisitions (eBrevia) and investments (Mediant, Gain Compliance) to adapt to technological changes and clients' preference for self-service tools[49] Market Volatility, Seasonality, and COVID-19 Impact - The Capital Markets segments are subject to market volatility, as transactional offerings depend on the global volume of IPOs, M&A, and debt offerings, which is partially mitigated by recurring compliance work[53] - The business experiences seasonality, with peak periods for public company reporting after each fiscal quarter and for investment companies in the second fiscal quarter[54] - The COVID-19 pandemic adversely impacted financial performance, particularly transactional offerings in early 2020, though the market stabilized in the third quarter; the company incurred $0.5 million in net incremental expenses in 2020 due to the pandemic[55][56][59] Government Regulation and Regulatory Impact - SEC Rule 30e-3, effective for default electronic distribution on January 1, 2021, allows investment companies to deliver shareholder reports electronically, which is expected to cause a significant decline in printed report volume[62] - SEC Rule 498A, with compliance required by January 1, 2022, permits variable annuity and life insurance contracts to use a more concise summary prospectus, which is also expected to reduce printed prospectus volume[65] - The SEC's adoption of Inline XBRL (iXBRL) for fund risk/return summaries is expected to increase revenue for the IC-SS segment's compliance services[63] Human Capital Management Employee Statistics (as of Feb 15, 2021) | Metric | Value | | :--- | :--- | | Total Employees | ~2,350 | | US-based | ~85% | | International | ~15% | | Female Workforce | ~37% | | Male Workforce | ~63% | | Average Tenure | ~13.3 years | - The company focuses on attracting, retaining, and developing talent through competitive compensation, comprehensive benefits, and wellbeing programs[74][76][77] - DFIN is committed to Diversity, Equity & Inclusion (DEI), with an employee-led task force and leadership engagement; in 2020, approximately 32% of VP-level hires/promotions were women or from underrepresented groups[78] - Employee health and safety is a high priority, with an Environmental, Health and Safety Management System aligned with ISO 14001 and 45001; the company achieved a total recordable incident rate of 0.47 in 2020[82] Risk Factors The company faces risks from the COVID-19 pandemic, cybersecurity threats, market volatility, intense competition, existing debt, and evolving regulations like GDPR COVID-19 Pandemic Risk - The COVID-19 pandemic poses a material risk by potentially reducing demand for DFIN's services, especially transactional offerings, due to economic downturns and market volatility[86][87] - Operational disruptions are a risk if government restrictions interfere with the ability of employees and vendors to perform their duties, potentially impacting service delivery and client retention[87] Technology Risks - A primary risk is the failure to maintain confidentiality and security of systems containing material nonpublic information, which could lead to reputational damage, client loss, and legal liability; the company has been and expects to continue to be a target of cybercrime[90][91] - The business may be adversely affected by new technologies that allow clients to produce and file regulatory documents themselves, reducing demand for DFIN's traditional services[97][98] - The company's inability to protect its proprietary technology and intellectual property could impair its competitive position[105][106] Business, Economic, Market and Operating Risks - A significant portion of revenue depends on financial transactions (IPOs, M&A), making the business highly sensitive to factors beyond its control, such as market conditions, interest rates, and economic volatility[108][109] - The financial communications industry is highly competitive and fragmented, which creates adverse price pressures[110][111] - The business depends on retaining existing clients and generating referrals from financial institutions and law firms; a decline in retention or referrals would harm operating results[115][117] Financial Risks - As of December 31, 2020, the company had $233.0 million of 8.25% senior unsecured notes outstanding, which could adversely affect the business and limit financial flexibility[134][135] - The debt agreements contain restrictive covenants that limit the company's ability to incur additional debt, pay dividends, sell assets, and make certain investments[136][137] - The company is exposed to risks from changes in foreign currency exchange rates, as approximately 13% of 2020 net sales were international[128][144] Legal and Regulatory Risks - Changes in regulations, such as SEC Rule 30e-3 allowing electronic delivery of shareholder reports, may reduce demand for the company's print-related services[146][147] - Increasingly stringent and complex data privacy laws, such as Europe's GDPR, could impact software solutions and expose the company to increased compliance costs and liability[148][149] Benefit, Pension and Other Post-Retirement Benefit Plans Risk - The company may become liable for multi-employer pension plan obligations of its former affiliate, LSC Communications, which filed for bankruptcy in April 2020; DFIN and RRD remain jointly and severally liable for these obligations[154][155] - Adverse market conditions, lower returns on pension assets, or changes in discount rates could increase required contributions to pension and other post-retirement benefit plans in the future[151][152] Unresolved Staff Comments The company reports that it has no unresolved staff comments - None[157] Properties As of December 31, 2020, DFIN leased or owned 50 facilities worldwide, encompassing approximately 1.2 million square feet, with the majority being leased Facilities Overview (as of Dec 31, 2020) | Location | Number of Facilities | Total Square Feet | | :--- | :--- | :--- | | U.S. | 31 | ~1.1 million | | International | 19 | <0.1 million | | Total | 50 | ~1.2 million | - Approximately 0.3 million square feet of space is owned, while the remaining 0.9 million square feet is leased[158] Legal Proceedings Information regarding legal proceedings is available in Note 8, Commitments and Contingencies, to the Consolidated Financial Statements - For a discussion of certain litigation involving the Company, see Note 8, Commitments and Contingencies, to the Consolidated Financial Statements[159] Mine Safety Disclosures This item is not applicable to the company - Not applicable[160] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities DFIN's common stock (NYSE: DFIN) has a stock repurchase program with a remaining authorization of $50 million through December 31, 2022 - The company's common stock trades on the New York Stock Exchange (NYSE) under the ticker symbol "DFIN"[163] - In February 2020, the Board authorized a $25.0 million stock repurchase program; in February 2021, this was increased to bring the total remaining available authorization to $50 million and extended through December 31, 2022[165] Issuer Purchases of Equity Securities (Q4 2020) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Oct 2020 | 41,738 | $12.84 | | Nov 2020 | 4,400 | $12.99 | | Dec 2020 | 43,583 | $16.68 | | Total | 89,721 | $14.71 | Selected Financial Data Net sales increased in 2020, but the company reported a net loss of ($25.9) million due to significant restructuring and pension-related charges Selected Financial Data (in millions, except per share data) | Metric | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net sales | $894.5 | $874.7 | $963.0 | | Net (loss) earnings | $(25.9) | $37.6 | $73.6 | | Diluted (loss) earnings per share | $(0.76) | $1.10 | $2.16 | | Total assets | $865.6 | $886.9 | $868.7 | | Long-term debt | $230.5 | $296.0 | $362.7 | - Significant items impacting 2020 results included pre-tax charges of $79.2 million for restructuring and impairment, and a $19.0 million charge for the LSC multiemployer pension plan obligation[171] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2020, net sales grew 2.3%, but operating income fell 95.4% due to large charges; 2021 sales are expected to decrease while capital expenditures will increase Executive Overview & Outlook - 2020 Performance: Net sales rose 2.3% YoY to $894.5 million, driven by tech-enabled services and software solutions, but income from operations dropped 95.4% due to significant restructuring, impairment, and pension-related charges[177][179] - 2021 Outlook: The company anticipates a decrease in net sales due to regulatory impacts (SEC Rule 30e-3, Rule 498A) reducing print volumes, though modest margin improvement is expected from a better business mix and cost controls[181] - Capital Expenditures: Expected to increase from $31.1 million in 2020 to approximately $45.0 million in 2021, primarily for investments in the software portfolio[182] - LSC Pension Obligation: Following the bankruptcy of former affiliate LSC, DFIN recorded a $15.2 million accrued liability as of year-end 2020 for its potential share of multiemployer pension plan liabilities for which it remains jointly and severally liable with RRD[187][189] Results of Operations (Consolidated) Consolidated Results of Operations (in millions) | Line Item | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Total net sales | $894.5 | $874.7 | 2.3% | | Income from operations | $3.6 | $78.5 | (95.4%) | | Net (loss) earnings | $(25.9) | $37.6 | nm | - The $19.8 million increase in 2020 net sales was driven by a $44.5 million increase in tech-enabled services and a $10.9 million increase in software solutions, partially offset by a $35.6 million decrease in print and distribution[177] - The significant decrease in 2020 income from operations was primarily due to a $65.6 million increase in restructuring/impairment charges, a $19.0 million LSC pension obligation charge, and higher incentive compensation[179][205] - Interest expense decreased by 40.2% in 2020 due to the repurchase of $67.0 million of senior notes and lower borrowings on the Revolving Facility[206] Information by Segment 2020 Net Sales by Segment (in millions) | Segment | 2020 Net Sales | 2019 Net Sales | % Change | | :--- | :--- | :--- | :--- | | Capital Markets – Software Solutions | $133.2 | $126.7 | 5.1% | | Capital Markets – CCM | $424.0 | $389.7 | 8.8% | | Investment Companies – Software Solutions | $67.0 | $62.6 | 7.0% | | Investment Companies – CCM | $270.3 | $295.7 | (8.6%) | 2020 Income (Loss) from Operations by Segment (in millions) | Segment | 2020 Ops Income | 2019 Ops Income | % Change | | :--- | :--- | :--- | :--- | | Capital Markets – Software Solutions | $8.5 | $9.6 | (11.5%) | | Capital Markets – CCM | $120.6 | $86.3 | 39.7% | | Investment Companies – Software Solutions | $(1.7) | $(7.8) | 78.2% | | Investment Companies – CCM | $(43.1) | $29.4 | nm | | Corporate | $(80.7) | $(39.0) | (106.9%) | - The IC-CCM segment recorded a $43.1 million operating loss in 2020, driven by a $40.6 million goodwill impairment charge and lower sales volumes[251] - Corporate operating expenses increased by $41.7 million in 2020, primarily due to the $19.0 million LSC pension charge and higher incentive and healthcare expenses[258] Non-GAAP Measures (Adjusted EBITDA) - The company uses Non-GAAP Adjusted EBITDA to provide a more meaningful comparison of its core business operating results over time by excluding items like restructuring charges, share-based compensation, and acquisition-related expenses[261] Reconciliation of Net (Loss) Earnings to Adjusted EBITDA (in millions) | Metric | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net (loss) earnings | $(25.9) | $37.6 | $73.6 | | Adjustments (Restructuring, LSC pension, etc.) | $199.3 | $99.4 | $81.3 | | Adjusted EBITDA | $173.4 | $137.0 | $154.9 | Liquidity and Capital Resources Cash Flow Summary (in millions) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $154.2 | $54.5 | | Net cash used in investing activities | $(19.8) | $(12.2) | | Net cash used in financing activities | $(77.5) | $(74.5) | - The $99.7 million increase in operating cash flow in 2020 was primarily due to improved operating performance, favorable working capital changes, and lower payments for interest and income taxes[288] - As of December 31, 2020, the company had $233.0 million of senior notes outstanding and no borrowings under its $300.0 million Revolving Credit Facility[298][309] - Cash and cash equivalents increased by $56.4 million to $73.6 million at year-end 2020[283] Critical Accounting Policies and Estimates - Revenue Recognition: Requires significant judgment, especially for contracts with multiple performance obligations, where the transaction price is allocated based on estimated standalone selling prices[319] - Goodwill: Tested for impairment annually on October 31, the 2020 test resulted in a non-cash impairment charge of $40.6 million for the IC-CCM reporting unit, while the CM-SS reporting unit had a fair value cushion of 19.5% over its carrying value[324][330][332] - Other Long-Lived Assets: The company recognized impairment charges of $18.2 million on Right-of-Use (ROU) assets for abandoned operating leases in 2020[335] - Pension Benefits: Annual expense calculations are based on actuarial assumptions including discount rates and expected long-term rates of return; the weighted-average discount rate for pension benefits was 2.6% at year-end 2020[339] Quantitative and Qualitative Disclosures About Market Risk The company has limited exposure to foreign currency and interest rate risk, while credit risk is mitigated by a diverse customer base - The company is exposed to foreign currency exchange risk, primarily from the British Pound and Canadian dollar, as approximately 13% of 2020 net sales were earned outside the U.S.[355] - A hypothetical 10% change in interest rates would not have a material effect on interest income or expense[358] - Credit risk is managed through a diverse customer base, with no single customer representing more than 10% of net sales in 2020, 2019, or 2018[359] Financial Statements and Supplementary Data The required financial information is located beginning on page F-1 of the report - The financial information required by Item 8 is located beginning on page F-1 of this report[361] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no disagreements with its accountants on accounting and financial disclosure - None[361] Controls and Procedures Management and the independent auditor concluded that the company's disclosure controls, procedures, and internal control over financial reporting were effective - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[363] - Management concluded that internal control over financial reporting was effective as of December 31, 2020, based on the COSO framework[365] - Deloitte & Touche LLP issued an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of December 31, 2020[369] Other Information The company reports no other information - None[376] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, officers, and governance is incorporated by reference from the 2021 Proxy Statement, and the company has a Code of Ethics - Information regarding directors and executive officers is incorporated by reference from the Company's Proxy Statement for the Annual Meeting of Shareholders scheduled to be held May 13, 2021[378] Executive Compensation Information regarding executive and director compensation is incorporated by reference from the company's 2021 Proxy Statement - Information regarding executive and director compensation is incorporated by reference to the material under the captions "Compensation Discussion and Analysis," "Human Resources Committee Report," and other related sections of the 2021 Proxy Statement[382] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership is incorporated by reference from the 2021 Proxy Statement, with details on equity compensation plans provided - Information regarding security ownership of certain beneficial owners and management is incorporated by reference to the material under the heading "Stock Ownership" of the 2021 Proxy Statement[383] Equity Compensation Plan Information (as of Dec 31, 2020) | Plan Category | Number of securities to be issued upon exercise (thousands) | Weighted-average exercise price of outstanding options | Number of securities remaining available for future issuance (thousands) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 3,014 | $18.91 | 1,838 | Certain Relationships and Related Transactions, and Director Independence Information regarding related transactions and director independence is incorporated by reference from the company's 2021 Proxy Statement - Information regarding certain relationships and related transactions and director independence is incorporated by reference to the material under the heading "Certain Transactions," and "Corporate Governance—Independence of Directors" of the 2021 Proxy Statement[386] Principal Accountant Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the company's 2021 Proxy Statement - Information regarding principal accounting fees and services is incorporated by reference to the material under the heading "The Company's Independent Registered Public Accounting Firm" of the 2021 Proxy Statement[387] Part IV Exhibits, Financial Statement Schedules This section lists the financial statements and exhibits filed as part of the Annual Report on Form 10-K - The financial statements listed in the index on page F-1 are filed as part of this Annual Report[390] - The exhibits listed on pages E-1 through E-4 are filed as part of this Annual Report[391] Form 10-K Summary This item is not applicable - Not applicable[393] Consolidated Financial Statements Financial Statements For fiscal year 2020, DFIN reported a net loss of ($25.9) million on net sales of $894.5 million, with $154.2 million in cash from operations 2020 Key Financial Statement Figures (in millions) | Statement | Line Item | Amount | | :--- | :--- | :--- | | Operations | Total Net Sales | $894.5 | | | Net (Loss) Earnings | $(25.9) | | Balance Sheet | Total Assets | $865.6 | | | Total Liabilities | $617.8 | | | Total Equity | $247.8 | | Cash Flows | Net Cash from Operating Activities | $154.2 | Notes to Consolidated Financial Statements Key notes detail the 2020 segment realignment, a $40.6 million goodwill impairment, and a $15.2 million accrued liability for LSC pension obligations Note 2. Revenue - Revenue is recognized over time for subscription-based software solutions (Venue, Arc Suite, ActiveDisclosure) and at a point in time for most tech-enabled services and print offerings[473][475][477] - Unbilled receivables were $39.1 million and contract assets were $18.5 million as of December 31, 2020, reflecting timing differences between revenue recognition and customer invoicing[483] Note 4. Goodwill and Other Intangible Assets - Following the segment realignment in Q1 2020, goodwill was reallocated to the new reporting units using a relative fair value approach[489][490] - The annual goodwill impairment analysis in Q4 2020 resulted in a non-cash impairment charge of $40.6 million, fully impairing the goodwill within the IC-CCM reporting unit[491] Goodwill by Segment (as of Dec 31, 2020) | Segment | Goodwill (in millions) | | :--- | :--- | | CM-SS | $103.7 | | CM-CCM | $253.0 | | IC-SS | $53.2 | | IC-CCM | $0.0 | | Total | $409.9 | Note 6. Restructuring, Impairment and Other Charges 2020 Restructuring, Impairment and Other Charges (in millions) | Charge Type | Amount | | :--- | :--- | | Impairment Charges | $60.6 | | Employee Terminations | $15.6 | | Other Charges | $3.0 | | Total | $79.2 | - The $60.6 million in impairment charges includes a $40.6 million goodwill impairment for the IC-CCM unit and $18.2 million for abandoned operating lease ROU assets[513][514] - Employee termination costs of $15.6 million were for approximately 470 employees, largely related to efficiency efforts ahead of new SEC rules reducing print volumes[512] Note 8. Commitments and Contingencies - Following the Chapter 11 bankruptcy filing of former affiliate LSC, DFIN recorded a contingent liability for its potential share of LSC's multiemployer pension plan obligations (LSC MEPP Liabilities)[554] - As of December 31, 2020, the company has accrued $15.2 million related to this LSC MEPP liability, representing its estimated low end of the range of potential outcomes and its share of payments until a final allocation with RRD is determined[556] - The company recorded a $5.2 million charge in 2020 for estimated exposures related to sales and use taxes in certain jurisdictions where it has not historically collected or remitted such taxes[560] Note 10. Debt Long-Term Debt (in millions) | Component | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | 8.25% senior notes due 2024 | $233.0 | $300.0 | | Unamortized debt issuance costs | $(2.5) | $(4.0) | | Total long-term debt | $230.5 | $296.0 | - In 2020, the company purchased and retired $67.0 million (notional amount) of its senior notes, recognizing a pre-tax gain on debt extinguishment of $2.3 million[580] - As of December 31, 2020, there were no outstanding borrowings under the $300.0 million Revolving Credit Facility, which matures in December 2023[586] Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP issued an unqualified opinion on the financial statements, identifying unbilled receivables valuation and goodwill impairment as critical audit matters - The auditor, Deloitte & Touche LLP, issued an unqualified opinion on the company's financial statements and internal control over financial reporting[639][640] - Critical Audit Matter 1: Valuation of unbilled receivables and contract assets, due to the high volume of transactions and significant management judgment required[645][648] - Critical Audit Matter 2: Goodwill impairment testing for the IC-CCM and CM-SS reporting units, due to the significant judgments in forecasting revenue, selecting discount rates, and choosing market multiples[652][653]