Donnelley Financial Solutions(DFIN) - 2022 Q4 - Annual Report

Part I Business Overview DFIN, a global risk and compliance solutions firm, shifts from traditional printing to software and technology services - DFIN provides regulatory filing and transaction solutions, encompassing software, technology-enabled services, and print and distribution, to meet client regulatory and compliance needs[17] - The company's strategic focus is on concentrating investments and resources in advanced software solutions like ActiveDisclosure®, Arc Suite®, and Venue® virtual data rooms, while making targeted investments to enhance product functionality[19] 2022 Capital Markets Net Sales Composition | Category | 2022 Percentage | 2021 Percentage | | :--- | :--- | :--- | | Software Solutions | 31% | 24% | | - Venue (Transaction Solutions) | 55% (within software) | 58% (within software) | | - Compliance and Other Software | 45% (within software) | 42% (within software) | | Technology-Enabled Services and Print & Distribution | 69% | 76% | | - Transactional | 58% (within services) | 72% (within services) | | - Compliance | 42% (within services) | 28% (within services) | 2022 Investment Companies Net Sales Composition | Category | 2022 Percentage | 2021 Percentage | | :--- | :--- | :--- | | Software Solutions | 41% | 35% | | Technology-Enabled Services and Print & Distribution | 59% | 65% | | - Compliance | 94% (within services) | 93% (within services) | | - Transactional | 6% (within services) | 7% (within services) | - The company purchased renewable energy credits in 2022 to offset 100% of the electricity used at its print manufacturing facilities, with climate-related risks and opportunities overseen by the Corporate Responsibility and Governance Committee[81] Company Overview Capital Markets Investment Companies Segments Services and Products Company History Markets and Competition Technology Market Volatility/Cyclicality and Seasonality COVID-19 Impact Government Regulation and Regulatory Impact Resources Distribution Customers Cybersecurity and Data Protection Human Capital Climate Available Information Risk Factors The company faces diverse risks across technology, operations, finance, legal, regulatory, and pandemic factors, potentially impacting performance - The company's systems contain substantial proprietary, confidential, and non-public information, making them targets for cyberattacks, and security breaches could severely harm the company's reputation and business[85] - A significant portion of the company's net sales relies on financial and strategic business transactions, and market downturns, such as reduced IPO and M&A activity, could negatively impact demand for the company's services and products[95] Company Debt as of 2022 | Metric | Amount (million USD) | | :--- | :--- | | Outstanding Term Loan A as of December 31, 2022 | 125.0 | | Outstanding Revolving Credit as of December 31, 2022 | 45.0 | | Total Long-Term Debt as of December 31, 2022 | 169.2 | | Total Long-Term Debt as of December 31, 2021 | 124.0 | - The company faces potential funding obligation risks related to multiemployer pension plans, particularly liabilities from former affiliate LSC, for which the company and RRD are jointly and severally liable[124] - The COVID-19 pandemic and other global public health epidemics could materially adversely affect the company's business, future operating results, and overall financial performance, including customer demand and operational management capabilities[126] Technology Risks Business, Economic, Market and Operating Risks Financial Risks Legal and Regulatory Risks Benefit, Pension and Other Postretirement Benefits Plans Risk COVID-19 Pandemic Risk Unresolved Staff Comments There are no unresolved staff comments in this report - The company has no unresolved staff comments[129] Properties As of December 31, 2022, the company owned or leased 16 US (0.5M sq ft) and 12 international (0.1M sq ft) facilities - As of December 31, 2022, the company owned or leased 16 US facilities (approximately 0.5 million square feet) and 12 international facilities (less than 0.1 million square feet)[130] - The company owns approximately 0.2 million square feet of facilities globally, with the remaining 0.4 million square feet leased[130] - The company holds approximately 3.3 acres of land for sale[130] Legal Proceedings Legal proceedings details are in Note 8, 'Commitments and Contingencies,' of the consolidated financial statements - Details regarding the company's legal proceedings and contingent liabilities are provided in Note 8 to the audited consolidated financial statements[131] Mine Safety Disclosures This item is not applicable - Mine safety disclosures are not applicable[132] Part II Market for Donnelley Financial Solutions, Inc.'s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities DFIN's common stock trades on NYSE; Q4 2022 repurchases totaled $37.27 million, showing strong shareholder return - DFIN's common stock has traded on the New York Stock Exchange (NYSE) under the ticker symbol "DFIN" since October 3, 2016[135] - As of February 14, 2023, the company had 3,345 registered stockholders[136] Issuer Purchases of Equity Securities in Q4 2022 | Period | Total Shares Purchased | Average Price Paid Per Share ($) | Total Shares Purchased as Part of Publicly Announced Program or Plan | Maximum Value of Shares that May Yet Be Purchased Under the Program or Plan ($) | | :--- | :--- | :--- | :--- | :--- | | October 1 - October 31, 2022 | 180,061 | 38.41 | 180,061 | 131,025,550 | | November 1 - November 30, 2022 | 128,526 | 35.61 | 124,612 | 126,593,507 | | December 1 - December 31, 2022 | 61,524 | 37.41 | 61,524 | 124,292,140 | | Total | 370,111 | 37.27 | 366,197 | | - The Board of Directors authorized an increase in the stock repurchase program to $150 million and extended the expiration date to December 31, 2023, in February and August 2022[137] Cumulative Total Shareholder Return 2017-2022 | Company Name/Index | December 31, 2017 | December 31, 2018 | December 31, 2019 | December 31, 2020 | December 31, 2021 | December 31, 2022 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Donnelley Financial Solutions | 100 | 71.99 | 53.72 | 87.07 | 241.87 | 198.31 | | Russell 2000 Index | 100 | 88.99 | 111.70 | 134.00 | 153.85 | 122.41 | | S&P SmallCap 600 Index | 100 | 91.52 | 112.37 | 125.05 | 158.59 | 133.06 | | S&P Composite 1500 Diversified Financials Index | 100 | 89.76 | 111.82 | 124.58 | 168.96 | 149.27 | Principal Market Stockholders Issuer Purchases of Equity Securities Equity Compensation Plans Peer Performance Table Reserved This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations In 2022, net sales decreased 16.1% to $833.6M, operating income fell 33.9%, and adjusted EBITDA declined 26.0% Consolidated Operating Results Overview 2022 vs 2021 | Metric | 2022 (million USD) | 2021 (million USD) | Change (million USD) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net Sales | 833.6 | 993.3 | (159.7) | (16.1%) | | Operating Income | 145.0 | 219.3 | (74.3) | (33.9%) | | Net Income | 102.5 | 145.9 | (43.4) | (29.7%) | | Diluted Earnings Per Share | 3.17 | 4.14 | (0.97) | (23.4%) | Net Sales Change by Service Type 2022 vs 2021 | Service Type | 2022 (million USD) | 2021 (million USD) | Change (million USD) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Technology-Enabled Services | 380.9 | 519.5 | (138.6) | (26.7%) | | Software Solutions | 279.6 | 270.0 | 9.6 | 3.6% | | Print and Distribution | 173.1 | 203.8 | (30.7) | (15.1%) | Adjusted EBITDA 2022 vs 2021 | Metric | 2022 (million USD) | 2021 (million USD) | Change (million USD) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Adjusted EBITDA | 218.3 | 294.8 | (76.5) | (26.0%) | - The company anticipates capital expenditures of approximately $60 million in 2023, an increase from $54.2 million in 2022, primarily for investments in its software portfolio[199] Cash Flow Overview 2022 vs 2021 | Cash Flow Type | 2022 (million USD) | 2021 (million USD) | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | 150.2 | 180.0 | | Net Cash Used in Investing Activities | (50.9) | (45.0) | | Net Cash Used in Financing Activities | (121.1) | (154.9) | | Net Decrease in Cash and Cash Equivalents | (20.3) | (19.1) | - The company completed the disposition of its Edgar Online (EOL) business on November 9, 2022, generating $3.3 million in net cash proceeds[215] Business Segments Executive Overview Financial Review Non-GAAP Measures Selected Financial Data Liquidity and Capital Resources Critical Accounting Estimates Quantitative and Qualitative Disclosures about Market Risk The company manages interest and FX rate risks; a 10% USD rise could cut pre-tax earnings by $0.6M - The company manages market risks from changes in interest rates and foreign exchange rates through its ordinary course of business and financial activities, but held no derivative financial instruments as of December 31, 2022[243] - In 2022, approximately 14% of the company's net sales were derived from international operations outside the United States, primarily denominated in Hong Kong Dollars, Canadian Dollars, and British Pounds[244] - A hypothetical 10% appreciation of the U.S. Dollar against various currencies would result in an approximate $0.6 million decrease in the company's pre-tax earnings and a $5.8 million decrease in total assets[245] - A hypothetical 10% change in interest rates would impact interest expense and cash flows by $2.5 million[246][247] - The company mitigates credit risk on accounts receivable through a large and diversified customer base, with no single customer accounting for more than 10% of net sales[248] Market Risk Foreign Exchange Risk Interest Rate Risk Credit Risk Financial Statements and Supplementary Data The required financial information for this item begins on page F-1 of this annual report - The financial information required for this item begins on page F-1 of this annual report[249] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure No changes or disagreements with accountants on accounting and financial disclosure are reported - The company has no changes in or disagreements with accountants on accounting and financial disclosure[250] Controls and Procedures As of December 31, 2022, disclosure controls were effective, with no Q4 changes, and Deloitte issued an unqualified opinion - As of December 31, 2022, the company's Chief Executive Officer and Chief Financial Officer assessed and concluded that the company's disclosure controls and procedures were effective[252] - No changes in the company's internal control over financial reporting occurred during the fourth quarter of 2022 that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[253] - Management has filed an annual report on the effectiveness of internal control over financial reporting as of December 31, 2022, concluding that it was effective[254] - Deloitte, the independent registered public accounting firm, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2022[257][258] - Deloitte identified the valuation of unbilled receivables and contract assets as a critical audit matter due to the high volume of transactions, manual processes, and management's judgment required in estimating transaction prices, standalone selling prices, and variable consideration[490] Disclosure Controls and Procedures Changes in Internal Control Over Financial Reporting Management's Annual Report on Internal Control Over Financial Reporting Report of Independent Registered Public Accounting Firm Other Information No other information is required to be disclosed in this report - No other information is required to be disclosed in this report[264] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable - Disclosure regarding foreign jurisdictions that prevent inspections is not applicable[265] Part III Directors and Executive Officers of Donnelley Financial Solutions, Inc. and Corporate Governance Director, executive, and governance information is incorporated from the 2023 proxy statement; a CEO/CFO Code of Conduct is adopted - Information regarding the company's directors, executive officers, and corporate governance is incorporated by reference from the 2023 proxy statement[267] - The company has adopted a Code of Conduct applicable to its Chief Executive Officer and senior financial officers, with any amendments or waivers to be posted on its website[268] Executive Compensation Executive and director compensation information is incorporated by reference from relevant sections of the 2023 proxy statement - Executive and director compensation information is incorporated by reference from the "Compensation Discussion and Analysis," "Human Resources Committee Report," "Executive Compensation," "Potential Payments Upon Termination or Change in Control," and "Director Compensation" sections of the 2023 proxy statement[272] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of December 31, 2022, 2,632 thousand shares were outstanding under equity plans (avg. $18.19), with 3,476 thousand available Equity Compensation Plan Information (as of December 31, 2022) | Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (thousand shares) | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights ($) | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (thousand shares) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 2,632 | 18.19 | 3,476 | Equity Compensation Plan Information Certain Relationships and Related Transactions and Director Independence Related party transactions and director independence information is incorporated by reference from the 2023 proxy statement - Information on certain relationships and related transactions, as well as director independence, is incorporated by reference from the "Certain Transactions," "Board Committees and Their Functions," and "Corporate Governance—Director Independence" sections of the 2023 proxy statement[276] Principal Accounting Fees and Services Principal accounting fees and services information is incorporated by reference from the 2023 proxy statement - Information on principal accounting fees and services is incorporated by reference from the "Company's Independent Registered Public Accounting Firm" section of the 2023 proxy statement[277] Part IV Exhibits, Financial Statement Schedules This section lists financial statements, exhibits, and schedules, including consolidated statements of operations, balance sheets, and notes - The financial statements, exhibits, and financial statement schedules are included in this annual report[279][280] Financial Statements Exhibits Financial Statement Schedules Omitted Form 10-K Summary Index to Consolidated Financial Statements Consolidated Statements of Operations Consolidated Statements of Operations Key Data (2020-2022) | Metric | 2022 (million USD) | 2021 (million USD) | 2020 (million USD) | | :--- | :--- | :--- | :--- | | Net Sales | 833.6 | 993.3 | 894.5 | | Operating Income | 145.0 | 219.3 | 3.6 | | Net Income (Loss) | 102.5 | 145.9 | (25.9) | | Basic Earnings (Loss) Per Share | 3.33 | 4.36 | (0.76) | | Diluted Earnings (Loss) Per Share | 3.17 | 4.14 | (0.76) | Consolidated Statements of Comprehensive Income (Loss) Consolidated Statements of Comprehensive Income (Loss) Key Data (2020-2022) | Metric | 2022 (million USD) | 2021 (million USD) | 2020 (million USD) | | :--- | :--- | :--- | :--- | | Net Income (Loss) | 102.5 | 145.9 | (25.9) | | Other Comprehensive Income (Loss), Net of Tax | (4.9) | 2.5 | 3.8 | | Comprehensive Income (Loss) | 97.6 | 148.4 | (22.1) | Consolidated Balance Sheets Consolidated Balance Sheets Key Data (as of December 31, 2022 and 2021) | Metric | 2022 (million USD) | 2021 (million USD) | | :--- | :--- | :--- | | Cash and Cash Equivalents | 34.2 | 54.5 | | Accounts Receivable, Net of Allowance for Expected Credit Losses | 163.5 | 199.1 | | Total Current Assets | 228.4 | 279.7 | | Software, Net | 75.6 | 63.7 | | Goodwill | 405.8 | 410.0 | | Total Assets | 828.3 | 883.3 | | Total Current Liabilities | 224.8 | 261.4 | | Long-Term Debt | 169.2 | 124.0 | | Total Equity | 329.5 | 377.0 | Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows Key Data (2020-2022) | Cash Flow Type | 2022 (million USD) | 2021 (million USD) | 2020 (million USD) | | :--- | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | 150.2 | 180.0 | 154.2 | | Net Cash Used in Investing Activities | (50.9) | (45.0) | (19.8) | | Net Cash Used in Financing Activities | (121.1) | (154.9) | (77.5) | | Net (Decrease) Increase in Cash and Cash Equivalents | (20.3) | (19.1) | 56.4 | | Cash and Cash Equivalents at End of Period | 34.2 | 54.5 | 73.6 | Consolidated Statements of Equity Consolidated Statements of Equity Key Data (2020-2022) | Metric | 2022 (million USD) | 2021 (million USD) | 2020 (million USD) | | :--- | :--- | :--- | :--- | | Common Stock | 0.4 | 0.4 | 0.3 | | Treasury Stock | (221.8) | (57.1) | (16.0) | | Additional Paid-in Capital | 280.2 | 260.6 | 238.8 | | Retained Earnings | 353.9 | 251.4 | 105.5 | | Accumulated Other Comprehensive Loss | (83.2) | (78.3) | (80.8) | | Total Equity | 329.5 | 377.0 | 247.8 | Notes to the Audited Consolidated Financial Statements Note 1. Overview, Basis of Presentation and Significant Accounting Policies This note outlines DFIN's business, reporting segments, basis of presentation, and significant accounting policies, including revenue recognition, cash, receivables, inventory, long-lived assets, goodwill, intangibles, share-based compensation, pensions, income taxes, commitments, contingencies, and restructuring, noting the adoption of ASU 2016-13 and no significant impact from ASU 2021-08 - DFIN is a global risk and compliance solutions company serving clients through software, technology-enabled services, and print and distribution solutions[297] - The company operates with four operating and 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)[299] - The company adopted ASU 2016-13 on January 1, 2020, recording a $0.5 million cumulative-effect adjustment to retained earnings[314] Allowance for Expected Credit Losses Rollforward (2020-2022) | Metric | 2022 (million USD) | 2021 (million USD) | 2020 (million USD) | | :--- | :--- | :--- | :--- | | Balance at Beginning of Year | 12.7 | 10.5 | 7.7 | | Charged to Expense | 8.4 | 2.8 | 3.8 | | Write-offs, Reclassifications, and Other | (4.0) | (0.6) | (1.5) | | ASU 2016-13 Adoption | — | — | 0.5 | | Balance at End of Year | 17.1 | 12.7 | 10.5 | - The adoption of ASU 2021-08, regarding the accounting for contract assets and contract liabilities in a business combination, is not expected to have a material impact on the company's consolidated financial statements[343] Note 2. Revenue Company revenue from software solutions, technology-enabled services, and print and distribution is recognized based on control transfer, with software typically recognized over time and services/print at a point in time, and as of 2022, unbilled receivables were $33.2 million, contract assets were $20.1 million, and 43% of long-term contract revenue is expected within the next year - The company recognizes revenue when control of promised services or products is transferred to customers, in an amount reflecting the consideration the company expects to be entitled to receive[346] - Revenue from software solutions is primarily recognized over time during the contract period, while revenue from technology-enabled services and print and distribution is primarily recognized at a point in time[348][349] Net Sales by Segment and Revenue Type (2020-2022) | Segment | Revenue Type | 2022 (million USD) | 2021 (million USD) | 2020 (million USD) | | :--- | :--- | :--- | :--- | :--- | | Capital Markets - Software Solutions | Software Solutions | 180.2 | 181.0 | 133.2 | | Capital Markets - Compliance and Communications Management | Technology-Enabled Services | 305.1 | 443.1 | 314.4 | | | Print and Distribution | 105.2 | 118.4 | 109.6 | | Investment Companies - Software Solutions | Software Solutions | 99.4 | 89.0 | 67.0 | | Investment Companies - Compliance and Communications Management | Technology-Enabled Services | 75.8 | 76.4 | 94.8 | | | Print and Distribution | 67.9 | 85.4 | 175.5 | | Total Net Sales | | 833.6 | 993.3 | 894.5 | - As of December 31, 2022, contract assets totaled $20.1 million, and unbilled receivables were $33.2 million[358][359] - As of December 31, 2022, the estimated future revenue from unsatisfied or partially satisfied performance obligations for contracts with original durations exceeding one year was approximately $128.6 million, with approximately 43% expected to be recognized as revenue within the next twelve months[360] Note 3. Acquisition and Disposition On November 9, 2022, the company disposed of its EdgarOnline (EOL) business for $3.3 million net cash proceeds, recognizing a $0.7 million loss, and on December 13, 2021, acquired the remaining Guardum equity for $3.6 million to enhance Venue product functionality - The company disposed of its EdgarOnline (EOL) business on November 9, 2022, receiving $3.3 million in net cash proceeds and recognizing a $0.7 million loss[363] - On December 13, 2021, the company completed the acquisition of Guardum, purchasing the remaining equity for $3.6 million (net of cash acquired) to enhance Venue product functionality[362] Note 4. Goodwill and Other Intangible Assets, Net As of December 31, 2022, total goodwill was $405.8 million, primarily across CM-SS, CM-CCM, and IC-SS segments, with no impairment in 2022 or 2021 but a $40.6 million impairment in IC-CCM in 2020, and other net intangible assets totaled $7.8 million with an average remaining useful life of 11 years Goodwill Balances by Reportable Segment (as of December 31, 2022 and 2021) | Segment | 2022 (million USD) | 2021 (million USD) | | :--- | :--- | :--- | | Capital Markets - Software Solutions | 100.1 | 103.7 | | Capital Markets - Compliance and Communications Management | 252.7 | 253.1 | | Investment Companies - Software Solutions | 53.0 | 53.2 | | Investment Companies - Compliance and Communications Management | — | — | | Total | 405.8 | 410.0 | - No goodwill impairment occurred in 2022 or 2021; however, the IC-CCM reportable segment recorded a $40.6 million goodwill impairment in 2020[366] Other Intangible Assets, Net (as of December 31, 2022 and 2021) | Category | 2022 Net Book Value (million USD) | 2021 Net Book Value (million USD) | | :--- | :--- | :--- | | Customer Relationships | 7.6 | 8.3 | | Trademarks | 0.2 | 0.4 | | Total | 7.8 | 8.7 | - As of December 31, 2022, the weighted-average remaining useful life of unamortized intangible assets was approximately 11 years[367] Note 5. Leases The company holds operating and finance leases for facilities and IT equipment, recognizing right-of-use assets and liabilities based on future minimum payments, with net operating lease expense of $13.4 million and finance lease expense of $2.0 million in 2022, and total future operating and finance lease liabilities of $47.4 million and $7.4 million, respectively, as of December 31, 2022 - The company holds operating leases for service centers, office space, warehouses, and equipment, as well as finance leases primarily for IT equipment[372][373] Lease Expense (2020-2022) | Lease Type | 2022 (million USD) | 2021 (million USD) | 2020 (million USD) | | :--- | :--- | :--- | :--- | | Net Operating Lease Expense | 13.4 | 14.9 | 22.1 | | Finance Lease Expense | 2.0 | 0.9 | — | Future Lease Liability Maturities (as of December 31, 2022) | Year | Operating Leases (million USD) | Finance Leases (million USD) | | :--- | :--- | :--- | | 2023 | 17.6 | 2.2 | | 2024 | 14.8 | 2.2 | | 2025 | 9.5 | 2.0 | | 2026 | 3.4 | 1.0 | | 2027 | 0.7 | — | | 2028 and thereafter | 1.4 | — | | Total Lease Payments | 47.4 | 7.4 | Note 6. Restructuring, Impairment and Other Charges, Net In 2022, the company recorded $7.7 million in net restructuring, impairment, and other charges, primarily $6.8 million in employee termination costs affecting approximately 130 employees, following $13.6 million in 2021 (including $9.2 million impairment) and $79.2 million in 2020 (including $40.6 million goodwill impairment and $18.2 million operating lease right-of-use asset impairment) Restructuring, Impairment and Other Charges, Net (2020-2022) | Year | Employee Termination (million USD) | Restructuring Charges (million USD) | Impairment Charges (million USD) | Other Charges (million USD) | Total (million USD) | | :--- | :--- | :--- | :--- | :--- | :--- | | 2022 | 6.8 | 0.4 | 0.1 | 0.4 | 7.7 | | 2021 | 3.4 | 0.8 | 9.2 | 0.2 | 13.6 | | 2020 | 15.6 | — | 60.6 | 3.0 | 79.2 | - Restructuring actions in 2022 were primarily related to the reorganization of certain Capital Markets businesses and the relocation of a digital print facility, resulting in the termination of approximately 130 employees[380] - In 2020, the company recorded a $40.6 million goodwill impairment in the IC-CCM segment and an $18.2 million impairment of operating lease right-of-use assets[385][386] Employee Termination Reserve Rollforward (2021-2022) | Metric | 2022 (million USD) | 2021 (million USD) | | :--- | :--- | :--- | | Balance at Beginning of Year | 2.4 | 8.5 | | Restructuring Charges | 7.1 | 3.4 | | Reversal of Restructuring Charges | (0.3) | — | | Cash Paid | (4.1) | (9.5) | | Balance at End of Year | 5.1 | 2.4 | Note 7. Retirement Plans The company's primary pension plan was frozen on December 31, 2011, with net pension income of $0.9 million in 2022, an underfunded status of $43.6 million, and plan assets of $193.5 million as of December 31, 2022, while 401(k) matching contributions totaled $5.6 million and multiemployer pension plan liabilities were $11.0 million, including $9.4 million related to LSC MEPP - The company's primary pension plan was frozen on December 31, 2011, no longer accepting new employees or allowing participants to accrue additional benefits[390] Net Pension Plan Income (2020-2022) | Metric | 2022 (million USD) | 2021 (million USD) | 2020 (million USD) | | :--- | :--- | :--- | :--- | | Interest Cost | 7.4 | 6.2 | 8.8 | | Expected Return on Assets | (11.6) | (14.2) | (13.9) | | Amortization, Net | 3.3 | 3.8 | 3.1 | | Net Pension Plan Income | (0.9) | (4.2) | (2.0) | Pension Benefit Plan Funded Status (as of December 31, 2022 and 2021) | Metric | 2022 (million USD) | 2021 (million USD) | | :--- | :--- | :--- | | Benefit Obligation at End of Period | 237.1 | 314.0 | | Fair Value of Plan Assets at End of Period | 193.5 | 273.1 | | Underfunded Status at End of Period | (43.6) | (40.9) | - In 2022, the company's 401(k) matching contribution expense was $5.6 million[409] - As of December 31, 2022, the company's total multiemployer pension plan (MEPP) liabilities amounted to $11.0 million, with $9.4 million related to LSC MEPP liabilities[414] Note 8. Commitments and Contingencies As of December 31, 2022, the company had approximately $54 million in non-cancelable contractual commitments, primarily for IT, professional, maintenance, and other outsourced services, and management does not expect litigation and priority matters to materially impact consolidated operating results, financial position, or cash flows - As of December 31, 2022, the company had approximately $54 million in non-cancelable contractual commitments, primarily for information technology, professional, maintenance, and other outsourced services[416] - Management believes that the ultimate resolution of litigation and priority matters will not have a material adverse effect on the company's consolidated operating results, financial position, or cash flows[417] Note 9. Income Taxes Income tax expense for 2022 was $36.8 million, with an effective tax rate of 26.4% influenced by increased valuation allowances and non-deductible expenses, and as of December 31, 2022, net deferred tax assets were $33.4 million, valuation allowance was $5.4 million, unrecognized tax benefits were $2.5 million, and the company anticipates no significant impact from the Inflation Reduction Act on its financial performance Income Tax Expense (2020-2022) | Metric | 2022 (million USD) | 2021 (million USD) | 2020 (million USD) | | :--- | :--- | :--- | :--- | | Current Income Tax Expense | 37.3 | 52.2 | 34.8 | | Deferred Income Tax (Benefit) Expense | (0.5) | (0.3) | (26.4) | | Total Income Tax Expense | 36.8 | 51.9 | 8.4 | Reconciliation of Effective Income Tax Rate to Federal Statutory Rate (2020-2022) | Reconciling Item | 2022 (%) | 2021 (%) | 2020 (%) | | :--- | :--- | :--- | :--- | | Federal Statutory Rate | 21.0 | 21.0 | 21.0 | | State and Local Income Taxes, Net of Federal Income Tax Benefit | 6.8 | 5.9 | (8.7) | | Change in Valuation Allowance | 1.2 | (1.5) | (10.5) | | Non-Deductible Expenses | 1.0 | 0.5 | (17.0) | | Effective Income Tax Rate | 26.4 | 26.2 | (48.0) | Deferred Tax Assets and Liabilities (as of December 31, 2022 and 2021) | Category | 2022 (million USD) | 2021 (million USD) | | :--- | :--- | :--- | | Total Deferred Tax Assets | 61.1 | 69.2 | | Valuation Allowance | (5.4) | (4.8) | | Total Deferred Tax Liabilities | (27.7) | (37.5) | | Net Deferred Tax Assets | 33.4 | 31.7 | - As of December 31, 2022, the company had $2.5 million in unrecognized tax benefits[427] - The company currently anticipates that the 15% corporate alternative minimum tax in the Inflation Reduction Act will not have a material impact on its financial results[422] Note 10. Debt As of December 31, 2022, total long-term debt was $169.2 million, comprising a $125 million Term Loan A and $45.0 million in revolving credit, with weighted-average interest rates of 3.7% and 4.3% respectively, and the company redeemed its 8.25% Senior Notes due 2024 in 2021, remaining in compliance with all debt covenants Company Debt Composition (as of December 31, 2022 and 2021) | Debt Type | 2022 (million USD) | 2021 (million USD) | | :--- | :--- | :--- | | Term Loan A | 125.0 | 125.0 | | Revolving Credit Borrowings | 45.0 | — | | Unamortized Debt Issuance Costs | (0.8) | (1.0) | | Total Long-Term Debt | 169.2 | 124.0 | - The weighted-average interest rate for Term Loan A was 3.7% in 2022 and 2.1% in 2021, while for revolving credit borrowings, it was 4.3% in 2022 and 2.8% in 2021[434][435] - On October 15, 2021, the company redeemed its remaining $233 million outstanding Senior Notes, recognizing a $6.8 million pre-tax loss on extinguishment of debt[439] - As of December 31, 2022, the company was in compliance with all debt covenants and expects to remain so[213] Note 11. Earnings (Loss) per Share In 2022, basic earnings per share were $3.33 and diluted earnings per share were $3.17, compared to $4.36 and $4.14 respectively in 2021, and basic and diluted losses per share were $0.76 in 2020 due to a net loss Earnings (Loss) Per Share Calculation (2020-2022) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Basic Earnings (Loss) Per Share | 3.33 | 4.36 | (0.76) | | Diluted Earnings (Loss) Per Share | 3.17 | 4.14 | (0.76) | | Net Income (Loss) (million USD) | 102.5 | 145.9 | (25.9) | | Basic Weighted-Average Common Shares Outstanding (million shares) | 30.8 | 33.5 | 33.9 | | Diluted Weighted-Average Common Shares Outstanding (million shares) | 32.3 | 35.2 | 33.9 | Note 12. Share-based Compensation In 2022, total share-based compensation expense was $19.3 million, with $22.6 million in unrecognized compensation expense expected to be recognized over the next 1.6 years, and the equity incentive plans include stock options, RSUs, and PSUs, with no stock options granted in 2022, and weighted-average fair values of $30.42 for RSUs and $26.96 for PSUs granted - In 2022, total share-based compensation expense was $19.3 million, and $22.6 million of unrecognized compensation expense is expected to be recognized over a weighted-average period of 1.6 years[447] - No stock options were granted in 2022; the weighted-average fair value of RSUs granted in 2022 was $30.42, and for PSUs, it was $26.96[452][454] Restricted Stock Units (RSUs) Rollforward (2022) | Metric | Number of Shares (thousand shares) | Weighted-Average Grant-Date Fair Value ($) | | :--- | :--- | :--- | | Unvested at December 31, 2021 | 1,159 | 17.71 | | Granted | 412 | 30.42 | | Vested | (558) | 15.74 | | Forfeited | (24) | 26.68 | | Unvested at December 31, 2022 | 989 | 23.91 | Performance Stock Units (PSUs) Rollforward (2022) | Metric | Number of Shares (thousand shares) | Weighted-Average Grant-Date Fair Value ($) | | :--- | :--- | :--- | | Unvested at December 31, 2021 | 953 | 16.77 | | Granted | 359 | 26.96 | | Vested | (409) | 13.49 | | Unvested at December 31, 2022 | 903 | 22.31 | Note 13. Capital Stock The company is authorized to issue 65 million shares of common stock and 1 million shares of preferred stock, and in 2022, repurchased 4,733,875 common shares for $152.5 million at an average price of $32.21 per share, with $124.3 million remaining under the authorized repurchase program as of December 31, 2022 - The company is authorized to issue 65 million shares of common stock and 1 million shares of preferred stock, both with a par value of $0.01 per share[461] - In 2022, the company repurchased 4,733,875 shares of common stock for a total of $152.5 million, at an average price of $32.21 per share[464] - As of December 31, 2022, the remaining authorized repurchase amount was $124.3 million[464] Note 14. Comprehensive Income (Loss) In 2022, comprehensive income (loss) was $97.6 million, comprising net income of $102.5 million and other comprehensive loss (net of tax) of $4.9 million, primarily influenced by pension and other postretirement benefit plan costs and foreign currency translation adjustments Other Comprehensive Income (Loss) and Income Tax Effects (2020-2022) | Metric | 2022 Pre-Tax (million USD) | 2022 Income Tax (million USD) | 2022 Net of Tax (million USD) | | :--- | :--- | :--- | :--- | | Foreign Currency Translation Adjustments | (1.6) | (0.2) | (1.4) | | Pension and Other Postretirement Benefit Plan Adjustments | (4.8) | (1.3) | (3.5) | | Other Comprehensive Income (Loss) | (6.4) | (1.5) | (4.9) | Accumulated Other Comprehensive Loss Rollforward (2020-2022) | Metric | 2022 (million USD) | 2021 (million USD) | 2020 (million USD) | | :--- | :--- | :--- | :--- | | Balance at Beginning of Year | (78.3) | (80.8) | (84.6) | | Other Comprehensive (Loss) Income | (4.9) | 2.5 | 3.8 | | Balance at End of Year | (83.2) | (78.3) | (80.8) | Note 15. Segment Information The company reports performance through four operating segments: CM-SS, CM-CCM, IC-SS, and IC-CCM, with total operating segment net sales of $833.6 million and operating income of $202.5 million in 2022, and CM-CCM contributing the highest net sales ($410.3 million) and operating income ($131.4 million) - The company operates through four operating and reportable segments: CM-SS, CM-CCM, IC-SS, and IC-CCM[469] Net Sales and Operating Income by Segment (2022) | Segment | Net Sales (million USD) | Operating Income (million USD) | | :--- | :--- | :--- | | Capital Markets - Software Solutions | 180.2 | 13.5 | | Capital Markets - Compliance and Communications Management | 410.3 | 131.4 | | Investment Companies - Software Solutions | 99.4 | 21.9 | | Investment Companies - Compliance and Communications Management | 143.7 | 35.7 | | Total Operating Segments | 833.6 | 202.5 | | Corporate Level | — | (57.5) | | Total | 833.6 | 145.0 | Assets and Capital Expenditures by Segment (2022) | Segment | Assets (million USD) | Capital Expenditures (million USD) | | :--- | :--- | :--- | | Capital Markets - Software Solutions | 187.4 | 27.0 | | Capital Markets - Compliance and Communications Management | 387.7 | 5.0 | | Investment Companies - Software Solutions | 98.4 | 15.6 | | Investment Companies - Compliance and Communications Management | 36.7 | 3.0 | | Total Operating Segments | 710.2 | 50.6 | | Corporate Level | 118.1 | 3.6 | | Total | 828.3 | 54.2 | Note 16. Geographic Area Information In 2022, the company's net sales primarily originated from the US ($718.5 million), with international sales totaling $115.1 million (14% of total net sales) mainly from Asia, Europe, and Canada, and long-lived assets also predominantly located in the US Net Sales by Geographic Area (2020-2022) | Region | 2022 (million USD) | 2021 (million USD) | 2020 (million USD) | | :--- | :--- | :--- | :--- | | United States | 718.5 | 856.5 | 778.9 | | Asia | 48.2 | 55.5 | 51.1 | | Europe | 31.4 | 42.0 | 34.3 | | Canada | 33.7 | 38.0 | 28.6 | | Other | 1.8 | 1.3 | 1.6 | | Consolidated Total | 833.6 | 993.3 | 894.5 | Long-Lived Assets by Geographic Area (2020-2022) | Region | 2022 (million USD) | 2021 (million USD) | 2020 (million USD) | | :--- | :--- | :--- | :--- | | United States | 135.3 | 130.6 | 127.5 | | Asia | 11.5 | 8.9 | 8.0 | | Europe | 5.6 | 13.3 | 8.7 | | Canada | 0.5 | 0.4 | 0.5 | | Consolidated Total | 152.9 | 153.2 | 144.7 | Report of Independent Registered Public Accounting Firm Unaudited Quarterly Financial Information Unaudited Quarterly Financial Information 2022 | Metric | Q1 (million USD) | Q2 (million USD) | Q3 (million USD) | Q4 (million USD) | Full Year (million USD) | | :--- | :--- | :--- | :--- | :--- | :--- | | Net Sales | 211.0 | 266.2 | 188.7 | 167.7 | 833.6 | | Operating Income | 35.3 | 65.9 | 26.7 | 17.1 | 145.0 | | Net Income | 26.4 | 46.0 | 19.2 | 10.9 | 102.5 | | Basic Earnings Per Share | 0.80 | 1.46 | 0.64 | 0.37 | 3.33 | | Diluted Earnings Per Share | 0.77 | 1.42 | 0.62 | 0.36 | 3.17 | Signatures This report was signed on February 21, 2023, by authorized representatives, including the CEO, CFO, and Board members - This report was signed by authorized representatives of Donnelley Financial Solutions, Inc. on February 21, 2023[503] - Signatories include President and CEO Daniel N. Leib, Executive Vice President and CFO David A. Gardella, Senior Vice President and Chief Accounting Officer Kami S. Turner, and members of the Board of Directors[505]