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DFIN Donnelley Financial Solutions

Filed: 1 Aug 19, 4:17pm

 

 

 

 

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, 2019 

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.)

 

 

 

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

 

  

Accelerated filer

 

 

 

 

  

 

 

 

Non-Accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

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 million shares of common stock were outstanding.  

 

1


 

 

DONNELLEY FINANCIAL SOLUTIONS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019

 

TABLE OF CONTENTS

 

Part I

FINANCIAL INFORMATION

  

Page

Item 1:

Condensed Consolidated Financial Statements (unaudited)

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018

  

3

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2019 and 2018

  

4

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018

  

5

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018

  

6

 

 

 

 

 

Condensed Consolidated Statements of Equity for the three months ended June 30, 2019 and 2018

 

7

 

 

 

 

 

Condensed Consolidated Statements of Equity for the six months ended June 30, 2019 and 2018

  

8

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

9

 

 

 

 

Item 2:

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

31

 

 

 

 

Item 3:

Quantitative and Qualitative Disclosure About Market Risk

 

46

 

 

 

 

Item 4:

Controls and Procedures

 

46

 

Part II

OTHER INFORMATION 

  

Page

Item 1:

Legal Proceedings

  

47

 

 

 

 

Item 1A:

Risk Factors

  

47

 

 

 

 

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

  

47

 

 

 

 

Item 4:

Mine Safety Disclosures

 

47

 

 

 

 

Item 6:

Exhibits

  

48

 

 

 

 

Signatures

  

51

 

 

 

2


 

 

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

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Services net sales

$

161.2

 

 

$

187.9

 

 

$

289.1

 

 

$

347.4

 

Products net sales

 

97.7

 

 

 

102.7

 

 

 

199.4

 

 

 

198.4

 

Total net sales

 

258.9

 

 

 

290.6

 

 

 

488.5

 

 

 

545.8

 

Services cost of sales (exclusive of depreciation and amortization)

 

75.6

 

 

 

92.0

 

 

 

151.0

 

 

 

177.9

 

Products cost of sales (exclusive of depreciation and amortization)

 

73.4

 

 

 

73.6

 

 

 

151.9

 

 

 

146.3

 

Total cost of sales

 

149.0

 

 

 

165.6

 

 

 

302.9

 

 

 

324.2

 

Selling, general and administrative expenses (exclusive of depreciation and amortization)

 

57.9

 

 

 

75.1

 

 

 

112.8

 

 

 

141.2

 

Restructuring, impairment and other charges-net

 

3.8

 

 

 

2.6

 

 

 

5.9

 

 

 

3.3

 

Depreciation and amortization

 

12.0

 

 

 

11.1

 

 

 

24.1

 

 

 

21.5

 

Other operating loss

 

2.8

 

 

 

 

 

 

2.8

 

 

 

 

Income from operations

 

33.4

 

 

 

36.2

 

 

 

40.0

 

 

 

55.6

 

Interest expense-net

 

9.1

 

 

 

9.8

 

 

 

18.0

 

 

 

18.8

 

Investment and other income-net

 

(0.5

)

 

 

(0.8

)

 

 

(1.1

)

 

 

(1.6

)

Earnings before income taxes

 

24.8

 

 

 

27.2

 

 

 

23.1

 

 

 

38.4

 

Income tax expense

 

7.5

 

 

 

8.3

 

 

 

7.2

 

 

 

11.8

 

Net earnings

$

17.3

 

 

$

18.9

 

 

$

15.9

 

 

$

26.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings per share (Note 10):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net earnings per share

 

0.51

 

 

 

0.56

 

 

 

0.47

 

 

 

0.79

 

Diluted net earnings per share

 

0.51

 

 

 

0.56

 

 

 

0.47

 

 

 

0.78

 

Weighted average number of common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

34.1

 

 

33.8

 

 

 

34.0

 

 

 

33.7

 

Diluted

 

34.2

 

 

 

34.0

 

 

 

34.1

 

 

33.9

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

 

3


 

 

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

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net earnings

$

17.3

 

 

$

18.9

 

 

$

15.9

 

 

$

26.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Translation adjustments

 

0.5

 

 

 

(3.4

)

 

 

2.7

 

 

 

(2.7

)

Adjustment for net periodic pension and other postretirement benefits plan cost

 

0.3

 

 

 

0.5

 

 

 

0.7

 

 

 

1.0

 

Other comprehensive income (loss), net of tax

 

0.8

 

 

 

(2.9

)

 

 

3.4

 

 

 

(1.7

)

Comprehensive income

$

18.1

 

 

$

16.0

 

 

$

19.3

 

 

$

24.9

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

 

4


 

 

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,

 

 

December 31,

 

 

 

2019

 

 

2018

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

9.5

 

 

$

47.3

 

Receivables, less allowances for doubtful accounts of $10.7 in 2019 (2018 - $7.9)

 

 

260.7

 

 

 

172.9

 

Inventories

 

 

13.0

 

 

 

12.1

 

Prepaid expenses and other current assets

 

 

17.7

 

 

 

16.7

 

Total current assets

 

 

300.9

 

 

 

249.0

 

Property, plant and equipment-net

 

 

37.0

 

 

 

32.2

 

Right-of-use assets

 

 

84.4

 

 

 

 

Software-net

 

 

51.6

 

 

 

47.8

 

Goodwill

 

 

450.3

 

 

 

450.0

 

Other intangible assets-net

 

 

30.0

 

 

 

37.2

 

Deferred income taxes

 

 

14.3

 

 

 

9.7

 

Other noncurrent assets

 

 

40.6

 

 

 

42.8

 

Total assets

 

$

1,009.1

 

 

$

868.7

 

LIABILITIES

 

 

 

 

 

 

 

 

Accounts payable

 

$

78.0

 

 

$

72.4

 

Accrued liabilities

 

 

123.2

 

 

 

126.0

 

Total current liabilities

 

 

201.2

 

 

 

198.4

 

Long-term debt (Note 13)

 

 

419.1

 

 

 

362.7

 

Deferred compensation liabilities

 

 

19.9

 

 

 

19.5

 

Pension and other postretirement benefits plan liabilities

 

 

49.0

 

 

 

51.3

 

Noncurrent lease liabilities

 

 

62.8

 

 

 

 

Other noncurrent liabilities

 

 

8.0

 

 

 

10.8

 

Total liabilities

 

 

760.0

 

 

 

642.7

 

Commitments and Contingencies (Note 14)

 

 

 

 

 

 

 

 

EQUITY

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value

 

 

 

 

 

 

 

 

Authorized: 1.0 shares; Issued: None

 

 

 

 

 

 

Common stock, $0.01 par value

 

 

 

 

 

 

 

 

Authorized: 65.0 shares;

 

 

 

 

 

 

 

 

Issued: 34.5 shares in 2019 (2018 - 34.2 shares)

 

 

0.3

 

 

 

0.3

 

Treasury stock, at cost: 0.2 shares in 2019 (2018 - 0.1 shares)

 

 

(3.7

)

 

 

(2.4

)

Additional paid-in-capital

 

 

221.6

 

 

 

216.5

 

Retained earnings

 

 

110.2

 

 

 

94.3

 

Accumulated other comprehensive loss

 

 

(79.3

)

 

 

(82.7

)

Total equity

 

 

249.1

 

 

 

226.0

 

Total liabilities and equity

 

$

1,009.1

 

 

$

868.7

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

 

5


 

Donnelley Financial Solutions, Inc. and Subsidiaries (“DFIN”)

Condensed Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2019 and 2018

(in millions)

(UNAUDITED)

 

 

Six Months Ended

 

 

June 30,

 

 

2019

 

 

2018

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

Net earnings

$

15.9

 

 

$

26.6

 

Adjustments to reconcile net earnings to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

24.1

 

 

 

21.5

 

Provision for doubtful accounts receivable

 

3.2

 

 

 

3.5

 

Share-based compensation

 

5.1

 

 

 

5.1

 

Deferred income taxes

 

(4.8

)

 

 

1.7

 

Net pension plan income

 

(1.0

)

 

 

(1.6

)

Other

 

18.3

 

 

 

1.7

 

Changes in operating assets and liabilities - net of acquisitions:

 

 

 

 

 

 

 

Accounts receivable – net

 

(90.7

)

 

 

(102.1

)

Inventories

 

(0.9

)

 

 

(4.8

)

Prepaid expenses and other current assets

 

(0.9

)

 

 

0.8

 

Accounts payable

 

6.1

 

 

 

13.3

 

Income taxes payable and receivable

 

(5.2

)

 

 

3.9

 

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

 

 

 

 

 

 

 

Capital expenditures

 

(26.2

)

 

 

(15.6

)

Acquisition of business, net of cash acquired

 

(2.6

)

 

 

 

Other investing activities

 

0.1

 

 

 

 

Net cash used in investing activities

 

(28.7

)

 

 

(15.6

)

FINANCING ACTIVITIES

 

 

 

 

 

 

 

Revolving facility borrowings

 

337.0

 

 

 

206.5

 

Payments on revolving facility borrowings

 

(281.5

)

 

 

(179.5

)

Proceeds from the issuance of common stock

 

 

 

 

1.2

 

Treasury share repurchases

 

(1.3

)

 

 

(0.8

)

Debt issuance costs

 

(0.2

)

 

 

 

Net cash provided by financing activities

 

54.0

 

 

 

27.4

 

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

 

 

 

52.0

 

Cash and cash equivalents at end of period

$

9.5

 

 

$

11.8

 

 

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

 

 

Income taxes paid

$

17.6

 

 

$

6.1

 

Interest paid

$

16.5

 

 

$

17.8

 

 

 

 

 

 

 

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

 

6


 

Donnelley Financial Solutions, Inc. and Subsidiaries (“DFIN”)

Condensed Consolidated Statements of Equity

For the Three 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 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

 

 

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

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

18.9

 

 

 

 

 

 

18.9

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2.9

)

 

 

(2.9

)

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

3.3

 

 

 

 

 

 

 

 

 

3.3

 

Issuance of share-based awards, net of withholdings and other

 

0.1

 

 

 

 

 

 

 

 

 

 

 

 

(0.1

)

 

 

 

 

 

 

 

 

(0.1

)

Balance at June 30, 2018

 

34.1

 

 

$

0.3

 

 

 

0.1

 

 

$

(1.7

)

 

$

212.1

 

 

$

36.4

 

 

$

(66.3

)

 

$

180.8

 

 

 

 

 

7


 

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

Description of Business

Donnelley Financial Solutions, Inc. (“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”), technology-enabled services and print and distribution solutions to public and private companies, mutual funds and other regulated investment firms, to serve their regulatory and compliance needs. 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, including alternative investment and insurance investment companies, the Company provides technology-enabled filing solutions including cloud-based tools for creating and filing high-quality regulatory documents and solutions for investors designed to improve the speed and accuracy of their access to investment information. Throughout a company’s life cycle, the Company serves its clients’ regulatory and compliance needs. The Company’s deep industry and regulatory expertise and a commitment to exceptional service guides our clients to navigate a high-stakes and ever-changing regulatory environment.

Basis of Presentation

The accompanying unaudited 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, 2018 filed with the SEC on February 27, 2019. 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 consolidated interim financial statements include estimates and assumptions of management that affect the amounts reported in the unaudited condensed consolidated financial statements. Actual results could differ from these estimates.

Changes in Presentation

Certain prior year amounts have been restated to conform to the Company’s current reporting unit structure. Due to the sale of the Language Solutions business in 2018, 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.

 

 

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, 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 offerings 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 services and products 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.

 

The Company’s SaaS solutions, including Venue, the FundSuiteArc software platform, ActiveDisclosure, data and analytics and others, are generally provided on a subscription basis and allow customers access to use the products over the contract period. As a result, revenue for SaaS solutions is recognized ratably over time as the customer receives the benefit throughout the contract period. The timing of invoicing varies, however the customer may be invoiced before the end of the contract period, resulting in a deferred revenue balance.

 

Revenue for warehousing services is recognized ratably over time as the customer receives the benefit throughout the storage period.

Point in time

All remaining revenue arrangements are generally recognized at a point in time and are primarily invoiced upon completion of all services or upon shipment to the customer.

 

Certain of these arrangements include multiple performance obligations and revenue is recognized upon completion of each performance obligation, such as when a document is filed with a regulatory agency and upon completion of printing the related document. For arrangements with multiple performance obligations, the transaction price is allocated to the separate performance obligations. The Company provides customer specific solutions and as such, observable standalone selling price is rarely available. Standalone selling price is more frequently determined using an estimate of the standalone selling price of each distinct service or product, taking into consideration historical selling price by customer for each distinct service or product. These estimates may vary from the final amounts invoiced to the customer and are adjusted upon completion of all performance obligations. Customers may be invoiced subsequent to the recognition of revenue for completed performance obligations, resulting in contract asset balances.

 

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 promises, including the services performed and printing of the related document, if applicable.

 

Revenue for arrangements without a regulatory filing generally have a single performance obligation, as the services and products provided are not distinct within the context of the contract, and are recognized upon completion of the services performed or upon completion of printing of the related product.

 

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.

 

11


Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

(in millions, except per share data, unless otherwise indicated)

 

Contract Balances

 

Contract assets represent revenue recognized for performance obligations completed before an unconditional right to payment exists, and therefore invoicing has not yet occurred. Contract assets were $8.2 million at June 30, 2019 and $8.7 million at December 31, 2018, respectively. Generally, the contract assets balance is impacted by the recognition of additional contract assets, offset by amounts invoiced to customers. For the six months ended June 30, 2019, final amounts invoiced to customers exceeded estimates of standalone selling price as of January 1, 2019 for the related arrangements by approximately $1.4 million. Contract assets are included in accounts receivable on the condensed consolidated balance sheet.

 

Contract liabilities consist of deferred revenue and progress billings which are included in accrued liabilities on the condensed consolidated balance sheet. Changes in contract liabilities for the six months ended June 30, 2019 and 2018, respectively, were as follows:

 

Balance at January 1, 2019

$

12.0

 

Deferral of revenue

 

25.1

 

Revenue recognized

 

(25.2

)

Balance at June 30, 2019

$

11.9

 

 

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

 

 

 

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. 

12


Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

(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. Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill by segment for the six months ended June 30, 2019 were as follows:

 

 

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

 

 

The components of other intangible assets at June 30, 2019 and December 31, 2018 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

 

 

Amortization expense for other intangible assets was $3.6 million and $3.5 million for the three months ended June 30, 2019 and 2018, respectively, and $7.3 million and $6.9 million for the six months ended June 30, 2019 and 2018, respectively.

The following table outlines the estimated annual amortization expense related to other intangible assets as of June 30, 2019:

 

For the year ending December 31,

Amount

 

2019

$

14.6

 

2020

 

13.0

 

2021

 

0.9

 

2022

 

0.9

 

2023

 

0.9

 

2024 and thereafter

 

7.0

 

Total

$

37.3

 

 

Note 7. 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 assets and 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 liabilities 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, 2019 and did not reduce future rental commitments at December 31, 2018.

 

The components of lease expense for the three and six months ended June 30, 2019 were as follows:

 

 

Three months ended

 

 

Six months ended

 

 

June 30, 2019

 

 

June 30, 2019

 

Operating lease expense

$

6.4

 

 

$

13.2

 

Sublease income

 

(1.7

)

 

 

(2.5

)

Net lease expense

$

4.7

 

 

$

10.7

 

 

Other information related to operating leases as of and for the six months ended June 30, 2019 were as follows:

 

Lease Term and Discount Rate

June 30, 2019

 

Weighted average remaining lease term

4.8 years

 

Weighted average discount rate

4.6

%

 

 

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

 

 

(a)

Excluding payments for the six months ended June 30, 2019

 

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. Restructuring, Impairment and Other Charges

Restructuring, Impairment and Other Charges recognized in Results of Operations

For the three months ended June 30, 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

 

 

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

 

 

16


Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

(in millions, except per share data, unless otherwise indicated)

 

For the three and six months ended June 30, 2019, the Company recorded net restructuring charges of $3.8 million and $5.8 million, respectively, for employee termination costs for 164 employees, substantially all of whom were terminated as of June 30, 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, 2018 and June 30, 2019, and changes during the six months ended June 30, 2019, 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

 

 

The current portion of restructuring reserves of $3.0 million at June 30, 2019 was included in accrued liabilities, while the long-term portion of $0.1 million was included in other noncurrent liabilities at June 30, 2019.

The Company anticipates that payments associated with the employee terminations reflected in the table above will be substantially completed by December 31, 2019.

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. Retirement Plans

The components of the estimated net pension plan income for DFIN’s pension plans for the three and six months ended June 30, 2019 and 2018 were as follows:  

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Pension expense (income)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest cost

$

2.7

 

 

$

2.5

 

 

$

5.5

 

 

$

5.1

 

Expected return on assets

 

(3.7

)

 

 

(4.0

)

 

 

(7.4

)

 

 

(8.0

)

Amortization, net

 

0.5

 

 

 

0.7

 

 

 

0.9

 

 

 

1.3

 

Net pension income

$

(0.5

)

 

$

(0.8

)

 

$

(1.0

)

 

$

(1.6

)

 

 

Note 10. Earnings per Share

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.

17


Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

(in millions, except per share data, unless otherwise indicated)

 

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 (as amended, 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.

The reconciliation of the numerator and denominator of the basic and diluted earnings 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:

 

 

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 11. 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, 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

 

 

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

)

 

18


Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

(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, 2017 and June 30, 2018 were as follows:

 

 

Pension and Other Postretirement Benefits Plan Cost

 

 

Translation Adjustments

 

 

Total

 

Balance at December 31, 2017

$

(52.9

)

 

$

(11.7

)

 

$

(64.6

)

Other comprehensive income before reclassifications

 

 

 

 

(2.7

)

 

 

(2.7

)

Amounts reclassified from accumulated other comprehensive loss

 

1.0

 

 

 

 

 

 

1.0

 

Net change in accumulated other comprehensive loss

 

1.0

 

 

 

(2.7

)

 

 

(1.7

)

Balance at June 30, 2018

$

(51.9

)

 

$

(14.4

)

 

$

(66.3

)

 

 

Reclassifications from accumulated other comprehensive loss for the three and six months ended June 30, 2019 and 2018 were as follows:  

 

 

Three Months Ended

 

 

Six Months Ended

 

Classification in the Condensed

 

June 30,

 

 

June 30,

 

Consolidated

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Statements of Operations

Amortization of pension and other postretirement benefits plan cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net actuarial loss

$

0.5

 

 

$

0.7

 

 

$

0.9

 

 

$

1.3

 

(a)

Reclassifications before tax

 

0.5

 

 

 

0.7

 

 

 

0.9

 

 

 

1.3

 

 

Income tax expense

 

0.2

 

 

 

0.2

 

 

 

0.3

 

 

 

0.3

 

 

Reclassifications, net of tax

$

0.3

 

 

$

0.5

 

 

$

0.6

 

 

$

1.0

 

 

 

(a)

This accumulated other comprehensive loss component is included in the calculation of net periodic pension and other postretirement benefits plan income recognized in investment and other income in the unaudited condensed consolidated statements of operations (see Note 9, Retirement Plans).

 

 

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.*

19


Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

(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 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 15. New Accounting Pronouncements  

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued 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 the former accounting standard. The Company adopted 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, the Company issued the Notes. The Guarantors of the Notes, Donnelley Financial, LLC and DFS International Holding, Inc., entered into an agreement pursuant 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.”

 

22


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 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

(in millions, except per share data, unless otherwise indicated)

 

Condensed Consolidating Statements of Operations

For the Three Months Ended June 30, 2018

 

 

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

 

 

 

 

26


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 June 30, 2019

 

 

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

 

 

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

 

 

$

 

 

$

 

 

$

 

 

 

 

 

 

 

30


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Company Overview

Donnelley Financial Solutions, Inc. (“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”), technology-enabled services and print and distribution solutions to public and private companies, mutual funds and other regulated investment firms, to serve their regulatory and compliance needs. 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 include filing agent services, digital document creation and online content management tools that support their corporate financial transactions and regulatory reporting. The Company provides solutions to facilitate clients’ communications with their shareholders; and virtual data rooms and other deal management solutions. For the investment markets, including alternative investment and insurance investment companies, the Company provides technology-enabled filing solutions including cloud-based tools for creating and filing high-quality regulatory documents and solutions for investors designed to improve the speed of access to and accuracy of investment information. Throughout a company’s life cycle, the Company serves its clients’ regulatory and compliance needs. The Company’s deep industry 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:

 

United States. The U.S. segment is comprised of three reporting units: capital markets; investment markets; and language solutions, which was divested in 2018.* The Company services capital market and investment market clients in the U.S. by delivering products and technology-enabled services to help create, manage and deliver financial communications to investors and regulators. The Company provides capital market and investment market clients with communication tools, services and software to allow them to comply with their ongoing regulatory filings. In addition, the U.S. segment provides clients with communications services to create, manage and deliver registration statements, prospectuses, proxies and other communications to regulators and investors. The U.S. segment also includes commercial printing capabilities and language solutions.*

 

International. The International segment includes 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 within the United States. In addition, the International segment provides services to international investment market clients to allow them to comply with applicable SEC regulations, as well as language solutions to international clients.*

*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 amounts have been restated to conform 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 earnings of employee benefit plans, such as pension income and share-based compensation, are included in Corporate and are not allocated to the reportable segments.

For the Company’s financial results and the presentation of certain other financial information 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, and the Company’s SaaS solutions, including 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.

31


 

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 well as the acquisition of eBrevia 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 to the Company’s ongoing innovation in 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 offers a high-touch, service oriented experience, technology changes have provided alternatives to the Company’s clients that allow them to manage more 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 innovative services and solutions, including acquisitions of eBrevia 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.

Market Volatility/Cyclicality

The Company is subject to market volatility in the United States and world economy, as the success of the transactional offering is largely dependent on the global market for IPOs, secondary offerings, mergers and acquisitions, public and private debt offerings, leveraged buyouts, spinouts and other transactions. A variety of factors impact the global markets, including the regulatory and political environment. Recently, the U.S. IPO market and public debt market were disrupted by the U.S. federal government shutdown that occurred from December 2018 to January 2019. Future government shutdowns could affect volatility of any of these markets. The International segment is particularly susceptible to capital market volatility as most of the International business is capital markets transaction focused. The Company mitigates some 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 supporting the quarterly/annual public company reporting process through its EDGAR filing services and ActiveDisclosure product, its investment markets 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 peak

32


 

periods through a combined strategy of hiring additional full-time 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. The Company continues to remain focused on driving recurring revenue to mitigate market volatility.

Regulatory Impact

The SEC is adopting new rules and forms and amending 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 Markets business. 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. 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 Materials

The primary raw materials used in the Company’s printed products are paper and ink. The paper and ink are sourced from a small set of select suppliers to ensure consistent quality that meets the Company’s performance expectations and provides for continuity of supply. The Company believes that the risk of incurring material losses as a result of a shortage in raw materials is unlikely and that the losses, if any, would not have a materially negative impact 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 Estimates

The preparation of financial statements in conformity with GAAP requires the extensive use of management’s estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure 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, as filed with the SEC on February 27, 2019.

Financial Review

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.

33


 

Results of Operations for the Three Months Ended June 30, 2019 as Compared to the Three Months Ended June 30, 2018

The following table shows the results of operations for the three months ended June 30, 2019 and 2018:

 

 

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

%)

 

Consolidated

Net sales of services for the three months ended June 30, 2019 decreased $26.7 million, or 14.2%, to $161.2 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. Net sales of services decreased $19.8 million due to the July 2018 sale of the Language Solutions business. In addition, net sales of services decreased due to lower capital markets transactions and compliance volumes, 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 three months ended June 30, 2019 decreased $5.0 million, or 4.9%, to $97.7 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. Net sales of products decreased due to lower capital markets compliance and transactions volumes 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%, for the three months ended June 30, 2019, versus the three 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 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 sales 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 million, or 22.9%, to $57.9 million, for the three months ended June 30, 2019, as compared to the three months ended June 30, 2018, primarily due to lower spin-off related transaction expenses, the impact from the sale of the Language Solutions business and cost control initiatives. As a percentage of net sales, selling, general, and administrative expenses 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 and cost control initiatives.

For the three months ended June 30, 2019, the Company recorded net restructuring, impairment and other charges of $3.8 million, as compared to net restructuring, impairment and other charges of $2.6 million for the three months ended June 30, 2018. In 2019, these charges included $3.8 million of employee termination costs for 96 employees. In 2018, these charges included $2.4 million of employee termination costs for 47 employees and $0.2 million of lease termination and other restructuring costs.

Depreciation and amortization increased $0.9 million, or 8.1%, to $12.0 million for the three months ended June 30, 2019 compared to the three months ended June 30, 2018. Depreciation and amortization included $3.6 million and $3.5 million of amortization of other intangible assets related to customer relationships and a tradename for the three months ended June 30, 2019 and 2018, respectively.

34


 

Other operating loss for the three months ended June 30, 2019 included $2.8 million recognized for the estimated payment of amounts related to the 2018 disposition of the Language Solutions business. 

Income from operations for the three months ended June 30, 2019 decreased $2.8 million, or 7.7%, to $33.4 million versus the three months ended June 30, 2018, primarily due to lower capital markets transactions and compliance volumes, partially offset by higher mutual fund volumes, lower spin-off related transaction expenses and cost control initiatives.

 

 

2019

 

 

2018

 

 

$ Change

 

 

% Change

 

 

(in millions, except percentages)

 

Interest expense-net

$

9.1

 

 

$

9.8

 

 

$

(0.7

)

 

 

(7.1

%)

 

Net interest expense decreased $0.7 million for the three months ended June 30, 2019 compared to the three months ended June 30, 2018 due to a decrease in average outstanding debt.

 

 

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% for the three months ended June 30, 2019 compared to 30.5% for the three months ended June 30, 2018.

 

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.

 

 

Three Months Ended June 30,

 

 

2019

 

 

2018

 

 

(in millions, except percentages)

 

Net sales

$

223.2

 

 

$

242.5

 

Income from operations

 

40.4

 

 

 

46.9

 

Operating margin

 

18.1

%

 

 

19.3

%

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

 

 

 

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

%)

 

*Certain prior year amounts were restated to conform to the Company’s current reporting unit structure.

 

35


 

Net sales for the U.S. segment for the three months ended June 30, 2019 were $223.2 million, a decrease of $19.3 million, or 8.0%, compared to the three months ended June 30, 2018. 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, primarily due to ActiveDisclosure and the acquisition of eBrevia. An analysis of net sales by reporting unit follows:

 

Capital Markets: Sales decreased due to lower capital markets transactions, primarily as a result of fewer mergers and acquisitions deals completed, which was only partially offset by an increase in IPO activity. Sales also decreased due to lower compliance volumes, partially offset by higher volumes in ActiveDisclosure and the acquisition of eBrevia.

 

Investment Markets: Sales increased due to higher mutual fund print and healthcare volumes, partially offset by lower commercial print volumes.

 

Language Solutions: There were no sales in the three months ended June 30, 2019 due to the sale of the Language Solutions business in July 2018.

U.S. segment income from operations decreased $6.5 million, or 13.9%, for the three months ended June 30, 2019 as compared to the three 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 19.3% for the three months ended June 30, 2018 to 18.1% for the three months ended June 30, 2019 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, partially offset by lower spin-off related transaction expenses, which favorably impacted margins by 3.2 percentage points.

International

 

 

Three Months Ended June 30,

 

 

2019

 

 

2018

 

 

(in millions, except percentages)

 

Net sales

$

35.7

 

 

$

48.1

 

Income from operations

 

1.6

 

 

 

1.6

 

Operating margin

 

4.5

%

 

 

3.3

%

Loss on sale of Language Solutions business

 

1.6

 

 

 

 

Restructuring, impairment and other charges-net

 

0.4

 

 

 

1.9

 

 

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.

36


 

Corporate

The following table summarizes unallocated operating expenses and certain items impacting comparability within the activities presented as Corporate:

 

 

Three Months Ended June 30,

 

 

2019

 

 

2018

 

 

(in millions)

 

Operating expenses

$

8.6

 

 

$

12.3

 

Share-based compensation expense

 

3.6

 

 

 

3.3

 

Restructuring, impairment and other charges-net

 

0.7

 

 

 

0.1

 

Investor-related expenses

 

0.5

 

 

 

 

Spin-off related transaction expenses

 

 

 

 

0.7

 

Disposition-related expenses

 

 

 

 

1.5

 

Acquisition-related expenses

 

 

 

 

0.3

 

 

Corporate operating expenses for the three months ended June 30, 2019 decreased $3.7 million 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

 

 

2018

 

 

$ Change

 

 

% Change

 

 

(in millions, except percentages)

 

Services net sales

$

289.1

 

 

$

347.4

 

 

$

(58.3

)

 

 

(16.8

%)

Products net sales

 

199.4

 

 

 

198.4

 

 

 

1.0

 

 

 

0.5

%

Net sales

 

488.5

 

 

 

545.8

 

 

 

(57.3

)

 

 

(10.5

%)

Services cost of sales (exclusive of depreciation and amortization)

 

151.0

 

 

 

177.9

 

 

 

(26.9

)

 

 

(15.1

%)

Products cost of sales (exclusive of depreciation and amortization)

 

151.9

 

 

 

146.3

 

 

 

5.6

 

 

 

3.8

%

Cost of sales

 

302.9

 

 

 

324.2

 

 

 

(21.3

)

 

 

(6.6

%)

Selling, general and administrative expenses (exclusive of depreciation and amortization)

 

112.8

 

 

 

141.2

 

 

 

(28.4

)

 

 

(20.1

%)

Restructuring, impairment and other charges-net

 

5.9

 

 

 

3.3

 

 

 

2.6

 

 

 

78.8

%

Depreciation and amortization

 

24.1

 

 

 

21.5

 

 

 

2.6

 

 

 

12.1

%

Other operating loss

 

2.8

 

 

 

 

 

 

2.8

 

 

 

100.0

%

Income from operations

$

40.0

 

 

$

55.6

 

 

$

(15.6

)

 

 

(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.

37


 

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

 

 

2018

 

 

$ Change

 

 

% Change

 

 

(in millions, except percentages)

 

Interest expense-net

$

18.0

 

 

$

18.8

 

 

$

(0.8

)

 

 

(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

 

 

2018

 

 

$ Change

 

 

% Change

 

 

(in millions, except percentages)

 

Earnings before income taxes

$

23.1

 

 

$

38.4

 

 

$

(15.3

)

 

 

(39.8

%)

Income tax expense

 

7.2

 

 

 

11.8

 

 

 

(4.6

)

 

 

(39.0

%)

Effective income tax rate

 

31.2

%

 

 

30.7

%

 

 

 

 

 

 

 

 

 

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.

38


 

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,

 

 

2019

 

 

2018

 

 

(in millions, except percentages)

 

Net sales

$

426.0

 

 

$

455.6

 

Income from operations

 

61.7

 

 

 

73.3

 

Operating margin

 

14.5

%

 

 

16.1

%

Restructuring, impairment and other charges-net

 

3.3

 

 

 

1.3

 

Loss on sale of Language Solutions business

 

1.2

 

 

 

 

Spin-off related transaction expenses

 

 

 

 

14.0

 

 

 

Net Sales for the Six Months

 

 

 

 

 

 

 

 

 

Ended June 30,

 

 

 

 

 

 

 

 

Reporting unit

2019

 

 

2018

 

 

$ Change

 

% Change

 

 

(in millions, except percentages)

 

Capital Markets

$

238.0

 

 

$

262.1

 

 

$

(24.1

)

 

(9.2

%)

Investment Markets*

 

188.0

 

 

 

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:

 

Capital Markets: Sales decreased due to lower capital markets transactions and compliance volumes, partially offset by higher volumes in ActiveDisclosure and the acquisition of eBrevia.

 

Investment Markets: Sales increased due to higher mutual fund print volumes, partially driven by a special proxy project. The increase in sales was partially offset by lower commercial print volumes.

 

Language Solutions: There were no sales in the six months ended June 30, 2019 due to the sale of the Language Solutions business in July 2018.

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 sale 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.    

 

39


 

International

 

 

Six Months Ended June 30,

 

 

2019

 

 

2018

 

 

(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 sale of the Language Solutions business. Net sales also decreased due to lower capital markets transactions and mutual fund volumes, 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:

 

 

Six Months Ended June 30,

 

 

2019

 

 

2018

 

 

(in millions)

 

Operating expenses

$

20.0

 

 

$

21.8

 

Share-based compensation expense

 

5.1

 

 

 

5.1

 

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, 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 adjusted 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 adjusted 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 adjusted EBITDA can provide a useful additional basis for comparing the current performance of the underlying operations being evaluated.

40


 

Non-GAAP adjusted 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 adjusted 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.

 

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 Separation from R.R. Donnelley & Sons Company (“RRD”) (the “Separation”) to operate as a standalone publicly traded company. These expenses include third-party consulting fees, information technology expenses, employee retention payments, legal fees and other costs related to the Separation, including system implementation expenses related to transitioning from transition service agreements with RRD and LSC Communications, Inc. (“LSC”). Management does not believe that these expenses are reflective of ongoing operating results.

 

Disposition-related expenses. Expenses incurred related to the disposition of the Language Solutions business. These expenses primarily include legal fees, third-party advisory and consulting fees and other costs related to the disposition. 

A reconciliation of GAAP net earnings to Non-GAAP adjusted EBITDA for the three and six months ended June 30, 2019 and 2018 for these adjustments is presented in the following table:

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2019

 

 

2018

 

 

2019

 

 

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

 

 

2019 Restructuring, impairment and other charges—net. The three months ended June 30, 2019 included $3.8 million for employee termination costs. The six months ended June 30, 2019 included $5.8 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.

 

Share-based compensation expense. Included pre-tax charges of $3.6 million and $3.3 million for the three months ended June 30, 2019 and 2018, respectively, and $5.1 million for both the six months ended June 30, 2019 and 2018.

 

Loss on sale of Language Solutions business. Included pre-tax charges of $2.8 million for the three and six months ended June 30, 2019 for the estimated payment of amounts related to the July 2018 disposition of the Language Solutions business.

 

41


 

Investor-related expenses. Included pre-tax charges of $0.5 million and $1.5 million related to non-routine investor matters for the three and six months ended June 30, 2019. These expenses include third-party advisory and consulting fees and legal fees.

 

Spin-off related transaction expenses. Included pre-tax charges of $0.4 million for the six months ended June 30, 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 describes the Company’s cash flows 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. 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 months ended June 30, 2019 and will evaluate its ability to make additional cash repatriations during the fourth quarter of 2019. The Company recorded deferred taxes attributable to the book-over-tax outside basis differences in its foreign subsidiaries for the excess cash repatriated as of June 30, 2019.

42


 

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.

The Company’s debt maturity schedule as of June 30, 2019 is shown in the table below:

 

 

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

 

 

(a)

Excludes unamortized debt issuance costs of $4.4 million which do not represent contractual commitments with a fixed amount or maturity date.

(b)

Excludes unamortized debt issuance costs of $3.4 million and a discount of $1.1 million which do not represent contractual commitments with a fixed amount or maturity date.

 

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 of outstanding borrowings under the Revolving Facility. Based on the Company’s results of operations for the twelve months ended June 30, 2019 and existing debt, the Company would have had the ability to utilize an incremental $79.2 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 is shown in the table below:

 

 

 

June 30, 2019

 

Availability

 

(in millions)

 

Revolving Facility

 

$

300.0

 

Availability reduction from covenants

 

 

165.3

 

 

 

$

134.7

 

Usage

 

 

 

 

Borrowings under the Revolving Facility

 

 

55.5

 

Impact on availability related to outstanding letters of credit

 

 

 

 

 

$

55.5

 

 

 

 

 

 

Current availability at June 30, 2019

 

$

79.2

 

Cash

 

 

9.5

 

Net Available Liquidity

 

$

88.7

 

 

The Company was in compliance with its debt covenants as of June 30, 2019, and expects to remain in compliance based on management’s estimates of operating and financial results for 2019 and the foreseeable future. However, declines in market and economic conditions or demand for certain of the Company’s products and services 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.

43


 

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, the Revolving Facility is supported by sixteen U.S. and international financial institutions.

As of June 30, 2019, the Company had $2.9 million in outstanding letters of credit and bank guarantees, of which none reduced the availability under the Revolving Facility.

Acquisitions and Dispositions

During the six months ended June 30, 2019 and the year ended December 31, 2018, the Company paid $2.6 million and $12.5 million, net of cash acquired, respectively, for 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. $1.9 million of the purchase price related to amounts held in escrow was payable as of June 30, 2019 and 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, Commitments and Contingencies, to the Unaudited Condensed Consolidated Financial Statements.

New Accounting Pronouncements and Pending Accounting Standards

Recently issued accounting standards and their estimated effect on the Company’s consolidated financial statements are described in Note 15, New Accounting Pronouncements, 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 our forward-looking statements.

44


 

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 our actual results to differ materially from those indicated in any such forward-looking statements. These factors include, but are not limited to:

 

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, clients and key employees;

 

the growth of new technologies with which we may be able to adequately compete;

 

our inability to maintain client referrals;

 

vulnerability to adverse events as a result of becoming a stand-alone company following the Separation from RRD, including the inability to obtain as favorable of terms from third-party vendors;

 

the competitive market for our products and industry fragmentation affecting our prices;

 

the ability to gain client acceptance of our new products and technologies;

 

delay in market acceptance of our products and services due to undetected errors or failures found in our products and services;

 

failure to maintain the confidentiality, integrity and availability of our systems, software and solutions;

 

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 our or our vendors’ systems;

 

factors that affect client demand, including changes in economic conditions, national or international regulations and clients’ budgetary constraints;

 

our ability to access debt and the capital markets due to adverse credit market conditions;

 

the effect of increasing costs of providing healthcare and other benefits to our employees;

 

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 our proprietary technology;

 

failure to successfully integrate acquired businesses into our business;

 

availability to maintain our brands and reputation;

 

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;

 

the effect of economic and political conditions on a regional, national or international basis;

 

lack of market for our common stock;

 

lack of history as an operating company and costs associated with being an independent company; and

 

failure to achieve certain intended benefits of the Separation.

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 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.

 

 

45


 

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, of 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.

 

 

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. 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.

(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, 2019 that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

46


 

PART II — OTHER INFORMATION

For a discussion of certain litigation involving the Company, see Note 14, Commitments and Contingencies, to the Unaudited Condensed Consolidated Financial Statements.

 

 

Item 1A. Risk Factors

There have been no material changes to the risk factors 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.

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period

Total Number

of Shares

Purchased (a)

 

 

Average Price

Paid per Share

 

 

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

 

April 1, 2019 - April 30, 2019

 

 

$

 

 

 

$

 

May 1, 2019 - May 31, 2019

 

1,528

 

 

 

12.33

 

 

 

$

 

June 1, 2019 - June 30, 2019

 

3,722

 

 

 

14.30

 

 

 

$

 

Total

 

5,250

 

 

$

13.73

 

 

 

 

 

 

 

(a)

Shares withheld for tax liabilities upon vesting of equity awards

Item 3. Defaults Upon Senior Securities

None.

 

 

Item 4. Mine Safety Disclosures

Not applicable.

 

 

47


 

Item 6. Exhibits

 

  3.1

  

Amended and Restated Certificate of Incorporation of Donnelley Financial Solutions, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated September 30, 2016, filed on October 3, 2016)

 

 

 

  3.2

 

Amended and Restated By-laws of Donnelley Financial Solutions, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K dated September 30, 2016, filed on October 3, 2016)

 

 

 

  4.1

  

Indenture, dated as of September 30, 2016, among Donnelley Financial Solutions, Inc., the subsidiary guarantors party thereto and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K dated September 30, 2016, filed on October 3, 2016)

 

 

 

10.1

 

Credit Agreement, dated as of September 30, 2016, among Donnelley Financial Solutions, Inc., as Borrower, the lenders party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated September 30, 2016, filed on October 3, 2016)*

 

 

 

10.2

 

Amendment No. 1 to Credit Agreement, dated as of October 2, 2017, among Donnelley Financial Solutions, Inc., as Borrower, the lenders party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q dated September 30, 2017, filed on November 2, 2017)

 

 

 

10.3

 

Amendment No. 2 to Credit Agreement, dated as of December 18, 2018, by and among Donnelley Financial Solutions, Inc., the lenders party thereto from time to time and JPMorgan Chase Bank, N.A., as administrative agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated December 18, 2018, filed on December 18, 2018)

 

 

 

10.4

 

2016 Donnelley Financial Solutions, Inc. Performance Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated September 30, 2016, filed on October 3, 2016)*

 

 

 

10.5

 

Amended and Restated Donnelley Financial Solutions, Inc. 2016 Performance Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated May 18, 2017, filed on May 23, 2017)*

 

 

 

10.6

 

Amendment to the Donnelley Financial Solutions, Inc. Amended and Restated 2016 Performance Incentive Plan dated May 20, 2019 (incorporated herein by reference to Appendix A of the Company’s definitive proxy statement on Schedule 14A (file No. 001-37728) filed April 22, 2019)*

 

 

 

10.7

 

Amendment to Amended and Restated Donnelley Financial Solutions, Inc. 2016 Performance Incentive Plan dated June 27, 2019 (filed herewith)* 

 

 

 

10.8

  

Donnelley Financial Solutions, Inc. Non-Employee Director Compensation Plan (incorporated by reference to Exhibit 10.5 to the Company’s Annual Report on Form 10-K dated December 31, 2017, filed on February 28, 2018)*

 

 

 

10.9

 

Policy on Retirement Benefits, Phantom Stock Grants and Stock Options for Directors (incorporated by reference to Exhibit 10.1 to R.R Donnelley & Sons Company Quarterly Report on Form 10-Q for the quarter ended June 30, 2008, filed on August 6, 2008)*

 

 

 

10.10

  

Donnelley Financial Solutions, Inc. Nonqualified Deferred Compensation Plan, dated as of September 22, 2016 (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K dated September 30, 2016, filed on October 3, 2016)*

 

 

 

10.11

  

Donnelley Financial Unfunded Supplemental Pension Plan effective October 1, 2016 (incorporated by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-K dated December 31, 2016, filed on February 28, 2017)*

 

 

 

10.12

 

Donnelley Financial Solutions, Inc. Executive Severance Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated May 30, 2017, filed on June 5, 2017)*

 

 

 

10.13

 

Letter Agreement to Employment Agreement, dated as of April 20, 2018, between the Company and Daniel N. Leib (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated April 10, 2018, filed on April 16, 2018)*

 

 

 

10.14

 

Amended and Restated Employment Agreement, dated as of July 13, 2017, between the Company and Daniel N. Leib (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated July 13, 2017, filed on July 14, 2017)*

 

 

 

48


 

10.15

  

Assignment of Employment Agreement and Acceptance of Assignment, dated as of September 29, 2016, between Donnelley Financial Solutions, Inc., R. R. Donnelley & Sons Company and Thomas F. Juhase (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K dated September 30, 2016, filed on October 3, 2016)*

 

 

 

10.16

 

Waiver of Severance Benefits, dated as of June 1, 2017, by and between Thomas F. Juhase and the Company (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated May 30, 2017, filed on June 5, 2017)*

 

 

 

10.17

  

Assignment of Employment Agreement and Acceptance of Assignment, dated as of September 29, 2016, between Donnelley Financial Solutions, Inc., R. R. Donnelley & Sons Company and David A. Gardella (incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K dated September 30, 2016, filed on October 3, 2016)*

 

 

 

10.18

 

Waiver of Severance Benefits, dated as of June 1, 2017, by and between David A. Gardella and the Company (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K dated May 30, 2017, filed on June 5, 2017)*

 

 

 

10.19

 

Assignment of Severance Agreement and Acceptance of Assignment, dated as of September 29, 2016, between Donnelley Financial Solutions, Inc., R. R. Donnelley & Sons Company and Jennifer B. Reiners (incorporated by reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K dated September 30, 2016, filed on October 3, 2016)*

 

 

 

10.20

 

Waiver of Severance Benefits, dated as of June 1, 2017, by and between Jennifer B. Reiners and the Company (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K dated May 30, 2017, filed on June 5, 2017)*

 

 

 

10.21

 

Donnelley Financial Solutions Annual Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated March 2, 2018, filed on March 13, 2018)*

 

 

 

10.22

 

Form of Founders Award (Restricted Stock) Agreement (incorporated by reference to Exhibit 10.15 to the Company’s Annual Report on Form 10-K dated December 31, 2016, filed on February 28, 2017)*

 

 

 

10.23

 

Form of Performance Restricted Stock Award Agreement (for 2017) (incorporated by reference to Exhibit 10.16 to the Company’s Quarterly Report on Form 10-Q dated March 31, 2017, filed on May 4, 2017)*

 

 

 

10.24

 

Form of Amendment to Performance Restricted Stock Award Agreement (for 2017) (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K dated May 30, 2017, filed on June 5, 2017)*

 

 

 

10.25

 

Form of Performance Share Unit Award Agreement (incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K dated December 31, 2017, filed on February 28, 2018)*

 

 

 

10.26

 

Form of Performance Share Unit Award Agreement (for 2017) (incorporated by reference to Exhibit 10.17 to the Company’s Quarterly Report on Form 10-Q dated March 31, 2017, filed on May 4, 2017)*

 

 

 

10.27

 

Form of Performance Share Unit Award Agreement (for 2019) (incorporated by reference to Exhibit 10.25 to the Company’s Quarterly Report on Form 10-Q dated March 31, 2018, filed on May 2, 2019)*

 

 

 

10.28

 

Form of Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.18 to the Company’s Quarterly Report on Form 10-Q dated March 31, 2017, filed on May 4, 2017)*

 

 

 

10.29

 

Form of Stock Option Award Agreement (incorporated by reference to Exhibit 10.19 to the Company’s Quarterly Report on Form 10-Q dated March 31, 2017, filed on May 4, 2017)*

 

 

 

10.30

 

Agreement regarding title and retention bonus for Thomas Juhase dated March 21, 2016 converted from R.R. Donnelley & Sons Company to the Company pursuant to the Separation Agreement (incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K dated December 31, 2016, filed on February 28, 2017)*

 

 

 

10.31

 

Form of Director Restricted Stock Unit Award (incorporated by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10-K dated December 31, 2016, filed on February 28, 2017)*

 

 

 

10.32

 

Form of Restricted Stock Unit Award Agreement for directors converted from R.R. Donnelley & Sons Company to the Company pursuant to the Separation Agreement (incorporated by reference to Exhibit 10.21 to the R.R. Donnelley & Sons Company Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed on March 14, 2005)*

 

 

 

10.33

 

Form of Restricted Stock Unit Award Agreement for directors converted from R.R. Donnelley & Sons Company to the Company pursuant to the Separation Agreement (incorporated by reference to Exhibit 10.25 to the R.R. Donnelley & Sons Company Annual Report on Form 10-K for the fiscal year ended December 31, 2007, filed on February 27, 2008)*

 

 

 

49


 

10.34

 

Form of Restricted Stock Unit Award Agreement for directors converted from R.R. Donnelley & Sons Company to the Company pursuant to the Separation Agreement (incorporated by reference to Exhibit 10.23 to the R.R. Donnelley & Sons Company Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on February 25, 2009)*

 

 

 

10.35

 

Form of Amendment to Director Restricted Stock Unit Awards converted from R.R. Donnelley & Sons Company to the Company pursuant to the Separation Agreement (incorporated by reference to Exhibit 10.22 to the R.R. Donnelley & Sons Company Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on February 25, 2009)*

 

 

 

10.36

 

Form of Amendment to Director Restricted Stock Unit Awards dated May 21, 2009 converted from R.R. Donnelley & Sons Company to the Company pursuant to the Separation Agreement (incorporated by reference to Exhibit 10.23 to the R.R. Donnelley & Sons Company Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, filed on August 5, 2009)*

 

 

 

10.37

 

Form of Director Indemnification Agreement (incorporated by reference to Exhibit 10.10 to the Company’s Quarterly Report on Form 10-Q dated September 30, 2016, filed on November 9, 2016)

 

 

 

10.38

 

Agreement, dated February 17, 2019, by and among the Company, Simcoe Capital Management, LLC and, solely for purposes of Section 2(g) thereof, Jeffrey Jacobowitz (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated February 17, 2019, filed on February 19, 2019)

 

 

 

14.1

 

Code of Ethics for the Chief Executive Officer and Senior Financial Officers (incorporated by reference to Exhibit 14.1 to the Company’s Annual Report on Form 10-K dated December 31, 2016, filed on February 28, 2017)

 

 

 

 

 

 

31.1

  

Certification by Daniel N. Leib, President and Chief Executive Officer, required by Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934 (filed herewith)

 

 

 

31.2

  

Certification by David A. Gardella, Executive Vice President and Chief Financial Officer, required by Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934 (filed herewith)

 

 

 

32.1

  

Certification by Daniel N. Leib, President and Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the United States Code (filed herewith)

 

 

 

32.2

  

Certification by David A. Gardella, Executive Vice President and Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the United States Code (filed herewith)

 

 

 

101.INS

  

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.

 

101.SCH

  

XBRL Taxonomy Extension Schema Document

101.CAL

  

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

  

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

  

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

  

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

*

Management contract or compensatory plan or arrangement.

 

 

 

50


 

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.

 

 

By:

 

/s/ DAVID A. GARDELLA

 

 

David A. Gardella

 

 

Executive Vice President and Chief Financial Officer

 

Date: August 1, 2019

 

 

51