Thank you, Dan, and good morning, everyone.
Before I discuss our second quarter financial performance, I’d like to recap a significant item in the quarter that impacts our year-over-year comparability.
As we’ve discussed on the last few earnings calls, we completed the sale of our Language Solutions business in the third quarter of 2018.
Our second quarter 2019 results exclude Language Solutions, while the second quarter of 2018 includes Language Solutions for the entire quarter.
As I indicated on our last call, the sale negatively impacted our second quarter reported net sales comparison by $19.8 million and negatively impacted our gross profit and non-GAAP adjusted EBITDA comparisons by approximately $5.3 million and $1.5 million, respectively, inclusive of net stranded costs.
Keeping this in mind, I’ll review the second quarter results. On a consolidated basis, net sales for the second quarter were $258.9 million, a decrease of $31.7 million, or 10.9% from the second quarter of 2018, primarily due to the sale of the Language Solutions business, along with lower U.S. capital markets transactional and compliance activity.
After adjusting for the sale of Language Solutions, changes in foreign exchange rates and the acquisition of eBrevia, organic net sales decreased 4%. The decrease was largely driven by U.S. capital markets transactional net sales, as a strong IPO quarter was more than offset by fewer M&A deals being completed when compared to the second quarter of 2018, resulting in U.S. capital markets transactional net sales being down from the second quarter of 2018.
The second quarter of 2018 also included a single multimillion dollar M&A deal, and the same deal had a similar impact on the third quarter 2018 transactional sales, which I will touch on again when I discuss our third quarter outlook.
U.S. capital markets compliance net sales were down year-over-year, as we recognize more compliance sales in the first quarter of this year, due to earlier completion of recurring work.
The second quarter declines were partially offset by continued growth in our SaaS offerings, led by ActiveDisclosure, combined with strong demand for proxy and regulatory compliance solutions in U.S. investment markets and increased transactional activity in Asia.
As Dan highlighted, our second quarter gross margin was 42.4%, or 60 basis points lower than the second quarter of 2018, primarily driven by an unfavorable mix between higher-margin services, including capital markets transactional net sales and lower-margin products net sales.
Non-GAAP SG&A expense in the quarter was $53.8 million, $7.8 million lower than the second quarter of 2018.
As a percentage of revenue, non-GAAP SG&A was 20.8%, down 40 basis points compared to the second quarter of 2018. The decrease in expense was primarily driven by the impact from the sale of the Language Solutions business, cost control initiatives and lower variable compensation expense related to underperformance in SaaS net sales growth relative to our internal plan.
Our second quarter non-GAAP adjusted EBITDA was $56.1 million, a decrease of $7.3 million from the second quarter of 2018, primarily driven by lower overall capital markets transactional and compliance activity, along with the sale of the Language Solutions business, partially offset by the impact of cost control initiatives and lower variable compensation expense.
As I noted earlier, the sale of the Language Solutions business negatively impacted the second quarter EBITDA comparison by approximately $1.5 million.
Turning now to our segment results. Net sales in our U.S. segment were $223.2 million in the second quarter of 2019, a decrease of 8% from last year’s second quarter. On an organic basis, after adjusting for the sale of Language Solutions and the purchase of eBrevia, net sales declined 5.6%.
Net sales in U.S. capital markets decreased 11.8% on an organic basis, due primarily to lower overall transactional and compliance activity. This was partially offset by net sales growth in U.S. investment markets, which increased 3.7% on an organic basis, primarily driven by increased demand for proxy and regulatory compliance solutions.
Non-GAAP adjusted EBITDA margin for the segment of 24.4% decreased 230 basis points from the second quarter of 2018, primarily due to lower U.S. capital markets transactional and compliance activity.
Net sales in our International segment were $35.7 million in the second quarter of 2019, a decrease of 25.8% from the second quarter of last year. On an organic basis, excluding the impact of the sale of Language Solutions and changes in foreign exchange rates, net sales in the second quarter were up 4.4% due to an increase in transactional activity in Asia.
Non-GAAP adjusted EBITDA margin for the segment was 15.1%, up 490 basis points due to the increased level of transactional activity, the sale of the Language Solutions business and the impact of cost savings initiatives.
Our second quarter 2019 non-GAAP unallocated corporate expenses, excluding depreciation and amortization, were $3.7 million, a decrease of $2.5 million from the second quarter of 2018. The decrease was primarily driven by the impact of cost savings initiatives and lower variable compensation expense.
Consolidated free cash flow in the quarter was a use of $8.1 million, $2.3 million unfavorable to the second quarter of 2018. Relative to last year’s second quarter, the higher use of cash was primarily driven by lower EBITDA, the timing of various tax payments, as well as higher capital expenditures. This was partially offset by benefit of working capital and lower interest payments related to our debt reduction.
Our controllable working capital rate, which we define as accounts receivable plus inventory less accounts payable, as a percent of our trailing three-month annualized net sales was 18.9%, up 250 basis points from the second quarter of 2018, due primarily to higher receivable balances at quarter-end.
We continue to actively work to enhance our customer collections processes and expect year-over-year trend in this ratio to improve throughout the year, ending the year at approximately 17.5%.
We ended the quarter with $419.1 million of total debt and $409.6 million of net debt, including $55.5 million drawn on our revolver and we had net available liquidity of $88.7 million.
As of June 30, 2019, our non-GAAP net leverage ratio was 3.1 times, up 0.3 times from June 2018 and up 1.1 times from year-end 2018. The increase from year-end was partially driven by normal seasonality of our cash flow, as well as lower EBITDA, resulting from decreased transactional activity in the first-half of the year.
We continue to target a gross leverage ratio in the range of 2.25 times to 2.75 times and expect to be below the low-end of that range by the end of this year.
As highlighted in this morning’s press release, we are reiterating the full-year 2019 guidance that we previously provided.
While there’s no change to our guidance, I will recap our expectations.
We expect 2019 total net sales to be in the range of $910 millions to $940 million, likely coming in towards the lower-end of the range, due to the year-to-date impact of a soft M&A environment on transactions and Venue.
We expect our non-GAAP adjusted EBITDA to be in the range of $145 million to $155 million, as we continue to focus on our cost control efforts to keep us on track to meeting our profit and cash flow goals.
Depreciation and amortization is expected to be $48 million; we expect interest of approximately $35 million; our full-year non-GAAP effective tax rate is expected to be in the range of 29% to 31%; we project the full-year fully diluted weighted average share count to be approximately 35 million shares; and lastly, we expect capital expenditures in the range of $40 million to $45 million, with free cash flow also in the range of $40 million to $45 million.
I also want to add a quick reminder regarding the impact of Language Solutions on the next quarter.
As noted in this morning’s press release, the year-over-year negative impacts in the third quarter will be $3.2 million in net sales, $1.2 million in gross profit and $0.5 million in non-GAAP adjusted EBITDA.
On a full-year basis, the sale negatively impacts the year-over-year net sales comparison by $41.8 million and negatively impacts the gross profit and non-GAAP adjusted EBITDA comparisons by approximately $12 million and $3 million, respectively, inclusive of estimated net stranded costs. These impacts are all reflected in our full-year guidance.
Regarding our outlook for next quarter.
We’re expecting third quarter net sales to be in the range of $205 million to $210 million and approximately 1.7% year-over-year organic decline at the midpoint, due in part to the very large M&A transaction in last year’s third quarter that I mentioned earlier.
Regarding profitability, we expect that our non-GAAP adjusted EBITDA margin should improve slightly when compared to the third quarter of 2018, due to the sale of the Language Solutions business and the impact of our cost savings initiatives, as well as an improved sales mix.
To summarize, second quarter capital markets transactional activity, while strong in IPOs, was negatively impacted by fewer completed M&A deals compared to the prior year, including a very large deal that span both the second and third quarters of last year.
Compliance net sales were also down in the quarter, but were largely on track for the first-half. SaaS net sales growth, while remaining temporarily off-trend this quarter, was healthy in ActiveDisclosure, eBrevia and FundSuiteArc, with Venue showing signs of a rebound heading into Q3.
Going into the second-half of 2019, we built a strong transactional pipeline, prudently invested in growth opportunities, all while diligently managing costs, as such, our full-year guidance remains unchanged.
Before I turn it back to Dan, one last housekeeping item that I’d like to mention.
We will be including additional net sales details, including SaaS, as well as our quarterly sales mix in our investor presentation starting this quarter.
Our latest presentation, which we posted later today and updated each quarter, can be found on the investor page of our website.
And with that, I’ll turn it back to Dan.