SEC Form 10-Q filed by Donnelley Financial Solutions Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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Securities registered pursuant to Section 12(b) of the Act:
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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.
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).
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.
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Emerging growth company |
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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 April 26, 2024,
DONNELLEY FINANCIAL SOLUTIONS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2024
TABLE OF CONTENTS
Part II |
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Item 1: |
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Item 1A: |
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Item 2: |
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Item 3: |
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Item 4: |
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Item 5: |
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Item 6: |
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35 |
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2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Donnelley Financial Solutions, Inc. and subsidiaries (“DFIN” or the “Company”) has made forward-looking statements in this Quarterly Report on Form 10-Q (the “Quarterly Report”) 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 forward-looking statements.
Forward-looking statements are not guarantees of future performance. These forward-looking statements are subject to a number of important factors, including those factors discussed in detail in Part I, Item 1A. Risk Factors of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on February 20, 2024 (the “Annual Report”), in addition to those discussed elsewhere in this Quarterly Report, that could cause the Company’s actual results to differ materially from those indicated in any such forward-looking statements. These factors include, but are not limited to:
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 should consider these forward-looking statements only as the Company’s current plans, estimates and beliefs. Except to the extent required by law, 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 to reflect any new events or any change in conditions or circumstances other than to the extent required by law.
3
Donnelley Financial Solutions, Inc. and Subsidiaries (“DFIN”)
Condensed Consolidated Statements of Operations
(in millions, except per share data)
(UNAUDITED)
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Three Months Ended March 31, |
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2024 |
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2023 |
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Net sales |
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Tech-enabled services |
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$ |
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$ |
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Software solutions |
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Print and distribution |
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Total net sales |
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Cost of sales (a) |
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Tech-enabled services |
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Software solutions |
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Print and distribution |
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Total cost of sales |
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Selling, general and administrative expenses (a) |
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Depreciation and amortization |
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Restructuring, impairment and other charges, net |
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Other operating income, net |
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( |
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Income from operations |
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Interest expense, net |
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Investment and other income, net |
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Earnings before income taxes |
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Income tax expense |
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Net earnings |
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$ |
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$ |
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Net earnings per share: |
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Basic |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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Weighted average number of common shares outstanding: |
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Basic |
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Diluted |
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See Notes to the Unaudited Condensed Consolidated Financial Statements
4
Donnelley Financial Solutions, Inc. and Subsidiaries (“DFIN”)
Condensed Consolidated Statements of Comprehensive Income
(in millions)
(UNAUDITED)
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Three Months Ended March 31, |
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2024 |
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2023 |
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Net earnings |
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$ |
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$ |
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Other comprehensive (loss) income, net of tax: |
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Translation adjustments |
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Adjustment for net periodic pension and other postretirement benefits plans |
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Other comprehensive (loss) income, net of tax |
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Comprehensive income |
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$ |
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$ |
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See Notes to the Unaudited Condensed Consolidated Financial Statements
5
Donnelley Financial Solutions, Inc. and Subsidiaries (“DFIN”)
Condensed Consolidated Balance Sheets
(in millions, except per share data)
(UNAUDITED)
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March 31, 2024 |
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December 31, 2023 |
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ASSETS |
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Cash and cash equivalents |
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$ |
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$ |
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Receivables, less allowances for expected losses of $ |
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Prepaid expenses and other current assets |
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Assets held for sale |
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Total current assets |
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Property, plant and equipment, net |
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Operating lease right-of-use assets |
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Software, net |
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Goodwill |
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Deferred income taxes, net |
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Other noncurrent assets |
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Total assets |
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$ |
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$ |
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LIABILITIES |
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Accounts payable |
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$ |
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$ |
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Operating lease liabilities |
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Accrued liabilities |
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Total current liabilities |
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Long-term debt |
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Deferred compensation liabilities |
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Pension and other postretirement benefits plans liabilities |
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Noncurrent operating lease liabilities |
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Other noncurrent liabilities |
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Total liabilities |
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EQUITY |
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Preferred stock, $ |
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Authorized: |
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Common stock, $ |
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Authorized: |
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Issued and outstanding: |
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Treasury stock, at cost: |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive loss |
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( |
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Total equity |
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Total liabilities and equity |
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$ |
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$ |
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See Notes to the Unaudited Condensed Consolidated Financial Statements
6
Donnelley Financial Solutions, Inc. and Subsidiaries (“DFIN”)
Condensed Consolidated Statements of Cash Flows
(in millions)
(UNAUDITED)
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Three Months Ended March 31, |
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2024 |
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2023 |
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OPERATING ACTIVITIES |
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Net earnings |
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$ |
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$ |
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Adjustments to reconcile net earnings to net cash used in operating activities: |
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Depreciation and amortization |
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Provision for expected losses on accounts receivable |
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Share-based compensation expense |
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Deferred income taxes |
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( |
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( |
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Net pension plan income |
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( |
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( |
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Gain on sale of long-lived assets |
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( |
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( |
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Gain on investments in equity securities |
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( |
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( |
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Amortization of operating lease right-of-use assets |
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Other |
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Changes in operating assets and liabilities: |
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Receivables, net |
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( |
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( |
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Prepaid expenses and other current assets |
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( |
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( |
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Accounts payable |
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Income taxes payable and receivable |
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Accrued liabilities and other |
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( |
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( |
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Operating lease liabilities |
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( |
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( |
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Pension and other postretirement benefits plans contributions |
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( |
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( |
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Net cash used in operating activities |
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( |
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( |
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INVESTING ACTIVITIES |
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Capital expenditures |
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( |
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( |
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Proceeds from sale of long-lived assets |
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Proceeds from sales of investments in equity securities |
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Net cash provided by (used in) investing activities |
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( |
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FINANCING ACTIVITIES |
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Revolving facility borrowings |
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Payments on revolving facility borrowings |
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( |
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( |
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Treasury share repurchases |
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( |
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Cash received for common stock issuances |
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Finance lease payments |
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( |
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Net cash provided by financing activities |
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Effect of exchange rate on cash and cash equivalents |
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( |
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Net increase (decrease) in cash and cash equivalents |
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( |
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Cash and cash equivalents at beginning of year |
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Cash and cash equivalents at end of period |
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$ |
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$ |
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Supplemental cash flow information: |
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Income taxes paid (net of refunds) |
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$ |
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$ |
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Interest paid |
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$ |
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$ |
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Non-cash investing activities: |
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Non-cash consideration from sale of investment in an equity security (Note 1) |
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$ |
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$ |
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Capitalized software included in accounts payable |
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$ |
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$ |
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See Notes to the Unaudited Condensed Consolidated Financial Statements
7
Donnelley Financial Solutions, Inc. and Subsidiaries (“DFIN”)
Condensed Consolidated Statements of Changes in Stockholders’ Equity
For the Three Months Ended March 31, 2024 and 2023
(in millions)
(UNAUDITED)
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Common Stock |
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Treasury Stock |
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Additional |
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Retained |
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Accumulated |
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Total |
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Shares |
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Amount |
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Shares |
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Amount |
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Balance at December 31, 2023 |
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$ |
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$ |
( |
) |
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$ |
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$ |
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$ |
( |
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$ |
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Net earnings |
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Other comprehensive loss |
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( |
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( |
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Share-based compensation expense |
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Common stock repurchases |
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( |
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( |
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Issuance of share-based awards, net of withholdings and other |
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( |
) |
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( |
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Balance at March 31, 2024 |
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$ |
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$ |
( |
) |
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$ |
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$ |
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$ |
( |
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$ |
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Common Stock |
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Treasury Stock |
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Additional |
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Retained |
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Accumulated |
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Total |
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Shares |
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Amount |
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Shares |
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Amount |
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Balance at December 31, 2022 |
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$ |
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$ |
( |
) |
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$ |
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$ |
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$ |
( |
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$ |
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Net earnings |
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Other comprehensive income |
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Share-based compensation expense |
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Common stock repurchases |
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( |
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( |
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Issuance of share-based awards, net of withholdings and other |
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( |
) |
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( |
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Balance at March 31, 2023 |
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$ |
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$ |
( |
) |
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$ |
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$ |
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$ |
( |
) |
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$ |
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See Notes to the Unaudited Condensed Consolidated Financial Statements
8
Donnelley Financial Solutions, Inc. and Subsidiaries (“DFIN”)
Notes to the Unaudited Condensed Consolidated Financial Statements
(in millions, except per share data, unless otherwise indicated)
Note 1. Overview, Basis of Presentation and Significant Accounting Policies
Description of Business
DFIN is a leading global provider of innovative software and technology-enabled financial regulatory and compliance solutions. The Company provides regulatory filing and deal solutions via its software, technology-enabled services and print and distribution solutions to public and private companies, mutual funds and other regulated investment firms, to serve its clients’ regulatory and compliance needs. DFIN helps its clients comply with applicable regulations where and how they want to work in a digital world, providing numerous solutions tailored to each client’s precise needs. The prevailing trend is toward clients choosing to utilize the Company’s software solutions, in conjunction with its tech-enabled services, to meet their document and filing needs, while at the same time shifting away from physical print and distribution of documents, except for when it is still regulatorily required or requested by investors.
The Company serves its clients’ regulatory and compliance needs throughout their respective life cycles. For its capital markets clients, the Company offers solutions that allow companies to comply with U.S. Securities and Exchange Commission (“SEC”) regulations and support their corporate financial transactions and regulatory/financial reporting through the use of digital document creation and online content management tools; filing agent services, where applicable; solutions to facilitate clients’ communications with their investors; and virtual data rooms and other deal management solutions. For investment companies, including mutual fund, insurance-investment and alternative investment companies, the Company provides solutions for creating, compiling and filing regulatory communications as well as solutions for investors designed to improve the access to and accuracy of their investment information.
Services and Products
The Company separately reports its net sales and related cost of sales for its software solutions, tech-enabled services and print and distribution offerings. The Company’s software solutions consist of ActiveDisclosure® (“ActiveDisclosure”), the Arc Suite® software platform (“Arc Suite”) and Venue® Virtual Data Room (“Venue”). The Company’s tech-enabled services offerings consist of document composition, compliance-related SEC Electronic Data Gathering, Analysis, and Retrieval (“EDGAR”) filing services and transactional solutions. The Company’s print and distribution offerings primarily consist of conventional and digital printed products and related shipping.
Basis of Presentation
The accompanying Unaudited Condensed Consolidated Financial Statements include the accounts of DFIN and all majority-owned subsidiaries 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 Financial Statements and accompanying notes included in the Company’s latest Annual Report. In the opinion of management, the financial data presented includes all adjustments necessary to present fairly the results of operations, financial position and cash flows for the interim periods presented. Results of interim periods should not be considered indicative of the results for the full year.
Significant Accounting Policies
Use of 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 as well as disclosure of contingent assets and liabilities as of 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 accounting estimates are disclosed in the Annual Report.
Allowances for Expected Losses—
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March 31, |
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2024 |
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2023 |
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Balance, beginning of year |
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$ |
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$ |
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Provisions charged to expense |
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|
||
Write-offs, reclassifications and other |
|
|
( |
) |
|
|
( |
) |
Balance, end of period |
|
$ |
|
|
$ |
|
||
9
Donnelley Financial Solutions, Inc. and Subsidiaries (“DFIN”)
Notes to the Unaudited Condensed Consolidated Financial Statements (continued)
(in millions, except per share data, unless otherwise indicated)
The components of the CECL reserve balance at March 31, 2024 and December 31, 2023 were as follows:
|
|
March 31, 2024 |
|
|
December 31, 2023 |
|
||
Provision for accounts receivable |
|
$ |
|
|
$ |
|
||
Provision for unbilled receivables and contract assets |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
Assets Held for Sale—As of December 31, 2023, the Company had land held for sale with a carrying value of $
Property, Plant and Equipment, net—
|
|
March 31, 2024 |
|
|
December 31, 2023 |
|
||
Land |
|
$ |
|
|
$ |
|
||
Buildings |
|
|
|
|
|
|
||
Machinery and equipment |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Less: Accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
Total |
|
$ |
|
|
$ |
|
||
During the three months ended March 31, 2024 and 2023, depreciation expense was $
Software, net—Capitalized software development costs are amortized over their estimated useful life using the straight-line method, up to a maximum of
Investments—The carrying value of the Company’s investments in equity securities was $
During the three months ended March 31, 2023, the Company sold an investment in an equity security and received proceeds of $
Recently Issued Accounting Pronouncements
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures,” which requires that an entity disclose consistent categories and greater disaggregation of significant expenses by reportable segment, information regarding the chief operating decision maker (“CODM”) and how the CODM uses the reported measures in assessing segment performance and deciding how to allocate resources, among other amendments that expand segment reporting disclosures. ASU 2023-07 also requires that an entity disclose all information about a reportable segment’s profit or loss and assets currently required annually by FASB Accounting Standards Codification (“ASC”) Topic 280, Segment Reporting, in interim periods. The standard is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this standard on its disclosures to the Unaudited Condensed Consolidated Financial Statements.
10
Donnelley Financial Solutions, Inc. and Subsidiaries (“DFIN”)
Notes to the Unaudited Condensed Consolidated Financial Statements (continued)
(in millions, except per share data, unless otherwise indicated)
In December 2023, the FASB issued ASU No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures,” which requires that an entity disclose consistent categories and greater disaggregation of information in the income tax rate reconciliation, income taxes paid disaggregated by jurisdiction, among other amendments that expand income tax disclosures. The standard is effective for fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this standard on its disclosures to the Unaudited Condensed Consolidated Financial Statements.
Note 2. Revenue
Revenue Recognition
The Company manages highly-customized data and materials to enable filings with the SEC on behalf of its customers as well as performs tagging of documents using Inline eXtensible Business Reporting Language (“iXBRL”) and other services. Clients are provided with EDGAR filing services, iXBRL compliance services and translation, editing, interpreting, proof-reading and multilingual typesetting services, among other services. The Company provides software solutions to public and private companies, mutual funds and other regulated investment firms to serve their regulatory and compliance needs, including ActiveDisclosure, Arc Suite and Venue, and provides digital document creation, online content management and print and distribution solutions.
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 services include software solutions and tech-enabled services whereas the Company’s products are comprised of print and distribution offerings. 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 is not distinct. Revenue for the Company’s tech-enabled services, software solutions and print and distribution offerings is recognized either over time or at a point in time, as further disclosed in the Annual Report.
Disaggregation of Revenue
The following table disaggregates revenue between tech-enabled services, software solutions and print and distribution by reportable segment:
|
|
Three Months Ended March 31, |
|
|||||||||||||||||||||||||||||
|
|
2024 |
|
|
2023 |
|
||||||||||||||||||||||||||
|
|
Tech-enabled Services |
|
|
Software Solutions |
|
|
Print and Distribution |
|
|
Total |
|
|
Tech-enabled Services |
|
|
Software Solutions |
|
|
Print and Distribution |
|
|
Total |
|
||||||||
Capital Markets - Software Solutions |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||||
Capital Markets - Compliance and Communications Management |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Investment Companies - Software Solutions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Investment Companies - Compliance and Communications Management |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Total net sales |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||||
11
Donnelley Financial Solutions, Inc. and Subsidiaries (“DFIN”)
Notes to the Unaudited Condensed Consolidated Financial Statements (continued)
(in millions, except per share data, unless otherwise indicated)
Unbilled Receivables and Contract Balances
The timing of revenue recognition may differ from the timing of invoicing to customers and these timing differences result in contract assets, unbilled receivables or contract liabilities. Contract assets represent revenue recognized for performance obligations completed before an unconditional right to payment exists and therefore invoicing has not yet occurred. The Company generally estimates contract assets based on the historical selling price adjusted for its current experience and expected resolution of the variable consideration of the completed performance obligation. When the Company’s contracts contain variable consideration, the variable consideration is recognized only to the extent that it is probable that a significant revenue reversal will not occur in a future period. As a result, the estimated revenue and contract assets may be constrained until the uncertainty associated with the variable consideration is resolved, which generally occurs in less than one year. Determining whether there will be a significant revenue reversal in the future and the determination of the amount of the constraint requires significant judgment.
Contract assets were $
Contract liabilities consist of deferred revenue and progress billings, which are included in accrued liabilities on the Unaudited Condensed Consolidated Balance Sheets. The Company recognized $
|
|
March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Balance, beginning of year |
|
$ |
|
|
$ |
|
||
Deferral of revenue |
|
|
|
|
|
|
||
Revenue recognized |
|
|
( |
) |
|
|
( |
) |
Balance, end of period |
|
$ |
|
|
$ |
|
||
Most of the Company's contracts with significant remaining performance obligations have an initial expected duration of one year or less. As of March 31, 2024, the future estimated revenue related to unsatisfied or partially satisfied performance obligations under contracts with an original contractual term in excess of one year was approximately $
12
Donnelley Financial Solutions, Inc. and Subsidiaries (“DFIN”)
Notes to the Unaudited Condensed Consolidated Financial Statements (continued)
(in millions, except per share data, unless otherwise indicated)
Note 3. Goodwill
The goodwill balances by reportable segment were as follows:
|
|
Gross book |
|
|
Accumulated |
|
|
Net book |
|
|
Foreign |
|
|
Net book |
|
|||||
Capital Markets - Software Solutions |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Capital Markets - Compliance and Communications Management |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||
Investment Companies - Software Solutions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Investment Companies - Compliance and Communications Management |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
||||
Total |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Note 4. Leases
|
|
Three Months Ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Cash paid related to operating leases |
|
$ |
|
|
$ |
|
||
Cash paid related to finance leases |
|
$ |
|
|
$ |
|
||
The components of lease expense for the three months ended March 31, 2024 and 2023 were as follows:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Operating lease expense: |
|
|
|
|
|
|
||
Operating lease expense |
|
$ |
|
|
$ |
|
||
Sublease income |
|
|
( |
) |
|
|
( |
) |
Net operating lease expense |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Finance lease expense: |
|
|
|
|
|
|
||
Amortization of right-of-use assets |
|
$ |
|
|
$ |
|
||
Interest on lease liabilities |
|
|
|
|
|
|
||
Total finance lease expense |
|
$ |
|
|
$ |
|
||
The Company’s finance lease liabilities as of March 31, 2024 and December 31, 2023 are presented on the Company’s Unaudited Condensed Consolidated Balance Sheets as follows:
|
|
March 31, 2024 |
|
|
December 31, 2023 |
|
||
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|
||
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|||
Total |
|
$ |
|
|
$ |
|
||
13
Donnelley Financial Solutions, Inc. and Subsidiaries (“DFIN”)
Notes to the Unaudited Condensed Consolidated Financial Statements (continued)
(in millions, except per share data, unless otherwise indicated)
Other information related to finance leases for the three months ended March 31, 2024 and 2023 was as follows:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Non-cash disclosure: |
|
|
|
|
|
|
||
Increase in finance lease liabilities due to new right-of-use assets |
|
$ |
|
|
$ |
|
||
Note 5. Restructuring, Impairment and Other Charges, net
Restructuring, Impairment and Other Charges, net recognized in Results of Operations
The Company records restructuring charges associated with management-approved restructuring plans, which could include the elimination of job functions, closure or relocation of facilities, reorganization of operations, changes in management structure, workforce reductions or other actions. Restructuring charges may include ongoing and enhanced termination benefits related to employee separations, contract termination costs and other related costs associated with exit or disposal activities. Restructuring charges for employee terminations include management’s estimate as to the timing and amount of severance and actual results could differ from estimates.
For the three months ended March 31, 2024 and 2023, the Company recorded the following restructuring, impairment and other charges, net by reportable segment:
|
|
Employee Terminations |
|
|
Other Charges |
|
|
Total |
|
|||
Three Months Ended March 31, 2024 |
|
|
|
|
|
|
|
|
|
|||
Capital Markets - Compliance and Communications Management |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Investment Companies - Software Solutions |
|
|
|
|
|
|
|
|
|
|||
Corporate |
|
|
|
|
|
|
|
|
|
|||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
Employee Terminations |
|
|
Other Charges |
|
|
Total |
|
|||
Three Months Ended March 31, 2023 |
|
|
|
|
|
|
|
|
|
|||
Capital Markets - Software Solutions |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Capital Markets - Compliance and Communications Management |
|
|
|
|
|
|
|
|
|
|||
Investment Companies - Software Solutions |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Investment Companies - Compliance and Communications Management |
|
|
|
|
|
|
|
|
|
|||
Corporate |
|
|
|
|
|
|
|
|
|
|||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|||
For the three months ended March 31, 2024, the Company recorded net restructuring charges of $
For the three months ended March 31, 2023, the Company recorded net restructuring charges of $
14
Donnelley Financial Solutions, Inc. and Subsidiaries (“DFIN”)
Notes to the Unaudited Condensed Consolidated Financial Statements (continued)
(in millions, except per share data, unless otherwise indicated)
Restructuring Reserve – Employee Terminations
The Company’s employee terminations liability is included in accrued liabilities on the Company’s Unaudited Condensed Consolidated Balance Sheets. Changes in the accrual for employee terminations during the three months ended March 31, 2024 were as follows:
|
|
Employee Terminations |
|
|
Balance at December 31, 2023 |
|
$ |
|
|
Restructuring charges, net |
|
|
|
|
Cash paid |
|
|
( |
) |
Balance at March 31, 2024 |
|
$ |
|
|
Note 6. Retirement Plans
The components of estimated net pension plan income for the three months ended March 31, 2024 and 2023 were as follows:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Interest cost |
|
$ |
|
|
$ |
|
||
Expected return on assets |
|
|
( |
) |
|
|
( |
) |
Amortization, net |
|
|
|
|
|
|
||
Net pension plan income |
|
$ |
( |
) |
|
$ |
( |
) |
Note 7. Commitments and Contingencies
Litigation
From time to time, the Company’s customers and other counterparties 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 8. Debt
The Company’s debt as of March 31, 2024 and December 31, 2023 consisted of the following:
|
|
March 31, 2024 |
|
|
December 31, 2023 |
|
||
Term Loan A Facility |
|
$ |
|
|
$ |
|
||
Borrowings under the Revolving Facility |
|
|
|
|
|
|
||
Unamortized debt issuance costs |
|
|
( |
) |
|
|
( |
) |
Total long-term debt |
|
$ |
|
|
$ |
|
||
Credit Agreement—On May 27, 2021, the Company amended and restated its credit agreement dated as of September 30, 2016 (as in effect prior to such amendment and restatement, the “Credit Agreement,” and the Credit Agreement, as so amended and restated, the “Amended and Restated Credit Agreement”), by and among the Company, the lenders party thereto from time to time and JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, to, among other things, provide for a $
15
Donnelley Financial Solutions, Inc. and Subsidiaries (“DFIN”)
Notes to the Unaudited Condensed Consolidated Financial Statements (continued)
(in millions, except per share data, unless otherwise indicated)
On May 11, 2023, the Company entered into the first amendment to the Amended and Restated Credit Agreement to change the reference rate from LIBOR, which ceased being published on June 30, 2023, to the Secured Overnight Financing Rate (“SOFR”) for both the Term Loan A Facility and the Revolving Facility. The SOFR interest rate was effective for the Revolving Facility and the Term Loan A on May 30, 2023 and June 12, 2023, respectively. No other significant terms of the Amended and Restated Credit Agreement were amended. The Amended and Restated Credit Agreement contains a number of covenants, including 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 $
Term Loan A Facility—The unpaid principal amount of the Term Loan A Facility is due and payable in full on May 27, 2026. Voluntary prepayments of the Term Loan A Facility are permitted at any time without premium or penalty. The weighted-average interest rate on borrowings under the Term Loan A Facility was
Revolving Facility—As of March 31, 2024, there were $
The following table summarizes interest expense, net included on the Unaudited Condensed Consolidated Statements of Operations:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Interest incurred |
|
$ |
|
|
$ |
|
||
Interest income |
|
|
( |
) |
|
|
( |
) |
Interest expense, net |
|
$ |
|
|
$ |
|
||
Note 9. Earnings per Share
The reconciliation of the numerator and denominator of the basic and diluted net earnings per share calculation and the anti-dilutive share-based awards for the three months ended March 31, 2024 and 2023 were as follows:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Net earnings per share: |
|
|
|
|
|
|
||
Basic |
|
$ |
|
|
$ |
|
||
Diluted |
|
$ |
|
|
$ |
|
||
Numerator: |
|
|
|
|
|
|
||
Net earnings |
|
$ |
|
|
$ |
|
||
Denominator: |
|
|
|
|
|
|
||
Weighted average number of common shares outstanding |
|
|
|
|
|
|
||
Dilutive awards |
|
|
|
|
|
|
||
Diluted weighted average number of common shares outstanding |
|
|
|
|
|
|
||
Weighted average number of anti-dilutive share-based awards: |
|
|
|
|
|
|
||
Restricted stock units |
|
|
|
|
|
|
||
16
Donnelley Financial Solutions, Inc. and Subsidiaries (“DFIN”)
Notes to the Unaudited Condensed Consolidated Financial Statements (continued)
(in millions, except per share data, unless otherwise indicated)
Note 10. Share-based Compensation
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 (the “Board”) and the Company’s stockholders and provides 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, PSUs, performance cash awards or RSUs. In addition, non-employee members of the Board may receive awards under the 2016 PIP. Increases to the shares of common stock available for issuance under the 2016 PIP requires stockholder approval. At March 31, 2024, there were
The Company recognizes compensation expense for share-based awards based on estimated grant date fair values and certain assumptions, as further disclosed in Note 12, Share-based Compensation, of the Annual Report.
Total share-based compensation expense was $
Stock Options
There were no stock options granted during the three months ended March 31, 2024.
|
|
Shares Under Option (thousands) |
|
|
Weighted-Average Exercise Price |
|
||
Outstanding at December 31, 2023 |
|
|
|
|
$ |
|
||
Outstanding at March 31, 2024 |
|
|
|
|
$ |
|
||
Vested and exercisable at March 31, 2024 |
|
|
|
|
$ |
|
||
Restricted Stock Units
RSUs outstanding as of March 31, 2024 and December 31, 2023, and changes during the three months ended March 31, 2024, were as follows:
|
|
Shares (thousands) |
|
|
Weighted-Average Grant Date Fair Value |
|
||
Nonvested at December 31, 2023 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
|
|
||
Vested |
|
|
( |
) |
|
|
|
|
Forfeited |
|
|
( |
) |
|
|
|
|
Nonvested at March 31, 2024 |
|
|
|
|
$ |
|
||
As of March 31, 2024, $
Performance Share Units
PSUs outstanding as of March 31, 2024 and December 31, 2023, and changes during the three months ended March 31, 2024, were as follows:
|
|
Shares (thousands) |
|
|
Weighted-Average Grant Date Fair Value |
|
||
Nonvested at December 31, 2023 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
|
|
||
Vested |
|
|
( |
) |
|
|
|
|
Forfeited |
|
|
( |
) |
|
|
|
|
Nonvested at March 31, 2024 |
|
|
|
|
$ |
|
||
17
Donnelley Financial Solutions, Inc. and Subsidiaries (“DFIN”)
Notes to the Unaudited Condensed Consolidated Financial Statements (continued)
(in millions, except per share data, unless otherwise indicated)
During the three months ended March 31, 2024,
The fair value of PSUs granted prior to 2024 was based on the Company's stock price on the grant date. The 2024 PSUs include a market condition related to the performance of the Company's stock price relative to a peer group, or relative total shareholder return (“TSR”) modifier, which can affect the number of shares ultimately issued to grantees at the end of the three-year performance period. The grant date fair value of the 2024 PSUs was determined based on a Monte Carlo valuation model. The total potential payout for the 2024 PSUs is payable upon the achievement of certain established performance targets and can also be impacted by the TSR modifier, resulting in a range from
Year Granted |
|
Performance / |
|
Estimated or Actual Attainment |
|
PSUs Outstanding as of March 31, 2024 |
|
|
Estimated PSU Attainment or Actual PSUs Earned |
|
||
|
|
|
|
|
|
|
|
|||||
|
|
(d) |
|
|
|
|
|
|
||||
|
|
(d) |
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|||||
|
|
(d) |
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
||
As of March 31, 2024, $
Note 11. Capital Stock
The Company has authorized for issuance
18
Donnelley Financial Solutions, Inc. and Subsidiaries (“DFIN”)
Notes to the Unaudited Condensed Consolidated Financial Statements (continued)
(in millions, except per share data, unless otherwise indicated)
Common Stock Repurchases
On August 17, 2022, the Board authorized an increase to the stock repurchase program previously approved in February 2022 to bring the total remaining available repurchase authorization for shares on or after August 17, 2022 to $
The stock repurchase program may be suspended or discontinued at any time. The timing and amount of any shares repurchased are determined by the Company based on its evaluation of market conditions and other factors and may be completed from time to time in one or more transactions on the open market or in privately negotiated purchases in accordance with all applicable securities laws and regulations and all repurchases in the open market will be made in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Repurchases may also be made under a Rule 10b5-1 plan, which would permit shares to be repurchased when the Company might otherwise be precluded from doing so.
The Company’s stock repurchases for the three months ended March 31, 2024 and 2023 were as follows:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Common stock repurchases |
|
$ |
|
|
$ |
|
||
Number of shares repurchased |
|
|
|
|
|
|
||
Average price paid per share |
|
$ |
|
|
$ |
|
||
Note 12. Comprehensive Income
The components of other comprehensive (loss) income and income tax expense allocated to each component for the three months ended March 31, 2024 and 2023 were as follows:
|
|
Three Months Ended March 31, 2024 |
|
|||||||||
|
|
Before Tax |
|
|
Income Tax |
|
|
Net of Tax |
|
|||
Translation adjustments |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
Adjustment for net periodic pension and other postretirement benefits plans |
|
|
|
|
|
|
|
|
|
|||
Other comprehensive (loss) income |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
|
|
Three Months Ended March 31, 2023 |
|
|||||||||
|
|
Before Tax |
|
|
Income Tax |
|
|
Net of Tax |
|
|||
Translation adjustments |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Adjustment for net periodic pension and other postretirement benefits plans |
|
|
|
|
|
|
|
|
|
|||
Other comprehensive income |
|
$ |
|
|
$ |
|
|
$ |
|
|||
The following table summarizes changes in accumulated other comprehensive loss by component for the three months ended March 31, 2024:
|
|
Pension and Other Postretirement Benefits Plans Cost |
|
|
Translation Adjustments |
|
|
Total |
|
|||
Balance at December 31, 2023 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Other comprehensive loss before reclassifications |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Amounts reclassified from accumulated other comprehensive loss |
|
|
|
|
|
|
|
|
|
|||
Net change in accumulated other comprehensive loss |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Balance at March 31, 2024 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
19
Donnelley Financial Solutions, Inc. and Subsidiaries (“DFIN”)
Notes to the Unaudited Condensed Consolidated Financial Statements (continued)
(in millions, except per share data, unless otherwise indicated)
The following table summarizes changes in accumulated other comprehensive loss by component for the three months ended March 31, 2023:
|
|
Pension and Other Postretirement Benefits Plans Cost |
|
|
Translation Adjustments |
|
|
Total |
|
|||
Balance at December 31, 2022 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Other comprehensive income before reclassifications |
|
|
|
|
|
|
|
|
|
|||
Amounts reclassified from accumulated other comprehensive loss |
|
|
|
|
|
|
|
|
|
|||
Net change in accumulated other comprehensive loss |
|
|
|
|
|
|
|
|
|
|||
Balance at March 31, 2023 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Reclassifications from accumulated other comprehensive loss for the three months ended March 31, 2024 and 2023 were as follows:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Amortization of pension and other postretirement benefits plans cost: |
|
|
|
|
|
|
||
Net actuarial loss (a) |
|
$ |
|
|
$ |
|
||
Reclassifications before tax |
|
|
|
|
|
|
||
Income tax expense |
|
|
|
|
|
|
||
Reclassifications, net of tax |
|
$ |
|
|
$ |
|
||
Note 13. Segment Information
The Company operates its business through
Capital Markets
The Company provides software solutions, tech-enabled services and print and distribution solutions to public and private companies for deal solutions and compliance to companies that are, or are preparing to become, subject to the filing and reporting requirements of the Securities Act of 1933, as amended (the “Securities Act”), and the Exchange Act. Capital markets clients leverage the Company’s software offerings, proprietary technology, deep industry expertise and experience to successfully navigate the SEC’s specified file formats when submitting compliance documents through the SEC’s EDGAR system for their transactional and ongoing compliance needs. The Company assists its capital markets clients throughout the course of initial public offerings, secondary offerings, mergers and acquisitions, public and private debt offerings, leveraged buyouts, spinouts, special purpose acquisition company (“SPAC”) and de-SPAC transactions and other similar transactions. In addition, the Company provides clients with compliance solutions to prepare their ongoing required Exchange Act filings that are compatible with the SEC’s EDGAR system, most notably Form 10-K, Form 10-Q, Form 8-K and proxy filings. The Company’s operating segments associated with its capital markets services and product offerings are as follows:
Capital Markets – Software Solutions—The Company provides Venue and ActiveDisclosure to public and private companies to help manage public and private transactional and compliance processes; collaborate; and tag, validate and file SEC documents.
Capital Markets – Compliance & Communications Management—The Company provides tech-enabled services and print and distribution solutions to public and private companies for deal solutions and SEC compliance requirements.
20
Donnelley Financial Solutions, Inc. and Subsidiaries (“DFIN”)
Notes to the Unaudited Condensed Consolidated Financial Statements (continued)
(in millions, except per share data, unless otherwise indicated)
Investment Companies
The Company provides software solutions, tech-enabled services and print, distribution and fulfillment solutions to its investment companies clients, which are primarily mutual fund companies, alternative investment companies, insurance companies and third-party fund administrators, that are subject to the filing and reporting requirements of the Investment Company Act of 1940, as amended (the “Investment Company Act”) as well as European and Canadian regulations. The Company’s suite of solutions enables its investment companies clients to comply with applicable ongoing SEC regulations, as well as to create, manage and deliver accurate and timely financial communications to investors and regulators. Investment companies clients leverage the Company’s proprietary technology, deep industry expertise and experience to successfully navigate the SEC’s specified file formats when submitting compliance documents through the SEC's EDGAR system. The Company’s operating segments associated with its investment companies services and products offerings are as follows:
Investment Companies – Software Solutions—The Company provides clients with the Arc Suite platform that contains a comprehensive suite of cloud-based solutions, including ArcDigital, ArcReporting, ArcPro and ArcRegulatory, as well as services that enable storage and management of compliance and regulatory information in a self-service, central repository so that documents can be easily accessed, assembled, edited, tagged, translated, rendered and submitted to regulators and investors.
Investment Companies – Compliance & Communications Management—The Company provides its investment companies clients tech-enabled services to prepare, file, tag and distribute registration forms, as well as iXBRL-formatted filings pursuant to the Investment Company Act, through the SEC’s EDGAR system. In addition, the Company provides print and distribution solutions for its clients to communicate with their investors.
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 CODM and is most consistent with the presentation of profitability reported within the Unaudited Condensed Consolidated Financial Statements.
|
|
Net Sales |
|
|
Income (Loss) from Operations |
|
|
Assets(a) |
|
|
Depreciation and Amortization |
|
|
Capital Expenditures |
|
|||||
Three Months Ended March 31, 2024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Capital Markets - Software Solutions |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Capital Markets - Compliance and Communications Management |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Investment Companies - Software Solutions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Investment Companies - Compliance and Communications Management |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total operating segments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Corporate |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Three Months Ended March 31, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Capital Markets - Software Solutions |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
||||
Capital Markets - Compliance and Communications Management |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Investment Companies - Software Solutions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Investment Companies - Compliance and Communications Management |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total operating segments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Corporate |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
21
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
As used in this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), unless otherwise specified or the context otherwise requires, the “Company” or “DFIN” refer to Donnelley Financial Solutions, Inc. and its consolidated subsidiaries. MD&A should be read together with the Company’s Unaudited Condensed Consolidated Financial Statements and the related notes thereto, as well as the Company’s audited Consolidated Financial Statements and the related notes thereto within its Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on February 20, 2024 (the “Annual Report”).
Company Overview
DFIN is a leading global provider of innovative software and technology-enabled financial regulatory and compliance solutions. The Company provides regulatory filing and deal solutions via its software, technology-enabled services and print and distribution solutions to public and private companies, mutual funds and other regulated investment firms, to serve its clients’ regulatory and compliance needs. DFIN helps its clients comply with applicable regulations where and how they want to work in a digital world, providing numerous solutions tailored to each client’s precise needs. The prevailing trend is toward clients choosing to utilize the Company’s software solutions, in conjunction with its tech-enabled services, to meet their document and filing needs, while at the same time shifting away from physical print and distribution of documents, except for when it is still regulatorily required or requested by investors.
The Company serves its clients’ regulatory and compliance needs throughout their respective life cycles. For its capital markets clients, the Company offers solutions that allow companies to comply with U.S. Securities and Exchange Commission (“SEC”) regulations and support their corporate financial transactions and regulatory/financial reporting through the use of digital document creation and online content management tools; filing agent services, where applicable; solutions to facilitate clients’ communications with their investors; and virtual data rooms and other deal management solutions. For investment companies, including mutual fund, insurance-investment and alternative investment companies, the Company provides solutions for creating, compiling and filing regulatory communications as well as solutions for investors designed to improve the access to and accuracy of their investment information.
Technological advancements, regulatory changes, and evolving workflow preferences have led to the Company’s clients managing more of the financial disclosure process themselves, changing the marketplace for the Company’s services and products. DFIN’s strategy in its Software Solutions segments (CM-SS and IC-SS, as defined below) aligns with the changing marketplace by focusing the Company’s investments and resources in its advanced software solutions, primarily ActiveDisclosure® (“ActiveDisclosure”), Arc Suite® software platform (“Arc Suite”) and Venue® Virtual Data Room (“Venue”), while making targeted investments to further enhance product features. In its Compliance & Communications Management segments (CM-CCM and IC-CCM, as defined below), the Company’s strategy focuses on maintaining its market-leading position by offering a high-touch, service-oriented experience, using its unique combination of tech-enabled services and print and distribution capabilities.
Market Volatility/Cyclicality and Seasonality
The Company’s Capital Markets segments (CM-SS and CM-CCM), in particular, are subject to market volatility, as the demand for the transactional and Venue offerings is largely dependent on the global market for initial public offerings (“IPOs”), secondary offerings, mergers and acquisitions (“M&A”), public and private debt offerings, leveraged buyouts, spinouts, special purpose acquisition company (“SPAC”) and de-SPAC transactions and other similar transactions. A variety of factors impact the global markets for transactions, including economic activity levels, interest rates, market volatility, the regulatory and political environment, geopolitical and civil unrest and global pandemics, among others. Due to the significant net sales and profitability derived from transactional and Venue offerings, market volatility can lead to uneven financial performance when comparing to previous periods. U.S. IPOs, M&A transactions and public debt offerings were also previously disrupted by U.S. federal government shutdowns, and any future government shutdowns could result in additional volatility. The Company's compliance offerings, supporting the quarterly and annual public company reporting processes through its filing services and ActiveDisclosure, as well as its Investment Companies segments (IC-SS and IC-CCM) regulatory and stockholder communications offerings, including Arc Suite, are less impacted by market volatility. The Company's overall risk profile is balanced by offering services in higher demand during a down market, such as document management tools for the bankruptcy/restructuring process and by moving upstream in the filing process with products like Venue.
22
The quarterly/annual public company reporting cycle subjects the Company to filing seasonality which peaks shortly after the end of each fiscal quarter. Additionally, investment companies clients’ financial and regulatory reporting requirements include filings for mutual funds on a semi-annual basis as well as annual prospectus filings, which peaks during the second fiscal quarter. The seasonality and associated operational implications include the need to increase staff during peak periods through a combined strategy of hiring temporary personnel, increasing the premium time of existing staff and outsourcing production for a number of services. ActiveDisclosure and Arc Suite provide clients and their financial advisors software solutions which allow them to autonomously file and distribute compliance documents with regulatory agencies reducing the need for additional service support during peak periods. The Company remains focused on driving annual recurring revenue to mitigate the impact of market volatility on its financial results.
Services and Products
The Company separately reports its net sales and related cost of sales for its software solutions, tech-enabled services and print and distribution offerings. The Company’s software solutions consist of ActiveDisclosure, Arc Suite and Venue. The Company’s tech-enabled services offerings consist of document composition, compliance-related SEC Electronic Data Gathering, Analysis, and Retrieval (“EDGAR”) filing services and transactional solutions. The Company’s print and distribution offerings primarily consist of conventional and digital printed products and related shipping.
Government Regulations and Regulatory Impact
The SEC is adopting new as well as amending existing rules and forms to modernize the reporting and disclosure of information under the Securities Act of 1933, as amended (the “Securities Act”), the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the Investment Company Act of 1940, as amended (the “Investment Company Act”). As the scope and complexity of the regulatory environment continues to increase, regulators are also demanding a greater use of structured, machine-readable data in companies’ disclosures. These actions are driving significant changes which impact the Company’s customers, and have enabled the Company to offer new value-added functionality and services and accelerate its transition from print and distribution to software solutions.
On October 26, 2022, the SEC announced that it adopted the Tailored Shareholder Reports (“TSR”) for Mutual Funds and Exchange-Traded Funds rule, which requires certain investment companies to complete a new concise and visually engaging annual and semi-annual TSR that highlights key information that is particularly important for retail investors to assess and monitor their investments. The TSR, which can be printed and mailed or delivered electronically upon request of the investor, replaces SEC Rule 30e-3 “Optional Internet Availability of Investment Company Shareholder Reports” for open-ended funds and ETFs registered under N-1A and will require iXBRL tagging. The rule went into effect on January 24, 2023 and compliance is required by July 24, 2024. As a result, the Company is expecting an increase in net sales from Arc Suite, tech-enabled services and print beginning in the second half of 2024.
Segments
The Company’s four operating and reportable segments are: Capital Markets – Software Solutions (“CM-SS”), Capital Markets – Compliance and Communications Management (“CM-CCM”), Investment Companies – Software Solutions (“IC-SS”) and Investment Companies – Compliance and Communications Management (“IC-CCM”). Corporate is not an operating segment and consists primarily of unallocated selling, general and administrative (“SG&A”) activities and associated expenses including, in part, executive, legal, finance and certain facility costs. In addition, certain costs and earnings of employee benefits plans, such as pension and other postretirement benefits plans expense (income) as well as share-based compensation expense, are included in Corporate and not allocated to the operating segments.
Capital Markets
The Company provides software solutions, tech-enabled services and print and distribution solutions to public and private companies for deal solutions and compliance to companies that are, or are preparing to become, subject to the filing and reporting requirements of the Securities Act and the Exchange Act. The Company’s operating segments associated with its capital markets services and products offerings are as follows:
Capital Markets – Software Solutions—The CM-SS segment provides Venue and ActiveDisclosure to public and private companies to help manage public and private transactional and compliance processes; collaborate; and tag, validate and file SEC documents.
23
Capital Markets – Compliance & Communications Management—The CM-CCM segment provides tech-enabled services and print and distribution solutions to public and private companies for deal solutions and SEC compliance requirements. The Company's private conference facilities offer around-the-clock services to support the transaction process, production platform and service delivery model for a fully-virtual experience while replicating the in-person experience. The Company has seen clients utilizing the range of options available to them, including a hybrid approach with working group members participating both virtually and in-person during drafting sessions for their transactions.
Investment Companies
The Company provides software solutions, tech-enabled services and print, distribution and fulfillment solutions to its investment companies clients, which are primarily mutual fund companies, alternative investment companies, insurance companies and third-party fund administrators, that are subject to the filing and reporting requirements of the Investment Company Act as well as European and Canadian regulations. The Company’s operating segments associated with its investment companies services and products offerings are as follows:
Investment Companies – Software Solutions—The IC-SS segment provides clients with the Arc Suite platform that contains a comprehensive suite of cloud-based solutions, including ArcDigital, ArcReporting, ArcPro and ArcRegulatory as well as services that enable storage and management of compliance and regulatory information in a self-service, central repository so that documents can be easily accessed, assembled, edited, tagged, translated, rendered and submitted to regulators and investors.
Investment Companies – Compliance & Communications Management—The IC-CCM segment provides clients with tech-enabled solutions for creating, filing and distributing regulatory communications and solutions for investor communications, as well as iXBRL-formatted filings pursuant to the Investment Company Act, through the SEC’s EDGAR system. The IC-CCM segment also provides turnkey proxy services, including discovery, planning and implementation, print and mail management, solicitation, tabulation services, stockholder meeting review and expert support.
Executive Overview
First Quarter Overview
Net sales for the three months ended March 31, 2024 increased by $4.8 million, or 2.4%, to $203.4 million from $198.6 million for the three months ended March 31, 2023, including a $1.2 million, or 0.6%, decrease due to the disposition of the eBrevia business and a $0.3 million, or 0.2%, increase due to changes in foreign currency exchange rates. Net sales increased primarily due to higher capital markets transactional volumes, higher Venue volumes and Venue price increases, partially offset by lower capital markets and investment companies compliance volumes.
Income from operations for the three months ended March 31, 2024 increased by $29.8 million, to $44.6 million from $14.8 million for the three months ended March 31, 2023, primarily due to a net pre-tax gain on the sale of land, lower restructuring, impairment and other charges, net, higher sales volumes, a favorable sales mix and cost control initiatives, partially offset by higher depreciation and amortization expense and higher incentive compensation expense.
Financial Review
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires the extensive use of management’s estimates and assumptions that affect the reported amounts of assets and liabilities as well as disclosures of contingent assets and liabilities as of 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 Annual Report.
In the financial review that follows, the Company discusses its unaudited condensed consolidated results of operations, financial position, 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 thereto.
24
Results of Operations for the Three Months Ended March 31, 2024 as Compared to the Three Months Ended March 31, 2023
The following table shows the results of operations for the three months ended March 31, 2024 and 2023:
|
|
Three Months Ended March 31, |
|
|||||||||||||
|
|
2024 |
|
|
2023 |
|
|
$ Change |
|
|
% Change |
|
||||
|
(in millions, except percentages) |
|
||||||||||||||
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Tech-enabled services |
|
$ |
82.9 |
|
|
$ |
78.4 |
|
|
$ |
4.5 |
|
|
|
5.7 |
% |
Software solutions |
|
|
80.3 |
|
|
|
70.1 |
|
|
|
10.2 |
|
|
|
14.6 |
% |
Print and distribution |
|
|
40.2 |
|
|
|
50.1 |
|
|
|
(9.9 |
) |
|
|
(19.8 |
%) |
Total net sales |
|
|
203.4 |
|
|
|
198.6 |
|
|
|
4.8 |
|
|
|
2.4 |
% |
Cost of sales (a) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Tech-enabled services |
|
|
30.6 |
|
|
|
33.3 |
|
|
|
(2.7 |
) |
|
|
(8.1 |
%) |
Software solutions |
|
|
27.3 |
|
|
|
28.4 |
|
|
|
(1.1 |
) |
|
|
(3.9 |
%) |
Print and distribution |
|
|
22.2 |
|
|
|
28.6 |
|
|
|
(6.4 |
) |
|
|
(22.4 |
%) |
Total cost of sales |
|
|
80.1 |
|
|
|
90.3 |
|
|
|
(10.2 |
) |
|
|
(11.3 |
%) |
Selling, general and administrative expenses (a) |
|
|
72.8 |
|
|
|
70.5 |
|
|
|
2.3 |
|
|
|
3.3 |
% |
Depreciation and amortization |
|
|
13.9 |
|
|
|
12.4 |
|
|
|
1.5 |
|
|
|
12.1 |
% |
Restructuring, impairment and other charges, net |
|
|
1.8 |
|
|
|
10.9 |
|
|
|
(9.1 |
) |
|
|
(83.5 |
%) |
Other operating income, net |
|
|
(9.8 |
) |
|
|
(0.3 |
) |
|
|
(9.5 |
) |
|
nm |
|
|
Income from operations |
|
|
44.6 |
|
|
|
14.8 |
|
|
|
29.8 |
|
|
nm |
|
|
Interest expense, net |
|
|
3.6 |
|
|
|
3.5 |
|
|
|
0.1 |
|
|
|
2.9 |
% |
Investment and other income, net |
|
|
(0.4 |
) |
|
|
(6.9 |
) |
|
|
6.5 |
|
|
|
(94.2 |
%) |
Earnings before income taxes |
|
|
41.4 |
|
|
|
18.2 |
|
|
|
23.2 |
|
|
nm |
|
|
Income tax expense |
|
|
8.1 |
|
|
|
2.4 |
|
|
|
5.7 |
|
|
nm |
|
|
Net earnings |
|
$ |
33.3 |
|
|
$ |
15.8 |
|
|
$ |
17.5 |
|
|
nm |
|
|
nm – Not meaningful
Consolidated
Three Months Ended March 31, 2024 compared to the Three Months Ended March 31, 2023
Net sales of tech-enabled services of $82.9 million for the three months ended March 31, 2024 increased $4.5 million, or 5.7%, as compared to the three months ended March 31, 2023. Net sales of tech-enabled services increased primarily due to higher capital markets transactional volumes, partially offset by lower capital markets compliance volumes.
Net sales of software solutions of $80.3 million for the three months ended March 31, 2024 increased $10.2 million, or 14.6%, as compared to the three months ended March 31, 2023. Net sales of software solutions increased primarily due to higher Venue volumes and Venue price increases, partially offset by the disposition of the eBrevia business, which was sold in the fourth quarter of 2023.
Net sales of print and distribution of $40.2 million for the three months ended March 31, 2024 decreased $9.9 million, or 19.8%, as compared to the three months ended March 31, 2023. Net sales of print and distribution decreased primarily due to lower capital markets and investment companies compliance volumes.
Tech-enabled services cost of sales of $30.6 million for the three months ended March 31, 2024 decreased $2.7 million, or 8.1%, as compared to the three months ended March 31, 2023. Tech-enabled services cost of sales decreased primarily due to cost control initiatives and a favorable sales mix, partially offset by higher sales volumes. As a percentage of tech-enabled services net sales, tech-enabled services cost of sales decreased 5.6%, primarily driven by cost control initiatives and a favorable sales mix.
Software solutions cost of sales of $27.3 million for the three months ended March 31, 2024 decreased $1.1 million, or 3.9%, as compared to the three months ended March 31, 2023. Software solutions cost of sales decreased primarily due to a favorable sales mix and cost control initiatives, partially offset by higher sales volumes. As a percentage of software solutions net sales, software solutions cost of sales decreased 6.5%, primarily driven by a favorable sales mix and cost control initiatives.
Print and distribution cost of sales of $22.2 million for the three months ended March 31, 2024 decreased $6.4 million, or 22.4%, as compared to the three months ended March 31, 2023. Print and distribution cost of sales decreased primarily due to lower sales volumes and cost control initiatives. As a percentage of print and distribution net sales, print and distribution cost of sales decreased 1.9%, primarily driven by cost control initiatives.
25
SG&A expenses of $72.8 million for the three months ended March 31, 2024 increased $2.3 million, or 3.3%, as compared to the three months ended March 31, 2023. SG&A expenses increased primarily due to higher selling expense as a result of the increase in sales volumes, higher bad debt expense, higher share-based compensation expense, higher incentive compensation expense and higher healthcare expense, partially offset by lower consulting expense and cost control initiatives. As a percentage of net sales, SG&A expenses increased to 35.8% for the three months ended March 31, 2024 from 35.5% for the three months ended March 31, 2023, primarily due to higher selling expense, higher bad debt expense, higher share-based compensation expense, higher incentive compensation expense and higher healthcare expense, partially offset by lower consulting expense and cost control initiatives.
Depreciation and amortization of $13.9 million for the three months ended March 31, 2024 increased $1.5 million, or 12.1%, as compared to the three months ended March 31, 2023, primarily due to additional software development.
Restructuring, impairment and other charges, net of $1.8 million for the three months ended March 31, 2024 decreased $9.1 million, or 83.5%, as compared to the three months ended March 31, 2023. For the three months ended March 31, 2024, these charges included $1.7 million of employee termination costs for approximately 10 employees. For the three months ended March 31, 2023, these charges included $10.8 million of employee termination costs for approximately 150 employees.
Other operating income, net of $9.8 million for the three months ended March 31, 2024 included a net pre-tax gain on the sale of land.
Income from operations of $44.6 million for the three months ended March 31, 2024 increased $29.8 million, as compared to the three months ended March 31, 2023. Income from operations increased primarily due to a net pre-tax gain on the sale of land, lower restructuring, impairment and other charges, net, higher sales volumes, a favorable sales mix and cost control initiatives, partially offset by higher depreciation and amortization expense and higher incentive compensation expense.
Interest expense, net of $3.6 million for the three months ended March 31, 2024 increased $0.1 million, or 2.9%, as compared to the three months ended March 31, 2023. Interest expense, net increased primarily due to a higher variable interest rate on the Company’s outstanding debt facilities, partially offset by lower average Revolving Facility (as defined below) borrowings during the three months ended March 31, 2024 compared to the three months ended March 31, 2023.
Investment and other income, net of $0.4 million for the three months ended March 31, 2024 decreased $6.5 million, or 94.2%, as compared to the three months ended March 31, 2023. Investment and other income, net decreased primarily due to a net realized gain of $6.7 million on the sale of an investment in an equity security during the three months ended March 31, 2023.
The effective income tax rate was 19.6% for the three months ended March 31, 2024, as compared to 13.2% for the three months ended March 31, 2023. The increase in the effective income tax rate was primarily driven by higher pre-tax earnings for the three months ended March 31, 2024, which reduced the net favorable impact of discrete items.
Information by Segment
The following tables summarize net sales, income (loss) from operations, operating margin and certain items impacting comparability within each of the operating segments for the three months ended March 31, 2024 and 2023:
Capital Markets – Software Solutions
|
|
Three Months Ended March 31, |
|
|||||||||||||
|
|
2024 |
|
|
2023 |
|
|
$ Change |
|
|
% Change |
|
||||
|
(in millions, except percentages) |
|
||||||||||||||
Net sales |
|
$ |
53.0 |
|
|
$ |
43.7 |
|
|
$ |
9.3 |
|
|
|
21.3 |
% |
Income (loss) from operations |
|
|
9.5 |
|
|
|
(0.6 |
) |
|
|
10.1 |
|
|
nm |
|
|
Operating margin |
|
|
17.9 |
% |
|
|
(1.4 |
%) |
|
|
|
|
|
|
||
Items impacting comparability |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Restructuring, impairment and other charges, net |
|
|
— |
|
|
|
2.0 |
|
|
|
(2.0 |
) |
|
|
(100.0 |
%) |
Non-income tax, net |
|
|
(0.2 |
) |
|
|
(0.2 |
) |
|
|
— |
|
|
|
— |
|
Depreciation and amortization |
|
|
6.5 |
|
|
|
6.2 |
|
|
|
0.3 |
|
|
|
4.8 |
% |
nm – Not meaningful
26
Net sales of $53.0 million for the three months ended March 31, 2024 increased $9.3 million, or 21.3%, as compared to the three months ended March 31, 2023. Net sales increased primarily due to higher Venue volumes and Venue price increases, partially offset by a $1.2 million decrease due to the disposition of the eBrevia business, which was sold in the fourth quarter of 2023.
Income from operations of $9.5 million for the three months ended March 31, 2024 increased $10.1 million, as compared to a loss from operations of $0.6 million for the three months ended March 31, 2023, primarily due to higher sales volumes, a favorable sales mix, price increases, lower restructuring, impairment and other charges, net and cost control initiatives.
Operating margin increased from a negative margin of 1.4% for the three months ended March 31, 2023 to 17.9% for the three months ended March 31, 2024, primarily due to a favorable sales mix, price increases, lower restructuring, impairment and other charges, net, which had a positive impact on operating margin of 3.8%, and cost control initiatives.
Capital Markets – Compliance and Communications Management
|
|
Three Months Ended March 31, |
|
|||||||||||||
|
|
2024 |
|
|
2023 |
|
|
$ Change |
|
|
% Change |
|
||||
|
(in millions, except percentages) |
|
||||||||||||||
Net sales |
|
$ |
91.1 |
|
|
$ |
94.1 |
|
|
$ |
(3.0 |
) |
|
|
(3.2 |
%) |
Income from operations |
|
|
38.6 |
|
|
|
16.6 |
|
|
|
22.0 |
|
|
nm |
|
|
Operating margin |
|
|
42.4 |
% |
|
|
17.6 |
% |
|
|
|
|
|
|
||
Items impacting comparability |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Restructuring, impairment and other charges, net |
|
|
0.6 |
|
|
|
8.3 |
|
|
|
(7.7 |
) |
|
|
(92.8 |
%) |
Gain on sale of long-lived assets |
|
|
(9.8 |
) |
|
|
(0.3 |
) |
|
|
(9.5 |
) |
|
nm |
|
|
Non-income tax, net |
|
|
(0.1 |
) |
|
|
— |
|
|
|
(0.1 |
) |
|
nm |
|
|
Accelerated rent expense |
|
|
— |
|
|
|
0.5 |
|
|
|
(0.5 |
) |
|
|
(100.0 |
%) |
Depreciation and amortization |
|
|
2.1 |
|
|
|
1.8 |
|
|
|
0.3 |
|
|
|
16.7 |
% |
nm – Not meaningful
Net sales of $91.1 million for the three months ended March 31, 2024 decreased $3.0 million, or 3.2%, as compared to the three months ended March 31, 2023. Net sales decreased primarily due to lower compliance volumes, partially offset by higher transactional volumes and price increases.
Income from operations of $38.6 million for the three months ended March 31, 2024 increased $22.0 million, as compared to the three months ended March 31, 2023, primarily due to a net pre-tax gain on the sale of land, lower restructuring, impairment and other charges, net, a favorable sales mix and cost control initiatives, partially offset by lower sales volumes, higher incentive compensation expense and higher bad debt expense.
Operating margin increased from 17.6% for the three months ended March 31, 2023 to 42.4% for the three months ended March 31, 2024, primarily due to a net pre-tax gain on the sale of land and lower restructuring, impairment and other charges, net, which combined had a positive impact on operating margin of 18.9%, a favorable sales mix and cost control initiatives, partially offset by higher incentive compensation expense and higher bad debt expense.
Investment Companies – Software Solutions
|
|
Three Months Ended March 31, |
|
|||||||||||||
|
|
2024 |
|
|
2023 |
|
|
$ Change |
|
|
% Change |
|
||||
|
(in millions, except percentages) |
|
||||||||||||||
Net sales |
|
$ |
27.3 |
|
|
$ |
26.4 |
|
|
$ |
0.9 |
|
|
|
3.4 |
% |
Income from operations |
|
|
3.8 |
|
|
|
5.0 |
|
|
|
(1.2 |
) |
|
|
(24.0 |
%) |
Operating margin |
|
|
13.9 |
% |
|
|
18.9 |
% |
|
|
|
|
|
|
||
Items impacting comparability |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Restructuring, impairment and other charges, net |
|
|
0.1 |
|
|
|
(0.1 |
) |
|
|
0.2 |
|
|
nm |
|
|
Non-income tax, net |
|
|
(0.1 |
) |
|
|
— |
|
|
|
(0.1 |
) |
|
nm |
|
|
Depreciation and amortization |
|
|
4.2 |
|
|
|
3.3 |
|
|
|
0.9 |
|
|
|
27.3 |
% |
nm – Not meaningful
Net sales of $27.3 million for the three months ended March 31, 2024 increased $0.9 million, or 3.4%, as compared to the three months ended March 31, 2023. Net sales increased primarily due to higher ArcReporting volumes and Arc Suite price increases.
27
Income from operations of $3.8 million for the three months ended March 31, 2024 decreased $1.2 million, or 24.0%, as compared to the three months ended March 31, 2023, primarily due to higher depreciation and amortization expense and higher product development costs.
Operating margin decreased from 18.9% for the three months ended March 31, 2023 to 13.9% for the three months ended March 31, 2024, primarily due to higher depreciation and amortization expense and higher product development costs.
Investment Companies – Compliance and Communications Management
|
|
Three Months Ended March 31, |
|
|||||||||||||
|
|
2024 |
|
|
2023 |
|
|
$ Change |
|
|
% Change |
|
||||
|
(in millions, except percentages) |
|
||||||||||||||
Net sales |
|
$ |
32.0 |
|
|
$ |
34.4 |
|
|
$ |
(2.4 |
) |
|
|
(7.0 |
%) |
Income from operations |
|
|
7.1 |
|
|
|
8.1 |
|
|
|
(1.0 |
) |
|
|
(12.3 |
%) |
Operating margin |
|
|
22.2 |
% |
|
|
23.5 |
% |
|
|
|
|
|
|
||
Items impacting comparability |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Restructuring, impairment and other charges, net |
|
|
— |
|
|
|
0.2 |
|
|
|
(0.2 |
) |
|
|
(100.0 |
%) |
Depreciation and amortization |
|
|
1.1 |
|
|
|
1.1 |
|
|
|
— |
|
|
|
— |
|
Net sales of $32.0 million for the three months ended March 31, 2024 decreased $2.4 million, or 7.0%, as compared to the three months ended March 31, 2023. Net sales decreased primarily due to lower compliance volumes.
Income from operations of $7.1 million for the three months ended March 31, 2024 decreased $1.0 million, or 12.3%, as compared to the three months ended March 31, 2023, primarily due to lower sales volumes, partially offset by lower selling expense as a result of the decrease in sales volumes.
Operating margin decreased from 23.5% for the three months ended March 31, 2023 to 22.2% for the three months ended March 31, 2024, primarily due to lower sales volumes, partially offset by lower selling expense as a result of the decrease in sales volumes.
Corporate
The following table summarizes unallocated operating expenses and certain items impacting comparability within the activities presented as Corporate for the three months ended March 31, 2024 and 2023:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
|
(in millions) |
|
||||||
Operating expenses |
|
$ |
14.4 |
|
|
$ |
14.3 |
|
Items impacting comparability |
|
|
|
|
|
|
||
Share-based compensation expense |
|
|
5.1 |
|
|
|
4.3 |
|
Restructuring, impairment and other charges, net |
|
|
1.1 |
|
|
|
0.5 |
|
Corporate operating expenses of $14.4 million for the three months ended March 31, 2024 increased $0.1 million compared to the three months ended March 31, 2023, primarily due to higher healthcare expense, higher share-based compensation expense and higher restructuring, impairment and other charges, net, mostly offset by lower consulting expense.
Non-GAAP Measures
The Company believes that certain non-GAAP measures, such as non-GAAP adjusted EBITDA (“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 prepared in accordance with GAAP, to compare the relative performance of operations in planning, budgeting and reviewing the performance of its business. 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 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 historic cost and age of assets, restructuring, impairment and other charges, net, non-income tax, net, gain on investments in equity securities as well as other items, as described below, the Company believes that Adjusted EBITDA can provide a useful additional basis for comparing the current performance of the underlying operations being evaluated.
28
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 and, accordingly, such measures may not be comparable to similarly-titled measures of other companies. In addition to the factors listed above, share-based compensation expense is excluded from Adjusted EBITDA. Although share-based compensation is a key incentive offered to certain of the Company’s employees, business performance is evaluated excluding share-based compensation expense. Depending upon the size, timing and the terms of grants, share-based compensation expense may vary but will recur in future periods.
The following table reconciles net earnings to Adjusted EBITDA for the three months ended March 31, 2024 and 2023:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
|
(in millions) |
|
||||||
Net earnings |
|
$ |
33.3 |
|
|
$ |
15.8 |
|
Restructuring, impairment and other charges, net |
|
|
1.8 |
|
|
|
10.9 |
|
Share-based compensation expense |
|
|
5.1 |
|
|
|
4.3 |
|
Gain on sale of long-lived assets |
|
|
(9.8 |
) |
|
|
(0.3 |
) |
Non-income tax, net |
|
|
(0.4 |
) |
|
|
(0.2 |
) |
Gain on investments in equity securities |
|
|
(0.1 |
) |
|
|
(6.7 |
) |
Accelerated rent expense |
|
|
— |
|
|
|
0.5 |
|
Depreciation and amortization |
|
|
13.9 |
|
|
|
12.4 |
|
Interest expense, net |
|
|
3.6 |
|
|
|
3.5 |
|
Investment and other income, net |
|
|
(0.3 |
) |
|
|
(0.2 |
) |
Income tax expense |
|
|
8.1 |
|
|
|
2.4 |
|
Adjusted EBITDA |
|
$ |
55.2 |
|
|
$ |
42.4 |
|
Restructuring, impairment and other charges, net—Included employee termination costs of $1.7 million and $10.8 million for the three months ended March 31, 2024 and 2023, respectively. Refer to Note 5, Restructuring, Impairment and Other Charges, net, to the Unaudited Condensed Consolidated Financial Statements for additional information.
Share-based compensation expense—Included charges of $5.1 million and $4.3 million for the three months ended March 31, 2024 and 2023, respectively. Refer to Note 10, Share-based Compensation, to the Unaudited Condensed Consolidated Financial Statements for additional information.
Gain on sale of long-lived assets—Included a net pre-tax gain of $9.8 million for the three months ended March 31, 2024 related to the sale of land and a gain of $0.3 million for the three months ended March 31, 2023 related to non-refundable fees on the sale of land. Refer to Note 1, Overview, Basis of Presentation and Significant Accounting Policies, to the Unaudited Condensed Consolidated Financial Statements for additional information.
Non-income tax, net—Included income of $0.4 million and $0.2 million for the three months ended March 31, 2024 and 2023, respectively, related to certain estimated non-income tax exposures previously accrued by the Company.
Gain on investments in equity securities—Included a net realized gain of $0.1 million and $6.7 million for the three months ended March 31, 2024 and 2023, respectively, related to the sales of investments in equity securities. Refer to Note 1, Overview, Basis of Presentation and Significant Accounting Policies, to the Unaudited Condensed Consolidated Financial Statements for additional information.
Accelerated rent expense—Includes charges of $0.5 million for the three months ended March 31, 2023 related to the acceleration of rent expense associated with abandoned operating leases.
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 investors. Cash and cash equivalents on hand, operating cash flows and the Company’s 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.
29
The Company maintains cash pooling structures that enable participating international locations to draw on the pools’ cash resources to meet local liquidity needs. Foreign cash balances may be loaned from certain cash pools to U.S. operating entities on a temporary basis in order to reduce the Company’s short-term borrowing costs or for other purposes. The Company has the ability to repatriate foreign cash, associated with foreign earnings previously subjected to U.S. tax, with minimal additional 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 earnings already subject to U.S. tax. The Company repatriated excess cash at its foreign subsidiaries to the U.S. during the three months ended March 31, 2024. The Company did not repatriate excess cash at its foreign subsidiaries to the U.S. during the year ended December 31, 2023. The Company is evaluating whether to make any cash repatriations in the future.
The Organization for Economic Co-operation and Development’s (“OECD”) current project, widely known as Anti-Base Erosion and Profit Shifting, seeks to address tax challenges arising in the global economy by introducing a global minimum corporate tax of 15%, referred to as Pillar Two, and several mechanisms to ensure tax is paid (the “GloBE Model Rules”). Policymakers across jurisdictions have begun adopting the GloBE Model Rules to implement a global minimum corporate tax rate of 15%. The OECD continues to release administrative guidance and many countries in which the Company operates have adopted or have proposed legislation to adopt Pillar Two. Many aspects of the minimum tax directive became effective beginning in 2024, with certain additional impacts coming into effect beginning in 2025 and beyond. The Company is monitoring enacted legislation and effective dates in its jurisdictions of operations. The Pillar Two framework did not have a material impact on the Company’s Unaudited Condensed Consolidated Financial Statements for the three months ended March 31, 2024 and the Company does not expect enacted legislation to have a material impact in future periods.
Cash and cash equivalents were $43.7 million at March 31, 2024, which included $17.1 million in the U.S. and $26.6 million at international locations.
The following table describes the Company’s cash flows for the three months ended March 31, 2024 and 2023:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
|
|
(in millions) |
|
|||||
Net cash used in operating activities |
|
$ |
(27.9 |
) |
|
$ |
(51.5 |
) |
Net cash provided by (used in) investing activities |
|
|
0.2 |
|
|
|
(1.7 |
) |
Net cash provided by financing activities |
|
|
48.6 |
|
|
|
47.7 |
|
Effect of exchange rate on cash and cash equivalents |
|
|
(0.3 |
) |
|
|
0.1 |
|
Net increase (decrease) in cash and cash equivalents |
|
$ |
20.6 |
|
|
$ |
(5.4 |
) |
Cash Flows Used in Operating Activities
Operating cash inflows and outflows are largely attributable to sales of the Company’s services and products as well as recurring expenditures for labor, rent and other operating activities.
Net cash used in operating activities was $27.9 million for the three months ended March 31, 2024 as compared to $51.5 million for the three months ended March 31, 2023. The decrease in cash used in operating activities was primarily due to an increase in net earnings and favorable changes to accounts payable, partially offset by an unfavorable change in accounts receivable. Accounts payable increased operating cash flows by $6.4 million for the three months ended March 31, 2024, as compared to $0.6 million for the three months ended March 31, 2023, primarily due to the timing of supplier payments. Accounts receivable decreased operating cash flows by $47.2 million for the three months ended March 31, 2023, as compared to $39.7 million for the three months ended March 31, 2023, due to timing of collections.
Cash Flows Provided by (Used in) Investing Activities
Net cash provided by investing activities was $0.2 million for the three months ended March 31, 2024, which primarily consisted of $12.4 million of proceeds from the sale of land, partially offset by $12.3 million of capital expenditures, substantially all related to investments in software development. The Company currently expects capital expenditures to be approximately $65 million to $70 million for the year ending December 31, 2024.
Net cash used in investing activities was $1.7 million for the three months ended March 31, 2023, which consisted of $10.6 million of capital expenditures, substantially all related to investments in software development, partially offset by $8.9 million of proceeds from the sale of an investment in an equity security.
30
Cash Flows Provided by Financing Activities
Net cash provided by financing activities was $48.6 million for the three months ended March 31, 2024. During the three months ended March 31, 2024, the Company received $138.5 million of proceeds from the Revolving Facility borrowings, partially offset by $58.5 million of payments on the Revolving Facility borrowings. The Company's common stock repurchases for the three months ended March 31, 2024 totaled $30.8 million, which included $22.5 million associated with vesting of the Company's equity awards and $8.3 million of repurchases under the stock repurchase program.
Net cash provided by financing activities was $47.7 million for the three months ended March 31, 2023. During the three months ended March 31, 2023, the Company received $99.0 million of proceeds from the Revolving Facility borrowings, partially offset by $33.5 million of payments on the Revolving Facility borrowings. The Company’s common stock repurchases for the three months ended March 31, 2023 totaled $18.4 million, which included $17.0 million associated with vesting of the Company’s employees’ equity awards and $1.4 million of repurchases under the stock repurchase program.
Debt
The Company’s debt as of March 31, 2024 and December 31, 2023 consisted of the following (in millions):
|
|
March 31, 2024 |
|
|
December 31, 2023 |
|
||
Term Loan A Facility |
|
$ |
125.0 |
|
|
$ |
125.0 |
|
Borrowings under the Revolving Facility |
|
|
80.0 |
|
|
|
— |
|
Unamortized debt issuance costs |
|
|
(0.5 |
) |
|
|
(0.5 |
) |
Total long-term debt |
|
$ |
204.5 |
|
|
$ |
124.5 |
|
Credit Agreement—On May 27, 2021, the Company amended and restated its credit agreement dated as of September 30, 2016 (as in effect prior to such amendment and restatement, the “Credit Agreement,” and the Credit Agreement, as so amended and restated, the “Amended and Restated Credit Agreement”), by and among the Company, the lenders party thereto from time to time and JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, to, among other things, provide for a $200.0 million delayed-draw term loan A facility (the “Term Loan A Facility”) (bearing interest at a rate equal to the sum of the London Interbank Offered Rate (“LIBOR”) plus a margin ranging from 2.00% to 2.50% based upon the Company's Consolidated Net Leverage Ratio), extend the maturity of the $300.0 million revolving credit facility (the “Revolving Facility”) to May 27, 2026 and modify the financial maintenance and negative covenants in the Credit Agreement.
On May 11, 2023, the Company entered into the first amendment to the Amended and Restated Credit Agreement to change the reference rate from LIBOR, which ceased being published on June 30, 2023, to the Secured Overnight Financing Rate (“SOFR”) for both the Term Loan A Facility and the Revolving Facility. The SOFR interest rate was effective for the Revolving Facility and the Term Loan A on May 30, 2023 and June 12, 2023, respectively. No other significant terms of the Amended and Restated Credit Agreement were amended. The Amended and Restated Credit Agreement contains a number of covenants, including 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 the aggregate, though additional dividends may be allowed subject to certain conditions. Each of these covenants is subject to important exceptions and qualifications. The unpaid principal amount of the Term Loan A Facility is due and payable in full on May 27, 2026. Voluntary prepayments of the Term Loan A Facility are permitted at any time without premium or penalty.
As of March 31, 2024, there were $80.0 million of borrowings outstanding under the Revolving Facility as well as $2.5 million in outstanding letters of credit and bank guarantees, of which $1.0 million of the outstanding letters of credit reduced the availability under the Revolving Facility. Based on the Company’s results of operations for the twelve months ended March 31, 2024 and existing debt, the Company would have had the ability to utilize the remaining $219.0 million of the Revolving Facility and not have been in violation of the terms of the agreement.
31
The current availability under the Revolving Facility and net available liquidity as of March 31, 2024 are shown in the table below:
|
|
March 31, 2024 |
|
|
Availability |
|
(in millions) |
|
|
Revolving Facility |
|
$ |
300.0 |
|
Availability reduction from covenants |
|
|
— |
|
|
|
$ |
300.0 |
|
Usage |
|
|
|
|
Borrowings under the Revolving Facility |
|
$ |
80.0 |
|
Impact on availability related to outstanding letters of credit |
|
|
1.0 |
|
|
|
$ |
81.0 |
|
|
|
|
|
|
Current availability at March 31, 2024 |
|
$ |
219.0 |
|
Cash and cash equivalents |
|
|
43.7 |
|
Net Available Liquidity |
|
$ |
262.7 |
|
The Company was in compliance with its debt covenants as of March 31, 2024, and expects to remain in compliance based on management’s estimates of operating and financial results for fiscal year 2024 and the foreseeable future. However, declines in market and economic conditions or demand for certain of the Company’s services and products could impact the Company’s ability to remain in compliance with its debt covenants in future periods.
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 March 31, 2024, the Revolving Facility is supported by fifteen U.S. and international financial institutions.
As of March 31, 2024, the Company met all the conditions required to borrow under the Revolving Facility, and management expects the Company to continue to meet the applicable borrowing conditions.
OTHER INFORMATION
Litigation and Contingent Liabilities
For a discussion of certain litigation involving the Company, see Note 7, Commitments and Contingencies, to the Unaudited Condensed Consolidated Financial Statements.
Critical Accounting Estimates
There were no changes to critical accounting estimates from those disclosed in the Annual Report.
New Accounting Pronouncements
Recently issued accounting standards and their estimated effect on the Company’s Unaudited Condensed Consolidated Financial Statements are described in Note 1, Overview, Basis of Presentation and Significant Accounting Policies, to the Unaudited Condensed Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes to the Company’s market risk disclosed in the Annual Report.
Item 4. 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 Exchange Act) as of March 31, 2024. 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 March 31, 2024.
The Company is implementing a new quote-to-cash process, including the implementation of new systems, for certain of its software services (“QTC Process”). This project improves the efficiency and effectiveness of certain business transactions, invoicing and reporting processes, as well as the underlying systems environment. The new QTC Process is a significant component of the Company's internal control over financial reporting.
32
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
For a discussion of certain litigation involving the Company, see Note 7, Commitments and Contingencies, to the Unaudited Condensed Consolidated Financial Statements.
Item 1A. Risk Factors
There were no material changes during the three months ended March 31, 2024 to the risk factors identified in the Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Period |
|
Total Number of Shares Purchased |
|
|
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 (a) |
|
||||
January 1, 2024 - January 31, 2024 |
|
|
23,671 |
|
|
$ |
61.66 |
|
|
|
21,000 |
|
|
$ |
148,707,003 |
|
February 1, 2024 - February 29, 2024 |
|
|
28,690 |
|
|
|
63.45 |
|
|
|
28,690 |
|
|
|
146,886,655 |
|
March 1, 2024 - March 31, 2024 (b) |
|
|
433,895 |
|
|
|
64.58 |
|
|
|
90,203 |
|
|
$ |
141,240,972 |
|
Total |
|
|
486,256 |
|
|
$ |
64.37 |
|
|
|
139,893 |
|
|
|
|
|
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Director or Officer Adoption or Termination of Trading Agreements
On
33
Item 6. Exhibits
3.1 |
|
||
|
|
|
|
3.2 |
|
||
|
|
|
|
3.3 |
|
||
|
|
|
|
10.1 |
|
||
|
|
|
|
31.1 |
|
||
|
|
|
|
31.2 |
|
||
|
|
|
|
32.1 |
|
||
|
|
|
|
32.2 |
|
||
|
|
|
|
101.INS |
|
Inline 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 |
|
Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents |
|
|
|
|
|
104 |
|
The cover page for the Company’s Quarterly Report on Form 10-Q has been formatted in Inline XBRL and contained in Exhibit 101 |
|
* Management contract or compensatory plan or arrangement.
34
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: May 1, 2024
35