Quarterly Report (10-q)

Date : 05/02/2019 @ 8:21PM
Source : Edgar (US Regulatory)
Stock : Donnelley Financial Solutions Inc (DFIN)
Quote : 9.61  -0.54 (-5.32%) @ 11:17PM
Donnelley Financial Solu... share price Chart
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Last $ 9.61 ◊ 0.00 (0.00%)

Quarterly Report (10-q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019  

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-37728

 

Donnelley Financial Solutions, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

36-4829638

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

35 West Wacker Drive,

Chicago, Illinois

 

60601

(Address of principal executive offices)

 

(Zip code)

(844) 866-4337

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each Class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock (Par Value $0.01)

 

DFIN

 

NYSE

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes       No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated filer

 

  

Accelerated filer

 

 

 

 

  

 

 

 

Non-Accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes       No  

As of April 26, 2019, 34.2 million shares of common stock were outstanding.  

 

 

 

 


 

 

DONNELLEY FINANCIAL SOLUTIONS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019

 

TABLE OF CONTENTS

 

Part I

FINANCIAL INFORMATION

  

Page

Item 1:

Condensed Consolidated Financial Statements (unaudited)

 

3

 

 

 

 

 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018

  

3

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2019 and 2018

  

4

 

 

 

 

 

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

  

5

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018

  

6

 

 

 

 

 

Condensed Consolidated Statements of Equity for the three months ended March 31, 2019 and 2018

 

7

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

  

8

 

 

 

 

Item 2:

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

  

30

 

 

 

 

Item 3:

Quantitative and Qualitative Disclosure About Market Risk

 

42

 

 

 

 

Item 4:

Controls and Procedures

 

42

 

Part II

OTHER INFORMATION  

  

Page

Item 1:

Legal Proceedings

  

43

 

 

 

 

Item 1A:

Risk Factors

  

43

 

 

 

 

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

  

43

 

 

 

 

Item 4:

Mine Safety Disclosures

 

43

 

 

 

 

Item 6:

Exhibits

  

44

 

 

 

 

Signatures

  

47

 

 

 

2


 

 

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

Condensed Consolidated Statements of Operations

For the Three Months Ended March 31, 2019 and 2018

(in millions, except per share data)

(UNAUDITED)

 

 

Three Months Ended

 

 

March 31,

 

 

2019

 

 

2018

 

Services net sales

$

127.9

 

 

$

159.5

 

Products net sales

 

101.7

 

 

 

95.7

 

Total net sales

 

229.6

 

 

 

255.2

 

Services cost of sales (exclusive of depreciation and amortization)

 

75.4

 

 

 

85.9

 

Products cost of sales (exclusive of depreciation and amortization)

 

78.5

 

 

 

72.7

 

Total cost of sales

 

153.9

 

 

 

158.6

 

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

 

54.9

 

 

 

66.1

 

Restructuring, impairment and other charges-net

 

2.1

 

 

 

0.7

 

Depreciation and amortization

 

12.1

 

 

 

10.4

 

Income from operations

 

6.6

 

 

 

19.4

 

Interest expense-net

 

8.9

 

 

 

9.0

 

Investment and other income-net

 

(0.6

)

 

 

(0.8

)

(Loss) earnings before income taxes

 

(1.7

)

 

 

11.2

 

Income tax (benefit) expense

 

(0.3

)

 

 

3.5

 

Net (loss) earnings

$

(1.4

)

 

$

7.7

 

 

 

 

 

 

 

 

 

Net (loss) earnings per share (Note 11):

 

 

 

 

 

 

 

Basic net (loss) earnings per share

 

(0.04

)

 

 

0.23

 

Diluted net (loss)earnings per share

 

(0.04

)

 

 

0.23

 

Weighted average number of common shares outstanding

 

 

 

 

 

 

 

Basic

 

34.0

 

 

33.7

 

Diluted

 

34.0

 

 

33.9

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

 

3


 

 

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

Condensed Consolidated Statements of Comprehensive Income

For the Three Months Ended March 31, 2019 and 2018

(in millions)

(UNAUDITED)

 

 

Three Months Ended

 

 

March 31,

 

 

2019

 

 

2018

 

Net (loss) earnings

$

(1.4

)

 

$

7.7

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

Translation adjustments

 

2.2

 

 

 

0.7

 

Adjustment for net periodic pension and other postretirement benefits plan cost

 

0.4

 

 

 

0.5

 

Other comprehensive income, net of tax

 

2.6

 

 

 

1.2

 

Comprehensive (loss) income

$

1.2

 

 

$

8.9

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

 

4


 

 

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

Condensed Consolidated Balance Sheets

As of March 31, 2019 and December 31, 2018

(in millions, except per share data)

(UNAUDITED)

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

10.5

 

 

$

47.3

 

Receivables, less allowances for doubtful accounts of $8.6 in 2019 (2018 - $7.9)

 

 

235.6

 

 

 

172.9

 

Inventories

 

 

14.8

 

 

 

12.1

 

Prepaid expenses and other current assets

 

 

20.8

 

 

 

16.7

 

Total current assets

 

 

281.7

 

 

 

249.0

 

Property, plant and equipment-net

 

 

38.1

 

 

 

32.2

 

Right-of-use assets

 

 

95.5

 

 

 

 

Software-net

 

 

49.9

 

 

 

47.8

 

Goodwill

 

 

450.2

 

 

 

450.0

 

Other intangible assets-net

 

 

33.6

 

 

 

37.2

 

Deferred income taxes

 

 

12.3

 

 

 

9.7

 

Other noncurrent assets

 

 

41.1

 

 

 

42.8

 

Total assets

 

$

1,002.4

 

 

$

868.7

 

LIABILITIES

 

 

 

 

 

 

 

 

Accounts payable

 

$

98.0

 

 

$

72.4

 

Accrued liabilities

 

 

113.7

 

 

 

126.0

 

Total current liabilities

 

 

211.7

 

 

 

198.4

 

Long-term debt (Note 14)

 

 

411.7

 

 

 

362.7

 

Deferred compensation liabilities

 

 

19.8

 

 

 

19.5

 

Pension and other postretirement benefits plan liabilities

 

 

50.1

 

 

 

51.3

 

Noncurrent lease liabilities

 

 

73.9

 

 

 

 

Other noncurrent liabilities

 

 

7.7

 

 

 

10.8

 

Total liabilities

 

 

774.9

 

 

 

642.7

 

Commitments and Contingencies (Note 15)

 

 

 

 

 

 

 

 

EQUITY

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value

 

 

 

 

 

 

 

 

Authorized: 1.0 shares; Issued: None

 

 

 

 

 

 

Common stock, $0.01 par value

 

 

 

 

 

 

 

 

Authorized: 65.0 shares;

 

 

 

 

 

 

 

 

Issued: 34.4 shares in 2019 (2018 - 34.2 shares)

 

 

0.3

 

 

 

0.3

 

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

 

 

(3.6

)

 

 

(2.4

)

Additional paid-in-capital

 

 

218.0

 

 

 

216.5

 

Retained earnings

 

 

92.9

 

 

 

94.3

 

Accumulated other comprehensive loss

 

 

(80.1

)

 

 

(82.7

)

Total equity

 

 

227.5

 

 

 

226.0

 

Total liabilities and equity

 

$

1,002.4

 

 

$

868.7

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

 

5


 

 

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

Condensed Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2019 and 2018

(in millions)

(UNAUDITED)

 

 

Three Months Ended

 

 

March 31,

 

 

2019

 

 

2018

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

Net (loss) earnings

$

(1.4

)

 

$

7.7

 

Adjustments to reconcile net (loss) earnings to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

12.1

 

 

 

10.4

 

Provision for doubtful accounts receivable

 

1.0

 

 

 

1.0

 

Share-based compensation

 

1.5

 

 

 

1.8

 

Deferred income taxes

 

(2.8

)

 

 

0.6

 

Net pension plan income

 

(0.5

)

 

 

(0.8

)

Other

 

8.8

 

 

 

0.5

 

Changes in operating assets and liabilities - net of acquisitions:

 

 

 

 

 

 

 

Accounts receivable - net

 

(63.6

)

 

 

(65.4

)

Inventories

 

(2.7

)

 

 

(5.8

)

Prepaid expenses and other current assets

 

(3.2

)

 

 

(0.2

)

Accounts payable

 

23.9

 

 

 

20.3

 

Income taxes payable and receivable

 

(11.3

)

 

 

0.6

 

Accrued liabilities and other

 

(29.9

)

 

 

(23.1

)

Pension and other postretirement benefits plan contributions

 

(0.2

)

 

 

(1.2

)

Net cash used in operating activities

 

(68.3

)

 

 

(53.6

)

INVESTING ACTIVITIES

 

 

 

 

 

 

 

Capital expenditures

 

(15.1

)

 

 

(6.4

)

Acquisition of business, net of cash acquired

 

(2.2

)

 

 

 

Other investing activities

 

0.2

 

 

 

 

Net cash used in investing activities

 

(17.1

)

 

 

(6.4

)

FINANCING ACTIVITIES

 

 

 

 

 

 

 

Revolving facility borrowings

 

178.5

 

 

 

88.0

 

Payments on revolving facility borrowings

 

(130.0)

 

 

 

(68.0

)

Proceeds from the issuance of common stock

 

 

 

 

1.2

 

Treasury share repurchases

 

(1.2

)

 

 

(0.8

)

Debt issuance costs

 

(0.2

)

 

 

 

Net cash provided by financing activities

 

47.1

 

 

 

20.4

 

Effect of exchange rate on cash and cash equivalents

 

1.5

 

 

 

(0.3

)

Net decrease in cash and cash equivalents

 

(36.8

)

 

 

(39.9

)

Cash and cash equivalents at beginning of year

 

47.3

 

 

 

52.0

 

Cash and cash equivalents at end of period

$

10.5

 

 

$

12.1

 

 

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

 

 

Income taxes paid

$

13.8

 

 

$

2.2

 

Interest paid

$

1.5

 

 

$

2.2

 

 

 

 

 

 

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

 

6


 

 

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

Condensed Consolidated Statements of Equity

For the Three Months Ended March 31, 2019 and 2018

(in millions)

(UNAUDITED)

 

 

Common Stock

 

 

Treasury Stock

 

 

Additional

Paid-in-Capital

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive Loss

 

 

Total Equity

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

34.2

 

 

$

0.3

 

 

 

0.1

 

 

$

(2.4

)

 

$

216.5

 

 

$

94.3

 

 

$

(82.7

)

 

$

226.0

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1.4

)

 

 

 

 

 

(1.4

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2.6

 

 

 

2.6

 

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

1.5

 

 

 

 

 

 

 

 

 

1.5

 

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

 

0.2

 

 

 

 

 

 

0.1

 

 

 

(1.2

)

 

 

 

 

 

 

 

 

 

 

 

(1.2

)

Balance at March 31, 2019

 

34.4

 

 

$

0.3

 

 

 

0.2

 

 

$

(3.6

)

 

$

218.0

 

 

$

92.9

 

 

$

(80.1

)

 

$

227.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Treasury Stock

 

 

Additional

Paid-in-Capital

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive Loss

 

 

Total Equity

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

33.8

 

 

$

0.3

 

 

 

 

 

$

(0.9

)

 

$

205.7

 

 

$

8.9

 

 

$

(64.6

)

 

$

149.4

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7.7

 

 

 

 

 

 

7.7

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1.2

 

 

 

1.2

 

Adoption of ASU 2014-09

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.9

 

 

 

 

 

 

0.9

 

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

1.8

 

 

 

 

 

 

 

 

 

1.8

 

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

 

0.2

 

 

 

 

 

 

0.1

 

 

 

(0.8

)

 

 

1.4

 

 

 

 

 

 

 

 

 

0.6

 

Balance at March 31, 2018

 

34.0

 

 

$

0.3

 

 

 

0.1

 

 

$

(1.7

)

 

$

208.9

 

 

$

17.5

 

 

$

(63.4

)

 

$

161.6

 

 

 

 

7


Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

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

 

 

Note 1. Overview and Basis of Presentation

Description of Business

Donnelley Financial Solutions, Inc. (“DFIN,” or the “Company”) is a leading global risk and compliance solutions company. The Company provides regulatory filing solutions, software-as-a-service (“SaaS”), technology-enabled services and print and distribution solutions to public and private companies, mutual funds and other regulated investment firms, to serve their regulatory and compliance needs. For corporate clients within its capital markets offerings, the Company offers technology-enabled filing solutions that allow U.S. public companies to comply with applicable U.S. Securities and Exchange Commission (“SEC”) regulations including filing agent services, digital document creation and online content management tools that support their corporate financial transactions and regulatory reporting; solutions to facilitate clients’ communications with their shareholders; and virtual data rooms and other deal management solutions. For the investment markets, including alternative investment and insurance investment companies, the Company provides technology-enabled filing solutions including cloud-based tools for creating and filing high-quality regulatory documents and solutions for investors designed to improve the speed and accuracy of their access to investment information. Throughout a company’s life cycle, the Company serves its clients’ regulatory and compliance needs. The Company’s deep industry and regulatory expertise and a commitment to exceptional service guides our clients to navigate a high-stakes and ever-changing regulatory environment.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of DFIN and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the rules and regulations of the SEC. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The financial data presented herein should be read in conjunction with the audited consolidated and combined financial statements and accompanying notes included in the Company’s latest Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on February 27, 2019. In the opinion of management, the financial data presented includes all adjustments necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented. Results of interim periods should not be considered indicative of the results for the full year. These unaudited condensed consolidated interim financial statements include estimates and assumptions of management that affect the amounts reported in the unaudited condensed consolidated financial statements. Actual results could differ from these estimates.

Changes in Presentation

Certain prior year amounts have been restated to conform to the Company’s current reporting unit structure. Due to the sale of the Language Solutions business in 2018, the Company made changes to the reporting units within the U.S. segment. The former Language Solutions and other reporting unit has been renamed “Language Solutions.” Certain results previously included within the former Language Solutions and other reporting unit are now included within the Investment Markets reporting unit.

 

 

Note 2. Revenue

Revenue Recognition

The Company manages highly-customized data and materials, such as Exchange Act, Securities Act and Investment Company Act filings with the SEC on behalf of its customers, manages virtual data rooms and performs XBRL and related services. Clients are provided with EDGAR filing services, XBRL compliance services and translation, editing, interpreting, proof-reading and multilingual typesetting services, among others. The Company’s SaaS offerings include the Venue Virtual Data Room (“Venue”), the FundSuiteArc software platform, ActiveDisclosure and data and analytics, among others.

Substantially all of the Company’s revenue is derived from contracts with an initial expected duration of one year or less. Generally, customer payment is due within ten days upon invoicing.

8


Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

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

 

 

Revenue is recognized upon transfer of control of promised services or products to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those services or products. The Company’s arrangements with customers often include promises to transfer multiple services or products to a customer. Determining whether services and products are considered distinct performance obligations that should be accounted for separately requires significant judgment. Certain customer arrangements have multiple performance obligations as certain promises are both capable of being distinct and are distinct within the context of the contract. Other customer arrangements have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts, and therefore are not distinct.

Revenue for the Company’s services and products is recognized either over time or at a point in time, as outlined below.

Over time

The Company recognizes revenue for certain services over time.

 

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

 

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

Point in time

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

 

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

 

Revenue for arrangements which include assisting customers in completing regulatory filings for transactions, such as mergers and acquisitions or other public capital market transactions, is recognized upon completion of all promises, including the services performed and printing of the related document, if applicable.

 

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

 

Warehousing, fulfillment services and shipping and handling are each separate performance obligations. As a result, when the Company provides warehousing and future fulfillment services, revenue for the composition services performed and printing of the product is recognized upon completion of the performance obligation(s), as control of the inventory has transferred to the customer and the inventory is being stored at the customer’s request.

Because substantially all of the Company’s products are customized, product returns are not significant; however, the Company accrues for the estimated amount of customer credits at the time of sale.

The Company records deferred revenue when amounts are invoiced but the revenue recognition criteria are not yet met. Such revenue is recognized when all criteria are subsequently met.

9


Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

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

 

 

Certain revenues earned by the Company require significant judgment to determine if revenue should be recorded gross, as a principal, or net of related costs, as an agent. Billings for shipping and handling costs as well as certain postage costs, and out-of-pocket expenses are recorded gross. Revenue is not recognized for customer-supplied postage. The Company’s printing operations process paper that may be supplied directly by customers or may be purchased by the Company from third parties and sold to customers. Revenue is not recognized for customer-supplied paper, however revenues for Company-supplied paper are recognized on a gross basis. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to authorities.

 

Disaggregation of revenue

 

The following tables disaggregate revenue by reporting unit and timing of revenue recognition for the three months ended March 31, 2019 and 2018:

 

 

Three Months Ended March 31, 2019

 

 

Point in time

 

 

Over time

 

 

Total

 

U.S.

 

 

 

 

 

 

 

 

 

 

 

Capital Markets

$

85.0

 

 

$

24.7

 

 

$

109.7

 

Investment Markets

 

80.5

 

 

 

12.6

 

 

 

93.1

 

Total U.S.

 

165.5

 

 

 

37.3

 

 

 

202.8

 

International

 

21.1

 

 

 

5.7

 

 

 

26.8

 

Total net sales

$

186.6

 

 

$

43.0

 

 

$

229.6

 

 

 

Three Months Ended March 31, 2018

 

 

Point in time

 

 

Over time

 

 

Total

 

U.S.

 

 

 

 

 

 

 

 

 

 

 

Capital Markets

$

93.5

 

 

$

24.0

 

 

$

117.5

 

Investment Markets*

 

76.0

 

 

 

13.5

 

 

 

89.5

 

Language Solutions*

 

6.1

 

 

 

 

 

 

6.1

 

Total U.S.

 

175.6

 

 

 

37.5

 

 

 

213.1

 

International

 

37.9

 

 

 

4.2

 

 

 

42.1

 

Total net sales

$

213.5

 

 

$

41.7

 

 

$

255.2

 

 

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

 

Contract Balances

 

Contract assets represent revenue recognized for performance obligations completed before an unconditional right to payment exists, and therefore invoicing has not yet occurred. Contract assets were $14.9 million at March 31, 2019 and $8.7 million at December 31, 2018, respectively. Generally, the contract assets balance is impacted by the recognition of additional contract assets, offset by amounts invoiced to customers. For the three months ended March 31, 2019, final amounts invoiced to customers exceeded estimates of standalone selling price as of January 1, 2019 for the related arrangements by approximately $1.3 million. Contract assets are included in accounts receivable on the condensed consolidated balance sheet.

 

Contract liabilities consist of deferred revenue and progress billings which are included in accrued liabilities on the condensed consolidated balance sheet. Changes in contract liabilities for the three months ended March 31, 2019 and 2018, respectively, were as follows:

 

Balance at January 1, 2019

$

12.0

 

Deferral of revenue

 

12.2

 

Revenue recognized

 

(12.6

)

Balance at March 31, 2019

$

11.6

 

10


Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

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

 

 

 

Balance at January 1, 2018

$

14.2

 

Deferral of revenue

 

9.4

 

Revenue recognized

 

(10.5

)

Balance at March 31, 2018

$

13.1

 

 

 

Note 3. Acquisitions and Dispositions

Acquisition

On December 18, 2018, the Company acquired eBrevia, a leading provider of artificial intelligence-based data extraction and contract analytics software solutions. The eBrevia technology provides leading enterprise contract review and analysis solutions, leveraging machine learning to produce faster and more accurate results. eBrevia's software, which extracts and summarizes key legal provisions and other information, can be used in due diligence, contract management, lease abstraction and document drafting. The acquisition enhances the Company’s Venue Deal Solutions offerings to provide clients with secure data aggregation, due diligence, compliance and risk management solutions. The Company previously held a 12.8% investment in eBrevia prior to the acquisition. The purchase price for the remaining equity of eBrevia, which includes the Company’s estimate of contingent consideration, was $23.3 million, net of cash acquired of $0.2 million. $2.0 million of the purchase price, excluding contingent consideration and amounts held in escrow, remains payable as of March 31, 2019. The fair value of the Company’s previously held investment was $3.3 million, resulting in the recognition of a $1.8 million gain, which is reflected in investment and other income in the consolidated statements of operations for the year ended December 31, 2018. The fair value of the previously held investment was determined based on the purchase price paid for the remaining equity less an estimated control premium. The former owners of eBrevia, excluding the Company, may receive additional contingent consideration of up to $3.5 million in cash subject to eBrevia achieving certain financial targets during the twenty-four months post acquisition. As of the acquisition date and March 31, 2019, the Company estimated the fair value of contingent consideration to be $0.8 million using a probability weighting of the potential payouts. Subsequent changes in the estimated contingent consideration from the final purchase price allocation will be recognized in the Company’s consolidated statement of operations. The operations of eBrevia are included within the Capital Markets reporting unit in the U.S. segment.

 

During the three months ended March 31, 2019, there were no acquisition-related expenses. For the three months ended March 31, 2018, the Company recorded $0.2 million of acquisition-related expenses associated with acquisitions completed or contemplated within selling, general and administrative expenses in the condensed consolidated statement of operations.

 

The eBrevia acquisition was recorded by allocating the cost of the acquisition to the assets acquired, including other intangible assets, based on their estimated fair values at the acquisition date. The excess of the cost of the acquisition over the net amounts assigned to the fair value of the assets acquired was recorded as goodwill.  

 

There is no tax deductible goodwill related to the eBrevia acquisition.  

11


Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

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

 

 

The purchase price allocation for eBrevia is preliminary as the Company is still in the process of obtaining data to finalize the estimated fair values of certain deferred tax account balances. The final purchase price allocation may differ from what is currently reflected in the consolidated financial statements . Based on the current valuation, the preliminary purchase price allocation for this acquisition is as follows:

 

Accounts receivable

$

0.3

 

Other intangible assets

 

11.4

 

Software

 

0.8

 

Goodwill

 

12.9

 

Accounts payable and accrued liabilities

 

(0.4

)

Deferred taxes-net

 

(1.7

)

Total purchase price-net of cash acquired

 

23.3

 

Less: fair value of the Company's previously held investment in eBrevia

 

(3.3

)

Less: fair value of contingent consideration

 

(0.8

)

Less: payable for initial consideration

 

(2.0

)

Less: amounts held in escrow and liabilities assumed

 

(2.5

)

Net cash paid

$

14.7

 

 

Disposition

On July 22, 2018, the Company sold its Language Solutions business, which helped companies adapt their business content into different languages for specific countries, markets and regions, for net proceeds of $77.5 million in cash, all of which was received as of December 31, 2018, resulting in a gain of $53.8 million, which was recognized in other operating income in the consolidated statement of operations for the year ended December 31, 2018. Language Solutions' operating results were included within the Language Solutions reporting unit within the U.S. segment as well as the International segment.

 

Note 4. Inventories

The components of the Company’s inventories, net of excess and obsolescence reserves for raw materials, at March 31, 2019 and December 31, 2018 were as follows:  

 

 

March 31, 2019

 

 

December 31, 2018

 

Raw materials and manufacturing supplies

$

4.6

 

 

$

4.0

 

Work in process

 

10.2

 

 

 

8.1

 

Total

$

14.8

 

 

$

12.1

 

 

 

Note 5. Property, Plant and Equipment

The components of the Company’s property, plant and equipment at March 31, 2019 and December 31, 2018 were as follows:

   

 

March 31, 2019

 

 

December 31, 2018

 

Land

$

10.0

 

 

$

10.0

 

Buildings

 

36.9

 

 

 

36.2

 

Machinery and equipment

 

113.1

 

 

 

106.3

 

 

 

160.0

 

 

 

152.5

 

Less: Accumulated depreciation

 

(121.9

)

 

 

(120.3

)

Total

$

38.1

 

 

$

32.2

 

 

Depreciation expense was $1.5 million and $1.9 million for the three months ended March 31, 2019 and 2018, respectively.

 

 

12


Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

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

 

 

Note 6. Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill by segment for the three months ended March 31, 2019 were as follows:

 

 

U.S.

 

 

International

 

 

Total

 

Net book value as of December 31, 2018

$

438.5

 

 

$

11.5

 

 

$

450.0

 

Purchase accounting adjustments

 

0.1

 

 

 

 

 

 

0.1

 

Foreign exchange and other adjustments

 

 

 

 

0.1

 

 

 

0.1

 

Net book value as of March 31, 2019

$

438.6

 

 

$

11.6

 

 

$

450.2

 

 

The components of other intangible assets at March 31, 2019 and December 31, 2018 were as follows:

 

 

March 31, 2019

 

 

December 31, 2018

 

 

Gross

 

 

 

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

 

Carrying

 

 

Accumulated

 

 

Net Book

 

 

Carrying

 

 

Accumulated

 

 

Net   Book

 

 

Amount

 

 

Amortization

 

 

Value

 

 

Amount

 

 

Amortization

 

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

$

149.6

 

 

$

(116.9

)

 

$

32.7

 

 

$

149.3

 

 

$

(113.1

)

 

$

36.2

 

Trade names

 

3.9

 

 

 

(3.0

)

 

 

0.9

 

 

 

3.9

 

 

 

(2.9

)

 

 

1.0

 

Total other intangible assets

$

153.5

 

 

$

(119.9

)

 

$

33.6

 

 

$

153.2

 

 

$

(116.0

)

 

$

37.2

 

 

Amortization expense for other intangible assets was $3.7 million and $3.4 million for the three months ended March 31, 2019 and 2018, respectively.

The following table outlines the estimated annual amortization expense related to other intangible assets as of March 31, 2019:

 

For the year ending December 31,

Amount

 

2019

$

14.6

 

2020

 

13.0

 

2021

 

0.9

 

2022

 

0.9

 

2023

 

0.9

 

2024 and thereafter

 

7.0

 

Total

$

37.3

 

 

Note 7. Leases

In February 2016, the FASB issued Accounting Standards Update No. 2016-02 “Leases (Topic 842)” (“ASU 2016-02”), which requires lessees to put most leases on the balance sheet but recognize expense on the income statement in a manner similar to current accounting. For lessors, ASU 2016-02 also modifies the classification criteria and the accounting for sales-type and direct financing leases. On January 1, 2019, the Company adopted the standard and all related amendments, using the optional transition method applied to leases at the adoption date. The comparative periods have not been restated and continue to be reported under the accounting standards in effect for those periods.

 

The Company elected the optional package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs. The Company also elected the practical expedient to not separate lease components from non-lease components for real estate leases. As a result of the adoption of ASU 2016-02, the Company recognized a lease liability of $101.6 million and a right-of-use (“ROU”) asset of $100.8 million for operating leases at January 1, 2019.

 

The Company has operating leases for certain service centers, office space, warehouses and equipment. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of future minimum lease payments over the lease term at commencement date. Upon adoption of ASU 2016-02, ROU assets were adjusted for deferred rent, restructuring liabilities, prepaids and favorable/onerous lease balances as of January 1, 2019. Lease expense is recognized on a straight-line basis over the expected lease term. The Company’s incremental borrowing rate is used in determining the present value of future payments at the commencement date of the lease, or for the adoption of ASU 2016-02, at January 1, 2019. Balances related to operating leases are included in ROU assets, accrued liabilities and noncurrent lease liabilities on the condensed consolidated balance sheet.

13


Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

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

 

 

 

All real estate leases are recorded on the balance sheet. Equipment and other non-real estate leases with an initial term of twelve months or less are not recorded on the balance sheet. Lease agreements for some locations provide for rent escalations and renewal options. Lease terms include the option to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Certain real estate leases require payment for taxes, insurance and maintenance which are considered non-lease components. The Company accounts for real estate leases and the related fixed non-lease components together as a single component.

 

The Company determines if an arrangement is a lease at inception. The Company must consider whether the contract conveys the right to control the use of an identified asset. Certain arrangements require significant judgment to determine if an asset is specified in the contract and if the Company directs how and for what purpose the asset is used during the term of the contract.

 

The Company has non-cancelable sublease rental arrangements which did not reduce the future maturities of the operating lease liabilities at March 31, 2019 and did not reduce future rental commitments at December 31, 2018.

 

The components of lease expense for the three months ended March 31, 2019 were as follows:

 

 

Three months ended

 

 

March 31, 2019

 

Operating lease expense

$

6.8

 

Sublease income

 

(0.8

)

Net lease expense

$

6.0

 

 

Other information related to operating leases for the three months ended March 31, 2019 was as follows:

 

Lease Term and Discount Rate

March 31, 2019

 

Weighted average remaining lease term

5.0 years

 

Weighted average discount rate

 

4.5

%

 

 

Three months ended

 

Lease Liabilities

March 31, 2019

 

Cash paid related to lease liabilities

$

6.6

 

Non-cash disclosure:

 

 

 

Increase in lease liabilities due to new ROU assets

$

0.2

 

 

Maturities of lease liabilities for operating leases as of March 31, 2019 were as follows:

 

 

Amount

 

2019 (a)

$

20.7

 

2020

 

24.4

 

2021

 

19.7

 

2022

 

15.4

 

2023

 

11.6

 

2024 and thereafter

 

18.2

 

Total lease payments

 

110.0

 

Less: Interest

 

(13.7

)

Present value of lease liabilities

$

96.3

 

 

 

(a)

Excluding payments for the three months ended March 31, 2019

 

As of March 31, 2019

 

 

 

Accrued liabilities

$

22.4

 

Noncurrent lease liabilities

 

73.9

 

Total

$