Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
As used in this management’s discussion and analysis, unless otherwise specified or the context otherwise requires, the “Company,” “DFIN,” “we,” “our,” and “us” refer to Donnelley Financial Solutions, Inc. and its consolidated subsidiaries. This discussion and analysis should be read together with the Company’s Unaudited Condensed Consolidated Financial Statements and the notes thereto, as well as the Company’s audited Consolidated Financial Statements for the year ended December 31, 2021.
Company Overview
DFIN is a leading global risk and compliance solutions company. 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 cases where 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 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 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®, Arc Suite and Venue® Virtual Data Room (“Venue”), while making targeted investments, such as the Company’s acquisition of Guardum Holdings Limited ("Guardum"), to further enhance its solution set. 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 in the United States and world economies as the success of 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, 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 the U.S. federal government shutdowns, and any future government shutdowns could result in additional volatility. The Company mitigates a portion of this volatility through its 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. The Company also mitigates some of that risk 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.
25
The quarterly/annual public company reporting process work subjects the Company to filing seasonality which peaks shortly after the end of each fiscal quarter. Additionally, investment companies clients require the Company to manage the financial and regulatory reporting and filing for mutual funds on an 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. Additionally, clients and their financial advisors have begun to increasingly rely on web-based services which allow clients to autonomously file and distribute compliance documents with regulatory agencies, such as the SEC. While the Company believes that its ActiveDisclosure and Arc Suite solutions are competitive in this space, competitors are also continuing to develop technologies that aim to improve clients’ ability to autonomously produce and file documents to meet their regulatory obligations. The Company remains focused on driving annual recurring revenue to mitigate market volatility.
COVID-19
In December 2019, a novel strain of coronavirus, known as COVID-19 (“COVID-19”), was identified and subsequently characterized as a pandemic. Although COVID-19 has adversely impacted the Company’s financial condition, results of operations and overall financial performance, the extent of any further impact is currently uncertain and depends on factors including the impact on the Company’s customers, employees and vendors.
The COVID-19 pandemic has had and may continue to have a material adverse impact on certain of the Company’s customers’ financial results, which has and may continue to force those clients to alter their plans for purchasing the Company’s services and products. There remains uncertainty for future periods with the COVID-19 pandemic, including potentially new strains of COVID-19, resulting in renewal of mitigation measures, including targeted shutdowns. Some of this volatility is mitigated through the Company’s compliance offerings, supporting the quarterly and annual public company reporting processes, as well as its investment companies regulatory and stockholder communications offerings. The Company continues to work closely with its clients to help them access the Company's services and products and continue to meet their regulatory requirements. If the Company’s customers reduce, defer or cancel their spending with DFIN, it would materially adversely impact the Company’s business, results of operations and overall financial performance.
In response to the COVID-19 pandemic, the Company has taken numerous steps, and will continue to take further actions to ensure the safety of the Company's employees. The Company also incurred and may continue to incur certain expenses related to the COVID-19 pandemic, however, the impact of such costs on the Company's business, results of operations, liquidity and overall financial performance cannot be predicted at this time.
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 Venue, ActiveDisclosure, eBrevia and Arc Suite, among others. The Company’s tech-enabled services offerings consist of document composition, compliance-related SEC Electronic Data Gathering, Analysis, and Retrieval (“EDGAR”) filing services and transaction solutions. The Company’s print and distribution offerings primarily consist of conventional and digital printed products and related shipping.
Government Regulation 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 Acts of 1934, as amended (the "Exchange Act") and the Investment Company Act of 1940, as amended (the “Investment Company Act”). These actions, primarily within the Investment Companies business, are driving significant regulatory changes which impact the Company’s customers, and have enabled the Company to accelerate its transition from print and distribution to software solutions.
On June 5, 2018, the SEC adopted Rule 30e-3 which provides certain registered investment companies with an option to electronically deliver stockholder reports and other materials rather than providing such reports in paper. Investors who prefer to receive reports in paper will continue to receive them in that format. While Rule 30e-3 was effective January 1, 2019, default electronic distribution pursuant to the rule began on January 1, 2021 due to a 24-month transition period, during which registered investment companies notified investors of the upcoming change in transmission format of stockholder reports. As a result of Rule 30e-3, the Company experienced a significant decline in the volume of printed annual and semi-annual stockholder reports in 2021 and an increase in revenue from ArcDigital software solutions. This trend is expected to continue during 2022.
26
On March 11, 2020, the SEC announced that it adopted a new rule 498A under the Securities Act and related regulatory amendments permitting variable annuity and variable life insurance contracts to use a more concise summary prospectus to provide disclosures to investors. More detailed information about the variable annuity or variable life insurance contract will be available online, and an investor must opt in to have that information delivered in paper. The new rule and related form amendments became effective on July 1, 2020 with compliance required by January 1, 2022. As a result of Rule 498A, the Company experienced a significant decline in printed prospectus volume in 2021 and an increase in revenue from the ArcPro and ArcDigital software solutions. This trend is expected to continue during 2022.
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 benefit 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, ActiveDisclosure, eBrevia and other solutions to public and private companies to help manage public and private transaction processes, extract data and analyze contracts; collaborate; and tag, validate and file SEC documents.
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. In addition, the Company offers clients the use of private conferencing facilities in major global cities. This service helps clients maintain confidentiality in deal negotiations and provide clients a place to host in-person working groups to meet, strategize and prepare documents for the transaction deal stream. Due to the COVID-19 pandemic, the Company transformed its production platform and service delivery model for a fully-virtual experience while replicating the in-person experience. The Company anticipates that in the future, clients will utilize the range of options available to them, including a hybrid approach with working group members working 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 that are subject to the filing and reporting requirements of the Investment Company Act as well as European and Canadian regulations, primarily mutual fund companies, alternative investment companies, insurance companies and third-party fund administrators. 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 and 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, translated, rendered and submitted to regulators.
Investment Companies – Compliance & Communications Management—The IC-CCM segment provides clients with tech-enabled solutions for creating and filing regulatory communications and solutions for investor communications, as well as XBRL-formatted filings pursuant to the Investment Company Act, through the SEC 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.
27
Executive Overview
Second Quarter Overview
Net sales for the three months ended June 30, 2022 decreased by $1.3 million, or 0.5%, to $266.2 million from $267.5 million for the three months ended June 30, 2021, including a $2.1 million, or 0.8%, decrease due to changes in foreign currency exchange rates. Net sales decreased primarily due to lower capital markets transactional volumes and lower print volumes as a result of SEC Rules 30e-3 and 498A, which reduced print requirements, partially offset by higher capital markets compliance volumes and higher software solutions volumes in ActiveDisclosure and Arc Suite.
Income from operations for the three months ended June 30, 2022 increased by $3.9 million, or 6.3%, to $65.9 million from $62.0 million for the three months ended June 30, 2021, primarily due to cost control initiatives and a decrease in restructuring, impairment and other charges, net, partially offset by lower capital market transactional volumes.
Year-to-Date Overview
Net sales for the six months ended June 30, 2022 decreased by $35.6 million, or 6.9%, to $477.2 million from $512.8 million for the six months ended June 30, 2021, including a $2.6 million, or 0.5%, decrease due to changes in foreign currency exchange rates. Net sales decreased primarily due to lower capital markets transactional volumes and lower print volumes as a result of SEC Rules 30e-3 and 498A, which reduced print requirements, partially offset by higher capital markets compliance volumes and higher software solutions volumes in ActiveDisclosure, Arc Suite and Venue.
Income from operations for the six months ended June 30, 2022 decreased by $11.7 million, or 10.4%, to $101.2 million from $112.9 million for the six months ended June 30, 2021, primarily due to lower sales volumes and an unfavorable sales mix, partially offset by a $7.5 million decrease in LSC multiemployer pension plans obligation expense, cost control initiatives and lower 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on February 22, 2022 (the “Annual Report”).
In the financial review that follows, the Company discusses its unaudited condensed consolidated results of operations, cash flows and certain other information. This discussion should be read in conjunction with the Company’s Unaudited Condensed Consolidated Financial Statements and the related notes thereto.
28
Results of Operations for the Three and Six Months Ended June 30, 2022 as Compared to the Three and Six Months Ended June 30, 2021
The following table shows the results of operations for the three and six months ended June 30, 2022 and 2021:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
|
(in millions, except percentages) |
|
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tech-enabled services |
|
$ |
133.3 |
|
|
$ |
134.0 |
|
|
$ |
(0.7 |
) |
|
|
(0.5 |
%) |
|
$ |
225.0 |
|
|
$ |
252.5 |
|
|
$ |
(27.5 |
) |
|
|
(10.9 |
%) |
Software solutions |
|
|
71.6 |
|
|
|
66.6 |
|
|
|
5.0 |
|
|
|
7.5 |
% |
|
|
141.4 |
|
|
|
126.9 |
|
|
|
14.5 |
|
|
|
11.4 |
% |
Print and distribution |
|
|
61.3 |
|
|
|
66.9 |
|
|
|
(5.6 |
) |
|
|
(8.4 |
%) |
|
|
110.8 |
|
|
|
133.4 |
|
|
|
(22.6 |
) |
|
|
(16.9 |
%) |
Total net sales |
|
|
266.2 |
|
|
|
267.5 |
|
|
|
(1.3 |
) |
|
|
(0.5 |
%) |
|
|
477.2 |
|
|
|
512.8 |
|
|
|
(35.6 |
) |
|
|
(6.9 |
%) |
Cost of sales (a) |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tech-enabled services |
|
|
40.2 |
|
|
|
42.7 |
|
|
|
(2.5 |
) |
|
|
(5.9 |
%) |
|
|
77.9 |
|
|
|
83.7 |
|
|
|
(5.8 |
) |
|
|
(6.9 |
%) |
Software solutions |
|
|
28.6 |
|
|
|
25.1 |
|
|
|
3.5 |
|
|
|
13.9 |
% |
|
|
56.1 |
|
|
|
49.6 |
|
|
|
6.5 |
|
|
|
13.1 |
% |
Print and distribution |
|
|
42.9 |
|
|
|
49.7 |
|
|
|
(6.8 |
) |
|
|
(13.7 |
%) |
|
|
76.6 |
|
|
|
94.5 |
|
|
|
(17.9 |
) |
|
|
(18.9 |
%) |
Total cost of sales |
|
|
111.7 |
|
|
|
117.5 |
|
|
|
(5.8 |
) |
|
|
(4.9 |
%) |
|
|
210.6 |
|
|
|
227.8 |
|
|
|
(17.2 |
) |
|
|
(7.6 |
%) |
Selling, general and administrative expenses (a) |
|
|
77.4 |
|
|
|
75.1 |
|
|
|
2.3 |
|
|
|
3.1 |
% |
|
|
141.7 |
|
|
|
148.6 |
|
|
|
(6.9 |
) |
|
|
(4.6 |
%) |
Depreciation and amortization |
|
|
11.2 |
|
|
|
10.1 |
|
|
|
1.1 |
|
|
|
10.9 |
% |
|
|
21.9 |
|
|
|
19.9 |
|
|
|
2.0 |
|
|
|
10.1 |
% |
Restructuring, impairment and other charges, net |
|
|
0.2 |
|
|
|
2.8 |
|
|
|
(2.6 |
) |
|
|
(92.9 |
%) |
|
|
2.0 |
|
|
|
3.6 |
|
|
|
(1.6 |
) |
|
|
(44.4 |
%) |
Other operating income, net |
|
|
(0.2 |
) |
|
|
— |
|
|
|
(0.2 |
) |
|
nm |
|
|
|
(0.2 |
) |
|
|
— |
|
|
|
(0.2 |
) |
|
nm |
|
Income from operations |
|
|
65.9 |
|
|
|
62.0 |
|
|
|
3.9 |
|
|
|
6.3 |
% |
|
|
101.2 |
|
|
|
112.9 |
|
|
|
(11.7 |
) |
|
|
(10.4 |
%) |
Interest expense, net |
|
|
2.1 |
|
|
|
5.9 |
|
|
|
(3.8 |
) |
|
|
(64.4 |
%) |
|
|
3.6 |
|
|
|
11.2 |
|
|
|
(7.6 |
) |
|
|
(67.9 |
%) |
Investment and other income, net |
|
|
(0.3 |
) |
|
|
(1.5 |
) |
|
|
1.2 |
|
|
|
(80.0 |
%) |
|
|
(0.5 |
) |
|
|
(2.3 |
) |
|
|
1.8 |
|
|
|
(78.3 |
%) |
Earnings before income taxes |
|
|
64.1 |
|
|
|
57.6 |
|
|
|
6.5 |
|
|
|
11.3 |
% |
|
|
98.1 |
|
|
|
104.0 |
|
|
|
(5.9 |
) |
|
|
(5.7 |
%) |
Income tax expense |
|
|
18.1 |
|
|
|
14.7 |
|
|
|
3.4 |
|
|
|
23.1 |
% |
|
|
25.7 |
|
|
|
25.9 |
|
|
|
(0.2 |
) |
|
|
(0.8 |
%) |
Net earnings |
|
$ |
46.0 |
|
|
$ |
42.9 |
|
|
$ |
3.1 |
|
|
|
7.2 |
% |
|
$ |
72.4 |
|
|
$ |
78.1 |
|
|
$ |
(5.7 |
) |
|
|
(7.3 |
%) |
(a)Exclusive of depreciation and amortization
nm – Not meaningful
Consolidated
Three Months Ended June 30, 2022 compared to the Three Months Ended June 30, 2021
Net sales of tech-enabled services of $133.3 million for the three months ended June 30, 2022 decreased $0.7 million, or 0.5%, as compared to the three months ended June 30, 2021, including a $0.9 million, or 0.7%, decrease due to changes in foreign currency exchange rates. Net sales of tech-enabled services decreased primarily due to lower capital markets transactional volumes, partially offset by higher capital markets compliance volumes.
Net sales of software solutions of $71.6 million for the three months ended June 30, 2022 increased $5.0 million, or 7.5%, as compared to the three months ended June 30, 2021, including a $0.9 million, or 1.2%, decrease due to changes in foreign currency exchange rates. Net sales of software solutions increased primarily due to higher ActiveDisclosure, ArcPro and ArcReporting volumes.
Net sales of print and distribution of $61.3 million for the three months ended June 30, 2022 decreased $5.6 million, or 8.4%, as compared to the three months ended June 30, 2021, including a $0.3 million, or 0.5%, decrease due to changes in foreign currency exchange rates. Net sales of print and distribution decreased primarily due to lower insurance and investment companies compliance volumes as a result of SEC Rules 30e-3 and 498A, which reduced print requirements.
Tech-enabled services cost of sales of $40.2 million for the three months ended June 30, 2022 decreased $2.5 million, or 5.9%, as compared to the three months ended June 30, 2021. Tech-enabled services cost of sales decreased primarily due to cost control initiatives. As a percentage of tech-enabled services net sales, tech-enabled services cost of sales decreased 1.7%, primarily driven by cost control initiatives.
29
Software solutions cost of sales of $28.6 million for the three months ended June 30, 2022 increased $3.5 million, or 13.9%, as compared to the three months ended June 30, 2021. Software solutions cost of sales increased primarily due to higher net sales volumes, an unfavorable sales mix and a higher allocation of overhead costs. As a percentage of software solutions net sales, software solutions cost of sales increased 2.2%, primarily driven by an unfavorable sales mix and a higher allocation of overhead costs.
Print and distribution cost of sales of $42.9 million for the three months ended June 30, 2022 decreased $6.8 million, or 13.7%, as compared to the three months ended June 30, 2021. Print and distribution cost of sales decreased primarily due to lower sales volumes, cost savings as a result of the consolidation of the print platform and a lower allocation of overhead costs. As a percentage of print and distribution net sales, print and distribution cost of sales decreased 4.3%, primarily driven by cost savings as a result of the consolidation of the print platform and a lower allocation of overhead costs.
SG&A expenses of $77.4 million for the three months ended June 30, 2022 increased $2.3 million, or 3.1%, as compared to the three months ended June 30, 2021. SG&A expenses increased primarily due to increased consulting services expense and higher marketing expenses, partially offset by lower incentive compensation expense. As a percentage of net sales, SG&A expenses increased to 29.1% for the three months ended June 30, 2022 from 28.1% for the three months ended June 30, 2021, primarily driven by increased consulting services expense and higher marketing expenses, partially offset by lower incentive compensation expense.
Depreciation and amortization of $11.2 million for the three months ended June 30, 2022 increased $1.1 million, or 10.9%, as compared to the three months ended June 30, 2021, primarily due to higher software amortization expense.
Restructuring, impairment and other charges, net of $0.2 million for the three months ended June 30, 2022 decreased $2.6 million, or 92.9%, as compared to the three months ended June 30, 2021. In 2021, these charges included $2.7 million of employee termination costs for approximately 170 employees.
Income from operations of $65.9 million for the three months ended June 30, 2022 increased $3.9 million, or 6.3%, as compared to the three months ended June 30, 2021. Income from operations increased primarily due to cost control initiatives and a decrease in restructuring, impairment and other charges, net, partially offset by lower capital markets transactional volumes.
Interest expense, net of $2.1 million for the three months ended June 30, 2022 decreased $3.8 million, or 64.4%, as compared to the three months ended June 30, 2021. Interest expense, net decreased primarily due to the prepayment of the Company's 8.25% Senior Notes Due 2024 ("Notes") during the fourth quarter of 2021 and a lower interest rate on the Term Loan A Facility (as defined below), partially offset by a higher average Revolver Facility (as defined below) balance during the three months ended June 30, 2022 compared to the three months ended June 30, 2021.
Investment and other income, net of $0.3 million for the three months ended June 30, 2022 decreased $1.2 million, or 80.0%, as compared to the three months ended June 30, 2021, primarily due to a decrease in net pension plan income.
The effective income tax rate was 28.2% for the three months ended June 30, 2022, as compared to 25.5% for the three months ended June 30, 2021. The increase in the effective income tax rate for the three months ended June 30, 2022 was primarily driven by a decrease in favorable discrete adjustments.
Six Months Ended June 30, 2022 compared to the Six Months Ended June 30, 2021
Net sales of tech-enabled services of $225.0 million for the six months ended June 30, 2022 decreased $27.5 million, or 10.9%, as compared to the six months ended June 30, 2021, including a $1.0 million, or 0.5%, decrease due to changes in foreign currency exchange rates. Net sales of tech-enabled services decreased primarily due to lower capital markets transactional volumes, partially offset by higher capital markets compliance volumes.
Net sales of software solutions of $141.4 million for the six months ended June 30, 2022 increased $14.5 million, or 11.4%, as compared to the six months ended June 30, 2021, including a $1.2 million, or 0.8%, decrease due to changes in foreign currency exchange rates. Net sales of software solutions increased primarily due to higher ActiveDisclosure, Venue, ArcPro and ArcReporting volumes.
30
Net sales of print and distribution of $110.8 million for the six months ended June 30, 2022 decreased $22.6 million, or 16.9%, as compared to the six months ended June 30, 2021, including a $0.4 million, or 0.4%, decrease due to changes in foreign currency exchange rates. Net sales of print and distribution decreased primarily due to lower insurance and investment companies compliance volumes as a result of SEC Rules 30e-3 and 498A, which reduced print requirements, and lower capital markets transactional volumes.
Tech-enabled services cost of sales of $77.9 million for the six months ended June 30, 2022 decreased $5.8 million, or 6.9%, as compared to the six months ended June 30, 2021. Tech-enabled services cost of sales decreased primarily due to lower sales volumes and cost control initiatives, partially offset by an unfavorable sales mix. As a percentage of tech-enabled services net sales, tech-enabled services cost of sales increased 1.5%, primarily driven by an unfavorable sales mix, partially offset by cost control initiatives.
Software solutions cost of sales of $56.1 million for the six months ended June 30, 2022 increased $6.5 million, or 13.1%, as compared to the six months ended June 30, 2021. Software solutions cost of sales increased primarily due to higher net sales volumes, an unfavorable sales mix and a higher allocation of overhead costs. As a percentage of software solutions net sales, software solutions cost of sales increased 0.6%, primarily driven by an unfavorable sales mix and a higher allocation of overhead costs.
Print and distribution cost of sales of $76.6 million for the six months ended June 30, 2022 decreased $17.9 million, or 18.9%, as compared to the six months ended June 30, 2021. Print and distribution cost of sales decreased primarily due to lower sales volumes, cost savings as a result of the consolidation of the print platform, a lower allocation of overhead costs and lower incentive compensation expense. As a percentage of print and distribution net sales, print and distribution cost of sales decreased 1.7%, primarily driven by cost savings as a result of the consolidation of the print platform, a lower allocation of overhead costs and lower incentive compensation expense.
SG&A expenses of $141.7 million for the six months ended June 30, 2022 decreased $6.9 million, or 4.6%, as compared to the six months ended June 30, 2021. SG&A expenses decreased primarily due to lower selling expense as a result of a decrease in sales volumes, a $7.5 million decrease in expense related to the LSC multiemployer pension plans obligation and lower incentive compensation expense, partially offset by higher consulting and marketing expenses. As a percentage of net sales, SG&A expenses increased to 29.7% for the six months ended June 30, 2022 from 29.0% for the six months ended June 30, 2021, primarily due to lower sales volumes and higher consulting and marketing expenses, partially offset by lower expense related to the LSC multiemployer pension plans obligation and lower incentive compensation expense.
Depreciation and amortization of $21.9 million for the six months ended June 30, 2022 increased $2.0 million, or 10.1%, as compared to the six months ended June 30, 2021, primarily due to higher software amortization expense.
Restructuring, impairment and other charges, net of $2.0 million for the six months ended June 30, 2022 decreased $1.6 million, or 44.4%, as compared to the six months ended June 30, 2021. In 2022, these charges included $1.7 million of employee termination costs for approximately 70 employees and $0.2 million of other charges. In 2021, these charges included $2.9 million of employee termination costs for approximately 170 employees and $0.6 million of other restructuring charges.
Income from operations of $101.2 million for the six months ended June 30, 2022 decreased $11.7 million, or 10.4%, as compared to the six months ended June 30, 2021, primarily due to lower sales volumes and an unfavorable sales mix, partially offset by a $7.5 million decrease in expense related to the LSC multiemployer pension plans obligation, cost control initiatives and lower incentive compensation expense.
Interest expense, net of $3.6 million for the six months ended June 30, 2022 decreased $7.6 million, or 67.9%, as compared to the six months ended June 30, 2021. Interest expense, net decreased primarily due to the prepayment of the Company's Notes during the fourth quarter of 2021 and a lower interest rate on the Term Loan A Facility (as defined below), partially offset by a higher average Revolver Facility (as defined below) balance during the six months ended June 30, 2022 compared to the six months ended June 30, 2021.
Investment and other income, net of $0.5 million for the six months ended June 30, 2022 decreased $1.8 million, or 78.3%, as compared to the six months ended June 30, 2021, primarily due to a decrease in net pension plan income.
The effective income tax rate was 26.2% for the six months ended June 30, 2022, as compared to 24.9% for the six months ended June 30, 2021. The increase in the effective income tax rate for the six months ended June 30, 2022 was primarily driven by a decrease in favorable discrete adjustments.
31
Information by Segment
The following tables summarize net sales, income from operations, operating margin and certain items impacting comparability within each of the operating segments and Corporate.
Capital Markets – Software Solutions
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
|
(in millions, except percentages) |
|
Net sales |
|
$ |
46.3 |
|
|
$ |
43.8 |
|
|
$ |
2.5 |
|
|
|
5.7 |
% |
|
$ |
91.0 |
|
|
$ |
82.3 |
|
|
$ |
8.7 |
|
|
|
10.6 |
% |
Income from operations |
|
|
3.1 |
|
|
|
9.3 |
|
|
|
(6.2 |
) |
|
|
(66.7 |
%) |
|
|
7.4 |
|
|
|
15.8 |
|
|
|
(8.4 |
) |
|
|
(53.2 |
%) |
Operating margin |
|
|
6.7 |
% |
|
|
21.2 |
% |
|
|
|
|
|
|
|
|
8.1 |
% |
|
|
19.2 |
% |
|
|
|
|
|
|
Items impacting comparability |
|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring, impairment and other charges, net |
|
|
0.2 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
100.0 |
% |
|
|
1.0 |
|
|
|
0.1 |
|
|
|
0.9 |
|
|
nm |
|
Non-income tax, net |
|
|
(0.1 |
) |
|
|
(0.8 |
) |
|
|
0.7 |
|
|
|
(87.5 |
%) |
|
|
(0.3 |
) |
|
|
(0.7 |
) |
|
|
0.4 |
|
|
|
(57.1 |
%) |
nm – Not meaningful
Three Months Ended June 30, 2022 compared to the Three Months Ended June 30, 2021
Net sales of $46.3 million for the three months ended June 30, 2022 increased $2.5 million, or 5.7%, as compared to the three months ended June 30, 2021. Net sales increased primarily due to higher ActiveDisclosure volumes.
Income from operations of $3.1 million for three months ended June 30, 2022 decreased $6.2 million, or 66.7%, as compared to the three months ended June 30, 2021, primarily due to an unfavorable sales mix, an increase in depreciation and amortization expense and a higher allocation of overhead costs, partially offset by higher sales volumes and price increases.
Operating margin decreased from 21.2% for the three months ended June 30, 2021 to 6.7% for the three months ended June 30, 2022, primarily due to an unfavorable sales mix, an increase in depreciation and amortization expense and a higher allocation of overhead costs, partially offset by price increases.
Six Months Ended June 30, 2022 compared to the Six Months Ended June 30, 2021
Net sales of $91.0 million for the six months ended June 30, 2022 increased $8.7 million, or 10.6%, as compared to the six months ended June 30, 2021. Net sales increased primarily due to higher ActiveDisclosure and Venue volumes.
Income from operations of $7.4 million for the six months ended June 30, 2022 decreased $8.4 million, or 53.2%, as compared to the six months ended June 30, 2021, primarily due to an unfavorable sales mix, an increase in depreciation and amortization expense, a higher allocation of overhead costs and higher product development costs, partially offset by higher sales volumes and price increases.
Operating margin decreased from 19.2% for the six months ended June 30, 2021 to 8.1% for the six months ended June 30, 2022, primarily due to an unfavorable sales mix, an increase in depreciation and amortization expense, a higher allocation of overhead costs and higher product development costs, partially offset by price increases.
32
Capital Markets – Compliance and Communications Management
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|
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|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
|
(in millions, except percentages) |
|
Net sales |
|
$ |
150.0 |
|
|
$ |
153.1 |
|
|
$ |
(3.1 |
) |
|
|
(2.0 |
%) |
|
$ |
253.6 |
|
|
$ |
291.6 |
|
|
$ |
(38.0 |
) |
|
|
(13.0 |
%) |
Income from operations |
|
|
60.5 |
|
|
|
64.6 |
|
|
|
(4.1 |
) |
|
|
(6.3 |
%) |
|
|
89.4 |
|
|
|
123.7 |
|
|
|
(34.3 |
) |
|
|
(27.7 |
%) |
Operating margin |
|
|
40.3 |
% |
|
|
42.2 |
% |
|
|
|
|
|
|
|
|
35.3 |
% |
|
|
42.4 |
% |
|
|
|
|
|
|
Items impacting comparability |
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring, impairment and other charges, net |
|
|
— |
|
|
|
0.6 |
|
|
|
(0.6 |
) |
|
|
(100.0 |
%) |
|
|
0.4 |
|
|
|
0.6 |
|
|
|
(0.2 |
) |
|
|
(33.3 |
%) |
Non-income tax, net |
|
|
— |
|
|
|
(0.1 |
) |
|
|
0.1 |
|
|
|
(100.0 |
%) |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
— |
|
|
|
— |
|
Income related to sale of assets |
|
|
(0.2 |
) |
|
|
— |
|
|
|
(0.2 |
) |
|
nm |
|
|
|
(0.2 |
) |
|
|
— |
|
|
|
(0.2 |
) |
|
nm |
|
COVID-19 related recoveries |
|
|
(0.2 |
) |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
100.0 |
% |
|
|
(0.2 |
) |
|
|
(0.3 |
) |
|
|
0.1 |
|
|
|
(33.3 |
%) |
nm – Not meaningful
Three Months Ended June 30, 2022 compared to the Three Months Ended June 30, 2021
Net sales of $150.0 million for the three months ended June 30, 2022 decreased $3.1 million, or 2.0%, as compared to the three months ended June 30, 2021. Net sales decreased primarily due to lower transactional volumes, partially offset by higher compliance volumes.
Income from operations of $60.5 million for three months ended June 30, 2022 decreased $4.1 million, or 6.3%, as compared to the three months ended June 30, 2021, primarily due to an unfavorable sales mix, lower sales volumes and higher marketing expenses, partially offset by lower selling expense and cost control initiatives.
Operating margin decreased from 42.2% for the three months ended June 30, 2021 to 40.3% for the three months ended June 30, 2022, primarily due to an unfavorable sales mix and higher marketing expenses, partially offset by lower selling expense and cost control initiatives.
Six Months Ended June 30, 2022 compared to the Six Months Ended June 30, 2021
Net sales of $253.6 million for the six months ended June 30, 2022 decreased $38.0 million, or 13.0%, as compared to the six months ended June 30, 2021. Net sales decreased primarily due to lower transactional volumes, partially offset by higher compliance volumes.
Income from operations of $89.4 million for the six months ended June 30, 2022 decreased $34.3 million, or 27.7%, as compared to the six months ended June 30, 2021, primarily due to lower sales volumes, an unfavorable sales mix and higher marketing expenses, partially offset by lower selling expense as a result of the decrease in sales volumes and cost control initiatives.
Operating margin decreased from 42.4% for the six months ended June 30, 2021 to 35.3% for the six months ended June 30, 2022, primarily due to an unfavorable sales mix and higher marketing expenses, partially offset by lower selling expense as a result of a decrease in sales and cost control initiatives.
33
Investment Companies – Software Solutions
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
|
(in millions, except percentages) |
|
Net sales |
|
$ |
25.3 |
|
|
$ |
22.8 |
|
|
$ |
2.5 |
|
|
|
11.0 |
% |
|
$ |
50.4 |
|
|
$ |
44.6 |
|
|
$ |
5.8 |
|
|
|
13.0 |
% |
Income from operations |
|
|
5.9 |
|
|
|
3.5 |
|
|
|
2.4 |
|
|
|
68.6 |
% |
|
|
12.1 |
|
|
|
5.5 |
|
|
|
6.6 |
|
|
nm |
|
Operating margin |
|
|
23.3 |
% |
|
|
15.4 |
% |
|
|
|
|
|
|
|
|
24.0 |
% |
|
|
12.3 |
% |
|
|
|
|
|
|
Items impacting comparability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring, impairment and other charges, net |
|
|
— |
|
|
|
0.1 |
|
|
|
(0.1 |
) |
|
|
(100.0 |
%) |
|
|
0.1 |
|
|
|
0.1 |
|
|
|
— |
|
|
|
— |
|
Non-income tax, net |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
— |
|
|
|
— |
|
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
— |
|
|
|
— |
|
nm – Not meaningful
Three Months Ended June 30, 2022 compared to the Three Months Ended June 30, 2021
Net sales of $25.3 million for the three months ended June 30, 2022 increased $2.5 million, or 11.0%, as compared to the three months ended June 30, 2021. Net sales increased primarily due to higher ArcPro and ArcReporting volumes.
Income from operations of $5.9 million for three months ended June 30, 2022 increased $2.4 million, or 68.6%, as compared to the three months ended June 30, 2021, primarily due to higher sales volumes.
Operating margin increased from 15.4% for the three months ended June 30, 2021 to 23.3% for the three months ended June 30, 2022, primarily due to higher sales volumes.
Six Months Ended June 30, 2022 compared to the Six Months Ended June 30, 2021
Net sales of $50.4 million for the six months ended June 30, 2022 increased $5.8 million, or 13.0%, as compared to the six months ended June 30, 2021. Net sales increased primarily due to higher ArcPro and ArcReporting volumes.
Income from operations of $12.1 million for the six months ended June 30, 2022 increased $6.6 million, as compared to the six months ended June 30, 2021, primarily due to higher sales volumes, a decrease in depreciation and amortization expense and lower incentive compensation expense.
Operating margin increased from 12.3% for the six months ended June 30, 2021 to 24.0% for the six months ended June 30, 2022, primarily due to higher sales volumes, a decrease in depreciation and amortization expense and lower incentive compensation expense.
34
Investment Companies – Compliance and Communications Management
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
|
(in millions, except percentages) |
|
Net sales |
|
$ |
44.6 |
|
|
$ |
47.8 |
|
|
$ |
(3.2 |
) |
|
|
(6.7 |
%) |
|
$ |
82.2 |
|
|
$ |
94.3 |
|
|
$ |
(12.1 |
) |
|
|
(12.8 |
%) |
Income from operations |
|
|
13.7 |
|
|
|
2.1 |
|
|
|
11.6 |
|
|
nm |
|
|
|
21.8 |
|
|
|
8.4 |
|
|
|
13.4 |
|
|
nm |
|
Operating margin |
|
|
30.7 |
% |
|
|
4.4 |
% |
|
|
|
|
|
|
|
|
26.5 |
% |
|
|
8.9 |
% |
|
|
|
|
|
|
Items impacting comparability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring, impairment and other charges, net |
|
|
(0.2 |
) |
|
|
1.9 |
|
|
|
(2.1 |
) |
|
nm |
|
|
|
0.2 |
|
|
|
2.6 |
|
|
|
(2.4 |
) |
|
|
(92.3 |
%) |
COVID-19 related recoveries |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.7 |
) |
|
|
0.7 |
|
|
|
(100.0 |
%) |
Three Months Ended June 30, 2022 compared to the Three Months Ended June 30, 2021
Net sales of $44.6 million for the three months ended June 30, 2022 decreased $3.2 million, or 6.7%, as compared to the three months ended June 30, 2021. Net sales decreased primarily due to lower print volumes as a result of SEC Rules 30e-3 and 498A, which reduced print requirements.
Income from operations of $13.7 million for three months ended June 30, 2022 increased $11.6 million, as compared to the three months ended June 30, 2021, primarily due to a favorable sales mix, lower restructuring, impairment and other charges, net, cost savings as a result of the consolidation of the print platform and a lower allocation of overhead costs, partially offset by lower sales volumes.
Operating margin increased from 4.4% for the three months ended June 30, 2021 to 30.7% for the three months ended June 30, 2022, primarily due to a favorable sales mix, lower restructuring, impairment and other charges, net, which had a positive impact on operating margin of 4.7%, cost savings as a result of the consolidation of the print platform and a lower allocation of overhead costs.
Six Months Ended June 30, 2022 compared to the Six Months Ended June 30, 2021
Net sales of $82.2 million for the six months ended June 30, 2022 decreased $12.1 million, or 12.8%, as compared to the six months ended June 30, 2021. Net sales decreased primarily due to lower print volumes as a result of SEC Rules 30e-3 and 498A, which reduced print requirements.
Income from operations of $21.8 million for the six months ended June 30, 2022 increased $13.4 million, as compared to the six months ended June 30, 2021, primarily due to a favorable sales mix, cost savings as a result of the consolidation of the print platform, a lower allocation of overhead costs, lower restructuring, impairment and other charges, net and lower incentive compensation expense, partially offset by lower sales volumes.
Operating margin increased from 8.9% for the six months ended June 30, 2021 to 26.5% for the six months ended June 30, 2022, primarily due to a favorable sales mix, cost savings as a result of the consolidation of the print platform, a lower allocation of overhead costs, lower restructuring, impairment and other charges, net, which had a positive impact on operating margin of 2.9%, and lower incentive compensation expense.
35
Corporate
The following table summarizes unallocated operating expenses and certain items impacting comparability within the activities presented as Corporate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
|
(in millions) |
|
Operating expenses |
|
$ |
17.3 |
|
|
$ |
17.5 |
|
|
$ |
29.5 |
|
|
$ |
40.5 |
|
Items impacting comparability |
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense |
|
|
5.9 |
|
|
|
5.9 |
|
|
|
9.5 |
|
|
|
9.0 |
|
Restructuring, impairment and other charges, net |
|
|
0.2 |
|
|
|
0.1 |
|
|
|
0.3 |
|
|
|
0.2 |
|
LSC multiemployer pension plans obligation |
|
|
— |
|
|
|
0.2 |
|
|
|
— |
|
|
|
7.5 |
|
Three Months Ended June 30, 2022 compared to the Three Months Ended June 30, 2021
Corporate operating expenses for the three months ended June 30, 2022 decreased $0.2 million as compared to the three months ended June 30, 2021 due to lower healthcare expenses and incentive compensation expenses, partially offset by higher consulting expense.
Six Months Ended June 30, 2022 compared to the Six Months Ended June 30, 2021
Corporate operating expenses for the six months ended June 30, 2022 decreased $11.0 million as compared to the six months ended June 30, 2021, primarily due to the $7.5 million decrease in expense related to the LSC multiemployer pension plans obligation expensed in 2021 and lower incentive compensation and healthcare expenses, partially offset by higher 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, loss on equity investment 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.
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, the following items are excluded from Adjusted EBITDA:
•Share-based compensation expense. Although share-based compensation is a key incentive offered to certain of the Company’s employees, business performance is evaluated excluding share-based compensation expenses. Depending upon the size, timing and the terms of grants, share-based compensation expense may vary but will recur in future periods.
•LSC multiemployer pension plans obligation. As a result of LSC Communications, Inc.'s ("LSC") bankruptcy, the Company recorded charges for estimated payments related to LSC's multiemployer pension plans withdrawal liabilities ("LSC MEPP Liabilities"), as the Company and R.R. Donnelley & Sons Company ("RRD") remained jointly and severally liable for LSC MEPP Liabilities arising prior to the Company's and LSC's spinoff from RRD.
36
•COVID-19 related recoveries. As a result of incremental expenses (including incremental vendor costs and premium wages paid to certain employees as well as costs to clean and disinfect the Company's facilities more frequently) incurred related to the COVID-19 pandemic, during the six months ended June 30, 2021, the Company received an insurance reimbursement associated with these incremental expenses. During the six months ended June 30, 2022, the Company received certain government subsidies related to employee wages at certain international locations.
A reconciliation of net earnings to Adjusted EBITDA for the three and six months ended June 30, 2022 and 2021 is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
(in millions) |
|
Net earnings |
$ |
46.0 |
|
|
$ |
42.9 |
|
|
$ |
72.4 |
|
|
$ |
78.1 |
|
Restructuring, impairment and other charges, net |
|
0.2 |
|
|
|
2.8 |
|
|
|
2.0 |
|
|
|
3.6 |
|
Share-based compensation expense |
|
5.9 |
|
|
|
5.9 |
|
|
|
9.5 |
|
|
|
9.0 |
|
Non-income tax, net |
|
(0.2 |
) |
|
|
(1.0 |
) |
|
|
(0.5 |
) |
|
|
(0.9 |
) |
Income related to sale of assets |
|
(0.2 |
) |
|
|
— |
|
|
|
(0.2 |
) |
|
|
— |
|
COVID-19 related recoveries |
|
(0.2 |
) |
|
|
(0.1 |
) |
|
|
(0.2 |
) |
|
|
(1.0 |
) |
LSC multiemployer pension plans obligation |
|
— |
|
|
|
0.2 |
|
|
|
— |
|
|
|
7.5 |
|
Loss on equity investment |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.2 |
|
Depreciation and amortization |
|
11.2 |
|
|
|
10.1 |
|
|
|
21.9 |
|
|
|
19.9 |
|
Interest expense, net |
|
2.1 |
|
|
|
5.9 |
|
|
|
3.6 |
|
|
|
11.2 |
|
Investment and other income, net |
|
(0.3 |
) |
|
|
(1.5 |
) |
|
|
(0.5 |
) |
|
|
(2.5 |
) |
Income tax expense |
|
18.1 |
|
|
|
14.7 |
|
|
|
25.7 |
|
|
|
25.9 |
|
Adjusted EBITDA |
$ |
82.6 |
|
|
$ |
79.9 |
|
|
$ |
133.7 |
|
|
$ |
151.0 |
|
Restructuring, impairment and other charges, net—The six months ended June 30, 2022 included employee termination costs of $1.7 million. The three months ended June 30, 2021 included $2.7 million of employee termination costs. The six months ended June 30, 2021 included $2.9 million of employee termination costs and $0.6 million of other restructuring charges. Refer to Note 5, Restructuring, Impairment and Other Charges, net, for additional information.
Share-based compensation expense—Included charges of $5.9 million and $9.5 million for the three and six months ended June 30, 2022, respectively, and $5.9 million and $9.0 million for the three and six months ended June 30, 2021, respectively.
Non-income tax, net—Included income of $0.2 million and $0.5 million for the three and six months ended June 30, 2022, respectively, and $1.0 million and $0.9 million for the three and six months ended June 30, 2021, respectively, related to certain estimated non-income tax exposures previously accrued by the Company.
Income related to sale of assets—Included income of $0.2 million for both the three and six months ended June 30, 2022 from a forfeited deposit on a terminated agreement for the sale of land.
COVID-19 related recoveries—Included recoveries $0.2 million for both the three and six months ended June 30, 2022 related to governmental subsidies, as described above, and recoveries of $0.1 million and $1.0 million for the three and six months ended June 30, 2021, respectively, primarily related to insurance reimbursements of COVID-19 related expenses.
LSC multiemployer pension plans obligation—Included charges of $0.2 million and $7.5 million for the three and six months ended June 30, 2021, respectively, for the Company's accrual related to the LSC MEPP Liabilities.
Loss on equity investment—Included an unrealized loss of $0.2 million for the six months ended June 30, 2021.
37
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 stockholders. Cash on hand, operating cash flows and the Company’s $300.0 million senior secured revolving credit facility (the “Revolving Facility”) are the primary sources of liquidity and are expected to be used for, among other things, payment of interest and principal on the Company’s debt obligations, capital expenditures necessary to support productivity improvement and growth, acquisitions and completion of restructuring programs.
The 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 year ended December 31, 2021. The Company is evaluating whether to make any cash repatriations in the future.
Cash and cash equivalents were $17.8 million at June 30, 2022, which included $9.8 million in the U.S. and $8.0 million at international locations.
The following describes the Company’s cash flows for the six months ended June 30, 2022 and 2021:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
|
(in millions) |
|
Net cash used in operating activities |
|
$ |
(6.4 |
) |
|
$ |
(7.7 |
) |
Net cash used in investing activities |
|
|
(24.8 |
) |
|
|
(17.7 |
) |
Net cash used in financing activities |
|
|
(7.2 |
) |
|
|
(9.9 |
) |
Effect of exchange rate on cash and cash equivalents |
|
|
1.7 |
|
|
|
1.6 |
|
Net decrease in cash and cash equivalents |
|
$ |
(36.7 |
) |
|
$ |
(33.7 |
) |
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, raw materials and other operating activities.
Net cash used in operating activities was $6.4 million for the six months ended June 30, 2022 compared to $7.7 million for the six months ended June 30, 2021. The decrease in cash used in operating activities was primarily due to favorable changes in accounts payable and accounts receivable and a decrease in interest paid, partially offset by an unfavorable change in accrued liabilities during the six months ended June 30, 2022. Accounts payable increased operating cash flows by $22.9 million for the six months ended June 30, 2022, as compared to $4.0 million for the six months ended June 30, 2021, due to timing of supplier payments. Accounts receivable decreased operating cash flows by $79.8 million for the six months ended June 30, 2022, as compared to $94.4 million for the six months ended June 30, 2021, due to the decline in revenue. The Company's interest payments decreased by $7.8 million from $10.6 million for the six months ended June 30, 2021 to $2.8 million for the six months ended June 30, 2022, primarily due to the Company's retirement of the Notes. Accrued liabilities and other decreased operating cash flows by $52.3 million for the six months ended June 30, 2022, as compared to $19.3 million for the six months ended June 30, 2021, primarily due to higher incentive compensation and commissions payments in 2022 and lower incentive compensation and commissions accruals in 2022 compared to 2021.
Cash Flows Used in Investing Activities
Net cash used in investing activities was $24.8 million for the six months ended June 30, 2022, which consisted of capital expenditures, mostly driven by investments in software development. The Company expects that capital expenditures for the full year ended December 31, 2022 will be approximately $50 million to $55 million.
Net cash used in investing activities was $17.7 million for the six months ended June 30, 2021, which consisted of capital expenditures, mostly driven by investments in software development.
38
Cash Flows Used in Financing Activities
Net cash used in financing activities was $7.2 million for the six months ended June 30, 2022. During the six months ended June 30, 2022, the Company received $209.0 million of proceeds from the Revolving Facility borrowings, partially offset by $99.0 million of payments on the Revolving Facility borrowings. The Company’s common stock repurchases for the six months ended June 30, 2022 totaled $116.6 million, which included $104.6 million of repurchases under the stock repurchase program and $12.0 million associated with vesting of the Company employees’ equity awards.
Net cash used in financing activities was $9.9 million for the six months ended June 30, 2021. During the six months ended June 30, 2021, the Company received $228.0 million of proceeds from the Revolving Facility borrowings, partially offset by $218.0 million of payments on the Revolving Facility borrowings. The Company’s common stock repurchases for the six months ended June 30, 2021 totaled $19.1 million, which included $10.5 million of repurchases under the stock repurchase program and $8.6 million associated with vesting of the Company employees' equity awards.
Debt
The Company’s debt as of June 30, 2022 and December 31, 2021 consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
Term Loan A Facility |
|
$ |
125.0 |
|
|
$ |
125.0 |
|
Borrowings under the Revolving Facility |
|
|
110.0 |
|
|
|
— |
|
Unamortized debt issuance costs |
|
|
(0.9 |
) |
|
|
(1.0 |
) |
Total long-term debt |
|
$ |
234.1 |
|
|
$ |
124.0 |
|
Credit Agreement—On May 27, 2021 (the "Restatement Effective Date"), 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 Facility to May 27, 2026 and modify the financial maintenance and negative covenants in the Credit Agreement. 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 Amended and Restated 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.
As of June 30, 2022, there was $110.0 million of borrowings outstanding under the Revolving Facility as well as $3.0 million in outstanding letters of credit and bank guarantees and none 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 June 30, 2022 and existing debt, the Company would have had the ability to utilize $190.0 million of the Revolving Facility and not have been in violation of the terms of the agreement.
39
The current availability under the Revolving Facility and net available liquidity as of June 30, 2022 are presented in the table below:
|
|
|
|
|
|
|
June 30, 2022 |
|
Availability |
|
(in millions) |
|
Revolving Facility |
|
$ |
300.0 |
|
Availability reduction from covenants |
|
|
— |
|
|
|
$ |
300.0 |
|
Usage |
|
|
|
Borrowings under the Revolving Facility |
|
$ |
110.0 |
|
|
|
|
|
Current availability at June 30, 2022 |
|
$ |
190.0 |
|
Cash and cash equivalents |
|
|
17.8 |
|
Net Available Liquidity |
|
$ |
207.8 |
|
The Company was in compliance with its debt covenants as of June 30, 2022, and expects to remain in compliance based on management’s estimates of operating and financial results for fiscal year 2022 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 June 30, 2022, the Revolving Facility is supported by fifteen U.S. and international financial institutions.
As of June 30, 2022, 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 “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” of the Annual Report.
New Accounting Pronouncements
Recently issued and adopted accounting standards, as applicable, and their 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.