10-Q 1 dfin-10q_20160930.htm 10-Q dfin-10q_20160930.htm

 

 

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 September 30, 2016

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)

 

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 

*The registrant became subject to such requirements on September 20, 2016 and it has filed all reports so required since that date.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

Yes      No  

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

 

Large Accelerated filer

 

  

Accelerated filer

 

 

 

 

  

 

 

 

Non-Accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

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 November 4, 2016, 32.6 million shares of common stock were outstanding.  

 

 

 

 

1


DONNELLEY FINANCIAL SOLUTIONS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2016

 

TABLE OF CONTENTS

 

Part I

FINANCIAL INFORMATION

  

Page

Item 1:

Condensed Combined Financial Statements (unaudited)

 

3

 

 

 

 

 

Condensed Combined Statements of Operations for the three and nine months ended
September 30, 2016 and 2015

  

3

 

 

 

 

 

Condensed Combined Statements of Comprehensive Income for the three and nine months ended
September 30, 2016 and 2015

  

4

 

 

 

 

 

Condensed Combined Balance Sheets as of September 30, 2016 and December 31, 2015

  

5

 

 

 

 

 

Condensed Combined Statements of Cash Flows for the nine months ended September 30, 2016 and 2015

  

6

 

 

 

 

 

Notes to Condensed Combined Financial Statements

  

7

 

 

 

 

Item 2:

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

  

20

 

 

 

 

Item 3:

Quantitative and Qualitative Disclosure About Market Risk

 

33

 

 

 

 

Item 4:

Controls and Procedures

 

33

 

 

Part II

OTHER INFORMATION 

  

Page

Item 1:

Legal Proceedings

  

34

 

 

 

 

Item 1A:

Risk Factors

  

34

 

 

 

 

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

  

34

 

 

 

 

Item 4:

Mine Safety Disclosures

 

34

 

 

 

 

Item 6:

Exhibits

  

35

 

 

 

 

Signatures

  

37

 

 

 

2


 

Donnelley Financial Solutions, Inc.

Condensed Combined Statements of Operations

For the Three and Nine Months Ended September 30, 2016 and 2015

(in millions, except per share data)

(UNAUDITED)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Services net sales

$

139.4

 

 

$

142.1

 

 

$

454.1

 

 

$

479.9

 

Products net sales

 

85.0

 

 

 

89.5

 

 

 

308.4

 

 

 

331.0

 

Total net sales

 

224.4

 

 

 

231.6

 

 

 

762.5

 

 

 

810.9

 

Services cost of sales (exclusive of depreciation and amortization)

 

64.2

 

 

 

71.1

 

 

 

214.6

 

 

 

222.4

 

Services cost of sales with RRD affiliates (exclusive of depreciation and amortization)

 

8.7

 

 

 

9.3

 

 

 

29.4

 

 

 

31.5

 

Products cost of sales (exclusive of depreciation and amortization)

 

62.0

 

 

 

50.9

 

 

 

179.9

 

 

 

177.5

 

Products cost of sales with RRD affiliates (exclusive of depreciation and amortization)

 

11.5

 

 

 

12.9

 

 

 

48.6

 

 

 

58.4

 

Total cost of sales

 

146.4

 

 

 

144.2

 

 

 

472.5

 

 

 

489.8

 

Selling, general and administrative expenses (exclusive of depreciation and

   amortization)

 

48.5

 

 

 

47.5

 

 

 

156.8

 

 

 

151.2

 

Restructuring, impairment and other charges-net

 

1.7

 

 

 

1.4

 

 

 

3.6

 

 

 

3.3

 

Depreciation and amortization

 

9.8

 

 

 

10.3

 

 

 

30.1

 

 

 

32.0

 

Income from operations

 

18.0

 

 

 

28.2

 

 

 

99.5

 

 

 

134.6

 

Interest (income) expense-net

 

(0.1

)

 

 

0.3

 

 

 

0.3

 

 

 

0.9

 

Earnings before income taxes

 

18.1

 

 

 

27.9

 

 

 

99.2

 

 

 

133.7

 

Income tax expense

 

7.9

 

 

 

11.1

 

 

 

39.3

 

 

 

52.6

 

Net earnings

$

10.2

 

 

$

16.8

 

 

$

59.9

 

 

$

81.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings per share (Note 8):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net earnings per share

$

0.31

 

 

$

0.52

 

 

$

1.85

 

 

$

2.50

 

Basic and diluted common shares outstanding

 

32.4

 

 

 

32.4

 

 

 

32.4

 

 

 

32.4

 

 

See Notes to Unaudited Condensed Combined Financial Statements

 

 

 

3


 

Donnelley Financial Solutions, Inc.

Condensed Combined Statements of Comprehensive Income

For the Three and Nine Months Ended September 30, 2016 and 2015

(in millions)

(UNAUDITED)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net earnings

$

10.2

 

 

$

16.8

 

 

$

59.9

 

 

$

81.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Translation adjustments

 

0.2

 

 

 

(4.3

)

 

 

4.2

 

 

 

(7.0

)

Adjustment for net periodic pension plan cost

 

(0.2

)

 

 

5.5

 

 

 

(0.4

)

 

 

16.3

 

Other comprehensive income

 

 

 

 

1.2

 

 

 

3.8

 

 

 

9.3

 

Comprehensive income

$

10.2

 

 

$

18.0

 

 

$

63.7

 

 

$

90.4

 

 

See Notes to Unaudited Condensed Combined Financial Statements

 

 


 

4


 

Donnelley Financial Solutions, Inc.

Condensed Combined Balance Sheets

As of September 30, 2016 and December 31, 2015

(in millions, except per share data)

(UNAUDITED)

 

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

53.0

 

 

$

15.1

 

Receivables, less allowances for doubtful accounts of $5.4 in 2016 (2015 - $4.6)

 

 

198.5

 

 

 

146.2

 

Inventories

 

 

25.1

 

 

 

22.2

 

Prepaid expenses and other current assets

 

 

13.6

 

 

 

7.3

 

Total current assets

 

 

290.2

 

 

 

190.8

 

Property, plant and equipment-net

 

 

32.8

 

 

 

33.0

 

Goodwill

 

 

446.8

 

 

 

446.8

 

Other intangible assets-net

 

 

58.4

 

 

 

69.3

 

Software-net

 

 

45.1

 

 

 

43.4

 

Deferred income taxes

 

 

11.8

 

 

 

10.6

 

Other noncurrent assets

 

 

28.9

 

 

 

23.7

 

Total assets

 

$

914.0

 

 

$

817.6

 

LIABILITIES

 

 

 

 

 

 

 

 

Accounts payable

 

$

60.2

 

 

$

39.5

 

Accrued liabilities

 

 

84.8

 

 

 

75.4

 

Short-term debt

 

 

17.1

 

 

 

8.8

 

Total current liabilities

 

 

162.1

 

 

 

123.7

 

Long-term debt (Note 11)

 

 

619.4

 

 

 

 

Note payable with an RRD affiliate

 

 

 

 

 

29.2

 

Deferred compensation liabilities

 

 

29.4

 

 

 

28.5

 

Other noncurrent liabilities

 

 

14.5

 

 

 

12.7

 

Total liabilities

 

 

825.4

 

 

 

194.1

 

Commitments and Contingencies (Note 12)

 

 

 

 

 

 

 

 

EQUITY

 

 

 

 

 

 

 

 

     Accumulated other comprehensive loss

 

 

(12.2

)

 

 

(16.0

)

     Net parent company investment

 

 

100.8

 

 

 

639.5

 

Total equity

 

 

88.6

 

 

 

623.5

 

Total liabilities and equity

 

$

914.0

 

 

$

817.6

 

 

See Notes to Unaudited Condensed Combined Financial Statements

 

 

 

 

5


 

Donnelley Financial Solutions, Inc.

Condensed Combined Statements of Cash Flows

For the Nine Months Ended September 30, 2016 and 2015

(in millions)

(UNAUDITED)

 

 

Nine Months Ended

 

 

September 30,

 

 

2016

 

 

2015

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

Net earnings

$

59.9

 

 

$

81.1

 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

30.1

 

 

 

32.0

 

Provision for doubtful accounts receivable

 

1.7

 

 

 

0.8

 

Share-based compensation

 

1.2

 

 

 

1.3

 

Deferred income taxes

 

(1.0

)

 

 

7.2

 

Other

 

0.7

 

 

 

0.2

 

Changes in operating assets and liabilities - net of acquisitions:

 

 

 

 

 

 

 

Accounts receivable - net

 

(54.6

)

 

 

(40.4

)

Inventories

 

(2.9

)

 

 

(2.1

)

Prepaid expenses and other current assets

 

(6.3

)

 

 

0.6

 

Accounts payable

 

17.9

 

 

 

2.9

 

Income taxes payable and receivable

 

(0.6

)

 

 

0.4

 

Accrued liabilities and other

 

10.7

 

 

 

(25.0

)

Net cash provided by operating activities

 

56.8

 

 

 

59.0

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

Capital expenditures

 

(14.0

)

 

 

(16.9

)

Purchases of investments

 

(3.5

)

 

 

 

Other investing activities

 

0.5

 

 

 

 

Net cash used in investing activities

 

(17.0

)

 

 

(16.9

)

FINANCING ACTIVITIES

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

348.2

 

 

 

 

Net change in short-term debt

 

(8.8

)

 

 

(18.9

)

Debt issuance costs

 

(9.3

)

 

 

 

Other financing activities

 

 

 

 

(14.8

)

Net transfers to Parent and affiliates

 

(336.2

)

 

 

(20.9

)

Net cash used in financing activities

 

(6.1

)

 

 

(54.6

)

Effect of exchange rate on cash and cash equivalents

 

4.2

 

 

 

(2.6

)

Net increase (decrease) in cash and cash equivalents

 

37.9

 

 

 

(15.1

)

Cash and cash equivalents at beginning of year

 

15.1

 

 

 

28.6

 

Cash and cash equivalents at end of period

$

53.0

 

 

$

13.5

 

 

 

 

 

 

 

 

 

Supplemental non-cash disclosure:

 

 

 

 

 

 

 

Debt exchange with RR Donnelley, including $5.5 million of debt issuance costs

$

300.0

 

 

$

 

Settlement of intercompany note payable

 

29.6

 

 

 

 

Accrued debt issuance costs

 

1.6

 

 

 

 

 

 

See Notes to Unaudited Condensed Combined Financial Statements

 

 

 

 

6

 


Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Combined Financial Statements

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

 

 

Note 1. Overview and Basis of Presentation

Description of Business and Separation

 

Donnelley Financial Solutions, Inc. (“Donnelley Financial,” “the Company” and “we”) is a financial communications services company that supports global capital markets compliance and transaction needs for its corporate clients and their advisors (such as law firms and investment bankers) and global investment markets compliance and analytics needs for mutual fund companies, variable annuity providers and broker/dealers. With proprietary technology such as data storage and workflow collaboration tools, deep subject matter expertise and a global footprint, Donnelley Financial produces, manages, stores, distributes and translates documents and electronic communications in order to deliver timely financial communications to investors and documents in a manner that complies with regulatory commissions.

Donnelley Financial’s Registration Statement on Form 10, as amended (“Form 10), was declared effective by the U.S. Securities and Exchange Commission (“SEC”) on September 20, 2016. On October 1, 2016, Donnelley Financial became an independent publicly traded company through the distribution by R.R. Donnelley & Sons Company (“RRD”) of approximately 26.2 million shares, or 80.75%, of Donnelley Financial common stock to RRD shareholders (the “Separation”). Holders of RRD common stock received one share of Donnelley Financial common stock for every eight shares of RRD common stock held on September 23, 2016. RRD retained approximately 6.2 million shares of Donnelley Financial common stock, or a 19.25% interest in Donnelley Financial, as part of the Separation, but expects to dispose of the common stock that it retained in the 12-month period following the Separation. Donnelley Financial’s common stock began regular-way trading under the ticker symbol “DFIN” on the New York Stock Exchange on October 3, 2016.  On October 1, 2016, RRD also completed the previously announced separation of LSC Communications, Inc. (“LSC”), its publishing and retail-centric print services and office products business.

The Company and LSC entered into a Separation and Distribution Agreement with RRD to effect the distribution of the Company’s and LSC’s common stock to R.R. Donnelley’s common stockholders. This agreement governs the Company’s relationship with RRD and LSC with respect to pre-Separation matters and provides for the allocation of employee benefit, litigation and other liabilities and obligations attributable to periods prior to the Separation. The Separation and Distribution Agreement also includes an agreement that the Company, RRD and LSC will provide each other with appropriate indemnities with respect to liabilities arising out of the businesses being distributed and retained by RRD in the Separation. The Separation and Distribution Agreement also addresses employee compensation and benefit matters.

In connection with the Separation, the Company entered into transition services agreements separately with RRD and LSC, under which, in exchange for the fees specified in the arrangements, RRD and LSC agree to provide certain services to the Company and the Company agrees to provide certain services to RRD, respectively, for up to 24 months following the Separation. These services include, but are not limited to, information technology, accounts receivable, accounts payable, payroll and other financial and administrative services and functions. These agreements facilitate the separation by allowing the Company to operate independently prior to establishing stand-alone back office systems across its organization.  

The Company entered into a number of commercial and other arrangements with RRD and its subsidiaries. These include, among other things, arrangements for the provision of services, including global outsourcing and logistics services, printing and binding, digital printing, composition and access to technology. The Company also entered into a number of commercial and other arrangements with LSC and its subsidiaries, pursuant to which LSC will print and bind products for the Company. The terms of the arrangements with RRD and LSC do not exceed 24 months. Subsequent to the Separation, RRD and LSC are clients of the Company and expect to utilize financial communication software and services that the Company provides to all of its clients.

Basis of Presentation

The accompanying unaudited condensed combined interim financial statements have been prepared on a stand-alone basis and are derived from RRD’s consolidated financial statements and accounting records.  The unaudited condensed combined financial statements include the financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the rules and regulations of the United States Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  

7


Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Combined Financial Statements

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

 

 

The financial data presented herein is unaudited and should be read in conjunction with the audited combined financial statements and accompanying notes for the year ended December 31, 2015 included in our Form 10. 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 of the full year. These unaudited condensed combined interim financial statements include estimates and assumptions of management that affect the amounts reported in the unaudited condensed combined financial statements. Actual results could differ from these estimates.

The unaudited condensed combined financial statements include the allocation of certain assets and liabilities that have historically been held at the RRD corporate level but which are specifically identifiable or attributable to the Company.  Cash and cash equivalents held by RRD were not allocated to Donnelley Financial unless they were held in a legal entity that was transferred to Donnelley Financial. All intercompany transactions and accounts within Donnelley Financial have been eliminated. All intracompany transactions between RRD and Donnelley Financial are considered to be effectively settled in the unaudited condensed combined financial statements at the time the transaction is recorded. The total net effect of the settlement of these intracompany transactions is reflected in the unaudited condensed combined statements of cash flows as a financing activity and in the unaudited condensed combined balance sheets as net parent company investment. Net parent company investment is primarily impacted by contributions from RRD which are the result of treasury activities and net funding provided by or distributed to RRD.  

The unaudited condensed combined financial statements include certain expenses of RRD which were allocated to Donnelley Financial for certain functions, including general corporate expenses related to information technology, finance, legal, human resources, internal audit, treasury, tax, investor relations and executive oversight.  These expenses have been allocated to the Company on the basis of direct usage, when available, with the remainder allocated on the pro rata basis of revenue, employee headcount, or other measures. We consider the expense methodology and results to be reasonable for all periods presented.  However these allocations may not be indicative of the actual expenses that would have been incurred as an independent public company or the costs that may be incurred in the future.

The income tax amounts in these unaudited condensed combined financial statements have been calculated based on a separate income tax return methodology and presented as if the Company’s operations were separate taxpayers in the respective jurisdictions.

RRD maintains various benefit and share-based compensation plans at a corporate level.  Donnelley Financial employees participated in those programs and a portion of the cost of those plans is included in Donnelley Financial’s unaudited condensed combined financial statements.  However, Donnelley Financial’s unaudited condensed combined balance sheets do not include any equity related to share-based compensation plans.  On October 1, 2016, Donnelley Financial recorded net pension plan liabilities of $68.3 million (consisting of a total benefit plan liability of $317.0 million, net of plan assets having fair market value of $248.7 million), as a result of the transfer of certain pension plan liabilities and assets from RRD to the Company upon the legal split of those plans. Refer to Note 5, Retirement Plans, for further details regarding the Company’s pension and other postretirement benefit plans. Refer to Note 6, Share Based Compensation, for further details regarding the Company’s share-based compensation plans.

 

Donnelley Financial generates a portion of net revenue from sales to RRD’s subsidiaries. Included in the unaudited condensed combined financial statements are net revenues from intercompany sales of $1.1 million and $1.9 million for the three months ended September 30, 2016 and September 30, 2015, respectively, and $3.6 million and $5.8 million for the nine months ended September 30, 2016 and September 30, 2015, respectively. Donnelley Financial utilizes RRD for freight and logistics, production of certain printed products and outsourced business services functions. Included in the unaudited condensed combined financial statements are cost of sales to RRD and affiliates of $20.2 million and $22.2 million for the three months ended September 30, 2016 and September 30, 2015, respectively, and $78.0 million and $89.9 million for the nine months ended September 30, 2016 and September 30, 2015, respectively.  Intercompany receivables and payables with RRD are reflected within net parent company investment in the accompanying unaudited condensed combined financial statements. See Note 13, Related Parties, for a further description of related party transactions.

 

 

8


Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Combined Financial Statements

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

 

 

Note 2. Inventories

The components of the Company’s inventories, net of excess and obsolescence reserves for raw materials and finished goods, at September 30, 2016 and December 31, 2015 were as follows:  

 

 

September 30,

 

 

December 31,

 

 

2016

 

 

2015

 

Raw materials and manufacturing supplies

$

8.1

 

 

$

8.0

 

Work in process

 

11.2

 

 

 

9.6

 

Finished goods

 

5.8

 

 

 

4.6

 

Total

$

25.1

 

 

$

22.2

 

 

 

Note 3. Property, Plant and Equipment

The components of the Company’s property, plant and equipment at September 30, 2016 and December 31, 2015 were as follows:

   

 

September 30,

 

 

December 31,

 

 

2016

 

 

2015

 

Land

$

10.0

 

 

$

10.0

 

Buildings

 

44.5

 

 

 

44.7

 

Machinery and equipment

 

105.7

 

 

 

121.4

 

 

 

160.2

 

 

 

176.1

 

Less: Accumulated depreciation

 

(127.4

)

 

 

(143.1

)

Total

$

32.8

 

 

$

33.0

 

 

Depreciation expense was $1.4 million and $1.9 million for the three months ended September 30, 2016 and 2015, respectively, and $6.1 million and $6.8 million for the nine months ended September 30, 2016 and 2015, respectively.

 

 

Note 4. Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill by segment for the nine months ended September 30, 2016 were as follows:

 

 

U.S.

 

 

International

 

 

Total

 

Net book value as of December 31, 2015

$

429.2

 

 

$

17.6

 

 

$

446.8

 

Foreign exchange and other adjustments

 

 

 

 

 

 

 

 

Net book value as of September 30, 2016

$

429.2

 

 

$

17.6

 

 

$

446.8

 

 

The components of other intangible assets at September 30, 2016 and December 31, 2015 were as follows:

 

 

September 30, 2016

 

 

December 31, 2015

 

 

Gross

 

 

 

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

 

Carrying

 

 

Accumulated

 

 

Net Book

 

 

Carrying

 

 

Accumulated

 

 

Net Book

 

 

Amount

 

 

Amortization

 

 

Value

 

 

Amount

 

 

Amortization

 

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

$

139.8

 

 

$

(82.3

)

 

$

57.5

 

 

$

140.2

 

 

$

(71.8

)

 

$

68.4

 

Trade names

 

6.3

 

 

 

(5.5

)

 

 

0.8

 

 

 

6.3

 

 

 

(5.5

)

 

 

0.8

 

Trademarks, licenses and agreements

 

3.2

 

 

 

(3.1

)

 

 

0.1

 

 

 

6.2

 

 

 

(6.1

)

 

 

0.1

 

Total other intangible assets

$

149.3

 

 

$

(90.9

)

 

$

58.4

 

 

$

152.7

 

 

$

(83.4

)

 

$

69.3

 

 

Amortization expense for other intangible assets was $3.6 million and $3.9 million for the three months ended September 30, 2016 and 2015, respectively, and $10.8 million and $11.7 million for the nine months ended September 30, 2016 and 2015, respectively.

9


Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Combined Financial Statements

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

 

 

The following table outlines the estimated annual amortization expense related to other intangible assets as of September 30, 2016:

 

For the year ending December 31,

Amount

 

2016

$

14.4

 

2017

 

14.4

 

2018

 

13.8

 

2019

 

13.8

 

2020

 

12.4

 

2021 and thereafter

 

0.4

 

Total

$

69.2

 

 

 

Note 5. Retirement Plans

Donnelley Financial’s Pension Plans

RRD maintained a defined benefit plan (the “plan”) for certain current and former U.S. employees of RRD. Effective December 31, 2013, RRD merged the plan into a separate defined benefit pension plan for Donnelley Financial to create a combined defined benefit pension plan (the “combined plan”). During 2015, the sponsorship of the combined plan was transferred to RRD, which became the legal obligor of the combined plan. Accordingly, the obligations of the combined plan are not reflected in the condensed combined balance sheet of Donnelley Financial as of December 31, 2015.

The components of the estimated net pension plan expense (income) for Donnelley Financial’s pension plans for the three and nine months ended September 30, 2016 and 2015 were as follows:  

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Pension expense (income)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest cost

$

 

 

$

36.9

 

 

$

 

 

$

110.5

 

Expected return on assets

 

 

 

 

(52.7

)

 

 

 

 

 

(158.0

)

Amortization, net

 

(0.2

)

 

 

9.1

 

 

 

(0.4

)

 

 

27.3

 

Net pension income

$

(0.2

)

 

$

(6.7

)

 

$

(0.4

)

 

$

(20.2

)

Less: income allocated to RRD affiliates

 

 

 

 

6.4

 

 

 

 

 

 

18.7

 

Net periodic benefit income, net of allocation

$

(0.2

)

 

$

(0.3

)

 

$

(0.4

)

 

$

(1.5

)

On October 1, 2016, Donnelley Financial recorded net pension plan liabilities of $68.3 million (consisting of a total benefit plan liability of $317.0 million, net of plan assets having fair market value of $248.7 million), as a result of the transfer of certain pension plan liabilities and assets from RRD to the Company upon the legal split of those plans. The Company’s primary defined benefit plan is frozen. No new employees will be permitted to enter the Company’s frozen plan and participants will earn no additional benefits. Benefits are generally based upon years of service and compensation. These defined benefit retirement income plans are funded in conformity with the applicable government regulations. The Company funds at least the minimum amount required for all funded plans using actuarial cost methods and assumptions acceptable under government regulations.

Donnelley Financial’s Participation in RRD’s Pension and Postretirement Benefit Plans

RRD provided pension and other postretirement healthcare benefits to certain current and former employees of Donnelley Financial.  Prior to the Separation, RRD was responsible for the net benefit plan obligations associated with these plans, and as such, these liabilities are not reflected in Donnelley Financial’s condensed combined balance sheets.

10


Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Combined Financial Statements

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

 

 

Donnelley Financial’s condensed combined statements of operations include expense allocations for these benefits. These allocations were funded through intercompany transactions with RRD which are reflected within net parent company investment in Donnelley Financial. Total RRD pension and postretirement benefit plan net income allocated to Donnelley Financial, related to pension cost and postretirement benefits, was $1.3 million and $1.0 million in the three months ended September 30, 2016 and 2015, respectively, and $4.2 million and $3.0 million in the nine months ended September 30, 2016 and 2015, respectively. Included in these is an allocation for other postretirement benefit plans for $0.3 million and $0.5 million in the three months ended September 30, 2016 and 2015, respectively, and $1.0 million and $1.5 million in the nine months ended September 30, 2016 and 2015, respectively.  These allocations are reflected in the Company’s cost of sales and selling, general and administrative expenses.  

 

 

Note 6. Share Based Compensation

RRD maintained an incentive stock program for the benefit of its officers, directors and certain employees, including certain Donnelley Financial employees.  The following disclosures represent the portion of RRD’s program in which Donnelley Financial’s employees and directors participated.  RRD’s share-based compensation programs in which Donnelley Financial employees participated included restricted stock units (“RSUs”).  

Share-based compensation expense includes expense attributable to the Company based on the award terms previously granted to the Company’s employees and an allocation of compensation expense for RRD’s corporate and shared functional employees.  As the share-based compensation plans are RRD’s plans, the amounts have been recognized through net parent company investment on the condensed combined balance sheets.  Total compensation expense related to all share based compensation plans was $0.2 million and $0.3 million for the three months ended September 30, 2016 and 2015, respectively, and $1.2 million and $1.3 million for the nine months ended September 30, 2016 and 2015, respectively.

In connection with the Separation, as of October 1, 2016 employee stock options and restricted stock units were adjusted and converted into new equity awards using a 10-day volume weighted average share price of Donnelley Financial, RRD and LSC, as described in the Separation and Distribution Agreement. Upon the Separation on October 1, 2016, holders of certain RRD stock options and RSUs received awards in Donnelley Financial, RRD and LSC pursuant to the Separation and Distribution Agreement. Converted awards retained the same vesting schedule and expiration date of the original awards.

On October 1, 2016, the Company awarded 156,169 shares of restricted stock and 60,748 RSUs to certain employees under the Donnelley Financial Solutions Performance Incentive Plan. 50% of each of the awards of restricted stock and RSUs will vest two years from the grant date and 50% will vest three years from the grant date. Vesting of the restricted stock awards is also subject to performance metrics. Both the restricted stock and RSU awards are subject to forfeiture upon termination of employment prior to vesting, subject in some cases to early vesting upon specified events, including death or permanent disability of the grantee, termination of the grantee’s employment under certain circumstances or a change in control of the Company. On October 1, 2016, the Company also granted 16,620 restricted stock units to members of the Board of Directors, as a pro-rata portion of their annual equity retainer.

 

 

Note 7. Equity

The Company’s equity as of December 31, 2015 and September 30, 2016, and changes during the nine months ended September 30, 2016, were as follows:

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

Net Parent

 

 

Other

 

 

 

 

 

 

Company

 

 

Comprehensive

 

 

Total

 

 

Investment

 

 

Loss

 

 

Equity

 

Balance at December 31, 2015

$

639.5

 

 

$

(16.0

)

 

$

623.5

 

Net earnings

 

59.9

 

 

 

 

 

 

59.9

 

Transfers to parent company, net

 

(598.6

)

 

 

 

 

 

(598.6

)

Other comprehensive income

 

 

 

 

3.8

 

 

 

3.8

 

Balance at September 30, 2016

$

100.8

 

 

$

(12.2

)

 

$

88.6

 

 

11


Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Combined Financial Statements

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

 

 

Net transfers to parent company during the nine months ended September 30, 2016 included the transfer of $340.2 million of proceeds from borrowings under the Company’s $350.0 million senior secured term loan B facility and a $300.0 million debt exchange with RRD, partially offset by a $29.6 million non-cash settlement of an intercompany note payable and other transfers from RRD. Refer to Note 11, Debt, for further details regarding these transactions.

The Company’s equity as of December 31, 2014 and September 30, 2015, and changes during the nine months ended September 30, 2015, were as follows:

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

Net Parent

 

 

Other

 

 

 

 

 

 

Company

 

 

Comprehensive

 

 

Total

 

 

Investment

 

 

Loss

 

 

Equity

 

Balance at December 31, 2014

$

1,025.2

 

 

$

(673.7

)

 

$

351.5

 

Net earnings

 

81.1

 

 

 

 

 

 

81.1

 

Transfers to parent company, net

 

(15.5

)

 

 

 

 

 

(15.5

)

Other comprehensive income

 

 

 

 

9.3

 

 

 

9.3

 

Balance at September 30, 2015

$

1,090.8

 

 

$

(664.4

)

 

$

426.4

 

 

 

Note 8. Earnings per Share

On October 1, 2016, RRD distributed approximately 26.2 million shares of Donnelley Financial common stock to RRD shareholders in connection with the spin-off of Donnelley Financial, with RRD retaining approximately 6.2 million shares of Donnelley Financial common stock. Holders of RRD common stock received one share of Donnelley Financial for every eight shares of RRD common stock held on September 23, 2016. Basic and diluted earnings per common share and the average number of common shares outstanding were retrospectively restated for the number of Donnelley Financial shares outstanding immediately following this transaction. The same number of shares was used to calculate basic and diluted earnings per share since there were no Donnelley Financial equity awards outstanding prior to the spin-off.

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net earnings

$

10.2

 

 

$

16.8

 

 

$

59.9

 

 

$

81.1

 

Basic and diluted net earnings per share

$

0.31

 

 

$

0.52

 

 

$

1.85

 

 

$

2.50

 

Basic and diluted common shares outstanding

 

32.4

 

 

 

32.4

 

 

 

32.4

 

 

 

32.4

 

 

 

Note 9. Comprehensive Income

The components of other comprehensive income and income tax expense allocated to each component for the three and nine months ended September 30, 2016 and 2015 were as follows:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30, 2016

 

 

September 30, 2016

 

 

Before Tax

 

 

Income Tax

 

 

Net of Tax

 

 

Before Tax

 

 

Income Tax

 

 

Net of Tax

 

 

Amount

 

 

Expense

 

 

Amount

 

 

Amount

 

 

Expense

 

 

Amount

 

Translation adjustments

$

0.2

 

 

$

 

 

$

0.2

 

 

$

4.2

 

 

$

 

 

$

4.2

 

Adjustment for net periodic pension plan cost

 

(0.2

)

 

 

 

 

 

(0.2

)

 

 

(0.4

)

 

 

 

 

 

(0.4

)

Other comprehensive income

$

 

 

$

 

 

$

 

 

$

3.8

 

 

$

 

 

$

3.8

 

 

12


Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Combined Financial Statements

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

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30, 2015

 

 

September 30, 2015

 

 

Before Tax

 

 

Income Tax

 

 

Net of Tax

 

 

Before Tax

 

 

Income Tax

 

 

Net of Tax

 

 

Amount

 

 

Expense

 

 

Amount

 

 

Amount

 

 

Expense

 

 

Amount

 

Translation adjustments

$

(4.3

)

 

$

 

 

$

(4.3

)

 

$

(7.0

)

 

$

 

 

$

(7.0

)

Adjustment for net periodic pension plan cost

 

9.1

 

 

 

3.6

 

 

 

5.5

 

 

 

27.3

 

 

 

11.0

 

 

 

16.3

 

Other comprehensive income

$

4.8

 

 

$

3.6

 

 

$

1.2

 

 

$

20.3

 

 

$

11.0

 

 

$

9.3

 

 

Accumulated other comprehensive loss by component as of December 31, 2015 and September 30, 2016, and changes during the nine months ended September 30, 2016, were as follows:

 

 

Pension Plan Cost

 

 

Translation Adjustments

 

 

Total

 

Balance at December 31, 2015

$

 

 

$

(16.0

)

 

$

(16.0

)

Other comprehensive income before reclassifications

 

 

 

 

4.2

 

 

 

4.2

 

Amounts reclassified from accumulated other comprehensive loss

 

(0.4

)

 

 

 

 

 

(0.4

)

Net change in accumulated other comprehensive loss

 

(0.4

)

 

 

4.2

 

 

 

3.8

 

Balance at September 30, 2016

$

(0.4

)

 

$

(11.8

)

 

$

(12.2

)

 

 

Accumulated other comprehensive loss by component as of December 31, 2014 and September 30, 2015, and changes during the nine months ended September 30, 2015, were as follows:

 

 

Pension Plan Cost

 

 

Translation Adjustments

 

 

Total

 

Balance at December 31, 2014

$

(665.2

)

 

$

(8.5

)

 

$

(673.7

)

Other comprehensive loss before reclassifications

 

 

 

 

(7.0

)

 

 

(7.0

)

Amounts reclassified from accumulated other comprehensive loss

 

16.3

 

 

 

 

 

 

16.3

 

Net change in accumulated other comprehensive loss

 

16.3

 

 

 

(7.0

)

 

 

9.3

 

Balance at September 30, 2015

$

(648.9

)

 

$

(15.5

)

 

$

(664.4

)

 

 

Reclassifications from accumulated other comprehensive loss for the three and nine months ended September 30, 2016 and 2015 were as follows:  

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Classification in the

 

September 30,

 

 

September 30,

 

 

Condensed Combined

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

Statements of Operations

Amortization of pension plan cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net actuarial (loss) income

$

(0.2

)

 

$

9.1

 

 

$

(0.4

)

 

$

27.3

 

 

(a)

Reclassifications before tax

 

(0.2

)

 

 

9.1

 

 

 

(0.4

)

 

 

27.3

 

 

 

Income tax expense

 

 

 

 

3.6

 

 

 

 

 

 

11.0

 

 

 

Reclassifications, net of tax

$

(0.2

)

 

$

5.5