10-Q 1 dfin-10q_20170930.htm 10-Q dfin-10q_20170930.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, 2017

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 

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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated filer

 

  

Accelerated filer

 

 

 

 

  

 

 

 

Non-Accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

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

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

Yes      No  

As of October 27, 2017, 33.7 million shares of common stock were outstanding.  

 

 

 

 


 

 

DONNELLEY FINANCIAL SOLUTIONS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED September 30, 2017

 

TABLE OF CONTENTS

 

Part I

FINANCIAL INFORMATION

  

Page

Item 1:

Condensed Consolidated and Combined Financial Statements (unaudited)

 

3

 

 

 

 

 

Condensed Consolidated and Combined Statements of Operations for the three and nine months ended September 30, 2017 and 2016

  

3

 

 

 

 

 

Condensed Consolidated and Combined Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016

  

4

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016

  

5

 

 

 

 

 

Condensed Consolidated and Combined Statements of Cash Flows for the nine months ended September 30, 2017 and 2016

  

6

 

 

 

 

 

Notes to Condensed Consolidated and Combined Financial Statements

  

7

 

 

 

 

Item 2:

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

  

32

 

 

 

 

Item 3:

Quantitative and Qualitative Disclosure About Market Risk

 

47

 

 

 

 

Item 4:

Controls and Procedures

 

47

 

Part II

OTHER INFORMATION 

  

Page

Item 1:

Legal Proceedings

  

48

 

 

 

 

Item 1A:

Risk Factors

  

48

 

 

 

 

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

  

48

 

 

 

 

Item 4:

Mine Safety Disclosures

 

48

 

 

 

 

Item 6:

Exhibits

  

49

 

 

 

 

Signatures

  

53

 

 

 

2


 

 

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

Condensed Consolidated and Combined Statements of Operations

For the Three and Nine Months Ended September 30, 2017 and 2016

(in millions, except per share data)

(UNAUDITED)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Services net sales

$

140.3

 

 

$

139.4

 

 

$

471.4

 

 

$

454.1

 

Products net sales

 

82.3

 

 

 

85.0

 

 

 

308.7

 

 

 

308.4

 

Total net sales

 

222.6

 

 

 

224.4

 

 

 

780.1

 

 

 

762.5

 

Services cost of sales (exclusive of depreciation and amortization)

 

81.7

 

 

 

64.2

 

 

 

240.2

 

 

 

214.6

 

Services cost of sales with R.R. Donnelley affiliates (exclusive of depreciation and amortization)*

 

 

 

 

8.7

 

 

 

19.5

 

 

 

29.4

 

Products cost of sales (exclusive of depreciation and amortization)

 

58.9

 

 

 

62.0

 

 

 

190.7

 

 

 

179.9

 

Products cost of sales with R.R. Donnelley affiliates (exclusive of depreciation and amortization)*

 

 

 

 

11.5

 

 

 

32.3

 

 

 

48.6

 

Total cost of sales

 

140.6

 

 

 

146.4

 

 

 

482.7

 

 

 

472.5

 

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

 

54.0

 

 

 

48.5

 

 

 

171.2

 

 

 

156.8

 

Restructuring, impairment and other charges-net

 

(0.6

)

 

 

1.7

 

 

 

6.4

 

 

 

3.6

 

Depreciation and amortization

 

10.6

 

 

 

9.8

 

 

 

31.7

 

 

 

30.1

 

Income from operations

 

18.0

 

 

 

18.0

 

 

 

88.1

 

 

 

99.5

 

Interest expense (income)-net

 

10.6

 

 

 

(0.1

)

 

 

32.7

 

 

 

0.3

 

Earnings before income taxes

 

7.4

 

 

 

18.1

 

 

 

55.4

 

 

 

99.2

 

Income tax expense

 

2.1

 

 

 

7.9

 

 

 

22.0

 

 

 

39.3

 

Net earnings

$

5.3

 

 

$

10.2

 

 

$

33.4

 

 

$

59.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings per share (Note 8):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net earnings per share

 

0.16

 

 

 

0.31

 

 

 

1.01

 

 

 

1.85

 

Diluted net earnings per share

 

0.16

 

 

 

0.31

 

 

 

1.01

 

 

 

1.85

 

Weighted average number of common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

33.6

 

 

32.4

 

 

 

33.0

 

 

32.4

 

Diluted

 

33.8

 

 

32.4

 

 

 

33.2

 

 

32.4

 

 

        *

Beginning in the quarter ended September 30, 2017, R.R. Donnelley & Sons Company ("RRD") no longer qualified as a related party, therefore the amounts disclosed related to RRD are presented through June 30, 2017 only.

 

See Notes to Unaudited Condensed Consolidated and Combined Financial Statements

 

 

 

3


 

 

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

Condensed Consolidated and Combined Statements of Comprehensive Income

For the Three and Nine Months Ended September 30, 2017 and 2016

(in millions)

(UNAUDITED)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net earnings

$

5.3

 

 

$

10.2

 

 

$

33.4

 

 

$

59.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Translation adjustments

 

2.2

 

 

 

0.2

 

 

 

4.6

 

 

 

4.2

 

Adjustment for net periodic pension and other postretirement benefits plan cost

0.3

 

 

 

(0.2

)

 

 

1.0

 

 

 

(0.4

)

Other comprehensive income, net of tax

 

2.5

 

 

 

 

 

 

5.6

 

 

 

3.8

 

Comprehensive income

$

7.8

 

 

$

10.2

 

 

$

39.0

 

 

$

63.7

 

 

See Notes to Unaudited Condensed Consolidated and Combined Financial Statements

 

 

 

4


 

 

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

Condensed Consolidated Balance Sheets

As of September 30, 2017 and December 31, 2016

(in millions, except per share data)

(UNAUDITED)

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

32.2

 

 

$

36.2

 

Receivables, less allowances for doubtful accounts of $8.7 in 2017 (2016 - $6.4)

 

 

219.3

 

 

 

156.2

 

Receivables from R.R. Donnelley*

 

 

 

 

 

96.0

 

Inventories

 

 

23.6

 

 

 

24.1

 

Prepaid expenses and other current assets

 

 

15.1

 

 

 

17.1

 

Total current assets

 

 

290.2

 

 

 

329.6

 

Property, plant and equipment-net

 

 

34.7

 

 

 

35.5

 

Goodwill

 

 

447.5

 

 

 

446.4

 

Other intangible assets-net

 

 

44.2

 

 

 

54.3

 

Software-net

 

 

41.9

 

 

 

41.6

 

Deferred income taxes

 

 

36.6

 

 

 

37.0

 

Other noncurrent assets

 

 

38.6

 

 

 

34.5

 

Total assets

 

$

933.7

 

 

$

978.9

 

LIABILITIES

 

 

 

 

 

 

 

 

Accounts payable

 

$

74.4

 

 

$

85.3

 

Accrued liabilities

 

 

110.1

 

 

 

100.7

 

Total current liabilities

 

 

184.5

 

 

 

186.0

 

Long-term debt (Note 11)

 

 

488.4

 

 

 

587.0

 

Deferred compensation liabilities

 

 

24.6

 

 

 

24.4

 

Pension and other postretirement benefits plan liabilities

 

 

51.4

 

 

 

56.4

 

Other noncurrent liabilities

 

 

11.2

 

 

 

14.0

 

Total liabilities

 

 

760.1

 

 

 

867.8

 

Commitments and Contingencies (Note 12)

 

 

 

 

 

 

 

 

EQUITY

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value

 

 

 

 

 

 

 

 

Authorized: 1.0 shares; Issued: None

 

 

 

 

 

 

Common stock, $0.01 par value

 

 

 

 

 

 

 

 

Authorized: 65.0 shares;

 

 

 

 

 

 

 

 

Issued: 33.8 shares in 2017 (2016 - 32.6 shares)

 

 

0.3

 

 

 

0.3

 

Treasury stock, at cost: less than 0.1 shares in 2017

 

 

(0.9

)

 

 

 

Additional paid-in-capital

 

 

204.3

 

 

 

179.9

 

Retained earnings (deficit)

 

 

32.6

 

 

 

(0.8

)

Accumulated other comprehensive loss

 

 

(62.7

)

 

 

(68.3

)

Total equity

 

 

173.6

 

 

 

111.1

 

Total liabilities and equity

 

$

933.7

 

 

$

978.9

 

 

        *

Beginning in the quarter ended September 30, 2017, RRD no longer qualified as a related party, therefore the amounts disclosed related to RRD are presented through June 30, 2017 only.

 

See Notes to Unaudited Condensed Consolidated and Combined Financial Statements

 

 

 

5


 

 

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

Condensed Consolidated and Combined Statements of Cash Flows

For the Nine Months Ended September 30, 2017 and 2016

(in millions)

(UNAUDITED)

 

 

Nine Months Ended

 

 

September 30,

 

 

2017

 

 

2016

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

Net earnings

$

33.4

 

 

$

59.9

 

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

 

 

 

 

 

 

 

Impairment charges

 

0.2

 

 

 

 

Depreciation and amortization

 

31.7

 

 

 

30.1

 

Provision for doubtful accounts receivable

 

4.3

 

 

 

1.7

 

Share-based compensation

 

5.2

 

 

 

1.2

 

Deferred income taxes

 

(2.7

)

 

 

(1.0

)

Change in uncertain tax positions

 

(0.2

)

 

 

 

Net pension and other postretirement benefits plan income

 

(2.5

)

 

 

(0.4

)

Other

 

1.7

 

 

 

0.7

 

Changes in operating assets and liabilities - net of acquisitions:

 

 

 

 

 

 

 

Accounts receivable - net

 

(36.6

)

 

 

(54.6

)

Inventories

 

0.6

 

 

 

(2.9

)

Prepaid expenses and other current assets

 

(2.0

)

 

 

(6.3

)

Accounts payable

 

(11.7

)

 

 

17.9

 

Income taxes payable and receivable

 

3.7

 

 

 

(0.6

)

Accrued liabilities and other

 

10.3

 

 

 

12.2

 

Pension and other postretirement benefits plan contributions

 

(1.7

)

 

 

(1.1

)

Net cash provided by operating activities

 

33.7

 

 

 

56.8

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

Capital expenditures

 

(20.0

)

 

 

(14.0

)

Purchases of investments

 

(3.4

)

 

 

(3.5

)

Other investing activities

 

0.3

 

 

 

0.5

 

Net cash used in investing activities

 

(23.1

)

 

 

(17.0

)

FINANCING ACTIVITIES

 

 

 

 

 

 

 

Revolving facility borrowings

 

230.0

 

 

 

 

Payments on revolving facility borrowings

 

(230.0

)

 

 

 

Payments on long-term debt

 

(100.0

)

 

 

 

Debt issuance costs

 

(1.5

)

 

 

(9.3

)

Separation-related payment from R.R. Donnelley

 

68.0

 

 

 

 

Proceeds from issuance of common stock

 

18.8

 

 

 

 

Proceeds from issuance of long-term debt

 

 

 

 

348.2

 

Net change in short-term debt

 

 

 

 

(8.8

)

Net transfers to Parent and affiliates

 

 

 

 

(336.2

)

Treasury stock repurchases

 

(0.9

)

 

 

 

Other financing activities

 

0.4

 

 

 

 

Net cash used in financing activities

 

(15.2

)

 

 

(6.1

)

Effect of exchange rate on cash and cash equivalents

 

0.6

 

 

 

4.2

 

Net (decrease) increase in cash and cash equivalents

 

(4.0

)

 

 

37.9

 

Cash and cash equivalents at beginning of year

 

36.2

 

 

 

15.1

 

Cash and cash equivalents at end of period

$

32.2

 

 

$

53.0

 

 

 

 

 

 

 

 

 

Supplemental non-cash disclosure:

 

 

 

 

 

 

 

Debt exchange with R.R. 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 Consolidated and Combined Financial Statements

 

6


Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Consolidated and Combined Financial Statements

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

 

 

Note 1. Overview and Basis of Presentation

Description of Business

Donnelley Financial Solutions, Inc. (the “Company” or “Donnelley Financial” ) 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, was declared effective by the U.S. Securities and Exchange Commission (the “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. As part of the Separation, RRD retained approximately 6.2 million shares of Donnelley Financial common stock, or a 19.25% interest in Donnelley Financial. 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. On March 28, 2017, RRD completed the sale of 6.2 million shares of LSC common stock (RRD’s remaining ownership stake in LSC) in an underwritten public offering. As a result, beginning in the quarter ended June 30, 2017, LSC is no longer an affiliate of the Company.

On September 14, 2016, 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 RRD’s common stockholders (the “Separation and Distribution Agreement”). 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.  

At the time of the Separation, 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, premedia 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 makes available to all of its clients.

7


Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Consolidated and Combined Financial Statements

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

 

 

On March 24, 2017, pursuant to the Stockholder and Registration Rights Agreement, dated as of September 30, 2016, by and between the Company and RRD, the Company filed a Registration Statement on Form S-1 to register the offering and sale of shares of the Company’s common stock retained by RRD. The Registration Statement on Form S-1, as amended, was declared effective by the SEC on June 13, 2017. On June 21, 2017, RRD completed the sale of approximately 6.1 million shares of the Company’s common stock in an underwritten public offering. Upon the consummation of the offering, RRD retained approximately 0.1 million shares of the Company’s common stock which were subsequently sold by RRD on August 1, 2017. In conjunction with the underwritten public offering, the underwriters exercised their option to purchase approximately 0.9 million of the Company’s shares (the “Option Shares”). The Company received approximately $18.8 million in net proceeds from the sale of the Option Shares, after deducting estimated underwriting discounts and commissions. The proceeds were used to reduce outstanding debt under the Revolving Facility (as defined in Note 11, Debt). Beginning in the quarter ended September 30, 2017, RRD no longer qualified as a related party, therefore amounts disclosed related to RRD are presented through June 30, 2017 only.  

Basis of Presentation

The accompanying unaudited condensed consolidated and combined financial statements reflect the consolidated financial position and consolidated results of operations of the Company as an independent, publicly traded company for the periods after the Separation and the combined financial position and combined results of operations for the periods prior to the Separation. Prior to the Separation, the combined financial statements were prepared on a stand-alone basis and were derived from RRD’s consolidated financial statements and accounting records.

The unaudited condensed consolidated and combined financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the rules and regulations of the SEC. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The financial data presented herein should be read in conjunction with the audited consolidated and combined financial statements and accompanying notes included in the Company’s latest Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on February 28, 2017. In the opinion of management, the financial data presented includes all adjustments necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented. Results of interim periods should not be considered indicative of the results for the full year. These unaudited condensed consolidated and combined interim financial statements include estimates and assumptions of management that affect the amounts reported in the unaudited condensed consolidated and combined financial statements. Actual results could differ from these estimates.

For periods prior to the Separation, the unaudited condensed consolidated and combined financial statements include the allocation of certain assets and liabilities that were historically held at the RRD corporate level but which were 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 consolidated and 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 consolidated and combined statements of cash flows as a financing activity and in the unaudited condensed consolidated and 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.  

Prior to the Separation, the unaudited condensed consolidated and 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 were 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.

For periods prior to the Separation, the income tax amounts in the unaudited condensed consolidated and combined financial statements were calculated based on a separate income tax return methodology and presented as if the Company’s operations were separate taxpayers in the respective jurisdictions.

8


Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Consolidated and Combined Financial Statements

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

 

 

RRD maintained 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 condensed consolidated and combined financial statements for periods prior to the Separation.  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 pension plan asset allocation from RRD was finalized on June 30, 2017, which resulted in a $0.7 million decrease to the fair value of plan assets transferred to the Company from RRD. The Company also recorded a net other postretirement benefit liability of $1.5 million, as a result of the transfer of an other postretirement benefit plan from RRD to the Company. Refer to Note 6, Retirement Plans, for further details regarding the Company’s pension and other postretirement benefit 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 sales to RRD and affiliates of $1.1 million and $3.6 million for the three months and nine months ended September 30, 2016, 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 $78.0 million for the three and nine months ended September 30, 2016, respectively.  Intercompany receivables and payables with RRD are reflected within net parent company investment in the accompanying unaudited condensed combined financial statements for periods prior to the Separation. See Note 13, Related Parties, for a further description of related party transactions.

 

 

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, 2017 and December 31, 2016 were as follows:  

 

 

September 30, 2017

 

 

December 31, 2016

 

Raw materials and manufacturing supplies

$

6.4

 

 

$

7.6

 

Work in process

 

11.4

 

 

 

10.8

 

Finished goods

 

5.8

 

 

 

5.7

 

Total

$

23.6

 

 

$

24.1

 

 

 

Note 3. Property, Plant and Equipment

The components of the Company’s property, plant and equipment at September 30, 2017 and December 31, 2016 were as follows:

   

 

September 30, 2017

 

 

December 31, 2016

 

Land

$

10.0

 

 

$

10.0

 

Buildings

 

43.7

 

 

 

44.4

 

Machinery and equipment

 

104.4

 

 

 

109.2

 

 

 

158.1

 

 

 

163.6

 

Less: Accumulated depreciation

 

(123.4

)

 

 

(128.1

)

Total

$

34.7

 

 

$

35.5

 

 

Depreciation expense was $1.9 million and $1.4 million for the three months ended September 30, 2017 and 2016, respectively, and $5.0 million and $6.1 million for the nine months ended September 30, 2017 and 2016, 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, 2017 were as follows:

 

 

U.S.

 

 

International

 

 

Total

 

Net book value as of December 31, 2016

$

429.2

 

 

$

17.2

 

 

$

446.4

 

Foreign exchange and other adjustments

 

 

 

 

1.1

 

 

 

1.1

 

Net book value as of September 30, 2017

$

429.2

 

 

$

18.3

 

 

$

447.5

 

9


Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Consolidated and Combined Financial Statements

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

 

 

 

The components of other intangible assets at September 30, 2017 and December 31, 2016 were as follows:

 

 

September 30, 2017

 

 

December 31, 2016

 

 

Gross

 

 

 

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

 

Carrying

 

 

Accumulated

 

 

Net Book

 

 

Carrying

 

 

Accumulated

 

 

Net Book

 

 

Amount

 

 

Amortization

 

 

Value

 

 

Amount

 

 

Amortization

 

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

$

140.6

 

 

$

(97.1

)

 

$

43.5

 

 

$

138.8

 

 

$

(85.3

)

 

$

53.5

 

Trade names

 

6.3

 

 

 

(5.6

)

 

 

0.7

 

 

 

6.3

 

 

 

(5.5

)

 

 

0.8

 

Trademarks, licenses and agreements

 

3.2

 

 

 

(3.2

)

 

 

 

 

 

3.2

 

 

 

(3.2

)

 

 

 

Total other intangible assets

$

150.1

 

 

$

(105.9

)

 

$

44.2

 

 

$

148.3

 

 

$

(94.0

)

 

$

54.3

 

 

Amortization expense for other intangible assets was $3.6 million and $3.6 million for the three months ended September 30, 2017 and 2016, respectively, and $10.7 million and $10.8 million for the nine months ended September 30, 2017 and 2016, respectively.

The following table outlines the estimated annual amortization expense related to other intangible assets as of September 30, 2017:

 

For the year ending December 31,

Amount

 

2017

$

14.3

 

2018

 

13.9

 

2019

 

13.9

 

2020

 

12.5

 

2021

 

0.1

 

2022 and thereafter

 

0.2

 

Total

$

54.9

 

 

Note 5. Restructuring, Impairment and Other Charges

Restructuring, Impairment and Other Charges recognized in Results of Operations

For the three months ended September 30, 2017 and 2016, the Company recorded the following net restructuring, impairment and other charges:

 

Three Months Ended

 

Employee

 

 

Other

Restructuring

 

 

Total

Restructuring

 

 

 

 

 

September 30, 2017

 

Terminations

 

 

Charges

 

 

Charges

 

 

Total

 

U.S.

 

$

0.2

 

 

$

(1.0

)

 

$

(0.8

)

 

$

(0.8

)

International

 

 

0.1

 

 

 

 

 

 

0.1

 

 

 

0.1

 

Corporate

 

 

0.1

 

 

 

 

 

 

0.1

 

 

 

0.1

 

Total

 

$

0.4

 

 

$

(1.0

)

 

$

(0.6

)

 

$

(0.6

)

 

Three Months Ended

 

Employee

 

 

Other

Restructuring

 

 

Total

Restructuring

 

 

 

 

 

September 30, 2016

 

Terminations

 

 

Charges

 

 

Charges

 

 

Total

 

U.S.

 

$

1.0

 

 

$

0.4

 

 

$

1.4

 

 

$

1.4

 

International

 

 

0.3

 

 

 

 

 

 

0.3

 

 

 

0.3

 

Corporate

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1.3

 

 

$

0.4

 

 

$

1.7

 

 

$

1.7

 

 

10


Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Consolidated and Combined Financial Statements

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

 

 

For the nine months ended September 30, 2017 and 2016, the Company recorded the following net restructuring, impairment and other charges:

 

Nine Months Ended

 

Employee

 

 

Other

Restructuring

 

 

Total

Restructuring

 

 

 

 

 

 

Other

 

 

 

 

 

September 30, 2017

 

Terminations

 

 

Charges

 

 

Charges

 

 

Impairment

 

 

Charges

 

 

Total

 

U.S.

 

$

3.2

 

 

$

0.9

 

 

$

4.1

 

 

$

0.2

 

 

$

0.1

 

 

$

4.4

 

International

 

 

1.3

 

 

 

 

 

 

1.3

 

 

 

 

 

 

 

 

 

1.3

 

Corporate

 

 

0.7

 

 

 

 

 

 

0.7

 

 

 

 

 

 

 

 

 

0.7

 

Total

 

$

5.2

 

 

$

0.9

 

 

$

6.1

 

 

$

0.2

 

 

$

0.1

 

 

$

6.4

 

 

Nine Months Ended

 

Employee

 

 

Other

Restructuring

 

 

Total

Restructuring

 

 

 

 

 

 

Other

 

 

 

 

 

September 30, 2016

 

Terminations

 

 

Charges

 

 

Charges

 

 

Impairment

 

 

Charges

 

 

Total

 

U.S.

 

$

1.8

 

 

$

1.2

 

 

$

3.0

 

 

$

 

 

$

0.1

 

 

$

3.1

 

International

 

 

0.5

 

 

 

 

 

 

0.5

 

 

 

 

 

 

 

 

 

0.5

 

Corporate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

2.3

 

 

$

1.2

 

 

$

3.5

 

 

$

 

 

$

0.1

 

 

$

3.6

 

Restructuring and Impairment Charges

For the three and nine months ended September 30, 2017, the Company recorded net restructuring charges of $0.4 million and $5.2 million, respectively, for employee termination costs for 169 employees, substantially all of whom were terminated as of September 30, 2017. These charges primarily related to the reorganization of certain operations and certain administrative functions. Additionally, the Company recognized a net reversal of $1.0 million of other restructuring charges during the three months ended September 30, 2017 primarily due to the reversal of previously recognized lease termination costs associated with a facility that the Company began using during the third quarter of 2017. The Company incurred net lease termination and other restructuring charges of $0.9 million for the nine months ended September 30, 2017.  For the nine months ended September 30, 2017, the Company also recorded $0.2 million of net impairment charges primarily related to leasehold improvements associated with facility closures.  The nine months ended September 30, 2017 includes $0.1 million for other charges associated with the Company’s decision to withdraw in 2013 from certain multi-employer pension plans serving facilities that continued to operate.

For the three and nine months ended September 30, 2016, the Company recorded net restructuring charges of $1.3 million and $2.3 million, respectively, for employee termination costs for 22 employees. These charges primarily related to the reorganization of certain administrative functions. Additionally, the Company incurred lease termination and other restructuring charges of $0.4 million and $1.2 million, respectively, for the three and nine months ended September 30, 2016. The nine months ended September 30, 2016, includes $0.1 million for other charges associated with the Company’s decision to withdraw in 2013 from certain multi-employer pension plans serving facilities that continued to operate.

 

Restructuring Reserve

The restructuring reserve as of December 31, 2016 and September 30, 2017, and changes during the nine months ended September 30, 2017, were as follows:

 

 

 

 

 

 

 

 

 

 

Foreign

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

Restructuring

 

 

Exchange and

 

 

Cash

 

 

September 30,

 

 

2016

 

 

Charges

 

 

Other

 

 

Paid

 

 

2017

 

Employee terminations

$

1.6

 

 

$

5.2

 

 

$

0.1

 

 

$

(5.3

)

 

$

1.6

 

Lease terminations and other

 

3.8

 

 

 

0.9

 

 

 

0.2

 

 

 

(1.5

)

 

 

3.4

 

Total

$

5.4

 

 

$

6.1

 

 

$

0.3

 

 

$

(6.8

)

 

$

5.0

 

 

The current portion of restructuring reserves of $3.2 million at September 30, 2017 was included in accrued liabilities, while the long-term portion of $1.8 million, primarily related to lease termination costs, was included in other noncurrent liabilities at September 30, 2017.

 

11


Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Consolidated and Combined Financial Statements

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

 

 

The Company anticipates that payments associated with the employee terminations reflected in the above table will be substantially completed by March 31, 2018.

The restructuring liabilities classified as “lease terminations and other” consisted of lease terminations, other facility closing costs and contract termination costs. Payments on certain of the lease obligations are scheduled to continue until 2026. Market conditions and the Company’s ability to sublease these properties could affect the ultimate charges related to the lease obligations. Any potential recoveries or additional charges could affect amounts reported in the Company’s financial statements.

 

Note 6. Retirement Plans

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 unaudited condensed consolidated and combined balance sheets.

Donnelley Financial’s unaudited condensed consolidated and 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 $4.2 million in the three and nine months ended September 30, 2016, respectively. Included in these amounts is an allocation for other postretirement benefit plans for $0.3 million and $1.0 million in the three and nine months ended September 30, 2016, respectively.  These allocations are reflected in the Company’s cost of sales and selling, general and administrative expenses.  

Donnelley Financial’s Pension and Postretirement Benefit 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. The pension plan asset allocation from RRD was finalized on June 30, 2017, which resulted in a $0.7 million decrease to the fair value of plan assets transferred to the Company from RRD. The Company also recorded a net other postretirement benefit liability of $1.5 million, as a result of the transfer of an other postretirement benefit plan from RRD to the Company.

The components of the estimated net pension plan income for Donnelley Financial’s pension plans for the three and nine months ended September 30, 2017 and 2016 were as follows:  

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Pension expense (income)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest cost

$

2.6

 

 

$

 

 

$

7.9

 

 

$

 

Expected return on assets

 

(4.0

)

 

 

 

 

 

(12.0

)

 

 

 

Amortization, net

 

0.6

 

 

 

(0.2

)

 

 

1.6

 

 

 

(0.4

)

Net pension income

$

(0.8

)

 

$

(0.2

)

 

$

(2.5

)

 

$

(0.4

)

 

 

12


Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Consolidated and Combined Financial Statements

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

 

 

Note 7. Equity

The Company’s equity as of December 31, 2016 and September 30, 2017, and changes during the nine months ended September 30, 2017, were as follows:

 

 

Total

 

 

Equity

 

Balance at December 31, 2016

$

111.1

 

Net earnings

 

33.4

 

Other comprehensive income

 

5.6

 

Separation-related adjustments

 

0.2

 

Share-based compensation

 

5.2