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AOE su

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

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

For the fiscal year ended December 31, 2019

OR

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

For the transition period from                     to

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 DriveChicago, Illinois

 

60601

(Address of principal executive offices)

 

(ZIP Code)

Registrant’s telephone number, including area code—(844) 866-4337

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

 

 

Title of each
Class

 

Trading Symbol

 

Name of each exchange on which
registered

 

Common Stock (Par Value $0.01)

DFIN

NYSE

 

 

Securities registered pursuant to Section 12(g) of the Act:  None

Indicated by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes      No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes      No  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

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

 

Large accelerated filer 

 

Accelerated filer

 

Non-accelerated filer 

 

Smaller reporting company 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes      No  

The aggregate market value of the shares of common stock (based on the closing price of these shares on the NYSE) on June 28, 2019, the last business day of the registrant’s most recently completed second fiscal quarter, held by nonaffiliates was $413,269,478.

As of February 20, 2020, 34,253,926 shares of common stock were outstanding.

Documents Incorporated By Reference

Portions of the registrant’s proxy statement related to its annual meeting of stockholders scheduled to be held on May 18, 2020 are incorporated by reference into Part III of this Form 10-K.

 

 

 

 


 

DONNELLEY FINANCIAL SOLUTIONS, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2019

 

TABLE OF CONTENTS

 

 

 

Item No.

 

Name of Item

  

Page

 

Part I

 

 

 

 

  

 

 

 

 

 

Item 1.

 

Business

  

 

3

 

 

 

Item 1A.

 

Risk Factors

  

 

10

  

 

 

Item 1B.

 

Unresolved Staff Comments

  

 

19

  

 

 

Item 2.

 

Properties

  

 

19

  

 

 

Item 3.

 

Legal Proceedings

  

 

19

  

 

 

Item 4.

 

Mine Safety Disclosures

  

 

19

  

 

Part II

 

 

 

 

  

 

 

 

 

 

Item 5.

 

Market for Donnelley Financial Solutions, Inc. Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

  

 

20

  

 

 

Item 6.

 

Selected Financial Data

  

 

22

  

 

 

Item 7.

 

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

  

 

24

  

 

 

Item 7A.

 

Quantitative and Qualitative Disclosures about Market Risk

  

 

40

  

 

 

Item 8.

 

Financial Statements and Supplementary Data

  

 

41

  

 

 

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

  

 

41

  

 

 

Item 9A.

 

Controls and Procedures

  

 

41

  

 

 

Item 9B.

 

Other Information

  

 

43

  

 

Part III

 

 

 

 

  

 

 

 

 

 

Item 10.

 

Directors and Executive Officers of Donnelley Financial Solutions, Inc. and Corporate Governance

  

 

43

  

 

 

 

 

Executive Officers of Donnelley Financial Solutions, Inc.

  

 

43

  

 

 

Item 11.

 

Executive Compensation

  

 

44

  

 

 

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  

 

44

  

 

 

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

  

 

44

  

 

 

Item 14.

 

Principal Accounting Fees and Services

  

 

44

  

 

Part IV

 

 

 

 

  

 

 

 

 

 

Item 15.

 

Exhibits, Financial Statement Schedules

  

 

45

  

 

 

Item 16.

 

Form 10-K Summary

 

 

45

  

 

 

 

Index to Consolidated Financial Statements

 

F-1

Consolidated Financial Statements and Notes

 

F-2

Report of Independent Registered Public Accounting Firm

 

F-48

 

 

 

Exhibits

  

E-1

 

 

 

Signatures

 

 

 

2


 

PART I

ITEM 1.

BUSINESS

Company Overview

 

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

Global Capital Markets (“GCM”)

The Company provides a comprehensive set of solutions to corporate clients, domestically and internationally, to comply with disclosure obligations, create, manage and deliver accurate and timely financial communications, manage public and private transaction processes and provide clients with business intelligence from financial disclosures with data and analytics services. These solutions include the Company’s traditional full-service SEC’s Electronic Data Gathering, Analysis, and Retrieval (“EDGAR”) filing preparation and filing agent services, technology-enabled services and print and distribution solutions, as well as the Company’s SaaS solutions, ActiveDisclosure, Venue Virtual Data Room (“Venue”), EDGAR Online and eBrevia.

The Company’s GCM clients consist mainly of companies that are subject to the filing and reporting requirements of the Securities Act of 1933, as amended (the “Securities Act”) and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company also supports public and private companies throughout merger and acquisition transaction processes and in public and private capital markets transactions with deal management solutions focused on aiding transactional efficiency from inception to completion. In 2019, approximately 49% of GCM net sales were transactional in nature, approximately 36% of GCM net sales were compliance in nature, approximately 14% of GCM net sales were related to Venue services and the remainder of GCM net sales were related to data and analytics services.

Transaction Solutions

The Company helps GCM clients throughout the course of public and private business transactions. For mergers and acquisition (“M&A”) transactions the Company supports deal participants in creating transaction-related registration statements, proxies and prospectuses, files client documents as their filing agent through the EDGAR filing system and manages print for distribution to its clients’ shareholders. The Company also provides complete initial public offering (“IPO”) solutions that support the various stages of the IPO process. Solutions include preparing and filing registration statements and prospectuses, both through the Company’s filing agent solution and its ActiveDisclosure SaaS solution, the Venue Virtual Data Room and secure file sharing SaaS solution and the eBrevia contract analytics SaaS solution.

The Company’s cloud-based Venue® Virtual Data Room is a highly secure data room platform that allows GCM clients to share confidential information in real-time throughout the transaction lifecycle. Clients can maintain control over sensitive data when conducting due diligence for M&A, raising capital for an IPO or developing a document repository. Specifically, companies have used Venue to securely organize, manage, distribute and track corporate governance, financing, legal and other documents in an online workspace accessible to internal and outside advisors.

The Company acquired eBrevia, Inc. (“eBrevia”), a provider of artificial intelligence-based data extraction and contract analytics software solutions, on December 18, 2018. The eBrevia technology provides enterprise contract review and analysis solutions, leveraging machine learning to produce fast and accurate results. eBrevia's software, which extracts and summarizes key provisions and other information, is leveraged in due diligence, contract management, lease abstraction, and document drafting. The acquisition enhances the Company’s Venue offerings to provide clients with secure data aggregation, due diligence, compliance and risk management solutions. 

3


 

The Company also offers clients the use of private conferencing facilities in major cities in the U.S. and international jurisdictions. This service helps clients maintain confidentiality in deal negotiations and provides clients a place to host in-person working groups to meet, strategize and prepare documents for the transactional deal stream. The Company’s sites are outfitted to provide around-the-clock services to support the transaction process. 

Through an investment in and commercial agreement with Mediant Communications, Inc. (“Mediant”), the Company can simplify the annual meeting and proxy process for its capital markets customers via project management services and state of the art voting and tabulation technology. Additionally, the Company can help develop client-branded websites and enhanced online versions of the proxy statement and annual meeting documents to improve navigation, highlight key messaging and expand their reach to a broader investor base. This partnership allows the Company to manage and centralize communications for all investors, fulfill and distribute proxy materials and host virtual shareholder meetings, if desired.  

Compliance Solutions

The Company provides compliance solutions to GCM clients in preparing the Exchange Act filings that are compatible with the SEC’s EDGAR system. GCM clients leverage the Company’s deep industry expertise and experience to successfully navigate the SEC’s specified file formats when submitting compliance documents through the EDGAR system.

The Company’s cloud-based ActiveDisclosure platform provides GCM clients with end-to-end solutions to collaborate, tag, validate and file with the SEC efficiently.  

The Company supports GCM clients in meeting SEC-mandated regulatory filing requirements, including tagged filing in the eXtensible Business Reporting Language (“XBRL”) format. The Company provides clients with a suite of tagging, review and validation tools to assist them with the XBRL requirements. The Company has accounting and finance professionals that assist its GCM clients with the processes of tag selection, tag review, file creation, validation and distribution.

The Company helps GCM clients elevate their proxy filings from compliance documents to investor-focused strategic communications tools with Proxy Design services. The Company’s end-to-end proxy solutions include advisory services, proxy strategy and design, disclosure management, EDGAR filing and expertise, online hosting solutions, print production, distribution and annual meeting services.

The Company also provides additional compliance solutions through strategic partnerships, including a full suite of audit management and compliance solutions for Sarbanes-Oxley Act (“SOX”), operational audits, IT compliance, enterprise risk management and workflow management.

EDGAR® Online - Data and Analytics 

The Company’s EDGAR® Online solution delivers intelligent solutions in financial disclosures, creating and distributing company data and public filings for equities, mutual funds and other publicly traded assets. In addition to providing access to data sets, the Company provides subscription-based proprietary desktop and web tools for data analysis. EDGARPro enables investors, analysts, lawyers, auditors and corporate executives to access detailed company information, as-reported and standardized financial data, SEC filings, stock quotes and news.

Global Investment Markets (“GIM”)

The Company provides a comprehensive set of solutions to clients operating in global investment markets domestically and internationally, including United States-based mutual funds, hedge and alternative investment funds, insurance companies and overseas investment structures for collective investments (similar to mutual funds in the United States). The Company also provides products to third party service providers and custodians who support investment managers, and sells products and distribution services to broker networks and financial advisors that distribute and sell investment products.

In 2019, approximately 96% of GIM net sales, excluding postage and freight, were compliance in nature, while the remaining 4% of GIM net sales were transactional in natureIn addition, approximately 89% of the Company’s 2019 GIM net sales, excluding postage and freight, were derived predominantly from clients in the mutual fund and insurance industries, while the remaining 11% of net sales were derived primarily from clients in the healthcare industry. The Company’s services and sales teams currently support clients in the United States, Canada, Ireland, the United Kingdom, France, Luxembourg, Poland, India and Australia. 

4


 

The Company provides U.S. based mutual funds and investment insurance companies with solutions to prepare and file registration forms and subsequent ongoing disclosures, as well as XBRL-formatted filings pursuant to the Investment Company Act of 1940 (the “Investment Act”), through the EDGAR system.

The Company’s proprietary FundSuiteArc software platform provides GIM clients with a comprehensive suite of cloud-based services and products that store and manage information in a self-service, central repository for compliance and regulatory documents to be easily accessed, assembled, edited, translated, rendered and submitted to regulators. Some of the products within FundSuiteArc are cloud-based and include automation and single-source data validation that streamlines processes and drives efficiency for clients. FundSuiteArc includes ArcFiling, ArcReporting, ArcPro, ArcExchange and ArcMarketing. The ArcFiling solution supports the newly required filing of Form N-CEN, as well as the filing of Form N-PORT, for which the initial filing dates began in April 2019. The Company’s ArcFiling software solution supports both filings. The Company expects an increase in SaaS revenue due to the increase in the frequency of filings for registered investment companies.

Through an investment in and commercial agreement with Mediant, the Company provides a suite of software to brokers and financial advisors that enable them to monitor and view shareholder communications. The Company offers various technology and electronic delivery services and products to make the distribution of documents and content more efficient. The Company also supports the distribution, tabulation and solicitation of shareholders for corporate elections and mutual fund proxy events.

The Company provides turn-key proxy services for mutual funds and investment insurance companies including discovery, planning and implementation, print and mail management, solicitation, tabulation services, shareholder meeting review and expert support for mutual funds, variable annuities, REITs and other alternative investments.  

The Company provides GIM clients with investor communication solutions including printing, digital distribution, e-Delivery and fulfillment systems.

The Company offers to healthcare providers a comprehensive set of solutions to support the creation, ordering and distribution of pre-enrollment and post-enrollment information in the form of customized and/or personalized kits, booklets and packets.  

Segments

The Company operates in two business segments:

 

United States. The U.S. segment is comprised of two reporting units: capital markets and investment markets. The Company sold its Language Solutions business, a former reporting unit, on July 22, 2018. The Company services capital market and investment market clients in the U.S. by delivering technology-enabled services and products to help create, manage and deliver financial communications to investors and regulators. The Company provides capital market and investment market clients with communication tools, services and software to allow them to comply with their ongoing regulatory filings. In addition, the U.S. segment provides clients with communications services to create, manage and deliver registration statements, prospectuses, proxies and other communications to regulators and investors. The U.S. segment also includes commercial printing capabilities.

 

International. The International segment includes operations in Asia, Europe, Canada and Latin America. The international business is primarily focused on working with international capital markets clients on capital markets offerings and regulatory compliance-related activities within the United States. In addition, the International segment provides services to international investment market clients to allow them to comply with applicable SEC regulations. The Company provided language solutions to international clients, prior to the sale of the Company’s Language Solutions business on July 22, 2018. Refer to Note 4, Acquisitions and Dispositions, to the Consolidated Financial Statements for additional information.

The Company reports certain unallocated selling, general and administrative (“SG&A”) activities and associated expenses within Corporate, including, in part, executive, legal, finance, marketing and certain facility costs. In addition, certain costs and earnings of employee benefit plans, such as pension income and share-based compensation, are included in Corporate and are not allocated to the reportable segments.

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Services and Products

The Company separately reports its net sales and related cost of sales for its services and products offerings. The Company’s services offerings consist of document composition, compliance-related EDGAR filing services, transaction solutions, and the Company’s SaaS solutions, including Venue, FundSuiteArc, ActiveDisclosure, EDGAR Online and others. The Company’s product offerings primarily consist of conventional and digital printed products and related shipping costs. Prior to the sale of the Company’s Language Solutions business on July 22, 2018, the Company provided language solutions services to international clients.

Company History

Spin-off Transaction

On October 1, 2016, DFIN became an independent publicly traded company through the distribution by RRD of approximately 26.2 million shares, or 80.75%, of DFIN common stock to RRD shareholders (the “Separation”). Holders of RRD common stock received one share of DFIN 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 DFIN common stock, or a 19.25% interest in DFIN, of which 6.1 million shares and 0.1 million shares were subsequently sold in June 2017 and August 2017, respectively. DFIN’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.

Language Solutions Disposition

On July 22, 2018, the Company sold its Language Solutions business. Prior to its sale, the Language Solutions business supported domestic and international businesses in 73 different countries and in a variety of industries, including the financial, corporate, life sciences and legal industries, among others, by helping them adapt their business content into different languages for specific countries, markets and regions through a complete suite of language services and products.

eBrevia Acquisition

On December 18, 2018, the Company acquired eBrevia, a provider of artificial intelligence-based data extraction and contract analytics software solutions. Prior to the acquisition, the Company held a 12.8% investment in eBrevia. The purchase price for the remaining equity of eBrevia, which includes the Company’s estimate of contingent consideration, was $23.3 million, net of cash acquired of $0.2 million. The eBrevia technology provides enterprise contract review and analysis solutions, leveraging machine learning to produce fast and accurate results. eBrevia's software, which extracts and summarizes key legal provisions and other information, is used in due diligence, contract management, lease abstraction and document drafting. eBrevia’s operations are included within the Capital Markets reporting unit in the U.S. segment. The acquisition enhances the Company’s Venue offerings to provide clients with secure data aggregation, due diligence, compliance and risk management solutions. 

Competition

Technological and regulatory changes, including the electronic distribution of documents, continue to impact the market for the Company’s services and products. In addition to the Company’s ongoing innovation in its SaaS solutions, one of the Company’s competitive strengths is that it offers a wide array of communications products, compliance services, a global platform, exceptional sales and service and regulatory domain expertise, which provide differentiated solutions for its clients.

The global risk and compliance industry, in general, is highly competitive and barriers to entry have decreased as a result of technology innovation and the simplification of EDGAR filings. Despite some consolidation in recent years, the industry remains highly fragmented in the United States and even more so internationally with many in-country alternative providers. The Company expects competition to increase from existing competitors as well as new and emerging market entrants. In addition, as the Company expands its product and service offerings, it may face competition from new and existing competitors. The Company competes primarily on product quality and functionality, service levels, subject matter regulatory expertise, security, price and reputation.

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The impact of digital technologies has impacted many of the products and markets in which the Company competes, most acutely in the Company’s mutual fund, variable annuity and public company compliance business offerings. While the Company offers a high-touch, service oriented experience, technology changes have provided alternatives to the Company’s clients that allow them to manage more of the financial disclosure process themselves. The Company has invested in its own SaaS solutions, ActiveDisclosure, FundSuiteArc and Venue to serve clients and increase retention, and has invested to expand capabilities and address new market sectors. The future impact of technology as well as the streamlining and modernizing of disclosure requirements on the business is difficult to predict and could result in additional expenditures to restructure impacted operations or develop new technologies. In addition, the Company has made targeted acquisitions and investments in its existing business to offer clients innovative services and solutions, including acquisitions of eBrevia and EDGAR Online and investments in AuditBoard, Mediant, and Gain Compliance that support the Company’s position as a technology service leader in this evolving industry.  

The Company’s competitors for SEC filing services for public company compliance clients include full service financial communications providers, technology point solution providers focused on financial communications and general technology providers. The Company’s competitors for Venue Virtual Data Room include providers of virtual data room-specific solutions and enterprise software providers that offer online products that serve as document repositories, virtual data rooms as well as file sharing and collaboration solutions. The Company’s competitors for SEC filing services for investment markets clients include full service traditional providers, small niche technology providers and local and regional print providers that bid against the Company for printing, mailing and fulfillment services.  

Market Volatility/Cyclicality

The Company is subject to market volatility in the United States and world economy, as the success of the transactional offering is largely dependent on the global market for IPOs, secondary offerings, mergers and acquisitions, public and private debt offerings, leveraged buyouts, spinouts and other transactions. A variety of factors impact the global markets, including the regulatory and political environment. In the past, U.S. IPO, M&A and public debt offerings were disrupted by the U.S. federal government shutdown that occurred, most recently, from December 2018 to January 2019. Future government shutdowns could result in additional volatility. The International segment is particularly susceptible to capital market volatility as most of the International business is capital markets transaction focused. The Company mitigates some of that risk by offering services in higher demand during a down market, like document management tools for the bankruptcy/restructuring process, and also by moving upstream from the filing process with products like Venue, the Company’s data room solution. The Company also attempts to balance this volatility through supporting the quarterly/annual public company reporting process through its EDGAR filing services and ActiveDisclosure product, its investment markets regulatory and shareholder communications offering and continues to expand into adjacent growth businesses like data and analytics, which has recurring revenues and is not as susceptible to market volatility and cycles. The quarterly/annual public company reporting process work also subjects the Company to filing seasonality shortly after the end of each fiscal quarter, with peak periods during the course of the year. The seasonality and associated operational implications include the need to increase staff during peak periods through a combined strategy of hiring additional full-time and 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 FundSuiteArc solutions are competitive in this space, competitors are 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 recurring revenue to mitigate market volatility.

Regulatory Impact

The SEC is adopting new as well as amending existing rules and forms to modernize the reporting and disclosure of information by registered investment companies. These changes are driving significant regulatory changes which impact the Company’s customers within its Investment Markets business. On October 13, 2016, the SEC adopted a new N-PORT filing requirement, which requires certain registered investment companies to report information about their portfolio in XML, a structured data format, on a monthly basis, replacing what was previously a quarterly filing requirement. This rule also includes an annual N-CEN filing in XML, replacing a semi-annual filing requirement. Compliance dates depend on asset size and began as soon as June 1, 2018 for larger funds. In 2019, the SEC amended the rule and Funds now file three months of N-PORT on a quarterly basis. The first N-PORT filing deadlines began in April 2019 for larger funds with over $1 billion in assets. Beginning in April 2020, smaller funds will begin filing N-PORT on a quarterly basis. The Company’s ArcFiling software solution can support both filings.

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On June 5, 2018, the SEC adopted Rule 30e-3 which provides certain registered investment companies with an option to electronically deliver shareholder 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 will begin on January 1, 2021 due to a 24-month transition period, during which registered investment companies must notify investors of the upcoming change in transmission format of shareholder reports. The Company expects a decline in the volume of printed annual and semi-annual shareholder reports in 2021 and beyond as a result of Rule 30e-3.

Raw Materials

The primary raw materials used in the Company’s printed products are paper and ink. The paper and ink is sourced from a small set of select suppliers to ensure consistent quality that meets the Company’s performance expectations and provides for continuity of supply. The Company believes that the risk of incurring material losses as a result of a shortage in raw materials is unlikely and that the losses, if any, would not have a materially negative impact on the Company’s business.

Distribution

The Company’s products are distributed to end-users through the U.S or foreign postal services, through retail channels, electronically or by direct shipment to customer facilities.

Customers

For each of the years ended December 31, 2019, 2018 and 2017, no customer accounted for 10% or more of the Company’s net sales.

Technology

The Company invests resources in developing software solutions to complement its services. The Company invests in its core composition systems and client facing solutions and has also adopted market-leading third party systems which have improved the efficiency of its sales and operations processes. The Company has continued to invest in enhancements of its technology-based offerings including EDGAR filing and XBRL services, Venue Virtual Data Room, ActiveDisclosure, FundSuiteArc software platform, and its data and analytics solutions. The Company continues to invest in leading and innovative technology such as robotic process automation, machine learning and hybrid cloud architecture.

Cybersecurity & Data Protection

A core aspect of the Company’s business relies on technology and software; as a result, the security of those technologies and software, as well as the protection of the confidential information entrusted to the Company by its customers, are key parts of the Company’s business and strategy. The DFIN Cybersecurity Program is based upon industry leading frameworks, which include International Standardization Organization #27001 (ISO 27001), Control Objectives for Information Technology (COBIT), and the National Institute of Standards and Technology Framework for Improving Critical Infrastructure Cybersecurity (commonly known as NIST). The Company’s technologies and software must also comply with domestic and international regulatory and legal requirements. Ensuring that these technologies and software comply with those regulations is a key focus of the Company’s efforts.

The Company leverages cybersecurity technologies designed to ensure that client, employee and business confidential data is secure. The Company’s cybersecurity portfolio is inclusive of, but not limited to, data encryption, data masking, leading secure software development methodologies, aggressive application and network penetration testing, incident response, digital forensics, least-privileged access controls, anti-malware, virtual private networks and cyber threat intelligence. Additionally, the Company manages a 24x7 Security Operations capability that monitors and responds to cyber threats in real time.

To demonstrate transparency, the Company’s commitment to effective cybersecurity and data protection efforts and in pursuit of continuous improvement, the Company undergoes a series of third-party security reviews, including third-party penetration tests.

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Environmental Compliance

It is the Company’s policy to conduct its global operations in accordance with all applicable laws, regulations and other requirements. It is not possible to quantify with certainty the potential impact of actions regarding environmental matters, particularly remediation and other compliance efforts that the Company may undertake in the future. However, in the opinion of management, compliance with the present environmental protection laws, before taking into account estimated recoveries from third parties, will not have a material adverse effect on the Company’s consolidated annual results of operations, financial position or cash flows.

Employees

As of December 31, 2019, the Company had approximately 2,900 employees.

Available Information

The Company maintains a website at www.dfinsolutions.com where the Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports, as well as other SEC filings, are available without charge, as soon as reasonably practicable following the time they are filed with, or furnished to, the SEC. The Principles of Corporate Governance of the Company’s Board of Directors, the charters of the Audit, Compensation, Corporate Responsibility & Governance Committees of the Board of Directors and the Company’s Principles of Ethical Business Conduct are also available on the Investor Relations portion of the Company’s website, and will be provided, free of charge, to any shareholder who requests a copy. References to the Company’s website address do not constitute incorporation by reference of the information contained on the website, and the information contained on the website is not part of or incorporated by reference in this document.

Special Note Regarding Forward-Looking Statements

The Company has made forward-looking statements in this Annual Report on Form 10-K (the “Annual Report”) within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 that are subject to risks and uncertainties. These statements are based on the beliefs and assumptions of the Company. Generally, forward-looking statements include information concerning possible or assumed future actions, events, or results of operations of the Company.

These statements may include words such as “anticipates,” “estimates,” “expects,” “projects,” “forecasts,” “intends,” “plans,” “continues,” “believes,” “may,” “will,” “goals” and variations of such words and similar expressions are intended to identify our forward-looking statements.

Forward-looking statements are not guarantees of performance. These forward-looking statements are subject to a number of important factors, including those factors discussed in detail in “Item 1A: Risk Factors” and elsewhere in this Annual Report, that could cause the Company’s actual results to differ materially from those indicated in any such forward-looking statements. These factors include, but are not limited to:

 

the volatility of the global economy and financial markets, and its impact on transactional volume;

 

failure to offer high quality customer support and services;

 

the retention of existing, and continued attraction of additional clients;

 

the growth of new technologies with which the Company may be able to adequately compete;

 

the Company’s inability to maintain client referrals;

 

the competitive market for the Company’s products and industry fragmentation affecting prices;

 

the ability to gain client acceptance of the Company’s new products and technologies;

 

delay in market acceptance of the Company’s services and products due to undetected errors or failures found in its services and products;

 

failure to maintain the confidentiality, integrity and availability of systems, software and solutions;

 

failure to properly use and protect client and employee information and data;

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the effect of a material breach of security or other performance issues of any of the Company’s or its vendors’ systems;

 

factors that affect client demand, including changes in economic conditions, national or international regulations and clients’ budgetary constraints;

 

the Company’s ability to access debt and the capital markets due to adverse credit market conditions;

 

the effect of increasing costs of providing healthcare and other benefits to employees;

 

changes in the availability or costs of key materials (such as ink and paper) or in prices received for the sale of by-products;

 

failure to protect the Company’s proprietary technology;

 

failure to successfully integrate acquired businesses;

 

availability to maintain the Company’s brands and reputation;

 

the retention of existing, and continued attraction of, key employees, including management;

 

the effects of operating in international markets, including fluctuations in currency exchange rates; and

 

the effect of economic and political conditions on a regional, national or international basis.

Because forward-looking statements are subject to assumptions and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Undue reliance should not be placed on such statements, which speak only as of the date of this document or the date of any document that may be incorporated by reference into this document.

Consequently, readers of the Annual Report should consider these forward-looking statements only as the Company’s current plans, estimates and beliefs. The Company does not undertake and specifically declines any obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect future events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. The Company undertakes no obligation to update or revise any forward-looking statements in this Annual Report to reflect any new events or any change in conditions or circumstances.

 

 

ITEM 1A.

RISK FACTORS

 

The Company’s consolidated results of operations, financial position and cash flows can be adversely affected by various risks. These risks include the principal factors listed below and the other matters set forth in the Annual Report. You should carefully consider all of these risks.

 


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A significant part of the Company’s business is derived from the use of DFIN’s services and products in connection with financial and strategic business transactions. Trends that affect the volume of these transactions may negatively impact the demand for DFIN’s services and products.

A significant portion of the Company’s net sales depends on the purchase of DFIN’s services and products by parties involved in GCM compliance and transactions. As a result, the Company’s business is largely dependent on the global market for IPOs, secondary offerings, mergers and acquisitions, public and private debt offerings, leveraged buyouts, spinouts, bankruptcy and claims processing and other transactions. These transactions are often tied to market conditions and the resulting volume of these types of transactions affects demand for the Company’s services and products. Downturns in the financial markets, global economy or in the economies of the geographies in which the Company does business and reduced equity valuations create risks that could negatively impact the Company’s business. For example, in the past, economic volatility has led to a decline in the financial condition of a number of the Company’s clients and led to the postponement of their capital markets transactions. To the extent that there is continued volatility, the Company may face increasing volume pressure. Furthermore, the Company’s offerings for GIM clients can be affected by fluctuations in the inflow and outflow of money into investment management funds which determines the number of new funds that are opened and closed. As a result, the Company is unable to predict the impact of any potential worsening of macroeconomic conditions which could have impacts to the Company’s results of operations. The level of activity in the financial communications services industry, including the financial transactions and related compliance needs DFIN’s services and products are used to support, is sensitive to many factors beyond the Company’s control, including interest rates, regulatory policies, general economic conditions, the Company’s clients’ competitive environments, business trends, terrorism and political change, such as the impact of the United Kingdom’s (the “UK”) recent withdrawal from the European Union (the “EU”). While EU rules will continue to apply in the UK until the end of 2020 (which period may be extended by one or two years), there can be no assurance that an agreement between the UK and the EU with regard to future trade and co-operation will be reached prior to the end of this transition period. In addition, a weak economy could hinder the Company’s ability to collect amounts owed by clients. Failure of the Company’s clients to pay the amounts owed or to pay such amounts in a timely manner, may increase the Company’s exposure to credit risks and result in bad debt write-offs. Unfavorable conditions or changes in any of these factors could negatively impact the Company’s results of operations, financial position and cash flow.

The quality of the Company’s customer support and services offerings is important to the Company’s clients, and if the Company fails to offer high quality customer support and services, clients may not use DFIN’s solutions resulting in a potential decline in net sales.

 

A high level of customer support is critical for the successful marketing and sale of DFIN’s solutions. If the Company is unable to provide a level of customer support and service to meet or exceed clients’ expectations, the Company could experience a loss of clients and market share, a failure to attract new clients, including in new geographic regions and increased service and support costs and a diversion of resources. Any of these results could negatively impact the Company’s results of operations, financial position and cash flow.

A substantial part of the Company’s business depends on clients continuing their use of DFIN’s services and products. Any decline in the Company’s client retention would harm the Company’s future operating results.

 

The Company does not have long term contracts with most of GCM and GIM clients and, therefore, relies on their continued use of DFIN’s services and products, particularly for compliance-related services. As a result, client retention, particularly during periods of declining transactional volume, is an important part of the Company’s strategic business plan. There can be no assurance that clients will continue to use DFIN’s services and products to meet their ongoing needs, particularly in the face of competitors’ services and products offerings. Client retention rates may decline due to a variety of factors, including:

 

the Company’s inability to demonstrate to the value of its solutions;

 

the price, performance and functionality of DFIN’s solutions;

 

the availability, price, performance and functionality of competing services and products;

 

clients’ ceasing to use or anticipating a declining need for the Company’s services in their operations;

 

consolidation in the Company’s client base;

 

the effects of economic downturns and global economic conditions;

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technology and application failures and outages, interruption of service, security breaches or fraud which could adversely affect the Company’s reputation and the Company’s relations with its clients; or

 

reductions in clients’ spending levels.

If the Company’s retention rates are lower than anticipated or decline for any reason, the Company’s net sales may decrease and the Company’s profitability may be harmed, which could negatively impact the Company’s results of operations, financial position and cash flow.

The Company’s business may be adversely affected by new technologies enabling clients to produce and file documents on their own.

 

The Company’s business may be adversely affected as clients seek out opportunities to produce and file regulatory documentation on their own and begin to implement technologies that assist them in this process. For example, clients and their financial advisors have increasingly relied on web-based services which allow clients to autonomously file and distribute reports required pursuant to the Exchange Act, prospectuses and other materials as a replacement for using the Company’s EDGAR filing services. If technologies are further developed to provide clients with the ability to autonomously produce and file documents to meet their regulatory obligations, and the Company does not develop products or provide services to compete with such new technologies, the Company’s business may be adversely affected by those clients who choose alternative solutions, including self-serving or filing themselves.

The Company’s performance and growth depend on its ability to generate client referrals and to develop referenceable client relationships that will enhance the Company’s sales and marketing efforts.

 

The Company depends on users of its solutions to generate client referrals for the Company’s services. The Company depends, in part, on the financial institutions, law firms and other third parties who use DFIN’s services and products to recommend solutions to their client base, which provides the Company the opportunity to reach a larger client base than it can reach through the direct sales and internal marketing efforts. For instance, a portion of the Company’s net sales from GCM clients is generated through referrals by investment banks, financial advisors and law firms that have utilized the Company’s services in connection with prior transactions. These referrals are an important source of new clients for the Company’s services.

A decline in the number of referrals could require the Company to devote substantially more resources to the sales and marketing of its services, which would increase costs, potentially lead to a decline in net sales, slow the Company’s growth and negatively impact its results of operations, financial position and cash flow.

 

The Company’s indebtedness may adversely affect the Company’s business and results of operations, financial position and cash flow.

 

As of December 31, 2019, the Company had $300 million of 8.25% senior unsecured notes due October 15, 2024 (“Notes”) outstanding. As of December 31, 2019, the Company did not have any amounts outstanding under its Credit Facilities, as defined below. The Company’s ability to make payments on and to refinance indebtedness, as well as any future debt that it may incur, will depend on the Company’s ability to generate cash in the future from operations, financings or asset sales. The Company’s ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond the Company’s control. The Company may not generate sufficient funds to service its debt and meet its business needs, such as funding working capital or the expansion of the Company’s operations. If the Company is not able to repay or refinance debt as it becomes due, it may be forced to take disadvantageous actions, including facility closure, staff reductions, reducing financing in the future for working capital, capital expenditures and general corporate purposes, selling assets or dedicating an unsustainable level of cash flows from operations to the payment of principal and interest on its indebtedness, and restricting future capital return to stockholders. The lenders who hold the Company’s debt could also accelerate amounts due in the event of a default, which could potentially trigger a default or acceleration of the maturity of the Company’s debt.

In addition, the Company’s competitors who may be less leveraged, could put the Company at a competitive disadvantage. These competitors could have greater financial flexibility to pursue strategic acquisitions, secure additional financing and may better withstand downturns in the Company’s industry or the economy in general.

 

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The agreements and instruments that govern the Company’s debt impose restrictions that may limit the Company’s operating and financial flexibility.

 

On September 30, 2016, in connection with the Separation, the Company entered into a Credit Agreement (the “Credit Agreement”) by and among the Company, the lenders party thereto from time to time and JPMorgan Chase Bank, N.A., as administrative agent. The Credit Agreement provides for a $350.0 million senior secured term loan B facility (the “Term Loan Credit Facility”) and a $300.0 million senior secured revolving credit facility (the “Revolving Facility,” and, together with the Term Loan Credit Facility, the “Credit Facilities”). The Credit Agreement that governs the Company’s Credit Facilities and the indenture that governs the Notes contain a number of significant restrictions and covenants that limit the Company’s ability to:

 

 

incur additional debt;

 

pay dividends, make other distributions or repurchase or redeem capital stock;

 

prepay, redeem or repurchase certain debt;

 

make loans and investments;

 

sell, transfer or otherwise dispose of assets;

 

incur or permit to exist certain liens; enter into certain types of transactions with affiliates;

 

enter into agreements restricting the Company’s subsidiaries’ ability to pay dividends; and

 

consolidate, merge or sell all or substantially all of the Company’s assets.

 

These covenants can have the effect of limiting the Company’s flexibility in planning for or reacting to changes in the Company’s business and the markets in which it competes. In addition, the Credit Agreement that governs the Credit Facilities requires the Company to comply with certain financial maintenance covenants. Operating results below current levels or other adverse factors, including a significant increase in interest rates, could result in the Company being unable to comply with the financial covenants contained in the Term Loan Credit Facility and indenture. If the Company violates covenants under the Credit Facilities and indenture and is unable to obtain a waiver from the lenders, the Company’s debt under the Credit Facilities and indenture would be in default and could be accelerated by the Company’s lenders. Due to cross-default provisions in the agreements and instruments governing the Company’s debt, a default under one agreement or instrument could result in a default under, and the acceleration of, other debt.

 

If the Company’s debt is accelerated, the Company may not be able to repay its debt or borrow sufficient funds to refinance it. Even if the Company is able to obtain new financing, it may not be on commercially reasonable terms, on terms that are acceptable, or at all. If the Company’s debt is in default for any reason, the Company’s business and results of operations, financial position and cash flow could be materially and adversely affected. In addition, complying with these covenants may also cause the Company to take actions that are not favorable to holders of the Notes and may make it more difficult for the Company to successfully execute its business strategy and compete against companies that are not subject to such restrictions.

Despite the Company’s current level of indebtedness, it may be able to incur significantly more debt.

Despite the Company’s current level of indebtedness, the Company may be able to incur significant additional debt, including secured debt, in the future. Although the indenture governing the Notes and the Credit Agreement governing the Credit Facilities restrict the incurrence of additional debt, these restrictions are subject to a number of qualifications and exceptions. Also, these restrictions do not prevent the Company from incurring obligations that do not constitute indebtedness. In addition, as of December 31, 2019, the Company had $231.6 million available for additional borrowing under the Revolving Facility. The more indebtedness the Company incurs, the further exposed it becomes to the risks associated with leverage described above.

Adverse credit market conditions may limit the Company’s ability to obtain future financing.

 

The Company may, from time to time, depend on access to credit markets. Uncertainty and volatility in global financial markets may cause financial markets institutions to fail or may cause lenders to hoard capital and reduce lending. As a result, DFIN may not obtain financing on terms and conditions that are favorable, or at all.

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The highly competitive market for DFIN’s services and products and industry fragmentation may continue to create adverse price pressures.

 

The financial communications services industry is highly competitive with relatively low barriers to entry and the industry remains highly fragmented in North America and internationally. Management expects that competition will increase from existing competitors, as well as new and emerging entrants. Additionally, as the Company expands its product and service offerings, it may face competition from new and existing competitors. As a result, competition may lead to additional pricing pressure on DFIN’s services and products, which could negatively impact its results of operations, financial position and cash flow.

The business plan management announced at the Company’s 2018 investor day relies on the Company’s ability to transform into a software-as-a-service company, and a failure to adapt to technological changes to address the changing demands of clients may adversely impact the Company’s business, and if the Company fails to successfully develop, introduce or integrate new services or enhancements to its services and products platforms, systems or applications, DFIN’s reputation, net sales and operating income may suffer.

 

In May 2018, management introduced the Company’s new business plan that focuses on transitioning its business to a software and technology focused company. In order to do that, the Company must attract new clients for those businesses, and its ability to attract new clients and increase sales to existing clients will depend in large part on the Company’s ability to enhance and improve existing services and products platforms, including application solutions, and to introduce new functionality either by acquisition or internal development. The Company’s operating results would suffer if its innovations are not responsive to the needs of the Company’s clients, are not appropriately timed with market opportunities or are not brought to market effectively. In addition, it is possible that management’s assumptions about the features that they believe will drive purchasing decisions for the Company’s potential clients or renewal decisions for the existing clients could be inaccurate. There can be no assurance that new products or services, or upgrades to DFIN’s products or services, will be released as anticipated or that, when released, they will not contain defects. If product defects arise, the Company could experience negative publicity, damage to its reputation, decline in net sales, delay in market acceptance or claims by clients brought against the Company. Moreover, upgrades and enhancements to the Company’s platforms may require substantial capital investment without assurance that the upgrades and enhancements will enable the Company to achieve or sustain a competitive advantage in the product and service offerings. If the Company is unable to license or acquire new technology solutions to enhance existing product and service offerings, the results of operations, financial position and cash flow may be negatively impacted.  

Undetected errors or failures found in DFIN’s services and products may result in loss of or delay in market acceptance of the services and products that could negatively impact its business.

 

DFIN’s services and products may contain undetected errors or scalability limitations during their life cycle, but particularly when first introduced or as new versions are released to the market. The Company releases enhanced versions of products including platforms during various stages of development. Despite production testing by the Company and operational testing by current and potential clients, errors may not be found in new services and products until after commencement of commercial availability or use, resulting in a loss of or a delay in market acceptance, damage to the Company’s reputation, client dissatisfaction and decline in net sales and operating income.

Modifications in the rules and regulations to which clients or potential clients are subject to may impact the demand for the Company’s product and service offerings.

 

Clients are subject to rules and regulations requiring certain printed or electronic communications governing the form, content and delivery methods of such communications, such as SEC Rule 30e-3 which provides certain registered investment companies with an option to electronically deliver shareholder reports and other materials rather than providing such reports in paper. Modifications in these regulations may impact clients’ business practices and could reduce demand for DFIN’s services and products offerings. Modifications in such regulations could eliminate the need for certain types of communications altogether or impact the quantity or format of required communications.


14


 

The Company’s failure to maintain the confidentiality, integrity and availability of its systems, software and solutions could seriously damage the Company’s reputation and affect its ability to retain clients and attract new business.

 

Maintaining the confidentiality, integrity and availability of DFIN’s systems, software and solutions is an issue of critical importance for the Company and its clients and users who rely on DFIN’s systems to prepare regulatory filings and store and exchange large volumes of information, much of which is proprietary, confidential and may constitute material nonpublic information. Given DFIN’s systems contain material nonpublic information about public reporting companies and potential mergers and acquisitions activities prior to its public release, the Company may be a target of hacking or cybercrime. Inadvertent disclosure of the information maintained on DFIN’s systems (or on the systems of the vendors on which the Company relies) due to human error, breach of the systems through hacking, cybercrime or a leak of confidential information due to employee misconduct, could seriously damage the Company’s reputation, could cause it to expend significant resources responding to document requests from government agencies and customers and could cause significant reputational harm for the Company and its clients. The Company’s technologies, systems, networks and software have been and continue to be subject to cybersecurity threats and attacks, which range from uncoordinated individual attempts to sophisticated and targeted measures directed at the Company. The risk of a security breach or disruption, particularly through cyber attack or cyber intrusion, has increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased and the Company has in the past and may in the future be subject to security breaches. For example, during 2019 the Company experienced two cyber incidents, one of which was through a commercial partner. The incident involving the Company’s commercial partner was a result of a compromise to the partner’s email server and the DFIN incident was, the Company believes, the result of a compromised login credential, each of which allowed unauthorized viewing of client information on that system. In each incident, the Company believes the unauthorized access was limited to that system. The Company has contacted, and, in the future will contact, impacted customers as appropriate with respect to all cyber incidents.

The Company’s customers and employees have been, and will continue to be, targeted by parties using fraudulent e-mails and other communications in attempts to misappropriate login credentials, including passwords, or to introduce viruses or other malware programs to its information systems, the information systems of its vendors or third-party service providers and/or its customers' computers. Though the Company endeavors to mitigate these threats through product improvements, use of encryption and authentication technology and customer and employee education, such cyber attacks against the Company or its vendors and third-party service providers remain a serious issue. Further, to access the Company’s services and products, the Company’s customers use personal electronic devices that are beyond DFIN’s security control systems. Techniques used to obtain unauthorized access to, or to sabotage, systems change frequently and generally are not recognized until executed against a target. Consistent with all software solutions, DFIN’s software may be vulnerable to these types of attacks. Breaches and other inappropriate access can be difficult to detect and any delay in identifying them could increase their harm. An attack of this type could disrupt the proper functioning of the Company’s software solutions, cause errors in the output of clients’ work, allow unauthorized access to sensitive, proprietary or confidential information and other undesirable or destructive outcomes.

As a result of these types of risks and attacks, the Company has implemented and continuously reviews and updates systems, processes and procedures to protect against unauthorized access to or use of data and to prevent data loss. For example, in 2019 the Company refreshed relevant security standards to reflect changes in current security threats, increased the number of cyber security resources monitoring DFIN systems for cyber threats, enhanced intrusion and detection capabilities and refreshed mandatory information security awareness training content, including awareness around phishing. However, the ever-evolving threats mean the Company and its third-party service providers and vendors must continually evaluate and adapt their respective systems and processes and overall security environment. There is no guarantee that these measures will be adequate to safeguard against all data security breaches, system compromises or misuses of data.


15


 

Furthermore, DFIN’s systems allow the Company to share information that may be confidential in nature to its clients across the Company’s offices worldwide. This design allows the Company to increase global reach for its clients and increase its responsiveness to client demands, but also increases the risk of a security breach or a leak of such information as it allows additional points of access to information by increasing the number of employees and facilities working on certain jobs. In addition, DFIN’s systems leverage third party outsourcing arrangements, which expedites the Company’s responsiveness but exposes information to additional access points. If an actual or perceived information leak or breach of security were to occur, the Company’s reputation could suffer, clients could stop using DFIN’s services and products offerings, the Company could have to respond to document requests from government agencies and customers and it could face lawsuits and potential liability, any of which could cause DFIN’s financial performance to be negatively impacted. The Company has incurred, and expects to continue to incur, expenses to prevent, investigate and remediate security breaches and vulnerabilities, including deploying additional personnel and protection technologies, training employees and engaging third-party experts and consultants. Though the Company maintains professional liability insurance that includes coverage if a cybersecurity incident were to occur, there can be no assurance that insurance coverage will be available, responsive, or that the available coverage will be sufficient to cover losses and claims related to any cybersecurity incidents the Company may experience.

A number of core processes, such as software development, sales and marketing, client service and financial transactions, rely on DFIN’s IT infrastructure and applications. Defects or malfunctions in the Company’s IT infrastructure and applications could cause DFIN’s services and products offerings not to perform as clients expect, which could negatively impact the Company’s reputation and business. In addition, malicious software, sabotage and other cybersecurity breaches of the types described above could cause an outage in DFIN’s infrastructure, which could lead to a substantial delay of service and ultimately downtimes, recovery costs and client claims, any of which could negatively impact the Company’s results of operations, financial position and cash flow.

Some of DFIN’s systems and services are developed by third parties or supported by third party hardware and software. The Company’s business and reputation could suffer if these third party systems and services fail to perform properly or are no longer available to the Company.

Some of DFIN’s systems and services are developed by third parties or rely on hardware purchased or leased and software licensed from third parties. These systems and services, or the hardware and software required to run the Company’s existing systems and services, may not continue to be available on commercially reasonable terms or at all. Any loss of the right to use any of this hardware or software could result in delays in the provisioning of DFIN’s services, which could negatively affect the Company’s business until equivalent technology is either developed by the Company or, if available, is identified, obtained and integrated. In addition, it is possible that the Company’s hardware vendors or the licensors of third party software could increase their prices, which could have an adverse impact on DFIN’s business, operating results and financial condition. Further, changing hardware vendors or software licensors could detract from management’s ability to focus on the ongoing operations of the Company’s business or could cause delays in the operations of the business.

Additionally, third party software underlying DFIN’s services can contain undetected errors or bugs, or be susceptible to cybersecurity breaches described above. The Company may be forced to delay commercial release of its services until any discovered problems are corrected and, in some cases, may need to implement enhancements or modifications to correct errors that the Company does not detect until after deployment of its services.

Increasing regulatory focus on privacy issues and expanding laws could impact DFIN’s software products and expose the Company to increased liability.

Privacy and data security laws apply to DFIN’s various businesses in all jurisdictions in which the Company operates. In particular, clients use DFIN’s software services, including Venue, to share personal data and information on a confidential basis, and such sharing may be subject to privacy and data security laws. DFIN’s global business operates in countries that have more stringent data protection laws than those in the United States. These data protection laws may be inconsistent across jurisdictions and are subject to evolving and differing interpretations. New laws, such as the GDPR which went into effect in May 2018 in Europe, and industry self-regulatory codes have been or are being enacted to protect personal data. Complying with these regulations has been, and will continue to be, costly, and there are or will be significant penalties for failure to comply with these regulations, including significant penalties for failing to comply with GDPR. Further, any perception of DFIN’s practices, products or services as a violation of individual privacy rights may subject the Company to public criticism, class action lawsuits, reputational harm, or investigations or claims by regulators, industry groups or other third parties, all of which could disrupt DFIN’s business and expose the Company to liability.


16


 

Transferring personal data and information across international borders is becoming increasingly complex. For example, Europe has stringent regulations regarding transfer of personal data and information. The mechanisms that DFIN and many other companies rely upon for data transfers from Europe to the United States (e.g., Privacy Shield and Model Clauses) are being contested in the European court systems. The Company is closely monitoring developments related to requirements for transferring personal data and information. These requirements may result in an increase in the obligations required to provide DFIN’s services in the EU or in sanctions and fines for non-compliance. Several other countries, including Australia and Japan, have also established specific legal requirements for cross-border transfers of personal information. These developments in Europe and elsewhere could harm DFIN’s business, financial condition and results of operations.

Fluctuations in the costs and availability of paper, ink, energy and other raw materials may adversely impact the Company.

 

Increases in the costs of these inputs may increase DFIN’s costs and the Company may not be able to pass these costs on to clients through higher prices. Moreover, rising raw materials costs, and any consequent impact on pricing, could lead to a decrease in demand for DFIN’s services and products.

If the Company is unable to protect its proprietary technology and other rights, the value of DFIN’s business and its competitive position may be impaired.

 

If the Company is unable to protect its intellectual property, the Company’s competitors could use its intellectual property to market services and products similar to DFIN’s, which could decrease demand for its services. The Company relies on a combination of patents, trademarks, licensing and other proprietary rights laws, as well as third party nondisclosure agreements and other contractual provisions and technical measures, to protect its intellectual property rights. These protections may not be adequate to prevent competitors from copying or reverse-engineering DFIN’s technology and services to create similar offerings. Additionally, any of DFIN’s pending or future patent applications may not be issued with the scope of protection the Company seeks, if at all. The scope of patent protection, if any, the Company may obtain is difficult to predict and the patents may be found invalid, unenforceable or of insufficient scope to prevent competitors from offering similar services. DFIN’s competitors may independently develop technologies that are substantially equivalent or superior to the Company’s technology. To protect DFIN’s proprietary information, the Company requires employees, consultants, advisors, independent contractors and collaborators to enter into confidentiality agreements and maintain policies and procedures to limit access to the Company’s trade secrets and proprietary information. These agreements and the other actions may not provide meaningful protection for DFIN’s proprietary information or know-how from unauthorized use, misappropriation or disclosure. Further, existing patent laws may not provide adequate or meaningful protection in the event competitors independently develop technology, products or services similar to DFIN’s. Even if the laws governing intellectual property rights provide protection, the Company may have insufficient resources to take the legal actions necessary to protect its interests. In addition, DFIN’s intellectual property rights and interests may not be afforded the same protection under the laws of foreign countries as they are under the laws of the United States.

DFIN’s business is dependent upon brand recognition and reputation, and the failure to maintain or enhance the Company’s brand or reputation would likely have an adverse effect on its business.

 

DFIN’s brand recognition and reputation are important aspects of the Company’s business. Maintaining and further enhancing DFIN’s brands and reputation will be important to retaining and attracting clients for DFIN’s products. The Company also believes that the importance of DFIN’s brand recognition and reputation for products will continue to increase as competition in the market for DFIN’s products and industry continues to increase. The Company’s success in this area will be dependent on a wide range of factors, some of which are beyond the Company’s control, including the efficacy of the Company’s marketing efforts, its ability to retain existing and obtain new clients and strategic partners, human error, the quality and perceived value of DFIN’s services and products offerings, actions of the Company’s competitors and positive or negative publicity. Damage to the Company’s reputation and loss of brand equity may reduce demand for DFIN’s services and products offerings and negatively impact its results of operations, financial position and cash flow.


17


 

The Company may be unable to hire and retain talented employees, including management.

 

DFIN’s success depends, in part, on its general ability to attract, develop, motivate and retain highly skilled employees. The loss of a significant number of employees or the inability to attract, hire, develop, train and retain additional skilled personnel could have a serious negative effect on DFIN’s business. Management believes the Company’s ability to retain its client base and to attract new clients is directly related to DFIN’s sales force and client service personnel, and if the Company cannot retain these key employees, its business could suffer. In addition, many members of DFIN’s management have significant industry experience that is valuable to competitors. The Company expects that its executive officers will have non-solicitation agreements contractually prohibiting them from soliciting clients and employees within a specified period of time after they leave DFIN. If one or more members of the senior management team leave and cannot be replaced with a suitable candidate quickly, the Company could experience difficulty in managing its business properly, which could negatively impact its results of operations, financial position and cash flow.

The trend of increasing costs to provide health care and other benefits to employees and retirees may continue.

 

DFIN provides health care and other benefits to both employees and retirees. For many years, costs for health care have increased more rapidly than general inflation in the U.S. economy. If this trend in health care costs continues, the cost to provide such benefits could increase, adversely impacting profitability. Changes to health care regulations in the U.S. and internationally may also increase cost of providing such benefits.

Changes in market conditions, changes in discount rates, or lower returns on assets may increase required pension and other post-retirement benefit plan contributions in future periods.

 

The funded status of DFIN’s pension and other post-retirement benefits plans is dependent upon many factors, including returns on invested assets and the level of certain interest rates. As experienced in prior years, declines in the market value of the securities held by the plans coupled with historically low interest rates have substantially reduced, and in the future could further reduce, the funded status of the plans. These reductions may increase the level of expected required pension and other post-retirement benefit plan contributions in future years. Various conditions may lead to changes in the discount rates used to value the year-end benefit obligations of the plans, which could partially mitigate, or worsen, the effects of lower asset returns. If adverse conditions were to continue for an extended period of time, the Company’s costs and required cash contributions associated with pension and other post-retirement benefit plans may substantially increase in future periods.

The Company is exposed to risks related to potential adverse changes in currency exchange rates.

 

The Company is exposed to market risks resulting from changes in the currency exchange rates of the currencies in the countries in which it does business. Although operating in local currencies may limit the impact of currency rate fluctuations on the operating results of non-U.S. activities, fluctuations in such rates may affect the translation of these results into DFIN’s financial statements. To the extent borrowings, sales, purchases, net sales and expenses or other transactions are not in the applicable local currency, the Company may enter into foreign currency spot and forward contracts to hedge the currency risk. Management cannot be sure, however, that its efforts at hedging will be successful, and such efforts could, in certain circumstances, lead to losses.

There are risks associated with operations outside the United States.

 

The Company has operations outside the United States. DFIN works with capital markets clients around the world, and in 2019 the International segment accounted for 13% of DFIN’s net sales. The Company’s operations outside of the United States are primarily focused in Europe, Asia, Canada and Latin America. As a result, the Company is subject to the risks inherent in conducting business outside the United States, including:

 

costs of customizing services and products for foreign countries;

 

difficulties in managing and staffing international operations;

 

increased infrastructure costs including legal, tax, accounting and information technology;

 

reduced protection for intellectual property rights in some countries;

 

potentially greater difficulties in collecting accounts receivable, including currency conversion and cash repatriation from foreign jurisdictions;

 

increased licenses, tariffs and other trade barriers;

18


 

 

potentially adverse tax consequences;

 

increased burdens of complying with a wide variety of foreign laws, including employment-related laws, which may be more stringent than U.S. laws;

 

unexpected changes in regulatory requirements;

 

political and economic instability; and

 

compliance with applicable anti-corruption and sanction laws and regulations.

The Company cannot be sure that its investments or operations in other countries will produce desired levels of net sales or that one or more of the factors listed above will not affect the Company’s global business.

The Company has in the past acquired and may in the future to acquire other businesses, and it may be unable to successfully integrate the operations of these businesses and may not achieve the cost savings and increased net sales anticipated as a result of these acquisitions.

 

Achieving the anticipated benefits of acquisitions will depend in part upon DFIN’s ability to integrate these businesses in an efficient and effective manner. The integration of companies that have previously operated independently may result in significant challenges, and the Company may be unable to accomplish the integration smoothly or successfully. In particular, the coordination of geographically dispersed organizations with differences in corporate cultures and management philosophies may increase the difficulties of integration. The integration of acquired businesses may also require the dedication of significant management resources, which may temporarily distract management’s attention from the day-to-day operations of the Company. In addition, the process of integrating operations may cause an interruption of, or loss of momentum in, the activities of one or more of the Company’s businesses and the loss of key personnel from the Company or the acquired businesses. Further, employee uncertainty and lack of focus during the integration process may disrupt the businesses of the Company or the acquired businesses.

 

The Company’s reliance on strategic partnerships as part of its business strategy may adversely affect the development of DFIN’s business in those areas.

 

The Company’s business strategy includes pursuing and maintaining strategic partnerships in order to facilitate its entry into adjacent lines of business. This approach may expose the Company to risk of conflict with its strategic arrangement partners and the need to divert management resources to oversee these partnership arrangements. Further, as these arrangements require cooperation with third party partners, these strategic arrangements may not be able to make decisions as quickly as DFIN would if it was operating on its own or may take actions that are different from what the Company would do on a standalone basis in light of the need to consider DFIN partners’ interests. As a result, the Company may be less able to respond timely to changes in market dynamics, which could have a material adverse effect on its business, financial condition and results of operations.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

ITEM 2.

PROPERTIES

The Company’s corporate office is located in leased office space at 35 West Wacker Drive, Chicago, Illinois, 60601. As of December 31, 2019, the Company leased or owned 40 U.S. facilities, some of which had multiple buildings and warehouses, and these U.S. facilities encompassed approximately 1.3 million square feet. The Company leased 22 international facilities, some of which had multiple buildings and warehouses, encompassing approximately 0.1 million square feet in Europe, Asia, Canada and Latin America. Of the Company’s worldwide facilities, approximately 0.3 million square feet of space was owned, while the remaining 1.1 million square feet of space was leased.

 

ITEM 3.

For a discussion of certain litigation involving the Company, see Note 13, Commitments and Contingencies, to the Consolidated Financial Statements.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

19


 

PART II

ITEM 5.

MARKET FOR DONNELLEY FINANCIAL SOLUTIONS, INC.’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Principal Market

DFIN’s common stock began “regular-way” trading under the ticker symbol “DFIN” on the New York Stock Exchange (“NYSE”) on October 3, 2016. The following table sets forth, for the periods indicated, the range of the high and low closing prices for the Company’s common stock as reported by the NYSE:

 

 

 

2019

 

 

2018

 

 

 

Low

 

 

High

 

 

Low

 

 

High

 

First Quarter

 

$

13.57

 

 

$

16.91

 

 

$

16.87

 

 

$

22.00

 

Second Quarter

 

 

11.98

 

 

 

16.08

 

 

 

15.31

 

 

 

19.26

 

Third Quarter

 

 

10.62

 

 

 

14.01

 

 

 

17.42

 

 

 

21.25

 

Fourth Quarter

 

 

9.41

 

 

 

11.45

 

 

 

13.47

 

 

 

17.64

 

 

Stockholders

As of February 20, 2020, there were 4,200 stockholders of record of the Company’s common stock.

Issuer Purchases of Equity Securities

 

Period

 

Total Number of Shares Purchased (a)

 

 

Average Price Paid per Share

 

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

 

 

Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs

 

October 1, 2019 - October 31, 2019

 

 

43,721

 

 

$

11.32

 

 

 

 

 

$

 

November 1, 2019 - November 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

December 1, 2019 - December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

43,721

 

 

$

11.32

 

 

 

 

 

$

 

 

(a)

Shares withheld for tax liabilities upon vesting of equity awards

Common Stock Repurchases—On February 4, 2020, the Board of Directors (the “Board”) authorized a stock repurchase program, under which the Company is authorized to repurchase up to $25.0 million of its outstanding common stock from time to time in one or more transactions on the open market or in privately negotiated purchases in accordance with all applicable securities laws and regulations and all repurchases in the open market will be made in compliance with Rule 10b-18 under the Exchange Act. The timing and amount of any shares repurchased will be determined by the Company based on its evaluation of market conditions and other factors. Repurchases may also be made under a Rule 10b5-1 plan, which would permit shares to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws. The stock repurchase program will be effective through December 31, 2021, however, it may be suspended or discontinued at any time.

Equity Compensation Plans

For information regarding equity compensation plans, see Item 12 of Part III of the Annual Report.

20


 

PEER PERFORMANCE TABLE

The following graph compares the cumulative total shareholder return on DFIN’s common stock from October 3, 2016, when “regular-way” trading in DFIN’s common stock began on the NYSE, through December 31, 2019, with the comparable cumulative return of the Standard & Poor’s (“S&P”) SmallCap 600 Index and a selected peer group of companies. The comparison assumes all dividends have been reinvested and an initial investment of $100 on October 3, 2016. The returns of each company in the peer group have been weighted to reflect their market capitalizations. The stock price performance on the following graph is not necessarily indicative of future stock price performance.

 

 

 

 

 

Base

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period

 

December 31,

 

 

December 31,

 

 

December 31,

 

 

December 31,

 

Company Name/Index

 

10/3/2016

 

2016

 

 

2017

 

 

2018

 

 

2019

 

Donnelley Financial Solutions

 

100

 

 

100.04

 

 

 

84.85

 

 

 

61.08

 

 

 

45.58

 

S&P SmallCap 600 Index

 

100

 

 

111.52

 

 

 

126.28

 

 

 

115.57

 

 

 

141.90

 

Peer Group

 

100

 

 

99.84

 

 

 

121.78

 

 

 

132.59

 

 

 

168.36

 

 

Below are the specific companies included in the peer group.

 

Peer Group Companies

 

 

Advisory Board Company(a)

DST Systems Inc.(b)

Henry (Jack) & Associates Inc.

ARC Document Solutions Inc

Dun & Bradstreet Corp

LiveRamp Holdings Inc.(c)

Bottomline Technologies Inc

ePlus Inc

Perficient Inc

Broadridge Financial Solutions Inc

Euronet Worldwide Inc

Resources Connection Inc

CoreLogic Inc

FactSet Research Systems Inc.

Verint Systems Inc

CSG Systems International Inc.

Gartner Inc

 

 

(a)

Advisory Board Company was included through November 17, 2017, when it was acquired by OptumInsight

(b)

DST Systems Inc. was included through April 16, 2018, when it was acquired by SS&C Technologies

(c)

LiveRamp Holdings Inc. was previously named Acxiom Corp

 

This performance graph and other information furnished under this Part II Item 5 of this Form 10-K shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act.

21


 

ITEM 6.

SELECTED FINANCIAL DATA

SELECTED FINANCIAL DATA

(in millions, except per share data)

 

 

Year Ended December 31,

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

Consolidated and Combined Statements of Operations data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

874.7

 

 

$

963.0

 

 

$

1,004.9

 

 

$

983.5

 

 

$

1,049.5

 

Net earnings

 

37.6

 

 

 

73.6

 

 

 

9.7

 

 

 

59.1

 

 

 

104.3

 

Net earnings per share(a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

1.10

 

 

 

2.18

 

 

 

0.29

 

 

 

1.81

 

 

 

3.22

 

Diluted

 

1.10

 

 

 

2.16

 

 

 

0.29

 

 

 

1.80

 

 

 

3.22

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated and Combined Balance Sheet data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

886.9

 

 

 

868.7

 

 

 

893.5

 

 

 

978.9

 

 

 

817.6

 

Long-term debt

 

296.0

 

 

 

362.7

 

 

 

458.3

 

 

 

587.0

 

 

 

 

Note payable with an RRD affiliate

 

 

 

 

 

 

 

 

 

 

 

 

 

29.2

 

 

(a)

On October 1, 2016, RRD distributed approximately 26.2 million shares of DFIN common stock to RRD shareholders in connection with the spin-off of DFIN, with RRD retaining approximately 6.2 million shares of DFIN common stock. 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 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 4, 2017.

 

For periods prior to the Separation, basic and diluted earnings per share were calculated using the number of shares distributed and retained by RRD, totaling 32.4 million. The same number of shares was used to calculate basic and diluted earnings per share since there were no DFIN equity awards outstanding prior to the spin-off.

 

The above table reflects results of acquired businesses from the relevant acquisition dates and includes the following significant items:

 

 

 

Pre-tax

 

 

After-tax

 

Year ended December 31, 2019

 

 

 

 

 

 

 

 

Net gain on sale of building

 

$

(19.2

)

 

$

(13.7

)

Gain on equity investment

 

 

(13.6

)

 

 

(9.7

)

Restructuring, impairment and other charges – net

 

 

13.6

 

 

 

9.9

 

Share-based compensation expense

 

 

8.9

 

 

 

7.0

 

Loss on debt extinguishment

 

 

4.1

 

 

 

3.1

 

Net loss on sale of Language Solutions business

 

 

4.0

 

 

 

2.2

 

Pension settlement charges

 

 

3.9

 

 

 

2.8

 

Investor-related expenses

 

 

1.5

 

 

 

1.1

 

Acquisition-related expenses

 

 

0.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pre-tax

 

 

After-tax

 

Year ended December 31, 2018

 

 

 

 

 

 

 

 

Net gain on sale of Language Solutions business

 

$

(53.8

)

 

$

(38.6

)

Gain on equity investment

 

 

(11.8

)

 

 

(8.5

)

Gain on eBrevia investment

 

 

(1.8

)

 

 

(1.5

)

Spin-off related transaction expenses

 

 

20.1

 

 

 

14.6

 

Share-based compensation expense

 

 

9.2

 

 

 

6.7

 

Disposition-related expenses

 

 

6.8

 

 

 

5.1

 

Restructuring, impairment and other charges – net

 

 

4.4

 

 

 

3.2

 

Acquisition-related expenses

 

 

0.8

 

 

 

0.5

 

Investor-related expenses

 

 

0.5

 

 

 

0.4

 

22


 

 

 

 

Pre-tax

 

 

After-tax

 

Year ended December 31, 2017

 

 

 

 

 

 

 

 

Spin-off related transaction expenses

 

$

16.5

 

 

$

9.9

 

Restructuring, impairment and other charges – net

 

 

7.1

 

 

 

4.2

 

Share-based compensation expense

 

 

6.8

 

 

 

4.1

 

Acquisition-related expenses

 

 

0.2

 

 

 

0.1

 

 

 

 

Pre-tax

 

 

After-tax

 

Year ended December 31, 2016

 

 

 

 

 

 

 

 

Restructuring, impairment and other charges – net

 

$

5.4

 

 

$

3.3

 

Spin-off related transaction expenses

 

 

4.9

 

 

 

3.0

 

Share-based compensation expense

 

 

2.5

 

 

 

1.5

 

 

 

 

Pre-tax

 

 

After-tax

 

Year ended December 31, 2015

 

 

 

 

 

 

 

 

Restructuring, impairment and other charges – net

 

$

4.4

 

 

$

2.8

 

Share-based compensation expense

 

 

1.6

 

 

 

1.0

 

 

 

23


 

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of DFIN’s financial condition and results of operations should be read together with other sections of this Annual Report, including “Item 1. Business,” “Item 6. Selected Financial Data” and the consolidated financial statements and notes to those statements included in this Annual Report.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains a number of forward-looking statements, all of which are based on the Company’s current expectations and could be affected by the uncertainties and other factors described throughout this Annual Report and particularly in “Item 1A. Risk Factors” and “Special Note Regarding Forward-Looking Statements.”

Business

For a description of the Company’s business, segments and product and service offerings, see Item 1, Business, of Part I of this Annual Report.

The Company separately reports its net sales and related cost of sales for its services and products offerings. The Company’s services offerings consist of all non-print offerings, including document composition, compliance-related EDGAR filing services, transaction solutions, and the Company’s SaaS solutions, including Venue, FundSuiteArc, ActiveDisclosure and data and analytics, and others. The Company’s product offerings primarily consist of conventional and digital printed products and related shipping costs.

Spin-off Transaction

On October 1, 2016, DFIN became an independent publicly traded company through the distribution by RRD of approximately 26.2 million shares, or 80.75%, of DFIN common stock to RRD shareholders. Holders of RRD common stock received one share of DFIN 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 DFIN common stock, or a 19.25% interest in DFIN, of which 6.1 million shares and 0.1 million shares were subsequently sold in June 2017 and August 2017, respectively.

 

DFIN’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, 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 no longer qualified as a related party of the Company. 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.

Executive Overview

2019 Overview

Net sales decreased by $88.3 million, or 9.2%, in 2019 compared to 2018, including a $41.8 million, or 4.3%, decrease due to the impact of the sale of the Language Solutions business in July 2018 and a $3.0 million decrease due to changes in foreign exchange rates. The remaining decline in net sales was primarily due to lower capital markets transactions and compliance volumes, which was partially offset by growth in SaaS solutions, primarily in ActiveDisclosure and FundSuiteArc, growth in mutual fund print volumes and the impact from the acquisition of eBrevia.

Income from operations for the year ended December 31, 2019 decreased $42.6 million, or 35.2%, to $78.5 million from $121.1 million for the year ended December 31, 2018, primarily due to the $53.8 million gain on sale of the Language Solutions business recognized during the year ended December 31, 2018, partially offset by the $19.2 million net gain recognized from the sale of a building during the year ended December 31, 2019. The remaining decrease in income from operations was driven by lower capital markets transactions and compliance volumes, as well as higher restructuring, impairment and other charges, partially offset by lower spin-off related transaction expenses, disposition-related expenses and incentive compensation expense, as well as growth in the Company’s SaaS offerings and mutual fund print volume.

24


 

Outlook

In 2020, the Company expects net sales to be relatively flat, as compared to 2019, with the Company’s SaaS portfolio providing top line growth, offset by a decline in print-related services and products sales in both Capital Markets and Investment Markets. Accordingly, the Company also expects margin improvement in 2020 from mix and cost control actions. The Company does not expect foreign exchange rates to have a significant impact on results.

Cash flows from operations in 2020 are expected to benefit from cost control actions and significantly lower cash interest expense. The Company expects capital expenditures to be approximately $35.0 million in 2020, as compared to $44.8 million in 2019.

Financial Review

In the financial review that follows, the Company discusses its consolidated results of operations, cash flows and certain other information. This discussion should be read in conjunction with the Company’s consolidated financial statements and the related notes.

The Company’s Annual Report on Form 10-K for the year ended December 31, 2018 includes a discussion and analysis of the Company’s financial condition and results of operations for the year ended December 31, 2017 and year-to-year comparisons of 2018 and 2017, which are not included in this Annual Report, in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Results of Operations for the Year Ended December 31, 2019 as Compared to the Year Ended December 31, 2018

The following table shows the results of operations for the years ended December 31, 2019 and 2018:

 

 

2019

 

 

2018

 

 

$ Change

 

 

% Change

 

 

(in millions, except percentages)

 

Services net sales

$

554.0

 

 

$

618.0

 

 

$

(64.0

)

 

 

(10.4

%)

Products net sales

 

320.7

 

 

 

345.0

 

 

 

(24.3

)

 

 

(7.0

%)

Total net sales

 

874.7

 

 

 

963.0

 

 

 

(88.3

)

 

 

(9.2

%)

Services cost of sales (exclusive of depreciation and amortization)

 

284.8

 

 

 

328.8

 

 

 

(44.0

)

 

 

(13.4

%)

Products cost of sales (exclusive of depreciation and amortization)

 

257.6

 

 

 

258.5

 

 

 

(0.9

)

 

 

(0.3

%)

Total cost of sales

 

542.4

 

 

 

587.3

 

 

 

(44.9

)

 

 

(7.6

%)

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

 

205.8

 

 

 

258.2

 

 

 

(52.4

)

 

 

(20.3

%)

Restructuring, impairment and other charges-net

 

13.6

 

 

 

4.4

 

 

 

9.2

 

 

 

209.1

%

Depreciation and amortization

 

49.6

 

 

 

45.8

 

 

 

3.8

 

 

 

8.3

%

Other operating income

 

(15.2

)

 

 

(53.8

)

 

 

38.6

 

 

 

(71.7

%)

Income from operations

$

78.5

 

 

$

121.1

 

 

$

(42.6

)

 

 

(35.2

%)

 

Consolidated

 

Net sales of services for the year ended December 31, 2019 decreased $64.0 million, or 10.4%, to $554.0 million versus the year ended December 31, 2018, including a decrease of $41.8 million, or 6.8%, due to the July 2018 sale of the Language Solutions business and a $2.4 million decrease due to changes in foreign exchange rates. In addition, net sales of services decreased due to lower capital markets transactions and compliance volumes, partially offset by growth in SaaS solutions, primarily in ActiveDisclosure and FundSuiteArc, as well as impact from the acquisition of eBrevia.

 

Net sales of products for the year ended December 31, 2019 decreased $24.3 million, or 7.0%, to $320.7 million versus the year ended December 31, 2018, including a $0.6 million decrease due to changes in foreign exchange rates. Net sales of products decreased due to lower volumes in capital markets transactions and commercial print volumes, partially offset by higher mutual fund print volumes.

25


 

Services cost of sales decreased $44.0 million, or 13.4%, to $284.8 million for the year ended December 31, 2019, versus the year ended December 31, 2018, primarily due to the impact from the sale of the Language Solutions business. In addition, services cost of sales decreased due to lower capital markets transactions and compliance volumes and the impact of cost control initiatives. As a percentage of net services sales, services cost of sales decreased 1.8%, primarily due to favorable mix.

Products cost of sales decreased $0.9 million, or 0.3%, to $257.6 million for the year ended December 31, 2019, versus the year ended December 31, 2018. Products cost of sales decreased due to lower capital markets transactions and commercial print volumes as well as cost control initiatives, partially offset by higher mutual fund print volumes. As a percentage of net product sales, products cost of sales increased 5.4%, primarily due to unfavorable mix.

SG&A expenses for the year ended December 31, 2019 decreased $52.4 million, or 20.3%, to $205.8 million, as compared to the year ended December 31, 2018, primarily due to cost control initiatives, lower spin-off related and disposition-related expenses, lower selling expenses as a result of lower volume, and the impact from the sale of the Language Solutions business. As a percentage of net sales, SG&A expenses decreased from 26.8% for the year ended December 31, 2018 to 23.5% for the year ended December 31, 2019.

Restructuring, impairment and other charges, net for the year ended December 31, 2019, totaled $13.6 million compared to $4.4 million for the year ended December 31, 2018, an increase of $9.2 million. The increase was primarily driven by $9.1 million of employee termination costs for 271 employees, substantially all of whom were terminated as of December 31, 2019. For the year ended December 31, 2018, the Company incurred $3.4 million of employee termination costs for 89 employees, all of whom were terminated as of December 31, 2019. These restructuring charges in both periods primarily related to the reorganization of certain operations and certain administrative functions. Additionally, the Company recognized a $2.0 million impairment charge related to an equity investment during the year ended December 31, 2019.

Depreciation and amortization for the year ended December 31, 2019 increased $3.8 million, or 8.3%, to $49.6 million compared to the year ended December 31, 2018. Depreciation and amortization included $14.3 million and $13.7 million of amortization of other intangible assets for the years ended December 31, 2019 and 2018, respectively.

Other operating income for the year ended December 31, 2019 included a $19.2 million net gain recognized from the sale of a building, partially offset by a $4.0 million loss recognized in 2019 related to the 2018 disposition of the Language Solutions business. Other operating income for the year ended December 31, 2018 included a $53.8 million gain recognized on the sale of the Language Solutions business.

Income from operations for the year ended December 31, 2019 decreased $42.6 million, or 35.2%, to $78.5 million from $121.1 million for the year ended December 31, 2018, primarily due to the $53.8 million gain on sale of the Language Solutions business recognized during the year ended December 31, 2018, partially offset by the $19.2 million net gain recognized from the sale of a building during the year ended December 31, 2019. The remaining decrease in income from operations was driven by lower capital markets transactions and compliance volumes, as well as higher restructuring, impairment and other charges, partially offset by lower spin-off related transaction expenses, disposition-related expenses and incentive compensation expense, as well as growth in the Company’s SaaS offerings and mutual fund print volume.

 

 

 

 

2019

 

 

2018

 

 

$ Change

 

 

% Change

 

 

 

 

(in millions, except percentages)

 

Interest expense-net

 

 

$

38.1

 

 

$

36.7

 

 

$

1.4

 

 

 

3.8

%

 

Net interest expense increased by $1.4 million for the year ended December 31, 2019, to $38.1 million, versus the year ended December 31, 2018, primarily due to a loss on extinguishment of debt of $4.1 million, partially offset by a decrease in average outstanding debt. Refer to Liquidity and Capital Resources for further discussion.

 

26


 

Net investment and other income for the year ended December 31, 2019 of $11.7 million primarily consisted of a $13.6 million gain related to an equity investment, partially offset by $1.8 million of non-cash pension expense. Net investment and other income for the year ended December 31, 2018 primarily consisted of an $11.8 million gain related to an equity investment and net pension plan income.

 

 

 

2019

 

 

2018

 

 

$ Change

 

 

% Change

 

 

 

(in millions, except percentages)

 

Earnings before income taxes

 

$

52.1

 

 

$

102.7

 

 

$

(50.6

)

 

 

(49.3

%)

Income tax expense

 

 

14.5

 

 

 

29.1

 

 

 

(14.6

)

 

 

(50.2

%)

Effective income tax rate

 

 

27.8

%

 

 

28.3

%

 

 

 

 

 

 

 

 

 

The effective income tax rate was 27.8% for the year ended December 31, 2019 compared to 28.3% for the year ended December 31, 2018. The 2019 effective income tax rate was impacted by favorable return to provision adjustments primarily related to foreign-derived intangible income, state and local income taxes and income tax credits, partially offset by increases in valuation allowances and non-deductible expenses. Refer to Note 15, Income Taxes, for further details.

 

Information by Segment

The following tables summarize net sales, income (loss) from operations and certain items impacting comparability within each of the operating segments and Corporate.

U.S.

 

 

Year Ended December 31,

 

 

2019

 

 

2018

 

 

(in millions, except percentages)

 

Net sales

$

761.4

 

 

$

811.8

 

Income from operations