# Donnelley Financial Solutions, Inc. (DFIN) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Donnelley Financial Solutions, Inc.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1669811/000095017022001605/dfin-20211231.htm
Accession: 0000950170-22-001605
Filing date: 2022-02-22
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/DFIN/
All MD&A years: /company/DFIN/mda/
Next year: /company/DFIN/mda/fy2022/ (FY 2022)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read together with the Company’s audited Consolidated Financial Statements and the notes thereto, as well as “Item 1. Business” included in this Annual Report on Form 10-K.

MD&A contains a number of forward-looking statements, all of which are based on the Company’s current expectations and could be affected by the risks and uncertainties, as well as other factors, described throughout this Annual Report on Form 10-K, particularly in “Item 1A. Risk Factors” and “Special Note Regarding Forward-Looking Statements.”

Business

For a description of the Company’s business and services and products offerings, refer to Item 1. Business of Part I of this Annual Report on Form 10-K.

The Company separately reports its net sales and related cost of sales for its software solutions, tech-enabled services and print and distribution offerings. The Company’s software solutions consist of Venue, ActiveDisclosure, eBrevia, Arc Suite and others. The Company’s tech-enabled services offerings consist of document composition, compliance-related SEC EDGAR filing services and transaction solutions. The Company’s print and distribution offerings primarily consist of conventional and digital printed products and related shipping.

Segments

The Company operates its business through four operating and reportable segments: Capital Markets – Software Solutions, Capital Markets – Compliance and Communications Management, Investment Companies – Software Solutions and Investment Companies – Compliance and Communications Management. Corporate is not an operating segment and consists primarily of unallocated SG&A activities and associated expenses including, in part, executive, legal, finance and certain facility costs. In addition, certain costs and earnings of employee benefit plans, such as pension and other postretirement benefits plan expense (income) as well as share-based compensation expense, are included in Corporate and not allocated to the operating segments. For a description of the Company’s operating segments, refer to Item 1. Business of Part I of this Annual Report on Form 10-K.

Executive Overview

2021 Overview

Net sales for the year ended December 31, 2021 increased by $98.8 million, or 11.0%, as compared to the year ended December 31, 2020, including a $5.4 million, or 0.6%, increase due to changes in foreign exchange rates. Net sales increased primarily due to higher capital markets transactional and compliance volumes and higher software solutions volumes in Venue, Arc Suite and ActiveDisclosure, partially offset by lower insurance and investment companies compliance print volumes as a result of the impact of SEC Rules 30e-3 and 498A on the Company's business.

Income from operations for the year ended December 31, 2021 increased $215.7 million as compared to the year ended December 31, 2020. Income from operations increased primarily due to higher sales volumes, a $65.6 million reduction in restructuring, impairment, and other charges, net, a favorable sales mix, cost savings as a result of consolidation of the print platform and a $13.6 million decrease in LSC multiemployer pension plan obligation expense, partially offset by higher selling expense as a result of increased sales volume, higher incentive compensation expense and higher share-based compensation expense.

Redemption of 8.25% Senior Notes Due 2024 and Partial Prepayment of the Term Loan A Facility

On October 15, 2021, the Company redeemed the remaining outstanding Notes balance of $233.0 million at the redemption price of 102.063, plus accrued and unpaid interest of $9.6 million, using $200.0 million of proceeds from the Company's Term Loan A Facility and cash. The Company recorded a pre-tax loss on the extinguishment of the Notes of $6.8 million in the fourth quarter of 2021.

In the fourth quarter of 2021, the Company prepaid $75.0 million of the original principal amount of the Term Loan A Facility and recorded a pre-tax loss on the extinguishment of debt of $0.6 million.

28

COVID-19

As further described in Part 1—Item 1. Business—COVID-19, in December 2019, COVID-19 was identified in China and has since extensively impacted the global health and economic environment. On March 11, 2020, WHO characterized COVID-19 as a pandemic. Although COVID-19 has adversely impacted the Company’s financial condition, results of operations and overall financial performance, the extent of that impact is currently uncertain and depends on factors including the impact on the Company’s customers, employees and vendors.

The COVID-19 pandemic has had and may continue to have a material adverse impact on certain of the Company’s customers’ financial results, which has and may continue to force those clients to alter their plans for purchasing the Company’s services and products. In addition, the global markets were disrupted due to the COVID-19 pandemic, which had a temporary negative impact on the Company’s transactional offerings. This stabilized in the third quarter of 2020 and the Company continues to experience a high volume of transactional offerings. However, there remains uncertainty for future periods with the COVID-19 pandemic, including potentially new strains of COVID-19, resulting in renewal of mitigation measures, including targeted shutdowns. Some of this volatility is mitigated through the Company’s compliance offerings, supporting the quarterly and annual public company reporting processes, as well as its investment companies regulatory and stockholder communications offerings. If the Company’s customers reduce, defer or cancel their spending with DFIN, it would materially adversely impact the Company’s business, results of operations and overall financial performance.

Some of the Company’s operations also have been affected by a range of external factors related to the COVID-19 pandemic that are not within the Company’s control. For example, many jurisdictions imposed a wide range of restrictions on the physical movement of the Company’s employees and vendors to limit the spread of COVID-19, although most of these restrictions have been rescinded, in whole or in part. If any of these external factors or widespread geographic shutdowns are renewed, or if the COVID-19 pandemic and related mitigation measures otherwise have a substantial impact on the Company’s or vendors’ employee attendance or productivity, the Company’s operations are expected to be adversely affected, and in turn the Company’s business, results of operations, liquidity and overall financial performance would be harmed. Furthermore, the Company’s insurance costs may increase.

In response to the COVID-19 pandemic, the Company has taken numerous steps, and will continue to take further actions to ensure the safety of the Company's employees. At the beginning of the pandemic, the Company reviewed and implemented an updated business continuity plan, required all non-essential employees to work from home, prohibited non-essential travel and conducted client and employee meetings virtually. During the third quarter of 2021, the Company implemented a flexible model that allows employees the option to continue to work from home, with the exception of essential employees whose roles require them to be on site. In the Company's manufacturing locations, the Company is following all federal, state and local safety requirements including social distancing where possible, wearing masks and increased cleaning. The Company continues to evaluate these measures on an ongoing basis to ensure continuity of the Company's business operations and the safety of the Company's workforce. Incremental expenses incurred related to the COVID-19 pandemic included incremental vendor costs and premium wages paid to certain employees as well as costs to clean and disinfect the Company’s facilities more frequently. The Company could incur such costs in future periods, however, the impact of such costs on the Company's business, results of operations, liquidity and overall financial performance cannot be predicted at this time. As a result of the incremental expenses, starting in the second quarter of 2020, the Company invoiced certain customers COVID-19-related sales surcharges to recoup some of the expenses. The invoicing of sales surcharges subsided during 2021. In the second half of 2020, the Company also received certain government subsidies in connection with COVID-19, primarily related to employee wages at certain international locations. The Company recorded $1.0 million of COVID-19 recoveries, net, primarily related to an insurance reimbursement for COVID-19 expenses during the year ended December 31, 2021, and incurred $0.5 million of incremental expense, net of sales surcharges and government subsidies, during the year ended December 31, 2020. The Company also continues to work closely with its clients to support them as they implement their own contingency plans, helping them access the Company's services and products and continue to meet their regulatory requirements.

The Company believes that implementing cost reduction efforts helped mitigate the impact that reduced revenues in the first half of 2020 had on income from operations. The Company has reduced expenses and may take further actions that alter its business operations as the situation evolves. The ultimate impact of the COVID-19 pandemic and the effects on the Company’s business, results of operations, liquidity and overall financial performance cannot be predicted at this time.

29

Multiemployer Pension Plans Obligation

On April 13, 2020, LSC announced that it, along with most of its U.S. subsidiaries, voluntarily filed for business reorganization under Chapter 11 of the U.S. Bankruptcy Code (“LSC Chapter 11 Filing”). In the second quarter of 2020, the Company became aware that, subsequent to the LSC Chapter 11 Filing, LSC failed to make certain required monthly and quarterly withdrawal liability payments to multiemployer pension plans ("MEPP") from which RRD had withdrawn prior to the Separation. Responsibility for certain pre-Separation withdrawal liability obligations, resulting in such monthly and quarterly payment obligations (the “LSC MEPP Liabilities”), had been assigned to LSC pursuant to the September 14, 2016 Separation and Distribution Agreement among the Company, RRD and LSC (the “Separation Agreement”), however, the Company and RRD remained jointly and severally liable for the LSC MEPP Liabilities pursuant to laws and regulations governing multiemployer pension plans. The Company believes the total undiscounted LSC MEPP Liabilities for which LSC was responsible at the time of the LSC Chapter 11 Filing were approximately $103 million (or approximately $57 million on a discounted basis, assuming a blended discount rate of approximately 10%) and were payable over approximately a 15-year period (through 2034), with annual payments ranging from $1.6 million to $8.5 million at the time.

On July 24, 2020, the Company and RRD signed an agreement agreeing to submit to mediation and, if required, arbitration to determine the final liability allocation between the Company and RRD with respect to the LSC MEPP Liabilities. DFIN and RRD also agreed to share all required monthly and quarterly withdrawal liability payment obligations that become due during the mediation/arbitration period, with an adjustment and repayment to be made for any such payments according to the final allocation.

The Company is required to record a liability when it is probable that a loss has been incurred and the amount can be reasonably estimated. In 2020, the Company recorded charges of $19.0 million and had $15.2 million accrued as of December 31, 2020 for its estimated payments related to the LSC MEPP Liabilities, including the Company’s low end of the range of potential outcomes as well as the Company’s estimated shared payments until a final allocation was determined.

In March 2021 and April 2021, the Company and RRD reached settlements with two of the three LSC multiemployer pension plan funds, which represented approximately $59 million of the estimated $103 million total undiscounted LSC MEPP Liabilities at the time of the LSC Chapter 11 filing. The Company and RRD each made lump sum payments in the second quarter of 2021 to settle all obligations related to these funds, which were also subject to adjustment and repayment according to the final liability allocation determination.

In November 2021, arbitration proceedings were completed and the final allocation of the LSC MEPP Liabilities of 1/3 to the Company and 2/3 to RRD was determined by the arbitration panel. As a result of the final liability allocation, the Company received a reimbursement from RRD of $7.1 million in December 2021 for payments made in excess of the Company’s allocated share of the LSC MEPP Liabilities, including the lump sum payments made associated with the March 2021 and April 2021 settlements, and adjusted its accruals for the Company’s portion of the LSC MEPP Liabilities.

As of December 31, 2021, the Company's undiscounted LSC MEPP Liabilities were $12.3 million, $1.1 million of which is payable in each of the five succeeding years and the remainder thereafter through 2033, with annual payments ranging from $0.8 million to $1.1 million. For the year ended December 31, 2021, the Company recorded net expense of $5.4 million and had $10.1 million accrued as of December 31, 2021, on a discounted basis, assuming a blended discount rate of approximately 3.5%. The expense associated with the LSC MEPP Liabilities and the reimbursement from RRD have been recorded in SG&A expenses within the Corporate segment in the Company’s audited Consolidated Statements of Operations for the years ended December 31, 2021 and 2020.

There can be no assurance that the Company’s actual future liabilities relating to MEPP liabilities (including MEPP liabilities where the Company and RRD remain jointly and severally liable) will not differ materially from the amount recorded in the Company’s audited Consolidated Financial Statements. If RRD fails to make required payments in respect of the remaining LSC MEPP Liabilities, or RRD fails to make required payments in respect to RRD's MEPP liabilities, the Company may become obligated to make such payments. In addition, the Company’s MEPP liabilities could be affected by the financial stability of other employers participating in such plans and decisions by those employers to withdraw from such plans in the future.

30

Financial Review

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

A discussion of the Company's financial condition, changes in financial condition and results of operations for the year ended December 31, 2020 as compared to the year ended December 31, 2019, can be found in Part II, "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of DFIN's Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 25, 2021.

Results of Operations for the Year Ended December 31, 2021 as Compared to the Year Ended December 31, 2020

The following table shows the results of operations for the years ended December 31, 2021 and 2020:

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

nm – Not meaningful

(a)
Exclusive of depreciation and amortization

Consolidated

Net sales of tech-enabled services of $519.5 million for the year ended December 31, 2021 increased $110.3 million, or 27.0%, as compared to the year ended December 31, 2020. Net sales of tech-enabled services increased primarily due to increased capital markets transactional and compliance volumes, partially offset by lower insurance and investment companies compliance volumes.

Net sales of software solutions of $270.0 million for the year ended December 31, 2021 increased $69.8 million, or 34.9%, as compared to the year ended December 31, 2020. Net sales of software solutions increased primarily due to increased Venue, ArcDigital, ActiveDisclosure and ArcPro volumes.

Net sales of print and distribution of $203.8 million for the year ended December 31, 2021 decreased $81.3 million, or 28.5%, as compared to the year ended December 31, 2020. Net sales of print and distribution decreased primarily due to lower insurance and investment companies compliance volumes as a result of the impact of SEC Rules 30e-3 and 498A on the Company's business, partially offset by higher capital markets transactional print volumes.

31

Tech-enabled services cost of sales of $162.3 million for the year ended December 31, 2021 decreased $13.8 million, or 7.8%, as compared to the year ended December 31, 2020, primarily due to a favorable sales mix and cost control initiatives, partially offset by the impact of higher sales volumes, a higher allocation of overhead costs and higher incentive compensation expense. As a percentage of tech-enabled services net sales, tech-enabled services cost of sales decreased 11.8%, primarily driven by a favorable sales mix and cost control initiatives, partially offset by a higher allocation of overhead costs and higher incentive compensation expense.

Software solutions cost of sales of $105.3 million for the year ended December 31, 2021 increased $11.4 million, or 12.1%, as compared the year ended December 31, 2020, primarily due to increased sales volume, a higher allocation of overhead costs and higher incentive compensation expense, partially offset by a favorable sales mix and cost control initiatives. As a percentage of software solutions net sales, software solutions costs of sales decreased 7.9%, primarily driven by a favorable sales mix and cost control initiatives, partially offset by a higher allocation of overhead costs and higher incentive compensation expense.

Print and distribution cost of sales of $145.5 million for the year ended December 31, 2021 decreased $80.5 million, or 35.6%, as compared to the year ended December 31, 2020, primarily due to the impact of lower sales volumes as a result of the impact of SEC Rules 30e-3 and 498A on the Company's business, cost savings as a result of the consolidation of the print platform and a lower allocation of overhead costs, partially offset by higher incentive compensation expense. As a percentage of print and distribution net sales, print and distribution cost of sales decreased 7.9%, primarily driven by cost savings as a result of the consolidation of the print platform and a lower allocation of overhead costs, partially offset by higher incentive compensation expense.

SG&A expenses of $307.7 million for the year ended December 31, 2021 increased $42.9 million, or 16.2%, as compared to the year ended December 31, 2020, primarily due to higher selling expense as a result of increased sales volume, higher incentive compensation expense and higher share-based compensation expense, partially offset by a $13.6 million decrease in LSC multiemployer pension plan obligation expense. As a percentage of net sales, SG&A expenses increased from 29.6% for the year ended December 31, 2020 to 31.0% for the year ended December 31, 2021, primarily due to higher selling expense as a result of increased sales volume, higher incentive compensation expense and higher share-based compensation expense, partially offset by a decrease in LSC multiemployer pension plan obligation expense.

Depreciation and amortization of $40.3 million for the year ended December 31, 2021 decreased $10.6 million, or 20.8%, as compared to the year ended December 31, 2020. Depreciation and amortization decreased primarily due to intangible assets that were fully amortized by the end of fiscal year 2020. Depreciation and amortization included $1.1 million and $12.4 million of amortization of other intangible assets for the years ended December 31, 2021 and 2020, respectively.

Restructuring, impairment and other charges, net of $13.6 million for the year ended December 31, 2021 decreased $65.6 million, or 82.8%, as compared to the year ended December 31, 2020. For the year ended December 31, 2021, these charges included impairment charges of $9.2 million, primarily related to the impairment of an equity investment and the demolition of an office building, and $3.4 million for employee termination costs for approximately 175 employees. For the year ended December 31, 2020, these charges included a $40.6 million non-cash goodwill impairment charge within the IC-CCM reporting unit, $15.6 million of employee termination costs for approximately 470 employees, impairment charges of $20.0 million primarily related to operating lease ROU assets and $3.0 million of other charges, primarily related to the realignment of the Company's operating segments.

Other operating income, net of $0.7 million for the year ended December 31, 2021 included a net gain on the sale of machinery and equipment from facilities being exited.

Income from operations of $219.3 million for the year ended December 31, 2021 increased $215.7 million as compared to the year ended December 31, 2020, primarily due to higher sales volumes, a $65.6 million reduction in restructuring, impairment, and other charges, net, a favorable sales mix, cost savings as a result of consolidation of the print platform and a $13.6 million decrease in LSC multiemployer pension plan obligation expense, partially offset by higher selling expense as a result of increased sales volume, higher incentive compensation expense and higher share-based compensation expense.

32

Interest expense, net of $26.6 million for the year ended December 31, 2021 increased $3.8 million, or 16.7%, as compared to the year ended December 31, 2020, primarily due to $7.4 million of losses on debt extinguishments recorded during 2021 compared to a $2.3 million gain on debt extinguishment recorded during 2020, partially offset by a lower average Revolving Facility balance during 2021 compared to 2020, and the prepayment of the Notes during the fourth quarter of 2021, which were replaced by the Term Loan A that has a lower interest rate.

Investment and other income, net of $5.1 million for the year ended December 31, 2021 increased $3.4 million as compared to the year ended December 31, 2020, primarily due to an increase in net pension plan income.

The effective income tax rate was 26.2% for the year ended December 31, 2021 compared to (48.0%) for the year ended December 31, 2020. The change in the effective tax rate was primarily driven by the nondeductible goodwill impairment charge recorded in 2020, increased earnings in 2021 and a reduction in the valuation allowances. Refer to Note 9, 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.

Capital Markets – Software Solutions

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

nm – Not meaningful

Net sales of $181.0 million for the year ended December 31, 2021 increased $47.8 million, or 35.9%, as compared to the year ended December 31, 2020. Net sales increased primarily due to higher Venue, ActiveDisclosure and other compliance software solutions volumes.

Income from operations of $30.4 million for the year ended December 31, 2021 increased $21.9 million as compared to the year ended December 31, 2020, primarily due to higher sales volumes, a favorable sales mix, a reduction of non-income tax, net expense, and cost savings initiatives, partially offset by higher selling expense as a result of increased sales volumes, a higher allocation of overhead costs and higher incentive compensation expense.

Operating margin increased from 6.4% for the year ended December 31, 2020 to 16.8% for the year ended December 31, 2021, primarily due to a favorable sales mix, a reduction of non-income tax, net expense, which had a positive impact on the change in operating margin of 2.4%, and cost savings initiatives, partially offset by higher selling expense as a result of increased sales volumes, a higher allocation of overhead costs and higher incentive compensation expense.

33

Capital Markets – Compliance and Communications Management

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","","2020","","","$ Change","","","% Change"],["","(in millions, except percentages)"],["Net sales","$","561.5","","","$","424.0","","","$","137.5","","","","32.4","%"],["Income from operations","","242.6","","","","120.6","","","","122.0","","","nm"],["Operating margin","","43.2","%","","","28.4","%"],["Items impacting comparability"],["Restructuring, impairment and other charges, net","","3.5","","","","22.2","","","","(18.7",")","","","(84.2","%)"],["COVID-19 related recoveries, net","","(0.2",")","","","(2.2",")","","","2.0","","","","(90.9","%)"],["Non-income tax, net","","(0.2",")","","","0.6","","","","(0.8",")","","nm"],["Accelerated rent expense","","\u2014","","","","1.2","","","","(1.2",")","","","(100.0","%)"]]
[[/GREPCENT_TABLE]]

nm – Not meaningful

Net sales of $561.5 million for the year ended December 31, 2021 increased $137.5 million, or 32.4%, as compared to the year ended December 31, 2020. Net sales increased primarily due to higher transactional and compliance volumes.

Income from operations of $242.6 million for the year ended December 31, 2021 increased $122.0 million as compared to the year ended December 31, 2020, primarily due to higher sales volume, a favorable sales mix, a decrease in restructuring, impairment, and other charges, net, a reduction in depreciation and amortization and cost savings initiatives, partially offset by higher selling expense as a result of increased sales volume, a higher allocation of overhead costs and higher incentive compensation expense.

Operating margin increased from 28.4% for the year ended December 31, 2020 to 43.2% for the year ended December 31, 2021, primarily due to higher sales volume, a favorable sales mix, a decrease in restructuring, impairment, and other charges, net, which had a positive impact on operating margin of 3.3%, a reduction in depreciation and amortization and cost savings initiatives, partially offset by higher selling expense as a result of increased sales volume, a higher allocation of overhead costs and higher incentive compensation expense.

Investment Companies – Software Solutions

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

nm – Not meaningful

Net sales of $89.0 million for the year ended December 31, 2021 increased $22.0 million, or 32.8%, as compared to the year ended December 31, 2020. Net sales increased primarily due to higher ArcDigital volume resulting from the TCM offering, which supports compliance with SEC Rules 30e-3 and 498A regulatory requirements, and higher ArcPro volumes driven by iXBRL requirements.

Income from operations of $8.9 million for the year ended December 31, 2021 increased $10.6 million as compared to an operating loss of $1.7 million for the year ended December 31, 2020, primarily due to higher sales volumes, a favorable sales mix and a decrease in restructuring, impairment, and other charges, net, partially offset by a higher allocation of overhead costs and higher incentive compensation expense.

Operating margin increased from a negative margin of 2.5% for the year ended December 31, 2020 to 10.0% for the year ended December 31, 2021, primarily due to higher sales volume, a favorable net sales mix, along with a decrease in restructuring, impairment, and other charges, net, which had a positive impact on operating margin of 3.3%, partially offset by a higher allocation of overhead costs and higher incentive compensation expense.

34

Investment Companies – Compliance and Communications Management

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

nm – Not meaningful

Net sales of $161.8 million for the year ended December 31, 2021 decreased $108.5 million, or 40.1%, as compared to the year ended December 31, 2020. Net sales decreased primarily due to lower insurance and investment companies compliance volumes as a result of SEC Rules 30e-3 and 498A eliminating print requirements and lower transactional and commercial volumes.

Income from operations of $15.0 million for the year ended December 31, 2021 increased $58.1 million as compared to an operating loss of $43.1 million for the year ended December 31, 2020, primarily due to a decrease in restructuring, impairment and other charges, net, which included a $40.6 million goodwill impairment charge in 2020, cost savings as a result of the print platform consolidation, a lower allocation of overhead costs, a reduction in depreciation and amortization expense and a decrease in COVID-19 related expenses, net, partially offset by lower sales volume and higher incentive compensation expense.

Operating margin increased from a negative margin of 15.9% for the year ended December 31, 2020 to 9.3% for the year ended December 31, 2021, primarily due to a decrease in restructuring, impairment and other charges, net, as well as a decrease in COVID-19 related expenses, net, which combined had a positive impact on operating margin of 28.7%, cost savings as a result of the print platform consolidation, a lower allocation of overhead costs and a reduction in depreciation and amortization expense, partially offset by higher incentive compensation expense.

Corporate

The following table summarizes unallocated operating expenses and certain items impacting comparability within the activities presented as Corporate:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","","2020"],["","(in millions)"],["Operating expenses","$","77.6","","","$","80.7"],["Items impacting comparability"],["Share-based compensation expense","","19.5","","","","13.6"],["Restructuring, impairment and other charges, net","","6.7","","","","6.8"],["LSC multiemployer pension plans obligation","","5.4","","","","19.0"],["COVID-19 related expenses, net","","\u2014","","","","0.3"],["eBrevia contingent consideration","","\u2014","","","","(0.8",")"],["Accelerated rent expense","","\u2014","","","","0.1"]]
[[/GREPCENT_TABLE]]

Corporate operating expenses of $77.6 million for the year ended December 31, 2021 decreased $3.1 million as compared to the year ended December 31, 2020, primarily due to a $13.6 million decrease in LSC multiemployer pension plan obligation expense and lower legal expenses, partially offset by higher incentive compensation, share-based compensation and consulting expenses.

35

Non-GAAP Measures

The Company believes that certain Non-GAAP measures, such as Non-GAAP adjusted EBITDA (“Adjusted EBITDA”), provide useful information about the Company’s operating results and enhance the overall ability to assess the Company’s financial performance. The Company uses these measures, together with other measures of performance prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), to compare the relative performance of operations in planning, budgeting and reviewing the performance of its business. Adjusted EBITDA allows investors to make a more meaningful comparison between the Company’s core business operating results over different periods of time. The Company believes that Adjusted EBITDA, when viewed with the Company’s results under GAAP and the accompanying reconciliations, provides useful information about the Company’s business without regard to potential distortions. By eliminating potential differences in results of operations between periods caused by factors such as historic cost and age of assets, restructuring, impairment and other charges, acquisition-related expenses, and gain or loss on certain equity investments and asset sales as well as other items, as described below, the Company believes that Adjusted EBITDA can provide a useful additional basis for comparing the current performance of the underlying operations being evaluated.

Adjusted EBITDA is not presented in accordance with GAAP and has important limitations as an analytical tool. These measures should not be considered as a substitute for analysis of the Company’s results as reported under GAAP. In addition, these measures are defined differently by different companies and, accordingly, such measures may not be comparable to similarly-titled measures of other companies.

In addition to the factors listed above, the following items are excluded from Adjusted EBITDA:

•
Share-based compensation expense. Although share-based compensation is a key incentive offered to certain of the Company’s employees, business performance is evaluated excluding share-based compensation expenses. Depending upon the size, timing and the terms of grants, non-cash compensation expense may vary but will recur in future periods.

•
COVID-19 related (recoveries) expenses, net. Recoveries recognized and incremental expenses incurred as a result of the COVID-19 pandemic. Incremental expenses included incremental vendor costs and premium wages paid to certain employees as well as costs to clean and disinfect the Company's facilities more frequently. As a result of these incremental expenses, the Company invoiced certain customers COVID-19 related surcharges as well as received an insurance reimbursement associated with certain COVID-19 related expenses. In 2020, the Company also received certain government subsidies, primarily related to employee wages at certain international locations.

A reconciliation of net earnings (loss) to Adjusted EBITDA for the years ended December 31, 2021 and 2020 is presented in the following table:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","","2020"],["","(in millions)"],["Net earnings (loss)","$","145.9","","","$","(25.9",")"],["Restructuring, impairment and other charges, net","","13.6","","","","79.2"],["Share-based compensation expense","","19.5","","","","13.6"],["LSC multiemployer pension plans obligation","","5.4","","","","19.0"],["Non-income tax, net","","(1.6",")","","","5.2"],["COVID-19 related (recoveries) expenses, net","","(1.0",")","","","0.5"],["Gain on sale of long-lived assets, net","","(0.7",")","","","\u2014"],["Gain on equity investments, net","","(0.4",")","","","\u2014"],["Accelerated rent expense","","\u2014","","","","2.2"],["eBrevia contingent consideration","","\u2014","","","","(0.8",")"],["Depreciation and amortization","","40.3","","","","50.9"],["Interest expense, net","","26.6","","","","22.8"],["Investment and other income, net","","(4.7",")","","","(1.7",")"],["Income tax expense","","51.9","","","","8.4"],["Adjusted EBITDA","$","294.8","","","$","173.4"]]
[[/GREPCENT_TABLE]]

36

Restructuring, impairment and other charges, net —The year ended December 31, 2021 included employee termination costs of $3.4 million and impairment charges of $9.2 million, primarily related to a partial impairment of an investment in equity securities and the demolition of an office building, as further described in Note 1, Overview, Basis of Presentation and Significant Accounting Policies. The year ended December 31, 2020 included employee termination costs of $15.6 million, non-cash impairment charges of $60.6 million, primarily related to IC-CCM goodwill and operating lease ROU assets and $3.0 million of other charges, primarily related to the realignment of the Company's operating segments. Refer to Note 6, Restructuring, Impairment and Other Charges, for additional information.

Share-based compensation expense—Included charges of $19.5 million and $13.6 million for the years ended December 31, 2021 and 2020, respectively.

LSC multiemployer pension plans obligation—Included charges of $5.4 million and $19.0 million for the years ended December 31, 2021 and 2020, respectively, for the Company’s accrual related to the LSC MEPP Liabilities. The charge for the year ended December 31, 2021 is net of a $7.1 million reimbursement from RRD as a result of the final allocation of the liability. Refer to Note 8, Commitments and Contingencies, for additional information.

Non-income tax, net—Included income of $1.6 million for the year ended December 31, 2021 and a charge of $5.2 million for the year ended December 31, 2020, related to the Company’s accrual for certain estimated non-income tax exposures. Refer to Note 8, Commitments and Contingencies, for additional information.

COVID-19 related (recoveries) expenses, net—Included net recoveries of $1.0 million for the year ended December 31, 2021, primarily related to an insurance reimbursement of COVID-19 expenses, and net charges of $0.5 million for the year ended December 31, 2020, primarily related to incremental vendor costs, premium wages and incentive compensation paid to certain employees, net of COVID-19 related sales surcharges invoiced to certain customers and government subsidies, as described above.

Gain on sale of long-lived assets, net—Included a net gain of $0.7 million for the year ended December 31, 2021, primarily related to the sale of machinery and equipment from facilities being exited as a result of restructuring actions.

Gain on equity investments, net—Included a net unrealized gain of $0.4 million for the year ended December 31, 2021. Gain on equity investments, net is included in investment and other income, net in the audited Consolidated Statements of Operations.

Accelerated rent expense—Included a charge of $2.2 million for the year ended December 31, 2020, primarily related to the acceleration of rent expense associated with abandoned operating leases.

eBrevia contingent consideration—Included a gain of $0.8 million for the year ended December 31, 2020, as a result of a decrease in the contingent consideration for the former owners of eBrevia.

Selected Financial Data

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","","2020"],["","(in millions, except per share data)"],["Consolidated Statements of Operations data:"],["Net sales","$","993.3","","","$","894.5"],["Net earnings (loss)","","145.9","","","","(25.9",")"],["Net earnings (loss) per share"],["Basic","","4.36","","","","(0.76",")"],["Diluted","","4.14","","","","(0.76",")"],["Consolidated Balance Sheets data:"],["Total assets","","883.3","","","","865.6"],["Long-term debt","","124.0","","","","230.5"]]
[[/GREPCENT_TABLE]]

37

The following table includes the pre-tax and after-tax impact of certain Non-GAAP items for the years ended December 31, 2021 and 2020:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31, 2021"],["","","Pre-tax","","","After-tax"],["","","(in millions)"],["Non-income tax, net","","$","(1.6",")","","$","(1.2",")"],["COVID-19 related recoveries, net","","","(1.0",")","","","(0.7",")"],["Gain on sale of long-lived assets, net","","","(0.7",")","","","(0.5",")"],["Gain on equity investments, net","","","(0.4",")","","","(0.3",")"],["Share-based compensation expense","","","19.5","","","","9.9"],["Restructuring, impairment and other charges, net","","","13.6","","","","9.9"],["Loss on debt extinguishments","","","7.4","","","","5.4"],["LSC multiemployer pension plans obligation","","","5.4","","","","3.9"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","Year Ended December 31, 2020"],["","","Pre-tax","","","After-tax"],["","","(in millions)"],["Gain on debt extinguishments","","$","(2.3",")","","$","(1.7",")"],["eBrevia contingent consideration","","","(0.8",")","","","(0.8",")"],["Restructuring, impairment and other charges, net","","","79.2","","","","67.9"],["LSC multiemployer pension plans obligation","","","19.0","","","","13.9"],["Share-based compensation expense","","","13.6","","","","11.1"],["Non-income tax, net","","","5.2","","","","3.8"],["Accelerated rent expense","","","2.2","","","","1.7"],["COVID-19 related expenses, net","","","0.5","","","","0.2"]]
[[/GREPCENT_TABLE]]

Liquidity and Capital Resources

The Company believes it has sufficient liquidity to support its ongoing operations and to invest in future growth to create value for its stockholders. Cash on hand, operating cash flows and the Company’s Revolving Facility are the primary sources of liquidity and are expected to be used for, among other things, payment of interest and principal on the Company’s debt obligations, capital expenditures necessary to support productivity improvement and growth, acquisitions and completion of restructuring programs.

The Company maintains cash pooling structures that enable participating international locations to draw on the pools’ cash resources to meet local liquidity needs. Foreign cash balances may be loaned from certain cash pools to U.S. operating entities on a temporary basis in order to reduce the Company’s short-term borrowing costs or for other purposes. The Company has the ability to repatriate foreign cash, associated with foreign earnings previously subjected to U.S. tax, with minimal additional tax consequences. The Company maintains its assertion of indefinite reinvestment on all foreign earnings and other outside basis differences to indicate that the Company remains indefinitely reinvested in operations outside of the U.S., with the exception of the previously taxed foreign earnings already subject to U.S. tax. The Company repatriated excess cash at its foreign subsidiaries to the U.S. during the years ended December 31, 2021 and December 31, 2019 and did not make cash repatriations during 2020. The Company is evaluating whether to make any cash repatriations in the future.

The Company currently expects capital expenditures to be approximately $50 million to $55 million in 2022, as compared to $42.3 million in 2021. The Company is also evaluating additional investment opportunities that could increase 2022 capital expenditures by an incremental $10 million to $15 million. The increase in capital expenditures related to the amount currently expected and the incremental opportunities being evaluated are primarily related to investments in the Company's software portfolio.

As of December 31, 2021, cash and cash equivalents were $54.5 million, a decrease of $19.1 million as compared to December 31, 2020. As of December 31, 2021, cash and cash equivalents included $24.5 million in the U.S. and $30.0 million at international locations.

38

The following describes the Company’s cash flows for the years ended December 31, 2021 and 2020.

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","","2020"],["","(in millions)"],["Net cash provided by operating activities","$","180.0","","","$","154.2"],["Net cash used in investing activities","","(45.0",")","","","(19.8",")"],["Net cash used in financing activities","","(154.9",")","","","(77.5",")"],["Effect of exchange rate on cash and cash equivalents","","0.8","","","","(0.5",")"],["Net (decrease) increase in cash and cash equivalents","$","(19.1",")","","$","56.4"]]
[[/GREPCENT_TABLE]]

Cash Flows Provided By Operating Activities

Operating cash inflows and outflows are largely attributable to sales of the Company’s services and products as well as recurring expenditures for labor, rent, raw materials and other operating activities.

2021 compared to 2020

Net cash provided by operating activities was $180.0 million for the year ended December 31, 2021, as compared to $154.2 million for the year ended December 31, 2020. The increase in cash provided by operating activities of $25.8 million was primarily due to the significant increase in net earnings, partially offset by the timing of payments, an increase in income taxes paid and a decrease in collections due to timing of customer payments. Accounts payable and accrued liabilities and other increased operating cash flows by $16.8 million for the year ended December 31, 2021, as compared to a $74.9 million increase in operating cash flows for the year ended December 31, 2020, primarily due to higher incentive compensation and commission payments during 2021 and timing of vendor payments. The Company's income tax payments increased by $43.3 million to $65.0 million for the year ended December 31, 2021 from $21.7 million, primarily due to federal and state income tax payments made in the year ended December 31, 2021. Accounts receivable decreased operating cash flow by $28.8 million for the year ended December 31, 2021, as compared to $14.8 million for the year ended December 31, 2020.

Cash Flows Used In Investing Activities

Net cash used in investing activities was $45.0 million for the year ended December 31, 2021, and primarily consisted of capital expenditures of $42.3 million, mostly driven by investment in software development, and the acquisition of Guardum.

Net cash used in investing activities was $19.8 million for the year ended December 31, 2020, and primarily consisted of capital expenditures of $31.1 million, mostly driven by investment in software development, partially offset by $12.8 million of proceeds from the sale of one of the Company’s investments in equity securities.

Cash Flows Used In Financing Activities

Net cash used in financing activities for the year ended December 31, 2021 was $154.9 million. During the year ended December 31, 2021, the Company received $278.0 million of proceeds from the Revolving Facility borrowings, offset by $278.0 million of payments on the Revolving Facility borrowings. The Company made $312.8 million of payments on long-term debt, including the redemption of $233.0 million of the Notes, which were partially paid for with proceeds of $200.0 million from the Term Loan A Facility during the year ended December 31, 2021, and $75.0 million of prepayments on the Term Loan A Facility. The Company's common stock repurchases for the year ended December 31, 2021 totaled $40.9 million, which included $32.2 million of repurchases under the stock repurchase program and $8.7 million associated with vesting of the Company employees' equity awards.

Net cash used in financing activities for the year ended December 31, 2020 was $77.5 million. During the year ended December 31, 2020, the Company received $369.0 million of proceeds from the Revolving Facility borrowings, offset by $369.0 million of payments on the Revolving Facility borrowings. The Company made payments of $63.8 million for the purchase and retirement of certain of the Company’s notes. The Company’s common stock repurchases for the year ended December 31, 2020 totaled $11.8 million.

39

Contractual Cash Obligations and Other Commitments and Contingencies

As of December 31, 2021, the Company had total future contractual and other obligations of approximately $464 million, with approximately $206 million of the future contractual and other obligations due during 2022. The future contractual obligations primarily consist of outstanding debt and related interest, operating and finance lease payments, outsourced services relating to information technology, maintenance and other services, sales commissions, incentive compensation, deferred compensation, multi-employer pension plan obligations, pension and other postretirement benefits plans contributions as well as other miscellaneous obligations. Refer to Note 1, Overview, Basis of Presentation and Significant Accounting Policies; Note 5, Leases; Note 6, Restructuring, Impairment and Other Charges; Note 7, Retirement Plans; Note 8, Commitments and Contingencies and Note 10, Debt to the audited Consolidated Financial Statements for additional information.

Debt

The Company’s debt as of December 31, 2021 and 2020 consisted of the following (in millions):

[[GREPCENT_TABLE]]
[["","December 31,"],["","2021","","","2020"],["Term Loan A Facility","$","125.0","","","$","\u2014"],["8.25% senior notes due October 15, 2024","","\u2014","","","","233.0"],["Unamortized debt issuance costs","","(1.0",")","","","(2.5",")"],["Total long-term debt","$","124.0","","","$","230.5"]]
[[/GREPCENT_TABLE]]

The Company’s debt maturity and interest payments schedule as of December 31, 2021 is shown in the table below:

[[GREPCENT_TABLE]]
[["","Payments Due In"],["","Total","","","2022","","","2023","","","2024","","","2025","","","2026","","","2027 and thereafter"],["","(in millions)"],["Term Loan A Facility (a)","$","125.0","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","125.0","","","$","\u2014"],["Interest due on Term Loan A Facility (b)","","11.8","","","","2.6","","","","2.6","","","","2.6","","","","2.6","","","","1.4","","","","\u2014"],["Total as of December 31, 2021","$","136.8","","","$","2.6","","","$","2.6","","","$","2.6","","","$","2.6","","","$","126.4","","","$","\u2014"]]
[[/GREPCENT_TABLE]]

_________

(a)
Excludes unamortized debt issuance costs of $1.0 million, which do not represent contractual commitments with a fixed amount or maturity date.

(b)
Includes estimated interest for the Term Loan A Facility based on the interest rate at December 31, 2021. Estimated interest payments may differ in the future based on changes in floating interest rates, timing of additional prepayments or other factors or events.

8.25% Senior Notes Due 2024— On September 30, 2016, DFIN issued $300.0 million of 8.25% senior unsecured notes due October 15, 2024 (the “Notes”). The Company’s Notes were issued pursuant to an indenture (the “Indenture”) where certain wholly-owned domestic subsidiaries of the Company guaranteed the Notes (the “Guarantors”). On October 15, 2021, the Company redeemed the remaining outstanding Notes balance of $233.0 million at the redemption price of 102.063, plus accrued and unpaid interest of $9.6 million using $200.0 million of proceeds from the Company's Term Loan A Facility and cash. The Company recorded a pre-tax loss on the extinguishment of the Notes of $6.8 million in the fourth quarter of 2021. During 2020, the Company purchased and retired $67.0 million (notional amount) of the Notes and recognized a pre-tax gain on the extinguishment of debt of $2.3 million, which was net of unamortized debt issuance costs. The loss (gain) on debt extinguishment is reflected within interest expense, net in the audited Consolidated Statements of Operations.

40

Prior to the repayment and the resulting release of all Guarantors, the Notes were fully and unconditionally as well as jointly and severally guaranteed, on an unsecured basis, by the Guarantors, which were comprised of each of the Company’s direct and indirect wholly-owned U.S. subsidiaries that guaranteed the Company’s obligations under the Credit Facilities, including Donnelley Financial, LLC and DFS International Holdings, Inc. The Notes were not guaranteed by the Company’s foreign subsidiaries or unrestricted subsidiaries ("Nonguarantors"). The Indenture governing the Notes contained certain covenants applicable to the Company and its restricted subsidiaries, including limitations on: (1) liens; (2) indebtedness; (3) mergers, consolidations and acquisitions; (4) sales, transfers and other dispositions of assets; (5) loans and other investments; (6) dividends and other distributions, stock repurchases and redemptions and other restricted payments; (7) restrictions affecting subsidiaries; (8) transactions with affiliates; and (9) designations of unrestricted subsidiaries. Each of these covenants was subject to important exceptions and qualifications. The Notes and the related guarantees were the Company and the Guarantors’, respective, senior unsecured obligations and ranked equally in right of payment to all senior debt, including the obligations under the Company’s Credit Facilities, senior in right of payment to all subordinated debt, and effectively subordinated in right of payment to any of the Company and the Guarantors’ secured debt, to the extent of the value of the assets securing such debt.

Credit Agreement—On May 27, 2021 (the "Restatement Effective Date"), the Company amended and restated its credit agreement dated as of September 30, 2016 (as in effect prior to such amendment and restatement, the “Credit Agreement,” and the Credit Agreement, as so amended and restated, the “Amended and Restated Credit Agreement”), to, among other things extend the maturity of the $300.0 million Revolving Facility to May 27, 2026 and modify certain financial maintenance and negative covenants in the Credit Agreement. The Amended and Restated Credit Agreement also provided for a $200.0 million delayed-draw Term Loan A Facility. On October 14, 2021, the Company drew $200.0 million from the Term Loan A Facility and used the proceeds to redeem the Company's Notes on October 15, 2021, as further described above. Under the Credit Agreement, the Term Loan A Facility bears interest at a rate equal to the sum of the London Interbank Offered Rate ("LIBOR") plus a margin ranging from 2.00% to 2.50% based upon the Company's Consolidated Net Leverage Ratio. Prior to the prepayment of quarterly installments, as described below, the principal amount of loans under the Term Loan A Facility were due and payable in equal quarterly installments of 1.25% of the original principal amount of the loans during the first three years after the Restatement Effective Date, commencing on March 31, 2022, and 2.50% of the original principal amount of the loans thereafter.

In the fourth quarter of 2021, the Company prepaid $75.0 million of the original principal amount of the Term Loan A Facility and recognized a pre-tax loss on extinguishment of debt of $0.6 million. As a result, quarterly installments of the original principal amount are no longer required and the entire unpaid principal amount of the Term Loan A Facility is due and payable on May 27, 2026. Voluntary prepayments of the Term Loan A Facility are permitted at any time without premium or penalty.

The Amended and Restated Credit Agreement contains a number of covenants, including a minimum Interest Coverage Ratio and the Consolidated Net Leverage Ratio, as defined in and calculated pursuant to the Credit Agreement, that, in part, restrict the Company’s ability to incur additional indebtedness, create liens, engage in mergers and consolidations, make restricted payments and dispose of certain assets. The Credit Agreement generally allows annual dividend payments of up to $20.0 million in the aggregate, though additional dividends may be allowed subject to certain conditions. Each of these covenants is subject to important exceptions and qualifications.

As of December 31, 2021, there were no outstanding borrowings under the Revolving Facility. Based on the Company’s results of operations for the year ended December 31, 2021 and existing debt, the Company would have had the ability to utilize $297.8 million of the Revolving Facility and not have been in violation of the terms of the agreement.

41

The current availability under the Revolving Facility and net available liquidity as of December 31, 2021 is shown in the table below:

[[GREPCENT_TABLE]]
[["","","December 31, 2021"],["Availability","","(in millions)"],["Revolving Facility","","$","300.0"],["Availability reduction from covenants","","","\u2014"],["","","$","300.0"],["Usage"],["Borrowings under the Revolving Facility","","$","\u2014"],["Impact on availability related to outstanding letters of credit","","","2.2"],["","","$","2.2"],["Current availability at December 31, 2021","","$","297.8"],["Cash and cash equivalents","","","54.5"],["Net Available Liquidity","","$","352.3"]]
[[/GREPCENT_TABLE]]

The Company was in compliance with its debt covenants as of December 31, 2021, and expects to remain in compliance based on management’s estimates of operating and financial results for 2022 and the foreseeable future. However, declines in market and economic conditions or demand for certain of the Company’s services and products could impact the Company’s ability to remain in compliance with its debt covenants in future periods.

The failure of a financial institution supporting the Revolving Facility would reduce the size of the Company’s committed facility unless a replacement institution was added. As of December 31, 2021, the Revolving Facility is supported by fifteen U.S. and international financial institutions. As of December 31, 2021, the Company had $3.2 million in outstanding letters of credit and bank guarantees, of which $2.2 million reduced the availability under the Revolving Facility.

As of December 31, 2021, the Company met all the conditions required to borrow under the Revolving Facility and management expects the Company to continue to meet the applicable borrowing conditions.

Acquisitions and Dispositions

On December 13, 2021, the Company completed the acquisition of Guardum, a leading data security and privacy software provider that helps companies locate, secure and control data. The acquisition enhances the Company's Venue offering. By safeguarding privacy and improving data accuracy, Guardum's data security is a competitive differentiator. Prior to the acquisition, the Company held a 33.0% investment in Guardum. The purchase price for the remaining equity of Guardum was $3.6 million, net of cash acquired of $0.1 million.

The Company’s acquisition of eBrevia closed on December 18, 2018. During the year ended December 31, 2019, the Company paid $4.5 million for the acquisition of eBrevia. An additional $1.9 million of the purchase price, which was held in the event of potential claims, was paid during the year ended December 31, 2020 pursuant to the terms of the acquisition agreement.

During the year ended December 31, 2018, the Company sold its Language Solutions business for net proceeds of $77.5 million in cash, all of which was received as of December 31, 2019. During the year ended December 31, 2019, the Company paid $4.0 million related to the disposition of the Language Solutions business.

OTHER INFORMATION

Litigation and Contingent Liabilities

For a discussion of certain litigation and contingent liabilities involving the Company, see Note 8, Commitments and Contingencies, to the audited Consolidated Financial Statements.

42

Critical Accounting Estimates

The preparation of financial statements in conformity with GAAP requires the extensive use of management’s estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates. Estimates are used when accounting for items and matters including, but not limited to, revenue recognition, goodwill, asset valuations and useful lives, pension and income taxes.

Revenue Recognition

The Company manages highly-customized data and materials, such as the Exchange Act, the Securities Act and the Investment Company Act filings with the SEC on behalf of the Company’s customers, manages virtual data rooms and performs XBRL and related services. Clients are provided with EDGAR filing services, XBRL compliance services and translation, editing, interpreting, proof-reading and multilingual typesetting services, among other services. The Company’s software solutions include Venue, the Arc Suite software platform, ActiveDisclosure, data and analytics and others. The Company also provides digital document creation, online content management and print and distribution solutions to public and private companies, mutual funds and other regulated investment firms to serve their regulatory and compliance needs.

Revenue is recognized upon transfer of control of promised services or products to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those services or products. The Company's services include software solutions and tech-enabled services whereas the Company's products are comprised of print and distribution offerings. The Company’s arrangements with customers often include promises to transfer multiple services or products to a customer. Determining whether services and products are considered distinct performance obligations that should be accounted for separately requires significant judgment. Certain customer arrangements have multiple performance obligations as certain promises are both capable of being distinct and are distinct within the context of the contract. Other customer arrangements have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts, and therefore is not distinct. Billings for shipping and handling costs as well as certain postage costs and out-of-pocket expenses are recorded gross. In accordance with the practical expedient within ASC Topic 606, Revenue from Contracts with Customers, the Company expenses incremental costs to obtain the contract, primarily commissions, as incurred when the amortization period of the asset is one year or less. Sales commissions associated with multi-year contracts beyond the initial year are subject to an employee service requirement and are not capitalized as they are not considered incremental costs to obtain a contract. For arrangements with multiple performance obligations, the transaction price is allocated to the separate performance obligations. As the Company provides customer specific solutions, observable standalone selling price is rarely available. As such, standalone selling price is more frequently determined using an estimate of the standalone selling price of each distinct service or product, taking into consideration the historical selling price by customer for each distinct service or product, if available. These estimates may vary from the final amounts invoiced to the customer and are adjusted upon completion of all performance obligations.

The timing of revenue recognition may differ from the timing of invoicing to customers and these timing differences result in unbilled receivables, contract assets or contract liabilities. Contract assets represent revenue recognized for performance obligations completed before an unconditional right to payment exists and therefore invoicing has not yet occurred. The Company generally estimates contract assets based on the historical selling price adjusted for its current experience and expected resolution of the variable consideration of the completed performance obligation. When the Company's contracts contain variable consideration, the variable consideration is recognized only to the extent that it is probable that a significant revenue reversal will not occur in a future period. As a result, the estimated revenue and contract assets may be constrained until the uncertainty associated with the variable consideration is resolved, which generally occurs in less than one year. Generally, the contract asset balance is impacted by the recognition of additional revenue, amounts invoiced to customers and changes in the level of the constraint applied to variable consideration. Unbilled receivables are recorded when there is an unconditional right to payment and invoicing has not yet occurred. The Company estimates the value of unbilled receivables based on a combination of historical customer selling price and management’s assessment of realizable selling price. Unbilled receivables can vary significantly from period to period as a result of seasonality, volume and market conditions. Unbilled receivables and contract assets are included in accounts receivable on the audited Consolidated Balance Sheets. Contract liabilities consist of deferred revenue and progress billings which are included in accrued liabilities on the audited Consolidated Balance Sheets.

Because substantially all of the Company’s products are customized, product returns are not significant; however, the Company accrues for the estimated amount of customer credits at the time of sale. Refer to Note 1, Overview, Basis of Presentation and Significant Accounting Policies, to the audited Consolidated Financial Statements for further discussion.

43

Goodwill

The Company’s methodology for allocating the purchase price of acquisitions is based on established valuation techniques that reflect the consideration of several factors, including valuations performed by third-party appraisers when appropriate. Goodwill is measured as the excess of the cost of an acquired entity over the fair value assigned to identifiable assets acquired and liabilities assumed. Goodwill is either assigned to a specific reporting unit or allocated between reporting units based on the relative fair value of each reporting unit.

The Company performs its goodwill impairment tests annually as of October 31, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company also performs an interim review for indicators of impairment each quarter to assess whether an interim impairment review is required for any reporting unit. As part of its interim reviews, management analyzes potential changes in the value of individual reporting units based on each reporting unit’s operating results for the period compared to expected results as of the prior year’s annual impairment test. In addition, management considers how other key assumptions, including discount rates and expected long-term growth rates, used in the last annual impairment test, could be impacted by changes in market conditions and economic events. Based on these interim assessments, management concluded that as of the interim periods, no events or changes in circumstances indicated that it was more likely than not that the fair value for any reporting unit had declined below its carrying amount.

The Company has four reporting units for which cash flows are determinable, however, only the CM-SS, CM-CCM and IC-SS reporting units had goodwill as of October 31, 2021.

In applying the goodwill impairment test, the Company has the option to perform a qualitative test (also known as “Step 0”) or a quantitative test (“Step 1”). Under the Step 0 test, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of the reporting units is less than its carrying value. If after assessing these qualitative factors, the Company determines it is not “more-likely-than-not” that the fair value of the reporting unit is less than the carrying value, then performing the Step 1 quantitative test is not required.

Step 1 of the quantitative test requires comparison of the fair value of each of the reporting units to the respective carrying value. If the carrying value of the reporting unit is less than the fair value, no impairment exists. If the carrying amount of a reporting unit exceeded the estimated fair value, an impairment loss is generally recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.

Qualitative Assessment for Impairment—For the CM-CCM and IC-SS reporting units, the Company performed a qualitative assessment to determine whether it was more likely than not that the fair values of the reporting units were less than their carrying values. In performing this analysis, the Company considered various qualitative factors, including, economic conditions, industry and market considerations, cost factors, overall financial performance of the reporting unit and other entity and reporting unit specific events.

Based on its qualitative assessments, management concluded that as of October 31, 2021, it was not more likely than not that the fair values of the CM-CCM and IC-SS reporting units were less than their carrying values. The goodwill balances of the CM-CCM and IC-SS reporting units as of December 31, 2021 were $253.1 million and $53.2 million, respectively.

Quantitative Assessment for Impairment—For the remaining reporting unit with goodwill, CM-SS, a quantitative assessment was completed. The analysis performed included estimating the fair value of the reporting unit using both the income and market approaches. The income approach requires management to estimate a number of factors, including projected future operating results, economic projections, anticipated future cash flows, discount rates and the allocation of shared or corporate items. The market approach estimates fair value using comparable marketplace fair value data from within a comparable industry grouping. The Company weighted both the income and market approach equally to estimate the concluded fair value of the reporting unit.

The determination of fair value in the quantitative assessment requires the Company to make significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to: the selection of appropriate peer group companies and an appropriate market multiple, the discount rate; terminal growth rates; and forecasts of revenue, operating income, restructuring charges and capital expenditures.

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As a result of the quantitative assessment for CM-SS, the estimated fair value exceeded the carrying value and no goodwill impairment charge was recorded for the year ended December 31, 2021. The goodwill balance of the CM-SS reporting unit as of December 31, 2021 was $103.7 million.

Goodwill Impairment Assumptions—Although the Company believes its estimates of fair value are reasonable, actual financial results could differ from those estimates due to the inherent uncertainty involved in making such estimates. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on either the fair value of the reporting units, the amount of the goodwill impairment charge, or both.

One measure of the sensitivity of the amount of goodwill impairment charges to key assumptions is the amount by which each reporting unit “passed” (fair value exceeds carrying amount, a “cushion”) or “failed” (the carrying amount exceeds fair value) the quantitative assessment. As of October 31, 2021, the CM-SS reporting unit's estimated fair value was far in excess of the carrying value.

The Company believes that its estimates of future cash flows and discount rates are reasonable, but future changes in the underlying assumptions could differ due to the inherent uncertainty in making such estimates. Additionally, lower volumes, unfavorable regulatory developments or lower than expected growth or profitability of software solutions could have a significant impact on the fair values of the reporting units.

Other Long-Lived Assets

The Company evaluates the recoverability of other long-lived assets, including operating lease right-of-use assets (“ROU”), property, plant and equipment, software and definite-lived intangible assets, whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. The Company assesses its asset groups for indicators of impairment on a recurring basis. Factors which could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the assets or the strategy for the overall business, a significant decrease in the market value of the assets or significant negative industry or economic trends. When the Company determines that the carrying value of one of its asset groups may not be recoverable based upon the existence of one or more of the indicators, the assets are assessed for impairment based on the estimated future undiscounted cash flows expected to result from the use of the asset group and its eventual disposition. If the carrying value of an asset group exceeds its estimated future undiscounted cash flows, an impairment loss is recorded for the excess of the asset group’s carrying value over its fair value.

During the year ended December 31, 2021, the Company recorded non-cash impairment charges of $3.3 million associated with its other long-lived assets, primarily related to the demolition of an office building in the CM-CCM segment.

Pension and Other Postretirement Benefits Plans

The Company’s primary defined benefit plan was frozen effective December 31, 2011. No new employees are permitted to enter the Company’s frozen plan and participants will earn no additional benefits. Benefits are generally based upon years of service and compensation. These defined benefit retirement income plans are funded in conformity with the applicable government regulations. The Company funds at least the minimum amount required for all funded plans using actuarial cost methods and assumptions acceptable under government regulations.

The annual income and expense amounts relating to the pension plan are based on calculations which include various actuarial assumptions including mortality expectations, discount rates and expected long-term rates of return. The Company reviews its actuarial assumptions on an annual basis as of December 31 (or more frequently if a significant event requiring remeasurement occurs) and modifies the assumptions based on current rates and trends when it is appropriate to do so. The effects of modifications are recognized immediately on the audited Consolidated Balance Sheets, but are amortized into operating earnings over future periods, with the deferred amount recorded in accumulated other comprehensive income (loss). The Company believes that the assumptions utilized in recording its obligations under its plans are reasonable based on its experience, market conditions and input from its actuaries and investment advisors. The weighted-average discount rate to determine the pension benefit obligation at December 31, 2021 was 2.9%.

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A 1.0% change in the discount rates as of December 31, 2021 would increase/(decrease) the accumulated benefit obligation and projected benefit obligation:

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The Company’s defined benefit plan has a risk management approach for its pension plan assets. The overall investment objective of this approach is to further reduce the risk of significant decreases in the plan’s funded status by allocating a larger portion of the plan’s assets to investments expected to hedge the impact of interest rate risks on the plan’s obligation.

The expected long-term rate of return for the plan assets is based upon many factors including expected asset allocations, historical asset returns, current and expected future market conditions and risk. In addition, the Company considered the impact of the current interest rate environment on the expected long-term rate of return for certain asset classes, particularly fixed income. The target asset allocation percentage for the pension plan was approximately 70% for fixed income investments and 30% for return seeking investments. The expected long-term rate of return on plan assets assumption used to calculate net pension plan income in 2021 was 6.0% for the Company’s pension plans. The expected long-term rate of return on plan assets assumption that will be used to calculate net pension plan income in 2022 is 4.75%.

A 0.25% change in the expected long-term rate of return on plan assets as of December 31, 2021 would increase/(decrease) pension plan income for the year ending December 31, 2022 as follows:

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Accounting for Income Taxes

In the Company’s audited Consolidated Financial Statements, income tax expense and deferred tax balances have been calculated on a separate income tax return basis.

Significant judgment is required in determining the provision for income taxes and related accruals, deferred tax assets and liabilities and any valuation allowance recorded against deferred tax assets. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. Additionally, the Company’s tax returns are subject to audit by various U.S. and foreign tax authorities. The Company recognizes a tax position in its financial statements when it is more likely than not (i.e., a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. This recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Although management believes that its estimates are reasonable, the final outcome of uncertain tax positions may be materially different from that which is reflected in the Company’s historical financial statements.

The Company has recorded deferred tax assets related to future deductible items, including domestic and foreign tax loss and credit carryforwards. The Company evaluates these deferred tax assets by tax jurisdiction. The utilization of these tax assets is limited by the amount of taxable income expected to be generated within the allowable carryforward period and other factors. Accordingly, management has provided a valuation allowance to reduce certain of these deferred tax assets when management has concluded that, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be fully realized. If actual results differ from these estimates, or the estimates are adjusted in future periods, adjustments to the valuation allowance might need to be recorded. As of December 31, 2021 and 2020, valuation allowances of $4.8 million and $7.5 million, respectively, were recorded in the Company’s audited Consolidated Balance Sheets. Refer to Note 9, Income Taxes, to the audited Consolidated Financial Statements for further detail on the accounting for income taxes.

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New Accounting Pronouncements and Pending Accounting Standards

Recently issued accounting standards and their estimated effect on the Company’s audited Consolidated Financial Statements are described in Note 1, Overview, Basis of Presentation and Significant Accounting Policies, to the audited Consolidated Financial Statements.