Donnelley Financial Solutions, Inc. (DFIN) FY 2022 MD&A

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 Part I, Item 1. Business of this Annual Report.

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, particularly in “Special Note Regarding Forward-Looking Statements” and Part I, Item 1A. Risk Factors.

Business

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

The Company separately reports its net sales and related cost of sales for its software solutions, tech-enabled services and print and distribution offerings. The Company’s software solutions consist of Venue, ActiveDisclosure, eBrevia and Arc Suite, among others. The Company’s tech-enabled services offerings consist of document composition, compliance-related SEC 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 benefits plans, such as pension and other postretirement benefits plans expense (income) as well as share-based compensation expense, are included in Corporate and not allocated to the operating segments. For a description of the Company’s operating segments, refer to Part I, Item 1. Business of this Annual Report.

Executive Overview

Net sales for the year ended December 31, 2022 decreased by $159.7 million, or 16.1%, to $833.6 million from $993.3 million for the year ended December 31, 2021, including a $6.3 million, or 0.6%, decrease due to changes in foreign currency exchange rates. Net sales decreased primarily due to lower capital markets transactional volumes and lower print volumes as a result of SEC Rules 30e-3 and 498A, which reduced print requirements, partially offset by higher capital markets compliance volumes, higher software solutions volumes in Arc Suite and higher ActiveDisclosure pricing and volumes.

Income from operations for the year ended December 31, 2022 decreased by $74.3 million, or 33.9%, to $145.0 million from $219.3 million for the year ended December 31, 2021. Income from operations decreased primarily due to lower capital markets transactional volumes, higher depreciation and amortization expense and higher bad debt and marketing expenses, partially offset by lower incentive compensation expense, lower selling expense as a result of the decrease in sales volumes, lower restructuring, impairment, and other charges, net and a $5.4 million decrease in expense related to the LSC multiemployer pension plans obligation.

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, 2021 as compared to the year ended December 31, 2020, 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, 2021, filed with the SEC on February 22, 2022.

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Results of Operations for the Year Ended December 31, 2022 as Compared to the Year Ended December 31, 2021

The following table shows the results of operations for the years ended December 31, 2022 and 2021:

nm – Not meaningful

(a)
Exclusive of depreciation and amortization

Consolidated

Net sales of tech-enabled services of $380.9 million for the year ended December 31, 2022 decreased $138.6 million, or 26.7%, as compared to the year ended December 31, 2021. Net sales of tech-enabled services decreased primarily due to lower capital markets transactional volumes, partially offset by higher capital markets compliance volumes.

Net sales of software solutions of $279.6 million for the year ended December 31, 2022 increased $9.6 million, or 3.6%, as compared to the year ended December 31, 2021. Net sales of software solutions increased primarily due to higher ActiveDisclosure pricing and volumes as well as higher ArcPro, ArcReporting and ArcDigital volumes, partially offset by lower Venue and other compliance software solutions volumes.

Net sales of print and distribution of $173.1 million for the year ended December 31, 2022 decreased $30.7 million, or 15.1%, as compared to the year ended December 31, 2021. Net sales of print and distribution decreased primarily due to lower insurance and investment companies compliance volumes as a result of SEC Rules 30e-3 and 498A, which reduced print requirements, and lower capital markets transactional volumes.

Tech-enabled services cost of sales of $141.1 million for the year ended December 31, 2022 decreased $21.2 million, or 13.1%, as compared to the year ended December 31, 2021. Tech-enabled services cost of sales decreased primarily due to lower capital markets transactional volumes, lower incentive compensation expense and cost control initiatives, partially offset by an unfavorable sales mix. As a percentage of tech-enabled services net sales, tech-enabled services cost of sales increased 5.8%, primarily driven by an unfavorable sales mix, partially offset by lower incentive compensation expense and cost savings initiatives.

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Software solutions cost of sales of $113.4 million for the year ended December 31, 2022 increased $8.1 million, or 7.7%, as compared the year ended December 31, 2021. Software solutions cost of sales increased primarily due to an unfavorable sales mix, higher product development expense, higher sales volumes and a higher allocation of overhead costs. As a percentage of software solutions net sales, software solutions costs of sales increased 1.6%, primarily driven by an unfavorable sales mix, higher product development expense and a higher allocation of overhead costs.

Print and distribution cost of sales of $115.7 million for the year ended December 31, 2022 decreased $29.8 million, or 20.5%, as compared to the year ended December 31, 2021. Print and distribution cost of sales decreased primarily due to lower sales volumes, cost savings as a result of the consolidation of the print platform, a lower allocation of overhead costs and lower incentive compensation expense. As a percentage of print and distribution net sales, print and distribution cost of sales decreased 4.6%, primarily driven by cost savings as a result of the consolidation of the print platform, a lower allocation of overhead costs and lower incentive compensation expense.

SG&A expenses of $264.0 million for the year ended December 31, 2022 decreased $43.7 million, or 14.2%, as compared to the year ended December 31, 2021. SG&A expenses decreased primarily due to lower selling expense as a result of a decrease in sales volumes, lower incentive compensation expense and a $5.4 million decrease in expense related to the LSC multiemployer pension plans obligation, partially offset by higher bad debt, marketing and consulting expenses. As a percentage of net sales, SG&A expenses increased from 31.0% for the year ended December 31, 2021 to 31.7% for the year ended December 31, 2022, primarily driven by lower sales volumes and higher bad debt, marketing and consulting expenses, partially offset by lower selling expense, lower incentive compensation expense and lower expense related to the LSC multiemployer pension plans obligation.

Depreciation and amortization of $46.3 million for the year ended December 31, 2022 increased $6.0 million, or 14.9%, as compared to the year ended December 31, 2021, primarily due to higher software amortization expense.

Restructuring, impairment and other charges, net of $7.7 million for the year ended December 31, 2022 decreased $5.9 million, or 43.4%, as compared to the year ended December 31, 2021. For the year ended December 31, 2022, these charges included $6.8 million of employee termination costs for approximately 130 employees. For the year ended December 31, 2021, these charges included impairment charges of $9.2 million, primarily related to the partial impairment of an investment in equity securities and the demolition of an office building, and $3.4 million of employee termination costs for approximately 175 employees.

Other operating loss, net of $0.4 million for the year ended December 31, 2022 included a $0.7 million loss on the sale of the EOL business. 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 $145.0 million for the year ended December 31, 2022 decreased $74.3 million, or 33.9%, as compared to the year ended December 31, 2021. Income from operations decreased primarily due to lower capital markets transactional volumes, higher depreciation and amortization expense and higher bad debt and marketing expenses, partially offset by lower incentive compensation expense, lower selling expense as a result of the decrease in sales volumes, lower restructuring, impairment, and other charges, net and a $5.4 million decrease in expense related to the LSC multiemployer pension plans obligation.

Interest expense, net of $9.2 million for the year ended December 31, 2022 decreased $17.4 million, or 65.4%, as compared to the year ended December 31, 2021. Interest expense, net decreased primarily due to the prepayment of the Company's Notes during the fourth quarter of 2021 and a lower interest rate on the Term Loan A Facility, partially offset by a higher average Revolving Facility balance during the year ended December 31, 2022 compared to the year ended December 31, 2021.

Investment and other income, net of $3.5 million for the year ended December 31, 2022 decreased $1.6 million, or 31.4%, as compared to the year ended December 31, 2021, primarily due to a decrease in net pension plan income, partially offset by an increase in earnings on equity investments.

The effective income tax rate was 26.4% for the year ended December 31, 2022 compared to 26.2% for the year ended December 31, 2021. The change in the effective income tax rate was primarily driven by decreased earnings in 2022, an increase in valuation allowances and an increase in non-deductible expenses, partially offset by favorable return to provision adjustments and income tax credits. Refer to Note 9, Income Taxes, to the audited Consolidated Financial Statements for further information.

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Information by Segment

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

Capital Markets – Software Solutions

nm – Not meaningful

Net sales of $180.2 million for the year ended December 31, 2022 decreased $0.8 million, or 0.4%, as compared to the year ended December 31, 2021. Net sales decreased primarily due to lower Venue and other compliance software solutions volumes, partially offset by higher ActiveDisclosure pricing and volumes.

Income from operations of $13.5 million for the year ended December 31, 2022 decreased $16.9 million, or 55.6%, as compared to the year ended December 31, 2021, primarily due to an unfavorable sales mix, an increase in depreciation and amortization, a higher allocation of overhead costs and higher product development costs, partially offset by lower selling expense, price increases and lower incentive compensation expense.

Operating margin decreased from 16.8% for the year ended December 31, 2021 to 7.5% for the year ended December 31, 2022, primarily due to an unfavorable sales mix, an increase in depreciation and amortization, a higher allocation of overhead costs and higher product development costs, partially offset by lower selling expense, price increases and lower incentive compensation expense.

Capital Markets – Compliance and Communications Management

nm – Not meaningful

Net sales of $410.3 million for the year ended December 31, 2022 decreased $151.2 million, or 26.9%, as compared to the year ended December 31, 2021. Net sales decreased primarily due to lower transactional volumes, partially offset by higher compliance volumes.

Income from operations of $131.4 million for the year ended December 31, 2022 decreased $111.2 million, or 45.8%, as compared to the year ended December 31, 2021, primarily due to lower transactional sales volumes, an unfavorable sales mix, higher bad debt and marketing expenses and a higher allocation of overhead costs, partially offset by lower selling expense as a result of the decrease in sales volume, lower incentive compensation expense, price increases and cost control initiatives.

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Operating margin decreased from 43.2% for the year ended December 31, 2021 to 32.0% for the year ended December 31, 2022, primarily due to an unfavorable sales mix, higher bad debt and marketing expenses and a higher allocation of overhead costs, partially offset by lower selling expense as a result of the decrease in sales volume, lower incentive compensation expense, price increases and cost control initiatives.

Investment Companies – Software Solutions

nm – Not meaningful

Net sales of $99.4 million for the year ended December 31, 2022 increased $10.4 million, or 11.7%, as compared to the year ended December 31, 2021. Net sales increased primarily due to higher ArcPro, ArcReporting and ArcDigital volumes.

Income from operations of $21.9 million for the year ended December 31, 2022 increased $13.0 million, as compared to the year ended December 31, 2021, primarily due to higher sales volumes and lower incentive compensation expense, partially offset by higher product development costs.

Operating margin increased from 10.0% for the year ended December 31, 2021 to 22.0% for the year ended December 31, 2022, primarily due to higher sales volumes and lower incentive compensation expense, partially offset by higher product development costs.

Investment Companies – Compliance and Communications Management

nm – Not meaningful

Net sales of $143.7 million for the year ended December 31, 2022 decreased $18.1 million, or 11.2%, as compared to the year ended December 31, 2021. Net sales decreased primarily due to lower print volumes as a result of the implementation of SEC Rules 30e-3 and 498A, which reduced print requirements.

Income from operations of $35.7 million for the year ended December 31, 2022 increased $20.7 million, as compared to the year ended December 31, 2021, primarily due to a favorable sales mix, a lower allocation of overhead costs, lower incentive compensation expense, cost savings as a result of the consolidation of the print platform and lower restructuring, impairment, and other charges, net.

Operating margin increased from 9.3% for the year ended December 31, 2021 to 24.8% for the year ended December 31, 2022, primarily due to a favorable sales mix, a lower allocation of overhead costs, lower incentive compensation expense, cost savings as a result of the consolidation of the print platform and lower restructuring, impairment, and other charges, net.

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Corporate

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

Corporate operating expenses of $57.5 million for the year ended December 31, 2022 decreased $20.1 million as compared to the year ended December 31, 2021, primarily due to lower incentive compensation expense, lower restructuring, impairment, and other charges, net and the 2021 LSC multiemployer pension plans obligation expense, partially offset by a higher allocation of costs and higher legal expenses.

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, net, non-income tax, net, gain on equity investments, net as well as other items, as described below, the Company believes that Adjusted EBITDA can provide a useful additional basis for comparing the current performance of the underlying operations being evaluated.

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

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

•
LSC multiemployer pension plans obligation. As a result of LSC's bankruptcy, the Company recorded charges for estimated payments related to the LSC MEPP Liabilities, as the Company and RRD remained jointly and severally liable for LSC MEPP Liabilities arising prior to the Company's and LSC's separation from RRD.

•
COVID-19 related recoveries. As a result of incremental expenses (including incremental vendor costs and premium wages paid to certain employees as well as costs to clean and disinfect the Company's facilities more frequently) incurred related to the COVID-19 pandemic, during the year ended December 31, 2021, the Company received an insurance reimbursement associated with these incremental expenses. During the year ended December 31, 2022, the Company received certain government subsidies related to employee wages at certain international locations.

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A reconciliation of net earnings to Adjusted EBITDA for the years ended December 31, 2022 and 2021 is presented in the following table:

Restructuring, impairment and other charges, net—The year ended December 31, 2022 included employee termination costs of $6.8 million. 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. Refer to Note 6, Restructuring, Impairment and Other Charges, net, to the audited Consolidated Financial Statements for additional information.

Share-based compensation expense—Included charges of $19.3 million and $19.5 million for the years ended December 31, 2022 and 2021, respectively.

Accelerated rent expense—Included charges of $0.8 million for the year ended December 31, 2022 for the acceleration of rent expense associated with abandoned operating leases.

Loss on sale of a business—Included a loss of $0.7 million for the year ended December 31, 2022 related to the disposition of the EOL business.

Disposition-related expenses—Included charges of $0.1 million for the year ended December 31, 2022 related to legal costs associated with the disposition of the EOL business.

Non-income tax, net—Included income of $0.9 million and $1.6 million for the years ended December 31, 2022 and 2021, respectively, related to certain estimated non-income tax exposures previously accrued by the Company.

COVID-19 related recoveries—Included recoveries of $0.5 million for the year ended December 31, 2022 related to government subsidies, as described above, and recoveries of $1.0 million for the year ended December 31, 2021, primarily related to insurance reimbursements of COVID-19 related expenses.

Gain on equity investments, net—Included net unrealized gains of $0.5 million and $0.4 million for the years ended December 31, 2022 and 2021, respectively. Refer to Note 1, Overview, Basis of Presentation and Significant Accounting Policies, to the audited Consolidated Financial Statements for additional information.

Gain on sale of long-lived assets, net—Included a gain of $0.2 million for the year ended December 31, 2022 from non-refundable deposits on agreements for the sale of land and 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.

LSC multiemployer pension plans obligation—Included charges of $5.4 million for the year ended December 31, 2021 for the Company’s accrual related to the LSC MEPP Liabilities.

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Selected Financial Data

The following table includes the pre-tax and after-tax impact of certain Non-GAAP adjustments for the years ended December 31, 2022 and 2021:

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 investors. 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 year ended December 31, 2021 and did not make cash repatriations during 2022 and 2020. The Company is evaluating whether to make any cash repatriations in the future.

On August 16, 2022, President Biden signed the Inflation Reduction Act (“IRA”) into law, which included enactment of a 15% corporate minimum tax effective in 2023 and imposes a 1% excise tax on share repurchases that occur after December 31, 2022. The Company currently does not expect the IRA to have a material impact on its financial results.

The Company currently expects capital expenditures to be approximately $60 million in 2023, as compared to $54.2 million in 2022. The increase in capital expenditures relates to investments in the Company's software portfolio.

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Cash and cash equivalents were $34.2 million at December 31, 2022, which included $4.2 million in the U.S. and $30.0 million at international locations.

The following describes the Company’s cash flows for the years ended December 31, 2022 and 2021:

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.

Net cash provided by operating activities was $150.2 million for the year ended December 31, 2022, as compared to $180.0 million for the year ended December 31, 2021. The decrease in net cash provided by operating activities was primarily due to the unfavorable change in accrued liabilities and other and the decrease in net earnings, partially offset by favorable changes to accounts receivable, accounts payable and a decrease in income taxes and interest paid during the year ended December 31, 2022. Accrued liabilities and other decreased operating cash flows by $53.9 million for the year ended December 31, 2022, as compared to a $36.6 million increase in operating cash flows for the year ended December 31, 2021, primarily due to higher incentive compensation and sales commission payments in 2022 and lower incentive compensation and sales commission accruals in 2022 compared to 2021. Accounts receivable increased operating cash flows by $24.4 million for the year ended December 31, 2022, as compared to a $28.8 million decrease for the year ended December 31, 2022, due to the decline in revenue. Accounts payable increased operating cash flows by $12.1 million for the year ended December 31, 2022, as compared to decreasing operating cash flows by $19.8 million for the year ended December 31, 2021, due to timing of supplier payments. The Company's income tax payments decreased by $26.6 million to $38.4 million for the year ended December 31, 2022 from $65.0 million for the year ended December 31, 2021, primarily due to the decrease in pre-tax earnings for the year ended December 31, 2022. The Company's interest payments decreased to $7.6 million for the year ended December 31, 2022 from $21.8 million for the year ended December 31, 2021, primarily due to the Company's prepayment of its 8.25% Senior Notes Due 2024 (the “Notes”) in 2021.

Cash Flows Used In Investing Activities

Net cash used in investing activities was $50.9 million for the year ended December 31, 2022, which consisted of $54.2 million of capital expenditures, mostly driven by investments in software development, partially offset by $3.3 million of proceeds from the sale of the EOL business.

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

Cash Flows Used In Financing Activities

Net cash used in financing activities was $121.1 million for the year ended December 31, 2022. During the year ended December 31, 2022, the Company received $345.5 million of proceeds from the Revolving Facility borrowings, offset by $300.5 million of payments on the Revolving Facility borrowings. The Company's common stock repurchases for the year ended December 31, 2022 totaled $164.7 million, which included $152.5 million of repurchases under the stock repurchase program and $12.2 million associated with vesting of the Company employees' equity awards.

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Net cash used in financing activities was $154.9 million for the year ended December 31, 2021. 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.

Contractual Cash Obligations and Other Commitments and Contingencies

As of December 31, 2022, the Company had total future contractual and other obligations of approximately $438 million, with approximately $156 million of the future contractual and other obligations due during 2023. The future contractual obligations 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 and 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, net; 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, 2022 and 2021 consisted of the following:

The Company’s debt maturity and interest payments schedule as of December 31, 2022 is shown in the table below:

_________

(a)
Excludes unamortized debt issuance costs of $0.8 million, which do not represent contractual commitments with a fixed amount or maturity date.

(b)
Includes estimated interest for the Term Loan A Facility and the Revolving Facility based on borrowings and the interest rates at December 31, 2022. Estimated interest payments may differ in the future based on changes in borrowings, floating interest rates, timing of additional prepayments or other factors or events.

Credit Agreement—On May 27, 2021 (the “Restatement Effective Date”), the Company amended and restated its credit agreement dated as of September 30, 2016 (as in effect prior to such amendment and restatement, the “Credit Agreement,” and the Credit Agreement, as so amended and restated, the “Amended and Restated Credit Agreement”), by and among the Company, the lenders party thereto from time to time and JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, to, among other things, provide for a $200.0 million delayed-draw term loan A facility (the “Term Loan A Facility”) (bearing interest at a rate equal to the sum of the London Interbank Offered Rate (“LIBOR”) plus a margin ranging from 2.00% to 2.50% based upon the Company's Consolidated Net Leverage Ratio), extend the maturity of the $300.0 million Revolving Facility to May 27, 2026 and modify the financial maintenance and negative covenants in the Credit Agreement. The unpaid principal amount of the Term Loan A Facility is due and payable in full on May 27, 2026. Voluntary prepayments of the Term Loan A Facility are permitted at any time without premium or penalty.

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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, 2022, there were $45.0 million of borrowings outstanding under the Revolving Facility as well as $2.6 million in outstanding letters of credit and bank guarantees and none of the outstanding letters of credit reduced the availability under the Revolving Facility. Based on the Company’s results of operations for the year ended December 31, 2022 and existing debt, the Company would have had the ability to utilize the remaining $255.0 million of the Revolving Facility and not have been in violation of the terms of the agreement.

The current availability under the Revolving Facility and net available liquidity as of December 31, 2022 is shown in the table below:

The Company was in compliance with its debt covenants as of December 31, 2022, and expects to remain in compliance based on management’s estimates of operating and financial results for fiscal year 2023 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, 2022, the Revolving Facility is supported by fifteen U.S. and international financial institutions.

As of December 31, 2022, the Company met all the conditions required to borrow under the Revolving Facility, and management expects the Company to continue to meet the applicable borrowing conditions.

Acquisitions and Dispositions

The Company's disposition of the Edgar Online (“EOL”) business closed on November 9, 2022, and the Company received net cash proceeds of $3.3 million.

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.

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.

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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 as well as disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates. 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 to enable filings with the SEC on behalf of its customers related to the Exchange Act, the Securities Act and the Investment Company Act as well as performs XBRL and other 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 provides software solutions to public and private companies, mutual funds and other regulated investment firms to serve their regulatory and compliance needs, including Venue, Arc Suite, ActiveDisclosure, among others, and provides digital document creation, online content management and print and distribution solutions.

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. For arrangements with multiple performance obligations, the transaction price is allocated to the separate performance obligations. When the Company provides customer specific solutions, observable standalone selling price is rarely available. As such, standalone selling price is determined using an estimate of the standalone selling price of each distinct service or product, taking into consideration 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.

Certain revenues earned by the Company require significant judgment to determine if revenue should be recorded gross, as a principal, or net of related costs, as an agent. Billings for shipping and handling costs as well as certain postage costs, and out-of-pocket expenses are recorded gross.

The timing of revenue recognition may differ from the timing of invoicing to customers and these timing differences result in contract assets, unbilled receivables 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. Determining whether there will be a significant revenue reversal in the future and the determination of the amount of the constraint requires significant judgment.

Generally, the contract assets balance is impacted by the recognition of additional revenue, amounts invoiced to customers and changes in the level of 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.

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Goodwill

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.

Three of the Company's four reporting units, CM-SS, CM-CCM and IC-SS, had goodwill as of October 31, 2022.

For the annual goodwill impairment review, 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 unit 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 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 recognized, generally in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.

Qualitative Assessment for Impairment—As of October 31, 2022, the Company performed a qualitative assessment for the CM-SS, CM-CCM and IC-SS reporting units, 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, 2022, it was not more likely than not that the fair values of the reporting units were less than their respective carrying values. The goodwill balances of the CM-SS, CM-CCM and IC-SS reporting units as of December 31, 2022 were $100.1 million, $252.7 million and $53.0 million, respectively.

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, including lower than expected growth or profitability, unfavorable regulatory developments or other underlying assumptions could have a significant impact on the fair value 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.

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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 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, 2022 was 5.2%.

A 1.0% change in the discount rates as of December 31, 2022 would (decrease) increase the accumulated benefit obligation and projected benefit obligation:

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 60% for fixed income investments and 40% for return seeking investments. The expected long-term rate of return on plan assets assumption used to calculate net pension plan income in 2022 was 4.8% 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 2023 is 5.8%.

A 0.25% change in the expected long-term rate of return on plan assets as of December 31, 2022 would increase (decrease) net pension plan income for the year ending December 31, 2023 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, 2022 and 2021, valuation allowances of $5.4 million and $4.8 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.

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.