Donnelley Financial Solutions, Inc.: Form 10-Q for the period ended Jun 30, 2023

As used in this management’s discussion and analysis, unless otherwise specified or the context otherwise requires, the “Company,” “DFIN,” “we,” “our,” and “us” refer to Donnelley Financial Solutions, Inc. and its consolidated subsidiaries. This discussion and analysis should be read together with the Company’s Unaudited Condensed Consolidated Financial Statements and the related notes thereto, as well as the Company’s audited Consolidated Financial Statements for the year ended December 31, 2022.

Company Overview

DFIN is a leading global risk and compliance solutions company. The Company provides regulatory filing and deal solutions via its software, technology-enabled services and print and distribution solutions to public and private companies, mutual funds and other regulated investment firms, to serve its clients’ regulatory and compliance needs. DFIN helps its clients comply with applicable regulations where and how they want to work in a digital world, providing numerous solutions tailored to each client’s precise needs. The prevailing trend is toward clients choosing to utilize the Company’s software solutions, in conjunction with its tech-enabled services, to meet their document and filing needs, while at the same time shifting away from physical print and distribution of documents, except for cases where it is still regulatorily required or requested by investors.

The Company serves its clients’ regulatory and compliance needs throughout their respective life cycles. For its capital markets clients, the Company offers solutions that allow public companies to comply with applicable U.S. Securities and Exchange Commission (“SEC”) regulations including filing agent services, digital document creation and online content management tools that support their corporate financial transactions and regulatory reporting; solutions to facilitate clients’ communications with their investors; and virtual data rooms and other deal management solutions. For investment companies, including mutual fund, insurance-investment and alternative investment companies, the Company provides solutions for creating, compiling and filing regulatory communications as well as solutions for investors designed to improve the access to and accuracy of their investment information.

Technological advancements, regulatory changes, and evolving workflow preferences have led to the Company’s clients managing more of the financial disclosure process themselves, changing the marketplace for the Company’s services and products. DFIN’s strategy in its Software Solutions segments (CM-SS and IC-SS, as defined below) aligns with the changing marketplace by focusing the Company’s investments and resources in its advanced software solutions, primarily ActiveDisclosure®, Arc Suite® software platform ("Arc Suite") and Venue® Virtual Data Room (“Venue”), while making targeted investments, such as the Company’s acquisition of Guardum Holdings Limited in 2021, to further enhance product features. In its Compliance & Communications Management segments (CM-CCM and IC-CCM, as defined below), the Company’s strategy focuses on maintaining its market-leading position by offering a high-touch, service-oriented experience, using its unique combination of tech-enabled services and print and distribution capabilities.

Market Volatility/Cyclicality and Seasonality

The Company’s Capital Markets segments (CM-SS and CM-CCM), in particular, are subject to market volatility in the United States and world economies, as the success of the transactional and Venue offerings is largely dependent on the global market for initial public offerings ("IPOs"), secondary offerings, mergers and acquisitions ("M&A"), public and private debt offerings, leveraged buyouts, spinouts, special purpose acquisition company ("SPAC") and de-SPAC transactions and other similar transactions. A variety of factors impact the global markets for transactions, including economic activity levels, interest rates, market volatility, the regulatory and political environment, geopolitical and civil unrest and global pandemics, among others. Due to the significant net sales and profitability derived from transactional and Venue offerings, market volatility can lead to uneven financial performance when comparing to previous periods. U.S. IPOs, M&A transactions and public debt offerings were also previously disrupted by U.S. federal government shutdowns, and any future government shutdowns could result in additional volatility. The Company mitigates a portion of this volatility through its compliance offerings, supporting the quarterly and annual public company reporting processes through its filing services and ActiveDisclosure, as well as its Investment Companies segments (IC-SS and IC-CCM) regulatory and stockholder communications offerings, including Arc Suite. The Company also mitigates some of the risk by offering services in higher demand during a down market, such as document management tools for the bankruptcy/restructuring process and by moving upstream in the filing process with products like Venue.

The quarterly/annual public company reporting process work subjects the Company to filing seasonality which peaks shortly after the end of each fiscal quarter. Additionally, investment companies clients require the Company to manage the financial and regulatory reporting and filing for mutual funds on a semi-annual basis as well as annual prospectus filings, which peaks during the second fiscal quarter. The seasonality and associated operational implications include the need to increase staff during peak periods through a combined strategy of hiring temporary personnel, increasing the premium time of existing staff and outsourcing production for a number of services. Additionally, clients and their financial advisors have begun to increasingly rely on web-based services which allow clients to autonomously file and distribute compliance documents with regulatory agencies, such as the SEC. While the Company believes that its ActiveDisclosure and Arc Suite solutions are competitive in this space, competitors are also continuing to develop technologies that aim to improve clients’ ability to autonomously produce and file documents to meet their regulatory obligations. The Company remains focused on driving annual recurring revenue to mitigate market volatility.

Services and Products

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 Electronic Data Gathering, Analysis, and Retrieval (“EDGAR”) filing services and transaction solutions. The Company’s print and distribution offerings primarily consist of conventional and digital printed products and related shipping.

Government Regulations and Regulatory Impact

The SEC is adopting new as well as amending existing rules and forms to modernize the reporting and disclosure of information under the Securities Act of 1933, as amended (the "Securities Act"), the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the Investment Company Act of 1940, as amended (the “Investment Company Act”). These actions, primarily within the Investment Companies business, are driving significant regulatory changes which impact the Company’s customers, and have enabled the Company to accelerate its transition from print and distribution to software solutions.

On October 26, 2022, the SEC announced that it adopted the Tailored Shareholder Reports (“TSR”) for Mutual Funds and Exchange-Traded Funds rule which requires certain investment companies to complete a new concise and visually engaging annual and semi-annual TSR that highlights key information that is particularly important for retail investors to assess and monitor their investments. The TSR, which can be printed and mailed or delivered electronically upon request of the investor, replaces Rule 30e-3 for open-ended funds and ETFs registered under Form N-1A and will require iXBRL tagging. While the rule was effective January 24, 2023, due to an 18-month transition period, compliance is not required until July 24, 2024. As a result, the Company is expecting an increase in revenue from Arc Suite software and related regulatory filings beginning in the second half of 2024.

Segments

The Company’s four operating and reportable segments are: Capital Markets – Software Solutions (“CM-SS”), Capital Markets – Compliance and Communications Management (“CM-CCM”), Investment Companies – Software Solutions (“IC-SS”) and Investment Companies – Compliance and Communications Management (“IC-CCM”). Corporate is not an operating segment and consists primarily of unallocated selling, general and administrative (“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.

Capital Markets

The Company provides software solutions, tech-enabled services and print and distribution solutions to public and private companies for deal solutions and compliance to companies that are, or are preparing to become, subject to the filing and reporting requirements of the Securities Act and the Exchange Act. The Company’s operating segments associated with its capital markets services and products offerings are as follows:

***Capital Markets – Software Solutions—***The CM-SS segment provides Venue, ActiveDisclosure, eBrevia and other solutions to public and private companies to help manage public and private transactional and compliance processes; extract data and analyze contracts; collaborate; and tag, validate and file SEC documents.

***Capital Markets – Compliance & Communications Management—***The CM-CCM segment provides tech-enabled services and print and distribution solutions to public and private companies for deal solutions and SEC compliance requirements. The Company's private conference facilities offer around-the-clock services to support the transaction process, production platform and service delivery model for a fully-virtual experience while replicating the in-person experience. The Company has seen clients utilizing the range of options available to them, including a hybrid approach with working group members working both virtually and in-person during drafting sessions for their transactions. While the Company has significantly reduced its private conferencing footprint, the service helps clients maintain confidentiality in deal negotiations and provides clients a place to host in-person working groups to meet, strategize and prepare documents for transactions.

Investment Companies

The Company provides software solutions, tech-enabled services and print, distribution and fulfillment solutions to its investment companies clients that are subject to the filing and reporting requirements of the Investment Company Act, primarily mutual fund companies, alternative investment companies, insurance companies and third-party fund administrators. The Company’s operating segments associated with its investment companies services and products offerings are as follows:

***Investment Companies – Software Solutions—***The IC-SS segment provides clients with the Arc Suite platform that contains a comprehensive suite of cloud-based solutions, including ArcDigital, ArcReporting, ArcPro and ArcRegulatory as well as services that enable storage and management of compliance and regulatory information in a self-service, central repository so that documents can be easily accessed, assembled, edited, tagged, translated, rendered and submitted to regulators and investors.

***Investment Companies – Compliance & Communications Management—***The IC-CCM segment provides clients with tech-enabled solutions for creating, filing and distributing regulatory communications and solutions for investor communications, as well as XBRL-formatted filings pursuant to the Investment Company Act, through the SEC EDGAR system. The IC-CCM segment also provides turnkey proxy services, including discovery, planning and implementation, print and mail management, solicitation, tabulation services, stockholder meeting review and expert support.

Executive Overview

Second Quarter Overview

Net sales for three months ended June 30, 2023 decreased by $24.1 million, or 9.1%, to $242.1 million from $266.2 million for the three months ended June 30, 2022, including a $1.6 million, or 0.6%, decrease due to the disposition of the EdgarOnline ("EOL") business and a $0.6 million, or 0.2%, decrease due to changes in foreign currency exchange rates. Net sales decreased primarily due to lower capital markets transactional volumes, partially offset by higher software solutions pricing and volumes.

Income from operations for the three months ended June 30, 2023 decreased by $10.3 million, or 15.6%, to $55.6 million from $65.9 million for the three months ended June 30, 2022, primarily due to lower sales volumes, an unfavorable sales mix, higher depreciation and amortization expense and higher bad debt expense, partially offset by cost control initiatives, lower incentive compensation expense and lower selling expense as a result of the decrease in sales volumes.

Year-to-Date Overview

Net sales for the six months ended June 30, 2023 decreased by $36.5 million, or 7.6%, to $440.7 million from $477.2 million for the six months ended June 30, 2022, including a $3.2 million, or 0.7%, decrease due to the disposition of the EOL business and a $2.1 million, or 0.4%, decrease due to changes in foreign currency exchange rates. Net sales decreased primarily due to lower capital markets transactional volumes, partially offset higher software solutions pricing and volumes.

Income from operations for the six months ended June 30, 2023 decreased by $30.8 million, or 30.4%, to $70.4 million from $101.2 million for the six months ended June 30, 2022, primarily due to lower sales volumes, an unfavorable sales mix, higher restructuring, impairment and other charges, net and higher depreciation and amortization expense, partially offset by cost control initiatives, lower selling expense as a result of the decrease in sales volumes and lower incentive compensation expense.

Financial Review

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“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. The Company’s significant accounting policies and critical estimates are disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on February 21, 2023 (the “Annual Report”).

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

Results of Operations for the Three and Six Months Ended June 30, 2023 as Compared to the Three and Six Months Ended June 30, 2022

The following table shows the results of operations for the three and six months ended June 30, 2023 and 2022:

(in millions, except percentages)

(a) Exclusive of depreciation and amortization

nm – Not meaningful

Consolidated

Three Months Ended June 30, 2023 compared to the Three Months Ended June 30, 2022

Net sales of tech-enabled services of $104.5 million for the three months ended June 30, 2023 decreased $28.8 million, or 21.6%, as compared to the three months ended June 30, 2022. Net sales of tech-enabled services decreased primarily due to lower capital markets transactional volumes and lower investment companies compliance volumes.

Net sales of software solutions of $75.7 million for the three months ended June 30, 2023 increased $4.1 million, or 5.7%, as compared to the three months ended June 30, 2022. Net sales of software solutions increased primarily due to Venue and ActiveDisclosure price increases and higher ArcRegulatory volumes, partially offset by the disposition of the EOL business in the fourth quarter of 2022.

Net sales of print and distribution of $61.9 million for the three months ended June 30, 2023 increased $0.6 million, or 1.0%, as compared to the three months ended June 30, 2022. Net sales of print and distribution increased primarily due to higher investment companies compliance volumes.

Tech-enabled services cost of sales of $37.0 million for the three months ended June 30, 2023 decreased $3.2 million, or 8.0%, as compared to the three months ended June 30, 2022. Tech-enabled services cost of sales decreased primarily due to lower sales volumes, cost control initiatives and lower incentive compensation expense, partially offset by an unfavorable sales mix. As a percentage of tech-enabled services net sales, tech-enabled services cost of sales increased 5.2%, primarily driven by an unfavorable sales mix, partially offset by cost control initiatives and lower incentive compensation expense.

Software solutions cost of sales of $26.9 million for the three months ended June 30, 2023 decreased $1.7 million, or 5.9%, as compared to the three months ended June 30, 2022. Software solutions cost of sales decreased primarily due to cost control initiatives and lower incentive compensation expense, partially offset by higher product development costs. As a percentage of software solutions net sales, software solutions cost of sales decreased 4.4%, primarily driven by price increases, cost control initiatives and lower incentive compensation expense, partially offset by higher product development costs.

Print and distribution cost of sales of $34.3 million for the three months ended June 30, 2023 decreased $8.6 million, or 20.0%, as compared to the three months ended June 30, 2022. Print and distribution cost of sales decreased primarily due to cost control initiatives. As a percentage of print and distribution net sales, print and distribution cost of sales decreased 14.6%, primarily driven by cost control initiatives.

SG&A expenses of $76.2 million for the three months ended June 30, 2023 decreased $1.2 million, or 1.6%, as compared to the three months ended June 30, 2022. SG&A expenses decreased primarily due to cost control initiatives, lower incentive compensation expense and lower selling expense as a result of the decrease in sales volumes, partially offset by higher bad debt expense. As a percentage of net sales, SG&A expenses increased to 31.5% for the three months ended June 30, 2023 from 29.1% for the three months ended June 30, 2022, primarily driven by lower sales volume and higher bad debt expense, partially offset by cost control initiatives, lower incentive compensation expense and lower selling expense.

Depreciation and amortization of $14.4 million for the three months ended June 30, 2023 increased $3.2 million, or 28.6%, as compared to the three months ended June 30, 2022. Depreciation and amortization increased primarily due to higher software amortization expense.

Restructuring, impairment and other charges, net, which was a credit of $2.2 million for the three months ended June 30, 2023, decreased $2.4 million as compared to the three months ended June 30, 2022. In 2023, the credit includes a reversal in estimated severance for certain previously accrued employee termination costs as a result of voluntary resignations and differences in estimated and actual severance costs.

Income from operations of $55.6 million for the three months ended June 30, 2023 decreased $10.3 million, or 15.6%, as compared to the three months ended June 30, 2022. Income from operations decreased primarily due to lower sales volumes, an unfavorable sales mix, higher depreciation and amortization expense and higher bad debt expense, partially offset by cost control initiatives, lower incentive compensation expense and lower selling expense as a result of the decrease in sales volumes.

Interest expense, net of $4.6 million for the three months ended June 30, 2023 increased $2.5 million as compared to the three months ended June 30, 2022. Interest expense, net increased primarily due to a higher average Revolving Facility (as defined below) balance during the three months ended June 30, 2023 and a higher variable interest rate on the Company's outstanding debt facilities.

Investment and other income, net of $0.3 million for the three months ended June 30, 2023 was flat as compared to the three months ended June 30, 2022.

The effective income tax rate was 26.5% for the three months ended June 30, 2023 as compared to 28.2% for the three months ended June 30, 2022. The decrease in the effective income tax rate was primarily driven by a decrease in valuation allowances, the net favorable impact of discrete adjustments and lower pre-tax earnings.

Six Months Ended June 30, 2023 compared to the Six Months Ended June 30, 2022

Net sales of tech-enabled services of $182.9 million for the six months ended June 30, 2023 decreased $42.1 million, or 18.7%, as compared to the six months ended June 30, 2022. Net sales of tech-enabled services decreased primarily due to lower capital markets transactional volumes and lower investment companies compliance volumes.

Net sales of software solutions of $145.8 million for the six months ended June 30, 2023 increased $4.4 million, or 3.1%, as compared to the six months ended June 30, 2022. Net sales of software solutions increased primarily due to ActiveDisclosure and Venue price increases and higher ArcPro and ArcRegulatory volumes, partially offset by the disposition of the EOL business in the fourth quarter of 2022.

Net sales of print and distribution of $112.0 million for the six months ended June 30, 2023 increased $1.2 million, or 1.1%, as compared to the six months ended June 30, 2022. Net sales of print and distribution increased primarily due to higher capital markets compliance volumes.

Tech-enabled services cost of sales of $70.3 million for the six months ended June 30, 2023 decreased $7.6 million, or 9.8%, as compared to the six months ended June 30, 2022. Tech-enabled services cost of sales decreased primarily due to lower sales volumes, cost control initiatives and lower incentive compensation expense, partially offset by an unfavorable sales mix. As a percentage of tech-enabled services net sales, tech-enabled services cost of sales increased 3.8%, primarily driven by an unfavorable sales mix, partially offset by cost control initiatives and lower incentive compensation expense.

Software solutions cost of sales of $55.3 million for the six months ended June 30, 2023 decreased $0.8 million, or 1.4%, as compared to the six months ended June 30, 2022. Software solutions cost of sales decreased primarily due to cost control initiatives and lower incentive compensation expense, partially offset by higher product development costs. As a percentage of software solutions net sales, software solutions cost of sales decreased 1.8%, primarily driven by price increases, cost control initiatives and lower incentive compensation expense, partially offset by higher product development costs.

Print and distribution cost of sales of $62.9 million for the six months ended June 30, 2023 decreased $13.7 million, or 17.9%, as compared to the six months ended June 30, 2022. Print and distribution cost of sales decreased primarily due to cost control initiatives. As a percentage of print and distribution net sales, print and distribution cost of sales decreased 12.9%, primarily driven by cost control initiatives.

SG&A expenses of $146.7 million for the six months ended June 30, 2023 increased $5.0 million, or 3.5%, as compared to the six months ended June 30, 2022. SG&A expenses increased primarily due to higher bad debt expense, a higher allocation of technology-related expense, higher employee-related expenses driven by additional headcount in areas that support the Company's transformation initiatives and higher share-based compensation expense, partially offset by cost control initiatives, lower selling expense as a result of the decrease in sales volumes and lower incentive compensation expense. As a percentage of net sales, SG&A expenses increased to 33.3% for the six months ended June 30, 2023 from 29.7% for the six months ended June 30, 2022, primarily due to higher bad debt expense, higher healthcare expenses and higher share-based compensation expense, partially offset by cost control initiatives and lower selling expense.

Depreciation and amortization of $26.8 million for the six months ended June 30, 2023 increased $4.9 million, or 22.4%, as compared to the six months ended June 30, 2022, primarily due to higher software amortization expense.

Restructuring, impairment and other charges, net of $8.7 million for the six months ended June 30, 2023 increased $6.7 million as compared to the six months ended June 30, 2022. In 2023, these charges included $8.5 million of employee termination costs for approximately 150 employees. In 2022, these charges included $1.7 million of employee termination costs for approximately 70 employees.

Income from operations of $70.4 million for the six months ended June 30, 2023 decreased $30.8 million, or 30.4%, as compared to the six months ended June 30, 2022. Income from operations decreased primarily due to lower sales volumes, an unfavorable sales mix, higher restructuring, impairment and other charges, net and higher depreciation and amortization expense, partially offset by cost control initiatives, lower selling expense as a result of the decrease in sales volumes and lower incentive compensation expense.

Interest expense, net of $8.1 million for the six months ended June 30, 2023 increased $4.5 million as compared to the six months ended June 30, 2022. Interest expense, net increased primarily due to a higher average Revolving Facility (as defined below) balance during the six months ended June 30, 2023 and a higher variable interest rate on the Company's outstanding debt facilities.

Investment and other income, net of $7.2 million for the six months ended June 30, 2023 increased $6.7 million as compared to the six months ended June 30, 2022. Investment and other income, net increased primarily due to realized gains on the sales of investments in equity securities.

The effective income tax rate was 23.0% for the six months ended June 30, 2023, as compared to 26.2% for the six months ended June 30, 2022. The decrease in the effective income tax rate was primarily driven by the net favorable impact of discrete adjustments and lower pre-tax earnings.

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

(in millions, except percentages)

nm – Not meaningful

Three Months Ended June 30, 2023 compared to the Three Months Ended June 30, 2022

Net sales of $47.7 million for the three months ended June 30, 2023 increased $1.4 million, or 3.0%, as compared to the three months ended June 30, 2022. Net sales increased primarily due to Venue and ActiveDisclosure price increases, partially offset by a $1.6 million decrease due to the disposition of the EOL business in the fourth quarter of 2022.

Income from operations of $4.4 million for the three months ended June 30, 2023 increased $1.3 million, or 41.9%, as compared to the three months ended June 30, 2022, primarily due to price increases, cost control initiatives and lower incentive compensation expense, partially offset by an increase in depreciation and amortization expense and higher restructuring, impairment, and other charges, net.

Operating margin increased from 6.7% for the three months ended June 30, 2022 to 9.2% for the three months ended June 30, 2023, primarily due to price increases, cost control initiatives and lower incentive compensation expense, partially offset by an increase in depreciation and amortization expense and higher restructuring, impairment, and other charges, net, which had a negative impact on operating margin of 1.7%.

Six Months Ended June 30, 2023 compared to the Six Months Ended June 30, 2022

Net sales of $91.4 million for the six months ended June 30, 2023 increased $0.4 million, or 0.4%, as compared to the six months ended June 30, 2022. Net sales increased primarily due to ActiveDisclosure and Venue price increases, partially offset by a $3.2 million decrease due to the disposition of the EOL business in the fourth quarter of 2022.

Income from operations of $3.8 million for the six months ended June 30, 2023 decreased $3.6 million, or 48.6%, as compared to the six months ended June 30, 2022, primarily due to an increase in depreciation and amortization expense, higher restructuring, impairment, and other charges, net and a higher allocation of overhead costs, partially offset by price increases and cost control initiatives.

Operating margin decreased from 8.1% for the six months ended June 30, 2022 to 4.2% for the six months ended June 30, 2023, primarily due to an increase in depreciation and amortization expense, higher restructuring, impairment, and other charges, net, which had a negative impact on operating margin of 2.2%, and a higher allocation of overhead costs, partially offset by price increases and cost control initiatives.

Capital Markets – Compliance and Communications Management

(in millions, except percentages)

nm – Not meaningful

Three Months Ended June 30, 2023 compared to the Three Months Ended June 30, 2022

Net sales of $122.9 million for the three months ended June 30, 2023 decreased $27.1 million, or 18.1%, as compared to the three months ended June 30, 2022. Net sales decreased primarily due to lower transactional volumes.

Income from operations of $47.0 million for the three months ended June 30, 2023 decreased $13.5 million, or 22.3%, as compared to the three months ended June 30, 2022, primarily due to lower transactional volumes, an unfavorable sales mix and higher bad debt expense, partially offset by cost control initiatives, lower restructuring, impairment and other charges, net, lower selling expense as a result of the decrease in sales volumes and lower incentive compensation expense.

Operating margin decreased from 40.3% for the three months ended June 30, 2022 to 38.2% for the three months ended June 30, 2023, primarily due to an unfavorable sales mix and higher bad debt expense, partially offset by cost control initiatives, lower restructuring, impairment and other charges, net, which had a positive impact on operating margin of 3.3%, lower selling expense and lower incentive compensation expense.

Six Months Ended June 30, 2023 compared to the Six Months Ended June 30, 2022

Net sales of $217.0 million for the six months ended June 30, 2023 decreased $36.6 million, or 14.4%, as compared to the six months ended June 30, 2022. Net sales decreased primarily due to lower transactional volumes, partially offset by compliance price increases.

Income from operations of $63.6 million for the six months ended June 30, 2023 decreased $25.8 million, or 28.9%, as compared to the six months ended June 30, 2022, primarily due to lower transactional sales volumes, an unfavorable sales mix, higher restructuring, impairment, and other charges, net and higher bad debt expense, partially offset by cost control initiatives, lower selling expense as a result of the decrease in sales volumes and lower incentive compensation expense.

Operating margin decreased from 35.3% for the six months ended June 30, 2022 to 29.3% for the six months ended June 30, 2023, primarily due to an unfavorable sales mix, higher restructuring, impairment, and other charges, net, which had a negative impact on operating margin of 1.8%, and higher bad debt expense, partially offset by cost control initiatives, lower selling expense and lower incentive compensation expense.

Investment Companies – Software Solutions

(in millions, except percentages)

nm – Not meaningful

Three Months Ended June 30, 2023 compared to the Three Months Ended June 30, 2022

Net sales of $28.0 million for the three months ended June 30, 2023 increased $2.7 million, or 10.7%, as compared to the three months ended June 30, 2022. Net sales increased primarily due to higher ArcRegulatory volumes.

Income from operations of $6.7 million for the three months ended June 30, 2023 increased $0.8 million, or 13.6%, as compared to the three months ended June 30, 2022, primarily due to higher sales volumes, partially offset by higher restructuring, impairment, and other charges, net.

Operating margin increased from 23.3% for the three months ended June 30, 2022 to 23.9% for the three months ended June 30, 2023, primarily due to higher sales volumes, partially offset by higher restructuring, impairment, and other charges, net, which had a negative impact on operating margin of 2.5%.

Six Months Ended June 30, 2023 compared to the Six Months Ended June 30, 2022

Net sales of $54.4 million for the six months ended June 30, 2023 increased $4.0 million, or 7.9%, as compared to the six months ended June 30, 2022. Net sales increased primarily due to higher ArcPro and ArcRegulatory volumes.

Income from operations of $11.7 million for the six months ended June 30, 2023 decreased $0.4 million, or 3.3%, as compared to the six months ended June 30, 2022, primarily due to higher product development costs and a higher allocation of overhead costs, partially offset by higher sales volumes and cost control initiatives.

Operating margin decreased from 24.0% for the six months ended June 30, 2022 to 21.5% for the six months ended June 30, 2023, primarily due to higher product development costs and a higher allocation of overhead costs, partially offset by cost control initiatives.

Investment Companies – Compliance and Communications Management

(in millions, except percentages)

32

Three Months Ended June 30, 2023 compared to the Three Months Ended June 30, 2022

Net sales of $43.5 million for the three months ended June 30, 2023 decreased $1.1 million, or 2.5%, as compared to the three months ended June 30, 2022. Net sales decreased primarily due to lower compliance volumes.

Income from operations of $16.1 million for the three months ended June 30, 2023 increased $2.4 million, or 17.5%, as compared to the three months ended June 30, 2022, primarily due to a favorable sales mix, partially offset by lower sales volumes and a higher allocation of overhead costs.

Operating margin increased from 30.7% for the three months ended June 30, 2022 to 37.0% for the three months ended June 30, 2023, primarily due to a favorable sales mix, partially offset by a higher allocation of overhead costs.

Six Months Ended June 30, 2023 compared to the Six Months Ended June 30, 2022

Net sales of $77.9 million for the six months ended June 30, 2023 decreased $4.3 million, or 5.2%, as compared to the six months ended June 30, 2022. Net sales decreased primarily due to lower compliance volumes.

Income from operations of $24.2 million for the six months ended June 30, 2023 increased $2.4 million, or 11.0%, compared to the six months ended June 30, 2022, primarily due to a favorable sales mix and cost control initiatives, partially offset by lower sales volumes and a higher allocation of overhead costs.

Operating margin increased from 26.5% for the six months ended June 30, 2022 to 31.1% for the six months ended June 30, 2023, primarily due to a favorable sales mix and cost control initiatives, partially offset by a higher allocation of overhead costs.

Corporate

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

(in millions)

Three Months Ended June 30, 2023 compared to the Three Months Ended June 30, 2022

Corporate operating expenses for the three months ended June 30, 2023 increased $1.3 million as compared to the three months ended June 30, 2022, primarily due to higher healthcare expenses and higher share-based compensation expense, partially offset by lower incentive compensation expense.

Six Months Ended June 30, 2023 compared to the Six Months Ended June 30, 2022

Corporate operating expenses for the six months ended June 30, 2023 increased $3.4 million as compared to the six months ended June 30, 2022, primarily due to higher share-based compensation expense and higher consulting expense, partially offset by lower incentive compensation expense.

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 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 investments in equity securities 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, share-based compensation expense is excluded from Adjusted EBITDA. 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.

A reconciliation of net earnings to Adjusted EBITDA for the three and six months ended June 30, 2023 and 2022 is presented in the following table:

(in millions)

***Restructuring, impairment and other charges, net—***The three months ended June 30, 2023 included a net credit for employee termination costs of $2.3 million. The six months ended June 30, 2023 included employee termination costs of $8.5 million. The six months ended June 30, 2022 included employee termination costs of $1.7 million. Refer to Note 5, Restructuring, Impairment and Other Charges, net, for additional information.

***Share-based compensation expense—***Included charges of $6.7 million and $11.0 million for the three and six months ended June 30, 2023, respectively, and $5.9 million and $9.5 million for the three and six months ended June 30, 2022, respectively.

***Accelerated rent expense—***Includes charges of $0.1 million and $0.6 million for the three and six months ended June 30, 2023, respectively, related to the acceleration of rent expense associated with abandoned operating leases.

***Gain on investments in equity securities—***Included a net realized gain of $0.2 million and $6.9 million for the three and six months ended June 30, 2023, respectively, related to the sales of investments in equity securities. Refer to Note 1, Overview, Basis of Presentation and Significant Accounting Policies, for additional information.

***Gain on sale of long-lived assets—***Included a gain of $0.1 million and $0.4 million for the three and six months ended June 30, 2023, respectively, and a gain of $0.2 million for both the three and six months ended June 30, 2022, from non-refundable deposits on the potential sale of land.

***Non-income tax, net—***Included income of $0.2 million and $0.4 million for the three and six months ended June 30, 2023, respectively, and $0.2 million and $0.5 million for the three and six months ended June 30, 2022, respectively, related to certain estimated non-income tax exposures previously accrued by the Company.

***COVID-19 related recoveries—***Included recoveries of $0.2 million for both the three and six months ended June 30, 2022 from certain governmental subsidies related to employee wages at certain international locations.

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, 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 did not repatriate excess cash at its foreign subsidiaries to the U.S. during the year ended December 31, 2022. 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 Unaudited Condensed Consolidated Financial Statements.

Cash and cash equivalents were $19.4 million at June 30, 2023, which included $4.1 million in the U.S. and $15.3 million at international locations.

The following describes the Company’s cash flows for the six months ended June 30, 2023 and 2022:

(in millions)

Cash Flows Used In 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 and other operating activities.

Net cash used in operating activities was $31.3 million for the six months ended June 30, 2023 compared to $6.4 million for the six months ended June 30, 2022. The increase in cash used in operating activities was primarily due to an unfavorable change in accounts payable, a decrease in net earnings, an unfavorable change to accounts receivable and an increase in interest paid, partially offset by lower incentive compensation and commissions payments in 2023. Accounts payable decreased operating cash flows by $2.9 million for the six months ended June 30, 2023, as compared to increasing operating cash flows by $22.9 million for the six months ended June 30, 2022, due to timing of supplier payments. Accounts receivables decreased operating cash flows by $86.7 million for the six months ended June 30, 2023, as compared to a decrease of $79.8 million for the six months ended June 30, 2022, primarily due to timing of collections. The Company's interest payments increased from $2.8 million to $8.7 million for the six months ended June 30, 2023, primarily due to higher average borrowings on the Revolver Facility (as defined below) and higher interest rates. These increases in cash used were partially offset by accrued liabilities and other, which decreased operating cash flows by $23.6 million for the six months ended June 30, 2023, as compared to a decrease of $52.3 million for the six months ended June 30, 2022, primarily due to lower incentive compensation and commissions payments in 2023, as a result of the Company's 2022 operating results.

Cash Flows Used in Investing Activities

Net cash used in investing activities was $13.9 million for the six months ended June 30, 2023, which consisted of $23.8 million of capital expenditures, substantially all related to investments in software development, partially offset by $9.9 million of proceeds from sales of investments in equity securities. The Company expects that capital expenditures for the year ended December 31, 2023 will be approximately $60 million.

Net cash used in investing activities was $24.8 million for the six months ended June 30, 2022, which consisted of capital expenditures, mostly driven by investments in software development.

Cash Flows Provided by (Used in) Financing Activities

Net cash provided by financing activities was $30.0 million for the six months ended June 30, 2023. During the six months ended June 30, 2023, the Company received $169.0 million of proceeds from the Revolving Facility borrowings, partially offset by $118.5 million of payments on the Revolving Facility borrowings. The Company's common stock repurchases for the six months ended June 30, 2023 totaled $20.6 million, which included $17.3 million associated with vesting of the Company employee's equity awards and $3.3 million of repurchases under the stock repurchase program.

Net cash used in financing activities was $7.2 million for the six months ended June 30, 2022. During the six months ended June 30, 2022, the Company received $209.0 million of proceeds from the Revolving Facility borrowings, offset by $99.0 million of payments on the Revolving Facility borrowings. The Company’s common stock repurchases for the six months ended June 30, 2022 totaled $116.6 million, which included $104.6 million of repurchases under the stock repurchase program and $12.0 million associated with vesting of the Company employees' equity awards.

Debt

The Company’s debt as of June 30, 2023 and December 31, 2022 consisted of the following (in millions):

**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.

On May 11, 2023, the Company entered into the first amendment to the Amended and Restated Credit Agreement to change the reference rate from LIBOR, which ceased being published on June 30, 2023, to the Secured Overnight Financing Rate (“SOFR”) for both the Term Loan A Facility and the Revolving Facility. The SOFR interest rate was effective for the Revolving Facility and the Term Loan A on May 30, 2023 and June 12, 2023, respectively. No other significant terms of the Amended and Restated Credit Agreement were amended. 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.

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 June 30, 2023, there was $95.5 million of borrowings outstanding under the Revolving Facility as well as $2.6 million in outstanding letters of credit and bank guarantees, of which $1.0 million of the outstanding letters of credit reduced the availability under the Revolving Facility. Based on the Company’s results of operations for the twelve months ended June 30, 2023 and existing debt, the Company would have had the ability to utilize the remaining $203.5 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 June 30, 2023 is shown in the table below:

(in millions)

The Company was in compliance with its debt covenants as of June 30, 2023, 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 June 30, 2023, the Revolving Facility is supported by fifteen U.S. and international financial institutions.

As of June 30, 2023, 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.

OTHER INFORMATION

Litigation and Contingent Liabilities

For a discussion of certain litigation involving the Company, see Note 7, Commitments and Contingencies, to the Unaudited Condensed Consolidated Financial Statements.

Critical Accounting Estimates

There were no changes to critical accounting estimates from those disclosed in the Annual Report.

New Accounting Pronouncements

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

(a) Disclosure controls and procedures.

Management, together with the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(b) and Rule 15d-15(e) of the Exchange Act) as of June 30, 2023. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2023.

(b) Changes in internal control over financial reporting.

There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2023 that have materially affected or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

There were no material changes during the three months ended June 30, 2023 to the risk factors identified in the Annual Report.