Donnelley Financial Solutions, Inc. (DFIN) FY 2023 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 related 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 ActiveDisclosure, Arc Suite and Venue. The Company’s tech-enabled services offerings consist of document composition, compliance-related SEC EDGAR filing services and transactional 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, 2023 decreased by $36.4 million, or 4.4%, to $797.2 million from $833.6 million for the year ended December 31, 2022, including a $0.8 million, or 0.1% decrease due to changes in foreign currency exchange rates. Net sales decreased primarily due to lower capital markets transactional volumes and a $5.7 million decrease from the disposition of the EOL and eBrevia businesses, partially offset by higher software solutions net sales driven by price increases and higher volumes and higher investment companies transactional volumes.

Income from operations for the year ended December 31, 2023 decreased by $35.0 million, or 24.1%, to $110.0 million from $145.0 million for the year ended December 31, 2022. Income from operations decreased primarily due to lower sales volumes, an unfavorable sales mix, higher depreciation and amortization expense, a $6.1 million loss on the disposition of the eBrevia business and higher bad debt expense, partially offset by cost control initiatives and lower selling expense as a result of the decrease in sales volumes.

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, 2022 as compared to the year ended December 31, 2021, 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, 2022, filed with the SEC on February 21, 2023.

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Results of Operations for the Year Ended December 31, 2023 as Compared to the Year Ended December 31, 2022

The following table shows the results of operations for the years ended December 31, 2023 and 2022:

nm – Not meaningful

(a)
Exclusive of depreciation and amortization

Consolidated

Net sales of tech-enabled services of $336.9 million for the year ended December 31, 2023 decreased $44.0 million, or 11.6%, as compared to the year ended December 31, 2022. Net sales of tech-enabled services decreased primarily due to lower capital markets transactional and compliance volumes.

Net sales of software solutions of $292.7 million for the year ended December 31, 2023 increased $13.1 million, or 4.7%, as compared to the year ended December 31, 2022. Net sales of software solutions increased primarily due to Venue and ActiveDisclosure price increases, higher Venue volumes, higher ArcRegulatory, ArcPro and ArcDigital volumes and price increases, partially offset by the disposition of the EOL and eBrevia businesses in the fourth quarters of 2022 and 2023, respectively.

Net sales of print and distribution of $167.6 million for the year ended December 31, 2023 decreased $5.5 million, or 3.2%, as compared to the year ended December 31, 2022. Net sales of print and distribution decreased primarily due to lower capital markets transactional and compliance volumes, partially offset by higher investment companies transactional volumes.

Tech-enabled services cost of sales of $127.6 million for the year ended December 31, 2023 decreased $13.5 million, or 9.6%, as compared to the year ended December 31, 2022. Tech-enabled services cost of sales decreased primarily due to lower sales volumes, cost control initiatives and a lower allocation of technology-related expenses, partially offset by an unfavorable sales mix. As a percentage of tech-enabled services net sales, tech-enabled services cost of sales increased 0.9%, primarily driven by an unfavorable sales mix, partially offset by cost control initiatives and a lower allocation of technology-related expenses.

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Software solutions cost of sales of $108.7 million for the year ended December 31, 2023 decreased $4.7 million, or 4.1%, as compared the year ended December 31, 2022. Software solutions cost of sales decreased primarily due to cost control initiatives, partially offset by higher product development costs and a higher allocation of technology-related expenses. As a percentage of software solutions net sales, software solutions costs of sales decreased 3.5%, primarily driven by cost control initiatives and a favorable sales mix, partially offset by higher product development costs.

Print and distribution cost of sales of $97.0 million for the year ended December 31, 2023 decreased $18.7 million, or 16.2%, as compared to the year ended December 31, 2022. Print and distribution cost of sales decreased primarily due to cost control initiatives and lower sales volumes. As a percentage of print and distribution net sales, print and distribution cost of sales decreased 8.9%, primarily driven by cost control initiatives.

SG&A expenses of $282.1 million for the year ended December 31, 2023 increased $18.1 million, or 6.9%, as compared to the year ended December 31, 2022. SG&A expenses increased primarily due to a higher allocation of technology-related expense, higher bad debt expense, higher employee-related expenses driven by additional headcount in areas that support the Company's strategic initiatives, higher share-based compensation expense, higher third-party services and higher incentive compensation expense, partially offset by cost control initiatives and lower selling expense as a result of the decrease in sales volumes. As a percentage of net sales, SG&A expenses increased from 31.7% for the year ended December 31, 2022 to 35.4% for the year ended December 31, 2023, primarily driven by a higher allocation of technology-related expense, higher bad debt expense, higher employee-related expenses, higher share-based compensation expense, higher third-party services and higher incentive compensation expense, partially offset by cost control initiatives and lower selling expense as a result of the decrease in sales volumes.

Depreciation and amortization of $56.7 million for the year ended December 31, 2023 increased $10.4 million, or 22.5%, as compared to the year ended December 31, 2022, primarily due to additional software development and higher other intangible assets amortization expense. Refer to Note 4, Goodwill and Other Intangible Assets, net, to the audited Consolidated Financial Statements for further information.

Restructuring, impairment and other charges, net of $9.8 million for the year ended December 31, 2023 increased $2.1 million, or 27.3%, as compared to the year ended December 31, 2022. For the year ended December 31, 2023, these charges included $9.2 million of employee termination costs for approximately 170 employees. For the year ended December 31, 2022, these charges included $6.8 million of employee termination costs for approximately 130 employees. Refer to Note 6, Restructuring, Impairment and Other Charges, net, to the audited Consolidated Financial Statements for further information.

Other operating loss, net of $5.3 million for the year ended December 31, 2023 included a $6.1 million loss on the disposition of the eBrevia business. Other operating loss, net of $0.4 million for the year ended December 31, 2022 included a $0.7 million loss on the disposition of the EOL business. Refer to Note 3, Acquisition and Dispositions, to the audited Consolidated Financial Statements for further information.

Income from operations of $110.0 million for the year ended December 31, 2023 decreased $35.0 million, or 24.1%, as compared to the year ended December 31, 2022. Income from operations decreased primarily due to lower sales volumes, an unfavorable sales mix, higher depreciation and amortization expense, a $6.1 million loss on the disposition of the eBrevia business and higher bad debt expense, partially offset by cost control initiatives and lower selling expense as a result of the decrease in sales volumes.

Interest expense, net of $15.8 million for the year ended December 31, 2023 increased $6.6 million, or 71.7%, as compared to the year ended December 31, 2022. Interest expense, net increased primarily due to a higher variable interest rate on the Company's outstanding debt facilities and a higher average Revolving Facility balance during the year ended December 31, 2023. Refer to Note 10, Debt, to the audited Consolidated Financial Statements for further information.

Investment and other income, net of $7.8 million for the year ended December 31, 2023 increased $4.3 million as compared to the year ended December 31, 2022, primarily due to a net realized gain on the sales of investments in equity securities, partially offset by a decrease in earnings on equity investments. Refer to Note 1, Overview, Basis of Presentation and Significant Accounting Policies, to the audited Consolidated Financial Statements for further information.

The effective income tax rate was 19.4% for the year ended December 31, 2023 compared to 26.4% for the year ended December 31, 2022. The change in the effective income tax rate was primarily driven by the tax benefit from the loss on the disposition of the eBrevia business, income tax credits, favorable return to provision adjustments and lower pre-tax earnings. 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 $185.9 million for the year ended December 31, 2023 increased $5.7 million, or 3.2%, as compared to the year ended December 31, 2022. Net sales increased primarily due to Venue and ActiveDisclosure price increases and higher Venue volumes, partially offset by a $5.7 million decrease due to the disposition of the EOL and eBrevia businesses in the fourth quarters of 2022 and 2023, respectively.

Income from operations of $6.8 million for the year ended December 31, 2023 decreased $6.7 million, or 49.6%, as compared to the year ended December 31, 2022, primarily due to an increase in depreciation and amortization expense, a $6.1 million loss on the disposition of the eBrevia business in the fourth quarter of 2023, higher selling expense, a higher allocation of overhead costs and higher restructuring, impairment and other charges, net, partially offset by price increases and cost control initiatives.

Operating margin decreased from 7.5% for the year ended December 31, 2022 to 3.7% for the year ended December 31, 2023, primarily due to an increase in depreciation and amortization expense, a $6.1 million loss on the disposition of the eBrevia business, which had a negative impact on operating margin of 3.3%, the decline in sales due to the disposition of the EOL business, higher selling expense, a higher allocation of overhead costs and higher restructuring, impairment and other charges, net, partially offset by price increases and cost control initiatives.

Capital Markets – Compliance and Communications Management

nm – Not meaningful

Net sales of $355.4 million for the year ended December 31, 2023 decreased $54.9 million, or 13.4%, as compared to the year ended December 31, 2022. Net sales decreased primarily due to lower transactional and compliance volumes.

Income from operations of $103.9 million for the year ended December 31, 2023 decreased $27.5 million, or 20.9%, as compared to the year ended December 31, 2022, primarily due to lower sales volumes, an unfavorable sales mix, higher bad debt expense and higher accelerated rent expense, partially offset by cost control initiatives and lower selling expense as a result of the decrease in sales volumes.

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Operating margin decreased from 32.0% for the year ended December 31, 2022 to 29.2% for the year ended December 31, 2023, primarily due to an unfavorable sales mix, higher bad debt expense and higher accelerated rent expense, partially offset by cost control initiatives and lower selling expense as a result of the decrease in sales volumes.

Investment Companies – Software Solutions

nm – Not meaningful

Net sales of $106.8 million for the year ended December 31, 2023 increased $7.4 million, or 7.4%, as compared to the year ended December 31, 2022. Net sales increased primarily due to higher ArcRegulatory, ArcPro, and ArcDigital volumes and price increases.

Income from operations of $22.1 million for the year ended December 31, 2023 increased $0.2 million, or 0.9%, as compared to the year ended December 31, 2022, primarily due to higher sales volumes, cost control initiatives and price increases, partially offset by higher product development costs, higher depreciation and amortization expense and a higher allocation of overhead costs.

Operating margin decreased from 22.0% for the year ended December 31, 2022 to 20.7% for the year ended December 31, 2023, primarily due to higher product development costs, higher depreciation and amortization expense and a higher allocation of overhead costs, partially offset by cost control initiatives and price increases.

Investment Companies – Compliance and Communications Management

Net sales of $149.1 million for the year ended December 31, 2023 increased $5.4 million, or 3.8%, as compared to the year ended December 31, 2022. Net sales increased primarily due to higher transactional volumes, partially offset by lower compliance volumes.

Income from operations of $44.7 million for the year ended December 31, 2023 increased $9.0 million, or 25.2%, as compared to the year ended December 31, 2022, primarily due to higher sales volumes, a favorable sales mix, cost control initiatives and lower restructuring, impairment and other charges, net, partially offset by a higher allocation of overhead costs.

Operating margin increased from 24.8% for the year ended December 31, 2022 to 30.0% for the year ended December 31, 2023, primarily due to a favorable sales mix, cost control initiatives, and lower restructuring, impairment and other charges, net, partially offset by a higher allocation of overhead costs.

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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 $67.5 million for the year ended December 31, 2023 increased $10.0 million as compared to the year ended December 31, 2022, primarily due to higher consulting expense, higher share-based compensation expense, higher incentive compensation expense and higher healthcare expense, partially offset by cost control initiatives.

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 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 employees, business performance is evaluated excluding share-based compensation expense. Depending upon the size, timing and the terms of grants, share-based compensation expense may vary but will recur in future periods.

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A reconciliation of net earnings to Adjusted EBITDA for the years ended December 31, 2023 and 2022 is presented in the following table:

Restructuring, impairment and other charges, net—The year ended December 31, 2023 included employee termination costs of $9.2 million. The year ended December 31, 2022 included employee termination costs of $6.8 million. 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 $22.5 million and $19.3 million for the years ended December 31, 2023 and 2022, respectively.

Loss on sale of businesses—Included a loss of $6.1 million for the year ended December 31, 2023 related to the disposition of the eBrevia business and a loss of $0.7 million for the year ended December 31, 2022 related to the disposition of the EOL business.

Accelerated rent expense—Included charges of $3.7 million and $0.8 million for the years ended December 31, 2023 and 2022, respectively, related to the acceleration of rent expense associated with abandoned operating leases.

Disposition-related expenses—Included charges of $0.3 million for the year ended December 31, 2023 related to costs associated with the disposition of the eBrevia business and charges of $0.1 million for the year ended December 31, 2022 related to legal costs associated with the disposition of the EOL business.

Gain on investments in equity securities—Included a net realized gain of $7.0 million for the year ended December 31, 2023 related to the sales of investments in equity securities and an unrealized gain of $0.5 million for the year ended December 31, 2022. Refer to Note 1, Overview, Basis of Presentation and Significant Accounting Policies, to the audited Consolidated Financial Statements for additional information.

Non-income tax, net—Included income of $0.9 million for both of the years ended December 31, 2023 and 2022 related to certain estimated non-income tax exposures previously accrued by the Company.

Gain on sale of long-lived assets—Included a gain of $0.8 million and $0.2 million for the years ended December 31, 2023 and 2022, respectively, from non-refundable deposits on the potential sale of land.

COVID-19 related recoveries—Included recoveries of $0.5 million for the year ended December 31, 2022 from certain governmental subsidies related to employee wages at certain international locations.

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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, 2023 and 2022:

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 2023 and 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 enactment of the IRA did not have a material impact on the Company's audited Consolidated Financial Statements.

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The Organization for Economic Co-operation and Development’s (“OECD”) current project, widely known as Anti-Base Erosion and Profit Shifting, seeks to address tax challenges arising in the global economy by introducing a global minimum corporate tax of 15%, referred to as Pillar Two, and several mechanisms to ensure tax is paid (the “GloBE Model Rules”). Policymakers across jurisdictions have begun adopting the GloBE Model Rules to implement a global minimum corporate tax rate of 15%. The OECD continues to release administrative guidance and many countries in which the Company operates have adopted or have proposed legislation to adopt Pillar Two. Many aspects of the minimum tax directive will be effective beginning in 2024, with certain additional impacts coming into effect beginning in 2025 and beyond. The Company is monitoring implemented legislation and effective dates in its jurisdictions of operations. The Company currently does not expect the Pillar Two framework to have a material impact on its consolidated financial statements.

The Company currently expects capital expenditures to be approximately $65 million to $70 million in 2024, as compared to $61.8 million in 2023. The increase in capital expenditures relates to investments in the Company’s software portfolio.

Cash and cash equivalents were $23.1 million at December 31, 2023, which included $4.7 million in the U.S. and $18.4 million at international locations.

The following describes the Company’s cash flows for the years ended December 31, 2023 and 2022:

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 and other operating activities.

Net cash provided by operating activities was $124.0 million for the year ended December 31, 2023, as compared to $150.2 million for the year ended December 31, 2022. The decrease in net cash provided by operating activities was primarily due to unfavorable changes to accounts payable, accounts receivable, a decrease in net earnings and an increase in interest paid, partially offset by lower incentive compensation and commissions payments. Accounts payable decreased operating cash flows by $15.3 million for the year ended December 31, 2023, as compared to increasing operating cash flows by $12.1 million for the year ended December 31, 2022, primarily due to timing of supplier payments. Accounts receivable decreased operating cash flows by $2.3 million for the year ended December 31, 2023, as compared to increasing operating cash flows by $24.4 million for the year ended December 31, 2022, due to the timing of collections. The Company’s interest payments increased to $16.6 million for the year ended December 31, 2023 from $7.6 million for the year ended December 31, 2022, primarily due to higher interest rates and higher average borrowings on the Revolving Facility. These decreases in cash provided were partially offset by accrued liabilities and other, which decreased operating cash flows by $14.6 million for the year ended December 31, 2023, as compared to a decrease of $53.9 million for the year ended December 31, 2022, primarily due to lower incentive compensation payments in 2023 as a result of the Company’s 2022 operating results and lower commissions payments in 2023 as a result of lower sales volumes.

Cash Flows Used In Investing Activities

Net cash used in investing activities was $51.3 million for the year ended December 31, 2023, which consisted of $61.8 million of capital expenditures, substantially all related to investments in software development, partially offset by $10.0 million of proceeds from the sales of investments in equity securities.

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.

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Cash Flows Used In Financing Activities

Net cash used in financing activities was $84.6 million for the year ended December 31, 2023. During the year ended December 31, 2023, the Company made payments of $347.0 million on the Revolving Facility borrowings, partially offset by $302.0 million of proceeds from the Revolving Facility borrowings. The Company’s common stock repurchases for the year ended December 31, 2023 totaled $40.3 million, which included $22.6 million of repurchases under the stock repurchase program and $17.7 million associated with vesting of the Company’s employees’ equity awards.

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.

Contractual Cash Obligations and Other Commitments and Contingencies

As of December 31, 2023, the Company had total future contractual and other obligations of approximately $334 million, with approximately $138 million of the future contractual and other obligations due during 2024. The future contractual obligations consist of outstanding debt and related interest, sales commissions, operating and finance lease payments, outsourced services relating to information technology, maintenance and other services, incentive compensation, deferred compensation, multi-employer pension plans 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, 2023 and 2022 consisted of the following (in millions):

The Company’s debt maturity and interest payments schedule as of December 31, 2023 is shown in the table below:

(a)
Excludes unamortized debt issuance costs of $0.5 million, which do not represent contractual commitments with a fixed amount or maturity date.

(b)
Includes estimated interest for the Term Loan A Facility based on borrowings and the interest rates at December 31, 2023. 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 credit facility (the “Revolving Facility”) to May 27, 2026 and modify the financial maintenance and negative covenants in the Credit Agreement.

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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 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. 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.

As of December 31, 2023, there were no borrowings outstanding under the Revolving Facility, however, the Company had $2.5 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 year ended December 31, 2023 and existing debt, the Company would have had the ability to utilize the remaining $299.0 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, 2023 is shown in the table below:

The Company was in compliance with its debt covenants as of December 31, 2023, and expects to remain in compliance based on management’s estimates of operating and financial results for fiscal year 2024 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, 2023, the Revolving Facility is supported by fifteen U.S. and international financial institutions.

As of December 31, 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.

Dispositions

The Company’s disposition of the eBrevia, Inc (“eBrevia”) business closed on December 1, 2023, and the Company received net cash proceeds of $0.5 million.

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.

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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.

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 ActiveDisclosure, Arc Suite and Venue, 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.

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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.

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 in 2023, 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, 2023.

For the annual goodwill impairment review, the Company has the option to perform a qualitative test (“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 exceeds 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.

Quantitative Assessment for Impairment—As of October 31, 2023, the Company performed a quantitative assessment for the CM-SS, CM-CCM and IC-SS reporting units. The analysis performed included estimating the fair value of the reporting units using both the income and market approaches. The income approach requires management to estimate a number of factors, including projected future operating results, anticipated future cash flows, discount rates and the allocation of shared or corporate items. The market approach estimates fair value using comparable marketplace fair value data from within a comparable industry grouping. The Company weighed both the income and market approaches equally to estimate the concluded fair value of the reporting unit.

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

As a result of the quantitative assessment for CM-SS, CM-CCM and IC-SS, the estimated fair value substantially exceeded the carrying value and no goodwill impairment charge was recorded for the year ended December 31, 2023. The goodwill balances of the CM-SS, CM-CCM, and IC-SS reporting units as of December 31, 2023 were $100.0 million, $252.8 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.

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Other Long-Lived Assets

The Company evaluates the recoverability of other long-lived assets, including software, operating lease right-of-use assets (“ROU”) and property, plant and equipment, 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.

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 do not earn 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, 2023 was 5.0%.

A 1.0% change in the discount rates as of December 31, 2023 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 for the year ended December 31, 2023 was 5.8% 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 for the year ending December 31, 2024 is 6.0%.

A 0.25% change in the expected long-term rate of return on plan assets as of December 31, 2023 would increase (decrease) net pension plan income for the year ending December 31, 2024 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, 2023 and 2022, valuation allowances of $5.8 million and $5.4 million, respectively, were recorded on the Company’s audited Consolidated Balance Sheets. Refer to Note 9, Income Taxes, to the audited Consolidated Financial Statements for further information.

New Accounting Pronouncements and Pending Accounting Standards

Recently adopted and issued accounting standards and their 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.