Donnelley Financial Solutions, Inc. - Quarter Report: 2018 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2018

OR

Commission File Number 1-37728

Donnelley Financial Solutions, Inc.

(Exact name of registrant as specified in its charter)

(844) 866-4337

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   ☒    No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  ☒    No  ☐

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ☐    No  ☒

As of April 27, 2018, 33.9 million shares of common stock were outstanding.  

DONNELLEY FINANCIAL SOLUTIONS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2018

TABLE OF CONTENTS

2

Donnelley Financial Solutions, Inc. and Subsidiaries (“Donnelley Financial”)

Condensed Consolidated Statements of Operations

For the Three Months Ended March 31, 2018 and 2017

(in millions, except per share data)

(UNAUDITED)

*Beginning in the quarter ended June 30, 2017, LSC Communications, Inc. (“LSC”) no longer qualified as a related party, therefore the amounts disclosed related to LSC are only presented for the three months ended March 31, 2017. Beginning in the quarter ended September 30, 2017, R.R. Donnelley & Sons Company ("RRD") no longer qualified as a related party, therefore the amounts disclosed related to RRD are only presented for the three months ended March 31, 2017.

See Notes to Unaudited Condensed Consolidated Financial Statements

3

Donnelley Financial Solutions, Inc. and Subsidiaries (“Donnelley Financial”)

Condensed Consolidated Statements of Comprehensive Income

For the Three Months Ended March 31, 2018 and 2017

(in millions)

(UNAUDITED)

See Notes to Unaudited Condensed Consolidated Financial Statements

4

Donnelley Financial Solutions, Inc. and Subsidiaries (“Donnelley Financial”)

Condensed Consolidated Balance Sheets

As of March 31, 2018 and December 31, 2017

(in millions, except per share data)

(UNAUDITED)

See Notes to Unaudited Condensed Consolidated Financial Statements

5

Donnelley Financial Solutions, Inc. and Subsidiaries (“Donnelley Financial”)

Condensed Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2018 and 2017

(in millions)

(UNAUDITED)

See Notes to Unaudited Condensed Consolidated Financial Statements

6

Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

(in millions, except per share data, unless otherwise indicated)

Note 1. Overview and Basis of Presentation

Description of Business

Donnelley Financial Solutions, Inc. (the “Company” or “Donnelley Financial” ) is a financial communications services company that supports global capital markets compliance and transaction needs for its corporate clients and their advisors (such as law firms and investment bankers) and global investment markets compliance and analytics needs for mutual fund companies, variable annuity providers and broker/dealers. With proprietary technology such as data storage and workflow collaboration tools, deep subject matter expertise and a global footprint, Donnelley Financial produces, manages, stores, distributes and translates documents and electronic communications in order to deliver timely financial communications to investors and documents in a manner that complies with regulatory commissions.

Donnelley Financial’s Registration Statement on Form 10, as amended, was declared effective by the U.S. Securities and Exchange Commission (the “SEC”) on September 20, 2016. On October 1, 2016, Donnelley Financial became an independent publicly traded company through the distribution by R.R. Donnelley & Sons Company (“RRD”) of approximately 26.2 million shares, or 80.75%, of Donnelley Financial common stock to RRD shareholders (the “Separation”). Holders of RRD common stock received one share of Donnelley Financial common stock for every eight shares of RRD common stock held on September 23, 2016. As part of the Separation, RRD retained approximately 6.2 million shares of Donnelley Financial common stock, or a 19.25% interest in Donnelley Financial. Donnelley Financial’s common stock began regular-way trading under the ticker symbol “DFIN” on the New York Stock Exchange on October 3, 2016.  On October 1, 2016, RRD also completed the previously announced separation of LSC Communications, Inc. (“LSC”), its publishing and retail-centric print services and office products business. On March 28, 2017, RRD completed the sale of 6.2 million shares of LSC common stock (RRD’s remaining ownership stake in LSC) in an underwritten public offering. As a result, beginning in the quarter ended June 30, 2017, LSC no longer qualified as a related party of the Company.

On March 24, 2017, pursuant to the Stockholder and Registration Rights Agreement, dated as of September 30, 2016, by and between the Company and RRD, the Company filed a Registration Statement on Form S-1 to register the offering and sale of shares of the Company’s common stock retained by RRD. The Registration Statement on Form S-1, as amended, was declared effective by the SEC on June 13, 2017. On June 21, 2017, RRD completed the sale of approximately 6.1 million shares of the Company’s common stock in an underwritten public offering. Upon the consummation of the offering, RRD retained approximately 0.1 million shares of the Company’s common stock which were subsequently sold by RRD on August 4, 2017. In conjunction with the underwritten public offering, the underwriters exercised their option to purchase approximately 0.9 million of the Company’s shares (the “Option Shares”). The Company received approximately $18.8 million in net proceeds from the sale of the Option Shares, after deducting estimated underwriting discounts and commissions. The proceeds were used to reduce outstanding debt under the Revolving Facility (as defined in Note 14, Debt). Beginning in the quarter ended September 30, 2017, RRD no longer qualified as a related party, therefore amounts disclosed related to RRD are presented only for the three months ended March 31, 2017.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Donnelley Financial Solutions, Inc. (the “Company” or “Donnelley Financial”) and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the rules and regulations of the SEC. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The financial data presented herein should be read in conjunction with the audited consolidated and combined financial statements and accompanying notes included in the Company’s latest Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on February 28, 2018. In the opinion of management, the financial data presented includes all adjustments necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented. Results of interim periods should not be considered indicative of the results for the full year. These unaudited condensed consolidated interim financial statements include estimates and assumptions of management that affect the amounts reported in the unaudited condensed consolidated financial statements. Actual results could differ from these estimates.

7

Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

(in millions, except per share data, unless otherwise indicated)

Note 2. Revenue

Revenue Recognition

The Company manages highly-customized data and materials, such as Exchange Act, Securities Act and Investment Company Act filings with the SEC on behalf of our customers, manages virtual data rooms and performs XBRL and related services.  Clients are provided with EDGAR filing services, XBRL compliance services and translation, editing, interpreting, proof-reading and multilingual typesetting services, among others. Our software-as-a-service solutions (“SaaS”) include the Venue Virtual Data Room, the FundSuiteArc software platform, ActiveDisclosure and data and analytics, among others.

Substantially all of the Company’s revenue is derived from contracts with an initial expected duration of one year or less. Generally, customer payment is due within ten days upon invoicing.

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 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 judgement. 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 are not distinct.

Revenue for the Company’s services and products is recognized either over time or at a point in time, as outlined below.

Over time

The Company recognizes revenue for certain services over time.

Point in time

All remaining revenue arrangements are generally recognized at a point in time and are primarily invoiced upon completion of all services or upon shipment to the customer.

8

Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

(in millions, except per share data, unless otherwise indicated)

Because substantially all of the Company’s products are customized, product returns are not significant; however, the Company accrues for the estimated amount of customer credits at the time of sale.

The Company records deferred revenue when amounts are invoiced but the revenue recognition criteria are not yet met. Such revenue is recognized when all criteria are subsequently met.

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.  Revenue is not recognized for customer-supplied postage. The Company’s printing operations process paper that may be supplied directly by customers or may be purchased by the Company from third parties and sold to customers.  Revenue is not recognized for customer-supplied paper, however revenues for Company-supplied paper are recognized on a gross basis. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to authorities.

Adoption of ASU 2014-09

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), which outlines a single comprehensive model for entities to use in accounting for revenue using a five-step process that supersedes virtually all existing revenue guidance. ASU 2014-09 also requires additional quantitative and qualitative disclosures. On January 1, 2018, the Company adopted the standard and all related amendments, using the modified retrospective approach applied to contracts that were not completed as of January 1, 2018. The Company recognized the cumulative effect of applying the standard as an opening transition adjustment to retained earnings. The comparative periods have not been restated and continue to be reported under the accounting standards in effect for those periods (“Previous Revenue Standard”).

As a result of the adoption of ASU 2014-09, revenue recognition has been accelerated for certain arrangements with multiple performance obligations as revenue is now recognized upon the completion of each performance obligation rather than upon completion of all services and shipment of the related document, if applicable. Revenue has also been accelerated for certain inventory which has been invoiced but not yet shipped at the customer’s request. Additionally, certain revenues related to virtual data room services have been deferred to be recognized over the term of the contract.

As substantially all of the Company’s revenue is derived from contracts with an initial expected duration of one year or less, the Company has applied the practical expedient for performance obligations related to contracts with an initial duration of less than one year and is therefore not required to disclose information regarding remaining performance obligations at the end of the reporting period. The Company has also elected the practical expedient to recognize costs to obtain the contract, primarily commissions, as incurred.

9

Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

(in millions, except per share data, unless otherwise indicated)

The cumulative effect of the changes made to the Company’s consolidated January 1, 2018 balance sheet for the adoption of ASU 2014-09 were as follows:

The impact of the adoption of ASU 2014-09 on the Company’s condensed consolidated statement of operations and condensed consolidated balance sheet was as follows:

10

Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

(in millions, except per share data, unless otherwise indicated)

Disaggregation of revenue

The following table disaggregates revenue by reporting unit and timing of revenue recognition:

Contract Balances

Contract assets represent revenue recognized for performance obligations completed before an unconditional right to payment exists, and therefore invoicing has not yet occurred. Contract assets were $11.2 million and $9.0 million at March 31, 2018 and January 1, 2018, respectively. Generally, the contract assets balance is impacted by the recognition of additional contract assets, offset by amounts invoiced to customers. For the three months ended March 31, 2018, final amounts invoiced to customers exceeded estimates of standalone selling price as of January 1, 2018 for the related arrangements by approximately $0.7 million. Contract assets are included in accounts receivable on the condensed consolidated balance sheet.

Contract liabilities consist of deferred revenue and progress billings which are included in accrued liabilities on the condensed consolidated balance sheet. Changes in contract liabilities were as follows:

11

Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

(in millions, except per share data, unless otherwise indicated)

Note 3. Inventories

The components of the Company’s inventories, net of excess and obsolescence reserves for raw materials and finished goods, at March 31, 2018 and December 31, 2017 were as follows:  

Note 4. Property, Plant and Equipment

The components of the Company’s property, plant and equipment at March 31, 2018 and December 31, 2017 were as follows:

During the three months ended March 31, 2018 and 2017, depreciation expense was $1.9 million and $1.3 million, respectively.

Note 5. Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill by segment for the three months ended March 31, 2018 were as follows:

The components of other intangible assets at March 31, 2018 and December 31, 2017 were as follows:

Amortization expense for other intangible assets was $3.4 million and $3.6 million for the three months ended March 31, 2018 and 2017, respectively.  

12

Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

(in millions, except per share data, unless otherwise indicated)

The following table outlines the estimated annual amortization expense related to other intangible assets as of March 31, 2018:

Note 6. Restructuring, Impairment and Other Charges

Restructuring, Impairment and Other Charges recognized in Results of Operations

For the three months ended March 31, 2018 and 2017, the Company recorded the following net restructuring, impairment and other charges:

13

Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

(in millions, except per share data, unless otherwise indicated)

Restructuring and Impairment Charges

For the three months ended March 31, 2018, the Company recorded net restructuring charges of $0.5 million for lease termination and other restructuring costs, $0.1 million for employee termination costs and $0.1 million for other charges associated with the Company’s decision to withdraw in 2013 from certain multi-employer pension plans serving facilities that continued to operate.

For the three months ended March 31, 2017, the Company recorded net restructuring charges of $3.3 million for employee termination costs for 87 employees. These charges primarily related to the reorganization of certain operations. Additionally, the Company incurred $0.4 million of lease termination and other restructuring charges and $0.1 million of other charges associated with the Company’s decision to withdraw in 2013 from certain multi-employer pension plans serving facilities that continued to operate.

Restructuring Reserve

The restructuring reserve as of December 31, 2017 and March 31, 2018, and changes during the three months ended March 31, 2018, were as follows:

The current portion of restructuring reserves of $2.2 million at March 31, 2018 was included in accrued liabilities, while the long-term portion of $0.8 million, primarily related to lease termination costs, was included in other noncurrent liabilities at March 31, 2018.

The Company anticipates that payments associated with the employee terminations reflected in the above table will be substantially completed by September 30, 2018.

The restructuring liabilities classified as “lease terminations and other” consisted of lease terminations, other facility closing costs and contract termination costs. Payments on certain of the lease obligations are scheduled to continue until 2021. Market conditions and the Company’s ability to sublease these properties could affect the ultimate charges related to the lease obligations. Any potential recoveries or additional charges could affect amounts reported in the Company’s financial statements.

Note 7. Retirement Plans

The components of the estimated net pension plan income for Donnelley Financial’s pension plans for the three months ended March 31, 2018 and 2017 were as follows:  

14

Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

(in millions, except per share data, unless otherwise indicated)

During the three months ended March 31, 2018, the Company adopted Accounting Standards Update No. 2017-07 “Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (“ASU 2017-07”), which requires an employer to report the service cost component of net periodic benefit cost in the same line item(s) as other employee compensation costs arising from services rendered during the period. The other components of net periodic benefit cost are presented in the income statement separately from the line item(s) that includes the service cost and outside of any subtotal of operating income. ASU 2017-07 was adopted on a retrospective basis. The adoption of ASU 2017-07 resulted in the presentation of net pension income within investment and other income in the condensed consolidated statement of operations instead of selling, general and administrative expenses. Prior period net pension income was also reclassified.

Note 8. Income Taxes

The Company’s provision for income taxes for the three months ended March 31, 2018 and 2017 is based on the estimated annual effective tax rate, plus discrete items. The following table presents the provision for income taxes and the effective tax rates for the three months ended March 31, 2018 and 2017:

Cash payments for income taxes for U.S. states and foreign jurisdictions were $2.2 million and $1.3 million for the three months ended March 31, 2108 and 2017, respectively.

The decrease in the effective income tax rate to 31.3% for the three months ended March 31, 2018 compared to 42.2% for the three months ended March 31, 2017 was primarily due to changes in U.S. corporate tax law pursuant to the enactment of the U.S. Federal Tax Cut and Jobs Act (“the Tax Act”) on December 22, 2017. The Tax Act, effective January 1, 2018, reduced the corporate income tax rate from a maximum 35% to a flat 21% rate, broadened the tax base and created a territorial tax system, while subjecting U.S. shareholders to tax on certain earnings of foreign subsidiaries considered to be Global Intangible Low-Taxed Income (“GILTI”).

Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, the Company made reasonable estimates of the tax effects and recorded provisional amounts in its consolidated financial statements for the year ended December 31, 2017. Staff Accounting Bulletin No. 118 (“SAB 118”) provided a measurement period of one year from the Tax Act enactment date for companies to complete their accounting for the enactment-date effects of the Tax Act that were considered provisional estimates at December 31, 2017. The following provides an update on the effects of the Tax Act that at December 31, 2017 were either incomplete, but the Company was able to determine a reasonable estimate and therefore recorded provisional amounts in its December 31, 2017 consolidated financial statements, or were incomplete and the Company was unable to determine a reasonable estimate, and therefore no provisional amounts were recorded in the December 31, 2017 consolidated financial statements.

Deemed Repatriation Transition Tax

Due to the transition to a territorial tax system under the Tax Act, the Company was deemed to repatriate and pay a mandatory tax on its foreign subsidiaries’ untaxed accumulated earnings as of December 31, 2017 (“the transition tax”). The Company was able to reasonably estimate the transition tax and recorded an initial provisional liability of $14.2 million along with a corresponding adjustment of $14.2 million to income tax expense in its consolidated financial statements for the year ended December 31, 2017. Upon further analysis of the deemed repatriation tax impact in the various U.S. states in which the Company files income tax returns, the Company recognized a measurement period adjustment of $0.4 million to decrease the transition tax liability with a corresponding $0.4 million state income tax benefit in its condensed consolidated financial statements for the three months ended March 31, 2018. The Company continues to gather additional information to more precisely compute the amount of its transition tax obligation and the accounting for this item is not yet complete due to potential refinement of the Company’s foreign untaxed accumulated earnings and foreign taxes paid, as well as guidance and regulations that may be issued by the Department of the U.S. Treasury Internal Revenue Service (“IRS”) and/or U.S state government taxing authorities and actions the Company may take as a result. The Company expects to finalize its accounting within the prescribed measurement period.

15

Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

(in millions, except per share data, unless otherwise indicated)

Re-measurement of Deferred Tax Assets and Liabilities

As a result of the reduction in the U.S. corporate income tax rate from 35% to 21%, the Company was required to re-measure its U.S. net deferred tax assets at December 31, 2017. The Company estimated a reduction in the value of its net deferred tax asset of approximately $8.2 million, which was recorded as additional deferred income tax expense in the Company’s consolidated statement of operations for the year ended December 31, 2017. No incremental measurement adjustments were recognized during the three months ended March 31, 2018; however, the Company continues to gather additional information in order to finalize the accounting for this item and expects to finalize the accounting within the prescribed measurement period.

GILTI Accounting Policy Election

Along with the change to a territorial tax system, the Tax Act created the GILTI provision which taxes certain foreign income in excess of a deemed return on tangible assets of U.S. multi-nationals’ foreign subsidiary corporations. The Company may have GILTI in a given year, and the determination of whether the Company is subject to the GILTI provision will be an annual analysis of several factors under the provision, including the amount of foreign income generated by the Company’s foreign subsidiaries and whether that income is considered GILTI in such year. In addition to the immediate taxation of GILTI, the Tax Act allows a U.S. corporation a deduction for 37.5% of foreign-derived intangible income (“FDII”) and a 50% deduction of GILTI. Companies may make an accounting policy election to either account for deferred taxes related to GILTI or to treat taxes on GILTI as period costs. The Company has elected to recognize resulting tax on GILTI as a period expense in the period the tax is incurred and expects to incur such tax for the year ended December 31, 2018. Accordingly, the Company has included an estimate of approximately $0.4 million of tax on net GILTI (net of deduction for FDII) in its 2018 estimated annual effective tax rate. The Company has made sufficient progress with its GILTI and FDII provision calculations; however, as the Company continues to collect and prepare necessary data, and interprets additional guidance and regulations anticipated to be issued by the IRS and state taxing authorities, the Company may make adjustments to this estimate that could affect the Company’s estimated annual effective tax rate.

Indefinite Reinvestment Assertion

Earnings generated by a foreign subsidiary are presumed to ultimately be transferred to the parent company. Therefore, the establishment of deferred taxes may be required with respect to the excess of the investment value for financial reporting over the tax basis of investments in those foreign subsidiaries (also referred to as book-over-tax outside basis differences). A company may overcome this presumption and forgo recording a deferred tax liability in its financial statements if it can assert that management has the intent and ability to indefinitely reinvest the earnings of its foreign subsidiaries. Prior to the year ended December 31, 2017, the Company did not provide deferred U.S., foreign or local income taxes on the book-over-tax outside basis differences of its foreign subsidiaries because such excess was considered to be indefinitely reinvested in the local country businesses. As a result of the transition tax that the Company has incurred pursuant to the Tax Act, the Company now has the ability to repatriate to the U.S. parent the foreign cash associated with the foreign earnings subject to the transition tax, as these earnings have already been subject to U.S. federal taxes. The Company is currently analyzing its global working capital and cash requirements in order to determine the amount of excess cash at its foreign subsidiaries that can be repatriated to the U.S., but has not yet determined whether the Company plans to change its assertion of indefinite reinvestment on all foreign earnings and other outside basis differences.  As the Company has not completed its analysis, the Company has not recorded any deferred taxes attributable to the book-over-tax outside basis differences in its foreign subsidiaries as of March 31, 2018.  The Company will record the tax effects of any change in the Company’s assertion in the period that it completes its analysis; however, the Company does not anticipate incurring material foreign and/or local country taxes upon repatriation of foreign subsidiary earnings to the U.S.

16

Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

(in millions, except per share data, unless otherwise indicated)

Note 9. Share Based Compensation

Share-based compensation expense

For all share-based awards granted to employees and directors following the Separation, including stock options, restricted stock units (“RSUs”), performance based restricted stock and performance share units (“PSUs”), the Company recognizes compensation expense based on estimated grant date fair values based on certain assumptions as of the grant date. The Company estimates the number of awards expected to vest based, in part, on historical forfeiture rates and also based on management’s expectations of employee turnover within the specific employee groups receiving each type of award. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods, if actual forfeitures differ from those estimates. The Company recognizes compensation costs for RSUs expected to vest, on a straight-line basis over the requisite service period of the award, which is generally the vesting term of three years. Compensation expense for performance based restricted stock awards granted in 2016, which vest on a graded basis, is recognized utilizing a graded vesting schedule. Compensation expense for performance based restricted stock awards granted in 2017, which cliff vest, is recognized on a straight-line basis over the performance period of the award. The Company recognizes compensation costs for PSUs, which cliff vest, on a straight-line basis over the performance period of the award. Compensation expense for stock options is recognized on a straight-line basis over the requisite service period of the award, which is generally the vesting term of four years.     

The stock options, RSUs, performance based restricted stock and PSUs granted during 2017 and 2018 are subject to forfeiture upon termination of employment prior to vesting, subject in some cases to early vesting upon specified events, including death or permanent disability of the grantee or a change in control of the Company. In addition, upon a change in control of the Company, PSUs will be measured for attainment of the performance metrics as of the end of the Company’s fiscal quarter ending immediately prior to the fiscal quarter in which the change in control took place and the performance based restricted stock will be measured at 100% attainment of the target performance metrics.  Both awards will remain subject to time based vesting until the end of the vesting period; provided that the award will vest in full if, within three months prior to or two years after the date of the change in control of the Company, the grantee’s employment is terminated without cause by the Company or for good reason by the grantee.

Total compensation expense related to all share based compensation plans was $1.8 million and $1.1 million for the three months ended March 31, 2018 and 2017, respectively.

Stock Options

The Company granted 324,500 options, with a weighted-average grant date fair market value of $5.83, during the three months ended March 31, 2018. The fair market value of each stock option award was estimated using the Black-Scholes-Merton option pricing model and the Company used the following methods to determine its underlying assumptions:

The assumptions used to determine the fair market value of the stock options granted during the three months ended March 31, 2018 were as follows:

17

Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

(in millions, except per share data, unless otherwise indicated)

Stock option awards outstanding as of December 31, 2017 and March 31, 2018, and changes during the three months ended March 31, 2018, were as follows:

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on March 31, 2018 and December 31, 2017, respectively, and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their in-the-money options on March 31, 2018 and December 31, 2017. This amount will change in future periods based on the fair market value of the Company’s stock and the number of options outstanding. Total intrinsic value of options exercised was $1.0 million for the three months ended March 31, 2018 and was de minimis for the three months ended March 31, 2017. There were no excess tax benefits on stock option exercises for the three months ended March 31, 2018 and 2017.

Compensation expense related to stock options was $0.1 million for the three months ended March 31, 2018 and was de minimis for the three months ended March 31, 2017. As of March 31, 2018, $2.8 million of total unrecognized compensation expense related to stock options is expected to be recognized over a weighted average period of 3.6 years.

Restricted Stock Units

Nonvested restricted stock unit awards as of December 31, 2017 and March 31, 2018, and changes during the three months ended March 31, 2018, were as follows:

Compensation expense related to RSUs was $0.9 million and $0.6 million for the three months ended March 31, 2018 and 2017, respectively. As of March 31, 2018, there was $10.2 million of unrecognized share-based compensation expense related to 0.8 million restricted stock unit awards, with a weighted-average grant date fair value of $20.02, that are expected to vest over a weighted-average period of 2.4 years. The fair value of these awards was determined based on the Company’s stock price on the grant date, as the Company currently does not anticipate paying any cash dividends in the foreseeable future.

18

Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

(in millions, except per share data, unless otherwise indicated)

Restricted Stock

There were no restricted stock awards granted during the three months ended March 31, 2018. Compensation expense for the restricted stock awards is currently being recognized based on 100% attainment of the targeted performance metrics for the restricted stock awards granted in 2017 and is being recognized based on 100% actual achievement of the performance metrics for the restricted stock awards granted in 2016. The total potential payout for awards granted during 2017 range from zero to 129,400 shares, should certain performance targets be achieved. The maximum payout of 156,159 shares was achieved as of December 31, 2017 for the restricted stock awards granted during 2016. Compensation expense for restricted stock awards was $0.6 million and $0.5 million for the three months ended March 31, 2018 and 2017, respectively. As of March 31, 2018, there was $2.7 million of unrecognized compensation expense related to restricted stock awards, which is expected to be recognized over a weighted average period of 1.7 years.

Performance Share Units

Nonvested performance share units as of December 31, 2017 and March 31, 2018, and changes during the three months ended March 31, 2018, were as follows:

During the three months ended March 31, 2018, 232,300 performance share units were granted to certain executive officers and senior management, payable upon the achievement of certain established performance targets. The performance period for the shares awarded is January 1, 2018 through December 31, 2020. Distributions under these awards are payable at the end of the performance period in common stock or cash, at the Company’s discretion. The total potential payout for awards granted during the three months ended March 31, 2018 range from zero to 348,450 shares, should certain performance targets be achieved. The fair value of these awards was determined based on the Company’s stock price on the grant date.

Compensation expense for the PSUs granted in 2018 and 2017 is currently being recognized based on 100% attainment of the targeted performance metrics or 232,300 and 37,100 shares, for each respective period. Compensation expense related to PSUs was $0.2 million for the three months ended March 31, 2018 and was de minimis for the three months ended March 31, 2017. As of March 31, 2018, there was $4.4 million of unrecognized compensation expense related to PSUs, which is expected to be recognized over a weighted average period of 2.8 years.    

Note 10. Equity

The Company’s equity as of December 31, 2017 and March 31, 2018, and changes during the three months ended March 31, 2018, were as follows:

19

Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

(in millions, except per share data, unless otherwise indicated)

The Company’s equity as of December 31, 2016 and March 31, 2017, and changes during the three months ended March 31, 2017, were as follows:

Separation-related adjustments primarily relate to the settlement of balances due to or from RRD for activity prior to the Separation.

Note 11. Earnings per Share

Basic earnings per share is calculated by dividing net earnings by the weighted average number of common shares outstanding for the period. In computing diluted earnings per share, basic earnings per share is adjusted for the assumed issuance of all potentially dilutive share-based awards, including restricted stock units and restricted stock.     

The reconciliation of the numerator and denominator of the basic and diluted earnings per share calculation and the anti-dilutive share-based awards for the three months ended March 31, 2018 and 2017 were as follows:

20

Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

(in millions, except per share data, unless otherwise indicated)

Note 12. Comprehensive Income

The components of other comprehensive income and income tax expense allocated to each component for the three months ended March 31, 2018 and 2017 were as follows:

Accumulated other comprehensive loss by component as of December 31, 2017 and March 31, 2018 were as follows:

Accumulated other comprehensive loss by component as of December 31, 2016 and March 31, 2017 as follows:

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Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

(in millions, except per share data, unless otherwise indicated)

Reclassifications from accumulated other comprehensive loss for the three months ended March 31, 2018 and 2017 were as follows:  

Note 13. Segment Information

The Company’s segments are summarized below:

United States

The U.S. segment serves capital market and investment market clients in the U.S. by delivering products and services to help create, manage, and deliver, accurate and timely financial communications to investors and regulators. The Company also provides virtual data rooms to facilitate the deal management requirements of capital markets and mergers and acquisitions transactions, and provides data and analytics services that help professionals uncover intelligence from disclosures contained within public filings made with the SEC. The U.S. segment also includes language solutions capabilities, through which the Company can translate documents and create content in up to 190 different languages for its clients, and commercial print.

International

The International segment includes the Company’s operations in Asia, Europe, Canada and Latin America. The international business is primarily focused on working with international capital markets clients on capital markets offerings and regulatory compliance related activities into or within the United States. In addition, the international segment provides language translation services and shareholder communication services to investment market clients.

Corporate

Corporate consists of unallocated general and administrative activities and associated expenses including, in part, executive, legal, finance, communications and certain facility costs.  In addition, certain costs and earnings of employee benefit plans, such as pension and other postretirement benefit plan expense (income) and allocated costs for share-based compensation, are included in Corporate and not allocated to the operating segments.

22

Donnelley Financial Solutions, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

(in millions, except per share data, unless otherwise indicated)

Information by Segment

The Company has disclosed income (loss) from operations as the primary measure of segment earnings (loss). This is the measure of profitability used by the Company’s chief operating decision-maker and is most consistent with the presentation of profitability reported within the condensed consolidated financial statements.