ARC Document Solutions(ARC) - 2019 Q2 - Quarterly Report

PART I—FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements The company's unaudited financials show a significant year-over-year decline in net income and the adoption of a new lease accounting standard Condensed Consolidated Balance Sheet Highlights (Unaudited) | Account | June 30, 2019 (in thousands) | Dec 31, 2018 (in thousands) | | :--- | :--- | :--- | | Cash and cash equivalents | $21,741 | $29,433 | | Total current assets | $111,648 | $115,375 | | Right-of-use assets from operating leases | $42,845 | $— | | Total assets | $372,462 | $339,716 | | Total current liabilities | $91,689 | $80,950 | | Long-term debt and finance leases | $94,070 | $105,060 | | Total liabilities | $224,709 | $192,414 | | Total equity | $147,753 | $147,302 | Condensed Consolidated Statements of Operations Highlights (Unaudited) | Metric (in thousands, except EPS) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $98,873 | $104,190 | $195,995 | $201,898 | | Gross profit | $33,848 | $35,835 | $64,523 | $66,020 | | Income from operations | $5,762 | $7,344 | $7,905 | $9,220 | | Net income attributable to ARC | $524 | $4,074 | $1,116 | $4,702 | | Diluted EPS | $0.01 | $0.09 | $0.02 | $0.10 | - Net cash provided by operating activities for the six months ended June 30, 2019, was $19.0 million, a decrease from $23.0 million in 2018, while cash and cash equivalents fell to $21.7 million[16] - The company adopted the new lease accounting standard, ASC 842, recognizing operating lease Right-of-Use (ROU) assets of approximately $46.9 million and operating lease liabilities of $53.7 million[28][67] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses declining sales and net income in H1 2019, driven by lower print demand, offset partially by growth in AIM services Business Summary The company provides document solutions primarily to the AEC/O industry, with a strategic focus on growing digital and onsite services - The company's main service offerings are Construction Document and Information Management (CDIM), Managed Print Services (MPS), Archiving and Information Management (AIM), and Equipment and Supplies sales[96] - Sales to the AEC/O industry constituted approximately 79% of net sales for the first six months of 2019[99] - The company's strategic focus is on growing MPS, AIM, and CDIM to align with the market shift toward onsite and cloud-based document management[97] Results of Operations Net sales and net income declined in Q2 and H1 2019 due to lower demand in most segments, with AIM being the only growth area Net Sales by Category (YoY Change) | Category | Q2 2019 (in millions) | Q2 YoY Change | H1 2019 (in millions) | H1 YoY Change | | :--- | :--- | :--- | :--- | :--- | | CDIM | $54.4 | -2.0% | $105.2 | -2.5% | | MPS | $31.6 | -5.3% | $62.5 | -3.6% | | AIM | $3.6 | +13.6% | $6.9 | +12.6% | | Equipment & Supplies | $9.3 | -23.5% | $21.4 | -7.4% | | Total Net Sales | $98.9 | -5.1% | $196.0 | -2.9% | Key Profitability Metrics (Q2 2019 vs Q2 2018) | Metric (in millions) | Q2 2019 | Q2 2018 | YoY Change | | :--- | :--- | :--- | :--- | | Gross Profit | $33.8 | $35.8 | -5.5% | | Net Income Attributable to ARC | $0.5 | $4.1 | -87.1% | | Adjusted EBITDA | $14.4 | $16.2 | -10.8% | - The effective tax rate for Q2 2019 was 88.4%, a significant increase from 31.5% in Q2 2018, due to deferred tax expense related to expired stock-based compensation[121] - The decline in Equipment and Supplies sales was primarily driven by a market slowdown in China, affecting the company's joint venture, UDS[112] Liquidity and Capital Resources The company's liquidity, sourced from operations and borrowings, decreased but is considered sufficient for the next twelve months Liquidity and Debt Position (in thousands) | Metric | June 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $21,741 | $29,433 | | Working capital | $19,959 | $34,425 | | Total debt obligations | $116,986 | $127,192 | - Net cash provided by operating activities for the first six months of 2019 was $19.0 million, a decrease from $23.0 million in the prior-year period, due to the timing of cash outlays[145][147] - As of June 30, 2019, the company had $43.8 million of borrowing availability under its Revolving Loan commitment[159] Critical Accounting Policies No material changes were made to critical accounting policies, with goodwill not impaired and a valuation allowance maintained for deferred tax assets - There have been no material changes to the critical accounting policies described in the 2018 Annual Report on Form 10-K[170] - The last annual goodwill impairment test as of September 30, 2018, indicated no impairment, with fair values significantly exceeding carrying values[171][176] - The company maintains a valuation allowance of $2.2 million against certain deferred tax assets as of June 30, 2019[180] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company reports no new or material market risks for this period - The company indicates that there are no applicable quantitative and qualitative disclosures about market risk for this period[185] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls during the quarter - Based on an evaluation as of June 30, 2019, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective[187] - No changes to internal control over financial reporting occurred during the second quarter of 2019 that have materially affected, or are reasonably likely to materially affect, internal controls[188] PART II—OTHER INFORMATION Item 1. Legal Proceedings Ongoing legal proceedings are not expected to have a material impact on the company's financial condition or results - The company states that the outcome of ongoing legal proceedings is not expected to have a material effect on its consolidated financial position, results of operations or cash flows[190] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the 2018 Annual Report on Form 10-K - There have been no material changes to the risk factors previously disclosed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2018[191] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company initiated a new $15.0 million stock repurchase program and repurchased 354,000 shares during the second quarter - On May 1, 2019, the Board of Directors approved a stock repurchase program authorizing the purchase of up to $15.0 million of the company's common stock through March 31, 2021[192] Issuer Purchases of Equity Securities (Q2 2019) | Period | Total Shares Purchased (in thousands) | Average Price Paid per Share | | :--- | :--- | :--- | | May 2019 | 236 | $2.10 | | June 2019 | 118 | $2.12 | | Total | 354 | N/A | - As of June 30, 2019, approximately $14.25 million remained available for repurchase under the program[192] Item 6. Exhibits This section lists filed exhibits, including officer certifications required by the Sarbanes-Oxley Act and XBRL data files - The report includes required certifications from the CEO (Principal Executive Officer) and CFO (Principal Financial Officer) pursuant to the Sarbanes-Oxley Act of 2002[194] - Interactive Data Files (XBRL Instance Document and related taxonomy files) are also filed as exhibits with this report[194]