ARC Document Solutions(US:ARC)2024-11-04 14:17PART I—FINANCIAL INFORMATION Condensed Consolidated Financial Statements Presents unaudited condensed consolidated financial statements for Q3 2024, highlighting a net loss, decreased operating cash flow, and a pending merger agreement Condensed Consolidated Balance Sheets The balance sheet as of September 30, 2024, shows total assets increased to $313.5 million, liabilities rose, and cash equivalents decreased to $51.3 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $51,291 | $56,093 | | Accounts receivable, net | $41,896 | $35,775 | | Total current assets | $111,527 | $108,652 | | Total assets | $313,455 | $310,124 | | Liabilities & Equity | | | | Total current liabilities | $74,702 | $71,157 | | Long-term debt and finance leases | $52,172 | $53,366 | | Total liabilities | $156,908 | $154,399 | | Total equity | $156,547 | $155,725 | Condensed Consolidated Statements of Operations Net sales for Q3 2024 increased to $74.4 million, but a surge in SG&A expenses led to a net loss of $0.1 million, impacting diluted EPS Statement of Operations Summary (in thousands, except EPS) | Metric | Q3 2024 | Q3 2023 | Nine Months 2024 | Nine Months 2023 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $74,448 | $71,057 | $220,354 | $212,325 | | Gross profit | $24,759 | $24,149 | $73,954 | $72,250 | | SG&A expenses | $23,268 | $19,269 | $63,681 | $57,764 | | Income from operations | $1,482 | $4,870 | $10,244 | $14,455 | | Net (loss) income | $(101) | $3,121 | $5,398 | $8,935 | | Diluted EPS | $— | $0.07 | $0.13 | $0.21 | Condensed Consolidated Statements of Cash Flows Net cash from operations decreased to $19.2 million for the nine months ended September 30, 2024, with increased investing and financing activities Cash Flow Summary - Nine Months Ended Sep 30 (in thousands) | Cash Flow Activity | 2024 | 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $19,209 | $22,857 | | Net cash used in investing activities | $(10,456) | $(7,461) | | Net cash used in financing activities | $(13,616) | $(17,206) | | Net change in cash and cash equivalents | $(4,802) | $(1,975) | Notes to Condensed Consolidated Financial Statements Key notes disclose a pending merger agreement, revenue by service line, no goodwill impairment, and an increased site remediation liability of $4.3 million - On August 27, 2024, ARC entered into a merger agreement with TechPrint Holdings, LLC, an entity affiliated with ARC's CEO, COO, and CFO, to be taken private. The transaction is expected to close in Q4 20243133 Net Sales by Service Line (in thousands) | Service Line | Q3 2024 | Q3 2023 | Nine Months 2024 | Nine Months 2023 | | :--- | :--- | :--- | :--- | :--- | | Digital Printing | $46,636 | $43,537 | $136,127 | $129,134 | | MPS | $18,315 | $18,582 | $55,627 | $56,556 | | Scanning & Digital Imaging | $5,354 | $4,991 | $16,676 | $14,845 | | Equipment & Supplies | $4,143 | $3,947 | $11,924 | $11,790 | | Total Net Sales | $74,448 | $71,057 | $220,354 | $212,325 | - The company recorded a site remediation liability of $4.3 million as of September 30, 2024, related to a contaminated site acquired in the 1990s. This is an increase from the initial estimate due to newly identified complexities818384 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses 3.8% revenue growth for the first nine months of 2024, increased SG&A due to merger costs, and strong liquidity despite lower net income Results of Operations Q3 2024 net sales increased 4.8% to $74.4 million, but surging SG&A expenses, driven by merger costs, resulted in a net loss and reduced EBITDA margin Q3 2024 vs Q3 2023 Performance (in millions) | Metric | Q3 2024 | Q3 2023 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Net Sales | $74.4 | $71.1 | $3.4 | 4.8% | | Gross Profit | $24.8 | $24.1 | $0.6 | 2.5% | | SG&A Expenses | $23.3 | $19.3 | $4.0 | 20.8% | | Net (Loss) Income | $(0.1) | $3.2 | $(3.2) | (102.1)% | | Adjusted EBITDA | $6.2 | $10.0 | $(3.9) | (38.4)% | - The increase in Selling, General and Administrative (SG&A) expenses for Q3 and the first nine months of 2024 included $3.2 million and $4.1 million, respectively, of costs related to the pending take-private merger transaction128 - The effective tax rate for Q3 2024 was 108.6%, significantly impacted by non-deductible costs associated with the merger agreement131132 Liquidity and Capital Resources As of September 30, 2024, the company held $51.3 million in cash, with $36.8 million in working capital, and sufficient liquidity for the next twelve months Liquidity Position (in thousands) | Metric | Sep 30, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Cash and cash equivalents | $51,291 | $56,093 | | Working capital | $36,825 | $37,495 | | Total debt obligations | $59,148 | $62,236 | - The company's 2021 Credit Agreement, with $40.0 million in outstanding revolving loans, will be paid off as part of the transactions contemplated by the Merger Agreement130185 - Capital expenditures for the nine months ended September 30, 2024, were $10.9 million, an increase from $7.7 million in the prior year, as the company chose to purchase more equipment outright due to rising interest rates168 Critical Accounting Policies and Significant Judgements and Estimates No material changes to critical accounting policies, with goodwill confirmed as not impaired and a valuation allowance maintained against deferred tax assets - The annual goodwill impairment test as of September 30, 2024, concluded that the company's $121.1 million in goodwill was not impaired197200 - A sensitivity analysis showed that a 50-basis point reduction in projected EBITDA margin or a 50-basis point increase in the discount rate would not result in goodwill impairment200201 Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, ARC is exempt from providing disclosures on market risk under Item 3 - As a smaller reporting company, ARC is exempt from providing disclosures on market risk under Item 3210 Controls and Procedures Disclosure controls and procedures were effective as of September 30, 2024, with no material changes to internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2024212 - No changes that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting occurred during the quarter ended September 30, 2024213 PART II—OTHER INFORMATION Legal Proceedings The company is involved in routine legal proceedings, with no expected material adverse effect on financial condition or results of operations - The company does not expect current legal proceedings to have a material adverse effect on its results of operations, financial condition, or cash flows215 Risk Factors Primary risks relate to the pending merger, including potential non-completion, operational uncertainty, and significant transaction-related costs - A key risk is the potential failure to complete the proposed merger, which is subject to stockholder approval and other closing conditions. Failure could result in adverse consequences, including a termination fee of $5,277,367218219220 - The pending transaction creates uncertainty that may impair the company's ability to retain key employees and could cause customers and suppliers to change or discontinue business relationships222 - The merger agreement restricts the company from taking certain actions without the acquirer's consent, potentially preventing it from pursuing attractive business opportunities226 Unregistered Sales of Equity Securities and Use of Proceeds No equity securities were repurchased in Q3 2024, with repurchases restricted due to the pending merger agreement - No shares were repurchased during the quarter from July 1, 2024, to September 30, 2024. The company is restricted from repurchasing shares due to the pending merger agreement232 Other Information No directors or executive officers adopted or terminated Rule 10b5-1 trading plans during Q3 2024 - No board members or executive officers adopted or terminated Rule 10b5-1 trading plans in Q3 2024233 Exhibits This section lists all exhibits filed with the Form 10-Q, including the Merger Agreement and CEO/CFO certifications - Key exhibits filed with this report include the Merger Agreement dated August 27, 2024, and related amendments, along with CEO/CFO certifications under SOX Sections 302 and 906235 Signatures The report was duly signed by the Chairman and CEO, and the CFO, on November 4, 2024 - The report was signed on November 4, 2024, by the company's Chairman and CEO, and its CFO237