ARC Document Solutions(ARC) - 2021 Q2 - Quarterly Report

PART I—FINANCIAL INFORMATION This section provides the unaudited condensed consolidated financial statements and management's discussion and analysis for the reporting period Condensed Consolidated Financial Statements This section presents the unaudited condensed consolidated financial statements for ARC Document Solutions, Inc. as of June 30, 2021, and for the three and six months then ended, including balance sheets, statements of operations, comprehensive income, equity, and cash flows, along with accompanying notes detailing accounting policies and specific financial items Condensed Consolidated Balance Sheet Highlights (Unaudited) | Account | June 30, 2021 (in thousands) | December 31, 2020 (in thousands) | | :--- | :--- | :--- | | Total Current Assets | $107,837 | $108,747 | | Total Assets | $330,250 | $345,438 | | Total Current Liabilities | $75,058 | $76,247 | | Total Liabilities | $174,455 | $191,102 | | Total Equity | $155,795 | $154,336 | Condensed Consolidated Statements of Operations Highlights (Unaudited) | Metric (in thousands, except per share data) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $68,799 | $64,319 | $130,529 | $152,744 | | Gross Profit | $22,792 | $20,445 | $41,579 | $48,042 | | Income from Operations | $4,187 | $2,682 | $5,904 | $5,344 | | Net Income Attributable to ARC | $2,574 | $1,461 | $3,363 | $2,144 | | Diluted EPS | $0.06 | $0.03 | $0.08 | $0.05 | Condensed Consolidated Statements of Cash Flows Highlights (Unaudited) | Cash Flow Activity (in thousands) | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $16,889 | $26,255 | | Net cash used in investing activities | $(1,334) | $(2,501) | | Net cash (used in) provided by financing activities | $(18,364) | $5,438 | | Net change in cash and cash equivalents | $(2,578) | $29,006 | Notes to Condensed Consolidated Financial Statements This section provides detailed notes to the unaudited condensed consolidated financial statements, including accounting policies, new credit agreements, and stock-based compensation information Net Sales by Principal Service/Product (in thousands) | Service/Product | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | CDIM | $43,089 | $41,070 | $80,523 | $90,230 | | MPS | $18,005 | $16,233 | $35,340 | $43,541 | | AIM | $3,286 | $2,653 | $6,310 | $6,253 | | Equipment and supplies sales | $4,419 | $4,363 | $8,356 | $12,720 | | Total Net Sales | $68,799 | $64,319 | $130,529 | $152,744 | - The company entered into a new Credit Agreement on April 22, 2021, providing for revolving loans up to $70 million and maturing on April 22, 2026. As of June 30, 2021, borrowing availability was $19.1 million[63][64] - On April 29, 2021, shareholders approved the 2021 Incentive Plan. As of June 30, 2021, total unrecognized compensation cost related to unvested stock-based payments was $3.2 million, expected to be recognized over a weighted-average period of approximately 2.4 years[74][77] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance for Q2 and H1 2021, highlighting a 7.0% year-over-year increase in Q2 net sales due to recovering economic activity post-pandemic, covering operational results by segment, noting growth in CDIM, MPS, and AIM in Q2, and improved gross margins due to a reconfigured cost structure, while detailing its strong liquidity position with $52.4 million in cash and reduced total debt, and the successful refinancing of its credit facility COVID-19 Pandemic Impact This section outlines the company's strategic adaptations and liquidity measures taken in response to the COVID-19 pandemic and acknowledges ongoing uncertainties - The company transformed its business during Q2 2020 to adapt to the pandemic by reconfiguring operations and its cost structure to serve new customer needs[92] - Actions taken to improve liquidity in response to the pandemic include reducing working capital, postponing capital expenditures, reducing operating costs, and cutting discretionary spending[94] - While Q2 2021 sales increased as pandemic effects subsided, uncertainty remains regarding COVID-19 variants and their potential impact on future results[91] Results of Operations This section details the company's financial performance, including net sales, gross profit, net income, and Adjusted EBITDA, highlighting improvements driven by economic recovery and cost structure reconfiguration Financial Performance Summary (in millions) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | % Change | | :--- | :--- | :--- | :--- | | Total Net Sales | $68.8 | $64.3 | 7.0% | | Gross Profit | $22.8 | $20.4 | 11.5% | | Net Income Attributable to ARC | $2.6 | $1.5 | 76.2% | | Adjusted EBITDA | $11.1 | $10.7 | 3.7% | - Net sales for Q2 2021 increased 7.0% YoY, primarily due to increasing economic activity as negative effects of the COVID-19 pandemic subsided. For H1 2021, net sales decreased 14.5% compared to H1 2020, which included stronger pre-pandemic results[102] - Gross margin for Q2 2021 increased to 33.1% from 31.8% in Q2 2020. This improvement was driven by the leverage provided by the new, reconfigured operating cost structure implemented in 2020[108][109] - Net interest expense decreased by $0.6 million in Q2 2021 and $1.0 million in H1 2021 compared to the prior year periods, due to continued pay-down of long-term debt and lower LIBOR rates[112] Liquidity and Capital Resources This section reviews the company's cash position, working capital, and debt obligations, emphasizing its strong liquidity and the successful refinancing of its credit facility Key Liquidity Metrics (in thousands) | Metric | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $52,372 | $54,950 | | Working capital | $32,779 | $32,500 | | Total debt obligations | $83,646 | $97,236 | - The company's cash and cash equivalents stood at $52.4 million as of June 30, 2021, of which $16.0 million was held in foreign countries[134] - On April 22, 2021, the company entered into a new $70 million Credit Agreement maturing in 2026. As of June 30, 2021, borrowing availability was $19.1 million, and the company was in compliance with all covenants[145][146][149] Critical Accounting Policies This section discusses the company's critical accounting policies, including the annual goodwill impairment test and the valuation allowance for deferred tax assets - The annual goodwill impairment test as of September 30, 2020, determined that goodwill was not impaired. The fair value of reporting units with goodwill exceeded their carrying values by more than 50%[158][161] - The company maintains a valuation allowance of $2.2 million against certain deferred tax assets as of June 30, 2021, based on its assessment of whether it is more likely than not that these assets will be realized[166] Quantitative and Qualitative Disclosures About Market Risk The company states that this item is not applicable for the reporting period - Not applicable[169] Controls and Procedures Based on an evaluation conducted by management, including the CEO and CFO, the company's disclosure controls and procedures were deemed effective as of June 30, 2021, with no material changes to internal control over financial reporting during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2021, the company's disclosure controls and procedures were effective[171] - No changes to internal control over financial reporting occurred during the six months ended June 30, 2021, that have materially affected, or are reasonably likely to materially affect, internal controls[172] PART II—OTHER INFORMATION This section covers other required disclosures, including legal proceedings, risk factors, equity security sales, and a list of exhibits Legal Proceedings The company is involved in various legal proceedings arising from its business operations, has established accruals for probable and estimable losses, and management does not currently believe the ultimate resolution will have a material adverse effect on its financial results or condition - The company is involved in legal proceedings from the ordinary course of business and has accrued for potential losses that are probable and reasonably estimable[173] - Management does not currently believe the ultimate resolution of any ongoing legal matters will have a material adverse effect on its results of operations, financial condition, or cash flows[173] Risk Factors This section directs readers to the company's Annual Report on Form 10-K for the year ended December 31, 2020, for a detailed discussion of risk factors - For information on risk factors, the report refers to "Part I - Item 1A. Risk Factors" of the Annual Report on Form 10-K for the year ended December 31, 2020[174] Unregistered Sales of Equity Securities and Use of Proceeds This section provides details on the company's stock repurchase activities, noting the Board of Directors has authorized a stock repurchase program for up to $15.0 million of its common stock, effective through March 31, 2023 Issuer Purchases of Equity Securities (Q2 2021) | Period | Total Shares Purchased (in thousands) | Average Price Paid per Share ($) | | :--- | :--- | :--- | | April 1 - April 30, 2021 | — | — | | May 1 - May 31, 2021 | 264 | $2.07 | | June 1 - June 30, 2021 | 115 | $2.22 | - The company's Board of Directors approved a stock repurchase program authorizing the purchase of up to $15.0 million of its outstanding common stock through March 31, 2023[176] Exhibits This section lists the exhibits filed as part of the Form 10-Q, which include Sarbanes-Oxley Act certifications from the Principal Executive Officer and Principal Financial Officer, as well as XBRL data files - The exhibits filed with this report include certifications from the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, along with XBRL instance documents[178]