ARC Document Solutions(ARC) - 2022 Q2 - Quarterly Report

PART I—FINANCIAL INFORMATION This section covers the company's financial statements, management's discussion and analysis, market risk, and internal controls Item 1. Condensed Consolidated Financial Statements Presents unaudited condensed consolidated financial statements for Q2 and H1 2022, highlighting changes in assets, liabilities, and cash flows Condensed Consolidated Balance Sheets Total assets decreased to $311.7 million, liabilities to $157.3 million, and equity slightly to $154.3 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $44,595 | $55,929 | | Total current assets | $106,773 | $112,544 | | Goodwill | $121,051 | $121,051 | | Total assets | $311,655 | $323,999 | | Liabilities & Equity | | | | Total current liabilities | $72,560 | $75,462 | | Long-term debt and finance leases | $59,995 | $64,426 | | Total liabilities | $157,311 | $165,007 | | Total equity | $154,344 | $158,992 | Condensed Consolidated Statements of Operations Net sales increased to $74.6 million in Q2 and $144.1 million in H1 2022, with net income also rising Statement of Operations Highlights (in thousands, except per share data) | Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $74,564 | $68,799 | $144,052 | $130,529 | | Gross profit | $25,538 | $22,792 | $47,987 | $41,579 | | Income from operations | $5,564 | $4,187 | $8,623 | $5,904 | | Net income attributable to ARC | $3,262 | $2,574 | $5,234 | $3,363 | | Diluted EPS | $0.08 | $0.06 | $0.12 | $0.08 | Condensed Consolidated Statements of Cash Flows Operating cash flow decreased to $11.5 million, with significant cash used in financing activities, resulting in an $11.3 million net decrease Cash Flow Summary for the Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $11,529 | $16,889 | | Net cash used in investing activities | $(2,524) | $(1,334) | | Net cash used in financing activities | $(19,434) | $(18,364) | | Net change in cash and cash equivalents | $(11,334) | $(2,578) | Notes to Condensed Consolidated Financial Statements Details accounting policies, revenue by service line, and significant financial events, including a capital distribution from a Chinese JV Net Sales by Service Line (in thousands) | Service Line | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :--- | :--- | :--- | :--- | :--- | | Digital Printing | $46,165 | $43,089 | $88,112 | $80,523 | | MPS | $19,248 | $18,005 | $37,902 | $35,340 | | Scanning and Digital Imaging | $4,320 | $3,286 | $8,489 | $6,310 | | Equipment and Supplies Sales | $4,831 | $4,419 | $9,549 | $8,356 | | Total net sales | $74,564 | $68,799 | $144,052 | $130,529 | - The company operates as a single reportable segment because its operating segments have similar products, services, customers, and economic characteristics[48] - In Q2 2022, the company completed an $11.2 million capital distribution from its Chinese joint venture. ARC received $7.3 million (65%), and the JV partner received $3.9 million (35%)[39] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 and H1 2022 financial results, highlighting sales growth, margin improvements, liquidity, and debt compliance Results of Operations Net sales grew 8.4% in Q2 and 10.4% in H1 2022, driven by segment expansion and improved gross profit margins Year-over-Year Sales Growth by Segment | Segment | Q2 2022 Growth | H1 2022 Growth | | :--- | :--- | :--- | | Digital Printing | 7.1% | 9.4% | | MPS | 6.9% | 7.2% | | Scanning and Digital Imaging | 31.5% | 34.5% | | Equipment and supplies sales | 9.3% | 14.3% | | Total net sales | 8.4% | 10.4% | - Gross margin improved due to a new cost structure implemented in 2020 and efforts to drive more work through service centers, which was partially offset by increased labor and material costs from inflation[114] - The increase in SG&A expenses was due to selective salary increases, as well as higher commissions, bonuses, and travel resulting from increased sales and profitability[115][116] Non-GAAP Financial Measures Presents non-GAAP measures like Adjusted EBITDA and Adjusted Net Income, showing slight increases despite margin pressures Reconciliation of Net Income to Adjusted EBITDA (in thousands) | Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :--- | :--- | :--- | :--- | :--- | | Net income attributable to ARC | $3,262 | $2,574 | $5,234 | $3,363 | | Interest, Taxes, D&A | $7,635 | $8,106 | $14,292 | $15,746 | | EBITDA | $10,897 | $10,680 | $19,526 | $19,109 | | Stock-based compensation | $439 | $404 | $890 | $743 | | Adjusted EBITDA | $11,336 | $11,084 | $20,416 | $19,852 | Reconciliation of Net Income to Adjusted Net Income (in thousands) | Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :--- | :--- | :--- | :--- | :--- | | Net income attributable to ARC | $3,262 | $2,574 | $5,234 | $3,363 | | Deferred tax valuation allowance and other discrete tax items | $432 | $68 | $438 | $199 | | Adjusted net income attributable to ARC | $3,694 | $2,642 | $5,672 | $3,562 | Liquidity and Capital Resources Discusses liquidity, including $44.6 million cash, decreased working capital, and $24.1 million available under the credit facility - Total cash and cash equivalents were $44.6 million as of June 30, 2022, of which $4.0 million was held in foreign countries[138] - Days sales outstanding (DSO) was 54 days as of June 30, 2022, compared to 50 days as of June 30, 2021[141] - As of June 30, 2022, borrowing availability under the 2021 Credit Agreement was $24.1 million, after deducting $43.8 million in outstanding loans and $2.2 million in letters of credit[150] Critical Accounting Policies and Significant Judgements and Estimates Reviews critical accounting policies, focusing on goodwill impairment and income tax estimates, with no impairment noted for 2021 - The annual goodwill impairment test as of September 30, 2021, concluded that goodwill was not impaired. The fair value of all reporting units with goodwill exceeded their carrying values by more than 50%[162][165] - The company has a $2.4 million valuation allowance against certain deferred tax assets as of June 30, 2022, as it is not more likely than not that these assets will be realized[168] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, ARC is exempt from providing quantitative and qualitative market risk disclosures - As a smaller reporting company, ARC is exempt from providing quantitative and qualitative disclosures about market risk[172] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2022, with no material changes - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of June 30, 2022[174] - No changes were made to internal control over financial reporting during the six months ended June 30, 2022, that have materially affected, or are reasonably likely to materially affect, internal controls[175] PART II—OTHER INFORMATION Presents other information including legal proceedings, risk factors, equity transactions, and key exhibits Item 1. Legal Proceedings The company is involved in legal proceedings, with accruals for probable losses, not expecting a material adverse effect - The company has accrued for probable and estimable losses from legal proceedings and does not expect the ultimate resolution to have a material adverse effect[177] Item 1A. Risk Factors No material changes to risk factors previously disclosed in the Annual Report on Form 10-K for 2021 - The report refers to the risk factors detailed in the Annual Report on Form 10-K for the year ended December 31, 2021[178] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 268,000 shares for $0.8 million in Q2 2022, with $7.0 million remaining for future repurchases Issuer Purchases of Equity Securities (Q2 2022) | Period | Total Shares Purchased | Average Price Paid per Share ($) | | :--- | :--- | :--- | | April 2022 | 0 | — | | May 2022 | 193,000 | $3.13 | | June 2022 | 75,000 | $3.06 | | Total | 268,000 | | - As of June 30, 2022, $7.0 million remained available under the company's stock repurchase program, which is authorized through March 31, 2023[180] Item 5. Other Information The company amended its CFO's employment agreement to include an annual $100,000 long-term equity incentive award - The company amended its CFO's employment agreement to include an annual long-term equity incentive award of $100,000 in stock options[181] Item 6. Exhibits Lists exhibits filed with the Form 10-Q, including CEO/CFO certifications and an executive employment agreement amendment - Key exhibits filed include CEO/CFO certifications (31.1, 31.2, 32.1, 32.2) and an amendment to the CFO's employment agreement (10.49)[183]