ARC Document Solutions(ARC) - 2020 Q4 - Annual Report

Part I Business ARC Document Solutions provides a comprehensive suite of document distribution and graphic production services, primarily targeting the architectural, engineering, construction, and building owner/operator (AEC/O) industry - The company's core service offerings include: Offsite Services, Specialized Color Printing, Managed Print Services (MPS), Archive and Information Management (AIM), Web-Based Document Management Applications, and Equipment and Supplies Sales[17][18][19] - ARC serves over 45,000 customers, with no single customer accounting for more than 2% of overall revenue, and is the largest document solutions provider to the AEC/O market in North America[20][22] - A significant portion of the company's revenue is geographically concentrated, with approximately 32% of total revenue in 2020 derived from California[26][58] - As of December 31, 2020, the company employed approximately 1,750 people[29] - Key competitive strengths include strong domain expertise in the AEC/O market, extensive customer relationships, a wide variety of specialized printing capabilities, a large service center footprint, and a unique combination of onsite, offsite, and cloud-based offerings[36] Risk Factors The company faces significant risks from the COVID-19 pandemic, high dependency on the cyclical AEC/O industry, revenue concentration in California, and high fixed costs making earnings sensitive to revenue fluctuations - The COVID-19 pandemic has adversely affected and is expected to continue to adversely affect the company's financial condition and results of operations[49][50] - The business is highly dependent on the AEC/O industry, which accounted for approximately 69% of net sales in 2020, and a downturn in this industry could significantly harm revenue and profitability[57] - A significant portion of overall costs are fixed (estimated at 36% in 2020), making earnings highly sensitive to changes in revenue[63] - The company faces risks related to its debt, including restrictive covenants in its Credit Agreement, where a substantial downturn could cause a breach of financial ratios, leading to default[54][83][84] - The common stock is subject to market price volatility and risks delisting from the NYSE if the average closing price falls below $1.00 over 30 consecutive trading days[89][93] Unresolved Staff Comments The company reports no unresolved staff comments - None[94] Properties As of year-end 2020, ARC operated 148 service centers globally, occupying approximately 1.0 million square feet, with the vast majority of facilities being leased - The company operated 148 service centers at the end of 2020, with 126 in the U.S. and 22 internationally[94] - Total occupied space was approximately 1.0 million square feet as of December 31, 2020[94] - Nearly all service centers and administrative facilities are leased[94] Legal Proceedings The company is involved in routine legal proceedings from normal business operations and does not expect their resolution to have a material adverse effect on its financial condition - The company is involved in routine legal proceedings from the conduct of its business[96] - Accruals are made for probable and reasonably estimable losses, and management does not currently anticipate a material adverse effect from these matters[96] Mine Safety Disclosures This item is not applicable to the company - Not applicable[97] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ARC's common stock trades on the NYSE, a quarterly cash dividend of $0.01 per share was declared, and a $15.0 million stock repurchase program is active - The company's common stock is listed on the NYSE under the symbol "ARC"[98] - A quarterly cash dividend of $0.01 per share was declared in December 2020[100] Issuer Purchases of Equity Securities (Q4 2020) | Period | Total Shares Purchased (thousands) | Average Price Paid per Share ($) | Dollar Value Remaining in Program (thousands) | | :--- | :--- | :--- | :--- | | Nov 2020 | 114 | 1.34 | 10,551 | | Dec 2020 | 467 | 1.39 | 9,901 | - The Board of Directors approved a stock repurchase program authorizing up to $15.0 million in purchases through March 31, 2023[102] Selected Financial Data This item is not applicable to the company for this reporting period - Not applicable[103] Management's Discussion and Analysis of Financial Condition and Results of Operations The COVID-19 pandemic caused a 24.3% sales decline to $289.5 million in 2020, but net income more than doubled to $6.2 million due to significant cost reductions and improved liquidity COVID-19 Pandemic Impact The pandemic negatively impacted demand and profitability, prompting significant cost-saving measures while the company maintained essential business operations at reduced volumes - The pandemic caused a decline in demand for products and services starting in late March 2020, negatively impacting sales and profitability[113] - Mitigation efforts included reducing working capital, suspending share repurchases and dividends for a portion of 2020, postponing capital expenditures, and reducing operating and discretionary costs[116] - As an essential business serving infrastructure, housing, and healthcare, the company kept almost all of its 148 service centers open at reduced volumes[117] Results of Operations (2020 vs. 2019) Net sales fell 24.3% to $289.5 million in 2020, but significant SG&A reductions and a lower effective tax rate contributed to a rise in net income to $6.2 million Consolidated Results of Operations | Financial Metric (In millions) | 2020 | 2019 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total net sales | $289.5 | $382.4 | $(92.9) | (24.3)% | | CDIM | $175.5 | $205.5 | $(30.0) | (14.6)% | | MPS | $79.3 | $123.3 | $(44.0) | (35.7)% | | AIM | $12.3 | $14.1 | $(1.8) | (12.7)% | | Equipment and Supplies | $22.3 | $39.5 | $(17.2) | (43.5)% | | Gross profit | $92.9 | $125.2 | $(32.3) | (25.8)% | | SG&A expenses | $79.0 | $107.3 | $(28.2) | (26.3)% | | Net income attributable to ARC | $6.2 | $3.0 | $3.2 | 105.2% | | Adjusted EBITDA | $44.8 | $49.4 | $(4.6) | (9.3)% | - The decline in MPS sales was primarily driven by office employees working from home, significantly reducing print volumes in customers' offices[124] - Gross margin decreased by only 60 basis points to 32.1% despite the large sales drop, aided by cost savings and a reduction in lower-margin Equipment and Supplies sales[128] - The increase in net income was largely driven by a significant decrease in the income tax provision, as 2019 included a large tax expense related to expired nonqualified stock options[136] Liquidity and Capital Resources The company demonstrated strong liquidity management in 2020, increasing its cash to $55.0 million and generating $54.5 million in operating cash flow while reducing debt and capital expenditures Key Liquidity Metrics | Metric (In thousands) | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $54,950 | $29,425 | | Working capital | $32,500 | $20,008 | | Total debt obligations | $97,236 | $106,157 | - Cash flows from operations increased to $54.5 million in 2020 from $52.8 million in 2019, reflecting sustained profitability and active management of working capital[151][152] - Capital expenditures were significantly reduced to $6.4 million in 2020 from $12.9 million in 2019 as a cash preservation measure during the pandemic[153] - As of Dec 31, 2020, the company had $22.8 million available for borrowing under its revolving credit facility[160][164] Critical Accounting Policies Key accounting policies involve significant estimates for goodwill impairment, revenue recognition, leases, and income taxes, with no goodwill impairment found in 2020 - The annual goodwill impairment test as of September 30, 2020, indicated no impairment, with the fair values of the two reporting units with goodwill exceeding their carrying values by more than 100%[168][171] - Revenue is recognized when control transfers to the customer, which for most services like CDIM and AIM, occurs at the point of delivery of the physical or digital documents[175][176] - The company maintains a valuation allowance of $2.1 million against certain deferred tax assets as of December 31, 2020, for which realization is not more likely than not[181][262] Quantitative and Qualitative Disclosures About Market Risk This item is not applicable to the company - Not applicable[184] Financial Statements and Supplementary Data The company's audited consolidated financial statements and accompanying notes are included in Part IV, Item 15 of this Annual Report on Form 10-K - The full financial statements and supplementary data are filed as part of the report, beginning on page F-1[185] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[185] Controls and Procedures Management concluded that the company's disclosure controls, procedures, and internal control over financial reporting were effective as of December 31, 2020 - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[187] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2020, based on the COSO framework (2013)[188] - No changes in internal control over financial reporting occurred during the fourth quarter of 2020 that materially affected, or are reasonably likely to materially affect, internal controls[190] Other Information The company reports no other information for this item - None[190] Part III Directors, Compensation, Security Ownership, and Accountant Fees Information for Items 10-14 is incorporated by reference from the company's 2021 Proxy Statement, to be filed within 120 days of the fiscal year-end - Information regarding Directors, Executive Officers, and Corporate Governance (Item 10) is incorporated by reference from the 2021 Proxy Statement[192] - Information regarding Executive Compensation (Item 11) is incorporated by reference from the 2021 Proxy Statement[193] - Information regarding Security Ownership (Item 12), Certain Relationships (Item 13), and Principal Accountant Fees (Item 14) is incorporated by reference from the 2021 Proxy Statement[194][195][196] Part IV Exhibits, Financial Statement Schedules This section lists the consolidated financial statements and all exhibits filed with the report, including debt agreements, incentive plans, and Sarbanes-Oxley certifications - The filing includes the Consolidated Financial Statements and Notes to Consolidated Financial Statements[198] - A list of exhibits is provided, including the Sixth Amendment to the Credit Agreement (Exhibit 10.40) and various executive employment agreements and stock plans[201][204] - Certifications by the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act are filed as exhibits[205] Financial Statements and Notes The consolidated financial statements present ARC's financial position and results of operations, with key notes detailing goodwill, debt, leases, and income taxes Report of Independent Registered Public Accounting Firm The company's financial statements received unqualified audit opinions for 2020 and 2019, with Revenue Recognition and Goodwill Impairment identified as Critical Audit Matters for 2020 - Armanino LLP audited the 2020 financial statements and issued an unqualified opinion[225] - Deloitte & Touche LLP audited the 2019 financial statements and issued an unqualified opinion[220] - The 2020 audit identified two Critical Audit Matters (CAMs): Revenue Recognition and Goodwill Impairment, due to the complexity and judgment involved[229][230][233] Notes to Consolidated Financial Statements The notes detail significant revenue concentration in California, a goodwill balance of $121.1 million with no impairment, total debt of $97.2 million, and total lease liabilities of $88.0 million - Sales in California represented approximately 32% of total sales in 2020, and purchases from the three largest vendors comprised approximately 53% of total inventory and supplies purchases (Note 2)[256][257] - The carrying amount of goodwill was $121.1 million as of December 31, 2020, with no impairment recorded during the year (Note 3)[305][309] - Total lease liabilities were $88.0 million as of December 31, 2020, composed of $45.7 million for operating leases and $42.2 million for finance leases (Note 7)[330][332] - The company had federal net operating loss carryforwards of approximately $79.6 million as of December 31, 2020 (Note 8)[351]