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(Exact name of Registrant as specified in its Charter)
_______________________________________
iDelaware
i20-1700361
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i12657 Alcosta Blvd, Suite 200
iSan
Ramon
iCalifornia
i94583
(Address of principal executive offices)
(Zip
Code)
(i925) i949-5100
(Registrant's telephone number, including area code)
_______________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title
of each class
Trading Symbol(s)
Name of each exchange on which registered
iiCommon Stock, par value $0.001 per share/
iiARC/
iiThe
New York Stock Exchange/
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☒
No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☒ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
iAccelerated
filer
☒
Non-accelerated filer
☐
Smaller reporting company
i☒
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No i☒
The number of outstanding shares of the registrant's common stock, par value $0.001 per share, was i43,636,242
as of April 27, 2023.
In
this Quarterly Report on Form 10-Q, “ARC Document Solutions,”“ARC,”“the Company,”“we,”“us,” and “our” refer to ARC Document Solutions, Inc., a Delaware corporation, and its consolidated subsidiaries, unless the context otherwise dictates.
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact contained in this report are statements that could be deemed forward-looking
statements, including without limitation statements with respect to expectations regarding the impact of the future cash flows, and capital requirements, the impact of foreign exchange rate movements on sales and net income, and the Company's anticipated effective tax rate, and statements of assumptions underlying any of the foregoing. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
In some cases, you can identify forward-looking statements by terms such as “believe,”“expect,”“anticipate,”“estimate,”“intend,”“plan,”“project,”“target,”“likely,”“will,”“would,”“could,” and other similar language, whether in the negative or affirmative. The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations.
These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of risks, uncertainties and assumptions as described under the section titled "Part I - Item 1A. Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2022. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot
be predicted or quantified, you should not rely on these forward-looking statements as indicative of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Some of the key factors that could cause actual results to differ from our expectations are listed below:
•A significant portion of our revenue across all of our product and services is generated from customers in the architectural, engineering, construction and building owner/operator industry. Any decline in that industry could adversely affect our future revenue and profitability.
•Because a significant portion of our overall costs are fixed, our earnings are highly sensitive to changes in revenue.
•We
derive a significant percentage of net sales from within the State of California and our business could be disproportionately harmed by an economic downturn or natural disaster affecting California.
•Our growth strategy depends, in part, on our ability to successfully market and execute several different, but related, service offerings. Failure to do so could impede our future growth and adversely affect our competitive position.
•We are dependent upon our vendors to continue to supply us equipment, parts, supplies, and services at comparable terms and price levels as the business grows.
•Our failure to protect our customers’ confidential information against security breaches could damage our reputation, harm our business and adversely affect our results of operation.
•Our
failure to adequately protect the proprietary aspects of our technology solutions may cause us to lose market share.
•Our failure to comply with laws related to privacy and data security could adversely affect our financial condition.
•Our information technology and telecommunications systems are susceptible to damage, breach or interruption.
•Added risks are associated with our international operations.
•Our business could suffer if we fail to attract, retain, and successfully integrate skilled personnel.
•The market price of our common stock is volatile, and is impacted by factors other than our financial performance, which could
cause the value of an investment in our stock to decline.
•Changes in tax laws and interpretations could adversely affect our business.
4
•Our debt instruments impose certain restrictions on our ability to operate which in turn could negatively affect our ability to respond to business and market conditions and therefore could have an adverse effect on our business and results of operations.
•If the interest rates on our borrowings increase, our access to capital and net income could be adversely affected.
•We may be exposed to employment-related claims
and costs and periodic litigation that could adversely affect our business and results of operations.
Except where otherwise indicated, the statements made in this Quarterly Report on Form 10-Q are made as of the date we filed this report with the Securities and Exchange Commission and should not be relied upon as of any subsequent date. All future written and verbal forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Unless required by law, we undertake no obligation, to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You should, however, consult further disclosures we make in future filings of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, and any amendments
thereto, as well as our proxy statements.
TRADEMARKS AND TRADE NAMES
We own or have rights to a number of trademarks, service marks, and trade names that we use in conjunction with the operation of our business, including the name and design mark “ARC Document Solutions,”“ABACUS,”“METAPRINT,”“PlanWell,”“PlanWell PDS,”“Riot Creative Imaging,”“SKYSITE,” and various design marks associated therewith. In addition, we own or have rights to various trademarks, service marks, and trade names that we use regionally in conjunction with our operations. This report also includes trademarks, service marks and trade names of other companies.
The
accompanying notes are an integral part of these condensed consolidated financial statements.
9
ARC DOCUMENT SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three
Months Ended March 31,
(In thousands)
2023
2022
Cash flows from operating activities
Net income
$
i1,827
$
i1,856
Adjustments
to reconcile net income to net cash provided by operating activities:
Allowance for credit losses
i98
i72
Depreciation
i4,652
i5,394
Amortization
of intangible assets
i11
i35
Amortization
of deferred financing costs
i16
i15
Stock-based
compensation
i494
i451
Deferred
income taxes
i962
i735
Deferred
tax valuation allowance
i43
i8
Other
non-cash items, net
(i75)
(i50)
Changes
in operating assets and liabilities:
Accounts receivable
(i698)
(i1,390)
Inventory
(i583)
(i867)
Prepaid
expenses and other assets
i3,258
i3,213
Accounts
payable and accrued expenses
(i6,181)
(i6,541)
Net
cash provided by operating activities
i3,824
i2,931
Cash
flows from investing activities
Capital expenditures
(i2,255)
(i1,242)
Other
i92
i88
Net
cash used in investing activities
(i2,163)
(i1,154)
Cash
flows from financing activities
Proceeds from stock option exercises
i1,036
i288
Proceeds
from issuance of common stock under Employee Stock Purchase Plan
i29
i20
Share
repurchases
(i117)
(i281)
Payments
on finance leases
(i3,183)
(i4,033)
Borrowings
under revolving credit facilities
i42,000
i38,000
Payments
under revolving credit facilities
(i42,000)
(i39,250)
Dividends
paid
(i2,122)
(i2,108)
Net
cash used in financing activities
(i4,357)
(i7,364)
Effect
of foreign currency translation on cash balances
(i62)
i32
Net
change in cash and cash equivalents
(i2,758)
(i5,555)
Cash
and cash equivalents at beginning of period
i52,561
i55,929
Cash
and cash equivalents at end of period
$
i49,803
$
i50,374
Supplemental
disclosure of cash flow information
Noncash investing and financing activities
Finance lease obligations incurred
$
i1,485
$
i1,689
Operating
lease obligations incurred
$
i3,365
$
i1,147
The
accompanying notes are an integral part of these condensed consolidated financial statements.
10
ARC DOCUMENT SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data or where otherwise noted)
(Unaudited)
1. iDescription
of Business and Basis of Presentation
ARC Document Solutions, Inc. ("ARC Document Solutions,""ARC" or "the Company") is a digital printing company. ARC provides digital printing and document-related services to customers in a growing variety of industries. ARC offers Digital Printing services, Managed Print Services ("MPS"), and Scanning and Digital Imaging services. In addition, ARC also sells Equipment and Supplies. The Company conducts its operations through its wholly-owned operating subsidiary, ARC Document Solutions, LLC, a Texas limited liability company, and its affiliates.
i
Basis
of Presentation
The accompanying interim Condensed Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in conformity with the requirements of the U.S. Securities and Exchange Commission ("SEC"). As permitted under those rules, certain footnotes or other financial information required by GAAP for complete financial statements have been condensed or omitted. In management’s opinion, the accompanying interim Condensed Consolidated Financial Statements reflect all adjustments of a normal and recurring nature that are necessary to fairly present the interim Condensed Consolidated Financial Statements. All intercompany accounts and transactions have been eliminated in consolidation. The operating results for the three months ended March 31,
2023, are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the interim Condensed Consolidated Financial Statements and accompanying notes. The Company evaluates its estimates and assumptions on an ongoing basis and relies on historical experience and various other factors that it believes to be reasonable under the circumstances to determine such estimates. Actual results could differ from those estimates and such differences may be material to the interim Condensed Consolidated Financial Statements.
These interim Condensed Consolidated Financial
Statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
iNoncontrolling Interest
The Company accounted
for its investment in UNIS Document Solutions Co. Ltd. ("UDS"), under the purchase method of accounting, in accordance with Accounting Standards Codification ("ASC") 805, Business Combinations. UDS has been consolidated in the Company's financial statements from the date of acquisition. Noncontrolling interest, which represents the i35% noncontrolling interest in UDS owned by the joint venture ("JV")
partner, is reflected on the Company's Condensed Consolidated Financial Statements.
iRevenue Recognition
Revenue is recognized when control of the promised goods or services is transferred to ARC's customers, in an amount that reflects the consideration it expects to be entitled to in exchange for those goods or services. iNet
sales of the Company’s principal services and products were as follows:
(1)
MPS includes $i17.5 million of rental income and $i1.5 million of service income for the three months ended March 31, 2023. MPS includes $i17.2
million of rental income and $i1.5 million of service income for the three months ended March 31, 2022.
Digital Printing consists of professional services and software services to (i) reproduce and distribute large-format and small-format documents in either black and white or color (“Ordered Prints”) and (ii) specialized graphic color printing. Substantially all of the Company’s revenue from Digital Printing comes from
professional services to reproduce Ordered Prints. Sales of Ordered Prints are initiated through a customer order or quote and are governed by established terms and conditions agreed upon at the onset of the customer relationship. Revenue is recognized when the performance obligation under the terms of a contract with a customer are satisfied, which generally occurs with the transfer of control of the Ordered Prints. Transfer of control occurs at a specific point in time, when the Ordered Prints are delivered to the customer’s site or handed to the customer for walk-in orders. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. Taxes collected concurrent with revenue-producing activities are excluded from
revenue.
MPS consists of placement, management, and optimization of print and imaging equipment in customers' offices, job sites, and other facilities. MPS relieves the Company’s customers of the burden of purchasing print equipment and related supplies and maintaining print devices and print networks, and it shifts their costs to a “per-use” basis. MPS is supported by the Company's hosted proprietary technology, Abacus®, which allows customers to capture, control, manage, print, and account for their documents. Under its MPS contracts, the
Company is paid a fixed rate per unit for each print produced (per-use), often referred to as a “click charge”. MPS sales are driven by the ongoing print needs of the Company’s customers at their facilities. Upon the issuance of ASC 842, Leases, the Company concluded that certain of its MPS arrangements, which had previously been accounted for as service revenue under ASC 606, Revenue from Contracts with Customers, are accounted for as operating leases under ASC 842.
Scanning and Digital Imaging combines software and professional services to facilitate the capture,
management, access and retrieval of documents and information that have been produced in the past. Scanning and Digital Imaging includes the Company's hosted SKYSITE ® software and ARC Facilities solution to organize, search and retrieve documents, as well as the provision of services that include the capture and conversion of hardcopy and electronic documents into digital files (“Scanned Documents”), and their cloud-based storage and maintenance. Sales of Scanning and Digital Imaging professional services, which represent substantially all revenue for the business line, are initiated through a customer order or proposal and are governed by established terms and conditions agreed upon at the onset of the customer relationship. Revenue is recognized when the performance obligation under the terms of a contract
with a customer are satisfied; generally, this occurs with the transfer of control of the digital files. Transfer of control occurs at a specific point-in-time, when the Scanned Documents are delivered to the customer either through SKYSITE, ARC Facilities, or through other electronic media. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. Taxes collected concurrent with revenue-producing activities are excluded from revenue.
Equipment and Supplies sales consist of reselling printing, imaging, and related equipment (“Goods”) to customers primarily in architectural, engineering and construction firms. Sales of Equipment and Supplies are initiated through a customer order and are governed by established terms and conditions agreed upon at the
onset of the customer relationship. Revenue is recognized when the performance obligations under the terms of a contract with a customer are satisfied; generally, this occurs with the transfer of control of the Goods. Transfer of control occurs at a specific point-in-time, when the Goods are delivered to the customer’s site. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. Taxes collected concurrent with revenue-producing activities are excluded from revenue. The Company has experienced minimal customer returns or refunds and does not offer a warranty on equipment that it is reselling.
12
i
Recently
Adopted Accounting Pronouncements
In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments - Credit Loss (Topic 326) (“ASU 2016-13”), which updates the guidance on recognition and measurement of credit losses for financial assets. The new requirements, known as the current expected credit loss model ("CECL") will require entities to adopt an impairment model based on expected losses rather than incurred losses. ASU 2016-13 must be adopted on a modified-retrospective approach. This update was effective for fiscal years beginning after December 15, 2020 including interim periods within those fiscal years. In October 2019, the FASB approved an extension for all non-SEC filers, including small reporting companies, to extend the effective date to fiscal years beginning after December
15, 2022, including interim periods within those fiscal years. Therefore, the effective date for this update will be January 1, 2023. The implementation of CECL did not have a material impact on the Company's consolidated statements of financial condition and results of operations.
i
Segment Reporting
The provisions of ASC 280, Segment Reporting, require
public companies to report financial and descriptive information about their reportable operating segments. The Company identifies operating segments based on the various business activities that earn revenue and incur expense and whose operating results are reviewed by the Company's Chief Executive Officer, who is the Company's chief operating decision maker. Because its operating segments have similar products and services, classes of customers, production processes, distribution methods and economic characteristics, the Company operates as a single reportable segment.
i
Risk
and Uncertainties
The Company generates a significant portion of its revenue from sales of services and products to customers in the architectural, engineering, construction and building owner/operator ("AEC/O") industry. As a result, the Company's results largely depend on the strength of that industry. The Company's historical operating results reflect the cyclical and variable nature of the AEC/O industry. ARC believes that the AEC/O industry generally experiences downturns several months after a downturn in the general economy, and that there may be a similar delay in the recovery of the AEC/O industry following a recovery of the general economy. A downturn
in the AEC/O industry would diminish demand for all of the Company's products and services, and would therefore negatively affect the Company's revenues and have a material adverse effect on the Company's business, operating results and financial condition.
As part of the Company’s growth strategy, ARC intends to continue to offer and grow a variety of service offerings that are relatively new to the company. The success of the
Company's efforts will be affected by its ability to acquire new customers for the Company's new service offerings as well as sell the new service offerings to existing customers. The Company’s inability to successfully market and execute these relatively new service offerings could significantly affect its business and reduce its long term revenue, resulting in an adverse effect on its results of operations and financial condition.
2. iEarnings
per Share
iThe Company accounts for earnings per share in accordance with ASC 260, Earnings Per Share. Basic earnings per share is computed by dividing net income attributable to ARC by the weighted-average number of shares of common stock outstanding for the period. Diluted earnings per common share is computed similarly to basic earnings per share except that the denominator is increased to include
the number of additional shares of common stock that would have been outstanding if shares subject to outstanding options and acquisition rights had been issued and if the additional shares were dilutive. Common share equivalents are excluded from the computation if their effect is anti-dilutive. For the three months ended March 31, 2023, i3.8 million shares of common stock, were excluded from the calculation of diluted
net income attributable to ARC per common share, because they were anti-dilutive. For the three months ended March 31, 2022, i2.8 million shares of common stock were excluded from the calculation of diluted net income attributable to ARC per common share, because they were anti-dilutive. The Company's common share equivalents consist
of stock options issued under the Company's equity incentive plan.
iBasic and diluted weighted average common shares outstanding were calculated as follows for the three months ended March 31, 2023 and 2022:
Weighted average common shares outstanding during the period—basic
i42,552
i42,064
Effect
of dilutive stock awards
i1,212
i1,675
Weighted
average common shares outstanding during the period—diluted
i43,764
i43,739
3.
iGoodwill and Other Intangibles
i
Goodwill
In accordance with
ASC 350, Intangibles - Goodwill and Other, the Company assesses goodwill for impairment annually as of September 30, and more frequently if events and circumstances indicate that goodwill might be impaired. At September 30, 2022, the Company performed its annual assessment and determined that goodwill was inot impaired.
Goodwill
impairment testing is performed at the reporting unit level. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support the value of the goodwill. In 2017, the Company elected to early-adopt ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies subsequent goodwill measurement by eliminating step two from the goodwill impairment test.
/
There
can be no assurance that the estimates and assumptions made for purposes of the Company’s goodwill impairment analysis in 2022 will prove to be accurate predictions of the future. If the Company’s assumptions, including forecasted EBITDA of certain reporting units, are not achieved, or its assumptions regarding disruptions caused by the pandemic, and its impact on the recovery from COVID-19 change, then the Company may be required to record goodwill impairment charges in future periods, whether in connection with the next annual impairment testing in the third quarter of 2023, or on an interim basis, if any such change constitutes a triggering event (as defined under ASC 350, Intangibles-Goodwill
and Other) outside of the quarter when the Company regularly performs its annual goodwill impairment test. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such charge would be material. There was ino change in the carrying amount of goodwill from January 1, 2022 through March 31, 2023.
See
“Critical Accounting Policies and Significant Judgements and Estimates" in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2022 for further information regarding the process and assumptions used in the goodwill impairment analysis.
i
Long-lived and Other Intangible Assets
The
Company periodically assesses potential impairments of its long-lived assets in accordance with the provisions of ASC 360, Accounting for the Impairment or Disposal of Long-lived Assets. An impairment review is performed whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. The Company groups its assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of the other assets and liabilities. The Company has determined that the lowest level for which identifiable cash flows are available is the regional level, which is the operating segment level.
Factors considered by the
Company include, but are not limited to, significant underperformance relative to historical or projected operating results; significant changes in the manner of use of the acquired assets or the strategy for the overall business; and significant negative industry or economic trends. When the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of the above indicators of impairment, the Company estimates the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future undiscounted cash flows and eventual disposition is less than the carrying amount of the asset, the Company recognizes an impairment loss. An impairment loss is reflected as the amount by which the carrying
amount of the asset exceeds the fair value of the asset, based on the fair value if available, or discounted cash flows, if fair value is not available. The Company assessed potential impairments of its long-lived assets as of September 30, 2022 and concluded that there was ino impairment.
iOther
intangible assets that have finite lives are amortized over their useful lives. Customer relationships are amortized using the accelerated method, based on customer attrition rates, over their estimated useful lives of i13 (weighted average) years./
14
i
The
following table sets forth the Company’s other intangible assets resulting from business acquisitions as of March 31, 2023 and December 31, 2022 which continue to be amortized:
Estimated
future amortization expense of other intangible assets for the remainder of the 2023 fiscal year, and each of the subsequent four fiscal years and thereafter, are as follows:
On a quarterly basis, the Company estimates its effective tax rate for the full fiscal year and records a quarterly income tax provision based on the anticipated annual effective rate and the recognition of any discrete items within the quarter.
The Company recorded an income tax provision of $i1.2
million in relation to pretax income of $i3.0 million, for the three months ended March 31, 2023, which resulted in an effective income tax rate of i38.8%,
primarily impacted by state taxes, non-deductible compensation, certain stock-based compensation and other non-deductible expenses. The Company recorded an income tax provision of $i0.8 million in relation to pretax income of $i2.7
million, for the three months ended March 31, 2022, which resulted in an effective income tax rate of i30.1%, primarily impacted by state taxes, certain stock-based compensation, changes in valuation allowances against certain deferred tax assets and non-deductible expenses.
In accordance with ASC 740-10, Income Taxes, the Company evaluates
the need for deferred tax asset valuation allowances based on a more likely than not standard. The ability to realize deferred tax assets depends on the ability to generate sufficient taxable income within the carryback or carryforward periods provided for in the tax law for each applicable tax jurisdiction. The Company considers the following possible sources of taxable income when assessing the realization of deferred tax assets:
•Future reversals of existing taxable temporary differences;
•Future taxable income exclusive of reversing temporary differences and carryforwards;
•Taxable income in prior carryback years; and
•Tax-planning
strategies.
The assessment regarding whether a valuation allowance is required or should be adjusted also considers all available positive and negative evidence factors, including but not limited to:
•Nature, frequency, and severity of recent losses;
•Duration of statutory carryforward periods;
•Historical experience with tax attributes expiring unused; and
•Near- and medium-term financial outlook.
15
The
Company utilizes a rolling three years of actual and current year anticipated results as the primary measure of cumulative income/losses in recent years, as adjusted for permanent differences. The evaluation of deferred tax assets requires judgment in assessing the likely future tax consequences of events that have been recognized in the Company's financial statements or tax returns and future profitability. The Company's accounting for deferred tax consequences represents its best estimate of those future events. Changes in the Company's current estimates, due to unanticipated events, such as the ultimate financial impact of and recovery from the COVID-19 pandemic or otherwise, could have a material effect
on its financial condition and results of operations. The Company has a $i2.7 million valuation allowance against certain deferred tax assets as of March 31, 2023.
Based on the Company’s current assessment, the remaining net deferred tax assets as of March 31,
2023 are considered more likely than not to be realized. The valuation allowance of $i2.7 million may be increased or reduced as conditions change or if the Company is unable to implement certain available tax planning strategies. The realization of the Company’s net deferred tax assets ultimately depends on future taxable income, reversals of existing taxable temporary differences
or through a loss carry back.
Various
finance leases; weighted average interest rate of i5.3% and i5.1%at
March 31, 2023 and December 31, 2022, respectively; principal and interest payable monthly through March 2028
i24,775
i26,474
i64,775
i66,474
Less
current portion
(i10,615)
(i11,558)
$
i54,160
$
i54,916
/
Credit
Agreement
On April 22, 2021, the Company entered into a Credit Agreement with U.S. Bank National Association, as administrative agent and the lender party thereto (the "2021 Credit Agreement"). The 2021 Credit Agreement provides for the extension of revolving loans in an aggregate principal amount not to exceed $i70 million and replaces the Credit
Agreement dated as of November 20, 2014, as amended (the "2014 Credit Agreement"). The 2021 Credit Agreement features terms similar to the 2014 Credit Agreement, including the ability to use excess cash of up to $i15 million per year for restricted payments such as share repurchases and dividends. The obligation under the 2021 Credit Agreement matures on April 22, 2026.
As of March 31,
2023, the Company's borrowing availability under the revolving loan commitment was $i27.8 million, after deducting outstanding letters of credit of $i2.2 million
and outstanding revolving loans of $i40.0 million.
Loans borrowed under the 2021 Credit Agreement bear interest, in the case of LIBOR loans, at a per annum rate equal to the applicable LIBOR (which rate shall not be less than zero), plus a margin ranging from i1.25%
to i1.75%, based on the Company’s Total Leverage Ratio (as defined in the 2021 Credit Agreement). Loans borrowed under the 2021 Credit Agreement that are not LIBOR loans bear interest at a per annum rate (which rate shall not be less than zero) equal to (i) the greatest of (A) the Federal Funds Rate plus i0.50%,
(B) the one month LIBOR rate plus i1.00%, per annum, and (C) the rate of interest announced, from time to time, by U.S. Bank National Association as its “prime rate,” plus (ii) a margin ranging from i0.25%
to i0.75%, based on the Company’s Total Leverage Ratio. As of March 31, 2023, LIBOR loans borrowed under the 2021 Credit Agreement accrued interest at i6.2%.
The
Company pays certain recurring fees with respect to the 2021 Credit Agreement, including administration fees to the administrative agent.
Subject to certain exceptions, including, in certain circumstances, reinvestment rights, the loans extended under the Credit Agreement are subject to customary mandatory prepayment provisions with respect to: the net proceeds from certain asset sales; the net proceeds from certain issuances or incurrences of debt (other than debt permitted to be incurred under the terms of the 2021 Credit Agreement); the net proceeds from certain issuances of equity securities; and net proceeds of certain insurance recoveries and condemnation events of the Company.
16
The
2021 Credit Agreement contains customary representations and warranties, subject to limitations and exceptions, and customary covenants restricting the ability (subject to various exceptions) of the Company and its subsidiaries to: incur additional indebtedness (including guarantee obligations); incur liens; sell certain property or assets; engage in mergers or other fundamental changes; consummate acquisitions; make investments; make certain distributions or repurchase equity interest of the Company or its subsidiaries; change the nature of their business; prepay or amend certain indebtedness; engage in certain transactions
with affiliates; amend their organizational documents; or enter into certain restrictive agreements. In addition, the 2021 Credit Agreement contains financial covenants which requires the Company to maintain (i) at all times, a Total Leverage Ratio in an amount not to exceed i2.75 to 1.00; and (ii) a Fixed Charge Coverage Ratio (as defined in the 2021 Credit Agreement), as of the last day of each fiscal quarter, an amount not less than i1.15
to 1.00. ARC was in compliance with its covenants as of March 31, 2023.
The 2021 Credit Agreement also includes certain tests the Company is required to meet in order to pay dividends, repurchase stock and make other restricted payments. In order to make such payments which are permitted subject to certain customary conditions set forth in the 2021 Credit Agreement, the amount of all such payments will be limited to $i15 million
during any itwelve-month period. When calculating the fixed charge coverage ratio, the Company may exclude up to $i10 million
of such restricted payments that would otherwise constitute fixed charges in any itwelve-month period.
The 2021 Credit Agreement allows for payment of dividends. In February 2023, the Company's board of directors declared a quarterly cash dividend of $i0.05
per share that is payable on May 31, 2023 to shareholders of record as of April 28, 2023. Accordingly, the Company recorded a dividend payable of $i2.1 million within accrued expenses as of March 31, 2023.
The 2021 Credit Agreement contains customary events of default, including with respect to: nonpayment
of principal, interest, fees or other amounts; failure to perform or observe covenants; material inaccuracy of a representation or warranty when made; cross-default to other material indebtedness; bankruptcy, insolvency and dissolution events; inability to pay debts; monetary judgment defaults; actual or asserted invalidity or impairment of any definitive loan documentation, repudiation of guaranties or subordination terms; certain ERISA related events; or a change of control.
The obligations of the Company’s subsidiary that is the borrower under the 2021 Credit Agreement are guaranteed by the Company and each of the Company's other United States subsidiaries.
The 2021 Credit Agreement and any interest rate protection and other hedging arrangements provided by any lender party to the credit facility or any affiliate of such a lender are secured on a first priority basis by a perfected security interest in substantially all of the borrower’s, the Company’s and each guarantor’s assets (subject to certain exceptions).
17
6. iCommitments
and Contingencies
Operating Leases.The Company leases machinery, equipment, and office and operational facilities under non-cancelable operating lease agreements used in the ordinary course of business. Certain lease agreements for the Company's facilities generally contain renewal options and provide for annual increases in rent based on the local Consumer Price Index. Refer to Note 7, Leasing, on the Company's Annual Report on Form 10-K for the year ended December 31, 2022 for a schedule of the
Company's future minimum operating lease payments.
Legal Proceedings.The Company is involved, and will continue to be involved, in legal proceedings arising out of the conduct of the Company's business, including commercial and employment-related lawsuits. Some of these lawsuits purport or may be determined to be class actions and seek substantial damages, and some may remain unresolved for several years. The Company establishes accruals for specific legal proceedings when it is considered probable that a loss has been incurred and the amount of the loss can be reasonably estimated. The
Company's evaluation of whether a loss is reasonably probable is based on the Company's assessment and consultation with legal counsel regarding the ultimate outcome of the matter. As of March 31, 2023, the Company has accrued for the potential impact of loss contingencies that are probable and reasonably estimable. The Company does not currently believe that the ultimate resolution of any of these matters will have a material adverse effect on its results of operations, financial condition, or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material
adverse effect on the Company's results of operations, financial condition, or cash flows.
Environmental Matters.The Company has accrued liabilities for environmental assessment and remediation matters relating to operations at certain locations conducted in the past by predecessor companies that do not relate to ARC's current operations. The Company has accrued these liabilities because it is probable that a loss or cost will be incurred and the amount of loss or cost can be reasonably estimated. These estimates could change as a result of changes in planned remedial actions, remediation technologies, site conditions, the estimated time to complete
remediation, environmental laws and regulations, and other factors. Because of the uncertainties associated with environmental assessment and remediation activities, the Company's future expenses relating to these matters could be higher than the liabilities it has accrued. Based upon current information, the Company believes that the impact of the resolution of these matters would not be, individually or in the aggregate, material to its financial position, results of operations or cash flows.
7. iStock-Based
Compensation
On April 29, 2021, the Company's shareholders approved the Company's 2021 Incentive Plan, replacing the 2014 Stock Incentive Plan, as amended, which is the only equity incentive plan under which the Company can currently grant equity incentive awards. The 2021 Incentive Plan provides for the grant of incentive and non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units, stock bonuses and other forms of awards granted or denominated in the Company's common stock or units of
the Company's common stock, as well as cash bonus awards, to employees, directors and consultants of the Company. The Company is authorized to issue up to i3.5 million shares plus such additional
number of shares of common stock (up to i6,132,593 shares) as is equal to the number of shares of common stock subject to awards granted under the 2014 Incentive Plan and the Company's 2005 Stock Plan, which awards expire, terminate or are otherwise surrendered, cancelled, forfeited or repurchased by the
Company pursuant to a contractual repurchase right. As of March 31, 2023, i0.2 million shares remained available for issuance under the 2021 Incentive Plan. On April 26, 2023, the Company's shareholders approved an amendment to the 2021 Plan
to increase the aggregate number of equity incentive shares authorized for issuance by i5,000,000 shares of common stock.
Stock options granted under the Company's stock plan generally expire no later than iten
years from the date of grant. Options generally vest and become fully exercisable over a period of three to ifour years from date of award, except that options granted to non-employee directors may vest over a shorter time period. The exercise price of options is equal to at least i100%
of the fair market value of the Company’s common stock on the date of grant. The Company allows for cashless exercises of vested outstanding options.
During the three months ended March 31, 2023, the Company granted options to acquire a total of i1.1
million shares of the Company's common stock to certain key employees with an exercise price equal to the fair market value of the Company’s common stock on the date of grant. These stock options vest annually over ithree years to ifour
years from the grant date and expire i10 years after the date of grant. During the three months ended March 31, 2023, the Company granted i0.1
million shares of restricted stock awards to certain key employees with a deemed issuance price per share equal to the closing price of the Company's common stock on the date the restricted stock was granted. These restricted stock awards vest annually over ithree years from the grant date.
Stock-based compensation expense was $ii0.5/
million for the three months ended March 31, 2023 and March 31, 2022.
18
As of March 31, 2023, total unrecognized compensation cost related to unvested stock-based payments totaled $i3.9
million and is expected to be recognized over a weighted-average period of approximately i2.3 years.
8. iiFair
Value Measurements/
In accordance with ASC 820, Fair Value Measurement, the Company has categorized its assets and liabilities that are measured at fair value into a three-level fair value hierarchy. If the inputs used to measure fair value fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement. The three levels of the hierarchy are defined as follows:
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level
2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.
As of March 31, 2023, the Company's assets and liabilities that are measured at fair value were not material.
Fair Values of Financial Instruments.The following methods and assumptions were used by the Company
in estimating the fair value of its financial instruments for disclosure purposes:
Cash equivalents: Cash equivalents are time deposits with a maturity of three months or less when purchased, which are highly liquid and readily convertible to cash. Cash equivalents reported in the Company’s interim Condensed Consolidated Balance Sheet were $i1.6 million as of March 31,
2023 and $i1.7 million as of December 31, 2022 and are carried at cost and approximate fair value due to the relatively short period to maturity of these instruments.
Short and long-term debt: The carrying amount of the Company’s finance leases reported in the interim Condensed Consolidated Balance Sheets approximates fair value based on
the Company’s current incremental borrowing rate for similar types of borrowing arrangements. The carrying amount reported in the Company’s interim Condensed Consolidated Balance Sheet as of March 31, 2023 for borrowings under its 2021 Credit Agreement is $i40.0 million. The
Company has determined, utilizing observable market quotes, that the fair value of borrowings under its 2021 Credit Agreement is $i40.0 million as of March 31, 2023.
19
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our interim Condensed Consolidated Financial Statements and the related notes and other financial information appearing elsewhere in this report, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2022 and this Quarterly Report on Form 10-Q for the quarter ended March 31, 2023.
Business Summary
ARC Document Solutions Inc. is a digital printing company. We provide digital printing and document-related services to customers in a growing variety of industries. Our primary services and product offering
are:
•digital printing of general and specialized business documents such as those found in marketing and advertising, engineering and construction and other industries, as well as producing highly-customized display graphics of all types and sizes;
•acquiring, placing and managing ARC-certified office printing equipment with proprietary device tracking and print management software at our customers’ offices and job sites;
•scanning documents, indexing them and adding digital search features for use in digital document management, document archives and facilities management, as well as providing other digital imaging services; and,
•reselling digital printing equipment and supplies.
Each
of these services frequently include additional logistics services in the form of distributing and delivering finished documents, installing display graphics, or the digital storage of graphic files.
We have categorized our service and product offerings to report distinct sales recognized from:
Digital Printing: We print documents of any size in color and black and white on a variety of materials including plain paper, vinyl, fabric, metal, wood and other three-dimensional substrates. While we can and do print high-page count work such as manuals or catalogs, the documents we typically produce are usually characterized by their high-quality production, low-volume and quick turnaround, and are produced using highly-sophisticated digital printing equipment.
Managed Print Services: We
acquire and manage digital printing equipment and place it in our customers' facilities for their use, based on a service level agreement. We lease or own the equipment ourselves, while our customers pay for what they use. Per-use minimum charges are often part of our service agreements. We operate more than 10,500 managed print services, or MPS locations, ranging in size from one or two pieces of equipment in a single office, to hundreds of pieces of equipment in offices around the world. We also provide proprietary software to our customers to control their print expenses and connect their remote employees with their offices and ARC print centers nationwide. This software is developed and integrated by ARC.
Scanning and Digital Imaging: We scan hard-copy small format or large format documents in color or black and white, typically providing them to our customers as searchable PDF files. We also use
our patented optical character recognition technology to make documents searchable, and we host them on proprietary applications for use as part of our ARC Facilities solutions. The types of documents that we scan include office files, construction plans and other small or large documents. We also process, distribute and print-on-demand images we capture for our customers. Our large, centralized Scanning and Digital Imaging centers are compliant with the Health Insurability Portability and Accountability Act of 1996, or HIPAA, so we can convert documents that include protected health information. Our unique software creates efficient search tags on scanned data for easy search and retrieval. We offer Cloud-based document management software and other digital hosting services to our customers or make files available for our customers to host themselves.
Equipment and Supplies Sales: We sell equipment
and supplies to a small segment of our customer base. We also provide ancillary services such as equipment service and maintenance, often as a way to generate recurring revenue in addition to a one-time sale. In addition, we offer certified used equipment available for sale or for use in our MPS offering.
The majority of our products and services are available from each of our service centers. Our primary operational objective is to optimize our business performance by driving as much customer work through our service center network as is practical, and leveraging our production infrastructure, workforce, and production-grade equipment. All our production centers are digitally connected and we operate standard software and systems to support seamless movement of customers digital data and print anywhere within the ARC system.
20
In
addition, we can provide many of our services in our customers’ offices. Our geographic presence is concentrated in the U.S., with additional service centers in Canada, the United Arab Emirates (UAE), China, India, and the United Kingdom. Our origin as a company was in California, and the initial expansion of our business was concentrated there. We derive approximately 31% of our total revenue from the products and services delivered in California.
All of our production facilities are connected via a Software-Defined Wide Area Network (SD-WAN). Our cloud offerings are hosted by Amazon Web Services. We employ a combination of proprietary and industry-leading technologies to provide redundancy, backup and security of all data in our systems. All of our technology operations are designed to meet ISO 29001 standards for data security, and several
of our service centers are HIPAA-compliant allowing us to manage document conversions and other scanning tasks involving protected health information, or PHI.
Costs and Expenses
Our cost of sales consists primarily of materials (paper, toner and other consumables), labor, and “indirect costs.” Indirect costs consist primarily of equipment expenses related to our MPS locations (typically our customers’ offices and job sites) and our service centers. Facilities and equipment expenses include maintenance, repairs, rents, insurance, and depreciation. Paper is the largest component of our material cost; however, the impact of paper pricing on our operating margins is mitigated, and in some cases eliminated, as it is often passed on to our customers. We closely monitor material cost as a percentage of net sales to measure volume and waste, and we maintain
low levels of inventory. We also track labor utilization, or net sales per employee, to measure productivity and determine staffing levels.
The effects of the 2022 global supply chain disruptions have eased in 2023. The supply chain disruptions for us were primarily confined to price increases. As noted above, price increases are often passed on to our customers. Labor costs have increased moderately to retain valuable employees or to compete for new hires. While these increases had an effect, we believe our cost optimization program will continue to make them manageable in the future.
Historically, our capital expenditure requirements have varied based on our need for printing equipment in our MPS locations and service centers. Over the past two years, the pandemic has reduced the number of employees in our customers’ locations, which has,
in turn, reduced the need for equipment. We believe this equipment trend is likely to become permanent and, as a result, we think the past two years are more indicative of future capital needs than historical trends.
Because our relationships with credit providers allows us to obtain attractive lease rates, we have historically chosen to lease rather than purchase most of our equipment over the past two years. With the rising cost of capital, in 2023 we have decided to adjust our historical strategy and use more of our available cash to acquire equipment and minimize the impact of interest expense on our results of operations.
Research and development costs consist mainly of the salaries, leased building space, and computer equipment related to our data storage and development centers in San Ramon, California
and Kolkata, India. Such costs are primarily recorded to cost of sales.
21
COVID-19 Pandemic
The COVID-19 pandemic adversely impacted our financial performance during 2020 to 2022, but we expect that its acute impact is mostly behind us. We believe, however, that the reduced office presence of employees brought on by the COVID-19 pandemic will be permanent. As a result, our MPS business remains under pressure as most employers have left work-from-home policies in place. We expect that remote work and hybrid work arrangements will remain the norm for many of our customers, but print volumes may increase marginally
as they did in the first quarter of 2023 as some employers bring their employees back into the office at higher rates than we saw in 2022. We believe work-from-home and hybrid work practices benefit our scanning business as employees need access to documents, regardless of where they are working, and document scanning is the first step in making them accessible in the cloud.
Uncertainty around the potential disruption to our business related to the COVID-19 pandemic and its effect on the U.S. economy and our clients’ ongoing business operations has largely been mitigated, but we remain watchful and prepared to alter our business operations to protect employees and customers. The following discussions are subject to the future effects of the COVID-19 pandemic on our ongoing business operations.
22
Results
of Operations
Three Months Ended March 31,
Increase (decrease)
(In
millions, except percentages)
2023(1)
2022(1)
$
%
Digital Printing
$
41.4
$
41.9
$
(0.6)
(1.4)
%
MPS
19.0
18.7
0.4
1.9
%
Scanning
and Digital Imaging
4.6
4.2
0.4
10.2
%
Equipment
and supplies sales
3.9
4.7
(0.8)
(16.7)
%
Total net sales
$
68.9
$
69.5
$
(0.6)
(0.8)
%
Gross
profit
$
22.9
$
22.4
$
0.5
2.1
%
Selling, general and administrative expenses
$
19.5
$
19.4
$
0.1
0.7
%
Amortization
of intangible assets
$
—
$
—
$
—
(68.6)
%
Interest
expense, net
$
0.5
$
0.4
$
—
6.0
%
Income tax provision
$
1.2
$
0.8
$
0.4
45.4
%
Net
income attributable to ARC
$
1.9
$
2.0
$
—
(1.6)
%
Non-GAAP (2)
Adjusted
net income attributable to ARC (2)
$
2.2
$
2.0
$
0.2
9.9
%
EBITDA (2)
$
8.2
$
8.6
$
(0.4)
(4.8)
%
Adjusted
EBITDA (2)
$
8.7
$
9.1
$
(0.4)
(4.0)
%
1.Column does not foot due to rounding.
2.See
"Non-GAAP Financial Measures" following "Results of Operations" for definitions, reconciliations and more information related to our Non-GAAP disclosures.
The following table provides information on the percentages of certain items of selected financial data as a percentage of net sales for the periods indicated:
(2)See "Non-GAAP Financial Measures" following "Results of Operations" for definitions, reconciliations and more information related to our Non-GAAP disclosures.
Net sales for the three months ended March 31, 2023, decreased 0.8% compared to the same period in 2022. The decrease in net sales for the first quarter 2023 was primarily driven
by a decrease in our lower margin Equipment & Supplies sales and a decrease in our Digital Printing services, partially offset by the year-over-year increase in sales from MPS and Scanning and Digital Imaging services.
Digital Printing. Year-over-year sales of Digital Printing services decreased $0.6 million, or 1.4%, for the three months ended March 31, 2023. Year-over-year sales increased in digital color graphic printing from new and existing customers and we experienced continuing demand for digital color graphic printing across most of our customer base. This growth was offset by the decrease in digital plan printing sales which we attribute to less activity and lower spending on new construction projects due to increased costs of capital. Digital Printing services represented 60% of total net sales for the three months
ended March 31, 2023 and March 31, 2022.
MPS. Year-over-year sales of MPS services for the three months ended March 31, 2023, increased $0.4 million, or 1.9%. Growth in MPS sales reflects an increase of on-site printing volume as moderation of work-from-home directives encouraged more employees to return to offices during the period.
MPS sales represented approximately 28% of total net sales for the three months ended March 31, 2023, compared to 27% for the three months ended March 31, 2022.
The number of MPS locations has remained relatively flat
year-over-year at approximately 10,700 as of March 31, 2023.
Scanning and Digital Imaging. Year-over-year sales of Scanning and Digital Imaging services increased $0.4 million, or 10.2% for the three months ended March 31, 2023. The increase in sales of our Scanning and Digital Imaging services was primarily attributable to growing demand for paper-to-digital document conversions used in day-to-day business operations, and the creation of digital archives to replace long-term warehoused paper document storage. We continue to drive an expansion of our addressable market for Scanning and Digital Imaging services with increased marketing activity, as well as targeting building owners and facility managers that require on-demand access to their legacy documents to operate their assets
efficiently. We believe that, with the expansion of the markets and industries we serve and the desire of our existing customers to have digital access to documents, our Scanning and Digital Imaging services will continue to grow in the future.
Equipment and Supplies Sales. Year-over-year sales of Equipment and Supplies decreased $0.8 million, or 16.7%, for the three months ended March 31, 2023 driven mostly by a year-over-year sales drop of $0.5 million from our Chinese joint venture as the Chinese economy continues to be challenged.
Gross Profit
During the three months ended March 31, 2023, gross profit increased to $22.9 million, or 33.3%, compared to $22.4 million, or 32.3% during the three
months ended March 31, 2022, primarily driven by the efficiency in our cost structure and the reduction in depreciation expense of $0.7 million.
Gross margin improvement was largely driven by our efforts to drive more work through our service centers which allows us to leverage our infrastructure (facilities & equipment), cross-trained workforce, and production-grade equipment, as well as improved production efficiencies in 2023. The improvements were partially offset by an increase in labor resulting from the inflationary pressures experienced during the last twelve months.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $0.1 million, or 0.7%, to $19.5 million for the three months ended March 31,
2023 compared to the three months ended March 31, 2022, which is consistent compared to the same period in 2022 despite the increase in labor costs.
Amortization of Intangibles
Amortization of intangibles decreased to less than $0.1 million for the three months ended March 31, 2023, due to the completed amortization of certain customer relationship intangibles related to historical acquisitions.
24
Interest Expense, Net
Net interest expense of $0.5 million for the three months ended March 31,
2023, increased $0.1 million, compared to $0.4 million for the three months ended March 31, 2022. The slight increase is due to the increase in interest rates partially offset by the continued pay down of our long-term debt. Our 2021 Credit Agreement (as defined below) features a flexible payment schedule which allows us to pay down or draw on it at any time. As such, we intend to use available cash throughout the year to pay down the revolving loan to manage our interest expense.
Income Taxes
We recorded an income tax provision of $1.2 million in relation to pretax income of $3.0 million for the three months ended March 31, 2023, which resulted in an effective income tax rate of 38.8%. Our effective income tax rate for the three months ended March 31,
2023, was primarily impacted by state taxes, non-deductible compensation, certain stock-based compensation and other non-deductible expenses. Excluding the impact of certain stock-based compensation, an increase in certain valuation allowances, and other discrete items, our effective income tax rate for the consolidated company would have been 30.4% and our effective income tax rate attributable to ARC Document Solutions, Inc. would have been 29.9% for the three months ended March 31, 2023.
By comparison, we recorded an income tax provision of $0.8 million in relation to pretax income of $2.7 million for the three months ended March 31, 2022, which resulted in an effective income tax rate of 30.1%. Our effective income tax rate for the three months ended March 31, 2022, was
primarily impacted by state taxes, certain stock-based compensation, change in valuation allowances against certain deferred tax assets and non-deductible expenses. Excluding the impact of the change in valuation allowances and certain stock-based compensation, our effective income tax rate for the consolidated company would have been 28.8% and our effective income tax rate attributable to ARC Document Solutions, Inc. would have been 28.6% for the three months ended March 31, 2022.
We have a $2.7 million valuation allowance against certain deferred tax assets as of March 31, 2023.
Noncontrolling Interest
Net loss attributable to noncontrolling interest represents 35% of the income/loss of UDS and its subsidiaries,
which together comprise our Chinese joint venture operations.
Net Income Attributable to ARC
Net income attributable to ARC decreased to $1.9 million during the three months ended March 31, 2023, as compared to $2.0 million during the three months ended March 31, 2022. The decrease in net income attributable to ARC was primarily driven by the increase in income tax provision as noted above in the first quarter of 2023.
EBITDA
EBITDA margin and Adjusted EBITDA margin is not a recognized measure under GAAP. When analyzing our operating performance, investors should use EBITDA margin and Adjusted EBITDA in addition to, and not as an alternative for, operating income or any other performance measure
presented in accordance with GAAP. It is a measure we use to measure our performance and liquidity. We believe EBITDA margin and Adjusted EBITDA reflect an additional way of viewing aspects of our operations that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our business. We believe the measure is used by investors and is a useful indicator to measure our performance. Because not all companies use identical calculations, our presentation of EBITDA margin and Adjusted EBITDA may not be comparable to similarly titled measures of other companies. See Non-GAAP Financial Measures below for additional discussion.
EBITDA margin decreased to 11.9% for the three months ended March 31, 2023, from 12.4% for the same period in 2022. Excluding the effect of stock-based compensation, adjusted EBITDA margin decreased to 12.6% during
the three months ended March 31, 2023, as compared to 13.1% for the same period in 2022. The decrease for the three months ended March 31, 2023, is largely attributable to lower sales.
25
Impact of Inflation
Rising costs for raw materials, such as paper, and fuel charges are largely being passed on to customers via price increases during the ordinary course of business. These price increases have moderated the impact of inflation on our financial results in 2023. As these inflationary pressures continue, however, the increased cost of labor, materials and other indirect costs require close and active management to avoid material
impacts to our cost structure.
Non-GAAP Financial Measures
EBITDA and related ratios presented in this report are supplemental measures of our performance that are not required by or presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These measures are not measurements of our financial performance under GAAP and should not be considered as alternatives to net income, income from operations, net income margin or any other performance measures derived in accordance with GAAP or as an alternative to cash flows from operating, investing or financing activities as a measure of our liquidity.
EBITDA represents net income before interest, taxes, depreciation and amortization. EBITDA margin is a non-GAAP measure calculated by dividing EBITDA by net sales.
We
have presented EBITDA and related ratios because we consider them important supplemental measures of our performance and liquidity. We believe investors may also find these measures meaningful, given how our management makes use of them. The following is a discussion of our use of these measures.
We use EBITDA to measure and compare the performance of our operating divisions. Our operating divisions’ financial performance includes all of the operating activities except debt and taxation which are managed at the corporate level for U.S. operating divisions. We use EBITDA to compare the performance of our operating divisions and to measure performance for determining consolidated-level compensation. In addition, we use EBITDA to evaluate potential acquisitions and potential capital expenditures.
EBITDA and related ratios have limitations as analytical tools, and should not be considered
in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are as follows:
•They do not reflect our cash expenditures, or future requirements for capital expenditures and contractual commitments;
•They do not reflect changes in, or cash requirements for, our working capital needs;
•They do not reflect the significant interest expense, or the cash requirements necessary, to service interest or principal payments on our debt;
•Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements; and
•Other
companies, including companies in our industry, may calculate these measures differently than we do, limiting their usefulness as comparative measures.
Because of these limitations, EBITDA and related ratios should not be considered as measures of discretionary cash available to us to invest in business growth or to reduce our indebtedness. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA and related ratios only as supplements.
Our presentation of adjusted net income and adjusted EBITDA over certain periods is an attempt to provide meaningful comparisons to our historical performance for our existing and future investors. The unprecedented changes in our end markets over the past several years have required us to take measures that are unique in our history and specific to individual circumstances. Comparisons inclusive of these actions
make normal financial and other performance patterns difficult to discern under a strict GAAP presentation. Each non-GAAP presentation, however, is explained in detail in the reconciliation tables below.
Specifically, we have presented adjusted net income attributable to ARC and adjusted earnings per share attributable to ARC shareholders for the three months ended March 31, 2023 and 2022 to reflect the exclusion of changes in the valuation allowances related to certain deferred tax assets and other discrete tax items. This presentation facilitates a meaningful comparison of our operating results for the three months ended March 31, 2023 and 2022. We believe these changes were the result of items which are not indicative of our
actual operating performance.
26
We have presented adjusted EBITDA for the three months ended March 31, 2023 and 2022 to exclude stock-based compensation expense. Adjusted EBITDA margin is a non-GAAP measure calculated by dividing adjusted EBITDA by net sales. The adjustment to exclude stock-based compensation expense to EBITDA is consistent with the definition of adjusted EBITDA in our 2021 Credit Agreement; therefore, we believe this information is useful to investors in assessing our financial performance.
The following is a reconciliation of cash flows provided by operating activities to EBITDA:
Three
Months Ended March 31,
(In thousands)
2023
2022
Cash flows provided by operating activities
$
3,824
$
2,931
Changes
in operating assets and liabilities
4,204
5,585
Non-cash expenses, including depreciation and amortization
(6,201)
(6,660)
Income tax provision
1,160
798
Interest
expense, net
456
430
Loss attributable to the noncontrolling interest
113
116
Depreciation and amortization
4,663
5,429
EBITDA
$
8,219
$
8,629
The
following is a reconciliation of net income attributable to ARC Document Solutions, Inc. to EBITDA and adjusted EBITDA:
Three Months Ended March 31,
(In thousands)
2023
2022
Net
income attributable to ARC Document Solutions, Inc.
$
1,940
$
1,972
Interest expense, net
456
430
Income tax provision
1,160
798
Depreciation
and amortization
4,663
5,429
EBITDA
8,219
8,629
Stock-based
compensation
494
451
Adjusted EBITDA
$
8,713
$
9,080
The following is a reconciliation of net income margin attributable
to ARC Document Solutions, Inc. to EBITDA margin and adjusted EBITDA margin:
Net
income margin attributable to ARC Document Solutions, Inc.
2.8
%
2.8
%
Interest expense, net
0.7
0.6
Income tax provision
1.7
1.1
Depreciation
and amortization
6.8
7.8
EBITDA margin
11.9
12.4
Stock-based
compensation
0.7
0.6
Adjusted EBITDA margin
12.6
%
13.1
%
(1)Column does not foot due to rounding.
27
The
following is a reconciliation of net income attributable to ARC Document Solutions, Inc. to adjusted net income and adjusted earnings per share attributable to ARC Document Solutions, Inc.:
Three Months Ended March 31,
(In thousands, except per share amounts)
2023
2022
Net
income attributable to ARC Document Solutions, Inc.
$
1,940
$
1,972
Deferred
tax valuation allowance and other discrete tax items
234
6
Adjusted net income attributable to ARC Document Solutions, Inc.
$
2,174
$
1,978
Actual:
Earnings
per share attributable to ARC Document Solutions, Inc. shareholders:
Basic
$
0.05
$
0.05
Diluted
$
0.04
$
0.05
Weighted
average common shares outstanding:
Basic
42,552
42,064
Diluted
43,764
43,739
Adjusted:
Earnings per
share attributable to ARC Document Solutions, Inc. shareholders:
Basic
$
0.05
$
0.05
Diluted
$
0.05
$
0.05
Weighted
average common shares outstanding:
Basic
42,552
42,064
Diluted
43,764
43,739
Liquidity
and Capital Resources
Our principal sources of cash have been cash flows from operations and borrowings under our debt and lease agreements. Our recent historical uses of cash have been for ongoing operations, payment of principal and interest on outstanding debt obligations, capital expenditures and stock repurchases.
Total cash and cash equivalents as of March 31, 2023 was $49.8 million. Of this amount, $4.3 million was held in foreign countries, with $2.7 million held in China. Repatriation of some of our cash and cash equivalents in foreign countries could be subject to delay for local country approvals and could have potential adverse tax consequences. As a result of holding cash and cash equivalents outside of the U.S., our financial flexibility may be reduced.
28
Supplemental
information pertaining to our historical sources and uses of cash is presented as follows and should be read in conjunction with our interim Condensed Consolidated Statements of Cash Flows and notes thereto included elsewhere in this report.
Three Months Ended March 31,
(In
thousands)
2023
2022
Net cash provided by operating activities
$
3,824
$
2,931
Net cash used in investing activities
$
(2,163)
$
(1,154)
Net
cash used in financing activities
$
(4,357)
$
(7,364)
Operating Activities
Cash flows from operations are primarily driven by sales and net profit generated from these sales, excluding non-cash charges.
The increase in cash flows from operations during the three months ended March 31, 2023, compared to the same period in 2022, was primarily due to an improvement in accounts receivable collections,
timing of payables and continued inventory management. Closely managing our cash collections resulted in days sales outstanding, or DSO, improving to 51 days as of March 31, 2023, compared to 53 days as of March 31, 2022.
DSO is calculated by taking the respective years March 31st, accounts receivable balance divided by the net sales for the quarter multiplied by the number of total days in a quarter. Other companies, including companies in our industry, may calculate DSO differently than we do, limiting its usefulness as a comparative measure.
We have presented DSO because we consider it an important metric as it is a valuable indicator of the efficiency of the business and quality of our cash flows. We believe investors may also find this metric meaningful given the importance of
cash flows from operations and management's ability to efficiently manage our working capital.
We use DSO to measure and compare the cash management performance of our operating divisions.
Investing Activities
Net cash used in investing activities was primarily related to capital expenditures. We incurred capital expenditures totaling $2.3 million and $1.2 million for the three months ended March 31, 2023, and 2022, respectively. The year-over-year increase in capital expenditures is driven primarily by our decision to enter into fewer leases and acquire more equipment outright in 2023 due to increasing interest rates. The overall amount of equipment we have acquired has, however, remained consistent with prior year.
Financing
Activities
Net cash of $4.4 million used in financing activities during the three months ended March 31, 2023, primarily relates to payments on our finance leases and dividends, partially offset by proceeds from stock option exercises.
Our cash position, working capital, and debt obligations as of March 31, 2023 and December 31, 2022 are shown below and should be read in conjunction with our interim Condensed Consolidated Balance Sheets and related notes contained elsewhere in this report.
The
increase of $2.6 million in working capital was primarily driven by the increase in accounts receivable of $0.7 million and a $0.6 million increase in inventory, in addition to a decrease in accrued expenses, partially offset by the decrease in cash. To manage our working capital, we chiefly focus on our DSO and monitor the aging of our accounts receivable, as receivables are the most significant element of our working capital.
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We believe that our current cash and cash equivalents balance of $49.8 million, the availability under our 2021 Credit Agreement, the availability under our equipment lease lines, and cash flows provided by operations should be adequate to cover the next twelve months and beyond of working capital needs, debt requirements consisting of scheduled
principal and interest payments, and planned capital expenditures, to the extent such items are known or are reasonably determinable based on current business and market conditions. See “Debt Obligations” section for further information related to our 2021 Credit Agreement.
A significant portion of our revenue across all of our product and services is generated from customers in the AEC/O industry. As a result, our operating results and financial condition can be significantly affected by economic factors that influence the AEC/O industry, including the COVID-19 pandemic. Additionally, a general economic downturn may adversely affect the ability of our customers and suppliers to obtain financing for significant operations and purchases, and to perform their obligations under their agreements with us. We believe that credit constraints in the financial markets could result in a
decrease in, or cancellation of, existing business, could limit new business, and could negatively affect our ability to collect our accounts receivable on a timely basis.
We have not been actively seeking growth through acquisition since 2009, and while we remain opportunistic with regard to opportunities, we don’t intend to pursue them in the near future.
Debt Obligations
Credit Agreement
On April 22, 2021, we entered into a Credit Agreement with U.S. Bank National Association, as administrative agent and the lender party thereto (the "2021 Credit Agreement"). The 2021 Credit Agreement provides for the extension of revolving loans in an aggregate principal amount not to exceed $70 million and replaces the Credit Agreement dated as of
November 20, 2014, as amended (the "2014 Credit Agreement"). The 2021 Credit Agreement features terms similar to the 2014 Credit Agreement, including the ability to use excess cash of up to $15 million per year for restricted payments such as share repurchases and dividends. The obligation under the 2021 Credit Agreement matures on April 22, 2026.
The 2021 Credit Agreement also includes certain tests we are required to meet in order to pay dividends, repurchase stock and make other restricted payments. In order to make such payments which are permitted subject to certain customary conditions set forth in the 2021 Credit Agreement, the amount of all such payments will be limited to $15 million during any twelve-month period. When calculating the fixed charge coverage ratio, we may exclude up to $10 million of such restricted
payments that would otherwise constitute fixed charges in any twelve-month period.
As of March 31, 2023, our borrowing availability under the revolving loan commitment was $27.8 million, after deducting outstanding letters of credit of $2.2 million and outstanding revolving loans of $40.0 million.
Loans borrowed under the 2021 Credit Agreement bear interest, in the case of LIBOR loans, at a per annum rate equal to the applicable LIBOR (which rate shall not be less than zero), plus a margin ranging from 1.25% to 1.75%, based on our Total Leverage Ratio (as defined in the 2021 Credit Agreement). Loans borrowed under the 2021 Credit Agreement that are not LIBOR loans bear interest at a per annum rate (which rate shall not be less than zero) equal to (i) the greatest of (A) the Federal Funds Rate plus 0.50%, (B) the one month LIBOR rate
plus 1.00%, per annum, and (C) the rate of interest announced, from time to time, by U.S. Bank National Association as its “prime rate,” plus (ii) a margin ranging from 0.25% to 0.75%, based on our Total Leverage Ratio. As of March 31, 2023, LIBOR loans borrowed under the 2021 Credit Agreement accrued interest at 6.2%. We pay certain recurring fees with respect to the 2021 Credit Agreement, including administration fees to the administrative agent.
The transition to non-LIBOR loan rates for us will occur in the second quarter of 2023, but we believe the transition will not have a material impact on our interest expense.
Subject to certain exceptions, including, in certain circumstances, reinvestment rights, the loans extended under the 2021 Credit Agreement are subject to customary mandatory prepayment provisions
with respect to: the net proceeds from certain asset sales; the net proceeds from certain issuances or incurrences of debt (other than debt permitted to be incurred under the terms of the 2021 Credit Agreement); the net proceeds from certain issuances of equity securities; and net proceeds of certain insurance recoveries and condemnation events.
30
The 2021 Credit Agreement contains customary representations and warranties, subject to limitations and exceptions, and customary covenants restricting the ability (subject to various exceptions) we and our subsidiaries: incur additional indebtedness (including guarantee obligations); incur liens; sell certain property or assets; engage in
mergers or other fundamental changes; consummate acquisitions; make investments; make certain distributions or repurchase our equity securities or those of our subsidiaries; change the nature of their business; prepay or amend certain indebtedness; engage in certain transactions with affiliates; amend their organizational documents; or enter into certain restrictive agreements. In addition, the 2021 Credit Agreement contains financial covenants which requires we maintain (i) at all times, a Total Leverage Ratio in an amount not to exceed 2.75 to 1.00; and (ii) a Fixed Charge Coverage Ratio (as defined in the 2021 Credit Agreement), as of the last day of each fiscal quarter, an amount not less than 1.15 to 1.00. We were in compliance with our covenants under the 2021 Credit Agreement as of March 31, 2023.
The
2021 Credit Agreement contains customary events of default, including with respect to: nonpayment of principal, interest, fees or other amounts; failure to perform or observe covenants; material inaccuracy of a representation or warranty when made; cross-default to other material indebtedness; bankruptcy, insolvency and dissolution events; inability to pay debts; monetary judgment defaults; actual or asserted invalidity or impairment of any definitive loan documentation, repudiation of guaranties or subordination terms; certain ERISA related events; or a change of control.
The obligations of our subsidiary that is the borrower under the 2021 Credit Agreement are guaranteed by us and each of our other United States domestic subsidiaries. The 2021 Credit Agreement and any interest rate protection and other hedging arrangements provided
by any lender party to the credit facility or any affiliate of such a lender are secured on a first priority basis by a perfected security interest in substantially all of our and each guarantor’s assets (subject to certain exceptions).
Finance Leases
As of March 31, 2023, we had $24.8 million of finance lease obligations outstanding, with a weighted average interest rate of 5.3% and maturities between 2022 and 2028. Refer to Note 7, Leasing, as previously disclosed on our Annual Form 10-K for the fiscal year ended for December 31, 2022, for the schedule on maturities of finance lease liabilities, as there have been no material changes to report as of March 31, 2023.
Contractual
Obligations and Other Commitments
Operating Leases. We have entered into various non-cancelable operating leases primarily related to facilities, equipment and vehicles used in the ordinary course of business. Refer to Note 7, Leasing, as previously disclosed on our Annual Form 10-K for the fiscal year ended for December 31, 2022, for the schedule on maturities of operating lease liabilities as there were no material changes as of March 31, 2023.
Legal Proceedings. We are involved, and will continue to be involved, in legal proceedings arising out of the conduct of our business, including commercial and employment-related lawsuits. Some of these lawsuits purport or may be determined to be
class actions and seek substantial damages, and some may remain unresolved for several years. We establish accruals for specific legal proceedings when it is considered probable that a loss has been incurred and the amount of the loss can be reasonably estimated. We evaluate whether a loss is reasonably probable based on our assessment and consultation with legal counsel regarding the ultimate outcome of the matter. As of March 31, 2023, we have accrued for the potential impact of loss contingencies that are probable and reasonably estimable. We do not currently believe that the ultimate resolution of any of these matters will have a material adverse effect on our results of operations, financial condition, or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect on our results of operations,
financial condition, or cash flows.
Environmental Matters. We have accrued liabilities for environmental assessment and remediation matters relating to operations at certain locations conducted in the past by predecessor companies that do not relate to our current operations. We have accrued these liabilities because it is probable that a loss or cost will be incurred and the amount of loss or cost can be reasonably estimated. These estimates could change as a result of changes in planned remedial actions, remediation technologies, site conditions, the estimated time to complete remediation, environmental laws and regulations, and other factors. Because of the uncertainties associated with environmental assessment and remediation activities, our future expenses relating to these matters could be higher than the liabilities we have accrued. Based upon current information, we believe that the impact of
the resolution of these matters would not be, individually or in the aggregate, material to our financial position, results of operations or cash flows.
31
Critical Accounting Policies and Significant Judgements and Estimates
Our management prepares financial statements in conformity with GAAP. When we prepare these consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to accounts receivable,
inventories, deferred tax assets, goodwill and intangible assets, long-lived assets and leases. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. Our Annual Report on Form 10-K for the year ended December 31, 2022 includes a description of certain critical accounting policies, including those with respect to goodwill, revenue recognition, and income taxes, which we believe are critical to understanding our historical and future performance, as these policies
relate to the more significant areas involving management's judgments and estimates. There have been no material changes to the critical accounting policies, significant judgements and estimates described in our Annual Report on Form 10-K for the year ended December 31, 2022.
Goodwill Impairment
In accordance with ASC 350, Intangibles - Goodwill and Other, we assess goodwill for impairment annually as of September 30, and more frequently if events and circumstances indicate that goodwill might be impaired. At September 30, 2022, the Company performed its assessment and determined that goodwill was not impaired.
Goodwill
impairment testing is performed at the reporting unit level. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support the value of the goodwill. In 2017, we elected to early-adopt ASU 2017-04 which simplifies subsequent goodwill measurement by eliminating step two from the goodwill impairment test.
We determine the fair value of our reporting units using an income approach. Under the income approach, we determined fair value based on estimated discounted future cash flows of each reporting unit. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates and
EBITDA margins, discount rates and future market conditions, among others. The level of judgment and estimation is inherently higher in these uncertain economic times.
The results of the annual goodwill impairment test, as of September 30, 2022, were as follows:
(Dollars in thousands)
Number of Reporting Units
Representing Goodwill of
No
goodwill balance
6
$
—
Fair value of reporting units exceeds their carrying values by more than 35%
1
121,051
7
$
121,051
Based
upon a sensitivity analysis, a reduction of approximately 50-basis points of projected EBITDA in 2022 and beyond, assuming all other assumptions remain constant, would result in no impairment of goodwill.
Based upon a separate sensitivity analysis, a 50-basis point increase to the weighted average cost of capital would result in no further impairment of goodwill.
Given the uncertain economic times and the changing document and printing needs of our customers and the uncertainties regarding the effect on our business, there can be no assurance that the estimates and assumptions made for purposes of our goodwill impairment testing in 2022 will prove to be accurate predictions of the future. If our assumptions, including forecasted EBITDA of certain reporting units, are not achieved, then we may be required to record goodwill impairment charges in future periods, whether in connection
with our next annual impairment testing in the third quarter of 2023, or on an interim basis, if any such change constitutes a triggering event (as defined under ASC 350, Intangibles - Goodwill and Other) outside of the quarter when we regularly perform our annual goodwill impairment test. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such charge would be material.
32
Income Taxes
Deferred tax assets and liabilities reflect temporary differences between the amount of assets and liabilities for financial and tax reporting purposes. Such amounts are adjusted, as appropriate, to reflect changes in tax rates expected
to be in effect when the temporary differences reverse. A valuation allowance is recorded to reduce our deferred tax assets to the amount that is more likely than not to be realized. Changes in tax laws or accounting standards and methods may affect recorded deferred taxes in future periods.
When establishing a valuation allowance, we consider future sources of taxable income such as future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards and tax planning strategies. A tax planning strategy is an action that: is prudent and feasible; an enterprise ordinarily might not take but would take to prevent an operating loss or tax credit carryforward from expiring unused; and would result in realization of deferred tax assets. In the event we determine that our deferred tax assets, more likely than not, will not be realized in the future, the valuation
adjustment to the deferred tax assets will be charged to earnings in the period in which we make such a determination. We have a $2.7 million valuation allowance against certain deferred tax assets as of March 31, 2023.
In future quarters we will continue to evaluate our historical results for the preceding twelve quarters and our future projections to determine whether we will generate sufficient taxable income to utilize our deferred tax assets, and whether a valuation allowance is required.
We calculate our current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed in subsequent years. Adjustments based on filed returns are recorded when identified.
Income
taxes have not been provided on certain undistributed earnings of foreign subsidiaries because such earnings are considered to be permanently reinvested.
The amount of taxable income or loss we report to the various tax jurisdictions is subject to ongoing audits by federal, state and foreign tax authorities. We estimate the potential outcome of any uncertain tax issue, which is subject to management’s assessment of relevant risks, facts, and circumstances existing at that time. We use a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. We record a liability for the difference between the benefit recognized and measured and tax position taken or expected to be taken on its tax return. To the extent that
our assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. We report tax-related interest and penalties as a component of income tax expense.
Recent Accounting Pronouncements
See Note 1, “Description of Business and Basis of Presentation” to our interim Condensed Consolidated Financial Statements for disclosure on recent accounting pronouncements adopted.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
We are a smaller reporting company, as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, and are not required to
provide the information required under this Item 3.
Item 4.Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934 ("Exchange Act") are recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s ("SEC") rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required
disclosures.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2023. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that as of March 31, 2023, our disclosure controls and procedures were effective.
33
Changes in Internal Control over Financial Reporting
There were no changes to internal
control over financial reporting during the three months ended March 31, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
34
PART II—OTHER INFORMATION
Item 1.Legal Proceedings
We are involved, and will continue to be involved, in legal proceedings
arising out of the conduct of our business, including commercial and employment-related lawsuits. Some of these lawsuits purport or may be determined to be class actions and seek substantial damages, and some may remain unresolved for several years. We establish accruals for specific legal proceedings when it is considered probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Our evaluation of whether a loss is reasonably probable is based on our assessment and consultation with legal counsel regarding the ultimate outcome of the matter. As of March 31, 2023, we have accrued for the potential impact of loss contingencies that are probable and reasonably estimable. We do not currently believe that the ultimate resolution of any of these matters will have a material adverse effect on our results of operations, financial condition, or cash flows. However, the results of these matters
cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect on our results of operations, financial condition, or cash flows.
Item 1A.Risk Factors
Information concerning certain risks and uncertainties are set forth in "Part I - Item 1A. Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on February 23, 2023.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
(In thousands, except for price per share)
(a) Total Number of Shares Purchased (1)
(b) Average
Price Paid per Share ($)
(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
(d) Approximate Dollar Value of Shares That May Yet Be Purchased Under The Plans or Programs (1)
(1) On February 23, 2023, we announced that our Board of Directors expanded the repurchase program we previously announced on May 1, 2019 by an additional $5.0 million for an aggregate program size of $20.0 million through March 31, 2026. Under the repurchase program, purchases of shares of common stock may be made from time to time in the open market, or in privately negotiated transactions,
in compliance with applicable state and federal securities laws. The timing and amounts of any purchases will be based on market conditions and other factors including price, regulatory requirements, and capital availability. The stock repurchase program does not obligate us to acquire any specific number of shares in any period, and may be expanded, extended, modified or discontinued at any time without prior notice.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
