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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________
Form 10-K
_______________________________________
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 2022
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the transition period from
to
Commission File Number: 001-32407
_______________________________________
ARC DOCUMENT SOLUTIONS, INC.
(Exact name of Registrant as specified in its Charter)
_______________________________________
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Delaware |
20-1700361 |
(State or other jurisdiction of
incorporation or organization) |
(I.R.S. Employer
Identification No.) |
12657 Alcosta Blvd, Suite 200
San Ramon, California 94583
(925) 949-5100
(Address, including zip code, and telephone number, including area
code, of Registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class |
Trading Symbol(s) |
Name of Each Exchange on Which Registered |
Common Stock, par value $0.001 per share |
ARC |
New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Yes ¨ No ý
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes ¨ No ý
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. Yes ý 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). Yes ý No ¨
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
¨
Accelerated filer
ý
Non-accelerated filer
¨
Smaller reporting company
☒
Emerging growth company
☐
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 has filed a report on
and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section
404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the
registered public accounting firm that prepared or issued its audit
report.
ý
If securities are registered pursuant to Section 12(b) of the Act,
indicate by check mark whether the financial statements of the
registrant included in the filing reflect the correction of an
error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are
restatements that required a recovery analysis of incentive-based
compensation received by any of the registrant’s executive officers
during the relevant recovery period pursuant to §240.10D-1(b).
☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). Yes ☐ No ý
Based on the closing price of $2.63 of the registrant’s Common
Stock on the New York Stock Exchange on June 30, 2022 (the
last business day of the registrant’s most recently completed
second fiscal quarter), the aggregate market value of the voting
common equity held by non-affiliates of the registrant on that date
was approximately $95,936,175.
As of February 14, 2023, there were 43,153,609 shares of the
Registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Definitive Proxy Statement on Schedule
14A for its 2023 Annual Meeting of Stockholders, to be filed with
the Securities and Exchange Commission, are incorporated by
reference in this Annual Report on Form 10-K in Part III as
indicated therein.
_______________________________________
ARC DOCUMENT SOLUTIONS, INC.
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 2022
Table of Contents
Page
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PART I |
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Item 1. Business |
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Item 1A. Risk Factors |
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Item 1B. Unresolved Staff Comments |
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Item 2. Properties |
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Item 3. Legal Proceedings |
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Item 4. Mine Safety Disclosures |
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PART II |
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Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities |
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Item 6. Reserved |
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Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations |
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Item 7A. Quantitative and Qualitative Disclosures About Market
Risk |
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Item 8. Financial Statements and Supplementary Data |
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Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure |
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Item 9A. Controls and Procedures |
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Item 9B. Other Information |
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Item 9C. Disclosure Regarding Foreign Jurisdiction that Prevent
Inspections |
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PART III |
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Item 10. Directors, Executive Officers and Corporate
Governance |
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Item 11. Executive Compensation |
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Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters |
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Item 13. Certain Relationships and Related Transactions, and
Director Independence |
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Item 14. Principal Accountant Fees and Services |
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PART IV |
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Item 15. Exhibits and Financial Statement Schedule |
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Item 16. Form 10-K Summary |
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Signatures |
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ARC DOCUMENT SOLUTIONS, INC.
2022 ANNUAL REPORT ON FORM 10-K
In this Annual Report on Form 10-K, “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.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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 Annual Report on Form 10-K
are only predictions. We have based these forward-looking
statements largely 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
Annual Report on Form 10-K and should not be relied upon as of any
subsequent date. Such statements are subject to a number of risks,
uncertainties and assumptions described in the section titled “Risk
Factors” under Part I, Item 1A below and elsewhere in this Annual
Report on Form 10-K. 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 prices 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.
•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.
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. We undertake no obligation, and
specifically disclaim any 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.
PART I
Item 1.
Business
Our Company
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
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.
While our production equipment and services are technologically
sophisticated, we have also invested heavily in developing
technology applications that improve digital printing and document
management process, increase the efficiency of print networks, and
provide features that enhance data security. We believe the use of
this technology by our customers creates a more valuable
relationship.
Our services, technology and national footprint create economies of
scale and production efficiency across geographical boundaries for
customers who prefer to work with a single supplier for their
digital printing needs. We believe these single-source capabilities
provide us with a material advantage over our competition in local
and regional markets.
We serve more than 40,000 active customers in a wide variety of
markets including retail, technology, energy, education,
hospitality, public utilities, and others. We also perform work for
a majority of the largest design, engineering, and
construction-oriented firms in North America. Our largest customers
are served by an enterprise sales force called Global Solutions. No
individual customer accounts for more than 2.5% of our overall
revenue.
We believe that no other public company in the U.S. offers the
particular set of services we do. We believe we are the largest
digital printing provider to the architectural, engineering and
construction industry, or AEC, as measured by revenue, number of
customers, and number of service centers.
Our employees are generally long-tenured, highly-experienced, and
cross-trained. They provide our services from more than 130 service
centers located throughout North America and in select locations
around the world. All of our service centers can provide the
complete array of our general services, but each service center
varies in scale, size of labor force and capacity based on the size
and needs of its particular market.
Our primary operational objective is to drive as much customer work
through our service center network as is practical in order to
leverage our production infrastructure, a capable and efficient
workforce, and production-grade equipment.
Our services can be customized to meet the needs of individual
customers, as well as address the needs of a broad industry, and we
believe we have an excellent reputation for service and
reliability. Because of our reputation for high level of service
and the benefits that our technology brings to our customers, we
find that we are able to charge a reasonable premium for our
offering.
Importantly, we don't believe that we should be compared to
conventional printers. We do not produce high-volume, low-margin,
commodity offset or lithographic printing, but rather provide
short-run, customized, high-quality digital printing services. As
such, we believe the customers, end-products, production equipment,
labor utilization and economic models of conventional printers are
materially different than ours.
We were founded in 1988, went public and was listed on the New York
Stock Exchange in 2005, and is headquartered in San Ramon,
California. We are a Delaware corporation operating under a single
brand, “ARC.” Our corporate name is “ARC
Document Solutions, Inc.,” and our NYSE ticker symbol is “ARC.” We
conduct our operations through our wholly-owned subsidiary, ARC
Document Solutions, LLC, a Texas limited liability company, and its
affiliates. In the years following our inception, our business grew
through acquisitions, but for more than a decade acquisitions have
not been a focal point for growth.
Principal Products and Services
Specifically, our offerings include:
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, or SLA. We lease or own the equipment ourselves, while
our customers pay for what they use. Per-use minimum charges are
often part of our SLAs. 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 equipment in
offices around the world. We also provide proprietary software to
our customers that are designed 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, or
PHI. 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.
In previous years, our services were characterized by the primary
industries/markets in which they were meant to be sold, e.g., the
construction industry or the document archiving and storage market.
Having expanded the variety of the markets and industries we serve
over the past several years, we now believe it is more useful to
report our services by production method. Specifically, we
previously described Digital Printing as “construction document and
information management” or “CDIM,” and Scanning and Digital Imaging
as “archiving and information management” or “AIM.”
The methods for financial reporting and revenue recognition in our
renamed service lines remain unchanged. Likewise, “Managed Print
Services” or “MPS” and “Equipment Sales and Supplies” are also
reported identically from previous years.
Operations
The majority of our products and services are available from each
of our service centers. As noted earlier, our primary operational
objective is to optimize our business performance by driving as
much customer work through our service center network as is
practical, 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.
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, or 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.
In response to the pandemic, most of our corporate, financial and
administrative staff have been working entirely or partially from
home, while our service center staff continue to work in our
facilities and adhere to strict safety and health
protocols.
Seasonality is a small part of our business, with sales of Digital
Printing for construction clients influenced by seasonality and
building cycles. Sales of display graphics are affected by retail
trends, marketing calendars, advertising campaigns and branding
initiatives, as well as the marketing and communication needs of
our office and real estate development clients.
MPS sales are driven by the generation of office documents and our
customers' desire to improve business processes and reduce
print-related costs. Scanning and Digital Imaging sales are
influenced primarily by the desire for document workflow
improvements. Equipment and Supplies sales are driven by purchasing
cycles of individual customers, as well as by new features and
advancements from equipment manufacturers.
Strategic Focus
Our strategic focus areas include driving profitable growth,
optimizing our business performance, and returning value to our
shareholders.
Driving profitable growth:
We intend to expand the markets and industries we serve while
leveraging our long-term relationships with existing customers. Our
outside sales efforts are focused on developing new customers and
markets that are identified and targeted by our centralized
corporate marketing team. Account-based sales have been generally
shifted to in-house service centers where work is performed,
existing customer relationships are strongest, and additional
contacts within these accounts can be easily
discovered.
Optimizing
our business performance:
We intend to leverage our service centers and cross-trained
workforce to create efficiencies in our operations, lower our
costs, and provide exceptional service to our customers. We believe
that the more work we are able to drive through our service
centers, the greater our efficiencies become.
Returning value to our shareholders:
We intend to continue focusing our capital allocation strategy on
benefiting our shareholders by using our cash flows to fund our
dividend program and repurchase shares of our common stock in the
open market.
Human Capital Management
We employed approximately 1,800 people as of December 31, 2022.
Approximately 70% of our employees are located in the U.S.
Approximately 98% of our team are full-time employees, with 60%
representing non-exempt roles working in production functions.
There are 15 engineers employed in our corporate headquarters in
San Ramon, California, to develop, maintain, and support our
proprietary software solutions. We also operate a technology center
in Kolkata, India, with approximately 200 employees at that
location who, in addition to supporting our San Ramon technology
team, also support our research and development efforts.
Approximately 80 service employees and managers work in our service
centers in Canada, 50 in the United Kingdom, and another 200 in
India, United Arab Emirates and China. None of our employees are
currently represented by labor unions.
We have long embraced inclusion, diversity and equity in our
workforce from the top down. Two of our four board members are
women. Our Chairman and Chief Executive Officer, our Chief
Operating Officer and our Chief Technology Officer are Southeast
Asian, our Chief Financial Officer is Hispanic, and our Corporate
Counsel and Corporate Secretary is a woman. Similar racial and
gender diversity is represented across our workforce.
We believe our success is a direct result of the contributions and
commitment of our employees. Like most U.S. employers in 2022, ARC
adjusted its compensation plans throughout the year to help
facilitate employee retention. We also make profit-sharing and
incentive plans part of most employees' compensation package. We
believe that profit-sharing plans in particular encourage team
efforts and cohesion within local and regional employee
groups.
Our employee benefit offerings include price-competitive,
high-quality medical insurance plans that include incentives for
physical fitness, and we offer mental health and other employee
assistance programs.
Our Customers
We serve approximately 40,000 active customers in a wide variety of
markets. No single customer accounted for 2.5% or more of our sales
in 2022. The size of our customers is wide-ranging, from local
restaurant owners and construction subcontractors to international
retailers, regional energy companies, and some of the country’s
largest school districts. We frequently sell products and services
from across our portfolio to a single customer, particularly when
working with larger customers. In addition, we often sell similar
services to different companies within the same industry. Payment
terms for account-based customers typically do not exceed 30
days.
The types of Digital Printing customers we sell to span a wide
variety of industries that include but are not limited
to:
•advertising/media/marketing/promotional/graphic
design departments
•building
owners and real estate developers
•design,
engineering and construction professionals
•office
management & IT departments responsible for print and document
management
•facilities
management staff in schools, hospitals and other
institutions
•procurement
departments in businesses of all kinds
•small
business owners
•retail
merchandising departments, and
•city/county/state
municipalities
The local markets we serve through our service centers are often
highly fragmented with a wide variety of specialized,
geographically-differentiated business practices. Larger regional,
national and international customers often consolidate the
purchasing and the acquisition of our services through a single
corporate department. We serve these larger customers through our
enterprise sales force which we refer to as our Global
Solutions.
Competition
The level of competition that we face varies in each of our
markets, but we believe our service level, the breadth of our
offerings, price, quality, responsiveness, and convenience to the
customer are common competitive elements in any
market.
We often compete with single-service firms, e.g., quick printers,
copier dealers or scanning bureaus, but we do not know of any other
firm that currently provides the full suite of services we
offer.
Local copy shops and self-serve franchises are often aggressive
competitors for digital printing business, but rarely offer the
breadth of document management and logistics services that we
do.
There are several companies in each major metropolitan market that
provide MPS and related print services, but we believe these
companies cannot provide the same or similar integrated services
and technology that we offer.
Likewise, there are small and regional scanning companies in many
of the markets where we compete, but few have the infrastructure,
footprint, stewardship guarantees, and privacy certifications that
we do.
With regard to large national and international customers, we know
of no other document solutions companies in the U.S. with the
national presence and global reach that we have established for
each of our primary services.
We believe that we have a strong competitive position in the
markets and industries that we serve for the following
reasons:
•Broad
expertise in specialized digital printing, finishing and
installation.
•Capabilities
in a wide variety of digital printing formats including
large-format, small-format, black and white, color, as well as
print capabilities on conventional substrates (paper and
paper-based products) and unconventional substrates (vinyl, fabric,
plastic, metal, three-dimensional structures, etc.).
•Strong
domain expertise in printing specialty documents, especially in the
architectural, engineering and construction
industries.
•Long-standing
positive customer relationships in every industry we
serve.
•High-ranking
organic search engine statistics for our primary
services.
•Long-term
contracts with high-profile, enterprise-level customers that can be
leveraged for referral work.
•A
large North American service center footprint of more than 130
facilities, with additional market presence in Canada, China, the
UAE, India, the U.K. and other select international
locations.
•The
variety of equipment brands we make available to our customers as
compared to the single brands offered by competing equipment
manufacturers.
•We
believe we are the only national company that integrates digital
printing and document production at (1) customer sites (onsite
offerings), (2) a national network of service centers (offsite
offerings), and (3) digital management of documents in the cloud
(cloud-based offerings).
Suppliers and Vendors
We purchase or lease equipment for use in our production facilities
and at our customers’ sites. We also purchase paper, toner and
other consumables for the operation of our equipment. As a
high-volume purchaser, we believe we receive favorable prices as
compared to other service providers. Price increases are typically
passed on to customers.
Our primary vendors of equipment, maintenance services, and digital
printing supplies include Hewlett Packard, Canon Solutions America
(Océ), and Xerox.
Purchases from these vendors during 2022 comprised approximately
40% of our total purchases of inventory and supplies. Although
there are a limited number of suppliers that could supply our
inventory, we believe any shortfalls from existing suppliers could
be filled by other suppliers on comparable terms.
Proprietary Rights
We rely on a combination of copyright, trademark and trade secret
laws, license agreements, nondisclosure and non-competition
agreements, reseller agreements, customer contracts, and technical
measures to establish and protect our rights in our proprietary
technology. We also rely on a variety of technologies that are
licensed from third parties to perform key functions.
We have registered “ARC Document Solutions,” “ARC,” as well as our
historical name and logo, “American Reprographics Company,” as
trademarks in the U.S. with the United States Patent and Trademark
Office, or USPTO. We have registered “PlanWell”, “PlanWell PDS”,
“Riot Creative Imaging”, “ABACUS” and "SKYSITE” as trademarks with
the USPTO and in other countries. We have registered three patents
which relate to systems and methods for optimizing data transfers
and synchronization of information that enable our facilities
management solution. We do not own any other registered trademarks,
service marks, or patents, that are material to our
business.
For a discussion of the risks associated with our proprietary
rights, see Item 1A, "Risk Factors - Our failure to adequately
protect the proprietary aspects of our technology solutions may
cause us to lose market share."
Available Information
We use our corporate website, www.e-arc.com, as a channel for
routine distribution of important information, including news
releases, analyst presentations and financial information. The
information on our website is not incorporated by reference into
this Annual Report on Form 10-K or into any other report or
document we file with the U.S. Securities and Exchange Commission
or SEC. We file with, or furnish, to the SEC Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K
and any amendments to those reports, as well as proxy statements
and annual reports to shareholders, and, from time to time, other
documents. The reports and other documents filed with or furnished
to the SEC are available to investors on or through our corporate
website free of charge as soon as reasonably practicable after we
electronically file them with or furnish them to the SEC. The SEC
maintains an internet site located at http://www.sec.gov that
contains reports, proxy and information statements and other
information regarding issuers that file electronically with the
SEC. Our SEC filings and other documents pertaining to the conduct
of our business can be found on the “Investors” section of our
website available at ir.e-arc.com. These documents are available in
print to any shareholder who requests a copy by writing or by
calling ARC Document Solutions.
Item 1A.
Risk Factors
The risks and uncertainties set forth below, as well as other risks
and uncertainties described elsewhere in this Annual Report on Form
10-K including in our consolidated financial statements and
accompanying notes and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” or in other filings
with the SEC, could materially and adversely affect our business,
financial condition, operating results, and the trading price of
our common stock. Additional risks and uncertainties that are not
currently known to us or that are not currently believed by us to
be material may also harm our business operations and financial
results. Because of the following risks and uncertainties, as well
as other factors affecting our financial condition and operating
results, past financial performance should not be considered to be
a reliable indicator of future performance, and investors should
not use historical trends to anticipate results or trends in future
periods.
Risks Related to Our Business
A significant portion of our revenue across all of our product and
services is generated from customers in the AEC/O industry. Any
decline in that industry could adversely affect our future revenue
and profitability.
We estimate that customers in the AEC/O industry accounted for more
than 50% of our net sales in 2022; therefore, our results largely
depend on the strength of that industry. Our historical operating
results reflect the cyclical and variable nature of the AEC/O
industry. We believe 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 our products
and services, and would therefore negatively affect our revenues
and have a material adverse effect on our business, operating
results and financial condition.
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.
We derived approximately 31% of our net sales in 2022 from our
operations in California. Accordingly, we are sensitive to economic
factors affecting business activity in California, including
general and local economic conditions, declines in specific
industries, macroeconomic trends, political factors affecting
commerce and economic development, and natural disasters (including
drought, earthquakes and wildfires) the intensity and frequency of
which are being exacerbated by climate change. Any adverse
developments affecting California could have a disproportionately
negative effect on our results of operations and financial
condition.
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.
As part of our growth strategy, we intend to continue to offer and
grow a variety of service offerings that are relatively new to the
company. Our efforts will be affected by our ability to acquire new
customers for our new service offerings as well as sell the new
service offerings to existing customers. If we fail to procure new
customers or sell these services to our existing customers, our
growth may be adversely affected and we may incur operating losses
as a result of a failure to realize revenue from the investments
made in new service offerings.
Because a significant portion of our overall costs are fixed, our
earnings are highly sensitive to changes in revenue.
Our network of service centers, equipment and related support
activities involves substantial fixed costs which cannot be
adjusted quickly to respond to declines in demand for our services.
We estimate that approximately 24% of our overall costs were fixed
in 2022. As a consequence, our results of operations are subject to
relatively high levels of volatility and our earnings could
deteriorate rapidly in the face of declining revenues because our
ability to reduce fixed costs in the short-term is limited. If we
fail to manage our fixed costs appropriately, or to maintain
adequate cash reserves to cover such costs, we may suffer material
adverse effects on our results of operations and financial
condition.
We are dependent upon our vendors to continue to supply us with
equipment, parts, supplies, and services at comparable terms and
price levels as the business grows.
Our access to equipment, parts, supplies, and services depends upon
our relationships with, and our ability to purchase these items on
competitive terms from our principal vendors. These vendors are not
required to use us to distribute their equipment and are generally
free to change the prices and other terms at which they sell to us.
In addition, we compete with the selling efforts of some of these
vendors. Our reliance on a limited number of principal vendors
presents various risks. These include the risk that an interruption
in our relationships with our principal vendors for any reason,
such as a natural catastrophe, epidemics such as the COVID-19
pandemic, or actions taken in regard to increased tariffs on goods
produced in certain
countries such as China, we may not be able to develop an alternate
source without incurring material additional costs and substantial
delays.
Significant deterioration in relationships with, or in the
financial condition of, these significant vendors could have an
adverse effect on our ability to sell equipment as well as our
ability to provide effective service and technical support to our
customers. If one of these vendors terminates or significantly
curtails its relationship with us, or if one of these vendors
ceases operations, we would be forced to expand our relationships
with our other existing vendors or seek out new relationships with
previously unused vendors.
Our failure to adequately protect the proprietary aspects of our
technology solutions may cause us to lose market
share.
Our success depends on our ability to protect and preserve the
proprietary aspects of our technology products. We rely on a
combination of patent, copyright, trademark and trade secret
protection, confidentiality agreements, license and subscription
agreements, and technical measures to establish and protect our
rights in our proprietary technologies. These protections, however,
may be inadequate. It is also possible that our intellectual
property rights could be challenged, invalidated or circumvented,
allowing others to use our intellectual property to our competitive
detriment. Furthermore, we may, from time to time, be subject to
intellectual property litigation which can be expensive, a burden
on management’s time and our Company’s resources, and the outcome
of any such litigation may be uncertain.
Competition in our industry and innovation by our competitors may
hinder our ability to execute our business strategy and adversely
affect our profitability.
The markets for our products and services are highly competitive,
with competition primarily at local and regional levels. We compete
primarily based on the level and quality of customer service,
technological leadership, and price. Our future success depends, in
part, on our ability to continue to improve our service and product
offerings, and develop and integrate new technology solutions. In
addition, current and prospective customers may decide to perform
certain services themselves instead of outsourcing these services
to us. These competitive pressures could adversely affect our sales
and consolidated results of operations.
Our failure to comply with laws related to privacy and data
security could adversely affect our financial
condition.
We are or may become subject to a variety of laws and regulations
in the United States and abroad regarding privacy, data protection
and data security. These laws and regulations are continuously
evolving and developing. The scope and interpretation of the laws
that are or may be applicable to us are often uncertain and may be
conflicting, particularly with respect to foreign laws.
In particular,
health information-related laws and regulations, such as the HIPAA,
may also have an impact on our business in light of the scanning
and storage capabilities that we offer and provide to certain
customers, which may involve user data that is considered to be
personal health information under HIPAA. If we are unable to comply
with the applicable privacy and security requirements, we could be
subject to claims, legal liabilities, penalties, fines, and
negative publicity, which could harm our operating
results.
Our information technology and telecommunications systems are
susceptible to damage, breach or interruption.
The management of our business is aided by the uninterrupted
operation of our information technology systems, including computer
hardware and software, and telecommunication systems. These systems
are vulnerable to security breaches, natural disasters or other
catastrophic events, computer viruses, or other interruptions or
damage stemming from power outages, equipment failure or unintended
usage by employees. In particular, our employees and unauthorized
third parties may gain access to personally identifiable or other
regulated information, the misuse of which could result in legal
liability. In addition, we rely on information technology systems
to process, transmit and store electronic information and to
communicate among our locations around the world and with our
clients, partners and consultants, including through cloud-based
platforms often provided by third parties. The breadth and
complexity of this infrastructure increases the potential risk of
security breaches. Security breaches caused by computer hackers and
foreign governments, may disable or damage the proper functioning
of our systems. It is possible that our security controls, and/or
those of the third parties with whom we partner, over personal and
other confidential information may not prevent unauthorized access
to, or destruction, loss, theft, misappropriation or release of
personally identifiable or other proprietary, confidential,
sensitive or valuable information of ours or third parties,
including our customers. Any such unauthorized access could lead to
potential disclosure of regulated information. Any such disclosure
or damage to our systems, or those of third parties with which we
partner, could subject us to third party claims and reputational
harm. In those instances, our ability to attract new clients may be
impaired and/or we may be subject to damages and regulatory
penalties and fines. In addition, system-wide or local failures of
these information technology systems could have a material adverse
effect on our business, financial condition, results of operations
or cash flows.
Damage or disruption to our facilities, including our technology
center, could impair our ability to effectively provide our
services and may have a significant effect on our revenues,
expenses and financial condition.
Our IT systems are an important part of our operations. We
currently store customer data on a variety of servers, including
servers hosted by Amazon Web Services and at our technology center
located in San Ramon, California near known earthquake fault zones.
Although we have redundant systems and offsite backup procedures in
place, interruption in service, damage to or destruction of our
technology center or a disruption of our data storage processes
resulting from sustained process abnormalities, human error, acts
of terrorism, violence, war or a natural disaster, such as fire,
earthquake or flood, could result in delays, in reduced levels of
customer service and have a material adverse effect on the markets
in which we operate and on our business operations.
Although we currently maintain general property damage insurance,
if we incur losses from uninsured events, we could incur
significant expenses which would adversely affect our results of
operations, cash flows and financial condition.
Catastrophic events, including global pandemics such as the
COVID-19 pandemic, could materially adversely affect
our business, results of operations and/or financial
condition.
The occurrence of a major earthquake, fire, flood or other weather
events, power loss, telecommunications failure, software or
hardware malfunctions, pandemics (including the COVID-19 pandemic),
cyber-attack, war, terrorist attack or other catastrophic event
that our disaster recovery plans do not adequately address, could
adversely affect our employees, our systems, our ability to produce
and distribute our products, and our reputation. For example, the
COVID-19 pandemic has had, and continues to have, a significant
impact around the world, prompting governments and businesses to
take unprecedented measures in response. Such measures have
included travel bans and restrictions, quarantines, shelter in
place orders and shutdowns. These measures have impacted and may
continue to impact all or portions of our workforce and operations
and the operations of our customers and suppliers. Although certain
restrictions related to the COVID-19 pandemic have eased,
uncertainty continues to exist regarding such measures and
potential future measures. Current material shortages, logistics
constraints and labor inefficiencies have limited and could
continue to limit our ability to meet customer demand, which could
have a material adverse effect on our business, results of
operations and/or financial condition.
The COVID-19 pandemic has significantly increased economic and
customer demand uncertainty, has caused inflationary pressure in
the U.S. and elsewhere and has led to volatility in customer demand
for the Company’s products and services and caused supply chain
disruptions. Economic uncertainties could continue to affect
customer demand for the Company’s products and services and the
financial condition and credit risk of our customers.
A catastrophic event resulting in the destruction or disruption of
our workforce, our systems, our ability to produce and distribute
our products, any of our data centers or our critical business or
information technology systems could adversely affect our ability
to conduct normal business operations and our operating results or
cash flows. The adverse effects of any such catastrophic event
would be exacerbated if experienced at the same time as another
unexpected and adverse event, such as the COVID-19
pandemic.
Added risks are associated with our international
operations.
We have international operations in China, India, the United
Kingdom, Canada, and United Arab Emirates. Approximately 11% of our
revenues for 2022 were derived from our international operations,
with approximately 3% derived from China. Our future revenues,
costs of operations and net income could be adversely affected by a
number of factors related to our international operations,
including changes in economic conditions from country to country
(resulting from pandemics such as the COVID-19 outbreak or
otherwise), currency fluctuations, changes in a country’s political
condition, trade protection measures, licensing and other legal
requirements and local tax issues.
Our business could suffer if we fail to attract, retain, and
successfully integrate skilled personnel.
We believe that our ability to attract, retain, and successfully
integrate qualified personnel is critical to our success. As we
continue to place more emphasis on document management and storage
technology, our need to hire and retain software and other
technology-focused personnel has increased, and can be expected to
continue to increase. Competition for such personnel, particularly
in the San Francisco Bay Area, is intense. If we lose key personnel
and/or are unable to recruit qualified personnel, our ability to
manage and grow our business will be adversely affected. In
addition, the loss of the services of one or more members of our
senior management team would disrupt our business and impede our
ability to successfully execute our business strategy.
We may be exposed to employment-related claims and periodic
litigation that could adversely affect our business and results of
operations.
We are subject to a number of risks inherent to our status as an
employer, including claims of misconduct or negligence on the part
of our employees, claims by our employees and former employees of
discrimination or harassment; claims relating to violations of
wage, hour and other workplace regulations; and claims relating to
employee benefits, entitlements to employee benefits, or errors in
the calculation or administration of such benefits.
If we experience significant incidents in any of the
above-described areas, we could face substantial out-of-pocket
losses, or fines. In addition, such claims may give rise to
litigation, which may be time consuming, distracting and costly,
and could have a material adverse effect on our
business.
Environmental, health, and safety laws and regulations, and the
costs of compliance, could materially adversely affect our
financial position, results of operations and cash
flows.
Our operations are subject to numerous laws and regulations
governing environmental protection and occupational health and
safety matters. Under these laws and regulations, we may be liable
for, among other things, the cost of investigating and remediating
contamination, regardless of fault or actions on our part. The
amount of any such expense or related natural resource damages for
which we may be held responsible could be substantial. We cannot
predict the potential financial impact on our business if adverse
environmental, health, or safety conditions are discovered, or
environmental, health, and safety requirements become more
stringent.
If we are required to incur environmental, health, or safety
compliance or remediation costs that are not currently anticipated
and accrued by us, our financial position, results of operations
and cash flows could be materially adversely affected, depending on
the magnitude of the cost.
Changes in tax laws and interpretations could adversely affect our
business.
We are subject to income and other taxes in the U.S. and in
numerous foreign jurisdictions. Our domestic and foreign tax
provisions are dependent on the jurisdictions in which profits are
determined to be earned and taxed. Additionally, the amount of tax
provision is subject to our interpretation of applicable tax laws
in the jurisdictions in which we operate. A number of factors
influence our effective tax rate, including changes in tax laws and
treaties as well as the interpretation of existing laws and rules.
Federal, state, and local governments and administrative bodies
within the U.S., which represents a majority of our operations, and
other foreign jurisdictions have implemented, or are considering, a
variety of broad tax, trade, and other regulatory reforms that may
impact us.
Results of tax examinations may adversely affect our future results
of operations.
We are subject to various tax examinations on an ongoing basis.
Adverse results of tax examinations for income, payroll, value
added, sales-based and other taxes may require future material tax
payments if we are unable to sustain our position with the relevant
jurisdiction. Where appropriate, we have made accruals for these
matters which are reflected in our Consolidated Balance Sheets and
Statements of Operations.
Risks Related to Our Indebtedness
Our debt instruments impose certain restrictions on our ability to
operate which in turn could negatively affect our ability to
respond to changing business and market conditions and therefore
could have an adverse effect on our business and results of
operations.
As of December 31, 2022, we had $66.5 million in outstanding
short and long-term borrowings under our credit facilities, and
finance leases, excluding trade payables and operating leases. The
terms of the agreements under which this indebtedness was incurred
may limit or restrict, among other things, our ability to incur
certain additional debt, make certain restricted payments,
consummate certain asset sales, and enter into certain transactions
with affiliates.
We are also required to maintain a total leverage ratio and fixed
charge coverage ratio under our credit agreement with U.S. Bank
National Association, dated April 22, 2021, or the 2021 Credit
Agreement. Our inability to meet these ratios could result in the
acceleration of the repayment of the outstanding obligations under
the 2021 Credit Agreement, the termination of the lenders’
commitment to provide our revolving line of credit thereunder, the
increase in our effective cost of funds or the cross-default of
other credit arrangements. As a result, our ability to operate may
be restricted and our ability to respond to business and market
conditions may be limited, which could have an adverse effect on
our business and operating results.
Risks Related to Our Common Stock
The market prices of our common stock is volatile, and may be
impacted by factors other than our financial performance, which
could cause the value of an investment in our common stock to
decline.
The market price of our common stock may fluctuate substantially
due to a variety of factors, many of which are beyond our control.
Between January 1, 2022, and December 31, 2022, the closing price
of our common stock fluctuated from a low of $2.16 to a high of
$4.17 per share.
In the past, stockholders have sometimes instituted securities
class action litigation against companies following periods of
volatility in the market price of their securities. Any similar
litigation against us could result in substantial costs, divert
management's attention as well as our other resources and could
have a material adverse effect on our business, results of
operations and financial condition.
There can be no assurance that we will continue to declare
dividends or repurchase shares of our common stock.
Our Board of Directors has declared quarterly dividends in the
past.
Our ability to continue to pay quarterly dividends and to
repurchase shares of our common stock is subject to capital
availability and periodic determinations by our Board of Directors
that dividends and repurchases of shares of our common stock are in
the best interests of our shareholders and in compliance with
applicable laws. Our dividend payments and repurchases of shares of
our common stock may change from time to time. Management currently
intends to continue quarterly dividends, and repurchases of shares
of our common stock, subject to approval by our Board of Directors,
but we cannot provide any assurance as to the timing,
sustainability, or any particular amounts of future dividends and
repurchases of shares of our common stock. A suspension in our
dividend payments or repurchases of shares of our common stock
could have a negative effect on the price of our common stock and
would have a negative effect on returns on investment to our
shareholders.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
At the end of 2022, we operated 144 service centers, of which 123
were in the United States, nine were in Canada, six were in China,
three were in the United Kingdom, two were in India, and one was in
United Arab Emirates. We also occupied a technology center in
Kolkata, India, as well as other facilities, including our
executive offices located in San Ramon, California.
In total, the Company occupied approximately 1.0 million square
feet as of December 31, 2022.
We lease nearly all of our service centers, and each of our
administrative facilities and our technology centers. In addition
to the facilities that are owned, our fixed assets are comprised
primarily of machinery and equipment, vehicles, and computer
equipment. We believe that our facilities are adequate and
appropriate for the purposes for which they are currently used in
our operations and are well maintained.
Item 3.
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 December 31, 2022, 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 4.
Mine Safety Disclosures
Not applicable.
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
Our common stock, par value $0.001, is listed on the New York Stock
Exchange or NYSE under the stock symbol “ARC”.
Holders
As of February 14, 2023, the approximate number of
stockholders of record of our common stock was 133. Because many of
the shares of our common stock are held by brokers and other
institutions on behalf of stockholders, we are unable to estimate
the total number of beneficial owners represented by these
stockholders of record.
Dividends
In December 2022, our Board of Directors declared a quarterly cash
dividend of $0.05 per share of common stock that is payable on
February 28, 2023 to shareholders of record as of January 31, 2023.
The timing, declaration and payment of future dividends, however,
falls within the discretion of our Board of Directors and will
depend upon many factors, such as our financial condition and
earnings, the capital requirements of our business, restrictions
imposed by applicable law and our debt agreements and any other
factors the Board of Directors deems relevant from time to
time.
Issuer Purchases of Equity Securities
The following table presents information regarding repurchases of
our common stock for the periods presented:
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(In thousands, except for price per share) |
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(a) Total Number of
Shares Purchased (1) |
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(b) Average Price Paid per Share ($) |
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(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) |
Period |
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October 1, 2022—October 31, 2022 |
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— |
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— |
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$ |
6,968 |
|
November 1, 2022—November 30, 2022 |
|
239 |
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|
$ |
2.79 |
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|
239 |
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$ |
6,301 |
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December 1, 2022—December 31, 2022 |
|
30 |
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|
$ |
2.99 |
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30 |
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$ |
6,211 |
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Total repurchases during the fourth quarter of 2022 |
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269 |
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269 |
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(1) The Company’s stock repurchase program authorizes us to
purchase up to $15.0 million of our outstanding common stock
through March 31, 2023. In February 2023, the Company's Board of
Directors authorized the expansion of the stock repurchase program
to $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.
Item 6.
[Reserved]
Item 7.
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
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
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.
For a more complete description of our business, and product and
service offerings, see Part I, Item 1 - "Business" - of this Annual
Report on Form 10-K.
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, paper pricing
typically does not significantly affect our operating margins as
they are 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.
Historically, our capital expenditure requirements have varied
based on our need for printing equipment in our MPS locations and
service centers. Over the past several 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 our future capital needs will remain muted.
Because our relationships with credit providers allow us to obtain
attractive lease rates, we chose to lease rather than purchase most
of our equipment over the past two years.
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.
COVID-19 Pandemic
The COVID-19 pandemic continued to affect our financial performance
during 2022, but was felt most strongly in the first quarter of the
year. Business momentum from that point forward, however, increased
throughout the remainder of the year, and we believe the reduced
office presence of employees where we deliver our MPS services will
be permanent. The products and services we provided throughout the
year were related to COVID-19 health and safety initiatives. While
we saw a dramatic decline in pandemic-related sales, we more than
offset the decline by serving the normal needs of our customers.
Our MPS business continued to remain under pressure throughout the
year as most employers left work-from-home policies in place. We
expect that a hybrid work arrangement will remain the norm for our
customers in 2023, but for print volumes to increase marginally as
some employers bring their employees back into the office at higher
rates than we saw in 2022. We believe work-from-home 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.
Employee Safety
In response to the COVID-19 pandemic, we implemented significant
changes to our operating environment to help our employees around
the world remain safe. As the pandemic has waned throughout 2022,
many of our corporate, financial and administrative staff continue
to work entirely or partially from home, while our service center
staff continues to work in our facilities. Safety and health
protocols for each service center have been based on
government-issued local health and safety procedures.
We still maintain many of the changes we put in place in our
service center production and other high-traffic areas to ensure
sufficient distancing, installed clear barriers at our customer
counters and other high-density areas, limited visitor entry where
appropriate, and dramatically increased virtual meetings in place
of face-to-face meetings. It is our intention to continue employing
these general safety protocols for the near future.
Market Review
We believe the expanding list of industries we serve are generally
growing and offer ongoing sales opportunities for our
services.
Demand for digital printing appears high across our customer base,
and includes environmental graphics, marketing and promotional
work. We believe the incorporation of hybrid work schedules and
return-to-office initiatives across the economy due to the pandemic
continue to create opportunities for our MPS services and software,
and that work-from-home and other remote document access
requirements are spurring demand for scanning and digital imaging
services.
We believe that the desire to communicate visually—and especially
in color—is growing in all areas of commerce, in office
environments, in educational venues, and in public spaces of all
kinds. While office capacity has fluctuated with the progress of
the COVID-19 pandemic, we believe there is minimal desire among our
customers to completely abandon in office work. We believe
employers want to make environments more inviting and engaging for
the people who occupy them.
Construction activity has been remarkably robust over the past two
years. While constrained by labor and supply chain issues, we think
building activity for both new buildings and retrofitting older
structures continues to be driven by property developers and owners
who are intent on keeping their real estate assets compelling to
tenants and prospective tenants.
Economic inflation in the U.S., Canada and abroad has materially
affected our business over the past year, primarily in the form of
higher labor and material costs. Price increases in materials
continue to be passed on to our customers. Supply chain disruptions
over the past year have been largely resolved, and we remain
reasonably protected from them due to the wide variety of suppliers
we have developed over our history.
Results of Operations
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2022 Versus 2021 |
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Year Ended December 31, |
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Increase (decrease) |
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|
(In millions, except percentages) |
2022
(1)
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2021
(1)
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$
(1)
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% |
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Digital Printing |
$ |
174.8 |
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$ |
166.7 |
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$ |
8.1 |
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4.8 |
% |
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MPS |
75.8 |
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72.4 |
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3.3 |
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4.6 |
% |
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Scanning and Digital Imaging |
17.4 |
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14.5 |
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2.9 |
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20.1 |
% |
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Total services sales |
$ |
267.9 |
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$ |
253.6 |
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$ |
14.3 |
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5.6 |
% |
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Equipment and Supplies sales |
18.1 |
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|
18.6 |
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(0.5) |
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(2.7) |
% |
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Total net sales |
$ |
286.0 |
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|
$ |
272.2 |
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$ |
13.8 |
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5.1 |
% |
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Gross profit |
$ |
96.0 |
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$ |
87.7 |
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$ |
8.3 |
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9.5 |
% |
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|
Selling, general and administrative expenses |
$ |
77.5 |
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|
$ |
72.3 |
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$ |
5.2 |
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|
7.2 |
% |
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|
Amortization of intangibles |
$ |
0.1 |
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|
$ |
0.2 |
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|
$ |
(0.1) |
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|
(51.3) |
% |
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Interest expense, net |
$ |
1.8 |
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$ |
2.1 |
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$ |
(0.4) |
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|
(16.3) |
% |
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|
Income tax provision |
$ |
5.8 |
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|
$ |
4.2 |
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$ |
1.7 |
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39.5 |
% |
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|
Net income attributable to ARC |
$ |
11.1 |
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|
$ |
9.1 |
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$ |
2.0 |
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21.3 |
% |
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|
|
Adjusted net income attributable to ARC
(2)
|
$ |
12.0 |
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|
$ |
9.5 |
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$ |
2.5 |
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26.4 |
% |
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|
|
Cash flows provided by operating activities |
$ |
37.2 |
|
|
$ |
35.8 |
|
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|
|
$ |
1.5 |
|
|
4.1 |
% |
|
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|
|
EBITDA
(2)
|
$ |
39.1 |
|
|
$ |
40.0 |
|
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|
|
$ |
(0.9) |
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|
(2.2) |
% |
|
|
|
|
Adjusted EBITDA
(2)
|
$ |
40.9 |
|
|
$ |
41.7 |
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|
|
$ |
(0.8) |
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|
(1.9) |
% |
|
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|
|
(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:
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|
As Percentage of Net Sales |
|
Year Ended December 31, |
|
2022
(1)
|
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2021
(1)
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|
|
Net Sales |
100.0 |
% |
|
100.0 |
% |
|
|
Cost of sales |
66.4 |
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|
67.8 |
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|
|
Gross profit |
33.6 |
|
|
32.2 |
|
|
|
Selling, general and administrative expenses |
27.1 |
|
|
26.6 |
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|
|
Amortization of intangibles |
— |
|
|
0.1 |
|
|
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Income from operations |
6.4 |
|
|
5.6 |
|
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|
Interest expense, net |
0.6 |
|
|
0.8 |
|
|
|
Income before income tax provision |
5.8 |
|
|
4.8 |
|
|
|
Income tax provision |
2.0 |
|
|
1.5 |
|
|
|
Net income |
3.8 |
|
|
3.2 |
|
|
|
Loss attributable to the noncontrolling interest |
0.1 |
|
|
0.1 |
|
|
|
Net income attributable to ARC |
3.9 |
% |
|
3.4 |
% |
|
|
|
|
|
|
|
|
EBITDA
(2)
|
13.7 |
% |
|
14.7 |
% |
|
|
Adjusted EBITDA
(2)
|
14.3 |
% |
|
15.3 |
% |
|
|
(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.
Fiscal Year Ended December 31, 2022 Compared to Fiscal Year
Ended December 31, 2021
Net Sales
Net sales in 2022 increased 5.1%, compared to 2021. The increase in
net sales was driven largely by our expansion in markets and
industries we serve. This resulted in year-over-year quarterly net
sales growth in the first three quarters of the year, offset by a
slight decline in net sales in the fourth quarter largely caused by
weak sales from our Chinese joint venture.
Digital Printing.
Sales of Digital Printing services in 2022 increased by $8.1
million, or 4.8%, compared to 2021. The increase in sales of
Digital Printing services was primarily due to demand in the
retail, office, education, and construction verticals as the
economic constraints of the pandemic waned throughout the year.
Digital Printing services represented 61% of total net sales
for both 2022 and 2021.
MPS.
Sales of MPS services in 2022 increased by $3.3 million, or 4.6%,
compared to 2021. The increase in annual MPS sales was driven by
the increased return of employees in the U.S. and Canada to their
offices in response to the lifting of restrictions by their
employers, and thus increasing the volume of printing done in our
customers’ offices. MPS engagements on construction job sites
remained active throughout the year as construction activity
continued to be robust. Additionally, contributing to the sales
increase were price increases implemented in 2022. Revenues from
MPS sales represented approximately 27% of total net sales for both
2022 and 2021.
The number of MPS locations has remained relatively flat
year-over-year at approximately 10,720 as of December 31,
2022.
Scanning and Digital Imaging.
Year-over-year sales of Scanning and Digital Imaging services
increased by $2.9 million, or 20.1%, in 2022, compared to 2021. The
increase in sales of our Scanning and Digital Imaging services was
primarily attributable to demand from businesses interested in
remote digital access to documents and removing paper documents
from their premises. 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.
Equipment and Supplies sales decreased by $0.5 million, or 2.7%, in
2022, compared to 2021. The decrease was primarily driven by the
economic slowdown in China related to the COVID-19 pandemic, which
decreased sales from UNIS Document Solutions Co. Ltd, or UDS, our
Chinese joint venture. Equipment and Supplies sales derived from
UDS, were $2.5 million in 2022, as compared to $3.9 million in
2021. Equipment and Supplies sales represented approximately 6% of
total net sales for 2022 and approximately 7% for
2021.
Gross Profit
Gross profit increased to $96.0 million in 2022, compared to $87.7
million in 2021. Gross margin increased to 33.6% in 2022, compared
to 32.2% in 2021, in conjunction with a net sales increase of $13.8
million. Gross margin improvement was largely driven by additional
sales and our efforts to drive more work through our service
centers to leverage our infrastructure, cross-trained workforce,
and production-grade equipment. The improved gross margins driven
by our ability to better leverage our costs, were partially offset
by an increase in labor and material costs resulting from current
inflationary pressures.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $5.2
million, or 7.2%, in 2022 compared to 2021. The increase was
primarily due to increased labor costs and salary adjustments to
improve employee retention, as well as higher commissions, bonuses
and travel resulting from increased sales and
profitability.
Amortization of Intangibles
Amortization of intangibles of $0.1 million in 2022 decreased
compared to 2021, primarily due to the completed amortization of
certain customer relationships related to historical acquisitions.
In the years following our inception, our business grew through
acquisitions, but for more than a decade acquisitions have not been
a focal point for growth.
Interest Expense, Net
Net interest expense totaled $1.8 million in 2022, compared to $2.1
million in 2021. The decrease in 2022 compared to 2021 was due to
the continuing reduction of our overall debt.
Income Taxes
We recorded an income tax provision of $5.8 million in relation to
a pretax income of $16.6 million for 2022, which resulted in an
effective income tax rate of 35.1%. In addition to recurring state
and foreign taxes and certain nondeductible expenses, our effective
income tax rate for 2022 was impacted by a change in valuation
allowances against certain deferred tax assets and stock based
compensation forfeitures. Excluding the impact of valuation
allowances, stock based compensation forfeitures and other discrete
items, our effective income tax rate for the consolidated company
would have been 29.4% and our effective income tax rate
attributable to ARC Document Solutions, Inc. would have been
29.1%.
We recorded an income tax provision of $4.2 million in relation to
a pretax income of $13.0 million for 2021, which resulted in an
effective income tax rate of 32.1%. In addition to recurring state
and foreign taxes and certain nondeductible expenses, our effective
income tax rate for 2021 was primarily impacted by a change in
valuation allowances against certain deferred tax assets and
stock-based compensation forfeitures. Excluding the impact of
valuation allowances, stock based compensation forfeitures and
other discrete items, our effective income tax rate for the
consolidated company would have been 29.2% and our effective income
attributable to ARC Document Solutions, Inc. would have been
28.7%.
Noncontrolling Interest
Net income attributable to noncontrolling interest represents 35%
of the income of our Chinese joint venture with UDS and its
subsidiaries, which together comprise our Chinese joint-venture
operations.
Net Income Attributable to ARC
Net income attributable to us was $11.1 million in 2022, as
compared to $9.1 million in 2021. The increase in net income
attributable to us in 2022 is driven by the increase in net sales
and decrease in depreciation expense of $4.0 million, partially
offset by the increase in selling, general and administrative
expenses described above. As hybrid work schedules reduced office
printing volumes, our need for printing equipment has significantly
decreased and has reduced our depreciation expense.
EBITDA
EBITDA margin decreased slightly to 13.7% in 2022 from 14.7% in
2021. Excluding the effect of stock-based compensation adjusted
EBITDA margin decreased slightly to 14.3% in 2022 from 15.3% in
2021. The decrease is largely attributable to higher labor and
SG&A costs as noted above.
Impact of Inflation
Inflation has had a significant impact on our operations in 2022,
but we believe inflationary pressures are largely behind us as we
move into 2023. Price increases for raw materials, such as paper
and fuel charges, typically have been, and we expect will continue
to be, passed on to customers in the ordinary course of business,
but we don't expect labor and related costs to decrease from 2022
levels.
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 or GAAP. These measures are not
measurements of our financial performance under GAAP and should not
be considered as alternatives to net income, net income margin,
income from operations, 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
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 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 2022 and 2021 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 2022 and 2021.
We believe these changes were the result of items which are not
indicative of our actual operating performance.
We have presented adjusted EBITDA for 2022 and 2021 to exclude
stock-based compensation expense. The adjustment of EBITDA for this
item is consistent with the definition of adjusted EBITDA in our
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
(In thousands) |
2022 |
|
2021 |
|
|
Cash flows provided by operating activities |
$ |
37,227 |
|
|
$ |
35,775 |
|
|
|
Changes in operating assets and liabilities |
1,128 |
|
|
3,331 |
|
|
|
Non-cash expenses |
(7,140) |
|
|
(5,708) |
|
|
|
Income tax provision |
5,832 |
|
|
4,181 |
|
|
|
Interest expense, net |
1,796 |
|
|
2,147 |
|
|
|
Loss attributable to the noncontrolling interest |
304 |
|
|
301 |
|
|
|
|
|
|
|
|
|
EBITDA |
$ |
39,147 |
|
|
$ |
40,027 |
|
|
|
The following is a reconciliation of net income attributable to ARC
Document Solutions, Inc. shareholders to EBITDA and adjusted
EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
(In thousands) |
2022 |
|
2021 |
|
|
Net income attributable to ARC Document Solutions, Inc.
shareholders |
$ |
11,094 |
|
|
$ |
9,143 |
|
|
|
Interest expense, net |
1,796 |
|
|
2,147 |
|
|
|
Income tax provision |
5,832 |
|
|
4,181 |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
20,425 |
|
|
24,556 |
|
|
|
EBITDA |
39,147 |
|
|
40,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
1,773 |
|
|
1,686 |
|
|
|
Adjusted EBITDA |
$ |
40,920 |
|
|
$ |
41,713 |
|
|
|
The following is a reconciliation of net income margin attributable
to ARC Document Solutions, Inc. shareholders to EBITDA margin and
adjusted EBITDA margin:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2022
(1)
|
|
2021
(1)
|
|
|
Net income margin attributable to ARC Document Solutions, Inc.
shareholders |
|
3.9 |
% |
|
3.4 |
% |
|
|
Interest expense, net |
|
0.6 |
|
|
0.8 |
|
|
|
Income tax provision |
|
2.0 |
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
7.1 |
|
|
9.0 |
|
|
|
EBITDA margin |
|
13.7 |
|
|
14.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
0.6 |
|
|
0.6 |
|
|
|
Adjusted EBITDA margin |
|
14.3 |
% |
|
15.3 |
% |
|
|
(1)Column
does not foot due to rounding.
The following is a reconciliation of net income attributable to ARC
Document Solutions, Inc. shareholders to adjusted net income and
adjusted earnings per share attributable to ARC Document Solutions,
Inc. shareholders:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
(In thousands, except per share data) |
|
2022 |
|
2021 |
|
|
Net income attributable to ARC Document Solutions, Inc.
shareholders |
|
$ |
11,094 |
|
|
$ |
9,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax valuation allowance and other discrete tax
items |
|
905 |
|
|
352 |
|
|
|
Adjusted net income attributable to ARC Document Solutions, Inc.
shareholders |
|
$ |
11,999 |
|
|
$ |
9,495 |
|
|
|
Actual: |
|
|
|
|
|
|
Earnings per share attributable to ARC Document Solutions, Inc.
shareholders: |
|
|
|
|
|
|
Basic |
|
$ |
0.26 |
|
|
$ |
0.22 |
|
|
|
Diluted |
|
$ |
0.26 |
|
|
$ |
0.21 |
|
|
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
Basic |
|
42,214 |
|
|
42,164 |
|
|
|
Diluted |
|
43,280 |
|
|
42,732 |
|
|
|
Adjusted: |
|
|
|
|
|
|
Earnings per share attributable to ARC Document Solutions,
Inc. shareholders: |
|
|
|
|
|
|
Basic |
|
$ |
0.28 |
|
|
$ |
0.23 |
|
|
|
Diluted |
|
$ |
0.28 |
|
|
$ |
0.22 |
|
|
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
Basic |
|
42,214 |
|
|
42,164 |
|
|
|
Diluted |
|
43,280 |
|
|
42,732 |
|
|
|
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, dividends and stock repurchases.
We continually assess our capital allocation strategy, including
decisions relating to dividends, repurchase shares of our common
stock, capital expenditures, and debt pay-downs. In the
beginning of 2020 we suspended dividends due to uncertainties
caused by the COVID-19 pandemic. In December 2020, we recommenced
our dividend program and subsequently increased the quarterly
dividend amount to 5 cents per share of our common stock. The
timing, declaration and payment of future dividends, however, falls
within the discretion of our Board of Directors and will depend
upon many factors, including our financial condition and earnings,
the capital requirements of our business, restrictions imposed by
applicable law and the terms of any of our debt agreements and any
other factors the Board of Directors deems relevant from time to
time.
In February 2023, our Board of Directors approved a stock
repurchase program that authorized us to purchase up to $20.0
million of our outstanding common stock through March 31, 2026.
Purchases may be made from time to time in the open market at
prevailing market prices or in privately negotiated
transactions. During the year ended December 31, 2022 we
repurchased 0.6 million shares of our common stock for a total
purchase price of $1.7 million. During the year ended
December 31, 2021, we repurchased 0.8 million shares of
our common stock for a total purchase price of
$1.9 million.
Total cash and cash equivalents as of December 31, 2022 was
$52.6 million. Of this amount, $5.2 million was held in foreign
countries, with $3.2 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.
Supplemental information pertaining to our historical sources and
uses of cash is presented as follows and should be read in
conjunction with our Consolidated Statements of Cash Flows and
notes thereto included elsewhere in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
(In thousands) |
|
2022 |
|
2021 |
|
|
Net cash provided by operating activities |
|
$ |
37,227 |
|
|
$ |
35,775 |
|
|
|
Net cash used in investing activities |
|
$ |
(5,574) |
|
|
$ |
(3,189) |
|
|
|
Net cash used in financing activities |
|
$ |
(34,155) |
|
|
$ |
(32,022) |
|
|
|
Operating Activities
Cash flows from operations are primarily driven by sales and the
net profit generated from these sales, excluding non-cash
charges.
The increase in cash flows from operations in 2022 was primarily
due to an improvement in our collectibles which resulted in an
improvement in the aging of our receivables, partially offset by a
decrease in EBITDA.
Days sales outstanding, or DSO was 51 days as of
December 31, 2022 and December 31, 2021. We are
closely managing cash collections.
DSO is calculated by taking the respective years December
31st,
accounts receivable balance divided by the net sales during the
fourth quarter of that year multiplied by the number of total days
in a quarter.
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.
Investing Activities
Net cash used in investing activities was primarily related to
capital expenditures. We incurred capital expenditures totaling
$5.9 million and $3.6 million, in 2022 and 2021, respectively. The
capital expenditure amount in 2022 is a normalized amount based on
our current sales levels, as compared to 2021 that was purposely
kept low as we came out of the COVID-19 pandemic. We have a
concerted effort to reduce and closely manage our capital
expenditures, as our need for printing equipment has significantly
decreased over the past three years.
Because our relationships with credit providers allow us to obtain
attractive lease rates, we usually choose to lease rather than
purchase equipment unless there is a compelling reason to do
otherwise.
Financing Activities
Net cash of $34.2 million used in financing activities in 2022
primarily relates to payments on our 2021 Credit Agreement, finance
leases, dividends, and repurchases of shares of our common stock.
As noted above, our need for printing equipment has significantly
decreased over the past several years, resulting in a decrease of
$5.5 million in our finance lease liability as of December 31,
2022 compared to the balance in the prior year. This reduction in
the finance lease liability will also drive a reduction in 2023
payments for financed leases.
Our cash position, working capital, and debt obligations as of
December 31, 2022 and 2021 are shown below and should be read
in conjunction with our Consolidated Balance Sheets and notes
thereto contained elsewhere in this report.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
(In Thousands) |
|
2022 |
|
2021 |
|
|
Cash and cash equivalents |
|
$ |
52,561 |
|
|
$ |
55,929 |
|
|
|
Working capital |
|
$ |
34,906 |
|
|
$ |
37,082 |
|
|
|
|
|
|
|
|
|
|
Borrowings from revolving credit facility |
|
$ |
40,000 |
|
|
$ |
46,250 |
|
|
|
Various finance leases |
|
26,474 |
|
|
31,992 |
|
|
|
Total debt obligations |
|
$ |
66,474 |
|
|
$ |
78,242 |
|
|
|
The decrease of $2.2 million in working capital in 2022 was
primarily driven by the decrease in cash of $3.4 million and $0.7
million decrease in accounts receivable over 2021, partially offset
by the $2.3 million decrease in the current portion of our finance
lease liability. 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.
We believe that our current cash and cash equivalents balance of
$52.6 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 disruptions in the capital markets,
economic sanctions and economic slowdowns or recessions, rising
inflation, public health crises (including the COVID-19 pandemic)
and interest rates fluctuations. 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 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, or
Revolving Loans, and replaces the Credit Agreement dated as of
November 20, 2014, as amended, or 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
repurchase shares of our common stock and declare and pay
dividends. The obligation under the 2021 Credit Agreement mature 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 December 31, 2022, our borrowing availability under the
Revolving Loan commitment was $27.8 million, after deducting
outstanding letters of credit of $2.2 million and an outstanding
Revolving Loan balance 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. 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
first half of 2023, but we believe the transitions 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.
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 us and our 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; pay dividends, other
distributions or repurchase equity interest of us or our
subsidiaries; change the nature of their business; prepay or amend
certain indebtedness; engage in certain transactions with
affiliates; amend our organizational documents; or enter into
certain restrictive agreements. In addition, the 2021 Credit
Agreement contains financial covenants which requires us to
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 as of December 31,
2022.
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).
Credit Agreement
The following table sets forth the outstanding balance, borrowing
capacity and applicable interest rate under Credit
Agreement.
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|
|
|
|
December 31, 2022 |
|
|
Balance |
|
Available
Borrowing
Capacity |
|
Interest
Rate |
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
Revolving Loans
(1)
|
|
$ |
40,000 |
|
|
$ |
27,844 |
|
|
5.6 |
% |
|
|
|
|
|
|
|
(1)
Revolving Loan available borrowing capacity, net of $2.2 million of
outstanding standby letters of credit as of December 31,
2022.
Finance Leases
As of December 31, 2022, we had $26.5 million of finance lease
obligations outstanding, with a weighted average interest rate of
5.1% and maturities between 2023 and 2028.
Commitments and Contingencies
Operating Leases.
We lease machinery, equipment, and office and operational
facilities under non-cancelable operating lease agreements. Certain
lease agreements for our facilities generally contain renewal
options and provide for annual increases in rent based on the local
Consumer Price Index. Refer to Note 7,
Leasing,
for the schedule of our future minimum operating lease payments as
of December 31, 2022.
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 December 31, 2022, 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.
Critical Accounting Policies and Significant Judgments 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.
We believe that the accounting policies discussed below are
critical to understanding our historical and future performance, as
these policies relate to the more significant areas involving
management's judgments and estimates.
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 annual 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 judgement and estimation is inherently higher in the
current environment considering the uncertainty created by the
COVID-19 pandemic. We have evaluated numerous factors disrupting
our business and made significant assumptions which include the
severity and duration of our business disruption, the timing and
degree of economic recovery and ultimately, the combined effect of
these assumptions on our future operating results and cash
flows.
The results of the latest 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 further
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 uncertainty regarding the ultimate financial impact of
the COVID-19 pandemic and the proceeding economic recovery, 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, or our
assumptions change regarding disruptions caused by the pandemic,
and the impact on the recovery from COVID-19 change, 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.
Revenue Recognition
Revenue is recognized when control of the promised goods or
services is transferred to our customers, in an amount that
reflects the consideration that we are expected to be entitled to
in exchange for those goods or services. We applied practical
expedients related to unsatisfied performance obligations for
(i) contracts with an original expected length of one year or
less and (ii) contracts for which the Company recognizes
revenue at the amount to which it has the right to invoice for
services performed.
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, or
Ordered Prints and (ii) specialized graphic color printing.
Substantially, all 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; generally, this occurs with the transfer
of control of the re-produced 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 we
expect 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 the 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 shifts their
costs to a “per-use” basis. MPS is supported by our hosted
proprietary technology, Abacus®,
which allows our 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. The pattern of
revenue recognition for the Company's MPS revenue has remained
substantially unchanged following the adoption of ASC 842. See Note
7,
Leasing,
for additional information.
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 may include our hosted
SKYSITE software and 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, or Scanned Documents, and their
cloud-based storage and maintenance. Sales of scanning and digital
imaging services, which represent substantially all revenue for
this 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, our facilities
solution or through other electronic media. Revenue is measured as
the amount of consideration we expect 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, or 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 we expect to
receive in exchange for transferring goods or providing
services. Taxes collected concurrent with revenue-producing
activities are excluded from revenue. We have experienced minimal
customer returns or refunds and does not offer a warranty on
equipment that it is reselling.
Leases
We recognize lease assets and corresponding lease liabilities for
all operating and finance leases on our Consolidated Balance
Sheets, excluding short-term leases (leases with terms of 12 months
or less) as described under ASU No. 2016-02,
Leases (Topic 842).
Some of our long-term operating lease agreements include options to
extend, which are also factored into the recognition of their
respective assets and liabilities when appropriate based on
management’s assessment of the probability that the options will be
exercised. Lease payments are discounted using the rate implicit in
the lease, or, if not readily determinable, a third-party secured
incremental borrowing rate based on information available at lease
commencement. Additionally, certain of our lease agreements include
escalating rents over the lease terms which, under Topic 842,
results in rent being expensed on a straight-line basis over the
life of the lease that commences on the date we have the right to
control the property. Finance leases were not impacted
by the adoption of ASC 842, as finance lease liabilities and the
corresponding ROU assets were already recorded in the balance sheet
under the previous guidance, ASC 840. For additional information
about the impact of the adoption of ASC 842, see Note 7,
Leasing.
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 its 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 December 31, 2022.
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 of the potential outcome of
any uncertain tax issue 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 2,
Summary of Significant Accounting Policies
to our Consolidated Financial Statements for disclosure on recently
adopted accounting pronouncements and those not yet
adopted.
Item 7A.
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, or the Exchange Act,
and are not required to provide the information required under this
item.
Item 8.
Financial Statements and Supplementary Data
Our financial statements and the accompanying notes that are filed
as part of this Annual Report on Form 10-K are listed under
Part IV, Item 15 - "Financial Statements Schedules and
Reports” and are set forth beginning on page F-1 immediately
following the signature pages of this Annual Report on Form
10-K.
Item 9.
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A.
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, or the Exchange Act are
recorded, processed, summarized, and reported within the time
periods specified in the Securities and Exchange Commission’s rules
and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive
Officer (our principal executive officer) and our Chief Financial
Officer (our principal 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 December 31, 2022.
Based on that evaluation, our Chief Executive Officer and our Chief
Financial Officer concluded that as of December 31, 2022, our
disclosure controls and procedures were effective.
Management’s Report on Internal Control Over Financial
Reporting
Management is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in
Rule 13a-15(f) or 15(d)-15(f) of the Exchange Act). Under the
supervision and with the participation of our management, including
our Chief Executive Officer and President and our Chief Financial
Officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting based upon the framework
in
Internal Control — Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on that evaluation, our management
concluded that our internal control over financial reporting was
effective as of December 31, 2022.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Changes in Internal Control Over Financial Reporting
There were no changes to internal control over financial reporting
during the quarter ended December 31, 2022, that have
materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
Item 9B.
Other Information
None.
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent
Inspections
Not applicable.
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
Certain information regarding our executive officers is included
below. All other information regarding directors, executive
officers and corporate governance required by this item is
incorporated herein by reference to the applicable information in
the proxy statement for our 2023 Annual Meeting of Stockholders, or
2023 Annual Meeting, which will be filed with the SEC within
120 days after our fiscal year end of December 31, 2022,
and is set forth under “Nominees for Director,” “Corporate
Governance Profile,” “Delinquent Section 16(a) Reports” and in
other applicable sections in the proxy statement.
Information about our Executive Officers
The following sets forth certain information regarding all of our
executive officers as of February 22, 2023:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name |
|
Age |
|
Position |
Kumarakulasingam Suriyakumar |
|
69 |
|
Chairman and Chief Executive Officer Director |
Jorge Avalos |
|
47 |
|
Chief Financial Officer |
Rahul K. Roy |
|
63 |
|
Chief Technology Officer |
Dilantha Wijesuriya |
|
61 |
|
President and Chief Operating Officer |
Kumarakulasingam (“Suri”) Suriyakumar
co-founded the Company in 1989 and has served as ARC Document
Solution’s Chief Executive Officer since June 1, 2007. He served as
the Company’s Chief Operating Officer from 1991 until his
appointment as Chief Executive. He also served as President from
1991 until June of 2022. On July 24, 2008, Mr. Suriyakumar was
appointed Chairman of ARC’s Board of Directors. Prior to joining
the Company, Mr. Suriyakumar was employed with Aitken Spence &
Co. LTD, a highly diversified conglomerate and one of the five
largest corporations in Sri Lanka.
Jorge Avalos
was appointed Chief Financial Officer of ARC Document Solutions in
January of 2015. From 2011 to his appointment as CFO, Mr. Avalos
was Chief Accounting Officer and Vice President Finance of ARC. Mr.
Avalos joined the Company in June 2006 as the Company’s Director of
Finance and became the Company’s Corporate Controller in December
2006, and Vice President, Corporate Controller in December of 2010.
Prior to joining the company, Mr. Avalos was employed with Vendare
Media Group, an online network and social media company, as its
controller. From September 1998 through March 2005, Mr. Avalos was
employed in a variety of audit and management roles with
PricewaterhouseCoopers LLP.
Rahul K. Roy
joined ARC Document Solutions as its Chief Technology Officer in
September 2000. Prior to joining the Company, Mr. Roy was the
founder, President and Chief Executive Officer of MirrorPlus
Technologies, Inc., which developed software for the reprographics
industry, from August 1993 until it was acquired by the Company in
1999. Mr. Roy also served as the Chief Operating Officer of
InPrint, a provider of printing, software, duplication, packaging,
assembly, and distribution services to technology companies, from
1993 until it was acquired by the Company in 1999.
Dilantha “Dilo” Wijesuriya
joined Ford Graphics, a former division of ARC Document Solutions,
in January 1991. He subsequently became president of that division
in 2001, and became a Company regional operations head in 2004, a
position he retained until his appointment as the Company’s Senior
Vice President, National Operations in August 2008. Mr. Wijesuriya
was appointed Chief Operating Officer in 2011 and made President in
June of 2022. Prior to his employment with the Company, Mr.
Wijesuriya was a divisional manager with Aitken Spence & Co.
LTD, a highly diversified conglomerate and one of the five largest
corporations in Sri Lanka.
Item 11.
Executive Compensation
The information required by this item is incorporated herein by
reference to the applicable information in the proxy statement for
our 2023 Annual Meeting and is set forth under “Executive
Compensation.”
The information in the section of the proxy statement for our 2023
Annual Meeting captioned “Compensation Committee Report” is
incorporated by reference herein but shall be deemed furnished, not
filed and shall not be deemed to be incorporated by reference into
any filing we make under the Securities Act of 1933 or the Exchange
Act.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required by this item is incorporated herein by
reference to the applicable information in the proxy statement for
our 2023 Annual Meeting and is set forth under “Beneficial
Ownership of Voting Securities” and “Equity Compensation Plan
Information.”
Item 13.
Certain Relationships and Related Transactions, and Director
Independence
The information required by this item is incorporated herein by
reference to the applicable information in the proxy statement for
our 2023 Annual Meeting and is set forth under “Certain
Relationships and Related Transactions” and “Corporate Governance
Profile.”
Item 14.
Principal Accountant Fees and Services
The information required by this item is incorporated herein by
reference to the proxy statement for our 2023 Annual Meeting and is
set forth under “Auditor Fees.”
PART IV
Item 15.
Exhibits, Financial Statement Schedules.
(a) The following documents are filed as part of this Annual
Report on Form 10-K:
|
|
|
(1)
Financial Statements
|
|
Report of Independent Registered Public Accounting Firm - Armanino
LLP (PCAOB ID: 32)
|
Consolidated Balance Sheets as of December 31, 2022 and
2021 |
Consolidated Statements of Operations for the years ended December
31, 2022 and 2021 |
Consolidated Statements of Comprehensive Income for the years ended
December 31, 2022 and 2021 |
Consolidated Statements of Equity for the years ended December 31,
2022 and 2021 |
Consolidated Statements of Cash Flows for the years ended December
31, 2022 and 2021 |
Notes to Consolidated Financial Statements |
(2)
Financial Statement Schedules
All other schedules have been omitted as the required information
is not present or is not present in amounts sufficient to require
submission of the schedule, or because the information required is
included in the Consolidated Financial Statements and notes
thereto.
(3)
Exhibits
See Item 15(b) below.
(b) Exhibits
The following exhibits are filed herewith as part of this Annual
Report on Form 10-K or are incorporated by reference to exhibits
previously filed with the SEC:
Index to Exhibits
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Number |
|
Description |
|
|
3.1 |
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|
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3.2 |
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3.3 |
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4.1 |
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4.2 |
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|
10.1 |
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10.2 |
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10.3 |
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10.4 |
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10.5 |
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10.6 |
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10.7 |
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10.8 |
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10.9 |
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10.10 |
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10.11 |
|
|
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|
|
10.12 |
|
|
Lease Agreement, for the premises commonly known as 934 and 940
Venice Boulevard, Los Angeles, CA, dated November 19, 1997, by
and between American Reprographics Company, L.L.C. (formerly Ford
Graphics Group, L.L.C.) and Sumo Holdings LA, LLC (incorporated by
reference to Exhibit 10.10 to the Registrant’s Registration
Statement on Form S-1 (Reg. No. 333-119788), as filed on
October 15, 2004).
|
|
|
10.13 |
|
|
Amendment to Lease for the premises commonly known as 934 and 940
Venice Boulevard, Los Angeles, CA, effective as of August 2,
2005, by and between Sumo Holdings LA, LLC, Landlord and American
Reprographics Company, L.L.C. (formerly known as Ford Graphics
Group, L.L.C.) Tenant (incorporated by reference to
Exhibit 10.2 to the Registrant’s Form 10-Q filed on
November 14, 2005
|
|
|
10.14 |
|
|
|
|
|
10.15 |
|
|
|
|
|
10.16 |
|
|
Indemnification Agreement, dated April 10, 2000, among
American Reprographics Company, L.L.C., American Reprographics
Holdings, L.L.C., ARC Acquisition Co., L.L.C.,
Mr. Chandramohan, Mr. Suriyakumar, Micro Device, Inc.,
Dieterich-Post Company, ZS Ford L.P., and ZS Ford L.L.C.
(incorporated by reference to Exhibit 10.19 to the
Registrant’s Registration Statement on Form S-1 (Reg.
No. 333-119788), as filed on October 15,
2004).
|
|
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|
10.17 |
|
|
|
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|
10.18 |
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|
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|
10.19 |
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10.20 |
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10.21 |
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10.22 |
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10.23 |
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10.24 |
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10.25 |
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10.26 |
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10.27 |
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10.28 |
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10.29 |
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10.30 |
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10.31 |
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10.32 |
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10.33 |
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10.34 |
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10.35 |
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10.36 |
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10.37 |
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|
10.38 |
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|
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|
10.39 |
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|
10.40 |
|
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|
10.41 |
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|
10.42 |
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|
10.43 |
|
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|
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|
10.44 |
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|
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|
10.45 |
|
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|
|
|
|
10.46 |
|
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|
|
|
|
10.47 |
|
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|
|
|
|
10.48 |
|
|
|
|
|
|
10.49 |
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21.1 |
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31.1 |
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31.2 |
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32.1 |
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32.2 |
|
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|
101.INS |
|
XBRL Instance Document * |
|
|
101.SCH |
|
XBRL Taxonomy Extension Schema * |
|
|
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase * |
|
|
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase * |
|
|
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase * |
|
|
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase * |
|
|
|
104 |
|
Cover Page Interactive Data File (embedded within the Inline XBRL
document)
|
|
|
|
* |
|
Filed herewith |
|
|
|
^ |
|
Indicates management contract or compensatory plan or
agreement |
Item 16.
Form 10-K Summary.
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
|
|
|
|
|
|
|
|
|
|
|
|
ARC DOCUMENT SOLUTIONS, INC. |
|
|
By: |
|
/s/ KUMARAKULASINGAM SURIYAKUMAR |
|
|
Chairman and Chief Executive Officer |
Date: February 23, 2023
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant in the capacities and on the dates
indicated.
|
|
|
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|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
/s/ KUMARAKULASINGAM SURIYAKUMAR
Kumarakulasingam Suriyakumar
|
|
Chairman and
Chief Executive Officer and Director (Principal Executive
Officer) |
|
February 23, 2023 |
|
|
|
/s/ JORGE AVALOS
Jorge Avalos
|
|
Chief Financial Officer (Principal Financial and Accounting
Officer) |
|
February 23, 2023 |
|
|
|
|
|
/s/ TRACEY LUTTRELL
Tracey Luttrell
|
|
Director, Corporate Counsel and Corporate Secretary |
|
February 23, 2023 |
|
|
|
|
|
/s/ BRADFORD L. BROOKS Bradford
L. Brooks
|
|
Director |
|
February 23, 2023 |
|
|
|
/s/ CHERYL COOK
Cheryl Cook
|
|
Director |
|
February 23, 2023 |
|
|
|
/s/ MARK W. MEALY
Mark W. Mealy
|
|
Director |
|
February 23, 2023 |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm (PCAOB ID:
32)
|
|
F-2 |
|
|
|
|
|
Consolidated Balance Sheets as of December 31, 2022 and
2021 |
|
F-4 |
|
|
|
Consolidated Statements of Operations for the years ended December
31, 2022 and 2021 |
|
F-5 |
|
|
|
Consolidated Statements of Comprehensive Income for the years ended
December 31, 2022 and 2021 |
|
F-6 |
|
|
|
Consolidated Statements of Equity for the years ended December 31,
2022 and 2021 |
|
F-7 |
|
|
|
Consolidated Statements of Cash Flows for the years ended December
31, 2022 and 2021 |
|
F-8 |
|
|
|
Notes to Consolidated Financial Statements |
|
F-9 |
|
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Board of Directors and
Stockholders of ARC Document Solutions, Inc.:
Opinion on the Consolidated Financial Statements and Internal
Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of ARC
Document Solutions, Inc. and Subsidiaries (collectively the
"Company" or “ARC”) as of December 31, 2022 and 2021, the related
consolidated statements of operations, comprehensive income,
equity, and cash flows, for each of the two years in the period
ended December 31, 2022, and the related notes (collectively
referred to as the "financial statements"). We have also audited
the Company’s internal control over financial reporting as of
December 31, 2022, based on criteria established in Internal
Control-Integrated Framework (2013) issued by the Committee of
Sponsoring Organization of the Treadway Commission
(COSO).
In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of the
Company as of December 31, 2022 and 2021, and the results of their
operations and their cash flows for each of the two years in the
period ended December 31, 2022, in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the Company
maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2022, based on criteria
established in Internal Control-Integrated Framework (2013) issued
by COSO.
Basis for Opinion
The Company's management is responsible for these consolidated
financial statements, for maintaining effective internal control
over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting included
in the accompanying Management's Report on Internal Control over
Financial Reporting appearing under Item 9A. Our responsibility is
to express an opinion on the Company's consolidated financial
statements and an opinion on the Company's internal control over
financial reporting based on our audits. We are a public accounting
firm registered with the Public Company Accounting Oversight Board
(United States) (PCAOB) and are required to be independent with
respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due
to error or fraud, and whether effective internal control over
financial reporting was maintained in all material
respects.
Our audits of the consolidated financial statements included
performing procedures to assess the risks of material misstatement
of the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the consolidated
financial statements. Our audit of internal control over financial
reporting included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed
risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial
Reporting
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles. A company's internal control over financial
reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of
the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could
have a material effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising
from the current period audit of the consolidated financial
statements that were communicated or required to be communicated to
the audit committee and that (i) relate to accounts or disclosures
that are material to the consolidated financial statements and (ii)
involved especially challenging, subjective, or complex judgments.
The communication of critical audit matters does not alter in any
way our opinion on the consolidated financial statements, taken as
a whole, and we are not, by communicating the critical audit matter
below, providing separate opinions on the critical audit matter or
on the accounts or disclosures to which it relates.
Revenue Recognition — Refer to Note 2 to the Financial
Statements
Critical Audit Matter Description
The Company recognizes revenue in a manner that best depicts the
transfer of promised goods or services to the customer, when
control of the product or service is transferred to a customer. The
Company’s critical contracts with customers include Digital
Printing, Equipment and Supplies agreements, and certain MPS
agreements. Certain MPS agreements within the Company’s MPS revenue
stream are accounted for as operating leases. The revenue streams
of the Company result in a high volume of transactions. The Company
recognizes revenue upon transfer of control of promised products or
services to customers in an amount that reflects the consideration
the Company expects to receive in exchange for those products or
services.
How the Critical Audit Matter Was Addressed in the
Audit
Our principal audit procedures related to the Company's revenue
recognition for these customer agreements included the
following:
•We
tested the effectiveness of internal controls related to the
transfer of goods or services and consideration the Company expects
to receive in exchange for those products or services.
•We
selected a sample of customer agreements and performed the
following procedures:
◦Obtained
and read contract source documents for each selection, including
master agreements, and other documents that were part of the
agreement to identify significant terms of the contracts and
performance obligations.
◦Assessed
the terms in the customer agreement and evaluated the
appropriateness of management’s application of their accounting
policies, in the determination of revenue recognition
conclusions.
◦Verified
proper transfer of control and recognition of revenue for each
selection.
•We
tested the mathematical accuracy of management's calculations of
revenue and the associated timing of recognizing the related
revenue subject to any constraints in the financial
statements.
We have served as the Company's auditor since 2020.
ArmaninoLLP
San Francisco, California
February 23, 2023
ARC DOCUMENT SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
2022 |
|
2021 |
Assets |
|
|
|
Current assets: |
|
|
|
Cash and cash equivalents |
$ |
52,561 |
|
|
$ |
55,929 |
|
Accounts receivable, net of allowances for accounts receivable
of
$1,947
and $2,104
|
38,748 |
|
|
39,441 |
|
Inventory |
8,610 |
|
|
8,842 |
|
|
|
|
|
Prepaid expenses |
4,018 |
|
|
4,125 |
|
Other current assets |
3,540 |
|
|
4,207 |
|
Total current assets |
107,477 |
|
|
112,544 |
|
Property and equipment, net of accumulated depreciation of
$231,913
and $229,803
|
40,214 |
|
|
45,153 |
|
Right-of-use assets from operating leases |
28,163 |
|
|
29,360 |
|
Goodwill |
121,051 |
|
|
121,051 |
|
Other intangible assets, net |
208 |
|
|
325 |
|
|
|
|
|
Deferred income taxes, net |
7,993 |
|
|
13,293 |
|
Other assets |
2,209 |
|
|
2,273 |
|
Total assets |
$ |
307,315 |
|
|
$ |
323,999 |
|
Liabilities and Equity |
|
|
|
Current liabilities: |
|
|
|
Accounts payable |
$ |
22,972 |
|
|
$ |
22,753 |
|
Accrued payroll and payroll-related expenses |
11,235 |
|
|
11,857 |
|
Accrued expenses |
16,882 |
|
|
16,752 |
|
Current operating lease liabilities |
9,924 |
|
|
10,284 |
|
Current portion of finance leases |
11,558 |
|
|
13,816 |
|
Total current liabilities |
72,571 |
|
|
75,462 |
|
Long-term operating lease liabilities |
23,339 |
|
|
24,952 |
|
Long-term debt and finance leases |
54,916 |
|
|
64,426 |
|
|
|
|
|
Other long-term liabilities |
199 |
|
|
167 |
|
Total liabilities |
151,025 |
|
|
165,007 |
|
Commitments and contingencies (Note 6) |
|
|
|
Shareholders’ equity: |
|
|
|
ARC Document Solutions, Inc. shareholders’ equity: |
|
|
|
Preferred stock, $0.001 par value, 25,000 shares authorized;
0
shares issued and outstanding
|
— |
|
|
— |
|
Common stock, $0.001 par value, 150,000 shares authorized;
51,400
and 50,584 shares issued and
43,101
and 43,108 shares outstanding
|
51 |
|
|
50 |
|
Additional paid-in capital |
132,952 |
|
|
129,881 |
|
Retained earnings |
44,416 |
|
|
41,768 |
|
Accumulated other comprehensive loss |
(4,187) |
|
|
(2,501) |
|
|
173,232 |
|
|
169,198 |
|
Less cost of common stock in treasury,
8,299
and 7,476 shares
|
18,877 |
|
|
16,771 |
|
Total ARC Document Solutions, Inc. shareholders’ equity |
154,355 |
|
|
152,427 |
|
Noncontrolling interest |
1,935 |
|
|
6,565 |
|
Total equity |
156,290 |
|
|
158,992 |
|
Total liabilities and equity |
$ |
307,315 |
|
|
$ |
323,999 |
|
The accompanying notes are an integral part of these consolidated
financial statements.
ARC DOCUMENT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, |
|
2022 |
|
2021 |
|
|
Service sales |
$ |
267,891 |
|
|
$ |
253,586 |
|
|
|
Equipment and Supplies sales |
18,119 |
|
|
18,622 |
|
|
|
Total net sales |
286,010 |
|
|
272,208 |
|
|
|
Cost of sales |
190,013 |
|
|
184,558 |
|
|
|
Gross profit |
95,997 |
|
|
87,650 |
|
|
|
Selling, general and administrative expenses |
77,544 |
|
|
72,322 |
|
|
|
Amortization of intangible assets |
97 |
|
|
199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
18,356 |
|
|
15,129 |
|
|
|
Other income, net |
(62) |
|
|
(41) |
|
|
|
|
|
|
|
|
|
Interest expense, net |
1,796 |
|
|
2,147 |
|
|
|
Income before income tax provision |
16,622 |
|
|
13,023 |
|
|
|
Income tax provision |
5,832 |
|
|
4,181 |
|
|
|
Net income |
10,790 |
|
|
8,842 |
|
|
|
Loss attributable to noncontrolling interest |
304 |
|
|
301 |
|
|
|
Net income attributable to ARC Document Solutions, Inc.
shareholders |
$ |
11,094 |
|
|
$ |
9,143 |
|
|
|
|
|
|
|
|
|
Earnings per share attributable to ARC Document Solutions, Inc.
shareholders: |
|
|
|
|
|
Basic |
$ |
0.26 |
|
|
$ |
0.22 |
|
|
|
Diluted |
$ |
0.26 |
|
|
$ |
0.21 |
|
|
|
Weighted average common shares outstanding: |
|
|
|
|
|
Basic |
42,214 |
|
|
42,164 |
|
|
|
Diluted |
43,280 |
|
|
42,732 |
|
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
ARC DOCUMENT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, |
|
2022 |
|
2021 |
|
|
Net income |
$ |
10,790 |
|
|
$ |
8,842 |
|
|
|
Other comprehensive (loss) income, net of tax |
|
|
|
|
|
Foreign currency translation adjustments, net of tax |
(2,104) |
|
|
484 |
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income, net of tax |
(2,104) |
|
|
484 |
|
|
|
Comprehensive income |
8,686 |
|
|
9,326 |
|
|
|
Comprehensive loss attributable to noncontrolling
interest |
(722) |
|
|
(103) |
|
|
|
Comprehensive income attributable to ARC Document Solutions, Inc.
shareholders |
$ |
9,408 |
|
|
$ |
9,429 |
|
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
ARC DOCUMENT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARC Document Solutions, Inc. Shareholders |
|
|
|
|
|
Common Stock |
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
Shares |
|
Par
Value |
|
Additional Paid-in
Capital |
|
Retained
Earnings |
|
Other Comprehensive
(Loss) Income |
|
Common Stock in
Treasury |
|
Noncontrolling
Interest |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2020 |
49,422 |
|
|
$ |
49 |
|
|
$ |
127,755 |
|
|
$ |
37,308 |
|
|
$ |
(2,787) |
|
|
$ |
(14,657) |
|
|
$ |
6,668 |
|
|
$ |
154,336 |
|
Stock-based compensation |
963 |
|
|
1 |
|
|
1,685 |
|
|
|
|
|
|
|
|
|
|
1,686 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under Employee Stock Purchase
Plan |
34 |
|
|
|
|
61 |
|
|
|
|
|
|
|
|
|
|
61 |
|
Stock options exercised |
165 |
|
|
|
|
380 |
|
|
|
|
|
|
|
|
|
|
380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury shares |
|
|
|
|
|
|
|
|
|
|
(2,114) |
|
|
|
|
(2,114) |
|
Cash dividends - common stock ($0.11 per share)
|
|
|
|
|
|
|
(4,683) |
|
|
|
|
|
|
|
|
(4,683) |
|
Comprehensive income (loss) |
|
|
|
|
|
|
9,143 |
|
|
286 |
|
|
|
|
(103) |
|
|
9,326 |
|
Balance at December 31, 2021 |
50,584 |
|
|
$ |
50 |
|
|
$ |
129,881 |
|
|
$ |
41,768 |
|
|
$ |
(2,501) |
|
|
$ |
(16,771) |
|
|
$ |
6,565 |
|
|
$ |
158,992 |
|
Stock-based compensation |
152 |
|
|
|
|
1,773 |
|
|
|
|
|
|
|
|
|
|
1,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under Employee Stock Purchase
Plan |
45 |
|
|
|
|
98 |
|
|
|
|
|
|
|
|
|
|
98 |
|
Stock options exercised |
619 |
|
|
1 |
|
|
1,200 |
|
|
|
|
|
|
|
|
|
|
1,201 |
|
Treasury shares |
|
|
|
|
|
|
|
|
|
|
(2,106) |
|
|
|
|
(2,106) |
|
Cash dividends - common stock ($0.20 per share)
|
|
|
|
|
|
|
(8,446) |
|
|
|
|
|
|
|
|
(8,446) |
|
Distribution to noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
(3,908) |
|
|
(3,908) |
|
Comprehensive income (loss) |
|
|
|
|
|
|
11,094 |
|
|
(1,686) |
|
|
|
|
(722) |
|
|
8,686 |
|
Balance at December 31, 2022 |
51,400 |
|
|
$ |
51 |
|
|
$ |
132,952 |
|
|
$ |
44,416 |
|
|
$ |
(4,187) |
|
|
$ |
(18,877) |
|
|
$ |
1,935 |
|
|
$ |
156,290 |
|
The accompanying notes are an integral part of these consolidated
financial statements.
ARC DOCUMENT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
2022 |
|
2021 |
|
|
Cash flows from operating activities |
|
|
|
|
|
Net income |
$ |
10,790 |
|
|
$ |
8,842 |
|
|
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
Allowance for accounts receivable |
320 |
|
|
221 |
|
|
|
Depreciation |
20,328 |
|
|
24,357 |
|
|
|
Amortization of intangible assets |
97 |
|
|
199 |
|
|
|
Amortization of deferred financing costs |
61 |
|
|
62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
1,773 |
|
|
1,686 |
|
|
|
Deferred income taxes |
4,927 |
|
|
3,642 |
|
|
|
Deferred tax valuation allowance |
264 |
|
|
323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-cash items, net |
(205) |
|
|
(226) |
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
Accounts receivable |
(195) |
|
|
(3,380) |
|
|
|
Inventory |
62 |
|
|
651 |
|
|
|
Prepaid expenses and other assets |
9,746 |
|
|
9,889 |
|
|
|
Accounts payable and accrued expenses |
(10,741) |
|
|
(10,491) |
|
|
|
Net cash provided by operating activities |
37,227 |
|
|
35,775 |
|
|
|
Cash flows from investing activities |
|
|
|
|
|
Capital expenditures |
(5,881) |
|
|
(3,554) |
|
|
|
|
|
|
|
|
|
Other |
307 |
|
|
365 |
|
|
|
Net cash used in investing activities |
(5,574) |
|
|
(3,189) |
|
|
|
Cash flows from financing activities |
|
|
|
|
|
Proceeds from stock option exercises |
1,201 |
|
|
380 |
|
|
|
Proceeds from issuance of common stock under Employee Stock
Purchase Plan |
98 |
|
|
61 |
|
|
|
Share repurchases |
(2,106) |
|
|
(2,114) |
|
|
|
Distribution to noncontrolling interest |
(3,908) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on long-term debt agreements and finance
leases |
(14,736) |
|
|
(18,369) |
|
|
|
Borrowings under revolving credit facilities |
154,000 |
|
|
100,500 |
|
|
|
Payments under revolving credit facilities |
(160,250) |
|
|
(109,250) |
|
|
|
Payment of deferred financing costs |
(6) |
|
|
(281) |
|
|
|
|
|
|
|
|
|
Dividends paid |
(8,448) |
|
|
(2,949) |
|
|
|
Net cash used in financing activities |
(34,155) |
|
|
(32,022) |
|
|
|
Effect of foreign currency translation on cash balances |
(866) |
|
|
415 |
|
|
|
Net change in cash and cash equivalents |
(3,368) |
|
|
979 |
|
|
|
Cash and cash equivalents at beginning of period |
55,929 |
|
|
54,950 |
|
|
|
Cash and cash equivalents at end of period |
$ |
52,561 |
|
|
$ |
55,929 |
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
Cash paid for interest |
$ |
1,837 |
|
|
$ |
2,344 |
|
|
|
Income taxes paid, net |
$ |
167 |
|
|
$ |
299 |
|
|
|
Noncash financing activities: |
|
|
|
|
|
Finance lease obligations incurred |
$ |
9,482 |
|
|
$ |
8,034 |
|
|
|
Operating lease obligations incurred |
$ |
8,687 |
|
|
$ |
1,774 |
|
|
|
Declared unpaid dividends |
$ |
2,106 |
|
|
$ |
2,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
ARC DOCUMENT SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data or where otherwise
noted)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
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. 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.
Basis of Presentation
The accompanying Consolidated Financial Statements include the
accounts of the Company and its subsidiaries. All intercompany
accounts and transactions have been eliminated in
consolidation.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America (“GAAP”) requires management to make estimates and
assumptions that affect the amounts reported in the 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 Consolidated Financial
Statements.
Risk and Uncertainties
The Company generates a significant portion of its revenue across
all of its products and services from customers in the
architectural, engineering, construction and building
owner/operator (AEC/O) industry. As a result, the Company’s
operating results and financial condition can be significantly
affected by economic factors that influence the AEC/O industry,
such as non-residential construction spending, GDP growth, interest
rates, unemployment rates, and office vacancy rates, all of which
have been amplified due to the COVID-19 pandemic. Reduced activity
(relative to historic levels) in the AEC/O industry would diminish
demand for all of ARC’s services and products, and would therefore
negatively affect revenues and have a material adverse effect on
its business, operating results and financial
condition.
As part of the Company's growth strategy, ARC intends to continue
to expand the market and industries it services and increase sales
of a variety of service offerings that utilize ARC's existing
production methods and infrastructure, but 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 to 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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
Cash equivalents include demand deposits and short-term investments
with a maturity of three months or less when
purchased.
The Company maintains its cash deposits at numerous banks located
throughout the United States, Canada, India, United Arab Emirates,
the United Kingdom and China, which at times, may exceed federally
insured limits. UNIS Document Solutions, Co. Ltd., ("UDS"), the
Company’s joint venture in China, held $3.2 million and $15.4
million of the Company’s cash and cash equivalents as of
December 31, 2022 and 2021, respectively. The Company has not
experienced any losses in such accounts and believes it is not
exposed to any significant risk on cash and cash
equivalents.
Concentrations of Credit Risk and Significant Vendors
Concentrations of credit risk with respect to trade receivables are
limited due to a large, diverse customer base. No individual
customer represented more than 2.5% of net sales during 2022 and
2021.
The Company has geographic concentration risk as sales in
California, as a percent of total sales, were approximately 31% and
33% for 2022 and 2021, respectively.
The Company contracts with various suppliers. Although there are a
limited number of suppliers that could supply the Company’s
inventory, management believes any shortfalls from existing
suppliers could be absorbed by its existing suppliers or from other
suppliers on comparable terms. However, a change in suppliers could
cause a delay in sales and adversely affect results.
Purchases from the Company’s three largest vendors during 2022 and
2021 comprised approximately 40% of the Company’s total purchases
of inventory and supplies.
Allowance for Doubtful Accounts
The Company performs periodic credit evaluations of the financial
condition of its customers, monitors collections and payments from
customers, and generally does not require collateral. The Company
provides for the possible inability to collect accounts receivable
by recording an allowance for doubtful accounts. The Company writes
off an account when it is considered uncollectible. The Company
estimates the allowance for doubtful accounts based on historical
experience, aging of accounts receivable, and information regarding
the credit worthiness of its customers. Additionally, the Company
provides an allowance for returns and discounts based on historical
experience. The allowance for doubtful accounts activity was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
Beginning
of Period |
|
Charges to
Cost and
Expenses |
|
Deductions
(1)
|
|
Balance at
End of
Period |
Year ended December 31, 2022 |
|
|
|
|
|
|
|
Allowance for accounts receivable |
$ |
2,104 |
|
|
$ |
320 |
|
|
$ |
(477) |
|
|
$ |
1,947 |
|
Year ended December 31, 2021 |
|
|
|
|
|
|
|
Allowance for accounts receivable |
$ |
2,357 |
|
|
$ |
221 |
|
|
$ |
(474) |
|
|
$ |
2,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Deductions represent uncollectible accounts written-off net of
recoveries.
Inventories
Inventories are valued at the lower of cost (determined on a
first-in, first-out basis; or average cost) or net realizable
value. Inventories primarily consist of materials for use and
resale in digital printing, and equipment for resale. On an ongoing
basis, inventories are reviewed and adjusted for estimated
obsolescence or unmarketable inventories to reflect the lower of
cost or net realizable value. Charges to write-down inventory to
realizable value are recorded as an increase in cost of
sales.
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 the Company's 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, the Company considers
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 the Company determines that
its 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 the Company
makes such a determination. The Company had a $2.7 million and
$2.4 million valuation allowance against certain deferred tax
assets as of December 31, 2022 and December 31, 2021,
respectively.
In future quarters the Company will continue to evaluate its
historical results for the preceding twelve quarters and its future
projections to determine whether the Company will generate
sufficient taxable income to utilize its deferred tax assets, and
whether a valuation allowance is required.
The Company calculates its 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 the Company reports to the
various tax jurisdictions is subject to ongoing audits by federal,
state and foreign tax authorities. The Company's estimate of the
potential outcome of any uncertain tax issue is subject to
management’s assessment of relevant risks, facts, and circumstances
existing at that time. The Company uses 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. The
Company records 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 the Company's
assessment of such tax positions changes, the change in estimate is
recorded in the period in which the determination is made. The
Company reports tax-related interest and penalties as a component
of income tax expense.
Property and Equipment, net
Property and equipment are stated at cost and are depreciated using
the straight-line method over their estimated useful lives, as
follows:
|
|
|
|
|
|
|
|
|
Buildings |
|
10-20 years
|
Leasehold improvements |
|
10-20 years or lease term, if shorter
|
Machinery and equipment |
|
3-7 years
|
Furniture and fixtures |
|
3-7 years
|
Assets acquired under capital lease arrangements are included in
machinery and equipment, are recorded at the present value of the
minimum lease payments, and are depreciated using the straight-line
method over the life of the asset or term of the lease, whichever
is shorter. Expenses for repairs and maintenance are charged to
expense as incurred, while renewals and betterments are
capitalized. Gains or losses on the sale or disposal of property
and equipment are reflected in operating income.
The Company accounts for software costs developed for internal use
in accordance with ASC 350-40,
Intangibles – Goodwill and Other,
which requires companies to capitalize certain qualifying costs
incurred during the application development stage of the related
software development project. The primary use of this software is
for internal use and, accordingly, such capitalized software
development costs are depreciated on a straight-line basis over the
economic lives of the related products not to exceed three years.
The Company’s machinery and equipment (see Note 4,
Property and Equipment, Net)
includes $1.7 million and $1.2 million of capitalized software
development costs as of December 31, 2022 and 2021, net of
accumulated amortization of $23.3 million and $22.3 million as of
December 31, 2022 and 2021, respectively. Depreciation expense
includes the amortization of capitalized software development costs
which amounted to $1.0 million and $0.7 million, during the years
ended December 31, 2022 and 2021, respectively.
Software development costs for products intended to be sold, leased
or otherwise marketed are expensed as incurred until technological
feasibility has been established, at which time such costs are
capitalized until the product is available for general release to
customers. Technological feasibility is established when a product
design and working model have been completed and the completeness
of the working model and its consistency with the product design
have been confirmed by testing. To date, the establishment of
technological feasibility of the Company’s products and general
release of such software have substantially coincided.
Software development costs for software to be sold, leased, or
otherwise marketed are expensed as incurred until the establishment
of technological feasibility, at which time those costs are
capitalized until the product is available for general release to
customers and amortized over the estimated life of the product.
Technological feasibility is established upon the completion of a
working prototype that has been certified as having no critical
bugs and is a release candidate. To date, costs and time incurred
between the establishment of technological feasibility and product
release have not been material, and all software development costs
have been charged to research and development expense in our
consolidated statements of comprehensive income
(loss).
Impairment of Long-Lived 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 had no long-lived asset impairments in 2022
or 2021.
Goodwill and Other Intangible Assets
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.
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 which
simplifies subsequent goodwill measurement by eliminating step two
from the goodwill impairment test.
The Company determines the fair value of its reporting units using
an income approach. Under the income approach, the Company
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 judgement and estimation is
inherently higher in the current environment considering the
uncertainty created by the COVID-19 pandemic. The Company has
evaluated numerous factors disrupting its business and made
significant assumptions which include the severity and duration of
the business disruption, the timing and degree of economic recovery
and the combined effect of these assumptions on the Company's
future operating results and cash flows.
Other 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 13 (weighted average) years.
Deferred Financing Costs
Direct costs incurred in connection with debt agreements are
recorded as incurred and amortized based on the effective interest
method for the Company's borrowings under its credit agreement with
U.S. Bank National Association, dated April 22, 2021 (the "2021
Credit Agreement"). At December 31, 2022 and 2021, the Company
had $0.2 million and $0.3 million in unamortized deferred
financing costs.
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 maturity of three months or
less when purchased, which are highly liquid and readily
convertible to cash. Cash equivalents reported in the Company’s
Consolidated Balance Sheets were $1.7 million and $13.8 million as
of December 31, 2022 and 2021, respectively, 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 and finance leases:
The carrying amount of the Company’s finance leases reported in the
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 Consolidated Balance Sheet as of December 31, 2022
for borrowings under its Credit Agreement is $40.0 million. The
Company has determined that borrowings under its Credit Agreement
of $40.0 million as of December 31, 2022 approximates its fair
value.
Insurance Liability
The Company maintains a high deductible insurance policy for a
significant portion of its risks and associated liabilities with
respect to workers’ compensation. The Company’s deductible is $250
thousand per individual. The accrued liabilities associated with
this program are based on the Company’s estimate of the ultimate
costs to settle known claims, as well as claims incurred but not
yet reported to the Company, as of the balance sheet date. The
Company’s estimated liability is not discounted and is based upon
an actuarial report obtained from a third party. The actuarial
report uses information provided by the Company’s insurance brokers
and insurers, combined with the Company’s judgments regarding a
number of assumptions and factors, including the frequency and
severity of claims, claims development history, case jurisdiction,
applicable legislation, and the Company’s claims settlement
practices.
Commitments and Contingencies
In the normal course of business, the Company estimates potential
future loss accruals related to legal, workers’ compensation, tax
and other contingencies. These accruals require management’s
judgment on the outcome of various events based on the best
available information. However, due to changes in facts and
circumstances, the ultimate outcomes could differ from management’s
estimates.
Revenue Recognition
Revenue is recognized when control of the promised goods or
services is transferred to the Company's customers, in an amount
that reflects the consideration that the Company is expected to be
entitled to in exchange for those goods or services. The Company
applied practical expedients related to unsatisfied performance
obligations for (i) contracts with an original expected length
of one year or less and (ii) contracts for which the Company
recognizes revenue at the amount to which it has the right to
invoice for services performed.
Net sales of the Company’s principal services and products were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
2022 |
|
2021 |
|
|
Service Sales |
|
|
|
|
|
Digital Printing |
$ |
174,752 |
|
|
$ |
166,694 |
|
|
|
MPS |
75,782 |
|
|
72,434 |
|
|
|
Scanning and Digital Imaging |
17,357 |
|
|
14,458 |
|
|
|
Total services sales |
267,891 |
|
|
253,586 |
|
|
|
Equipment and Supplies Sales |
18,119 |
|
|
18,622 |
|
|
|
Total net sales |
$ |
286,010 |
|
|
$ |
272,208 |
|
|
|
Digital Printing consists of professional services and software
services to (i) re-produce 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 re-produce 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; generally, this occurs with
the transfer of control of the re-produced 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 the 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 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. The pattern of revenue recognition for the
Company's MPS revenue has remained substantially unchanged
following the adoption of ASC 842. See Note 7,
Leasing,
for additional information.
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 we expect 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.
The Company has established contractual pricing for certain large
national customer accounts (“Global Solutions”). These contracts
generally establish uniform pricing at all operating segments for
Global Solutions. Revenues earned from the Company’s Global
Solutions are recognized in the same manner as non-Global Solutions
revenues.
Included in revenues are fees charged to customers for shipping,
handling, and delivery services. Such revenues amounted to $11.3
million and $10.6 million for 2022 and 2021,
respectively.
Revenues from hosted software licensing activities are recognized
ratably over the term of the license. Revenues from software
licensing activities comprise less than 2% of the Company’s
consolidated revenues during the years ended December 31, 2022
and 2021.
Management provides for returns, discounts and allowances based on
historic experience and adjusts such allowances as considered
necessary.
In previous years, the Company's services were characterized by the
primary industries/markets in which they were meant to be sold,
e.g., the construction industry or the document archiving and
storage market. Having expanded the variety of markets and
industries it serves over the past several years, the Company now
believes it is more useful to report its services by production
method. Thus, Digital Printing was previously described as
“construction document and information management” or “CDIM,” and
Scanning and Digital Imaging was previously described as “archiving
and information management” or “AIM.”
The methods for financial reporting and revenue recognition in the
renamed service lines remain unchanged. Likewise, “Managed Print
Services” or “MPS” and “Equipment Sales and Supplies” are also
reported identically from previous years.
Comprehensive Income (Loss)
The Company’s comprehensive income (loss) includes foreign currency
translation adjustments, net of taxes.
Asset and liability accounts of international operations are
translated into the Company’s functional currency, U.S. dollars, at
current rates. Revenues and expenses are translated at the average
currency rate for the fiscal year.
Segment and Geographic 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.
The Company recognizes revenues in geographic areas based on the
location to which the product was shipped or services have been
rendered. See table below for revenues and property and equipment,
net, attributable to the Company’s U.S. operations and foreign
operations.
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|
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|
|
|
|
|
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|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2022 |
|
2021 |
|
|
|
|
U.S. |
|
Foreign
Countries |
|
Total |
|
U.S. |
|
Foreign
Countries |
|
Total |
|
|
|
|
|
|
Revenues from external customers |
|
$ |
254,559 |
|
|
$ |
31,451 |
|
|
$ |
286,010 |
|
|
$ |
241,719 |
|
|
$ |
30,489 |
|
|
$ |
272,208 |
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
34,595 |
|
|
$ |
5,619 |
|
|
$ |
40,214 |
|
|
$ |
39,584 |
|
|
$ |
5,569 |
|
|
$ |
45,153 |
|
|
|
|
|
|
|
Advertising and Shipping and Handling Costs
Advertising costs are expensed as incurred and approximated $0.7
million and $0.6 million during 2022 and 2021, respectively.
Shipping and handling costs incurred by the Company are included in
cost of sales.
Stock-Based Compensation
The Company applies the Black-Scholes valuation model in
determining the fair value of share-based payments to employees,
which is then amortized on a straight-line basis over the requisite
service period.
Total stock-based compensation for 2022 and 2021, was $1.8 million
and $1.7 million, respectively, and was recorded in selling,
general, and administrative expenses, consistent with the
classification of the underlying salaries. In accordance with ASC
718,
Income Taxes,
any excess tax benefit resulting from stock-based compensation, in
the Consolidated Statements of Cash Flows, are classified along
with other income tax cash flows as an operating
activity.
The weighted average fair value at the grant date for options
issued in 2022 and 2021, was $0.96 and $1.14, respectively. The
fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model using the following
weighted average assumptions for 2022 and 2021:
|
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|
|
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|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2022 |
|
2021 |
|
|
Weighted average assumptions used: |
|
|
|
|
|
|
Risk free interest rate |
|
2.1 |
% |
|
0.7 |
% |
|
|
Expected volatility |
|
56.4 |
% |
|
62.6 |
% |
|
|
Expected dividend yield |
|
6.2 |
% |
|
1.5 |
% |
|
|
Using historical exercise data as a basis, the Company determined
that the expected term for stock options issued in 2022 and 2021,
was 6.7 years.
For fiscal years 2022 and 2021, expected stock price volatility is
based on the Company’s historical volatility for a period equal to
the expected term. The risk-free interest rate is based on the U.S.
Treasury yield curve in effect at the time of grant with an
equivalent remaining term.
The Company accounts for forfeitures of share-based awards when
they occur.
As of December 31, 2022, total unrecognized stock-based
compensation expense related to nonvested stock-based compensation
was approximately $2.6 million, which is expected to be recognized
over a weighted average period of approximately
1.9 years.
For additional information, see Note 9,
Employee Stock Purchase Plan and Stock Plan.
Research and Development Expenses
Research and development activities relate to costs associated with
the design and testing of new technology or enhancements and
maintenance to existing technology. Such costs are expensed as
incurred are primarily recorded to cost of sales. In total,
research and development amounted to $6.5 million and $6.4 million,
during 2022 and 2021, respectively.
Noncontrolling Interest
The Company accounted for its investment in UDS under the purchase
method of accounting, in accordance with ASC 805,
Business Combinations.
UDS has been consolidated in the Company’s financial statements
from the date of acquisition. Noncontrolling interest, which
represents the 35% noncontrolling interest in UDS, is reflected on
the Company’s Consolidated Financial Statements. In May of 2022,
the Company completed an $11.2 million capital distribution
from its Chinese JV. As the Company is 65% owner, $7.3 million
came to the Company's US operations, and 35% or $3.9 million
went to the JV partner, thus resulting in a $3.9 million
decrease in the Company's consolidated cash and noncontrolling
interest balance sheet accounts.
Sales Taxes
The Company bills sales taxes, as applicable, to its customers. The
Company acts as an agent and bills, collects, and remits the sales
tax to the proper government jurisdiction. The sales taxes are
accounted for on a net basis, and therefore are not included as
part of the Company’s revenue.
Earnings Per Share
The 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 common shares
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 common
shares that would have been outstanding if common shares subject to
outstanding options and acquisition rights had been issued and if
the additional common shares were dilutive. Common share
equivalents are excluded from the computation if their effect is
anti-dilutive. There were 3.2 million and 4.3 million common shares
excluded from the calculation of diluted net income attributable to
ARC per common share as their effect would have been anti-dilutive
for 2022 and 2021, respectively. The Company’s common share
equivalents consist of stock options issued under the Company’s
Stock Plan.
Basic and diluted weighted average common shares outstanding were
calculated as follows for 2022 and 2021:
|
|
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|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
2022 |
|
2021 |
|
|
Weighted average common shares outstanding during the period —
basic |
42,214 |
|
|
42,164 |
|
|
|
Effect of dilutive stock awards |
1,066 |
|
|
568 |
|
|
|
Weighted average common shares outstanding during the period —
diluted |
43,280 |
|
|
42,732 |
|
|
|
Recent Accounting Pronouncements Not Yet Adopted
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 Company is
finalizing its assessment of CECL and believes that the impact will
be insignificant on its consolidated statements of financial
condition and results of operations.
3. GOODWILL AND OTHER INTANGIBLES
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 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 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.
Given the uncertainty regarding the ultimate financial impact of
the COVID-19 pandemic and the ensuing economic recovery, 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 Company’s 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.
The carrying amount of goodwill from January 1, 2021 through
December 31, 2022 is summarized as follows:
|
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|
|
|
|
|
|
|
|
|
|
|
Gross
Goodwill |
|
Accumulated
Impairment
Loss |
|
Net
Carrying
Amount |
|
|
|
|
|
|
January 1, 2021 |
$ |
405,558 |
|
|
$ |
284,507 |
|
|
$ |
121,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2021 |
$ |
405,558 |
|
|
$ |
284,507 |
|
|
$ |
121,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2022 |
$ |
405,558 |
|
|
$ |
284,507 |
|
|
$ |
121,051 |
|
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 no impairment.
The following table sets forth the Company’s other intangible
assets resulting from business acquisitions as of December 31,
2022 and 2021 which continue to be amortized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2022 |
|
December 31, 2021 |
|
Gross
Carrying
Amount |
|
Accumulated
Amortization |
|
Net
Carrying
Amount |
|
Gross
Carrying
Amount |
|
Accumulated
Amortization |
|
Net
Carrying
Amount |
Amortizable other intangible assets |
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
$ |
99,087 |
|
|
$ |
99,073 |
|
|
$ |
14 |
|
|
$ |
99,446 |
|
|
$ |
99,371 |
|
|
$ |
75 |
|
Trade names and trademarks |
20,281 |
|
|
20,087 |
|
|
194 |
|
|
20,344 |
|
|
20,094 |
|
|
250 |
|
|
$ |
119,368 |
|
|
$ |
119,160 |
|
|
$ |
208 |
|
|
$ |
119,790 |
|
|
$ |
119,465 |
|
|
$ |
325 |
|
Estimated future amortization expense of other intangible assets
for each of the next five fiscal years and thereafter are as
follows: