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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________ 
Form 10-Q
 _______________________________________ 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2023
or
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)
_______________________________________ 
Delaware20-1700361
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
12657 Alcosta Blvd, Suite 200
San RamonCalifornia94583
(Address of principal executive offices)(Zip Code)
(925949-5100
(Registrant's telephone number, including area code)
_______________________________________ 
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.001 per shareARCThe New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes     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      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
Accelerated filer
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 is a shell company (as defined in Rule 12b-2 of the Act).    Yes      No  
The number of outstanding shares of the registrant's common stock, par value $0.001 per share, was 43,234,211 as of July 24, 2023.



ARC DOCUMENT SOLUTIONS, INC.
Form 10-Q
For the Quarter Ended June 30, 2023
Table of Contents
 
PART I—FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022 (Unaudited)
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2023 and 2022 (Unaudited)
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2023 and 2022 (Unaudited)
Condensed Consolidated Statements of Equity for the three and six months ended June 30, 2023 and 2022 (Unaudited)
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and 2022 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 5. Other Information
Item 6. Exhibits
Signatures
3


In this Quarterly Report on Form 10-Q, “ARC Document Solutions,” “ARC,” “the Company,” “we,” “us,” and “our” refer to ARC Document Solutions, Inc., a Delaware corporation, and its consolidated subsidiaries, unless the context otherwise dictates.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact contained in this report are statements that could be deemed forward-looking statements, including without limitation statements with respect to expectations regarding the impact of the future cash flows, and capital requirements, the impact of foreign exchange rate movements on sales and net income, and the Company's anticipated effective tax rate, and statements of assumptions underlying any of the foregoing. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
In some cases, you can identify forward-looking statements by terms such as “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “project,” “target,” “likely,” “will,” “would,” “could,” and other similar language, whether in the negative or affirmative. The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations.
These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of risks, uncertainties and assumptions as described under the section titled "Part I - Item 1A. Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2022. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as indicative of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Some of the key factors that could cause actual results to differ from our expectations are listed below:
A significant portion of our revenue across all of our product and services is generated from customers in the architectural, engineering, construction and building owner/operator industry. Any decline in that industry could adversely affect our future revenue and profitability.
Because a significant portion of our overall costs are fixed, our earnings are highly sensitive to changes in revenue.
We derive a significant percentage of net sales from within the State of California and our business could be disproportionately harmed by an economic downturn or natural disaster affecting California.
Our growth strategy depends, in part, on our ability to successfully market and execute several different, but related, service offerings. Failure to do so could impede our future growth and adversely affect our competitive position.
We are dependent upon our vendors to continue to supply us equipment, parts, supplies, and services at comparable terms and price levels as the business grows.
Our failure to protect our customers’ confidential information against security breaches could damage our reputation, harm our business and adversely affect our results of operation.
Our failure to adequately protect the proprietary aspects of our technology solutions may cause us to lose market share.
Our failure to comply with laws related to privacy and data security could adversely affect our financial condition.
Our information technology and telecommunications systems are susceptible to damage, breach or interruption.
Added risks are associated with our international operations.
Our business could suffer if we fail to attract, retain, and successfully integrate skilled personnel.
The market price of our common stock is volatile, and is impacted by factors other than our financial performance, which could cause the value of an investment in our stock to decline.
Changes in tax laws and interpretations could adversely affect our business.
4


Our debt instruments impose certain restrictions on our ability to operate which in turn could negatively affect our ability to respond to business and market conditions and therefore could have an adverse effect on our business and results of operations.
If the interest rates on our borrowings increase, our access to capital and net income could be adversely affected.
We may be exposed to employment-related claims and costs and periodic litigation that could adversely affect our business and results of operations.
Except where otherwise indicated, the statements made in this Quarterly Report on Form 10-Q are made as of the date we filed this report with the Securities and Exchange Commission and should not be relied upon as of any subsequent date. All future written and verbal forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Unless required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You should, however, consult further disclosures we make in future filings of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, and any amendments thereto, as well as our proxy statements.
TRADEMARKS AND TRADE NAMES
We own or have rights to a number of trademarks, service marks, and trade names that we use in conjunction with the operation of our business, including the name and design mark “ARC Document Solutions,” “ABACUS,” “METAPRINT,” “PlanWell,” “PlanWell PDS,” “Riot Creative Imaging,” “SKYSITE,” and various design marks associated therewith. In addition, we own or have rights to various trademarks, service marks, and trade names that we use regionally in conjunction with our operations. This report also includes trademarks, service marks and trade names of other companies.



5


PART I—FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
ARC DOCUMENT SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
June 30,December 31,
(In thousands, except per share data)20232022
Assets
Current assets:
Cash and cash equivalents$51,066 $52,561 
Accounts receivable, net of allowances for accounts receivable of $2,012 and $1,947
38,451 38,748 
Inventory8,876 8,610 
Prepaid expenses4,154 4,018 
Other current assets3,817 3,540 
Total current assets106,364 107,477 
Property and equipment, net of accumulated depreciation of $232,051 and $231,913
37,941 40,214 
Right-of-use assets from operating leases27,691 28,163 
Goodwill121,051 121,051 
Other intangible assets, net178 208 
Deferred income taxes5,430 7,993 
Other assets2,138 2,209 
Total assets$300,793 $307,315 
Liabilities and Equity
Current liabilities:
Accounts payable$23,526 $22,972 
Accrued payroll and payroll-related expenses8,451 11,235 
Accrued expenses15,524 16,882 
Current operating lease liability9,534 9,924 
Current portion of finance leases9,792 11,558 
Total current liabilities66,827 72,571 
Long-term operating lease liabilities22,949 23,339 
Long-term debt and finance leases52,984 54,916 
Other long-term liabilities132 199 
Total liabilities142,892 151,025 
Commitments and contingencies (Note 6)
Stockholders’ equity:
ARC Document Solutions, Inc. stockholders’ 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; 52,436 and 51,400 shares issued and 43,229 and 43,101 shares outstanding
52 51 
Additional paid-in capital135,115 132,952 
Retained earnings46,087 44,416 
Accumulated other comprehensive loss(4,284)(4,187)
176,970 173,232 
Less cost of common stock in treasury, 9,207 and 8,299 shares
20,685 18,877 
Total ARC Document Solutions, Inc. stockholders’ equity156,285 154,355 
Noncontrolling interest1,616 1,935 
Total equity157,901 156,290 
Total liabilities and equity$300,793 $307,315 
The accompanying notes are an integral part of these condensed consolidated financial statements.
6




ARC DOCUMENT SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 Three Months Ended 
June 30,
Six Months Ended 
June 30,
(In thousands, except per share data)2023202220232022
Net sales$72,350 $74,564 $141,268 $144,052 
Cost of sales47,174 49,026 93,167 96,065 
Gross profit25,176 25,538 48,101 47,987 
Selling, general and administrative expenses19,013 19,939 38,495 39,294 
Amortization of intangible assets10 35 21 70 
Income from operations6,153 5,564 9,585 8,623 
Other income, net(15)(9)(26)(34)
Interest expense, net447 446 903 876 
Income before income tax provision5,721 5,127 8,708 7,781 
Income tax provision1,734 2,001 2,894 2,799 
Net income3,987 3,126 5,814 4,982 
Loss attributable to the noncontrolling interest31 136 144 252 
Net income attributable to ARC Document Solutions, Inc. stockholders$4,018 $3,262 $5,958 $5,234 
Earnings per share attributable to ARC Document Solutions, Inc. stockholders
Basic $0.09 $0.08 $0.14 $0.12 
Diluted $0.09 $0.08 $0.14 $0.12 
Weighted average common shares outstanding:
Basic 42,801 42,250 42,673 42,172 
Diluted 43,614 43,490 43,679 43,630 
The accompanying notes are an integral part of these condensed consolidated financial statements.

7


ARC DOCUMENT SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
 Three Months Ended 
June 30,
Six Months Ended 
June 30,
(In thousands)2023202220232022
Net income$3,987 $3,126 $5,814 $4,982 
Other comprehensive loss, net of tax
Foreign currency translation adjustments(310)(1,444)(272)(1,402)
Other comprehensive loss, net of tax(310)(1,444)(272)(1,402)
Comprehensive income3,677 1,682 5,542 3,580 
Comprehensive loss attributable to noncontrolling interest, net of tax(195)(522)(319)(606)
Comprehensive income attributable to ARC Document Solutions, Inc. stockholders$3,872 $2,204 $5,861 $4,186 
The accompanying notes are an integral part of these condensed consolidated financial statements.

8


ARC DOCUMENT SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited) 
 ARC Document Solutions, Inc. Stockholders  
 Common Stock Accumulated  
(In thousands, except per share data)SharesPar
Value
Additional Paid-in
Capital
Retained EarningsOther Comprehensive
Loss
Common Stock in
Treasury
Noncontrolling
Interest
Total
Balance at March 31, 202250,830 $51 $130,639 $41,624 $(2,491)$(17,052)$6,481 $159,252 
Stock-based compensation47 — 439 — — — — 439 
Stock options exercised10 — 23 — — — — 23 
Issuance of common stock under Employee Stock Purchase Plan9 — 18 — — — — 18 
Treasury shares— — — — — (1,049)— (1,049)
Cash dividends - common stock ($0.05 per share)
— — — (2,113)— — — (2,113)
Distribution to noncontrolling interest— — — — — — (3,908)(3,908)
Comprehensive income (loss), net of tax— — — 3,262 (1,058)— (522)1,682 
Balance at June 30, 202250,896 $51 $131,119 $42,773 $(3,549)$(18,101)$2,051 $154,344 
 ARC Document Solutions, Inc. Stockholders  
 Common Stock Accumulated  
(In thousands, except per share data)SharesPar
Value
Additional Paid-in
Capital
Retained
Earnings
Other Comprehensive
Loss
Common Stock in
Treasury
Noncontrolling
Interest
Total
Balance at March 31, 202352,268 $52 $134,510 $44,231 $(4,138)$(18,994)$1,811 $157,472 
Stock-based compensation131  529     529 
Stock options exercised26  45     45 
Issuance of common stock under Employee Stock Purchase Plan11  31     31 
Treasury shares   — — (1,691) (1,691)
Cash dividends - common stock ($0.05 per share)
—   (2,162)— —  (2,162)
Comprehensive income (loss), net of tax   4,018 (146) (195)3,677 
Balance at June 30, 202352,436 $52 $135,115 $46,087 $(4,284)$(20,685)$1,616 $157,901 
ARC Document Solutions, Inc. Stockholders
 Common Stock Accumulated  
(In thousands, except per share data)SharesPar
Value
Additional Paid-in
Capital
Retained EarningsOther Comprehensive LossCommon Stock in
Treasury
Noncontrolling InterestTotal
Balance at December 31, 202150,584 $50 $129,881 $41,768 $(2,501)$(16,771)$6,565 $158,992 
Stock-based compensation152 — 890 — — — — 890 
Stock options exercised145 1 310 — — — — 311 
Issuance of common stock under Employee Stock Purchase Plan15 — 38 — — — — 38 
Treasury shares— — — — — (1,330)— (1,330)
Cash dividends - common stock ($0.10 per share)
— — — (4,229)— — — (4,229)
Distribution to noncontrolling interest— — — — — — (3,908)(3,908)
Comprehensive income (loss), net of tax— — — 5,234 (1,048)— (606)3,580 
Balance at June 30, 202250,896 $51 $131,119 $42,773 $(3,549)$(18,101)$2,051 $154,344 
 ARC Document Solutions, Inc. Stockholders  
 Common Stock Accumulated  
(In thousands, except per share data)SharesPar
Value
Additional Paid-in
Capital
Retained
Earnings
Other Comprehensive
Loss
Common Stock in
Treasury
Noncontrolling
Interest
Total
Balance at December 31, 202251,400 $51 $132,952 $44,416 $(4,187)$(18,877)$1,935 $156,290 
Stock-based compensation236  1,023     1,023 
Stock options exercised777 1 1,080     1,081 
Issuance of common stock under Employee Stock Purchase Plan23  60     60 
Treasury shares     (1,808) (1,808)
Cash dividends - common stock ($0.10 per share)
   (4,287)   (4,287)
Comprehensive income (loss), net of tax   5,958 (97) (319)5,542 
Balance at June 30, 202352,436 $52 $135,115 $46,087 $(4,284)$(20,685)$1,616 $157,901 
The accompanying notes are an integral part of these condensed consolidated financial statements.
9




ARC DOCUMENT SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 Six Months Ended 
June 30,
(In thousands)20232022
Cash flows from operating activities
Net income$5,814 $4,982 
Adjustments to reconcile net income to net cash provided by operating activities:
Allowance for credit losses229 201 
Depreciation9,015 10,547 
Amortization of intangible assets21 70 
Amortization of deferred financing costs32 30 
Stock-based compensation1,023 890 
Deferred income taxes2,545 2,578 
Deferred tax valuation allowance49 16 
Other non-cash items, net(157)(106)
Changes in operating assets and liabilities:
Accounts receivable222 (5,607)
Inventory(323)(1,156)
Prepaid expenses and other assets4,542 5,197 
Accounts payable and accrued expenses(8,859)(6,113)
Net cash provided by operating activities14,153 11,529 
Cash flows from investing activities
Capital expenditures(4,496)(2,666)
Other191 142 
Net cash used in investing activities(4,305)(2,524)
Cash flows from financing activities
Proceeds from stock option exercises 1,081 311 
Proceeds from issuance of common stock under Employee Stock Purchase Plan60 38 
Share repurchases(1,808)(1,330)
Distribution to noncontrolling interest (3,908)
Payments on finance leases(6,194)(7,827)
Borrowings under revolving credit facilities82,000 76,000 
Payments under revolving credit facilities(82,000)(78,500)
Payment of deferred financing costs(23) 
Dividends paid(4,267)(4,218)
Net cash used in financing activities(11,151)(19,434)
Effect of foreign currency translation on cash balances (192)(905)
Net change in cash and cash equivalents(1,495)(11,334)
Cash and cash equivalents at beginning of period52,561 55,929 
Cash and cash equivalents at end of period$51,066 $44,595 
Supplemental disclosure of cash flow information
Noncash investing and financing activities
Finance lease obligations incurred$2,482 $4,363 
Operating lease obligations incurred$4,375 $4,799 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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ARC DOCUMENT SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data or where otherwise noted)
(Unaudited)
1. Description of Business and Basis of Presentation
ARC Document Solutions, Inc. ("ARC Document Solutions," "ARC" or "the Company") is a digital printing company. ARC provides digital printing and document-related services to customers in a growing variety of industries. ARC offers Digital Printing services, Managed Print Services ("MPS"), and Scanning and Digital Imaging services. In addition, ARC also sells Equipment and Supplies. The Company conducts its operations through its wholly-owned operating subsidiary, ARC Document Solutions, LLC, a Texas limited liability company, and its affiliates.
Basis of Presentation
The accompanying interim Condensed Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in conformity with the requirements of the U.S. Securities and Exchange Commission ("SEC"). As permitted under those rules, certain footnotes or other financial information required by GAAP for complete financial statements have been condensed or omitted. In management’s opinion, the accompanying interim Condensed Consolidated Financial Statements reflect all adjustments of a normal and recurring nature that are necessary to fairly present the interim Condensed Consolidated Financial Statements. All intercompany accounts and transactions have been eliminated in consolidation. The operating results for the three and six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the interim Condensed Consolidated Financial Statements and accompanying notes. The Company evaluates its estimates and assumptions on an ongoing basis and relies on historical experience and various other factors that it believes to be reasonable under the circumstances to determine such estimates. Actual results could differ from those estimates and such differences may be material to the interim Condensed Consolidated Financial Statements.
These interim Condensed Consolidated Financial Statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
Noncontrolling Interest
The Company accounted for its investment in UNIS Document Solutions Co. Ltd. ("UDS"), under the purchase method of accounting, in accordance with Accounting Standards Codification ("ASC") 805, Business Combinations. UDS has been consolidated in the Company's financial statements from the date of acquisition. Noncontrolling interest, which represents the 35% noncontrolling interest in UDS owned by the joint venture ("JV") partner, is reflected on the Company's Condensed Consolidated Financial Statements.
Revenue Recognition
Revenue is recognized when control of the promised goods or services is transferred to ARC's customers, in an amount that reflects the consideration it expects to be entitled to in exchange for those goods or services. Net sales of the Company’s principal services and products were as follows:
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 Three Months Ended 
June 30,
Six Months Ended 
June 30,
 2023202220232022
Service Sales
Digital Printing$44,218 $46,165 $85,597 $88,112 
MPS(1)
18,958 19,248 37,974 37,902 
Scanning and Digital Imaging5,260 4,320 9,854 8,489 
Total services sales$68,436 $69,733 $133,425 $134,503 
Equipment and Supplies Sales3,914 4,831 7,843 9,549 
Total net sales$72,350 $74,564 $141,268 $144,052 
(1) MPS includes $17.4 million of rental income and $1.5 million of service income for the three months ended June 30, 2023 and $35.0 million of rental income and $3.0 million of service income for the six months ended June 30, 2023. MPS includes $17.8 million of rental income and $1.4 million of service income for the three months ended June 30, 2022 and $35.0 million of rental income and $2.9 million of service income for the six months ended June 30, 2022.
Digital Printing consists of professional services and software services to (i) reproduce and distribute large-format and small-format documents in either black and white or color (“Ordered Prints”) and (ii) specialized graphic color printing. Substantially all of the Company’s revenue from Digital Printing comes from professional services to reproduce Ordered Prints. Sales of Ordered Prints are initiated through a customer order or quote and are governed by established terms and conditions agreed upon at the onset of the customer relationship. Revenue is recognized when the performance obligation under the terms of a contract with a customer are satisfied, which generally occurs with the transfer of control of the Ordered Prints. Transfer of control occurs at a specific point in time, when the Ordered Prints are delivered to the customer’s site or handed to the customer for walk-in orders. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. Taxes collected concurrent with revenue-producing activities are excluded from revenue.
MPS consists of placement, management, and optimization of print and imaging equipment in customers' offices, job sites, and other facilities. MPS relieves the Company’s customers of the burden of purchasing print equipment and related supplies and maintaining print devices and print networks, and it shifts their costs to a “per-use” basis. MPS is supported by the Company's hosted proprietary technology, Abacus®, which allows customers to capture, control, manage, print, and account for their documents. Under its MPS contracts, the Company is paid a fixed rate per unit for each print produced (per-use), often referred to as a “click charge”. MPS sales are driven by the ongoing print needs of the Company’s customers at their facilities. Upon the issuance of ASC 842, Leases, the Company concluded that certain of its MPS arrangements, which had previously been accounted for as service revenue under ASC 606, Revenue from Contracts with Customers, are accounted for as operating leases under ASC 842.
Scanning and Digital Imaging combines software and professional services to facilitate the capture, management, access and retrieval of documents and information that have been produced in the past. Scanning and Digital Imaging includes the Company's hosted SKYSITE ® software and ARC Facilities solution to organize, search and retrieve documents, as well as the provision of services that include the capture and conversion of hardcopy and electronic documents into digital files (“Scanned Documents”), and their cloud-based storage and maintenance. Sales of Scanning and Digital Imaging professional services, which represent substantially all revenue for the business line, are initiated through a customer order or proposal and are governed by established terms and conditions agreed upon at the onset of the customer relationship. Revenue is recognized when the performance obligation under the terms of a contract with a customer are satisfied; generally, this occurs with the transfer of control of the digital files. Transfer of control occurs at a specific point-in-time, when the Scanned Documents are delivered to the customer either through SKYSITE, ARC Facilities, or through other electronic media. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. Taxes collected concurrent with revenue-producing activities are excluded from revenue.
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Equipment and Supplies sales consist of reselling printing, imaging, and related equipment (“Goods”) to customers primarily in architectural, engineering and construction firms. Sales of Equipment and Supplies are initiated through a customer order and are governed by established terms and conditions agreed upon at the onset of the customer relationship. Revenue is recognized when the performance obligations under the terms of a contract with a customer are satisfied; generally, this occurs with the transfer of control of the Goods. Transfer of control occurs at a specific point-in-time, when the Goods are delivered to the customer’s site. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. Taxes collected concurrent with revenue-producing activities are excluded from revenue. The Company has experienced minimal customer returns or refunds and does not offer a warranty on equipment that it is reselling.
Recently Adopted Accounting Pronouncements
In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments - Credit Loss (Topic 326) (“ASU 2016-13”), which updates the guidance on recognition and measurement of credit losses for financial assets. The new requirements, known as the current expected credit loss model ("CECL") will require entities to adopt an impairment model based on expected losses rather than incurred losses. ASU 2016-13 must be adopted on a modified-retrospective approach. This update was effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. In October 2019, the FASB approved an extension for all non-SEC filers, including small reporting companies, to extend the effective date to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Therefore, the effective date for this update was January 1, 2023. The implementation of CECL did not have a material impact on the Company's consolidated statements of financial condition and results of operations.
Segment Reporting
The provisions of ASC 280, Segment Reporting, require public companies to report financial and descriptive information about their reportable operating segments. The Company identifies operating segments based on the various business activities that earn revenue and incur expense and whose operating results are reviewed by the Company's Chief Executive Officer, who is the Company's chief operating decision maker. Because its operating segments have similar products and services, classes of customers, production processes, distribution methods and economic characteristics, the Company operates as a single reportable segment.
Risk and Uncertainties
The Company generates a significant portion of its revenue from sales of services and products to customers in the architectural, engineering, construction and building owner/operator ("AEC/O") industry. As a result, the Company's results largely depend on the strength of that industry. The Company's historical operating results reflect the cyclical and variable nature of the AEC/O industry. ARC believes that the AEC/O industry generally experiences downturns several months after a downturn in the general economy, and that there may be a similar delay in the recovery of the AEC/O industry following a recovery of the general economy. A downturn in the AEC/O industry would diminish demand for all of the Company's products and services, and would therefore negatively affect the Company's revenues and have a material adverse effect on the Company's business, operating results and financial condition.
As part of the Company’s growth strategy, ARC intends to continue to offer and grow a variety of service offerings that are relatively new to the company. The success of the Company's efforts will be affected by its ability to acquire new customers for the Company's new service offerings as well as sell the new service offerings to existing customers. The Company’s inability to successfully market and execute these relatively new service offerings could significantly affect its business and reduce its long term revenue, resulting in an adverse effect on its results of operations and financial condition.
2. 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 shares of common stock outstanding for the period. Diluted earnings per common share is computed similarly to basic earnings per share except that the denominator is increased to include the number of additional shares of common stock that would have been outstanding if shares subject to outstanding options and acquisition rights had been issued and if the additional shares were dilutive. Common share equivalents are excluded from the computation if their effect is anti-dilutive. For the three and six months ended June 30, 2023, 4.4 million and 4.1 million shares of common stock, respectively, were excluded from the calculation of diluted net income attributable to ARC per common share, because they were anti-dilutive. For the three and six months ended June 30, 2022, 3.2 million and 3.0 million shares of common stock, respectively, were excluded from the calculation of diluted net
13


income attributable to ARC per common share, because they were anti-dilutive. The Company's common share equivalents consist of stock options issued under the Company's equity incentive plan.
Basic and diluted weighted average common shares outstanding were calculated as follows for the three and six months ended June 30, 2023 and 2022: 
 Three Months Ended 
June 30,
Six Months Ended 
June 30,
 2023202220232022
Weighted average common shares outstanding during the period—basic42,801 42,250 42,673 42,172 
Effect of dilutive stock awards813 1,240 1,006 1,458 
Weighted average common shares outstanding during the period—diluted43,614 43,490 43,679 43,630 

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 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, the Company elected to early-adopt ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies subsequent goodwill measurement by eliminating step two from the goodwill impairment test.
There can be no assurance that the estimates and assumptions made for purposes of the Company’s goodwill impairment analysis in 2022 will prove to be accurate predictions of the future. If the Company’s assumptions, including forecasted EBITDA of certain reporting units, are not achieved, or its assumptions regarding disruptions caused by the pandemic, and its impact on the recovery from COVID-19 change, then the Company may be required to record goodwill impairment charges in future periods, whether in connection with the next annual impairment testing in the third quarter of 2023, or on an interim basis, if any such change constitutes a triggering event (as defined under ASC 350, Intangibles-Goodwill and Other) outside of the quarter when the Company regularly performs its annual goodwill impairment test. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such charge would be material. There was no change in the carrying amount of goodwill from January 1, 2022 through June 30, 2023. 
See “Critical Accounting Policies and Significant Judgements and Estimates" in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2022 for further information regarding the process and assumptions used in the goodwill impairment analysis.
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.
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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.
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.
The following table sets forth the Company’s other intangible assets resulting from business acquisitions as of June 30, 2023 and December 31, 2022 which continue to be amortized: 
 June 30, 2023December 31, 2022
 Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Amortizable other intangible assets
Customer relationships$99,167 $99,157 $10 $99,087 $99,073 $14 
Trade names and trademarks20,246 20,078 168 20,281 20,087 194 
$119,413 $119,235 $178 $119,368 $119,160 $208 
Estimated future amortization expense of other intangible assets for the remainder of the 2023 fiscal year, and each of the subsequent four fiscal years and thereafter, are as follows: 
2023 (excluding the six months ended June 30, 2023)$21 
202438 
202534 
202633 
202733 
Thereafter19 
$178 
4. Income Taxes
On a quarterly basis, the Company estimates its effective tax rate for the full fiscal year and records a quarterly income tax provision based on the anticipated annual effective rate and the recognition of any discrete items within the quarter.
The Company recorded an income tax provision of $1.7 million and $2.9 million in relation to pretax income of $5.7 million and $8.7 million, respectively, for the three and six months ended June 30, 2023, which resulted in an effective income tax rate of 30.3% and 33.2%, respectively, primarily impacted by state taxes, non-deductible compensation, certain stock-based compensation and other non-deductible expenses. The Company recorded an income tax provision of $2.0 million and $2.8 million in relation to pretax income of $5.1 million and $7.8 million, respectively, for the three and six months ended June 30, 2022, which resulted in an effective income tax rate of 39.0% and 36.0%, respectively, primarily impacted by state taxes, non-deductible compensation, certain stock-based compensation and other non-deductible expenses.
In accordance with ASC 740-10, Income Taxes, the Company evaluates the need for deferred tax asset valuation allowances based on a more likely than not standard. The ability to realize deferred tax assets depends on the ability to generate sufficient taxable income within the carryback or carryforward periods provided for in the tax law for each applicable tax jurisdiction. The Company considers the following possible sources of taxable income when assessing the realization of deferred tax assets:

Future reversals of existing taxable temporary differences;
Future taxable income exclusive of reversing temporary differences and carryforwards;
Taxable income in prior carryback years; and
15


Tax-planning strategies.
The assessment regarding whether a valuation allowance is required or should be adjusted also considers all available positive and negative evidence factors, including but not limited to:

Nature, frequency, and severity of recent losses;
Duration of statutory carryforward periods;
Historical experience with tax attributes expiring unused; and
Near- and medium-term financial outlook.
The Company utilizes a rolling three years of actual and current year anticipated results as the primary measure of cumulative income/losses in recent years, as adjusted for permanent differences. The evaluation of deferred tax assets requires judgment in assessing the likely future tax consequences of events that have been recognized in the Company's financial statements or tax returns and future profitability. The Company's accounting for deferred tax consequences represents its best estimate of those future events. Changes in the Company's current estimates, due to unanticipated events, such as the ultimate financial impact of and recovery from the COVID-19 pandemic or otherwise, could have a material effect on its financial condition and results of operations. The Company has a $2.7 million valuation allowance against certain deferred tax assets as of June 30, 2023.
Based on the Company’s current assessment, the remaining net deferred tax assets as of June 30, 2023 are considered more likely than not to be realized. The valuation allowance of $2.7 million may be increased or reduced as conditions change or if the Company is unable to implement certain available tax planning strategies. The realization of the Company’s net deferred tax assets ultimately depends on future taxable income, reversals of existing taxable temporary differences or through a loss carry back.
5. Long-Term Debt
Long-term debt consists of the following: 
June 30, 2023December 31, 2022
Revolving Loans; 6.5% and 5.6% interest rate at June 30, 2023 and December 31, 2022
$40,000 $40,000 
Various finance leases; weighted average interest rate of 5.4% and 5.1% at June 30, 2023 and December 31, 2022, respectively; principal and interest payable monthly through May 2028
22,776 26,474 
62,776 66,474 
Less current portion(9,792)(11,558)
$52,984 $54,916 
Credit Agreement
On June 15, 2023, the Company entered into an amendment (the "Amendment") to its Credit Agreement dated as of April 22, 2021 (the "2021 Credit Agreement") with U.S. Bank National Association, as administrative agent and the lenders part thereto. The Amendment, among other things, modifies certain terms of the 2021 Credit Agreement to replace the relevant benchmark provisions from the London Interbank Offered Rate to the forward-looking term rate based on the Secured Overnight Financing Rate ("SOFR"). The Amendment also modifies certain terms of the 2021 Credit Agreement relating to the payment of dividends and stock repurchases by the Company and the related component calculations included in the fixed charge coverage ratio that the Company is required to maintain. After giving effect to the Amendment, the Company is permitted to repurchase up to $10 million of its stock in any twelve-month period and all such permitted stock repurchases will be excluded from the calculation of the fixed charge coverage ratio. In addition, the Company is permitted to make other restricted payments that are not stock repurchases, such as the payment of dividends, of up to $12 million made during any twelve-month period which will be excluded from the calculation of the fixed charge coverage ratio. The making of stock repurchases and the payment of dividends and other restricted payments is subject, in each case, to pro forma compliance with the financial covenants and other customary conditions set forth in the 2021 Credit Agreement.
The 2021 Credit Agreement provides for the extension of revolving loans in an aggregate principal amount not to exceed $70 million and replaces the Credit Agreement dated as of November 20, 2014, as amended (the "2014 Credit Agreement"). The obligation under the 2021 Credit Agreement matures on April 22, 2026.
As of June 30, 2023, the Company's borrowing availability under the revolving loan commitment was $27.8 million, after deducting outstanding letters of credit of $2.2 million and outstanding revolving loans of $40.0 million.
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Loans borrowed under the 2021 Credit Agreement bear interest, in the case of Term SOFR loans, at a per annum rate equal to the applicable Term SOFR (which rate shall not be less than zero), plus a margin ranging from 1.25% to 1.75%, based on the Company’s Total Leverage Ratio (as defined in the 2021 Credit Agreement). Loans borrowed under the 2021 Credit Agreement that are not Term SOFR loans bear interest at a per annum rate equal to the Alternate Base Rate plus a margin ranging from 0.25% to 0.75%, based on the Company’s Total Leverage Ratio. As of June 30, 2023, one month Term SOFR loans borrowed under the 2021 Credit Agreement accrued interest at 6.5%.
The Company pays certain recurring fees with respect to the 2021 Credit Agreement, including administration fees to the administrative agent.
Subject to certain exceptions, including, in certain circumstances, reinvestment rights, the loans extended under the Credit Agreement are subject to customary mandatory prepayment provisions with respect to: the net proceeds from certain asset sales; the net proceeds from certain issuances or incurrences of debt (other than debt permitted to be incurred under the terms of the 2021 Credit Agreement); the net proceeds from certain issuances of equity securities; and net proceeds of certain insurance recoveries and condemnation events of the Company.
The 2021 Credit Agreement contains customary representations and warranties, subject to limitations and exceptions, and customary covenants restricting the ability (subject to various exceptions) of the Company and its subsidiaries to: incur additional indebtedness (including guarantee obligations); incur liens; sell certain property or assets; engage in mergers or other fundamental changes; consummate acquisitions; make investments; make certain distributions or repurchase equity interest of the Company or its subsidiaries; change the nature of their business; prepay or amend certain indebtedness; engage in certain transactions with affiliates; amend their organizational documents; or enter into certain restrictive agreements. In addition, the 2021 Credit Agreement contains financial covenants which requires the Company to maintain (i) at all times, a Total Leverage Ratio in an amount not to exceed 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. ARC was in compliance with its covenants as of June 30, 2023.
The 2021 Credit Agreement allows for payment of dividends. In April 2023, the Company's board of directors declared a quarterly cash dividend of $0.05 per share that is payable on August 31, 2023 to stockholders of record as of July 31, 2023. Accordingly, the Company recorded a dividend payable of $2.2 million within accrued expenses as of June 30, 2023.
The 2021 Credit Agreement contains customary events of default, including with respect to: nonpayment of principal, interest, fees or other amounts; failure to perform or observe covenants; material inaccuracy of a representation or warranty when made; cross-default to other material indebtedness; bankruptcy, insolvency and dissolution events; inability to pay debts; monetary judgment defaults; actual or asserted invalidity or impairment of any definitive loan documentation, repudiation of guaranties or subordination terms; certain ERISA related events; or a change of control.
The obligations of the Company’s subsidiary that is the borrower under the 2021 Credit Agreement are guaranteed by the Company and each of the Company's other United States subsidiaries. The 2021 Credit Agreement and any interest rate protection and other hedging arrangements provided by any lender party to the credit facility or any affiliate of such a lender are secured on a first priority basis by a perfected security interest in substantially all of the borrower’s, the Company’s and each guarantor’s assets (subject to certain exceptions).
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6. Commitments and Contingencies
Operating Leases. The Company leases machinery, equipment, and office and operational facilities under non-cancelable operating lease agreements used in the ordinary course of business. Certain lease agreements for the Company's facilities generally contain renewal options and provide for annual increases in rent based on the local Consumer Price Index. Refer to Note 7, Leasing, on the Company's Annual Report on Form 10-K for the year ended December 31, 2022 for a schedule of the Company's future minimum operating lease payments.
Legal Proceedings. The Company is involved, and will continue to be involved, in legal proceedings arising out of the conduct of the Company's business, including commercial and employment-related lawsuits. Some of these lawsuits purport or may be determined to be class actions and seek substantial damages, and some may remain unresolved for several years. The Company establishes accruals for specific legal proceedings when it is considered probable that a loss has been incurred and the amount of the loss can be reasonably estimated. The Company's evaluation of whether a loss is reasonably probable is based on the Company's assessment and consultation with legal counsel regarding the ultimate outcome of the matter. As of June 30, 2023, the Company has accrued for the potential impact of loss contingencies that are probable and reasonably estimable. The Company does not currently believe that the ultimate resolution of any of these matters will have a material adverse effect on its results of operations, financial condition, or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect on the Company's results of operations, financial condition, or cash flows.
Environmental Matters. The Company has accrued liabilities for environmental assessment and remediation matters relating to operations at certain locations conducted in the past by predecessor companies that do not relate to ARC's current operations. The Company has accrued these liabilities because it is probable that a loss or cost will be incurred and the amount of loss or cost can be reasonably estimated. These estimates could change as a result of changes in planned remedial actions, remediation technologies, site conditions, the estimated time to complete remediation, environmental laws and regulations, and other factors. Because of the uncertainties associated with environmental assessment and remediation activities, the Company's future expenses relating to these matters could be higher than the liabilities it has accrued. Based upon current information, the Company believes that the impact of the resolution of these matters would not be, individually or in the aggregate, material to its financial position, results of operations or cash flows.
7. Stock-Based Compensation
On April 29, 2021, the Company's stockholders approved the Company's 2021 Incentive Plan, replacing the 2014 Stock Incentive Plan, as amended, which is the only equity incentive plan under which the Company can currently grant equity incentive awards. The 2021 Incentive Plan provides for the grant of incentive and non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units, stock bonuses and other forms of awards granted or denominated in the Company's common stock or units of the Company's common stock, as well as cash bonus awards, to employees, directors and consultants of the Company. On April 26, 2023, the Company's stockholders approved an amendment to the 2021 Incentive Plan ("Amended 2021 Plan") to increase the aggregate number of equity incentive shares authorized for issuance by 5,000,000 shares of common stock. Under the Amended 2021 Plan, the Company is authorized to issue up to 8.5 million shares plus such additional number of shares of common stock (up to 6,132,593 shares) as is equal to the number of shares of common stock subject to awards granted under the 2014 Incentive Plan and the Company's 2005 Stock Plan, which awards expire, terminate or are otherwise surrendered, cancelled, forfeited or repurchased by the Company pursuant to a contractual repurchase right. As of June 30, 2023, 5.1 million shares remained available for issuance under the 2021 Incentive Plan.
Stock options granted under the Company's stock plan generally expire no later than ten years from the date of grant. Options generally vest and become fully exercisable over a period of three to four years from date of award, except that options granted to non-employee directors may vest over a shorter time period. The exercise price of options is equal to at least 100% of the fair market value of the Company’s common stock on the date of grant. The Company allows for cashless exercises of vested outstanding options.
During the six months ended June 30, 2023, the Company granted options to acquire a total of 1.1 million shares of the Company's common stock to certain key employees with an exercise price equal to the fair market value of the Company’s common stock on the date of grant. These stock options vest annually over three years to four years from the grant date and expire 10 years after the date of grant. During the six months ended June 30, 2023, the Company granted 0.2 million shares of restricted stock awards to certain key employees with a deemed issuance price per share equal to the closing price of the Company's common stock on the date the restricted stock was granted. These restricted stock awards vest annually over three years from the grant date.
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Stock-based compensation expense was $0.5 million and $1.0 million for the three and six months ended June 30, 2023, respectively, compared to stock-based compensation expense of $0.4 million and $0.9 million for the three and six months ended June 30, 2022, respectively.
As of June 30, 2023, total unrecognized compensation cost related to unvested stock-based payments totaled $3.8 million and is expected to be recognized over a weighted-average period of approximately 2.0 years.
8. Fair Value Measurements
In accordance with ASC 820, Fair Value Measurement, the Company has categorized its assets and liabilities that are measured at fair value into a three-level fair value hierarchy. If the inputs used to measure fair value fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement. The three levels of the hierarchy are defined as follows:
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.
As of June 30, 2023, the Company's assets and liabilities that are measured at fair value were not material.
Fair Values of Financial Instruments. The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments for disclosure purposes:
Cash equivalents: Cash equivalents are time deposits with a maturity of three months or less when purchased, which are highly liquid and readily convertible to cash. Cash equivalents reported in the Company’s interim Condensed Consolidated Balance Sheet were $1.3 million as of June 30, 2023 and $1.7 million as of December 31, 2022 and are carried at cost and approximate fair value due to the relatively short period to maturity of these instruments.
Long-term debt: The carrying amount reported in the Company’s interim Condensed Consolidated Balance Sheet as of June 30, 2023 for borrowings under its 2021 Credit Agreement is $40.0 million. The Company has determined, utilizing observable market quotes, that the fair value of borrowings under its 2021 Credit Agreement is $40.0 million as of June 30, 2023.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our interim Condensed Consolidated Financial Statements and the related notes and other financial information appearing elsewhere in this report, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2022 and this Quarterly Report on Form 10-Q for the quarter ended June 30, 2023.
Business Summary
ARC Document Solutions Inc. is a digital printing company. We provide digital printing and document-related services to customers in a growing variety of industries. Our primary services and product offering are:
digital printing of general and specialized business documents such as those found in marketing and advertising, engineering and construction and other industries, as well as producing highly-customized display graphics of all types and sizes;
acquiring, placing and managing ARC-certified office printing equipment with proprietary device tracking and print management software at our customers’ offices and job sites;
scanning documents, indexing them and adding digital search features for use in digital document management, document archives and facilities management, as well as providing other digital imaging services; and
reselling digital printing equipment and supplies.
Each of these services frequently include additional logistics services in the form of distributing and delivering finished documents, installing display graphics, or the digital storage of graphic files.
We have categorized our service and product offerings to report distinct sales recognized from:
Digital Printing: We print documents of any size in color and black and white on a variety of materials including plain paper, vinyl, fabric, metal, wood and other three-dimensional substrates. While we can and do print high-page count work such as manuals or catalogs, the documents we typically produce are usually characterized by their high-quality production, low-volume and quick turnaround, and are produced using highly-sophisticated digital printing equipment.
Managed Print Services: We acquire and manage digital printing equipment and place it in our customers' facilities for their use, based on a service level agreement. We lease or own the equipment ourselves, while our customers pay for what they use. Per-use minimum charges are often part of our service agreements. We operate more than 10,500 managed print services, or MPS locations, ranging in size from one or two pieces of equipment in a single office, to hundreds of pieces of equipment in offices around the world. We also provide proprietary software to our customers to control their print expenses and connect their remote employees with their offices and ARC print centers nationwide. This software is developed and integrated by ARC.
Scanning and Digital Imaging: We scan hard-copy small format or large format documents in color or black and white, typically providing them to our customers as searchable PDF files. We also use our patented optical character recognition technology to make documents searchable, and we host them on proprietary applications for use as part of our ARC Facilities solutions. The types of documents that we scan include office files, construction plans and other small or large documents. We also process, distribute and print-on-demand images we capture for our customers. Our large, centralized Scanning and Digital Imaging centers are compliant with the Health Insurability Portability and Accountability Act of 1996, or HIPAA, so we can convert documents that include protected health information. Our unique software creates efficient search tags on scanned data for easy search and retrieval. We offer Cloud-based document management software and other digital hosting services to our customers or make files available for our customers to host themselves.
Equipment and Supplies Sales: We sell equipment and supplies to a small segment of our customer base. We also provide ancillary services such as equipment service and maintenance, often as a way to generate recurring revenue in addition to a one-time sale. In addition, we offer certified used equipment available for sale or for use in our MPS offering.
The majority of our products and services are available from each of our service centers. Our primary operational objective is to optimize our business performance by driving as much customer work through our service center network as is practical, and leveraging our production infrastructure, workforce, and production-grade equipment. All our production centers are digitally connected and we operate standard software and systems to support seamless movement of customers digital data and print anywhere within the ARC system.

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In addition, we can provide many of our services in our customers’ offices. Our geographic presence is concentrated in the U.S., with additional service centers in Canada, the United Arab Emirates (UAE), China, India, and the United Kingdom. Our origin as a company was in California, and the initial expansion of our business was concentrated there. We derive approximately 31% of our total revenue from the products and services delivered in California.

All of our production facilities are connected via a Software-Defined Wide Area Network (SD-WAN). Our cloud offerings are hosted by Amazon Web Services. We employ a combination of proprietary and industry-leading technologies to provide redundancy, backup and security of all data in our systems. All of our technology operations are designed to meet ISO 29001 standards for data security, and several of our service centers are HIPAA-compliant allowing us to manage document conversions and other scanning tasks involving protected health information, or PHI.
Costs and Expenses
Our cost of sales consists primarily of materials (paper, toner and other consumables), labor, and “indirect costs.” Indirect costs consist primarily of equipment expenses related to our MPS locations (typically our customers’ offices and job sites) and our service centers. Facilities and equipment expenses include maintenance, repairs, rents, insurance, and depreciation. Paper is the largest component of our material cost; however, the impact of paper pricing on our operating margins is mitigated, and in some cases eliminated, as it is often passed on to our customers. We closely monitor material cost as a percentage of net sales to measure volume and waste, and we maintain low levels of inventory. We also track labor utilization, or net sales per employee, to measure productivity and determine staffing levels.
The effects of the 2022 global supply chain disruptions on our business have eased in 2023. The supply chain disruptions for us were primarily confined to price increases. As noted above, price increases are often passed on to our customers. Our labor costs have increased moderately as we sought to retain valuable employees and competed for new hires during the six months ended June 30, 2023. While these increases had an effect on our results of operations, we believe our cost optimization program allowed us to mitigate their impact and will allow us to continue to manage them in future periods.

Historically, our capital expenditure requirements have varied based on our need for printing equipment in our MPS locations and service centers. Over the past two years, the pandemic has reduced the number of employees working in our customers’ locations, which has, in turn, reduced our need for printing equipment. We believe this trend is likely to become permanent and, as a result, we think the past two years of capital expenditures are more indicative of our future capital needs than our historical results.

Because our relationships with credit providers allows us to obtain attractive lease rates, we have historically chosen to lease rather than purchase most of our equipment over the past two years. With the rising cost of capital, in 2023 we have decided to adjust our historical strategy and use more of our available cash to acquire equipment and minimize the impact of interest expense on our results of operations.

Research and development costs consist mainly of the salaries, leased building space, and computer equipment related to our data storage and development centers in San Ramon, California and Kolkata, India. Such costs are primarily recorded to cost of sales.
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COVID-19 Pandemic
The COVID-19 pandemic adversely impacted our financial performance during 2020 to 2022, but we expect that its acute impact is mostly behind us. We believe, however, that the reduced office presence of employees brought on by the COVID-19 pandemic will be permanent. As a result, our MPS business has been and remains under pressure as most employers have left work-from-home policies in place. We expect that remote work and hybrid work arrangements will remain the norm for many of our customers for the remainder of 2023. We believe work-from-home and hybrid work practices benefit our scanning business as employees need access to documents, regardless of where they are working, and document scanning is the first step in making them accessible in the cloud.
Uncertainty around the potential disruption to our business related to the COVID-19 pandemic and its effect on the U.S. economy and our clients’ ongoing business operations has largely been mitigated, but we remain watchful and prepared to alter our business operations to protect employees and customers. The following discussions are subject to the future effects of the COVID-19 pandemic on our ongoing business operations.


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Results of Operations
 
 Three Months Ended June 30,Increase (decrease)Six Months Ended 
June 30,
Increase (decrease)
(In millions, except percentages)
2023(1)
2022(1)
$%
2023(1)
2022(1)
$%
Digital Printing$44.2 $46.2 $(1.9)(4.2)%$85.6 $88.1 $(2.5)(2.9)%
MPS19.0 19.2 (0.3)(1.5)%38.0 37.9 0.1 0.2 %
Scanning and Digital Imaging5.3 4.3 0.9 21.8 %9.9 8.5 1.4 16.1 %
Equipment and supplies sales3.9 4.8 (0.9)(19.0)%7.8 9.5 (1.7)(17.9)%
Total net sales$72.4 $74.6 $(2.2)(3.0)%$141.3 $144.1 $(2.8)(1.9)%
Gross profit$25.2 $25.5 $(0.4)(1.4)%$48.1 $48.0 $0.1 0.2 %
Selling, general and administrative expenses$19.0 $19.9 $(0.9)(4.6)%$38.5 $39.3 $(0.8)(2.0)%
Amortization of intangible assets$ $— $— (71.4)%$ $0.1 $— (70.0)%
Interest expense, net$0.4 $0.4 $— 0.2 %$0.9 $0.9 $— 3.1 %
Income tax provision$1.7 $2.0 $(0.3)(13.3)%$2.9 $2.8 $0.1 3.4 %
Net income attributable to ARC$4.0 $3.3 $0.8 23.2 %$6.0 $5.2 $0.7 13.8 %
Non-GAAP (2)
Adjusted net income attributable to ARC (2)
$4.1 $3.7 $0.4 9.7 %$6.2 $5.7 $0.6 9.7 %
EBITDA (2)
$10.6 $10.9 $(0.3)(3.0)%$18.8 $19.5 $(0.7)(3.8)%
Adjusted EBITDA (2)
$11.1 $11.3 $(0.2)(2.1)%$19.8 $20.4 $(0.6)(2.9)%
 
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:
 As Percentage of Net SalesAs Percentage of Net Sales
Three Months Ended June 30,Six Months Ended June 30,
 
2023 (1)
2022 (1)
2023 (1)
2022(1)
Net sales100.0 %100.0 %100.0 %100.0 %
Cost of sales65.2 65.8 66.0 66.7 
Gross profit34.8 34.2 34.0 33.3 
Selling, general and administrative expenses26.3 26.7 27.2 27.3 
Amortization of intangible assets —  — 
Income from operations8.5 7.5 6.8 6.0 
Interest expense, net0.6 0.6 0.6 0.6 
Income before income tax provision7.9 6.9 6.2 5.4 
Income tax provision2.4 2.7 2.0 1.9 
Net income5.5 4.2 4.1 3.5 
Loss attributable to the noncontrolling interest 0.2 0.1 0.2 
Net income attributable to ARC5.6 %4.4 %4.2 %3.6 %
Non-GAAP (2)
EBITDA (2)
14.6 %14.6 %13.3 %13.6 %
Adjusted EBITDA (2)
15.3 %15.2 %14.0 %14.2 %
 
(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.
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Three and Six Months Ended June 30, 2023 Compared to Three and Six Months Ended June 30, 2022
Net Sales
Net sales for the three and six months ended June 30, 2023, decreased 3.0% and 1.9%, respectively, compared to the same period in 2022. The decrease in net sales for the second quarter 2023 was primarily driven by a decrease in our lower margin Equipment & Supplies sales and a decrease in our Digital Printing services, partially offset by the year-over-year increase in sales from Scanning and Digital Imaging services.
Digital Printing. Year-over-year sales of Digital Printing services decreased $1.9 million, or 4.2%, for the three months ended June 30, 2023. Year-over-year sales of Digital Printing services decreased $2.5 million, or 2.9%, for the six months ended June 30, 2023. Year-over-year sales increased in digital color graphic printing from new and existing customers and we experienced continuing demand for digital color graphic printing across most of our customer base. This growth was offset by the decrease in digital plan printing sales which we attribute to less activity and lower spending on new construction projects due to the increased costs of capital compared to the prior year period. Digital Printing services represented 61% of total net sales for the three and six months ended June 30, 2023, compared to 62% and 61% for the three and six months ended June 30, 2022, respectively.
MPS. Year-over-year sales of MPS services for the three months ended June 30, 2023, decreased $0.3 million, or 1.5%. Year-over-year sales of MPS services for the six months ended June 30, 2023 increased $0.1 million or 0.2%. MPS sales have remained between $18 million to $19 million per quarter for the last two years as our MPS sales continues to be challenged by reduced in office presence of our customers' employees. Fewer employees returning to the workplace after the pandemic has muted print volumes in offices. We expect MPS sales to remain challenged for the balance of the year.
MPS sales represented approximately 26% and 27%, respectively, of total net sales for the three and six months ended June 30, 2023, compared to 26% for the three and six months ended June 30, 2022.
The number of MPS locations have declined slightly year over year to approximately 10,550 as of June 30, 2023, representing a net decrease of approximately 250 locations compared to June 30, 2022.
Scanning and Digital Imaging. Year-over-year sales of Scanning and Digital Imaging services increased $0.9 million, or 21.8% and $1.4 million, or 16.1% for the three and six months ended June 30, 2023, respectively. The increase in sales of our Scanning and Digital Imaging services was primarily attributable to growing demand for paper-to-digital document conversions used in day-to-day business operations, and the creation of digital archives to replace long-term warehoused paper document storage. We are expanding operational capacity in this service line, and we continue to drive an expansion of our addressable market for Scanning and Digital Imaging services with increased marketing activity, as well as by targeting building owners and facility managers that require on-demand access to their legacy documents to operate their assets efficiently. We believe that, with the expansion of the markets and industries we serve and the desire of our existing customers to have digital access to documents, our Scanning and Digital Imaging services will continue to grow in the future.
Equipment and Supplies Sales. Year-over-year sales of Equipment and Supplies decreased $0.9 million, or 19.0%, for the three months ended June 30, 2023 and decreased $1.7 million, or 17.9%, for the six months ended June 30, 2023. Equipment and Supplies sales continue to decline in the U.S. as well as in our China operations. We attribute the decrease in sales to the high cost of capital which reduced our customers' willingness to invest in equipment expenditures.
Gross Profit
During the three months ended June 30, 2023, gross profit decreased to $25.2 million, or 34.8%, compared to $25.5 million, or 34.2% during the three months ended June 30, 2022. Despite a sales decrease of $2.2 million in the second quarter of 2023 gross profit only decreased by $0.4 million due to a 60 basis points increase in gross margin. The increase in gross margin was driven by an improved efficiency in our cost structure and a reduction in depreciation expense of $0.7 million.
During the six months ended June 30, 2023, gross profit increased to $48.1 million, or 34.0%, compared to $48.0 million, or 33.3% during the six months ended June 30, 2022. Gross margin improvement was largely driven by our efforts to drive more work through our service centers which allowed us to leverage our facilities and equipment, cross-trained workforce, and production-grade equipment, as well as improved production efficiencies in 2023. The improvements were partially offset by an increase in labor resulting from the inflationary pressures experienced during the last twelve months.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by $0.9 million, or 4.6%, to $19.0 million for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. Selling, general and administrative expenses decreased by $0.8 million, or 2.0%, to $38.5 million for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. The decrease in selling, general and administrative expenses was primarily driven by lower commission and bonus accruals due to the decline in net sales.
Amortization of Intangibles
Amortization of intangibles decreased to less than $0.1 million for the three and six months ended June 30, 2023, due to the completion of amortization for certain customer relationship intangibles related to historical acquisitions.
Interest Expense, Net
Net interest expense of $0.4 million and $0.9 million for the three and six months ended June 30, 2023, respectively, remained relatively flat compared to the same period in 2022. Increases in interest rates within the first half of 2023 have been offset by the continued pay down of our long-term debt. Our 2021 Credit Agreement (as defined below) features a flexible payment schedule which allows us to pay down or draw on it at any time. As such, we intend to use available cash throughout the year to pay down the revolving loan to manage our interest expense.
Income Taxes
We recorded an income tax provision of $1.7 million and $2.9 million in relation to pretax income of $5.7 million and $8.7 million for the three and six months ended June 30, 2023, respectively, which resulted in an effective income tax rate of 30.3% and 33.2%, respectively. Our effective income tax rate for the three and six months ended June 30, 2023, was primarily impacted by state taxes, non-deductible compensation, certain stock-based compensation and other non-deductible expenses. Excluding the impact of certain stock-based compensation, an increase in certain valuation allowances, and other discrete items, our effective income tax rate for the consolidated company would have been 29.7% and 29.9%, respectively, and our effective income tax rate attributable to ARC Document Solutions, Inc. would have been 29.6% and 29.7% for the three and six months ended June 30, 2023.
By comparison, we recorded an income tax provision of $2.0 million and $2.8 million in relation to pretax income of $5.1 million and $7.8 million for the three and six months ended June 30, 2022, respectively, which resulted in an effective income tax rate of 39.0% and 36.0%, respectively. Our effective income tax rate for the three and six months ended June 30, 2022, was primarily impacted by state taxes, non-deductible compensation, certain stock-based compensation and other non-deductible expenses. Excluding the impact of certain stock-based compensation, our effective income tax rate for the consolidated company would have been 30.3% and 29.8%, respectively, and our effective income tax rate attributable to ARC Document Solutions, Inc. would have been 29.8% and 29.4%, respectively, for the three and six months ended June 30, 2022.
We have a $2.7 million valuation allowance against certain deferred tax assets as of June 30, 2023.
Noncontrolling Interest
Net loss attributable to noncontrolling interest represents 35% of the income/loss of UDS and its subsidiaries, which together comprise our Chinese joint venture operations.
Net Income Attributable to ARC
Net income attributable to ARC increased to $4.0 million and $6.0 million during the three and six months ended June 30, 2023, respectively, as compared to $3.3 million and $5.2 million during the three and six months ended June 30, 2022, respectively. The increase in net income attributable to ARC, despite the decrease in sales for both periods, was primarily driven by the decrease in selling, general and administrative expense as noted above in the first half of 2023.
EBITDA
EBITDA margin and Adjusted EBITDA margin is not a recognized measure under GAAP. When analyzing our operating performance, investors should use EBITDA margin and Adjusted EBITDA in addition to, and not as an alternative for, operating income or any other performance measure presented in accordance with GAAP. It is a measure we use to measure our performance and liquidity. We believe EBITDA margin and Adjusted EBITDA reflect an additional way of viewing aspects of
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our operations that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our business. We believe the measure is used by investors and is a useful indicator to measure our performance. Because not all companies use identical calculations, our presentation of EBITDA margin and Adjusted EBITDA may not be comparable to similarly titled measures of other companies. See Non-GAAP Financial Measures below for additional discussion.
EBITDA margin remained flat at 14.6% for the three months ended June 30, 2023, compared to the same period in 2022. Excluding the effect of stock-based compensation, Adjusted EBITDA margin increased to 15.3% during the three months ended June 30, 2023, as compared to 15.2% for the same period in 2022, primarily driven by the decrease in selling, general and administrative expenses mentioned above, partially offset by the decline in sales and resulting decrease in gross profit.
EBITDA margin decreased to 13.3% for the six months ended June 30, 2023, from 13.6% for the same period in 2022. Excluding the effect of stock-based compensation, Adjusted EBITDA margin decreased to 14.0% during the six months ended June 30, 2023, as compared to 14.2% for the same period in 2022. The decrease for the six months ended June 30, 2023 is largely attributable to lower sales.
Impact of Inflation
Rising costs for raw materials, such as paper, and fuel charges are largely being passed on to customers via price increases during the ordinary course of business. These price increases have moderated the impact of inflation on our financial results in 2023. As these inflationary pressures continue, however, the increased cost of labor, materials and other indirect costs require close and active management to avoid material impacts to our cost structure.
Non-GAAP Financial Measures
EBITDA, EBITDA margin, Adjusted EBITDA, Adjusted EBITDA margin, adjusted net income and adjusted earnings per share presented in this report are supplemental measures of our performance that are not required by or presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These measures are not measurements of our financial performance under GAAP and should not be considered as alternatives to net income, income from operations, net income margin, diluted earnings per share 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. We have presented these measures 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.
EBITDA represents net income before interest, taxes, depreciation and amortization. We calculate EBITDA margin by dividing EBITDA by net sales.
We use EBITDA and EBITDA margin 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 and EBITDA margin to compare the performance of our operating divisions and to measure performance for determining consolidated-level compensation. In addition, we use EBITDA and EBITDA margin to evaluate potential acquisitions and potential capital expenditures.
EBITDA and EBITDA margin 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
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GAAP results and using EBITDA and EBITDA margin only as supplements.
Our presentation of adjusted net income and Adjusted EBITDA over certain periods is an attempt to provide meaningful comparisons to our historical performance for our existing and future investors. The unprecedented changes in our end markets over the past several years have required us to take measures that are unique in our history and specific to individual circumstances. Comparisons inclusive of these actions make normal financial and other performance patterns difficult to discern under a strict GAAP presentation. Each non-GAAP presentation, however, is explained in detail in the reconciliation tables below.
Specifically, we have presented adjusted net income attributable to ARC and adjusted earnings per share attributable to ARC stockholders for the three and six months ended June 30, 2023 and 2022 to reflect the exclusion of changes in the valuation allowances related to certain deferred tax assets and other discrete tax items. We believe this presentation helps facilitate our investors understanding of our results of operations and allows them to make meaningful comparisons of our operating results for the three and six months ended June 30, 2023 against the corresponding periods in 2022. We believe these changes were the result of items which are not indicative of our actual operating performance.
We have presented Adjusted EBITDA for the three and six months ended June 30, 2023 and 2022 to exclude stock-based compensation expense. We calculate Adjusted EBITDA margin by dividing Adjusted EBITDA by net sales. The adjustment to exclude stock-based compensation expense from EBITDA is consistent with the definition of Adjusted EBITDA in our 2021 Credit Agreement; therefore, we believe this information is useful to investors in assessing our financial performance and ability to access our 2021 Credit Facility.
The following is a reconciliation of cash flows provided by operating activities to EBITDA:
 
 Three Months Ended 
June 30,
Six Months Ended 
June 30,
(In thousands)2023202220232022
Cash flows provided by operating activities$10,329 $8,598 $14,153 $11,529 
Changes in operating assets and liabilities214 2,094 4,418 7,679 
Non-cash expenses, including depreciation and amortization(6,556)(7,566)(12,757)(14,226)
Income tax provision1,734 2,001 2,894 2,799 
Interest expense, net447 446 903 876 
Loss attributable to the noncontrolling interest31 136 144 252 
Depreciation and amortization4,373 5,188 9,036 10,617 
EBITDA$10,572 $10,897 $18,791 $19,526 
The following is a reconciliation of net income attributable to ARC Document Solutions, Inc. to EBITDA and adjusted EBITDA:
 Three Months Ended 
June 30,
Six Months Ended 
June 30,
(In thousands)2023202220232022
Net income attributable to ARC Document Solutions, Inc.$4,018 $3,262 $5,958 $5,234 
Interest expense, net447 446 903 876 
Income tax provision1,734 2,001 2,894 2,799 
Depreciation and amortization4,373 5,188 9,036 10,617 
EBITDA10,572 10,897 18,791 19,526 
Stock-based compensation529 439 1,023 890 
Adjusted EBITDA$11,101 $11,336 $19,814 $20,416 

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The following is a reconciliation of net income margin attributable to ARC Document Solutions, Inc. to EBITDA margin and adjusted EBITDA margin:
 Three Months Ended 
June 30,
Six Months Ended 
June 30,
2023
2022 (1)
2023(1)
2022 (1)
Net income margin attributable to ARC Document Solutions, Inc.5.6 %4.4 %4.2 %3.6 %
Interest expense, net0.6 0.6 0.6 0.6 
Income tax provision2.4 2.7 2.0 1.9 
Depreciation and amortization6.0 7.0 6.4 7.4 
EBITDA margin14.6 14.6 13.3 13.6 
Stock-based compensation0.7 0.6 0.7 0.6 
Adjusted EBITDA margin15.3 %15.2 %14.0 %14.2 %
(1)Column does not foot due to rounding.

The following is a reconciliation of net income attributable to ARC Document Solutions, Inc. to adjusted net income and adjusted earnings per share attributable to ARC Document Solutions, Inc.:
 Three Months Ended 
June 30,
Six Months Ended 
June 30,
(In thousands, except per share amounts)2023202220232022
Net income attributable to ARC Document Solutions, Inc.$4,018 $3,262 $5,958 $5,234 
Deferred tax valuation allowance and other discrete tax items33 432 267 438 
Adjusted net income attributable to ARC Document Solutions, Inc.$4,051 $3,694 $6,225 $5,672 
Actual:
Earnings per share attributable to ARC Document Solutions, Inc. stockholders:
Basic$0.09 $0.08 $0.14 $0.12 
Diluted$0.09 $0.08 $0.14 $0.12 
Weighted average common shares outstanding:
Basic42,801 42,250 42,673 42,172 
Diluted43,614 43,490 43,679 43,630 
Adjusted:
Earnings per share attributable to ARC Document Solutions, Inc. stockholders:
Basic$0.09 $0.09 $0.15 $0.13 
Diluted$0.09 $0.08 $0.14 $0.13 
Weighted average common shares outstanding:
Basic42,801 42,250 42,673 42,172 
Diluted43,614 43,490 43,679 43,630 

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.
Total cash and cash equivalents as of June 30, 2023 was $51.1 million. Of this amount, $4.1 million was held in foreign countries, with $2.1 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, our ability to access our cash and cash equivalents held outside of the U.S. may be limited and our financial flexibility may be reduced.
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Supplemental information pertaining to our historical sources and uses of cash is presented as follows and should be read in conjunction with our interim Condensed Consolidated Statements of Cash Flows and notes thereto included elsewhere in this report.
 
 Six Months Ended 
June 30,
(In thousands)20232022
Net cash provided by operating activities$14,153 $11,529 
Net cash used in investing activities$(4,305)$(2,524)
Net cash used in financing activities$(11,151)$(19,434)
Operating Activities
Cash flows from operations are primarily driven by sales and net profit generated from these sales, excluding non-cash charges.
The increase in cash flows from operations during the six months ended June 30, 2023, compared to the same period in 2022, was primarily due to an improvement in accounts receivable collections and continued inventory management. Closely managing our cash collections resulted in days sales outstanding, or DSO, improving to 48 days as of June 30, 2023, compared to 54 days as of June 30, 2022.
DSO is calculated by taking the respective years June 30th, accounts receivable balance divided by the net sales for the quarter multiplied by the number of total days in a quarter. Other companies, including companies in our industry, may calculate DSO differently than we do, limiting its usefulness as a comparative measure.
We have presented DSO because we consider it to be an important indicator of the efficiency of our business and the quality of our cash flows. We believe investors may also find this metric meaningful given the importance of cash flows from operations and management's ability to efficiently manage our working capital.
We use DSO to measure and compare the cash management performance of our operating divisions.
Investing Activities
Net cash used in investing activities was primarily related to capital expenditures. We incurred capital expenditures totaling $4.5 million and $2.7 million for the six months ended June 30, 2023, and 2022, respectively. The year-over-year increase in capital expenditures is driven primarily by our decision to enter into fewer leases and acq