ARC DOCUMENT SOLUTIONS, INC. 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 2019 Form 10-K and this Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2020 . Business SummaryARC Document Solutions, Inc. ("ARC Document Solutions ," "ARC," "we," "us," or "our") is a leading document solutions provider to design, engineering, construction, and facilities management professionals, while also providing document solutions to businesses of all types. Our customers need us to manage the scale, complexity and workflow of their documents. We help them reduce their costs and increase their efficiency by improving their access and control over documents, and we offer a wide variety of ways to access, distribute, collaborate on, and store documents. Each of our service offerings is enabled through a suite of supporting proprietary technology and a wide variety of value-added 17 --------------------------------------------------------------------------------
services. We have categorized our service and product offerings to report distinct sales recognized from:
Construction Document and Information Management (CDIM), which consists of professional services and software services to manage and distribute documents and information primarily related to construction projects. CDIM sales include software services such as SKYSITE®, our cloud-based project communication application, as well as providing document and information management services that are often technology-enabled. The bulk of our current revenue from CDIM comes from large-format and small-format printing services we provide in both black and white and in color. The sale of services addresses a variety of customer needs including the provision of project communication tools, project information management, building information modeling, digital document distribution services, printing services, and others. Managed Print Services (MPS), consists of placement, management, and optimization of print and imaging equipment in our customers' offices, job sites, and other facilities. MPS relieves our customers of the burden of owning and managing print devices and print networks, and shifts their costs to a "per-use" basis. MPS is supported by our proprietary technology, Abacus®, which allows our customers to capture, control, manage, print, and account for their documents. MPS revenue is derived from two sources: 1) an engagement with the customer to place primarily large-format equipment, that we own or lease, at a construction site or in our customers' offices, and 2) an arrangement by which our customers outsource their printing function to us, including all office printing, copying, and reprographics printing. In both cases this is recurring, contracted revenue in which we are paid a single cost per unit of material used, often referred to as a "click charge." MPS sales are driven by the ongoing print needs of our customers at their facilities. Archiving and Information Management (AIM), combines software and professional services to facilitate the capture, management, access and retrieval of documents and information that have been produced in the past. AIM includes our SKYSITE software to organize, search and retrieve documents, as well as the provision of services that include the capture and conversion of hardcopy and electronic documents, and their cloud-based storage and maintenance. AIM sales are driven by the need to leverage past legacy information and documents for present or future use, facilitate cost savings and efficiency improvements over current hardcopy and digital storage methods, as well as comply with regulatory and records retention requirements. Equipment and Supplies, which consists of reselling printing, imaging, and related equipment to customers primarily in architectural, engineering and construction firms. We have expanded our business beyond the services we traditionally provided to the architectural, engineering, construction, and building owner/operator (AEC/O) industry in the past and are currently focused on growing MPS, AIM and CDIM, as we believe the mix of services demanded by the AEC/O industry continues to shift toward document management at customer locations and in the cloud, and away from its historical emphasis on large-format construction drawings produced "offsite" in our service centers. We deliver our services via the cloud, through a nationwide network of service centers, regionally-based technical specialists, locally-based sales executives, and a national/regional sales force known as Global Solutions. Based on our analysis of our operating results, we estimate that sales to the AEC/O industry accounted for approximately 75% of our net sales for the three months endedMarch 31, 2020 , with the remaining 25% consisting of sales to businesses outside of the AEC/O industry. Costs and Expenses Our cost of sales consists primarily of materials (paper, toner, and other consumables), labor, and "indirect costs" which consist primarily of equipment expenses related to our MPS contracts and our service center facilities. Facilities and equipment expenses include maintenance, repairs, rents, insurance, and depreciation. Paper is the largest component of our material cost; however, paper pricing typically does not significantly affect our operating margins due, in part, to our efforts to pass increased costs on to our customers. We closely monitor material cost as a percentage of net sales to measure volume and waste. We also track labor utilization, or net sales per employee, to measure productivity and determine staffing levels. We maintain low levels of inventory. Historically, our capital expenditure requirements have varied due to the cost and availability of finance lease lines of credit. Our relationships with credit providers have provided attractive lease rates over the recent years, and as a result, we chose to lease rather than purchase equipment in a significant portion of our engagements. Research and development costs consist mainly of the salaries, leased building space, and computer equipment that comprises our data storage and development centers inSan Ramon, California andKolkata, India . Such costs are primarily recorded to cost of 18 --------------------------------------------------------------------------------
sales.
COVID-19 Pandemic The global spread of the novel coronavirus (COVID-19) in recent months has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. The impact of this pandemic has created significant uncertainty in the global economy and has affected our business, employees, suppliers, and customers. Despite a strong start to the year, the decline in demand for our products and services duringMarch 2020 , which we believe was a result of the COVID-19 pandemic, negatively impacted our sales and profitability for the first quarter of 2020. We also expect an adverse impact on our sales and profitability in future periods. These impacts are expected to be material. However, the duration of these trends and the magnitude of such impacts cannot be precisely estimated at this time, as they are affected by a number of factors, many of which are outside management's control, including those presented in Item 1A. Risk Factors of this Quarterly Report. Although subject to unforeseen changes that may arise as the COVID-19 pandemic continues to unfold, we currently expect the second quarter of 2020 to be our most significantly impacted quarter, with a current belief for sequential improvement during the second half of 2020. Sustained adverse impacts to us, as well as to certain of our suppliers, dealers or customers may also affect our future valuation of certain assets and therefore may increase the likelihood of an impairment charge, write-off, or reserve associated with such assets, including goodwill, intangible assets, property and equipment, inventories, accounts receivable, tax assets, and other assets. We took proactive actions early on to protect the health of our employees and their families, including curtailing business travel and encouraging videoconferencing whenever possible. In addition, as the COVID-19 pandemic worsened throughout March and intoApril 2020 , we required personnel to work remotely to the extent possible and we restricted access to our sites to personnel who are required to perform critical business continuity activities. While we believe we have taken appropriate measures to mitigate the impacts of the COVID-19 pandemic, as the situation evolves into what could be a more prolonged pandemic, we will continue to analyze additional mitigation measures that may be needed to preserve the health and safety of our workforce and our customers and the ongoing continuity of our business operations. Those measures might include temporarily suspending select service centers, modifying workspaces, continuing social distancing policies, implementing new personal protective equipment or health screening policies at our facilities, or such other industry best practices needed to continue to maintain a healthy and safe environment for our employees amidst the COVID-19 pandemic. Given the economic uncertainty as a result of the COVID-19 pandemic, we have taken actions to improve our current liquidity position, including drawing on our revolving credit facility within the first quarter of 2020, reducing working capital, suspending share repurchases and future dividend payouts, postponing capital expenditures, reducing operating costs, initiating workforce reductions and salary reductions, and substantially reducing discretionary spending. We are the largest document services provider to industries that build and maintain our country's infrastructure and thus were considered an essential business and permitted to remain open in most markets during the first quarter of 2020. We also serve the housing, healthcare, and technology industries, and we were able to keep almost all of our 170 service centers open, be it at reduced volumes, in order to fulfill our customers' needs. However, there is significant uncertainty around the breadth and duration of our business disruptions related to the COVID-19 pandemic, as well as its impact on theU.S. economy, the ongoing business operations of our clients or our results of operations and financial condition. While our management team is actively monitoring the impacts of the COVID-19 pandemic and may take further actions altering our business operations that we determine are in the best interests of our employees and clients or as required by federal, state, or local authorities, the full impact of the COVID-19 pandemic on our results of operations, financial condition, or liquidity for the remainder of fiscal year 2020 and beyond cannot be estimated at this point. The following discussions are subject to the future effects of the COVID-19 pandemic on our ongoing business operations. 19
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Results of Operations
Three Months Ended March 31, Increase (decrease)
(In millions, except percentages) 2020(2) 2019 $ %
CDIM $ 49.2 $ 50.8 $ (1.6 ) (3.2 )%
MPS 27.3 30.9 (3.6 ) (11.6 )%
AIM 3.6 3.3 0.3 10.4 %
Equipment and supplies sales 8.4 12.1 (3.8 ) (31.2 )%
Total net sales $ 88.4 $ 97.1 $ (8.7 ) (9.0 )%
Gross profit $ 27.6 $ 30.7 $ (3.1 ) (10.0 )%
Selling, general and administrative expenses $ 24.3 $ 27.6 $ (3.3 ) (11.9 )%
Amortization of intangible assets $ 0.6 $ 0.9 $ (0.3 ) (33.3 )%
Interest expense, net $ 1.1 $ 1.4 $ (0.3 ) (22.4 )%
Income tax provision $ 1.1 $ 0.3 $ 0.8 289.8 %
Net income attributable to ARC $ 0.7 $ 0.6 $ 0.1 15.4 %
Non-GAAP (1)
Adjusted net income attributable to ARC (1) $ 1.2 $ 0.6 $ 0.6 91.3 %
EBITDA (1) $ 10.9 $ 10.6 $ 0.3 2.6 %
Adjusted EBITDA (1) $ 11.4 $ 11.2 $ 0.2 1.6 %
(1) See "Non-GAAP Financial Measures" on pg. 22 for additional information.
(2) Column does not foot due to rounding.
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 Sales
Three Months Ended March 31,
2020 (1) 2019 (1)
Net Sales 100.0 % 100.0 %
Cost of sales 68.8 68.4
Gross profit 31.2 31.6
Selling, general and administrative expenses 27.5 28.5
Amortization of intangible assets 0.7 0.9 Income from operations 3.0 2.2 Interest expense, net 1.3 1.5 Income before income tax provision 1.8 0.8 Income tax provision 1.3 0.3 Net income 0.5 0.5 Loss attributable to the noncontrolling interest 0.2
0.1
Net income attributable to ARC 0.8 % 0.6 % Non-GAAP (2) EBITDA (2) 12.3 % 10.9 % Adjusted EBITDA (2) 12.9 % 11.6 %
(1) Column does not foot due to rounding.
(2) See "Non-GAAP Financial Measures" on pg. 22 for additional information.
20
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Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019
Net Sales
Net sales for the three months ended March 31, 2020 decreased 9.0% compared to
the same period in 2019 due to the negative impact of the COVID-19 pandemic on
revenues from all of our service offerings, with the exception of AIM revenues.
The material decline in our net sales began in March, 2020 when stay-at-home
orders were put in place by several states in the U.S. following the World
Health Organization's declaration of COVID-19 a pandemic. The first such
shelter-at-home order in the U.S. was declared in California , which drives
approximately 34% of our total revenue.
CDIM. Year-over-year sales of CDIM services decreased $1.6 million , or 3.2%, for
the three months ended March 31, 2020 due to the COVID-19 pandemic. CDIM
services represented 56% of total net sales for the three months ended March 31,
2020 , compared to 52% for the three months ended March 31, 2019 .
MPS. Year-over-year sales of MPS services for the three months ended March 31,
2020 decreased $3.6 million , or 11.6%. The decline in MPS sales was driven
primarily by office employees in the U.S. and Canada who followed directives to
shelter-at-home, significantly reducing the volume of printing done in their
offices. MPS engagements on construction job sites continued to operate, and
many customers have required minimums that remain in effect to offset some of
our equipment costs. Our MPS offering delivers value to our customers by
optimizing their print infrastructure primarily during the first year after
joining us as a customer. MPS sales represented approximately 31% of total net
sales for the three months ended March 31, 2020 , compared to 32% for the three
months ended March 31, 2019 .
The number of MPS locations has grown to approximately 10,950 as of March 31,
2020 , representing a net increase of approximately 370 locations compared to
March 31, 2019 . While MPS is subject to temporary performance fluctuations based
on the loss or acquisition of large clients, we believe there is an opportunity
for MPS sales growth in the future after the pandemic due to the value that we
bring to our customers and the desire to reduce printing costs in the AEC/O
industry.
AIM. Year-over-year sales of AIM services increased $0.3 million , or 10.4%, for
the three months ended March 31, 2020 . The increase in sales of our AIM services
for the three months ended March 31, 2020 was primarily driven by sales of
solutions for building owners and facilities managers. We are driving an
expansion of our addressable market for AIM services by targeting building
owners and facilities managers that require on-demand access to their legacy
documents to operate their assets efficiently. As noted by an increase in sales
of AIM services in the first quarter of 2020, sales in AIM services can
fluctuate based on the level of scanning opportunities during the quarter.
However, with our expanded addressable market and desire to get digital access
to documents especially during the pandemic we believe our AIM services will
grow over time.
Equipment and Supplies Sales. Year-over-year sales of Equipment and Supplies
decreased $3.8 million , or 31.2%, for the three months ended March 31, 2020 . The
decline in Equipment and Supplies sales was primarily driven by the COVID-19
slowdown in China which decreased sales from UNIS Document Solutions Co. Ltd
("UDS"), our Chinese joint venture. Equipment and Supplies sales at UDS were
$3.4 million for the three months ended March 31, 2020 , compared to $6.9 million
for the three months ended March 31, 2019 . Traditionally, our customers in China
have exhibited a preference for owning print and imaging related equipment as
opposed to using equipment through onsite services arrangements, although recent
changes in the market may be indicative of a shift in procurement practices.
Equipment and Supplies sales continued to decline in the U.S. for the three
months ended March 31, 2020 . We do not anticipate growth in Equipment and
Supplies sales as we continue to place more focus on growing MPS sales and
converting sales contracts to MPS agreements.
Gross Profit
During the three months ended March 31, 2020 , gross profit and gross margin
decreased to $27.6 million , and 31.2% compared to $30.7 million and 31.6%,
during the same period in 2019, on a sales decline of $8.7 million .
Despite the significant drop in net sales due to the COVID-19 pandemic, gross
margin decreased by 0.4%, essentially remaining flat for the three months ended
March 31, 2020 . Gross margins were aided by the drop of $3.5 million in low
margin Equipment and Supplies sales from UDS, and cost saving activities in
connection with the restructuring plan we initiated in the third quarter of 2019
as well as cost savings initiated in response to the current COVID-19 pandemic.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $3.3 million , or 11.9%,
for the three months ended March 31, 2020 , compared to the same period in 2019.
The reduction was due to cost saving activities in connection with the
restructuring plan we initiated in the third quarter of 2019 as well as cost
savings initiated in response to the current COVID-19 pandemic, which included
head count reductions, suspension of all travel, reduced consulting expenses,
reduced bonuses and commissions, as well as the elimination of any discretionary
spending.
21
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Amortization of Intangibles
Amortization of intangibles of $0.6 million for the three months ended March 31,
2020 decreased $0.3 million compared to the same periods in 2019 due to the
completed amortization of certain customer relationship intangibles related to
historical acquisitions.
Interest Expense, Net
Net interest expense of $1.1 million for the three months ended March 31, 2020 ,
decreased compared to the same period in 2019 due to the pay down of our
long-term debt.
Income Taxes
We recorded an income tax provision of $1.1 million in relation to pretax income
of $1.6 million for the three months ended March 31, 2020 , which resulted in an
effective income tax rate of 70.6%. The increase in our effective income tax
rate for the three months ended March 31, 2020 was primarily due to shortfalls
in certain stock-based compensation, valuation allowances against certain
deferred tax assets, non-deductible expenses and the financial impact from the
COVID-19 pandemic. Excluding the impact of the change in valuation allowances,
certain nondeductible stock-based compensation, and other discrete tax items,
our effective income tax rate would have been 33.4% for the three months ended
March 31, 2020 .
By comparison, we recorded an income tax provision of $0.3 million in relation
to pretax income of $0.7 million for the three months ended March 31, 2019 ,
which resulted in an effective income tax rate of 38.8%. Excluding the impact of
valuation allowances, certain nondeductible stock-based compensation, and other
discrete tax items, our effective income tax rate would have been 31.1% for the
three months ended March 31, 2019 .
We have a $2.5 million valuation allowance against certain deferred tax assets
as of March 31, 2020 .
Noncontrolling Interest
Net loss attributable to noncontrolling interest represents 35% of the income 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 $0.7 million during the three months
ended March 31, 2020 . The increase in net income attributable to ARC compared to
the prior year period was driven by a decline in selling, general and
administrative expenses, which more than offset the decline in gross profit.
EBITDA
EBITDA margin increased to 12.3% for the three months ended March 31, 2020 , from
10.9% for the same period in 2019. Excluding the effect of stock-based
compensation, adjusted EBITDA margin increased to 12.9% during the three months
ended March 31, 2020 , as compared to 11.6% for the same period in 2019. The
increase in adjusted EBITDA margin for the three months ended March 31, 2020 was
primarily due to the significant decline in Selling, General and Administrative
expenses.
Impact of Inflation
We do not believe inflation has had a significant effect on our operations.
Price increases for raw materials, such as paper and fuel charges, typically
have been, and we expect will continue to be, passed on to customers in the
ordinary course of business.
Non-GAAP Financial Measures
EBITDA and related ratios presented in this report are supplemental measures of
our performance that are not required by or presented in accordance with
accounting principles generally accepted in the United States of America
("GAAP"). These measures are not measurements of our financial performance under
GAAP and should not be considered as alternatives to net income, income from
operations, or any other performance measures derived in accordance with GAAP or
as an alternative to cash flows from operating, investing or financing
activities as a measure of our liquidity.
EBITDA represents net income before interest, taxes, depreciation and
amortization. EBITDA margin is a non-GAAP measure calculated by dividing EBITDA
by net sales.
We have presented EBITDA and related ratios because we consider them important
supplemental measures of our performance
22
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and liquidity. We believe investors may also find these measures meaningful,
given how our management makes use of them. The following is a discussion of our
use of these measures.
We use EBITDA to measure and compare the performance of our operating segments.
Our operating segments' financial performance includes all of the operating
activities except debt and taxation which are managed at the corporate level for
U.S. operating segments. We use EBITDA to compare the performance of our
operating segments and to measure performance for determining consolidated-level
compensation. In addition, we use EBITDA to evaluate potential acquisitions and
potential capital expenditures.
EBITDA and related ratios have limitations as analytical tools, and should not
be considered in isolation, or as a substitute for analysis of our results as
reported under GAAP. Some of these limitations are as follows:
• They do not reflect our cash expenditures, or future requirements for
capital expenditures and contractual commitments;
• They do not reflect changes in, or cash requirements for, our working
capital needs;
• They do not reflect the significant interest expense, or the cash
requirements necessary, to service interest or principal payments on our
debt;
• Although depreciation and amortization are non-cash charges, the assets
being depreciated and amortized will often have to be replaced in the
future, and EBITDA does not reflect any cash requirements for such
replacements; and
• Other companies, including companies in our industry, may calculate these
measures differently than we do, limiting their usefulness as comparative
measures.
Because of these limitations, EBITDA and related ratios should not be considered as measures of discretionary cash available to us to invest in business growth or to reduce our indebtedness. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA and related ratios only as supplements. Our presentation of adjusted net income and adjusted EBITDA over certain periods is an attempt to provide meaningful comparisons to our historical performance for our existing and future investors. The unprecedented changes in our end markets over the past several years have required us to take measures that are unique in our history and specific to individual circumstances. Comparisons inclusive of these actions make normal financial and other performance patterns difficult to discern under a strict GAAP presentation. Each non-GAAP presentation, however, is explained in detail in the reconciliation tables below. Specifically, we have presented adjusted net income attributable to ARC and adjusted earnings per share attributable to ARC shareholders for the three months endedMarch 31, 2020 and 2019 to reflect the valuation allowances related to certain deferred tax assets and other discrete tax items. This presentation facilitates a meaningful comparison of our operating results for the three months endedMarch 31, 2020 and 2019. We believe these charges were the result of items which are not indicative of our actual operating performance. We have presented adjusted EBITDA for the three months endedMarch 31, 2020 and 2019 to exclude stock-based compensation expense. The adjustment to exclude stock-based compensation expense to EBITDA is consistent with the definition of adjusted EBITDA in our Credit Agreement; therefore, we believe this information is useful to investors in assessing our financial performance. The following is a reconciliation of cash flows provided by operating activities to EBITDA: Three Months Ended March 31, (In thousands) 2020 2019 Cash flows provided by operating activities$ 2,774 $
2,665
Changes in operating assets and liabilities 7,501
7,102
Non-cash expenses, including depreciation and amortization (9,813 ) (9,320 ) Income tax provision 1,107 284 Interest expense, net 1,109 1,430 Loss attributable to the noncontrolling interest 221 145 Depreciation and amortization 8,004 8,318 EBITDA$ 10,903 $ 10,624 23
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The following is a reconciliation of net income attributable to
Three Months Ended
March 31,
(In thousands) 2020 2019
Net income attributable to ARC Document Solutions, Inc. $ 683 $ 592
Interest expense, net 1,109 1,430
Income tax provision 1,107 284
Depreciation and amortization 8,004 8,318
EBITDA 10,903 10,624
Stock-based compensation 504 608
Adjusted EBITDA $ 11,407 $ 11,232 The following is a reconciliation of net income margin attributable to
Three Months Ended
March 31,
2020 (1) 2019(1)
Net income margin attributable to
0.6 %
Interest expense, net 1.3 1.5
Income tax provision 1.3 0.3
Depreciation and amortization 9.1 8.6
EBITDA margin 12.3 10.9
Stock-based compensation 0.6 0.6
Adjusted EBITDA margin 12.9 % 11.6 %
(1) Column does not foot due to rounding.
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The following is a reconciliation of net income attributable to ARC Document
Solutions, Inc. to adjusted net income attributable to ARC Document Solutions,
Inc. :
Three Months Ended
March 31 ,
(In thousands, except per share amounts) 2020 2019
Net income attributable to
$ 592 Deferred tax valuation allowance and other discrete tax items 499 26
Adjusted net income attributable to
$ 1,182
Actual:
Earnings per share attributable toARC Document Solutions, Inc. shareholders: Basic$ 0.02 $ 0.01 Diluted$ 0.02 $ 0.01 Weighted average common shares outstanding: Basic 43,676 45,118 Diluted 43,811 45,355 Adjusted: Earnings per share attributable toARC Document Solutions, Inc. shareholders: Basic$ 0.03 $ 0.01 Diluted$ 0.03 $ 0.01 Weighted average common shares outstanding: Basic 43,676 45,118 Diluted 43,811 45,355 Liquidity and Capital Resources Our principal sources of cash have been cash flows from operations and borrowings under our debt and lease agreements. Our recent historical uses of cash have been for ongoing operations, payment of principal and interest on outstanding debt obligations, capital expenditures and stock repurchases. Total cash and cash equivalents as ofMarch 31, 2020 , was$38.2 million . Of this amount,$15.0 million was held in foreign countries, with$13.1 million held inChina . Repatriation of some of our cash and cash equivalents in foreign countries could be subject to delay for local country approvals and could have potential adverse tax consequences. As a result of holding cash and cash equivalents outside of theU.S. , our financial flexibility may be reduced. Supplemental information pertaining to our historical sources and uses of cash is presented as follows and should be read in conjunction with our interim Condensed Consolidated Statements of Cash Flows and notes thereto included elsewhere in this report. Three Months Ended March 31, (In thousands) 2020 2019 Net cash provided by operating activities$ 2,774 $
2,665
Net cash used in investing activities$ (1,048 ) $
(3,030 )
Net cash provided by (used in) financing activities
25-------------------------------------------------------------------------------- Operating Activities Cash flows from operations are primarily driven by sales and net profit generated from these sales, excluding non-cash charges. The slight increase in cash flows from operations during the three months endedMarch 31, 2020 compared to the same period in 2019 resulted from an increase in net income and improved management of operating assets and liabilities. Days sales outstanding ("DSO") was 54 days as ofMarch 31, 2020 and 56 days as ofMarch 31, 2019 . We are closely managing cash collections which have remained consistent since the outbreak of the COVID-19 pandemic. Investing Activities Net cash used in investing activities was primarily related to capital expenditures. We incurred capital expenditures totaling$1.1 million and$3.2 million for the three months endedMarch 31, 2020 and 2019, respectively. The change in capital expenditures is driven primarily by the timing of equipment purchases, and whether such equipment is leased or purchased with available cash. Financing Activities Net cash of$7.5 million provided by financing activities during the three months endedMarch 31, 2020 primarily relates to a net borrowing of$15.0 million under our revolving credit facility, partially offset by payments on finance leases and share repurchases. Our cash position, working capital, and debt obligations as ofMarch 31, 2020 andDecember 31, 2019 are shown below and should be read in conjunction with our interim Condensed Consolidated Balance Sheets and notes thereto contained elsewhere in this report. (In thousands) March 31, 2020 December 31, 2019 Cash and cash equivalents $ 38,210 $ 29,425 Working capital $ 35,782 $ 20,008 Borrowings from revolving credit facility $ 75,000 $ 60,000 Other debt obligations 46,715 46,157 Total debt obligations$ 121,715 $ 106,157 We have taken a conservative and cautious approach to the current COVID-19 pandemic with respect to our cash management practices. To that end, we drew down$15 million from our revolving credit facility which we have not used, nor do we plan to use it, in the near term. This drove our$15.8 million increase in working capital from year-end. To manage our working capital, we chiefly focus on our DSO and monitor the aging of our accounts receivable, as receivables are the most significant element of our working capital. We believe that our current cash and cash equivalents balance of$38.2 million , availability under our revolving credit facility, availability under our equipment lease lines, and cash flows provided by operations should be sufficient to cover the next twelve months working capital needs, leasing requirements consisting of scheduled principal and interest payments, and planned capital expenditures, to the extent such items are known or are reasonably determinable based on current business and market conditions. However, as the impact of the COVID-19 pandemic on the economy and our operations evolves, we will continue to assess our liquidity needs. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. An extended period of global supply chain and economic disruption could materially affect our business, results of operations, ability to meet debt covenants, access to sources of liquidity and financial condition. Given the economic uncertainty as a result of the COVID-19 pandemic, we have taken actions to improve our current liquidity position, including drawing on our revolving credit facility within the first quarter of 2020, reducing working capital, suspending share repurchases and future dividend payouts, postponing capital expenditures, reducing operating costs, initiating workforce reductions and salary reductions, and substantially reducing discretionary spending. Additionally, we are actively working with lessors to defer equipment lease payments and working with landlords to defer facility rent payments. We currently believe the ultimate outcome of such deferment negotiations may be significant. We have already seen the preliminary benefits of these action plans as evidenced by the increase of ourU.S. cash balance as ofMay 1, 2020 , by more than$10 million sinceMarch 31, 2020 . See "Debt Obligations" section for further information related to our revolving credit facility. We generate the majority of our revenue from sales of services and products to the AEC/O industry. As a result, our operating results and financial condition can be significantly affected by economic factors that influence the AEC/O industry, including the 26 -------------------------------------------------------------------------------- COVID-19 pandemic which has already reduced non-residential and residential construction spending. Additionally, a general economic downturn may adversely affect the ability of our customers and suppliers to obtain financing for significant operations and purchases, and to perform their obligations under their agreements with us. We believe that credit constraints in the financial markets could result in a decrease in, or cancellation of, existing business, could limit new business, and could negatively affect our ability to collect our accounts receivable on a timely basis. We have not been actively seeking growth through acquisition, nor do we intend to in the near future due to the COVID-19 pandemic. Debt Obligations Credit Agreement OnDecember 17, 2019 , we entered into an amendment (the "2019 Amendment") to our Credit Agreement, dated as ofNovember 20, 2014 ("Credit Agreement") withWells Fargo Bank . The 2019 Amendment increased the maximum aggregate principal amount of Revolving Loans under the Credit Agreement from$65 million to$80 million . Proceeds of a portion of the Revolving Loans drawn under the Credit Agreement were used to fully repay the$49.5 million term loan that was then outstanding under the Credit Agreement (the "Term Loan"). The 2019 Amendment also modified certain tests we are required to meet in order to pay dividends, repurchase stock and make other restricted payments. In order to make such payments which are permitted subject to certain customary conditions set forth in the Credit Agreement, the amount of all such payments will be limited to$15 million during any twelve-month period. Per the 2019 Amendment, when calculating the fixed charge coverage ratio we may now exclude up to$10 million of such restricted payments that would otherwise constitute fixed charges in any twelve month period. As ofMarch 31, 2020 , our borrowing availability under the Revolving Loan commitment was$2.8 million , after deducting outstanding letters of credit of$2.2 million and outstanding Revolving Loans of$75.0 million . Loans borrowed under the Credit Agreement bear interest, in the case of LIBOR rate loans, at a per annum rate equal to the applicable LIBOR rate, plus a margin ranging from 1.25% to 1.75%, based on our Total Leverage Ratio (as defined in the Credit Agreement). Loans borrowed under the Credit Agreement that are not LIBOR rate loans bear interest at a per annum rate equal to (i) the greatest of (A) the Federal Funds Rate plus 0.50%, (B) the one month LIBOR rate plus 1.00%, per annum, and (C) the rate of interest announced, from time to time, byWells Fargo Bank, National Association as its "prime rate," plus (ii) a margin ranging from 0.25% to 0.75%, based on our Total Leverage Ratio. We pay certain recurring fees with respect to the 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 Credit Agreement); the net proceeds from certain issuances of equity securities; and net proceeds of certain insurance recoveries and condemnation events. The Credit Agreement contains customary representations and warranties, subject to limitations and exceptions, and customary covenants restricting the ability (subject to various exceptions) of us and our subsidiaries to: incur additional indebtedness (including guarantee obligations); incur liens; sell certain property or assets; engage in mergers or other fundamental changes; consummate acquisitions; make investments; pay dividends, other distributions or repurchase equity interest of us or our subsidiaries; change the nature of their business; prepay or amend certain indebtedness; engage in certain transactions with affiliates; amend our organizational documents; or enter into certain restrictive agreements. In addition, the Credit Agreement contains financial covenants which requires us to maintain (i) at all times, a Total Leverage Ratio in an amount not to exceed 2.75 to 1.00; and (ii) a Fixed Charge Coverage Ratio (as defined in the Credit Agreement), as of the last day of each fiscal quarter, an amount not less than 1.15 to 1.00. We were in compliance with our covenants as ofMarch 31, 2020 . After considering a variety of potential effects the COVID-19 pandemic could have on our consolidated Sales, as well as the actions we have already taken and other options available to us, we currently believe we will be in compliance with our covenants for the remainder of the term of the Credit Agreement. The impact of the pandemic, however, and the speed of economic recovery in the markets we serve is highly uncertain. If conditions change in the future and we expect to be out of compliance as a result, we would seek waivers from the lenders prior to any covenant violation. Any covenant waiver may lead to increased costs, increased interest rates, additional restrictive covenants and other available lender protections that would be applicable. There can be no assurance that we would be able to obtain waivers in a timely manner, or on acceptable terms at all. If we were not able to obtain waivers or repay the debt facilities, this would lead 27 -------------------------------------------------------------------------------- to an event of default and potential acceleration of amounts due under all of our outstanding debt. As a result, the failure to obtain waivers would have a material adverse effect on us. Refer to Part I, Item 1A. Risk Factors, for more information. The Credit Agreement contains customary events of default, including with respect to: nonpayment of principal, interest, fees or other amounts; failure to perform or observe covenants; material inaccuracy of a representation or warranty when made; cross-default to other material indebtedness; bankruptcy, insolvency and dissolution events; inability to pay debts; monetary judgment defaults; actual or asserted invalidity or impairment of any definitive loan documentation, repudiation of guaranties or subordination terms; certain ERISA related events; or a change of control. The obligations of our subsidiary that is the borrower under the Credit Agreement are guaranteed by us and each of our otherUnited States domestic subsidiaries. The Credit Agreement and any interest rate protection and other hedging arrangements provided by any lender party to the credit facility or any affiliate of such a lender are secured on a first priority basis by a perfected security interest in substantially all of our and each guarantor's assets (subject to certain exceptions). Finance Leases As ofMarch 31, 2020 , we had$46.7 million of finance lease obligations outstanding, with a weighted average interest rate of 4.8% and maturities between 2019 and 2024. Refer to Note 8, Leasing, as previously disclosed on our 2019 Annual Form 10-K for the schedule on maturities of finance lease liabilities, as there have been no material changes to report as ofMarch 31, 2020 . We expect there will be changes to the timing of these maturities, once we have finalized agreements with lessors as they relate to the deferment of lease payments. Off-Balance Sheet Arrangements As ofMarch 31, 2020 , we did not have any off-balance-sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K. Contractual Obligations and Other Commitments Operating Leases. We have entered into various non-cancelable operating leases primarily related to facilities, equipment and vehicles used in the ordinary course of business. Refer to Note 8, Leasing, as previously disclosed on our 2019 Annual Form 10-K for the schedule on maturities of operating lease liabilities as there were no material changes as ofMarch 31, 2020 . We expect there will be changes to the timing of these lease payments, once we have finalized agreements with landlords as they relate to the deferment of facility lease payments. Legal Proceedings. We are involved in various legal proceedings and other legal matters from time to time in the normal course of business. We do not believe that the outcome of any of those matters will have a material effect on our consolidated financial position, results of operations or cash flows. Critical Accounting Policies Critical accounting policies are those accounting policies that we believe are important to the portrayal of our financial condition and results and require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our 2019 Annual Report on Form 10-K includes a description of certain critical accounting policies, including those with respect to goodwill, revenue recognition, and income taxes. There have been no material changes to our critical accounting policies described in our 2019 Annual Report on Form 10-K. Goodwill Impairment In accordance with ASC 350, Intangibles -Goodwill and Other, we assess goodwill for impairment annually as ofSeptember 30 , and more frequently if events and circumstances indicate that goodwill might be impaired. AtMarch 31, 2020 , we determined that there were sufficient indicators to trigger an interim goodwill impairment analysis based on a combination of factors, all of which relate to the COVID-19 pandemic. The indicators included (1) the current global economic environment, (2) a revision of our forecasted future earnings, and (3) a decline in our market capitalization in 2020. As a result of this analysis, we concluded that the fair value of each reporting unit exceeds its carrying value and goodwill was not impaired as ofMarch 31, 2020 . 28 --------------------------------------------------------------------------------Goodwill impairment testing is performed at the reporting unit level.Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support the value of the goodwill. In 2017, we elected to early-adopt ASU 2017-04, 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. As a result, we compare the fair value of a reporting unit with its respective carrying value, and recognized an impairment charge, if any, for the amount by which the carrying amount exceeds the reporting unit's fair value. We determine the fair value of our reporting units using an income approach. Under the income approach, we determined fair value based on estimated discounted future cash flows of each reporting unit. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates and EBITDA margins, discount rates and future market conditions, among others. The level of judgment and estimation is inherently higher in the current environment considering the uncertainty created by the COVID-19 pandemic. We have evaluated numerous factors disrupting our business and made significant assumptions which include the severity and duration of our business disruption, the timing and degree of economic recovery and ultimately, the combined effect of these assumptions on our future operating results and cash flows. The results of the interim goodwill impairment test, as ofMarch 31, 2020 , were as follows: Number of Reporting Representing (Dollars in thousands) Units Goodwill of No goodwill balance 6 $ - Fair value of reporting units exceeds their carrying values by more than 90% 2 121,051 8$ 121,051 Based upon a sensitivity analysis, a reduction of approximately 50-basis points of projected EBITDA in 2020 and beyond, assuming all other assumptions remain constant, would result in no impairment of goodwill. Based upon a separate sensitivity analysis, a 50-basis point increase to the weighted average cost of capital would result in no further impairment of goodwill. Given the uncertainty regarding the ultimate financial impact of the COVID-19 pandemic and the proceeding economic recovery, and the changing document and printing needs of our customers and the uncertainties regarding the effect on our business, there can be no assurance that the estimates and assumptions made for purposes of our goodwill impairment testing in 2020 will prove to be accurate predictions of the future. If our assumptions, including forecasted EBITDA of certain reporting units, are not achieved, or assumptions change pertaining to our business disruption, and its impact on the related recovery from COVID-19, we may be required to record goodwill impairment charges in future periods, whether in connection with our next annual impairment testing in the third quarter of 2020, or on an interim basis, if any such change constitutes a triggering event (as defined under ASC 350, Intangibles -Goodwill and Other) outside of the quarter when we regularly perform our annual goodwill impairment test. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such charge would be material. Income Taxes Deferred tax assets and liabilities reflect temporary differences between the amount of assets and liabilities for financial and tax reporting purposes. Such amounts are adjusted, as appropriate, to reflect changes in tax rates expected to be in effect when the temporary differences reverse. A valuation allowance is recorded to reduce our deferred tax assets to the amount that is more likely than not to be realized. Changes in tax laws or accounting standards and methods may affect recorded deferred taxes in future periods. When establishing a valuation allowance, we consider future sources of taxable income such as future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards and tax planning strategies. A tax planning strategy is an action that: is prudent and feasible; an enterprise ordinarily might not take, but would take to prevent an operating loss or tax credit carryforward from expiring unused; and would result in realization of deferred tax assets. In the event we determine that our deferred tax assets, more likely than not, will not be realized in the future, the valuation adjustment to the deferred tax assets will be charged to earnings in the period in which we make such a determination. We have a$2.5 million valuation allowance against certain deferred tax assets as ofMarch 31, 2020 . 29 -------------------------------------------------------------------------------- In future quarters we will continue to evaluate our historical results for the preceding twelve quarters and our future projections to determine whether we will generate sufficient taxable income to utilize our deferred tax assets, and whether a valuation allowance is required. We calculate our current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed in subsequent years. Adjustments based on filed returns are recorded when identified.
Income taxes have not been provided on certain undistributed earnings of foreign subsidiaries because such earnings are considered to be permanently reinvested.
The amount of taxable income or loss we report to the various tax jurisdictions is subject to ongoing audits by federal, state and foreign tax authorities. We estimate of the potential outcome of any uncertain tax issue is subject to management's assessment of relevant risks, facts, and circumstances existing at that time. We use a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. We record a liability for the difference between the benefit recognized and measured and tax position taken or expected to be taken on its tax return. To the extent that our assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. We report tax-related interest and penalties as a component of income tax expense. Recent Accounting Pronouncements See Note 1, "Description of Business and Basis of Presentation" to our interim Condensed Consolidated Financial Statements for disclosure on recent accounting pronouncements not yet adopted.
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