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Dynamic quotes 
OFFON

ARC DOCUMENT SOLUTIONS, INC.

(ARC)
  Report
Real-time Estimate Quote. Real-time Estimate  - 07/23 07:02:11 pm
2.0700 USD   -0.48%
07/01ARC DOCUMENT : to Report Second Quarter Results on August 3, 2021
PU
06/29ARC DOCUMENT SOLUTIONS, INC. : Other Events (form 8-K)
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06/25ARC DOCUMENT : Digging for Data with Abacus
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ARC DOCUMENT : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

05/05/2021 | 06:03am EDT
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, 2020 and this Quarterly Report on Form 10-Q for the quarter ended
March 31, 2021.
Business Summary
ARC 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 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 to manage and distribute documents and information related
to construction projects and related project-based businesses outside of the
architectural, engineering and construction (AEC) industry. Our reconfiguration
of the Company's sales and marketing functions in late-2019, as well as customer
needs driven by the COVID-19 pandemic, have led to the significant expansion of
the non-AEC segment of our CDIM business, primarily through the provision of
color graphics and signage. CDIM sales also 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.

Managed Print Services (MPS), which 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 sales represent 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. Because the recent pandemic has forced a large number of our
clients to direct their employees to work from home, MPS volume and sales have
declined over the past year.

Archiving and Information Management (AIM), which consists of 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 application 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. A growing portion of our sales are being driven by our ability
to handle protected health information (PHI) as our regional scanning centers
are HIPAA-compliant. AIM sales are driven by the need to leverage past
intellectual property 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. Remote access
to digital documents driven by work-from-home conditions created by the recent
pandemic have also contributed to recent sales in this area of our business.

Equipment and Supplies, which consists of reselling printing, imaging, and related equipment to customers primarily to 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.
                                       20
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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 67% of our net sales for the three
months ended March 31, 2021, with the remaining 33% 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, rental payments,
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 in San Ramon, California, and Kolkata, India. Such costs are primarily
recorded to cost of sales.
                                       21
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COVID-19 Pandemic
The global spread of the novel coronavirus (COVID-19) 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 prolonged uncertainty in the global economy and has
negatively affected our business, employees, suppliers, and customers. Our sales
during the first quarter of 2021 were negatively impacted by the COVID-19
pandemic. 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 "Part I - Item 1A. Risk Factors" of our Annual Report on Form 10-K
for the year ended December 31, 2020.
To adapt to the uncertainty and shifting demands brought on by the COVID-19
pandemic, we transformed our business during the second quarter of 2020 into a
smaller but stronger company, offering a range of products beyond the
construction vertical and our historical print segments, and reconfiguring our
operations and cost structure to fit the needs of our customers in the current
market. We have repositioned the Company based on the belief that there is
potential for new growth and similar, if not better margins, barring any
unforeseen changes that may arise due to the COVID-19 pandemic or otherwise.
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 believe that we have taken appropriate measures to mitigate the impacts of
the COVID-19 pandemic as it relates to the health and safety of our employees
and customers. As the situation continues to persist, 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
operations at select service centers, modifying workspaces, continuing social
distancing protocols, incorporating additional personal protective equipment
and/or incorporating health screening policies at our facilities, or such other
industry best practices needed to comply with applicable government orders and
to continue to maintain a healthy and safe environment for our employees during
the COVID-19 pandemic.
Given the ongoing economic uncertainty resulting from the COVID-19 pandemic, we
have taken actions to improve our current liquidity position, including reducing
working capital, 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 considered an essential business.
We also serve the housing, healthcare, and technology industries, and have been
able to keep almost all of our service centers open during the pandemic, though
at reduced volumes, in order to fulfill our customers' needs. However, there is
uncertainty around the extent and duration of interruptions to our business
related to the COVID-19 pandemic, as well as the pandemic's overall impact on
the U.S. economy, on our clients' ongoing business operations, and on 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 the results of
our operations, financial condition, or liquidity for the remainder of fiscal
year 2021 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.

                                       22
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Results of Operations

                                                                           Three Months Ended
                                                                                March 31,                      Increase (decrease)
(In millions, except percentages)                                                                            2021(2)              2020(2)             $                 %
CDIM                                                                                                   $     37.4                $  49.2          $ (11.7)            (23.9) %
MPS                                                                                                          17.3                   27.3            (10.0)            (36.5) %
AIM                                                                                                           3.0                    3.6             (0.6)            (16.0) %

Equipment and supplies sales                                                                                  3.9                    8.4             (4.4)            (52.9) %
Total net sales                                                                                        $     61.7                $  88.4          $ (26.7)            (30.2) %

Gross profit                                                                                           $     18.8                $  27.6          $  (8.8)            (31.9) %
Selling, general and administrative expenses                                                           $     17.0                $  24.3          $  (7.3)            (30.2) %
Amortization of intangible assets                                                                      $      0.1                $   0.6          $  (0.5)            (87.4) %

Interest expense, net                                                                                  $      0.6                $   1.1          $  (0.5)            (44.1) %
Income tax provision                                                                                   $      0.5                $   1.1          $  (0.6)            (55.2) %
Net income attributable to ARC                                                                         $      0.8                $   0.7          $   0.1              15.5  %
Non-GAAP (1)
Adjusted net income attributable to ARC (1)                                                            $      0.9                $   1.2          $  (0.3)            (22.2) %
EBITDA (1)                                                                                             $      8.4                $  10.9          $  (2.5)            (22.7) %
Adjusted EBITDA (1)                                                                                    $      8.8                $  11.4          $  (2.6)            (23.1) %


(1)See "Non-GAAP Financial Measures" on pg. 25 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,
                                                                                                            2021                 2020(1)
Net Sales                                                                                                     100.0  %              100.0  %
Cost of sales                                                                                                  69.6                  68.8
Gross profit                                                                                                   30.4                  31.2
Selling, general and administrative expenses                                                                   27.5                  27.5
Amortization of intangible assets                                                                               0.1                   0.7

Income from operations                                                                                          2.8                   3.0

Interest expense, net                                                                                           1.0                   1.3
Income before income tax provision                                                                              1.8                   1.8
Income tax provision                                                                                            0.8                   1.3
Net income                                                                                                      1.0                   0.5
Loss attributable to the noncontrolling interest                                                                0.3                   0.2
Net income attributable to ARC                                                                                  1.3  %                0.8  %
Non-GAAP (2)
EBITDA (2)                                                                                                     13.7  %               12.3  %
Adjusted EBITDA (2)                                                                                            14.2  %               12.9  %



(1)Column does not foot due to rounding.
(2)See "Non-GAAP Financial Measures" on pg. 25 for additional information.
                                       23
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Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020
Net Sales
Net sales for the three months ended March 31, 2021 decreased 30.2%, compared to
three months ended March 31, 2020 due to the negative impact of the COVID-19
pandemic on revenues from all of our service offerings.
CDIM. Year-over-year sales of CDIM services decreased $11.7 million, or 23.9%,
for the three months ended March 31, 2021, due to the impact of the COVID-19
pandemic. CDIM services represented 61% of total net sales for the three months
ended March 31, 2021, compared to 56% for the three months ended March 31, 2020.
The impact of the pandemic on CDIM was not as pronounced as other parts of our
business due to the expansion of products and services beyond the construction
vertical and our historical print segments that resulted from the
reconfiguration of our sales and marketing functions in 2019 and 2020.
MPS. Year-over-year sales of MPS services for the three months ended March 31,
2021 decreased $10.0 million, or 36.5%. The decline in MPS sales was driven
primarily by office employees in the U.S. and Canada who followed directives to
work from home, significantly reducing the volume of printing done in our
customers' offices. MPS engagements on construction job sites continued to
operate, and many customers have required minimums that helped mitigate the drop
in print volumes. MPS sales represented approximately 28% of total net sales for
the three months ended March 31, 2021, compared to 31% for the three months
ended March 31, 2020.
The number of MPS locations have declined year over year to approximately 10,750
as of March 31, 2021, representing a net decrease of approximately 200 locations
compared to March 31, 2020.
AIM. Year-over-year sales of AIM services decreased $0.6 million, or 16.0%, for
the three months ended March 31, 2021. The decrease in sales of our AIM services
was primarily due to the lack of office activity resulting from the COVID-19
pandemic, which caused a reduction in scanning opportunities. We continue to
drive an expansion of our addressable market for AIM services 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 our addressable market and the desire of our customers to have
digital access to documents, our AIM services will grow in the future.
Equipment and Supplies Sales. Year-over-year sales of Equipment and Supplies
decreased $4.4 million, or 52.9%, for the three months ended March 31, 2021. The
decline in Equipment and Supplies sales was primarily driven by the slowdown in
China related to the COVID-19 pandemic, which decreased sales from UNIS Document
Solutions Co. Ltd ("UDS"), our Chinese joint venture. Equipment and Supplies
sales at UDS were $0.8 million for the three months ended March 31, 2021,
compared to $3.4 million for the three months ended March 31, 2020.
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. Equipment and Supplies sales continued to decline in the
U.S. for the three months ended March 31, 2021, in part due to the COVID-19
pandemic. 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, 2021, gross profit decreased to $18.8
million and gross margin decreased to 30.4%, compared to $27.6 million, or 31.2%
during the three months ended March 31, 2020, on a sales decline of $26.7
million.
Despite the significant drop in net sales due to the COVID-19 pandemic, gross
margin for the three months ended March 31, 2021, remained above 30%. Gross
margins were aided by the drop in low margin Equipment and Supplies sales from
UDS and cost savings initiated in response to the ongoing COVID-19 pandemic.
During the second quarter of 2020, we began to reconfigure our operating
structure and costs to serve new customer needs and to reflect the reduction in
our revenues as a result of the COVID-19 pandemic.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $7.3 million, or 30.2%,
for the three months ended March 31, 2021 compared to the three months ended
March 31, 2020. The reduction was due to cost savings initiated in response to
the current COVID-19 pandemic that included headcount reductions, suspension of
business travel, reduced consulting expenses, reduced bonuses and commissions,
and the elimination of discretionary spending.
                                       24
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Amortization of Intangibles
Amortization of intangibles of $0.1 million for the three months ended March 31,
2021, decreased by $0.5 million compared to the three months ended March 31,
2020, due to the completed amortization of certain customer relationship
intangibles related to historical acquisitions.
Interest Expense, Net
Net interest expense of $0.6 million for the three months ended March 31, 2021,
decreased compared to the three months ended March 31, 2020 due to the continued
pay down of our long-term debt, decrease in LIBOR, and decrease in bank debt
interest spread due to the improvement in our leverage ratio.
Income Taxes
We recorded an income tax provision of $0.5 million in relation to pretax income
of $1.1 million for the three months ended March 31, 2021, which resulted in an
effective income tax rate of 44.8%. Our effective income tax rate for the three
months ended March 31, 2021 was primarily impacted by certain stock-based
compensation, a change in valuation allowances against certain deferred tax
assets and non-deductible expenses. 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 28.9%, for the
three months ended March 31, 2021.
By comparison, 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, valuations
allowances against certain deferred tax assets, non-deductible expenses and the
financial impact from COVID-19. Excluding the impact of 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.
We have a $2.1 million valuation allowance against certain deferred tax assets
as of March 31, 2021.
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 $0.8 million during the three months
ended March 31, 2021. The increase in net income attributable to ARC compared to
the prior year period for the three months ending March 31, 2020 was driven by
the decrease in income taxes.
EBITDA
EBITDA margin increased to 13.7% for the three months ended March 31, 2021, from
12.3% for the same period in 2020. Excluding the effect of stock-based
compensation, adjusted EBITDA margin increased to 14.2% during the three months
ended March 31, 2021, as compared to 12.9% for the same period in 2020. The
increase in adjusted EBITDA margin for the three months ended March 31, 2021 was
primarily due to the significant decline in selling, general and administrative
expenses, as noted above.
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
                                       25
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cash flows from operating, investing or financing activities as a measure of our
liquidity.
EBITDA represents net income before interest, taxes, depreciation and
amortization. EBITDA margin is a non-GAAP measure calculated by dividing EBITDA
by net sales.
We have presented EBITDA and related ratios because we consider them important
supplemental measures of our performance and liquidity. We believe investors may
also find these measures meaningful, given how our management makes use of them.
The following is a discussion of our use of these measures.
We use EBITDA to measure and compare the performance of our operating 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 ended March 31, 2021 and 2020 to reflect the exclusion of changes in the
valuation allowances related to certain deferred tax assets and other discrete
tax items. This presentation facilitates a meaningful comparison of our
operating results for the three months ended March 31, 2021 and 2020. 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 ended March 31, 2021 and
2020 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 2014/2021 Credit Agreement; therefore, we believe this
information is useful to investors in assessing our financial performance.
                                       26
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The following is a reconciliation of cash flows provided by operating activities
to EBITDA:

                                                                                   Three Months
                                                                                      Ended
                                                                                    March 31,
(In thousands)                                                                            2021               2020
Cash flows provided by operating activities                                           $   5,375          $   2,774
Changes in operating assets and liabilities                                               2,494              7,501
Non-cash expenses, including depreciation and amortization                               (7,257)            (9,813)
Income tax provision                                                                        496              1,107
Interest expense, net                                                                       620              1,109
Loss attributable to the noncontrolling interest                                            177                221
Depreciation and amortization                                                             6,524              8,004
EBITDA                                                                                $   8,429          $  10,903

The following is a reconciliation of net income attributable to ARC Document Solutions, Inc. to EBITDA and adjusted EBITDA:

                                                                                  Three Months
                                                                                     Ended
                                                                                    March 31,
(In thousands)                                                                           2021              2020
Net income attributable to ARC Document Solutions, Inc.                               $    789          $    683
Interest expense, net                                                                      620             1,109
Income tax provision                                                                       496             1,107
Depreciation and amortization                                                            6,524             8,004
EBITDA                                                                                   8,429            10,903

Stock-based compensation                                                                   339               504
Adjusted EBITDA                                                                       $  8,768          $ 11,407


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
                                                                                     March 31,
                                                                                             2021                2020(1)
Net income margin attributable to ARC Document Solutions, Inc.                                  1.3  %                0.8  %
Interest expense, net                                                                           1.0                   1.3
Income tax provision                                                                            0.8                   1.3
Depreciation and amortization                                                                  10.6                   9.1
EBITDA margin                                                                                  13.7                  12.3

Stock-based compensation                                                                        0.5                   0.6
Adjusted EBITDA margin                                                                         14.2  %               12.9  %



(1)Column does not foot due to rounding.

                                       27
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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)                                                    2021                2020
Net income attributable to ARC Document Solutions, Inc.                                 $      789          $     683

Deferred tax valuation allowance and other discrete tax items                                  131                499
Adjusted net income attributable to ARC Document Solutions, Inc.                        $      920          $   1,182

Actual:

Earnings per share attributable to ARC Document Solutions, Inc.
shareholders:
Basic                                                                                   $     0.02          $    0.02
Diluted                                                                                 $     0.02          $    0.02
Weighted average common shares outstanding:
Basic                                                                                       42,264             43,676
Diluted                                                                                     42,634             43,811
Adjusted:
Earnings per share attributable to ARC Document Solutions, Inc.
shareholders:
Basic                                                                                   $     0.02          $    0.03
Diluted                                                                                 $     0.02          $    0.03
Weighted average common shares outstanding:
Basic                                                                                       42,264             43,676
Diluted                                                                                     42,634             43,811



Liquidity and Capital Resources
Our principal sources of cash have been cash flows from operations and
borrowings under our debt and lease agreements. Our recent historical uses of
cash have been for ongoing operations, payment of principal and interest on
outstanding debt obligations, capital expenditures and stock repurchases.
Total cash and cash equivalents as of March 31, 2021 was $49.5 million. Of this
amount, $15.9 million was held in foreign countries, with $14.6 million held in
China. Repatriation of some of our cash and cash equivalents in foreign
countries could be subject to delay for local country approvals and could have
potential adverse tax consequences. As a result of holding cash and cash
equivalents outside of the U.S., our financial flexibility may be reduced.
Supplemental information pertaining to our historical sources and uses of cash
is presented as follows and should be read in conjunction with our interim
Condensed Consolidated Statements of Cash Flows and notes thereto included
elsewhere in this report.

                                                                   Three Months Ended
                                                                        March 31,
(In thousands)                                                                    2021           2020
Net cash provided by operating activities                                      $   5,375      $  2,774
Net cash used in investing activities                                          $    (437)     $ (1,048)
Net cash (used in) provided by financing activities                            $ (10,381)     $  7,543




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Operating Activities
Cash flows from operations are primarily driven by sales and net profit
generated from these sales, excluding non-cash charges.
The increase in cash flows from operations during the three months ended
March 31, 2021, compared to the same period in 2020, resulted from improved
management of operating assets and liabilities. Days sales outstanding ("DSO")
was 54 days as of March 31, 2021 and as of March 31, 2020. 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 $0.6 million and $1.1
million for the three months ended March 31, 2021 and 2020, respectively. The
decrease in capital expenditures is driven primarily by a concerted effort to
reduce and closely manage capital expenditures during the COVID-19 pandemic.
As we continue to foster our relationships with credit providers and obtain
attractive lease rates, we have increasingly chosen to lease rather than
purchase equipment.
Financing Activities
Net cash of $10.4 million used in financing activities during the three months
ended March 31, 2021 primarily relates to payments on our revolver debt
agreement, finance leases and dividends.
Our cash position, working capital, and debt obligations as of March 31, 2021
and December 31, 2020 are shown below and should be read in conjunction with our
interim Condensed Consolidated Balance Sheets and related notes contained
elsewhere in this report.
(In thousands)                                March 31, 2021       December 31, 2020
Cash and cash equivalents                    $        49,460      $           54,950
Working capital                              $        30,369      $           32,500

Borrowings from revolving credit facility $ 50,000 $

  55,000
Other debt obligations                                38,380                  42,236
Total debt obligations                       $        88,380      $           97,236



The decrease of $2.1 million in working capital was primarily driven by the
decrease in cash due to a $5 million pay down of the revolving credit facility
during the first quarter of 2021. 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 $49.5 million,
combined with 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 by reducing working capital,
postponing capital expenditures, reducing operating costs, initiating workforce
reductions and salary reductions, and substantially reducing discretionary
spending. 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 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
                                       29
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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.
Debt Obligations
Credit Agreement
On December 17, 2019, we entered into an amendment (the "2019 Amendment") to our
Credit Agreement, dated as of November 20, 2014 (the "2014 Credit Agreement")
with Wells Fargo Bank.
The 2019 Amendment increased the maximum aggregate principal amount of revolving
loans under the 2014 Credit Agreement from $65 million to $80 million. Proceeds
of a portion of the revolving loans drawn under the 2014 Credit Agreement were
used to fully repay the $49.5 million term loan that was then outstanding under
the 2014 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 2014 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 exclude
up to $10 million of such restricted payments that would otherwise constitute
fixed charges in any twelve-month period.
As of March 31, 2021, our borrowing availability under the revolving loan
commitment was $27.8 million, after deducting outstanding letters of credit of
$2.2 million and outstanding revolving loans of $50.0 million.
Loans borrowed under the 2014 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 2014 Credit Agreement). Loans borrowed under the 2014 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, by Wells 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 2014 Credit Agreement,
including administration fees to the administrative agent.
Subject to certain exceptions, including, in certain circumstances, reinvestment
rights, the loans extended under the 2014 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 2014
Credit Agreement); the net proceeds from certain issuances of equity securities;
and net proceeds of certain insurance recoveries and condemnation events.
The 2014 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 2014 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 2014 Credit Agreement), as of the last day of
each fiscal quarter, an amount not less than 1.15 to 1.00. We were in compliance
with our covenants as of March 31, 2021. 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 2014 Credit Agreement. The impact of the COVID-19 pandemic,
however, and the speed of economic recovery in the markets we serve is highly
uncertain. If conditions change in the future due to the ongoing COVID-19
pandemic or for other reasons and we expect to be out of compliance as a result,
we will likely 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
any such waivers in a timely manner, or on acceptable terms, or at all. If we
were not able to obtain covenant violation waivers or repay our debt facilities,
this would lead to an event of default and potential acceleration of amounts due
under all of our outstanding debt. As a result, the failure to obtain covenant
violation waivers or repay our debt obligations when they become due would have
a material adverse effect on us. Refer to "Part I - Item 1A. Risk Factors" of
our Annual Report on Form 10-K for the year ended December 31, 2020, for more
information.
                                       30
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The 2014 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 2014 Credit
Agreement are guaranteed by us and each of our other United States domestic
subsidiaries. The 2014 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).
On April 22, 2021, we entered into a Credit Agreement with U.S. Bank National
Association, as administrative agent and the lender party thereto (the "2021
Credit Agreement"). The 2021 Credit Agreement provides for the extension of
revolving loans in an aggregate principal amount not to exceed $70 million and
replaces the 2014 Credit Agreement dated as of November 20, 2014, as amended.
The new agreement features terms similar to the 2014 Credit Agreement, including
the ability to use excess cash of up to $15 million per year for restricted
payments such as share repurchases and dividends. The obligation under the 2021
Credit Agreement matures on April 22, 2026.
Loans borrowed under the 2021 Credit Agreement will bear interest, in the case
of LIBOR loans, at a per annum rate equal to the applicable LIBOR (which rate
shall not be less than zero), plus a margin ranging from 1.25% to 1.75%, based
on our Total Leverage Ratio (as defined in the 2021 Credit Agreement). Loans
borrowed under the 2021 Credit Agreement that are not LIBOR loans bear interest
at a per annum rate (which rate shall not be less than zero) equal to (i) the
greatest of (A) the Federal Funds Rate plus 0.50%, (B) the one month LIBOR plus
1.00% per annum, and (C) the rate of interest announced, from time to time, by
U.S. Bank National Association as its "prime rate," plus (ii) a margin ranging
from 0.25% to 0.75%, based on our Total Leverage Ratio.
Finance Leases
As of March 31, 2021, we had $38.4 million of finance lease obligations
outstanding, with a weighted average interest rate of 5.0% and maturities
between 2021 and 2026. Refer to Note 7, Leasing, as previously disclosed on our
Annual Form 10-K for the fiscal year ended for December 31, 2020 for the
schedule on maturities of finance lease liabilities, as there have been no
material changes to report as of March 31, 2021.
Off-Balance Sheet Arrangements
As of March 31, 2021, 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 7, Leasing, as previously disclosed on our
Annual Form 10-K for the fiscal year ended for December 31, 2020 for the
schedule on maturities of operating lease liabilities as there were no material
changes as of March 31, 2021.
Legal Proceedings. We are involved, and will continue to be involved, in legal
proceedings arising out of the conduct of our business, including commercial and
employment-related lawsuits. Some of these lawsuits purport or may be determined
to be class actions and seek substantial damages, and some may remain unresolved
for several years. We establish accruals for specific legal proceedings when it
is considered probable that a loss has been incurred and the amount of the loss
can be reasonably estimated. Our evaluation of whether a loss is reasonably
probable is based on our assessment and consultation with legal counsel
regarding the ultimate outcome of the matter. As of March 31, 2021 we have
accrued for the potential impact of loss contingencies that are probable and
reasonably estimable. We do not currently believe that the ultimate resolution
of any of these matters will have a material adverse effect on our results of
operations, financial condition, or cash flows. However, the results of these
matters cannot be predicted with certainty, and an unfavorable resolution of one
or more of these matters could have a material adverse effect on our results of
operations, financial condition, or cash flows.
                                       31
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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 Annual Report on Form 10-K for the year ended December 31, 2020
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 Annual
Report on Form 10-K for the year ended December 31, 2020.
Goodwill Impairment
In accordance with ASC 350, Intangibles - Goodwill and Other, we assess goodwill
for impairment annually as of September 30, and more frequently if events and
circumstances indicate that goodwill might be impaired. At September 30, 2020,
the Company performed its assessment and determined that goodwill was not
impaired.
Goodwill impairment testing is performed at the reporting unit level. Goodwill
is assigned to reporting units at the date the goodwill is initially recorded.
Once goodwill has been assigned to reporting units, it no longer retains its
association with a particular acquisition, and all of the activities within a
reporting unit, whether acquired or internally generated, are available to
support the value of the goodwill. In 2017, we elected to early-adopt ASU
2017-04 which simplifies subsequent goodwill measurement by eliminating step two
from the goodwill impairment test.
We determine the fair value of our reporting units using an income approach.
Under the income approach, we determined fair value based on estimated
discounted future cash flows of each reporting unit. Determining the fair value
of a reporting unit is judgmental in nature and requires the use of significant
estimates and assumptions, including revenue growth rates and EBITDA margins,
discount rates and future market conditions, among others. The level of judgment
and estimation is inherently higher in 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 annual goodwill impairment test, as of September 30, 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 50%                                                               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 our assumptions change
regarding disruptions caused by the pandemic, and the impact on the recovery
from COVID-19 change, then we may be required to record goodwill impairment
charges in future periods, whether in connection with our next annual impairment
testing in the third quarter of 2021, 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
                                       32
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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 $2.1 million valuation allowance against certain deferred tax assets as
of March 31, 2021.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

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