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 Annual Report on Form 10-K for the year ended
Business Summary
•digital printing of general and specialized business documents such as those found in marketing and advertising, engineering and construction and other industries, as well as producing highly-customized display graphics of all types and sizes; •acquiring, placing and managing ARC-certified office printing equipment with proprietary device tracking and print management software at our customers' offices and job sites; •scanning documents, indexing them and adding digital search features for use in digital document management, document archives and facilities management, as well as providing other digital imaging services; and, •reselling digital printing equipment and supplies.
Each of these services frequently include additional logistics services in the form of distributing and delivering finished documents, installing display graphics, or the digital storage of graphic files.
We have categorized our service and product offerings to report distinct sales recognized from:
Digital Printing: We print documents of any size in color and black and white on a variety of materials including plain paper, vinyl, fabric, metal, wood and other three-dimensional substrates. While we can and do print high-page count work such as manuals or catalogs, the documents we typically produce are usually characterized by their high-quality production, low-volume and quick turnaround, and are produced using highly-sophisticated digital printing equipment. Managed Print Services: We acquire and manage digital printing equipment and place it in our customers' facilities for their use, based on a service level agreement. We lease or own the equipment ourselves, while our customers pay for what they use. Per-use minimum charges are often part of our service agreements. We operate more than 10,500 managed print services, or MPS locations, ranging in size from one or two pieces of equipment in a single office, to hundreds of pieces equipment in offices around the world. We also provide proprietary software to our customers to control their print expenses and connect their remote employees with their offices and ARC print centers nationwide. This software is developed and integrated by ARC. Scanning and Digital Imaging: We scan hard-copy small format or large format documents in color or black and white, typically providing them to our customers as searchable PDF files. We also use our patented optical character recognition technology to make documents searchable, and we host them on proprietary applications for use as part of our ARC Facilities solutions. The types of documents that we scan include office files, construction plans and other small or large documents. We also process, distribute and print-on-demand images we capture for our customers. Our large, centralized Scanning and Digital Imaging centers are compliant with the Health Insurability Portability and Accountability Act of 1996, or HIPAA, so we can convert documents that include protected health information. Our unique software creates efficient search tags on scanned data for easy search and retrieval. We offer Cloud-based document management software and other digital hosting services to our customers or make files available for our customers to host themselves.
Equipment and Supplies Sales: We sell equipment and supplies to a small segment of our customer base. We also provide ancillary services such as equipment service and maintenance, often as a way to generate recurring revenue in addition to a one-time sale. In addition, we offer certified used equipment available for sale or for use in our MPS offering.
In previous years, our services were characterized by the primary industries/markets in which they were meant to be sold, e.g., the construction industry or the document archiving and storage market. Having expanded the variety of the markets and industries we serve over the past several years, we now believe it is more useful to report our services by production method. Specifically, we previously described Digital Printing as "construction document and information management" or "CDIM," and Scanning and Digital Imaging as "archiving and information management" or "AIM."
The methods for financial reporting and revenue recognition in our renamed service lines remain unchanged. Likewise, "Managed Print Services" or "MPS" and "Equipment Sales and Supplies" are also reported identically from previous years.
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The majority of our products and services are available from each of our service
centers. Our primary operational objective is to optimize our business
performance by driving as much customer work through our service center network
as is practical, leveraging our production infrastructure, workforce, and
production-grade equipment. All our production centers are digitally connected
and we operate standard software and systems to support seamless movement of
customers digital data and print anywhere within the ARC system.
In addition, we can provide many of our services in our customers' offices. Our
geographic presence is concentrated in the U.S. , with additional service centers
in Canada , the United Arab Emirates (UAE ), China , India , and the United Kingdom .
Our origin as a company was in California , and the initial expansion of our
business was concentrated there. We derive approximately 32% of our total
revenue from the products and services delivered in California .
All of our production facilities are connected via a Software-Defined Wide Area
Network (SD-WAN). Our cloud offerings are hosted by Amazon Web Services . We
employ a combination of proprietary and industry-leading technologies to provide
redundancy, backup and security of all data in our systems. All of our
technology operations are designed to meet ISO 29001 standards for data
security, and several of our service centers are HIPAA-compliant allowing us to
manage document conversions and other scanning tasks involving protected health
information, or PHI.
Costs and Expenses
Our cost of sales consists primarily of materials (paper, toner and other
consumables), labor, and "indirect costs." Indirect costs consist primarily of
equipment expenses related to our MPS locations (typically our customers'
offices and job sites) and our service centers. Facilities and equipment
expenses include maintenance, repairs, rents, insurance, and depreciation. Paper
is the largest component of our material cost; however, paper pricing typically
does not significantly affect our operating margins as they are often passed on
to our customers. We closely monitor material cost as a percentage of net sales
to measure volume and waste, and we maintain low levels of inventory. We also
track labor utilization, or net sales per employee, to measure productivity and
determine staffing levels.
The effects of global supply chain disruptions have been confined primarily to
price increases for production materials and the demand for greater flexibility
in inventory practices, such as purchasing in greater volume to leverage better
economics or to ensure production continuity by having materials on hand. As
noted above, price increases are often passed on to our customers. Labor costs
have increased moderately to retain valuable employees or to compete for new
hires. While these increases had an effect, we believe our cost optimization
program will continue to make them manageable in the future.
Historically, our capital expenditure requirements have varied based on our need
for printing equipment in our MPS locations and service centers. Over the past
two years, the pandemic has reduced the number of employees in our customers'
locations, which has, in turn, reduced the need for equipment. We believe this
equipment trend is likely to become permanent and, as a result, we think the
past two years are more indicative of future capital needs than historical
trends.
Because our relationships with credit providers allows us to obtain attractive
lease rates, we chose to lease rather than purchase most of our equipment over
the past two years.
Research and development costs consist mainly of the salaries, leased building
space, and computer equipment related to our data storage and development
centers in San Ramon, California and Kolkata, India . Such costs are primarily
recorded to cost of sales.
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--------------------------------------------------------------------------------COVID-19 Pandemic
The COVID-19 pandemic continued to have adverse effects on our financial performance during 2021, but barring further negative developments of the virus and its impact on personal and economic well-being, we expect that the worst of those effects are behind us. We expect a hybrid office to remain the norm in 2022, but for print volumes to increase marginally as employers bring their employees back into the office at higher rates than we saw in 2021. We believe work-from-home practices benefit our scanning business as employees need access to documents, regardless of where they are working, and document scanning is the first step in making them accessible in the cloud. Throughout the first quarter of 2022, we believe uncertainty surrounding the potential disruption to our business related to the COVID-19 pandemic has begun to dissipate, as well as the pandemic's overall impact on theU.S. economy, on our clients' ongoing business operations, and on our results of operations and financial condition. However, we remain cautious in our prediction of future events and their potential effects on our business results. Our management team is actively monitoring the continuing impacts of the COVID-19 pandemic and may take further voluntary or required actions to alter our business operations to protect employees and customers. The following discussions are subject to the future effects of the COVID-19 pandemic on our ongoing business operations. 22 --------------------------------------------------------------------------------
Results of Operations
Three Months Ended
March 31, Increase (decrease)
(In millions, except percentages) 2022(2) 2021(2) $ %
Digital Printing $ 41.9 $ 37.4 $ 4.5 12.1 %
MPS 18.7 17.3 1.3 7.6 %
Scanning and Digital Imaging 4.2 3.0 1.1 37.8 %
Equipment and supplies sales 4.7 3.9 0.8 19.8 %
Total net sales $ 69.5 $ 61.7 $ 7.8 12.6 %
Gross profit $ 22.4 $ 18.8 $ 3.7 19.5 %
Selling, general and administrative expenses $ 19.4 $ 17.0 $ 2.4 13.9 %
Amortization of intangible assets $ - $ 0.1 $ - (53.3) %
Interest expense, net $ 0.4 $ 0.6 $ (0.2) (30.6) %
Income tax provision $ 0.8 $ 0.5 $ 0.3 60.9 %
Net income attributable to ARC $ 2.0 $ 0.8 $ 1.2 149.9 %
Non-GAAP (1)
Adjusted net income attributable to ARC (1) $ 2.0 $ 0.9 $ 1.1 115.0 %
EBITDA (1) $ 8.6 $ 8.4 $ 0.2 2.4 %
Adjusted EBITDA (1) $ 9.1 $ 8.8 $ 0.3 3.6 %
(1)See "Non-GAAP Financial Measures" following "Results of Operations" for definitions, reconciliations and more information related to our Non-GAAP disclosures. (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,
2022(1) 2021(1)
Net sales 100.0 % 100.0 %
Cost of sales 67.7 69.6
Gross profit 32.3 30.4
Selling, general and administrative expenses 27.9 27.5
Amortization of intangible assets 0.1 0.1
Income from operations 4.4 2.8
Interest expense, net 0.6 1.0
Income before income tax provision 3.8 1.8
Income tax provision 1.1 0.8
Net income 2.7 1.0
Loss attributable to the noncontrolling interest 0.2 0.3
Net income attributable to ARC 2.8 % 1.3 %
Non-GAAP (2)
EBITDA (2) 12.4 % 13.7 %
Adjusted EBITDA (2) 13.1 % 14.2 %
(1)Column does not foot due to rounding. (2)See "Non-GAAP Financial Measures" following "Results of Operations" for definitions, reconciliations and more information related to our Non-GAAP disclosures.
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Three Months Ended
Net sales for the three months endedMarch 31, 2022 increased 12.6%, compared to three months endedMarch 31, 2021 . The increase in net sales in the first quarter of 2022 is primarily due to increasing year-over-year economic activity compared to the first quarter of 2021 when the effects of the COVID-19 pandemic constrained normal business levels. Digital Printing. Year-over-year sales of Digital Printing services increased$4.5 million , or 12.1%, for the three months endedMarch 31, 2022 . The increase is due to increased volume from digital plan printing from our construction-oriented customers, as well as an increase in digital color graphic printing. Digital Printing services represented 60% of total net sales for the three months endedMarch 31, 2022 , compared to 61% for the three months endedMarch 31, 2021 . The impact of the pandemic on Digital Printing was not as pronounced as other parts of our business due to the expansion of our products and services beyond the construction industry. MPS. Year-over-year sales of MPS services for the three months endedMarch 31, 2022 increased$1.3 million , or 7.6%. The increase in MPS sales reflect a moderation of work-from-home directives that drove more employees into offices during the period, and continuing activity on construction job sites. MPS sales represented approximately 27% of total net sales for the three months endedMarch 31, 2022 , compared to 28% for the three months endedMarch 31, 2021 .
The number of MPS locations has remained relatively flat year-over-year at
approximately 10,800 and 10,750 as of
Scanning and Digital Imaging. Year-over-year sales of Scanning and Digital Imaging services increased$1.1 million , or 37.8%, for the three months endedMarch 31, 2022 . The increase in sales of our Scanning and Digital Imaging services was primarily attributable to increased demand for paper-to-digital document conversions in re-opened offices. We continue to drive an expansion of our addressable market for Scanning and Digital Imaging services with increased marketing activity, as well as targeting building owners and facility managers that require on-demand access to their legacy documents to operate their assets efficiently. We believe that, with the expansion of the markets and industries we serve and the desire of our existing customers to have digital access to documents, our Scanning and Digital Imaging services will continue to grow in the future. Equipment and Supplies Sales. Year-over-year sales of Equipment and Supplies increased$0.8 million , or 19.8%, for the three months endedMarch 31, 2022 . The increase is driven by demand from offices and job sites as they re-opened to employees, especially in theU.S.
Gross Profit
During the three months endedMarch 31, 2022 , gross profit increased to$22.4 million , or 32.3%, compared to$18.8 million , or 30.4% during the three months endedMarch 31, 2021 , primarily driven by the increase in sales of$7.8 million . Gross margin improvement was largely driven by the new cost structure we put in place in 2020, and through our efforts to drive more work through our service centers to leverage our infrastructure, cross-trained workforce, and production-grade equipment, which we were able to leverage with the increase in sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by$2.4 million , or 13.9%, for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 . The increase is due to selective increases in salaries to retain existing employees or attract new hires, as well as commissions, bonuses, and travel resulting from increased sales and profitability. It should be noted that in the first quarter of 2021, salary reductions as a result of the COVID-19 pandemic were still in effect.
Amortization of Intangibles
Amortization of intangibles was less than
Interest Expense, Net
Net interest expense of$0.4 million for the three months endedMarch 31, 2022 , compared to$0.6 million for the three months endedMarch 31, 2021 , decreased due to the continued pay down of our long-term debt, and decrease in bank debt interest spread due to the improvement in our leverage ratio. 24 --------------------------------------------------------------------------------
Income Taxes
We recorded an income tax provision of$0.8 million in relation to pretax income of$2.7 million for the three months endedMarch 31, 2022 , which resulted in an effective income tax rate of 30.1%. Our effective income tax rate for the three months endedMarch 31, 2022 primarily impacted by state taxes, certain stock-based compensation, change in valuation allowances against certain deferred tax assets and non-deductible expenses. Excluding the impact of the change in valuation allowances and certain stock-based compensation, our effective income tax rate would have been 28.8%, for the three months endedMarch 31, 2022 . By comparison, we recorded an income tax provision of$0.5 million in relation to pretax income of$1.1 million for the three months endedMarch 31, 2021 , which resulted in an effective income tax rate of 44.8%. Our effective income tax rate for three months endedMarch 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 endedMarch 31, 2021 .
We have a
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$2.0 million during the three months endedMarch 31, 2022 , as compared to$0.8 million during the three months endedMarch 31, 2021 . The increase in net income attributable to ARC was primarily driven by the increase in net sales and the decrease in depreciation expense of$1.1 million , partially offset by the increase in selling, general and administrative expenses described above. Since the onset of the COVID-19 pandemic our need for printing equipment has significantly decreased, therefore reducing our depreciation expense.
EBITDA
EBITDA margin and Adjusted EBITDA margin is not a recognized measure under GAAP. When analyzing our operating performance, investors should use EBITDA margin and Adjusted EBITDA in addition to, and not as an alternative for, operating income or any other performance measure presented in accordance with GAAP. It is a measure we use to measure our performance and liquidity. We believe EBITDA margin and Adjusted EBITDA reflect an additional way of viewing aspects of our operations that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our business. We believe the measure is used by investors and is a useful indicator to measure our performance. Because not all companies use identical calculations, our presentation of EBITDA margin and Adjusted EBITDA may not be comparable to similarly titled measures of other companies. See Non-GAAP Financial Measures below for additional discussion. EBITDA margin decreased to 12.4% for the three months endedMarch 31, 2022 , from 13.7% for the same period in 2021. Excluding the effect of stock-based compensation, adjusted EBITDA margin decreased to 13.1% during the three months endedMarch 31, 2022 , as compared to 14.2% for the same period in 2021. The decrease in adjusted EBITDA margin for the three months endedMarch 31, 2022 was due to the increase in selling, general and administrative expenses described 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 inthe United States of America ("GAAP"). These measures are not measurements of our financial performance under GAAP and should not be considered as alternatives to net income, income from operations, net income margin or any other performance measures derived in accordance with GAAP or as an alternative to cash flows from operating, investing or financing activities as a measure of our liquidity. 25 --------------------------------------------------------------------------------
EBITDA represents net income before interest, taxes, depreciation and amortization. EBITDA margin is a non-GAAP measure calculated by dividing EBITDA by net sales.
We have presented EBITDA and related ratios because we consider them important supplemental measures of our performance and liquidity. We believe investors may also find these measures meaningful, given how our management makes use of them. The following is a discussion of our use of these measures. We use EBITDA to measure and compare the performance of our operating divisions. Our operating divisions' financial performance includes all of the operating activities except debt and taxation which are managed at the corporate level forU.S. operating divisions. We use EBITDA to compare the performance of our operating divisions and to measure performance for determining consolidated-level compensation. In addition, we use EBITDA to evaluate potential acquisitions and potential capital expenditures. EBITDA and related ratios have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are as follows:
•They do not reflect our cash expenditures, or future requirements for capital expenditures and contractual commitments;
•They do not reflect changes in, or cash requirements for, our working capital needs;
•They do not reflect the significant interest expense, or the cash requirements necessary, to service interest or principal payments on our debt;
•Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements; and
•Other companies, including companies in our industry, may calculate these measures differently than we do, limiting their usefulness as comparative measures.
Because of these limitations, EBITDA and related ratios should not be considered as measures of discretionary cash available to us to invest in business growth or to reduce our indebtedness. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA and related ratios only as supplements. Our presentation of adjusted net income and adjusted EBITDA over certain periods is an attempt to provide meaningful comparisons to our historical performance for our existing and future investors. The unprecedented changes in our end markets over the past several years have required us to take measures that are unique in our history and specific to individual circumstances. Comparisons inclusive of these actions make normal financial and other performance patterns difficult to discern under a strict GAAP presentation. Each non-GAAP presentation, however, is explained in detail in the reconciliation tables below. Specifically, we have presented adjusted net income attributable to ARC and adjusted earnings per share attributable to ARC shareholders for the three months endedMarch 31, 2022 and 2021 to reflect the exclusion of changes in the valuation allowances related to certain deferred tax assets and other discrete tax items. This presentation facilitates a meaningful comparison of our operating results for the three months endedMarch 31, 2022 and 2021. We believe these changes were the result of items which are not indicative of our actual operating performance. We have presented adjusted EBITDA for the three months endedMarch 31, 2022 and 2021 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 2021 Credit Agreement; therefore, we believe this information is useful to investors in assessing our financial performance. 26 -------------------------------------------------------------------------------- The following is a reconciliation of cash flows provided by operating activities to EBITDA: Three Months Ended March 31, (In thousands) 2022 2021 Cash flows provided by operating activities$ 2,931 $ 5,375 Changes in operating assets and liabilities 5,585 2,494 Non-cash expenses, including depreciation and amortization (6,660) (7,257) Income tax provision 798 496 Interest expense, net 430 620 Loss attributable to the noncontrolling interest 116 177 Depreciation and amortization 5,429 6,524 EBITDA$ 8,629 $ 8,429
The following is a reconciliation of net income attributable to
Three Months
Ended
March 31,
(In thousands) 2022 2021
Net income attributable to ARC Document Solutions, Inc. $ 1,972 $ 789
Interest expense, net 430 620
Income tax provision 798 496
Depreciation and amortization 5,429 6,524
EBITDA 8,629 8,429
Stock-based compensation 451 339
Adjusted EBITDA $ 9,080 $ 8,768 The following is a reconciliation of net income margin attributable to
Three Months Ended
March 31,
2022(1) 2021
Net income margin attributable to ARC Document Solutions, Inc. 2.8 % 1.3 %
Interest expense, net 0.6 1.0
Income tax provision 1.1 0.8
Depreciation and amortization 7.8 10.6
EBITDA margin 12.4 13.7
Stock-based compensation 0.6 0.5
Adjusted EBITDA margin 13.1 % 14.2 %
(1)Column does not foot due to rounding.
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The following is a reconciliation of net income attributable to
Three Months
Ended
March 31,
(In thousands, except per share amounts) 2022 2021
Net income attributable to ARC Document Solutions, Inc. $ 1,972 $ 789
Deferred tax valuation allowance and other discrete tax items 6 131
Adjusted net income attributable to ARC Document Solutions, Inc. $ 1,978 $ 920 Actual:
Earnings per share attributable toARC Document Solutions, Inc. shareholders: Basic$ 0.05 $ 0.02 Diluted$ 0.05 $ 0.02 Weighted average common shares outstanding: Basic 42,064 42,264 Diluted 43,739 42,634 Adjusted: Earnings per share attributable toARC Document Solutions, Inc. shareholders: Basic$ 0.05 $ 0.02 Diluted$ 0.05 $ 0.02 Weighted average common shares outstanding: Basic 42,064 42,264 Diluted 43,739 42,634
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, 2022 was$50.4 million . Of this amount,$15.9 million was held in foreign countries, with$15.0 million held inChina . Repatriation of some of our cash and cash equivalents in foreign countries could be subject to delay for local country approvals and could have potential adverse tax consequences. As a result of holding cash and cash equivalents outside of theU.S. , our financial flexibility may be reduced. Supplemental information pertaining to our historical sources and uses of cash is presented as follows and should be read in conjunction with our interim Condensed Consolidated Statements of Cash Flows and notes thereto included elsewhere in this report. Three Months Ended March 31, (In thousands) 2022 2021 Net cash provided by operating activities$ 2,931 $ 5,375 Net cash used in investing activities$ (1,154) $ (437) Net cash used in financing activities$ (7,364) $ (10,381) 28
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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 decrease in cash flows from operations during the three months endedMarch 31, 2022 , compared to the same period in 2021, was primarily due to the timing of accounts receivable collections and timing of payables. Days sales outstanding, or DSO, was 53 days as ofMarch 31, 2022 and 54 days as ofMarch 31, 2021 . We are closely managing cash collections which have remained consistent since the outbreak of the COVID-19 pandemic. DSO is calculated by taking the respective yearsMarch 31st , accounts receivable balance divided by the net sales for the quarter multiplied by the number of total days in a quarter. We have presented DSO because we consider it an important metric as it is a valuable indicator of the efficiency of the business and quality of our cash flows. We believe investors may also find this metric meaningful given the importance of cash flows from operations and management's ability to efficiently manage our working capital.
We use DSO to measure and compare the cash management performance of our operating divisions.
Investing Activities
Net cash used in investing activities was primarily related to capital expenditures. We incurred capital expenditures totaling$1.2 million and$0.6 million for the three months endedMarch 31, 2022 and 2021, respectively. The increase in capital expenditures is driven primarily by the fact that in the prior year we had a low level of purchases. Because our relationships with credit providers allow us to obtain attractive lease rates, we usually choose to lease rather than purchase equipment unless there is a compelling reason to do otherwise. Other companies, including companies in our industry, may calculate DSO differently than we do, limiting its usefulness as a comparative measure.
Financing Activities
Net cash of
Our cash position, working capital, and debt obligations as ofMarch 31, 2022 andDecember 31, 2021 are shown below and should be read in conjunction with our interim Condensed Consolidated Balance Sheets and related notes contained elsewhere in this report. (In thousands) March 31, 2022 December 31, 2021 Cash and cash equivalents$ 50,374 $ 55,929 Working capital$ 37,618 $ 37,082
Borrowings from revolving credit facility
46,250 Other debt obligations 29,687 31,992 Total debt obligations$ 74,687 $ 78,242 The increase of$0.5 million in working capital was primarily driven by the increase in accounts receivable of$1.3 million and a$0.9 million increase in inventory, in addition to a decrease in the current portion of operating and finance lease liabilities, as we entered into fewer leases, partially offset by the decrease in cash. To manage our working capital, we chiefly focus on our DSO and monitor the aging of our accounts receivable, as receivables are the most significant element of our working capital. We believe that our current cash and cash equivalents balance of$50.4 million , the availability under our 2021 Credit Agreement, the availability under our equipment lease lines, and cash flows provided by operations should be adequate to cover the next twelve months and beyond of working capital needs, debt requirements consisting of scheduled principal and interest payments, and planned capital expenditures, to the extent such items are known or are reasonably determinable based on current business and market conditions. See "Debt Obligations" section for further information related to our 2021 Credit Agreement.
A significant portion of our revenue across all of our product and services is generated from customers in the AEC/O industry. As a result, our operating results and financial condition can be significantly affected by economic factors that influence the
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AEC/O industry, including the COVID-19 pandemic. Additionally, a general
economic downturn may adversely affect the ability of our customers and
suppliers to obtain financing for significant operations and purchases, and to
perform their obligations under their agreements with us. We believe that credit
constraints in the financial markets could result in a decrease in, or
cancellation of, existing business, could limit new business, and could
negatively affect our ability to collect our accounts receivable on a timely
basis.
We have not been actively seeking growth through acquisition since 2009, and
while we remain opportunistic with regard to opportunities, we don't intend to
pursue them in the near future.
Debt Obligations
Credit Agreement
OnApril 22, 2021 , we entered into a Credit Agreement withU.S. Bank National Association , as administrative agent and the lender party thereto (the "2021 Credit Agreement"). The 2021 Credit Agreement provides for the extension of revolving loans in an aggregate principal amount not to exceed$70 million and replaces the Credit Agreement dated as ofNovember 20, 2014 , as amended (the "2014 Credit Agreement"). The 2021 Credit Agreement features terms similar to the 2014 Credit Agreement, including the ability to use excess cash of up to$15 million per year for restricted payments such as share repurchases and dividends. The obligation under the 2021 Credit Agreement matures onApril 22, 2026 . The 2021 Credit Agreement also includes certain tests we are required to meet in order to pay dividends, repurchase stock and make other restricted payments. In order to make such payments which are permitted subject to certain customary conditions set forth in the 2021 Credit Agreement, the amount of all such payments will be limited to$15 million during any twelve-month period. When calculating the fixed charge coverage ratio, we may exclude up to$10 million of such restricted payments that would otherwise constitute fixed charges in any twelve-month period.
As of
Loans borrowed under the 2021 Credit Agreement bear interest, in the case of LIBOR loans, at a per annum rate equal to the applicable LIBOR (which rate shall not be less than zero), plus a margin ranging from 1.25% to 1.75%, based on our Total Leverage Ratio (as defined in the 2021 Credit Agreement). Loans borrowed under the 2021 Credit Agreement that are not LIBOR loans bear interest at a per annum rate (which rate shall not be less than zero) equal to (i) the greatest of (A) the Federal Funds Rate plus 0.50%, (B) the one month LIBOR rate plus 1.00%, per annum, and (C) the rate of interest announced, from time to time, byU.S. Bank National Association as its "prime rate," plus (ii) a margin ranging from 0.25% to 0.75%, based on the our Total Leverage Ratio. As ofMarch 31, 2022 , LIBOR loans borrowed under the 2021 Credit Agreement accrued interest at 1.8%. We pay certain recurring fees with respect to the 2021 Credit Agreement, including administration fees to the administrative agent. The transition to non-LIBOR loan rates for us is uncertain, but we believe the transitions will not have a material impact on our interest expense for the year of transition. Subject to certain exceptions, including, in certain circumstances, reinvestment rights, the loans extended under the 2021 Credit Agreement are subject to customary mandatory prepayment provisions with respect to: the net proceeds from certain asset sales; the net proceeds from certain issuances or incurrences of debt (other than debt permitted to be incurred under the terms of the 2021 Credit Agreement); the net proceeds from certain issuances of equity securities; and net proceeds of certain insurance recoveries and condemnation events. The 2021 Credit Agreement contains customary representations and warranties, subject to limitations and exceptions, and customary covenants restricting the ability (subject to various exceptions) we and our subsidiaries: incur additional indebtedness (including guarantee obligations); incur liens; sell certain property or assets; engage in mergers or other fundamental changes; consummate acquisitions; make investments; make certain distributions or repurchase our equity securities or those of our subsidiaries; change the nature of their business; prepay or amend certain indebtedness; engage in certain transactions with affiliates; amend their organizational documents; or enter into certain restrictive agreements. In addition, the 2021 Credit Agreement contains financial covenants which requires we maintain (i) at all times, a Total Leverage Ratio in an amount not to exceed 2.75 to 1.00; and (ii) a Fixed Charge Coverage Ratio (as defined in the 2021 Credit Agreement), as of the last day of each fiscal quarter, an amount not less than 1.15 to 1.00. We were in compliance with our covenants under the 2021 Credit Agreement as ofMarch 31, 2022 . The 2021 Credit Agreement contains customary events of default, including with respect to: nonpayment of principal, interest, fees or other amounts; failure to perform or observe covenants; material inaccuracy of a representation or warranty when made; 30 -------------------------------------------------------------------------------- cross-default to other material indebtedness; bankruptcy, insolvency and dissolution events; inability to pay debts; monetary judgment defaults; actual or asserted invalidity or impairment of any definitive loan documentation, repudiation of guaranties or subordination terms; certain ERISA related events; or a change of control. The obligations of our subsidiary that is the borrower under the 2021 Credit Agreement are guaranteed by us and each of our otherUnited States domestic subsidiaries. The 2021 Credit Agreement and any interest rate protection and other hedging arrangements provided by any lender party to the credit facility or any affiliate of such a lender are secured on a first priority basis by a perfected security interest in substantially all of our and each guarantor's assets (subject to certain exceptions).
Finance Leases
As of
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 forDecember 31, 2021 for the schedule on maturities of operating lease liabilities as there were no material changes as ofMarch 31, 2022 . Legal Proceedings. We are involved, and will continue to be involved, in legal proceedings arising out of the conduct of our business, including commercial and employment-related lawsuits. Some of these lawsuits purport or may be determined to be class actions and seek substantial damages, and some may remain unresolved for several years. We establish accruals for specific legal proceedings when it is considered probable that a loss has been incurred and the amount of the loss can be reasonably estimated. We evaluate whether a loss is reasonably probable based on our assessment and consultation with legal counsel regarding the ultimate outcome of the matter. As ofMarch 31, 2022 we have accrued for the potential impact of loss contingencies that are probable and reasonably estimable. We do not currently believe that the ultimate resolution of any of these matters will have a material adverse effect on our results of operations, financial condition, or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect on our results of operations, financial condition, or cash flows. Environmental Matters. We have accrued liabilities for environmental assessment and remediation matters relating to operations at certain locations conducted in the past by predecessor companies that do not relate to our current operations. We have accrued these liabilities because it is probable that a loss or cost will be incurred and the amount of loss or cost can be reasonably estimated. These estimates could change as a result of changes in planned remedial actions, remediation technologies, site conditions, the estimated time to complete remediation, environmental laws and regulations, and other factors. Because of the uncertainties associated with environmental assessment and remediation activities, our future expenses relating to these matters could be higher than the liabilities we have accrued. Based upon current information, we believe that the impact of the resolution of these matters would not be, individually or in the aggregate, material to our financial position, results of operations or cash flows. 31 --------------------------------------------------------------------------------
Critical Accounting Policies and Significant Judgements and Estimates
Our management prepares financial statements in conformity with GAAP. When we prepare these consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to accounts receivable, inventories, deferred tax assets, goodwill and intangible assets, long-lived assets and leases. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. Our Annual Report on Form 10-K for the year endedDecember 31, 2021 includes a description of certain critical accounting policies, including those with respect to goodwill, revenue recognition, and income taxes, which we believe are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management's judgments and estimates. There have been no material changes to the critical accounting policies, significant judgements and estimates described in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . 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. AtSeptember 30, 2021 , 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 ofSeptember 30, 2021 , 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 2021 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 2022, 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 32 -------------------------------------------------------------------------------- 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$2.4 million valuation allowance against certain deferred tax assets as ofMarch 31, 2022 . In future quarters we will continue to evaluate our historical results for the preceding twelve quarters and our future projections to determine whether we will generate sufficient taxable income to utilize our deferred tax assets, and whether a valuation allowance is required.
We calculate our current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed in subsequent years. Adjustments based on filed returns are recorded when identified.
Income taxes have not been provided on certain undistributed earnings of foreign subsidiaries because such earnings are considered to be permanently reinvested.
The amount of taxable income or loss we report to the various tax jurisdictions is subject to ongoing audits by federal, state and foreign tax authorities. We estimate of the potential outcome of any uncertain tax issue is subject to management's assessment of relevant risks, facts, and circumstances existing at that time. We use a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. We record a liability for the difference between the benefit recognized and measured and tax position taken or expected to be taken on its tax return. To the extent that our assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. We report tax-related interest and penalties as a component of income tax expense.
Recent Accounting Pronouncements
See Note 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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