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FINANCE

ARC DOCUMENT SOLUTIONS, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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The following discussion should be read in conjunction with our interim condensed consolidated financial statements and related notes and other financial information contained elsewhere in this report, and 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, 2021 and this quarterly report on Form 10-Q for the quarter ended
September 30, 2022.


Business Summary

ARC Document Solutions Inc. is a digital printing company. We provide digital printing services and document related services to clients in a growing variety of industries. Our main services and product offering are:


•digital printing of general and specialized business documents such as those
found in marketing and advertising, engineering and construction and other
industries, as well as producing highly-customized display graphics of all types
and sizes;
•acquiring, placing and managing ARC-certified office printing equipment with
proprietary device tracking and print management software at our customers'
offices and job sites;
•scanning documents, indexing them and adding digital search features for use in
digital document management, document archives and facilities management, as
well as providing other digital imaging services; and,
•reselling digital printing equipment and supplies.

Each of these services often includes additional logistical services in the form of distribution and delivery of finished documents, installation of display graphics, or 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 servicing and maintenance, often as a means of generating recurring revenue in addition to a one-time sale. Additionally, we have Certified Pre-Owned equipment available for sale or 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 of financial reporting and revenue recognition in our renowned service lines remain unchanged. Similarly, “Managed Print Services” or “MPS” and “Equipment Sales and Supplies” are also reported identically to 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, the impact of paper
pricing on our operating margins are mitigated and in some cases eliminated 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 third quarter of 2022, we believe the disruption to our business
related to the COVID-19 pandemic has largely dissipated and we are now working
under conditions that are likely to continue for the foreseeable future. A
lasting effect of the pandemic appears to be the use of hybrid work schedules
for many of our office-based clients. While this could change and more people
may come back to work in offices, there is no indication of a mass return to
offices throughout the country and thus we believe that our managed print
services business line is likely to remain muted relative to periods prior to
the pandemic. This does not preclude year-over-year growth in this part of our
business, but at this time we do not expect revenues to ramp up quickly to
levels prior to 2020 and ultimately, may never do so. 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.


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Results of Operations


                                                                                                                                                     Nine Months Ended
                                            Three Months Ended September 30,                       Increase (decrease)                                 September 30,                                  Increase (decrease)
(In millions, except percentages)              2022(1)            2021(1)                         $                            %                 2022(1)              2021(1)                        $                            %
Digital Printing                            $     44.7          $    44.9          $            (0.2)                          (0.5) %       $    132.8             $  125.4          $             7.4                             5.9  %
MPS                                               19.4               18.5                        0.9                            5.0  %             57.3                 53.8                        3.5                             6.5  %
Scanning and Digital Imaging                       4.8                4.1                        0.7                           17.3  %             13.3                 10.4                        2.9                            27.8  %

Equipment and supplies sales                       4.3                5.0                       (0.7)                         (13.8) %             13.8                 13.3                        0.5                             3.8  %
Total net sales                             $     73.1          $    72.4          $             0.7                            1.0  %       $    217.2             $  203.0          $            14.2                             7.0  %

Gross profit                                $     24.8          $    23.8          $             1.0                            4.3  %       $     72.8             $   65.4          $             7.4                            11.4  %
Selling, general and administrative         $     19.1          $    18.8          $             0.3                            1.3  %       $     58.4             $   54.4          $             4.0                             7.4  %
expenses
Amortization of intangible assets           $        -          $       -          $               -                          (54.1) %       $      0.1             $    0.2          $            (0.1)                          (48.2) %

Interest expense, net                       $      0.5          $     0.5          $               -                           (8.3) %       $      1.3             $    1.7          $            (0.4)                          (21.3) %
Income tax provision                        $      1.6          $     1.3          $             0.3                           21.5  %       $      4.4             $    2.9          $             1.4                            48.4  %
Net income attributable to ARC              $      3.7          $     3.2          $             0.6                           17.6  %       $      9.0             $    6.5          $             2.4                            37.2  %
Non-GAAP (2)
Adjusted net income attributable to ARC (2) $      3.7          $     3.2          $             0.5                           15.4  %       $      9.4             $    6.8          $             2.6                            38.4  %
EBITDA (2)                                  $     10.8          $    11.0          $            (0.3)                          (2.3) %       $     30.3             $   30.1          $             0.2                             0.6  %
Adjusted EBITDA (2)                         $     11.2          $    11.5          $            (0.3)                          (2.5) %       $     31.6             $   31.3          $             0.3                             0.9  %


1. The column does not rest due to rounding. 2. See “Non-GAAP Financial Measures” after “Results of Operations” for definitions, reconciliations and more information relating to our non-GAAP information.


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                                              As Percentage of Net Sales
                                                                 Three Months Ended September 30,                                         Nine 

Months ended September 30,

                                                                  2022 (1)                        2021 (1)                                  2022                             2021(1)
Net sales                                                                      100.0  %               100.0  %                                            100.0  %              100.0  %
Cost of sales                                                                   66.1                   67.2                                                66.5                  67.8
Gross profit                                                                    33.9                   32.8                                                33.5                  32.2
Selling, general and administrative expenses                                    26.1                   26.0                                                26.9                  26.8
Amortization of intangible assets                                                  -                    0.1                                                   -                   0.1

Income from operations                                                           7.8                    6.8                                                 6.6                   5.3

Interest expense, net                                                            0.6                    0.7                                                 0.6                   0.8
Income before income tax provision                                               7.2                    6.1                                                 6.0                   4.5
Income tax provision                                                             2.2                    1.8                                                 2.0                   1.5
Net income                                                                       5.1                    4.3                                                 4.0                   3.1
Loss attributable to the noncontrolling interest                                   -                    0.1                                                 0.1                   0.2
Net income attributable to ARC                                                   5.1  %                 4.4  %                                              4.1  %                3.2  %
Non-GAAP (2)
EBITDA (2)                                                                      14.7  %                15.2  %                                             13.9  %               14.8  %
Adjusted EBITDA (2)                                                             15.3  %                15.9  %                                             14.6  %               15.4  %


(1) The column has no foot due to rounding. (2)See “Non-GAAP Financial Measures” after “Results of Operations” for definitions, reconciliations and more information regarding our non-GAAP information.

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Three and nine months ended September 30, 2022 Compared to the three and nine month periods ended September 30, 2021


Net Sales

Net sales for the three and nine months ended September 30, 2022 increased 1.0%
and 7.0%, respectively, compared to the same periods in 2021. The increase in
net sales in 2022 is due to the expansion and diversification of our customer
base and selling additional services to existing customers. We believe the
current volatility in the market has not negatively impacted our sales but there
can be no assurance that this will continue in the future.

Digital Printing. Year-over-year sales of Digital Printing services decreased
$0.2 million, or 0.5%, for the three months ended September 30, 2022. The slight
decrease in Digital Printing sales for the third quarter of 2022 is due to
comparatively outsized sales related to COVID-19 signage for the same period in
2021. This was partially offset by an increase in digital color graphic printing
from new and existing customers, as well as an increase in sales in digital plan
printing from our construction-oriented customers. Year-over-year sales of
Digital Printing services increased $7.4 million, or 5.9%, for the nine months
ended September 30, 2022. The increase is due to continuing demand for digital
color graphic printing across most of our customer base including digital plan
printing from our construction-oriented customers. Digital Printing services
represented 61% of total net sales for the three and nine months ended
September 30, 2022, compared to 62% for the three and nine months ended
September 30, 2021.

MPS. Year-over-year sales of MPS services for the three months ended
September 30, 2022 increased $0.9 million, or 5.0%. Year-over-year sales of MPS
services for the nine months ended September 30, 2021 increased $3.5 million, or
6.5%. Growth in MPS sales reflects an increase of on-site printing volume as
moderation of work-from-home directives encouraged more employees to return to
offices during the period, as activity on construction job sites continued, and
as we implemented price increases to offset the effects of inflation in our
supply chain.

MPS sales represented approximately 27% and 26% of total net sales for the three
and nine months ended September 30, 2022, respectively compared to 26% and 27%
for the three and nine months ended September 30, 2021, respectively.

The number of MPS locations remained relatively stable year-over-year at approximately 10,800 as of September 30, 2022 and 2021.


Scanning and Digital Imaging. Year-over-year sales of Scanning and Digital
Imaging services increased $0.7 million, or 17.3%, and $2.9 million or 27.8% for
the three and nine months ended September 30, 2022, respectively. The increase
in sales of our Scanning and Digital Imaging services was primarily attributable
to growing demand for paper-to-digital document conversions used in day-to-day
business operations, and the creation of digital archives to replace long-term
warehoused paper document storage. We 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
decreased $0.7 million, or 13.8%, for the three months ended September 30, 2022
as a result of reduced sales of $0.6 million from our Chinese joint venture as
the Chinese economy continues to be challenged. Year-over-year sales of
Equipment and Supplies increased $0.5 million, or 3.8%, for the nine months
ended September 30, 2022. The increase is driven by high demand in the United
States from offices and job sites as they re-opened to employees earlier in the
year.

Gross Profit

During the three months ended September 30, 2022, gross profit increased to
$24.8 million, or 33.9%, compared to $23.8 million, or 32.8% during the three
months ended September 30, 2021, primarily driven by the increase in net sales
of $0.7 million and a reduction in depreciation expense of $1.0 million.

During the nine months ended September 30, 2022, gross profit increased to $72.8
million, or 33.5%, compared to $65.4 million, or 32.2% during the nine months
ended September 30, 2021, primarily driven by the increase in net sales of $14.2
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 which allows us to leverage our infrastructure (facilities & equipment),
cross-trained workforce, and production-grade equipment. The improved gross
margins driven by our ability to better leverage our costs, were partially
offset by an increase in labor and material costs resulting from current
inflationary pressures.
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Selling, general and administrative expenses


Selling, general and administrative expenses increased by $0.3 million, or 1.3%,
for the three months ended September 30, 2022 compared to the three months ended
September 30, 2021. Selling, general and administrative expenses increased $4.0
million or 7.4%, for the nine months ended September 30, 2022 compared to the
nine months ended September 30, 2021. The increase is due to higher labor costs,
as well as higher commissions, bonuses, and travel resulting from increased
sales and profitability.

Amortization of intangible assets


Amortization of intangibles decreased to less than $0.1 million for the three
and nine months ended September 30, 2022, due to the completed amortization of
certain customer relationship intangibles related to historical acquisitions.

Interest expense, net


Net interest expense of $0.45 million and $1.3 million for the three and nine
months ended September 30, 2022, respectively, decreased compared to $0.5
million and $1.7 million for the three and nine months ended September 30, 2021,
respectively. The decrease is due to the continued pay down of our long-term
debt. The revolving loan features a flexible payment schedule allowing us to pay
down or draw on it at any time. As such, we intend to use available cash
throughout the year to manage our interest expense.

Income taxes


We recorded an income tax provision of $1.6 million and $4.4 million in relation
to pretax income of $5.3 million and $13.1 million for the three and nine months
ended September 30, 2022, respectively, which resulted in an effective income
tax rate of 29.9% and 33.5%, respectively. Our effective income tax rate for the
three and nine months ended September 30, 2022 was primarily impacted by state
taxes, non-deductible compensation, certain stock-based compensation and other
non-deductible expenses. Excluding the impact of certain stock-based
compensation, our effective income tax rate would have been 30.4% and 30.0%,
respectively, for the three and nine months ended September 30, 2022.

By comparison, we recorded an income tax provision of $1.3 million and $2.9
million in relation to pretax income of $4.4 million and $9.2 million for the
three and nine months ended September 30, 2021, respectively, which resulted in
an effective income tax rate of 29.3% and 32.2%, respectively. Our effective
income tax rate for the three and nine months ended September 30, 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 29.1% and 28.5%, respectively, for the
three and nine months ended September 30, 2021.

We have a $2.4 million impairment of certain deferred tax assets at September 30, 2022.


Noncontrolling Interest

The net loss attributable to non-controlling interests represents 35% of the revenue/loss of UDS and its subsidiaries, which together constitute our joint venture business in China.

Net income attributable to ARC


Net income attributable to ARC increased to $3.7 million and $9.0 million during
the three and nine months ended September 30, 2022, respectively, as compared to
$3.2 million and $6.5 million during the three and nine months ended
September 30, 2021, respectively. The increase in net income attributable to ARC
was primarily driven by the increase in net sales and the year-to-date decrease
in depreciation expense of $3.2 million, partially offset by the increase in
selling, general and administrative expenses described above. As hybrid work
schedules reduced office printing volumes, our need for printing equipment has
significantly decreased and thus reduced 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
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our operations that, when viewed with our GAAP results, provides a more complete
understanding of factors and trends affecting our business. We believe the
measure is used by investors and is a useful indicator to measure our
performance. Because not all companies use identical calculations, our
presentation of EBITDA margin and Adjusted EBITDA may not be comparable to
similarly titled measures of other companies. See Non-GAAP Financial Measures
below for additional discussion.

EBITDA margin decreased to 14.7% for the three months ended September 30, 2022,
from 15.2% for the same period in 2021. Excluding the effect of stock-based
compensation, adjusted EBITDA margin decreased to 15.3% during the three months
ended September 30, 2022, as compared to 15.9% for the same period in 2021. The
decrease in adjusted EBITDA margin for the three and nine months ended
September 30, 2022, was due to the inflationary increase in direct material and
labor costs in absolute dollars and as a percentage of sales.

EBITDA margin decreased to 13.9% for the nine months ended September 30, 2022,
from 14.8% for the same period in 2021. Excluding the effect of stock-based
compensation, adjusted EBITDA margin decreased to 14.6% during the nine months
ended September 30, 2022, as compared to 15.4% for the same period in 2021. The
decrease in adjusted EBITDA margin for the nine months ended September 30, 2022,
was due to the increase in direct material and labor costs in absolute dollars
and as a percentage of sales due to inflation.

Impact of inflation


Rising costs for raw materials, such as paper and fuel charges are largely being
passed on to customers via price increases during the ordinary course of
business. These price increases have moderated the impact of inflation on our
direct costs in 2022. As these inflationary pressures continue, however, the
increased cost of labor, materials and other indirect costs require close and
active management to avoid material impacts to our cost structure.

Non-GAAP Financial Measures


EBITDA 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, 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.

EBITDA represents net earnings before interest, taxes, depreciation and amortization. EBITDA margin is a non-GAAP measure calculated by dividing EBITDA by net sales.


We have presented EBITDA and related ratios because we consider them important
supplemental measures of our performance and liquidity. We believe investors may
also find these measures meaningful, given how our management makes use of them.
The following is a discussion of our use of these measures.

We use EBITDA to measure and compare the performance of our operating divisions.
Our operating divisions' financial performance includes all of the operating
activities except debt and taxation which are managed at the corporate level for
U.S. operating divisions. We use EBITDA to compare the performance of our
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, future capital expenditure requirements and contractual commitments;

•They do not reflect changes or cash requirements for our working capital requirements;

• They do not reflect the significant interest charges, nor the cash requirements necessary, to service interest or principal repayments on our debt;

•Although depreciation and amortization are non-cash charges, depreciated assets will often need to be replaced in the future, and EBITDA does not reflect any cash requirement for such replacements; and

• Other companies, including companies in our industry, may calculate these measures differently than we do, which limits their usefulness as comparative measures.

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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 and
nine months ended September 30, 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 and nine months ended September 30, 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 and nine months ended
September 30, 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.

The following is a reconciliation of cash flows provided by operating activities
to EBITDA:


                                                               Three Months Ended                     Nine Months Ended
                                                                  September 30,                          September 30,
(In thousands)                                                2022               2021               2022               2021
Cash flows provided by operating activities              $    14,869          $ 11,285          $   26,398          $ 28,174
Changes in operating assets and liabilities                   (4,056)             (328)              3,623             1,001
Non-cash expenses, including depreciation and
amortization                                                  (7,107)           (7,820)            (21,333)          (22,958)
Income tax provision                                           1,577             1,298               4,376             2,949
Interest expense, net                                            454               495               1,330             1,691
Loss attributable to the noncontrolling interest                  31                41                 283               324
Depreciation and amortization                                  4,982             6,029              15,599            18,928
EBITDA                                                   $    10,750          $ 11,000          $   30,276          $ 30,109

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

                                                             Three Months Ended                     Nine Months Ended
                                                                September 30,                          September 30,
(In thousands)                                              2022               2021               2022               2021
Net income attributable to ARC Document Solutions,
Inc.                                                   $     3,737          $  3,178          $    8,971          $  6,541
Interest expense, net                                          454               495               1,330             1,691
Income tax provision                                         1,577             1,298               4,376             2,949
Depreciation and amortization                                4,982             6,029              15,599            18,928
EBITDA                                                      10,750            11,000              30,276            30,109

Stock-based compensation                                       441               481               1,331             1,224
Adjusted EBITDA                                        $    11,191          $ 11,481          $   31,607          $ 31,333



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The following is a reconciliation of the net profit margin attributable to ARC DocumentSolutions, Inc. EBITDA margin and adjusted EBITDA margin:

                                                                Three Months Ended                          Nine Months Ended
                                                                   September 30,                               September 30,
                                                             2022                  2021                  2022                  2021
Net income margin attributable to ARC Document
Solutions, Inc.                                                  5.1  %               4.4  %                 4.1  %               3.2  %
Interest expense, net                                            0.6                  0.7                    0.6                  0.8
Income tax provision                                             2.2                  1.8                    2.0                  1.5
Depreciation and amortization                                    6.8                  8.3                    7.2                  9.3
EBITDA margin                                                   14.7                 15.2                   13.9                 14.8

Stock-based compensation                                         0.6                  0.7                    0.6                  0.6
Adjusted EBITDA margin                                          15.3  %              15.9  %                14.6  %              15.4  %

The following is a reconciliation of net income attributable to ARC DocumentSolutions, Inc. adjusted net earnings and adjusted earnings per share attributable to ARC DocumentSolutions, Inc.:


                                                              Three Months Ended                             Nine Months Ended
                                                                 September 30,                                  September 30,
(In thousands, except per share amounts)                     2022                 2021                      2022                2021

Net income attributable to ARC DocumentSolutions, Inc.

                                                  $     3,737              $ 3,178                $    8,971             $ 6,541

Deferred tax valuation allowance and other discrete tax items

                                                     (28)                  37                       410                 236
Adjusted net income attributable to ARC Document
Solutions, Inc.                                       $     3,709              $ 3,215                $    9,381             $ 6,777

Real:

Earnings per share attributable to ARC Document
Solutions, Inc. shareholders:
Basic                                                 $      0.09              $  0.08                $     0.21             $  0.15
Diluted                                               $      0.09              $  0.07                $     0.21             $  0.15
Weighted average common shares outstanding:
Basic                                                      42,283               42,073                    42,209              42,213
Diluted                                                    42,956               42,724                    43,414              42,629
Adjusted:
Earnings per share attributable to ARC Document
Solutions, Inc. shareholders:
Basic                                                 $      0.09              $  0.08                $     0.22             $  0.16
Diluted                                               $      0.09              $  0.08                $     0.22             $  0.16
Weighted average common shares outstanding:
Basic                                                      42,283               42,073                    42,209              42,213
Diluted                                                    42,956               42,724                    43,414              42,629


Cash and capital resources

Our primary sources of cash were cash flow from operations and borrowings under our loan and lease agreements. Our recent historical uses of cash have been for ongoing operations, payment of principal and interest on outstanding debt securities, capital expenditures and share buybacks.



Total cash and cash equivalents as of September 30, 2022 was $50.6 million. Of
this amount, $4.3 million was held in foreign countries, with $2.5 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. In
May of 2022, we completed an $11.2 million capital distribution from our Chinese
joint venture ("JV"). As we are 65% owners, $7.3 million came to our US
operations, and
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35% or $3.9 million went to our JV partner, thus resulting in a $3.9 million
decrease in our consolidated cash and non-controlling interests balance sheet account.


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.

                                                         Nine Months Ended
                                                           September 30,
(In thousands)                                                         2022           2021
Net cash provided by operating activities                           $  26,398      $  28,174
Net cash used in investing activities                               $  (4,074)     $  (3,100)
Net cash used in financing activities                               $ (26,494)     $ (25,307)


Operating Activities

Cash flow from operations is primarily driven by sales and the net income generated by these sales, excluding non-cash charges.


The decrease in cash flows from operations during the nine months ended
September 30, 2022, compared to the same period in 2021, was primarily due to
the timing of accounts receivable collections and timing of payroll. Days sales
outstanding, or DSO, was 51 days as of September 30, 2022 and 50 days as of
September 30, 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 years September 30th, accounts
receivable balance divided by the net sales for the quarter multiplied by the
number of total days in a quarter. Other companies, including companies in our
industry, may calculate DSO differently than we do, limiting its usefulness as a
comparative measure.

We have presented DSO because we consider it 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 benchmark the cash management performance of our operating divisions.

Investing activities


Net cash used in investing activities was primarily related to capital
expenditures. We incurred capital expenditures totaling $4.3 million and $3.4
million for the nine months ended September 30, 2022 and 2021, respectively. The
year-over-year increase in capital expenditures is driven primarily by the fact
that in the prior year we made fewer purchases than normal.

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.

Fundraising activities


Net cash of $26.5 million used in financing activities during the nine months
ended September 30, 2022, primarily relates to payments on our revolver debt
agreement, finance leases, dividends, share repurchases and a capital
distribution to the noncontrolling interest owner of our Chinese joint venture
for $3.9 million.

Our cash position, working capital, and debt obligations as of September 30,
2022 and December 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.
                                       30
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(In thousands)                                September 30, 2022       December 31, 2021
Cash and cash equivalents                    $            50,648      $           55,929
Working capital                              $            36,158      $           37,082

Borrowings from revolving credit facility    $            42,500      $           46,250
Other debt obligations                                    26,342                  31,992
Total debt obligations                       $            68,842      $           78,242



The decrease of $0.9 million in working capital was primarily driven by a
capital cash distribution to the noncontrolling interest owner of our Chinese
joint venture for $3.9 million, partially offset by the increase in accounts
receivable of $1.7 million and a $0.7 million increase in inventory. 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 $50.6 million,
the availability under our 2021 Credit Agreement, the availability under our
equipment lease lines, and cash flows provided by operations should be adequate
to cover the next twelve months and beyond of working capital needs, debt
requirements consisting of scheduled principal and interest payments, and
planned capital expenditures, to the extent such items are known or are
reasonably determinable based on current business and market conditions. See
"Debt Obligations" section for further information related to our 2021 Credit
Agreement.

A significant portion of our revenue across all of our product and services is
generated from customers in the AEC/O industry. As a result, our operating
results and financial condition can be significantly affected by economic
factors that influence the AEC/O industry, including the 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 securities

credit agreement


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 Credit Agreement dated as of November 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 on April 22,
2026.

The 2021 Credit Agreement also includes certain tests we are required to meet in
order to pay dividends, repurchase stock and make other restricted payments. In
order to make such payments which are permitted subject to certain customary
conditions set forth in the 2021 Credit Agreement, the amount of all such
payments will be limited to $15 million during any twelve-month period. When
calculating the fixed charge coverage ratio, we may exclude up to $10 million of
such restricted payments that would otherwise constitute fixed charges in any
twelve-month period.

As of September 30, 2022, our borrowing availability under the revolving loan
commitment was $25.3 million, after deducting outstanding letters of credit of
$2.2 million and outstanding revolving loans of $42.5 million.

Loans borrowed under the 2021 Credit Agreement bear interest, in the case of
LIBOR loans, at a per annum rate equal to the applicable LIBOR (which rate shall
not be less than zero), plus a margin ranging from 1.25% to 1.75%, based on our
Total Leverage Ratio (as defined in the 2021 Credit Agreement). Loans borrowed
under the 2021 Credit Agreement that are not LIBOR loans bear interest at a per
annum rate (which rate shall not be less than zero) equal to (i) the greatest of
(A) the Federal Funds Rate plus 0.50%, (B) the one month LIBOR rate plus 1.00%,
per annum, and (C) the rate of interest announced, from time to time, by U.S.
Bank National Association as its "prime rate," plus (ii) a margin ranging from
0.25% to 0.75%, based on our Total Leverage Ratio. As of September 30, 2022,
LIBOR loans borrowed under the 2021 Credit Agreement accrued interest at 4.3%.
We pay certain recurring fees with respect to the 2021 Credit Agreement,
including administration fees to the
                                       31
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administrative agent.


We will transition to Secured Overnight Financing Rates ("SOFR") by March 31,
2023 and away from LIBOR loan rates. We believe this transition 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 of
September 30, 2022.

The 2021 Credit Agreement contains customary events of default, including with
respect to: nonpayment of principal, interest, fees or other amounts; failure to
perform or observe covenants; material inaccuracy of a representation or
warranty when made; cross-default to other material indebtedness; bankruptcy,
insolvency and dissolution events; inability to pay debts; monetary judgment
defaults; actual or asserted invalidity or impairment of any definitive loan
documentation, repudiation of guaranties or subordination terms; certain ERISA
related events; or a change of control.

The obligations of our subsidiary that is the borrower under the 2021 Credit
Agreement are guaranteed by us and each of our other United States domestic
subsidiaries. The 2021 Credit Agreement and any interest rate protection and
other hedging arrangements provided by any lender party to the credit facility
or any affiliate of such a lender are secured on a first priority basis by a
perfected security interest in substantially all of our and each guarantor's
assets (subject to certain exceptions).

Finance leases

From September 30, 2022we have had $26.3 million outstanding finance lease obligations, with a weighted average interest rate of 4.8% and maturities between 2022 and 2028. See Note 7, Leasing, as previously disclosed on our Annual Form 10- K for the year ended December 31, 2021for the schedule of finance lease debts, no significant change being to be reported as of the date September 30, 2022.

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, 2021, for the
schedule on maturities of operating lease liabilities as there were no material
changes as of September 30, 2022.

Legal Proceedings. We are involved, and will continue to be involved, in legal
proceedings arising out of the conduct of our business, including commercial and
employment-related lawsuits. Some of these lawsuits purport or may be determined
to be class actions and seek substantial damages, and some may remain unresolved
for several years. We establish accruals for specific legal proceedings when it
is considered probable that a loss has been incurred and the amount of the loss
can be reasonably estimated. We evaluate whether a loss is reasonably probable
based on our assessment and consultation with legal counsel regarding the
ultimate outcome of the matter. As of September 30, 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
                                       32
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reasonably estimated. These estimates could change as a result of changes in
planned remedial actions, remediation technologies, site conditions, the
estimated time to complete remediation, environmental laws and regulations, and
other factors. Because of the uncertainties associated with environmental
assessment and remediation activities, our future expenses relating to these
matters could be higher than the liabilities we have accrued. Based upon current
information, we believe that the impact of the resolution of these matters would
not be, individually or in the aggregate, material to our financial position,
results of operations or cash flows.

Critical Accounting Policies and Significant Judgments and Estimates


Our management prepares financial statements in conformity with GAAP. When we
prepare these consolidated financial statements, we are required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, we evaluate our estimates and
judgments, including those related to accounts receivable, inventories, deferred
tax assets, goodwill and intangible assets, long-lived assets and leases. We
base our estimates and judgments on historical experience and on various other
factors that we believe to be reasonable under the circumstances, the results of
which form the basis for our judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. To the extent that
there are material differences between these estimates and actual results, our
future financial statement presentation, financial condition, results of
operations and cash flows will be affected. Our Annual Report on Form 10-K for
the year ended December 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 ended December 31, 2021.

Goodwill Impairment

In accordance with ASC 350, Intangibles - Goodwill and Other, we assess goodwill
for impairment annually as of September 30, and more frequently if events and
circumstances indicate that goodwill might be impaired. At September 30, 2022,
the Company performed its 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, 2022,
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 35%                                                               1                  121,051
                                                                            7            $     121,051


Based upon a sensitivity analysis, a reduction of approximately 50-basis points
of projected EBITDA in 2022 and beyond, assuming all other assumptions remain
constant, would result in no impairment of goodwill.

According to a separate sensitivity analysis, a 50 basis point increase in the weighted average cost of capital would not result in any additional 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
                                       33
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business, there can be no assurance that the estimates and assumptions made for
purposes of our goodwill impairment testing in 2022 will prove to be accurate
predictions of the future. If our assumptions, including forecasted EBITDA of
certain reporting units, are not achieved, or our assumptions change regarding
disruptions caused by the pandemic, and the impact on the recovery from COVID-19
change, then we may be required to record goodwill impairment charges in future
periods, whether in connection with our next annual impairment testing in the
third quarter of 2023, or on an interim basis, if any such change constitutes a
triggering event (as defined under ASC 350, Intangibles - Goodwill and Other)
outside of the quarter when we regularly perform our annual goodwill impairment
test. It is not possible at this time to determine if any such future impairment
charge would result or, if it does, whether such charge would be material.

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
of September 30, 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 provision for current and deferred taxes based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed in subsequent years. Adjustments based on returns filed are recorded when identified.

Income tax has not been provided for on certain undistributed profits of foreign subsidiaries because these profits 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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