ARC Document Solutions Reports Results for Third Quarter 2017

November 01, 2017

WALNUT CREEK, Calif., Nov. 1, 2017 /PRNewswire/ -- ARC Document Solutions, Inc. (NYSE: ARC), a leading document solutions provider to design, engineering, construction, and facilities management professionals, today reported its financial results for the third quarter ended September 30, 2017.

Financial Highlights:


Three Months Ended


Nine Months Ended


September 30,


September 30,

(All dollar amounts in millions, except EPS)

2017

2016


2017

2016

Net Sales

$

96.5


$

100.4



$

297.5


$

307.8


Gross Margin

30.3

%

32.6

%


31.8

%

33.4

%

Goodwill impairment

$

17.6


$



$

17.6


$

73.9


Net (loss) income attributable to ARC

$

(14.8)


$

2.8



$

(9.4)


$

(50.5)


Adjusted net income attributable to ARC

$

0.4


$

3.0



$

5.9


$

10.5


Earnings per share - Diluted

$

(0.32)


$

0.06



$

(0.20)


$

(1.10)


Adjusted earnings per share - Diluted

$

0.01


$

0.07



$

0.13


$

0.23


Cash provided by operating activities

$

11.3


$

12.2



$

36.8


$

34.0


EBITDA

$

(7.0)


$

14.4



$

21.9


$

(28.1)


Adjusted EBITDA

$

11.5


$

15.1



$

42.1


$

48.1


Capital Expenditures

$

2.3


$

2.4



$

7.2


$

7.6


Debt & Capital Leases (including current), net of unamortized deferred financing fees




$

149.2


$

158.9


 

ARC Document Solutions

Management Commentary

"We faced another challenging quarter in our continuing transformation even as we made progress in protecting our print revenue and built momentum in our new technology initiatives," said K. "Suri" Suriyakumar, Chairman, President and CEO of ARC Document Solutions. "While there were smaller declines in print volumes year over year, the sales mix and higher employee costs weighed on our margins, as did the effects of the recent hurricanes that swept through the Southeastern part of the U.S."

"The combination of lower sales and the pressure on our margins left us no choice but to revise our annual guidance for 2017," said Mr. Suriyakumar. "As we have stated on numerous occasions, managing change is never easy, and periods of disruption are part of the process. We remain encouraged by our efforts and the response from our markets, and are staying the course as we move through our transformation."

"We expect our fourth quarter performance to be similar to the third quarter, which supports our revised guidance," said Jorge Avalos, Chief Financial Officer. "Despite the pressures we faced in the period, ARC continues to generate strong cash flows, as evidenced by the 8% year-to-date growth, and is benefiting from a capital structure designed to support us through our transformation."

2017 Third Quarter Supplemental Information:

Net sales were $96.5 million, a 4.0% decrease compared to the third quarter of 2016.

Based on our performance in the third quarter of 2017, and the adoption of the new simplified goodwill impairment measurement accounting standard, we recognized a non-cash goodwill impairment charge of $17.6 million.

There was one less business day in the third quarter of 2017 as compared to the third quarter of 2016.

Days sales outstanding were 55 in Q3 2017 and Q3 2016.

Architectural, engineering, construction and building owner/operators (AEC/O) customers comprised approximately 78% of our total net sales, while customers outside of construction made up approximately 22% of our total net sales.

Total number of MPS locations at the end of the third quarter has grown to approximately 10,000, a net gain of approximately 630 locations over Q3 2016.

Adjusted EBITDA excludes loss on extinguishment of debt, goodwill impairment, restructuring expense and stock-based compensation expense.

Sales from Services and Product Lines as a Percentage of Net Sales



Three Months Ended

Nine Months Ended


September 30,

September 30,

Services and Product Line

2017

2016

2017

2016

CDIM

52.0

%

53.0

%

52.1

%

52.6

%

MPS

33.3

%

32.7

%

32.8

%

32.5

%

AIM

3.5

%

3.1

%

3.3

%

3.4

%

Equipment and supplies sales

11.2

%

11.2

%

11.8

%

11.5

%


















Outlook

ARC Document Solutions revised its annual forecast for 2017, anticipating fully-diluted annual adjusted earnings per share to be in the range of  $0.12 to $0.15, as compared to the  previous forecast of $0.24 to $0.29; annual cash provided by operating activities is projected to be in the range of $45 to $49 million as compared to the previous forecast of $49 to $54 million; and annual adjusted EBITDA is forecast to be in the range of $52 to $55 million as compared to the previous forecast of $58 million to $63 million.

Teleconference and Webcast

ARC Document Solutions will hold a conference call with investors and analysts on Wednesday, November 1, 2017, at 2 P.M. Pacific Time (5 P.M. Eastern Time) to discuss results for the Company's 2017 third quarter. To access the live audio call, dial 866-564-2842. International callers may join the conference by dialing +1 323-794-2094. The conference ID number is 6216256. A live webcast will also be made available on the investor relations page of ARC Document Solution's website at http://ir.e-arc.com. A recording of the webcast will be available for approximately 90 days following the call's conclusion.

About ARC Document Solutions (NYSE: ARC)

ARC Document Solutions distributes Documents and Information to facilitate communication for design, engineering and construction professionals, real estate managers and developers, facilities owners, and a variety of similar disciplines. The Company provides cloud and mobile solutions, professional services, and hardware to help its customers around the world reduce costs and increase efficiency, improve information access and control, and communicate faster, easier, and better. Follow ARC at www.e-arc.com.

Forward-Looking Statements

This press release contains forward-looking statements that are based on current opinions, estimates and assumptions of management regarding future events and the future financial performance of the Company. Words and phrases such as "building momentum," "guidance," "expect," "believe," "forecast," "outlook," and similar expressions identify forward-looking statements and all statements other than statements of historical fact, including, but not limited to, any projections regarding earnings, revenues and financial performance of the Company, could be deemed forward-looking statements. We caution you that such statements are only predictions and are subject to certain risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements. In addition to matters affecting the construction, managed print services, document management or reprographics industries, or the economy generally, factors that could cause actual results to differ from expectations stated in forward-looking statements include, among others, the factors described in the caption entitled "Risk Factors" in Item 1A in ARC Document Solution's Annual Report on Form 10-K for the fiscal year ended December 31, 2016, Quarterly Reports on Form 10-Q, and other periodic filings and prospectuses. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.

 

ARC Document Solutions, Inc.

Consolidated Balance Sheets

(In thousands, except per share data)

(Unaudited)


September 30,

December 31,

Current assets:

2017

2016

Cash and cash equivalents

$

26,363


$

25,239


Accounts receivable, net of allowances for accounts receivable of $2,495 and $2,060

59,006


59,735


Inventories, net

19,095


18,184


Prepaid expenses

5,008


3,861


Other current assets

5,034


4,785


Total current assets

114,506


111,804


Property and equipment, net of accumulated depreciation of $205,435 and $201,192

65,645


60,735


Goodwill

121,051


138,688


Other intangible assets, net

10,087


13,202


Deferred income taxes

41,364


42,667


Other assets

2,590


2,185


Total assets

$

355,243


$

369,281


Current liabilities:



Accounts payable

$

25,027


$

24,782


Accrued payroll and payroll-related expenses

10,908


12,219


Accrued expenses

15,041


16,138


Current portion of long-term debt and capital leases

20,268


13,773


Total current liabilities

71,244


66,912


Long-term debt and capital leases

128,917


143,400


Other long-term liabilities

3,329


2,148


Total liabilities

203,490


212,460


Commitments and contingencies



Stockholders' equity:



ARC Document Solutions, Inc. stockholders' equity:



Preferred stock, $0.001 par value, 25,000 shares authorized; 0 shares issued and outstanding



Common stock, $0.001 par value, 150,000 shares authorized; 47,891 and 47,428 shares issued and 46,451 and 45,988 shares outstanding

48


47


   Additional paid-in capital

120,204


117,749


   Retained earnings

32,681


41,822


   Accumulated other comprehensive loss

(2,545)


(3,793)



150,388


155,825


Less cost of common stock in treasury, 1,440 shares

5,909


5,909


Total ARC Document Solutions, Inc. stockholders' equity

144,479


149,916


Noncontrolling interest

7,274


6,905


Total equity

151,753


156,821


Total liabilities and equity

$

355,243


$

369,281


 

ARC Document Solutions, Inc.

Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

Three Months Ended

Nine Months Ended


September 30,

September 30,


2017

2016

2017

2016

Service sales

$

85,625


$

89,178


$

262,459


$

272,394


Equipment and supplies sales

10,833


11,265


35,010


35,369


Total net sales

96,458


100,443


297,469


307,763


Cost of sales

67,231


67,713


202,918


204,904


Gross profit

29,227


32,730


94,551


102,859


Selling, general and administrative expenses

25,843


24,893


76,540


76,752


Amortization of intangible assets

1,053


1,160


3,250


3,705


Goodwill impairment

17,637



17,637


73,920


Restructuring expense




7


(Loss) income from operations

(15,306)


6,677


(2,876)


(51,525)


Other income, net

(19)


(16)


(60)


(54)


Loss on extinguishment and modification of debt

124


66


230


156


Interest expense, net

1,530


1,563


4,679


4,535


(Loss) income before income tax (benefit) provision

(16,941)


5,064


(7,725)


(56,162)


Income tax (benefit) provision

(2,174)


2,162


1,574


(5,884)


Net (loss) income

(14,767)


2,902


(9,299)


(50,278)


Income attributable to the noncontrolling interest

(7)


(61)


(55)


(211)


Net (loss) income attributable to ARC Document  Solutions, Inc. shareholders

$

(14,774)


$

2,841


$

(9,354)


$

(50,489)


(Loss) earnings per share attributable to ARC Document Solutions, Inc.  shareholders:





Basic

$

(0.32)


$

0.06


$

(0.20)


$

(1.10)


Diluted

$

(0.32)


$

0.06


$

(0.20)


$

(1.10)


Weighted average common shares outstanding:





Basic

45,834


45,599


45,756


46,055


Diluted

45,834


46,189


45,756


46,055


 

ARC Document Solutions, Inc.
Non-GAAP Measures
Reconciliation of cash flows provided by operating activities to EBITDA and Adjusted EBITDA
(In thousands)
(Unaudited)


Three Months Ended

Nine Months Ended


September 30,

September 30,


2017

2016

2017

2016

Cash flows provided by operating activities

$

11,326


$

12,163


$

36,756


$

34,046


Changes in operating assets and liabilities, net of effect of business acquisitions

(959)


1,958


1,406


9,976


Non-cash expenses, including depreciation, amortization and goodwill impairment

(25,134)


(11,219)


(47,461)


(94,300)


Income tax (benefit) provision

(2,174)


2,162


1,574


(5,884)


Interest expense, net

1,530


1,563


4,679


4,535


Income attributable to the noncontrolling interest

(7)


(61)


(55)


(211)


Depreciation and amortization

8,430


7,857


25,037


23,737


EBITDA

(6,988)


14,423


21,936


(28,101)


Loss on extinguishment and modification of debt

124


66


230


156


Goodwill impairment

17,637



17,637


73,920


Restructuring expense




7


Stock-based compensation

699


650


2,251


2,073


Adjusted EBITDA

$

11,472


$

15,139


$

42,054


$

48,055



See Non-GAAP Financial Measures discussion below.

 


ARC Document Solutions, Inc.
Non-GAAP Measures
Reconciliation of net (loss) income attributable to ARC Document Solutions, Inc. to EBITDA and Adjusted EBITDA
(In thousands)
(Unaudited)


 Three Months Ended

Nine Months Ended


September 30,

September 30,


2017

2016

2017

2016

Net (loss) income attributable to ARC Document Solutions, Inc.

$

(14,774)


$

2,841


$

(9,354)


$

(50,489)


Interest expense, net

1,530


1,563


4,679


4,535


Income tax (benefit) provision

(2,174)


2,162


1,574


(5,884)


Depreciation and amortization

8,430


7,857


25,037


23,737


EBITDA

(6,988)


14,423


21,936


(28,101)


Loss on extinguishment and modification of debt

124


66


230


156


Goodwill impairment

17,637



17,637


73,920


Restructuring expense




7


Stock-based compensation

699


650


2,251


2,073


Adjusted EBITDA

$

11,472


$

15,139


$

42,054


$

48,055



See Non-GAAP Financial Measures discussion below.

 

ARC Document Solutions, Inc.
Non-GAAP Measures
Reconciliation of net (loss) income attributable to ARC to unaudited adjusted net income attributable to ARC
(In thousands, except per share data)
(Unaudited)


 Three Months Ended

Nine Months Ended


September 30,

September 30,


2017

2016

2017

2016

Net (loss) income attributable to ARC Document Solutions, Inc.

$

(14,774)


$

2,841


$

(9,354)


$

(50,489)


Loss on extinguishment and modification of debt

124


66


230


156


Goodwill impairment

17,637



17,637


73,920


Restructuring expense




7


Income tax benefit related to above items

(3,144)


(26)


(3,186)


(13,395)


Deferred tax valuation allowance and other discrete tax items

515


138


594


341


Unaudited adjusted net income attributable to ARC Document Solutions, Inc.

$

358


$

3,019


$

5,921


$

10,540







Actual:





(Loss) earnings per share attributable to ARC Document Solutions, Inc. shareholders:





Basic

$

(0.32)


$

0.06


$

(0.20)


$

(1.10)


Diluted

$

(0.32)


$

0.06


$

(0.20)


$

(1.10)


Weighted average common shares outstanding:





Basic

45,834


45,599


45,756


46,055


Diluted

45,834


46,189


45,756


46,055







Adjusted:





Earnings per share attributable to ARC Document Solutions, Inc. shareholders:





Basic

$

0.01


$

0.07


$

0.13


$

0.23


Diluted

$

0.01


$

0.07


$

0.13


$

0.23


Weighted average common shares outstanding:





Basic

45,834


45,599


45,756


46,055


Diluted

46,342


46,189


46,335


46,655



See Non-GAAP Financial Measures discussion below.

 

ARC Document Solutions, Inc.
Net Sales by Product Line
(In thousands)
(Unaudited)


 Three Months Ended

Nine Months Ended


September 30,

September 30,


2017

2016

2017

2016

Service sales





CDIM

$

50,089


$

53,228


$

155,031


$

161,753


MPS

32,153


32,796


97,697


100,082


AIM

3,383


3,154


9,731


10,559


Total service sales

85,625


89,178


262,459


272,394


Equipment and supplies sales

10,833


11,265


35,010


35,369


Total net sales

$

96,458


$

100,443


$

297,469


$

307,763


Non-GAAP Financial Measures

EBITDA and related ratios presented in this report are supplemental measures of our performance that are not required by or presented in accordance with accounting principles generally accepted in the United States of America ("GAAP"). These measures are not measurements of our financial performance under GAAP and should not be considered as alternatives to net income, income from operations, or any other performance measures derived in accordance with GAAP or as an alternative to cash flows from operating, investing or financing activities as a measure of our liquidity.

EBITDA represents net income before interest, taxes, depreciation and amortization.

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

We use EBITDA to measure and compare the performance of our operating segments. Our operating segments' financial performance includes all of the operating activities except debt and taxation which are managed at the corporate level for U.S. operating segments. We use EBITDA to compare the performance of our operating segments and to measure performance for determining consolidated-level compensation. In addition, we use EBITDA to evaluate potential acquisitions and potential capital expenditures.

EBITDA and related ratios have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are as follows:

  • They do not reflect our cash expenditures, or future requirements for capital expenditures and contractual commitments;
  • They do not reflect changes in, or cash requirements for, our working capital needs;
  • They do not reflect the significant interest expense, or the cash requirements necessary, to service interest or principal payments on our debt;
  • Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements; and
  • Other companies, including companies in our industry, may calculate these measures differently than we do, limiting their usefulness as comparative measures.

Because of these limitations, EBITDA and related ratios should not be considered as measures of discretionary cash available to us to invest in business growth or to reduce our indebtedness. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA and related ratios only as supplements.

Our presentation of adjusted net income and adjusted EBITDA over certain periods is an attempt to provide meaningful comparisons to our historical performance for our existing and future investors. The unprecedented changes in our end markets over the past several years have required us to take measures that are unique in our history and specific to individual circumstances. Comparisons inclusive of these actions make normal financial and other performance patterns difficult to discern under a strict GAAP presentation. Each non-GAAP presentation, however, is explained in detail in the reconciliation tables above.

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, 2017 and 2016 to reflect the exclusion of loss on extinguishment and modification of debt, goodwill impairment, restructuring expense, and 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, 2017 and 2016. We believe these charges were the result of our capital restructuring, or other items which are not indicative of our actual operating performance.

We have presented adjusted EBITDA for the three and nine months ended September 30, 2017 and 2016 to exclude loss on extinguishment and modification of debt, goodwill impairment, restructuring expense and stock-based compensation expense. The adjustment of EBITDA for these items is consistent with the definition of adjusted EBITDA in our credit agreement; therefore, we believe this information is useful to investors in assessing our financial performance.

ARC Document Solutions, Inc.
Consolidated Statements of Cash Flows  
(In thousands)

(Unaudited)

Three Months Ended

Nine Months Ended


September 30,

September 30,


2017

2016

2017

2016

Cash flows from operating activities





Net (loss) income

$

(14,767)


$

2,902


$

(9,299)


$

(50,278)


Adjustments to reconcile net (loss) income to net cash provided by operating activities:





Allowance for accounts receivable

306


324


867


644


Depreciation

7,377


6,697


21,787


20,032


Amortization of intangible assets

1,053


1,160


3,250


3,705


Amortization of deferred financing costs

69


111


246


344


Goodwill impairment

17,637



17,637


73,920


Stock-based compensation

699


650


2,251


2,073


Deferred income taxes

(2,380)


2,299


1,045


(6,018)


Deferred tax valuation allowance

454


(1)


488


(16)


Loss on extinguishment and modification of debt

124


66


230


156


Other non-cash items, net

(205)


(87)


(340)


(540)


Changes in operating assets and liabilities:





Accounts receivable

554


(897)


406


(2,285)


Inventory

(142)


(429)


(650)


(3,196)


Prepaid expenses and other assets

1,029


1,179


(1,129)


513


Accounts payable and accrued expenses

(482)


(1,811)


(33)


(5,008)


Net cash provided by operating activities

11,326


12,163


36,756


34,046


Cash flows from investing activities





Capital expenditures

(2,335)


(2,430)


(7,246)


(7,580)


Other

72


135


466


842


Net cash used in investing activities

(2,263)


(2,295)


(6,780)


(6,738)


Cash flows from financing activities





Proceeds from stock option exercises

2


46


73


76


Proceeds from issuance of common stock under Employee Stock Purchase Plan

37


26


103


96


Share repurchases


(200)



(5,297)


Contingent consideration on prior acquisitions

(63)


(86)


(214)


(453)


Early extinguishment of long-term debt


(7,000)


(14,150)


(16,000)


Payments on long-term debt agreements and capital leases

(52,146)


(3,310)


(60,060)


(9,651)


Borrowings under revolving credit facilities

52,350



54,850



Payments under revolving credit facilities

(9,375)



(9,675)



Payment of deferred financing costs

(270)


(76)


(270)


(106)


Net cash used in financing activities

(9,465)


(10,600)


(29,343)


(31,335)


Effect of foreign currency translation on cash balances

161


(80)


491


(296)


Net change in cash and cash equivalents

(241)


(812)


1,124


(4,323)


Cash and cash equivalents at beginning of period

26,604


20,452


25,239


23,963


Cash and cash equivalents at end of period

$

26,363


$

19,640


$

26,363


$

19,640


Supplemental disclosure of cash flow information





Noncash investing and financing activities





Capital lease obligations incurred

$

6,404


$

3,738


$

20,714


$

12,345


Contingent liabilities in connection with acquisition of businesses

$


$


$

27


$

85


 

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SOURCE ARC Document Solutions, Inc.

David Stickney, VP Corporate Communications & Investor Relations, 925-949-5114