ARC Document Solutions Reports Results for Fourth Quarter and Full Year 2017

February 27, 2018

WALNUT CREEK, Calif., Feb. 27, 2018 /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 fourth quarter and full year ended December 31, 2017.

Financial Highlights:






Three Months Ended

Twelve Months Ended


December 31,

December 31,

(All dollar amounts in millions, except EPS)

2017

2016

2017

2016

Net Sales

$

97.1


$

98.6


$

394.6


$

406.3


Gross Margin

30.3

%

30.8

%

31.4

%

32.8

%

Net (loss) income attributable to ARC

$

(12.2)


$

2.6


$

(21.5)


$

(47.9)


Adjusted net income attributable to ARC

$

0.9


$

2.6


$

6.8


$

13.1


(Loss) earnings per share - Diluted

$

(0.27)


$

0.06


$

(0.47)


$

(1.04)


Adjusted earnings per share - Diluted

$

0.02


$

0.06


$

0.15


$

0.28


Cash provided by operating activities

$

15.6


$

19.1


$

52.4


$

53.1


EBITDA

$

11.3


$

13.6


$

33.2


$

(14.5)


Adjusted EBITDA

$

12.0


$

14.3


$

54.0


$

62.3


Capital Expenditures

$

(1.9)


$

(4.5)


$

(9.1)


$

(12.1)


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



$

144.4


$

157.2


Logo

Management Commentary

"At the end of 2017, ARC was more than half way through the transition we announced in 2016. While we still have our work cut out for us, we've made significant progress in protecting our print revenues while driving interest and growth in our technology offerings," said K. "Suri" Suriyakumar, Chairman, President and CEO of ARC Document Solutions. "In the fourth quarter, CDIM declined just one percent year-over-year, and MPS sales were flat for the same period. Both were welcome improvements, and gave us reason to believe that we can counter the negative sales trends in print for the foreseeable future with aggressive measures to gain market share."

"Meanwhile, there has been significant interest and adoption in our facilities management solution. As we announced earlier this month, Facilities Executive magazine readers voted us the best provider in the 'Facility Software/Reporting Tools' category for our mobile facilities dashboards in their 25th annual Readers' Choice Award Program," said Mr. Suriyakumar. "It is tremendously exciting to disrupt such a huge market, but progress toward a purchasing decision consistently requires more education and time than we anticipated."

"While the remaining steps of our transition continue to present both challenges and opportunities, it is critical that we manage through them with a solid financial foundation. That's exactly what we delivered in 2017," Mr. Suriyakumar continued. "Our performance in 2017 was characterized by the strength of our cash flows. We paid down more than $20 million of our senior debt to maintain the strength of our capital structure; we bought back $3.4 million worth of our own stock in the fourth quarter; and we ended the year with $28 million in cash on the balance sheet. It's an indication of the continuing health of the Company and the base from which we can build in 2018."

Management anticipates its 2018 diluted annual adjusted earnings per share to be in the range of $0.10 to $0.16; annual cash provided by operating activities is projected to be in the range of $44 million to $50 million; and annual adjusted EBITDA is forecast to be in the range of $48 million to $54 million.

"We believe the investments we've made in both print and technology will fuel our progress in the coming quarters," Mr. Suriyakumar added. "As we continue to preserve our print revenue and capture more facilities business toward the latter part of 2018, we anticipate these sales will begin to offset the shrinkage in print volumes we've experienced over the past several years. While our forecast for 2018 is conservative, we expect the progress of our transition to be evident."

2017 Fourth Quarter Supplemental Information:

Net sales were $97.1 million, a 1.5% decrease compared to the fourth quarter of 2016.

Days sales outstanding in Q4 2017 were 53, compared to 55 days in Q4 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 fourth quarter has grown to approximately 10,100, a net gain of approximately 700 locations over Q4 2016.

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

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









Three Months Ended


Twelve Months Ended


December 31,


December 31,

Services and Product Line

2017

2016


2017

2016

CDIM

51.6

%

51.5

%


52.0

%

52.3

%

MPS

32.7

%

32.2

%


32.8

%

32.4

%

AIM

3.1

%

3.5

%


3.2

%

3.5

%

Equipment and supplies sales

12.6

%

12.8

%


12.0

%

11.8

%

Outlook

ARC Document Solutions anticipates 2018 fully-diluted annual adjusted earnings per share to be in the range of $0.10 to $0.16; 2018 annual cash provided by operating activities is projected to be in the range of $44 million to $50 million; and 2018 annual adjusted EBITDA is forecast to be in the range of $48 million to $54 million.

CEO Employment Agreement Amended

On February 22, 2018, ARC Document Solutions, Inc. entered into an amended and restated executive employment agreement with the Company's Chief Executive Officer and President, Kumarakulasingam Suriyakumar, effective as of February 9, 2018. The Employment Agreement was amended to modify the terms under which Mr. Suriyakumar would be eligible to receive an annual incentive bonus. Mr. Suriyakumar's annual incentive bonus will be based on performance measures established by the Company's Compensation Committee within the first ninety days of the calendar year. The annual incentive bonus will not exceed 100% of Mr. Suriyakumar's annual base salary, if the performance targets are attained (but not exceeded), and will have a maximum potential payment of 150% of his annual base salary, if the performance targets are exceeded. He will only be entitled to an annual incentive bonus if he remains continuously employed through the last day of the fiscal year to which the bonus relates. At the Compensation Committee's election, the incentive bonus may be paid in cash, shares of the Company's common stock or a mix of cash and stock. To the extent the incentive bonus is paid in shares of the Company's common stock, the shares will vest in annual installments over three years, unless the Committee determines otherwise, subject to Mr. Suriyakumar's continued employment through the applicable vesting date.

In addition, the Employment Agreement lowers Mr. Suriyakumar's annual base salary from $950,000 to $800,000. The remaining terms and conditions of the Employment Agreement remain the same.

Teleconference and Webcast

ARC Document Solutions will hold a conference call with investors and analysts on Tuesday, February 27, 2018, at 2 P.M. Pacific Time (5 P.M. Eastern Time) to discuss results for the Company's 2017 fourth quarter and fiscal year. To access the live audio call, dial 800-263-0877. International callers may join the conference by dialing 323-794-2094. The conference ID number is 2301326. A live webcast will also be made available on the investor relations page of ARC Document Solution's website at ir.e-arc.com. The webcast of the call will be available at www.e-arc.com 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 "believe", "foreseeable future", "indication", "continuing health", "forecast", "progress in the coming quarters", "anticipate", 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)




December 31,

December 31,

Current assets:

2017

2016

Cash and cash equivalents

$

28,059


$

25,239


Accounts receivable, net of allowances for accounts receivable of $2,341 and $2,060

57,011


59,735


Inventories, net

19,937


18,184


Prepaid expenses

4,208


3,861


Other current assets

5,266


4,785


Total current assets

114,481


111,804


Property and equipment, net of accumulated depreciation of $198,693 and $201,192

64,245


60,735


Goodwill

121,051


138,688


Other intangible assets, net

9,068


13,202


Deferred income taxes

28,029


42,667


Other assets

2,551


2,185


Total assets

$

339,425


$

369,281


Current liabilities:



Accounts payable

$

24,289


$

24,782


Accrued payroll and payroll-related expenses

12,617


12,219


Accrued expenses

17,201


16,138


Current portion of long-term debt and capital leases

20,791


13,773


Total current liabilities

74,898


66,912


Long-term debt and capital leases

123,626


143,400


Other long-term liabilities

3,290


2,148


Total liabilities

201,814


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; 47,913 and 47,428 shares issued and 45,266 and 45,988 shares outstanding

48


47


Additional paid-in capital

120,953


117,749


Retained earnings

20,524


41,822


Accumulated other comprehensive loss

(1,998)


(3,793)



139,527


155,825


Less cost of common stock in treasury, 2,647 and 1,440 shares

9,290


5,909


Total ARC Document Solutions, Inc. stockholders' equity

130,237


149,916


Noncontrolling interest

7,374


6,905


Total equity

137,611


156,821


Total liabilities and equity

$

339,425


$

369,281


 

ARC Document Solutions, Inc.




Consolidated Statements of Operations




(In thousands, except per share data)




(Unaudited)

Three Months Ended

Twelve Months Ended


December 31,

December 31,


2017

2016

2017

2016

Service sales

$

84,867


$

85,947


$

347,326


$

358,341


Equipment and supplies sales

12,243


12,611


47,253


47,980


Total net sales

97,110


98,558


394,579


406,321


Cost of sales

67,638


68,174


270,556


273,078


Gross profit

29,472


30,384


124,023


133,243


Selling, general and administrative expenses

25,349


23,462


101,889


100,214


Amortization of intangible assets

1,030


1,128


4,280


4,833


Goodwill impairment



17,637


73,920


Restructuring expense




7


Income (loss) from operations

3,093


5,794


217


(45,731)


Other income, net

(21)


(18)


(81)


(72)


Loss on extinguishment and modification of debt


52


230


208


Interest expense, net

1,500


1,461


6,179


5,996


Income (loss) before income tax provision (benefit)

1,614


4,299


(6,111)


(51,863)


Income tax provision (benefit)

13,670


1,520


15,244


(4,364)


Net (loss) income

(12,056)


2,779


(21,355)


(47,499)


Income attributable to noncontrolling interest

(101)


(155)


(156)


(366)


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

$

(12,157)


$

2,624


$

(21,511)


$

(47,865)


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





Basic

$

(0.27)


$

0.06


$

(0.47)


$

(1.04)


Diluted

$

(0.27)


$

0.06


$

(0.47)


$

(1.04)


Weighted average common shares outstanding:





Basic

45,414


45,567


45,669


45,932


Diluted

45,414


46,274


45,669


45,932


 

ARC Document Solutions
Consolidated Statements of Cash Flows

Three Months Ended

Twelve Months Ended

(In thousands) (Unaudited)

December 31,

December 31,


2017

2016

2017

2016

Cash flows from operating activities





Net (loss) income

$

(12,056)


$

2,779


$

(21,355)


$

(47,499)


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





Allowance for accounts receivable

382


274


1,249


918


Depreciation

7,256


6,886


29,043


26,918


Amortization of intangible assets

1,030


1,128


4,280


4,833


Amortization of deferred financing costs

60


101


306


445


Goodwill impairment



17,637


73,920


Stock-based compensation

696


620


2,947


2,693


Deferred income taxes

12,757


1,307


13,802


(4,711)


Deferred tax valuation allowance

543


67


1,031


51


Loss on extinguishment and modification of debt


52


230


208


Other non-cash items, net

284


(176)


(56)


(716)


Changes in operating assets and liabilities:





Accounts receivable

1,752


991


2,158


(1,294)


Inventory

(689)


1,606


(1,339)


(1,590)


Prepaid expenses and other assets

573


(404)


(556)


109


Accounts payable and accrued expenses

3,026


3,865


2,993


(1,143)


Net cash provided by operating activities

15,614


19,096


52,370


53,142


Cash flows from investing activities





Capital expenditures

(1,860)


(4,517)


(9,106)


(12,097)


Other

278


259


744


1,101


Net cash used in investing activities

(1,582)


(4,258)


(8,362)


(10,996)


Cash flows from financing activities





Proceeds from stock option exercises

22


22


96


98


Proceeds from issuance of common stock under Employee Stock Purchase Plan

30


24


133


120


Share repurchases

(3,381)



(3,381)


(5,297)


Contingent consideration on prior acquisitions

(60)


(118)


(275)


(571)


Early extinguishment of long-term debt


(6,000)


(14,150)


(22,000)


Payments on long-term debt agreements and capital leases

(5,456)


(3,339)


(65,516)


(12,990)


Borrowings under revolving credit facilities

8,250


1,000


63,100


1,000


Payments under revolving credit facilities

(12,125)


(50)


(21,800)


(50)


Payment of deferred financing costs



(270)


(106)


Net cash used in financing activities

(12,720)


(8,461)


(42,063)


(39,796)


Effect of foreign currency translation on cash balances

384


(778)


875


(1,074)


Net change in cash and cash equivalents

1,696


5,599


2,820


1,276


Cash and cash equivalents at beginning of period

26,363


19,640


25,239


23,963


Cash and cash equivalents at end of period

$

28,059


$

25,239


$

28,059


$

25,239


Supplemental disclosure of cash flow information:





Noncash financing activities:





Capital lease obligations incurred

$

4,478


$

6,603


$

25,192


$

18,948


Contingent liabilities in connection with the acquisition of businesses

$


$


$

27


$

75


 

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






 Three Months Ended

Twelve Months Ended


December 31,

December 31,


2017

2016

2017

2016

Service Sales





CDIM

$

50,052


$

50,758


$

205,083


$

212,511


MPS

31,782


31,729


129,479


131,811


AIM

3,033


3,460


12,764


14,019


Total services sales

84,867


85,947


347,326


358,341


Equipment and supplies sales

12,243


12,611


47,253


47,980


Total net sales

$

97,110


$

98,558


$

394,579


$

406,321


 

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

Twelve Months Ended


December 31,

December 31,


2017

2016

2017

2016

Cash flows provided by operating activities

$

15,614


$

19,096


$

52,370


$

53,142


Changes in operating assets and liabilities

(4,662)


(6,058)


(3,256)


3,918


Non-cash expenses, including goodwill impairment

(14,722)


(2,245)


(37,146)


(72,808)


Income tax provision (benefit)

13,670


1,520


15,244


(4,364)


Interest expense, net

1,500


1,461


6,179


5,996


Income attributable to noncontrolling interest

(101)


(155)


(156)


(366)


EBITDA

11,299


13,619


33,235


(14,482)


Loss on extinguishment and modification of debt


52


230


208


Goodwill impairment



17,637


73,920


Restructuring expense




7


Stock-based compensation

696


620


2,947


2,693


Adjusted EBITDA

$

11,995


$

14,291


$

54,049


$

62,346



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. shareholders to EBITDA and Adjusted EBITDA
(In thousands)
(Unaudited)


 Three Months Ended

Twelve Months Ended


December 31,

December 31,


2017

2016

2017

2016

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

$

(12,157)


$

2,624


$

(21,511)


$

(47,865)


Interest expense, net

1,500


1,461


6,179


5,996


Income tax provision (benefit)

13,670


1,520


15,244


(4,364)


Depreciation and amortization

8,286


8,014


33,323


31,751


EBITDA

11,299


13,619


33,235


(14,482)


Loss on extinguishment and modification of debt


52


230


208


Goodwill impairment



17,637


73,920


Restructuring expense




7


Stock-based compensation

696


620


2,947


2,693


Adjusted EBITDA

$

11,995


$

14,291


$

54,049


$

62,346



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

Twelve Months Ended


December 31,

December 31,


2017

2016

2017

2016

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

$

(12,157)


$

2,624


$

(21,511)


$

(47,865)


Loss on extinguishment and modification of debt


52


230


208


Goodwill impairment



17,637


73,920


Restructuring expense




7


Income tax benefit related to above items


(24)


(3,194)


(13,419)


Deferred tax impact due to new tax laws, valuation allowance and other discrete tax items

13,069


(94)


13,663


247


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

$

912


$

2,558


$

6,825


$

13,098







Actual:





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





Basic

$

(0.27)


$

0.06


$

(0.47)


$

(1.04)


Diluted

$

(0.27)


$

0.06


$

(0.47)


$

(1.04)


Weighted average common shares outstanding:





Basic

45,414


45,567


45,669


45,932


Diluted

45,414


46,274


45,669


45,932







Adjusted:





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





Basic

$

0.02


$

0.06


$

0.15


$

0.29


Diluted

$

0.02


$

0.06


$

0.15


$

0.28


Weighted average common shares outstanding:





Basic

45,414


45,567


45,669


45,932


Diluted

45,804


46,274


46,207


46,561



See Non-GAAP Financial Measures discussion below.

Non-GAAP Financial Measures

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

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

We have presented EBITDA and related ratios because we consider them important supplemental measures of our performance 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 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 twelve months ended December 31, 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, including the impact of new tax laws enacted in 2017. This presentation facilitates a meaningful comparison of our operating results for the three and twelve months ended December 31, 2017 and 2016.

We have presented adjusted EBITDA for the three and twelve months ended December 31, 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.

 

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SOURCE ARC Document Solutions, Inc.