ARC Document Solutions Reports Results for Fourth Quarter and Fiscal Year 2012

February 28, 2013

WALNUT CREEK, CA -- (MARKETWIRE) -- 02/28/13 -- ARC Document Solutions, Inc. (NYSE: ARC), the nation's leading document solutions company for the architecture, engineering, and construction (AEC) industry, today reported its financial results for the fourth quarter and full year ended December 31, 2012.

Business Highlights:

  • Annual cash from operations was $37.6 million
  • Annual gross margin was 30.4%
  • Restructuring activity drove 180 bps expansion in adjusted EBITDA margin from 13.1% in the third quarter to 14.9% in the fourth quarter
  • Eight percent annual increase in Onsite Services sales is led by MPS
  • Annual adjusted earnings per share was ($0.04)
  • 2013 Annual adjusted earnings per share outlook is $0.03 to $0.07; annual cash from operations outlook for 2013 is $38-45 million

Financial Highlights:
















Three Months Ended

Twelve Months Ended


December 31

December 31
(All dollar figures in millions, except EPS)
2012

2011

2012

2011
Net Sales
$ 96.9

$ 101.8

$ 406.1

$ 422.7
Gross Margin

29.6 %

30.7 %

30.4 %

31.8 %
Net Loss attributable to ARC
$ (5.9 )
$ (3.1 )
$ (32.0 )
$ (133.1 )
Adjusted Net Loss attributable to ARC
$ (0.8 )
$ (0.2 )
$ (1.7 )
$ (1.0 )
EPS
$ (0.13 )
$ (0.07 )
$ (0.70 )
$ (2.93 )
Adjusted EPS
$ (0.02 )
$ 0.00

$ (0.04 )
$ (0.02 )

















Cash from Operations
$ 6.7

$ 19.7

$ 37.6

$ 49.2
Capital Expenditures
$ 6.2

$ 3.6

$ 20.3

$ 15.6

















Debt & Capital Leases (including current)
$ 222.5

$ 226.3

$ 222.5

$ 226.3


































Management Commentary:

"The aggressive and ambitious restructuring plan we announced in November helped us avoid what could have been a significantly depressed earnings per share and cash performance in the fourth quarter of 2012," said K. "Suri" Suriyakumar, Chairman, President and CEO of ARC Document Solutions. "A timely response was critical to transition the company in line with the dramatic changes we observed in our customers' behavior."

"While our organization continues to strengthen its position as a leading document solutions provider, I am pleased with the speed and efficiency with which we implemented our restructuring plan," added Mr. Suriyakumar. " It not only provided a strong finish for the year, but our improved cost structure certainly will allow us to deliver significantly better performance in 2013 even without a full recovery in the AEC industry."

CFO John Toth commented, "Throughout 2012 we maintained our strong cash flow and balance sheet. We absorbed the costs of the restructuring without drawing on our revolver, and we ended the year with our highest amount of cash since 2009. And in the fourth quarter, we took critical steps to improve the quality of our earnings through diversification across product lines and importantly, refining our cost structure to support and grow margin from multiple service lines. This fundamental improvement in our value proposition -- and in the quality of our earnings -- can be seen in the expansion of our adjusted EBITDA margin which increased almost 200 basis points between Q3 and Q4, bucking the historic trends of margin contraction between Q3 and Q4."

Sales Reporting Presentation:

The company announced that beginning with its annual filing on Form 10-K, ARC Document Solutions' statement of operations will reflect net sales reporting under two categories -- "Service sales" and "Equipment and supplies sales" -- replacing the historical revenue categories of "Reprographics services," "Facilities management," and "Equipment and supplies sales." The broader categories of "Service sales" and "Equipment and supplies sales" will allow the company to better assign and report distinct sales recognized from its traditional reprographics services, onsite services, color printing services, digital services, and equipment and supplies sales. Under its previous revenue reporting structure, traditional reprographics, color, and digital services were blended in "Reprographics services."

Restructuring Charge

ARC Document Solutions management recorded a restructuring charge of $3.3 million as a result of reducing its service center footprint and headcount during October and November of 2012. The charges pertain primarily to property lease exit costs and severance payments related to headcount reductions.

Outlook:
ARC anticipates annual adjusted earnings per share in 2013 to be in the range of $0.03 to $0.07 on a fully-diluted basis, and annual cash flow from operations to be in the range of $38 million to $45 million.

Teleconference and Webcast:
ARC will host a conference call and audio webcast today at 2:00 P.M. Pacific Time (5:00 P.M. Eastern Time) to discuss results for the Company's fourth quarter and full year 2012. The conference call can be accessed by dialing (855) 812-4355. The conference ID number is 94854869.

A live Webcast will also be made available on the investor relations page of ARC's website at www.e-arc.com.

A replay will be available approximately one hour after the call for seven days following the call's conclusion. To access the replay, dial (855) 859-2056. The conference ID number to access the replay is 94854869. A Web archive will be made available at http://www.e-arc.com for approximately 90 days following the call's conclusion.

About ARC Document Solutions (NYSE: ARC)
ARC Document Solutions provides specialized document solutions to businesses of all types, with an emphasis on the non-residential segment of the architecture, engineering and construction ("AEC") industry. The company's products and services enhance our customers' document workflow, reduce costs, shorten document processing and distribution time, improve the quality of document management tasks, and provide a secure, controlled environment in which to manage, distribute and produce documents. The company's service centers are digitally connected and allow the provision of services to tens of thousands of customers all over the world. ARC is headquartered in California with more than 150 service centers located in major metropolitan markets in the US, Canada, China, and in select locations in the U.K., Hong Kong, Australia and India. For more information, visit 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 such as "allow us to deliver," "anticipated," "trends," "opportunities," 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. Factors that could cause our actual results to differ materially from those set forth in the forward-looking statements include, but are not limited to, current economic conditions and downturn in the architectural, engineering and construction (AEC) industries specifically, and the timing and nature of any economic recovery; our inability to mitigate revenue exposure to the cyclical nature of the AEC industries; our inability to streamline operations and reduce and/or manage costs; our failure to develop and introduce new services successfully, including expansion of client service capabilities in our core AEC market; competition in our industry and innovation by our competitors; our failure to anticipate and adapt to future changes in our industry; our failure to take advantage of market opportunities and/or to complete acquisitions; our dependence on certain key vendors for equipment, maintenance services and supplies; and damage or disruption to our facilities, our technology centers, our vendors or a majority of our customers. The foregoing list of risks and uncertainties is illustrative but is by no means exhaustive. For more information on factors that may affect our future performance, please review our periodic filings with the U.S. Securities and Exchange Commission, and specifically the risk factors set forth in our most recent reports on Form 10-K and Form 10-Q. 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
(Dollars in thousands, except per share data)
(Unaudited)




December 31,
December 31,


2012
2011
Assets






Current assets:






Cash and cash equivalents
$ 28,021
$ 25,437
Accounts receivable, net of allowances for accounts receivable of $2,634 and $3,309

51,855

54,713
Inventories, net

14,251

12,107
Prepaid expenses

3,277

3,999
Other current assets

6,819

7,541
Total current assets

104,223

103,797








Property and equipment, net of accumulated depreciation of $197,830 and $191,598

56,471

55,084
Goodwill

212,608

229,315
Other intangible assets, net

34,498

45,127
Deferred financing costs, net

4,219

4,574
Deferred income taxes

1,246

1,368
Other assets

2,574

2,092
Total assets
$ 415,839
$ 441,357








Liabilities and Equity






Current liabilities:






Accounts payable
$ 21,215
$ 21,787
Accrued payroll and payroll-related expenses

6,774

7,292
Accrued expenses

22,321

19,308
Current portion of long-term debt and capital leases

13,263

15,005
Total current liabilities

63,573

63,392








Long-term debt and capital leases

209,262

211,259
Deferred income taxes

28,936

26,447
Other long-term liabilities

3,231

3,194
Total liabilities

305,002

304,292








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; 46,274 and 46,235 shares issued and 46,262 and 46,235 shares outstanding

46

46
Additional paid-in capital

102,510

99,728
Retained earnings

695

32,663
Accumulated other comprehensive income (loss)

689

(1,760 )



103,940

130,677
Less cost of common stock in treasury, 12 and 0 shares

44

-
Total ARC Document Solutions, Inc.'s equity

103,896

130,677
Noncontrolling interest

6,941

6,388
Total equity

110,837

137,065
Total liabilities and equity
$ 415,839
$ 441,357












ARC Document Solutions, Inc.
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
(Unaudited)




Three Months Ended

Twelve Months Ended


December 31,

December 31,


2012

2011

2012

2011

















Service sales
$ 82,969

$ 86,898

$ 350,260

$ 368,213
Equipment and supplies sales

13,922


14,948


55,858


54,519
Total net sales

96,891


101,846


406,118


422,732
Cost of sales

68,251


70,553


282,599


288,434
Gross profit

28,640


31,293


123,519


134,298
Selling, general and administrative expenses

21,727


23,146


93,073


101,315
Amortization of intangible assets

1,791


4,596


11,035


18,715
Goodwill impairment

-


-


16,707


65,444
Restructuring expense

3,320


-


3,320


-
Income (loss) from operations

1,802


3,551


(616 )

(51,176 )
Other income, net

(21 )

(15 )

(100 )

(103 )
Interest expense, net

6,490


7,495


28,165


31,104
Loss before income tax provision (benefit)

(4,667 )

(3,929 )

(28,681 )

(82,177 )
Income tax provision (benefit)

939


(941 )

2,784


50,931
Net loss

(5,606 )

(2,988 )

(31,465 )

(133,108 )
(Income) loss attributable to the noncontrolling interest

(290 )

(69 )

(503 )

21
Net loss attributable to ARC Document Solutions, Inc.
$ (5,896 )
$ (3,057 )
$ (31,968 )
$ (133,087 )

















Loss per share attributable to ARC Document Solutions, Inc.'s shareholders:
















Basic
$ (0.13 )
$ (0.07 )
$ (0.70 )
$ (2.93 )

Diluted
$ (0.13 )
$ (0.07 )
$ (0.70 )
$ (2.93 )

















Weighted average common shares outstanding:
















Basic

45,749


45,505


45,668


45,401

Diluted

45,749


45,505


45,668


45,401











































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















Three Months Ended December 31,

Twelve Months Ended December 31,


2012

2011

2012

2011


































Cash flows provided by operating activities (1)
$ 6,673

$ 19,678

$ 37,552

$ 49,168

Changes in operating assets and liabilities, net of business acquisitions

1,647


(8,926 )

(463 )

10,152

Non-cash expenses, including depreciation amortization and restructuring

(13,926 )

(13,740 )

(68,554 )

(192,428 )

Income tax provision (benefit)

939


(941 )

2,784


50,931

Interest expense

6,490


7,495


28,165


31,104

Net (income) loss attributable to the noncontrolling interest

(290 )

(69 )

(503 )

21
EBIT

1,533


3,497


(1,019 )

(51,052 )

Depreciation and amortization

9,012


11,513


39,522


47,876
EBITDA

10,545


15,010


38,503


(3,176 )

Goodwill impairment

-


-


16,707


65,444

Restructuring expense

3,320


-


3,320


-

Stock-based compensation

542


496


1,999


4,271
Adjusted EBITDA
$ 14,407

$ 15,506

$ 60,529

$ 66,539

















(1) For the three and twelve months ended December 31, 2012 cash flows provided by operating activities includes $1.0 million in cash payments related to restructuring.











































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















Three Months Ended December 31,

Twelve Months Ended December 31,


2012

2011

2012

2011

















Net loss attributable to ARC Document Solutions, Inc.
$ (5,896 )
$ (3,057 )
$ (31,968 )
$ (133,087 )

Goodwill impairment

-


-


16,707


65,444

Change in trade name impact to amortization

-


2,369


3,158


9,475

Restructuring expense

3,320


-


3,320


-

Interest rate swap related costs

393


1,322


3,440


5,691

Income tax provision, related to above items

(1,397 )

(1,308 )

(7,676 )

(16,053 )

Deferred tax valuation allowance and other discrete tax items

2,736


516


11,311


67,556
Unaudited adjusted net loss attributable to ARC Document Solutions, Inc.
$ (844 )
$ (158 )
$ (1,708 )
$ (974 )

















Actual:















Loss per share attributable to ARC Document Solutions, Inc.'s shareholders:









Basic
$ (0.13 )
$ (0.07 )
$ (0.70 )
$ (2.93 )

Diluted
$ (0.13 )
$ (0.07 )
$ (0.70 )
$ (2.93 )

















Weighted average common shares outstanding:
















Basic

45,749


45,505


45,668


45,401

Diluted

45,749


45,505


45,668


45,401

















Adjusted:















Loss per share attributable to ARC Document Solutions, Inc.'s shareholders:









Basic
$ (0.02 )
$ (0.00 )
$ (0.04 )
$ (0.02 )

Diluted
$ (0.02 )
$ (0.00 )
$ (0.04 )
$ (0.02 )

















Weighted average common shares outstanding:
















Basic

45,749


45,505


45,668


45,401

Diluted

45,749


45,505


45,668


45,401











































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















Three Months Ended December 31,

Twelve Months Ended December 31,


2012

2011

2012

2011

















Net loss attributable to ARC Document Solutions, Inc.
$ (5,896 )
$ (3,057 )
$ (31,968 )
$ (133,087 )

Interest expense, net

6,490


7,495


28,165


31,104

Income tax provision (benefit)

939


(941 )

2,784


50,931
EBIT

1,533


3,497


(1,019 )

(51,052 )

Depreciation and amortization

9,012


11,513


39,522


47,876
EBITDA

10,545


15,010


38,503


(3,176 )

Goodwill impairment

-


-


16,707


65,444

Restructuring expense

3,320


-


3,320


-

Stock-based compensation

542


496


1,999


4,271
Adjusted EBITDA
$ 14,407

$ 15,506

$ 60,529

$ 66,539



































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











Three Months Ended December 31,
Twelve Months Ended December 31,


2012
2011
2012
2011













Service sales












Traditional reprographics
$ 28,357
$ 32,820
$ 126,785
$ 145,449

Color

19,241

19,355

79,080

84,062

Digital

7,816

9,345

35,578

38,020


Subtotal (1)

55,414

61,520

241,443

267,531

Onsite services (2)

27,555

25,378

108,817

100,682


Total service sales

82,969

86,898

350,260

368,213













Equipment and supplies sales

13,922

14,948

55,858

54,519
Total net sales
$ 96,891
$ 101,846
$ 406,118
$ 422,732













(1) For comparison purposes this subtotal agrees with reprographics services historically reported.
(2) Represents work done at our customers' sites which includes Facilities Management ("FM") and Managed Print Services ("MPS")

Non-GAAP Financial Measures.
EBIT, 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.

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

We present EBIT, 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 EBIT and 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. As a result, we believe EBIT is the best measure of operating segment profitability and the most useful metric by which to measure and compare the performance of our operating segments. We also use EBIT to measure performance for determining operating segment-level compensation and we use EBITDA to measure performance for determining consolidated-level compensation. In addition, we use EBIT and EBITDA to evaluate potential acquisitions and potential capital expenditures.

EBIT, 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, EBIT, 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 EBIT, 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. For more information, see our 2011 Annual Report on Form 10-K.

Specifically, we have presented adjusted net loss attributable to ARC and adjusted loss per share attributable to ARC shareholders for the three and twelve months ended December 31, 2012 and 2011 to reflect the exclusion of goodwill impairment charges, the amortization impact related specifically to the change in useful lives of trade names, restructuring expense, interest rate swap related costs, the valuation allowance 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 twelve months ended December 31, 2012 and 2011. We believe these charges were the result of our capital restructuring, or other items which are not indicative of our actual operating performance.

We presented adjusted EBITDA in the three months ended December 31, 2012 to exclude restructuring expense of $3.3 million, and stock-based compensation expense of $0.5 million. We presented adjusted EBITDA in the twelve months ended December 31, 2012 to exclude the non-cash goodwill impairment charge of $16.7 million, restructuring expense of $3.3 million, and stock-based compensation expense of $2.0 million. We presented adjusted EBITDA for the three and twelve months ended December 31, 2011 to exclude stock-based compensation expense of $0.5 million and $4.3 million, respectively, and a non-cash goodwill impairment charge of $65.4 million for the twelve months ended December 31, 2011. The adjustments to EBITDA for non-cash items are 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
(Dollars in thousands)
(Unaudited)















Three Months Ended

Twelve Months Ended


December 31,

December 31,


2012

2011

2012

2011
Cash flows from operating activities















Net loss
$ (5,606 )
$ (2,988 )
$ (31,465 )
$ (133,108 )

Adjustments to reconcile net loss to net cash provided by operating activities:

















Allowance for accounts receivable

(76 )

288


456


1,034


Depreciation

7,221


6,917


28,487


29,161


Amortization of intangible assets

1,791


4,596


11,035


18,715


Amortization of deferred financing costs

276


225


1,088


887


Amortization of bond discount

158


142


611


549


Goodwill impairment

-


-


16,707


65,444


Stock-based compensation

542


496


1,999


4,271


Excess tax benefit related to stock-based compensation

-


31


-


-


Deferred income taxes

(2,132 )

(2,833 )

(6,433 )

673


Deferred tax valuation allowance

2,984


2,827


9,750


68,546


Restructuring expense, non-cash portion

2,379


-


2,379


-


Amortization of derivative, net of tax effect

246


828


2,154


3,565


Other noncash items, net

537


223


321


(417 )


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


















Accounts receivable

5,864


5,917


2,533


(2,582 )



Inventory

(339 )

(1,206 )

(3,005 )

(1,170 )



Prepaid expenses and other assets

2,233


12,652


1,032


(453 )



Accounts payable and accrued expenses

(9,405 )

(8,437 )

(97 )

(5,947 )
Net cash provided by operating activities

6,673


19,678


37,552


49,168
Cash flows from investing activities
















Capital expenditures

(6,154 )

(3,615 )

(20,348 )

(15,553 )



































Payments for businesses acquired, net of cash acquired and including other cash payments associated with the acquisitions

-


(823 )

-


(823 )

Payment for swap transaction

-


-


-


(9,729 )

Other

190


(2 )

323


923
Net cash used in investing activities

(5,964 )

(4,440 )

(20,025 )

(25,182 )
Cash flows from financing activities
















Proceeds from stock option exercises

-


-


79


108

Proceeds from issuance of common stock under Employee Stock Purchase Plan

-


31


28


62

Excess tax benefit related to stock-based compensation

-


(31 )

-


-

Payments on long-term debt agreements and capital leases

(3,560 )

(5,460 )

(15,601 )

(25,179 )

Net borrowings (repayments) under revolving credit facilities

225


(10,121 )

1,266


701

Payment of deferred financing costs

-


(131 )

(839 )

(799 )
Net cash used in financing activities

(3,335 )

(15,712 )

(15,067 )

(25,107 )
Effect of foreign currency translation on cash balances

113


(43 )

124


265
Net change in cash and cash equivalents

(2,513 )

(517 )

2,584


(856 )
Cash and cash equivalents at beginning of period

30,534


25,954


25,437


26,293
Cash and cash equivalents at end of period
$ 28,021

$ 25,437

$ 28,021

$ 25,437



-


-


-


-
Supplemental disclosure of cash flow information















Noncash investing and financing activities















Noncash transactions include the following:
















Capital lease obligations incurred
$ 1,536

$ 3,202

$ 10,047

$ 10,678

Liabilities in connection with acquisition of businesses
$ -

$ -

$ -

$ 548

Liabilities in connection with deferred financing costs
$ -

$ 107

$ -

$ 107

















Contact Information:
David Stickney
VP Corporate Communications
925-949-5114