ARC Document Solutions Reports Results for Second Quarter 2014

August 05, 2014

WALNUT CREEK, CA -- (Marketwired) -- 08/05/14 -- ARC Document Solutions, Inc. (NYSE: ARC), the nation's leading document solutions provider for the architecture, engineering, and construction (AEC) industry, today reported its financial results for the second quarter ended June 30, 2014.

Quarterly Business Highlights:

  • Q2 Adjusted earnings per share of $0.10 vs. $0.04 in Q2 2013
  • Q2 Gross margin of 36.0%; year-over-year increase of 200 basis points
  • Q2 cash flow from operations increased to $14.0 million from $8.1 million for the same period last year
  • Q2 Adjusted EBITDA margin of 19.1%; year-over-year increase of 160 basis points on higher sales and gross margin
  • Term B Loan principal reduced by $16.5 million as of July 31, 2014; represents payments of $11.5 million more than required
  • Maintains 2014 fully-diluted annual adjusted earnings per share outlook in the range $0.19 to $0.23; outlook for 2014 annual cash provided by operating activities in the range of $51-$56 million, and adjusted EBITDA in the range of $69-73 million

Financial Highlights:













Three Months Ended

Six Months Ended


June 30,

June 30,
(All dollar amounts in millions, except EPS)
2014

2013

2014

2013
Net Revenue
$ 109.0

$ 104.6

$ 209.4

$ 204.7
Gross Margin

36.0 %

34.0 %

34.9 %

33.2 %
Net Income attributable to ARC
$ 4.5

$ 0.7

$ 5.9

$ 1.1
Adjusted Net Income attributable to ARC
$ 4.5

$ 1.6

$ 6.3

$ 2.2
Earnings per share - Diluted
$ 0.10

$ 0.02

$ 0.13

$ 0.02
Adjusted earnings per share - Diluted
$ 0.10

$ 0.04

$ 0.13

$ 0.05
Adjusted EBITDA
$ 20.9

$ 18.3

$ 37.0

$ 34.3
Cash provided by operating activities
$ 14.0

$ 8.1

$ 21.7

$ 20.0
Capital Expenditures
$ 3.0

$ 4.4

$ 6.6

$ 10.0
Debt & Capital Leases (including current)








$ 210.8

$ 220.8

















Management Commentary

"Our managed print services program continued to perform well in the second quarter, and the rest of the business is stabilizing," said K. "Suri" Suriyakumar, Chairman, President and CEO of ARC Document Solutions. "With exceptional operational performance, we have been able to deliver a strong quarter, generate excellent cash flows, and create an opportunity to aggressively reduce our senior debt."

Chief Operating Officer, Dilo Wijesuriya, said, "We made significant gains with some of our largest prospects and clients during the quarter, and made good progress in placing our technology products and services. The construction market appears to be regaining some of its strength in certain markets, and that will help us in the coming quarters as we leverage the operational improvements we've made since the recession."

"Our revenue improvement was welcome particularly when combined with the fundamental increase in our margins. Ultimately our generation of free cash tells our story best during this period, growing 199% on a year-over-year basis for the quarter," said John Toth, Chief Financial Officer. "We continue to put a high priority on improving our credit quality, and leveraging the upgrade by S&P to pursue further improvements in our capital structure."

2014 Second Quarter Supplemental Information:

Net sales were $109.0 million, a 4.2% increase compared to the second quarter of 2013.

Days sales outstanding in Q2 2014 were 52, compared to 54 days in Q2 2013.

AEC customers comprised approximately 77% of our total net sales, while non-AEC customers made up approximately 23% of our total net sales.

Total number of Onsite Services contracts at the end of the second quarter was approximately 8,000, a gain of nearly 300 contracts from the beginning of the year.

Adjusted EBITDA is EBITDA net of the impact of restructuring costs, stock based compensation, and one-time significant legal expenses.


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









Three Months Ended Six Months Ended

June 30, June 30,
Services and Product Line 2014
2013
2014
2013
Onsite Services 31.3 % 29.2 % 31.3 % 29.1 %
Traditional Reprographics 27.8 % 29.2 % 27.9 % 29.4 %
Color Services 21.2 % 20.9 % 21.2 % 20.9 %
Digital Services 8.0 % 8.3 % 8.0 % 8.3 %
Equipment and Supplies Sales 11.7 % 12.4 % 11.6 % 12.3 %









Outlook:

ARC Document Solutions continues to anticipate annual adjusted earnings per share in 2014 to be in the range of $0.19 to $0.23 on a fully diluted basis. Annual cash flow from operations is expected to be in the range of $51 million to $56 million. Annual adjusted EBITDA is projected to be in the range of $69 million to $73 million.

Teleconference and Webcast:

ARC Document Solutions 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 second quarter of 2014. To access the live audio call, dial 888-505-4375. International callers may join the conference by dialing 719-457-2085. The conference ID number is 2162568. A live webcast will also be made available on the investor relations page of ARC Document Solutions' website at www.e-arc.com.

A replay of the call will be available for five days after the call's conclusion. To access the replay, dial 888-203-1112. International callers may access the replay by dialing 719-457-0820. The conference ID number is 2162568. The webcast will also be made available at www.e-arc.com for approximately 90 days following the call's conclusion.

About ARC Document Solutions (NYSE: ARC)

ARC Document Solutions is a leading document solutions company serving businesses of all types, with an emphasis on the non-residential segment of the architecture, engineering and construction industries. The Company helps more than 90,000 customers reduce costs and increase efficiency in the use of their documents, improve document access and control, and offers a wide variety of ways to print, produce, and store documents. ARC provides its solutions onsite in more than 8,000 of its customers' offices, offsite in service centers around the world, and digitally in the form of proprietary software and web applications. For more information please 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 "continuing growth," "confidence" "sustainable," 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, 2013, 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)





June 30,

December 31,
Current assets: 2014

2013

Cash and cash equivalents $ 24,206

$ 27,362

Accounts receivable, net of allowances for accounts receivable of $2,506 and $2,517
63,622


56,328

Inventories, net
16,013


14,047

Deferred income taxes
207


356

Prepaid expenses
4,455


4,324

Other current assets
3,275


4,013


Total current assets
111,778


106,430
Property and equipment, net of accumulated depreciation of $214,115 and $206,636
57,923


56,181
Goodwill
212,608


212,608
Other intangible assets, net
26,078


27,856
Deferred financing fees, net
2,866


3,242
Deferred income taxes
1,254


1,186
Other assets
2,420


2,419


Total assets $ 414,927

$ 409,922
Current liabilities:







Accounts payable $ 25,793

$ 23,363

Accrued payroll and payroll-related expenses
11,698


11,497

Accrued expenses
23,096


21,365

Current portion of long-term debt and capital leases
13,859


21,500


Total current liabilities
74,446


77,725
Long-term debt and capital leases
196,977


198,228
Deferred income taxes
32,724


31,667
Other long-term liabilities
3,190


3,163


Total liabilities
307,337


310,783
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; 46,751 and 46,365 shares issued and 46,682 and 46,320 shares outstanding
46


46

Additional paid-in capital
108,525


105,806

Retained deficit
(8,687 )

(14,628 )

Accumulated other comprehensive income
655


634


100,539


91,858

Less cost of common stock in treasury, 69 and 45 shares
319


168


Total ARC Document Solutions, Inc. stockholders' equity
100,220


91,690
Noncontrolling interest
7,370


7,449


Total equity
107,590


99,139


Total liabilities and equity $ 414,927

$ 409,922






























ARC Document Solutions, Inc.










Consolidated Statements of Operations










(In thousands, except per share data)










(Unaudited) Three Months Ended

Six Months Ended

June 30,

June 30,

2014

2013

2014

2013
Service sales $ 96,198

$ 91,628

$ 185,129

$ 179,428
Equipment and supplies sales
12,784


12,994


24,226


25,230

Total net sales
108,982


104,622


209,355


204,658
Cost of sales
69,775


69,011


136,214


136,668

Gross profit
39,207


35,611


73,141


67,990
Selling, general and administrative expenses
28,283


24,891


54,389


48,664
Amortization of intangible assets
1,503


1,699


3,001


3,446
Restructuring expense
271


636


754


1,108

Income from operations
9,150


8,385


14,997


14,772
Other income
(23 )

(35 )

(49 )

(61 )
Interest expense, net
3,944


6,076


7,857


12,117

Income before income tax provision
5,229


2,344


7,189


2,716
Income tax provision
607


1,467


1,271


1,156

Net income
4,622


877


5,918


1,560
(Income) loss attributable to noncontrolling interest
(77 )

(155 )

23


(423 )

Net income attributable to ARC Document Solutions, Inc. shareholders $ 4,545

$ 722

$ 5,941

$ 1,137
Earnings per share attributable to ARC Document Solutions, Inc. shareholders:















Basic $ 0.10

$ 0.02

$ 0.13

$ 0.02

Diluted $ 0.10

$ 0.02

$ 0.13

$ 0.02
Weighted average common shares outstanding:















Basic
46,254


45,901


46,122


45,832

Diluted
46,834


46,058


46,759


45,884



















































ARC Document Solutions, Inc.
Non-GAAP Measures Reconciliation of cash flows provided by operating activities to EBIT, EBITDA and Adjusted EBITDA







(In thousands) (Unaudited)
















Three Months Ended

Six Months Ended


June 30,

June 30,


2014

2013

2014

2013
Cash flows provided by operating activities (1)
$ 14,024

$ 8,110

$ 21,738

$ 19,991

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

930


4,314


5,159


2,558

Non-cash expenses, including depreciation, amortization and restructuring

(10,332 )

(11,547 )

(20,979 )

(20,989 )

Income tax provision

607


1,467


1,271


1,156

Interest expense, net

3,944


6,076


7,857


12,117

(Income) loss attributable to the noncontrolling interest

(77 )

(155 )

23


(423 )
EBIT

9,096


8,265


15,069


14,410

Depreciation and amortization

8,532


8,719


17,025


17,421
EBITDA

17,628


16,984


32,094


31,831

Trade secret litigation costs(2)

2,083


--


2,481


--

Restructuring expense

271


636


754


1,108

Stock-based compensation

881


729


1,662


1,321
Adjusted EBITDA
$ 20,863

$ 18,349

$ 36,991

$ 34,260

















(1) Cash flows provided by operating activities for the three and six months ended June 30, 2013 includes cash payments related to restructuring of $1.0 million and $2.6 million, respectively. Cash flows provided by operating activities for the six months ended June 30, 2013 includes an income tax refund of $3.8 million received in 2013 related to our 2009 consolidated federal income tax return. Cash flows provided by operating activities for the three and six months ended June 30, 2014 includes cash payments for trade secret litigation costs of $1.1 million and $1.5 million, respectively, and cash payments related to restructuring of $0.3 million and $0.6 million, respectively.


(2) On February 1, 2013, we filed a civil complaint against a competitor and a former employee in the Superior Court of California for Orange County, which alleged, among other claims, the misappropriation of ARC trade secrets; namely, proprietary customer lists that were used to communicate with our customers in an attempt to unfairly acquire their business. In prior litigation with the competitor based on related facts, in 2007 the competitor entered into a settlement agreement and stipulated judgment, which included an injunction. We instituted this suit to stop the defendant from using similar unfair business practices against us in the Southern California market. The case proceeded to trial in May 2014, and a jury verdict was entered for the defendants. We are considering our appeal options. Legal fees associated with the litigation totaled $2.1 million and $2.5 million for the three and six months ended June 30, 2014, respectively.














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
























Three Months Ended

Six Months Ended

June 30,

June 30,

2014

2013

2014

2013
Net income attributable to ARC Document Solutions, Inc. $ 4,545

$ 722

$ 5,941

$ 1,137

Restructuring expense
271


636


754


1,108

Trade secret litigation costs
2,083


--


2,481


--

Income tax benefit related to above items
(917 )

(252 )

(1,261 )

(431 )

Deferred tax valuation allowance and other discrete tax items
(1,469 )

542


(1,626 )

388
Unaudited adjusted net income attributable to ARC Document Solutions, Inc. $ 4,513

$ 1,648

$ 6,289

$ 2,202
















Actual:














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















Basic $ 0.10

$ 0.02

$ 0.13

$ 0.02

Diluted $ 0.10

$ 0.02

$ 0.13

$ 0.02
Weighted average common shares outstanding:















Basic
46,254


45,901


46,122


45,832

Diluted
46,834


46,058


46,759


45,884
















Adjusted:














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















Basic $ 0.10

$ 0.04

$ 0.14

$ 0.05

Diluted $ 0.10

$ 0.04

$ 0.13

$ 0.05
Weighted average common shares outstanding:















Basic
46,254


45,901


46,122


45,832

Diluted
46,834


46,058


46,759


45,884




















































ARC Document Solutions, Inc. Non-GAAP Measures Reconciliation of net income attributable to ARC Document Solutions, Inc. shareholders to EBIT, EBITDA and Adjusted EBITDA




(In thousands) (Unaudited)









Three Months Ended
Six Months Ended

June 30,
June 30,

2014
2013
2014
2013
Net income attributable to ARC Document Solutions, Inc. shareholders $ 4,545
$ 722
$ 5,941
$ 1,137

Interest expense, net
3,944

6,076

7,857

12,117

Income tax provision
607

1,467

1,271

1,156
EBIT
9,096

8,265

15,069

14,410

Depreciation and amortization
8,532

8,719

17,025

17,421
EBITDA
17,628

16,984

32,094

31,831

Trade secret litigation costs
2,083

--

2,481

--

Restructuring expense
271

636

754

1,108

Stock-based compensation
881

729

1,662

1,321
Adjusted EBITDA $ 20,863
$ 18,349
$ 36,991
$ 34,260












ARC Document Solutions, Inc.
Net Sales by Product Line







(In thousands) (Unaudited)







Three Months Ended
Six Months Ended

June 30,
June 30,

2014
2013
2014
2013
Service Sales










Traditional reprographics $ 30,181
$ 30,516
$ 58,506
$ 60,074
Color
23,148

21,846

44,313

42,751
Digital
8,759

8,690

16,818

17,051

Subtotal
62,088

61,052

119,637

119,876
Onsite services(1)
34,110

30,576

65,492

59,552

Total services sales
96,198

91,628

185,129

179,428
Equipment and supplies sales
12,784

12,994

24,226

25,230

Total net sales $ 108,982
$ 104,622
$ 209,355
$ 204,658













(1) Represents work done at our customer 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. For more information, see our interim Condensed Consolidated Financial Statements and related notes on our 2014 second quarter report on Form 10-Q. Additionally, please refer to our 2013 Annual Report on Form 10-K.

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 six months ended June 30, 2014 and 2013 to reflect the exclusion of restructuring expense, trade secret litigation costs, 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 six months ended June 30, 2014 and 2013. We believe these charges were the result of the current macroeconomic environment, our capital restructuring, or other items which are not indicative of our actual operating performance.

We presented adjusted EBITDA in the three and six months ended June 30, 2014 and 2013 to exclude stock-based compensation expense, trade secret litigation costs, and restructuring expense. The adjustment of EBITDA for non-cash adjustments 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
Consolidated Statements of Cash Flows (In thousands) (Unaudited)
Three Months Ended

Six Months Ended

June 30,

June 30,

2014

2013

2014

2013
Cash flows from operating activities














Net income $ 4,622

$ 877

$ 5,918

$ 1,560
Adjustments to reconcile net income to net cash provided by operating activities:















Allowance for accounts receivable
100


301


247


446

Depreciation
7,029


7,020


14,024


13,975

Amortization of intangible assets
1,503


1,699


3,001


3,446

Amortization of deferred financing costs
214


278


397


561

Amortization of discount on long-term debt
224


167


449


332

Stock-based compensation
881


729


1,662


1,321

Deferred income taxes
2,279


1,145


4,172


736

Deferred tax valuation allowance
(1,748 )

154


(3,037 )

174

Restructuring expense, non-cash portion
7


235


391


293

Other non-cash items, net
(157 )

(181 )

(327 )

(295 )

Changes in operating assets and liabilities:
















Accounts receivable
(4,059 )

(2,666 )

(7,494 )

(11,849 )


Inventory
85


234


(1,929 )

280


Prepaid expenses and other assets
415


(619 )

637


3,090


Accounts payable and accrued expenses
2,629


(1,263 )

3,627


5,921
Net cash provided by operating activities
14,024


8,110


21,738


19,991
Cash flows from investing activities














Capital expenditures
(3,032 )

(4,430 )

(6,597 )

(10,042 )
Payments related to business acquisitions
(342 )

--


(342 )

--
Other
236


182


400


539
Net cash used in investing activities
(3,138 )

(4,248 )

(6,539 )

(9,503 )
Cash flows from financing activities














Proceeds from stock option exercises
568


--


1,009


--
Proceeds from issuance of common stock under Employee Stock Purchase Plan
27


9


48


9
Share repurchases, including shares surrendered for tax withholding
(151 )

(90 )

(151 )

(90 )
Proceeds from borrowings on long-term debt agreements
--


402


--


402
Payments on long-term debt agreements and capital leases
(10,477 )

(3,075 )

(18,440 )

(6,407 )
Net (repayments) borrowings under revolving credit facilities
(697 )

929


(295 )

(210 )
Payment of deferred financing costs
3


--


(454 )

--
Net cash used in financing activities
(10,727 )

(1,825 )

(18,283 )

(6,296 )
Effect of foreign currency translation on cash balances
54


121


(72 )

164
Net change in cash and cash equivalents
213


2,158


(3,156 )

4,356
Cash and cash equivalents at beginning of period
23,993


30,219


27,362


28,021
Cash and cash equivalents at end of period $ 24,206

$ 32,377

$ 24,206

$ 32,377
Supplemental disclosure of cash flow information














Noncash financing activities















Capital lease obligations incurred $ 5,315

$ 2,992

$ 9,403

$ 4,246

Contingent liabilities in connection with business acquisitions $ 924

$ --

$ 924

$ --

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

Source: ARC Document Solutions, Inc.