ARC Document Solutions Reports Results for Third Quarter 2014

November 06, 2014

WALNUT CREEK, CA -- (Marketwired) -- 11/06/14 -- 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 third quarter ended September 30, 2014.

Quarterly Business Highlights:

  • Q3 Adjusted earnings per share of $0.06 vs. $0.02 in Q3 2013
  • Q3 Gross margin of 33.9%; year-over-year increase of 140 basis points
  • Q3 cash flow from operations was $15.3 million and included cash payments for trade secret litigation and quarterly interest payments on senior debt
  • Revises 2014 fully-diluted annual adjusted earnings per share outlook from $0.19 to $0.23 to be in the range of $0.24 to $0.27, narrows the outlook for 2014 annual cash provided by operating activities from $51 million to $56 million to be in the range of $52 to $54 million, and revises the outlook for annual adjusted EBITDA from $69 million to $73 million to be in the range of $71 million to $74 million

Financial Highlights:
Three Months Ended Nine Months Ended
September 30, September 30,
(All dollar amounts in millions, except EPS) 2014 2013 2014 2013
Net Revenue $ 106.8 $ 101.3 $ 316.2 $ 305.9
Gross Margin 33.9 % 32.5 % 34.6 % 33.0 %
Net income (loss) attributable to ARC $ 3.7 $ (0.5 ) $ 9.6 $ 0.7
Adjusted Net Income attributable to ARC $ 2.9 $ 0.8 $ 9.2 $ 3.0
Earnings (loss) per share - Diluted $ 0.08 $ (0.01 ) $ 0.20 $ 0.01
Adjusted earnings per share - Diluted $ 0.06 $ 0.02 $ 0.20 $ 0.07
Adjusted EBITDA $ 18.3 $ 16.6 $ 55.2 $ 50.8
Cash provided by operating activities $ 15.3 $ 20.0 $ 37.0 $ 40.0
Capital Expenditures $ 3.4 $ 4.8 $ 10.0 $ 14.9
Debt & Capital Leases (including current) $ 205.6 $ 213.4

Management Commentary

"It was an excellent quarter and our performance clearly highlighted the difference between the document solutions provider we are today, the reprographics company we were prior to the recession, and the role we'll play in the future distributing documents and information from the cloud with secure mobile access. Our customers are asking us to find new ways to meet their needs, work with them in the cloud, and create new solutions for them to interact with the massive amounts of information they generate," said K. "Suri" Suriyakumar , Chairman, President and CEO of ARC Document Solutions. "It's a different ballgame."

"We achieved double digit growth in managed print services and color, we saw more growth in archiving and information management and our construction document hyperlinking services, and there was great interest and new placements around the country for our PlanWell SmartScreens," Mr. Suriyakumar continued. "Our robust margin expansion led to strong earnings performance, and strong cash generation provided the means to aggressively reduce our senior debt in the same fashion we established in the first two quarters of the year, improving both our capital structure and our debt ratios."

The Company also announced that it has entered into a commitment letter with Wells Fargo Bank to refinance the Company's existing line of credit and its current "Term B" loan facility with a new secured credit facility containing "tranche A" revolving loans and "Term A" loans expected to be syndicated primarily to commercial banking institutions active in the "pro rata" bank market. The closing of the new loan facility is subject to the satisfaction of various conditions, including the receipt of commitments from the proposed lenders and the negotiation of definitive documentation. The Company expects the interest rate of the new five-year Term A facility to be at or near LIBOR plus 250 basis points. The Company expects to close the new loan facility before the end of the fourth quarter.

2014 Third Quarter Supplemental Information:

Net sales were $106.8 million, a 5.5% increase compared to the third quarter of 2013.

Days sales outstanding in Q3 2014 were 54, compared to 52 days in Q3 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 third quarter was approximately 8,330, an increase of nearly 630 contracts from the beginning of the year.

Adjusted EBITDA is EBITDA net of the impact of loss on extinguishment of debt, trade secret litigation costs, stock-based compensation expense, and restructuring 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 2014 2013 2014 2013
Onsite Services 32.7 % 30.6 % 31.8 % 29.6 %
Traditional Reprographics 26.4 % 28.5 % 27.4 % 29.1 %
Color Services 21.4 % 20.4 % 21.2 % 20.7 %
Digital Services 7.9 % 8.2 % 8.0 % 8.3 %
Equipment and Supplies Sales 11.6 % 12.3 % 11.6 % 12.3 %

Outlook:

ARC Document Solutions has revised its outlook upward for annual adjusted earnings per share in 2014 from $0.19 to $0.23 to be in the range of $0.24 to $0.27 on a fully diluted basis. The outlook for annual cash flow from operations has been narrowed from $51 million to $56 million to be in the range of $52 million to $54 million. The outlook for annual adjusted EBITDA has been revised upward from $69 million to $73 million to be in the range of $71 million to $74 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 third quarter of 2014. To access the live audio call, dial 888-461-2024. International callers may join the conference by dialing 719-325-2144. The conference ID number is 1208767. 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 1208767. 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 "expect," "confident," "assume," "intent," 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)
September 30, December 31,
Current assets: 2014 2013
Cash and cash equivalents $ 24,835 $ 27,362
Accounts receivable, net of allowances for accounts receivable of $2,507 and $2,517 64,056 56,328
Inventories, net 16,167 14,047
Deferred income taxes 347 356
Prepaid expenses 5,208 4,324
Other current assets 3,466 4,013
Total current assets 114,079 106,430
Property and equipment, net of accumulated depreciation of $215,606 and $206,636 59,515 56,181
Goodwill 212,608 212,608
Other intangible assets, net 24,682 27,856
Deferred financing fees, net 2,575 3,242
Deferred income taxes 976 1,186
Other assets 2,356 2,419
Total assets $ 416,791 $ 409,922
Current liabilities:
Accounts payable $ 25,427 $ 23,363
Accrued payroll and payroll-related expenses 14,733 11,497
Accrued expenses 23,369 21,365
Current portion of long-term debt and capital leases 11,394 21,500
Total current liabilities 74,923 77,725
Long-term debt and capital leases 194,238 198,228
Deferred income taxes 33,110 31,667
Other long-term liabilities 3,059 3,163
Total liabilities 305,330 310,783
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; 46,790 and 46,365 shares issued and 46,721 and 46,320 shares outstanding 46 46
Additional paid-in capital 109,690 105,806
Retained deficit (5,026 ) (14,628 )
Accumulated other comprehensive income 229 634
104,939 91,858
Less cost of common stock in treasury, 69 and 45 shares 319 168
Total ARC Document Solutions, Inc. stockholders' equity 104,620 91,690
Noncontrolling interest 6,841 7,449
Total equity 111,461 99,139
Total liabilities and equity $ 416,791 $ 409,922
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,
2014 2013 2014 2013
Service sales $ 94,426 $ 88,830 $ 279,555 $ 268,258
Equipment and supplies sales 12,381 12,422 36,607 37,652
Total net sales 106,807 101,252 316,162 305,910
Cost of sales 70,584 68,372 206,798 205,040
Gross profit 36,223 32,880 109,364 100,870
Selling, general and administrative expenses 26,331 24,019 80,720 72,683
Amortization of intangible assets 1,497 1,610 4,498 5,056
Restructuring expense 11 657 765 1,765
Income from operations 8,384 6,594 23,381 21,366
Other income (22 ) (25 ) (71 ) (86 )
Loss on extinguishment of debt 347 262 347 262
Interest expense, net 3,780 5,895 11,637 18,012
Income before income tax provision 4,279 462 11,468 3,178
Income tax provision 659 790 1,930 1,946
Net income (loss) 3,620 (328 ) 9,538 1,232
Loss (income) attributable to noncontrolling interest 41 (122 ) 64 (545 )
Net income (loss) attributable to ARC Document Solutions, Inc. shareholders $ 3,661 $ (450 ) $ 9,602 $ 687
Earnings (loss) per share attributable to ARC Document Solutions, Inc. shareholders:
Basic $ 0.08 $ (0.01 ) $ 0.21 $ 0.01
Diluted $ 0.08 $ (0.01 ) $ 0.20 $ 0.01
Weighted average common shares outstanding:
Basic 46,338 45,976 46,195 45,880
Diluted 47,015 45,976 46,856 45,947
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 Nine Months Ended
September 30, September 30,
2014 2013 2014 2013
Cash flows provided by operating activities (1) $ 15,311 $ 20,019 $ 37,049 $ 40,010
Changes in operating assets and liabilities, net of effect of business acquisitions (1,174 ) (9,575 ) 3,985 (7,017 )
Non-cash expenses, including depreciation, amortization and restructuring (10,517 ) (10,772 ) (31,496 ) (31,761 )
Income tax provision 659 790 1,930 1,946
Interest expense, net 3,780 5,895 11,637 18,012
Loss (income) attributable to the noncontrolling interest 41 (122 ) 64 (545 )
EBIT 8,100 6,235 23,169 20,645
Depreciation and amortization 8,536 8,669 25,561 26,090
EBITDA 16,636 14,904 48,730 46,735
Loss on extinguishment of debt 347 262 347 262
Trade secret litigation costs (2) 306 -- 2,787 --
Restructuring expense 11 657 765 1,765
Stock-based compensation 956 728 2,618 2,049
Adjusted EBITDA $ 18,256 $ 16,551 $ 55,247 $ 50,811
(1) Cash flows provided by operating activities for the three and nine months ended September 30, 2013 includes cash payments related to restructuring of $0.7 million and $3.3 million, respectively. Cash flows provided by operating activities for the nine months ended September 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 nine months ended September 30, 2014 includes cash payments for trade secret litigation costs of $1.1 million and $2.6 million, respectively, and cash payments related to restructuring of $0.6 million and $1.2 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. In August 2014, we filed a Notice of Appeal. Legal fees associated with the litigation totaled $0.3 million and $2.8 million for the three and nine months ended September 30, 2014, respectively.
ARC Document Solutions, Inc.
Non-GAAP Measures
Reconciliation of net income (loss) 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,
2014 2013 2014 2013
Net income (loss) attributable to ARC Document Solutions, Inc. $ 3,661 $ (450 ) $ 9,602 $ 687
Loss on extinguishment of debt 347 262 347 262
Restructuring expense 11 657 765 1,765
Trade secret litigation costs 306 -- 2,787 --
Income tax benefit related to above items (258 ) (359 ) (1,519 ) (790 )
Deferred tax valuation allowance and other discrete tax items (1,172 ) 685 (2,798 ) 1,073
Unaudited adjusted net income attributable to ARC Document Solutions, Inc. $ 2,895 $ 795 $ 9,184 $ 2,997
Actual:
Earnings (loss) per share attributable to ARC Document Solutions, Inc. shareholders:
Basic $ 0.08 $ (0.01 ) $ 0.21 $ 0.01
Diluted $ 0.08 $ (0.01 ) $ 0.20 $ 0.01
Weighted average common shares outstanding:
Basic 46,338 45,976 46,195 45,880
Diluted 47,015 45,976 46,856 45,947
Adjusted:
Earnings per share attributable to ARC Document Solutions, Inc. shareholders:
Basic $ 0.06 $ 0.02 $ 0.20 $ 0.07
Diluted $ 0.06 $ 0.02 $ 0.20 $ 0.07
Weighted average common shares outstanding:
Basic 46,338 45,976 46,195 45,880
Diluted 47,015 46,487 46,856 45,947
ARC Document Solutions, Inc.
Non-GAAP Measures
Reconciliation of net income (loss) attributable to ARC Document Solutions, Inc. shareholders to EBIT, EBITDA and Adjusted EBITDA
(In thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2014 2013 2014 2013
Net income (loss) attributable to ARC Document Solutions, Inc. shareholders $ 3,661 $ (450 ) $ 9,602 $ 687
Interest expense, net 3,780 5,895 11,637 18,012
Income tax provision 659 790 1,930 1,946
EBIT 8,100 6,235 23,169 20,645
Depreciation and amortization 8,536 8,669 25,561 26,090
EBITDA 16,636 14,904 48,730 46,735
Loss on extinguishment of debt 347 262 347 262
Trade secret litigation costs 306 -- 2,787 --
Restructuring expense 11 657 765 1,765
Stock-based compensation 956 728 2,618 2,049
Adjusted EBITDA $ 18,256 $ 16,551 $ 55,247 $ 50,811
ARC Document Solutions, Inc.
Net Sales by Product Line
(In thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2014 2013 2014 2013
Service Sales
Onsite services(1) $ 34,950 $ 30,990 $ 100,442 $ 90,542
Traditional reprographics 28,196 28,907 86,702 88,981
Color 22,869 20,638 67,182 63,389
Digital 8,411 8,295 25,229 25,346
Total services sales 94,426 88,830 279,555 268,258
Equipment and supplies sales 12,381 12,422 36,607 37,652
Total net sales $ 106,807 $ 101,252 $ 316,162 $ 305,910
(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 third 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 nine months ended September 30, 2014 and 2013 to reflect the exclusion of loss on extinguishment of debt, 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 nine months ended September 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 nine months ended September 30, 2014 and 2013 to exclude loss on extinguishment of debt, trade secret litigation costs, stock-based compensation expense, 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 Nine Months Ended
September 30, September 30,
2014 2013 2014 2013
Cash flows from operating activities
Net income (loss) $ 3,620 $ (328 ) $ 9,538 $ 1,232
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Allowance for accounts receivable 197 105 444 551
Depreciation 7,039 7,059 21,063 21,034
Amortization of intangible assets 1,497 1,610 4,498 5,056
Amortization of deferred financing costs 190 270 587 831
Amortization of discount on long-term debt 207 168 656 500
Stock-based compensation 956 728 2,618 2,049
Deferred income taxes 2,100 182 6,272 918
Deferred tax valuation allowance (1,615 ) 386 (4,652 ) 560
Restructuring expense, non-cash portion -- 70 -- 363
Loss on early extinguishment of debt 347 262 347 262
Other non-cash items, net (401 ) (68 ) (337 ) (363 )
Changes in operating assets and liabilities:
Accounts receivable (930 ) 4,491 (8,424 ) (7,358 )
Inventory (142 ) 441 (2,071 ) 721
Prepaid expenses and other assets (946 ) (1,102 ) (309 ) 1,988
Accounts payable and accrued expenses 3,192 5,745 6,819 11,666
Net cash provided by operating activities 15,311 20,019 37,049 40,010
Cash flows from investing activities
Capital expenditures (3,430 ) (4,814 ) (10,027 ) (14,856 )
Payments related to business acquisitions -- -- (342 ) --
Other 105 83 505 622
Net cash used in investing activities (3,325 ) (4,731 ) (9,864 ) (14,234 )
Cash flows from financing activities
Proceeds from stock option exercises 191 -- 1,201 --
Proceeds from issuance of common stock under Employee Stock Purchase Plan 17 4 65 13
Share repurchases, including shares surrendered for tax withholding -- -- (151 ) (90 )
Proceeds from borrowings on long-term debt agreements -- -- -- 402
Payments of debt extinguishment costs -- (66 ) -- (66 )
Early extinguishment of long-term debt (5,000 ) (7,000 ) (12,500 ) (7,000 )
Payments on long-term debt agreements and capital leases (5,497 ) (2,988 ) (16,437 ) (9,395 )
Net repayments under revolving credit facilities (532 ) (228 ) (828 ) (438 )
Payment of deferred financing costs -- -- (454 ) --
Dividends paid to noncontrolling interest (486 ) (485 ) (486 ) (485 )
Net cash used in financing activities (11,307 ) (10,763 ) (29,590 ) (17,059 )
Effect of foreign currency translation on cash balances (50 ) 152 (122 ) 316
Net change in cash and cash equivalents 629 4,677 (2,527 ) 9,033
Cash and cash equivalents at beginning of period 24,206 32,377 27,362 28,021
Cash and cash equivalents at end of period $ 24,835 $ 37,054 $ 24,835 $ 37,054
Supplemental disclosure of cash flow information
Noncash investing and financing activities
Capital lease obligations incurred $ 5,506 $ 2,491 $ 14,909 $ 6,737
Contingent liabilities in connection with business acquisitions $ 186 $ -- $ 1,110 $ --

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

Source: ARC Document Solutions, Inc.