SOURCE: ARC Document Solutions, Inc.

ARC Document Solutions, Inc.

May 03, 2016 16:05 ET

ARC Document Solutions Reports Results for First Quarter 2016

WALNUT CREEK, CA--(Marketwired - May 3, 2016) - 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 first quarter ended March 31, 2016.

2016 First Quarter Business Highlights:

  • Net sales of $103.6 million vs. $104.3 million in 2015
  • Adjusted diluted earnings per share were $0.06 vs. $0.07 in 2015
  • Gross margin of 32.6% vs. 34.5% in 2015 due to quarterly increase in lower margin sales
  • Cash flow from operations of $5.3 million despite $3 million negative impact compared to prior year from payroll timing
  • Adjusted EBITDA of $14.8 million or 14.3%
  • Approximately 700,000 shares of ARC common stock repurchased in the open market
  • Management reaffirms 2016 forecast

             
Financial Highlights:            
    Three Months Ended  
    March 31,  
(All dollar amounts in millions, except EPS)   2016     2015  
Net Sales   $ 103.6     $ 104.3  
Gross Margin     32.6 %     34.5 %
Net income attributable to ARC   $ 2.6     $ 4.4  
Adjusted Net Income attributable to ARC   $ 2.7     $ 3.2  
Earnings per share - Diluted   $ 0.05     $ 0.09  
Adjusted earnings per share - Diluted   $ 0.06     $ 0.07  
Adjusted EBITDA   $ 14.8     $ 16.8  
Cash provided by operating activities   $ 5.3     $ 5.3  
Adjusted cash provided by operating activities   $ 5.3     $ 6.4  
Capital Expenditures   $ 2.5     $ 3.5  
Debt & Capital Leases (including current), net of unamortized deferred financing fees   $ 167.0     $ 197.9  
                 

Management Commentary

"We continue to make progress towards the transformation of the company," said K. "Suri" Suriyakumar, Chairman, President and CEO of ARC Document Solutions. "Our sales performance was as expected but the margins were softer due to our product mix. That said, our technology enabled services continued to grow, especially our AIM solution. We are working hard to offset the slow secular declines in our traditional business with new solutions and we are executing on our plans as expected, and I'm pleased with the direction in which we're headed."

"I'm also happy to announce the appointment of John Freeland to our Board of Directors," Mr. Suriyakumar continued. "As a part of our transition, we're actively seeking out candidates with strong backgrounds in building and leading technology-enabled companies, and John is a great fit. His experience and leadership with Accenture, salesforce.com, and IRI will bring a fresh perspective to our thinking and decisions on the Board. I look forward to his contributions."

"As usual, strong cash generation characterized the first quarter for ARC," said Jorge Avalos, Chief Financial Officer of ARC Document Solutions. "While we saw cash from operations off to its usual slow start due to seasonal timing of sales, our ability to execute our stock repurchase plan was unaffected. We bought $2.7 million of ARC common stock in the open market during the period, and further reduced the principal of our senior debt by more than $4 million."

2016 First Quarter Supplemental Information:

Net sales were $103.6 million, a 0.7% decrease compared to the first quarter of 2015.

Days sales outstanding in Q1 2016 were 53, compared to 57 days in Q1 2015.

AEC customers comprised approximately 78% of our total net sales, while non-AEC customers made up approximately 22% of our total net sales.

Total number of MPS accounts at the end of the first quarter has grown to approximately 9,050, a gain of 390 contracts over Q1 2015. This information reflects the reduction of approximately 200 locations associated with a large client that did not renew their MPS engagement with us at the end of 2015.

Adjusted EBITDA excludes loss on extinguishment of debt, the impact of 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
    March 31,
Services and Product Line   2016   2015
CDIM   51.8 %   52.4 %
MPS   32.1 %   34.4 %
AIM   3.6 %   2.7 %
Equipment and supplies sales   12.5 %   10.5 %
             

Outlook

ARC Document Solutions anticipates annual adjusted earnings per share in 2016 to be in the range of $0.30 to $0.35 on a fully diluted basis, and annual cash flow from operations to be in the range of $55 million to $60 million. The Company's outlook for 2016 annual adjusted EBITDA is expected to be in the range of $66 million to $71 million.

Teleconference and Webcast

To access the live audio call, dial 888-359-3627. International callers may join the conference by dialing 719-457-1035. The conference ID number is 6370048. 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. A telephone replay of the call also will be available for five days after the call's conclusion. To access the replay, please register at https://jsp.premiereglobal.com/webrsvp. The conference ID number is 6370048.

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 such as "expect," "forecast," "project," "outlook," and similar expressions identify forward-looking statements and all statements other than statements of historical fact, including, but not limited to, any projections regarding earnings, revenues and financial performance of the Company, could be deemed forward-looking statements. We caution you that such statements are only predictions and are subject to certain risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements. In addition to matters affecting the construction, managed print services, document management or reprographics industries, or the economy generally, factors that could cause actual results to differ from expectations stated in forward-looking statements include, among others, the factors described in the caption entitled "Risk Factors" in Item 1A in ARC Document Solution's Annual Report on Form 10-K for the fiscal year ended December 31, 2015, 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)            
    March 31,     December 31,  
Current assets:   2016     2015  
  Cash and cash equivalents   $ 16,793     $ 23,963  
  Accounts receivable, net of allowances for accounts receivable of $1,853 and $2,094     61,377       60,085  
  Inventories, net     18,529       16,972  
  Prepaid expenses     4,356       4,555  
  Other current assets     3,687       4,131  
    Total current assets     104,742       109,706  
Property and equipment, net of accumulated depreciation of $205,486 and $202,457     56,247       57,590  
Goodwill     212,608       212,608  
Other intangible assets, net     16,872       17,946  
Deferred income taxes     72,991       74,196  
Other assets     2,501       2,492  
    Total assets   $ 465,961     $ 474,538  
Current liabilities:                
  Accounts payable   $ 21,385     $ 23,989  
  Accrued payroll and payroll-related expenses     8,507       12,118  
  Accrued expenses     19,707       19,194  
  Current portion of long-term debt and capital leases     14,651       14,374  
    Total current liabilities     64,250       69,675  
Long-term debt and capital leases     152,353       157,018  
Deferred income taxes     36,490       35,933  
Other long-term liabilities     2,869       2,778  
    Total liabilities     255,962       265,404  
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; 47,275 and 47,130 shares issued and 46,474 and 47,029 shares outstanding     47       47  
  Additional paid-in capital     115,842       115,089  
  Retained earnings     92,261       89,687  
  Accumulated other comprehensive loss     (1,928 )     (2,097 )
      206,222       202,726  
  Less cost of common stock in treasury, 801 and 101 shares     3,345       612  
    Total ARC Document Solutions, Inc. stockholders' equity     202,877       202,114  
Noncontrolling interest     7,122       7,020  
    Total equity     209,999       209,134  
    Total liabilities and equity   $ 465,961     $ 474,538  
                 
             
ARC Document Solutions, Inc.            
Consolidated Statements of Operations            
(In thousands, except per share data)            
(Unaudited)   Three Months Ended  
    March 31,  
    2016     2015  
Service sales   $ 90,635     $ 93,325  
Equipment and supplies sales     12,915       10,994  
  Total net sales     103,550       104,319  
Cost of sales     69,813       68,298  
  Gross profit     33,737       36,021  
Selling, general and administrative expenses     26,356       27,455  
Amortization of intangible assets     1,313       1,489  
Restructuring expense     2       74  
  Income from operations     6,066       7,003  
Other income, net     (23 )     (26 )
Loss on extinguishment of debt     46       --  
Interest expense, net     1,446       1,857  
  Income before income tax provision     4,597       5,172  
Income tax provision     1,969       761  
  Net income     2,628       4,411  
(Income) loss attributable to the noncontrolling interest     (54 )     25  
  Net income attributable to ARC Document Solutions, Inc. shareholders   $ 2,574     $ 4,436  
                   
Earnings per share attributable to ARC Document Solutions, Inc. shareholders:                
  Basic   $ 0.06     $ 0.10  
  Diluted   $ 0.05     $ 0.09  
Weighted average common shares outstanding:                
  Basic     46,608       46,443  
  Diluted     47,203       47,654  
                 
   
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  
    March 31,  
    2016     2015  
Cash flows provided by operating activities   $ 5,303     $ 5,288  
  Changes in operating assets and liabilities, net of effect of business acquisitions     7,809       9,416  
  Non-cash expenses, including depreciation, amortization and restructuring     (10,484 )     (10,293 )
  Income tax provision     1,969       761  
  Interest expense, net     1,446       1,857  
  (Income) loss attributable to the noncontrolling interest     (54 )     25  
EBIT     5,989       7,054  
  Depreciation and amortization     7,990       8,555  
EBITDA     13,979       15,609  
  Loss on extinguishment of debt     46       --  
  Trade secret litigation costs(1)     --       34  
  Restructuring expense(2)     2       74  
  Stock-based compensation     772       1,083  
Adjusted EBITDA   $ 14,799     $ 16,800  
                 
(1) 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 ARC 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 the first quarter of 2015, we entered into a settlement and paid the defendant. Legal fees associated with the litigation were recorded as selling, general and administrative expense.
   
(2) In October 2012, we initiated a restructuring plan which included the closure or downsizing of the Company's service center locations, as well as a reduction in headcount. Restructuring expenses in 2016 and 2015 primarily consist of revised estimated lease termination and obligation costs resulting from facilities closed in 2013.
   
   
ARC Document Solutions, Inc.  
Non-GAAP Measures  
Reconciliation of cash flows provided by operating activities to adjusted cash flows provided by operating activities  
(In thousands)  
(Unaudited)  
    Three Months Ended  
    March 31,  
    2016     2015  
Cash flows provided by operating activities   $ 5,303     $ 5,288  
  Payments related to trade secret litigation costs     --       999  
  Payments related to restructuring expenses     2       118  
Adjusted cash flows provided by operating activities   $ 5,305     $ 6,405  
                 
   
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  
    March 31,  
    2016     2015  
Net income attributable to ARC Document Solutions, Inc.   $ 2,574     $ 4,436  
  Loss on extinguishment of debt     46       --  
  Restructuring expense     2       74  
  Trade secret litigation costs     --       34  
  Income tax benefit related to above items     (19 )     (42 )
  Deferred tax valuation allowance and other discrete tax items     108       (1,256 )
Unaudited adjusted net income attributable to ARC Document Solutions, Inc.   $ 2,711     $ 3,246  
                 
Actual:                
Earnings per share attributable to ARC Document Solutions, Inc. shareholders:                
  Basic   $ 0.06     $ 0.10  
  Diluted   $ 0.05     $ 0.09  
Weighted average common shares outstanding:                
  Basic     46,608       46,443  
  Diluted     47,203       47,654  
                 
Adjusted:                
Earnings per share attributable to ARC Document Solutions, Inc. shareholders:                
  Basic   $ 0.06     $ 0.07  
  Diluted   $ 0.06     $ 0.07  
Weighted average common shares outstanding:                
  Basic     46,608       46,443  
  Diluted     47,203       47,654  
                 
   
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  
    March 31,  
    2016     2015  
Net income attributable to ARC Document Solutions, Inc. shareholders   $ 2,574     $ 4,436  
  Interest expense, net     1,446       1,857  
  Income tax provision     1,969       761  
EBIT     5,989       7,054  
  Depreciation and amortization     7,990       8,555  
EBITDA     13,979       15,609  
  Loss on extinguishment of debt     46       --  
  Trade secret litigation costs     --       34  
  Restructuring expense     2       74  
  Stock-based compensation     772       1,083  
Adjusted EBITDA   $ 14,799     $ 16,800  
                 
   
ARC Document Solutions, Inc.  
Net Sales by Product Line  
(In thousands)  
(Unaudited)  
    Three Months Ended  
    March 31,  
    2016     2015  
Service sales                
CDIM   $ 53,665     $ 54,643  
MPS     33,231       35,877  
AIM     3,739       2,805  
  Total service sales     90,635       93,325  
Equipment and supplies sales     12,915       10,994  
  Total net sales   $ 103,550     $ 104,319  
                 

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 have presented 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 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, adjusted EBITDA, and adjusted cash flows from operations 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 months ended March 31, 2016 and 2015 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. We have presented adjusted cash flows from operating activities for the three months ended March 31, 2016 and 2015 to reflect the exclusion of cash payments related to trade secret litigation costs and cash payments related to restructuring expenses. This presentation facilitates a meaningful comparison of our operating results for the three months ended March 31, 2016 and 2015. We believe these charges were the result of the then current macroeconomic environment, our capital restructuring, or other items which are not indicative of our actual operating performance.

We have presented adjusted EBITDA in the three months ended March 31, 2016 and 2015 to exclude loss on extinguishment of debt, trade secret litigation costs, restructuring expense and stock-based compensation expense. The adjustment of EBITDA for these items is consistent with the definition of adjusted EBITDA in our credit agreement; therefore, we believe this information is useful to investors in assessing our financial performance.

       
ARC Document Solutions      
Consolidated Statements of Cash Flows (In thousands)      
(Unaudited)   Three Months Ended  
    March 31,  
    2016     2015  
Cash flows from operating activities                
Net income   $ 2,628     $ 4,411  
Adjustments to reconcile net income to net cash provided by operating activities:                
  Allowance for accounts receivable     71       26  
  Depreciation     6,677       7,066  
  Amortization of intangible assets     1,313       1,489  
  Amortization of deferred financing costs     118       161  
  Stock-based compensation     772       1,083  
  Deferred income taxes     1,749       2,176  
  Deferred tax valuation allowance     72       (1,534 )
  Loss on early extinguishment of debt     46       --  
  Other non-cash items, net     (334 )     (174 )
  Changes in operating assets and liabilities:                
    Accounts receivable     (1,264 )     (4,522 )
    Inventory     (1,568 )     (1,093 )
    Prepaid expenses and other assets     397       1,999  
    Accounts payable and accrued expenses     (5,374 )     (5,800 )
Net cash provided by operating activities     5,303       5,288  
Cash flows from investing activities                
Capital expenditures     (2,505 )     (3,501 )
Other     226       155  
Net cash used in investing activities     (2,279 )     (3,346 )
Cash flows from financing activities                
Proceeds from stock option exercises     11       545  
Proceeds from issuance of common stock under Employee Stock Purchase Plan     39       27  
Share repurchases     (2,733 )     --  
Contingent consideration on prior acquisitions     (65 )     --  
Early extinguishment of long-term debt     (4,400 )     --  
Payments on long-term debt agreements and capital leases     (3,121 )     (6,067 )
Net repayments under revolving credit facilities     --       (984 )
Payment of deferred financing costs     (30 )     (24 )
Payment of hedge premium     --       (632 )
Net cash used in financing activities     (10,299 )     (7,135 )
Effect of foreign currency translation on cash balances     105       118  
Net change in cash and cash equivalents     (7,170 )     (5,075 )
Cash and cash equivalents at beginning of period     23,963       22,636  
Cash and cash equivalents at end of period   $ 16,793     $ 17,561  
Supplemental disclosure of cash flow information                
Noncash investing and financing activities                
  Capital lease obligations incurred   $ 2,865     $ 3,500  
  Liabilities in connection with the acquisition of businesses   $ 104     $ --  
                 

Contact Information

  • Contact Information:
    David Stickney
    VP Corporate Communications & Investor Relations
    925-949-5114