SOURCE: ARC Document Solutions, Inc.

ARC Document Solutions, Inc.

August 05, 2014 16:16 ET

ARC Document Solutions Reports Results for Second Quarter 2014

WALNUT CREEK, CA--(Marketwired - Aug 5, 2014) - 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

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