SOURCE: ARC Document Solutions, Inc.

ARC Document Solutions, Inc.

August 02, 2016 16:05 ET

ARC Document Solutions Reports Results for Second Quarter 2016

WALNUT CREEK, CA--(Marketwired - Aug 2, 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 second quarter ended June 30, 2016.

2016 Second Quarter Business Highlights:

  • Net sales of $103.8 million vs. $113.4 million in Q2 2015
  • Adjusted diluted earnings per share were $0.10 vs. $0.13 in Q2 2015
  • Gross margin of 35.1% vs. 36.0% in Q2 2015 due to lower sales volume
  • Cash flow from operations of $16.6 million vs. $16.9 million in Q2 2015
  • Adjusted EBITDA of $18.1 million or 17.5%
  • Approximately 581,000 shares of ARC common stock repurchased in the open market
  • Revised 2016 forecast is for annual adjusted earnings per share to be in the range of $0.24 to $0.28; annual cash flow from operations to be in the range of $48 million to $52 million; and annual adjusted EBITDA is expected to be in the range of $59 million to $63 million.
   
Financial Highlights:  
   
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
(All dollar amounts in millions, except EPS)   2016     2015     2016     2015  
Net Sales   $ 103.8     $ 113.4     $ 207.3     $ 217.7  
Gross Margin     35.1 %     36.0 %     33.8 %     35.3 %
Net (loss) income attributable to ARC   $ (55.9 )   $ 9.3     $ (53.3 )   $ 13.7  
Adjusted Net Income attributable to ARC   $ 4.8     $ 6.2     $ 7.5     $ 9.4  
(Loss) earnings per share - Diluted   $ (1.22 )   $ 0.19     $ (1.15 )   $ 0.29  
Adjusted earnings per share - Diluted   $ 0.10     $ 0.13     $ 0.16     $ 0.20  
Adjusted EBITDA   $ 18.1     $ 21.6     $ 32.9     $ 38.4  
Cash provided by operating activities   $ 16.6     $ 16.9     $ 21.9     $ 22.2  
Capital Expenditures   $ 2.6     $ 4.1     $ 5.2     $ 7.6  
Debt & Capital Leases (including current), net of unamortized deferred financing fees                   $ 164.9     $ 187.0  
                                 

Management Commentary

"Despite continuing drops in our traditional business, our new services continue to grow, led by year-over-year growth of nine percent in archiving and information management," said K. "Suri" Suriyakumar, Chairman, President and CEO of ARC Document Solutions. "While our technology services have yet to offset declines related to printing services, our cash position remains strong as evidenced by our continuing ability to repurchase our shares and reduce our senior debt. Our capital structure is excellent, and we are confident in our ability to keep the company stable and productive during this transition."

"The type of transition ARC is going through is a tough one. The result is that we are changing at every level -- sales, operations, technology, and finance -- to balance the future needs of the market against what customers need today," Mr. Suriyakumar continued. "This is especially true given that the construction industry is slow in adopting technology. It is why I have emphasized in my previous discussions that we require 24 to 36 months to get on top of this transition."

"The company remains on sound financial footing while we work our way through the difficult sales comparison to last year," said Jorge Avalos, Chief Financial Officer of ARC Document Solutions. "Cash flow from operations is on par with last year's performance, the leverage ratio on our senior debt is below 2.5 times, and we continue to repurchase shares, all of which demonstrates our continuing focus on cash generation, debt pay-down, and returning value to our shareholders."

2016 Second Quarter Supplemental Information:

Net sales were $103.8 million, an 8.5% decrease compared to the second quarter of 2015.

Days sales outstanding in Q2 2016 were 53, compared to 54 days in Q2 2015.

Architectural, engineering, construction and building owner/operators (AEC/O) customers comprised approximately 77% of our total net sales, while customers outside of construction made up approximately 23% of our total net sales.

Total number of MPS locations at the end of the second quarter has grown to approximately 9,240, a gain of 520 locations over Q2 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, goodwill impairment, 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     Six Months Ended  
    June 30,     June 30,  
Services and Product Line   2016     2015     2016     2015  
CDIM   52.9 %   51.9 %   52.3 %   52.2 %
MPS   32.8 %   32.7 %   32.5 %   33.5 %
AIM   3.5 %   3.0 %   3.6 %   2.8 %
Equipment and supplies sales   10.8 %   12.4 %   11.6 %   11.5 %
                         

Outlook

ARC Document Solutions has revised is 2016 annual forecast and now anticipates annual adjusted earnings per share in 2016 to be in the range of $0.24 to $0.28 on a fully diluted basis, as compared to $0.30 to $0.35 previously. Annual cash flow from operations is now projected to be in the range of $48 million to $52 million, as compared to $55 million to $60 million previously. The Company's outlook for 2016 annual adjusted EBITDA is now expected to be in the range of $59 million to $63 million, as compared to $66 to $71 million previously.

Teleconference and Webcast

To access the live audio call, dial 888-329-8877. International callers may join the conference by dialing 719-457-2645. The conference ID number is 5777429. 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 copy and paste the following URL into your browser http://bit.ly/29mPy39. The conference ID number is 5777429.

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 "anticipates," "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)  
    June 30,     December 31,  
Current assets:   2016     2015  
  Cash and cash equivalents   $ 20,452     $ 23,963  
  Accounts receivable, net of allowances for accounts receivable of $1,850 and $2,094     60,933       60,085  
  Inventories, net     19,570       16,972  
  Prepaid expenses     4,766       4,555  
  Other current assets     4,347       4,131  
    Total current assets     110,068       109,706  
Property and equipment, net of accumulated depreciation of $206,584 and $202,457     57,754       57,590  
Goodwill     138,688       212,608  
Other intangible assets, net     15,580       17,946  
Deferred income taxes     76,019       74,196  
Other assets     2,372       2,492  
    Total assets   $ 400,481     $ 474,538  
Current liabilities:                
  Accounts payable   $ 22,148     $ 23,989  
  Accrued payroll and payroll-related expenses     11,811       12,118  
  Accrued expenses     18,023       19,194  
  Current portion of long-term debt and capital leases     14,863       14,374  
    Total current liabilities     66,845       69,675  
Long-term debt and capital leases     150,059       157,018  
Deferred income taxes     29,412       35,933  
Other long-term liabilities     2,623       2,778  
    Total liabilities     248,939       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; 47,390 and 47,130 shares issued and 46,008 and 47,029 shares outstanding     47       47  
  Additional paid-in capital     116,494       115,089  
  Retained earnings     36,357       89,687  
  Accumulated other comprehensive loss     (2,653 )     (2,097 )
      150,245       202,726  
  Less cost of common stock in treasury, 1,382 and 101 shares     5,709       612  
    Total ARC Document Solutions, Inc. stockholders' equity     144,536       202,114  
Noncontrolling interest     7,006       7,020  
    Total equity     151,542       209,134  
    Total liabilities and equity   $ 400,481     $ 474,538  
                     
                     
                     
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,  
    2016     2015     2016     2015  
Service sales   $ 92,581     $ 99,336     $ 183,216     $ 192,661  
Equipment and supplies sales     11,189       14,053       24,104       25,047  
  Total net sales     103,770       113,389       207,320       217,708  
Cost of sales     67,378       72,530       137,191       140,828  
  Gross profit     36,392       40,859       70,129       76,880  
Selling, general and administrative expenses     25,503       27,132       51,859       54,587  
Amortization of intangible assets     1,232       1,442       2,545       2,931  
Goodwill impairment     73,920       --       73,920       --  
Restructuring expense     5       11       7       85  
  (Loss) income from operations     (64,268 )     12,274       (58,202 )     19,277  
Other income, net     (15 )     (30 )     (38 )     (56 )
Loss on extinguishment of debt     44       97       90       97  
Interest expense, net     1,526       1,939       2,972       3,796  
  (Loss) income before income tax (benefit) provision     (65,823 )     10,268       (61,226 )     15,440  
Income tax (benefit) provision     (10,015 )     811       (8,046 )     1,572  
  Net (loss) income     (55,808 )     9,457       (53,180 )     13,868  
Income attributable to the noncontrolling interest     (96 )     (200 )     (150 )     (175 )
  Net (loss) income attributable to ARC Document Solutions, Inc. shareholders   $ (55,904 )   $ 9,257     $ (53,330 )   $ 13,693  
(Loss) earnings per share attributable to ARC Document Solutions, Inc. shareholders:                                
  Basic   $ (1.22 )   $ 0.20     $ (1.15 )   $ 0.29  
  Diluted   $ (1.22 )   $ 0.19     $ (1.15 )   $ 0.29  
Weighted average common shares outstanding:                                
  Basic     45,955       46,611       46,285       46,528  
  Diluted     45,955       47,558       46,285       47,634  
                                   
                                   
                                   
ARC Document Solutions, Inc.
Non-GAAP Measures
Reconciliation of cash flows provided by operating activities to EBITDA and Adjusted EBITDA
(In thousands)
(Unaudited)
 
               
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2016     2015     2016     2015  
Cash flows provided by operating activities   $ 16,580     $ 16,864     $ 21,883     $ 22,152  
  Changes in operating assets and liabilities, net of effect of business acquisitions     209       2,928       8,018       12,344  
  Non-cash expenses, including depreciation, amortization and goodwill impairment     (72,597 )     (10,335 )     (83,081 )     (20,628 )
  Income tax (benefit) provision     (10,015 )     811       (8,046 )     1,572  
  Interest expense, net     1,526       1,939       2,972       3,796  
  Income attributable to the noncontrolling interest     (96 )     (200 )     (150 )     (175 )
  Depreciation and amortization     7,890       8,520       15,880       17,075  
EBITDA     (56,503 )     20,527       (42,524 )     36,136  
  Loss on extinguishment of debt     44       97       90       97  
  Goodwill impairment     73,920       --       73,920       --  
  Trade secret litigation costs(1)     --       --       --       34  
  Restructuring expense(2)     5       11       7       85  
  Stock-based compensation     651       921       1,423       2,004  
Adjusted EBITDA   $ 18,117     $ 21,556     $ 32,916     $ 38,356  
                                 

(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 net (loss) 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,  
    2016     2015     2016     2015  
Net (loss) income attributable to ARC Document Solutions, Inc.   $ (55,904 )   $ 9,257     $ (53,330 )   $ 13,693  
  Loss on extinguishment of debt     44       97       90       97  
  Goodwill impairment     73,920       --       73,920       --  
  Restructuring expense     5       11       7       85  
  Trade secret litigation costs     --       --       --       34  
  Income tax benefit related to above items     (13,350 )     (42 )     (13,369 )     (84 )
  Deferred tax valuation allowance and other discrete tax items     95       (3,151 )     203       (4,407 )
Unaudited adjusted net income attributable to ARC Document Solutions, Inc.   $ 4,810     $ 6,172     $ 7,521     $ 9,418  
                                 
Actual:                                
(Loss) earnings per share attributable to ARC Document Solutions, Inc. shareholders:                                
  Basic   $ (1.22 )   $ 0.20     $ (1.15 )   $ 0.29  
  Diluted   $ (1.22 )   $ 0.19     $ (1.15 )   $ 0.29  
Weighted average common shares outstanding:                                
  Basic     45,955       46,611       46,285       46,528  
  Diluted     45,955       47,558       46,285       47,634  
                                 
Adjusted:                                
Earnings per share attributable to ARC Document Solutions, Inc. shareholders:                                
  Basic   $ 0.10     $ 0.13     $ 0.16     $ 0.20  
  Diluted   $ 0.10     $ 0.13     $ 0.16     $ 0.20  
Weighted average common shares outstanding:                                
  Basic     45,955       46,611       46,285       46,528  
  Diluted     46,568       47,558       46,889       47,634  
                                 
                                 
                                 

ARC Document Solutions, Inc.
Non-GAAP Measures
Reconciliation of net (loss) income attributable to ARC Document Solutions, Inc. shareholders to EBITDA and Adjusted EBITDA
(In thousands)
(Unaudited)
 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
    2016     2015   2016     2015
Net (loss) income attributable to ARC Document Solutions, Inc. shareholders   $ (55,904 )   $ 9,257   $ (53,330 )   $ 13,693
  Interest expense, net     1,526       1,939     2,972       3,796
  Income tax (benefit) provision     (10,015 )     811     (8,046 )     1,572
  Depreciation and amortization     7,890       8,520     15,880       17,075
EBITDA     (56,503 )     20,527     (42,524 )     36,136
  Loss on extinguishment of debt     44       97     90       97
  Goodwill impairment     73,920       --     73,920       --
  Trade secret litigation costs     --       --     --       34
  Restructuring expense     5       11     7       85
  Stock-based compensation     651       921     1,423       2,004
Adjusted EBITDA   $ 18,117     $ 21,556   $ 32,916     $ 38,356
                             
                             
                             
ARC Document Solutions, Inc.
Net Sales by Product Line
(In thousands)
(Unaudited)
 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
    2016   2015   2016   2015
Service sales                        
CDIM   $ 54,860   $ 58,835     108,525     113,477
MPS     34,055     37,134     67,286     73,011
AIM     3,666     3,367     7,405     6,173
    Total service sales     92,581     99,336     183,216     192,661
Equipment and supplies sales     11,189     14,053     24,104     25,047
    Total net sales   $ 103,770   $ 113,389   $ 207,320   $ 217,708
                         
                         

Non-GAAP Financial Measures

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.

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

We have presented 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 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. We use EBITDA to compare the performance of our operating segments and to measure performance for determining consolidated-level compensation. In addition, we use EBITDA to evaluate potential acquisitions and potential capital expenditures.

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, 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 EBITDA and related ratios only as supplements.

Our presentation of adjusted net income and adjusted EBITDA over certain periods is an attempt to provide meaningful comparisons to our historical performance for our existing and future investors. The unprecedented changes in our end markets over the past several years have required us to take measures that are unique in our history and specific to individual circumstances. Comparisons inclusive of these actions make normal financial and other performance patterns difficult to discern under a strict GAAP presentation. Each non-GAAP presentation, however, is explained in detail in the reconciliation tables above.

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, 2016 and 2015 to reflect the exclusion of loss on extinguishment of debt, goodwill impairment, 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, 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 and six months ended June 30, 2016 and 2015 to exclude loss on extinguishment of debt, goodwill impairment, 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     Six Months Ended  
    June 30,     June 30,  
    2016     2015     2016     2015  
Cash flows from operating activities                                
Net (loss) income   $ (55,808 )   $ 9,457     $ (53,180 )   $ 13,868  
Adjustments to reconcile net income to net cash provided by operating activities:                                
  Allowance for accounts receivable     249       156       320       182  
  Depreciation     6,658       7,078       13,335       14,144  
  Amortization of intangible assets     1,232       1,442       2,545       2,931  
  Amortization of deferred financing costs     115       161       233       322  
  Goodwill impairment     73,920       --       73,920       --  
  Stock-based compensation     651       921       1,423       2,004  
  Deferred income taxes     (10,066 )     3,847       (8,317 )     6,023  
  Deferred tax valuation allowance     (87 )     (3,257 )     (15 )     (4,791 )
  Loss on early extinguishment of debt     44       97       90       97  
  Other non-cash items, net     (119 )     (110 )     (453 )     (284 )
  Changes in operating assets and liabilities:                                
    Accounts receivable     (124 )     (2,111 )     (1,388 )     (6,633 )
    Inventory     (1,199 )     (1,765 )     (2,767 )     (2,858 )
    Prepaid expenses and other assets     (1,063 )     (282 )     (666 )     1,717  
    Accounts payable and accrued expenses     2,177       1,230       (3,197 )     (4,570 )
Net cash provided by operating activities     16,580       16,864       21,883       22,152  
Cash flows from investing activities                                
Capital expenditures     (2,645 )     (4,136 )     (5,150 )     (7,637 )
Other     481       93       707       248  
Net cash used in investing activities     (2,164 )     (4,043 )     (4,443 )     (7,389 )
Cash flows from financing activities                                
Proceeds from stock option exercises     19       16       30       561  
Proceeds from issuance of common stock under Employee Stock Purchase Plan     31       31       70       58  
Share repurchases     (2,364 )     (204 )     (5,097 )     (204 )
Contingent consideration on prior acquisitions     (302 )     --       (367 )     --  
Early extinguishment of long-term debt     (4,600 )     (7,250 )     (9,000 )     (7,250 )
Payments on long-term debt agreements and capital leases     (3,220 )     (6,713 )     (6,341 )     (12,780 )
Net repayments under revolving credit facilities     --       (760 )     --       (1,744 )
Payment of deferred financing costs     --       (1 )     (30 )     (25 )
Payment of hedge premium     --       --       --       (632 )
Net cash used in financing activities     (10,436 )     (14,881 )     (20,735 )     (22,016 )
Effect of foreign currency translation on cash balances     (321 )     (65 )     (216 )     53  
Net change in cash and cash equivalents     3,659       (2,125 )     (3,511 )     (7,200 )
Cash and cash equivalents at beginning of period     16,793       17,561       23,963       22,636  
Cash and cash equivalents at end of period   $ 20,452     $ 15,436     $ 20,452     $ 15,436  
Supplemental disclosure of cash flow information                                
Noncash investing and financing activities                                
    Capital lease obligations incurred   $ 5,742     $ 3,542     $ 8,607     $ 7,042  
    Contingent liabilities in connection with acquisition of businesses   $ --     $ --     $ 89     $ --  
    Liabilities in connection with deferred financing fees   $ 76     $ --     $ 76     $ --  

Contact Information

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