ARC Document Solutions Reports Results for Second Quarter 2014

Marketwired
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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

$

--

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