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 (
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: David Stickney VP Corporate Communications 925-949-5114