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			$	--