ARC Document Solutions Reports Results for Fourth Quarter and Full Year 2013

(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.

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. For more information, see our 2012 Annual Report on Form 10-K.

Specifically, we have presented adjusted net income (loss) attributable to ARC and adjusted earnings (loss) per share attributable to ARC for the three and twelve months ended December 31, 2013 and 2012 to reflect the exclusion of amortization impact related specifically to the change in useful lives of trade names, loss on extinguishment of debt, goodwill impairment, restructuring expense, interest rate swap related 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 twelve months ended December 31, 2013 and 2012. 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 three and twelve months ended December 31, 2013 and 2012 to exclude stock-based compensation expense, restructuring expense, goodwill impairment and loss on extinguishment of debt. 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 (Dollars in                           
 thousands) (Unaudited)                                                     
                                                                            
                                Three Months Ended     Twelve Months Ended  
                                   December 31,            December 31,     
                              ---------------------   --------------------- 
                                 2013        2012        2013        2012   
                              ---------   ---------   ---------   --------- 
Cash flows from operating                                                   
 activities                                                                                     
Net  loss                                            $  (15,807)    $    (5,606)    $  (14,575)    $  (31,465)
Adjustments  to  reconcile  net                                                                                                
  loss  to  net  cash  provided                                                                                                    
  by  operating  activities:                                                                                                      
    Allowance  for  accounts                                                                                                        
      receivable                                                85                  (76)                636                  456  
    Depreciation                                        7,099              7,221            28,133            28,487  
    Amortization  of  intangible                                                                                                
      assets                                                  1,556              1,791              6,612            11,035  
    Amortization  of  deferred                                                                                                    
      financing  costs                                    267                  276              1,098              1,088  
    Amortization  of  bond                                                                                                            
      discount                                                  171                  158                  671                  611  
    Goodwill  impairment                                --                    --                    --            16,707  
    Stock-based  compensation                1,158                  542              3,207              1,999  
    Deferred  income  taxes                    (5,827)          (2,132)          (4,909)          (6,433)
    Deferred  tax  valuation                                                                                                        
      allowance                                            6,717              2,984              7,277              9,750  
    Restructuring  expense,                                                                                                        
      non-cash  portion                                (119)            2,379                  244              2,379  
    Amortization  of                                                                                                                      
      derivative,  net  of  tax                                                                                                      
      effect                                                        --                  246                    --              2,154  
    Loss  on  early                                                                                                                          
      extinguishment  of  debt                16,077                    --            16,339                    --  
    Other  non-cash  items,  net                    40                  537                (323)                321  
    Changes  in  operating                                                                                                            
      assets  and  liabilities,                                                                                                    
      net  of  effect  of  business                                                                                                
      acquisitions:                                                                                                                        
        Accounts  receivable                      2,225              5,864            (5,133)            2,533  
        Inventory                                            (345)              (339)                376            (3,005)
        Prepaid  expenses  and                                                                                                        
          other  assets                                      (22)            2,233              1,966              1,032  
        Accounts  payable  and                                                                                                        
          accrued  expenses                        (6,487)          (9,405)            5,179                  (97)
                                                            ---------      ---------      ---------      ---------  
Net  cash  provided  by                                                                                                                
  operating  activities                          6,788              6,673            46,798            37,552  
                                                            ---------      ---------      ---------      ---------  
Cash  flows  from  investing                                                                                                      
  activities                                                                                                                                  
Capital  expenditures                          (3,335)          (6,154)        (18,191)        (20,348)
Other                                                              119                  190                  741                  323  
                                                            ---------      ---------      ---------      ---------  
Net  cash  used  in  investing                                                                                                    
  activities                                            (3,216)          (5,964)        (17,450)        (20,025)
                                                            ---------      ---------      ---------      ---------  
Cash  flows  from  financing                                                                                                      
  activities                                                                                                                                  
Proceeds  from  stock  option                                                                                                    
  exercises                                                      59                    --                    59                    79  
Proceeds  from  issuance  of                                                                                                      
  common  stock  under  Employee                                                                                                
  Stock  Purchase  Plan                                  17                    --                    30                    28  
Share  repurchases,  including                                                                                                
  shares  surrendered  for  tax                                                                                                  
  withholding                                                (34)                  --                (124)                  --  
Proceeds  from  borrowings  on                                                                                                  
  long-term  debt  agreements            196,000                    --          196,402                    --  
Payments  of  debt                                                                                                                        
  extinguishment  costs                      (11,264)                                (11,330)                  --  
Early  extinguishment  of                                                                                                          
  long-term  debt                                (193,000)                              (200,000)                  --  
Payments  on  long-term  debt                                                                                                    
  agreements  and  capital                                                                                                          
  leases                                                    (2,984)          (3,560)        (12,379)        (15,601)
Net  (repayments)  borrowings                                                                                                  
  under  revolving  credit                                                                                                          
  facilities                                                  201                  225                (237)            1,266  
Payment  of  deferred                                                                                                                  
  financing  costs                                  (2,220)                  --            (2,220)              (839)
Dividends  paid  to                                                                                                                      
  noncontrolling  interest                          --                                        (485)                  --  
                                                            ---------      ---------      ---------      ---------  
Net  cash  used  in  financing                                                                                                    
  activities                                          (13,225)          (3,335)        (30,284)        (15,067)
                                                            ---------      ---------      ---------      ---------  
Effect  of  foreign  currency                                                                                                    
  translation  on  cash                                                                                                                
  balances                                                      (39)                113                  277                  124  
                                                            ---------      ---------      ---------      ---------  
Net  change  in  cash  and  cash                                                                                                  
  equivalents                                          (9,692)          (2,513)              (659)            2,584  
Cash  and  cash  equivalents  at                                                                                                
  beginning  of  period                          37,054            30,534            28,021            25,437  
                                                            ---------      ---------      ---------      ---------  
Cash  and  cash  equivalents  at                                                                                                
  end  of  period                                $    27,362      $    28,021      $    27,362      $    28,021  
                                                            =========      =========      =========      =========  
Supplemental  disclosure  of                                                                                                    
  cash  flow  information:                                                                                                          
Noncash  financing                                                                                                                      
  activities:                                                                                                                                
    Capital  lease  obligations                                                                                                  
      incurred                                      $      3,662      $      1,536      $    10,399      $    10,047  
    Liabilities  in  connection                                                                                                  
      with  deferred  financing                                                                                                    
      costs                                            $          433      $            --      $          433      $            --  
                                                                                                                                                        
 

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