ARC Document Solutions Reports Results for Second Quarter 2016

Non-GAAP Financial Measures

EBITDA and related ratios presented in this report are supplemental measures of our performance that are not required by or presented in accordance with accounting principles generally accepted in the United States of America ("GAAP"). These measures are not measurements of our financial performance under GAAP and should not be considered as alternatives to net income, income from operations, or any other performance measures derived in accordance with GAAP or as an alternative to cash flows from operating, investing or financing activities as a measure of our liquidity.

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

We have presented EBITDA and related ratios because we consider them important supplemental measures of our performance and liquidity. We believe investors may also find these measures meaningful, given how our management makes use of them. The following is a discussion of our use of these measures.

We use EBITDA to measure and compare the performance of our operating segments. Our operating segments' financial performance includes all of the operating activities except debt and taxation which are managed at the corporate level for U.S. operating segments. We use EBITDA to compare the performance of our operating segments and to measure performance for determining consolidated-level compensation. In addition, we use EBITDA to evaluate potential acquisitions and potential capital expenditures.

EBITDA and related ratios have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are as follows:

  • They do not reflect our cash expenditures, or future requirements for capital expenditures and contractual commitments;
  • They do not reflect changes in, or cash requirements for, our working capital needs;
  • They do not reflect the significant interest expense, or the cash requirements necessary, to service interest or principal payments on our debt;
  • Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements; and
  • Other companies, including companies in our industry, may calculate these measures differently than we do, limiting their usefulness as comparative measures.

Because of these limitations, EBITDA, and related ratios should not be considered as measures of discretionary cash available to us to invest in business growth or to reduce our indebtedness. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA and related ratios only as supplements.

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

Specifically, we have presented adjusted net income attributable to ARC and adjusted earnings per share attributable to ARC shareholders for the three and six months ended June 30, 2016 and 2015 to reflect the exclusion of loss on extinguishment of debt, goodwill impairment, restructuring expense, trade secret litigation costs, and changes in the valuation allowances related to certain deferred tax assets and other discrete tax items. This presentation facilitates a meaningful comparison of our operating results for the three and six months ended June 30, 2016 and 2015. We believe these charges were the result of the then current macroeconomic environment, our capital restructuring, or other items which are not indicative of our actual operating performance.

We have presented adjusted EBITDA in the three and six months ended June 30, 2016 and 2015 to exclude loss on extinguishment of debt, goodwill impairment, trade secret litigation costs, restructuring expense and stock-based compensation expense. The adjustment of EBITDA for these items is consistent with the definition of adjusted EBITDA in our credit agreement; therefore, we believe this information is useful to investors in assessing our financial performance.

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



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