ARC Document Solutions Reports Results for First Quarter 2015

WALNUT CREEK, CA--(Marketwired - May 5, 2015) - 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 first quarter ended March 31, 2015.

2015 First Quarter Business Highlights:

• Revenue grew 3.9% year-over-year
• Adjusted earnings per share were $0.07 vs. $0.04 in Q1 2014
• Gross margin was 34.5%, a year-over-year increase of 70 basis points
• Adjusted cash flow from operations was $6.4 million vs. $8.1 million in Q1 2014; decrease largely due to timing of accounts receivable collections
• Adjusted EBITDA of $16.8 million; grew 4% in line with sales despite planned investments in SG&A
• Maintains 2015 fully-diluted annual adjusted earnings per share projected to be in the range of $0.37 to $0.41; annual adjusted cash provided by operating activities projected to be in the range of $61 to $66 million; and annual adjusted EBITDA to be in the range of $75 million to $80 million

Financial Highlights:
		Three Months Ended
		March 31,
(All dollar amounts in millions, except EPS)		2015				2014
Net Revenue		$	104.3			$	100.4
Gross Margin			34.5	%			33.8	%
Net income attributable to ARC		$	4.4			$	1.4
Adjusted Net Income attributable to ARC		$	3.2			$	1.8
Earnings per share - Diluted		$	0.09			$	0.03
Adjusted earnings per share - Diluted		$	0.07			$	0.04
Adjusted EBITDA		$	16.8			$	16.1
Cash provided by operating activities		$	5.3			$	7.7
Adjusted cash provided by operating activities		$	6.4			$	8.1
Capital Expenditures		$	3.5			$	3.6
Debt & Capital Leases (including current)		$	200.2			$	216.4

Management Commentary

"Sales and gross margins continued to expand in the first quarter of 2015 thanks to approximately nine percent sales growth in both MPS and AIM, 2.4 percent growth in CDIM, and a business mix weighted to our more technology-enabled services," said K. Suri Suriyakumar, Chairman, President and CEO of ARC Document Solutions. "I'm also pleased to be reporting under our new revenue categories. Our financial presentation and our approach to the market are now closely aligned and will allow us to better demonstrate the company's value and potential to both customers and investors."

Jorge Avalos, ARC Document Solutions' Chief Financial Officer said, "Our adjusted EBITDA grew four percent, in line with our sales growth, despite our previously announced sales and marketing investments. The EBITDA increase was driven by our sales performance and a 70 basis point improvement in gross margin that resulted from our ability to leverage our fixed costs, strong cost controls, and higher margin sales. Our strong earnings performance benefited from the same achievements, as well as improvements in our capital structure. Adjusted cash flow from operations was affected by the timing of accounts receivables collections, but consistent with prior years, we expect to build toward our annual forecast in future quarters."

The company also introduced a new, supplemental format for reporting net sales by service and product line, replacing the five categories it reported in the past (Onsite Services, Traditional Reprographics, Color Services, Digital Services, and Equipment and Supplies). The new service sales categories, as have been noted in previous disclosures, are Managed Print Services (MPS), Archiving and Information Management (AIM), and Construction Document and Information Management (CDIM). Equipment and Supplies will remain a separate product category. A supplemental table appears below, containing quarter-over-quarter comparisons for the past eight quarters. ARC's forthcoming quarterly report on Form 10-Q will contain further information to provide additional information about the new reporting structure.

2015 First Quarter Supplemental Information:

Net sales were $104.3 million, a 3.9% increase compared to the first quarter of 2014.

Days sales outstanding in Q1 2015 were 57, compared to 53 days in Q1 2014.

AEC customers comprised approximately 78% of our total net sales, while non-AEC customers made up approximately 22% of our total net sales.

Total number of MPS contracts at the end of the first quarter was approximately 8,660, an increase of approximately 160 contracts from the end of 2014.

Adjusted EBITDA is EBITDA net of the impact of trade secret litigation costs, stock-based compensation expense, and restructuring expense.

Sales from Services and Product Lines as a Percentage of Net Sales
	Three Months Ended
	March 31,
Services and Product Line	2015		2014
CDIM	52.4	%	53.1	%
MPS	34.4	%	32.9	%
AIM	2.7	%	2.6	%
Equipment and supplies sales	10.5	%	11.4	%

Outlook:

ARC Document Solutions is maintaining its annual 2015 outlook. The company's fully diluted annual adjusted earnings per share outlook is expected to be in the range of $0.37 to $0.41. The outlook for annual adjusted cash provided by operating activities is projected to be in the range of $61 to $66 million; and annual adjusted EBITDA is projected to be in the range of $75 million to $80 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 first quarter of 2015. To access the live audio call, dial 888-556-4997. International callers may join the conference by dialing 719-325-2472. The conference ID number is 3250225. A live webcast will also be made available on the investor relations page of ARC Document Solution's website at ir.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 3250225. 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 8,500 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 "expect," "confident," "assume," 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, 2014, 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)
				March 31,				December 31,
Current assets:				2015				2014
	Cash and cash equivalents			$	17,561			$	22,636
	Accounts receivable, net of allowances for accounts receivable of $2,371 and $2,413				66,046				62,045
	Inventories, net				17,354				16,251
	Deferred income taxes				277				278
	Prepaid expenses				5,247				4,767
	Other current assets				3,913				6,080
		Total current assets			110,398				112,057
Property and equipment, net of accumulated depreciation of $218,850 and $214,697					58,897				59,520
Goodwill					212,608				212,608
Other intangible assets, net					22,228				23,841
Deferred financing fees, net					2,296				2,440
Deferred income taxes					992				1,110
Other assets					2,686				2,492
		Total assets		$	410,105			$	414,068
Current liabilities:
	Accounts payable			$	23,701			$	26,866
	Accrued payroll and payroll-related expenses				11,788				13,765
	Accrued expenses				21,253				22,793
	Current portion of long-term debt and capital leases				28,303				27,969
		Total current liabilities			85,045				91,393
Long-term debt and capital leases					171,890				175,916
Deferred income taxes					34,050				33,463
Other long-term liabilities					3,464				3,458
		Total liabilities			294,449				304,230
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; 47,039 and 46,800 shares issued and 46,962 and 46,723 shares outstanding				47				47
	Additional paid-in capital				112,573				110,650
	Retained deficit				(2,917	)			(7,353	)
	Accumulated other comprehensive loss				(678	)			(161	)
					109,025				103,183
	Less cost of common stock in treasury, 77 and 77 shares				408				408
		Total ARC Document Solutions, Inc. stockholders' equity			108,617				102,775
Noncontrolling interest					7,039				7,063
		Total equity			115,656				109,838
		Total liabilities and equity		$	410,105			$	414,068

ARC Document Solutions, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)			Three Months Ended
			March 31,
			2015				2014
Service sales			$	93,325			$	88,931
Equipment and supplies sales				10,994				11,442
	Total net sales			104,319				100,373
Cost of sales				68,298				66,439
	Gross profit			36,021				33,934
Selling, general and administrative expenses				27,455				26,106
Amortization of intangible assets				1,489				1,498
Restructuring expense				74				483
	Income from operations			7,003				5,847
Other income, net				(26	)			(26	)
Interest expense, net				1,857				3,913
	Income before income tax provision			5,172				1,960
Income tax provision				761				664
	Net income			4,411				1,296
Loss attributable to noncontrolling interest				25				100
	Net income attributable to ARC Document Solutions, Inc. shareholders		$	4,436			$	1,396
Earnings per share attributable to ARC Document Solutions, Inc. shareholders:
	Basic		$	0.10			$	0.03
	Diluted		$	0.09			$	0.03
Weighted average common shares outstanding:
	Basic			46,443				45,990
	Diluted			47,654				46,782

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
			March 31,
			2015				2014
Cash flows provided by operating activities			$	5,288			$	7,714
	Changes in operating assets and liabilities, net of effect of business acquisitions			9,416				4,229
	Non-cash expenses, including depreciation, amortization and restructuring			(10,293	)			(10,647	)
	Income tax provision			761				664
	Interest expense, net			1,857				3,913
	Loss attributable to the noncontrolling interest			25				100
EBIT				7,054				5,973
	Depreciation and amortization			8,555				8,493
EBITDA				15,609				14,466
	Trade secret litigation costs(1)			34				398
	Restructuring expense			74				483
	Stock-based compensation			1,083				781
Adjusted EBITDA			$	16,800			$	16,128

⁽¹⁾ 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 ARC 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. In the first quarter of 2015, we entered into a settlement and paid the defendant. Legal fees associated with the litigation totaled $34 thousand and $0.4 million for the three months ended March 31, 2015 and 2014, respectively, and were recorded as selling, general and administrative expense.

ARC Document Solutions, Inc.
Non-GAAP Measures
Reconciliation of cash flows provided by operating activities to adjusted cash flows provided by operating activities
(In thousands)
(Unaudited)
			Three Months Ended
			March 31,
			2015			2014
Cash flows provided by operating activities			$	5,288		$	7,714
	Payments related to trade secret litigation costs			999			119
	Payments related to restructuring expenses			118			303
Adjusted cash flows provided by operating activities			$	6,405		$	8,136

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
			March 31,
			2015				2014
Net income attributable to ARC Document Solutions, Inc.			$	4,436			$	1,396
	Restructuring expense			74				483
	Trade secret litigation costs			34				398
	Income tax benefit related to above items			(42	)			(344	)
	Deferred tax valuation allowance and other discrete tax items			(1,256	)			(157	)
Unaudited adjusted net income attributable to ARC Document Solutions, Inc.			$	3,246			$	1,776
Actual:
Earnings per share attributable to ARC Document Solutions, Inc. shareholders:
	Basic		$	0.10			$	0.03
	Diluted		$	0.09			$	0.03
Weighted average common shares outstanding:
	Basic			46,443				45,990
	Diluted			47,654				46,782
Adjusted:
Earnings per share attributable to ARC Document Solutions, Inc. shareholders:
	Basic		$	0.07			$	0.04
	Diluted		$	0.07			$	0.04
Weighted average common shares outstanding:
	Basic			46,443				45,990
	Diluted			47,654				46,782

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
			March 31,
			2015			2014
Net income attributable to ARC Document Solutions, Inc. shareholders			$	4,436		$	1,396
	Interest expense, net			1,857			3,913
	Income tax provision			761			664
EBIT				7,054			5,973
	Depreciation and amortization			8,555			8,493
EBITDA				15,609			14,466
	Trade secret litigation costs			34			398
	Restructuring expense			74			483
	Stock-based compensation			1,083			781
Adjusted EBITDA			$	16,800		$	16,128

ARC Document Solutions, Inc.
Net Sales by Product Line
(In thousands)
(Unaudited)
			Three Months Ended
			March 31,
			2015			2014
Service Sales
CDIM				54,643			53,340
MPS				35,877			33,009
AIM				2,805			2,582
	Total service sales			93,325			88,931
Equipment and supplies sales				10,994			11,442
	Total net sales		$	104,319		$	100,373

ARC Document Solutions, Inc.
Net Sales by Product Line
2014 and 2013 by Quarter
(In thousands)
(Unaudited)
			Three Months Ended												Year Ended
			March 31, 2014			June 30, 2014			September 30, 2014			December 31, 2014			2014
Service Sales
CDIM			$	53,340		$	57,542		$	55,352		$	53,530		$	219,764
MPS				33,009			35,743			36,464			36,097			141,313
AIM				2,582			2,913			2,610			2,702			10,807
	Total service sales			88,931			96,198			94,426			92,329			371,884
Equipment and supplies sales				11,442			12,784			12,381			15,265			51,872
	Total net sales		$	100,373		$	108,982		$	106,807		$	107,594		$	423,756
			Three Months Ended												Year Ended
			March 31, 2013			June 30, 2013			September 30, 2013			December 31, 2013			2013
Service Sales
CDIM			$	54,645		$	56,485		$	53,430		$	51,745		$	216,305
MPS				30,673			32,243			32,674			32,615			128,205
AIM				2,482			2,900			2,726			2,740			10,848
	Total service sales			87,800			91,628			88,830			87,100			355,358
Equipment and supplies sales				12,236			12,994			12,422			14,185			51,837
	Total net sales		$	100,036		$	104,622		$	101,252		$	101,285		$	407,195

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 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 2015 first quarter report on Form 10-Q. Additionally, please refer to our 2014 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 months ended March 31, 2015 and 2014 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. We have presented adjusted cash flows from operating activities for the three months ended March 31, 2015 and 2014 to reflect the exclusion of cash payments related to trade secret litigation costs and cash payments related to restructuring expenses. This presentation facilitates a meaningful comparison of our operating results for the three months ended March 31, 2015 and 2014. 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 months ended March 31, 2015 and 2014 to exclude trade secret litigation costs, stock-based compensation expense, 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
				March 31,
				2015				2014
Cash flows from operating activities
Net income				$	4,411			$	1,296
Adjustments to reconcile net income to net cash provided by operating activities:
	Allowance for accounts receivable				26				147
	Depreciation				7,066				6,995
	Amortization of intangible assets				1,489				1,498
	Amortization of deferred financing costs				161				183
	Amortization of discount on long-term debt				--				225
	Stock-based compensation				1,083				781
	Deferred income taxes				2,176				1,893
	Deferred tax valuation allowance				(1,534	)			(1,289	)
	Restructuring expense, non-cash portion				--				384
	Other non-cash items, net				(174	)			(170	)
	Changes in operating assets and liabilities:
		Accounts receivable			(4,522	)			(3,435	)
		Inventory			(1,093	)			(2,014	)
		Prepaid expenses and other assets			1,999				222
		Accounts payable and accrued expenses			(5,800	)			998
Net cash provided by operating activities					5,288				7,714
Cash flows from investing activities
Capital expenditures					(3,501	)			(3,565	)
Other					155				164
Net cash used in investing activities					(3,346	)			(3,401	)
Cash flows from financing activities
Proceeds from stock option exercises					545				441
Proceeds from issuance of common stock under Employee Stock Purchase Plan					27				21
Early extinguishment of long-term debt					--				--
Payments on long-term debt agreements and capital leases					(6,067	)			(7,963	)
Net (repayments) borrowings under revolving credit facilities					(984	)			402
Payment of deferred financing costs					(24	)			(457	)
Payment of hedge premium					(632	)			--
Net cash used in financing activities					(7,135	)			(7,556	)
Effect of foreign currency translation on cash balances					118				(126	)
Net change in cash and cash equivalents					(5,075	)			(3,369	)
Cash and cash equivalents at beginning of period					22,636				27,362
Cash and cash equivalents at end of period				$	17,561			$	23,993
Supplemental disclosure of cash flow information
Noncash investing and financing activities
	Capital lease obligations incurred			$	3,500			$	4,088
	Stock options exercised - unsettled			$	--			$	550