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
