ARC Reports Growth in Overall Sales and Earnings for Q1 2024
ARC Document Solutions, Inc. reported growth in overall sales and earnings for Q1 2024. Net sales increased to $70.8 million, gross margin declined slightly to 32.2%, net income attributable to ARC rose to $2.5 million, and adjusted net income increased to $2.6 million. Earnings per share - diluted improved to $0.06, adjusted to $0.06. Cash provided by operating activities was $3.7 million, EBITDA was $7.9 million, and adjusted EBITDA was $8.6 million. Despite challenges like inflationary pressures and lower gross margin, ARC's strategic focus and investments drove sales growth.
Net sales for Q1 2024 increased to $70.8 million, reflecting a 2.7% growth compared to the same period in 2023.
Adjusted net income attributable to ARC rose to $2.6 million, showing an improvement from the previous year.
Earnings per share - diluted increased to $0.06, adjusted to $0.06, reflecting positive growth for shareholders.
Cash provided by operating activities amounted to $3.7 million, indicating operational stability and cash flow generation.
ARC's focus on key business lines led to a nearly three percent growth in sales for the first quarter of 2024 across U.S., Canadian, U.K., and other international markets.
The gross margin declined to 32.2% in Q1 2024, driven by inflationary pressures and increased labor and material costs.
Despite revenue growth, both EBITDA and Adjusted EBITDA decreased slightly due to the lower gross margin, impacting overall profitability.
Equipment and Supplies sales decreased by 3.0% year-over-year, primarily in the U.S., due to reduced capital spending by domestic customers.
Insights
The slight uptick in net sales to $70.8 million, representing a 2.7% increase, is generally a positive indicator, as it suggests the company is growing its top line. However, this growth must be contextualized within the industry and relative to historical performance to fully grasp its significance. A gross margin decrease of 110 basis points signals some contraction which could be a red flag for investors, as it may indicate rising costs or pricing pressures that could affect future profitability. The commitment to an annual dividend backed by steady cash flows is a reassuring sign for investors who prioritize income.
From an earnings perspective, any increase in EPS is typically favorable, but the modest change from $0.04 to $0.06 may not significantly alter the investment thesis for a stock, unless it is part of a larger, positive trend. The reported decrease in EBITDA and adjusted EBITDA is somewhat concerning, suggesting that despite top-line growth, the company's operational efficiency or cost management could be challenged.
The reported growth in Digital Printing and Scanning and Digital Imaging sales is indicative of ARC's strategic adaptation to market demands, especially as physical documentation trends toward digitization. A decrease in MPS (Managed Print Services) sales, however, could hint at a broader industry shift away from traditional printing solutions, reflecting changes in workplace dynamics and possibly a permanent move towards more digital and remote work structures.
The mention of international markets contributing positively to sales momentum is noteworthy. It indicates the company's resilience in a global context and could be a buffer against regional economic downturns. Yet, the reference to construction and design activity slowing affecting plan printing warrants attention. This could be a leading indicator of a downturn in a significant industry segment for ARC, which may have longer-term effects on the company's performance.
ARC's management's emphasis on strategic focus and selective investments driving top-line growth is aligned with what investors like to see—a company that actively manages its portfolio to optimize performance. One must be cautious though, as increased capital expenditures from $2.3 million to $3.1 million suggest an expansionary phase; investors should monitor whether these investments translate into future revenue growth.
The balance between the slight decline in cash provided by operating activities and the management's intent to purchase more company stock in 2024 presents a mixed signal, potentially indicating confidence from the management in the company's valuation or an attempt to return value to shareholders in lieu of higher dividend payouts or reinvestment in the business.
SAN RAMON, CA / ACCESSWIRE / May 7, 2024 / ARC Document Solutions, Inc. (NYSE:ARC), a leading provider of digital printing and document-related services, today reported its financial results for the first quarter ended March 31, 2024.
Financial Highlights: | ||||||||
| Three Months Ended | ||||||||
| March 31, | ||||||||
(All dollar amounts in millions, except EPS) | 2024 | 2023 | ||||||
Net sales | $ | 70.8 | $ | 68.9 | ||||
Gross margin | 32.2 | % | 33.3 | % | ||||
Net income attributable to ARC | $ | 2.5 | $ | 1.9 | ||||
Adjusted net income attributable to ARC | $ | 2.6 | $ | 2.2 | ||||
Earnings per share - diluted | $ | 0.06 | $ | 0.04 | ||||
Adjusted earnings per share - diluted | $ | 0.06 | $ | 0.05 | ||||
Cash provided by operating activities | $ | 3.7 | $ | 3.8 | ||||
EBITDA | $ | 7.9 | $ | 8.2 | ||||
Adjusted EBITDA | $ | 8.6 | $ | 8.7 | ||||
Capital expenditures | $ | 3.1 | $ | 2.3 | ||||
Debt & finance leases (including current) | $ | 60.7 | $ | 64.8 | ||||
Management Commentary:
"ARC's business transformation remains on track," said Suri Suriyakumar, Chairman and CEO of ARC. "We are gratified that our strategic focus and selective investments are driving top line growth, even while material and labor costs continue to pressure margins."
"Our focus on key business lines, and the efforts our teams have made over the past three months rewarded us with nearly three percent growth in sales for the first quarter," said Dilo Wijesuriya, President and COO of ARC. "U.S., Canadian, U.K., and other international markets all had positive sales momentum, but we had to work for it. Construction and design activity slowed which affected plan printing, and capital spending was constrained. We fought back with color and scanning to offset these challenges and delivered a solid quarter."
"Revenue growth drove the one cent increase in earnings per share for the quarter, but we felt the impact of inflationary pressures at the gross margin line," said Jorge Avalos, Chief Financial Officer. "That said, we secured our annual dividend with cash flows that were in line with the prior year period, and we expect to continue purchasing more of our own stock in 2024."
2024 First Quarter Supplemental Information:
Net sales were
Cash & cash equivalents on the consolidated balance sheet in the first quarter 2024 were
ARC's next quarterly cash dividend of
Days sales outstanding were 48 in Q1 2024 and 51 in Q1 2023.
The number of MPS locations have declined slightly year over year to approximately 10,400 as of March 31, 2024, representing a net decrease of approximately 300 locations compared to March 31, 2023.
Net Revenue
In millions | 1Q 2024 | FYE 2023 | 4Q 2023 | 3Q 2023 | 2Q 2023 | 1Q 2023 | ||||||||||||||||||
Total net revenue | $ | 70.8 | $ | 281.2 | $ | 68.9 | $ | 71.1 | $ | 72.4 | $ | 68.9 | ||||||||||||
In the first quarter 2024, net sales increased
Revenue by Business Lines
In millions | 1Q 2024 | FYE 2023 | 4Q 2023 | 3Q 2023 | 2Q 2023 | 1Q 2023 | ||||||||||||||||||
Digital Printing | $ | 42.7 | $ | 170.1 | $ | 40.9 | $ | 43.5 | $ | 44.2 | $ | 41.4 | ||||||||||||
MPS | $ | 18.6 | $ | 74.8 | $ | 18.2 | $ | 18.6 | $ | 19.0 | $ | 19.0 | ||||||||||||
Scanning and Digital Imaging | $ | 5.7 | $ | 20.3 | $ | 5.5 | $ | 5.0 | $ | 5.3 | $ | 4.6 | ||||||||||||
Equipment and supplies | $ | 3.8 | $ | 16.0 | $ | 4.3 | $ | 3.9 | $ | 3.9 | $ | 3.9 | ||||||||||||
In the first quarter 2024, Digital Printing sales increased
In the first quarter 2024, MPS sales decreased
In the first quarter 2024, Scanning and Digital Imaging sales increased
In the first quarter 2024, Equipment and Supplies sales decreased
Gross Profit
In millions unless otherwise indicated | 1Q 2024 | FYE 2023 | 4Q 2023 | 3Q 2023 | 2Q 2023 | 1Q 2023 | ||||||||||||||||||
Gross profit | $ | 22.8 | $ | 94.4 | $ | 22.2 | $ | 24.1 | $ | 25.2 | $ | 22.9 | ||||||||||||
Gross margin | 32.2 | % | 33.6 | % | 32.2 | % | 34.0 | % | 34.8 | % | 33.3 | % | ||||||||||||
In the first quarter 2024, gross profit and gross margin were
Selling, General and Administrative Expenses
In millions | 1Q 2024 | FYE 2023 | 4Q 2023 | 3Q 2023 | 2Q 2023 | 1Q 2023 | ||||||||||||||||||
Selling, general and administrative expenses | $ | 19.1 | $ | 76.3 | $ | 18.6 | $ | 19.3 | $ | 19.0 | $ | 19.5 | ||||||||||||
Selling, general and administrative expenses decreased by
Net Income and Earnings Per Share
| In millions unless otherwise indicated | 1Q 2024 | FYE 2023 | 4Q 2023 | 3Q 2023 | 2Q 2023 | 1Q 2023 | ||||||||||||||||||
Net income attributable to ARC - GAAP | $ | 2.5 | $ | 8.2 | $ | (0.9 | ) | $ | 3.2 | $ | 4.0 | $ | 1.9 | |||||||||||
Adjusted net income attributable to ARC | $ | 2.6 | $ | 11.8 | $ | 2.4 | $ | 3.2 | $ | 4.1 | $ | 2.2 | ||||||||||||
Earnings per share attributable to ARC | ||||||||||||||||||||||||
Diluted EPS - GAAP | $ | 0.06 | $ | 0.19 | $ | (0.02 | ) | $ | 0.07 | $ | 0.09 | $ | 0.04 | |||||||||||
Adjusted diluted EPS | $ | 0.06 | $ | 0.27 | $ | 0.05 | $ | 0.07 | $ | 0.09 | $ | 0.05 | ||||||||||||
Year-over-year net income attributable to ARC and earnings per share increased during the first quarter of 2024. The increase was driven primarily by lower selling, general and administrative expenses and interest expense.
Cash Provided by Operating Activities
In millions | 1Q 2024 | FYE 2023 | 4Q 2023 | 3Q 2023 | 2Q 2023 | 1Q 2023 | ||||||||||||||||||
Cash provided by operating activities | $ | 3.7 | $ | 36.6 | $ | 13.7 | $ | 8.7 | $ | 10.3 | $ | 3.8 | ||||||||||||
The slight decrease in cash flows from operations during the first quarter of 2024 was primarily due to timing of receivable collections as a result of an increase in sales.
EBITDA
In millions | 1Q 2024 | FYE 2023 | 4Q 2023 | 3Q 2023 | 2Q 2023 | 1Q 2023 | ||||||||||||||||||
EBITDA | $ | 7.9 | $ | 31.9 | $ | 3.7 | $ | 9.4 | $ | 10.6 | $ | 8.2 | ||||||||||||
Adjusted EBITDA | $ | 8.6 | $ | 38.1 | $ | 8.3 | $ | 10.0 | $ | 11.1 | $ | 8.7 | ||||||||||||
Despite the increase in revenue in the first quarter of 2024, EBITDA and Adjusted EBITDA decreased modestly due to lower gross margin, as described above.
| Three Months Ended | ||||||||
| March 31, | ||||||||
Sales from Services and Product Lines as a Percentage of Net Sales | 2024 | 2023 | ||||||
Digital Printing | 60.4 | % | 60.0 | % | ||||
MPS | 26.2 | % | 27.6 | % | ||||
Scanning and Digital Imaging | 8.0 | % | 6.7 | % | ||||
Equipment and supplies sales | 5.4 | % | 5.7 | % | ||||
Teleconference and Webcast
ARC Document Solutions will hold a conference call with investors and analysts on Tuesday, May 7, 2024, at 2 P.M. Pacific Time (5 P.M. Eastern Time) to discuss results of the Company's first quarter of 2024. To access the live conference call outlining ARC's 2024 first quarter results, dial (800) 715-9871. International callers may join the conference by dialing (646) 307-1963. The conference code is 1511143 and will be required to dial into the call. A live webcast will also be made available at: https://events.q4inc.com/attendee/298624556 or on the Company's investor relations website at http://ir.e-arc.com. A replay of the webcast will be available on the website following the call's conclusion.
About ARC Document Solutions (NYSE:ARC)
ARC partners with top brands around the world to tell their stories through visually compelling graphics. We use advanced digital printing technology, sustainable materials, and innovative techniques to bring their vision to life. ARC also provides other digital printing and scanning services to a wide variety of industries all over North America and in select markets around the world. Follow ARC at 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, and on the Company's operations. Words and phrases such as, "driving top line growth," "we expect," 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, digital printing 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 section titled "Part I - Item 1A. Risk Factors " of ARC Document Solution's Annual Report on Form 10-K for the fiscal year ended December 31, 2023, 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.
Contact Information:
David Stickney
VP Corporate Communications & Investor Relations
925-949-5114
ARC Document Solutions, Inc. | ||||||||
Consolidated Balance Sheets | ||||||||
(In thousands, except per share data) | ||||||||
(Unaudited) | ||||||||
| March 31, | December 31, | |||||||
Current assets: | 2024 | 2023 | ||||||
Cash and cash equivalents | $ | 52,029 | $ | 56,093 | ||||
Accounts receivable, net of allowances for accounts receivable of | 37,887 | 35,775 | ||||||
Inventory | 9,277 | 8,818 | ||||||
Prepaid expenses | 4,507 | 3,988 | ||||||
Other current assets | 3,571 | 3,978 | ||||||
Total current assets | 107,271 | 108,652 | ||||||
Property and equipment, net of accumulated depreciation of | 40,848 | 40,925 | ||||||
Right-of-use assets from operating leases | 34,459 | 32,838 | ||||||
Goodwill | 121,051 | 121,051 | ||||||
Other intangible assets, net | 149 | 162 | ||||||
Deferred income taxes | 3,559 | 4,383 | ||||||
Other assets | 1,947 | 2,113 | ||||||
Total assets | $ | 309,284 | $ | 310,124 | ||||
Current liabilities: | ||||||||
Accounts payable | $ | 24,023 | $ | 24,175 | ||||
Accrued payroll and payroll-related expenses | 9,022 | 9,401 | ||||||
Accrued expenses | 17,549 | 18,787 | ||||||
Current operating lease liabilities | 10,171 | 9,924 | ||||||
Current portion of finance leases | 8,095 | 8,870 | ||||||
Total current liabilities | 68,860 | 71,157 | ||||||
Long-term operating lease liabilities | 28,730 | 27,357 | ||||||
Long-term debt and finance leases | 52,635 | 53,366 | ||||||
Deferred income taxes | 148 | 52 | ||||||
Other long-term liabilities | 2,455 | 2,467 | ||||||
Total liabilities | 152,828 | 154,399 | ||||||
Commitments and contingencies | ||||||||
Stockholders' equity: | ||||||||
ARC Document Solutions, Inc. stockholders' equity: | ||||||||
Preferred stock, | - | - | ||||||
Common stock, | 53 | 52 | ||||||
Additional paid-in capital | 137,146 | 136,460 | ||||||
Retained earnings | 44,495 | 44,144 | ||||||
Accumulated other comprehensive loss | (4,347 | ) | (4,200 | ) | ||||
| 177,347 | 176,456 | |||||||
Less cost of common stock in treasury, 9,762 and 9,743 shares | 22,445 | 22,390 | ||||||
Total ARC Document Solutions, Inc. stockholders' equity | 154,902 | 154,066 | ||||||
Noncontrolling interest | 1,554 | 1,659 | ||||||
Total equity | 156,456 | 155,725 | ||||||
Total liabilities and equity | $ | 309,284 | $ | 310,124 | ||||
ARC Document Solutions, Inc. | ||||||||
Consolidated Statements of Operations | ||||||||
(In thousands, except per share data) | ||||||||
(Unaudited) | Three Months Ended | |||||||
| March 31, | ||||||||
| 2024 | 2023 | |||||||
Net sales | $ | 70,792 | $ | 68,918 | ||||
Cost of sales | 47,985 | 45,993 | ||||||
Gross profit | 22,807 | 22,925 | ||||||
Selling, general and administrative expenses | 19,071 | 19,482 | ||||||
Amortization of intangible assets | 10 | 11 | ||||||
Income from operations | 3,726 | 3,432 | ||||||
Other income, net | (36 | ) | (11 | ) | ||||
Interest expense, net | 310 | 456 | ||||||
Income before income tax provision | 3,452 | 2,987 | ||||||
Income tax provision | 1,088 | 1,160 | ||||||
Net income | 2,364 | 1,827 | ||||||
Loss attributable to the noncontrolling interest | 89 | 113 | ||||||
Net income attributable to ARC Document Solutions, Inc. stockholders | $ | 2,453 | $ | 1,940 | ||||
Earnings per share attributable to ARC Document Solutions, Inc. stockholders | ||||||||
Basic | $ | 0.06 | $ | 0.05 | ||||
Diluted | $ | 0.06 | $ | 0.04 | ||||
Weighted average common shares outstanding: | ||||||||
Basic | 42,191 | 42,552 | ||||||
Diluted | 43,049 | 43,764 | ||||||
| ARC Document Solutions, Inc. | ||||||||
Consolidated Statements of Cash Flows | ||||||||
(In thousands) | ||||||||
(Unaudited) | Three Months Ended | |||||||
| March 31, | ||||||||
| 2024 | 2023 | |||||||
Cash flows from operating activities | ||||||||
Net income | $ | 2,364 | $ | 1,827 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Allowance for credit losses | 97 | 98 | ||||||
Depreciation | 4,040 | 4,652 | ||||||
Amortization of intangible assets | 10 | 11 | ||||||
Amortization of deferred financing costs | 17 | 16 | ||||||
Stock-based compensation | 651 | 494 | ||||||
Deferred income taxes | 841 | 962 | ||||||
Deferred tax valuation allowance | 59 | 43 | ||||||
Other non-cash items, net | (55 | ) | (75 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (2,286 | ) | (698 | ) | ||||
Inventory | (495 | ) | (583 | ) | ||||
Prepaid expenses and other assets | 2,411 | 3,258 | ||||||
Accounts payable and accrued expenses | (3,953 | ) | (6,181 | ) | ||||
Net cash provided by operating activities | 3,701 | 3,824 | ||||||
Cash flows from investing activities | ||||||||
Capital expenditures | (3,075 | ) | (2,255 | ) | ||||
Other | 66 | 92 | ||||||
Net cash used in investing activities | (3,009 | ) | (2,163 | ) | ||||
Cash flows from financing activities | ||||||||
Proceeds from stock option exercises | 4 | 1,036 | ||||||
Proceeds from issuance of common stock under Employee Stock Purchase Plan | 32 | 29 | ||||||
Share repurchases | (55 | ) | (117 | ) | ||||
Payments on finance leases | (2,552 | ) | (3,183 | ) | ||||
Borrowings under revolving credit facilities | 40,000 | 42,000 | ||||||
Payments under revolving credit facilities | (40,000 | ) | (42,000 | ) | ||||
Dividends paid | (2,108 | ) | (2,122 | ) | ||||
Net cash used in financing activities | (4,679 | ) | (4,357 | ) | ||||
Effect of foreign currency translation on cash balances | (77 | ) | (62 | ) | ||||
Net change in cash and cash equivalents | (4,064 | ) | (2,758 | ) | ||||
Cash and cash equivalents at beginning of period | 56,093 | 52,561 | ||||||
Cash and cash equivalents at end of period | $ | 52,029 | $ | 49,803 | ||||
Supplemental disclosure of cash flow information | ||||||||
Noncash investing and financing activities | ||||||||
Finance lease obligations incurred | $ | 1,106 | $ | 1,485 | ||||
Operating lease obligations incurred | $ | 4,235 | $ | 3,365 | ||||
ARC Document Solutions, Inc. Net Sales by Product Line (In thousands) (Unaudited) | ||||||||
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2024 | 2023 | |||||||
Service sales | ||||||||
Digital Printing | $ | 42,725 | $ | 41,379 | ||||
MPS | 18,584 | 19,016 | ||||||
Scanning and Digital Imaging | 5,671 | 4,594 | ||||||
Total service sales | 66,980 | 64,989 | ||||||
Equipment and Supplies Sales | 3,812 | 3,929 | ||||||
Total net sales | $ | 70,792 | $ | 68,918 | ||||
ARC Document Solutions, Inc. Non-GAAP Measures Reconciliation of cash flows provided by operating activities to EBITDA and Adjusted EBITDA (In thousands) (Unaudited) | ||||||||
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2024 | 2023 | |||||||
Cash flows provided by operating activities | $ | 3,701 | $ | 3,824 | ||||
Changes in operating assets and liabilities | 4,323 | 4,204 | ||||||
Non-cash expenses, including depreciation and amortization | (5,660 | ) | (6,201 | ) | ||||
Income tax provision | 1,088 | 1,160 | ||||||
Interest expense, net | 310 | 456 | ||||||
Loss attributable to the noncontrolling interest | 89 | 113 | ||||||
Depreciation and amortization | 4,050 | 4,663 | ||||||
EBITDA | 7,901 | 8,219 | ||||||
Stock-based compensation | 651 | 494 | ||||||
Adjusted EBITDA | $ | 8,552 | $ | 8,713 | ||||
See Non-GAAP Financial Measures discussion below.
ARC Document Solutions, Inc. Non-GAAP Measures Reconciliation of net income attributable to ARC Document Solutions, Inc. to EBITDA and Adjusted EBITDA (In thousands) (Unaudited) | ||||||||
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2024 | 2023 | |||||||
Net income attributable to ARC Document Solutions, Inc. | $ | 2,453 | $ | 1,940 | ||||
Interest expense, net | 310 | 456 | ||||||
Income tax provision | 1,088 | 1,160 | ||||||
Depreciation and amortization | 4,050 | 4,663 | ||||||
EBITDA | 7,901 | 8,219 | ||||||
Stock-based compensation | 651 | 494 | ||||||
Adjusted EBITDA | $ | 8,552 | $ | 8,713 | ||||
See Non-GAAP Financial Measures discussion below.
ARC Document Solutions, Inc. Non-GAAP Measures Reconciliation of net income attributable to ARC Document Solutions, Inc. to unaudited adjusted net income attributable to ARC Document Solutions, Inc. (In thousands, except per share data) (Unaudited) | ||||||||
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2024 | 2023 | |||||||
Net income attributable to ARC Document Solutions, Inc. | $ | 2,453 | $ | 1,940 | ||||
Deferred tax valuation allowance and other discrete tax items | 107 | 234 | ||||||
Adjusted net income attributable to ARC Document Solutions, Inc. | $ | 2,560 | $ | 2,174 | ||||
Actual: | ||||||||
Earnings per share attributable to ARC Document Solutions, Inc. stockholders: | ||||||||
Basic | $ | 0.06 | $ | 0.05 | ||||
Diluted | $ | 0.06 | $ | 0.04 | ||||
Weighted average common shares outstanding: | ||||||||
Basic | 42,191 | 42,552 | ||||||
Diluted | 43,049 | 43,764 | ||||||
Adjusted: | ||||||||
Earnings per share attributable to ARC Document Solutions, Inc. stockholders: | ||||||||
Basic | $ | 0.06 | $ | 0.05 | ||||
Diluted | $ | 0.06 | $ | 0.05 | ||||
Weighted average common shares outstanding: | ||||||||
Basic | 42,191 | 42,552 | ||||||
Diluted | 43,049 | 43,764 | ||||||
See Non-GAAP Financial Measures discussion below.
Non-GAAP Financial Measures
EBITDA, EBITDA margin, Adjusted EBITDA, Adjusted EBITDA margin, adjusted net income and adjusted earnings per share 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, net income margin, diluted earnings per share 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. We have presented these measures 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.
EBITDA represents net income before interest, taxes, depreciation and amortization. We calculate EBITDA margin by dividing EBITDA by net sales.
We use EBITDA and EBITDA margin to measure and compare the performance of our operating divisions. Our operating divisions' financial performance includes all of the operating activities except debt and taxation which are managed at the corporate level for U.S. operating divisions. We use EBITDA and EBITDA margin to compare the performance of our operating divisions and to measure performance for determining consolidated-level compensation. In addition, we use EBITDA and EBITDA margin to evaluate potential acquisitions and potential capital expenditures.
EBITDA and EBITDA margin 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 EBITDA margin only as supplements.
Our presentation of adjusted net income and adjusted EBITDA 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 stockholders for the three months ended March 31, 2024 to reflect the exclusion of changes in the valuation allowances related to certain deferred tax assets and other discrete tax items. We believe this presentation helps facilitate our investors understanding of our results of operations and allows them to make meaningful comparisons of our operating results for the three months ended March 31, 2024 against the corresponding periods in 2023. We believe these changes were the result of items which are not indicative of our actual operating performance.
We have presented Adjusted EBITDA for the three months ended March 31, 2024 to exclude stock-based compensation expense. We calculated Adjusted EBITDA margin by dividing Adjusted EBITDA by net sales. The adjustment to exclude stock-based compensation expense from EBITDA 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 and ability to access our credit facility.
SOURCE: ARC Document Solutions
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