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| ARP > SEC Filings for ARP > Form 10-Q on 8-Aug-2008 | All Recent SEC Filings |
8-Aug-2008
Quarterly Report
• Document distribution & logistics;
• Print-on-demand; and
• On-site services, frequently referred to as facilities management, or FMs, (any combination of the above services supplied at a customer's location).
We deliver these services through our specialized technology, more than 980
sales and customer service employees interacting with our customers every day,
and more than 5,100 on-site services facilities at our customers' locations. All
of our local service centers are connected by a digital infrastructure, allowing
us to deliver services, products, and value to more than 140,000 companies
throughout North America.
Our divisions operate under local brand names. Each brand name typically
represents a business or group of businesses that has been acquired since the
formation of the Company. We coordinate these operating divisions and
consolidate their service offerings for large regional or national customers
through a corporate-controlled "Premier Accounts" program.
A significant component of our growth has been from acquisitions. In the first
six months of 2008, we paid $5.3 million in connection with five new business
acquisitions. In 2007, we acquired 19 businesses for $146.3 million. Each
acquisition was accounted for using the purchase method, and as such, our
consolidated income statements reflect sales and expenses of acquired businesses
only for post-acquisition periods. All acquisition amounts include
acquisition-related costs.
As part of our growth strategy, we sometimes open or acquire branch or satellite
service centers in contiguous markets, which we view as a low cost, rapid form
of market expansion. Our branch openings require modest capital expenditures and
are expected to generate operating profit within 12 months from opening.
In the following pages, we offer descriptions of how we manage and measure
financial performance throughout the Company. Our comments in this report
represent our best estimates of current business trends and future trends that
we think may affect our business. Actual results, however, may differ from what
is presented here.
Evaluating our Performance. We evaluate our success in delivering value to our
shareholders by striving for the following:
• Creating consistent, profitable revenue growth;
• Maintaining our industry leadership as measured by our geographical footprint, market share and revenue generation;
• Continuing to develop and invest in our products, services, and technology to meet the changing needs of our customers;
• Maintaining the lowest cost structure in the industry; and
• Maintaining a flexible capital structure that provides for both responsible debt service and the pursuit of acquisitions and other high-return investments.
Primary Financial Measures. We use net sales, costs and expenses, EBIT, EBITDA
and operating cash flow to operate and assess the performance of our business.
The Company identifies operating segments based on the various business
activities that earn revenue and incur expense, whose operating results are
reviewed by management. Based on the fact that operating segments have similar
products and services, class of customers, production process and performance
objectives, the Company is deemed to operate as a single reportable business
segment. Please refer to our 2007 Annual Report on Form 10-K for more
information regarding our primary financial measures.
Other Common Financial Measures. We also use a variety of other common financial
measures as indicators of our performance, including:
• Net income and earnings per share;
• Material costs as a percentage of net sales; and
• Days Sales Outstanding/Days Sales Inventory/Days Accounts Payable.
In addition to using these financial measures at the corporate level, we monitor
some of them daily and location-by-location through use of our proprietary
company intranet and reporting tools. Our corporate operations staff also
conducts a monthly variance analysis on the income statement, balance sheet, and
cash flows of each operating division.
We believe our current customer segment mix has approximately 80% of our
revenues generated from the AEC market, while 20% is generated from non-AEC
sources. We believe this mix is optimal because it offers us the advantages of
diversification without diminishing our focus on our core competencies.
Not all of these financial measurements are represented directly on the
Company's consolidated financial statements, but meaningful discussions of each
are part of our quarterly disclosures and presentations to the investment
community.
Acquisitions. Our disciplined approach to complementary acquisitions has led us
to acquire reprographics businesses that fit our profile for performance
potential and meet strategic criteria for gaining market share. In most cases,
performance of newly acquired businesses improves almost immediately due to the
application of financial best practices, significantly greater purchasing power,
and productivity-enhancing technology.
According to the International Reprographics Association (IRgA), the
reprographics industry is highly-fragmented and comprised primarily of small
businesses with an average of $1.5 million in annual sales.
When we acquire businesses, our management typically uses the previous year's
sales figures as an informal basis for estimating future revenues for the
Company. We do not use this approach for formal accounting or reporting purposes
but as an internal benchmark with which to measure the future effect of
operating synergies, best practices and sound financial management on the
acquired entity.
We also use previous year's sales figures to assist us in determining how the
acquired company will be integrated into the overall management structure of the
Company. We categorize newly acquired businesses in one of two ways:
1. Standalone Acquisitions. Post-acquisition, these businesses maintain their
existing local brand and act as strategic platforms for the Company to
acquire market share in and around the specific geographical location.
2. Branch/Fold-in Acquisitions. These are equivalent to our opening a new or "greenfield" branch. They support an outlying portion of a larger market and rely on a larger centralized production facility nearby for strategic management, load balancing, providing specialized services, and for administrative and other "back office" support. We maintain the staff and equipment of these businesses to a minimum to serve a small market or a single large customer, or we may physically integrate (fold-in) staff and equipment into a larger nearby production facility.
Economic Factors Affecting Financial Performance. We estimate that sales to the
AEC market accounted for 80% of our net sales, with the remaining 20% consisting
of sales to non-AEC markets (based on a compilation of approximately 80% of
revenues from our divisions and designating revenues using certain assumptions
as derived from either AEC or non-AEC based customers). As a result, our
operating results and financial condition can be significantly affected by
economic factors that influence the AEC industry, such as non-residential and
residential construction spending, GDP growth, interest rates, employment rates,
office vacancy rates, and government expenditures. Similar to the AEC industry,
the reprographics industry typically lags a recovery in the broader economy.
Non-GAAP Measures
EBIT and EBITDA and related ratios presented in this report are supplemental
measures of our performance that are not required by or presented in accordance
with 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 flow 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. Amortization does
not include $1.1 million and $1.0 million of stock based compensation expense,
for the three months ended June 30, 2008 and 2007, respectively and $2.0 million
and $1.6 million of stock based compensation expense, for the six months ended
June 30, 2008 and 2007, respectively. 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 and 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 to measure and compare the performance of our operating segments.
Our operating segments' financial performance includes all of the operating
activities except for debt and taxation which are managed at the corporate
level. As a result, EBIT is the best measure of divisional 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 division-level compensation and use EBITDA to measure performance for
determining consolidated-level compensation. We also use EBITDA as a metric to
manage cash flow from our operating segments to the corporate level and to
determine the financial health of each operating segment. As noted above, since
debt and taxation are managed at the corporate level, the cash flow from each
operating segment should be approximately equal to the corresponding EBITDA of
each operating segment, assuming no other changes to an operating segment's
balance sheet. As a result, we reconcile EBITDA to cash flow monthly as one of
our key internal controls. We also use EBIT and EBITDA to evaluate potential
acquisitions and to evaluate whether to incur capital expenditures.
EBIT, EBITDA and related ratios have limitations as analytical tools, and you
should not consider them 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 and EBITDA
only as supplements. For more information, see our consolidated financial
statements and related notes elsewhere in this report. Additionally, please
refer to our 2007 Annual Report on Form 10-K.
The following is a reconciliation of cash flows provided by operating activities
to EBIT, EBITDA, and net income:
Three Months Ended June 30, Six Months Ended June 30,
2008 2007 2008 2007
(Dollars in thousands) (Dollars in thousands)
Cash flows provided by operating
activities $ 41,137 $ 33,959 $ 61,485 $ 45,365
Changes in operating assets and
liabilities (6,096 ) (2,711 ) 6,819 12,121
Non-cash (expenses) income,
including depreciation and
amortization (16,165 ) (11,636 ) (30,930 ) (21,029 )
Income tax provision 11,384 11,612 22,836 21,407
Interest expense 6,559 6,642 13,705 11,802
EBIT $ 36,819 $ 37,866 $ 73,915 $ 69,666
Depreciation and amortization 12,216 10,029 24,333 18,387
EBITDA $ 49,035 $ 47,895 $ 98,248 $ 88,053
Interest expense (6,559 ) (6,642 ) (13,705 ) (11,802 )
Income tax provision (11,384 ) (11,612 ) (22,836 ) (21,407 )
Depreciation and amortization (12,216 ) (10,029 ) (24,333 ) (18,387 )
Net income $ 18,876 $ 19,612 $ 37,374 $ 36,457
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The following is a reconciliation of net income to EBIT and EBITDA:
Three Months Ended June 30, Six Months Ended June 30,
2008 2007 2008 2007
(Dollars in thousands) (Dollars in thousands)
Net income $ 18,876 $ 19,612 $ 37,374 $ 36,457
Interest expense, net 6,559 6,642 13,705 11,802
Income tax provision 11,384 11,612 22,836 21,407
EBIT $ 36,819 $ 37,866 $ 73,915 $ 69,666
Depreciation and amortization 12,216 10,029 24,333 18,387
EBITDA $ 49,035 $ 47,895 $ 98,248 $ 88,053
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The following is a reconciliation of net income margin to EBIT margin and EBITDA margin:
Three Months Ended June 30, Six Months Ended June 30,
2008 2007 (1) 2008 (1) 2007
Net income margin 10.2 % 11.0 % 10.0 % 10.8 %
Interest expense, net 3.5 3.7 3.7 3.5
Income tax provision 6.2 6.5 6.1 6.3
EBIT margin 19.9 21.3 19.8 20.6
Depreciation and amortization 6.6 5.6 6.5 5.5
EBITDA margin 26.5 % 26.9 % 26.4 % 26.1 %
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(1) column does not foot due to rounding
Results of Operations for the Three and Six Months Ended June 30, 2008 and 2007 The following table provides information on the percentages of certain items of selected financial data compared to net sales for the periods indicated:
As Percentage of Net Sales As Percentage of Net Sales
Three Months Ended June 30, Six Months Ended June 30,
2008 2007 2008 (1) 2007
Net Sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 57.2 57.9 57.4 57.8
Gross profit 42.8 42.1 42.6 42.2
Selling, general and administrative
expenses 21.4 19.4 21.2 20.3
Amortization of intangibles 1.5 1.4 1.6 1.2
Income from operations 19.9 21.3 19.8 20.6
Other income - - (0.1 ) -
Interest expense, net 3.5 3.7 3.7 3.5
Income before income tax provision 16.4 17.6 16.2 17.1
Income tax provision 6.2 6.5 6.1 6.3
Net income 10.2 % 11.0 % 10.0 % 10.8 %
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(1) column does not foot due to rounding
Three and Six Months Ended June 30, 2008 Compared to Three and Six Months Ended
June 30, 2007
Three Months Ended Six Months Ended
June 30, Increase (decrease) June 30, Increase (decrease)
2008 2007 (In dollars) (Percent) 2008 2007 (In dollars) (Percent)
(In millions) (In millions)
Reprographics services $ 139.2 $ 133.3 $ 5.9 4.4 % $ 281.7 $ 253.0 $ 28.7 11.3 %
Facilities management 31.2 29.0 2.2 7.6 % 60.8 55.3 5.5 9.9 %
Equipment and supplies sales 14.5 15.5 (1.0 ) -6.5 % 29.9 29.6 0.3 1.0 %
Total net sales 184.9 177.8 7.1 4.0 % 372.4 338.0 34.4 10.2 %
Gross profit 79.1 74.8 4.3 5.7 % 158.7 142.6 16.1 11.3 %
Selling, general and
administrative expenses 39.5 34.5 5.0 14.5 % 79.0 68.7 10.3 15.0 %
Amortization of intangibles 2.8 2.5 0.3 12.0 % 6.0 4.2 1.8 42.9 %
Interest expense, net 6.6 6.6 0.0 0.0 % 13.7 11.8 1.9 16.1 %
Income taxes 11.4 11.6 (0.2 ) -1.7 % 22.8 21.4 1.4 6.5 %
Net Income 18.9 19.6 (0.7 ) -3.6 % 37.4 36.5 0.9 2.5 %
EBITDA 49.0 47.9 1.1 2.3 % 98.2 88.1 10.1 11.5 %
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Net Sales.
Net sales increased by 4.0% for the three months ended June 30, 2008, compared
to the three months ended June 30, 2007. Net sales increased by 10.2% for the
six months ended June 30, 2008 compared to the same period in 2007.
In the three months ended June 30, 2008, net sales increase was primarily due to
sales growth of 8.8% from our standalone acquisitions acquired in 2007. This
increase in net sales for the period was offset, however, by lower sales
performance in our existing divisions primarily due to the softening economy and
a general slow down in the construction market.
In the six months ended June 30, 2008, net sales increase was primarily due to
our standalone acquisitions acquired in 2007 as they contributed approximately
11.7% to our sales growth and new sales acquired through our Premier Accounts
program. The increase in sales due to standalone acquisitions was partially
offset by a drop in sales as explained above.
Reprographics services. Net sales during the three and six months ended June 30,
2008, increased by $5.9 million and $28.7 million, respectively, compared to the
same periods in 2007, due primarily to the expansion of our market share through
acquisitions, and an increase in our digital sales. We acquired 19 businesses at
various times throughout the year in 2007, and five businesses in the first six
months of 2008 each with a primary focus on reprographics services. These
acquired businesses added sales from their preexisting customers to our own, and
in some cases, also allowed us to aggregate regional work from larger clients.
Our Premier Accounts program also added significant new sales, contributing more
than $1.0 million and $4.5 million of revenue from new non-AEC customers in the
three and six months ended June 30, 2008, respectively, compared to the same
periods in 2007. Overall reprographics services sales nationwide were negatively
affected by the general softness in the economy and slow down in the
construction market, which partially offset the sales increases described above.
The largest impact affecting reprographics services sales was the decrease in
our Southern California region reprographics services sales of approximately
$3.5 million and $5.6 million for the three and six months ended June 30, 2008,
respectively, resulting primarily from the downturn in residential construction
in Southern California.
While most of our customers in the AEC industry still prefer paper plans, we
have seen an increase in our digital service revenue, presumably due to the
greater efficiency digital document workflows bring to our customers'
businesses, but also due to greater consistency in the way that we charge for
these services as they become more widely accepted throughout the construction
industry. During the three and six months ended June 30, 2008 digital services
revenue increased by $3.3 million and $7.8 million, respectively, over the same
periods in 2007.
Facilities management. On-site, or facilities management services, continued to
. . .
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