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,
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2015 2014
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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
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Net cash provided by operating activities 5,288 7,714
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Cash flows from investing activities
Capital expenditures (3,501) (3,565)
Other 155 164
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Net cash used in investing activities (3,346) (3,401)
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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) --
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Net cash used in financing activities (7,135) (7,556)
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Effect of foreign currency translation on cash
balances 118 (126)
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Net change in cash and cash equivalents (5,075) (3,369)
Cash and cash equivalents at beginning of period 22,636 27,362
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Cash and cash equivalents at end of period $ 17,561 $ 23,993
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Supplemental disclosure of cash flow information
Noncash investing and financing activities
Capital lease obligations incurred $ 3,500 $ 4,088
Stock options exercised - unsettled $ -- $ 550
Contact Information: David Stickney VP Corporate Communications and Investor Relations 925-949-5114
