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 third 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 nine months ended September 30, 2014 and 2013 to reflect the exclusion of loss on extinguishment of debt, 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 nine months ended September 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 nine months ended September 30, 2014 and 2013 to exclude loss on extinguishment of debt, 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 Nine Months Ended
September 30, September 30,
-------------------- --------------------
2014 2013 2014 2013
--------- --------- --------- ---------
Cash flows from operating
activities
Net income (loss) $ 3,620 $ (328) $ 9,538 $ 1,232
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Allowance for accounts
receivable 197 105 444 551
Depreciation 7,039 7,059 21,063 21,034
Amortization of intangible
assets 1,497 1,610 4,498 5,056
Amortization of deferred
financing costs 190 270 587 831
Amortization of discount on
long-term debt 207 168 656 500
Stock-based compensation 956 728 2,618 2,049
Deferred income taxes 2,100 182 6,272 918
Deferred tax valuation
allowance (1,615) 386 (4,652) 560
Restructuring expense, non-
cash portion -- 70 -- 363
Loss on early extinguishment
of debt 347 262 347 262
Other non-cash items, net (401) (68) (337) (363)
Changes in operating assets
and liabilities:
Accounts receivable (930) 4,491 (8,424) (7,358)
Inventory (142) 441 (2,071) 721
Prepaid expenses and other
assets (946) (1,102) (309) 1,988
Accounts payable and accrued
expenses 3,192 5,745 6,819 11,666
--------- --------- --------- ---------
Net cash provided by operating
activities 15,311 20,019 37,049 40,010
--------- --------- --------- ---------
Cash flows from investing
activities
Capital expenditures (3,430) (4,814) (10,027) (14,856)
Payments related to business
acquisitions -- -- (342) --
Other 105 83 505 622
--------- --------- --------- ---------
Net cash used in investing
activities (3,325) (4,731) (9,864) (14,234)
--------- --------- --------- ---------
Cash flows from financing
activities
Proceeds from stock option
exercises 191 -- 1,201 --
Proceeds from issuance of common
stock under Employee Stock
Purchase Plan 17 4 65 13
Share repurchases, including
shares surrendered for tax
withholding -- -- (151) (90)
Proceeds from borrowings on
long-term debt agreements -- -- -- 402
Payments of debt extinguishment
costs -- (66) -- (66)
Early extinguishment of long-
term debt (5,000) (7,000) (12,500) (7,000)
Payments on long-term debt
agreements and capital leases (5,497) (2,988) (16,437) (9,395)
Net repayments under revolving
credit facilities (532) (228) (828) (438)
Payment of deferred financing
costs -- -- (454) --
Dividends paid to noncontrolling
interest (486) (485) (486) (485)
--------- --------- --------- ---------
Net cash used in financing
activities (11,307) (10,763) (29,590) (17,059)
--------- --------- --------- ---------
Effect of foreign currency
translation on cash balances (50) 152 (122) 316
--------- --------- --------- ---------
Net change in cash and cash
equivalents 629 4,677 (2,527) 9,033
Cash and cash equivalents at
beginning of period 24,206 32,377 27,362 28,021
--------- --------- --------- ---------
Cash and cash equivalents at end
of period $ 24,835 $ 37,054 $ 24,835 $ 37,054
========= ========= ========= =========
Supplemental disclosure of cash
flow information
Noncash investing and financing
activities
Capital lease obligations
incurred $ 5,506 $ 2,491 $ 14,909 $ 6,737
Contingent liabilities in
connection with business
acquisitions $ 186 $ -- $ 1,110 $ --
