Friday, August 5, 2011

Second comment about ARC’s Q2 2011 results

Well, actually, in this post I’m going to talk about two issues; a) ARC’s stock price and b) ARC’s Q2 2011 results.

ARC reported its Q2 2011 results yesterday, and, for a company reporting what can only be characterized as mediocre (if not disappointing) results, the timing was horrible – just before ARC’s results were released, the Dow Jones Index plunged over 500 points!

This morning (August 5th), ARC’s shares plunged below $5.00 per share and, at the end of the day, closed at $4.58 per share!

At the end of the day, ARC’s “market cap” (O/S shares x price-per share) ended up being $211.5 million (per Google Finance.)

(Just a brief reminder from the past … ARC paid around $100 mil just to purchase Ridgway’s, several years ago. At today’s market cap, if you buy ARC at $4.58, you get the rest of ARC’s acquisitions and the core Ford Graphics operations that preceded the formation of ARC for only $111.5 million “extra.”)

On March 25th, I did an extensive post on this blog about RW Baird & Co’s then-just-announced upgrade action on ARC’s stock. Here’s a link to that post, if you care to read what I said back then before going on with the rest of today’s post.

And, on June 17th, I did another, rather extensive post on this blog about ARC’s stock. Here’s a link to that post, if you care to read what I said back then before going on with the rest of today’s post.

At the end of that post, I said this….

“What goes up can come down,…. and vice versa.”

I don’t think that anyone can accurately predict where ARC’s stock price is going from here; up, down or sideways. So far this year, there’s been little, if any, positive news about the residential construction industry or about the non-residential construction industry, and, trend-wise, the AIA ABI Index readings have been mixed of late. Even thought ARC has initiatives that are not bound by what’s going on in the A/E/C industry, ARC is still “mostly” a reprographer heavily tied to the A/E/C industry.

I think we’re going to have to see some positive news about a recovery in the A/E/C industry before we’re going to see positive action in ARC’s shares.

Okay, I hope you re-read the March 25th and June 17th posts.

Here’s the rest of today’s post.

I don’t think that it is surprising to anyone (at least to anyone who really follows the A/E/C Industry and the Reprographics Industry) that ARC’s Q2 2011 Sales were less than ARC’s Sales for the same period last year. A/E/C Industry activity is somewhat down this year compared to last year, and, in spite of the fact that ARC has tried to generate more non-A/E/C sales (its Riot Color initiatives, its MPS Initiatives, its iShipDocs initiatives, etc), ARC’s revenues, and fortunes, are still very much tied to A/E/C Industry activity.

Note that during the first half of 2011, ARC completed at least three acquisitions of reprographics companies. We published an article about that on this blog. Even though those acquisitions were “small”, they still added to ARC’s revenues for Q2 2011. And, what I’m pointing out, here, is that ARC’s Q2 2011 sales would have been less than the $109.59 mil ARC just reported, if ARC had not acquired those companies.

Curiously, though, not a single analyst asked any questions about the effect of those acquisitions on ARC’s Q2 2011 sales! Do the analysts even know about those acquisitions?

Revenues from “reprographics services” off a solid 10%, Q2 2011 vs. Q2 2010. I totally expected that.

What I did not expect to see was revenues from “reprographics services” at virtually the same amount in Q2 2011 as in Q1 2011, and I say that for two reasons: a) I continue to expect to see meaningful increases in ARC’s color business, but I’m not seeing that, and b) throughout the history of the U.S. reprographics industry, “reprographics services” revenues in Q2 normally (almost always) outpace Q1 “reprographics services” revenues. Q2’s reprographics services revenues normally set the tone for the rest of the year…… and, based on Q2’s results, I can’t see a rosy outlook.

ARC’s management teams (national and local) continue to a good job keeping operating costs in line with sales. It is not fun to close stores, especially if store closings mean layoffs/terminations. But, when sales are declining, costs have to be kept in line, like it or not. That’s the pressure a public company faces.

Very brief comments about the Q2 2011 Consolidated Statement of Operations:

a) if ARC had not had to take a Goodwill Impairment charge, ARC would have reported income, rather than a loss, on the Income (Loss) from Operations line.

b) If ARC had not had to take a Goodwill Impairment charge and if ARC’s charge for interest expense was only the amount of interest expense ARC actually incurred for Q2, it looks like ARC would have come very close to break-even on the Income (Loss) Before Income Tax line.

c) I’ve got no further comment, at all, about the HUGE Income Tax provision ARC made in Q2. (A couple of days ago, I did a separate post about that.)

So, summing it up, if ARC had not had to take this charge, if ARC had not had to take that charge, if ARC had not had to take….. well, you know where I’m going with this …… if ARC had not been impacted by “those other expenses”, then ARC might have reported a profit. But, ARC reported an $84.6 MILLION DOLLAR LOSS FOR Q2. THAT’S STUNNING!

As to ARC’s Balance Sheet, it looks to me like ARC’s “tangible” assets now add up to around $177 million. Compare that to $329 mil in total liabilities.

I wasn’t able to listen in on the “earnings call,” but I did read the transcript published by (Unlike previous transcripts there were a lot of obvious transcription errors this time around.) I often find the Q&A session amusing, and this time was no different. The amusement I’m speaking of is generated by some of the questions analysts ask. Some of those questions are naïve and just plain _____. I keep thinking about this (borrowing on religion) …. “the simple son is the one who knows not what questions to ask.”

One of my industry friends also reads the earnings transcripts, and, in a back and forth discussion, today via e-mail, he commented about the earnings transcript that was released yesterday evening, after ARC held the earnings call - - - here are his comments:

“I always read the transcripts too, for whatever they are worth…mostly for their comedy, as you note. They are always highly authored marketing pitches that try to put a positive light on mediocre at best results.”

Personally, I think Andrew Steinerman of JPMorganChase, is struggling to grasp what “digital services” are and how and why they can be much more profitable than printing (reprographics) services. Perhaps Andrew should commit to spending a few days in an ARC shop in NYC to observe what “digital services” really are and what costs go into generating “digital” vs. “reprographics” services. I think he also needs to better understand the tie-in, the relationship, if you will, between “digital services” and “reprographics” (printing) services. Some digital services don’t get done if printing isn’t going to be done.

Ryan Davis of Oppenheimer asked a few questions; priceless exchange with Suri; here we go….

Ryan: Okay I guess another question more qualitative you know kind of one of the people in the store front – your people in the store front on the street saying I mean is ABI right, can you get – kind of get some color there?

Suri’s response: You are referring to the Architectural Billing Index, ABI?

Ryan: Yeah, I mean, where is everyone – what’s your – the end markets, the customers saying kind of to your people in the storefront, are you kind of hearing much in them?

Suri’s response: If you want to see how Suri responded, go to and read the transcript.

After I read Ryan’s questions, I laughed so hard I nearly fell of my chair. I’m doubtful that Suri was amused.

- - - - - - - - -

So, at what point might Suri (and maybe a couple or a few of ARC’s largest institutional investors) consider taking ARC private?

No comments:

Post a Comment