ARC Document Solutions Inc (ARC) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2007 American Reprographics Company Earnings Conference Call. My name is Michelle, and I will be your coordinator for today.

At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference.

(OPERATOR INSTRUCTIONS)

And as a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to your host for today, Mr. David Stickney from American Reprographics Company.

Please proceed, sir.

Thank you, Michelle.

Welcome to the call, everyone. Joining me today are Mohan Chandramohan, our Chairman and Chief Executive Officer; Suri Suriyakumar, our President and Chief Operating Officer; and Jonathan Mather, our Chief Financial Officer.

Earlier today, the Company issued a release reporting financial results for the first quarter ending March 31, 2007. You can access this release and the Company's other releases from the Investor Relations section of American Reprographics Company's website at www.e-arc.com. You can listen to a taped replay at your convenience beginning about an hour after this call's conclusion. It will be accessible for seven days after the call. The dial-in number for this replay is in today's press release.

Please be advised that this call is being webcast live. A replay of the webcast will be available for 90 days from today, and again, you can access it from the Investor Relations section on the Company's website.

Before we begin, please be advised that this call contains forward-looking statements that fall within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding future events and the future financial performance of the Company, including the Company's financial outlook. Such statements are only predictions, and actual results may differ materially as a result of risks and uncertainties that pertain to our business. These risks are highlighted in our quarterly and annual SEC filings.

The forward-looking statements contained in this call are based on information as of today, May 3, 2007, and, except as required by law, the Company undertakes no obligation to update or revise any of these forward-looking statements. This call will also contain references to certain non-GAAP measures. The reconciliation of these non-GAAP measures is set forth in today's press release and in our Form 8-K filing.

With these administrative details now out of the way, I'll turn the call over to our Chairman and CEO, Mohan Chandramohan.

Thank you, David. Good afternoon, and thank you for joining us.

Before we proceed with the regular business of the earnings call, I would like to address our announcement earlier this week that I will be accelerating my previously disclosed retirement as the Chief Executive Officer of the Company, effective on June 1st.

As many of you recognize, ARC is careful and considerate when addressing the future. Our plans are the result of the best minds and best thinking we can muster in the Company. My decision to accelerate the 15-month transition plan is the result of the flexibility we've built into the plan as well as the strong work ethic, nimble response and forward thinking efforts of Suri and the rest of the management team.

I'm absolutely delighted to hand the baton to Suri at this point. I look forward to seeing what his tremendous energy, enthusiasm and expertise will produce as the Chief Executive Officer of ARC.

I also want to thank each of our investors who have shown their interest and support in ARC over the past several years. Your support, insight and excellent questions have kept both the management team and the Company sharp and provided tremendous incentives to perform beyond expectations. I have every confidence that your continued input will drive the Company to greater success.

While I'm not going far, given my position as Chairman and the largest shareholder of Company, I'm leaving on a high note.

The Imaging Technologies acquisition also announced this week is the largest acquisition we have completed since becoming a public company. The result of the acquisition is the achievement of a long-held company milestone to establish a dominant geographical presence in the southeast and a solid platform for growth.

Also, several of our key business initiatives are hitting their strides, and we are solidly on track for meeting our year-end goals.

In the nearly 20 years I have been leading the Company, I have never been prouder than I am at this moment or more confident of its success. As such, there is no better time to move on.

In that spirit, I'm going to turn the call over to Suri, sign off from my speaking role on these conference calls and for once listen as a keenly interested, deeply involved shareholder and Chairman. I'm leaving the Company in truly capable hands. I wish the management team and all of you the best in your future endeavors and thank you for your support of ARC. Suri?

Thank you, Mohan. I'm sure that I am speaking for the entire ARC family when I say thank you to Mohan for his leadership and inspiration. I'm looking forward to continuing to work with him as Chairman, and I'm also tremendously excited about taking the Company forward as its new CEO.

Our call today will proceed in its usual fashion. I will begin with a brief overview of our financial results for the first quarter of 2007, followed by a brief review of our outlook for the balance of 2007, and I'll finish with a look at our operational performance for the quarter. After that, our CFO, Jonathan Mather will review the financial in some detail, and then we will take your questions.

To begin, ARC reported sales for the first quarter of 2007 of $160.2 million compared to $140.8 million in the first quarter of 2006. This represents a 13.8% increase year-over-year.

Our gross margin for the first quarter was 42.3%, which compares to 42.9% for the same period in 2006. ARC's EBITDA margin for the first quarter was 25.1% compared to 24.2% in the first quarter of 2006. Earnings per share for the first quarter of 2007 were $0.37.

This performance was achieved in spite of the fact that we had additional administrative expenditures related to our second re-offering completed in March along with overflow expenses related to Sarbanes-Oxley certification in 2006. If not for these additional expenses, fully diluted EPS for the quarter would have been $0.39.

We also experienced a fair number of weather-related business interruptions in several markets during the first two months of the year. The weather, of course, also affected the construction business in these markets overall. With that said, however, at this point, I'm reaffirming our revenue forecast for 2007 of $690 million to $710 million and our earnings per share forecast to be in the range of $1.58 to $1.62.

I also should note, contrary to our practice in the past, we included certain acquisition in our forecast that we were -- that were progressing smoothly towards completion at that time. As such, for 2007, we projected $24 million in revenue to flow through from the acquisitions that were completed in 2006, and we expected $45 million of revenue impact from acquisitions completed in 2007, thus approximately $69 million were accounted for in the acquisition activity in the forecast.

I'm very pleased to announce that with the completion of the MBC and Imaging Technologies Agreements the bulk of our forecasted target for acquisitions have been achieved. The pipeline for future acquisitions remains strong, and we will continue to pursue them aggressively.

I'd like to turn to specific operational details for the quarter now. With regard to our national footprint, we added 20 branches, closed or consolidated three of them, ending the quarter with a net gain of 17 locations. As of March 31st, the Company employed 4,689 employees, and during this time, we were actively engaged in finalizing our most recent acquisitions and setting the stage for continued acquisition growth in the coming quarters.

The business mix stayed at 80% AEC-related services and 20% from non-AEC services as before. Our FM count for the quarter was 109 new contracts, bringing our total to 3,337 contracts. FM contributed 16.5% of the revenues for the quarter compared to 16.3% in the first quarter of 2006.

Digital document management services contributed 5.6% of all first quarter revenue and, of course, continue to create options that our competition cannot afford in service levels and specific applications.

Our Premier account lines also continue to embrace the digital transition in reprographics workflow. Notably, Boeing, Whiting-Turner, Perini Construction and MGM City Center are all heavy users of our technology and continue to work with their teams to use our online plan rooms, job submission tools and bid management applications.

Our discussions with potential partners overseas have continued since our last call in late February. While we have no specific news to report at the moment, we continue to explore joint venture and other business possibilities in China and other hot spots of commercial development in Asia and in the Middle East.

A bit closer to home, the PEiR Group received an excellent reception in Europe during the first week of April. More than 30 reprographic companies and a number of European reprographic suppliers attended the conference. Countries including Austria, Finland, Germany, the Netherlands, Spain and Switzerland were represented. France Repro, one of France's largest reprographics organizations with more than 33 member companies, announced their intention to join the PEiR Group, while many [inaudible] companies expressed their interest and support of the group's intent to create a tight network of reprographers across Europe.

The PEiR Group's recruiting efforts in Europe were the primary focus of our first quarter activity, and eight new members joined the organization year-to-date in the U.S. Between these new members, attrition and ARC acquisition activity, membership in the PEiR Group is currently at 159 companies.

With that as a general report card on operations of the business during the first quarter, I'd like to turn briefly to our management transition. I want to assure you that the goals and plans the Company announced earlier this year will remain consistent for 2007 under my direction as the Company's new CEO. Mohan and I have been partners for many years, and our ambitions and general thinking about the future direction of the Company has always been in concert.

The Company's growth objectives remain consistent in the five areas we consider to be [weighted factors] for our business. As many of you know, they are revenue, earnings, digital document management services, facilities management services and, of course, free cash flow.

As we noted earlier this year, we consider these objectives to be our principal guides in creating an unshakable leadership position in the industry as it transitions to a more digitally sophisticated value-added service segment. These five principal areas of focus will guide is through the remainder of 2007.

At this point, I'll turn over the call to Jonathan for the review of the financials for the quarter. Jonathan?

We may need to have Jonathan unmute his phone. Apparently we're having some technical difficulty here in having Jonathan pick up the phone.

At this point, we'll just have Suri continue with comments from our financials from the first quarter. Suri?

Okay, I will continue until --

I hope the lady operator didn't --

There we are. Jonathan, we can here you now.

Can you hear me? Okay.

Yes. You're live.

Okay. Thank you, Suri. Sorry for all that confusion.

That's okay. Not a problem.

Okay. As Suri mentioned earlier, revenue for the first quarter of 2007 was $160.2 million compared to $140.8 million reported in the same period of 2006 or an increase of 13.8%.

Revenue by segment was as follows. Reprographics services, $119.8 million, representing 14.3% growth. Onsite services, or FMs, $26.4 million, representing 14.9% growth. Equipment and supplies, $14.1 million, representing 7.9% growth.

First quarter revenues by geographic region were as follows. Southern California, $46.9 million. Northern California, $26.4 million. Pacific Northwest, $9.1 million. South, $34.4 million. Midwest, $19.6 million. Northeast, $23.8 million.

Gross margin for the first quarter was 42.3%. This compares to 42.9% for the same period in 2006.

Our SG&A expense was 21.4% during the first quarter of 2007 as compared to 22.4% in the same quarter of 2006. SG&A included $1.2 million in additional costs relating to our second re-offering in March of this year and other professional and administrative expenses.

Operating income in the first quarter was $31.8 million or 19.8% of revenue compared to $28.1 million or 19.9% of revenue in the first quarter of 2006. Interest expense during the first quarter of 2007 was $5.2 million compared to $4.5 million in first quarter of 2006.

Net income for the first quarter of 2007 was $16.8 million or $0.37 per share fully diluted. This compares to net income for the first quarter 2006 of $14.4 million or $0.32 per share fully diluted.

The additional expenses mentioned above had a $0.02 impact on the earnings per fully diluted share.

Fully diluted shares outstanding were 45.8 million at the end of the first quarter in 2007.

Moving on to the balance sheet. We ended the first quarter of 2007 with working capital, excluding restricted cash, of $15.5 million or approximately 2.5% of trailing 12-months revenue. This compares to $12.7 million for December 2006 or approximately 2.1% of 2006 revenue.

Day sales outstanding, or DSO, were 52 days in the first quarter 2007, equal to 52 days in the first quarter of 2006.

Total debt, including capital leases, at the end of first quarter 2007 was $293.6 million, up from $266.1 million for the same period of 2006. The ratio of debt to trailing 12-month EBITDA at the end of quarter one was 1.9 compared to 1.9, the same, at the end of the fourth quarter 2006.

Also, to complete some of our recent acquisitions, we borrowed $50 million from our existing term-loan facilities. Cash flow from operations in the first quarter 2007 was $11.4 million compared to $15.2 million in the same period of 2006. Finally, we're projecting a corporate tax rate for the balance of the year to be at 38.8%.

That concludes our financial discussion. At this point, I will turn the call back to Suri. Suri?

Thank you, Jonathan. As per our usual convention, I'll take your questions and either answer them myself or direct them to Jonathan as required. Operator, at this time we can bring in the questions and answers.

Thank you. (OPERATOR INSTRUCTIONS)

Your first question comes from the line of Mike Fox of J.P. Morgan. Please proceed.

Good afternoon, everyone. And Mohan, congratulations on the accelerated transition.

Mike, Mohan has left the call dial, but I'll certainly pass on your congratulations to him.

Okay, great. Thanks. Can you just talk about the organic growth for the quarter and whether or not there was any impact on -- from working days and then also the impact from weather?

Not a whole lot of impact on the working days, Mike, but we certainly had some impact from the weather. We had a fair number of days. It was not across the nation, but we certainly had a fair number of days in various cities across the nation. We had about 12 days shut down in Chicago, Denver four days. We had a day in Cincinnati, Columbus. Detroit had a couple of days. Grand Rapids had a day. So it goes on and on. Toronto had three days.

So we had a fair number of shutdowns. And as a result of that, it certainly impacted our numbers. And of course, when that happens it also impacts construction as a whole because oftentime the work stoppage, by the time they gear up and start again, it's a little slow. And Jonathan, could you address the organic growth part of it?

Sure. To answer your question, for the quarter the organic growth was 4.5% and the acquisition growth was 9.3%.

Okay. And then is there any way, Jonathan, to quantify the impact from the weather on the organic growth?

It's difficult to say exactly in dollars because it's just not only, as Suri said, the shutdown of facilities, but there's also a multiplier effect because contractors, their work also is affected, et cetera. So while we have internally attempted to have some numbers [inaudible] because there is no real science to come up with that. But it clearly could be a couple of million dollars.

Okay. And then with regard to the $1.2 million, was that included in your guidance when you gave it the last call?

No, because at that time the second re-offering was being considered, so that was not in our quarter. Second, we don't give quarterly guidance, Mike. We give annual guidance. So while we didn't provide quarterly guidance, in the annual guidance we did consider some of the secondary related costs, but not to the full extent. Plus, the legal -- the professional legal expenses that Suri talked of was not something we had anticipated because that was after the plaintiff pursuing an action, that this was the up-front cost.

Okay. So effectively by reaffirming your guidance, your outlook is maybe a little bit better than it was because there are a couple of items that are negatively impacting the numbers, what they're going to come out at.

You could interpret it that way.

Okay. And then with regard to the guidance also, I understand you're being conservative given that the acquisitions done to date put you at the high end of the target there, and then the acquisition pipeline remains full. So if you do any more acquisitions, would we assume that that would result in some upside?

Yes, you can assume that, Mike. I mean what we said is, obviously, unlike the past years, we accounted -- and now when we give the guidance we accounted for some acquisition targets because we certainly had these negotiations going very smoothly. So with the completion of ITS and MBC, that pretty much takes into consideration that amount we accounted for. Therefore -- and of course we still have a very healthy pipeline. Therefore, so we would obviously be able to continue to do acquisitions, and that certainly will help us.

Okay, great. And then, are you still expecting I think it was 6% to 8% for organic growth this year despite the lower number in this quarter?

Absolutely, absolutely. And the thing to understand, Mike, is that the first quarter always starts up a little slow given we come out of a weather -- small -- what you call slow weather conditions, holidays and bad weather typically year after year. And then it ramps up during the latter part of the year.

That's exactly why we don't give the quarterly guidance. Jonathan touched on that earlier. First quarter is always slow to start, and then it ramps up. And many of our initiatives, for example, if you take something like Boeing, we just kicked it off and it will gather momentum later on.

So we feel good about the organic growth, absolutely. We feel very confident from a non-residential perspective and what we know on the ground, it looks solid.

Okay, great. And just a follow-up on that. Can you talk about what you've seen so far in the second quarter with regard to maybe where organic growth is pacing or, if you can't quantify it, just kind of the pace relative to the first quarter?

Yes, hard to quantify. Typically second quarter starts picking up, Mike, and based on the information we have on the ground and the work we are doing on the non-residential side. I mean if you just basically take our space, it's looking good. I mean, it's not changed from the time that we give the guidance.

As you know, when we give the guidance -- that was early March -- we knew exactly the impact of the weather. So that is something that we already had that in mind. And still we gave the guidance because we were comfortable that with the work and the predictions we had on the ground. So that hasn't changed at all, and we certainly think second quarter will continue to more upwards.

Okay, great. I'll let someone else get in there.

All right. Thanks, Mike

Your next question comes from the line of Scott Schneeberger of CIBC World Markets. Please proceed.

Hey, good afternoon. And I guess I'll start out along those same lines.

Okay.

Mike mentioned you have 6% to 8% organic growth guidance, which I think was actually 8%. And you're saying that, yes, for the full year you're still looking to achieve at least that level, Suri?

Yes, absolutely, Scott. Yes, yes.

Just wanted to confirm on those numbers.

Sure. Absolutely.

I was just looking back at the trends in the past. You did have a very tough comp in the first quarter of last year. Did that contribute at all or was it really just the weather? I'm just trying to dig a little deeper there.

Okay. And what exactly, in what area, what trends are you referring to, Scott?

On the organic growth, the 4.5 number is substantially lower than what we've seen before from you guys, and weather contributed, and you're saying non-res still looks good. I'm just wondering if there's any other pieces that were missing here?

No. It's mainly the weather, which impacted us. And like I said, it is just not one swoop across the nation, Scott. It was just in so many locations, and it came at different times. So it kind of disrupted the rhythm, so to speak, when we come off holiday period and bad weather period as it is, which is typically the trend, like I said before.

You're talking about November/December. Things are slow down, shut down, and then we kick it off and then next thing you know it's, bang, we run into bad weather. That kind of really puts a dampener on it. So that, I would think, is about the most impacting thing which actually squeeze the organic growth there.

Jonathan, would you agree?

I agree with you. In fact, when I was looking at the numbers. Quarter one last year, Scott, weather was perfect for the construction industry -- this is 2006. Completely different in this year.

So when we were trying to put in some numbers -- question Mike came up with -- surveyed our region, divisions, et cetera, none of them -- quarter one last year was great. This year we had made the challenges with the aspect of the weather.

Okay, thanks. Could you guys discuss how the weather impacts the line items of reprographic services as opposed to facility management? If you could just compare and contrast there. Or does it affect them equally?

Actually, fundamentally, Scott, it affects the reprographic services mostly. The facilities management don't get affected a whole lot.

But having said that, you know, if the weather is bad -- particularly in this particular year, though, if you notice, that what happened was we had really freaky weather. I mean, there were freezes all over the place. So offices were shut down.

So in those instances things like even -- for example, in Oklahoma for two days we had office shutdowns. So you have heard the famous JetBlue story and how much the weather impacted the airport shutdowns and therefore [inaudible] shutdowns and so on and so forth.

So when that happens, it can across the board have an impact on organic growth. But if you are referring to the growth related to FMs, our digital services, you must also take into consideration that during the last quarter last year, we did significant acquisitions, meaning in terms of size. We did Reliable, and we did T-Square. And between them we had about $30 million plus worth of business coming in, and that actually tends to dilute our numbers in terms of digital services and FM, really.

But in spite of that, our numbers look pretty decent in FMs and digital services. We were able to maintain that. Does that give you enough color?

Yes, that's very helpful. Another question. I think you've talked about 43% gross margin in the past. Are you still targeting that? It looks like we're going to have a lot of acquisitions this year. I know you can get them to be breakeven to profitable quickly, but it obviously dilutes you a little bit in the first place. Just curious on a little more color on that, please.

Right. I mean in terms of gross margins we certainly feel -- obviously, the first quarter gained because of fixed cost. The absorption of fixed costs was lower, so obviously you sense a little bit of softness there. But we're very comfortable with the gross margin numbers.

Needless to say, if we acquire a large number of companies on single-digit margins -- now our typical assumption, when we do an acquisition, is that the companies we acquire are on 10% margin. But if there happen to be too many single-digit margin acquisitions, then there will be an impact. But barring that, we are very comfortable with the gross margin number.

All right, thanks. And real quick. I don't think you've given clarity on this, and I respect if you don't. But on the two acquisitions you've made this year, are they similar to Reliable-type margins or are they similar towards your traditional lower margin initially that you're going to have to ramp up?

They're most similar to the traditional margins.

Okay. Thanks. That's helpful. I'll hop out now. Thanks a lot.

All right. Thanks, Scott.

Your next question comes from the line of Al Kabili of Goldman Sachs. Please proceed.

Good afternoon, guys.

Good afternoon, Al. How are you?

Great, thanks. A question on the margins following up on that. I'm trying to understand why they would be down year-over-year in the first quarter. I hear you about the fixed-cost absorption, but organic revenue was still positive this quarter. So if you could just comment on what caused the decline on the margins.

Right. The biggest impact from my perspective, Al, is definitely the fixed cost. Jonathan, would you like to add to that?

Yes. When you finish, Suri, I can add color to what you said. I agree with you.

Go ahead, Jonathan.

So, as Suri said, the first thing is absorption of what we refer to as fixed, including labor, because if there's a bad storm you don't suddenly that day itself lay off everybody. So, clearly, the fixed -- semi-fixed related cost was a driving-the-margin-down factor.

Second one to the part is, yes, while there were organic growth, as Suri pointed out earlier, some of the acquisitions we did last year coming into this -- in the first, the acquisitions were done after the first quarter. Say, take Reliable. I mean I'm just using it as an example, although that's not a margin story. Until they get ramped up fully to the best-in-class practices of ARC, they don't enjoy the similar type of margins. So they become a drag down on our good margins.

But the main factor for the quarter one gross margins shortcomings compared to the prior was clearly the fixed overhead absorption.

Okay. So I just would have thought if organic growth is positive, your fixed-cost absorption would still be, while maybe not as strong as normally, it would still have not have been a hit. But maybe I can follow up with you later offline.

Absolutely. You know, Al, you could call Jonathan after the call, if you require, to clarify that point a little bit deeper.

Okay. And in terms of capacity utilization of the branches, where are we right now? Are we getting to the point that we need to start adding personnel and additional equipment as volumes continue to ramp up or where are we in the process?

With regard to the branch capacity, we still have a fair amount of capacity left, Al. There are a couple of reasons for it. One, with the digital technology transition, as more and more the business gets transitioned into digital technologies, our ability to do more work and transfer these things -- in other words what we call workload sharing or sharing the workload amongst branches -- is all greater.

In the past, when we were basically working off analog documents, we couldn't move work between branches. But what we are able to do now is that we are able to move work from branch to branch virtually at the drop of a hat and be able to utilize that excess capacity.

So we're very comfortable for now, and I would think we are in the 70% plus capacity and that we have a fair amount of elbow room to grow. And of course, needless to say, as technology takes foothold, the process is getting more and more automated, which allows us to actually do more work with the capacity we have.

Okay. And then in terms of the acquisition drag on the margins. Is it just that the acquisitions this year are that much lower margin than what you've had in the past? Because you've always done acquisitions and had pretty good expansion there, but it seems as if this year they seem to be hitting you a little bit harder on the margin side. Could you comment on that, please?

My perception -- my view, knowing what I know, Al, is more to do with the fact that we've always had acquisitions, and of course, you can never pinpoint to a specific number because of the fact that they come in all sizes and shapes, which, of course, you know very well.

But my estimate for the first quarter is more to do with the fact that we typically come off of a slow quarter, and if the weather, again, like Jonathan said, if it is very good -- and we have had years like that. Every now and then we would have a year where we kick it off in January, it's bright and chirpy, it's dry like hell and the work gets on to full speed, and there is no hiccup whatsoever. In those instances, the -- what you call the acceleration of work from the slow period into the early part of the period is very, very fast.

What happened this year was it was very sluggish in spite of the fact that people sometimes refer to as a mild winter -- I mean we had freak weather in several of the spots like we mentioned, several locations we mentioned before, so we got hammered in those locations. So, for example, if a location is hampered for two days, if the shutdown is for two days, I promise you by the time the branch comes back to normal working days it'll take another two to three days because customers get impacted. They have mobilization issues. They can't move all the equipment they wanted.

It's not like the next day -- particularly in construction industry, unlike manufacturing or anything like that, whatever the destruction was there you just kick off the factory and it goes full speed, you are in the outdoors. And so for you to -- whether it is all wet and soaked or whether it is, what do you call, snowy, the slowdown has a much bigger emphasis on our business. So what happens is, if we have a day or two of bad weather, we pretty much get most of that week eaten up.

Okay.

And my feeling is it's mostly related to the fact that we had a slower start for the first quarter related to last year. Last year we just, like Jonathan said, we jumped off and it was a great start.

If I may add something to help Scott to further the point. Public information that we provide we basically give an income statement, which doesn't give you the breakdown between material, labor, overhead, et cetera, but the cash flow.

And just to give you a pointer, if you look at depreciation totally as a fixed cost, right, 2006 quarter one -- this is what publicly we shared with you -- at 3.4%. 2007 quarter one is at 3.9%. That's just an indicator of the revenue. Just an indicator of absorption of [50] basis points.

Okay. And following up on cash flow. Can you discuss -- it seems that the free cash flow this year in the first quarter is down versus last year. Could you help us understand the puts and takes there?

Sure, absolutely. Let me begin by saying that we expect the free cash flow for the year -- my emphasis on the year -- to be stronger than 2006. Where 2006 our free cash was $91 million, we're projecting it to be about $100 million.

So quarter one was more timing to begin with, and the cash flow is in the earnings release that we submitted. The one main factor was timing of payables. In our accounts payable at the end of last year we had income taxes due, which normally is paid in the quarter. For a good reason it was [inaudible] in the balance sheet. That itself changed as a payment in this quarter one negatively impacted by about $7 million.

So the details of the cash flow, I will point out that particular example, which show on a timing basis quarter one looks as though free cash flow is $11 million cash flow from operating activities and $2 million in capital expenditures, that is 9. But the flipflop, the tax payable. However, you can be confident that for the year we expect to have generated more than $100 million in cash, free cash.

Okay. So it was a tax or -- it was a tax payables issue?

Exactly.

Okay. Got you.

And it's in the cashflow that -- in the release, attached to the release.

Okay. Thanks, Jonathan. And the last question, on the SG&A costs of the equity issuance. Were you able to just break out what the equity issuance cost alone was?

We didn't provide the details, but I can share that with you. In the $0.5 million range.

Okay. Okay, great. Thanks guys.

All right. Thanks, Al.

And your next question comes from the line of Matt Litfin of William Blair & Company. Please proceed.

Yes, good afternoon.

Good afternoon, Matt.

Did you say that the percent of revenue from FMs was down year-over-year?

No. It is actually the same. But we were just talking about the organic growth part of it, and what we were finding out was the fact that, Matt, because we acquired two large acquisitions, put together about $30 million the last quarter of last year, we were saying as a percentage we did well. It doesn't show a whole lot there.

Okay, thanks. And what about the percent of revenue that came from the residential area? Could you comment on that versus the prior year?

We didn't break that down specifically, Matt. But as you know, overall it does not impact us tremendously. But typically what happens -- so typically what happens is, in the areas where there has been explosive growth in home building that impacted. So we could have some impact in Orange County, some impact in Phoenix and so on, so forth. But overall as a company, it didn't have a tremendous impact on us.

Jonathan, would you like to add anything to that?

I mean, exactly what you just said.

So there's not a whole lot of impact because of residential across the company on the whole number. But in specific branch locations, we might have sensed the pain.

Well, I think typically it's been maybe in the mid-teens. When you say it doesn't affect you very much, does that mean 20 basis points or does that mean 3 or 4 percentage points of revenue?

15% of our revenue comes from not the residential, and 65% comes from the non-res. And so that makes up 80% and 20% from [inaudible]. That's the mix, Matt. So I don't think for the first quarter that number varied a whole lot.

I see. Jonathan, can you tell us how much net interest expense is embedded in your guidance for 2007? I think that your interest expense came in a bit lower than I was looking for on the Q1.

Again, in the guidance what we provide is revenue and EPS, not into the details of the [model]. But what I can tell you is you can see the debt at the end of the quarter. We talked about raising the additional $50 million, and then with the cash coming in from operations, subject to other acquisitions, it'll taper down.

So your current interest or the interest that we had of $5.2 million will go up slightly and -- because of cash coming in, it'll not rise drastically over the next few quarters.

I see. Okay. One more, if I might? By not including acquisitions this time in your guidance, are you changing your rules around how you give guidance or should we just take that to mean that your pipeline doesn't have anything imminent, and next quarter or the quarter beyond when something is imminent you'll go back to including acquisitions?

Matt, what happened is -- in the previous year when we give guidance we actually did not include acquisitions. We don't feel good about including acquisitions in general because, obviously, for many reasons. Number one, we don't want to be pressurized into a situation where we are compelled to make a certain number of acquisitions because we have built that into the guidance. That's number one. And number two, we always find that if you have actually not nailed a deal down it is very hard to count those dollars.

So as a general practice, when Mohan gave guidance the time before after we got public, we didn't, as a practice, include acquisitions. However, this year, when we were giving guidance, given that we were so close to getting these deals done and we were in our own minds were very sure it's a done deal -- obviously we hadn't inked it, but we were very comfortable the way they were proceeding and the market conditions and so on -- we decided it makes sense for us to add those acquisitions in, so which we have done.

But having said that, there is a lot more, and these two happened in a way, Matt, that they were two large acquisitions because we knew there were big dollars which were going to come in. So we felt comfortable throwing that in. Mohan and I talked about it, and we felt comfortable throwing that in.

Going forward, we will have the same practice as we have had always not to include acquisitions. And as soon as we do them, we'd obviously announce it to world.

Okay, great. Thank you.

You're welcome.

Your next question comes from the line of Mike Schneider of Robert W. Baird. Please proceed.

Good afternoon, guys.

Good afternoon, Mike.

Sticking with the acquisitions line of questions. First, just when you did give guidance, Suri, was it MBC and Imaging Tech that were contemplated in the guidance?

I mean, we obviously had a whole bag of acquisitions, Mike. Again, for confidentiality reasons, we couldn't discuss all of it.

But both -- I must say, though, the larger one really looked good. I mean, ITS looked good. That's what made us think about including the acquisitions. So MBC was -- an acquisition like MBC, we worked on it for nearly -- so many years, though. I mean, we have been working on it three, four, five years, but it was coming to fruition in the last six to eight months, and we were working towards it.

But that's always the case with family-owned companies when we are doing acquisitions. It takes a while, and we always give it the time it's required. But ITS was also a financial seller. So we felt like that deal was there, it was there to be taken by us, and we were the only ones who were capable of executing a deal like that. So we felt comfortable putting that in.

Okay. And the expenses associated with the deals. Had you run through any of the expenses in Q1 or are they to come in Q2 and can you quantify them please?

Jonathan, could you handle that?

Again, when you talk about expenses, the expenses that go to the P&L in quarter one would have been incurred in quarter one. We don't spend a lot of money on acquisitions like what you may expect. There's no financing involved, et cetera. It's legal expenses. A lot of legal, we have internal. Diligence, we use a lot of internal. And some of those other expenses are expensed, and those that can be capitalized are capitalized.

And I guess I was referring more to initial integration costs or severance costs associated.

Oh, okay. Mike, actually, in terms of integration costs, no. They don't impact us a whole lot traditionally as we have done. Severance costs and so on, as you know, we have -- typically we retain all the management, 90% plus. So I can tell you in almost all the acquisitions we did extremely little -- in fact no, virtually no severance costs which shows on the account, on the radar screen.

And we are very excited about the team both in MBC and ITS, excellent teams, because that's exactly what we needed in mid-Atlantic and the south Atlantic region. We got some really great players there, further consolidating our position. So, yes, there's not a whole lot to worry about there.

And with those two acquisitions, given their size, the top 10 in this industry is consolidating rapidly, what do you estimate now your post-acquisition market share is in the United States?

You know, I never thought about that, Mike. Obviously $60 million more added to just over $600 million plus. So I guess we are into $660 million, $670 million, Jonathan, run rate?

Yes. $600 million run rate, I would say.

Okay. On a [5 billion] market size, Mike.

Okay. And sticking with the line of expenses. The Premier account launches during the quarter, I presume Boeing got up and running. Were there any unusual or significant expenses to launch that account in Q1?

Not really, no. It's business as usual now. We're obviously working on several new accounts. In some instances when we work on a new account, because of the technology investment or because of their requirement to do some technology changes, we might spend some money. But, no, first quarter is business as usual, Mike.

And how many Premier accounts do you have as of quarter end or right now?

I think the last known count -- I don't have that off the cuff, Mike, but I can check and get back to you. But the last known count I think we were around 12. I think the last quarter we were at seven when we had the last call. We probably went up to 12 now.

And can you update us, back in the third quarter you announced that you were going to, in effect, allocate some additional funds to ramp the Premier account strategy and the Sub-Hub strategy, can you give us an update on that money and basically the returns and success in those strategies?

Right. Basically, those are all kind of long-term investments on the technology side and setting up and getting the people up and running. Premier accounts is doing very well as evidenced by Boeing. And obviously, for example, in order to kick status an operation like Boeing, it's about $12 million to $15 million contract. So a substantial amount of work which has to be moved in terms of the manpower and the systems getting up and running. Those accounts do absorb a lot of the time and energy and the money.

But in terms of what we did with Premier accounts is some investments there in terms of hiring people, setting up infrastructure, getting the process moving along. And in Sub-Hub, it's obviously a much longer term process there. That we actually built a new product, built a new platform, and we are in the process of introducing that to a different group of customers whom we don't interact with on a daily basis the way we would actually interact with them in Sub-Hub.

So it's a different concept. It's our reprographic customers. However, it's more than just our direct customers. It's our customers' customers. These are subcontractors. And when we have something like Sub-Hub up and going, we would directly deal with subcontractors in a variety of things that they will require. But that aspect of it is still ramping up, Mike, and there's no return from that just yet.

Okay. And then digital. What did it grow in the quarter?

For this quarter?

Yes. Revenue growth.

Revenue? Jonathan, do you have the breakdown there?

Yes. Just the digital alone in quarter one is 5.6% of our revenue.

Okay. And what was the growth rate, Jonathan?

Last year same period was 4.5, which grew 39.9% year-over-year; 40% growth year-over-year.

Okay. And --

And that is -- sorry, Mike -- and that is in spite of the fact that remember that we added those companies in the last quarter.

Right. Okay. So that would be an organic growth number?

Yes, yes.

Okay. And on organic growth, to circle back to this, the goal had been 8% for the year. You're starting again in the 4.5% range, and yet you didn't reduce the revenue guidance.

Given that you can't make up the days that were lost in the first quarter, what do you see in the marketplace that gives you confidence you're, in effect, going to make up those lost days in Q1 and still hit this 8% organic growth number for the year?

Typically what happens in the construction world, Mike, is that, yes, as we do lose days, but the work does ramp up. The people do try to catch up.

So one of the reasons why March gets to be a very busy month, starts off with February and then March gets busy, is because of all the backlog during November and December. Things are very slow. People are waiting to get things done, but it doesn't get done because of the holidays and because of the weather pattern and so on and so forth. And then it starts gaining momentum during the early part of February and then, of course, kicks into full gear during March.

So we are fairly confident that we will be able to maintain that level of activity during the rest of the year. Of course, based on what we know from the ground with information with regard to all of the predictions and so on, non-residential seems to be really strong. I mean, I just got a report yesterday in a local market in San Francisco, the vacancy rates are down to single digits. And every aspect of rent class, the rents have gone up.

So we're very confident based on what we know about market that non-residential will remain strong unless something that we don't know shows up on the radar screen. But up to now, in our space, we're very comfortable with that number.

Suri, if I may add to what you just said --

Yes, Jonathan.

-- to answer that question. As Suri pointed out earlier, when we provided the guidance and provided the 8% organic growth guidance, it was in the first week of March, when we already had experienced some of the negative weather conditions of January and February. So taking into those negative conditions, which resulted in a 4.5%, as you pointed out, organic growth in the quarter one, we still quoted an 8% organic growth.

Remember that in the second half -- I mean, as Suri pointed out, we're already sensing April, which we ended. We're already seeing growth. And we have accounts -- Premier accounts like Boeing, et cetera, ramping up. For the second half of the year, we are very bullish with such accounts, et cetera. So the 8% was having taken into consideration the first quarter weather challenges.

Okay. Well, that's a great point, Jonathan. I guess I hadn't put in context the Q1 call that you had already experienced a lot of this weather, and it was in there.

Also the Boeing. Boeing is a big account that we've talked about before. I mean, just like given an example.

I don't want to turn this into a meteorology study. But the first half of April was actually the snowiest and coldest April in 24 years, the first two weeks of it. Presumably, that's been taken into account today as well?

Yes. Yes, Mike. I mean, obviously, we keep track of those. It doesn't seem like it had killed us, but the numbers are still coming in. And obviously, like you said, it's hard to predict what the full impact of any weather-related situations or shut downs like that. It will take a while for us to establish exactly what the impact has been, but it doesn't look too bad. But we certainly know it has been pretty volatile. It's almost like the stock market there, the weather.

Okay. And final question, Jonathan, just into the data. The reprographics services line item of revenue. Can you tell us what acquisitions contributed just to reprographic services?

I don't have that to give you at my fingertips. So I don't want to give you a guess. Most of our businesses are reprographic, right, Suri?

Yes, exactly. Except for FMs and digital services. And of course, then we have the supplies and (inaudible), but it mostly comes under reprographic services.

As Suri pointed out earlier, when we buy these companies, they have very minimal digital and FM businesses.

Okay. I'll follow-up on that. Thank you, guys.

You're welcome, Mike.

And your final question comes from the line of Jack Sherck of Suntrust Robinson Humphrey. Please proceed.

Hi. Thank you very much. I just had a question in regards to the $24 million in acquisitions that were completed in '06. Sort of what's the timing of those rolling into organic growth throughout the year?

Well, Jack, what happens is -- are you're talking about the flow through, which we had done in 2006 which is now flowing into 2007?

Correct.

Okay. Obviously, there are a mix of companies, and it all depends on where the companies were at the time we acquired the companies. Some companies could be at the lower of the scale. If they were -- for example, they might have much less digital services. They might have -- have or have no FM revenue at all. And in terms of profitability, some of these companies could be in the single digits, lower single digits or high single digits, could be in the lower teens, higher teens. So the number always varies.

So when you put everything together, it's hard to establish a particular pattern or period during which we'll be able to draw that organic growth. Now in some companies, of course, if they are already at, say, the mid teens, then they'll come up to speed much faster. In some instances, some companies we acquired were already PEiR members. So they already used some of our technologies. So there, bringing them up to speed is much, much faster.

And that's exactly why we've always stayed with the annual guidance. It's much more effective when we take into consideration the whole year instead of going by -- in sort of trying to gauge that in the short term.

Okay. And just my final question is in terms of your 65% exposure to non-residential --

Yes.

-- what percentage of that is made up by office construction or office related?

We don't break that down, Jack. Obviously, all of that consider -- all of that comes under the non-residential title or banner segment. Even FMI would break it down like that. I don't think they break that down further to whether it's office or warehouse. I don't know of that kind of breakdown. They might have it, but we don't actually go beyond that.

Okay, great. Thank you very much.

Oh, you're very welcome.

And I will now turn it back to management for closing remarks.

Thank you, Michelle. I'd like to thank everyone for joining us today and also your continued interest in ARC. Have a great evening, everybody. Good night.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.