ARC Document Solutions Inc (ARC) 2011 Q4 法說會逐字稿

Good Afternoon. My name is Joseph, and I will be your conference operator today. At this time, I would like to welcome everyone to the ARC's 2012 quarter four and fiscal year-end conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

(Operator Instructions) Thank you. I would now like to turn the call over to Mr. David Stickney, Vice President of Corporate Communications.

Thank you, Joseph and welcome, everyone. Joining me today are Suri Suriyakumar, our Chairman, President and Chief Executive Officer; Dila Wijesuriya, our COO; John Toth, our Chief Financial Officer; and Jorge Avalos, our Chief Accounting Officer. Our fourth quarter and fiscal year end financial results were publicized earlier today in a press release. You can access the press release and the Company's other releases from the investors relations section of ARC's website at www.e-arc.com. A taped replay of this call will be made available several hours after its conclusion. It will be accessible for seven days after the call. You can find the dial-in number for the replay in today's press release. We are also webcasting our call today, and the replay of the webcast will be available for 90 days on ARC's website.

This call will contain 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. Bear in mind that 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, February 21, 2012, and, except as required by law, the Company undertakes obligation to update or revise any of these forward-looking statements. Finally, this call will 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. At this point, I'll turn the call over to our Chairman, President and CEO, Suri Suriyakumar. Suri?

Thank you, David, and good afternoon. Our results for the fourth quarter and full year came in as expected in 2011, and, once again, our performance amply demonstrate our ability to perform in the midst of economic and industry uncertainty. The Company reported annual revenue for 2011 of $422.7 million, with a gross margin of 31.8%. Cash flow from operations was $49.2 million in 2011, making it the fifth year in a row where the Company has generated more than $1.00 per share in cash flow from operations. Adjusted earnings per share came in at negative $0.02 and included $0.015 of cost associated with the company CFOs transition and certain facility closing costs. We reported revenue for the fourth quarter of 2011 of $101.8 million, a quarterly gross margin of 30.7%, adjusted earnings per share for the fourth quarter of $0.00, while cash flow from operations for the period was $19.7 million.

While most reprographers clung desperately to traditional services and struggled to survive in 2011, ARC was actively diversifying into adjacent and growing markets and delivering results that strongly indicate the Company is finding new ways to apply its core competencies to new markets and generate new sources of income. As I noted in our press release earlier, FM revenues grew 13.5% in the fourth quarter and posted more than 11% increase year-over-year. This performance was led largely by our managed print services and offering that was brand-new to us just 18 months ago. Large format color revenue grew 10.3% year-over-year, again led by new offerings to new markets under our Riot Creative Imaging brand. And while not a new source of revenue for us, annual digital services sales stayed steady at 9% as a percentage of our overall revenue, in spite of the drop in digital services revenue generated by the project related work which we traditionally enjoy. As you can see, the real story of 2011 was the success of our diversification efforts.

When we reported our 2010 results at this time last year, economists were calling for a recovery in late 2011. This year however, forecasts are more tempered by comparison, and from what we can see, this is probably appropriate. The economy is improving bit by bit according to the headlines, but evidence of the best news is difficult to find on the ground. Employment appears to be inching up, the markets have improved and some capital looks like it's coming off the sidelines. But vacancy rates remain stubbornly high, and lending for nonresidential construction projects is still very difficult to come by. Construction related reports from FMI, McGraw-Hill, the AIA and others suggested that improvement in the office market will not experience meaningful growth until 2013, and any growth they expect in 2012 will be coming off of a very low base. The outlook for retail space remains [hampered] too. In short, it appears that the bigger segments of nonessential construction, the driver of revenue for ARC will remain challenged in the months ahead. In light of these facts, the progress we made in diversifying our business is even more meaningful, particularly in the five areas introduced last February. First, we will continue to pursue large clients who significantly move the needle on our top line. Large AEC corporations continue to grow through M&A, but look to aggressively reduce operating costs of the merged entities given the economic environment.

ARC is not only in a perfect position to provide these services because of its national and global presence, but nearly all of our services addresses efficiencies in both document management costs and document workflow. Being the only full service document management company capable of addressing these concerns, we intend to exploit our strengths in this area. ARC global solutions already does business with 15 of the top 100 AEC firms in the country, and we are actively hunting for exclusive relationships with the remaining 85. We are also targeting top-tier regional companies in the AEC space.

Second, is our growing pursuit of growing strength and growing strength in managed print services, or MPS. As we have reported throughout the past several quarters, we see this market as rich with potential. Gartner identified ARC as the only player in its magic quadrant who addresses the AEC market with a comprehensive MPS solution. Our experience over the past 18 months suggests our offering is compelling and difficult for traditional vendors in the space to compete with. MPS also leads our global solutions value proposition. Every one of our existing customers and prospects can reduce cost and improve efficiency with this offering, and we are the only company who can offer both construction document management services and the back office productivity of MPS under a single contract.

Third is our continuing expansion into digital color imaging, particularly the production of large format graphics. By offering specialized services in multiple locations, under the same management, our customers benefit from being able to produce sophisticated graphics, close to the ultimate use and eliminate the inconvenience and high cost of traditional print then ship services. This is ideal for high end retail companies, multi-location restaurant chains and product manufacturers that require the regular production and distribution of point of purchase materials. At the beginning of 2011, we had 10 regional production centers under the Riot Creative Imaging brand. We added two more in 2011, one in Irvine, California and one in Orlando, Florida. Riot has allowed us to leverage our strength and expertise in this new market, and delivered significant year-over-year revenue growth.

We also continued to invest and bring to market new advances in our technology services in 2011. On the product side, we upgraded our document logistics application, ishipdocs, and recorded more than $7 million in sales with this product. That's up from $4 million in 2010. We also upgraded our print tracking tool, AbacusPCR, which continues to provide a compelling value proposition for our on-site service engagements.

On the services side, we launched our technology consulting efforts and were gratified to see the interest it sparked outside of our core markets. Large clients such as airline companies, universities, steel manufacturers and others took us up on our offer to reduce cost and bring greater efficiency to their document workflows. We have known for some time in this industry that document management practices are changing, driven by a growing preference for digital workflows and a corresponding decline of print. Today, both the tough economy and the consolidation of the largest companies in the AEC market are accelerating this change. Large companies are forcing smaller companies to adopt digital practices over print to improve productivity and communication with technology, and every business is looking for greater efficiency as they chase the cost reductions that come with it. Our customers are hungry for the gains that are coming as a result of innovation, and they want them sooner than later. While this behavior will affect our print related revenues in the large format black-and-white segment, it also plays directly to our strengths. It highlights our expertise and technology offerings, and through their use, we can facilitate revenue growth in other areas of our business.

As I mentioned earlier, the outcome of our work in 2011 is dramatically different from most traditional reprographers. We are making progress because of our willingness to embrace change, to think outside the box and to accept rather than fight the growing evidence that our customers are transforming right in front of our eyes. Our customers are changing the way they think about the business, changing the way they manage their business, and changing the way they do business. We see this as an opportunity since we dominate this niche market. Our ability to understand and meet our customers' evolving needs makes our service offering even more compelling than before, allowing us to put distance between us and anyone who competes with us in this space. Like us, our customers are exploring, discovering ways to improve efficiency, reduce costs and deliver more value with fewer resources, and we have a tremendous portfolio of services to offer them. We welcome the opportunities this new environment is presenting us.

At this point, I'm going to turn over the call to John Toth, our CFO, so he can add more insight to our performance in 2011 with a review of some key financial information. John?

Thank you, Suri, and good evening to everyone, good afternoon. When I joined the company in the middle of 2011, the strength and agility of its management team was apparent to me. Seeing it in action over the past eight months, I am even more impressed, and I am eager to enhance the financial function and add to our existing strengths in operational and sales execution during the year. That said, as enthusiastic as I am about the future, there is great -- there's a great deal of progress in 2011 that deserves your attention. So, for the moment, I will confine my remarks to our recent financial history.

First, I'll talk about revenue levels and mix, and then make my way down the income statement. On a year-over-year comparison, revenue for the fourth quarter of 2011 dropped by 3%, while revenue for the full year of 2011 dropped by 4.3%. If we correlate the mitigating decline in our revenue losses for both the quarter and the year to the recent industry data Suri presented earlier, this strongly suggests that we are bumping along the bottom of this recent down cycle. Our customer mix remains largely unchanged from the beginning of the year with AEC revenue accounting for 77.3% of our revenue and 22.7% of our revenue coming from non-AEC customers.

We believe our customer mix is stable because, offsetting the decline in revenue from traditional reprographics from AEC customers, we are selling new products to these same AEC customers in the form of MPS and technology services. Therefore, although we maintain 77% of our revenues from AEC, we are diluting our dependence on new construction projects to drive growth. We believe our steady customer mix represents both the strength of our relationships in the AEC, and secondly, it supports our strategy for diversifying by selling new products to existing customers in addition to exploring new markets.

Our revenue mix for the fourth quarter had reprographics delivering 51% of our overall revenue, facilities management, or FM, delivering roughly 25% of our revenue, equipment and supplies delivering approximately 15% of our revenue, and digital services delivering roughly 9% of our revenue. The revenue mix for the full year of 2011 had reprographics delivering approximately 54% of our overall revenue, FM delivering roughly 24% of our revenue, equipment and supplies delivering roughly 13% of our revenue and digital services delivering approximately 9% of our revenue. The strong showing in equipment and supplies in the fourth quarter reflects the strongest quarter for sales in our Chinese operations. As a reminder, in defining our revenue streams, our reprographics revenue, as reported on the financials, includes both color and digital sales in addition to black-and-white print sales. And the FM line includes our managed print services, or MPS, sales. For your daily sales calculations, I 'd note that the fourth quarter of 2011 had 62 days as did the fourth quarter of 2010.

In 2011 we saw mitigated declines in revenue on a regional basis as well as on a national basis. Our year-over-year regional revenue performance for 2011 was as follows -- southern California was down 9%, northern California was down 6%, the Pacific Northwest was down 0.5%, our southern region was down 9%, the Midwest was up 0.5% and the Northwest was down 5%. Our international operations, excluding Canada, are up 19%. We saw growth in the UK as a major global services customer asked us to extend our services across the Atlantic. Our reprographics business in China also grew, and our acquisition there in Shenzhen in September also contributed positively to our performance.

Moving out of revenue into gross margin, I wanted to point out the improvement in our fourth quarter gross margin. For the second quarter in a row, our gross margin improved year-over-year despite a decline in year-over-year revenue. This is largely the result of our cost-cutting, or Stay Fit measures, which were implemented in the first half of 2011. But we believe it is also did our evolving product mix.

I also want to point out that amortization of intangible assets was up $598,000 for the quarter as compared to the same period in 2010. It was up $7.1 million overall for the year. As you may recall, this was caused by the accelerated amortization of our trade names, which we initiated during the fourth order of 2010. The period of accelerated amortization for these items will be complete in April of 2012. Net interest expense was $7.5 million during the fourth quarter compared to $6.8 million in the same period 2010. The net interest expense was $31.1 million for the full year 2011 compared to $24.1 million for the full year 2010. This year-over-year increase is due to the issuance of our 10.5% high-yield notes. The notes were issued in December, 2010, so 2011 is the first full year of interest expense under these notes. The notes carry a higher interest rate than the bank debt they refinanced.

Before moving on, I want to point out the most recent change to our capital structure. On January 27, 2012 we replaced our previous $50 million revolver with a far less restrictive, lower interest, non-monitored, asset supported facility. As a reminder, the facility includes a $10 million accordion feature that may be used to increase the borrowing capacity up to $60 million. The agreement carries no financial covenants unless there is less than $10 million of excess availability under the line. Currently, this revolver remains entirely undrawn.

As we move further into the balance sheet, you can see we ended 2011 with a healthy cash balance of $25.4 million. Days sales outstanding, or DSO, were 48 days in the fourth quarter of 2011. This is down from 52 days in the third quarter. Total debt, including capital leases, in the fourth quarter 2011, was $226.3 million, down from $238.6 million in the previous quarter, and down from $239.6 million at the end of 2010. The ratio of debt to trailing 12 months adjusted EBITDA at the end of the fourth quarter was 3.4, and EBITDA coverage of interest was 2.1 times. We will be filing our 10-K toward the end of this month, and I encourage you to review it for further details.

Finally, to reiterate our outlook for 2012, we anticipate annual adjusted earnings per share in 2012 to be in the range of $0.05 to $0.10 on an adjusted, fully diluted basis. And annual cash flow from operations to be in the range of $40 million to $50 million. At this point, I'll turn the call back to Suri. Suri?

Thank you, John. Operator, at this time we are available to take questions from our investors.

Thank you.

(Operator Instructions) Andrew Steinerman, JPMorgan.

Hi, this is Molly for Andrew. I just wanted to ask a question about first quarter, in terms of what you're seeing so far for trend in January and February and how you expect demand to look versus normal seasonality for the first quarter?

Based on what we see, up to now, in the early part of the year, the trend is very much continuing to be what we had experienced in the last quarter. Say, in other words, what I would say is that there doesn't seem to be any major change in the way customers are thinking or the projects are coming along. The good news is we don't seem to have any more drop. It seems like we are bumping along the bottom here.

And, in terms of seasonality, we haven't had any major negatives up to now. It seems like it's going to be like a regular first quarter. Last year we had issues related with that and a variety of issues that doesn't seem to have impacted us, a lot this year. So, it is going to be a pretty regular first quarter based on everything what we know for now.

Okay, great. And then, looking forward, what kind of revenue growth would you need to see to maintain margin and then to see any lift in margins?

To maintain margins?

Right.

In terms of revenue growth? John, would you like to address that?

Frankly, we wouldn't need to see any revenue growth to maintain margins, with some give or take around the current level. And I would say that we should -- we're pretty well geared with our fixed costs so that revenue growth north of $5 million above where we currently are, you should start to see noticeable margin expansion.

Okay, great. Thank you.

Scott Schneeberger, Oppenheimer.

Good afternoon. This is actually [Daniel Halpberg] filling in for Scott. I have two questions regarding nonresidential construction, and I know you touched on this in the prepared remarks. But can you please speak again to what segments within nonresidential construction that is driving your revenue and that is forecasted to remain challenging next year? Thank you.

Yes, so the large -- the biggest driver of nonres construction, which actually drives our revenues, are mostly related to office complexes. That's the big one, and then, of course, you have lodging, a little bit of healthcare, educational and maybe a little bit of manufacturing. So largely commercial office and lodging, those are the three big segments which actually drive us really hard.

And based on everything, what we are seeing from FMI, those numbers don't seem to show a lot of promise -- they are stable in 2011, but they don't seem to actually accelerate. For them, they really start growing, I'm looking at the graph as I'm talking to you, in 2013, is when you have a significant difference. So, 2012 is when it starts building up so -- and it makes sense to think about it like that because, as employment picks up, then the vacancy rates are going to go down, and then you will start the construction process. So, that lag I think is going to be there before we see results on the ground for our Business.

Okay, thank you.

[Ornest Hyman, Walt Hoffen and Company]

Hi, everyone. I have a couple of questions. Can you help us understand the gross margin progression? Obviously, the margins increased year-over-year, but they were down sequentially. So, can you kind of help us understand that? And then maybe talk a little bit about the margin -- the gross margin expectations heading into 2012 from a directional perspective?

Sure. Obviously, there are several moving parts in that. We continue to do what we call the Stay Fit and take out cost. That is a significant exercise. It has become virtually part of that culture having done that three, four years in a row. And then, the revenue mix keeps changing, as well. But I will let John dive into that. John?

Thanks. I'll try and address each of the points. The sequential decline in gross margin between Q3 and Q4 is largely due to a business mix change where Q4 is the biggest quarter for equipment sales in China, and equipment sales is a lower margin portion of our revenue stream. Also seasonality, construction slows down naturally in the fourth quarter due to revenue, due to weather excuse me. So, you'll see also a decline in the top line between Q3 and Q4.

So, that speaks to the sequential change. As Suri mentioned, the year-over-year change is largely the result of the great efforts of our Chief Operating Officer and implementation of the Stay Fit measures, so that has expanded our margin. And, lastly, on a go forward basis, I'd encourage you to look at Q3 and Q4 2011 trended into 2012, because those two quarters show the benefits of the Stay Fit measures that were implemented in Q1 and Q2 of 2011. So those are the quarters and the margin numbers I would use for a 2012 outlook. Does that address your question?

Yes, that's helpful. And the charge we took in the fourth quarter for the CFO transition, the $1.5 million, is that all within the SG&A line?

Yes.

Okay. And my last question is on capital management. The outlook for cash flow looks quite good, and I know we had originally put an early call provision on a portion of the high coupon senior notes. With the cash flow expectations that you put out there at this time, do you think it's feasible that we could be calling some of those notes?

I think -- as we say, as we disclose in our 10K, the Company reserves the option to go into the market to repurchase bonds as a market participant. Our first opportunity to call is a little ways off, and, as you know, there will be a premium involved. So, I'm going to see -- we're going to look at what the world looks like at that time, in terms of interest rate and the cost to call them in. It's something we look at constantly -- the opportunity to repurchase bonds and replace them with lower cost debt.

Okay. Thank you.

(Operator Instructions)

Brad Safalow, PAA Research

First question, can you -- last year you were nice enough in the fourth quarter to give us an update on where you actually stand on global services in terms of total revenue and total account adds and kind of the annualized impact of those adds. Can you give us a refresh here? Where we do in 2011, and how many new accounts did you have in 2011?

Brad, I'm not -- let me see that I can get that information. But, basically, we have about 15 off the top 100, our top 50 -- we always refer to them as top 50 in the past -- the list is top 100. Obviously, our first target is to go after the top 50. So, our revenues have grown significantly in global solutions from last year to this year. We are up to -- Dila, what is the number is it up to now $60 million,

$61 million.

-- $61 million total revenue from global solutions. And last year, we were around if I remember about $40 million, Dila? $43 million. So, I'm just getting those numbers off the cuff, Brad, but that's one of our biggest growth areas. But in the global solutions revenue, included is the MPS, because the global solution customers wanted MPS installations in their offices, we did that in our customers' offices. So the MPS revenue is included in that, but that's the biggest growth we have had in the Company.

I know, those are, obviously, big numbers relative to your overall growth. Can you give me an update on the total branch footprint you have, and what your plans are for '12? In terms of number branches?

Sure. Number branches we have, let me pull it out, so we have 222 is the location, of which 200 are in the United States, we have 7 in Canada, 1 in the UK, China 12 and India 2. So basically, in 2011 -- if you look at 2011 net we have closed in 2011 27, all rationalized.

What we are doing is, as you know, in the areas where we have duplicate branches or overlapping services, we are rationalizing them as we go along as part of the restructuring process. So we are around 220 total number locations, and we don't expect to cut any more of this unless we have a compelling reason to cut. But right now and it seems to be pretty optimal.

Okay and just on one of the things we look at it is the revenue per branch and at least, based on my math, you actually had year-over-year growth in revenue per branch for two consecutive quarters. I understand, given some of the changes in the whole way you do business is not as relevant as it once was, But is the 200 footprint in the US, is that sufficient? And do you think you can generate revenue per branch growth in '12?

Right. The challenge we have there, Brad is, that's a metric we don't follow in the reprographics or in our Business. Growth, taking into consideration growth same store sales, as they call it. David is reminding me of the term. It skipped my mind for a second. So we don't necessarily, that's not a metric we track, same-store sales.

The reason we don't do that is because we have what you refer to as a hubs and spokes configuration in our locations. So, if you take every major city, we have a main hub, and then you have surrounding that would be the small locations.

Now, whenever customers send jobs, for example, if it is downtown San Francisco, where we have here the main location, but, let's say in the financial district, we might have a small shop, but a substantial amount of work might be channeled through that shop. But we may not perform that work in that little shop. Instead, they are digitally transferred to the main hub and then produced and delivered next day morning through the small hub.

So, that's something that we don't track. But, another way of answering your question, I think I have a sense for what you're looking for, is that the four areas we have been focusing on, that's managed print services, facilities management, color and technology services, all four of them are experiencing growth and we certainly expect all four of those lines to grow this year.

I guess for me as an outsider is just a way to gauge the efficiency of your physical footprint. And I don't really have any other barometer to look at.

Sure. And I think that's kind of a challenge at this point in time, and the reason being is, obviously, almost all of the locations we have significant capacity now. If you think about the fact that we at time -- at one time was knocking off $700 million plus in revenue. So we certainly have the capacity, even though we closed the locations. Because even when we were doing $700 million, we still had excess capacity.

So right now, Brad, at this point in time I think, like for example, let's say, for example, our business doubled. If our business, based on what it is today, if it doubled we probably won't have to do anything in the locations to increase the throughput. We will simply increase the number of shifts, because right now we are operating a single shift, and each of these locations have the capability of working around the clock, which is what we used to do during the heydays.

Right. And other comments, (inaudible) other companies that are kind of non-res or office-focused, have talked a little bit about how GSA has affected their business. How did that affect your business and 11? I don't know what percentage of revenues you generate, or have historically, from that category, can you comment on that at all?

Meaning are you talking about non-AEC, Brad?

Government business. So --

The one thing we don't do is, we don't separate the business because it's not practically feasible for us to do that, Brad. Because for example, our main customers are architects, (inaudible), and construction companies. So when they send documents to us, which we manage for them, distribute them, print them, we don't necessarily try to identify what segment of the customers they are serving.

Meaning, it's not possible for us to ask our customers hey, is this job coming because you are doing an expansion project or retrofit, a government project or industry project? It's a very hard thing for us to do that. So, as a result, we don't have that separation. What we know is that revenues from government or state, federal related projects are generally high in a downturn. That's all we can say.

Right, okay. Understood. And you commented on little bit on the FM growth. When we look at the full-year number 11%, is it possible for you to kind of parse out what came from MPS versus what came from activity actually on-site at your clients that's more the traditional FM business?

We have that in a bucket, but what we can say is that the number of FMs grew in the year 2011, 0 by 200 -- 250? Round numbers, 250 new FMs is what we installed, Brad. But, I don't have the numbers as to how many dollars were generated out of that. But if you take that FM/MPS configuration, because they're so close, the majority of that revenue was driven by the managed print services.

Okay. And then last question just in terms of capital allocations, someone else, obviously, asked about your ability to repurchase bonds. I'm not sure ihe knew exactly where they trade now. But, outside of that, one, what are your CapEx expectations for the year, and two, what are your capital allocation priorities?

Okay. So, basically, capital allocation priorities is to see what we need to do in order to invest in the business, because that's something that we are starting to think more and more about this year as we continue to see our customers' behaviors change, which I talked about in my prepared remarks, Brad. Customers are increasingly adapting to MPS, adapting to digital technologies and color, so we want to actually beef that up. So, that is something which is under consideration right now. With regard to exact CapEx and what we need to do, John, would you like to address that?

In general, we see our CapEx roughly in line with 2011 spend. Some of what Suri spoke to, in terms of investing and in developing our technology, technically comes out as expense, as we invest in people to further develop our technology offerings. But, in general, our CapEx spend, we see roughly in line with our 2011 levels.

Okay, I will turn it over. Thanks, guys.

Brandon Dobell, William Blair.

I jumped on late, so if you addressed this in some way, please tell me. I'm not paying attention. But as you were going through the fourth quarter, I think actually, in previous quarters you talked a little bit about, let's call it, week-to-week or month-to-month trends. And I think on the third quarter call you guys talked about an expectation for the Reprographics business to kind of stay or put up growth about the same as the previous quarter. It came a little bit better than that.

Was there any improvement through the quarter? Was it a particular month? Was it a particular kind of timeframe that changed the trajectory a bit? I guess maybe one different way to ask that would be, as you exited December, did you feel better about where you were than when you went into October?

Okay. Long question. I was trying to keep track of all the things you asked.

Same big question, but just trying to figure out how to order trended for you, and if you kind of felt better as you went through it.

Sure. I think largely the quarter stayed flat. There was not much inflection during the quarter. I think it was the word John used is, bouncing along the bottom. So we didn't see a whole lot of inflection during the quarter, and at the end of it, at the tail end of it we finished strong. Because, as you know, we have China and China has a lot of the coupon sales. So that actually at -- in December is generally when they wrap it up, it's pretty strong there. So that kind of helped pop up the numbers.

But the way I would describe answering your question, how do you feel about 2011 as you wrap the year, I think the early part of the year, like I said in my prepared comments, we expected 2011 latter half to bounce up. I mean that's what the economists said. But we all knew that was not going to happen. But, the good news is the year stayed flat. It seemed like everything has flattened out.

So when we finished the year, we felt like we met all of our goals. Like we met the revenue numbers, we met the projected numbers, we were so happy we met the cash flow numbers, which always makes us a very attractive investment to be able to deliver that kind of cash. So, we feel good about that. And, we just have to wait for the market to recover. But in the meantime, what we are doing is, we are investing in the right areas, in order to make sure that we experience some growth this year. That's what we are hoping for. John, would you like to --?

No, I think -- I think we feel good that we have opportunities to grow outside of our dependence on projects.

Yes.

And I think that's a strong message we would like to send. And that we have the cash flow and the capital access, both cash and revolver, to invest in developing -- further developing those opportunities. So, we're pretty excited about that outlook.

Well, I will take that answer one step further. Is there a way for us to, I guess, gain some insight into maybe the velocity of RFPs or the velocity of potential deals that you're responding to, competing for, and maybe kind of just a derivative of what a sales cycle, or sales pipeline would look in that kind of non-project based business for you guys?

Right. So, so it all starts with what it is starting with right now. Better employment numbers, better, what do you call, vacancy rates or occupation. When that starts going up all of those -- they are the main drivers. The three main drivers are actually employment, unemployment rate or employment-- how employment is improving, the second one is how the vacancy rates, and third one private investment. On all three fronts we are seeing positive movement.

That -- which is the greatest part of it all, which is very, very good. But what we wanted to do was - we wanted to make sure we cautioned our investors that, although these metrics are starting to show, we don't want anybody to think that it will right away impact our numbers, revenue numbers. Because there is a lag between the numbers improving and revenue coming into our coffers.

So what will happen is these improved numbers with unemployment, vacancy rates and private investment will start impacting, and then the projects will get off the ground as the vacancy rates go down, and employment picks up, and more money will come in for construction. So, it's just that what we wanted to be sure was that, during the year, we may not see most of it if this trend continues. But if this trend continues, what happens is, then it will start kicking all the metrics which we traditionally see. Which means that we'll have more projects coming off, and we will have more work down the line.

Okay.

Does that give you some color?

Yes. And then one final one, maybe taking one of Brad's questions in a little bit different direction. You talked about capital spending budget for this year. How should we expect or think about the capital that you are using in the existing facilities, especially in the US, to replace equipment? Or, do you think you got the equipment you need and maybe it's just more on the FM business for CapEx? I'm trying to get a sense of how much you're still trying to upgrade the existing, let's call it throughput capacity, in advance of when the business comes back?

Sure. So in terms of the upgrading our facilities or doing things to our facilities, we don't need to do anything. Because, we have consistently been upgrading our equipment. And most of them are leases. And it's, even if you wanted it, let's, say for some reason, if there was a compelling need to upgrade. We don't -- there is no reason to now. It's very easy for us to do that because of our relationship with our vendors, and we are one of the biggest purchasers of these output devices, so that's a very easy thing for us to do.

But, as it stands now, I answered a previous question where we can actually virtually literally double the capacity, and we wouldn't think that we would need to upgrade the equipment. But where the CapEx is going and where we are investing, is in the new areas like managed print services, when we actually put the coupon in our customers' offices or new FMs or new color facilities where we are expanding the capacity for our Riot color customers.

So, some of this equipment is like, for example HP came up with the latest latex equipment, so if the customers prefer those prints, we might install that equipment just in order to capture that market share. So, we are investing in the right areas where we think we can generate additional revenues and expand our market share.

Okay. Great. Thanks, guys. Appreciate it.

At this time there are no further questions.

Thank you very much, Joseph. Ladies and gentlemen, thank you very much for your attention this evening and your continued interest in ARC. Have a great evening, and we will talk to you soon.

This concludes today's conference call. You may now disconnect.