ARC Document Solutions Inc (ARC) 2012 Q4 法說會逐字稿

Good afternoon. My name is Matthew , and I will be your conference operator today. At this time I would like to welcome everyone to the ARC Document Solutions fourth quarter and full year earnings conference call. (Operator Instructions).

I would now like to turn the call over to your host, Mr. David Stickney. Mr. Stickney, you may begin.

Thank you , Matthew, and welcome everyone. Joining me today our Suri Suriyakumar, our Chairman, President and Chief Executive Officer; Dilo 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 for 2012 were publicized earlier today in a press release. You can access the press release and the Company'’s other releases from the Investor Relations section of ARC Documents Solutions website 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 this replay in today'’s press release. We are also web casting our call today,and the replay of the web cast 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. Please bear in mind that suchstatements 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 28, 2013, and except as required by law, the Company undertakes no obligation to update or revise any of these forward-looking statements.

Finally, this call will contain references to certain non-GAAP measures. A 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 will turn the call over to our Chairman, President and CEO, Suri Suriyakumar. Suri.

Thank you, David, and good afternoon. Our fourth quarter and year end performance for 2012 reflects the result of an aggressive and ambitious restructuring plan we initiated in October in response to a dramatic shift in our customers behavior which has been accelerating over the past year. While the construction market appeared to begin its slow recovery in 2012, we saw clear evidence in the third quarter that traditional reprographics revenue would not recover at the same pace due to the adoption of technology by our customers. Therefore we moved very quickly to ensure that our costs and resources were in line with the current portfolio production services and that our primarily offerings were tied to growth markets, so the Company remained on sound financial footing.

Restructuring the Company was critical to our long term objective. The steps we took to position the Company as the document solutions provider of choice in our industry were not only important for the future sales effort, but were also tailored to deliver strong earnings at current revenue levels. The actions we took to better manage our cost structure and the speed with which we took them bolstered our performance in the fourth quarter. We delivered results few could have expected given our position at end of third quarter.

The Company reported annual revenue for 2012 of $406 million with a gross margin of 30.4%. Cash flow from operations was $38 million in 2012 even after cash payments of $1 million related to our restructuring efforts. This increased to $0.82 per share for the year. Our balance sheet remains strong, our revolver remains undrawn, and adjusted annual earning per share came in at negative $0.04. While I can not admit to being satisfied with our EPS performance,given that we were able to avoid further deterioration of our earnings during what is normally the weakest quarter of our industry, provides me with enormous confidence that our restructuring efforts were targeted in the right place.

Our gross margin and adjusted EBITDA margin both improved sequentially from the third quarter to the fourth quarter for the first time since we became a public Company, and it is continuing testament to the execution skills of our management team. The changes we made in the fourth quarter in addition to efforts throughout 2012 will allow us to achieve significantly better performance in 2013 even without a full recovery in the AEC industry. For your reference the revenue for the fourth quarter of 2012 was $96.9 million , our quarterly gross margin was 29.6%,adjusted earnings per share for the fourth quarter was negative $0.02, and cash flow from operations for the period was $6.7 million.

As some of you may recall at the end of 2011 , I drew your attention to our diversification as more a proactive step in our evolution as a document solution company and also as a hedge against the possibility of project printing remaining constrained due to the impact of technology. We have known for more than 10 years that digital methods of document production and distribution would eventually take hold and begin to impact traditional printing. That is exactly why we have invested heavily on a technology center and developed our own software in the first place.

Now we are finally seeing what we have been anticipating for so long. We were well prepared for the transition, and that is why we have been able to move so quickly to refine our business model and produce new sources of revenue, and fearlessly attack the costs that no longer support our business in the same way they have in the past.

Not only have we optimized our geography footprint scaling down the number of locations and our headcount, but we have more closely aligned our operations to the nature of work we are doing today. While our customers behavior continues to change with regard to how they view, manage and distribute drawings and documents, their need for services such as managing print, document archival services and document retrieval text continue to expand with the increasing use of technology and tools such as information building modeling. Simply put, the industry we serve and the customer we serve remains the same. And our relationships are stronger than ever before.

While our customers may not be printing as much, they are generating more documents resulting in a critical need for a service provider who is technology enabled and capable of storing, managing , distributing, archiving and retrieving their documents. Our manage print services offering along with services such as archival information management and digital shipping further adds value to the services we have been providing these customer for decades. All of these attributes combined with our deep domain knowledge makes us a unique service provider in this space. Our portfolio of services cannot be matched, and it is allows us to remain the dominate document solution company in our space.

Our services are becoming more deeply integrated in to our customers work flow and more sales opportunities are available inside the offices rather than inside of our shops. While our traditional service centers remain important for offsite work, during periods of peak document production in our customers offices and, of course, project related work when required , we don't have the same space requirements for our shops that we had in the past. Not only are we reducing the number of our services center, but we are also reducing the size of each of these service centers as we renegotiate our leases.

The importance of our technology which was previously focused on managing project related documents has now shifted toward capturing the entire ecosystem of documents generated in our customers offices. Our flagship application PlanWell enterprise remains deeply relevant and well used to support construction projects. However by providing management services and making our services available throughout everyone of our customers offices we are now managing every document they produce.

Where our services were once primarily rewarded to construction documents we are now using tools like Abacus for managing, distributing, producing and archiving documents related to legal, contracts, human resources, accounting, financial and more for our customers. Today Abacus sells more than 50,000 users who track their printing every day on nearly 10,000 machines all over the country. The usage and cost of more than 30 million impression a year are collected and consolidated into a single invoice for more than 70 enterprise level customers. In some cases such metrics are uploaded automatically into customers ERP systems to help maintain realtime billing and management reporting.

Abacus employees rules-printing features that keeps the cost down (Inaudible) printing that keeps the efficiency up, and innovative applications that allow users to archive their documents as they print them. Three or four operation dashboards that permit (Inaudible) of any business to see not only activity by department , device, and service level, but also compare such metrics to companies similar to their own to help bench mark their performance across the industry. On the very near horizon Abacus will integrate in to our collaboration platform of a digital shipping and manage file trans application and more.

These integration are in turn critical to the advancement of our archive and information management initiative called AIM or AIM as we call it. It is a service designed to move both legacy and active document traditionally and held in a warehouse storage to the cloud. No longer held captive in boxes or delivered by trucks and forklift we are no beginning to scan paper documents or even capture documents as they are being printed, and store them in a scalable archive supported by Amazon cloud services.

Our new services, much of our existing technology, and all of our new solutions are designed to address a shift in our customers behavior. These tools will assist us in building back the revenue typically associated with traditional reprographics that has been lost during the construction downturn and from the secular changes that has emerge as the industry begins to recover. Early signs are evident in the growth of global service sales steadily increasing revenue from many print services and more. Given the work we did to address our cost structure more of this revenue will drop to the bottom line which in turn will help our margin performance.

The changes we have made and the earlier but positive signs we are seeing as a result support a brighter picture in 2013 then we have seen in several years. As a result our 2013 outlook for annual adjusted earnings per share is in the range of $0.03 to $0.07 on a fully diluted basis, and our outlook for annual cash flow from operations is in the range of $38 million to $45 million.

Finally you will note that we have changed the formal name of our Company to ARC Document Solutions. As I have predicted in the past, we have emerged from these difficult years as a new and different Company than we were prior to the recession and thought it only fitting to reflect these changes in our name going forward.

At this point I am going to turn the call over to John Toth, our CFO, to review key financial information for 2012. John.

Thank you, Suri. There are three topics I would like to cover on this call. First, I am going to review the changes we have made to the sales reporting presentation in our financial statement. Secondly, I will review in summary the restructuring charge we have taken in the fourth quarter, and finally, I will quickly review key items in our fourth quarter and full year financial results per past practice.

Starting with changes to our sales reporting presentation. As we have said on previous calls ARC Document Solutions has different business line that are responsive to different drivers. In an effort to increase your visibility in to the nature and changing dynamic of our consolidating business we are increasing the level of granularity of our revenue reporting. We will now be reporting on five revenue categories in the schedule footnotes and narrative of our 10-K, whereas historically we reported three revenue categories, which were reprographics services, facility management and equipment and supplies.

First, the equipment and supplies sales line is unchanged in the new format. Second, the facility management sales line has been renamed on-site services, but the make up of that line item, i.e., the sales that goes into it is unchanged. We changed the name of this revenue stream to reflect the fact that those sales include revenue from both large format project related machines placed on customers sites known as FM as well as small format machines placed in customer offices known as MPS. This revenue line is driven by the ongoing print needs of the customers and is less exposed to the epithetic large format printing needs associated with construction projects.

The third revenue line reprographics service has been broken in to the following three line items. Traditional reprographics which as the name indicates is primarily the printing and distribution of construction related documents at ARC locations. Next color which consists of specialized digital color printing and finishing services executed also at ARC locations. This includes work done under our Riot color brand. And third, digital services which consist primarily of digital document management services and archiving as well as software licensing. In our 10-K you will see much more detailed discussion of these line items as well as a five year history of the sales category.

We believe this presentation of this presentation of our revenue more accurately reflects the drivers of our consolidated revenue and will provide you greater insight in to the opportunities and risk and diversification provided by our portfolio of business line. As this may cause changes to any models you have of the business, please feel free to contact me with questions and clarifications. The presentation of our balance sheet and cash flow statement remain unchanged.

Now I will briefly review the financial impact of the restructuring plan we under took in the fourth quarter. As noted in our earnings release earlier today we recorded a restructuring expense of $3.3 million. This is the result of the aggressive initiative Suri discussed specifically the closure of 33 service centers, streamlining middle management and the reduction of the Company's workforce by approximately 300 employees. Of this $3.3 million $800,000 is for employee termination cost, which are cash cost paid in the fourth quarter. Another $2.2 million is for property lease exit cost associated with our footprint reduction this is also a cash expense, but most of this cash will be paid out in future periods. And the balance of $400,000 is for other expenses including non cash items associated with the restructuring plan. We have already paid for the majority of these restructuring expenses with cash generated from the business and without having to draw on our revolver.

With those two notable items out of the way, now I want to address the financial results themselves. Beginning with revenue our consolidated net revenue for the fourth quarter was $96.9 million resulting in full year 2012 net revenue of $406 million. This is a 4% decrease from the prior year. For your daily sales calculations 2012 had 254 working days as did 2011. The fourth quarter of 2012 had 63 days versus the fourth quarter of 2011 which had 62 days. We believe the number of working days in a period has a greater impact on our traditional reprographics and color business line than it does on our on site service business.

Moving on to the revenue mix by product line and using our new five revenue categories for the full year tradition reprographics was down 13% on a year-over-year basis while onsite services were up 8%. It should be noted that for the fourth quartersales from traditional reprographics was $28.4 million or 29% of total Q4 net sales. While sales from on-site services $27.6 million or 28% of Q4 net sales. This is less than a $1 million difference in the quarterly run rate these two businesses. As Suri pointed out it is a growing indication of both the shift our customers have taken with regard to where and how they want their services as well as how quickly we are responded to fulfill our customers evolving needs.

Breaking out each product line as percent of consolidated revenue for the full year 2012 traditional reprographics delivered 31% of our revenue versus 34% in 2011. Color services made up 19% of our revenue in 2012 versus 20% in 2011. Digital services made up 9% of our 2012 revenue essentially even with 2011. And on-site services delivered 27% of our total revenue an increase of 3 points as compared to 24% in 2011. Equipment and supplies sales delivered 14% of our overall revenue in 2012 compared with 13% in 2011.

With regard to customer mix in 2012 revenue from AEC customers accounted for 76% of our total revenue with 24% coming from non AEC customers. This consistency in customer mix is due to the fact that we continue to leverage our strong relationships in the AEC space with our new services. As for sales by geography our year-over-year regional revenue performance for 2012 was as follows,Northern California was flat for 2011, Southern California revenue was down 8%, the Pacific Northwest was down 9%, revenue in our Southern region was down 8%, the Midwest was down 2%, and the Northeast region was down 8%. Our International operations excluding Canada was up 23%. This strong growth was lead by our China operations.

Moving down our income statement our consolidated gross margin for 2012 was 30.4% as Suri noted and it compares to a gross margin of 31.8% for the full year 2011. As we noted earlier this year the drop is primarily due to lower sales activity and business lines executed at our shops location most notably traditional reprographics. As a result fixed costs consumed a greater portion of the revenue. The decline in traditional reprographics sales combined with the modest growth in equipment and supplies sales resulted in a higher mix of equipment sales which has higher material costs and lower gross margin than our other business lines.

All of that said, in 2012 our gross margin increased 20 basis points between Q3 and Q4. Historically we have seen a sequential decrease in gross margin between Q3 and Q4, and that decrease has been between 160 basis points and 340 basis points dating back to 2008. The fourth quarter improvement this year speaks to the success of our aggressive restructuring efforts in the fourth quarter as well as out normal year round vigilance with regard to containing cost.

Our SG&A for 2012 was approximately $93 million which was down more than $8 million from SG&A in 2011 again due primarily to the aggressive steps taken to restructure and right size the businesses fixed costs. Net interest expense was $28 million for 2012 compared with $31 million in 2011. This expense consists primarily of $21 million in annual interest on our 10.5% high yield notes issued December 2010. The result inclusive of goodwill impairment taken in Q3 and the restructuring expense taking in Q4 was a net loss for the full year 2012 of $32 million. Adjusted to exclude these charges and other non cash charges we had a net loss of $1.7 million and adjusted earnings per share of negative $0.04 for the year.

As you know the fourth quarter is historically our weakest quarter of the year. However our restructuring efforts taken in October and November have resulted in significant sustained savings for our business. To summarize the ongoing financial impact of our restructuring we estimate the following, headcount reductions accounted for more than $8 million in annual savings. Administrative consolidation accounted for an additional $2 million in annual savings. Closure of under performing branches contributed an additional $2.5 million in saving, and an additional $3 million in saving were generated from other margin expansion activities.

I should note that it is difficult to track the dollar amount of these savings through our P&L in 2013 as sales fluctuate, but the impact of these measure should be seen as an expansion of our gross margin overtime. As you would expect we are far from finished. We have several initiatives in place today to drive growth in our new business line and there by growth in our consolidated sales and we relentlessly continue to work to expand our margins.

Moving now to our cash flow performance. Our adjusted EBITDA for 2012 was $60.5 million versus $66.5 million in 2011. We ended the year with an adjusted EBITDA margin of 14.9% versus 15.7% for the year in 2011. It is worthy of note that our adjusted EBITDA margin for the fourth quarter of 2012 increased sequentially by almost 200 basis points versus the third quarter and this metric most clearly demonstrates the improvement in the quality of our earnings.

Cash flow from operation was $37.6 million for 2012 versus $49.2 million for 2011. Our free cash flow was $17.2 million versus $33.6 million in 2011. Note that in 2011 results were helped by approximately $14 million in tax refunds received by the Company. Excluding the impact of this refund our cash flow from operations would have been higher in 2012 versus 2011 despite lower sales.

Closing out with the balance sheet we ended 2012 with a cash balance of $28 million. The highest amount of cash we have reported for December 31st since 2009. Day sales outstanding or DSO were an aggressive 48 days in fourth quarter 2012 more than to fulfilling our commitment to reduce DSO to under 50 before year end. Total debt including capital leases at the end of 2012 was $222.5 million down from $226.3 million in 2011.

A 2% decrease on a year-over-year basis. And as noted our $50 million senior revolver we put in place in January 2012 continues to remain untouched. The ratio of net debt to trailing 12 month adjusted EBITDA at the end of the year was 3.2 times and adjusted EBITDA coverage of interest was more than 2 times.

As our margin, cash flow and balance sheet key metrics show we continue to execute strong management of our capital base. With the steps we have taken in Q4 we have positioned the Company for much greater success going forward. At this point, I will turn the call back to Suri. Suri.

Thank you, John. Operator, we are ready to take the questions.

(Operator Instructions). Your first question comes from the line of [Josh Neibor].

Josh, have we got you? Hello?

Mr. Neibor,your line is open.

Matthew, why don't we give Josh a chance to dial back in and move on to the next question please.

Your next question comes from the name of Molly McGarrett.

Hi, it is Andrew Steinerman. My question has to do with digital services which is still 9% of revenues. John you took this opportunity to break out increased disclosure why not make a digital services a category that has disclosure like that on a consistent basis? Could you remind us what is in digital services besides for PlanWell? And my next question is why given the increased adoption of digital services did that not become a higher percentage this year?

Digital services -- hi, Andrew, how are you?

Hi, John.

Digital services is still a little bit of a mix bag of different drivers. The two dominate revenue streams in there is PlanWell and services related to reprographics including saving plans on to disks and flash drives, et cetera, and that revenue really moves with traditional reprographics. The other side of the coin is often what you think of as technology services is software licenses, archiving services, et cetera. That is a growing business line for us, and those two elements tend to offset and are mixed in that line. I am optimistic that over the course of 2013 we will see our growing line begin to dominate and you will see the expansion you expect, but at this time it is a mix of two business lines that tend to offset.

And if you can say, is the mix 50/50?

Directionally, yes.

And also did you did break out how much manage print serves was?You told me it was within that category, but how big is manage print services now as a business?

It closed out 2012 on-site closed out as $109 million.

I am saying just management print services within that.

As opposed to facilities management?

Right.

MPS would be about 50%, 55% of that number.

Perfect. And what is the growth of MPS in general?

MPS in general moves with the global solutions growth which for the year -- let me pull up that number. For the year was over 20%.

Perfect. Thanks for the comments. Appreciate it.

Your next question comes from the line ofAlan Weber.

Good afternoon. Can you talk about -- you give the cash flow projection. Can you talk about even in the directional what you expect in terms of EBITDA , and also if directional is not specific on the revenue side within the five categories how you see 2013 at this point?

I am going to answer delicately because we don't provide guidance on a revenue basis or an EBITDA basis. Directionally again because we have the decline of traditional reprographics and the rapid growth in our manage print services directionally revenue we see as relatively flat give or take a few percentage points either way. EBITDA we expect to see considerable margin expansion on our gross margin. We also identify savings in our G&A, so we expect to see significant margin expansion in EBITDA margin as well. Materially and again I want to stay away from forward-looking guidance specifically on those two metrics. Does that help give you some guidance?

It does. Thanks. Also how many centers did you close the year at, and how many centers do you think you might have at the end of 2013 or 2014? As it sounded like some may come off of more expensive leases or like that.

Right now we have 192 that is total number of locations after restructuring. It breaks down to 167 in the United States, 7 in Canada, 1 in UK,12 in China, 2 in India. In terms of 2013 we have not specifically identified how many more locations we will plan to close. But what we are doing, Alan, is we are taking a careful look at how these services centers help our customers.

What we are doing is most of the work has shifted into our customers offices and these service centers are largely now used for any project related work which can come up or the over flow work which comes out. So we are able to control the centers and make them smaller and more efficiency so we are looking at that. But there is no specified number as to how many service centers we will close, but we will certainly continue to look at smaller cities and where there are too much of concentration of service centers try to consolidate them together again in order to gain better margins.

And my final question is, and I appreciate your comments, what is your general view of your end markets on the construction side as you put together these kind of projections?

There are two sides to that. If you generally look at the construction market obviously they started a slow recovery there is definitely signs of lot of activity which is starting to happening in many areas related to what we saw in 2011 and certainly in 2012. So it is definitely in the right direction. Whether will it fully recover in 2013, we don't think so. I think the full recovery is further ahead. 2013 will be definitely better than compared to 2012.

But in terms of our numbers what will be different is the fact that because lots of the services we offer are now shifted toward management services and archival information management and work that goes on inside our customers offices especially as related to the larger customer we would grow our revenues inside the customers offices significantly by offering managed print services. If you take our global services revenue, most of the revenue is growing inside our customers offices. In other words, that is a new segment of the business that we have started capturing in the last two, three years, which is now growing in double-digit numbers.John gave some indication in the previous question as to how global services is growing.

That is growing at 20% plus year-over-year, so we expect that growth to remain throughout 2013. That is where most of the growth is going to be coming from for us as we see it, and any project work which comes up because the construction market is recovering albeit at a slower pace we will be able to capture that as well.

Okay. My last question was I realize the traditional is obviously a lot smaller part of Company than it used to be. When you look out, do you just look out if the markets rebound it is going to be a continued decline on that line item year by year or at some point do you see it flattening out?

I think it will flatten out and the reason being because there will be some erosion, a little amount of erosion, which is going on in that segment because of the secular changes which are taking place there is no doubt. But construction is also a huge industry and it has been deeply affected because of this recession, so when the market comes back even people are printing less the amount of print services we are able to provide our customers will certainly outweigh the secular impact it is going to have on that $120 million plus of business we have right now.

So as the market recovers we expect that number to be flat and it might have modest growth on that number especially if the market recovers at full speed there are still a lot of customers who will want printing. We are not experiencing that right now because the number of project we are doing are still not a whole lot.

Great, thank you very much.

Your welcome.

Your next question comes from the line of Brandon Dobell.

Thanks. Maybe focusing on the transition from Q4 to Q1 for a second. What kind of surprise either good or bad for the fourth quarter in terms of segment growth rates, and as you started 2013 did those same kind of things keep going i.e., a growth rate in one part of the business was better in the fourth quarter than you thought and it kept going or I am trying to get a sense of the pacing of the growth rate in the different segments that we now have.

Sure. In terms of surprise in the fourth quarter it is more in the third quarter. After the second quarter we went through the third quarter. We saw the impact of the secular change. I often classify, I talked about it inside the Company it is almost like a blockbuster story if you know what I mean. We start to see a significant change occurring. We had to react fast, and we realized there is significant change, pronounced significant change, in our customers behavior. So that is what we did in the fourth quarter.

So the surprise is we surprised ourself how fast we were able to actually pull this off after getting the third quarter result the amount of work we did was an enormous body of work. Because we had operations spread across the country, we had to identify which of those operations had to be restructured, what kind of headcount reduction, how do we change the management, what do we do with those customers, how do we transition those customer to our other service centers. So there is a tremendous amount of work done in the fourth quarter to actually change direction of the Company.

Because if you recall what we had in the third quarter , if you were heading that way, we would have gone in to double-digit negative numbers in terms of EPS performance, but we were able to reverse that in terms of getting the Company restructured to the portfolio services we now provide our customers which makes a meaningful difference.

Having done that, in terms of where the business is headed that does not change a whole lot in the fourth quarter. In fact it continues to stay on track. In order words, in third quarter we talked for the first time our MPS revenue overtook the traditional reprographics revenue line for the first time. We are starting to sense that kind of change in the way our business is evolving, and we expect that to grow because our managed print service offering continues to grow with large customers and also small customers as we install more FM and MPS in our customers offices.

We expect this secular change to take (Inaudible) that is why we are focused on positioning the Company properly. In that space we are very dominate because the kind of services we can provide as I said in my prepared script in the call, to these customers we are unique in that space. We can give on-site service, off-site service and services based on cloud and tie everything together to capture the entire ecosystem of the document solutions for our customers.

Okay. I want to go back to a comment John made I think to the previous question about the let's call it different broad segment growth rates or directional growth rates this year. John, when you mentioned you thought traditional reprographics was going to be down this year was that in total so traditional color and digital as you are now segmenting them or was is just that $28 million, $29 million chunk of revenue from the fourth quarter that part is going to continue to struggle where you see color and digital maybe see some growth this year?

When you talk to the financial officer, you are talking to glass half empty side of management team.

Perfect.

When I made that comment, I think Suri articulated the outward view and I agree with that, but I was speaking to that $29 million of traditional reprographics which has different stresses on it. And right now early days in 2013 we definitely see the non-res. construction market as healthier than it has been in the past, but the vote is out as to how that is going to impact that line and our trend has been challenging historically.

And the way to think about, Brandon, I would add. The way to think about that is if you talk about the segment John talked about it is work done in our shops. Think about it like that. It is project related work done in our service centers , and that is mostly project related work and that is the one which is getting affected. And when construction starts putting its head up which we are starting to see signs of that both in residential and non residential that number will pick up a little.

And it will not pick up at the same pace as the revenue in the past because of secular change but that number will pick up. But the way to think about that revenue is we talk about reprographics,traditional reprographics, revenue is the way to think about it is the work we did in our service centers our shops as we call it previously, for project related work,which included some digital which included some color largely included large format black and white and small format black and white for project documents.

Got it. And as we think about capital needs in the business this coming year so spend a descent chunk of money just on regular capital spending and also capital leases that were on the cash flow statement. how do we think about those two numbers for 2013 relative to what you posted in 2012? Again just back to your comment about operating cash flow, just trying to get a feel for what kind of free cash flow the business can generate this year.

Sure. I think the free cash flow generation will continue to remain healthy. That is one of the characteristics of our business. You saw that even in 2012, we did very well our revolver remains undrawn, and we want to continue to maintain that for sure. I'll let John give you more color on that. But in 2012 we did some things differently for example we used our cash to buy some (Inaudible) instances in order to test a few different options out because there were leasing companies leasing and (Inaudible).

Then we also realized that we can buy with our cash because we were generating a fair amount of cash, so that we can actually help our margins a little bit. So we did that in 2012. Going forward what we see is the most number of output devices we buy are from small format, what you refer to as multi function devices. We do buy large format devices, but the big large format devices are becoming less and less. They are smaller, much more efficient large format devices. What we refer to as low volume large format devices which we are placing in our customers offices, so that is one aspect.

The large majority of the devices we are buying are actually multi function devices which as I described in my script we are placing them in customers offices because now we are capturing their entire ecosystem of document management, which means legal, accounting, contracts all that kind of stuff. In that space what is good is there are a lot of manufactures. There are over 25 plus manufacturers, eight of them are billion dollars manufacturers. And we are taking the approach that we want them lease to buy lease through the manufacturers. Overall we don't expect the landscape to change a lot. John, would you like to give a little more color on that?

Just to add further color, the acquisition of machines in combination of CapEx and capital leases in total we expect to be relatively stable with largely in support of our global solution customers which have large roll out and large equipment needs. It is really not for our shops. And as Suri pointed out in 2012 we were fairly aggressive in purchasing machines as a vehicle of negotiating with the lease market if you will. We feel like we have our lease relationships where we want them to be, so in 2013 I expect to see the balance shift towards leasing as opposed to CapEx and move in that direction. But again we will always maintain a balance between those two.

Okay. And then final one from one me. I may have missed it in the prepared remarks, maybe from John. The new revenue granularity or segmentation are we going to get historical, so looking back the first three quarters of 2012 or 2011 numbers either in the 10-K or in a separate disclosure?

Yes, in the K you are going to see five years of historical.

Fantastic.

If you need more, you are welcome to call us.

One other point I would add to the cash discussion, John, is that last year we had some tax refunds. We mentioned that in the script, $14 million. So if you think about it like that we actually outperformed cash with lower sales this year in terms of cash performance. So again that I think is notable, again goes to how well we have managed our cash , which might be relevant to your thinking in that sphere.

Our cash flow -- if you normalized out refunds from the IRS our cash flow from operation would have been greater this year than prior years.

Got it. Thanks guys. Appreciate it.

All right.

And your next question comes from the line of Josh Neibor, which is a follow-up question.

Josh, have we got you this time? Josh, I am afraid we don't have you. We can't hear you if you are on the line. Matthew, if we have another question, maybe we will give Josh one more chance here.

And your next question comes from the line of Alan Weber.

Hi. Just a quick follow-up from the previous question. I missed part of it. The capital spending and cap leases for 2013 what should that be?

We don't give specific guidance on CapEx for 2013. The guidance we are giving is that we expect to use less of our own money to buy machines and use more of the lease market going forward. In total the machine acquisition in 2013 we think will be in line with 2012, and really track the growth rate of our global solutions business with MPS growth of over 20%.

Okay. Great. Thank you very much.

We have a follow-up question from Josh Neibor again. And, Mr. Neibor,please unmute your line.

Well, it looks like we continue to have trouble with that line. Matthew, just for a moment here. This is David Stickney. Josh, we will make sure to call you after the conclusion of this call and make sure that your questions are answered. Matthew, at this point do we have anybody else in the queue?

No, sir, we do not.

All right. Thank you,ladies and gentlemen, for your continued interest in ARC Document Solutions. We appreciate your participation in the call as usual. Have a great evening. We will talk to you soon.

This does conclude today's teleconference. You may now disconnect.