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American Reprographics Company (NYSE:ARC)

Q3 2011 Earnings Conference Call

November 2, 2011 5:00 PM ET

Executives

David Stickney – President, Corporate Communications

Suri Suriyakumar – Chairman, President and CEO

John Toth – CFO

Dilo Wijesuriya – COO

Analysts

Andrew Steinerman – JP Morgan

Scott Schneeberger – Oppenheimer & Co.

David Manthey [ph] – Robert W. Baird

Matthew Kempler – Sidoti & Company

Brandon Dobell – William Blair & Company

Operator

Good afternoon. My name is Tonia and I will be your conference operator today. At this time, I would like to welcome everyone to the ARC’s third quarter earnings results 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. Sir you may begin.

David Stickney

Thank you, Tonia. I’d like to welcome everyone to our call today. Joining me are Suri Suriyakumar, our Chairman, President and Chief Executive Officer; Dilo Wijesuriya, our COO; John Toth, our CFO; and Jorge Avalos, our Chief Accounting Officer.

Our third quarter financial results 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’s website at www.e-arc.com. A taped replay of this call will be made available beginning about two 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 webcasting our call today and the replay of the web cast will be available for 90 days on the company’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, November 2, 2011 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. 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?

Suri Suriyakumar

Thank you, David and good afternoon. As we stated in our release earlier today, macroeconomic conditions continue to remain sluggish at best. We saw it coming, and there were no surprises during the quarter. The AEC market remains flat despite some sporadic signs of activity relative to the first two quarters of the year.

That being said ARC continues to maintain its strong financial and operational performance. We delivered adjusted EPS of $0.02 at $17.6 million for the quarter, and $29.5 million year-to-date. Our cash flow from operation remains very strong. Despite a year-over-year sales decline of $4.6 million, we increased our gross margin from 32% to 32.4% for the same period, while making necessary investments in areas such as MPS, color and technology to reposition the company for growth as the economy recovers.

We were also very happy to pay down the outstanding balance of $8.9 million on our revolver at the end of October that is bringing our senior secured debt outstanding down to zero. Clearly this demonstrates our continuing ability to take quick and aggressive action to maintain the health of the company even in the face of a difficult economic condition.

From an operational perspective, our investment in new areas such as managed print services, or MPS as we call it and digital color imaging, are both beginning to pay dividends. Our growth in managed print services has been particularly gratifying during this continuing period of low activity in the AEC market. Had we not exclude the diversification of our business, our revenues would have been dramatically affected during times like this.

Instead, we have been substantial – we have seen substantial MPS growth in the quarter, primarily from our larger global solutions customers, which drove the 12.8% increase in our FM revenue category versus the same quarter last year. Additional revenue support has come from improved color sales from the non-AEC segment of the market. While our progress in these areas does not entirely offset the decline of our project related business, it is strongly validating our diversified sales strategy.

Concerning our cash flow performance noted earlier, I think it also proves that our business model can continue to generate the kind of cash we have come to expect from ARC even as market and sales categories continue to evolve. One of those new and evolving categories for us has to do with the increasing use of technology in the construction space. We are seeing a shift in the use of technology, especially as it relates to document management.

Sharing, distributing, and collaborating are all becoming easier with several new solutions now available in the market. In addition, customers have started using a variety of software solutions for project management, collaboration, bidding and other tasks. However, these solutions are disconnected and vital information is often locked up in different silos, where it cannot be leveraged by the entire organization.

ARC is in a perfect position to be able to consult with our customers and provide a single platform through which we could connect all of these different silos. Our document management experience, and the creativity and innovation we have brought to bear on document management technology, we can help these customers improve productivity and provide better business intelligence to their teams.

As we begin to identify customers who need to solve these types of problems, we are developing a new and different way to deepen our relationship with customers, while at the same time when we are securing consulting contracts for ourselves. As an example consider that we were recently awarded a contract for providing document management, and collaboration solutions for a facilities group of Southwest Airlines. Likewise, steel manufacturing giant, Arcelor Mittal recently asked us to provide a document conversion strategy, as well as collaboration and archival services to help manage the hundreds of thousands of documents on file in their Midwestern plants.

ARC’s management team remains committed to leveraging all of ARC’s strengths and looking at new ways to take advantage of them as we move forward into the future. With that as the background for the quarter, I will turn the call over to John Toth, our new CFO, for a review of our quarterly numbers and then we will open the call to your questions as usual. John.

John Toth

Thank you Suri. Diving into our customer mix, non-residential construction customers delivered 70.8% of our total revenue for the quarter. 5.8% of our revenue came from residential construction customers, and our non-AEC customers provided 23.4% of our revenue. With regard to our product and service mix, reprographic services provided 62.6% of our overall revenue. As Suri has mentioned, project related printing is the primary driver for reprographic services, and the decline in reprographics as a percentage of our revenue is the result of the overall low activity in the construction market.

Digital services, which are embedded in the reprographic services line delivered 8.9% of our overall revenue. Facilities management, which is also where we account for revenue for managed print services or MPS delivered 24.3% of our overall revenue, while equipment and supplies delivered 13.1%. There were 64 working days for the third quarter of 2011, which is the same number of working days that were in both the second quarter of 2011, as well as in the third quarter of 2010.

On a regional basis, our year-over-year revenue performance reflects the uneven market at the moment with bright spots in some regions, and other areas where we’re still seeing minimal activity. Northern California was down 6.7%, while the Pacific Northwest region was up 2%. Our southern region was down 10.4%, while the Midwest region was up 1.8%, the Northeast was down 5.7% and Southern California was down 9.2%. One bright spot is our Chinese operation grew by more than 20% on a year-over-year basis from 5.7 million to almost $7 million.

As Suri mentioned, we produced a gross margin of 32.4% for the third quarter, nearly half a point improvement over last year’s third quarter performance, which is especially strong when considering that our revenue was down 4.6 million or roughly 4% on a year-over-year basis. The restructuring of our business, streamlined decision-making by the management team, and our continuing focus on cost reductions are helping to keep the company and its margins in very healthy territory.

Consistent with the second quarter, amortization of intangible assets for the third quarter was up $2.2 million as compared to the same period in 2011. As a reminder, this was caused by the accelerated amortization of our trade name, which we initiated during the fourth quarter of 2010. The period of accelerated amortization for these items will be complete in April of 2012.

Net interest expense was $7.7 million during the third quarter compared to $5.6 million in the same period in 2010. The increase of $2.1 million is driven by a higher effective interest rate for the quarter when compared to the third quarter of last year, which predates the issuance of our 10.5% high yield notes.

Before we leave the P&L, I will briefly visit the goodwill impairment charge of 42.1 million for this quarter. As you may know, we are required to conduct an annual goodwill assessment in September. The amount of this impairment charge was driven by our use of a higher weighted average cost of capital or WAC in our analysis. The higher WAC was due to the continuing uncertainty in the timing of an economic recovery, the significant decline in our stock price during the third quarter and the lower trading price of our bonds during the quarter, which resulted in higher yield or higher implied interest rate on our debt. As a result of this analysis, we recorded a pre-tax non-cash charge for three months ended September 30, 2011, to reduce the carrying value of goodwill by 42.1 million.

Taking a quick look at our balance sheet, we ended the third quarter of 2011 with a cash balance of $26 million. Day Sales Outstanding or DSO were 52 days in the third quarter of 2011 up slightly from 50 days in the previous quarter primarily due to some timing issues and the growth of our global solutions business.

Total debt including capital leases at the end of the third quarter of 2011 was $238.6 million down from $248.2 million in the third quarter of 2010. As of the end of October it is less than $230 million. And the ratio of debt to trailing 12 months adjusted EBITDA at the end of the third quarter was $3.6 million, and EBITDA coverage of interest was 1.8 times. That covers the basics. Please refer to our 10-Q for further details, and I encourage you to look to our public filings with any questions you may have.

At this point, I will turn it back to you Suri.

Suri Suriyakumar

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

Question-and-Answer Session

Operator

(Operator instructions) Your first question will come from Andrew Steinerman.

Andrew Steinerman – JP Morgan

It is Andrew. We talk about non-residential construction still being rather anemic, my question is does ARC get activity when non-residential buildings do remodelings, is that substantial enough that there will be reprographics work or do you truly need new construction in non-res for that business to pick up?

Suri Suriyakumar

No, you are right. I mean the need to Andrew retrofit any work related to tenant improvements or improvement to an existing building there will always be reprographics activity. It may not be in the same level as a brand-new building, but there will certainly be reprographics in the non-residential section.

Andrew Steinerman – JP Morgan

All right, and how are you seeing in terms of that type of activity because in the other companies that I cover that have non-res exposure they have talked about remodeling picking up?

Suri Suriyakumar

Yes, exactly. So right now if you see our revenues other than the managed print services revenue which comes from our non-AEC customers, rather non residential customers which are large construction companies, most of the other work is related to all the tenant improvements and all the remodelings work which is going on, all the maintenance work, all the extensions and so on.

Andrew Steinerman – JP Morgan

And have you seen a recent tick up in that activity, or that activity has sort of been steady for a while?

Suri Suriyakumar

That has been steady for a while. That is the one that keeps our base revenue going. Dilo, would you have anything to add. That is pretty much the case. Yes, Dilo here confirms that is pretty much the case Andrew.

Andrew Steinerman – JP Morgan

Okay, and the revenues just reported just remind me if there is any acquisition effect in the revenues just reported.

Suri Suriyakumar

No, there were no acquisitions for this period.

Andrew Steinerman – JP Morgan

Okay. Thank you very much.

Suri Suriyakumar

You are welcome.

Operator

Your next question comes from Scott Schneeberger.

Scott Schneeberger - Oppenheimer & Co.

Good afternoon. Suri, could you remind us a little bit about seasonality in the business, and what you expect to see looking out a few months, a few quarters, what you have seen this far in October, and when you think you will get a better taste for what (inaudible) for the non-res market?

Suri Suriyakumar

Sure. I mean in terms of seasonality as you know, as the market levels off after all this significant decline has kind of leveled off, seasonality will start kicking in, and so in that sense, the second quarter is the strongest quarter. So third quarter is slightly softer than the second quarter and the last quarter is the worst quarter for construction just because of the weather and you know our idea of holidays and so on and so forth. Traditionally year-over-year last quarter is the lowest quarter Scott, and we certainly expect that to be the case this year.

And then of course, when the next year kicks in, January will be soft. It will pick up during February and March. March actually is the strongest month usually year after year, and then second quarter we expect it to be strong. With regard to the economy picking up, right now it is looking very sluggish. There is certainly more noise like I said in my script compared to the first half of the year. Sporadic, you know there is people talking about activity picking up, and there is some new construction related talks, which are going on. But there is nothing on the ground yet to show it is on its way. But we certainly feel like it is bottoming out very much like what we said before.

Scott Schneeberger - Oppenheimer & Co.

Okay. Thanks for that. With regard to China, I think you said 20% year-over-year growth, could you talk about what is going on there, what you see that shaping up into, and is this a seasonally strong quarter or is it just a strong quarter overall?

Suri Suriyakumar

Dilo, would you like to add.

Dilo Wijesuriya

Yes. Scott, typically the third quarter is a strong quarter for China. But our best quarter is typically the fourth quarter. If you look at the third quarter results most of the activity came from equipment sales, and there is a slight improvement in the reprographics sales as well in China.

Scott Schneeberger - Oppenheimer & Co.

Okay, thanks. And how large are you guys looking to shape the China opportunity?

Suri Suriyakumar

So, basically we are taking a very opportunistic approach Scott, the way we look at it is you know, obviously our focus you see in the US, especially given the times, we are seriously focused in what we are doing at home. And there is a lot more opportunity to see as the market turns. Obviously that is the biggest question.

But in China what we are doing is as we come along opportunities, if we have good acquisitions, if we have a chance to actually engage a large customer we’re doing that. So you know, without a whole lot of focus, we are doing that pretty well, and it is going pretty well. Obviously China is growing; we want to be selective about where we’re growing, so that we will grow in a meaningful way. But it has been pretty attractive. We have done some acquisitions in some areas, but mostly, what we are trying to do is focus in the areas of reprographics and document management. So we can take the same core competencies and extend it out there in China.

Scott Schneeberger - Oppenheimer & Co.

Great. One more if I could. The margin was solid in the quarter, do you feel like the cost structure is appropriate for this stabilized level of revenue. Is that more that you would like to do on that front, and if so what are the areas you are focused on. Thanks.

Suri Suriyakumar

It is appropriate where the cost structure is. Obviously like I said in my – when I was talking we certainly are very aggressive in taking quick action to make sure to keep the costs under control. We have always been like that Scott. So what we have done has produced the results, within virtually a couple of quarters. However, there are a lot of things that we did during the early part of the year, which is in the pipeline, such as you know whether you talk about leases, or whether you talk about equipment. Many of the things we are doing to restructure and rebalance the organization in order to position the organization for growth, all that is an ongoing thing now.

And as a result, there is more of it happening even as we talk. It is what we call the stay fit exercise. We are constantly looking at locations, we are constantly repositioning equipment and that is an ongoing thing now. Where we’re taking that in order to make sure we have the maximum efficiency. But right now the cost structure is pretty good for the revenues we have, and therefore any pick up on the revenues can only bring us tremendous benefits to the bottom line.

Scott Schneeberger - Oppenheimer & Co.

It sounds good. Thanks.

Suri Suriyakumar

All right Scott.

Operator

The next question comes from David Manthey [ph].

David Manthey – Robert W. Baird

Yes, hi, good afternoon.

Suri Suriyakumar

Good afternoon David.

David Manthey – Robert W. Baird

First off, could you tell us what you are all including in digital revenues today, and then if you talk about your transition to the seat license model and how that is doing, and also if you could address – I heard you talk about (inaudible) this quarter?

Suri Suriyakumar

Right. You know in terms of digital revenues it is all of the activities which comes from scanning, indexing, all of the services we provide customers, where they ask us to perform services related to digital activity. So it could be scanning, it could be indexing, it could be setting up files, all of the digital charges we have is what we are basically doing plus seat license. The dealer adds them. In addition to that we do have seat licenses.

So when we talk about the transition model, the seat licenses is only one aspect of it David. Obviously we have some software such as Planwell, which is actually the planroom, which is Planwell Enterprise and then we have Planwell Collaborate, and then we do have tools like (inaudible) Abacus and MetaPrint. So wherever we have customers engaged this software or employ this software to use we would charge them seat licenses.

So that is a component of our digital revenues.

In addition to that, we would also have digital services, which is scanning, indexing, or any kind of outsourced work we’re doing for them in converting drawings and so on. Then on top of that with some customers when we provide them consultancy services that is you know again digital revenue as well.

David Manthey – Robert W. Baird

Okay, thank you. And could you give us an update on ishipdocs, any kind of growth numbers or anything?

Suri Suriyakumar

In terms of the ishipdocs, we had ishipdocs 1, and we just released ishipdocs 2. ishipdocs 2 is still at its very early stages. So the numbers haven’t changed, but with regard to ishipdocs 1, which is the primary driver of shipping documents and sharing documents within the construction space we are tracking about $6.5 million in revenues in that segment.

David Manthey – Robert W. Baird

Okay, and then as it relates to the acquisition landscape, could you talk about, what it looks like today and how interested are you in doing deals at this point?

Suri Suriyakumar

Right. So obviously the landscape is not very good. When I say not very good as you know the industry has been pretty much devastated because of the downturn. And there are not a whole lot of competitors who are in good shape with regard to the companies themselves, because obviously many of them had substantial erosion of revenues and quite a few of them have got into financial difficulty, or operating purely marginally.

So where we are looking at David is that there are companies, which actually are unable to continue. If so we’re buying customer bases from them. So we typically refer to them as tuck in acquisitions. So we could actually if a company is nearly folding up and they didn’t have a whole lot of assets to sell, and they don’t have a structure. They can’t continue to run. Then we would actually providing – we’re legally clear, and we can acquire the customer base, then we would acquire those customer bases.

We call them tuck in acquisitions. There are a few we are doing like that, not a whole lot. but in terms of having large acquisitions, unless this is in an area where we have no presence at all we’re kind of not very interested in acquiring these companies for many reasons. One, the industry has substantially changed in the way we are operating. So these companies who had a traditional model would be significantly behind in terms of employing technology, document management or providing services to the customers.

So they are not wholly attractive, unless it is a market that we don’t have any presence on and there are a few markets like that in the United States, and might consider acquisitions in those markets. But largely where we would probably look for tucked in acquisitions and not necessarily a whole lot of acquisitions in the reprographics world.

David Manthey – Robert W. Baird

Okay, thank you. And then just one last quick one, what are the number of selling days in the fourth quarter 2011 and what was the corresponding number in the fourth quarter of 2010?

Suri Suriyakumar

Working days, I think it is – let me take a quick look here. Fourth quarter of 2011 would be 62 working days. And then this quarter we had 64, last quarter we had 64.

David Manthey – Robert W. Baird

The fourth quarter of ’10 was 64?

Suri Suriyakumar

62. First quarter of ’10 was also 62, yes.

David Manthey – Robert W. Baird

Okay. thank you very much.

Suri Suriyakumar

You are welcome.

Operator

The next question comes from Matthew Kempler.

Matthew Kempler - Sidoti & Company

Hi, good evening.

Suri Suriyakumar

Good evening, Matt.

Matthew Kempler - Sidoti & Company

I wanted to dissect the facilities management growth a little bit more. Can you talk about in the growth that we are seeing, how much of that is coming from same customer growth versus new clients coming on to the platform?

Suri Suriyakumar

Okay. so that category Matt, when we take that category, we are actually categorizing when we say FM, it is actually FM/MPS. Am I right, Dilo. So what is happening there is most of the growth you are seeing, almost all of that is largely coming from the MPS growth. the number of FMs continued to stay stable. I think it is at 5000. Let me take a quick look here. 5900, 5895, so that is pretty stable, 5900. There are few customers here and there we would remove the FMs and there will be a few we will be installing.

But as you know FMs are project management related work inside our customers’ offices. So until the project work picks up, this FM work is going to be not very active, meaning it is not going to grow actively. So our FM revenues, I would say pretty stable largely. All of the new revenues that we are getting that is about this 12%, over 12% growth we have got is primarily from the managed print services we provide again to these large customers. So that is what you call MPS.

Matthew Kempler - Sidoti & Company

Okay, but just to understand, so on the facilities management side, excluding the managed print services addition, are you seeing revenue per client shrink along the lines of what you are seeing on the reprographic side and then you are just more than offsetting that with MPS or is the actual revenue per client holding stable on the facilities management side?

Suri Suriyakumar

I would think earlier last year we saw a shrinkage of FM revenues on a per client basis and it simply relates to the fact Matt that there is not much project work, they are probably not doing a whole lot of printing. They are doing limited printing and that revenue has pretty much stabilized. We haven’t seen a lot of erosion on that revenue in the FMs, in our customers’ offices.

But I must tell you though that that is a very good question, if you go back two years, and compare the revenues, which is numbers we don’t provide, but I know as you have asked, two years and compared the revenues out of those FMs. Those numbers could be lighter. But in the last year or so those numbers have become stable. There is a certain amount of works go in it. And they will actually grow when the project works come back.

Matthew Kempler - Sidoti & Company

Okay, and then as a follow up on the reprographic services side, so you are showing roughly 9% to 10% year-over-year declines so far this year. do you expect these declines to narrow as we move through 2012 and kind of what factors would you consider in arriving at an assumption for that?

Suri Suriyakumar

Right. We certainly expect it to narrow. It is flattening out. In fact we did a study on that and we can see them flattening out. John would you like to give some color on that.

John Toth

I think what we have seen is a stabilizing trend over the past two quarters, particularly of this year. And our daily sales number, on a day over day, over a month over month or quarter-over-quarter basis that gap seems to be pretty stable across the year. So hopefully we are bumping along the bottom, and well positioned to return to higher levels from here.

Suri Suriyakumar

So, this goes to actually answer the previous question asked by someone else earlier to see whether there is a lot of retrofit and whether there is remodeling work going on. It is I think that kind of work, which keeps going on right now. So that is evidence of what John as describing as bumping along the bottom here. We don’t expect it to have the same level of decline. It is flattening out right now.

Matthew Kempler - Sidoti & Company

Okay, thank you.

Suri Suriyakumar

You are welcome.

Operator

Your next question comes from Brandon Dobell.

Brandon Dobell - William Blair & Company

Good afternoon guys.

Suri Suriyakumar

Good afternoon.

Brandon Dobell - William Blair & Company

A couple of questions here, first on gross margins, maybe if you could give us a little more granularity within just the reprographics part of the business I would imagine there are some cost savings that are helping gross margins there, but is the mix of business a tailwind or a headwind to gross margin within just reprographics and then kind of from a bigger picture perspective if you think about gross margins stabilizing like you talked about revenue stabilizing or is there a big enough mix shift going on under the surface that you will see the gross margins moving one way or the other way kind of in a more material way?

Suri Suriyakumar

Right. You know the gross margins are where they are because of the way the revenues have stabilized, and of course all of the work we have done in rebalancing, restructuring to make sure that we stay healthy. With regard to the product mix itself, I will ask John in a second to give you a little bit color, more color on that, but I just want to address the issue of for mix.

You know, largely one of the largest segments of the work, which is growing for us is managed print services, and we have seen the gross margins in the managed print services is similar to what we had in reprographics. There might be a few challenges here and there, but largely that segment of the business is as similar gross margins like what we had in reprographics. So you will find even as the business evolves, and grows we will be able to hold on to our gross margins.

The only area where the gross margin might be a little more challenging might be in the area of color. But even there the spectrum of business we go after is high-quality quick turnaround, fast turnaround work short runs, where the margins are pretty decent. One more thing I would add is that as our technology revenue starts to kick in more and more, the gross margins there are much higher obviously than the products we have.

So overall from a business perspective as the business evolves, and new segments grow, we don’t expect our margins to change largely, but we expect the margins to go up when the revenues go up, because of all the improvements we have done in the branch locations, in the structure itself. John would you like to add to that?

John Toth

The only point I would add is that one thing I have noticed our revenue per contract on the FM/MPS side has shown nice growth over the past 7 quarters. So that business line which is becoming a larger part of our mix has the opportunity to be a healthy contributor to our consolidated gross margin. I would say per Suri’s point, color is probably a slightly lower margin business for us.

But as our MPS business, and FM business grows, particularly with our global solutions, our large customers that will give margin expansion pressure in addition to the benefit that we will see of leveraging our fixed cost with increased sales. Does that make sense?

Brandon Dobell - William Blair & Company

Yes, that makes sense. And as a segue from that, or as a tie in, as let us call it customer mix changed a little bit towards FM or MPS, would you expect your average DSOs to trend up also just given you have got larger customers that tend to push a little bit more on terms, and we have seen DSOs tick up a little bit this year. Trying to figure out how to model that for the fourth quarter, but also on a longer term basis?

Suri Suriyakumar

I think on a longer term basis, you know, we will certainly continue to maintain the kind of DSOs we have, or we have had you know somewhere between 48 to 50 that kind of range. We would obviously always want to be at 45, you know that, because we’re always pushing the buttons. But that is the kind of range, I think in this particular instant we see it slightly go up, because we really had explosive growth on the MPS side. We were fortunate enough to sign up some large customers, and we did some installations, really, really quick and before you could really understand the impact of it, we are on our way.

So we build quickly. So we are ironing out some of those issues, and what is happening with all these newer customers is our billing is becoming more and more centralized. So we expect it to be more efficient going forward, not really slowing us down. But it is one of those things that the quick growth has actually you know shows that in the number of outstanding days.

Brandon Dobell - William Blair & Company

Okay, and then final question, I guess cash flow related, comparing the puts and takes in operating cash for the second quarter versus third quarter, maybe a little bit of color on the movement around crudes, prepaid expenses, there are some decent swings quarter-to-quarter that certainly were a headwind last quarter to operating cash flow, but a tailwind this quarter, and also you guys maintained your cash flow guidance, so I’m guessing there is just a little bit of timing issues there. But any color you can give us there will be helpful, thanks.

Suri Suriyakumar

Okay. John.

John Toth

It is really, if I can cheat on this question the most is by saying it is timing issues. You know, so that is not to be too flip, but it is primarily timing issues between the quarters. We see that those swings particularly moving between the quarters as we are moving forward. Some of it is related to global solutions, and to add on to what Suri said earlier as we grow that side of our business with bigger customers, who tend to provide chunky payments at the end of a month. Statistically you will see that average probably move out as those more chunky payments hit.

Brandon Dobell - William Blair & Company

Okay. It makes sense. Thanks.

Operator

There are no further questions at this time.

Suri Suriyakumar

Great. Thank you everyone for joining us this evening. We certainly appreciate your continued interest in ARC, and we look forward to talking with you all again very soon. Thanks and have a great evening.

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