American Reprographics Company's CEO Discusses Q3 2012 Results - Earnings Call Transcript

| About: ARC Document (ARC)

American Reprographics Company (NYSE:ARC)

Q3 2012 Earnings Call

November 5, 2012 5:00 PM ET

Executives

David Stickney – VP, Corporate Communications

Suri Suriyakumar – Chairman, President and CEO

John Toth – CFO

Jorge Avalos – Chief Accounting Officer and VP, Finance

Analysts

Matthew Kempler – Sidoti & Company

Tim O’Connor – William Blair

Scott Schneeberger – Oppenheimer

Andrew Berg – Post Advisory Group

DeForest Hinman – Walthausen & Company

Operator

Good evening. My name is Lucy and I will be your conference operator today. At this time I would like to welcome everyone to the ARC Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker remarks there will be a question-and-answer session. (Operator Instructions)

Thank you, I would now like to turn the call over to your host David Stickney, Vice President of Corporate Communications. You may begin your conference.

David Stickney

Thank you, Lucy. I would like to welcome everyone to our call today. Joining me as usual is Suri Suriyakumar, our Chairman, President and Chief Executive Officer; Dilo Wijesuriya, our Chief Operating Officer; John Toth, our Chief Financial Officer; and Jorge Avalos, our Chief Accounting Officer.

The financial results of our third quarter 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 an hour 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 webcast 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 5, 2012 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’ll turn the call over to our Chairman, President and CEO, Suri Suriyakumar. Suri?

Suri Suriyakumar

Thank you, David and good afternoon. As we reported earlier today, in the third quarter of 2012, ARC delivered $99.4 million in revenue, a gross margin of 29.4% and $14 million in cash flow from operations. Adjusted earnings per share for the quarter came in at negative $0.04.

Year-to-date our cash flow remains very healthy at $30.9 million compared to $29.5 million in 2011, despite a drop in sales. More importantly, our revolver remains undrawn. While we haven’t seen any significant recovery in AEC projects, we have seen a few bellwether projects emerge in the last few quarters.

For the first time in several years, we have had the opportunity to closely observe how the increasing use of technology has impacted projects as related to documentation and distribution of prints.

While we have always understood the necessity to drive cost down and improve efficiency, we’ll always accelerate the use of technology. We’re now seeing a material change in how our customers use print for projects.

We’re starting to see where customers are preventing or even avoiding the bid process all together by pre-selecting the contractors. In many cases, project participants are required to download their drawings from the web.

Our larger clients are continually finding other ways to keep printing to a minimum, sub-sub printing very selectively and even our small-to-mid sized customers are clearly getting comfortable with the more digital, less print-oriented workflow for their projects.

We expect this behavior to accelerate in the years to come. Therefore, it was incumbent upon us to take a more aggressive stance towards our transformation and act quickly to shed costs associated with this declining revenue line. It was necessary to make these changes immediately, so our performance would not be impaired by the erosion of project related revenue.

From the beginning of October to today, we have put every location and every position in the company under a microscope to determine how best to apply our resources into growing sales categories such as MPS, color, and digital services. In those instances where our cost structure was more heavily weighted towards project based printing, we either reduced the cost, reallocated resources, or eliminated operations outright.

Our head count has been reduced by more than 300. We closed nearly 27 locations and have dramatically streamlined our regional management structure in a very short period of time. As many of you are aware, we have been working on transforming ARC into a technology enabled document solutions company for a number of years.

Consolidating our brand, introducing MPS services to the AEC industry, diversifying our color offering and taking the first steps toward technology consulting. All of these actions were taken to prepare us for a new environment where project related printing would not be the primary growth engine of the company. As a result, we could make our most recent changes with confidence and speed because we knew what was required. We planned them well in advance. The pivotal factor in our plans has always been timing.

Given the excellent historical performance of our traditional reprographics business, we have always felt it would be irresponsible to reduce support in this service line as long as it helps some reasonable potential to resume its revenue growth with a recovery in the market. Far from ignoring similar changes that have caused failures in other markets in transition, the necessary actions we have to take have always been clear to us.

Now, after nearly 12 quarters of heads and starts in the U.S. economy and painfully slow advances in the construction market, the time is right and we are moving forward quickly and decisively. Despite the weaker sales in reprographics during the third quarter, our FM/MPS business has continued its robust growth and delivered year-over-year growth of 6.3% for the quarter and nearly 8% year-to-date, number of contracts increased by 250 for the quarter.

By expanding our contract from a preferred provider to an exclusive provider, we have enlarged our user base by 50% or more with large companies like AECOM, HKS and Swinerton. During the last weeks of the third quarter, we also landed three new multi-billion dollar global service customers including, Parsons Brinckerhoff. Roll outs for these clients will begin in the fourth quarter and gain momentum through 2013 and 2014.

We were also gratified to be positioned again in Gartner’s Magic Quadrant for MPS worldwide published in October. I think it’s worthy of note that we are the only non-equipment manufacturer in the entire report. While our color business has been challenged in small format segment due to the loss of a few projects, our sales team is making progress with some exciting new accounts including Bloomingdales, Michael Kors, Calvin Klein, Whole Foods, and Tom Shoes as well as ongoing work for Disney, Mattel, Forever 21, American Apparel, Chick-Fil-A, Coca-Cola, Taco Bell and other high profile brands.

We’re also taking on new AEC and non-AEC clients in archive and information management, demonstrating the power of PlanWell Collaborate and document management in the cloud, instead of traditional methods of storing and paying for documents that are left in a box, on a shelf in a warehouse.

All of these successes were in motion as we entered the third quarter and continue to progress as we move into the fourth quarter. While the recent changes have required tremendous focus, long hours, and some very painful decisions with regard to our workforce in particular, it has not slowed us down.

On the contrary, we’re moving faster than ever before as we divest ourselves of infrastructure and cost associated with project-related printing. These changes are, in fact, one of the primary reasons why we are maintaining our annual forecast for earnings per share and cash from operations. We still expect to deliver 2012 EPS in the range of negative $0.03 to positive $0.03 and cash flow from operations in the range of $35 million to $45 million.

As you might imagine, undertaking such significant changes has put me in contact with almost every ARC employee in the country. I have had meetings with every single person on our sales teams, held company-wide conference calls to explain our actions, and mobilized our entire management team to leave no question unanswered.

Our message to our employees is the same I leave with you today. Change is here. If we ignore these signs, it is at our own peril. But if we embrace it, we ensure a profitable future.

We’re more streamlined, nimble and faster than ever before. We are more unified as a company than ever before. We are offering services that no one in the industry ever imagined, and we are offering value that few, if any one of our competitors can offer. It’s a position of strength and one that offers enormous opportunities in the future.

At this point, I’ll turn the call over to John for a review of our quarterly performance and then we’ll open the call to your questions as per our usual practice. John.

John Toth

Thank you, Suri. Starting with the top of the P&L, our net revenue for the quarter was $99.4 million, 5.1% decrease versus prior year quarter. For your daily sales calculations, the third quarter of 2012 had 63 days. The third quarter of 2011 had 64 days, as did the second quarter of 2012.

With regard to customer mix, revenue from AEC customers accounted for 75% of our total revenue, with 25% of our revenue coming from non-AEC customers. This is consistent with previous quarters. With regard to sales by geography, our year-over-year regional revenue performance for Q3 of 2012 was as follows.

Northern California was down 2.2%. Southern California was down 6.5%. The Pacific Northwest was down 13%. Southern region was down 7.5%. The Midwest region was essentially flat due to the implementation of global solutions customers in that region. And the Northeast region was down 10.3%. Our international operations, excluding Canada are, are up 9.4%.

As you might expect given our restructuring efforts, we continue to see a shift in our sales mix from traditional reprographic services fulfilled inside our own service centers to on customer side facilities management and MPS services or FM/MPS. And in the month of September for the first time our revenue from FM/MPS exceeded our revenue from traditional black and white reprographic services.

Reprographic services in total delivered 59% of our overall revenue for the quarter versus approximately 63% in Q3, 2011. Our facilities management sales which include MPS delivered approximately 27% of total revenue versus roughly 24% in Q3, 2011. And equipment and supply sales delivered approximately 14% of our revenue versus 13% for the quarter year ago. Digital services delivered 9% this quarter which is the same as the quarter previous year.

With regard to gross margin, our gross margin for the quarter was 29.4%. This is down from our 32.4% level in Q3 2011 primarily due to lower sales volume through our reprographic shops. This lower volume results in lower margins from that business as the fixed cost consume a greater portion of the revenue. It also results in a higher mix of equipment sales which has higher material costs than our other business lines.

Net interest expense was $7 million during the third quarter compared to $7.7 million in the same period 2011, and consists primarily of accrued interest on our 10.5% high yield notes, which were issued in December 2010. Our SG&A for the quarter was approximately $24 million, which grew slightly from the third quarter 2011 due primarily to the expansion of our sales force earlier this year. As noted in our earnings release earlier today, we recorded a goodwill impairment charge of $16.7 million in the third quarter as a result of our annual analysis conducted on September 30.

As many of you know who follow our stock, we’re required to revisit the book to value of our goodwill annually and the decline in sales volume in our reprographics business drove this impairment. The result was a net loss in the third quarter of $20.1 million.

Adjusted to exclude our non-cash charges, we had a net loss of $1.7 million and adjusted earnings per share for the quarter of negative $0.04. This results in a year-to-date earnings per share of negative $0.02.

Moving onto our cash flow, our year-to-date adjusted EBITDA was $46 million versus $51 million for the same period last year. Our adjusted EBITDA margin is 14.9% year-to-date versus 15.8% for the same period last year.

Our year-to-date cash flow from operations was $30.9 million versus $29.5 million for the same period last year. And our year-to-date free cash flow was $16.7 million versus $17.6 million for the same period last year.

Now moving to the balance sheet and related metrics, we ended the third quarter of 2012 with a cash balance of $30.5 million. Our days sales outstanding or DSO were 52 days in the third quarter of 2012, the same as it was in the quarter – in quarter three of last year. DSO is something we are very focused on improving and reducing to under 50 before the year-end.

Total debt including capital leases at the end of the third quarter was $224 million, down from $239 million for the same period last year, a 6% decrease on a year-over-year basis and a reflection of our continued work on creating more capital flexibility for the company. As Suri mentioned, our $50 million senior facility we put in place in January continues to remain undrawn.

On a trailing 12 months basis, the ratio of debt to adjusted EBITDA at the end of the third quarter was 3.6% and adjusted EBITDA coverage of interest was slightly more than two times. With that as an overview, I want to continue to communicate how actively and aggressively we are managing the company’s financial position, especially with regard to the investments we are making now to build our business in the face of a changing construction market.

As Suri pointed out earlier, timing the point at which we aggressively shed costs associated with our traditional project related business has required much consideration, making the most of our historical expertise has been the right thing to do, and we will continue to engage in these practices as long as our customers require them. But the growth of the company is clearly going to come from other areas.

As we make this transition, I will remind you that our balance sheet remains strong. Our cash increased from $23.3 million at the end of Q2 to $30.5 million at the end of Q3, and our cash flow from operations is $30.9 million year-to-date versus $29.5 million for the same period last year in spite of the decline in sales. We continue to generate cash and manage our capital availability just as we have always done. Our approach to the business remains hard headed and clear eyed as demonstrated by the actions we have already taken.

At this point, I will turn it back to Suri. 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 comes from the line of Matthew Kempler with Sidoti & Company.

Matthew Kempler – Sidoti & Company

So, I guess the first thing is we – talk about what change this quarter that gave you better visibility into the impact of digital on print projects and then maybe we can dig into how much of your remaining revenue is tied to that and what we can do to recover growth despite those trends?

Suri Suriyakumar

Sure, Matt. So fundamentally, this is something we have been observing. One of the things we have been doing is that as we – as the new projects start to come out, we are starting to see how those projects are being managed by our customers. Because we knew changes will take place and we knew customers behavior will change but we really never knew how much it’s going to change until we saw project in action.

What we are able to see, Matt, is a few projects came up. And this particular project is a stadium project, football stadium project, in the northern California area and we were able to actually see that the customers actually bypassed the bid process. And it just so happens that, more and more customers are thinking about if you remember the cycle we used to talk about, design development bid build.

We get about 15% of our revenues in design development and balance 85% during bid and build. In this particular instance, we saw in a large project customers bypass the bid process by pre-selecting the subcontractors and general contractors.

In addition, lots of smaller projects, some of them in fact are state and what you call federal projects, we are seeing people using digital bidding process. So, this is something that we have been waiting for and we are starting to see it. And it is clear that this behavior is only going to increase or rather accelerate because customers get more and more comfortable with digital.

So, we thought, okay, it’s time for us to start adjusting, because one of the questions asked is, you have all these 200 plus locations and substantial capacity to produce reprographics project-related work. How are you going to change that or adjust that or right-size that for the new portfolio of products we have? And we’re starting to see evidence that there is going to be less project-related printing, and we’re quickly starting to make adjustments for that so that that won’t continue to impact us.

Matthew Kempler – Sidoti & Company

Okay. And then – so then the follow-up to that was, what percent of your remaining revenue is still tied to these print projects that these portions that you think will be going away over time? And then, what do you think will be the offsets and in what timeframe do you think they’ll come to be able to balance out and return to growth?

Suri Suriyakumar

So what – in the numbers we have showed, during our heyday so to speak, we had about $350 million plus in revenues related to project related printing. This year we had a run rate about $120 million. Am I right, John? About $120 million, so we are doing about $10 million a month. And we think that will continue to erode. There is no question, as the customer behavior gets impacted, I am not sure it will all go away, Matt, I mean, they – but we have to assume that substantial part of that will go away. We got to wait and see whether we lose 50% of that in the next year or two or 60% of that or less than that. I’m not sure. But it’s something that we want to be prepared for even though we have no evidence as to how much we will lose.

Now, we are obviously looking at the worst case scenario. But if you take the current trend this year, the reprographics revenue, meaning project-related revenue, dropped by 13%, John? Average of 13%. So, we would expect that to be the same. Now that is always offset by new projects coming online.

Remember Matt, we don’t have a whole lot of new projects now. There are only a couple of projects which we have seen in the, what you call horizon. Now, when the new projects come, granted, they are not going to generate the same revenues, but there will be print related revenues which are generated by this project. So, that will get offset as well. So, we think it’s going to go on at 10% plus, around that range. But we want to make sure we are not keeping this excess capacity with the hope that we are going to have substantial project related revenues, which is coming on. So that’s the first part of your question.

And then the second part is how we will fill that in meaning, how we’re going to make up for those revenues is the growth in FM/MPS. We have had in fact for the first time, Matt, in our history for the first time, the large format black and white revenue segment, that is project related printing, that’s what we basically refer to as project related printing. Large format black and white printing, for the first time the hard dollars there were lower than the FM/MPS revenue line for the first time.

So, again, we saw that as a trend where FM/MPS revenue is starting to grow. So this is, in September. We are talking about July, August, September. For the first time in September, we saw large format black and white revenue lower than FM/MPS. And FM/MPS business is continuing to grow. And we saw an uptick again because of additional installation for the month of September. So we expect that FM/MPS to grow. Also, last quarter we installed about 250 additional contracts in the FM/MPS line. These are small FM/MPSs which we install in customers’ offices in our regional customers.

So number of contracts went up by 250. That’s number one. Number two, we started installing some larger customers, so that improved our FM/MPS line significantly and we expect that to grow, in the next years to come because we dominate that space, Matt.

Matthew Kempler – Sidoti & Company

Okay. Thank you. And then I guess, just help us understand from your view are you going to see any pressure from, the positioning that we’ve had of, we’ve got the national distribution which helps us with our global wins but now we have to try to balance that portfolio site that we have?

Suri Suriyakumar

Right. No, I mean that – I mean to this date, I’m knocking on wood as I’m talking to you because that’s one thing that I specifically addressed in my script, that we don’t have a whole lot of competition in that space up to now with regard to providing these MPS services for large global customers.

Where the service centers across the nation become a significant asset to us is when we can tell our customers, we can provide you services across the nation because we’re locally present in almost all of the major cities and we can also do your overflow work. In other words, we cannot only do on-site work, we can do off-site work.

Now, if you take the traditional reprographics competition or traditional competition from the reprographics space in that segment of the business, Matt, we have no competition from regular reprographer, but we compete with manufacturers.

What manufacturers don’t have is the overflow facility or the ability to have local people available to support those operations in various cities. So that’s actually a strength for us. So, while we have fine-tuned our brand structure, we’ve actually further consolidating our service center as the assets we have to support the MPS facilities.

So, as question you didn’t ask, but you might ask then, how did you close the 30 branches? So, in cities where we don’t think there is a lot of action going on and we don’t think there’s a potential for a big customer to be there, and if it’s not doing very well, then we shut that branch down.

So, for example, Lodi is a branch we had for a while. If the traditional reprographics were picked up, we probably would have had some volume there. But in the absence of that kind of project related printing coming up, it’s unlikely we’ll do a whole lot of work in Lodi. Now, contrary to that, if you take San Antonio, we had two locations in San Antonio and we consolidated into one because being in San Antonio in one location is more than adequate to support our large customers.

Matthew Kempler – Sidoti & Company

Okay. Great. And then last question from me, I will get back in the queue. What are the quarterly cost savings we are supposed to expect from these reductions we just took?

Suri Suriyakumar

So we haven’t estimated number. We are still working on that Matt. John, would you like to just give a snapshot of what you think is round numbers here?

John Toth

Hi, Matt. We continue to develop the numbers – in general, we expect these initiatives to put our margin for the fourth quarter in line with what we have seen in the past for Q4, 2011, et cetera. So, hopefully that kind of gives you some guidance as to what to expect. 27 locations, over 300 individuals, so much of this is happening in the COGS and will impact the gross margin line and bring it in line with the margins we historically have expected, potentially slightly more for the Q4.

Matthew Kempler – Sidoti & Company

Okay. Thank you, guys.

Suri Suriyakumar

You’re welcome. Thank you, Matt.

Operator

And your next question comes from the line of Tim O’Connor with William Blair.

Tim O’Connor – William Blair

Hi guys.

Suri Suriyakumar

Hi.

Tim O’Connor – William Blair

Maybe you touched on this a little bit, but facilities and management and equipment and supply sales slowed down a little bit in the third quarter. I guess maybe wanted to dig in on both of those segments individually, just see what you are seeing in the near term there?

Suri Suriyakumar

Okay. So I think the FM/MPS line, John, are we down on that? I thought that we are up in the third quarter.

John Toth

FM/MPS.

Suri Suriyakumar

FMMPS is up about...

John Toth

6.5%,

Suri Suriyakumar

Just over 6%.

John Toth

You mean on a sequential basis?

Suri Suriyakumar

Are you saying sequential basis?

Tim O’Connor – William Blair

Yes, 6.5% versus your roughly 7.5% last quarter, 10% the first quarter.

John Toth

So the pace of growth.

Tim O’Connor – William Blair

Yeah.

John Toth

It’s less than what you have seen. This is what I would say (inaudible). But we – that line item is very exposed particularly to the landing of large global solutions customers and we expect to see that growth to continue to be in the double digit range. It’s not a trend, if you will. But that business line is exposed to large customers signing their contracts with us in each quarter. And that’s what drives that percentage growth.

Suri Suriyakumar

It’s all about timing of the roll out.

Tim O’Connor – William Blair

The timing of the roll out and it’s also a reflection of overall percentages, right. As a percentage of the total revenue, so, do you think that impacted?

John Toth

That also continued the increase. We think as we move closer to implementing some of these new accounts, especially those that we added towards the end of the third quarter and are rolling on the fourth quarter then we should see that expansion go closer to the 10% we see in the beginning part of the year on a year-over-year basis. Just for the month.

Suri Suriyakumar

Just for the month, okay. Does that answer your question?

Tim O’Connor – William Blair

Yeah, that helps. And then on equipment and supply sales, it sounded like your international revenue grew a little bit. So I am assuming that equipment and supply sales domestically was maybe a little bit lighter than where you would have wanted it compared with the first couple of quarters. So what are you thinking about that business?

Suri Suriyakumar

I think it’s off for about – by about a percentage point or so. So, this being not a very strong quarter, that might have actually contributed to that. But you know in general overall, our equipment and supplies business has remained pretty strong. And even in China, it’s continuing to remain strong. It’s not growing progressively, but it’s pretty – remained pretty robust. You have anything to add Jorge?

Jorge Avalos

Yeah. One is just a comparison. In the first quarter of 2011, our equipment sales in our China operations were depressed. So when you – by comparison in the first quarter of 2012 compared to last year, you’ve seen a percentage growth. So to Suri’s point, we have seen a struggle on a sure absolute dollars basis in 2012 has stayed relatively consistent.

Suri Suriyakumar

Okay. Would you say that for absolute dollars even in FM/MPS absolute dollars are greater probably?

Jorge Avalos

Greater.

Suri Suriyakumar

Absolutely, okay. So, that’s the answer. So, the absolute dollars are higher. These are all inconsistencies between quarters as to how they are performing.

Tim O’Connor – William Blair:. And then, if you were to see sort of a little bit of decline in the project business, what does that do to gross margins overall looking out a couple of years if the mix shift continues away from project?

Suri Suriyakumar

Okay. So, the project-related revenue is largely – what we referred to is large format black and white. That actually has been a pretty profitable segment for us over a period of time. But in the last year or so, as the revenue continues to drop down and we have the capacity, but the revenue has continued to drop down, it is just over 30%. It’s not significantly higher to the extent that is going to impact our gross margins.

If you take our FM/MPS line we are still in that range, 30% plus. If you take our color business it’s slightly less than 30% range. But if you take the equipment and supplies we are much lower which we all know is the case.

But the FMM/PS line is up there and the technology services, we are much higher in whatever revenue we generate there. So I don’t worry about the fact that the rest of the $120 million if you do have 10%, 15% erosion it will significantly affect our margins. In fact, with all the changes we have made, you know, I think our gross margins will stabilize and for the same revenue if you take the same revenue our gross margins will probably move upwards for the changes we have made.

Tim O’Connor – William Blair

Okay. And I guess just to take a step back and look at the market as a whole, do you think closing these 30 locations and reducing the employee head count obviously has a little bit of impact on revenue but do you think you’re still picking up market share? And do you continue to expect to pick up market share just looking at the reprographics side?

Suri Suriyakumar

So two elements. So we have continued to pick market share in the segments that we are working. Like if you take construction space where we have the large volume of customers, the reprographic services, which is largely dominated by project related work, there is no market share growth there. We don’t see that there because what is happening is that segment of the business is the one which is shrinking.

However, what is growing in that construction base and that customer base is the managed print services FM market because more and more people are starting to download drawings and using their equipment to print selectively the documents. So our customers which is substantial, more customers are installing equipment in-house in small format and large formats.

The rough or the approximate way of looking at that is that when you have a management services, we are largely talking about small format output device and when we referred to them as FMs they’re largely related to project related work but that is inside the customers’ offices. That segment of our business is growing and that’s what we said in the last quarter, we increased it by 250 new contracts. In the global solutions customers where you have multi-billion dollar customers, in that space, we completely dominate the managed print services segment. So that for us is growing – not just growing, growing very healthily.

Tim O’Connor – William Blair

Okay. Thank you.

Suri Suriyakumar

You’re welcome.

Operator

And your next question comes from the line of Scott Schneeberger with Oppenheimer.

Scott Schneeberger – Oppenheimer

I guess, first question, so if you could address just the non-residential construction environment. I know you have some sub sectors within the ABI that haven’t seen the success of the ABI, but just speaking to what you are seeing in construction overall on the street level? Obviously we have a good indication from what you said thus far but just a little bit more commentary on that? Thanks.

Suri Suriyakumar

Sure. Basically, there is more life than what we experience in the previous year. Definitely we are starting to see some projects come out and they are slowly coming out compared to what we used to have in good year. I wouldn’t say growth is here. But I would say we see signs of green shoots coming up and some of them are turning into projects. So, one of the projects we talked about is the football stadium, 49er stadium, they’re moving to Santa Clara, so they have started building. Most people know that and their construction is about 15% to 20%.

Apple is on its way building its new headquarters and that project hasn’t broken ground. Amazon just announced that they’re going to have a three building campus, probably a multi-billion dollars project in the Northwest. So, those are all finally saying they will break ground, so we don’t have hundreds of projects coming up like when the market returns back to normal, but we’re certainly starting to see a few off the projects coming up and there will be some activity compared to what we used to have before.

And we certainly expect that to be the trend although we don’t think growth will be huge, I think there will be much more life in the marketplace as compared to 2012, hopefully with the elections behind us.

Scott Schneeberger – Oppenheimer

Thanks. And with regard to these location closings, is that – you are pretty broad on the way you categorize the United States region-wise. And you just rattled off projects that are predominantly West Coast-based. And are you seeing – and I heard all the regional numbers, but are you seeing any particular area where I know, for instance, upper Midwest, you didn’t have a business presence and you were trying to start on that as economic downturn came. Is that, for instance, a place where may be you have the locations slowing down or is it more broad based across all regions?

Suri Suriyakumar

Right. So, here is the way I would categorize that. If there are – largely in whatever the sector we’re in, the reason we have these service centers is because we were largely doing the project related print work. So even though let’s say upper Midwest, if there are a lot projects coming up and they happen to be housing and they don’t necessarily generate project related printing, we probably won’t consider that an attractive market to get into.

However, if you do have global or national level customers who have a big location there and they’re engaged in a big project and they’re going to have a 300% office, I think we’ll open a location without batting an eyelid, because we do have the capacity, we do have the equipment, so we’re going to assess market by market. Right now if you take the locations we have, we are rock solid in all the major cities or all the major metropolitan marketplaces where our big customers operate. So that we cannot only provide overflow services for management services, if they do have project related printing we can handle it. But the point we are trying to make here is called the project related work which used to be a significant driver and the reason for us to open branch structure has actually is diminishing. So, we want to make sure that even if we open location it will be very different. It will be a smaller service center with a few machines so that we can support the customers.

Scott Schneeberger – Oppenheimer

Thanks, Suri. One last one on the restructuring. I recall seeing the press release, you said this is all typically expected, but a little bit more expedited. Is it largely done right now? Is it something you wanted to complete by year end? How should we think about the strategic outlook for the size of the business into the out years? Thank you.

Suri Suriyakumar

You’re welcome. So it’s – I would use the term it’s largely than now. I mean, obviously branch closures and headcount reductions is not a comfortable thing to do and it’s usually painful on the organization. So we wanted to make sure we did that quickly and efficiently and which is what we did in order to respond to how the customer behaviors are changing and how the market is starting to evolve.

And so, in terms of making the decisions, we are largely done and finished. And what we will do is, we will continue to now that the company is restructured, we’ll continue to build the base of business we have in these new portfolio of products. When I say new portfolio of products they’re not brand new. Those are products we have had which has been developing over a period of time, most of them are starting to gather momentum. So we will start aggressively building our service centers towards that portfolio of products and less focus on or if necessary eliminate the project related printing infrastructure that we have had.

Because one of the theories has been, this is what we have been saying; people would say would you cut more? Would you cut more? Is there a reason to cut more? My answer has always been that we have right sized the company to where we want to be. And we want to position the company for recovery. If during the recovery, we had a substantial amount of project related work came, we would have been ready to deal with it.

But however, having realized that project related revenue is not going to be in the same form or same volumes as we have had in the past, we are quickly reacting to that and removing the extra infrastructure and the cost related to that, so that those costs don’t continue to waste down as we move into the new portfolio or the growing portfolio of product lines.

Scott Schneeberger – Oppenheimer

Okay. Great. Thanks, Suri.

Suri Suriyakumar

You’re welcome.

Operator

And your next question comes from the line of Andrew Berg with Post Advisory Group.

Andrew Berg – Post Advisory Group

Question, going back to – you said you added several large multi-billion dollar companies. I think you said subsequent to the end of the quarter, can you give us some sense of what that may add in terms of revenue in the fourth quarter?

Suri Suriyakumar

In terms of revenue in the fourth quarter, there is not going to be a whole lot of dollars. So, what happens is that when you have large multi-billion dollar companies which are basically national and global companies signed contracts with us and we only cited one company who publicly announced that we were selected, that Parsons Brinkerhoff. There are two other companies. It’s not public yet, so therefore we have refrained from using specific names.

So, what happens is most of these companies has over 100-plus locations across the nation and some of them international locations. So, what we do is we start installing managed print services, MPS installation in all these customers’ offices and they generally kick-off after we sign the contract, and then quarter-by-quarter they will increase.

So for example, in the first quarter or so, we won’t see so much of the impact. And in some customers such as AECOM, we started two years ago and we’re still – we barely finished let’s say 50% of the installation. We’re still about 50%, 60%. We have 40% more to go. It takes years to actually transition all the equipment depending on the contracts they have, depending on the types of equipment they have. So, if you take from a quarterly perspective, I wouldn’t count any dollars for the fourth quarter.

Andrew Berg – Post Advisory Group

Okay. Care to hazard a guess for which they might contribute all of next year?

Suri Suriyakumar

All of next year. So, typically a large account like that, I am giving you a range, could be anywhere from – I mean depending on the size of the company, if it is a $2 billion size company, you could have $5 million to $7 million and if it is $7 billion company or $6 billion company, it could go into $10 million to $12 million. These vary depending on what kind of output devices they use and what kind of additional services we provide. Obviously, our objective is to once we install the managed print services then we start enhancing our services such as archival or other services such as digital services related to shipping documents.

Andrew Berg – Post Advisory Group

Okay. And then with respect to the cost cutting efforts that you did this quarter, were there any costs associated with that that’s running through either the cost of goods sold or the SG&A line that we should be thinking about as potentially one-time in nature?

Suri Suriyakumar

Yeah. There might be a few things which will come up one time in nature which we are identifying. John would you like to add some color to that?

John Toth

I think as we go through this restructuring, we are going to have one time charges. We are going to identify them associated with the plant closures, some equipment will be written off, things of that nature.

Suri Suriyakumar

And that could be coming in order to add to what John said, for example, there might be certain leases we are exiting and then there might be some charges related to that, so that’s always likely to happen. So there will be some costs related to that and we will be able to better identify that by the end of the quarter.

Andrew Berg – Post Advisory Group

Okay. But in the quarter that just ended in the third quarter, if we look at your cost of sales line or your SG&A, there weren’t any one time items we should think about as an add back.

Suri Suriyakumar

No, definitely not in the third quarter. Did you have anything else, John?

John Toth

Other than the goodwill.

Andrew Berg – Post Advisory Group

Yeah, other than goodwill. Okay.

Suri Suriyakumar

Okay, okay. Great.

Andrew Berg – Post Advisory Group

Thank you very much.

Suri Suriyakumar

You’re welcome.

Operator

(Operator Instructions) Your next question comes from the line of DeForest Hinman with Walthausen & Company.

Suri Suriyakumar

DeForest?

DeForest Hinman – Walthausen & Company

Hi. Sorry. My question has been answered.

Suri Suriyakumar

Oh, sorry, okay. Thank you.

Operator

We have no further questions in queue. I would now like to turn the call back over to David Stickney.

David Stickney

Ladies and gentlemen thank you very much for your attention and continued interest in ARC. Have a great evening. We’ll talk to you next quarter.

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