2. Today, ARC is turning
the page. Last year revenues
crept up to $407 million, the
first top-line growth for the
company in five years. Net
income was still in the red,
at negative $15 million, but
that was the smallest loss
since 2009, while adjusted
net income (a non-GAAP
measure) entered the black,
at $4 million. ARC’s outlook
for 2014 includes cash from
operations in the range of
$51 million to $56 million,
compared with $47 million
for 2013.
The turnaround has
been engineered through a
change in strategy on one
hand and an ambitious re-
structuring on the other.
Regarding the strategic shift,
“our customers depend on
projects, but not only on
projects,” says John Toth,
who joined ARC as CFO in
July 2011. “They do tenant
improvements, remodeling,
pitches, and consulting. Pre-
viously, we focused only on
the ‘big project’ part. Now
we focus on the AEC enter-
prise and all of its activities
and document needs.
“If 20 years ago we were
a company that only print-
ed blueprints, in 5 years
we’re going to be an en-
terprise content manage-
ment company,” says Toth.
A reconfigured portfolio of
offerings includes online
data-management services,
other technical services, and
printer software.
Meanwhile, the restruc-
turing, launched in the sec-
ond half of 2012, has pro-
duced a quick payoff: a 260
basis-point improvement in
gross margins and a tripling
of the price of ARC’s stock,
which traded above $7 at the
beginning of April.
Regaining
Credibility
The restructuring was nec-
essary “to regain credibil-
ity,” says Toth. “Our stock
was trading at $2.50, and our
market value was less than
our debt.” From the outset,
the finance chief expected
that the results of the re-
structuring would be big.
“We said to the market and
Like many companies, ARC
Document Solutions was
knocked for a loop during
the recession. A 25-year-old
firm known for most of its life as
American Reprographics, ARC’s
main business is printing precise,
data-intensive documents like
blueprints and technical draw-
ings for large-scale construction
projects, such as sports stadiums
and hospitals. Three-fourths of
the company’s revenues depend
on the nonresidential segments
of the architecture, engineering,
and construction (AEC) industry,
and when those segments went
south, so did ARC, with sales
plummeting from a peak of $701
million in 2008 to $406 million
in 2012, accompanied by heavy
bottom-line losses and a sagging
stock price.
Blueprint For
A TurnaroundAn ambitious restructuring is helping ARC Document
Solutions recover from a four-year swoon. CFO John Toth
provides an inside look. BY DAVID McCANN
CASE
STUDY
3. the rating agencies, ‘We’re going to tell
you what we’re going to do, and then
we’re going to do it.’ The market kind
of said, ‘We’ll believe it when we see it.’
That was fine, because we were going
to deliver.”
Working alongside COO Dilantha
Wijesuriya, Toth set in motion a mas-
sive effort to identify operational in-
efficiencies at ARC’s 200-plus loca-
tions, which served local construction
markets. Essentially, the effort was a
complete revamping of the company’s
internal financial reporting. The goal
was to zero in on locations delivering
poor gross margins and either get them
to do things differently or shut them
down. Margins less than 25% contrib-
uted little or no profit; Toth sought a
35% standard.
The threat of being shut down was a
strong motivator for change. For Toth,
the ability to deliver that message and
back it up with action was important.
ARC Document
Solutions
CASE
STUDY
“It was actually very liberating, tak-
ing the approach that, ‘We will shut
you down. We’re going to restructure
with a capital R, so you’d better take
the gloves off and start looking around
your territory, because you’ve got to
have a 35% gross margin.’ ”
The Heat (Map) Is On
To help low-margin performers im-
prove, Toth’s team created a heat
map—a huge color-coded Excel chart
listing operating units in the rows and
financial metrics in the columns. The
map showed dozens of metrics for
each of 212 locations, including mix of
products sold and various costs as a
percentage of sales, such as labor, ma-
terials, and rent. Each metric was col-
or-flagged to indicate whether it was in
line with the overall company average
(green), out of line (red), or on the bor-
der (yellow).
Finance conducted monthly calls
with managers to teach them how to
read the map and identify action ar-
eas. Notes Toth, “We’d say, ‘Look at
your location, you have a 22% margin.’
They might say, ‘The rent is high in
this location.’ And we [might reply],
‘No, it’s not. Your rent is 9% of sales,
and the company average is 8%. Your
problem is labor. Your cost is 25% of
sales, while companywide it’s 14%.
You’ve got to tell us why.’ We were
able to get down into each location
very quickly and train them how to
look at their business.”
Becoming more aware of product
sales mix was an important learning
experience for the locations. Opera-
tions people don’t necessarily think
about the mix, or how much they’re
selling in various product lines, ex-
plains Toth. “You have to break it
down for them, show them that a soft-
ware sale is a 70% margin sale, while
a piece of equipment is a 20% margin
sale,” he says.
Also, expressing metrics in differ-
ent ways resonates with some opera-
tions staffers. For example, instead
of saying labor costs should be kept
to 14% of sales, it might be more ef-
fective to tell staffers that the cost of
goods sold should be about $5,000 per
0
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Documenting a Turnaround
The recent upturn in ARC’s stock reflects the improvement in
the company’s operations.
Source: Yahoo Finance
“We were able to evolve our
management reporting to be very
valuable, precise, granular, and
substantive. We put that reporting
in terms the operators could
understand and act on.”
John Toth, CFO of ARC Document Solutions
