ARC DOCUMENT SOLUTIONS, INC., 10-Q filed on 11/7/2013
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2013
Oct. 30, 2013
Document Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Sep. 30, 2013 
 
Document Fiscal Year Focus
2013 
 
Document Fiscal Period Focus
Q3 
 
Entity Registrant Name
ARC Document Solutions, Inc. 
 
Entity Central Index Key
0001305168 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
46,356,018 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2013
Dec. 31, 2012
Current assets:
 
 
Cash and cash equivalents
$ 37,054 
$ 28,021 
Accounts receivable, net of allowances for accounts receivable of $2,672 and $2,634
58,643 
51,855 
Inventories, net
13,750 
14,251 
Deferred income taxes
468 
   
Prepaid expenses
4,711 
3,277 
Other current assets
3,418 
6,819 
Total current assets
118,044 
104,223 
Property and equipment, net of accumulated depreciation of $204,231 and $197,830
56,367 
56,471 
Goodwill
212,608 
212,608 
Other intangible assets, net
29,436 
34,498 
Deferred financing fees, net
3,291 
4,219 
Deferred income taxes
1,269 
1,246 
Other assets
2,591 
2,574 
Total assets
423,606 
415,839 
Current liabilities:
 
 
Accounts payable
21,889 
21,215 
Accrued payroll and payroll-related expenses
12,834 
6,774 
Accrued expenses
27,623 
22,321 
Current portion of long-term debt and capital leases
11,505 
13,263 
Total current liabilities
73,851 
63,573 
Long-term debt and capital leases
201,880 
209,262 
Deferred income taxes
30,938 
28,936 
Other long-term liabilities
3,122 
3,231 
Total liabilities
309,791 
305,002 
Commitments and contingencies (Note 7)
   
   
ARC Document Solutions, Inc. stockholders' equity:
 
 
Preferred stock, $0.001 par value, 25,000 shares authorized; 0 shares issued and outstanding
Common stock, $0.001 par value, 150,000 shares authorized; 46,356 and 46,274 shares issued and 46,316 and 46,262 shares outstanding
46 
46 
Additional paid-in capital
104,572 
102,510 
Retained earnings
1,382 
695 
Accumulated other comprehensive income
736 
689 
Total stockholders equity before adjustment of treasury stock
106,736 
103,940 
Less cost of common stock in treasury, 40 and 12 shares
134 
44 
Total ARC Document Solutions, Inc. stockholders' equity
106,602 
103,896 
Noncontrolling interest
7,213 
6,941 
Total equity
113,815 
110,837 
Total liabilities and equity
$ 423,606 
$ 415,839 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Sep. 30, 2013
Dec. 31, 2012
Statement of Financial Position [Abstract]
 
 
Allowances for accounts receivable
$ 2,672 
$ 2,634 
Accumulated depreciation on property and equipment
$ 204,231 
$ 197,830 
Preferred stock, par value
$ 0.001 
$ 0.001 
Preferred stock, shares authorized
25,000,000 
25,000,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value
$ 0.001 
$ 0.001 
Common stock, shares authorized
150,000,000 
150,000,000 
Common stock, shares issued
46,356,000 
46,274,000 
Common stock, shares outstanding
46,316,000 
46,262,000 
Treasury stock, shares
40,000 
12,000 
Condensed Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2013
Sep. 30, 2012
Sep. 30, 2013
Sep. 30, 2012
Income Statement [Abstract]
 
 
 
 
Service sales
$ 88,830 
$ 85,836 
$ 268,258 
$ 267,291 
Equipment and supplies sales
12,422 
13,590 
37,652 
41,936 
Total net sales
101,252 
99,426 
305,910 
309,227 
Cost of sales
68,372 
70,178 
205,040 
214,348 
Gross profit
32,880 
29,248 
100,870 
94,879 
Selling, general and administrative expenses
24,019 
23,916 
72,683 
71,346 
Amortization of intangible assets
1,610 
1,846 
5,056 
9,244 
Goodwill impairment
16,707 
16,707 
Restructuring expense
657 
1,765 
Income (loss) from operations
6,594 
(13,221)
21,366 
(2,418)
Other income
(25)
(25)
(86)
(79)
Loss on extinguishment of debt
262 
262 
Interest expense, net
5,895 
6,982 
18,012 
21,675 
Income (loss) before income tax provision (benefit)
462 
(20,178)
3,178 
(24,014)
Income tax provision (benefit)
790 
(84)
1,946 
1,845 
Net (loss) income
(328)
(20,094)
1,232 
(25,859)
Income attributable to noncontrolling interest
(122)
(18)
(545)
(213)
Net (loss) income attributable to ARC Document Solutions, Inc. shareholders
$ (450)
$ (20,112)
$ 687 
$ (26,072)
(Loss) earnings per share attributable to ARC Document Solutions, Inc. shareholders:
 
 
 
 
Basic (dollars per share)
$ (0.01)
$ (0.44)
$ 0.01 
$ (0.57)
Diluted (dollars per share)
$ (0.01)
$ (0.44)
$ 0.01 
$ (0.57)
Weighted average common shares outstanding:
 
 
 
 
Basic (shares)
45,976 
45,716 
45,880 
45,641 
Diluted (shares)
45,976 
45,716 
45,947 
45,641 
Condensed Consolidated Statements of Comprehensive Income (Loss) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2013
Sep. 30, 2012
Sep. 30, 2013
Sep. 30, 2012
Statement of Comprehensive Income [Abstract]
 
 
 
 
Net (loss) income
$ (328)
$ (20,094)
$ 1,232 
$ (25,859)
Other comprehensive income, net of tax
 
 
 
 
Foreign currency translation adjustments
385 
270 
259 
281 
Amortization of derivative, net of tax effect of $0 for the three and nine months ended September 30, 2013, and $289 and $1,138 for the three and nine months ended September 30, 2012, respectively
486 
1,908 
Other comprehensive income, net of tax
385 
756 
259 
2,189 
Comprehensive income (loss)
57 
(19,338)
1,491 
(23,670)
Comprehensive income (loss) attributable to noncontrolling interest
182 
(9)
757 
205 
Comprehensive (loss) income attributable to ARC Document Solutions, Inc. shareholders
$ (125)
$ (19,329)
$ 734 
$ (23,875)
Condensed Consolidated Statements of Comprehensive Income (Loss) (Parenthetical) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2013
Sep. 30, 2012
Sep. 30, 2013
Sep. 30, 2012
Statement of Comprehensive Income [Abstract]
 
 
 
 
Tax effect of amortization of derivative
$ 0 
$ 289 
$ 0 
$ 1,138 
Condensed Consolidated Statements of Equity and Comprehensive Income (Loss) (USD $)
In Thousands, unless otherwise specified
Total
Common Stock [Member]
Additional Paid-in Capital [Member]
Retained Earnings [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Common Stock in Treasury [Member]
Noncontrolling Interest [Member]
Beginning Balance at Dec. 31, 2011
$ 137,065 
$ 46 
$ 99,728 
$ 32,663 
$ (1,760)
 
$ 6,388 
Beginning Balance, shares at Dec. 31, 2011
 
46,235 
 
 
 
 
 
Stock-based compensation
1,457 
 
1,457 
 
 
 
 
Stock-based compensation, shares
 
29 
 
 
 
 
 
Issuance of common stock under Employee Stock Purchase Plan
28 
 
28 
 
 
 
 
Issuance of common stock under Employee Stock Purchase Plan, shares
 
 
 
 
 
 
Stock options exercised
79 
 
79 
 
 
 
 
Stock options exercised, shares
 
15 
 
 
 
 
 
Tax benefit from stock-based compensation, net of tax deficiency
676 
 
676 
 
 
 
 
Comprehensive income (loss):
 
 
 
 
 
 
 
Net (loss) income
(25,859)
 
 
(26,072)
 
 
213 
Foreign currency translation adjustments
281 
 
 
 
289 
 
(8)
Amortization on derivative, net of tax effect
1,908 
 
 
 
1,908 
 
 
Comprehensive income (loss)
(23,670)
 
 
 
 
 
 
Ending Balance at Sep. 30, 2012
115,635 
46 
101,968 
6,591 
437 
 
6,593 
Ending Balance, shares at Sep. 30, 2012
 
46,285 
 
 
 
 
 
Beginning Balance at Dec. 31, 2012
110,837 
46 
102,510 
695 
689 
(44)
6,941 
Beginning Balance, shares at Dec. 31, 2012
46,274 
46,274 
 
 
 
 
 
Stock-based compensation
2,049 
 
2,049 
 
 
 
 
Stock-based compensation, shares
 
50 
 
 
 
 
 
Issuance of common stock under Employee Stock Purchase Plan
13 
 
13 
 
 
 
 
Issuance of common stock under Employee Stock Purchase Plan, shares
 
 
 
 
 
 
Treasury shares
(90)
 
 
 
 
(90)
 
Treasury shares, shares
40 
28 
 
 
 
 
 
Dividends paid to noncontrolling interest
(485)
 
 
 
 
 
(485)
Comprehensive income (loss):
 
 
 
 
 
 
 
Net (loss) income
1,232 
 
 
687 
 
 
545 
Foreign currency translation adjustments
259 
 
 
 
47 
 
212 
Amortization on derivative, net of tax effect
 
 
 
 
 
 
Comprehensive income (loss)
1,491 
 
 
 
 
 
 
Ending Balance at Sep. 30, 2013
$ 113,815 
$ 46 
$ 104,572 
$ 1,382 
$ 736 
$ (134)
$ 7,213 
Ending Balance, shares at Sep. 30, 2013
46,356 
46,356 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2013
Sep. 30, 2012
Sep. 30, 2013
Sep. 30, 2012
Cash flows from operating activities
 
 
 
 
Net (loss) income
$ (328)
$ (20,094)
$ 1,232 
$ (25,859)
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
 
Allowance for accounts receivable
105 
128 
551 
532 
Depreciation
7,059 
7,143 
21,034 
21,266 
Amortization of intangible assets
1,610 
1,846 
5,056 
9,244 
Amortization of deferred financing costs
270 
276 
831 
812 
Amortization of bond discount
168 
156 
500 
453 
Goodwill impairment
16,707 
16,707 
Stock-based compensation
728 
554 
2,049 
1,457 
Deferred income taxes
182 
(3,797)
918 
(4,301)
Deferred tax valuation allowance
386 
3,854 
560 
6,766 
Restructuring expense, non-cash portion
70 
363 
   
Amortization of derivative, net of tax effect
486 
1,908 
Other non-cash items, net
194 
(123)
(101)
(216)
Changes in operating assets and liabilities, net of effect of business acquisitions:
 
 
 
 
Accounts receivable
4,491 
2,796 
(7,358)
(3,331)
Inventory
441 
(1,081)
721 
(2,666)
Prepaid expenses and other assets
(1,102)
(795)
1,988 
(1,201)
Accounts payable and accrued expenses
5,745 
5,973 
11,666 
9,308 
Net cash provided by operating activities
20,019 
14,029 
40,010 
30,879 
Cash flows from investing activities
 
 
 
 
Capital expenditures
(4,814)
(4,932)
(14,856)
(14,194)
Other
83 
317 
622 
133 
Net cash used in investing activities
(4,731)
(4,615)
(14,234)
(14,061)
Cash flows from financing activities
 
 
 
 
Proceeds from stock option exercises
79 
Proceeds from issuance of common stock under Employee Stock Purchase Plan
13 
28 
Share repurchases, including shares surrendered for tax withholding
(90)
Proceeds from borrowings on long-term debt agreements
402 
Payments of debt extinguishment costs
(66)
(66)
Early extinguishment of long-term debt
(7,000)
(7,000)
Payments on long-term debt agreements and capital leases
(2,988)
(3,575)
(9,395)
(12,041)
Net (repayments) borrowings under revolving credit facilities
(228)
1,424 
(438)
1,041 
Payment of deferred financing costs
(839)
Dividends paid to noncontrolling interest
(485)
(485)
Net cash used in financing activities
(10,763)
(2,151)
(17,059)
(11,732)
Effect of foreign currency translation on cash balances
152 
(47)
316 
11 
Net change in cash and cash equivalents
4,677 
7,216 
9,033 
5,097 
Cash and cash equivalents at beginning of period
32,377 
23,318 
28,021 
25,437 
Cash and cash equivalents at end of period
37,054 
30,534 
37,054 
30,534 
Noncash financing activities
 
 
 
 
Capital lease obligations incurred
$ 2,491 
$ 1,781 
$ 6,737 
$ 8,511 
Description of Business and Basis of Presentation
Description of Business and Basis of Presentation
Description of Business and Basis of Presentation
ARC Document Solutions, Inc. (“ARC Document Solutions,” “ARC” or the “Company”) provides specialized document management services to businesses of all types, with an emphasis on the non-residential segment of the architectural, engineering and construction (“AEC”) industry. ARC offers a variety of services including: Onsite Services, Digital Services, Color Services, and Traditional Reprographics Services. In addition, ARC also sells Equipment and Supplies. The Company conducts its operations through its wholly-owned operating subsidiary, American Reprographics Company, L.L.C., a California limited liability company, and its subsidiaries.
Basis of Presentation
The accompanying interim Condensed Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in conformity with the requirements of the SEC. As permitted under those rules, certain footnotes or other financial information required by GAAP for complete financial statements have been condensed or omitted. In management’s opinion, the accompanying interim Condensed Consolidated Financial Statements presented reflect all adjustments of a normal and recurring nature that are necessary to fairly present the interim Condensed Consolidated Financial Statements. All material intercompany accounts and transactions have been eliminated in consolidation. The operating results for the three and nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the interim Condensed Consolidated Financial Statements and accompanying notes. The Company evaluates its estimates and assumptions on an ongoing basis and relies on historical experience and various other factors that it believes to be reasonable under the circumstances to determine such estimates. Actual results could differ from those estimates, and such differences may be material to the interim Condensed Consolidated Financial Statements.
These interim Condensed Consolidated Financial Statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes included in the Company’s 2012 Form 10-K.
Recent Accounting Pronouncements
In March 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-05. The new guidance covers the accounting for a cumulative translation adjustment on the parent entity upon de-recognition of a subsidiary or group of assets within a foreign entity. This new guidance requires that the parent release any related cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The adoption of ASU 2013-05 will be effective beginning January 1, 2014. The Company does not anticipate the adoption to materially impact the Company’s Condensed Consolidated Financial Statements.
In February 2013, the FASB issued ASU 2013-02. This new guidance requires entities to present (either on the face of the income statement or in the notes) the effects on the line items of the income statement for amounts reclassified out of accumulated other comprehensive income. The adoption of ASU 2013-02 had no impact to the Company’s Condensed Consolidated Financial Statements.
Segment Reporting
The provisions of Accounting Standards Codification (“ASC”) 280, Disclosures about Segments of an Enterprise and Related Information, require public companies to report financial and descriptive information about their reportable operating segments. The Company identifies operating segments based on the various business activities that earn revenue and incur expense, whose operating results are reviewed by the Company's Chief Executive Officer and Chief Operating Officer, who, acting jointly, are deemed to be the chief operating decision makers. Because its operating segments have similar products and services, classes of customers, production processes and economic characteristics, the Company is deemed to operate as a single reportable segment.
Net sales of the Company’s principal services and products were as follows:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2013
 
2012
 
2013
 
2012
Service Sales
 
 
 
 
 
 
 
Traditional reprographics
$
28,907

 
$
30,820

 
$
88,981

 
$
98,427

Color
20,638

 
19,335

 
63,389

 
59,839

Digital
8,295

 
8,565

 
25,346

 
27,763

Subtotal(1)
57,840

 
58,720

 
177,716

 
186,029

Onsite services(2)
30,990

 
27,116

 
90,542

 
81,262

Total services sales
88,830

 
85,836

 
268,258

 
267,291

Equipment and supplies sales
12,422

 
13,590

 
37,652

 
41,936

Total net sales
$
101,252

 
$
99,426

 
$
305,910

 
$
309,227

 
(1)
For comparison purposes this subtotal agrees with Reprographics Services historically reported prior to the 2012 Annual Report on Form 10-K.
(2)
Represents work done at the Company’s customer sites which includes Facilities Management (“FM”) and Managed Print Services (“MPS”).
Risk and Uncertainties
The Company generates the majority of its revenue from sales of services and products to the AEC industry. As a result, the Company’s operating results and financial condition can be significantly affected by economic factors that influence the AEC industry, such as non-residential construction spending, GDP growth, interest rates, unemployment rates, and office vacancy rates. Reduced activity (relative to historic levels) in the AEC industry would diminish demand for some of ARC’s services and products, and would therefore negatively affect revenues and have a material adverse effect on its business, operating results and financial condition.
As part of the Company’s growth strategy, ARC intends to continue to offer and grow a variety of service offerings that are relatively new to the Company. The success of the Company’s efforts will be affected by its ability to acquire new customers for the Company’s new service offerings as well as sell the new service offerings to existing customers. The Company’s inability to successfully market and execute these relatively new service offerings could significantly affect its business and reduce its long term revenue, resulting in an adverse effect on its results of operations and financial condition.
Earnings Per Share
Earnings Per Share
Earnings per Share
The Company accounts for earnings per share in accordance with ASC 260, Earnings Per Share. Basic earnings per share is computed by dividing net income attributable to ARC by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if common shares subject to outstanding options and acquisition rights had been issued and if the additional common shares were dilutive. Common stock equivalents are excluded from the computation if their effect is anti-dilutive. For the three and nine ended September 30, 2013, stock options for 2.2 million and 3.6 million common shares, respectively, were excluded from the calculation of diluted net income attributable to ARC per common share because they were anti-dilutive. For the three and nine months ended September 30, 2012, stock options for 2.3 million common shares were excluded from the calculation of diluted net income attributable to ARC per common share because they were anti-dilutive.
Basic and diluted earnings per share for the three and nine months ended September 30, 2013 and 2012 were calculated using the following common shares:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2013
 
2012
 
2013
 
2012
Weighted average common shares outstanding—basic
45,976

 
45,716

 
45,880

 
45,641

Effect of dilutive impact on equity-based compensation awards

 

 
67

 

Weighted average common shares outstanding—diluted
45,976

 
45,716

 
45,947

 
45,641

Restructuring Expenses
Restructuring Expenses
Restructuring Expenses
To ensure that the Company’s costs and resources were in line with demand for its current portfolio of services and products, management initiated a restructuring plan in the fourth quarter of 2012. Through September 30, 2013, the restructuring plan included the closure of 48 of the Company’s service centers, which represented more than 15% of its total number of service center locations. In addition, as part of the restructuring plan, the Company reduced headcount and middle management associated with its service center locations, streamlined the senior operational management team, and allocated more resources into growing sales categories such as managed print services. The reduction in headcount totaled approximately 300 full-time employees, which represented approximately 10% of the Company’s total workforce.
Restructuring expenses include employee termination costs, estimated lease termination and obligation costs, and other restructuring expenses. The Company’s restructuring efforts included service center closures in both 2012 and 2013. For the three and nine months ended September 30, 2013, the Company closed seven and fifteen service center locations, respectively, in addition to 33 closures in 2012. In total, the Company estimates that 2013 closures will result in restructuring expenses of less than $2.5 million.
The following table summarizes restructuring expenses incurred in the three and nine months ended September 30, 2013.
 
 
Three Months Ended September 30, 2013
 
Nine Months Ended September 30, 2013
Employee termination costs
$
1

 
$
12

Estimated lease termination and obligation costs
395

 
1,361

Other restructuring expenses
261

 
392

Total restructuring expenses
$
657

 
$
1,765


The changes in the restructuring liability from December 31, 2012 through September 30, 2013 are summarized as follows:
 
 
Nine Months Ended September 30, 2013
Balance, December 31, 2012
$
2,299

Restructuring expenses
1,765

Payments
(3,324
)
Balance, September 30, 2013
$
740

Goodwill and Other Intangibles Resulting from Business Acquisitions
Goodwill and Other Intangibles Resulting from Business Acquisitions
Goodwill and Other Intangibles Resulting from Business Acquisitions
Goodwill
In connection with acquisitions, the Company applies the provisions of ASC 805, Business Combinations, using the acquisition method of accounting. The excess purchase price over the assessed fair value of net tangible assets and identifiable intangible assets acquired is recorded as goodwill.
In accordance with ASC 350, Intangibles—Goodwill and Other, the Company assesses goodwill for impairment annually as of September 30, and more frequently if events and circumstances indicate that goodwill might be impaired. At September 30, 2013, the Company assessed goodwill for impairment and determined that goodwill was not impaired.
At September 30, 2012, absent the fact that the Company assesses goodwill for impairment annually as of September 30, the Company determined that there were sufficient indicators to trigger a goodwill impairment analysis. The indicators included, among other factors: (1) the Company’s underperformance relative to its plan in the third quarter of 2012, (2) the performance against plan of reporting units which previously had goodwill impairment, (3) the economic environment, and (4) the continued decrease in large and small format printing at the Company’s service centers, which the Company management believes is partly due to customers’ increasing adoption of technology. The Company’s analysis indicated that seven of its 27 reporting units, six in the United States and one in Canada, had a goodwill impairment as of September 30, 2012. Accordingly, the Company recorded a pretax, non-cash charge for the three months ended September 30, 2012 to reduce the carrying value of goodwill by $16.7 million.
Goodwill impairment testing is performed at the reporting unit level. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support the value of the goodwill.
Goodwill impairment testing is a two-step process. Step one involves comparing the fair value of the reporting units to its carrying amount. If the carrying amount of a reporting unit is greater than zero and its fair value is greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount is greater than the fair value, the second step must be completed to measure the amount of impairment, if any. Step two involves calculating the implied fair value of goodwill by deducting the fair value of all tangible and intangible assets, excluding goodwill, of the reporting unit from the fair value of the reporting unit as determined in step one. The implied fair value of goodwill determined in this step is compared to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, an impairment loss is recognized equal to the difference.
The Company determines the fair value of its reporting units using an income approach. Under the income approach, the Company determined fair value based on estimated discounted future cash flows of each reporting unit. The cash flows are discounted by an estimated weighted-average cost of capital, which is intended to reflect the overall level of inherent risk of a reporting unit. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates and EBITDA margins, discount rates and future market conditions, among others. The Company considered market information in assessing the reasonableness of the fair value under the income approach outlined above.
Given the current economic environment, the changing document and printing needs of the Company’s customers, and the uncertainties regarding the related impact on the Company’s business, there can be no assurance that the estimates and assumptions made for purposes of the Company’s goodwill impairment testing in 2013 will prove to be accurate predictions of the future. If the Company’s assumptions, including forecasted EBITDA of certain reporting units, are not achieved, the Company may be required to record additional goodwill impairment charges in future periods, whether in connection with the Company’s next annual impairment testing in the third quarter of 2014, or on an interim basis, if any such change constitutes a triggering event (as defined under ASC 350, Intangibles—Goodwill and Other ) outside of the quarter when the Company regularly performs its annual goodwill impairment test. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such charge would be material.
The changes in the carrying amount of goodwill from January 1, 2012 through September 30, 2013 are summarized as follows:
 
 
Gross
Goodwill
 
Accumulated
Impairment
Loss
 
Net
Carrying
Amount
January 1, 2012
$
405,558

 
$
176,243

 
$
229,315

Additions

 

 

Goodwill impairment

 
16,707

 
(16,707
)
December 31, 2012
405,558

 
192,950

 
212,608

Additions

 

 

Goodwill impairment

 

 

September 30, 2013
$
405,558

 
$
192,950

 
$
212,608


See “Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations for further information regarding the process and assumptions used in the goodwill impairment analysis.
Long-lived Assets
The Company periodically assesses potential impairments of its long-lived assets in accordance with the provisions of ASC 360, Accounting for the Impairment or Disposal of Long-lived Assets. An impairment review is performed whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. The Company groups its assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of the other assets and liabilities. The Company has determined that the lowest level for which identifiable cash flows are available is the divisional level.
Factors considered by the Company include, but are not limited to, significant underperformance relative to historical or projected operating results; significant changes in the manner of use of the acquired assets or the strategy for the overall business; and significant negative industry or economic trends. When the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of the above indicators of impairment, the Company estimates the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future undiscounted cash flows and eventual disposition is less than the carrying amount of the asset, the Company recognizes an impairment loss. An impairment loss is reflected as the amount by which the carrying amount of the asset exceeds the fair value of the asset, based on the fair value if available, or discounted cash flows, if fair value is not available.
Other intangible assets that have finite lives are amortized over their useful lives. Customer relationships are amortized using the accelerated method, based on customer attrition rates, over their estimated useful lives of 13 (weighted average) years.
During the fourth quarter of 2010, the Company decided to consolidate the various brands that previously represented the Company’s market presence in North America. Beginning in January 2011, each of the Company’s North American operating segments and their respective locations began to adopt ARC, the Company’s overall brand name. Original brand names were used in conjunction with the new ARC brand name to reinforce the Company’s continuing presence in the business communities it serves, and ongoing relationships with its customers. Accordingly, the remaining estimated useful lives of the trade name intangible assets were revised down to 18 months. This change in estimate was accounted for on a prospective basis, resulting in increased amortization expense over the revised useful life of each trade name. There was no related impact for the three and nine months ended September 30, 2013 or for the three months ended September 30, 2012. The impact of this change for the nine months ended September 30, 2012 was an increase in amortization expense of approximately $3.2 million. Trade names were amortized using the straight-line method. The Company retired the original North American trade names in April 2012.
The following table sets forth the Company’s other intangible assets resulting from business acquisitions as of September 30, 2013 and December 31, 2012 which continue to be amortized:
 
 
September 30, 2013
 
December 31, 2012
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Amortizable other intangible assets
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
$
97,861

 
$
69,005

 
$
28,856

 
$
97,926

 
$
64,024

 
$
33,902

Trade names and trademarks
20,370

 
19,790

 
580

 
20,350

 
19,754

 
596

 
$
118,231

 
$
88,795

 
$
29,436

 
$
118,276

 
$
83,778

 
$
34,498


Based on current information, estimated future amortization expense of amortizable intangible assets for the remainder of the 2013 fiscal year, each of the subsequent four fiscal years and thereafter are as follows:
 
2013 (excluding the nine months ended September 30, 2013)
$
1,548

2014
5,761

2015
5,218

2016
4,518

2017
4,002

Thereafter
8,389

 
$
29,436

Income Taxes
Income Taxes
Income Taxes
On a quarterly basis, the Company estimates its effective tax rate for the full fiscal year and records a quarterly income tax provision based on the anticipated rate in conjunction with the recognition of any discrete items within the quarter.
The Company recorded an income tax provision of $0.8 million and $1.9 million in relation to pretax income of $0.5 million and $3.2 million for the three and nine months ended September 30, 2013, respectively. The income tax provision was primarily due to the impact of amortization of tax basis goodwill in a deferred tax liability position.
In accordance with ASC 740-10, Income Taxes, the Company evaluates its deferred tax assets to determine if a valuation allowance is required based on the consideration of all available evidence using a “more likely than not” standard, with significant weight being given to evidence that can be objectively verified. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability; the length of statutory carryover periods for operating losses and tax credit carryovers; and available tax planning alternatives. During 2011, 2012 and the nine months ended September 30, 2013, the Company determined that cumulative losses for the preceding twelve quarters constituted sufficient objective evidence (as defined by ASC 740-10) that a valuation allowance on certain deferred assets was needed. As of September 30, 2013, the Company has a $78.8 million valuation allowance against certain of its deferred tax assets.
Based on the Company’s assessment, the remaining net deferred tax assets of $1.7 million as of September 30, 2013 which relate to foreign entities are considered to be more likely than not to be realized. The valuation allowance of $78.8 million may be increased or decreased as conditions change or if the Company is unable to implement certain available tax planning strategies. The realization of the Company’s net deferred tax assets ultimately depend on future taxable income, reversals of existing taxable temporary differences or through a loss carry back. The Company has income tax receivables of $0.2 million as of September 30, 2013 included in other current assets in its condensed consolidated balance sheet primarily related to income tax refunds for prior years.
Long-Term Debt
Long-Term Debt
Long-Term Debt
Long-term debt consists of the following:
 
 
September 30, 2013
 
December 31, 2012
10.5% senior notes due 2016, net of bond discount of $2,549 and $3,148
$
190,451

 
$
196,852

Various capital leases; weighted average interest rate of 7.5% at September 30, 2013 and December 31, 2012; principal and interest payable monthly through September 2018
20,841

 
23,445

Borrowings from foreign revolving credit facilities; 0.6% interest rate at September 30, 2013 and December 31, 2012
1,596

 
1,985

Various other notes payable with a weighted average interest rate of 6.4% and 6.0% at September 30, 2013 and December 31, 2012, respectively; principal and interest payable monthly through June 2016
497

 
243

 
213,385

 
222,525

Less current portion
(11,505
)
 
(13,263
)
 
$
201,880

 
$
209,262


10.5% Senior Notes due 2016
On December 1, 2010, the Company completed a private placement of 10.5% senior unsecured notes due 2016 (the “Notes”).
The Notes have an aggregate principal amount of $200 million. The Notes are general unsecured senior obligations of the Company and are subordinate to all existing and future senior secured debt of the Company to the extent of the assets securing such debt. The Company’s obligations under the Notes are jointly and severally guaranteed by all of the Company’s domestic subsidiaries. The issue price was 97.824% with a yield to maturity of 11.0%. Interest on the Notes accrues at a rate of 10.5% per annum and is payable semiannually in arrears on June 15 and December 15 of each year, commencing on June 15, 2011. The Company will make each interest payment to the holders of record of the Notes on the immediately preceding June 1 and December 1.
The Company received gross proceeds of $195.6 million from the Notes offering. In connection with the issuance of the Notes, the Company entered into an indenture (the “Indenture”). The Notes were offered only to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and outside the United States to non-U.S. persons pursuant to Regulation S under the Securities Act.
Optional Redemption. At any time prior to December 15, 2013, the Company may redeem all or part of the Notes upon not less than 30 nor more than 60 days’ prior notice at a redemption price equal to the sum of (i) 100% of the principal amount thereof, plus (ii) a make-whole premium as of the date of redemption, plus (iii) accrued and unpaid interest, if any, to the date of redemption. In addition, the Company may redeem some or all of the Notes (i) on December 15, 2013 or during the 12 month period thereafter, at a redemption price equal to 105.25% of the principal amount thereof and (ii) on or after December 15, 2014, at the redemption price set forth in the Indenture, in each case, together with accrued and unpaid interest, if any, to the date of redemption. At any time prior to December 15, 2013, the Company may use the proceeds of certain equity offerings to redeem up to 35% of the aggregate principal amount of the Notes, including any permitted additional notes, at a redemption price equal to 110.5% of the principal amount of the Notes redeemed, plus accrued and unpaid interest, if any, to the date of redemption.
Repurchase upon Change of Control. Upon the occurrence of a change in control (as defined in the Indenture), each holder of the Notes may require the Company to repurchase all of the then-outstanding Notes in cash at a price equal to 101% of the aggregate principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to the date of repurchase.
Other Covenants. The Indenture contains covenants that limit, among other things, the Company’s and certain of its subsidiaries’ ability to (1) incur certain additional debt and issue preferred stock, (2) make certain restricted payments, (3) consummate specified asset sales, (4) enter into certain transactions with affiliates, (5) create liens, (6) declare or pay any dividend or make any other distributions, (7) make certain investments, and (8) merge or consolidate with another person.
Events of Default. The Indenture provides for customary events of default (subject in certain cases to customary grace and cure periods), which include non-payment, breach of covenants in the Indenture, cross default and acceleration of other indebtedness, failure to pay certain judgments and certain events of bankruptcy and insolvency. Generally, if an event of default occurs, the Trustee or holders of at least 25% in principal amount of the then outstanding Notes may declare the principal of and accrued but unpaid interest on all of the then-outstanding Notes to be due and payable.
Exchange Offer. Pursuant to a registered exchange offer in May 2011, the Company offered to exchange up to $200 million aggregate principal amount of the Notes, for new notes that were registered under the Securities Act. The terms of the registered notes are the same as the terms of the Notes, except that they are registered under the Securities Act and the transfer restrictions, registration rights and additional interest provisions are not applicable. The Company accepted the exchange of $200 million aggregate principal amounts of the Notes that were properly tendered in the exchange offer.
Note Repurchase. In July 2013, the Company repurchased $7.0 million in aggregate principal amount of its 10.5% senior unsecured notes due December 15, 2016 in the open market using available cash.

In October and November of 2013, the Company repurchased an additional $5.3 million in aggregate principal amount of its
10.5% senior unsecured notes due December 15, 2016 in the open market using available cash.
2012 Credit Agreement
On January 27, 2012, the Company entered into a new Credit Agreement (the “2012 Credit Agreement”) and terminated its previous senior secured credit agreement. The 2012 Credit Agreement provides revolving loans in an aggregate principal amount not to exceed $50.0 million with a Canadian sublimit of $5.0 million, based on inventory, accounts receivable and unencumbered equipment of the Company’s subsidiaries organized in the US and Canada (“Domestic Subsidiaries”) that meet certain eligibility criteria. The 2012 Credit Agreement has a maturity date of June 15, 2016.
Amounts borrowed in US dollars under the 2012 Credit Agreement bear interest, in the case of LIBOR loans, at a per annum rate equal to LIBOR plus the LIBOR Margin, which may range from 1.75% to 2.25%, based on Average Daily Net Availability (as defined in the 2012 Credit Agreement). All other amounts borrowed in US dollars that are not LIBOR loans bear interest at a per annum rate equal to (i) the greatest of (A) the Federal Funds rate plus 0.5%, (B) the LIBOR (calculated based upon an interest period of three months and determined on a daily basis), plus 1.0% per annum, and (C) the rate of interest announced, from time to time, within Wells Fargo Bank, National Association at its principal office in San Francisco as its “prime rate,” plus (ii) the Base Rate Margin (as defined in the 2012 Credit Agreement), which may range from 0.75% to 1.25%, based on Average Daily Net Availability (as defined in the 2012 Credit Agreement). Amounts borrowed in Canadian dollars bear interest at a per annum rate equal to the Canadian Base Rate (as defined in the 2012 Credit Agreement) plus the LIBOR Margin, which may range from 1.75% to 2.25%, based on Average Daily Net Availability.
The 2012 Credit Agreement contains various loan covenants that restrict the Company’s ability to take certain actions, including restrictions on incurrence of indebtedness, creation of liens, mergers or consolidations, dispositions of assets, repurchase or redemption of capital stock, making certain investments, entering into certain transactions with affiliates or changing the nature of the Company’s business. In addition, at any time when Excess Availability (as defined in the 2012 Credit Agreement) is less than $10.0 million, the Company is required to maintain a Fixed Charge Coverage Ratio (as defined in the 2012 Credit Agreement) of at least 1.0. The Company’s obligations under the 2012 Credit Agreement are secured by substantially all of its assets pursuant to a Guaranty and Security Agreement.
As of and during the three and nine months ended September 30, 2013, the Company did not have any outstanding debt under the 2012 Credit Agreement.
As of September 30, 2013, based on inventory, accounts receivable and unencumbered equipment of the Company’s subsidiaries organized in the US and Canada, the Company’s borrowing availability under the 2012 Credit Agreement was $48.8 million. Standby letters of credit totaling $2.5 million reduced the Company’s borrowing availability under the 2012 Credit Agreement to $46.3 million as of September 30, 2013.
Foreign Credit Agreement
In the third quarter of 2013, in conjunction with its Chinese operations, UNIS Document Solutions Co. Ltd. (“UDS”), the Company’s Chinese business venture with Beijing-based Unisplendour, entered into a revolving credit facility with a term of 18 months . The facility provide for a maximum credit amount of 10.0 million Chinese Yuan Renminbi, which translates to U.S. $1.6 million as of September 30, 2013. Draws on the facility are limited to 30 day periods and incur a fee of 0.05% of the amount drawn and no additional interest is charged.
Other Notes Payable
Includes notes payable collateralized by equipment previously purchased and subordinated seller notes payable related to prior acquisitions.
Commitments and Contingencies
Commitments and Contingencies
Commitments and Contingencies
Operating Leases. The Company has entered into various non-cancelable operating leases primarily related to facilities, equipment and vehicles used in the ordinary course of business.
Contingent Transaction Consideration. The Company is subject to earnout obligations entered into in connection with prior acquisitions. If the acquired businesses generate sales and/or operating profits in excess of predetermined targets, the Company is obligated to make additional cash payments in accordance with the terms of such earnout obligations. As of September 30, 2013, the Company has potential future earnout obligations for acquisitions consummated before the adoption of ASC 805, Business Combinations, of approximately $1.8 million through 2014 if predetermined financial targets are met or exceeded. Earnout payments prior to the adoption of ASC 805 are recorded as additional purchase price (as goodwill) when the contingent payments are earned and become payable.
Legal Proceedings. On October 21, 2010, a former employee, individually and on behalf of a purported class consisting of all non-exempt employees who work or worked for American Reprographics Company, L.L.C. and American Reprographics Company in the State of California at any time from October 21, 2006 through the present, filed an action against the Company in the Superior Court of California for the County of Orange. The complaint alleges, among other things, that the Company violated the California Labor Code by failing to (i) provide meal and rest periods, or compensation in lieu thereof, (ii) timely pay wages due at termination, and (iii) that those practices also violate the California Business and Professions Code. The relief sought includes damages, restitution, penalties, interest, costs, and attorneys’ fees and such other relief as the court deems proper. On March 15, 2013, the Company participated in a private mediation session with claimants’ counsel which did not result in resolution of the claim. A subsequent court status conference was held on July 8, 2013 with no resolution reached. Although the Company believes that it has meritorious defenses to the claim, the Company also believes that a loss is probable and recorded a liability of $0.9 million as of September 30, 2013. The case remains unresolved as of September 30, 2013. As such, the ultimate resolution of the claim could result in a loss different than the estimated loss recorded.
In addition to the matter described above, the Company is involved in various additional legal proceedings and other legal matters from time to time in the normal course of business. The Company does not believe that the outcome of any of these matters will have a material effect on its consolidated financial position, results of operations or cash flows.
Stock-Based Compensation
Stock-Based Compensation
Stock-Based Compensation
The Company’s 2005 Stock Plan (the “Stock Plan”) provides for the grant of incentive and non-statutory stock options, stock appreciation rights, restricted stock purchase awards, restricted stock awards, and restricted stock units to employees, directors and consultants of the Company. The Stock Plan authorizes the Company to issue up to 5.0 million shares of common stock. This amount automatically increased annually on the first day of the Company’s fiscal year, from 2006 through and including 2010, by the lesser of (i) 1.0% of the Company’s outstanding shares on the date of the increase; (ii) 0.3 million shares; or (iii) such smaller number of shares determined by the Company’s board of directors. As of September 30, 2013, 0.7 million shares remain available for issuance under the Stock Plan.
Stock options granted under the Stock Plan generally expire no later than ten years from the date of grant. Options generally vest and become fully exercisable over a period of two to five years from date of award, except that options granted to non-employee directors may vest over a shorter time period. The exercise price of options must be equal to at least 100% (110% in the case of an incentive stock option granted to a 10% stockholder) of the fair market value of the Company’s common stock on the date of grant. The Company allows for cashless exercises of vested outstanding options.
During the nine months ended September 30, 2013, the Company granted options to acquire a total of 1.5 million shares, of the Company’s common stock to certain key employees with an exercise price equal to the fair market value of the Company’s common stock on the date of grant. The stock options granted to those key employees vest annually over three to four years and expire 10 years after the date of grant.
The impact of stock-based compensation before income taxes on the interim Condensed Consolidated Statements of Operations was $0.7 million and $0.6 million for the three months ended September 30, 2013 and 2012, respectively.
The impact of stock-based compensation before income taxes on the interim Condensed Consolidated Statements of Operations was $2.0 million and $1.5 million for the nine months ended September 30, 2013 and 2012, respectively.
As of September 30, 2013, total unrecognized compensation cost related to unvested stock-based payments totaled $4.9 million and is expected to be recognized over a weighted-average period of 1.9 years.
Derivatives and Hedging Transactions
Derivatives and Hedging Transactions
Derivatives and Hedging Transactions
As of September 30, 2013 the Company was not party to any derivative or hedging transactions.
As of December 31, 2010, the Company was party to a swap transaction, in which the Company exchanged its floating-rate payments for fixed-rate payments. As of December 1, 2010, the swap transaction was de-designated upon issuance of the Notes and payoff of the Company’s previous credit agreement. The swap transaction no longer qualified as a cash flow hedge under ASC 815, Derivatives and Hedging, as all the floating-rate debt was extinguished. The swap transaction qualified as a cash flow hedge up to November 30, 2010. On January 3, 2011, the Company terminated and settled the swap transaction.
As of September 30, 2013, there is no amount deferred in accumulated other comprehensive income related to any swap transactions.
The following table summarizes the effect of the swap transaction on the interim Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and 2012:
 
 
Amount of Gain or (Loss) Reclassified from
Accumulated Comprehensive Income (Loss) into Income
 
(effective portion)
 
(ineffective portion)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Location of Loss Reclassified from AOCL into Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
$

 
$
(776
)
 
$

 
$
(3,047
)
 
$

 
$

 
$

 
$

Fair Value Measurements
Fair Value Measurements
Fair Value Measurements
In accordance with ASC 820, the Company has categorized its assets and liabilities that are measured at fair value into a three-level fair value hierarchy as set forth below. If the inputs used to measure fair value fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement. The three levels of the hierarchy are defined as follows:
Level 1-inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2-inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3-inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The following table summarizes the bases used to measure certain assets and liabilities at fair value on a nonrecurring basis in the condensed consolidated financial statements as of and for the nine months ended September 30, 2013 and 2012:

 
Significant Other Unobservable Inputs September 30,
 
2013
 
2012
 
Level 3
 
Total Losses
 
Level 3
 
Total Losses
Nonrecurring Fair Value Measure
 
 
 
 
 
 
 
Goodwill
$
212,608

 
$

 
$
212,608

 
$
16,707


In accordance with ASC 350, goodwill was written down to its implied fair value of $212.6 million as of September 30, 2012, resulting in an impairment charge of $16.7 million during the nine months ended September 30, 2012. See Note 4, “Goodwill and other intangibles resulting from business acquisitions” for further information regarding the process of determining the implied fair value of goodwill and change in goodwill.
Fair Values of Financial Instruments. The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments for disclosure purposes:
Cash equivalents: Cash equivalents are time deposits with maturity of three months or less when purchased, which are highly liquid and readily convertible to cash. Cash equivalents reported in the Company’s Condensed Consolidated Balance Sheets were $12.5 million and $13.7 million as of September 30, 2013 and December 31, 2012, respectively, and are carried at cost and approximate fair value due to the relatively short period to maturity of these instruments.
Short- and long-term debt: The carrying amount of the Company’s capital leases reported in the Condensed Consolidated Balance Sheets approximates fair value based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements. The carrying amount reported in the Company’s Condensed Consolidated Balance Sheet as of September 30, 2013 for its Notes and other notes payable is $193.0 million and $0.5 million, respectively. Using a discounted cash flow technique that incorporates a market interest rate which assumes adjustments for duration, optionality, and risk profile, the Company has determined the fair value of its Notes and other notes payable is $201.2 million and $0.5 million, respectively, as of September 30, 2013.
Condensed Consolidating Financial Statements
Condensed Consolidating Financial Statements
Condensed Consolidating Financial Statements
The Notes are fully and unconditionally guaranteed, on a joint and several basis, by all of the Company’s domestic subsidiaries (the “Guarantor Subsidiaries”). The Company’s foreign subsidiaries have not guaranteed the Notes (the “Non-Guarantor Subsidiaries”). Each of the Guarantor Subsidiaries is 100% owned, directly or indirectly, by the Company. There are no significant restrictions on the ability of the Company to obtain funds from any of the Guarantor Subsidiaries by dividends or loans. In lieu of providing separate audited financial statements for the Guarantor Subsidiaries, condensed consolidating financial information is presented below.
Condensed Consolidating Balance Sheet
September 30, 2013
(Unaudited)
 
(In thousands)
ARC Document Solutions, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Total
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
21,115

 
$
15,939

 
$

 
$
37,054

Accounts receivable, net

 
49,186

 
9,457

 

 
58,643

Intercompany operations
128,672

 
5,109

 

 
(133,781
)
 

Inventories, net

 
10,469

 
3,281

 

 
13,750

Deferred income taxes

 
3

 
465

 

 
468

Prepaid expenses
1

 
3,702

 
1,008

 

 
4,711

Other current assets

 
1,834

 
1,584

 

 
3,418

Total current assets
128,673

 
91,418

 
31,734

 
(133,781
)
 
118,044

Property and equipment, net

 
48,471

 
7,896

 

 
56,367

Goodwill

 
212,608

 

 

 
212,608

Investment in subsidiaries
171,077

 
18,089

 

 
(189,166
)
 

Other intangible assets, net

 
27,508

 
1,928

 

 
29,436

Deferred financing costs, net
3,291

 

 

 

 
3,291

Deferred income taxes

 
69

 
1,200

 

 
1,269

Other assets

 
2,095

 
496

 

 
2,591

Total assets
$
303,041

 
$
400,258

 
$
43,254

 
$
(322,947
)
 
$
423,606

Liabilities and Equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
19,491

 
$
2,398

 
$

 
$
21,889

Accrued payroll and payroll-related expenses

 
12,089

 
745

 

 
12,834

Accrued expenses
5,984

 
18,451

 
3,188

 

 
27,623

Intercompany loans

 
128,377

 
5,404

 
(133,781
)
 

Current portion of long-term debt and capital leases

 
8,581

 
2,924

 

 
11,505

Total current liabilities
5,984

 
186,989

 
14,659

 
(133,781
)
 
73,851

Long-term debt and capital leases
190,455

 
9,974

 
1,451

 

 
201,880

Deferred income taxes

 
30,910

 
28

 

 
30,938

Other long-term liabilities

 
1,308

 
1,814

 

 
3,122

Total liabilities
196,439

 
229,181

 
17,952

 
(133,781
)
 
309,791

Commitments and contingencies

 

 

 

 

Total equity
106,602

 
171,077

 
25,302

 
(189,166
)
 
113,815

Total liabilities and equity
$
303,041

 
$
400,258

 
$
43,254

 
$
(322,947
)
 
$
423,606


Condensed Consolidating Balance Sheet
December 31, 2012
(Unaudited)
 
(In thousands)
ARC Document Solutions, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Total
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
10,965

 
$
17,056

 
$

 
$
28,021

Accounts receivable, net

 
45,289

 
6,566

 

 
51,855

Intercompany operations
146,475

 
4,869

 

 
(151,344
)
 

Inventories, net

 
9,426

 
4,825

 

 
14,251

Prepaid expenses

 
2,732

 
545

 

 
3,277

Other current assets

 
5,854

 
965

 

 
6,819

Total current assets
146,475

 
79,135

 
29,957

 
(151,344
)
 
104,223

Property and equipment, net

 
48,484

 
7,987

 

 
56,471

Goodwill

 
212,608

 

 

 
212,608

Investment in subsidiaries
151,015

 
14,233

 

 
(165,248
)
 

Other intangible assets, net

 
32,327

 
2,171

 

 
34,498

Deferred financing costs, net
4,219

 

 

 

 
4,219

Deferred income taxes

 

 
1,246

 

 
1,246

Other assets

 
1,788

 
786

 

 
2,574

Total assets
$
301,709

 
$
388,575

 
$
42,147

 
$
(316,592
)
 
$
415,839

Liabilities and Equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
1

 
$
19,395

 
$
1,819

 
$

 
$
21,215

Accrued payroll and payroll-related expenses

 
6,460

 
314

 

 
6,774

Accrued expenses
951

 
17,230

 
4,140

 

 
22,321

Intercompany loans

 
143,450

 
7,894

 
(151,344
)
 

Current portion of long-term debt and capital leases

 
9,909

 
3,354

 

 
13,263

Total current liabilities
952

 
196,444

 
17,521

 
(151,344
)
 
63,573

Long-term debt and capital leases
196,861

 
10,945

 
1,456

 

 
209,262

Deferred income taxes

 
28,900

 
36

 

 
28,936

Other long-term liabilities

 
1,271

 
1,960

 

 
3,231

Total liabilities
197,813

 
237,560

 
20,973

 
(151,344
)
 
305,002

Commitments and contingencies

 

 

 

 

Total equity
103,896

 
151,015

 
21,174

 
(165,248
)
 
110,837

Total liabilities and equity
$
301,709

 
$
388,575

 
$
42,147

 
$
(316,592
)
 
$
415,839



Condensed Consolidating Statement of Operations
Three Months Ended
September 30, 2013
(Unaudited)
 
(In thousands)
ARC Document Solutions, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Total
Net sales
$

 
$
88,766

 
$
12,486

 
$

 
$
101,252

Cost of sales

 
58,727

 
9,645

 

 
68,372

Gross profit

 
30,039

 
2,841

 

 
32,880

Selling, general and administrative expenses
2

 
21,672

 
2,345

 

 
24,019

Amortization of intangible assets

 
1,534

 
76

 

 
1,610

Restructuring expense

 
657

 

 

 
657

(Loss) income from operations
(2
)
 
6,176

 
420

 

 
6,594

Other income, net

 
(25
)
 

 

 
(25
)
Loss on extinguishment of debt
262

 

 

 

 
262

Interest expense, net
5,584

 
357

 
(46
)
 

 
5,895

(Loss) income before equity earnings of subsidiaries and income tax provision
(5,848
)
 
5,844

 
466

 

 
462

Equity in earnings of subsidiaries
(5,398
)
 
(253
)
 

 
5,651

 

Income tax provision

 
699

 
91

 

 
790

Net (loss) income
(450
)
 
5,398

 
375

 
(5,651
)
 
(328
)
Income attributable to noncontrolling interest

 

 
(122
)
 

 
(122
)
Net (loss) income attributable to ARC Document Solutions, Inc. shareholders
$
(450
)
 
$
5,398

 
$
253

 
$
(5,651
)
 
$
(450
)
Condensed Consolidating Statement of Operations
Three Months Ended
September 30, 2012
(Unaudited)
 
(In thousands)
ARC Document Solutions, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Total
Net sales
$

 
$
86,714

 
$
12,712

 
$

 
$
99,426

Cost of sales

 
59,988

 
10,190

 

 
70,178

Gross profit

 
26,726

 
2,522

 

 
29,248

Selling, general and administrative expenses
2

 
23,274

 
640

 

 
23,916

Amortization of intangible assets

 
1,760

 
86

 

 
1,846

Goodwill impairment

 
15,204

 
1,503

 

 
16,707

(Loss) income from operations
(2
)
 
(13,512
)
 
293

 

 
(13,221
)
Other income, net

 
(25
)
 

 

 
(25
)
Interest expense, net
5,752

 
1,238

 
(8
)
 

 
6,982

(Loss) income before equity earnings of subsidiaries and income tax (benefit) provision
(5,754
)
 
(14,725
)
 
301

 

 
(20,178
)
Equity in earnings of subsidiaries
14,358

 
(200
)
 

 
(14,158
)
 

Income tax (benefit) provision

 
(167
)
 
83

 

 
(84
)
Net (loss) income
(20,112
)
 
(14,358
)
 
218

 
14,158

 
(20,094
)
Income attributable to noncontrolling interest

 

 
(18
)
 

 
(18
)
Net (loss) income attributable to ARC Document Solutions, Inc. shareholders
$
(20,112
)
 
$
(14,358
)
 
$
200

 
$
14,158

 
$
(20,112
)
Condensed Consolidating Statement of Operations
Nine Months Ended
September 30, 2013
(Unaudited)
 
(In thousands)
ARC Document Solutions, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Total
Net sales
$

 
$
268,530

 
$
37,380

 
$

 
$
305,910

Cost of sales

 
176,300

 
28,740

 

 
205,040

Gross profit

 
92,230

 
8,640

 

 
100,870

Selling, general and administrative expenses
5

 
65,950

 
6,728

 

 
72,683

Amortization of intangible assets

 
4,821

 
235

 

 
5,056

Restructuring expense

 
1,758

 
7

 

 
1,765

(Loss) income from operations
(5
)
 
19,701

 
1,670

 

 
21,366

Other income, net

 
(86
)
 

 

 
(86
)
Loss on extinguishment of debt
262

 

 

 

 
262

Interest expense, net
17,101

 
1,056

 
(145
)
 

 
18,012

(Loss) income before equity earnings of subsidiaries and income tax provision (benefit)
(17,368
)
 
18,731

 
1,815

 

 
3,178

Equity in earnings of subsidiaries
(18,055
)
 
(1,550
)
 

 
19,605

 

Income tax provision (benefit)

 
2,226

 
(280
)
 

 
1,946

Net income (loss)
687

 
18,055

 
2,095

 
(19,605
)
 
1,232

Income attributable to noncontrolling interest

 

 
(545
)
 

 
(545
)
Net income (loss) attributable to ARC Document Solutions, Inc. shareholders
$
687

 
$
18,055

 
$
1,550

 
$
(19,605
)
 
$
687


Condensed Consolidating Statement of Operations
Nine Months Ended
September 30, 2012
(Unaudited)
(In thousands)
ARC
Document
Solutions, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Total
Net sales
$

 
$
270,645

 
$
38,582

 
$

 
$
309,227

Cost of sales

 
184,274

 
30,074

 

 
214,348

Gross profit

 
86,371

 
8,508

 

 
94,879

Selling, general and administrative expenses
5

 
66,631

 
4,710

 

 
71,346

Amortization of intangible assets

 
8,961

 
283

 

 
9,244

Goodwill impairment

 
15,204

 
1,503

 

 
16,707

(Loss) income from operations
(5
)
 
(4,425
)
 
2,012

 

 
(2,418
)
Other income, net

 
(79
)
 

 

 
(79
)
Interest expense, net
17,219

 
4,514

 
(58
)
 

 
21,675

(Loss) income before equity earnings of subsidiaries and income tax provision
(17,224
)
 
(8,860
)
 
2,070

 

 
(24,014
)
Equity in earnings of subsidiaries
8,848

 
(1,527
)
 

 
(7,321
)
 

Income tax provision

 
1,515

 
330

 

 
1,845

Net (loss) income
(26,072
)
 
(8,848
)
 
1,740

 
7,321

 
(25,859
)
Income attributable to noncontrolling interest

 

 
(213
)
 

 
(213
)
Net (loss) income attributable to ARC Document Solutions, Inc. shareholders
$
(26,072
)
 
$
(8,848
)
 
$
1,527

 
$
7,321

 
$
(26,072
)

Condensed Consolidating Statement of Comprehensive Income (Loss)
Three Months Ended
September 30, 2013
(Unaudited)
 
(In thousands)
ARC Document Solutions, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Total
Net (loss) income
$
(450
)
 
$
5,398

 
$
375

 
$
(5,651
)
 
$
(328
)
Other comprehensive income, net of tax
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax

 

 
385

 

 
385

Other comprehensive income, net of tax

 

 
385

 

 
385

Comprehensive (loss) income
(450