ARC DOCUMENT SOLUTIONS, INC., 10-Q filed on 5/8/2013
Quarterly Report
Document and Entity Information
3 Months Ended
Mar. 31, 2013
May 1, 2013
Document and Entity Information [Abstract]
 
 
Entity Registrant Name
ARC Document Solutions, Inc. 
 
Entity Central Index Key
0001305168 
 
Document Type
10-Q 
 
Document Period End Date
Mar. 31, 2013 
 
Amendment Flag
false 
 
Document Fiscal Year Focus
2013 
 
Document Fiscal Period Focus
Q1 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
46,249,615 
Condensed Consolidated Balance Sheets (Unaudited) (USD $)
In Thousands, unless otherwise specified
Mar. 31, 2013
Dec. 31, 2012
Current assets:
 
 
Cash and cash equivalents
$ 30,219 
$ 28,021 
Accounts receivable, net of allowances for accounts receivable of $2,565 and $2,634
60,758 
51,855 
Inventories, net
13,907 
14,251 
Deferred income taxes
382 
 
Prepaid expenses
3,553 
3,277 
Other current assets
2,819 
6,819 
Total current assets
111,638 
104,223 
Property and equipment, net of accumulated depreciation of $198,309 and $197,830
56,345 
56,471 
Goodwill
212,608 
212,608 
Other intangible assets, net
32,723 
34,498 
Deferred financing fees, net
3,936 
4,219 
Deferred income taxes
1,316 
1,246 
Other assets
2,536 
2,574 
Total assets
421,102 
415,839 
Current liabilities:
 
 
Accounts payable
20,558 
21,215 
Accrued payroll and payroll-related expenses
9,460 
6,774 
Accrued expenses
27,578 
22,321 
Current portion of long-term debt and capital leases
11,264 
13,263 
Total current liabilities
68,860 
63,573 
Long-term debt and capital leases
208,124 
209,262 
Deferred income taxes
29,018 
28,936 
Other long-term liabilities
3,141 
3,231 
Total liabilities
309,143 
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; 46,264 and 46,274 shares issued and 46,251 and 46,262 shares outstanding
46 
46 
Additional paid-in capital
103,102 
102,510 
Retained earnings
1,110 
695 
Accumulated other comprehensive income
495 
689 
Total stockholders equity before adjustment of treasury stock
104,753 
103,940 
Less cost of common stock in treasury, 12 shares
44 
44 
Total ARC Document Solutions, Inc. stockholders' equity
104,709 
103,896 
Noncontrolling interest
7,250 
6,941 
Total equity
111,959 
110,837 
Total liabilities and equity
$ 421,102 
$ 415,839 
Condensed Consolidated Balance Sheets (Unaudited) (Parenthetical) (USD $)
In Thousands, except Per Share data, unless otherwise specified
Mar. 31, 2013
Dec. 31, 2012
Condensed Consolidated Balance Sheets [Abstract]
 
 
Allowances for accounts receivable
$ 2,565 
$ 2,634 
Accumulated depreciation on property and equipment
$ 198,309 
$ 197,830 
Preferred stock, par value
$ 0.001 
$ 0.001 
Preferred stock, shares authorized
25,000 
25,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value
$ 0.001 
$ 0.001 
Common stock, shares authorized
150,000 
150,000 
Common stock, shares issued
46,264 
46,274 
Common stock, shares outstanding
46,251 
46,262 
Treasury stock, shares
12 
12 
Condensed Consolidated Statements of Operations (Unaudited) (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended
Mar. 31, 2013
Mar. 31, 2012
Condensed Consolidated Statements of Operations [Abstract]
 
 
Service sales
$ 87,800 
$ 89,672 
Equipment and supplies sales
12,236 
13,901 
Total net sales
100,036 
103,573 
Cost of sales
67,657 
71,695 
Gross profit
32,379 
31,878 
Selling, general and administrative expenses
23,773 
23,457 
Amortization of intangible assets
1,747 
4,593 
Restructuring expense
472 
 
Income from operations
6,387 
3,828 
Other income
(26)
(30)
Interest expense, net
6,041 
7,438 
Income (loss) before income tax (benefit) provision
372 
(3,580)
Income tax (benefit) provision
(311)
1,310 
Net income (loss)
683 
(4,890)
Income attributable to noncontrolling interest
(268)
(17)
Net income (loss) attributable to ARC Document Solutions, Inc. shareholders
$ 415 
$ (4,907)
Earnings (loss) per share attributable to ARC Document Solutions, Inc. shareholders:
 
 
Basic
$ 0.01 
$ (0.11)
Diluted
$ 0.01 
$ (0.11)
Weighted average common shares outstanding:
 
 
Basic
45,762 
45,541 
Diluted
45,791 
45,541 
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2013
Mar. 31, 2012
Condensed Consolidated Statements of Comprehensive Income (Loss) [Abstract]
 
 
Net income (loss)
$ 683 
$ (4,890)
Other comprehensive income, net of tax:
 
 
Foreign currency translation adjustments, net of tax effect of ($20) and $31
(153)
320 
Amortization of derivative, net of tax effect of $0 and $469
   
786 
Other comprehensive (loss) income, net of tax
(153)
1,106 
Comprehensive income (loss)
530 
(3,784)
Comprehensive income attributable to noncontrolling interest
309 
59 
Comprehensive income (loss) attributable to ARC Document Solutions, Inc. shareholders
$ 221 
$ (3,843)
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) (Parenthetical) (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2013
Mar. 31, 2012
Condensed Consolidated Statements of Comprehensive Income (Loss) [Abstract]
 
 
Tax effect of foreign currency translation adjustments
$ (20)
$ 31 
Tax effect of amortization of derivative
$ 0 
$ 469 
Condensed Consolidated Statements of Equity and Comprehensive Income (Loss) (Unaudited) (USD $)
In Thousands, unless otherwise specified
Total
Common Stock
Additional Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Income (loss)
Common Stock in Treasury
Noncontrolling Interest
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
444 
 
444 
 
 
 
 
Stock-based compensation, shares
 
(9)
 
 
 
 
 
Issuance of common stock under Employee Stock Purchase Plan
22 
 
22 
 
 
 
 
Issuance of common stock under Employee Stock Purchase Plan, shares
 
 
 
 
 
 
Tax benefit from stock-based compensation, net of tax deficiency
676 
 
676 
 
 
 
 
Comprehensive income (loss):
 
 
 
 
 
 
 
Net (loss) income
(4,890)
 
 
(4,907)
 
 
17 
Foreign currency translation adjustments
320 
 
 
 
278 
 
42 
Amortization on derivative, net of tax effect
786 
 
 
 
786 
 
 
Comprehensive income (loss)
(3,784)
 
 
 
 
 
 
Ending Balance at Mar. 31, 2012
134,423 
46 
100,870 
27,756 
(696)
 
6,447 
Ending Balance, shares at Mar. 31, 2012
 
46,230 
 
 
 
 
 
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
592 
 
592 
 
 
 
 
Stock-based compensation, shares
 
(10)
 
 
 
 
 
Comprehensive income (loss):
 
 
 
 
 
 
 
Net (loss) income
683 
 
 
415 
 
 
268 
Foreign currency translation adjustments
(153)
 
 
 
(194)
 
41 
Comprehensive income (loss)
530 
 
 
 
 
 
 
Ending Balance at Mar. 31, 2013
$ 111,959 
$ 46 
$ 103,102 
$ 1,110 
$ 495 
$ (44)
$ 7,250 
Ending Balance, shares at Mar. 31, 2013
46,264 
46,264 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2013
Mar. 31, 2012
Cash flows from operating activities
 
 
Net income (loss)
$ 683 
$ (4,890)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
Allowance for accounts receivable
145 
240 
Depreciation
6,955 
7,062 
Amortization of intangible assets
1,747 
4,593 
Amortization of deferred financing costs
283 
255 
Amortization of bond discount
165 
147 
Stock-based compensation
592 
444 
Deferred income taxes
(409)
(325)
Deferred tax valuation allowance
20 
1,968 
Restructuring expense, non-cash portion
58 
 
Amortization of derivative, net of tax effect
   
786 
Other non-cash items, net
(114)
(30)
Changes in operating assets and liabilities, net of effect of business acquisitions:
 
 
Accounts receivable
(9,183)
(5,634)
Inventory
46 
(521)
Prepaid expenses and other assets
3,709 
(266)
Accounts payable and accrued expenses
7,184 
8,566 
Net cash provided by operating activities
11,881 
12,395 
Cash flows from investing activities
 
 
Capital expenditures
(5,612)
(3,805)
Other
357 
191 
Net cash used in investing activities
(5,255)
(3,614)
Cash flows from financing activities
 
 
Proceeds from issuance of common stock under Employee Stock Purchase Plan
 
21 
Payments on long-term debt agreements and capital leases
(3,332)
(4,388)
Net (repayments) borrowings under revolving credit facilities
(1,139)
552 
Payment of deferred financing costs
 
(712)
Net cash used in financing activities
(4,471)
(4,527)
Effect of foreign currency translation on cash balances
43 
123 
Net change in cash and cash equivalents
2,198 
4,377 
Cash and cash equivalents at beginning of period
28,021 
25,437 
Cash and cash equivalents at end of period
30,219 
29,814 
Noncash transactions include the following:
 
 
Capital lease obligations incurred
$ 1,254 
$ 3,846 
Description of Business and Basis of Presentation
Description of Business and Basis of Presentation

1. 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 months ended March 31, 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 to 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.

In September 2011, the FASB issued ASU 2011-08. The new guidance provides an entity the option, when testing for goodwill impairment, to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after performing a qualitative assessment, an entity determines it is more likely than not that the fair value of a reporting unit is less than its carrying amount, it is required to perform the currently prescribed two-step goodwill impairment test to identify potential goodwill impairment, and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any). The adoption of ASU 2011-08 will have 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 chief operating decision maker. Based on the fact that operating segments have similar products and services, classes of customers, production processes and performance objectives, 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
March 31,
 
    2013     2012  

Service Sales

               

Traditional reprographics

  $ 29,558     $ 33,323  

Color

    20,905       20,003  

Digital

    8,361       9,690  
   

 

 

   

 

 

 

Subtotal (1)

    58,824       63,016  

Onsite services (2)

    28,976       26,656  
   

 

 

   

 

 

 

Total services sales

    87,800       89,672  

Equipment and supplies sales

    12,236       13,901  
   

 

 

   

 

 

 

Total net sales

  $ 100,036     $ 103,573  
   

 

 

   

 

 

 

 

(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 provided 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

2. 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 months ended March 31, 2013, stock options for 3.8 million common shares were excluded from the calculation of diluted net income attributable to ARC per common share because they were anti-dilutive. For the three months ended March 31, 2012, stock options for 2.2 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 months ended March 31, 2013 and 2012 were calculated using the following common shares:

 

                 
    Three Months Ended
March  31,
 
    2013     2012  

Weighted average common shares outstanding—basic

    45,762       45,541  

Effect of dilutive impact on equity-based compensation awards

    29       —    
   

 

 

   

 

 

 

Weighted average common shares outstanding—diluted

    45,791       45,541  
   

 

 

   

 

 

 
Restructuring Expenses
Restructuring Expenses

3. 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. The restructuring plan included the closure of 37 of the Company’s service centers, which represented more than 10% 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 additional service center closures in 2013. For the three months ended March 31, 2013, the Company closed four service center locations in addition to 33 closures in 2012. The Company estimates that 2013 closures will result in additional restructuring expenses of less than $1.0 million.

The following table summarizes restructuring expenses incurred in the three months ended March 31, 2013.

 

         
    Three Months Ended
March 31, 2013
 
    2013  

Employee termination costs

  $ 11  

Estimated lease termination and obligation costs

    407  

Other restructuring expenses

    54  
   

 

 

 

Total restructuring expenses

  $ 472  
   

 

 

 

The changes in the restructuring liability from December 31, 2012 through March 31, 2013 are summarized as follows:

 

         
    Three Months Ended  
    March 31, 2013  

Balance, December 31, 2012

  $ 2,299  

Restructuring expenses

    472  

Payments

    (1,608 )

Adjustments

    (4 )
   

 

 

 

Balance, March 31, 2013

  $ 1,159  
   

 

 

 
Goodwill and Other Intangibles Resulting from Business Acquisitions
Goodwill and Other Intangibles Resulting from Business Acquisitions

4. 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, 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. Based upon its assessment, the Company concluded that no goodwill impairment triggering events have occurred during the first quarter of 2013 that would require an additional impairment test.

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 2012 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 2013, 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 March 31, 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

    —         —         —    
   

 

 

   

 

 

   

 

 

 

March 31, 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 months ended March 31, 2013. The impact of this change in the three months ended March 31, 2012 was an increase in amortization expense of approximately $2.4 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 March 31, 2013 and December 31, 2012 which continue to be amortized:

 

                                                 
    March 31, 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

  $ 97,868     $ 65,734     $ 32,134     $ 97,926     $ 64,024     $ 33,902  

Trade names and trademarks

    20,354       19,765       589       20,350       19,754       596  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    $ 118,222     $ 85,499     $ 32,723     $ 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 three months ended March 31, 2013)

  $ 4,849  

2014

    5,761  

2015

    5,217  

2016

    4,517  

2017

    4,001  

Thereafter

    8,378  
   

 

 

 
    $ 32,723  
   

 

 

 
Income Taxes
Income Taxes

5. 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 benefit of $0.3 million in relation to pretax income of $0.4 million for the three months ended March 31, 2013. The income tax benefit was primarily due to a reduction of a valuation allowance against certain deferred tax assets in one of the Company’s businesses in China.

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 three months ended March 31, 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 March 31, 2013, the Company has a $78.3 million valuation allowance against certain of its deferred tax assets.

Based on the Company’s assessment, the remaining net deferred tax assets of $80.0 million as of March 31, 2013 are considered to be more likely than not to be realized. The valuation allowance of $78.3 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 $0.4 million as of March 31, 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

6. Long-Term Debt

Long-term debt consists of the following:

 

                 
    March 31,
2013
    December 31,
2012
 

Borrowings from foreign revolving credit facilities; 0.6% interest rate at March 31, 2013 and December 31, 2012

  $ 856     $ 1,985  

10.5% senior notes due 2016, net of bond discount of $2,984 and $3,148

    197,016       196,852  

Various subordinated notes payable; weighted average interest rate of 6.0% at March 31, 2013 and December 31, 2012; principal and interest payable monthly through September 2014

    221       243  

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

    21,295       23,445  
   

 

 

   

 

 

 
      219,388       222,525  

Less current portion

    (11,264 )     (13,263 )
   

 

 

   

 

 

 
    $ 208,124     $ 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 on or after December 15, 2013, at redemption prices set forth in the Indenture, 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.

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 months ended March 31, 2013, the Company did not have any outstanding debt under the 2012 Credit Agreement.

As of March 31, 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 $50.0 million. Standby letters of credit totaling $2.9 million reduced the Company’s borrowing availability under the 2012 Credit Agreement to $47.1 million as of March 31, 2013.

Foreign Credit Agreement

In the third quarter of 2012, in conjunction with its Chinese operations, UNIS Document Solutions Co. Ltd. (“UDS”), the Company’s Chinese business venture with Beijing-based Unisplendour, entered into one-year revolving credit facilities. The facilities provide for a maximum credit amount of 20.0 million Chinese Yuan Renminbi, which translates to U.S. $3.2 million as of March 31, 2013. Draws on the facilities are limited to 30 day periods and incur a fee of 0.05% of the amount drawn and no additional interest is charged.

Commitments and Contingencies
Commitments and Contingencies

7. 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 March 31, 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. 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 $0.5 million as of March 31, 2013. The case remains unresolved as of March 31, 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

8. 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 March 31, 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 three months ended March 31, 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 $0.6 million and $0.4 million for the three months ended March 31, 2013 and 2012, respectively.

As of March 31, 2013, total unrecognized compensation cost related to unvested stock-based payments totaled $6.1 million and is expected to be recognized over a weighted-average period of 2.4 years.

Derivatives and Hedging Transactions
Derivatives and Hedging Transactions

9. Derivatives and Hedging Transactions

As of March 31, 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 March 31, 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 months ended March 31, 2013 and 2012:

 

                                 
    Amount of Gain or (Loss) Reclassified
fromAccumulated Comprehensive Income (Loss) into Income
 
   

(effective portion)

Three Months Ended

March 31,

   

(ineffective portion)
Three Months Ended

March 31,

 
    2013     2012     2013     2012  

Location of Loss Reclassified from Accumulated Comprehensive Income (Loss) into Income

                               

Interest expense

  $ —       $ (1,255 )   $ —       $ —    
Fair Value Measurements
Fair Value Measurements

10. Fair Value Measurements

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 $11.9 million and $13.7 million as of March 31, 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 March 31, 2013 for its Notes and its subordinated notes payable is $200.0 million and $0.2 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 its subordinated notes payable is $199.7 million and $0.2 million, respectively, as of March 31, 2013.

Condensed Consolidating Financial Statements
Condensed Consolidating Financial Statements

11. 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

March 31, 2013

(Unaudited)

 

                                         

(In thousands)

  ARC
Document
Solutions, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Total  

Assets

                                       

Current assets:

                                       

Cash and cash equivalents

  $ —       $ 14,766     $ 15,453     $ —       $ 30,219  

Accounts receivable, net

    —         52,052       8,706       —         60,758  

Intercompany operations

    146,413       4,950       —         (151,363     —    

Inventories, net

    —         10,055       3,852       —         13,907  

Deferred income taxes

    —         —         382       —         382  

Prepaid expenses

    4       2,902       647       —         3,553  

Other current assets

    —         1,734       1,085       —         2,819  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    146,417       86,459       30,125       (151,363 )     111,638  

Property and equipment, net

    —         48,696       7,649       —         56,345  

Goodwill

    —         212,608       —         —         212,608  

Investment in subsidiaries

    157,591       14,824       —         (172,415     —    

Other intangible assets, net

    —         30,649       2,074       —         32,723  

Deferred financing costs, net

    3,936       —         —         —         3,936  

Deferred income taxes

    —         —         1,316       —         1,316  

Other assets

    —         1,733       803       —         2,536  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 307,944     $ 394,969     $ 41,967     $ (323,778   $ 421,102  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Equity

                                       

Current liabilities:

                                       

Accounts payable

  $ —       $ 17,876     $ 2,682     $ —       $ 20,558  

Accrued payroll and payroll-related expenses

    —         9,354       106       —         9,460  

Accrued expenses

    6,209       17,504       3,865       —         27,578  

Intercompany loans

    —         143,388       7,975       (151,363     —    

Current portion of long-term debt and capital leases

    —         9,005       2,259       —         11,264  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    6,209       197,127       16,887       (151,363     68,860  

Long-term debt and capital leases

    197,026       9,956       1,142       —         208,124  

Deferred income taxes

    —         29,009       9       —         29,018  

Other long-term liabilities

    —         1,286       1,855       —         3,141  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    203,235       237,378       19,893       (151,363 )     309,143  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commitments and contingencies

                                       

Total equity

    104,709       157,591       22,074       (172,415     111,959  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

  $ 307,944     $ 394,969     $ 41,967     $ (323,778   $ 421,102  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

March 31, 2013

(Unaudited)

 

                                         

(In thousands)

  ARC
Document
Solutions, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Total  

Net sales

  $ —       $ 88,348     $ 11,688     $ —       $ 100,036  

Cost of sales

    —         58,690       8,967       —         67,657  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    —         29,658       2,721       —         32,379  

Selling, general and administrative expenses

    2       21,627       2,144       —         23,773  

Amortization of intangible assets

    —         1,680       67       —         1,747  

Restructuring expense

    —         465       7       —         472  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

    (2 )     5,886       503       —         6,387  

Other income, net

    —         (26     —         —         (26

Interest expense (income), net

    5,757       343       (59     —         6,041  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before equity earnings of subsidiaries and income tax (benefit) provision

    (5,759     5,569       562       —         372  

Equity in earnings of subsidiaries

    (6,174     (773     —         6,947       —    

Income tax (benefit) provision

    —         168       (479     —         (311
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

    415       6,174       1,041       (6,947     683  

Loss attributable to noncontrolling interest

    —         —         (268     —         (268
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to ARC Document Solutions

  $ 415     $ 6,174     $ 773     $ (6,947   $ 415  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Operations

Three Months Ended

March 31, 2012

(Unaudited)

 

                                         

(In thousands)

  ARC
Document
Solutions,  Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Total  

Net sales

  $ —       $ 91,554     $ 12,019     $ —       $ 103,573  

Cost of sales

    —         62,294       9,401       —         71,695  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    —         29,260       2,618       —         31,878  

Selling, general and administrative expenses

    2       21,517       1,938       —         23,457  

Amortization of intangible assets

    —         4,491       102       —         4,593  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

    (2     3,252       578       —         3,828  

Other (income) expense, net

    —         (38     8       —         (30

Interest expense (income), net

    5,722       1,737       (21     —         7,438  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before equity earnings of subsidiaries and income tax provision

    (5,724     1,553       591       —         (3,580

Equity in earnings of subsidiaries

    (817     (430     —         1,247       —    

Income tax provision

    —         1,166       144       —         1,310  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

    (4,907     817       447       (1,247     (4,890

Loss attributable to noncontrolling interest

    —         —         (17     —         (17
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to ARC Document Solutions

  $ (4,907   $ 817     $ 430     $ (1,247   $ (4,907
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Condensed Consolidating Statement of Comprehensive Income (Loss)

Three Months Ended

March 31, 2013

(Unaudited)

 

                                         

(In thousands)

  ARC
Document
Solutions, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Total  

Net income (loss)

  $ 415     $ 6,174     $ 1,041     $ (6,947   $ 683  

Other comprehensive income, net of tax:

                                       

Foreign currency translation adjustments, net of tax

    —         —         (153     —         (153

Amortization of derivative, net of tax

    —         —         —         —         —    
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax

    —         —         (153     —         (153
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

    415       6,174       888       (6,947     530  

Comprehensive income attributable to noncontrolling interest

    —         —         309       —         309  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to ARC Document Solutions

  $ 415     $ 6,174     $ 579     $ (6,947   $ 221  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Comprehensive Income (Loss)

Three Months Ended

March 31, 2012

(Unaudited)

 

                                         

(In thousands)

  ARC
Document
Solutions, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Total  

Net income (loss)

  $ (4,907   $ 817     $ 447     $ (1,247   $ (4,890

Other comprehensive income, net of tax:

                                       

Foreign currency translation adjustments, net of tax

    —         —         320       —         320  

Amortization of derivative, net of tax

    —         786       —         —         786  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax

    —         786       320       —         1,106  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

    (4,907     1,603       767       (1,247     (3,784

Comprehensive income attributable to noncontrolling interest

    —         —         59       —         59  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to ARC Document Solutions

  $ (4,907   $ 1,603     $ 708     $ (1,247   $ (3,843
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Condensed Consolidating Statement of Cash Flows

Three Months Ended

March 31, 2013

(Unaudited)

 

                                         

(In thousands)

  ARC
Document
Solutions, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Total  

Cash flows from operating activities

                                       

Net cash (used in) provided by operating activities

  $ (62   $ 11,676     $ 267     $ —       $ 11,881  

Cash flows from investing activities

                                       

Capital expenditures

    —         (5,056     (556     —         (5,612

Other

    —         300       57       —         357  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    —         (4,756     (499     —         (5,255
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities

                                       

Payments on long-term debt agreements and capital leases

    —         (2,976     (356     —         (3,332

Net repayments under revolving credit facilities

    —         —         (1,139     —         (1,139

Advances to/from subsidiaries

    62       (143     81       —         —    
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    62       (3,119     (1,414     —         (4,471
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of foreign currency translation on cash balances

    —         —         43       —         43  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents

    —         3,801       (1,603     —         2,198  

Cash and cash equivalents at beginning of period

    —         10,965       17,056       —         28,021  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

  $  —       $ 14,766     $ 15,453     $  —       $ 30,219  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Condensed Consolidating Statement of Cash Flows

Three Months Ended

March 31, 2012

(Unaudited)

 

                                         

(In thousands)

  ARC
Document
Solutions, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Total  

Cash flows from operating activities

                                       

Net cash (used in) provided by operating activities

  $ (53   $ 11,790     $ 658     $ —       $ 12,395  

Cash flows from investing activities

                                       

Capital expenditures

    —         (3,331     (474     —         (3,805

Other

    —         182       9       —         191  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    —         (3,149     (465     —         (3,614
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities

                                       

Proceeds from issuance of common stock under Employee Stock Purchase Plan

    —         21       —         —         21  

Payments on long-term debt agreements and capital leases

    —         (3,992     (396     —         (4,388

Net borrowings under revolving credit facility

    —         —         552       —         552  

Payment of deferred financing costs

    (712     —         —         —         (712

Advances to/from subsidiaries

    765       (1,588     823       —         —    
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    53       (5,559     979       —         (4,527
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of foreign currency translation on cash balances

    —         —         123       —         123  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents

    —         3,082       1,295       —         4,377  

Cash and cash equivalents at beginning of period

    —         11,706       13,731       —         25,437  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

  $ —       $ 14,788     $ 15,026     $  —       $ 29,814  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Description of Business and Basis of Presentation (Policies)

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 months ended March 31, 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 to 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.

In September 2011, the FASB issued ASU 2011-08. The new guidance provides an entity the option, when testing for goodwill impairment, to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after performing a qualitative assessment, an entity determines it is more likely than not that the fair value of a reporting unit is less than its carrying amount, it is required to perform the currently prescribed two-step goodwill impairment test to identify potential goodwill impairment, and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any). The adoption of ASU 2011-08 will have 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 chief operating decision maker. Based on the fact that operating segments have similar products and services, classes of customers, production processes and performance objectives, 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
March 31,
 
    2013     2012  

Service Sales

               

Traditional reprographics

  $ 29,558     $ 33,323  

Color

    20,905       20,003  

Digital

    8,361       9,690  
   

 

 

   

 

 

 

Subtotal (1)

    58,824       63,016  

Onsite services (2)

    28,976       26,656  
   

 

 

   

 

 

 

Total services sales

    87,800       89,672  

Equipment and supplies sales

    12,236       13,901  
   

 

 

   

 

 

 

Total net sales

  $ 100,036     $ 103,573  
   

 

 

   

 

 

 

 

(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 provided 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.

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 months ended March 31, 2013, stock options for 3.8 million common shares were excluded from the calculation of diluted net income attributable to ARC per common share because they were anti-dilutive. For the three months ended March 31, 2012, stock options for 2.2 million common shares were excluded from the calculation of diluted net income attributable to ARC per common share because they were anti-dilutive.

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.

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.

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 three months ended March 31, 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 March 31, 2013, the Company has a $78.3 million valuation allowance against certain of its deferred tax assets.

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.

Description of Business and Basis of Presentation (Tables)
Net sales of Principal services and products
                 
     Three Months Ended
March 31,
 
    2013     2012  

Service Sales

               

Traditional reprographics

  $ 29,558     $ 33,323  

Color

    20,905       20,003  

Digital

    8,361       9,690  
   

 

 

   

 

 

 

Subtotal (1)

    58,824       63,016  

Onsite services (2)

    28,976       26,656  
   

 

 

   

 

 

 

Total services sales

    87,800       89,672  

Equipment and supplies sales

    12,236       13,901  
   

 

 

   

 

 

 

Total net sales

  $ 100,036     $ 103,573  
   

 

 

   

 

 

 

 

(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”).
Earnings per Share (Tables)
Basic and diluted earnings per share
                 
    Three Months Ended
March  31,
 
    2013     2012  

Weighted average common shares outstanding—basic

    45,762       45,541  

Effect of dilutive impact on equity-based compensation awards

    29       —    
   

 

 

   

 

 

 

Weighted average common shares outstanding—diluted

    45,791       45,541  
   

 

 

   

 

 

 
Restructuring Expenses (Tables)
         
    Three Months Ended
March 31, 2013
 
    2013  

Employee termination costs

  $ 11  

Estimated lease termination and obligation costs

    407  

Other restructuring expenses

    54  
   

 

 

 

Total restructuring expenses

  $ 472  
   

 

 

 
         
    Three Months Ended  
    March 31, 2013  

Balance, December 31, 2012

  $ 2,299  

Restructuring expenses

    472  

Payments

    (1,608 )

Adjustments

    (4 )
   

 

 

 

Balance, March 31, 2013

  $ 1,159  
   

 

 

 
Goodwill and Other Intangibles Resulting from Business Acquisitions (Tables)
                         
    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

    —         —         —    
   

 

 

   

 

 

   

 

 

 

March 31, 2013

  $ 405,558     $ 192,950     $ 212,608  
   

 

 

   

 

 

   

 

 

 
                                                 
    March 31, 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

  $ 97,868     $ 65,734     $ 32,134     $ 97,926     $ 64,024     $ 33,902  

Trade names and trademarks

    20,354       19,765       589       20,350       19,754       596  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    $ 118,222     $ 85,499     $ 32,723     $ 118,276     $ 83,778     $ 34,498  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
         

2013 (excluding the three months ended March 31, 2013)

  $ 4,849  

2014

    5,761  

2015

    5,217  

2016

    4,517  

2017

    4,001  

Thereafter

    8,378  
   

 

 

 
    $ 32,723  
   

 

 

 
Long-Term Debt (Tables)
Long-Term debt
                 
    March 31,
2013
    December 31,
2012
 

Borrowings from foreign revolving credit facilities; 0.6% interest rate at March 31, 2013 and December 31, 2012

  $ 856     $ 1,985  

10.5% senior notes due 2016, net of bond discount of $2,984 and $3,148

    197,016       196,852  

Various subordinated notes payable; weighted average interest rate of 6.0% at March 31, 2013 and December 31, 2012; principal and interest payable monthly through September 2014

    221       243  

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

    21,295       23,445  
   

 

 

   

 

 

 
      219,388       222,525  

Less current portion

    (11,264 )     (13,263 )
   

 

 

   

 

 

 
    $ 208,124     $ 209,262  
   

 

 

   

 

 

 
Derivatives and Hedging Transactions (Tables)
Summary of effect of swap transaction on condensed consolidated statements of operations
                                 
    Amount of Gain or (Loss) Reclassified
fromAccumulated Comprehensive Income (Loss) into Income
 
   

(effective portion)

Three Months Ended

March 31,

   

(ineffective portion)
Three Months Ended

March 31,

 
    2013     2012     2013     2012  

Location of Loss Reclassified from Accumulated Comprehensive Income (Loss) into Income

                               

Interest expense

  $ —       $ (1,255 )   $ —       $ —    
Condensed Consolidating Financial Statements (Tables)

Condensed Consolidating Balance Sheet

March 31, 2013

(Unaudited)

 

                                         

(In thousands)

  ARC
Document
Solutions, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Total  

Assets

                                       

Current assets:

                                       

Cash and cash equivalents

  $ —       $ 14,766     $ 15,453     $ —       $ 30,219  

Accounts receivable, net

    —         52,052       8,706       —         60,758  

Intercompany operations

    146,413       4,950       —         (151,363     —    

Inventories, net

    —         10,055       3,852       —         13,907  

Deferred income taxes

    —         —         382       —         382  

Prepaid expenses

    4       2,902       647       —         3,553  

Other current assets

    —         1,734       1,085       —         2,819  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    146,417       86,459       30,125       (151,363 )     111,638  

Property and equipment, net

    —         48,696       7,649       —         56,345  

Goodwill

    —         212,608       —         —         212,608  

Investment in subsidiaries

    157,591       14,824       —         (172,415     —    

Other intangible assets, net

    —         30,649       2,074       —         32,723  

Deferred financing costs, net

    3,936       —         —         —         3,936  

Deferred income taxes

    —         —         1,316       —         1,316  

Other assets

    —         1,733       803       —         2,536  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 307,944     $ 394,969     $ 41,967     $ (323,778   $ 421,102  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Equity

                                       

Current liabilities:

                                       

Accounts payable

  $ —       $ 17,876     $ 2,682     $ —       $ 20,558  

Accrued payroll and payroll-related expenses

    —         9,354       106       —         9,460  

Accrued expenses

    6,209       17,504       3,865       —         27,578  

Intercompany loans

    —         143,388       7,975       (151,363     —    

Current portion of long-term debt and capital leases

    —         9,005       2,259       —         11,264  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    6,209       197,127       16,887       (151,363     68,860  

Long-term debt and capital leases

    197,026       9,956       1,142       —         208,124  

Deferred income taxes

    —         29,009       9       —         29,018  

Other long-term liabilities

    —         1,286       1,855       —         3,141  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    203,235       237,378       19,893       (151,363 )     309,143  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commitments and contingencies

                                       

Total equity

    104,709       157,591       22,074       (172,415     111,959  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

  $ 307,944     $ 394,969     $ 41,967     $ (323,778   $ 421,102  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

March 31, 2013

(Unaudited)

 

                                         

(In thousands)

  ARC
Document
Solutions, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Total  

Net sales

  $ —       $ 88,348     $ 11,688     $ —       $ 100,036  

Cost of sales

    —         58,690       8,967       —         67,657  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    —         29,658       2,721       —         32,379  

Selling, general and administrative expenses

    2       21,627       2,144       —         23,773  

Amortization of intangible assets

    —         1,680       67       —         1,747  

Restructuring expense

    —         465       7       —         472  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

    (2 )     5,886       503       —         6,387  

Other income, net

    —         (26     —         —         (26

Interest expense (income), net

    5,757       343       (59     —         6,041  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before equity earnings of subsidiaries and income tax (benefit) provision

    (5,759     5,569       562       —         372  

Equity in earnings of subsidiaries

    (6,174     (773     —         6,947       —    

Income tax (benefit) provision

    —         168       (479     —         (311
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

    415       6,174       1,041       (6,947     683  

Loss attributable to noncontrolling interest

    —         —         (268     —         (268
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to ARC Document Solutions

  $ 415     $ 6,174     $ 773     $ (6,947   $ 415  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Operations

Three Months Ended

March 31, 2012

(Unaudited)

 

                                         

(In thousands)

  ARC
Document
Solutions,  Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Total  

Net sales

  $ —       $ 91,554     $ 12,019     $ —       $ 103,573  

Cost of sales

    —         62,294       9,401       —         71,695  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    —         29,260       2,618       —         31,878  

Selling, general and administrative expenses

    2       21,517       1,938       —