Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-32407

 

 

ARC DOCUMENT SOLUTIONS, INC.

(Exact name of Registrant as specified in its Charter)

 

 

 

Delaware   20-1700361

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1981 N. Broadway, Suite 385

Walnut Creek, California 94596

(925) 949-5100

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

As of August 2, 2013, there were 46,316,478 shares of the issuer’s common stock outstanding.

 

 

 


Table of Contents

ARC DOCUMENT SOLUTIONS, INC.

Form 10-Q

For the Quarter Ended June 30, 2013

Table of Contents

 

PART I—FINANCIAL INFORMATION

     4   

Item 1. Condensed Consolidated Financial Statements

     4   

Condensed Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012 (Unaudited)

     4   

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2013 and 2012 (Unaudited)

     5   

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2013 and 2012 (Unaudited)

     6   

Condensed Consolidated Statements of Equity and Comprehensive Income (Loss) for the six months ended June 30, 2013 and 2012 (Unaudited)

     7   

Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 2013 and 2012 (Unaudited)

     8   

Notes to Condensed Consolidated Financial Statements (Unaudited)

     9   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     23   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     34   

Item 4. Controls and Procedures

     34   

PART II—OTHER INFORMATION

     35   

Item1. Legal Proceedings

     35   

Item 1A. Risk Factors

     35   

Item 6. Exhibits

     35   

Signatures

     36   

Exhibit Index

     37   

Exhibit 31.1

  

Exhibit 31.2

  

Exhibit 32.1

  

Exhibit 32.2

  

EX-101 INSTANCE DOCUMENT

  

EX-101 SCHEMA DOCUMENT

  

EX-101 CALCULATION LINKBASE DOCUMENT

  

EX-101 LABELS LINKBASE DOCUMENT

  

EX-101 PRESENTATION LINKBASE DOCUMENT

  

 

2


Table of Contents

FORWARD-LOOKING STATEMENTS

This Form 10-Q contains statements that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this Form 10-Q, the words “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “project,” “target,” “likely,” “will,” “would,” “could,” and variations of such words and similar expressions as they relate to our management or to ARC Document Solutions, Inc. (the “Company”) are intended to identify forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those contemplated herein. We have described in Part II, Item 1A-“Risk Factors” a number of factors that could cause our actual results to differ from our projections or estimates. These factors and other risk factors described in this Form 10-Q are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results. Consequently, there can be no assurance that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, us. Given these uncertainties, you are cautioned not to place undue reliance on such forward-looking statements.

Except where otherwise indicated, the statements made in this Form 10-Q are made as of the date we filed this report with the Securities and Exchange Commission and should not be relied upon as of any subsequent date. All future written and verbal forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We undertake no obligation, and specifically disclaim any obligation, to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You should, however, consult further disclosures we make in future filings of our Forms 10-K, Forms 10-Q, and Forms 8-K, and any amendments thereto, as well as our proxy statements.

 

3


Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

ARC DOCUMENT SOLUTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     June 30,      December 31,  

(In thousands, except per share data)

   2013      2012  

Assets

     

Current assets:

     

Cash and cash equivalents

   $ 32,377       $ 28,021   

Accounts receivable, net of allowances for accounts receivable of $2,736 and $2,634

     63,111         51,855   

Inventories, net

     13,717         14,251   

Deferred income taxes

     386         —    

Prepaid expenses

     3,993         3,277   

Other current assets

     3,318         6,819   
  

 

 

    

 

 

 

Total current assets

     116,902         104,223   

Property and equipment, net of accumulated depreciation of $201,643 and $197,830

     56,552         56,471   

Goodwill

     212,608         212,608   

Other intangible assets, net

     31,021         34,498   

Deferred financing fees, net

     3,658         4,219   

Deferred income taxes

     1,350         1,246   

Other assets

     2,275         2,574   
  

 

 

    

 

 

 

Total assets

   $ 424,366       $ 415,839   
  

 

 

    

 

 

 

Liabilities and Equity

     

Current liabilities:

     

Accounts payable

   $ 24,824       $ 21,215   

Accrued payroll and payroll-related expenses

     9,834         6,774   

Accrued expenses

     21,958         22,321   

Current portion of long-term debt and capital leases

     12,061         13,263   
  

 

 

    

 

 

 

Total current liabilities

     68,677         63,573   

Long-term debt and capital leases

     208,722         209,262   

Deferred income taxes

     30,319         28,936   

Other long-term liabilities

     3,137         3,231   
  

 

 

    

 

 

 

Total liabilities

     310,855         305,002   
  

 

 

    

 

 

 

Commitments and contingencies (Note 7)

     

Stockholders’ equity:

     

ARC Document Solutions, Inc. stockholders’ equity:

     

Preferred stock, $0.001 par value, 25,000 shares authorized; 0 shares issued and outstanding

     —          —    

Common stock, $0.001 par value, 150,000 shares authorized; 46,356 and 46,274 shares issued and 46,316 and 46,262 shares outstanding

     46         46   

Additional paid-in capital

     103,840         102,510   

Retained earnings

     1,832         695   

Accumulated other comprehensive income

     411         689   
  

 

 

    

 

 

 
     106,129         103,940   

Less cost of common stock in treasury, 40 and 12 shares

     134         44   
  

 

 

    

 

 

 

Total ARC Document Solutions, Inc. stockholders’ equity

     105,995         103,896   

Noncontrolling interest

     7,516         6,941   
  

 

 

    

 

 

 

Total equity

     113,511         110,837   
  

 

 

    

 

 

 

Total liabilities and equity

   $ 424,366       $ 415,839   
  

 

 

    

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

ARC DOCUMENT SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

(In thousands, except per share data)

   2013     2012     2013     2012  

Service sales

   $ 91,628      $ 91,783      $ 179,428      $ 181,455   

Equipment and supplies sales

     12,994        14,445        25,230        28,346   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

     104,622        106,228        204,658        209,801   

Cost of sales

     69,011        72,475        136,668        144,170   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     35,611        33,753        67,990        65,631   

Selling, general and administrative expenses

     24,891        23,973        48,664        47,430   

Amortization of intangible assets

     1,699        2,805        3,446        7,398   

Restructuring expense

     636        —         1,108        —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     8,385        6,975        14,772        10,803   

Other income

     (35     (24 )     (61     (54

Interest expense, net

     6,076        7,255        12,117        14,693   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision

     2,344        (256     2,716        (3,836

Income tax provision

     1,467        619        1,156        1,929   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     877        (875     1,560        (5,765

Income attributable to noncontrolling interest

     (155     (178 )     (423     (195
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 722      $ (1,053 )   $ 1,137      $ (5,960
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per share attributable to ARC Document Solutions, Inc. shareholders:

        

Basic

   $ 0.02      $ (0.02 )   $ 0.02      $ (0.13
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.02      $ (0.02 )   $ 0.02      $ (0.13
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding:

        

Basic

     45,901        45,667        45,832        45,604   

Diluted

     46,058        45,667        45,884        45,604   

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

ARC DOCUMENT SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

     Three Months Ended
June  30,
    Six Months Ended
June  30,
 

(In thousands)

   2013      2012     2013     2012  

Net income (loss)

   $ 877       $ (875   $ 1,560      $ (5,765

Other comprehensive income (loss), net of tax

         

Foreign currency translation adjustments

     27         (311     (126     9   

Amortization of derivative, net of tax effect of $0 for the three and six months ended June 30, 2013, and $380 and $849 for the three and six months ended June 30, 2012, respectively

     —           636        —          1,422   
  

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     27         325        (126     1,431   
  

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     904         (550     1,434        (4,334

Comprehensive income attributable to noncontrolling interest

     266         154        575        213   
  

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to ARC Document Solutions, Inc. shareholders

   $ 638       $ (704   $ 859      $ (4,547
  

 

 

    

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

ARC DOCUMENT SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

     ARC Document Solutions, Inc. Shareholders               
     Common Stock      Additional            Accumulated
Other
    Common               

(In thousands, except per share data)

   Shares      Par
Value
     Paid-in
Capital
     Retained
Earnings
    Comprehensive
Income (loss)
    Stock in
Treasury
    Noncontrolling
Interest
     Total  

Balance at December 31, 2011

     46,235       $ 46       $ 99,728       $ 32,663      $ (1,760   $ —        $ 6,388       $ 137,065   

Stock-based compensation

     31         —           903         —          —          —          —           903   

Issuance of common stock under Employee Stock Purchase Plan

     6         —           28         —          —          —          —           28   

Stock options exercised

     15         —           79         —          —          —          —           79   

Tax benefit from stock-based compensation, net of tax deficiency

     —           —           676         —          —          —          —           676   

Comprehensive loss:

                    

Net (loss) income

     —           —           —           (5,960     —          —          195         (5,765

Foreign currency translation adjustments

     —           —           —           —          (9     —          18         9   

Amortization on derivative, net of tax effect

     —           —           —           —          1,422        —          —           1,422   
                    

 

 

 

Comprehensive loss

                       (4,334
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance at June 30, 2012

     46,287       $ 46       $ 101,414       $ 26,703      $ (347   $ —        $ 6,601       $ 134,417   
     ARC Document Solutions, Inc. Shareholders               
     Common Stock      Additional            Accumulated
Other
    Common               

(In thousands, except per share data)

   Shares      Par
Value
     Paid-in
Capital
     Retained
Earnings
    Comprehensive
Income (loss)
    Stock in
Treasury
    Noncontrolling
Interest
     Total  

Balance at December 31, 2012

     46,274       $ 46       $ 102,510       $ 695      $ 689      $ (44   $ 6,941       $ 110,837   

Stock-based compensation

     51         —           1,321         —          —          —          —           1,321   

Issuance of common stock under Employee Stock Purchase Plan

     3         —           9         —          —          —          —           9   

Treasury shares

     28         —           —           —          —          (90     —           (90

Comprehensive income:

                    

Net income

     —           —           —           1,137        —          —          423         1,560   

Foreign currency translation adjustments

     —           —           —           —          (278     —          152         (126
                    

 

 

 

Comprehensive income

                       1,434   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance at June 30, 2013

     46,356       $ 46       $ 103,840       $ 1,832      $ 411      $ (134   $ 7,516       $ 113,511   

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

ARC DOCUMENT SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

(In thousands)

   2013     2012     2013     2012  

Cash flows from operating activities

        

Net income (loss)

   $ 877      $ (875   $ 1,560      $ (5,765

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

        

Allowance for accounts receivable

     301        164        446        404   

Depreciation

     7,020        7,061        13,975        14,123   

Amortization of intangible assets

     1,699        2,805        3,446        7,398   

Amortization of deferred financing costs

     278        281        561        536   

Amortization of bond discount

     167        150        332        297   

Stock-based compensation

     729        459        1,321        903   

Deferred income taxes

     1,145        (179     736        (504

Deferred tax valuation allowance

     154        944        174        2,912   

Restructuring expense, non-cash portion

     235        —          293        —     

Amortization of derivative, net of tax effect

     —          636        —          1,422   

Other non-cash items, net

     (181 )     (63     (295 )     (93

Changes in operating assets and liabilities, net of effect of business acquisitions:

        

Accounts receivable

     (2,666 )     (493     (11,849 )     (6,127

Inventory

     234        (1,064     280        (1,585

Prepaid expenses and other assets

     (619 )     (140     3,090        (406

Accounts payable and accrued expenses

     (1,263 )     (5,231     5,921        3,335   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     8,110        4,455        19,991        16,850   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities

        

Capital expenditures

     (4,430 )     (5,457     (10,042 )     (9,262

Other

     182        (375     539        (184
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (4,248 )     (5,832     (9,503 )     (9,446
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities

        

Proceeds from stock option exercises

     —          79        —          79   

Proceeds from issuance of common stock under Employee Stock Purchase Plan

     9        7        9        28   

Share repurchases, including shares surrendered for tax withholding

     (90     —          (90     —     

Proceeds from borrowings on long-term debt agreements

     402        —          402        —     

Payments on long-term debt agreements and capital leases

     (3,075 )     (4,078     (6,407 )     (8,466

Net borrowings (repayments) under revolving credit facilities

     929        (935     (210 )     (383

Payment of deferred financing costs

     —          (127     —          (839
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (1,825 )     (5,054     (6,296 )     (9,581
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect of foreign currency translation on cash balances

     121        (65     164        58   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents

     2,158        (6,496     4,356        (2,119

Cash and cash equivalents at beginning of period

     30,219        29,814        28,021        25,437   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 32,377      $ 23,318      $ 32,377      $ 23,318   
  

 

 

   

 

 

   

 

 

   

 

 

 

Supplemental disclosure of cash flow information

        

Noncash financing activities

        

Capital lease obligations incurred

   $ 2,992      $ 2,884      $ 4,246      $ 6,730   

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

ARC DOCUMENT SOLUTIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data or where otherwise noted)

(Unaudited)

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 and six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the interim Condensed Consolidated Financial Statements and accompanying notes. The Company evaluates its estimates and assumptions on an ongoing basis and relies on historical experience and various other factors that it believes to be reasonable under the circumstances to determine such estimates. Actual results could differ from those estimates, and such differences may be material to the interim Condensed Consolidated Financial Statements.

These interim Condensed Consolidated Financial Statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes included in the Company’s 2012 Form 10-K.

Recent Accounting Pronouncements

In March 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-05. The new guidance covers the accounting for a cumulative translation adjustment on the parent entity upon de-recognition of a subsidiary or group of assets within a foreign entity. This new guidance requires that the parent release any related cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The adoption of ASU 2013-05 will be effective beginning January 1, 2014. The Company does not anticipate the adoption to materially impact the Company’s Condensed Consolidated Financial Statements.

In February 2013, the FASB issued ASU 2013-02. This new guidance requires entities to present (either on the face of the income statement or in the notes) the effects on the line items of the income statement for amounts reclassified out of accumulated other comprehensive income. The adoption of ASU 2013-02 had no impact to the Company’s Condensed Consolidated Financial Statements.

Segment Reporting

The provisions of Accounting Standards Codification (“ASC”) 280, Disclosures about Segments of an Enterprise and Related Information, require public companies to report financial and descriptive information about their reportable operating segments. The Company identifies operating segments based on the various business activities that earn revenue and incur expense, whose operating results are reviewed by the chief operating decision maker. Based on the fact that operating segments have similar products and services, classes of customers, production processes and economic characteristics, the Company is deemed to operate as a single reportable segment.

Net sales of the Company’s principal services and products were as follows:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2013      2012      2013      2012  

Service Sales

           

Traditional reprographics

   $ 30,516       $ 34,284       $ 60,074       $ 67,607   

Color

     21,846         20,501         42,751         40,504   

Digital

     8,690         9,508         17,051         19,198   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal(1)

     61,052         64,293         119,876         127,309   

Onsite services(2)

     30,576         27,490         59,552         54,146   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total services sales

     91,628         91,783         179,428         181,455   

Equipment and supplies sales

     12,994         14,445         25,230         28,346   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net sales

   $ 104,622       $ 106,228       $ 204,658       $ 209,801   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) For comparison purposes this subtotal agrees with Reprographics Services historically reported prior to the 2012 Annual Report on Form 10-K.
(2) Represents work done at the Company’s customer sites which includes Facilities Management (“FM”) and Managed Print Services (“MPS”).

Risk and Uncertainties

The Company generates the majority of its revenue from sales of services and products to the AEC industry. As a result, the Company’s operating results and financial condition can be significantly affected by economic factors that influence the AEC industry, such as non-residential construction spending, GDP growth, interest rates, unemployment rates, and office vacancy rates. Reduced activity (relative to historic levels) in the AEC industry would diminish demand for some of ARC’s services and products, and would therefore negatively affect revenues and have a material adverse effect on its business, operating results and financial condition.

 

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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.

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 and six months ended June 30, 2013, stock options for 2.2 million and 3.8 million common shares, respectively, were excluded from the calculation of diluted net income attributable to ARC per common share because they were anti-dilutive. For the three and six months ended June 30, 2012, stock options for 2.3 million common shares were excluded from the calculation of diluted net income attributable to ARC per common share because they were anti-dilutive.

Basic and diluted earnings per share for the three and six months ended June 30, 2013 and 2012 were calculated using the following common shares:

 

     Three Months Ended
June  30,
     Six Months Ended
June 30,
 
     2013      2012      2013      2012  

Weighted average common shares outstanding—basic

     45,901         45,667         45,832         45,604   

Effect of dilutive impact on equity-based compensation awards

     157         —          52         —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding—diluted

     46,058         45,667         45,884         45,604   
  

 

 

    

 

 

    

 

 

    

 

 

 

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. Through June 30, 2013, the restructuring plan included the closure of 41 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 service center closures in both 2012 and 2013. For the three and six months ended June 30, 2013, the Company closed four and eight service center locations, respectively, in addition to 33 closures in 2012. In total, the Company estimates that 2013 closures will result in restructuring expenses of less than $1.5 million.

The following table summarizes restructuring expenses incurred in the three and six months ended June 30, 2013.

 

     Three Months Ended
June  30, 2013
     Six Months Ended
June 30, 2013
 

Employee termination costs

   $ —         $ 11   

Estimated lease termination and obligation costs

     559         966   

Other restructuring expenses

     77         131   
  

 

 

    

 

 

 

Total restructuring expenses

   $ 636       $ 1,108   
  

 

 

    

 

 

 

The changes in the restructuring liability from December 31, 2012 through June 30, 2013 are summarized as follows:

 

     Six Months Ended
June 30, 2013
 

Balance, December 31, 2012

   $ 2,299   

Restructuring expenses

     1,108   

Payments

     (2,614

Adjustments

     (3
  

 

 

 

Balance, June 30, 2013

   $ 790   
  

 

 

 

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.

 

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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 six months 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 June 30, 2013 are summarized as follows:

 

     Gross
Goodwill
     Accumulated
Impairment
Loss
     Net
Carrying
Amount
 

January 1, 2012

   $ 405,558       $ 176,243       $ 229,315   

Additions

     —           —           —     

Goodwill impairment

     —           16,707         (16,707
  

 

 

    

 

 

    

 

 

 

December 31, 2012

     405,558         192,950         212,608   

Additions

     —           —           —     

Goodwill impairment

     —           —           —     
  

 

 

    

 

 

    

 

 

 

June 30, 2013

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

 

 

    

 

 

    

 

 

 

See “Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations for further information regarding the process and assumptions used in the goodwill impairment analysis.

Long-lived Assets

The Company periodically assesses potential impairments of its long-lived assets in accordance with the provisions of ASC 360, Accounting for the Impairment or Disposal of Long-lived Assets. An impairment review is performed whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. The Company groups its assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of the other assets and liabilities. The Company has determined that the lowest level for which identifiable cash flows are available is the divisional level.

Factors considered by the Company include, but are not limited to, significant underperformance relative to historical or projected operating results; significant changes in the manner of use of the acquired assets or the strategy for the overall business; and significant negative industry or economic trends. When the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of the above indicators of impairment, the Company estimates the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future undiscounted cash flows and eventual disposition is less than the carrying amount of the asset, the Company recognizes an impairment loss. An impairment loss is reflected as the amount by which the carrying amount of the asset exceeds the fair value of the asset, based on the fair value if available, or discounted cash flows, if fair value is not available.

Other intangible assets that have finite lives are amortized over their useful lives. Customer relationships are amortized using the accelerated method, based on customer attrition rates, over their estimated useful lives of 13 (weighted average) years.

During the fourth quarter of 2010, the Company decided to consolidate the various brands that previously represented the Company’s market presence in North America. Beginning in January 2011, each of the Company’s North American operating segments and their respective locations began to adopt ARC, the Company’s overall brand name. Original brand names were used in conjunction with the new ARC brand name to reinforce the Company’s continuing presence in the business communities it serves, and ongoing relationships with its customers. Accordingly, the remaining estimated useful lives of the trade name intangible assets were revised down to 18 months. This change in estimate was accounted for on a prospective basis, resulting in increased amortization expense over the revised useful life of each trade name. There was no related impact for the three and six months ended June 30, 2013. The impact of this change in the three and six months ended June 30, 2012 was an increase in amortization expense of approximately $0.8 million and $3.2 million, respectively. Trade names were amortized using the straight-line method. The Company retired the original North American trade names in April 2012.

 

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The following table sets forth the Company’s other intangible assets resulting from business acquisitions as of June 30, 2013 and December 31, 2012 which continue to be amortized:

 

     June 30, 2013      December 31, 2012  
     Gross
Carrying
Amount
     Accumulated
Amortization
     Net
Carrying
Amount
     Gross
Carrying
Amount
     Accumulated
Amortization
     Net
Carrying
Amount
 

Amortizable other intangible assets

                 

Customer relationships

   $ 97,805       $ 67,372       $ 30,433       $ 97,926       $ 64,024       $ 33,902   

Trade names and trademarks

     20,365         19,777         588         20,350         19,754         596   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 118,170       $ 87,149       $ 31,021       $ 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 six months ended June 30, 2013)

   $ 3,157   

2014

     5,757   

2015

     5,214   

2016

     4,515   

2017

     3,999   

Thereafter

     8,379   
  

 

 

 
   $ 31,021   
  

 

 

 

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 provision of $1.5 million and $1.2 million in relation to pretax income of $2.3 million and $2.7 million for the three and six months ended June 30, 2013, respectively. The income tax provision was primarily due to the impact of amortization of tax basis goodwill in a deferred tax liability position.

In accordance with ASC 740-10, Income Taxes, the Company evaluates its deferred tax assets to determine if a valuation allowance is required based on the consideration of all available evidence using a “more likely than not” standard, with significant weight being given to evidence that can be objectively verified. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability; the length of statutory carryover periods for operating losses and tax credit carryovers; and available tax planning alternatives. During 2011, 2012 and the six months ended June 30, 2013, the Company determined that cumulative losses for the preceding twelve quarters constituted sufficient objective evidence (as defined by ASC 740-10) that a valuation allowance on certain deferred assets was needed. As of June 30, 2013, the Company has a $78.4 million valuation allowance against certain of its deferred tax assets.

Based on the Company’s assessment, the remaining net deferred tax assets of $1.7 million as of June 30, 2013 are considered to be more likely than not to be realized. The valuation allowance of $78.4 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 $0.3 million as of June 30, 2013 included in other current assets in its condensed consolidated balance sheet primarily related to income tax refunds for prior years.

6. Long-Term Debt

Long-term debt consists of the following:

 

     June 30,
2013
    December 31,
2012
 

10.5% senior notes due 2016, net of bond discount of $2,816 and $3,148

   $ 197,184      $ 196,852   

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

     21,210        23,445   

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

     1,814        1,985   

Various other notes payable with a weighted average interest rate of 6.3% and 6.0% at June 30, 2013 and December 31, 2012, respectively; principal and interest payable monthly through June 2016

     575        243   
  

 

 

   

 

 

 
     220,783        222,525   

Less current portion

     (12,061     (13,263
  

 

 

   

 

 

 
   $ 208,722      $ 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.

 

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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.

Note Repurchase. In July 2013, the company repurchased $7.0 million in aggregate principal amount of its 10.5% senior unsecured notes due December 15, 2016 in the open market.

2012 Credit Agreement

On January 27, 2012, the Company entered into a new Credit Agreement (the “2012 Credit Agreement”) and terminated its previous senior secured credit agreement. The 2012 Credit Agreement provides revolving loans in an aggregate principal amount not to exceed $50.0 million with a Canadian sublimit of $5.0 million, based on inventory, accounts receivable and unencumbered equipment of the Company’s subsidiaries organized in the US and Canada (“Domestic Subsidiaries”) that meet certain eligibility criteria. The 2012 Credit Agreement has a maturity date of June 15, 2016.

Amounts borrowed in US dollars under the 2012 Credit Agreement bear interest, in the case of LIBOR loans, at a per annum rate equal to LIBOR plus the LIBOR Margin, which may range from 1.75% to 2.25%, based on Average Daily Net Availability (as defined in the 2012 Credit Agreement). All other amounts borrowed in US dollars that are not LIBOR loans bear interest at a per annum rate equal to (i) the greatest of (A) the Federal Funds rate plus 0.5%, (B) the LIBOR (calculated based upon an interest period of three months and determined on a daily basis), plus 1.0% per annum, and (C) the rate of interest announced, from time to time, within Wells Fargo Bank, National Association at its principal office in San Francisco as its “prime rate,” plus (ii) the Base Rate Margin (as defined in the 2012 Credit Agreement), which may range from 0.75% to 1.25%, based on Average Daily Net Availability (as defined in the 2012 Credit Agreement). Amounts borrowed in Canadian dollars bear interest at a per annum rate equal to the Canadian Base Rate (as defined in the 2012 Credit Agreement) plus the LIBOR Margin, which may range from 1.75% to 2.25%, based on Average Daily Net Availability.

The 2012 Credit Agreement contains various loan covenants that restrict the Company’s ability to take certain actions, including restrictions on incurrence of indebtedness, creation of liens, mergers or consolidations, dispositions of assets, repurchase or redemption of capital stock, making certain investments, entering into certain transactions with affiliates or changing the nature of the Company’s business. In addition, at any time when Excess Availability (as defined in the 2012 Credit Agreement) is less than $10.0 million, the Company is required to maintain a Fixed Charge Coverage Ratio (as defined in the 2012 Credit Agreement) of at least 1.0. The Company’s obligations under the 2012 Credit Agreement are secured by substantially all of its assets pursuant to a Guaranty and Security Agreement.

As of and during the three and six months ended June 30, 2013, the Company did not have any outstanding debt under the 2012 Credit Agreement.

As of June 30, 2013, based on inventory, accounts receivable and unencumbered equipment of the Company’s subsidiaries organized in the US and Canada, the Company’s borrowing availability under the 2012 Credit Agreement was $50.0 million. Standby letters of credit totaling $2.5 million reduced the Company’s borrowing availability under the 2012 Credit Agreement to $47.5 million as of June 30, 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 June 30, 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.

Other Notes Payable

Includes notes payable collateralized by equipment previously purchased and subordinated seller notes payable related to prior acquisitions.

 

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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 June 30, 2013, the Company has potential future earnout obligations for acquisitions consummated before the adoption of ASC 805, Business Combinations, of approximately $1.8 million through 2014 if predetermined financial targets are met or exceeded. Earnout payments prior to the adoption of ASC 805 are recorded as additional purchase price (as goodwill) when the contingent payments are earned and become payable.

Legal Proceedings. On October 21, 2010, a former employee, individually and on behalf of a purported class consisting of all non-exempt employees who work or worked for American Reprographics Company, L.L.C. and American Reprographics Company in the State of California at any time from October 21, 2006 through the present, filed an action against the Company in the Superior Court of California for the County of Orange. The complaint alleges, among other things, that the Company violated the California Labor Code by failing to (i) provide meal and rest periods, or compensation in lieu thereof, (ii) timely pay wages due at termination, and (iii) that those practices also violate the California Business and Professions Code. The relief sought includes damages, restitution, penalties, interest, costs, and attorneys’ fees and such other relief as the court deems proper. On March 15, 2013, the Company participated in a private mediation session with claimants’ counsel which did not result in resolution of the claim. A subsequent court status conference was held on July 8, 2013 with no resolution reached. Although the Company believes that it has meritorious defenses to the claim, the Company also believes that a loss is probable and recorded a liability of $0.9 million as of June 30, 2013. The case remains unresolved as of June 30, 2013. As such, the ultimate resolution of the claim could result in a loss different than the estimated loss recorded.

In addition to the matter described above, the Company is involved in various additional legal proceedings and other legal matters from time to time in the normal course of business. The Company does not believe that the outcome of any of these matters will have a material effect on its consolidated financial position, results of operations or cash flows.

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 June 30, 2013, 0.6 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 six months ended June 30, 2013, the Company granted options to acquire a total of 1.5 million shares, respectively, of the Company’s common stock to certain key employees with an exercise price equal to the fair market value of the Company’s common stock on the date of grant. The stock options granted to those key employees vest annually over three to four years and expire 10 years after the date of grant.

The impact of stock-based compensation before income taxes on the interim Condensed Consolidated Statements of Operations was $0.7 million and $0.5 million for the three months ended June 30, 2013 and 2012, respectively.

The impact of stock-based compensation before income taxes on the interim Condensed Consolidated Statements of Operations was $1.3 million and $0.9 million for the six months ended June 30, 2013 and 2012, respectively.

As of June 30, 2013, total unrecognized compensation cost related to unvested stock-based payments totaled $5.7 million and is expected to be recognized over a weighted-average period of 2.1 years.

9. Derivatives and Hedging Transactions

As of June 30, 2013 the Company was not party to any derivative or hedging transactions.

As of December 31, 2010, the Company was party to a swap transaction, in which the Company exchanged its floating-rate payments for fixed-rate payments. As of December 1, 2010, the swap transaction was de-designated upon issuance of the Notes and payoff of the Company’s previous credit agreement. The swap transaction no longer qualified as a cash flow hedge under ASC 815, Derivatives and Hedging, as all the floating-rate debt was extinguished. The swap transaction qualified as a cash flow hedge up to November 30, 2010. On January 3, 2011, the Company terminated and settled the swap transaction.

As of June 30, 2013, there is no amount deferred in accumulated other comprehensive income related to any swap transactions.

The following table summarizes the effect of the swap transaction on the interim Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2013 and 2012:

 

     Amount of Gain or (Loss) Reclassified from
Accumulated Comprehensive Income (Loss) into Income
 
     (effective portion)     (ineffective portion)  
     Three Months Ended
June 30,
    Six Months  Ended
June 30,
    Three Month Ended
June 30,
     Six Months Ended
June 30,
 
     2013      2012     2013      2012     2013      2012      2013      2012  

Location of Loss Reclassified from AOCL into Income

                     

Interest expense

   $ —         $ (1,015   $ —         $ (2,271   $ —        $ —        $ —        $ —    

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:

 

14


Table of Contents

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 $14.4 million and $13.7 million as of June 30, 2013 and December 31, 2012, respectively, and are carried at cost and approximate fair value due to the relatively short period to maturity of these instruments.

Short- and long-term debt: The carrying amount of the Company’s capital leases reported in the Condensed Consolidated Balance Sheets approximates fair value based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements. The carrying amount reported in the Company’s Condensed Consolidated Balance Sheet as of June 30, 2013 for its Notes and other notes payable is $200.0 million and $0.6 million, respectively. Using a discounted cash flow technique that incorporates a market interest rate which assumes adjustments for duration, optionality, and risk profile, the Company has determined the fair value of its Notes and other notes payable is $202.0 million and $0.6 million, respectively, as of June 30, 2013.

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

June 30, 2013

(Unaudited)

 

(In thousands)

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

Assets

             

Current assets:

             

Cash and cash equivalents

   $ —         $ 15,080       $ 17,297       $ —        $ 32,377   

Accounts receivable, net

     —           52,807         10,304         —          63,111   

Intercompany operations

     135,848         5,327         —           (141,175     —     

Inventories, net

     —           10,090         3,627         —          13,717   

Deferred income taxes

     —           3         383         —          386   

Prepaid expenses

     3         3,152         838         —          3,993   

Other current assets

     —           1,832         1,486         —          3,318   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     135,851         88,291         33,935         (141,175     116,902   

Property and equipment, net

     —           48,470         8,082         —          56,552   

Goodwill

     —           212,608         —           —          212,608   

Investment in subsidiaries

     164,632         15,255         —           (179,887     —     

Other intangible assets, net

     —           29,040         1,981         —          31,021   

Deferred financing costs, net

     3,658         —           —           —          3,658   

Deferred income taxes

     —           69         1,281         —          1,350   

Other assets

     —           1,911         364         —          2,275   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 304,141       $ 395,644       $ 45,643       $ (321,062   $ 424,366   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities and Equity

             

Current liabilities:

             

Accounts payable

   $ —         $ 21,245       $ 3,579       $ —        $ 24,824   

Accrued payroll and payroll-related expenses

     —           9,138         696         —          9,834   

Accrued expenses

     958         17,311         3,689         —          21,958   

Intercompany loans

     —           132,823         8,352         (141,175     —     

Current portion of long-term debt and capital leases

     —           8,870         3,191         —          12,061   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     958         189,387         19,507         (141,175     68,677   

Long-term debt and capital leases

     197,188         10,042         1,492         —          208,722   

Deferred income taxes

     —           30,319         —           —          30,319   

Other long-term liabilities

     —           1,264         1,873         —          3,137   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     198,146         231,012         22,872         (141,175     310,855   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Commitments and contingencies

             

Total equity

     105,995         164,632         22,771         (179,887     113,511   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 304,141       $ 395,644       $ 45,643       $ (321,062   $ 424,366   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

15


Table of Contents

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   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

Condensed Consolidating Statement of Operations

Three Months Ended

June 30, 2013

(Unaudited)

 

(In thousands)

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

Net sales

   $ —       $ 91,416      $ 13,206      $ —       $ 104,622   

Cost of sales

     —         58,883        10,128        —         69,011   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —         32,533        3,078        —         35,611   

Selling, general and administrative expenses

     1        22,651        2,239        —         24,891   

Amortization of intangible assets

     —         1,607        92        —         1,699   

Restructuring expense

     —         636        —          —         636   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     (1 )     7,639        747        —         8,385   

Other income, net

     —         (35     —          —         (35

Interest expense (income), net

     5,760        356        (40     —         6,076   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (5,761     7,318        787        —         2,344   

Equity in earnings of subsidiaries

     (6,483     (524     —          7,007        —    

Income tax provision

     —         1,359        108        —         1,467   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     722        6,483        679        (7,007     877   

Income attributable to noncontrolling interest

     —         —         (155     —         (155
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to ARC Document Solutions

   $ 722      $ 6,483      $ 524      $ (7,007   $ 722   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Operations

Three Months Ended

June 30, 2012

(Unaudited)

 

(In thousands)

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

Net sales

   $ —       $ 92,377      $ 13,851      $ —       $ 106,228   

Cost of sales

     —         61,992        10,483        —         72,475   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —         30,385        3,368        —         33,753   

Selling, general and administrative expenses

     1        21,840        2,132        —         23,973   

Amortization of intangible assets

     —         2,710        95        —         2,805   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     (1 )     5,835        1,141        —         6,975   

Other income, net

     —         (16     (8     —         (24

Interest expense (income), net

     5,745        1,539        (29     —         7,255   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (5,746     4,312        1,178        —         (256

Equity in earnings of subsidiaries

     (4,693     (897     —         5,590        —    

Income tax provision

     —         516        103        —         619   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (1,053     4,693        1,075        (5,590     (875

Income attributable to noncontrolling interest

     —         —         (178     —         (178
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to ARC Document Solutions

   $ (1,053   $ 4,693      $ 897      $ (5,590   $ (1,053
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Condensed Consolidating Statement of Operations

Six Months Ended

June 30, 2013

(Unaudited)

 

(In thousands)

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

Net sales

   $ —       $ 179,764      $ 24,894      $ —       $ 204,658   

Cost of sales

     —         117,573        19,095        —         136,668   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —         62,191        5,799        —         67,990   

Selling, general and administrative expenses

     3        44,278        4,383        —         48,664   

Amortization of intangible assets

     —         3,287        159        —         3,446   

Restructuring expense

     —         1,101        7        —         1,108   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     (3 )     13,525        1,250        —         14,772   

Other income, net

     —         (61     —         —         (61

Interest expense (income), net

     11,517        699        (99     —         12,117   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (11,520     12,887        1,349        —         2,716   

Equity in earnings of subsidiaries

     (12,657     (1,297     —         13,954        —    

Income tax provision (benefit)

     —         1,527        (371     —         1,156   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     1,137        12,657        1,720        (13,954     1,560   

Income attributable to noncontrolling interest

     —         —         (423     —         (423
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to ARC Document Solutions

   $ 1,137      $ 12,657      $ 1,297      $ (13,954   $ 1,137   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Operations

Six Months Ended

June 30, 2012

(Unaudited)

 

(In thousands)

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

Net sales

   $ —       $ 183,931      $ 25,870      $ —       $ 209,801   

Cost of sales

     —         124,286        19,884        —         144,170   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —         59,645        5,986        —         65,631   

Selling, general and administrative expenses

     3        43,357        4,070        —         47,430   

Amortization of intangible assets

     —         7,201        197        —         7,398   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     (3 )     9,087        1,719        —         10,803   

Other income, net

     —         (54     —         —         (54

Interest expense (income), net

     11,467        3,276        (50     —         14,693   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (11,470     5,865        1,769        —         (3,836

Equity in earnings of subsidiaries

     (5,510     (1,327     —         6,837        —    

Income tax provision

     —         1,682        247        —         1,929   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (5,960     5,510        1,522        (6,837     (5,765

Income attributable to noncontrolling interest

     —         —         (195     —         (195
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to ARC Document Solutions

   $ (5,960   $ 5,510      $ 1,327      $ (6,837   $ (5,960
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

18


Table of Contents

Condensed Consolidating Statement of Comprehensive Income (Loss)

Three Months Ended

June 30, 2013

(Unaudited)

 

(In thousands)

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

Net income (loss)

   $ 722       $ 6,483       $ 679       $ (7,007   $ 877   

Other comprehensive income, net of tax:

             

Foreign currency translation adjustments, net of tax

     —          —          27         —         27   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Other comprehensive income, net of tax

     —          —          27         —         27   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income (loss)

     722         6,483         706         (7,007     904   

Comprehensive income attributable to noncontrolling interest

     —          —          266         —         266   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income (loss) attributable to ARC Document Solutions

   $ 722       $ 6,483       $ 440       $ (7,007   $ 638   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Condensed Consolidating Statement of Comprehensive Income (Loss)

Three Months Ended

June 30, 2012

(Unaudited)

 

(In thousands)

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

Net (loss) income

   $ (1,053   $ 4,693       $ 1,075      $ (5,590   $ (875

Other comprehensive income (loss), net of tax:

           

Foreign currency translation adjustments, net of tax

     —         —          (311     —         (311

Amortization of derivative, net of tax

     —         636         —         —         636   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     —         636         (311     —         325   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

     (1,053     5,329         764        (5,590     (550

Comprehensive income attributable to noncontrolling interest

     —         —          154        —         154   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income attributable to ARC Document Solutions

   $ (1,053   $ 5,329       $ 610      $ (5,590   $ (704
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

19


Table of Contents

Condensed Consolidating Statement of Comprehensive Income (Loss)

Six Months Ended

June 30, 2013

(Unaudited)

 

(In thousands)

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

Net income (loss)

   $ 1,137       $ 12,657       $ 1,720      $ (13,954   $ 1,560   

Other comprehensive loss, net of tax:

            

Foreign currency translation adjustments, net of tax

     —          —          (126     —         (126
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive loss, net of tax

     —          —          (126     —         (126
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     1,137         12,657         1,594        (13,954     1,434   

Comprehensive income attributable to noncontrolling interest

     —          —          575        —         575   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to ARC Document Solutions

   $ 1,137       $ 12,657       $ 1,019      $ (13,954   $ 859   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Comprehensive Income (Loss)

Six Months Ended

June 30, 2012

(Unaudited)

 

(In thousands)

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

Net (loss) income

   $ (5,960   $ 5,510       $ 1,522       $ (6,837   $ (5,765

Other comprehensive income, net of tax:

            

Foreign currency translation adjustments, net of tax

     —         —          9         —         9   

Amortization of derivative, net of tax

     —         1,422         —          —         1,422   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Other comprehensive income, net of tax

     —         1,422         9         —         1,431   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive (loss) income

     (5,960     6,932         1,531         (6,837     (4,334

Comprehensive income attributable to noncontrolling interest

     —         —          213         —         213   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive (loss) income attributable to ARC Document Solutions

   $ (5,960   $ 6,932       $ 1,318       $ (6,837   $ (4,547
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

20


Table of Contents

Condensed Consolidating Statement of Cash Flows

Three Months Ended

June 30, 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

   $ (10,565   $ 17,478      $ 1,197      $ —        $ 8,110   

Cash flows from investing activities

           

Capital expenditures

     —          (3,751     (679     —           (4,430

Other

     —          (113     295        —           182   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in investing activities

     —          (3,864     (384     —           (4,248
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash flows from financing activities

           

Proceeds from issuance of common stock under Employee Stock Purchase Plan

     —          9        —          —           9   

Share repurchases, including shares surrendered for tax withholding

     —          (90     —          —           (90

Proceeds from borrowings on long-term debt agreements

     —          402        —          —           402   

Payments on long-term debt agreements and capital leases

     —          (2,679     (396     —           (3,075

Net borrowings under revolving credit facility

     —          —          929        —           929   

Advances to/from subsidiaries

     10,565        (10,942     377        —           —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash provided by (used in) financing activities

     10,565        (13,300     910        —           (1,825
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Effect of foreign currency translation on cash balances

     —          —          121        —           121   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net change in cash and cash equivalents

     —          314        1,844        —           2,158   

Cash and cash equivalents at beginning of period

     —          14,766        15,453        —           30,219   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents at end of period

   $ —        $ 15,080      $ 17,297      $ —         $ 32,377   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Condensed Consolidating Statement of Cash Flows

Three Months Ended

June 30, 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

   $ (10,529   $ 14,598      $ 386      $ —        $ 4,455   

Cash flows from investing activities

           

Capital expenditures

     —          (5,078     (379     —           (5,457

Other

     —          (299     (76     —           (375
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in investing activities

     —          (5,377     (455     —           (5,832
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash flows from financing activities

           

Proceeds from stock option exercises

     —          79        —          —           79   

Proceeds from issuance of common stock under Employee Stock Purchase Plan

     —          7        —          —           7   

Payments on long-term debt agreements and capital leases

     —          (3,749     (329     —           (4,078

Net payments under revolving credit facility

     —          —          (935     —           (935

Payment of deferred financing costs

     (127     —          —          —           (127

Advances to/from subsidiaries

     10,656        (10,665     9        —           —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash provided by (used in) financing activities

     10,529        (14,328     (1,255     —           (5,054
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Effect of foreign currency translation on cash balances

     —          —          (65     —           (65
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net change in cash and cash equivalents

     —          (5,107     (1,389     —           (6,496

Cash and cash equivalents at beginning of period

     —          14,788        15,026        —           29,814   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents at end of period

   $ —        $ 9,681      $ 13,637      $ —         $ 23,318   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

21


Table of Contents

Condensed Consolidating Statement of Cash Flows

Six Months Ended

June 30, 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

   $ (10,627   $ 29,154      $ 1,464      $ —         $ 19,991   

Cash flows from investing activities

           

Capital expenditures

     —          (8,807     (1,235     —           (10,042

Other

     —          187        352        —           539   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in investing activities

     —          (8,620     (883     —           (9,503
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash flows from financing activities

           

Proceeds from issuance of common stock under Employee Stock Purchase Plan

     —          9        —          —           9   

Share repurchases, including shares surrendered for tax withholding

     —          (90     —          —           (90

Proceeds from borrowings on long-term debt agreements

     —          402        —          —           402   

Payments on long-term debt agreements and capital leases

     —          (5,655     (752     —           (6,407

Net payments under revolving credit facility

     —          —          (210     —           (210

Advances to/from subsidiaries

     10,627        (11,085     458        —           —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash provided by (used in) financing activities

     10,627        (16,419     (504     —           (6,296
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Effect of foreign currency translation on cash balances

     —          —          164        —           164   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net change in cash and cash equivalents

     —          4,115        241        —           4,356   

Cash and cash equivalents at beginning of period

     —          10,965        17,056        —           28,021   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents at end of period

   $ —        $ 15,080      $ 17,297      $ —         $ 32,377   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Condensed Consolidating Statement of Cash Flows

Six Months Ended

June 30, 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

   $ (10,582   $ 26,388      $ 1,044      $ —         $ 16,850   

Cash flows from investing activities

           

Capital expenditures

     —          (8,409     (853     —           (9,262

Other

     —          (117     (67     —           (184
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in investing activities

     —          (8,526     (920     —           (9,446
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash flows from financing activities

           

Proceeds from stock option exercises

     —          79        —          —           79   

Proceeds from issuance of common stock under Employee Stock Purchase Plan

     —          28        —          —           28   

Payments on long-term debt agreements and capital leases

     —          (7,741     (725     —           (8,466

Net payments under revolving credit facility

     —          —          (383     —           (383

Payment of deferred financing costs

     (839     —          —          —           (839

Advances to/from subsidiaries

     11,421        (12,253     832        —           —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash provided by (used in) financing activities

     10,582        (19,887     (276     —           (9,581
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Effect of foreign currency translation on cash balances

     —          —          58        —           58   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net change in cash and cash equivalents

     —          (2,025     (94     —           (2,119

Cash and cash equivalents at beginning of period

     —          11,706        13,731        —           25,437   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents at end of period

   $ —        $ 9,681      $ 13,637      $ —         $ 23,318   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

22


Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our interim Condensed Consolidated Financial Statements and the related notes and other financial information appearing elsewhere in this report as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2012 Form 10-K and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013.

Business Summary

ARC Document Solutions, Inc. (“ARC Document Solutions,” “ARC,” “we,” “us,” or “our”) provides specialized document management services to businesses of all types, with an emphasis on the non-residential segment of the architecture, engineering and construction (“AEC”) industry.

We help our customers reduce their costs and improve efficiency in the use of their documents, improve their access and control over documents, and offer a wide variety of ways to print, produce, distribute, collaborate on and store documents.

In an effort to increase the visibility into the nature and changing dynamics of our consolidated business, effective with our 2012 annual report on Form 10-K we have categorized our service and product offerings to better report distinct sales recognized from our Onsite Services, Color Services, Digital Services, Traditional Reprographics Services, and Equipment and Supplies Sales. Under our previous revenue reporting structure, the categories of Traditional Reprographics, Color Services, and Digital Services presented below were combined and reported as “Reprographics Services.”

Onsite Services consists of placement, management, and optimization of print and imaging equipment in our customer’s facilities, relieving them of the burden of owning and managing print devices and print networks, and shifting their costs to a “per-use” basis. Onsite Services sales are driven by the ongoing print needs of our customers, and are less exposed to the episodic large-format printing needs associated with construction projects. This category has been renamed from “Facilities Management,” but the service offerings reported in this category remain unchanged.

Color Services consists of specialized color printing and finishing services to marketing departments, regional and national retailers, and our traditional AEC customer base. This includes services provided under our Riot Creative Imaging brand.

Digital Services consists of digital document management services of all kinds, including archive and information management (“AIM”), “digital shipping” and managed file transfer, software licensing, and technology consulting services.

Traditional Reprographics consists of the management, distribution, and print-on-demand of black and white construction drawings (frequently referred to as “blueprints”) and specification books, and derives a majority of its revenue from large-format black and white printing.

Equipment and Supplies consists of reselling printing, imaging, and related equipment to customers primarily in the AEC industry. This category remains unchanged from prior filings.

Traditional Reprographics, Color Services, and Digital Services were previously disclosed as “Reprographic Services” sales. We believe the updated presentation of our sales categories reflects the drivers of our consolidated sales and will provide greater insight into the opportunities and risk diversification provided by our portfolio of service and product offerings.

We are expanding our business beyond the services we have traditionally provided to the AEC industry and are currently focused on growing managed print services, digital color imaging, and technology-based document management services, as we believe the mix of services demanded by the AEC industry continues to shift toward document management at customer locations (represented primarily by our Onsite Services), and away from its historical emphasis on printing of large-format black and white construction drawings “offsite” in our service centers (represented primarily by our Traditional Reprographics).

We deliver our services through a nationwide network of service centers, regionally-based technical specialists, locally-based sales executives, and a national/regional sales force known as Global Solutions.

Acquisition activity during the last three years has been minimal and did not materially affect our overall business.

We believe ARC Document Solutions offers a distinct portfolio of services within the AEC industry that include its legacy reprographics business as well as its newer offerings in Onsite Services, Color Services, and Digital Services. Our customer base for these services, however, is still distinctly related to the AEC industry. Based on our analysis of our operating results, we estimate that sales to the AEC industry accounted for approximately 76% of our net sales for the six months ended June 30, 2013, with the remaining 24% consisting of sales to non-AEC industries.

Historically, our local service centers operated under their acquired brand to maintain the local brand identity. In response to changes in our markets, consisting primarily of the consolidation of our larger customers and prospects as noted above, we branded all of our operations “ARC” in 2011 to highlight the national and global scope and scale of our services. We refined our identity further at the end of 2012 by renaming our Delaware corporation “ARC Document Solutions, Inc.” Our non-AEC Color Services are branded separately as Riot Creative Imaging to facilitate marketing to a specialized customer base.

We identify operating segments based on the various business activities that earn revenue and incur expense. Since operating segments have similar products and services, classes of customers, production processes and economic characteristics, we are deemed to operate as a single reportable segment. See Note 1 “Description of Business and Basis of Presentation” for further information.

Costs and Expenses. Our cost of sales consists primarily of materials (paper, toner and other consumables), labor, and “indirect costs” which consist primarily of expenses for facilities and equipment. Facilities and equipment expenses include maintenance, repairs, rents, insurance, and depreciation. Paper is the largest component of our material cost. However, paper pricing typically does not significantly affect our operating margins due, in part, to our efforts to pass increased costs on to our customers. We closely monitor material cost as a percentage of net sales to measure volume and waste. We also track labor utilization, or net sales per employee, to measure productivity and determine staffing levels.

We maintain low levels of inventory. Historically, our capital expenditure requirements have varied due to the cost and availability of capital lease lines of credit. During 2012 and through the first half of 2013, we were more frequently electing to purchase equipment for our facilities and onsite service installations rather than lease equipment due to the availability of cash to fund capital expenditures and the interest savings thereby. As we continue to foster our relationships with credit providers and obtain attractive lease rates, we may increasingly choose to lease rather than purchase equipment in the future.

 

23


Table of Contents

Research and development costs consist mainly of the salaries, leased building space, and computer equipment that comprise our data storage and development centers in Fremont, California and Kolkata, India. Such costs are primarily recorded to cost of sales.

We believe customers are increasingly (1) adopting technology and digital document management practices, and (2) changing their workflow patterns and thereby their document and printing needs. While the construction market appeared to begin a slow recovery in 2012, we believe that there was a growing body of evidence by the third quarter of 2012 that demonstrated Traditional Reprographics sales, produced at our service centers, would not likely recover at the same pace due to these factors.

To ensure that the Company’s costs and resources were in line with demand for our current portfolio of services and products, management initiated a restructuring plan in October of 2012. The restructuring plan included the closure of 33 of the Company’s service centers in 2012, which represented more than 10% of our total number of service center locations, and an additional eight service centers in 2013. In addition, as part of the restructuring plan, we reduced headcount and middle management associated with our service center locations, streamlined the senior operational management team, and allocated more resources into growing sales categories such as managed print services and digital services. The reduction in headcount totaled approximately 300 full-time employees, which represented approximately 10% of our total workforce.

In the first six months of 2013, our gross margins improved by 190 basis points compared to the same period in 2012, which we attribute to our restructuring efforts initiated in October 2012, and suggests continuing year-over-year margin expansion in future periods.

Non-GAAP Financial Measures.

EBIT, EBITDA and related ratios presented in this report are supplemental measures of our performance that are not required by or presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These measures are not measurements of our financial performance under GAAP and should not be considered as alternatives to net income, income from operations, or any other performance measures derived in accordance with GAAP or as an alternative to cash flows from operating, investing or financing activities as a measure of our liquidity.

EBIT represents net income before interest and taxes. EBITDA represents net income before interest, taxes, depreciation and amortization. EBIT margin is a non-GAAP measure calculated by dividing EBIT by net sales. EBITDA margin is a non-GAAP measure calculated by dividing EBITDA by net sales.

We present EBIT, EBITDA and related ratios because we consider them important supplemental measures of our performance and liquidity. We believe investors may also find these measures meaningful, given how our management makes use of them. The following is a discussion of our use of these measures.

We use EBIT and EBITDA to measure and compare the performance of our operating segments. Our operating segments’ financial performance includes all of the operating activities except debt and taxation which are managed at the corporate level for U.S. operating segments. As a result, we believe EBIT is the best measure of operating segment profitability and the most useful metric by which to measure and compare the performance of our operating segments. We also use EBIT to measure performance for determining operating segment-level compensation and we use EBITDA to measure performance for determining consolidated-level compensation. In addition, we use EBIT and EBITDA to evaluate potential acquisitions and potential capital expenditures.

EBIT, EBITDA and related ratios have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are as follows:

 

   

They do not reflect our cash expenditures, or future requirements for capital expenditures and contractual commitments;

 

   

They do not reflect changes in, or cash requirements for, our working capital needs;

 

   

They do not reflect the significant interest expense, or the cash requirements necessary, to service interest or principal payments on our debt;

 

   

Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements; and

 

   

Other companies, including companies in our industry, may calculate these measures differently than we do, limiting their usefulness as comparative measures.

Because of these limitations, EBIT, EBITDA, and related ratios should not be considered as measures of discretionary cash available to us to invest in business growth or to reduce our indebtedness. We compensate for these limitations by relying primarily on our GAAP results and using EBIT, EBITDA and related ratios only as supplements.

Our presentation of adjusted net income and adjusted EBITDA over certain periods is an attempt to provide meaningful comparisons to our historical performance for our existing and future investors. The unprecedented changes in our end markets over the past several years have required us to take measures that are unique in our history and specific to individual circumstances. Comparisons inclusive of these actions make normal financial and other performance patterns difficult to discern under a strict GAAP presentation. Each non-GAAP presentation, however, is explained in detail in the reconciliation tables below.

Specifically, we have presented adjusted net income attributable to ARC and adjusted earnings per share attributable to ARC shareholders for the three and six months ended June 30, 2013 and 2012 to reflect the exclusion of amortization impact related specifically to the change in useful lives of trade names, restructuring expense, interest rate swap related costs, and changes in the valuation allowances related to certain deferred tax assets and other discrete tax items. This presentation facilitates a meaningful comparison of our operating results for the three and six months ended June 30, 2013 and 2012. We believe these charges were the result of the current macroeconomic environment, our capital restructuring, or other items which are not indicative of our actual operating performance.

We presented adjusted EBITDA in three and six months ended June 30, 2013 and 2012 to exclude stock-based compensation expense and restructuring expense. The adjustment of EBITDA for non-cash adjustments is consistent with the definition of adjusted EBITDA in our credit agreement; therefore, we believe this information is useful to investors in assessing our financial performance.

 

24


Table of Contents

The following is a reconciliation of cash flows provided by operating activities to EBIT, EBITDA, and net income (loss) attributable to ARC:

 

     Three Months Ended June 30,     Six Months Ended June 30,  

(In thousands)

   2013     2012     2013     2012  

Cash flows provided by operating activities

   $ 8,110      $ 4,455      $ 19,991      $ 16,850   

Changes in operating assets and liabilities, net of effect of business acquisitions

     4,314        6,928        2,558        4,783   

Non-cash expenses, including depreciation, amortization and restructuring

     (11,547 )     (12,258     (20,989 )     (27,398

Income tax provision

     1,467        619        1,156        1,929   

Interest expense, net

     6,076        7,255        12,117        14,693   

Income attributable to the noncontrolling interest

     (155     (178     (423     (195
  

 

 

   

 

 

   

 

 

   

 

 

 

EBIT

     8,265        6,821        14,410        10,662   

Depreciation and amortization

     8,719        9,866        17,421        21,521   
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     16,984        16,687        31,831        32,183   

Interest expense, net

     (6,076 )     (7,255     (12,117 )     (14,693

Income tax provision

     (1,467 )     (619     (1,156 )     (1,929

Depreciation and amortization

     (8,719 )     (9,866     (17,421 )     (21,521
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to ARC

   $ 722      $ (1,053   $ 1,137      $ (5,960
  

 

 

   

 

 

   

 

 

   

 

 

 

The following is a reconciliation of net income (loss) attributable to ARC to EBIT, EBITDA and adjusted EBITDA:

 

     Three Months Ended June 30,     Six Months Ended June 30,  

(In thousands)

   2013      2012     2013      2012  

Net income (loss) attributable to ARC

   $ 722       $ (1,053   $ 1,137       $ (5,960

Interest expense, net

     6,076         7,255        12,117         14,693   

Income tax provision

     1,467         619        1,156         1,929   
  

 

 

    

 

 

   

 

 

    

 

 

 

EBIT

     8,265         6,821        14,410         10,662   

Depreciation and amortization

     8,719         9,866        17,421         21,521   
  

 

 

    

 

 

   

 

 

    

 

 

 

EBITDA

     16,984         16,687        31,831         32,183   

Restructuring expense

     636         —          1,108         —     

Stock-based compensation

     729         459        1,321