10-Q 1 arc-06302016x10q.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________ 
Form 10-Q
 _______________________________________ 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
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  ý    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  ý    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
ý
 
 
 
 
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  ý
As of July 29, 2016, there were 47,389,907 shares of the issuer’s common stock outstanding.




ARC DOCUMENT SOLUTIONS, INC.
Form 10-Q
For the Quarter Ended June 30, 2016
Table of Contents
 
PART I—FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015 (Unaudited)
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2016 and 2015 (Unaudited)
Condensed Consolidated Statements of Comprehensive (Loss) Income for the three and six months ended June 30, 2016 and 2015 (Unaudited)
Condensed Consolidated Statements of Equity for the six months ended June 30, 2016 and 2015 (Unaudited)
Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 2016 and 2015 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
Signatures
Exhibit Index
Exhibit 31.1
 
Exhibit 31.2
 
Exhibit 32.1
 
Exhibit 32.2
 
 
 
 
 
 
 
 
 
 
 

2



FORWARD-LOOKING STATEMENTS
This Quarterly Report on 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



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)
2016
 
2015
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
20,452

 
$
23,963

Accounts receivable, net of allowances for accounts receivable of $1,850 and $2,094
60,933

 
60,085

Inventories, net
19,570

 
16,972

Prepaid expenses
4,766

 
4,555

Other current assets
4,347

 
4,131

Total current assets
110,068

 
109,706

Property and equipment, net of accumulated depreciation of $206,584 and $202,457
57,754

 
57,590

Goodwill
138,688

 
212,608

Other intangible assets, net
15,580

 
17,946

Deferred income taxes
76,019

 
74,196

Other assets
2,372

 
2,492

Total assets
$
400,481

 
$
474,538

Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
22,148

 
$
23,989

Accrued payroll and payroll-related expenses
11,811

 
12,118

Accrued expenses
18,023

 
19,194

Current portion of long-term debt and capital leases
14,863

 
14,374

Total current liabilities
66,845

 
69,675

Long-term debt and capital leases
150,059

 
157,018

Deferred income taxes
29,412

 
35,933

Other long-term liabilities
2,623

 
2,778

Total liabilities
248,939

 
265,404

Commitments and contingencies (Note 6)

 

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; 47,390 and 47,130 shares issued and 46,008 and 47,029 shares outstanding
47

 
47

Additional paid-in capital
116,494

 
115,089

Retained earnings
36,357

 
89,687

Accumulated other comprehensive loss
(2,653
)
 
(2,097
)
 
150,245

 
202,726

Less cost of common stock in treasury, 1,382 and 101 shares
5,709

 
612

Total ARC Document Solutions, Inc. stockholders’ equity
144,536

 
202,114

Noncontrolling interest
7,006

 
7,020

Total equity
151,542

 
209,134

Total liabilities and equity
$
400,481

 
$
474,538

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

4



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)
2016
 
2015
 
2016
 
2015
Service sales
$
92,581

 
$
99,336

 
$
183,216

 
$
192,661

Equipment and supplies sales
11,189

 
14,053

 
24,104

 
25,047

Total net sales
103,770

 
113,389

 
207,320

 
217,708

Cost of sales
67,378

 
72,530

 
137,191

 
140,828

Gross profit
36,392

 
40,859

 
70,129

 
76,880

Selling, general and administrative expenses
25,503

 
27,132

 
51,859

 
54,587

Amortization of intangible assets
1,232

 
1,442

 
2,545

 
2,931

Goodwill impairment
73,920

 

 
73,920

 

Restructuring expense
5

 
11

 
7

 
85

(Loss) income from operations
(64,268
)
 
12,274

 
(58,202
)
 
19,277

Other income, net
(15
)
 
(30
)
 
(38
)
 
(56
)
Loss on extinguishment of debt
44

 
97

 
90

 
97

Interest expense, net
1,526

 
1,939

 
2,972

 
3,796

(Loss) income before income tax (benefit) provision
(65,823
)
 
10,268

 
(61,226
)
 
15,440

Income tax (benefit) provision
(10,015
)
 
811

 
(8,046
)
 
1,572

Net (loss) income
(55,808
)
 
9,457

 
(53,180
)
 
13,868

Income attributable to the noncontrolling interest
(96
)
 
(200
)
 
(150
)
 
(175
)
Net (loss) income attributable to ARC Document Solutions, Inc. shareholders
$
(55,904
)
 
$
9,257

 
$
(53,330
)
 
$
13,693

(Loss) earnings per share attributable to ARC Document Solutions, Inc. shareholders:
 
 
 
 
 
 
 
Basic
$
(1.22
)
 
$
0.20

 
$
(1.15
)
 
$
0.29

Diluted
$
(1.22
)
 
$
0.19

 
$
(1.15
)
 
$
0.29

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
45,955

 
46,611

 
46,285

 
46,528

Diluted
45,955

 
47,558

 
46,285

 
47,634

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


5



ARC DOCUMENT SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(In thousands)
2016
 
2015
 
2016
 
2015
Net (loss) income
$
(55,808
)
 
$
9,457

 
$
(53,180
)
 
$
13,868

Other comprehensive (loss) income, net of tax
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax
(935
)
 
315

 
(623
)
 
(90
)
Fair value adjustment of derivatives, net of tax
(2
)
 
(83
)
 
(97
)
 
(194
)
Other comprehensive (loss) income, net of tax
(937
)
 
232

 
(720
)
 
(284
)
Comprehensive (loss) income
(56,745
)
 
9,689

 
(53,900
)
 
13,584

Comprehensive (loss) income attributable to noncontrolling interest
(116
)
 
231

 
(14
)
 
207

Comprehensive (loss) income attributable to ARC Document Solutions, Inc. shareholders
$
(56,629
)
 
$
9,458

 
$
(53,886
)
 
$
13,377

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


6



ARC DOCUMENT SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited) 

 
ARC Document Solutions, Inc. Shareholders
 
 
 
 
 
Common Stock
 
 
 
 
 
Accumulated
 
 
 
 
 
 
(In thousands, except per share data)
Shares
 
Par
Value
 
Additional Paid-in
Capital
 
Retained Deficit
 
Other Comprehensive
Loss
 
Common Stock in
Treasury
 
Noncontrolling
Interest
 
Total
Balance at December 31, 2014
46,800

 
$
47

 
$
110,650

 
$
(7,353
)
 
$
(161
)
 
$
(408
)
 
$
7,063

 
$
109,838

Stock-based compensation
131

 

 
2,275

 

 

 

 

 
2,275

Issuance of common stock under Employee Stock Purchase Plan
8

 

 
58

 

 

 

 

 
58

Stock options exercised
125

 

 
561

 

 

 

 

 
561

Treasury shares
24

 

 

 

 

 
(204
)
 

 
(204
)
Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Net income

 

 

 
13,693

 

 

 
175

 
13,868

Foreign currency translation adjustments, net of tax

 

 

 

 
(122
)
 

 
32

 
(90
)
Fair value adjustment of derivatives, net of tax

 

 

 

 
(194
)
 

 

 
(194
)
Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
13,584

Balance at June 30, 2015
47,088

 
$
47

 
$
113,544

 
$
6,340

 
$
(477
)
 
$
(612
)
 
$
7,270

 
$
126,112

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ARC Document Solutions, Inc. Shareholders
 
 
 
 
 
Common Stock
 
 
 
 
 
Accumulated
 
 
 
 
 
 
(In thousands, except per share data)
Shares
 
Par
Value
 
Additional Paid-in
Capital
 
Retained
Earnings
 
Other Comprehensive
Loss
 
Common Stock in
Treasury
 
Noncontrolling
Interest
 
Total
Balance at December 31, 2015
47,130

 
$
47

 
$
115,089

 
$
89,687

 
$
(2,097
)
 
$
(612
)
 
$
7,020

 
$
209,134

Stock-based compensation
229

 

 
1,423

 

 

 

 

 
1,423

Issuance of common stock under Employee Stock Purchase Plan
19

 

 
70

 

 

 

 

 
70

Stock options exercised
12

 

 
30

 

 

 

 

 
30

Tax deficiency from stock based compensation


 


 
(118
)
 


 


 


 


 
(118
)
Treasury shares

 

 

 

 

 
(5,097
)
 

 
(5,097
)
Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Net (loss) income

 

 

 
(53,330
)
 

 

 
150

 
(53,180
)
Foreign currency translation adjustments, net of tax

 

 

 

 
(459
)
 

 
(164
)
 
(623
)
Fair value adjustment of derivatives, net of tax

 

 

 

 
(97
)
 

 

 
(97
)
Comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(53,900
)
Balance at June 30, 2016
47,390

 
$
47

 
$
116,494

 
$
36,357

 
$
(2,653
)
 
$
(5,709
)
 
$
7,006

 
$
151,542

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

7



ARC DOCUMENT SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(In thousands)
2016
 
2015
 
2016
 
2015
Cash flows from operating activities
 
 
 
 
 
 
 
Net (loss) income
$
(55,808
)
 
$
9,457

 
$
(53,180
)
 
$
13,868

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
Allowance for accounts receivable
249

 
156

 
320

 
182

Depreciation
6,658

 
7,078

 
13,335

 
14,144

Amortization of intangible assets
1,232

 
1,442

 
2,545

 
2,931

Amortization of deferred financing costs
115

 
161

 
233

 
322

Goodwill impairment
73,920

 

 
73,920

 

Stock-based compensation
651

 
921

 
1,423

 
2,004

Deferred income taxes
(10,066
)
 
3,847

 
(8,317
)
 
6,023

Deferred tax valuation allowance
(87
)
 
(3,257
)
 
(15
)
 
(4,791
)
Loss on early extinguishment of debt
44

 
97

 
90

 
97

Other non-cash items, net
(119
)
 
(110
)
 
(453
)
 
(284
)
Changes in operating assets and liabilities:
 
 
 
 
 
 
 
Accounts receivable
(124
)
 
(2,111
)
 
(1,388
)
 
(6,633
)
Inventory
(1,199
)
 
(1,765
)
 
(2,767
)
 
(2,858
)
Prepaid expenses and other assets
(1,063
)
 
(282
)
 
(666
)
 
1,717

Accounts payable and accrued expenses
2,177

 
1,230

 
(3,197
)
 
(4,570
)
Net cash provided by operating activities
16,580

 
16,864

 
21,883

 
22,152

Cash flows from investing activities
 
 
 
 
 
 
 
Capital expenditures
(2,645
)
 
(4,136
)
 
(5,150
)
 
(7,637
)
Other
481

 
93

 
707

 
248

Net cash used in investing activities
(2,164
)
 
(4,043
)
 
(4,443
)
 
(7,389
)
Cash flows from financing activities
 
 
 
 
 
 
 
Proceeds from stock option exercises
19

 
16

 
30

 
561

Proceeds from issuance of common stock under Employee Stock Purchase Plan
31

 
31

 
70

 
58

Share repurchases
(2,364
)
 
(204
)
 
(5,097
)
 
(204
)
Contingent consideration on prior acquisitions
(302
)
 

 
(367
)
 

Early extinguishment of long-term debt
(4,600
)
 
(7,250
)
 
(9,000
)
 
(7,250
)
Payments on long-term debt agreements and capital leases
(3,220
)
 
(6,713
)
 
(6,341
)
 
(12,780
)
Net repayments under revolving credit facilities

 
(760
)
 

 
(1,744
)
Payment of deferred financing costs

 
(1
)
 
(30
)
 
(25
)
Payment of hedge premium

 

 

 
(632
)
Net cash used in financing activities
(10,436
)
 
(14,881
)
 
(20,735
)
 
(22,016
)
Effect of foreign currency translation on cash balances
(321
)
 
(65
)
 
(216
)
 
53

Net change in cash and cash equivalents
3,659

 
(2,125
)
 
(3,511
)
 
(7,200
)
Cash and cash equivalents at beginning of period
16,793

 
17,561

 
23,963

 
22,636

Cash and cash equivalents at end of period
$
20,452

 
$
15,436

 
$
20,452

 
$
15,436

Supplemental disclosure of cash flow information
 
 
 
 
 
 
 
Noncash investing and financing activities
 
 
 
 
 
 
 
Capital lease obligations incurred
$
5,742

 
$
3,542

 
$
8,607

 
$
7,042

Contingent liabilities in connection with acquisition of businesses
$

 
$

 
$
89

 
$

Liabilities in connection with deferred financing fees
$
76

 
$

 
$
76

 
$

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

8



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”) is a leading document solutions provider to design, engineering, construction, and facilities management professionals, while also providing document solutions to businesses of all types. ARC offers a variety of services including: Construction Document Information Management ("CDIM"), Managed Print Services ("MPS"), and Archive and Information Management ("AIM"). In addition, ARC also sells Equipment and Supplies. The Company conducts its operations through its wholly-owned operating subsidiary, ARC Document Solutions, LLC, a Texas limited liability company, and its affiliates.
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, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.
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 2015 Form 10-K.
Recent Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Improvements to Employee Share-Based Payment Accounting. The new guidance requires excess tax benefits and tax deficiencies to be recorded in the statement of operations when share-based awards vest or are settled. In addition, cash flows related to excess tax benefits will no longer be separately classified as a financing activity apart from other income tax cash flows. The standard also allows the Company to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting, clarifies that all cash payments made on an employee’s behalf for withheld shares should be presented as a financing activity on the Company's statement of cash flows, and provides an accounting policy election to account for forfeitures as they occur. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is permitted. The Company is currently in the process of evaluating the impact of the adoption of ASU 2016-09 on its condensed consolidated financial statements.

In February 2016, the FASB issued Accounting Standards Codification (“ASC”) 842, Leases. The new guidance replaces the existing guidance in ASC 840, Leases. ASC 842 requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use (ROU) asset and a corresponding lease liability. For finance leases the lessee would recognize interest expense and amortization of the ROU asset and for operating leases the lessee would recognize a straight-line total lease expense. ASC 842 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is currently in the process of evaluating the impact of the adoption of ASC 842 on its consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory. The new guidance requires that inventory be measured at the lower of cost or net realizable value and amends existing guidance which requires inventory be measured at the lower of cost or market. Replacing the concept of market with the single measurement of net realizable value is intended to create efficiencies for financial statement preparers. ASU 2015-11 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is permitted. The Company is currently in the process of evaluating the impact of the adoption of ASU 2015-11 on its condensed consolidated financial statements.

9



In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the existing revenue recognition requirements in “Revenue Recognition (Topic 605).” The new guidance requires entities to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently in the process of evaluating the impact of the adoption of ASU 2014-09 on its condensed consolidated financial statements.
In April 2015, the FASB issued ASU 2015-05, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. The new guidance amends Accounting Standards Codification ("ASC") 350-40, Intangibles - Goodwill and Other, Internal-Use Software, to provide guidance on determining whether a cloud computing arrangement contains a software license that should be accounted for as internal-use software. ASU 2015-05 is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. The Company adopted ASU 2015-05 on January 1, 2016. The adoption of ASU 2015-05 did not have a material impact to the Company's condensed consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which changes the presentation of deferred financing fees in an entity's financial statements. Under the ASU, deferred financing fees are to be presented in the balance sheet as a direct deduction from the related debt liability rather than as an asset. ASU 2015-03 is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. The Company adopted ASU 2015-03 as of January 1, 2016. In conjunction with the adoption of ASU 2015-03, the Company reclassified net deferred financing fees of $1.6 million at December 31, 2015 from an asset to a direct deduction from the related debt liability to conform to the current period presentation.
Segment Reporting
The provisions of 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 and whose operating results are reviewed by the Company's Chief Executive Officer, who is the Company's chief operating decision maker. Because its operating segments have similar products and services, classes of customers, production processes, distribution methods and economic characteristics, the Company operates 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,
 
2016
 
2015
 
2016
 
2015
Service Sales
 
 
 
 
 
 
 
CDIM
$
54,860

 
$
58,835

 
$
108,525

 
$
113,477

MPS
34,055

 
37,134

 
67,286

 
73,011

AIM
3,666

 
3,367

 
7,405

 
6,173

Total service sales
92,581

 
99,336

 
183,216

 
192,661

Equipment and supplies sales
11,189

 
14,053

 
24,104

 
25,047

Total net sales
$
103,770

 
$
113,389

 
$
207,320

 
$
217,708

Risk and Uncertainties
The Company generates the majority of its revenue from sales of services and products to customers in the architectural, engineering, construction and building owner/operator (AEC/O) industry. As a result, the Company’s operating results and financial condition can be significantly affected by economic factors that influence the AEC/O 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/O industry would diminish demand for some of ARC’s services and products, and would therefore negatively affect revenues and have a material adverse effect on its business, operating results and financial condition.
As part of the Company’s growth strategy, ARC intends to continue to offer and grow a variety of service offerings that are relatively new to the Company. The success of the Company’s efforts will be affected by its ability to acquire new customers for the Company’s new service offerings, as well as to sell the new service offerings to existing customers. The Company’s inability to successfully

10



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 common share is computed similarly 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 share equivalents are excluded from the computation if their effect is anti-dilutive. For the three and six months ended June 30, 2016, stock options of 4.4 million common shares were excluded from the calculation of diluted net loss attributable to ARC per common share because they were anti-dilutive. For the three and six months ended June 30, 2015, stock options of 1.6 million and 0.5 million common shares, were excluded from the calculation of diluted net income attributable to ARC per common share because they were anti-dilutive. The Company's common share equivalents consist of stock options issued under the Company's stock plan.
Basic and diluted weighted average common shares outstanding were calculated as follows for the three and six months ended June 30, 2016 and 2015:
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
Weighted average common shares outstanding during the period—basic
45,955

 
46,611

 
46,285

 
46,528

Effect of dilutive stock options

 
947

 

 
1,106

Weighted average common shares outstanding during the period—diluted
45,955

 
47,558

 
46,285

 
47,634


Stock Repurchase Program
On February 8, 2016, the Company announced that the Company's Board of Directors had approved a stock repurchase program that authorizes the Company to purchase up to $15.0 million of the Company's outstanding common stock through December 31, 2017. Under the repurchase program, purchases of shares of common stock may be made from time to time in the open market, or in privately negotiated transactions, in compliance with applicable state and federal securities laws. The stock repurchase program does not obligate the company to acquire any specific number of shares in any period, and may be expanded, extended, modified or discontinued at any time without prior notice. See Part II, Item 2., “Unregistered Sales of Equity Securities and Use of Proceeds” of this report for additional information on the stock repurchase program.

3. Goodwill and Other Intangibles Resulting from Business Acquisitions
Goodwill
In connection with acquisitions, the Company applies the provisions of ASC 805, Business Combinations, using the acquisition method of accounting. The excess purchase price over the assessed fair value of net tangible assets and identifiable intangible assets acquired is recorded as goodwill.
In accordance with ASC 350, Intangibles-Goodwill and Other, the Company assesses goodwill for impairment annually as of September 30, and more frequently if events and circumstances indicate that goodwill might be impaired.
At June 30, 2016, the Company determined that there were sufficient indicators to trigger an interim goodwill impairment analysis. The indicators included, among other factors: (1) the underperformance against plan of the Company's reporting units, (2) a revision of the Company's forecasted future earnings, and (3) a decline in the Company's market capitalization in 2016. The Company’s analysis indicated that five of its eight reporting units, four in the United States and one in Canada, failed step one of the impairment analysis; however, step two of the analysis is not yet final due to the complexity and significant amount of work required to calculate the implied fair value of goodwill. The preliminary results of step two of the Company's goodwill impairment analysis indicate that the Company's goodwill is impaired by approximately $73.9 million. Accordingly, the Company recorded a pretax, non-cash charge for the three and six months ended June 30, 2016 to reduce the carrying value of goodwill by $73.9 million. This represents the Company's best estimate of its goodwill impairment as of June 30, 2016; however, it is possible that material

11



adjustments to the Company's preliminary estimates may be required as the calculations are finalized.
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. During the second quarter of 2016, in connection with an operationally focused reorganization of certain of the Company's reporting units, one additional reporting unit was added. As such, the goodwill of the former reporting units affected was reassigned to the new reporting unit based on their relative fair values and represented less than one percent of the Company's goodwill balance at the time.
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 interim goodwill impairment test in 2016 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 2016, 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, 2015 through June 30, 2016 are summarized as follows:
 
 
Gross
Goodwill
 
Accumulated
Impairment
Loss
 
Net
Carrying
Amount
 
 
 
 
 
 
January 1, 2015
$
405,558

 
$
192,950

 
$
212,608

Additions

 

 

Goodwill impairment

 

 

December 31, 2015
405,558

 
192,950

 
212,608

Additions

 

 

Goodwill impairment

 
73,920

 
(73,920
)
June 30, 2016
$
405,558

 
$
266,870

 
$
138,688

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

12



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 regional level, which is the operating segment 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.
The Company assessed its long-lived assets for possible impairment as of June 30, 2016 and concluded that its long-lived assets were not impaired.
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.
The following table sets forth the Company’s other intangible assets resulting from business acquisitions as of June 30, 2016 and December 31, 2015 which continue to be amortized:
 
 
June 30, 2016
 
December 31, 2015
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Amortizable other intangible assets
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
$
99,298

 
$
84,159

 
$
15,139

 
$
99,050

 
$
81,572

 
$
17,478

Trade names and trademarks
20,314

 
19,873

 
441

 
20,329

 
19,861

 
468

 
$
119,612

 
$
104,032

 
$
15,580

 
$
119,379

 
$
101,433

 
$
17,946

Based on current information, estimated future amortization expense of amortizable intangible assets for the remainder of the 2016 fiscal year, each of the subsequent four fiscal years and thereafter are as follows:
 
2016 (excluding the six months ended June 30, 2016)
$
2,297

2017
4,274

2018
3,860

2019
3,139

2020
1,528

Thereafter
482

 
$
15,580

4. 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 income tax benefits of $10.0 million and $8.0 million in relation to pretax losses of $65.8 million and $61.2 million for the three and six months ended June 30, 2016, respectively, which resulted in an effective income tax rate of 15.2% and 13.1%, for the three and six months ended June 30, 2016, respectively. The Company's low effective income tax rate was primarily due to the $41.4 million goodwill impairment related to historical stock acquisitions which cannot be deducted for income tax purposes until the related stock is disposed of. The Company recorded an income tax provision of $0.8 million and $1.6 million in relation to pretax income of $10.3 million and $15.4 million for the three and six months ended June 30, 2015 which resulted in an effective income tax rate of 7.9% and 10.2%, respectively, which was primarily impacted by the amortization of tax goodwill in a deferred tax liability position given the Company had a valuation allowance against certain of its deferred tax assets.


13



In accordance with ASC 740-10, Income Taxes, the Company evaluates the need for deferred tax asset valuation allowances based on a more likely than not standard. The ability to realize deferred tax assets depends on the ability to generate sufficient taxable income within the carryback or carryforward periods provided for in the tax law for each applicable tax jurisdiction. The Company considers the following possible sources of taxable income when assessing the realization of deferred tax assets:

Future reversals of existing taxable temporary differences;
Future taxable income exclusive of reversing temporary differences and carryforwards;
Taxable income in prior carryback years; and
Tax-planning strategies.

The assessment regarding whether a valuation allowance is required or should be adjusted also considers all available positive and negative evidence factors, including but not limited to:

Nature, frequency, and severity of recent losses;
Duration of statutory carryforward periods;
Historical experience with tax attributes expiring unused; and
Near- and medium-term financial outlook.

It is difficult to conclude a valuation allowance is not required when there is significant objective and verifiable negative evidence, such as cumulative losses in recent years. The Company utilizes a rolling three years of actual and current year anticipated results as the primary measure of cumulative losses in recent years, excluding permanent differences. The evaluation of deferred tax assets requires judgment in assessing the likely future tax consequences of events that have been recognized in the Company's financial statements or tax returns and future profitability. The Company's accounting for deferred tax consequences represents its best estimate of those future events. Changes in the Company's current estimates, due to unanticipated events or otherwise, could have a material effect on its financial condition and results of operations. At September 30, 2015 as a result of sustained profitability in the U.S. evidenced by three years of earnings and forecasted continuing profitability, the Company determined it was more likely than not that future earnings will be sufficient to realize certain of its deferred tax assets in the U.S. Accordingly the Company reversed most of its U.S. valuation allowance, resulting in non-cash income tax benefit of $80.7 million for the year ended December 31, 2015. The Company continues to carry a $1.3 million valuation allowance against certain deferred tax assets as of June 30, 2016.

Based on the Company’s current assessment based on the items noted above, the remaining net deferred tax assets as of June 30, 2016 are considered more likely than not to be realized. The valuation allowance of $1.3 million may be increased or reduced 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 $9 thousand as of June 30, 2016 included in other current assets in its Condensed Consolidated Balance Sheet primarily related to income tax refunds for prior years.
5. Long-Term Debt
Long-term debt consists of the following:
 
 
 
June 30, 2016
 
December 31, 2015
Term A loan facility maturing 2019 net of deferred financing fees of $1,369 and $1,586; 2.65% and 2.50% interest rate at June 30, 2016 and December 31, 2015
 
$
132,631

 
$
141,414

Various capital leases; weighted average interest rate of 5.6% and 5.8% at June 30, 2016 and December 31, 2015; principal and interest payable monthly through May 2021
 
32,250

 
29,866

Various other notes payable with a weighted average interest rate of 10.7% and 8.5% at June 30, 2016 and December 31, 2015; principal and interest payable monthly through November 2019
 
41

 
112

 
 
164,922

 
171,392

Less current portion
 
(14,863
)
 
(14,374
)
 
 
$
150,059

 
$
157,018




14



Term A Loan Facility
On November 20, 2014 the Company entered into a Credit Agreement (the “Term A Credit Agreement”) with Wells Fargo Bank, National Association, as administrative agent and the lenders party thereto.
The Term A Credit Agreement provides for the extension of term loans (“Term Loans”) in an aggregate principal amount of $175.0 million, the entirety of which was disbursed on the Closing Date in order to pay outstanding obligations under the Company’s Term Loan Credit Agreement dated as of December 20, 2013. The Term A Credit Agreement also provides for the extension of revolving loans (“Revolving Loans”) in an aggregate principal amount not to exceed $30.0 million. The Revolving Loan facility under the Term A Credit Agreement replaces the Company’s Credit Agreement dated as of January 27, 2012. The Company may request incremental commitments to the aggregate principal amount of Term Loans and Revolving Loans available under the Term A Credit Agreement by an amount not to exceed $75.0 million in the aggregate. Unless an incremental commitment to increase the Term Loan or provide a new term loan matures at a later date, the obligations under the Term A Credit Agreement mature on November 20, 2019. As of June 30, 2016, the Company's borrowing availability under the Term A Credit Agreement was $28.2 million, which was the maximum borrowing limit of $30.0 million reduced by outstanding letters of credit of $1.8 million.

Loans borrowed under the Term A Credit Agreement bear interest, in the case of LIBOR rate loans, at a per annum rate equal to the applicable LIBOR rate, plus a margin ranging from 1.50% to 2.50%, based on the Company’s Total Leverage Ratio (as defined in the Term A Credit Agreement). Loans borrowed under the Term A Credit Agreement that are not LIBOR rate loans bear interest at a per annum rate equal to (i) the greatest of (A) the Federal Funds Rate plus 0.50%, (B) the one month LIBOR rate plus 1.00%, and (C) the rate of interest announced, from time to time, by Wells Fargo Bank, National Association as its “prime rate,” plus (ii) a margin ranging from 0.50% to 1.50%, based on the Company’s Total Leverage Ratio.

The Company will pay certain recurring fees with respect to the credit facility, including administration fees to the administrative agent.

Subject to certain exceptions, including in certain circumstances, reinvestment rights, the loans extended under the Term A Credit Agreement are subject to customary mandatory prepayment provisions with respect to: the net proceeds from certain asset sales; the net proceeds from certain issuances or incurrences of debt (other than debt permitted to be incurred under the terms of the Term A Credit Agreement); the net proceeds from certain issuances of equity securities; and net proceeds of certain insurance recoveries and condemnation events of the Company.

The Term A Credit Agreement contains customary representations and warranties, subject to limitations and exceptions, and customary covenants restricting the ability (subject to various exceptions) of the Company and its subsidiaries to: incur additional indebtedness (including guarantee obligations); incur liens; sell certain property or assets; engage in mergers or other fundamental changes; consummate acquisitions; make investments; pay dividends, other distributions or repurchase equity interest of the Company or its subsidiaries; change the nature of their business; prepay or amend certain indebtedness; engage in certain transactions with affiliates; amend their organizational documents; or enter into certain restrictive agreements. In addition, the Term A Credit Agreement contains financial covenants which requires the Company to maintain (i) at all times, a Total Leverage Ratio in an amount not to exceed 3.25 to 1.00 through the Company’s fiscal quarter ending September 30, 2016, and thereafter, in an amount not to exceed 3.00 to 1.00; and (ii) a Fixed Charge Coverage Ratio (as defined in the Term A Credit Agreement), as amended on June 24, 2016, the Company is required to maintain, as of the last day of each fiscal quarter, an amount not less than 1.15 to 1.00. On February 5, 2016, the Term A Credit Agreement was amended to exclude up to $15.0 million of stock repurchases from the calculation of the Company's Fixed Charge Coverage Ratio, provided that those stock repurchases are consummated in accordance with the other terms and conditions of the agreement.

The Term A Credit Agreement contains customary events of default, including with respect to: nonpayment of principal, interest, fees or other amounts; failure to perform or observe covenants; material inaccuracy of a representation or warranty when made; cross-default to other material indebtedness; bankruptcy, insolvency and dissolution events; inability to pay debts; monetary judgment defaults; actual or asserted invalidity or impairment of any definitive loan documentation, repudiation of guaranties or subordination terms; certain ERISA related events; or a change of control.

The obligations of the Company’s subsidiary that is the borrower under the Term A Credit Agreement are guaranteed by the Company and each other United States domestic subsidiary of the Company. The Term A Credit Agreement and any interest rate protection and other hedging arrangements provided by any lender party to the Credit Facility or any affiliate of such a lender are secured on a first priority basis by a perfected security interest in substantially all of the borrower’s, the Company’s and each guarantor’s assets (subject to certain exceptions).

15



As of June 30, 2016, the Company has paid $41.0 million in aggregate principal on its $175.0 million Term Loan Credit Agreement, which was $14.8 million above the required payments from inception to date, of which $9.0 million was paid in the first six months of 2016. The $9.0 million early pay down of the term loan resulted in a loss on extinguishment of debt of $44 thousand and $90 thousand for the three and six months ended June 30, 2016.
Other Notes Payable
Includes notes payable collateralized by equipment previously purchased.
6. 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.

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 settlement date, filed an action against the Company in the Superior Court of California for the County of Orange. The complaint alleged, 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 included 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. Subsequent to the mediation session, the mediator issued a proposal that was accepted by both parties. In the second quarter of 2016, the Company settled with the defendants and paid $1.0 million, which had been accrued as of December 31, 2015.

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.
7. Stock-Based Compensation
At the Company's annual meeting of stockholders held on May 1, 2014, the Company's stockholders approved the Company's 2014 Stock Plan (the “2014 Stock Plan”) as adopted by the Company's board of directors. The 2014 Stock Plan replaces the American Reprographics Company 2005 Stock Plan (the "2005 Plan"). The 2014 Stock Plan provides for the grant of incentive and non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units, stock bonuses and other forms of awards granted or denominated in the Company's common stock or units of the Company's common stock, as well as cash bonus awards to employees, directors and consultants of the Company. The 2014 Stock Plan authorizes the Company to issue up to 3.5 million shares of common stock. As of June 30, 2016, 1.5 million shares remain available for issuance under the Stock Plan.
Stock options granted under the 2014 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 three to four 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% 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, 2016, the Company granted options to acquire a total of 528 thousand shares of the Company's common stock to certain key employees with an exercise price equal to the fair market value of the Company’s common stock on the date of grant. During the six months ended June 30, 2016, the Company granted 130 thousand shares of restricted stock to certain key employees at a price per share equal to the closing price of the Company's common stock on the date the restricted stock was granted. The granted stock options and restricted stock vest annually over three years from the grant date. In addition, the Company granted 14 thousand shares of restricted stock to each of the Company's seven non-employee members of its board of directors at a price per share equal to the closing price of the Company's common stock on the date the restricted stock was granted. The restricted stock vests on the one-year anniversary of the grant date.
The impact of stock-based compensation before income taxes on the interim Condensed Consolidated Statements of Operations was $0.7 million and $0.9 million for the three months ended June 30, 2016 and 2015, respectively.
The impact of stock-based compensation before income taxes on the interim Condensed Consolidated Statements of Operations was $1.4 million and $2.0 million for the six months ended June 30, 2016 and 2015, respectively.

16



As of June 30, 2016, total unrecognized compensation cost related to unvested stock-based payments totaled $4.2 million and is expected to be recognized over a weighted-average period of approximately 2.0 years.
8. Derivatives and Hedging Transactions

The Company uses derivative financial instruments to hedge its exposure to interest rate volatility related to its Term A Loan Facility. The Company does not use derivative financial instruments for speculative or trading purposes. Such derivatives are designated as cash flow hedges and accounted for under ASC 815, Derivatives and Hedging. Derivative instruments are recorded at fair value as either assets or liabilities in the interim condensed consolidated balance sheets. Changes in fair value of cash flow hedges that are designated as effective hedging instruments are deferred in equity as a component of accumulated other comprehensive loss ("AOCL"). Any ineffectiveness in such cash flow hedges is immediately recognized in earnings. Changes in the fair value of hedges that are not designated as effective hedging instruments are immediately recognized in earnings. Cash flows from the Company’s derivative instruments are classified in the condensed consolidated statements of cash flows in the same category as the items being hedged.

In January 2015, the Company entered into three one-year interest rate cap contracts to hedge against its exposure to interest rate volatility: (1) $80.0 million notional interest rate cap effective in 2015, (2) $65.0 million notional forward interest rate cap effective in 2016, and (3) $50.0 million notional forward interest rate cap effective in 2017. Over the next twelve months, the Company expects to reclassify $0.3 million from AOCL to interest expense.

The following table summarizes the fair value and classification on the Condensed Consolidated Balance Sheets of the Company's derivatives as of June 30, 2016 and December 31, 2015:
 
 
 
Fair Value
 
Balance Sheet Classification
 
June 30, 2016
 
December 31, 2015
Derivative designated as hedging instrument under ASC 815
 
 
 
 
 
Interest rate cap contracts - current portion
Other current assets
 
$
4

 
$
48

Interest rate cap contracts - long-term portion
Other assets
 
12

 
191

Total derivatives designated as hedging instruments
 
 
$
16

 
$
239



The following table summarizes the loss recognized in AOCL of derivatives, designated and qualifying as cash flow hedges for the three and six months ended June 30, 2016 and 2015:

 
 
Amount of Loss Recognized in AOCL on Derivative
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
2016
 
2015
 
2016
 
2015
Derivative in ASC 815 Cash Flow Hedging Relationship
 
 
 
 
 
 
 
 
Interest rate cap contracts
 
$
(2
)
 
$
(83
)
 
$
(97
)
 
$
(194
)

The following table summarizes the effect of the interest rate cap on the Condensed Consolidated Statements of Income for the three and six months ended June 30, 2016 and 2015:


17



 
 
Amount of Gain or (Loss) Reclassified from AOCL into Income
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
2016

2015
 
2016
 
2015
 
 
Effective Portion
 
Ineffective Portion
 
Effective Portion
 
Ineffective Portion
 
Effective Portion
 
Ineffective Portion
 
Effective Portion
 
Ineffective Portion
Location of Loss Reclassified from AOCL into Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
$
43

 
$

 
$

 
$

 
$
64

 
$

 
$
1

 
$


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

The following table summarizes the bases used to measure certain assets and liabilities at fair value on a nonrecurring basis in the condensed consolidated financial statements as of and for the six months ended June 30, 2016:

 
 
Significant Other Unobservable Inputs
 
 
June 30, 2016
 
 
Level 3
 
Total Losses
Nonrecurring Fair Value Measure
 
 
 
 
 
 
 
 
 
Goodwill
 
$
138,688

 
$
73,920

 
 
 
 
 
In accordance with ASC 350, goodwill was written down to its implied fair value of $138.7 million as of June 30, 2016, resulting in an impairment charge of $73.9 million during the six months ended June 30, 2016. See Note 3, “Goodwill and Other Intangibles Resulting from Business Acquisitions” for further information regarding the process of determining the implied fair value of goodwill and change in goodwill.

The following table summarizes the bases used to measure certain assets and liabilities at fair value on a recurring basis in the condensed consolidated financial statements as of and for the six months ended June 30, 2016 and as of and for the year ended December 31 2015:

 
 
 
Significant Other Unobservable Inputs
 
 
 
June 30, 2016
 
December 31, 2015
 
 
 
Level 2
 
Level 3
 
Total Losses
 
Level 2
 
Level 3
 
Total Losses
Recurring Fair Value Measure
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate cap contracts
 
$
16

 
$

 
$

 
$
239

 
$

 
$

 
Contingent purchase price consideration for acquired businesses
 
$

 
$
604

 
$

 
$

 
$
1,059

 
$


The Company determines the fair value of its interest rate cap contracts based on observable interest rate yield curves and represent the expected discounted cash flows underlying the financial instruments.

18



The Company recognizes liabilities for future earnout obligations on business acquisitions, or contingent purchase price consideration for acquired businesses, at their fair value based on discounted projected payments on such obligations. The inputs to the valuation, which are level 3 inputs within the fair value hierarchy, are projected sales to be provided by the acquired businesses based on historical sales trends for which earnout amounts are contractually based. Based on the Company's assessment as of June 30, 2016, the estimated contractually required earnout amounts would be achieved.
The following table presents the change in the Level 3 contingent purchase price consideration liability for the three and six months ended June 30, 2016 and 2015:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
Beginning balance
$
868

 
$
1,579

 
$
1,059

 
$
1,768

     Additions related to acquisitions

 

 
104

 

     Payments
(302
)
 
(116
)
 
(367
)
 
(142
)
     Adjustments included in earnings
27

 
(30
)
 
(195
)
 
(30
)
     Foreign currency translation adjustments
11

 
46

 
3

 
(117
)
Ending balance
$
604

 
$
1,479

 
$
604

 
$
1,479

Fair Values of Financial Instruments. The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments for disclosure purposes:
Cash equivalents: Cash equivalents are time deposits with maturity of three months or less when purchased, which are highly liquid and readily convertible to cash. Cash equivalents reported in the Company’s Condensed Consolidated Balance Sheets were $5.3 million and $6.3 million as of June 30, 2016 and December 31, 2015, 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, 2016 for borrowings under its Term Loan Credit Agreement is $134.0 million, excluding unamortized deferred financing fees. The Company has determined, utilizing observable market quotes, that the fair value of borrowings under its Term Loan Credit Agreement is $134.0 million as of June 30, 2016.

19




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 2015 Form 10-K and this Quarterly Report on Form 10-Q for the quarter ended June 30, 2016.
Business Summary
ARC Document Solutions, Inc. (“ARC Document Solutions,” “ARC,” “we,” “us,” or “our”) is a leading document solutions provider to design, engineering, construction, and facilities management professionals, while also providing document solutions to businesses of all types.
Our customers need us to manage the scale, complexity and workflow of their documents. We help them reduce their costs and increase their efficiency by improving their access and control over documents, and we offer a wide variety of ways to access, distribute, collaborate on, and store documents.
Each of our service offerings is enabled through a suite of supporting proprietary technology and a wide variety of value-added services. We have categorized our service and product offerings to report distinct sales recognized from:

Construction Document and Information Management (CDIM), which consists of software and professional services to manage and distribute documents and information primarily related to construction projects. CDIM sales include software such as SKYSITE® ProjectLink, our cloud-based project communication application, as well as providing document and information management services that are often technology-enabled. The bulk of our current revenue from CDIM comes from large-format and small-format printing services we provide in both black and white and in color. Sales from traditional construction plan printing have been in steady decline since the last recession as technology supplants the use of traditional “blueprints.”

Software is a smaller part of overall CDIM sales which we anticipate to continue to grow with the adoption of technology. The sale of services address a variety of customer needs including the provision of project communication tools, project information management, building information modeling, digital document distribution services, printing services, and others.
Managed Print Services (MPS), consists of placement, management, and optimization of print and imaging equipment in our customers' offices, job sites, and other facilities. MPS relieves our customers of the burden of owning and managing print devices and print networks, and shifts their costs to a “per-use” basis. MPS is supported by our proprietary technology, Abacus™, which allows our customers to capture, control, manage, print, and account for their documents. MPS Services revenue is derived from two sources: 1) an engagement with the customer to place primarily large-format equipment, that we own or lease, at a construction site or in our customers’ offices, and 2) an arrangement by which our customers outsource their printing function to us, including all office printing, copying, and reprographics printing. In both cases this is recurring, contracted revenue with most contracts ranging from 3 to 5 years and we are paid a single cost per unit of material used, often referred to as a “click charge.” MPS sales are driven by the ongoing print needs of our customers at their facilities.

Archiving and Information Management (AIM), combines software and professional services to facilitate the capture, management, access and retrieval of documents and information that have been produced in the past. AIM includes our SKYSITE InfoLink software to organize, search and retrieve documents, as well as the provision of services that include the capture and conversion of hardcopy and electronic documents, and their cloud-based storage and maintenance. AIM sales are driven by the need to leverage past intellectual property for present or future use, facilitate cost savings and efficiency improvements over current hardcopy and digital storage methods, as well as comply with regulatory and records retention requirements.
Equipment and Supplies, which consists of reselling printing, imaging, and related equipment to customers primarily to architectural, engineering and construction firms.
We have expanded our business beyond the services we traditionally provided to the architectural, engineering, construction, and building owner/operator (AEC/O) industry in the past and are currently focused on growing MPS, AIM and CDIM, as we believe the mix of services demanded by the AEC/O industry continues to shift toward document management at customer locations and in the cloud (represented primarily by our MPS and AIM revenues), and away from its historical emphasis on large-format construction drawings produced “offsite” in our service centers (represented primarily by our revenues from large-format black

20



and white printing services). Based on growth percentage, AIM is our fastest-growing service offering and has grown 20% in the first six months of 2016 as compared to the same period in 2015.
We deliver our services via the cloud, 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 we offer a distinct portfolio of services within the AEC/O industry, though clients outside of our core market continue to show significant interest in our offerings. Based on our analysis of our operating results, we estimate that sales to the AEC/O industry accounted for approximately 77% of our net sales for the six months ended June 30, 2016, with the remaining 23% consisting of sales to businesses outside of construction.
We identify operating segments based on the various business activities that earn revenue and incur expense. Our operating results are reviewed by the Company's Chief Executive Officer, who is our Company's chief operating decision maker. Since our operating segments have similar products and services, classes of customers, production processes, distribution methods and economic characteristics, we have 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 equipment expenses related to our MPS contracts and our service center facilities. 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. Our relationships with credit providers have provided attractive lease rates over the past two years, and as a result, we chose to lease rather than purchase equipment in a significant portion of our engagements.
Research and development costs consist mainly of the salaries, leased building space, and computer equipment that comprises our data storage and development centers in Fremont, California and Kolkata, India. Such costs are primarily recorded to cost of sales.
Non-GAAP Financial Measures
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.
EBITDA represents net income before interest, taxes, depreciation and amortization. EBITDA margin is a non-GAAP measure calculated by dividing EBITDA by net sales.
We have presented 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 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. We use EBITDA to compare the performance of our operating segments and to measure performance for determining consolidated-level compensation. In addition, we use EBITDA to evaluate potential acquisitions and potential capital expenditures.
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:

21



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, 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 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, 2016 and 2015 to reflect the exclusion of loss on extinguishment of debt, goodwill impairment, restructuring expense, trade secret litigation 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, 2016 and 2015. We believe these charges were the result of the then current macroeconomic environment, our capital restructuring, or other items which are not indicative of our actual operating performance.
We have presented adjusted EBITDA in the three and six months ended June 30, 2016 and 2015 to exclude loss on extinguishment of debt, goodwill impairment, trade secret litigation costs, restructuring expense and stock-based compensation expense. The adjustment of EBITDA for these items 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.
The following is a reconciliation of cash flows provided by operating activities to EBITDA, and net (loss) income attributable to ARC Document Solutions, Inc. shareholders:
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(In thousands)
2016
 
2015
 
2016
 
2015
Cash flows provided by operating activities
$
16,580

 
$
16,864

 
$
21,883

 
$
22,152

Changes in operating assets and liabilities, net of effect of business acquisitions
209

 
2,928

 
8,018

 
12,344

Non-cash expenses, including depreciation, amortization and goodwill impairment
(72,597
)
 
(10,335
)
 
(83,081
)
 
(20,628
)
Income tax (benefit) provision
(10,015
)
 
811

 
(8,046
)
 
1,572

Interest expense, net
1,526

 
1,939

 
2,972

 
3,796

Income attributable to the noncontrolling interest
(96
)
 
(200
)
 
(150
)
 
(175
)
Depreciation and amortization
7,890

 
8,520

 
15,880

 
17,075

EBITDA
(56,503
)
 
20,527

 
(42,524
)
 
36,136

Interest expense, net
(1,526
)
 
(1,939
)
 
(2,972
)
 
(3,796
)
Income tax provision (benefit)
10,015

 
(811
)
 
8,046

 
(1,572
)
Depreciation and amortization
(7,890
)
 
(8,520
)
 
(15,880
)
 
(17,075
)
Net (loss) income attributable to ARC Document Solutions, Inc. shareholders
$
(55,904
)
 
$
9,257

 
$
(53,330
)
 
$
13,693


22



The following is a reconciliation of net (loss) income attributable to ARC Document Solutions, Inc. to EBITDA and adjusted EBITDA:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(In thousands)
2016
 
2015
 
2016
 
2015
Net (loss) income attributable to ARC Document Solutions, Inc. shareholders
$
(55,904
)
 
$
9,257

 
$
(53,330
)
 
$
13,693

Interest expense, net
1,526

 
1,939

 
2,972

 
3,796

Income tax (benefit) provision
(10,015
)
 
811

 
(8,046
)
 
1,572

Depreciation and amortization
7,890

 
8,520

 
15,880

 
17,075

EBITDA
(56,503
)
 
20,527

 
(42,524
)
 
36,136

Loss on extinguishment of debt
44

 
97

 
90

 
97

Goodwill impairment
73,920

 

 
73,920

 

Trade secret litigation costs(1)

 

 

 
34

Restructuring expense(2)
5

 
11

 
7

 
85

Stock-based compensation
651

 
921

 
1,423

 
2,004

Adjusted EBITDA
$
18,117

 
$
21,556

 
$
32,916

 
$
38,356


(1)
On February 1, 2013, we filed a civil complaint against a competitor and a former employee in the Superior Court of California for Orange County, which alleged, among other claims, the misappropriation of ARC trade secrets; namely, proprietary customer lists that were used to communicate with ARC customers in an attempt to unfairly acquire their business. In prior litigation with the competitor based on related facts, in 2007 the competitor entered into a settlement agreement and stipulated judgment, which included an injunction. We instituted this suit to stop the defendant from using similar unfair business practices against us in the Southern California market. The case proceeded to trial in May 2014, and a jury verdict was entered for the defendants. In the first quarter of 2015, we entered into a settlement and paid the defendant. Legal fees associated with the litigation were recorded as selling, general and administrative expense.

(2)
In October 2012, we initiated a restructuring plan which included the closure or downsizing of the Company's service center locations, as well as a reduction in headcount. Restructuring expenses in 2016 and 2015 primarily consist of revised estimated lease termination and obligation costs resulting from facilities closed in 2013.

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

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016 (1)
 
2015
 
2016 (1)
 
2015 (1)
Net (loss) income margin attributable to ARC
(53.9
)%
 
8.2
%
 
(25.7
)%
 
6.3
%
Interest expense, net
1.5

 
1.7

 
1.5

 
1.7

Income tax (benefit) provision
(9.7
)
 
0.7

 
(3.9
)
 
0.7

Depreciation and amortization
7.6

 
7.5

 
7.7

 
7.8

EBITDA margin
(54.5
)
 
18.1

 
(20.5
)
 
16.6

Loss on extinguishment of debt

 
0.1

 

 

Goodwill impairment
71.2

 

 
35.7

 

Trade secret litigation costs

 

 

 

Restructuring expense

 

 

 

Stock-based compensation
0.6

 
0.8

 
0.7

 
0.9

Adjusted EBITDA margin
17.5
 %
 
19.0
%
 
15.9
 %
 
17.6
%
 
(1)
Column does not foot due to rounding


23



The following is a reconciliation of net (loss) income attributable to ARC Document Solutions, Inc. to unaudited adjusted net income attributable to ARC Document Solutions, Inc.:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(In thousands, except per share amounts)
2016
 
2015
 
2016
 
2015
Net (loss) income attributable to ARC Document Solutions, Inc.
$
(55,904
)
 
$
9,257

 
$
(53,330
)
 
$
13,693

Loss on extinguishment of debt
44

 
97

 
90

 
97

Goodwill impairment
73,920

 

 
73,920

 

Restructuring expense
5

 
11

 
7

 
85

Trade secret litigation costs

 

 

 
34

Income tax benefit related to above items
(13,350
)
 
(42
)
 
(13,369
)
 
(84
)
Deferred tax valuation allowance and other discrete tax items
95

 
(3,151
)
 
203

 
(4,407
)
Unaudited adjusted net income attributable to ARC Document Solutions, Inc.
$
4,810

 
$
6,172

 
$
7,521

 
$
9,418

 
 
 
 
 
 
 
 
Actual:
 
 
 
 
 
 
 
(Loss) earnings per share attributable to ARC Document Solutions, Inc. shareholders:
 
 
 
 
 
 
 
Basic
$
(1.22
)
 
$
0.20

 
$
(1.15
)
 
$
0.29

Diluted
$
(1.22
)
 
$
0.19

 
$
(1.15
)
 
$
0.29

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
45,955

 
46,611

 
46,285

 
46,528

Diluted
45,955

 
47,558

 
46,285

 
47,634

Adjusted:
 
 
 
 
 
 
 
Earnings per share attributable to ARC Document Solutions, Inc. shareholders:
 
 
 
 
 
 
 
Basic
$
0.10

 
$
0.13

 
$
0.16

 
$
0.20

Diluted
$
0.10

 
$
0.13

 
$
0.16

 
$
0.20

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
45,955

 
46,611

 
46,285

 
46,528

Diluted
46,568

 
47,558

 
46,889

 
47,634





24



Results of Operations
 
 
Three Months Ended June 30,
 
Increase (decrease)
 
Six Months Ended 
 June 30,
 
Increase (decrease)
(In millions, except percentages)
2016 (1)
 
2015
 
$
 
%
 
2016
 
2015
 
$
 
%
CDIM
$
54.9

 
$
58.8

 
$
(4.0
)
 
(6.8
)%
 
$
108.5

 
$
113.5

 
$
(5.0
)
 
(4.4
)%
MPS
34.1

 
37.1

 
(3.1
)
 
(8.3
)%
 
67.3

 
73.0

 
(5.7
)
 
(7.8
)%
AIM
3.7

 
3.4

 
0.3

 
8.9
 %
 
7.4

 
6.2

 
1.2

 
20.0
 %
Total service sales
92.6

 
99.3

 
(6.8
)
 
(6.8
)%
 
183.2

 
192.7

 
(9.4
)
 
(4.9
)%
Equipment and supplies sales
11.2

 
14.1

 
(2.9
)
 
(20.4
)%
 
24.1

 
25.0

 
(0.9
)
 
(3.8
)%
Total net sales
$
103.8

 
$
113.4

 
$
(9.6
)
 
(8.5
)%
 
$
207.3

 
$
217.7

 
$
(10.4
)
 
(4.8
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit
$
36.4

 
$
40.9

 
$
(4.5
)
 
(10.9
)%
 
$
70.1

 
$
76.9

 
$
(6.8
)
 
(8.8
)%
Selling, general and administrative expenses
$
25.5

 
$
27.1

 
$
(1.6
)
 
(6.0
)%
 
$
51.9

 
$
54.6

 
$
(2.7
)
 
(5.0
)%
Amortization of intangibles
$
1.2

 
$
1.4

 
$
(0.2
)
 
(14.6
)%
 
$
2.5

 
$
2.9

 
$
(0.4
)
 
(13.2
)%
Goodwill impairment
$
73.9

 
$

 
$
73.9

 
100.0
 %
 
$
73.9

 
$

 
$
73.9

 
100.0
 %
Restructuring expense
$

 
$

 
$

 
 %
 
$

 
$
0.1

 
$
(0.1
)
 
(91.8
)%
Loss on extinguishment of debt
$

 
$
0.1

 
$
(0.1
)
 
(54.6
)%
 
$
0.1

 
$
0.1

 
$