10-Q 1 arc-09302016x10q.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 September 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 October 28, 2016, there were 45,974,642 shares of the issuer’s common stock outstanding.




ARC DOCUMENT SOLUTIONS, INC.
Form 10-Q
For the Quarter Ended September 30, 2016
Table of Contents
 
PART I—FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015 (Unaudited)
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2015 (Unaudited)
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2016 and 2015 (Unaudited)
Condensed Consolidated Statements of Equity for the nine months ended September 30, 2016 and 2015 (Unaudited)
Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 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)
 
 
September 30,
 
December 31,
(In thousands, except per share data)
2016
 
2015
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
19,640

 
$
23,963

Accounts receivable, net of allowances for accounts receivable of $2,007 and $2,094
61,373

 
60,085

Inventories, net
19,981

 
16,972

Prepaid expenses
4,689

 
4,555

Other current assets
3,485

 
4,131

Total current assets
109,168

 
109,706

Property and equipment, net of accumulated depreciation of $208,749 and $202,457
56,923

 
57,590

Goodwill
138,688

 
212,608

Other intangible assets, net
14,393

 
17,946

Deferred income taxes
74,138

 
74,196

Other assets
2,255

 
2,492

Total assets
$
395,565

 
$
474,538

Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
22,534

 
$
23,989

Accrued payroll and payroll-related expenses
10,196

 
12,118

Accrued expenses
16,793

 
19,194

Current portion of long-term debt and capital leases
12,926

 
14,374

Total current liabilities
62,449

 
69,675

Long-term debt and capital leases
145,978

 
157,018

Deferred income taxes
29,845

 
35,933

Other long-term liabilities
2,482

 
2,778

Total liabilities
240,754

 
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; 47,415 and 47,130 shares issued and 45,975 and 47,029 shares outstanding
47

 
47

Additional paid-in capital
117,264

 
115,089

Retained earnings
39,198

 
89,687

Accumulated other comprehensive loss
(2,831
)
 
(2,097
)
 
153,678

 
202,726

Less cost of common stock in treasury, 1,440 and 101 shares
5,909

 
612

Total ARC Document Solutions, Inc. stockholders’ equity
147,769

 
202,114

Noncontrolling interest
7,042

 
7,020

Total equity
154,811

 
209,134

Total liabilities and equity
$
395,565

 
$
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 
 September 30,
 
Nine Months Ended 
 September 30,
(In thousands, except per share data)
2016
 
2015
 
2016
 
2015
Service sales
$
89,178

 
$
94,384

 
$
272,394

 
$
287,045

Equipment and supplies sales
11,265

 
12,034

 
35,369

 
37,081

Total net sales
100,443

 
106,418

 
307,763

 
324,126

Cost of sales
67,713

 
70,475

 
204,904

 
211,303

Gross profit
32,730

 
35,943

 
102,859

 
112,823

Selling, general and administrative expenses
24,893

 
25,816

 
76,752

 
80,403

Amortization of intangible assets
1,160

 
1,375

 
3,705

 
4,306

Goodwill impairment

 

 
73,920

 

Restructuring expense

 
4

 
7

 
89

Income (loss) from operations
6,677

 
8,748

 
(51,525
)
 
28,025

Other income, net
(16
)
 
(25
)
 
(54
)
 
(81
)
Loss on extinguishment of debt
66

 
96

 
156

 
193

Interest expense, net
1,563

 
1,679

 
4,535

 
5,475

Income (loss) before income tax provision (benefit)
5,064

 
6,998

 
(56,162
)
 
22,438

Income tax provision (benefit)
2,162

 
(73,338
)
 
(5,884
)
 
(71,766
)
Net income (loss)
2,902

 
80,336

 
(50,278
)
 
94,204

Income attributable to the noncontrolling interest
(61
)
 
(50
)
 
(211
)
 
(225
)
Net income (loss) attributable to ARC Document Solutions, Inc. shareholders
$
2,841

 
$
80,286

 
$
(50,489
)
 
$
93,979

Earnings (loss) per share attributable to ARC Document Solutions, Inc. shareholders:
 
 
 
 
 
 
 
Basic
$
0.06

 
$
1.72

 
$
(1.10
)
 
$
2.02

Diluted
$
0.06

 
$
1.69

 
$
(1.10
)
 
$
1.98

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
45,599

 
46,698

 
46,055

 
46,601

Diluted
46,189

 
47,557

 
46,055

 
47,541

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


5



ARC DOCUMENT SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(In thousands)
2016
 
2015
 
2016
 
2015
Net income (loss)
$
2,902

 
$
80,336

 
$
(50,278
)
 
$
94,204

Other comprehensive loss, net of tax
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax
(250
)
 
(1,434
)
 
(873
)
 
(1,524
)
Fair value adjustment of derivatives, net of tax
47

 
(69
)
 
(50
)
 
(263
)
Other comprehensive loss, net of tax
(203
)
 
(1,503
)
 
(923
)
 
(1,787
)
Comprehensive income (loss)
2,699

 
78,833

 
(51,201
)
 
92,417

Comprehensive income (loss) attributable to noncontrolling interest
36

 
(237
)
 
22

 
(30
)
Comprehensive income (loss) attributable to ARC Document Solutions, Inc. shareholders
$
2,663

 
$
79,070

 
$
(51,223
)
 
$
92,447

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 Earnings
 
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

 

 
3,009

 

 

 

 

 
3,009

Issuance of common stock under Employee Stock Purchase Plan
13

 

 
83

 

 

 

 

 
83

Stock options exercised
125

 

 
562

 

 

 

 

 
562

Treasury shares
24

 

 

 

 

 
(204
)
 

 
(204
)
Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Net income

 

 

 
93,979

 

 

 
225

 
94,204

Foreign currency translation adjustments, net of tax

 

 

 

 
(1,269
)
 

 
(255
)
 
(1,524
)
Fair value adjustment of derivatives, net of tax

 

 

 

 
(263
)
 

 

 
(263
)
Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
92,417

Balance at September 30, 2015
47,093

 
$
47

 
$
114,304

 
$
86,626

 
$
(1,693
)
 
$
(612
)
 
$
7,033

 
$
205,705

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

 

 
2,073

 

 

 

 

 
2,073

Issuance of common stock under Employee Stock Purchase Plan
28

 

 
96

 

 

 

 

 
96

Stock options exercised
28

 

 
76

 

 

 

 

 
76

Tax deficiency from stock based compensation


 


 
(70
)
 


 


 


 


 
(70
)
Treasury shares

 

 

 

 

 
(5,297
)
 

 
(5,297
)
Comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Net (loss) income

 

 

 
(50,489
)
 

 

 
211

 
(50,278
)
Foreign currency translation adjustments, net of tax

 

 

 

 
(684
)
 

 
(189
)
 
(873
)
Fair value adjustment of derivatives, net of tax

 

 

 

 
(50
)
 

 

 
(50
)
Comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(51,201
)
Balance at September 30, 2016
47,415

 
$
47

 
$
117,264

 
$
39,198

 
$
(2,831
)
 
$
(5,909
)
 
$
7,042

 
$
154,811

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 
 September 30,
 
Nine Months Ended 
 September 30,
(In thousands)
2016
 
2015
 
2016
 
2015
Cash flows from operating activities
 
 
 
 
 
 
 
Net income (loss)
$
2,902

 
$
80,336

 
$
(50,278
)
 
$
94,204

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
 
 
 
Allowance for accounts receivable
324

 
110

 
644

 
292

Depreciation
6,697

 
7,040

 
20,032

 
21,184

Amortization of intangible assets
1,160

 
1,375

 
3,705

 
4,306

Amortization of deferred financing costs
111

 
138

 
344

 
460

Goodwill impairment

 

 
73,920

 

Stock-based compensation
650

 
735

 
2,073

 
2,739

Deferred income taxes
2,299

 
2,198

 
(6,018
)
 
8,221

Deferred tax valuation allowance
(1
)
 
(76,091
)
 
(16
)
 
(80,882
)
Loss on early extinguishment of debt
66

 
96

 
156

 
193

Other non-cash items, net
(87
)
 
(73
)
 
(540
)
 
(357
)
Changes in operating assets and liabilities:
 
 
 
 
 
 
 
Accounts receivable
(897
)
 
2,996

 
(2,285
)
 
(3,637
)
Inventory
(429
)
 
1,083

 
(3,196
)
 
(1,775
)
Prepaid expenses and other assets
1,179

 
1,224

 
513

 
2,941

Accounts payable and accrued expenses
(1,811
)
 
(202
)
 
(5,008
)
 
(4,772
)
Net cash provided by operating activities
12,163

 
20,965

 
34,046

 
43,117

Cash flows from investing activities
 
 
 
 
 
 
 
Capital expenditures
(2,430
)
 
(3,880
)
 
(7,580
)
 
(11,517
)
Other
135

 
266

 
842

 
514

Net cash used in investing activities
(2,295
)
 
(3,614
)
 
(6,738
)
 
(11,003
)
Cash flows from financing activities
 
 
 
 
 
 
 
Proceeds from stock option exercises
46

 
1

 
76

 
562

Proceeds from issuance of common stock under Employee Stock Purchase Plan
26

 
25

 
96

 
83

Share repurchases
(200
)
 

 
(5,297
)
 
(204
)
Contingent consideration on prior acquisitions
(86
)
 
(360
)
 
(453
)
 
(360
)
Early extinguishment of long-term debt
(7,000
)
 
(3,625
)
 
(16,000
)
 
(10,875
)
Payments on long-term debt agreements and capital leases
(3,310
)
 
(7,262
)
 
(9,651
)
 
(20,042
)
Net repayments under revolving credit facilities

 
(144
)
 

 
(1,888
)
Payment of deferred financing costs
(76
)
 

 
(106
)
 
(25
)
Payment of hedge premium

 

 

 
(632
)
Net cash used in financing activities
(10,600
)
 
(11,365
)
 
(31,335
)
 
(33,381
)
Effect of foreign currency translation on cash balances
(80
)
 
(598
)
 
(296
)
 
(545
)
Net change in cash and cash equivalents
(812
)
 
5,388

 
(4,323
)
 
(1,812
)
Cash and cash equivalents at beginning of period
20,452

 
15,436

 
23,963

 
22,636

Cash and cash equivalents at end of period
$
19,640

 
$
20,824

 
$
19,640

 
$
20,824

Supplemental disclosure of cash flow information
 
 
 
 
 
 
 
Noncash investing and financing activities
 
 
 
 
 
 
 
Capital lease obligations incurred
$
3,738

 
$
2,625

 
$
12,345

 
$
9,667

Contingent liabilities in connection with acquisition of businesses
$

 
$

 
$
85

 
$

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 architectural, 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 Securities and Exchange Commission (SEC). As permitted under those rules, certain footnotes or other financial information required by GAAP for complete financial statements have been condensed or omitted. In management’s opinion, the accompanying interim Condensed Consolidated Financial Statements presented reflect all adjustments of a normal and recurring nature that are necessary to fairly present the interim Condensed Consolidated Financial Statements. All material intercompany accounts and transactions have been eliminated in consolidation. The operating results for the three and nine months ended September 30, 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 August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-15, Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments. The new guidance addresses diversity in practice for classification of certain transactions in the statement of cash flows including, but not limited to: debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, and distributions received from equity method investees. ASU 2016-15 is effective for annual reporting periods beginning after December 15, 2017, 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 2016-15 on its condensed consolidated financial statements.

In March 2016, the FASB issued 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

9



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.
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, Segment Reporting, 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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Service Sales
 
 
 
 
 
 
 
CDIM
$
53,228

 
$
54,710

 
$
161,753

 
$
168,187

MPS
32,796

 
35,923

 
100,082

 
108,934

AIM
3,154

 
3,751

 
10,559

 
9,924

Total service sales
89,178

 
94,384

 
272,394

 
287,045

Equipment and supplies sales
11,265

 
12,034

 
35,369

 
37,081

Total net sales
$
100,443

 
$
106,418

 
$
307,763

 
$
324,126

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

10



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, some of which 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 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 nine months ended September 30, 2016, stock options of 3.0 million and 4.4 million common shares were excluded from the calculation of diluted net income (loss) attributable to ARC per common share, respectively, because they were anti-dilutive. For the three and nine months ended September 30, 2015, stock options of 2.1 million and 1.5 million common shares were excluded from the calculation of diluted net income attributable to ARC per common share, respectively, 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 nine months ended September 30, 2016 and 2015:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Weighted average common shares outstanding during the period—basic
45,599

 
46,698

 
46,055

 
46,601

Effect of dilutive stock options
590

 
859

 

 
940

Weighted average common shares outstanding during the period—diluted
46,189

 
47,557

 
46,055

 
47,541


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.


11



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 September 30, 2016, the Company performed its assessment and determined that goodwill was not impaired.
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.
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 performed its preliminary assessment as of June 30, 2016 and noted 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 was subject to finalization of the implied fair value of goodwill. The preliminary results of step two of the Company's goodwill impairment analysis indicated that the Company's goodwill was 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. The Company completed step two of the analysis in the third quarter of 2016 with no change to the previous estimate.
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 2017, 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 September 30, 2016 are summarized as follows:
 

12



 
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
)
September 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 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 during the nine months ended September 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 September 30, 2016 and December 31, 2015 which continue to be amortized:
 
 
September 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
$
99,227

 
$
85,265

 
$
13,962

 
$
99,050

 
$
81,572

 
$
17,478

Trade names and trademarks
20,312

 
19,881

 
431

 
20,329

 
19,861

 
468

 
$
119,539

 
$
105,146

 
$
14,393

 
$
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:
 

13



2016 (excluding the nine months ended September 30, 2016)
$
1,135

2017
4,267

2018
3,855

2019
3,134

2020
1,523

Thereafter
479

 
$
14,393

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 an income tax provision of $2.2 million in relation to pretax income of $5.1 million for the three months ended September 30, 2016, and an income tax benefit of $5.9 million in relation to pretax loss of $56.2 million for the nine months ended September 30, 2016, which resulted in an effective income tax rate of 42.6% and 10.5%, for the three and nine months ended September 30, 2016, respectively. The Company's low effective income tax rate for the nine months ended September 30, 2016 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 income tax benefits of $73.3 million and $71.8 million in relation to pretax income of $7.0 million and $22.4 million for the three and nine months ended September 30, 2015.

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 would 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 September 30, 2016.

Based on the Company’s current assessment, the remaining net deferred tax assets as of September 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.

14



5. Long-Term Debt
Long-term debt consists of the following:
 
 
 
September 30, 2016
 
December 31, 2015
Term A loan facility maturing 2019 net of deferred financing fees of $1,192 and $1,586; 2.59% and 2.50% interest rate at September 30, 2016 and December 31, 2015
 
$
125,808

 
$
141,414

Various capital leases; weighted average interest rate of 5.6% and 5.8% at September 30, 2016 and December 31, 2015; principal and interest payable monthly through September 2021
 
33,059

 
29,866

Various other notes payable with a weighted average interest rate of 10.7% and 8.5% at September 30, 2016 and December 31, 2015; principal and interest payable monthly through November 2019
 
37

 
112

 
 
158,904

 
171,392

Less current portion
 
(12,926
)
 
(14,374
)
 
 
$
145,978

 
$
157,018



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 September 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

15



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).
As of September 30, 2016, the Company has paid $48.0 million in aggregate principal on its $175.0 million Term Loan Credit Agreement, which was $17.4 million above the required payments from inception to date. Principal payments on the Term Loan Credit Agreement of $16.0 million in 2016 resulted in a loss on extinguishment of debt of $66 thousand and $156 thousand for the three and nine months ended September 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 September 30, 2016, 1.6 million shares remain available for issuance under the Stock Plan.

16



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 nine months ended September 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 nine months ended September 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 approximately 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 for the both the three months ended September 30, 2016 and 2015.
The impact of stock-based compensation before income taxes on the interim Condensed Consolidated Statements of Operations was $2.1 million and $2.7 million for the nine months ended September 30, 2016 and 2015, respectively.
As of September 30, 2016, total unrecognized compensation cost related to unvested stock-based payments totaled $3.4 million and is expected to be recognized over a weighted-average period of approximately 1.8 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 $0.4 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 September 30, 2016 and December 31, 2015:
 
 
 
Fair Value
 
Balance Sheet Classification
 
September 30, 2016
 
December 31, 2015
Derivative designated as hedging instrument under ASC 815
 
 
 
 
 
Interest rate cap contracts - current portion
Other current assets
 
$
12

 
$
48

Interest rate cap contracts - long-term portion
Other assets
 
11

 
191

Total derivatives designated as hedging instruments
 
 
$
23

 
$
239



The following table summarizes the income (loss) recognized in AOCL of derivatives, designated and qualifying as cash flow hedges for the three and nine months ended September 30, 2016 and 2015:


17



 
 
Amount of Income (Loss) Recognized in AOCL on Derivative
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2016
 
2015
 
2016
 
2015
Derivative in ASC 815 Cash Flow Hedging Relationship
 
 
 
 
 
 
 
 
Interest rate cap contracts, net of tax
 
$
47

 
$
(69
)
 
$
(50
)
 
$
(263
)

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

 
 
Amount of Loss Reclassified from AOCL into Income
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 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
 
$
68

 
$

 
$
9

 
$

 
$
132

 
$

 
$
10

 
$


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 nine months ended September 30, 2016:

 
 
Significant Other Unobservable Inputs
 
 
September 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 nine months ended September 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 nine months ended September 30, 2016 and as of and for the year ended December 31 2015:


18



 
 
 
Significant Other Unobservable Inputs
 
 
 
September 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
 
$
23

 
$

 
$

 
$
239

 
$

 
$

 
Contingent purchase price consideration for acquired businesses
 
$

 
$
541

 
$

 
$

 
$
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.
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 September 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 nine months ended September 30, 2016 and 2015:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Beginning balance
$
604

 
$
1,479

 
$
1,059

 
$
1,768

     Additions related to acquisitions

 

 
104

 

     Payments
(86
)
 
(360
)
 
(453
)
 
(502
)
     Adjustments included in earnings
15

 
32

 
(180
)
 
2

     Foreign currency translation adjustments
8

 
(34
)
 
11

 
(151
)
Ending balance
$
541

 
$
1,117

 
$
541

 
$
1,117

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 $8.3 million and $6.3 million as of September 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 September 30, 2016 for borrowings under its Term Loan Credit Agreement is $127.0 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 $127.0 million as of September 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 September 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 services and professional services to manage and distribute documents and information primarily related to construction projects. CDIM sales include software services 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 services are 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.

20



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 nine months ended September 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:
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;

21



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 nine months ended September 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 nine months ended September 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 nine months ended September 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 income (loss) attributable to ARC Document Solutions, Inc. shareholders:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(In thousands)
2016
 
2015
 
2016
 
2015
Cash flows provided by operating activities
$
12,163

 
$
20,965

 
$
34,046

 
$
43,117

Changes in operating assets and liabilities, net of effect of business acquisitions
1,958

 
(5,101
)
 
9,976

 
7,243

Non-cash expenses, including depreciation, amortization and goodwill impairment
(11,219
)
 
64,472

 
(94,300
)
 
43,844

Income tax provision (benefit)
2,162

 
(73,338
)
 
(5,884
)
 
(71,766
)
Interest expense, net
1,563

 
1,679

 
4,535

 
5,475

Income attributable to the noncontrolling interest
(61
)
 
(50
)
 
(211
)
 
(225
)
Depreciation and amortization
7,857

 
8,415

 
23,737

 
25,490

EBITDA
14,423

 
17,042

 
(28,101
)
 
53,178

Interest expense, net
(1,563
)
 
(1,679
)
 
(4,535
)
 
(5,475
)
Income tax (provision) benefit
(2,162
)
 
73,338

 
5,884

 
71,766

Depreciation and amortization
(7,857
)
 
(8,415
)
 
(23,737
)
 
(25,490
)
Net income (loss) attributable to ARC Document Solutions, Inc. shareholders
$
2,841

 
$
80,286

 
$
(50,489
)
 
$
93,979

The following is a reconciliation of net income (loss) attributable to ARC Document Solutions, Inc. to EBITDA and adjusted EBITDA:

22



 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(In thousands)
2016
 
2015
 
2016
 
2015
Net income (loss) attributable to ARC Document Solutions, Inc. shareholders
$
2,841

 
$
80,286

 
$
(50,489
)
 
$
93,979

Interest expense, net
1,563

 
1,679

 
4,535

 
5,475

Income tax provision (benefit)
2,162

 
(73,338
)
 
(5,884
)
 
(71,766
)
Depreciation and amortization
7,857

 
8,415

 
23,737

 
25,490

EBITDA
14,423

 
17,042

 
(28,101
)
 
53,178

Loss on extinguishment of debt
66

 
96

 
156

 
193

Goodwill impairment

 

 
73,920

 

Trade secret litigation costs(1)

 

 

 
34

Restructuring expense(2)

 
4

 
7

 
89

Stock-based compensation
650

 
735

 
2,073

 
2,739

Adjusted EBITDA
$
15,139

 
$
17,877

 
$
48,055

 
$
56,233


(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 income (loss) margin attributable to ARC to EBITDA margin and adjusted EBITDA margin:

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016 (1)
 
2015
Net income (loss) margin attributable to ARC
2.8
%
 
75.4
 %
 
(16.4
)%
 
29.0
 %
Interest expense, net
1.6

 
1.6

 
1.5

 
1.6

Income tax provision (benefit)
2.2

 
(68.9
)
 
(1.9
)
 
(22.1
)
Depreciation and amortization
7.8

 
7.9

 
7.7

 
7.9

EBITDA margin
14.4

 
16.0

 
(9.1
)
 
16.4

Loss on extinguishment of debt
0.1

 
0.1

 
0.1

 
0.1

Goodwill impairment

 

 
24.0

 

Trade secret litigation costs

 

 

 

Restructuring expense

 

 

 

Stock-based compensation
0.6

 
0.7

 
0.7

 
0.8

Adjusted EBITDA margin
15.1
%
 
16.8
 %
 
15.6
 %
 
17.3
 %
 
(1)
Column does not foot due to rounding


23



The following is a reconciliation of net income (loss) attributable to ARC Document Solutions, Inc. to unaudited adjusted net income attributable to ARC Document Solutions, Inc.:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(In thousands, except per share amounts)
2016
 
2015
 
2016
 
2015
Net income (loss) attributable to ARC Document Solutions, Inc.
$
2,841

 
$
80,286

 
$
(50,489
)
 
$
93,979

Loss on extinguishment of debt
66

 
96

 
156

 
193

Goodwill impairment

 

 
73,920

 

Restructuring expense

 
4

 
7

 
89

Trade secret litigation costs

 

 

 
34

Income tax benefit related to above items
(26
)
 
(41
)
 
(13,395
)
 
(125
)
Deferred tax valuation allowance and other discrete tax items
138

 
(76,147
)
 
341

 
(80,554
)
Unaudited adjusted net income attributable to ARC Document Solutions, Inc.
$
3,019

 
$
4,198

 
$
10,540

 
$
13,616

 
 
 
 
 
 
 
 
Actual:
 
 
 
 
 
 
 
Earnings (loss) per share attributable to ARC Document Solutions, Inc. shareholders:
 
 
 
 
 
 
 
Basic
$
0.06

 
$
1.72

 
$
(1.10
)
 
$
2.02

Diluted
$
0.06

 
$
1.69

 
$
(1.10
)
 
$
1.98

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
45,599

 
46,698

 
46,055

 
46,601

Diluted
46,189

 
47,557

 
46,055

 
47,541

Adjusted:
 
 
 
 
 
 
 
Earnings per share attributable to ARC Document Solutions, Inc. shareholders:
 
 
 
 
 
 
 
Basic
$
0.07

 
$
0.09

 
$
0.23

 
$
0.29

Diluted
$
0.07

 
$
0.09

 
$
0.23

 
$
0.29

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
45,599

 
46,698

 
46,055

 
46,601

Diluted
46,189

 
47,557

 
46,655

 
47,541





24



Results of Operations
 
 
Three Months Ended September 30,
 
Increase (decrease)
 
Nine Months Ended 
 September 30,
 
Increase (decrease)
(In millions, except percentages)
2016 (1)
 
2015
 
$
 
%
 
2016 (1)
 
2015
 
$
 
%
CDIM
$
53.2

 
$
54.7

 
$
(1.5
)
 
(2.7
)%
 
$
161.8

 
$
168.2

 
$
(6.4
)
 
(3.8
)%
MPS
32.8

 
35.9

 
(3.1
)
 
(8.7
)%
 
100.1

 
108.9

 
(8.9
)
 
(8.1
)%
AIM
3.2

 
3.8

 
(0.6
)
 
(15.9
)%
 
10.6

 
9.9

 
0.6

 
6.4
 %
Total service sales
89.2

 
94.4

 
(5.2
)
 
(5.5
)%
 
272.4

 
287.0

 
(14.7
)
 
(5.1
)%
Equipment and supplies sales
11.3

 
12.0

 
(0.8
)
 
(6.4
)%
 
35.4

 
37.1

 
(1.7
)
 
(4.6
)%
Total net sales
$
100.4

 
$
106.4

 
$
(6.0
)
 
(5.6
)%
 
$
307.8

 
$
324.1

 
$
(16.4
)
 
(5.0
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit
$
32.7

 
$
35.9

 
$
(3.2
)
 
(8.9
)%
 
$
102.9

 
$
112.8

 
$
(10.0
)
 
(8.8
)%
Selling, general and administrative expenses
$
24.9

 
$
25.8

 
$
(0.9
)
 
(3.6
)%
 
$
76.8

 
$
80.4

 
$
(3.7
)
 
(4.5
)%
Amortization of intangibles
$
1.2

 
$
1.4

 
$
(0.2
)
 
(15.6
)%
 
$
3.7

 
$
4.3

 
$
(0.6
)
 
(14.0
)%
Goodwill impairment
$

 
$

 
$

 
 %
 
$
73.9

 
$

 
$
73.9

 
100.0
 %
Restructuring expense
$

 
$

 
$

 
 %
 
$

 
$
0.1

 
$
(0.1
)
 
(92.1
)%
Loss on extinguishment of debt
$
0.1

 
$
0.1

 
$

 
(31.3
)%
 
$
0.2

 
$
0.2

 
$

 
(19.2
)%
Interest expense, net
$
1.6

 
$
1.7

 
$
(0.1
)
 
(6.9
)%
 
$
4.5

 
$