NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data or where otherwise noted)
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 Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the 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 Consolidated Financial Statements.
Correction to 2016 Financial Statements
Subsequent to the issuance of the Company's 2016 Consolidated Financial Statements, management identified an immaterial error in the balance sheet presentation of the Company's deferred tax assets and liabilities as of December 31, 2016. In its 2016 Consolidated Financial Statements, the Company presented its deferred taxes on a gross basis; however, such deferred taxes should have been presented on a net basis by taxing jurisdiction in accordance with Accounting Standards Codification (ASC) 740,
Income Taxes
. As a result of the error, the Company has corrected the deferred tax assets and deferred tax liabilities balances as of December 31, 2016 in the accompanying Consolidated Balance Sheets. The correction resulted in a decrease to the Company's deferred tax liabilities balance of
$30.3 million
with a corresponding decrease of the same amount to the Company's deferred tax assets balance as of December 31, 2016. This correction had no impact to the Company's previously reported Consolidated Statements of Operations, Consolidated Statements of Comprehensive Income (Loss), Consolidated Statements of Equity, Consolidated Statements of Cash Flows, or Notes to the Consolidated Financial Statements. The Company has concluded that the error correction was not material to the Consolidated Financial Statements.
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, 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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
Cash equivalents include demand deposits and short-term investments with a maturity of three months or less when purchased.
The Company maintains its cash deposits at numerous banks located throughout the United States, Canada, India, Australia, United Arab Emirates, the United Kingdom and China, which at times, may exceed federally insured limits. UDS, the Company’s
joint venture in China, held
$11.9 million
and
$11.7 million
of the Company’s cash and cash equivalents as of
December 31, 2017
and
2016
, respectively. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risk on cash and cash equivalents.
Concentrations of Credit Risk and Significant Vendors
Concentrations of credit risk with respect to trade receivables are limited due to a large, diverse customer base.
No
individual customer represented more than
2%
,
2%
, or
4%
of net sales during
2017
,
2016
, and
2015
, respectively.
The Company has geographic concentration risk as sales in California, as a percent of total sales, were approximately
34%
,
33%
, and
31%
for
2017
,
2016
, and
2015
, respectively.
The Company contracts with various suppliers. Although there are a limited number of suppliers that could supply the Company’s inventory, management believes any shortfalls from existing suppliers would be absorbed from other suppliers on comparable terms. However, a change in suppliers could cause a delay in sales and adversely affect results.
Purchases from the Company’s three largest vendors during
2017
,
2016
, and
2015
comprised approximately
46%
,
40%
, and
37%
respectively, of the Company’s total purchases of inventory and supplies.
Allowance for Doubtful Accounts
The Company performs periodic credit evaluations of the financial condition of its customers, monitors collections and payments from customers, and generally does not require collateral. The Company provides for the possible inability to collect accounts receivable by recording an allowance for doubtful accounts. The Company writes off an account when it is considered uncollectible. The Company estimates the allowance for doubtful accounts based on historical experience, aging of accounts receivable, and information regarding the credit worthiness of its customers. Additionally, the Company provides an allowance for returns and discounts based on historical experience. The allowance for doubtful accounts activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
Beginning
of Period
|
|
Charges to
Cost and
Expenses
|
|
Deductions
(1)
|
|
Balance at
End of
Period
|
Year ended December 31, 2017
|
|
|
|
|
|
|
|
Allowance for accounts receivable
|
$
|
2,060
|
|
|
$
|
1,249
|
|
|
$
|
(968
|
)
|
|
$
|
2,341
|
|
Year ended December 31, 2016
|
|
|
|
|
|
|
|
Allowance for accounts receivable
|
$
|
2,094
|
|
|
$
|
918
|
|
|
$
|
(952
|
)
|
|
$
|
2,060
|
|
Year ended December 31, 2015
|
|
|
|
|
|
|
|
Allowance for accounts receivable
|
$
|
2,413
|
|
|
$
|
340
|
|
|
$
|
(659
|
)
|
|
$
|
2,094
|
|
(1)
Deductions represent uncollectible accounts written-off net of recoveries.
Inventories
Inventories are valued at the lower of cost (determined on a first-in, first-out basis; or average cost) or net realizable value. Inventories primarily consist of reprographics materials for use and resale, and equipment for resale. On an ongoing basis, inventories are reviewed and adjusted for estimated obsolescence or unmarketable inventories to reflect the lower of cost or net realizable value. Charges to increase inventory reserves are recorded as an increase in cost of sales. As of
December 31, 2017
and
2016
, the reserves for inventory obsolescence was
$0.9 million
and
0.7 million
, respectively.
Income Taxes
Deferred tax assets and liabilities reflect temporary differences between the amount of assets and liabilities for financial and tax reporting purposes. Such amounts are adjusted, as appropriate, to reflect changes in tax rates expected to be in effect when the temporary differences reverse. A valuation allowance is recorded to reduce the Company's deferred tax assets to the amount that is more likely than not to be realized. Changes in tax laws or accounting standards and methods may affect recorded deferred taxes in future periods.
When establishing a valuation allowance, the Company considers future sources of taxable income such as future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards and tax planning strategies. A tax planning strategy is an action that: is prudent and feasible; an enterprise ordinarily might not take, but would take to prevent an operating loss or tax credit carryforward from expiring unused; and would result in realization of deferred tax assets. In the event the Company determines that its deferred tax assets, more likely than not, will not be realized
in the future, the valuation adjustment to the deferred tax assets will be charged to earnings in the period in which the Company makes such a determination.
At September 30, 2015 as a result of sustained profitability in the U.S. evidenced by three years of earnings and forecasted continuing profitability (as defined by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740-10, Income Taxes), the Company determined it was more likely than not future earnings would be sufficient to realize deferred tax assets in the U.S. Accordingly the Company reversed most of its income tax valuation allowance resulting in non-cash income tax benefit of
$80.7 million
for the year ended December 31, 2015. The Company has a
$2.4 million
valuation allowance against certain deferred tax assets as of December 31, 2017.
In future quarters the Company will continue to evaluate its historical results for the preceding twelve quarters and its future projections to determine whether the Company will generate sufficient taxable income to utilize its deferred tax assets, and whether a valuation allowance is required.
The Company calculates its current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed in subsequent years. Adjustments based on filed returns are recorded when identified.
Income taxes have not been provided on certain undistributed earnings of foreign subsidiaries because such earnings are considered to be permanently reinvested.
The amount of taxable income or loss the Company reports to the various tax jurisdictions is subject to ongoing audits by federal, state and foreign tax authorities. The Company's estimate of the potential outcome of any uncertain tax issue is subject to management’s assessment of relevant risks, facts, and circumstances existing at that time. The Company uses a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. The Company records a liability for the difference between the benefit recognized and measured and tax position taken or expected to be taken on its tax return. To the extent that the Company's assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. The Company reports tax-related interest and penalties as a component of income tax expense.
The Company’s effective income tax rate differs from the statutory tax rate primarily due to the effect of the Tax Cuts and Jobs Act (the "TCJA") enacted on December 22, 2017, the valuation allowance on certain of the Company’s deferred tax assets, state income taxes, stock-based compensation, goodwill and other identifiable intangibles, and other discrete items. See Note 7 “Income Taxes” for further information.
Property and Equipment
Property and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives, as follows:
|
|
|
|
Buildings
|
|
10-20 years
|
Leasehold improvements
|
|
10-20 years or lease term, if shorter
|
Machinery and equipment
|
|
3-7 years
|
Furniture and fixtures
|
|
3-7 years
|
Assets acquired under capital lease arrangements are included in machinery and equipment, are recorded at the present value of the minimum lease payments, and are depreciated using the straight-line method over the life of the asset or term of the lease, whichever is shorter. Expenses for repairs and maintenance are charged to expense as incurred, while renewals and betterments are capitalized. Gains or losses on the sale or disposal of property and equipment are reflected in operating income.
The Company accounts for software costs developed for internal use in accordance with ASC 350-40,
Intangibles – Goodwill and Other,
which requires companies to capitalize certain qualifying costs incurred during the application development stage of the related software development project. The primary use of this software is for internal use and, accordingly, such capitalized software development costs are depreciated on a straight-line basis over the economic lives of the related products not to exceed
three
years. The Company’s machinery and equipment (see Note 4 “Property and Equipment”) includes
$1.7 million
and
$0.8 million
of capitalized software development costs as of
December 31, 2017
and
2016
, net of accumulated amortization of
$18.9 million
and
$18.1 million
as of
December 31, 2017
and
2016
, respectively. Depreciation expense includes the amortization of
capitalized software development costs which amounted to
$0.8 million
,
$0.4 million
, and
$0.2 million
during the years ended
December 31, 2017
,
2016
, and
2015
, respectively.
Impairment of 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 had
no
long-lived asset impairments in
2017
,
2016
or
2015
.
Goodwill and Other Intangible Assets
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.
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.
Traditionally, 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 an implied fair value of goodwill.
For its annual goodwill impairment test as of September 30, 2017, the Company elected to early-adopt ASU 2017-04 which simplifies subsequent goodwill measurement by eliminating step two from the goodwill impairment test.
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. 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.
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.
Deferred Financing Costs
Direct costs incurred in connection with debt agreements are recorded as incurred and amortized based on the effective interest method for the Company's borrowings under its credit agreement ("Credit Agreement"). At
December 31, 2017
and
2016
, the Company had deferred financing costs of
$0.8 million
and
$1.0 million
, respectively, net of accumulated amortization of
$0.1 million
and
$1.6 million
, respectively.
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 Consolidated Balance Sheet were
$8.5 million
and
$3.9 million
as of
December 31, 2017
and
2016
, 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 and capital leases:
The carrying amount of the Company’s capital leases reported in the 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 Consolidated Balance Sheet as of
December 31, 2017
for borrowings under its Credit Agreement is
$100.0 million
, excluding unamortized deferred financing fees. The Company has determined, utilizing observable market quotes, that the fair value of borrowings under its Credit Agreement is
$100.0 million
as of
December 31, 2017
.
Insurance Liability
The Company maintains a high deductible insurance policy for a significant portion of its risks and associated liabilities with respect to workers’ compensation. The Company’s deductible is
$250 thousand
per individual. The accrued liabilities associated with this program are based on the Company’s estimate of the ultimate costs to settle known claims, as well as claims incurred but not yet reported to the Company, as of the balance sheet date. The Company’s estimated liability is not discounted and is based upon an actuarial report obtained from a third party. The actuarial report uses information provided by the Company’s insurance brokers and insurers, combined with the Company’s judgments regarding a number of assumptions and factors, including the frequency and severity of claims, claims development history, case jurisdiction, applicable legislation, and the Company’s claims settlement practices.
The Company is self-insured for healthcare benefits provided to certain employees in the United States, with a stop-loss at
$250 thousand
per individual. Liabilities associated with the risks that are retained by the Company are estimated, in part, by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions. The Company’s results could be materially affected by claims and other expenses related to such plans if future occurrences and claims differ from these assumptions and historical trends. Other employees are covered by other offered healthcare benefits.
Commitments and Contingencies
In the normal course of business, the Company estimates potential future loss accruals related to legal, workers’ compensation, healthcare, tax and other contingencies. These accruals require management’s judgment on the outcome of various events based on the best available information. However, due to changes in facts and circumstances, the ultimate outcomes could differ from management’s estimates.
Revenue Recognition
The Company applies the provisions of ASC 605,
Revenue Recognition
. In general, the Company recognizes revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery of products has occurred or services have been rendered, (iii) the sales price charged is fixed or determinable and (iv) collection is reasonably assured. Net sales include an allowance for estimated sales returns and discounts.
The Company recognizes service revenue when services have been rendered, while revenues from the resale of equipment and supplies are recognized upon delivery to the customer or upon customer pickup. Revenue from equipment service agreements are recognized over the term of the service agreement.
The Company has established contractual pricing for certain large national customer accounts (“Global Solutions”). These contracts generally establish uniform pricing at all operating segments for Global Solutions. Revenues earned from the Company’s Global Solutions are recognized in the same manner as non-Global Solutions revenues.
Included in revenues are fees charged to customers for shipping, handling, and delivery services. Such revenues amounted to
$10.7 million
,
$11.1 million
, and
$11.2 million
for
2017
,
2016
, and
2015
, respectively.
Revenues from hosted software licensing activities are recognized ratably over the term of the license. Revenues from software licensing activities comprise less than
1%
of the Company’s consolidated revenues during the years ended
December 31, 2017
,
2016
, and
2015
.
Management provides for returns, discounts and allowances based on historic experience and adjusts such allowances as considered necessary.
Comprehensive (Loss) Income
The Company’s comprehensive (loss) income includes foreign currency translation adjustments and the fair value adjustment of derivatives, net of taxes.
Asset and liability accounts of international operations are translated into the Company’s functional currency, U.S. dollars, at current rates. Revenues and expenses are translated at the average currency rate for the fiscal year.
Segment and Geographic 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Service Sales
|
|
|
|
|
|
CDIM
|
$
|
205,083
|
|
|
$
|
212,511
|
|
|
$
|
221,174
|
|
MPS
|
129,479
|
|
|
131,811
|
|
|
144,244
|
|
AIM
|
12,764
|
|
|
14,019
|
|
|
13,220
|
|
Total services sales
|
347,326
|
|
|
358,341
|
|
|
378,638
|
|
Equipment and Supplies Sales
|
47,253
|
|
|
47,980
|
|
|
50,027
|
|
Total net sales
|
$
|
394,579
|
|
|
$
|
406,321
|
|
|
$
|
428,665
|
|
The Company recognizes revenues in geographic areas based on the location to which the product was shipped or services have been rendered. See table below for revenues and property and equipment, net, attributable to the Company’s U.S. operations and foreign operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
U.S.
|
|
Foreign
Countries
|
|
Total
|
|
U.S.
|
|
Foreign
Countries
|
|
Total
|
|
U.S.
|
|
Foreign
Countries
|
|
Total
|
Revenues from external customers
|
|
$
|
339,250
|
|
|
$
|
55,329
|
|
|
$
|
394,579
|
|
|
$
|
353,077
|
|
|
$
|
53,244
|
|
|
$
|
406,321
|
|
|
$
|
366,082
|
|
|
$
|
62,583
|
|
|
$
|
428,665
|
|
Property and equipment, net
|
|
$
|
58,287
|
|
|
$
|
5,958
|
|
|
$
|
64,245
|
|
|
$
|
54,847
|
|
|
$
|
5,888
|
|
|
$
|
60,735
|
|
|
$
|
50,777
|
|
|
$
|
6,813
|
|
|
$
|
57,590
|
|
Advertising and Shipping and Handling Costs
Advertising costs are expensed as incurred and approximated
$1.7 million
,
$1.9 million
, and
$2.0 million
during
2017
,
2016
, and
2015
, respectively. Shipping and handling costs incurred by the Company are included in cost of sales.
Stock-Based Compensation
The Company applies the Black-Scholes valuation model in determining the fair value of share-based payments to employees, which is then amortized on a straight-line basis over the requisite service period.
Total stock-based compensation for
2017
,
2016
, and
2015
, was
$2.9 million
,
$2.7 million
, and
$3.5 million
, respectively, and was recorded in selling, general, and administrative expenses, consistent with the classification of the underlying salaries. In
accordance with ASC 718,
Income Taxes
, any excess tax benefit resulting from stock-based compensation, in the Consolidated Statements of Cash Flows, are classified as financing cash inflows.
The weighted average fair value at the grant date for options issued in
2017
,
2016
, and
2015
, was
$2.57
,
$2.07
, and
$4.88
respectively. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model using the following weighted average assumptions for
2017
,
2016
, and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Weighted average assumptions used:
|
|
|
|
|
|
|
Risk free interest rate
|
|
2.11
|
%
|
|
1.43
|
%
|
|
1.62
|
%
|
Expected volatility
|
|
54.9
|
%
|
|
56.8
|
%
|
|
56.2
|
%
|
Expected dividend yield
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Using historical exercise data as a basis, the Company determined that the expected term for stock options issued in
2017
,
2016
, and
2015
was
6.5
years,
6.5
years, and
6.4
years, respectively.
For fiscal years
2017
,
2016
, and
2015
, expected stock price volatility is based on the Company’s historical volatility for a period equal to the expected term. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant with an equivalent remaining term. The Company has not paid dividends in the past and does not currently plan to pay dividends in the near future. The Company accounts for forfeitures of share-based awards when they occur.
As of
December 31, 2017
, total unrecognized stock-based compensation expense related to nonvested stock-based compensation was approximately
$3.1 million
, which is expected to be recognized over a weighted average period of approximately
1.8
years.
For additional information, see Note 8 “Employee Stock Purchase Plan and Stock Plan.”
Research and Development Expenses
Research and development activities relate to costs associated with the design and testing of new technology or enhancements and maintenance to existing technology. Such costs are expensed as incurred are primarily recorded to cost of sales. In total, research and development amounted to
$6.9 million
,
$6.2 million
, and
$5.8 million
during
2017
,
2016
, and
2015
, respectively.
Noncontrolling Interest
The Company accounted for its investment in UNIS Document Solutions Co. Ltd., (“UDS”) under the purchase method of accounting, in accordance with ASC 805,
Business Combinations
. UDS has been consolidated in the Company’s financial statements from the date of acquisition. Noncontrolling interest, which represents the
35 percent
non-controlling interest in UDS, is reflected on the Company’s Consolidated Financial Statements.
Sales Taxes
The Company bills sales taxes, as applicable, to its customers. The Company acts as an agent and bills, collects, and remits the sales tax to the proper government jurisdiction. The sales taxes are accounted for on a net basis, and therefore are not included as part of the Company’s revenue.
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. There were
5.3 million
,
4.7 million
, and
2.0 million
common shares excluded from the calculation of diluted net (loss) income attributable to ARC per common share as their effect would have been anti-dilutive for
2017
,
2016
, and
2015
, respectively. 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
2017
,
2016
, and
2015
:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Weighted average common shares outstanding during the period — basic
|
45,669
|
|
|
45,932
|
|
|
46,631
|
|
Effect of dilutive stock options
|
—
|
|
|
—
|
|
|
901
|
|
Weighted average common shares outstanding during the period — diluted
|
45,669
|
|
|
45,932
|
|
|
47,532
|
|
Recently Adopted Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04,
Intangibles-Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment
. The new guidance simplifies subsequent goodwill measurement by eliminating step two from the goodwill impairment test. Accordingly, the Company is required to perform its annual, or interim, goodwill impairment tests by comparing the fair value of a reporting unit with its respective carrying value, and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The Company elected to early-adopt ASU 2017-04 for its annual goodwill impairment test as of September 30, 2017. See Note 3, “Goodwill and Other Intangibles” for further information regarding the process of assessing goodwill impairment and the results of the Company's 2017 annual goodwill impairment test.
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. The Company adopted ASU 2016-09 on January 1, 2017, which resulted in a cumulative adjustment to equity of
$0.2 million
, and an election to account for forfeitures of share-based awards when they occur.
Recent Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
. 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. In addition, ASU 2014-09 provides guidance on the recognition of costs related to obtaining and fulfilling customer contracts. The new guidance is effective for 2018, including interim periods.
The Company has performed an analysis of each of its service revenue categories (CDIM, MPS and AIM) to identify any differences in the recognition, measurement, or presentation of revenue recognition and related costs. In addition, the Company analyzed its product revenue category (equipment and supplies sales). Based on its analyses, the Company expects the pattern of revenue recognition and the costs to acquire customer contracts to remain consistent with the Company's current revenue recognition policy. The Company also analyzed detailed disclosure requirements as well as any changes to the Company’s systems and internal controls to support adoption of the new standard.
T
he Company will adopt the new standard effective January 1, 2018 under the modified retrospective method and expects the impact to its consolidated financial statements to be immaterial.
In August 2016, the FASB issued 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 the Company in 2018. The adoption is not expected to have a material impact to the Company's consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Codification (“ASC”) 842 (“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 the Company January 1, 2019. While the Company is continuing to assess the potential impacts that ASC 842 will have on its consolidated financial statements, the Company believes that the most significant impact relates to its accounting for facility leases related to its service centers and office space, which are currently classified as operating leases. The Company expects the accounting for capital leases related to its machinery and equipment will remain substantially unchanged under the new standard. Due to the substantial number of operating leases that it has, the Company believes this ASU will increase assets and liabilities by the same material amount on its consolidated balance sheet. The Company’s current undiscounted minimum commitments under noncancelable operating leases is approximately
$64.0 million
. The Company does not believe adoption of this ASU will have a significant impact to its consolidated statements of operations, equity, or cash flows.
3. GOODWILL AND OTHER INTANGIBLES
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.
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.
Traditionally, 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 an implied fair value of goodwill.
For its annual goodwill impairment test as of September 30, 2017, the Company elected to early-adopt ASU 2017-04 which simplifies subsequent goodwill measurement by eliminating step two from the goodwill impairment test. As a result, the Company compared the fair value of a reporting unit with its respective carrying value, and recognized an impairment charge for the amount by which the carrying amount exceeded the reporting unit’s fair value.
At September 30, 2017, the Company's goodwill impairment analysis showed one reporting unit with goodwill attributed to it had a carrying amount which exceeded its fair value. The underperformance of the Company relative to its forecast in the third quarter of 2017, and more specifically, the underperformance against forecast of one of the Company's reporting units which previously had goodwill impairment in 2016 drove the decline in the fair value of the reporting unit. As a result, the Company recorded a pretax, non-cash charge for the three months ended September 30, 2017 to reduce the carrying value of goodwill by
$17.6 million
.
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 interim goodwill impairment analysis as of June 30, 2016 indicated that
five
of its
eight
reporting units,
four
in the United States and
one
in Canada, failed step one of the impairment analysis. Accordingly, the Company recorded a pretax, non-cash charge for the three months ended June 30, 2016 to reduce the carrying value of goodwill by
$73.9 million
.
Given the changing document and printing needs of the Company’s customers, and the uncertainties regarding the effect on the Company’s business, there can be no assurance that the estimates and assumptions made for purposes of the Company’s goodwill impairment test in 2017 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 2018, 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, 2016
through
December 31, 2017
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Goodwill
|
|
Accumulated
Impairment
Loss
|
|
Net
Carrying
Amount
|
|
|
|
|
|
|
January 1, 2016
|
$
|
405,558
|
|
|
$
|
192,950
|
|
|
$
|
212,608
|
|
Goodwill impairment
|
—
|
|
|
73,920
|
|
|
(73,920
|
)
|
December 31, 2016
|
405,558
|
|
|
266,870
|
|
|
138,688
|
|
Goodwill impairment
|
—
|
|
|
17,637
|
|
|
(17,637
|
)
|
December 31, 2017
|
$
|
405,558
|
|
|
$
|
284,507
|
|
|
$
|
121,051
|
|
Long-lived and Other Intangible 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 potential impairments of its long lived assets as of September 30, 2017 and concluded that there was no impairment.
The following table sets forth the Company’s other intangible assets resulting from business acquisitions as of
December 31, 2017
and
2016
which continue to be amortized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Amortizable other intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
99,486
|
|
|
$
|
90,805
|
|
|
$
|
8,681
|
|
|
$
|
99,104
|
|
|
$
|
86,305
|
|
|
$
|
12,799
|
|
Trade names and trademarks
|
20,297
|
|
|
19,910
|
|
|
387
|
|
|
20,281
|
|
|
19,878
|
|
|
403
|
|
|
$
|
119,783
|
|
|
$
|
110,715
|
|
|
$
|
9,068
|
|
|
$
|
119,385
|
|
|
$
|
106,183
|
|
|
$
|
13,202
|
|
Estimated future amortization expense of other intangible assets for each of the next five fiscal years and thereafter are as follows:
|
|
|
|
|
2018
|
$
|
3,877
|
|
2019
|
3,152
|
|
2020
|
1,540
|
|
2021
|
180
|
|
2022
|
103
|
|
Thereafter
|
216
|
|
|
$
|
9,068
|
|
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Machinery and equipment
|
$
|
245,172
|
|
|
$
|
242,805
|
|
Buildings and leasehold improvements
|
15,512
|
|
|
16,688
|
|
Furniture and fixtures
|
2,254
|
|
|
2,434
|
|
|
262,938
|
|
|
261,927
|
|
Less accumulated depreciation
|
(198,693
|
)
|
|
(201,192
|
)
|
|
$
|
64,245
|
|
|
$
|
60,735
|
|
Depreciation expense was
$29.0 million
,
$26.9 million
, and
$28.0 million
for
2017
,
2016
and
2015
, respectively.
5. LONG-TERM DEBT
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Term Loan maturing 2022 net of deferred financing fees of
$757
and $1,039;
3.12%
and 2.86% interest rate at December 31, 2017 and 2016
|
$
|
56,993
|
|
|
$
|
119,961
|
|
Revolving Loans;
3.64%
and 2.64% interest rate at December 31, 2017 and 2016
|
42,250
|
|
|
950
|
|
Various capital leases; weighted average interest rate of
5.0%
and 5.6% at December 31, 2017 and 2016; principal and interest payable monthly through December 2022
|
45,157
|
|
|
36,231
|
|
Various other notes payable with a weighted average interest rate of
10.7%
at December 31, 2017 and 2016; principal and interest payable monthly through November 2019
|
17
|
|
|
31
|
|
|
144,417
|
|
|
157,173
|
|
Less current portion
|
(20,791
|
)
|
|
(13,773
|
)
|
|
$
|
123,626
|
|
|
$
|
143,400
|
|
Credit Agreement
On July 14, 2017, the Company amended its Credit Agreement which was originally entered into on November 20, 2014 with Wells Fargo Bank, National Association, as administrative agent and the lenders party thereto.
Prior to being amended, the Credit Agreement provided for the extension of term loans (“Term Loans”) in an aggregate principal amount of
$175.0 million
. In addition, prior to being amended, the Credit Agreement provided for the extension of revolving loans (“Revolving Loans”) in an aggregate principal amount not to exceed
$30.0 million
. The amendment increased the maximum aggregate principal amount of Revolving Loans under the agreement from
$30 million
to
$80 million
and reduced the outstanding principal amount of the Term Loan under the agreement to
$60 million
. Upon the execution of the amendment to the Credit Agreement, the total principal amount outstanding under the agreement remained unchanged at
$110.0 million
. As a result of the amendment to the Credit Agreement, the principal of the Term Loan amortizes at an annual rate of
7.5%
during the first and second years following the date of the amendment and at an annual rate of
10%
during the third, fourth and fifth years following the date of the amendment, with any remaining balance payable upon the maturity date. The amendment also extended the maturity date for both the Revolving Loans and the Term Loans until July 14, 2022.
As of
December 31, 2017
, the Company's borrowing availability of Revolving Loans under the
$80.0 million
Revolving Loan commitment was
$35.9 million
, after deducting outstanding letters of credit of
$1.8 million
and outstanding Revolving Loans of
$42.3 million
.
Loans borrowed under the 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
1.25%
to
2.25%
, based on the Company’s Total Leverage Ratio (as defined in the Credit Agreement). Loans borrowed under the 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%
per annum, 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
0.25%
to
1.25%
, based on the Company’s Total Leverage Ratio. The amendment reduced the rate of interest payable on the loans borrowed under the Credit Agreement by
0.25%
.
The Company pays 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 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 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 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 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; and (ii) a Fixed Charge Coverage Ratio (as defined in the Credit Agreement), as of the last day of each fiscal quarter, an amount not less than
1.15
to 1.00.
The 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 Credit Agreement are guaranteed by the Company and each other United States domestic subsidiary of the Company. The 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).
Prior to entering into the amendment to our Credit Agreement in the third quarter of 2017, the Company had paid
$68.2 million
in aggregate principal on its Credit Agreement. Principal prepayments on the Credit Agreement of
$14.2 million
in
2017
resulted in a loss on extinguishment and modification of debt of
$0.2 million
for
2017
.
Minimum future maturities of long-term debt, excludes deferred financing fees, and capital lease obligations as of
December 31, 2017
are as follows:
|
|
|
|
|
|
|
|
|
|
Long-Term Debt
|
|
Capital Lease Obligations
|
Year ending December 31:
|
|
|
|
2018
|
$
|
4,513
|
|
|
$
|
16,278
|
|
2019
|
5,254
|
|
|
12,544
|
|
2020
|
6,000
|
|
|
9,103
|
|
2021
|
6,000
|
|
|
5,708
|
|
2022
|
78,250
|
|
|
1,524
|
|
Thereafter
|
—
|
|
|
—
|
|
|
$
|
100,017
|
|
|
$
|
45,157
|
|
6. COMMITMENTS AND CONTINGENCIES
The Company leases machinery, equipment, and office and operational facilities under non-cancelable operating lease agreements. Certain lease agreements for the Company’s facilities generally contain renewal options and provide for annual increases in rent based on the local Consumer Price Index. The following is a schedule of the Company’s future minimum lease payments as of
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Party
|
|
Related Party
|
|
Total
|
Year ending December 31:
|
|
|
|
|
|
|
2018
|
|
$
|
17,766
|
|
|
$
|
504
|
|
|
$
|
18,270
|
|
2019
|
|
11,130
|
|
|
514
|
|
|
11,644
|
|
2020
|
|
8,726
|
|
|
514
|
|
|
9,240
|
|
2021
|
|
5,857
|
|
|
514
|
|
|
6,371
|
|
2022
|
|
5,222
|
|
|
514
|
|
|
5,736
|
|
Thereafter
|
|
12,223
|
|
|
514
|
|
|
12,737
|
|
|
|
$
|
60,924
|
|
|
$
|
3,074
|
|
|
$
|
63,998
|
|
Total rent expense under operating leases, including month-to-month rentals, amounted to
$22.1 million
,
$23.7 million
, and
$24.0 million
during
2017
,
2016
and
2015
, respectively. Under certain lease agreements, the Company is responsible for other costs such as property taxes, insurance, maintenance, and utilities.
The Company leased several of its facilities under lease agreements with entities owned by certain of its current and former executive officers which expire through December 2023. The rental payments on these facilities amounted to
$0.5 million
,
$0.5 million
and
$0.5 million
during
2017
,
2016
and
2015
, respectively.
The Company has entered into indemnification agreements with each director and named executive officer which provide indemnification under certain circumstances for acts and omissions which may not be covered by any directors’ and officers’ liability insurance. The indemnification agreements may require the Company, among other things, to indemnify its officers and directors against certain liabilities that may arise by reason of their status or service as officers and directors (other than liabilities arising from willful misconduct of a culpable nature), to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified, and to obtain officers’ and directors’ insurance if available on reasonable terms. There have been no events to date which would require the Company to indemnify its officers or directors.
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. INCOME TAXES
In December 2017, the Tax Cuts and Jobs Act (the “TCJA”) was enacted. The TCJA includes a number of changes to existing U.S. tax laws that impact the Company. This includes a reduction to the federal corporate tax rate from 35 percent to 21 percent for the tax years beginning after December 31, 2017. The TCJA also provides for a one-time transition tax on certain foreign earnings as well as changes beginning in 2018 regarding the deductibility of interest expense, additional limitations on executive compensation, meals and entertainment expenses and the inclusion of certain foreign earnings in U.S. taxable income.
The Company recognized
$11.9 million
of tax expense in the fourth quarter of 2017 primarily due to the reduction in its net U.S. deferred tax assets for the 14% decrease in the U.S. federal statutory rate. In accordance with Staff Accounting Bulletin No. 118, which provides guidance on accounting for the impact of the TCJA, in effect allowing an entity to use a methodology similar to the measurement period in a business combination, as of
March 5, 2018
, the Company has not completed its accounting for the tax effects of the TCJA. As such, the Company has recorded a reasonable estimate of the impact from the TCJA, but is still analyzing the TCJA and refining its calculations. Additionally, further guidance from the IRS, SEC, or the FASB could result in changes to the Company’s accounting for the tax effects of the TCJA. The accounting is expected to be completed by the time the calendar year 2017 federal corporate tax income tax return is filed in late 2018.
The following table includes the consolidated income tax provision for federal, state, and foreign income taxes related to the Company’s total earnings before taxes for
2017
,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
(170
|
)
|
|
$
|
42
|
|
|
$
|
219
|
|
State
|
|
139
|
|
|
89
|
|
|
364
|
|
Foreign
|
|
438
|
|
|
165
|
|
|
481
|
|
|
|
407
|
|
|
296
|
|
|
1,064
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
15,669
|
|
|
(3,236
|
)
|
|
(56,750
|
)
|
State
|
|
(751
|
)
|
|
(1,519
|
)
|
|
(13,705
|
)
|
Foreign
|
|
(81
|
)
|
|
95
|
|
|
(41
|
)
|
|
|
14,837
|
|
|
(4,660
|
)
|
|
(70,496
|
)
|
Income tax provision (benefit)
|
|
$
|
15,244
|
|
|
$
|
(4,364
|
)
|
|
$
|
(69,432
|
)
|
The Company's foreign earnings before taxes were
$1.0 million
,
$0.7 million
and
$1.1 million
for
2017
,
2016
and
2015
, respectively.
The consolidated deferred tax assets and liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Deferred tax assets:
|
|
|
|
Financial statement accruals not currently deductible
|
$
|
2,339
|
|
|
$
|
2,692
|
|
Accrued vacation
|
848
|
|
|
1,185
|
|
Deferred revenue
|
185
|
|
|
280
|
|
State taxes
|
29
|
|
|
48
|
|
Fixed assets
|
4,113
|
|
|
6,555
|
|
Goodwill and other identifiable intangibles
|
12,848
|
|
|
22,291
|
|
Stock-based compensation
|
4,545
|
|
|
6,072
|
|
Federal tax net operating loss carryforward
|
17,258
|
|
|
27,759
|
|
State tax net operating loss carryforward, net
|
5,951
|
|
|
4,996
|
|
State tax credits, net
|
1,164
|
|
|
958
|
|
Foreign tax credit carryforward
|
517
|
|
|
517
|
|
Foreign tax net operating loss carryforward
|
616
|
|
|
499
|
|
Federal alternative minimum tax
|
104
|
|
|
284
|
|
Interest rate hedge
|
—
|
|
|
131
|
|
Gross deferred tax assets
|
50,517
|
|
|
74,267
|
|
Less: valuation allowance
|
(2,366
|
)
|
|
(1,304
|
)
|
Net deferred tax assets
|
$
|
48,151
|
|
|
$
|
72,963
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Goodwill and other identifiable intangibles
|
$
|
(19,972
|
)
|
|
$
|
(30,296
|
)
|
Outside basis in foreign entities
|
(150
|
)
|
|
—
|
|
Net deferred tax assets
|
$
|
28,029
|
|
|
$
|
42,667
|
|
A reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Statutory federal income tax rate
|
35
|
%
|
|
35
|
%
|
|
35
|
%
|
State taxes, net of federal benefit
|
—
|
|
|
2
|
|
|
5
|
|
Foreign taxes
|
(4
|
)
|
|
—
|
|
|
—
|
|
Valuation allowance
|
(17
|
)
|
|
—
|
|
|
(289
|
)
|
Non-deductible expenses and other
|
(5
|
)
|
|
1
|
|
|
1
|
|
Section 162(m) limitation
|
(1
|
)
|
|
(1
|
)
|
|
1
|
|
Tax Cuts and Jobs Act enacted on December 22, 2017
|
(195
|
)
|
|
—
|
|
|
—
|
|
Discrete items for state taxes
|
(4
|
)
|
|
(1
|
)
|
|
(1
|
)
|
Non-deductible portion of goodwill impairment
|
(58
|
)
|
|
(28
|
)
|
|
—
|
|
Effective income tax rate
|
(249
|
)%
|
|
8
|
%
|
|
(248
|
)%
|
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.
The Company utilizes a rolling three years of actual and current year anticipated results as the primary measure of cumulative income/losses in recent years, as adjusted for 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 has a
$2.4 million
valuation allowance against certain deferred tax assets as of
December 31, 2017
, which increased by
$1.1 million
in 2017 primarily due to the provisions in the TCJA.
Based on the Company’s current assessment, the remaining net deferred tax assets as of December 31, 2017 are considered more likely than not to be realized. The valuation allowance of
$2.4 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 depends on future taxable income, reversals of existing taxable temporary differences or through a loss carry back. The Company has income tax receivables of
$25 thousand
as of December 31, 2017 included in other current assets in its consolidated balance sheet primarily related to income tax refunds for prior years.
As of December 31,
2017
, the Company had approximately
$82.2 million
of consolidated federal,
$96.6 million
of state and
$3.3 million
of foreign net operating loss and charitable contribution carryforwards available to offset future taxable income, respectively. The federal net operating loss carryforward began in
2011
and will begin to expire in varying amounts
between 2031 and 2037
. The charitable contribution carryforward began in
2015
and will begin to expire in varying amounts between 2020 and 2022. The state net operating loss carryforwards expire in varying amounts
between 2018 and 2037
. The foreign net operating loss carryforwards begin to expire in varying amounts
beginning in 2022
.
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2011.
There were
no
unrecognized tax benefits as of and for the years ended
December 31, 2017
or
2016
, or 2015.
8. EMPLOYEE STOCK PURCHASE PLAN AND STOCK PLAN
Employee Stock Purchase Plan
Under the Company’s Employee Stock Purchase Plan (the “ESPP”) eligible employees may purchase up to a calendar year maximum per eligible employee of the lesser of (i)
2,500
shares of common stock, or (ii) a number of shares of common stock having an aggregate fair market value of
$25 thousand
as determined on the date of purchase at
85%
of the fair market value of such shares of common stock on the applicable purchase date. The compensation expense in connection with the ESPP in
2017
,
2016
, and
2015
was
$30 thousand
,
$21 thousand
and
$19 thousand
, respectively.
Employees purchased the following shares in the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Shares purchased
|
47
|
|
|
33
|
|
|
21
|
|
Average price per share
|
$
|
2.83
|
|
|
$
|
3.59
|
|
|
$
|
5.40
|
|
Stock Plan
The Company's 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 Company's Stock Plan authorizes the Company to issue up to
3.5 million
shares of common stock. At
December 31, 2017
,
0.7 million
shares remain available for issuance under the Stock Plan.
Stock options granted under the Company's 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
2017
and
2016
, the Company granted options to acquire a total of
526 thousand
shares and
570 thousand
shares, respectively, of the Company's common stock to certain key employees with an exercise price equal to the fair market value of the Company’s common stock on the date of grant. The granted stock options vest annually over
three
to
four
years from the grant date and expire
10
years after the date of grant.
The following is a further breakdown of the stock option activity under the Stock Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Contractual
Life
(In years)
|
|
Aggregate
Intrinsic
Value
(In thousands)
|
Outstanding at December 31, 2015
|
3,953
|
|
|
$
|
5.84
|
|
|
|
|
|
Granted
|
570
|
|
|
$
|
3.74
|
|
|
|
|
|
Exercised
|
(36
|
)
|
|
$
|
2.70
|
|
|
|
|
|
Forfeited/Cancelled
|
(186
|
)
|
|
$
|
5.77
|
|
|
|
|
|
Outstanding at December 31, 2016
|
4,301
|
|
|
$
|
5.44
|
|
|
|
|
|
Granted
|
526
|
|
|
$
|
4.67
|
|
|
|
|
|
Exercised
|
(34
|
)
|
|
$
|
2.82
|
|
|
|
|
|
Forfeited/Cancelled
|
(58
|
)
|
|
$
|
6.21
|
|
|
|
|
|
Outstanding at December 31, 2017
|
4,735
|
|
|
$
|
5.36
|
|
|
5.44
|
|
$
|
28
|
|
Vested or expected to vest at December 31, 2017
|
4,735
|
|
|
$
|
5.36
|
|
|
5.44
|
|
$
|
28
|
|
Exercisable at December 31, 2017
|
3,691
|
|
|
$
|
5.46
|
|
|
4.57
|
|
$
|
26
|
|
The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the closing stock price on
December 31, 2017
and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all the option holders exercised their options on
December 31, 2017
. This amount changes based on the fair market value of the common stock. Total intrinsic value of options exercised during the years ended
December 31, 2017
,
2016
and
2015
was
$63 thousand
,
$42 thousand
and
$0.6 million
, respectively.
A summary of the Company’s non-vested stock options as of
December 31, 2017
, and changes during the year then ended is as follows:
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Grant Date
|
Non-vested Options
|
Shares
|
|
Fair Market Value
|
Non-vested at December 31, 2016
|
1,046
|
|
|
$
|
3.15
|
|
Granted
|
526
|
|
|
$
|
2.57
|
|
Vested
|
(510
|
)
|
|
$
|
3.35
|
|
Forfeited/Cancelled
|
(18
|
)
|
|
$
|
2.83
|
|
Non-vested at December 31, 2017
|
1,044
|
|
|
$
|
2.77
|
|
The following table summarizes certain information concerning outstanding options at
December 31, 2017
:
|
|
|
|
|
|
Range of Exercise Price
|
Options Outstanding at
December 31, 2017
|
$2.37 – $2.70
|
1,330
|
|
$3.65 – $4.82
|
1,020
|
|
$5.37 – $7.19
|
1,001
|
|
$8.20 – $9.09
|
1,384
|
|
$2.37 – $9.09
|
4,735
|
|
Restricted Stock
The Stock Plan provides for automatic grants of restricted stock awards to non-employee directors of the Company, as of each annual meeting of the Company’s stockholders having a then fair market value equal to
$60 thousand
.
In 2017, the Company granted
306 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
16 thousand
shares of restricted stock to each of the Company's
six
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.
In 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.
In 2015, the Company granted
116 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 restricted stock vests annually over
three
to
four
years from the grant date. In addition, the Company granted
7 thousand
shares of restricted stock to each of the Company's
six
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.
A summary of the Company’s non-vested restricted stock as of
December 31, 2017
, and changes during the year then ended is as follows:
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Grant Date
|
Non-vested Restricted Stock
|
Shares
|
|
Fair Market Value
|
Non-vested at December 31, 2016
|
388
|
|
|
$
|
5.71
|
|
Granted
|
403
|
|
|
$
|
4.49
|
|
Vested
|
(208
|
)
|
|
$
|
5.35
|
|
Forfeited/Cancelled
|
—
|
|
|
$
|
—
|
|
Non-vested at December 31, 2017
|
583
|
|
|
$
|
4.99
|
|
The total fair value of restricted stock awards vested during the years ended
December 31, 2017
,
2016
and
2015
was
$1.0 million
,
$0.4 million
and
$1.6 million
, respectively.
9. RETIREMENT PLANS
The Company sponsors a 401(k) Plan, which covers substantially all employees of the Company who have attained age 21. Under the Company’s 401(k) Plan, eligible employees may contribute up to
75%
of their annual eligible compensation (or in the case of highly compensated employees, up to
6%
of their annual eligible compensation), subject to contribution limitations imposed by the Internal Revenue Service. The Company matches
20%
of an employee’s contributions, up to a total of
4%
of that employee’s compensation. An independent third party administers the Company’s 401(k) Plan. The Company's total expense under these plans amounted to
$0.4 million
annually during
2017
,
2016
and
2015
.
10. 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 consolidated financial statements as of and for the year ended December 31,
2017
and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant Other Unobservable Inputs
|
|
December 31, 2017
|
|
December 31, 2016
|
|
Level 3
|
|
Total Losses
|
|
Level 3
|
|
Total Losses
|
Nonrecurring Fair Value Measure
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
$
|
121,051
|
|
|
$
|
17,637
|
|
|
$
|
138,688
|
|
|
$
|
73,920
|
|
In accordance with ASC 350, goodwill was written down to its implied fair value of
$121.1 million
as of September 30, 2017, resulting in an impairment charge of
$17.6 million
during
2017
. As of June 30, 2016, goodwill was written down to its implied fair value of
$138.7 million
resulting in an impairment charge of
$73.9 million
during
2016
. See Note 3, “Goodwill and Other Intangibles ” 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 consolidated financial statements as of and for the year ended
December 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant Other Unobservable Inputs
|
|
December 31, 2017
|
|
December 31, 2016
|
|
Level 2
|
|
Level 3
|
|
Total Losses
|
|
Level 2
|
|
Level 3
|
|
Total Losses
|
Recurring Fair Value Measure
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate cap contracts
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
39
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Contingent purchase price consideration for
acquired businesses
|
$
|
—
|
|
|
$
|
205
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
402
|
|
|
$
|
—
|
|
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
December 31, 2017
, 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
2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
Beginning balance
|
$
|
402
|
|
|
$
|
1,059
|
|
Additions related to acquisitions
|
27
|
|
|
104
|
|
Payments
|
(274
|
)
|
|
(571
|
)
|
Adjustments included in earnings
|
34
|
|
|
(171
|
)
|
Foreign currency translation adjustments
|
16
|
|
|
(19
|
)
|
Ending balance
|
$
|
205
|
|
|
$
|
402
|
|