ARC DOCUMENT SOLUTIONS, INC., 10-K filed on 3/1/2017
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2016
Feb. 15, 2017
Jun. 30, 2016
Document Document And Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 31, 2016 
 
 
Document Fiscal Year Focus
2016 
 
 
Document Fiscal Period Focus
FY 
 
 
Entity Registrant Name
ARC Document Solutions, Inc. 
 
 
Entity Central Index Key
0001305168 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Filer Category
Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
46,012,515 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Well-known Seasoned Issuer
No 
 
 
Entity Public Float
 
 
$ 158,572,158 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2016
Dec. 31, 2015
Current assets:
 
 
Cash and cash equivalents
$ 25,239 
$ 23,963 
Accounts receivable, net of allowances for accounts receivable of $2,060 and $2,094
59,735 
60,085 
Inventories, net
18,184 
16,972 
Prepaid expenses
3,861 
4,555 
Other current assets
4,785 
4,131 
Total current assets
111,804 
109,706 
Property and equipment, net of accumulated depreciation of $201,192 and $202,457
60,735 
57,590 
Goodwill
138,688 
212,608 
Other intangible assets, net
13,202 
17,946 
Deferred income taxes
72,963 
74,196 
Other assets
2,185 
2,492 
Total assets
399,577 
474,538 
Current liabilities:
 
 
Accounts payable
24,782 
23,989 
Accrued payroll and payroll-related expenses
12,219 
12,118 
Accrued expenses
16,138 
19,194 
Current portion of long-term debt and capital leases
13,773 
14,374 
Total current liabilities
66,912 
69,675 
Long-term debt and capital leases
143,400 
157,018 
Deferred income taxes
30,296 
35,933 
Other long-term liabilities
2,148 
2,778 
Total liabilities
242,756 
265,404 
Commitments and contingencies (Note 7)
   
   
ARC Document Solutions, Inc. stockholders’ equity:
 
 
Preferred stock, $0.001 par value, 25,000 shares authorized; 0 shares issued and outstanding
Common stock, $0.001 par value, 150,000 shares authorized; 47,428 and 47,130 shares issued and 45,988 and 47,029 shares outstanding
47 
47 
Additional paid-in capital
117,749 
115,089 
Retained earnings
41,822 
89,687 
Accumulated other comprehensive loss
(3,793)
(2,097)
Total stockholders equity before adjustment of treasury stock
155,825 
202,726 
Less cost of common stock in treasury, 1,440 and 101 shares
5,909 
612 
Total ARC Document Solutions, Inc. stockholders’ equity
149,916 
202,114 
Noncontrolling interest
6,905 
7,020 
Total equity
156,821 
209,134 
Total liabilities and equity
$ 399,577 
$ 474,538 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Dec. 31, 2016
Dec. 31, 2015
Statement of Financial Position [Abstract]
 
 
Allowances for accounts receivable
$ 2,060 
$ 2,094 
Accumulated depreciation on property and equipment
$ 201,192 
$ 202,457 
Preferred stock, par value (in dollars per share)
$ 0.001 
$ 0.001 
Preferred stock, shares authorized (in shares)
25,000,000 
25,000,000 
Preferred stock, shares issued (in shares)
Preferred stock, shares outstanding (in shares)
Common stock, par value (in dollars per share)
$ 0.001 
$ 0.001 
Common stock, shares authorized (in shares)
150,000,000 
150,000,000 
Common stock, shares issued (in shares)
47,428,000 
47,130,000 
Common stock, shares outstanding (in shares)
45,988,000 
47,029,000 
Treasury stock, shares (in shares)
1,440,000 
101,000 
Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Income Statement [Abstract]
 
 
 
Service sales
$ 358,341 
$ 378,638 
$ 371,884 
Equipment and supplies sales
47,980 
50,027 
51,872 
Total net sales
406,321 
428,665 
423,756 
Cost of sales
273,078 
280,541 
279,478 
Gross profit
133,243 
148,124 
144,278 
Selling, general and administrative expenses
100,214 
107,280 
107,672 
Amortization of intangible assets
4,833 
5,642 
5,987 
Goodwill impairment
73,920 
Restructuring expense
89 
777 
(Loss) income from operations
(45,731)
35,113 
29,842 
Other income, net
(72)
(99)
(96)
Loss on extinguishment of debt
208 
282 
5,599 
Interest expense, net
5,996 
6,974 
14,560 
(Loss) income before income tax (benefit) provision
(51,863)
27,956 
9,779 
Income tax (benefit) provision
(4,364)
(69,432)
2,348 
Net (loss) income
(47,499)
97,388 
7,431 
Income attributable to noncontrolling interest
(366)
(348)
(156)
Net (loss) income attributable to ARC Document Solutions, Inc. shareholders
$ (47,865)
$ 97,040 
$ 7,275 
(Loss) earnings per share attributable to ARC Document Solutions, Inc. shareholders:
 
 
 
Basic (dollars per share)
$ (1.04)
$ 2.08 
$ 0.16 
Diluted (dollars per share)
$ (1.04)
$ 2.04 
$ 0.15 
Weighted average common shares outstanding:
 
 
 
Basic (shares)
45,932 
46,631 
46,245 
Diluted (shares)
45,932 
47,532 
47,088 
Consolidated Statements of Comprehensive (Loss) Income (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Statement of Comprehensive Income [Abstract]
 
 
 
Net (loss) income
$ (47,499)
$ 97,388 
$ 7,431 
Other comprehensive loss, net of tax
 
 
 
Foreign currency translation adjustments, net of tax
(2,191)
(2,116)
(851)
Fair value adjustment of derivatives, net of tax
14 
(211)
Other comprehensive loss, net of tax
(2,177)
(2,327)
(851)
Comprehensive (loss) income
(49,676)
95,061 
6,580 
Comprehensive (loss) income attributable to noncontrolling interest
(115)
(43)
100 
Comprehensive (loss) income attributable to ARC Document Solutions, Inc. shareholders
$ (49,561)
$ 95,104 
$ 6,480 
Consolidated Statements of Equity (USD $)
In Thousands, unless otherwise specified
Total
Common Stock
Additional Paid-in Capital
Retained Earnings (Deficit)
Accumulated Other Comprehensive Income (Loss)
Common Stock in Treasury
Noncontrolling Interest
Beginning Balance at Dec. 31, 2013
$ 99,139 
$ 46 
$ 105,806 
$ (14,628)
$ 634 
$ (168)
$ 7,449 
Beginning Balance, shares (in shares) at Dec. 31, 2013
 
46,365 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
Stock-based compensation, shares (in shares)
 
167 
 
 
 
 
 
Stock-based compensation
3,532 
 
3,532 
 
 
 
 
Issuance of common stock under Employee Stock Purchase Plan, shares (in shares)
13 
13 
 
 
 
 
 
Issuance of common stock under Employee Stock Purchase Plan
82 
 
82 
 
 
 
 
Stock options exercised, shares (in shares)
 
223 
 
 
 
 
 
Stock options exercised
1,231 
1,230 
 
 
 
 
Dividends paid to noncontrolling interest
(486)
 
 
 
 
 
(486)
Treasury shares (in shares)
 
32 
 
 
 
 
 
Treasury shares
(240)
 
 
 
 
(240)
 
Comprehensive income (loss)
6,580 
 
 
7,275 
(795)
 
100 
Ending Balance at Dec. 31, 2014
109,838 
47 
110,650 
(7,353)
(161)
(408)
7,063 
Ending Balance, shares (in shares) at Dec. 31, 2014
 
46,800 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
Stock-based compensation, shares (in shares)
 
131 
 
 
 
 
 
Stock-based compensation
3,783 
 
3,783 
 
 
 
 
Issuance of common stock under Employee Stock Purchase Plan, shares (in shares)
21 
21 
 
 
 
 
 
Issuance of common stock under Employee Stock Purchase Plan
111 
 
111 
 
 
 
 
Stock options exercised, shares (in shares)
154 
154 
 
 
 
 
 
Stock options exercised
673 
673 
 
 
 
 
Tax deficiency from stock-based compensation
(128)
 
(128)
 
 
 
 
Treasury shares (in shares)
 
24 
 
 
 
 
 
Treasury shares
(204)
 
 
 
 
(204)
 
Comprehensive income (loss)
95,061 
 
 
97,040 
(1,936)
 
(43)
Ending Balance at Dec. 31, 2015
209,134 
47 
115,089 
89,687 
(2,097)
(612)
7,020 
Ending Balance, shares (in shares) at Dec. 31, 2015
47,130 
47,130 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
Stock-based compensation, shares (in shares)
 
229 
 
 
 
 
 
Stock-based compensation
2,693 
 
2,693 
 
 
 
 
Issuance of common stock under Employee Stock Purchase Plan, shares (in shares)
33 
33 
 
 
 
 
 
Issuance of common stock under Employee Stock Purchase Plan
120 
 
120 
 
 
 
 
Stock options exercised, shares (in shares)
36 
36 
 
 
 
 
 
Stock options exercised
98 
98 
 
 
 
 
Tax deficiency from stock-based compensation
(251)
 
(251)
 
 
 
 
Treasury shares (in shares)
 
 
 
 
 
 
Treasury shares
(5,297)
 
 
 
 
(5,297)
 
Comprehensive income (loss)
(49,676)
 
 
(47,865)
(1,696)
 
(115)
Ending Balance at Dec. 31, 2016
$ 156,821 
$ 47 
$ 117,749 
$ 41,822 
$ (3,793)
$ (5,909)
$ 6,905 
Ending Balance, shares (in shares) at Dec. 31, 2016
47,428 
47,428 
 
 
 
 
 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Cash flows from operating activities
 
 
 
Net (loss) income
$ (47,499)
$ 97,388 
$ 7,431 
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Allowance for accounts receivable
918 
340 
500 
Depreciation
26,900 
28,019 
28,148 
Amortization of intangible assets
4,833 
5,642 
5,987 
Amortization of deferred financing costs
445 
589 
758 
Amortization of discount on long-term debt
764 
Goodwill impairment
73,920 
Stock-based compensation
2,693 
3,512 
3,802 
Deferred income taxes
(4,711)
10,173 
5,429 
Deferred tax valuation allowance
51 
(80,669)
(3,552)
Loss on early extinguishment of debt
208 
282 
5,599 
Other non-cash items, net
(716)
(390)
(462)
Changes in operating assets and liabilities, net of effect of business acquisitions:
 
 
 
Accounts receivable
(1,294)
729 
(6,898)
Inventory
(1,590)
(967)
(2,220)
Prepaid expenses and other assets
109 
2,296 
(1,830)
Accounts payable and accrued expenses
(1,143)
(6,963)
6,510 
Net cash provided by operating activities
53,142 
59,981 
50,012 
Cash flows from investing activities
 
 
 
Capital expenditures
(12,097)
(14,245)
(13,269)
Other
1,101 
589 
(527)
Net cash used in investing activities
(10,996)
(13,656)
(13,796)
Cash flows from financing activities
 
 
 
Proceeds from stock option exercises
98 
673 
1,227 
Proceeds from issuance of common stock under Employee Stock Purchase Plan
120 
111 
82 
Share repurchases
(5,297)
(204)
(240)
Contingent consideration on prior acquisitions
(571)
(413)
Proceeds from borrowings on long-term debt agreements
175,000 
Early extinguishment of long-term debt
(22,000)
(14,500)
(194,500)
Payments on long-term debt agreements and capital leases
(12,990)
(27,329)
(19,217)
Net borrowings (repayments) under revolving credit facilities
950 
(1,888)
98 
Payment of deferred financing costs
(106)
(25)
(2,735)
Payment of hedge premium
(632)
Dividends paid to noncontrolling interest
(486)
Net cash used in financing activities
(39,796)
(44,207)
(40,771)
Effect of foreign currency translation on cash balances
(1,074)
(791)
(171)
Net change in cash and cash equivalents
1,276 
1,327 
(4,726)
Cash and cash equivalents at beginning of period
23,963 
22,636 
27,362 
Cash and cash equivalents at end of period
25,239 
23,963 
22,636 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
5,936 
7,247 
13,303 
Income taxes paid, net
971 
721 
548 
Noncash financing activities:
 
 
 
Capital lease obligations incurred
18,948 
13,157 
19,055 
Contingent liabilities in connection with the acquisition of businesses
75 
1,768 
Liabilities in connection with deferred financing costs
$ 0 
$ 0 
$ 8 
Description of Business and Basis of Presentation
Description of Business and Basis of Presentation
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.
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.
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
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 $11.7 million of the Company’s cash and cash equivalents as of December 31, 2016. 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%, 4% or 4% of net sales during the years ended December 31, 2016, 2015 and 2014, respectively.
The Company has geographic concentration risk as sales in California, as a percent of total sales, were approximately 33%, 31% and 30% for the years ended December 31, 2016, 2015 and 2014, 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 the years ended December 31, 2016, 2015 and 2014 comprised approximately 40%, 37%, and 33% 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. In 2016, 2015, and 2014 the Company recorded expenses of $0.9 million, $0.3 million and $0.5 million, respectively, related to the allowance for doubtful accounts.
Inventories
Inventories are valued at the lower of cost (determined on a first-in, first-out basis; or average cost) or market. 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 market. Charges to increase inventory reserves are recorded as an increase in cost of sales. Estimated inventory obsolescence has been provided for in the financial statements and has been within the range of management’s expectations. As of December 31, 2016 and 2015, the reserves for inventory obsolescence was $0.7 million and 0.9 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 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 December 31, 2016.
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 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 8 “Income Taxes” for further information.
Income tax deficiencies and benefits affecting stockholders’ equity are primarily related to employee stock-based compensation.
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 5 “Property and Equipment”) includes $0.8 million and $0.6 million of capitalized software development costs as of December 31, 2016 and 2015, net of accumulated amortization of $18.1 million and $17.7 million as of December 31, 2016 and 2015, respectively. Depreciation expense includes the amortization of capitalized software development costs which amounted to $0.4 million, $0.2 million and $0.2 million during the years ended December 31, 2016, 2015 and 2014, 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 2016, 2015 or 2014.
Goodwill and Other Intangible Assets
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.
Goodwill impairment testing is performed at the reporting unit level. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support the value of the goodwill.
Goodwill impairment testing is a two-step process. Step one involves comparing the fair value of the reporting units to its carrying amount. If the carrying amount of a reporting unit is greater than zero and its fair value is greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount is greater than the fair value, the second step must be completed to measure the amount of impairment, if any. Step two involves calculating the implied fair value of goodwill by deducting the fair value of all tangible and intangible assets, excluding goodwill, of the reporting unit from the fair value of the reporting unit as determined in step one. The implied fair value of goodwill determined in this step is compared to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, an impairment loss is recognized equal to the difference.
The Company determines the fair value of its reporting units using an income approach. Under the income approach, the Company determined fair value based on estimated discounted future cash flows of each reporting unit. The cash flows are discounted by an estimated weighted-average cost of capital, which is intended to reflect the overall level of inherent risk of a reporting unit. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates and EBITDA margins, discount rates and future market conditions, among others. The Company considered market information in assessing the reasonableness of the fair value under the income approach outlined above.
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 term loan credit agreement ("Term A Credit Agreement"). At December 31, 2016 and 2015, the Company had deferred financing costs of $1.0 million and $1.6 million, respectively, net of accumulated amortization of $1.6 million and $1.0 million, respectively.
In 2014, the Company added $2.5 million of deferred financing costs related to its Term A Credit Agreement. In addition, the Company wrote off $2.4 million of deferred financing costs due to the extinguishment, in full, of its previous credit agreements.
Derivative Financial Instruments
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.
Historically, the Company enters into derivative instruments to manage its exposure to changes in interest rates. These instruments allow the Company to raise funds at floating rates and effectively swap them into fixed rates, without the exchange of the underlying principal amount. Such agreements are designated and accounted for under ASC 815, Derivatives and Hedging. Derivative instruments are recorded at fair value as either assets or liabilities in the Consolidated Balance Sheets.

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 $3.9 million and $6.3 million as of December 31, 2016 and 2015, respectively, and are carried at cost and approximate fair value due to the relatively short period to maturity of these instruments.
Interest rate cap contracts: 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. Interest rate cap contracts reported in the Company's Consolidated Balance Sheet were $39 thousand as of December 31, 2016.

Contingent Liabilities: 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, 2016, the estimated contractually required earnout amounts would be achieved. Liabilities for future earnout obligations totaled $0.4 million as of December 31, 2016.
Short- and long-term debt: 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, 2016 for borrowings under its Term Loan Credit Agreement is $121.0 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 $121.0 million, as of December 31, 2016.
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 $11.1 million, $11.2 million, and $11.6 million for the years ended December 31, 2016, 2015 and 2014, 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, 2016, 2015 and 2014.
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 weighted-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,
 
2016
 
2015
 
2014
Service Sales
 
 
 
 
 
CDIM
$
212,511

 
$
221,174

 
$
219,764

MPS
131,811

 
144,244

 
141,313

AIM
14,019

 
13,220

 
10,807

Total services sales
358,341

 
378,638

 
371,884

Equipment and Supplies Sales
47,980

 
50,027

 
51,872

Total net sales
$
406,321

 
$
428,665

 
$
423,756

 
The Company recognizes revenues in geographic areas based on the location to which the product was shipped or services have been rendered. Operations outside the United States have historically been small. See table below for revenues and long-lived assets, net, excluding intangible assets, attributable to the Company’s U.S. operations and foreign operations. 
 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
 
 
U.S.
 
Foreign
Countries
 
Total
 
U.S.
 
Foreign
Countries
 
Total
 
U.S.
 
Foreign
Countries
 
Total
Revenues from external customers
 
$
353,077

 
$
53,244

 
$
406,321

 
$
366,082

 
$
62,583

 
$
428,665

 
$
364,382

 
$
59,374

 
$
423,756

Long-lived assets, net, excluding intangible assets
 
$
54,847

 
$
5,888

 
$
60,735

 
$
50,777

 
$
6,813

 
$
57,590

 
$
51,826

 
$
7,694

 
$
59,520


Advertising and Shipping and Handling Costs
Advertising costs are expensed as incurred and approximated $1.9 million, $2.0 million, and $1.7 million during the years ended December 31, 2016, 2015 and 2014, 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 the years ended December 31, 2016, 2015 and 2014, was $2.7 million, $3.5 million and $3.8 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 the fiscal years ended December 31, 2016, 2015 and 2014, was $2.07, $4.88 and $3.69 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 the years ended December 31, 2016 and 2015 and 2014: 
 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
Weighted average assumptions used:
 
 
 
 
 
 
Risk free interest rate
 
1.43
%
 
1.62
%
 
2.12
%
Expected volatility
 
56.8
%
 
56.2
%
 
57.3
%
Expected dividend yield
 
%
 
%
 
%

Using historical exercise data as a basis, the Company determined that the expected term for stock options issued in 2016, 2015 and 2014 was 6.5 years, 6.4 years and 7.1 years, respectively.
For fiscal years 2016, 2015 and 2014, 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 assumed a forfeiture rate of 4% in 2016, 4% in 2015 and 3% in 2014. The Company’s assumed forfeiture rate is based on the historical forfeiture rate for employees at similar levels in the Company. The Company reviews its forfeiture rate at least on an annual basis.
As of December 31, 2016, total unrecognized stock-based compensation expense related to nonvested stock-based compensation was approximately $2.8 million, which is expected to be recognized over a weighted average period of approximately 1.7 years.
For additional information, see Note 9 “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 $6.2 million, $5.8 million and $6.3 million during the fiscal years ended December 31, 2016, 2015 and 2014, 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 4.7 million, 2.0 million and 1.5 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 the years ended December 31, 2016, 2015 and 2014, 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 the years ended December 31, 2016, 2015 and 2014:
 
 
Year Ended December 31,
 
2016
 
2015
 
2014
Weighted average common shares outstanding during the period — basic
45,932

 
46,631

 
46,245

Effect of dilutive stock options

 
901

 
843

Weighted average common shares outstanding during the period — diluted
45,932

 
47,532

 
47,088


Recent Accounting Pronouncements

In January 2017, the 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 2 from the goodwill impairment test. Accordingly, the Company will be 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 new standard is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019 with early adoption permitted for interim or annual goodwill impairment tests performed after January 1, 2017. In its most recent goodwill impairment analysis, the fair value of one of the Company's reporting units, which previously recorded a partial goodwill impairment in the second quarter of 2016, was less than its respective carrying amount; however, the implied fair value of such goodwill exceeded the carrying amount of goodwill. As such, the total of $17.6 million of remaining goodwill attributable to this reporting unit, or a portion thereof, is at risk of impairment upon the adoption of ASU 2017-04.

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 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 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 does not expect the adoption of ASU 2016-09 to have a material impact on its 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 fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. 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.
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 does not expect the adoption of ASU 2016-09 to have a material impact on its 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 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 and $2.4 million at December 31, 2015 and 2014, respectively, from an asset to a direct deduction from the related debt liability to conform to the current period presentation.
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. While the Company is continuing to assess the potential impacts that ASU 2014-09 will have on its consolidated financial statements, the Company anticipates that the new guidance will primarily impact revenue recognized from its software service offerings, which account for less than 10% of the Company's consolidated total net sales.
Restructuring Expenses
Restructuring Expenses
RESTRUCTURING EXPENSES
To ensure that the Company’s costs and resources were in line with demand for its current portfolio of services and products, management initiated a restructuring plan in the fourth quarter of 2012. Restructuring activities associated with the plan concluded in the fourth quarter of 2013. Restructuring expenses include employee termination costs, estimated lease termination and obligation costs, and other restructuring expenses. To date, the Company has incurred $6.7 million of expense related to its restructuring plan.
Goodwill and Other Intangibles Resulting from Business Acquisitions
Goodwill and Other Intangibles Resulting from Business Acquisitions
GOODWILL AND OTHER INTANGIBLES RESULTING FROM BUSINESS ACQUISITIONS
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 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. During 2016, the Company performed an interim goodwill impairment analysis as of June 30, 2016 in addition to its annual goodwill impairment analysis as of September 30, 2016.
Goodwill impairment testing is performed at the reporting unit level. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support the value of the goodwill.
Goodwill impairment testing is a two-step process. Step one involves comparing the fair value of the reporting units to its carrying amount. If the carrying amount of a reporting unit is greater than zero and its fair value is greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount is greater than the fair value, the second step must be completed to measure the amount of impairment, if any. Step two involves calculating the implied fair value of goodwill by deducting the fair value of all tangible and intangible assets, excluding goodwill, of the reporting unit from the fair value of the reporting unit as determined in step one. The implied fair value of goodwill determined in this step is compared to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, an impairment loss is recognized equal to the difference.
The Company determines the fair value of its reporting units using an income approach. Under the income approach, the Company determined fair value based on estimated discounted future cash flows of each reporting unit. 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.
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; 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 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.
At September 30, 2016, the Company performed its annual assessment and determined that goodwill was not impaired. The resulting analysis showed one reporting unit, which had previously recognized an impairment in the Company's interim goodwill impairment analysis, failing step one of the analysis, but no additional impairment of the related goodwill was required as of September 30, 2016 or December 31, 2016.
Given the current economic environment, 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 tests 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 December 31, 2016 are summarized as follows:
 
Gross
Goodwill
 
Accumulated
Impairment
Loss
 
Net
Carrying
Amount
 
 
 
 
 
 
January 1, 2015
$
405,558

 
$
192,950

 
$
212,608

Additions

 

 

Goodwill impairment

 

 

December 31, 2015
405,558

 
192,950

 
212,608

Additions

 

 

Goodwill impairment

 
73,920

 
(73,920
)
December 31, 2016
$
405,558

 
$
266,870

 
$
138,688


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 December 31, 2016 and December 31, 2015 which continue to be amortized:
 
 
December 31, 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
$
99,104

 
$
86,305

 
$
12,799

 
$
99,050

 
$
81,572

 
$
17,478

Trade names and trademarks
20,281

 
19,878

 
403

 
20,329

 
19,861

 
468

 
$
119,385

 
$
106,183

 
$
13,202

 
$
119,379

 
$
101,433

 
$
17,946


Based on current information, estimated future amortization expense of other intangible assets for each of the next five fiscal years and thereafter are as follows:
 
2017
$
4,256

2018
3,843

2019
3,123

2020
1,514

2021
166

Thereafter
300

 
$
13,202

Property and Equipment
Property and Equipment
PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
 
December 31,
 
2016
 
2015
Machinery and equipment
$
242,805

 
$
241,125

Buildings and leasehold improvements
16,688

 
15,833

Furniture and fixtures
2,434

 
3,089

 
261,927

 
260,047

Less accumulated depreciation
(201,192
)
 
(202,457
)
 
$
60,735

 
$
57,590


Depreciation expense was $26.9 million, $28.0 million, and $28.1 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Long-Term Debt
Long-Term Debt
LONG-TERM DEBT
Long-term debt consists of the following:
 
 
December 31,
 
2016
 
2015
Term A loan facility maturing 2019 net of deferred financing fees of $1,039 and $1,586; 2.86% and 2.50% interest rate at December 31, 2016 and December 31, 2015

$
119,961

 
$
141,414

Borrowings from revolving loan facility under the Term A Credit Agreement; 2.64% interest rate at December 31, 2016
950

 

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

36,231

 
29,866

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

31

 
112

 
157,173

 
171,392

Less current portion
(13,773
)
 
(14,374
)
 
$
143,400

 
$
157,018


Term A and Revolving 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 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 December 31, 2016, the Company's borrowing availability under the Term A Credit Agreement was $26.9 million, which was the maximum borrowing limit of $30.0 million reduced by outstanding letters of credit of $2.1 million and revolver credit facility balance of $1.0 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% 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 0.50% to 1.50%, based on our Company’s Total Leverage Ratio.
The Company will pay certain recurring fees with respect to the credit facility, including administration fees to the administrative agent.
Subject to certain exceptions, including in certain circumstances, reinvestment rights, the loans extended under the Term A Credit Agreement are subject to customary mandatory prepayment provisions with respect to: the net proceeds from certain asset sales; the net proceeds from certain issuances or incurrences of debt (other than debt permitted to be incurred under the terms of the Term A Credit Agreement); the net proceeds from certain issuances of equity securities; and net proceeds of certain insurance recoveries and condemnation events of the Company.
The Term A Credit Agreement contains customary representations and warranties, subject to limitations and exceptions, and customary covenants restricting the ability (subject to various exceptions) of the Company and its subsidiaries to: incur additional indebtedness (including guarantee obligations); incur liens; sell certain property or assets; engage in mergers or other fundamental changes; consummate acquisitions; make investments; pay dividends, other distributions or repurchase equity interest of the Company or its subsidiaries; change the nature of their business; prepay or amend certain indebtedness; engage in certain transactions with affiliates; amend their organizational documents; or enter into certain restrictive agreements. In addition, the Term A Credit Agreement contains financial covenants which requires the Company to maintain (i) at all times, a Total Leverage Ratio in an amount not to exceed 3.25 to 1.00 through the Company’s fiscal quarter ending September 30, 2016, and thereafter, in an amount not to exceed 3.00 to 1.00; and (ii) a Fixed Charge Coverage Ratio (as defined in the Term A Credit Agreement), as amended on June 24, 2016, the Company is required to maintain, as of the last day of each fiscal quarter, an amount not less than 1.15 to 1.00. On February 5, 2016, the Term A Credit Agreement was amended to exclude up to $15.0 million of stock repurchases from the calculation of the Company's Fixed Charge Coverage Ratio, provided that those stock repurchases are consummated in accordance with the other terms and conditions of the agreement.
The Term A Credit Agreement contains customary events of default, including with respect to: nonpayment of principal, interest, fees or other amounts; failure to perform or observe covenants; material inaccuracy of a representation or warranty when made; cross-default to other material indebtedness; bankruptcy, insolvency and dissolution events; inability to pay debts; monetary judgment defaults; actual or asserted invalidity or impairment of any definitive loan documentation, repudiation of guaranties or subordination terms; certain ERISA related events; or a change of control.
The obligations of the Company’s subsidiary that is the borrower under the Term A Credit Agreement are guaranteed by the Company and each other United States domestic subsidiary of the Company. The Term A Credit Agreement and any interest rate protection and other hedging arrangements provided by any lender party to the Credit Facility or any affiliate of such a lender are secured on a first priority basis by a perfected security interest in substantially all of the borrower’s, the Company’s and each guarantor’s assets (subject to certain exceptions).

As of December 31, 2016, the Company had paid $54.0 million in aggregate principal on its $175.0 million Term Loan Credit Agreement. Principal prepayments on the Term Loan Credit Agreement of $22.0 million in 2016 resulted in a loss on extinguishment of debt of $0.2 million for the year ended December 31, 2016.
Term B Loan Facility

On December 20, 2013, we entered into a Term Loan Credit Agreement (the “Term B Loan Credit Agreement”) among ARC, as borrower, JPMorgan Chase Bank., N.A, as administrative agent and as collateral agent, and the lenders party thereto. Concurrently with the Company’s entry into the Term A Credit Agreement described above, the Company paid in full and terminated the Term B Loan Credit Agreement resulting in a loss on early extinguishment of debt of $5.6 million in 2014.
Other Notes Payable
Includes notes payable collateralized by equipment previously purchased.
Minimum future maturities of long-term debt, excludes deferred financing fees, and capital lease obligations as of December 31, 2016 are as follows:
 
 
Long-Term Debt
 
Capital Lease Obligations
Year ending December 31:
 
 
 
2017
$
14

 
$
13,759

2018
16,017

 
10,723

2019
105,950

 
6,889

2020

 
3,636

2021

 
1,224

Thereafter

 

 
$
121,981

 
$
36,231

Commitments and Contingencies
Commitments and Contingencies
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, 2016:
 
 
 
Third Party
 
Related Party
 
Total
Year ending December 31:
 
 
 
 
 
 
2017
 
$
14,777

 
$
504

 
$
15,281

2018
 
10,737

 
504

 
11,241

2019
 
6,914

 
514

 
7,428

2020
 
5,295

 
514

 
5,809

2021
 
3,668

 
514

 
4,182

Thereafter
 
2,187

 
1,028

 
3,215

 
 
$
43,578

 
$
3,578

 
$
47,156


Total rent expense under operating leases, including month-to-month rentals, amounted to $23.7 million, $24.0 million, and $23.4 million during the years ended December 31, 2016, 2015 and 2014, 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 the years ended December 31, 2016, 2015 and 2014, 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.
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 matters 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.
Income Taxes
Income Taxes
INCOME TAXES
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 2016, 2015 and 2014:
 
 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
Current:
 
 
 
 
 
 
Federal
 
$
42

 
$
219

 
$

State
 
89

 
364

 
86

Foreign
 
165

 
481

 
392

 
 
296

 
1,064

 
478

Deferred:
 
 
 
 
 
 
Federal
 
(3,236
)
 
(56,750
)
 
1,453

State
 
(1,519
)
 
(13,705
)
 
343

Foreign
 
95

 
(41
)
 
74

 
 
(4,660
)
 
(70,496
)
 
1,870

Income tax (benefit) provision
 
$
(4,364
)
 
$
(69,432
)
 
$
2,348


The Company's foreign earnings before taxes were $0.7 million, $1.1 million and $0.3 million for 2016, 2015 and 2014, respectively.
The consolidated deferred tax assets and liabilities consist of the following:
 
 
December 31,
 
2016
 
2015
Deferred tax assets:
 
 
 
Financial statement accruals not currently deductible
$
2,692

 
$
3,409

Accrued vacation
1,185

 
1,215

Deferred revenue
280

 
280

State taxes
48

 
116

Fixed assets
6,555

 
7,647

Goodwill and other identifiable intangibles
22,291

 
20,828

Stock-based compensation
6,072

 
5,562

Federal tax net operating loss carryforward
27,759

 
29,089

State tax net operating loss carryforward, net
4,996

 
5,096

State tax credits, net
958

 
1,002

Foreign tax credit carryforward
517

 
517

Foreign tax net operating loss carryforward
499

 
380

Federal alternative minimum tax
284

 
222

Interest rate hedge
131

 
140

Gross deferred tax assets
74,267

 
75,503

Less: valuation allowance
(1,304
)
 
(1,307
)
Net deferred tax assets
$
72,963

 
$
74,196

 
 
 
 
Deferred tax liabilities:
 
 
 
Goodwill and other identifiable intangibles
$
(30,296
)
 
$
(35,933
)
Net deferred tax assets
$
42,667

 
$
38,263



A reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows:
 
 
Year Ended December 31,
 
2016
 
2015
 
2014
Statutory federal income tax rate
35
%
 
35
 %
 
35
%
State taxes, net of federal benefit
2

 
5

 
4

Foreign taxes

 

 
1

Valuation allowance

 
(289
)
 
(36
)
Non-deductible expenses and other
1

 
1

 
3

Section 162(m) limitation
(1
)
 
1

 
4

Stock-based compensation

 

 
16

Discrete item for state taxes
(1
)
 
(1
)
 
(4
)
Discrete items for other

 

 
1

Non-deductible portion of goodwill impairment
(28
)
 

 

Effective income tax rate
8
%
 
(248
)%
 
24
%


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, 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 December 31, 2016.

Based on the Company’s current assessment, the remaining net deferred tax assets as of December 31, 2016 are considered more likely than not to be realized. The valuation allowance of $1.3 million may be increased or reduced as conditions change or if the Company is unable to implement certain available tax planning strategies. The realization of the Company’s net deferred tax assets ultimately depend on future taxable income, reversals of existing taxable temporary differences or through a loss carry back. The Company has income tax receivables of $0.2 million as of December 31, 2016 included in other current assets in its Consolidated Balance Sheet primarily related to income tax refunds for prior years.
As of December 31, 2016, the Company had approximately $79.9 million of consolidated federal, $96.6 million of state and $2.6 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 2034. The charitable contribution carryforward began in 2011 and will begin to expire in varying amounts between 2017 and 2020. The state net operating loss carryforwards expire in varying amounts between 2017 and 2034. The foreign net operating loss carryforwards begin to expire in varying amounts beginning in 2017.

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 2010. In 2010, the IRS commenced an examination of the Company’s U.S. income tax return for 2008, which was completed in February of 2011. The IRS did not propose any adjustments to the Company’s 2008 U.S. income tax return. In 2011, the IRS commenced an examination of the Company’s 2009 and 2010 U.S. income tax returns. The IRS did not propose any significant adjustments to the Company’s 2009 and 2010 U.S. income tax returns as of December 31, 2016.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
 
 
 
2014
Beginning balance at January 1,
 
$
266

Additions based on tax positions related to the current year
 

Reductions based on tax positions related to the prior year
 
(266
)
Reductions for tax positions due to expiration of statute of limitations
 

Ending balance at December 31,
 
$


There were no unrecognized tax benefits as of and for the years ended December 31, 2016 or 2015.
Employee Stock Purchase Plan and Stock Plan
Employee Stock Purchase Plan and Stock Plan
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 2016, 2015, and 2014 was $21 thousand, $19 thousand and $15 thousand, respectively.

Employees purchased the following shares in the periods presented:
 
 
Year Ended December 31,
 
2016
 
2015
 
2014
Shares purchased
33

 
21

 
13

Average price per share
$
3.59

 
$
5.40

 
$
6.24


Stock Plan
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. At December 31, 2016, 1.6 million shares remain available for issuance under the Stock Plan.
Stock options granted under the 2014 Stock Plan generally expire no later than ten years from the date of grant. Options generally vest and become fully exercisable over a period of three to four years from date of award, except that options granted to non-employee directors may vest over a shorter time period. The exercise price of options must be equal to at least 100% of the fair market value of the Company’s common stock on the date of grant. The Company allows for cashless exercises of vested outstanding options.
During the years ended December 31, 2016 and 2015, the Company granted options to acquire a total of 570 thousand shares and 526 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, 2014
3,681

 
$
5.50

 
 
 
 
Granted
526

 
$
8.91

 
 
 
 
Exercised
(154
)
 
$
4.36

 
 
 
 
Forfeited/Cancelled
(100
)
 
$
11.76

 
 
 
 
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

 
5.92
 
$
3,954

Vested or expected to vest at December 31, 2016
4,267

 
$
5.44

 
5.90
 
$
3,924

Exercisable at December 31, 2016
3,255

 
$
5.37

 
5.09
 
$
3,151


The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the closing stock price on December 31, 2016 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, 2016. 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, 2016, 2015 and 2014 was $42 thousand, $0.6 million and $0.4 million, respectively.

A summary of the Company’s non-vested stock options as of December 31, 2016, and changes during the fiscal year then ended is as follows:
 
 
 
Weighted
Average Grant Date
Non-vested Options
Shares
 
Fair Market Value
Non-vested at December 31, 2015
1,383

 
$
5.92

Granted
570

 
$
2.07

Vested
(804
)
 
$
2.72

Forfeited/Cancelled
(103
)
 
$
3.23

Non-vested at December 31, 2016
1,046

 
$
3.15

The following table summarizes certain information concerning outstanding options at December 31, 2016:
 
 
 
Range of Exercise Price
Options Outstanding at
December 31, 2016
$2.37 – $2.70
1,345

$3.65 – $4.82
530

$5.37 – $7.19
1,025

$8.20 – $9.09
1,401

$2.37 – $9.09
4,301

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 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.
In 2014, the Company granted 144 thousand shares of restricted stock to the Company's Chief Executive Officer. The restricted stock vests annually over four years after the date of grant. In addition, the Company granted 9 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, 2016, and changes during the fiscal year then ended is as follows:
 
 
 
Weighted
Average Grant Date
Non-vested Restricted Stock
Shares
 
Fair Market Value
Non-vested at December 31, 2015
266

 
$
8.31

Granted
228

 
$
3.91

Vested
(106
)
 
$
8.30

Forfeited/Cancelled

 
$

Non-vested at December 31, 2016
388

 
$
5.71


The total fair value of restricted stock awards vested during the years ended December 31, 2016, 2015 and 2014 was $0.4 million, $1.6 million and $1.8 million, respectively.
Retirement Plans
Retirement Plans
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. During a portion of 2009, the Company made an employer matching contribution equal to 20% of an employee’s contributions, up to a total of 4% of that employee’s compensation. In July 2009, the Company amended its 401(k) Plan to eliminate the mandatory company contribution and to provide for discretionary company contributions. In 2013, the Company reinstated the mandatory company contribution. An independent third party administers the Company’s 401(k) Plan. The Company's total expense under these plans amounted to $0.4 million, $0.4 million and $80 thousand during the years ended December 31, 2016, 2015 and 2014, respectively.
Derivatives and Hedging Transactions
Derivatives and Hedging Transactions
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 Consolidated Balance Sheets of the Company's derivatives as of December 31, 2016 and 2015:

 
 
 
Fair Value
 
Balance Sheet Classification
 
December 31, 2016
 
December 31, 2015
Derivative designated as hedging instrument under ASC 815
 
 
 
 
 
Interest rate cap contracts - current portion
Other current assets
 
$
39

 
$
48

Interest rate cap contracts - long-term portion
Other assets
 

 
191

Total derivatives designated as hedging instruments
 
 
$
39

 
$
239



The following table summarizes the loss recognized in AOCL of derivatives, designated and qualifying as cash flow hedges for the year ended December 31, 2016, 2015 and 2014:

 
Amount of Loss Recognized in AOCL on Derivative
 
Year Ended December 31,
 
2016
 
2015
 
2014
Derivative in ASC 815 Cash Flow Hedging Relationship
 
 
 
 
 
Interest rate cap contracts, net of tax
$
(197
)
 
$
(211
)
 
$



The following table summarizes the effect of the interest rate cap on the Consolidated Statements of Operations for the year ended December 31, 2016, 2015 and 2014:
 
 
Amount of Loss
Reclassified from AOCL into Income
 
(effective portion)
 
(ineffective portion)
 
Year Ended December 31,
 
Year Ended December 31,
 
2016
 
2015
 
2014
 
2016
 
2015
 
2014
Location of Loss Reclassified from AOCL into Income
 
 
 
 
 
 
 
 
 
 
 
Interest expense
$
224

 
$
36

 
$

 
$

 
$

 
$

Fair Value Measurements
Fair Value Measurements
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, 2016:

 
Significant Other Unobservable Inputs
 
December 31, 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 year ended December 31, 2016. See Note 4, “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 consolidated financial statements as of and for the year ended December 31, 2016 and 2015:
 
 
Significant Other Unobservable Inputs
 
December 31, 2016
 
December 31, 2015
 
Level 2
 
Level 3
 
Total Losses
 
Level 2
 
Level 3
 
Total Losses
Recurring Fair Value Measure
 
 
 
 
 
 
 
 
 
 
 
       Interest rate cap contracts
$
39

 
$

 
$

 
$
239

 
$

 
$

       Contingent purchase price consideration for
       acquired businesses
$

 
$
402

 
$

 
$

 
$
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 December 31, 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 year ended December 31, 2016 and 2015:
 
Year Ended December 31,
 
2016
 
2015
Beginning balance
$
1,059

 
$
1,768

     Additions related to acquisitions
104

 

     Payments
(571
)
 
(555
)
     Adjustments included in earnings
(171
)
 
38

     Foreign currency translation adjustments
(19
)
 
(192
)
Ending balance
$
402

 
$
1,059

Valuation and Qualifying Accounts
Valuation and Qualifying Accounts
Schedule II
ARC DOCUMENT SOLUTIONS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
 
 
Balance at
Beginning
of Period
 
Charges to
Cost and
Expenses
 
Deductions
(1)
 
Balance at
End of
Period
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

Year ended December 31, 2014
 
 
 
 
 
 
 
Allowance for accounts receivable
$
2,517

 
$
546

 
$
(650
)
 
$
2,413

 
(1)
Deductions represent uncollectible accounts written-off net of recoveries.
Summary of Significant Accounting Policies (Policies)
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.
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.
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 $11.7 million of the Company’s cash and cash equivalents as of December 31, 2016. 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%, 4% or 4% of net sales during the years ended December 31, 2016, 2015 and 2014, respectively.
The Company has geographic concentration risk as sales in California, as a percent of total sales, were approximately 33%, 31% and 30% for the years ended December 31, 2016, 2015 and 2014, 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.
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.
Inventories
Inventories are valued at the lower of cost (determined on a first-in, first-out basis; or average cost) or market. 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 market. Charges to increase inventory reserves are recorded as an increase in cost of sales. Estimated inventory obsolescence has been provided for in the financial statements and has been within the range of management’s expectations.
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 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 December 31, 2016.
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 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 8 “Income Taxes” for further information.
Income tax deficiencies and benefits affecting stockholders’ equity are primarily related to employee stock-based compensation.
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.
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.
Goodwill and Other Intangible Assets
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.
Goodwill impairment testing is performed at the reporting unit level. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support the value of the goodwill.
Goodwill impairment testing is a two-step process. Step one involves comparing the fair value of the reporting units to its carrying amount. If the carrying amount of a reporting unit is greater than zero and its fair value is greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount is greater than the fair value, the second step must be completed to measure the amount of impairment, if any. Step two involves calculating the implied fair value of goodwill by deducting the fair value of all tangible and intangible assets, excluding goodwill, of the reporting unit from the fair value of the reporting unit as determined in step one. The implied fair value of goodwill determined in this step is compared to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, an impairment loss is recognized equal to the difference.
The Company determines the fair value of its reporting units using an income approach. Under the income approach, the Company determined fair value based on estimated discounted future cash flows of each reporting unit. The cash flows are discounted by an estimated weighted-average cost of capital, which is intended to reflect the overall level of inherent risk of a reporting unit. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates and EBITDA margins, discount rates and future market conditions, among others. The Company considered market information in assessing the reasonableness of the fair value under the income approach outlined above.
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 term loan credit agreement ("Term A Credit Agreement"). At December 31, 2016 and 2015, the Company had deferred financing costs of $1.0 million and $1.6 million, respectively, net of accumulated amortization of $1.6 million and $1.0 million, respectively.
In 2014, the Company added $2.5 million of deferred financing costs related to its Term A Credit Agreement. In addition, the Company wrote off $2.4 million of deferred financing costs due to the extinguishment, in full, of its previous credit agreements.
Derivative Financial Instruments
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.
Historically,
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 $3.9 million and $6.3 million as of December 31, 2016 and 2015, respectively, and are carried at cost and approximate fair value due to the relatively short period to maturity of these instruments.
Interest rate cap contracts: 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. Interest rate cap contracts reported in the Company's Consolidated Balance Sheet were $39 thousand as of December 31, 2016.

Contingent Liabilities: 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, 2016, the estimated contractually required earnout amounts would be achieved. Liabilities for future earnout obligations totaled $0.4 million as of December 31, 2016.
Short- and long-term debt: 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, 2016 for borrowings under its Term Loan Credit Agreement is $121.0 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 $121.0 million, as of December 31, 2016.
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 $11.1 million, $11.2 million, and $11.6 million for the years ended December 31, 2016, 2015 and 2014, 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, 2016, 2015 and 2014.
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 weighted-average currency rate for the fiscal year.
The Company recognizes revenues in geographic areas based on the location to which the product was shipped or services have been rendered. Operations outside the United States have historically been small. See table below for revenues and long-lived assets, net, excluding intangible assets, attributable to the Company’s U.S. operations and foreign operations. 
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.
Advertising and Shipping and Handling Costs
Advertising costs are expensed as incurred and approximated $1.9 million, $2.0 million, and $1.7 million during the years ended December 31, 2016, 2015 and 2014, 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.
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.
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.
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.
Recent Accounting Pronouncements

In January 2017, the 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 2 from the goodwill impairment test. Accordingly, the Company will be 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 new standard is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019 with early adoption permitted for interim or annual goodwill impairment tests performed after January 1, 2017. In its most recent goodwill impairment analysis, the fair value of one of the Company's reporting units, which previously recorded a partial goodwill impairment in the second quarter of 2016, was less than its respective carrying amount; however, the implied fair value of such goodwill exceeded the carrying amount of goodwill. As such, the total of $17.6 million of remaining goodwill attributable to this reporting unit, or a portion thereof, is at risk of impairment upon the adoption of ASU 2017-04.

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 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 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 does not expect the adoption of ASU 2016-09 to have a material impact on its 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 fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. 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.
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 does not expect the adoption of ASU 2016-09 to have a material impact on its 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 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 and $2.4 million at December 31, 2015 and 2014, respectively, from an asset to a direct deduction from the related debt liability to conform to the current period presentation.
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. While the Company is continuing to assess the potential impacts that ASU 2014-09 will have on its consolidated financial statements, the Company anticipates that the new guidance will primarily impact revenue recognized from its software service offerings, which account for less than 10% of the Company's consolidated total net sales.
Summary of Significant Accounting Policies (Tables)
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
Net sales of the Company’s principal services and products were as follows:
 
 
Year Ended December 31,
 
2016
 
2015
 
2014
Service Sales
 
 
 
 
 
CDIM
$
212,511

 
$
221,174

 
$
219,764

MPS
131,811

 
144,244

 
141,313

AIM
14,019

 
13,220

 
10,807

Total services sales
358,341

 
378,638

 
371,884

Equipment and Supplies Sales
47,980

 
50,027

 
51,872

Total net sales
$
406,321

 
$
428,665

 
$
423,756

 
See table below for revenues and long-lived assets, net, excluding intangible assets, attributable to the Company’s U.S. operations and foreign operations. 
 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
 
 
U.S.
 
Foreign
Countries
 
Total
 
U.S.
 
Foreign
Countries
 
Total
 
U.S.
 
Foreign
Countries
 
Total
Revenues from external customers
 
$
353,077

 
$
53,244

 
$
406,321

 
$
366,082

 
$
62,583

 
$
428,665

 
$
364,382

 
$
59,374

 
$
423,756

Long-lived assets, net, excluding intangible assets
 
$
54,847

 
$
5,888

 
$
60,735