ARC DOCUMENT SOLUTIONS, INC., 10-Q filed on 5/8/2019
Quarterly Report
v3.19.1
Document and Entity Information - shares
3 Months Ended
Mar. 31, 2019
Apr. 30, 2019
Document And Entity Information [Abstract]    
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Mar. 31, 2019  
Document Fiscal Year Focus 2019  
Document Fiscal Period Focus Q1  
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 Small Business true  
Entity Emerging Growth false  
Entity Common Stock, Shares Outstanding   46,269,365
v3.19.1
Condensed Consolidated Balance Sheets (Unaudited) - USD ($)
$ in Thousands
Mar. 31, 2019
Dec. 31, 2018
Current assets:    
Cash and cash equivalents $ 18,770 $ 29,433
Accounts receivable, net of allowances for accounts receivable of $2,082 and $2,016 60,108 58,035
Inventories, net 16,278 16,768
Prepaid expenses 5,315 4,937
Other current assets 7,318 6,202
Total current assets 107,789 115,375
Property and equipment, net of accumulated depreciation of $203,924 and $199,480 69,984 70,668
Right-of-use assets from operating leases 44,783  
Goodwill 121,051 121,051
Other intangible assets, net 4,253 5,126
Deferred income taxes 24,779 24,946
Other assets 2,266 2,550
Total assets 374,905 339,716
Current liabilities:    
Accounts payable 24,739 24,218
Accrued payroll and payroll-related expenses 9,626 17,029
Accrued expenses 19,418 17,571
Current operating lease liability 11,756  
Current portion of long-term debt and finance leases 22,312 22,132
Total current liabilities 87,851 80,950
Long-term operating lease liabilities 40,013  
Long-term debt and finance leases 99,006 105,060
Other long-term liabilities 468 6,404
Total liabilities 227,338 192,414
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 0 0
Common stock, $0.001 par value, 150,000 shares authorized; 48,969 and 48,492 shares issued and 46,269 and 45,818 shares outstanding 49 48
Additional paid-in capital 124,182 123,525
Retained earnings 29,989 29,397
Accumulated other comprehensive loss (3,919) (3,351)
Total stockholders equity before adjustment of treasury stock 150,301 149,619
Less cost of common stock in treasury, 2,700 and 2,674 shares 9,416 9,350
Total ARC Document Solutions, Inc. stockholders’ equity 140,885 140,269
Noncontrolling interest 6,682 7,033
Total equity 147,567 147,302
Total liabilities and equity $ 374,905 $ 339,716
v3.19.1
Condensed Consolidated Balance Sheets (Parenthetical) (Unaudited) - USD ($)
$ in Thousands
Mar. 31, 2019
Dec. 31, 2018
Statement of Financial Position [Abstract]    
Allowances for accounts receivable $ 2,082 $ 2,016
Accumulated depreciation on property and equipment $ 203,924 $ 199,480
Preferred stock, par value (in usd per share) $ 0.001 $ 0.001
Preferred stock, shares authorized (in shares) 25,000,000 25,000,000
Preferred stock, shares issued (in shares) 0 0
Preferred stock, shares outstanding (in shares) 0 0
Common stock, par value (in usd per share) $ 0.001 $ 0.001
Common stock, shares authorized (in shares) 150,000,000 150,000,000
Common stock, shares issued (in shares) 48,969,000 48,492,000
Common stock, shares outstanding (in shares) 46,269,000 45,818,000
Treasury stock, (in shares) 2,700,000 2,674,000
v3.19.1
Condensed Consolidated Statements of Operations (Unaudited) - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Income Statement [Abstract]    
Net sales $ 97,122 $ 97,708
Cost of sales 66,447 67,523
Gross profit 30,675 30,185
Selling, general and administrative expenses 27,637 27,301
Amortization of intangible assets 895 1,008
Income from operations 2,143 1,876
Other income, net (18) (81)
Interest expense, net 1,430 1,442
Income before income tax provision 731 515
Income tax provision 284 39
Net income 447 476
Loss attributable to the noncontrolling interest 145 152
Net income attributable to ARC Document Solutions, Inc. shareholders $ 592 $ 628
Earnings per share attributable to ARC Document Solutions, Inc. shareholders:    
Basic (dollars per share) $ 0.01 $ 0.01
Diluted (dollars per share) $ 0.01 $ 0.01
Weighted average common shares outstanding:    
Basic (shares) 45,118 44,741
Diluted (shares) 45,355 44,855
v3.19.1
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Statement of Comprehensive Income [Abstract]    
Net income $ 447 $ 476
Other comprehensive (loss) income, net of tax    
Foreign currency translation adjustments, net of tax (774) 400
Fair value adjustment of derivatives, net of tax 0 0
Other comprehensive (loss) income, net of tax (774) 400
Comprehensive (loss) income (327) 876
Comprehensive (loss) income attributable to noncontrolling interest (351) 204
Comprehensive income (loss) attributable to ARC Document Solutions, Inc. shareholders $ 24 $ 672
v3.19.1
Condensed Consolidated Statements of Equity (Unaudited) - USD ($)
shares in Thousands, $ in Thousands
Total
Common Stock
Additional Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Common Stock in Treasury
Noncontrolling Interest
Beginning Balance, shares (in shares) at Dec. 31, 2017   47,913          
Beginning Balance at Dec. 31, 2017 $ 137,611 $ 48 $ 120,953 $ 20,524 $ (1,998) $ (9,290) $ 7,374
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Stock-based compensation, shares (in shares)   503          
Stock-based compensation 653   653        
Issuance of common stock under Employee Stock Purchase Plan, shares (in shares)   76          
Issuance of common stock under Employee Stock Purchase Plan 44   44        
Treasury shares (60)         (60)  
Comprehensive income (loss) 876     628 44   204
Ending Balance, shares (in shares) at Mar. 31, 2018   48,492          
Ending Balance at Mar. 31, 2018 $ 139,124 $ 48 121,650 21,152 (1,954) (9,350) 7,578
Beginning Balance, shares (in shares) at Dec. 31, 2018 48,492 48,492          
Beginning Balance at Dec. 31, 2018 $ 147,302 $ 48 123,525 29,397 (3,351) (9,350) 7,033
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Stock-based compensation, shares (in shares)   450          
Stock-based compensation 608 $ 1 607        
Issuance of common stock under Employee Stock Purchase Plan, shares (in shares)   27          
Issuance of common stock under Employee Stock Purchase Plan 50   50        
Treasury shares (66)         (66)  
Comprehensive income (loss) $ (327)     592 (568)   (351)
Ending Balance, shares (in shares) at Mar. 31, 2019 48,969 48,969          
Ending Balance at Mar. 31, 2019 $ 147,567 $ 49 $ 124,182 $ 29,989 $ (3,919) $ (9,416) $ 6,682
v3.19.1
Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Cash flows from operating activities    
Net income $ 447 $ 476
Adjustments to reconcile net income to net cash provided by (used in) operating activities:    
Allowance for accounts receivable 232 327
Depreciation 7,423 7,129
Amortization of intangible assets 895 1,008
Amortization of deferred financing costs 55 60
Stock-based compensation 608 653
Deferred income taxes 175 (92)
Deferred tax valuation allowance (8) 57
Other non-cash items, net (60) (44)
Changes in operating assets and liabilities:    
Accounts receivable (2,537) (2,913)
Inventory 359 524
Prepaid expenses and other assets 1,798 (150)
Accounts payable and accrued expenses (6,722) (9,014)
Net cash provided by (used in) operating activities 2,665 (1,979)
Cash flows from investing activities    
Capital expenditures (3,196) (2,892)
Other 166 380
Net cash used in investing activities (3,030) (2,512)
Cash flows from financing activities    
Proceeds from issuance of common stock under Employee Stock Purchase Plan 50 44
Share repurchases (66) (60)
Contingent consideration on prior acquisitions (3) (53)
Payments on long-term debt agreements and finance leases (5,750) (5,751)
Borrowings under revolving credit facilities 8,250 2,000
Payments under revolving credit facilities (12,125) (5,875)
Net cash used in financing activities (9,644) (9,695)
Effect of foreign currency translation on cash balances (654) 95
Net change in cash and cash equivalents (10,663) (14,091)
Cash and cash equivalents at beginning of period 29,433 28,059
Cash and cash equivalents at end of period 18,770 13,968
Noncash investing and financing activities    
Finance lease obligations incurred 3,664 $ 3,275
Operating lease obligations incurred $ 1,068  
v3.19.1
Description of Business and Basis of Presentation
3 Months Ended
Mar. 31, 2019
Accounting Policies [Abstract]  
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 interim Condensed Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in conformity with the requirements of the Securities and Exchange Commission ("SEC"). As permitted under those rules, certain footnotes or other financial information required by GAAP for complete financial statements have been condensed or omitted. In management’s opinion, the accompanying interim Condensed Consolidated Financial Statements presented reflect all adjustments of a normal and recurring nature that are necessary to fairly present the interim Condensed Consolidated Financial Statements. All intercompany accounts and transactions have been eliminated in consolidation. The operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the interim Condensed Consolidated Financial Statements and accompanying notes. The Company evaluates its estimates and assumptions on an ongoing basis and relies on historical experience and various other factors that it believes to be reasonable under the circumstances to determine such estimates. Actual results could differ from those estimates and such differences may be material to the interim Condensed Consolidated Financial Statements.
These interim Condensed Consolidated Financial Statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes included in the Company’s 2018 Form 10-K.
Revenue Recognition
 
Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Net sales of the Company’s principal services and products were as follows:
 
 
Three Months Ended 
 March 31,
 
2019
 
2018
CDIM
$
50,805

 
$
52,320

MPS(1)
30,907

 
31,467

AIM
3,262

 
2,923

Equipment and supplies sales
12,148

 
10,998

Net sales
$
97,122

 
$
97,708


(1) MPS includes $28.7 million in rental income and $2.2 million in service income for the three months ended March 31, 2019.
CDIM consists of professional services and software services to (i) re-produce and distribute large-format and small-format documents in either black and white or color (“Ordered Prints”) and (ii) specialized graphic color printing. Substantially all of the Company’s revenue from CDIM comes from professional services to re-produce Ordered Prints. Sales of Ordered Prints are initiated through a customer order or quote and are governed by established terms and conditions agreed upon at the onset of the customer relationship. Revenue is recognized when the performance obligation under the terms of a contract with a customer are satisfied; generally, this occurs with the transfer of control of the re-produced Ordered Prints. Transfer of control occurs at a specific point in time, when the Ordered Prints are delivered to the customer’s site or handed to the customer for walk in orders. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Taxes collected concurrent with revenue-producing activities are excluded from revenue.
MPS consists of placement, management, and optimization of print and imaging equipment in the customers' offices, job sites, and other facilities. MPS relieves the Company’s customers of the burden of purchasing print equipment and related supplies and maintaining print devices and print networks, and shifts their costs to a “per-use” basis. MPS is supported by our hosted proprietary technology, Abacus® , which allows our customers to capture, control, manage, print, and account for their documents. Under its MPS contracts, the Company is paid a fixed rate per unit for each print produced (per-use), often referred to as a “click charge.” MPS sales are driven by the ongoing print needs of the Company’s customers at their facilities. Upon the issuance of Accounting Standards Codification ("ASC") 842, Leases, the Company concluded that certain of its MPS arrangements, which had previously been accounted for as service revenue under ASC 606, Revenue from Contracts with Customers, are accounted for as operating leases under ASC 842. See Note 6, Leasing, for additional information.
AIM combines software and professional services to facilitate the capture, management, access and retrieval of documents and information that have been produced in the past. AIM includes our hosted SKYSITE ® software to organize, search and retrieve documents, as well as the provision of services that include the capture and conversion of hardcopy and electronic documents into digital files (“Scanned Documents”), and their cloud-based storage and maintenance. Sales of AIM professional services, which represents the majority of AIM revenue, are initiated through a customer order or proposal and are governed by established terms and conditions agreed upon at the onset of the customer relationship. Revenue is recognized when the performance obligation under the terms of a contract with a customer are satisfied; generally, this occurs with the transfer of control of the digital files. Transfer of control occurs at a specific point-in-time, when the Scanned Documents are delivered to the customer either through SKYSITE or on electronic media. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Taxes collected concurrent with revenue-producing activities are excluded from revenue.

Equipment and Supplies sales consist of reselling printing, imaging, and related equipment (“Goods”) to customers primarily in architectural, engineering and construction firms. Sales of equipment and supplies are initiated through a customer order and are governed by established terms and conditions agreed upon at the onset of the customer relationship. Revenue is recognized when the performance obligations under the terms of a contract with a customer are satisfied; generally, this occurs with the transfer of control of the Goods. Transfer of control occurs at a specific point-in-time, when the Goods are delivered to the customer’s site. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Taxes collected concurrent with revenue-producing activities are excluded from revenue. The Company has experienced minimal customer returns or refunds and does not offer a warranty on equipment that it is reselling.

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued Accounting Standards Codification (“ASC”) 842 (“ASC 842”), Leases. The new guidance replaced the existing guidance in ASC 840, Leases. ASC 842 requires a dual approach for lessee accounting under which a lessee accounts for leases as finance leases or operating leases. Both finance leases and operating leases result in the lessee recognizing a right-of-use (ROU) asset and a corresponding lease liability. For finance leases the lessee recognizes interest expense and amortization of the ROU asset and for operating leases the lessee will recognize a straight-line total lease expense. The Company adopted ASC 842 on January 1, 2019. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provided entities the option to use the effective date as the date of initial application on transition to the new guidance. The Company elected this transition method, and as a result, the Company did not adjust comparative information for prior periods. For additional information about the impact of the adoption of ASC 842, see Note 6, Leasing.

Segment Reporting
The provisions of ASC 280, Segment Reporting, require public companies to report financial and descriptive information about their reportable operating segments. The Company identifies operating segments based on the various business activities that earn revenue and incur expense and whose operating results are reviewed by the Company's Chief Executive Officer, who is the Company's chief operating decision maker. Because its operating segments have similar products and services, classes of customers, production processes, distribution methods and economic characteristics, the Company operates as a single reportable segment.
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.
v3.19.1
Earnings per Share
3 Months Ended
Mar. 31, 2019
Earnings Per Share [Abstract]  
Earnings per Share
Earnings per Share
The Company accounts for earnings per share in accordance with ASC 260, Earnings Per Share. Basic earnings per share is computed by dividing net income attributable to ARC by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share is computed similarly to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if common shares subject to outstanding options and acquisition rights had been issued and if the additional common shares were dilutive. Common share equivalents are excluded from the computation if their effect is anti-dilutive. For the three months ended March 31, 2019, 5.5 million common shares were excluded from the calculation of diluted net income attributable to ARC per common share, respectively, because they were anti-dilutive. For the three months ended March 31, 2018, 5.0 million common shares were excluded from the calculation of diluted net loss attributable to ARC per common share because they were anti-dilutive. The Company's common share equivalents consist of stock options issued under the Company's stock plan.
Basic and diluted weighted average common shares outstanding were calculated as follows for the three months ended March 31, 2019 and 2018:
 
 
Three Months Ended 
 March 31,
 
2019
 
2018
Weighted average common shares outstanding during the period—basic
45,118

 
44,741

Effect of dilutive stock options
237

 
114

Weighted average common shares outstanding during the period—diluted
45,355

 
44,855

v3.19.1
Goodwill and Other Intangibles
3 Months Ended
Mar. 31, 2019
Goodwill and Intangible Assets Disclosure [Abstract]  
Goodwill and Other Intangibles
Goodwill and Other Intangibles
Goodwill
In accordance with ASC 350, Intangibles - Goodwill and Other, the Company assesses goodwill for impairment annually as of September 30, and more frequently if events and circumstances indicate that goodwill might be impaired. At September 30, 2018, the Company performed its assessment and determined that goodwill was not impaired.
Goodwill impairment testing is performed at the reporting unit level. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support the value of the goodwill. For its annual goodwill impairment test as of September 30, 2017, the Company elected to early-adopt ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies subsequent goodwill measurement by eliminating step two from the goodwill impairment test.
The Company determines the fair value of its reporting units using an income approach. Under the income approach, the Company determined fair value based on estimated discounted future cash flows of each reporting unit. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates and EBITDA margins, discount rates and future market conditions, among others.
Given the changing document and printing needs of the Company’s customers, and the uncertainties regarding the effect on the Company’s business, there can be no assurance that the estimates and assumptions made for purposes of the Company’s goodwill impairment test in 2018 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 2019, 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. There was no change in the carrying amount of goodwill from January 1, 2018 through March 31, 2019. 
See “Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations for further information regarding the process and assumptions used in the goodwill impairment analysis.
Long-lived and Other Intangible Assets
The Company periodically assesses potential impairments of its long-lived assets in accordance with the provisions of ASC 360, Accounting for the Impairment or Disposal of Long-lived Assets. An impairment review is performed whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. The Company groups its assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of the other assets and liabilities. The Company has determined that the lowest level for which identifiable cash flows are available is the regional level, which is the operating segment level.
Factors considered by the Company include, but are not limited to, significant underperformance relative to historical or projected operating results; significant changes in the manner of use of the acquired assets or the strategy for the overall business; and significant negative industry or economic trends. When the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of the above indicators of impairment, the Company estimates the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future undiscounted cash flows and eventual disposition is less than the carrying amount of the asset, the Company recognizes an impairment loss. An impairment loss is reflected as the amount by which the carrying amount of the asset exceeds the fair value of the asset, based on the fair value if available, or discounted cash flows, if fair value is not available.
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 March 31, 2019 and December 31, 2018 which continue to be amortized:
 
 
March 31, 2019
 
December 31, 2018
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Amortizable other intangible assets
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
$
99,215

 
$
95,298

 
$
3,917

 
$
99,136

 
$
94,345

 
$
4,791

Trade names and trademarks
20,305

 
19,969

 
336

 
20,259

 
19,924

 
335

 
$
119,520

 
$
115,267

 
$
4,253

 
$
119,395

 
$
114,269

 
$
5,126


Estimated future amortization expense of other intangible assets for the remainder of the 2019 fiscal year, and each of the subsequent four fiscal years and thereafter are as follows:
 
2019 (excluding the three months ended March 31, 2019)
$
2,239

2020
1,527

2021
175

2022
99

2023
43

Thereafter
170

 
$
4,253

v3.19.1
Income Taxes
3 Months Ended
Mar. 31, 2019
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes
On a quarterly basis, the Company estimates its effective tax rate for the full fiscal year and records a quarterly income tax provision based on the anticipated annual effective rate and the recognition of any discrete items within the quarter.
The Company recorded an income tax provision of $0.3 million in relation to pretax income of $0.7 million for the three months ended March 31, 2019, which resulted in an effective income tax rate of 38.8%. The Company recorded an income tax provision of $39 thousand in relation to pretax income of $0.5 million for the three months ended March 31, 2018, which resulted in an effective income tax rate of 7.6%.

The Company has a deferred tax asset of approximately $2.4 million related to certain stock-based compensation with a strike price of $8.20 that is pending to expire in the second quarter of 2019. Upon expiration, if unexercised, the Company will record deferred tax expense of approximately $2.4 million, which will be treated as a discrete item.

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

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

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

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

The Company utilizes a rolling three years of actual and current year anticipated results as the primary measure of cumulative income/losses in recent years, as adjusted for permanent differences. The evaluation of deferred tax assets requires judgment in assessing the likely future tax consequences of events that have been recognized in the Company's financial statements or tax returns and future profitability. The Company's accounting for deferred tax consequences represents its best estimate of those future events. Changes in the Company's current estimates, due to unanticipated events or otherwise, could have a material effect on its financial condition and results of operations. The Company has a $2.2 million valuation allowance against certain deferred tax assets as of March 31, 2019.

Based on the Company’s current assessment, the remaining net deferred tax assets as of March 31, 2019 are considered more likely than not to be realized. The valuation allowance of $2.2 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 $0.1 million as of March 31, 2019 included in other current assets in its interim Condensed Consolidated Balance Sheet primarily related to income tax refunds for prior years.
v3.19.1
Long-Term Debt
3 Months Ended
Mar. 31, 2019
Debt Disclosure [Abstract]  
Long-Term Debt
Long-Term Debt
Long-term debt consists of the following:
 
 
 
March 31, 2019
 
December 31, 2018
Term Loan maturing 2022, net of deferred financing fees of $509 and $556; 4.25% and 4.11% interest rate at March 31, 2019 and December 31, 2018
 
$
51,616

 
$
52,694

Revolving Loans; 4.53% and 4.74% interest rate at March 31, 2019 and December 31, 2018
 
22,875

 
26,750

Various finance leases; weighted average interest rate of 4.8% at March, 31 2019 and December 31, 2018; principal and interest payable monthly through March 2024
 
46,818

 
47,737

Various other notes payable with a weighted average interest rate of 10.7% at March 31, 2019 and December 31, 2018; principal and interest payable monthly through November 2019
 
9

 
11

 
 
121,318

 
127,192

Less current portion
 
(22,312
)
 
(22,132
)
 
 
$
99,006

 
$
105,060




Credit Agreement
On July 14, 2017, the Company amended its Credit Agreement which was originally entered into on November 20, 2014 with Wells Fargo Bank, National Association, as administrative agent and the lenders party thereto.
Prior to being amended, the Credit Agreement provided for the extension of term loans (“Term Loans”) in an aggregate principal amount of $175.0 million. In addition, prior to being amended, the Credit Agreement provided for the extension of revolving loans (“Revolving Loans”) in an aggregate principal amount not to exceed $30.0 million. The amendment increased the maximum aggregate principal amount of Revolving Loans under the agreement from $30.0 million to $80.0 million and reduced the outstanding principal amount of the Term Loan under the agreement to $60.0 million. Upon the execution of the amendment to the Credit Agreement, the total principal amount outstanding under the agreement remained unchanged at $110.0 million. As a result of the amendment to the Credit Agreement, the principal of the Term Loan amortizes at an annual rate of 7.5% during the first and second years following the date of the amendment and at an annual rate of 10% during the third, fourth and fifth years following the date of the amendment, with any remaining balance payable upon the maturity date. The amendment also extended the maturity date for both the Revolving Loans and the Term Loans until July 14, 2022. In November 2018, the Company reduced the $80.0 million Revolving Loan commitment by $15.0 million.
As of March 31, 2019, the Company's borrowing availability of Revolving Loans under the Revolving Loan commitment was $39.9 million, after deducting outstanding letters of credit of $2.2 million and outstanding Revolving Loans of $22.9 million.

Loans borrowed under the Credit Agreement bear interest, in the case of LIBOR rate loans, at a per annum rate equal to the applicable LIBOR rate, plus a margin ranging from 1.25% to 2.25%, based on the Company’s Total Leverage Ratio (as defined in the Credit Agreement). Loans borrowed under the Credit Agreement that are not LIBOR rate loans bear interest at a per annum rate equal to (i) the greatest of (A) the Federal Funds Rate plus 0.50%, (B) the one month LIBOR rate plus 1.00%, per annum, and (C) the rate of interest announced, from time to time, by Wells Fargo Bank, National Association as its “prime rate,” plus (ii) a margin ranging from 0.25% to 1.25%, based on the Company’s Total Leverage Ratio. The amendment reduced the rate of interest payable on the loans borrowed under the Credit Agreement by 0.25%.

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

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

The Credit Agreement contains customary representations and warranties, subject to limitations and exceptions, and customary covenants restricting the ability (subject to various exceptions) of the Company and its subsidiaries to: incur additional indebtedness (including guarantee obligations); incur liens; sell certain property or assets; engage in mergers or other fundamental changes; consummate acquisitions; make investments; pay dividends, other distributions or repurchase equity interest of the Company or its subsidiaries; change the nature of their business; prepay or amend certain indebtedness; engage in certain transactions with affiliates; amend their organizational documents; or enter into certain restrictive agreements. In addition, the Credit Agreement contains financial covenants which requires the Company to maintain (i) at all times, a Total Leverage Ratio in an amount not to exceed 3.25 to 1.00; and (ii) a Fixed Charge Coverage Ratio (as defined in the Credit Agreement), as of the last day of each fiscal quarter, an amount not less than 1.15 to 1.00.

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

The obligations of the Company’s subsidiary that is the borrower under the Credit Agreement are guaranteed by the Company and each other United States domestic subsidiary of the Company. The Credit Agreement and any interest rate protection and other hedging arrangements provided by any lender party to the Credit facility or any affiliate of such a lender are secured on a first priority basis by a perfected security interest in substantially all of the borrower’s, the Company’s and each guarantor’s assets (subject to certain exceptions).
v3.19.1
Leasing
3 Months Ended
Mar. 31, 2019
Leases [Abstract]  
Leasing
Leasing
Adoption of ASC Topic 842, Leases
In February 2016, the FASB issued 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 accounts for leases as finance leases or operating leases. Both finance leases and operating leases result in the lessee recognizing a right-of-use ("ROU") asset and a corresponding lease liability. For finance leases the lessee recognizes interest expense and amortization of the ROU asset, and for operating leases the lessee will recognize a straight-line total lease expense. In addition, ASC 842 changes the definition of a lease, which resulted in changes to the classification of certain service contracts with customers to lease arrangements. The Company adopted ASC 842 on January 1, 2019.
In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provided entities the option to use the effective date as the date of initial application on transition to the new guidance. The Company elected this transition method, and as a result, the Company did not adjust comparative information for prior periods. The Company elected certain additional practical expedients permitted by the new guidance allowing the Company to carry forward historical accounting related to lease identification and classification for existing leases upon adoption. The Company elected, for its equipment asset classes, the practical expedient that allows lessees to treat the lease and non-lease components of leases as a single lease component. Leases with an initial term of 12 months or less are not recorded on the Company's consolidated balance sheet.
As part of the transition, the Company completed a comprehensive review of its lease portfolio, including significant leases by geography and by asset type that were impacted by the new guidance, and enhanced its controls around leasing. The adoption of ASC 842 resulted in an increase to total assets and liabilities due to the recording of operating lease ROU assets of approximately $46.9 million and operating lease liabilities of approximately $53.7 million, as of January 1, 2019. Finance leases were not impacted by the adoption of ASC 842, as finance lease liabilities and the corresponding ROU assets were already recorded in the balance sheet under the previous guidance, ASC 840. The adoption did not materially impact the Company’s Consolidated Statements of Earnings or Cash Flows.
Lessee Accounting
The Company determines if an arrangement is a lease at inception. The Company's material lease contracts are generally for real estate or print equipment, and the determination of whether such contracts contain leases generally does not require significant estimates or judgments. The Company’s leases classified as operating leases primarily consist of real estate leases. The Company’s real estate leases contain both lease and non-lease components, which are accounted for separately. The Company’s leases classified as finance leases primarily consist of print equipment. Certain of the print equipment leases under contract have lease and non-lease components, which are accounted for as a single lease component as discussed above. Other than the election to treat the Company's fixed lease payment as a single lease component, the accounting for finance leases will remain unchanged under ASC 842.
Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company's operating leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU assets also include any lease payments made and are reduced by any lease incentives received. The lease terms primarily range from one to ten years, with renewal terms that can extend the lease term from 1 to 5 years. A portion of the Company’s real estate leases are generally subject to annual changes in the Consumer Price Index (CPI), which are treated as variable lease payments and recognized in the period in which the obligation for those payments was incurred. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The tables below present financial information associated with its leases. This information is only presented as of, and for the three months ended, March 31, 2019 because, as noted above, the Company adopted Topic 842 using a transition method that does not require application to periods prior to adoption.
 
Classification
March 31, 2019
Assets
 
 
Operating lease assets
Right-of-use assets from operating leases
$
44,783

Finance lease assets
Property and equipment
82,292

 
Less accumulated depreciation
(38,262
)
 
Property and equipment, net
44,030

Total lease assets
 
$
88,813

 
 
 
Liabilities
 
 
Current
 
 
Operating
Current operating lease liabilities
$
11,756

Finance
Current portion of long-term debt and finance leases
16,678

Long-term
 
 
Operating
Long-term operating lease liabilities
40,013

Finance
Long-term debt and finance leases
30,140

Total lease liabilities
 
$
98,587



 
Classification
Three Months Ended March 31, 2019
Operating lease cost
Cost of sales
$
4,370

 
Selling, general and administrative expenses
817

Total operating lease cost (1)
 
$
5,187

 
 
 
Finance lease cost
 
 
Amortization of leased assets
Cost of sales
$
4,554

 
Selling, general and administrative expenses
65

Interest on lease liabilities
Interest expense, net
581

Total finance lease cost
 
5,200

Total lease cost
 
$
10,387

(1) Includes variable lease costs and short-term lease costs of $715 and $71, respectively.

Maturity of lease liabilities (as of March 31, 2019)
Operating leases(1)
 
Finance leases(2)
2019
 
$
12,257

 
$
16,031

2020
 
11,924

 
15,792

2021
 
9,396

 
11,668

2022
 
7,811

 
6,356

2023
 
6,523

 
2,280

2024
 
4,577

 
236

Thereafter
 
11,009

 

Total
 
63,497

 
52,363

Less amount representing interest
 
11,728

 
5,545

Present value of lease liability
 
$
51,769

 
$
46,818

(1) Reflects payments for non-cancelable operating leases with initial terms of one year or more as of March 31, 2019. The table above does not include any legally binding minimum lease payments for leases signed but not yet commenced, and such leases are not material in the aggregate.
(2) The table above does not include any legally binding minimum lease payments for leases signed but not yet commenced, and such leases are not material in the aggregate.

As previously disclosed in the Company's 2018 Annual Report on Form 10-K and under the previous lease accounting standard, future minimum lease payments for operating leases and capital lease obligation as of December 31, 2018 were as follows:
Maturity of lease liabilities (as of December 31, 2018)
Operating leases
 
Capital leases
2019
 
$
16,355

 
$
16,872

2020
 
12,956

 
13,817

2021
 
10,130

 
10,141

2022
 
8,510

 
5,274

2023
 
7,054

 
1,633

Thereafter
 
16,650

 

Total
 
$
71,655

 
$
47,737



 
March 31, 2019
Weighted average remaining lease term (years)
 
Operating leases
 
5.8

Finance leases
 
3.2

 
 
 
Weighted average discount rate
 
Operating leases
 
6.0
%
Finance leases
 
4.8
%

Other information
Three Months Ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities
 
Operating cash flows from operating leases
$
4,035

Operating cash flows from finance leases
$
576

Financing cash flows from finance leases
$
4,625


Lessor Accounting
The Company concluded that certain of its contracts with customers should be accounted for as operating leases upon adoption of ASC 842. Specifically, certain of the Company's MPS arrangements, which had previously been accounted for as service revenue under ASC 606, Revenue from Contracts with Customers, are accounted for as operating leases under ASC 842.
The Company's MPS arrangements consists of the placement, management, and optimization of print and imaging equipment in customers' offices, job sites, and other facilities under which the Company is paid a fixed rate per unit for each print produced (per-use), often referred to as a “click charge.” Accordingly, the fixed rate per unit charged to the customer covers the use of the equipment (i.e., the lease component), as well as the additional services performed by the Company as described above (i.e., the non-lease component). Certain of the Company's MPS contracts provide the customer the option to renew or terminate the agreement, which are considered when assessing the lease term. The Company elected the practical expedient to not separate certain lease and non-lease components related to its MPS arrangements, and accounts for the combined component under ASC 842. The pattern of revenue recognition for the Company's MPS revenue remains substantially unchanged following the adoption of ASC 842.
MPS revenue includes $28.7 million in rental income and $2.2 million in service income for the three months ended March 31, 2019. The Company's property and equipment, net of accumulated depreciation, includes approximately $40 million of equipment subject to leases with customers under the Company's MPS arrangements. Following the termination of an MPS arrangement, the Company will place existing equipment at an alternate customer site pursuant to an MPS arrangement, at one of the Company's service centers, or dispose of the equipment.
Leasing
Leasing
Adoption of ASC Topic 842, Leases
In February 2016, the FASB issued 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 accounts for leases as finance leases or operating leases. Both finance leases and operating leases result in the lessee recognizing a right-of-use ("ROU") asset and a corresponding lease liability. For finance leases the lessee recognizes interest expense and amortization of the ROU asset, and for operating leases the lessee will recognize a straight-line total lease expense. In addition, ASC 842 changes the definition of a lease, which resulted in changes to the classification of certain service contracts with customers to lease arrangements. The Company adopted ASC 842 on January 1, 2019.
In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provided entities the option to use the effective date as the date of initial application on transition to the new guidance. The Company elected this transition method, and as a result, the Company did not adjust comparative information for prior periods. The Company elected certain additional practical expedients permitted by the new guidance allowing the Company to carry forward historical accounting related to lease identification and classification for existing leases upon adoption. The Company elected, for its equipment asset classes, the practical expedient that allows lessees to treat the lease and non-lease components of leases as a single lease component. Leases with an initial term of 12 months or less are not recorded on the Company's consolidated balance sheet.
As part of the transition, the Company completed a comprehensive review of its lease portfolio, including significant leases by geography and by asset type that were impacted by the new guidance, and enhanced its controls around leasing. The adoption of ASC 842 resulted in an increase to total assets and liabilities due to the recording of operating lease ROU assets of approximately $46.9 million and operating lease liabilities of approximately $53.7 million, as of January 1, 2019. Finance leases were not impacted by the adoption of ASC 842, as finance lease liabilities and the corresponding ROU assets were already recorded in the balance sheet under the previous guidance, ASC 840. The adoption did not materially impact the Company’s Consolidated Statements of Earnings or Cash Flows.
Lessee Accounting
The Company determines if an arrangement is a lease at inception. The Company's material lease contracts are generally for real estate or print equipment, and the determination of whether such contracts contain leases generally does not require significant estimates or judgments. The Company’s leases classified as operating leases primarily consist of real estate leases. The Company’s real estate leases contain both lease and non-lease components, which are accounted for separately. The Company’s leases classified as finance leases primarily consist of print equipment. Certain of the print equipment leases under contract have lease and non-lease components, which are accounted for as a single lease component as discussed above. Other than the election to treat the Company's fixed lease payment as a single lease component, the accounting for finance leases will remain unchanged under ASC 842.
Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company's operating leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU assets also include any lease payments made and are reduced by any lease incentives received. The lease terms primarily range from one to ten years, with renewal terms that can extend the lease term from 1 to 5 years. A portion of the Company’s real estate leases are generally subject to annual changes in the Consumer Price Index (CPI), which are treated as variable lease payments and recognized in the period in which the obligation for those payments was incurred. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The tables below present financial information associated with its leases. This information is only presented as of, and for the three months ended, March 31, 2019 because, as noted above, the Company adopted Topic 842 using a transition method that does not require application to periods prior to adoption.
 
Classification
March 31, 2019
Assets
 
 
Operating lease assets
Right-of-use assets from operating leases
$
44,783

Finance lease assets
Property and equipment
82,292

 
Less accumulated depreciation
(38,262
)
 
Property and equipment, net
44,030

Total lease assets
 
$
88,813

 
 
 
Liabilities
 
 
Current
 
 
Operating
Current operating lease liabilities
$
11,756

Finance
Current portion of long-term debt and finance leases
16,678

Long-term
 
 
Operating
Long-term operating lease liabilities
40,013

Finance
Long-term debt and finance leases
30,140

Total lease liabilities
 
$
98,587



 
Classification
Three Months Ended March 31, 2019
Operating lease cost
Cost of sales
$
4,370

 
Selling, general and administrative expenses
817

Total operating lease cost (1)
 
$
5,187

 
 
 
Finance lease cost
 
 
Amortization of leased assets
Cost of sales
$
4,554

 
Selling, general and administrative expenses
65

Interest on lease liabilities
Interest expense, net
581

Total finance lease cost
 
5,200

Total lease cost
 
$
10,387

(1) Includes variable lease costs and short-term lease costs of $715 and $71, respectively.

Maturity of lease liabilities (as of March 31, 2019)
Operating leases(1)
 
Finance leases(2)
2019
 
$
12,257

 
$
16,031

2020
 
11,924

 
15,792

2021
 
9,396

 
11,668

2022
 
7,811

 
6,356

2023
 
6,523

 
2,280

2024
 
4,577

 
236

Thereafter
 
11,009

 

Total
 
63,497

 
52,363

Less amount representing interest
 
11,728

 
5,545

Present value of lease liability
 
$
51,769

 
$
46,818

(1) Reflects payments for non-cancelable operating leases with initial terms of one year or more as of March 31, 2019. The table above does not include any legally binding minimum lease payments for leases signed but not yet commenced, and such leases are not material in the aggregate.
(2) The table above does not include any legally binding minimum lease payments for leases signed but not yet commenced, and such leases are not material in the aggregate.

As previously disclosed in the Company's 2018 Annual Report on Form 10-K and under the previous lease accounting standard, future minimum lease payments for operating leases and capital lease obligation as of December 31, 2018 were as follows:
Maturity of lease liabilities (as of December 31, 2018)
Operating leases
 
Capital leases
2019
 
$
16,355

 
$
16,872

2020
 
12,956

 
13,817

2021
 
10,130

 
10,141

2022
 
8,510

 
5,274

2023
 
7,054

 
1,633

Thereafter
 
16,650

 

Total
 
$
71,655

 
$
47,737



 
March 31, 2019
Weighted average remaining lease term (years)
 
Operating leases
 
5.8

Finance leases
 
3.2

 
 
 
Weighted average discount rate
 
Operating leases
 
6.0
%
Finance leases
 
4.8
%

Other information
Three Months Ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities
 
Operating cash flows from operating leases
$
4,035

Operating cash flows from finance leases
$
576

Financing cash flows from finance leases
$
4,625


Lessor Accounting
The Company concluded that certain of its contracts with customers should be accounted for as operating leases upon adoption of ASC 842. Specifically, certain of the Company's MPS arrangements, which had previously been accounted for as service revenue under ASC 606, Revenue from Contracts with Customers, are accounted for as operating leases under ASC 842.
The Company's MPS arrangements consists of the placement, management, and optimization of print and imaging equipment in customers' offices, job sites, and other facilities under which the Company is paid a fixed rate per unit for each print produced (per-use), often referred to as a “click charge.” Accordingly, the fixed rate per unit charged to the customer covers the use of the equipment (i.e., the lease component), as well as the additional services performed by the Company as described above (i.e., the non-lease component). Certain of the Company's MPS contracts provide the customer the option to renew or terminate the agreement, which are considered when assessing the lease term. The Company elected the practical expedient to not separate certain lease and non-lease components related to its MPS arrangements, and accounts for the combined component under ASC 842. The pattern of revenue recognition for the Company's MPS revenue remains substantially unchanged following the adoption of ASC 842.
MPS revenue includes $28.7 million in rental income and $2.2 million in service income for the three months ended March 31, 2019. The Company's property and equipment, net of accumulated depreciation, includes approximately $40 million of equipment subject to leases with customers under the Company's MPS arrangements. Following the termination of an MPS arrangement, the Company will place existing equipment at an alternate customer site pursuant to an MPS arrangement, at one of the Company's service centers, or dispose of the equipment.
Leasing
Leasing
Adoption of ASC Topic 842, Leases
In February 2016, the FASB issued 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 accounts for leases as finance leases or operating leases. Both finance leases and operating leases result in the lessee recognizing a right-of-use ("ROU") asset and a corresponding lease liability. For finance leases the lessee recognizes interest expense and amortization of the ROU asset, and for operating leases the lessee will recognize a straight-line total lease expense. In addition, ASC 842 changes the definition of a lease, which resulted in changes to the classification of certain service contracts with customers to lease arrangements. The Company adopted ASC 842 on January 1, 2019.
In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provided entities the option to use the effective date as the date of initial application on transition to the new guidance. The Company elected this transition method, and as a result, the Company did not adjust comparative information for prior periods. The Company elected certain additional practical expedients permitted by the new guidance allowing the Company to carry forward historical accounting related to lease identification and classification for existing leases upon adoption. The Company elected, for its equipment asset classes, the practical expedient that allows lessees to treat the lease and non-lease components of leases as a single lease component. Leases with an initial term of 12 months or less are not recorded on the Company's consolidated balance sheet.
As part of the transition, the Company completed a comprehensive review of its lease portfolio, including significant leases by geography and by asset type that were impacted by the new guidance, and enhanced its controls around leasing. The adoption of ASC 842 resulted in an increase to total assets and liabilities due to the recording of operating lease ROU assets of approximately $46.9 million and operating lease liabilities of approximately $53.7 million, as of January 1, 2019. Finance leases were not impacted by the adoption of ASC 842, as finance lease liabilities and the corresponding ROU assets were already recorded in the balance sheet under the previous guidance, ASC 840. The adoption did not materially impact the Company’s Consolidated Statements of Earnings or Cash Flows.
Lessee Accounting
The Company determines if an arrangement is a lease at inception. The Company's material lease contracts are generally for real estate or print equipment, and the determination of whether such contracts contain leases generally does not require significant estimates or judgments. The Company’s leases classified as operating leases primarily consist of real estate leases. The Company’s real estate leases contain both lease and non-lease components, which are accounted for separately. The Company’s leases classified as finance leases primarily consist of print equipment. Certain of the print equipment leases under contract have lease and non-lease components, which are accounted for as a single lease component as discussed above. Other than the election to treat the Company's fixed lease payment as a single lease component, the accounting for finance leases will remain unchanged under ASC 842.
Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company's operating leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU assets also include any lease payments made and are reduced by any lease incentives received. The lease terms primarily range from one to ten years, with renewal terms that can extend the lease term from 1 to 5 years. A portion of the Company’s real estate leases are generally subject to annual changes in the Consumer Price Index (CPI), which are treated as variable lease payments and recognized in the period in which the obligation for those payments was incurred. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The tables below present financial information associated with its leases. This information is only presented as of, and for the three months ended, March 31, 2019 because, as noted above, the Company adopted Topic 842 using a transition method that does not require application to periods prior to adoption.
 
Classification
March 31, 2019
Assets
 
 
Operating lease assets
Right-of-use assets from operating leases
$
44,783

Finance lease assets
Property and equipment
82,292

 
Less accumulated depreciation
(38,262
)
 
Property and equipment, net
44,030

Total lease assets
 
$
88,813

 
 
 
Liabilities
 
 
Current
 
 
Operating
Current operating lease liabilities
$
11,756

Finance
Current portion of long-term debt and finance leases
16,678

Long-term
 
 
Operating
Long-term operating lease liabilities
40,013

Finance
Long-term debt and finance leases
30,140

Total lease liabilities
 
$
98,587



 
Classification
Three Months Ended March 31, 2019
Operating lease cost
Cost of sales
$
4,370

 
Selling, general and administrative expenses
817

Total operating lease cost (1)
 
$
5,187

 
 
 
Finance lease cost
 
 
Amortization of leased assets
Cost of sales
$
4,554

 
Selling, general and administrative expenses
65

Interest on lease liabilities
Interest expense, net
581

Total finance lease cost
 
5,200

Total lease cost
 
$
10,387

(1) Includes variable lease costs and short-term lease costs of $715 and $71, respectively.

Maturity of lease liabilities (as of March 31, 2019)
Operating leases(1)
 
Finance leases(2)
2019
 
$
12,257

 
$
16,031

2020
 
11,924

 
15,792

2021
 
9,396

 
11,668

2022
 
7,811

 
6,356

2023
 
6,523

 
2,280

2024
 
4,577

 
236

Thereafter
 
11,009

 

Total
 
63,497

 
52,363

Less amount representing interest
 
11,728

 
5,545

Present value of lease liability
 
$
51,769

 
$
46,818

(1) Reflects payments for non-cancelable operating leases with initial terms of one year or more as of March 31, 2019. The table above does not include any legally binding minimum lease payments for leases signed but not yet commenced, and such leases are not material in the aggregate.
(2) The table above does not include any legally binding minimum lease payments for leases signed but not yet commenced, and such leases are not material in the aggregate.

As previously disclosed in the Company's 2018 Annual Report on Form 10-K and under the previous lease accounting standard, future minimum lease payments for operating leases and capital lease obligation as of December 31, 2018 were as follows:
Maturity of lease liabilities (as of December 31, 2018)
Operating leases
 
Capital leases
2019
 
$
16,355

 
$
16,872

2020
 
12,956

 
13,817

2021
 
10,130

 
10,141

2022
 
8,510

 
5,274

2023
 
7,054

 
1,633

Thereafter
 
16,650

 

Total
 
$
71,655

 
$
47,737



 
March 31, 2019
Weighted average remaining lease term (years)
 
Operating leases
 
5.8

Finance leases
 
3.2

 
 
 
Weighted average discount rate
 
Operating leases
 
6.0
%
Finance leases
 
4.8
%

Other information
Three Months Ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities
 
Operating cash flows from operating leases
$
4,035

Operating cash flows from finance leases
$
576

Financing cash flows from finance leases
$
4,625


Lessor Accounting
The Company concluded that certain of its contracts with customers should be accounted for as operating leases upon adoption of ASC 842. Specifically, certain of the Company's MPS arrangements, which had previously been accounted for as service revenue under ASC 606, Revenue from Contracts with Customers, are accounted for as operating leases under ASC 842.
The Company's MPS arrangements consists of the placement, management, and optimization of print and imaging equipment in customers' offices, job sites, and other facilities under which the Company is paid a fixed rate per unit for each print produced (per-use), often referred to as a “click charge.” Accordingly, the fixed rate per unit charged to the customer covers the use of the equipment (i.e., the lease component), as well as the additional services performed by the Company as described above (i.e., the non-lease component). Certain of the Company's MPS contracts provide the customer the option to renew or terminate the agreement, which are considered when assessing the lease term. The Company elected the practical expedient to not separate certain lease and non-lease components related to its MPS arrangements, and accounts for the combined component under ASC 842. The pattern of revenue recognition for the Company's MPS revenue remains substantially unchanged following the adoption of ASC 842.
MPS revenue includes $28.7 million in rental income and $2.2 million in service income for the three months ended March 31, 2019. The Company's property and equipment, net of accumulated depreciation, includes approximately $40 million of equipment subject to leases with customers under the Company's MPS arrangements. Following the termination of an MPS arrangement, the Company will place existing equipment at an alternate customer site pursuant to an MPS arrangement, at one of the Company's service centers, or dispose of the equipment.
Leasing
Leasing
Adoption of ASC Topic 842, Leases
In February 2016, the FASB issued 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 accounts for leases as finance leases or operating leases. Both finance leases and operating leases result in the lessee recognizing a right-of-use ("ROU") asset and a corresponding lease liability. For finance leases the lessee recognizes interest expense and amortization of the ROU asset, and for operating leases the lessee will recognize a straight-line total lease expense. In addition, ASC 842 changes the definition of a lease, which resulted in changes to the classification of certain service contracts with customers to lease arrangements. The Company adopted ASC 842 on January 1, 2019.
In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provided entities the option to use the effective date as the date of initial application on transition to the new guidance. The Company elected this transition method, and as a result, the Company did not adjust comparative information for prior periods. The Company elected certain additional practical expedients permitted by the new guidance allowing the Company to carry forward historical accounting related to lease identification and classification for existing leases upon adoption. The Company elected, for its equipment asset classes, the practical expedient that allows lessees to treat the lease and non-lease components of leases as a single lease component. Leases with an initial term of 12 months or less are not recorded on the Company's consolidated balance sheet.
As part of the transition, the Company completed a comprehensive review of its lease portfolio, including significant leases by geography and by asset type that were impacted by the new guidance, and enhanced its controls around leasing. The adoption of ASC 842 resulted in an increase to total assets and liabilities due to the recording of operating lease ROU assets of approximately $46.9 million and operating lease liabilities of approximately $53.7 million, as of January 1, 2019. Finance leases were not impacted by the adoption of ASC 842, as finance lease liabilities and the corresponding ROU assets were already recorded in the balance sheet under the previous guidance, ASC 840. The adoption did not materially impact the Company’s Consolidated Statements of Earnings or Cash Flows.
Lessee Accounting
The Company determines if an arrangement is a lease at inception. The Company's material lease contracts are generally for real estate or print equipment, and the determination of whether such contracts contain leases generally does not require significant estimates or judgments. The Company’s leases classified as operating leases primarily consist of real estate leases. The Company’s real estate leases contain both lease and non-lease components, which are accounted for separately. The Company’s leases classified as finance leases primarily consist of print equipment. Certain of the print equipment leases under contract have lease and non-lease components, which are accounted for as a single lease component as discussed above. Other than the election to treat the Company's fixed lease payment as a single lease component, the accounting for finance leases will remain unchanged under ASC 842.
Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company's operating leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU assets also include any lease payments made and are reduced by any lease incentives received. The lease terms primarily range from one to ten years, with renewal terms that can extend the lease term from 1 to 5 years. A portion of the Company’s real estate leases are generally subject to annual changes in the Consumer Price Index (CPI), which are treated as variable lease payments and recognized in the period in which the obligation for those payments was incurred. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The tables below present financial information associated with its leases. This information is only presented as of, and for the three months ended, March 31, 2019 because, as noted above, the Company adopted Topic 842 using a transition method that does not require application to periods prior to adoption.
 
Classification
March 31, 2019
Assets
 
 
Operating lease assets
Right-of-use assets from operating leases
$
44,783

Finance lease assets
Property and equipment
82,292

 
Less accumulated depreciation
(38,262
)
 
Property and equipment, net
44,030

Total lease assets
 
$
88,813

 
 
 
Liabilities
 
 
Current
 
 
Operating
Current operating lease liabilities
$
11,756

Finance
Current portion of long-term debt and finance leases
16,678

Long-term
 
 
Operating
Long-term operating lease liabilities
40,013

Finance
Long-term debt and finance leases
30,140

Total lease liabilities
 
$
98,587



 
Classification
Three Months Ended March 31, 2019
Operating lease cost
Cost of sales
$
4,370

 
Selling, general and administrative expenses
817

Total operating lease cost (1)
 
$
5,187

 
 
 
Finance lease cost
 
 
Amortization of leased assets
Cost of sales
$
4,554

 
Selling, general and administrative expenses
65

Interest on lease liabilities
Interest expense, net
581

Total finance lease cost
 
5,200

Total lease cost
 
$
10,387

(1) Includes variable lease costs and short-term lease costs of $715 and $71, respectively.

Maturity of lease liabilities (as of March 31, 2019)
Operating leases(1)
 
Finance leases(2)
2019
 
$
12,257

 
$
16,031

2020
 
11,924

 
15,792

2021
 
9,396

 
11,668

2022
 
7,811

 
6,356

2023
 
6,523

 
2,280

2024
 
4,577

 
236

Thereafter
 
11,009

 

Total
 
63,497

 
52,363

Less amount representing interest
 
11,728

 
5,545

Present value of lease liability
 
$
51,769

 
$
46,818

(1) Reflects payments for non-cancelable operating leases with initial terms of one year or more as of March 31, 2019. The table above does not include any legally binding minimum lease payments for leases signed but not yet commenced, and such leases are not material in the aggregate.
(2) The table above does not include any legally binding minimum lease payments for leases signed but not yet commenced, and such leases are not material in the aggregate.

As previously disclosed in the Company's 2018 Annual Report on Form 10-K and under the previous lease accounting standard, future minimum lease payments for operating leases and capital lease obligation as of December 31, 2018 were as follows:
Maturity of lease liabilities (as of December 31, 2018)
Operating leases
 
Capital leases
2019
 
$
16,355

 
$
16,872

2020
 
12,956

 
13,817

2021
 
10,130

 
10,141

2022
 
8,510

 
5,274

2023
 
7,054

 
1,633

Thereafter
 
16,650

 

Total
 
$
71,655

 
$
47,737



 
March 31, 2019
Weighted average remaining lease term (years)
 
Operating leases
 
5.8

Finance leases
 
3.2

 
 
 
Weighted average discount rate
 
Operating leases
 
6.0
%
Finance leases
 
4.8
%

Other information
Three Months Ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities
 
Operating cash flows from operating leases
$
4,035

Operating cash flows from finance leases
$
576

Financing cash flows from finance leases
$
4,625


Lessor Accounting
The Company concluded that certain of its contracts with customers should be accounted for as operating leases upon adoption of ASC 842. Specifically, certain of the Company's MPS arrangements, which had previously been accounted for as service revenue under ASC 606, Revenue from Contracts with Customers, are accounted for as operating leases under ASC 842.
The Company's MPS arrangements consists of the placement, management, and optimization of print and imaging equipment in customers' offices, job sites, and other facilities under which the Company is paid a fixed rate per unit for each print produced (per-use), often referred to as a “click charge.” Accordingly, the fixed rate per unit charged to the customer covers the use of the equipment (i.e., the lease component), as well as the additional services performed by the Company as described above (i.e., the non-lease component). Certain of the Company's MPS contracts provide the customer the option to renew or terminate the agreement, which are considered when assessing the lease term. The Company elected the practical expedient to not separate certain lease and non-lease components related to its MPS arrangements, and accounts for the combined component under ASC 842. The pattern of revenue recognition for the Company's MPS revenue remains substantially unchanged following the adoption of ASC 842.
MPS revenue includes $28.7 million in rental income and $2.2 million in service income for the three months ended March 31, 2019. The Company's property and equipment, net of accumulated depreciation, includes approximately $40 million of equipment subject to leases with customers under the Company's MPS arrangements. Following the termination of an MPS arrangement, the Company will place existing equipment at an alternate customer site pursuant to an MPS arrangement, at one of the Company's service centers, or dispose of the equipment.
v3.19.1
Commitments and Contingencies
3 Months Ended
Mar. 31, 2019
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies
Commitments and Contingencies
Operating Leases. The Company leases machinery, equipment, and office and operational facilities under non-cancelable operating lease agreements used in the ordinary course of business.

Legal Proceedings. We are involved in various legal proceedings and other legal matters from time to time in the normal course of business. We do not believe that the outcome of any of those matters will have a material effect on our consolidated financial position, results of operations or cash flows.
v3.19.1
Stock-Based Compensation
3 Months Ended
Mar. 31, 2019
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Stock-Based Compensation
Stock-Based Compensation
The Company's stock plan provides for the grant of incentive and non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units, stock bonuses and other forms of awards granted or denominated in the Company's common stock or units of the Company's common stock, as well as cash bonus awards to employees, directors and consultants of the Company. On April 26, 2018, the Company's shareholders approved an amendment to the Company's stock plan to increase the aggregate number of shares authorized for issuance under such plan by 3.5 million shares. The Company's stock plan, as amended, currently authorizes the Company to issue up to 7.0 million shares of common stock. As of March 31, 2019, 2.0 million shares remained available for issuance under the stock plan.
Stock options granted under the Company's stock plan generally expire no later than ten years from the date of grant. Options generally vest and become fully exercisable over a period of three to four years from date of award, except that options granted to non-employee directors may vest over a shorter time period. The exercise price of options must be equal to at least 100% of the fair market value of the Company’s common stock on the date of grant. The Company allows for cashless exercises of vested outstanding options.
During the three months ended March 31, 2019, the Company granted options to acquire a total of 0.7 million shares of the Company's common stock to certain key employees with an exercise price equal to the fair market value of the Company’s common stock on the date of grant. During the three months ended March 31, 2019, the Company granted 0.5 million shares of restricted stock awards to certain key employees with a deemed issuance price per share equal to the closing price of the Company's common stock on the date the restricted stock was granted. These stock options and restricted stock awards vest annually over three years from the grant date.
Stock-based compensation expense was $0.6 million for the three months ended March 31, 2019, compared to stock-based compensation expense of $0.7 million for the three months ended March 31, 2018.
As of March 31, 2019, total unrecognized compensation cost related to unvested stock-based payments totaled $4.0 million and is expected to be recognized over a weighted-average period of approximately 2.3 years.
v3.19.1
Fair Value Measurements
3 Months Ended
Mar. 31, 2019
Fair Value Disclosures [Abstract]  
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. 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.
As of March 31, 2019, the Company's assets and liabilities that are measured at fair value were not material.
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 interim Condensed Consolidated Balance Sheet were $7.5 million and $7.3 million as of March 31, 2019 and December 31, 2018, respectively, and are carried at cost and approximate fair value due to the relatively short period to maturity of these instruments.
Short and long-term debt: The carrying amount of the Company’s finance leases reported in the interim Condensed Consolidated Balance Sheets approximates fair value based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements. The carrying amount reported in the Company’s interim Condensed Consolidated Balance Sheet as of March 31, 2019 for borrowings under its Credit Agreement is $75.0 million, excluding unamortized deferred financing fees. The Company has determined, utilizing observable market quotes, that the fair value of borrowings under its Credit Agreement is $75.0 million as of March 31, 2019.
v3.19.1
Description of Business and Basis of Presentation (Policies)
3 Months Ended
Mar. 31, 2019
Accounting Policies [Abstract]  
Basis of Presentation
Basis of Presentation
The accompanying interim Condensed Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in conformity with the requirements of the Securities and Exchange Commission ("SEC"). As permitted under those rules, certain footnotes or other financial information required by GAAP for complete financial statements have been condensed or omitted. In management’s opinion, the accompanying interim Condensed Consolidated Financial Statements presented reflect all adjustments of a normal and recurring nature that are necessary to fairly present the interim Condensed Consolidated Financial Statements. All intercompany accounts and transactions have been eliminated in consolidation. The operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the interim Condensed Consolidated Financial Statements and accompanying notes. The Company evaluates its estimates and assumptions on an ongoing basis and relies on historical experience and various other factors that it believes to be reasonable under the circumstances to determine such estimates. Actual results could differ from those estimates and such differences may be material to the interim Condensed Consolidated Financial Statements.
These interim Condensed Consolidated Financial Statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes included in the Company’s 2018 Form 10-K.
Revenue Recognition
CDIM consists of professional services and software services to (i) re-produce and distribute large-format and small-format documents in either black and white or color (“Ordered Prints”) and (ii) specialized graphic color printing. Substantially all of the Company’s revenue from CDIM comes from professional services to re-produce Ordered Prints. Sales of Ordered Prints are initiated through a customer order or quote and are governed by established terms and conditions agreed upon at the onset of the customer relationship. Revenue is recognized when the performance obligation under the terms of a contract with a customer are satisfied; generally, this occurs with the transfer of control of the re-produced Ordered Prints. Transfer of control occurs at a specific point in time, when the Ordered Prints are delivered to the customer’s site or handed to the customer for walk in orders. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Taxes collected concurrent with revenue-producing activities are excluded from revenue.
MPS consists of placement, management, and optimization of print and imaging equipment in the customers' offices, job sites, and other facilities. MPS relieves the Company’s customers of the burden of purchasing print equipment and related supplies and maintaining print devices and print networks, and shifts their costs to a “per-use” basis. MPS is supported by our hosted proprietary technology, Abacus® , which allows our customers to capture, control, manage, print, and account for their documents. Under its MPS contracts, the Company is paid a fixed rate per unit for each print produced (per-use), often referred to as a “click charge.” MPS sales are driven by the ongoing print needs of the Company’s customers at their facilities. Upon the issuance of Accounting Standards Codification ("ASC") 842, Leases, the Company concluded that certain of its MPS arrangements, which had previously been accounted for as service revenue under ASC 606, Revenue from Contracts with Customers, are accounted for as operating leases under ASC 842. See Note 6, Leasing, for additional information.
AIM combines software and professional services to facilitate the capture, management, access and retrieval of documents and information that have been produced in the past. AIM includes our hosted SKYSITE ® software to organize, search and retrieve documents, as well as the provision of services that include the capture and conversion of hardcopy and electronic documents into digital files (“Scanned Documents”), and their cloud-based storage and maintenance. Sales of AIM professional services, which represents the majority of AIM revenue, are initiated through a customer order or proposal and are governed by established terms and conditions agreed upon at the onset of the customer relationship. Revenue is recognized when the performance obligation under the terms of a contract with a customer are satisfied; generally, this occurs with the transfer of control of the digital files. Transfer of control occurs at a specific point-in-time, when the Scanned Documents are delivered to the customer either through SKYSITE or on electronic media. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Taxes collected concurrent with revenue-producing activities are excluded from revenue.

Equipment and Supplies sales consist of reselling printing, imaging, and related equipment (“Goods”) to customers primarily in architectural, engineering and construction firms. Sales of equipment and supplies are initiated through a customer order and are governed by established terms and conditions agreed upon at the onset of the customer relationship. Revenue is recognized when the performance obligations under the terms of a contract with a customer are satisfied; generally, this occurs with the transfer of control of the Goods. Transfer of control occurs at a specific point-in-time, when the Goods are delivered to the customer’s site. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Taxes collected concurrent with revenue-producing activities are excluded from revenue. The Company has experienced minimal customer returns or refunds and does not offer a warranty on equipment that it is reselling.
Revenue Recognition
 
Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
Recently Adopted Accounting Pronouncements
Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued Accounting Standards Codification (“ASC”) 842 (“ASC 842”), Leases. The new guidance replaced the existing guidance in ASC 840, Leases. ASC 842 requires a dual approach for lessee accounting under which a lessee accounts for leases as finance leases or operating leases. Both finance leases and operating leases result in the lessee recognizing a right-of-use (ROU) asset and a corresponding lease liability. For finance leases the lessee recognizes interest expense and amortization of the ROU asset and for operating leases the lessee will recognize a straight-line total lease expense. The Company adopted ASC 842 on January 1, 2019. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provided entities the option to use the effective date as the date of initial application on transition to the new guidance. The Company elected this transition method, and as a result, the Company did not adjust comparative information for prior periods. For additional information about the impact of the adoption of ASC 842, see Note 6, Leasing.

Segment Reporting
Segment Reporting
The provisions of ASC 280, Segment Reporting, require public companies to report financial and descriptive information about their reportable operating segments. The Company identifies operating segments based on the various business activities that earn revenue and incur expense and whose operating results are reviewed by the Company's Chief Executive Officer, who is the Company's chief operating decision maker. Because its operating segments have similar products and services, classes of customers, production processes, distribution methods and economic characteristics, the Company operates as a single reportable segment.
Risk and Uncertainties
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.
Earnings Per Share
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.
Goodwill
Goodwill
In accordance with ASC 350, Intangibles - Goodwill and Other, the Company assesses goodwill for impairment annually as of September 30, and more frequently if events and circumstances indicate that goodwill might be impaired. At September 30, 2018, the Company performed its assessment and determined that goodwill was not impaired.
Goodwill impairment testing is performed at the reporting unit level. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support the value of the goodwill. For its annual goodwill impairment test as of September 30, 2017, the Company elected to early-adopt ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies subsequent goodwill measurement by eliminating step two from the goodwill impairment test.
The Company determines the fair value of its reporting units using an income approach. Under the income approach, the Company determined fair value based on estimated discounted future cash flows of each reporting unit. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates and EBITDA margins, discount rates and future market conditions, among others.
Given the changing document and printing needs of the Company’s customers, and the uncertainties regarding the effect on the Company’s business, there can be no assurance that the estimates and assumptions made for purposes of the Company’s goodwill impairment test in 2018 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 2019, 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.
Long-Lived Assets
Long-lived and Other Intangible Assets
The Company periodically assesses potential impairments of its long-lived assets in accordance with the provisions of ASC 360, Accounting for the Impairment or Disposal of Long-lived Assets. An impairment review is performed whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. The Company groups its assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of the other assets and liabilities. The Company has determined that the lowest level for which identifiable cash flows are available is the regional level, which is the operating segment level.
Factors considered by the Company include, but are not limited to, significant underperformance relative to historical or projected operating results; significant changes in the manner of use of the acquired assets or the strategy for the overall business; and significant negative industry or economic trends. When the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of the above indicators of impairment, the Company estimates the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future undiscounted cash flows and eventual disposition is less than the carrying amount of the asset, the Company recognizes an impairment loss. An impairment loss is reflected as the amount by which the carrying amount of the asset exceeds the fair value of the asset, based on the fair value if available, or discounted cash flows, if fair value is not available.
Other Intangible Assets
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.
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. 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.
Adoption of ASC Topic 842, Leases
Adoption of ASC Topic 842, Leases
In February 2016, the FASB issued 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 accounts for leases as finance leases or operating leases. Both finance leases and operating leases result in the lessee recognizing a right-of-use ("ROU") asset and a corresponding lease liability. For finance leases the lessee recognizes interest expense and amortization of the ROU asset, and for operating leases the lessee will recognize a straight-line total lease expense. In addition, ASC 842 changes the definition of a lease, which resulted in changes to the classification of certain service contracts with customers to lease arrangements. The Company adopted ASC 842 on January 1, 2019.
In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provided entities the option to use the effective date as the date of initial application on transition to the new guidance. The Company elected this transition method, and as a result, the Company did not adjust comparative information for prior periods. The Company elected certain additional practical expedients permitted by the new guidance allowing the Company to carry forward historical accounting related to lease identification and classification for existing leases upon adoption. The Company elected, for its equipment asset classes, the practical expedient that allows lessees to treat the lease and non-lease components of leases as a single lease component. Leases with an initial term of 12 months or less are not recorded on the Company's consolidated balance sheet.
As part of the transition, the Company completed a comprehensive review of its lease portfolio, including significant leases by geography and by asset type that were impacted by the new guidance, and enhanced its controls around leasing. The adoption of ASC 842 resulted in an increase to total assets and liabilities due to the recording of operating lease ROU assets of approximately $46.9 million and operating lease liabilities of approximately $53.7 million, as of January 1, 2019. Finance leases were not impacted by the adoption of ASC 842, as finance lease liabilities and the corresponding ROU assets were already recorded in the balance sheet under the previous guidance, ASC 840. The adoption did not materially impact the Company’s Consolidated Statements of Earnings or Cash Flows.
Lessee Accounting
The Company determines if an arrangement is a lease at inception. The Company's material lease contracts are generally for real estate or print equipment, and the determination of whether such contracts contain leases generally does not require significant estimates or judgments. The Company’s leases classified as operating leases primarily consist of real estate leases. The Company’s real estate leases contain both lease and non-lease components, which are accounted for separately. The Company’s leases classified as finance leases primarily consist of print equipment. Certain of the print equipment leases under contract have lease and non-lease components, which are accounted for as a single lease component as discussed above. Other than the election to treat the Company's fixed lease payment as a single lease component, the accounting for finance leases will remain unchanged under ASC 842.
Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company's operating leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU assets also include any lease payments made and are reduced by any lease incentives received. The lease terms primarily range from one to ten years, with renewal terms that can extend the lease term from 1 to 5 years. A portion of the Company’s real estate leases are generally subject to annual changes in the Consumer Price Index (CPI), which are treated as variable lease payments and recognized in the period in which the obligation for those payments was incurred. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Adoption of ASC Topic 842, Leases
Lessor Accounting
The Company concluded that certain of its contracts with customers should be accounted for as operating leases upon adoption of ASC 842. Specifically, certain of the Company's MPS arrangements, which had previously been accounted for as service revenue under ASC 606, Revenue from Contracts with Customers, are accounted for as operating leases under ASC 842.
The Company's MPS arrangements consists of the placement, management, and optimization of print and imaging equipment in customers' offices, job sites, and other facilities under which the Company is paid a fixed rate per unit for each print produced (per-use), often referred to as a “click charge.” Accordingly, the fixed rate per unit charged to the customer covers the use of the equipment (i.e., the lease component), as well as the additional services performed by the Company as described above (i.e., the non-lease component). Certain of the Company's MPS contracts provide the customer the option to renew or terminate the agreement, which are considered when assessing the lease term. The Company elected the practical expedient to not separate certain lease and non-lease components related to its MPS arrangements, and accounts for the combined component under ASC 842. The pattern of revenue recognition for the Company's MPS revenue remains substantially unchanged following the adoption of ASC 842.
Adoption of ASC Topic 842, Leases
In February 2016, the FASB issued 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 accounts for leases as finance leases or operating leases. Both finance leases and operating leases result in the lessee recognizing a right-of-use ("ROU") asset and a corresponding lease liability. For finance leases the lessee recognizes interest expense and amortization of the ROU asset, and for operating leases the lessee will recognize a straight-line total lease expense. In addition, ASC 842 changes the definition of a lease, which resulted in changes to the classification of certain service contracts with customers to lease arrangements. The Company adopted ASC 842 on January 1, 2019.
In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provided entities the option to use the effective date as the date of initial application on transition to the new guidance. The Company elected this transition method, and as a result, the Company did not adjust comparative information for prior periods. The Company elected certain additional practical expedients permitted by the new guidance allowing the Company to carry forward historical accounting related to lease identification and classification for existing leases upon adoption. The Company elected, for its equipment asset classes, the practical expedient that allows lessees to treat the lease and non-lease components of leases as a single lease component. Leases with an initial term of 12 months or less are not recorded on the Company's consolidated balance sheet.
As part of the transition, the Company completed a comprehensive review of its lease portfolio, including significant leases by geography and by asset type that were impacted by the new guidance, and enhanced its controls around leasing. The adoption of ASC 842 resulted in an increase to total assets and liabilities due to the recording of operating lease ROU assets of approximately $46.9 million and operating lease liabilities of approximately $53.7 million, as of January 1, 2019. Finance leases were not impacted by the adoption of ASC 842, as finance lease liabilities and the corresponding ROU assets were already recorded in the balance sheet under the previous guidance, ASC 840. The adoption did not materially impact the Company’s Consolidated Statements of Earnings or Cash Flows.
Lessee Accounting
The Company determines if an arrangement is a lease at inception. The Company's material lease contracts are generally for real estate or print equipment, and the determination of whether such contracts contain leases generally does not require significant estimates or judgments. The Company’s leases classified as operating leases primarily consist of real estate leases. The Company’s real estate leases contain both lease and non-lease components, which are accounted for separately. The Company’s leases classified as finance leases primarily consist of print equipment. Certain of the print equipment leases under contract have lease and non-lease components, which are accounted for as a single lease component as discussed above. Other than the election to treat the Company's fixed lease payment as a single lease component, the accounting for finance leases will remain unchanged under ASC 842.
Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company's operating leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU assets also include any lease payments made and are reduced by any lease incentives received. The lease terms primarily range from one to ten years, with renewal terms that can extend the lease term from 1 to 5 years. A portion of the Company’s real estate leases are generally subject to annual changes in the Consumer Price Index (CPI), which are treated as variable lease payments and recognized in the period in which the obligation for those payments was incurred. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
v3.19.1
Description of Business and Basis of Presentation (Tables)
3 Months Ended
Mar. 31, 2019
Accounting Policies [Abstract]  
Net Sales of Principal Services and Products
Net sales of the Company’s principal services and products were as follows:
 
 
Three Months Ended 
 March 31,
 
2019
 
2018
CDIM
$
50,805

 
$
52,320

MPS(1)
30,907

 
31,467

AIM
3,262

 
2,923

Equipment and supplies sales
12,148

 
10,998

Net sales
$
97,122

 
$
97,708


(1) MPS includes $28.7 million in rental income and $2.2 million in service income for the three months ended March 31, 2019.
v3.19.1
Earnings per Share (Tables)
3 Months Ended
Mar. 31, 2019
Earnings Per Share [Abstract]  
Basic and Diluted Earnings Per Share
Basic and diluted weighted average common shares outstanding were calculated as follows for the three months ended March 31, 2019 and 2018:
 
 
Three Months Ended 
 March 31,
 
2019
 
2018
Weighted average common shares outstanding during the period—basic
45,118

 
44,741

Effect of dilutive stock options
237

 
114

Weighted average common shares outstanding during the period—diluted
45,355

 
44,855

v3.19.1
Goodwill and Other Intangibles (Tables)
3 Months Ended
Mar. 31, 2019
Goodwill and Intangible Assets Disclosure [Abstract]  
Other Intangible Assets Resulting from Business Acquisitions
The following table sets forth the Company’s other intangible assets resulting from business acquisitions as of March 31, 2019 and December 31, 2018 which continue to be amortized:
 
 
March 31, 2019
 
December 31, 2018
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Amortizable other intangible assets
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
$
99,215

 
$
95,298

 
$
3,917

 
$
99,136

 
$
94,345

 
$
4,791

Trade names and trademarks
20,305

 
19,969

 
336

 
20,259

 
19,924

 
335

 
$
119,520

 
$
115,267

 
$
4,253

 
$
119,395

 
$
114,269

 
$
5,126

Estimated Future Amortization Expense of Amortizable Intangible Assets
Estimated future amortization expense of other intangible assets for the remainder of the 2019 fiscal year, and each of the subsequent four fiscal years and thereafter are as follows:
 
2019 (excluding the three months ended March 31, 2019)
$
2,239

2020
1,527

2021
175

2022
99

2023
43

Thereafter
170

 
$
4,253

v3.19.1
Long-Term Debt (Tables)
3 Months Ended
Mar. 31, 2019
Debt Disclosure [Abstract]  
Long-Term Debt
Long-term debt consists of the following:
 
 
 
March 31, 2019
 
December 31, 2018
Term Loan maturing 2022, net of deferred financing fees of $509 and $556; 4.25% and 4.11% interest rate at March 31, 2019 and December 31, 2018
 
$
51,616

 
$
52,694

Revolving Loans; 4.53% and 4.74% interest rate at March 31, 2019 and December 31, 2018
 
22,875

 
26,750

Various finance leases; weighted average interest rate of 4.8% at March, 31 2019 and December 31, 2018; principal and interest payable monthly through March 2024
 
46,818

 
47,737

Various other notes payable with a weighted average interest rate of 10.7% at March 31, 2019 and December 31, 2018; principal and interest payable monthly through November 2019
 
9

 
11

 
 
121,318

 
127,192

Less current portion
 
(22,312
)
 
(22,132
)
 
 
$
99,006

 
$
105,060