ARC DOCUMENT SOLUTIONS, INC. - Quarter Report: 2011 September (Form 10-Q)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-32407

AMERICAN REPROGRAPHICS COMPANY

(Exact name of Registrant as specified in its Charter)

Delaware		20-1700361
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

As of November 2, 2011, there were 46,235,743 shares of the issuer’s common stock outstanding.

 

 

AMERICAN REPROGRAPHICS COMPANY

Form 10-Q

For the Quarter Ended September 30, 2011

Table of Contents

PART I—FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements			4
Condensed Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010			4
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2011 and 2010			5
Condensed Consolidated Statements of Equity and Comprehensive Income (Loss) for the nine months ended September 30, 2011 and 2010			6
Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2011 and 2010			7
Notes to Condensed Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			28
Item 3. Quantitative and Qualitative Disclosures About Market Risk			43
Item 4. Controls and Procedures			44
PART II—OTHER INFORMATION			44
Item 1. Legal Proceedings			44
Item 1A. Risk Factors			44
Item 6. Exhibits			45
Signatures			46
Exhibit Index			47
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

FORWARD-LOOKING STATEMENTS

This Form 10-Q contains statements that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this Form 10-Q, the words “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “targets,” “likely,” “will,” “would,” “could,” and variations of such words and similar expressions as they relate to our management or to American Reprographics Company (“the Company”) are intended to identify forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those contemplated herein. We have described in Part II, Item 1A-“Risk Factors” a number of factors that could cause our actual results to differ from our projections or estimates. These factors and other risk factors described in this Form 10-Q are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results. Consequently, there can be no assurance that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, us. Given these uncertainties, you are cautioned not to place undue reliance on such forward-looking statements.

Except where otherwise indicated, the statements made in this Form 10-Q are made as of the date we filed this report with the United States Securities and Exchange Commission (“SEC”) and should not be relied upon as of any subsequent date. All future written and verbal forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We undertake no obligation, and specifically disclaim any obligation, to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You should, however, consult further disclosures we make in future filings of our Forms 10-K, Forms 10-Q, and Forms 8-K, and any amendments thereto, as well as our proxy statements.

PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

AMERICAN REPROGRAPHICS COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

		September 30,				December 31,
(In thousands, except per share amounts) (Unaudited)		2011				2010
Assets
Current assets:
Cash and cash equivalents		$	25,954			$	26,293
Accounts receivable, net of allowances for accounts receivable of $3,578 and $4,030			60,956				52,619
Inventories, net			10,880				10,689
Deferred income taxes			—				7,157
Prepaid expenses			4,589				4,074
Other current assets			19,609				6,870
Total current assets			121,988				107,702
Property and equipment, net of accumulated depreciation of $188,086 and $211,875			55,407				59,036
Goodwill			229,315				294,759
Other intangible assets, net			49,701				62,643
Deferred financing costs, net			4,561				4,995
Deferred income taxes			1,347				37,835
Other assets			2,120				2,115
Total assets		$	464,439			$	569,085
Liabilities and Equity
Current liabilities:
Accounts payable		$	22,931			$	23,593
Accrued payroll and payroll-related expenses			9,759				7,980
Accrued expenses			24,983				30,134
Current portion of long-term debt and capital leases			26,648				23,608
Total current liabilities			84,321				85,315
Long-term debt and capital leases			211,954				216,016
Deferred income taxes			26,070				—
Other long-term liabilities			3,073				5,072
Total liabilities			325,418				306,403
Commitments and contingencies (Note 6)
Stockholders’ equity:
American Reprographics Company stockholders’ equity:
Preferred stock, $0.001 par value, 25,000 shares authorized; 0 and 0 shares issued and outstanding			—				—
Common stock, $0.001 par value, 150,000 shares authorized; 46,236 and 46,183 shares issued, and 46,236 and 45,736 shares outstanding			46				46
Additional paid-in capital			99,698				96,251
Retained earnings			35,720				173,459
Accumulated other comprehensive loss			(2,722	)			(5,541	)
			132,742				264,215
Less cost of common stock in treasury, 0 and 447 shares			—				7,709
Total American Reprographics Company stockholders’ equity			132,742				256,506
Noncontrolling interest			6,279				6,176
Total equity			139,021				262,682
Total liabilities and equity		$	464,439			$	569,085

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

AMERICAN REPROGRAPHICS COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(In thousands, except per share amounts) (Unaudited)		2011				2010				2011				2010
Reprographics services		$	65,529			$	72,709			$	206,011			$	227,419
Facilities management			25,505				22,602				75,304				67,632
Equipment and supplies sales			13,758				14,110				39,571				41,619
Total net sales			104,792				109,421				320,886				336,670
Cost of sales			70,868				74,403				217,881				225,346
Gross profit			33,924				35,018				103,005				111,324
Selling, general and administrative expenses			23,533				26,612				78,169				81,912
Amortization of intangible assets			4,654				2,466				14,119				7,659
Goodwill impairment			42,109				38,263				65,444				38,263
Loss from operations			(36,372	)			(32,323	)			(54,727	)			(16,510	)
Other income			(27	)			(52	)			(88	)			(129	)
Interest expense, net			7,743				5,614				23,609				17,256
Loss before income tax (benefit) provision			(44,088	)			(37,885	)			(78,248	)			(33,637	)
Income tax (benefit) provision			(2,392	)			(12,668	)			51,872				(10,862	)
Net loss			(41,696	)			(25,217	)			(130,120	)			(22,775	)
(Income) loss attributable to noncontrolling interest			(61	)			73				90				27
Net loss attributable to American Reprographics Company		$	(41,757	)		$	(25,144	)		$	(130,030	)		$	(22,748	)
Loss per share attributable to American Reprographics Company shareholders:
Basic		$	(0.92	)		$	(0.56	)		$	(2.87	)		$	(0.50	)
Diluted		$	(0.92	)		$	(0.56	)		$	(2.87	)		$	(0.50	)
Weighted average common shares outstanding:
Basic			45,416				45,224				45,366				45,191
Diluted			45,416				45,224				45,366				45,191

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

AMERICAN REPROGRAPHICS COMPANY

		American Reprographics Company Shareholders
																		Accumulated
		Common Stock								Additional								Other				Common
						Par				Paid-in				Retained				Comprehensive				Stock in				Noncontrolling
(In thousands) (Unaudited)		Shares				Value				Capital				Earnings				Loss				Treasury				Interest				Total
Balance at December 31, 2009			45,665			$	46			$	89,982			$	200,961			$	(7,273	)		$	(7,709	)		$	6,017			$	282,024
Stock-based compensation			29				—				4,371				—				—				—				—				4,371
Issuance of common stock under Employee Stock Purchase Plan			7				—				51				—				—				—				—				51
Stock options exercised			23				—				125				—				—				—				—				125
Tax benefit from stock-based compensation			—				—				21				—				—				—				—				21
Comprehensive loss:
Net loss			—				—				—				(22,748	)			—				—				(27	)			(22,775	)
Foreign currency translation adjustments			—				—				—				—				314				—				159				473
Loss on derivative, net of tax effect			—				—				—				—				(119	)			—				—				(119	)
Comprehensive loss:																															(22,421	)
Balance at September 30, 2010			45,724			$	46			$	94,550			$	178,213			$	(7,078	)		$	(7,709	)		$	6,149			$	264,171

		American Reprographics Company Shareholders
																		Accumulated
		Common Stock								Additional								Other				Common
						Par				Paid-in				Retained				Comprehensive				Stock in				Noncontrolling
(In thousands) (Unaudited)		Shares				Value				Capital				Earnings				Loss				Treasury				Interest				Total
Balance at December 31, 2010			45,736			$	46			$	96,251			$	173,459			$	(5,541	)		$	(7,709	)		$	6,176			$	262,682
Stock-based compensation			475				—				3,775				—				—				—				—				3,775
Issuance of common stock under Employee Stock Purchase Plan			8				—				33				—				—				—				—				33
Stock options exercised			17				—				108				—				—				—				—				108
Tax deficiency from stock-based compensation, net of tax benefit			—				—				(469	)			—				—				—				—				(469	)
Retirement of 447 treasury shares			—				—				—				(7,709	)			—				7,709				—				—
Comprehensive loss:
Net loss			—				—				—				(130,030	)			—				—				(90	)			(130,120	)
Foreign currency translation adjustments			—				—				—				—				82				—				193				275
Amortization of derivative, net of tax effect			—				—				—				—				2,737				—				—				2,737
Comprehensive loss:																															(127,108	)
Balance at September 30, 2011			46,236			$	46			$	99,698			$	35,720			$	(2,722	)		$	—			$	6,279			$	139,021

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

AMERICAN REPROGRAPHICS COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(In thousands) (Unaudited)		2011				2010				2011				2010
Cash flows from operating activities
Net loss		$	(41,696	)		$	(25,217	)		$	(130,120	)		$	(22,775	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Allowance for accounts receivable			329				281				746				598
Depreciation			7,057				8,291				22,244				25,862
Amortization of intangible assets			4,654				2,466				14,119				7,659
Amortization of deferred financing costs			225				389				662				1,159
Amortization of bond discount			140				—				407				—
Goodwill impairment			42,109				38,263				65,444				38,263
Stock-based compensation			517				1,453				3,775				4,371
Excess tax benefit related to stock-based compensation			—				—				(31	)			(38	)
Deferred income taxes			(5,009	)			(9,914	)			3,506				(9,750	)
Deferred tax valuation allowance			1,379				—				65,719				—
Amortization of derivative, net of tax effect			871				—				2,737				—
Other non-cash items, net			(463	)			416				(640	)			102
Changes in operating assets and liabilities, net of effect of business acquisitions:
Accounts receivable			206				751				(8,499	)			(5,033	)
Inventory			1,084				829				36				(456	)
Prepaid expenses and other assets			942				(3,582	)			(13,105	)			(5,516	)
Accounts payable and accrued expenses			5,272				(4,164	)			2,490				3,562
Net cash provided by operating activities			17,617				10,262				29,490				38,008
Cash flows from investing activities
Capital expenditures			(4,316	)			(2,919	)			(11,938	)			(5,696	)
Payments for businesses acquired, net of cash acquired and including other cash payments associated with the acquisitions			—				(500	)			—				(500	)
Payment for swap transaction			—				—				(9,729	)			—
Other			278				(91	)			925				754
Net cash used in investing activities			(4,038	)			(3,510	)			(20,742	)			(5,442	)
Cash flows from financing activities
Proceeds from stock option exercises			—				—				108				125
Proceeds from issuance of common stock under Employee Stock Purchase Plan			8				21				31				37
Excess tax benefit related to stock-based compensation			—				—				31				38
Payments on long-term debt agreements and capital leases			(5,618	)			(10,607	)			(19,719	)			(32,203	)
Net (repayments) borrowings under revolving credit facilities			(3,798	)			(327	)			10,822				(450	)
Payment of loan fees			(127	)			—				(668	)			—
Net cash used in financing activities			(9,535	)			(10,913	)			(9,395	)			(32,453	)
Effect of foreign currency translation on cash balances			3				243				308				265
Net change in cash and cash equivalents			4,047				(3,918	)			(339	)			378
Cash and cash equivalents at beginning of period			21,907				33,673				26,293				29,377
Cash and cash equivalents at end of period		$	25,954			$	29,755			$	25,954			$	29,755
Supplemental disclosure of cash flow information
Noncash investing and financing activities
Noncash transactions include the following:
Capital lease obligations incurred		$	2,023			$	2,408			$	7,476			$	6,802
Liabilities in connection with the acquisition of businesses		$	1,371			$	—			$	1,371			$	—
Net gain (loss) on derivative, net of tax effect		$	—			$	55			$	—			$	(119	)

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

AMERICAN REPROGRAPHICS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Description of Business and Basis of Presentation

American Reprographics Company (“ARC” or the “Company”) is the largest reprographics company in the United States providing business-to-business document management services primarily to the architectural, engineering and construction (“AEC”) industry. ARC also provides these services to companies in non-AEC industries, such as aerospace, technology, financial services, retail, entertainment, and food and hospitality, that require sophisticated document management services. The Company conducts its operations through its wholly-owned operating subsidiary, American Reprographics Company, L.L.C., a California limited liability company, and its subsidiaries.

Basis of Presentation

The accompanying interim Condensed Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in conformity with the requirements of the SEC. As permitted under those rules, certain footnotes or other financial information required by GAAP for complete financial statements have been condensed or omitted. In management’s opinion, the accompanying interim Condensed Consolidated Financial Statements presented reflect all adjustments of a normal and recurring nature that are necessary to fairly present the interim Condensed Consolidated Financial Statements. All material intercompany accounts and transactions have been eliminated in consolidation. The operating results for the three and nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

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.

The Company reclassified certain amounts in the prior year financial statements to conform to the current presentation. This reclassification had no effect on the Condensed Consolidated Statement of Operations, as previously reported. The Company reclassified $4,074 from prepaid expenses and other current assets at December 31, 2010 to a separate prepaid expenses caption in order to conform to the current presentation.

These interim Condensed Consolidated Financial Statements and notes should be read in conjunction with the consolidated financial statements and notes included in the Company’s 2010 Form 10-K.

Recently Adopted Accounting Pronouncements

In December 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-29. The amendments in this update affect any public entity as defined by ASC 805, Business Combinations, that enters into business combinations that are material on an individual or aggregate basis. The objective in this update is to address diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. ASU 2010-29 is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The Company adopted provisions of ASU 2010-29 effective January 1, 2011, which did not have a material effect on its Consolidated Financial Statements. The Company has not had any material business combinations in 2011.

In December 2010, the FASB issued ASU 2010-28. This update provides amendments to the criteria of ASC 350, Intangibles-Goodwill and Other. The amendments to this update affect all entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing step one of the goodwill impairment test is zero or negative. ASU 2010-28 is effective for financial statements issued for years beginning after December 15, 2010. Early adoption is not permitted. The Company adopted the provisions of ASU 2010-28 effective January 1, 2011, which did not have a material effect on its Consolidated Financial Statements.

In October 2009, the FASB issued ASU 2009-13. This update provides amendments to the criteria of ASC 605, Revenue Recognition, for separating consideration in multiple-deliverable arrangements. The amendments to this update establish a selling price hierarchy for determining the selling price of a deliverable. ASU 2009-13 is effective for financial statements issued for years beginning on or after June 15, 2010. The Company adopted the provisions of ASU 2010-06 effective January 1, 2011, which did not have a material effect on its Consolidated Financial Statements.

Recent Accounting Pronouncements Not Yet Adopted

In September 2011, the FASB issued ASU 2011-08. The new guidance provides an entity the option, when testing for goodwill impairment, to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after performing a qualitative assessment, an entity determines it is more likely than not that the fair value of a reporting unit is less than its carrying amount, it is required to perform the currently prescribed two-step goodwill impairment test to identify potential goodwill impairment, and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any). The new guidance will be effective for the Company beginning January 1, 2012.

In June 2011, the FASB issued ASU 2011-05. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Instead, an entity will be required to present either a continuous statement of net income and other comprehensive income or present net income and other comprehensive income in two separate but consecutive statements. The new guidance will be effective for the Company beginning January 1, 2012 and will have presentation changes only.

In May 2011, the FASB issued ASU 2011-04 which amends the accounting and disclosure requirements on fair value measurements. The new guidance limits the highest-and-best-use measure to nonfinancial assets, permits certain financial assets and liabilities with offsetting positions in market or counterparty credit risks to be measured at a net basis, and provides guidance on the applicability of premiums and discounts. Additionally, the new guidance expands the disclosures on Level 3 inputs by requiring quantitative disclosure of the unobservable inputs and assumptions, as well as description of the valuation processes and the sensitivity of the fair value to changes in unobservable inputs. The new guidance will be effective for the Company beginning January 1, 2012. Other than requiring additional disclosures, the Company does not anticipate material impacts to its Consolidated Financial Statements upon adoption.

Segment Reporting

The provisions of ASC 280, Disclosures about Segments of an Enterprise and Related Information, require public companies to report financial and descriptive information about their reportable operating segments. The Company identifies operating segments based on the various business activities that earn revenue and incur expense, whose operating results are reviewed by the chief operating decision maker. Based on the fact that operating segments have similar products and services, classes of customers, production processes and performance objectives, the Company is deemed to operate as a single reportable segment.

Risk and Uncertainties

The Company generates the majority of its revenue from sales of products and services provided to the AEC industry. As a result, the Company’s operating results and financial condition can be significantly affected by economic factors that influence the AEC industry, such as non-residential and residential construction spending, GDP growth, interest rates, unemployment rates, office vacancy rates, and government expenditures. The effects of the recent recession and current economic environment in the United States have resulted in a significant downturn in the non-residential and residential portions of the AEC industry. The AEC industry generally experiences a downturn several months after a downturn in the general economy and there may be a similar delay in the recovery of the AEC industry following a recovery in the general economy. Similar to the AEC industry, the reprographics industry typically lags a recovery in the broader economy. A prolonged downturn in the AEC industry and the reprographics industry would continue to diminish demand for ARC’s products and services, and would therefore negatively impact revenues and have a material adverse impact on its business, operating results and financial condition.

2. Earnings per Share

The Company accounts for earnings per share in accordance with ASC 260, formerly SFAS No. 128, 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 share is computed similar 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 stock equivalents are excluded from the computation if their effect is anti-dilutive. For the three and nine months ended September 30, 2011 and 2010, stock options for 2.2 million common shares were excluded from the calculation of diluted net income attributable to ARC per common share because they were anti-dilutive.

Basic and diluted earnings per share for the three and nine months ended September 30, 2011 and 2010 were calculated using the following common shares:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(In thousands)		2011				2010				2011				2010
Weighted average common shares outstanding — basic			45,416				45,224				45,366				45,191
Effect of dilutive impact on equity-based compensation awards			—				—				—				—
Weighted average common shares outstanding — diluted			45,416				45,224				45,366				45,191

3. Goodwill and Other Intangibles Resulting from Business Acquisitions

Goodwill

In connection with acquisitions, the Company applies the provisions of ASC 805, using the acquisition method of accounting. The excess purchase price over the fair value of net tangible assets and identifiable intangible assets acquired is recorded as goodwill.

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, 2011, the Company performed its annual goodwill impairment analysis, which indicated that nine of its 37 reporting units, eight in the United States and one in Canada, had a goodwill impairment as of September 30, 2011. Accordingly, the Company recorded a pretax, non-cash charge for the three months ended September 30, 2011 to reduce the carrying value of goodwill by $42.1 million. Given the increased uncertainty in the timing of the recovery of the construction industry, and the increased uncertainty in the economy as a whole, as well as the significant decline in the price of the Company’s senior notes (resulting in a higher yield) and a decline of the Company’s stock price during the third quarter, the Company concluded that it was appropriate to increase the estimated weighted average cost of capital (WACC) of its reporting units as of September 30, 2011. The increase in the Company’s WACC was the main driver in the decrease in the estimated fair value of reporting units during the third quarter of 2011, which in turn resulted in the goodwill impairment.

At June 30, 2011, the Company determined that there were sufficient indicators to trigger an interim goodwill impairment analysis. The indicators included, among other factors: (1) the economic environment, (2) the performance against plan of reporting units which previously had goodwill impairment, and (3) revised forecasted future earnings. The Company’s analysis indicated that six of its 36 reporting units, all of which are located in the United States, had a goodwill impairment as of June 30, 2011. Accordingly, the Company recorded a pretax, non-cash charge for the three and six months ended June 30, 2011 to reduce the carrying value of goodwill by $23.3 million.

Goodwill impairment testing is performed at the reporting unit level. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support the value of the goodwill.

Goodwill impairment testing is a two-step process. Step one involves comparing the fair value of the reporting units to its carrying amount. If the carrying amount of a reporting unit is greater than zero and its fair value is greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount is greater than the fair value, the second step must be completed to measure the amount of impairment, if any. Step two involves calculating the implied fair value of goodwill by deducting the fair value of all tangible and intangible assets, excluding goodwill, of the reporting unit from the fair value of the reporting unit as determined in step one. The implied fair value of goodwill determined in this step is compared to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, an impairment loss is recognized equal to the difference.

The Company determines the fair value of its reporting units using an income approach. Under the income approach, the Company determined fair value based on estimated discounted future cash flows of each reporting unit. The cash flows are discounted by an estimated weighted-average cost of capital, which is intended to reflect the overall level of inherent risk of a reporting unit. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates and EBITDA margins, discount rates and future market conditions, among others. The Company considered market information in assessing the reasonableness of the fair value under the income approach outlined above.

Given the current economic environment and the uncertainties regarding the impact on the Company’s business, there can be no assurance that the estimates and assumptions made for purposes of the Company’s goodwill impairment testing as of September 30, 2011 regarding the duration of the lack of significant new construction activity in the AEC industry, or the timing or strength of general economic recovery, will prove to be accurate predictions of the future. If the Company’s assumptions regarding 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 2012, or on an interim basis, if any such change constitutes a triggering event (as defined under ASC 805) outside of the quarter when the Company regularly performs its annual goodwill impairment test. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such charge would be material.

The changes in the carrying amount of goodwill from January 1, 2010 through September 30, 2011 are summarized as follows:

						Accumulated				Net
		Gross				Impairment				Carrying
(In thousands)		Goodwill				Loss				Amount
January 1, 2010		$	405,054			$	72,536			$	332,518
Additions			500				—				500
Goodwill impairment			—				38,263				(38,263	)
Translation adjustment			4				—				4
December 31, 2010			405,558				110,799				294,759
Additions			—				—				—
Goodwill impairment			—				65,444				(65,444	)
September 30, 2011		$	405,558			$	176,243			$	229,315

The additions to goodwill include the excess purchase price over fair value of net assets acquired, purchase price adjustments, and certain earnout payments.

See “Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations for further information regarding the process and assumptions used in the goodwill impairment analysis.

Long-lived Assets

The Company periodically assesses potential impairments of its long-lived assets in accordance with the provisions of ASC 360, Accounting for the Impairment or Disposal of Long-lived Assets. An impairment review is performed whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. The Company groups its assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of the other assets and liabilities. The Company has determined that the lowest level for which identifiable cash flows are available is the divisional level.

Factors considered by the Company include, but are not limited to, significant underperformance relative to historical or projected operating results; significant changes in the manner of use of the acquired assets or the strategy for the overall business; and significant negative industry or economic trends. When the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of the above indicators of impairment, the Company estimates the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future undiscounted cash flows and eventual disposition is less than the carrying amount of the asset, the Company recognizes an impairment loss. An impairment loss is reflected as the amount by which the carrying amount of the asset exceeds the fair value of the asset, based on the fair value if available, or discounted cash flows, if fair value is not available.

The reporting units of the Company have been negatively impacted by the decline in commercial and residential construction. Before assessing the Company’s goodwill for impairment, the Company evaluated, as described above, the long-lived assets in its reporting units for impairment. Based on these assessments in 2011, there was no impairment as of September 30, 2011.

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.

During the fourth quarter of 2010, the Company decided to consolidate the various brands that previously represented the Company’s market presence around the country. Beginning in January 2011, each of the Company’s operating segments and their respective locations began to adopt ARC, the Company’s overall brand name. Original brand names will be used in conjunction with the new ARC brand name to reinforce the Company’s continuing presence in the business communities it serves, and ongoing relationships with its customers. Accordingly, the remaining estimated useful lives of the trade name intangible assets were revised down to 18 months. This change in estimate is accounted for on a prospective basis, resulting in increased amortization expense over the revised useful life of each trade name. The impact of this change in the three and nine months ended September 30, 2011 was an increase in amortization expense of approximately $2.4 million and $7.1 million, respectively. Trade names are amortized using the straight-line method. The latest the Company expects to fully retire original trade names is April 2012.

Non-competition agreements are amortized over their term on a straight-line basis.

The following table sets forth the Company’s other intangible assets resulting from business acquisitions as of September 30, 2011 and December 31, 2010 which continue to be amortized:

		September 30, 2011												December 31, 2010
		Gross								Net				Gross								Net
		Carrying				Accumulated				Carrying				Carrying				Accumulated				Carrying
(In thousands)		Amount				Amortization				Amount				Amount				Amortization				Amount
Amortizable other intangible assets
Customer relationships		$	97,474			$	54,495			$	42,979			$	96,359			$	48,301			$	48,058
Trade names and trademarks			20,317				13,607				6,710				20,294				5,736				14,558
Non-competition agreements			100				88				12				100				73				27
		$	117,891			$	68,190			$	49,701			$	116,753			$	54,110			$	62,643

Based on current information, estimated future amortization expense of amortizable intangible assets for the remainder of the 2011 fiscal year, each of the subsequent four fiscal years and thereafter are as follows:

(In thousands)
2011		$	4,618
2012			10,957
2013			6,536
2014			5,701
2015			5,168
Thereafter			16,721
		$	49,701

4. Income Taxes

On a quarterly basis, the Company estimates its effective tax rate for the full fiscal year and records a quarterly income tax provision based on the anticipated rate in conjunction with the recognition of any discrete items within the quarter.

The Company recorded an income tax benefit of $2.4 million in relation to a pretax loss of $44.1 million, and an income tax provision of $51.9 million in relation to a pretax loss of $78.2 million for the three and nine months ended September 30, 2011, respectively. For the three months ended September 30, 2011, the low income tax benefit was primarily due to the impact of a stock basis goodwill impairment charge of $27.1 million, which is nondeductible for U.S. income tax purposes, and an additional valuation allowance of $1.4 million recorded against certain deferred tax assets recognized in the same period. For the nine months ended September 30, 2011, the income tax provision of $51.9 million is primarily due to the establishment of a $65.7 million non-cash valuation allowance against certain of the Company’s deferred tax assets as discussed below.

During the first quarter of 2011, the audit of the Company’s 2008 federal income tax return by the Internal Revenue Service was finalized and resulted in no adjustments. Due to this final result and other pertinent factors, the Company derecognized its liability for an uncertain tax position of $1.5 million and related accrued interest of $0.1 million.

In accordance with ASC 740-10, Income Taxes, the Company evaluates its deferred tax assets to determine if a valuation allowance is required based on the consideration of all available evidence using a “more likely than not” standard, with significant weight being given to evidence that can be objectively verified. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability; the length of statutory carryforward periods for operating losses and tax credit carryforwards; and available tax planning alternatives. As of September 30, 2011, the Company determined that cumulative losses for the preceding twelve quarters constituted sufficient objective evidence (as defined by ASC 740-10) that a valuation allowance was needed, and therefore established a $65.7 million valuation allowance against certain of its deferred tax assets.

Based on the Company’s assessment, the remaining net deferred tax assets of $1.3 million as of September 30, 2011 are considered to be more likely than not to be realized. The valuation allowance of $65.7 million may be increased or decreased 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 $16.4 million as of September 30, 2011 included in other current assets in its consolidated balance sheet primarily relating to 2010 losses that were be carried back to 2008.

5. Long-Term Debt

Long-term debt consists of the following:

		September 30,				December 31,
(In thousands)		2011				2010
Borrowings from foreign revolving credit facility; 6.0% interest rate at September 30, 2011		$	1,022			$	—
Borrowings from a domestic revolving credit facility; 2.3% interest rate at September 30, 2011			9,800				—
10.5% senior notes due 2016, net of bond discount of $3,902 and $4,308			196,098				195,692
Various subordinated notes payable; weighted average interest rate of 6.1% and 6.2%; principal and interest payable monthly through September 2014			2,620				8,635
Various capital leases; weighted average interest rate of 8.5% and 8.8%; principal and interest payable monthly through November 2016			29,062				35,297
			238,602				239,624
Less current portion			(26,648	)			(23,608	)
		$	211,954			$	216,016

10.5% Senior Notes due 2016

On December 1, 2010, the Company completed a private placement of 10.5% senior unsecured notes due 2016 (the “Notes”).

The Notes have an aggregate principal amount of $200 million. The Notes are general unsecured senior obligations of the Company and are subordinate to all existing and future senior secured debt of the Company to the extent of the assets securing such debt. The Company’s obligations under the Notes are jointly and severally guaranteed by all of the Company’s domestic subsidiaries. The issue price was 97.824% with a yield to maturity of 11.0%. Interest on the Notes accrues at a rate of 10.5% per annum and is payable semiannually in arrears on June 15 and December 15 of each year, commencing on June 15, 2011. The Company will make each interest payment to the holders of record of the Notes on the immediately preceding June 1 and December 1.

The Company received gross proceeds of $195.6 million from the Notes offering. In connection with the issuance of the Notes, the Company entered into an indenture (the “Indenture”). The Notes were offered only to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and outside the United States to non-U.S. persons pursuant to Regulation S under the Securities Act.

Optional Redemption. At any time prior to December 15, 2013, the Company may redeem all or part of the Notes upon not less than 30 nor more than 60 days’ prior notice at a redemption price equal to the sum of (i) 100% of the principal amount thereof, plus (ii) a make-whole premium as of the date of redemption, plus (iii) accrued and unpaid interest, if any, to the date of redemption. In addition, the Company may redeem some or all of the Notes on or after December 15, 2013, at redemption prices set forth in the Indenture, together with accrued and unpaid interest, if any, to the date of redemption. At any time prior to December 15, 2013, the Company may use the proceeds of certain equity offerings to redeem up to 35% of the aggregate principal amount of the Notes, including any permitted additional notes, at a redemption price equal to 110.5% of the principal amount of the Notes redeemed, plus accrued and unpaid interest, if any, to the date of redemption.

Repurchase upon Change of Control. Upon the occurrence of a change in control (as defined in the Indenture), each holder of the Notes may require the Company to repurchase all of the then-outstanding Notes in cash at a price equal to 101% of the aggregate principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to the date of repurchase.

Other Covenants. The Indenture contains covenants that limit, among other things, the Company’s and certain of its subsidiaries’ ability to (1) incur certain additional debt and issue preferred stock, (2) make certain restricted payments, (3) consummate specified asset sales, (4) enter into certain transactions with affiliates, (5) create liens, (6) declare or pay any dividend or make any other distributions, (7) make certain investments, and (8) merge or consolidate with another person.

Events of Default. The Indenture provides for customary events of default (subject in certain cases to customary grace and cure periods), which include non-payment, breach of covenants in the Indenture, cross default and acceleration of other indebtedness, a failure to pay certain judgments and certain events of bankruptcy and insolvency. Generally, if an event of default occurs, the Trustee or holders of at least 25% in principal amount of the then outstanding Notes may declare the principal of and accrued but unpaid interest on all of the then-outstanding Notes to be due and payable.

Exchange Offer. Pursuant to a registered exchange offer in May 2011, the Company offered to exchange up to $200 million aggregate principal amount of the Notes, for new notes that were registered under the Securities Act. The terms of the registered notes are the same as the terms of the Notes, except that they are registered under the Securities Act and the transfer restrictions, registration rights and additional interest provisions are not applicable. The Company accepted the exchange of $200 million aggregate principal amounts of the Notes that were properly tendered in the exchange offer.

2010 Credit Agreement

In connection with the issuance of the Notes, the Company and certain of its subsidiaries also entered into a $50 million credit agreement (the “2010 Credit Agreement”) and paid off in full amounts outstanding under its prior credit agreement.

The 2010 Credit Agreement provides for a $50 million senior secured revolving line of credit, of which up to $20 million is available for the issuance of letters of credit. The line of credit is available on a revolving basis until December 1, 2015 and is secured by substantially all of the assets of the Company and certain of its subsidiaries. Advances under the revolving line of credit are subject to customary borrowing conditions, including the accuracy of representations and warranties and the absence of events of default. The Company may borrow, partially or wholly repay its outstanding borrowings and reborrow, subject to the terms of the 2010 Credit Agreement.

The Company’s obligations under the 2010 Credit Agreement are guaranteed by its domestic subsidiaries and, subject to certain exceptions, are secured by security interests granted in all of the Company’s and the domestic subsidiaries’ personal and real property.

Advances under the 2010 Credit Agreement bear interest at LIBOR plus the applicable rate. The applicable rate is determined based upon the consolidated leverage ratio for the Company with a minimum and maximum applicable rate of 1.50% and 2.00%, respectively. The initial applicable rate is 2.00%. During the continuation of certain events of default, all amounts due under the 2010 Credit Agreement bear interest at 4.0% above the rate otherwise applicable. In addition, the Company is required to pay an unused commitment fee on the average daily unused amount of the line of credit at the applicable rate, calculated and payable quarterly in arrears, as follows: if the consolidated leverage ratio is (i) greater than or equal to 3.00x, the unused commitment fee is 0.20%, (ii) less than or equal to 2.99x but greater than or equal to 2.00x, 0.15%, and (iii) less than 2.00x, 0.10%.

The 2010 Credit Agreement contains the following financial covenants:

•

Maximum consolidated leverage ratio as follows:

	•		4.35:1.00 for quarters ending December 31, 2010 through September 30, 2011
	•		4.25:1.00 for quarters ending December 31, 2011 through September 30, 2012
	•		4.15:1.00 for quarters ending December 31, 2012 through September 30, 2013
	•		4.00:1.00 for quarters ending December 31, 2013 through maturity;

	•		Maximum consolidated senior secured debt leverage ratio not greater than 1.50:1.00, determined on the last day of each fiscal quarter through maturity;
	•		Minimum consolidated interest coverage ratio as follows:

	•		1.70:1.00 for quarters ending December 31, 2010 through September 30, 2011
	•		1.75:1.00 for quarters ending December 31, 2011 through maturity;

The 2010 Credit Agreement also contains covenants which, subject to certain exceptions, restrict the Company’s ability to incur additional debt, grant liens or guaranty other indebtedness, pay dividends, redeem stock, pay or redeem subordinated indebtedness, make investments or capital expenditures, dispose or acquire assets, dispose of equity interests in subsidiaries, enter into any merger, sale of assets, consolidation or liquidation transaction, or engage in transactions with stockholders and affiliates. Covenants in the 2010 Credit Agreement also require the Company to provide periodic financial reports to the lender, observe certain practices and procedures with respect to the collateral pledged as security, comply with applicable laws and maintain and preserve the Company and its subsidiaries’ properties and insurance.

As of September 30, 2011, the Company was in compliance with the financial incurrence-based covenants under the Notes and financial maintenance-based covenants under the 2010 Credit Agreement. The Company’s trailing twelve months key financial covenant ratios under the 2010 Credit Agreement as of September 30, 2011 were 1.80:1.00 for minimum interest coverage, 3.68:1.00 for maximum total leverage and 0.60:1.00 for maximum senior secured leverage.

The Company expects to be in compliance with the financial covenants in the 2010 Credit Agreement through the term of the agreement. However, it is possible that a default under certain financial covenants may occur in the future, should the minimum required profitability levels not be achieved. If the Company defaults on the covenants under the 2010 Credit Agreement and is unable to obtain waivers from its lenders, the lenders will be able to exercise their rights and remedies under the 2010 Credit Agreement, including a call provision on outstanding debt, which would have a material adverse effect on the Company’s business and financial condition.

As of September 30, 2011, standby letters of credit totaling $3.9 million had been issued. The standby letters of credit and borrowings under the 2010 Credit Agreement reduced the Company’s borrowing availability under its 2010 Credit Agreement to $36.3 million.

Foreign Credit Facility

In the second quarter of 2011, in conjunction with its Chinese operations, UNIS Document Solutions Co. Ltd. (“UDS”) entered into a one-year revolving credit facility. This facility provides for a maximum credit amount of 8.0 million Chinese Yuan Renminbi. This translates to U.S. $1.2 million as of September 30, 2011. Draws on the facility are limited to 30 day periods and incur a fee of 0.5% of the amount drawn and no additional interest is charged.

Interest Rate Swap Transaction

On December 19, 2007, the Company entered into an interest rate swap transaction in order to hedge the floating interest rate risk on the Company’s long term variable rate debt.

In connection with the issuance of the Notes, the swap transaction no longer qualified as a cash flow hedge and was de-designated.

As of December 31, 2010, the swap transaction had a negative fair value of $9.7 million, all of which was recorded in accrued expenses. On January 3, 2011, the swap transaction was terminated and settled. For further information, see Note 9 “Derivatives and Hedging Transactions”.

6. Commitments and Contingencies

Operating Leases. The Company has entered into various non-cancelable operating leases primarily related to facilities, equipment and vehicles used in the ordinary course of business.

Contingent Transaction Consideration. The Company is subject to earnout obligations entered into in connection with prior acquisitions. If the acquired businesses generate sales and/or operating profits in excess of predetermined targets, the Company is obligated to make additional cash payments in accordance with the terms of such earnout obligations. As of September 30, 2011, the Company has potential future earnout obligations for acquisitions consummated before the adoption of ASC 805 of approximately $1.5 million through 2014 if predetermined financial targets are met or exceeded, and earnout obligations of $0.3 million through 2014 consummated subsequent to the adoption of ASC 805. Earnout payments prior to the adoption of ASC 805 are recorded as additional purchase price (as goodwill) when the contingent payments are earned and become payable.

Legal Proceedings. On October 21, 2010, a former employee, individually and on behalf of a purported class consisting of all non-exempt employees who work or worked for American Reprographics Company, LLC and American Reprographics Company in the State of California at any time from October 21, 2006 through October 21, 2010, filed an action against the Company in the Superior Court of California for the County of Orange. The complaint alleges, among other things, that the Company violated the California Labor Code by failing to (i) provide meal and rest periods, or compensation in lieu thereof, (ii) timely pay wages due at termination, and (iii) that those practices also violate the California Business and Professions Code. The relief sought includes damages, restitution, penalties, interest, costs, and attorneys’ fees and such other relief as the court deems proper. The Company has not included any liability in its Consolidated Financial Statements in connection with this matter. The Company cannot reasonably estimate the amount or range of possible loss, if any, at this time.

In addition to the matter described above, the Company is involved in various additional legal proceedings and other legal matters from time to time in the normal course of business. The Company does not believe that the outcome of any of these matters will have a material adverse effect on its consolidated financial position, results of operations or cash flows.

7. Comprehensive Loss

The Company’s comprehensive loss includes foreign currency translation adjustments and the amortized fair value of the swap transaction, net of taxes. The swap transaction was de-designated on December 1, 2010, as it no longer qualified as a cash flow hedge when the cash proceeds from the issuance of the Notes were used to pay off the Company’s previous credit agreement. At that time, the fair value of the swap transaction was computed and the effective portion is recorded in other comprehensive income and will be amortized into income, net of tax effect, on the straight-line method, based on the original notional schedule.

The differences between net loss and comprehensive loss attributable to ARC for the three and nine months ended September 30, 2011 and 2010 are as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(In thousands)		2011				2010				2011				2010
Net loss		$	(41,696	)		$	(25,217	)		$	(130,120	)		$	(22,775	)
Foreign currency translation adjustments			(308	)			423				275				473
Gain (loss) on derivative, net of tax effect			871				55				2,737				(119	)
Comprehensive loss			(41,133	)			(24,739	)			(127,108	)			(22,421	)
Comprehensive income attributable to noncontrolling interest			(127	)			(86	)			(103	)			(132	)
Comprehensive loss attributable to American Reprographics Company		$	(41,260	)		$	(24,825	)		$	(127,211	)		$	(22,553	)

Asset and liability accounts of foreign operations are translated into U.S. dollars, the Company’s functional currency, at current rates. Revenues and expenses are translated at the weighted-average currency rate for the fiscal period.

8. Stock-Based Compensation

The Company adopted the American Reprographics Company 2005 Stock Plan (the “Stock Plan”) in February 2005. The Stock Plan provides for the grant of incentive and non-statutory stock options, stock appreciation rights, restricted stock purchase awards, restricted stock awards, and restricted stock units to employees, directors and consultants of the Company. The Stock Plan authorizes the Company to issue up to 5,000,000 shares of common stock. This amount automatically increased annually on the first day of the Company’s fiscal year, from 2006 through and including 2010, by the lesser of (i) 1.0% of the Company’s outstanding shares on the date of the increase; (ii) 300,000 shares; or (iii) such smaller number of shares determined by the Company’s board of directors. As of September 30, 2011, 2,308,903 shares remain available for issuance under the Stock Plan.

Stock options granted under the 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 two to five years, 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% (110% in the case of an incentive stock option granted to a 10% stockholder) of the fair market value of the Company’s common stock on the date of grant. The Company allows for cashless exercises of vested outstanding options.

During the nine months ended September 30, 2011, the Company granted options to acquire a total of 54,836 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 respective dates of grant. In addition, the Company granted 465,444 shares of restricted stock to certain key employees, and 5,587 shares of restricted stock to each of the Company’s six non-employee members of its Board of Directors at a price per share equal to the closing price of the Company’s common stock on the respective dates the restricted stock was granted.

The impact of stock-based compensation before income taxes on the interim Condensed Consolidated Statements of Operations was $0.5 million and $1.5 million for the three months ended September 30, 2011 and 2010, respectively.

The impact of stock-based compensation before income taxes on the interim Condensed Consolidated Statements of Operations was $3.8 million and $4.4 million for the nine months ended September 30, 2011 and 2010, respectively.

As of September 30, 2011, total unrecognized compensation cost related to unvested stock-based payments totaled $5.2 million and is expected to be recognized over a weighted-average period of 3.3 years.

9. Derivatives and Hedging Transactions

As of September 30, 2011, the Company was not party to any derivative or hedging transactions.

As of December 31, 2010, the Company was party to a swap transaction, in which the Company exchanged its floating-rate payments for fixed-rate payments. As of December 1, 2010, the swap transaction was de-designated upon issuance of the Notes and payoff of the Company’s previous credit agreement. The swap transaction no longer qualified as a cash flow hedge under ASC 815, as all the floating-rate debt was extinguished. The swap transaction qualified as a cash flow hedge up to November 30, 2010. On January 3, 2011, the Company terminated and settled the swap transaction.

As of September 30, 2011, $4.8 million is deferred in Accumulated Other Comprehensive Loss (“AOCL”) and will be recognized in earnings over the remainder of the original term of the swap transaction which was scheduled to end in December 2012. Over the next 12 months, the Company will amortize $4.4 million from AOCL to interest expense.

The following table summarizes the fair value and classification on the interim Condensed Consolidated Balance Sheets of the swap transaction as of December 31, 2010:

						Fair Value
		Balance Sheet				December 31,
(In thousands)		Classification				2010
Derivative not designated as hedging instrument under ASC 815
Swap transaction		Accrued expenses				$	9,729

The following table summarizes the gain (loss) recognized in AOCL of derivatives, designated and qualifying as cash flow hedges for the three and nine months ended September 30, 2010:

		Amount of Gain or (Loss) Recognized in AOCL on
		Derivative
		Three Months Ended				Nine Months Ended
(In thousands)		September 30, 2010				September 30, 2010
Derivative in ASC 815 cash flow hedging relationship
Swap transaction		$	92			$	(234	)
Tax effect			(37	)			115
Swap transaction, net of tax effect		$	55			$	(119	)

The following table summarizes the effect of the swap transaction on the interim Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2011 and 2010:

		Amount of Gain or (Loss) Reclassified from AOCL into Income
		(effective portion)																(ineffective portion)
		Three Months Ended								Nine Months Ended								Three Months Ended								Nine Months Ended
		September 30,								September 30,								September 30,								September 30,
(In thousands)		2011				2010				2011				2010				2011				2010				2011				2010
Location of Gain or (Loss) Reclassified from AOCL into Income
Interest expense		$	(1,389	)		$	(1,841	)		$	(4,369	)		$	(5,775	)		$	—			$	(44	)		$	—			$	(150	)

The following table summarizes the loss recognized in income of derivatives, not designated as hedging instruments under ASC 815 for the three and nine months ended September 30, 2011:

		Amount of Loss Recognized in Income on
		Derivative
		Three Months Ended				Nine Months Ended
(In thousands)		September 30, 2011				September 30, 2011
Derivative not designated as hedging instrument under ASC 815
Swap transaction		$	—			$	(120	)
Tax effect			—				45
Swap transaction, net of tax effect		$	—			$	(75	)

10. Fair Value Measurements

In accordance with ASC 820, the Company has categorized its assets and liabilities that are measured at fair value into a three-level fair value hierarchy as set forth below. If the inputs used to measure fair value fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement. The three levels of the hierarchy are defined as follows:

Level 1—inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2—inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3—inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The following table sets forth, by level within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2010. As required by ASC 820, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

		Significant Other
		Observable Inputs
		Level 2
(In thousands)		December 31, 2010
Recurring Fair Value Measure
Swap transaction		$	9,729

The Company has also included additional required disclosures about the Company’s swap transaction in Note 9 “Derivatives and Hedging Transactions.”

The swap transaction is valued at fair value with the use of an income approach based on current market interest rates using a discounted cash flow model and an adjustment for counterparty risk. This model reflects the contractual terms of the derivative instrument, including the time to maturity and debt repayment schedule, and market-based parameters such as interest rates and yield curves. This model does not require significant judgment, and the inputs are observable. Thus, the derivative instrument is classified within Level 2 of the valuation hierarchy. The Company terminated and settled the swap transaction on January 3, 2011.

The following table summarizes the bases used to measure certain assets and liabilities at fair value on a nonrecurring basis in the consolidated financial statements as of and for the nine months ended September 30, 2011:

		Significant Other Unobservable Inputs
		September 30, 2011
(In thousands)		Level 3				Total Losses
Nonrecurring Fair Value Measure
Goodwill		$	229,315			$	65,444

In accordance with the provisions of ASC 350, goodwill was written down to its implied fair value of $229.3 million as of September 30, 2011, resulting in an impairment charge of $65.4 million during the nine months ended September 30, 2011. See Note 3, “Goodwill and Other Intangibles Resulting from Business Acquisitions” for further information regarding the process of determining the implied fair value of goodwill.

Fair Values of Financial Instruments. The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments for disclosure purposes:

Cash equivalents: Cash equivalents are time deposits with maturity of three months or less when purchased, which are highly liquid and readily convertible to cash. Cash equivalents reported in the Company’s Consolidated Balance Sheets were $9.8 million as of September 30, 2011, and are carried at cost and approximate fair value, due to the relatively short period to maturity of these instruments.

Short- and long-term debt: The carrying amount of the Company’s capital leases reported in the Consolidated Balance Sheets approximates fair value based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements. The carrying amount reported in the Company’s Consolidated Balance Sheet as of September 30, 2011 for its Notes is $200.0 million and $2.6 million for its subordinated notes payable. Using a discounted cash flow technique that incorporates a market interest rate which assumes adjustments for duration, optionality, and risk profile, the Company has determined the fair value of its Notes is $194.0 million as of September 30, 2011 and the fair value and for its subordinated notes payable is $2.5 million as of September 30, 2011.

Interest rate hedge agreements: The fair value of the interest rate swap was based on market interest rates using a discounted cash flow model and an adjustment for counterparty risk.

11. Condensed Consolidating Financial Statements

The Notes are fully and unconditionally guaranteed, on a joint and several basis, by all of the Company’s domestic subsidiaries (the “Guarantor Subsidiaries”). The Company’s foreign subsidiaries have not guaranteed the Notes (the “Non-Guarantor Subsidiaries”). Each of the Guarantor Subsidiaries is 100% owned, directly or indirectly, by the Company. There are no significant restrictions on the ability of the Company to obtain funds from any of the Guarantor Subsidiaries by dividends or loan. In lieu of providing separate audited financial statements for the Guarantor Subsidiaries, condensed consolidating financial information is presented below.

Condensed Consolidating Balance Sheet
September 30, 2011

		American
		Reprographics				Guarantor				Non-Guarantor
(In thousands) (Unaudited)		Company				Subsidiaries				Subsidiaries				Eliminations				Total
Assets
Current assets:
Cash and cash equivalents		$	—			$	14,331			$	11,623			$	—			$	25,954
Accounts receivable, net			—				53,564				7,392				—				60,956
Intercompany operations			295				4,461				(4,756	)			—				—
Inventories, net			—				7,841				3,039				—				10,880
Prepaid expenses			13				3,073				1,503				—				4,589
Other current assets			—				18,529				1,080				—				19,609
Total current assets			308				101,799				19,881				—				121,988
Property and equipment, net			—				48,077				7,330				—				55,407
Goodwill			—				229,315				—				—				229,315
Investment in subsidiaries			151,207				12,604				—				(163,811	)			—
Other intangible assets, net			—				47,245				2,456				—				49,701
Deferred financing costs, net			4,561				—				—				—				4,561
Deferred income taxes			—				—				1,347				—				1,347
Other assets			—				1,864				256				—				2,120
Total assets		$	156,076			$	440,904			$	31,270			$	(163,811	)		$	464,439
Liabilities and Equity
Current liabilities:
Accounts payable		$	—			$	20,458			$	2,473			$	—			$	22,931
Accrued payroll and payroll-related expenses			—				9,397				362				—				9,759
Accrued expenses			6,184				16,265				2,534				—				24,983
Intercompany loans			(188,751	)			186,975				1,776				—				—
Current portion of long-term debt and capital leases			9,800				14,954				1,894				—				26,648
Total current liabilities			(172,767	)			248,049				9,039				—				84,321
Long-term debt and capital leases			196,101				14,233				1,620				—				211,954
Deferred income taxes			—				26,070				—								26,070
Other long-term liabilities			—				1,345				1,728				—				3,073
Total liabilities			23,334				289,697				12,387				—				325,418
Commitments and contingencies
Total equity			132,742				151,207				18,883				(163,811	)			139,021
Total liabilities and equity		$	156,076			$	440,904			$	31,270			$	(163,811	)		$	464,439