Notes to Condensed Consolidated Financial Statements
Note 1
.
Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements (“condensed consolidated financial statements”) include the accounts of Electronics For Imaging, Inc. and its subsidiaries (“EFI” or “Company”). All intercompany accounts and transactions have been eliminated in consolidation.
These condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information, rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements, and accounting policies consistent in all material respects with those applied in preparing our audited annual consolidated financial statements included in our Annual Report on Form 10-K, as amended by Amendment No. 1, for the year ended
December 31, 2017
(the “2017 Form 10-K”). These condensed consolidated financial statements and accompanying notes should be read in conjunction with our annual consolidated financial statements and notes included in the 2017 Form 10-K. In the opinion of management, these condensed consolidated financial statements reflect all adjustments, including normal recurring adjustments, management considers necessary for the fair presentation of our financial position, operating results, comprehensive income, and cash flows for the interim periods presented. Our results for the interim periods are not necessarily indicative of results for the entire year.
Out-of-Period Adjustments
In the nine months ended September 30, 2017, we recorded out-of-period adjustments related to certain bill and hold transactions, which decreased revenue by
$3.4 million
, gross profit by
$0.5 million
, and net income by
$0.3 million
(or
$0.01
per diluted share). We evaluated these adjustments considering both qualitative and quantitative factors and their impact in relation to each period, as well as the periods in which they originated. The impact of recognizing these adjustments in prior years was not significant to any individual period. Management believes the adjustments are immaterial to these condensed consolidated financial statements for the nine months ended September 30, 2017 and all previously issued financial statements.
Recently Adopted Accounting Pronouncements
Revenue Recognition
. Effective January 1, 2018, we adopted Accounting Standards Codification (“ASC”) 606
Revenue from Contracts with Customers
(“ASC 606”) using the modified retrospective method applied to all incomplete contracts as of the date of initial application. ASC 606 supersedes the revenue recognition requirements in ASC 605, Revenue Recognition (“ASC 605”), and requires the recognition of revenue when promised goods or services are transferred to customers in an amount that reflects the considerations to which the entity expects to be entitled to in exchange for those goods or services. In addition, ASC 606 requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Effective January 1, 2018, we also adopted ASC 340-40,
Other Assets and Deferred Costs
–
Contracts with Customers
(“ASC 340-40”), using the modified retrospective method to all incomplete contracts as of the date of initial application. ASC 340-40 requires the deferral of incremental costs of obtaining a contract with a customer.
Results for reporting periods beginning after January 1, 2018 are presented under ASC 606 and ASC 340-40, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605. Additional discussion of these recently adopted pronouncements and their impact on our Condensed Consolidated Financial Statements is included below under Significant Accounting Policies, in
Note 4
–
Revenue
, and in
Note 5
–
Supplemental Financial Statement Information
.
Income Taxes
. Staff Accounting Bulletin (“SAB”) 118 provides guidance for the application of ASC 740 for a measurement period to complete the accounting for certain elements of the Tax Cut & Jobs Act of 2017 (the “2017 Tax Act”). The measurement period is defined as up to one year from the enactment date, which will expire on December 22, 2018. SAB 118 requires that we recognize those income tax effects in our financial statements for which the accounting can be completed, as may be the case for the effect of rate changes on deferred tax assets and deferred tax liabilities. For matters that have not been completed, we are required to recognize provisional amounts to the extent that they are reasonably estimable, adjust them during the measurement period when more information becomes available, and report this information in our financial statements in that period. See additional information in Note 14
–
Income Taxes.
Restricted Cash
. Accounting Standard Update (“ASU”) 2016-18,
Statement of Cash Flows: Restricted Cash
, became effective in the first quarter of 2018 and requires the statement of cash flows to explain the change in cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents are included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts in
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
the statement of cash flows. We previously included the changes in restricted cash equivalents in operating or investing activities in the Consolidated Statements of Cash Flows. Prior period amounts have been revised to conform to the current year presentation.
Reconciliation of cash, cash equivalents, and restricted cash equivalents
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(in thousands)
|
September 30, 2018
|
|
December 31, 2017
|
|
September 30, 2017
|
|
December 31, 2016
|
|
Cash and cash equivalents
|
$
|
180,942
|
|
|
$
|
170,345
|
|
|
$
|
175,830
|
|
|
$
|
164,313
|
|
|
Restricted cash equivalents
|
39,809
|
|
|
32,531
|
|
|
6,826
|
|
|
1,142
|
|
|
Total cash, cash equivalents, and restricted cash equivalents shown in the statement of cash flows
|
$
|
220,751
|
|
|
$
|
202,876
|
|
|
$
|
182,656
|
|
|
$
|
165,455
|
|
Definition of a Business
. In January 2017, the Financial Accounting Standard Board (“FASB’) issued ASU 2017-01,
Business Combinations: Clarifying the Definition of a Business
, which became effective in the first quarter of 2018 and significantly narrows how businesses are defined. Under ASU 2017-01, when substantially all of the fair value of the gross assets acquired is concentrated in a single asset or group of similar identifiable assets, then the assets acquired do not constitute a business. If substantially all of the fair value of the gross assets acquired is not concentrated in a single asset or group of similar assets, then the assets acquired may constitute a business if certain criteria are met. We must determine whether the acquired gross assets and activities include an input and a “substantive” process that together “significantly” contribute to the ability to create an output. A framework and specific criteria are provided to assist with the evaluation of whether a process is “substantive” and “significantly contributes” to the ability to create an output. “Output” is narrowly defined to be consistent with the description of a performance obligation in the new revenue guidance or this ASU. Missing inputs and processes may not be replaced by integration with our own inputs and processes under the new guidance. The adoption of ASU 2017-1 did not impact our condensed consolidated financial statements as of
September 30, 2018
because we did not acquire a business
during the nine months ended September 30, 2018
.
Nonfinancial Asset Derecognition
. In February 2017, the FASB issued ASU 2017-05,
Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets: Clarifying the Scope of Asset Derecognition and Accounting for Partial Sales of Nonfinancial Assets
, which clarifies the scope of recent guidance as it relates to nonfinancial asset derecognition and the accounting for partial sales of nonfinancial assets. The ASU conforms the derecognition guidance as it relates to nonfinancial assets with the derecognition guidance in the new revenue standard (ASC 606) and is not expected to have a material impact on the accounting for real estate dispositions. ASU 2017-5 became effective in the first quarter of 2018.
During the nine months ended September 30, 2018
, we sold a non-financial asset, which is discussed further in
Note 10
–
Commitments and Contingencies
. There was no material impact from the adoption of this ASU in our condensed consolidated financial statements
during the three and nine months ended September 30, 2018
.
Stock Compensation Modification
. In May 2017, the FASB issued ASU 2017-09,
Stock Compensation – Scope of Modification Accounting
, which clarifies the scope of modification accounting for share-based payment arrangements, which became effective in the first quarter of 2018. Specifically, we do not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. We elected to adopt this guidance prospectively to awards modified on or after the adoption date. The adoption of ASU 2017-09 did not have a material impact on our condensed consolidated financial statements
during the three and nine months ended September 30, 2018
.
Settlement of Convertible Debt
. ASU 2016-15,
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments
, issued in August 2016, requires that cash settlements of principal amounts of debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the debt must classify the portion of the principal payment attributable to the accreted interest related to the debt discount as cash outflows from operating activities. This is consistent with the classification of the coupon interest payments.
ASU 2016-15 became effective in the first quarter of 2018. Accordingly,
$63.6 million
of the debt discount attributable to the difference between the
0.75%
coupon interest rate on our
0.75%
Convertible Senior Notes due 2019 (“Notes”) and the
4.98%
(
5.46%
inclusive of debt issuance costs) effective interest rate on the Notes will be classified as an operating cash outflow in the Condensed Consolidated Statement of Cash Flows upon any cash settlement of the Notes. The Notes were not settled as of
September 30, 2018
. We will apply ASU 2016-15 upon any cash settlement of the Notes.
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
Recent Accounting Pronouncements Not Yet Adopted
Lease Arrangements
. Under current guidance, the classification of a lease by a lessee as either an operating or capital lease determines whether an asset and liability is recognized on the balance sheet. ASU 2016-2,
Leases
, which was issued in February 2016 and will be effective in the first quarter of 2019, requires that a lessee recognize an asset and liability on its balance sheet related to all leases with terms more than one year. For all leases, a lessee will be required to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position. The right-to-use asset represents the right to use the underlying asset during the lease term.
The recognition, measurement, and presentation of expenses and cash flows by a lessee will not significantly change from previous guidance. There continues to be a differentiation between finance leases and operating leases. The criteria for determining whether a lease is a finance or operating lease are substantially the same as existing guidance except that the “bright line” percentages have been removed. Also, an additional criterion has been added in the new guidance to consider whether the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. Additional judgment will be required in applying the new lease guidance.
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•
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For finance leases, interest is recognized on the lease liability separately from depreciation of the right-of-use asset in the statement of operations. Principal repayments are classified within financing activities and interest payments are classified as operating activities in the statement of cash flows.
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•
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For operating leases, a lessee is required to recognize lease expense generally on a straight-line basis. All operating lease payments are classified as operating activities in the statement of cash flows.
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The current build-to-suit lease accounting guidance will be rescinded by the new guidance, although simplified guidance will remain regarding lessee control during the construction period. Consequently, the accounting for build-to-suit leases will be the same as operating leases unless the lessee control provisions are applicable.
We expect to apply the additional transition method provided in ASU 2018-11, which allows us to initially apply the new leases standard at our January 1, 2019 adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings. We expect to elect all of the available transition practical expedients which permit us not to reassess our prior conclusions about lease identification, lease classification, and initial direct costs. While we continue to assess the effects of the adoption, we have not yet quantified the impact but we believe there will be material increases in our non-current assets and liabilities, and in our current liabilities on our Consolidated Balance Sheets at the time of adoption. The adoption of this new standard to our lease transactions as lessee is not expected to have a material impact on our results of operations as reflected in our Consolidated Statements of Operations. We do not expect a material impact on our results of operations or financial position from adoption of this standard to our lease transactions as lessor.
Significant Accounting Policies
There have been no material changes in our significant accounting policies, as compared to the significant accounting policies described in our
2017
Form 10-K, with the exception of the following:
Revenue Recognition
On January 1, 2018, we adopted ASC 606 using the modified retrospective method applied to contracts that were not completed as of January 1, 2018. On January 1, 2018, we also adopted ASC 340-40 using the modified retrospective method applied to all contracts as of the date of initial application.
We apply judgment in determining the customer’s ability and intention to pay. Judgments are made after considering a variety of factors including the customer’s historical payment experience, current creditworthiness, current economic impacts on the customer, past due balances, and significant one-time events or, in the case of a new customer, published credit and financial information.
For customer arrangements that include multiple products or services, judgment is required to determine the standalone selling price (“SSP”) for each distinct performance obligation. Where an observable price is not available, we gather all reasonable available data points, consider adjustments based on market conditions, entity-specific factors, and the need to stratify selling prices into meaningful groups (e.g., geographic region) in determining SSP. We allocate the total contract consideration to each distinct performance obligation on a relative SSP basis. Revenue is then recognized in accordance with the timing of the transfer of control of each performance obligation to the customer.
Accounting for long-term contracts where we provide information technology system development and implementation services requires significant judgment to estimate total contract revenue and costs. For long-term contracts, we estimate the profit on a contract
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
as the difference between the total estimated revenue and expected costs to complete the services. We then recognize that revenue and profit over the life of the contract. Contract estimates are based on various assumptions to project the outcome of future events that could span several years.
A change in our estimate of total costs to complete could affect the profitability of our contracts. We review and update our contract-related estimates regularly, and the effects of changes, if any, are reflected in the Condensed Consolidated Statements of Operations in the period that they are determined. Changes in estimates related to certain types of contracts accounted for using an input method measure of progress, such as cost-to-cost, can occur over the life of a contract for a variety of reasons, including the availability of labor and labor productivity, the nature and complexity of the work to be performed, cost estimates, level of effort and/or other assumptions impacting revenue or cost to perform a contract. We recognize adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance is recognized using the adjusted estimate. If, at any time, the estimate of contract profitability indicates an anticipated loss on the contract, we recognize the total loss in the quarter it is identified.
Management exercises judgment to determine the period of benefit to amortize contract acquisition costs by considering factors such as expected renewals of customer contracts, duration of customer relationships and our technology development life cycle. Although we believe that the historical assumptions and estimates we have made are reasonable and appropriate, different assumptions and estimates could materially impact our reported financial results. Amortization of deferred contract acquisition costs is included in sales and marketing expense in the Condensed Consolidated Statements of Operations. We periodically review these deferred costs to determine whether events or changes in circumstances have occurred that could impact the period of benefit of these deferred contract acquisition costs.
The nature of our products and services are as follows:
Hardware
. Our hardware, such as Industrial Inkjet printers and Fiery digital front ends (“DFEs”), is generally sold with software that is integral to the functionality of the product. In these cases, the hardware and software license are accounted for as a single performance obligation. The contract consideration is generally in the form of a fixed fee at contract inception and revenue is recognized at the point in time when control is transferred to the customer. Consideration received from customers may include trade-in printers, which are valued at the lower of cost or net realizable value.
We offer shipping and handling services to customers related to the sale of hardware. We have elected the practical expedient to account for shipping and handling activities performed after transferring control of goods to our customer as a cost to fulfill the contract. The cost of shipping and handling is accrued at the point in which control transfers to the customer and revenue is recognized.
Ink
. We typically enter into contracts with our existing customer base of installed printers to purchase ink that is not bundled with other deliverables within the contract. The ink is accounted for as a single performance obligation and revenue is recognized at the point in time when control of the ink is transferred to the customer.
Licenses
. Our software license arrangements provide the customer with the right to install and use functional intellectual property (as it exists at the point in time at which the license is granted) for the duration of the contract term. Revenue from distinct software licenses is recognized at the point in time when the software is made available to the customer for download.
Our software license arrangements are generally comprised of fixed license fees (“license fees”) that are payable upfront, annually, quarterly, or monthly based on negotiated customer payment terms. For software license arrangements in which a significant portion of the license fees are due more than 12 months after the software is delivered to the customer, a significant financing component may exist. The significant financing component is calculated as the difference between the stated value and present value of the software license fees and is recognized as interest income under the effective interest method over the contract term. The total software license fee net of the significant financing component is recognized as revenue at the point in time when the software is made available to the customer for download or when the software is shipped to the customer. In instances where the timing of revenue recognition and the timing of invoicing is one year or less, we follow the practical expedient and do not impute interest for these contracts.
Maintenance
. Our software license arrangements typically include an initial (bundled) post contract customer support (maintenance or “PCS”) term. Our promise to those customers who elect to purchase PCS represents a distinct, stand-alone performance obligation. Contract consideration is allocated to the PCS based on its relative SSP and revenue is recognized over the PCS term.
Professional Services
. We provide various professional services to customers, primarily project management, software implementation, non-recurring engineering design, and training. Revenues from arrangements to provide professional services are
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
generally distinct from the other promises in the contract(s). The majority of our professional services contracts are billed on a time and materials basis and revenue is recognized over time as the services are performed.
Software as a Service (“SaaS”)
. Our SaaS-based arrangements provide customers with continuous access to our software solutions in the form of a service hosted in the cloud. These arrangements may include initial implementation and setup and/or on-going support that represent a single promise (i.e. each individual promised component is not distinct) to provide continuous access to the software solution. Any setup fees associated with our SaaS arrangements are recognized ratably over the contract term plus expected renewal periods. As the customer simultaneously receives and consumes the benefits as access is provided, our performance obligation under our SaaS-based arrangements is comprised of a series of distinct components delivered over time. Our SaaS-based arrangements consideration is typically fixed.
Extended Service Plans (“ESP”)
. For our hardware arrangements, we enter into contracts with certain customers to provide services to maintain and repair the hardware for an extended period. ESPs are classified as service-type warranties under ASC 606 as they are sold separately and provide services which are incremental to the assurance that the product will perform to the agreed upon standards. The ESPs are accounted for as a separate performance obligation. Revenue from ESPs are recognized ratably over the contract period as the service is provided.
Note 2
.
Earnings Per Share
Net income per basic common share is computed using the weighted average number of common shares outstanding during the period. Net income per diluted common share is computed using the weighted average number of common and dilutive potential common shares outstanding during the period. Potential common shares result from the assumed exercise of outstanding common stock options having a dilutive effect using the treasury stock method, non-vested shares of time-based restricted stock units ("RSUs") having a dilutive effect, non-vested performance-based restricted stock units ("PSUs") for which the performance criteria have been met, shares to be purchased under our Employee Stock Purchase Plan (“ESPP”) having a dilutive effect, the assumed release of shares for the expected satisfaction of contingent consideration based on achievement of specified performance criteria related to the acquisition of Corrugated Technologies, Inc. (“CTI”), the assumed conversion of our Notes having a dilutive effect using the treasury stock method when the stock price exceeds the conversion price of the Notes, as well as the dilutive effect of our warrants when the stock price exceeds the warrant strike price. Our stock price has not exceeded the conversion price of the Notes or the strike price of the warrants during any periods presented. Any potential shares that are anti-dilutive are excluded from the effect of dilutive securities.
PSUs and market-based restricted stock units that would be issuable if the end of the reporting period were the end of the vesting period, if the result would be dilutive, are assumed to be outstanding for purposes of determining net income per diluted common share as of the later of the beginning of the period or the grant date. Accordingly, PSUs, which vested on various dates during the
three and nine months ended
September 30, 2018
and
2017
, based on achievement of specified performance criteria related to revenue, cash flows from operating activities, and non-GAAP operating income targets, are included in the determination of net income per diluted common share as of the beginning of each period.
Basic and diluted earnings per share are reconciled as follows (in thousands, except per share amounts):
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2018
|
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2017
|
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2018
|
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2017
|
|
Basic net income per share:
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|
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|
Net income available to common shareholders
|
$
|
1,920
|
|
|
$
|
3,454
|
|
|
$
|
2,093
|
|
|
$
|
11,000
|
|
|
Weighted average common shares outstanding
|
44,428
|
|
|
46,348
|
|
|
44,714
|
|
|
46,442
|
|
|
Basic net income per share
|
$
|
0.04
|
|
|
$
|
0.07
|
|
|
$
|
0.05
|
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$
|
0.24
|
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Diluted net income per share:
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|
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Net income available to common shareholders
|
$
|
1,920
|
|
|
$
|
3,454
|
|
|
$
|
2,093
|
|
|
$
|
11,000
|
|
|
Weighted average common shares outstanding
|
44,428
|
|
|
46,348
|
|
|
44,714
|
|
|
46,442
|
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|
Dilutive stock options and non-vested RSUs and PSUs
|
926
|
|
|
589
|
|
|
674
|
|
|
660
|
|
|
Weighted average common shares outstanding for purposes of computing diluted net income per share
|
45,354
|
|
|
46,937
|
|
|
45,388
|
|
|
47,102
|
|
|
Diluted net income per share
|
$
|
0.04
|
|
|
$
|
0.07
|
|
|
$
|
0.05
|
|
|
$
|
0.23
|
|
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
Potential shares of common stock that were not included in the determination of diluted net income per share because the impact of including them would have been anti-dilutive or performance conditions have not been met, consisted of the following (in thousands):
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2018
|
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2017
|
|
2018
|
|
2017
|
|
RSUs & PSUs
|
626
|
|
|
327
|
|
|
554
|
|
|
304
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ESPP purchase rights
|
41
|
|
|
410
|
|
|
638
|
|
|
342
|
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Total potential shares of common stock excluded from the computation of diluted earnings per share
|
667
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|
|
737
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|
|
1,192
|
|
|
646
|
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The weighted-average number of common shares outstanding does not include the effect of the potential common shares from conversion of our Notes and exercise of our warrants because the effect would have been anti-dilutive since the conversion price of the Notes and the strike price of the warrants exceeded the average market price of our common stock. We have the option to pay cash, issue shares of common stock, or any combination thereof for the aggregate amount due upon conversion of the Notes. Our intent is to settle the principal amount of the Notes in cash upon conversion. As a result, only amounts payable in excess of the principal amount of the Notes are considered in diluted net income per share under the treasury stock method. The Note Hedges are not included in the calculation of diluted net income per share because the effect of any exercise of the Note Hedges would be anti-dilutive. Please refer to
Note 9
–
Convertible Senior Notes
for additional information and definitions.
Note 3
.
Segment and Geographic Information
Operating segment information is presented based on the internal reporting used by the chief operating decision making group (“CODM”) to allocate resources and evaluate operating segment performance. Our segments consist of Industrial Inkjet, Productivity Software, and Fiery.
Industrial Inkjet
consists of our VUTEk super-wide and wide format display graphics, Nozomi corrugated packaging and display, Reggiani textile, and Cretaprint ceramic tile decoration and building material industrial digital inkjet printers; digital ultra-violet (“UV”) curable, light-emitting diode (“LED”) curable, ceramic, water-based, and thermoforming and specialty inks, as well as a variety of textile inks including dye sublimation, pigmented, reactive dye, acid dye, pure disperse dye, water-based dispersed printing ink, supplies, and coatings; digital inkjet printer parts; and professional services. Printing surfaces include paper, vinyl, corrugated, textile, glass, plastic, aluminum composite, ceramic tile, wood, and many other flexible and rigid substrates.
Productivity Software
consists of a complete software suite that enables efficient and automated end-to-end business and production workflows for the print and packaging industry. This
Productivity Suite
also provides tools to enable revenue growth, efficient scheduling, and optimization of processes, equipment, and personnel. Customers are provided the financial and technical flexibility to deploy locally within their business or to be hosted in the cloud. The Productivity Suite addresses all segments of the print industry and consists of the: (i)
Packaging Suite,
with Radius at its core, for tag & label, cartons, and flexible packaging businesses; (ii)
Corrugated Packaging Suite,
with CTI at its core, for corrugated packaging businesses, including corrugated control capability using EFI Escada; (iii)
Enterprise Commercial Print Suite,
with Monarch at its core, for enterprise print businesses; (iv)
Publication Print Suite,
with Monarch or Technique at its core, for publication print businesses; (v)
Midmarket Print Suite,
with Pace at its core, for medium size print businesses; (vi)
Quick Print Suite,
with PrintSmith Vision and essential capabilities of Digital StoreFront at its core, for small printers and in-plant sites; and (vii)
Value Added Products,
available with the suite and standalone, such as web-to-print, e-commerce, cross media marketing, warehousing, fulfillment, shop floor data collection, and shipping to reduce costs, increase profits, and offer new products and services to their existing and future customers. We also market Optitex computer-aided fashion design (“fashion CAD”) software, which facilitates fast fashion and increased efficiency in the textile and fashion industries.
Fiery
consists of Fiery and FreeFlow Print Server (“FFPS”), which was acquired from Xerox Corporation (“Xerox”), that transform digital copiers and printers into high performance networked printing devices for the office, commercial and industrial printing markets. This operating segment is comprised of (i) stand-alone DFEs connected to digital printers, copiers, and other peripheral devices, (ii) embedded DFEs and design-licensed solutions used in digital copiers and multi-functional devices, (iii) optional software integrated into our DFE solutions such as Fiery Central, and Graphics Arts Package, (iv) Fiery Self Serve, our self-service and payment solution, and (v) stand-alone software-based solutions such as our proofing, textile, and scanning solutions.
Operating income is not reported by operating segment because operating expenses include significant shared expenses and other costs that are managed outside of the operating segments. Such operating expenses include various corporate expenses such as stock-based compensation, corporate sales and marketing, research and development, amortization of identified intangibles, various non-recurring charges, and other separately managed general and administrative expenses.
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
Our revenue and gross profit (i.e., gross profit excluding stock-based compensation expense) by operating segment are summarized as follows (in thousands):
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Three Months Ended September 30,
|
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Nine Months Ended September 30,
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|
|
2018
|
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2017
|
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2018
|
|
2017
|
|
Industrial Inkjet
|
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Revenue
|
$
|
154,902
|
|
|
$
|
142,930
|
|
|
$
|
453,545
|
|
|
$
|
407,886
|
|
|
Gross profit
|
53,661
|
|
|
53,392
|
|
|
158,351
|
|
|
154,972
|
|
|
Gross profit percentages
|
34.6
|
%
|
|
37.4
|
%
|
|
34.9
|
%
|
|
38.0
|
%
|
|
Productivity Software
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
40,452
|
|
|
$
|
37,171
|
|
|
$
|
125,839
|
|
|
$
|
111,292
|
|
|
Gross profit
|
28,394
|
|
|
26,667
|
|
|
88,988
|
|
|
81,431
|
|
|
Gross profit percentages
|
70.2
|
%
|
|
71.7
|
%
|
|
70.7
|
%
|
|
73.2
|
%
|
|
Fiery
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
61,780
|
|
|
$
|
68,258
|
|
|
$
|
178,688
|
|
|
$
|
204,919
|
|
|
Gross profit
|
44,368
|
|
|
47,884
|
|
|
128,590
|
|
|
143,821
|
|
|
Gross profit percentages
|
71.8
|
%
|
|
70.2
|
%
|
|
72.0
|
%
|
|
70.2
|
%
|
Operating segment profit is reconciled to our Condensed Consolidated Statements of Operations as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Segment gross profit
|
$
|
126,423
|
|
|
$
|
127,943
|
|
|
$
|
375,929
|
|
|
$
|
380,224
|
|
|
Stock-based compensation expense
|
(904
|
)
|
|
(486
|
)
|
|
(2,715
|
)
|
|
(1,985
|
)
|
|
Gross profit
|
$
|
125,519
|
|
|
$
|
127,457
|
|
|
$
|
373,214
|
|
|
$
|
378,239
|
|
Tangible and intangible assets, net of liabilities, are summarized by operating segment as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
Inkjet
|
|
Productivity
Software
|
|
Fiery
|
|
Corporate and
Unallocated Net
Assets
|
|
Total
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
$
|
150,197
|
|
|
$
|
170,098
|
|
|
$
|
74,077
|
|
|
$
|
—
|
|
|
$
|
394,372
|
|
|
Identified intangible assets, net
|
45,688
|
|
|
24,903
|
|
|
15,655
|
|
|
—
|
|
|
86,246
|
|
|
Tangible assets, net of liabilities
|
251,948
|
|
|
(26,192
|
)
|
|
25,738
|
|
|
28,154
|
|
|
279,648
|
|
|
Net tangible and intangible assets
|
$
|
447,833
|
|
|
$
|
168,809
|
|
|
$
|
115,470
|
|
|
$
|
28,154
|
|
|
$
|
760,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
$
|
154,373
|
|
|
$
|
174,644
|
|
|
$
|
74,261
|
|
|
$
|
—
|
|
|
$
|
403,278
|
|
|
Identified intangible assets, net
|
66,547
|
|
|
36,379
|
|
|
20,082
|
|
|
—
|
|
|
123,008
|
|
|
Tangible assets, net of liabilities
|
221,933
|
|
|
(27,755
|
)
|
|
11,286
|
|
|
49,561
|
|
|
255,025
|
|
|
Net tangible and intangible assets
|
$
|
442,853
|
|
|
$
|
183,268
|
|
|
$
|
105,629
|
|
|
$
|
49,561
|
|
|
$
|
781,311
|
|
Corporate and unallocated net assets consist of cash and cash equivalents, short-term investments, restricted cash equivalents, corporate headquarters facility, convertible senior notes, imputed financing obligation related to build-to-suit lease, income taxes receivable, and income taxes payable.
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
Revenue by Geographic Region
We report revenue by geographic region based on ship-to destination which is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Americas
|
$
|
134,491
|
|
|
$
|
129,488
|
|
|
$
|
374,170
|
|
|
$
|
353,397
|
|
|
Europe, Middle East, and Africa (“EMEA”)
|
88,879
|
|
|
85,089
|
|
|
271,064
|
|
|
274,635
|
|
|
Asia Pacific (“APAC”)
|
33,764
|
|
|
33,782
|
|
|
112,838
|
|
|
96,065
|
|
|
Total revenue
|
$
|
257,134
|
|
|
$
|
248,359
|
|
|
$
|
758,072
|
|
|
$
|
724,097
|
|
Note 4
.
Revenue
We derive our revenue primarily from product revenue, which includes industrial digital inkjet printers, ink, and parts; print production software; and DFEs. We receive service revenue from printer maintenance agreements, customer support, training, software development, and consulting.
Upon the adoption of ASC 606 and ASC 340-40, we recorded a net increase to our opening balance of retained earnings of
$4.7 million
as of January 1, 2018, after considering the income tax impact, due to the cumulative effect of adoption. The adoption impact primarily related to capitalizing customer contract acquisition costs consisting of sales commissions, partially offset by an increase in deferred revenue to reflect the deferral of a significant financing component that will be recognized as interest income as payments are received over the contractual terms, and deferral of upfront setup fees that will be recognized ratably over the expected contractual terms.
The cumulative effect of applying ASC 606 and ASC 340-40 to active contracts as of the adoption date resulted in the following adjustments to the Condensed Consolidated Balance Sheet as of January 1, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported as of
December 31, 2017
|
|
ASC 606
Adjustments
|
|
As Adjusted
January 1, 2018
|
|
Assets
|
|
|
|
|
|
|
Accounts receivable, net
|
$
|
244,416
|
|
|
$
|
102
|
|
|
$
|
244,518
|
|
|
Other current assets
|
41,799
|
|
|
(1,628
|
)
|
|
40,171
|
|
|
Deferred tax assets
|
45,083
|
|
|
(1,466
|
)
|
|
43,617
|
|
|
Other assets
|
15,504
|
|
|
8,062
|
|
|
23,566
|
|
|
Liabilities
|
|
|
|
|
|
|
Deferred revenue
|
55,833
|
|
|
(95
|
)
|
|
55,738
|
|
|
Noncurrent contingent and other liabilities
|
28,801
|
|
|
491
|
|
|
29,292
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
Retained earnings
|
402,544
|
|
|
4,674
|
|
|
407,218
|
|
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
The impact of adopting ASC 606 and ASC 340-40 on our Condensed Consolidated Statement of Operations is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
Nine Months Ended September 30, 2018
|
|
|
Amounts in
Accordance with
ASC 606
|
|
Amounts in
Accordance with
ASC 605
|
|
Effect of change
higher (lower)
|
|
Amounts in
Accordance with
ASC 606
|
|
Amounts in
Accordance with
ASC 605
|
|
Effect of change
higher (lower)
|
|
Revenue
|
$
|
257,134
|
|
|
$
|
255,746
|
|
|
$
|
1,388
|
|
|
$
|
758,072
|
|
|
$
|
754,348
|
|
|
$
|
3,724
|
|
|
Cost of revenue
|
131,615
|
|
|
131,067
|
|
|
548
|
|
|
384,858
|
|
|
384,509
|
|
|
349
|
|
|
Gross profit
|
125,519
|
|
|
124,679
|
|
|
840
|
|
|
373,214
|
|
|
369,839
|
|
|
3,375
|
|
|
Operating expenses
|
123,404
|
|
|
123,316
|
|
|
88
|
|
|
359,520
|
|
|
359,418
|
|
|
102
|
|
|
Income from operations
|
2,115
|
|
|
1,363
|
|
|
752
|
|
|
13,694
|
|
|
10,421
|
|
|
3,273
|
|
|
Interest income and other income, net
|
336
|
|
|
199
|
|
|
137
|
|
|
1,270
|
|
|
823
|
|
|
447
|
|
|
Income (loss) before income taxes
|
(2,345
|
)
|
|
(3,234
|
)
|
|
889
|
|
|
225
|
|
|
(3,495
|
)
|
|
3,720
|
|
|
Benefits from income taxes
|
4,265
|
|
|
4,465
|
|
|
(200
|
)
|
|
1,868
|
|
|
2,363
|
|
|
(495
|
)
|
|
Net income (loss)
|
1,920
|
|
|
1,231
|
|
|
689
|
|
|
2,093
|
|
|
(1,132
|
)
|
|
3,225
|
|
The impact of adopting ASC 606 and ASC 340-40 on our Condensed Consolidated Balance Sheet as of
September 30, 2018
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts in
Accordance with
ASC 606
|
|
Amounts in
Accordance with
ASC 605
|
|
Effect of change
higher (lower)
|
|
Assets
|
|
|
|
|
|
|
Accounts receivable, net
|
$
|
240,150
|
|
|
$
|
236,018
|
|
|
$
|
4,132
|
|
|
Other current assets
|
47,814
|
|
|
49,790
|
|
|
(1,976
|
)
|
|
Deferred tax assets
|
43,265
|
|
|
45,226
|
|
|
(1,961
|
)
|
|
Other assets
|
34,369
|
|
|
26,409
|
|
|
7,960
|
|
|
Liabilities
|
|
|
|
|
|
|
Deferred revenue
|
65,181
|
|
|
65,239
|
|
|
(58
|
)
|
|
Noncurrent contingent and other liabilities
|
17,307
|
|
|
16,993
|
|
|
314
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
Retained earnings
|
409,311
|
|
|
401,412
|
|
|
7,899
|
|
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
The following table presents our disaggregated revenue by source (in thousands). Sales and usage-based taxes are excluded from revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
Nine Months Ended September 30, 2018
|
|
|
Industrial
Inkjet
|
|
Productivity
Software
|
|
Fiery
|
|
Total
|
|
Industrial
Inkjet
|
|
Productivity
Software
|
|
Fiery
|
|
Total
|
|
Major Products and Service Lines:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial Inkjet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Printers and parts
|
$
|
97,846
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
97,846
|
|
|
$
|
283,819
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
283,819
|
|
|
Ink, supplies, and maintenance
|
57,056
|
|
|
—
|
|
|
—
|
|
|
57,056
|
|
|
169,726
|
|
|
—
|
|
|
—
|
|
|
169,726
|
|
|
Productivity Software
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses
|
—
|
|
|
10,774
|
|
|
—
|
|
|
10,774
|
|
|
—
|
|
|
34,086
|
|
|
—
|
|
|
34,086
|
|
|
Professional services
|
—
|
|
|
7,349
|
|
|
—
|
|
|
7,349
|
|
|
—
|
|
|
22,919
|
|
|
—
|
|
|
22,919
|
|
|
Maintenance and subscriptions
|
—
|
|
|
22,329
|
|
|
—
|
|
|
22,329
|
|
|
—
|
|
|
68,834
|
|
|
—
|
|
|
68,834
|
|
|
Fiery
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital front ends and related
products
|
—
|
|
|
—
|
|
|
58,257
|
|
|
58,257
|
|
|
—
|
|
|
—
|
|
|
167,713
|
|
|
167,713
|
|
|
Maintenance and subscriptions
|
—
|
|
|
—
|
|
|
3,523
|
|
|
3,523
|
|
|
—
|
|
|
—
|
|
|
10,975
|
|
|
10,975
|
|
|
Total
|
$
|
154,902
|
|
|
$
|
40,452
|
|
|
$
|
61,780
|
|
|
$
|
257,134
|
|
|
$
|
453,545
|
|
|
$
|
125,839
|
|
|
$
|
178,688
|
|
|
$
|
758,072
|
|
|
Timing of Revenue Recognition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transferred at a Point in Time
|
$
|
149,521
|
|
|
$
|
10,774
|
|
|
$
|
58,257
|
|
|
$
|
218,552
|
|
|
$
|
437,780
|
|
|
$
|
34,086
|
|
|
$
|
167,713
|
|
|
$
|
639,579
|
|
|
Transferred Over Time
|
5,381
|
|
|
29,678
|
|
|
3,523
|
|
|
38,582
|
|
|
15,765
|
|
|
91,753
|
|
|
10,975
|
|
|
118,493
|
|
|
Total
|
$
|
154,902
|
|
|
$
|
40,452
|
|
|
$
|
61,780
|
|
|
$
|
257,134
|
|
|
$
|
453,545
|
|
|
$
|
125,839
|
|
|
$
|
178,688
|
|
|
$
|
758,072
|
|
|
Recurring/Non-Recurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Recurring
|
$
|
97,846
|
|
|
$
|
18,123
|
|
|
$
|
58,257
|
|
|
$
|
174,226
|
|
|
$
|
283,819
|
|
|
$
|
57,005
|
|
|
$
|
167,713
|
|
|
$
|
508,537
|
|
|
Recurring
|
57,056
|
|
|
22,329
|
|
|
3,523
|
|
|
82,908
|
|
|
169,726
|
|
|
68,834
|
|
|
10,975
|
|
|
249,535
|
|
|
Total
|
$
|
154,902
|
|
|
$
|
40,452
|
|
|
$
|
61,780
|
|
|
$
|
257,134
|
|
|
$
|
453,545
|
|
|
$
|
125,839
|
|
|
$
|
178,688
|
|
|
$
|
758,072
|
|
Remaining Performance Obligations
Revenue allocated to remaining performance obligations includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods (“backlog”). Remaining performance obligations were
$105.4 million
as of
September 30, 2018
, of which we expect to recognize substantially all of the revenue over the next
12 months
.
Contract Balances
Timing of revenue recognition may differ from timing of invoicing to customers. Payment terms and conditions vary by contract. Deferred revenue (contract liability) represents amounts received in advance, or invoiced in advance, for product support contracts, software customer support contracts, consulting and integration projects, SaaS arrangements, or product sales. We defer these amounts when we collect or invoice the customer and then generally recognize revenue either ratably over the support contract term, upon performing the related services, under the cost-to-cost method, or in accordance with our revenue recognition policy. Revenue recognized
during the three and nine months ended September 30, 2018
, which was included in deferred revenue as of
December 31, 2017
, was
$7.6
and
$45.3 million
, respectively.
Unbilled accounts receivable represents contract assets for revenue that have been recognized in advance of billing the customer, which is common for long-term contracts. Billing requirements vary by contract but are generally structured around the completion of certain development milestones. Unbilled accounts receivable as of
December 31, 2017
, that were transferred to accounts receivable
during the three and nine months ended September 30, 2018
, were
$2.7
and
$24.6 million
, respectively.
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
The following table reflects the balances in unbilled accounts receivable and deferred revenue (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
January 1, 2018
|
|
Unbilled accounts receivable – current
|
$
|
34,830
|
|
|
$
|
23,296
|
|
|
Unbilled accounts receivable – noncurrent
|
3,483
|
|
|
4,122
|
|
|
Deferred revenue – current
|
65,181
|
|
|
55,738
|
|
|
Deferred revenue – noncurrent
|
349
|
|
|
565
|
|
Note 5
.
Supplemental Financial Statement Information
Supplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
(in thousands)
|
2018
|
|
2017
|
|
Net cash paid for income taxes
|
$
|
12,765
|
|
|
$
|
15,724
|
|
|
Cash paid for interest expense
|
3,001
|
|
|
3,667
|
|
|
Property, equipment, and intellectual property received, but not paid
|
639
|
|
|
703
|
|
See also
Note 10
–
Commitments and Contingencies
for information about the impact from the termination of our lease in Fremont, CA.
Inventories
Inventories are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
Raw materials
|
$
|
52,085
|
|
|
$
|
57,061
|
|
|
Work-in-process
|
13,584
|
|
|
9,792
|
|
|
Finished goods
|
55,621
|
|
|
58,960
|
|
|
Total
|
$
|
121,290
|
|
|
$
|
125,813
|
|
Deferred Contract Acquisition Costs
Certain of our sales incentive programs that meet the definition of an incremental cost of obtaining a customer contract are required to be capitalized under ASC 340-40. We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year.
Sales commissions for renewal of a contract may not be commensurate with the commissions paid for the acquisition of the initial contract because commissions are generally not paid on the renewal of a specifically anticipated contract. Sales commissions for initial contracts are deferred and then amortized generally on a straight-line basis over a period of benefit that we have determined to be
three
to
four years
. We determined the period of benefit by taking into consideration our customer contracts, our technology, and other factors.
Upon adoption of ASC 340-40 on January 1, 2018, we capitalized
$8.1 million
in contract acquisition costs related to contracts that were not completed. For contracts that have durations of less than one year, we follow the practical expedient and expense these costs when incurred.
During the three and nine months ended September 30, 2018
, we amortized
$1.1
and
$3.3 million
of deferred contract acquisition costs, respectively, and we recognized
no
impairment losses in relation to costs capitalized.
During the three and nine months ended September 30, 2018
, an additional
$1.1
and
$3.2 million
of contract acquisition costs were capitalized, respectively. Deferred contract acquisition costs are included within other noncurrent assets in our Condensed Consolidated Balance Sheets.
Deferred Cost of Revenue
Deferred cost of revenue related to unrecognized revenue on shipments to customers was
$1.3
and
$3.5 million
as of
September 30, 2018
and
December 31, 2017
, respectively, and is included in other current assets in our Condensed Consolidated Balance Sheets.
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
Product Warranty Reserves
Product warranty reserves are included in accrued and other liabilities on our Condensed Consolidated Balance Sheets. The changes in product warranty reserves are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
Beginning balance
|
$
|
16,335
|
|
|
$
|
10,319
|
|
|
Liability assumed upon acquiring FFPS
|
—
|
|
|
9,368
|
|
|
Provisions, net of releases
|
8,154
|
|
|
9,284
|
|
|
Settlements
|
(11,245
|
)
|
|
(12,588
|
)
|
|
Ending balance
|
$
|
13,244
|
|
|
$
|
16,383
|
|
Equipment Leased to Customers Under Operating Leases, Net
Equipment leased to customers under operating leases was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
Equipment leased to customers under operating leases
|
$
|
7,755
|
|
|
$
|
5,432
|
|
|
Accumulated depreciation
|
(3,297
|
)
|
|
(1,927
|
)
|
|
Equipment leased to customers under operating leases, net
|
$
|
4,458
|
|
|
$
|
3,505
|
|
Scheduled minimum future rental revenue on operating leases as of
September 30, 2018
was as follows (in thousands):
|
|
|
|
|
|
|
|
Remainder of 2018
|
$
|
729
|
|
|
2019
|
2,134
|
|
|
2020
|
2,590
|
|
|
2021
|
384
|
|
|
2022
|
432
|
|
|
Total
|
$
|
6,269
|
|
Accumulated Other Comprehensive Income (Loss) (“AOCI”)
AOCI classified within stockholders’ equity on our Condensed Consolidated Balance Sheets was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
Net unrealized investment losses
|
$
|
(941
|
)
|
|
$
|
(697
|
)
|
|
Currency translation gains (losses)
|
(6,055
|
)
|
|
8,794
|
|
|
Net unrealized gain on cash flow hedges
|
—
|
|
|
41
|
|
|
Total
|
$
|
(6,996
|
)
|
|
$
|
8,138
|
|
Amounts reclassified out of AOCI, net of tax, were immaterial for all periods presented, and consisted of unrealized gains and losses from investments in debt securities that are reported within interest income and other income, net, in our Condensed Consolidated Statements of Operations.
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
Note 6
.
Accounts Receivable
Financing Receivables
Our financing receivables consist of sales-type lease and trade receivables that have an original contractual maturity in excess of one year. Sales-type lease receivables are included within other current assets and other assets, while trade receivables are included in accounts receivable (net of allowances) and other assets. Our financing receivables are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
Sales-type lease receivables
|
$
|
30,196
|
|
|
$
|
16,558
|
|
|
Trade receivables
|
11,814
|
|
|
12,125
|
|
|
Total financing receivables
|
$
|
42,010
|
|
|
$
|
28,683
|
|
|
|
|
|
|
|
Scheduled to be received in excess of one year
|
$
|
23,727
|
|
|
$
|
15,191
|
|
The credit quality of financing receivables is evaluated on the same basis as trade receivables. An allowance for estimated uncollectible amounts is provided as needed.
Accounts Receivable Sales Arrangements
Trade receivables are derecognized from our Condensed Consolidated Balance Sheets when sold to third parties upon determining that such receivables are presumptively beyond the reach of creditors in a bankruptcy proceeding. Any recourse obligation is measured using market data from similar transactions and the servicing liability is determined based on the fair value that a third party would charge to service these receivables. These liabilities were determined to not be material as of
September 30, 2018
and
December 31, 2017
.
We have facilities in the U.S. that enable us to sell to third parties, on an ongoing basis, certain trade receivables with recourse. Trade receivables sold with recourse are generally short-term receivables with payment due dates of less than 10 days from the date of sale. Trade receivables sold under these facilities were
$3.1
and
$13.1
million
during the three and nine months ended September 30, 2018
respectively, and
$21.4
million during the year ended
December 31, 2017
, which approximates the cash received.
We have facilities in Europe that enable us to sell to third parties, on an ongoing basis, certain trade receivables without recourse. Trade receivables sold without recourse are generally short-term receivables secured by letters of credit with payment due dates of less than one year. Trade receivables sold under these facilities were
$1.1
and
$6.8
million
during the three and nine months ended September 30, 2018
, respectively, and
$5.9 million
during the year ended
December 31, 2017
, which approximates the cash received.
We report collections from the sale of trade receivables to third parties as operating cash flows in the Condensed Consolidated Statements of Cash Flows.
Note 7
.
Fair Value Measurements
We invest our excess cash on deposit with major banks in money market, United States (“U.S.”) Treasury and government-sponsored entity, corporate, municipal government, asset-backed, and mortgage-backed residential debt securities. By policy, we invest primarily in high-grade marketable securities. We are exposed to credit risk in the event of default by the financial institutions or issuers of these investments to the extent of the amounts recorded in our Condensed Consolidated Balance Sheets.
We consider all highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents. Typically, the cost of these investments approximates fair value. Marketable investments with a maturity greater than three months are classified as available-for-sale short-term investments. Available-for-sale securities are stated at fair value with unrealized gains and losses reported as a separate component of AOCI, net of tax. The credit portion of any other-than-temporary impairment is included in net income. Realized gains and losses on sales or maturities of financial instruments are recognized upon sale of the investments using the specific identification method.
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
Our available-for-sale short-term investments are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
Gross unrealized
gains
|
|
Gross unrealized
losses
|
|
Fair value
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
U.S. Government and sponsored entities
|
$
|
55,322
|
|
|
$
|
—
|
|
|
$
|
(714
|
)
|
|
$
|
54,608
|
|
|
Corporate debt securities
|
51,345
|
|
|
—
|
|
|
(495
|
)
|
|
50,850
|
|
|
Municipal securities
|
383
|
|
|
—
|
|
|
(4
|
)
|
|
379
|
|
|
Asset-backed securities
|
7,020
|
|
|
33
|
|
|
(61
|
)
|
|
6,992
|
|
|
Mortgage-backed securities – residential
|
158
|
|
|
—
|
|
|
(1
|
)
|
|
157
|
|
|
Total short-term investments
|
$
|
114,228
|
|
|
$
|
33
|
|
|
$
|
(1,275
|
)
|
|
$
|
112,986
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
U.S. Government and sponsored entities
|
$
|
59,824
|
|
|
$
|
—
|
|
|
$
|
(660
|
)
|
|
$
|
59,164
|
|
|
Corporate debt securities
|
79,356
|
|
|
—
|
|
|
(450
|
)
|
|
78,906
|
|
|
Municipal securities
|
382
|
|
|
—
|
|
|
(2
|
)
|
|
380
|
|
|
Asset-backed securities
|
9,808
|
|
|
44
|
|
|
(47
|
)
|
|
9,805
|
|
|
Mortgage-backed securities – residential
|
445
|
|
|
—
|
|
|
(3
|
)
|
|
442
|
|
|
Total short-term investments
|
$
|
149,815
|
|
|
$
|
44
|
|
|
$
|
(1,162
|
)
|
|
$
|
148,697
|
|
The fair value and duration that investments, including cash equivalents, have been in a gross unrealized loss position below are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
More than 12 Months
|
|
Total
|
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and sponsored entities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
54,608
|
|
|
$
|
(714
|
)
|
|
$
|
54,608
|
|
|
$
|
(714
|
)
|
|
Corporate debt securities
|
10,159
|
|
|
(90
|
)
|
|
40,691
|
|
|
(405
|
)
|
|
50,850
|
|
|
(495
|
)
|
|
Municipal securities
|
379
|
|
|
(4
|
)
|
|
—
|
|
|
—
|
|
|
379
|
|
|
(4
|
)
|
|
Asset-backed securities
|
—
|
|
|
—
|
|
|
6,934
|
|
|
(61
|
)
|
|
6,934
|
|
|
(61
|
)
|
|
Mortgage-backed securities – residential
|
18
|
|
|
—
|
|
|
86
|
|
|
(1
|
)
|
|
104
|
|
|
(1
|
)
|
|
Total
|
$
|
10,556
|
|
|
$
|
(94
|
)
|
|
$
|
102,319
|
|
|
$
|
(1,181
|
)
|
|
$
|
112,875
|
|
|
$
|
(1,275
|
)
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and sponsored entities
|
$
|
23,023
|
|
|
$
|
(206
|
)
|
|
$
|
35,989
|
|
|
$
|
(454
|
)
|
|
$
|
59,012
|
|
|
$
|
(660
|
)
|
|
Corporate debt securities
|
45,857
|
|
|
(207
|
)
|
|
32,634
|
|
|
(243
|
)
|
|
78,491
|
|
|
(450
|
)
|
|
Municipal securities
|
378
|
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
378
|
|
|
(2
|
)
|
|
Asset-backed securities
|
6,779
|
|
|
(31
|
)
|
|
2,947
|
|
|
(16
|
)
|
|
9,726
|
|
|
(47
|
)
|
|
Mortgage-backed securities – residential
|
162
|
|
|
(2
|
)
|
|
142
|
|
|
(1
|
)
|
|
304
|
|
|
(3
|
)
|
|
Total
|
$
|
76,199
|
|
|
$
|
(448
|
)
|
|
$
|
71,712
|
|
|
$
|
(714
|
)
|
|
$
|
147,911
|
|
|
$
|
(1,162
|
)
|
For fixed income securities that have unrealized losses as of
September 30, 2018
, we do not have the intent to sell any of these investments and it is not more likely than not that we will be required to sell any of these investments before recovery of the entire amortized cost basis. We have evaluated these fixed income securities and determined that no credit losses exist. Accordingly, management has determined that the unrealized losses on our fixed income securities as of
September 30, 2018
were temporary in nature.
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
Amortized cost and estimated fair value of investments as of
September 30, 2018
, are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
Fair value
|
|
Mature in less than one year
|
$
|
75,459
|
|
|
$
|
74,864
|
|
|
Mature in one to three years
|
38,769
|
|
|
38,122
|
|
|
Total short-term investments
|
$
|
114,228
|
|
|
$
|
112,986
|
|
Net realized gains from sales of investments are recognized in interest income and other income, net, and were immaterial
during the three and nine months ended September 30, 2018
, and
September 30, 2017
, respectively. Net unrealized losses of
$1.2
and
$1.1
million were included in AOCI, net of tax effect, on the Condensed Consolidated Balance Sheets as of
September 30, 2018
, and
December 31, 2017
, respectively.
Fair Value Measurements
Our fair value hierarchy is defined as follows:
Level 1: Inputs that are quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date;
Level 2: Inputs that are other than quoted prices included within Level 1, that are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date for the duration of the instrument’s anticipated life or by comparison to similar instruments; and
Level 3: Inputs that are unobservable or reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. These include management’s own judgments about market participant assumptions developed based on the best information available in the circumstances.
We utilize the market approach to measure the fair value of our fixed income securities. The market approach is a valuation technique that uses the prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The fair value of our fixed income securities is obtained using readily-available market prices from a variety of industry standard data providers, large financial institutions, and other third-party sources for the identical underlying securities. The fair value of our investments in certain money market funds is expected to maintain a net asset value of
$1.00
per share and, as such, is priced at the expected market price.
We obtain the fair value of our Level 2 financial instruments from several third-party asset managers, custodian banks, and accounting service providers. Independently, these service providers use professional pricing services to gather pricing data, which may include quoted market prices for identical or comparable instruments or inputs other than quoted prices that are observable either directly or indirectly. As part of this process, we engaged a pricing service to assist management in its pricing analysis and assessment of other-than-temporary impairment. All estimates, key assumptions, and forecasts were either provided by or reviewed by us. While we utilize a third-party pricing service, the impairment analysis and related valuations represent conclusions of management and not conclusions or statements of any third party.
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
Our assets and liabilities measured at fair value by levels within the fair value hierarchy are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
18,524
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18,524
|
|
|
$
|
9,897
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,897
|
|
|
U.S. Government and sponsored
entities
|
33,279
|
|
|
21,328
|
|
|
—
|
|
|
54,607
|
|
|
33,261
|
|
|
25,903
|
|
|
—
|
|
|
59,164
|
|
|
Corporate debt securities
|
—
|
|
|
50,850
|
|
|
—
|
|
|
50,850
|
|
|
—
|
|
|
78,906
|
|
|
—
|
|
|
78,906
|
|
|
Municipal securities
|
—
|
|
|
379
|
|
|
—
|
|
|
379
|
|
|
—
|
|
|
380
|
|
|
—
|
|
|
380
|
|
|
Asset-backed securities
|
—
|
|
|
6,934
|
|
|
59
|
|
|
6,993
|
|
|
—
|
|
|
9,754
|
|
|
51
|
|
|
9,805
|
|
|
Mortgage-backed securities
– residential
|
—
|
|
|
157
|
|
|
—
|
|
|
157
|
|
|
—
|
|
|
442
|
|
|
—
|
|
|
442
|
|
|
Total
|
$
|
51,803
|
|
|
$
|
79,648
|
|
|
$
|
59
|
|
|
$
|
131,510
|
|
|
$
|
43,158
|
|
|
$
|
115,385
|
|
|
$
|
51
|
|
|
$
|
158,594
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration,
current and noncurrent
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
20,323
|
|
|
$
|
20,323
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
35,702
|
|
|
$
|
35,702
|
|
|
Self-insurance
|
—
|
|
|
—
|
|
|
982
|
|
|
982
|
|
|
—
|
|
|
—
|
|
|
902
|
|
|
902
|
|
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
21,305
|
|
|
$
|
21,305
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
36,604
|
|
|
$
|
36,604
|
|
Money market funds have been classified as cash equivalents as of
September 30, 2018
, and
December 31, 2017
, respectively.
Investments are generally classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices or alternative pricing sources with reasonable levels of price transparency. Investments in U.S. Treasury obligations and overnight money market mutual funds have been classified as Level 1 because these securities are valued based on quoted prices in active markets or are actively traded at
$1.00
net asset value. There have been
no
transfers between Level 1 and 2 during the
nine months ended September 30, 2018
and
2017
.
Government agency investments and corporate debt instruments, including investments in asset-backed and mortgage-backed securities, have generally been classified as Level 2 because markets for these securities are less active or valuations for such securities utilize significant inputs, which are directly or indirectly observable. We hold asset-backed securities with income payments derived from and collateralized by a specified pool of underlying assets. Asset-backed securities in the portfolio are predominantly collateralized by credit cards and auto loans. We also hold mortgage-backed securities which have been fully reserved.
Liabilities for Contingent Consideration
Acquisition-related liabilities for contingent consideration (i.e., earnouts) as of
September 30, 2018
are related to the 2017 acquisitions of Escada Innovations Limited and Escada Systems, Inc. (collectively, “Escada”) and Generation Digital Solutions, Inc. (“Generation Digital”); the 2016 acquisitions of Optitex Ltd. (“Optitex”) and Rialco Limited (“Rialco”); the 2015 acquisitions of Shuttleworth Business Systems Limited and CDM Solutions Limited (collectively, “Shuttleworth”), and CTI; and the 2013 acquisition of PrintLeader Software (“PrintLeader”).
The fair value of these earnouts is estimated to be
$20.3
and
$35.7 million
as of
September 30, 2018
, and
December 31, 2017
, respectively, by applying the income approach in accordance with ASC 805-30-25-5. Key assumptions include risk-free discount rates between
0.6%
and
5.0%
, as well as probability-adjusted revenue, gross profit, and direct operating income using the Monte Carlo valuation method. Probability-adjusted revenue, gross profit, and direct operating income are significant inputs that are not observable in the market, and are therefore classified as Level 3 inputs. These contingent liabilities have been reflected in the Condensed Consolidated Balance Sheet as of
September 30, 2018
, as current and noncurrent liabilities of
$8.5
and
$11.8
million, respectively.
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
Changes in the fair value of contingent consideration are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Liability for Contingent Consideration
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
22,129
|
|
|
$
|
61,414
|
|
|
$
|
35,702
|
|
|
$
|
56,463
|
|
|
Fair value of Generation Digital contingent consideration at August 14, 2017
|
—
|
|
|
3,600
|
|
|
—
|
|
|
3,600
|
|
|
Changes in valuation
|
721
|
|
|
75
|
|
|
(12,054
|
)
|
|
974
|
|
|
Earnout accretion
|
91
|
|
|
336
|
|
|
194
|
|
|
1,213
|
|
|
Payments and settlements
|
(2,611
|
)
|
|
(10,265
|
)
|
|
(3,361
|
)
|
|
(11,559
|
)
|
|
Foreign currency adjustment
|
(7
|
)
|
|
(1,640
|
)
|
|
(158
|
)
|
|
2,829
|
|
|
Ending balance
|
$
|
20,323
|
|
|
$
|
53,520
|
|
|
$
|
20,323
|
|
|
53,520
|
|
The Optitex, Generation Digital, and Shuttleworth earnout liability valuations decreased, on a combined basis,
during the three and nine months ended September 30, 2018
by
$1.5
and
$14.3 million
, respectively, based on recent actual and updated forecasted financial performance data. The Escada earnout liability valuation increased
$2.2 million
during the three and nine months ended September 30, 2018
. The Optitex, CTI, and Rialco earnout probabilities increased, while the Shuttleworth earnout performance probability decreased, during 2017. The earnout liability valuations increased
during the three and nine months ended September 30, 2017
by
$0.1
and
$1.0 million
, respectively. Changes in the fair value of contingent consideration subsequent to the acquisition date are reported in general and administrative expenses.
Earnout payments and settlements
during the three and nine months ended September 30, 2018
of
$2.6
and
$3.4 million
were primarily related to the Rialco, Generation Digital, and Shuttleworth contingent consideration liabilities. Earnout payments and settlements
during the three and nine months ended September 30, 2017
of
$10.3
and
$11.6 million
, respectively, were related to the Reggiani, Optitex, Rialco, and Shuttleworth contingent consideration liabilities.
The primary inputs to the fair value measurement of contingent consideration liability are the discount rate and probability-adjusted revenue or earnings targets specified in the acquisition agreements. Accordingly, we reviewed the sensitivity of the fair value measurement to changes in these inputs. We assessed the probability of achieving the revenue and profitability performance targets for contingent consideration associated with each acquisition at percentage levels between
50%
and
100%
as of each respective acquisition date based on an assessment of the historical performance of each acquired entity, our current expectations of future performance, and other relevant factors. A change in probability-adjusted revenue of five percentage points from the level assumed in the current valuations would result in an increase in the fair value of contingent consideration of
$1.8
million or a decrease of
$1.2 million
. A change in the discount rate of one percentage point would result in an increase in the fair value of contingent consideration of
$0.2 million
or a decrease of
$0.2 million
. The potential undiscounted amount of contingent consideration that we could be required to pay related to our business acquisitions, assuming all remaining earnout payments were maximized, would be
$11.4 million
above amounts currently accrued as of
September 30, 2018
.
Fair Value of Derivative Instruments
We utilize the income approach to measure the fair value of our derivative assets and liabilities. The income approach uses pricing models that rely on market observable inputs such as yield curves, currency exchange rates, and forward prices, and are therefore classified as Level 2 measurements. The notional amount of our derivative assets and liabilities was
$209.9
and
$239.4 million
as of
September 30, 2018
and
December 31, 2017
, respectively.
Fair Value of Convertible Senior Notes
In September 2014, we issued
$345 million
aggregate principal amount of our Notes. The Notes are carried at their original issuance value, net of unamortized debt discount, and are not marked to market each period. The fair value of the Notes as of
September 30, 2018
was approximately
$340.7 million
and was classified as a Level 2 fair value measurement. Fair value was estimated based upon actual quotations obtained at the end of the reporting period or the most recent date available. The market value of our Notes can be in excess of the outstanding principal amount due to the conversion premium.
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
Note 8
.
Derivatives and Hedging
We are exposed to market risk and foreign currency exchange risk from changes in foreign currency exchange rates, which could affect operating results, financial position, and cash flows. We manage our exposure to these risks through our regular operating and financing activities and, when appropriate, through use of derivative financial instruments. These derivative financial instruments are used to hedge monetary assets and liabilities, intercompany balances, trade receivables, anticipated cash flows, and to reduce earnings and cash flow volatility resulting from shifts in foreign currency exchange rates. Our objective is to offset gains and losses resulting from these exposures with losses and gains on the derivative contracts used to hedge them, thereby reducing volatility of earnings or protecting fair values of assets and liabilities. We do not have any leveraged derivatives, nor do we use derivative contracts for speculative purposes. We present the fair value of all open derivative instruments, including those embedded in other contracts, as assets or liabilities on our Condensed Consolidated Balance Sheets. The related cash flow impacts of our derivative contracts are reflected as cash flows from operating activities.
Our exposures are primarily related to non-U.S. dollar-denominated revenue in Europe, the U.K., Latin America, China, Israel, and Australia, and to non-U.S. dollar-denominated operating expenses in Europe, India, the U.K., China, Israel, Brazil, and Australia. From time to time we have hedged our operating expense cash flow exposure in Indian rupees. We hedge balance sheet remeasurement exposure associated with British pound sterling, Canadian dollar, Chinese renminbi, Brazilian real, Israeli shekel, Japanese yen, and Euro-denominated intercompany balances; Brazilian real, British pound sterling, Australian dollar, Chinese renminbi, Israeli shekel, and Euro-denominated trade receivables; and British pound sterling, Israeli shekel, Canadian dollar, and Euro-denominated net monetary assets.
By their nature, derivative instruments involve, to varying degrees, elements of market and credit risk. The market risk associated with these instruments resulting from currency exchange movement is expected to offset the market risk of the underlying transactions, assets, and liabilities being hedged. Under our master netting agreements with our foreign currency derivative counterparties, we are allowed to net transactions of the same currency with a single net amount payable by one party to the other. The derivatives held by us are not subject to any credit contingent features negotiated with these counterparties. We are not required to pledge cash collateral related to these foreign currency derivative contracts. We do not believe there is significant risk of loss from non-performance by the counterparty associated with these instruments because, by policy, we only deal with counterparties having a minimum investment grade or better credit rating. Credit risk is managed through the continuous monitoring of exposures to such counterparties.
Cash Flow Hedges
We did
not
have any foreign currency derivative contracts designated as cash flow hedges as of
September 30, 2018
nor
during the nine months ended September 30, 2018
. Our foreign currency derivative contracts designated as cash flow hedges for our Indian rupee operating expenses were in the notional amount of
$3.9 million
as of
December 31, 2017
. The fair value of the net assets (liabilities) related to these cash flow hedges were not material. The changes in fair value of these contracts are reported as a component of AOCI and reclassified to operating expense in the periods of payment of the hedged operating expenses. The amount of ineffectiveness that was recorded in the Condensed Consolidated Statements of Operations for these designated cash flow hedges was immaterial. All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.
Balance Sheet Hedges
Our forward contracts are not designated for hedge accounting treatment since there is a natural offset for the remeasurement of the underlying foreign currency denominated asset or liability. We recognize changes in the fair value of non-designated derivative instruments in earnings in the period of change. Gains and losses on foreign currency forward contracts used to hedge balance sheet exposures are recognized in interest income and other income, net, in the same period as the remeasurement gain or loss of the related foreign currency denominated assets and liabilities. Our forward contracts not designated for hedge accounting treatment consisted of hedges of Australian dollar, British pound sterling, Brazilian real, Canadian dollar, Chinese renminbi, Euro, Israeli shekel
and Japanese yen.
These balance sheet hedges cover currency exposures in the following line items in the notional amounts indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet categories
|
September 30, 2018
|
|
December 31, 2017
|
|
Accounts Receivable
|
$
|
46,574
|
|
|
$
|
44,427
|
|
|
Other assets and liabilities, net
|
38,185
|
|
|
46,550
|
|
|
Intercompany balances
|
125,189
|
|
|
144,477
|
|
|
Total
|
$
|
209,948
|
|
|
$
|
235,454
|
|
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
Note 9
.
Convertible Senior Notes
0.75% Convertible Senior Notes Due 2019
In September 2014, we completed a private placement of
$345 million
principal amount of
0.75%
Convertible Senior Notes due
September 1, 2019
. The net proceeds from this offering were approximately
$336.3 million
, after deducting the initial purchasers’ commissions and the offering expenses paid by us. We used approximately
$29.4 million
of the net proceeds to purchase the Note Hedges described below, net of the proceeds from the Warrant transactions also described below.
The Notes are senior unsecured obligations of EFI with interest payable semiannually in arrears on March 1 and September 1 of each year. The Notes are not callable and will mature on September 1, 2019, unless previously purchased or converted in accordance with their terms prior to such date. Holders of the Notes who convert in connection with a “fundamental change,” as defined in the indenture governing the Notes (“Indenture”), may require us to purchase for cash all or any portion of their Notes at a purchase price equal to 100 percent of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any.
The initial conversion rate is
18.9667
shares of common stock per
$1,000
principal amount of Notes, which is equivalent to an initial conversion price of approximately
$52.72
per share of common stock. Upon conversion of the Notes, holders will receive cash, shares of common stock or a combination thereof, at our election. Our intent is to settle the principal amount of the Notes in cash upon conversion. If the conversion value exceeds the principal amount, we would deliver shares of our common stock for our conversion obligation in excess of the aggregate principal amount. As of
September 30, 2018
, none of the conditions allowing holders of the Notes to convert had been met.
We separated the Notes into liability and equity components. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) is amortized to interest expense over the term of the Notes using the effective interest method with an effective interest rate of
4.98%
per annum (
5.46%
inclusive of debt issuance costs). The equity component is not remeasured if it continues to meet the conditions for equity classification.
We allocated the total transaction costs incurred by the issuance of the Notes to the liability and equity components based on their relative values. Issuance costs of
$7.0 million
attributable to the
$281.4 million
liability component are being amortized to expense over the term of the Notes, and issuance costs of
$1.6 million
attributable to the
$63.6 million
equity component were offset against the equity component in stockholders’ equity. Additionally, we recorded a deferred tax liability of
$23.7 million
on the debt discount, which is not deductible for tax purposes.
The Notes consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
Liability component
|
$
|
345,000
|
|
|
$
|
345,000
|
|
|
Debt discount, net of amortization
|
(12,975
|
)
|
|
(23,178
|
)
|
|
Debt issuance costs, net of amortization
|
(1,658
|
)
|
|
(2,865
|
)
|
|
Net carrying amount
|
$
|
330,367
|
|
|
$
|
318,957
|
|
|
Equity component
|
$
|
63,643
|
|
|
$
|
63,643
|
|
|
Less: debt issuance costs allocated to equity
|
(1,582
|
)
|
|
(1,582
|
)
|
|
Net carrying amount
|
$
|
62,061
|
|
|
$
|
62,061
|
|
Interest expense recognized on the Notes was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
0.75% coupon
|
$
|
647
|
|
|
$
|
647
|
|
|
$
|
1,948
|
|
|
$
|
1,933
|
|
|
Amortization of debt discount
|
3,448
|
|
|
3,265
|
|
|
10,203
|
|
|
9,627
|
|
|
Amortization of debt issuance costs
|
407
|
|
|
388
|
|
|
1,207
|
|
|
1,144
|
|
|
Total
|
$
|
4,502
|
|
|
$
|
4,300
|
|
|
$
|
13,358
|
|
|
$
|
12,704
|
|
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
Note Hedges
We paid an aggregate of
$63.9 million
in convertible note hedge transactions with respect to our common stock (“Note Hedges”) in September 2014. The Note Hedges will expire upon maturity of the Notes. The Note Hedges are intended to offset the potential dilution upon conversion and/or offset any cash payments we are required to make in excess of the principal amount upon conversion of the Notes in the event that the market value per share of our common stock, as measured under the terms of the Note Hedges, is greater than the strike price of the Note Hedges. The strike price of the Note Hedges initially corresponded to the conversion price of the Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion price of the Notes. The Note Hedges are separate transactions and are not part of the Notes. Holders of the Notes will not have any rights with respect to the Note Hedges.
Warrants
Concurrently with entering into the Note Hedges, we separately sold Warrants to acquire shares of our common stock at a strike price of
$68.86
per share (the "Warrants"). We received aggregate proceeds of
$34.5 million
from the sale of the Warrants. If the average market value per share of our common stock for the reporting period, as measured under the Warrants, exceeds the strike price of the Warrants, the Warrants will have a dilutive effect on our earnings per share. The Warrants are separate transactions and are not part of the Notes or the Note Hedges and are accounted for as a component of additional paid-in capital. Holders of the Notes and Note Hedges will not have any rights with respect to the Warrants.
Note 10
.
Commitments and Contingencies
Contingent Consideration
We are required to make payments to the former stockholders of acquired companies based on the achievement of specified performance targets as explained in
Note 7
–
Fair Value Measurements
.
Lease Commitments and Contractual Obligations
As of
September 30, 2018
, we have leased certain of our current facilities and vehicles under noncancelable operating lease agreements. We are required to pay property taxes, insurance, and nominal maintenance costs for certain of these facilities and vehicles, and any increases over the base year of these expenses on the remainder of these leases.
Lease Termination
On
July 27, 2018
, we executed an agreement (the “Termination Agreement”) to terminate the lease agreement dated April 19, 2013 between John Arrillaga Survivor’s Trust, represented by John Arrillaga, Trustee, and Richard T. Peery Separate Property Trust, represented by Richard T. Peery, Trustee and the Company, pursuant to which the Company had leased a portion of an approximately 108,000 square foot, two-story building located at 6700 Dumbarton Circle, Fremont, CA, adjacent to the Company’s headquarters. The Termination Agreement was effective
July 31, 2018
. The Company moved its operations and personnel from the formerly leased facility into our headquarters building in July 2018. Prior to executing the Termination Agreement, the underlying lease had a remaining term of
ten
years and minimum noncancelable lease payments of
$16.0 million
. For accounting purposes, we were considered the owner of the building and had recorded the asset at a net book value of
$13.7 million
in property and equipment, net, on our Condensed Consolidated Balance Sheet prior to the termination. As of
July 31, 2018
, we derecognized the lease asset and removed the corresponding liability of
$14.5 million
, which represented the present value of the lease obligation, from our Condensed Consolidated Balance Sheet. The Termination Agreement required us to pay total penalties of
$0.8 million
. The net loss from this lease termination of
$0.1 million
was charged to restructuring expense during the three months ended September 30, 2018.
Assets Held for Sale
During the fourth quarter of 2017, our management approved a plan to sell approximately
31.5
acres of land and
two
manufacturing buildings located at One Vutek Place and 189 Waukewan Street, Meredith, New Hampshire, consisting of
163,000
total square feet. These assets, which were previously recorded within property and equipment, net at a net book value of
$5.1 million
, were reclassified as assets held for sale upon the approval of the plan. We recognized an impairment charge of
$0.9 million
in the fourth quarter of 2017, and reported the assets at
$4.2 million
on our Condensed Consolidated Balance Sheet as of December 31, 2017.
During the three months ended September 30, 2018
, we sold the 189 Waukewan Street land and building for net proceeds of
$1.1 million
and recognized a gain of
$0.1 million
. The One Vutek Place land and building remained in assets held for sale at a total value of
$3.1 million
as of
September 30, 2018
on the Condensed Consolidated Balance Sheet and are actively being marketed.
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
Off-Balance Sheet Financing – Lease Arrangements
On August 26, 2016, we entered into a lease agreement with a lease term of
48.5 years
, inclusive of
two
renewal options of
5.0
and
3.5 years
, with the City of Manchester, NH to lease
16.9
acres adjacent to the Manchester Regional Airport. The land is subleased to MUFG Americas Capital Leasing & Finance, LLC (“MUFG”), formerly Bank of Tokyo – Mitsubishi UFJ Leasing & Finance LLC, during the term of the lease related to the manufacturing facility that was constructed on the site, which is described below. Minimum lease payments are
$13.3 million
during the entire
48.5
-year term of the land lease, excluding
six
months of the land lease that were financed into the manufacturing facility lease.
On August 26, 2016, we entered into a
six
-year lease with MUFG whereby a
225,000
-square foot manufacturing and warehouse facility was constructed for our Industrial Inkjet operating segment at a cost of
$39.8 million
. Construction was completed in April 2018. Minimum lease payments during the initial
six
-year term are
$1.8 million
. Upon completion of the initial
six
-year term, we have the option to renew the lease, purchase the facility, or return the facility to MUFG subject to an
89%
residual value guarantee under which we would recognize additional rent expense in the form of a variable rent payment. We have assessed our exposure in relation to the residual value guarantee and believe that there is no deficiency to the guaranteed value as of
September 30, 2018
.
During the construction period, we were required to maintain restricted cash equivalents or restricted investments equal to the amount expended to date on the construction of the building as collateral. The funds were deposited with a third-party trustee and were restricted during the construction period. Upon completion of construction,
$39.8 million
was deposited with MUFG and is restricted as collateral until the end of the underlying building lease period.
Legal Proceedings
From time to time, we are involved in a variety of claims, lawsuits, investigations, or proceedings relating to contractual disputes, securities laws, intellectual property rights, employment, or other matters that may arise in the normal course of business. We assess our potential liability in each of these matters by using the information available to us. We develop our views on estimated losses in consultation with inside and outside counsel, which involves a subjective analysis of potential results and various combinations of appropriate litigation and settlement strategies. We accrue estimated losses from contingencies if a loss is deemed probable and can be reasonably estimated.
As of
September 30, 2018
, we are subject to the matters described below:
Matan Digital Printing (“MDG”) Matter.
EFI acquired Matan Digital Printers (“Matan”) in 2015 from sellers (the “2015 Sellers”) that had acquired Matan Digital Printing Ltd. from other sellers in 2001 (the “2001 Sellers”). The 2001 Sellers have asserted a claim against the 2015 Sellers and Matan asserting that they are entitled to a portion of the 2015 Sellers’ proceeds from EFI’s acquisition. The 2015 Sellers dispute this claim and have agreed to indemnify EFI against the 2001 Sellers’ claim.
We do not believe that it is probable that we will incur a loss in the resolution of this matter. It is reasonably possible, however, that our financial statements could be materially affected by an unfavorable resolution and we could incur a material loss in this matter. We estimate the range of loss to be between
one
dollar and
$10.1 million
. If we incur a loss in this matter, it will be offset by a receivable of an equal amount representing a claim for indemnification against the escrow account established in connection with the Matan acquisition.
Purported Class Action Lawsuit.
On August 10, 2017, a putative class action was filed against the Company and its two named executive officers in the United States District Court for the District of New Jersey, captioned
Pipitone v. Electronics For Imaging, Inc
., No. 2:17-cv-5992 (D.N.J.). A First Amended Complaint was filed on February 20, 2018. The plaintiffs allege, among other things, that statements by the Company and its officers about the Company’s financial reporting, revenue recognition, internal controls, and disclosure controls and procedures were false or misleading. The complaint seeks an unspecified amount of damages, interest, attorneys’ fees, and other costs, on behalf of a putative class of individuals and entities that purchased or otherwise acquired EFI securities from February 22, 2017 through August 3, 2017. EFI filed a motion to dismiss on April 23, 2018. The plaintiffs filed an opposition on May 23, 2018, and EFI filed its reply brief on June 13, 2018. A hearing on EFI’s motion to dismiss has not yet been scheduled.
At this time, we do not believe it is probable that we will incur a material loss in this matter. However, it is reasonably possible that our financial statements could be materially affected by an unfavorable resolution of this matter. Since this matter is in the preliminary stages, we are not yet in a position to estimate the amount or range of reasonably possible loss that may be incurred.
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
Purported Derivative Shareholder Lawsuits.
On August 22, 2017, a purported derivative shareholder complaint was filed in the Superior Court of the State of California for the County of Alameda captioned
Schiffmiller v. Gecht
, No. RG17873197. A First Amended Complaint was filed on April 13, 2018. The complaint makes claims derivatively and on behalf of the Company as nominal defendant against the Company’s named executive officers and directors for alleged breaches of fiduciary duties and unjust enrichment, and alleges, among other things, that statements by the Company and its officers about the Company’s financial reporting, revenue recognition, internal controls, and disclosure controls and procedures were false or misleading. The complaint alleges the Company has suffered damage as a result of the individual defendants’ alleged actions, and seeks an unspecified amount of damages, restitution, and declaratory and other relief. The derivative action has been stayed pending the resolution of the
Pipitone
class action described above.
At this time, we do not believe it is probable that we will incur a material loss in this matter. However, it is reasonably possible that our financial statements could be materially affected by an unfavorable resolution of this matter. Because this matter has been stayed pending resolution of the
Pipitone
class action described above, we are not yet in a position to estimate the amount or range of reasonably possible loss that may be incurred.
Other Matters.
As of
September 30, 2018
, we were subject to various other claims, lawsuits, investigations, and proceedings in addition to the matters discussed above. There is at least a reasonable possibility that additional losses may be incurred in excess of the amounts that we have accrued. However, we believe that these claims are not material to our financial statements or the range of reasonably possible losses is not reasonably estimable. Litigation is inherently unpredictable, and while we believe that we have valid defenses with respect to legal matters pending against us, our financial statements could be materially affected in any particular period by the unfavorable resolution of one or more of these contingencies or because of the diversion of management’s attention and the incurrence of significant expenses.
Note 11
.
Stock Repurchase Program
On September 11, 2017, the board of directors approved the repurchase of an additional
$125 million
for our share repurchase program commencing September 11, 2017 and expiring on
December 31, 2018
. The board of directors had previously authorized
$150 million
under the program in November 2015. Under this publicly announced program, we repurchased
1,614,166
and
1,019,544
shares for an aggregate purchase price of
$50.5
and
$47.0 million
during the
nine months ended September 30, 2018
and
2017
, respectively. As of
September 30, 2018
,
$58.9 million
remained authorized for repurchases under this program.
Our employees have the option to surrender shares of common stock to satisfy their tax withholding obligations that arise on the vesting of RSUs, the exercise price of certain stock options, and any tax withholding obligations incurred from exercise of stock options. Employees surrendered
63,107
and
233,159
shares at an aggregate value of
$2.0
and
$10.0 million
during the
nine months ended September 30, 2018
and
2017
, respectively.
Note 12
.
Stock-based Compensation
Stock-based compensation expense related to ESPP purchase rights and RSUs is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Stock-based compensation expense by type of awards
|
|
|
|
|
|
|
|
|
RSUs
|
$
|
10,587
|
|
|
$
|
3,545
|
|
|
$
|
25,793
|
|
|
$
|
18,875
|
|
|
ESPP purchase rights
|
1,336
|
|
|
1,103
|
|
|
4,685
|
|
|
3,666
|
|
|
Total stock-based compensation expense
|
11,923
|
|
|
4,648
|
|
|
30,478
|
|
|
22,541
|
|
|
Income tax benefit
|
(1,747
|
)
|
|
(1,525
|
)
|
|
(4,437
|
)
|
|
(6,929
|
)
|
|
Stock-based compensation expense, net of tax
|
$
|
10,176
|
|
|
$
|
3,123
|
|
|
$
|
26,041
|
|
|
$
|
15,612
|
|
Valuation Assumptions for ESPP Purchase Rights and Stock Options
We use the Black-Scholes-Merton (“BSM”) option pricing model to value stock-based compensation for all equity awards, except market-based awards, which are valued using the Monte Carlo valuation model. We value RSUs at the closing market price on the date of grant.
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
The estimated weighted average fair value per share and underlying assumptions of ESPP purchase rights issued were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
Weighted average fair value per share
|
$13.91
|
|
$12.09
|
|
Expected volatility
|
37
|
%
|
—
|
80%
|
|
24
|
%
|
—
|
28%
|
|
Risk-free interest rate
|
2.2
|
%
|
—
|
2.7%
|
|
0.7
|
%
|
—
|
1.3%
|
|
Expected term (in years)
|
0.5
|
|
—
|
2.0
|
|
0.5
|
|
—
|
2.0
|
No
stock options were granted during the
nine months ended September 30, 2018
and
2017
. As of
September 30, 2018
,
100,000
shares underlying stock options are outstanding and exercisable. They are time-based options with an aggregate intrinsic value of
$1.8 million
, a weighted average exercise price of
$16.00
per share, and remaining contractual term of
0.7 years
. Aggregate intrinsic value for stock options represents the difference between the closing price per share of our common stock on the last trading day of the period and the option exercise price, multiplied by the number of in-the-money stock options outstanding, vested and expected to vest, and exercisable as of
September 30, 2018
.
Non-vested RSUs
Non-vested RSUs were awarded to employees under our equity incentive plans. Non-vested RSUs do not have the voting rights of common stock and the shares underlying non-vested RSUs are not considered issued and outstanding. Non-vested RSUs generally vest over a service period of
one
to
four
years. The compensation expense incurred for these service-based awards is based on the closing market price of our stock on the date of grant and is amortized on a graded vesting basis over the requisite service period.
Non-vested RSU activity during the
nine months ended September 30, 2018
is summarized below (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time-based
|
|
Performance-based
|
|
Market-based
|
|
Total
|
|
|
Shares
|
|
Weighted average grant date fair value
|
|
Shares
|
|
Weighted average grant date fair value
|
|
Shares
|
|
Weighted average grant date fair value
|
|
Shares
|
|
Weighted average grant date fair value
|
|
Non-vested at January 1, 2018
|
1,048
|
|
|
$
|
35.76
|
|
|
1,209
|
|
|
$
|
42.18
|
|
|
23
|
|
|
$
|
35.15
|
|
|
2,280
|
|
|
$
|
39.16
|
|
|
Granted
|
985
|
|
|
31.31
|
|
|
829
|
|
|
30.92
|
|
|
—
|
|
|
—
|
|
|
1,814
|
|
|
31.13
|
|
|
Vested
|
(287
|
)
|
|
40.04
|
|
|
(20
|
)
|
|
44.84
|
|
|
—
|
|
|
—
|
|
|
(307
|
)
|
|
40.36
|
|
|
Forfeited
|
(96
|
)
|
|
34.90
|
|
|
(614
|
)
|
|
44.65
|
|
|
—
|
|
|
—
|
|
|
(710
|
)
|
|
43.33
|
|
|
Non-vested at September 30, 2018
|
1,650
|
|
|
32.41
|
|
|
1,404
|
|
|
34.42
|
|
|
23
|
|
|
35.15
|
|
|
3,077
|
|
|
33.35
|
|
Vested RSUs
The grant date fair value of RSUs vested during the
nine months ended September 30, 2018
was
$12.4 million
. The aggregate intrinsic value of RSUs vested and expected to vest as of
September 30, 2018
was
$57.7 million
and the remaining weighted average vesting period was
1.08 years
. Aggregate intrinsic value for RSUs vested and expected to vest represents the closing market price per share of our common stock on the last trading day of the period, multiplied by the number of RSUs vested and expected to vest as of
September 30, 2018
. RSUs expected to vest represent time-based RSUs unvested and outstanding as of
September 30, 2018
, and performance-based RSUs for which the requisite service period has not been rendered, but are expected to vest based on the achievement of performance conditions. Performance-based RSUs that vested based on certain financial results achieved are expensed in the period that the performance and related service criteria were met.
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
Valuation Assumptions for Performance-based and Market-based RSUs
Performance-based stock options, market-based RSUs, and market-based stock options were
not
granted during the
nine months ended September 30, 2018
. We use the BSM option pricing model to value performance-based RSUs. The weighted average grant date fair value per share of performance-based RSUs granted and the assumptions used to estimate grant date fair value are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
|
|
Long-term
|
|
Nine Months Ended September 30, 2018
|
|
|
|
|
|
|
Grant date fair value per share
|
$
|
28.26
|
|
|
$
|
34.56
|
|
|
Service period (years)
|
1.0
|
|
|
3.0
|
|
|
Nine Months Ended September 30, 2017
|
|
|
|
|
|
|
Grant date fair value per share
|
$
|
47.23
|
|
|
$
|
45.96
|
|
|
Service period (years)
|
1.0
|
|
|
2.0
|
–
|
3.0
|
|
Our performance-based RSUs generally vest when specified performance criteria are met based on bookings, revenue, cash provided by operating activities, non-GAAP operating income, non-GAAP earnings per share, revenue growth compared to market comparables, non-GAAP earnings per share growth compared to cash flow from operating activities growth, or other targets during the service period; otherwise, they are forfeited. Non-GAAP operating income is operating income determined in accordance with GAAP, adjusted to remove the impact of certain items and the related tax effects. Non-GAAP earnings per share is net income determined in accordance with GAAP, adjusted to remove the impact of certain items, and the related tax effects, divided by the weighted average number of common shares and dilutive potential common shares outstanding during the period.
The grant date fair value per share determined in accordance with the BSM valuation model is being amortized over the service period of the performance-based awards. The probability of achieving the performance criteria was determined based on review of the actual results achieved thus far by each business unit compared with the operating plan during the service period as well as the overall expectations of the business unit. Stock-based compensation expense was adjusted based on the updated fair value resulting from this probability assessment. As actual results are achieved during the service period, the probability assessment is updated and stock-based compensation expense is adjusted accordingly.
Market-based awards that were granted in prior periods vest when our average closing stock price exceeds defined multiples of the closing stock price for
90
consecutive trading days. If these multiples are not achieved by the expiration date, the awards are forfeited. The grant date fair value is amortized over the average derived service period of the awards. The average derived service period and total fair value were determined using a Monte Carlo valuation model based on our assumptions, which include a risk-free interest rate and implied volatility.
Note 13
.
Restructuring and Other
During the nine months ended September 30, 2018
and
2017
, we continued to analyze and re-align our cost structure following our business acquisitions. These charges primarily relate to integrating recently acquired businesses, consolidating facilities, eliminating redundancies, and lowering our operating expense run rate. Restructuring and other consists primarily of restructuring, severance, short-term retention costs, facility downsizing and relocation, and acquisition integration expenses.
Restructuring and other costs were
$2.8
and
$10.5 million
during the
three and nine months ended
September 30, 2018
, respectively, and were
$0.8
and
$5.4 million
during the
three and nine months ended
September 30, 2017
, respectively. Restructuring and other costs include severance charges of
$1.6
and
$5.9 million
related to reductions in head count of
30
and
113
during the
three and nine months ended
September 30, 2018
, respectively; and
$0.3
and
$3.8 million
related to reductions in head count of
15
and
128
during the
three and nine months ended
September 30, 2017
, respectively. Severance costs include severance payments, retention payments, related employee benefits, outplacement fees, recruiting, and employee relocation costs.
Facilities relocation and downsizing expenses were
$0.4
and
$1.4 million
during the
three and nine months ended
September 30, 2018
, respectively; and were
$0.4
and
$0.6 million
during the
three and nine months ended
September 30, 2017
, respectively. These expenses were primarily related to the relocation of certain manufacturing and administrative locations due to reduced space requirements. Integration expenses of
$0.9
and
$3.2 million
during the
three and nine months ended
September 30, 2018
, respectively, and
$0.2
and
$1.0 million
during the
three and nine months ended
September 30, 2017
, respectively, were incurred for the integration of our business acquisitions.
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
Restructuring and other reserve activities are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
Beginning reserve balance
|
$
|
2,452
|
|
|
$
|
1,824
|
|
|
Restructuring charges
|
6,289
|
|
|
4,101
|
|
|
Other charges
|
4,188
|
|
|
1,321
|
|
|
Non-cash restructuring and other
|
(686
|
)
|
|
(182
|
)
|
|
Payments
|
(9,751
|
)
|
|
(4,720
|
)
|
|
Ending reserve balance
|
$
|
2,492
|
|
|
$
|
2,344
|
|
Note 14
.
Income Taxes
We recognized tax
benefit
s of
$4.3
and
$1.9 million
on pretax
loss
of
$2.3
and pretax income of
$0.2 million
during the
three and nine months ended
September 30, 2018
, respectively; and tax
provision
s of
$0.8
and
$0.8 million
on pretax net
income
of
$4.2
and
$11.8 million
during the
three and nine months ended
September 30, 2017
, respectively. The benefit from (provision for) income taxes before discrete items reflected in the table below was a benefit of
$0.9
and a provision of
$0.1 million
during the
three and nine months ended
September 30, 2018
, respectively, and provisions of
$2.0
and
$4.5 million
during the
three and nine months ended
September 30, 2017
, respectively. The decrease in the provision for income taxes before discrete items
for the three and nine months ended September 30, 2018
, compared with the same periods in the prior year, was primarily due to decreased profitability before income taxes.
Primary differences between our provision for income taxes before discrete items and the income tax provision at the U.S. statutory rate include taxes on permanently reinvested foreign earnings, the tax effects of stock-based compensation expense which are non-deductible for tax purposes, and the U.S. Research and Development Credit.
Our tax benefit from (provision for) income taxes before discrete items is reconciled to our recorded benefit from (provision for) income taxes, as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Benefit from (provision for) income taxes before discrete items
|
$
|
932
|
|
|
$
|
(1,973
|
)
|
|
$
|
(105
|
)
|
|
$
|
(4,517
|
)
|
|
Interest related to unrecognized tax benefits
|
71
|
|
|
—
|
|
|
(154
|
)
|
|
(121
|
)
|
|
Benefit from (provision for) stock-based compensation, including ESPP dispositions
|
112
|
|
|
(363
|
)
|
|
86
|
|
|
1,934
|
|
|
Benefit from reversals of uncertain tax positions
|
2,333
|
|
|
1,845
|
|
|
2,528
|
|
|
1,825
|
|
|
Benefit from (provision for) reassessment of taxes upon filing tax returns
|
135
|
|
|
(300
|
)
|
|
213
|
|
|
(396
|
)
|
|
Benefit from (provision for) reassessment of taxes upon tax law change
|
—
|
|
|
—
|
|
|
(160
|
)
|
|
480
|
|
|
Benefit from (provision for) deemed repatriation transition tax
|
682
|
|
|
—
|
|
|
(540
|
)
|
|
—
|
|
|
Benefit from (provision for) income taxes
|
$
|
4,265
|
|
|
$
|
(791
|
)
|
|
$
|
1,868
|
|
|
$
|
(795
|
)
|
On December 22, 2017, the 2017 Tax Act was enacted by the U.S. government. The 2017 Tax Act made broad and complex changes to the U.S. tax code that impact the
nine months ended September 30, 2018
and year ended
December 31, 2017
, including, but not limited to, lowering the U.S. corporate income tax rate from
35%
to
21%
effective January 1, 2018, imposing a one-time deemed repatriation transition tax, and the remeasurement of U.S. deferred tax assets and liabilities.
The SEC issued SAB 118, which allows us to record a provisional estimate of the income tax effects of the 2017 Tax Act in the period in which we can make a reasonable estimate of its effects. We recorded a
$27.5 million
tax charge in the year ended
December 31, 2017
as a provisional estimate. This provisional estimate included an estimated charge of
$17.0 million
related to the deemed repatriation transition tax, which is comprised of a gross transition tax of
$27.0 million
offset by foreign tax credits of
$10.0 million
. In addition, we recorded a
$10.5 million
charge related to the remeasurement of U.S. deferred tax assets and liabilities in the year ended
December 31, 2017
. While we have calculated a reasonable estimate of the impact of the U.S. tax rate reduction and the amount of the deemed repatriation transition tax, we are gathering additional information to refine and finalize our calculation of the impacts of the 2017 Tax Act on our U.S. deferred tax assets and liabilities, the deemed repatriation transition tax, and other provisions associated with the 2017 Tax Act. As an adjustment to our December 2017 provisional estimate, we recorded a benefit of
$0.7 million
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
and a provision of
$0.5 million
for federal and state taxes related to the deemed repatriation transition tax
during the three and nine months ended September 30, 2018
, respectively. As we obtain additional information, we will finalize the calculation of the income tax effects of the 2017 Tax Act in the fourth quarter of 2018.
The 2017 Tax Act also created a global intangible low-tax income (“GILTI”) provision, which is a minimum tax on certain foreign earnings, commencing in the year ending December 31, 2018. The amount of future U.S. inclusions in taxable income related to GILTI depends on our current structure, estimated future results of global operations, and our intent and ability to modify our structure and/or our business. We are not yet able to provide a reasonable estimate of the effect of this provision of the 2017 Tax Act. Therefore, we have not made any adjustments related to the potential GILTI tax in our financial statements and have not made a policy decision regarding whether to record deferred taxes associated with GILTI. Any subsequent adjustment to the deferred tax amounts related to GILTI (or other computations) will be recorded as a tax expense in the fourth quarter of 2018 when our analysis is complete.
As of
September 30, 2018
, and
December 31, 2017
, gross unrecognized benefits that would impact the effective tax rate if recognized were
$30.8
and
$33.9 million
, respectively. Over the next twelve months, our existing tax positions will continue to generate increased liabilities for unrecognized tax benefits. It is reasonably possible that our gross unrecognized tax benefits will decrease up to
$6.9 million
in the next twelve months. These adjustments, if recognized, would positively impact our effective tax rate, and would be recognized as additional tax benefits in our Condensed Consolidated Statements of Operations.
$15.5 million
of gross unrecognized tax benefits were offset against deferred tax assets as of
September 30, 2018
, and the remaining
$15.3 million
has been recorded as noncurrent income taxes payable.
We are open to assessment by the Internal Revenue Service (“IRS”) for the 2015-2017 tax years, state tax jurisdictions for the 2013-2017 tax years, the Netherlands tax authority for the 2014-2016 tax years, the Spanish tax authority for the 2014-2017 tax years, the Israel tax authority for the 2014-2016 tax years, and the Italian tax authority for the 2013-2016 tax years.
|
|
|
|
Item 2:
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
Forward-looking Statements
This Quarterly Report on Form 10-Q (“Report”), including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding future events and the future results of the Company that are based on current expectations, estimates, forecasts, and projections about the industry in which the Company operates and the beliefs and assumptions of the management of the Company. Words such as “address,” “anticipate,” “believe,” “consider,” “continue,” “develop,” “estimate,” “expect,” “further,” “goal,” “intend,” “may,” “plan,” “potential,” “project,” “seek,” “should,” “target,” “will,” variations of such words, and similar expressions are intended to identify such forward-looking statements. Such statements reflect the current views of the Company and its management with respect to future events and are subject to certain risks, uncertainties, and assumptions. Potential risks and uncertainties include, but are not necessarily limited to, intense competition in each of our businesses, including competition from products developed by EFI’s customers; our ability to remediate the material weaknesses identified in EFI’s internal control over financial reporting; the uncertainty of the outcome of the pending securities lawsuits against EFI; unforeseen expenses; fluctuations in currency exchange rates; the difficulty of aligning expense levels with revenue; management’s ability to forecast revenues, expenses and earnings; our ability to successfully integrate acquired businesses; changes in the mix of products sold; the uncertainty of market acceptance of new product introductions; the challenge of managing asset levels, including inventory and variations in inventory levels; the uncertainty of continued success in technological advances; the challenges of obtaining timely, efficient and quality product manufacturing and supply of components; any world-wide financial and economic difficulties and downturns; adverse tax-related matters such as tax audits, changes in our effective tax rate or new tax legislative proposals; the unpredictability of development schedules and commercialization of products by the leading printer manufacturers and declines or delays in demand for our related products; the impact of changing consumer preferences on demand for our textile products; litigation involving intellectual property rights or other related matters; the uncertainty regarding the amount and timing of future share repurchases by EFI and the origin of funds used for such repurchases; the market prices of EFI's common stock prior to, during and after the share repurchases; any potential impact from our recent change in Chief Executive Officer ; and any other risk factors that may be included from time to time in the Company’s SEC reports.
Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, the Company’s actual results, performance, or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in this Report under the section entitled “Risk Factors” in Item 1A of Part II of this report and Item 1A of Part I of our 2017 Form 10-K and elsewhere and in other reports the Company files with the SEC. The following discussion should be read in conjunction with our 2017 Form 10-K and with the condensed consolidated financial statements and notes thereto included elsewhere in this Report. The
Company assumes no obligation to revise or update these forward-looking statements to reflect actual results, events, or changes in factors or assumptions affecting such forward-looking statements
Business Overview
We are a world leader in customer-centric digital printing innovation focused on the transformation of the printing, packaging, ceramic tile decoration, and textile industries from the use of traditional analog based printing to digital on-demand printing.
Our products include industrial super-wide and wide format display graphics, corrugated packaging and display, textile, and ceramic tile decoration digital inkjet printers that utilize our digital ink, industrial digital inkjet printer parts, and professional services; print production workflow, web-to-print, cross-media marketing, fashion design, and business process automation solutions; and color printing DFEs creating an on-demand digital printing ecosystem. Our ink includes digital UV curable, LED curable, ceramic, water-based, and thermoforming and specialty ink, as well as a variety of textile ink including dye sublimation, pigmented, reactive dye, acid dye, pure disperse dye, water-based dispersed printing ink, and coatings. Our award-winning business process automation solutions are integrated from creation to print and are vertically integrated with our industrial digital inkjet printers and products produced by the leading production digital color page printer manufacturers that are driven by our Fiery DFEs.
Our product portfolio includes industrial digital inkjet products (“Industrial Inkjet”) including VUTEk display graphics super-wide and wide format, Nozomi corrugated packaging, Reggiani textile, Cretaprint ceramic tile decoration and building material printers and ink; print production workflow, web-to-print, cross-media marketing, Optitex textile two-dimensional and three-dimensional fashion computer-aided design applications, and business process automation software (“Productivity Software”), which provides corporate printing, packaging, publishing, and mailing and fulfillment solutions for the printing and packaging industry; and Fiery DFEs (“Fiery”). Our integrated solutions and award-winning technologies are designed to automate print and business processes, streamline workflow, provide profitable value-added services, and produce accurate digital output.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make judgments, assumptions, and estimates that affect the amounts reported. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably possible could materially impact the financial statements. Management believes there have been no significant changes
during the three and nine months ended September 30, 2018
to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2017 Form 10-K, with the exception of the following:
Revenue Recognition
Effective January 1, 2018, we adopted ASC 606 and ASC 340-40 using the modified retrospective method applied to those contracts that were not completed as of January 1, 2018. As a result of the adoption, we use significant judgments in applying the new revenue standards as further outlined in Notes 1 and 4 to the Condensed Consolidated Financial Statements.
Recent Accounting Pronouncements
See
Note 1
–
Basis of Presentation and Significant Accounting Policies
of Notes to Condensed Consolidated Financial Statements for a full description of recent accounting pronouncements including the respective expected dates of adoption.
Results of Operations
Overview
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2018
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2017
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Change
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2018
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2017
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Change
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Amount
|
|
Percent
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Amount
|
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Percent
|
|
Revenue
|
$
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257,134
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|
$
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248,359
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|
$
|
8,775
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4
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%
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|
$
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758,072
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$
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724,097
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|
$
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33,975
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5
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%
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Cost of revenue
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131,615
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120,902
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|
10,713
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9
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384,858
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345,858
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39,000
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11
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Gross profit
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125,519
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127,457
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(1,938
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)
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(2
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)
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373,214
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378,239
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(5,025
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)
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(1
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)
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Operating expenses:
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Research and development
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40,341
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39,585
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756
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2
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119,701
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118,201
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1,500
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1
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Sales and marketing
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44,661
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42,269
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2,392
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6
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137,448
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129,018
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8,430
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7
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General and administrative
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24,466
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25,075
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(609
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)
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(2
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)
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57,093
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67,239
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(10,146
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)
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(15
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)
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Amortization of identified intangibles
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11,137
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12,299
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(1,162
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)
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(9
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)
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34,801
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34,829
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(28
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)
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—
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Restructuring and other
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2,799
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832
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1,967
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*
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10,477
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5,421
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5,056
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93
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Total operating expenses
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123,404
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120,060
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3,344
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3
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359,520
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354,708
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4,812
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1
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Income from operations
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2,115
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7,397
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(5,282
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)
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(71
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)
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13,694
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23,531
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(9,837
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)
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(42
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)
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Interest expense
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(4,796
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)
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(4,912
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)
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116
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(2
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)
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(14,739
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)
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(14,538
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)
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(201
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)
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1
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Interest income and other income, net
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336
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1,760
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(1,424
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)
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(81
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)
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1,270
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2,802
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(1,532
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)
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(55
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)
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Income (loss) before income taxes
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(2,345
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)
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4,245
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(6,590
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)
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*
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225
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11,795
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(11,570
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)
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(98
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)
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Benefit from (provision for) income taxes
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4,265
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(791
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)
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5,056
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*
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1,868
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(795
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)
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2,663
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*
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Net income
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$
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1,920
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$
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3,454
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$
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(1,534
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)
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(44
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)%
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$
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2,093
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$
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11,000
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$
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(8,907
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)
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(81
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)%
|
___________
* Percentage not meaningful.
Key financial results
during the three and nine months ended September 30, 2018 and 2017
were as follows:
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•
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Our consolidated revenue
increased
by
$8.8 million
, or
4%
, and
$34.0 million
, or
5%
,
during the three and nine months ended September 30, 2018
, respectively, compared to the same periods in the prior year. The
increase
in the three-month period was driven by a
$12.0 million
increase in Industrial Inkjet revenue and a
$3.3 million
increase in Productivity Software revenue, partially offset by a
$6.5 million
decrease in Fiery revenue. The
increase
in the nine-month period was driven by a
$45.7 million
increase
in Industrial Inkjet revenue and an
$14.5 million
increase
in Productivity Software revenue, partially offset by a
$26.2 million
decrease
in Fiery revenue.
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•
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Gross profit
decreased
by
$1.9 million
or
2%
during the three months ended September 30, 2018
, and by
$5.0 million
or
1%
during the nine months ended September 30, 2018
, compared to the same periods in the prior year. Gross profit percentage declined to
48.8%
from
51.3%
during the three months ended September 30, 2018
and to
49.2%
from
52.2%
during the nine months ended September 30, 2018
, compared to the same periods in the prior year.
These reductions were primarily due to changes in product mix from proportionately lower Fiery sales and proportionately higher Industrial Inkjet sales. In addition, Industrial Inkjet gross margins in the 2018 periods are lower than historical levels due to the ramp-up of production on new products.
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•
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Operating expenses
increased
by
$3.3 million
or
3%
and by
$4.8 million
or
1%
during the three and nine months ended September 30, 2018
, respectively, compared to the same periods in the prior year. The
increase
in operating expenses
for the three months ended September 30, 2018
was primarily due to
increased
sales and marketing expense of
$2.4 million
and
increased
restructuring and other expense of
$2.0 million
, partially offset by
a decrease
in amortization of identified intangibles of
$1.2 million
in the
third
quarter of 2018. The
increase
in operating expenses
for the nine months ended September 30, 2018
was primarily due to
increased
sales and marketing expense of
$8.4 million
,
increased
restructuring and other expense of
$5.1 million
, and
increased
research and development ("R&D") expense of
$1.5 million
, partially offset by a
$10.1 million
decrease
in general and administrative ("G&A") expenses driven by a
$14.0 million
reduction in estimated fair value of contingent consideration on acquisitions.
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•
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Interest income and other income, net
decreased
by
$1.4
and
$1.5 million
in the three and nine months ended September 30, 2018
, compared to the same periods last year. The decrease for the three-month period was primarily attributable to
|
higher foreign currency losses of
$0.9 million
. The decrease for the nine-month period was primarily due to a
$1.0 million
decline in interest income.
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•
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Provision for income taxes decreased by
$5.1 million
and
$2.7 million
, respectively,
during the three and nine months ended September 30, 2018
, compared to the same period last year, primarily due to decreased profitability before income taxes and the impacts of discrete income tax items during the current year periods.
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The following table presents items on our Condensed Consolidated Statements of Operations as percentages of total revenue:
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2018
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2017
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2018
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2017
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Revenue
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100.0
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%
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100.0
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%
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|
100.0
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%
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100.0
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%
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|
Gross profit
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48.8
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51.3
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49.2
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52.2
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Operating expenses:
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Research and development
|
15.7
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15.9
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15.8
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16.3
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Sales and marketing
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17.4
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17.0
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18.1
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17.8
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|
General and administrative
|
9.5
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10.1
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7.5
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9.3
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Amortization of identified intangibles
|
4.3
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|
5.0
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4.6
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|
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4.8
|
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|
Restructuring and other
|
1.1
|
|
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0.3
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|
|
1.4
|
|
|
0.8
|
|
|
Total operating expenses
|
48.0
|
|
|
48.3
|
|
|
47.4
|
|
|
49.0
|
|
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Income from operations
|
0.8
|
|
|
3.0
|
|
|
1.8
|
|
|
3.2
|
|
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Interest expense
|
(1.9
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)
|
|
(2.0
|
)
|
|
(1.9
|
)
|
|
(2.0
|
)
|
|
Interest income and other income, net
|
0.1
|
|
|
0.7
|
|
|
0.2
|
|
|
0.4
|
|
|
Income (loss) before income taxes
|
(1.0
|
)
|
|
1.7
|
|
|
0.1
|
|
|
1.6
|
|
|
Benefit from (provision for) income taxes
|
1.7
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|
(0.3
|
)
|
|
0.2
|
|
|
(0.1
|
)
|
|
Net income
|
0.7
|
%
|
|
1.4
|
%
|
|
0.3
|
%
|
|
1.5
|
%
|
Revenue
We classify our revenue, gross profit, assets, and liabilities in accordance with our three operating segments; Industrial Inkjet, Productivity Software, and Fiery, as described in
Note 3
–
Segment and Geographic Information
of our Notes to Condensed Consolidated Financial Statements.
Ex-Currency.
To better understand trends in our business, we believe it is helpful to adjust our Condensed Consolidated Statements of Operations to exclude the impact of year-over-year changes in the translation of foreign currencies into U.S. dollars. This is a non-GAAP measure that is calculated by adjusting revenue, gross profit, and operating expenses by using historical exchange rates in effect during the comparable prior period and removing the balance sheet currency remeasurement impact from interest income and other income, net, including removal of any hedging gains and losses. We refer to these adjustments as “ex-currency.” The year-over-year currency impact can be determined as the difference between year-over-year actual fluctuations and year-over-year ex-currency fluctuations.
Management believes the ex-currency measures provide investors with an additional perspective on year-over-year financial trends and enable investors to analyze our operating results in the same way management does. A reconciliation of the ex-currency adjustments to GAAP results
for the three and nine months ended September 30, 2018 and 2017
is included under “Non-GAAP Financial Information” below.
Revenue by Operating Segment
Our revenue by operating segment was as follows (in thousands):
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Change
|
|
|
2018
|
|
%
of total
|
|
2017
|
|
%
of total
|
|
Amount
|
|
Percent
|
|
Industrial Inkjet
|
$
|
154,902
|
|
|
60
|
%
|
|
$
|
142,930
|
|
|
58
|
%
|
|
$
|
11,972
|
|
|
8
|
%
|
|
Productivity Software
|
40,452
|
|
|
16
|
|
|
37,171
|
|
|
15
|
|
|
3,281
|
|
|
9
|
|
|
Fiery
|
61,780
|
|
|
24
|
|
|
68,258
|
|
|
27
|
|
|
(6,478
|
)
|
|
(9
|
)
|
|
Total revenue
|
$
|
257,134
|
|
|
100
|
%
|
|
$
|
248,359
|
|
|
100
|
%
|
|
$
|
8,775
|
|
|
4
|
%
|
Our consolidated revenue
increased
by
$8.8 million
or
4%
(
4%
ex-currency)
during the three months ended September 30, 2018
compared to the same period in 2017, primarily due to increased Industrial Inkjet and Productivity Software revenue, partially offset by decreased Fiery revenue.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
Change
|
|
|
2018
|
|
%
of total
|
|
2017
|
|
%
of total
|
|
Amount
|
|
Percent
|
|
Industrial Inkjet
|
$
|
453,545
|
|
|
60
|
%
|
|
$
|
407,886
|
|
|
56
|
%
|
|
$
|
45,659
|
|
|
11
|
%
|
|
Productivity Software
|
125,839
|
|
|
17
|
|
|
111,292
|
|
|
16
|
|
|
14,547
|
|
|
13
|
|
|
Fiery
|
178,688
|
|
|
23
|
|
|
204,919
|
|
|
28
|
|
|
(26,231
|
)
|
|
(13
|
)
|
|
Total revenue
|
$
|
758,072
|
|
|
100
|
%
|
|
$
|
724,097
|
|
|
100
|
%
|
|
$
|
33,975
|
|
|
5
|
%
|
Our consolidated revenue
increased
by
$34.0 million
or
5%
(
2%
ex-currency)
during the nine months ended September 30, 2018
compared to the same period in
2017
, primarily due to increased Industrial Inkjet and Productivity Software revenue, partially offset by decreased Fiery revenue. Also, adoption of the new revenue recognition guidance increased reported revenue by
$3.7 million
in the nine-month period, primarily in the Productivity Software segment, compared to the previous revenue recognition guidance. In addition, we recorded out-of-period adjustments related to certain bill and hold transactions
in the nine months ended September 30, 2017
, which decreased the prior year revenue by
$3.4 million
.
Industrial Inkjet
Industrial Inkjet revenue
increased
by
$12.0 million
, or
8%
(
9%
ex-currency),
during the three months ended September 30, 2018
compared with the same period in
2017
, primarily due to increased sales of Nozomi corrugated printers. Ink volume was up modestly in the three months ended September 30, 2018 compared to the same period in 2017. We experienced supply issues during the current quarter, primarily in China, where we saw changes in tariff structure, price increases in ink components, and short supplies of ink components due to reduced production levels at a number of suppliers, which limited the amount of ink we could manufacture. The company is working to increase purchases from new sources for ink components but we could still experience some negative impact on ink volume growth in the short term.
Industrial Inkjet revenue
increased
by
$45.7 million
, or
11%
(
8%
ex-currency),
during the nine months ended September 30, 2018
compared with the same period in
2017
, primarily due to increased sales of Nozomi corrugated printers. In addition, we recorded out-of-period adjustments related to certain bill and hold transactions
in the nine months ended September 30, 2017
, which decreased the prior year revenue by
$3.4 million
.
Productivity Software
Productivity Software revenue
increased
by
$3.3 million
, or
9%
(
9%
ex-currency),
during the three months ended September 30, 2018
compared with the same period in
2017
, primarily due to sales of our Escada corrugated systems. We acquired Escada in the fourth quarter of 2017. License revenue also increased by
$1.5 million
during the quarter compared to the same quarter in
2017
.
Productivity Software revenue
increased
by
$14.5 million
, or
13%
(
11%
ex-currency),
during the nine months ended September 30, 2018
compared with the same period in
2017
. Productivity software revenue increased primarily due to:
|
|
|
|
•
|
increased license revenue of
$5.0 million
, including the $3.6 million impact from adoption of the new revenue recognition guidance,
|
|
|
|
|
•
|
increased maintenance and services revenue of
$3.2 million
, and
|
|
|
|
|
•
|
sales of our Escada corrugated systems.
|
Fiery
Fiery revenue
decreased
by
$6.5 million
, or
9%
(
9%
ex-currency)
during the three months ended September 30, 2018
compared with the same period in
2017
. Fiery revenue
decreased
by
$26.2 million
, or
13%
(
13%
ex-currency)
during the nine months ended September 30, 2018
compared with the same period in
2017
. Although end customer and reseller preference for Fiery products drives demand, most Fiery revenue relies on printer manufacturers to design, develop, and integrate Fiery technology into their print engines. Certain of our customers have reduced purchases of Fiery controllers and software options during 2018 compared to 2017 due to their reduced sales of printers to which Fiery is attached.
Revenue by Geographic Area
We report revenue by geographic region based on ship-to destination, summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Change
|
|
|
2018
|
|
%
of total
|
|
2017
|
|
%
of total
|
|
Amount
|
|
Percent
|
|
Americas
|
$
|
134,491
|
|
|
52
|
%
|
|
$
|
129,488
|
|
|
52
|
%
|
|
$
|
5,003
|
|
|
4
|
%
|
|
EMEA
|
88,879
|
|
|
35
|
|
|
85,089
|
|
|
34
|
|
|
3,790
|
|
|
4
|
|
|
APAC
|
33,764
|
|
|
13
|
|
|
33,782
|
|
|
14
|
|
|
(18
|
)
|
|
—
|
|
|
Total revenue
|
$
|
257,134
|
|
|
100
|
%
|
|
$
|
248,359
|
|
|
100
|
%
|
|
$
|
8,775
|
|
|
4
|
%
|
Americas.
Revenue
increased
by
$5.0 million
, or
4%
(
4%
ex-currency),
during the three months ended September 30, 2018
compared with the same period in 2017, driven primarily by increased sales of Nozomi corrugated printers.
EMEA.
Revenue
increased
by
$3.8 million
, or
4%
(
5%
ex-currency),
during the three months ended September 30, 2018
compared with the same period in 2017, driven primarily by increased sales of Nozomi corrugated printers.
APAC.
Revenue remained flat
during the three months ended September 30, 2018
compared with the same period in 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
Change
|
|
|
2018
|
|
%
of total
|
|
2017
|
|
%
of total
|
|
Amount
|
|
Percent
|
|
Americas
|
$
|
374,170
|
|
|
49
|
%
|
|
$
|
353,397
|
|
|
49
|
%
|
|
$
|
20,773
|
|
|
6
|
%
|
|
EMEA
|
271,064
|
|
|
36
|
|
|
274,635
|
|
|
38
|
|
|
(3,571
|
)
|
|
(1
|
)
|
|
APAC
|
112,838
|
|
|
15
|
|
|
96,065
|
|
|
13
|
|
|
16,773
|
|
|
17
|
|
|
Total revenue
|
$
|
758,072
|
|
|
100
|
%
|
|
$
|
724,097
|
|
|
100
|
%
|
|
$
|
33,975
|
|
|
5
|
%
|
Americas.
Revenue
increased
by
$20.8 million
, or
6%
(
6%
ex-currency),
during the nine months ended September 30, 2018
compared with the same period in 2017, primarily due to increased sales of Nozomi corrugated printers.
EMEA.
Revenue
decreased
by
$3.6 million
, or
1%
(
6%
ex-currency),
during the nine months ended September 30, 2018
compared with the same period in 2017, primarily due to lower sales of Fiery products.
APAC.
Revenue
increased
by
$16.8 million
, or
17%
(
15%
ex-currency),
during the nine months ended September 30, 2018
compared with the same period in 2017, primarily due to increased sales of Reggiani textile printers.
Revenue Concentration
A substantial portion of our revenue has been attributable to sales of products through the leading printer manufacturers and independent distributor channels. We have a direct relationship with several leading printer manufacturers and work closely to design, develop, and integrate Fiery technology into their print engines. A significant portion of our revenue is, and has been, generated by sales of our Fiery DFE products to a relatively small number of leading printer manufacturers.
During the nine months ended September 30, 2018
and 2017, no customer individually accounted for 10% or more of our consolidated revenue. We expect that if we continue to increase our revenue in the Industrial Inkjet and Productivity Software operating segments in the future, the percentage of our revenue from the leading printer manufacturer customers will continue to decrease over time.
Gross Profit
Gross profit by operating segment, excluding stock-based compensation expense, was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Industrial Inkjet
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
154,902
|
|
|
$
|
142,930
|
|
|
$
|
453,545
|
|
|
$
|
407,886
|
|
|
Gross profit
|
53,661
|
|
|
53,392
|
|
|
158,351
|
|
|
154,972
|
|
|
Gross profit percentages
|
34.6
|
%
|
|
37.4
|
%
|
|
34.9
|
%
|
|
38.0
|
%
|
|
Productivity Software
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
40,452
|
|
|
$
|
37,171
|
|
|
$
|
125,839
|
|
|
$
|
111,292
|
|
|
Gross profit
|
28,394
|
|
|
26,667
|
|
|
88,988
|
|
|
81,431
|
|
|
Gross profit percentages
|
70.2
|
%
|
|
71.7
|
%
|
|
70.7
|
%
|
|
73.2
|
%
|
|
Fiery
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
61,780
|
|
|
$
|
68,258
|
|
|
$
|
178,688
|
|
|
$
|
204,919
|
|
|
Gross profit
|
44,368
|
|
|
47,884
|
|
|
128,590
|
|
|
143,821
|
|
|
Gross profit percentages
|
71.8
|
%
|
|
70.2
|
%
|
|
72.0
|
%
|
|
70.2
|
%
|
A reconciliation of our segment gross profit to our Condensed Consolidated Statements of Operations is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Segment gross profit
|
$
|
126,423
|
|
|
$
|
127,943
|
|
|
$
|
375,929
|
|
|
$
|
380,224
|
|
|
Stock-based compensation expense
|
(904
|
)
|
|
(486
|
)
|
|
(2,715
|
)
|
|
(1,985
|
)
|
|
Gross profit
|
$
|
125,519
|
|
|
$
|
127,457
|
|
|
$
|
373,214
|
|
|
$
|
378,239
|
|
|
Consolidated gross profit percentage
|
48.8
|
%
|
|
51.3
|
%
|
|
49.2
|
%
|
|
52.2
|
%
|
Our gross profit percentage
decreased
to
48.8%
and
49.2%
during the three and nine months ended September 30, 2018
, respectively, from
51.3%
and
52.2%
during the same periods in 2017. The
decreased
gross profit percentage was primarily due to
the greater proportion of Industrial Inkjet revenues than Productivity Software and Fiery revenues
in the three and nine months ended September 30, 2018 and 2017
compared to the same periods in the prior year. The Productivity Software and Fiery segments produce higher average gross profit percentages than our Industrial Inkjet segment. In addition, as more fully explained below, the gross profit percentage in the Industrial Inkjet segment was lower
in the three and nine months ended September 30, 2018
than in the comparable prior year periods.
Industrial Inkjet Gross Profit
The Industrial Inkjet gross profit percentage
decreased
to
34.6%
(
34.8%
ex-currency) and
34.9%
(
34.4%
ex-currency)
during the three and nine months ended September 30, 2018
, respectively, from
37.4%
and
38.0%
during the same periods in 2017.
Gross profit percentages decreased due to a higher proportion of corrugated printer sales, which are currently at a relatively lower gross profit percentage due to the ramping up of production and sales of our new Nozomi single-pass industrial digital inkjet platform. In addition, other new product introductions are currently producing reduced gross profit percentages as those products undergo a similar ramp up phase.
Productivity Software Gross Profit
The Productivity Software gross profit percentages
decreased
to
70.2
(
70.1%
ex-currency) and
70.7
(
70.9%
ex-currency)
during the three and nine months ended September 30, 2018
, respectively, from
71.7%
and
73.2%
during the same periods in 2017. The decrease in gross profit percentages is primarily attributable to changes in product mix.
Fiery Gross Profit
The Fiery gross profit percentage
increased
to
71.8%
(
71.8%
ex-currency) and
72.0%
(
71.9%
ex-currency)
during the three and nine months ended September 30, 2018
, respectively, from
70.2%
and
70.2%
during the same periods in 2017, reflecting changes in product mix and the impacts from cost reduction initiatives the Company has implemented.
Operating Expenses
Operating expenses were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
Change
|
|
|
2018
|
|
2017
|
|
Amount
|
|
Percent
|
|
2018
|
|
2017
|
|
Amount
|
|
Percent
|
|
Research and development
|
$
|
40,341
|
|
|
$
|
39,585
|
|
|
$
|
756
|
|
|
2
|
%
|
|
$
|
119,701
|
|
|
$
|
118,201
|
|
|
$
|
1,500
|
|
|
1
|
%
|
|
Sales and marketing
|
44,661
|
|
|
42,269
|
|
|
2,392
|
|
|
6
|
|
|
137,448
|
|
|
129,018
|
|
|
8,430
|
|
|
7
|
|
|
General and administrative
|
24,466
|
|
|
25,075
|
|
|
(609
|
)
|
|
(2
|
)
|
|
57,093
|
|
|
67,239
|
|
|
(10,146
|
)
|
|
(15
|
)
|
|
Amortization of identified intangibles
|
11,137
|
|
|
12,299
|
|
|
(1,162
|
)
|
|
(9
|
)
|
|
34,801
|
|
|
34,829
|
|
|
(28
|
)
|
|
—
|
|
|
Restructuring and other
|
2,799
|
|
|
832
|
|
|
1,967
|
|
|
*
|
|
|
10,477
|
|
|
5,421
|
|
|
5,056
|
|
|
93
|
|
|
Total operating expenses
|
$
|
123,404
|
|
|
$
|
120,060
|
|
|
$
|
3,344
|
|
|
3
|
%
|
|
$
|
359,520
|
|
|
$
|
354,708
|
|
|
$
|
4,812
|
|
|
1
|
%
|
* Percentage not meaningful.
Operating expenses
increased
by
$3.3 million
, or
3%
(
3%
ex-currency)
during the three months ended September 30, 2018
compared to the same period in 2017.
The
increase
in operating expenses was primarily due to
increased sales and marketing expense of
$2.4 million
and increased restructuring and other expense of
$2.0 million
, partially offset by
a decrease
in amortization of identified intangibles of
$1.2 million
in the
third
quarter of 2018.
Operating expenses
increased
by
$4.8 million
, or
1%
(down
1%
ex-currency)
during the nine months ended September 30, 2018
compared to the same period in 2017. The
increase
in operating expenses was primarily due to an
$8.4 million
increase
in sales and marketing expense, a
$5.1 million
increase
in restructuring and other expense, and a
$1.5 million
increase
in R&D expense, partially offset by a
$10.1 million
decrease
in G&A expense. The decrease in G&A expense was driven by a
$14.0 million
reduction in estimated fair value of contingent consideration on acquisitions, partially offset by an increase in stock-based compensation expenses of $3.7 million.
Movement in foreign currency exchange rates did not have a material effect on operating expenses in the
three months ended September 30, 2018
, but increased operating expenses by
$7.0 million
in the
nine months ended September 30, 2018
, compared to the same periods in 2017. We expect our operating expenses will continue to fluctuate as a result of movements in U.S. dollar exchange rates versus the Euro, British pound sterling, Brazilian real, Israeli shekel, Chinese renminbi, Indian rupee and other currencies.
Research and Development
R&D expenses include personnel, consulting, travel, research and development facilities, prototype materials, testing and development equipment, and non-recurring engineering expenses.
R&D expense
during the three months ended September 30, 2018
was
$40.3 million
, or
15.7%
of revenue, compared to
$39.6 million
, or
15.9%
of revenue, during the same period in 2017. The
increase
of
$0.8 million
, or
2%
(
3%
ex-currency), was primarily driven by an increase in stock-based compensation expense of $2.0 million, partially offset by a reduction in prototypes and supplies.
R&D expense
during the nine months ended September 30, 2018
was
$119.7 million
, or
15.8%
of revenue, compared to
$118.2 million
, or
16.3%
of revenue, during the same period in 2017. The
increase
of
$1.5 million
, or
1%
(flat ex-currency), was primarily driven by increases in stock-based compensation expenses of $2.0 million and non-recurring engineering expenses of $1.0 million, partially offset by reduced expenses for consulting and temporary labor.
Sales and Marketing
Sales and marketing expenses include personnel, trade shows, marketing programs and promotional materials, sales commissions, travel and entertainment, depreciation, and worldwide sales office expenses.
Sales and marketing expense
during the three months ended September 30, 2018
was
$44.7 million
, or
17.4%
of revenue, compared to
$42.3 million
, or
17.0%
of revenue, during the same period in 2017. The
increase
of
$2.4 million
, or
6%
(
6%
ex-currency) was primarily driven by
an increase of $1.2 million in stock-based compensation and higher personnel-related expenses of $0.8 million.
Sales and marketing expenses
during the nine months ended September 30, 2018
were
$137.4 million
, or
18.1%
of revenue, compared to
$129.0 million
, or
17.8%
of revenue, during the same period in 2017. The
increase
of
$8.4 million
, or
7%
(
4%
ex-
currency) was primarily driven by
higher personnel-related expenses of $5.9 million and increased stock-based compensation of $1.6 million.
General and Administrative
G&A expenses consist primarily of finance, human resources, legal, bad debts, and litigation expenses, as well as changes in the estimated fair value of earnout liabilities.
G&A expenses
during the three months ended September 30, 2018
were
$24.5 million
, or
9.5%
of revenue, compared to
$25.1 million
, or
10.1%
of revenue, during the same period in 2017. The
decrease
of
$0.6 million
, or
2%
(
2%
ex-currency) was primarily due to a reduction in audit, legal, and consulting service fees of $4.3 million, partially offset by an increase in stock-based compensation of $3.6 million.
G&A expenses
during the nine months ended September 30, 2018
were
$57.1 million
, or
7.5%
of revenue, compared to
$67.2 million
, or
9.3%
of revenue, during the same period in 2017. The
decrease
of
$10.1 million
, or
15%
(
17%
% ex-currency) was primarily due to
a
$14.0 million
reduction in the fair value of estimated contingent consideration, partially offset by an increase in stock-based compensation expense of $3.7 million.
Stock-based Compensation
We amortize stock-based compensation cost on a graded vesting basis over the vesting period, after assessing the probability of achieving requisite performance criteria with respect to performance-based and market-based awards. Stock-based compensation cost is recognized over the requisite service period for each separately vesting tranche of the award as though the award were, in substance, multiple awards. This results in greater stock-based compensation expense during the initial years of the vesting period.
Stock-based compensation expense was
$11.9
and
$4.6 million
during the three months ended September 30, 2018
and 2017, respectively,
an increase
of
$7.3 million
. Stock-based compensation expense
increased
primarily due to the timing of the annual equity grants and increased vesting probabilities of certain performance-based awards compared to the prior year.
Stock-based compensation expense was
$30.5
and
$22.5 million
during the nine months ended September 30, 2018
and 2017, respectively,
an increase
of
$7.9 million
. Stock-based compensation expense
increased
primarily due to an increase in new grants, increased ESPP expenses, timing of new grants, and increased vesting probabilities of certain performance-based awards compared to the prior year.
Amortization of Identified Intangibles
Amortization of identified intangibles
during the three months ended September 30, 2018
was
$11.1 million
compared to
$12.3 million
during the same period in 2017,
a decrease
of
$1.2 million
, or
9%
, due to certain intangible assets from prior year acquisitions becoming fully amortized. Amortization of identified intangibles
during the nine months ended September 30, 2018
was
$34.8 million
, flat compared to the same period in 2017.
Restructuring and Other
Restructuring and other costs were
$2.8 million
and
$0.8 million
during the three months ended September 30, 2018
and
2017
, respectively. Restructuring and other costs included severance charges of
$1.6
and
$0.3 million
related to reductions in head count of
30
and
15
during the three months ended September 30, 2018
and 2017, respectively. Costs of integration of acquired businesses were
$0.9 million
and
$0.2 million
during the three months ended September 30, 2018
and 2017. Restructuring and other costs were
$10.5
and
$5.4 million
during the nine months ended September 30, 2018
and 2017, respectively. Restructuring and other costs included severance charges of
$5.9
and
$3.8 million
related to reductions in head count of
113
and
128
during the nine months ended September 30, 2018
and 2017, respectively. Costs of integration of acquired businesses were
$3.2 million
and
$1.0 million
during the nine months ended September 30, 2018
and 2017. Severance costs include severance payments, related employee benefits, outplacement fees, recruiting, and employee relocation costs.
Facilities relocation and downsizing expenses were
$0.4 million
during the three months ended September 30, 2018
and
2017
. Facilities relocation and downsizing expenses were
$1.4
and
$0.6 million
during the nine months ended September 30, 2018
and 2017, respectively. The increase in the 2018 nine-month period is primarily related to the relocation of our previous facilities in Meredith, NH to our new facility in Manchester, NH in the second quarter of 2018.
Interest Expense
Interest expense
during the three and nine months ended September 30, 2018
was
$4.8
and
$14.7 million
, respectively, compared to
$4.9 million
and
$14.5 million
, respectively, during the same periods in 2017.
Interest Income and Other Income, Net
Interest income and other income, net
, includes interest income on our cash equivalents and short-term investments, gains and losses from sales of our cash equivalents and short-term investments, imputed interest income on revenue contracts with a significant financing component, and net foreign currency exchange gains and losses.
Interest income and other income, net
was
$0.3 million
during the three months ended September 30, 2018
, compared to income of
$1.8 million
during the same period in 2017. The change was primarily due to increased foreign currency exchange losses.
Interest income and other income, net
was
$1.3 million
and
$2.8 million
during the nine months ended September 30, 2018
and 2017, respectively. The decrease was primarily due to a
$1.0 million
decline in interest income.
Income (Loss) Before Income Taxes
The geographic mix of income (loss) before income taxes was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
U.S.
|
$
|
(12,094
|
)
|
|
$
|
(804
|
)
|
|
$
|
(42,166
|
)
|
|
$
|
(2,795
|
)
|
|
Foreign
|
9,749
|
|
|
5,049
|
|
|
42,391
|
|
|
14,590
|
|
|
Total
|
$
|
(2,345
|
)
|
|
$
|
4,245
|
|
|
$
|
225
|
|
|
$
|
11,795
|
|
During the three months ended September 30, 2018
, pretax loss of
$2.3 million
consisted of U.S. pretax loss of
$12.1 million
and foreign pretax income of
$9.7 million
, respectively. Pretax loss attributable to U.S. operations included stock-based compensation expense of
$11.9 million
, interest expense of $3.5 million, amortization of identified intangible assets of $2.9 million, and restructuring and other of $1.9 million. Pretax income attributable to foreign operations included amortization of identified intangible assets of $8.2 million, restructuring and other of $0.9 million, and a change in the estimated fair value of contingent consideration on acquisitions of $2.2 million.
The exclusion of these items from pretax loss would have resulted in U.S. and foreign pretax income of $8.1 and $21.1 million, respectively,
during the three months ended September 30, 2018
.
During the nine months ended September 30, 2018
, pretax income of
$0.2 million
consisted of U.S. pretax loss of
$42.2 million
and foreign pretax income of
$42.4 million
, respectively. Pretax loss attributable to U.S. operations included stock-based compensation expense of $30.5 million, interest expense of $10.3 million, amortization of identified intangible assets of $9.0 million, restructuring and other of $7.1 million, and the favorable impact of a change in estimated fair value of contingent consideration on acquisitions of $2.6 million. Pretax income attributable to foreign operations included amortization of identified intangible assets of $25.8 million, restructuring and other of $3.3 million, and a favorable impact of a change in the fair value of estimated contingent consideration of $9.5 million. The exclusion of these items from pretax income would have resulted in U.S. and foreign pretax income of $12.0 and $62.1 million, respectively,
during the nine months ended September 30, 2018
.
During the three months ended September 30, 2017
, pretax income of
$4.2 million
consisted of U.S. pretax loss of
$0.8 million
and foreign pretax income of
$5.0 million
, respectively. Pretax loss attributable to U.S. operations included amortization of identified intangible assets of $3.4 million, stock-based compensation of $4.6 million, restructuring and other of $0.7 million, acquisition-related costs of $0.6 million, legal and accounting fees related to the revenue recognition review and assessment of $4.7 million, and interest expense related to our Notes of $4.3 million. Pretax income attributable to foreign operations included amortization of identified intangible assets of $8.9 million, restructuring and other of $0.2 million, and earnout interest accretion of $0.3 million. The exclusion of these items from pretax income would result in U.S. and foreign pretax income of $17.5 and $14.4 million, respectively,
during the three months ended September 30, 2017
.
During the nine months ended September 30, 2017
, pretax income of
$11.8 million
consisted of U.S. pretax loss of
$2.8 million
and foreign pretax income of
$14.6 million
, respectively. Pretax loss attributable to U.S. operations included amortization of identified intangible assets of $10.2 million, stock-based compensation of $22.5 million, restructuring and other of $4.1 million, legal and accounting fees related to the revenue recognition review and assessment of $4.7 million, acquisition-related costs of $1.9 million, cost of revenue resulting from the fair value adjustment of FFPS inventory of $0.5 million, change in fair value of contingent consideration of $0.7 million, and interest expense related to our Notes of $12.7 million. Pretax income attributable to foreign operations included amortization of identified intangible assets of $24.7 million, restructuring and other of $1.3 million, cost of revenue resulting from the fair value adjustment of FFPS inventory of $0.7 million, and earnout interest accretion of $1.2 million. The exclusion of these items from pretax income would result in U.S. and foreign pretax income of $54.8 and $42.8 million, respectively,
during the nine months ended September 30, 2017
.
Benefit from (Provision for) Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Income (loss) before income taxes
|
$
|
(2,345
|
)
|
|
$
|
4,245
|
|
|
$
|
225
|
|
|
$
|
11,795
|
|
|
Benefit from (provision for) income taxes
|
4,265
|
|
|
(791
|
)
|
|
1,868
|
|
|
(795
|
)
|
|
Effective income tax rate
|
*
|
|
|
18.6
|
%
|
|
*
|
|
|
6.7
|
%
|
___________
* Percentage not meaningful.
Our tax provision has decreased
in the three and nine months ended September 30, 2018 and 2017
compared to the same periods in 2017, primarily due to decreased profitability before income taxes and the impacts of discrete income tax items.
The 2017 Tax Act has wide-ranging impacts including, but not limited to, lowering the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018, imposing a one-time deemed repatriation transition tax, and the revaluation of U.S. deferred tax assets and liabilities. The 2017 Tax Act also created a minimum tax on certain foreign earnings, also known as the GILTI provision, commencing in the year ending December 31, 2018. The SEC issued SAB 118 which allows us to record a provisional estimate of the income tax effects of the 2017 Tax Act in the period in which we can make a reasonable estimate of its effects. As an adjustment to our December 2017 provisional estimates, we have recorded a benefit of $0.7 million and a provision of $0.5 million for federal and state taxes related to the deemed repatriation transition tax
during the three and nine months ended September 30, 2018
. As we obtain additional information, we will finalize the calculation of the income tax effects of the 2017 Tax Act in the fourth quarter of 2018.
We earn a significant amount of our operating income outside the U.S., which is deemed to be permanently reinvested in foreign jurisdictions. Of the income generated in jurisdictions with tax rates materially lower than the statutory U.S. tax rate of 21%, most is earned in the Cayman Islands. In 2017, we realigned the ownership of certain intellectual property to augment operational synergies and parallel both our worldwide intellectual property ownership and our worldwide supply chain. Our effective tax rate could fluctuate significantly and be adversely impacted if anticipated earnings in the foreign jurisdictions are significantly different than current projections.
While we currently do not foresee a need to repatriate the earnings of foreign operations, should we require more capital in the U.S. than our cash and cash equivalents and short-term investments located in the U.S., along with cash generated by our U.S. operations, we may elect to repatriate funds held in our foreign jurisdictions or raise capital in the U.S. through debt or equity issuances. These alternatives could result in higher effective tax rates, the cash payments of taxes and/or increased interest expense, and foreign income and withholding taxes. Due to the enactment of the 2017 Tax Act, we are not subject to U.S. federal income tax on dividends received from our foreign subsidiaries commencing January 1, 2018. We are evaluating the potential foreign and U.S. state income tax liabilities that would result from future repatriations, if any, and how the 2017 Tax Act will impact our current permanent reinvestment assertion. We expect to complete this analysis and the impact, if any, which the 2017 Tax Act may have on our indefinite reinvestment assertion in the fourth quarter of 2018.
In Altera Corp. v. Commissioner, the U.S. Court of Appeals for the Ninth Circuit, reversing a prior decision of the Tax Court, initially issued an opinion on July 24, 2018 to require U.S. corporations to share stock-based compensation expenses with their foreign affiliates in accordance with U.S. Department of Treasury regulations. The Ninth Circuit subsequently withdrew this initial decision on August 7, 2018 to create a reconstituted panel to review its initial conclusion. These actions do not impact our condensed consolidated financial statements through
September 30, 2018
because no benefit had been recorded as a result of the prior Tax Court decision. We will continue to monitor ongoing developments and potential impacts to our Condensed Consolidated Financial Statements.
We assess the likelihood that our deferred tax assets will be recovered from future taxable income by considering both positive and negative evidence relating to their recoverability. If we believe that recovery of these deferred tax assets is not more likely than not, we establish a valuation allowance. Significant judgment is required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we considered all available evidence, including recent operating results, projections of future taxable income, our ability to utilize loss and credit carryforwards, and the feasibility of tax planning strategies. Other than valuation allowances on deferred tax assets related to California, Luxembourg, Israel, Netherlands, and Turkey deferred tax assets that will not likely be realized based on the size of the net operating loss and research and development credits being generated, we have determined that is more likely than not that we will realize the benefit related to all other deferred tax assets. To the extent we increase a valuation allowance, we include an expense in the Condensed Consolidated Statement of Operations in the period in which such determination is made.
Non-GAAP Financial Information
Use of Non-GAAP Ex-Currency Financial Information
To better understand trends in our business, we believe it is helpful to adjust our statement of operations to exclude the impact of year-over-year changes in the translation of foreign currencies into U.S. dollars. This is a non-GAAP measure that is calculated by adjusting revenue, gross profit, and operating expenses by using historical exchange rates in effect during the comparable prior year period and removing the balance sheet currency re-measurement impact from interest income and other income, net, including removal of any hedging gains and losses. We refer to these adjustments as “ex-currency”. Management believes the ex-currency measures provide investors with an additional perspective on year-over-year financial trends and enable investors to analyze our operating results in the same way management does. The year-over-year currency impact can be determined as the difference between year-over-year actual growth rates and year-over-year ex-currency growth rates.
Our non-GAAP ex-currency measures, are not in accordance with or an alternative to GAAP and may be materially different from other non-GAAP measures, including similarly titled non-GAAP measures, used by other companies. The presentation of this additional information should not be considered in isolation from, as a substitute for, or superior to, revenue, gross profit, or operating expenses prepared in accordance with GAAP.
RECONCILIATION OF GAAP REVENUE BY OPERATING SEGMENT TO
NON-GAAP EX-CURRENCY
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
(in millions)
|
GAAP
|
|
Ex-Currency
|
|
GAAP
|
|
Ex-Currency
|
|
|
2018
|
|
%
|
|
Ex-Currency Adjustments
|
|
2018
|
|
%
|
|
GAAP
|
|
%
|
|
Change from 2017 GAAP
|
|
Change from 2017 GAAP
|
|
|
of total
|
|
of total
|
2017
|
of total
|
$
|
|
%
|
|
$
|
|
%
|
|
Industrial Inkjet
|
$
|
154.9
|
|
|
60
|
%
|
|
$
|
0.7
|
|
|
$
|
155.6
|
|
|
60
|
%
|
|
$
|
142.9
|
|
|
58
|
%
|
|
$
|
12.0
|
|
|
8
|
%
|
|
$
|
12.7
|
|
|
9
|
%
|
|
Productivity Software
|
40.4
|
|
|
16
|
|
|
0.2
|
|
|
40.6
|
|
|
16
|
|
|
37.2
|
|
|
15
|
|
|
3.2
|
|
|
9
|
|
|
3.4
|
|
|
9
|
|
|
Fiery
|
61.8
|
|
|
24
|
|
|
—
|
|
|
61.8
|
|
|
24
|
|
|
68.3
|
|
|
27
|
|
|
(6.5
|
)
|
|
(9
|
)
|
|
(6.5
|
)
|
|
(9
|
)
|
|
Total revenue
|
$
|
257.1
|
|
|
100
|
%
|
|
$
|
0.9
|
|
|
$
|
258.0
|
|
|
100
|
%
|
|
$
|
248.4
|
|
|
100
|
%
|
|
$
|
8.7
|
|
|
4
|
%
|
|
$
|
9.6
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
(in millions)
|
GAAP
|
|
Ex-Currency
|
|
GAAP
|
|
Ex-Currency
|
|
|
2018
|
|
%
|
|
Ex-Currency Adjustments
|
|
2018
|
|
%
|
|
GAAP
|
|
%
|
|
Change from 2017 GAAP
|
|
Change from 2017 GAAP
|
|
|
of total
|
|
of total
|
2017
|
of total
|
$
|
|
%
|
|
$
|
|
%
|
|
Industrial Inkjet
|
$
|
453.6
|
|
|
60
|
%
|
|
$
|
(13.6
|
)
|
|
$
|
440.0
|
|
|
59
|
%
|
|
$
|
407.9
|
|
|
56
|
%
|
|
$
|
45.7
|
|
|
11
|
%
|
|
$
|
32.1
|
|
|
8
|
%
|
|
Productivity Software
|
125.8
|
|
|
17
|
|
|
(2.0
|
)
|
|
123.8
|
|
|
17
|
|
|
111.3
|
|
|
16
|
|
|
14.5
|
|
|
13
|
|
|
12.5
|
|
|
11
|
|
|
Fiery
|
178.7
|
|
|
23
|
|
|
(0.3
|
)
|
|
178.4
|
|
|
24
|
|
|
204.9
|
|
|
28
|
|
|
(26.2
|
)
|
|
(13
|
)
|
|
(26.5
|
)
|
|
(13
|
)
|
|
Total revenue
|
$
|
758.1
|
|
|
100
|
%
|
|
$
|
(15.9
|
)
|
|
$
|
742.2
|
|
|
100
|
%
|
|
$
|
724.1
|
|
|
100
|
%
|
|
$
|
34.0
|
|
|
5
|
%
|
|
$
|
18.1
|
|
|
2
|
%
|
RECONCILIATION OF GAAP REVENUE BY GEOGRAPHIC AREA TO
NON-GAAP EX-CURRENCY
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
(in millions)
|
GAAP
|
|
Ex-Currency
|
|
GAAP
|
|
Ex-Currency
|
|
|
2018
|
|
%
|
|
Ex-Currency Adjustments
|
|
2018
|
|
%
|
|
GAAP
|
|
%
|
|
Change from 2017 GAAP
|
|
Change from 2017 GAAP
|
|
|
of total
|
of total
|
2017
|
of total
|
$
|
|
%
|
|
$
|
|
%
|
|
Americas
|
$
|
134.5
|
|
|
52
|
%
|
|
$
|
0.1
|
|
|
$
|
134.6
|
|
|
52
|
%
|
|
$
|
129.5
|
|
|
52
|
%
|
|
$
|
5.0
|
|
|
4
|
%
|
|
$
|
5.1
|
|
|
4
|
%
|
|
EMEA
|
88.9
|
|
|
35
|
|
|
0.3
|
|
|
89.2
|
|
|
35
|
|
|
85.1
|
|
|
34
|
|
|
3.8
|
|
|
4
|
|
|
4.1
|
|
|
5
|
|
|
APAC
|
33.7
|
|
|
13
|
|
|
0.5
|
|
|
34.2
|
|
|
13
|
|
|
33.8
|
|
|
14
|
|
|
(0.1
|
)
|
|
—
|
|
|
0.4
|
|
|
1
|
|
|
Total revenue
|
$
|
257.1
|
|
|
100
|
%
|
|
$
|
0.9
|
|
|
$
|
258.0
|
|
|
100
|
%
|
|
$
|
248.4
|
|
|
100
|
%
|
|
$
|
8.7
|
|
|
4
|
%
|
|
$
|
9.6
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
(in millions)
|
GAAP
|
|
Ex-Currency
|
|
GAAP
|
|
Ex-Currency
|
|
|
2018
|
|
%
|
|
Ex-Currency Adjustments
|
|
2018
|
|
%
|
|
GAAP
|
|
%
|
|
Change from 2017 GAAP
|
|
Change from 2017 GAAP
|
|
|
of total
|
of total
|
2017
|
of total
|
$
|
|
%
|
|
$
|
|
%
|
|
Americas
|
$
|
374.2
|
|
|
49
|
%
|
|
$
|
(0.4
|
)
|
|
$
|
373.8
|
|
|
50
|
%
|
|
$
|
353.4
|
|
|
49
|
%
|
|
$
|
20.8
|
|
|
6
|
%
|
|
$
|
20.4
|
|
|
6
|
%
|
|
EMEA
|
271.1
|
|
|
36
|
|
|
(12.9)
|
|
258.2
|
|
|
35
|
|
|
274.6
|
|
|
38
|
|
|
(3.6
|
)
|
|
(1
|
)
|
|
(16.5
|
)
|
|
(6
|
)
|
|
APAC
|
112.8
|
|
|
15
|
|
|
(2.6)
|
|
110.2
|
|
|
15
|
|
|
96.1
|
|
|
13
|
|
|
16.8
|
|
|
17
|
|
|
14.2
|
|
|
15
|
|
|
Total revenue
|
$
|
758.1
|
|
|
100
|
%
|
|
$
|
(15.9
|
)
|
|
$
|
742.2
|
|
|
100
|
%
|
|
$
|
724.1
|
|
|
100
|
%
|
|
$
|
34.0
|
|
|
5
|
%
|
|
$
|
18.1
|
|
|
2
|
%
|
RECONCILIATION OF GROSS PROFIT BY OPERATING SEGMENT TO
NON-GAAP EX-CURRENCY
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
GAAP
|
|
Ex-Currency
Adjustments
|
|
Ex-Currency
|
|
GAAP
|
|
GAAP
|
|
Ex-Currency
Adjustments
|
|
Ex-Currency
|
|
GAAP
|
|
(in millions)
|
2018
|
|
2018
|
|
2017
|
|
2018
|
|
2018
|
|
2017
|
|
Industrial Inkjet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
154.9
|
|
|
$
|
0.7
|
|
|
$
|
155.6
|
|
|
$
|
142.9
|
|
|
$
|
453.6
|
|
|
$
|
(13.6
|
)
|
|
$
|
440.0
|
|
|
$
|
407.9
|
|
|
Gross profit
|
53.7
|
|
|
0.5
|
|
|
54.2
|
|
|
53.4
|
|
|
158.4
|
|
|
(6.9
|
)
|
|
151.5
|
|
|
155.0
|
|
|
Gross profit percentages
|
34.6
|
%
|
|
|
|
34.8
|
%
|
|
37.4
|
%
|
|
34.9
|
%
|
|
|
|
34.4
|
%
|
|
38.0
|
%
|
|
Productivity Software
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
40.4
|
|
|
$
|
0.2
|
|
|
$
|
40.6
|
|
|
$
|
37.2
|
|
|
$
|
125.8
|
|
|
$
|
(2.0
|
)
|
|
$
|
123.8
|
|
|
$
|
111.3
|
|
|
Gross profit
|
28.4
|
|
|
0.1
|
|
|
28.5
|
|
|
26.7
|
|
|
89.0
|
|
|
(1.2
|
)
|
|
87.8
|
|
|
81.4
|
|
|
Gross profit percentages
|
70.2
|
%
|
|
|
|
70.1
|
%
|
|
71.7
|
%
|
|
70.7
|
%
|
|
|
|
70.9
|
%
|
|
73.2
|
%
|
|
Fiery
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
61.8
|
|
|
$
|
—
|
|
|
$
|
61.8
|
|
|
$
|
68.3
|
|
|
$
|
178.7
|
|
|
$
|
(0.2
|
)
|
|
$
|
178.5
|
|
|
$
|
204.9
|
|
|
Gross profit
|
44.4
|
|
|
—
|
|
|
44.4
|
|
|
47.9
|
|
|
128.6
|
|
|
(0.2
|
)
|
|
128.4
|
|
|
143.8
|
|
|
Gross profit percentages
|
71.8
|
%
|
|
|
|
71.8
|
%
|
|
70.2
|
%
|
|
72.0
|
%
|
|
|
|
71.9
|
%
|
|
70.2
|
%
|
Operating segment gross profit is reconciled to our Condensed Consolidated Statements of Operations during the periods presented below as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
GAAP
|
|
Ex-Currency
Adjustments
|
|
Ex-Currency
|
|
GAAP
|
|
GAAP
|
|
Ex-Currency
Adjustments
|
|
Ex-Currency
|
|
GAAP
|
|
(in millions)
|
2018
|
|
2018
|
|
2017
|
|
2018
|
|
2018
|
|
2017
|
|
Segment gross profit
|
$
|
126.4
|
|
|
$
|
0.6
|
|
|
$
|
127.0
|
|
|
$
|
127.9
|
|
|
$
|
375.9
|
|
|
$
|
(8.3
|
)
|
|
$
|
367.6
|
|
|
$
|
380.2
|
|
|
Stock-based compensation expense
|
(0.9
|
)
|
|
—
|
|
|
(0.9
|
)
|
|
(0.5
|
)
|
|
(2.7
|
)
|
|
—
|
|
|
(2.7
|
)
|
|
(2.0
|
)
|
|
Gross profit
|
$
|
125.5
|
|
|
$
|
0.6
|
|
|
$
|
126.1
|
|
|
$
|
127.5
|
|
|
$
|
373.2
|
|
|
$
|
(8.3
|
)
|
|
$
|
364.9
|
|
|
$
|
378.2
|
|
RECONCILIATION OF GAAP OPERATING EXPENSES TO
NON-GAAP EX-CURRENCY
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
Ex-Currency
|
|
GAAP
|
|
Ex-Currency
|
|
|
GAAP
|
|
Ex-Currency Adjustments
|
|
2018
|
|
GAAP
|
|
Change from 2017 GAAP
|
|
Change from 2017 GAAP
|
|
(in millions)
|
2018
|
|
|
|
2017
|
|
$
|
|
%
|
|
$
|
|
%
|
|
Research and development
|
$
|
40.3
|
|
|
$
|
0.4
|
|
|
$
|
40.7
|
|
|
$
|
39.6
|
|
|
$
|
0.8
|
|
|
2
|
%
|
|
$
|
1.2
|
|
|
3
|
%
|
|
Sales and marketing
|
44.7
|
|
|
0.2
|
|
|
44.9
|
|
|
42.3
|
|
|
2.4
|
|
|
6
|
|
|
2.6
|
|
|
6
|
|
|
General and administrative
|
24.5
|
|
|
0.1
|
|
|
24.6
|
|
|
25.1
|
|
|
(0.6
|
)
|
|
(2
|
)
|
|
(0.5
|
)
|
|
(2
|
)
|
|
Amortization of identified intangibles
|
11.1
|
|
|
0.1
|
|
|
11.2
|
|
|
12.3
|
|
|
(1.2
|
)
|
|
(9
|
)
|
|
(1.1
|
)
|
|
(9
|
)
|
|
Restructuring and other
|
2.8
|
|
|
—
|
|
|
2.8
|
|
|
0.8
|
|
|
2.0
|
|
|
236
|
|
|
2.0
|
|
|
236
|
|
|
Total operating expenses
|
$
|
123.4
|
|
|
$
|
0.8
|
|
|
$
|
124.2
|
|
|
$
|
120.1
|
|
|
$
|
3.3
|
|
|
3
|
%
|
|
$
|
4.1
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
Ex-Currency
|
|
GAAP
|
|
Ex-Currency
|
|
|
GAAP
|
|
Ex-Currency Adjustments
|
|
2018
|
|
GAAP
|
|
Change from 2017 GAAP
|
|
Change from 2017 GAAP
|
|
(in millions)
|
2018
|
|
|
|
2017
|
|
$
|
|
%
|
|
$
|
|
%
|
|
Research and development
|
$
|
119.7
|
|
|
$
|
(1.2
|
)
|
|
$
|
118.5
|
|
|
$
|
118.2
|
|
|
$
|
1.5
|
|
|
1
|
%
|
|
$
|
0.3
|
|
|
—
|
%
|
|
Sales and marketing
|
137.4
|
|
|
(3.4
|
)
|
|
134.0
|
|
|
129.0
|
|
|
8.4
|
|
|
7
|
|
|
5.0
|
|
|
4
|
|
|
General and administrative
|
57.1
|
|
|
(1.0
|
)
|
|
56.1
|
|
|
67.2
|
|
|
(10.1
|
)
|
|
(15
|
)
|
|
(11.1
|
)
|
|
(17
|
)
|
|
Amortization of identified intangibles
|
34.8
|
|
|
(1.2
|
)
|
|
33.6
|
|
|
34.8
|
|
|
—
|
|
|
—
|
|
|
(1.2
|
)
|
|
(4
|
)
|
|
Restructuring and other
|
10.5
|
|
|
(0.2
|
)
|
|
10.3
|
|
|
5.4
|
|
|
5.1
|
|
|
93
|
|
|
4.9
|
|
|
90
|
|
|
Total operating expenses
|
$
|
359.5
|
|
|
$
|
(7.0
|
)
|
|
$
|
352.5
|
|
|
$
|
354.7
|
|
|
$
|
4.8
|
|
|
1
|
%
|
|
$
|
(2.2
|
)
|
|
(1
|
)%
|
Liquidity and Capital Resources
Overview
Cash, cash equivalents, restricted cash equivalents, and short-term investments decreased by
$17.8 million
to
$333.7 million
as of
September 30, 2018
, from
$351.6 million
as of
December 31, 2017
. The decrease was primarily due to expenditures under our stock repurchase program, payments of acquisition-related debt, purchases of property and equipment, and contingent consideration payments related to businesses acquired, partially offset by cash flow from operating activities and proceeds from issuance of common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
September 30, 2018
|
|
December 31, 2017
|
|
Change
|
|
Cash and cash equivalents
|
$
|
180,942
|
|
|
$
|
170,345
|
|
|
$
|
10,597
|
|
|
Restricted cash equivalents
|
39,809
|
|
|
32,531
|
|
|
7,278
|
|
|
Short term investments
|
112,986
|
|
|
148,697
|
|
|
(35,711
|
)
|
|
Total cash, cash equivalents, restricted cash equivalents, and short-term investments
|
$
|
333,737
|
|
|
$
|
351,573
|
|
|
$
|
(17,836
|
)
|
Cash flow activities are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
(in thousands)
|
2018
|
|
2017
|
|
Change
|
|
Net cash provided by operating activities
|
$
|
50,155
|
|
|
$
|
42,441
|
|
|
$
|
7,714
|
|
|
Net cash provided by investing activities*
|
27,177
|
|
|
36,097
|
|
|
(8,920
|
)
|
|
Net cash used for financing activities
|
(57,407
|
)
|
|
(65,505
|
)
|
|
8,098
|
|
|
Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash equivalents
|
(2,050
|
)
|
|
4,168
|
|
|
(6,218
|
)
|
|
Increase in cash, cash equivalents, and restricted cash equivalents*
|
$
|
17,875
|
|
|
$
|
17,201
|
|
|
$
|
674
|
|
* Certain prior period amounts have been revised due to the implementation of ASU 2016-18. See Note 1 for details.
Cash, cash equivalents, restricted cash equivalents, and short-term investments held outside of the U.S. in various foreign subsidiaries were
$132.8
and
$88.4 million
as of
September 30, 2018
, and
December 31, 2017
, respectively. Management anticipates using these foreign funds for local operations and to finance international acquisitions.
Based on past performance and current expectations, we believe that our cash, cash equivalents, short-term investments, and cash generated from operating activities will satisfy our working capital, capital expenditure, investment, stock repurchase, commitments (see
Note 10
–
Commitments and Contingencies
of the Notes to Condensed Consolidated Financial Statements), and other liquidity requirements associated with our existing operations through at least the next twelve months. We believe that the most strategic uses of our cash resources include business acquisitions, strategic investments to gain access to new technologies, repurchase of shares of our common stock, and working capital.
Operating Activities
During the nine months ended September 30, 2018
, our cash provided by operating activities was
$50.2 million
. Net cash provided by operating activities
in the nine months ended September 30, 2018
consisted primarily of net income of
$2.1 million
, non-cash expenses including
$50.1 million
of depreciation and amortization,
$30.5 million
of stock-based compensation, and
$11.3 million
of non-cash accretion of interest expenses on Notes and imputed financing obligations, partially offset by the change in fair value of contingent consideration of
$11.9 million
, net change in derivative assets and liabilities of
$2.4 million
, and net change in operating assets and liabilities of
$36.3 million
. The net change in operating assets and liabilities of
$36.3 million
consisted primarily of an increase in other current assets of $21.7 million, an increase in income taxes receivable of $7.2 million, and a decrease in income taxes payable of $6.8 million.
Accounts Receivable
Our primary source of operating cash flow is the collection of accounts receivable from our customers. One measure of the effectiveness of our collection efforts is average days sales outstanding for accounts receivable (“DSO”). DSOs were 86 and 84 days as of
September 30, 2018
and
December 31, 2017
, respectively. We calculate DSO by dividing net accounts receivable at the end of the quarter by revenue recognized during the quarter, multiplied by the total days in the quarter.
DSOs increased slightly
during the nine months ended September 30, 2018
, compared with
December 31, 2017
, primarily due to a greater portion of our revenue coming from our Industrial Inkjet and Productivity Software segments which have substantially longer average payment terms than our Fiery segment. We expect DSOs to vary from period to period because of changes in the mix of business between direct customers and leading printer manufacturers, the effectiveness of our collection efforts both domestically and overseas, and variations in the linearity of our sales. As the percentage of Industrial Inkjet and Productivity Software related revenue increases, we expect DSOs may trend higher.
We have facilities in the U.S. that enable us to sell to third parties, on an ongoing basis, certain trade receivables with recourse. Trade receivables sold with recourse are generally short-term receivables with payment due dates of less than 10 days from date of sale. We also have facilities in Europe that enable us to sell to third parties, on an ongoing basis, certain trade receivables without recourse. Trade receivables sold without recourse are generally short-term receivables secured by international letters of credit with payment due dates of less than one year.
Trade receivables sold cumulatively under these facilities were
$13.1
and
$6.8
million
during the nine months ended September 30, 2018
on a recourse and nonrecourse basis, respectively, which approximates the cash received. The receivables that were sold to third parties were removed from the Condensed Consolidated Balance Sheets and were reflected as cash provided by operating activities in the Condensed Consolidated Statements of Cash Flows.
Allowances for doubtful accounts are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
Allowance for trade receivables
|
$
|
21,345
|
|
|
$
|
20,278
|
|
|
Allowance for trade-in sales
|
7,765
|
|
|
10,176
|
|
|
Allowance for sales rebates
|
1,064
|
|
|
1,782
|
|
|
Total allowances for doubtful accounts
|
$
|
30,174
|
|
|
$
|
32,236
|
|
Inventories
Our inventories are procured primarily in support of the Industrial Inkjet and Fiery operating segments. The majority of our Industrial Inkjet products are manufactured internally, while Fiery production is primarily outsourced. The result is lower inventory turnover for Industrial Inkjet inventories compared with Fiery inventories.
Our inventories
decreased
by
$4.5 million
to
$121.3 million
as of
September 30, 2018
from
$125.8 million
as of
December 31, 2017
, primarily due to a decrease in Industrial Inkjet inventories. Inventory turnover was 4.3 turns for the quarter ended
September 30, 2018
compared with 4.4 turns during the quarter ended
December 31, 2017
and 3.6 turns in the quarter ended
September 30, 2017
. We calculate inventory turnover by dividing annualized current quarter cost of revenue by ending inventories.
Investing Activities
Acquisitions
In the nine months ended September 30, 2018
, we received cash from an escrow settlement of $1.0 million in relation to the acquisition of CTI and paid $0.3 million as a working capital purchase price adjustment on the acquisition of Escada. We received a net working capital adjustment of $0.2 million related to the Optitex acquisition during the first quarter of 2017, which was recorded as a purchase price adjustment.
On August 14, 2017, we acquired Generation Digital for cash consideration of $3.2 million, net of cash acquired, plus an additional potential future cash earnout, which is contingent on achieving certain revenue and operating profit performance targets. Generation Digital provides software to textile and fashion designers for the creation and design of prints and patterns, color matching, and color palette creation and management within our Fiery operating segment.
On May 8, 2017, we acquired CRC Information Systems, Inc. (“CRC”) from Reynolds for cash consideration of $7.6 million. CRC provides business process automation software for commercial label and packaging printers included in the Midmarket Print Suite within our Productivity Software operating segment.
On January 31, 2017, we purchased the FFPS business from Xerox for cash consideration of $5.9 million, plus $18.0 million of future cash payments, of which $9.0 million was paid in July 2017 and $9.0 million was paid in July 2018. These two subsequent payments are included in our cash flows from financing activities as repayment of acquisition-related debt in our Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017, respectively. The FFPS business manufactures and markets the FFPS DFE, which previously competed with our Fiery DFE.
Investments
Proceeds from sales and maturities of marketable securities, net of purchases, were
$35.1 million
and
$77.4 million
during the nine months ended September 30, 2018
and
2017
, respectively. We have classified our investment portfolio as “available for sale.” Our investments are made with a policy of capital preservation and liquidity as primary objectives. We may hold investments in fixed income debt securities to maturity; however, we may sell an investment at any time if the quality rating of the investment declines, the yield on the investment is no longer attractive, or we have better uses for the cash. Since we invest primarily in investment securities
that are highly liquid with a ready market, we believe the purchase, maturity, or sale of our investments has no material impact on our overall liquidity.
Property and Equipment, Net
Our property and equipment additions have historically been funded with cash flows from operating activities. Net cash payments for purchases of property and equipment were
$9.8 million
and
$8.7 million
during the nine months ended September 30, 2018
and
2017
, respectively. See also
Note 5
–
Supplemental Financial Statement Information
of the Notes to Condensed Consolidated Financial Statements for additional information about purchases of property and equipment.
Proceeds from sale of held-for-sale Building and Land
During the three months ended September 30, 2018
we sold one of our buildings and the related land in our former Meredith, NH facility for
$1.1 million
in cash. This property was previously included in assets held for sale on the Consolidated Balance Sheet as of
December 31, 2017
. We are actively marketing the remaining building and land at this formerly facility.
Restricted Cash Equivalents and Investments
We have restricted cash equivalents and investments that are required to be maintained by the lease related to our Manchester, NH facility, which is described more fully in
Note 10
–
Commitments and Contingencies
of the Notes to Condensed Consolidated Financial Statements. The funds were invested with a third-party trustee during the construction period and upon completion of construction in April 2018, were deposited with MUFG where they are restricted as collateral until the end of the underlying building lease period in 2024. This restricted cash and cash equivalents was
$39.8
and
$32.5 million
as of
September 30, 2018
and
December 31, 2017
, respectively.
Financing Activities
Proceeds from Issuance of Common Stock
Historically, our recurring cash flows provided by financing activities have included receipt of cash from the issuance of common stock through the exercise of stock options and employee purchases of ESPP shares. We received proceeds from the exercise of stock options of zero and $1.7 million and employee purchases of ESPP shares of
$10.2 million
and $10.0 million
during the nine months ended September 30, 2018
and
2017
, respectively. While we may continue to receive proceeds from these plans in future periods, the timing and amount of such proceeds are difficult to predict and are contingent on certain factors including the price of our common stock, the timing and number of stock options exercised by employees that had participated in these plans, net settlement options, employee participation in our ESPP, and general market conditions.
Treasury Stock Purchases
During the nine months ended September 30, 2018
and 2017 we expended
$52.5 million
and
$56.9 million
, respectively, to repurchase outstanding shares of our common stock. Such repurchases included
$2.0
and
$10.0
million used for net settlement of shares for the exercise price of certain stock options and any tax withholding obligations incurred connected with such exercises and tax withholding obligations that arose on the vesting of RSUs
during the nine months ended September 30, 2018
and
2017
, respectively.
On September 11, 2017, the board of directors approved an additional $125 million for our share repurchase program commencing September 11, 2017. At that time, $28.8 million remained available for repurchase under the 2015 authorization for this program. The 2017 authorization thereby increased the repurchase authorization to $153.8 million of our common stock. This authorization expires December 31, 2018. Under this publicly announced plan, we repurchased
1,614,166
and
1,019,544
shares for an aggregate purchase price of
$50.5 million
and
$47.0 million
during the nine months ended September 30, 2018
and
2017
, respectively. As of
September 30, 2018
,
$58.9 million
remained authorized for repurchases under this program.
Repayment of Acquisition-Related Debt
We paid
$12.0 million
and
$10.8 million
of acquisition-related debt
during the nine months ended September 30, 2018
and
2017
, respectively. These payments included $9.0 million in each nine-month period related to the acquisition of FFPS.
Earnout Payments
Earnout payments
during the nine months ended September 30, 2018
were
$3.1 million
, consisting of payments related to previously accrued contingent consideration liabilities for Rialco, General Digital, and Shuttleworth. Earnout payments
during the nine months ended September 30, 2017
were
$9.5 million
, primarily related to previously accrued contingent consideration liabilities for Reggiani, Rialco, and Shuttleworth.
Convertible Senior Notes
Our $345 million principal amount Notes are due on September 1, 2019, unless previously purchased or converted in accordance with their terms prior to such date. The Company is currently evaluating alternatives for refinancing all or a portion of the Notes prior to their maturity date.
Other Commitments
We are reliant on several sole source suppliers for certain key components and could experience a significant negative impact on our financial condition and results of operations if such supplies were reduced or not available. From time to time we may find it necessary to purchase higher than normal levels of such supplies to provide safety stocks in case of supply disruptions. We may also be required to compensate our subcontract manufacturers for components purchased for orders subsequently canceled by us. We periodically review the potential liability for these purchase commitments and the adequacy of the related accruals.
Off-Balance Sheet Financing
Please refer to Note 10 – Commitments and Contingencies of our Notes to Condensed Consolidated Financial Statements for discussion of our six-year lease with MUFG for a 225,000 square foot manufacturing and warehouse facility in Manchester, NH. Minimum lease payments during the initial six-year term for the building are $1.8 million and minimum lease payments are $13.1 million during the 48.5-year term of the related land lease, excluding six months of the land lease that was financed into the manufacturing facility lease. Upon completion of the initial six-year building lease term, we have the option to renew the lease, purchase the facility, or return the facility to MUFG subject to an 89% residual value guarantee under which we would recognize additional rent expense in the form of a variable rent payment. We have assessed our exposure in relation to the residual value guarantee and believe that there is no deficiency to the guaranteed value as of
September 30, 2018
.
Contractual Obligations
Please refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Contractual Obligations” presented in our 2017 Form 10-K. There were no material changes
during the nine months ended September 30, 2018
.
