Notes to Condensed Consolidated Financial Statements
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 (U.S. GAAP or 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
for the year ended December 31,
2016. These condensed consolidated financial statements and accompanying notes should be read in conjunction with our annual consolidated financial statements and the notes thereto for the year ended December 31, 2016, included in our Annual
Report on 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.
Recent Accounting Pronouncements
Inventory Valuation.
In July 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
2015-11,
Simplifying the Measurement of Inventory, which became effective in the first quarter of 2017. ASU
2015-11
requires that inventory be valued at the lower of
cost or net realizable value, which is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. We previously valued inventory at the lower of cost or
net realizable value less a reasonable profit margin as allowed by previous inventory valuation guidance. The adoption of ASU
2015-11
increased our inventory valuation by $0.4 million in 2017.
Revenue Recognition.
ASU
2014-09,
Revenue from Contracts with Customers, issued in May 2014, and ASU
2016-10,
Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, and subsequent amendments, enhances the comparability of revenue recognition practices across entities, industries,
jurisdictions, and capital markets. The principles-based guidance provides a framework for addressing revenue recognition issues comprehensively. The standard requires that revenue be recognized in an amount that reflects the consideration that the
entity expects to be entitled in exchange for goods or services, which are referred to as performance obligations.
The guidance requires
comprehensive annual and interim disclosures regarding the nature, amount, timing, and uncertainty of recognized revenue. Qualitative and quantitative disclosures will be required regarding:
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contracts with customers, including revenue and impairments recognized, disaggregation, and information about contract balances and performance
obligations,
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significant judgments and changes in judgments required to determine the transaction price, amounts allocated to performance obligations, and the
timing for recognizing revenue resulting from the satisfaction of performance obligations, and
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assets recognized from the costs to obtain or fulfill a contract.
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ASU
2014-09
will be effective in the first quarter of 2018. Two adoption methods are allowed under ASU
2014-09.
Under the
full retrospective method, the revised guidance is applied to all contracts in all reporting periods presented in the financial statements, subject to certain allowable exceptions. Retained earnings is adjusted for the cumulative effect of the
change as of January 1, 2016. Under the modified retrospective method, the revised guidance is applied to all contracts existing as of January 1, 2018, with an adjustment to beginning retained earnings for the cumulative effect of the
change and providing additional disclosures comparing results to previous guidance. We are evaluating the impact of each transition method on our financial statements and related disclosures.
Upon initial evaluation, we believe the key changes in the guidance that impact our revenue recognition relate to the allocation of contract revenue between various services and software licenses, and the
timing of when those revenues are recognized. The requirement to defer incremental contract acquisition costs and recognize them over the contract period or expected customer life will result in the recognition of a deferred charge on our balance
sheet. We are currently assessing the impact of these requirements on our consolidated financial statements upon adoption.
7
Principal vs Agent.
ASU
2016-08,
Principal vs. Agent
Considerations (Reporting Revenue Gross vs Net), issued in March 2016, streamlines and clarifies the criteria for identifying whether an entity is satisfying a performance obligation as the principal or agent in the transaction. The entity that is
responsible for fulfilling the contractual obligations related to the good or service is acting as the principal and recognizes the gross amount of consideration. The entity that is responsible only for arranging delivery to the customer is acting
as the agent and recognizes revenue in the amount of the fee or commission related to arranging for the delivery of the good or service.
Several indicators of the nature of the relationship that are considered under current guidance have been streamlined and clarified in the new guidance
by focusing more specifically on the performance obligations that must be fulfilled in the transaction, which entity carries the inventory risk in the transaction, and which entity controls the pricing of the good or service. Credit risk will no
longer be a criterion. This guidance will be effective in the first quarter of 2018. We are evaluating its impact on our revenue and results of operations.
Stock-based Compensation.
In March 2016, the FASB issued ASU
2016-09,
which became effective in the first quarter of 2017 with early adoption permitted. We
elected to early adopt this standard in the second quarter of 2016, which required retroactive application of this standard as of the first quarter in 2016 resulting in the following:
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Under this guidance, all excess tax benefits and deficiencies were recognized as income tax expense. Excess tax benefits of less than $0.1 million
that were charged to additional
paid-in
capital in the first quarter of 2016 were reversed upon adoption. We recorded $2.2 million of deferred tax assets related to excess tax benefits for federal
research and development income tax credits not previously benefitted.
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The requirement to reclassify gross excess tax benefits related to stock-based compensation from operating to financing activities in the statement of
cash flows was eliminated. The reclassification of $0.2 million in the first quarter of 2016 has been reversed upon adoption. We applied this guidance retrospectively to all prior periods to maintain the comparability of presentation between
periods, which resulted in a $0.2 million increase in cash flows provided by operating activities during the three months ended March 31, 2016, and a corresponding decrease in cash flows provided by financing activities.
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We elected to account for forfeitures when they occur instead of estimating the expected forfeiture rate. Adoption of this provision during the second
quarter of 2016 resulted in a retroactive net income adjustment of $0.2 million, net of tax effect, in the first quarter of 2016 and a cumulative effect adjustment to retained earnings of $2.1 million, net of tax, as of January 1,
2016.
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Statutory tax withholding is permitted up to the maximum statutory tax rate in applicable jurisdictions. The retrospective impact of this provision on
prior period financial statements is not material.
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Financial Instruments.
ASU
2016-13,
Measurement of Credit Losses on Financial Instruments, issued in June 2016, amends current guidance regarding other-than-temporary impairment of
available-for-sale
debt securities. The new guidance requires an estimate of expected credit loss when fair value is below the amortized cost of the asset without regard for the length of time that the fair
value has been below the amortized cost or the historical or implied volatility of the asset. In addition, credit losses on
available-for-sale
debt securities will be
limited to the difference between the securitys amortized cost basis and its fair value. The use of an allowance to record estimated credit losses (and subsequent recoveries) will also be required under the new guidance.
ASU
2016-13
will be effective in the first quarter of 2020. We are evaluating its impact on the carrying value of
our
available-for-sale
securities and results of operations.
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
will be effective in the first quarter of 2018. Accordingly, $63.6 million 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 will be classified as an
operating cash outflow in the Condensed Consolidated Statement of Cash Flows upon cash settlement in 2019.
8
Restricted Cash.
In November 2016, the FASB issued ASU
2016-18,
Statement of Cash Flows: Restricted Cash, requiring that the statement of cash flows explain the change during the period in the total of 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 should be included with cash and cash equivalents when reconciling the
beginning-of-period
and
end-of-period
total amounts shown on the statement of cash flows. Under current guidance, changes in
restricted cash and restricted cash equivalents are included in operating or investing activities in the condensed consolidated statements of cash flows.
ASU
2016-18
will be effective in the first quarter of 2018. We are evaluating its impact on our statement of cash flows.
Lease Arrangements.
Under current guidance, the classification of a lease by a lessee as either an operating lease or a capital lease determines
whether an asset and liability is recognized on the balance sheet. ASU
2016-02,
issued in February 2016 and 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 in excess of 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 have not
significantly changed from previous guidance. There continues to be a differentiation between finance leases and operating leases. The criteria for determining whether a lease is a financing or operating lease are substantially the same as existing
guidance except that the bright line percentages have been removed.
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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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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 finance leases unless the lessee control provisions are applicable.
We have not quantified the impact, but we expect our consolidated financial position and results of operations to be materially affected.
Definition of a Business.
ASU
2017-01,
Business Combinations: Clarifying the Definition of a Business, was
issued in January 2017. Under current guidance, a business is defined as an integrated set of assets and activities that usually consists of inputs, processes, and outputs. However, outputs are not required to be present and only some inputs and
processes must be present if the acquiring entity can produce outputs by integrating the acquired set of assets and activities with its own inputs and processes. Under ASU
2017-01,
when substantially all of
the fair value of the gross assets acquired (or disposed of) is concentrated in a single asset or group of similar identifiable assets, then we must determine whether the acquired (or disposed) 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 this evaluation. Output is narrowly defined to be consistent with the
description in the new revenue guidance. Missing inputs and processes may not be replaced by integration with our own inputs and processes under the new guidance.
Our condensed consolidated financial statements may be impacted if an acquisition does not qualify as a business combination after ASU
2017-01
is effective in the
first quarter of 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 (ASU
2014-09)
and is expected to have a material impact on the accounting for real estate dispositions.
ASU
2017-05
will be effective in the first quarter of 2018. This guidance may be adopted using either the full retrospective or modified retrospective method as
defined in ASU
2014-09;
however, we are not required to adopt the same method for ASU
2014-09
and ASU
2017-05.
9
Supplemental Cash Flow Information
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Three Months Ended March 31,
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(in thousands)
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2017
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2016
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Net cash paid for income taxes
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$
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2,092
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$
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1,960
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Cash paid for interest expense
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$
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1,661
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$
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1,694
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Acquisitions of businesses:
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Cash paid for businesses purchased, excluding contingent consideration
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$
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5,700
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$
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8,238
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Cash acquired in business acquisition
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(256
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)
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Net cash paid for businesses purchased, net of cash acquired
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$
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(5,700
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)
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$
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7,982
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Common stock issued in connection with Reggiani Macchine SpA (Reggiani) acquisition
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$
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$
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73
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Non-cash
investing and financing activities:
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Non-cash
settlement of vacation liabilities by issuing restricted stock units
(RSUs)
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$
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$
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2,733
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Property, equipment, and intellectual property received, but not paid
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1,060
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1,478
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$
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1,060
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$
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4,211
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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 restricted stock having a dilutive effect,
non-vested
restricted stock 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 from escrow 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, and the assumed exercise of our warrants having a dilutive effect using the treasury stock method when the stock price exceeds the warrant strike
price. Any potential shares that are anti-dilutive as defined in Accounting Standards Codification (ASC) 260, Earnings Per Share, are excluded from the effect of dilutive securities.
Performance-based and market-based restricted stock and stock options 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 in accordance with ASC
260-10-45-48.
Accordingly, performance-based RSUs, which vested on various dates during the three months ended March 31, 2017 and
2016, based on achievement of specified performance criteria related to revenue, cash flows from operating activities, and
non-GAAP
operating income targets, and performance-based stock options, which vested
during the three months ended March 31, 2016 based on achievement of specified targets related to
non-GAAP
return on equity 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 during the three months ended March 31, 2017 and 2016 are reconciled
as follows (in thousands, except per share amounts):
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Three months ended March 31,
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2017
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2016
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Basic net income per share:
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Net income available to common shareholders
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$
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4,787
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$
|
2,103
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Weighted average common shares outstanding
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46,551
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47,215
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Basic net income per share
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$
|
0.10
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$
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0.04
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Diluted net income per share:
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Net income available to common shareholders
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$
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4,787
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$
|
2,103
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Weighted average common shares outstanding
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46,551
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47,215
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Diluted stock options and
non-vested
restricted stock
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657
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708
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Weighted average common shares outstanding for purposes of computing diluted net income per share
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47,208
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47,923
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Diluted net income per share
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$
|
0.10
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$
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0.04
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10
Potential shares of common stock that are not included in the determination of diluted net income per share
because they are anti-dilutive consist of ESPP purchase rights having an anti-dilutive effect of less than 0.1 million shares for the three months ended March 31, 2017 and 2016.
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. The effects of these
potentially outstanding shares were not included in the calculation of diluted net income per share 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 also 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 6 Convertible Senior Notes, Note Hedges, and Warrants of the Notes to Condensed Consolidated Financial Statements for
additional information.
3. Balance Sheet Details
Inventories
Inventories, net of allowances, as of March 31, 2017 and
December 31, 2016 are as follows (in thousands):
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March 31,
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December 31,
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2017
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2016
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Raw materials
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$
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49,675
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$
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45,798
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Work in process
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10,633
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7,362
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Finished goods
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53,502
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45,915
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$
|
113,810
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$
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99,075
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Deferred Cost of Revenue
Deferred cost of revenue related to unrecognized revenue on shipments to customers was $3.5 and $3.4 million as of March 31, 2017 and December 31, 2016, respectively, and is included in
other current assets in our Condensed Consolidated Balance Sheets.
Product Warranty Reserves
The changes in product warranty reserves during the three months ended March 31, 2017 and 2016 are as follows (in thousands):
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2017
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2016
|
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Balance at January 1,
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$
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10,319
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$
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9,635
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Liability assumed upon acquiring FreeFlow print server (FFPS)
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9,368
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Provisions, net of releases
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3,564
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3,073
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Settlements
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(4,144
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)
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(3,041
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)
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Balance at March 31,
|
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$
|
19,107
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$
|
9,667
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Accumulated Other Comprehensive Loss (OCI)
OCI classified within stockholders equity in our Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016 is as follows (in thousands):
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March 31,
|
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December 31,
|
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2017
|
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2016
|
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Net unrealized investment losses
|
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$
|
(342
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)
|
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$
|
(473
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)
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Currency translation losses
|
|
|
(18,056
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)
|
|
|
(24,230
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)
|
Net unrealized gains on cash flow hedges
|
|
|
64
|
|
|
|
9
|
|
|
|
|
|
|
|
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Accumulated other comprehensive loss
|
|
$
|
(18,334
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)
|
|
$
|
(24,694
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)
|
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|
|
|
|
|
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Amounts reclassified out of OCI were less than $0.1 million, net of tax, during the three months ended
March 31, 2017 and 2016, and consisted of unrealized gains and losses from investments in debt securities that are reported within interest income and other income (expense), net, in our Condensed Consolidated Statements of Operations.
11
4. Acquisition
We acquired certain assets comprising the FFPS business from Xerox Corporation (Xerox), a New York corporation headquartered in Norwalk, Connecticut, on January 31, 2017. FFPS is included
in our Fiery operating segment. Acquisition-related transaction costs were $0.7 million during the three months ended March 31, 2017.
We purchased FFPS for cash consideration of $23.9 million consisting of $5.9 million paid at closing, $9.0 million payable in July 2017,
and $9.0 million payable in July 2018, which have been discounted at our incremental borrowing rate of 4.98%, resulting in a purchase price of $23.0 million. FFPS is a digital front end (DFE) that previously competed with our
Fiery DFE.
This acquisition was accounted for as a purchase business combination. We allocated the purchase price to the tangible and
identifiable intangible assets acquired and liabilities assumed based on their estimated fair value on January 31, 2017, which is the acquisition date. Excess purchase consideration was recorded as goodwill. Factors contributing to a purchase
price that results in goodwill include, but are not limited to, the opportunity to cross-sell FFPS DFEs to existing customers, the positive reputation of FFPS in the market, the opportunity to sell Fiery DFEs to FFPS customers, and the opportunity
to expand our presence in the DFE market through the synergy of FFPS technology with existing Fiery products.
We engaged a third party
valuation firm to aid management in its analyses of the fair value of FFPS. All estimates, key assumptions, and forecasts were either provided by or reviewed by us. While we chose to utilize a third party valuation firm, the fair value analyses and
related valuations represent the conclusions of management and not the conclusions or statements of any third party.
The purchase price
allocation is preliminary and subject to change within the measurement period as the valuation is finalized. We expect to continue to obtain information to assist us in finalizing the fair value of the net assets acquired during the measurement
period, which ends on January 31, 2018. Measurement period adjustments will be recognized in the reporting period in which the adjustment amounts are determined, if any.
Valuation Methodologies
Intangible assets acquired from FFPS consist of a purchasing
agreement between the parties,
take-or-pay
contractual penalty, trade name, existing technology, and
in-process
research & development (IPR&D). Each intangible asset valuation methodology for the FFPS acquisition assumes either a risk-free discount rate of 4.98% or probability-adjusted discount rates between 18% and 20%.
Purchasing Agreement
was valued using the excess earnings method, which is an income approach. According to the Master Purchasing Agreement (the
Purchasing Agreement) entered into with Xerox, we will be their preferred supplier of DFEs provided that we meet quality, cost, delivery, and services requirements. The value of purchasing agreement lies in the generation of a consistent
and predictable revenue source without incurring the costs normally required to acquire the Purchasing Agreement. The Purchasing Agreement was valued by estimating the revenue attributable to the Purchasing Agreement and probability-weighted in each
forecast year to reflect the uncertainty of maintaining the existing relationship with Xerox beyond the initial five-year term of the agreement.
Take-or-pay
Contract
was valued using the Monte Carlo method, which is an income approach. If Xeroxs purchases
of Fiery and FFPS DFEs during each of four consecutive
12-month
periods is less than the minimum level defined for each purchase period, then Xerox shall make a
one-time
payment in an amount equal to a percentage of such shortfall compared to the minimum level, subject to the maximum payment amount agreed between the parties for each purchase period. Key assumptions include a risk-free discount rate of 4.98%, asset
volatility of 27%, and probability-adjusted DFE revenue. If Xeroxs purchases of Fiery and FFPS DFEs exceed the minimum purchase levels defined for each purchase period, then we will pay a percentage of such excess to Xerox.
Trade Name
was valued using the relief from royalty method, which is an income approach, with royalty rates based on various factors including an
analysis of market data, comparable trade name agreements, and historical advertising dollars spent supporting the trade name.
Existing
Technology
was valued using the relief from royalty method based on royalty rates for similar technologies. The value of existing technology is derived from consistent and predictable revenue, including the opportunity to cross-sell to existing
customers, and the avoidance of the costs associated with developing the technology. Revenue related to existing technology was adjusted in each forecast year to reflect the evolution of the technology and the cost of sustaining research and
development required to maintain the technology.
12
IPR&D
was valued using the relief from royalty method by estimating the cost to develop purchased
IPR&D into commercially viable products, estimating the net cash flows resulting from the sale of those products, and discounting the net cash flows back to their present value. Project schedules were 63% complete as of the acquisition date and
75% as of March 31, 2017 based on managements estimate of tasks completed to achieve technical and commercial feasibility. IPR&D is subject to amortization after product completion over the product life or otherwise assessed for
impairment in accordance with acquisition accounting guidance. Additional costs incurred to complete IPR&D after the acquisition are expensed.
The allocation of the FFPS purchase price to the assets acquired and liabilities assumed (in thousands) is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Weighted
average
useful life
|
|
|
Purchase
Price
Allocation
|
|
Purchasing agreement
|
|
|
10 years
|
|
|
$
|
8,800
|
|
Take-or-pay
contract
|
|
|
4 years
|
|
|
|
9,000
|
|
Existing technology
|
|
|
2 years
|
|
|
|
2,570
|
|
Trade name
|
|
|
5 years
|
|
|
|
1,020
|
|
IPR&D
|
|
|
|
|
|
|
70
|
|
Goodwill
|
|
|
|
|
|
|
7,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,580
|
|
Net tangible liabilities
|
|
|
|
|
|
|
(5,537
|
)
|
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
|
|
|
|
$
|
23,043
|
|
|
|
|
|
|
|
|
|
|
Pro forma results of operations for FFPS have not been presented because they are not material to our Condensed
Consolidated Results of Operations for the three months ended March 31, 2017 and 2016. Goodwill, which represents the excess of the purchase price over the net tangible and intangible assets acquired, that was generated by our acquisition of
FFPS is not deductible for tax purposes.
5. Investments and Fair Value Measurements
We invest our excess cash on deposit with major banks in money market, 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 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 has approximated 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 OCI, adjusted for deferred income taxes. The credit portion of any other-than-temporary impairment is included in net income. Realized gains and losses on sales of financial
instruments are recognized upon sale of the investments using the specific identification method.
Our
available-for-sale
short-term investments as of March 31, 2017 and December 31, 2016 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
|
Gross unrealized
gains
|
|
|
Gross unrealized
losses
|
|
|
Fair value
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and sponsored entities
|
|
$
|
70,895
|
|
|
$
|
38
|
|
|
$
|
(328
|
)
|
|
$
|
70,605
|
|
Corporate debt securities
|
|
|
197,310
|
|
|
|
133
|
|
|
|
(427
|
)
|
|
|
197,016
|
|
Municipal government
|
|
|
1,661
|
|
|
|
|
|
|
|
|
|
|
|
1,661
|
|
Asset-backed securities
|
|
|
21,789
|
|
|
|
71
|
|
|
|
(29
|
)
|
|
|
21,831
|
|
Mortgage-backed securities residential
|
|
|
1,291
|
|
|
|
2
|
|
|
|
(3
|
)
|
|
|
1,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
292,946
|
|
|
$
|
244
|
|
|
$
|
(787
|
)
|
|
$
|
292,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and sponsored entities
|
|
$
|
70,893
|
|
|
$
|
49
|
|
|
$
|
(348
|
)
|
|
$
|
70,594
|
|
Corporate debt securities
|
|
|
198,166
|
|
|
|
102
|
|
|
|
(621
|
)
|
|
|
197,647
|
|
Municipal government
|
|
|
1,278
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
1,277
|
|
Asset-backed securities
|
|
|
24,233
|
|
|
|
79
|
|
|
|
(17
|
)
|
|
|
24,295
|
|
Mortgage-backed securities residential
|
|
|
1,615
|
|
|
|
3
|
|
|
|
(3
|
)
|
|
|
1,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
296,185
|
|
|
$
|
233
|
|
|
$
|
(990
|
)
|
|
$
|
295,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
The fair value and duration that investments, including cash equivalents, have been in a gross unrealized
loss position as of March 31, 2017 and December 31, 2016 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
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and sponsored entities
|
|
$
|
43,964
|
|
|
$
|
(328
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
43,964
|
|
|
$
|
(328
|
)
|
Corporate debt securities
|
|
|
127,857
|
|
|
|
(417
|
)
|
|
|
6,190
|
|
|
|
(10
|
)
|
|
|
134,047
|
|
|
|
(427
|
)
|
Asset-backed securities
|
|
|
8,973
|
|
|
|
(22
|
)
|
|
|
2,742
|
|
|
|
(7
|
)
|
|
|
11,715
|
|
|
|
(29
|
)
|
Mortgage-backed securities residential
|
|
|
382
|
|
|
|
(1
|
)
|
|
|
129
|
|
|
|
(2
|
)
|
|
|
511
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
181,176
|
|
|
$
|
(768
|
)
|
|
$
|
9,061
|
|
|
$
|
(19
|
)
|
|
$
|
190,237
|
|
|
$
|
(787
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and sponsored entities
|
|
$
|
39,810
|
|
|
$
|
(348
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
39,810
|
|
|
$
|
(348
|
)
|
Corporate debt securities
|
|
|
133,382
|
|
|
|
(581
|
)
|
|
|
13,158
|
|
|
|
(40
|
)
|
|
|
146,540
|
|
|
|
(621
|
)
|
Municipal government
|
|
|
1,268
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
1,268
|
|
|
|
(1
|
)
|
Asset-backed securities
|
|
|
4,540
|
|
|
|
(7
|
)
|
|
|
4,611
|
|
|
|
(10
|
)
|
|
|
9,151
|
|
|
|
(17
|
)
|
Mortgage-backed securities residential
|
|
|
428
|
|
|
|
(1
|
)
|
|
|
153
|
|
|
|
(2
|
)
|
|
|
581
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
179,428
|
|
|
$
|
(938
|
)
|
|
$
|
17,922
|
|
|
$
|
(52
|
)
|
|
$
|
197,350
|
|
|
$
|
(990
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For fixed income securities that have unrealized losses as of March 31, 2017, we have determined that 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 March 31, 2017 were temporary in nature.
Amortized cost and estimated fair value of investments as of March 31, 2017 are summarized by maturity date as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
|
Fair value
|
|
Mature in less than one year
|
|
$
|
99,520
|
|
|
$
|
99,463
|
|
Mature in one to three years
|
|
|
193,426
|
|
|
|
192,940
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
292,946
|
|
|
$
|
292,403
|
|
|
|
|
|
|
|
|
|
|
Net realized gains of less than $0.1 million from sales of investments were recognized in interest income and other
income (expense), net, during the three months ended March 31, 2017 and 2016. Net unrealized losses of 0.5 and $0.8 million were included in OCI in the accompanying Condensed Consolidated Balance Sheets as of March 31, 2017 and
December 31, 2016, respectively.
Fair Value Measurements
ASC 820, Fair Value Measurements, identifies fair value as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a three-tier fair value hierarchy 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 instruments anticipated life or by comparison to similar
instruments; and
Level 3: Inputs that are unobservable or reflect managements best estimate of what market
participants would use in pricing the asset or liability at the measurement date. These include managements 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
per share and, as such, is priced at the expected market price.
14
We obtain the fair value of our Level 2 financial instruments from several third party asset managers,
custodian banks, and the 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 chose to 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.
Our investments and liabilities measured at fair value have been presented in accordance with the fair value hierarchy
specified in ASC 820 as of March 31, 2017 and December 31, 2016 in order of liquidity as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
other
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
9,585
|
|
|
$
|
9,585
|
|
|
$
|
|
|
|
$
|
|
|
U.S. Government and sponsored entities
|
|
|
70,605
|
|
|
|
51,143
|
|
|
|
19,462
|
|
|
|
|
|
Corporate debt securities
|
|
|
197,016
|
|
|
|
|
|
|
|
197,016
|
|
|
|
|
|
Municipal government
|
|
|
1,661
|
|
|
|
|
|
|
|
1,661
|
|
|
|
|
|
Asset-backed securities
|
|
|
21,831
|
|
|
|
|
|
|
|
21,767
|
|
|
|
64
|
|
Mortgage-backed securities residential
|
|
|
1,290
|
|
|
|
|
|
|
|
1,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
301,988
|
|
|
$
|
60,728
|
|
|
$
|
241,196
|
|
|
$
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration, current and noncurrent
|
|
$
|
58,192
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
58,192
|
|
Self-insurance
|
|
|
1,641
|
|
|
|
|
|
|
|
|
|
|
|
1,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
59,833
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
59,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
23,575
|
|
|
$
|
23,575
|
|
|
$
|
|
|
|
$
|
|
|
U.S. Government and sponsored entities
|
|
|
70,594
|
|
|
|
51,870
|
|
|
|
18,724
|
|
|
|
|
|
Corporate debt securities
|
|
|
197,647
|
|
|
|
|
|
|
|
197,647
|
|
|
|
|
|
Municipal government
|
|
|
1,277
|
|
|
|
|
|
|
|
1,277
|
|
|
|
|
|
Asset-backed securities
|
|
|
24,295
|
|
|
|
|
|
|
|
24,228
|
|
|
|
67
|
|
Mortgage-backed securities residential
|
|
|
1,615
|
|
|
|
|
|
|
|
1,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
319,003
|
|
|
$
|
75,445
|
|
|
$
|
243,491
|
|
|
$
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration, current and noncurrent
|
|
$
|
56,463
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
56,463
|
|
Self-insurance
|
|
|
1,542
|
|
|
|
|
|
|
|
|
|
|
|
1,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
58,005
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
58,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds consist of $9.6 and $23.6 million, which have been classified as cash equivalents as of
March 31, 2017 and December 31, 2016, 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 three months ended
March 31, 2017 and 2016.
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 two
asset-backed securities collateralized by mortgage loans, which have been fully reserved.
15
Liabilities for Contingent Consideration
Acquisition-related liabilities for contingent consideration (i.e., earnouts) are related to the purchase business combinations of Optitex Ltd. (Optitex) and Rialco Limited
(Rialco) in 2016; Shuttleworth Business Systems Limited and CDM Solutions Limited (collectively, Shuttleworth), CTI, and Reggiani in 2015; DiMS! organizing print BV (DIMS), DirectSmile GmbH
(DirectSmile), and SmartLinc, Inc. (SmartLinc) in 2014; Outback Software Pty. Ltd. doing business as Metrix Software (Metrix) and PrintLeader Software (PrintLeader) in 2013.
The fair value of these earnouts is estimated to be $58.2 and $56.5 million as of March 31, 2017 and December 31, 2016, respectively, by
applying the income approach in accordance with ASC
805-30-25-5,
Business Combinations. Key assumptions include risk-free
discount rates between 0.6% and 4.98% (Monte Carlo valuation method) and discount rates between 4.7% and 6.0% (probability-adjusted method), as well as probability-adjusted revenue and earnings before interest and taxes (EBIT) levels.
Probability-adjusted revenue, gross profit, operating profit, and EBIT are significant inputs that are not observable in the market, which ASC
820-10-35
refers to as
Level 3 inputs. These contingent liabilities have been reflected in the Condensed Consolidated Balance Sheet as of March 31, 2017 as current and noncurrent liabilities of $21.9 and $36.3 million, respectively.
The fair value of contingent consideration increased by $1.3 million primarily due to an increase in the Optitex earnout performance probability,
including $0.4 million of earnout interest accretion related to all acquisitions during the three months ended March 31, 2017. The fair value of contingent consideration increased by $6.8 million primarily due to increased Rialco,
Optitex, Reggiani, DirectSmile, and CTI earnout performance probabilities, partially offset by decreased DIMS and Shuttleworth earnout performance probabilities, and including $2.7 million of earnout interest accretion related to all acquisitions
during the year ended December 31, 2016. In accordance with ASC
805-30-35-1,
changes in the fair value of contingent
consideration subsequent to the acquisition date have been recognized in general and administrative expense.
Earnout payments during the
three months ended March 31, 2017 of $1.3 million are primarily related to the previously accrued Shuttleworth contingent consideration liability. Earnout payments during the year ended December 31, 2016 of $23.8, $3.6, $0.4, and
$0.2 million are primarily related to the previously accrued Reggiani, DirectSmile, SmartLinc, and Metrix contingent consideration liabilities, respectively.
Changes in the fair value of contingent consideration are summarized as follows (in thousands):
|
|
|
|
|
Fair value of contingent consideration at January 1, 2016
|
|
$
|
54,796
|
|
|
|
Fair value of Rialco contingent consideration at March 1, 2016
|
|
|
2,109
|
|
Fair value of Optitex contingent consideration at June 16, 2016
|
|
|
22,300
|
|
Changes in valuation
|
|
|
6,813
|
|
Payments
|
|
|
(28,111
|
)
|
Foreign currency adjustment
|
|
|
(1,444
|
)
|
|
|
|
|
|
Fair value of contingent consideration at December 31, 2016
|
|
$
|
56,463
|
|
|
|
|
|
|
|
|
Changes in valuation
|
|
$
|
1,283
|
|
Payments
|
|
|
(1,265
|
)
|
Foreign currency adjustment
|
|
|
1,711
|
|
|
|
|
|
|
Fair value of contingent consideration at March 31, 2017
|
|
$
|
58,192
|
|
|
|
|
|
|
Since the primary inputs to the fair value measurement of contingent consideration liability are the discount rate and
probability-adjusted revenue, we reviewed the sensitivity of the fair value measurement to changes in these inputs. We assessed the probability of achieving the revenue performance targets for contingent consideration associated with each
acquisition at percentage levels between 60% 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 $1.6 million or a decrease of $2.6 million
resulting in a corresponding adjustment to general and administrative expense. A change in the discount rate of one percentage point results in an increase in the fair value of contingent consideration of $0.2 million or a decrease of
$0.9 million. The potential undiscounted amount of future contingent consideration cash payments that we could be required to make related to our business acquisitions, beyond amounts currently accrued, is $11.9 million as of
March 31, 2017.
16
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 $165.5 and $161.8 million as of March 31, 2017 and December 31,
2016, respectively. The fair value of our derivative assets and liabilities that were designated for cash flow hedge accounting treatment having notional amounts of $3.3 and $3.2 million as of March 31, 2017 and December 31, 2016,
respectively, was not material.
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 approximate fair value of the Notes as of March 31, 2017 was approximately $377 million and was considered 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. A substantial portion of the market value of our Notes in excess of the outstanding principal amount relates to the conversion premium.
6. Convertible Senior Notes (Notes), Note Hedges, and Warrants
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 2019 (Notes). The Notes were sold to the initial purchasers for resale to qualified institutional buyers pursuant to Rule 144A under the Securities Act
of 1933, as amended. 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, commencing March 1, 2015. 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 March 31, 2017, none of the conditions listed below
allowing holders of the Notes to convert had been met.
Throughout the term of the Notes, the conversion rate may be adjusted upon the
occurrence of certain events. Holders of the Notes will not receive any cash payment representing accrued and unpaid interest upon conversion of a Note. Holders may convert their Notes only under the following circumstances:
|
|
|
if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading
days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
|
|
|
|
during the five business day period after any five consecutive trading day period (Notes Measurement Period) in which the trading
price (as the term is defined in the Indenture) per $1,000 principal amount of Notes for each trading day of such Notes Measurement Period was less than 98% of the product of the last reported stock price on such trading day and the conversion
rate on each such trading day;
|
|
|
|
upon the occurrence of specified corporate events; or
|
|
|
|
at any time on or after March 1, 2019 until the close of business on the second scheduled trading day immediately preceding the maturity date.
|
17
We separated the Notes into liability and equity components. The carrying amount of the liability component
was calculated by measuring the estimated fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair
value of the liability component from the face value of the Notes as a whole. 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 as long as it continues to meet the conditions for equity classification.
We allocated the total transaction costs incurred by the Notes issuance 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 consist of the following as of March 31, 2017 and December 31, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Liability component
|
|
$
|
345,000
|
|
|
$
|
345,000
|
|
Debt discount, net of amortization
|
|
|
(32,973
|
)
|
|
|
(36,115
|
)
|
Debt issuance costs, net of amortization
|
|
|
(4,027
|
)
|
|
|
(4,401
|
)
|
|
|
|
|
|
|
|
|
|
Net carrying amount
|
|
$
|
308,000
|
|
|
$
|
304,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 related to the Notes during the three months ended March 31, 2017 and 2016 was as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
0.75% coupon
|
|
$
|
640
|
|
|
$
|
640
|
|
Amortization of debt issuance costs
|
|
|
374
|
|
|
|
355
|
|
Amortization of debt discount
|
|
|
3,142
|
|
|
|
2,976
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,156
|
|
|
$
|
3,971
|
|
|
|
|
|
|
|
|
|
|
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 correspond 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 entered into warrant transactions (Warrants), whereby we sold warrants to
acquire shares of our common stock at a strike price of $68.86 per share. 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.
18
7. Income taxes
We recognized a tax benefit of $1.0 million and a provision of $0.3 million on pretax net income of $3.8 and $2.4 million during the three months ended March 31, 2017 and 2016,
respectively. The provisions for income taxes before discrete items reflected in the table below were $1.1 and $0.5 million during the three months ended March 31, 2017 and 2016, respectively. The increase in the provision for income taxes
before discrete items for the three months ended March 31, 2017, compared with the same period in the prior year, is primarily due to the increase in 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 of 35% include lower taxes on permanently reinvested foreign
earnings and the tax effects of stock-based compensation expense pursuant to ASC
718-740,
Stock Compensation Income Taxes, which are
non-deductible
for tax
purposes.
Our tax provision before discrete items is reconciled to our recorded provision for income taxes during the three months ended
March 31, 2017 and 2016 as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Provision for income taxes before discrete items
|
|
$
|
1.1
|
|
|
$
|
0.5
|
|
Interest related to unrecognized tax benefits
|
|
|
0.1
|
|
|
|
0.2
|
|
Benefit related to stock based compensation, including ESPP dispositions
|
|
|
(1.6
|
)
|
|
|
(0.1
|
)
|
Benefit from reassessment of taxes upon filing tax returns
|
|
|
(0.1
|
)
|
|
|
(0.3
|
)
|
Benefit from reassessment of taxes upon tax law change
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Benefit from) Provision for income taxes
|
|
$
|
(1.0
|
)
|
|
$
|
0.3
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2017 and December 31, 2016, gross unrecognized benefits that would affect the effective tax
rate if recognized were $32.3 and $32.0 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 $3.5 million in the next twelve months primarily due to the lapse of the statute of limitations for federal and state tax purposes. 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.
In accordance
with ASU
2013-11,
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, Similar Tax Loss, or Tax Credit Carryforward Exists, $20.4 million of gross unrecognized tax benefits
were offset against deferred tax assets as of March 31, 2017, and the remaining $11.9 million has been recorded as noncurrent income taxes payable.
We recognize potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. As of March 31, 2017 and December 31, 2016, we have accrued $0.6 and
$0.5 million, respectively, for potential payments of interest and penalties.
We are subject to examination by the Internal Revenue
Service (IRS) for the 2013-2015 tax years, state tax jurisdictions for the 2012-2015 tax years, the Netherlands tax authority for the 2012-2015 tax years, the Spanish tax authority for the 2012-2015 tax years, the Israel tax authority
for the 2011-2015 tax years, and the Italian tax authority for the 2012-2015 tax years.
8. 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 more fully explained in Note 5 Investments and Fair Value Measurements.
Lease Commitments and Contractual Obligations
As of March 31, 2017, we have leased certain of our current facilities under noncancellable operating lease agreements. We are required to pay property taxes, insurance, and nominal maintenance costs
for certain of these facilities and any increases over the base year of these expenses on the remainder of our facilities.
19
Assets Held for Sale
Management approved a plan to sell the office building located at 1340 Corporate Center Curve, Eagan, Minnesota, consisting of 43,682 square feet and 5.6 acres of land, then enter into a lease agreement
with the purchaser of the facility to lease 22,000 square feet under a
ten-year
lease agreement at market rental rates. The gain on the sale of the facility and land will be deferred over the lease term.
Assets held for sale of $3.8 million as of March 31, 2017 consist of $2.9 million net book value of the facility and $0.9 million of related land.
On April 13, 2017, we entered into an agreement with MSP Metro Operating Company, LLC (MSP), under which the facility, improvements, and land were sold for a total price of
$4.8 million. We simultaneously entered into a lease agreement with MSP to lease 22,000 square feet under a
ten-year
lease agreement for minimum lease payments of $3.3 million. The transaction is
expected to close within six months, upon completion of due diligence.
Off-Balance
Sheet Financing
- Lease Arrangements
On August 26, 2016, we entered into a lease agreement and have accounted for a lease term of 48.5 years,
inclusive of two renewal options of 5.0 and 3.5 years, with the City of Manchester to lease 16.9 acres adjacent to the Manchester Regional Airport. The land is subleased to Bank of Tokyo Mitsubishi UFJ Leasing & Finance LLC
(BTMU) during the term of the lease related to the manufacturing facility that is being constructed on the site, which is described below. Minimum lease payments are $13.1 million during the 48.5 year term of the land lease,
excluding four months of the land lease that is financed into the manufacturing facility lease.
On August 26, 2016, we entered into a
six-year
lease with BTMU whereby a 225,000 square foot manufacturing and warehouse facility is under construction related to our super-wide format industrial digital inkjet printer business in the Industrial Inkjet
operating segment at a projected cost of $40 million and a construction period of 18 months. Minimum lease payments during the initial
six-year
term are $1.8 million. Upon completion of the initial
term, we have the option to renew the lease, purchase the facility, or return the facility to BTMU 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 with respect to funds expended by BTMU as of March 31, 2017. We are treated as the owner of the facility for
federal income tax purposes.
The funds pledged under the lease represent 115% of the total expenditures made by BTMU through March 31,
2017. The funds are invested in $6.2 and $4.5 million of U.S. government securities and cash equivalents, respectively, with a third party trustee and will be restricted during the construction period. Upon completion of construction, the funds
will be released as cash and cash equivalents. The portion of released funds that represents 100% of the total expenditures made by BTMU will be deposited with BTMU and restricted as collateral until the end of the underlying lease period.
The funds pledged as collateral are invested in U.S. government securities and cash equivalents as of March 31, 2017, and are classified
as Level 1 in the fair value hierarchy as more fully defined in Note 5Investments and Fair Value Measurements. Net unrealized gains of less than $0.1 million were included in OCI in the accompanying Condensed Consolidated Balance
Sheet as of March 31, 2017.
We have evaluated the BTMU lease agreement to determine if the arrangement qualifies as a variable interest
entity (VIE) under ASC
810-10,
Consolidation. We have determined that the lease agreement does not qualify as a VIE, and as such, we are not required to consolidate the VIE in our condensed
consolidated financial statements.
Legal Proceedings
We may be involved, from time to time, 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 March 31, 2017, we are subject to the matter discussed below.
20
Matan Digital Printing (MDG) Matter
EFI acquired Matan Digital Printers (Matan) in 2015 from sellers (the 2015 Sellers) that 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 EFIs acquisition. The 2015
Sellers dispute this claim and have agreed to indemnify EFI against the 2001 Sellers claim.
Although we are fully indemnified and we do
not believe that it is probable that we will incur a loss, it is reasonably possible that our financial statements could be materially affected by the unfavorable resolution of this matter. Accordingly, it is reasonably possible that 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.
Other Matters
As of March 31, 2017, we were subject to various other claims, lawsuits, investigations, and proceedings in addition to the matter 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 managements attention and the incurrence of significant expenses.
9. Segment Information and Geographic Data
Operating segment information is required to be
presented based on the internal reporting used by the chief operating decision making group (CODM) to allocate resources and evaluate operating segment performance. Our CODM is comprised of our Chief Executive Officer and Chief Financial
Officer. The CODM group is focused on assessment and resource allocation among the Industrial Inkjet, Productivity Software, and Fiery operating segments.
Our operating segments are integrated through their reporting and operating structures, shared technology and practices, shared sales and marketing, and combined production facilities. Our enterprise
management processes use financial information that is closely aligned with our three operating segments at the gross profit level. Relevant discrete financial information is prepared at the gross profit level for each of our three operating
segments, which is used by the CODM to allocate resources and assess the performance of each operating segment.
We classify our revenue,
operating segment profit (i.e., gross profit), assets, and liabilities in accordance with our operating segments as follows:
Industrial
Inkjet,
which consists of our VUTEk and Matan super-wide and wide format display graphics, Reggiani textile, Jetrion label and packaging, and Cretaprint ceramic tile decoration and construction material industrial digital inkjet printers;
digital ultra-violet (UV) curable, light-emitting diode (LED) curable, ceramic, water-based, and thermoforming ink, as well as a variety of textile ink including dye sublimation, pigmented, reactive dye, acid dye, pure
disperse dye, and water-based dispersed printing ink; 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,
which 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; (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)
Mid-market
Print Suite,
with Pace at its core, for medium size print businesses; (vi)
Quick Print Suite,
with PrintSmith 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.
21
Fiery,
which consists of DFEs, including the recently acquired FFPS DFE from Xerox, that
transform digital copiers and printers into high performance networked printing devices for the office, industrial, and commercial 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 solutions.
Our CODM evaluates the performance of our operating segments based on net sales and gross profit. Gross profit for each operating segment includes revenue from sales to third parties and related cost of
revenue attributable to the operating segment. Cost of revenue for each operating segment excludes certain expenses managed outside the operating segments consisting primarily of stock-based compensation expense.
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.
Operating segment
profit (i.e., gross profit), excluding stock-based compensation expense and acquisition-related inventory charges, during the three months ended March 31, 2017 and 2016 is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Industrial Inkjet
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
123,263
|
|
|
$
|
125,798
|
|
Gross profit
|
|
|
49,070
|
|
|
|
42,450
|
|
Gross profit percentages
|
|
|
39.8
|
%
|
|
|
33.7
|
%
|
Productivity Software
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
35,058
|
|
|
$
|
32,540
|
|
Gross profit
|
|
|
25,596
|
|
|
|
23,694
|
|
Gross profit percentages
|
|
|
73.0
|
%
|
|
|
72.8
|
%
|
Fiery
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
70,370
|
|
|
$
|
75,795
|
|
Gross profit
|
|
|
49,698
|
|
|
|
53,264
|
|
Gross profit percentages
|
|
|
70.6
|
%
|
|
|
70.3
|
%
|
Operating segment profit (i.e., gross profit) is reconciled to our Condensed Consolidated Statements of Operations during
the three months ended March 31, 2017 and 2016 as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Segment gross profit
|
|
$
|
124,364
|
|
|
$
|
119,408
|
|
Stock-based compensation expense
|
|
|
(834
|
)
|
|
|
(697
|
)
|
Other items excluded from segment profit
|
|
|
|
|
|
|
(314
|
)
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
123,530
|
|
|
$
|
118,397
|
|
|
|
|
|
|
|
|
|
|
The Fiery gross profit percentage is impacted by $1.0 million charged to cost of revenue, which reflects the FFPS
cost of manufacturing plus a portion of the expected profit margin. Inventory acquired in the acquisition of FFPS is required to be recorded at fair value rather than historical cost in accordance with ASC 805. This amount is not included in the
financial information regularly reviewed by the CODM as this acquisition-related charge is not indicative of the gross margin trends in the FFPS business. Excluding this charge, the Fiery gross profit percentage would be 72.1%.
22
Tangible and intangible assets, net of liabilities, are summarized by operating segment as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
Industrial
Inkjet
|
|
|
Productivity
Software
|
|
|
Fiery
|
|
|
Corporate
and
Unallocated
Net
Assets
|
|
|
Total
|
|
Goodwill
|
|
$
|
143,472
|
|
|
$
|
157,721
|
|
|
$
|
70,481
|
|
|
$
|
|
|
|
$
|
371,674
|
|
Identified intangible assets, net
|
|
|
80,277
|
|
|
|
35,557
|
|
|
|
20,624
|
|
|
|
|
|
|
|
136,458
|
|
Tangible assets, net of liabilities
|
|
|
188,954
|
|
|
|
(41,270
|
)
|
|
|
8,465
|
|
|
|
168,378
|
|
|
|
324,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net tangible and intangible assets
|
|
$
|
412,703
|
|
|
$
|
152,008
|
|
|
$
|
99,570
|
|
|
$
|
168,378
|
|
|
$
|
832,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
141,068
|
|
|
$
|
155,475
|
|
|
$
|
63,298
|
|
|
$
|
|
|
|
$
|
359,841
|
|
Identified intangible assets, net
|
|
|
84,465
|
|
|
|
38,440
|
|
|
|
92
|
|
|
|
|
|
|
|
122,997
|
|
Tangible assets, net of liabilities
|
|
|
156,202
|
|
|
|
(27,689
|
)
|
|
|
33,325
|
|
|
|
183,156
|
|
|
|
344,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net tangible and intangible assets
|
|
$
|
381,735
|
|
|
$
|
166,226
|
|
|
$
|
96,715
|
|
|
$
|
183,156
|
|
|
$
|
827,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and unallocated assets consist of cash and cash equivalents, short-term investments, restricted investments and
cash equivalents, corporate headquarters facility, convertible notes, imputed financing obligation, income taxes receivable, and income taxes payable.
Geographic Regions
Our revenue originates in the U.S., China, the Netherlands, Germany,
Italy, France, the U.K., Spain, Israel, Brazil, Australia, and New Zealand. We report revenue by geographic region based on
ship-to
destination. Shipments to some of our significant printer
manufacturer/distributor customers are made to centralized purchasing and manufacturing locations, which in turn sell through to other locations. As a result of these factors, we believe that sales to certain geographic locations might be higher or
lower, as the ultimate destinations are difficult to ascertain.
Our revenue by
ship-to
destination
during the three months ended March 31, 2017 and 2016 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Americas
|
|
$
|
109,895
|
|
|
$
|
120,266
|
|
Europe, Middle East, and Africa (EMEA)
|
|
|
88,033
|
|
|
|
83,583
|
|
Asia Pacific (APAC)
|
|
|
30,763
|
|
|
|
30,284
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
228,691
|
|
|
$
|
234,133
|
|
|
|
|
|
|
|
|
|
|
10. 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 the 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 market 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. ASC
815, Derivatives and Hedging, requires the fair value of all derivative instruments, including those embedded in other contracts, to be recorded as assets or liabilities in our Condensed Consolidated Balance Sheet. 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, Australia, New Zealand, and Canada, and to
non-U.S.
dollar-denominated operating
expenses in Europe, India, Japan, the U.K., China, Israel, Brazil, and Australia. We hedge our operating expense cash flow exposure in Indian rupees. We hedge balance sheet remeasurement exposure associated with British pound sterling, Israeli
shekel, Australian dollar, New Zealand dollar, Japanese yen, Chinese renminbi, and Euro-denominated intercompany balances; Brazilian real, British pound sterling, Australian dollar, Canadian dollar, Israeli shekel, and Euro-denominated trade
receivables; and British pound sterling, Indian rupee, and Euro-denominated-denominated net monetary assets.
23
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 (i.e., operating expense exposure in Indian rupees;
the collection of trade receivables denominated in currencies other than their functional currency and the settlement of intercompany balances denominated in currencies other than their functional currency). We do not believe there is significant
risk of loss from
non-performance
by the counterparty associated with these instruments because, by policy, we 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
Foreign currency derivative contracts with notional amounts of $3.3 million and $3.2 million have been designated as cash flow hedges of our
Indian rupee operating expense exposure at March 31, 2017 and December 31, 2016, respectively. The fair value of the net assets (liabilities) related to these cash flow hedges are not material. The changes in fair value of these contracts
are reported as a component of OCI 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 derivatives gain or loss were included in the assessment of hedge effectiveness.
Balance Sheet Hedges
Forward contracts not designated for hedge accounting treatment with
notional amounts of $162.2 and $158.7 million are used to hedge foreign currency balance sheet exposures at March 31, 2017 and December 31, 2016, respectively. They 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 (expense), net, in the same period as the remeasurement gain or loss of the related foreign
currency denominated assets and liabilities. Forward contracts not designated as hedging instruments consist of hedges of British pound sterling, Israeli shekel, Australian dollar, New Zealand dollar, Japanese yen, Chinese renminbi, and
Euro-denominated intercompany balances with notional amounts of $87.6 and $90.7 million; hedges of Brazilian real, British pound sterling, Australian dollar, Canadian dollar, Israeli shekel, and Euro-denominated trade receivables with notional
amounts of $49.0 and $39.8 million; and hedges of British pounds sterling, Indian rupee, and Euro-denominated other net monetary assets with notional amounts of $25.6 and $28.2 million at March 31, 2017 and December 31, 2016,
respectively.
11. Restructuring and Other
During the three months ended March 31, 2017 and 2016, cost reduction actions were taken to lower our operating expense run rate as we analyze and
re-align
our
cost structure following our business acquisitions. These charges primarily relate to cost reduction actions undertaken to integrate recently acquired businesses, consolidate facilities, and lower our operating expense run rate. Restructuring and
other consists primarily of restructuring, severance, retention, facility downsizing and relocation, and acquisition integration expenses. Our restructuring and other plans are accounted for in accordance with ASC 420, Exit or Disposal Cost
Obligations, ASC 712, Compensation
Non-Retirement
Postemployment Benefits, and ASC 820.
Restructuring and other costs were $0.9 and $2.7 million during the three months ended March 31, 2017 and 2016, respectively. Restructuring and
other costs include severance charges of $0.4 and $2.5 million related to reductions in head count of 18 and 71 during the three months ended March 31, 2017 and 2016, respectively. Severance costs include severance payments, related
employee benefits, outplacement fees, and employee relocation costs.
Facilities relocation and downsizing expenses were $0.1 million
during the three months ended March 31, 2017 and 2016, primarily related to the relocation of certain manufacturing and administrative locations due to reduced space requirements. Integration expenses of $0.5 and $0.1 million during the
three months ended March 31, 2017 and 2016, respectively, were required to integrate our business acquisitions.
Restructuring and other
reserve activities during the three months ended March 31, 2017 and 2016 are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
Reserve balance at January 1,
|
|
$
|
1,824
|
|
|
$
|
3,019
|
|
Restructuring charges
|
|
|
285
|
|
|
|
1,846
|
|
Other charges
|
|
|
633
|
|
|
|
868
|
|
Non-cash
restructuring and other
|
|
|
(63
|
)
|
|
|
(403
|
)
|
Payments
|
|
|
(684
|
)
|
|
|
(1,828
|
)
|
|
|
|
|
|
|
|
|
|
Reserve balance at March 31,
|
|
$
|
1,995
|
|
|
$
|
3,502
|
|
|
|
|
|
|
|
|
|
|
24
12. Stock-based Compensation
We account for stock-based payment awards in accordance with ASC 718, Stock Compensation, which requires the measurement and recognition of compensation expense for all equity awards granted to our
employees and directors, including RSUs, ESPP purchase rights, and employee stock options related to all stock-based compensation plans based on the fair value of such awards on the date of grant. We amortize stock-based compensation cost on a
graded vesting basis over the vesting period reduced by forfeitures, after assessing the probability of achieving the requisite performance criteria with respect to performance-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.
Stock-based
compensation expense related to stock options, ESPP purchase rights, and RSUs during the three months ended March 31, 2017 and 2016 is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
RSUs
|
|
$
|
9,237
|
|
|
$
|
10,563
|
|
ESPP purchase rights
|
|
|
1,043
|
|
|
|
766
|
|
Employee stock options
|
|
|
|
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
|
10,280
|
|
|
|
11,284
|
|
Income tax benefit
|
|
|
(2,873
|
)
|
|
|
(2,659
|
)
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense, net of tax
|
|
$
|
7,407
|
|
|
$
|
8,625
|
|
|
|
|
|
|
|
|
|
|
Valuation Assumptions for Stock Options and ESPP Purchase Rights
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.
The BSM model determines the fair value of stock-based payment awards based on
the stock price on the date of grant and is affected by assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards,
expected term, interest rates, and actual and projected employee stock option exercise behavior. Expected volatility is based on the historical volatility of our stock over a preceding period commensurate with the expected term of the option. The
expected term is based upon managements consideration of the historical life, vesting period, and contractual period of the options granted. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield
curve in effect at the time of grant. Expected dividend yield was not considered in the option pricing formula since we do not pay dividends and have no current plans to do so in the future.
Stock options were not granted during the three months ended March 31, 2017 and 2016. The estimated weighted average fair value per share of ESPP purchase rights issued and the underlying weighted
average assumptions for the three months ended March 31, 2017 and 2016 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Weighted average fair value per share
|
|
$
|
12.03
|
|
|
$
|
10.39
|
|
Expected volatility
|
|
|
24% - 28
|
%
|
|
|
22% - 25
|
%
|
Risk-free interest rate
|
|
|
0.7% - 1.2
|
%
|
|
|
0.5% - 0.8
|
%
|
Expected term (in years)
|
|
|
0.5 - 2.0
|
|
|
|
0.5 - 2.0
|
|
Stock options outstanding and exercisable, including performance-based and market-based options, as of March 31, 2017
and activity during the three months ended March 31, 2017 are summarized below (in thousands, except weighted average exercise price and remaining contractual term):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
outstanding
|
|
|
Weighted
average
exercise price
|
|
|
Weighted
average
remaining
contractual
term (years)
|
|
|
Aggregate
intrinsic
value
|
|
Options outstanding at January 1, 2017
|
|
|
315
|
|
|
$
|
13.86
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(63
|
)
|
|
|
12.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at March 31, 2017
|
|
|
252
|
|
|
$
|
14.26
|
|
|
|
1.40
|
|
|
$
|
8,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest at March 31, 2017
|
|
|
252
|
|
|
$
|
14.26
|
|
|
|
1.40
|
|
|
$
|
8,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at March 31, 2017
|
|
|
252
|
|
|
$
|
14.26
|
|
|
|
1.40
|
|
|
$
|
8,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
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 fiscal period and the option exercise price multiplied by the number of
in-the-money
stock options outstanding, vested
and expected to vest, and exercisable at March 31, 2017.
Non-vested
RSUs as of March 31,
2017 and activity during the three months ended March 31, 2017 are 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, 2017
|
|
|
795
|
|
|
$
|
43.79
|
|
|
|
1,265
|
|
|
$
|
42.64
|
|
|
|
23
|
|
|
$
|
33.16
|
|
|
|
2,083
|
|
|
$
|
43.34
|
|
Granted
|
|
|
53
|
|
|
|
45.96
|
|
|
|
358
|
|
|
|
46.95
|
|
|
|
|
|
|
|
|
|
|
|
411
|
|
|
|
46.83
|
|
Vested
|
|
|
(56
|
)
|
|
|
42.48
|
|
|
|
(235
|
)
|
|
|
40.64
|
|
|
|
|
|
|
|
|
|
|
|
(291
|
)
|
|
|
40.99
|
|
Forfeited
|
|
|
(14
|
)
|
|
|
44.12
|
|
|
|
(367
|
)
|
|
|
40.61
|
|
|
|
|
|
|
|
|
|
|
|
(381
|
)
|
|
|
40.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested
at March 31, 2017
|
|
|
778
|
|
|
$
|
44.03
|
|
|
|
1,021
|
|
|
$
|
45.34
|
|
|
|
23
|
|
|
$
|
33.16
|
|
|
|
1,822
|
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$
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44.62
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Performance-based and Market-based RSUs and Stock Options
Performance-based RSUs that vested based on financial results are included in the period that the performance and related service criteria were met. The grant date fair value of RSUs vested during the
three months ended March 31 2017 was $11.9 million. The aggregate intrinsic value at March 31, 2017 for RSUs expected to vest was $59.4 million and the remaining weighted average vesting period was 1.13 years. Aggregate intrinsic
value for RSUs vested and expected to vest represents the closing price per share of our common stock on the last trading day of the fiscal period, multiplied by the number of RSUs vested and expected to vest as of March 31, 2017. RSUs expected
to vest represent time-based RSUs unvested and outstanding at March 31, 2017, and performance-based RSUs for which the requisite service period has not been rendered, but are expected to vest based on the achievement of performance conditions.
Performance-based and market-based stock options were not granted during the three months ended March 31, 2017. We use the BSM option
pricing model to value performance-based RSUs. The weighted average grant date fair value per share of performance-based RSUs granted and the assumptions used to estimate grant date fair value during the three months ended March 31, 2017 and
2016 are as follows:
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Performance-based
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RSUs
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Short-term
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Long-term
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Three months ended March 31, 2017 Grants
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Grant date fair value per share
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$
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47.28
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$
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45.89
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Service period (years)
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1.0
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2.0 - 3.0
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Three months ended March 31, 2016 Grants
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Grant date fair value per share
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$
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39.47
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$
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36.78
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Service period (years)
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1.0
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3.0
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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 defined as operating income determined in accordance with GAAP, adjusted to remove the impact of certain expenses and gains.
Non-GAAP
earnings per share is defined as net income determined in accordance with GAAP, adjusted to remove the impact of certain expenses and gains, and the related tax effects, divided by the weighted average number of common shares and dilutive potential
common shares outstanding during the period as more fully defined in Note 2 Earnings Per Share of the Notes to Consolidated Financial Statements.
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
awards was determined based on review of the actual results achieved thus far by each business unit compared with the operating plan during the pertinent service period as well as the overall strength of the business unit. Stock-based compensation
expense was adjusted based on this probability assessment. As actual results are achieved during the service period, the probability assessment is updated and stock-based compensation expense adjusted accordingly.
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Market-based awards vest when our average closing stock price exceeds defined multiples of the closing stock
price on a specified date for 90 consecutive trading days. If these multiples were not achieved by another specified date, the awards are forfeited. The grant date fair value is being 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.
13. Common Stock Repurchase Programs
On
November 9, 2015, the board of directors approved the repurchase of $150 million of outstanding common stock commencing January 1, 2016. This authorization expires December 31, 2018. Under this publicly announced plan, we
repurchased 0.4 and 0.5 million shares for an aggregate purchase price of $17.5 and $20.0 million during the three months ended March 31, 2017 and 2016, respectively.
Our employees have the option to surrender shares of common stock to satisfy their tax withholding obligations that arise on the vesting of RSUs. In connection with stock option exercises, certain
employees can surrender shares to satisfy the exercise price of certain stock options and any tax withholding obligations incurred in connection with such exercises. Employees surrendered 0.1 million shares for an aggregate purchase price of
$5.0 and $3.1 million during the three months ended March 31, 2017 and 2016, respectively.
These repurchased shares reduce shares
outstanding and are recorded as treasury stock under the cost method thereby reducing stockholders equity by the cost of the repurchased shares. Our buyback program is limited by SEC regulations and is subject to compliance with our insider
trading policy.
14. Accounts Receivable
Financing Receivables
ASC 310, Receivables, requires disclosure regarding the credit
quality of our financing receivables and allowance for credit losses including disclosure of credit quality indicators, past due information, and modifications of our financing receivables. Our financing receivables of $32.3 and $31.0 million
consisting of $19.7 and $17.8 million of sales-type lease receivables, included within other current assets and other assets at March 31, 2017 and December 31, 2016, respectively, and $12.6 and $13.2 million of trade receivables
having an original contractual maturity in excess of one year, included within accounts receivable, net of allowance, at March 31, 2017 and December 31, 2016, respectively. The trade receivables of $12.6 and $13.2 million having an
original total contractual maturity in excess of one year at March 31, 2017 and December 31, 2016, include $6.4 and $7.1 million, respectively, which are scheduled to be received in less than one year. The credit quality of financing
receivables is evaluated on the same basis as trade receivables. We do not have material past due financing receivables.
Accounts
Receivable Sales Arrangements
In accordance with ASC
860-20,
Transfers and Servicing, trade
receivables are derecognized from our Condensed Consolidated Balance Sheet when sold to third parties upon determining that such receivables are presumptively beyond the reach of creditors in a bankruptcy proceeding. The 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 at
March 31, 2017 and December 31, 2016.
We have facilities in the U.S. and Italy 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, which are subject to a servicing obligation. Trade
receivables sold under these facilities were $4.2 and $19.8 million during the three months ended March 31, 2017 and the year ended December 31, 2016, respectively, which approximates the cash received.
We have facilities in Spain and Italy 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 with payment due dates of less than one year, which are secured by international letters of credit. Trade receivables sold under these facilities were $1.0 and $3.5 million
during the three months ended March 31, 2017 and the year ended December 31, 2016, respectively, 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.
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