Notes to Condensed Consolidated Financial Statements
Note 1
.
Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements (“Condensed Consolidated Financial Statements”) include the accounts of Electronics For Imaging, Inc. and its subsidiaries (“EFI” or “Company”). All intercompany accounts and transactions have been eliminated in consolidation.
These condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("U.S.") and (“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, 2018
(the “
2018
Form 10-K”), except for the adoption of ASC 842 as described below. These condensed consolidated financial statements and accompanying notes should be read in conjunction with our annual consolidated financial statements and notes included in the
2018
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 (loss), and cash flows for the interim periods presented. Our results for the interim periods are not necessarily indicative of results to be expected for the entire year.
On April 14, 2019, the Company entered into a definitive agreement and plan of merger to be acquired by an affiliate of Siris Capital Group, LLC (“Siris”). See
Note 2
–
Business Acquisitions
for further details.
Recently Adopted Accounting Pronouncements
Leases
. On January 1, 2019, we adopted FASB ASU No. 2016-02,
Leases
(ASC 842), as amended, which supersedes the lease accounting guidance under Topic 840, and generally requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use ("ROU") assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements. We adopted the new guidance using the modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application and not restating comparative periods. The standard had a material impact on our Condensed Consolidated Balance Sheet, but did not materially affect our Condensed Consolidated Statements of Operations or of Cash Flows. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases.
We elected the package of practical expedients permitted under the transition guidance, which allowed us to carryforward our historical lease classification, our assessment on whether a contract was or contains a lease, and our initial direct costs for leases that existed prior to January 1, 2019. We also elected to combine our lease and non-lease components and to not recognize ROU assets and lease liabilities for leases with an initial term of 12 months or less. We elected not to adopt the hindsight practical expedient when determining lease term and assessing impairment of ROU assets.
We determine if an arrangement is a lease at inception. We evaluate classification of leases at commencement and as necessary at modification. As of March 31, 2019, we did not have any finance leases as lessee. Operating leases are included in operating lease right-of-use assets, net, operating lease liabilities – current, and operating lease liabilities – noncurrent on the Condensed Consolidated Balance Sheets. ROU assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease.
Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at commencement in determining the present value of lease payments. The ROU asset also includes any lease payments made prior to commencement and is recorded net of any lease incentives received. Variable lease payments are expensed as incurred and are not included within the ROU asset and lease liability calculation. Variable lease payments primarily include reimbursements of costs incurred by lessors for common area maintenance, utilities, and fuel and vehicle maintenance charges. Our leases may include options to extend or terminate the lease. The lease terms are determined using the noncancellable period, including any rent-free periods provided by the lessor, and reflect options to extend or terminate the lease when it is reasonably certain that we will exercise that option. At lease inception, and in subsequent periods as necessary, we estimate the lease term based on an assessment of extension and termination options that are reasonably certain to be exercised. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
We do not separate non-lease components from lease components for all underlying classes of assets. In addition, the Company does not recognize ROU assets and lease liabilities for short-term leases, which have a lease term of twelve months or less and do not include an option to purchase the underlying asset that we are reasonably certain to exercise.
Upon adoption, we recorded a cumulative effect adjustment to retained earnings of
$0.7 million
, net of a tax adjustment of
$0.1 million
, related to immaterial leases that we did not recognize in the Consolidated Statements of Operations on a straight-line basis under ASC 840. See
Note 11
–
Leases
,
for additional disclosures required upon adopting the standard.
The cumulative effect of the adjustments made to the Company's Condensed Consolidated Balance Sheet as of the adoption date is detailed as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Adjustments to Adopt ASC 842
|
|
January 1, 2019
|
|
|
As Reported
|
|
|
As Adjusted
|
|
Assets:
|
|
|
|
|
|
|
Other current assets
|
$
|
44,623
|
|
|
$
|
(1,626
|
)
|
|
$
|
42,997
|
|
|
Operating lease right-of-use assets
|
—
|
|
|
36,863
|
|
|
36,863
|
|
|
Total assets
|
1,499,034
|
|
|
35,237
|
|
|
1,534,271
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
Accrued and other liabilities
|
79,323
|
|
|
(2,000
|
)
|
|
77,323
|
|
|
Operating lease liabilities – current
|
—
|
|
|
8,720
|
|
|
8,720
|
|
|
Operating lease liabilities – noncurrent
|
—
|
|
|
29,236
|
|
|
29,236
|
|
|
Total liabilities
|
772,926
|
|
|
35,956
|
|
|
808,882
|
|
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
|
Retained earnings
|
406,247
|
|
|
(719
|
)
|
|
405,528
|
|
|
Total stockholders' equity
|
726,108
|
|
|
(719
|
)
|
|
725,389
|
|
Significant Accounting Policies
There have been no other material changes in our significant accounting policies, as compared to the significant accounting policies described in our
2018
Form 10-K.
Note 2
.
Business Acquisitions
Proposed Acquisition
On April 14, 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with East Private Holdings II, LLC, (“Parent”) and East Merger Sub, Inc., a wholly owned subsidiary of Parent (“Merger Sub”), providing for the merger of Merger Sub with and into the Company (the “Merger”), with the Company continuing as the surviving company of the merger and a wholly owned subsidiary of Parent. Parent and Merger Sub are affiliates of the Siris Funds (as defined below). The all-cash transaction is valued at approximately
$1.7 billion
.
Subject to the terms and conditions set forth in the Merger Agreement, each share of the Company’s common stock outstanding immediately prior to the Merger will automatically be cancelled, extinguished and converted into the right to receive
$37.00
per share in cash, without interest, and less any applicable withholding taxes (the “Merger Consideration”), (other than shares held by (a) the Company as treasury stock, (b) owned by the Parent or Merger Sub, (c) owned by any direct or wholly owned subsidiary of the Company, or (d) stockholders of the Company who properly exercised their appraisal rights under the General Corporation Law of the state of Delaware.
In addition, at or immediately prior to the effective time of the Merger, each of the Company’s outstanding restricted stock units that is subject to time-based vesting requirements only (“RSU”) and each of the Company’s outstanding restricted stock units that is subject to both time-based and performance-based vesting requirements (“PSU”) will be treated, as follows: (1) each RSU that is currently
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
outstanding as of immediately prior to the effective time of the Merger that is vested or scheduled to vest within 12 months after the closing of the Merger (the “Closing”) will be converted into the right to receive the Merger Consideration promptly following the Closing; (2) each other RSU will be assumed and converted into the right to the Merger Consideration, subject to applicable tax withholding, in accordance with its existing vesting schedule and applicable terms and conditions immediately prior to the effective time of the Merger, including the holder’s continued employment or service through the applicable vesting date; (3) each PSU granted pursuant to the Company’s 2019 annual bonus program will be assumed and converted into the right to receive the Merger Consideration, subject to applicable tax withholding, in accordance with its existing vesting schedule and applicable terms and conditions immediately prior to the effective time of the Merger, including achievement of the applicable performance goals and the holder’s continued employment or service through the applicable vesting date; (4) each other PSU (“LTIP PSU”), to the extent it would vest if the target level of performance established for the award had been attained, will be assumed and converted into a right to receive the Merger Consideration, subject to applicable tax withholding, in accordance with the time-based vesting schedule for the award (but in no event earlier than the end of the applicable performance period) and the applicable terms and conditions immediately prior to the effective time of the Merger (other than the performance-based vesting conditions), including the holder’s continued employment through the applicable vesting date; and (5) each LTIP PSU, to the extent eligible to vest only if the target level of performance under the award was exceeded and held by an individual employed by the Company or one of its subsidiaries at the effective time of the Merger, will be assumed and converted into the right to receive the Merger Consideration, subject to applicable tax withholding, in accordance with the applicable terms and conditions immediately prior to the effective time of the Merger, including the time-based and performance-based vesting requirements applicable to the award, and any such LTIP PSU held by an individual not employed by the Company or one of its subsidiaries at the effective time of the Merger will be cancelled without payment at the effective time of the Merger. Any PSUs as to which the applicable performance period has ended prior to the effective time of the Merger and that remain subject only to time-based vesting conditions will be treated as RSUs as described above. In addition, at or immediately prior to the effective time of the Merger, each of the Company’s stock options (whether vested or unvested) will be cancelled and converted into the right to receive, for each of the Company’s common stock subject to the option, the Merger Consideration less the per-share exercise price of the option (with any option that has a per-share exercise price equal to or greater than the Merger Consideration being cancelled without payment at the effective time of the Merger), subject to applicable tax withholding. In each case, any existing provisions for accelerated vesting of Company equity awards in connection with the transaction or in connection with a severance event under an employment or similar agreement will continue in effect in accordance with their terms.
Completion of the Merger is subject to the satisfaction of several conditions, including: (i) adoption of the Merger Agreement by the requisite vote of the Company’s stockholders; (ii) the expiration or termination of any applicable waiting period relating to the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"); and (iii) certain other customary conditions. On May 3, 2019, the U. S. Federal Trade Commission granted early termination of the waiting period under the HSR Act.
During the period beginning on the date of the Merger Agreement until 12:01 am New York time on May 29, 2019 (the “Go-Shop Period), the Company may solicit alternative acquisition proposals from third parties and will have the right to terminate the Merger Agreement to enter into a superior proposal subject to the terms and conditions of the Merger Agreement. If the Company terminates the Merger Agreement for the purpose of entering into an agreement in respect of a superior proposal during the Go-Shop Period, the Company must pay a termination fee of
$25.4 million
to Parent. If there is a superior proposal, the Merger Agreement provides Parent with a customary right to attempt to match a superior proposal.
The Merger Agreement contains certain termination rights for each of the Company and Parent, and further provides that, upon termination of the Merger Agreement, under specified circumstances, the Company may be required to pay Parent a termination fee of either
$25.4 million
as described above, or
$59.2 million
or the Parent may be required to pay the Company a reverse termination fee of
$109.9 million
.
Parent has obtained (i) equity financing commitments from Siris Partners IV, L.P. and Siris Partners IV Parallel, L.P. (collectively, the “Siris Funds”), and (ii) debt financing commitments from certain financial institutions for the purpose of, among other things, funding the aggregate Merger Consideration. Pursuant to a limited guarantee delivered by the Siris Funds to the Company, the Siris Funds have also agreed to guarantee Parent’s obligation to pay any termination fee or damages awards to the Company and to reimburse the Company with respect to certain expenses in connection with the Merger, in each case as required by the Merger Agreement.
The Merger Agreement has been adopted by the board of directors of the Company, and the board of directors of the Company has recommended that the stockholders of the Company adopt the Merger Agreement. The Merger is expected to close in the third quarter of 2019, subject to satisfaction of the closing conditions. If the Merger is completed, our common stock will be delisted from Nasdaq
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
and deregistered under the Securities Exchange Act of 1934, as amended, and we will no longer file periodic reports with the Securities and Exchange Commission.
Acquisition of BDR Boya Kimya San.Tic. A.S.
On May 3, 2019, we acquired BDR Boya Kimya San.Tic. A.S. ("BDR"), a digital textile ink development and manufacturing company based in Turkey. BDR will expand the Company's digital textile ink offerings as well as providing a low-cost manufacturing facility for ink.
Note 3
.
Net Loss Per Share
Net income (loss) per basic common share is computed using the weighted average number of common shares outstanding during the period. Net income (loss) 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 RSUs having a dilutive effect, non-vested PSUs for which the performance criteria have been met, shares to be purchased under our Employee Stock Purchase Plan (“ESPP”) having a dilutive effect, the assumed release of shares for the expected satisfaction of contingent consideration based on achievement of specified performance criteria related to the acquisition of Corrugated Technologies, Inc. (“CTI”), the assumed conversion of our notes having a dilutive effect using the treasury stock method when the stock price exceeds the conversion price of our
0.75%
Convertible Senior Notes due 2019 (“2019 Notes”) and
2.25%
Convertible Senior Notes due 2023 (“2023 Notes” and together with the 2019 Notes, the “Notes”), as well as the dilutive effect of our warrants when the stock price exceeds the warrant strike price. Our stock price has not exceeded the conversion price of the Notes or the strike price of the warrants during any periods presented. Any potential shares that are anti-dilutive are excluded from the effect of dilutive securities.
PSUs and market-based restricted stock units that would be issuable if the end of the reporting period were the end of the vesting period, if the result would be dilutive, are assumed to be outstanding for purposes of determining net income per diluted common share as of the later of the beginning of the period or the grant date. Accordingly, PSUs, which vested on various dates during the
three months ended
March 31, 2019
and
2018
, based on achievement of specified performance criteria related to revenue, cash flows from operating activities, and non-GAAP operating income targets, are included in the determination of net income per diluted common share as of the beginning of each period.
Basic and diluted net loss per share are reconciled as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Basic and Diluted Net Loss per Share
|
2019
|
|
2018
|
|
Basic net loss per share:
|
|
|
|
|
Net loss
|
$
|
(18,663
|
)
|
|
$
|
(3,595
|
)
|
|
Weighted average common shares outstanding
|
42,614
|
|
|
45,030
|
|
|
Basic net loss per share
|
$
|
(0.44
|
)
|
|
$
|
(0.08
|
)
|
|
Diluted net loss per share:
|
|
|
|
|
Net loss
|
$
|
(18,663
|
)
|
|
$
|
(3,595
|
)
|
|
Weighted average common shares outstanding
|
42,614
|
|
|
45,030
|
|
|
Weighted average common shares outstanding for purposes of computing diluted net loss per share
|
42,614
|
|
|
45,030
|
|
|
Diluted net loss per share
|
$
|
(0.44
|
)
|
|
$
|
(0.08
|
)
|
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
Potential shares of common stock that were not included in the determination of diluted net loss per share because the impact of including them would have been anti-dilutive or performance conditions have not been met, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Potential Shares Excluded from Diluted Net Loss per Share Computation
|
2019
|
|
2018
|
|
Options
|
28
|
|
|
69
|
|
|
RSUs & PSUs
|
1,183
|
|
|
751
|
|
|
ESPP purchase rights
|
1,281
|
|
|
862
|
|
|
Total potential shares of common stock excluded from the computation of diluted net loss per share
|
2,492
|
|
|
1,682
|
|
The weighted-average number of common shares outstanding does not include the effect of the potential common shares from conversion of our Notes and exercise of our warrants because the effect would have been anti-dilutive since the conversion price of the Notes and the strike price of the warrants exceeded the average market price of our common stock. We have the option to pay cash, issue shares of common stock, or any combination thereof for the aggregate amount due upon conversion of the Notes. Our intent is to settle the principal amount of the Notes in cash upon conversion. As a result, only amounts payable in excess of the principal amount of the Notes are considered in diluted net income (loss) per share under the treasury stock method. The Note Hedges are not included in the calculation of diluted net loss per share because the effect of any exercise of the Note Hedges would be anti-dilutive. Please refer to
Note 10
–
Debt
for additional information and definitions.
Note 4
.
Segment Information
Operating segment information is presented based on the internal reporting used by the chief operating decision making group (“CODM”) to allocate resources and evaluate operating segment performance. Our segments consist of Industrial Inkjet, Productivity Software, and Fiery.
Industrial Inkjet
consists of our VUTEk super-wide and wide format display graphics, Nozomi corrugated packaging and display, Reggiani textile, and Cretaprint ceramic tile decoration and building material industrial digital inkjet printers; digital ultra-violet (“UV”) curable, light-emitting diode (“LED”) curable, ceramic, water-based, and thermoforming and specialty inks, as well as a variety of textile inks including dye sublimation, pigmented, reactive dye, acid dye, pure disperse dye, water-based dispersed printing ink, supplies, and coatings; digital inkjet printer parts; and professional services. Printing surfaces include paper, vinyl, corrugated, textile, glass, plastic, aluminum composite, ceramic tile, wood, and many other flexible and rigid substrates.
Productivity Software
consists of a complete software suite that enables efficient and automated end-to-end business and production workflows for the print and packaging industries. This
Productivity Suite
also provides tools to enable revenue growth, efficient scheduling, and optimization of processes, equipment, and personnel. Customers are provided the financial and technical flexibility to deploy locally within their business or to be hosted in the cloud. The Productivity Suite addresses all segments of the print industry and consists of the: (i)
Packaging Suite,
with Radius at its core, for tag & label, cartons, and flexible packaging businesses; (ii)
Corrugated Packaging Suite,
with CTI at its core, for corrugated packaging businesses, including corrugated control capability using EFI Escada; (iii)
Enterprise Commercial Print Suite,
with Monarch at its core, for enterprise print businesses; (iv)
Publication Print Suite,
with Monarch or Technique at its core, for publication print businesses; (v)
Midmarket Print Suite,
with Pace at its core, for medium size print businesses; (vi)
Quick Print Suite,
with PrintSmith Vision and essential capabilities of Digital StoreFront at its core, for small printers and in-plant sites; and (vii)
Value Added Products,
available with the suite and standalone, such as web-to-print, e-commerce, cross media marketing, warehousing, fulfillment, shop floor data collection, and shipping to reduce costs, increase profits, and offer new products and services to their existing and future customers. We also market Optitex computer-aided fashion design software, which facilitates fast fashion and increased efficiency in the textile and fashion industries.
Fiery
consists of Fiery and FreeFlow Print Server (“FFPS”), which was acquired from Xerox Corporation (“Xerox”), that transform digital copiers and printers into high performance networked printing devices for the office, commercial and industrial printing markets. This operating segment is comprised of (i) stand-alone Digital Front Ends ("DFEs") connected to digital printers, copiers, and other peripheral devices, (ii) embedded DFEs and design-licensed solutions used in digital copiers and multi-functional devices, (iii) optional software integrated into our DFE solutions such as Fiery Central, and Graphics Arts Package, (iv) Fiery Self Serve, our self-service and payment solution, and (v) stand-alone software-based solutions such as our proofing, textile, and scanning solutions.
Operating income is not reported by operating segment because operating expenses include significant shared expenses and other costs that are managed outside of the operating segments. Such operating expenses include various corporate expenses such as stock-
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
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.
Our revenue and gross profit (i.e., gross profit excluding stock-based compensation expense) by operating segment are summarized as follows
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Segment Revenue and Gross Profit
|
2019
|
|
2018
|
|
Industrial Inkjet
|
|
|
|
|
Revenue
|
$
|
130,423
|
|
|
$
|
142,209
|
|
|
Gross profit
|
44,312
|
|
|
49,707
|
|
|
Gross profit percentage
|
34.0
|
%
|
|
35.0
|
%
|
|
Productivity Software
|
|
|
|
|
Revenue
|
$
|
39,512
|
|
|
$
|
43,775
|
|
|
Gross profit
|
28,333
|
|
|
31,413
|
|
|
Gross profit percentage
|
71.7
|
%
|
|
71.8
|
%
|
|
Fiery
|
|
|
|
|
Revenue
|
$
|
53,780
|
|
|
$
|
53,882
|
|
|
Gross profit
|
37,959
|
|
|
38,755
|
|
|
Gross profit percentage
|
70.6
|
%
|
|
71.9
|
%
|
Operating segment profit is reconciled to our Condensed Consolidated Statements of Operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
(in thousands)
|
2019
|
|
2018
|
|
Segment gross profit
|
$
|
110,604
|
|
|
$
|
119,875
|
|
|
Stock-based compensation expense
|
(785
|
)
|
|
(768
|
)
|
|
Gross profit
|
$
|
109,819
|
|
|
$
|
119,107
|
|
Tangible and intangible assets, net of liabilities, are summarized by operating segment as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Industrial
Inkjet
|
|
Productivity
Software
|
|
Fiery
|
|
Unallocated
Net Assets
|
|
Total
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
$
|
147,568
|
|
|
$
|
169,728
|
|
|
$
|
73,904
|
|
|
$
|
—
|
|
|
$
|
391,200
|
|
|
Identified intangible assets, net
|
32,514
|
|
|
19,450
|
|
|
13,193
|
|
|
—
|
|
|
65,157
|
|
|
Tangible assets, net of liabilities
|
257,339
|
|
|
(9,102
|
)
|
|
27,054
|
|
|
(14,158
|
)
|
|
261,133
|
|
|
Net tangible and intangible assets
|
$
|
437,421
|
|
|
$
|
180,076
|
|
|
$
|
114,151
|
|
|
$
|
(14,158
|
)
|
|
$
|
717,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
$
|
147,932
|
|
|
$
|
168,186
|
|
|
$
|
73,991
|
|
|
$
|
—
|
|
|
$
|
390,109
|
|
|
Identified intangible assets, net
|
38,782
|
|
|
21,677
|
|
|
14,263
|
|
|
—
|
|
|
74,722
|
|
|
Tangible assets, net of liabilities
|
234,689
|
|
|
(12,747
|
)
|
|
21,092
|
|
|
18,243
|
|
|
261,277
|
|
|
Net tangible and intangible assets
|
$
|
421,403
|
|
|
$
|
177,116
|
|
|
$
|
109,346
|
|
|
$
|
18,243
|
|
|
$
|
726,108
|
|
Corporate and unallocated net assets primarily consist of cash and cash equivalents, restricted cash equivalents, corporate headquarters facility, convertible senior notes, income taxes receivable, and income taxes payable.
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
Note 5
.
Revenue
We derive our revenue primarily from product revenue, which includes industrial digital inkjet printers, ink, and parts; print production software; and DFEs. We receive service revenue from printer maintenance agreements, customer support, training, software development, and consulting.
The following table presents our disaggregated revenue by source, excluding sales and usage-based taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by Major Products and Services
|
Three Months Ended March 31, 2019
|
|
Three Months Ended March 31, 2018
|
|
(in thousands)
|
Industrial
Inkjet
|
|
Productivity
Software
|
|
Fiery
|
|
Total
|
|
Industrial
Inkjet
|
|
Productivity
Software
|
|
Fiery
|
|
Total
|
|
Industrial Inkjet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Printers and parts
|
$
|
75,905
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
75,905
|
|
|
$
|
88,374
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
88,374
|
|
|
Ink, supplies, and maintenance
|
54,518
|
|
|
—
|
|
|
—
|
|
|
54,518
|
|
|
53,835
|
|
|
—
|
|
|
—
|
|
|
53,835
|
|
|
Productivity Software
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses
|
—
|
|
|
9,608
|
|
|
—
|
|
|
9,608
|
|
|
—
|
|
|
12,656
|
|
|
—
|
|
|
12,656
|
|
|
Professional services
|
—
|
|
|
7,592
|
|
|
—
|
|
|
7,592
|
|
|
—
|
|
|
7,545
|
|
|
—
|
|
|
7,545
|
|
|
Maintenance and subscriptions
|
—
|
|
|
22,312
|
|
|
—
|
|
|
22,312
|
|
|
—
|
|
|
23,574
|
|
|
—
|
|
|
23,574
|
|
|
Fiery
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital front ends and related products
|
—
|
|
|
—
|
|
|
49,573
|
|
|
49,573
|
|
|
—
|
|
|
—
|
|
|
50,096
|
|
|
50,096
|
|
|
Maintenance and subscriptions
|
—
|
|
|
—
|
|
|
4,207
|
|
|
4,207
|
|
|
—
|
|
|
—
|
|
|
3,786
|
|
|
3,786
|
|
|
Total
|
$
|
130,423
|
|
|
$
|
39,512
|
|
|
$
|
53,780
|
|
|
$
|
223,715
|
|
|
$
|
142,209
|
|
|
$
|
43,775
|
|
|
$
|
53,882
|
|
|
$
|
239,866
|
|
|
Timing of Revenue Recognition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transferred at a Point in Time
|
$
|
124,616
|
|
|
$
|
9,608
|
|
|
$
|
49,573
|
|
|
$
|
183,797
|
|
|
$
|
137,110
|
|
|
$
|
12,656
|
|
|
$
|
50,096
|
|
|
$
|
199,862
|
|
|
Transferred Over Time
|
5,807
|
|
|
29,904
|
|
|
4,207
|
|
|
39,918
|
|
|
5,099
|
|
|
31,119
|
|
|
3,786
|
|
|
40,004
|
|
|
Total
|
$
|
130,423
|
|
|
$
|
39,512
|
|
|
$
|
53,780
|
|
|
$
|
223,715
|
|
|
$
|
142,209
|
|
|
$
|
43,775
|
|
|
$
|
53,882
|
|
|
$
|
239,866
|
|
|
Recurring/Non-Recurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Recurring
|
$
|
75,905
|
|
|
$
|
17,200
|
|
|
$
|
49,573
|
|
|
$
|
142,678
|
|
|
$
|
88,374
|
|
|
$
|
20,201
|
|
|
$
|
50,096
|
|
|
$
|
158,671
|
|
|
Recurring
|
54,518
|
|
|
22,312
|
|
|
4,207
|
|
|
81,037
|
|
|
53,835
|
|
|
23,574
|
|
|
3,786
|
|
|
81,195
|
|
|
Total
|
$
|
130,423
|
|
|
$
|
39,512
|
|
|
$
|
53,780
|
|
|
$
|
223,715
|
|
|
$
|
142,209
|
|
|
$
|
43,775
|
|
|
$
|
53,882
|
|
|
$
|
239,866
|
|
We report revenue by geographic region based on ship-to destination which is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by Geographic Region
|
Three Months Ended March 31,
|
|
(in thousands)
|
2019
|
|
2018
|
|
Americas
|
$
|
104,569
|
|
|
$
|
117,385
|
|
|
Europe, Middle East, and Africa (“EMEA”)
|
91,159
|
|
|
88,175
|
|
|
Asia Pacific (“APAC”)
|
27,987
|
|
|
34,306
|
|
|
Total revenue
|
$
|
223,715
|
|
|
$
|
239,866
|
|
Remaining Performance Obligations
Revenue allocated to remaining performance obligations includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods (“backlog”). Remaining performance obligations were
$91.8 million
as of
March 31, 2019
, of which we expect to recognize substantially all of the revenue over the next
12 months
.
Contract Balances
Timing of revenue recognition may differ from timing of invoicing to customers. Payment terms and conditions vary by contract. Deferred revenue (contract liability) represents amounts received in advance, or invoiced in advance, for software and product support contracts, consulting and integration projects, SaaS arrangements, or product sales. We defer these amounts when we collect or invoice the customer and then generally recognize revenue either ratably over the support contract term, upon performing the related services, under the cost-to-cost method, or in accordance with our revenue recognition policy. Revenue recognized
during the three months ended March 31, 2019
, which was included in deferred revenue as of
December 31, 2018
, was
$28.7 million
.
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
Unbilled accounts receivable represent contract assets for revenue that have been recognized in advance of billing the customer, which is common for long-term contracts. Billing requirements vary by contract but are generally structured around time-based milestones. Unbilled accounts receivable as of
December 31, 2018
, that were transferred to accounts receivable
during the three months ended March 31, 2019
, were
$17.2 million
.
The following table reflects the balances in unbilled accounts receivable and deferred revenue (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Unbilled accounts receivable – current
|
$
|
22,684
|
|
|
$
|
20,507
|
|
|
Unbilled accounts receivable – noncurrent
|
8,101
|
|
|
8,320
|
|
|
Deferred revenue – current
|
75,716
|
|
|
60,547
|
|
|
Deferred revenue – noncurrent
|
205
|
|
|
290
|
|
Note 6
.
Supplemental Financial Statement Information
Supplemental disclosures about cash flow information are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2019
|
|
2018
|
|
Net cash paid for income taxes
|
$
|
1,295
|
|
|
$
|
2,562
|
|
|
Cash paid for interest expense
|
1,388
|
|
|
1,716
|
|
|
Property, equipment, and intellectual property received, but not paid
|
1,288
|
|
|
999
|
|
|
Inventory reclassified as property and equipment, net for operating leases
|
4,921
|
|
|
—
|
|
|
Right of use asset recognized upon adoption of ASC 842
|
36,863
|
|
|
—
|
|
|
Lease liability recognized upon adoption of ASC 842
|
37,956
|
|
|
—
|
|
|
Non-cash changes in right of use assets and lease liabilities
|
279
|
|
|
—
|
|
Inventories
Inventories are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Raw materials
|
$
|
58,574
|
|
|
$
|
55,794
|
|
|
Work-in-process
|
13,545
|
|
|
12,971
|
|
|
Finished goods
|
69,761
|
|
|
65,583
|
|
|
Total
|
$
|
141,880
|
|
|
$
|
134,348
|
|
Assets Held for Sale
During the fourth quarter of 2017, our management approved a plan to sell approximately
31.5
acres of land and
two
manufacturing buildings located at One Vutek Place and 189 Waukewan Street, Meredith, New Hampshire, consisting of
163,000
total square feet. In the three months ended September 30, 2018, we sold the 189 Waukewan Street land and building for net proceeds of
$1.1 million
and recognized a gain of
$0.1 million
. The One Vutek Place land and building remained in assets held for sale at a total value of
$2.8 million
as of
March 31, 2019
and
December 31, 2018
on the Condensed Consolidated Balance Sheets and are actively being marketed.
Deferred Contract Acquisition Costs
Certain of our sales incentive programs that meet the definition of an incremental cost of obtaining a customer contract are required to be capitalized under ASC 340-40. We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year, and amortize such costs over the expected period of benefit, generally
three
to
four
years. We determined the period of benefit by taking into consideration our customer contracts, our technology, and other factors. For contracts that have durations of less than one year, we follow the practical expedient and expense these costs when incurred.
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
Equipment Leased to Customers Under Operating Leases, Net
Equipment leased to customers under operating leases was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Equipment leased to customers under operating leases
|
$
|
12,170
|
|
|
$
|
7,376
|
|
|
Accumulated depreciation
|
(3,815
|
)
|
|
(3,555
|
)
|
|
Equipment leased to customers under operating leases, net
|
$
|
8,355
|
|
|
$
|
3,821
|
|
Scheduled minimum future rental revenue on operating leases as of
March 31, 2019
was as follows (in thousands):
|
|
|
|
|
|
|
|
Remainder of 2019
|
$
|
2,213
|
|
|
2020
|
3,790
|
|
|
2021
|
1,584
|
|
|
2022
|
1,632
|
|
|
2023
|
2,900
|
|
|
Total
|
$
|
12,119
|
|
Restricted Cash Equivalents and Investments.
We have restricted cash equivalents that are required to be maintained by the lease related to our Manchester, NH facility. The funds are deposited with MUFG Americas Capital Leasing & Finance, LLC where they are restricted as collateral until the end of the underlying building lease period in 2024. These restricted cash equivalents were
$39.8 million
as of both
March 31, 2019
and
December 31, 2018
.
Product Warranty Reserves
Product warranty reserves are included in accrued and other liabilities on our Condensed Consolidated Balance Sheets (In thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2019
|
|
2018
|
|
Beginning balance
|
$
|
12,774
|
|
|
$
|
16,335
|
|
|
Provisions, net of releases
|
2,433
|
|
|
2,972
|
|
|
Settlements
|
(3,159
|
)
|
|
(4,501
|
)
|
|
Ending balance
|
$
|
12,048
|
|
|
$
|
14,806
|
|
Accumulated Other Comprehensive Loss (“AOCL”)
AOCL classified within stockholders’ equity on our Condensed Consolidated Balance Sheets was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Currency translation loss
|
$
|
(13,608
|
)
|
|
$
|
(12,814
|
)
|
Amounts reclassified out of AOCL, net of tax, were immaterial for all periods presented, and consisted of unrealized gains and losses from investments in debt securities that are reported within interest and other income, net, in our Condensed Consolidated Statements of Operations.
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
Note 7
.
Accounts Receivable
The accounts receivable allowance consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable Allowance
|
March 31, 2019
|
|
December 31, 2018
|
|
Allowance for doubtful accounts
|
$
|
21,537
|
|
|
$
|
21,354
|
|
|
Allowance for returns
|
4,724
|
|
|
4,417
|
|
|
Allowance for trade-ins
|
4,092
|
|
|
4,955
|
|
|
Allowance for sales rebates
|
587
|
|
|
1,540
|
|
|
Total accounts receivable allowance
|
$
|
30,940
|
|
|
$
|
32,266
|
|
Accounts Receivable Sale Arrangements
Trade receivables are derecognized from our Condensed Consolidated Balance Sheets when sold to third parties upon determining that such receivables are presumptively beyond the reach of creditors in a bankruptcy proceeding. Any servicing obligation is measured based on the fair value that a third party would charge to service these receivables. These servicing liabilities were determined to not be material as of
March 31, 2019
and
December 31, 2018
.
U.S. trade receivables sold without recourse are generally short-term receivables with payment due dates of less than 10 days from the date of sale, and are subject to a servicing obligation. Trade receivables sold under these facilities were
$2.4 million
during the three months ended March 31, 2019
, and
$16.7
million during the year ended
December 31, 2018
, which approximates the cash received.
European trade receivables sold without recourse are generally short-term receivables secured by letters of credit with payment due dates of less than one year. Trade receivables sold under these facilities were
$1.7 million
during the three months ended March 31, 2019
and
$10.3 million
during the year ended
December 31, 2018
, 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.
Financing Receivables
Our financing receivables consist of sales-type lease and trade receivables that have an original contractual maturity in excess of one year. Sales-type lease receivables are included within other current assets and other assets, while trade receivables are included in accounts receivable, net and in other assets. Our financing receivables are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Financing Receivables
|
March 31, 2019
|
|
December 31, 2018
|
|
Sales-type lease receivables
|
$
|
30,140
|
|
|
$
|
31,201
|
|
|
Trade receivables
|
23,829
|
|
|
14,681
|
|
|
Total financing receivables
|
$
|
53,969
|
|
|
$
|
45,882
|
|
|
|
|
|
|
|
Scheduled to be received in excess of one year
|
$
|
28,500
|
|
|
$
|
29,470
|
|
Note 8
.
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 the amounts recorded in our Condensed Consolidated Balance Sheets.
We consider all highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents. Typically, the cost of these investments approximates fair value. Marketable investments with a maturity greater than three months are classified as available-for-sale short-term investments. Available-for-sale securities are stated at fair value and, as of December 31, 2018, any unrealized gains and losses were included in the Condensed Consolidated Statement of Operations. Realized
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
gains and losses on sales or maturities of financial instruments are recognized upon sale of the investments using the specific identification method.
Our available-for-sale short-term investments are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Short-Term Investments
|
Amortized cost
|
|
Gross unrealized
gains
|
|
Gross unrealized
losses
|
|
Fair value
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
Total short-term investments
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
U.S. Government and sponsored entities
|
$
|
50,329
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
50,329
|
|
|
Corporate debt securities
|
47,434
|
|
|
—
|
|
|
—
|
|
|
47,434
|
|
|
Municipal securities
|
379
|
|
|
—
|
|
|
—
|
|
|
379
|
|
|
Asset-backed securities
|
4,091
|
|
|
—
|
|
|
—
|
|
|
4,091
|
|
|
Mortgage-backed securities – residential
|
116
|
|
|
—
|
|
|
—
|
|
|
116
|
|
|
Total short-term investments
|
$
|
102,349
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
102,349
|
|
In the three months ended December 31, 2018
we determined that it was more likely than not we would sell a substantial portion of our available for sale securities and recognized an unrealized loss of
$0.9 million
which was reported in interest income and other income, net in the Consolidated Statements of Operations. Accordingly, there were
no
unrecognized losses in the investment portfolio as of December 31, 2018.
In the three months ended March 31, 2019
, we sold all of our available for sale securities, recognizing an insignificant gain.
As of March 31, 2019
, we own no short-term investments.
Fair Value Measurements
Our fair value hierarchy is defined as follows:
Level 1: Inputs that are quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date;
Level 2: Inputs that are other than quoted prices included within Level 1, that are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date for the duration of the instrument’s anticipated life or by comparison to similar instruments; and
Level 3: Inputs that are unobservable or reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. These include management’s own judgments about market participant assumptions developed based on the best information available in the circumstances.
We utilize the market approach to measure the fair value of our fixed income securities. The market approach is a valuation technique that uses the prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The fair value of our fixed income securities is obtained using readily-available market prices from a variety of industry standard data providers, large financial institutions, and other third-party sources for the identical underlying securities. The fair value of our investments in certain money market funds is expected to maintain a net asset value of
$1.00
per share and, as such, is priced at the expected market price.
We obtain the fair value of our Level 2 financial instruments from several third-party asset managers, custodian banks, and accounting service providers. Independently, these service providers use professional pricing services to gather pricing data, which may include quoted market prices for identical or comparable instruments or inputs other than quoted prices that are observable either directly or indirectly. As part of this process, we engaged a pricing service to assist management in its pricing analysis and assessment of other-than-temporary impairment. All estimates, key assumptions, and forecasts were either provided by or reviewed by us. While we utilize a third-party pricing service, the impairment analysis and related valuations represent conclusions of management and not conclusions or statements of any third party.
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
Our assets and liabilities measured at fair value by levels within the fair value hierarchy are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
(in thousands)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
230
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
230
|
|
|
$
|
28,715
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
28,715
|
|
|
U.S. Government and sponsored entities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
28,885
|
|
|
21,444
|
|
|
—
|
|
|
50,329
|
|
|
Corporate debt securities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
47,434
|
|
|
—
|
|
|
47,434
|
|
|
Municipal securities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
379
|
|
|
—
|
|
|
379
|
|
|
Asset-backed securities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,036
|
|
|
55
|
|
|
4,091
|
|
|
Mortgage-backed securities – residential
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
116
|
|
|
—
|
|
|
116
|
|
|
Derivative assets
|
—
|
|
|
3,244
|
|
|
—
|
|
|
$
|
3,244
|
|
|
—
|
|
|
3,468
|
|
|
—
|
|
|
$
|
3,468
|
|
|
Total
|
$
|
230
|
|
|
$
|
3,244
|
|
|
$
|
—
|
|
|
$
|
3,474
|
|
|
$
|
57,600
|
|
|
$
|
76,877
|
|
|
$
|
55
|
|
|
$
|
134,532
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration, current and noncurrent
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,017
|
|
|
$
|
10,017
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,501
|
|
|
$
|
10,501
|
|
|
Self-insurance
|
—
|
|
|
—
|
|
|
841
|
|
|
841
|
|
|
—
|
|
|
—
|
|
|
840
|
|
|
840
|
|
|
Derivative liabilities
|
—
|
|
|
3,889
|
|
|
—
|
|
|
3,889
|
|
|
—
|
|
|
3,399
|
|
|
—
|
|
|
3,399
|
|
|
Total
|
$
|
—
|
|
|
$
|
3,889
|
|
|
$
|
10,858
|
|
|
$
|
14,747
|
|
|
$
|
—
|
|
|
$
|
3,399
|
|
|
$
|
11,341
|
|
|
$
|
14,740
|
|
Money market funds are classified as cash equivalents and are classified as Level 1 because these securities are actively traded at
$1.00
net asset value. 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 are classified as Level 1 because these securities are valued based on quoted prices in active markets. There were
no
transfers between Level 1 and 2 during the
three months ended March 31, 2019
and
2018
.
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 held asset-backed securities with income payments derived from and collateralized by a specified pool of underlying assets. Asset-backed securities in the portfolio were predominantly collateralized by credit cards and auto loans.
Liabilities for Contingent Consideration
Acquisition-related liabilities for contingent consideration (i.e., earnouts) as of
March 31, 2019
are related to our prior acquisitions. The fair value of these earnouts is estimated to be
$10.0
and
$10.5 million
as of
March 31, 2019
, and
December 31, 2018
, respectively, by applying the income approach in accordance with ASC 805-30-25-5. Key assumptions include risk-free discount rates between
0.6%
and
5.0%
, as well as probability-adjusted revenue, gross profit, and direct operating income using the Monte Carlo valuation method. Probability-adjusted revenue, gross profit, and direct operating income are significant inputs that are not observable in the market and are therefore classified as Level 3 inputs. These contingent liabilities have been reflected in the Condensed Consolidated Balance Sheet as of
March 31, 2019
, as current and noncurrent liabilities of
$9.8
and
$0.2
million, respectively.
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
Changes in the fair value of contingent consideration are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2019
|
|
2018
|
|
Liability for Contingent Consideration
|
|
|
|
|
Beginning balance
|
$
|
10,501
|
|
|
$
|
35,702
|
|
|
Changes in valuation
|
1,986
|
|
|
(1,459
|
)
|
|
Earnout accretion
|
21
|
|
|
230
|
|
|
Payments and settlements
|
(2,716
|
)
|
|
(724
|
)
|
|
Foreign currency adjustment
|
225
|
|
|
246
|
|
|
Ending balance
|
$
|
10,017
|
|
|
$
|
33,995
|
|
The Generation Digital earnout liability valuation increased
during the three months ended March 31, 2019
by
$2.0
million based on actual and updated forecasted financial performance data. Earnout payments of
$2.7
million
during the three months ended March 31, 2019
primarily related to the Escada contingent consideration liability.
During the three months ended March 31, 2018
, the Generation Digital and Shuttleworth earnout liability valuations decreased based on actual and forecasted financial performance data. Earnout payments primarily related to the Shuttleworth contingent consideration liability.
Since the primary inputs to the fair value measurement of contingent consideration liabilities are the probability-adjusted revenue and discount rate, we reviewed the sensitivity of the fair value measurement to changes in these inputs. We assessed the probability of achieving the revenue and profitability performance targets for contingent consideration associated with each acquisition at percentage levels between
50%
and
100%
as of each respective acquisition date based on an assessment of the historical performance of each acquired entity, our current expectations of future performance, and other relevant factors. A change in probability-adjusted revenue of five percentage points from the level assumed in the current valuations would result in an increase in the fair value of contingent consideration of
$0.9 million
or a decrease of
$0.2 million
. A change in the discount rate of one percentage point would result in an immaterial change in the fair value of contingent consideration. The potential undiscounted amount of contingent consideration that we could be required to pay related to our business acquisitions, beyond amounts currently accrued, is
$17.2 million
as of
March 31, 2019
.
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
$186.6
and
$191.8 million
as of
March 31, 2019
and
December 31, 2018
, respectively.
Fair Value of Convertible Senior Notes
In September 2014, we issued
$345
million aggregate principal amount of convertible senior notes. The 2019 Notes are carried at their original issuance value, net of unamortized debt discount, and are not marked to market each period. The fair value of the 2019 Notes as of
March 31, 2019
was approximately
$336 million
and was considered as a Level 2 fair value measurement. Fair value was estimated based upon actual quotations obtained at the end of the reporting period or the most recent date available. A substantial contributing factor to the market value of our 2019 Notes is the conversion premium.
In November 2018, we issued
$150
million aggregate principal amount of convertible senior notes. The 2023 Notes are carried at their original issuance value, net of unamortized debt discount, and are not marked to market each period. The fair value of the 2023 Notes as of March 31, 2019 was approximately
$150
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 contributing factor to the market value of our 2023 Notes is the conversion premium.
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
Note 9
.
Derivatives and Hedging
We are exposed to market risk and foreign currency exchange risk from changes in foreign currency exchange rates, which could affect operating results, financial position, and cash flows. We manage our exposure to these risks through our regular operating and financing activities and, when appropriate, through use of derivative financial instruments. These derivative financial instruments are used to hedge monetary assets and liabilities, intercompany balances, trade receivables, and to reduce earnings and cash flow volatility resulting from shifts in foreign currency exchange rates. Our objective is to offset the remeasurement gains and losses resulting from these exposures with losses and gains on the derivative contracts used to hedge them, thereby reducing volatility of earnings or protecting fair values of assets and liabilities. We do not have any leveraged derivatives, nor do we use derivative contracts for speculative purposes. We present the fair value of all open derivative instruments, including any embedded in other contracts, as assets or liabilities on our Condensed Consolidated Balance Sheets. The related cash flow impacts of our derivative contracts are reflected as cash flows from operating activities.
Our exposures are primarily related to non-U.S. dollar-denominated revenue in Europe, the U.K., Latin America, China, Israel, and Australia, and to non-U.S. dollar-denominated operating expenses in Europe, India, the U.K., China, Israel, Brazil, and Australia. We hedge balance sheet remeasurement exposure associated with British pound sterling, Canadian dollar, Chinese renminbi, Brazilian real, Israeli shekel, Japanese yen, and Euro-denominated intercompany balances; Brazilian real, British pound sterling, Australian dollar, Chinese renminbi, Israeli shekel, and Euro-denominated trade receivables; and British pound sterling, Israeli shekel, Canadian dollar, and Euro-denominated net monetary assets.
By their nature, derivative instruments involve, to varying degrees, elements of market and credit risk. The market risk associated with these instruments resulting from currency exchange movement is expected to offset the market risk of the underlying transactions, assets, and liabilities being hedged. Under our master netting agreements with our foreign currency derivative counterparties, we are allowed to net transactions of the same currency with a single net amount payable by one party to the other. The derivatives held by us are not subject to any credit contingent features negotiated with these counterparties. We are not required to pledge cash collateral related to these foreign currency derivative contracts. We do not believe there is significant risk of loss from non-performance by the counterparty associated with these instruments because, by policy, we only deal with counterparties having a minimum investment grade or better credit rating. Credit risk is managed through the continuous monitoring of exposures to such counterparties.
Balance Sheet Hedges
Our forward contracts are not designated for hedge accounting treatment since there is a natural offset for the remeasurement of the underlying foreign currency denominated asset or liability. We recognize changes in the fair value of non-designated derivative instruments in earnings in the period of change. Gains and losses on foreign currency forward contracts used to hedge balance sheet exposures are recognized in interest income and other income, net, in the same period as the remeasurement gain or loss of the related foreign currency denominated assets and liabilities. Our forward contracts not designated for hedge accounting treatment consisted of hedges of Australian dollar, British pound sterling, Brazilian real, Canadian dollar, Chinese renminbi, Euro, Israeli shekel,
and Japanese yen.
These balance sheet hedges cover currency exposures in the following line items in the notional amounts indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet categories
|
March 31, 2019
|
|
December 31, 2018
|
|
Accounts Receivable
|
$
|
51,047
|
|
|
$
|
52,200
|
|
|
Other assets and liabilities, net
|
40,267
|
|
|
40,400
|
|
|
Intercompany balances
|
95,256
|
|
|
99,200
|
|
|
Total
|
$
|
186,570
|
|
|
$
|
191,800
|
|
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
Note 10
.
Debt
Our debt primarily consisted of convertible senior notes summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Senior Notes
|
March 31, 2019
|
|
December 31, 2018
|
|
2019 Notes (Maturing September 1, 2019)
|
|
|
|
|
Principal amount
|
$
|
345,000
|
|
|
$
|
345,000
|
|
|
Debt discount, net of amortization
|
(5,795
|
)
|
|
(9,366
|
)
|
|
Debt issuance costs, net of amortization
|
(971
|
)
|
|
(1,360
|
)
|
|
Convertible senior notes – current
|
$
|
338,234
|
|
|
$
|
334,274
|
|
|
|
|
|
|
|
2023 Notes (Maturing November 15, 2023)
|
|
|
|
|
Principal amount
|
$
|
150,000
|
|
|
$
|
150,000
|
|
|
Debt discount, net of amortization
|
(26,463
|
)
|
|
(27,653
|
)
|
|
Debt issuance costs, net of amortization
|
(3,502
|
)
|
|
(3,659
|
)
|
|
Convertible senior notes – non-current
|
$
|
120,035
|
|
|
$
|
118,688
|
|
0.75% Convertible Senior Notes Due 2019
In September 2014, we issued
$345.0 million
principal amount of the 2019 Notes. The initial conversion rate is
18.9667
shares of common stock per
$1,000
principal amount of 2019 Notes, which is equivalent to an initial conversion price of approximately
$52.72
per share of common stock. Upon conversion of the 2019 Notes, holders will receive cash, shares of common stock or a combination thereof, at our election. As of
March 31, 2019
, none of the conditions allowing holders of the 2019 Notes to convert had been met. The 2019 Notes mature on
September 1, 2019
. Our intent is to settle the principal amount of the Notes in cash. 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. The cash payment of the principal amount will be presented as financing cash flow while the discount portion will be operating cash flow on our Statements of Cash Flows.
If the proposed transaction with an affiliate of Siris is completed (See
Note 2
–
Business Acquisitions
) prior to the maturity date of the 2019 Notes, we will be required to repay the principal amount of the 2019 Notes, as well as a make-whole amount, in cash at the closing date of the transaction. Under the terms of the 2019 Notes, we estimate the total cash payment would be approximately
$345.0 million
.
We allocated the total transaction costs incurred in the issuance of the 2019 Notes to the liability and equity components based on their relative values. Issuance costs of
$7.0 million
attributable to the original
$281.4 million
liability component are being amortized to expense over the term of the 2019 Notes, and issuance costs of
$1.6 million
attributable to the original
$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.
2.25% Convertible Senior Notes Due 2023
In
November 2018
, we issued
$150 million
aggregate principal amount of the 2023 Notes. Of the
$145 million
total net proceeds, we used
$40.0 million
for concurrent stock repurchases. The 2023 Notes are senior unsecured obligations and were issued at par with interest payable semiannually in arrears on May 15 and November 15 of each year, commencing May 15, 2019. The 2023 Notes will mature on
November 15, 2023
. The initial conversion rate is
28.0128
shares of common stock per
$1,000
principal amount of the 2023 Notes, which is equivalent to an initial conversion price of approximately
$35.70
per share of common stock. Upon conversion of the 2023 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 2023 Notes in cash upon conversion. If the conversion value exceeds the principal amount, we intend to deliver shares of our common stock for our conversion obligation in excess of the aggregate principal amount. As of
March 31, 2019
, none of the conditions allowing holders of the 2023 Notes to convert had been met.
If the proposed transaction with an affiliate of Siris is completed (See
Note 2
–
Business Acquisitions
), we will be required to repay the principal amount of the 2023 Notes, plus the cash value of any share price in excess of the initial conversion price, plus a make-
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
whole payment in cash for the early redemption, on the closing date of the transaction. Under the terms of the 2023 Notes, we estimate the total cash payment would be approximately
$179.1 million
.
We allocated the total transaction costs incurred in the issuance of the 2023 Notes to the liability and equity components based on their relative values. Issuance costs of
$3.7 million
attributable to the original
$122.0 million
liability component are being amortized to expense over the term of the Notes, and issuance costs of
$0.9 million
attributable to the original
$28.0 million
equity component were offset against the equity component in stockholders’ equity. Additionally, we recorded a deferred tax liability of
$6.6 million
on the debt discount, which is not deductible for tax purposes.
The equity components of the Notes as of
March 31, 2019
and
December 31, 2018
are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 Notes
|
|
2023 Notes
|
|
Equity component
|
$
|
63,643
|
|
|
$
|
28,045
|
|
|
Less: debt issuance costs allocated to equity
|
(1,582
|
)
|
|
(853
|
)
|
|
Greenshoe option value
|
568
|
|
|
—
|
|
|
Tax effects
|
485
|
|
|
(6,619
|
)
|
|
Equity component, net
|
$
|
63,114
|
|
|
$
|
20,573
|
|
Interest expense recognized on the Notes was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
Three Months Ended March 31,
|
|
|
2019
|
|
2018
|
|
2019 Notes
|
|
|
|
|
0.75% coupon
|
$
|
647
|
|
|
$
|
647
|
|
|
Amortization of debt discount
|
3,571
|
|
|
3,355
|
|
|
Amortization of debt issuance costs
|
389
|
|
|
397
|
|
|
Interest expense on 2019 Notes
|
$
|
4,607
|
|
|
$
|
4,399
|
|
|
|
|
|
|
|
2023 Notes
|
|
|
|
|
|
|
2.25% Coupon
|
$
|
844
|
|
|
$
|
—
|
|
|
Amortization of debt discount
|
1,190
|
|
|
—
|
|
|
Amortization of debt issuance costs
|
157
|
|
|
—
|
|
|
Interest expense on 2023 Notes
|
$
|
2,191
|
|
|
$
|
—
|
|
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 in conjunction with the issuance of the 2019 Notes. The Note Hedges will expire upon maturity of the 2019 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 2019 Notes in the event that the market value per share of our common stock, as measured under the terms of the Note Hedges, is greater than the strike price of the Note Hedges. The strike price of the Note Hedges initially corresponded to the conversion price of the 2019 Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion price of the 2019 Notes. The Note Hedges are separate transactions and are not part of the 2019 Notes. Holders of the 2019 Notes do not have any rights with respect to the Note Hedges.
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
Warrants
Concurrently with entering into the Note Hedges, we separately sold warrants to acquire shares of our common stock at a strike price of
$68.86
per share (the "Warrants"), in conjunction with the issuance of the 2019 Notes. 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 2019 Notes or the Note Hedges and are accounted for as a component of additional paid-in capital. Holders of the 2019 Notes and Note Hedges do not have any rights with respect to the Warrants. If the proposed transaction with an affiliate of Siris is completed (See
Note 2
–
Business Acquisitions
), we will be required to repurchase the warrants for approximately
$4.6 million
on the date of the transaction.
Revolving Credit Agreement
In
January 2019
, we entered into a
5
-year
$150.0 million
revolving credit agreement with an option for an additional
$50.0 million
, subject to certain requirements. Interest is variable with a premium applied to an index rate. The amount of the premium varies based on our net leverage ratio. Interest is due monthly on any borrowings, and a commitment fee is assessed on the portion of the facility that is not utilized. This credit facility is secured by substantially all of our domestic assets and the pledge of
65%
of the stock of our foreign subsidiaries. The agreement contains various affirmative and negative covenants, as well as three financial covenants based on leverage and interest coverage ratios. As of
March 31, 2019
, the Company was in compliance with the financial covenants under this agreement.
The issuance cost of
$0.8 million
incurred on this facility was recorded in other long-term assets and is being amortized on a straight-line basis over the
5
-year term of this agreement. There were
no
borrowings outstanding under the facility at
March 31, 2019
.
Note 11
.
Leases
We lease facilities and equipment under non-cancellable operating leases that have remaining lease terms of
5
month to
47
years, and
1
month to
5
years, respectively. Generally, each leased facility is subject to an individual lease or sublease, certain of which may provide options to extend or terminate the lease agreement. Facilities primarily consist of corporate offices, manufacturing sites, and storage facilities. Equipment primarily consists of vehicles and office equipment. Certain lease agreements also include variable lease payments that are primarily comprised of common area maintenance and utility charges, along with fuel and maintenance charges for vehicles. Short-term leases and sublease income are not material for the period. As further explained in
Note 1
–
Basis of Presentation and Significant Accounting Policies
, we adopted ASC 842 effective January 1, 2019. Accordingly, right of use assets and lease liabilities for these operating leases are included on the Condensed Consolidated Balance Sheet as of
March 31, 2019
but not as of December 31, 2018.
The components of our lease expense were as follows (in thousands):
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2019
|
|
Operating lease expense
|
$
|
2,721
|
|
|
Variable lease expense
|
392
|
|
|
Total lease expense
|
$
|
3,113
|
|
Other information related to lease term and discount rate is as follows:
|
|
|
|
|
|
|
|
March 31, 2019
|
|
Weighted average remaining lease term (years)
|
13.9
|
|
|
Weighted average discount rate
|
4.0
|
%
|
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
Future minimum lease payments under noncancellable operating leases for each of the next five years ending December 31 and thereafter
as of March 31, 2019
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
2019
|
$
|
7,535
|
|
|
2020
|
8,936
|
|
|
2021
|
5,889
|
|
|
2022
|
3,545
|
|
|
2023
|
1,995
|
|
|
Thereafter
|
24,560
|
|
|
Total lease payments
|
52,460
|
|
|
Less: imputed interest
|
(16,705
|
)
|
|
Total lease liabilities
|
$
|
35,755
|
|
Future minimum operating lease payments for the years ending December 31, 2019 and 2020 in the preceding table exclude sublease rental income of
$0.2
and
$0.1 million
, respectively. There were no leases signed but not commenced as of
March 31, 2019
.
Future minimum lease payments under noncancellable operating leases for each of the next five years and thereafter as of
December 31, 2018
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
2019
|
$
|
6,559
|
|
|
2020
|
6,216
|
|
|
2021
|
4,355
|
|
|
2022
|
2,582
|
|
|
2023
|
1,423
|
|
|
Thereafter
|
24,180
|
|
|
Total
|
$
|
45,315
|
|
Future minimum operating lease payments for the years ending December 31, 2019 and 2020 in the preceding table exclude sublease rental income of
$0.4
and
$0.1 million
, respectively.
Note 12
.
Commitments and Contingencies
Contingent Consideration
We may be required to make payments to the former owners of acquired businesses based on the achievement of specified performance targets as further explained in
Note 8
–
Fair Value Measurements
.
Lease Commitments and Contractual Obligations
As of
March 31, 2019
, we have leased certain of our current facilities and vehicles under noncancellable operating lease agreements. We are required to pay property taxes, insurance, and nominal maintenance costs for certain of these facilities and vehicles, and any increases over the base year of these expenses on the remainder of these leases. See additional discussion in
Note 11
–
Leases
.
Legal Proceedings
From time to time, we are involved in a variety of claims, lawsuits, investigations, or proceedings relating to contractual disputes, securities laws, intellectual property rights, employment, or other matters that may arise in the normal course of business. We assess our potential liability in each of these matters by using the information available to us. We develop our views on estimated losses in consultation with inside and outside counsel, which involves a subjective analysis of potential results and various combinations of
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
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, 2019
, we are subject to the matters described below:
Matan Digital Printing (“MDG”) Matter.
EFI acquired Matan Digital Printers (“Matan”) in 2015 from sellers (the “2015 Sellers”) that had acquired Matan Digital Printing Ltd. from other sellers in 2001 (the “2001 Sellers”). The 2001 Sellers have asserted a claim against the 2015 Sellers and Matan asserting that they are entitled to a portion of the 2015 Sellers’ proceeds from EFI’s acquisition. The 2015 Sellers dispute this claim and have agreed to indemnify EFI against the 2001 Sellers’ claim.
We do not believe that it is probable that we will incur a loss in the resolution of this matter. It is reasonably possible, however, that our financial statements could be materially affected by an unfavorable resolution and we could incur a material loss in this matter. We estimate the range of loss to be between
one
dollar and
$10.1 million
. If we incur a loss in this matter, it will be offset by a receivable of an equal amount representing a claim for indemnification against the escrow account established in connection with the Matan acquisition.
Purported Class Action Lawsuit.
On August 10, 2017, a putative class action was filed against the Company and its two named executive officers in the U.S. District Court for the District of New Jersey, captioned
Pipitone v. Electronics For Imaging, Inc
., No. 2:17-cv-05992 (D.N.J.). A First Amended Complaint was filed on February 20, 2018. The plaintiffs alleged, among other things, that statements by the Company and its officers about the Company’s financial reporting, revenue recognition, internal controls, and disclosure controls and procedures were false or misleading. On January 31, 2019, the district court dismissed the complaint without prejudice. On April 12, 2019, the plaintiffs filed a notice of appeal to the U.S. Court of Appeals for the Third Circuit.
At this time, we do not believe it is probable that we will incur a material loss in this matter. However, it is possible that our financial statements could be materially affected by an unfavorable resolution of this matter. Because this matter was dismissed in its preliminary pleading stages, however, and because we view the plaintiffs’ likelihood of success on appeal to be small, we are not in a position to estimate an amount or range of reasonably possible loss that may be incurred.
Purported Derivative Shareholder Lawsuits.
On August 22, 2017, a purported derivative shareholder complaint was filed in the Superior Court of the State of California for the County of Alameda captioned
Schiffmiller v. Gecht
, No. RG17873197. A First Amended Complaint was filed on April 13, 2018. The complaint makes claims derivatively and on behalf of the Company as nominal defendant against the Company’s named executive officers and directors for alleged breaches of fiduciary duties and unjust enrichment, and alleges, among other things, that statements by the Company and its officers about the Company’s financial reporting, revenue recognition, internal controls, and disclosure controls and procedures were false or misleading. The complaint alleges the Company has suffered damage as a result of the individual defendants’ alleged actions, and seeks an unspecified amount of damages, restitution, and declaratory and other relief. The derivative action has been stayed pending the resolution of the
Pipitone
class action described above.
At this time, we do not believe it is probable that we will incur a material loss in this matter. However, it is possible that our financial statements could be materially affected by an unfavorable resolution of this matter, which was stayed pending the resolution of the
Pipitone
class action described above. As the
Pipitone
matter was dismissed but is now on appeal, it is unclear whether this matter will continue to be stayed or will be dismissed, and we therefore are not in a position to estimate an amount or range of reasonably possible loss that may be incurred.
Other Matters.
As of
March 31, 2019
, we were subject to various other claims, lawsuits, investigations, and proceedings in addition to the matters discussed above. There is at least a reasonable possibility that additional losses may be incurred in excess of the amounts that we have accrued. However, we believe that these claims are not material to our financial statements or the range of reasonably possible losses is not reasonably estimable. Litigation is inherently unpredictable, and while we believe that we have valid defenses with respect to legal matters pending against us, our financial statements could be materially affected in any particular reporting period by the unfavorable resolution of one or more of these contingencies or because of the diversion of management’s attention and the incurrence of significant expenses.
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
Note 13
.
Stock Repurchase Program
On September 11, 2017, the board of directors approved the repurchase of an additional
$125.0 million
for our share repurchase program commencing September 11, 2017 and expiring on
December 31, 2018
. The board of directors had previously authorized
$150 million
under the program in November 2015. We completed the total authorized amount as of
December 31, 2018
. As of
March 31, 2019
, there was
no
new authorized program for repurchases.
Our employees have the option to surrender shares of common stock to satisfy their tax withholding obligations that arise on the vesting of RSUs, the exercise price of certain stock options, and any tax withholding obligations incurred from exercise of stock options. Employees surrendered
91,027
and
7,571
shares at an aggregate value of
$2.5
and
$0.2 million
during the
three months ended March 31, 2019
and
2018
, respectively.
Note 14
.
Stock-based Compensation
Our stock-based compensation expense is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based Compensation Expense
|
Three Months Ended March 31,
|
|
(in thousands)
|
2019
|
|
2018
|
|
Cost of revenue
|
$
|
785
|
|
|
$
|
768
|
|
|
Research and development
|
3,017
|
|
|
2,355
|
|
|
Sales and marketing
|
1,782
|
|
|
1,799
|
|
|
General and administrative
|
3,690
|
|
|
1,848
|
|
|
Total stock-based compensation expense
|
$
|
9,274
|
|
|
$
|
6,770
|
|
Stock-based compensation expense related to ESPP purchase rights and RSUs is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Stock-Based Compensation Expense by Award Type
|
Three Months Ended March 31,
|
|
(in thousands)
|
2019
|
|
2018
|
|
RSUs
|
$
|
7,728
|
|
|
$
|
5,324
|
|
|
ESPP purchase rights
|
1,546
|
|
|
1,446
|
|
|
Total stock-based compensation expense
|
9,274
|
|
|
6,770
|
|
|
Income tax benefit
|
(1,243
|
)
|
|
(858
|
)
|
|
Stock-based compensation expense, net of tax
|
$
|
8,031
|
|
|
$
|
5,912
|
|
Valuation Assumptions for ESPP Purchase Rights and Stock Options
We use the Black-Scholes-Merton (“BSM”) option pricing model to value stock-based compensation for all equity awards, except time-based RSUs and market-based awards. Time-based RSUs are valued at the closing market price on the date of grant. Market-based awards are valued using the Monte Carlo valuation method.
The estimated weighted average fair value per share and underlying assumptions of ESPP purchase rights issued were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
ESPP Assumptions
|
2019
|
|
2018
|
|
Weighted average fair value per share
|
$7.54
|
|
$9.30
|
|
Expected volatility
|
43
|
%
|
—
|
71%
|
|
59
|
%
|
—
|
107%
|
|
Risk-free interest rate
|
2.46
|
%
|
—
|
2.56%
|
|
1.60
|
%
|
—
|
2.20%
|
|
Expected term (in years)
|
0.5
|
|
—
|
2.0
|
|
0.5
|
|
—
|
2.0
|
No
stock options were granted during the
three months ended March 31, 2019
and
2018
. As of
March 31, 2019
,
75,000
shares underlying stock options are outstanding and exercisable. They are time-based options with an aggregate intrinsic value of
$0.8 million
, a weighted average exercise price of
$16.57
per share, and remaining contractual term of
0.44 years
. Aggregate intrinsic value for stock options represents the difference between the closing price per share of our common stock on the last trading day of the
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
period and the option exercise price, multiplied by the number of in-the-money stock options outstanding, vested and expected to vest, and exercisable as of
March 31, 2019
.
Non-vested RSUs
Non-vested RSUs were awarded to employees under our equity incentive plans. Non-vested RSUs do not have the voting rights of common stock and the shares underlying non-vested RSUs are not considered issued and outstanding. Non-vested RSUs generally vest over a service period of
one
to
four
years. The compensation expense incurred for these service-based awards is based on the closing market price of our stock on the date of grant and is amortized on a graded vesting basis over the requisite service period.
Non-vested RSU activity during the
three months ended March 31, 2019
is summarized below (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time-based
|
|
Performance-based
|
|
Market-based
|
|
Total
|
|
|
Shares
|
|
Weighted average grant date fair value
|
|
Shares
|
|
Weighted average grant date fair value
|
|
Shares
|
|
Weighted average grant date fair value
|
|
Shares
|
|
Weighted average grant date fair value
|
|
Non-vested at January 1, 2019
|
1,385
|
|
|
$
|
32.59
|
|
|
1,466
|
|
|
$
|
34.18
|
|
|
70
|
|
|
$
|
26.67
|
|
|
2,921
|
|
|
$
|
33.25
|
|
|
Granted
|
125
|
|
|
27.22
|
|
|
549
|
|
|
27.22
|
|
|
—
|
|
|
—
|
|
|
674
|
|
|
27.22
|
|
|
Vested
|
(169
|
)
|
|
28.44
|
|
|
(170
|
)
|
|
28.65
|
|
|
—
|
|
|
—
|
|
|
(339
|
)
|
|
28.55
|
|
|
Forfeited
|
(18
|
)
|
|
33.51
|
|
|
(466
|
)
|
|
35.47
|
|
|
—
|
|
|
—
|
|
|
(484
|
)
|
|
35.40
|
|
|
Non-vested at March 31, 2019
|
1,323
|
|
|
32.60
|
|
|
1,379
|
|
|
31.66
|
|
|
70
|
|
|
26.67
|
|
|
2,772
|
|
|
31.98
|
|
If the transaction with an affiliate of Siris is completed (See
Note 2
–
Business Acquisitions
), time-based non-vested RSUs that are scheduled to vest within twelve months of the closing date of the transaction will be accelerated and paid in cash at
$37.00
per share upon the closing. Unvested performance-based RSUs measured on 2019 performance metrics will continue to vest and will be paid out in cash in 2020 if the 2019 performance metrics are met. Time-based awards vesting more than twelve months from the closing date of the transaction will be converted to cash and will continue to vest under the original vesting schedule. Unvested performance-based RSUs vesting after 2019 will be converted to time-based awards as if
100%
targeted performance metrics were achieved, and will vest and be paid in cash consistent with the original performance periods.
Vested RSUs
The grant date fair value of RSUs vested during the
three months ended March 31, 2019
was
$9.7 million
. The aggregate intrinsic value of RSUs vested and expected to vest as of
March 31, 2019
was
$39.7 million
and the remaining weighted average vesting period was
0.92 years
. Aggregate intrinsic value for RSUs vested and expected to vest represents the closing market price per share of our common stock on the last trading day of the period, multiplied by the number of RSUs vested and expected to vest as of
March 31, 2019
. RSUs expected to vest represent time-based RSUs unvested and outstanding as of
March 31, 2019
, and performance-based RSUs for which the requisite service period has not been rendered, but are expected to vest based on the estimated achievement of performance conditions. Performance-based RSUs are expensed based on estimated performance results and as service criteria are met.
Valuation Assumptions for Performance-based and Market-based RSUs
Stock options and market-based RSUs were
not
granted during the
three months ended March 31, 2019
. We use the BSM option pricing model to value performance-based RSUs. The weighted average grant date fair value per share of performance-based RSUs granted and the assumptions used to estimate grant date fair value are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance-Based RSUs Granted
|
Short-term
|
|
Long-term
|
|
Three Months Ended March 31, 2019
|
|
|
|
|
|
|
Grant date fair value per share
|
$
|
27.22
|
|
|
$
|
—
|
|
|
Service period (years)
|
1.0
|
|
|
N/A
|
|
|
Three Months Ended March 31, 2018
|
|
|
|
|
|
|
Grant date fair value per share
|
$
|
28.59
|
|
|
$
|
—
|
|
|
Service period (years)
|
1.0
|
|
|
|
|
N/A
|
|
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
Our performance-based RSUs generally vest when specified performance criteria are met; otherwise, they are forfeited.
The grant date fair value per share determined in accordance with the BSM valuation model is being amortized over the service period of the performance-based awards. The probability of achieving the performance criteria was determined based on review of the actual results achieved and forecasted financial performance for the remaining performance measurement period. Stock-based compensation expense is adjusted based on the updated fair value resulting from this probability assessment for each reporting period.
Market-based awards that were granted in prior periods vest when our average closing stock price exceeds defined multiples of the closing stock price for
90
consecutive trading days. If these multiples are not achieved by the expiration date, the awards are forfeited. The grant date fair value is amortized over the average derived service period of the awards. The average derived service period and total fair value were determined using a Monte Carlo valuation model based on our assumptions, which include a risk-free interest rate and implied volatility.
Note 15
.
Restructuring and Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Restructuring and Other
(in thousands)
|
2019
|
|
2018
|
|
Beginning reserve balance
|
$
|
1,971
|
|
|
$
|
2,452
|
|
|
Restructuring charges
|
1,014
|
|
|
2,916
|
|
|
Other charges
|
1,402
|
|
|
1,738
|
|
|
Non-cash restructuring and other
|
(302
|
)
|
|
(173
|
)
|
|
Payments
|
(2,475
|
)
|
|
(3,102
|
)
|
|
Ending reserve balance
|
$
|
1,610
|
|
|
$
|
3,831
|
|
During the three months ended March 31, 2019 and 2018
, we continued to analyze and re-align our cost structure. These charges primarily relate to integrating recently acquired businesses, consolidating facilities, eliminating redundancies, and lowering our operating expenses. Restructuring and other consists primarily of restructuring, severance, short-term retention costs, facility downsizing and relocation, and acquisition integration expenses.
Restructuring and other costs were
$2.4
and
$4.7 million
during the three months ended March 31, 2019 and 2018
, respectively. Restructuring and other costs include severance charges of
$1.3 million
related to reductions in head count of
33
during the
three months ended
March 31, 2019
; and
$3.0 million
related to reductions in head count of
55
during the
three months ended
March 31, 2018
. Severance costs include severance payments, retention payments, related employee benefits, outplacement fees, recruiting, and employee relocation costs.
Facilities relocation and downsizing expenses were
$0.2
and
$0.5 million
during the three months ended March 31, 2019 and 2018
, respectively. These expenses were primarily related to the relocation of certain manufacturing and administrative locations due to reduced space requirements. Integration expenses of
$1.0
and
$1.1 million
during the three months ended March 31, 2019 and 2018
, respectively, were incurred for the integration of our business acquisitions.
Note 16
.
Income Taxes
We recognized a tax
provision
of
$0.2 million
on pretax
loss
of
$18.5 million
during the
three months ended
March 31, 2019
; and a tax
benefit
of
$2.1 million
on pretax
loss
of
$5.7 million
during the
three months ended
March 31, 2018
. The provision for (benefit from) income taxes before discrete items reflected in the table below was a provision of
$22 thousand
during the
three months ended
March 31, 2019
, and a benefit of
$3.5 million
during the
three months ended
March 31, 2018
. The increase in the provision for income taxes before discrete items
for the three months ended March 31, 2019
, compared with the same period in the prior year, was primarily due to a decreased expected tax rate applied to pre-tax losses.
Primary differences between our provision for income taxes before discrete items and the income tax provision at the U.S. statutory rate include taxes on permanently reinvested foreign earnings, the tax effects of stock-based compensation expense which are non-deductible for tax purposes, and the U.S. Research and Development Credit.
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Reconciliation of Provision for Income Taxes Before Discrete Items
(in thousands)
|
2019
|
|
2018
|
|
Provision for (benefit from) income taxes before discrete items
|
$
|
22
|
|
|
$
|
(3,456
|
)
|
|
Interest related to unrecognized tax benefits
|
98
|
|
|
112
|
|
|
Provision for (benefit from) stock-based compensation, including ESPP dispositions
|
32
|
|
|
(24
|
)
|
|
Benefit from reversals of uncertain tax positions
|
—
|
|
|
(150
|
)
|
|
Provision for reassessment of taxes upon tax law change
|
—
|
|
|
161
|
|
|
Provision for deemed repatriation transition tax
|
—
|
|
|
1,222
|
|
|
Provision (benefit) for income taxes
|
$
|
152
|
|
|
$
|
(2,135
|
)
|
The SEC issued SAB 118, which allowed us to record a provisional estimate of the income tax effects of the 2017 Tax Act in the period in which we could make a reasonable estimate of its effects. Subsequent to the initial
$27.5 million
tax charge in the year ended December 31, 2017 as a provisional estimate, we accrued
$1.2 million
for state taxes as an additional provisional estimate in the three months ended March 31, 2018.
As of
March 31, 2019
, and
December 31, 2018
, gross unrecognized benefits that would impact the effective tax rate if recognized were
$33.4
and
$31.7 million
, respectively. Over the next twelve months, our existing tax positions will continue to generate increased liabilities for unrecognized tax benefits. It is reasonably possible that our gross unrecognized tax benefits will decrease up to
$6.5 million
in the next twelve months. These adjustments, if recognized, would positively impact our effective tax rate, and would be recognized as additional tax benefits in our Condensed Consolidated Statements of Operations.
$17.6 million
of gross unrecognized tax benefits were offset against deferred tax assets as of
March 31, 2019
, and the remaining
$15.8 million
has been recorded as noncurrent income taxes payable.
We are subject to examination by the Internal Revenue Service (“IRS”) for the 2015-2017 tax years, state tax jurisdictions for the 2014-2017 tax years, the Netherlands tax authority for the 2014-2017 tax years, the Spanish tax authority for the 2014-2017 tax years, the Israel tax authority for the 2015-2017 tax years, and the Italian tax authority for the 2014-2017 tax years.