Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the audited consolidated financial statements and related notes thereto included in this Annual Report on Form 10-K.
All assumptions, anticipations, expectations, and forecasts contained herein are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act that involve risks and uncertainties. Forward-looking statements include, among others, those statements including words such as “address,” “anticipate,” “believe,” “consider,” “continue,” “develop,” “estimate,” “expect,” “further,” “goal,” “intend,” “may,” “plan,” “potential,” “project,” “seek,” “should,” “target,” “will,” variations of such words, and similar expressions. Our actual results could differ materially from those discussed here. For a discussion of the factors that could impact our results, readers are referred to Item 1A, “Risk Factors,” in Part I of this Annual Report on Form 10-K and to our other reports filed with the SEC, including the Company’s most recent Quarterly Report on Form 10-Q and Current Reports on Form 8-K, and any amendments thereto. We do not assume any obligation to update the forward-looking statements provided to reflect events that occur or circumstances that exist after the date on which they were made.
Results of Operations
Consolidated results of operations are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
Change
|
|
2017
|
|
2016
|
|
Change
|
|
|
|
|
|
Amount
|
|
Percent
|
|
|
|
|
|
Amount
|
|
Percent
|
Revenue
|
$
|
1,015,021
|
|
|
$
|
993,260
|
|
|
$
|
21,761
|
|
|
2
|
%
|
|
$
|
993,260
|
|
|
$
|
992,065
|
|
|
$
|
1,195
|
|
|
—
|
%
|
Cost of revenue
|
516,448
|
|
|
486,804
|
|
|
29,644
|
|
|
6
|
%
|
|
486,804
|
|
|
483,900
|
|
|
2,904
|
|
|
1
|
%
|
Gross profit
|
498,573
|
|
|
506,456
|
|
|
(7,883
|
)
|
|
(2
|
)%
|
|
506,456
|
|
|
508,165
|
|
|
(1,709
|
)
|
|
—
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
159,941
|
|
|
157,358
|
|
|
2,583
|
|
|
2
|
%
|
|
157,358
|
|
|
151,395
|
|
|
5,963
|
|
|
4
|
%
|
Sales and marketing
|
183,498
|
|
|
173,697
|
|
|
9,801
|
|
|
6
|
%
|
|
173,697
|
|
|
169,042
|
|
|
4,655
|
|
|
3
|
%
|
General and administrative
|
76,576
|
|
|
92,953
|
|
|
(16,377
|
)
|
|
(18
|
)%
|
|
92,953
|
|
|
85,618
|
|
|
7,335
|
|
|
9
|
%
|
Amortization of identified intangibles
|
45,291
|
|
|
47,339
|
|
|
(2,048
|
)
|
|
(4
|
)%
|
|
47,339
|
|
|
39,560
|
|
|
7,779
|
|
|
20
|
%
|
Restructuring and other
|
13,581
|
|
|
7,562
|
|
|
6,019
|
|
|
80
|
%
|
|
7,562
|
|
|
6,731
|
|
|
831
|
|
|
12
|
%
|
Total operating expenses
|
478,887
|
|
|
478,909
|
|
|
(22
|
)
|
|
—
|
%
|
|
478,909
|
|
|
452,346
|
|
|
26,563
|
|
|
6
|
%
|
Income from operations
|
19,686
|
|
|
27,547
|
|
|
(7,861
|
)
|
|
(29
|
)%
|
|
27,547
|
|
|
55,819
|
|
|
(28,272
|
)
|
|
(51
|
)%
|
Interest expense
|
(20,169
|
)
|
|
(19,505
|
)
|
|
(664
|
)
|
|
3
|
%
|
|
(19,505
|
)
|
|
(17,716
|
)
|
|
(1,789
|
)
|
|
10
|
%
|
Interest income and other income, net
|
1,604
|
|
|
4,088
|
|
|
(2,484
|
)
|
|
(61
|
)%
|
|
4,088
|
|
|
545
|
|
|
3,543
|
|
|
*
|
Income before income taxes
|
$
|
1,121
|
|
|
$
|
12,130
|
|
|
$
|
(11,009
|
)
|
|
*
|
|
$
|
12,130
|
|
|
$
|
38,648
|
|
|
$
|
(26,518
|
)
|
|
(69
|
)%
|
___________
* Percentage not meaningful.
Out-of-Period Adjustments
As discussed more fully in
Note 1
–
The Company and Summary of Significant Accounting Policies
of Notes to Consolidated Financial Statements, during the year ended December 31, 2017, we recorded out-of-period adjustments related to certain bill and hold transactions, which decreased revenue by $3.4 million, decreased gross profit by $0.5 million, and increased net loss by $0.3 million (or $0.01 per diluted share).
Consolidated Revenue
Consolidated revenue grew by
$21.8 million
or
2%
in the
year ended December 31, 2018
compared to the
year ended December 31, 2017
, reflecting growth of
6%
in Industrial Inkjet,
7%
growth in Productivity Software, and a decrease of
10%
in Fiery revenues. Sales in the Americas grew by
3%
, sales in EMEA declined by
1%
, and sales in APAC increased by
9%
in the
year ended December 31, 2018
compared to the
year ended December 31, 2017
.
Consolidated revenue grew by
$1.2 million
or less than 1% in the
year ended December 31, 2017
compared to the
year ended December 31, 2016
, reflecting growth of
1%
in Industrial Inkjet,
3%
growth in Productivity Software, and a decrease of
4%
in Fiery revenues. Sales in the Americas decreased by
2%
, while sales in EMEA and APAC both increased by
3%
in the
year ended December 31, 2017
compared to the
year ended December 31, 2016
.
We completed our acquisitions of FFPS, Generation Digital, CRC, and Escada in the
year ended December 31, 2017
. Post-acquisition revenue was $27.1 million in 2017 related to these four acquisitions. We completed our acquisitions of Rialco and Optitex in the
year ended December 31, 2016
. Post-acquisition revenue was $19.8 million in 2016 related to these two acquisitions.
Revenue by Operating Segment
We manage our business in three operating segments as follows:
Industrial Inkjet,
which consists of super-wide and wide format display graphics, corrugated packaging and display, textile, and ceramic tile and building material industrial digital inkjet printers; digital UV curable, LED curable, ceramic, water-based, and thermoforming and specialty ink, as well as a variety of textile ink including dye sublimation, pigmented, reactive dye, acid dye, pure disperse dye, water-based dispersed printing ink, and coatings; digital inkjet printer parts; and professional services.
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. We also market Optitex fashion CAD software, which facilitates fast fashion and increased efficiency in the fashion and textile industries.
Fiery,
which consists of Fiery and FFPS, 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, (iv) self-service and payment solutions, and (v) stand-alone software-based solutions such as our proofing, textile, and scanning solutions.
See additional discussion of our business and operating segments in Item 1: Business.
Revenue by operating segment is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by Segment
|
Year Ended December 31,
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
Change
|
|
2017
|
|
2016
|
|
Change
|
|
|
|
|
|
Amount
|
|
Percent
|
|
|
|
|
|
Amount
|
|
Percent
|
Industrial Inkjet
|
$607,559
|
|
$570,688
|
|
$36,871
|
|
6
|
%
|
|
$
|
570,688
|
|
|
$
|
562,583
|
|
|
$
|
8,105
|
|
|
1
|
%
|
Productivity Software
|
168,284
|
|
|
156,561
|
|
|
11,723
|
|
|
7
|
|
|
156,561
|
|
|
151,737
|
|
|
4,824
|
|
|
3
|
|
Fiery
|
239,178
|
|
|
266,011
|
|
|
(26,833
|
)
|
|
(10
|
)
|
|
266,011
|
|
|
277,745
|
|
|
(11,734
|
)
|
|
(4
|
)
|
Total
|
$1,015,021
|
|
$993,260
|
|
$21,761
|
|
2
|
%
|
|
$
|
993,260
|
|
|
$
|
992,065
|
|
|
$
|
1,195
|
|
|
—
|
%
|
The percentage of consolidated revenue by operating segment was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Industrial Inkjet
|
$
|
607,559
|
|
|
60
|
%
|
|
$
|
570,688
|
|
|
57
|
%
|
|
$
|
562,583
|
|
|
57
|
%
|
Productivity Software
|
168,284
|
|
|
17
|
|
|
156,561
|
|
|
16
|
|
|
151,737
|
|
|
15
|
|
Fiery
|
239,178
|
|
|
23
|
|
|
266,011
|
|
|
27
|
|
|
277,745
|
|
|
28
|
|
Total
|
$
|
1,015,021
|
|
|
100
|
%
|
|
$
|
993,260
|
|
|
100
|
%
|
|
$
|
992,065
|
|
|
100
|
%
|
Overview
During the past several years, revenue from our Industrial Inkjet and Productivity Software segments has grown while revenue from our Fiery segment has decreased. This shifting in product mix has important implications for us because our gross profit margins have historically been lower in the Industrial Inkjet segment than in either the Productivity Software or Fiery segments. If this trend continues our consolidated gross profit margin may be lower in future periods, although management is implementing plans to improve gross margins in the Industrial Inkjet segment to help mitigate this impact.
Industrial Inkjet
Industrial Inkjet revenue increased by
$36.9 million
or
6%
in the
year ended December 31, 2018
compared to the
year ended December 31, 2017
. Industrial Inkjet revenue increased primarily due to:
|
|
•
|
continuing sales of our Nozomi single-pass industrial digital inkjet platform for the corrugated market which was launched in the second half of 2017, and reached total revenue of $65.7 million in 2018, compared to $16.1 million in 2017,
|
|
|
•
|
increased ink revenue due to the increase in our installed printer base and the high utilization that our industrial inkjet printers are experiencing in the field, and
|
|
|
•
|
increased revenue from parts and service.
|
|
|
•
|
These increases were partially offset by decreased printer sales in the display graphics and ceramic market segments due to reduced customer demand.
|
Industrial Inkjet revenue increased by
$8.1 million
or
1%
in the
year ended December 31, 2017
compared to the
year ended December 31, 2016
. Industrial Inkjet revenue increased primarily due to:
|
|
•
|
the launch of our Nozomi single-pass industrial digital inkjet platform in 2017,
|
|
|
•
|
a full year of post-acquisition Rialco ink products revenue, which closed in March 2016,
|
|
|
•
|
increased ink revenue due to the increase in our installed printer base and the high utilization that our industrial digital inkjet printers are experiencing in the field, and
|
|
|
•
|
increased revenue from parts and service, partially offset by
|
|
|
•
|
decreased digital inkjet printer revenue due to reduced demand in anticipation of future product launches and
|
|
|
•
|
printer revenue, which would have been higher by $3.4 million when considering out-of-period adjustments related to certain bill and hold transactions, which were recorded during the year ended December 31, 2017.
|
Productivity Software
Productivity Software revenue increased by
$11.7 million
or
7%
in the
year ended December 31, 2018
compared to the
year ended December 31, 2017
, primarily due to post-acquisition revenue from Escada, which was acquired in October 2017, increased license revenue in our other products, and post-acquisition revenue from CRC, which was acquired in May 2017.
Productivity Software revenue increased by
$4.8 million
or
3%
in the
year ended December 31, 2017
compared to the
year ended December 31, 2016
, primarily due to post-acquisition revenue from Optitex, which was acquired in June 2016, post-acquisition revenue from CRC, post-acquisition revenue from Escada, increased service revenue, and annual price increases related to our maintenance contracts, partially offset by decreased license revenue.
Fiery
Fiery revenue decreased by
$26.8 million
or
10%
in the
year ended December 31, 2018
compared to the
year ended December 31, 2017
. Although end customer and reseller preference for Fiery products drives demand, most Fiery revenue relies on printer manufacturers to design, develop, and integrate Fiery technology into their print engines. We believe sales of the printers on which Fiery is available decreased during 2018. In addition, several of these leading printer manufacturers have developed competing DFEs for their printers in lieu of using Fiery DFEs. The leading printer manufacturers further reduced their purchases during 2018 compared to 2017 for controller units, software options, and DFE solutions. These decreases were partially offset by post-acquisition revenue from Generation Digital, which was acquired in August 2017.
Fiery revenue decreased by
$11.7 million
or
4%
in the
year ended December 31, 2017
compared to the
year ended December 31, 2016
. The leading printer manufacturers tightly managed their inventory levels in the first half of 2017, which decreased demand, partially offset by increased inventory levels and increased demand in the second half of 2017. This decrease in volume was partially offset by post-acquisition revenue from FFPS, which was acquired in January 2017, and post-acquisition revenue from Generation Digital.
Recurring Revenue
We define recurring revenue as ongoing sales of products and services which by their nature are expected to continue over a reasonable period of time. We include ink sales in recurring revenue because our customers typically buy their ink from us throughout the life of our printers. We include revenue from extended service, warranty, and maintenance plans because we generally provide these services over an extended contract period. We include revenue from software subscriptions because it is provided over a contractual period of time, and our experience is that most customers renew their subscriptions on an ongoing basis.
Our recurring revenue by segment and the percentage of total segment revenue is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring Revenue
|
Year Ended December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
Industrial Inkjet
|
$
|
226,887
|
|
|
37
|
%
|
|
$
|
221,316
|
|
|
39
|
%
|
|
$
|
206,540
|
|
|
37
|
%
|
Productivity Software
|
91,487
|
|
|
54
|
|
|
89,375
|
|
|
57
|
|
|
83,051
|
|
|
55
|
|
Fiery
|
18,169
|
|
|
8
|
|
|
14,642
|
|
|
6
|
|
|
14,379
|
|
|
5
|
|
Total
|
$
|
336,543
|
|
|
|
|
$
|
325,333
|
|
|
|
|
$
|
303,970
|
|
|
|
Recurring revenue increased by
$11.2 million
or
3%
in the
year ended December 31, 2018
compared to the
year ended December 31, 2017
, primarily due to increased ink volume and higher software maintenance and support revenues, partially offset by a slight decline in extended warranty revenue within the Industrial Inkjet segment.
Recurring revenue increased by
$21.4 million
or
7%
in the
year ended December 31, 2017
compared to the
year ended December 31, 2016
, primarily due to increased ink volume and higher software maintenance and support revenues.
From time to time we may experience supply issues like we did during the third quarter of 2018, primarily in China, where we saw changes in tariff structure, price increases in ink components, and short supplies of ink components due to reduced production levels at a number of suppliers, which limited the amount of ink we could manufacture. We are working to increase purchases from new sources for ink components but we could still experience some negative impact on ink volume growth in the short term.
Revenue by Geographic Region
Revenue by geographic region is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by Region
|
Year Ended December 31,
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
Change
|
|
2017
|
|
2016
|
|
Change
|
|
|
|
|
|
Amount
|
|
Percent
|
|
|
|
|
|
Amount
|
|
Percent
|
Americas
|
$
|
502,820
|
|
|
$
|
487,968
|
|
|
$
|
14,852
|
|
|
3
|
%
|
|
$
|
487,968
|
|
|
$
|
500,411
|
|
|
(12,443
|
)
|
|
(2
|
)%
|
EMEA
|
364,908
|
|
|
369,610
|
|
|
(4,702
|
)
|
|
(1
|
)
|
|
369,610
|
|
|
360,305
|
|
|
9,305
|
|
|
3
|
|
APAC
|
147,293
|
|
|
135,682
|
|
|
11,611
|
|
|
9
|
|
|
135,682
|
|
|
131,349
|
|
|
4,333
|
|
|
3
|
|
Total
|
$
|
1,015,021
|
|
|
$
|
993,260
|
|
|
$
|
21,761
|
|
|
2
|
%
|
|
$
|
993,260
|
|
|
$
|
992,065
|
|
|
$
|
1,195
|
|
|
—
|
%
|
Americas
Revenue in the Americas increased by
$14.9 million
or
3%
in the
year ended December 31, 2018
compared to the
year ended December 31, 2017
. The Americas accounted for
50%
of consolidated revenue compared to
49%
in the prior year. The increase was driven by a 13% increase in Industrial Inkjet revenues in the region due primarily to sales of our Nozomi corrugated printers, and an increase in sales to the textile market segment, partially offset by reduced sales in the display graphics market. Productivity Software sales in the Americas increased by 2% while Fiery sales decreased by 11% compared to the prior year.
Americas revenue decreased by
$12.4 million
or
2%
in the
year ended December 31, 2017
compared to the
year ended December 31, 2016
. The Americas accounted for
49%
of consolidated revenue compared to
51%
in the prior year. The decrease was primarily due to decreased Industrial Inkjet printer revenue resulting from reduced demand in anticipation of future product launches, Industrial Inkjet revenue that would have been higher by $3.4 million when considering out-of-period adjustments related to certain bill and hold transactions, and decreased Fiery revenue, partially offset by increased ink revenue.
EMEA
Revenue in EMEA decreased by
$4.7 million
or
1%
in the
year ended December 31, 2018
compared to the
year ended December 31, 2017
. EMEA accounted for
36%
of consolidated revenue compared to
37%
in the prior year. The decrease was attributable to a decrease of 18% in Fiery sales in the region due to reduced demand, partially offset by a 16% increase in Productivity Software revenues and a 1% increase in Industrial Inkjet sales compared to the prior year. Movements in currency exchange rates reduced the year-over-year decrease.
EMEA revenue increased by
$9.3 million
or
3%
in the
year ended December 31, 2017
compared to the
year ended December 31, 2016
. EMEA accounted for
37%
of consolidated revenue compared to
36%
in the prior year. The increase was primarily due to increased Industrial Inkjet revenue from the Nozomi corrugated printer, higher ink revenue, post-acquisition Optitex revenue, and post-acquisition Escada revenue, partially offset by decreased Fiery revenue.
APAC
Revenue in APAC increased by
$11.6 million
or
9%
in the
year ended December 31, 2018
compared to the
year ended December 31, 2017
. APAC accounted for
14%
of consolidated revenue compared to
14%
in the prior year. The increase was primarily due to a 15% increase in Fiery sales in the region, as well as a 4% increase in Industrial Inkjet and a 32% increase in Productivity Software sales compared to the prior year. Within Industrial Inkjet, sales of textile printers increased while sales of ceramic printers decreased.
APAC revenue increased by
$4.3 million
or
3%
in the
year ended December 31, 2017
compared to the
year ended December 31, 2016
. APAC accounted for
14%
of consolidated revenue compared to
13%
in the prior year. The increase was primarily due to increased industrial digital inkjet printer and ink revenue and post-acquisition Optitex revenue, partially offset by decreased Fiery revenue.
Revenue Concentration
A substantial portion of our revenue over the years has been attributable to sales of products through the leading printer manufacturers and independent distributor channels. We have a direct relationship with several leading printer manufacturers and work closely to design, develop, and integrate Fiery technology into their print engines. The printer manufacturers act as distributors and sell our DFE products to end customers through reseller channels. End customer and reseller channel preference for our DFE and software solutions drives demand for Fiery products through the printer manufacturers.
Although end customer and reseller channel preference for Fiery products drives demand, most Fiery revenue relies on printer manufacturers to design, develop, and integrate Fiery technology into their print engines. A significant portion of our revenue is, and has been, generated by sales of our Fiery DFE products to a relatively small number of leading printer manufacturers. During the
year ended December 31, 2017
, Xerox provided 11% of our consolidated revenue. No customer accounted for more than 10% of our revenue for the years ended December 31, 2018 or December 31, 2016.
Our reliance on revenue from the leading printer manufacturers was
22%
,
26%
, and
28%
during the years ended December 31, 2018, 2017, and 2016, respectively. Over time, we expect our revenue from the leading printer manufacturers to decline as a percentage of our consolidated revenue as we grow our Industrial Inkjet and Productivity Software segments. Because sales of our Fiery DFE products constitute a significant portion of our revenue and there are a limited number of printer manufacturers producing copiers and printers in sufficient volume to be attractive customers for us, we expect that we will continue to depend on a relatively small number of printer manufacturers for a significant portion of our Fiery DFE revenue in future periods. Accordingly, if we lose or experience reduced sales to one of these printer manufacturer/distributors, we will have difficulty replacing that revenue with sales to new or existing customers.
Consolidated Gross Profit
Gross profit declined by
$7.9 million
and gross margin decreased from
51.0%
in
year ended December 31, 2017
to
49.1%
in the
year ended December 31, 2018
. The decrease in gross profit and margin was primarily due to shifts in product mix resulting in a greater proportion of our consolidated revenues coming from the Industrial Inkjet segment and a lower proportion coming from the Fiery segment. We have historically earned higher gross margins in the Fiery segment than in the Industrial Inkjet segment. We also recognized a $1.2 million increase in stock-based compensation expense within cost of revenues compared to the prior year.
Gross profit declined by
$1.7 million
and gross margin decreased from
51.2%
in the
year ended December 31, 2016
to
51.0%
in the
year ended December 31, 2017
. The decrease in gross profit and margin was primarily due to shifts in product mix resulting in a greater proportion of our consolidated revenues coming from the Industrial Inkjet segment and a lower proportion coming from the Fiery segments compared to the prior year.
Gross Profit by Segment
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.
Gross profit by operating segment, excluding stock-based compensation, was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Segment Gross Profit
|
2018
|
|
2017
|
|
2016
|
Industrial Inkjet
|
|
|
|
|
|
Revenue
|
$
|
607,559
|
|
|
$
|
570,688
|
|
|
$
|
562,583
|
|
Gross profit
|
210,792
|
|
|
208,620
|
|
|
198,923
|
|
Gross profit percentages
|
34.7
|
%
|
|
36.6
|
%
|
|
35.4
|
%
|
Productivity Software
|
|
|
|
|
|
Revenue
|
$
|
168,284
|
|
|
$
|
156,561
|
|
|
$
|
151,737
|
|
Gross profit
|
119,470
|
|
|
114,460
|
|
|
114,179
|
|
Gross profit percentages
|
71.0
|
%
|
|
73.1
|
%
|
|
75.2
|
%
|
Fiery
|
|
|
|
|
|
Revenue
|
$
|
239,178
|
|
|
$
|
266,011
|
|
|
$
|
277,745
|
|
Gross profit
|
172,081
|
|
|
185,937
|
|
|
198,322
|
|
Gross profit percentages
|
71.9
|
%
|
|
69.9
|
%
|
|
71.4
|
%
|
Industrial Inkjet Gross Profit
The Industrial Inkjet gross profit percentage decreased to
34.7%
in the
year ended December 31, 2018
compared to
36.6%
in the
year ended December 31, 2017
. The decrease was primarily due to lower gross margins on ink sales reflecting an increase in customer incentive discount programs during 2018, as well as higher ink and ink component costs due to a change in supplier. In addition, printer gross margins also declined slightly due to a higher mix of revenue coming from our Nozomi corrugated printers, which were not at their targeted gross margin levels until the end of 2018.
The Industrial Inkjet gross profit percentage increased to
36.6%
in the
year ended December 31, 2017
compared to
35.4%
in the
year ended December 31, 2016
. Gross profit percentages improved in ink, parts, and service, while printer gross profit percentages were comparable. The printer gross profit percentage continued to benefit from manufacturing efficiencies related to super-wide format printer production, reduced warranty expense due to engineering and quality improvements, and increased ink revenue at a higher gross profit percentage, partially offset by lower gross profit during the launch of our Nozomi single-pass platform and inventory write downs as a result of our Xeikon License Agreement.
Productivity Software Gross Profit
The Productivity Software gross profit percentage decreased to
71.0%
in the
year ended December 31, 2018
compared to
73.1%
in the
year ended December 31, 2017
. The decrease was primarily due to a higher mix of lower margin hardware and decreased gross margins on maintenance contracts, partially offset by increased gross margins on licenses and subscriptions.
The Productivity Software gross profit percentage decreased to
73.1%
in the
year ended December 31, 2017
compared to
75.2%
in the
year ended December 31, 2016
. The decrease was primarily due to decreased license revenue and increased product maintenance costs, partially offset by price increases on annual maintenance renewal contracts.
Fiery Gross Profit
The Fiery gross profit percentage increased to
71.9%
in the
year ended December 31, 2018
compared to
69.9%
in the
year ended December 31, 2017
. The Fiery gross profit percentage was negatively impacted by a charge of $1.4 million to cost of revenue in the year ended December 31, 2017, which reflects the cost of manufacturing plus a portion of the expected profit margin related to the acquired FFPS inventories. Inventory acquired in the acquisition of FFPS was required to be recorded at fair value rather than historical cost in accordance with ASC 805, Business Combinations. This amount is not included in the financial information regularly reviewed by management 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 have been 70.4% during the year ended December 31, 2017. The remainder of the increase was primarily due to improved margins on customized solutions provided to customers.
The Fiery gross profit percentage decreased to
69.9%
in the
year ended December 31, 2017
compared to
71.4%
in the
year ended December 31, 2016
. The Fiery gross profit percentage, excluding the fair value adjustment related to acquired FFPS inventories of $1.4 million, would have been 70.4% during the year ended December 31, 2017. The revenue mix between standalone and embedded DFEs, which have a lower margin compared with higher margin software options, accounts for this margin fluctuation between the periods.
Reconciliation to Consolidated Gross Profit
A reconciliation of operating segment gross profit to the consolidated statements of operations for the years ended
December 31, 2018
, 2017, and 2016 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Segment gross profit
|
$
|
502,343
|
|
|
$
|
509,017
|
|
|
$
|
511,424
|
|
Stock-based compensation expense
|
(3,770
|
)
|
|
(2,561
|
)
|
|
(2,784
|
)
|
Other items excluded from segment profit
|
—
|
|
|
—
|
|
|
(475
|
)
|
Gross profit
|
$
|
498,573
|
|
|
$
|
506,456
|
|
|
$
|
508,165
|
|
Operating Expenses
We are a global company and much of our operating expense is incurred in foreign locations. Accordingly, our operating expenses, as reported in U.S. Dollars, fluctuate due to changes in foreign currency exchange rates. We expect that if the U.S. dollar remains volatile against the British pound sterling, Euro, Indian rupee, Israeli shekel, or other currencies, operating expenses reported in U.S. dollars could fluctuate.
Research and Development
Research and development expenses include personnel, consulting, travel, research and development facilities, prototype materials, and non-recurring engineering expenses.
Research and development expense increased by
$2.6 million
or
2%
in the
year ended December 31, 2018
compared to the
year ended December 31, 2017
. The increase was primarily due to increased performance-based compensation of $2.0 million and increased stock-based compensation of $3.9 million due to higher probability of achieving certain performance based restricted stock units ("PSUs"). Partially offsetting these increases were reduced expenditures for outside consulting of $2.7 million and a $0.7 million reduction in prototype costs.
Research and development expense increased by
$6.0 million
or
4%
in the
year ended December 31, 2017
compared to the
year ended December 31, 2016
. The increase was primarily related to prototypes and non-recurring engineering, consulting, contractors, supplies, freight, and related travel expenses which increased by $7.6 million related to future product launches and FFPS sustaining engineering. Partially offsetting these increases were decreased personnel costs of $4.2 million primarily due to reduced variable compensation expense. The remaining increase of $2.6 million is primarily due to facilities and information technology expenses related to our research and development activities.
Sales and Marketing
Sales and marketing expenses include personnel, trade shows, marketing programs and promotional materials, sales commissions, travel and entertainment, depreciation, and worldwide sales office expenses.
Sales and marketing expense increased by
$9.8 million
or
6%
in the
year ended December 31, 2018
compared to the
year ended December 31, 2017
. The increase was primarily due to higher personnel costs including increased salaries, and variable compensation of $7.0 million, and increased stock-based compensation expense of $2.4 million due to higher probability of achieving certain performance-based awards.
Sales and marketing expense increased by
$4.7 million
or
3%
in
year ended December 31, 2017
compared to the
year ended December 31, 2016
. The increase was primarily due to higher personnel costs of $4.8 million primarily due to increased head count related to our business acquisitions. Stock-based compensation expense decreased by $1.1 million primarily due to reduced probability of achieving certain performance-based awards and delayed timing of granting our annual stock awards, partially offset by increased ESPP participation by employees compared to the prior year. The remaining increase of $1.0 million is primarily due to facilities and information technology expenses related to our sales and marketing activities.
General and Administrative
General and administrative expenses consist primarily of human resources, legal, finance, bad debts, and accounting expenses, as well as changes in the fair value of earnout liabilities.
General and administrative expense decreased by
$16.4 million
or
18%
in the
year ended December 31, 2018
compared to the
year ended December 31, 2017
. The decrease was primarily due to a change of $27.9 million in fair value adjustments to contingent consideration liabilities on previous acquisitions. The net contingent consideration liability reductions of
$21.5 million
in 2018 compare to a net increase of
$6.5 million
recognized during 2017, for a total change of $27.9 million. During 2018 we recorded a $20.9 million reduction in the contingent consideration liability for our 2016 acquisition of Optitex based on updated actual and projected performance against the earnout targets specified in the acquisition agreement. We also recognized a $2.6 million reduction in the contingent consideration liability for our prior acquisition of Generation Digital and a $2.2 million increase in the contingent consideration liability of our 2017 acquisition of Escada during the year ended December 31, 2018.
In addition to the fair value adjustments, bad debts expense decreased by $2.0 million in the current year compared to the prior year. Legal, accounting, and consulting expenses decreased by $2.1 million in 2018 compared to 2017 primarily related to our revenue recognition and accounting review costs which were higher in 2017. Partially offsetting these reductions were increases of $11.3 million in stock-based compensation due to the impacts of the transition of our Chief Executive Officer ("CEO") position, which required acceleration of stock-based compensation expense recognition on prior grants to our previous CEO at the date of change in his employment status, and higher probability of achieving certain performance-based awards for other employees. In addition, salaries increased by $2.7 million compared to the prior year due to increased headcount and annual merit adjustments and increased building rent and maintenance of $1.5 million.
General and administrative expenses increased by
$7.3 million
, or
9%
in the
year ended December 31, 2017
compared to the
year ended December 31, 2016
. Personnel costs increased by $2.3 million primarily due to head count increases related to our business acquisitions. Professional services fees increased by $1.2 million. Reserves for litigation and doubtful accounts increased by $0.6 million and the fair value adjustments to contingent consideration increased by $0.4 million. Legal and accounting fees related to the revenue recognition and accounting review were $6.4 million. Stock-based compensation expense decreased by $4.2 million primarily due to reduced probability of achieving certain performance-based awards and delayed timing of granting our annual awards.
The fair value of contingent consideration increased by $6.5 million during the
year ended December 31, 2017
, including earnout interest accretion of $1.7 million related to all acquisitions. The Optitex, CTI, and Rialco earnout performance probabilities increased while the Shuttleworth earnout performance probability decreased during 2017. The estimated probabilities of achieving the Optitex, Reggiani, DirectSmile, and CTI earnout performance targets increased during the year ended December 31, 2016, partially offset by reduced probabilities of achieving the DIMS and Shuttleworth earnout performance targets, resulting in an increase in the associated liability and a charge to general and administrative expense of $6.9 million, including accretion of interest related to all acquisitions.
Many of our acquisitions have included elements of contingent consideration in the purchase price which are primarily linked to financial performance of the acquired business following our acquisition. The fair value of this contingent consideration is estimated and recorded at the acquisition date. In subsequent periods, as the actual and expected financial performance of the business changes, the contingent consideration liabilities are adjusted to updated estimated fair values.
We recorded impairment losses of
$0.3
and
$0.9 million
during the years ended December 31, 2018 and 2017, respectively, related to the Meredith, NH manufacturing facilities and related land. For additional information, please refer to
Note 9
–
Property and Equipment, net
of Notes to Consolidated Financial Statements for details. There were no asset impairment charges recognized during the year ended December 31, 2016.
Amortization of Identified Intangibles
Amortization of identified intangibles decreased by
$2.0 million
or
4%
in the
year ended December 31, 2018
compared to the
year ended December 31, 2017
, primarily because we made no acquisitions during 2018, and certain identified intangibles from earlier acquisitions became fully amortized.
Amortization of identified intangibles increased by
$7.7 million
, or
20%
in the
year ended December 31, 2017
compared to the
year ended December 31, 2016
, primarily due to amortization of identified intangibles resulting from the Escada, Generation Digital, CRC, and FFPS acquisitions made in 2017, as well as full year amortization expense recognized on 2016 acquisitions, partially offset by decreased amortization due to certain intangible assets from prior year acquisitions becoming fully amortized.
Restructuring and Other
Restructuring and other expenses were
$13.6 million
in the
year ended December 31, 2018
and included severance costs of $7.6 million related to head count reductions of 148. Severance costs include severance payments, related employee benefits, retention bonuses, outplacement fees, recruiting, and relocation costs. We also incurred facilities relocation and downsizing expenses of $1.7 million, primarily consisting of costs to relocate operations from our prior Meredith, NH facilities to our new Manchester, NH facility and to consolidate our headquarters in Fremont, CA from two buildings into one. Facilities restructuring and other expenses are primarily related to the relocation of certain manufacturing and administrative locations to accommodate decreased or different space requirements. We also recognized
$4.3 million
in integration costs incurred to integrate our previously acquired businesses, including costs incurred in the project to implement SAP at our Reggiani subsidiary.
Restructuring and other expenses were
$7.6 million
in the
year ended December 31, 2017
and included severance costs of $4.7 million related to head count reductions of 144. We incurred facilities relocation and downsizing expenses of $0.6 million consisting of costs to relocate certain manufacturing and administrative locations to accommodate decreased or different space requirements. We also recognized $2.3 million in integration costs incurred to integrate our previously-acquired businesses.
Restructuring and other expenses were
$6.7 million
in the
year ended December 31, 2016
and included severance costs of $4.1 million related to head count reductions of 128. We incurred facilities relocation and downsizing expenses of $0.5 million primarily consisting of costs to relocate certain manufacturing and administrative locations to accommodate decreased or different space requirements. We also recognized $2.1 million in integration costs incurred to integrate our previously-acquired businesses.
Stock-based Compensation
Stock-based compensation expense for the years ended
December 31, 2018
, 2017, and 2016 was
$45.3
,
$26.5
, and
$31.8 million
, respectively. Stock-based compensation expense is included in cost of sales, research and development, sales and marketing, and general and administrative expenses in the Consolidated Statement of Operations.
We account for stock-based payment awards in accordance with ASC 718, Stock Compensation, which requires stock-based compensation expense to be recognized based on the fair value of such awards on the date of grant. We amortize compensation cost on a graded vesting basis over the vesting period, after assessing the probability of achieving requisite performance criteria with respect to performance-based awards. Stock-based compensation cost is recognized over the requisite service period for each separately vesting tranche of the award as though the award were, in substance, multiple awards. This has the impact of greater stock-based compensation expense recognized during the initial years of the vesting period for awards with multiple tranches.
Stock-based compensation expense increased by
$18.7 million
or
71%
in the
year ended December 31, 2018
compared to the
year ended December 31, 2017
primarily due to increased probability of achieving performance-based awards and the impacts of the transition of our CEO during 2018, which required acceleration of stock-compensation expense recognition on prior grants to our previous CEO at the date of change in his employment status. Stock-based compensation expense decreased by
$5.3 million
or
17%
in the
year ended December 31, 2017
compared to the
year ended December 31, 2016
primarily due to reduced probability of achieving performance-based awards and delayed timing of granting our annual awards, partially offset by increased ESPP expense resulting from higher employee participation compared to the prior year.
Interest Expense
Interest expense increased by
$0.7 million
or
3%
in the
year ended December 31, 2018
compared to the
year ended December 31, 2017
, primarily due to interest recognized on the 2023 Notes issued in November 2018. Interest expense increased by
$1.8 million
or
10%
in the
year ended December 31, 2017
compared to the
year ended December 31, 2016
primarily due to interest accretion related to the FFPS purchase liability, long-term warranties, the Reggiani non-compete agreement liability, and contingent consideration liabilities.
Interest Income and Other Income, Net
Interest income and other income, net, includes interest income on our cash equivalents and short-term investments, gains and losses from sales of our cash equivalents and short-term investments, and net foreign currency exchange gains and losses.
Interest income and other income, net decreased by
$2.5 million
or
61%
in the
year ended December 31, 2018
compared to the
year ended December 31, 2017
, primarily due to reduced interest income of
$0.8 million
due to reduced levels of cash investments during most of the year and a $0.8 million increase in loss on investments. Interest income and other income, net increased by
$3.5 million
in the
year ended December 31, 2017
compared to the
year ended December 31, 2016
, primarily due to increased investment income of $0.8 million resulting from increased market interest rates, decreased foreign currency exchange losses of $2.2 million, and $0.3 million related to the Xeikon License Agreement.
Income (Loss) before Income Taxes
Income (loss) before income taxes is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
U.S.
|
$
|
(64,810
|
)
|
|
$
|
(27,926
|
)
|
|
$
|
8,254
|
|
Foreign
|
65,931
|
|
|
40,056
|
|
|
30,394
|
|
Total income before income taxes
|
$
|
1,121
|
|
|
$
|
12,130
|
|
|
$
|
38,648
|
|
For the
year ended December 31, 2018
, income before income taxes of
$1.1 million
consisted of a U.S. loss before income taxes of
$64.8 million
and foreign income before income taxes of
$65.9 million
, respectively. Loss before income taxes attributable to U.S. operations included stock-based compensation of
$45.3 million
, interest expense related to our Notes of $14.2 million, amortization of identified intangible assets of $11.7 million, restructuring and other of $9.2 million, legal and
accounting fees related to the revenue recognition review and assessment of $2.4 million, acquisition-related costs of $1.3 million, loss on investments of $0.9 million, and asset impairment charges of $0.3 million, partially offset by a decrease in the fair value of contingent consideration of $2.6 million. Income before income taxes attributable to foreign operations included amortization of identified intangible assets of $33.6 million, restructuring and other of $4.2 million, and a decrease in the fair value of contingent consideration of $19.1 million. The exclusion of these items from income before income taxes would result in U.S. and foreign income before income taxes of $17.7 and $84.7 million, respectively, during the
year ended December 31, 2018
.
For the year ended December 31, 2017, income before income taxes of
$12.1 million
consisted of U.S. loss before income taxes of
$27.9 million
and foreign income before income taxes of
$40.1 million
, respectively. Loss before income taxes attributable to U.S. operations included amortization of identified intangible assets of $13.6 million, stock-based compensation of $26.5 million, restructuring and other of $5.5 million, legal and accounting fees related to the revenue recognition review and assessment of $6.4 million, asset impairment of $0.9 million, acquisition-related costs of $1.8 million, cost of revenue resulting from the fair value adjustment of FFPS inventory of $0.6 million, increased fair value of contingent consideration of $0.7 million, and interest expense related to our Notes of $17.1 million. Income before income taxes attributable to foreign operations included amortization of identified intangible assets of $33.7 million, restructuring and other of $2.1 million, cost of revenue resulting from the fair value adjustment of FFPS inventory of $0.8 million, litigation settlement expense of $0.3 million, earnout interest accretion of $1.7 million, acquisition-related costs of $0.3 million, and increased fair value of contingent consideration of $4.1 million. The exclusion of these items from income before income taxes would result in U.S. and foreign income before income taxes of $45.2 and $83.0 million, respectively, during the year ended December 31, 2017.
For the year ended December 31, 2016, income before income taxes of
$38.6 million
consisted of U.S. and foreign income before income taxes of
$8.3
and
$30.4 million
, respectively. The income before income taxes attributable to U.S. operations included amortization of identified intangibles of $7.6 million, stock-based compensation of $31.8 million, restructuring and other costs of $3.8 million, acquisition-related costs of $0.6 million, litigation settlement expense of $1.0 million, and interest expense and amortization of debt issuance costs related to our Notes of $16.3 million, and the change in fair value of contingent consideration of $0.6 million. The income before income taxes attributable to foreign operations included amortization of identified intangibles of $31.9 million, restructuring and other costs of $2.9 million, acquisition-related costs of $1.6 million, earnout interest accretion of $2.7 million, and the change in fair value of contingent consideration of $3.7 million. The exclusion of these items from income before income taxes would result in a U.S. and foreign income before income taxes of $69.9 and $73.2 million, respectively, for the year ended December 31, 2016.
Provision for (Benefit from) Income Taxes
Our provision for (benefit from) income taxes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Provision (Benefit)
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Income Before Tax
|
$
|
1,121
|
|
|
$
|
12,130
|
|
|
$
|
38,648
|
|
Provision for (benefit from) income taxes
|
2,092
|
|
|
27,475
|
|
|
(6,301
|
)
|
Effective income tax rate
|
186.6
|
%
|
|
226.5
|
%
|
|
(16.3
|
)%
|
Primary differences between our effective tax rate and U.S. statutory tax rate of 21% in 2018 and 35% in 2017 and 2016 include taxes on permanently reinvested foreign earnings, the tax effects of stock-based compensation expense pursuant to ASC 718-740, Stock Compensation – Income Taxes, which are non-deductible for tax purposes, the release of previously unrecognized tax benefits due to the expiration of U.S. federal, state and foreign statute of limitations, and tax benefits related to research and development tax credits.
In December 2017, the U.S. enacted the 2017 Tax Act which has wide ranging impacts including, but not limited to, a deemed repatriation transition tax and the revaluation of U.S. deferred tax assets and liabilities. 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. We initially recorded a $27.5 million tax charge in the year ended December 31, 2017 as a provisional estimate. This charge included an estimated charge of $17.0 million related to the deemed repatriation transition tax, which was comprised of a gross transition tax of $27.0 million offset by foreign tax credits of $10.0 million. In addition, we recorded a $10.5 million charge related to the remeasurement of U.S. deferred tax assets and liabilities. In 2018, pursuant to SAB 118, we recorded a net adjustment of a $1.2 million benefit to the deemed repatriation tax and remeasurement of U.S. deferred tax balances, as a result of the filing of our 2017 U.S. federal and state tax returns. We have completed our accounting for the impacts of the 2017 Tax Act.
The 2017 Tax Act also created a minimum tax on certain foreign earnings, also known as the GILTI provision, commencing in the year ending December 31, 2018. In 2018, we recorded a net charge of $4.7 million (GILTI inclusion less GILTI foreign tax credits) for the full year. In addition, we have made an accounting policy election to record GILTI as a period expense and not record deferred tax assets associated with GILTI.
During the years ended December 31, 2018 and 2017, we recognized tax benefits (including state tax benefit) of $3.6 million and $3.5 million, respectively, from the release of previously unrecognized tax benefits due to the expiration of U.S. federal, state, and foreign statute of limitations. During the year ended December 31, 2016, we recognized a $16.6 million tax benefit from the release of previously unrecognized tax benefits due to the expiration of U.S. federal, state, and foreign statutes of limitations, of which $10.3 million related to the 2012 gain on sale of our Foster City building and land.
We earn a significant amount of our operating income outside the U.S., which is permanently reinvested in foreign jurisdictions. Of the income generated in foreign jurisdictions, most is earned in the Netherlands, Spain, U.K., Italy, Israel, and the Cayman Islands. In 2017 and 2016, we realigned the ownership of certain intellectual property to augment operational synergies and parallel both our worldwide intellectual property ownership and our worldwide supply chain. Our effective tax rate could fluctuate significantly and be adversely impacted if anticipated earnings in the Netherlands, Spain, Italy, U.K., Israel, and the Cayman Islands are materially different than current projections.
While we currently do not foresee a need to repatriate the earnings of foreign operations, should we require more capital in the U.S. than our cash and cash equivalents and short-term investments located in the U.S., along with cash generated by our U.S. operations and potential borrowings under our revolving line of credit, we may elect to repatriate funds held in our foreign jurisdictions or raise capital in the U.S. through debt or equity issuances. These alternatives could result in higher effective tax rates, the cash payment of taxes and/or increased interest expense, and foreign income and withholding taxes.
As of December 31, 2018, the Company has accumulated undistributed earnings generated by our foreign subsidiaries of approximately $301 million. Since these earnings were subjected to the one-time transition tax on foreign earnings as required by the 2017 Tax Act, any additional taxes due with respect to such earnings or the excess of the amount for financial reporting over the tax basis of our foreign investments would generally be limited to foreign and state taxes. We intend, however, to indefinitely reinvest these earnings and expect future U.S. cash generation to be sufficient to meet future U.S. cash needs
.
In Altera Corp. v. Commissioner, the U.S. Tax Court issued an opinion on July 27, 2015 to exclude stock-based compensation expense in an intercompany cost-sharing arrangement. To date, the U.S. Department of the Treasury has not withdrawn the requirement to include stock-based compensation in intercompany cost-sharing arrangements from its regulations. On July 24, 2018, the Ninth Circuit Court reversed the Tax Court decision to require U.S. corporations to share their stock-based compensation with their foreign affiliates. The Ninth Circuit Court subsequently withdrew its initial decision on August 7, 2018. A final decision has not been reached as of December 31, 2018. Due to the uncertainty related to the status of both the current regulations and the appeal that has been filed by the Internal Revenue Service, we have not recorded any benefit as of December 31, 2018 in our Consolidated Statements of Operations. We will continue to monitor ongoing developments and potential impacts to our consolidated financial statements.
We assess the likelihood that our deferred tax assets will be recovered from future taxable income by considering both positive and negative evidence relating to their recoverability. If we believe that recovery of these deferred tax assets is not more likely than not, we establish a valuation allowance.
Significant judgment is required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we considered all available evidence, including recent operating results, projections of future taxable income, our ability to utilize loss and credit carryforwards, and the feasibility of tax planning strategies. Other than valuation allowances on deferred tax assets related to California, Luxembourg, Israel, Netherlands, Turkey, and the Optitex business unit that are likely to not be realized based on the size of the net operating loss and research and development credits being generated, we have determined that it is more likely than not that we will realize the benefits related to all other deferred tax assets. To the extent we increase a valuation allowance, we will include an expense in the Consolidated Statement of Operations in the period in which such determination is made.
Liquidity and Capital Resources
Overview
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2018
|
|
2017
|
|
2016
|
Cash and cash equivalents
|
$
|
309,052
|
|
|
$
|
170,345
|
|
|
$
|
164,313
|
|
Short-term investments
|
102,349
|
|
|
148,697
|
|
|
295,428
|
|
Cash, cash equivalents, and short-term investments
|
$
|
411,401
|
|
|
$
|
319,042
|
|
|
$
|
459,741
|
|
During the
year ended December 31, 2018
, cash, cash equivalents, and short-term investments increased by
$92.4 million
to
$411.4 million
as of
December 31, 2018
. The increase was primarily due to net proceeds of
$146.3 million
generated by the issuance of the 2023 Notes, cash flows from operating activities of
$83.5 million
, and
$10.5 million
received from the issuance of stock. These cash inflows were partially offset by purchases of treasury stock and net stock settlements totaling
$113.5 million
, net purchases of property and equipment of
$12.3 million
,
$11.2 million
paid in satisfaction of acquisition-related debt, and
$7.3 million
in funding of restricted cash related to the build-to-suit lease project in Manchester, NH.
During the
year ended December 31, 2017
, cash, cash equivalents, and short-term investments decreased by
$140.7 million
to
$319.0 million
as of
December 31, 2017
. The decrease was primarily due to purchases of treasury stock and net share settlements totaling
$101.8 million
, payments related to business acquisitions of
$63.6 million
, restricted cash equivalent funding of $26.3 million related to the build-to-suit lease construction project in Manchester, NH, and net purchases of property and equipment of
$13.8 million
. These cash outflows were partially offset by cash flows from operating activities of
$51.3 million
and
$12.1 million
received from the issuance of stock.
During the
year ended December 31, 2016
, cash, cash equivalents, and short-term investments decreased by
$37.6 million
to
$459.7 million
as of
December 31, 2016
. The decrease was primarily due to purchases of treasury stock and net share settlements totaling
$83.3 million
, payments related to acquisitions of
$56.3 million
, cash payments for property and equipment of
$22.4 million
, and restricted cash equivalent funding of $6.3 million related to the build-to-suit lease construction project in Manchester, NH. These cash outflows were partially offset by cash flows provided by operating activities of
$121.0 million
and proceeds from issuance of stock of
$11.1 million
.
As of
December 31, 2018
, we have approximately
$301.0 million
of unremitted foreign earnings which are deemed to be permanently reinvested. Cash, cash equivalents, and short-term investments held outside of the U.S. in various foreign subsidiaries were
$155.6
and
$88.4 million
as of
December 31, 2018
and 2017, respectively. These foreign-based funds are expected to be used to fund local operations and finance international acquisitions.
Based on past performance and current expectations, we believe that our cash, cash equivalents, short-term investments, cash generated from operating activities, and available borrowing under our $150 million Revolving Credit Facility will be adequate to satisfy our debt service, working capital, capital expenditure, investment, stock repurchase, commitments, and other liquidity requirements associated with our existing operations through at least the next twelve months. Our 2019 Notes mature on September 1, 2019 and on that date we expect to pay the $345 million principal amount in cash. We believe that the most strategic uses of our cash resources include business acquisitions, strategic investments to gain access to new technologies, repurchases of shares of our common stock, and working capital. See
Note 9
–
Property and Equipment, net
,
Note 12
–
Debt
, and
Note 13
–
Commitments and Contingencies
of Notes to Consolidated Financial Statements, as well as
Contractual Obligations below, for additional information about our expected obligations. As of
December 31, 2018
, cash, cash equivalents, and short-term investments available were
$411.4 million
.
Operating Activities
Net cash provided by operating activities is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2018
|
|
2017
|
|
2016
|
Net income (loss)
|
$
|
(971
|
)
|
|
$
|
(15,345
|
)
|
|
$
|
44,949
|
|
Depreciation and amortization
|
65,557
|
|
|
65,647
|
|
|
55,081
|
|
Deferred taxes
|
(11,381
|
)
|
|
8,753
|
|
|
(11,091
|
)
|
Stock-based compensation, net of cash settlements
|
45,281
|
|
|
26,532
|
|
|
31,726
|
|
Change in fair value of contingent obligations
|
(21,486
|
)
|
|
6,980
|
|
|
6,813
|
|
Non-cash accretion of interest expense on convertible notes and imputed financing obligation
|
15,239
|
|
|
14,981
|
|
|
13,489
|
|
Other non-cash charges and credits
|
11,295
|
|
|
18,378
|
|
|
15,024
|
|
Changes in operating assets and liabilities, net of effect of acquired business
|
(20,029
|
)
|
|
(74,631
|
)
|
|
(34,987
|
)
|
Net cash provided by operating activities
|
$
|
83,505
|
|
|
$
|
51,295
|
|
|
$
|
121,004
|
|
Net cash provided by operating activities in the
year ended December 31, 2018
consisted primarily of net loss of
$1.0 million
, depreciation and amortization of
$65.6 million
, a deferred tax benefit of
$11.4 million
, non-cash stock-based compensation of
$45.3 million
, non-cash changes in the fair value of contingent obligations from prior acquisitions of
$21.5 million
, non-cash interest accretion of
$15.2 million
, and other non-cash charges and credits and changes in operating assets and liabilities. The change in fair value of contingent obligations is primarily due to a reduction in the obligation related to Optitex. Other non-cash charges and credits included a provision for bad debts and sales-related allowances of
$7.0 million
and a provision for inventory obsolescence of
$6.0 million
. Changes in operating assets and liabilities included a net increase in accounts receivable of
$7.4 million
, a
$18.1 million
increase in inventories reflecting lower than anticipated sales volumes in the fourth quarter, an increase in other current assets of
$18.9 million
primarily due to increased lease receivables, and an increase in accounts payable and accrued liabilities of
$27.4 million
reflecting timing of payments to vendors.
Net cash provided by operating activities in the
year ended December 31, 2017
consisted primarily of net loss of
$15.3 million
, depreciation and amortization of
$65.6 million
, a deferred tax provision of
$8.8 million
, non-cash stock-based compensation of
$26.5 million
, non-cash changes in the fair value of contingent obligations from acquisitions of
$7.0 million
, non-cash interest accretion of
$15.0 million
, and other non-cash charges and credits and changes in operating assets and liabilities. The change in fair value of contingent obligations is primarily due to interest accretion on the obligations and increases in the estimated liabilities for Optitex, CTI, and Rialco, partially offset by a reduction for Shuttleworth. Other non-cash charges and credits included a provision for bad debts and sales-related allowances of
$12.4 million
and provision for inventory obsolescence of
$6.3 million
. Changes in operating assets and liabilities included a net increase in accounts receivable of
$29.2 million
, a
$24.4 million
increase in inventories reflecting lower than anticipated sales volumes in the fourth quarter, an increase in other current assets of
$9.2 million
, and a decrease in accounts payable and accrued liabilities of
$6.2 million
reflecting timing of payments to vendors.
Net cash provided by operating activities in the
year ended December 31, 2016
consisted primarily of net income of
$44.9 million
, depreciation and amortization of
$55.1 million
, a deferred tax benefit of
$11.1 million
, non-cash stock-based compensation of
$31.7 million
, non-cash changes in the fair value of contingent obligations from acquisitions of
$6.8 million
, non-cash interest accretion of
$13.5 million
, and other non-cash charges and credits and changes in operating assets and liabilities. The change in fair value of contingent obligations is primarily due to interest accretion on the obligations and increases in the estimated liabilities for Optitex, Reggiani, DirectSmile, and CTI, partially offset by a reduction for DIMS and Shuttleworth. Other non-cash charges and credits included a provision for bad debts and sales-related allowances of
$10.7
million
and provision for inventory obsolescence of
$5.7 million
. Changes in operating assets and liabilities included a net increase in accounts receivable of
$31.2 million
.
Accounts Receivable
Our primary source of operating cash flow is the collection of accounts receivable from our customers. One measure of the effectiveness of our collection efforts is DSO. DSOs were
87
,
84
,
and
76
days as of
December 31, 2018
, 2017, and 2016, respectively.
DSOs increased during the
year ended December 31, 2018
, compared to the
year ended December 31, 2017
, primarily due to sales with extended payment terms and reduced down payment requirements as a result of a higher portion of our sales coming from our two direct-sales businesses; Industrial Inkjet and Productivity Software. DSOs increased during the
year ended December 31, 2017
compared to the
year ended December 31, 2016
, primarily due to sales with extended payment terms and a non-linear sales cycle resulting in significant billings at the end of the quarter. Industrial Inkjet and Productivity Software were
76%
,
73%
, and
72%
of consolidated revenue during the years ended
December 31, 2018
, 2017, and 2016, respectively. Our DSOs related to the Industrial Inkjet and Productivity Software segments are traditionally higher than those related to the significant printer manufacturer customers or distributors in our Fiery segment as, historically, these Fiery customers have been granted shorter payment terms and have paid on a more timely basis. We expect DSOs to continue to vary from period to period because of changes in the mix of business between direct customers and the leading printer manufacturers, the effectiveness of our collection efforts both domestically and overseas, and variations in the linearity of our sales. If the percentage of Industrial Inkjet and Productivity Software related revenue increases, we expect DSOs will trend higher.
We have facilities in the U.S. and Italy that enable us to sell to third parties, on an ongoing basis, certain trade receivables. Trade receivables sold are generally short-term receivables with payment due dates of less than 10 days from date of sale, which are subject to a servicing obligation. We also have facilities in Spain and Italy that enable us to sell to third parties, on an ongoing basis, certain trade receivables. 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
$27.0 million
during the
year ended December 31, 2018
, which approximates the cash received. The receivables that were sold to third parties were removed from the Consolidated Balance Sheets and were reflected as cash provided by operating activities in the Consolidated Statements of Cash Flows.
Inventories
Our inventories are procured primarily in support of the Industrial Inkjet and Fiery operating segments. The majority of our Industrial Inkjet products are manufactured internally, while Fiery production is primarily outsourced. One result of this approach is lower inventory turnover for Industrial Inkjet inventories compared with Fiery inventories.
Our net inventories increased by
$8.5 million
to
$134.3 million
as of
December 31, 2018
, compared to
$125.8 million
as of
December 31, 2017
, primarily due to an increase in Industrial Inkjet inventories, including our Nozomi product line, due to actual sales in the fourth quarter of 2018 being lower than expected. Inventory turnover was
3.9
during the quarter ended
December 31, 2018
, compared to
4.4
turns during the quarter ended December 31, 2017. We calculate inventory turnover by dividing annualized current quarter cost of revenue by ending inventories.
Working Capital
Our working capital, defined as current assets minus current liabilities, was
$212.1 million
and
$456.7 million
as of
December 31, 2018
and 2017, respectively. The reduction in working capital is primarily due to the classification of our 2019 Notes within current liabilities as of
December 31, 2018
, due to their maturity date being September 1, 2019.
Investing Activities
Net cash provided by (used for) investing activities was
$36.2 million
,
$107.8 million
, and
$(10.9) million
for the years ended
December 31, 2018
, 2017, and 2016, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Investing Activities
|
2018
|
|
2017
|
|
2016
|
Purchases of short-term investments
|
$
|
—
|
|
|
$
|
(87,623
|
)
|
|
$
|
(216,349
|
)
|
Proceeds from sales and maturities of short-term investments
|
46,624
|
|
|
233,633
|
|
|
252,856
|
|
Purchases (Sales) of restricted cash investments
|
—
|
|
|
5,115
|
|
|
(5,110
|
)
|
Purchases, net of proceeds from sales, of property and equipment
|
(12,290
|
)
|
|
(13,754
|
)
|
|
(22,373
|
)
|
Proceeds from sale of held-for-sale building and land
|
1,130
|
|
|
—
|
|
|
—
|
|
Businesses and technology purchased, net of cash acquired and dispositions
|
697
|
|
|
(29,559
|
)
|
|
(19,932
|
)
|
Net cash provided by (used for) investing activities*
|
$
|
36,161
|
|
|
$
|
107,812
|
|
|
$
|
(10,908
|
)
|
* Certain prior period amounts have been revised due to the implementation of ASU 2016-18. See Note 1 – The Company and Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements for details.
Investments
We invest cash in excess of our current operating needs in highly liquid, high-quality investment vehicles, of generally short-term duration. Our investments are made with a policy of capital preservation and liquidity as primary objectives. We may hold investments in fixed income debt securities to maturity; however, we may sell an investment at any time if the quality rating of the investment declines, the yield on the investment is no longer attractive, or we have better uses for the cash. Since we invest primarily in investment securities that are highly liquid with a ready market, we believe the purchase, maturity, or sale of our investments has no material impact on our overall liquidity.
Restricted Cash and Investments
We have restricted cash equivalents that are required to be maintained by the lease related to our Manchester, NH facility described more fully in
Note 9
–
Property and Equipment, net
, of Notes to Consolidated Financial Statements. The funds are pledged as collateral against the lease of that facility and are held on deposit with MUFG, our landlord for the facility. We had
$39.8 million
and
$32.5 million
of these restricted funds included in non-current assets on the Consolidated Balance Sheets, as of
December 31, 2018
and 2017, respectively.
Property and Equipment
Net purchases of property and equipment were
$12.3 million
,
$13.8 million
, and
$22.4 million
in the years ended
December 31, 2018
, 2017, and 2016, respectively. Our property and equipment additions have historically been funded from cash flows from operating activities. We anticipate that we will continue to purchase necessary property and equipment in the normal course of our business. The amount and timing of these purchases and the related cash outflows in future periods is difficult to predict and is dependent on a number of factors including the hiring of employees, the rate of change in computer hardware and software used in our business, new product development, and our business outlook.
Property Held-for-Sale
During the
year ended December 31, 2018
, we sold one of our two buildings and the related land in Meredith, NH for net proceeds of $1.1 million and recognized a gain of $0.1 million. See additional discussion in
Note 9
–-
Property and Equipment, net
.
Acquisitions
On October 1, 2017, we acquired Escada for cash consideration of $11.9 million, net of cash acquired, plus an additional potential future cash earnout contingent on achieving certain revenue and operating profit performance targets. Escada offers the corrugated packaging market corrugator control systems, which provide comprehensive control and traceability for the entire corrugated packaging process.
On August 14, 2017, we acquired Generation Digital for cash consideration of $3.2 million, net of cash acquired, plus an additional potential future cash earnout contingent on achieving certain revenue and operating profit performance targets. Generation Digital provides software to textile and fashion designers for the creation and design of prints and patterns, color matching, and color palette creation and management.
On May 8, 2017, we acquired CRC for cash consideration of $7.6 million. CRC provides business process automation software for commercial, label, and packaging printers.
On January 31, 2017, we purchased the FFPS business from Xerox for cash consideration of $5.9 million, plus $18.0 million of future cash payments, of which $9.0 million was paid in July 2017 and $9.0 million was paid in July 2018. The FFPS business manufactures and markets the FFPS DFE, which previously competed with our Fiery DFE.
On June 16, 2016, we purchased Optitex for cash consideration of $11.6 million, net of cash acquired, plus an additional potential future cash earnout contingent on achieving revenue and operating profit performance targets. We received a $0.2 million purchase price adjustment payment in 2017. Optitex has developed and markets integrated 2D and 3D CAD software that is shortening the design cycle, reducing costs, and accelerating the adoption of fast fashion.
On March 1, 2016, we purchased Rialco for cash consideration of $8.4 million, net of cash acquired, plus an additional potential future cash earnout contingent on achieving revenue and gross profit targets. Rialco is a leading European supplier of dye powders and color products for the textile, digital print, and other decorating industries.
A tax recovery liability of $1.0 million related to the Creta Print S.L. “(Cretaprint”) acquisition was paid during the year ended December 31, 2016. The escrow of $1.5 million related to the Reggiani acquisition was remitted to us in return for the issuance of shares of common stock for the year ended December 31, 2016. We also purchased additional intellectual property related to the Reggiani business for $0.2 and $0.3 million in 2017 and 2016, respectively. We paid $1.4 million, which was the first payment related to a four-year non-compete agreement with the sellers of the Reggiani business in 2017.
We acquired privately-held CTI and Shuttleworth during the fourth quarter of 2015, which have been included in our Productivity Software operating segment, for aggregate cash consideration of $9.3 million, net of cash acquired, $9.7 million in shares of EFI stock, plus a potential future cash earnout contingent on achieving certain performance targets.
Xeikon License Agreement
On November 1, 2017, we entered into an Agreement with Xeikon to license the right to the manufacturing, technology, marketing, and support of the Jetrion product line. During 2017, pursuant to the Agreement, we received $1.5 million of royalty payments, which are reflected as operating cash inflows, and $0.5 million of intellectual property payments, which are reflected as investing cash inflows.
Financing Activities
Net cash provided by (used for) financing activities was
$28.8 million
,
$(125.9) million
, and
$(109.1) million
for the years ended
December 31, 2018
, 2017, and 2016, respectively.
Convertible Senior Notes
In November 2018, we completed a private placement of $150 million principal amount of 2.25% convertible notes due in 2023. The net proceeds from this offering were
$146.3 million
, after deducting commissions and offering expenses paid by us. We used $40.0 million of the net proceeds to repurchase our common shares.
In September 2014, we completed a private placement of
$345.0
million principal amount of 0.75% convertible notes due September 1,
2019
. 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. Our management believes the likelihood of conversion prior to the maturity date is low, and expects to repay the principal in cash utilizing the Company's existing cash, cash equivalents, and short-term investments, cash generated from operations prior to the maturity date, and available borrowings under the Company's revolving credit facility. At the maturity date, payment of the principal equal to the original discount of $63.6 million will be reported within cash flows from operating activities.
See
Note 12
–
Debt
of Notes to Consolidated Financial Statements for additional information about the Company's convertible notes.
Revolving Credit Facility
On January 2, 2019, we entered into a 5-year $150 million revolving credit agreement with an option for an additional $50 million, subject to certain requirements. Interest is variable with a premium applied to an index rate. This credit facility is secured by substantially all of our domestic assets and the pledge of 65% of the stock of our foreign subsidiaries. See Note 12 – Debt for additional information about the Company's revolving credit facility.
Stock Option and ESPP Proceeds
We received proceeds from the issuance of our common stock through exercise of stock options and employee purchases of ESPP shares of
$10.5 million
,
$12.1 million
, and
$11.1 million
, respectively, during the years ended
December 31, 2018
, 2017, and 2016. While we may continue to receive proceeds from these plans in future periods, the timing and amount of such proceeds are difficult to predict and are contingent on a number of factors including the price of our common stock, the timing and number of stock options exercised by employees that had participated in these plans, net settlement options, employee participation in our ESPP, and general market conditions. We anticipate that cash provided from the exercise of stock options will decline over time as we have shifted to issuance of RSUs, rather than stock options, although we may grant stock option awards in the future.
Treasury Stock Purchases
The most significant use of funds for financing activities during the years ended
December 31, 2018
, 2017, and 2016 was the repurchase of our common stock, which totaled
$113.5 million
,
$101.8 million
, and
$83.3 million
, respectively. These totals include cash used for net settlement of shares for the exercise price of certain stock options and any tax withholding obligations incurred connected with such exercises and tax withholding obligations that arose on the vesting of RSUs.
The repurchases of our stock was made under a plan approved and publicly announced and as of
December 31, 2018
, the program has ended and there is no remaining authorization for additional purchases. See Item 5 – Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities for further discussion of our common stock repurchase programs.
Contingent Consideration (Earnout) Payments
Cash payments related to contingent consideration totaled
$3.2 million
during the
year ended December 31, 2018
. These payments related to the prior acquisitions of Rialco, Generation Digital, Shuttleworth, and PrintLeader.
Cash payments related to contingent consideration totaled
$30.9 million
during the
year ended December 31, 2017
. These payments related to the acquisitions of Reggiani, Optitex, Rialco, and Shuttleworth. The portion of the Reggiani earnout
representing performance targets achieved in excess of the fair value recorded in the opening balance sheet as of the acquisition date was $5.9 million and is reflected as cash used for operating activities in the Consolidated Statement of Cash Flows. The remaining $15.6 million related to the Reggiani earnout is included in cash used for financing activities.
Cash payments related to contingent consideration totaled
$28.1 million
during the
year ended December 31, 2016
. These payments related to the acquisitions of Reggiani, DirectSmile, SmartLinc, Inc. (SmartLinc), and Metrix Software (“Metrix”).
Acquisition-related Debt Payments
We made
$11.2 million
,
$9.0 million
, and
$8.3 million
of acquisition-related debt payments in the years ended
December 31, 2018
, 2017, and 2016. These payments included $9.0 million to Xerox for the purchase of FFPS in both 2018 and 2017. The payments in the
year ended December 31, 2016
primarily related to indebtedness assumed in the Optitex and Matan acquisitions.
New Leases Accounting Standard
Effective January 1, 2019, we will adopt the new accounting standard for leases using the optional transition method to initially apply the new lease standard at the adoption date, and will recognize a cumulative-effect adjustment to the opening balance of retained earnings. We expect to record total right of use assets and lease liabilities on our opening Consolidated Balance Sheet of between
$35.0
and
$40.0 million
as of January 1, 2019. Please see
Note 1
–
The Company and Summary of Significant Accounting Policies
of Notes to Consolidated Financial Statements for additional information. The Company and Summary of Significant Accounting Policies for additional information.
Contractual Obligations
The following table summarizes our significant contractual obligations as of
December 31, 2018
and the effect that such obligations are expected to have on our liquidity and cash flows in future periods (in thousands):
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|
|
Payments Due by Period
|
|
Total
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Thereafter
|
Operating lease obligations
|
$
|
45,315
|
|
|
$
|
6,559
|
|
|
$
|
6,216
|
|
|
$
|
4,355
|
|
|
$
|
2,582
|
|
|
$
|
1,423
|
|
|
$
|
24,180
|
|
Contingent consideration
(1)
|
10,501
|
|
|
8,269
|
|
|
2,232
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Purchase obligations
(2)
|
74,092
|
|
|
69,736
|
|
|
4,356
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Convertible senior notes
(3)
|
514,463
|
|
|
350,963
|
|
|
3,375
|
|
|
3,375
|
|
|
3,375
|
|
|
153,375
|
|
|
—
|
|
Noncurrent tax liabilities
(4)
|
32,007
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
(2)
|
$
|
676,378
|
|
|
$
|
435,527
|
|
|
$
|
16,179
|
|
|
$
|
7,730
|
|
|
$
|
5,957
|
|
|
$
|
154,798
|
|
|
$
|
24,180
|
|
_________________
|
|
(1)
|
Represents the fair value of acquisition-related contingent consideration liabilities. The current portion is included in accrued and other liabilities, representing earnout liabilities that are payable within one year, and those that are payable beyond one year are included in noncurrent contingent and other liabilities on the Consolidated Balance Sheets.
|
|
|
(2)
|
Excludes contractual obligations recorded on the balance sheet as current liabilities and cancellable purchase orders.
|
|
|
(3)
|
Obligations to make interest and principal payments related to the 2019 and 2023 Notes. See
Note 12
–
Debt
of Notes to Consolidated Financial Statements for further information.
|
|
|
(4)
|
As of
December 31, 2018
, the liability for noncurrent tax liabilities, including interest and penalties, is reflected in the Consolidated Balance Sheet as $15.5 million of noncurrent income taxes payable and $16.5 million as a reduction of deferred tax assets. Due to the uncertainty of the timing of future payments, noncurrent tax liabilities are presented in the total column on a separate line in this table. Please refer to Note 17–Income Taxes of Notes to the Consolidated Financial Statements for additional discussion of noncurrent tax liabilities.
|
Purchase obligations in the table above include agreements to purchase goods or services that are enforceable, noncancellable, and legally binding that specify all significant terms including fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transactions. Purchase obligations exclude purchase orders for raw materials and other goods and services that are cancellable without penalty. Our purchase orders are
based on current manufacturing needs and are generally fulfilled by our vendors within short time horizons. We also enter into contracts for outsourced services; however, the obligations under these contracts were not significant and the contracts generally contain clauses allowing for cancellation without significant penalty. Accordingly, such contracts are not included in the preceding table. The expected timing of payment for the obligations listed above is estimated based on current information. Timing of payments and actual amounts paid may be different depending on when the goods or services are received or changes to agreed-upon amounts for some obligations.
Off-Balance Sheet Financing
In August 2016, we entered into a lease agreement for a 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 of land adjacent to the Manchester Regional Airport. Minimum lease payments are $13.3 million during the entire 48.5 year term of the land lease, excluding six months of the land lease which was financed by the manufacturing facility lease. This obligation is included in the Contractual Obligations table above within the operating lease category.
In August 2016, we entered into a six-year lease with BTMU whereby a 225,000 square foot manufacturing and warehouse facility in Manchester, New Hampshire was constructed for our Industrial Inkjet operating segment. Construction was completed in April 2018 at a total cost of $39.8 million. Minimum lease payments during the six-year term are $1.8 million. This obligation is included in the Contractual Obligations table above within the operating lease category. Upon completion of the six-year 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. We are treated as the owner of the facility for federal income tax purposes. Cash and cash equivalents of
$39.8 million
are on deposit with BTMU and restricted as collateral until the end of the lease term.
Critical Accounting Policies
The preparation of consolidated financial statements requires estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We evaluate our estimates on an ongoing basis. Estimates are based on historical and current experience, the impact of the current economic environment, and various assumptions believed to be reasonable under the circumstances at the time of the estimate, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Our critical accounting policies and estimates include the following:
|
|
•
|
allowances for doubtful accounts,
|
|
|
•
|
inventory valuation and purchase commitment reserves,
|
|
|
•
|
restructuring reserves,
|
|
|
•
|
fair value of financial instruments;
|
|
|
•
|
accounting for stock-based compensation;
|
|
|
•
|
accounting for income taxes;
|
|
|
•
|
valuation analysis of goodwill and intangible assets;
|
|
|
•
|
build-to-suit leases; and
|
|
|
•
|
determination of functional currencies for consolidating international operations.
|
Revenue recognition.
Significant management judgments and estimates must be made and used in connection with the revenue recognized in any accounting period. Please refer to
Note 1
–
The Company and Summary of Significant Accounting Policies
and
Note 4
–
Revenue
of Notes to Consolidated Financial Statements for additional description of our revenue recognition accounting policies.
The key estimates and assumptions and corresponding uncertainties for recognizing revenue are summarized as follows:
|
|
|
|
Key Estimates and Assumptions
|
|
Key Uncertainties
|
For customer arrangements that include multiple products or services, judgment is required to determine the standalone selling price (“SSP”) for each distinct performance obligation. Where an observable price is not available, we gather all reasonable available data points, consider adjustments based on market conditions, entity-specific factors, and the need to stratify selling prices into meaningful groups (e.g., geographic region) in determining SSP. We allocate the total contract consideration to each distinct performance obligation on a relative SSP basis. Revenue is then recognized in accordance with the timing of the transfer of control to the customer for each performance obligation.
Distributors and resellers participate in various marketing and other programs, and we maintain estimated accruals and allowances for these programs based on contractual terms and historical experience.
If the arrangement includes a customer-negotiated refund or right of return relative to the delivered item and the delivery and performance of the undelivered item is considered probable and substantially in our control, the delivered element constitutes a separate unit of accounting. We limit revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products or services, future performance obligations, or subject to customer-specified return or refund privileges.
Estimated period over which contract acquisition costs are amortized.
|
|
As our business and offerings evolve over time, modifications to our pricing and discounting methodologies, changes in the scope and nature of service offerings and/or changes in customer segmentation may result in a lack of consistency required to establish and/or maintain SSP or to maintain consistent SSP. Additionally, technological changes resulting in variability in product costs and gross margins may require changes to our SSP model. Changes in SSP may result in a different allocation of revenue to the deliverables in multiple-element arrangements. These factors, among others, may adversely impact the amount of revenue and gross margins we report in a particular period.
If we experience changes in market or competitive conditions resulting in credits issued to our distributors and partners deviating significantly from our estimates, our revenue may be adversely impacted.
Revenue recognition is dependent on proper identification of the separate units of accounting in an arrangement and determining whether they have stand-alone value. Significant contract interpretation can be required to determine the appropriate accounting, including whether the deliverables specified in a multiple element arrangement should be treated as separate units of accounting for revenue recognition purposes, and, if so, how the price should be allocated among the elements and when to recognize revenue for each element.
The period of time over which our customers purchase products from us could be different than our estimate.
|
Allowances for doubtful accounts.
We establish an allowance for doubtful accounts to ensure that trade receivables are not overstated due to uncollectibility. To ensure that we have established an adequate allowance for doubtful accounts, management analyzes accounts receivable and historical bad debts, customer concentrations, customer creditworthiness, current economic trends and macroeconomic conditions, changes in customer payment terms, the length of time receivables are past due, and significant one-time events. We record specific reserves for individual accounts when we become aware of specific customer circumstances, such as bankruptcy filings, deterioration in the customer’s operating results or financial position, or potential unfavorable outcomes from disputes with customers or vendors.
Inventory valuation.
We state our inventory at the lower of cost and market. Management estimates potential inventory obsolescence and noncancellable purchase commitments to properly value inventory and establish reserves for potential losses on purchase commitments. Significant management judgment and estimates must be made related to inventory valuation including the evaluation of current economic trends, changes in customer demand, product design changes, product life cycle and development plans, product pricing, physical deterioration, and quality issues.
Warranty reserves.
An accrual is established when the warranty liability is estimable and probable based upon historical experience. A provision for estimated future warranty work is recorded in cost of revenue when revenue is recognized. The warranty liability is reviewed regularly and periodically adjusted to reflect changes in warranty estimates. Significant management judgments and estimates must be made in connection with establishing and updating warranty reserves including estimated potential inventory return rates and replacement or repair costs.
Litigation accruals.
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. The material assumptions used by management to estimate litigation accruals include:
|
|
•
|
consultation with our external attorneys regarding the expected duration of a claim or lawsuit, the potential outcome, and the likelihood of settlement;
|
|
|
•
|
likelihood of assertion of unasserted claims and assessments;
|
|
|
•
|
our strategy regarding the claim or lawsuit;
|
|
|
•
|
expected insurance coverage under our policies; and
|
|
|
•
|
past experiences with similar claims and lawsuits.
|
Litigation is inherently unpredictable, and while we believe that we have valid defenses with respect to legal matters pending against us, our financial statements could be materially affected in any particular period by the unfavorable resolution of one or more of these contingencies or because of the diversion of management’s attention and the incurrence of significant expenses.
Restructuring reserves.
We have engaged, and may continue to engage, in restructuring actions, which require management to utilize significant estimates related to the timing and the expense for severance and other employee separation costs, realizable values of assets made obsolete, lease cancellation, facility downsizing, and other exit costs. If actual amounts differ from our estimates, the amount of the restructuring charges could be materially impacted.
Fair value of financial instruments.
We invest our excess cash on deposit with major banks in money market, U.S. Treasury and government-sponsored entity, corporate debt, municipal, and asset-backed 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 the Consolidated Balance Sheets.
As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a three-tier fair value hierarchy as more fully defined in
Note 8
–
Fair Value Measurements
of Notes to Consolidated Financial Statements. We utilize the market approach to measure fair value of our fixed income securities. The market approach is a valuation technique that uses 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.
As part of this process, we engage pricing services to assist management in its analysis. All estimates, key assumptions, and forecasts are either provided by or reviewed by us. While we utilize third party pricing services, the impairment analysis and related valuations represent the conclusions of management and not the conclusions or statements of any third party.
We obtain the fair value of our Level 2 financial instruments from third party asset managers, the custodian bank, and the accounting service provider. 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.
The validation procedures performed by management include the following:
|
|
•
|
obtaining an understanding of the pricing service’s valuation methodologies, including the timing and frequency,
|
|
|
•
|
evaluating the type, nature, and complexity of our investments in financial instruments,
|
|
|
•
|
evaluating the activity level in the market for the type of securities in which we have invested including the volatility of price movements requiring analysis, and
|
|
|
•
|
validating the quoted market prices provided by our service providers by completing a three-way reconciliation, comparing the assessment of the fair values provided by the asset manager, the custody bank, and the accounting book of record provider for each portfolio.
|
Accounting for stock-based compensation.
We recognize stock-based compensation based on the fair value of such awards on the date of grant. We amortize stock-based compensation expense on a graded vesting basis over the vesting period, after assessing the probability of achieving the requisite performance criteria with respect to performance-based awards. Stock-based compensation expense is recognized over the requisite service period for each separately vesting tranche as though the award were, in substance, multiple awards. We account for forfeitures when they occur. 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 a Monte Carlo valuation model. Option pricing models were developed to estimate the value of traded options that have no vesting or hedging restrictions and are fully transferable. We must use judgment in determining and applying the assumptions needed for the valuation of stock awards and issuance of common stock under our ESPP.
Accounting for income taxes.
Significant management judgment is required to determine our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against our deferred tax assets. We estimate our actual current tax expense, including permanent charges and benefits, and temporary differences resulting from differing treatment of items, such as deferred revenue for tax and book accounting purposes. These temporary differences result in deferred tax assets and liabilities, which are included within our Consolidated Balance Sheets. We assess the likelihood that our deferred tax assets will be recovered from future taxable income by considering both positive and negative evidence relating to their recoverability. If we believe that recovery of these deferred tax assets is not more likely than not, we establish a valuation allowance. To the extent that we adjust a valuation allowance in a period, we include the impact in the Consolidated Statement of Operations in the period in which such determination is made.
In assessing the need for a valuation allowance, we considered all available evidence, including recent operating results, projections of future taxable income, our ability to utilize loss and credit carryforwards, and the feasibility of tax planning strategies.
We account for uncertainty in income taxes by recognizing a tax position only when it is more likely than not that the tax position, based on its technical merits, will be sustained upon ultimate settlement with the applicable tax authority. The tax benefit recognized is the largest amount of tax benefit that is greater than fifty percent likely of being realized upon ultimate settlement with the applicable tax authority that has full knowledge of all relevant information.
Significant management judgment is required in evaluating our uncertain tax positions. Our gross unrecognized benefits are
$36.5 million
as of
December 31, 2018
. Our evaluation of uncertain tax positions is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. If actual settlements differ from these estimates, or we adjust these estimates in future periods, we may need to recognize additional tax benefits or charges that could materially impact our financial position and results of operations.
Valuation analysis of goodwill and intangible assets.
We perform our annual goodwill impairment analysis in the fourth quarter of each year or more frequently if we believe indicators of impairment exist. Triggering events that may require an interim impairment analysis include indicators such as adverse industry or economic trends, restructuring actions, significant changes in the manner of our use of the acquired assets, significant changes in the strategy for our overall business, our assessment of growth and profitability in each reporting unit for future years, significant decline in our stock price for a sustained period, or a sustained decline in our market capitalization relative to net book value. In our goodwill impairment assessment, we compare the fair value of each reporting unit to its carrying value. If the fair value of a reporting unit exceeds the carrying amount of the net assets assigned to that reporting unit, goodwill is not impaired. If the fair value of the reporting unit is less than its carrying amount, goodwill is impaired and the excess of the reporting unit’s carrying value over the fair value is recognized as an impairment loss.
Our goodwill valuation analysis is based on our respective reporting units (Industrial Inkjet, Productivity Software, and Fiery), which are consistent with our operating segments identified in
Note 3
–
Segment, Geographic, and Major Customer Information
of Notes to Consolidated Financial Statements. We determined the fair value of our reporting units as of
December 31, 2018
by equally weighting the market and income approaches. Under the market approach, we estimated fair value based on market multiples of revenue or earnings of comparable companies. Under the income approach, we estimated fair value based on a discounted projected cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model.
The key estimates and assumptions and corresponding uncertainties for goodwill impairment analysis are summarized as follows:
|
|
•
|
identification of comparable companies to benchmark under the market approach giving due consideration to the following factors:
|
|
|
◦
|
financial condition and operating performance of the reporting unit being evaluated relative to companies operating in the same or similar businesses,
|
|
|
◦
|
economic, environmental, and political factors faced by such companies, and
|
|
|
◦
|
companies that are considered to be reasonable investment alternatives.
|
|
|
•
|
impact of goodwill impairments recognized in prior years,
|
|
|
•
|
susceptibility of each of our reporting units to fair value fluctuations,
|
|
|
•
|
reporting unit revenue, gross profit, and operating expense growth rates,
|
|
|
•
|
discount rate to apply to estimated cash flows,
|
|
|
•
|
terminal values based on the Gordon growth methodology,
|
|
|
•
|
appropriate market comparables,
|
|
|
•
|
estimated multiples of revenue and earnings before interest expense and taxes (“EBIT”) that a willing buyer is likely to pay,
|
|
|
•
|
reasonable gross profit levels,
|
|
|
•
|
estimated control premium a willing buyer is likely to pay, including consideration of the following:
|
|
|
◦
|
the most similar transactions in relevant industries and determined the average premium indicated by the transactions deemed to be most similar to a hypothetical transaction involving our reporting units
|
|
|
◦
|
weighted average and median control premiums offered in relevant industries,
|
|
|
◦
|
industry specific control premiums, and
|
|
|
◦
|
specific transaction control premiums.
|
|
|
•
|
significant events or changes in circumstances including the following:
|
|
|
◦
|
significant negative industry or economic trends,
|
|
|
◦
|
significant decline in our stock price for a sustained period,
|
|
|
◦
|
our market capitalization relative to net book value,
|
|
|
◦
|
significant changes in the manner of our use of the acquired assets,
|
|
|
◦
|
significant changes in the strategy for our overall business, and
|
|
|
◦
|
our assessment of growth and profitability in each reporting unit over the coming years.
|
Given the inherent uncertainty of forecasting future economic activity or financial results, there can be no assurance that our estimates and assumptions made for purposes of our goodwill impairment testing as of December 31,
2018
will prove to be accurate predictions of the future. If our assumptions regarding forecasted revenue or gross profit rates are not achieved, we may be required to record goodwill impairment charges in future periods relating to any of our reporting units, whether in connection with the next annual impairment testing in the fourth quarter of the following fiscal year or prior to that, if any such change constitutes an interim triggering event.
Business combinations.
We account for business acquisitions as purchase business combinations in accordance with ASC 805, which requires that the acquisition method of accounting be used for all business combinations. Please refer to Note 1 – The Company and Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements for our accounting policy with respect to accounting for business combinations.
We allocate the purchase price of acquired companies to the tangible and intangible assets acquired, including in-process research & development (“IPR&D”), and liabilities assumed based on their estimated fair values. Such a valuation requires management to make significant estimates and assumptions, especially with respect to intangible assets. The results of operations for each acquisition are included in our financial statements from the date of acquisition.
The key estimates and assumptions and corresponding uncertainties to account for business acquisitions are summarized as follows:
|
|
|
|
Key Estimates and Assumptions
|
|
Key Uncertainties
|
Management estimates fair value based on assumptions believed to be reasonable. These estimates are based on historical experience and information obtained from the management of the acquired companies. Critical estimates in valuing certain intangible assets include, but are not limited to: future expected cash flows; acquired developed technologies and patents; expected costs to develop IPR&D into commercially viable products and estimating cash flows from the projects when completed; the acquired company’s brand awareness and market position, as well as assumptions about the period of time the acquired brand will continue to be used in our product portfolio; and discount rates.
We estimate fair value of acquisition-related contingent consideration based on the probability of realization of the performance targets. This estimate is based on significant inputs that are not observable in the market, which ASC 820-10-35 refers to as Level 3 inputs, reflecting our assessment of the assumptions market participants would use to value these liabilities. The fair value of contingent consideration is measured at each reporting period, with any changes in the fair value recognized as a component of general and administrative expense.
Other estimates associated with the accounting for acquisitions include severance costs and the costs to vacate or downsize facilities, including the future costs to operate and eventually abandon or relinquish duplicate facilities. These costs are recognized as restructuring and other expenses (i.e., not included in purchase accounting), are based on management estimates, and are subject to refinement.
|
|
Our financial projections may ultimately prove to be inaccurate and unanticipated events and circumstances may occur. As a result, these estimates are inherently uncertain and unpredictable, assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur, which may affect the accuracy or validity of such assumptions, estimates or other actual results. Therefore, no assurance can be given that the underlying assumptions used to establish the valuation for these acquired businesses will prove to be correct.
We typically engage a third party valuation firm to assist management in its analysis. 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 valuations represent the conclusions of management and not the conclusions or statements of any third party.
Estimated costs may change as additional information becomes available regarding assets acquired and liabilities assumed and as management continues its assessment of the pre-merger operations.
|
Build-to-Suit leases.
If we are deemed to be the accounting owner of a facility we account for the property as a depreciable asset and the related lease agreement is accounted for as an imputed financing obligation. If we are not deemed to be the accounting owner, then we account for the property as an operating lease. Significant judgments are required to make this determination, which relate to actions, guarantees, and investments that we make as a lessee that may be considered to be actions that only an owner would take. In addition, our potential investments in these facilities must comply with the maximum guarantee test to ensure that potential investments cannot exceed 90% of the fair value of each facility. We have three leases subject to the build-to-suit accounting requirements, located in New Hampshire, Spain, and the Netherlands. The New Hampshire and Spain facilities consist of construction of new facilities. The facility in the Netherlands was an existing facility, but was not functional in its current form at lease inception, and thus, represented a construction project subject to the guidance. When leasing an existing facility, we must consider whether the leased asset is fully functional and may be occupied by any lessee in its current form without requiring improvement (commonly referred to as the “second tenant scope exception”).
In August 2016, we entered into a six-year lease with MUFG (formerly BTMU) whereby a 225,000 square foot manufacturing and warehouse facility in New Hampshire was constructed for our Industrial Inkjet operating segment. Upon completion of the six-year 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 MUFG to construct the facility. We are not deemed to be the accounting owner of this facility as we do not have responsibility for actions, guarantees, or investments for which only an owner would accept responsibility.
We are not deemed to be the accounting owner of the leased facilities in the Netherlands or Spain as we only have responsibility for normal tenant improvement costs in each of these facilities. Similarly, we are not responsible for actions, guarantees, or investments for which only an owner would accept responsibility.
Determining functional currencies for the purpose of consolidating our international operations.
We have a number of foreign subsidiaries, which together account for approximately
50%
of our net revenue, approximately 37% of our total assets, and approximately 38% of our total liabilities as of December 31, 2018.
For those subsidiaries that operate in a local functional currency environment, all assets and liabilities are translated into U.S. dollars using current exchange rates, while revenue and expenses are translated using monthly exchange rates, which approximate the average exchange rates in effect during each period. Resulting translation adjustments are reported as a separate component of accumulated other comprehensive income (“AOCI”), adjusted for deferred income taxes. Consequently, determination of the functional currency of each entity has a material impact on our financial position and results of operations. Management assesses the salient economic factors, both individually and collectively when determining the functional currency. The economic factors that must be evaluated include cash flows, sales price, sales market, expense, financing, and intercompany transaction indicators.
Recent Accounting Pronouncements
See
Note 1
–
The Company and Summary of Significant Accounting Policies
of Notes to Consolidated Financial Statements for a full description of recent accounting pronouncements (adopted and not yet adopted) including the respective and prospective dates of adoption.
Item 8: Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Electronics For Imaging, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Electronics For Imaging, Inc. and subsidiaries (the “Company”) as of
December 31, 2018
and
2017
, and the related consolidated statements of operations, comprehensive income, cash flows, and stockholders’ equity for each of the three years in the period ended
December 31, 2018
, and the related notes and schedule listed in the Index at Item 15(2) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of
December 31, 2018
and
2017
, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2018
, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of
December 31, 2018
, based on criteria established in
Internal Control – Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
February 27, 2019
, expressed an unqualified opinion on the Company’s internal control over financial reporting.
Adoption of New Revenue Recognition Accounting Standard (ASC 606)
As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for revenue from contracts with customers in 2018 due to the adoption of the new revenue standard. The Company adopted the new revenue standard using the modified retrospective approach.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ D
ELOITTE
& T
OUCHE
LLP
San Jose, California
February 27, 2019
We have served as the Company’s auditor since 2014.
Electronics For Imaging, Inc.
Consolidated Balance Sheets
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December 31,
|
(in thousands)
|
2018
|
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2017
|
Assets
|
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Current assets:
|
|
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Cash and cash equivalents
|
$
|
309,052
|
|
|
$
|
170,345
|
|
Short-term investments
|
102,349
|
|
|
148,697
|
|
Accounts receivable, net of allowances of $32.3 and $32.2 million, respectively
|
241,841
|
|
|
244,416
|
|
Inventories
|
134,348
|
|
|
125,813
|
|
Income taxes receivable
|
4,926
|
|
|
4,565
|
|
Assets held for sale
|
2,800
|
|
|
4,200
|
|
Other current assets
|
44,623
|
|
|
41,799
|
|
Total current assets
|
839,939
|
|
|
739,835
|
|
Property and equipment, net
|
77,613
|
|
|
98,762
|
|
Restricted cash equivalents
|
39,809
|
|
|
32,531
|
|
Goodwill
|
390,109
|
|
|
403,278
|
|
Intangible assets, net
|
74,722
|
|
|
123,008
|
|
Deferred tax assets
|
39,449
|
|
|
45,083
|
|
Other assets
|
37,393
|
|
|
15,504
|
|
Total assets
|
$
|
1,499,034
|
|
|
$
|
1,458,001
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
$
|
148,587
|
|
|
$
|
123,935
|
|
Accrued and other liabilities
|
79,323
|
|
|
98,090
|
|
Deferred revenue
|
60,547
|
|
|
55,833
|
|
Convertible senior notes, net – current
|
334,274
|
|
|
—
|
|
Income taxes payable
|
5,077
|
|
|
5,309
|
|
Total current liabilities
|
627,808
|
|
|
283,167
|
|
Convertible senior notes, net – noncurrent
|
118,688
|
|
|
318,957
|
|
Imputed financing obligation related to build-to-suit lease
|
—
|
|
|
13,944
|
|
Noncurrent contingent and other liabilities
|
7,179
|
|
|
28,801
|
|
Deferred tax liabilities
|
3,770
|
|
|
11,652
|
|
Noncurrent income taxes payable
|
15,481
|
|
|
20,169
|
|
Total liabilities
|
772,926
|
|
|
676,690
|
|
Commitments and contingencies (Note 13)
|
|
|
|
Stockholders’ equity:
|
|
|
|
Preferred stock, $0.01 par value; 5,000 shares authorized; none issued and outstanding
|
—
|
|
|
—
|
|
Common stock, $0.01 par value; 150,000 shares authorized; 55,347 and 54,249 shares issued, respectively
|
553
|
|
|
542
|
|
Additional paid-in capital
|
821,205
|
|
|
745,661
|
|
Treasury stock, at cost; 12,927 and 9,070 shares, respectively
|
(489,083
|
)
|
|
(375,574
|
)
|
Accumulated other comprehensive income (loss)
|
(12,814
|
)
|
|
8,138
|
|
Retained earnings
|
406,247
|
|
|
402,544
|
|
Total stockholders’ equity
|
726,108
|
|
|
781,311
|
|
Total liabilities and stockholders’ equity
|
$
|
1,499,034
|
|
|
$
|
1,458,001
|
|
See accompanying notes to consolidated financial statements.
Electronics For Imaging, Inc.
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands, except per share amounts)
|
2018
|
|
2017
|
|
2016
|
Revenue
|
$
|
1,015,021
|
|
|
$
|
993,260
|
|
|
$
|
992,065
|
|
Cost of revenue
|
516,448
|
|
|
486,804
|
|
|
483,900
|
|
Gross profit
|
498,573
|
|
|
506,456
|
|
|
508,165
|
|
Operating expenses:
|
|
|
|
|
|
Research and development
|
159,941
|
|
|
157,358
|
|
|
151,395
|
|
Sales and marketing
|
183,498
|
|
|
173,697
|
|
|
169,042
|
|
General and administrative
|
76,576
|
|
|
92,953
|
|
|
85,618
|
|
Amortization of identified intangibles
|
45,291
|
|
|
47,339
|
|
|
39,560
|
|
Restructuring and other
|
13,581
|
|
|
7,562
|
|
|
6,731
|
|
Total operating expenses
|
478,887
|
|
|
478,909
|
|
|
452,346
|
|
Income from operations
|
19,686
|
|
|
27,547
|
|
|
55,819
|
|
Interest expense
|
(20,169
|
)
|
|
(19,505
|
)
|
|
(17,716
|
)
|
Interest income and other income, net
|
1,604
|
|
|
4,088
|
|
|
545
|
|
Income before income taxes
|
1,121
|
|
|
12,130
|
|
|
38,648
|
|
Provision for (benefit from) income taxes
|
2,092
|
|
|
27,475
|
|
|
(6,301
|
)
|
Net income (loss)
|
$
|
(971
|
)
|
|
$
|
(15,345
|
)
|
|
$
|
44,949
|
|
Net income (loss) per basic common share
|
$
|
(0.02
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
0.96
|
|
Net income (loss) per diluted common share
|
$
|
(0.02
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
0.94
|
|
Shares used in basic per-share calculation
|
44,429
|
|
|
46,281
|
|
|
46,900
|
|
Shares used in diluted per-share calculation
|
44,429
|
|
|
46,281
|
|
|
47,797
|
|
See accompanying notes to consolidated financial statements.
Electronics For Imaging, Inc.
Consolidated Statements of Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2018
|
|
2017
|
|
2016
|
Net income (loss)
|
$
|
(971
|
)
|
|
$
|
(15,345
|
)
|
|
$
|
44,949
|
|
Net unrealized investment gains (losses):
|
|
|
|
|
|
Unrealized holding gains (losses), net of tax provision of $0.4 million for the year ended December 31, 2018, and net of tax benefit of less than $0.1 million for the years ended December 31, 2017 and 2016, respectively
|
678
|
|
|
(84
|
)
|
|
(97
|
)
|
Reclassification adjustments included in net income, net of tax*
|
19
|
|
|
(140
|
)
|
|
—
|
|
Net unrealized investment gains (losses)
|
697
|
|
|
(224
|
)
|
|
(97
|
)
|
Currency translation adjustments, net of tax benefit of $0.3 million for the year ended December 31, 2018, and tax provision of $0.5 and $0.1 million for the years ended December 31, 2017 and 2016, respectively
|
(21,608
|
)
|
|
32,905
|
|
|
(7,111
|
)
|
Unrealized gains (losses) on cash flow hedges
|
(41
|
)
|
|
32
|
|
|
8
|
|
Comprehensive income (loss)
|
$
|
(21,923
|
)
|
|
$
|
17,368
|
|
|
$
|
37,749
|
|
_____________________________________
* Tax effect was less than $0.1 million for each of the periods presented above.
See accompanying notes to consolidated financial statements.
Electronics For Imaging, Inc.
Consolidated Statements of Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
Additional
paid-in capital
|
|
Treasury stock
|
|
Accumulated
Other
comprehensive
income (loss)
|
|
Retained
earnings
|
|
Total
stockholders’
equity
|
(in thousands)
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Balances as of December 31, 2015
|
51,808
|
|
|
$
|
518
|
|
|
$
|
657,354
|
|
|
(4,476
|
)
|
|
$
|
(190,439
|
)
|
|
$
|
(17,375
|
)
|
|
$
|
372,844
|
|
|
$
|
822,902
|
|
Comprehensive income (loss), net of tax
|
|
|
|
|
|
|
|
|
|
|
(7,200
|
)
|
|
44,949
|
|
|
37,749
|
|
Exercise of common stock options
|
116
|
|
|
1
|
|
|
1,344
|
|
|
|
|
|
|
|
|
|
|
1,345
|
|
Restricted stock vested
|
787
|
|
|
8
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
—
|
|
Common stock issued in connection with business acquisition
|
30
|
|
|
—
|
|
|
(73
|
)
|
|
|
|
|
|
|
|
|
|
(73
|
)
|
Cumulative effect adjustment upon adoption of ASU 2016-09
|
|
|
|
|
2,743
|
|
|
|
|
|
|
|
|
96
|
|
|
2,839
|
|
Stock-based compensation, net of cash settlements
|
|
|
|
|
31,726
|
|
|
|
|
|
|
|
|
|
|
31,726
|
|
Non-cash settlement of vacation liabilities by issuing RSUs
|
|
|
|
|
3,059
|
|
|
|
|
|
|
|
|
|
|
3,059
|
|
Stock repurchases
|
|
|
|
|
|
|
(1,981
|
)
|
|
(83,291
|
)
|
|
|
|
|
|
(83,291
|
)
|
Stock issued pursuant to ESPP
|
297
|
|
|
3
|
|
|
9,756
|
|
|
|
|
|
|
|
|
|
|
9,759
|
|
Balances as of December 31, 2016
|
53,038
|
|
|
$
|
530
|
|
|
$
|
705,901
|
|
|
(6,457
|
)
|
|
$
|
(273,730
|
)
|
|
$
|
(24,575
|
)
|
|
$
|
417,889
|
|
|
$
|
826,015
|
|
Comprehensive income (loss), net of tax
|
|
|
|
|
|
|
|
|
|
|
32,713
|
|
|
(15,345
|
)
|
|
17,368
|
|
Exercise of common stock options
|
166
|
|
|
2
|
|
|
2,064
|
|
|
|
|
|
|
|
|
|
|
2,066
|
|
Restricted stock vested
|
761
|
|
|
7
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
—
|
|
Stock-based compensation
|
|
|
|
|
26,532
|
|
|
|
|
|
|
|
|
|
|
26,532
|
|
Non-cash settlement of employee-related liabilities by issuing RSUs
|
|
|
|
|
1,166
|
|
|
|
|
|
|
|
|
|
|
1,166
|
|
Stock repurchases
|
|
|
|
|
|
|
(2,613
|
)
|
|
(101,844
|
)
|
|
|
|
|
|
(101,844
|
)
|
Stock issued pursuant to ESPP
|
284
|
|
|
3
|
|
|
10,005
|
|
|
|
|
|
|
|
|
|
|
10,008
|
|
Balances as of December 31, 2017
|
54,249
|
|
|
$
|
542
|
|
|
$
|
745,661
|
|
|
(9,070
|
)
|
|
$
|
(375,574
|
)
|
|
$
|
8,138
|
|
|
$
|
402,544
|
|
|
$
|
781,311
|
|
Comprehensive loss, net of tax
|
|
|
|
|
|
|
|
|
|
|
(20,952
|
)
|
|
(971
|
)
|
|
(21,923
|
)
|
Cumulative effect adjustment upon adoption of ASC 606
|
|
|
|
|
|
|
|
|
|
|
|
|
4,674
|
|
|
4,674
|
|
Exercise of common stock options
|
75
|
|
|
1
|
|
|
1,070
|
|
|
|
|
|
|
|
|
|
|
1,071
|
|
Restricted stock vested
|
639
|
|
|
6
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
—
|
|
Common stock issued in connection with business acquisition
|
5
|
|
|
—
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
123
|
|
Escrow settlement in connection with business acquisition
|
|
|
|
|
(945
|
)
|
|
|
|
|
|
|
|
|
|
(945
|
)
|
Equity component of convertible senior notes issued
|
|
|
|
|
20,573
|
|
|
|
|
|
|
|
|
|
|
20,573
|
|
Stock-based compensation
|
|
|
|
|
45,281
|
|
|
|
|
|
|
|
|
|
|
45,281
|
|
Stock repurchases
|
|
|
|
|
|
|
(3,857
|
)
|
|
(113,509
|
)
|
|
|
|
|
|
(113,509
|
)
|
Stock issued pursuant to ESPP
|
379
|
|
|
4
|
|
|
9,448
|
|
|
|
|
|
|
|
|
|
|
9,452
|
|
Balances as of December 31, 2018
|
55,347
|
|
|
$
|
553
|
|
|
$
|
821,205
|
|
|
(12,927
|
)
|
|
$
|
(489,083
|
)
|
|
$
|
(12,814
|
)
|
|
$
|
406,247
|
|
|
$
|
726,108
|
|
See accompanying notes to consolidated financial statements.
Electronics For Imaging, Inc.
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
(in thousands)
|
2018
|
|
2017
|
|
2016
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income (loss)
|
$
|
(971
|
)
|
|
$
|
(15,345
|
)
|
|
$
|
44,949
|
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
65,557
|
|
|
65,647
|
|
|
55,081
|
|
Deferred taxes
|
(11,381
|
)
|
|
8,753
|
|
|
(11,091
|
)
|
Provision for bad debts and sales-related allowances
|
7,034
|
|
|
12,416
|
|
|
10,678
|
|
Provision for inventory obsolescence
|
6,016
|
|
|
6,312
|
|
|
5,716
|
|
Stock-based compensation, net of cash settlements
|
45,281
|
|
|
26,532
|
|
|
31,726
|
|
Change in fair value of contingent obligations
|
(21,486
|
)
|
|
6,980
|
|
|
6,813
|
|
Payments of contingent obligations
|
(699
|
)
|
|
(5,906
|
)
|
|
—
|
|
Non-cash accretion of interest expense on convertible notes and imputed financing obligation
|
15,239
|
|
|
14,981
|
|
|
13,489
|
|
Net change in derivative assets and liabilities
|
(2,286
|
)
|
|
2,938
|
|
|
(2,125
|
)
|
Other non-cash charges and credits
|
1,230
|
|
|
2,618
|
|
|
755
|
|
Changes in operating assets and liabilities, net of effect of acquired businesses:
|
|
|
|
|
|
Accounts receivable
|
(7,394
|
)
|
|
(29,189
|
)
|
|
(31,221
|
)
|
Inventories
|
(18,068
|
)
|
|
(24,398
|
)
|
|
4,510
|
|
Other current assets
|
(18,898
|
)
|
|
(9,218
|
)
|
|
(6,498
|
)
|
Accounts payable and other accrued liabilities
|
27,389
|
|
|
(6,235
|
)
|
|
651
|
|
Income taxes receivable/payable, net
|
(3,058
|
)
|
|
(5,591
|
)
|
|
(2,429
|
)
|
Net cash provided by operating activities
|
83,505
|
|
|
51,295
|
|
|
121,004
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Purchases of short-term investments
|
—
|
|
|
(87,623
|
)
|
|
(216,349
|
)
|
Proceeds from sales and maturities of short-term investments
|
46,624
|
|
|
233,633
|
|
|
252,856
|
|
Purchases (Sales) of restricted cash investments
|
—
|
|
|
5,115
|
|
|
(5,110
|
)
|
Purchases, net of proceeds from sales, of property and equipment
|
(12,290
|
)
|
|
(13,754
|
)
|
|
(22,373
|
)
|
Proceeds from sale of held-for-sale building and land
|
1,130
|
|
|
—
|
|
|
—
|
|
Businesses and technology purchased, net of cash acquired and dispositions
|
697
|
|
|
(29,559
|
)
|
|
(19,932
|
)
|
Net cash provided by (used for) investing activities*
|
36,161
|
|
|
107,812
|
|
|
(10,908
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
Proceeds from issuance of convertible senior notes
|
150,000
|
|
|
—
|
|
|
—
|
|
Debt issuance costs
|
(3,750
|
)
|
|
—
|
|
|
—
|
|
Proceeds from issuance of common stock
|
10,522
|
|
|
12,074
|
|
|
11,100
|
|
Purchases of treasury stock and net share settlements
|
(113,509
|
)
|
|
(101,844
|
)
|
|
(83,292
|
)
|
Repayment of acquisition-related debt
|
(11,209
|
)
|
|
(9,000
|
)
|
|
(8,275
|
)
|
Contingent consideration payments related to businesses acquired
|
(2,503
|
)
|
|
(25,018
|
)
|
|
(28,111
|
)
|
Repayment of short-term obligations
|
(755
|
)
|
|
(2,094
|
)
|
|
(528
|
)
|
Net cash provided by (used for) financing activities
|
28,796
|
|
|
(125,882
|
)
|
|
(109,106
|
)
|
Effect of foreign exchange rate changes on cash and cash equivalents
|
(2,477
|
)
|
|
4,196
|
|
|
374
|
|
Increase (decrease) in cash and cash equivalents*
|
145,985
|
|
|
37,421
|
|
|
1,364
|
|
Cash, cash equivalents, and restricted cash at beginning of year*
|
202,876
|
|
|
165,455
|
|
|
164,091
|
|
Cash, cash equivalents, and restricted cash at end of year*
|
$
|
348,861
|
|
|
$
|
202,876
|
|
|
$
|
165,455
|
|
_____________________________________
* Certain prior period amounts have been revised due to the implementation of ASU 2016-18. See Note 1 for details.
See accompanying notes to consolidated financial statements.
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
Note 1
.
The Company and Summary of Significant Accounting Policies
The Company
We are a world leader in customer-centric digital printing innovation focused on the transformation of the printing, packaging, ceramic tile decoration, and textile industries from the use of traditional analog based printing to digital on-demand printing.
Our products include industrial super-wide and wide format display graphics, corrugated packaging and display, textile, and ceramic tile decoration digital inkjet printers, digital ink, industrial digital inkjet printer parts, and professional services; print production workflow, web-to-print, cross-media marketing, fashion design, and business process automation software solutions; and color printing DFEs creating an on-demand digital printing ecosystem. Our ink includes digital UV curable, LED curable, ceramic, water-based, thermoforming, and specialty ink, as well as a variety of textile ink including dye sublimation, pigmented, reactive dye, acid dye, pure disperse dye, water-based dispersed printing ink, and coatings. Our business process automation solutions are integrated from creation to print and are vertically integrated with our industrial inkjet printers, and products produced by the leading printer manufacturers that are driven by our Fiery DFEs.
2017 Out-of-Period Adjustments
During the year ended December 31, 2017, we recorded out-of-period adjustments related to certain bill and hold transactions, which decreased revenue by
$3.4 million
, decreased gross profit by
$0.5 million
, and increased net loss by
$0.3 million
(or
$0.01
per diluted share). We evaluated these adjustments considering both qualitative and quantitative factors and the impact of these adjustments in relation to each period, as well as the periods in which they originated. Management believes these adjustments were immaterial to these consolidated financial statements and all previously issued financial statements.
Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of EFI and our subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements requires estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses, comprehensive income, cash flows, and related disclosure of contingent assets and liabilities. We evaluate our estimates, including those related to revenue recognition, bad debts, inventory valuation and purchase commitment reserves, warranty obligations, litigation expenses, restructuring activities, fair value of financial instruments, stock-based compensation, income taxes, valuation of goodwill and intangible assets, business combinations, build-to-suit lease accounting, functional currency determination, contingent consideration in acquisitions, and contingencies on an ongoing basis. Estimates are based on historical and current experience, the impact of the current economic environment, and various other assumptions believed to be reasonable under the circumstances at the time of the estimate, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates.
Cash, Cash Equivalents, and Short-term Investments
We invest our excess cash on deposit with major banks in money market, U.S. Treasury and government-sponsored entity, corporate, municipal government, and asset-backed 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 on our Consolidated Balance Sheets.
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
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 AOCI, adjusted for deferred income taxes. The credit portion of any other-than-temporary impairment is included in net income (loss). Realized gains and losses on sales of financial instruments are recognized upon sale of the investments using the specific identification method.
We review investments in debt securities for other-than-temporary impairment whenever the fair value is less than the amortized cost and evidence indicates the investment’s carrying amount is not recoverable within a reasonable period of time. We assess the fair value of individual securities as part of our ongoing portfolio management. Our other-than-temporary assessment includes reviewing the length of time and extent to which fair value has been less than amortized cost; the seniority and durations of the securities; adverse conditions related to a security, industry, or sector; historical and projected issuer financial performance, credit ratings, issuer specific news; and other available relevant information. To determine whether an impairment is other-than-temporary, we consider whether we have the intent to sell the debt security or if it will be more likely than not that we will be required to sell the debt security prior to the anticipated recovery of its amortized cost basis, and whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary.
In determining whether a credit loss existed, we used our best estimate of the present value of cash flows expected to be collected from each debt security. For these cash flow estimates, including prepayment assumptions, we rely on data from widely accepted third party data sources and internal estimates. In addition to prepayment assumptions, cash flow estimates vary based on assumptions regarding the underlying collateral including default rates, recoveries, and changes in value. Expected cash flows were discounted using the effective interest rate implicit in the securities.
Based on this analysis, we determined that there were other-than-temporary impairments in our available for sale securities at December 31, 2018.
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 in anticipation of satisfying our obligation on the
2019
Notes when they mature in September
2019
. We recognized an unrealized loss of
$0.9 million
which has been reported in interest income and other income, net in the Consolidated Statements of Operations. There were
no
other than temporary impairments, including credit-related impairments, during the years ended December 31,
2017
and
2016
. We classify our investments as current or noncurrent based on the nature of the investments and their availability for use in current operations.
Fair Value of Financial Instruments
We assess the fair value of our financial instruments each reporting period. The carrying amounts of cash, cash equivalents, accounts receivable, accounts payable, and accrued and other liabilities, approximate their respective fair values due to the short maturities of these financial instruments and because accounts receivable are reduced by an allowance for doubtful accounts. The fair value of our available-for-sale securities, contingent acquisition-related liabilities, self-insurance liability, derivative instruments, and convertible senior notes are disclosed in Note 8 – Fair Value Measurements.
Revenue Recognition
On January 1, 2018, we adopted Accounting Standards Codification (“ASC”) 606 Revenue from Contracts with Customers (“ASC 606”) using the modified retrospective method applied to contracts that were not completed as of January 1, 2018. ASC 606 supersedes the revenue recognition requirements in ASC 605, Revenue Recognition (“ASC 605”), and requires the recognition of revenue when promised goods or services are transferred to customers in an amount that reflects the considerations to which the entity expects to be entitled to in exchange for those goods or services. On January 1, 2018, we also adopted ASC 340-40, Other Assets and Deferred Costs – Contracts with Customers (“ASC 340-40”), using the modified retrospective method to all incomplete contracts as of the date of initial application.
Results for reporting periods beginning after January 1, 2018 are presented under ASC 606 and ASC 340-40, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605. Additional discussion of these recently adopted pronouncements and their impact on our Consolidated Financial Statements
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
is included below under Significant Accounting Policies, in
Note 4
–
Revenue
, and in
Note 5
–
Supplemental Financial Statement Information
.
The nature of our products and services are as follows:
Hardware
. Our hardware, such as Industrial Inkjet printers, Productivity Software devices, and Fiery DFEs, is generally sold with software that is integral to the functionality of the product. In these cases, the hardware and software license are accounted for as a single performance obligation. The contract consideration is generally in the form of a fixed fee at contract inception and revenue is recognized at the point in time when control is transferred to the customer. Consideration received from customers may include trade-in printers, which are valued at the lower of cost or net realizable value.
We offer shipping and handling services to customers related to the sale of hardware. We have elected the practical expedient to account for shipping and handling activities performed after transferring control of goods to our customer as a cost to fulfill the contract. The cost of shipping and handling is accrued at the point in which control transfers to the customer and revenue is recognized.
Ink
. We typically enter into contracts with our existing customer base of installed printers to purchase ink that is not bundled with other deliverables within the contract. The ink is accounted for as a single performance obligation and revenue is recognized at the point in time when control of the ink is transferred to the customer.
Licenses
. Our software license arrangements provide the customer with the right to install and use functional intellectual property (as it exists at the point in time at which the license is granted) for the duration of the contract term (perpetual or term license). Revenue from distinct software licenses is recognized at the point in time when the software is made available to the customer for download.
Maintenance
. Our software license arrangements typically include an initial (bundled) post contract customer support (maintenance or “PCS”) term. Our promise to those customers who elect to purchase PCS represents a distinct, stand-alone performance obligation. Contract consideration is allocated to the PCS based on its relative SSP and revenue is recognized over the PCS term.
Professional Services
. We provide various professional services to customers, primarily project management, software implementation, non-recurring engineering design, and training. Revenues from arrangements to provide professional services are generally distinct from the other promises in the contract(s). The majority of our professional services contracts are billed on a time and materials basis and revenue is recognized over time as the services are performed.
Software as a Service
. Our SaaS-based arrangements provide customers with continuous access to our software solutions in the form of a service hosted in the cloud. These arrangements may include initial implementation and setup and/or on-going support that represent a single promise (i.e. each individual promised component is not distinct) to provide continuous access to the software solution. Any setup fees associated with our SaaS arrangements are recognized ratably over the contract term plus expected renewal periods. As the customer simultaneously receives and consumes the benefits as access is provided, our performance obligation under our SaaS-based arrangements is comprised of a series of distinct components delivered over time. Our SaaS-based arrangements consideration is typically fixed.
Extended Service Plans (“ESP”)
. For our hardware arrangements, we enter into contracts with certain customers to provide services to maintain and repair the hardware for an extended period. ESPs are classified as service-type warranties under ASC 606 as they are sold separately and provide services which are incremental to the assurance that the product will perform to the agreed upon standards. The ESPs are accounted for as a separate performance obligation. Revenue from ESPs are recognized ratably over the contract period as the service is provided.
Contracts With Multiple Performance Obligations.
For customer arrangements that include multiple products or services, judgment is required to determine the standalone selling price (“SSP”) for each distinct performance obligation. Where an observable price is not available, we gather all reasonable available data points, consider adjustments based on market conditions, entity-specific factors, and the need to stratify selling prices into meaningful groups (e.g., geographic region) in determining SSP. We allocate the total contract consideration to each distinct performance obligation on a relative SSP basis.
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
Revenue is then recognized in accordance with the timing of the transfer of control to the customer for each performance obligation.
Assessing Collectibility.
We apply judgment in determining the customer’s ability and intention to pay. Judgments are made after considering a variety of factors including the customer’s historical payment experience, current creditworthiness, current economic impacts on the customer, past due balances, and significant one-time events or, in the case of a new customer, published credit and financial information.
Contract Acquisition Costs.
Management exercises judgment to determine the period of benefit to amortize contract acquisition costs by considering factors such as expected renewals of customer contracts, duration of customer relationships and our technology development life cycle. Although we believe that the historical assumptions and estimates we have made are reasonable and appropriate, different assumptions and estimates could materially impact our reported financial results. Amortization of deferred contract acquisition costs is included in sales and marketing expense in the Consolidated Statements of Operations. We periodically review these deferred costs to determine whether events or changes in circumstances have occurred that could impact the period of benefit of these deferred contract acquisition costs.
Shipping and Handling Costs.
Amounts billed to customers for shipping and handling costs are included in revenue. Shipping and handling costs are charged to cost of revenue as incurred.
Significant Financing Component.
Effective January 1, 2018 under ASC 606, for contracts with extended payment terms greater than 12 months, we determine whether the implicit financing component is significant or not. If significant, we defer the portion of the revenue represented by the significant financing component and recognize it as interest income over the term of the contract using the effective interest method.
Prior Period Revenue Recognition.
For the years ended December 31, 2017 and 2016, prior to the adoption of ASC 606, we recognize revenue on the sale of DFEs, printers, and ink in accordance with the provisions of SAB 104, Revenue Recognition, and when applicable, ASC 605-25. As such, revenue was generally recognized when persuasive evidence of an arrangement exists, the product has been delivered or services have been rendered, the fee is fixed or determinable, and collection is reasonably assured.
Service sales, principally representing software license and printer maintenance agreements, customer support, training, and consulting were recognized over the contractual period or as services were rendered. Subscription arrangements where the customer pays a fixed fee and receives services over a period of time were recognized ratably over the service period. Any up front setup fees associated with our subscription arrangements were recognized ratably, generally over one year. Revenue from contracts with multiple element arrangements involving tangible products containing software and non-software components that function together to deliver the product’s essential functionality by applying the relative sales price method of allocation were recognized in accordance with ASC 605-25. The sales price for each element was determined using vendor-specific objective evidence ("VSOE") when available (including post-contract customer support, professional services, hosting, and training). When VSOE was not available, then third party evidence ("TPE") was used. If VSOE or TPE are not available, then best estimated selling price was used when applying the relative sales price method for each unit of accounting. When the arrangement included software and non-software elements, revenue was first allocated to the non-software and software elements as a group based on their relative sales price. Thereafter, the relative sales price allocated to the software elements as a group was further allocated to each unit of accounting in accordance with ASC 985-605.
Leasing Arrangements.
If the sales arrangement is classified as a sales-type lease, then revenue is recognized upon shipment. Leases that are not classified as sales-type leases are accounted for as operating leases with revenue recognized ratably over the lease term. A lease is classified as a sales-type lease with revenue recognized upon shipment if the lease is determined to be collectible and has no significant uncertainties and if any of the following criteria are satisfied:
|
|
•
|
present value of all minimum lease payments is greater than or equal to 90% of the fair value of the equipment at lease inception,
|
|
|
•
|
noncancellable lease term is greater than or equal to 75% of the economic life of the equipment,
|
|
|
•
|
bargain purchase option that allows the lessee to purchase the equipment below fair value, or
|
|
|
•
|
transfer of ownership to the lessee upon termination of the lease.
|
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
Deferred Revenue.
Deferred revenue represents amounts received in advance for product support contracts, software customer support contracts, consulting and integration projects, or product sales. Product support contracts include stand-alone product support packages, routine maintenance service contracts, and upgrades or extensions to standard product warranties. We defer these amounts when we invoice the customer and then generally recognize revenue either ratably over the support contract life, upon performing the related services, under the percentage of completion method, or in accordance with our revenue recognition policy.
Allowance for Doubtful Accounts and Sales-related Allowances
We establish an allowance for doubtful accounts to ensure that trade receivables are not overstated due to uncollectibility. We record specific reserves for individual accounts when we become aware of specific customer circumstances, such as bankruptcy filings, deterioration in the customer’s operating results or financial position, or potential unfavorable outcomes from disputes with customers or vendors.
We perform ongoing credit evaluations of the financial condition of our customers and require collateral, such as letters of credit and bank guarantees, in certain circumstances. The past due or delinquency status of a receivable is based on the contractual payment terms of the receivable. Balances are written off when we deem it probable that the receivable will not be recovered.
We make provisions for sales rebates and revenue adjustments based on analysis of current sales programs and revenue in accordance with our revenue recognition policy.
Concentration of Risk
We are exposed to credit risk in the event of default by any of our customers to the extent of amounts recorded on the Consolidated Balance Sheets. We perform ongoing evaluations of the collectibility of accounts receivable balances for our customers and maintain allowances for estimated credit losses. Actual losses have not historically been significant, but have increased over the past several years as our customer base has grown through acquisitions.
Our Fiery products, which constitute approximately
23%
of revenue for the year ended
December 31, 2018
, are primarily sold to a limited number of leading printer manufacturers. We expect that we will continue to depend on a relatively small number of leading printer manufacturers for a significant portion of our revenue, although their significance is expected to decline in future periods as our revenue increases from Industrial Inkjet and Productivity Software products. We generally have experienced longer accounts receivable collection cycles in our Industrial Inkjet and Productivity Software operating segments compared to our Fiery operating segment as, historically, the leading printer manufacturers have paid on a more timely basis. Down payments are generally required from Industrial Inkjet and Productivity Software customers as a means to ensure payment.
Since Europe is composed of varied countries and regional economies, our European risk profile is somewhat more diversified due to the varying economic conditions among the countries. Approximately
37%
of our receivables are with European customers as of
December 31, 2018
. Of this amount,
27%
of our European receivables (
10%
of consolidated gross receivables) are in the higher risk southern European countries (mostly Italy, Spain, and Portugal), which our management believes to be adequately reserved.
Inventories
Inventories are generally stated at standard cost, which approximates the lower of actual cost, using the first-in, first-out (“FIFO”) cost flow assumption, or market. Reggiani inventories are stated at weighted average cost, which approximates the FIFO cost flow assumption, or market. We periodically review our inventories for potential excess or obsolete items and write down specific items to net realizable value as appropriate. Work-in-process inventories consist of our product at various levels of assembly and include materials, labor, and manufacturing overhead. Finished goods inventory represents completed products awaiting shipment.
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
We estimate potential inventory obsolescence and purchase commitments to evaluate the need for inventory reserves. Current economic trends, changes in customer demand, historical sales experience, product design changes, product life, demand, and the acceptance of our products are analyzed to evaluate the adequacy of such reserves.
Property and Equipment, Net
Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows: desktop, laptop computers, and computer server equipment (
two
to
three
years), software under perpetual licenses (
three
to
five
years), manufacturing equipment (
seven
years), testing and other equipment (
three
years), tooling (lesser of
three
years or the product life), research and development equipment with alternative future uses (
three
years), equipment leased to customers on operating leases (greater of
three
years or the lease term), furniture (
five
years), land improvements such as parking lots or sidewalks (
seven
years), leasehold improvements (the shorter of the useful life or lease term), building improvements (
five
to
ten
years), building and improvements under a build-to-suit lease (
forty
years), and purchased buildings (
forty
years).
When assets are retired or disposed, the asset and accumulated depreciation are removed from our Consolidated Balance Sheets, with any gain or loss recognized in our Statements of Operations. Repairs and maintenance expenditures are expensed as incurred, unless they are improvements that extend the useful life of the asset.
Goodwill
Goodwill is recorded when the consideration paid for an acquisition exceeds the fair value of net tangible and identified intangible assets acquired. We perform our annual goodwill impairment analysis in the fourth quarter of each year or more frequently if we believe indicators of potential impairment exist. Triggering events that may require an interim impairment analysis include indicators such as adverse industry or economic trends, restructuring actions, significant changes in the manner of our use of the acquired assets, significant changes in the strategy for our overall business, our assessment of growth and profitability in each reporting unit for future years, significant decline in our stock price for a sustained period, or a sustained decline in our market capitalization relative to net book value. In our goodwill impairment assessment, we compare the fair value of each reporting unit to its carrying value. If the fair value of a reporting unit exceeds the carrying amount of the net assets assigned to that reporting unit, goodwill is not impaired. If the fair value of the reporting unit is less than its carrying amount, goodwill is impaired and the excess of the reporting unit’s carrying value over the fair value is recognized as an impairment loss.
Long-lived Assets, including Intangible Assets
Purchased intangible assets are amortized on a straight-line basis over their economic lives of
two
to
six
years for developed technology,
three
to
nine
years for customer contracts/relationships,
four
to
five
years for covenants not to compete, and
three
to
sixteen
years for trademarks and trade names as we believe this method most closely reflects the pattern in which the economic benefits of the assets will be consumed.
We review the carrying values of long-lived assets whenever events and circumstances, such as reductions in demand, lower projections of profitability, significant changes in the manner of our use of acquired assets, or significant negative industry or economic trends, indicate that the net book value of an asset may not be recovered through expected future cash flows from its use and eventual disposition. An asset is considered impaired if its carrying amount exceeds the undiscounted future cash flow the asset is expected to generate. If this review indicates that an impairment has occurred, the impaired asset is written down to its fair value, which is typically calculated using quoted market prices and/or discounted expected future cash flows. Our estimates regarding future anticipated net revenue and cash flows, the remaining economic life of the products and technologies, or both, may differ from those used to assess the recoverability of assets. In that event, impairment charges or shortened useful lives of certain long-lived assets may be required, resulting in charges to our Consolidated Statements of Operations when such determinations are made.
An impairment loss is recorded for long-lived assets held-for-sale when the carrying amount of the asset exceeds its estimated fair value less cost to sell. A long-lived asset is not depreciated while it is classified as held-for-sale.
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
Warranty Reserves
Our Industrial Inkjet printers are generally accompanied by a
13
-month limited warranty commencing on the installation date, which covers both parts and labor. Our Fiery DFE limited warranty is
12
to
15
months. Estimated future hardware and software warranty costs are recorded as a cost of product revenue when the related revenue is recognized based on historical and projected warranty claim rates, historical and projected cost-per-claim, and knowledge of specific product failures that are outside our typical experience. Factors that affect our warranty liability include the number of installed units subject to warranty protection, product failure rates, and estimated material, distribution, and labor costs. We have agreed to continue to provide warranty coverage for certain expired FFPS warranties for
five
years subsequent to the acquisition date of the FFPS business.
Restructuring Reserves
Restructuring liabilities are established when the costs have been incurred. Severance and other employee separation costs are incurred when management commits to a plan of termination identifying the number of employees impacted, their termination dates, and the terms of their severance arrangements. The liability is accrued at the employee notification date unless service is required beyond the greater of 60 days or the legal notification period, in which case the liability is recognized ratably over the service period. Facility downsizing and closure costs are accrued at the earlier of the lessor notification date, if the lease agreement allows for early termination, or the cease use date. Relocation costs are incurred when the related relocation services are performed. Costs related to contracts without future benefit are incurred at the earlier of the cease use date or the contract cancellation date.
Research and Development
Research and development costs include salaries and benefits of employees performing research and development activities, supplies, and other expenses incurred from research and development efforts, and are expensed as incurred. We expense research and development costs associated with new software products as incurred until technological feasibility is established. To date, we have not capitalized research and development costs associated with software development as products and enhancements have generally reached technological feasibility, as defined by U.S. GAAP, and have been released for sale at substantially the same time. We have capitalized research and development equipment that has been acquired or constructed for research and development activities and has alternative future uses (in research and development projects or otherwise). Such research and development equipment is depreciated on a straight-line basis over a
three
-year useful life.
Advertising
Advertising costs are expensed as incurred. Total advertising and promotional expenses were
$6.7
,
$5.9
, and
$4.6 million
for the years ended
December 31, 2018
,
2017
, and
2016
, respectively.
Income Taxes
We account for income taxes in accordance with the provisions of ASC 740, which requires that deferred tax assets and liabilities be determined based on the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. Accordingly, the tax bases of assets and liabilities reflect the impact of the tax reform legislation that was enacted on December 22, 2017. We estimate our actual current tax expense including permanent charges and benefits and the temporary differences resulting from differing treatment of items for tax and financial accounting purposes. These temporary differences result in deferred tax assets and liabilities, which are included on our Consolidated Balance Sheets. In some cases, provisional amounts were recorded based on reasonable estimates. SAB 118 provides that the measurement period may not extend beyond one year from the enactment date. We recorded the provisional amounts of the tax effects of the 2017 Tax Act in 2017, and finalized the calculation of the tax effects in 2018.
We assess the likelihood that our deferred tax assets will be recovered from future taxable income by considering both positive and negative evidence relating to their recoverability. If we believe that recovery of these deferred tax assets is not
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
more likely than not, we establish a valuation allowance. Significant judgment is required in determining any valuation allowance recorded against deferred tax assets. We account for uncertainty in income taxes by recognizing a tax position only when it is more likely than not that the tax position, based on its technical merits, will be sustained upon ultimate settlement with the applicable tax authority. The tax benefit to be recognized is the largest amount of tax benefit that is greater than fifty percent likely of being realized upon ultimate settlement with the applicable tax authority that has full knowledge of all relevant information. Tax benefits that are deemed to be less than fifty percent likely of being realized are recorded in noncurrent income taxes payable until the uncertainty has been resolved through either examination by the relevant taxing authority or expiration of the pertinent statutes of limitations.
Business Combinations
We allocate the purchase price of acquired companies to the tangible and identifiable intangible assets acquired, including IPR&D, and liabilities assumed based on their estimated fair values. Such a valuation requires management to make significant estimates and assumptions, especially with respect to intangible assets. The results of operations for each acquisition are included in our financial statements from the date of acquisition.
Our acquisitions are accounted for as purchase business combinations using the acquisition method of accounting in accordance with ASC 805. Key provisions of the acquisition method of accounting include the following:
|
|
•
|
one hundred percent of assets and liabilities of the acquired business, including goodwill, are recorded at fair value, regardless of the percentage of the business acquired;
|
|
|
•
|
contingent assets and liabilities are recognized at fair value at the acquisition date;
|
|
|
•
|
contingent consideration is recognized at fair value at the acquisition date with changes in fair value recognized in earnings as assumptions are updated or upon settlement;
|
|
|
•
|
IPR&D is recognized at fair value at the acquisition date subject to amortization after product launch or otherwise assessed for impairment;
|
|
|
•
|
acquisition-related transaction and restructuring costs are expensed as incurred;
|
|
|
•
|
reversals of valuation allowances related to acquired deferred tax assets and liabilities and changes to acquired income tax uncertainties are recognized in earnings;
|
|
|
•
|
when making adjustments to finalize preliminary accounting during the measurement period, which may be up to one year, we recognize measurement period adjustments in the reporting period in which the adjustment amounts are determined; and,
|
|
|
•
|
upon final determination of the fair value of assets acquired and liabilities assumed during the measurement period, any subsequent adjustments are recorded in our Consolidated Statements of Operations.
|
Stock-Based Compensation
We account for stock-based compensation based on the fair value of such awards on the date of grant. We amortize stock-based compensation expense on a graded vesting basis over the vesting period after assessing the probability of achieving the requisite performance criteria with respect to performance-based awards. Stock-based compensation expense is recognized over the requisite service period for each separately vesting tranche as though the award were, in substance, multiple awards.
Our determination of the fair value of stock-based payment awards on the date of grant using an option pricing model is affected by volatility, expected term, and interest rate assumptions. 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 on management’s consideration of the historical life of the options, the vesting period of the options granted, and the 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.
Foreign Currency Translation
In preparing our consolidated financial statements, for subsidiaries that operate in a U.S. dollar functional currency environment, we remeasure balance sheet monetary items into U.S. dollars. Foreign currency assets and liabilities are
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
remeasured from the transaction currency into the functional currency at current exchange rates, except for non-monetary assets, liabilities, and capital accounts, which are remeasured at historical exchange rates. Revenue and expenses are remeasured at monthly exchange rates, which approximate average exchange rates in effect during each period. Gains or losses from foreign currency remeasurement are included in interest income and other income (expense), net. Net losses resulting from foreign currency transactions, including hedging gains and losses, are reported in interest income and other income (expense), net, and were
$1.7
,
$1.6
, and
$3.8 million
for the years ended
December 31, 2018
,
2017
, and
2016
, respectively.
For subsidiaries that operate in a local functional currency environment, all assets and liabilities are translated into U.S. dollars using current exchange rates, while revenue and expenses are translated using monthly exchange rates, which approximate the average exchange rates in effect during each period. Resulting translation adjustments are reported as a separate component of AOCI, adjusted for deferred income taxes. The cumulative translation adjustment balance, net of tax, was an unrealized loss of
$12.8 million
at
December 31, 2018
, and an unrealized gain of
$8.8
million at
December 31, 2017
.
We determine the functional currency of each of our foreign subsidiaries based on our assessment of the salient economic indicators discussed in ASC 830-10-55-5, Foreign Currency Matters.
Diluted Net Income (Loss) per Share
Diluted net income (loss) per share is computed using the weighted average number of common shares 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 ESPP having a dilutive effect, the assumed issuance at the beginning of 2017 of shares potentially released from escrow related to the acquisition of CTI, the assumed issuance at the beginning of 2016 of shares issued from escrow during 2016 related to the acquisition of Reggiani, the assumed conversion of our convertible notes having a dilutive effect using the treasury stock method when the stock price exceeds the conversion price of the convertible notes, as well as the dilutive effect of our warrants when the stock price exceeds the warrant strike price. Any potential shares that are anti-dilutive as defined in 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 (loss) per diluted common share as of the later of the beginning of the period or the grant date.
Derivative Instruments and Risk Management
Our derivative instruments consist of foreign currency exchange contracts as described below:
Cash Flow Hedges.
We utilize foreign currency exchange forward contracts to hedge foreign currency exchange exposures related to forecasted operating expenses denominated in Indian rupees. These derivative instruments are designated and qualify as cash flow hedges and in general, closely match the underlying forecasted transactions in duration. The changes in fair value of these contracts are reported as a component of AOCI and reclassified to operating expense in the periods of payment of the hedged operating expenses. We measure the effectiveness of hedges of forecasted transactions by comparing the fair value of the designated foreign currency exchange forward purchase contracts with the fair values of the forecasted transactions. Any ineffective portion of the derivative hedging gain or loss, as well as changes in the derivative time value (which is excluded from the assessment of hedge effectiveness), are recognized as a component of interest income and other income (expense), net.
Balance Sheet Hedges.
We utilize foreign currency exchange forward and option contracts to hedge against the short-term impact of foreign currency exchange rate fluctuations related to certain foreign-currency-denominated monetary assets and liabilities. These derivative instruments 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.
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
Factors that could have an impact on the effectiveness of our balance sheet and cash flow hedging program include the accuracy of forecasts and the volatility of foreign currency markets. These programs reduce, but do not entirely eliminate, the impact of currency exchange movements. The maturities of these instruments are generally less than one year. Currently, we do not enter into any foreign exchange forward contracts to hedge exposures related to firm commitments or nonmarketable investments. We do not have any leveraged derivatives, nor do we use derivative contracts for speculative purposes. The cash flow impacts of our derivative contracts are reflected as cash flows from operating activities in the Consolidated Statements of Cash Flows.
Recently Adopted Accounting Pronouncements
Revenue Recognition.
Effective January 1, 2018, we adopted ASC 606 using the modified retrospective method applied to all incomplete contracts as of the date of initial application. ASC 606 supersedes the revenue recognition requirements in ASC 605, and requires the recognition of revenue when promised goods or services are transferred to customers in an amount that reflects the considerations to which the entity expects to be entitled to in exchange for those goods or services. In addition, ASC 606 requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Effective January 1, 2018, we also adopted ASC 340-40 using the modified retrospective method to all incomplete contracts as of the date of initial application. ASC 340-40 requires the deferral of incremental costs of obtaining a contract with a customer.
Results for reporting periods beginning after January 1, 2018 are presented under ASC 606 and ASC 340-40, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605. Additional discussion of these recently adopted pronouncements is included above under Significant Accounting Policies, in
Note 4
–
Revenue
, and in
Note 5
–
Supplemental Financial Statement Information
.
Income Taxes
.
SAB 118 provides guidance for the application of ASC 740 in the reporting period that includes December 22, 2017, which is the date the Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018 (“2017 Tax Act”) was signed into law. SAB 118 requires that we recognize those income tax effects in our financial statements for which the accounting can be completed, as might be the case for the effect of rate changes on deferred tax assets and deferred tax liabilities. The measurement period is up to one year from the enactment date, which expired on December 22, 2018. We recorded the provisional amounts of the tax effects of the 2017 Tax Act in 2017, and finalized the calculation of the tax effects in 2018.
Restricted Cash
.
Accounting Standard Updates (“ASU”) 2016-18, Statement of Cash Flows: Restricted Cash, became effective in the first quarter of 2018 requiring the statement of cash flows to explain the change in cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents are included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts in the statement of cash flows. We previously included the changes in restricted cash equivalents in operating or investing activities in the Consolidated Statements of Cash Flows. Upon the adoption of ASU 2016-18, changes in restricted cash equivalents related to the off-balance sheet financing arrangement described in
Note 13
–
Commitments and Contingencies
are no longer presented as an investing cash outflow, but instead are presented as a component of the beginning and ending balance of cash, cash equivalents, and restricted cash equivalents in the Consolidated Statements of Cash Flows. Prior period amounts have been revised to conform to the current year presentation.
A reconciliation of cash, cash equivalents, and restricted cash equivalents is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Cash and cash equivalents
|
$
|
309,052
|
|
|
$
|
170,345
|
|
Restricted cash equivalents
|
39,809
|
|
|
32,531
|
|
Cash, cash equivalents, and restricted cash equivalents shown in the statement of cash flows
|
$
|
348,861
|
|
|
$
|
202,876
|
|
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
Settlement of Convertible Debt
.
ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, issued in August 2016, requires that cash settlements of principal amounts of debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the debt must classify the portion of the principal payment attributable to the accreted interest related to the debt discount as cash outflows from operating activities. This is consistent with the classification of the coupon interest payments. ASU 2016-15 became effective in the first quarter of 2018. Accordingly, the debt discount attributable to the difference between the coupon interest rate and the effective rate on our 2019 and 2023 Notes will be classified as an operating cash outflow in the Consolidated Statement of Cash Flows upon cash settlement.
Recent Accounting Pronouncements Not Yet Adopted
Lease Arrangements
.
In February 2016, the FASB issued ASU 2016- 02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing transactions. The primary change that will impact us is the recognition of right-of-use ("ROU") assets and lease liabilities, as lessee, for those leases classified as operating leases and with a term of greater than 12 months. We will recognize a ROU asset and a lease liability, initially measured at the present value of the lease payments. There will continue to be a differentiation between finance leases and operating leases. We do not currently have finance leases as lessee. 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. The current build-to-suit lease accounting guidance will be rescinded by the new guidance, although this guidance will be replaced with guidance restricting lessee control during the construction period. The accounting for build-to-suit leases will be the same as operating leases unless the lessee control provisions are applicable. The new standard requires lessors to account for leases using an approach that is substantially the same as existing guidance for sales-type leases, direct financing leases, and operating leases.
We will adopt this standard in the first quarter of 2019, using the optional transition method to initially apply the new lease standard at the adoption date, and will recognize a cumulative-effect adjustment to the opening balance of retained earnings. We expect to record total ROU Assets and Lease Liabilities on our opening Consolidated Balance Sheet of between
$35.0
and
$40.0 million
. As stated above, the recognition, measurement, and presentation of expenses and cash flows by a lessee will not significantly change from previous guidance; accordingly, the impact on our results of operations as reflected in our Consolidated Statements of Operations is not expected to be material.
Hedge Accounting
.
In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, which amends the hedge accounting recognition and presentation requirements. The new guidance continues to require an initial prospective quantitative hedge effectiveness assessment unless the hedging relationship qualifies for the critical-terms-match method or facts and circumstances method, which permit an assumption of perfect hedge effectiveness. After the initial quantitative assessment, the new guidance permits a qualitative ongoing effectiveness assessment for certain hedges if we can reasonably support an expectation of high effectiveness throughout the term of the hedge. The ASU also requires additional disclosure related to the effect on the income statement of cash flow hedges.
Upon adoption, a cumulative-effect adjustment will be recorded to charge any ineffective portion of derivative contracts designated as cash flow hedges existing at the date of adoption to AOCI with a corresponding adjustment to retained earnings as of the beginning of the fiscal year of the adoption. ASU 2017-12 will be effective in the first quarter of 2019. We expect the implementation of this guidance will not have a material impact on our consolidated financial statements.
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. Credit losses on available-for-sale debt securities will be limited to the difference between the security’s 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 expect that the implementation of this guidance will not have a material impact to our consolidated financial statements.
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
Note 2
.
Earnings 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 shares and potential dilutive common shares outstanding during the period. See
Note 1
–
The Company and Summary of Significant Accounting Policies
for additional information.
PSUs and market-based RSUs 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 (loss) 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 years ended
December 31, 2018
,
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 year ended December 31, 2016 based on achievement of specified targets related to non-GAAP return on equity, are included in the determination of net income (loss) per diluted common share as of the beginning of each respective year.
Basic and diluted earnings per share are reconciled as follows (in thousands, except for per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Basic net income (loss) per share:
|
|
|
|
|
|
Net income (loss) available to common shareholders
|
$
|
(971
|
)
|
|
$
|
(15,345
|
)
|
|
$
|
44,949
|
|
Weighted average common shares outstanding
|
44,429
|
|
|
46,281
|
|
|
46,900
|
|
Basic net income (loss) per share
|
$
|
(0.02
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
0.96
|
|
Diluted net income (loss) per share:
|
|
|
|
|
|
Net income (loss) available to common shareholders
|
$
|
(971
|
)
|
|
$
|
(15,345
|
)
|
|
$
|
44,949
|
|
Weighted average common shares outstanding
|
44,429
|
|
|
46,281
|
|
|
46,900
|
|
Dilutive stock options, restricted stock, and ESPP purchase rights
|
—
|
|
|
—
|
|
|
897
|
|
Weighted average common shares outstanding for purposes of computing diluted net income (loss) per share
|
44,429
|
|
|
46,281
|
|
|
47,797
|
|
Diluted net income (loss) per share
|
$
|
(0.02
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
0.94
|
|
Potential shares of common stock that were not included in the determination of diluted net income (loss) per share for the periods presented because the impact of including them would have been anti-dilutive or because their performance conditions have not been met, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Options
|
63
|
|
|
138
|
|
|
—
|
|
RSUs & PSUs
|
1,110
|
|
|
692
|
|
|
183
|
|
ESPP purchase rights
|
203
|
|
|
160
|
|
|
10
|
|
Total potential shares of common stock excluded from the computation of diluted earnings per share
|
1,376
|
|
|
990
|
|
|
193
|
|
The weighted-average number of common shares outstanding does not include the effect of the potential common shares from conversion of our 2019 Notes and exercise of our Warrants because the effects 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 2019 Notes. Our intent is to settle the principal amount of the 2019 Notes in cash upon conversion. The weighted-average number of common shares outstanding also does not include the effect of the potential common shares from conversion of our 2023 Notes because the effects would have been anti-dilutive since the conversion price of the 2023
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
Notes exceeded the average market price of our common stock. Only amounts payable in excess of the principal amount of the 2019 or 2023 Notes would be considered in diluted net income (loss) per share under the treasury stock method. We also entered into convertible note hedge transactions with respect to our common stock (“2019 Note Hedges”) in September 2014. The 2019 Note Hedges are also not included in the calculation of diluted net income (loss) per share because the effect of any exercise of the 2019 Note Hedges would also be anti-dilutive. Please refer to
Note 12
–
Debt
of Notes to Consolidated Financial Statements for additional information.
Note 3
.
Segment, Geographic, and Major Customer Information
Operating Segments
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 CODM is comprised of our Chief Executive Officer and Chief Financial Officer. Our
three
operating segments consist of Industrial Inkjet, Productivity Software, and Fiery.
Our operating segments are integrated through their reporting and operating structures, shared technology and practices, shared sales and marketing, shared back office support functions, 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 group 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
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 inkjet printers; digital UV curable, LED curable, ceramic, water-based, and thermoforming and specialty ink, as well as a variety of textile ink including dye sublimation, pigmented, reactive dye, acid dye, pure disperse dye, water-based dispersed printing ink, and coatings; digital inkjet printer parts; and professional services.
Productivity Software
consists of complete software suites that enable efficient and automated end-to-end business and production workflows for the print and packaging industries. These productivity suites also provide 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 Suites address all segments of the print industry. We also market Optitex fashion CAD software, which facilitates fast fashion and increased efficiency in the textile and fashion industries, and Escada corrugator control systems for the corrugated packaging market.
Fiery
consists of Fiery and FFPS DFEs, which transform digital copiers and printers into high performance networked printing devices for the office, commercial, and industrial printing markets. This operating segment is comprised of (i) stand-alone DFEs connected to digital printers, copiers, and other peripheral devices, (ii) embedded DFEs and design-licensed solutions used in digital copiers and multi-functional devices, (iii) optional software integrated into our DFE solutions such as Fiery Central and Graphics Arts Package, (iv) Fiery Self Serve, our self-service and payment solution, and (v) stand-alone software-based solutions such as our proofing, textile, and scanning solutions.
Our CODM group 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.
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
Revenue and gross profit for each operating segment, excluding stock-based compensation expense, are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Industrial Inkjet
|
|
|
|
|
|
Revenue
|
$
|
607,559
|
|
|
$
|
570,688
|
|
|
$
|
562,583
|
|
Gross profit
|
210,792
|
|
|
208,620
|
|
|
198,923
|
|
Gross profit percentages
|
34.7
|
%
|
|
36.6
|
%
|
|
35.4
|
%
|
Productivity Software
|
|
|
|
|
|
Revenue
|
$
|
168,284
|
|
|
$
|
156,561
|
|
|
$
|
151,737
|
|
Gross profit
|
119,470
|
|
|
114,460
|
|
|
114,179
|
|
Gross profit percentages
|
71.0
|
%
|
|
73.1
|
%
|
|
75.2
|
%
|
Fiery
|
|
|
|
|
|
Revenue
|
$
|
239,178
|
|
|
$
|
266,011
|
|
|
$
|
277,745
|
|
Gross profit
|
172,081
|
|
|
185,937
|
|
|
198,322
|
|
Gross profit percentages
|
71.9
|
%
|
|
69.9
|
%
|
|
71.4
|
%
|
Segment gross profit is reconciled to the Consolidated Statements of Operations as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Segment gross profit
|
$
|
502,343
|
|
|
$
|
509,017
|
|
|
$
|
511,424
|
|
Stock-based compensation expense
|
(3,770
|
)
|
|
(2,561
|
)
|
|
(2,784
|
)
|
Other items excluded from segment profit
|
—
|
|
|
—
|
|
|
(475
|
)
|
Gross profit
|
$
|
498,573
|
|
|
$
|
506,456
|
|
|
$
|
508,165
|
|
The Fiery gross profit percentage was negatively impacted by
$1.4 million
during the year ended December 31, 2017, charged to cost of revenue, which reflects the cost of manufacturing plus a portion of the expected profit margin related to the acquired FFPS inventories. Inventory acquired in the acquisition of FFPS is required to be recorded at fair value rather than historical cost.
Tangible and intangible assets, net of liabilities, are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
Inkjet
|
|
Productivity
Software
|
|
Fiery
|
|
Corporate and
Unallocated
Net Assets
|
|
Total
|
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
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
Goodwill
|
$
|
154,373
|
|
|
$
|
174,644
|
|
|
$
|
74,261
|
|
|
$
|
—
|
|
|
$
|
403,278
|
|
Identified intangible assets, net
|
66,547
|
|
|
36,379
|
|
|
20,082
|
|
|
—
|
|
|
123,008
|
|
Tangible assets, net of liabilities
|
221,933
|
|
|
(27,755
|
)
|
|
11,286
|
|
|
49,561
|
|
|
255,025
|
|
Net tangible and intangible assets
|
$
|
442,853
|
|
|
$
|
183,268
|
|
|
$
|
105,629
|
|
|
$
|
49,561
|
|
|
$
|
781,311
|
|
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
Corporate and unallocated assets and liabilities primarily consist of cash and cash equivalents, short-term investments, restricted investments and cash equivalents, corporate headquarters facility, convertible senior notes, net, imputed financing obligation related to build-to-suit lease, income taxes receivable, and income taxes payable.
Geographic Information
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 for us to ascertain.
Our revenue by ship-to destination is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Americas
|
$
|
502,820
|
|
|
$
|
487,968
|
|
|
$
|
500,411
|
|
EMEA
|
364,908
|
|
|
369,610
|
|
|
360,305
|
|
APAC
|
147,293
|
|
|
135,682
|
|
|
131,349
|
|
Total Revenue
|
$
|
1,015,021
|
|
|
$
|
993,260
|
|
|
$
|
992,065
|
|
The net book value of our property and equipment are summary as follows by geographic region (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Americas
|
$
|
60,612
|
|
|
$
|
77,683
|
|
EMEA
|
15,580
|
|
|
19,048
|
|
APAC
|
1,421
|
|
|
2,031
|
|
Total Property and Equipment, net
|
$
|
77,613
|
|
|
$
|
98,762
|
|
Major Customers
No individual customer accounted for more than 10% of our revenue for the years ended
December 31, 2018
and 2016. One customer, Xerox, provided
11%
of our consolidated revenue for the year ended
December 31, 2017
. No customer accounted for more than
10%
of our net consolidated accounts receivables as of
December 31, 2018
and
2017
.
Note 4
.
Revenue
We derive our revenue primarily from product revenue, which includes industrial inkjet printers, ink, and parts; productivity software; and DFEs. We also receive service revenue from printer maintenance agreements, customer support, training, software development, and consulting.
Upon the adoption of ASC 606 and ASC 340-40, we recorded a net increase to our opening balance of retained earnings of
$4.7 million
as of January 1, 2018, due to the cumulative effect of adoption. The adoption impact primarily related to capitalizing customer contract acquisition costs consisting of sales commissions, partially offset by an increase in deferred revenue to reflect the deferral of a significant financing component that will be recognized as interest income as payments are received over the contractual terms, and deferral of upfront setup fees that will be recognized ratably over the expected contractual terms.
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
The cumulative effect of applying ASC 606 and ASC 340-40 to active contracts as of the adoption date resulted in the following adjustments to the Consolidated Balance Sheet as of January 1, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported as of
December 31, 2017
|
|
ASC 606
Adjustments
|
|
As Adjusted
January 1, 2018
|
Assets
|
|
|
|
|
|
Accounts receivable, net
|
$
|
244,416
|
|
|
$
|
102
|
|
|
$
|
244,518
|
|
Other current assets
|
41,799
|
|
|
(1,628
|
)
|
|
40,171
|
|
Deferred tax assets
|
45,083
|
|
|
(1,466
|
)
|
|
43,617
|
|
Other assets
|
15,504
|
|
|
8,062
|
|
|
23,566
|
|
Liabilities
|
|
|
|
|
|
Deferred revenue
|
55,833
|
|
|
(95
|
)
|
|
55,738
|
|
Noncurrent contingent and other liabilities
|
28,801
|
|
|
491
|
|
|
29,292
|
|
Stockholders’ equity:
|
|
|
|
|
|
Retained earnings
|
402,544
|
|
|
4,674
|
|
|
407,218
|
|
The impact of adopting ASC 606 and ASC 340-40 on our Consolidated Statement of Operations is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
Amounts in
Accordance with
ASC 606
|
|
Amounts in
Accordance with
ASC 605
|
|
Effect of change
higher (lower)
|
Revenue
|
$
|
1,015,021
|
|
|
$
|
1,009,906
|
|
|
$
|
5,115
|
|
Cost of revenue
|
516,448
|
|
|
515,718
|
|
|
730
|
|
Gross profit
|
498,573
|
|
|
494,188
|
|
|
4,385
|
|
Operating expenses
|
478,887
|
|
|
479,378
|
|
|
(491
|
)
|
Income from operations
|
19,686
|
|
|
14,810
|
|
|
4,876
|
|
Interest income and other income, net
|
1,604
|
|
|
986
|
|
|
618
|
|
Income (loss) before income taxes
|
1,121
|
|
|
(4,373
|
)
|
|
5,494
|
|
Provision for income taxes
|
2,092
|
|
|
1,304
|
|
|
788
|
|
Net loss
|
(971
|
)
|
|
(5,677
|
)
|
|
4,706
|
|
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
The impact of adopting ASC 606 and ASC 340-40 on our Consolidated Balance Sheet as of
December 31, 2018
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts in
Accordance with
ASC 606
|
|
Amounts in
Accordance with
ASC 605
|
|
Effect of change
higher (lower)
|
Assets
|
|
|
|
|
|
Accounts receivable, net
|
$
|
241,841
|
|
|
$
|
236,438
|
|
|
$
|
5,403
|
|
Other current assets
|
44,623
|
|
|
46,981
|
|
|
(2,358
|
)
|
Deferred tax assets
|
39,449
|
|
|
41,702
|
|
|
(2,253
|
)
|
Other assets
|
37,393
|
|
|
28,840
|
|
|
8,553
|
|
Liabilities
|
|
|
|
|
|
Deferred revenue
|
60,547
|
|
|
60,837
|
|
|
(290
|
)
|
Noncurrent contingent and other liabilities
|
7,179
|
|
|
6,924
|
|
|
255
|
|
Stockholders’ equity
|
|
|
|
|
|
Retained earnings
|
406,247
|
|
|
396,867
|
|
|
9,380
|
|
The following table presents our disaggregated revenue by source (in thousands). Sales and usage-based taxes are excluded from revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Major Products and Service Lines:
|
|
|
|
|
|
Industrial Inkjet
|
|
|
|
|
|
Printers and parts
|
$
|
380,672
|
|
|
$
|
349,372
|
|
|
$
|
356,043
|
|
Ink, supplies, and maintenance
|
226,887
|
|
|
221,316
|
|
|
206,540
|
|
Productivity Software
|
|
|
|
|
|
Licenses
|
46,458
|
|
|
37,438
|
|
|
41,120
|
|
Professional services
|
30,339
|
|
|
29,748
|
|
|
27,566
|
|
Maintenance and subscriptions
|
91,487
|
|
|
89,375
|
|
|
83,051
|
|
Fiery
|
|
|
|
|
|
Digital front ends and related products
|
221,009
|
|
|
251,369
|
|
|
263,366
|
|
Maintenance and subscriptions
|
18,169
|
|
|
14,642
|
|
|
14,379
|
|
Total
|
$
|
1,015,021
|
|
|
$
|
993,260
|
|
|
$
|
992,065
|
|
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
Inkjet
|
|
Productivity
Software
|
|
Fiery
|
|
Total
|
Year Ended December 31, 2018
|
|
|
|
|
|
|
|
Timing of Revenue Recognition:
|
|
|
|
|
|
|
|
Transferred at a Point in Time
|
$
|
586,079
|
|
|
$
|
46,458
|
|
|
$
|
221,009
|
|
|
$
|
853,546
|
|
Transferred Over Time
|
21,480
|
|
|
121,826
|
|
|
18,169
|
|
|
161,475
|
|
Recurring/Non-Recurring:
|
|
|
|
|
|
|
|
Non-Recurring
|
$
|
380,672
|
|
|
$
|
76,797
|
|
|
$
|
221,009
|
|
|
$
|
678,478
|
|
Recurring
|
226,887
|
|
|
91,487
|
|
|
18,169
|
|
|
336,543
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
|
|
|
|
|
|
Timing of Revenue Recognition:
|
|
|
|
|
|
|
|
Transferred at a Point in Time
|
$
|
548,021
|
|
|
$
|
37,438
|
|
|
$
|
251,369
|
|
|
$
|
836,828
|
|
Transferred Over Time
|
22,667
|
|
|
119,123
|
|
|
14,642
|
|
|
156,432
|
|
Recurring/Non-Recurring:
|
|
|
|
|
|
|
|
Non-Recurring
|
$
|
349,372
|
|
|
$
|
67,186
|
|
|
$
|
251,369
|
|
|
$
|
667,927
|
|
Recurring
|
221,316
|
|
|
89,375
|
|
|
14,642
|
|
|
325,333
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
|
|
|
|
|
|
Timing of Revenue Recognition:
|
|
|
|
|
|
|
|
Transferred at a Point in Time
|
$
|
541,084
|
|
|
$
|
41,120
|
|
|
$
|
263,366
|
|
|
$
|
845,570
|
|
Transferred Over Time
|
21,499
|
|
|
110,617
|
|
|
14,379
|
|
|
146,495
|
|
Recurring/Non-Recurring:
|
|
|
|
|
|
|
|
Non-Recurring
|
$
|
356,043
|
|
|
$
|
68,686
|
|
|
$
|
263,366
|
|
|
$
|
688,095
|
|
Recurring
|
206,540
|
|
|
83,051
|
|
|
14,379
|
|
|
303,970
|
|
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
$85.5 million
as of
December 31, 2018
, of which we expect to recognize substantially all of the revenue over the next
12
months.
Contract Balances
Timing of revenue recognition may differ from timing of invoicing to customers. Payment terms and conditions vary by contract. Deferred revenue (contract liability) represents amounts received in advance, or invoiced in advance, for product support contracts, software customer support contracts, consulting and integration projects, SaaS arrangements, or product sales. We defer these amounts when we collect or invoice the customer and then generally recognize revenue either ratably over the support contract term, upon performing the related services, under the cost-to-cost method, or in accordance with our revenue recognition policy. Revenue recognized during the
year ended December 31, 2018
, which was included in deferred revenue as of December 31, 2017, was
$50.8 million
.
Unbilled accounts receivable represents contract assets for revenue that has been recognized in advance of billing the customer, which is common for long-term contracts. Billing requirements vary by contract but are generally structured around the completion of certain development milestones. Unbilled accounts receivable as of
December 31, 2017
, that were transferred to accounts receivable during the
year ended December 31, 2018
, were
$26.2 million
.
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
The following table reflects the balances in unbilled accounts receivable and deferred revenue (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
January 1, 2018
|
Unbilled accounts receivable – current
|
$
|
20,507
|
|
|
$
|
23,296
|
|
Unbilled accounts receivable – noncurrent
|
8,320
|
|
|
4,122
|
|
Deferred revenue – current
|
60,547
|
|
|
55,738
|
|
Deferred revenue – noncurrent
|
290
|
|
|
565
|
|
Note 5
.
Supplemental Financial Statement Information
Inventories
Inventories are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
Inventories
|
2018
|
|
2017
|
Raw materials
|
$
|
55,794
|
|
|
$
|
57,061
|
|
Work in process
|
12,971
|
|
|
9,792
|
|
Finished goods
|
65,583
|
|
|
58,960
|
|
Total inventories
|
$
|
134,348
|
|
|
$
|
125,813
|
|
Deferred Contract Acquisition Costs
Some of our sales incentive programs meet the definition of an incremental cost of obtaining a customer contract; and therefore, are required to be capitalized under ASC 340-40. We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year.
Sales commissions for renewal of a contract may not be commensurate with the commissions paid for the acquisition of the initial contract because commissions are generally not paid on the renewal of a specifically anticipated contract. Sales commissions for initial contracts are deferred and then amortized generally on a straight-line basis over a period of benefit that we have determined to be
three
to
four
years. We determined the period of benefit by taking into consideration our customer contracts, our technology, and other factors.
Upon adoption of ASC 340-40 on January 1, 2018, we capitalized
$8.1 million
in contract acquisition costs related to contracts that were not completed. For contracts that have durations of less than one year, we follow the practical expedient and expense these costs when incurred. During the year ended
December 31, 2018
, we amortized
$4.4 million
of deferred contract acquisition costs, and we recognized
no
impairment losses in relation to costs capitalized. During the year ended
December 31, 2018
, an additional
$4.9 million
of contract acquisition costs were capitalized. Deferred contract acquisition costs are included within other noncurrent assets on our Consolidated Balance Sheets.
Equipment Leased to Customers Under Operating Leases, Net
Equipment leased to customers under operating leases, which is included in property and equipment, net on the Consolidated Balance Sheets, was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
Equipment Leased to Customers
|
2018
|
|
2017
|
Equipment leased to customers under operating leases
|
$
|
7,376
|
|
|
$
|
5,432
|
|
Accumulated depreciation
|
(3,555
|
)
|
|
(1,927
|
)
|
Equipment leased to customers under operating leases, net
|
$
|
3,821
|
|
|
$
|
3,505
|
|
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
Supplemental Disclosure of Cash Flow Information
Supplemental disclosures about cash flow information are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Net cash paid for income taxes
|
$
|
16,342
|
|
|
$
|
23,279
|
|
|
$
|
6,812
|
|
Cash paid for interest expense
|
3,138
|
|
|
3,174
|
|
|
2,975
|
|
Acquisitions of businesses and technology:
|
|
|
|
|
|
Cash paid for businesses and technology purchased, excluding contingent consideration
|
$
|
—
|
|
|
$
|
30,230
|
|
|
$
|
21,560
|
|
Cash acquired in business acquisitions
|
—
|
|
|
(671
|
)
|
|
(1,628
|
)
|
Net cash paid for business acquisitions
|
$
|
—
|
|
|
$
|
29,559
|
|
|
$
|
19,932
|
|
Common stock issued in connection with business acquisitions
|
$
|
123
|
|
|
$
|
—
|
|
|
$
|
73
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
Non-cash settlement of employee-related liabilities by issuing RSUs
|
—
|
|
|
1,171
|
|
|
3,059
|
|
Property and equipment received, but not paid
|
1,185
|
|
|
681
|
|
|
1,257
|
|
Deferred Cost of Revenue
Deferred cost of revenue related to unrecognized revenue on shipments to customers was
$0.4
and
$3.5 million
as of
December 31, 2018
and
December 31, 2017
,
respectively, and is included in other current assets on the Consolidated Balance Sheets.
Accrued and Other Liabilities
Accrued and other liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
Accrued and Other Liabilities
|
As of December 31,
|
|
2018
|
|
2017
|
Accrued compensation and benefits
|
$
|
31,917
|
|
|
$
|
29,113
|
|
Warranty provision – current
|
11,130
|
|
|
12,931
|
|
Contingent consideration – current
|
8,268
|
|
|
14,922
|
|
Debt assumed through business acquisitions
|
1,451
|
|
|
11,101
|
|
Accrued royalty payments
|
4,839
|
|
|
4,903
|
|
Accrued litigation and consulting
|
2,976
|
|
|
4,277
|
|
Technology transfer
|
3,374
|
|
|
3,593
|
|
Hedging liability
|
3,399
|
|
|
3,281
|
|
Deferred rent
|
1,868
|
|
|
2,846
|
|
Sales tax liabilities
|
2,547
|
|
|
2,574
|
|
Restructuring and other
|
1,971
|
|
|
2,452
|
|
Other accrued liabilities
|
5,583
|
|
|
6,097
|
|
Total accrued and other liabilities
|
$
|
79,323
|
|
|
$
|
98,090
|
|
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
Accumulated Other Comprehensive Income (Loss) (“AOCI”)
AOCI classified within stockholders’ equity in our Consolidated Balance Sheets as of
December 31, 2018
and
2017
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
Other Comprehensive Income (Loss)
|
As of December 31,
|
|
2018
|
|
2017
|
Net unrealized investment losses
|
$
|
—
|
|
|
$
|
(697
|
)
|
Currency translation gains (losses)
|
(12,814
|
)
|
|
8,794
|
|
Net unrealized gains on cash flow hedges
|
—
|
|
|
41
|
|
Total other comprehensive income (Loss)
|
$
|
(12,814
|
)
|
|
$
|
8,138
|
|
There were less than
$0.1
and
$0.1 million
, net of tax, reclassified out of AOCI for the years ended
December 31, 2018
and
2017
, respectively, consisting of unrealized gains and losses from investments in debt securities reported within interest income and other income, net, in our Consolidated Statements of Operations.
Note 6
.
Business Acquisitions
We did not complete any business acquisitions during
2018
. We acquired FFPS and Generation Digital during
2017
, which have been included in our Fiery operating segment, and two business process automation businesses, CRC and Escada, which have been included in our Productivity Software operating segment. Post-acquisition revenue was
$27.1 million
in the
year ended December 31, 2017
related to these four acquisitions. We acquired Optitex and Rialco during
2016
, which have been included in our Productivity Software and Industrial Inkjet operating segments, respectively. Post-acquisition revenue was
$19.8 million
in the
year ended December 31, 2016
related to these two acquisitions. Acquisition-related transaction costs were
$1.2
,
$2.1
, and
$2.2 million
during the years ended
December 31, 2018
,
2017
, and
2016
, respectively.
These acquisitions were accounted for as purchase business combinations. We allocated the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed on the basis of their estimated fair value on their respective acquisition dates. Excess purchase consideration was recorded as goodwill. Factors contributing to a purchase price that results in goodwill include, but are not limited to, the retention of research and development personnel with skills to develop future technology, manufacturing capacity in the Industrial Inkjet operating segment, support personnel to provide maintenance services related to the products, a trained sales force capable of selling current and future products, the positive reputation of each of these businesses in the market, the opportunity to integrate acquired technology into our products, 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, and the opportunity to sell our Productivity Software Suite to customers of the acquired businesses. Rialco’s technical and commercial capabilities benefit the Industrial Inkjet operating segment in the sourcing, specification, and purification of high quality dyes and expand our research, development, and innovation base to develop ink for the signage, ceramic, and packaging markets.
2017 Acquisitions
Fiery Segment
We acquired certain assets comprising the FFPS business from Xerox on January 31, 2017 for cash consideration of
$23.9 million
consisting of
$5.9 million
paid at closing,
$9.0 million
paid in July 2017, and
$9.0 million
paid in July 2018. These subsequent payments were discounted at our incremental borrowing rate of
4.98%
, resulting in a purchase price of
$23.1 million
. The FFPS business manufactures and markets the FFPS DFE, which is a DFE that previously competed with our Fiery DFEs and is included in our Fiery segment.
We acquired privately held Generation Digital on August 14, 2017 for cash consideration of
$3.2 million
, net of cash acquired, plus an additional potential future cash earnout, which is contingent on achieving certain revenue and operating profit performance targets during a
6
-month period followed sequentially by a
12
-month period. Generation Digital provides
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
software to textile and fashion designers for the creation and design of prints and patterns, color matching, and color palette creation and management. Generation Digital has been integrated into the Fiery segment.
We made a contingent consideration payment for the initial
6
-month period but the fair value of the remaining earnout related to the Generation Digital acquisition is currently estimated to be
zero
as of
December 31, 2018
, by applying the income approach. Key assumptions include probability-adjusted revenue and operating profit levels. Probability-adjusted revenue and operating profit are significant inputs that are not observable in the market, which ASC 820-10-35 refers to as a Level 3 inputs. Changes in the fair value of contingent consideration subsequent to the acquisition date are recognized in general and administrative expenses.
Productivity Software Segment
During 2017 we acquired privately-held CRC and Escada, which have been included in our Productivity Software operating segment, for cash consideration of approximately
$19.5 million
, net of cash acquired, plus an additional potential future cash earnout related to Escada, which is contingent on Escada achieving certain revenue and operating profit performance targets over two consecutive
12
-month periods.
CRC, acquired from Reynolds on May 8, 2017, offers business process automation software for commercial, label, and packaging printers.
Escada, acquired on October 1, 2017, offers the corrugated packaging market corrugator control systems, which provide comprehensive control and traceability for the entire corrugated packaging process.
The fair value of the earnout related to the Escada acquisition is currently estimated to be
$4.2 million
as of
December 31, 2018
by applying the income approach in accordance with ASC 805-30-25-5, Business Combinations. Key assumptions include a risk-free discount rate of
2.97%
and probability-adjusted revenue and operating profit levels. This contingent liability is reflected in our Consolidated Balance Sheet as of
December 31, 2018
, as a current and noncurrent liability of
$2.4
and
$1.9 million
.
2016 Acquisitions
Industrial Inkjet Segment
Rialco was acquired on March 1, 2016 for cash consideration of
$8.4 million
, net of cash acquired, plus an additional potential future cash earnout, which is contingent on achieving certain revenue and gross profit performance targets over three consecutive 12-month periods. Rialco is a leading European supplier of dye powders and color products for the textile, digital print, and other decorating industries. Rialco’s pure disperse dyes are particularly important in the manufacture of high-quality dye sublimation inkjet ink for textile applications, which is a key growth area in the global migration from analog to digital print. Rialco has been included in the Industrial Inkjet segment.
The fair value of the earnout related to the remaining Rialco acquisition is estimated to be
$1.9 million
as of
December 31, 2018
by applying the income approach, adjusted for the impact of post-acquisition foreign currency translation changes. Key assumptions include a risk-free discount rate of
0.8%
and probability-adjusted revenue and gross profit levels. This contingent liability is reflected on the Consolidated Balance Sheet as of
December 31, 2018
, as a current liability of
$1.9 million
.
Productivity Software Segment
Optitex was acquired on June 16, 2016 for cash consideration of
$11.6 million
, net of cash acquired, plus an additional potential future cash earnout, which is contingent on achieving certain revenue and operating profit performance targets over three consecutive 12-month periods. Optitex has developed and markets integrated 2D and 3D CAD software that is shortening the design cycle, reducing our customers’ costs, and accelerating the adoption of fast fashion. Optitex has been integrated into the Productivity Software segment.
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
The fair value of the earnout related to the Optitex acquisition is estimated to be
zero
as of
December 31, 2018
, by applying the income approach, adjusted for the impact of post-acquisition foreign currency translation changes. Key assumptions include a risk-free discount rate of
3.39%
and probability-adjusted revenue and operating profit levels. During the year ended December 31, 2018, we reduced the contingent consideration liability for Optitex by a total of
$20.9 million
with a credit to general and administrative expenses.
Valuation Methodologies
Intangible assets acquired in
2017
, and
2016
consist of customer relationships, the Master Purchasing Agreement (the “Purchasing Agreement”) with Xerox, “take-or-pay” contractual penalty with Xerox, trade names, existing technology, backlog, and IPR&D. The intangible asset valuation methodologies for each acquisition assumes discount rates between
14%
and
30%
.
Customer Relationships and Backlog
were valued using the excess earnings method, which is an income approach. The value of customer relationships lies in the generation of a consistent and predictable revenue source and the avoidance of costs associated with developing the relationships. Customer relationships were valued by estimating the revenue and operating income attributable to existing customer relationships and probability-weighting each forecast year to reflect the uncertainty of maintaining existing relationships based on historical attrition rates. Backlog represents unfulfilled customer purchase orders at the acquisition date that will provide a relatively secure revenue stream, subject only to potential customer cancellation.
Trade Names
were 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 generally 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.
Rialco existing technology was valued using the cost approach. The value of existing technology was estimated based on the historical time and cost to develop the technology, the estimated man-years required to recreate the technology, historical employee compensation and benefits, and a reasonable mark-up based on profit for companies with similar operations.
Purchasing Agreement
was valued using the excess earnings method, which is an income approach. The Purchasing Agreement entered into with Xerox states that we will be Xerox’s preferred supplier of DFEs provided that we meet quality, cost, delivery, and services requirements. The value of the 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 and operating profit attributable to the Purchasing Agreement and probability-weighting 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 Xerox’s 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 Xerox’s 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.
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
The allocation of the purchase price to the assets acquired and liabilities assumed (in thousands) with respect to each of these acquisitions at their respective acquisition dates is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 Acquisitions
|
|
2016 Acquisitions
|
|
Fiery
|
|
Productivity Software
|
|
Industrial Inkjet
|
|
Productivity Software
|
|
FFPS
|
|
Generation Digital
|
|
CRC and Escada
|
|
Rialco
|
|
Optitex
|
|
Weighted
average
useful life
|
|
Purchase
Price
Allocation
|
|
Weighted
average
useful life
|
|
Purchase
Price
Allocation
|
|
Weighted
average
useful life
|
|
Purchase
Price
Allocation
|
|
Weighted
average
useful life
|
|
Purchase
Price
Allocation
|
|
Weighted
average
useful life
|
|
Purchase
Price
Allocation
|
Purchasing agreement
|
10 years
|
|
|
$
|
9,330
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Take-or-pay contract
|
4 years
|
|
|
9,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Customer relationships
|
—
|
|
|
—
|
|
|
8 years
|
|
|
3,030
|
|
|
7-9 years
|
|
|
5,240
|
|
|
6 years
|
|
|
2,512
|
|
|
3-4 years
|
|
|
8,890
|
|
Existing technology
|
2 years
|
|
|
2,570
|
|
|
5 years
|
|
|
890
|
|
|
4-6 years
|
|
|
5,870
|
|
|
5 years
|
|
|
846
|
|
|
5 years
|
|
|
7,760
|
|
Trade names
|
5 years
|
|
|
1,020
|
|
|
5 years
|
|
|
290
|
|
|
4-5 years
|
|
|
850
|
|
|
5 years
|
|
|
763
|
|
|
4 years
|
|
|
2,020
|
|
IPR&D
|
< one year
|
|
|
70
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Backlog
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
one year
|
|
|
191
|
|
|
< one year
|
|
|
56
|
|
|
< one year
|
|
|
370
|
|
Goodwill
|
—
|
|
|
6,590
|
|
|
—
|
|
|
3,012
|
|
|
—
|
|
|
11,632
|
|
|
|
|
1,426
|
|
|
|
|
28,147
|
|
Total intangible assets
|
|
|
28,580
|
|
|
|
|
7,222
|
|
|
|
|
23,783
|
|
|
|
|
5,603
|
|
|
|
|
47,187
|
|
Net tangible assets (liabilities)
|
|
(5,537
|
)
|
|
|
|
(298
|
)
|
|
|
|
(3,738
|
)
|
|
|
|
5,177
|
|
|
|
|
(11,924
|
)
|
Total purchase price
|
|
|
$
|
23,043
|
|
|
|
|
$
|
6,924
|
|
|
|
|
$
|
20,045
|
|
|
|
|
$
|
10,780
|
|
|
|
|
$
|
35,263
|
|
The initial preliminary purchase price allocations were adjusted by
$0.7
and
$0.8 million
during the years ended December 31,
2017
, and
2016
, respectively, primarily related to certain current assets and deferred tax liabilities. Proforma results of operations have not been presented because they are not material to our Consolidated Statements of Operations.
Goodwill represents the excess of the purchase price over the net tangible and intangible assets acquired. Goodwill that was generated by our acquisitions of Rialco, CRC and Escada is not deductible for tax purposes. Goodwill that was generated by our acquisitions of FFPS and Generation Digital is deductible for tax purposes. Goodwill that was generated by our acquisition of Optitex is deductible for U.S. tax purposes, but is not deductible for tax purposes in Israel.
Escada and Rialco generate revenue and incur operating expenses primarily in British pounds sterling. Upon consideration of the salient economic indicators, we consider British pounds sterling to be the functional currency for Escada and Rialco. Optitex generates revenue and incurs operating expenses primarily in Israeli shekels. Upon consideration of the salient economic indicators, we consider the Israeli shekel to be the functional currency for Optitex.
Note 7
.
Accounts Receivable
The accounts receivable allowance consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
Accounts Receivable Allowance
|
As of December 31,
|
|
2018
|
|
2017
|
Allowance for doubtful accounts
|
$
|
21,354
|
|
|
$
|
20,278
|
|
Allowance for returns
|
4,417
|
|
|
3,690
|
|
Allowance for trade-ins
|
4,955
|
|
|
6,486
|
|
Allowance for sales rebates
|
1,540
|
|
|
1,782
|
|
Total accounts receivable allowance
|
$
|
32,266
|
|
|
$
|
32,236
|
|
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
Accounts Receivable Sales Arrangements
In accordance with ASC 860-20, Transfers and Servicing, trade receivables are derecognized from our 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 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
December 31, 2018
and
2017
. We have facilities in the U.S. 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 10 days from the date of sale, which are subject to a servicing obligation. Trade receivables sold under these facilities were
$16.7
and
$21.4
million during the years ended
December 31, 2018
and
2017
, respectively, which approximates the cash received.
We have facilities in Europe that enable us to sell to third parties, on an ongoing basis, certain trade receivables without recourse. Trade receivables sold without recourse are generally short-term receivables secured by international letters of credit. Trade receivables sold under these facilities were
$10.3
and
$5.9
million during the years ended
December 31, 2018
and
2017
, respectively, which approximates the cash received.
We report collections from the sale of trade receivables to third parties as operating cash flows in the 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 non-current assets. Our financing receivables are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
Financing Receivables
|
2018
|
|
2017
|
Sales-type lease receivables
|
$
|
31,201
|
|
|
$
|
16,558
|
|
Trade receivables
|
14,681
|
|
|
12,125
|
|
Total financing receivables
|
$
|
45,882
|
|
|
$
|
28,683
|
|
|
|
|
|
Scheduled to be received in excess of one year
|
$
|
29,470
|
|
|
$
|
15,191
|
|
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 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 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 AOCI, adjusted for deferred income taxes. The credit portion of any other-than-temporary impairment is included in net income (loss). Realized gains and losses on sales of financial instruments are recognized upon sale of the investments using the specific identification method.
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
Our available-for-sale short-term investments are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
Gross
Unrealized Gains
|
|
Gross
Unrealized Losses
|
|
Fair value
|
As of 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
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
|
|
|
|
|
|
U.S. Government and sponsored entities
|
$
|
59,824
|
|
|
$
|
—
|
|
|
$
|
(660
|
)
|
|
$
|
59,164
|
|
Corporate debt securities
|
79,356
|
|
|
—
|
|
|
(450
|
)
|
|
78,906
|
|
Municipal securities
|
382
|
|
|
—
|
|
|
(2
|
)
|
|
380
|
|
Asset-backed securities
|
9,808
|
|
|
44
|
|
|
(47
|
)
|
|
9,805
|
|
Mortgage-backed securities – residential
|
445
|
|
|
—
|
|
|
(3
|
)
|
|
442
|
|
Total short-term investments
|
$
|
149,815
|
|
|
$
|
44
|
|
|
$
|
(1,162
|
)
|
|
$
|
148,697
|
|
The fair value and duration of the available for sale short term investments that are in a gross unrealized loss position are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
More than 12 Months
|
|
Total
|
As of December 31, 2017
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
U.S. Government and sponsored entities
|
$
|
23,023
|
|
|
$
|
(206
|
)
|
|
$
|
35,989
|
|
|
$
|
(454
|
)
|
|
$
|
59,012
|
|
|
$
|
(660
|
)
|
Corporate debt securities
|
45,857
|
|
|
(207
|
)
|
|
32,634
|
|
|
(243
|
)
|
|
78,491
|
|
|
(450
|
)
|
Municipal securities
|
378
|
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
378
|
|
|
(2
|
)
|
Asset-backed securities
|
6,779
|
|
|
(31
|
)
|
|
2,947
|
|
|
(16
|
)
|
|
9,726
|
|
|
(47
|
)
|
Mortgage-backed securities – residential
|
162
|
|
|
(2
|
)
|
|
142
|
|
|
(1
|
)
|
|
304
|
|
|
(3
|
)
|
Total
|
$
|
76,199
|
|
|
$
|
(448
|
)
|
|
$
|
71,712
|
|
|
$
|
(714
|
)
|
|
$
|
147,911
|
|
|
$
|
(1,162
|
)
|
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 in anticipation of satisfying our obligation on the
2019
Notes when they mature in September
2019
. We recognized an unrealized loss of
$0.9 million
which has been reported in interest income and other income, net in the Consolidated Statements of Operations. Accordingly, there are
no
unrecognized losses in this investment portfolio as of December 31, 2018.
Amortized cost and estimated fair value of investments are summarized by maturity date as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
Amortized cost
|
|
Fair value
|
Mature in less than one year
|
$
|
70,811
|
|
|
$
|
70,811
|
|
Mature in one to three years
|
31,538
|
|
|
31,538
|
|
Total short-term investments
|
$
|
102,349
|
|
|
$
|
102,349
|
|
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
For the year ended
December 31, 2018
, our net and gross realized gain on sales of investments were less than
$0.1 million
. For the years ended
December 31, 2017
and
2016
, our net realized gain on sales of investments were
$0.3 million
and
$0.4 million
, respectively, which were comprised of
$0.3 million
and
$0.4 million
in realized gains from sales of investments, respectively, partially offset by less than $
0.1
million in realized losses in both years. As of December 31
2017
, net unrealized losses of
$1.1 million
were included in AOCI on the accompanying Consolidated Balance Sheets. There were
no
net unrealized losses included in AOCI as of
December 31, 2018
.
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 that 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 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.
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 utilized these pricing services 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.
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
Our investments and liabilities measured at fair value have been presented in accordance with the fair value hierarchy specified in ASC 820 in order of liquidity as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
As of December 31, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
28,715
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
28,715
|
|
|
$
|
9,897
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,897
|
|
U.S. Government and sponsored entities
|
28,885
|
|
|
21,444
|
|
|
—
|
|
|
50,329
|
|
|
33,261
|
|
|
25,903
|
|
|
—
|
|
|
59,164
|
|
Corporate debt securities
|
—
|
|
|
47,434
|
|
|
—
|
|
|
47,434
|
|
|
—
|
|
|
78,906
|
|
|
—
|
|
|
78,906
|
|
Municipal securities
|
—
|
|
|
379
|
|
|
—
|
|
|
379
|
|
|
—
|
|
|
380
|
|
|
—
|
|
|
380
|
|
Asset-backed securities
|
—
|
|
|
4,036
|
|
|
55
|
|
|
4,091
|
|
|
—
|
|
|
9,754
|
|
|
51
|
|
|
9,805
|
|
Mortgage-backed securities—residential
|
—
|
|
|
116
|
|
|
—
|
|
|
116
|
|
|
—
|
|
|
442
|
|
|
—
|
|
|
442
|
|
Total Assets
|
$
|
57,600
|
|
|
$
|
73,409
|
|
|
$
|
55
|
|
|
$
|
131,064
|
|
|
$
|
43,158
|
|
|
$
|
115,385
|
|
|
$
|
51
|
|
|
$
|
158,594
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration, current and noncurrent
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,501
|
|
|
$
|
10,501
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
35,702
|
|
|
$
|
35,702
|
|
Self-insurance
|
—
|
|
|
—
|
|
|
840
|
|
|
840
|
|
|
—
|
|
|
—
|
|
|
902
|
|
|
902
|
|
Total Liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11,341
|
|
|
$
|
11,341
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
36,604
|
|
|
$
|
36,604
|
|
Money market funds have been classified as cash equivalents on the Consolidated Balance Sheets as of
December 31, 2018
and
2017
, respectively.
Investments are generally classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices or alternative pricing sources with reasonable levels of price transparency. There have been no transfers between Level 1 and 2 during the years ended
December 31, 2018
and
2017
.
Government agency investments and corporate debt instruments, including investments in asset-backed and mortgage-backed securities, have generally been classified as Level 2 because markets for these securities are less active or valuations for such securities utilize significant inputs which are directly or indirectly observable. We hold asset-backed securities with income payments derived from and collateralized by a specified pool of underlying assets. Asset-backed securities in the portfolio are predominantly collateralized by credit cards and auto loans.
Liabilities for Contingent Consideration
Acquisition-related liabilities for contingent consideration (i.e., earnouts) are related to the purchase business combinations of Generation Digital and Escada, acquired in 2017; Optitex and Rialco in 2016; Shuttleworth, CDM, CTI, and Reggiani in 2015; and PrintLeader Software (“PrintLeader”) in 2013.
The fair value of these earnouts is estimated to be
$10.5
and
$35.7
million as of
December 31, 2018
and
2017
, respectively, by applying the income approach in accordance with ASC 805-30-25-5. Key assumptions include risk-free discount rates between
0.6%
and
5.0%
(Monte Carlo valuation method) and discount rates between
4.7%
and
6.0%
(probability-adjusted method), as well as probability-adjusted revenue and earnings levels. Probability-adjusted revenue, gross margin, and earnings 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 Consolidated Balance Sheet as of
December 31, 2018
as current and noncurrent liabilities of
$8.3
and
$2.2 million
, respectively.
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
Changes in the fair value of the contingent consideration liability are summarized as follows (in thousands):
|
|
|
|
|
Fair value of contingent consideration at December 31, 2016
|
$
|
56,463
|
|
Fair value of Generation Digital contingent consideration at August 14, 2017
|
3,600
|
|
Fair value of Escada contingent consideration at October 1, 2017
|
2,049
|
|
Escrow adjustment for Reggiani acquisition
|
(4,711
|
)
|
Changes in valuation
|
6,472
|
|
Payments and settlements
|
(30,924
|
)
|
Foreign currency adjustment
|
2,753
|
|
Fair value of contingent consideration at December 31, 2017
|
$
|
35,702
|
|
Escrow adjustment
|
(200
|
)
|
Changes in valuation
|
(21,486
|
)
|
Payments and settlements
|
(3,193
|
)
|
Foreign currency adjustment
|
(322
|
)
|
Fair value of contingent consideration at December 31, 2018
|
$
|
10,501
|
|
The fair value of contingent consideration decreased by
$25.2 million
during the year ended
December 31, 2018
. The primary contributors to the decrease included a reduction in the fair value of the Optitex earnout of
$20.9 million
, and earnout payments of
$1.3
and
$1.1 million
to Rialco and Generation Digital, respectively. The fair value of contingent consideration decreased by
$20.8 million
during the year ended
December 31, 2017
. The
$30.9 million
of earnout payments consisted of payments of
$21.5
,
$6.8
,
$1.3
, and
$1.2 million
to Reggiani, Optitex, Rialco, and Shuttleworth, respectively. The
$6.5 million
of valuation changes pertain to
$1.7 million
of interest accretion on the outstanding liability, an increase in earnout performance probability of
$2.9
,
$2.1
, and
$0.6 million
for Optitex, Rialco, and CTI respectively, partially offset by a
$1.2 million
decrease in the earnout performance probability for Shuttleworth.
Since the primary inputs to the fair value measurement of the contingent consideration liability 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 performance targets for the 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
$0.7 million
or a decrease of
$0.5 million
, resulting in a corresponding adjustment to general and administrative expense. A change in the discount rate of one percentage point would result in an increase or decrease in the fair value of contingent consideration of less than
$0.1 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
$19.3 million
as of
December 31, 2018
.
Fair Value of Derivative Instruments
We utilize the income approach to measure the fair value of our derivative assets and liabilities. The income approach uses pricing models that rely on market observable inputs such as yield curves, currency exchange rates, and forward prices, and are therefore classified as Level 2 measurements. The notional amount of our derivative assets and liabilities was
$191.8
and
$239.4 million
as of
December 31, 2018
and
2017
, respectively. There were
no
derivatives that were designated as cash flow hedges as of
December 31, 2018
. The fair value of our derivative assets and liabilities designated for cash flow hedge with notional amount of
$3.9 million
as of
December 31, 2017
was not material.
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
December 31, 2018
was approximately
$335 million
and was considered a Level 2 fair value
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
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
December 31, 2018
was approximately
$143 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.
Note 9
.
Property and Equipment, net
Property and equipment, net, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
Property and Equipment, Net
|
2018
|
|
2017
|
Land, buildings, and improvements
|
$
|
50,123
|
|
|
$
|
68,404
|
|
Equipment and purchased software
|
93,170
|
|
|
93,849
|
|
Furniture and leasehold improvements
|
18,338
|
|
|
20,270
|
|
Gross
|
161,631
|
|
|
182,523
|
|
Less accumulated depreciation and amortization
|
(84,018
|
)
|
|
(83,761
|
)
|
Property and equipment, net
|
$
|
77,613
|
|
|
$
|
98,762
|
|
Depreciation expense was
$18.6
,
$16.8
, and
$14.1 million
for the years ended
December 31, 2018
,
2017
, and
2016
, respectively.
Fremont, California
.
We entered into a
15
-year lease agreement pursuant commencing on
September 1, 2013
to which we leased approximately
59,000
square feet of a building located in Fremont, California next to our corporate headquarters. Minimum lease payments were
$18.5 million
, net of full abatement of rent for the first three years of the lease term. During the initial lease term, we also had certain rights of first refusal to (i) lease the remaining portion of the facility and/or (ii) purchase the facility. This location contained the engineering, marketing, and administrative operations for our Fiery operating segment.
On
July 27, 2018
, we executed an agreement (the “Termination Agreement”) to terminate the above lease agreement dated
April 19, 2013
. The Termination Agreement was effective
July 31, 2018
. The Company moved its Fiery segment operations and personnel from the formerly leased facility into our adjacent headquarters building in July 2018. Prior to executing the Termination Agreement, the underlying lease had a remaining term of
ten
years and minimum noncancellable lease payments of
$16.0 million
. For accounting purposes, we were considered the owner of the building and had recorded the asset at a net book value of
$13.7 million
in property and equipment, net, on our Consolidated Balance Sheet prior to the termination. As of July 31, 2018, we had derecognized the lease asset and removed the corresponding liability of
$14.5 million
, which represented the present value of the lease obligation. The Termination Agreement required us to pay total penalties of
$0.8 million
. The net loss from this lease termination of
$0.1 million
was charged to restructuring expense during the year ended December 31, 2018.
Prior to the termination date, the monthly lease payments were allocated between the land element of the lease, which was accounted for as an operating lease, and the imputed financing obligation. The imputed financing obligation was being amortized in accordance with the effective interest method.
Eagan, Minnesota
.
In 2016, management approved a plan to sell approximately
5.6
acres and the office building located at 1340 Corporate Center Curve, Eagan, Minnesota, consisting of
43,682
square feet, and the related improvements were classified as assets held-for-sale. On
April 13, 2017
, we entered into an agreement under which we agreed to sell the office building, improvements, and related land, subject to completion of a 150-day due diligence period, which expired on September 7, 2017 without the transaction closing. Accordingly, assets previously recorded as assets held-for-sale of
$3.8 million
, which consisted of
$2.9 million
net book value of the facility and
$0.9 million
of related land as of December 31,
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
2016, have been classified as assets held for use within property and equipment, net, in our Consolidated Balance Sheets as of
December 31, 2018
and 2017.
Manchester, New Hampshire
.
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, NH to lease
16.9
acres adjacent to the Manchester Regional Airport. The land is subleased to MUFG during the term of the lease related to the manufacturing facility that was constructed on the site, which is described below. Minimum lease payments are
$13.3 million
during the entire
48.5
-year term of the land lease, excluding
six
months of the land lease that were financed into the manufacturing facility lease.
On August 26, 2016, we entered into a
six
-year lease with MUFG whereby a
225,000
-square foot manufacturing and warehouse facility was constructed for our Industrial Inkjet operating segment at a cost of
$39.8 million
. Construction was completed in April 2018. Minimum lease payments during the initial six-year term are
$1.8 million
. Upon completion of the initial six-year term, we have the option to renew the lease, purchase the facility, or return the facility to MUFG subject to an
89%
residual value guarantee under which we would recognize additional rent expense in the form of a variable rent payment. We have assessed our exposure in relation to the residual value guarantee and believe that there is no deficiency to the guaranteed value as of December 31, 2018. During the construction period, we were required to maintain restricted cash equivalents or restricted investments equal to the amount expended to date on the construction of the building as collateral. The funds were deposited with a third-party trustee and were restricted during the construction period. Upon completion of construction,
$39.8 million
was deposited with MUFG and is restricted as collateral until the end of the underlying building lease period.
Meredith, New Hampshire.
During the fourth quarter of 2017, our management approved a plan to sell approximately
31.5
acres of land and two manufacturing buildings located at One Vutek Place and 189 Waukewan Street, Meredith, New Hampshire, consisting of
163,000
total square feet. These assets, which were previously recorded within property and equipment, net at a net book value of
$5.1 million
, were reclassified as assets held-for-sale upon the approval of the plan. We recognized an impairment charge of
$0.9 million
in the fourth quarter of 2017, and reported the assets at
$4.2 million
on our Consolidated Balance Sheet as of December 31, 2017. During the three months ended September 30, 2018, we sold the 189 Waukewan Street land and building for net proceeds of
$1.1 million
and recognized a gain of
$0.1 million
. During the fourth quarter of 2018, we recognized an additional impairment charge of
$0.3 million
on the One Vutek Place property. The current carrying value of
$2.8 million
is classified as assets held-for-sale on the Consolidated Balance Sheet as of December 31, 2018.
Note 10
.
Goodwill and Long-Lived Intangible Assets
Purchased Intangible Assets
Our purchased intangible assets are as follows (in thousands, except for weighted average useful life):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
As of December 31, 2017
|
|
Weighted
average
original useful life
(in years)
|
|
Gross
carrying
amount
|
|
Accumulated
amortization
|
|
Weighted
average
remaining useful life
(in years)
|
|
Net
carrying
amount
|
|
Gross
carrying
amount
|
|
Accumulated
amortization
|
|
Net
carrying
amount
|
Goodwill
|
—
|
|
|
$
|
390,109
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
390,109
|
|
|
$
|
403,278
|
|
|
$
|
—
|
|
|
$
|
403,278
|
|
Customer relationships and other
|
5.9
|
|
|
$
|
79,558
|
|
|
$
|
(47,224
|
)
|
|
3.1
|
|
|
$
|
32,334
|
|
|
$
|
95,862
|
|
|
$
|
(45,862
|
)
|
|
$
|
50,000
|
|
Existing technology
|
4.0
|
|
|
189,737
|
|
|
(164,814
|
)
|
|
1.0
|
|
|
24,923
|
|
|
196,693
|
|
|
(149,300
|
)
|
|
47,393
|
|
Trademarks and trade names
|
10.9
|
|
|
70,326
|
|
|
(53,250
|
)
|
|
4.7
|
|
|
17,076
|
|
|
72,048
|
|
|
(46,822
|
)
|
|
25,226
|
|
IPR&D
|
0
|
|
|
389
|
|
|
—
|
|
|
0
|
|
|
389
|
|
|
389
|
|
|
—
|
|
|
389
|
|
Amortizable intangible assets
|
5.9
|
|
|
$
|
340,010
|
|
|
$
|
(265,288
|
)
|
|
2.8
|
|
|
$
|
74,722
|
|
|
$
|
364,992
|
|
|
$
|
(241,984
|
)
|
|
$
|
123,008
|
|
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
Acquired customer relationships, existing technology, and trademarks and trade names are amortized over their estimated useful lives of
1
to
16
years using the straight-line method, which approximates the pattern in which the economic benefits of the identified intangible assets are realized. There was no change in useful life of intangible assets during the
year ended December 31, 2018
. During the years ended December 31, 2017 and 2016, the remaining useful lives of certain amortizable intangible assets were reduced based on re-assessment, resulted in a
$0.2 million
and
$1.6 million
increase in amortization expense, respectively. Aggregate amortization expense was
$45.3
,
$47.3
, and
$39.6 million
during the years ended
December 31, 2018
,
2017
, and
2016
, respectively.
IPR&D is subject to amortization after product completion over the estimated product life or otherwise assessed for impairment in accordance with acquisition accounting guidance. There were
no
impairments of IPR&D recognized during the years ended
December 31, 2018
,
2017
, or
2016
.
Future estimated amortization expense on identified intangible assets as of
December 31, 2018
is as follows (in thousands):
|
|
|
|
|
Fiscal Year
|
Future
amortization
expense
|
2019
|
$
|
34,782
|
|
2020
|
15,948
|
|
2021
|
7,721
|
|
2022
|
5,756
|
|
2023
|
2,863
|
|
Thereafter
|
7,652
|
|
Total
|
$
|
74,722
|
|
Goodwill Rollforward
The goodwill rollforward for the years ended
December 31, 2018
and
2017
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
Inkjet
|
|
Productivity
Software
|
|
Fiery
|
|
Total
|
As of December 31, 2016
|
$
|
141,068
|
|
|
$
|
155,475
|
|
|
$
|
63,298
|
|
|
$
|
359,841
|
|
Additions (FFPS, Generation Digital, CRC, and Escada acquisitions)
|
—
|
|
|
11,632
|
|
|
9,602
|
|
|
21,234
|
|
Opening balance sheet adjustments
|
—
|
|
|
10
|
|
|
679
|
|
|
689
|
|
Foreign currency adjustments
|
13,305
|
|
|
7,527
|
|
|
682
|
|
|
21,514
|
|
As of December 31, 2017
|
154,373
|
|
|
174,644
|
|
|
74,261
|
|
|
403,278
|
|
Foreign currency adjustments
|
(6,441
|
)
|
|
(6,458
|
)
|
|
(270
|
)
|
|
(13,169
|
)
|
As of December 31, 2018
|
$
|
147,932
|
|
|
$
|
168,186
|
|
|
$
|
73,991
|
|
|
$
|
390,109
|
|
Accumulated impairment as of December 31, 2018, recognized in 2008
|
$
|
103,991
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
103,991
|
|
Goodwill Assessment
As further described in
Note 1
–
The Company and Summary of Significant Accounting Policies
, ASU 2011-08, Intangibles – Goodwill and Other (ASC 350): Testing Goodwill for Impairment, requires that a good will impairment test be performed at least annually and whenever there are indications of potential impairment.
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
Our goodwill valuation analysis is based on our respective goodwill reporting units (Industrial Inkjet, Productivity Software, and Fiery), which are consistent with our operating segments identified in
Note 3
–
Segment, Geographic, and Major Customer Information
of Notes to Consolidated Financial Statements. We determined the fair value of our reporting units as of
December 31, 2018
by equally weighting the market and income approaches. Under the market approach, we estimated fair value based on market multiples of revenue or earnings of comparable companies. Under the income approach, we estimated fair value based on a projected cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. Based on our valuation results, we have determined that the fair values of our Industrial Inkjet, Productivity Software, and Fiery reporting units exceed their carrying values as of
December 31, 2018
, by
$95.0
,
$49.0
and
$362.0 million
, respectively, or
22%
,
28%
, and
331%
, respectively.
To identify suitable comparable companies under the market approach, consideration was given to the financial condition and operating performance of the reporting unit being evaluated relative to companies operating in the same or similar businesses, potentially subject to corresponding economic, environmental, and political factors and considered to be reasonable investment alternatives. Consideration was given to the investment characteristics of the subject companies relative to those of similar publicly traded companies (i.e., guideline companies), which are actively traded. In applying the Public Company Market Multiple Method, valuation multiples were derived from historical and projected operating data of guideline companies and applied to the appropriate operating data of our reporting units to arrive at an indication of fair value.
Six
suitable guideline companies were identified for the Industrial Inkjet, reporting unit.
Seven
suitable guideline companies were identified for the Productivity Software and Fiery reporting units, respectively.
As part of this process, we engaged a third party valuation firm to assist management in its analysis. 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 impairment analysis and related valuations represent the conclusions of management and not the conclusions or statements of any third party.
The income approach requires that we project future revenues, earnings, and cash flows and discount them to their present value. Such an approach involves numerous assumptions and predictions about future performance. Despite ongoing economic uncertainty, our reporting units’ revenue is assumed to grow at historical normalized rates between
2019
and
2024
for the following primary reasons:
|
|
•
|
Our Industrial Inkjet segment is positioned to outpace the market with the successful introductions of several new products, including the Nozomi corrugated packaging printer platform, the VUTEk h3 and h5 & the BOLT textile printing platform expected to launch in 2019. Additional new product introductions are expected through the forecast horizon.
|
|
|
•
|
Our acquisition of Rialco in
2016
will contribute to the achievement of historical normalized Industrial Inkjet revenue growth rates through the forecast horizon.
|
|
|
•
|
Our acquisitions of Escada and CRC in
2017
and Optitex in
2016
will contribute to the achievement historical normalized Productivity Software revenue growth rates through the forecast horizon.
|
|
|
•
|
Other assumptions include:
|
|
|
▪
|
Long-term industry growth rates.
|
|
|
▪
|
Gross profit percentages will approximate historical average levels.
|
Our discounted cash flow projections are
twelve
-year financial forecasts, which were based on annual financial forecasts developed internally by management for use in managing our business and through discussions with the valuation firm engaged by us. The significant assumptions utilized in these
twelve
-year financial forecasts included consolidated annual revenue growth rates ranging from
4%
to
9%
which equates to a consolidated compound annual growth rate of
8%
. The upper end of the range exceeds our historical normalized growth rates due to the factors described above. Future cash flows were discounted to present value using a mid-year convention and a consolidated discount rate of
11.9%
. Terminal values were calculated using the Gordon growth methodology with a consolidated long-term growth rate of
4%
for Industrial Inkjet and Productivity Software and
2.5%
for Fiery. The sum of the fair values of the Industrial Inkjet, Productivity Software, and Fiery reporting units was reconciled to our current market capitalization (based on our stock price) plus an estimated control premium. Percentages of revenue growth over the forecast horizon were compared to approximate percentages realized by the guideline companies. To assess the reasonableness of the estimated control premium we examined the most similar transactions in relevant industries and determined the average premium indicated by the transactions deemed to be most
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
similar to a hypothetical transaction involving our reporting units. We examined the weighted average and median control premiums offered in relevant industries, industry specific control premiums, and specific transaction control premiums, as well as considering the historical and current price of our common stock, to conclude that our estimated control premium is reasonable.
We assess the impairment of identifiable intangibles and long-lived assets annually and whenever events or changes in circumstances indicate the carrying value may not be recoverable or the life of the asset may need to be revised. We recognized no impairments of identifiable intangibles during the three years ended
December 31, 2018
.
Given the uncertainty of the economic environment and the potential impact on our business, there can be no assurance that our estimates and assumptions used in the evaluation of goodwill and identified intangible assets for impairment as of
December 31, 2018
will prove to be accurate predictions of the future. If our assumptions regarding forecasted revenue or gross profit rates are not achieved, we may be required to record additional goodwill impairment charges in future periods relating to any of our reporting units, whether in connection with the next annual impairment testing in the fourth quarter of
2019
or prior to that, if any such change constitutes an interim triggering event. It is not possible to determine if any such future impairment charge would result or, if it does, whether such charge would be material.
Long-Lived Assets
We evaluate potential impairment with respect to long-lived assets whenever events or changes in circumstances indicate their carrying amount may not be recoverable. An asset is considered impaired if its carrying amount exceeds the undiscounted future cash flows the asset is expected to generate. An impairment loss is recorded for long-lived assets held-for-sale when the carrying amount of the asset exceeds its fair value less cost to sell. A long-lived asset is not depreciated while it is classified as held-for-sale.
We recorded total impairment losses of
$0.5 million
during the year ended
December 31, 2018
related to the reassessment of the One Vutek Building in Meredith, NH, which is classified as held-for-sale on the Consolidated Balance Sheets, and other long-lived assets. We recognized an impairment loss of
$0.9 million
during the year ended December 31, 2017 on the properties in Meredith, NH. Please refer to
Note 9
–
Property and Equipment, net
, for additional information. There were no asset impairment charges recognized during the year ended December 31, 2016.
Note 11
.
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, and trade receivables, and to reduce earnings and cash flow volatility resulting from shifts in foreign currency exchange rates. Our objective is to offset gains and losses resulting from these exposures with losses and gains on the derivative contracts used to hedge them, thereby reducing volatility of earnings or protecting fair values of assets and liabilities. We do not have any leveraged derivatives, nor do we use derivative contracts for speculative purposes. ASC 815 requires the fair value of all derivative instruments, including those embedded in other contracts, be recorded as assets or liabilities in our 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., China, Israel, and Australia, and to non-U.S. dollar-denominated operating expenses in Europe, India, Japan, the U.K., China, Israel, and Australia. From time to time we have hedged our operating expense cash flow exposure in Indian rupees. We hedge balance sheet remeasurement exposure associated primarily with Australian dollar, British pound sterling, Israeli shekel, Japanese yen, Chinese renminbi, and Euro-denominated intercompany balances, trade receivables, and other 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 counter parties, we are allowed to net transactions of the same currency with a single net amount payable by one
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
party to the other. The derivatives held by us are not subject to any credit contingent features negotiated with these counter parties. We are not required to pledge cash collateral related to these foreign currency derivatives because, by policy, we deal with counter parties having a minimum investment grade or better credit rating. Credit risk is managed through the continuous monitoring of exposures to such counter parties.
Cash Flow Hedges
We did not have any foreign currency derivative contracts designated as cash flow hedges as of December 31, 2018. Our foreign currency derivative contracts with a notional amount of
$3.9 million
and net asset or liability amounts that were immaterial had been designated as cash flow hedges of our Indian rupee operating expense exposure as of
December 31, 2017
. The changes in fair value of these contracts are reported as a component of AOCI and reclassified to operating expense in the periods of payment of the hedged operating expenses. Any ineffective portion of the derivative hedging gain or loss, as well as changes in the derivative time value (which is excluded from the assessment of hedge effectiveness), are recognized as a component of interest income and other income (expense), net.
Balance Sheet Hedges
Forward contracts not designated for hedge accounting treatment with notional amounts of
$191.8
and
$235.5 million
as of
December 31, 2018
and
2017
, respectively, are used to hedge foreign currency balance sheet exposures. 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 for hedge accounting treatment consist of hedges of British pound sterling, Israeli shekel, Japanese yen, Chinese renminbi, Australian dollar, and Euro-denominated intercompany balances with notional amounts of
$99.2
and
$144.5 million
as of
December 31, 2018
and
2017
, respectively, hedges of British pound sterling, Australian dollar, Israeli shekel, and Euro-denominated trade receivables with notional amounts of
$52.2
and
$44.4 million
as of
December 31, 2018
and
2017
, respectively, and hedges of British pounds sterling, Israeli shekel, and Euro-denominated other net monetary assets with notional amounts of
$40.4
and
$46.6 million
as of
December 31, 2018
and
2017
, respectively.
Note 12
.
Debt
2.25% Convertible Senior Notes Due 2023
In November 2018, we issued
$150.0 million
aggregate principal amount of
2.25%
convertible senior notes due
2023
in a private placement pursuant to Rule 144A of the Securities Act of 1933, as amended. Of the
$145.4 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
December 31, 2018
, none of the conditions allowing holders of the 2023 Notes to convert had been met.
The 2023 Notes are not redeemable prior to November 22, 2021. We may redeem for cash all or any portion of the notes, at our option, on or after November 22, 2021 if the last reported sale price of our common stock has been at least
130%
of the
conversion price then in effect for at least
20
trading days (whether or not consecutive) during any
30
consecutive trading day
period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide a redemption notice at a redemption price equal to
100%
of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
If we undergo a “fundamental change,” as defined in the indenture governing the 2023 Notes, subject to certain conditions, holders may require us to repurchase for cash all or any portion of their 2023 Notes. The fundamental change repurchase price will be
100%
of the principal amount of the 2023 Notes to be repurchased, plus any accrued and unpaid interest up to, but excluding, the fundamental change repurchase date.
Throughout the term of the 2023 Notes, the conversion rate may be adjusted upon the occurrence of certain events. Holders of the 2023 Notes will not receive any cash payment representing accrued and unpaid interest upon conversion. Holders may convert their 2023 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 per
$1,000
principal amount of notes for each trading day of the Note Measurement Period was less than
98%
of the product of the last reported sale price of our common stock and the conversion rate on each such trading day;
|
|
|
•
|
if we call any or all of the notes for redemption at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date;
|
|
|
•
|
upon the occurrence of specified corporate events;
|
|
|
•
|
on or after May 15, 2023 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their notes at any time, regardless of the foregoing circumstances.
|
We separated the 2023 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 2023 Notes as a whole. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) is amortized as interest expense over the term of the 2023 Notes using the effective interest method with an effective interest rate of
6.75%
per annum (
7.36%
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 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
$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
$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.
0.75% Convertible Senior Notes Due 2019
In September 2014, we completed a private placement of
$345.0
million principal amount of
0.75%
convertible senior notes due
2019
in a private placement pursuant to Rule 144A under the Securities Act of 1933, as amended. The net proceeds from this offering were
$336.3 million
, after deducting the initial purchasers’ commissions and the offering expenses. We used
$29.4 million
of the net proceeds to purchase the Note Hedges and the Warrant transactions described below.
The 2019 Notes are senior unsecured obligations 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 2019 Notes who convert in connection with a “fundamental change,” as defined in the indenture governing the 2019 Notes (“2019 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 2019 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 the 2019 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 2019 Notes in cash upon conversion. If the conversion value exceeds the principal amount, we intend
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
to deliver shares of our common stock for our conversion obligation in excess of the aggregate principal amount. As of
December 31, 2018
, none of the conditions allowing holders of the 2019 Notes to convert had been met.
Throughout the term of the 2019 Notes, the conversion rate may be adjusted upon the occurrence of certain events. Holders of the 2019 Notes will not receive any cash payment representing accrued and unpaid interest upon conversion. Holders may convert their 2019 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 Notes Measurement Period in which the “trading price” (as the term is defined in the 2019 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.
|
We separated the 2019 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 2019 Notes as a whole. The debt discount is amortized as interest expense over the term of the 2019 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 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
$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
$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.
Our Notes are summarized as follows (in thousands):
|
|
|
|
|
|
As of December 31,
|
|
2018
|
2023 Notes
|
|
Principal amount
|
$
|
150,000
|
|
Debt discount, net of amortization
|
(27,653
|
)
|
Debt issuance costs, net of amortization
|
(3,659
|
)
|
Liability component
|
$
|
118,688
|
|
Equity component
|
$
|
28,045
|
|
Less: debt issuance costs allocated to equity
|
(853
|
)
|
Tax effects
|
(6,619
|
)
|
Equity component, net
|
$
|
20,573
|
|
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2018
|
|
2017
|
2019 Notes
|
|
|
|
Principal amount
|
$
|
345,000
|
|
|
$
|
345,000
|
|
Debt discount, net of amortization
|
(9,366
|
)
|
|
(23,178
|
)
|
Debt issuance costs, net of amortization
|
(1,360
|
)
|
|
(2,865
|
)
|
Liability component
|
$
|
334,274
|
|
|
$
|
318,957
|
|
Equity component
|
$
|
63,643
|
|
|
$
|
63,643
|
|
Less: debt issuance costs allocated to equity
|
(1,582
|
)
|
|
(1,582
|
)
|
Greenshoe option value
|
568
|
|
|
568
|
|
Tax effects
|
485
|
|
|
485
|
|
Equity component, net
|
$
|
63,114
|
|
|
$
|
63,114
|
|
Interest expense recognized related to the Notes was as follows (in thousands):
|
|
|
|
|
|
Year Ended December 31,
|
2023 Notes
|
2018
|
2.25% Coupon
|
$
|
281
|
|
Amortization of debt issuance costs
|
52
|
|
Amortization of debt discount
|
392
|
|
Interest expense on 2023 Notes
|
$
|
725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
2019 Notes
|
2018
|
|
2017
|
|
2016
|
0.75% coupon
|
$
|
2,595
|
|
|
$
|
2,580
|
|
|
$
|
2,588
|
|
Amortization of debt issuance costs
|
1,505
|
|
|
1,536
|
|
|
1,350
|
|
Amortization of debt discount
|
13,812
|
|
|
12,937
|
|
|
12,400
|
|
Interest expense on 2019 Notes
|
$
|
17,912
|
|
|
$
|
17,053
|
|
|
$
|
16,338
|
|
Note Hedges
We paid an aggregate of
$63.9 million
for our 2019 Note Hedges in September 2014. The 2019 Note Hedges will expire upon maturity of the 2019 Notes. The 2019 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 2019 Note Hedges, is greater than the strike price of the 2019 Note Hedges. The strike price of the 2019 Note Hedges initially corresponds 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 2019 Hedges are separate transactions and are not part of the 2019 Notes. Holders of the 2019 Notes will not have any rights with respect to the Note Hedges.
Warrants
Concurrently with entering into the 2019 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 will expire in December 2019 and are separate transactions that are not part of
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
the 2019 Notes or the 2019 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.
Revolving Credit Agreement
On January 2, 2019, we entered into a
5
-year
$150 million
revolving credit agreement with an option for an additional
$50 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.
The issuance cost of
$0.8 million
incurred on this facility will be recorded in other long-term assets and will be amortized on a straight-line basis over the
5
-year term of this agreement. There were no initial borrowings made under the facility at closing.
Note 13
.
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 8
–
Fair Value Measurements
.
Purchase Commitments
We subcontract with other companies to manufacture certain of our products. During the normal course of business, our subcontractors procure components based on orders placed by us. If we cancel all or part of our orders, we may still be liable to the subcontractors for the cost of the components they purchased to manufacture our products. We periodically review the potential liability compared to the adequacy of the related allowance. The amount of potential liability was not material as of
December 31, 2018
or
2017
.
Lease Commitments
As of
December 31, 2018
, we lease 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 our facilities and vehicle leases.
Future minimum lease payments under noncancellable operating leases, including build-to-suit leases, and future minimum sublease receipts, for each of the next five years and thereafter as of
December 31, 2018
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
Fiscal Year
|
Future Minimum
Lease Payments
|
|
Future Minimum
Sublease Receipts
|
2019
|
$
|
6,559
|
|
|
$
|
351
|
|
2020
|
6,216
|
|
|
60
|
|
2021
|
4,355
|
|
|
—
|
|
2022
|
2,582
|
|
|
—
|
|
2023
|
1,423
|
|
|
—
|
|
Thereafter
|
24,180
|
|
|
—
|
|
Total
|
$
|
45,315
|
|
|
$
|
411
|
|
Facilities rent expense was
$8.4
,
$8.1
, and
$8.8 million
for the years ended
December 31, 2018
,
2017
, and
2016
, respectively. Vehicle rent expense was
$3.1
,
$2.8
, and
$2.8 million
for the years ended
December 31, 2018
,
2017
, and
2016
, respectively.
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
Guarantees and Product Warranties
Our Industrial Inkjet printers are generally accompanied by a
13
-month limited warranty, commencing on the installation date, which covers both parts and labor. Our Fiery DFE products limited warranty is generally
12
to
15
months. In accordance with ASC 450-30, an accrual is established when the warranty liability is estimable and probable based on historical experience. A provision for the estimated warranty costs relating to products that have been sold is recorded in cost of revenue upon recognition of revenue and the resulting accrual is reviewed regularly and periodically adjusted to reflect changes in warranty estimates. We have agreed to continue to provide warranty coverage for certain expired FFPS warranties for five years subsequent to the acquisition of the FFPS business.
The changes in product warranty reserve were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
Balance at January 1,
|
$
|
16,335
|
|
|
$
|
10,319
|
|
Liability assumed upon acquiring FFPS
|
—
|
|
|
10,362
|
|
Provisions, net of releases
|
10,548
|
|
|
13,487
|
|
Settlements
|
(14,109
|
)
|
|
(17,833
|
)
|
Balance at December 31,
|
$
|
12,774
|
|
|
$
|
16,335
|
|
Indemnifications
In the normal course of business and in an effort to facilitate the sales of our products, we sometimes indemnify other parties, including customers, lessors, and others. When we indemnify these parties, typically those provisions protect other parties against losses arising from our infringement of third party intellectual property rights or other claims made by third parties arising from the use or distribution of our products. Those provisions often contain various limitations including limits on the amount of protection provided.
As permitted under Delaware law, pursuant to our bylaws, charter, and indemnification agreements with our current and former executive officers, directors, and general counsel, we are required, subject to certain limited qualifications, to indemnify our executive officers, directors, and general counsel for certain events or occurrences while the executive officer, director, or general counsel is or was serving at our request in such capacity. The indemnification period covers all pertinent events and occurrences during the executive officer’s, director’s, or general counsel’s lifetime. The maximum potential future payments we may be obligated to make under these indemnification agreements is unlimited; however, we have director and officer insurance coverage that limits our exposure and may enable us to recover a portion of any future amounts paid.
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
December 31, 2018
, we are subject to the matters discussed below.
MDG Matter
EFI acquired Matan in 2015 from sellers (the “2015 Sellers”) that acquired MDG 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 any such claim and have fully indemnified EFI against the 2001 Sellers’ claim.
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
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 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
In August 2017, a putative class action was filed against the Company and its two named executive officers in the United States District Court for the District of New Jersey, captioned
Pipitone v. Electronics For Imaging, Inc
., No. 2:17-cv-05992 (D.N.J.) and a first amended complaint was filed in February 2018. The complaint 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. The complaint sought an unspecified amount of damages, interest, attorneys’ fees, and other costs, on behalf of a putative class of individuals and entities that purchased or otherwise acquired EFI securities from February 22, 2017 through August 3, 2017. On January 31, 2019, the district court dismissed the complaint without prejudice, giving the plaintiffs thirty days to file a second amended complaint that addresses the deficiencies identified in the court’s order.
At this time, we do not believe it is probable that we will incur a material loss in this matter. However, it is reasonably possible that our financial statements could be materially affected by an unfavorable resolution of this matter. Because there is no operative complaint on file as of the date of this filing, we are not in a position to estimate the amount or range of reasonably possible loss that may be incurred.
Shareholder Derivative Lawsuit
In August 2017, a shareholder derivative 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 in April 2018. The complaint makes claims derivatively and on behalf of the Company as nominal defendant against the Company’s named executive officers and directors for alleged breaches of fiduciary duties and unjust enrichment, and alleges, among other things, that statements by the Company and its officers about the Company’s financial reporting, revenue recognition, internal controls, and disclosure controls and procedures were false or misleading. The complaint alleges the Company has suffered damage as a result of the individual defendants’ alleged actions, and seeks an unspecified amount of damages, restitution, and declaratory and other relief. The derivative action has been stayed pending the resolution of the
Pipitone
class action described above.
At this time, we do not believe it is probable that we will incur a material loss in this matter. However, it is reasonably possible that our financial statements could be materially affected by an unfavorable resolution of this matter. Because this matter has been stayed pending resolution of the
Pipitone
class action described above, we are not yet in a position to estimate the amount or range of reasonably possible loss that may be incurred.
Other Matters
As of
December 31, 2018
, we were subject to various other claims, lawsuits, investigations, and proceedings in addition to the matters discussed above. There is at least a reasonable possibility that additional losses may be incurred in excess of the amounts that we have accrued. However, we believe that these claims are not material to our financial statements or the range of reasonably possible losses is not reasonably estimable. Litigation is inherently unpredictable, and while we believe that we have valid defenses with respect to legal matters pending against us, our financial statements could be materially affected in any particular period by the unfavorable resolution of one or more of these contingencies or because of the diversion of management’s attention and the incurrence of significant expenses.
Note 14
.
Stock Repurchase Program
In September 2017, the board of directors approved
$125.0 million
for our share repurchase program in addition to the
$150.0 million
previously authorized in November 2015. At that time,
$28.8 million
remained available for repurchase under the 2015 authorization. The 2017 authorization thereby increased the remaining repurchase authorization to
$153.8 million
. This authorization commenced on the date of approval and expired December 31, 2018. Under this publicly announced plan, we repurchased
3,726,042
and
2,363,988
shares for an aggregate purchase price of
$109.4
and
$91.4 million
during the years
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
ended
December 31, 2018
and
2017
, respectively. As of
December 31, 2018
, we have completed the
$275 million
authorized stock repurchase program.
Our employees have the option to surrender shares of common stock to satisfy their tax withholding obligations that arise on the vesting of RSUs and the exercise of stock options. During the years ended
December 31, 2018
and
2017
, our employees surrendered
131,008
and
249,363
shares for an aggregate purchase price of
$4.1
and
$10.5 million
, respectively.
Note 15
.
Stock-based Compensation and Other Employee Benefits
Equity Incentive Plans
As of
December 31, 2018
, we had outstanding equity awards under our 2017 Equity Incentive Plan and our 2009 Stock Plan. No awards may be granted under our 2009 Stock Plan after June 7, 2017. Our primary equity incentive plans are summarized as follows:
2017 Equity Incentive Plan
Our stockholders approved the 2017 Equity Incentive Plan (“2017 Plan”) on June 7, 2017, which includes:
|
|
•
|
1,200,000
shares of our common stock reserved for issuance pursuant to such plan;
|
|
|
•
|
1,593,660
common stock shares that were available for future grants under the 2009 Equity Incentive Award Plan (“Prior Plan”) immediately prior to termination of authority to grant new awards under the Prior Plan on June 7, 2017;
|
|
|
•
|
shares subject to stock options granted under the Prior Plan and outstanding as of June 7, 2017, which expire, or for any reason are canceled or terminated, after that date without being exercised; and
|
|
|
•
|
shares subject to restricted stock unit awards granted under the 2009 Plan that are outstanding and unvested as of June 7, 2017 which are forfeited, terminated, canceled, or otherwise reacquired after that date without having become vested.
|
The 2017 Plan provides for grants of stock options (both incentive and non-qualified stock options), restricted stock, stock units, stock bonuses, performance stock, stock appreciation rights, performance stock units, phantom stock, dividend equivalent rights or cash awards. Options and awards generally vest over a period of
one
to
four
years from the date of grant and generally expire
seven
to
ten
years from the date of the grant. The terms of the 2017 Plan provide that an option price shall not be less than
100%
of fair value on the date of the grant. Our board of directors may grant a stock bonus or stock unit award under the 2017 Plan in lieu of all or a portion of any cash bonus that a participant would have otherwise received for the related performance period.
The shares of common stock covered by the 2017 Plan may be treasury shares, authorized but unissued shares, or shares purchased in the open market. If an award under the 2017 Plan is forfeited (including a reimbursement of a non-vested award upon a participant’s termination of employment at a price equal to the par value of the common stock subject to the award) or expired, any shares of common stock subject to the award may be used again for new grants under the 2017 Plan.
The 2017 Plan is administered by the Compensation Committee of the Board of Directors (“Committee”). The Committee has the exclusive authority to administer the 2017 Plan, including the power to (i) designate participants under the 2017 Plan, (ii) determine the types of awards granted to participants under the 2017 Plan, the number of such awards, and the number of shares of our common stock that is subject to such awards, (iii) determine and interpret the terms and conditions of any awards under the 2017 Plan, including the vesting schedule, exercise price, whether to settle or accept the payment of any exercise price, in cash, common stock, other awards, or other property, and whether an award may be canceled, forfeited, or surrendered, (iv) prescribe the form of each award agreement, and (v) adopt rules for the administration, interpretation, and application of the 2017 Plan.
Persons eligible to participate in the 2017 Plan include all of our employees, directors, and consultants, as determined by the Committee. There were
2.5 million
shares outstanding and
0.6 million
shares available for grant under the 2017 Plan as of
December 31, 2018
.
2009 Stock Plan
With the adoption of the 2017 Plan, no additional awards may be granted under the 2009 Stock Plan (“2009 Plan”). The 2009 Plan provided for grants of stock options (both incentive and non-qualified stock options), restricted stock awards, stock appreciation rights, performance shares, performance stock units, dividend equivalents, stock payments, deferred stock, RSUs, and performance-based awards. Options and awards generally vest over a period of
one
to
four
years from the date of grant and generally expire
seven
to
ten
years from the date of the grant. The terms of the 2009 Plan provide that an option price shall not be less than
100%
of fair value on the date of the grant. Our board of directors could grant a stock bonus or stock unit award under the 2009 Plan in lieu of all or a portion of any cash bonus that a participant would have otherwise received for the related performance period.
The shares of common stock covered by the 2009 Plan may be treasury shares, authorized but unissued shares, or shares purchased in the open market. If an award under the 2009 Plan is forfeited, terminated, canceled, or otherwise reacquired, any shares of common stock subject to the award may be used again for new grants under the 2017 Plan. There were
0.5
,
1.3
, and
2.4 million
shares outstanding under the 2009 Plan as of
December 31, 2018
,
2017
, and
2016
, respectively.
Amended and Restated 2000 Employee Stock Purchase Plan
As most recently amended on June 4, 2013, our stockholders approved the Amended and Restated 2000 Employee Stock Purchase Plan that increased the number of shares authorized for issuance pursuant to such plan by
2 million
shares. The share increase was intended to ensure that we continue to have a sufficient reserve of common stock available under the ESPP to provide our eligible employees with the opportunity to acquire our common stock through participation in a payroll deduction-based ESPP designed to operate in compliance with Section 423 of the Internal Revenue Code ("IRC"). The ESPP does not provide for an automatic increase in the number of shares reserved for issuance under the ESPP.
The ESPP is qualified under Section 423 of the IRC. Eligible employees may contribute from
one
to
ten percent
of their base compensation. Employees are not able to purchase more than the number of shares having a value greater than
$25,000
in any calendar year, as measured at the beginning of the offering period under the ESPP. The purchase price shall be the lesser of
85%
of the fair value of the stock, either on the offering date or on the purchase date. The offering period shall not exceed
27
months beginning with the offering date. The ESPP provides for offerings of four consecutive, overlapping
six
-month offering periods, with a new offering period commencing on the first trading day on or after February 1 and August 1 of each year.
There were
0.4 million
shares issued under the ESPP at an average purchase price of
$24.93
during the year ended
December 31, 2018
, and there were
0.3 million
shares issued at an average price of
$35.18
and
$32.88
during each of the years ended
December 31,
2017
and
2016
, respectively. As of
December 31, 2018
, there was
$3.1 million
of total unrecognized compensation cost related to stock-based compensation arrangements granted under the ESPP, which is expected to be recognized over a period of
1.80 years
years. At
December 31, 2018
,
2017
, and
2016
, there were
0.5
,
0.9
, and
1.2 million
shares, respectively, of our common stock reserved for issuance under the ESPP.
Stock-based Compensation Expense
We measure and recognize compensation expense for all equity awards granted to our employees and directors, including employee stock options, RSUs, and ESPP purchase rights 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 actual 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. We use the BSM option pricing model to value stock-based compensation for stock options. We value market-based awards using a Monte Carlo valuation model. We value RSUs at the closing market price on the date of grant.
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
Stock-based compensation expense is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
Stock-Based Compensation
|
2018
|
|
2017
|
|
2016
|
RSUs
|
$
|
39,180
|
|
|
$
|
21,887
|
|
|
$
|
28,952
|
|
ESPP purchase rights
|
6,101
|
|
|
4,645
|
|
|
2,795
|
|
Employee stock options
|
—
|
|
|
—
|
|
|
79
|
|
Total stock-based compensation
|
45,281
|
|
|
26,532
|
|
|
31,826
|
|
Income tax benefit
|
(6,465
|
)
|
|
(8,188
|
)
|
|
(10,342
|
)
|
Stock-based compensation expense, net of tax
|
$
|
38,816
|
|
|
$
|
18,344
|
|
|
$
|
21,484
|
|
Stock-based compensation is reported in our Consolidated Statements of Operations within the following line items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
Stock-Based Compensation
|
2018
|
|
2017
|
|
2016
|
Cost of revenue
|
$
|
3,770
|
|
|
$
|
2,561
|
|
|
$
|
2,784
|
|
Research and development
|
13,037
|
|
|
9,177
|
|
|
8,968
|
|
Sales and marketing
|
8,960
|
|
|
6,583
|
|
|
7,690
|
|
General and administrative
|
19,514
|
|
|
8,211
|
|
|
12,384
|
|
Total stock-based compensation
|
$
|
45,281
|
|
|
$
|
26,532
|
|
|
$
|
31,826
|
|
Valuation Assumptions for Stock Options and ESPP Purchases
The BSM model determines the fair value of stock options based on the stock price on the date of grant and assumptions including volatility, expected term, and interest rates. Expected volatility is based on the historical volatility of our stock over a preceding period commensurate with the expected term of the stock option. The expected term is based on management’s consideration of the historical life of the stock options, the vesting period of the stock options granted, and the contractual period of the stock options granted. The risk-free interest rate for the expected term of the stock options 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 years ended
December 31, 2018
,
2017
, and
2016
. The estimated weighted average fair value per share of ESPP purchase rights issued and the assumptions used to estimate fair value for the years ended
December 31, 2018
,
2017
, and
2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
Employee Stock Purchase Plan
|
2018
|
|
2017
|
|
2016
|
Weighted average fair value per share
|
$
|
9.28
|
|
|
$
|
12.09
|
|
|
$
|
10.69
|
|
Expected volatility
|
37% - 107%
|
|
|
24% - 28%
|
|
|
22% - 32%
|
|
Risk-free interest rate
|
1.6% - 2.7%
|
|
|
0.7% - 1.3%
|
|
|
0.4% - 0.8%
|
|
Expected term (in years)
|
0.5 - 2.0
|
|
|
0.5 - 2.0
|
|
|
0.5 - 2.0
|
|
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
Stock Option Activity
Stock options outstanding and exercisable, including performance-based and market-based options, as of December 31, 2018,
2017
, and
2016
and activity for each of the years then ended are summarized as follows (in thousands, except weighted average exercise price and remaining contractual term):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
Shares
|
|
Weighted
average
exercise
price
|
|
Weighted
average
remaining
contractual
term
(years)
|
|
Aggregate
intrinsic
value
|
Options outstanding as of January 1, 2016
|
442
|
|
|
$
|
13.20
|
|
|
|
|
|
Options forfeited and expired
|
(12
|
)
|
|
10.77
|
|
|
|
|
|
Options exercised
|
(115
|
)
|
|
11.64
|
|
|
|
|
|
Options outstanding as of December 31, 2016
|
315
|
|
|
$
|
13.86
|
|
|
1.46
|
|
$
|
9,480
|
|
Options exercised
|
(165
|
)
|
|
12.45
|
|
|
|
|
|
Options outstanding as of December 31, 2017
|
150
|
|
|
$
|
15.43
|
|
|
1.27
|
|
$
|
2,116
|
|
Options exercised
|
(75
|
)
|
|
14.28
|
|
|
|
|
|
Options outstanding as of December 31, 2018
|
75
|
|
|
$
|
16.57
|
|
|
0.68
|
|
$
|
617
|
|
Options vested and expected to vest as of December 31, 2018
|
75
|
|
|
$
|
16.57
|
|
|
0.68
|
|
$
|
617
|
|
Options exercisable as of December 31, 2018
|
75
|
|
|
$
|
16.57
|
|
|
0.68
|
|
$
|
617
|
|
Aggregate stock option intrinsic value represents the difference between the closing price per share of our common stock on the last trading day of the fiscal period and the exercise price of the underlying awards for the options that were in the money at that time. The total intrinsic value of options exercised, determined as of the date of option exercise, was
$1.4
,
$5.3
, and
$3.8 million
for the years ended
December 31, 2018
,
2017
, and
2016
, respectively. There was no unrecognized compensation cost related to stock options expected to vest as of
December 31, 2018
. The weighted average exercise price is
$16.57
. The weighted average remaining contractual term of outstanding options is
0.68
years as of
December 31, 2018
.
Non-vested RSUs
Non-vested RSUs were awarded to employees under our equity incentive plans. Non-vested RSUs do not have the voting rights of common stock and the shares underlying non-vested RSUs are not considered issued and outstanding. Non-vested RSUs generally vest over a service period of
one
to
four
years. The compensation expense incurred for these service-based awards is based on the closing market price of our stock on the date of grant and is amortized on a graded vesting basis over the requisite service period. The weighted average fair value of RSUs granted during the years ended
December 31, 2018
,
2017
, and
2016
were
$30.93
,
$35.89
, and
$43.35
, respectively.
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
Non-vested RSUs, including performance-based and market-based RSUs, as of
December 31, 2018
,
2017
, and
2016
, and activity for each of the years then ended, are summarized as follows (shares in thousands):
|
|
|
|
|
|
|
|
Restricted Stock Units
|
Shares
|
|
Weighted
average grant
date fair value
|
Non-vested at January 1, 2016
|
1,814
|
|
|
$
|
40.53
|
|
Restricted stock granted
|
1,359
|
|
|
43.35
|
|
Restricted stock vested
|
(787
|
)
|
|
38.34
|
|
Restricted stock forfeited
|
(303
|
)
|
|
39.54
|
|
Non-vested at December 31, 2016
|
2,083
|
|
|
$
|
43.34
|
|
Restricted stock granted
|
1,467
|
|
|
35.89
|
|
Restricted stock vested
|
(761
|
)
|
|
42.74
|
|
Restricted stock forfeited
|
(510
|
)
|
|
41.51
|
|
Non-vested at December 31, 2017
|
2,279
|
|
|
$
|
39.16
|
|
Restricted stock granted
|
2,048
|
|
|
30.93
|
|
Restricted stock vested
|
(639
|
)
|
|
35.63
|
|
Restricted stock forfeited
|
(767
|
)
|
|
42.63
|
|
Non-vested at December 31, 2018
|
2,921
|
|
|
$
|
33.25
|
|
Vested RSUs
Performance-based RSUs that vested based on annual financial results are expensed over the term of service and when the performance criteria are expected to be met. The grant date fair value of RSUs that vested during the years ended
December 31, 2018
,
2017
, and
2016
were
$35.63
,
$42.74
, and
$38.34
, respectively. Aggregate intrinsic value of RSUs vested and expected to vest as of
December 31, 2018
was
$70.7 million
calculated as the closing price per share of our common stock on the last trading day of the fiscal period multiplied by
2.9 million
RSUs vested and expected to vest as of
December 31, 2018
. RSUs expected to vest represent time-based RSUs unvested and outstanding as of
December 31, 2018
, and performance-based RSUs for which the requisite service period has not been rendered, but are expected to vest based on the achievement of performance conditions. There was approximately
$35.4 million
of unrecognized compensation costs related to RSUs expected to vest as of
December 31, 2018
. That cost is expected to be recognized over a weighted average period of
1.0
years.
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
Performance-based and Market-based RSUs and Stock Options
Performance-based and market-based RSUs included in the tables above as of
December 31, 2018
,
2017
, and
2016
, and activity for each of the years then ended, are summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Performance-based
|
|
Market-based
|
|
RSUs
|
|
Stock
Options
|
|
RSUs
|
Non-vested at January 1, 2016
|
920
|
|
|
16
|
|
|
23
|
|
Granted
|
821
|
|
|
—
|
|
|
—
|
|
Vested
|
(226
|
)
|
|
(4
|
)
|
|
—
|
|
Forfeited
|
(250
|
)
|
|
(12
|
)
|
|
—
|
|
Non-vested at December 31, 2016
|
1,265
|
|
|
—
|
|
|
23
|
|
Granted
|
675
|
|
|
—
|
|
|
—
|
|
Vested
|
(284
|
)
|
|
—
|
|
|
—
|
|
Forfeited
|
(447
|
)
|
|
—
|
|
|
—
|
|
Non-vested at December 31, 2017
|
1,209
|
|
|
—
|
|
|
23
|
|
Granted
|
925
|
|
|
—
|
|
|
47
|
|
Vested
|
(20
|
)
|
|
—
|
|
|
—
|
|
Forfeited
|
(648
|
)
|
|
—
|
|
|
—
|
|
Non-vested at December 31, 2018
|
1,466
|
|
|
—
|
|
|
70
|
|
Approximately
21%
of the non-vested performance-based RSUs at
December 31, 2018
subsequently vested during the first quarter of
2019
based on achievement of specified performance criteria related to revenue and non-GAAP operating income targets.
We use the BSM option pricing model to value performance-based awards. We use a Monte Carlo option pricing model to value market-based awards. The estimated grant date fair value per share of performance-based and market-based RSUs granted and the assumptions used to estimate grant date fair value are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance-Based
|
|
Market-Based
|
|
RSUs
|
|
RSUs
|
|
Short-term
|
|
Long-term
|
|
|
Year ended December 31, 2018 Grants
|
|
|
|
|
|
Grant date fair value per share
|
$
|
28.41
|
|
|
$
|
33.99
|
|
|
$
|
22.52
|
|
Service period (years)
|
1.0
|
|
|
3.0
|
|
|
|
Derived service period (years)
|
|
|
|
|
1.0
|
|
Implied volatility
|
|
|
|
|
45.0
|
%
|
Risk-free interest rate
|
|
|
|
|
3.1
|
%
|
Year ended December 31, 2017 Grants
|
|
|
|
|
|
Grant date fair value per share
|
$
|
47.18
|
|
|
$
|
33.43
|
|
|
|
Service period (years)
|
1.0
|
|
|
2.0 - 3.0
|
|
|
|
Year ended December 31, 2016 Grants
|
|
|
|
|
|
Grant date fair value per share
|
$
|
39.79
|
|
|
$
|
45.76
|
|
|
|
Service period (years)
|
1.0
|
|
|
2.0 - 3.0
|
|
|
|
Our performance-based RSUs generally vest when specified performance criteria are met based on bookings, revenue, cash provided by operating activities, non-GAAP operating income, non-GAAP earnings per share, revenue growth compared to
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
market comparables, non-GAAP earnings per share growth compared to cash flows 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 as defined in Unaudited Non-GAAP Financial Information. Non-GAAP earnings per share is defined as net income (loss) determined in accordance with GAAP, adjusted to remove the impact of certain expenses, 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 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. Our stock compensation expense could change significantly in future periods if our probability assessments change significantly.
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
60
-
90
consecutive trading days. If these multiples were not achieved by the expiration 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 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.
Employee 401(k) Plan
We sponsor a 401(k) Savings Plan (“401(k) Plan”) that provides retirement and incidental benefits for our U.S. employees. Employees may contribute from
1%
to
75%
of their annual compensation to the 401(k) Plan, limited to a maximum annual amount as set periodically by the IRS. We match
50%
of U.S. employee contributions, up to a maximum of the first
4%
of the employee’s compensation contributed to the plan, subject to IRS limitations. All matching contributions vest over
four
years starting with the hire date of the individual employee. Our matching contributions to the 401(k) Plan totaled
$2.4
,
$2.3
, and
$2.2 million
during the years ended
December 31, 2018
,
2017
, and
2016
, respectively. The employees’ contributions and our contributions are invested in mutual funds managed by a fund manager, or in self-directed retirement plans.
Note 16
.
Restructuring and Other
During the years ended
December 31, 2018
,
2017
, and
2016
, we continued to analyze and re-align our cost structure following our business acquisitions. These charges primarily relate to integrating recently acquired businesses, consolidating facilities, eliminating redundancies, and lowering our operating expense run rate. Restructuring and other consists primarily of restructuring, severance, short-term retention costs, facility downsizing and relocation, and acquisition integration expenses. Our restructuring and other plans are accounted for in accordance with ASC 420, ASC 712, and ASC 820.
Restructuring and other costs for the years ended
December 31, 2018
,
2017
, and
2016
were
$13.6
,
$7.6
, and
$6.7 million
, respectively. Restructuring and other costs included severance costs of
$7.5
,
$4.7
, and
$4.1 million
related to head count reductions of
148
,
144
, and
128
for the years ended
December 31, 2018
,
2017
, and
2016
, respectively. Severance costs include severance payments, related employee benefits, outplacement fees, recruiting, and employee relocation costs.
Facilities relocation and downsizing expenses for the years ended
December 31, 2018
,
2017
, and
2016
were
$1.7
,
$0.6
, and
$0.5 million
, respectively. Facilities restructuring and other expenses are primarily related to the relocation of certain manufacturing and administrative locations to consolidate, streamline, or improve operations. Integration expenses for the years ended
December 31, 2018
,
2017
, and
2016
of
$4.3
,
$2.3
, and
$2.1 million
, respectively, represented costs to integrate our business acquisitions.
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
Restructuring and other reserve activities are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
Reserve balance at January 1
|
$
|
2,452
|
|
|
$
|
1,824
|
|
Restructuring charges
|
8,323
|
|
|
5,136
|
|
Other charges
|
5,259
|
|
|
2,424
|
|
Non-cash restructuring and other
|
(975
|
)
|
|
(264
|
)
|
Cash payments
|
(13,088
|
)
|
|
(6,668
|
)
|
Reserve balance at December 31
|
$
|
1,971
|
|
|
$
|
2,452
|
|
Note 17
.
Income Taxes
The components of income (loss) before income taxes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
U.S.
|
$
|
(64,810
|
)
|
|
$
|
(27,926
|
)
|
|
$
|
8,254
|
|
Foreign
|
65,931
|
|
|
40,056
|
|
|
30,394
|
|
Total income before income taxes
|
$
|
1,121
|
|
|
$
|
12,130
|
|
|
$
|
38,648
|
|
The provision for (benefit from) income taxes is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Current:
|
|
|
|
|
|
U.S. Federal
|
$
|
(376
|
)
|
|
$
|
6,897
|
|
|
$
|
(7,593
|
)
|
State
|
(9
|
)
|
|
(2,926
|
)
|
|
662
|
|
Foreign
|
13,858
|
|
|
14,751
|
|
|
11,721
|
|
Total current
|
13,473
|
|
|
18,722
|
|
|
4,790
|
|
Deferred:
|
|
|
|
|
|
U.S. Federal
|
(1,671
|
)
|
|
15,304
|
|
|
(4,276
|
)
|
State
|
(1,259
|
)
|
|
732
|
|
|
(567
|
)
|
Foreign
|
(8,451
|
)
|
|
(7,283
|
)
|
|
(6,248
|
)
|
Total deferred
|
(11,381
|
)
|
|
8,753
|
|
|
(11,091
|
)
|
Provision for (benefit from) income taxes
|
$
|
2,092
|
|
|
$
|
27,475
|
|
|
$
|
(6,301
|
)
|
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
The reconciliation of the income tax provision (benefit) computed at the federal statutory rate to the actual tax provision (benefit) is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Rate Reconciliation
|
2018
|
|
2017
|
|
2016
|
Tax provision at federal statutory rate
|
$
|
235
|
|
|
21.0
|
%
|
|
$
|
4,246
|
|
|
35.0
|
%
|
|
$
|
13,527
|
|
|
35.0
|
%
|
State income taxes, net of federal benefit
|
(1,002
|
)
|
|
(89.4
|
)%
|
|
(1,426
|
)
|
|
(11.8
|
)%
|
|
62
|
|
|
0.2
|
%
|
Research and development credits
|
(1,511
|
)
|
|
(134.8
|
)%
|
|
(1,508
|
)
|
|
(12.4
|
)%
|
|
(2,627
|
)
|
|
(6.8
|
)%
|
Effect of foreign operations
|
2,923
|
|
|
260.7
|
%
|
|
(1,344
|
)
|
|
(11.1
|
)%
|
|
(3,320
|
)
|
|
(8.5
|
)%
|
Deemed repatriation transition tax
|
(831
|
)
|
|
(74.2
|
)%
|
|
16,976
|
|
|
139.8
|
%
|
|
—
|
|
|
—
|
%
|
Provision for remeasuring deferred tax balances
|
(343
|
)
|
|
(30.6
|
)%
|
|
10,450
|
|
|
86.1
|
%
|
|
—
|
|
|
—
|
%
|
Reduction in accrual for estimated potential tax assessments
|
(2,047
|
)
|
|
(182.5
|
)%
|
|
(1,676
|
)
|
|
(13.7
|
)%
|
|
(15,404
|
)
|
|
(39.9
|
)%
|
Non-deductible stock-based compensation
|
3,940
|
|
|
351.5
|
%
|
|
1,249
|
|
|
10.3
|
%
|
|
1,288
|
|
|
3.3
|
%
|
Domestic manufacturing deduction
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
(831
|
)
|
|
(2.2
|
)%
|
Acquisition and integration costs
|
285
|
|
|
25.4
|
%
|
|
168
|
|
|
1.4
|
%
|
|
(103
|
)
|
|
(0.2
|
)%
|
Meals and entertainment
|
497
|
|
|
44.3
|
%
|
|
500
|
|
|
4.1
|
%
|
|
475
|
|
|
1.2
|
%
|
Other
|
(54
|
)
|
|
(4.8
|
)%
|
|
(160
|
)
|
|
(1.3
|
)%
|
|
632
|
|
|
1.6
|
%
|
Provision for (benefit from) income taxes
|
$
|
2,092
|
|
|
186.6
|
%
|
|
$
|
27,475
|
|
|
226.4
|
%
|
|
$
|
(6,301
|
)
|
|
(16.3
|
)%
|
On December 22, 2017, the 2017 Tax Act was enacted by the U.S. government. The 2017 Tax Act made broad and complex changes to the U.S. tax code that impacted the years ended
December 31, 2018
and 2017, including, but not limited to the deemed repatriation transition tax and the remeasurement of U.S. deferred tax assets and liabilities as a result of the reduction of the U.S. corporate rate from
35%
to
21%
. The enactment of the 2017 Tax Act required companies, under ASC 740, to recognize the effects of changes in tax law and rates on deferred tax assets and liabilities and the retroactive effects of changes in tax laws in the period in which the new legislation is enacted. The effects of these changes in tax law were recorded as a component of our tax provision, regardless of the category of pre-tax income or loss to which the deferred taxes relate.
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. We recorded a
$27.5 million
tax charge in the year ended December 31, 2017 as a provisional estimate. This includes an estimated charge of
$17.0 million
related to the deemed repatriation transition tax, which was comprised of a gross transition tax of
$27.0 million
offset by foreign tax credits of
$10.0 million
. In addition, we recorded a
$10.5 million
charge related to the remeasurement of U.S. deferred tax assets and liabilities. We applied the guidance in SAB 118 when accounting for the enactment-date effects of the Act in 2017 and throughout 2018. As of December 31, 2017, we had not completed our accounting for all of the enactment-date income tax effects of the Act under ASC 740, Income Taxes. In 2018, we recorded a cumulative adjustment of
$1.2 million
benefit to the
$27.5 million
recorded in 2017 as a result of the filing of our 2017 US federal and state tax returns. As of December 31, 2018, we have now completed our accounting for all of the enactment-date income tax effects of the Act.
The 2017 Tax Act also created a minimum tax on certain foreign earnings, also known as the GILTI provision, commencing in the year ending December 31, 2018. In 2018, we recorded a net charge of
$4.7 million
(GILTI inclusion less GILTI foreign tax credits) for the full year impact. In addition, we have made an accounting policy election to record GILTI as a period expense and not record deferred tax assets associated with GILTI.
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
The tax effects of temporary differences that give rise to deferred tax assets (liabilities) are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
Deferred Taxes
|
2018
|
|
2017
|
Tax credit carryforwards
|
$
|
67,346
|
|
|
$
|
62,096
|
|
Net operating loss carryforwards
|
10,823
|
|
|
9,066
|
|
Reserves and accruals not currently deductible for tax purposes
|
8,957
|
|
|
8,785
|
|
Stock-based compensation
|
6,004
|
|
|
3,432
|
|
Other
|
2,519
|
|
|
6,472
|
|
Gross deferred tax assets
|
95,649
|
|
|
89,851
|
|
Depreciation and amortization
|
(5,493
|
)
|
|
(11,075
|
)
|
Convertible Debt
|
(7,375
|
)
|
|
161
|
|
Gross deferred tax liabilities
|
(12,868
|
)
|
|
(10,914
|
)
|
Deferred tax valuation allowance
|
(47,102
|
)
|
|
(45,506
|
)
|
Net deferred tax assets
|
$
|
35,679
|
|
|
$
|
33,431
|
|
We have
$11.4 million
federal (
$47.6 million
for state tax purposes) and
$37.7 million
federal (
$39.6 million
for state tax purposes) of loss and credit carryforwards as of
December 31, 2018
. A majority of these federal and state losses and credits will expire between
2022
and
2027
. A significant portion of these net operating loss and credit carryforwards relate to recent acquisitions. Utilization of these loss and credit carryforwards will be subject to an annual limitation under the IRC. During the year ended December 31, 2018, we recorded
$6.6 million
of net deferred tax liabilities upon the issuance of the 2023 Notes.
In accordance with ASU 2016-09, which was adopted in the second quarter of 2016, we recorded
$2.2 million
of deferred tax assets related to excess tax benefits for federal research and development income tax credits not previously benefited and
$0.6 million
of deferred tax assets for the tax benefit on the cumulative effect adjustment associated with the change in accounting for RSU forfeitures.
We assess the likelihood that our deferred tax assets will be recovered from future taxable income by considering both positive and negative evidence relating to their recoverability. If we believe that recovery of these deferred tax assets is not more likely than not, we establish a valuation allowance. Significant judgment is required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we considered all available evidence, including recent operating results, projections of future taxable income, our ability to utilize loss and credit carryforwards, and the feasibility of tax planning strategies. Other than valuation allowances on deferred tax assets related to California, Luxembourg, Israel, Netherlands, Turkey and the Optitex business unit that are not likely to be realized based on the size of the net operating loss and research and development credits being generated, we have determined that it is more likely than not that we will realize the benefit related to all other deferred tax assets. To the extent we increase a valuation allowance, we will include an expense within the tax benefit in the Consolidated Statement of Operations in the period in which such determination is made.
Electronics For Imaging, Inc.
Notes to Consolidated Financial Statements
–
(Continued)
A reconciliation of the change in the gross unrecognized tax benefits is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Unrecognized Tax Benefits
|
Federal, State,
and Foreign
Tax
|
|
Accrued
Interest and
Penalties
|
|
Gross
Unrecognized
Income Tax
Benefits
|
Balance as of December 31, 2015
|
$
|
46,090
|
|
|
$
|
532
|
|
|
$
|
46,622
|
|
Additions for tax positions of prior years
|
1,826
|
|
|
234
|
|
|
2,060
|
|
Additions for tax positions related to 2016
|
3,925
|
|
|
—
|
|
|
3,925
|
|
Reductions due to lapse of applicable statute of limitations
|
(16,483
|
)
|
|
(230
|
)
|
|
(16,713
|
)
|
Balance as of December 31, 2016
|
$
|
35,358
|
|
|
$
|
536
|
|
|
$
|
35,894
|
|
Additions for tax positions of prior years
|
1,720
|
|
|
327
|
|
|
2,047
|
|
Additions for tax positions related to 2017
|
4,492
|
|
|
—
|
|
|
4,492
|
|
Reductions due to lapse of applicable statute of limitations
|
(4,065
|
)
|
|
(177
|
)
|
|
(4,242
|
)
|
Balance as of December 31, 2017
|
$
|
37,505
|
|
|
$
|
686
|
|
|
$
|
38,191
|
|
Reductions for tax positions of prior years
|
(1,027
|
)
|
|
390
|
|
|
(637
|
)
|
Additions for tax positions related to 2018
|
3,579
|
|
|
—
|
|
|
3,579
|
|
Reductions due to lapse of applicable statute of limitations
|
(4,454
|
)
|
|
(213
|
)
|
|
(4,667
|
)
|
Balance as of December 31, 2018
|
$
|
35,603
|
|
|
$
|
863
|
|
|
$
|
36,466
|
|
As of
December 31, 2018
,
2017
, and
2016
, gross unrecognized benefits that would affect the effective tax rate if recognized were
$31.7
,
$33.9
, and
$32.0 million
, respectively, offset by deferred tax benefits of
$0.4
,
$0.4
, and
$1.1 million
related to the federal tax effect of state income taxes for the same periods. 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 Consolidated Statements of Operations.
In accordance with ASU 2013-11, we recorded
$16.5 million
of gross unrecognized tax benefits as an offset to deferred tax assets as of
December 31, 2018
, and the remaining
$15.2 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
December 31, 2018
,
2017
, and
2016
, we have accrued
$0.9
,
$0.7
, 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
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.
SUPPLEMENTARY DATA
Unaudited Quarterly Consolidated Financial Information
The following table presents our operating results for each of the quarters in the years ended
December 31, 2018
and
2017
. The information for each of these quarters is unaudited, but has been prepared on the same basis as our audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. In the opinion of management, all necessary adjustments have been included that are required to state fairly our unaudited quarterly results when read in conjunction with our audited consolidated financial statements and the notes thereto. These operating results are not necessarily indicative of the results for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
(in thousands except per share data)
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
Revenue
|
$
|
239,866
|
|
|
$
|
261,072
|
|
|
$
|
257,134
|
|
|
$
|
256,949
|
|
Gross profit
|
119,107
|
|
|
128,588
|
|
|
125,519
|
|
|
125,359
|
|
Income from operations
|
(2,065
|
)
|
|
13,644
|
|
|
2,115
|
|
|
5,992
|
|
Net income (loss)
|
(3,595
|
)
|
|
3,768
|
|
|
1,920
|
|
|
(3,064
|
)
|
Net income (loss) per basic common share
|
$
|
(0.08
|
)
|
|
$
|
0.08
|
|
|
$
|
0.04
|
|
|
$
|
(0.07
|
)
|
Net income (loss) per diluted common share
|
$
|
(0.08
|
)
|
|
$
|
0.08
|
|
|
$
|
0.04
|
|
|
$
|
(0.07
|
)
|
|
Year Ended December 31, 2017
|
(in thousands except per share data)
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
Revenue
|
$
|
228,691
|
|
|
$
|
247,047
|
|
|
$
|
248,359
|
|
|
$
|
269,163
|
|
Gross profit
|
123,530
|
|
|
127,252
|
|
|
127,458
|
|
|
128,216
|
|
Income from operations
|
8,143
|
|
|
7,991
|
|
|
7,397
|
|
|
4,016
|
|
Net income (loss)
|
4,787
|
|
|
2,759
|
|
|
3,454
|
|
|
(26,345
|
)
|
Net income (loss) per basic common share
|
$
|
0.10
|
|
|
$
|
0.06
|
|
|
$
|
0.07
|
|
|
$
|
(0.58
|
)
|
Net income (loss) per diluted common share
|
$
|
0.10
|
|
|
$
|
0.06
|
|
|
$
|
0.07
|
|
|
$
|
(0.58
|
)
|