EFI Reports Record Third Quarter Revenue For 2018
For the three months ended
For the nine months ended
“EFI’s reputation for developing innovative, industry-leading technology was a key factor in my decision to join the Company,” said
EFI will discuss the Company’s financial results by conference call at
EFI™ is a global technology company, based in
Safe Harbor for Forward Looking Statements
Certain statements in this press release are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements other than statements of historical fact including words such as “accelerate”. “address”, “ahead”, “anticipate”, “believe”, “consider”, “continue”, “develop”, “estimate”, “expect”, “further”, "intend", “look”, “plan”, “progress” and "will" and statements in the future tense are forward looking statements. The statements in this press release that could be deemed forward-looking statements include statements regarding EFI’s strategy, plans, expectations regarding its revenue growth, introduction of new products, product portfolio, productivity, future opportunities for EFI and its customers, demand for products, the CEO transition, and any statements or assumptions underlying any of the foregoing.
Forward-looking statements are subject to certain risks and uncertainties that could cause our actual future results to differ materially, or cause a material adverse impact on our results. Potential risks and uncertainties include, but are not necessarily limited to, intense competition in each of our businesses, including competition from products developed by EFI’s customers; our ability to remediate the material weaknesses identified in EFI’s internal control over financial reporting; the uncertainty of the outcome of the pending securities lawsuits against EFI; unforeseen expenses; fluctuations in currency exchange rates; the difficulty of aligning expense levels with revenue; management’s ability to forecast revenues, expenses and earnings; our ability to successfully integrate acquired businesses; changes in the mix of products sold; the uncertainty of market acceptance of new product introductions; challenge of managing asset levels, including inventory and variations in inventory levels; the uncertainty of continued success in technological advances; the challenges of obtaining timely, efficient and quality product manufacturing and supply of components; any world-wide financial and economic difficulties and downturns; adverse tax-related matters such as tax audits, changes in our effective tax rate or new tax legislative proposals; the unpredictability of development schedules and commercialization of products by the leading printer manufacturers and declines or delays in demand for our related products; the impact of changing consumer preferences on demand for our textile products; litigation involving intellectual property rights or other related matters; the uncertainty regarding the amount and timing of future share repurchases by EFI and the origin of funds used for such repurchases; the market prices of EFI's common stock prior to, during and after the share repurchases; and any other risk factors that may be included from time to time in the Company’s
The statements in this press release are made as of the date of this press release and are subject to revision until the Company will have filed its Quarterly Report on Form 10-Q for the period ended September 30, 2018. EFI undertakes no obligation to update information contained in this press release. Amounts are subject to rounding.
For further information regarding risks and uncertainties associated with EFI’s businesses, please refer to the section entitled “Risk Factors” in the Company’s
Impact of the Tax Cuts and Jobs Act of 2017
Use of Non-GAAP Financial Information
To supplement our condensed consolidated financial results prepared under generally accepted accounting principles, or GAAP, we use non-GAAP measures of net income, operating income, and earnings per diluted share that are GAAP net income, GAAP operating income, and GAAP earnings per diluted share adjusted to exclude certain costs, expenses, and gains. A reconciliation of the adjustments to GAAP results for the three and six months ended
Our non-GAAP measures, including ex-currency are not in accordance with or an alternative to GAAP and may be materially different from other non-GAAP measures, including similarly titled non-GAAP measures, used by other companies. The presentation of this additional information should not be considered in isolation from, as a substitute for, or superior to, revenue, gross profit, operating expenses, net income or earnings per diluted share prepared in accordance with GAAP. Non-GAAP financial measures have limitations in that they do not reflect certain items that may have a material impact upon our reported financial results. We expect to continue to incur expenses of a nature similar to the non-GAAP adjustments described above, and exclusion of these items from our non-GAAP net income and non-GAAP earnings per diluted share should not be construed as an inference that these costs are unusual, infrequent, or non-recurring.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
|Three Months Ended
|Nine Months Ended
|Cost of revenue||131,615||120,902||384,858||345,858|
|Research and development||40,341||39,585||119,701||118,201|
|Sales and marketing||44,661||42,269||137,448||129,018|
|General and administrative||24,466||25,075||57,093||67,239|
|Amortization of identified intangibles||11,137||12,299||34,801||34,829|
|Restructuring and other||2,799||832||10,477||5,421|
|Total operating expenses||123,404||120,060||359,520||354,708|
|Income from operations||2,115||7,397||13,694||23,531|
|Interest income and other income, net||336||1,760||1,270||2,802|
|Income (loss) before income taxes||(2,345||)||4,245||225||11,795|
|Benefit from (Provision for) income taxes||4,265||(791||)||1,868||(795||)|
|Diluted Earnings Per Share|
|Net income per diluted common share||$||0.04||$||0.07||$||0.05||$||0.23|
|Shares used in diluted per-share calculation||45,354||46,937||45,388||47,102|
Reconciliation of GAAP Net Income to Non-GAAP Net Income
(in thousands, except per share data)
|Three Months Ended September 30,||Nine Months Ended September 30,|
|Cost of revenue related to fair value inventory adjustments||7||77||7||31||1,260||31|
|Amortization of intangibles assets||11,137||12,299||11,137||34,801||34,829||34,801|
|Stock based compensation – Cost of revenue||904||486||904||2,715||1,985||2,715|
|Stock based compensation – Research and development||3,649||1,640||3,649||9,517||7,556||9,517|
|Stock based compensation – Sales and marketing||2,377||1,108||2,377||6,767||5,176||6,767|
|Stock based compensation – General and administrative||4,993||1,414||4,993||11,479||7,824||11,479|
|Restructuring and other||2,799||833||2,799||10,477||5,422||10,477|
|General and administrative:|
|Acquisition-related transaction costs||164||637||164||931||1,820||931|
|Changes in fair value of contingent consideration||812||410||812||(11,860||)||2,187||(11,860||)|
|Revenue recognition accounting review costs and litigation and other settlements||(88||)||4,825||(88||)||1,671||5,102||1,671|
|Interest income and other income (expense), net:|
|Non-cash interest expense related to our convertible notes||3,477||3,293||3,477||10,289||9,713||10,289|
|Foreign exchange fluctuation related to contingent consideration||8||131||8||8||45||8|
|Balance sheet currency remeasurement impact||—||—||(672||)||—||—||(1,644||)|
|Tax effect of non-GAAP adjustments||(9,565||)||(5,175||)||(9,664||)||(16,508||)||(17,201||)||(16,305||)|
|Non-GAAP net income||$||22,594||$||25,432||$||23,012||$||62,411||$||76,718||$||61,546|
|Non-GAAP net income per diluted common share||$||0.50||$||0.54||$||0.51||$||1.38||$||1.63||$||1.36|
|Shares used in diluted per share calculation||45,354||46,937||45,354||45,388||47,102||45,388|
Condensed Consolidated Balance Sheets
|September 30, 2018||December 31, 2017|
|Cash and cash equivalents||$||180,942||$||170,345|
|Accounts receivable, net of allowances of $30.2 million and $32.2 million, respectively||240,150||244,416|
|Income taxes receivable||13,958||4,565|
|Assets held for sale||3,143||4,200|
|Other current assets||47,814||41,799|
|Total current assets||720,283||739,835|
|Property and equipment, net||79,495||98,762|
|Restricted cash equivalents||39,809||32,531|
|Intangible assets, net||86,246||123,008|
|Deferred tax assets||43,265||45,083|
|Liabilities and Stockholders’ Equity|
|Accrued and other liabilities||74,797||98,090|
|Convertible senior notes, net – current||330,367||—|
|Income taxes payable||6,762||5,309|
|Total current liabilities||595,810||283,167|
|Convertible senior notes, net – non-current||—||318,957|
|Imputed financing obligation related to build-to-suit lease||—||13,944|
|Noncurrent contingent and other liabilities||17,307||28,801|
|Deferred tax liabilities||6,151||11,652|
|Noncurrent income taxes payable||18,305||20,169|
|Total stockholders’ equity||760,266||781,311|
|Total liabilities and stockholders’ equity||$||1,397,839||$||1,458,001|
Condensed Consolidated Statements of Cash Flows
|Nine Months Ended
|Cash flows from operating activities:|
|Adjustments to reconcile net income to net cash provided by operating activities:|
|Depreciation and amortization||50,094||48,029|
|Provisions for bad debt and sales-related allowances||2,424||10,868|
|Provision for inventory obsolescence||4,488||3,642|
|Stock-based compensation expense||30,478||22,541|
|Non-cash accretion of interest expense on convertible notes and imputed financing obligation||11,304||11,211|
|Change in fair value of contingent consideration||(11,573||)||974|
|Net change in derivative assets and liabilities||(2,431||)||737|
|Other non-cash charges||88||1,543|
|Changes in operating assets and liabilities, net of effect of acquired businesses||(36,562||)||(58,955||)|
|Net cash provided by operating activities||50,155||42,441|
|Cash flows from investing activities:|
|Purchases of short-term investments||—||(87,623||)|
|Proceeds from sales and maturities of short-term investments||35,129||164,979|
|Purchases of restricted investments*||—||(15,775||)|
|Purchases, net of proceeds from sales, of property and equipment||(9,785||)||(8,745||)|
|Proceeds from sale of held-for-sale building and land||1,137||—|
|Businesses purchased, net of cash acquired||696||(16,739||)|
|Net cash provided by investing activities*||27,177||36,097|
|Cash flows from financing activities:|
|Proceeds from issuance of common stock||10,165||11,730|
|Purchases of treasury stock and net share settlements||(52,500||)||(56,937||)|
|Repayment of debt assumed through business acquisitions||(11,956||)||(10,786||)|
|Contingent consideration payments related to businesses acquired||(3,116||)||(9,512||)|
|Net cash used for financing activities||(57,407||)||(65,505||)|
|Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash equivalents||(2,050||)||4,168|
|Increase in cash, cash equivalents, and restricted cash equivalents*||17,875||17,201|
|Cash, cash equivalents, and restricted cash equivalents at beginning of period*||202,876||165,455|
|Cash, cash equivalents, and restricted cash equivalents at end of period*||$||220,751||$||182,656|
*Restricted Cash. ASU 2016-18, Statement of Cash Flows: Restricted Cash, which we adopted in Q1 2018, requires that the statement of cash flows explain the change in cash, cash equivalents, and restricted cash equivalents. Therefore, restricted cash equivalents are included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown above. This presentation is required to be presented retrospectively to prior periods.
Revenue by Operating Segment and Geographic Area
|Three Months Ended
|Nine Months Ended
|Revenue by Operating Segment|
|Revenue by Geographic Area|
|Revenue Ex-Currency Adjustment||$||901||$||—||$||(15,867||)||$||—|
About our Non-GAAP Net Income and Adjustments
Use of Non-GAAP Financial Information
To supplement our condensed consolidated financial results prepared in accordance with GAAP, we use non-GAAP measures of net income and earnings per diluted share that are GAAP net income and GAAP earnings per diluted share adjusted to exclude certain costs, expenses, gains, and losses.
We believe that the presentation of non-GAAP net income, non-GAAP operating income, and non-GAAP earnings per diluted share provides important supplemental information regarding certain costs, expenses, gains, and significant items that we believe are important to understanding financial and business trends relating to our financial condition and results of operations. Non-GAAP net income, non-GAAP operating income, and non-GAAP earnings per diluted share are among the primary indicators used by management as a basis for planning and forecasting future periods and by management and our Board of Directors to determine whether our operating performance has met specified targets and thresholds. Management uses non-GAAP net income, non-GAAP operating income, and non-GAAP earnings per diluted share when evaluating operating performance because it believes the exclusion of the items described below, for which the amounts and/or timing may vary significantly depending on our activities and other factors, facilitates comparability of our operating performance from period to period. We have chosen to provide this information to investors so they can analyze our operating results in the same way that management does and use this information in their assessment of our business and the valuation of our Company.
Use and Economic Substance of Non-GAAP Financial Measures
We compute non-GAAP net income, non-GAAP operating income, and non-GAAP earnings per diluted share by adjusting GAAP net income, non-GAAP operating income, and GAAP earnings per diluted share to remove the impact of amortization of intangible assets, stock-based compensation expense, restructuring and other expenses, acquisition-related transaction costs, costs to integrate such acquisitions into our business, incremental cost of revenue due to the fair value adjustment to inventories acquired in business acquisitions, changes in the fair value of contingent consideration including the related foreign exchange fluctuation impact, revenue recognition and accounting review costs, litigation settlements and non-cash interest expense related to our 0.75% convertible senior notes (“Notes”). We use a constant non-GAAP tax rate of 19%, which we believe reflects the long-term average tax rate based on our international structure and geographic distribution of revenue and profit.
Ex-Currency. To better understand trends in our business, we believe it is helpful to adjust our statement of operations to exclude the impact of year-over-year changes in the translation of foreign currencies into U.S. dollars. This is a non-GAAP measure that is calculated by adjusting revenue, gross profit, and operating expenses by using historical exchange rates in effect during the comparable prior year period and removing the balance sheet currency re-measurement impact from interest income and other income, net of expenses, including removal of any hedging gains and losses. We refer to these adjustments as “ex-currency”. Management believes the ex-currency measures provide investors with an additional perspective on year-over-year financial trends and enables investors to analyze our operating results in the same way management does. The year-over-year currency impact can be determined as the difference between year-over-year actual growth rates and year-over-year ex-currency growth rates.
These excluded items are described below:
- Cost of revenue related to fair value adjustment of the Free Flow Print Server business (“FFPS”). Inventory acquired in an acquisition must be recorded at fair value rather than historical cost in accordance with ASC 805, Business Combinations. The fair value of FFPS inventory reflects the manufacturing cost plus a portion of the expected gross profit. In 2017, we adjusted our cost of revenue to reflect the expected gross profit that was included in the inventory valuation under ASC 805. We believe this adjustment is useful to investors to understand the gross profit trends of our ongoing business.
- Amortization of intangible assets. Intangible assets acquired to date are being amortized on a straight-line basis.
- Stock-based compensation expense recognized in accordance with ASC 718, Stock Compensation.
- Restructuring and other consists of:
• Restructuring charges incurred as we consolidate the number and size of our facilities and reduce the size of our workforce.
• Integration-related expenses were
$0.9and $3.2 millionfor the three and nine months ended September 30, 2018, respectively, and $0.2and $1.0 millionfor the three and nine months ended September 30, 2017, respectively. We have acquired 18 businesses in the last 5 years, which have required significant information technology investment to integrate them into our business.
- Acquisition-related transaction costs associated with businesses acquired during the periods reported and anticipated transactions of
$0.2and $0.9 millionfor the three and nine months ended September 30, 2018, respectively, and $0.6and $1.8 millionfor the three and nine months ended September 30, 2017, respectively.
- Changes in fair value of contingent consideration. Our management determined that we should analyze the total return provided by the investment when evaluating operating results of an acquired entity. The total return consists of operating profit generated from the acquired entity compared to the purchase price paid, including the final amounts paid for contingent consideration without considering any post-acquisition adjustments related to changes in the fair value of the contingent consideration. Because our management believes the final purchase price paid for the acquisition reflects the accounting value assigned to both contingent consideration and to the intangible assets, we exclude the GAAP impact of any adjustments to the fair value of acquisition-related contingent consideration from the operating results of an acquisition in subsequent periods, including the related foreign exchange fluctuation impact. We believe this approach is useful in understanding the long-term return provided by our acquisitions and that investors benefit from a supplemental non-GAAP financial measure that excludes the impact of this adjustment.
- Non-cash interest expense on our Notes. Our Notes may be settled in cash on conversion. We are required to separately account for the liability (debt) and equity (conversion option) components of the Notes in a manner that reflects our non-convertible debt borrowing rate. Accordingly, for GAAP purposes, we are required to amortize a debt discount equal to the fair value of the conversion option as interest expense on our
$345 millionof 0.75% convertible senior notes that were issued in a private placement in September 2014over the term of the Notes.
- Revenue recognition accounting review costs and litigation and other settlements. As described in “Item 9A, Controls and Procedures” of our annual report on Form 10-K, for the year ended
December 31, 2017, as amended, our management concluded that we had material weaknesses in our internal control over financial reporting as of December 31, 2017related to revenue recognition practices and the valuation of certain textile digital inkjet printer inventories. Therefore, we did not maintain effective internal control over financial reporting or effective disclosure controls and procedures, both of which are requirements of the Securities Exchange Act of 1934, as of that date. The review of our revenue recognition practices has required that we expend significant management time and incur significant accounting, legal, and other expenses (credits) of $(0.1)and $1.7 millionduring the three and nine months ended September 30, 2018, respectively. We expect to incur additional costs in future periods.
- Tax effect of non-GAAP adjustments. We use a constant non-GAAP tax rate of 19%, which we believe reflects the long-term average tax rate based on our international structure and geographic distribution of revenue and profit. The long-term average tax rate is calculated in accordance with the principles of ASC 740, Income Taxes, to estimate the non-GAAP income tax provision in each jurisdiction in which we operate after excluding the tax effect of the non-GAAP items described above, and
$(0.7), $1.2and $27.5 millionof tax charges (benefits) recognized in Q3 18, Q1 18, and Q4 17, respectively, as a result of the 2017 Tax Act, which was enacted on December 22, 2017.
|For more information:
Chief Financial Officer
Market Street Partners