Document



 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-18805
ELECTRONICS FOR IMAGING, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
94-3086355
(State or other Jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
6750 Dumbarton Circle, Fremont, CA 94555
(Address of principal executive offices) (Zip Code)
(650) 357-3500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Exchange on which Registered
Common Stock, $.01 Par Value
 
The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:                                                       None 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  þ   No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  þ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes þ     No   ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
 
Accelerated filer
¨
Non-accelerated filer
¨
 
Smaller reporting company
¨
Emerging growth company
¨
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ 
The aggregate market value of the voting and non-voting common stock held by non-affiliates computed by reference to the price at which the common stock was last sold on June 29, 2018 was $1,431,471,129*
The number of shares outstanding of the registrant’s common stock, $.01 par value per share, as of February 22, 2019 was 42,642,184.

 DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to stockholders in connection with the 2019 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.
* Based on the last trade price of the registrant’s common stock reported on The Nasdaq Global Select Market on June 29, 2018, the last business day of the registrant’s second quarter of the 2018 fiscal year.
 








Electronics For Imaging, Inc.
Table of Contents

 
 
Page No.
PART I
 
 
ITEM 1
ITEM 1A
ITEM 1B
ITEM 2
ITEM 3
ITEM 4
 
 
 
PART II
 
 
ITEM 5
ITEM 6
ITEM 7
ITEM 7A
ITEM 8
ITEM 9
ITEM 9A
ITEM 9B
 
 
 
PART III
 
 
ITEM 10
ITEM 11
ITEM 12
ITEM 13
ITEM 14
 
 
 
PART IV
 
 
ITEM 15
ITEM 16
 



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FORWARD-LOOKING STATEMENTS
Certain of the information contained in this Annual Report on Form 10-K, including, without limitation, statements made under this Part I, Item 1, “Business,” Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Part II Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” which are not historical facts, may include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”), and is subject to risks and uncertainties and actual results or events may differ materially. When used herein, 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 as they relate to the Company or its management are intended to identify such statements as “forward-looking statements.” Such statements reflect the current views of the Company and its management with respect to future events and are subject to certain risks, uncertainties, and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, the Company’s actual results, performance, or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Important factors that could cause the Company’s actual results to differ materially from those included in the forward-looking statements made herein include, without limitation, those factors discussed in Item 1, “Business,” in Item 1A, “Risk Factors,” and elsewhere in this Annual Report on Form 10-K and in the Company’s other filings with the Securities and Exchange Commission (“SEC”), including the Company’s most recent Quarterly Report on Form 10-Q and Current Reports on Form 8-K, and any amendments thereto. The Company assumes no obligation to revise or update these forward-looking statements to reflect actual results, events, or changes in factors or assumptions affecting such forward-looking statements.


PART I
References to “EFI,” the “Company,” “we,” “us,” and “our” mean Electronics For Imaging, Inc. and its subsidiaries, unless the context indicates otherwise.


Item 1: Business

Overview

EFI is a world leader in customer-centric digital printing innovation focusing 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. EFI was incorporated in Delaware in 1988 and commenced operations in 1989. Our initial public offering of common stock was completed in 1992. Our common stock is traded on The Nasdaq Global Select Market under the symbol EFII. Our corporate headquarters are located at 6750 Dumbarton Circle, Fremont, California 94555.

We offer a wide-range of products and services for industrial digital printing. Our products and services are grouped in the following categories: Industrial Inkjet, Productivity Software, and Fiery.

Products and Services

Industrial Inkjet

Our Industrial Inkjet products address the high-growth industrial digital inkjet markets where significant conversion of production from analog to digital inkjet printing is occurring. The Industrial Inkjet operating segment consists of our VUTEk super-wide and wide format display graphics, Nozomi corrugated packaging and display, Reggiani textile, and Cretaprint ceramic tile decoration and building material industrial digital inkjet printers; digital ultra-violet ("UV") curable, light emitting diode ("LED") curable, ceramic, water-based, thermoforming, and specialty inks, as well as a variety of textile inks including dye sublimation, pigmented, reactive dye, acid dye, pure disperse dye, water-based dispersed printing ink, and


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coatings; digital inkjet printer parts; and professional services. Printing surfaces include paper, vinyl, corrugated, textile, glass, plastic, aluminum composite, ceramic tile, wood, and many other flexible and rigid substrates.

Display Graphics. Our display graphics products consist of super-wide format VUTEk printers (including h-series, HS-series and GS/LX-series, ) and roll-to-roll product families (including r-series). Our new VUTEk hybrid LED printer h-series debuted in October 2018 when we launched VUTEk h3 which offers maximum throughput of up to 74 boards per hour. In January 2019, we launched VUTEk h5, our newest higher-speed, premium-quality hybrid flatbed/roll-to-roll super-wide format LED printer, which can run up to 109 boards per hour and offers eight-color and optional four-color printing modes plus white, as well as an up to nine-layer print capability.

Our HS series of high-speed printers are alternatives to analog presses used by high volume graphic producers and are based on pin & cure printing technology. In 2018, we launched the HS125 F4 and HS 100 F4 inkjet presses for “Fast Graphics” out-of-home applications of hybrid flatbed/roll super-wide format products. The two new printers reconfigure the eight ink channels of the VUTEk HS series platform in a CMYK x 2 setup, efficiently addressing the need for cost-effective production on banners, billboards, building wraps and similar applications.

VUTEk super-wide format roll-to-roll printers include advanced material handling features such as in-line cutting and slitting. In 2018, we launched the VUTEk 3r+ and 5r+ LED roll-to-roll printers, which print at speeds up to 4,896 square feet per hour, with resolutions up to 1,200 dpi, and incorporate 7-picoliter Ultra-Drop technology.

Our wide format display graphics products consist of roll-to-roll, flatbed, and hybrid product families for the entry-level and mid-range industrial digital inkjet printer market. In 2018, we launched a new 3.2-meter Pro 32r wide format roll-to-roll LED printer providing a more competitive and economical, all-in-one, production-level printer, delivering up to 5,000 square meters per month. In 2017, we launched our wide format Pro 24f flatbed and Pro 16h LED hybrid printers.

Corrugated Packaging and Display. Our first single pass, ultra-high-speed LED industrial inkjet corrugated packaging press, Nozomi C18000, debuted in 2017. It is a revolutionary cost-effective solution for the corrugated, paper packaging, display printing, and other markets as it produces on-demand and just-in-time customized campaigns with direct to substrate printing as well as proofs on demand. In 2018, we announced new Nozomi print capabilities including a white ink feature and updated corrugated production workflow. With the new white ink feature, packaging converters can create impressive photographic images and vivid colors directly on brown kraft liner board.

Our VUTEk display graphics super-wide and wide format, and Nozomi corrugated packaging and display industrial digital inkjet printers incorporate “cool cure” LED printing technology. LED technology uses less heat than the traditional curing process resulting in increased uptime and greater reliability.

Textile. Our textile industrial inkjet products consist of the Reggiani and VUTEk FabriVU product families.

Reggiani industrial inkjet textile printers address the full scope of advanced textile printing with versatile printers suitable for dye sublimation, pigmented, reactive dye, acid dye, pure disperse dye, and water-based dispersed printing ink. Reggiani is at the forefront of digital printing as an alternative to either analog printing or single color (dyed) garments. Reggiani provides an overall solution for the entire textile printing process from yarn treatment to fabric printing and finishing for a wide variety of substrates and applications (fashion, home textile, sportswear, signage, automotive, and outdoor).

A significant driver for the adoption of digital textile printing is the growth of “fast fashion,” which is a term used by fashion retailers to express the need for designs to move quickly from the runway to the retailer to capture current fashion trends. The digital textile printing market has also benefited from sports apparel with short run production quantities, closer geographic proximity to end-use markets, and environmental awareness, as digital printing has a significantly lower environmental footprint than analog production, consuming less water, and generating less waste.

We demonstrated our new Reggiani BOLT textile printer in November 2018. It is an advanced ultra-high-speed digital single-pass printer with the potential to revolutionize the textile printing market, designed to provide users with high uptime and reliability, outstanding performance, superior printing uniformity and accuracy, long print head life and minimal maintenance needs. We anticipate commercially releasing this product in 2019.


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In 2018 we launched the COLORS and POWER industrial digital textile inkjet printers. The COLORS printer offers 12 color printing for the most accurate color reproduction in our product line and vivid colors on a variety of textiles. The POWER printer features our recirculating ink system which increases inkjet head life and our ink recovery system that reduces overall ink consumption.

Our VUTEk FabriVU textile printers are specialty hybrid flatbed/roll-fed printers that produce digitally printed fabrics, soft signage, or deep draw thermoformed and other custom applications. We launched the 3.4M FabriVU 340i in 2018 which features in-line sublimation for direct to textile signage printing in a single step, eliminating the need for running the textile in a heat press after printing.

Ceramic Tile Decoration. Our Cretaprint ceramic tile decoration inkjet printers are utilized by the ceramic tile and building material manufacturing industries.

In 2018, we launched Cretaprint C5 and D5 models which feature the new e•D5 print head that optimizes printer performance by assuring better alignment and higher throughput speeds. In 2017, we launched the Cretaprint C4 Twin, featuring a dual print head approach with up to four double print bars and widths up to 0.7 meters. We also launched the Cretaprint P4 in 2017 featuring up to 12 print bars, 1.4 meter print widths, and resolution of 360 dpi.

Ink. Our ink provides a recurring revenue stream generated from sales to our existing customer base of installed printers.
VUTEk printers primarily use digital UV and LED curable ink, although our solvent ink printers remain in use in the field. We were first to market with digital UV curable ink incorporating “cool cure” LED technology for use in high-end production super-wide, wide format, and corrugated packaging and display digital inkjet printing systems. We sell a variety of third party branded textile ink to users of our textile digital inkjet printers, including dye sublimation, pigmented, reactive dye, acid dye, water-based dispersed printing ink, and coatings. We launched our internal formulation of our reactive dye ink in 2016. In 2016, we introduced our soluble salt-based ceramic digital ink formulation.

Rialco Limited (“Rialco”), which we acquired in 2016, supplies 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’s technical and commercial capabilities benefit the Industrial Inkjet segment in the sourcing, specification, and purification of high quality dyes and expand our research, development, and innovation base to develop ink for our markets.

Label Printing. We entered into a Support Services and License Agreement (“Agreement”) with Xeikon, N.V. (“Xeikon”), a division of the Flint Group, in November 2017. Pursuant to the Agreement, we provided Xeikon access to the Jetrion customer list, which enabled Xeikon to sell Jetrion printers and re-sell our UV and LED label ink. Xeikon will purchase UV and LED label ink exclusively from us and resell to both our current customer base as well as new Xeikon inkjet customers over the four-year term of the Agreement. We cannot sell Jetrion printers during the four-year term of the Agreement.

Customer Base. Our industry-leading VUTEk display graphics super-wide and wide format UV, LED, and thermoforming industrial inkjet printers and inks are used by commercial photo labs, large sign shops, graphic screen printers, specialty commercial printers, and digital and billboard graphics providers serving the out-of-home advertising and industrial specialty print segments by printing banners, signage, building wraps, flags, point of purchase and exhibition signage, backlit displays, fleet graphics, photo-quality graphics, art exhibits, customized architectural elements, billboards, thermoplastic decoration, and other large graphic displays. Our Nozomi single-pass industrial digital inkjet platform and ink are sold to the corrugated, paper packaging, display graphics, and other markets. We sell our hybrid, roll-to-roll, and flatbed UV wide format graphics printers and ink to the industrial digital inkjet display graphics printer market. We sell Reggiani textile digital inkjet printers and textile ink to the display graphics soft signage market and textile contract printers serving major textile brand owners and fashion designers, the home furnishings market, as well as the global printed textile industry. We sell Cretaprint ceramic tile decoration and building material digital inkjet printers and ceramic ink to the ceramic tile and building materials manufacturing industries.



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Our primary industrial digital inkjet printers and their related features are summarized as follows:
Printer Type
 
Models
 
Capabilities
 
Application Examples
VUTEk
super-wide format
 
h3 and h5
 
Offers maximum throughput of up to 74 and 108 boards per hour for h3 and h5, respectively
 
Super-wide format banners, signage, building wraps, flags, point of purchase and exhibition signage, backlit displays, fleet graphics, photo-quality graphics, art exhibits, customized architectural elements, billboards, and thermoplastic decoration.
 
 
 
 
HS, GS/LX, H/QS, and
FabriVU Series printers EFI and 3M(R) co-branded Digital UV and LED, and thermoforming UV ink
 
Printing widths of 2 to 5 meters; up to two-inch thickness; 6, 7, and 8 colors, plus white and greyscale; up to 2400 dpi; flexible and rigid substrates; 1.8-meter and 3.4-meter wide aqueous-based soft signage printer models with speeds up to 500 square meters per hour; UV curable, LED “cool cure,” aqueous, and thermoforming digital UV inks
 
 
 
 
 
VUTEk
super-wide
roll-to-roll
 
VUTEk 3r and 5r,
Quantum series, Q series, and Flex series printers
Quantum LED curable ink Matan UV curable ink MatanFlex stretchable ink
 
Speeds up to 455 square meters per hour Printing widths of 3 to 5 meters; up to two-inch thickness; 4, 7, and 8 colors, plus white and greyscale; up to 1200 dpi; flexible and rigid substrates; UV curable and LED “cool cure” ink
 
Fleet graphics, traffic signage, labels, tags, decals, membranes, license plates, and sign printing
 
 
 
 
EFI
wide format
 
EFI Pro hybrid and flatbed EFI H1625 LED 3M ink SD thermoforming ink
32R roll-to-roll
 
Speeds up to 207 square meters per hour (flatbed) and 91 square meters per hour (hybrid), up to 1200 dpi, 4 colors plus white and greyscale, up to two-inch thickness, flexible and rigid substrates, UV curable, and LED “cool cure” ink
 
Wide format indoor and outdoor graphics with photographic image quality. Entry-level and mid-range markets.
Overflow and specialty markets
 
 
 
 
Nozomi
 
EFI Nozomi C18000
 
High-quality, high-speed digital LED
printing up to 75 linear meters per minute on substrates up to 1.8 meters wide
 
Corrugated packaging and merchandise display printing
 
 
 
 
 
 
 
Reggiani textile
 
Reggiani textile printers
Dye sublimation, pigmented, reactive dye, acid dye, and water-based dispersed printing ink
 
Speeds up to 325 square meters per hour. Substrates from ultra-light to heavy, up to 2400 dpi; dye sublimation, pigmented, reactive dye, acid dye, and water-based dispersed printing ink
 
Contract printers serving major textile brand owners and fashion designers. Textile soft signage market. Global printed textile industry
 
 
 
 
Cretaprint
ceramic tile decoration
 
Cretaprint C4, C4 twin, and C5;
Cretaprint P4, D4, and D5;
Cretaprint M4 and SOL;
Cretaprint ink
 
Single chassis accommodates up to 8 print bars. 1,000 customizable settings controlling printer widths up to 1.4 meters, speed, direction, and discharge.
 
Ceramic tile industry
Construction materials industry
 
 
 
 
Cretaprint building materials
 
Cubik building materials
 
Cubik: printing width up to 1.8 meters
print speed up to 75 linear m/min,
up to 8 printing bars
 
Construction materials industry

Productivity Software

To provide our customers with solutions to manage and streamline their printing and packaging operations, we have developed technology that enhances printing workflow and makes printing and packaging operations more powerful, productive, cost-effective, and easier to manage. Most of our software solutions have been developed with the express goal of automating print processes and streamlining workflow via open, integrated, and inter-operable products, services, and solutions.

The Productivity Software operating segment consists of a complete set of productivity software suites that enable efficient and automated end-to-end business and production workflows for the print and packaging industries. These productivity software 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 software suites address all segments of the print industry and consist of the: (i) Packaging Suite, with Radius at its core, for tag & label, cartons, and flexible packaging businesses; (ii) Corrugated


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Packaging Suite, with Corrugated Technologies, Inc. ("CTI") at its core, for corrugated packaging businesses, including corrugated control capability; (iii) Enterprise Commercial Print Suite with Monarch at its core, for enterprise print businesses; (iv) Publication Print Suite, with Monarch or Technique at its core, for publication print businesses; (v) Midmarket Print Suite, with Pace at its core, for medium size print businesses; (vi) Quick Print Suite, with PrintSmith Vision and essential capabilities of Digital StoreFront at its core, for small printers and in-plant sites; and (vii) Value Added Products, available with the suite and standalone, such as web-to-print, e-commerce, cross media marketing, warehousing, fulfillment, shop floor data collection, and shipping to reduce costs, increase profits, and offer new products and services to their existing and future customers. We also provide Optitex textile two-dimensional (“2D”) and three-dimensional (“3D”) computer aided fashion design (“CAD”) applications, which facilitate increased efficiency in the textile and fashion industries. Optitex markets integrated 2D and 3D CAD software that shortens the design cycle, reduces our customers’ costs, and helps accelerate the adoption of fast fashion.

Our enterprise resource planning and collaborative supply chain business process automation software solutions are designed to enable printers and print buyers to improve productivity and customer service while reducing costs. Web-to-print applications for print buyers and print producers facilitate web-based collaboration across the print supply chain. Customers recognize that business process automation is essential to improving their business practices and profitability. We are focused on making our business process automation solutions the global industry standard. We provide consulting and support services, as well as warranty support for our software products. We sell annual full-service maintenance agreements with each license that provide warranty protection from date of shipment, and Software as a Service ("SaaS") subscriptions. The sale and renewal of annual maintenance agreements and SaaS agreements provide us with recurring revenue streams.

Escada Innovations Limited and Escada Systems, Inc. (collectively, “Escada”), which we acquired in 2017, offer the corrugated packaging market corrugator control systems, which provide comprehensive control and traceability for the entire corrugation process. The acquisition of Optitex Ltd. (“Optitex”) in 2016 expanded our presence in the digital inkjet textile printing workflow market through the synergy of Optitex technology with the Reggiani digital inkjet textile printer business.

New Version Releases and Product Offerings. Integration among our software offerings is achieved through end-to-end automation including certified workflows and synchronized releases across multiple products afforded by our Productivity Suite. Integration of our software product offerings provides:
 
Out-of-the-box, end-to-end optimized workflows;
Certified integration and automation;
Global visibility that makes effective and proactive decision making possible; and
a solid modular, flexible, and scalable software foundation supporting product and customer diversification.

New versions have been released for each of our significant software components and new product offerings have resulted from strategic business acquisitions, which are described under “Growth and Expansion Strategies” below.

The Packaging Suite includes 22 certified workflows that provide unprecedented levels of business and production automation geared toward folding carton, tag and label, and flexible package converting environments. Enhancements integrate Radius software, intelligent estimating and planning with iQuote software, automated planning optimization with Metrix software, and key third party software such as the Esko Automation Engine.

The Corrugated Packaging Suite was enhanced with the acquisition of Escada in 2017, a leading provider of corrugator control systems for the corrugated packaging market. The Enterprise Commercial Print Suite includes improvements in inventory and purchasing, support for Digital StoreFront web-to-print services, stronger customer relationship management tools including the ability to add attachments to forms and expanded reporting capabilities and extended capabilities in dynamic estimating and planning. The Midmarket Print Suite includes web-to-print, cross-media marketing, estimating, scheduling, accounting, and fulfillment applications.

Enhancements include easier access to quotes, improved estimating, and more advanced filtering tools to drive efficiency in job estimating and production. Product-specific applications unique to the super-wide format print space, such as fleet and vehicle wraps, point-of-purchase signage and outdoor graphics. The Quick Print Suite includes a cloud-based platform for in-plant and quick print operations to reduce the customer deployment and maintenance burden.


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The Optitex Collaborate Application was released in early 2017 and is driven by cloud-based textile design technology that enables instant sharing among pattern makers, designers, and print teams for faster and more accurate apparel prototyping. In 2018, we launched the Optitex 3D Design Illustrator, a plug-in tool that allows designers the freedom to validate and customize 3D garments in Adobe® Illustrator®. This helps designers to visualize 3D garments, with accurate proportion and scaling, and customize the garment’s fabric, texture, print patterns and graphic placement without waiting for a printed sample.

We have established a new e-commerce platform specifically for fabric soft signage production operations and ink. The on-line ordering technology offers a new level of turnkey flexibility for increasingly popular fabric graphics applications, including outdoor, trade show, and point-of-purchase displays.

Our primary software offerings are summarized as follows:
Software Suite
 
Description
 
Users
Packaging Suite:
with Radius at its core
 
Business and production workflows for tag & label, cartons, and flexible packaging companies
 
All users with a production facility associated with the sales, item specification, production, material purchasing, billing and shipping of packaging related products
 
 
 
Corrugated Packaging Suite:
with CTI at its core, including corrugated control capability using EFI Escada
 
Business and production workflows for corrugated board and packaging manufacturers
 
Administration, sales, production and logistics employees producing corrugated sheets and/or corrugated boxes
 
 
 
Enterprise Commercial Print Suite;
with Monarch at its core
 
Business and production workflows for Enterprise commercial print businesses, (offset, digital, large format, direct mail, specialty printing and shipping / logistics companies)
 
Front office sales, management and finance and shop floor production, inventory controllers, mailing and logistics employees involved in the production of various commercial print products
 
 
 
Publication Print Suite:
with Monarch or Technique at its core
 
Business and production workflows for Publication Print companies (books and periodicals)
 
Sales, contract administrators, production planners and shop floor personnel associated production of books, catalogs, magazines, and periodicals
 
 
 
Midmarket Print Suite:
with Pace at its core
 
Business and production workflows for mid size Print companies (including commercial, digital, display graphics, in-plant, and print for pay printing companies; government printing operations)
 
Business & Production personnel, e.g., sales, estimators, customer service, production schedulers, finance and floor personnel & logistics
 
 
 
Quick Print Suite:
with PrintSmith Vision and essential capabilities of Digital StoreFront at its core
 
Hosted and modular, web-enabled digital printing and business management
 
Owners, managers, sales, estimators, customer service and accounting
 
 
 
Value Added Products
 
Web-to-print, e-commerce, cross media marketing, imposition solutions, warehousing, fulfillment, shop floor data collection, and logistics
 
Marketing professionals, production planners, production floor staff, warehouse and inventory managers, shipping and logistics
 
 
 
Optitex Textile 3D Design Software
 
Development and production software that builds patterns, visualize in 3D, streamlines marker making and cut order workflow, and cloud-based applications for show case design
 
Leading fashion brands, fashion retailers, and manufacturers in commercial and apparel industries

Fiery

Fiery products include (i) stand-alone Digital Front Ends ("DFEs"), which are 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 JobMaster, Graphics Arts Package, and Color Profiler (iv) Fiery Self Serve, our self-service and payment solution, and (v) stand-alone software-based solutions such as our proofing and textile solutions.


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Fiery and FFPS DFEs. Our Fiery segment consists of Fiery and the FreeFlow Print Server business (“FFPS”), which was acquired from Xerox Corporation (“Xerox”) in January 2017. DFEs transform digital copiers and printers into high performance networked printing devices for the office, commercial, and industrial printing markets. We have direct relationships with several leading printer manufacturers with whom we work closely to design, develop, and integrate Fiery DFE and software technology to maximize the capability of each print engine. The printer manufacturers act as distributors and sell Fiery products to end customers through reseller channels. End customer and reseller channel preference for the Fiery DFE and software solutions drives demand for Fiery products through the printer manufacturers.

In 2018, we launched two new Fiery DFEs, the Color Controller E-85A and E-45A, driving Ricoh ProTM C7200X Series production printers. The new Fiery DFEs include powerful tools to make expert color adjustments, plus job make-ready and automation enhancements. We also launched a new Fiery proServer Premium DFE technology in 2018 offering faster processing on individual jobs for EFI super-wide format printers. The Fiery NX Pro was launched in 2017, which provides faster views of job status and easier device management. The Fiery FS300 Pro was launched in 2017 with enhanced functionality with throughput up to 2,400 ppm.

Software Options for DFEs. Fiery Command WorkStation 6.0 job management interface software was released in 2017 featuring automated job presets, faster job searching capabilities, new user interface, advanced tools for printing multi-bank and bleed-edge tabbed documents, and the Home integrated interface, which is a new feature that provides at-a-glance status information for all connected Fiery servers and a snapshot of key print production statistics.

Fiery Workflow Suite is an integrated set of Fiery products, including Fiery Central, Fiery JobFlow, and Fiery JobMaster, among others, to deliver a fully integrated workflow from job submission and business management to scheduling, preparation, and production.

In January 2019, we launched our new Fiery FS350 software which further enhances graphic design productivity and versatility. Fiery Navigator is a cloud-based digital printing business intelligence tool for digital production presses that was first launched in 2016. Fiery Navigator provides printers with more insight into their production data to optimize resource allocation, ensure compliance with operating procedures, and make equipment decisions by capturing key operational data points and displaying production analytics in a comprehensive, customizable dashboard.

Fiery Self Serve is a leading solution of self-service and payment solutions that allows service providers to offer access to business machines including printers, copiers, computers, internet access, fax machines, and photo printing kiosks from mobile phones, iPad®, and USB drives. The M600 kiosk is a flexible and scalable system, which addresses demands for printing from any mobile device as well as from popular cloud storage services, and accepts credit cards, campus cards, and cash cards at the device, thereby eliminating the need for coin-operated machines.

Standalone Software Solutions. Our standalone Fiery software solutions include Fiery XF and Generation Digital Solutions, Inc. (“Generation Digital”). Fiery XF is an interface for the management, layout, and editing of digital print jobs. The 2017 acquisition of Generation Digital strengthens our fast fashion offerings, with design software for the textile and fashion industries. The Generation Digital textile design workflow is marketed under the name Fiery DesignPro and combines with our Fiery textile DFEs and Reggiani digital textile printers linking textile design and production.



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Our DFE platforms, primary printer manufacturer customers, and end user environments are summarized as follows:
Platform
 
Printer Manufacturers or Customers
 
User Environments
Fiery and FFPS external DFEs
 
Xerox, Ricoh, Canon, Konica Minolta, Fuji Xerox, Sharp, Kyocera Document Solutions, RISO, Landa, and Oki Data
 
Print for pay, corporate reprographic departments, graphic arts, advertising agencies, and transactional & commercial printers
 
 
 
Fiery embedded DFEs and design-licensed solutions
 
Canon, Xerox, Konica Minolta, Kyocera Document Solutions, and Sharp
 
Office, print for pay, and quick turnaround printers
 
 
 
Fiery Central, Fiery Navigator, Fiery Workflow Suite
 
Canon, Konica Minolta, Kyocera Document Solutions, Ricoh, Sharp, Xerox
 
Corporate reprographic departments, commercial printers, and production workflow solutions
 
 
 
Fiery Self Serve
 
Canon, FedEx Office, Konica Minolta, Ricoh, Staples, Xerox
 
ExpressPay self-service and payment solutions for retail copy and print stores, hotel business centers, college campuses, and convention centers
 
 
 
Production Inkjet and Proofing software: ColorProof XF, Pro, Fiery XF, Fiery proServer, textile
 
Digital color proofing and inkjet production print solutions offering fast, flexible workflow, power, and expandability; creation and design of prints, patterns, and color palettes
 
Digital, commercial and hybrid printers, prepress providers, publishers, creative agencies and photographers, ceramic tile, decoration, and super-wide & wide format print providers; fashion and textile designers
 
 
 
 
 
Fiery DesignPro
 
Designers of fashion, textile, fabric, wallpaper, and other pattern-based material
 
Independent designers, fashion and textile manufactures, and textile printers

Sales, Marketing, and Distribution

We have assembled, internally and through acquisitions, an experienced team of technical support, sales, and marketing personnel with backgrounds in color reproduction, digital pre-press, image processing, business process automation systems, networking, and software and hardware engineering, as well as market knowledge of the sectors we serve. We expect to continue to expand the scope and sophistication of our products and gain access to new markets and channels of distribution by applying our expertise in these areas.

Industrial Inkjet

Our Industrial Inkjet products are sold primarily through our direct sales force, augmented by some select distributors. We entered the corrugated inkjet printer market with the introduction of our Nozomi digital inkjet corrugated printer in 2017. We are leveraging our existing display graphics sales team together with dedicated packaging specialists and participation in corrugated packaging trade shows in most major markets around the globe. The market for corrugated digital printers is new and our team will also be building market demand for this approach as well as selling our printers.

Textile digital printing is an alternative to either analog printing or dyed garments. Widespread adoption of digital textile printing depends on the willingness and ability of businesses in the printed textile industry to replace their existing analog printing systems with digital printing systems. The adoption of digital textile printing is dependent to some extent on the growth of “fast fashion,” and has also benefited from sports apparel with shorter production runs, closer geographic proximity to end-use markets, and environmental awareness. A key element of our inkjet textile printing growth strategy is to market digital inkjet printing systems to contract printers that serve major textile brand owners and fashion designers. We have a dedicated team of textile sales and support personnel located in geographies around the world and leverage a select group of distributors and agents in a number of markets to augment our capabilities.

The ceramic tile industry has undergone a shift from southern Europe (e.g., Spain and Italy) to the emerging markets of China, India, Brazil, and Indonesia. As a result, we operate a Cretaprint sales and support center in Foshan, Guangdong,


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China, in addition to our facilities in Spain. Foshan is home to the largest concentration of ceramic tile manufacturers in China.

We promote our Industrial Inkjet products through public relations, direct mail, advertising, promotional material, trade shows, and ongoing customer communication programs. The majority of sales leads for our inkjet printer sales are generated from trade shows, including our recent 20th EFI Connect User Conference held in January 2019 in Las Vegas, NV, at which our management and sales force interacted with existing and potential customers directly to demonstrate certain products and help customers understand our product capabilities through workshops, exhibits, and keynote speeches.

Productivity Software

Our enterprise resource planning and collaborative supply chain business process automation software solutions within our Productivity Software portfolio are primarily sold directly to end users by our direct sales force. An additional distribution channel for our Productivity Software products is through sales by authorized distributors, dealers, and resellers who in turn sell the software solutions to end users either stand-alone or bundled with other solutions they offer.

We have distribution agreements with some of these channel partners, including Canon, Konica Minolta, Ricoh, Xerox, Esko, and Veritiv (formerly xpedx). There are a number of small private resellers of our business process automation software in different geographic regions throughout the world where a direct sales force is not cost-effective. We sell Optitex directly to the leading fashion brands and manufacturers through a direct sales force and distribution channels consisting of authorized distributors, dealers, and resellers.

Fiery

The primary distribution channel for our Fiery products is through our direct relationships with several leading printer manufacturers. We work closely together to design, develop, and integrate Fiery DFE and software technology to maximize the capability of each print engine. The printer manufacturers act as distributors and sell Fiery products to end customers through reseller channels. End customer and reseller channel preference for our Fiery DFE and software solutions drives demand for Fiery products through the printer manufacturers.

Our relationships with the leading printer and copier industry companies are important to our business and we have established relationships with Canon, Seiko Epson, Fuji Xerox, Kodak, Konica Minolta, Kyocera Document Solutions, Landa, OKI Data, Ricoh, Riso, Sharp, Toshiba, and Xerox. These relationships are based on business relationships that have been established over time. As of December 31, 2018, our agreements generally do not require them to make any future purchases from us. They are generally free to purchase and offer products from our competitors, or build their own products for sale to the end customer, or cease purchasing our products at any time, for any reason, or no reason.

Fiery Self Serve is our self-service and payment solution that is sold to Canon, FedEx Office, Konica Minolta, Ricoh, Staples, and Xerox. Fiery Self Serve is also marketed to college campuses and libraries.

We sell our proofing products primarily to authorized distributors, dealers, and resellers who in turn sell the solutions to end users either stand-alone or bundled with other solutions they offer. Primary customers with whom we have established distribution agreements include Canon, Epson, Xerox, and Heidelberg. We sell color matching, color palette creation, and print design software to the fashion industry. There can be no assurance that we will continue to successfully distribute our products through these channels.

Growth and Expansion Strategies

The growth and expansion of our revenue will be derived from (i) product innovation through internal development efforts or business acquisition, (ii) increasing market coverage through internal efforts or business acquisition, (iii) expanding the addressable market, and (iv) establishing enterprise coherence and leveraging industry standardization.


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Product Innovation. We achieve product innovation through internal research and development efforts, as well as by acquiring businesses with technology that is synergistic with our product lines and may be attractive to our customers. We expect to continue to expand and improve our offerings of new generations of products to our customers.

We have established relationships with many leading distribution companies in the graphic arts and commercial print industries such as Nazdar, 3M, and Veritiv, as well as significant printer manufacturing companies including Xerox, Ricoh, Canon, and Konica Minolta. We have also established global relationships with many of the leading print providers, such as R.R. Donnelley, FedEx Office, and Staples. These direct sales relationships, along with dealer arrangements, are important for our understanding of the end markets for our products and serve as a source of future product development ideas. In many cases, our products are customized for the needs of large customers yet maintain the common intuitive interfaces that we are known for around the world.

Increasing Market Coverage. We are increasing our market coverage through penetration of our sales and distribution networks, expansion into emerging markets in China, India, Latin America and Asia Pacific (“APAC”), and acquisitions that are synergistic with our other businesses such as the Generation Digital and Escada acquisitions. The Generation Digital textile design workflow is integrated with our Fiery textile DFEs and Reggiani digital textile printers linking textile design and production. Escada offers the corrugated packaging market corrugation control systems, which provide comprehensive control and traceability for the entire corrugation process and can ensure better quality corrugated materials are consumed by our Nozomi digital printers.

Expanding the Addressable Market. We are expanding our addressable market by extending into new markets within each of our operating segments. Further growth in the addressable markets for Industrial Inkjet, Productivity Software, and Fiery has been driven by our integration of the production workflow among these operating segments. Growth in the addressable market for corrugated packaging has resulted from our new Nozomi printer and we expect our new Bolt textile printer to expand our addressable market in textile production.

Establishing Enterprise Coherence and Leveraging Industry Standardization. Our goal is to offer best in class solutions that are inter-operable and conform to open standards, which will allow customers to configure the most efficient solution for their business by establishing enterprise coherence and leveraging industry standardization.

We establish coherence across our product lines by designing products and platforms that provide a consistent “look and feel” to the end user. Cross-product coherence creates higher productivity levels as a result of shortened learning curves. The integration that end users can achieve using our products for all of their digital printing and imaging needs leads to a lower total cost of ownership. Open architecture utilizing industry-established standards to provide interoperability across a range of digital printing devices and software applications ultimately provides end users with more choice and flexibility in their selection of products with advantages when a customer selects an EFI product as part of that architecture. For example, integration between our cloud-based Digital StoreFront application, our Pace business process automation application, and our Fiery XF Production Color RIP including integration to our Fiery or VUTEk product lines, is achieved by leveraging the industry standard Job Definition Format. Our Productivity Suite has taken this integration further through end-to-end automation including certified workflows and synchronized releases across multiple products consisting of our Packaging Suite, Corrugated Packaging Suite, Enterprise Commercial Print Suite, Publication Print Suite, Midmarket Print Suite, Quick Print Suite, and Value Added Products.

Recent Business Acquisitions. We achieve product innovation through internal research and development efforts, as well as by acquiring businesses with technology that is synergistic with our product lines and may be attractive to our customers. We also acquire businesses to expand our market coverage and customer base.



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Recent business acquisitions are summarized as follows: 
Year
 
Acquired Business
 
Acquired Product Line or Customer Base
2018
 
None
 
 
 
 
 
 
 
2017
 
FFPS
 
FFPS servers and customer base
 
 
CRC Information Systems (“CRC”)
 
North America print MIS customer base
 
 
Generation Digital
 
Software for textile and fashion designers
 
 
Escada
 
Machine control for corrugated packaging systems
 
 
 
2016
 
Rialco
 
Dye powders and color products for digital printing and industrial manufacturing
 
 
Optitex
 
Integrated 3D design software

We intend to continue to make strategic acquisitions in the future that support our product innovation, market coverage, and total addressable market expansion strategies.

Backlog

Although we obtain firm purchase orders from our significant printer manufacturer customers in our Fiery operating segment, these customers typically do not issue such purchase orders until 30 to 90 days before shipment. The non-linear nature of our Industrial Inkjet and Productivity Software operating segments results in limited customer contracts and purchase orders that are not shipped at the end of the period, which are not material and are not a meaningful indicator of future business prospects. See also Note 4 - Revenue of Notes to Consolidated Financial Statements for additional discussion.

Significant Relationships

We have established and continue to build and expand relationships with the leading printer manufacturers and distributors of digital printing technology to benefit from their products, distribution channels, and marketing resources. Our customers include domestic and international manufacturers, distributors, and sellers of digital printers. We work closely with the leading printer manufacturers to develop solutions that incorporate leading technology and work optimally in conjunction with their products. The top revenue-generating printer manufacturers, that we sold products to in 2018, in alphabetical order, were Canon, Fuji Xerox, Konica Minolta, Kyocera, Landa, OKI Data, Ricoh, Sharp, Toshiba, Seiko Epson, and Xerox Document Solutions. Because sales of our printer and copier-related products constitute a significant portion of our Fiery 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 to continue to depend on a relatively small number of printer manufacturers for a significant portion of our revenue in future periods. Revenue from these leading printer manufacturers was 22%, 26%, and 28% of our consolidated revenue, during 2018, 2017, and 2016, respectively.

We customarily enter into development and distribution agreements with our significant printer manufacturer customers. These agreements can be terminated under a range of circumstances and often on relatively short notice. The circumstances under which an agreement can be terminated vary from agreement to agreement and there can be no assurance that these significant printer manufacturers will continue to purchase products from us in the future, despite such agreements. Our agreements generally do not commit such customers to make future purchases from us. They could decline to purchase products from us in the future and could purchase and offer products from our competitors, or develop their own products for sale to the end customer. We recognize the importance of, and strive to maintain, our relationships with the leading printer manufacturers. Relationships with these companies are affected by a number of factors including, among others: competition from other suppliers, competition from their own internal development efforts, and changes in general economic, competitive, or market conditions including changes in demand for our products, changes in demand for the printer manufacturers’ products, industry consolidation, or fluctuations in currency exchange rates. There can be no assurance that we will continue to maintain or build the relationships we have developed to date.

We have a continuing relationship pursuant to a license agreement with Adobe Systems, Inc. (“Adobe”). We license PostScript® software from Adobe for use in many of our Fiery solutions under the OEM Distribution and License Agreement


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entered into in September 2005, as amended from time to time. Under our agreement with Adobe, we have a non-exclusive, non-transferable license to use the Adobe deliverables (including any software, development tools, utilities, software development kits, fonts, drivers, documentation, or related materials). The scope of additional licensing terms varies depending on the type of Adobe deliverable. Our agreement with Adobe was amended on February 1, 2018, to automatically renew annually. The agreement can be terminated by either party upon 120 days prior written notice. All royalties due to Adobe under the agreement are payable within 45 days after the end of each calendar quarter.

Each Fiery solution requires page description language software provided by Adobe, which is a leader in providing page description software. Adobe’s PostScript® software is widely used to manage the geometry, shape, and typography of hard copy documents. Adobe can terminate our current PostScript® software license agreement without cause. Although to date we have successfully obtained licenses to use Adobe’s PostScript® software when required, Adobe is not required to, and we cannot be certain that Adobe will, grant future licenses to Adobe PostScript® software on reasonable terms, in a timely manner, or at all. In addition, to obtain licenses from Adobe, Adobe requires that we obtain quality assurance approvals from them for our products that use Adobe software. If Adobe does not grant us such licenses or approvals, if the Adobe licenses are terminated, or if our relationship with Adobe is otherwise materially impaired, we would likely be unable to sell products that incorporate Adobe PostScript® software. If that occurred, we would have to license, acquire, develop, or re-establish our own competing software as a viable alternative for Adobe PostScript® software and our financial condition and results of operations could be significantly harmed for a period of time.

Our industrial inkjet printers require inkjet print heads that are manufactured by a limited number of suppliers. If we experience difficulty obtaining print heads, our inkjet printer production would be limited. In addition, we manufacture UV curable, textile digital, and ceramic digital ink for use in our printers and rely on a limited number of suppliers for certain pigments and other components used in our ink. Our ink sales would decline significantly if we were unable to obtain the pigments and other components when needed.

Corporate Responsibilities and Environmental Sustainability

We have taken steps to reduce the environmental impact of our operations and products and to promote sustainability. Our efforts include the following:

Transitioning from chemical-based to water-based inks. We have expended considerable resources in the development of water-based inks and printers that can use them. We have introduced new water-based printers and inks and are developing additional products using water-based technology. These printers can reduce emissions from the curing process which would otherwise result in greenhouse gases. 

Transitioning printer ink curing technology from mercury vapor UV lamps to LED UV lamps. Our display graphics and corrugated printres offer LED "cool cure" technology. LED technology uses less heat than the traditional curing process resulting in increased uptime and greater reliability. Energy assessments conducted by the Fogra Graphic Technology Research Association have shown that our super-wide format printers with LED curing can reduce energy consumption by up to 82% when compared with printers that use conventional mercury arc lamps.Transition to LED UV lamp curing also has the additional benefits of reducing ozone created during the curing process as well as the ability to use thinner substrates. The use of thinner substrates reduces the material load used in the overall image and the substrate thickness by over 30% compared to standard mercury UV lamp systems. In addition, use of LED UV lamps in our printers reduces the amount of landfill waste because LED UV lamps generally last about 16,000 hours before replacement, whereas mercury vapor UV lamps typically only last about 1000 hours before replacement.

Reggiani Sustainability Initiatives. Our textile business is a worldwide provider of complete solutions for the textile market, with a focus on the development of sustainable processes. All our industrial printers can be used with a complete range of water-based inks. In 2010, we undertook a certification process as a commitment to our customers in order to offer eco-sustainable processes guaranteed by “Green Label” certification issued by the Association of Italian Textile Machinery Manufacturers, a private non-profit association. EFI Reggiani’s innovations are the result of extensive research targeted to improve productivity and quality, optimize the textile manufacturing process, and reduce energy and water consumption, as well as environmental impact. For example, our TERRA pigment solution is a unique in-line polymerization process for faster, greener printing that eliminates the need for steaming or washing on


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direct-to-textile applications. As a result, users can achieve superior printing results while using less time, water and energy.

We are committed to sustainable business practices and products and will continue our efforts to proactively evaluate any potential changes that will benefit the environment.

Employees

As of December 31, 2018, we have approximately 3,400 full time employees.

Research and Development

As of December 31, 2018, 1,200 of our 3,400 full-time employees were involved in research and development. We believe that development of new products and enhancement of existing products are essential to our continued success. We intend to continue to devote substantial resources to research and new product development, as well as improvements to existing products. New platforms and ink formulations will continue to be developed for our Industrial Inkjet products as the industry accelerates its transition from analog to digital technology, from solvent-based printing to UV curable ink printing, and adopts digital textile printing due to the growth of “fast fashion.” We are developing new software applications designed to maximize work flow efficiencies and meet the needs of the graphic arts, packaging, and commercial print professions, including business process automation, web-to-print, e-commerce, cross-media marketing, imposition, proofing solutions, and 3D textile CAD applications. We are developing products to support additional printing devices including high-end color copiers and multi-functional devices. We have research and development sites in numerous U.S. locations, as well as in India, Europe, Israel, the United Kingdom (“U.K.”), Brazil, and Canada. Substantial additional expense is expected to be required to complete and bring to market products that are currently under development.

Manufacturing

We are leveraging efficiencies in our worldwide digital inkjet printer manufacturing operations by centralizing certain aspects of our product manufacturing. Our VUTEk display graphics super-wide, wide format industrial hybrid and flatbed inkjet printers were primarily manufactured in our Meredith, New Hampshire facility until March 2018. Starting in April 2018, we began to manufacture these printers in our new facility in Manchester, New Hampshire. In 2016, we transferred VUTEk roll-to-roll printer production to our Rosh Ha’Ayin, Israel, facility, our FabriVU textile digital inkjet printer production to our Bergamo, Italy, facility, and certain wide format industrial digital inkjet printers to our Castellon, Spain, facility.

We utilize subcontractors to manufacture our Fiery products and, to a lesser extent, our super-wide and wide format industrial printers. These subcontractors work closely with us to promote low cost and high quality while manufacturing our products. Subcontractors purchase components needed for our products from third parties. We are dependent on the ability of our subcontractors to produce the products we sell. Although we supervise our subcontractors, there can be no assurance that such subcontractors will perform efficiently or effectively. We have outsourced our Fiery production with Avnet, Inc. (“Avnet”), formulation of ceramic ink to two subcontractors, and formulation of textile ink to third party branded suppliers, with the exception of reactive dye textile ink, which we formulate in our Bedford, U.K. facility.

Should our subcontractors experience inability or unwillingness to manufacture or deliver our products, then our business, financial condition, and operations could be harmed. Since we generally do not maintain long-term agreements with our subcontractors and such agreements may be terminated with relatively short notice, any of our subcontractors could terminate their relationship with us and/or enter into agreements with our competitors that might restrict or prohibit them from manufacturing our products or could otherwise lead to an inability or unwillingness to fill our orders in a timely manner or at all.

Our VUTEk roll-to-roll super-wide format industrial printers are manufactured in a single location in our Rosh Ha’Ayin, Israel facility. Our Reggiani textile industrial printers are manufactured in a single location in our Bergamo, Italy facility. Our Cretaprint ceramic tile decoration and Nozomi corrugated packaging printers are manufactured in a single location in our Castellon, Spain facility. Our UV curable and LED curable digital ink that is used in our display graphics super-wide and wide-format industrial digital inkjet printers are formulated in a single location in our Ypsilanti, Michigan facility. Our


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reactive dye ink that is used in our textile digital inkjet printers is formulated in a single location in our Bedford, U.K., facility.

Most components used to manufacture our printers and ink are available from multiple suppliers, except for inkjet print heads, branded textile ink, and certain key ingredients (primarily pigments and photoinitiators) for our digital UV curable ink. Although typically in low volumes, many key components are sourced from single vendors. If we were unable to obtain the print heads currently used, we would be required to redesign our printers to use different print heads. If we were unable to obtain the branded textile ink or the components required for our digital ceramic, digital textile, or digital UV curable inks, we would have to qualify other sources, if possible, or reformulate and test the new ink formulations. In our Industrial Inkjet facilities, we use hazardous materials to formulate digital UV curable, digital textile, and ceramic digital ink, as well as store internally formulated and third-party ink. The storage, use, and disposal of those materials must meet the requirements of various environmental regulations.

Significant components necessary for manufacturing our products are obtained from a sole supplier or a limited group of suppliers. We depend largely on the following sole and limited source suppliers for our components and manufacturing services:
Supplier
 
Components
Intel
 
Central processing units (“CPUs”); chip sets
Toshiba
 
Application-specific integrated circuits (“ASIC”) & inkjet print heads
Open Silicon
 
ASICs
Altera
 
ASICs & programmable devices
Tundra
 
Chip sets
Avnet
 
Electric components, Contract manufacturing (Fiery)
Adobe
 
PostScript® (Fiery and Productivity Software)
Dell Electronics
 
Contract manufacturing (FFPS)
HCL Technologies
 
Sustaining engineering (FFPS)
Third party branded: DuPont, Huntsman, Sensient
 
Textile ink
Ink pigment and component suppliers
 
Ink pigments, photoinitiators, and other components
Columbia Tech
 
Inkjet sub-assemblies
Schneider Electric
 
Inkjet electrical sub-assemblies
Phoseon
 
LED lamps
Shenzhen Runtianzhi Tech
 
Inkjet sub-assemblies
Seiko
 
Inkjet print heads
Xaar
 
Inkjet print heads
Ricoh
 
Inkjet print heads
Kyocera Mita
 
Inkjet print heads
Progress Software
 
Monarch and Radius operating system
Printable
 
Digital StoreFront modular offering
Enabling Technologies Ltd
 
Sensor interface and electronics

We generally do not maintain long-term agreements with our component suppliers. We primarily conduct business with such suppliers largely on a purchase order basis. If any of our sole or limited source suppliers were unwilling or unable to supply us with the components for which we rely on them, we may be unable to continue manufacturing our products utilizing such components.



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Competition

Competition in our markets is significant and involves rapidly changing technologies and frequent new product introductions. To maintain and improve our competitive position, we must continue to develop and introduce new products and features on a timely and cost-effective basis to keep pace with the evolving needs of our customers and the product offerings of our competitors. We believe the principal competitive factor affecting our markets is the market acceptance rates for new printing technology.

Industrial Inkjet

Our super-wide and wide format industrial digital inkjet printers compete with printers produced by Agfa, Durst, Canon, Hewlett-Packard (“HP”), Inca, Mimaki, Roland, and Mutoh throughout most of the world. There are also Chinese and Korean printer manufacturers in the marketplace, but their products are typically sold in their domestic markets and are not currently perceived as viable alternatives in most other markets, given product quality and more limited after-sales service and support. Our UV and LED curable ink is sold to users of our UV industrial inkjet printers, which have advanced quality control systems to ensure that correct color and non-expired ink is used to prevent damage to the printer. This results in most ink used in our printers being sold by us. While third party ink is available, its use may compromise the printer’s quality control system and also voids certain provisions of our printer warranty and service contracts. Our Nozomi corrugated packaging digital inkjet printers compete with printers offered by Barberan, Durst, HP, and Sun Automation.

Our Reggiani industrial digital inkjet textile printers compete with Dover, Durst, Mimaki, Roland, Epson, Konica Minolta, Robustelli, Atexco, Shenzhen Homer Textile, Kornit, Ricoh, and Digital Graphics. Competitive digital inkjet textile printers are manufactured in Italy, Japan, China, and smaller emerging markets such as Indonesia. Key competitors driving digitalization of the textile printer market include Dover and Kornit. Reggiani also competes with other digital inkjet textile printing technologies including pre-washing and post-washing printing techniques.

Our Cretaprint ceramic tile decoration digital inkjet printers compete with ceramic tile decoration printers manufactured in Spain (KERAjet), Austria (Durst), Italy (Technoferrari, Projecta, Intesa, and System), China (Flora, Hope, Meijia, and Teckwin), and smaller emerging competition in other markets such as Indonesia. The ceramic tile industry has experienced a relocation from southern Europe to the emerging markets of China, India, Brazil, and Indonesia, among others. Competition in the Chinese market consists of small Chinese ceramic tile decoration digital inkjet printers and European manufacturers that are reducing prices to gain market share.

Productivity Software

Our Productivity Software segment, which includes our business process automation, cloud-based order entry and order management systems, cross media marketing, and imposition solution systems faces competition from software application vendors that specifically target the printing and packaging industries. These vendors are typically small, privately-owned companies. We also face competition from larger vendors that currently offer, or are seeking to develop, business process automation printing products including HP, Epicor, and SAP. We face competition from Oracle, SAP, Kiwiplan, and Heidelberg in the packaging software market.

Our Optitex 3D CAD software competes with Lectra, Assyst, CLO, Browzwear, and Gerber. Optitex provides 2D CAD design and 3D CAD visualization in the same application. Therefore, the CAD information and the 3D information are tightly integrated. Furthermore, the incremental learning curve from using 2D to using 3D is minimal.

Fiery

The principal competitive factors affecting the market for our Fiery solutions include customer service and support, product reputation, quality, performance, price, and product features such as functionality, scalability, ease of use, and ability to interface with products produced by the significant printer manufacturers. Although we have direct relationships with each of the leading printer manufacturers and work closely with them to integrate Fiery DFE and software technology into the design and development of their print engines to maximize their quality and capability, our primary competitors for stand-alone color DFEs, embedded DFEs, and design-licensed solutions are these same leading printer manufacturing companies. They


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each maintain substantial investments in research and development. Some of this investment is targeted at integrating products and technology that we have designed and some of this investment is targeted at developing products and technology that compete with our Fiery brand.

We are the largest third party DFE developer, although our market compared with DFEs developed internally by the leading printer manufacturers, since we primarily focus on production printers, rather than office or consumer printers, is small. We believe that our advantages include continuously advancing technology, short time-to-market, brand recognition, end user loyalty, sizable installed base, number of products supported, price driven by lower development costs, and market knowledge. We intend to continue to develop new DFEs with capabilities that meet the changing needs of the printer manufacturers’ product development road maps. Although we do not directly control the distribution channels, we provide a variety of features as well as unique “look and feel” to the printer manufacturers’ products to differentiate our customers’ products from those of their competitors. Ultimately, we believe that end customer and reseller channel preference for the Fiery DFE and software solutions drives demand for Fiery products through the printer manufacturers.

Intellectual Property Rights

We rely on a combination of patent, copyright, trademark, and trade secret laws; non-disclosure agreements; and other contractual provisions to establish, maintain, and protect our intellectual property rights. Although we believe that our intellectual property rights are important to our business, no single patent, copyright, trademark, or trade secret is solely responsible for the development and manufacturing of our products.

We are currently pursuing patent applications in the U.S. and certain foreign jurisdictions to protect various inventions. Over time, we have accumulated a portfolio of patents issued in these jurisdictions. We own or have rights to the copyrights of the software code in our products and rights to the trademarks under which our products are marketed. We have registered certain trademarks in the U.S. and certain foreign jurisdictions and will continue to evaluate the registration of additional trademarks as appropriate.

Certain of our products include intellectual property licensed from our customers. We have also granted and may continue to grant licenses to our intellectual property, when and as we deem appropriate.

Financial Information about Foreign and Domestic Operations and Export Sales

See Note 3Segment, Geographic, and Major Customer Information and Note 17Income Taxes of Notes to Consolidated Financial Statements. See also Item 1A: Risk Factors – We face risks from currency fluctuations and We face risks from our international operations.

Available Information

Our Internet address is www.efi.com. We make the following filings available free of charge through our Investor Relations website (ir.efi.com): our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements, and, if applicable, amendments to those reports filed or furnished pursuant to the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The information contained, or referred to, on our website is not part of this annual report or any other report that we file with, or furnish to, the SEC unless expressly noted.

We file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements, and other documents with the SEC under the Exchange Act. Such reports, proxy statements and other documents are available on the SEC website (www.sec.gov).


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Item 1A: Risk Factors

If we fail to continue to introduce new products that achieve market acceptance on a timely basis, we will not be able to compete effectively, and we will be unable to increase or maintain net revenue and gross margins.

We operate in a highly competitive and quickly changing environment. Our future success depends in large part upon our ability to identify demand trends and quickly develop or acquire, and manufacture and sell, products that satisfy these demands in a cost-effective manner. In order to differentiate our products from our competitors’ products, we must continue to invest in research and development. For example, we need a broad product portfolio and have identified gaps such as those we are currently experiencing in the high-end of Display Graphics, and are committing substantial resources to develop new products to strengthen our product portfolio.

Successfully predicting demand trends is difficult, and it is very difficult to predict the effect introducing any new products will have on our existing product sales. We will also need to respond effectively to new product announcements by our competitors and quickly introduce or enhance competitive products. Any delays in product development and introduction, or product introductions that do not meet broad market acceptance, or unsuccessful launches of new product lines, could result in:
 
loss of or delay in revenue and loss of market share;
negative publicity and damage to our reputation and brands;
a decline in the average selling price of our products;
adverse reactions in our sales channels, such as reduced online product visibility, or loss of a sales channel;
product returns; or
failure to recover amounts invested.

We face competition in our Industrial Inkjet and Productivity Software operating segments which could cause downward pressure on prices and loss of market share.

We operate in highly competitive markets in our Industrial Inkjet and Productivity Software segments.

Our super-wide and wide format industrial inkjet products compete against several companies that market industrial inkjet printing systems based on electrostatic, drop-on-demand, and continuous drop-on-demand inkjet and other technologies and printers utilizing UV curable ink, including Agfa, Durst, Canon, HP, Inco, Mimaki, Roland, and Mutoh;
Our Reggiani industrial inkjet textile printers compete with printers offered by Dover, Durst, Mimaki, Roland, Epson, Konica Minolta, Robustelli, Atexco, Shenzhen Homer Textile, Kornit and Digital Graphics;
Our Cretaprint ceramic tile decoration inkjet printers compete with ceramic tile decoration printers manufactured in Spain, Austria, Italy, Brazil, China, and smaller emerging competitors in other markets such as Indonesia;
Our Productivity Software operating segment faces competition from software application vendors, which include many small private companies, that specifically target the printing industry, as well as larger vendors that currently offer, or are seeking to develop, business process automation printing products. Competitors include HP, Epicor and SAP; and
Our packaging software market faces competition from Oracle, SAP, SolarSoft, and Heidelberg, and our Optitex 3D CAD software competes with Lectra, Assyst, CLO, Browzwear, and Gerber.

Some of our competitors have greater resources to develop new products and technologies and market those products, as well as acquire or develop critical components at lower costs, which would provide them with a competitive advantage. Our competitors could also exert downward pressure on product pricing to gain market share.

For example, the local competitors in the Chinese and Korean markets are developing, manufacturing, and selling inexpensive printers mainly to the local markets and in the ceramic tile decoration market, small Chinese ceramic tile decoration digital inkjet printer manufacturers and European manufacturers have been reducing prices to gain market share. We also face competition from existing conventional and digital inkjet super-wide and wide format printing methods,


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including screen printing and offset printing and Reggiani faces competition from other digital inkjet textile printing technologies including pre-washing and post-washing printing techniques.

We face strong competition for printing supplies such as ink and we have experienced supply issues in ink production, which may limit our growth in ink sales.

We compete with independent manufacturers in the ink market consisting of smaller vendors, as well as larger vendors such as DuPont Digital Printing and Sun Chemical.

Our UV curable ink is sold to users of our super-wide and wide format UV industrial inkjet printers, which have advanced quality control systems to ensure that correct color and non-expired ink is used to prevent damage to the printer. This results in most ink used in our super-wide and wide format printers being sold by us. While third party ink is available, its use compromises the printer’s quality control system and voids most provisions of our printer warranty and service contracts. Nevertheless, we cannot guarantee we will be able to remain the principal ink supplier for our super-wide and wide format UV industrial inkjet printers. We could experience an overall price reduction within the ink market, which would also adversely affect our gross profit.

We sell both our own inks and third party branded textile ink to users of our textile inkjet printer. We offer a strong value proposition with our own and third party branded inks, but cannot guarantee that we will be the primary supplier of textile ink to the users of our printers as these branded inks are available on the market.

Our solvent-based ceramic ink is sold to users of our ceramic tile decoration inkjet printers. The ceramic ink market is generally an open system for ink and therefore customers may change between suppliers. Although we are focused on developing this recurring revenue stream, we cannot guarantee that we will become the primary supplier of ceramic ink to the users of our printers.

In addition, we have recently experienced supply issues, 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. Although we are working to increase purchases from new sources for ink components, we may not be able to supply the same volume of ink as we have historically and may lose market share to our competitors, thereby limiting our growth in ink sales.

If the market for digital textile printing does not develop as we anticipate, we may not be able to grow our digital inkjet textile printing business.

If the global printed textile industry does not broadly accept digital printing as an alternative to either analog printing or single color (dyed) garments, our revenue may not grow as quickly as expected. Widespread adoption of digital textile printing depends on the willingness and ability of businesses in the printed textile industry to replace their existing analog printing systems and single color (dyed) garments with digital printing systems. The adoption of digital textile printing is dependent to some extent on the growth of “fast fashion.”

A key element of our digital inkjet textile printing growth strategy is to market digital inkjet printing systems to contract printers that serve major textile brand owners and fashion designers. If leading textile brand owners and fashion designers are not convinced of the benefits of digital inkjet textile printing or if there is a significant reduction in the popularity of printed textiles, especially those that are customized or personalized, among the consumers to whom such brand owners and fashion designers cater, or if these businesses decide that digital inkjet printing processes are less reliable, less cost-effective, lower quality, or otherwise less suitable for their commercial needs than analog printing processes and single color (dyed) garments, then the market for digital textile printers and software may not develop as we anticipate and we may not be able to grow our inkjet textile printing business.



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We do not typically have long-term purchase commitments with the printer manufacturer customers that purchase and resell our Fiery DFE and software solutions. They have in the past reduced or ceased to purchase products from us, and could at any time in the future reduce or cease to purchase products from us, thereby harming our operating results and business.

Although end customer and reseller channel preference for Fiery DFE and software solutions drives demand, most Fiery revenue relies on printer manufacturers to integrate Fiery technology into the design and development of their print engines. We have established direct relationships with several leading printer manufacturers and work closely with them to design, develop, and integrate Fiery DFE and software technology to maximize the capability of their print engines. These manufacturers act as distributors and sell Fiery products to end customers through reseller channels. A significant portion of our revenue is, and has been, generated by sales of our Fiery DFE and software solutions to a relatively small number of leading printer manufacturers. Our reliance on revenue from the leading printer manufacturers was 22%, 26%, and 28% of our consolidated revenue, during 2018, 2017, and 2016, respectively. Because sales of our Fiery products constitute a significant portion of our revenue and there are a limited number of printer manufacturers producing 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 revenue in future periods. Accordingly, if we lose or experience reduced sales to one of these printer manufacturer customers, we will have difficulty replacing that revenue with sales to new or existing customers.

With the exception of certain minimum purchase obligations, we typically do not have long-term volume purchase contracts with our significant printer manufacturer customers, including Konica Minolta, Ricoh, and Canon, and they are not obligated to purchase products from us. Accordingly, our printer manufacturer customers could at any time reduce their purchases from us or cease purchasing our products altogether. In the past, these printer manufacturer customers have elected to develop products on their own for sale to end customers, incorporated technologies developed by other companies into their products, and have directly sold third party competitive products, rather than rely solely or partially on our products. We expect that these printer manufacturer customers will continue to make such elections in the future.

Many of the products and technologies we are developing require that we coordinate development, quality testing, marketing, and other tasks with these printer manufacturers. We cannot control their development efforts or the timing of these efforts. We rely on these printer manufacturers to develop new printer and copier solutions, applications, and product enhancements that utilize our Fiery DFE technologies and software solutions in a timely and cost-effective manner. Our success in the DFE industry depends on the ability of these printer manufacturers to utilize our technologies to develop the right solutions with the right features to meet ever changing customer requirements and responding to emerging industry standards and other technological changes.

Because our printer manufacturer customers incorporate our products into products they manufacture and sell, any decline in demand for copiers or laser printers or any other negative developments affecting our major customers or the computer industry in general, including reduced end user demand, would likely harm our results of operations. Certain printer manufacturer customers have experienced serious financial difficulties in the past, which led to a decline in sales of our products. If any significant customers face such difficulties in the future, our operating results could be harmed through, among other things, decreased sales volume, write-off of accounts receivable, and write-off of inventories related to products we have manufactured for these customers’ products.

Economic uncertainty has negatively affected our business in the past and may negatively affect our business in the future.

Our revenue and profitability depend significantly on the overall demand for information technology products that enable printing of digital data, which in turn depends on a variety of macro- and micro-economic conditions. In addition, revenue growth and profitability in our Industrial Inkjet operating segment depends on demand and spending for advertising and marketing products and programs, which also depends on a variety of macro-and micro-economic conditions.

Uncertainty about current global economic conditions poses a risk as our customers may delay purchases of our products in response to tighter credit, negative financial news, and/or declines in income or asset values. For example, during the fourth quarter, we experienced many of our customers delaying spending on capital equipment and software as they became


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increasingly concerned about the economic environment. Any financial turmoil affecting the banking system and financial markets and the possibility that financial institutions may consolidate or terminate their activities have resulted in a tightening in the credit market, a low level of liquidity in many financial markets, and extreme volatility in fixed income, credit, currency, and equity markets. There could be a number of follow-on effects from a credit crisis on our business, including insolvency of key suppliers resulting in product delays; inability of customers and distributors to obtain credit to finance purchases of our products and/or customer and distributor insolvencies; increased difficulty in managing inventories; and other financial institutions negatively impacting our treasury operations.

Economic uncertainty remains in the European countries due to uncertainty associated with Brexit, uncertainty in Spain related to Catalonia, and uncertainty in Italy related to significant public debt and uncollectible loans in the banking system, among other considerations. We have no European sovereign debt investments. Our European debt investments consist of non-sovereign corporate debt securities of $4.5 million, which represents 10% of our corporate debt instruments (4% of our short-term investments) as of December 31, 2018. European debt investments are with corporations domiciled in the northern and central European countries of Netherlands, Sweden, and France. We do not have any short-term investments with corporations domiciled in the higher risk “southern European” countries (i.e., Italy, Spain, and Portugal). We believe that we do not have significant exposure with respect to our money market and corporate debt investments in Europe, although we do have some exposure due to the interdependencies among the European Union countries.

Economic conditions and regulatory changes leading up to and following the United Kingdom’s likely exit from the European Union could have a material adverse effect on our business and results of operations.

There remains significant uncertainty about the process for and the impacts of the U.K.'s leaving the European Union, typically referred to as Brexit. While the full effects of Brexit will not be known for some time, Brexit could cause disruptions to, and create uncertainty surrounding, our business and results of operations. The most immediate effect has been significant volatility in global equity and debt markets and currency exchange rate fluctuations. Ongoing global market volatility and a deterioration in economic conditions due to uncertainty surrounding Brexit, could significantly disrupt the markets in which we operate and lead our customers to closely monitor their costs and delay capital spending decisions.

The effects of Brexit will depend on any agreements the U.K. makes to retain access to E.U. markets, either during a transitional period or more permanently. The measures could potentially disrupt the markets we serve and may cause us to lose customers and employees. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which E.U. laws to replace or replicate as well as potential import duties for the products we produce in the U.K. and export to the European Union.

We have significant customers and operations in the U.K. and any of these effects of Brexit could adversely affect our business, results of operations and financial condition.

Our business, results of operations, and financial condition may be negatively impacted by conditions abroad, including local economies, political environments, fluctuating foreign currencies, shifting regulatory schemes, and the imposition of tariffs.

A significant amount of our revenue is generated from operations outside the U.S. We expect that sales outside of the U.S. will continue to represent a significant portion of our total revenue. We maintain significant operations and acquire or manufacture many of our products and/or their components outside the U.S. Our future revenue, costs, and results of operations could be significantly affected by changes in each country’s economic conditions, foreign currency exchange rates relative to the U.S. dollar, political conditions, trade protection measures, licensing requirements, local tax issues, capitalization, and other related legal matters. If our future revenue, costs, and results of operations are significantly affected by economic conditions abroad, our results of operations and financial condition could be negatively impacted. Specifically, the deceleration of the economy in China has negatively impacted, and may continue to negatively impact, our results of operations as our customers in China reduce their spending. The Chinese government continues to rebalance the country’s economic model with tightening real estate and environmental regulation.

In addition, we work with some suppliers located in China to obtain certain components for our products. The United States government has recently announced import tariffs on goods manufactured in China. These tariffs, depending upon the


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ultimate scope, duration and how they are implemented, could negatively impact our business by continuing to increase our costs and by making our products less competitive. We may not be able to pass such increased costs on to our customers. In addition, any changes to suppliers outside of China may increase our costs and could impact the global competitiveness of our products. We sell U.S. origin products in the Chinese market and any tariffs on U.S. goods imposed by the Chinese government, depending upon the ultimate scope, duration and how they are implemented, could negatively impact our business by making our products less competitive in that market.

We face risks from currency fluctuations.

Given the significance of non-U.S. sales to our total revenue, we face a continuing risk from the fluctuation of the U.S. dollar versus foreign currencies. Although the majority of our receivables are invoiced and collected in U.S. dollars, we have exposure from non-U.S. dollar-denominated sales (consisting primarily of the Euro, British pound sterling, and Chinese renminbi). We have a substantial number of international employees and facilities, resulting in material operating expenses denominated in foreign currencies. We have exposure from non-U.S. dollar-denominated operating expenses in foreign countries (primarily the Euro, British pound sterling, Israeli shekel, and Indian rupee).

We can benefit from or be adversely affected by either a weaker or stronger U.S. dollar relative to major currencies worldwide with respect to our consolidated financial statements. Accordingly, we can benefit from a stronger U.S. dollar due to the corresponding reduction in our foreign operating expenses translated into U.S. dollars and at the same time we can be adversely affected by a stronger U.S. dollar due to the corresponding reduction in foreign revenue translated into U.S. dollars. From time to time we have hedged our operating expense exposure in Indian rupees. We did not have any foreign currency derivative contracts designated as cash flow hedges as of December 31, 2018.

We hedge balance sheet remeasurement exposures using forward contracts not designated for hedge accounting treatment with notional amounts of $191.8 million as of December 31, 2018. Forward contracts not designated as hedging instruments consist of hedges of Australian dollars, British pounds sterling, Canadian dollars, Chinese renminbi, Euro, Israeli shekel, and Japanese yen. Please refer to Note 11Derivatives and Hedging of Notes to Consolidated Financial Statements for further information.

As of December 31, 2018, we had not entered into hedges against any other currency exposures, but we may consider hedging against movements in other currencies in the future. Our efforts to reduce risk from our international operations and from fluctuations in foreign currencies or interest rates may not be successful, which could harm our financial condition and operating results.

We face risks from our international operations.

We are subject to certain risks because of our international operations including:
 
restrictions on our ability to access cash generated by international operations, especially in China and Brazil, due to restrictions on the repatriation of dividends, distribution of cash to shareholders outside such countries, foreign exchange control, and other restrictions;
security concerns, such as armed conflict and civil or military unrest, crime, political instability, and terrorist activity;
customer credit risk, especially in emerging or economically challenged regions, with accompanying challenges to enforce our legal rights should collection issues arise;
changes in governmental regulation, including labor regulations, and our inability or failure to obtain required approvals, permits, or registrations could harm our international and domestic sales and adversely affect our revenue, business, and operations;
violations of governmental regulation, including labor regulations, could result in fines and penalties, including prohibiting us from exporting our products to one or more countries, and could materially adversely affect our business;
trade legislation in either the U.S. or other countries, such as a change in the current tariff structures, export compliance laws, or other trade policies, could adversely affect our ability to sell or manufacture in international markets;


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adverse tax consequences, including imposition of withholding or other taxes on payments by subsidiaries, and
some of our sales to international customers are made under export licenses that must be obtained from the U.S. Department of Commerce (“DOC”) and certain transactions require prior approval of the DOC or other governmental agencies.

We incur additional legal compliance costs associated with our international operations and could become subject to legal penalties in foreign countries if we do not comply with local laws and regulations, which may be substantially different from those in the U.S. In many foreign countries, particularly those with developing economies, it may be common to engage in business practices that are prohibited by U.S. regulations such as the Foreign Corrupt Practices Act of 1977, as amended. Although we have implemented policies and procedures designed to ensure compliance with these laws, there can be no assurance that all of our employees, contractors, and agents, as well as outsourced business operations, including those based in or from countries where practices that violate such U.S. laws may be customary, will not take actions in violation of our policies. Furthermore, there can be no assurance that employees, contractors, and agents of acquired companies did not take actions in violation of such laws and regulations prior to the date they were acquired by us, although we perform due diligence procedures to endeavor to discover any such actions prior to the acquisition date.

We license software used in most of our Fiery products and certain Productivity Software products from Adobe and the loss of these licenses would prevent shipment of these products.

We are required to obtain separate licenses from Adobe for the right to use Adobe PostScript® software in each copier or printer model that uses a Fiery DFE, and other Adobe software for certain Productivity Software products. Although to date we have successfully obtained licenses to use Adobe PostScript ® and other Adobe software when required, Adobe is not required to, and we cannot be certain that Adobe will, grant future licenses to Adobe PostScript® and other Adobe software on reasonable terms, in a timely manner, or at all. To obtain licenses from Adobe, Adobe requires that we obtain quality assurance approvals from them for our products that use Adobe software. Although to date we have successfully obtained such quality assurance approvals from Adobe, we cannot be certain they will grant us such approvals in the future. If Adobe does not grant us such licenses or approvals, if the Adobe licenses are terminated, or if our relationship is otherwise materially impaired, we would likely be unable to sell products that incorporate Adobe PostScript ® or other Adobe software and our financial condition and results of operations would be significantly harmed.

We manufacture super-wide and wide format industrial digital inkjet printers and formulate UV curable, LED curable, and reactive dye ink in single locations. Any significant interruption in the manufacturing process at these facilities could adversely affect our business.

Our VUTEk hybrid super-wide and wide format industrial digital inkjet printers are primarily manufactured in a single location in our Manchester, New Hampshire facility. Our VUTEk roll-to-roll super-wide format industrial digital inkjet printers are manufactured in a single location in our Rosh Ha’Ayin, Israel facility. Our FabriVU and other Reggiani industrial digital inkjet textile printers are manufactured in a single location in our Bergamo, Italy facility. Our Cretaprint ceramic tile decoration and Nozomi corrugated packaging digital inkjet printers are manufactured in a single location in our Castellon, Spain facility. We formulate our UV curable and LED curable digital ink that is used in our display graphics super-wide and wide-format industrial digital inkjet printers in a single location in our Ypsilanti, Michigan facility. We formulate our reactive dye ink that is used in our textile digital inkjet printers in a single location in our Bedford, U.K., facility. Any significant interruption in the manufacturing process at any of these facilities could affect the supply of our products, our ability to meet customer demand, and our ability to maintain market share.

We are developing contingency plans utilizing our manufacturing facilities in multiple locations and the capabilities of certain contract manufacturers in the event of a significant interruption in the manufacturing process at any of the aforementioned facilities. Until those plans are complete, disruptions in the manufacturing process at any of our sole source internal facilities could adversely affect our business.



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We depend on a limited group of suppliers for key components in our products. The loss of any of these suppliers, the inability of any of these suppliers to meet our requirements, or delays or shortages of supply of these components, could adversely affect our business.

Certain components necessary for the manufacture of our products are obtained from a sole supplier or a limited group of suppliers. These include CPUs, chip sets, ASICs, and other related semiconductor components; inkjet print heads for our industrial inkjet printers; branded textile ink; and certain key ingredients (primarily pigments and photoinitiators) for our digital UV curable ink. We generally do not maintain long-term agreements with our component suppliers and conduct business with such suppliers largely on a purchase order basis. If we are unable to continue to procure these sole or limited sourced components from our current suppliers in the required quantities, we will have to qualify other sources, if possible, or redesign our products. If we were unable to obtain the branded textile ink or the pigments required for our digital UV curable ink, we would have to qualify other sources, if possible, or reformulate and test the new ink formulations. These suppliers may be concentrated within similar industries or geographic locations, which could potentially exacerbate these risks. We cannot provide assurance that other sources of these components exist or will be willing to supply us on reasonable terms or at all, or that we will be able to design around these components. Any unavailability, delays, or shortages of these components or any inability of our suppliers to meet our requirements, could harm our business.

Because the purchase of certain key components involves long lead times, in the event of unanticipated volatility in demand for our products, we have in the past been, and may in the future be, unable to manufacture certain products in a quantity sufficient to meet current demand. Further, as has occurred in the past, in the event that anticipated demand does not materialize, we may hold excess quantities of inventory that could become obsolete. To meet projected demand, we maintain an inventory of components for which we are dependent on sole or limited source suppliers and components with prices that fluctuate significantly. As a result, we are subject to risk of inventory obsolescence, which could adversely affect our operating results and financial condition.

Market prices and availability of certain components, particularly memory subsystems and Intel-designed components, which collectively represent a substantial portion of the total manufactured cost of our products, have fluctuated significantly in the past. Such fluctuations could have a material adverse effect on our operating results and financial condition including reduced gross profit.

We are dependent on a limited number of subcontractors, with whom we generally do not have long-term contracts, to manufacture and deliver products to our customers. The loss of any of these subcontractors could adversely affect our business.

We subcontract with other companies to manufacture certain of our products and we generally do not have long-term agreements with these subcontractors. While we closely monitor our subcontractors’ performance, we cannot be assured that such subcontractors will continue to manufacture our products in a timely and effective manner. In the past, a weakened economy led to the dissolution, bankruptcy, or consolidation of some of our subcontractors, which decreased the available number of subcontractors. If the available number of subcontractors were to decrease in the future, it is possible that we would not be able to secure appropriate subcontractors to fulfill our demand in a timely manner, or at all, particularly if demand for our products increases.

The existence of fewer subcontractors may reduce our negotiating leverage, thereby potentially resulting in higher product costs. Financial problems resulting in the inability of our subcontractors to make or ship our products, could harm our business, operating results, and financial condition. If we change subcontractors, we could experience delays in finding, qualifying, and commencing business with new subcontractors, which would result in delayed delivery of our products and potentially the cancellation of orders for our products.

We have outsourced our Fiery production with Avnet, FFPS production with Dell, FFPS sustaining engineering with HCL, ceramic ink formulation with subcontractors in China and Italy, and formulation of certain textile ink with third party branded suppliers. Certain Industrial Inkjet sub-assemblies and wide format printer products are manufactured in the U.S. and China. Should our manufacturers experience any inability, or unwillingness, to manufacture or deliver our products, then our business, financial condition, and operations could be harmed. Since we generally do not maintain long-term agreements with our manufacturers, any of our manufacturers could enter into agreements with our competitors that might restrict or prohibit


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them from manufacturing our products or could otherwise lead to an inability to fill our orders in a timely manner. In such event, we may not be able to find suitable replacements, in which case our financial condition and operations would likely be harmed.

We may face increased risk of inventory obsolescence, excess, or shortages related to our Industrial Inkjet printers and ink.

We procure raw materials and internally manufacture our super-wide format, textile, and ceramic tile decoration industrial inkjet printers and formulate digital UV curable and reactive dye ink based on our sales forecasts. If we do not accurately forecast demand for our products, we may produce or purchase excess inventory, which may result in our inventory becoming obsolete. We might not produce the correct mix of products to match actual demand if our sales forecast is not accurate, resulting in lost sales. If we have excess printers, ink, or other products, we may need to lower prices to stimulate demand.

Our ink products have a defined shelf life. If we do not sell our ink before the end of its shelf life, it will have to be written off. We have also experienced UV curable ink shortages in the past and may continue to experience such shortages in the future. UV curable ink shortages may require that we incur additional costs to respond to increased demand and overcome such shortages.

If we are not able to hire and retain skilled employees, we may not be able to develop and manufacture products, or meet demand for our products, in a timely fashion.

We depend on skilled employees, such as software and hardware engineers, quality assurance engineers, chemists, chemical engineers, and other technical professionals with specialized skills. We are headquartered in the Silicon Valley and have research and development employees in facilities in 15 U.S. locations. We also have research and development employees in facilities in India, Europe, Israel, the U.K., Brazil, and Canada. Competition has historically been intense among companies hiring engineering and technical professionals. In times of professional labor imbalances, it has in the past and is likely in the future, to be difficult to locate and hire qualified engineers and technical professionals and to retain these employees. There are many technology companies located near our corporate offices in the Silicon Valley and our operations in India that may attempt to hire our employees.

The movement of our stock price may also impact our ability to hire and retain employees. If we do not offer competitive compensation, we may not be able to recruit or retain employees, which may have an adverse effect on our ability to develop products in a timely fashion, which could harm our business, financial condition, and operating results.

We rely on our distribution channels to ensure sales growth.

The leading printer manufacturers, which comprise the majority of the customer base in our Fiery operating segment, are typically large profitable customers with little credit risk to us. Our Productivity Software and Industrial Inkjet operating segments sell primarily through a direct sales force, augmented by some select distributors, to a broader base of customers than Fiery. Any interruption of these distribution channels could negatively impact us in the future.

Successfully managing the interaction of our direct and indirect channel efforts to reach various potential customer industries for our products and services is a complex process. For example, in response to our direct sales strategies or for other business reasons, our current distributors may choose to represent our competitors in place of us. In addition, from time to time we grant concessions to some of our distributors and allow them to return previously purchased products. Accordingly, reserves for estimated returns and exchanges are recorded as a reduction of revenues upon applicable product shipment, and are based upon our historical experience. Our reliance upon indirect distribution methods may reduce visibility to demand and pricing issues, and therefore make forecasting more difficult and, to the extent that returns exceed estimates, our revenues and operating results may be adversely affected.



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The sales cycle for our products is long and we may incur substantial non-recoverable expenses or devote significant resources to sales that do not occur when anticipated.

Potential or existing customers, particularly larger enterprise customers, generally commit significant resources to an evaluation of available products and require us to expend substantial time, effort and money educating them as to the value of our products and services. Sales of our products to these customers often require an extensive education and marketing effort.

We could expend significant funds and resources during a sales cycle and ultimately fail to win the customer. Our sales cycle for all our products and services is subject to significant risks and delays over which we have little or no control, including:
our customer’s budgetary constraints;
the timing of our customers’ budget cycles and approval processes;
our customers’ willingness to replace their current print solutions;
our need to educate potential customers about the uses and benefits of our products and services; and
the timing of the expiration of our customers’ current outsourcing agreements for similar products and services.

If our sales cycles lengthen unexpectedly, they could adversely affect the timing of our revenues or increase costs, which may cause fluctuations in our quarterly revenues and results of operations. Finally, if we are unsuccessful in closing sales of our products after spending significant funds and management resources, our operating margins and results of operations could be adversely impacted, and the price of our common stock could decline.

Our revenue for a particular period is difficult to predict, and a shortfall in revenue may harm our operating results.

Our revenue for a particular quarter is difficult to predict, especially in light of a challenging and inconsistent global macroeconomic environment and related market uncertainty. Our revenue may grow at a slower rate than in past periods or decline on a year-over-year basis. Our ability to meet financial expectations could also be adversely affected if the nonlinear sales pattern seen in some of our past quarters recurs in future periods. We have experienced periods of time during which bookings have exceeded shipments or manufacturing issues have delayed shipments, leading to nonlinearity in shipping patterns. In addition to making it difficult to predict revenue for a particular period, nonlinearity in shipping can increase costs, because irregular shipment patterns result in periods of underutilized capacity and periods in which overtime expenses may be incurred, as well as in potential additional inventory management-related costs. In addition, to the extent that manufacturing issues and any related component shortages result in delayed shipments in the future, and particularly in periods in which our contract manufacturers are operating at higher levels of capacity, it is possible that revenue for a quarter could be adversely affected if such matters occur and are not remediated within the same quarter.

The timing of large orders can also have a significant effect on our business and operating results from quarter to quarter, primarily in the United States and in emerging countries. From time to time, we receive large orders that have a significant effect on our operating results in the period in which the order is recognized as revenue. The timing of such orders is difficult to predict, and the timing of revenue recognition from such orders may affect period to period changes in revenue. As a result, our operating results could vary materially from quarter to quarter based on the receipt of such orders and their ultimate recognition as revenue.

Inventory management remains an area of focus. We have experienced longer than normal manufacturing lead times in the past which have caused some customers to place the same order multiple times within our various sales channels and to cancel the duplicative orders upon receipt of the product, or to place orders with other vendors with shorter manufacturing lead times. Such multiple ordering (along with other factors) or risk of order cancellation may cause difficulty in predicting our revenue and, as a result, could impair our ability to manage parts inventory effectively. In addition, our efforts to improve manufacturing lead-time performance may result in corresponding reductions in order backlog. A decline in backlog levels could result in more variability and less predictability in our quarter-to-quarter revenue and operating results. In addition, when facing component supply-related challenges, we have increased our efforts in procuring components in order to meet customer expectations which in turn contributes to an increase in purchase commitments. Increases in our purchase commitments to shorten lead times could also lead to excess and obsolete inventory charges if the demand for our products is less than our expectations.



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We plan our operating expense levels based primarily on forecasted revenue levels. These expenses and the impact of long-term commitments are relatively fixed in the short term. A shortfall in revenue could lead to operating results being below expectations because we may not be able to quickly reduce these expenses in response to short-term business changes.

Any of the above factors could have a material adverse impact on our operations and financial results.

Growing market share in the Productivity Software and Industrial Inkjet operating segments increases the possibility that we will experience increased bad debt expense and increased accounts receivable.

Many of the Productivity Software and Industrial Inkjet customers are smaller and potentially less credit worthy than the leading printer manufacturers that purchase from our Fiery segment. Our ceramic tile decoration digital inkjet customer base is primarily located in geographic regions, which have recently been subject to economic challenges, including southern Europe (primarily Spain and Italy) and emerging markets in APAC. Furthermore, if we increase the percentage of Productivity Software and Industrial Inkjet products that are sold internationally, it may be challenging to enforce our legal rights should collection issues arise. In addition, many of our Industrial Inkjet customers are requesting extended payment terms, and we have been granting them on a limited basis in response to our competitors offers. Due to these and other factors, growing Industrial Inkjet and Productivity Software market share may cause us to experience an increase in bad debt expense and an increase in days sales outstanding (“DSOs”).

DSOs increased during the year ended December 31, 2018, compared with December 31, 2017, primarily due to higher DSO across our businesses, except for Fiery and the textile market. We calculate DSO by dividing net accounts receivable at the end of the quarter by revenue recognized during the quarter, multiplied by the total days in the quarter, which is a measure of the relationship between sales and accounts receivable.

Acquisitions may result in unanticipated accounting charges or otherwise adversely affect our results of operations and result in difficulties assimilating and integrating operations, personnel, technologies, products, and information systems of acquired businesses.

We seek to develop new technologies and products from both internal and external sources. We have also purchased companies and businesses for the primary purpose of acquiring their customer base. As part of this effort, we have in the past made, and will likely continue to make, acquisitions of other businesses. Acquisitions involve numerous risks, including:
 
difficulties integrating operations, employees, technologies, products, information systems, and the required focus of management attention, time, and effort to accomplish successful integration;
information systems may be inadequate to operate the business of the acquired company until we are able to integrate the acquired business into our information technology system;
integration of acquired business into our information system may be delayed, which may limit our ability to manage the acquired business and implement financial and operational controls;
information systems may be poorly maintained by the acquired business;
risk of entering markets in which we have little or no prior experience, or entering markets where competitors have stronger market positions;
possible write-downs of impaired assets;
changes in the fair value of contingent consideration;
possible restructuring of personnel or leased facilities;
potential loss of key employees of the acquired company;
possible overruns (compared to expectations) relative to the expense levels and cash outflows of the acquired business;
adverse reactions by customers, suppliers, or parties transacting business with the acquired company or us;
risk of negatively impacting stock analyst ratings;
potential litigation or any administrative proceedings arising from prior transactions or prior actions of the acquired company;
inability to protect or secure technology rights;
possible overruns of direct acquisition and integration costs; and


28




equity securities issued in connection with acquisitions may be dilutive to our existing stockholders unless mitigating actions are taken such as treasury stock purchases; alternatively, acquisitions made entirely or partially for cash reduce cash reserves.

Mergers and acquisitions of companies are inherently risky. We cannot provide assurance that previous or future acquisitions will be successful or will not harm our business, operating results, financial condition, or stock price.

We face risks relating to the potential impairment of goodwill and long-lived assets.

We complete a review of the carrying value of our goodwill and long-lived assets annually and, based on a combination of factors (i.e., triggering events), we may be required to perform an interim analysis.

Given the uncertainty of the economic environment and its potential impact on our business, there can be no assurance that our estimates and assumptions regarding the duration of any economic downturn, or the period or strength of any subsequent recovery, 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 2019 or prior to that, if an interim triggering event were to occur. It is not possible to determine if any such future impairment charge would result or, if it does, whether such charge would be material. No goodwill impairment foreshadowing events have occurred as of December 31, 2018.

During the fourth quarter of 2017, management approved a plan to sell approximately 31.5 acres of land and two related manufacturing buildings located in Meredith, New Hampshire (“Meredith facility”). The fair value of the Meredith facility, based on expected sales proceeds less cost to sell, was estimated to be less than the carrying amount of the assets. As a result, we incurred an impairment loss of approximately $0.9 million in our consolidated results of operations for the year ended December 31, 2017. During the year ended December 31, 2018, we sold one of the buildings and associated land but the remaining building and land continue to be held-for-sale as of December 31, 2018. In the fourth quarter of 2018, we updated our analysis of the expected sales proceeds less cost to sell, and recognized an additional impairment charge of $0.3 million on the remaining Meredith facility. We may be required to record additional impairment charges or a loss on sale if the sales proceeds for the remaining Meredith facility do not meet our expectations. We may also need to record impairment charges if we decide to sell or dispose of other long-term assets.

We are currently subject to securities lawsuits and we may be subject to similar or other litigation in the future, which may divert management’s attention and have a material adverse effect on our business, financial condition, and results of operations.

The market price of our common stock declined significantly following our August 3, 2017 announcement concerning our assessment of the timing of recognition of revenue and the effectiveness of our current and historical disclosure controls and internal control over financial reporting. Subsequently in August, a purported class action lawsuit was filed alleging, among other things, that we and certain of our officers violated federal securities laws by making allegedly false and misleading statements concerning our financial reporting, revenue recognition, internal controls, and disclosure controls and procedures, prior to our August 2017 announcement. The plaintiffs seek unspecified monetary damages on behalf of the putative class and an award of costs and expenses, including attorney’s fees. In addition, later in August 2017, a shareholder derivative complaint was filed alleging, among other things, that certain of our officers and directors had breached fiduciary duties and had been unjustly enriched and had made allegedly false and misleading statements concerning our financial reporting, revenue recognition, internal controls, and disclosure controls and procedures. The complaint alleges that the Company has suffered damages and seeks an unspecified amount of damages, restitution, and declaratory and other relief.

We cannot predict the outcome of these lawsuits, and we may be subject to other similar litigation in the future. Monitoring and defending against legal actions, whether or not meritorious, is time-consuming for our management and detracts from our ability to fully focus our internal resources on our business activities. In addition, we may incur substantial legal fees and costs in connection with litigation. Although we maintain insurance coverage, recovery could be denied or prove to be insufficient. We are not currently able to estimate the possible cost to us from the currently pending lawsuits, and we cannot be certain how long it may take to resolve these matters or the possible amount of any damages that we may be required to


29




pay. We have not established any reserves for any potential liability relating to these or future securities lawsuits. It is possible that we could, in the future, incur judgments or enter into settlements of claims for monetary damages. A decision adverse to our interests on these actions could result in the payment of substantial damages and could have a material adverse effect on our business, results of operations, and financial condition. In addition, the uncertainty of the currently pending lawsuits could lead to more volatility in our stock price.

We are subject to numerous federal, state, and foreign employment laws and may face claims in the future under such laws.

We are subject to numerous federal, state, and foreign employment laws and from time to time face claims by our employees and former employees under such laws. There are no material claims pending or threatened against us under federal, state, or foreign employment laws, but we cannot be sure that material claims under such laws will not be made in the future against us, nor can we predict the likely impact of any such claims on us, or that, if asserted, we would be able to successfully resolve any such claims without incurring significant expense.

We may be unable to adequately protect our proprietary information and may incur expenses to defend our proprietary information.

We rely on copyright, patent, trademark, and trade secret protection, in addition to nondisclosure agreements, licensing, and cross-licensing arrangements to establish, maintain, and protect our intellectual property rights, all of which afford only limited protection. We have patents and pending patent applications in the U.S. and various foreign countries. There can be no assurance that patents will issue from our pending applications or from any future applications, or that, if issued, any claims allowed will be sufficiently broad to protect our technology. Any failure to adequately protect our proprietary information could harm our financial condition and operating results. We cannot be certain that any patents that have been, or may in the future be issued to us, or which we license from third parties, or any other proprietary rights will not be challenged, invalidated, or circumvented. In addition, we cannot be certain that any rights granted to us under any patents, licenses, or other proprietary rights will provide adequate protection of our proprietary information.

Many countries in which we derive revenue do not have comprehensive and highly developed legal systems, particularly with respect to the protection of intellectual property rights, which, among other things, can result in a prevalence of infringing products and counterfeit goods in certain countries, which could harm our business and reputation.

As different areas of our business change or mature, from time to time we evaluate our patent portfolio and decide to either pursue or not pursue specific patents and patent applications related to such areas. Choosing not to pursue certain patents, patentable applications, and failing to file applications for potentially patentable inventions, may harm our business by, among other things, enabling our competitors to more effectively compete with us, reducing potential claims we can bring against third parties for patent infringement, and limiting our potential defenses to intellectual property claims brought by third parties.

Litigation has been, and may continue to be, necessary to defend and enforce our proprietary rights. Such litigation, whether or not concluded successfully, could involve significant expense and the diversion of our attention and other resources, which could harm our financial condition and operating results.

We face risks from third party claims of infringement and potential litigation.

Third parties have claimed in the past, and may claim in the future, that our products infringe, or may infringe, their proprietary rights. Such claims have resulted in lengthy and expensive litigation in the past and could have a similar result in the future. Such claims and any related litigation, whether or not we are successful in the litigation, could result in substantial costs and diversion of our resources, which could harm our financial condition and operating results. Although we may seek licenses from third parties covering intellectual property that we are allegedly infringing, we cannot assure that any such licenses could be obtained on acceptable terms, if at all.



30




We are subject to risk of loss due to fire or earthquakes, floods, or other natural disasters.

We use flammable materials in the digital UV curable and ceramic digital ink formulation process; therefore, we may be subject to risk of loss resulting from fire. We maintain insurance policies to cover losses caused by fire, including business interruption insurance. If one or more of our facilities is damaged or otherwise ceases operations as a result of fire, it would reduce our digital UV curable and ceramic digital ink manufacturing capacity, which may reduce revenue and adversely affect our business.

Our corporate headquarters, including a significant portion of our research and development facilities, are located in the San Francisco Bay Area, which is known for seismic activity. This area has also experienced flooding in the past. Many of the components necessary for our products are purchased from suppliers based in areas that are subject to risk from natural disasters, including the San Francisco Bay Area, China, and Japan. A significant natural disaster, such as an earthquake, flood, tsunami, hurricane, typhoon, or other business interruptions due, for example, to power shortages and other interruptions have harmed our business, financial condition, and operating results in the past and could do so again in the future.

We may be subject to environmental-related liabilities due to our use of hazardous materials and solvents.

Our business operations involve the use of certain hazardous materials at certain of our locations. We formulate UV curable, reactive dye, and ceramic ink at certain locations and store UV curable, ceramic, solvent, and thermoforming ink, as well as a variety of textile ink including dye sublimation, pigmented, reactive dye, acid dye, and water-based dispersed printing ink at certain locations. Our outsourced partners in China and Italy formulate our ceramic solvent-based ink. The solvents used in ceramic digital ink formulation have low volatility and flammability by design. As a result, ceramic digital ink poses less environmental risk compared with true solvent ink. We launched internal formulation of reactive dye ink during 2016 at our facility in Bedford, U.K. Reactive dye is a water-based dye.

The hazardous materials and solvents that we use are subject to various governmental regulations relating to their transfer, handling, packaging, use, and disposal. We store ink at warehouses worldwide, including Europe, China, Israel, the U.K., and the U.S., and shipping companies distribute ink at our direction. We face potential liability for problems such as large spills or fires that may arise at ink manufacturing locations. While we customarily obtain insurance coverage typical for this kind of risk, such insurance may not be sufficient. If we fail to comply with these laws or an accident involving our ink waste or chemicals occurs, or if our insurance coverage is not sufficient, then our business and financial results could be harmed.

Future sales of our products could be limited if we do not comply with current and future environmental and chemical content regulations.

We believe that our products are currently compliant with RoHS, WEEE, REACH, and other regulations for the European Union as well as with China RoHS and other applicable international, U.S., state, and local environmental regulations. We monitor environmental compliance regulations to ensure that our products are fully compliant prior to the implementation of any potential new requirements. However, new unforeseen legislation could require us to re-engineer our products, complete costly analyses, or perform supplier surveys, which could harm our business and negatively impact our financial results. We could also incur additional costs, sanctions, and liabilities in connection with non-compliant product recalls, regulatory fines, and exclusion of non-compliant products from certain markets.

Environmental regulations and their enforcement have tightened in China, which has resulted in the closure of facilities without notice. Although such closures have not occurred with respect to our suppliers, the unexpected shutdown of supplier factories in China may impact our supply of raw material for digital inkjet ink. Some of our ceramic printing customers in China have experienced plant closures due to stricter environmental enforcement, which has impacted our sales of ceramic ink and may impact our sales in the future.



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Our products may contain defects, which are not discovered until after shipping, which could subject us to warranty claims in excess of our warranty reserves.

Our products consist of hardware and software developed by ourselves and others, which may contain undetected defects. We have in the past discovered software and hardware defects in certain of our products after their introduction, resulting in warranty expense and other expenses incurred in connection with rectifying such defects or, in certain circumstances, replacing the defective product, which may damage our relationships with our customers. Defects could be found in new versions of our products after commencement of commercial shipment and any such defects could result in a loss or delay in market acceptance of such products and thus harm our reputation and revenue. Defects in our products (including defects in licensed third-party software) detected prior to new product releases could result in delays in the introduction of new products and the incurrence of additional expense, which could harm our operating results. We generally provide a thirteen-month hardware limited warranty commencing upon installation for certain Industrial Inkjet printers, which may cover both parts and labor. Our Fiery DFE limited warranty is 12 to 15 months.

Our standard warranties contain limits on damages and exclusions, including but not limited to alteration, modification, misuse, mishandling, and storage or operation in improper environments. While we recorded an accrual of $12.8 million at December 31, 2018, for estimated warranty costs that are estimable and probable based on historical experience, we may incur additional costs of revenue and operating expenses if our warranty provision does not reflect adequately the cost to resolve or repair defects in our products or if our liability limitations are declared enforceable, which could harm our business, financial condition, and operating results.

Actual or perceived security vulnerabilities in our products could adversely affect our revenue or costs.

Maintaining the security of our software and hardware products is an issue of critical importance to our customers and for us. There are individuals and groups who develop and deploy viruses, worms, and other malicious software programs that could attack our products. Although we take preventive measures to protect our products, and we have a response team that is notified of high risk malicious events, these procedures may not be sufficient to mitigate damage to our products. Actual or perceived security vulnerabilities in our products could lead some customers to seek to return products, reduce or delay future purchases, or purchase competitive products. Any actual security vulnerabilities in our products could require us to incur additional costs to eliminate the vulnerabilities. Customers may also increase their expenditures to protect their computer systems from attack, which could delay or reduce purchases of our products. Any of these actions or responses by customers could adversely affect our revenue.

System failures, or system unavailability, could harm our business.

We rely on our network infrastructure, internal and external technology systems and websites for our operations, development, marketing, support, and sales activities. These systems are also subject to potential disruptions and acts of vandalism. Any event that causes failures or interruption in our hardware or software systems could harm our business, financial condition, and operating results.

Our business could be adversely impacted in the event of a failure of our information technology infrastructure or adversely impacted by a successful cyber-attack.

We have experienced cyber-security threats, threats to our information technology infrastructure and unauthorized attempts to gain access to our sensitive information. Prior cyber-attacks directed at us have not had a material impact on our business or financial results; however, this may not continue to be the case in the future. Cyber-security assessment analyses undertaken by us have identified and prioritized steps to enhance our cyber-security safeguards. We are in the process of implementing these recommendations. Nevertheless, there can be no assurance that we will adequately protect our information or that we will not experience any future successful attacks. Due to the evolving nature of security threats, the impact of any future incident cannot be predicted, and we may be required to expend significant additional resources to modify our cyber-security protective measures, to investigate and remediate vulnerabilities or other exposures or to make required notifications. In addition, we may be subject to litigation and financial losses. These costs related to cyber or other security threats or disruptions may not be fully insured or indemnified by other means. Occurrence of any of these events could adversely affect our operations, the services we provide to our customers, our financial results or our reputation; or such events could result in


32




the loss of competitive advantages derived from our research and development efforts or other intellectual property or early obsolescence of our products and services.

Our stock price has been volatile historically and may continue to be volatile.

The market price for our common stock has been and may continue to be volatile. During the twelve months ended December 31, 2018, the price of our common stock as reported on The Nasdaq Global Select Market ranged from a low of $23.01 to a high of $35.62. We expect our stock price to be subject to fluctuations as a result of a variety of factors, including factors beyond our control. These factors include:
 
actual or anticipated variations in our quarterly or annual operating results;
ability to initiate or complete stock repurchase programs;
announcements of technological innovations or new products or services by our competitors or by us;
announcements relating to strategic relationships, acquisitions, or investments;
announcements by our customers regarding their businesses or the products in which our products are included;
changes in financial estimates or other statements by securities analysts;
any failure to meet security analyst expectations;
changes in the securities analysts’ rating of our securities;
terrorist attacks and the affects of military engagements or natural disasters;
commencement of litigation or adverse results of pending litigation;
changes in the financial performance and/or market valuations of other software and high technology companies; and
changes in general economic conditions.

Because of this volatility, we may fail to meet the expectations of our stockholders or of securities analysts from time to time and the trading price of our securities could decline as a result. The stock market has experienced significant price and volume fluctuations that have particularly affected the trading prices of equity securities of many high technology companies. These fluctuations have often been unrelated or disproportionate to the operating performance of these companies. Any negative change in the public’s perception of high technology companies could depress our stock price regardless of our operating results.

Our stock repurchase program could affect our stock price and add volatility.

In November 2015, our board of directors authorized $150 million for the repurchase of our outstanding common stock. This authorization was scheduled to expire on December 31, 2018. On September 11, 2017, the board of directors approved the repurchase of an additional $125 million for our share repurchase program commencing September 11, 2017 and ending December 31, 2018. At that time, $28.8 million remained available for repurchase under the 2015 authorization. The 2017 authorization thereby increased the repurchase authorization to $153.8 million of our common stock. As of December 31, 2018, we have completed purchases of $275 million under our authorized stock repurchase program which expired at the end of 2018.

Any repurchases pursuant to our stock repurchase program could affect our stock price and add volatility. There can be no assurance that repurchases will be made at the best possible price. Potential risks and uncertainties also include, but are not necessarily limited to, the amount and timing of future stock repurchases and the origin of funds used for such repurchases. The existence of a stock repurchase program could also cause our stock price to be higher than it would be in the absence of such a program and could potentially reduce the market liquidity for our stock. Depending on market conditions and other factors, these repurchases may be commenced or suspended from time to time. Any such suspension could cause the market price of our stock to decline.

Our profitability may be affected by unanticipated changes in our tax provisions, the adoption of new U.S. or foreign tax legislation, or exposure to additional income tax liabilities.

We are subject to income taxes in the U.S. and many foreign countries. Intercompany transaction pricing can impact our tax liabilities. We are potentially subject to tax audits in various countries and tax authorities may disagree with our tax treatments, including intercompany pricing or other matters, and assess additional taxes. We regularly review the likely


33




outcomes of these audits to determine whether our tax provisions are sufficient. However, there can be no assurance that we will accurately predict the outcomes of these audits, and the final assessments of these audits can have a material impact on our net income (loss).

Our effective tax rate in the future may be impacted by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws, new information discovered during the preparation of our tax returns, deemed repatriation of foreign earnings, and enactment of future U.S. and foreign tax legislative initiatives, such as tax reform legislation (“2017 Tax Act”) enacted on December 22, 2017 in the United States (“U.S.”) or multi-jurisdictional actions to address “base erosion and profit-shifting” by multinational companies. The Organisation for Economic Co-operation and Development, or OECD, issued a series of reports on October 5, 2015 recommending changes to numerous well-established tax principles. Many countries are beginning to implement legislation to align their international tax rules with these recommendations. These actions could adversely impact our effective tax rate.

The 2017 Tax Act may significantly impact our tax liabilities, current business deductions, and the U.S. taxation of income earned by our foreign subsidiaries. Many of the provisions significantly differ from prior U.S. tax law resulting in changes to tax reporting and potentially increasing tax liabilities incurred.

In December 2017, the 2017 Tax Act was enacted, which included a broad range of changes impacting businesses, including corporate tax rates, business deductions, and international tax provisions. Many of the provisions significantly differ from previous U.S. tax law.

The 2017 Tax Act also will also significantly impact current and future tax liabilities including, but not limited to the reduction of the U.S. federal corporate tax rate from 35% to 21%, a minimum tax to address base erosion and profit shifting from the U.S., the elimination of U.S. federal income taxes on dividends from foreign subsidiaries, a new tax on global intangible low-tax income (“GILTI”), a limitation of deductible interest expense, and the repeal of the domestic production activity deduction. There are additional limitations imposed on the deductibility of certain executive compensation, the use of foreign tax credits to reduce U.S. income tax liabilities, and the utilization of net operating losses generated after December 31, 2017. Final regulations have not been issued to interpret many provisions of the 2017 Tax Act. These regulations, when issued, may have an adverse effect to our financial results.

We may not have the ability to raise the funds necessary to settle conversions of our 0.75% Convertible Senior Notes due 2019 (“2019 Notes”) and 2.25% Convertible Senior Notes due 2023 (“2023 Notes” and together with the 2019 Notes, the “Notes”) in cash, repay the Notes at maturity, or repurchase the Notes upon a fundamental change.

In September 2014, we completed a private placement of $345 million principal amount of 2019 Notes and in November 2018, we completed a private placement of $150 million principal amount of the 2023 Notes. Holders of the Notes will have the right to require us to repurchase all or a portion of their Notes upon the occurrence of a fundamental change at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, as described in Note 12Debt of Notes to Consolidated Financial Statements.

Upon conversion of the Notes, we will be required to make conversion payments in cash, unless we elect to deliver solely shares of our common stock to settle such conversion, as described in Note 12Debt of Notes to Consolidated Financial Statements. Moreover, we will be required to repay the Notes in cash at their maturity, unless earlier converted or repurchased. However, we may not have enough available cash or be able to obtain financing when the Notes are to be repurchased, converted, or at their maturity.

The conditional conversion feature of the Notes, if triggered, may adversely affect our financial condition and results of operations.

In the event the conditional conversion feature of the Notes is triggered, holders of Notes will be entitled to convert the Notes at any time during specified periods at their option. If one or more holders elect to convert their Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock, we would be required to settle all or a portion of the conversion obligation through the payment of cash, which could adversely affect our liquidity. Even if holders do not elect to convert their Notes, we could be required under applicable accounting rules to reclassify all or a portion of the


34




outstanding principal of the 2023 Notes as a current liability, which would result in a material reduction of our net working capital.

The accounting method for convertible debt securities that may be settled in cash (such as the Notes) could have a material effect on our reported financial results.

Financial Accounting Standards Board (“FASB”) ASC 470-20, Debt with Conversion and Other Options, requires us to separately account for the liability and equity components of the Notes that may be settled entirely or partially in cash upon conversion in a manner that reflects our non-convertible debt interest rate. Accordingly, the equity component of the Notes is included in additional paid-in capital within stockholders’ equity in our Consolidated Balance Sheet and the value of the equity component is treated as original issue discount for purposes of accounting for the debt component of the Notes. As a result, we are required to recognize non-cash interest expense in our Consolidated Statement of Operations in current and future periods as a result of the amortization of the discounted carrying value of the Notes to their principal amount over their term. We will report lower net income (loss) because ASC 470-20 requires interest to include both the current period’s amortization of the original issue discount and the Notes’ non-convertible interest rate. This could adversely affect our future consolidated financial results, the trading price of our common stock, and the trading price of the Notes.

Under certain circumstances, in calculating earnings per share, convertible debt instruments (such as the Notes) that may be settled entirely or partially in cash are accounted for utilizing the treasury stock method. The effect of the treasury stock method is that the shares of common stock issuable upon conversion of the Notes, if any, are not included in the calculation of diluted earnings per share except to the extent that the conversion value of the Notes exceeds their principal amount. Under the treasury stock method, diluted earnings per share is calculated as if the number of shares of common stock that would be necessary to settle such excess were issued, if we elected to settle such excess in shares. We cannot be sure that accounting standards will continue to permit the use of the treasury stock method in the future. If we are unable to use the treasury stock method in accounting for the shares issuable upon conversion of the Notes, if any, then our diluted consolidated earnings per share would be adversely affected.

Our debt obligations may be a burden on our future cash flows and cash resources.

On January 2, 2019, we entered into a credit agreement (the “Credit Agreement”) which provides for revolving commitments of up to $150 million (including up to $10 million for swing line loans and up to $25 million for letters of credit). The Credit Agreement also contains a feature permitting us, subject to certain requirements, to arrange with lenders for additional revolving commitments or term loans for up to an aggregate of $50 million. As of December 31, 2018, we had $345 million principal amount outstanding of the 2019 Notes and $150 million principal amount outstanding of the 2023 Notes. Our ability to repay the principal of, to pay interest on or to refinance our indebtedness, or to make cash payments in connection with any conversion of the Notes depends on our future performance, which is subject to economic, financial, competitive, and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt, or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.

Our Credit Agreement contains restrictions that could limit our flexibility in operating our business.

Our Credit Agreement contains various covenants that could limit our ability to engage in specified types of transactions under certain conditions. These covenants could limit our ability to, among other things:
incur additional debt;
create liens;
make certain investments, acquisitions, loans and advances;
sell assets or enter into sale and leaseback transactions;
pay dividends or make distributions or make other restricted payments;
prepay other indebtedness;
engage in certain transactions with affiliates; and


35




amend certain charter documents and material agreements relating to other indebtedness.

A breach of any of these covenants could result in a default under the Credit Agreement. In the event of a default under the Credit Agreement, the lenders could elect to declare all amounts outstanding to be immediately due and payable. If our lenders accelerate the repayment of borrowings, we may not be able to repay our debt obligations. If we were unable to repay amounts due to the lenders under our credit facility, those lenders could proceed against the collateral granted to them to secure that indebtedness.

Certain provisions contained in our amended and restated certificate of incorporation, our amended and restated bylaws, and under Delaware law could delay or impair a change in control.

Certain provisions in our amended and restated certificate of incorporation and amended and restated bylaws could have the effect of rendering more difficult or discouraging an acquisition of the Company deemed undesirable by our board of directors. Our amended and restated certificate of incorporation allows the board of directors to issue preferred stock, which may include powers, preferences, privileges, and other rights superior to our common stock, thereby limiting our stockholders’ ability to transfer their shares and may affect the price they are able to obtain. Our amended and restated bylaws do not allow stockholders to call special meetings and include, among other things, procedures for advance notification of stockholder nominations and proposals, which may have the effect of delaying or impairing attempts by our stockholders to remove or replace management, to commence proxy contests, or to effect changes in control or hostile takeovers of the Company.

As a Delaware corporation, we are subject to Delaware law, including Section 203 of the Delaware General Corporation Law, which imposes restrictions on certain transactions between a corporation and certain significant stockholders. These provisions could also have the effect of delaying or impairing the removal or replacement of management, proxy contests, or changes in control. Any provision of our amended and restated certificate of incorporation and amended and restated bylaws that has the effect of delaying or impairing a change in control of the Company could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could affect the price that certain investors may be willing to pay for our common stock.


Item 1B: Unresolved Staff Comments:
None.


Item 2: Properties

Our corporate and Fiery segment headquarters is located in Fremont, California where we currently own approximately 119,000 square feet of space. We lease 16.9 acres (736,166 square feet) of land from the City of Manchester in New Hampshire and we lease 225,000 square feet of manufacturing and office space in Manchester, NH consisting of our display graphics operations and manufacturing facility. The lease is for a six-year term with MUFG Americas Capital Leasing & Finance, LLC (“MUFG”), formerly Bank of Tokyo – Mitsubishi UFJ Leasing & Finance LLC ("BTMU").

We own and lease additional facilities throughout the United States and various international locations, including, but not limited to, Belgium, China, Germany, India, Israel, Italy, Netherlands, Spain, and the United Kingdom.

In 2018, land and one building we owned in Meredith, NH were sold for $1.1 million that was held-for-sale as of December 31, 2017. The second building and related land we own in Meredith, NH continue to be classified as held-for-sale on the Consolidated Balance Sheet as of December 31, 2018.

We believe that our current facilities are adequate to meet our ongoing needs, and that, if we require additional space, we will be able to obtain additional facilities on commercially reasonable terms.



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Item 3: 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.

For a description of our significant pending legal proceedings, please see Note 13Commitments and Contingencies of Notes to Consolidated Financial Statements.


Item 4: Mine Safety Disclosures
Not applicable.


PART II


Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock has traded on The Nasdaq Global Select Market (formerly The NASDAQ National Market) under the symbol EFII since October 2, 1992.

As of February 1, 2019, there were 100 stockholders of record, excluding a substantially greater number of “street name” holders or beneficial holders of our common stock, whose shares are held of record by banks, brokers, and other financial institutions.

We did not declare or pay cash dividends on our common stock during 2018 and 2017. We anticipate that we will retain all available funds for the repayment of our indebtedness and the operation of our business, and we do not plan to pay any cash dividends in the foreseeable future. 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.

Equity Compensation Plan Information

Information regarding our equity compensation plans may be found in Note 15Stock-based Compensation and Other Employee Benefits of Notes to Consolidated Financial Statements and Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters of this Annual Report on Form 10-K and is incorporated herein by reference.



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Repurchases of Equity Securities

Our stock repurchases during the year ended December 31, 2018 were as follows (in thousands except per share amounts):
Fiscal month
 
Total number
of shares
purchased (1)
 
Average price
paid per share
 
Total number of
shares
purchased as
part of publicly
announced
plans (1)
 
Approximate
dollar value of
shares that may
yet be purchased
under the plans (2)
January 2018
 
174

 
$
30.03

 
174

 
$
104,199

February 2018
 
229

 
28.12

 
224

 
97,890

March 2018
 
211

 
28.07

 
209

 
92,019

April 2018
 
154

 
27.93

 
138

 
88,168

May 2018
 
47

 
28.53

 
45

 
86,878

June 2018
 
170

 
34.01

 
169

 
81,117

July 2018
 
176

 
34.01

 
176

 
75,142

August 2018
 
219

 
31.18

 
200

 
68,333

September 2018
 
297

 
35.92

 
279

 
58,921

October 2018
 
350

 
31.34

 
348

 
48,005

November 2018
 
1,513

 
27.62

 
1,457

 
8,004

December 2018
 
317

 
26.06

 
307

 
4

Total
 
3,857

 
29.43

 
3,726

 
 
 
(1) 
The difference between total number of shares purchased and total number of shares purchased as part of publicly announced program is the shares withheld by us to satisfy any tax withholding obligations incurred in connection with the vesting of restricted stock units ("RSUs").

(2) 
On September 11, 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 repurchase authorization to $153.8 million. This authorization commenced on the date of approval and expired December 31, 2018. Under this publicly announced program, we repurchased 3.7 million shares for an aggregate purchase price of $109.4 million during the year ended December 31, 2018.




38




Comparison of Cumulative Total Return among Electronics For Imaging, Inc., NASDAQ Composite, and NASDAQ Computer Manufacturers Index

The stock price performance graph below includes information required by the SEC and shall not be deemed incorporated by reference by any general statement incorporating by reference in this Annual Report on Form 10-K into any filing under the Securities Act or under the Exchange Act, except to the extent the Company specifically incorporates this information by reference, and shall not otherwise be deemed soliciting material or filed under the Securities Act or the Exchange Act, or subject to the liabilities of Section 18 of the Exchange Act.

The following graph compares cumulative total returns based on an initial investment of $100 in our common stock to the NASDAQ Composite and the NASDAQ Computer Manufacturers Index. The stock price performance shown on the graph below is not indicative of future price performance and only reflects the Company’s relative stock price for the five-year period ending on December 31, 2018. All values assume reinvestment of dividends and are calculated at December 31 of each year.
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12741026&doc=15


39




Item 6: Selected Financial Data
The following table summarizes selected consolidated financial data as of and for the five years ended December 31, 2018. This information should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements and related notes thereto. For a more detailed description, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
(in thousands, except per share amounts):
 
 
For the years ended December 31,
 
 
2018
 
2017
 
2016
 
2015
 
2014
Operations (1)
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
1,015,021

 
$
993,260

 
$
992,065

 
$
882,513

 
$
790,427

Gross profit
 
$
498,573

 
$
506,456

 
$
508,165

 
$
457,430

 
$
429,737

Income from operations (2)
 
$
19,686

 
$
27,547

 
$
55,819

 
$
54,689

 
$
53,439

Net income (loss) (2) (3)
 
$
(971
)
 
$
(15,345
)
 
$
44,949

 
$
32,199

 
$
33,714

Net income (loss) per basic common share
 
$
(0.02
)
 
$
(0.33
)
 
$
0.96

 
$
0.68

 
$
0.72

Net income (loss) per diluted common share
 
$
(0.02
)
 
$
(0.33
)
 
$
0.94

 
$
0.67

 
$
0.70

Shares used in basic per-share calculation
 
44,429

 
46,281

 
46,900

 
47,217

 
46,866

Shares used in diluted per-share calculation
 
44,429

 
46,281

 
47,797

 
48,150

 
48,406

 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31,
 
 
2018
 
2017
 
2016
 
2015
 
2014
Financial Position
 
 
 
 
 
 
 
 
 
 
Cash, cash equivalents, and short-term investments
 
$
411,401

 
$
319,042

 
$
459,741

 
$
497,367

 
$
616,732

Working capital (4)
 
212,131

 
456,668

 
549,668

 
584,782

 
666,405

Total assets
 
1,499,034

 
1,458,001

 
1,478,929

 
1,448,246

 
1,297,422

Convertible senior notes, net (4) (5)
 
118,688

 
318,957

 
304,484

 
290,734

 
277,670

Stockholders’ equity
 
726,108

 
781,311

 
826,015

 
822,902

 
788,689

 
(1) 
Includes acquired company results of operations beginning on the date of each acquisition (there were no acquisitions during the year ended December 31, 2018). See Item 1 – Business for a summary of recent acquisitions.

(2) 
Income from operations and net income (loss) includes the following:
 
 
For the years ended December 31,
 
 
2018
 
2017
 
2016
 
2015
 
2014
Amortization of identified intangibles
 
$
45,291

 
$
47,339

 
$
39,560

 
$
26,510

 
$
20,673

Stock-based compensation expense
 
45,281

 
26,532

 
31,826

 
34,071

 
36,061

Restructuring and other costs
 
13,581

 
7,562

 
6,731

 
5,731

 
6,578

Revenue recognition and accounting review costs (6)
 
1,888

 
6,443

 

 

 

Litigation settlement expenses
 
99

 
436

 
1,027

 
584

 
897

Change in fair value of contingent consideration (7)
 
(21,486
)
 
6,472

 
6,939

 
(2,135
)
 
(3,810
)
Acquisition-related transaction costs
 
1,193

 
2,058

 
2,241

 
5,494

 
1,501

Total charges, net of recoveries
 
$
85,847

 
$
96,842

 
$
88,324

 
$
70,255

 
$
61,900

 
(3) 
Net income (loss) includes the following:



40




Tax charge of $27.5 million during the year ended December 31, 2017, and a tax benefit of $1.2 million in the year ended December 31, 2018, resulting from the enactment of the 2017 Tax Act and our accounting under SAB 118.

Net tax benefits of $3.6, $3.5, $16.6, $7.4, and $2.9 million for the years ended December 31, 2018, 2017, 2016, 2015 and 2014, respectively, resulting from the release of previously unrecognized tax benefits due to the expiration of U.S. federal, state, and foreign statutes of limitations.

Tax benefit of $3.1 million during the year ended December 31, 2014 resulting from the increased valuation of intangible assets for Brazilian tax reporting.

(4) 
In September 2014, we completed a private placement of $345 million principal amount of the 2019 Notes. These notes contained rights to convert the note principal into common stock under certain circumstances. The notes mature on September 1, 2019. They were previously classified as long-term debt through December 31, 2017 but are classified as current debt on the Consolidated Balance Sheet as of December 31, 2018. See further information in Note 12 – Debt of Notes to Consolidated Financial Statements.

(5) 
In November 2018, we completed a private placement of $150 million principal amount of the 2023 Notes. These notes contained rights to convert the note principal into common stock under certain circumstances. See further information in Note 12 – Debt of Notes to Consolidated Financial Statements.

(6) 
As of December 31, 2017, our management concluded that we had material weaknesses in our internal control over financial reporting related to revenue recognition practices and the valuation of certain textile printer inventories. The review of our revenue recognition practices and valuation of textile printer inventories required that we expend significant management time and incurred significant accounting, legal, and other expenses of $1.9 and $6.4 million in the years ended December 31, 2018 and 2017, respectively, to investigate and remediate these material weaknesses. Please see Item 9A for management's report on internal control over financial reporting as of December 31, 2018 in which we concluded that the material weaknesses had been remediated.

(7) 
Many of our acquisitions include contingent consideration based on future financial performance of the acquired business against targets established in the acquisition agreements. We estimate the fair value of this contingent consideration at the acquisition date and record the amount as part of the initial purchase accounting. Over time, as new information becomes available concerning the acquired business's actual and projected performance against the targets, the fair value of the contingent consideration is periodically updated resulting in a charge, or credit to general and administrative expenses in the Consolidated Statements of Operations. These non-cash charges and (credits) are presented on this line item to provide additional information about fluctuations in our operating and net income (loss) by period.


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.



41




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 1The 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.



42




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.



43




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.



44




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.


45





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.



46




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.



47




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.


48





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.


49





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 9Property 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.



50




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


51




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


52




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.



53




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 9Property and Equipment, net, Note 12Debt, and Note 13Commitments and Contingencies of Notes to Consolidated Financial Statements, as well as


54




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


55




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.



56




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