October 26, 2017

EFI Reports Third Quarter 2017 Results

FREMONT, Calif., Oct. 26, 2017 (GLOBE NEWSWIRE) -- Electronics For Imaging, Inc. (Nasdaq:EFII), a world leader in customer-focused digital printing innovation, today announced its results for the third quarter of 2017. 

For the quarter ended September 30, 2017, the Company reported record third quarter revenue of $248.4 million, up 1% compared to third quarter 2016 revenue of $245.6 million.  GAAP net income was $1.9 million, down 89% compared to $17.7 million for the same period in 2016 or $0.04 per diluted share, down 89% compared to $0.37 per diluted share for the same period in 2016.  Non-GAAP net income was $22.7 million, down 18% compared to non-GAAP net income of $27.6 million for the same period in 2016 or $0.48 per diluted share, down 17% compared to $0.58 per diluted share for the same period in 2016.  Cash flow from operating activities was $3.4 million, down 86% compared to $24.0 million during the same period in 2016.

For the nine months ended September 30, 2017, the Company reported revenue of $724.1 million, down 0.2% year-over-year compared to $725.4 million for the same period in 2016.  GAAP net income was $9.4 million or $0.20 per diluted share, compared to $25.0 million or $0.52 per diluted share for the same period in 2016.  Non-GAAP net income was $74.0 million or $1.57 per diluted share, compared to non-GAAP net income of $80.5 million or $1.68 per diluted share for the same period in 2016.  Cash flow from operating activities for the nine months ended September 30, 2017, was $42.4 million, down 24% compared to $55.8 million during the same period in 2016. 

"We are clearly disappointed in the third quarter results, which fell below our expectations largely due to delayed deals in our direct business," said Guy Gecht, CEO of EFI.  "To reaccelerate growth, we are reallocating budget and talent toward our largest opportunities, in textile and packaging, along with making organizational changes and adding senior positions to improve focus and execution."

Conference Call

EFI will discuss the Company's financial results by conference call at 5:00 pm ET/2:00 pm PT today.  Instructions for listening to the conference call over the Web are available on the investor relations portion of EFI's website at www.efi.com.

About EFI       

EFI™ is a global technology company, based in Silicon Valley, and is leading the worldwide transformation from analog to digital imaging. We are passionate about fueling customer success with products that increase competitiveness and boost productivity. To do that, we develop breakthrough technologies for the manufacturing of signage, packaging, textiles, ceramic tiles, and personalized documents, with a wide range of printers, inks, digital front ends, and a comprehensive business and production workflow suite that transforms and streamlines the entire production process. (www.efi.com)

Safe Harbor for Forward Looking Statements

Certain statements in this press release are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements other than statements of historical fact including words such as "address", "anticipate", "believe", "consider", "continue", "develop", "estimate", "expect", "further", "look", "plan", and "progress" and statements in the future tense are forward looking statements.  The statements in this press release that could be deemed forward-looking statements include statements regarding EFI's strategy, plans, expectations regarding its revenue growth, introduction of new products, product portfolio, productivity, future opportunities for EFI and its customers, demand for products, and any statements or assumptions underlying any of the foregoing.

Forward-looking statements are subject to certain risks and uncertainties that could cause our actual future results to differ materially, or cause a material adverse impact on our results.  Potential risks and uncertainties include, but are not necessarily limited to, intense competition in each of our businesses, including competition from products developed by EFI's customers; our ability to remediate the material weaknesses identified in EFI's internal control over financial reporting; the uncertainty of the outcome of the pending securities lawsuits against EFI; unforeseen expenses; fluctuations in currency exchange rates; the difficulty of aligning expense levels with revenue; management's ability to forecast revenues, expenses and earnings;  our ability to successfully integrate acquired businesses; changes in the mix of products sold; the uncertainty of market acceptance of new product introductions; challenge of managing asset levels, including inventory and variations in inventory levels; the uncertainty of continued success in technological advances; the challenges of obtaining timely, efficient and quality product manufacturing and supply of components;  any world-wide financial and economic difficulties and downturns; adverse tax-related matters such as tax audits, changes in our effective tax rate or new tax legislative proposals; the unpredictability of development schedules and commercialization of products by the leading printer manufacturers and declines or delays in demand for our related products; the impact of changing consumer preferences on demand for our textile products; litigation involving intellectual property rights or other related matters; the uncertainty regarding the amount and timing of future share repurchases by EFI and the origin of funds used for such repurchases; the market prices of EFI's common stock prior to, during and after the share repurchases; and any other risk factors that may be included from time to time in the Company's SEC reports.

The statements in this press release are made as of the date of this press release. EFI undertakes no obligation to update information contained in this press release. Amounts are subject to rounding.

For further information regarding risks and uncertainties associated with EFI's businesses, please refer to the section entitled "Risk Factors" in the Company's SEC filings, including, but not limited to, its annual report on Form 10-K and its quarterly reports on Form 10-Q, copies of which may be obtained by contacting EFI's Investor Relations Department by phone at 650-357-3828 or by email at investor.relations@efi.com or EFI's Investor Relations website at www.efi.com.

Use of Non-GAAP Financial Information
To supplement our condensed consolidated financial results prepared under generally accepted accounting principles, or GAAP, we use non-GAAP measures of net income and earnings per diluted share that are GAAP net income and GAAP earnings per diluted share adjusted to exclude certain costs, expenses, and gains. A reconciliation of the adjustments to GAAP results for the three and nine months ended September 30, 2017 and 2016 is provided below. In addition, an explanation of how management uses non-GAAP financial information to evaluate its business, the substance behind management's decision to use this non-GAAP financial information, the material limitations associated with the use of non-GAAP financial information, the manner in which management compensates for those limitations, and the substantive reasons management believes that this non-GAAP financial information provides useful information to investors is included under "About our Non-GAAP Net Income and Adjustments" after the tables below.

Our non-GAAP measures are not in accordance with or an alternative to GAAP and may be materially different from other non-GAAP measures, including similarly titled non-GAAP measures, used by other companies.  The presentation of this additional information should not be considered in isolation from, as a substitute for, or superior to, net income or earnings per diluted share prepared in accordance with GAAP.  Non-GAAP financial measures have limitations in that they do not reflect certain items that may have a material impact upon our reported financial results. We expect to continue to incur expenses of a nature similar to the non-GAAP adjustments described above, and exclusion of these items from our non-GAAP net income and non-GAAP earnings per diluted share should not be construed as an inference that these costs are unusual, infrequent, or non-recurring.

Electronics For Imaging, Inc.         
Condensed Consolidated Statements of Operations         
(in thousands, except per share data)         
(unaudited)         
          
  Three Months Ended Nine Months Ended 
  September 30, September 30, 
          
   2017   2016   2017   2016  
          
Revenue $  248,359  $  245,575  $  724,097  $  725,358  
Cost of revenue    123,315     120,381     348,272     356,720  
Gross profit    125,044     125,194     375,825     368,638  
  Operating expenses:         
  Research and development    40,568     36,933     119,184     111,731  
  Sales and marketing    42,269     43,060     129,018     127,360  
  General and administrative    23,901     24,088     66,065     66,366  
  Amortization of identified intangibles    12,299     10,395     34,829     29,360  
  Restructuring and other    833     1,308     5,422     5,733  
 Total operating expenses    119,870     115,784     354,518     340,550  
Income from operations    5,174     9,410     21,307     28,088  
Interest expense    (4,912)    (4,510)    (14,538)    (13,243) 
Interest income and other income, net    1,760     915     2,802     1,114  
Income before income taxes    2,022     5,815     9,571     15,959  
Benefit from (provision for) income taxes    (142)    11,847     (146)    9,041  
 Net income $  1,880  $  17,662  $  9,425  $  25,000  
          
Diluted EPS calculation         
Net income $  1,880  $  17,662  $  9,425  $  25,000  
 Net income per diluted common share $  0.04  $  0.37  $  0.20  $  0.52  
Shares used in diluted per share calculation    46,937     47,621     47,102     47,791  
          

 


Electronics For Imaging, Inc.            
Reconciliation of GAAP Net Income to Non-GAAP Net Income            
(in thousands, except per share data)            
(unaudited)            
             
  Three Months Ended Nine Months Ended
  September 30, September 30,
             
      Ex-Currency     Ex-Currency
   2017   2016   2017   2017   2016   2017 
             
Net income $  1,880  $  17,662  $  1,880  $  9,425  $  25,000  $  9,425 
Cost of revenue related to fair value inventory adjustment    77     —      77      1,260     —      1,260 
Ex-currency adjustment    —      —      (295)    —      —      1,126 
Stock based compensation — Cost of revenue    486     643     486     1,985     2,187     1,985 
Stock based compensation — Research and development    1,640     2,061     1,640     7,556     8,631     7,556 
Stock based compensation — Sales and marketing    1,108     2,284     1,108     5,176     6,669     5,176 
Stock based compensation — General and administrative    1,414     3,590     1,414     7,824     12,214     7,824 
Amortization of identified intangibles    12,299     10,395     12,299     34,829     29,360     34,829 
Restructuring and other    833     1,308     833     5,422     5,733     5,422 
General and administrative:            
  Acquisition-related transaction costs    637     434     637     1,820     1,700     1,820 
  Changes in fair value of contingent consideration    410     4,252     410     2,187     6,310     2,187 
  Revenue recognition review costs and litigation settlements  3,651   71     3,651     3,929     912     3,929 
Interest income and other income, net            
  Non-cash interest expense related to our convertible notes  3,293   3,155     3,293     9,713     9,237     9,713 
  Foreign exchange fluctuation related to contingent consideration  131   5     131     45     461     45 
  Balance sheet currency remeasurement impact   —     —      (350)   —     —      1,343 
Tax effect of non-GAAP adjustments    (5,178)    (18,309)    (5,056)    (17,205)    (27,922)    (17,674)
Non-GAAP net income $  22,681  $  27,551  $  22,158  $  73,966  $  80,492  $  75,966 
             
Non-GAAP net income per diluted common share $  0.48  $  0.58  $  0.47  $  1.57  $  1.68  $  1.61 
Shares used in diluted per share calculation    46,937     47,621     46,937     47,102     47,791     47,102 


Electronics For Imaging, Inc.    
Condensed Consolidated Balance Sheets    
(in thousands)    
(unaudited)    
     
  September 30, December 31,
    2017  2016
     
Assets    
Cash and cash equivalents $  175,830 $  164,313
Short-term investments    217,923    295,428
Accounts receivable, net    236,709    220,813
Inventories    130,122    99,075
Other current assets    49,424    36,637
  Total current assets    810,008    816,266
Property and equipment, net    106,641    103,304
Goodwill    387,001    359,841
Intangible assets, net    126,567    122,997
Restricted investments and cash equivalents    27,753    6,252
Other assets    76,727    72,836
  Total assets $  1,534,697 $  1,481,496
     
Liabilities & Stockholders' equity    
Accounts payable $  133,322 $  114,287
Accrued and other liabilities    168,224    139,318
Income taxes payable    7,302    10,256
  Total current liabilities    308,848    263,861
Convertible senior notes, net    315,255    304,484
Imputed financing obligation related to build-to-suit lease    14,087    14,152
Noncurrent contingent and other liabilities    31,068    42,786
Deferred tax liabilities    13,763    16,351
Noncurrent income taxes payable    12,439    12,030
  Total liabilities    695,460    653,664
Total stockholders' equity    839,237    827,832
  Total liabilities and stockholders' equity $  1,534,697 $  1,481,496


Electronics For Imaging, Inc.    
Condensed Consolidated Statements of Cash Flows    
(in thousands)    
(unaudited)    
       
    Nine Months Ended
    September 30,
       
     2017   2016 
Cash flows from operating activities:    
Net income $  9,425  $  25,000 
Adjustments to reconcile net income to net cash provided by operating activities:    
 Depreciation and amortization   47,894   40,734 
 Deferred taxes   (8,317)  (22,127)
 Stock-based compensation, net of cash settlements     22,541     26,743 
 Provision for inventory obsolescence     6,056     4,492 
 Provision for bad debts and sales-related allowances     10,868     7,558 
 Non-cash accretion of interest expense on convertible notes and imputed financing obligation   11,211     9,991 
 Other non-cash charges and gains     3,253     5,920 
Changes in operating assets and liabilities, net of effect of acquired businesses    (60,490)    (42,487)
Net cash provided by operating activities    42,441     55,824 
       
Cash flows from investing activities:    
 Purchases of short-term investments   (87,623)  (195,904)
 Proceeds from sales and maturities of short-term investments   164,979   223,206 
 Purchases of restricted investments and cash equivalents   (21,459)  (3,745)
 Purchases, net of proceeds from sales, of property and equipment   (8,745)  (17,611)
 Businesses purchased, net of cash acquired   (16,739)  (19,614)
Net cash provided by (used for) investing activities    30,413     (13,668)
       
Cash flows from financing activities:    
 Proceeds from issuance of common stock   11,730   10,359 
 Purchases of treasury stock and net share settlements   (56,937)  (65,354)
 Repayment of debt assumed through business acquisitions and debt issuance costs (10,786)  (8,539)
 Contingent consideration payments related to businesses acquired   (9,512)  (1,868)
Net cash used for financing activities    (65,505)    (65,402)
       
 Effect of foreign exchange rate changes on cash and cash equivalents     4,168     2,158 
 Increase (decrease) in cash and cash equivalents     11,517     (21,088)
 Cash and cash equivalents at beginning of period     164,313     164,091 
Cash and cash equivalents at end of period $  175,830  $  143,003 


Electronics For Imaging, Inc.         
Revenue by Operating Segment and Geographic Area      
(in thousands)            
(unaudited)            
             
  Three Months Ended Nine Months Ended    
  September 30, September 30,    
             
Revenue by Operating Segment  2017   2016  2017  2016    
  Industrial Inkjet $  142,930  $  143,004 $  407,886 $  408,926    
  Productivity Software    37,171     39,663    111,292    108,554    
  Fiery    68,258     62,908    204,919    207,878    
  Total $  248,359  $  245,575 $  724,097 $  725,358    
             
Revenue by Geographic Area            
  Americas $  129,488  $  128,252 $  353,397 $  363,977    
  EMEA    85,089     85,009    274,635    264,469    
  APAC    33,782     32,314    96,065    96,912    
  Total $  248,359  $  245,575 $  724,097 $  725,358    
             
Revenue Ex-Currency Adjustment    (3,622)   —     1,652   —     
  Total $  244,737  $  245,575 $  725,749 $  725,358    

About our Non-GAAP Net Income and Adjustments

Use of Non-GAAP Financial Information

To supplement our condensed consolidated financial results prepared in accordance with GAAP, we use non-GAAP measures of net income and earnings per diluted share that are GAAP net income and GAAP earnings per diluted share adjusted to exclude certain costs, expenses, and gains.

We believe that the presentation of non-GAAP net income and non-GAAP earnings per diluted share provides important supplemental information regarding certain costs, expenses, gains, and significant items that we believe are important to understanding financial and business trends relating to our financial condition and results of operations. Non-GAAP net income and non-GAAP earnings per diluted share are among the primary indicators used by management as a basis for planning and forecasting future periods and by management and our Board of Directors to determine whether our operating performance has met specified targets and thresholds. Management uses non-GAAP net income and non-GAAP earnings per diluted share when evaluating operating performance because it believes the exclusion of the items described below, for which the amounts and/or timing may vary significantly depending on our activities and other factors, facilitates comparability of our operating performance from period to period. We have chosen to provide this information to investors so they can analyze our operating results in the same way that management does and use this information in their assessment of our business and the valuation of our Company.

Use and Economic Substance of Non-GAAP Financial Measures

We compute non-GAAP net income, and non-GAAP earnings per diluted share by adjusting GAAP net income and GAAP earnings per diluted share to remove the impact of amortization of acquisition-related intangibles, stock-based compensation expense, restructuring and other expenses, acquisition-related transaction expenses, costs to integrate such acquisitions into our business, incremental cost of revenue due to the fair value adjustment to inventories acquired in business combinations, changes in the fair value of contingent consideration, revenue recognition review costs and litigation settlement charges, and non-cash interest expense related to our 0.75% convertible senior notes ("Notes").  We use a constant non-GAAP tax rate of 19%, which we believe reflects the long term average tax rate based on our international structure and geographic distribution of revenue and profit.

Ex-Currency.  To better understand trends in our business, we believe it is helpful to adjust our statement of operations to exclude the impact of year-over-year changes in the translation of foreign currencies into U.S. dollars. This is a non-GAAP measure that is calculated by adjusting revenue and non-GAAP net income by using historical exchange rates in effect during the comparable prior year period and removing the balance sheet currency re-measurement impact from interest income and other income (expense), net, including removal of any hedging gains and losses. We refer to these adjustments as "ex-currency." Management believes the ex-currency measures provide investors with an additional perspective on year-over-year financial trends and enables investors to analyze our operating results in the same way management does. The year-over-year currency impact can be determined as the difference between year-over-year actual growth rates and year-over-year ex-currency growth rates.

These excluded items are described below:

  • Inventory acquired in the acquisition of the Free Flow Print Server business ("FFPS") is required to be recorded at fair value rather than historical cost in accordance with ASC 805. The fair value of FFPS inventory reflects the manufacturing cost plus a portion of the expected gross profit. We have adjusted our cost of revenue to reflect the expected gross profit that was included in the inventory valuation under ASC 805. We believe this adjustment is useful to investors to understand the gross profit trends of our ongoing business.

  • Intangible assets acquired to date are being amortized on a straight-line basis.

  • Stock-based compensation expense of $22.5 and $29.7 million during the nine months ended September 30, 2017 and 2016, respectively, consists of $22.5 and $26.9 million of stock-based compensation expense recognized in accordance with ASC 718, Stock Compensation, and the non-cash settlement of $2.8 million of vacation liabilities settled through the issuance of RSUs during the nine months ended September 30, 2016, which is not included in the GAAP presentation of our stock-based compensation expense.

  • Restructuring and other expenses consists of:

    • Restructuring charges incurred as we consolidate the number and size of our facilities and, as a result, reduce the size of our workforce.

    • Expenses incurred to integrate businesses acquired of $0.2 and $1.0 million for the three and nine months ended September 30, 2017, respectively, and $0.6 and $1.5 million for the three and nine months ended September 30, 2016 respectively.

  • Acquisition-related transaction costs associated with businesses acquired during the periods reported and anticipated transactions of $0.6 and $1.8 million for the three and nine months ended September 30, 2017, respectively, and $0.4 and $1.7 million for the three and nine months ended September 30, 2016, respectively.

  • Changes in fair value of contingent consideration. Our management determined that we should analyze the total return provided by the investment when evaluating operating results of an acquired entity. The total return consists of operating profit generated from the acquired entity compared to the purchase price paid, including the final amounts paid for contingent consideration without considering any post-acquisition adjustments related to changes in the fair value of the contingent consideration. Because our management believes the final purchase price paid for the acquisition reflects the accounting value assigned to both contingent consideration and to the intangible assets, we exclude the GAAP impact of any adjustments to the fair value of acquisition-related contingent consideration from the operating results of an acquisition in subsequent periods, including the related foreign exchange fluctuation impact. We believe this approach is useful in understanding the long-term return provided by our acquisitions and that investors benefit from a supplemental non-GAAP financial measure that excludes the impact of this adjustment

  • Non-cash interest expense on our Notes. Our Notes may be settled in cash on conversion. We are required to separately account for the liability (debt) and equity (conversion option) components of the Notes in a manner that reflects our non-convertible debt borrowing rate. Accordingly, for GAAP purposes, we are required to amortize a debt discount equal to the fair value of the conversion option as interest expense on our $345 million of 0.75% convertible senior notes that were issued in a private placement in September 2014 over the term of the Notes.

  • Revenue recognition review costs and litigation settlements.  As described in "Item 9A, Controls and Procedures" of our annual report on Form 10-K, for the year ended December 31, 2016, as amended, our management concluded that we had material weaknesses in our internal control over financial reporting as of December 31, 2016 related to revenue recognition practices and therefore did not maintain effective internal control over financial reporting or effective disclosure controls and procedures, both of which are requirements of the Securities Exchange Act of 1934, as of that date. The review of our revenue recognition practices has required that we expend significant management time and incur significant accounting, legal, and other expenses totaling $3.6 million during the three and nine months ended September 30, 2017, and we expect to incur additional costs in the future periods.

    We settled or accrued reserves related to several litigation claims of $0.1 and $0.4 million for the three and nine months ended September 30, 2017, respectively, and $0.1 and $0.9 million during the three and nine months ended September 30, 2016, respectively.

  • Tax effect of non-GAAP adjustments. We use a constant non-GAAP tax rate of 19%, which we believe reflects the long-term average tax rate based on our international structure and geographic distribution of revenue and profit. The long-term average tax rate is calculated in accordance with the principles of ASC 740, Income Taxes, to estimate the non-GAAP income tax provision in each jurisdiction in which we operate after excluding the tax effect of the non-GAAP items described above.

For more information:
Marc Olin
Chief Financial Officer
EFI
650-357-3500

Investor Relations:
JoAnn Horne
Market Street Partners
415-445-3235


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