EFI Reports Record Third Quarter Revenue For 2018

FREMONT, Calif., Oct. 29, 2018 (GLOBE NEWSWIRE) -- Electronics For Imaging, Inc. EFII, a world leader in customer-focused digital printing innovation, today announced its results for the third quarter of 2018.

For the three months ended September 30, 2018, the Company reported record third quarter revenue of $257.1 million, up 4% compared to third quarter 2017 revenue of $248.4 million. GAAP net income was $1.9 million compared to GAAP net income of $3.5 million for the same period in 2017 or $0.04 per diluted share compared to $0.07 per diluted share for the same period in 2017. Non-GAAP net income was $22.6 million, down 11% compared to non-GAAP net income of $25.4 million for the same period in 2017 or $0.50 per diluted share, down 7% compared to $0.54 per diluted share for the same period in 2017. Cash flow from operating activities was $12.9 million compared to $3.4 million during the same period in 2017.

For the nine months ended September 30, 2018, the Company reported revenue of $758.1 million, up 5% year-over-year compared to $724.1 million for the same period in 2017. GAAP net income was $2.1 million or $0.05 per diluted share, compared to $11.0 million or $0.23 per diluted share for the same period in 2017. Non-GAAP net income was $62.4 million or $1.38 per diluted share, compared to non-GAAP net income of $76.7 million or $1.63 per diluted share for the same period in 2017. Cash flow from operating activities for the nine months ended September 30, 2018 was $50.2 million compared to $42.4 million during the same period in 2017.

"EFI's reputation for developing innovative, industry-leading technology was a key factor in my decision to join the Company," said Bill Muir, CEO of EFI. "The Nozomi platform and its early success in transforming corrugated packaging from analog to digital is just one example of how EFI is accelerating the digital transformation of industries where colorful images matter.  I am excited to partner with the talented and passionate team at EFI to fully realize the significant opportunities in front of us and provide increasing value to our customers and shareholders."

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 "accelerate". "address", "ahead", "anticipate", "believe", "consider", "continue", "develop", "estimate", "expect", "further", "intend", "look", "plan", "progress" and "will" and statements in the future tense are forward looking statements. The statements in this press release that could be deemed forward-looking statements include statements regarding EFI's strategy, plans, expectations regarding its revenue growth, introduction of new products, product portfolio, productivity, future opportunities for EFI and its customers, demand for products, the CEO transition, and any statements or assumptions underlying any of the foregoing.

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

The statements in this press release are made as of the date of this press release and are subject to revision until the Company will have filed its Quarterly Report on Form 10-Q for the period ended September 30, 2018. EFI undertakes no obligation to update information contained in this press release. Amounts are subject to rounding.

For further information regarding risks and uncertainties associated with EFI's businesses, please refer to the section entitled "Risk Factors" in the Company's 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.

Impact of the Tax Cuts and Jobs Act of 2017

On December 22, 2017, the Tax Cuts and Jobs Act, which has wide-ranging impacts on EFI including, but not limited to, a Deemed Repatriation Transition Tax and the revaluation of current U.S. deferred tax assets and liabilities, was enacted. We recorded a $27.3 million charge in the fourth quarter of 2017 as a provisional estimate related to the aforementioned items. In the first quarter of 2018, we also recorded an additional $1.2 million charge related to the state tax impact associated with the Deemed Repatriation Transition Tax. In the third quarter of 2018, we recorded a benefit of $0.7 million, consisting of an additional U.S. tax charge of $0.4 million and a reduction of the anticipated state tax charge of $1.1 million. The SEC staff issued Staff Accounting Bulletin ("SAB") 118, which allows companies to record a provisional estimate of the income tax effects in the quarter in which it can make reasonable estimates of the effects of the new law. While we have calculated a reasonable estimate of the impact of the U.S. tax rate reduction and the amount of the Deemed Repatriation Transition Tax, we are still gathering additional information to refine and finalize our calculation of the impacts of the new tax law on our U.S. deferred tax assets and liabilities, the Deemed Repatriation Transition Tax, and other provisions associated with the Tax Cuts and Jobs Act. As we obtain additional information, we may record material adjustments in the fourth quarter of 2018, and will finalize the income tax effects in the fourth quarter of 2018 when our analysis is complete.

Use of Non-GAAP Financial Information

To supplement our condensed consolidated financial results prepared under generally accepted accounting principles, or GAAP, we use non-GAAP measures of net income, operating income, and earnings per diluted share that are GAAP net income, GAAP operating income, and GAAP earnings per diluted share adjusted to exclude certain costs, expenses, and gains. A reconciliation of the adjustments to GAAP results for the three and six months ended June 30, 2018 and 2017 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, including ex-currency are not in accordance with or an alternative to GAAP and may be materially different from other non-GAAP measures, including similarly titled non-GAAP measures, used by other companies. The presentation of this additional information should not be considered in isolation from, as a substitute for, or superior to, revenue, gross profit, operating expenses, net income or earnings per diluted share prepared in accordance with GAAP. Non-GAAP financial measures have limitations in that they do not reflect certain items that may have a material impact upon our reported financial results. We expect to continue to incur expenses of a nature similar to the non-GAAP adjustments described above, and exclusion of these items from our non-GAAP net income and non-GAAP earnings per diluted share should not be construed as an inference that these costs are unusual, infrequent, or non-recurring.

 

Electronics For Imaging, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

 Three Months Ended

September 30,
 Nine Months Ended

September 30,
 2018 2017 2018 2017
Revenue$257,134  $248,359  $758,072  $724,097 
Cost of revenue131,615  120,902  384,858  345,858 
Gross profit125,519  127,457  373,214  378,239 
Operating expenses:       
Research and development40,341  39,585  119,701  118,201 
Sales and marketing44,661  42,269  137,448  129,018 
General and administrative24,466  25,075  57,093  67,239 
Amortization of identified intangibles11,137  12,299  34,801  34,829 
Restructuring and other2,799  832  10,477  5,421 
Total operating expenses123,404  120,060  359,520  354,708 
Income from operations2,115  7,397  13,694  23,531 
Interest expense(4,796) (4,912) (14,739) (14,538)
Interest income and other income, net336  1,760  1,270  2,802 
Income (loss) before income taxes(2,345) 4,245  225  11,795 
Benefit from (Provision for) income taxes4,265  (791) 1,868  (795)
Net income$1,920  $3,454  $2,093  $11,000 
        
Diluted Earnings Per Share       
Net income per diluted common share$0.04  $0.07  $0.05  $0.23 
Shares used in diluted per-share calculation45,354  46,937  45,388  47,102 
            



Electronics For Imaging, Inc.

Reconciliation of GAAP Net Income to Non-GAAP Net Income

(in thousands, except per share data)

(unaudited)

 Three Months Ended September 30, Nine Months Ended September 30,
 2018 2017 Ex-

Currency


2018
 2018 2017 Ex-

Currency


2018
Net income$1,920  $3,454  $1,920  $2,093  $11,000  $2,093 
Cost of revenue related to fair value inventory adjustments7  77  7  31  1,260  31 
Ex-currency adjustment    1,189      576 
Amortization of intangibles assets11,137  12,299  11,137  34,801  34,829  34,801 
Stock based compensation – Cost of revenue904  486  904  2,715  1,985  2,715 
Stock based compensation – Research and development3,649  1,640  3,649  9,517  7,556  9,517 
Stock based compensation – Sales and marketing2,377  1,108  2,377  6,767  5,176  6,767 
Stock based compensation – General and administrative4,993  1,414  4,993  11,479  7,824  11,479 
Restructuring and other2,799  833  2,799  10,477  5,422  10,477 
General and administrative:           
Acquisition-related transaction costs164  637  164  931  1,820  931 
Changes in fair value of contingent consideration812  410  812  (11,860) 2,187  (11,860)
Revenue recognition accounting review costs and litigation and other settlements(88) 4,825  (88) 1,671  5,102  1,671 
Interest income and other income (expense), net:           
  Non-cash interest expense related to our convertible notes3,477  3,293  3,477  10,289  9,713  10,289 
  Foreign exchange fluctuation related to contingent consideration8  131  8  8  45  8 
  Balance sheet currency remeasurement impact    (672)     (1,644)
Tax effect of non-GAAP adjustments(9,565) (5,175) (9,664) (16,508) (17,201) (16,305)
Non-GAAP net income$22,594  $25,432  $23,012  $62,411  $76,718  $61,546 
            
Non-GAAP net income per diluted common share$0.50  $0.54  $0.51  $1.38  $1.63  $1.36 
Shares used in diluted per share calculation45,354  46,937  45,354  45,388  47,102  45,388 
                  



Electronics For Imaging, Inc.

Condensed Consolidated Balance Sheets

(in thousands)

(unaudited)

  September 30, 2018 December 31, 2017
Assets    
Current assets:    
Cash and cash equivalents $180,942  $170,345 
Short-term investments 112,986  148,697 
Accounts receivable, net of allowances of $30.2 million and $32.2 million, respectively 240,150  244,416 
Inventories 121,290  125,813 
Income taxes receivable 13,958  4,565 
Assets held for sale 3,143  4,200 
Other current assets 47,814  41,799 
Total current assets 720,283  739,835 
Property and equipment, net 79,495  98,762 
Restricted cash equivalents 39,809  32,531 
Goodwill 394,372  403,278 
Intangible assets, net 86,246  123,008 
Deferred tax assets 43,265  45,083 
Other assets 34,369  15,504 
Total assets $1,397,839  $1,458,001 
Liabilities and Stockholders' Equity    
Current liabilities:    
Accounts payable $118,703  $123,935 
Accrued and other liabilities 74,797  98,090 
Deferred revenue 65,181  55,833 
Convertible senior notes, net – current 330,367   
Income taxes payable 6,762  5,309 
Total current liabilities 595,810  283,167 
Convertible senior notes, net – non-current   318,957 
Imputed financing obligation related to build-to-suit lease   13,944 
Noncurrent contingent and other liabilities 17,307  28,801 
Deferred tax liabilities 6,151  11,652 
Noncurrent income taxes payable 18,305  20,169 
Total liabilities 637,573  676,690 
Total stockholders' equity 760,266  781,311 
Total liabilities and stockholders' equity $1,397,839  $1,458,001 
         



Electronics For Imaging, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 Nine Months Ended

September 30,
 2018 2017
Cash flows from operating activities:   
Net income$2,093  $11,000 
Adjustments to reconcile net income to net cash provided by operating activities:   
Depreciation and amortization50,094  48,029 
Deferred taxes(248) (9,149)
Provisions for bad debt and sales-related allowances2,424  10,868 
Provision for inventory obsolescence4,488  3,642 
Stock-based compensation expense30,478  22,541 
Non-cash accretion of interest expense on convertible notes and imputed financing obligation11,304  11,211 
Change in fair value of contingent consideration(11,573) 974 
Net change in derivative assets and liabilities(2,431) 737 
Other non-cash charges88  1,543 
Changes in operating assets and liabilities, net of effect of acquired businesses(36,562) (58,955)
Net cash provided by operating activities50,155  42,441 
Cash flows from investing activities:   
Purchases of short-term investments  (87,623)
Proceeds from sales and maturities of short-term investments35,129  164,979 
Purchases of restricted investments*  (15,775)
Purchases, net of proceeds from sales, of property and equipment(9,785) (8,745)
Proceeds from sale of held-for-sale building and land1,137   
Businesses purchased, net of cash acquired696  (16,739)
Net cash provided by investing activities*27,177  36,097 
Cash flows from financing activities:   
Proceeds from issuance of common stock10,165  11,730 
Purchases of treasury stock and net share settlements(52,500) (56,937)
Repayment of debt assumed through business acquisitions(11,956) (10,786)
Contingent consideration payments related to businesses acquired(3,116) (9,512)
Net cash used for financing activities(57,407) (65,505)
Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash equivalents(2,050) 4,168 
Increase in cash, cash equivalents, and restricted cash equivalents*17,875  17,201 
Cash, cash equivalents, and restricted cash equivalents at beginning of period*202,876  165,455 
Cash, cash equivalents, and restricted cash equivalents at end of period*$220,751  $182,656 

*Restricted Cash. ASU 2016-18, Statement of Cash Flows: Restricted Cash, which we adopted in Q1 2018, requires that the statement of cash flows explain the change in cash, cash equivalents, and restricted cash equivalents. Therefore, restricted cash equivalents are included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown above. This presentation is required to be presented retrospectively to prior periods.



Electronics For Imaging, Inc.

Revenue by Operating Segment and Geographic Area

(in thousands)

(unaudited)

 Three Months Ended

September 30,
 Nine Months Ended

September 30,
 2018 2017 2018 2017
Revenue by Operating Segment       
Industrial Inkjet$154,902  $142,930  $453,545  $407,886 
Productivity Software40,452  37,171  125,839  111,292 
Fiery61,780  68,258  178,688  204,919 
Total$257,134  $248,359  $758,072  $724,097 
        
Revenue by Geographic Area       
Americas$134,491  $129,488  $374,170  $353,397 
EMEA88,879  85,089  271,064  274,635 
APAC33,764  33,782  112,838  96,065 
Total$257,134  $248,359  $758,072  $724,097 
        
Revenue Ex-Currency Adjustment$901  $  $(15,867) $ 
Total$258,035  $248,359  $742,205  $724,097 
                

 

About our Non-GAAP Net Income and Adjustments

Use of Non-GAAP Financial Information

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

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

Use and Economic Substance of Non-GAAP Financial Measures

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

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

These excluded items are described below:

  • Cost of revenue related to fair value adjustment of the Free Flow Print Server business ("FFPS"). Inventory acquired in an acquisition must be recorded at fair value rather than historical cost in accordance with ASC 805, Business Combinations. The fair value of FFPS inventory reflects the manufacturing cost plus a portion of the expected gross profit. In 2017, we adjusted our cost of revenue to reflect the expected gross profit that was included in the inventory valuation under ASC 805. We believe this adjustment is useful to investors to understand the gross profit trends of our ongoing business.



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



  • Stock-based compensation expense recognized in accordance with ASC 718, Stock Compensation.



  • Restructuring and other consists of:



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



      •  Integration-related expenses were $0.9 and $3.2 million for the three and nine months ended September 30, 2018, respectively, and $0.2 and $1.0 million for the three and nine months ended September 30, 2017, respectively. We have acquired 18 businesses in the last 5 years, which have required significant information technology investment to integrate them into our business.
  • Acquisition-related transaction costs associated with businesses acquired during the periods reported and anticipated transactions of $0.2 and $0.9 million for the three and nine months ended September 30, 2018, respectively, and $0.6 and $1.8 million for the three and nine months ended September 30, 2017, respectively.



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



  • Non-cash interest expense on our Notes. Our Notes may be settled in cash on conversion. We are required to separately account for the liability (debt) and equity (conversion option) components of the Notes in a manner that reflects our non-convertible debt borrowing rate. Accordingly, for GAAP purposes, we are required to amortize a debt discount equal to the fair value of the conversion option as interest expense on our $345 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 accounting review costs and litigation and other settlements. As described in "Item 9A, Controls and Procedures" of our annual report on Form 10-K, for the year ended December 31, 2017, as amended, our management concluded that we had material weaknesses in our internal control over financial reporting as of December 31, 2017 related to revenue recognition practices and the valuation of certain textile digital inkjet printer inventories. Therefore, we did not maintain effective internal control over financial reporting or effective disclosure controls and procedures, both of which are requirements of the Securities Exchange Act of 1934, as of that date. The review of our revenue recognition practices has required that we expend significant management time and incur significant accounting, legal, and other expenses (credits) of $(0.1) and $1.7 million during the three and nine months ended September 30, 2018, respectively. We expect to incur additional costs in future periods.



  • Tax effect of non-GAAP adjustments. We use a constant non-GAAP tax rate of 19%, which we believe reflects the long-term average tax rate based on our international structure and geographic distribution of revenue and profit. The long-term average tax rate is calculated in accordance with the principles of ASC 740, Income Taxes, to estimate the non-GAAP income tax provision in each jurisdiction in which we operate after excluding the tax effect of the non-GAAP items described above, and $(0.7), $1.2 and $27.5 million of tax charges (benefits) recognized in Q3 18, Q1 18, and Q4 17, respectively, as a result of the 2017 Tax Act, which was enacted on December 22, 2017.



   
For more information:



Marc Olin

Chief Financial Officer

EFI

650-357-3500
 Investor Relations:



JoAnn Horne

Market Street Partners

415-445-3235
   

Electronics For Imaging, Inc.

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