10-K 1 d835501d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

 

FORM 10-K

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014

 

¨ 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  x    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  x

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  x    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  x    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.    ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer       x    Accelerated filer    ¨
Non-accelerated filer       ¨    Smaller reporting company    ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  x

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 30, 2014 was $2,095,724.080.*

The number of shares outstanding of the registrant’s common stock, $.01 par value per share, as of January 28, 2015 was 46,894,719.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement to be delivered to stockholders in connection with the 2015 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 30, 2014, the last business day of the registrant’s second quarter of the 2014 fiscal year. Excludes 391,230 shares of common stock held by directors, executive officers, and stockholders known to the registrant to hold 10% or more of the registrant’s outstanding common stock in that such persons may be deemed to be affiliates. This determination of executive officer or affiliate status is not necessarily a conclusive determination for other purposes. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant, or that such person is controlled by or under common control with the registrant.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PART I   

ITEM 1

  Business      2   

ITEM 1A    

  Risk Factors      18   

ITEM 1B

  Unresolved Staff Comments      33   

ITEM 2

  Properties      33   

ITEM 3

  Legal Proceedings      34   

ITEM 4

  Mine Safety Disclosures      35   
PART II   

ITEM 5

  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      36   

ITEM 6

  Selected Financial Data      39   

ITEM 7

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      40   

ITEM 7A

  Quantitative and Qualitative Disclosures about Market Risk      76   

ITEM 8

  Financial Statements and Supplementary Data      79   

ITEM 9

  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      146   

ITEM 9A

  Controls and Procedures      146   

ITEM 9B

  Other Information      148   
PART III   

ITEM 10

  Directors, Executive Officers and Corporate Governance      149   

ITEM 11

  Executive Compensation      149   

ITEM 12

  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      149   

ITEM 13

  Certain Relationships and Related Transactions, and Director Independence      150   

ITEM 14

  Principal Accountant Fees and Services      150   
PART IV   

ITEM 15

  Exhibits and Financial Statement Schedules      151   

Signatures

     156   
  

Exhibit index

  

EXHIBIT 12.1

  

EXHIBIT 21

  

EXHIBIT 23.1

EXHIBIT 23.2

  

  

EXHIBIT 31.1

  

EXHIBIT 31.2

  

EXHIBIT 32.1

  

EXHIBIT 101

  


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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, the words “anticipate,” “believe,” “continue,” “estimate,” “expect,” “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.

 

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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

Filings

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. The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at Room 1580, 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet website that contains reports, proxy statements, information statements, and other information regarding issuers, including EFI, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at http://www.sec.gov.

We also make available free of charge through our internet website (http://www.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. None of the information on our website is incorporated by reference into our reports filed with, or furnished to, the SEC.

General

EFI was incorporated in Delaware in 1988 and commenced operations in 1989. Our initial public offering of common stock was effective 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 are a world leader in customer-centric digital printing innovation focused on the transformation of the printing, packaging, and ceramic tile decorative industries from the use of traditional analog based presses to digital on-demand printing. Our products include industrial super-wide, wide format, label and packaging, and ceramic tile decoration digital inkjet printers that utilize our digital ink, digital inkjet printer parts, and professional services; print production workflow, web-to-print, cross-media marketing, and business process automation solutions; and color digital front ends (“DFEs”) creating an on-demand digital printing ecosystem. Our inks include digital ultra-violet (“UV”), light emitting diode (“LED”), ceramic, textile dye sublimation, and thermoforming ink. Our award-winning business process automation solutions are integrated from creation to print and are vertically integrated with our industrial digital inkjet printers and products produced by the leading printer manufacturers that are driven by our Fiery DFEs.

Our product portfolio includes industrial inkjet products (“Industrial Inkjet”) including VUTEk super-wide and EFI wide format industrial digital inkjet printers, Jetrion label and packaging digital inkjet printing systems, and Cretaprint digital inkjet printers for ceramic tile decoration; print production workflow, web-to-print, cross-media marketing, and business process automation software (“Productivity Software”), which provides corporate printing, label and packaging, publishing, and mailing and fulfillment solutions for the printing industry; and Fiery DFEs (“Fiery”). Our integrated solutions and award-winning technologies are designed to automate print and business processes, streamline workflow, provide profitable value-added services, and produce accurate digital output.

 

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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. Industrial Inkjet consists of our VUTEk super-wide format, EFI wide format, Jetrion label and packaging, and Cretaprint ceramic tile decoration industrial digital inkjet printers; UV, LED, ceramic, textile dye sublimation, and thermoforming ink; digital inkjet printer parts; and professional services. Printing surfaces include paper, vinyl, corrugated, textile, glass, plastic, aluminum composite, ceramic tile, and many other flexible and rigid substrates.

Customer Base. Our industry-leading VUTEk super-wide format UV, LED, textile dye sublimation, and thermoforming industrial digital inkjet printers and ink 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 point of purchase displays, signage, banners, fleet graphics, building wraps, art exhibits, customized architectural elements, and other large graphic displays. We sell EFI hybrid and flatbed UV wide format graphics printers to the entry-level and mid-range industrial digital inkjet printer market. We sell Jetrion label and packaging digital inkjet printing systems, custom high-performance integration solutions, and specialty inks to the converting, packaging, and direct mail industries. We sell Cretaprint ceramic tile decoration digital inkjet printers and ceramic digital ink to the ceramic tile manufacturing and construction industries.

Our focus in 2014 has been to add LED capability to our printer models driven by strong market demand for our “cool cure” LED printing technology. LED technology is a green technology that saves our customers money by reducing their consumables waste and energy consumption. 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 devices that use conventional mercury arc lamps.

Super-wide Format. We launched next generation models and new finishing modules for our GS series of high-speed, high-resolution super-wide format industrial digital inkjet printers in 2014, 2013, and 2012. We launched the HS100 Pro UV inkjet press in 2013, which is an alternative to analog presses. The HS100 is a super-wide format industrial digital UV inkjet press incorporating pin & cure technology and utilizing an upgraded operating system platform. Pin & cure technology delivers precise ink lay down for better image quality and high production speeds, gloss control, an increased color gamut, and wider output capability.

The GS family of super-wide format industrial digital inkjet printers offers the highest quality and productivity in a super-wide format. We launched next generation models and new finishing modules for our GS series of high-speed, high-resolution super-wide format industrial digital inkjet printers in 2014, 2013, and 2012. The LX models incorporate LED technology. We added ultra-drop capability to our GS3250LX and GS2000LX hybrid printers in 2014. Ultra-drop technology offers smaller drop sizes and more precise control. Our newly developed Material Edge Guide (“MEG”) addresses challenges created by corrugated, fluted paper, and other plastic materials. The MEG eliminates the need to tape materials and allows customers to use less than perfect material. The five meter roll-to-roll GS5500LXr Pro LED inkjet printer was launched in 2014. The 3.2 meter GS3250LXr Pro was launched in 2013 and was the first dedicated roll-to-roll printer to use LED technology. The GS2000 Pro-TF and GS3250 Pro-TF industrial digital inkjet printers were launched in 2013 utilizing thermoforming digital UV-curable ink, which enables sign makers and printing companies to print directly onto thermoplastic sheet materials. In 2013, we launched the TX3250r, our textile dye sublimation printer, which enables textile and soft signage makers to print onto textile surfaces.

The H/QS family of super-wide format industrial digital inkjet printers offers high quality and productivity for the mid-range market in a super-wide format. In 2014, we launched the two meter H2000 Pro printer, which provides a more affordable entry point into high-end production printing for signage and graphics companies

 

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with the option to add features as their business grows. H2000 Pro users can run rigid, sheet and flexible media up to two inches thick. In 2012, we launched the QS2Pro and QS3Pro UV hybrid digital inkjet printers. These competitively-priced printers are driven by the HS100 operating system platform and combine greyscale print quality with production-level speeds for more color critical and higher premium printing than was previously available in our QS family of super-wide format printers.

Wide Format. Our EFI roll-to-roll, hybrid, and flatbed entry level production UV wide format inkjet printers are developed, manufactured, and marketed to the entry-level and mid-range industrial digital inkjet printer market. In 2014, we launched our wide format H1625 hybrid roll / flatbed printer. The H1625 includes LED technology enabling printing on a broad range of substrates, including media that cannot withstand the high-heat drying or curing methods used in other inkjet platforms. In 2012, we launched our R3225 roll-to-roll wide format (3.2 meter) industrial digital inkjet UV printer for the sign, banner, point-of-purchase, and graphics markets.

Label and Packaging. Our Jetrion label and packaging digital inkjet printers provide a wide array of label and packaging digital inkjet systems, custom high-performance integration solutions, and specialty digital UV and LED ink to the label and packaging industries. Our Jetrion 4950LX printer, which incorporates full LED curing and an image quality greater than 1000 dpi, was launched in 2013 and now offers a white printing option that was launched in 2014. We launched the 4900M and 4900M-330 UV digital inkjet printing systems in 2012, which provide a modular format that is upgradable for business growth as the label market continues to evolve from analog to digital. The 4900M-330 features a larger 13 inch print width.

Ceramic Tile Decoration. Our Cretaprint ceramic tile decoration digital inkjet printers are utilized by the ceramic tile manufacturing and construction industries. The ceramic tile decoration market is transitioning from analog to digital inkjet printing technology. We introduced the Cretaprint C4, which is our next generation ceramic tile decoration digital inkjet printer in 2014, which is scheduled to launch later in 2015. Electronics and ink systems have been upgraded to maximize accuracy in a broad range of production conditions. The Cretaprint, C4 printer allows the use of different print heads and digital applications on the same machine.

We launched the Cretaprint C3 ceramic tile decoration digital inkjet printer in 2012, which features a single chassis that accommodates up to eight print bars accessed via a slide-bar design and is independently configurable for printing and special decoration effects. This multipurpose printer offers over 1,000 customizable settings controlling print width, speed, printer direction, and ink discharge.

Our digital experience and award winning imaging technology in combination with Cretaprint leading digital ceramic tile decoration products enables us to provide the ceramic tile industry with expanded offerings, workflow software, and world-wide support. This capability was demonstrated in 2013 by the launch of the Fiery proServer, which is the first dedicated color management solution for the ceramic tile decoration market. The Fiery proServer for Cretaprint automates ceramic tile design, prototyping, and color separation while enabling the decoration of ceramic color tiles at different print locations under varying conditions including glazing, ink application, resolution, and kiln temperature.

Inks. VUTEk printers primarily use UV and LED curable ink, although our solvent ink printers remain in use in the field. We were first to market with digital UV ink incorporating “cool cure” LED technology for use in high-end production super-wide and wide format and label and packaging digital inkjet printing systems. We launched our ceramic digital ink in 2014

We accelerated our ink development capability with the purchase of technology from Polymeric Imaging, Inc. (“Polymeric”) in 2014. Polymeric has extensive experience developing inkjet inks that address important curing, adhesion, density, and durability issues that are encountered when printing on challenging substrates. We will use the technology to enhance capabilities for thermoforming and other high-elongation applications. Our range of versatile printing options for the super-wide format market was expanded in 2013 with the launch of our thermoforming digital UV-curable ink, which enables sign makers and printing companies to print directly onto

 

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thermoplastic sheet materials, which can then be formed into deep draw, high elongation parts while retaining hue and opacity. Our ink provides a recurring revenue stream generated from sales to our existing customer base of installed printers.

Our industrial digital inkjet printers and their related features are as follows:

 

Printer Type

 

Models

 

Capabilities

 

Application Examples

VUTEk super-wide format   HS, GS, and QS Series printers EFI and 3M(R) co-branded, UltraTex dye sublimation, 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 1000 dpi; flexible and rigid substrates; UV curable, LED “cool cure,” dye sublimation, and thermoforming digital UV inks.   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.
EFI wide format  

R family roll-to-roll

H family hybrid printers EFI H1625 LED 3M™ ink

  Speeds up to 87.2 square meters per hour (roll-to-roll) and 42.3 square meters per hour (hybrid), up to 1200 dpi, 4 colors plus white and greyscale, up to 2 inch thickness, flexible and rigid substrates, UV curable, and LED “cool cure.”   Wide format indoor and outdoor graphics with photographic image quality. Entry-level and mid-range market.
Jetrion label & packaging  

4950LX

4900M/4900M-330 4900ML

Jetrion inks

  Print resolutions greater than 1000 dpi; 4 colors plus white, printing width up to 14 inches, inches, UV curable, and LED “cool cure.” The 4900 platform enables digital printing and finishing in a single end-to-end system.   Primary and secondary label applications, Industrial label or flexible packaging Custom high performance integration solutions.
Cretaprint ceramic tile decoration  

Cretaprinter C3 Cretaplotter

Cretavision

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 industry

Productivity Software

To provide our customers with solutions to manage and streamline their printing operations, we have developed technology that enhances printing workflow and makes printing 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 interoperable products, services, and solutions.

 

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The Productivity Software operating segment includes (i) our business process automation software, including Monarch and Metrics; (ii) Pace, our business process automation software that is available in a cloud-based environment; (iii) Digital StoreFront, our cloud-based e-commerce solution that allows print service providers to accept, manage, and process printing orders over the internet; (iv) Radius, our business process automation software for label and packaging printers; and (v) other business process automation and e-commerce solutions designed for the printing and packaging industries.

Customer Base. We sell Pace to medium and large commercial print shops, display graphics providers, in-plant printing operations, and government printing operations; Monarch to large commercial, publication, direct mail, and digital print shops; Radius to the label and packaging industry; and Digital StoreFront to customers desiring e-commerce, web-to-print, and cross-media marketing solutions.

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 typically sell an annual full service maintenance agreement with each license that provides warranty protection from date of shipment. The sale and renewal of annual maintenance agreements provide a recurring revenue stream.

New Version Releases and Product Offerings. New versions have been released for each of our significant software products and new product offerings have resulted from strategic business acquisitions. New product offerings that have resulted from strategic business acquisitions are described under “Growth and Expansion Strategies” below. New versions of our PrintSmith, PrintFlow, Monarch, Pace, Metrix, Radius, Digital StoreFront, and Metrics IQuote software were released in 2014, 2013, and 2012.

New version releases in 2014 include the following:

 

   

PrintSmith version released for the quick print, franchise, and small commercial market segment.

 

   

PrintFlow scheduling software has been released for the printing and packaging industry, which creates an optimized schedule for the printing operation based on constraints such as workload, job characteristics, work center capabilities, and delivery priorities.

 

   

The Customer Relationship Management (“CRM”) and mailing modules of our Monarch software have been upgraded.

 

   

Pace has been interfaced with our Metrix impositioning software.

 

   

Radius 5.1 offers new features and enhancements, including a mobile CRM module; improved scheduling with PrintFlow plant optimization software; web-based SmartLinc multi-carrier shipping features; and Radius customer web portal.

 

   

Digital StoreFront 7.0 combines the software’s SmartStore Builder interface with advanced HTML5 tools for optimized web-to-print storefront access across desktop, tablet and mobile devices.

 

   

New version of Metrics IQuote sales price estimating software offering new price list functionality and tools for more-accurate costing on variable data including estimating offset and digital print jobs with minimal user interaction.

 

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Our primary software offerings include:

 

Product Name

 

Description

 

User

Business process automation software: Monarch, PSI, Logic, PrintSmith, PrintFlow, Radius, SmartLinc, Graphisoft, PC Topp, DiMS!, PrintStream, Prism, IQuote, Technique, Lector, GamSys, and Alphagraph   Collect, organize, and present business process information to improve productivity and customer service while reducing costs.   Commercial, publishing, digital, in-plant, print for pay, large format, direct mail, and specialty printing, shipping and logistics, and packaging companies.
Cloud-based business process automation software: Pace   Software modules for estimating, scheduling, print production, accounting, e-commerce, and web-to-print.   Commercial, digital, display graphics, in- plant, and print for pay printing companies. Government printing operations.
Imposition solutions for estimating, planning and integration into prepress and postpress solutions: Metrix   Imposition solutions for a broad range of product types and sizes and printing processes.   Customers desiring a solution to bridge the gap between business process automation and prepress that are not served by the Fiery and Fiery XF imposition tools.
Cloud-based order entry and order management systems, along with cross-media marketing: Digital StoreFront, DirectSmile, Online Print Solutions, PrinterSite, and PrintSmith Site   Procurement applications for print buyers, print producers, and marketing professionals to facilitate cloud-based collaboration across the supply chain.   Commercial, publishing, digital, in-plant, print for pay, large format, and specialty printers.

Fiery

Our Fiery brand consists of DFEs that transform digital copiers and printers into high performance networked printing devices for the office and commercial printing markets. Once networked, Fiery-powered printers and copiers can be shared across workgroups, departments, the enterprise, and the internet to quickly and economically produce high-quality color documents. We have 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 the Fiery DFE and software solutions drives demand for Fiery products through the printer manufacturers.

Fiery products are comprised of (i) stand-alone DFEs connected to digital printers, copiers, and other peripheral devices, (ii) embedded DFEs and design-licensed solutions used in digital copiers and multi-functional devices, (iii) optional software integrated into our DFE solutions such as Fiery Central, Command WorkStation, and MicroPress, (iv) Fiery Self Serve (formerly Entrac), our self-service and payment solution, (v) PrintMe, our mobile printing application, and (vi) stand-alone software-based solutions such as our proofing and scanning solutions.

Fiery DFEs. The Fiery FS150 Pro DFE was released in 2014, which simultaneously processes a print job on four processor cores allowing print jobs to be processed up to 55% faster. In 2013, Fiery FS100 Pro became the first DFE to achieve certification from both the VIGC (the Flemish Innovation Center for Graphic Communication) and the Job Definition Format (“JDF”) 1.3 Integrated Digital Printing Interoperability Conformance Specification.

 

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Fiery XF is a DFE and color management workflow for super-wide and wide format printing and proofing. Fiery XF 6.0 was released in 2014 featuring real WYSIWYG tiling preview, the new Fiery Dynamic Smoothing function, and the Fogra Process Standard Digital support.

Fiery proServer is a DFE and color management workflow for the super-wide format and ceramic tile decoration digital inkjet printer market. Fiery proServer 6.0 was released in 2014 featuring Fiery Accelerated System Technology, which processes Adobe PDF files up to seven times faster than previous versions of proServer. Although designed for our super-wide, wide format, and ceramic printers, Fiery proServer is compatible with 540 super-wide and wide format printers from numerous major manufacturers.

Software Solutions. Fiery Command WorkStation 5.6 job management interface software was released in 2014 featuring automated job presets, faster job searching capabilities, a new user interface, advanced tools for printing multi-bank and bleed-edge tabbed documents, and an integrated analytics tool, Fiery Dashboard.

Fiery Workflow Suite was released in 2012, which 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.

Fiery Self Serve is a leading provider 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 ®, USB drives, and cloud accounts such as Google DriveTM Dropbox.

In 2014, we announced integration with campus identification card systems and campus card solutions such as CBORD, Odyssey, and Blackboard. We also announced the release of Self-Serve AdminCentral, which is a cloud-based management system for the M500 product. In 2012, we launched the M500, which accepts credit cards, campus cards, and cash cards at the device, thereby eliminating the need for coin-operated machines. The M500 is a flexible and scalable system for college campuses and libraries, which addresses student demands for printing from any mobile device as well as from popular cloud storage services.

PrintMe. PrintMe Connect enables direct printing from Apple®, iPad®, iPhone®, and iPod touch® iOS 4.2-enabled and other mobile devices to Fiery-driven printers or multi-function peripherals. PrintMe was the world’s first cloud-based printing platform that enabled mobile workers to upload their documents to the PrintMe cloud and securely print them on any PrintMe-enabled printer.

 

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Our main DFE platforms, primary printer manufacturer customers, and end user environments are as follows:

 

Platform

 

Printer Manufacturers or Customers

 

User Environments

Fiery external DFEs

  Canon, Fuji Xerox, Konica Minolta, Kyocera Document Solutions, Landa, Ricoh, Sharp, Toshiba, Xerox   Print for pay, corporate reprographic departments, graphic arts, advertising agencies, and transactional & commercial printers
Fiery embedded DFEs and design-licensed solutions   Canon, Epson, Fuji Xerox, Intec, Konica Minolta, Kyocera Document Solutions, OKI Data, Ricoh, Sharp, Toshiba, Xerox   Office, print for pay, and quick turnaround printers
Fiery Central, MicroPress 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, Staples   ExpressPay self-service and payment solutions for retail copy and print stores, hotel business centers, college campuses, and convention centers

PrintMe PrintMe Mobile

  Canon, Channel Build Solutions, individual hotels, smaller channel resellers   Mobile printing from any mobile device to any network printer
Production Inkjet and Proofing software: ColorProof XF, Pro, Fiery XF, Fiery proServer   Digital color proofing and inkjet production print solutions offering fast, flexible workflow, power, and expandability   Digital, commercial and hybrid printers, prepress providers, publishers, creative agencies and photographers, ceramic tile, decoration, and super-wide & wide format print providers

Sales, Marketing, and Distribution

We have assembled, internally and through acquisitions, an experienced team of technical support and 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 enterprise printing, graphic arts, fulfillment systems, cross-media marketing, imposition solutions, ceramic tile decoration, and commercial printing. 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. Any interruption of either of these distribution channels could negatively impact us in the future.

The ceramic tile industry is undergoing a shift from southern Europe (e.g., Spain and Italy) to the emerging markets of China, India, Brazil, and Indonesia. As a result, we opened a Cretaprint sales and support center in Foshan, Guangdong, China in 2012. Foshan is home to the largest concentration of ceramic tile manufacturers in China.

 

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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. Any interruption in our trade show participation could materially impact our revenue and profitability. There were approximately 1,500 attendees at our 2014 EFI Connect trade show, which generates leads for the Industrial Inkjet and Productivity Software operating segments and generates end user demand for the Fiery segment.

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 sale to a mix of distribution channels consisting of 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 customers, including Canon, Konica Minolta, Ricoh, Xerox, 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. There can be no assurance that we will continue to successfully distribute products through these channels.

Our acquisitions of GamSys Software SPRL (“GamSys”) and Lector Computersysteme GmbH (“Lector”) in 2013 allowed our Productivity Software operating segment to expand our market in the French and German-speaking regions of Europe and Africa, respectively. Our acquisition of Metrics Sistemas de Informação, Serviços e Comércio Ltda. and Metrics Sistemas de Informação e Serviço Ltda. (collectively, “Metrics”) in 2012 and Prism Group Holdings Limited (“Prism”) in 2011 allowed our Productivity Software operating segment to enter emerging markets in Latin America and Asia Pacific (“APAC”), respectively.

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.

Although end customer and reseller channel preference for Fiery products drives demand, most Fiery revenue relies on these significant printer manufacturers/distributors to design, develop, and integrate Fiery technology into their print engine as described above. See Item 1A: Risk Factors— We do not typically have long-term purchase contracts with the printer manufacturer customers that purchase our Fiery DFE and software solutions. They have in the past reduced or ceased, and could at any time in the future reduce or cease, to purchase products from us, thereby harming our operating results and business.

Our relationships with the leading printer and copier industry companies are one of our most important assets. We have established relationships with leading printer and copier industry companies, including Canon, Epson, Fuji Xerox, Konica Minolta, Kyocera Document Solutions, Landa, OKI Data, Ricoh, Sharp, Toshiba, and Xerox. These relationships are based on business relationships that have been established over time. 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 FedEx Office, Staples, and Canon. Fiery Self Serve is also marketed to college campuses and libraries.

 

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Our proofing products are sold 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, Xerox, and Heidelberg. 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.

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 expand and improve our offerings of new generations of Industrial Inkjet products, including super-wide and wide format, label and packaging, and ceramic tile decoration digital inkjet printers. We expect to expand and improve our Productivity Software offerings, including new product lines related to digital printing, graphic arts, fulfillment systems, cross-media marketing, image personalization, workflow, and print management.

We have established relationships with many leading distribution companies in the graphic arts and commercial print industries such as Nazdar, Heidelberg, 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 the French and German-speaking regions of Europe and Africa through our acquisitions of GamSys and Lector in 2013, and expansion into emerging markets in China, India, and Latin America through the acquisitions of Creta Print S.L. (“Cretaprint”), Metrics in 2012, and Prism in 2011.

Expanding the Addressable Market. We are expanding our addressable market by extending into new markets within each of our operating segments such as ceramic tile decoration, thermoplastic pre-decoration, textile dye sublimation printing, image personalization, imposition solutions, various cloud-based software solutions, self-service and payment solutions, and mobile printing. Further growth in the addressable markets for Industrial Inkjet, Productivity Software, and Fiery has been driven by our development of an integrated VUTEk / Fiery / Productivity Software production workflow.

Establish Enterprise Coherence and Leverage Industry Standardization. Our goal is to offer best of breed solutions that are interoperable 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 integrated coherence 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. For

 

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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 JDF.

In 2013, FS100 Pro became the first, and currently only, DFE to achieve certification from both the VIGC and the JDF 1.3 Integrated Digital Printing Interoperability Conformance Specification. In 2012, our DFE became the first in the industry to achieve JDF certification for digital printing. We have received more than ten JDF certifications from Printing Industries of America.

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. The impact of our business acquisitions on product innovation, market coverage, and addressable market during 2014, 2013, and 2012 is summarized as follows:

 

Year

  

Acquired Business

  

Acquired Product Line or Customer Base

2014

   SmartLinc, Inc. (“SmartLinc”)    Shipping and logistics automation software
   Rhapso S.A. (“Rhapso”)    French customer base and corrugated packaging software
   DirectSmile GmbH (“DirectSmile”)    Image personalization, cross media marketing, variable data printing
   DiMS! organizing print BV (“DIMS”)    Multilingual, and multi-national print and packaging companies with a large European installed base

2013

   PrintLeader Software (“PrintLeader”)    Small commercial and in-plant printing operations
   GamSys Software SPRL (“GamSys”)    French speaking regions of Europe and Africa
   Outback Software Pty. Ltd. doing business as Metrix Software (“Metrix”)    Imposition solutions for customers not served by the Fiery and Fiery XF imposition tools.
   Lector Computersysteme GmbH (“Lector”)    German speaking regions of Europe

2012

   Creta Print S.L. (“Cretaprint”)    Ceramic tile decoration digital inkjet printers
   Fxcolors (“FX Colors”)    Software and technology for industrial printing
   Metrics Sistemas de Informação, Serviços e Comércio Ltda. and Metrics Sistemas de Informação e Serviço Ltda. (collectively, “Metrics”)    Latin American customer base (sales quotation software)
   Online Print Marketing Ltd. and DataCreation Pty. Ltd. together doing business as Online Print Solutions (“OPS”)    Web-to-print, publishing, and cross-media marketing integrated with Digital StoreFront and Fiery DFE
   Technique, Inc. and Technique Business Systems Limited (collectively, “Technique”)    European customer base

We will continue to be acquisitive in the future in an opportunistic way supporting our product innovation, market coverage, and total addressable market expansion strategy.

 

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Significant Relationships

We have established and continue to build and expand relationships with the leading printer manufacturers and distributors of digital printing technology in order to benefit from their products, distribution channels, and marketing resources. Our customers include domestic and international manufacturers, distributors, and sellers of digital copiers. 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, in alphabetical order, that we sold products to in 2014 were Canon, Epson, Fuji Xerox, Konica Minolta, Kyocera Document Solutions, Landa, OKI Data, Ricoh, Sharp, Toshiba, and Xerox. Sales to Xerox accounted for 11% of our 2014 revenue. 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. Although end customer and reseller channel preference for Fiery products drives demand, most Fiery revenue relies on the leading printer manufacturer / distributors to design, develop, and integrate Fiery technology into the their print engines. Accordingly, if we experience reduced sales or lose an important printer manufacturing customer, we will have difficulty replacing the revenue with sales to new or existing customers.

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. See Item 1A: Risk Factors— We do not typically have long-term purchase contracts with the printer manufacturer customers that purchase our Fiery DFE and software solutions. They have in the past reduced or ceased, and could at any time in the future reduce or cease, to purchase products from us, thereby harming our operating results and business.

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 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 current agreement with Adobe was renewed on April 1, 2013 through March 31, 2018. 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

 

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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. See Item 1A: Risk Factors— 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.

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 and ceramic digital ink for use in our printers and rely on a limited number of suppliers for certain pigments used in our ink. Our ink sales would decline significantly if we were unable to obtain the pigments when needed. See Item 1A: Risk Factors— 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.

Human Resources

As of December 31, 2014, we employed 2,672 full time employees. Approximately 762 were in sales and marketing (including 304 in customer service), 337 were in general and administrative, 506 were in manufacturing, and 1,067 were in research and development. Of the total number of employees, 1,494 employees were located in the Americas (primarily the U.S. and Brazil) and 1,178 were located outside of the Americas.

Research and Development

Research and development expense was $134.7, $128.1, and $120.3 million for the years ended December 31, 2014, 2013, and 2012, respectively. As of December 31, 2014, 1,067 of our 2,672 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. We expect to make significant expenditures to support research and development in the foreseeable future.

We expect to continue to develop new platforms and ink formulations for Industrial Inkjet print technologies and ceramic tile decoration as the industry continues and accelerates its transition from analog to digital technology and from solvent-based printing to UV curable ink printing. We are developing new software applications designed to maximize workflow efficiencies and meet the needs of the graphic arts and commercial print professions, including business process automation, web-to-print, e-commerce, cross-media marketing, imposition, and proofing solutions. 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 13 U.S. locations, as well as in India, Europe, the United Kingdom (“U.K.”), Brazil, Canada, New Zealand, China, Australia, and Japan. Substantial additional expense is required to complete and bring to market each of the products currently under development.

Manufacturing

We utilize subcontractors to manufacture our Fiery products and, to a lesser extent, our super-wide and wide format industrial digital inkjet 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”), label and packaging digital inkjet printer production to Roberts Tool Company (“Roberts”), and formulation of certain solvent ink with Nazdar Company, Inc. (“Nazdar”).

 

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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. See Item 1A: Risk Factors— We are dependent on a limited number of subcontractors, with whom we 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.

Our VUTEk super-wide format industrial digital inkjet printers are primarily manufactured in a single location in our Meredith, New Hampshire facility. We have encountered difficulties in hiring and retaining adequate skilled labor and management because Meredith is not located in a major metropolitan area. Our Cretaprint ceramic tile decoration digital inkjet printers are manufactured in a single location in our Castellon, Spain facility. Our ceramic digital ink that is used in our ceramic tile decoration digital inkjet printers is formulated in a single location in our Ypsilanti, Michigan facility. Most components used to manufacture our printers and ink are available from multiple suppliers, except for inkjet print heads and certain key ingredients (primarily pigments and photoinitiators) for our 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 pigments, we would be required to reformulate the ink and test the new ink formulations. In our Industrial Inkjet facilities, we use hazardous materials to formulate and store digital UV and ceramic digital ink. The storage, use, and disposal of those materials must meet the requirements of various environmental regulations.

See Item 1A: Risk Factors— 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 manufacture our super-wide format industrial digital inkjet printers and formulate our ceramic digital ink primarily in single locations. Any significant interruption in the manufacturing process at these facilities could adversely affect our business; 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; and We may be subject to environmental-related liabilities due to our use of hazardous materials and solvents.

 

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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    Contract manufacturing (Fiery)
Nazdar    Contract manufacturing (solvent ink)
Controls for Automation    Inkjet RFID (radio frequency identification)
Ink pigment suppliers    UV ink pigments and photoinitiators
Columbia Tech    Inkjet sub-assemblies
Roberts    Contract manufacturing (digital inkjet printers)
SEI, S.p.A    Laser finishing and winders
Shenzen Runtianzhi Tech    Inkjet sub-assemblies
Seiko    Inkjet print heads
Xaar    Inkjet print heads
Progress Software    Monarch and Radius operating system
Printable and XMPie    Digital StoreFront modular offerings

We generally do not maintain long-term agreements with our component suppliers. We primarily conduct business with such suppliers solely 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.

The absence of agreements with many of our suppliers also subjects us to pricing fluctuations, which is a factor we believe is partially offset by the desire of our suppliers to sell a high quantity of components. Many of our components are similar to those used in personal computers; consequently, the demand and price fluctuations of personal computer components could affect our component costs. In the event of unanticipated volatility in demand for our products, we may be unable to manufacture certain products in quantities sufficient to meet end user demand or we may hold excess quantities of inventory due to their long lead times. We maintain an inventory of components for which we are dependent on sole or limited source suppliers and of components with prices that fluctuate significantly. We cannot ensure that at any given time we will have sufficient inventory to enable us to meet demand for our products, which would harm our financial results. See Item 1A: Risk Factors— 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.

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.

Industrial Inkjet

Our super-wide and wide format industrial digital inkjet printers compete with printers produced by Agfa, Domino, Durst, Canon, Hewlett-Packard (“HP”), Inca, Mimaki, Roland, and Mutoh throughout most of the

 

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world. There are Chinese and Korean printer manufacturers in the marketplace, but their products are typically sold in their domestic markets and are not perceived as viable alternatives in most other markets. Our UV 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 most provisions of our printer warranty and service contracts.

Our Cretaprint ceramic tile decoration digital inkjet printer competes with ceramic tile decoration printers manufactured in Spain (KERAjet), Austria (Durst), Italy (Technoferrari, Projecta (B&T), Intesa (Sacmi), and System), China (Flora, Hope, Meijia, and Teckwin), and smaller emerging competition in other markets such as Indonesia. The ceramic tile industry is currently experiencing an ongoing relocation from southern Europe to the emerging markets of China, India, Brazil, and Indonesia. Competition in the Chinese market consists of small Chinese ceramic tile decoration printers and European manufacturers that are reducing prices to gain market share. In 2012, we opened a Cretaprint sales and support center in Foshan, Guangdong, China, which is home to the largest concentration of tile manufacturers in China.

Most ceramic tile decoration digital inkjet printer manufacturers have a background in analog equipment for ceramic tile plants and tile manufacturing facilities, while Durst and Flora entered the ceramic tile decoration market from the digital graphic arts business. Our ceramic tile decoration competitors are a mix of large, medium, and small ceramic tile decoration printer manufacturers, which are primarily privately owned.

Productivity Software

Our Productivity Software operating 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 industry. 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, Solarsoft, and Heidelberg in the packaging software market.

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 design, develop, and integrate Fiery DFE and software technology into 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 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. Our market position vis-à-vis internally developed DFEs is small; however, we are the largest third party DFE developer. 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 roadmaps. 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.

 

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We believe the principal competitive factor affecting our markets is the market acceptance rates for new printing technology. There can be no assurance that we will continue to advance our technology and products or compete effectively against other companies’ product offerings. Any failure to do so could have a material adverse affect on our business, operating results, and financial condition.

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 to the software code in our products and the 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. For a discussion of risks relating to our intellectual property, see Item 1A: Risk Factors— We may be unable to adequately protect our proprietary information and may incur expenses to defend our proprietary information.

Financial Information about Foreign and Domestic Operations and Export Sales

See Note 15—Segment Information, Geographic Regions, and Major Customers and Note 11—Income Taxes of the Notes to Consolidated Financial Statements. See also Item 1A: Risk Factors— We face risks from our international operations and We face risks from currency fluctuations.

Item  1A: Risk Factors

The market for our super-wide and wide format printers is very competitive.

The printing equipment industry is extremely competitive. Our super-wide and wide format industrial digital inkjet products compete against several companies that market industrial digital 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, Domino, Durst, Canon, HP, Inca, Mimaki, Roland, and Mutoh. Certain 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. They could also exert downward pressure on product pricing to gain market share.

The local competitors in the Chinese and Korean markets are developing, manufacturing, and selling inexpensive printers mainly to the local markets. Our ability to compete depends on factors both within and outside of our control, including the price, performance, and acceptance of our current printers and any products we develop in the future.

We also face competition from existing conventional super-wide and wide format digital inkjet printing methods, including screen printing and offset printing. Our competitors could develop new products, with existing or new technology, that could be more competitive in our market than our printers.

The market for our ceramic tile decoration digital inkjet printers is very competitive.

Our Cretaprint ceramic tile decoration digital inkjet printer competes with ceramic tile decoration printers manufactured in Spain, Italy, Brazil, China, and smaller emerging competitors in other markets such as

 

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Indonesia. Competition in the Chinese market consists of small Chinese ceramic tile decoration printers and European manufacturers that are reducing prices to gain market share.

Most ceramic tile decoration digital inkjet printer manufacturers have a background in analog equipment for ceramic tile plants and tile manufacturing facilities, while Durst and Flora entered the ceramic tile decoration market from the digital graphic arts business. Our ceramic tile decoration imaging competitors are a mix of large, medium, and small ceramic tile decoration printer manufacturers, which are primarily privately owned. Nevertheless, our competitors could develop new products, with existing or new technology, that could be more competitive in our market than our ceramic tile decoration digital inkjet printers.

We face strong competition for printing supplies such as ink.

We compete with independent manufacturers in the ink market.

Our UV 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 also 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 printers. We could experience an overall price reduction within the ink market, which would also adversely affect our gross profit. The loss of ink sales or price reduction in our printer installed base could adversely impact our revenue and gross profit.

Our solvent-based ceramic digital ink is sold to users of our ceramic tile decoration digital inkjet printers. Until we began formulating our solvent-based ceramic digital ink in our facility in Ypsilanti, Michigan, our customers were required to fulfill their ceramic digital ink requirements from third party suppliers. Although we are focused on developing this recurring revenue stream, we cannot guarantee that we will become the primary supplier of ceramic digital ink to the users of our printers.

We face strong competition in our Productivity Software operating segment.

Our Productivity Software operating segment, which includes our business process automation, cloud-based order entry and order management, cross-media marketing, and imposition solution systems, faces competition from software application vendors that specifically target the printing industry. 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, Solarsoft, and Heidelberg in the packaging software market.

We believe the principal competitive factor affecting our markets is the market acceptance rates for new printing technology. There can be no assurance that we will continue to advance our technology and products or compete effectively against other companies’ product offerings.

We do not typically have long-term purchase contracts with the printer manufacturer customers that purchase our Fiery DFE and software solutions. They have in the past reduced or ceased, 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 design, develop, and integrate Fiery technology into 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

 

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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. For example, Xerox provided 11% of our revenue for the year ended December 31, 2014. 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 Xerox, 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.

Entry into new markets or distribution channels could result in higher operating expenses that may not be offset by increased revenue.

We continue to explore opportunities to develop or acquire additional product lines in new markets, such as print management business process automation software, document scanning solutions, ceramic tile decoration UV ink, and industrial inkjet printers. We expect to continue to invest funds to develop new distribution and marketing channels for these and additional new products and services, which will increase our operating expenses.

We do not know if we will be successful in developing these channels, or whether the market will accept any of our new products or services, or if we will generate sufficient revenue from these activities to offset the additional operating expenses we incur. Even if we are able to introduce new products or services, if customers do not accept these new products or services, or if we are not able to price such products or services competitively, our results of operations will likely be adversely affected.

 

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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, including Europe, 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. 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.

Recently, economic uncertainty is particularly acute in Europe and especially the “southern European” countries (i.e., Spain, Portugal, Italy, and Greece) and in Ireland. We have no European sovereign debt investments. Our European debt and money market investments consist of non-sovereign corporate debt included within money market funds and corporate debt securities of $42.2 million, which represents 16% of our money market funds and corporate debt securities at December 31, 2014. Our European debt investments are with corporations domiciled in the northern and central European countries of Sweden, Germany, Netherlands, Switzerland, Luxembourg, Norway, France, Belgium, Finland, and the U.K. We do not have any investments in the higher risk “southern European” countries (i.e., Greece, Spain, Portugal, and Italy) or in Ireland. We believe that we do not have significant exposure with respect to our money market and corporate debt investments in Europe. Nevertheless, we do have some exposure due to the interdependencies among the European Union countries.

Since Europe is composed of varied countries and regional economies, our European risk profile is somewhat more diversified due to the varying economic conditions among the countries. Approximately 26% of our receivables are with European customers as of December 31, 2014. Of this amount, 22% of our European receivables (6% of consolidated net receivables) are in the higher risk southern European countries (mostly Spain, Portugal, and Italy), which are adequately reserved. The ongoing relocation of the ceramic tile industry from southern Europe to the emerging markets of China, India, Brazil, and Indonesia will reduce our exposure to credit risk in southern Europe. Nevertheless, if the ongoing economic uncertainty continues in southern Europe and spreads among all the European Union countries, we may experience difficulty collecting receivables from our European customers.

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

A significant amount of our revenue is generated from operations outside the U.S. Approximately $352.0 (45%), $315.6 (43%), and $298.0 (46%) million of revenue for the years ended December 31, 2014, 2013, and 2012, respectively, shipped to locations outside the Americas, primarily to Europe, Middle East, and Africa (“EMEA”) and APAC. We expect that sales shipped outside the Americas will continue to represent a significant portion of total revenue. We maintain significant operations and acquire or manufacture many of our products and/or their components outside the U.S. Our future revenues, 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

 

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related legal matters. If our future revenues, 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 slowdown in the Chinese construction market has negatively impacted, and may continue to negatively impact, our results of operations, specifically within our ceramic tile decoration digital inkjet printer business. Our revenue in the APAC region, excluding Japan, decreased by 7% during the year ended December 31, 2014, compared with the year ended December 31, 2013 primarily as a result of this impact.

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 of the Euro, Chinese renminbi, British pound sterling, Japanese yen, Brazilian real, Australian dollar, and New Zealand dollar). We have a substantial number of international employees, 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, Indian rupee, Japanese yen, Brazilian real, British pound sterling, Chinese renminbi, and Australian dollar).

Changes in exchange rates, and in particular a weakening of the U.S. dollar, may adversely affect our consolidated operating expenses and operating income as expressed in U.S. dollars. We hedge our operating expense exposure in Indian rupees. The notional amount of our Indian rupee cash flow hedge was $2.9 million at December 31, 2014.

Forward contracts not designated as hedging instruments consist of hedges of Brazilian real, British pound sterling, and Euro-denominated intercompany loans with notional amounts of $63.8 million, British pound sterling and Euro-denominated trade receivables with notional amounts of $20.8 million, and Indian rupee net monetary assets with notional amounts of $1.9 million at December 31, 2014.These forward contracts are not designated for hedge accounting treatment since there is a natural offset for the remeasurement of the underlying foreign currency denominated asset or liability.

As of December 31, 2014, 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 as follows:

 

   

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 of such countries, foreign exchange control, and other restrictions,

 

   

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,

 

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international labor regulations may be substantially different than the regulations we are accustomed to in the U.S., which may negatively impact labor efficiency and workforce relations,

 

   

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,

 

   

adverse tax consequences, including imposition of withholding or other taxes on payments by subsidiaries,

 

   

potential changes in the tax structures of European countries necessitated by the recent global economic downturn, 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 implement 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 our super-wide format industrial digital inkjet printers and formulate our ceramic digital ink primarily in single locations. Any significant interruption in the manufacturing process at these facilities could adversely affect our business.

Our VUTEk super-wide format industrial digital inkjet printers are primarily manufactured in a single location in our Meredith, New Hampshire facility. Our Cretaprint ceramic tile decoration digital inkjet printers are manufactured in a single location in our Castellon, Spain facility. Our ceramic digital ink that is used in our ceramic tile decoration digital inkjet printers is formulated in a single location in our Ypsilanti, Michigan facility. Any significant interruption in the manufacturing process at any of these facilities could affect the supply of our product, our ability to meet customer demand, and our ability to maintain market share.

 

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We are developing contingency plans utilizing 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.

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 super-wide and wide format, label and packaging, and ceramic tile decoration industrial digital inkjet printers, and certain key ingredients (primarily pigments and photoinitiators) for our digital UV ink. We generally do not maintain long-term agreements with our component suppliers and conduct business with such suppliers solely 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 are unable to obtain the print heads that we currently use, we would be required to redesign our printers to use different print heads. If we are unable to obtain the required pigments, we would need to reformulate our digital UV and ceramic ink and test the new ink formulation. 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 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 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

 

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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, label and packaging digital inkjet printer production with Roberts, and formulation of certain solvent ink with Nazdar. Certain Industrial Inkjet sub-assemblies are manufactured by subcontractors. Should our subcontractors 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 subcontractors, any of our subcontractors could enter into agreements with our competitors that might restrict or prohibit 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 replacement subcontractors, 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 and ceramic tile decoration industrial digital inkjet printers and formulate digital UV and ceramic digital 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 the ink before the end of its shelf life, it will have to be written off. We have also experienced UV ink shortages in the past and may continue to experience such shortages in the future. UV 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 and chemical engineers and other technical professionals with specialized skills. We are headquartered in the Silicon Valley and have research and development facilities in 13 U.S. locations. We have research and development facilities in India, Europe, the U.K., Brazil, Canada, New Zealand, China, Australia, and Japan. 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.

Our VUTEk printers are manufactured at our Meredith, New Hampshire facility, which is not located in a major metropolitan area. We have encountered difficulties in hiring and retaining adequately skilled labor and management at this location.

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.

 

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

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 to a broader base of customers than Fiery. Many of the Productivity Software and Industrial Inkjet customers are smaller and potentially less creditworthy. 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, Italy, and Portugal) 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. 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.

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 companies or other companies’ assets.

Acquisitions involve numerous risks, such as:

 

   

difficulties integrating operations, employees, technologies, or products, and the required focus of management attention, time, and effort to accomplish successful integration;

 

   

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

 

   

if we issue equity securities in connection with any future acquisition, it may be dilutive to our existing stockholders; alternatively, acquisitions made entirely or partially for cash (as was the case with respect to each of our acquisitions during the past three years) will 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.

 

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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 at December 31, 2014 will prove to be accurate predictions of the future. If our assumptions regarding forecasted revenue or gross profit rates are not achieved, we may be required to record additional goodwill impairment charges in future periods relating to any of our reporting units, whether in connection with the next annual impairment testing in the fourth quarter of 2015 or prior to that, if an interim triggering event has occurred. 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 foreshadowing events have occurred as of December 31, 2014.

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.

 

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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.

We may be subject to risk of loss due to fire because certain materials we use in our ink formulation process are flammable.

We use flammable materials in the digital UV and ceramic digital ink formulation process; therefore, we may be subject to risk of loss resulting from fire. The risk of fire associated with these materials cannot be completely eliminated. We own certain facilities that manufacture or warehouse our ink, which increases our exposure to such risk. We maintain insurance policies to cover losses caused by fire, including business interruption insurance. If one or more of these facilities is damaged or otherwise ceases operations as a result of fire, it would reduce our digital UV and ceramic ink manufacturing capacity, which may reduce revenue and adversely affect our business.

The location and concentration of our facilities subjects us to risk of earthquakes, floods, or other natural disasters.

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, Taiwan, 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 could harm our business, financial condition, and operating results.

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 three locations. At these facilities, we formulate and store UV, ceramic, solvent, thermoforming, and dye sublimation ink. The formulation and storage of solvent ink and ceramic ink requires the use of solvents. Our formulation of solvent ink is limited as we have primarily outsourced solvent ink formulation. However, we launched internal formulation and marketing of ceramic solvent-based ink during 2014 at our facility in Ypsilanti, Michigan. The solvents used in ceramic ink formulation have low volatility by design. As a result, ceramic ink poses less environmental risk compared with true solvent inks.

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 world-wide, including Europe 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.

 

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Future sales of our hardware products could be limited if we do not comply with current and future environmental and chemical content regulation in electrical and electronic equipment.

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.

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 twelve month hardware limited warranty from date of shipment for certain Industrial Inkjet printer and Fiery DFE products, which may cover both parts and labor.

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 $9.7 million at December 31, 2014, 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.

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. 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 technology systems, and internal and external websites for our development, marketing, operational, support, and sales activities. Our hardware and software systems related to such activities are subject to damage from malicious code released into the internet through vulnerabilities in popular software programs. These systems are also subject to acts of vandalism and potential disruption by actions or inactions of third parties. Any event that causes failures or interruption in our hardware or software systems could harm our business, financial condition, and operating results.

 

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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, 2014, the price of our common stock as reported on The NASDAQ Global Select Market ranged from a low of $36.62 to a high of $47.75. 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, impacted by the continuing uncertainty in our economy. 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.

The value of our investment portfolio is subject to interest rate volatility.

We maintain an investment portfolio of fixed income debt securities classified as available-for-sale securities. As a result, our investment portfolio is subject to counterparty risk and volatility if market interest rates fluctuate.

We attempt to limit our exposure to interest rate risk by investing in securities with maturities of less than three years; however, we may be unable to successfully limit our risk to interest rate fluctuations. This may cause volatility in our investment portfolio value.

We are partially self-insured for certain losses related to employee medical and dental coverage. Our self-insurance reserves may not be adequate to cover our medical and dental claim liabilities.

We are partially self-insured for certain losses related to employee medical and dental coverage, excluding employees covered by health maintenance organizations. We generally have an individual stop loss deductible of $125 thousand per enrollee unless specific exposures are separately insured. We have accrued a contingent liability of $1.4 million as of December 31, 2014, which is not discounted, based upon examination of historical trends, historical actuarial analysis, our claims experience, total plan enrollment (including employee

 

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contributions), population demographics, and other various estimates. Although we do not expect that we will ultimately pay claims significantly different from our estimates, self-insurance reserves, net income, and cash flows could be materially affected if future claims experience differs significantly from our historical trends and assumptions.

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

In November 2013, our board of directors authorized $200 million for the repurchase of our outstanding common stock. This authorization expires in November 2016. 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 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.

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, and new information discovered during the preparation of our tax returns. U.S. and foreign tax legislative initiatives, such as proposals for fundamental tax reform in the United States or multi-jurisdictional actions to address “base erosion and profit-shifting” by multinational companies, could adversely affect our effective tax rate, if enacted. Any of these changes could negatively impact our net income.

We may not have the ability to raise the funds necessary to settle conversions of our 0.75% Convertible Senior Notes due 2019 (“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 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 7—Convertible Senior Notes, Note Hedges, and Warrants of the 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 7—Convertible Senior Notes, Note Hedges, and Warrants of the 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 at the time we are required to make repurchases of Notes surrendered or pay cash with respect to Notes being converted or at their maturity.

 

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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 a portion or all of our 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 outstanding principal of the 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”) Accounting Standards Codification (“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 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.

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

 

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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

As of December 31, 2014, we owned or leased a total of approximately 1.2 million square feet world-wide. The following table sets forth the location, size, and use of our principal facilities (square footage in thousands):

 

Location

   Square
Footage
     Leased or
Owned
  Operating Segment   

Principal Uses

Fremont, California

(6750 Dumbarton Circle)

     119       Owned*   Corporate
& Fiery
  

Corporate offices, design engineering, product testing, sales, marketing, customer service

Fremont, California

(6700 Dumbarton Circle)

     59           Leased**   Fiery   

Administrative offices, design engineering, product testing

Meredith, New Hampshire

     163       Owned   Industrial
Inkjet
  

Manufacturing (Industrial Inkjet printers), design engineering, sales, customer service

Castellon, Spain

     154             Leased***   Industrial
Inkjet
  

Manufacturing, (Cretaprint), administrative, design engineering, sales, customer service

Bangalore, India

     96       Leased   All   

APAC corporate offices, design engineering, sales

Ypsilanti, Michigan

     94       Leased   Industrial
Inkjet
  

Manufacturing (digital UV & ceramic ink), design engineering, sales, customer service

Laconia, New Hampshire

     49       Leased   Industrial
Inkjet
  

Warehouse

Egan, Minnesota

     44       Owned   Fiery &
Productivity
Software
  

Administrative, design engineering, customer service, software engineering

Brussels, Belgium

     39       Leased   Industrial
Inkjet
  

Sales, Industrial Inkjet demonstration center

Lichtenvoorde, Netherlands

     38       Leased   Productivity
Software
  

Design engineering, software engineering, sales, customer service

Tempe, Arizona

     32       Leased   Fiery &
Productivity
Software
  

Manufacturing, (Fiery), distribution, customer service

Norcross, Georgia

     29       Leased   Fiery &
Productivity
Software
  

Design engineering, sales, customer service, quality assurance, and software engineering

Ratingen, Germany

     27       Leased   Fiery   

Software engineering, sales, customer service

Shanghai, China

     27             Leased***   Industrial
Inkjet
  

Sales, Industrial Inkjet demonstration center

Pittsburgh, Pennsylvania

     18       Leased   Productivity
Software
  

Administrative, software engineering, sales

Schiphol-Rijk, The Netherlands

     17       Leased   Industrial
Inkjet
  

EMEA corporate offices, sales, support services

Sao Paolo, Brazil

     14       Leased   Productivity
Software
  

Design engineering, software engineering, sales, customer service

Richmond Hill, Ontario, Canada

     10       Leased   Fiery   

Design engineering, sales, customer service

 

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* On April 26, 2013, we purchased an approximately 119,000 square feet building located at 6750 Dumbarton Circle, Fremont, California, the related land, and certain other property improvements for a total purchase price of $21.5 million.
** We entered into a 15-year lease agreement, pursuant to which we leased approximately 59,000 square feet of a cold shell building located at 6700 Dumbarton Circle, Fremont, California, which is adjacent to the building that we purchased. The lease commenced on September 1, 2013. See Note 8—Commitments and Contingencies of the Notes to Consolidated Financial Statements.
*** Currently occupying two facilities as part of our transition into new facilities in 2015.

We leased 26 additional domestic and international regional operations and sales offices and we own one additional international sales office building, excluding facilities that have been fully reserved and subleased. We believe that our facilities, in general, are adequate for our present needs. We do not expect that we would experience difficulties in obtaining additional space at fair market rates, if the need arose.

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.

As of December 31, 2014, we are subject to the matter discussed below.

Componex Corporation (“Componex”) vs. EFI

Componex, Inc. is a manufacturer of rolls used in machines handling continuous sheets of product and is a supplier for certain products in our VUTEk product line. On May 30, 2013, Componex filed an action in the United States District Court for the Western District of Wisconsin alleging that rolls supplied to EFI by other vendors infringe two patents held by Componex. We moved for summary judgment that, among other things, Componex’s patents are not valid and that, even if they are, the rolls supplied and used in our products do not infringe the patents. Componex also moved for summary judgment of infringement. On November 12, 2014, the district court granted summary judgment that one of the two patents at issue is invalid, that there is no evidence of infringement of the other patent at issue, and entered judgment in favor of EFI. On December 4, 2014, Componex filed its notice of appeal to the United States Court of Appeals for the Federal Circuit. The appeal is currently pending.

Although we do not believe that Componex’s patents or infringement claims based on the patent are valid and we do not believe it is probable that we will incur a material loss in this matter, it is reasonably possible that our financial statements could be materially affected if we do not prevail on appeal and the district court subsequently were to reach a different conclusion than in its final judgment. We estimate the range of potential loss to be between one dollar and $1.5 million.

 

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Other Matters

As of December 31, 2014, we were subject to claims, lawsuits, investigations, and proceedings in addition to the matter discussed above. There is at least a reasonable possibility that additional losses may be incurred in excess of the amounts that we have accrued. However, we believe that these claims are not material to our financial statements or the range of reasonably possible losses is not reasonably estimable. Litigation is inherently unpredictable, and while we believe that we have valid defenses with respect to legal matters pending against us, our financial statements could be materially affected in any particular period by the unfavorable resolution of one or more of these contingencies or because of the diversion of management’s attention and the incurrence of significant expenses.

Item  4: Mine Safety Disclosures

Not applicable.

 

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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. The table below lists the high and low sales price during each quarter the stock was traded in 2014 and 2013.

 

     2014      2013  
     Q1      Q2      Q3      Q4      Q1      Q2      Q3      Q4  

High

   $ 47.75       $ 45.46       $ 47.42       $ 46.50       $ 26.15       $ 29.62       $ 32.19       $ 39.87   

Low

   $ 37.86       $ 36.62       $ 42.75       $ 39.09       $ 18.97       $ 23.82       $ 28.55       $ 30.48   

As of January 28, 2015, there were 126 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 in either 2014 or 2013. We currently anticipate that we will retain all available funds for the operation of our business and 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 12—Employee Benefit Plans of the 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

Repurchases of equity securities during the year ended December 31, 2014 were as follows (in thousands except per share amounts):

 

Fiscal month

   Total number
of shares
purchased(2)
     Average price
paid per share
     Total number
of shares
purchased as
part of publicly
announced plans
     Approximate
dollar value of
shares that may yet
be purchased
under the plans(1)
 

January 2014

     85       $ 39.54         63       $ 194,915   

February 2014

     1,058         42.57         748         163,180   

March 2014

     1         42.62         —          163,180   

April 2014

     240         43.92         240         152,639   

May 2014

     45         39.41         —          152,639   

June 2014

     —          —          —          152,639   

July 2014

     245         46.22         238         141,639   

August 2014

     130         43.28         —          141,639   

September 2014

     257         43.20         232         131,639   

October 2014

     87         42.23         87         127,965   

November 2014

     185         44.86         156         120,965   

December 2014

     7         44.44         7         120,642   
  

 

 

       

 

 

    

 

 

 

Total

     2,340            1,771       $ 120,642   
  

 

 

       

 

 

    

 

 

 

 

(1)

In November 2013, our Board of Directors approved the repurchase of $200 million of outstanding common stock. This authorization expires in November 2016. Under this publicly announced plan, we repurchased 1.8 and 0.1 million shares for an aggregate purchase price of $76.8 and $2.6 million during the years ended December 31, 2014 and 2013, respectively.

(2) 

Includes 0.6 million shares purchased from employees to satisfy the exercise price of certain stock options and any tax withholding obligations incurred in connection with such exercises and minimum tax withholding obligations that arose on the vesting of restricted stock units (“RSUs”).

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.

 

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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, 2014. All values assume reinvestment of dividends and are calculated at December 31 of each year.

 

LOGO

 

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Item 6: Selected Financial Data

The following table summarizes selected consolidated financial data as of and for the five years ended December 31, 2014. 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.”

 

     For the years ended December 31,  

(in thousands, except per share amounts)

   2014      2013      2012      2011      2010  

Operations(1)

              

Revenue

   $ 790,427       $ 727,693       $ 652,137       $ 591,556       $ 504,007   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     429,737         395,166         354,821         330,983         267,685   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) from operations(2)

     53,439         174,648         33,886         27,333         (276
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income(2)(3)

   $ 33,714       $ 109,107       $ 83,269       $ 27,465       $ 7,487   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share

              

Net income per basic common share

   $ 0.72       $ 2.34       $ 1.79       $ 0.59       $ 0.16   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income per diluted common share

   $ 0.70       $ 2.26       $ 1.74       $ 0.58       $ 0.16   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Shares used in basic per-share calculation

     46,866         46,643         46,453         46,234         45,387   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Shares used in diluted per-share calculation

     48,406         48,359         47,734         47,579         47,152   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31,  

(in thousands)

   2014      2013      2012      2011      2010  

Financial Position

              

Cash, cash equivalents, and short-term investments

   $ 616,732       $ 355,041       $ 364,962       $ 219,158       $ 229,663   

Working capital

     684,898         399,694         262,821         244,824         265,250   

Total assets

     1,304,560         1,026,384         1,074,971         739,734         706,581   

Convertible senior notes, net(4)

     284,818         —          —          —          —    

Stockholders’ equity

     788,689         767,450         650,793         564,783         551,749   

 

(1) 

Includes acquired company results of operations beginning on the date of acquisition. See Note 3—Business Acquisitions of the Notes to Consolidated Financial Statements for a summary of recent acquisitions during the years ended December 31, 2014, 2013, and 2012.

 

(2) 

Income (loss) from operations includes the following:

 

     December 31,  

(in thousands)

   2014     2013     2012     2011      2010  

Amortization of acquisition-related intangibles

   $ 20,673      $ 19,438      $ 18,594      $ 11,248       $ 12,385   

Stock-based compensation expense

     36,061        25,770        19,721        23,370         15,924   

Restructuring and other costs

     6,578        4,834        5,803        3,258         3,615   

Litigation settlement expenses (recoveries)

     897        (3,081     256        —          —    

Change in fair value of contingent consideration

     (3,810     (5,742     (1,360     1,476         395   

Acquisition-related transaction costs

     1,501        1,434        2,200        2,327         1,169   

Gain on sale of building and land (Note 13)

     —         (117,216     —         —          —    
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total charges, net of recoveries

   $ 61,900      $ (74,563   $ 45,214      $ 41,679       $ 33,488   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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(3) 

Net income includes the following:

 

   

Tax benefit from the release of previously unrecognized tax benefits of $2.6, $5.8, $11.8, $2.6, and $8.5 million for the years ended December 31, 2014, 2013, 2012, 2011, and 2010, respectively, resulting from the release of previously unrecognized tax benefits resulting from the expiration of U.S. federal and state 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.

 

   

Tax provision of $19.4 million during the year ended December 31, 2013 to establish a valuation allowance related to the realization of tax benefits from existing California deferred tax assets.

 

   

Tax benefit of $3.2 million during the year ended December 31, 2013, resulting from the retroactive renewal of the U.S. federal research and development tax credit on January 2, 2013, retroactive to 2012, pursuant to the American Taxpayer Relief Act of 2012. ASC 740-10-45-15, Income Taxes, requires the effects of a change in tax law or rates be recognized in the period that includes the enactment date.

 

   

Tax benefit of $43.6 million during the year ended December 31, 2012 resulting from a capital loss related to the liquidation of a wholly-owned subsidiary.

 

   

Tax benefit of $6.5 million during the year ended December 31, 2012 resulting from the increased valuation of acquired intangibles for tax purposes due to an operational restructuring in Spain.

 

(4) 

In September 2014, we completed a private placement of $345 million principal amount of 0.75% Convertible Senior Notes due 2019 (“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 7—Convertible Senior Notes, Note Hedges, and Warrants of the Notes to Consolidated Financial Statements.

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 the words “anticipate,” “believe,” “continue,” “estimate,” “expect,” “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.

Overview

We completed a private placement of $345 million principal amount of 0.75% Convertible Senior Notes due 2019 (“Notes”) in September 2014. The Notes were sold under a purchase agreement among the Company, Morgan Stanley & Co., LLC, and Goldman, Sachs & Co., (together, the “Initial Purchasers”). The Notes were sold to the Initial Purchasers in reliance on an exemption from registration provided by Section 4 (a)(2) of the

 

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Securities Act for resale to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The net proceeds from this offering were approximately $336.4 million, after deducting the Initial Purchasers’ commissions and the offering expenses payable by us. As described more fully in Note 7—Convertible Senior Notes, Note Hedges, and Warrants, we used approximately $29.4 million of the net proceeds to pay the cost of the Note Hedges (after such cost was partially offset by the proceeds from the Warrant transactions).

In connection with the issuance of the Notes, we entered into an indenture with U.S. Bank, N.A., as trustee. Under the indenture, the Notes are senior unsecured obligations with interest payable semiannually in arrears on March 1 and September 1 of each year, commencing March 1, 2015. The Notes will mature on September 1, 2019, unless previously purchased or converted in accordance with their terms prior to such date. We may not redeem the Notes prior to maturity; however, holders of the Notes may convert them at certain times and upon the occurrence of certain events in the future.

Key financial results for the year ended December 31, 2014 were as follows:

 

   

Our results of operations for the year ended December 31, 2014 compared with the prior year reflect revenue growth, consistent gross profit, consistent operating expenses as a percentage of revenue, and increased foreign exchange loss. Our revenue growth was driven by increased revenue in all three operating segments. We completed our acquisitions of DIMS, DirectSmile, Rhapso, and SmartLinc in 2014. We completed our acquisitions of Lector, Metrix, GamSys, and PrintLeader in 2013. Their results are included in our results of operations commencing on their respective acquisition dates.

 

   

Our consolidated revenue increased by 9%, or $62.7 million, from $727.7 million for the year ended December 31, 2013 to $790.4 million for the year ended December 31, 2014. Industrial Inkjet, Productivity Software, and Fiery revenue increased by $24.6, $12.3, and $25.8 million, respectively, in 2014 compared with 2013. Recurring ink and maintenance revenue increased by 15% during the year ended December 31, 2014 compared with the same period in the prior year and represented 28% of consolidated revenue.

 

   

Our gross profit percentage was comparable at 54% during the years ended December 31, 2014 and 2013. Productivity Software and Fiery operating segment gross margin percentages increased by 0.5 and 1.6 points, respectively, offset by the decreased Industrial Inkjet operating segment gross margin percentage of 1.5 points.

 

   

Operating expenses as a percent of revenue increased from 30% in 2013 to 48% in 2014. Operating expenses increased by $155.8 million between 2013 and 2014 primarily due to the gain on sale of building and land of $117.2 million, which was recognized in 2013. Excluding the gain on sale of building and land, operating expenses increased as a percentage of revenue from 46% to 48% between 2013 and 2014. The increase in operating expenses of $38.6 million, excluding the gain on sale of building and land in 2013, was primarily due to head count increases related to our business acquisitions, commission payments resulting from increased revenue, trade show expenses, facilities-related restructuring expenses related to the consolidation of our operations in Germany, acquisition expenses, legal fees, amortization of intangible assets, and stock-based compensation, partially offset by the prior year release of reserves related to certain patent litigation, changes in fair value of contingent consideration, and imputed sublease income related to the deferred property transaction.

 

   

On November 1, 2012, we sold the 294,000 square foot building located in Foster City, California, which at that time served as our corporate headquarters, along with approximately four acres of land and certain other assets related to the property, for $179.7 million. We used the facility until October 31, 2013, while searching for a new facility, building it out, and relocating our corporate headquarters, for which period rent was not required to be paid. Because we vacated the facility on October 31, 2013, we have no continuing involvement with the property and have accounted for the transaction as a property sale during the fourth quarter of 2013, thereby recognizing a gain of approximately $117.2 million on the sale of the property.

 

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Interest expense increased by $3.6 million, from $2.3 million for the year ended December 31, 2013 to $5.9 million for the year ended December 31, 2014. Interest expense during the year ended December 31, 2014, consists primarily of interest expense and amortization of debt issuance costs related to our Notes of $4.7 million and imputed interest expense related to our build-to-suit lease of $0.9 million, which is compared with imputed interest expense related to the deferred proceeds from sale of building and land of $1.9 million, net of capitalized interest related to our new corporate headquarters, and imputed interest expense related to our build-to-suit lease of $0.3 million during the year ended December 31, 2013.

 

   

Interest income and other income (expense), net, decreased from a gain of $0.8 million during the year ended December 31, 2013, to a loss of $5.5 million during the year ended December 31, 2014, primarily due to a foreign exchange loss of $6.8 million during the year ended December 31, 2014, compared to a foreign exchange loss of $0.3 million during the year ended December 31, 2013, resulting from revaluation of foreign currency denominated net assets (mainly denominated in Euros, British pounds sterling, Brazilian reais, and Indian rupees), partially offset by hedging gains.

 

   

We recorded a tax provision of $8.4 million in 2014 on pre-tax income of $42.1 million compared to a tax provision of $64.0 million in 2013 on pre-tax income of $173.1 million. We recognized a tax benefit of $3.1 million in 2014 resulting from the increased valuation of intangible assets for Brazilian tax reporting. We recognized a tax charge of $19.4 million in 2013 to establish a valuation allowance for certain existing California deferred tax assets. We recognized $2.6 million of previously unrecognized tax benefits in 2014 as compared to $5.8 million in 2013. The effective tax rate was positively impacted in 2013 by the renewal of the U.S. federal research and development tax credit retroactive to 2012. ASC 740-10-45-15 requires that the effects of a change in tax law or rates be recognized in the period that includes the enactment date. Accordingly, $3.2 million of the retroactive credit that related to 2012 was entirely recognized on January 2, 2013.

Results of Operations

The following table presents items in our consolidated statements of operations as a percentage of total revenue for 2014, 2013, and 2012. These operating results are not necessarily indicative of results for any future period.

 

     For the years ended December 31,  
         2014             2013             2012      

Revenue

     100     100     100
  

 

 

   

 

 

   

 

 

 

Gross profit

     54        54        54   

Operating expenses (gains):

      

Research and development

     17        17        18   

Sales and marketing

     19        19        19   

General and administrative

     8        6        8   

Amortization of identified intangibles

     3        3        3   

Restructuring and other

     1        1        1   

Gain on sale of building and land

     —         (16     —    
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     48        30        49   
  

 

 

   

 

 

   

 

 

 

Income from operations

     6        24        5   

Interest expense

     (1     —          —     

Interest income and other income (expense), net

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     5        24        5   

Benefit from (provision for) income taxes

     (1     (9     8   
  

 

 

   

 

 

   

 

 

 

Net income

     4     15     13
  

 

 

   

 

 

   

 

 

 

 

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Revenue

We classify our revenue, gross profit, assets, and liabilities in accordance with our three operating segments as follows:

Industrial Inkjet, which consists of our VUTEk super-wide format, EFI wide format, Jetrion label and packaging, and Cretaprint ceramic tile decoration industrial digital inkjet printers; UV, LED, ceramic, textile dye sublimation, and thermoforming ink; digital inkjet printer parts; and professional services. Printing surfaces include paper, vinyl, corrugated, textile, glass, plastic, aluminum composite, ceramic tile, and many other flexible and rigid substrates.

Productivity Software, which includes (i) our business process automation software, including Monarch and Metrics; (ii) Pace, our business process automation software that is available in a cloud-based environment; (iii) Digital StoreFront, our cloud-based e-commerce solution that allows print service providers to accept, manage, and process printing orders over the internet; (iv) Radius, our business process automation software for label and packaging printers; and (v) other business process automation and e-commerce solutions designed for the printing and packaging industries.

Fiery, which consists of DFEs that transform digital copiers and printers into high performance networked printing devices for the office and commercial printing market. This operating segment is comprised of (i) stand-alone DFEs connected to digital printers, copiers, and other peripheral devices, (ii) embedded DFEs and design-licensed solutions used in digital copiers and multi-functional devices, (iii) optional software integrated into our DFE solutions such as Fiery Central, Command WorkStation, and MicroPress, (iv) Fiery Self Serve (formerly Entrac), our self-service and payment solution, (v) PrintMe, our mobile printing application, and (vi) stand-alone software-based solutions such as our proofing and scanning solutions.

Revenue by Operating Segment

Our revenue by operating segment for the years ended December 31, 2014, 2013, and 2012 was as follows (in thousands):

 

     For the years ended December 31,     % change  
     2014     2013     2012     2014
over
2013
    2013
over
2012
 

Industrial Inkjet

   $ 379,170         48   $ 354,614         49   $ 320,228         49     7     11

Productivity Software

     130,743         17        118,409         16        103,466         16        10        14   

Fiery

     280,514         35        254,670         35        228,443         35        10        11   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total revenue

   $ 790,427         100   $ 727,693         100   $ 652,137         100     9     12
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Overview

Revenue was $790.4, $727.7, and $652.1 million for the years ended December 31, 2014, 2013, and 2012, respectively, resulting in a 9% increase in 2014 compared with 2013 and a 12% increase in 2013 compared with 2012. The $62.7 million increase in 2014 compared with 2013 consisted of increased Industrial Inkjet, Productivity Software, and Fiery revenue of $24.6, $12.3, and $25.8 million, respectively. The $75.6 million increase in 2013 compared with 2012 consisted of increased Industrial Inkjet, Productivity Software, and Fiery revenue of $34.4, $14.9, and $26.3 million, respectively.

Our revenue growth was primarily driven by the strength of our Industrial Inkjet operating segment in the digital printing markets in which it participates, the benefits of the acquisition strategy in our Productivity Software operating segment with respect to both product offerings and our distribution channel, and product launches by the leading printer manufacturers in the Fiery operating segment.

 

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Industrial Inkjet Revenue

Industrial Inkjet revenue increased by $24.6 million, or 7%, in 2014 compared with 2013. Industrial Inkjet revenue in the super-wide and wide format products lines is benefiting from the ongoing analog to digital and solvent to UV migration. The Industrial Inkjet revenue increase was primarily due to:

 

   

significantly increased UV and LED ink revenue resulting from the high utilization our UV printers are experiencing in the field, partially offset by decreased solvent printer installed base demand measured by solvent ink usage,

 

   

strong demand for our printers incorporating LED technology such as:

 

  ¡    

the GS5500LXr 5-meter and GS3250LXr 3-meter roll-to-roll digital UV inkjet super-wide format printers,

 

  ¡    

the newly launched H1625 digital UV inkjet wide format printer,

 

   

the HS100 digital UV inkjet press representing an alternative to analog presses utilizing pin & cure technology, and

 

   

other super-wide and wide format digital inkjet printers,

 

   

partially offset by decreased ceramic tile decoration digital inkjet printer revenue due to softness in the global construction market. Companies are delaying investment in new equipment, especially in China.

Industrial Inkjet revenue increased by $34.4 million, or 11%, in 2013, compared with 2012, primarily due to significantly increased UV and LED ink revenue, strong demand for our GS3250LX and GS2000LX UV-curing digital inkjet printers incorporating “cool cure” LED technology, acceptance of our QS2Pro and QS3Pro UV hybrid digital inkjet printers, which were launched in 2012, our HS100 digital UV inkjet press incorporating pin & cure technology and representing an alternative to analog presses, which was launched during the second quarter of 2013, and our next generation Cretaprint C3 ceramic tile decoration digital inkjet printer, which was launched during the fourth quarter of 2012.

Productivity Software Revenue

Productivity Software revenue increased by $12.3 million, or 10%, in 2014 compared with 2013, primarily due to increased recurring maintenance revenue resulting from our business acquisition strategy; increased Radius, Pace, and web-to-print license revenue, as well as license and subscription revenue from recently acquired businesses. Productivity Software revenue benefited from our acquisitions of SmartLinc, Rhapso, DirectSmile, and DIMS, which closed in 2014, and GamSys, Metrix, and Lector, which closed in 2013. Our acquisitions have increased the international presence of our Productivity Software business and significantly increased our recurring maintenance revenue base.

Productivity Software revenue increased by $14.9 million, or 14%, in 2013 compared with 2012, primarily due to increased Monarch, Radius, and Pace revenue, as well as revenue from recently acquired businesses. Productivity Software revenue benefited from our acquisitions of GamSys, Metrix, and Lector, which closed in 2013, and Metrics, OPS, and Technique, which closed in 2012.

Fiery Revenue

Fiery revenue increased by $25.8 million, or 10%, in 2014 compared with 2013. Although end customer and reseller channel preference for Fiery products drives demand, most Fiery revenue relies on the leading printer manufacturers to design, develop, and integrate Fiery technology into their print engines. The Fiery revenue increase is primarily due to:

 

   

new product launches by these printer manufacturers with increased speed, quality, and versatility have made the DFE a more significant consideration for the customer resulting in increased stand-alone Fiery DFE revenue,

 

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significant investment in research and development has resulted in advances in color management, speed, and field presence, which have led to increased DFE market share,

 

   

integration of Fiery DFEs with certain Industrial Inkjet and Productivity Software products, and

 

   

increased sales of Fiery Self Serve payment solutions, and low reseller inventory.

Fiery revenue increased by $26.3 million, or 11%, in 2013 compared with 2012. The Fiery revenue increase is primarily due to new product launches by these printer manufacturers resulting in increased stand-alone and embedded DFE revenue, improved market share for Fiery versus competing DFEs in certain markets that we serve, as well as the launch of the Fiery FS100 Pro DFE platform. Our customers have also benefited from recent integration of our Fiery products with certain of our Industrial Inkjet and Productivity Software products.

Revenue by Geographic Region

Our revenue by geographic region for the years ended December 31, 2014, 2013, and 2012 was as follows (in thousands):

 

     For the years ended December 31,     % change  
     2014     2013     2012     2014
over
2013
    2013
over
2012
 

Americas

   $ 438,421         55   $ 412,127         56   $ 354,114         54     6     16

EMEA

     244,545         31        207,665         29        195,397         30        18        6   

APAC

     107,461         14        107,901         15        102,626         16        (0     5   

Japan

     27,733         4        21,977         3        27,870         4        26        (21

APAC, ex Japan

     79,728         10        85,924         12        74,756         12        (7     15   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total revenue

   $ 790,427         100   $ 727,693         100   $ 652,137         100     9     12
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Shipments to some of our significant printer manufacturer customers are made to centralized purchasing and manufacturing locations, which in turn ship to other locations, making it difficult to obtain accurate geographical shipment data. Accordingly, we believe that export sales of our products into each region may differ from what is reported. We expect that sales outside of the U.S. will continue to represent a significant portion of our total revenue.

Overview

Our consolidated revenue increase of $62.7 million, or 9% in 2014 compared with 2013, resulted from increased revenue in the Americas, EMEA, and Japan, partially offset by decreased revenue in APAC, excluding Japan.

Our consolidated revenue increase of $75.6 million, or 12%, in 2013 compared with 2012, resulted from increased revenue in the Americas, EMEA, and APAC, excluding Japan, partially offset by decreased revenue in Japan.

Americas Revenue

Americas revenue increased by $26.3 million, or 6%, in 2014 compared with 2013 resulting from increased revenue in all three of our operating segments. Decreased ceramic tile decoration digital inkjet revenue partially offset double digit percentage growth in super-wide and wide format digital inkjet printer revenue.

Americas revenue increased by $58.0 million, or 16%, in 2013 compared with 2012. Americas revenue increased in all three of our operating segments. Industrial Inkjet revenue increased primarily due to sales of super-wide and wide format UV printers and UV ink, as well as the effective introduction of our ceramic tile decoration

 

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digital inkjet printer product into this market. Productivity Software revenue increased primarily due to increased Monarch, Pace, and Radius revenue. Fiery revenue significantly increased primarily as a consequence of product launches by the leading printer manufacturers, which had previously been delayed.

EMEA Revenue

EMEA revenue increased by $36.9 million, or 18%, in 2014 compared with 2013 resulting from increased revenue in all three of our operating segments. Decreased ceramic tile decoration digital inkjet revenue partially offset double digit percentage growth in super-wide and wide format digital inkjet printer revenue. We drove significant sales into the EMEA region through our 2014 acquisitions of SmartLinc, Rhapso, DirectSmile, and DIMS.

EMEA revenue increased by $12.3 million, or 6%, in 2013 compared with 2012 primarily due to increased Productivity Software revenue through growth of our Monarch, Radius, and Pace revenue from higher sales in various countries including South Africa, U.K., and Germany. We also drove significant sales into the EMEA region through our 2012 business acquisitions of OPS and Technique and our 2013 business acquisitions of GamSys and Lector. Fiery revenue in the EMEA region also benefited from product launches by the leading printer manufacturers, which had previously been delayed.

Japan Revenue

Japan revenue increased by $5.8 million, or 26%, in 2014 compared with 2013 primarily due to primarily due to increased Fiery revenue and super-wide and wide format industrial digital inkjet printer sales.

Japan revenue decreased by $5.9 million, or 21%, in 2013 compared with 2012 primarily due to a decrease in Fiery revenue in Japan as the leading printer manufacturers focused their efforts elsewhere. The Fiery revenue decrease in Japan was partially offset by a modest amount of industrial digital inkjet printer sales.

APAC, ex Japan, Revenue

APAC, excluding Japan, revenue decreased by $6.2 million, or 7%, in 2014 compared with 2013 due to increased revenue in all three of our operating segments. Decreased ceramic tile decoration digital inkjet revenue partially offset double digit percentage growth in super-wide and wide format digital inkjet printer revenue. Decreased ceramic tile decoration digital inkjet printer revenue primarily resulted from the slowdown in the global construction industry, especially in China.

APAC, excluding Japan, revenue increased by $11.2 million, or 15%, in 2013 compared with 2012 primarily due to increased ceramic tile decoration digital inkjet printer revenue, super-wide and wide format industrial digital inkjet printer revenue, and product launches by the leading printer manufacturers in the Fiery operating segment.

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 Fiery products to end customers through reseller channels. End customer and reseller channel preference for the Fiery DFE and software solutions drive 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

 

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small number of leading printer manufacturers. Xerox provided 11% of our revenue for the year ended December 31, 2014, and 12% of our revenue for the years ended December 31, 2013 and 2012.

Our reliance on revenue from the leading printer manufacturers was 33% during 2014 and 2013 and 32% during 2012. Over time, we expect our revenue from the leading printer manufacturers to decline. Because sales of our printer and copier-related 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.

Gross Profit

Gross profit by operating segment, excluding stock-based compensation, for the years ended December 31, 2014, 2013, and 2012 was as follows (in thousands):

 

     2014     2013     2012  

Industrial Inkjet

      

Revenue

   $ 379,170      $ 354,614      $ 320,228   

Gross profit

     143,981        140,095        127,783   

Gross profit percentages

     38.0     39.5     39.9

Productivity Software

      

Revenue

   $ 130,743      $ 118,409      $ 103,466   

Gross profit

     94,733        85,246        74,426   

Gross profit percentages

     72.5     72.0     71.9

Fiery

      

Revenue

   $ 280,514      $ 254,670      $ 228,443   

Gross profit

     193,585        171,642        153,805   

Gross profit percentages

     69.0     67.4     67.3

A reconciliation of operating segment gross profit to the consolidated statements of operations for the years ended December 31, 2014, 2013, and 2012 is as follows (in thousands):

 

     2014     2013     2012  

Segment gross profit

   $ 432,299      $ 396,983      $ 356,014   

Stock-based compensation expense

     (2,562     (1,817     (1,193
  

 

 

   

 

 

   

 

 

 

Gross profit

   $ 429,737      $ 395,166      $ 354,821   
  

 

 

   

 

 

   

 

 

 

Overview

Our gross profit percentages were comparable at 54% during the years ended December 31, 2014, 2013, and 2012.

Industrial Inkjet Gross Profit

The Industrial Inkjet gross profit percentage decreased from 39.5% in 2013 to 38.0% in 2014 primarily due to relatively fixed manufacturing costs being spread over lower ceramic tile decoration digital inkjet printer revenue.

The Industrial Inkjet gross profit percentage decreased from 39.9% in 2012 to 39.5% in 2013 primarily due to an unfavorable mix shift between lower and higher margin printers, and freight costs.

 

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Productivity Software Gross Profit

The Productivity Software gross profit percentage increased from 72.0% in 2013 to 72.5% in 2014 primarily due to efficiencies gained through increased revenue, achievement of certain post-acquisition cost synergies, and price increases on annual maintenance renewal contracts.

The Productivity Software gross profit percentage increased from 71.9% in 2012 to 72.0% in 2013 primarily due to efficiencies gained through increased revenue and the achievement of certain post-acquisition cost synergies.

Fiery Gross Profit

The Fiery gross profit percentage increased from 67.4% in 2013 to 69.0% in 2014 primarily due to a mix shift from lower margin embedded DFEs to higher margin stand-alone DFEs and higher average selling price on DFEs for newly launched printers by the leading printer manufacturers.

The Fiery gross profit percentage increased from 67.3% in 2012 to 67.4% in 2013 primarily due to a mix shift from lower margin embedded DFEs to higher margin stand-alone DFEs.

Operating Expenses

Operating expenses for the years ended December 31, 2014, 2013, and 2012 were as follows (in thousands):

 

     For the years ended December 31,      % change  
     2014      2013     2012      2014
over
2013 
    2013
over
2012
 

Research and development

   $ 134,732       $ 128,124      $ 120,298         5     7

Sales and marketing

     147,383         137,583        125,513         7        10   

General and administrative

     66,932         47,755        50,727         40        (6

Amortization of identified intangibles

     20,673         19,438        18,594         6        5   

Restructuring and other

     6,578         4,834        5,803         36        (17

Gain on sale of building and land

     —          (117,216     —          —         (100
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total operating expenses

   $ 376,298       $ 220,518      $ 320,935         71     (31 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Operating expenses, net of gain on sale of building and land, increased by $155.8 million, or 71%, in 2014 as compared with 2013, and decreased by $100.4 million, or 31%, in 2013 as compared with 2012.

Operating expenses increased between 2013 and 2014 primarily due to the gain on sale of building and land of $117.2 million, which was recognized in 2013. Excluding the gain on sale of building and land, operating expenses increased by $38.6 million and increased as a percentage of revenue from 46% in 2013 to 48% in 2014. The increase in operating expenses, excluding the gain on sale of building and land in 2013, was primarily due to head count increases related to our business acquisitions, variable compensation due to improved profitability, commission payments resulting from increased revenue, trade show expenses, facilities-related restructuring expenses related to the consolidation of our operations in Germany, acquisition expenses, legal fees, amortization of intangible assets, and stock-based compensation, offset by the prior year release of reserves related to certain patent litigation, changes in fair value of contingent consideration, and imputed sublease income related to the deferred property transaction.

Operating expenses decreased between 2012 and 2013 primarily due to the gain on sale of building and land of $117.2 million. Excluding the gain on sale of building and land, operating expenses increased by $16.8 million, but decreased as a percentage of revenue from 49% in 2012 to 46% in 2013 due to the 12% increase in revenue between the corresponding years. The increase in operating expenses, excluding the gain on sale of building and

 

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land, was primarily due to head count increases related to our business acquisitions and geographic expansion in China, variable compensation due to improved profitability, commission payments resulting from increased revenue, trade show expenses, restructuring and other charges, legal fees, depreciation expense related to our deferred property transaction, and stock-based compensation, partially offset the release of reserves related to certain patent litigation, changes in fair value of contingent consideration, and imputed sublease income related to the deferred property transaction.

Research and Development

Research and development expenses include personnel, consulting, travel, research and development facilities, and prototype materials expenses. Research and development expenses for the years ended December 31, 2014, 2013, and 2012 were $134.7 million, or 17% of revenue, $128.1 million, or 17% of revenue, and $120.3 million, or 18% of revenue, respectively.

Research and development expenses increased by $6.6 million, or 5%, in 2014 as compared with 2013. Personnel-related expenses increased by $3.6 million primarily due to head count increases related to our business acquisitions, net of reduced variable compensation. Prototypes and non-recurring engineering, consulting, contractor, freight, and related travel expenses increased by $1.5 million primarily due to accelerated product development efforts in advance of new product launches earlier in 2014. Stock-based compensation expense increased by $1.2 million primarily due to new RSUs issued at a higher stock price compared to the prior year, increased Employee Stock Purchase Plan (“ESPP”) expense due to our appreciating stock price, and increased employee participation compared to the prior year. Facility and information technology expenses related to our research and development activities increased by $0.3 million.

Research and development expenses increased by $7.8 million, or 7%, in 2013 as compared with 2012. Personnel-related expenses increased by $3.5 million primarily due to head count increases related to our business acquisitions and variable compensation due to improved profitability. Prototypes and non-recurring engineering, consulting, contractor, and related travel expenses were comparable to the prior year. Stock-based compensation expense increased by $1.8 million. Facility and information technology expenses related to our research and development activities increased by $2.5 million.

Research and development head count was 1,067, 1,011, and 967 as of December 31, 2014, 2013, and 2012, respectively.

We expect that if the U.S. dollar remains volatile against the Indian rupee, Euro, British pound sterling, or Brazilian real, research and development expenses reported in U.S. dollars could fluctuate, although we hedge our operating expense exposure to the Indian rupee, which partially mitigates this risk.

Sales and Marketing

Sales and marketing expenses include personnel, trade shows, marketing programs and promotional materials, sales commissions, travel and entertainment, depreciation, and sales office expenses in the U.S., Europe, and APAC.

Sales and marketing expenses for the years ended December 31, 2014, 2013, and 2012 were $147.4 million, or 19% of revenue, $137.6 million, or 19% of revenue, and $125.5 million, or 19% of revenue, respectively.

Sales and marketing expenses increased by $9.8 million, or 7%, in 2014 as compared with 2013. Personnel-related expenses increased by $4.8 million primarily due to head count increases related to our business acquisitions and increased commission payments resulting from increased revenue, net of reduced variable compensation. Trade show and marketing program spending, including consulting, contractor, travel, and freight, increased by $0.3 million. Stock-based compensation expense increased by $2.6 million primarily due to new

 

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RSUs issued at a higher stock price compared to the prior year, increased ESPP expense due to our appreciating stock price, and increased employee participation compared to the prior year. The remaining increase of $2.1 million is primarily due to facility and information technology expenses related to our sales and marketing activities.

Sales and marketing expenses increased by $12.1 million, or 10%, in 2013 as compared with 2012. Personnel-related expenses increased by $10.5 million primarily due to head count increases related to our business acquisitions, increased commission payments resulting from increased revenue, and variable compensation due to improved profitability. Trade show and marketing program spending, including related travel and freight, increased by $1.4 million. Stock-based compensation expense increased by $1.2 million. Facility and information technology expenses decreased by $1.0 million.

Sales and marketing head count was 762, 721, and 613 as of December 31, 2014, 2013, and 2012, respectively, including 304, 276, and 207 in customer service head count for each of the years presented.

Over time, our sales and marketing expenses may increase in absolute terms if revenue increases in future periods as we continue to actively promote our products and introduce new products and services. We expect that if the U.S. dollar remains volatile against the Euro, British pound sterling, Brazilian real, Australian dollar, and other currencies, sales and marketing expenses reported in U.S. dollars could fluctuate.

General and Administrative

General and administrative expenses consist primarily of human resources, legal, and finance expenses. General and administrative expenses for the years ended December 31, 2014, 2013, and 2012 were $66.9 million, or 8% of revenue, $47.8 million, or 6% of revenue, and $50.7 million, or 8% of revenue, respectively.

General and administrative expenses increased by $19.1 million, or 40%, in 2014 as compared with 2013. Personnel-related expenses increased by $1.5 million primarily due to head count increases related to our business acquisitions, net of reduced variable compensation. Stock-based compensation expense increased by $5.7 million primarily due to new RSUs issued at a higher stock price compared to the prior year, increased ESPP expense due to our appreciating stock price, and increased employee participation compared to the prior year. Imputed sublease income of $3.1 million, partially offset by imputed depreciation of $1.4 million, was accrued during the year ended December 31, 2013 related to the deferred proceeds from sale of building and land. Legal and travel expenses increased by $1.2 million due to increased litigation activity in 2014. Litigation settlement expenses increased general and administrative expenses by $4.2 million compared with 2013 due to the settlement of a patent infringement claim in 2013, which resulted in the release of $3.3 million of litigation reserves compared with litigation settlement expense of $0.9 million in 2014. The remaining increase of $2.9 million is primarily due to facility expenses related to our new corporate headquarters.

The estimated probability or actual achievement of several earnout performance targets was reduced during the year ended December 31, 2014, net of earnout interest accretion, resulting in a reduction of the associated liability and a credit to general and administrative expense of $3.8 million. A similar change in the estimated probability or actual achievement of several earnout performance targets during the year ended December 31, 2013, net of earnout interest accretion, resulted in a reduction of the associated liability and a credit to general and administrative expense of $5.7 million.

General and administrative expenses decreased by $3.0 million, or 6%, in 2013 as compared with 2012. Personnel-related expenses increased by $2.5 million primarily due to head count increases related to business acquisitions and increased variable compensation due to improved profitability. Stock-based compensation expense increased by $2.4 million. Imputed sublease income increased by $2.6 million, partially offset by increased imputed depreciation of $1.1 million, related to the deferred property transaction. Results for 2012 include a credit to general and administrative expenses of $1.2 million related to the actual sublease of a portion

 

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of the Foster City facility prior to its sale. Acquisition-related expenses decreased by $0.8 million. Legal fees increased by $1.7 million due to increased litigation activity in 2013. Litigation settlement expenses reduced general and administrative expenses by $3.3 million compared with 2012 primarily due to the settlement of a patent infringement claim resulting in the release of related litigation reserves. Facility and information technology expenses decreased by $0.8 million.

The estimated probability or actual achievement of several earnout performance targets was reduced during the year ended December 31, 2013, net of earnout interest accretion, resulting in a reduction of the associated liability and a credit to general and administrative expense of $5.7 million. A similar change in the estimated probability or actual achievement of several earnout performance targets during the year ended December 31, 2012, net of earnout interest accretion, resulted in a reduction of the associated liability and a credit to general and administrative expense of $1.4 million.

We expect that if the U.S. dollar remains volatile against the Euro, British pound sterling, Indian rupee, Brazilian real, or other currencies, general and administrative expenses reported in U.S. dollars could fluctuate.

Stock-based Compensation

Stock-based compensation expense for the years ended December 31, 2014, 2013, and 2012 were $36.1 million, or 5% of revenue, $25.8 million, or 4% of revenue, and $19.7 million, or 3% of revenue, respectively.

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 during the initial years of the vesting period.

Stock-based compensation expense increased by $10.3 million, or 40%, in 2014 as compared with 2013 due to new RSUs issued at a higher stock price compared to the prior year, increased ESPP expense due to our appreciating stock price, and increased employee participation compared to the prior year.

Stock-based compensation expense increased by $6.1 million, or 31%, in 2013 as compared with 2012 due to increased probability of achieving performance-based awards and the impact of our increased stock price on the expense recognized for new RSUs.

Amortization of Identified Intangibles

Amortization of identified intangibles for the years ended December 31, 2014, 2013, and 2012 was $20.7 million, or 3% of revenue, $19.4 million, or 3% of revenue, and $18.6 million, or 3% of revenue, respectively.

Amortization of identified intangibles increased by $1.3 million, or 6%, in 2014 as compared with 2013 primarily due to amortization of intangible assets identified through the business acquisitions that closed during 2014 and 2013, partially offset by decreased amortization due to Pace, Entrac, Streamline, and Raster intangible assets becoming fully amortized.

Amortization of identified intangibles increased by $0.8 million, or 5%, in 2013 as compared with 2012 primarily due to amortization of intangible assets identified through the business acquisitions that closed during 2013 and 2012, partially offset by decreased amortization due to Jetrion and Pace intangibles becoming fully amortized.

 

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Restructuring and Other

During the years ended December 31, 2014, 2013, and 2012, cost reduction actions were taken to lower our operating expense run rate as we continue to analyze our cost structure and re-align our organization following business acquisitions. These charges primarily relate to cost reduction actions undertaken to integrate recently acquired businesses, consolidate facilities, and lower our operating expense run rate. Restructuring and other consists primarily of restructuring, severance, retention, facility downsizing and relocation, and acquisition integration expenses. Our restructuring and other plans are accounted for in accordance with ASC 420, Exit or Disposal Cost Obligations, ASC 712, Compensation—Non-Retirement Postemployment Benefits, and ASC 820, Fair Value Measurement.

Restructuring and other costs for the years ended December 31, 2014, 2013, and 2012 were $6.6, $4.8, and $5.8 million, respectively. Restructuring and other charges include severance costs of $3.2, $2.2, and $2.9 million related to head count reductions of 130, 106, and 117 for the years ended December 31, 2014, 2013, and 2012, respectively. Severance costs include severance payments, related employee benefits, retention bonuses, outplacement fees, and relocation costs.

Facilities relocation and downsizing costs for the years ended December 31, 2014, 2013, and 2012 were $2.0, $0.3, and $0.3 million, respectively. Facilities restructuring and other costs are primarily related to the consolidation of our German operations in 2014, relocation of our corporate headquarters as well as certain manufacturing and administrative facilities in 2013, and facilities downsizing and relocation costs related to various facilities in the Fiery operating segment in 2012. Integration expenses for the years ended December 31, 2014, 2013, and 2012 of $1.4, $1.4, and $1.7 million, respectively, were required to integrate our business acquisitions. Acquisition-related executive retention expense of $0.9 million was recognized during each of the years ended December 31, 2013 and 2012, respectively, coinciding with the continuing employment of a former shareholder of an acquired company.

Gain on Sale of Building and Land

On November 1, 2012, we sold the 294,000 square foot building located in Foster City, California, which at that time served as our corporate headquarters, along with approximately four acres of land and certain other assets related to the property for $179.7 million. We used the facility until October 31, 2013, while searching for a new facility, building it out, and relocating our corporate headquarters, for which period rent was not required to be paid. We accounted for this transaction as a financing related to our continued use of the facility and a sublease receivable related to use of a portion of the facility by the purchaser. Our use of the facility during the rent-free period constituted a form of continuing involvement that prevented gain recognition. We imputed interest expense on the financing obligation, which resulted in total deferred proceeds from property transaction of $183.2 million on October 31, 2013. We recorded sublease income at an implied market rate based on the level of sublease income realized prior to our sale of the facility. Because we vacated the facility on October 31, 2013, we have no continuing involvement with the property and have accounted for the transaction as a property sale during the fourth quarter of 2013, thereby recognizing a gain of $117.2 million on the sale of the property. We incurred imputed financing and depreciation expense, net of imputed sublease income, of $1.6 million between November 2012, when we sold the building, and the fourth quarter of 2013, when we vacated the building.

Interest Expense

Interest expense for the years ended December 31, 2014, 2013, and 2012 was $5.9, $2.3, and $0.7 million, respectively.

Interest expense increased by $3.6 million in 2014 compared with 2013. Interest expense increased primarily due to $4.7 million of interest expense and amortization of debt issuance costs related to our Notes and increased imputed interest expense of $0.6 million related to our build-to-suit lease, partially offset by imputed interest expense of $3.0 million related to the deferred proceeds from sale of building and land in 2013, net of capitalized interest of $1.1 million related to our new corporate headquarters.

 

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Interest expense increased by $1.6 million in 2013 compared with 2012. Interest expense increased primarily due to imputed interest expense of $0.3 million related to our build-to-suit lease and increased imputed interest expense of $1.3 million related to the deferred proceeds from sale of building and land in 2013.

Interest Income and Other Income (Expense), Net

Interest income and other income (expense), net, includes interest income, gains and losses from sales of our cash equivalents and short-term investments, and net foreign currency transaction gains and losses. Interest income and other income (expense), net, for the years ended December 31, 2014, 2013, and 2012 was $(5.5), $0.8, and $1.8 million, respectively.

Interest income and other income (expense), net, decreased by $6.3 million from a gain of $0.8 million in 2013 to a loss of $5.5 million in 2014 primarily due to a foreign exchange loss of $6.8 million during the year ended December 31, 2014, compared to a foreign exchange loss of $0.3 million during the year ended December 31, 2013, resulting from revaluation of foreign currency denominated net assets (mainly denominated in Euros, British pounds sterling, Brazilian reais, and Indian rupees), partially offset by hedging gains. Investment income increased by $0.3 million from $1.1 million in 2013 to $1.4 million in 2014 primarily resulting from increased investments in 2014, which were made possible by the proceeds from the Notes.

Interest income and other income (expense), net, decreased by $1.0 million from a gain of $1.8 million in 2012 to a gain of $0.8 million in 2013 primarily due to a foreign exchange loss of $0.3 million during the year ended December 31, 2013, compared to a foreign exchange gain of $0.6 million during the year ended December 31, 2012, resulting from revaluation of foreign currency denominated net assets (mainly denominated in Euros, British pounds sterling, Brazilian reais, and Indian rupees).

Goodwill Impairment

We perform our annual goodwill impairment analysis in the fourth quarter of each year according to the provisions of ASC 350-20-35, Goodwill—Subsequent Measurement. A two-step impairment test of goodwill is required, unless the simplified method is elected. In the first step, the fair value of each reporting unit is compared to its carrying value. If the fair value exceeds carrying value, goodwill is not impaired and further testing is not required. If the carrying value exceeds fair value, then the second step of the impairment test is required to determine the implied fair value of the reporting unit’s goodwill. The implied fair value of goodwill is calculated by deducting the fair value of all tangible and intangible net assets of the reporting unit, excluding goodwill, from the fair value of the reporting unit as determined in the first step. If the carrying value of the reporting unit’s goodwill exceeds its implied fair value, then an impairment loss must be recorded equal to the difference.

Our goodwill valuation analysis is based on our respective reporting units (Industrial Inkjet, Productivity Software, and Fiery), which are consistent with our operating segments identified in Note 15—Segment Information, Geographic Regions, and Major Customers of the Notes to Consolidated Financial Statements. We determined the fair value of our reporting units as of December 31, 2014 by equally weighting the market and income approaches. Under the market approach, we estimated fair value based on market multiples of revenue or earnings of comparable companies. Under the income approach, we estimated fair value based on a projected cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. Based on our valuation results, we have determined that the fair values of our Industrial Inkjet, Productivity Software, and Fiery reporting units exceed their carrying values by $713, $407, and $412 million, respectively, or 387%, 277%, and 463%, respectively.

Since fair values were determined using a weighting of the market and income approaches, we reviewed the sensitivity of the market multiple and discount rate to evaluate the sensitivity of the Industrial Inkjet, Productivity Software, and Fiery valuations. The impact of a change in the market multiple of 1% results in either an increase

 

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or decrease in Industrial Inkjet, Productivity Software, and Fiery fair values of 0.5%. Likewise, the impact of a change in the discount rate of one percentage point results in either an increase in the Industrial Inkjet, Productivity Software, and Fiery fair values of 8.8%, 8.7%, or 4.6%, respectively, or a decrease of 7.8%, 8.0%, or 7.0%, respectively. Consequently, we have concluded that no reasonably possible changes would reduce the fair value of the reporting units to such a level that it would cause a failure in step one of the impairment analysis.

Income before Income Taxes

Income before income taxes for the years ended December 31, 2014, 2013, and 2012 were as follows (in thousands):

 

     2014      2013      2012  

U.S.

   $ 15,090       $ 127,232       $ 5,615   

Foreign

     26,997         45,906         29,408   
  

 

 

    

 

 

    

 

 

 

Total

   $ 42,087       $ 173,138       $ 35,023   
  

 

 

    

 

 

    

 

 

 

For the year ended December 31, 2014, pretax net income of $42.1 million consisted of U.S. and foreign pretax net income of $15.1 and $27.0 million, respectively. The pretax net income attributable to U.S. operations included amortization of identified intangibles of $7.1 million, stock-based compensation of $36.1 million, restructuring and other costs of $2.2 million, acquisition-related costs of $1.1 million, litigation settlement expense of $0.9 million, and interest expense and amortization of debt issuance costs related to our Notes of $4.7 million, partially offset by the change in fair value of contingent consideration of $0.4 million. The pretax net income attributable to foreign operations included amortization of identified intangibles of $13.6 million, restructuring and other costs of $4.4 million, acquisition-related costs of $0.4 million, and earnout interest accretion of $0.6 million, partially offset by the change in fair value of contingent consideration of $4.1 million. The exclusion of these items from net income would result in a U.S. and foreign pretax net income of $66.8 and $41.9 million, respectively, for the year ended December 31, 2014.

For the year ended December 31, 2013, pre-tax income of $173.1 million consisted of U.S. and foreign pre-tax income of $127.2 and $45.9 million, respectively. Pre-tax income attributable to U.S. operations is net of amortization of identified intangibles of $8.1 million, stock-based compensation expense of $25.8 million, restructuring and other costs of $1.7 million, and acquisition-related transaction costs of $0.6 million, partially offset by the change in fair value of contingent consideration of $1.5 million, net of accretion and gain on sale of building and land of $117.2 million. Pre-tax income attributable to foreign operations is net of restructuring and other costs of $3.1 million, acquisition-related transaction costs of $0.8 million, and amortization of identified intangibles of $11.3 million, partially offset by the change in fair value of contingent consideration of $4.2 million, net of accretion, and the release of reserves related to patent litigation of $3.3 million. The exclusion of these items from net income would result in a U.S. and foreign pretax net income of $44.7 and $53.6 million, respectively, for the year ended December 31, 2013.

For the year ended December 31, 2012, pre-tax income of $35.0 million consisted of U.S. and foreign pre-tax income of $5.6 and $29.4 million, respectively. Pre-tax income attributable to U.S. operations is net of amortization of identified intangibles of $7.3 million, stock-based compensation expense of $19.7 million, restructuring and other costs of $3.2 million, imputed net expenses related to the sale of building and land of $0.4 million, and acquisition-related transaction costs of $1.6 million, partially offset by net litigation settlement of $0.3 million and change in fair value of contingent consideration of $1.4 million. Pre-tax income attributable to foreign operations is net of restructuring and other costs of $2.6 million, acquisition-related transaction costs of $0.6 million, amortization of identified intangibles of $11.3 million, and litigation settlement of $0.5 million. The exclusion of these items from net income would result in a U.S. and foreign pretax net income of $36.1 and $44.4 million, respectively, for the year ended December 31, 2012.

 

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Provision for (Benefit from) Income Taxes

We recorded a tax provision of $8.4 million in 2014 on pre-tax income of $42.1 million, a tax provision of $64.0 million in 2013 on pre-tax income of $173.1 million, and a tax benefit of $48.2 million in 2012 on pre-tax income of $35.0 million.

The provisions for income taxes before discrete items were $14.7, $11.5, and $17.2 million for the years ended December 31, 2014, 2013, and 2012, respectively. Primary differences between our recorded tax provision (benefit) rate and the U.S. statutory rate of 35% include tax benefits related to credits for research and development costs, lower taxes on permanently reinvested foreign earnings, tax benefit related to the liquidation of a subsidiary, tax effects of stock-based compensation expense pursuant to ASC 718-740, Stock Compensation—Income Taxes, and changes in the valuation allowance for financial reporting purposes.

The following table reconciles our provision for income taxes before discrete items to our provision for (benefit from) income taxes for the years ended December 31, 2014, 2013, and 2012 (in millions):

 

     2014      2013      2012  

Provision for income taxes before discrete items

   $ 14.7       $ 11.5       $ 17.2   

Interest related to unrecognized tax benefits

     0.4         0.4         0.3   

Benefit related to the 2012 U.S. federal research and development tax credit

     —           (3.2      —     

Benefit related to capital loss due to liquidation of subsidiary

     —           —           (43.6

Benefit related to increased value of intangibles

     (3.1      —           (6.5

Tax deductions related to ESPP dispositions

     (0.6      (0.6      (0.6

Provision for (benefit from) reassessment of taxes related to filing of prior year tax returns

     —           (0.1      (1.9

Benefit related to reversals of uncertain tax positions

     (2.6      (5.8      (10.5

Benefit from reversals of accrued interest related to uncertain tax positions

     (0.2      (0.5      (0.5

Benefit related to net adjustments due to foreign audit settlements

     —           (1.6      (0.8

Provision related to valuation allowance for California deferred tax assets

     —           19.4         —     

Provision related to gain on sale of building and land

     —           45.4         —     

Other discrete items

     (0.2      (0.9      (1.3
  

 

 

    

 

 

    

 

 

 

Provision for (benefit from) income taxes

   $ 8.4       $ 64.0       $ (48.2
  

 

 

    

 

 

    

 

 

 

During the year ended December 31, 2014, we recognized a $3.1 million tax benefit related to the increased valuation of intangible assets for Brazilian tax reporting resulting from the merger of our Brazilian subsidiaries.

In 2013, pursuant to the American Taxpayer Relief Act of 2012, we recognized tax benefits of $3.2 million resulting from the renewal of the U.S. federal research and development tax credit retroactive to the beginning of 2012. ASC 740-10-45-15 requires that the effects of a change in tax law or rates be recognized in the period that includes the enactment date.

The benefit from the reassessment of tax exposure related to the filing of prior year tax returns of $0.1 million for the year ended December 31, 2013, in the table above consists of $1.8 million of tax expense required to correctly state our prior year tax provision, which was partially offset by $1.9 million change in estimate for items recognized in the prior year. The prior year adjustment is required to correctly state our tax provision

 

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subsequent to the realignment of the ownership of our intellectual property that is described more fully below. We have determined that the impact of the prior year adjustment is immaterial to our consolidated financial statements for the years ended December 31, 2013 and 2012.

In 2012, we entered into a business reorganization and subsequent liquidation of VUTEk, Inc., a wholly-owned U.S. subsidiary that we acquired in 2005 in a non-taxable stock acquisition. One of the effects of this reorganization, in combination with other factors, was the recognition of a combined $43.6 million federal and state tax benefit due to the realization of capital loss deductions related to the difference between a portion of our original acquisition price of VUTEk, Inc. and its current fair value. As a result of the sale of our Foster City corporate headquarters facility and related land in 2012, we recognized taxable income of approximately $117.2 million and recorded a deferred tax asset of $47.9 million. While this gain was required to be reported in 2012 for income tax purposes, we recognized the gain for financial reporting purposes and reversed the $47.9 million deferred tax asset when we vacated the facility in 2013.

We earn a significant amount of our operating income outside the U.S., which is permanently reinvested in foreign jurisdictions. Most of this income is earned in the Netherlands, Spain, and Cayman Islands, which are jurisdictions with tax rates materially lower than the statutory U.S. tax rate of 35%. In 2014, we realigned the ownership of Radius and other recently acquired Productivity Software intellectual property to both augment operational synergies and parallel our worldwide supply chain. In 2012, we realigned the ownership of our Productivity Software and Cretaprint intellectual property to parallel our worldwide intellectual property ownership. In addition to achieving operational synergies, one of the effects of these reorganizations was the recognition of tax benefits of $0.3 and $6.5 million in 2014 and 2012, respectively. The $6.5 million tax benefit recorded in 2012 related to an increase in the value of intangible assets for Spanish statutory and tax reporting purposes. Our effective tax rate could fluctuate significantly and be adversely impacted if anticipated earnings in the Netherlands, Spain, and the Cayman Islands are proportionally lower than current projections and earnings in all other jurisdictions are proportionally higher than current projections.

While we currently do not foresee a need to repatriate the earnings of these operations, should we require more capital in the U.S. than is generated by our U.S. operations, 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.

We assess the likelihood that our deferred tax assets will be recovered from future taxable income by considering both positive and negative evidence relating to their recoverability. If we believe that recovery of these deferred tax assets is not more likely than not, we establish a valuation allowance. To the extent we increase a valuation allowance, we will include an expense within the tax provision in the Consolidated Statement of Operations in the period in which such determination is made.

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. A significant piece of objective positive evidence evaluated for jurisdictions in a net deferred tax asset position was cumulative pre-tax income during the three years ended December 31, 2014. In addition, we considered that loss and credit carryforwards have not expired unused and a majority of our loss and credit carryforwards will not expire prior to 2021. In 2013, we determined that it is more likely than not that our California deferred tax assets will not be realized based on the size of the research and development credits being generated that exceed the utilization of these tax attributes. As a result, we recorded a charge of $19.4 million to establish a valuation allowance against our California state deferred tax assets as of December 31, 2013.

 

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As of December 31, 2014, we have determined that it is more likely than not that we will realize the benefit related to our deferred tax assets, except for a valuation allowance related to the realization of existing California and Luxembourg deferred tax assets.

Unaudited Non-GAAP Financial Information

To supplement our 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 the presentation of non-GAAP net income and non-GAAP earnings per diluted share provides important supplemental information regarding non-cash expenses 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 the 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, changes in the fair value of contingent consideration, litigation settlement charges and reversals, non-cash interest expense related to our Notes, imputed interest expense and depreciation, net of accrued sublease income and capitalized interest, related to the sale of our corporate headquarters facility and related land, and the tax effects of those adjustments. Effective in 2014, 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.

These excluded items are described below:

 

   

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

Post-acquisition non-competition agreements are amortized over their term.

 

   

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

 

   

Restructuring and other 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.

 

  ¡    

Acquisition-related executive deferred compensation costs, which are dependent on the continuing employment of a former stockholder of an acquired company, were amortized on a straight-line basis during 2013 and 2012.

 

  ¡    

Expenses incurred to integrate businesses acquired during the periods reported.

 

   

Acquisition-related transaction costs associated with businesses acquired during the periods reported and anticipated transactions.

 

  ¡    

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

 

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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. 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.

 

  ¡    

Imputed net expenses related to sale of building and land. On November 1, 2012, we sold the 294,000 square foot building located in Foster City, California, which at that time served as our corporate headquarters, along with approximately four acres of land and certain other assets related to the property, for $179.7 million. We used the facility until October 31, 2013, for which period rent was not required to be paid. This constituted a form of continuing involvement that prevented gain recognition until we vacated the facility during the fourth quarter of 2013. Prior to vacating the building, the proceeds from the sale were recognized as deferred proceeds from property transaction on our Consolidated Balance Sheet. Imputed interest expense and depreciation, net of accrued sublease income and capitalized interest, was accrued during the years ended December 31, 2013 and 2012, related to the deferred property transaction.

 

  ¡    

Gain on sale of building and land. On November 1, 2012, we sold the aforementioned building and land for $179.7 million. We used the facility until October 31, 2013, while searching for a new facility, building it out, and relocating our corporate headquarters, for which period rent was not required to be paid. Because we vacated the facility on October 31, 2013, we have no continuing involvement with the property and have accounted for the transaction as a property sale during the fourth quarter of 2013, thereby recognizing a gain of approximately $117.2 million on the sale of the property.

 

  ¡    

Litigation settlements. In conjunction with our acquisition of Cretaprint, we assumed a contingent liability related to the alleged infringement of certain patents. Because the former owners of Cretaprint agreed to indemnify EFI against any potential liability, we accrued a contingent liability based on a reasonable estimate of the legal obligation that was probable as of the acquisition date and we accrued a contingent asset based on the portion of any liability for which the former Cretaprint owners would indemnify EFI. The net obligation accrued in the opening balance sheet on the acquisition date was EU 2.5 million (or approximately $3.3 million). The Spanish Court of Appeal reached a final determination in 2013, which resulted in EFI having no liability related to any potential infringement of the patent. Because this matter is no longer subject to appeal, we reversed this liability by recognizing a credit against general and administrative expense in 2013. In addition, we settled or accrued reserves related to several unrelated litigation claims in 2014, 2013, and 2012 in aggregate amounts of $0.9, $0.2, and $0.3 million, respectively.

 

   

Tax effects of non-GAAP adjustments are as follows:

 

  ¡    

Effective in 2014, we are using 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

 

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revenue and profit. The long-term average tax rate is calculated in accordance with the principles of ASC 740, after excluding the tax effect of the non-GAAP items described above, to estimate the non-GAAP income tax provision in each jurisdiction in which we operate.

 

  ¡    

In addition to excluding the tax effect of the non-GAAP items described above, we have excluded the following from our non-GAAP net income for the year ended December 31, 2013 and 2012:

 

   

Tax charge of $19.4 million in 2013 resulting from the establishment of a valuation allowance related to the realization of tax benefits from existing California deferred tax assets.

 

   

Tax benefit of $43.6 million in 2012 resulting from a capital loss related to the liquidation of a wholly-owned subsidiary.

 

   

Tax benefit of $6.5 million in 2012 resulting from the increase in value of acquired intangibles for tax purposes due to an operational restructuring in Spain.

 

   

Tax benefit of $5.8 and $11.8 million for the years ended December 31, 2013 and 2012, respectively, resulting from the release of previously unrecognized tax benefits to facilitate comparability of our operating performance between the periods. These tax benefits primarily resulted from the release of previously unrecognized tax benefits resulting from the expiration of U.S. federal statutes of limitations.

 

   

Tax benefit of $3.2 million from the retroactive renewal of the 2012 U.S. federal research and development tax credit on January 2, 2013. The tax benefit had been previously recognized in our non-GAAP net income for the year ended December 31, 2012.

 

   

Interest expense accrued on prior year tax reserves of $0.3 million for the years ended December 31, 2013 and 2012.

Usefulness of Non-GAAP Financial Information to Investors

These 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.

 

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Reconciliation of GAAP Net Income to Non-GAAP Net Income

(unaudited)

 

     For the years ended December 31,  

(millions, except per share data)

      2014           2013           2012     

Net income

   $ 33.7      $ 109.1      $ 83.3   
  

 

 

   

 

 

   

 

 

 

Amortization of identified intangible assets

     20.7        19.4        18.6   

Stock-based compensation expense

     36.1        25.8        19.7   

Restructuring and other

     6.6        4.8        5.8   

Gain on sale of building and land

     —         (117.2     —    

General and administrative:

      

Acquisition-related transaction costs

     1.5        1.4        2.2   

Change in fair value of contingent consideration

     (3.8     (5.7     (1.4

Litigation reserve provisions, net of releases

     0.9        (3.1     0.3   

Sublease income related to deferred property transaction

     —         (3.1     (0.5

Depreciation expense related to deferred property transaction

     —         1.4        0.3   

Interest income and other income (expense), net:

      

Interest expense related to deferred property transaction

     —         1.9        0.6   

Non-cash interest expense related to our Notes

     3.5        —         —    

Tax effect of non-GAAP net income

     (12.1     41.9        (67.4
  

 

 

   

 

 

   

 

 

 

Non-GAAP net income

   $ 87.1      $ 76.6      $ 61.5   
  

 

 

   

 

 

   

 

 

 

Non-GAAP net income per diluted share

   $ 1.80      $ 1.58      $ 1.29   
  

 

 

   

 

 

   

 

 

 

Shares for purposes of computing diluted non-GAAP net income per share

     48.4        48.4        47.7   
  

 

 

   

 

 

   

 

 

 

Critical Accounting Policies

The preparation of the consolidated financial statements requires estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates, including those related to revenue recognition, bad debts, inventory valuation and purchase commitment reserves, warranty obligations, litigation, restructuring activities, fair value of financial instruments, stock-based compensation, income taxes, valuation of goodwill and intangible assets, business combinations, build-to-suit lease, and contingencies on an ongoing basis. Estimates are based on historical and current experience, the impact of the current economic environment, and various other assumptions believed to be reasonable under the circumstances at the time of the estimate, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Our critical accounting policies and estimates are as follows:

 

   

revenue recognition;

 

   

allowances for doubtful accounts,

 

   

inventory valuation and purchase commitment reserves,

 

   

warranty reserves,

 

   

litigation accruals,

 

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restructuring reserves,

 

   

fair value of financial instruments;

 

   

accounting for stock-based compensation;

 

   

accounting for income taxes;

 

   

valuation analyses of goodwill and intangible assets;

 

   

business combinations;

 

   

build-to-suit lease; and

 

   

determination of functional currencies for consolidating international operations.

Revenue recognition. Significant management judgments and estimates must be made and used in connection with the revenue recognized in any accounting period. Please refer to Note 1—The Company and its Significant Accounting Policies of the Notes to Consolidated Financial Statements for a more thorough and complete description of our revenue recognition accounting policy. For purposes of evaluating and understanding the judgments required, our revenue recognition policy is summarized below.

Product revenue includes hardware (industrial digital inkjet printers including components placed under maintenance agreements, ink required for industrial digital inkjet printers, design-licensed solutions including upgrades, and DFEs), software licensing and development, and royalties. Service revenue includes software license maintenance agreements, industrial digital inkjet printer maintenance and service, customer support, training, and consulting. The timing of revenue recognition for each of these categories is discussed below.

We recognize revenue on the sale of printers, ink, and DFEs in accordance with the provisions of SEC Staff Accounting Bulletin (“SAB”) 104, Revenue Recognition, and when applicable, ASC 605-25, Revenue Recognition—Multiple-Element Arrangements. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is reasonably assured. Products generally must be shipped against written purchase orders. We use either a binding purchase order or signed contract as evidence of an arrangement. Sales to some of the leading printer manufacturers are evidenced by a master agreement governing the relationship together with a binding purchase order. Sales to our resellers are also evidenced by binding purchase orders or signed contracts and do not generally contain rights of return or price protection.

For multiple element arrangements, we allocate revenue to the software deliverables and the non-software deliverables as a group based on the relative selling prices of all of the deliverables in the arrangement. For non-software deliverables, we allocate the arrangement consideration based on the relative selling price of the deliverables using best estimate of the sales price (“BESP”). For software deliverables (including post-contract customer support, professional services, hosting, and training), we generally use vendor-specific objective evidence of the fair value of the sales price (“VSOE”), when available. The selling price for each element is based upon the following hierarchy: VSOE if available, third party evidence (“TPE”) if VSOE is not available, or BESP if neither VSOE nor TPE are available.

We have established our ability to produce estimates sufficiently dependable to require adoption of the percentage of completion method with respect to certain fixed price contracts where we provide information technology system development and implementation services. Revenue on such contracts is recognized over the contract term based on the percentage of development and implementation services that are provided during the period compared with the total estimated development and implementation services to be provided over the entire contract. These services require that we perform significant, extensive, and complex design, development, modification, or implementation activities of our customers’ systems. Performance will often extend over long periods, and our right to receive future payment depends on our future performance in accordance with these agreements.

 

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The key estimates and assumptions and corresponding uncertainties for recognizing revenue are summarized as follows:

 

Key Estimates and Assumptions

  

Key Uncertainties

We establish VSOE of selling price using the price charged for a deliverable when sold separately and generally evidenced by a substantial majority of historical stand-alone transactions falling within a reasonably narrow range. In addition, we consider major service type, customer type, and other variables in determining VSOE. Our revenue estimates and assumptions are based on our ability to assert and maintain VSOE.

 

BESP is generally evidenced by a majority of historical transactions falling within a reasonable price range. We also consider multiple factors, including, but not limited to, cost of products, gross margin objectives, historical pricing practices, customer type, and distribution channels. Our revenue estimates and assumptions are based on our ability to maintain consistent BESP.

 

Distributors and resellers participate in various marketing and other programs, and we maintain estimated accruals and allowances for these programs based on contractual terms and historical experience.

 

If the arrangement includes a customer-negotiated refund or right of return relative to the delivered item and the delivery and performance of the undelivered item is considered probable and substantially in our control, the delivered element constitutes a separate unit of accounting. We limit revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products or services, future performance obligations, or subject to customer-specified return or refund privileges.

 

The percentage of completion method involves recognizing probable and reasonably estimable revenue using the percentage of services completed based on the current cumulative cost as a percentage of the estimated total cost, using a reasonably consistent profit margin over the period.

  

As our business and offerings evolve over time, modifications to our pricing and discounting methodologies, changes in the scope and nature of service offerings and/or changes in customer segmentation may result in a lack of consistency required to establish and/or maintain VSOE or to maintain consistent BESP. Additionally, technological changes resulting in variability in product costs and gross margins may require changes to our BESP model. Changes in BESP may result in a different allocation of revenue to the deliverables in multiple-element arrangements. These factors, among others, may adversely impact the amount of revenue and gross margins we report in a particular period.

 

If we experience changes in market or competitive conditions resulting in credits issued to our distributors and partners deviating significantly from our estimates, our revenues may be adversely impacted.

 

Revenue recognition is dependent on proper identification of the separate units of accounting in an arrangement and determining whether they have stand-alone value. Significant contract interpretation can be required to determine the appropriate accounting, including whether the deliverables specified in a multiple element arrangement should be treated as separate units of accounting for revenue recognition purposes, and, if so, how the price should be allocated among the elements and when to recognize revenue for each element.

 

Due to the long-term nature of these projects, developing the estimates of costs often requires significant judgment. Factors that must be considered in estimating the progress of work completed and ultimate cost of the projects include, but are not limited to, the availability of labor and labor productivity, the nature and complexity of the work to be performed, and the impact of delayed performance. If changes occur in delivery, productivity, or other factors used in developing the estimates of costs or revenue, we revise our cost and revenue estimates, which may result in increases or decreases in revenue and costs. Such revisions are reflected in net income in the period in which the facts that give rise to that revision become known.

 

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Allowances for doubtful accounts. We establish an allowance for doubtful accounts to ensure that trade receivables are not overstated due to uncollectibility. Our accounts receivable balance was $155.4 million, net of allowance for doubtful accounts and revenue reserves of $17.5 million, as of December 31, 2014. To ensure that we have established an adequate allowance for doubtful accounts, management analyzes accounts receivable and historical bad debts, customer concentrations, customer creditworthiness, current economic trends and macroeconomic conditions, changes in customer payment terms, the length of time receivables are past due, and significant one-time events. We record specific reserves for individual accounts when we become aware of specific customer circumstances, such as bankruptcy filings, deterioration in the customer’s operating results or financial position, or potential unfavorable outcomes from disputes with customers or vendors.

Inventory valuation. Management estimates potential future inventory obsolescence and noncancellable purchase commitments in order to properly value inventory and establish adequate reserves for potential losses on purchase commitments. Significant management judgment and estimates must be made related to inventory valuation including the evaluation of current economic trends, changes in customer demand, product design changes, product life and demand, and the acceptance of our products.

Warranty reserves. Our Industrial Inkjet printer and Fiery DFE products are generally accompanied by a 12-month limited warranty from date of shipment, which covers both parts and labor. In accordance with ASC 450-30, Loss Contingencies, an accrual is established when the warranty liability is estimable and probable based upon historical experience. A provision for estimated future warranty work is recorded in cost of revenue when revenue is recognized.

The warranty liability is reviewed regularly and periodically adjusted to reflect changes in warranty estimates. Significant management judgments and estimates must be made in connection with establishing and updating warranty reserves including estimated potential inventory return rates and replacement or repair costs. Warranty reserves were $9.7 million as of December 31, 2014.

Litigation accruals. We may be involved, from time to time, in a variety of claims, lawsuits, investigations, or proceedings relating to contractual disputes, securities laws, intellectual property rights, employment, or other matters that may arise in the normal course of business. We assess our potential liability in each of these matters by using the information available to us. We develop our views on estimated losses in consultation with inside and outside counsel, which involves a subjective analysis of potential results and various combinations of appropriate litigation and settlement strategies. We accrue estimated losses from contingencies if a loss is deemed probable and can be reasonably estimated.

The material assumptions used by management to estimate the required litigation accrual include:

 

   

communication with our external attorneys regarding the expected duration of the lawsuit, the potential outcome of the lawsuit, and the likelihood of settlement;

 

   

likelihood of assertion of unasserted claims and assessments;

 

   

our strategy regarding the lawsuit;

 

   

deductible amounts under our insurance policies; and

 

   

past experiences with similar lawsuits.

Litigation is inherently unpredictable, and while we believe that we have valid defenses with respect to legal matters pending against us, our financial statements could be materially affected in any particular period by the unfavorable resolution of one or more of these contingencies or because of the diversion of management’s attention and the incurrence of significant expenses.

Restructuring reserves. We have engaged, and may continue to engage, in restructuring actions, which require management to utilize significant estimates related to the timing and the expense for severance and other

 

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employee separation costs, realizable values of assets made obsolete, lease cancellation, facility downsizing, and other exit costs. If actual amounts differ from our estimates, the amount of the restructuring charges could be materially impacted.

Fair value of financial instruments. We invest our excess cash on deposit with major banks in money market, U.S. Treasury and government-sponsored entity, corporate debt, municipal, asset-backed, and mortgage-backed residential securities. By policy, we invest primarily in high-grade marketable securities. We are exposed to credit risk in the event of default by the financial institutions or issuers of these investments to the extent of amounts recorded in the Consolidated Balance Sheets.

As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a three-tier fair value hierarchy as more fully defined in Note 6—Investments and Fair Value Measurements of the Notes to Consolidated Financial Statements. We utilize the market approach to measure fair value of our fixed income securities. The “market approach” is a valuation technique that uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The fair value of our fixed income securities are obtained using readily-available market prices from a variety of industry standard data providers, large financial institutions, and other third-party sources for the identical underlying securities.

As part of this process, we engaged pricing services to assist management in its analysis. All estimates, key assumptions, and forecasts were either provided by or reviewed by us. While we chose to utilize third party pricing services, the impairment analysis and related valuations represent the conclusions of management and not the conclusions or statements of any third party.

Specifically, we obtain the fair value of our Level 2 financial instruments from third party asset managers, the custodian bank, and the accounting service provider. Independently, these service providers use professional pricing services to gather pricing data, which may include quoted market prices for identical or comparable instruments or inputs other than quoted prices that are observable either directly or indirectly.

The validation procedures performed by management include the following:

 

   

obtaining an understanding of the pricing service’s valuation methodologies, including the timing and frequency,

 

   

evaluating the type, nature, and complexity of our investments in financial instruments,

 

   

evaluating the activity level in the market for the type of securities in which we have invested including the volatility of price movements requiring analysis, and

 

   

validating the quoted market prices provided by our service providers by completing a three-way reconciliation, comparing the assessment of the fair values provided by the asset manager, the custody bank, and the accounting book of record provider for each portfolio.

Obtaining an understanding of these valuation risks allows us to respond by developing internal controls that appropriately mitigate any risks identified. If material discrepancies are noted when comparing the valuations on a security-by-security basis, then we conduct detailed pricing analysis, search alternative pricing sources, or require the service provider to provide an in-depth price analysis prior to recording the fair value in our financial statements. If we determine that a price provided by the third party pricing services is not reflective of the fair value of the security, we require the custodian bank or accounting service provider to update their price file accordingly.

At least annually, we review the pricing practices followed by the various entities involved in determining the fair value of our securities; including comparing their process and practices to those followed by other external third party pricing vendors. Also, at least annually, we review the internal controls provided in place at the custodian bank and the accounting service provider.

 

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Accounting for stock-based compensation. We account for stock-based compensation in accordance with ASC 718, which requires stock-based compensation expense to be recognized based on the fair value of such awards on the date of grant. We amortize stock-based compensation expense on a graded vesting basis over the vesting period, after assessing the probability of achieving the requisite performance criteria with respect to performance-based awards. Stock-based compensation expense is recognized over the requisite service period for each separately vesting tranche as though the award were, in substance, multiple awards. We apply an estimated forfeiture rate based on historical experience and management assessment to reflect what we believe will be our final stock-based compensation expense. We must use our judgment in determining and applying the assumptions needed for the valuation of employee stock options, RSUs, and issuance of common stock under our ESPP.

We use the Black-Scholes-Merton (“BSM”) option pricing model to value stock-based compensation for all equity awards, except market -based awards. Market-based awards are valued using a Monte Carlo valuation model. Option pricing models were developed to estimate the value of traded options that have no vesting or hedging restrictions and are fully transferable. The BSM model determines the fair value of stock-based payment awards based on the stock price on the date of grant and is affected by assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards, expected term, interest rates, and actual and projected employee stock option exercise behavior. Expected volatility is based on the historical volatility of our stock over a preceding period commensurate with the expected term of the option. The expected term is based on management’s consideration of the historical life, vesting period, and contractual period of the options granted. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected dividend yield was not considered in the option pricing formula since we do not pay dividends and have no current plans to do so in the future.

Accounting for income taxes. Significant management judgment is required to determine our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against our deferred tax assets. We estimate our actual current tax expense, including permanent charges and benefits, and temporary differences resulting from differing treatment of items, such as deferred revenue for tax and book accounting purposes. These temporary differences result in deferred tax assets and liabilities, which are included within our Consolidated Balance Sheets.

We assess the likelihood that our deferred tax assets will be recovered from future taxable income by considering both positive and negative evidence relating to their recoverability. If we believe that recovery of these deferred tax assets is not more likely than not, we establish a valuation allowance. To the extent that we increase a valuation allowance in a period, we include an expense in the Consolidated Statement of Operations in the period in which such determination is made.

In assessing the need for a valuation allowance, we considered all available evidence, including recent operating results, projections of future taxable income, our ability to utilize loss and credit carryforwards, and the feasibility of tax planning strategies. A significant piece of objective positive evidence evaluated for jurisdictions in a net deferred tax asset position was cumulative pre-tax income over the three years ended December 31, 2014. In addition, we considered that loss and credit carryforwards have not expired unused and a majority of our loss and credit carryforwards will not expire prior to 2021. In 2013, we determined that it is more likely than not that our existing deferred tax assets in California would not be realized based on the size of the research and development credits being generated exceeding the utilization of these tax attributes.

As of December 31, 2014, we have determined that it is more likely than not that we will realize the benefit related to our deferred tax assets, except for a valuation allowance related to the realization of existing California and Luxembourg deferred tax assets.

Current and noncurrent deferred tax assets, net of current and noncurrent deferred tax liabilities, as of December 31, 2014 were $35.4 million, net of our valuation allowance of $32.3 million.

 

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In accordance with ASC 740-10-25-5 through 17, Income Taxes—Basic Recognition Threshold, we account for uncertainty in income taxes by recognizing a tax position only when it is more likely than not that the tax position, based on its technical merits, will be sustained upon ultimate settlement with the applicable tax authority. The tax benefit to be recognized is the largest amount of tax benefit that is greater than fifty percent likely of being realized upon ultimate settlement with the applicable tax authority that has full knowledge of all relevant information.

Significant management judgment is required in evaluating our uncertain tax positions. Our gross unrecognized benefits are $35.0 million as of December 31, 2014. Our evaluation of uncertain tax positions is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. If actual settlements differ from these estimates, or we adjust these estimates in future periods, we may need to recognize additional tax benefits or charges that could materially impact our financial position and results of operations.

As of December 31, 2014, we have permanently reinvested $97.5 million of unremitted foreign earnings. Should these earnings be remitted to the U.S., the tax on these earnings would be $17.5 million.

Valuation analyses of goodwill and intangible assets. We perform our annual goodwill impairment analysis in the fourth quarter of each year according to the provisions of ASC 350-20-35. A two-step impairment test of goodwill is required, unless the simplified method is elected. In the first step, the fair value of each reporting unit is compared to its carrying value. If the fair value exceeds carrying value, goodwill is not impaired and further testing is not required. If the carrying value exceeds fair value, then the second step of the impairment test is required to determine the implied fair value of the reporting unit’s goodwill. The implied fair value of goodwill is calculated by deducting the fair value of all tangible and intangible net assets of the reporting unit, excluding goodwill, from the fair value of the reporting unit as determined in the first step. If the carrying value of the reporting unit’s goodwill exceeds its implied fair value, then an impairment loss must be recorded equal to the difference.

Our goodwill valuation analysis is based on our respective reporting units (Industrial Inkjet, Productivity Software, and Fiery), which are consistent with our operating segments identified in Note 15—Segment Information, Geographic Regions, and Major Customers of the Notes to Consolidated Financial Statements. We determined the fair value of our reporting units as of December 31, 2014 by equally weighting the market and income approaches. Under the market approach, we estimated fair value based on market multiples of revenue or earnings of comparable companies. Under the income approach, we estimated fair value based on a projected cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model.

Significant management judgments are required in order to assess goodwill and intangible asset impairment, including the following:

 

   

identification of comparable companies to benchmark under the market approach giving due consideration to the following factors:

 

  ¡    

financial condition and operating performance of the reporting unit being evaluated relative to companies operating in the same or similar businesses,

 

  ¡    

economic, environmental, and political factors faced by such companies, and

 

  ¡    

companies that are considered to be reasonable investment alternatives.

 

   

impact of goodwill impairments recognized in prior years,

 

   

susceptibility of our reporting unit to fair value fluctuations,

 

   

reporting unit revenue, gross profit, and operating expense growth rates,

 

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five-year financial forecasts,

 

   

discount rate to apply to estimated cash flows,

 

   

terminal values based on the Gordon growth methodology,

 

   

appropriate market comparables,

 

   

estimated multiples of revenue and earnings before interest expense and taxes (“EBIT”) that a willing buyer is likely to pay,

 

   

reasonable gross profit levels,

 

   

estimated control premium a willing buyer is likely to pay, including consideration of the following:

 

  ¡    

the most similar transactions in relevant industries and determined the average premium indicated by the transactions deemed to be most similar to a hypothetical transaction involving our reporting units

 

  ¡    

weighted average and median control premiums offered in relevant industries,

 

  ¡    

industry specific control premiums, and

 

  ¡    

specific transaction control premiums.

 

   

significant events or changes in circumstances including the following:

 

  ¡    

significant negative industry or economic trends,

 

  ¡    

significant decline in our stock price for a sustained period,

 

  ¡    

our market capitalization relative to net book value,

 

  ¡    

significant changes in the manner of our use of the acquired assets,

 

  ¡    

significant changes in the strategy for our overall business, and

 

  ¡    

our assessment of growth and profitability in each reporting unit over the coming years.

Given the uncertainty of the economic environment and the potential impact on our business, there can be no assurance that our estimates and assumptions regarding the duration of the ongoing economic downturn, or the period or strength of recovery, made for purposes of our goodwill impairment testing at December 31, 2014 will prove to be accurate predictions of the future. If our assumptions regarding forecasted revenue or gross profit rates are not achieved, we may be required to record additional goodwill impairment charges in future periods relating to any of our reporting units, whether in connection with the next annual impairment testing in the fourth quarter of 2015 or prior to that, if any such change constitutes an interim triggering event. It is not possible to determine if any such future impairment charge would result or, if it does, whether such charge would be material.

As part of this process, we engaged a third party valuation firm to assist management in its analysis. All estimates, key assumptions, and forecasts were either provided by or reviewed by us. While we chose to utilize a third party valuation firm, the impairment analysis and related valuations represent the conclusions of management and not the conclusions or statements of any third party.

Business combinations. We allocate the purchase price of acquired companies to the tangible and intangible assets acquired, including in-process research & development (“IPR&D”), and liabilities assumed based on their estimated fair values. Such a valuation requires management to make significant estimates and assumptions, especially with respect to intangible assets. The results of operations for each acquisition are included in our financial statements from the date of acquisition.

 

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We account for business acquisitions as purchase business combinations in accordance with ASC 805, Business Combinations. The fundamental requirement of ASC 805 is that the acquisition method of accounting be used for all business combinations. Please refer to Note 1—The Company and its Significant Accounting Policies of the Notes to Consolidated Financial Statements for our accounting policy with respect to accounting for business combinations.

Management estimates fair value based on assumptions believed to be reasonable. These estimates are based on historical experience and information obtained from the management of the acquired companies. Critical estimates in valuing certain intangible assets include, but are not limited to: future expected cash flows; acquired developed technologies and patents; expected costs to develop IPR&D into commercially viable products and estimating cash flows from the projects when completed; the acquired company’s brand awareness and market position, as well as assumptions about the period of time the acquired brand will continue to be used in our product portfolio; and discount rates.

We estimate the fair value of acquisition-related contingent consideration based on the probability of realization of the performance targets. This estimate is based on significant inputs that are not observable in the market, which ASC 820-10-35 refers to as Level 3 inputs, reflecting our assessment of the assumptions market participants would use to value these liabilities. The fair value of contingent consideration is measured at each reporting period, with any changes in the fair value recognized as a component of general and administrative expense.

Other estimates associated with the accounting for acquisitions include severance costs and the costs to vacate or downsize facilities, including the future costs to operate and eventually abandon or relinquish duplicate facilities. These costs are recognized as restructuring and other expenses and are based on management estimates and are subject to refinement. Estimated costs may change as additional information becomes available regarding assets acquired and liabilities assumed and as management continues its assessment of the pre-merger operations.

Acquisition-related costs of $1.5, $1.4, and $2.2 million were expensed during the years ended December 31, 2014, 2013, and 2012, respectively, associated with businesses acquired during the periods reported and anticipated transactions.

Our financial projections may ultimately prove to be inaccurate and unanticipated events and circumstances may occur. As a result, these estimates are inherently uncertain and unpredictable, assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur, which may affect the accuracy or validity of such assumptions, estimates or other actual results. Therefore, no assurance can be given that the underlying assumptions used to establish the valuation for these acquired businesses will prove to be correct. We typically engage a third party valuation firm to assist management in its analysis. All estimates, key assumptions, and forecasts were either provided by or reviewed by us. While we chose to utilize a third party valuation firm, the valuations represent the conclusions of management and not the conclusions or statements of any third party.

Build-to-Suit lease. If we are deemed to be the accounting owner of a facility in accordance with the requirements of AC 840-40-55, Leases, then we are required to account for the property as a depreciable asset and the related lease agreement must be accounted for as an imputed financing obligation. Significant judgments are required to make this determination, which relate to actions, guarantees, and investments that we make as a lessee that may be considered to be actions that only an owner would take.

ASC 840-40-55, Sale-Leaseback Transactions, applies to “construction projects,” but does not define this term. When leasing an existing facility, we must consider whether the leased asset is fully functional and may be occupied by any lessee in its current form without requiring improvement (commonly referred to as the “second tenant scope exception”). The 6700 Dumbarton Circle facility was not functional in its then current form; thus, the asset represents a construction project subject to the guidance.

 

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The guidance in ASC 840-40-55-6, excludes lessees under a lease agreement in which the lessee’s maximum obligation, including guaranteed residual values, represents a minor amount of the construction project’s fair value (“minor scope exception”). Based on the square feet of leased space (58,560 square feet) compared to the total square feet of the building (108,166 square feet), the minor scope exception does not appear to be available.

The critical factor relating to our conclusion that we are the accounting owner of this facility is that we are responsible for cost over-runs, if any, related to force majeure events including strikes, war, and material availability. The landlord is responsible for any costs related to force majeure events that result in any damage to the facility. Since we are responsible for cost overruns related to certain force majeure events, we are in substance offering an indemnification to the landlord for events outside of our control. As such, we are deemed to be the accounting owner of the facility. See Note 8—Commitments and Contingencies of the Notes to Consolidated Financial Statements.

Determining functional currencies for the purpose of consolidating our international operations. We have a number of foreign subsidiaries, which together account for approximately 48% of our net revenue, approximately 21% of our total assets, and approximately 22% of our total liabilities as of December 31, 2014.

In preparing our consolidated financial statements, we must remeasure and translate balance sheet and income statement amounts into U.S. dollars. Foreign currency assets and liabilities are remeasured from the transaction currency into the functional currency at current exchange rates, except for non-monetary assets and capital accounts, which are remeasured at historical exchange rates. Revenue and expenses are remeasured at monthly exchange rates, which approximate average exchange rates in effect during each period. Gains or losses from foreign currency remeasurement are included in interest income and other income (expense), net.

For those subsidiaries that operate in a local currency functional environment, all assets and liabilities are translated into U.S. dollars using current exchange rates, while revenue and expenses are translated using monthly exchange rates, which approximate the average exchange rates in effect during each period. Resulting translation adjustments are reported as a separate component of accumulated other comprehensive income (“OCI”), adjusted for deferred income taxes.

Consequently, determination of the functional currency of each entity has a material impact on our financial position and results of operations. Management assesses the salient economic factors, both individually and collectively when determining the functional currency. The economic factors that must be evaluated include cash flow, sales price, sales market, expense, financing, and intercompany transaction indicators.

Recent Accounting Pronouncements

See Note 1—The Company and Its Significant Accounting Policies of the Notes to Consolidated Financial Statements for a full description of recent accounting pronouncements including the respective expected dates of adoption.

Liquidity and Capital Resources

Overview

Cash, cash equivalents, and short-term investments increased by $261.7 million to $616.7 million as of December 31, 2014 from $355.0 million as of December 31, 2013. The increase was primarily due to proceeds from the issuance of our Notes, net of debt issuance payments, of $336.4 million and proceeds from warrants of $34.5 million, net of purchases of Note Hedges of $63.9 million and repurchases of treasury stock of $76.8 million. The remaining increase in cash, cash equivalents, and short-term investments of $31.5 million was due to cash flows provided by operating activities of $82.3 million, proceeds from ESPP purchases of $8.6 million, and proceeds from common stock option exercises of $7.7 million, offset by cash consideration paid for business acquisitions of $22.0 million, net of cash acquired, acquisition-related contingent consideration payments of

 

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$10.6 million excluding the portion included in operating activities, net settlement of shares for the exercise price of certain stock options and any tax withholding obligations incurred in connection with such exercises and minimum tax withholding obligations that arose on the vesting of RSUs of $24.3 million, and cash payments for property and equipment of $15.9 million, including final payments related to the build-out of our new corporate headquarters facility in Fremont, California.

Cash, cash equivalents, and short-term investments decreased by $10.0 million to $355.0 million as of December 31, 2013 from $365.0 million as of December 31, 2012. This decrease was primarily due to purchases of property and equipment of $49.7 million, consisting primarily of our new corporate headquarters facility in Fremont, California, cash consideration paid for business acquisitions of $13.5 million, net of cash acquired, additional payments related to the acquisitions of Cretaprint, OPS, and Technique of $1.2 million, acquisition-related contingent consideration payments of $15.1 million excluding the portion included in operating activities, repayment of acquired business debt of $1.9 million, net settlement of shares for the exercise price of certain stock options and any tax withholding obligations incurred in connection with such exercises and minimum tax withholding obligations that arose on the vesting of RSUs of $13.9 million, and treasury stock purchases of $21.8 million, partially offset by cash flows provided by operating activities of $89.3 million, proceeds from ESPP purchases of $7.1 million, and proceeds from common stock option exercises of $5.2 million.

 

(in thousands)

   2014     2013     2012  

Cash and cash equivalents

   $ 298,133      $ 177,084      $ 283,996   

Short-term investments

     318,599        177,957        80,966   
  

 

 

   

 

 

   

 

 

 

Total cash, cash equivalents, and short-term investments

   $ 616,732      $ 355,041      $ 364,962   
  

 

 

   

 

 

   

 

 

 
      

Net cash provided by operating activities

   $ 82,341      $ 89,339      $ 53,354   

Net cash provided by (used for) investing activities

     (180,657     (161,862     133,115   

Net cash provided by (used for) financing activities

     220,825        (33,390     (22,741

Effect of foreign exchange rate changes on cash and cash equivalents

     (1,460     (999     210   
  

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

   $ 121,049      $ (106,912   $ 163,938   
  

 

 

   

 

 

   

 

 

 

As of December 31, 2014, we have approximately $97.5 million of unremitted earnings, which are not available to meet our operating and working capital requirements as these amounts have been permanently reinvested. Cash, cash equivalents, and short-term investments held outside of the U.S. in various foreign subsidiaries were $124.1 and $62.9 million as of December 31, 2014 and 2013, respectively. If these funds are needed for our operations in the U.S., we would be required to accrue and pay U.S. federal and state income taxes on some or all of these funds. However, our intent is to indefinitely reinvest these funds outside of the U.S. and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations.

Based on past performance and current expectations, we believe that our cash, cash equivalents, short-term investments, and cash generated from operating activities will satisfy our working capital, capital expenditure, investment, stock repurchase, commitments (see Note 8—Commitments and Contingencies of the Notes to Consolidated Financial Statements), and other liquidity requirements associated with our existing operations through at least the next twelve months. 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. At December 31, 2014, cash, cash equivalents, and short-term investments available were $616.7 million. We believe that our liquidity position and capital resources are sufficient to meet our operating and working capital needs.

Operating Activities

Net cash provided by operating activities was $82.3, $89.3, and $53.4 million for the years ended December 31, 2014, 2013, and 2012, respectively.

 

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Net cash provided by operating activities in 2014 consists primarily of net income of $33.7 million and non-cash charges and credits of $71.1 million, partially offset by the net change in operating asset and liabilities of $22.5 million. Non-cash charges and credits of $71.1 million consist primarily of $31.1 million of depreciation and amortization, $36.1 million of stock-based compensation, provision for inventory obsolescence of $6.3 million, provision for bad debts and sales-related allowances of $7.4 million, and non-cash accretion of interest expense related to our Notes and imputed build-to-suit financing obligation of $4.4 million, partially offset by $5.8 million of deferred tax credits, $3.4 million of contingent consideration payments related to businesses acquired, and $5.0 million of other non-cash charges and credits. The net change in operating assets and liabilities of $22.5 million consists primarily of increased accounts receivable of $27.1 million, increased gross inventories of $11.9 million, and decreased net income taxes payable of $5.6 million, partially offset by decreased other current assets of $13.4 million and increased accounts payable and accrued liabilities of $8.7 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 average days sales outstanding for accounts receivable (“DSO”). DSOs were 68, 61, and 71 days at December 31, 2014, 2013, and 2012, respectively. 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.

DSOs increased during the year ended December 31, 2014, compared with December 31, 2013, primarily due to trade receivables acquired through business acquisitions, international sales with extended payment terms, and a non-linear sales cycle resulting in significant billings at the end of the year. We expect DSOs to vary from period to period because of changes in the mix of business between direct customers and end user demand driven through the leading printer manufacturers, the effectiveness of our collection efforts both domestically and overseas, and variations in the linearity of our sales. As the percentage of Industrial Inkjet and Productivity Software related revenue increases, we expect DSOs may trend higher. Our DSOs related to the Industrial Inkjet and Productivity Software operating segments are traditionally higher than those related to the significant printer manufacturer customers / distributors in our Fiery operating segment as, historically, they have paid on a more timely basis.

We have facilities in Spain that enable us to sell to third parties, on an ongoing basis, certain trade receivables without recourse. The 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. We also have facilities in the U.S. that enable us to sell to third parties, on an ongoing basis, certain trade receivables with recourse. The trade receivables sold with recourse 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.

Trade receivables sold cumulatively under these facilities were $6.2 and $20.8 million throughout 2014 on a nonrecourse and recourse basis, respectively, 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. The result is lower inventory turnover for Industrial Inkjet inventories compared with Fiery inventories.

Our net inventories increased by $3.8 million from $68.3 million at December 31, 2013 to $72.1 million at December 31, 2014 as additional inventories are required to support increased revenue. Inventory turnover was 5.3 turns during the quarters ended December 31, 2014 and 2013. We calculate inventory turnover by dividing annualized current quarter cost of revenue by ending inventories.

 

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Accounts Payable, Accrued and Other Liabilities, and Net Income Taxes Payable

Our operating cash flows are impacted by the timing of payments to our vendors for accounts payable and by our accrual of liabilities. The change in accounts payable, accrued and other liabilities, and net income taxes payable increased our cash flows provided by operating activities by $3.1, $7.2, and $8.9 million in 2014, 2013, and 2012, respectively. Our working capital, defined as current assets minus current liabilities, was $684.9 and $399.7 million at December 31, 2014 and 2013, respectively.

Investing Activities

Net cash provided by (used for) investing activities was $(180.7), $(161.9), and $133.1 million for the years ended December 31, 2014, 2013, and 2012, respectively.

 

     2014     2013     2012  

Purchases of short-term investments

   $ (281,962   $ (145,088   $ (64,528

Proceeds from sales and maturities of short-term investments

     139,185        47,375        80,992   

Purchases, net of proceeds from sales, of property and equipment

     (15,900     (49,815     (6,147

Proceeds from sale of building and land, net of direct transaction costs

     —         91        179,173   

Businesses and technology purchased, net of cash acquired, and post-acquisition non-competition agreements

     (21,980     (14,688     (61,591

Proceeds from notes receivable of acquired businesses and other investments

     —         263        5,216   
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used for) investing activities

   $ (180,657   $ (161,862   $ 133,115   
  

 

 

   

 

 

   

 

 

 

Acquisitions

SmartLinc, Rhapso, DirectSmile, and DIMS were acquired in 2014 for aggregate cash consideration of $20.4 million, net of cash acquired, plus additional future cash earnouts contingent on achieving certain performance targets; technology was acquired from Polymeric for $1.1 million; $0.3 million was paid related to the GamSys acquisition, which was dependent on accounts receivable collections; and purchase price adjustments of $0.2 million were paid with respect to the acquisitions of Metrix, Lector, and Rhapso.

PrintLeader, GamSys, Metrix, and Lector were acquired in 2013 for $13.5 million in cash, net of cash acquired, including accounts receivable payments of $0.6 million in 2013, which were dependent on collections, plus additional future cash earnouts contingent on achieving certain performance targets. Purchase price adjustments of $1.2 million were paid related to the Cretaprint, OPS, and Technique acquisitions in 2013.

Cretaprint, FX Colors, Metrics, OPS, and Technique were acquired in 2012 for $60.6 million in cash, net of cash acquired, including $0.6 million related to the Metrics post-acquisition non-competition agreements, plus additional future cash earnouts contingent on achieving certain performance targets, FX Colors milestones, and Cretaprint executive retention.

Earnout payments of $0.6 million were made during the year ended December 31, 2012 relating to previously accrued Pace Systems Group, Inc. (“Pace”) contingent consideration liabilities. Pace was acquired prior to the effective date of ASC 805; consequently, related earnout payments are classified as investing activities.

 

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Property and Equipment

Net purchases of property and equipment were $15.9, $49.8, and $6.1 million in 2014, 2013, and 2012, respectively, including the purchase of ceramic ink formulation equipment and the purchase and build-out of our corporate headquarters facility. This facility serves as our worldwide corporate headquarters, as well as engineering, marketing, and administrative operations for our Fiery operating segment. We relocated our former headquarters on October 31, 2013. Please refer to Note 8—Commitments and Contingencies of the Notes to Consolidated Financial Statements for additional information.

Our property and equipment additions have historically been funded from operating activities. We anticipate that we will continue to purchase necessary property and equipment in the normal course of our business. The amount and timing of these purchases and the related cash outflows in future periods is difficult to predict and is dependent on a number of factors including the hiring of employees, the rate of change in computer hardware / software used in our business, and our business outlook.

On November 1, 2012, we sold the 294,000 square foot building located in Foster City, California, which at that time served as our corporate headquarters, along with approximately four acres of land and certain other assets related to the property, for cash proceeds of $179.3 million, net of direct transaction costs paid in 2012. Direct transaction costs consist primarily of documentary transfer and title costs, legal fees, and other expenses. We used the facility until October 31, 2013, for which period rent was not required to be paid. This constituted a form of continuing involvement that prevented gain recognition. Prior to vacating the building, the proceeds from the sale and accrued interest were accounted for as deferred proceeds from property transaction on our Consolidated Balance Sheet.

Investments

Purchases of marketable securities, net of proceeds from sales and maturities, were $142.8 and $97.7 million in 2014 and 2013, respectively. Proceeds from sales and maturities of marketable securities, net of purchases, were $16.5 million in 2012. We have classified our investment portfolio as “available for sale.” Our investments are made with a policy of capital preservation and liquidity as primary objectives. We may hold investments in fixed income debt securities to maturity; however, we may sell an investment at any time if the quality rating of the investment declines, the yield on the investment is no longer attractive, or we have better uses for the cash. Since we invest primarily in investment securities that are highly liquid with a ready market, we believe the purchase, maturity, or sale of our investments has no material impact on our overall liquidity.

Financing Activities

Net cash provided by (used for) financing activities was $220.8, $(33.4), and $(22.7) million for the years ended December 31, 2014, 2013, and 2012, respectively.

In September 2014, we completed a private placement of $345 million principal amount of Notes. The net proceeds from this offering were $336.4 million, after deducting commissions and offering expenses paid by us. We used approximately $29.4 million of the net proceeds to pay the cost of the Note Hedges (after such cost was partially offset by the proceeds from the Warrant transactions). We used approximately $10.0 million of the net proceeds from the Notes to repurchase 0.2 million shares of our common stock from purchasers of the Notes in privately negotiated transactions effected through one of the Initial Purchasers, as our agent.

Historically, our recurring cash flows provided by financing activities have been from the receipt of cash from the issuance of common stock through the exercise of stock options and employee purchases of ESPP shares. We received proceeds from the exercise of stock options of $7.7, $5.2, and $12.2 million and employee purchases of ESPP shares of $8.6, $7.1, and $6.8 million in 2014, 2013, and 2012, respectively. While we may continue to receive proceeds from these plans in future periods, the timing and amount of such proceeds are difficult to predict and are contingent on a number of factors including the price of our common stock, the timing and

 

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number of stock options exercised by employees that had participated in these plans, net settlement options, and general market conditions. We anticipate that cash provided from the exercise of stock options will decline over time as we have shifted to issuance of RSUs, rather than stock options. Although we may grant stock option awards from time to time, the granting of stock options is no longer our usual practice.

The primary use of funds for financing activities in 2014, 2013, and 2012 was $101.1, $35.7, and $35.2 million, respectively, of cash used to repurchase outstanding shares of our common stock including cash used for net settlement of shares for the exercise price of certain stock options and any tax withholding obligations incurred in connection with such exercises and minimum tax withholding obligations that arose on the vesting of RSUs. On August 31, 2012, our board of directors approved the repurchase of $100 million of outstanding common stock. Under this publicly announced plan, we repurchased 0.7 and 1.3 million shares for an aggregate purchase price of $19.3 and $22.9 million during the years ended December 31, 2013 and 2012, respectively.

On November 6, 2013, the board of directors cancelled $58 million remaining for repurchase under the 2012 authorization and approved a new authorization to repurchase of $200 million of outstanding common stock. This authorization expires in November 2016. Under this publicly announced plan, we repurchased 1.8 and 0.1 million shares for an aggregate purchase price of $76.8 and $2.6 million during the years ended December 31, 2014 and 2013, respectively.

See Item 5—Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities for further discussion of our common stock repurchase programs.

Earnout payments during the year ended December 31, 2014 of $6.2, $4.5, $2.0, and $1.2 million are related to the previously accrued Cretaprint, Metrics, Technique, and GamSys contingent consideration liabilities, respectively. Earnout payments during the year ended December 31, 2013 of $8.9, $4.5, $1.9, $0.7, and $0.6 million are related to previously accrued Cretaprint, Metrics, Radius, Alphagraph, and Streamline contingent consideration liabilities, respectively. Earnout payments during the year ended December 31, 2012 of $0.6 and $0.3 million related to previously accrued Streamline and Radius contingent consideration liabilities, respectively. The portion of the Metrics and Radius earnouts representing performance targets achieved in excess of amounts assumed in the opening balance sheet as of the respective acquisition date was $3.4 and $1.6 million during the years ended December 31, 2014 and 2013, respectively, and is reflected as cash used for operating activities in the Consolidated Statements of Cash Flows.

Other Commitments

Our Industrial Inkjet inventories consist of inventories required for our internal manufacturing operations and inventory purchased from third party contract manufacturers. Raw materials and finished goods, print heads, frames, digital UV ink, ceramic digital ink, and other components are required to support of our internal manufacturing operations. Solvent ink and certain sub-assemblies are purchased from third party contract manufacturers.

Our Fiery inventory consists primarily of raw materials and finished goods, memory subsystems, processors, and ASICs, which are sold to third party contract manufacturers responsible for manufacturing our products. Should we decide to purchase components and manufacture Fiery DFEs internally, or should it become necessary for us to purchase and sell components other than memory subsystems, processors, and ASICs to our contract manufacturers, inventory balances and potentially property and equipment would increase significantly, thereby reducing our available cash resources. Further, the inventories we carry could become obsolete, thereby negatively impacting our financial condition and results of operations. We are also reliant on several sole source suppliers for certain key components and could experience a further significant negative impact on our financial condition and results of operations if such supplies were reduced or not available.

 

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We may be required to compensate our subcontract manufacturers for components purchased for orders subsequently cancelled by us. We periodically review the potential liability and the adequacy of the related allowance. Our financial condition and results of operations could be negatively impacted if we were required to compensate our subcontract manufacturers in amounts in excess of the related allowance.

Legal Proceedings

Please refer to Item 3, Legal Proceedings, in this Annual Report on Form 10-K for more information regarding our legal proceedings.

Contractual Obligations and Off-Balance Sheet Financing

The impact of contractual obligations on our liquidity and capital resources in future periods should be analyzed in conjunction with the factors that impact our cash flows from operating activities discussed previously. The following table summarizes our significant contractual obligations at December 31, 2014 and the effect that such obligations are expected to have on our liquidity and cash flows in future periods. This table excludes amounts already recorded on our balance sheet as liabilities at December 31, 2014, with the exception of acquisition-related contingent consideration liabilities, unrecognized tax benefits, and our Notes.

 

     Payments due by period  

(in thousands)

   Total      Less than 1
year
     Between
1-3 years
     Between
3-5 years
     More than
5 years
 

Operating lease obligations

   $ 36,471       $ 5,317       $ 8,611       $ 7,054       $ 15,489   

Contingent consideration liabilities(1)

     12,277         8,254         4,023         —          —    

Purchase obligations(2)

     23,364         23,364         —          —          —    

Convertible senior notes(3)

     357,880         2,530         5,175         350,175         —    

Unrecognized tax benefits(4)

     34,969         —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 464,961       $ 39,465       $ 17,809       $ 357,229       $ 15,489   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Represents the fair value of acquisition-related contingent consideration liabilities. The current fair value is reflected in our Consolidated Balance Sheets under the caption “accrued and other liabilities” and represents the fair value of the contingent consideration liabilities that are payable within one year. The noncurrent fair value is reflected in our Consolidated Balance Sheets under the caption “noncurrent contingent and other liabilities” and represents the fair value of the contingent consideration liabilities that are payable beyond one year.

(2) 

Excludes contractual obligations recorded on the balance sheet as current liabilities and certain purchase orders as discussed below.

(3) 

Obligations related to our $345 million principal amount of our Notes, which is due in 2019. Estimated interest payments for our long-term debt, assuming no early retirement of debt obligations are $12.9 million through 2019.

(4) 

As of December 31, 2014, our liability for unrecognized tax benefits, including interest and penalties, is reflected in our Consolidated Balance Sheet as $16.5 million of “noncurrent income taxes payable” and $19.5 million as a reduction of “deferred tax assets.” Due to the uncertainty of the timing of future payments, unrecognized tax benefits are presented in the total column on a separate line in this table. See Note 11—Income Taxes of the Notes to the Consolidated Financial Statements for additional discussion of unrecognized tax benefits.

Purchase obligations in the table above include agreements to purchase goods or services that are enforceable, non-cancellable, and legally binding that specify all significant terms including fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. Purchase obligations exclude purchase orders for raw materials and other goods and services that are cancelable without penalty. Our purchase orders are based on current manufacturing needs and are generally fulfilled by our

 

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vendors within short time horizons. We also enter into contracts for outsourced services; however, the obligations under these contracts were not significant and the contracts generally contain clauses allowing for cancellation without significant penalty.

The expected timing of payment for the obligations listed above is estimated based on current information. Timing of payments and actual amounts paid may be different depending on when the goods or services are received or changes to agreed-upon amounts for some obligations.

Item 7A: Quantitative and Qualitative Disclosures about Market Risk

The following discussion of our risk management activities includes “forward-looking statements” that involve risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements.

Market Risk

We are exposed to various market risks. Market risk is the potential loss arising from adverse changes in market rates and prices, general credit, foreign currency exchange rate fluctuations, liquidity, and interest rate risks, which may be exacerbated by the tight global credit market and increase in economic uncertainty that have affected various sectors of the financial market and continue to cause credit and liquidity issues. We do not enter into derivatives or other financial instruments for trading or speculative purposes. We may enter into financial instrument contracts to manage and reduce the impact of changes in foreign currency exchange rates on earnings and cash flows. The counterparties to such contracts are major financial institutions. We hedge our operating expense exposure in Indian rupees. The notional amount of our Indian rupee cash flow hedge was $2.9 million at December 31, 2014. We hedge balance sheet remeasurement exposures using forward contracts not designated as hedging instruments with notional amounts of $86.5 million at December 31, 2014 consisting of hedges of Brazilian real, British pound sterling, and Euro-denominated intercompany loans with notional amounts of $63.8 million, hedges of British pound sterling and Euro-denominated trade receivables with notional amounts of $20.8 million, and a hedge of Indian rupee net monetary assets with a notional amount of $1.9 million.

Since Europe represents a significant portion of our revenue and cash flow, SEC Division of Corporation Finance Disclosure Guidance Topic 4 (“Guidance Topic 4”), European Sovereign Debt, encourages disclosure of our European concentrations of credit risk regarding gross receivables, related reserves, and aging on a region or country basis, and the impact on liquidity with respect to estimated timing of receivable payments. Since Europe is composed of varied countries and regional economies, our European risk profile is somewhat more diversified due to the varying economic conditions among the countries. Approximately 26% of our receivables are with European customers as of December 31, 2014. Of this amount, 22% of our European receivables (6% of consolidated net receivables) are in the higher risk southern European countries (mostly Spain, Portugal, and Italy), which are adequately reserved. The ongoing relocation of the ceramic tile industry from southern Europe to the emerging markets of China, India, Brazil, and Indonesia will reduce our exposure to credit risk in southern Europe.

Marketable Securities

We maintain an investment portfolio of short-term fixed income debt securities of various holdings, types, and maturities. These short-term investments are generally classified as available-for-sale and, consequently, are recorded on our Condensed Consolidated Balance Sheets at fair value with unrealized gains and losses reported as a separate component of OCI. We attempt to limit our exposure to interest rate risk by investing in securities with maturities of less than three years; however, we may be unable to successfully limit our risk to interest rate fluctuations. At any time, a sharp rise in interest rates could have a material adverse impact on the fair value of our investment portfolio. Conversely, declines in interest rates could have a material favorable impact on the fair value of our investment portfolio. Increases or decreases in interest rates could have a material impact on interest earnings related to new investments during the period. We do not currently hedge these interest rate exposures.

 

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Interest Rate Risk

Hypothetical changes in the fair values of financial instruments held by us at December 31, 2014 that are sensitive to changes in interest rates are presented below. The modeling technique measures the change in fair value arising from selected potential changes in interest rates. Market changes reflect immediate hypothetical parallel shifts in the yield curve of plus or minus 100 basis points over a twelve month time horizon (in thousands):

 

Valuation of

securities assuming

an interest rate

decrease of 100

basis points

   No change in
interest rates
   Valuation of
securities assuming
an interest rate
increase of 100
basis points

$  425,116

   $  422,267    $  418,851

Guidance Topic 4 encourages registrants to discuss their exposure to the uncertainty in the European economy. Specifically, registrants are asked to disclose their European debt by counterparty (i.e., sovereign and non-sovereign) and by country. We have no European sovereign debt investments. Our European debt and money market investments consist of non-sovereign corporate debt included within money market funds and corporate debt securities of $42.2 million, which represents 16% of our money market funds and available-for-sale securities at December 31, 2014. Our European debt investments are with corporations domiciled in the northern and central European countries of Sweden, Germany, Netherlands, Switzerland, Luxembourg, Norway, France, Belgium, Finland, and the U.K. We do not have any investments in the higher risk “southern European” countries (i.e., Greece, Spain, Portugal, and Italy) or in Ireland. 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.

As of December 31, 2014, we have $345 million principal amount of Notes outstanding. We carry these instruments at face value less unamortized discount on our Consolidated Balance Sheets. Since these instruments bear interest at fixed rates, we have no financial statement risk associated with changes in interest rates. However, the fair value of these instruments fluctuates when interest rates change. Please refer to Note 7—Convertible Senior Notes, Note Hedges, and Warrants of the Notes to Consolidated Financial Statements for additional information.

Foreign Currency Exchange Risk

A large portion of our business is conducted in countries other than the U.S. We are primarily exposed to changes in exchange rates for the Euro, British pound sterling, Indian rupee, Japanese yen, Brazilian real, Chinese renminbi, and Australian dollar. 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 of the Euro, British pound sterling, Japanese yen, Brazilian real, Chinese renminbi, Australian dollar, and New Zealand dollar) and operating expenses (primarily the Euro, British pound sterling, Chinese renminbi, Japanese yen, Indian rupee, Brazilian real, and Australian dollar) in foreign countries. We can benefit from a weaker dollar and we can be adversely affected from a stronger dollar relative to major currencies world-wide. Accordingly, changes in exchange rates, and in particular a weakening of the U.S. dollar, may adversely affect our consolidated operating expenses and operating income as expressed in U.S. dollars. We hedge our operating expense exposure in Indian rupees. The notional amount of our Indian rupee cash flow hedge was $2.9 million at December 31, 2014. We hedge balance sheet remeasurement exposures using forward contracts not designated as hedging instruments with notional amounts of $86.5 million at December 31, 2014 consisting of hedges of Brazilian real, British pound sterling, and Euro-denominated intercompany loans with notional amounts of $63.8 million, hedges of British pound sterling and Euro-denominated trade receivables with notional amounts of $20.8 million, and a hedge of Indian rupee net monetary assets with a notional amount of $1.9 million.

 

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The impact of hypothetical changes in foreign exchanges rates on revenue and income from operations are presented below. The modeling technique measures the change in revenue and income from operations resulting from changes in selected foreign exchange rates with respect to the Euro and British pound sterling of plus or minus one percent during the nine months ended December 31, 2014 as follows (in thousands):

 

    Impact of a foreign
exchange rate decrease
of one percent
    No change in foreign
exchange rates
    Impact of a foreign
exchange rate increase
of one percent
 

Revenue

  $ 792,043      $ 790,427      $ 788,811   
 

 

 

   

 

 

   

 

 

 

Income from operations

  $ 53,822      $ 53,439      $ 53,056   
 

 

 

   

 

 

   

 

 

 

 

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Item 8: Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Page  

Report of Independent Registered Public Accounting Firm

     80   

Consolidated Balance Sheets as of December 31, 2014 and 2013

     82   

Consolidated Statements of Operations for the Years Ended December 31, 2014, 2013, and 2012

     83   

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2014, 2013, and 2012

     84   

Consolidated Statements of Stockholders’ Equity for the Years Ended December  31, 2014, 2013, and 2012

     85   

Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013, and 2012

     86   

Notes to Consolidated Financial Statements

     87   

Unaudited Quarterly Consolidated Financial Information

     145   

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Electronics For Imaging, Inc.

Fremont, California

We have audited the accompanying consolidated balance sheet of Electronics For Imaging, Inc. and subsidiaries (collectively, the “Company”) as of December 31, 2014 and the related consolidated statements of operations, comprehensive income, cash flows, and stockholders’ equity for the year then ended. Our audit also included the financial statement schedule (2014) listed in the Index at Item 15. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the 2014 consolidated financial statements and financial statement schedule (2014) based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Electronics For Imaging, Inc. and subsidiaries as of December 31, 2014 and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule (2014), when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2014, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 17, 2015, expressed an unqualified opinion on the Company’s internal control over financial reporting.

/S/    DELOITTE & TOUCHE LLP

San Jose, California

February 17, 2015

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Electronics For Imaging, Inc.:

In our opinion, the consolidated balance sheet as of December 31, 2013 and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2013 present fairly, in all material respects, the financial position of Electronics For Imaging, Inc. and its subsidiaries at December 31, 2013, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule for each of the two years in the period ended December 31, 2013 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/S/    PRICEWATERHOUSECOOPERS LLP

San Jose, California

February 19, 2014

 

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Electronics For Imaging, Inc.

Consolidated Balance Sheets

 

     December 31,  
(in thousands)    2014     2013  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 298,133      $ 177,084   

Short-term investments, available for sale

     318,599        177,957   

Accounts receivable, net of allowances of $17.5 and $16.4 million, respectively

     155,421        130,717   

Inventories

     72,132        68,345   

Income taxes receivable and deferred tax assets

     18,618        20,945   

Other current assets

     15,804        25,516   
  

 

 

   

 

 

 

Total current assets

     878,707        600,564   

Property and equipment, net

     86,197        84,829   

Goodwill

     245,443        233,203   

Intangible assets, net

     62,571        68,722   

Deferred tax assets

     22,062        34,300   

Other assets

     9,580        4,766   
  

 

 

   

 

 

 

Total assets

   $ 1,304,560      $ 1,026,384   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities:

    

Accounts payable

   $ 86,940      $ 75,132   

Accrued and other liabilities

     63,183        78,515   

Deferred revenue

     41,927        42,569   

Income taxes payable and deferred tax liabilities

     1,759        4,654   
  

 

 

   

 

 

 

Total current liabilities

     193,809        200,870   

Convertible senior notes, net

     284,818        —    

Imputed financing obligation

     12,472        11,500   

Noncurrent contingent and other liabilities

     5,440        6,815   

Noncurrent deferred tax liabilities

     3,820        6,738   

Noncurrent income taxes payable

     15,512        33,011   
  

 

 

   

 

 

 

Total liabilities

     515,871        258,934   
  

 

 

   

 

 

 

Commitments and contingencies (Note 8)

    

Stockholders’ equity:

    

Preferred stock, $0.01 par value; 5,000 shares authorized; none issued and outstanding

     —         —    

Common stock, $0.01 par value; 150,000 shares authorized; 49,671 and 47,370 shares issued, respectively

     497        474   

Additional paid-in capital

     568,896        474,330   

Treasury stock, at cost; 2,736 and 396 shares, respectively

     (113,992     (12,897

Accumulated other comprehensive loss

     (7,357     (1,388

Retained earnings

     340,645        306,931   
  

 

 

   

 

 

 

Total stockholders’ equity

     788,689        767,450   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 1,304,560      $ 1,026,384   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

Electronics For Imaging, Inc.

Consolidated Statements of Operations

 

     For the years ended December 31,  
(in thousands, except per share amounts)    2014     2013     2012  

Revenue

   $ 790,427      $ 727,693      $ 652,137   

Cost of revenue(1)

     360,690        332,527        297,316   
  

 

 

   

 

 

   

 

 

 

Gross profit

     429,737        395,166        354,821   

Operating expenses (gains):

      

Research and development(1)

     134,732        128,124        120,298   

Sales and marketing(1)

     147,383        137,583        125,513   

General and administrative(1)

     66,932        47,755        50,727   

Amortization of identified intangibles

     20,673        19,438        18,594   

Restructuring and other (Note 14)

     6,578        4,834        5,803   

Gain on sale of building and land

     —         (117,216     —    
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     376,298        220,518        320,935   
  

 

 

   

 

 

   

 

 

 

Income from operations

     53,439        174,648        33,886   

Interest expense

     (5,859     (2,306     (709

Interest income and other income (expense), net

     (5,493     796        1,846   
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     42,087        173,138        35,023   

Benefit from (provision for) income taxes

     (8,373     (64,031     48,246   
  

 

 

   

 

 

   

 

 

 

Net income

   $ 33,714      $ 109,107      $ 83,269   
  

 

 

   

 

 

   

 

 

 

Net income per basic common share

   $ 0.72      $ 2.34      $ 1.79   
  

 

 

   

 

 

   

 

 

 

Net income per diluted common share

   $ 0.70      $ 2.26      $ 1.74   
  

 

 

   

 

 

   

 

 

 

Shares used in basic per-share calculation

     46,866        46,643        46,453   
  

 

 

   

 

 

   

 

 

 

Shares used in diluted per-share calculation

     48,406        48,359        47,734   
  

 

 

   

 

 

   

 

 

 

 

(1)        Includes stock-based compensation expense as follows:

      
     2014     2013     2012  

Cost of revenue

   $ 2,562      $ 1,817      $ 1,193   

Research and development

     8,818        7,568        5,719   

Sales and marketing

     7,070        4,500        3,320   

General and administrative

     17,611        11,885        9,489   

See accompanying notes to consolidated financial statements.

 

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Electronics For Imaging, Inc.

Consolidated Statements of Comprehensive Income

 

(in thousands)    For the years ended December 31,  
         2014             2013             2012      

Net income

   $ 33,714      $ 109,107      $ 83,269   

Net unrealized investment gains (losses):

      

Unrealized holding gains (losses), net of tax benefit of $0.2 million and tax provisions of less than $0.1 and $0.1 million for the years ended December 31, 2014, 2013, and 2012, respectively

     (344     66        198   

Reclassification adjustments included in net income, net of tax benefits of less than $0.1 million for the years ended December 31, 2014, 2013, and 2012

     (24     (23     (100
  

 

 

   

 

 

   

 

 

 

Net unrealized investment gains (losses)

     (368     43        98   

Currency translation adjustments, net of tax provisions of less than $0.1 and $0.1 million and tax benefit of $0.6 million for the years ended December 31, 2014, 2013, and 2012, respectively

     (5,576     (1,733     (1,304

Unrealized gains (losses) on cash flow hedges

     (25     33        28   
  

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 27,745      $ 107,450      $ 82,091   
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Electronics For Imaging, Inc.

Consolidated Statements of Stockholders’ Equity

 

     Common stock     Additional
paid-in
capital
    Treasury stock     Accumulated
Other
comprehensive
income (loss)
    Retained
earnings
    Total
stockholders’
equity
 
(in thousands)    Shares     Amount       Shares     Amount        

Balances as of December 31, 2011

     76,565      $ 766      $ 725,801        (30,964   $ (534,400   $ 1,447      $ 371,169      $ 564,783   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss), net of tax

               (1,178     83,269        82,091   

Exercise of common stock options

     785        8        12,193                12,201   

Restricted stock vested

     1,291        13        (13             —    

Stock-based compensation

         19,721                19,721   

Stock repurchases

           (2,081     (35,176         (35,176

Stock issued pursuant to ESPP

     552        5        6,752                6,757   

Tax benefit from employee stock plans

         417                417   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of December 31, 2012

     79,193      $ 792      $ 764,871        (33,045   $ (569,576   $ 269      $ 454,438      $ 650,794   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss), net of tax

               (1,657     109,107        107,450   

Exercise of common stock options

     433        4        5,168                5,172   

Restricted stock vested

     1,159        12        (12             —    

Stock-based compensation

         25,770                25,770   

Stock repurchases

           (1,341     (35,734         (35,734

Stock retirement and cancellation

     (33,990     (340     (335,459     33,990        592,413          (256,614     —    

Stock issued pursuant to ESPP

     575        6        7,125                7,131   

Tax benefit from employee stock plans

         6,867                6,867   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of December 31, 2013

     47,370      $ 474      $ 474,330        (396   $ (12,897   $ (1,388   $ 306,931      $ 767,450   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss), net of tax

               (5,969     33,714        27,745   

Exercise of common stock options

     490        5        7,690                7,695   

Restricted stock vested

     1,174        12        (12             —    

Equity component of convertible senior notes, net

         63,114                63,114   

Purchase of note hedges

         (63,928             (63,928

Issuance of warrants

         34,535                34,535   

Stock-based compensation

         36,061                36,061   

Stock repurchases

           (2,340     (101,095         (101,095

Stock issued pursuant to ESPP

     637        6        8,615                8,621   

Tax benefit from employee stock plans

         8,491                8,491   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of December 31, 2014

     49,671      $ 497      $ 568,896        (2,736   $ (113,992   $ (7,357   $ 340,645      $ 788,689   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Electronics For Imaging, Inc.

Consolidated Statements of Cash Flows

 

     For the years ended December 31,  
(in thousands)    2014     2013     2012  

Cash flows from operating activities:

      

Net income

   $ 33,714      $ 109,107      $ 83,269   

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation and amortization

     31,099        28,830        27,032   

Deferred taxes

     (5,836     53,846        (52,821

Tax benefit from employee stock plans

     8,491        6,867        417   

Excess tax benefit from stock-based compensation

     (9,789     (7,024     (1,360

Provision for bad debts and sales-related allowances

     7,408        9,595        3,250   

Provision for inventory obsolescence

     6,300        4,508        3,231   

Stock-based compensation

     36,061        25,770        19,721   

Contingent consideration payments related to businesses acquired

     (3,428     (1,563