UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2018March 31, 2019
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number001-33612
MONOTYPE IMAGING HOLDINGS INC.
(Exact name of registrant as specified in its charter)
Delaware | 20-3289482 | |
(State of incorporation) | (I.R.S. Employer Identification No.) | |
600 Unicorn Park Drive Woburn, Massachusetts | 01801 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code:(781) 970-6000
(Former Name, Former Address and Former Fiscal year, if changed since last report)
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically if any, every Interactive Data File required to be submitted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,”filer”, “accelerated filer”, “smaller reporting company” and an “emerging growth company” inRule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ | Accelerated filer | ☐ | |||||||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act) Yes ☐ No ☒
The number of shares outstanding of the registrant’s common stock as of October 26, 2018April 19, 2019 was 41,542,490.41,373,437.
MONOTYPE IMAGING HOLDINGS INC.
Item 1. |
MONOTYPE IMAGING HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited and in thousands, except share and per share data)
September 30, 2018 | December 31, 2017 | March 31, 2019 | December 31, 2018 | |||||||||||||
Assets | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 70,120 | $ | 82,822 | $ | 46,354 | $ | 60,106 | ||||||||
Restricted cash | 6,000 | 11,987 | 6,000 | 6,000 | ||||||||||||
Accounts receivable, net of allowance for doubtful accounts of $520 at September 30, 2018 and $634 at December 31, 2017 | 38,571 | 34,461 | ||||||||||||||
Accounts receivable, net of allowance for doubtful accounts of $455 at March 31, 2019 and $492 at December 31, 2018, respectively | 46,083 | 55,943 | ||||||||||||||
Income tax refunds receivable | 2,107 | 1,204 | 5,726 | 5,122 | ||||||||||||
Prepaid expenses and other current assets | 7,062 | 5,714 | 7,672 | 6,473 | ||||||||||||
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Total current assets | 123,860 | 136,188 | 111,835 | 133,644 | ||||||||||||
Right of use asset | 13,432 | — | ||||||||||||||
Property and equipment, net | 14,830 | 16,763 | 12,881 | 14,105 | ||||||||||||
Goodwill | 276,798 | 279,131 | 275,466 | 276,222 | ||||||||||||
Intangible assets, net | 76,539 | 84,856 | 72,823 | 74,699 | ||||||||||||
Restricted cash | — | 6,000 | ||||||||||||||
Other assets | 7,374 | 3,112 | 9,714 | 8,986 | ||||||||||||
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Total assets | $ | 499,401 | $ | 526,050 | $ | 496,151 | $ | 507,656 | ||||||||
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Liabilities and Stockholders’ Equity | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 2,830 | $ | 1,467 | $ | 2,325 | $ | 1,719 | ||||||||
Accrued expenses and other current liabilities | 32,408 | 43,096 | 30,182 | 43,840 | ||||||||||||
Accrued income taxes payable | 304 | 522 | 190 | 510 | ||||||||||||
Deferred revenue | 11,766 | 15,102 | 11,941 | 10,337 | ||||||||||||
Lease liability | 3,621 | — | ||||||||||||||
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Total current liabilities | 47,308 | 60,187 | 48,259 | 56,406 | ||||||||||||
Revolving line of credit | 80,000 | 93,000 | 70,000 | 75,000 | ||||||||||||
Other long-term liabilities | 3,014 | 6,428 | 1,649 | 3,102 | ||||||||||||
Deferred income taxes | 29,958 | 28,004 | 35,697 | 35,083 | ||||||||||||
Reserve for income taxes | 2,344 | 2,783 | — | 2,471 | ||||||||||||
Lease liability | 11,229 | — | ||||||||||||||
Accrued pension benefits | 6,201 | 6,280 | 5,829 | 5,888 | ||||||||||||
Commitments and contingencies(Note 14) | ||||||||||||||||
Commitments and contingencies (Note 15) | ||||||||||||||||
Stockholders’ equity: | ||||||||||||||||
Preferred stock, $0.001 par value, Authorized shares: 10,000,000; Issued and outstanding: none | — | — | — | — | ||||||||||||
Common stock, $0.001 par value, Authorized shares: 250,000,000; Shares issued: 45,773,708 at September 30, 2018 and 44,934,364 at December 31, 2017 | 44 | 44 | ||||||||||||||
Common stock, $0.001 par value, Authorized shares: 250,000,000; Shares issued 46,397,404 at March 31, 2019 and 45,803,288 at December 31, 2018 | 46 | 46 | ||||||||||||||
Additionalpaid-in capital | 313,354 | 298,113 | 324,027 | 319,486 | ||||||||||||
Treasury stock, at cost, 3,914,493 shares at September 30, 2018 and 3,215,644 shares at December 31, 2017 | (72,611 | ) | (64,083 | ) | ||||||||||||
Treasury stock, at cost, 4,955,996 shares at March 31, 2019 and 4,504,236 shares at December 31, 2018 | (91,329 | ) | (83,518 | ) | ||||||||||||
Retained earnings | 94,940 | 97,815 | 97,458 | 99,605 | ||||||||||||
Accumulated other comprehensive loss | (5,151 | ) | (2,521 | ) | (6,714 | ) | (5,913 | ) | ||||||||
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Total stockholders’ equity | 330,576 | 329,368 | 323,488 | 329,706 | ||||||||||||
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Total liabilities and stockholders’ equity | $ | 499,401 | $ | 526,050 | $ | 496,151 | $ | 507,656 | ||||||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
MONOTYPE IMAGING HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and in thousands, except share and per share data)
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | |||||||||||||||||||
License revenue | $ | 45,831 | $ | 49,913 | $ | 139,791 | $ | 141,083 | $ | 41,872 | $ | 45,867 | ||||||||||||
Service revenue | 12,138 | 10,594 | 35,548 | 29,690 | 9,484 | 10,816 | ||||||||||||||||||
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Total revenue | 57,969 | 60,507 | 175,339 | 170,773 | 51,356 | 56,683 | ||||||||||||||||||
Cost of revenue—license | 6,947 | 6,782 | 23,841 | 20,745 | 6,802 | 9,612 | ||||||||||||||||||
Cost of revenue—service | 2,448 | 2,937 | 7,946 | 7,893 | 2,801 | 2,824 | ||||||||||||||||||
Cost of revenue—amortization of acquired technology | 859 | 885 | 2,583 | 2,644 | 857 | 864 | ||||||||||||||||||
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Total cost of revenue | 10,254 | 10,604 | 34,370 | 31,282 | 10,460 | 13,300 | ||||||||||||||||||
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Gross profit | 47,715 | 49,903 | 140,969 | 139,491 | 40,896 | 43,383 | ||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Marketing and selling | 18,212 | 22,453 | 58,382 | 66,417 | 17,130 | 20,089 | ||||||||||||||||||
Research and development | 7,680 | 8,997 | 25,432 | 27,778 | 7,441 | 9,296 | ||||||||||||||||||
General and administrative | 10,786 | 11,291 | 38,262 | 34,032 | 12,019 | 15,618 | ||||||||||||||||||
Restructuring | 244 | — | 6,814 | — | (24 | ) | 194 | |||||||||||||||||
Amortization of other intangible assets | 851 | 1,021 | 2,840 | 3,051 | 832 | 1,024 | ||||||||||||||||||
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Total operating expenses | 37,773 | 43,762 | 131,730 | 131,278 | 37,398 | 46,221 | ||||||||||||||||||
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Income from operations | 9,942 | 6,141 | 9,239 | 8,213 | ||||||||||||||||||||
Income (loss) from operations | 3,498 | (2,838 | ) | |||||||||||||||||||||
Other (income) expense: | ||||||||||||||||||||||||
Interest expense | 959 | 815 | 2,756 | 2,365 | 908 | 852 | ||||||||||||||||||
Interest income | (133 | ) | (116 | ) | (403 | ) | (309) | (137 | ) | (124 | ) | |||||||||||||
Loss (gain) on foreign exchange | 408 | 1,357 | (30 | ) | 4,544 | 66 | (34 | ) | ||||||||||||||||
(Gain) loss on derivatives | (47 | ) | 119 | (138 | ) | 290 | ||||||||||||||||||
Other (income) expense, net | — | (32 | ) | (6 | ) | 24 | ||||||||||||||||||
Loss on derivatives | 95 | 136 | ||||||||||||||||||||||
Other | 45 | (4 | ) | |||||||||||||||||||||
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Total other expense | 1,187 | 2,143 | 2,179 | 6,914 | ||||||||||||||||||||
Total other expense, net | 977 | 826 | ||||||||||||||||||||||
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Income before provision for income taxes | 8,755 | 3,998 | 7,060 | 1,299 | ||||||||||||||||||||
Provision for income taxes | 5,434 | 2,737 | 4,243 | 1,609 | ||||||||||||||||||||
Income (loss) before benefit from income taxes | 2,521 | (3,664 | ) | |||||||||||||||||||||
Benefit from income taxes | (139 | ) | (2,465 | ) | ||||||||||||||||||||
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Net income (loss) | $ | 3,321 | $ | 1,261 | $ | 2,817 | $ | (310) | $ | 2,660 | $ | (1,199 | ) | |||||||||||
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Net income (loss) available to common stockholders—basic | $ | 3,143 | $ | 1,196 | $ | 2,226 | $ | (310) | $ | 2,514 | $ | (1,199 | ) | |||||||||||
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Net income (loss) available to common stockholders—diluted | $ | 3,143 | $ | 1,195 | $ | 2,226 | $ | (310) | $ | 2,514 | $ | (1,199 | ) | |||||||||||
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Net income (loss) per common share- basic and diluted | ||||||||||||||||||||||||
Net income (loss) per common share: | ||||||||||||||||||||||||
Basic | $ | 0.08 | $ | 0.03 | $ | 0.06 | $ | (0.01) | $ | 0.06 | $ | (0.03 | ) | |||||||||||
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Diluted | $ | 0.08 | $ | 0.03 | $ | 0.06 | $ | (0.01) | $ | 0.06 | $ | (0.03 | ) | |||||||||||
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Weighted-average number of shares outstanding: | ||||||||||||||||||||||||
Basic | 40,512,837 | 39,594,130 | 40,314,169 | 39,576,312 | 40,004,354 | 40,005,789 | ||||||||||||||||||
Diluted | 40,609,643 | 39,798,779 | 40,454,518 | 39,576,312 | 40,066,059 | 40,005,789 | ||||||||||||||||||
Dividends declared per common share | $ | 0.116 | $ | 0.113 | $ | 0.348 | $ | 0.339 | ||||||||||||||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
MONOTYPE IMAGING HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited and in thousands)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Net income (loss) | $ | 3,321 | $ | 1,261 | $ | 2,817 | $ | (310) | ||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||
Unrecognized actuarial gain, net of tax of $7, $8, $20 and $23, respectively | 23 | 16 | 64 | 45 | ||||||||||||
Foreign currency translation adjustments, net of tax of $(106), $1,058, $(1,296) and $3,469, respectively | (512 | ) | 2,191 | (2,694 | ) | 6,820 | ||||||||||
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Comprehensive income | $ | 2,832 | $ | 3,468 | $ | 187 | $ | 6,555 | ||||||||
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Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Net income (loss) | $ | 2,660 | $ | (1,199 | ) | |||
Other comprehensive income, net of tax: | ||||||||
Unrecognized actuarial gain, net of tax of $5 and $5, respectively | 16 | 19 | ||||||
Foreign currency translation adjustments, net of tax of ($276) and $356, respectively | (817 | ) | 1,325 | |||||
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Comprehensive income | $ | 1,859 | $ | 145 | ||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
MONOTYPE IMAGING HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the nine and three months ended September 30,March 31, 2019 and 2018 and 2017
(in thousands, except share and per share data)
Common Stock | Treasury Stock | Additional Paid-In | Retained | Accumulated Other Comprehensive | Total Stock- holders’ | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Earnings | Income (Loss) | Equity | |||||||||||||||||||||||||
Balance, December 31, 2017 | 44,934,364 | $ | 44 | 3,215,644 | $ | (64,083) | $ | 298,113 | $ | 97,815 | $ | (2,521) | $ | 329,368 | ||||||||||||||||||
Net income | 2,817 | 2,817 | ||||||||||||||||||||||||||||||
Issuance of capital shares | ||||||||||||||||||||||||||||||||
—restricted share grants | 496,025 | — | — | — | ||||||||||||||||||||||||||||
—exercised options | 248,276 | — | 3,455 | 3,455 | ||||||||||||||||||||||||||||
—restricted units converted | 95,043 | — | — | — | ||||||||||||||||||||||||||||
Repurchase of unvested shares of restricted common stock | — | 291,676 | — | — | ||||||||||||||||||||||||||||
Purchase of treasury stock | — | 326,808 | (6,678 | ) | (6,678 | ) | ||||||||||||||||||||||||||
Shares withheld | 80,365 | (1,850 | ) | (1,850 | ) | |||||||||||||||||||||||||||
Stock based compensation | 11,786 | 11,786 | ||||||||||||||||||||||||||||||
Dividends declared ($0.348 per share) | (14,642 | ) | (14,642 | ) | ||||||||||||||||||||||||||||
Cumulative adjustment, ASC 606 adoption | 8,950 | 8,950 | ||||||||||||||||||||||||||||||
Unrecognized actuarial loss, net of tax | 64 | 64 | ||||||||||||||||||||||||||||||
Cumulative translation adjustment, net of tax | (2,694 | ) | (2,694 | ) | ||||||||||||||||||||||||||||
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Balance, September 30, 2018 | 45,773,708 | $ | 44 | 3,914,493 | $ | (72,611 | ) | $ | 313,354 | $ | 94,940 | (5,151 | ) | $ | 330,576 | |||||||||||||||||
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Balance, June 30, 2018 | �� | 45,738,183 | $ | 44 | 3,586,782 | $ | (66,581 | ) | $ | 308,952 | $ | 96,477 | $ | (4,662 | ) | $ | 334,230 | |||||||||||||||
Net income | 3,321 | 3,321 | ||||||||||||||||||||||||||||||
Issuance of capital shares | ||||||||||||||||||||||||||||||||
—restricted share grants | 19,150 | — | — | — | ||||||||||||||||||||||||||||
—exercised options | 6,197 | — | 73 | 73 | ||||||||||||||||||||||||||||
—restricted units converted | 10,178 | — | — | — | ||||||||||||||||||||||||||||
Repurchase of unvested shares of restricted common stock | — | 29,167 | — | — | ||||||||||||||||||||||||||||
Purchase of treasury stock | — | 282,208 | (5,697 | ) | (5,697 | ) | ||||||||||||||||||||||||||
Shares withheld | 16,336 | (333 | ) | (333 | ) | |||||||||||||||||||||||||||
Stock based compensation | 4,329 | 4,329 | ||||||||||||||||||||||||||||||
Dividends declared ($0.116 per share) | (4,858 | ) | (4,858 | ) | ||||||||||||||||||||||||||||
Unrecognized actuarial loss, net of tax | 23 | 23 | ||||||||||||||||||||||||||||||
Cumulative translation adjustment, net of tax | (512 | ) | (512 | ) | ||||||||||||||||||||||||||||
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Balance, September 30, 2018 | 45,773,708 | $ | 44 | 3,914,493 | $ | (72,611 | ) | $ | 313,354 | $ | 94,940 | $ | (5,151 | ) | $ | 330,576 | ||||||||||||||||
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MONOTYPE IMAGING HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the nine and three months ended September 30, 2018 and 2017
(in thousands, except share and per share data)
Common Stock | Treasury Stock | Additional Paid-In | Retained | Accumulated Other Comprehensive | Total Stock- holders’ | Common Stock | Treasury Stock | Additional Paid-In | Retained | Accumulated Other Comprehensive | Total Stock- holders’ | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Earnings | Income (Loss) | Equity | Shares | Amount | Shares | Amount | Capital | Earnings | Income (Loss) | Equity | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2016 | 43,771,600 | $ | 43 | 2,493,174 | $ | (56,232 | ) | $ | 274,946 | $ | 105,718 | $ | (10,497) | $ | 313,978 | |||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | (310 | ) | (310 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of capital shares | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
—restricted share grants | 905,151 | 1 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
—exercised options | 107,343 | — | 1,062 | 1,062 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
—restricted units converted | 38,245 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Repurchase of unvested shares of restricted common stock | — | 167,054 | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Purchase of treasury stock | — | 340,989 | (6,351 | ) | (6,351 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares withheld | 39,552 | (776 | ) | (776 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock based compensation | 15,392 | 15,392 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared ($0.339 per share) | (14,180 | ) | (14,180 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cumulative adjustment, ASC 606 adoption | 872 | (571 | ) | 301 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Unrecognized actuarial loss, net of tax | 45 | 45 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cumulative translation adjustment, net of tax | 6,820 | 6,820 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Balance, September 30, 2017 | 44,822,339 | $ | 44 | 3,040,769 | $ | (63,359 | ) | $ | 292,272 | $ | 90,657 | $ | (3,632 | ) | $ | 315,982 | ||||||||||||||||||||||||||||||||||||||||||||||||
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Balance, June 30, 2017 | 44,666,826 | $ | 44 | 2,763,378 | $ | (58,992 | ) | $ | 286,607 | $ | 94,117 | $ | (5,839 | ) | $ | 315,937 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2018 | 45,803,288 | $ | 46 | 4,504,236 | $ | (83,518 | ) | $ | 319,486 | $ | 99,605 | $ | (5,913 | ) | $ | 329,706 | ||||||||||||||||||||||||||||||||||||||||||||||||
Net income | 1,261 | 1,261 | 2,660 | 2,660 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of capital shares | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
—restricted share grants | 84,055 | — | — | — | 483,952 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
—exercised options | 46,481 | — | 350 | 350 | 48,486 | — | 322 | 322 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
—restricted units converted | 24,977 | — | — | — | 61,678 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Repurchase of unvested shares of restricted common stock | — | 37,486 | — | — | 19,360 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Purchase of treasury stock | — | 232,989 | (4,233 | ) | (4,233 | ) | 370,500 | (6,590 | ) | (6,590 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares withheld | 6,916 | (134 | ) | (134 | ) | 61,900 | (1,221 | ) | (1,221 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock based compensation | 5,315 | 5,315 | 4,219 | 4,219 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared ($0.113 per share) | (4,721 | ) | (4,721 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared ($0.116 per share) | (4,807 | ) | (4,807 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Unrecognized actuarial loss, net of tax | 16 | 16 | 16 | 16 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cumulative translation adjustment, net of tax | 2,191 | 2,191 | (817 | ) | (817 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Balance, September 30, 2017 | 44,822,339 | $ | 44 | 3,040,769 | $ | (63,359 | ) | $ | 292,272 | $ | 90,657 | $ | (3,632 | ) | $ | 315,982 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2019 | 46,397,404 | $ | 46 | 4,955,996 | $ | (91,329 | ) | $ | 324,027 | $ | 97,458 | $ | (6,714 | ) | $ | 323,488 | ||||||||||||||||||||||||||||||||||||||||||||||||
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Balance, December 31, 2017 | 44,934,364 | $ | 44 | 3,215,644 | $ | (64,083 | ) | $ | 298,113 | $ | 97,815 | $ | (2,521 | ) | $ | 329,368 | ||||||||||||||||||||||||||||||||||||||||||||||||
Net loss | (1,199 | ) | (1,199 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of capital shares | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
—restricted share grants | 392,352 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
—exercised options | 186,783 | — | 2,648 | 2,648 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
—restricted units converted | 74,484 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Repurchase of unvested shares of restricted common stock | 153,344 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares withheld | 50,128 | (1,211 | ) | (1,211 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock based compensation | 4,262 | 4,262 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared ($0.116 per share) | (4,893 | ) | (4,893 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cumulative adjustment, ASC 606 adoption | 8,950 | 8,950 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Unrecognized actuarial loss, net of tax | 19 | 19 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cumulative translation adjustment, net of tax | 1,325 | 1,325 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Balance, March 31, 2018 | 45,587,983 | $ | 44 | 3,419,116 | $ | (65,294 | ) | $ | 305,023 | $ | 100,673 | $ | (1,177 | ) | $ | 339,269 | ||||||||||||||||||||||||||||||||||||||||||||||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
MONOTYPE IMAGING HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
Nine Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
Cash flows from operating activities | ||||||||||||||||
Net income (loss) | $ | 2,817 | $ | (310 | ) | $ | 2,660 | $ | (1,199 | ) | ||||||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||||||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 9,548 | 9,271 | 3,169 | 3,249 | ||||||||||||
Loss on retirement of fixed assets | 11 | 90 | ||||||||||||||
Loss on abandonment of product line | 3,223 | — | ||||||||||||||
Amortization of deferred financing costs and accreted interest | 165 | 165 | ||||||||||||||
Loss on extinguishment of debt | 34 | — | ||||||||||||||
Loss on retirement of assets | 13 | 9 | ||||||||||||||
Amortization of deferred financing costs and accretion of interest | 43 | 55 | ||||||||||||||
Stock based compensation | 11,761 | 15,294 | 4,219 | 4,247 | ||||||||||||
Provision for doubtful accounts | 555 | 734 | 91 | 191 | ||||||||||||
Deferred income taxes | (790 | ) | (2,982 | ) | 881 | (4,582 | ) | |||||||||
Unrealized currency loss on foreign denominated intercompany transactions | 203 | 3,870 | ||||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Unrealized currency gain on foreign denominated intercompany transactions | (265 | ) | (575 | ) | ||||||||||||
Changes in operating assets and liabilities, net of effect of acquisitions: | ||||||||||||||||
Accounts receivable | 2,198 | (3,978 | ) | 9,789 | 7,783 | |||||||||||
Prepaid expenses and other assets | (4,820 | ) | (1,560 | ) | (1,709 | ) | (1,321 | ) | ||||||||
Accounts payable | 1,395 | (16 | ) | 598 | 1,463 | |||||||||||
Accrued income taxes payable | (1,672 | ) | (349 | ) | ||||||||||||
Income tax refunds receivable | (604 | ) | (716 | ) | ||||||||||||
Accrued income taxes | (2,842 | ) | 26 | |||||||||||||
Accrued expenses and other liabilities | (12,219 | ) | 162 | (13,054 | ) | (4,179 | ) | |||||||||
Deferred revenue | (964 | ) | 1,122 | 1,072 | 3,045 | |||||||||||
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Net cash provided by operating activities | 11,411 | 21,513 | 4,095 | 7,496 | ||||||||||||
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Cash flows from investing activities | ||||||||||||||||
Purchases of property and equipment | (2,676 | ) | (5,272 | ) | (411 | ) | (1,463 | ) | ||||||||
Purchases of intangible assets | (160 | ) | (54 | ) | — | (160 | ) | |||||||||
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Net cash used in investing activities | (2,836 | ) | (5,326 | ) | (411 | ) | (1,623 | ) | ||||||||
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Cash flows from financing activities | ||||||||||||||||
Payments on revolving line of credit | (13,000 | ) | (9,000 | ) | ||||||||||||
Net payments on revolving line of credit | (5,200 | ) | (3,000 | ) | ||||||||||||
Proceeds from line of credit, net of issuance costs | 42 | — | ||||||||||||||
Common stock dividends paid | (14,494 | ) | (14,030 | ) | (4,791 | ) | (4,712 | ) | ||||||||
Purchase of treasury stock | (6,651 | ) | (6,446 | ) | (6,590 | ) | — | |||||||||
Payments for employee taxes on shares withheld | (1,850 | ) | (776 | ) | (1,221 | ) | (1,210 | ) | ||||||||
Proceeds from exercises of common stock options | 3,455 | 1,062 | 322 | 2,648 | ||||||||||||
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Net cash used in financing activities | (32,540 | ) | (29,190 | ) | (17,438 | ) | (6,274 | ) | ||||||||
Effect of exchange rates on cash, cash equivalents and restricted cash | (724 | ) | 1,107 | 2 | 943 | |||||||||||
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Decrease in cash, cash equivalents and restricted cash | (24,689 | ) | (11,896 | ) | ||||||||||||
(Decrease) increase in cash, cash equivalents and restricted cash | (13,752 | ) | 542 | |||||||||||||
Cash, cash equivalents and restricted cash at beginning of period | 100,809 | 109,426 | 66,106 | 100,809 | ||||||||||||
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Cash, cash equivalents and restricted cash at end of period | $ | 76,120 | $ | 97,530 | $ | 52,354 | $ | 101,351 | ||||||||
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Borrowing under revolving line of credit | $ | 158 | $ | — |
The accompanying notes are an integral part of these condensed consolidated financial statements.
MONOTYPE IMAGING HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018March 31, 2019
1. Nature of the Business
Monotype Imaging Holdings Inc. (the “Company” or “we”) is a leading global provider of branded and design assets, technology and expertise for creative professionals and consumer device manufacturers. We provide high-quality branded or personalized contentcreative assets and technology solutions across multiple devices and mediums. Our solutions, which include type, branded mobile content, visual content marketing solutions, custom design services, and tools and technologies that enable the creative process are licensed through our direct sales channel,e-commerce platforms and partner platforms. We also provide consumer device manufacturers and independent software vendors, or ISVs, with the right solutions for delivering consistent, compelling user experiences. Our solutions power the visual expression of the leading makers of a wide range of devices, including laser printers, digital copiers and mobile devices, among others, as well as provide a high-quality text experience in numerous software applications and operating systems. We license our design assets and technology to creative professionals, consumer device manufacturers and independent software vendors.
We are headquartered in Woburn, Massachusetts and we operate in one business segment: the development, marketing and licensing of design assets and technology. We also maintain various offices worldwide for selling and marketing, research and development and administration. As of September 30, 2018,At March 31, 2019, we conduct our operations through four domestic operating subsidiaries, Monotype Imaging Inc., Monotype ITC Inc. (“ITC”), MyFonts Inc. (“MyFonts”), and Olapic, Inc., and six foreign operating subsidiaries, Olapic Argentina S.A., Monotype Ltd. (“Monotype UK”), Monotype GmbH (“Monotype Germany”), Monotype Solutions India Pvt. Ltd. (“Monotype India”), Monotype Hong Kong Ltd. (“Monotype Hong Kong”) and Monotype KK (“Monotype Japan”).
2. Basis of Presentation
The accompanying unaudited condensed consolidated interim financial statements as of September 30, 2018March 31, 2019 and for the three and nine months ended September 30,March 31, 2019 and 2018 and 2017 include the accounts of the Company and its wholly-owned subsidiaries and have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for Quarterly Reports onForm 10-Q and Article 10 of RegulationS-X. Accordingly, such financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. GAAP requires the Company’s management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. The results for interim periods are not necessarily indicative of results to be expected for the year or for any future periods. In management’s opinion, these unaudited condensed consolidated interim financial statements contain all adjustments of a normal recurring nature necessary for a fair presentation of the financial statements for the interim periods presented. presented
We have elected to early adoptpresent the provisions in RegulationS-X, Rule8-03(a)(5) and10-01(a)(7) requiring an analysis of changes in stockholders’ equity be presented quarterly in either a statement or on in the notes to the financial statements,form for the current and comparative year to date interim periods and state the amount of dividends per share in the aggregate for each class of shares. We have elected to presentshares in accordance with the requirementsprovisions in statement form.RegulationS-X, Rule8-03(a)(5) and10-01(a)(7).
These unaudited condensed consolidated interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2017,2018, as reported in the Company’s Annual Report onForm 10-K. The Company’s significant accounting policies and practices are as described in the Annual Report, except for the adoption of the accounting standards described in Note 3 below.
Statement of Operations
For the three and nine months ended September 30, 2018, we have changed our presentation of revenue to disclose service revenue and cost of service revenue separately from license revenue and cost of license revenue, as service revenue now exceeds the materiality threshold for an individual line item. Prior year amounts were historically reported on a combined basis and have been restated to conform to current presentation.
We classify cloud-based subscriptions and other services, such as font related services, custom font design and post contract support as service revenue on our condensed consolidated statements of operations. All other revenue is classified as license revenue.
Highly Inflationary Economy
At September 30, 2018, our wholly-owned Olapic Argentina S.A. subsidiary employs approximately 99 people whose functions mainly include development, sales support and administration. The monthly operations average between $0.4 million and $0.5 million. The Argentinian economy was recently determined to be highly inflationary. A highly inflationary economy is one where the cumulative inflation rate for the three years preceding the beginning of the reporting period, including interim reporting periods, is in excess of 100 percent. Argentina’s inflation rate reached this threshold with the quarterly period ended June 30, 2018. For interim periods ended prior to July 1, 2018, the functional currency for our subsidiary is the Argentinian peso, the foreign entity’s local currency.
For a highly inflationary economy,the quarter ended March 31, 2018, to conform to current year presentation, we followedreclassified restructuring charges to disclose the guidance in ASC Topic 830,Foreign Currency Matters, (Subtopic ASC 830-10-45) and accountedexpense amount separately from other operating expenses. Previously the expense amounts were included within the following other operating expense line items:
Three Months Ended March 31, 2018 | ||||
Marketing and selling | $ | (24 | ) | |
Research and development | 146 | |||
General and administrative | 72 | |||
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Total | 194 | |||
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See Note 14 for the change in functional currency from the Argentinian peso to the U.S. dollar effective July 1, 2018. Under this guidance, translation adjustments are not removed from equity, and the translated amounts for nonmonetary assets and liabilities at the end of the prior period become the accounting basis for those assets both in the period of the change and in subsequent periods. A change in functional currency due to an economy’s designation as highly inflationary results from changes in economic factors (i.e., inflation); therefore, such a change is not considered a change in accounting policy or accounting principle. The change in functional currency did not have a material impact on financial position, operating results or cash flow.further details.
3. Recently Issued Accounting Pronouncements
Adopted
Revenue RecognitionLeases
In May 2014,February 2016, the FinancialFASB issued Accounting Standards Board, orUpdate (“ASU”)2016-02,Leases (Topic 842):Amendments to the FASB and the International Accounting Standards Board jointly issued ASU2014-09,Revenue from Contracts with Customers (Topic 606)Codification,(“ASC 606”ASU2016-02”), which outlinesreplaces the existing guidance for leases. ASU2016-02 requires the identification of arrangements that should be accounted for as leases by lessees. In general, for lease arrangements exceeding a comprehensive five-step revenue recognition model based on a principle that replaces virtually all existing revenue recognition rules under U.S. GAAP and which requires revenue totwelve-month term, these arrangements must now be recognized in a manner to depictas assets and liabilities on the transfer of promised goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. ASU2014-09 also provided the guidance in ASC Topic 340,Other Assets and Deferred Costs—Contracts with Customers (Subtopic340-40), which includes criteria for the capitalization and amortization of certain contract acquisition and fulfillment costs. The standard requires retrospective application; however, it allows entities to choose either full retrospective adoption, in which the standard is applied to allbalance sheet of the periods presented,lessee. Under ASU
2016-02, aright-of-use asset and lease obligation will be recorded for all leases, whether operating or modified retrospective adoption, in whichfinancing, while the cumulativecatch-up adjustment to the openingincome statement will reflect lease expense for operating leases and amortization/interest expense for financing leases. The balance of retained earnings is recognizedsheet amount recorded for existing leases at the date of application, with additional disclosures required to describe these effects.
We adoptedadoption of ASU2016-02 must be calculated using the standard on January 1, 2018, and applied the modified retrospective method of adoption and have elected to apply the new standard only to contracts not completedapplicable incremental borrowing rate at January 1, 2018, which represents contracts for which all (or substantially all) of the revenues have not been recognized under existing guidance as of the date of adoption.
The cumulative effect of the adoption on our condensed consolidated balance sheet, by applying the modified retrospective method as of January 1, 2018, is as follows (in thousands):
As Reported | Cumulative Adjustments | As Adjusted | ||||||||||
December 31, 2017 | January 1, 2018 | |||||||||||
Assets: | ||||||||||||
Accounts receivable, net(1) | $ | 34,461 | $ | 7,052 | $ | 41,513 | ||||||
Prepaid expenses and other current assets(2) | 5,714 | 427 | 6,141 | |||||||||
Other assets(3) | 3,112 | 650 | 3,762 | |||||||||
Liabilities: | ||||||||||||
Deferred revenue | 15,102 | (2,923 | ) | 12,179 | ||||||||
Other long-term liabilities(4) | 6,428 | (825 | ) | 5,603 | ||||||||
Deferred income taxes | 28,004 | 2,927 | 30,931 | |||||||||
Stockholders’ equity: | ||||||||||||
Retained earnings | 97,815 | 8,950 | 106,765 |
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In addition, we recognized additional royalty expenses totaling approximately $2.2 million, or $0.05 per share, upon the adoption of ASC 606, as an indirect effect of a change in accounting principle. These amounts are included in cost of revenue – license in the accompanying condensed consolidated statement of operations for the nine months ended September 30, 2018.
The following reflects the Company’s condensed consolidated balance sheet and condensed consolidated statement of operations on an as reported basis and as if we had continued to recognize revenue under the guidance of ASC985-605,Software Revenue Recognition, which is also referred to herein as “legacy GAAP” (in thousands):
September 30, 2018 | ||||||||||||
As Reported | Balances without adoption of ASC 606 | Increase (Decrease) | ||||||||||
Assets: | ||||||||||||
Accounts receivable, net | $ | 38,571 | $ | 25,334 | $ | (13,237 | ) | |||||
Prepaid expenses and other current assets | 7,062 | 6,448 | (614 | ) | ||||||||
Other assets | 7,374 | 2,648 | (4,726 | ) | ||||||||
Liabilities: | ||||||||||||
Accrued expenses and other current liabilities | 32,408 | 30,139 | (2,269 | ) | ||||||||
Deferred revenue | 11,766 | 18,827 | 7,061 | |||||||||
Other long-term liabilities | 3,014 | 4,042 | 1,028 | |||||||||
Deferred income taxes | 29,958 | 24,130 | (5,828 | ) | ||||||||
Stockholders’ equity: | ||||||||||||
Retained earnings | 94,940 | 76,371 | (18,569 | ) |
License revenue Cost of revenue—license Marketing and selling Provision for income taxes Net income (loss) Net income (loss)—basic and diluted License revenue Service revenue Cost of revenue—license Marketing and selling Provision for income taxes Net income (loss) Net income (loss)—basic and diluted For the three months ended September 30, 2018 As Reported Balances without
adoption of ASC 606 Increase
(Decrease) $ 45,831 $ 38,954 $ (6,877 ) 6,947 6,877 (70 ) 18,212 18,712 500 5,434 3,801 (1,633 ) 3,321 (2,353 ) (5,674 ) $ 0.08 $ (0.06 ) $ (0.14 ) For the nine months ended September 30, 2018 As Reported Balances without
adoption of ASC 606 Increase
(Decrease) $ 139,791 $ 126,666 $ (13,125 ) 35,548 35,350 (198 ) 23,841 21,572 (2,269 ) 58,382 59,848 1,466 4,243 1,342 (2,901 ) 2,817 (6,802 ) (9,619 ) $ 0.06 $ (0.18) $ (0.24)
The following summarizes the significant changes under ASC 606 as compared to legacy GAAP:
Under legacy GAAP, revenue related to our term licenses that were bundled with service-related performance obligations when vendor-specific objective evidence (“VSOE”) did not exist was required to be recognized ratably over the term of the agreement. Under ASC 606, the Company allocates revenue to each performance obligation in the contract and each performance obligation is accounted for separately; the license revenue is recognized at the time of delivery and the service revenue is recognized over time based on their relative standalone selling prices. The application of this provision is particularly impactful to our new Mosaic product offering which was launched in the first quarter of 2018. This new offering bundles our traditional font licenses with a SaaS based portal, which under legacy GAAP would have been recognized ratably. This provision also has resulted in some revenue from contracts signed prior to 2018 being accelerated and recorded to retained earnings instead of in our operating results in 2018 and beyond.
We have a limited number of contracts in which we offered extended payment terms for term licenses to our customers, including cases in which the license is delivered in full at the beginning of the contract. Under legacy GAAP, revenue was recognized when the payments became due, based upon the requirement that the fee be fixed or determinable. However, under the new guidance, revenue related to such arrangements is accelerated, with revenue related to the license recognized at the time of delivery, less a financing component (interest income) to be recognized over time based on the payment terms. The application of this provision has resulted in revenue from certain contracts signed prior to 2018 being accelerated and recorded to retained earnings instead of in our operating results in 2018 and beyond. This also impacts new contracts that we sign in 2018.
Under legacy GAAP, we recognized royalty revenue when the licensee reported it to us, typically one quarter after royalty-bearing units were shipped, at which time the fee is fixed or determinable. Under ASC 606, we now estimate royalty revenue from our royalty-based licenses in the period that the royalty-bearing event occurs. Thus, revenue from royalties reported to us in the first quarter of 2018 were recorded to retained earnings upon adoption of ASC 606, rather than being recognized as revenue as it would have been under legacy GAAP. This was partially offset by the recognition of revenue in the first quarter of 2018 for estimated royalties that were reported to us in the second quarter of 2018.
ASC 606 requires certain incremental costs related to contract acquisition, such as sales commissions, and contract fulfillment costs to be capitalized and amortized over the expected period of benefit whereas the Company had previously recognized such expenses as incurred.
Please see Note 4 for the Company’s policies related to revenue recognition and accounting for costs to obtain and fulfill a customer contract.
Statement of Cash Flows
In November 2016, the FASB issued ASU2016-18,Statement of Cash Flows (Topic 230): Restricted Cash, which requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconcilingbeginning-of-period andend-of-period total amounts shown on the statement of cash flows. This guidance is effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted. We adopted ASU2016-18 on January 1, 2018 and reflected restricted cash and restricted cash equivalents in thebeginning-of-period andend-of-period amounts on the cash flows, on a retrospective basis. As of result of this adoption, thebeginning-of-period amount on the statement of cash flows increased $18.0 million for the nine months ended September 30, 2018 and 2017, respectively, to include restricted cash and restricted cash equivalent balances. Theend-of-period amount on the statement of cash flows increased $6.0 million and $18.0 million for the nine months ended September 30, 2018 and 2017, respectively, to include restricted cash and restricted cash equivalent balances.
Stock Compensation
In May 2017, the FASB issued ASU2016-09,Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting.This guidance clarifies when companies would apply modification accounting to changes to the terms or conditions of a stock based payment award. The guidance narrows the definition of a modification. This guidance is effective for annual and interim periods beginning after December 15, 2017. 2018.
We adopted ASU2016-092016-02 on January 1, 20182019. We elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things allows us to carryforward the historical lease classification. We also elected the practical expedient that allows an accounting policy election to exclude right of use assets and there was nolease obligations from the balance sheet for all leases with an initial term of 12 months or less.
As permitted in the standard, the Company is using a modified retrospective approach, where current periods are shown under the new standard, while comparative periods are shown under Accounting Standard Codification No. 840, Leases (prior to the adoption of ASU2016-02), where entities recognize a cumulative effect to retained earnings at the date of adoption without restating prior periods’ balances or disclosures.
The adoption of ASU2016-02 on January 1, 2019, had a material impact on our consolidated financial statements.
Pension Benefits
In March 2017, the FASB issued ASUNo. 2017-07, Compensation-Retirement Benefits (Topic 715)-Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This guidance revises the presentation of the net periodic benefit cost in the income statement. The new standard is effective for annual and interim periods beginning after December 15, 2017. We adopted ASU2017-07 on January 1, 2018 and there was no material impact on our consolidated financial statements.
Pending
Internal Use Software
In August 2018, the FASB issued ASU2018-15,Intangibles – Goodwill and Other –Internal-Use Software (Topic350-40): Customer’s Accounting for Implementation of Cost Incurred in a Cloud Computing Arrangement that is Considered a Service Contact.This update clarifies the accounting for implementation costs related to a cloud computing arrangement that is a service contract previously defined in ASU2015-05. This guidance is effective for annual and interim reporting periods beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the impact of the adoption of ASU2018-15; however, we dobalance sheet, but did not expect the adoption of this standard to have a material impact on our consolidated financial statements.
Defined Benefit Pension Plan
In August 2018, the FASB issued ASU2018-14,Compensation—Retirement Benefits—Defined Benefit Plans—General: Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans. This guidance eliminates requirements for certain disclosures and requires certain additional disclosures concerning the company’s defined benefit pension plans and other postretirement plans. This guidance is effective for annual and interim reporting periods beginning after December 15, 2020, with early adoption permitted. We are currently evaluating thestatements of income or cash flows. The most significant impact of the adoption of ASU2018-14;2016-02 however, we do not expectwas the recognition of additionalright-of-use assets and lease liabilities for operating leases. At adoption, the Company recognizedright-of-use assets of this standard to have a material impact on our consolidated financial statements.approximately $14.4 million and total lease liabilities of $15.9 million.
Derivatives
In August 2017, the FASB issued ASUNo. 2017-12,Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This guidance simplifies the application of the hedge accounting guidance in current GAAP and improves the financial reporting of hedging relationships by allowing entities to better align their risk management activities and financial reporting for hedging relationships through changes to both designation and measurement for qualifying hedging relationships and the presentation of hedge results. Further, the new guidance allows more flexibility in the requirements to qualify and maintain hedge accounting. The new standard is effective for fiscal years beginning after December 15, 2018 and interim periods. We adopted ASU2017-12 on January 1, 2019 and there was no material impact on our consolidated financial statements.
Comprehensive Income
In February 2018, the FASB issued ASU2018-02,Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from AccumulatedOther Comprehensive Income. This guidance allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from Tax Cuts and Jobs Act (“The Act”). The new standard is effective for annual and interim periods beginning after December 15, 2018. We adopted this pronouncement on January 1, 2019 and elected to not reclassify the stranded federal corporate tax rate effects to retained earnings, which amount to approximately $0.6 million.
Pending
Internal Use Software
In August 2018, the FASB issued ASU2018-15,Intangibles – Goodwill and Other –Internal-Use Software (Topic350-40): Customer’s Accounting for Implementation of Cost Incurred in a Cloud Computing Arrangement that is Considered a Service Contract,(“ASU2018-15”).This update clarifies the accounting for implementation costs related to a cloud computing arrangement that is a service contract previously defined in ASU2015-05. This guidance is effective for annual and interim reporting periods beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the impact of the adoption of ASU2017-12;2018-15; however, we do not expect the adoption of this standard to have a material impact on our consolidated financial statements.
Defined Benefit Pension Plan
In August 2018, the FASB issued ASU2018-14,Compensation—Retirement Benefits—Defined Benefit Plans—General: Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans,(“ASU2018-14”). This guidance eliminates requirements for certain disclosures and requires certain additional disclosures concerning the company’s defined benefit pension plans and other postretirement plans. This guidance is effective for annual and interim reporting periods beginning after December 15, 2020, with early adoption permitted. We are currently evaluating the impact of the adoption of ASU2018-14; however, we do not expect the adoption of this standard to have a material impact on our consolidated financial statements.
Fair Value Measurement
In August 2018, the FASB issued ASU2018-13, Fair Value Measurement (Topic 820):Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, (“ASU2018-13”). This guidance is designed to improve the effectiveness of the disclosure. The new standard is effective for annual and interim reporting periods beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the impact of the adoption of ASU2018-13; however, we do not expect the adoption of this standard to have a material impact on our consolidated financial statements.
Goodwill
In January 2017, the FASB issued ASU2017-04,Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminated step 2 from the goodwill impairment test. This guidance is effective for annual and interim reporting periods beginning after December 15, 2019, with early adoption permitted for testing dates after January 1, 2017.permitted. We are currently evaluating the impact of the adoption of ASU2017-04; however, we do not expect the adoption of this standard to have a material impact on our consolidated financial statements.
Leases
In February 2016, the FASB issued ASU2016-02,Leases (Topic 842): Amendments to the FASB Accounting Standards Codification,which replaces the existing guidance for leases. ASU2016-02 requires the identification of arrangements that should be accounted for as leases by lessees. In general, for lease arrangements exceeding a twelve-month term, these arrangements must now be recognized as assets and liabilities on the balance sheet of the lessee. Under ASU2016-02, aright-of-use asset and lease obligation will be recorded for all leases, whether operating or financing, while the income statement will reflect lease expense for operating leases and amortization/interest expense for financing leases. The balance sheet amount recorded for existing leases at the date of adoption of ASU2016-02 must be calculated using the applicable incremental borrowing rate at the date of adoption. This guidance is effective for annual and interim periods beginning after December 15, 2018.
The Company will adopt this ASU on January 1, 2019 and has begun planning for adoption by implementing new lease accounting software, and by working to establish additional changes to our processes and internal controls to ensure all requirements are met upon adoption. The standard allows for a modified retrospective approach or a modified retrospective approach with comparatives under 840 option, where entities would recognize a cumulative effect to retained earnings at the date of adoption without restating prior periods’ balances or disclosures. The Company plans to use the modified retrospective approach with comparatives under 840 option that will not require revising comparative period information or disclosure. We will elect the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows us to carryforward the historical lease classification. In addition, we are electing the hindsight practical expedient to determine the lease term for existing leases. We will also elect the practical expedient that allows an accounting policy election to exclude right of use assets and lease obligations from the balance sheet for all leases with an initial term of 12 months or less.
Management is continuing to assess the impact of this standard on the Company’s condensed consolidated balance sheet, condensed consolidated statement of operations, condensed consolidated statements of cash flows or disclosures in the notes to the condensed consolidated financial statements.
4. Revenue Recognition
We recognize revenue when a customer obtains control of a promised good or service. The amount of revenue recognized reflects consideration that we expect to be entitled to receive in exchange for these services, and excludes any sales incentives and taxes collected from customers that are subsequently remitted to governmental authorities.
We adopted ASC 606 on January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. The reported results for 2018 reflect the application of ASC 606 guidance while the reported results for 2017 were prepared under legacy GAAP. The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of our products and services and will provide financial statement readers with enhanced disclosures.
Nature of Licenses and Services & Timing of Revenue Recognition
Creative Professional Revenue
Our Creative Professional revenue is primarily derived from rights to use font licenses, custom font design services, our web font and digital ad related services (which includes our web font services and web design tools), and hosted software as a service, or SaaS, offerings. We license fonts directly toend-users through our direct sales organization,e-commerce websites and indirectly through third-party resellers. Web font and digital ad related services refer to our web font services and web design tools. Our customers include graphic designers, advertising agencies, media organizations and corporations.
Revenue from font licenses is recognized upfront when the font software is delivered or made available to the customer. Custom font design services are generally not a separate distinct performance obligation and are sold with a license for the custom font, in which case revenue is recognized upon completion of the services and when the font is delivered and
accepted by the customer. In limited cases, the Company has an enforceable right to payment prior to final delivery and acceptance of custom font design work. In these cases, the Company has determined that the proper treatment is a single over-time performance obligation using input methods (incurred hours towards completion) to measure progress towards completion to determine the pattern of satisfaction of the performance obligation.
For our hosted offerings where we provide our customers the right to access our software without taking possession, revenue is recognized over the contract period on a time-elapsed basis, which is consistent with the transfer of service to the customer. Payment terms and conditions for Creative Professional contracts generally require payment within thirty to sixty days of contract inception. An exception exists for certain contracts for our SaaS offerings or a limited number of multi-year term license agreements which have periodic payment terms, generally quarterly or annually, over the term of the contract. In instances where the timing of revenue recognition differs from the respective payment terms, we have considered whether such contracts include a significant financing component, subject to the applicable practical expedient. The purpose of these payment structures is to align with industry and market standards, not to provide customers with financing. We have determined our contracts generally do not include a significant financing component; however, the Company will continue to assess (1) the length of time between when the goods or services are delivered and expected payment and (2) prevailing interest rates in the market tore-evaluate this conclusion.
OEM Revenue
Our OEM revenue is derived substantially from printer imaging, printer driver and display imaging products. OEM revenueproducts and primarily relates to licenses providing our customers the right to embed our fonts and technology in their products over a certain term. Under our OEM licensing arrangements, we either receive a fixed fee as specified under the license arrangement or a royalty for each product unit incorporating our fonts and technology that is shipped by our OEM customers. Although significantly less than royalties fromper-unit shipments and fixed fees from OEM customers, we also receive revenue from software application and operating systems vendors, who include our fonts and technology in their products and for font development. Revenue fromper-unit royalty contracts is estimated and recognized in the period that the royalty-bearing event or sale by our OEM customer occurs. Revenue from fixed fee licenses is generally recognized upfront at the point in time when the software embodying the font is shipped or made available to the customer. Certain OEM contracts may include customer support services and unspecified updates for our font technology thatwhich is a distinct stand-ready performance obligation and recognized ratably over the service period. Many of ourper-unit royalty licenses continue for the duration that our OEM customers ship products that include our technology, unless terminated for breach. Other licenses have terms that typically range from one fiscal quarter to five years, and usually provide for automatic or optional renewals.
Disaggregated Revenue
The following table presents our revenue disaggregated by the timing of revenue recognition as well as by type of product or services offered (See(see Note 1213 for further information regarding revenue by major markets and revenue by geography):
For the Three Months Ended September 30, 2018 | For the Nine Months Ended September 30, 2018 | March 31, 2019 | March 31, 2018 | |||||||||||||||||||||||||||||||||||||||||||||
Creative Professional | OEM | Total | Creative Professional | OEM | Total | Creative Professional | OEM | Total | Creative Professional | OEM | Total | |||||||||||||||||||||||||||||||||||||
License revenue: | ||||||||||||||||||||||||||||||||||||||||||||||||
License transferred in point in time | $ | 25,068 | $ | 20,763 | $ | 45,831 | $ | 77,817 | $ | 61,974 | $ | 139,791 | $ | 24,139 | $ | 17,733 | $ | 41,872 | $ | 24,879 | $ | 20,333 | $ | 45,212 | ||||||||||||||||||||||||
License transferred over time | — | — | — | 655 | — | 655 | ||||||||||||||||||||||||||||||||||||||||||
Service revenue: | ||||||||||||||||||||||||||||||||||||||||||||||||
Service transferred in point in time | 319 | 238 | 557 | 1,509 | 1,943 | 3,452 | 432 | 196 | 628 | 470 | 656 | 1,126 | ||||||||||||||||||||||||||||||||||||
Service transferred over time | 10,727 | 854 | 11,581 | 30,203 | 1,893 | 32,096 | 8,192 | 664 | 8,856 | 8,994 | 696 | 9,690 | ||||||||||||||||||||||||||||||||||||
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Total | $ | 36,114 | $ | 21,855 | $ | 57,969 | $ | 109,529 | $ | 65,810 | $ | 175,339 | $ | 32,763 | $ | 18,593 | $ | 51,356 | $ | 34,998 | $ | 21,685 | $ | 56,683 | ||||||||||||||||||||||||
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Significant Judgments
Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Once we determine the performance obligations, the Company determines the transaction price, which includes estimating the amount of variable consideration to be included in the transaction price, if any. We then allocate the transaction price to each performance obligation in the contract based on a relative stand-alone selling price method. The corresponding revenue is recognized as the related performance obligations are satisfied as discussed in the revenue categories above.
Judgment is required to determine the standalone selling price for each distinct performance obligation. We determine standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, we estimate the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.
With the exception of OEM royalty licenses, our contracts do not generally include a variable component to the transaction price. If royalties are not yet reported to us for the period in which the subsequent sale is expected to occur, we are required to estimate such royalties. When a new contract is signed for the licensing of IP on aper-unit basis, we deliver the licenses and based on ongoing discussions with the customer, will estimate when the distribution will begin and estimate royalties based on distribution forecasts provided by the customer. For ongoing arrangements, we have developed a process to estimateper-unit royalties based on historical data, trends, seasonality, knowledge of changes in contracts/rates, and quarterly discussions with sales personnel to identify significant changes in the customer’s distribution forecast (via seasonality, introduction of new products, discontinuation ofor products, etc.). Revenue related to the estimation ofper-unit royalties was $7.9$5.7 million and $4.3 million for both the three and nine months ended September 30, 2018.March 31, 2019 and 2018, respectively.
As discussed above, certain of our Creative Professional contracts have payment terms that differ from the timing of revenue recognition which requires us to assess whether the transaction price for those contracts include a significant financing component. We have elected the practical expedient thatwhich permits an entity to not adjust for the effects of a significant financing component if we expect that at the contract inception, the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less. For those contracts in which the period exceeds the one year threshold, this assessment, as well as the quantitative estimate of the financing component and its relative significance, requires judgment. We estimate the significant financing component provided to our customers with extended payment terms by determining the present value of the future payments by applying a discount rate that reflects the customer’s creditworthiness.
Transaction Price Allocated to Future Performance Obligations
The aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied or are partially satisfied as of September 30, 2018 is $21.9 million. This amount consists principally of amounts billed for undelivered services that are included in deferred revenue, totaling approximately $13.2 million, as well as unbilled backlog, which is the amount of transaction price allocated to unsatisfied or partially unsatisfied performance obligations, for enforceable contracts when there is not a present
unconditional right to invoice (a receivable), totaling approximately $8.7 million. Of these amounts, approximately $18.4 million. Substantially all the long-term amount is expected to be recognized as revenue within the next 12 months, with substantially all of the remainder expected to be recognized as revenue within the following 24 month period,period. The aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied or are partially satisfied as shownof March 31, 2019 and December 31, 2018 are in the table below (in thousands):
March 31, 2019 | December 31, 2018 | |||||||||||||||||||||||||||||||||||
Current | Long-term | Total | Current | Long-term | Total | Current | Long-term | Total | ||||||||||||||||||||||||||||
Deferred revenue | $ | 11,766 | $ | 1,427 | $ | 13,193 | $ | 11,941 | $ | 1,018 | $ | 12,959 | $ | 10,337 | $ | 1,552 | $ | 11,889 | ||||||||||||||||||
Unbilled backlog | 6,688 | 2,055 | 8,743 | 4,490 | 1,406 | 5,896 | 5,666 | 1,837 | 7,503 | |||||||||||||||||||||||||||
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Total | $ | 18,454 | $ | 3,482 | $ | 21,936 | $ | 16,431 | $ | 2,424 | $ | 18,855 | $ | 16,003 | $ | 3,389 | $ | 19,392 | ||||||||||||||||||
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Contract Balances
Timing of revenue recognition may differ from the timing of invoicing to customers. We record an unbilled receivable, or contract asset, when revenue is recognized prior to invoicing when we have an enforceable right to payment. When invoicing occurs prior to revenue recognition, we have unearned revenue, or contract liabilities, presented on our condensed consolidated balance sheet as “deferred revenue” within deferred revenue and other long-term liabilities, as appropriate.appropriate at March 31, 2019 and December 31, 2018. When invoicing occurs after revenue recognition, we have earned revenue, or contract assets, presented on our condensed consolidated balance sheet as “unbilled receivables” within accounts receivable and other assets, as appropriate.appropriate at March 31, 2019 and December 31, 2018.
Revenue recognized during the three and nine months ended September 30,March 31, 2019 and March 31, 2018 from amounts included in deferred revenue at the beginning of the periodperiods were approximately $7.2$5.7 million and $21.6$6.8 million, respectively. Revenue recognized during both the three month ended March 31, 2019 and nine months ended September 30,March 31, 2018 from performance obligations satisfied or partially satisfied in previous periods, mainly due to changes in the estimate of royalty revenues, was $7.9 million.is approximately $5.7 million and $4.3 million, respectively. During the ninethree months ended September 30,March 31, 2019 and March 31, 2018, the change in contract assets reclassified to receivables as a result of the right to the transaction consideration becoming unconditional was not material. The contract modifications entered into during the ninethree months ended September 30,March 31, 2019 and March 31, 2018 did not have a significant impact on the Company’s contract assets or deferred revenue.
Costs to Obtain and Fulfill a Contract
We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that certain commissions paid under our sales incentive programs meet the requirements to be capitalized. The amount capitalized for incremental costs to obtain contracts as of September 30, 2018March 31, 2019 was $2.5$3.8 million, of which $0.6$0.7 million was short-term and has been included in prepaid expenses and other current assets and $1.9$3.1 million was long term and has been included in other assets in our condensed consolidated balance sheet. The amount capitalized for incremental costs to obtain contracts as of December 31, 2018 was $3.6 million, of which $0.7 million was short-term and has been included in prepaid expenses and other current assets and $2.9 million was long term and has been included in other assets in our condensed consolidated balance sheet. Costs to obtain a contract are amortized as sales and marketing expense over the expected period of benefit in a manner that is consistent with the transfer of the related goods or services to which the asset relates. The judgments made in determining the amount of costs incurred include whether the commissions are in fact incremental and would not have occurred absent the customer contract and the estimate of the amortization period, which ranges between three and ten years depending on the nature of the performance obligations within the contract. These costs are periodically reviewed for impairment.impairment; however, no impairment existed as of March 31, 2019 or as of December 31, 2018. The amount of capitalized costs related to contracts which were terminated on or before September 30, 2018,March 31, 2019, due to the customer exercising anopt-out clause or the cancellation of an anticipated renewal was not material and was charged to operating expenses in the thirdfirst quarter of 2018.2019.
We have elected to apply the practical expedient and recognize the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less.
We capitalize incremental costs incurred to fulfill our contracts that (i) relate directly to the contract, (ii) are expected to generate resources that will be used to satisfy the Company’s performance obligation under the contract, and (iii) are expected to be recovered through revenue generated under the contract. Contract fulfillment costs primarily relate to font license fees that we pay on certain fonts that are owned by third parties. These fees are related to license revenue that is satisfied at a point in time and payable again upon license renewal, and as a result are incurred immediately upon contract execution. Accordingly, there are no capitalized costs related to costs to fulfill a contract as of September 30,March 31, 2019 or as of December 31, 2018.
5. Restricted Cash
Cash and cash equivalents that are restricted as to withdrawal or use under the terms of contractual agreements are classified on our balance sheet based on relevant restrictions. At March 31, 2019 and December 31, 2018, we had $6.0 million and $6.0 million, respectively, of cash held in escrow to be used for payments due in 2019 in connection with the Olapic, Inc. acquisition.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheet that sum to the total of the same such amounts shown in the consolidated statements of cash flows (in thousands):
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Consolidated balance sheet classification: | ||||||||
Cash and cash equivalents | $ | 46,354 | $ | 85,351 | ||||
Restricted cash, short term | 6,000 | 10,000 | ||||||
Restricted cash, long term | — | 6,000 | ||||||
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Total cash, cash equivalents and restricted cash | $ | 52,354 | $ | 101,351 | ||||
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6. Fair Value Measurements
The following table presents our financial assets and liabilities that are carried at fair value (in thousands):
Fair Value Measurement at September 30, 2018 | ||||||||||||||||
Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
Assets: | ||||||||||||||||
Cash equivalents—money market funds | $ | 28,788 | $ | 28,788 | $ | — | $ | — | ||||||||
Restricted cash equivalents—money market fund | 6,000 | 6,000 | — | — | ||||||||||||
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Total assets | $ | 34,788 | $ | 34,788 | $ | — | $ | — | ||||||||
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Fair Value Measurement at December 31, 2017 | Fair Value Measurement at March 31, 2019 | |||||||||||||||||||||||||||||||
Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||
Cash equivalents—money market funds | $ | 2,014 | $ | 2,014 | $ | — | $ | — | $ | 14,038 | $ | 14,038 | $ | — | $ | — | ||||||||||||||||
Cash equivalents—commercial paper | 16,477 | — | 16,477 | — | ||||||||||||||||||||||||||||
Cash equivalents—corporate bonds | 1,457 | — | 1,457 | — | ||||||||||||||||||||||||||||
Cash equivalents—U.S. government and agency securities | 10,488 | 10,488 | — | — | ||||||||||||||||||||||||||||
Restricted cash equivalents—money market fund | 3,000 | 3,000 | — | — | 6,000 | 6,000 | — | — | ||||||||||||||||||||||||
Restricted cash equivalents—U.S. government and agency security fund | 8,987 | 8,987 | — | — | ||||||||||||||||||||||||||||
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Total current assets | 42,423 | 24,489 | 17,934 | — | $ | 20,038 | $ | 20,038 | $ | — | $ | — | ||||||||||||||||||||
Restricted cash equivalents—money market fund | 6,000 | 6,000 | — | — | ||||||||||||||||||||||||||||
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Total long term assets | 6,000 | 6,000 | — | — | ||||||||||||||||||||||||||||
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Total assets | $ | 48,423 | $ | 30,489 | $ | 17,934 | $ | — | $ | 20,038 | $ | 20,038 | $ | — | $ | — | ||||||||||||||||
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Fair Value Measurement at December 31, 2018 | ||||||||||||||||||||||||||||||||
Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||
Cash equivalents—money market funds | $ | 28,940 | $ | 28,940 | $ | — | $ | — | ||||||||||||||||||||||||
Restricted cash equivalents—money market fund | 6,000 | 6,000 | — | — | ||||||||||||||||||||||||||||
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Total current assets | $ | 34,940 | $ | 34,940 | $ | — | $ | — | ||||||||||||||||||||||||
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Total assets | $ | 34,940 | $ | 34,940 | $ | — | $ | — | ||||||||||||||||||||||||
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The Company’s recurring fair value measures relate to short-term investments, which are classified as cash equivalents, derivative instruments and from time to timetime-to-time as contingent consideration. The fair value of our cash equivalents isare either based on quoted prices (unadjusted) for identical assets.similar assets or other observable inputs such as yield curves at commonly quoted intervals and other market corroborated inputs. The fair value of our derivatives is based on quoted market prices from various banking institutions or an independent third-party provider for similar instruments. In determining the fair value, we consider ournon-performance risk and that of our counterparties. At September 30, 2018,March 31, 2019, we had one30-day forward contract to sell 2.6 million British pounds sterling and purchase $3.4 million that together, had an immaterial fair value; and atvalue. At December 31, 2017,2018, we had one30-day forward contract to sell 2.52.7 million British pounds sterling and purchase $3.4 million that together, had an immaterial fair value.
The Company’snon-financial assets andnon-financial liabilities subject tonon-recurring measurements include goodwill and intangible assets.
6. Goodwill and7. Intangible Assets
During the quarter ended June 30, 2018, the Company decided to cease sales of certain service offerings that were principally acquired as part of the Company’s acquisition of Swyft Media in January 2015. The decision was made in connection with other restructuring actions tore-align the Company’s product and service offerings. See Note 13 for further details regarding the restructuring plan.
The Company has determined that disposal of the Swyft Media component did not qualify for reporting as a discontinued operation under ASC205-20,Discontinued Operations,as it did not represent a strategic shift in the Company’s operations that had (or will have) a major effect on the Company’s consolidated operations or financial results. As a result of its decision to cease sales of certain service offerings, the Company concluded that the useful life of certain long-lived assets, which represented the intangible assets acquired in the acquisition of Swyft Media, was zero and that there was no ongoing expected future cash flows related to these long-lived assets and no residual value. As a result, such assets were determined to be fully impaired and an impairment charge of approximately $2.6 million, representing the carrying value of these intangible assets, was recorded during the quarter ended June 30, 2018.
The Company evaluated whether the disposal group represented a business under ASU2017-01,Business Combinations (Topic 805): Clarifying the Definition of a Business,and determined that it did represent a business requiring goodwill to be allocated to the disposal group. The Company determined the fair value of the disposal group utilizing a revenue multiple market approach and allocated the Company’s goodwill to this disposal group on a relative fair value basis based on the fair value of the disposal group to the Company’s consolidated operations as Company only has a single reporting unit. This resulted in the allocation of $0.6 million of goodwill to the disposal group, which was deemed fully impaired as a result of the disposal. The write down is included in the goodwill table shown below.
Goodwill
The changes in the carrying value of goodwill are as follows (in thousands):
Balance at December 31, 2017 | $ | 279,131 | ||
Foreign currency exchange rate changes | (1,733 | ) | ||
Impairment | (600 | ) | ||
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Balance at September 30, 2018 | $ | 276,798 | ||
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Intangible Assets
Intangible assets as of September 30, 2018March 31, 2019 and December 31, 20172018 were as follows (dollar amounts in thousands):
September 30, 2018 | December 31, 2017 | Weighted- Average Amortization Period (Years) | March 31, 2019 | December 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Weighted- Average Amortization Period (Years) | Gross Carrying Amount | Accumulated Amortization | Net Balance | Gross Carrying Amount | Accumulated Amortization | Net Balance | Gross Carrying Amount | Accumulated Amortization | Net Balance | Gross Carrying Amount | Accumulated Amortization | Net Balance | ||||||||||||||||||||||||||||||||||||||||||
Customer relationships | 10 | $ | 64,895 | $ | (54,732 | ) | $ | 10,163 | $ | 68,296 | $ | (54,213 | ) | $ | 14,083 | 10 | $ | 64,711 | $ | (55,797 | ) | $ | 8,914 | $ | 64,822 | $ | (55,288 | ) | $ | 9,534 | ||||||||||||||||||||||||
Acquired technology | 11 | 68,921 | (51,807 | ) | 17,114 | 69,200 | (48,945 | ) | 20,255 | 11 | 68,745 | (53,693 | ) | 15,052 | 68,823 | (52,747 | ) | 16,076 | ||||||||||||||||||||||||||||||||||||
Non-compete agreements | 4 | 13,654 | (13,004 | ) | 650 | 14,632 | (13,470 | ) | 1,162 | 4 | 13,611 | (13,136 | ) | 475 | 13,636 | (13,073 | ) | 563 | ||||||||||||||||||||||||||||||||||||
Indefinite-lived intangible assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Trademarks | 44,212 | — | 44,212 | 44,956 | — | 44,956 | 43,982 | — | 43,982 | 44,126 | — | 44,126 | ||||||||||||||||||||||||||||||||||||||||||
Domain names | 4,400 | — | 4,400 | 4,400 | — | 4,400 | 4,400 | — | 4,400 | 4,400 | — | 4,400 | ||||||||||||||||||||||||||||||||||||||||||
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Total | $ | 196,082 | $ | (119,543 | ) | $ | 76,539 | $ | 201,484 | $ | (116,628 | ) | $ | 84,856 | $ | 195,449 | $ | (122,626 | ) | $ | 72,823 | $ | 195,807 | $ | (121,108 | ) | $ | 74,699 | ||||||||||||||||||||||||||
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7.8. Leases
We have operating leases for corporate offices and certain equipment. Our leases have remaining lease terms of 1 year to 6 years, some of which contain options to extend the leases for up to 5 years and some which include options to terminate the leases within 1 year. We have lease agreements with lease andnon-lease components, which are generally accounted for separately.
We determine if an arrangement is a lease at inception. Operating leases are included in the operating leaseright-of-use (“ROU”) assets and the short-term and long-term lease liabilities on our consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Pursuant to the terms of the lease agreement for the Company’s NY office, the Company obtained a standbyletter-of-credit in the amount of approximately $0.5 million as security on the lease obligation. Theletter-of credit is a reduction of the available borrowings under the Credit facility.
The components of lease expense were as follows (in thousands):
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Finance lease cost | $ | — | $ | — | ||||
Operating lease cost | 1,154 | — | ||||||
Short-term lease cost | — | — | ||||||
Variable lease cost | 52 | — | ||||||
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Total lease cost | 1,206 | — | ||||||
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Supplemental cash flow information related to leases was as follows (in thousands):
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
Operating cash flows from operating leases | $ | 1,224 | — | |||||
Right-of-use assets obtained in exchange for lease obligations: | ||||||||
Operating leases | — | — |
Supplemental balance sheet information related to leases was as follows (in thousands except remaining lease term and discount rate):
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Weighted average remaining lease term | ||||||||
Operating leases | 4.72 years | — | ||||||
Weighted average discount rate | ||||||||
Operating leases | 3.93 | % | — |
As of March 31, 2019, we have additional operating leases, primarily for corporate offices, that have not yet commenced of $1.8 million. These operating leases will commence in 2019 with lease terms of 2 to 5 years.
Maturities of operating lease liabilities were as follows (in thousands):
Twelve months ending March 31:
2019 | $ | 4,144 | ||
2020 | 3,409 | |||
2021 | 3,237 | |||
2022 | 2,650 | |||
2023 | 1,145 | |||
Thereafter | 1,718 | |||
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Total future minimum lease payments | $ | 16,303 | ||
Less: amounts representing interest | (1,145 | ) | ||
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Total lease liabilities | $ | 14,850 | ||
Less: current operating lease liability | (3,621 | ) | ||
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Long-term operating lease liability | $ | 11,229 | ||
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Maturities of lease liabilities as of December 31, 2018 were as follows:
Years ending December 31:
2019 | $ | 4,728 | ||
2020 | 3,131 | |||
2021 | 2,806 | |||
2022 | 2,652 | |||
2023 | 1,256 | |||
Thereafter | 2,004 | |||
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Total | $ | 16,577 | ||
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9. Debt
On September 15, 2015,March 22, 2019, the Company entered into a new credit agreement (the “New“New Credit Agreement”Agreement”) by and among the Company, the Company’s subsidiary, Monotype Imaging Inc., (“the Borrower”), any financial institution that becomes a Lender (as defined therein) and Silicon Valley Bank of America, N.A., as agent which provides foradministrative agent. Pursuant to the New Credit Agreement the Lenders have agreed to provide the Borrower with a five-year $150.0$200.0 million senior secured revolving credit facility (the “Credit Facility”“Credit Facility”). The Credit Facility permits the Company to request that the Lenders, at their election, increase the secured credit facility to a maximum of $200.0$300.0 million. The Credit Facility is availableprovides more flexibility in addition to an increased borrowing capacity and extended terms, as defined above. The New Credit Agreement replaced the Company’s existing $150.0 million revolving credit facility (the “Original Credit Agreement”) by and between the Company and Silicon Valley Bank. The Original Credit Agreement was terminated effective March 22, 2019 and was scheduled to expire on a revolving basis through September 15, 2020. Repayment of any amounts borrowed are not required until maturity ofThe Company had $75.0 million outstanding under the Original Credit Facility. However, the Company may repay any amounts borrowedAgreement at any time, without premium or penalty. At September 30, 2018 and December 31, 2017,2018. Available borrowings under the Original Credit Agreement were reduced by approximately $0.5 million for one standby letter of credit issued in connection with a facility lease agreement, leaving $74.5 million available for borrowings at December 31, 2018. At March 31, 2019, the Company had $80.0 million and $93.0$70.0 million outstanding under the Credit Facility. At September 30, 2018 and December 31, 2017, availableAvailable borrowings under the Credit Facility have been reduced by approximately $0.5 million for one standby letter of credit issued in connection with a facility lease agreement, leaving $69.5 million and $56.5$129.5 million available for borrowingborrowings at September 30, 2018 and DecemberMarch 31, 2017, respectively.2019.
Borrowings under the Credit Facility bear interest through March 21, 2024 at a variable rate not less than zero based upon,per annum equal to LIBOR plus between 1.0% and 1.625%, or at the Company’sBorrower’s option, either LIBOR or the higher of (i) the prime rate as published in the Wall Street Journal,announced by Bank of America and (ii) 0.5% plus the overnight federal funds rate, plus in each case, an applicable margin. The applicablebetween 0.0% and 0.625%, with the exact interest rate margin for LIBOR loans,determined based on the applicableconsolidated leverage ratio,ratio. The Company is 1.25%, 1.50% or 1.75% per annum, and the applicable margin for base rate loans,required to pay a commitment fee, based on the applicableconsolidated leverage ratio, is eitherequal to 0.175%, 0.20%, 0.225% or 0.25%, 0.50% or 0.75% per annum. At September 30, 2018, our rate, inclusiveannum on the undrawn portion available under the revolving credit facility and variable per annum fees in respect of applicable margins, was 3.8%outstanding letters of credit. In connection with the New Credit Agreement, the Company incurred closing and legal fees of approximately $0.9 million, which have been accounted for LIBOR,as deferred financing costs, that, together with approximately $0.3 million of unamortized deferred financing costs associated with loan syndicate lenders who participated in the new facility, will be amortized to interest expense over the term of the New Credit Agreement. In addition, $34 thousand of unamortized deferred financing costs associated with thepro-rata share of prior loan syndicate lenders that did not participate in the new facility were written off and at December 31, 2017, our rate, inclusivecharged to other expense in the first quarter of applicable margins, was 3.1% for LIBOR.2019.
As of September 30, 2018,The New Credit Agreement includes financial covenants which require the maximumCompany to maintain (i) a consolidated leverage ratio permitted was 3.00:1.00of no greater than 3.25 to 1.0 or, upon a qualified acquisition subject to certain conditions, 3.75 to 1.0 and (ii) a minimum consolidated interest coverage ratio of 3.00 to 1.0. At March 31, 2019, our consolidated leverage ratio was 1.75:1.000.72 to 1.0 and the minimum fixed chargeour consolidated interest coverage ratio was 1.25:1.0018.61 to 1.0. The New Credit Agreement also contains customary affirmative and our fixed charge ratio was 3.62:1.00.negative covenants for transactions of this type and other affirmative and negative covenants agreed to by the parties, including, among others, limits on the Company and its subsidiaries’ ability to incur debt or liens, engage in sale-leaseback transactions, make loans, investments and acquisitions, incur additional indebtedness, engage in mergers, enter into asset sales, transact with affiliates and alter its business. Adjusted EBITDA, under the Credit Facility, is defined as consolidated net earnings (or loss), plus net interest expense, income taxes, depreciation and amortization, and share based compensation expense, plus acquisition expenses not to exceed $2.0 million, minus capitalized research and development expense, plus restructuring, issuance costs, cashnon-operating costs and other expenses or losses minus cashnon-operating gains and othernon-cash gains; provided, however that the aggregate of all cashnon-operating expense shall not exceed 10% of Consolidated EBITDA. The New Credit Agreement also provides for a number of customary events of default, including, among others, payment, bankruptcy, covenant, representation and warranty, change of control and judgment defaults. Failure to comply with these covenants, or the occurrence of an event of default, could permit the Lenders under the New Credit Agreement to declare all amounts borrowed under the New Credit Agreement, together with accrued interest and fees, to be immediately due and payable. In addition,The obligations of the Borrower under the Credit Facility isFacilities are unconditionally guaranteed by the Company and certain subsidiaries and secured by a lien on substantially all of the Company’spresent and its domestic subsidiaries’ tangiblefuture property and intangible property by a pledge of allassets of the equity interests of the Company’s directCompany and indirect domesticsuch subsidiaries, and by a pledge by the Company’s domestic subsidiaries of 65% of the equity of their direct foreign subsidiaries,in each case, subject to limited exceptions. In addition to other covenants, the New Credit Agreement places limits on the Companyexceptions and its subsidiaries’ ability to incur debt or liens and engage in sale-leaseback transactions, make loans and investments, incur additional indebtedness, engage in mergers, acquisitions and asset sales, transact with affiliates and alter its business. The Company was in compliance with the covenants under the Credit Facility as of September 30, 2018.exclusions.
8. Defined Benefit Pension Plan
Our German subsidiary maintains an unfunded defined benefit pension plan which covers substantially all employees who joined the company prior to the plan’s closure to new participants in 2006. Participants are entitled to benefits in the form of retirement, disability and surviving dependent pensions. Benefits generally depend on years of service and the salary of the employees.
The components of net periodic benefit cost included in the accompanying condensed consolidated statements of operations were as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Service cost | $ | 27 | $ | 25 | $ | 81 | $ | 71 | ||||||||
Interest cost | 25 | 29 | 78 | 81 | ||||||||||||
Amortization | 22 | 24 | 69 | 68 | ||||||||||||
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Net periodic benefit cost | $ | 74 | $ | 78 | $ | 228 | $ | 220 | ||||||||
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9.10. Income Taxes
A reconciliation of income taxes computed at federal statutory rates to income tax expense (benefit) is as follows (dollar amounts in thousands):
Three Months Ended September 30, | ||||||||||||||||
2018 | 2017 | |||||||||||||||
Provision for income taxes at statutory rate | $ | 1,839 | 21.0 | % | $ | 1,399 | 35.0 | % | ||||||||
State and local income taxes, net of federal tax benefit | (4 | ) | 0.0 | % | (173 | ) | (4.3 | )% | ||||||||
Stock based compensation | 89 | 1.0 | % | 141 | 3.5 | % | ||||||||||
Foreign rate differential | 2,662 | 30.4 | % | (109 | ) | (2.7 | )% | |||||||||
Research credits | (70 | ) | (0.8 | )% | (381 | ) | (9.5 | )% | ||||||||
Permanentnon-deductible acquisition-related expense | 1,302 | 14.9 | % | 1,629 | 40.7 | % | ||||||||||
Net shortfall on stock based compensation | 76 | 0.8 | % | 257 | 6.4 | % | ||||||||||
Reversal of reserve for income taxes | (370 | ) | (4.2 | )% | (66 | ) | (1.6 | )% | ||||||||
Other, net | (90 | ) | (1.0 | )% | 40 | 1.0 | % | |||||||||
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Reported income tax provision | $ | 5,434 | 62.1 | % | $ | 2,737 | 68.5 | % | ||||||||
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Nine Months Ended September 30, | ||||||||||||||||
2018 | 2017 | |||||||||||||||
Provision for income taxes at statutory rate | $ | 1,483 | 21.0 | % | $ | 455 | 35.0 | % | ||||||||
State and local income taxes, net of federal tax benefit | (55 | ) | (0.8 | )% | (234 | ) | (18.0 | )% | ||||||||
Stock based compensation | 73 | 1.0 | % | 64 | 5.0 | % | ||||||||||
Foreign rate differential | 2,214 | 31.4 | % | (47 | ) | (3.6 | )% | |||||||||
Research credits | (57 | ) | (0.8 | )% | (170 | ) | (13.1 | )% | ||||||||
Permanentnon-deductible acquisition-related expense | 1,061 | 15.0 | % | 727 | 55.9 | % | ||||||||||
Net (windfall) shortfall on stock based compensation | (80 | ) | (1.1 | )% | 799 | 61.5 | % | |||||||||
Reversal of reserve for income taxes | (370 | ) | (5.2 | )% | (66 | ) | (5.1 | )% | ||||||||
Other, net | (26 | ) | (0.4 | )% | 81 | 6.3 | % | |||||||||
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Reported income tax provision | $ | 4,243 | 60.1 | % | $ | 1,609 | 123.9 | % | ||||||||
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Three Months Ended March 31, | ||||||||||||||||
2019 | 2018 | |||||||||||||||
Provision (benefit) from income taxes at statutory rate | $ | 529 | 21.0 | % | $ | (770 | ) | 21.0 | % | |||||||
State and local income taxes, net of federal tax benefit | 53 | 2.1 | % | (78 | ) | 2.1 | % | |||||||||
Impact of foreign income (loss) | 90 | 3.6 | % | (1,237 | ) | 33.8 | % | |||||||||
Foreign tax credit valuation allowance | (258 | ) | (10.2 | )% | — | — | ||||||||||
Permanentnon-deductible acquisition-related expense | 60 | 2.4 | % | (301 | ) | 8.2 | % | |||||||||
Net shortfall (windfall) on stock based compensation | 108 | 4.3 | % | (117 | ) | 3.2 | % | |||||||||
Reversal of reserve for income taxes | (734 | ) | (29.1 | )% | 22 | (0.6 | )% | |||||||||
Other, net | 13 | 0.4 | % | 16 | (0.4 | )% | ||||||||||
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Reported income tax benefit | $ | (139 | ) | (5.5 | )% | $ | (2,465 | ) | 67.3 | % | ||||||
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At September 30, 2018,As of March 31, 2019, the reserve for uncertainunrecognized tax positionsbenefits was approximately $7.0 million. Of this amount, $4.7$4.0 million, all of which is recorded as a reduction of deferred tax assets and $2.3 million is classified as long-term liabilities. During the quarter, the Company recorded a benefit of $0.4 million related to reserves no longer required due to the lapses of statutes of limitations.
As disclosed in the Company’s 2017Form 10-K, the Company recorded the tax effects of the 2017 Tax Cuts and Jobs Act (“The Act”) in the consolidated financial statements for the year ended December 31, 2017. The new legislation required the Company to pay tax on the unremitted earnings of its foreign subsidiaries through December 31, 2017. The Company recorded an initial estimate of the tax on unremitted earnings of approximately $0.2 million; however, this amount was offset by available foreign tax credits, and as a result the net estimated amount payable related to the deemed repatriation of foreign earnings was zero. The Company finalized this estimate during the quarter, and there was no change from the initial estimate.
10.11. Net Income (Loss) Per Share
For the three and nine months ended September 30,March 31, 2019 and 2018, and 2017, the net income (loss) available to common shareholders iswas divided by the weighted averageweighted-average number of common shares outstanding during the period to calculate diluted earnings per share. For the three months ended March 31, 2019, thetwo-class method was used in the computation of diluted net income (loss) per share, as the result was more dilutive. For the three months ended March 31, 2018, earnings was not allocated to participating securities in the calculation of basic and diluted earnings per share as there was a net loss. The assumed exercise of stock options and assumed vesting of restricted stock and restricted stock units were included in the computation of net income per share for the three and nine months ended September 30, 2018 and for the three months ended September 30, 2017,March 31, 2019, but were excluded in the computation of net (loss) per share for the ninethree months ended September 30, 2017,March 31, 2018, as their effect would have been anti-dilutive. For the three and nine months ended September 30, 2018 and for the three months ended September 30, 2017, thetwo-class method was used in the computation of diluted net income (loss) per share, as the result was more dilutive.
The following presents a reconciliation of the numerator and denominator used in the calculation of basic net income (loss) per share and a reconciliation of the numerator and denominator used in the calculation of diluted net income (loss) per share (in thousands, except share and per share data):
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | |||||||||||||||||||
Numerator: | ||||||||||||||||||||||||
Net income (loss), as reported | $ | 3,321 | $ | 1,261 | $ | 2,817 | $ | (310 | ) | $ | 2,660 | $ | (1,199 | ) | ||||||||||
Less: net income (loss) attributable to participating securities | (178 | ) | (65 | ) | (591 | ) | — | |||||||||||||||||
Less: net income attributable to participating securities | (146 | ) | — | |||||||||||||||||||||
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Net income (loss) available to common shareholders—basic | $ | 3,143 | $ | 1,196 | $ | 2,226 | $ | (310 | ) | $ | 2,514 | $ | (1,199 | ) | ||||||||||
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Denominator: | ||||||||||||||||||||||||
Basic: | ||||||||||||||||||||||||
Weighted-average shares of common stock outstanding | 42,040,716 | 41,750,884 | 42,026,047 | 41,700,355 | 41,263,669 | 41,846,619 | ||||||||||||||||||
Less: weighted-average shares of unvested restricted common stock outstanding | (1,527,879 | ) | (2,156,754 | ) | (1,711,878 | ) | (2,124,043 | ) | (1,259,315 | ) | (1,840,830 | ) | ||||||||||||
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Weighted-average number of common shares used in computing basic net income (loss) per common share | 40,512,837 | 39,594,130 | 40,314,169 | 39,576,312 | ||||||||||||||||||||
Weighted-average number of common shares used in computing basic and diluted net income (loss) per common share | 40,004,354 | 40,005,789 | ||||||||||||||||||||||
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Net income (loss) per share applicable to common shareholders—basic | $ | 0.08 | $ | 0.03 | $ | 0.06 | $ | (0.01 | ) | $ | 0.06 | $ | (0.03 | ) | ||||||||||
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Numerator: Net income (loss) available to common shareholders—basic Add-back: undistributed earnings allocated to unvested shareholders Less: undistributed earnings reallocated to unvested shareholders Net income (loss) available to common shareholders—diluted Denominator: Diluted: Weighted-average shares of common stock outstanding Less: weighted-average shares of unvested restricted common stock outstanding Weighted-average number of common shares issuable upon exercise of outstanding stock options Weighted-average number of common shares used in computing diluted net income (loss) per common share Net income (loss) per share applicable to common shareholders—diluted Three Months Ended
September 30, Nine Months Ended
September 30, 2018 2017 2018 2017 $ 3,143 $ 1,196 $ 2,226 $ (310 ) — (179 ) — — — 178 — — $ 3,143 $ 1,195 $ 2,226 $ (310 ) Three Months Ended
September 30, Nine Months Ended
September 30, 2018 2017 2018 2017 42,040,716 41,750,884 42,026,047 41,700,355 (1,527,879 ) (2,156,754 ) (1,711,878 ) (2,124,043 ) 96,806 204,649 140,349 — 40,609,643 39,798,779 40,454,518 39,576,312 $ 0.08 $ 0.03 $ 0.06 $ (0.01 )
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Numerator: | ||||||||
Net income (loss) available to common shareholders - basic | $ | 2,514 | $ | (1,199 | ) | |||
Add-back: undistributed earnings allocated to unvested shareholders | — | — | ||||||
Less: undistributed earnings reallocated to unvested shareholders | — | — | ||||||
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Net income (loss) available to common shareholders—diluted | $ | 2,514 | $ | (1,199 | ) | |||
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Denominator: | ||||||||
Diluted: | ||||||||
Weighted-average shares of common stock outstanding | 41,263,669 | 41,846,619 | ||||||
Less: weighted-average shares of unvested restricted common stock outstanding | (1,259,315 | ) | (1,840,830 | ) | ||||
Weighted-average number of common shares issuable upon exercise of outstanding stock options | 61,705 | — | ||||||
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Weighted-average number of common shares used in computing diluted net income (loss) per share | 40,066,059 | 40,005,789 | ||||||
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Net income (loss) per share applicable to common shareholders—diluted | $ | 0.06 | $ | (0.03 | ) | |||
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The following common share equivalents have been excluded from the computation of diluted weighted-average shares outstanding, as their effect would have been anti-dilutive:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | |||||||||||||||||||
Options | 506,003 | 633,858 | 488,471 | 824,536 | 490,897 | 620,312 | ||||||||||||||||||
Unvested restricted stock | 535,558 | 566,934 | 420,908 | 652,741 | ||||||||||||||||||||
Unvested restricted common stock | 912,271 | 685,719 | ||||||||||||||||||||||
Unvested restricted stock units | 17,248 | 32,971 | 26,645 | 58,674 | 81,854 | 64,024 |
11.12. Stockholders’ Equity
Stock purchases
On May 3, 2018, the Company’s Board of Directors approved a share purchase program permitting repurchases of up to $25.0 million of the Company’s outstanding shares of common stock through June 7, 2019. During the quarter ended September 30, 2018,March 31, 2019, the Company repurchasedpurchased a total of 282,208370,500 shares of its common stock for an aggregate purchase price of $5.7$6.6 million, including brokers’ fees. To date, 1,261,400 shares have been purchased under the plan for an aggregate purchase price of $23.9 million, including brokers’ fees. Intended to offset shareholder dilution, the Company expects to make repurchases periodically, either on the open market or in privately negotiated transactions, subject to availability, as business and market conditions warrant. The share repurchase program does not obligate the Company to acquire any particular amount of common stock, and the program may be suspended or discontinued at the discretion of managementmanagement’s and/or the Company’s Board of Directors.Directors’ discretion.
Stock Based Compensation
We account for stock based compensation in accordance with ASC Topic No. 718,Compensation—Compensation – Stock Compensation,, which requires the measurement of compensation costs at fair value on the date of grant and recognition of compensation expense over the service period for awards expected to vest. The following presents the impact of stock based compensation expense on our condensed consolidated statements of operations (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Marketing and selling | $ | 2,031 | $ | 2,455 | $ | 4,515 | $ | 7,348 | ||||||||
Research and development | 900 | 1,131 | 2,781 | 3,227 | ||||||||||||
General and administrative | 1,395 | 1,685 | 4,465 | 4,719 | ||||||||||||
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Total expensed | $ | 4,326 | $ | 5,271 | $ | 11,761 | $ | 15,294 | ||||||||
Property and equipment | 3 | 44 | 24 | 97 | ||||||||||||
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Total stock based compensation | $ | 4,329 | $ | 5,315 | $ | 11,785 | $ | 15,391 | ||||||||
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In the three months ended September 30, 2018 and 2017, $3 thousand and $44 thousand, respectively, of stock based compensation was capitalized as part of internal software projects, and this amount is included in property and equipment, net in our condensed consolidated balance sheet. In the nine months ended September 30, 2018 and 2017, $24 thousand and $97 thousand, respectively, of stock based compensation was capitalized as part of internal software projects, and this amount is included in property and equipment, net in our condensed consolidated balance sheet. For the nine months ended September 30, 2018, $1.4 million of stock based compensation expense was reversed as a result of forfeitures of awards by employees included in the restructuring plan. Thisnon-recurring amount has been included in restructuring expenses.
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Marketing and selling | $ | 1,770 | $ | 1,734 | ||||
Research and development | 722 | 988 | ||||||
General and administrative | 1,727 | 1,525 | ||||||
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Total expensed | 4,219 | 4,247 | ||||||
Property and equipment | — | 14 | ||||||
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Total stock based compensation | $ | 4,219 | $ | 4,261 | ||||
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As of September 30, 2018,March 31, 2019, the Company had $29.0$30.5 million of unrecognized compensation expense related to employees and directors’ unvested restricted stock awards restrictedand stock units and stock option awards that are expected to be recognized over a weighted-averageweighted average period of 2.22.3 years.
12.13. Segment Reporting
We view our operations and manage our business as one segment: the development, marketing and licensing of technologies and fonts. Factors used to identify our single segment include the financial information available for evaluation by our chief operating decision maker, our president and chief executive officer, in making decisions aboutdetermining how to allocate resources and assess performance. While our technologies and services are sold into two principal markets, Creative Professional and OEM, expensesassets and assetsexpenses are not formally allocated to these market segments, and operating results are assessed on an aggregate basis to make decisions about the allocation of resources. The following table presents revenue for these two principlemajor markets (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | |||||||||||||||||||
Creative Professional | $ | 36,114 | $ | 34,521 | $ | 109,529 | $ | 92,234 | $ | 32,763 | $ | 34,998 | ||||||||||||
OEM | 21,855 | 25,986 | 65,810 | 78,539 | 18,593 | 21,685 | ||||||||||||||||||
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Total | $ | 57,969 | $ | 60,507 | $ | 175,339 | $ | 170,773 | $ | 51,356 | $ | 56,683 | ||||||||||||
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Geographic segment information
We market our products and services principally through offices in the United States, United Kingdom, Germany, China, Republic of Korea and Japan. We report revenue based on the geographic location of our customers. For example, licenses may be sold to large international companies, which may be headquartered in the Republic of Korea, such revenues would be reported in the Republic of Korea and included in the revenue defined asfor Rest of World.Of World in the table below.
The following table summarizes revenue by customer location (in thousands of dollars, except percentages):
Three Months Ended September 30, | ||||||||||||||||||||||||||||||||
2018 | 2017 | Three Months Ended March 31, | ||||||||||||||||||||||||||||||
Sales | % of Total | Sales | % of Total | 2019 | 2018 | |||||||||||||||||||||||||||
(In thousands, except percentages) | Revenue | % of Total | Revenue | % of Total | ||||||||||||||||||||||||||||
United States | $ | 26,389 | 45.5 | % | $ | 27,951 | 46.2 | % | $ | 23,216 | 45.2 | % | $ | 24,823 | 43.8 | % | ||||||||||||||||
Japan | 12,847 | 22.2 | 14,963 | 24.7 | 9,634 | 18.8 | 11,652 | 20.5 | ||||||||||||||||||||||||
Europe, Middle East and Africa (EMEA) | 12,809 | 22.1 | 13,952 | 23.1 | ||||||||||||||||||||||||||||
Rest of World | 5,924 | 10.2 | 3,641 | 6.0 | ||||||||||||||||||||||||||||
Europe, Middle East, and Africa (EMEA) | 13,457 | 26.2 | 15,066 | 26.6 | ||||||||||||||||||||||||||||
Rest of the World | 5,049 | 9.8 | 5,142 | 9.1 | ||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||
Total | $ | 57,969 | 100.0 | % | $ | 60,507 | 100.0 | % | $ | 51,356 | 100.0 | % | $ | 56,683 | 100.0 | % | ||||||||||||||||
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Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||
2018 | 2017 | |||||||||||||||||||||||||||||||
Sales | % of Total | Sales | % of Total | |||||||||||||||||||||||||||||
(In thousands, except percentages) | ||||||||||||||||||||||||||||||||
United States | $ | 78,360 | 44.7 | % | $ | 74,631 | 43.7 | % | ||||||||||||||||||||||||
Japan | 36,217 | 20.7 | 44,278 | 25.9 | ||||||||||||||||||||||||||||
Europe, Middle East and Africa (EMEA) | 42,873 | 24.4 | 37,392 | 21.9 | ||||||||||||||||||||||||||||
Rest of World | 17,889 | 10.2 | 14,472 | 8.5 | ||||||||||||||||||||||||||||
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Total | $ | 175,339 | 100.0 | % | $ | 170,773 | 100.0 | % | ||||||||||||||||||||||||
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Long-lived assets, which includeincludes right of use assets, property and equipment, goodwill and intangible assets,intangibles, but exclude other assets, long-term investments and deferred tax assets, are attributed to geographic areas in which Company assets reside and is shown below (in thousands):
September 30, 2018 | December 31, 2017 | March 31, 2019 | December 31, 2018 | |||||||||||||
Long-lived assets: | ||||||||||||||||
United States | $ | 305,562 | $ | 314,930 | $ | 311,124 | $ | 303,046 | ||||||||
United Kingdom | 3,628 | 4,004 | 4,198 | 3,484 | ||||||||||||
Germany | 55,310 | 58,319 | 53,615 | 54,357 | ||||||||||||
Asia (including Japan) | 3,667 | 3,497 | 5,665 | 4,139 | ||||||||||||
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Total | $ | 368,167 | $ | 380,750 | $ | 374,602 | $ | 365,026 | ||||||||
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13.14. Restructuring
In December 2017, the Company implemented a restructuring plan to accelerate the integration of the Olapic business into the core of Monotype in an effort to improve operational efficiencies and to align its investment in the Olapic business to better support it over time. The plan provided for the elimination of 89 positions worldwide. As part of this plan, the Company recorded charges of approximately $3.0 million for severance and termination benefits and $0.2 million of facilities and associated costs. This restructuring was completed in the third quarter of 2018.
On June 6, 2018, the Company implemented a restructuring plan, under which the Company will reducereduced headcount in certain areas of the Company, made the decision to cease sales and marketing of the Swyft product and service line and to close a regional office, all in an effort to improve operational efficiencies. The plan provided for the elimination of approximately 50 positions worldwide across a variety of functions, with a concentration within engineering, as well as sales and marketing. The Company recorded net charges totaling $0.2 million and $6.8 million in the three and nine months ended September 30, 2018, respectively, related to severance and termination benefits, net of stock based compensation reversal, the write off of goodwill and intangible assets attributable to Swyft, the acceleration of the final deferred compensation payment to the founders of Swyft, and charges associated with the office closure.
The following presents the details of the restructuring expense line item within our consolidated statements of operations (in thousands):
Three Months Ended September 30, 2018 | Nine Months Ended September 30, 2018 | |||||||
Severance and termination benefits | $ | 177 | $ | 4,403 | ||||
Reversal of stock based compensation expense | — | (1,402 | ) | |||||
Accelerated deferred compensation | — | 523 | ||||||
Office closure | 67 | 67 | ||||||
Intangible assets impairment | — | 2,623 | ||||||
Write off of allocated goodwill | — | 600 | ||||||
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Total restructuring | $ | 244 | $ | 6,814 | ||||
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We reversed $1.4 million of stock based compensation expense as a result of forfeitures of awards by employees included in the restructuring plan. See Note 6In the three months ended March 31, 2019, the severance and termination accrual was reduced based the completion of certain final termination agreements. This restructuring plan was completed by December 31, 2018, other than the payment of deferred termination benefits to certain terminated employees. The Company continued to refine its cost structure, and in December 2018, implemented a restructuring plan in an effort to improve operational efficiencies. The plan provided for furtherthe elimination of 15 positions worldwide, including the positions held by two of the Olapic founders. To date, the Company recorded charges of approximately $1.0 million for severance and termination benefits associated with this plan and $0.9 million of accelerated expense associated with the final deferred compensation payment in connection with the departure of those founders. In addition, $0.9 million was recorded for additional stock based compensation expense associated with the acceleration of the vesting of those departing founders’ equity grants in accordance with the separation agreements. We expect this restructuring plan to be completed by the second quarter of 2019, other than the payment of deferred termination benefits to certain terminated employees.
The following presents the details regardingof the intangible asset disposal and write offrestructuring expense line item within our condensed consolidated statements of goodwill.operations (in thousands):
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Severance and termination benefits | $ | (24 | ) | $ | 194 | |||
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Total restructuring | $ | (24 | ) | $ | 194 | |||
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The following presents a roll forward of the restructuring reserves and provision activity (in thousands):
Personnel related | �� | Facilities related | Total | Personnel related | Total | |||||||||||||||
Restructuring reserve at January 1, 2018 | $ | 1,333 | $ | — | $ | 1,333 | ||||||||||||||
Restructuring charges | 194 | — | 194 | |||||||||||||||||
Cash payments | (985 | ) | — | (985 | ) | |||||||||||||||
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Restructuring reserve at March 31, 2018 | 542 | — | 542 | |||||||||||||||||
Restructuring reserve at December 31, 2018 | $ | 2,968 | $ | 2,968 | ||||||||||||||||
Restructuring charges | 4,031 | — | 4,031 | (24 | ) | (24 | ) | |||||||||||||
Cash payments | (479 | ) | — | (479 | ) | (1,595 | ) | (1,595 | ) | |||||||||||
Foreign currency exchange rate changes | (5 | ) | — | (5 | ) | (9 | ) | (9 | ) | |||||||||||
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Restructuring reserve at June 30, 2018 | $ | 4,089 | $ | — | $ | 4,089 | ||||||||||||||
Restructuring charges | 177 | 67 | 244 | |||||||||||||||||
Cash payments | (1,295 | ) | — | (1,295 | ) | |||||||||||||||
Foreign currency exchange rate changes | (24 | ) | — | (24 | ) | |||||||||||||||
Restructuring reserve at March 31, 2019 | 1,340 | 1,340 | ||||||||||||||||||
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Restructuring reserve at September 30, 2018 | $ | 2,947 | $ | 67 | $ | 3,014 | ||||||||||||||
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Future cash expenditures related to the restructuring are expected to be approximately $2.3$1.0 million, net of tax savings. We expect the restructuring plan to be completed by the end of 2018, other than the payment of deferred termination benefits to certain terminated employees.
14.
15. Commitments and Contingencies
Legal Proceedings
From time to time,time-to-time, we may be a party to various claims, suits and complaints. We do not believe that there are claims or legal proceedings that, if determined adversely to us, would have a material adverse effect on our business, results of operations or financial condition.
Licensing Warranty
Under our standard license agreement with our OEM customers, we warrant that the licensed technologies are free of infringement claims of intellectual property rights and will meet the specifications as defined in the licensing agreement for a specified period, typically one year.one-year period. Under the licensing agreements, liability for such indemnity obligations is limited, generally to the total arrangement fee; however, exceptions have been made on acase-by-case basis, increasing the maximum potential liability to agreed uponagreed-upon amounts at the time the contract is entered into or unlimited liability. We have never incurred costs payable to a customer or business partner to defend lawsuits or settle claims related to these warranties, and as a result, management believes the estimated fair value of these warranties is minimal. Accordingly, there are no liabilities recorded for these warranties as of September 30, 2018 andMarch 31, 2019 or December 31, 2017.
15.16. Subsequent Events
Stock Purchase Program
Subsequent to September 30, 2018,March 31, 2019, the Company purchased 315,00044,600 shares of common stock for $6.3$0.9 million, at an average price per share of $19.80$20.19 through October 26, 2018.April 19, 2019. The Company purchased these shares on the open market at prevailing market prices and in accordance with its previously announced share purchase program. At October 26, 2018, $12.0April 19, 2019, $0.3 million remains for future purchase under the Plan.
Dividend Declaration
On October 25, 2018,April 18, 2019, the Company’s Board of Directors declared aan $0.116 per share quarterly cash dividend on our outstanding common stock. The record date is set for January 2,July 1, 2019, and the dividend is payable to shareholders of record on January 22,July 19, 2019. Dividends are declared at the discretion of the Company’s Board of Directors and depend on actual cash from operations, the Company’s financial condition and capital requirements and any other factors the Company’s Board of Directors may consider relevant. Future dividend declarations, as well as the record and payment dates for such dividends, will be determined by the Company’s Board of Directors on a quarterly basis.
Item 2. |
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Forward Looking Statements and Projections
This Quarterly Report onForm 10-Q contains forward-lookingforward looking statements. Forward-lookingForward looking statements relate to future events or our future financial performance. We generally identify forward-lookingforward looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar words. These statements are only predictions. We have based these forward-lookingforward looking statements largely on our current expectations and projections about future events and financial
trends that we believe may affect our business, results of operations and financial condition. The outcome of the events described in these forward looking statements is subject to risks, uncertainties and other factors described in “Risks Factors” in our Annual Report on Form10-K for the year ended December 31, 2018, as well as those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors” and elsewhere in this Quarterly Report onForm 10-Q. Accordingly, you should not rely upon forward-lookingforward looking statements as predictions of future events. We cannot assure you that the events and circumstances reflected in the forward-lookingforward looking statements will be achieved or occur, and actual results could differ materially from those projected in the forward-lookingforward looking statements. The forward-lookingforward looking statements made in this Quarterly Report onForm 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-lookingforward looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.
Overview
We are a leading global provider of design assets, technology and expertise that are designed to enable the best user experiences, ensure brand integrity and help companies engage their best customers. We empower expression and engagement for creatives, designers, engineers and marketers at the world’s most revered brands. Monotype is home to some of the world’s most well-known typeface collections. We provide high-quality creative assets and technology solutions to marketers and content creators that empower our customers to achieve global brand fidelity and drive consistent user experiences across a wide variety of devices and online media. Along with our custom type services, our solutions enable consumers and professionals to express their creativity, while our tools and technologies improve creative workflows and maximize efficiency as content is published or distributed. Our solutions provide worldwide language coverage and high-quality text, and our embedded solutions support compelling user interfaces. We offer more than 14,00013,000 typeface designs, and include some of the world’s most widely used designs, such as the Times New Roman®, Helvetica®, Frutiger®, ITC Franklin Gothic™Gothic™, FF Meta and Droid™Droid™ typefaces, and support more than 250 Latin andnon-Latin languages. Oure-commerce websites, includingmyfonts.com, fonts.com, linotype.com,and fontshop.com, which attracted more than 50 million visitors in 20172018 from over 200 countries and territories, offer thousands of high-quality font products including our own fonts from the Monotype Libraries, as well as fonts from third parties.
Sources of Revenue
We derive revenue from two principal sources: licensing our design assets and technology to brands and creative professionals, which we refer to as our Creative Professional revenue, and licensing our text imaging solutions to consumer device manufacturers and independent software vendors, which we refer to as our OEM revenue. We derive our Creative Professional revenue primarily from brands, agencies, publishers, corporations, enterprises, small businesses and individuals. We derive our OEM revenue primarily from consumer device manufacturers. Our Creative Professional and OEM revenues are both comprised of license and service revenues. We classify cloud-based subscriptions and other services, such as font related services, custom font design and post contract support as service revenue. All other revenue is classified as license revenue. We operate our business based on our two principal markets, Creative Professional and OEM, which is the basis for the following discussion of operating results.
Some of our revenue streams, particularly project-related and custom font design service revenue where spending is largely discretionary in nature, have historically been, and we expect them to continue to be in the future, susceptible to weakening economic conditions.
Geographic revenue, which is based on the geographic location of our customers, is in the table below:
Three Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||||||||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||||||||||||||||||
Sales | % of Total | Sales | % of Total | Revenue | % of Total | Revenue | % of Total | |||||||||||||||||||||||||
(In thousands, except percentages) | (In thousands of dollars, except percentages) | |||||||||||||||||||||||||||||||
United States | $ | 26,389 | 45.5 | % | $ | 27,951 | 46.2 | % | $ | 23,216 | 45.2 | % | $ | 24,823 | 43.8 | % | ||||||||||||||||
Japan | 12,847 | 22.2 | 14,963 | 24.7 | 9,634 | 18.8 | 11,652 | 20.5 | ||||||||||||||||||||||||
Europe, Middle East and Africa (EMEA) | 12,809 | 22.1 | 13,952 | 23.1 | ||||||||||||||||||||||||||||
Rest of World | 5,924 | 10.2 | 3,641 | 6.0 | ||||||||||||||||||||||||||||
Europe, Middle East, and Africa (EMEA) | 13,457 | 26.2 | 15,066 | 26.6 | ||||||||||||||||||||||||||||
Rest of the World | 5,049 | 9.8 | 5,142 | 9.1 | ||||||||||||||||||||||||||||
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Total | $ | 57,969 | 100.0 | % | $ | 60,507 | 100.0 | % | $ | 51,356 | 100.0 | % | $ | 56,683 | 100.0 | % | ||||||||||||||||
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Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||
2018 | 2017 | |||||||||||||||||||||||||||||||
Sales | % of Total | Sales | % of Total | |||||||||||||||||||||||||||||
(In thousands, except percentages) | ||||||||||||||||||||||||||||||||
United States | $ | 78,360 | 44.7 | % | $ | 74,631 | 43.7 | % | ||||||||||||||||||||||||
Japan | 36,217 | 20.7 | 44,278 | 25.9 | ||||||||||||||||||||||||||||
Europe, Middle East and Africa (EMEA) | 42,873 | 24.4 | 37,392 | 21.9 | ||||||||||||||||||||||||||||
Rest of World | 17,889 | 10.2 | 14,472 | 8.5 | ||||||||||||||||||||||||||||
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Total | $ | 175,339 | 100.0 | % | $ | 170,773 | 100.0 | % | ||||||||||||||||||||||||
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For the three months ended September 30,March 31, 2019 and 2018, and 2017, revenue from customers outside the United States comprised 54.5%54.8% and 53.8%, respectively, of our total revenue. For the nine months ended September 30, 2018 and 2017, revenue from customers outside the United States comprised 55.3% and 56.3%56.2%, respectively, of our total revenue. We expect that sales by our international subsidiaries will continue to represent a substantial portion of our revenue for the foreseeable future. Future international revenue will depend on the continued use and expansion of our products worldwide.
We derive a significant portion of our OEM revenue from a limited number of customers, in particular manufacturers of laser printers and consumer electronic devices. For the three months ended September 30,March 31, 2019 and 2018, and 2017, our top ten licensees by revenue, most of which are OEM customers, accounted for approximately 26.9%24.6% and 27.5%23.0% of our total revenue, respectively. For the nine months ended September 30, 2018 and 2017, our top ten licensees by revenue accounted for approximately 23.6% and 28.4% of our total revenue, respectively. Although noNo one customer accounted for more than 10%10.0% of our total revenue for the three months ended March 31, 2019 or nine months ended September 30, 2018 or 2017, if we are unable to maintain relationships with major customers or establish relationships with new customers, our licensing revenue will be adversely affected.
Creative Professional Revenue
For a description of our Creative Professional revenue and related accounting policy, see Note 4.
OEM Revenue
For a description of our OEM revenue and related accounting policy, see Note 4.2018.
Cost of Revenue
Our cost of revenue consists of font license fees that we pay on certain fonts that are owned by third parties, personnel and allocated internal engineering expense and overhead costs related to custom font design services and SaaS based offerings and cloud-based web service costs. License fees that we pay to third parties are typically based on a percentage of our Creative Professional and OEM revenue and do not involve minimum fees.
Cost of revenue also includes amortization of acquired technology, which we amortize over 7 to 15 years. For purposes of amortizing acquired technology, we estimate the remaining useful life of the technology based upon various considerations, including our knowledge of the technology and the way our customers use it. We use the straight-line method to amortize acquired technology. There is no reliable evidence to suggest that we should expect any other pattern of amortization than an even pattern, and we believe this best reflects the expected pattern of economic usage.
Gross Profit
Our gross profit percentage is influenced by a number of factors including product mix, pricing and volume at any particular time. However, cost of OEM revenue is typically lower than cost of Creative Professional revenue because we own a higher percentage of the fonts licensed to OEM customers, provide value-added technology and have negotiated lower royalty rates on the fonts we license from third parties because of volume. In addition, within our Creative Professional business, the cost of custom font design and SaaS based service revenue is substantially higher than the cost of other revenue. The relative cost of Creative Professional revenue has decreased in recent periods, as efforts to sell license rights to more fonts that we own have been successful, and because we have recently experienced success in our effort to sell certain license rights that carry lower royalty rates to Creative Professional customers. Creative Professional revenue is growing at a faster rate than OEM revenue. We expect these trends to continue. Our gross profit is subject to variability fromperiod-to-period, depending on the product mix and the level of custom font design and SaaS based service revenue.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with GAAP and our discussion and analysis of our financial condition and results of operations requires us to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates.
Information about our critical accounting policies may be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Critical Accounting Policies,” included in our Annual Report on Form10-K for the year ended December 31, 2017, except for the adoption as of January 1, 2018, of guidance in ASC 606 as more fully described in Note 3 to the accompanying unaudited condensed consolidated quarterly statements.2018.
Results of Operations for the Three Months Ended September 30, 2018March 31, 2019 Compared to Three Months Ended September 30, 2017March 31, 2018
Revenue and cost of revenue, bifurcated into license and service, is as follows:
Three Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||||||||||
2018 | 2017 | Increase (Decrease) | 2019 | 2018 | (Decrease) | |||||||||||||||||||
License revenue | $ | 45,831 | $ | 49,913 | $ | (4,082 | ) | $ | 41,872 | $ | 45,867 | $ | (3,995 | ) | ||||||||||
Service revenue | 12,138 | 10,594 | 1,544 | 9,484 | 10,816 | (1,332 | ) | |||||||||||||||||
Cost of revenue—license | 6,947 | 6,782 | 165 | 6,802 | 9,612 | (2,810 | ) | |||||||||||||||||
Cost of revenue—service | 2,448 | 2,937 | (489 | ) | 2,801 | 2,824 | (23 | ) |
License revenue decreased primarily due to certainone-timethe decline in printer revenue recognizedfrom our printer imaging electronic customers and a decline in the third quarter of 2017, as a result of conversion of customers to fixed fee contractsrevenue from royalty bearing contracts. There was no corresponding item in the current period. In addition, our royalty based revenue is lowerweb channels in the three months ended September 30, 2018,March 31, 2019, as a result ofcompared to the adoption of ASC 606. We now estimate and accrue royalty-basedsame period in 2018. Service revenue decreased in the quarter whenthree months ended March 31, 2019, as compared to the royalty-based units are shipped, as opposed to when those shipments were reported to us by the licensee under legacy GAAP.
Service revenue has increased primarilysame period in 2018, mainly due to increased customer churn in the growthlast half of our SaaS-based product offerings, including our Mosaic solution.2018.
Gross profit from license revenue, before amortization of acquired technology, decreasedincreased to 84.8%83.9% from 86.4%,79.0% mainly due to theone-time additionalnon-recurring royalty expense in the three months ended March 31, 2018, for which there was no corresponding revenue in the period, over period.in accordance with ASC 606. There was no similar charge in the same period in 2019. Gross profit from service revenue, before amortization of acquired technology, increaseddecreased from 73.9% to 79.8% and 72.3%.70.5%, mainly due to a decline in our service revenue as some of our cost of revenue does not fluctuate with changes in revenue. See further discussion below for additional information regarding our period over period revenue and cost of revenue.
While revenue from services has grown to a level of significance requiring separate disclosure, we continue to operate our business based on our two principal markets, Creative Professional and OEM, which is the basis for the following discussion of operating results.
The following table sets forth items in the unaudited condensed consolidated quarterly statements of operationsincome as a percentage of sales for the periods indicated:
Three Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
Revenue: | ||||||||||||||||
Creative Professional | 62.3 | % | 57.1 | % | 63.8 | % | 61.7 | % | ||||||||
OEM | 37.7 | 42.9 | 36.2 | 38.3 | ||||||||||||
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Total revenue | 100.0 | 100.0 | 100.0 | 100.0 | ||||||||||||
Cost of revenue | 16.2 | 16.0 | 18.7 | 22.0 | ||||||||||||
Cost of revenue—amortization of acquired technology | 1.5 | 1.5 | 1.7 | 1.5 | ||||||||||||
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Total cost of revenue | 17.7 | 17.5 | 20.4 | 23.5 | ||||||||||||
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Gross profit | 82.3 | 82.5 | 79.6 | 76.5 | ||||||||||||
Marketing and selling | 31.4 | 37.1 | 33.3 | 35.4 | ||||||||||||
Research and development | 13.2 | 14.9 | 14.5 | 16.6 | ||||||||||||
General and administrative | 18.6 | 18.7 | 23.4 | 27.7 | ||||||||||||
Restructuring | 0.4 | — | ||||||||||||||
Amortization of other intangible assets | 1.5 | 1.7 | 1.6 | 1.8 | ||||||||||||
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Total operating expenses | 65.1 | 72.4 | 72.8 | 81.5 | ||||||||||||
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Income from operations | 17.2 | 10.1 | ||||||||||||||
Income (loss) from operations | 6.8 | (5.0 | ) | |||||||||||||
Interest expense, net | 1.5 | 1.1 | 1.4 | 1.3 | ||||||||||||
Loss on foreign exchange | 0.7 | 2.3 | ||||||||||||||
(Gain) loss on derivatives | (0.1 | ) | 0.2 | |||||||||||||
Other income | — | (0.1 | ) | |||||||||||||
Loss on extinguishment of debt | 0.1 | — | ||||||||||||||
Loss (gain) on foreign exchange | 0.1 | (0.1 | ) | |||||||||||||
Loss on derivatives | 0.2 | 0.2 | ||||||||||||||
Other | — | — | ||||||||||||||
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Total other expense | 2.1 | 3.5 | ||||||||||||||
Income before provision for income taxes | 15.1 | 6.6 | ||||||||||||||
Provision for income taxes | 9.4 | 4.5 | ||||||||||||||
Total other expenses | 1.8 | 1.4 | ||||||||||||||
Income (loss) before benefit from income taxes | 5.0 | (6.4 | ) | |||||||||||||
Benefit from income taxes | (0.2 | ) | (4.3 | ) | ||||||||||||
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Net income | 5.7 | % | 2.1 | % | ||||||||||||
Net income (loss) | 5.2 | % | (2.1 | %) | ||||||||||||
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The following discussion compares the three months ended September 30, 2018March 31, 2019 with the three months ended September 30, 2017.March 31, 2018.
RevenuesRevenue by Market.Market
We view our operations and manage our business as one segment: the development, marketing and licensing of technologies and fonts. Factors used to identify our single segment include the financial information available for evaluation by our chief operating decision maker in making decisions about how to allocate resources and assess performance. While our technologies and services are sold to customers in two principal markets, Creative Professional and consumer device manufacturers and independent software vendors, together OEM, expenses and assets are not formally allocated to these markets, and operating results are assessed on an aggregate basis to make decisions about the allocation of resources.
The following table presents revenue for these two principal markets (in thousands):
Three Months Ended September 30, | Increase (Decrease) | |||||||||||
2018 | 2017 | |||||||||||
Creative Professional | $ | 36,114 | $ | 34,521 | $ | 1,593 | ||||||
OEM | 21,855 | 25,986 | (4,131 | ) | ||||||||
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Total revenue | $ | 57,969 | $ | 60,507 | $ | (2,538 | ) | |||||
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Creative Professional OEM Total revenue Three Months Ended
March 31, 2019 2018 (Decrease) $ 32,763 $ 34,998 $ (2,235 ) 18,593 21,685 (3,092 ) $ 51,356 $ 56,683 $ (5,327 )
Revenue
Revenue was $58.0$51.4 million and $60.5$56.7 million for the three months ended September 30,March 31, 2019 and 2018, and 2017, respectively, a decrease of $2.5$5.3 million, or 4.2%9.4%.
Creative Professional revenue was $36.1$32.8 million and $34.5$35.0 million for the three months ended September 30,March 31, 2019 and 2018, and 2017, respectively, an increasea decrease of $1.6$2.2 million, or 4.6%6.4%, due to a decline in certain SAAS-based revenue andweb-based sales mainly due to growthincreased customer churn in sales to enterprise customers and increased service revenue as SaaS offerings continue to become a larger partthe last half of our portfolio.2018.
OEM revenue decreased $4.1$3.1 million, or 16.0%14.3%, to $21.9$18.6 million in the three months ended September 30, 2018,first quarter of 2019, as compared to $26.0$21.7 million in the three months ended September 30, 2017. Revenuefirst quarter of 2018, mainly due to a decline in printer revenue. The decrease in printer revenue, period over period, is largely due to a decline in revenue from our printer imaging electronic OEM customers decreased period over period partially due to lower revenue from customers under fixed fee contracts and partially due to $2.0 million ofone-time payments recognized in the third quarter of 2017 from the conversion of customers to fixed fee contracts from royalty bearing contracts. There was no corresponding item in the current period. Display imaging revenue decreased mainly due to a few large deals in the third quarter of 2017 that did not repeat in the third quarter of 2018.customers.
Cost of Revenue and Gross Profit
Cost of revenue, excluding amortization of acquired technology, was $9.4decreased $2.8 million, or 22.8%, to $9.6 million and $9.7$12.4 million forin the three months ended September 30,March 31, 2019 and 2018, respectively. In the first quarter of 2018, there was $2.2 million ofnon-recurring royalty expense in connection with the adoption of ASC 606. As a percentage of sales, cost of revenue, excluding amortization of acquired technology, was 18.7% and 2017,22.0% of total revenue in the three months ended March 31, 2019 and 2018, respectively, a decreasedecline of $0.3 million, or 3.3%, mainly due to lower total revenue..
The portion of cost of revenue consisting of amortization of acquired technology was unchanged at $0.9 million for the three months ended September 30,March 31, 2019 and 2018, and 2017, respectively.
Gross profit was 82.3%increased 3.1% to 79.6% in the three months ended September 30, 2018,March 31, 2019, as compared to 82.5%76.5% in the three months ended September 30, 2017, a decrease of 0.2 percentage points.March 31, 2018. The increase in gross profit in the three months ended March 31, 2019, as compared to the same period in 2018, was primarily due to theone-time additionalnon-recurring royalty expense in the prior period that did not occur in the current period, as described above.
Operating Expenses
Marketing and Selling.Marketing and selling expense decreased $4.3$3.0 million, or 18.9%14.7%, to $18.2$17.1 million in the three months ended September 30, 2018,March 31, 2019, as compared to $22.5 million in the same period in 2017. Personnel and personnel related expenses decreased $3.2 million, period over period, due to lower headcount mainly from our restructuring actions in the second quarter of 2018. Targeted marketing spending and consulting together decreased $1.1 million in the third quarter of 2018, as compared to the same period in 2017, due to portfolio decisions around discretionary programs. Decreased facilities expense, mainly due to the consolidation of certain regional offices in 2017, was offset by increased software expenses, mainly due to investments in information systems supporting the Creative Professional business, period over period.
Research and Development. Research and development expense was $7.7 million and $9.0$20.1 million in the three months ended September 30,March 31, 2018, and 2017, respectively, a decrease of $1.3 million, or 14.6%, primarily due to lower personnel expenses. Personnel and personnel related expenses decreased $1.2$2.4 million in the first quarter of 2019, as compared to the same period over period,in 2018, primarily due to lower headcount from our restructuring actions in the second and fourth quarters of 2018 and other decreases in headcount and lower variable compensation as a result of lower revenue. Targeted marketing spending decreased $0.4 million in the three months ended March 31, 2019, as compared to the same period in 2018, due to portfolio decisions around discretionary programs.
Research and Development. Research and development expense decreased $1.9 million, or 20.0%, to $7.4 million in the three months ended March 31, 2019, as compared to $9.3 million in the three months ended March 31, 2018, primarily due to lower personnel expenses. Personnel and personnel related expenses decreased mainly due to lower headcount from restructuring actions in the second quarterand fourth quarters of 2018 and in the fourth quarter of 2017.2018.
General and Administrative. General and administrative expense was $10.8decreased $3.6 million, and $11.3or 23.0%, to $12.0 million in the three months ended September 30, 2018 and 2017, respectively, a decrease of $0.5March 31, 2019, as compared to $15.6 million or 4.5%. Auditin the three months ended March 31, 2018. Outside consulting and legal expenses together decreased $0.4$3.2 million in the third quarter of 2018,three months ended March 31, 2019, as compared to the same period in 2017, mainly2018, primarily due to lower audit fees in the third quarter of 2018 and additional expenses incurred related to shareholder activities in the prior period which did not recur.related to shareholder activities. Personnel and personnel related expenses decreased $0.4 million in the three months ended March 31, 2019, as compared to the same period in 2018, mainly the result of restructuring actions in the fourth quarter of 2018.
Restructuring.Restructuring expense wasdecreased $0.2 million, or 112.4%, due to a credit of $24 thousand in the three months ended March 31, 2019 from $0.2 million in the three months ended September 30,March 31, 2018 due to additional severance expense and charges associated with the closure of one of our regional offices. There were no similar chargesoffices in the same period in 2017.prior period.
Amortization of Other Intangible Assets. Amortization of other intangible assets was $0.9$0.8 million and $1.0 million infor the three months ended September 30,March 31, 2019 and 2018, and 2017, respectively, a decrease of $0.1$0.2 million, or 16.8%.18.8%, mainly due to the write off intangible assets associated with the Swyft business in the second quarter of 2018.
Interest Expense, Net
Interest expense, net of interest income was $0.8 million and $0.7 million infor the three months ended September 30,March 31, 2019 and 2018, and 2017, respectively, an increase of $0.1 million, or 18.2%5.9%, mainly due to increases in interest rates onborrowings under our outstanding borrowings, partially offset by a reduction in the balance outstanding.revolving lines of credit.
Loss (Gain) on Foreign Exchange
LossesLoss (gain) on foreign exchange were $0.4 millionwas a loss of $66 thousand and $1.4 milliongain of $34 thousand in the three months ended September 30,March 31, 2019 and 2018, respectively. The loss and 2017, respectively, a decreasegain in each of $1.0 million,the periods was primarily the result of currency fluctuations on our foreign denominated receivables and payables. In the three months ended September 30, 2017, the loss was primarily due to the strengthening of the Euro, as compared to the U.S. dollar, on U.S. dollar denominated receivables held by our foreign subsidiaries.
Loss (Gain) on Derivatives
Loss (gain) on derivatives was a gain of $47 thousand$0.1 million and a loss of $0.1 million in the three months ended September 30,March 31, 2019 and 2018, and 2017, respectively, a decreasethe net result of $0.1 million, due tochanges in the market value of our30-day forward currency derivative contracts.
Provision for (Benefit from) Income Taxes
For the three months ended September 30,March 31, 2019 and 2018, and 2017, our effective tax rate was 62.1%a benefit of 5.5% and 68.5%a provision of 67.3%, respectively. Our effective tax ratebenefit of 5.5% for the three months ended September 30, 2018 wasMarch 31, 2019 is significantly lower than our 2017 effective tax rate for the same period in 2018, primarily due to the enactmentincrease in forecasted full yearpre-tax income for 2019 as compared to 2018, and the reversal of The Actreserves for unrecognized tax benefits. Following is a more detailed discussion of the decrease in December 2017. Significant changes resulting primarily from The Act included:the effective rate:
The statutoryimpact of foreign earnings increased our effective tax rate by 3.6% in the three months ended September 30, 2018 is 21.0%,first quarter of 2019, as compared to the U.S. statutory tax rate of 35.0%33.8% in the same period in 2017.
Foreign rate differential increased our effective rate 30.4% in the three months ended September 30, 2018, as compared to a decrease of 2.7% in the same period in 2017, due to changes in tax treatment of foreign earnings under The Act. These changes include significant new limitations on theour ability to better utilize foreign tax credits and to limit the effectsamount of income subject to the new Global Intangible Low Taxed Income (GILTI)(“GILTI”) provisions. TheseIn the prior period, these provisions haveof the Tax Cuts and Jobs Act (“The Act”) resulted in a significantly higher effective tax rate on foreign earnings.earnings due to limitations on the Company’s ability to utilize foreign tax credits in the first quarter of 2018.
In the three months ended March 31, 2019, we recorded a benefit of 29.1% for the reversal of reserve for unrecognized tax benefits, as compared to a benefit of 0.6% in the prior period, due to the completion of an audit of our 2016 federal tax return.
The Company has reflected a reduction in its valuation allowance for foreign tax credits, resulting in a benefit of 10.2%, related to the amount of foreign tax credit carryforwards that the Company is estimating that it will be able to utilize based on 2019 taxable income.
Non-deductible expenses added 14.9%2.4% to the effective tax rate for the three months ended September 30, 2018,March 31, 2019, as compared to 40.7% in the same period in 2017, primarily due to increased income before taxes.
In addition, the effective rate8.2% for the three months ended September 30, 2018 was reduced by 4.2% for a reduction in reserves resulting from the expiration of statutes of limitations. State and local taxes, net of federal benefit, provided a benefit of 4.3% in the three months ended September 30, 2017, as compared to 0.0% for the three months ended September 30, 2018, mainly due to adjustments to our deferred state tax balances, which resulted from changes in our estimated state tax rate.
Results of Operations for the Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
Revenue and cost of revenue, bifurcated into license and service, is as follows:
Nine Months Ended September 30, | ||||||||||||
2018 | 2017 | Increase (Decrease) | ||||||||||
License revenue | $ | 139,791 | $ | 141,083 | $ | (1,292 | ) | |||||
Service revenue | 35,548 | 29,690 | 5,858 | |||||||||
Cost of revenue—license | 23,841 | 20,745 | 3,096 | |||||||||
Cost of revenue—service | 7,946 | 7,893 | 53 |
License revenue decreased primarily due to certainone-time printer revenue recognized in the nine months ended September 30, 2017, as a result of conversion of customers to fixed fee contracts from royalty bearing contracts, partially offset by growth in sales to our enterprise customers. There was no corresponding item in the current period. In addition, our royalty based revenue is lower in the nine months ended September 30,March 31, 2018, a result of the adoptionacceleration of ASC 606. We now estimate and accrue our royalty-based revenue in the quarter when the royalty-based units are shipped, as opposed to when those shipments were reported to us by the licensee under legacy GAAP. This change had the effectfinal payment of shifting traditional holiday seasonality revenue for consumer electronics from the first quarter of 2018deferred compensation to the fourth quarterfounders of 2017.
Service revenue has increased primarily due to the growth of our SaaS-based product offerings, including our Mosaic solution.
Gross profit from license revenue, before amortization of acquired technology, decreased to 82.9% from 85.3%, primarily due to additionalnon-recurring royalty expenseSwyft in the nine months ended September 30, 2018 for which there was no corresponding revenue in the corresponding period in 2017, in accordance with ASC 606. Gross profit from service revenue, before amortization of acquired technology, increased to 77.6% from 73.4%. See further discussion below for additional information regarding our period over period revenue and cost of revenue.
While revenue from services has grown to a level of significance requiring separate disclosure, we continue to operate our business based on our two principal markets, Creative Professional and OEM, which is the basis for the following discussion of operating results.
The following table sets forth items in the condensed consolidatedyear-to-date statements of operations as a percentage of sales for the periods indicated:
Nine Months Ended September 30, | ||||||||
2018 | 2017 | |||||||
Revenue: | ||||||||
Creative Professional | 62.5 | % | 54.0 | % | ||||
OEM | 37.5 | 46.0 | ||||||
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Total revenue | 100.0 | 100.0 | ||||||
Cost of revenue | 18.1 | 16.8 | ||||||
Cost of revenue—amortization of acquired technology | 1.5 | 1.5 | ||||||
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Total cost of revenue | 19.6 | 18.3 | ||||||
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Gross profit | 80.4 | 81.7 | ||||||
Marketing and selling | 33.3 | 38.9 | ||||||
Research and development | 14.5 | 16.3 | ||||||
General and administrative | 21.8 | 19.9 | ||||||
Restructuring | 3.9 | — | ||||||
Amortization of other intangible assets | 1.6 | 1.8 | ||||||
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Total operating expenses | 75.1 | 76.9 | ||||||
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Income from operations | 5.3 | 4.8 | ||||||
Interest expense, net | 1.3 | 1.2 | ||||||
Loss on foreign exchange | — | 2.7 | ||||||
(Gain) loss on derivatives | (0.1 | ) | 0.2 | |||||
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Total other expense | 1.2 | 4.1 | ||||||
Income before provision for income taxes | 4.1 | 0.7 | ||||||
Provision for income taxes | 2.5 | 0.9 | ||||||
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Net (loss) income | 1.6 | % | (0.2 | %) | ||||
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The following discussion compares the nine months ended September 30, 2018 with the nine months ended September 30, 2017.
Revenue by Market.
The following table presents revenue for these two principal markets (in thousands):
Nine Months Ended September 30, | Increase (Decrease) | |||||||||||
2018 | 2017 | |||||||||||
Creative Professional | $ | 109,529 | $ | 92,234 | $ | 17,295 | ||||||
OEM | 65,810 | 78,539 | (12,729 | ) | ||||||||
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Total revenue | $ | 175,339 | $ | 170,773 | $ | 4,566 | ||||||
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Revenue
Revenue was $175.3 million and $170.8 million for the nine months ended September 30,June 2018 and 2017, respectively, an increaseto two of $4.5 million, or 2.7%.
Creative Professional revenue increased $17.3 million, or 18.8%, to $109.5 million for the nine months ended September 30, 2017, as compared to $92.2 millionfounders of Olapic in December 2018, both of which lowered the same period in 2017, mainly due to growth in salestotal amount of revenue from our enterprise customers, including the launch of our Mosaic solution and higher service revenue as SaaS offerings continue to become a larger part of our offering portfolio.
OEM revenue decreased $12.7 million, or 16.3%, to $65.8 million in the nine months ended September 30, 2018, as compared to $78.5 million in the nine months ended September 30, 2017. Revenue from our printer imaging OEM customers decreased period over period partially due to $6.1 million ofone-timenon-deductible payments recognized in the nine months ended September 30, 2017 from the conversion of customers to fixed fee contracts from royalty bearing contracts. There was no corresponding itemcompensation in the current period. Additionally, we recorded lower royalty based revenue as a result of the adoption of ASC 606. We now estimate and accrue royalty-based revenue in the quarter when the royalty-based units are shipped, as opposed to when those shipments were reported to us by the licensee under legacy GAAP. This change had the effect of shifting traditional holiday seasonality revenue for consumer electronics from the first quarter of 2018 to the fourth quarter of 2017.
Cost of Revenue and Gross Profit
Cost of revenue, excluding amortization of acquired technology, was $31.8 million and $28.6 million for the nine months ended September 30, 2018 and 2017, respectively, an increase of $3.2 million, or 11.0%, mainly due to $2.2 million of additionalnon-recurring royalty expense for which there was no corresponding revenue item in the period in accordance with ASC 606 and higher costs associated with the revenue from our enterprise customers. As a percentage of sales, cost of revenue, excluding amortization of acquired technology, was 18.1% and 16.8% of total revenue in the nine months ended September 30, 2018 and 2017, respectively.
Amortization of acquired technology was unchanged at $2.6 million for the nine months ended September 30, 2018 and 2017, respectively.
Gross profit was 80.4% in the nine months ended September 30, 2018, as compared to 81.7% in the nine months ended September 30, 2017, a decrease of 1.3 percentage points partially due to the additionalnon-recurring royalty expense as described above, and partially due to the continued shift in product mix between Creative Professional and the higher margin OEM business.
Operating Expenses
Marketing and Selling.Marketing and selling expense was $58.4 million and $66.4 million for the nine months ended September 30, 2018 and 2017, respectively, a decrease of $8.0 million, or 12.1%. Personnel and personnel related expenses decreased $6.6 million, period over period, due to lower headcount mainly from our restructuring actions in the second quarter of 2018. Targeted marketing spending and consulting expense together decreased $1.8 million in the nine months
ended September 30, 2018, as compared to the same period in 2017, due to portfolio decisions around discretionary programs. Software expenses increased $1.1 million, period over period, due to investments in information systems supporting the Creative Professional business. Facilities expense decreased $0.7 million due to the consolidation of certain regional offices in 2017.
Research and Development. Research and development expense was $25.4 million and $27.8 million in the nine months ended September 30, 2018 and 2017, respectively, a decrease of $2.4 million, or 8.5%. Personnel and personnel related expenses decreased $1.4 million in the nine months ended September 30, 2018, as compared to the same period in 2017, due to lower headcount mainly from restructuring actions in the second quarter of 2018 and in the fourth quarter of 2017. Decreased facilities expense contributed $0.4 million to the overall decrease period over period, due to the consolidation of certain regional offices in 2017. Consulting expense decreased $0.4 million, period over period due to the timing of projects.
General and Administrative. General and administrative expense was $38.3 million and $34.0 million in the nine months ended September 30, 2018 and 2017, respectively, an increase of $4.3 million, or 12.4%. Outside consulting and legal expenses increased $3.1 million in the nine months ended September 30, 2018, as compared to the same period in 2017, primarily due to additional expenses incurred related to shareholder activities. Personnel and personnel related expenses increased $0.4 million, period over period, mainly the result of key hiring. Increased infrastructure expenses, such as facilities, software and depreciation, together contributed $1.4 million to the overall increase in general and administrative expenses, period over period. Audit expenses decreased $0.7 million in the nine months ended September 30, 2018, as compared to the same period in 2017, mainly due to lower audit fees.
Restructuring.Restructuring expense was $6.8 million in the nine months ended September 30, 2018. There was no restructuring expense in the same period in 2017. Included in restructuring costs is a $3.2 million write down of intangible assets and goodwill allocated to the Swyft business, which was discontinued in connection with the restructuring action announced in June 2018. Severance expenses totaled $4.4 million and an acceleration of Swyft deferred compensation payment resulted in an incremental charge of $0.5 million mainly due to the restructuring action in the second quarter of 2018. Facilities charges were $0.1 million due to the closure of one of our regional offices in the third quarter of 2018. These charges were partially offset by a $1.4 million reversal of stock based compensation expense as a result of forfeitures of awards by employees included in the restructuring plan. There were no similar charges in the same period in 2017.
Amortization of Other Intangible Assets. Amortization of other intangible assets was $2.8 million and $3.0 million for the nine months ended September 30, 2018 and 2017, respectively, a decrease of $0.2 million, or 7.0%.
Interest Expense, Net
Interest expense, net of interest income was $2.4 million and $2.1 million in the nine months ended September 30, 2018 and 2017, respectively, an increase of $0.3 million, or 14.4%, as reductions in outstanding borrowings under our revolving line of credit were offset by an increase in interest rates.
(Gain) Loss on Foreign Exchange
(Gain) losses on foreign exchange was a gain of $30 thousand and a loss of $4.5 million for the nine months ended September 30, 2018 and 2017, respectively, a decrease of $4.6 million, primarily the result of currency fluctuations on our foreign denominated receivables and payables. In the nine months ended September 30, 2017, the loss was mainly attributed to the strengthening of the Euro, as compared to the U.S. dollar, on U.S. dollar denominated receivables held by our foreign subsidiaries.
Loss (Gain) on Derivatives
Loss (gain) on derivatives were a gain of $0.1 million and a loss of $0.3 million for the nine months ended September 30, 2018 and 2017, respectively, a decrease of $0.4 million, due to our30-day forward currency contracts.
Provision for Income Taxes
For the nine months ended September 30, 2018 and 2017, our effective tax rate was 60.1% and 123.9%, respectively. Our effective tax rate for the nine months ended September 30, 2018 is significantly lower than our 2017 effective tax rate primarily due to:
As a result of the enactment of The Act in December 2017, the statutory tax rate in the nine months ended September 30, 2018 is 21.0%, as compared to the U.S. statutory tax rate of 35.0% in the same period in 2017.
Foreign rate differential increased our effective rate 31.4% in the nine months ended September 30, 2018, as compared to a decrease of 3.6% in the same period in 2017, due to changes in tax treatment of foreign earnings under The Act. These changes include significant new limitations on the ability to utilize foreign tax credits, and the effects of the new Global Intangible Low Taxed Income (GILTI) provisions. These provisions have resulted in a significantly higher effective tax rate on foreign earnings.
Non-deductible expenses added 15.0% to the effective tax rate for the nine months ended September 30, 2018, as compared to 55.9% in the same period in 2017, as a result of the increase in income before taxes and changes in deductibility of certain expenses under The Act.
In addition, a net windfall on stock based compensation resulted in a 1.1% reduction in the effective rate for the nine months ended September 30, 2018, as compared to a shortfall rate in the same period in 2017 that resulted in a 61.5% increase in the effective rate. Further, state and local taxes reduced the effective tax rate for the nine months ended September 30, 2017 by 18.0%, as compared to 0.8% in the current period. For the nine months ended September 30, 2018 the change in state tax resulted mainly from adjustments to our deferred stat tax balances which resulted from changes in our estimated state tax rate.
Recently Issued Accounting Pronouncements
Information concerning recently issued accounting pronouncements may be found in Note 3 to our unaudited condensed consolidated financial statements included in this Quarterly Report on FormForm 10-Q.
Liquidity and Capital Resources
Cash Flows for the NineThree Months Ended September 30, 2018March 31, 2019 and 20172018.
Since our inception, we have financed our operations primarily through cash from operations, private and public stock sales and long-term debt arrangements, as described below. We believe our existing cash and cash equivalents, our cash flow from operating activities and available bank borrowings will be sufficient to meet our anticipated cash needs for at least one year from the issuance of these financial statements. At September 30, 2018,March 31, 2019, our principal sources of liquidity were cash and cash equivalents totaling $70.1$46.4 million and a $150.0$200.0 million revolving credit facility, of which there was $80.0$70.0 million of outstanding borrowings. On May 3, 2018, our Board of Directors approved a share repurchase program of up to $25.0 million of our outstanding common stock, which permits purchases through June 7, 2019. InFor the ninethree months ended September 30, 2018,March 31, 2019, we used $6.7$6.6 million in cash to purchase shares under the plan. At September 30, 2018,As of March 31, 2019 the plan has $18.3$1.1 million available for future purchases. Our future working capital requirements will depend on many factors, including the operations of our existing business, our potential strategic expansion and future acquisitions we might undertake.
The following table presents our cash flows from operating activities, investing activities and financing activities for the periods presented (in thousands):
Nine Months Ended September 30, | ||||||||
2018 | 2017 | |||||||
Net cash provided by operating activities | $ | 11,411 | $ | 21,513 | ||||
Net cash used in investing activities | (2,836 | ) | (5,326 | ) | ||||
Net cash used in financing activities | (32,540 | ) | (29,190 | ) | ||||
Effect of exchange rates on cash, cash equivalents and restricted cash | (724 | ) | 1,107 | |||||
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Total decrease in cash, cash equivalents and restricted cash | $ | (24,689 | ) | $ | (11,896 | ) | ||
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Net cash provided by operating activities Net cash used in investing activities Net cash used in financing activities Effect of exchange rates on cash, cash equivalents and restricted cash Total (decrease) increase in cash, cash equivalents and restricted cash Three Months Ended
March 31, 2019 2018 $ 4,095 $ 7,496 (411 ) (1,623 ) (17,438 ) (6,274 ) 2 943 $ (13,752 ) $ 542
Operating Activities
We generated $11.4$4.1 million in cash from operations during the ninethree months ended September 30, 2018.March 31, 2019. Net income, after adjusting for depreciation and amortization, loss extinguishment of debt, loss on retirement of fixed assets, amortization of deferred financing costs, and accretion ofaccreted interest, stock based compensation, provision for doubtful accounts, deferred income taxes, and unrealized currency gain on foreign denominated intercompany transactions generated $24.3$10.6 million in cash. Thenon-cash impairmentDecreased accrued expenses net of Swyft related intangible assets added back $3.2 million.
Accrued expenses andincreased accounts payable used $10.8 million, inclusive of largenon-recurring payments of deferred compensation of $10.0 million, additional royalty payments resulting from the adoption of ASC 606 of $2.1 million and payment of investor relations advisor fees of $2.2 million. In addition, we paid 2017 accrued variable compensation, offset by additional restructuring accruals. Decreased accounts receivable, net of decreased deferred revenue generated $1.2$12.5 million in cash, primarily a result of the payment of 2018 accrued variable compensation. Increased deferred revenue and decreased accounts receivable generated $10.9 million in cash as a result of customer payments received, net of an increase in unbilled receivables due to the adoption of ASC 606.received. Prepaid expenseexpenses and other assets used $4.8$1.7 million in cash, mainly due to an increasewhich includes approximately $0.9 million of capitalized financing costs in long term unbilled receivables and capitalized contract costs related toconnection with the adoption of ASC 606. AccruedNew Credit Facility. Increased tax refunds receivable combined with decreased accrued income taxes used $1.7$3.2 million during the nine monthsquarter ended September 30, 2018.March 31, 2019.
Variations in operating cash flows occur fromtime-to-time because our enterprise customers make upfront payments on subscription revenue. These payments are required under the terms of our license agreements and can cause large fluctuations in accounts receivable and deferred revenue. The timing and extent of such payments may significantly impact our cash balances.
We generated $21.5$7.5 million in cash from operations during the ninethree months ended September 30, 2017.March 31, 2018. Net income,loss, after adjusting for depreciation and amortization, loss on retirement of fixed assets, loss on debt extinguishment, amortization of deferred financing costs, and accretion ofaccreted interest, stock based compensation, excess tax benefit on stock options, provision for doubtful accounts, deferred income taxes, and unrealized currency gain on foreign denominated intercompany transactions generated $26.1$1.4 million in cash. Decreased accrued expenses offset by increased accounts payable used $2.7 million in cash, primarily a result of the payment of 2017 accrued variable compensation. Increased prepaiddeferred revenue and decreased accounts receivable generated $10.8 million in cash as a result of customer payments received in Q1, net of an increase in unbilled receivables due to the adoption of ASC 606. Prepaid expenses and other assets combined with decreased accounts payable, offset byused $1.3 million in cash, mainly due to an increase in accrued expenses and other liabilities, used $1.4 million, which is mainly duecapitalized contract costs related to the timingadoption of payments.ASC 606. Accrued income taxes used $0.3$0.7 million during the nine monthsquarter ended September 30, 2017. Increased accounts receivable, coupled with decreased deferred revenue used $2.9 million net in cash, which is mainly due to the timing of customer payments.March 31, 2018.
Investing Activities
During the ninethree months ended September 30, 2018,March 31, 2019, we used $2.8$0.4 million in investing activities mainly for the purchase of property and equipment. During the ninethree months ended September 30, 2017,March 31, 2018, we used $5.3$1.6 million in investing activities mainly for the purchase of $1.4 million of property and equipment.equipment and $0.2 million for acquisition of intangible assets.
Financing Activities
Cash used in financing activities forin the ninethree months ended September 30, 2018March 31, 2019 was $32.5$17.4 million. We received cash from the exercisesexercise of stock options of $3.5$0.3 million. We paid cash dividends of $14.5$4.8 million, and reduced borrowings under our revolving line of credit by $5.2 million. We also purchased $6.6 million in treasury stock and paid $13.0$1.2 million in employee taxes on shares withheld in the three months ended March 31, 2019. Cash used in financing activities for the three months ended March 31, 2018 was $6.3 million. We received cash from exercises of stock options of $2.6 million. We paid a cash dividend of $4.7 million and we paid $3.0 million on our outstanding revolving line of credit. We also purchased $6.7used $1.2 million in treasury stock and paid $1.8 million infor employee taxes on shares withheld in the nine months ended September 30, 2018. Cash used in financing activities for the nine months ended September 30, 2017 was $29.2 million. We received cash from the exercises of stock options of $1.0 million. We paid cash dividends of $14.0 million and paid $9.0 million on our outstanding revolving line of credit. We also purchased $6.4 million in treasury stock and paid $0.8 million in employee taxes on shares withheld in the nine months ended September 30, 2017.withheld.
Dividends
On July 25, 2018February 13, 2019, our Board of Directors approved aan $0.116 per share, or $4.9$4.8 million, quarterly cash dividend on our outstanding common stock. The record date was OctoberApril 1, 20182019 and the dividend was paid to shareholders of record on October 19, 2018.April 18, 2019. We anticipate this to be a recurring quarterly dividend with future payments and record dates, subject to board approval. On October 25, 2018, the Company’sApril 18, 2019, our Board of Directors approved a $0.116 per share quarterly cash dividend on our outstanding common stock. The record date is set for January 2,July 1, 2019 and the dividend is payable to shareholders of record on January 22,July 19, 2019.
Credit Facility
On September 15, 2015,March 22, 2019, the Company entered into a new credit agreement (the “New Credit Agreement”) by and among the Company, the Company’s subsidiary, Monotype Imaging Inc., (“the Borrower”), any financial institution that becomes a Lender (as defined therein) and Silicon Valley Bank of America, N.A., as agent which provides foradministrative agent. Pursuant to the New Credit Agreement the Lenders have agreed to provide the Borrower with a five-year $150.0$200.0 million senior secured revolving credit facility (the “Credit Facility”). The Credit Facility permits the Company to request that the Lenders, at their election, increase the secured credit facility to a maximum of $200.0$300.0 million. The Credit Facility is availableprovides more flexibility in addition to an increased borrowing capacity and extended terms, as defined above. The New Credit Agreement replaced the Company’s existing $150.0 million revolving credit facility (the “Original Credit Agreement”) by and between the Company and Silicon Valley Bank. The Original Credit Agreement was terminated effective March 22, 2019 and was scheduled to expire on a revolving basis through September 15, 2020. RepaymentThe Company had $75.0 million outstanding under the Original Credit Agreement at December 31, 2018. Available borrowings under the Original Credit Agreement were reduced by approximately $0.5 million for one standby letter of any amounts borrowed are not required until maturity ofcredit issued in connection with a facility lease agreement, leaving $74.5 million available for borrowings at December 31, 2018. At March 31, 2019, the Company had $70.0 million outstanding under the Credit Facility. However,Available borrowings under the Company may repay any amounts borrowedCredit Facility have been reduced by approximately $0.5 million for one standby letter of credit issued in connection with a facility lease agreement, leaving $129.5 million available for borrowings at any time, without premium or penalty. March 31, 2019.
Borrowings under the Credit Facility bear interest through March 21, 2024 at a variable rate not less than zero based upon,per annum equal to LIBOR plus between 1.0% and 1.625%, or at the Company’sBorrower’s option, either LIBOR or the higher of (i) the prime rate as published in the Wall Street Journalannounced by Bank of America and (ii) 0.5% plus the overnight federal funds rate, plus in each case, an applicable margin. The applicablebetween 0.0% and 0.625%, with the exact interest rate margin for LIBOR loans,determined based on the applicableconsolidated leverage ratio, is 1.25%, 1.50% or 1.75% per annum, and the applicable margin for base rate loans, based on the applicable leverage ratio, is either 0.25%, 0.50% or 0.75%% per annum.ratio. At September 30, 2018,March 31, 2019, our rate, inclusive of applicable margins, was 3.8%3.6% for LIBOR, and atLIBOR. At December 31, 2017,2018, our rate under the Original Credit Agreement, inclusive of applicable margins, was 3.1%4.3% for LIBOR. The Company hadis required to pay a commitment fee, based on the consolidated leverage ratio, equal to 0.175%, 0.20%, 0.225% or 0.25% per annum on the undrawn portion available under the revolving credit facility and variable per annum fees in respect of outstanding borrowingsletters of credit. In connection with the New Credit Agreement, the Company incurred closing and legal fees of approximately $0.9 million, which have been accounted for as deferred financing costs and will be amortized to interest expense over the term of the New Credit Agreement. In addition, $34.0 thousand of unamortized deferred financing costs associated with thepro-rata share of prior loan syndicate lenders that did not participate in the new facility were written off and charged to other expense in the first quarter of 2019.
The New Credit Agreement includes financial covenants which require the Company to maintain (i) a consolidated leverage ratio of no greater than 3.25 to 1.0 or, upon a qualified acquisition subject to certain conditions, 3.75 to 1.0 and (ii) a minimum consolidated interest coverage ratio of 3.00 to 1.0. At March 31, 2019, our consolidated leverage ratio was 0.72 to 1.0 and our consolidated interest coverage ratio was 18.61 to 1.0. The New Credit Agreement also contains customary affirmative and negative covenants for transactions of this type and other affirmative and negative covenants agreed to by the parties, including, among others, limits on the Company and its subsidiaries’ ability to incur debt or liens, engage in sale-leaseback transactions, make loans, investments and acquisitions, incur additional indebtedness, engage in mergers, enter into asset sales, transact with affiliates and alter its business. Adjusted EBITDA, under the Credit Facility, is defined as consolidated net earnings (or loss), plus net interest expense, income taxes, depreciation and amortization, and share based compensation expense, plus acquisition expenses not to exceed $2.0 million, minus capitalized research and development expense, plus restructuring, issuance costs, cashnon-operating costs and other expenses or losses minus cashnon-operating gains and othernon-cash gains; provided, however that the aggregate of $80.0 million at September 30, 2018,all cashnon-operating expense shall not exceed 10% of Consolidated EBITDA. The New Credit Agreement also provides for a number of customary events of default, including, among others, payment, bankruptcy, covenant, representation and $93.0 million at December 31, 2017. The Credit Facility has $0.5 million reserved for onestand-by letterwarranty, change of credit in connection with a facility lease agreement, leaving $69.5 millioncontrol and $56.5 million available for borrowing at September 30, 2018 and December 31, 2017, respectively.
As of September 30, 2018, the maximum leverage ratio permitted was 3.00:1.00 and our leverage ratio was 1.75:1.00 and the minimum fixed charge coverage ratio was 1.25:1.00 and our fixed charge ratio was 3.62:1.00.judgment defaults. Failure to comply with these covenants, or the occurrence of an event of default, could permit the Lenders under the New Credit Agreement to declare all amounts borrowed under the New Credit Agreement, together with accrued interest and fees, to be immediately due and payable. In addition,The obligations of the Borrower under the Credit Facility isFacilities are unconditionally guaranteed by the Company and certain subsidiaries and secured by a lien on substantially all of the Company’spresent and its domestic subsidiaries’ tangiblefuture property and intangible property by a pledge of allassets of the equity interests of the Company’s directCompany and indirect domesticsuch subsidiaries, and by a pledge by the Company’s domestic subsidiaries of 65% of the equity of their direct foreign subsidiaries,in each case, subject to limited exceptions. In addition to other covenants, the New Credit Agreement places limits on the Companyexceptions and its subsidiaries’ ability to incur debt or liens and engage in sale-leaseback transactions, make loans and investments, incur additional indebtedness, engage in mergers, acquisitions and asset sales, transact with affiliates and alter its business. The Company was in compliance with the covenants under the Credit Facility as of September 30, 2018.exclusions.
The following table presents a reconciliation from net income (loss), which is the most directly comparable GAAP operating performance measure, to EBITDA and from EBITDA to Adjusted EBITDA as defined in our Credit Facility (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Net income (loss) | $ | 3,321 | $ | 1,261 | $ | 2,817 | $ | (310 | ) | |||||||
Provision for income taxes | 5,434 | 2,737 | 4,243 | 1,609 | ||||||||||||
Interest expense, net | 826 | 699 | 2,353 | 2,056 | ||||||||||||
Depreciation and amortization | 3,101 | 3,098 | 9,548 | 9,271 | ||||||||||||
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EBITDA | $ | 12,682 | $ | 7,795 | $ | 18,961 | $ | 12,626 | ||||||||
Stock based compensation | 4,326 | 5,271 | 11,761 | 15,294 | ||||||||||||
Non-cash add backs | — | — | — | — | ||||||||||||
Restructuring, issuance and cashnon-operating costs | 265 | 202 | 4,682 | 198 | ||||||||||||
Acquisition expenses | — | — | — | — | ||||||||||||
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Adjusted EBITDA(1) | $ | 17,273 | $ | 13,268 | $ | 35,404 | $ | 28,118 | ||||||||
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The Credit Facility also contains provisions for an increased interest rate during periods of default. We do not believe that these covenants will affect our ability to operate our business, and we were in compliance with theall covenants under our Credit Facility as of September 30, 2018.March 31, 2019.
Non-GAAP Measures
In our quarterly earnings press releases and conference calls, in addition to Adjusted EBITDA as discussed above, we discuss a key measure that is not calculated according to GAAP. Thisnon-GAAP measure is net adjusted EBITDA, which is defined as net income (loss) from operations before interest expense, net, other (income) expense, net, provision for income taxes, depreciation, amortization of acquired intangible assets, and stock based compensation expense, acquisition-related compensation andone-timenon-recurring expenses. We use net adjusted EBITDA as a principal indicator of the operating performance of our business. We use net adjusted EBITDA in internal forecasts and models when establishing internal operating budgets, supplementing the financial results and forecasts reported to our board of directors, determining bonus compensation for our employees based on operating performance and evaluating short-term and long-term operating trends in our operations. We believe that net adjusted EBITDA permits a comparative assessment of our operating performance, relative to our performance based on our GAAP results, while isolating the effects of charges that may vary fromperiod-to-period without direct correlation to underlying operating performance. We believe that thesenon-GAAP financial adjustments are useful to investors because they allow investors to evaluate the effectiveness of the methodology and information used by management in our financial and operational decision-making. We believe that trends in our net adjusted EBITDA may be valuable indicators of our operating performance.
In our quarterly earnings press releases and conference calls, in addition to Adjusted EBITDA and net adjusted EBITDA as discussed above, we discuss another key measure that is not calculated according to GAAP. Thisnon-GAAP measure isnon-GAAP earnings per diluted share, which is defined as earnings per diluted share before amortization of acquired intangible assets, stock based compensation expenses, and acquisition-related compensation.compensation andone-timenon-recurring expenses. We usenon-GAAP earnings per diluted share as one of our principal indicators of the operating performance of our business. We usenon-GAAP earnings per diluted shareshares in internal forecasts, supplementing the financial results and forecasts reported to our board of directors and evaluating short-term and long-term operating trends in our operations. We believe thatnon-GAAP earnings per diluted share permits a comparative assessment of our operating performance, relative to our performance based on our GAAP results, while isolating the effects of charges that may vary fromperiod-to-period without direct correlation to underlying operating performance. We believe that thesenon-GAAP financial adjustments are useful to investors because they allow investors to evaluate the effectiveness of the methodology and information used by management in our financial and operational decision-making. We believe that trends in ournon-GAAP earnings per diluted share may be valuable indicators of our operating performance.
In March 2018, we revised our definition ofnon-GAAP net adjusted EBITDA andnon-GAAP earnings per share to exclude the impact ofone-timenon-recurring expenses, such as certain advisor fees, royalty expenses and restructuring expenses. This change more accurately reflects management’s view of the Company’s business and financial performance. The three months and nine months ended September 30, 2017 have been restated for comparison purposes.
The following table presents a reconciliation from net income (loss),loss, which is the most directly comparable GAAP operating financial measure, to net adjusted EBITDA as used by management (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | |||||||||||||||||||
Net income (loss) | $ | 3,321 | $ | 1,261 | $ | 2,817 | $ | (310 | ) | $ | 2,660 | $ | (1,199 | ) | ||||||||||
Interest expense, net | 826 | 699 | 2,353 | 2,056 | 771 | 728 | ||||||||||||||||||
Other expense (income), net | 361 | 1,444 | (174 | ) | 4,858 | |||||||||||||||||||
Provision for income taxes | 5,434 | 2,737 | 4,243 | 1,609 | ||||||||||||||||||||
Other expense, net | 206 | 98 | ||||||||||||||||||||||
Provision for (benefit from) income taxes | (139 | ) | (2,465 | ) | ||||||||||||||||||||
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Income from operations | 9,942 | 6,141 | 9,239 | 8,213 | ||||||||||||||||||||
Income (loss) from operations | $ | 3,498 | $ | (2,838 | ) | |||||||||||||||||||
Depreciation and amortization | 3,101 | 3,098 | 9,548 | 9,271 | 3,169 | 3,249 | ||||||||||||||||||
Stock based compensation | 4,326 | 5,271 | 13,163 | 15,294 | 4,219 | 4,247 | ||||||||||||||||||
Acquisition-related compensation | 661 | 1,407 | 2,934 | 4,221 | 167 | 1,189 | ||||||||||||||||||
Non-recurring expenses(3) | 244 | 210 | 11,734 | 210 | ||||||||||||||||||||
Non-recurring expenses (income)(2) | (24 | ) | 5,114 | |||||||||||||||||||||
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Net adjusted EBITDA | $ | 18,274 | $ | 16,127 | $ | 46,618 | $ | 37,209 | $ | 11,029 | $ | 10,961 | ||||||||||||
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The following table presents a reconciliation from net incomeearnings (loss) per diluted share, which is the most directly comparable GAAP measure, tonon-GAAP earnings per diluted share as used by management:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
GAAP income (loss) per diluted share | $ | 0.08 | $ | 0.03 | $ | 0.06 | $ | (0.01 | ) | |||||||
Amortization, net of tax of $0.01, $0.03, $0.03 and $0.12, respectively | 0.03 | 0.01 | 0.11 | 0.03 | ||||||||||||
Stock based compensation, net of tax of $0.02, $0.09, $0.06 and $0.31, respectively(1) | 0.09 | 0.04 | 0.27 | 0.07 | ||||||||||||
Acquisition-related compensation, net of tax of $0.00, $0.00, $0.00 and $0.00, respectively(2) | 0.02 | 0.04 | 0.08 | 0.11 | ||||||||||||
Non-recurring expenses, net of tax of $0.00, $0.00, $0.07 and $0.00, respectively(4) | 0.00 | 0.00 | 0.22 | 0.00 | ||||||||||||
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Non-GAAP earnings per diluted share(6) | $ | 0.22 | $ | 0.12 | $ | 0.74 | $ | 0.20 | ||||||||
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Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
GAAP income (loss) per diluted share | $ | 0.06 | $ | (0.03 | ) | |||
Amortization, net of tax of $0.01 and $0.01, respectively | 0.03 | 0.04 | ||||||
Stock based compensation, net of tax of $0.01 and $0.02, respectively | 0.09 | 0.09 | ||||||
Acquisition-related compensation, net of tax of $0.00 and $0.00, respectively(1) | 0.01 | 0.03 | ||||||
Non-recurring expenses (income), net of tax of $0.00 and $0.03, respectively(3) | — | 0.09 | ||||||
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Non-GAAP earnings per diluted share(5) | $ | 0.19 | $ | 0.22 | ||||
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(1) | For the |
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For the three months ended |
For the three months ended |
Net adjusted EBITDA is not a measure of operating performance under GAAP and should not be considered as an alternative or substitute for GAAP profitability measures such as income (loss) from operations and net income (loss). Net adjusted EBITDA as an operating performance measure has material limitations since it excludes the statement of income impact of depreciation and amortization expense and stock based compensation and therefore does not represent |
Non-GAAP earnings per diluted share is not a measure of operating performance under GAAP and should not be considered as an alternative or substitute for GAAP profitability measures such as earnings per share and earnings per diluted share.Non-GAAP earnings per diluted share as an operating performance measure has material limitations since it excludes the statement of income impact of amortization expense and stock based compensation, and therefore, does not represent |
is the most directly comparable GAAP operating performance measure tonon-GAAP earnings per diluted share. Asnon-GAAP earnings per diluted share is not defined by GAAP, our definition ofnon-GAAP earnings per diluted share may differ from and therefore may not be comparable to similarly titled measures used by other companies, thereby limiting its usefulness as a comparative measure. Because of the limitations thatnon-GAAP earnings per diluted share has as an analytical tool, investors should not consider it in isolation, or as a substitute for analysis of our operating results as reported under GAAP. |
Other Liquidity Matters
Contractual Obligations
The table below summarizes our operating lease contractual obligations at March 31, 2019 and the effects of such obligations on liquidity and cash flow in future years (in thousands). There is no change in our other contractual obligations from those disclosed in Part II, Item 7 of our Annual Report on Form10-K for the year ended December 31, 2018.
Contractual Obligations | Total | April 2019 - March 2020 | April 2020 - March 2022 | April 2012 - March 2024 | Thereafter | |||||||||||||||
Operating leases | $ | 16,303 | $ | 4,144 | $ | 6,646 | $ | 3,795 | $ | 1,718 |
Item 3. |
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We are exposed to financial market risk, including interest rate risk and foreign currency exchange risk.
Concentration of Revenue and Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents and trade receivables. Cash equivalents consist primarily of bank deposits.deposits and certain investments, such as commercial paper, corporate debt and municipal securities, with maturities less than 90 days. Deposits of cash held outside the United States totaled approximately $29.5$17.6 million and $24.3$21.1 million at September 30, 2018March 31, 2019 and December 31, 2017,2018, respectively.
We grant credit to customers in the ordinary course of business. Credit evaluations are performed on an ongoing basis to reduce credit risk, and no collateral is required from our customers. An allowance for uncollectible accounts is provided for those accounts receivable considered to be uncollectible based upon historical experience and credit evaluation. As of September 30, 2018March 31, 2019 and December 31, 2017, none of our customers2018, one customer individually accounted for 10% or more12.8% and 10.8% of our gross accounts receivable.receivable, respectively. Due to the nature of our quarterly revenue streams derived from royalty revenue, it is not unusual for our accounts receivable balances to include a few customers with large balances. Historically, we have not recorded material losses due to customers’ nonpayment. Our Creative Professional business consists of a higher volume of lower dollar value transactions. Accordingly, as the percent of Creative Professional revenue increases in relation to total revenue, we expect the average time to collect our accounts receivables, and our overall accounts receivables balances, to increase.
For the three and nine months ended September 30,March 31, 2019 and 2018, and 2017, no customer accounted for more than 10% of our revenue.
Interest Rate Risk
Our exposure to market risk associated with changes in interest rates relates primarily to our long-term debt. At September 30, 2018March 31, 2019 and December 31, 2017,2018, the Company had borrowings under our revolving Credit Facility of $80.0$70.0 million and $93.0$75.0 million, respectively. The interest rate on our Credit Facility fluctuates with either the prime rate or the LIBOR interest rate and at September 30, 2018March 31, 2019, our rate, inclusive of applicable margins, was 3.8%3.6% for LIBOR. AFor the three months ended March 31, 2019, a 10% increase in the rate would increasehave increased our annual interest expense by $0.2 million.
Foreign Currency Exchange Rate Risk
In accordance with ASC Topic No. 830,Foreign Currency Matters, or ASC 830, all assets and liabilities of our foreign subsidiaries whose functional currency is a currency other than U.S. dollars are translated into U.S. dollars at an exchange rate as of the balance sheet date.date or historical rates, as appropriate. Revenue and expenses of these subsidiaries are translated at the average monthly exchange rates. The resulting translation adjustments as calculated from the translation of our foreign subsidiaries to U.S. dollars are recorded as a separate component of stockholders’ equity.comprehensive income.
As discussed in Note 1, our wholly-owned Olapic Argentina S.A. subsidiary employs approximately 99 people whose functions mainly include development, sales support and administration. The Argentinian economy was recently determined to be highly inflationary. Argentina’s inflation rate reached this threshold with the quarterly period ended June 30, 2018. In accordance with this designation,
we were required to apply the guidance in ASC Topic 830,Foreign Currency Matters, (Subtopic ASC 830-10-45-10), and account for a change in functional currency from the ArgentinianArgentine peso to the U.S. dollar effective July 1, 2018. While we conduct our operation in Argentina Pesos,Argentine pesos, effective July 1, 2018, the functional currency was changed to the U.S. dollar. The operation is a service center supporting the company’s products and generates no revenue. Thus, the expenses primarily consist of compensation and related costs, totaling approximately $0.4 million to $0.5 million per month. The change in functional currency to U.S. dollars did not have a material impact on our financial position, operating results or cash flows.
For the three months ended September 30,March 31, 2019 and 2018, and 2017, revenue from customers outside the United States, primarilyparticularly EMEA and Japan, comprised 54.5%54.8% and 53.8%,56.2 %, respectively, of our total revenue. An effect of a 10% strengthening of the British pound sterling, the Euro and/orand Japanese yen, relative to the U.S. dollar, would have increaseddecreased our revenues by $2.0$1.7 million, increaseddecreased expenses by $1.8$1.7 million and increased operating income by $0.2$0.1 million for the three months ended September 30, 2018. For the nine months ended September 30, 2018 and 2017, revenue from customers outside the United States, primarily EMEA and Japan, comprised 55.3% and 56.3%, respectively, of our total revenue. An effect of a 10% strengthening of the British pound sterling, the Euro and/or Japanese yen, relative to the U.S. dollar, would have increased our revenues by $6.0 million, increased expenses by $5.8 million and increased operating income by $0.2 million for the nine months ended September 30, 2018.March 31, 2019. The sensitivity analysis assumes that all currencies move in the same direction at the same time and the ratio ofnon-U.S. dollar denominated revenue and expenses to U.S. dollar denominated revenue and expenses does not change from current levels.
We incur foreign currency exchange gains and losses related to certain customers that are invoiced in U.S. dollars, but who have the option to make an equivalent payment in their own functional currencies at a specified exchange rate as of a specified date. In the period from that date until payment in the customer’s functional currency is received and converted into U.S. dollars, we can incur realized gains and losses. We also incur foreign currency exchange gains and losses on certain intercompany assets and liabilities denominated in foreign currencies. We are currently utilizing30-day forward contracts to mitigate our exposure on these currency fluctuations. Any increase or decrease in the fair value of the forward contracts is offset by the change in the value of the hedged assets of our consolidated foreign affiliate. At September 30, 2018,March 31, 2019, we had one30-day forward contract to sell 2.6 million British poundspound sterling and to purchase $3.4 million that together, had an immaterial fair value. At December 31, 2017,2018, we had one30-day forward contract to sell 2.52.7 million British poundspound sterling and to purchase $3.4 million that together, had an immaterial fair value.
Item 4. |
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2018.March 31, 2019. The term “disclosure controls and procedures,” as defined in Rules13a-15(e) and15d-15(e) under the Securities and Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide a reasonable assurance of achieving their objectives.
Based on the evaluation of our disclosure controls and procedures as of September 30, 2018,March 31, 2019, our principal executive officer and principal financial officer concluded that, as of such date, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules13a-15(f) and15d-15(f) under the Exchange Act) that occurred during and as of the fiscal quarter ended September 30, 2018March 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We implemented internal controls to ensure we adequately evaluated our contracts and properly assessed the impact of the new accounting standard related to revenue recognition to facilitate its adoption on January 1, 2018. There were no significant changes to our internal control over financial reporting due to the adoption of the new standards.
Item 1. |
From time to time, we may be a party to various claims, suits and complaints. We do not believe that there are claims or legal proceedings that, if determined adversely to us, would have a material adverse effect on our business, results of operations or financial condition.
Item 1A. | Risk Factors |
Except as noted below, thereThere are no material changes in our risk factors from those disclosed in Part I, Item 1A of our Annual Report onForm 10-K for the year ended December 31, 2017.
We conduct a substantial portion of our business outside North America and, as a result, we face diverse risks related to engaging in international business.
We have offices in seven foreign countries and we are dedicating a significant portion of our sales efforts in countries outside North America. We are dependent on international sales for a substantial amount of our total revenue. In 2017 and 2016, approximately 56.9% and 58.3%, respectively, of our total revenue was derived from operations outside the U.S. In the three and nine months ended September 30, 2018, 54.5% and 55.3%, respectively, of our total revenue was derived from operations outside of the U.S. and we expect that international sales will continue to represent a substantial portion of our revenue for the foreseeable future. This future international revenue will depend on the continued use and expansion of our type and technologies, including the licensing of our solutions worldwide.
We are subject to the risks of conducting business internationally, including:2018.
our ability to enforce our contractual and intellectual property rights, especially in those foreign countries that do not respect and protect intellectual property rights to the same extent that the United States does, which increases the risk of unauthorized and uncompensated use of our type or technologies;
United States and foreign government trade or tariff restrictions, including those that may impose restrictions on importation of programming, technology or components to or from the United States;
foreign government taxes, regulations and permit requirements, including foreign taxes that we may not be able to offset against taxes imposed upon us in the United States, and foreign tax and other laws limiting our ability to repatriate funds to the United States;
risks related to fluctuations in foreign currency exchange rates, in particular fluctuations in the exchange rate of the Japanese yen, the European Union’s euro, and the United Kingdom’s pound sterling, including risks related to hedging activities we may undertake;
foreign labor laws, regulations and restrictions;
changes in diplomatic and trade relationships, including the United Kingdom’s decision to leave the European Union, as well as related events;
difficulty in staffing and managing foreign operations;
political instability, natural disasters, war and/or events of terrorism; and
the strength of international economies, including consideration of high inflation rates.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) |
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None.
(b)Use of proceeds
(b) | Use of proceeds |
Not applicable.
(c)Purchases of Equity Securities by the Issuer and Affiliated Purchasers
(c) | Purchases of Equity Securities by the Issuer and Affiliated Purchasers |
The following table provides information about purchases by the Company during the quarter ended September 30, 2018March 31, 2019 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act:
Monotype Imaging Holdings Inc. Purchases of Equity Securities
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(3) | Maximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased Under the Plans or Programs | ||||||||||||
July 2, 2018 to July 31, 2018(1)(2)(3) | 77,824 | $ | 18.76 | 69,000 | $ | 22,602,054 | ||||||||||
August 1, 2018 to August 31, 2018(1)(3) | 55,877 | $ | 16.23 | 44,600 | $ | 21,692,774 | ||||||||||
September 3, 2018 to September 28, 2018(1)(2)(3) | 194,010 | $ | 18.81 | 168,608 | $ | 18,321,846 | ||||||||||
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Total | 327,711 | $ | 18.40 | 282,208 | $ | 18,321,846 | ||||||||||
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Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased Under the Plans or Programs | ||||||||||||
January 2, 2019 to January 31, | 136,807 | $ | 14.74 | 123,500 | $ | 5,696,486 | ||||||||||
February 1, 2019 to February 28, | 146,554 | $ | 17.44 | 123,500 | $ | 3,536,730 | ||||||||||
March 1, 2019 to March 29, | 168,399 | $ | 19.12 | 123,500 | $ | 1,088,429 | ||||||||||
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Total | 451,760 | $ | 17.29 | 370,500 | $ | 1,088,429 | ||||||||||
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(1) | The Company repurchased unvested restricted stock in accordance with either the Third Amended and Restated 2007 Stock Option and Incentive Plan, |
(2) | The Company withheld |
(3) | The Company purchased shares of common stock in accordance with its share repurchase program announced on May 3, 2018. The Company purchased the shares on the open market at prevailing prices. |
Subsequent to September 30, 2018, the Company purchased 315,092 shares of common stock for $6.3 million, at an average price per share of $19.80 through October 26, 2018. The Company purchased these shares on the open market at prevailing market prices and in accordance with its previously announced share purchase program. At October 26, 2018, $12.0 million remains for future purchase under the share purchase program.
Item 3. |
Not applicable.
Item 4. | Mine Safety Disclosures |
None.
Listed and indexed below are all exhibits filed as part of this report.
Exhibit Number | Description | |
10.1 | ||
31.1 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by Chief Executive Officer.* | |
31.2 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by Chief Financial Officer.* | |
32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Executive Officer and Chief Financial Officer.** | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
(1) | Incorporated by reference to the Company’s Current Report on Form8-K filed on March 26, 2019. |
* | Filed herewith. |
** | Furnished herewith. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MONOTYPE IMAGING HOLDINGS INC. | ||||||
Date: | By: | /S/ SCOTT E. LANDERS | ||||
Scott E. Landers President, Chief Executive Officer and Director (Principal Executive Officer) | ||||||
Date: | By: | /S/ ANTHONY CALLINI | ||||
Anthony Callini Executive Vice President, Chief Financial Officer, Treasurer and Assistant Secretary (Principal Accounting and Principal Financial Officer) |
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