Cimpress N.V. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2017, the first quarter of fiscal 2018. This is an interim, unaudited report; amounts below are in U.S. dollars unless noted.
Business context
Cimpress aggregates customized print, signage, apparel and related orders through online brands and its own and third-party production network. Its four reportable segments are Vistaprint, Upload and Print, National Pen, and All Other Businesses. National Pen was acquired in December 2016, so it had no comparable-period revenue.
Key financial results
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Revenue | $563.3 million | $443.7 million |
| Gross profit / gross margin | $279.5 million / 49.6% | $230.7 million / 52.0% |
| Operating income (loss) | $46.6 million | $(27.8) million |
| Net income (loss) attributable to Cimpress | $23.4 million | $(29.1) million |
| Diluted EPS | $0.72 | $(0.92) |
| Cash from operations | $16.4 million | $9.6 million |
| Unlevered free cash flow (non-GAAP) | $(6.5) million | $(14.7) million |
- Reported revenue rose 27%; constant-currency growth was 24%, or 12% excluding acquisitions and divestitures without comparable-period revenue. Growth reflected National Pen, Vistaprint and Upload and Print.
- Operating income included a $47.5 million gain on the Albumprinter sale. Adjusted net operating profit, a non-GAAP measure, was $10.4 million versus $2.7 million.
- Cost of revenue increased to 50.4% of revenue from 48.0%. Management cited product mix, launches and investments, higher third-party fulfillment and shipping costs, and the larger Upload and Print contribution.
- Other expense was $16.3 million, versus $2.1 million, mainly from currency losses and derivatives not designated as hedges. Net interest expense rose to $13.1 million from $9.9 million.
Liquidity, debt and capital allocation
- At September 30, 2017, cash was $42.8 million. Debt was $829.3 million before debt issuance costs and discounts ($820.8 million net on the balance sheet); long-term debt was $800.9 million.
- Operating cash flow was $16.4 million; investing activities provided $62.3 million, chiefly due to $93.8 million of net Albumprinter sale proceeds. Financing activities used $75.5 million, including $40.7 million of share repurchases and $58.4 million of net debt repayments.
- The amended secured credit facility has a July 2022 maturity and $1.041 billion of commitments. After covenant and other limitations, the company reported $262.4 million available to borrow. It was in compliance with debt covenants.
- Variable-rate debt exposure remains material: a hypothetical 100-basis-point rate increase was estimated to add approximately $5.3 million to interest expense over the next 12 months.
- Management said cash, operating cash generation and committed borrowing capacity should fund liabilities and planned investments for at least the next 12 months. Fiscal 2018 capital allocation priorities include organic investment, share repurchases, acquisitions and debt reduction.
Material changes, outlook and notable items
- Albumprinter was sold on August 31, 2017 for €78.4 million, with $93.8 million net cash proceeds and a $47.5 million gain. It was not presented as discontinued operations. Cimpress retained an agreement for Albumprinter to fulfill certain Vistaprint photo-book orders and provide transitional services for up to one year.
- On August 23, Cimpress sold approximately 12% of WIRmachenDRUCK for $35.4 million; the resulting redeemable noncontrolling interest was $83.8 million at quarter-end.
- The WIRmachenDRUCK earn-out terms were amended: the maximum €40 million payment is due in January 2018. The related liability was $46.3 million at quarter-end.
- On November 1, 2017, Cimpress announced a Vistaprint reorganization, expected mostly in fiscal Q2. It estimated a pretax restructuring charge of $15–17 million, including about $0.4 million noncash share compensation, and expected net operating expense savings in fiscal 2018. The actions remained subject to required consultations.
- National Pen is highly seasonal; management expects most of its profit in the fiscal second quarter. Cimpress cautioned that overall results fluctuate with seasonality and investments; it provided no specific revenue or earnings guidance in the supplied filing text.
- Fiscal 2018 tax expectations include a higher annual effective tax rate than fiscal 2017, excluding discrete items, due partly to early adoption of an intra-entity tax accounting standard and a less favorable earnings mix. The adoption reduced retained earnings by $5.9 million; management estimated fiscal 2018 tax expense would have been $9.8 million lower without it.
Principal risks and contingencies
- Currency and interest-rate volatility affected reported results; Cimpress warned that non-hedge-accounted derivatives may continue to cause earnings volatility. Its currency hedging strategy may increase volatility in GAAP results.
- High debt, variable interest rates, restrictive covenants and substantial debt-service commitments could limit investment flexibility or pressure liquidity. Share repurchases, acquisitions and other uses of cash are subject to covenant restrictions.
- Other stated risks include execution and returns on the mass-customization strategy and acquisitions, competition and pricing pressure, seasonality and fulfillment capacity, cybersecurity and privacy, global operations and supply chains, tax uncertainty, and potential changes to trade rules including Brexit-related disruption.
- Unrecognized tax benefits were $6.0 million; tax audits or changes in tax positions could materially affect results or cash flows. The company reported no material legal proceedings and said it did not expect current matters to have a material adverse effect.
Investor facts to verify
- How much of the return to GAAP profitability reflects recurring operating improvement versus the Albumprinter gain and lower acquisition-related charges?
- Whether revenue growth excluding acquisitions and divestitures, and segment profitability, continue after the National Pen comparison base normalizes.
- Whether lower gross margin and negative unlevered free cash flow improve as planned investments, fulfillment costs and working-capital seasonality evolve.
- Execution, final cost and savings from the Vistaprint reorganization, and timing of the $46.3 million WIRmachenDRUCK earn-out payment.
- Available borrowing capacity under the credit agreement, covenant headroom, and the effects of interest rates and foreign-exchange movements on earnings and cash flow.