Cimpress plc — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2019 (quarter ended December 31; fiscal 2020). Unless indicated otherwise, amounts are U.S. dollars. The filing covers Cimpress N.V.’s historical activity before its December 3, 2019 merger into Irish-incorporated Cimpress plc, accounted for as a common-control merger.
Business context
Cimpress operates a group of decentralized businesses focused on mass-customized print, signage, promotional products, packaging, apparel, and related products and services. Reportable segments are Vistaprint, PrintBrothers, The Print Group, National Pen, and All Other Businesses. Management revised segment reporting and adopted segment EBITDA as its segment profitability measure; prior periods were recast.
Key financial results
| Metric | Three months ended Dec. 31, 2019 | Three months ended Dec. 31, 2018 | Six months ended Dec. 31, 2019 | Six months ended Dec. 31, 2018 |
|---|---|---|---|---|
| Revenue | $820.3 million | $825.6 million | $1,454.3 million | $1,414.5 million |
| Operating income | $121.6 million | $90.6 million | $147.0 million | $84.6 million |
| Net income | $190.6 million | $69.0 million | $210.5 million | $54.0 million |
| Net income attributable to Cimpress | $190.2 million | $69.0 million | $210.3 million | $54.4 million |
| Diluted EPS | $6.81 | $2.17 | $7.19 | $1.70 |
| Adjusted EBITDA (non-GAAP) | $185.5 million | $138.1 million | $265.0 million | $180.5 million |
Reported revenue declined about 1% in the quarter and increased 3% year to date. Constant-currency growth was 1% for the quarter and 5% year to date; excluding acquisitions, it was flat for the quarter and 2% year to date. Approximate gross margin improved to 52.0% from 50.2% for the quarter and to 50.5% from 49.5% year to date. Approximate operating margin rose to 14.8% from 11.0% for the quarter and to 10.1% from 6.0% year to date.
Operating cash flow was $265.1 million for the six months, compared with $205.5 million. Adjusted free cash flow, a non-GAAP measure, was $213.6 million versus $144.8 million. Investing cash outflow was $53.8 million, including $28.1 million of property and equipment purchases and $23.4 million of capitalized software and website development. Financing cash outflow was $207.4 million, principally reflecting $537.6 million of share repurchases, partly offset by net debt proceeds.
Cash and cash equivalents were $36.9 million at December 31, 2019. Gross debt, excluding issuance costs and discounts, was $1,381.1 million, up from $1,035.6 million at June 30, 2019; reported net debt carrying value was $1,370.3 million. The company had $531.1 million available under its senior secured facility after covenant limitations and was in compliance with debt covenants. It reported a shareholders’ deficit of $180.5 million, compared with equity of $131.8 million at June 30, primarily following substantial share repurchases. The company’s $400 million senior unsecured notes bear 7% interest and mature in 2026; secured facility borrowings are variable-rate, with a 3.39% weighted-average rate at quarter-end.
Material changes and management commentary
- Operating income increased $31.0 million for the quarter and $62.3 million year to date. Management attributed improvement chiefly to lower advertising spend, gross-margin and operating-efficiency gains, and reduced investment losses in early-stage businesses.
- Vistaprint revenue fell 2% in both periods, while segment EBITDA rose 36% in each period, largely following planned advertising reductions and improved gross margins. Management expects the year-over-year decline in advertising spend to moderate in the second half of fiscal 2020.
- PrintBrothers revenue grew 9% for the quarter and 8% year to date; segment EBITDA grew 41% and 22%, respectively. Management cited strong competition and ongoing price reductions, with cost savings and efficiencies supporting profitability.
- National Pen quarterly revenue declined 4%, while segment EBITDA increased 6%; management cited reduced prospecting and advertising spend and operational improvements.
- The company repurchased $537.6 million of shares during the six-month period. A new authorization permits repurchase of up to 5.5 million shares through May 22, 2021. A November repurchase of 750,000 shares from partnerships affiliated with its largest shareholder was reviewed by the disinterested Audit Committee.
- Adoption of the new lease standard on July 1, 2019 recognized operating lease assets and liabilities and reclassified certain build-to-suit leases. This affects balance-sheet comparisons and some operating-income and cash-flow presentation.
Outlook, unusual items, and risks
- Net income includes a discrete $114.1 million deferred tax benefit from Swiss tax reform. Management expects to realize most of this benefit in fiscal 2025–2030; excluding it, tax expense would have increased. The reported earnings and effective tax rate therefore do not represent a straightforward recurring run rate.
- Management said available cash, operating cash flows, and committed borrowing capacity should fund liabilities and planned investments. It expects to evaluate organic investment, share repurchases, acquisitions, and debt reduction, but does not expect a material acquisition in fiscal 2020. Its stated leverage target is no more than 3.5x trailing-twelve-month EBITDA as defined in its credit agreement.
- Foreign exchange and derivative mark-to-market movements can create significant earnings volatility. A hypothetical 100-basis-point rate increase was estimated to add about $4.5 million of interest expense over the next 12 months, inclusive of swaps.
- Other risks discussed include intense price and online-search competition, execution of the mass-customization platform and technology investments, customer acquisition and retention, acquisition performance, economic conditions, and debt covenant compliance. The filing reported no material change to the risk factors in the prior Form 10-K.
- Unrecorded purchase commitments were $119.0 million. Unrecognized tax benefits were $5.5 million; tax audit outcomes could materially affect results or cash flows. Cimpress said it was not party to material legal proceedings and did not expect current matters to have a material adverse effect.
Important facts for investors to verify
- How much of the earnings increase reflects recurring operating improvement versus the $114.1 million Swiss tax benefit and prior-year share-based compensation reversals?
- Whether reduced advertising spend can sustain Vistaprint and National Pen profitability while stabilizing customer and revenue trends.
- Debt, liquidity, covenant headroom, and the pace of share repurchases relative to cash generation and the stated leverage target.
- Whether reported and constant-currency segment trends persist, particularly amid European price competition and currency volatility.
- The cash timing and realization of Swiss tax benefits, and any developments in tax audits or other commitments and contingencies.