Cimpress plc — Form 10-Q summary
Business context and reporting period
Cimpress operates a group of mass-customization businesses selling print, signage, photo products, promotional products, apparel and related services. This unaudited report covers the fiscal second quarter and six months ended December 31, 2020; comparisons are with the corresponding 2019 periods. Amounts below are in U.S. dollars.
Key financial metrics
| Metric | Three months ended Dec. 31, 2020 | Six months ended Dec. 31, 2020 |
|---|---|---|
| Revenue | $786.1 million, down 4% reported and 9% organic constant currency | $1,372.6 million, down 6% reported and 10% organic constant currency |
| Gross margin | 50.9%, versus 52.0% a year earlier | 50.1%, versus 50.5% a year earlier |
| Operating income | $94.2 million, down $27.4 million; 12.0% of revenue | $130.2 million, down $16.8 million |
| Net income attributable to Cimpress | $32.3 million; diluted EPS $1.22 | $21.5 million; diluted EPS $0.82 |
| Adjusted EBITDA (non-GAAP) | $143.4 million, down $42.1 million | $231.9 million, down $33.1 million |
| Operating cash flow | Not presented separately for the quarter | $256.2 million, versus $265.1 million |
| Adjusted free cash flow (non-GAAP) | Not presented separately for the quarter | $212.9 million, versus $213.6 million |
For the six-month comparison, 2019 net income included a $114.1 million discrete tax benefit related to Swiss tax reform; therefore, the year-over-year net income decline is not directly indicative of operating performance. Six-month interest expense rose to $60.7 million from $30.8 million, mainly reflecting the additional 7% senior notes and 12% second-lien notes issued in 2020. Six-month other expense was $26.0 million, including $32.5 million of losses on derivatives not designated as hedges.
At December 31, 2020, cash was $36.9 million and debt carrying value, net of issuance costs and discounts, was $1.271 billion. Debt principal before those deductions was $1.315 billion. The company reported $585.1 million available to borrow under its senior secured credit facility, subject to covenant and use restrictions. Current assets of $259.2 million were below current liabilities of $661.4 million. Shareholders’ deficit was $364.9 million.
Material changes versus the prior comparable period
- COVID-19-related demand weakness continued, particularly for event-driven and small-business products. Second-quarter revenue declines were partly offset by pandemic-related products and favorable currency movements; excluding currency and acquisitions, revenue fell 9%.
- All reportable segments except All Other Businesses had lower reported second-quarter revenue. Vistaprint reported 1% growth, but organic constant-currency revenue declined 6%; PrintBrothers declined 4%, The Print Group 13%, and National Pen 10%. All Other Businesses grew 11%, supported by BuildASign.
- Segment EBITDA declined notably at Vistaprint, The Print Group and National Pen. National Pen’s six-month segment EBITDA fell 56% to $8.1 million. The company cited reduced demand, unfavorable product mix and lower fixed-cost absorption.
- Management reported $4.5 million of second-quarter expense for pandemic-related products, chiefly losses and inventory write-downs on disposable masks at National Pen. COVID-related government incentives provided $4.0 million of second-quarter operating income benefit.
- Operating cash flow decreased by $8.9 million year over year, while adjusted free cash flow was broadly stable. Investing cash use increased to $76.7 million, including $36.4 million for the 99designs acquisition, net of cash acquired.
Outlook, management commentary, risks and unusual items
- Management gave no specific revenue, earnings or cash-flow guidance in the supplied filing text. It said pandemic restrictions had intensified in some major markets, creating uncertainty about recovery timing, while continuing investment in technology, products, customer experience and branding and maintaining cost flexibility.
- Management believed cash, operating cash generation and borrowing availability would fund obligations, capital spending, debt service and working capital for at least the next 12 months. This depends in part on future performance and facility availability.
- Pre-existing financial maintenance covenants were suspended through the quarter ending December 31, 2021, subject to possible earlier reinstatement. During the suspension, the company must meet specified EBITDA and minimum-liquidity tests, including minimum liquidity of $50 million. Management expected compliance with reinstated covenants based on current forecasts; future compliance is a material risk.
- Debt includes $600 million of 7% senior unsecured notes due 2026 and $300 million of 12% second-lien notes due 2025. Up to half of the second-lien interest may be paid in kind at the company’s option. Share repurchases are prohibited during the covenant-suspension period, and acquisitions and other actions face tighter restrictions.
- On October 1, 2020, Cimpress acquired 99designs for a stated purchase price of $88.7 million, including deferred consideration. Preliminary purchase accounting includes $71.4 million of goodwill; final valuation remained subject to change. 99designs’ reported revenue and earnings contribution was not material in the period.
- Derivative mark-to-market effects and foreign-exchange movements may create earnings volatility. Tax positions are also uncertain: unrecognized tax benefits were $14.4 million, and final audit outcomes could materially affect results or cash flows.
- The company disclosed $226.3 million of unrecorded purchase commitments. A January 2021 Waltham lease modification was expected to reduce lease commitments by $47.5 million, excluding an $8.8 million termination-related payment. No material current legal proceedings were reported; management said risk factors had not materially changed from prior filings.
Important facts for investors to verify
- Whether revenue and margins recover as COVID-related restrictions and demand conditions change, especially in event-driven and small-business categories.
- Whether the company sustains cash generation and maintains access to its revolving facility while meeting the $50 million minimum-liquidity requirement and other amended covenant terms.
- Debt-service capacity given the debt balance, elevated interest expense and 12% second-lien notes, including any use of payment-in-kind interest.
- How disposable-mask inventory losses, foreign-exchange and derivative volatility, and government incentives affect future reported and adjusted results.
- Final purchase accounting and integration outcomes for 99designs, as well as the timing and amount of deferred acquisition payments.
- Resolution of tax audits and unrecognized tax benefits, and the actual savings and costs from the Waltham lease changes.