Cimpress N.V. — Form 10-Q summary
Business context and period. Cimpress sells customized print, signage, apparel and related products through online brands, owned manufacturing facilities and third-party fulfillers. This report covers the three and six months ended December 31, 2016 (fiscal 2017 second quarter and first half); comparisons are with the corresponding 2015 periods. Amounts below are in U.S. dollars.
Financial performance
| Metric | Three months ended Dec. 31 | Six months ended Dec. 31 |
|---|---|---|
| Revenue | $576.9 million, up 16% | $1,020.6 million, up 17% |
| Operating income | $33.7 million, down from $67.6 million | $5.9 million, down from $79.7 million |
| Net income attributable to Cimpress | $35.0 million, versus $59.3 million | $5.9 million, versus $70.1 million |
| Diluted EPS | $1.07, versus $1.81 | $0.18, versus $2.11 |
| Operating cash flow | Not separately presented for the quarter | $114.7 million, versus $162.3 million |
Quarterly operating margin fell to 5.8% from 13.6%; first-half margin was 0.6% versus 9.1%. Cost of revenue rose to 48.0% of revenue for the quarter from 39.8%, and to 48.1% for the first half from 40.7%. Other income, net was $30.5 million for the quarter and $28.4 million for the first half, substantially higher than comparable periods, reflecting currency-related and derivative gains. The quarter’s net income therefore includes significant non-operating gains.
Balance sheet, cash flow and capital
- At December 31, cash and cash equivalents were $49.6 million, down from $77.4 million at June 30. Current assets were $242.0 million against current liabilities of $436.0 million; management says liquidity is expected to be supported by operating cash flow and committed debt capacity.
- Debt, excluding debt issuance costs and discounts, was $882.7 million, up from $685.9 million at June 30. This included $599.7 million under the secured credit facility and $275.0 million of 7.0% notes due 2022. The company reported $220.7 million available under its facility and compliance with debt covenants.
- First-half investing cash outflow was $254.7 million, including $206.8 million for acquisitions; financing cash inflow was $116.3 million. The company also spent $50.0 million repurchasing shares and $20.2 million purchasing noncontrolling interests.
- Cash from operations declined by $47.7 million year over year. The filing attributes working-capital inflows partly to increased seasonal volume and accrued costs not yet paid.
Material changes and management commentary
- Revenue growth was driven in part by WIRmachenDRUCK and prior acquisitions, as well as organic growth. Constant-currency revenue growth was 18% in both the quarter and first half; excluding acquisitions made in the preceding four quarters, growth was 8% and 7%, respectively.
- Vistaprint revenue grew 7% reported and 9% constant currency in both periods. Upload and Print reported strong acquisition-supported growth; constant-currency growth excluding recent acquisitions was 11% for the quarter and 12% for the first half. All Other revenue declined 7% and 11% reported, respectively, with partner-contract terminations a principal factor.
- Management cited shipping-price reductions, design and product investments, higher seasonal labor and fulfillment costs, production inefficiencies, increased platform and technology investment, higher share-based compensation, and WIRmachenDRUCK earn-out charges as pressures on operating results. Holiday-period production inefficiencies at the Canadian facility and higher third-party fulfillment and expedited shipping costs reduced gross margin by about 200 basis points in aggregate.
- National Pen was acquired on December 30, 2016, for a purchase price of $212.2 million, funded with credit-facility borrowings. Its balance sheet and cash-flow effects are included, but it did not materially affect reported-period revenue or operating results due to the acquisition date. Purchase accounting remained preliminary.
- After quarter-end, Cimpress announced organizational changes intended to decentralize operations. It expects approximately $28–31 million of pretax restructuring charges, including $22–25 million of severance, and expects net operating expense savings beginning in fiscal 2018. Most actions were expected in the third quarter of fiscal 2017; timing and costs may differ.
Outlook, risks and contingencies
The filing gives no specific revenue or earnings guidance. Management expects cash, operating cash generation and available committed borrowing to fund liabilities and planned investments for the foreseeable future. It expects interest expense to rise relative to historical levels with higher borrowings, lease obligations or interest rates. A hypothetical 100-basis-point rate increase was estimated to add about $5.5 million to interest expense over the next 12 months, after swaps.
Key risks include high leverage and variable-rate exposure; currency volatility and gains or losses from derivatives that generally do not receive hedge accounting; seasonal demand and production capacity; execution and integration of acquisitions; competition and pricing pressure; and operational, cyber, tax and cross-border risks. The company disclosed $74.4 million of unrecorded purchase commitments and a $24.7 million WIRmachenDRUCK contingent earn-out liability, payable at its option in cash or shares subject to performance targets. It reported no material legal proceedings and said it was in compliance with debt covenants.
Important facts for investors to verify
- Whether operating performance improves after the sharp first-half decline, and how much reported earnings depend on currency and derivative gains.
- Whether seasonal production inefficiencies and elevated cost of revenue persist or reverse.
- National Pen’s finalized purchase accounting, integration progress and contribution to future results.
- The actual restructuring charges, implementation timing and realization of expected fiscal 2018 savings.
- Debt levels, covenant headroom, interest-rate sensitivity and the company’s ability to meet obligations while funding investment and shareholder repurchases.
- The drivers of the higher forecast fiscal 2017 effective tax rate and any resolution of open tax matters.