Cimpress N.V. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2015, the first quarter of fiscal 2016. Comparative period is the three months ended September 30, 2014. Amounts are in U.S. dollars; financial statement figures below are in millions unless noted.
Business context
Cimpress aggregates customized print and related product orders through Internet-based brands and automated manufacturing operations. Its reportable segments are Vistaprint, Upload and Print, and All Other. The company changed its segment structure in fiscal Q1 2016 and recast prior-period segment information.
Key financial results
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Revenue | $375.7 | $333.9 |
| Operating income | $12.1 | $16.9 |
| Net income attributable to Cimpress | $10.0 | $23.7 |
| Diluted earnings per share | $0.30 | $0.71 |
| Cash provided by operating activities | $25.7 | $52.6 |
| Cash and cash equivalents at period end | $93.8 | $60.9 |
- Revenue rose 13% as reported, 21% at constant currency, and 11% at constant currency excluding acquisitions.
- Operating margin fell to 3.2% from 5.1%; gross margin fell to 58.1% from 61.0%. Net income attributable to Cimpress was 2.7% of revenue versus 7.1%.
- Adjusted net operating profit after tax (NOPAT), a non-GAAP measure, declined to $16.4 million from $22.6 million.
- Other income was $9.2 million, mainly currency-related and derivative gains; interest expense rose to $8.1 million from $3.3 million. The effective tax rate was 29.8%, versus 8.7%.
- Investing cash outflow was $50.4 million, including $24.4 million of property and equipment purchases and $22.8 million for acquisitions. Financing cash inflow was $16.0 million; share repurchases used $127.8 million in cash.
Material changes and financial position
- Revenue growth included contributions from acquired businesses. Upload and Print revenue increased to $76.5 million from $38.7 million, including $33.7 million of revenue from recently acquired brands. Vistaprint revenue grew 2% reported and 8% at constant currency. All Other revenue declined 3% reported.
- Operating income declined despite higher revenue. Management cited acquired businesses’ lower gross-margin profile, investment in product selection and software, higher Vistaprint advertising, and investment in developing markets. Adjusted segment operating profit was $77.5 million versus $76.8 million, while corporate and global costs increased.
- At September 30, total debt was $655.3 million net of issuance costs and discounts; debt carrying value before those deductions was $663.9 million. Cash less gross debt was approximately $570.0 million net debt. Debt included $275 million of 7.0% unsecured notes due 2022 and $378.3 million under the secured credit facility.
- Current assets were $217.4 million and current liabilities $311.9 million. Management said available cash, operating cash flow, and committed financing were expected to cover liabilities and planned investments for the foreseeable future. Reported availability under the credit facility was $430.7 million; the company was in covenant compliance.
- Shareholders’ equity attributable to Cimpress fell to $109.7 million from $248.9 million at June 30, 2015, primarily reflecting treasury-share purchases and comprehensive losses. The quarter included purchases of 1,976,250 shares for $140.2 million inclusive of transaction costs; cash-flow presentation reports $127.8 million of share purchases.
Outlook, risks, and unusual items
- No specific numeric revenue or earnings guidance was provided. Management described planned fiscal 2016 capital allocation across internal projects, organic investment, share purchases, acquisitions, and debt reduction, with capital considered fungible among these uses.
- Management expects interest expense to rise relative to historical levels because of the unsecured notes, the Waltham lease, and increased capital leases. It also expects fiscal 2016 cash taxes to exceed income tax expense, partly due to tax benefits expected to be realized in future periods.
- The business is highly seasonal: the second fiscal quarter, which includes the holiday season, has historically generated a disproportionately large share of annual operating income. Management warned that weaker-than-expected seasonal demand or capacity and fulfillment disruptions could materially affect full-year results.
- A fire at the Venlo production facility resulted in $6.2 million of initial insurance proceeds and a $1.6 million net gain recognized in other income. The company reported $1.9 million of fire-related expense in excess of insurance recoveries in Vistaprint cost of revenue and expected to finalize the insurance settlement during fiscal 2016.
- Two businesses, Tradeprint and Litotipografia Alcione, were acquired for aggregate consideration of $25.4 million net of cash acquired. Their quarterly results were not material. The Waltham facility was completed and lease payments began in September; the arrangement was accounted for as a financing obligation, with related depreciation and interest expense commencing.
- Key exposures include foreign-exchange volatility, variable interest rates, acquisition integration and returns, competitive and customer-acquisition risks, operational interruptions, and tax uncertainty. The company disclosed a pending Massachusetts tax appeal, with a hearing scheduled to begin in December 2015; it believes its tax reserves are adequate but says resolution could materially affect results or cash flows.
Important facts for investors to verify
- Whether revenue growth, particularly in acquired Upload and Print businesses, translates into improved margins and returns on invested capital.
- How much of the decline in operating income and cash from operations reflects continuing investment, acquisition costs, working-capital movements, and nonrecurring items.
- Debt-service capacity and covenant headroom given approximately $663.9 million of debt before issuance-cost deductions, rising interest expense, and planned capital allocation.
- The final recovery under the Venlo fire insurance claim and the total financial effect of the disruption.
- Developments in the Massachusetts tax dispute and other uncertain tax positions, as well as the expected timing of cash tax payments.
- Execution of the seasonal second-quarter plan, including production capacity, fulfillment performance, and customer demand.