Business context and reporting period
Cimpress N.V. filed this Form 10-K for the fiscal year ended June 30, 2016; it is not a standalone 2015 Q4 filing. The company aggregates online orders for customized print, signage, apparel and related products, fulfilling them through owned facilities and third-party providers across a portfolio of brands.
Management’s strategic priority is to build a mass-customization platform and ecosystem; its financial objective is to maximize intrinsic value per share. The platform remained under development, with significant activity expected to migrate to it by the end of fiscal 2017.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $1,788.0 million | $1,494.2 million |
| Operating income | $78.2 million | $96.3 million |
| Net income attributable to Cimpress | $54.3 million | $92.2 million |
| Diluted EPS | $1.64 | $2.73 |
| Cash from operating activities | $247.4 million | $242.0 million |
| Capital expenditures | $80.4 million | $75.8 million |
Revenue grew 20% as reported, 24% at constant currency, and 11% at constant currency excluding acquisitions. Operating margin declined to 4.4% from 6.4%; net income attributable margin declined to 3.0% from 6.2%. Adjusted NOPAT, a company-defined non-GAAP measure, increased to $139.8 million from $125.1 million.
At June 30, 2016, cash and cash equivalents were $77.4 million, marketable securities were $7.9 million, and total debt was $685.9 million, including $275.0 million of 7% senior notes due 2022. The company had $427.5 million available under its secured credit facility after specified limitations and was in compliance with debt covenants. Working capital was negative $135.1 million. Management said available cash, operating cash flow and committed financing should cover liabilities and planned investments for the foreseeable future.
Material changes versus the prior comparable period
- Revenue increased by $293.8 million, primarily reflecting acquisitions, including WIRmachenDRUCK, and growth in Vistaprint and acquired Upload and Print businesses.
- Operating income fell by $18.1 million. The principal unusual charges were a $30.8 million goodwill impairment related to Exagroup and $11.0 million of costs for abandoned production equipment.
- Cost of revenue rose to 43.3% of revenue from 38.1%, partly because Upload and Print businesses have higher cost of revenue and grew rapidly. Technology and development declined to 12.4% of revenue from 13.0%, and marketing and selling declined to 30.1% from 32.8%.
- Net interest expense increased to $38.2 million from $16.7 million, primarily due to the senior notes, the Waltham lease arrangement and other financing obligations.
- Cash from operations increased modestly, while investing outflows included $164.4 million for acquisitions and $80.4 million for property, plant and equipment. The company spent $153.5 million repurchasing shares.
- Vistaprint revenue rose 6% as reported and 10% at constant currency. Upload and Print revenue rose 120% as reported, including acquisition effects, and 27% at constant currency excluding acquisitions. All Other revenue declined 6% as reported and grew 2% at constant currency.
Outlook, management commentary, risks and unusual items
- No specific numerical revenue or earnings guidance is provided. Management described planned fiscal 2017 investment in the platform, product expansion, capacity, advertising, new markets, acquisitions, share repurchases and debt reduction.
- Management attributed Vistaprint growth mainly to repeat bookings and improving new-customer bookings, while noting weaker performance in some European markets and continued customer-value proposition changes. It reported improved customer retention and Net Promoter Score.
- Exagroup’s outlook weakened amid increased competition and lower expected long-term margins, prompting the goodwill impairment. A 1% change in the discount rate used in its impairment analysis would change estimated fair value by approximately $7.0 million.
- The business is highly seasonal: the second fiscal quarter generated 86% of FY2016 operating income, compared with 62% in FY2015; the company said the FY2016 increase reflects the third-quarter impairment.
- Key risks include execution and returns from the mass-customization platform, acquisitions and integration, intense competition and pricing pressure, foreign-exchange and interest-rate exposure, cybersecurity and operational interruptions, and significant debt and restrictive covenants. Management also cited uncertainty following the UK Brexit vote, given the UK’s importance and cross-border supply flows.
- Currency hedging that does not qualify for hedge accounting can cause GAAP earnings volatility. A hypothetical 100-basis-point rate increase was estimated to add $3.1 million to interest expense over the next 12 months.
- The company recorded a $3.7 million income-tax benefit related to adoption of new share-based compensation accounting rules; reported FY2016 diluted EPS is not fully comparable with prior periods because the rule also changed diluted-share calculations.
- The auditor expressed an unqualified opinion on the financial statements and internal control over financial reporting. Newly acquired businesses were excluded from the auditor’s internal-control assessment.
Important facts for investors to verify
- Whether the platform reaches meaningful scale on schedule and produces the expected cost, service and growth benefits.
- Whether organic growth—particularly Vistaprint and acquired Upload and Print brands—can offset currency effects and acquisition-driven comparisons.
- Whether margins and operating income recover after the Exagroup impairment, equipment abandonment costs and mix shift toward higher-cost businesses.
- Debt, negative working capital, covenant headroom and cash needs alongside planned acquisitions, investment and share repurchases.
- Potential future earn-out and compensation expense, including approximately $7.0 million expected in FY2017’s first quarter following the WIRmachenDRUCK arrangement amendment.
- Exposure to seasonality, European competition, Brexit-related trade or currency changes, tax audits and unrecognized tax benefits.