Cimpress plc — Form 10-Q Summary
Reporting period: Three months ended September 30, 2020, Cimpress’ first quarter of fiscal 2021. Unless stated otherwise, amounts are in U.S. dollars.
Business context and results
Cimpress operates a group of mass-customization businesses selling print, signage, photo merchandise, promotional products and related offerings. The quarter remained affected by COVID-19, although management said the revenue decline was less severe than in the fourth quarter of fiscal 2020.
- Revenue: $586.5 million, down 7% year over year; organic constant-currency revenue declined 10%.
- Profitability: Operating income was $36.0 million, compared with $25.4 million. Net loss attributable to Cimpress was $10.8 million, versus net income of $20.0 million; diluted loss per share was $0.41, versus earnings per share of $0.66.
- Margins: Cost of revenue was 51.0% of revenue versus 51.4%, leaving gross margin approximately 49.0% versus 48.6%. Operating margin was approximately 6.1% versus 4.0%.
- Cash flow: Operating cash flow was $105.7 million, up from $62.9 million. Adjusted free cash flow, a non-GAAP measure, was $82.5 million versus $36.2 million. Investing activities used $21.1 million and financing activities used $92.0 million.
- Adjusted EBITDA: $88.5 million, up from $79.5 million, according to the company’s non-GAAP reconciliation.
Material changes and segment performance
- Revenue fell across Vistaprint (4%), PrintBrothers (8%), The Print Group (8%) and National Pen (4%); All Other Businesses revenue rose 3% as reported. COVID-related demand weakness affected multiple segments.
- Vistaprint segment EBITDA increased 3% to $90.2 million, supported by lower and more efficient advertising spend. PrintBrothers and The Print Group EBITDA declined 10% and 11%, respectively. National Pen’s EBITDA loss widened to $10.7 million from $9.9 million. All Other Businesses EBITDA rose to $8.6 million from $1.7 million, reflecting BuildASign growth, lower early-stage investment losses and the prior divestiture of VIDA.
- Management attributed improved operating income to lower advertising and discretionary spending, prior-year restructuring and technology reorganization benefits, and variable-cost management. Face masks and other pandemic-related products represented 8% of quarterly revenue.
Debt, liquidity and capital
- At September 30, cash and cash equivalents were $40.2 million. Debt principal, before debt issuance costs and premiums or discounts, was $1.401 billion; reported debt net of those items was $1.354 billion. The company reported a shareholders’ deficit of $414.4 million.
- Debt included $600 million of 7% senior unsecured notes due 2026, $300 million of 12% second-lien notes due 2025, $489.8 million drawn under the senior secured credit facility and $11.0 million of other debt.
- Approximately $502.4 million was available to borrow under the senior secured facility, subject to covenants and restrictions. The facility’s prior financial maintenance covenants were suspended; during the suspension, the company must maintain at least $50 million of liquidity and meet specified EBITDA tests in June and September 2021. Share repurchases and certain acquisitions are restricted.
- Management stated that cash, operating cash flow, borrowing availability, the covenant amendment and the April 2020 capital raise should fund obligations, capital spending, debt service and working capital needs for at least the next 12 months.
Outlook, risks and unusual items
- No specific revenue, earnings or cash-flow guidance was provided. Management said pandemic duration and effects remain difficult to predict; business results may remain volatile as restrictions and customer demand change.
- COVID-19 risks include continued demand weakness, supply and operating disruption, and shipping capacity constraints and surcharges—particularly during the holiday season—which could increase costs, delay shipments, reduce sales or harm brands.
- Interest expense rose to $30.5 million from $15.1 million, mainly reflecting the additional 7% notes issued in February 2020 and the 12% second-lien notes issued in May. Other expense was $8.8 million, versus $15.7 million of other income, principally reflecting unfavorable derivative and currency movements. Management expects non-hedge-accounted derivative volatility to continue.
- The quarter included $6.8 million of income tax expense despite a pretax loss, including discrete tax effects; early adoption of an income-tax accounting standard increased tax expense by $2.5 million. The effective tax rate is also affected by nondeductible interest and losses in jurisdictions where tax benefits cannot be recognized.
- On October 1, 2020, after quarter-end, Cimpress acquired 99designs for $90 million, subject to post-closing adjustment. It paid $45 million at closing and expects to pay the remainder in February 2022, using its existing credit facility.
- The company reported no material current legal proceedings. It disclosed $193.7 million of unrecorded purchase commitments and $13.4 million of unrecognized tax benefits.
Important facts for investors to verify
- Whether revenue and demand recover, and whether pandemic-related products and BuildASign growth can offset weakness in core categories.
- Whether operating cash flow and adjusted free cash flow remain strong after working-capital movements, investment needs and debt service.
- Debt servicing capacity, borrowing availability, the $50 million minimum-liquidity requirement and compliance when suspended maintenance covenants return.
- Potential effects of 12% second-lien financing, currency and derivative volatility, and shipping capacity or cost pressures.
- The 99designs acquisition’s final purchase-price adjustment, funding impact and contribution to results.
- Potential resolution of tax uncertainties and the effect of discrete tax items on reported earnings.