Cimpress(CMPR) - 2020 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Financial Statements Unaudited Q2 FY2020 financial statements show increased net income from a tax benefit, asset growth from lease accounting, and a shareholder deficit from share repurchases Consolidated Balance Sheets Balance sheets show increased assets from lease accounting, higher liabilities from debt and leases, and a shift to shareholder deficit due to share repurchases Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2019 | June 30, 2019 | | :--- | :--- | :--- | | Total Assets | $2,023,334 | $1,868,376 | | Operating lease assets, net | $173,156 | $— | | Goodwill | $721,057 | $718,880 | | Total Liabilities | $2,135,657 | $1,673,382 | | Long-term debt | $1,296,535 | $942,290 | | Operating lease liabilities | $180,974 | $— | | Total Shareholders' (Deficit) Equity | ($180,524) | $131,812 | Consolidated Statements of Operations Q2 FY2020 revenue slightly decreased, but net income surged to $190.6 million due to a significant income tax benefit, with similar trends for the six-month period Key Operating Results (in thousands, except per share data) | Metric | Three Months Ended Dec 31, 2019 | Three Months Ended Dec 31, 2018 | Six Months Ended Dec 31, 2019 | Six Months Ended Dec 31, 2018 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $820,333 | $825,567 | $1,454,292 | $1,414,548 | | Income from operations | $121,595 | $90,615 | $146,974 | $84,627 | | Income tax (benefit) expense | ($93,795) | $14,399 | ($87,680) | $19,880 | | Net income | $190,649 | $69,037 | $210,500 | $54,043 | | Diluted EPS | $6.81 | $2.17 | $7.19 | $1.70 | Consolidated Statements of Cash Flows Cash from operations increased, investing cash outflow decreased significantly due to no major acquisitions, and financing activities shifted to a net outflow from substantial share repurchases Cash Flow Summary (in thousands) | Cash Flow Activity | Six Months Ended Dec 31, 2019 | Six Months Ended Dec 31, 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $265,097 | $205,490 | | Net cash used in investing activities | ($53,816) | ($349,508) | | Net cash (used in) provided by financing activities | ($207,390) | $149,861 | - The company used $537.6 million for the purchase of ordinary shares in the first six months of fiscal 2020, compared to only $14.0 million in the same period of fiscal 2019[31] Notes to Consolidated Financial Statements Notes detail the company's reincorporation to Ireland, adoption of ASC 842, a significant tax benefit from Swiss Tax Reform, and changes in segment reporting - On December 3, 2019, Cimpress completed a cross-border merger, moving its incorporation from the Netherlands to Ireland. This was accounted for as a merger between entities under common control and did not have a material impact on operations or financial position[39][41] - The company adopted the new lease accounting standard ASC 842 on July 1, 2019, resulting in the recognition of $169.7 million in operating lease assets and $176.4 million in operating lease liabilities on the adoption date[53][56] - A discrete deferred tax benefit of $114.1 million was recognized in Q2 2020 due to Swiss Tax Reform, which provides transitional relief measures. The majority of this benefit is not expected to be realized until fiscal 2025 through 2030[119][120] - In Q1 2020, the company revised its segment reporting structure, moving Vistaprint Corporate Solutions, India, and Japan into the Vistaprint segment. It also changed its segment profitability measure from adjusted net operating profit to adjusted EBITDA[132][137] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 revenue decrease offset by increased operating income from reduced marketing spend and efficiencies, revised segment reporting, and strong liquidity despite share repurchases Financial Summary Q2 & YTD FY2020 | Metric | Q2 FY2020 | YTD FY2020 | | :--- | :--- | :--- | | Revenue | $820.3M (-1% YoY) | $1,454.3M (+3% YoY) | | Constant-Currency Revenue Growth | +1% | +5% | | Operating Income | $121.6M (+$31.0M YoY) | $147.0M (+$62.3M YoY) | | Adjusted EBITDA | $185.5M (+$47.4M YoY) | $265.0M (+$84.5M YoY) | | Cash from Operations (YTD) | N/A | $265.1M (+$59.6M YoY) | - The decrease in reported revenue for Q2 was primarily due to planned reductions in advertising spend in the Vistaprint and National Pen segments, offset by growth in other segments[179] - Operating income and Adjusted EBITDA increased due to profitability improvements across all segments, driven by reduced advertising spend and operational efficiencies, particularly in the Vistaprint and National Pen businesses[180][181] Consolidated Results of Operations Q2 FY2020 saw a slight revenue decrease but improved profitability due to reduced marketing expenses and a significant income tax benefit from Swiss Tax Reform - Marketing and selling expenses decreased by $37.3 million (18%) in Q2 and $58.1 million (15%) in the six-month period, primarily due to a reduction of advertising spend in the Vistaprint and National Pen businesses[189][194] - Technology and development expenses increased by 14% in Q2, partly due to ongoing investment in Vistaprint's technology infrastructure and increased costs in central technology teams[189][192] - The company recognized a discrete deferred tax benefit of $114.1 million related to Swiss Tax Reform, which was the primary driver for the overall income tax benefit of $93.8 million in Q2[207][208] Reportable Segment Results Q2 FY2020 segment results show varied revenue performance but overall EBITDA growth across all segments, driven by cost efficiencies and reduced advertising spend Segment Revenue & EBITDA (Q2 FY2020 vs Q2 FY2019, in thousands) | Segment | Q2 2020 Revenue | YoY Change | Q2 2020 Segment EBITDA | YoY Change | | :--- | :--- | :--- | :--- | :--- | | Vistaprint | $433,305 | -2% | $132,160 | +36% | | PrintBrothers | $126,617 | +9% | $16,459 | +41% | | The Print Group | $87,699 | 0% | $18,105 | +11% | | National Pen | $127,985 | -4% | $28,099 | +6% | | All Other Businesses | $49,774 | +3% | $3,668 | +260% | - Vistaprint's significant EBITDA improvement was driven by a $30.8 million reduction in advertising spend and gross margin improvements from reduced discounting and better shipping/plant efficiencies[213] - PrintBrothers and The Print Group segments faced aggressive price competition in Europe but grew EBITDA through cost reductions, operating efficiencies, and leveraging shared capabilities[216][222] Liquidity and Capital Resources The company maintains strong liquidity with increased cash from operations and available credit, despite significant cash outflows for share repurchases and capital expenditures - As of December 31, 2019, the company had $36.9 million in cash and cash equivalents and $531.1 million available for borrowing under its senior secured credit facility[233][238] - Key cash outflows for the six months ended Dec 31, 2019, included $537.6 million for share repurchases, $28.1 million for capital expenditures, and $23.4 million for capitalized software development[236] Contractual Obligations (in thousands) | Obligation Type | Total | Less than 1 year | | :--- | :--- | :--- | | Operating leases | $181,340 | $17,743 | | Purchase commitments | $119,028 | $64,473 | | Senior unsecured notes and interest | $582,000 | $28,000 | | Other debt and interest | $1,085,401 | $109,486 | | Total | $1,995,941 | $230,482 | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rates on variable-rate debt, partially hedged by swaps, and foreign currency fluctuations, primarily in Euro and British Pound - The company has $965.7 million of variable-rate debt. A hypothetical 100 basis point increase in interest rates would increase interest expense by about $4.5 million over the next 12 months, inclusive of existing interest rate swaps[260] - The most significant foreign currency exposures are in the Euro and British Pound. The company's hedging objectives are targeted at reducing volatility in forecasted U.S. dollar-equivalent adjusted EBITDA[262] - A hypothetical 10% adverse change in currency exchange rates against the functional currencies would have resulted in a $14.2 million increase to pre-tax income for the three months ended December 31, 2019, based on net monetary assets[268] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of December 31, 2019, with no significant changes to internal control over financial reporting - As of December 31, 2019, the CEO and CFO concluded that the company's disclosure controls and procedures were effective at the reasonable assurance level[269] - No significant changes to internal control over financial reporting occurred during the three months ended December 31, 2019[270] PART II OTHER INFORMATION Item 1A. Risk Factors No material changes to risk factors were reported since the last annual report on Form 10-K - No material changes to risk factors were reported since the last annual report on Form 10-K[272] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company actively repurchased shares during the quarter, terminating a previous program and initiating a new 5.5 million share repurchase program in November 2019 - On November 25, 2019, the Board approved a new share repurchase program authorizing the repurchase of up to 5.5 million ordinary shares, replacing a previous program from February 2019[274] Share Repurchases (Q2 FY2020) | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | October 2019 | 672,611 | $129.12 | | November 2019 | 1,607,125 | $135.92 | | December 2019 | — | — | | Total | 2,279,736 | $133.91 | Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including supplemental indentures, equity plan documents, and Sarbanes-Oxley certifications - Exhibits filed include supplemental indentures, equity plan documents, and Sarbanes-Oxley certifications from the CEO and CFO[277] Signatures The report was duly authorized and signed on January 30, 2020, by Sean E. Quinn, Chief Financial Officer of Cimpress plc - The Form 10-Q was signed on January 30, 2020, by Sean E. Quinn, Chief Financial Officer[281]