10-Q 1 cmpr1231201610-q.htm 10-Q Document








 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________
Form 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended December 31, 2016
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from               to               
Commission file number 000-51539
_________________________________
Cimpress N.V.
(Exact Name of Registrant as Specified in Its Charter)
_________________________________
The Netherlands
 
98-0417483
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.) 
Hudsonweg 8
5928 LW Venlo
The Netherlands
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code: 31-77-850-7700
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Exchange on Which Registered
Ordinary Shares, €0.01 par value
 
NASDAQ Global Select Market
_________________________________
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ     No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Exchange Act Rule 12b-2).
Large accelerated filer  þ
 
Accelerated filer  o
 
Non-accelerated filer  o
 
 
Smaller reporting company  o
 
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).  Yes o     No þ
As of January 27, 2017, there were 31,098,453 of Cimpress N.V. ordinary shares, par value 0.01 per share, outstanding.
 




CIMPRESS N.V.
QUARTERLY REPORT ON FORM 10-Q
For the Three and Six Months Ended December 31, 2016

TABLE OF CONTENTS
 
 
Page
PART I FINANCIAL INFORMATION
 
Item 1. Financial Statements (unaudited)
     Consolidated Balance Sheets as of December 31, 2016 and June 30, 2016
     Consolidated Statements of Operations for the three and six months ended December 31, 2016 and
     2015
     Consolidated Statements of Comprehensive Income for the three and six months ended December 31,
     2016 and 2015
     Consolidated Statements of Cash Flows for the six months ended December 31, 2016 and 2015
     Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II OTHER INFORMATION
 
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
Signatures





PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CIMPRESS N.V.
CONSOLIDATED BALANCE SHEETS
(unaudited in thousands, except share and per share data)

December 31,
2016

June 30,
2016
Assets
 


 

Current assets:
 


 

Cash and cash equivalents
$
49,588


$
77,426

Marketable securities

 
7,893

Accounts receivable, net of allowances of $508 and $490, respectively
52,179


32,327

Inventory
41,422


18,125

Prepaid expenses and other current assets
98,786


64,997

Total current assets
241,975


200,768

Property, plant and equipment, net
505,278


493,163

Software and web site development costs, net
42,856


35,212

Deferred tax assets
18,344


26,093

Goodwill
528,895


466,005

Intangible assets, net
292,591


216,970

Other assets
34,007


25,658

Total assets
$
1,663,946


$
1,463,869

Liabilities, noncontrolling interests and shareholders’ equity
 


 

Current liabilities:
 


 

Accounts payable
$
116,251


$
86,682

Accrued expenses
223,932


178,987

Deferred revenue
25,503


25,842

Short-term debt
46,115


21,717

Other current liabilities
24,234


22,635

Total current liabilities
436,035


335,863

Deferred tax liabilities
69,676


69,430

Lease financing obligation
108,481

 
110,232

Long-term debt
829,998


656,794

Other liabilities
78,113


60,173

Total liabilities
1,522,303


1,232,492

Commitments and contingencies (Note 15)
 
 
 
Redeemable noncontrolling interests
41,824


65,301

Shareholders’ equity:
 


 

Preferred shares, par value €0.01 per share, 100,000,000 shares authorized; none issued and outstanding



Ordinary shares, par value €0.01 per share, 100,000,000 shares authorized; 44,080,627 shares issued; and 31,094,307 and 31,536,732 shares outstanding, respectively
615


615

Treasury shares, at cost, 12,986,320 and 12,543,895 shares, respectively
(598,343
)

(548,549
)
Additional paid-in capital
348,732


335,192

Retained earnings
492,407


486,482

Accumulated other comprehensive loss
(143,915
)

(108,015
)
Total shareholders’ equity attributable to Cimpress N.V.
99,496


165,725

Noncontrolling interest
323

 
351

Total shareholders' equity
99,819

 
166,076

Total liabilities, noncontrolling interests and shareholders’ equity
$
1,663,946


$
1,463,869

See accompanying notes.

1




CIMPRESS N.V.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited in thousands, except share and per share data)
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2016
 
2015
 
2016
 
2015
Revenue
$
576,851

 
$
496,274

 
$
1,020,564

 
$
872,022

Cost of revenue (1)
277,027

 
197,571

 
490,758

 
354,855

Technology and development expense (1)
59,252

 
51,880

 
121,330

 
102,966

Marketing and selling expense (1)
157,825

 
142,671

 
297,176

 
264,806

General and administrative expense (1)
49,042

 
36,543

 
105,403

 
69,701

Income from operations
33,705

 
67,609

 
5,897

 
79,694

Other income, net
30,549

 
7,690

 
28,417

 
16,932

Interest expense, net
(9,631
)
 
(10,160
)
 
(19,535
)
 
(18,286
)
Income before income taxes
54,623

 
65,139

 
14,779

 
78,340

Income tax provision
19,601

 
6,148

 
9,787

 
9,327

Net income
35,022

 
58,991

 
4,992

 
69,013

Add: Net loss attributable to noncontrolling interest
6

 
328

 
933

 
1,077

Net income attributable to Cimpress N.V.
$
35,028

 
$
59,319

 
$
5,925

 
$
70,090

Basic net income per share attributable to Cimpress N.V.
$
1.12

 
$
1.89

 
$
0.19

 
$
2.20

Diluted net income per share attributable to Cimpress N.V.
$
1.07

 
$
1.81

 
$
0.18

 
$
2.11

Weighted average shares outstanding — basic
31,291,356

 
31,326,141

 
31,431,090

 
31,927,362

Weighted average shares outstanding — diluted
32,614,013

 
32,735,447

 
32,846,275

 
33,246,412

____________________________________________
(1) Share-based compensation is allocated as follows:
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2016
 
2015
 
2016
 
2015
Cost of revenue
$
75

 
$
28

 
$
118

 
$
54

Technology and development expense
3,118

 
1,422

 
5,443

 
2,752

Marketing and selling expense
1,480

 
425

 
2,300

 
836

General and administrative expense
6,604

 
4,191

 
14,987

 
8,614


See accompanying notes.



2




CIMPRESS N.V.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited in thousands)

 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2016
 
2015
 
2016
 
2015
Net income
$
35,022

 
$
58,991

 
$
4,992

 
$
69,013

Other comprehensive income, net of tax:

 

 

 

Foreign currency translation loss, net of hedges
(47,148
)
 
(14,934
)
 
(37,970
)
 
(24,137
)
Net unrealized gain (loss) on derivative instruments designated and qualifying as cash flow hedges
9,244

 
464

 
7,475

 
(462
)
Amounts reclassified from accumulated other comprehensive loss to net income on derivative instruments
(6,426
)
 
214


(5,594
)
 
440

Unrealized (loss) gain on available-for-sale-securities
(4,832
)
 
171

 
(5,756
)
 
(1,090
)
Amounts reclassified from accumulated other comprehensive loss to net income for realized gains on available-for-sale securities
2,268




2,268



Gain on pension benefit obligation, net

 
44


36

 
89

Comprehensive (loss) income
(11,872
)
 
44,950

 
(34,549
)
 
43,853

Add: Comprehensive loss attributable to noncontrolling interests
4,235

 
1,864

 
4,625

 
1,988

Total comprehensive (loss) income attributable to Cimpress N.V.
$
(7,637
)
 
$
46,814

 
$
(29,924
)
 
$
45,841

See accompanying notes.


3




CIMPRESS N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited in thousands)


Six Months Ended December 31,
 
2016

2015
Operating activities
 


 

Net income
$
4,992


$
69,013

Adjustments to reconcile net income to net cash provided by operating activities:
 


 

Depreciation and amortization
72,382


62,063

Share-based compensation expense
22,848


12,256

Deferred taxes
(17,508
)

(8,339
)
Abandonment of long-lived assets

 
3,022

Change in contingent earn-out liability
22,766

 

Gain on sale of available-for-sale securities
(2,268
)


Unrealized gain on derivatives not designated as hedging instruments included in net income
(4,573
)

(1,918
)
Effect of exchange rate changes on monetary assets and liabilities denominated in non-functional currency
(13,246
)

(10,829
)
Other non-cash items
1,719


1,530

Gain on proceeds from insurance

 
(3,136
)
Changes in operating assets and liabilities:
 


 

Accounts receivable
822


(1,629
)
Inventory
(4,187
)

(3,087
)
Prepaid expenses and other assets
(14,290
)

(2,394
)
Accounts payable
21,808


20,779

Accrued expenses and other liabilities
23,394


24,984

Net cash provided by operating activities
114,659


162,315

Investing activities
 


 

Purchases of property, plant and equipment
(36,260
)
 
(43,549
)
Business acquisitions, net of cash acquired
(206,816
)
 
(27,532
)
Purchases of intangible assets
(88
)
 
(402
)
Capitalization of software and website development costs
(19,110
)
 
(12,127
)
Proceeds from sale of available-for-sale securities
6,346

 

Proceeds from insurance related to investing activities


3,624

Other investing activities
1,227

 
775

Net cash used in investing activities
(254,701
)

(79,211
)
Financing activities
 
 
 
Proceeds from borrowings of debt
447,000

 
269,999

Payments of debt and debt issuance costs
(247,771
)
 
(235,332
)
Payments of withholding taxes in connection with equity awards
(8,864
)
 
(4,246
)
Payments of capital lease obligations
(6,814
)
 
(6,377
)
Purchase of ordinary shares
(50,008
)
 
(142,204
)
Purchase of noncontrolling interests
(20,230
)


Proceeds from issuance of ordinary shares
257

 
2,052

Capital contribution from noncontrolling interest
1,404

 
5,141

Other financing activities
1,281


(303
)
Net cash provided by (used in) financing activities
116,255

 
(111,270
)
Effect of exchange rate changes on cash
(4,051
)

(2,217
)
Net decrease in cash and cash equivalents
(27,838
)

(30,383
)
Cash and cash equivalents at beginning of period
77,426


103,584

Cash and cash equivalents at end of period
$
49,588


$
73,201

See accompanying notes.

4




CIMPRESS N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(unaudited in thousands)


 
Six Months Ended December 31,
 
2016
 
2015
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
20,155


$
17,998

Income taxes
20,309


10,745

Non-cash investing and financing activities:
 
 
 
Capitalization of construction costs related to financing lease obligation
$

 
$
13,688

Property and equipment acquired under capital leases
4,912

 
3,017

Amounts due for acquisitions of businesses
27,155

 
18,035

See accompanying notes.


5




CIMPRESS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited in thousands, except share and per share data)

1. Description of the Business
We are a technology driven company that aggregates, largely via the Internet, large volumes of small, individually customized orders for a broad spectrum of print, signage, apparel and similar products. We fulfill those orders with manufacturing capabilities that include Cimpress owned and operated manufacturing facilities and a network of third-party fulfillers to create customized products for customers on-demand. We bring our products to market through a portfolio of focused brands serving the needs of micro, small- and medium-sized businesses, resellers and consumers. These brands include Vistaprint, our global brand for micro business marketing products and services, as well as brands that we have acquired that serve the needs of various market segments, including resellers, small- and medium-sized businesses with differentiated service needs, and consumers purchasing products for themselves and their families.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and, accordingly, do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting primarily of normal recurring accruals, considered necessary for fair statement of the results of operations for the interim periods reported and of our financial condition as of the date of the interim balance sheet have been included.
The consolidated financial statements include the accounts of Cimpress N.V., its wholly owned subsidiaries, entities in which we maintain a controlling financial interest, and those entities in which we have a variable interest and are the primary beneficiary. Intercompany balances and transactions have been eliminated.
Operating results for the three and six months ended December 31, 2016 are not necessarily indicative of the results that may be expected for the year ending June 30, 2017 or for any other period. The consolidated balance sheet at June 30, 2016 has been derived from our audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended June 30, 2016 included in our Annual Report on Form 10-K filed with the United States Securities and Exchange Commission (the “SEC”).
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We believe our most significant estimates are associated with the ongoing evaluation of the recoverability of our long-lived assets and goodwill, estimated useful lives of assets, share-based compensation, accounting for business combinations, and income taxes and related valuation allowances, among others. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results could differ from those estimates.
Share-Based Compensation
During the three and six months ended December 31, 2016, we recorded share-based compensation expense of $11,277 and $22,848, respectively, and $6,066 and $12,256 during the three and six months ended December 31, 2015, respectively. As of December 31, 2016, there was $135,547 of total unrecognized compensation cost related to non-vested share-based compensation arrangements. This cost is expected to be recognized over a weighted average period of 2.0 years.
On August 15, 2016, we granted performance share units, or PSUs, associated with our new long-term incentive program. Compensation expense for our PSUs is estimated at fair value on the date of grant, which is fixed throughout the vesting period. The fair value is determined using a Monte Carlo simulation valuation model. As

6




the PSUs include both a service and market condition the related expense is recognized using the accelerated expense attribution method over the requisite service period for each separately vesting portion of the award. For PSUs that meet the service vesting condition, the expense recognized over the requisite service period will not be reversed if the market condition is not achieved.
Foreign Currency Translation
Our non-U.S. dollar functional currency subsidiaries translate their assets and liabilities denominated in their functional currency to U.S. dollars at current rates of exchange in effect at the balance sheet date, and revenues and expenses are translated at average rates prevailing throughout the period. The resulting gains and losses from translation are included as a component of accumulated other comprehensive loss. Transaction gains and losses and remeasurement of assets and liabilities denominated in currencies other than an entity’s functional currency are included in other income, net in our consolidated statements of operations.
Other income, net
The following table summarizes the components of other income, net:
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2016
 
2015
 
2016
 
2015
Gains on derivatives not designated as hedging instruments (1)
$
13,477


$
3,186


$
13,554


$
5,553

Currency-related gains, net (2)
14,988


2,473


12,022


7,507

Other gains (3)
2,084


2,031


2,841


3,872

Total other income, net
$
30,549

 
$
7,690

 
$
28,417

 
$
16,932

_____________________
(1) Primarily relates to both realized and unrealized gains on derivative forward currency contracts not designated as hedging instruments.
(2) We have significant non-functional currency intercompany financing relationships subject to currency exchange rate volatility and the net currency related gains for the three and six months ended December 31, 2016 and 2015 are primarily driven by this intercompany activity. Also, unrealized gains of $7,827 and $6,393 are included for the three and six months ended December 31, 2016, respectively. These are related to certain cross-currency swaps designated as cash flow hedges, which offset unrealized losses on the remeasurement of certain intercompany loans, also recorded in this category in the table above. The cross-currency swap contracts designated as cash flow hedges did not have an impact during the prior comparative periods.
(3) The gain recognized during the three months ended December 31, 2016, primarily relates to the gain on the sale of Plaza Create Co. Ltd. available-for-sale securities of $2,268. During the prior comparable periods, we recognized gains related to insurance recoveries of $1,549 and $3,136, respectively.
Net Income Per Share Attributable to Cimpress N.V.
Basic net income per share attributable to Cimpress N.V. is computed by dividing net income attributable to Cimpress N.V. by the weighted-average number of ordinary shares outstanding for the respective period. Diluted net income per share attributable to Cimpress N.V. gives effect to all potentially dilutive securities, including share options, restricted share units (“RSUs”), restricted share awards ("RSAs") and PSUs, if the effect of the securities is dilutive using the treasury stock method. Awards with performance or market conditions are included using the treasury stock method only if the conditions would have been met as of the end of the reporting period and their effect is dilutive.

The following table sets forth the reconciliation of the weighted-average number of ordinary shares:
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2016
 
2015
 
2016
 
2015
Weighted average shares outstanding, basic
31,291,356

 
31,326,141

 
31,431,090

 
31,927,362

Weighted average shares issuable upon exercise/vesting of outstanding share options/RSUs/RSAs
1,322,657

 
1,409,306

 
1,415,185

 
1,319,051

Shares used in computing diluted net income per share attributable to Cimpress N.V.
32,614,013

 
32,735,447

 
32,846,275

 
33,246,412

Weighted average anti-dilutive shares excluded from diluted net income per share attributable to Cimpress N.V.
28,031

 
20,703

 
22,586

 
50,438



7




Treasury Shares

Treasury shares are accounted for using the cost method and are included as a component of shareholders' equity. During the six months ended December 31, 2016 and 2015, we repurchased 593,763 and 2,002,835 of our ordinary shares, respectively, for a total cost of $50,008 and $142,204, respectively, inclusive of transactions costs, in connection with our publicly announced share repurchase programs.
Recently Issued or Adopted Accounting Pronouncements
Issued Accounting Standards to be Adopted
In November 2016, the FASB issued Accounting Standards Update No. 2016-18, "Statement of Cash Flows (Topic 230) Restricted Cash," (ASU 2016-18), which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendment is effective for us on July 1, 2018 and permits early adoption. This amendment will affect the presentation of our statement of cash flows once adopted.
In October 2016, the FASB issued Accounting Standards Update No. 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory," (ASU 2016-16), which requires the recognition for income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The new standard is effective for us on July 1, 2018 and permits early adoption. We are currently evaluating our adoption timing and the effect that ASU 2016-16 will have on our consolidated financial statements.
In March 2016, the FASB issued Accounting Standards Update No. 2016-04,"Liabilities - Extinguishment of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products," (ASU 2016-04), which requires an entity to recognize breakage for a liability resulting from the sale of a prepaid stored-value product in proportion to the pattern of rights expected to be exercised by the product holder only to the extent that it is probable that a significant reversal of the recognized breakage amount will not subsequently occur. The new standard is effective for us on July 1, 2018. The standard permits early adoption and should be applied either retrospectively to each period presented or by means of a cumulative adjustment to retained earnings as of the beginning of the fiscal year adopted. We do not expect the effect of ASU 2016-04 to have a material impact on our consolidated financial statements.
In March 2016, the FASB issued Accounting Standards Update No. 2016-02,"Leases (Topic 842)," (ASU 2016-02), which requires the recognition of lease assets and lease liabilities by lessees for those leases currently classified as operating lease. The standard also retains a distinction between finance leases and operating leases. The new standard is effective for us on July 1, 2019. The standard permits early adoption. We are currently evaluating our adoption timing and the effect that ASU 2016-02 will have on our consolidated financial statements.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01,"Financial Instruments- Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," (ASU 2016-01) which requires an entity to recognize the fair value change of equity securities with readily determinable fair values in net income which was previously recognized within other comprehensive income. The new standard is effective for us on July 1, 2018. The standard does not permit early adoption and should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The impact of ASU 2016-01 will result in the recognition of fair value changes for our available-for-sale securities within earnings. While we do not believe the impact will be material based on our current investments, it could create volatility in our consolidated statement of operations.
In July 2015, FASB issued Accounting Standards Update No. 2015-11,"Simplifying the Measurement of Inventory," (ASU 2015-11) which requires an entity to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new standard is effective for us on July 1, 2017 and will be applied prospectively as of the interim or annual period of adoption. We do not expect the effect of ASU 2015-11 to have a material impact on our consolidated financial statements.

8




In May 2014, the FASB issued Accounting Standards Update No. 2014-09,"Revenue from Contracts with Customers," (ASU 2014-09) which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This guidance will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The FASB has elected to defer the effective date to fiscal years beginning after December 15, 2017, which would result in an effective date for us of July 1, 2018, with early application permitted one year earlier. The standard permits the use of either the retrospective or cumulative catch-up transition method. We are currently evaluating our adoption timing and the effect that ASU 2014-09 will have on our consolidated financial statements.
3. Fair Value Measurements
The following table summarizes our investments in marketable securities:
 
June 30, 2016
 
Amortized Cost Basis (2)
 
Unrealized gain
 
Estimated Fair Value
Available-for-sale securities
 
 
 
 
 
Plaza Create Co. Ltd. common shares (1)
$
4,405

 
$
3,488

 
$
7,893

Total investments in available-for-sale securities
$
4,405

 
$
3,488

 
$
7,893


________________________
(1) On December 22, 2016, we sold all available-for-sale securities held in Plaza Create Co. Ltd recognizing a gain of $2,268 as a part of other income, net, for the three and six months ended December 31, 2016.
(2) Amortized cost basis represents our initial investment adjusted for currency translation.
We use a three-level valuation hierarchy for measuring fair value and include detailed financial statement disclosures about fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
Level 1: Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2: Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in markets that are not active and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

9




The following tables summarize our assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy:
 
December 31, 2016
 
Total
 
Quoted Prices in
Active
Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Interest rate swap contracts
$
2,180

 
$

 
$
2,180

 
$

Cross-currency swap contracts
3,198

 

 
3,198

 

Currency forward contracts
15,553

 

 
15,553

 

Currency option contracts
687

 

 
687

 

Total assets recorded at fair value
$
21,618

 
$

 
$
21,618

 
$

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Interest rate swap contracts
$
(610
)
 
$

 
$
(610
)
 
$

Cross-currency swap contracts
(1,144
)
 

 
(1,144
)
 

Currency forward contracts
(193
)
 

 
(193
)
 

Contingent consideration
(3,024
)
 

 

 
(3,024
)
Total liabilities recorded at fair value
$
(4,971
)
 
$

 
$
(1,947
)
 
$
(3,024
)

 
June 30, 2016
 
Total
 
Quoted Prices in
Active
Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Available-for-sale securities
$
7,893

 
$
7,893

 
$

 
$

Currency forward contracts
9,821

 

 
9,821

 

Total assets recorded at fair value
$
17,714

 
$
7,893

 
$
9,821

 
$

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Interest rate swap contracts
$
(2,180
)
 
$

 
$
(2,180
)
 
$

Cross-currency swap contracts
(8,850
)
 

 
(8,850
)
 

Currency forward contracts
(315
)
 

 
(315
)
 

Contingent consideration
(1,212
)
 

 

 
(1,212
)
Total liabilities recorded at fair value
$
(12,557
)
 
$

 
$
(11,345
)
 
$
(1,212
)
During the quarter ended December 31, 2016 and year ended June 30, 2016, there were no significant transfers in or out of Level 1, Level 2 and Level 3 classifications.
The valuations of the derivatives intended to mitigate our interest rate and currency risk are determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each instrument. This analysis utilizes observable market-based inputs, including interest rate curves, interest rate volatility, or spot and forward exchange rates, and reflects the contractual terms of these instruments, including the period to maturity. We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparties' nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements.
Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to appropriately reflect both our own nonperformance risk and the

10




respective counterparties' nonperformance risk in the fair value measurement. However, as of December 31, 2016, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 in the fair value hierarchy.
Contingent consideration obligations are measured at fair value and are based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The valuation of contingent consideration uses assumptions and estimates to forecast a range of outcomes and probabilities for the contingent consideration. Certain contingent consideration obligations are valued using a Monte Carlo simulation model. We assess these assumptions and estimates on a quarterly basis as additional data impacting the assumptions is obtained. Any changes in the fair value of contingent consideration related to updated assumptions and estimates will be recognized within general and administrative expenses in the consolidated statements of operations during the period in which the change occurs.
Related to the acquisition of WIRmachenDRUCK on February 1, 2016, we agreed to a contingent payment payable at our option in cash or shares during the third quarter of fiscal 2018 based on the achievement of a cumulative gross profit target for calendar years 2016 and 2017. The fair value of this contingent liability is $24,721 as of December 31, 2016, of which $3,024 is considered contingent consideration and included in the table below. The remaining portion of the liability is classified as a compensation arrangement and is discussed in Note 9.
The following table represents the changes in fair value of Level 3 contingent consideration:
 
Six Months Ended December 31,
 
2016 (1)
 
2015 (2)(3)
Balance at June 30
$
1,212

 
$
7,833

Fair value adjustment
1,946

 

Foreign currency impact
(134
)
 
(180
)
Balance at December 31
$
3,024

 
$
7,653

_____________________
(1) Classified as long-term liability on the consolidated balance sheet.
(2) Classified as short-term liability on the consolidated balance sheet.
(3) Contingent consideration balance as of December 31, 2015, which related to our Printdeal acquisition, was paid during the fourth quarter of fiscal 2016.

As of December 31, 2016 and June 30, 2016, the carrying amounts of our cash and cash equivalents, accounts receivables, accounts payable, and other current liabilities approximated their estimated fair values. As of December 31, 2016 and June 30, 2016 the carrying value of our debt, excluding debt issuance costs and debt discounts was $882,651 and $685,897, respectively, and the fair value was $909,856 and $686,409, respectively. Our debt at December 31, 2016 includes variable rate debt instruments indexed to LIBOR that resets periodically and fixed rate debt instruments. The estimated fair value of our debt was determined using available market information based on recent trades or activity of debt instruments with substantially similar risks, terms and maturities, which fall within Level 2 under the fair value hierarchy. The estimated fair value of assets and liabilities disclosed above may not be representative of actual values that could have been or will be realized in the future.
4. Derivative Financial Instruments
We use derivative financial instruments, such as interest rate swap contracts, cross-currency swap contracts, and currency forward and option contracts to manage interest rate and foreign currency exposures. Derivatives are recorded in the consolidated balance sheets at fair value. If the derivative is designated as a cash flow hedge or net investment hedge, then the effective portion of changes in the fair value of the derivative is recorded in accumulated other comprehensive loss and is subsequently reclassified into earnings in the period the hedged forecasted transaction affects earnings. If a derivative is deemed to be ineffective, then the ineffective portion of the change in fair value of the derivative is recognized directly in earnings. The change in the fair value of derivatives not designated as hedges is recognized directly in earnings, as a component of other income, net.



11




Hedges of Interest Rate Risk
We enter into interest rate swap contracts to manage variability in the amount of our known or expected cash payments related to a portion of our debt. Our objective in using interest rate swaps is to add stability to interest expense and to manage our exposure to interest rate movements. We designate our interest rate swaps as cash flow hedges. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for us making fixed-rate payments over the life of the contract agreements without exchange of the underlying notional amount. Realized gains or losses from interest rate swaps are recorded in earnings, as a component of interest expense, net. A portion of one of our interest rate swap contracts was deemed to be ineffective during the three and six months ended December 31, 2016 and 2015.
Amounts reported in accumulated other comprehensive loss related to interest rate swap contracts will be reclassified to interest expense as interest payments are accrued or made on our variable-rate debt. As of December 31, 2016, we estimate that $418 will be reclassified from accumulated other comprehensive loss to interest expense during the twelve months ending December 31, 2017. As of December 31, 2016, we had five outstanding interest rate swap contracts indexed to one-month LIBOR. These instruments were designated as cash flow hedges of interest rate risk and have varying start dates and maturity dates through December 2023.
Interest rate swap contracts outstanding:
 
Notional Amounts
Contracts accruing interest as of December 31, 2016
 
$
65,000

Contracts with a future start date
 
145,000

Total
 
$
210,000

Hedges of Currency Risk
Cross-Currency Swap Contracts
From time to time, we execute cross-currency swap contracts designated as cash flow hedges or net investment hedges. Cross-currency swaps involve an initial receipt of the notional amount in the hedge currency in exchange for our reporting currency based on a contracted exchange rate. Subsequently, we receive fixed rate payments in our reporting currency in exchange for fixed rate payments in the hedged currency over the life of the contract. At maturity, the final exchange involves the receipt of our reporting currency in exchange for the notional amount in the hedged currency.
Cross-currency swap contracts designated as cash flow hedges are executed to mitigate our currency exposure to the interest receipts as well as the principal remeasurement and repayment associated with certain intercompany loans denominated in a currency other than our reporting currency, the U.S. Dollar. As of December 31, 2016, we had two outstanding cross-currency swap contracts designated as cash flow hedges with a total notional amount of $120,011, both maturing during June 2019. We entered into the two cross-currency swap contracts to hedge the risk of changes in one Euro denominated intercompany loan entered into with one of our consolidated subsidiaries that has the Euro as its functional currency.
During the three and six months ended December 31, 2016, we recorded unrealized gains, net of tax, in accumulated other comprehensive loss in the amount of $6,731 and $4,711, respectively. Amounts reported in accumulated other comprehensive loss will be reclassified to other income, net as interest payments are accrued or paid and upon remeasuring the intercompany loan. As of December 31, 2016, we estimate that $2,348 will be reclassified from accumulated other comprehensive loss to other income, net during the twelve months ending December 31, 2017.
Cross-currency swap contracts designated as net investment hedges are executed to mitigate our currency exposure of net investments in subsidiaries that have reporting currencies other than the U.S. Dollar. As of December 31, 2016, we had two outstanding cross-currency swap contracts designated as net investment hedges with a total notional amount of $122,969, both maturing during April 2019. We entered into the two cross-currency swap contracts to hedge the risk of changes in the U.S. Dollar equivalent value of a portion of our net investment in a consolidated subsidiary that has the Euro as its functional currency. During the three and six months ended December 31, 2016, we recorded unrealized gains, net of tax, in accumulated other comprehensive loss as a

12




component of our cumulative translation adjustment in the amount of $6,883 and $4,824, respectively, and $2,510 and $2,929, for the three and six months ended December 31, 2015, respectively.
We did not hold any ineffective cross-currency swaps during the three and six months ended December 31, 2016 and 2015.
Other Currency Contracts
We execute currency forward contracts in order to mitigate our exposure to fluctuations in various currencies against our reporting currency, the U.S. Dollar, and as part of our acquisition of National Pen, we assumed additional outstanding currency option contracts.
As of December 31, 2016, we had one currency forward contract designated as a net investment hedge with a total notional amount of $31,727, maturing during June 2019. We entered into this contract to hedge the risk of changes in the U.S. Dollar equivalent value of a portion of our net investment in a consolidated subsidiary that has the Euro as its functional currency.
We have elected not to apply hedge accounting for all other currency forward and option contracts. During the three and six months ended December 31, 2016 and 2015, we have experienced volatility within other income, net in our consolidated statements of operations from unrealized gains and losses on the mark-to-market of outstanding currency forward contracts. Due to the timing of our acquisition of National Pen, the acquired currency option contracts did not impact our consolidated statement of operations. We expect this volatility to continue in future periods for contracts for which we do not apply hedge accounting. Additionally, since our hedging objectives may be targeted at non-GAAP financial metrics that exclude non-cash items such as depreciation and amortization, we may experience increased, not decreased, volatility in our GAAP results as a result of our currency hedging program.
As of December 31, 2016, we had the following outstanding currency forward contracts that were not designated for hedge accounting and were used to hedge fluctuations in the U.S. Dollar value of forecasted transactions denominated in Australian Dollar, Canadian Dollar, Danish Krone, Euro, British Pound, Indian Rupee, New Zealand Dollar, Norwegian Krone, Swedish Krona, and Swiss Franc:
Notional Amount
 
Effective Date
 
Maturity Date
 
Number of Instruments
 
Index
$213,344
 
October 2015 through October 2016
 
Various dates through March 2018
 
309
 
Various
As of December 31, 2016, we also had 27 outstanding currency option contracts assumed as part of the National Pen acquisition that were not designated for hedge accounting and were used to hedge fluctuations in the U.S. Dollar value of forecasted transactions denominated in Canadian Dollar, Euro, British Pound, Swedish Krona, Japanese Yen and Swiss Franc. The total notional amount was $10,080, with effective dates from April 2016 through September 2016 and maturity dates through December 2017.

13




Financial Instrument Presentation    
The table below presents the fair value of our derivative financial instruments as well as their classification on the balance sheet as of December 31, 2016 and June 30, 2016:
 
December 31, 2016

Asset Derivatives

Liability Derivatives
Derivatives designated as hedging instruments
Balance Sheet line item

Gross amounts of recognized assets

Gross amount offset in consolidated balance sheet

Net amount

Balance Sheet line item

Gross amounts of recognized liabilities

Gross amount offset in consolidated balance sheet

Net amount
Derivatives in Cash Flow Hedging Relationships
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
Other non-current assets

$
2,512


$
(332
)

$
2,180


Other current liabilities / other liabilities

$
(610
)

$


$
(610
)
Cross-currency swaps
Other non-current assets
 
3,198

 

 
3,198

 
Other liabilities
 

 

 

Derivatives in Net Investment Hedging Relationships
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cross-currency swaps
Other non-current assets
 

 

 

 
Other liabilities
 
(1,144
)
 

 
(1,144
)
Currency forward contracts
Other non-current assets
 
1,117

 

 
1,117

 
Other liabilities
 

 

 

Total derivatives designated as hedging instruments


$
6,827


$
(332
)

$
6,495




$
(1,754
)

$


$
(1,754
)
















Derivatives not designated as hedging instruments















Currency forward contracts
Other current assets / other assets

$
15,174


$
(738
)

$
14,436


Other current liabilities / other liabilities

$
(193
)

$


$
(193
)
Currency option contracts
Other current assets / other assets

687




687


Other current liabilities / other liabilities






Total derivatives not designated as hedging instruments


$
15,861


$
(738
)

$
15,123




$
(193
)

$


$
(193
)

14





June 30, 2016

Asset Derivatives

Liability Derivatives
Derivatives designated as hedging instruments
Balance Sheet line item

Gross amounts of recognized assets

Gross amount offset in consolidated balance sheet

Net amount

Balance Sheet line item

Gross amounts of recognized liabilities

Gross amount offset in consolidated balance sheet

Net amount
Derivatives in Cash Flow Hedging Relationships
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
Other non-current assets

$


$


$


Other current liabilities / other liabilities

$
(2,180
)

$


$
(2,180
)
Cross-currency swaps
Other non-current assets







Other liabilities

(2,080
)



(2,080
)
Derivatives in Net Investment Hedging Relationships
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cross-currency swaps
Other non-current assets







Other liabilities

(6,770
)



(6,770
)
Currency forward contracts
Other non-current assets







Other liabilities

(165
)



(165
)
Total derivatives designated as hedging instruments


$


$


$




$
(11,195
)

$


$
(11,195
)
















Derivatives not designated as hedging instruments















Currency forward contracts
Other current assets

$
10,748


$
(927
)

$
9,821


Other current liabilities

$
(508
)

$
358


$
(150
)
Total derivatives not designated as hedging instruments


$
10,748


$
(927
)

$
9,821




$
(508
)

$
358


$
(150
)
The following table presents the effect of our derivative financial instruments designated as hedging instruments and their classification within comprehensive loss for the three and six months ended December 31, 2016 and 2015:
Derivatives in Hedging Relationships
Amount of Gain (Loss) Recognized in Comprehensive (Loss) Income on Derivatives (Effective Portion)
 
Three Months Ended December 31,
 
Six Months Ended December 31,
In thousands
2016
 
2015
 
2016
 
2015
Derivatives in Cash Flow Hedging Relationships
 
 
 
 
 
 
 
Interest rate swaps
$
2,513

 
$
464

 
$
2,764

 
$
(462
)
Cross-currency swaps
6,731

 

 
4,711

 

Derivatives in Net Investment Hedging Relationships
 
 
 
 
 
 
 
Cross-currency swaps
6,883

 
2,510

 
4,824

 
2,929

Currency forward contracts
1,395

 

 
939

 

 
$
17,522

 
$
2,974

 
$
13,238

 
$
2,467

    

15




The following table presents reclassifications out of accumulated other comprehensive loss for the three and six months ended December 31, 2016 and 2015:
Details about Accumulated Other
Comprehensive Loss Components
Amount Reclassified from Accumulated Other Comprehensive Loss to Net Income
Affected line item in the
Statement of Operations
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
In thousands
2016
 
2015
 
2016
 
2015
 
Derivatives in Cash Flow Hedging Relationships
 
 
 
 
 
 
 
 
Interest rate swaps
$
117

 
$
(286
)
 
$
(38
)
 
$
(588
)
Interest expense, net
Cross-currency swaps
8,450

 

 
7,497

 

Other income, net
Total before income tax
8,567

 
(286
)
 
7,459

 
(588
)
Income before income taxes
Income tax
(2,142
)
 
72

 
(1,865
)
 
148

Income tax provision
Total
$
6,425

 
$
(214
)
 
$
5,594

 
$
(440
)
 
The following table presents the adjustment to fair value recorded within the consolidated statements of operations for derivative instruments for which we did not elect hedge accounting, as well as the effect of the ineffective portion and de-designated derivative financial instruments that no longer qualify as hedging instruments in the period:
 
Amount of Gain (Loss) Recognized in Net Income
 
Location of Gain (Loss) Recognized in Income (Ineffective Portion)
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
 
In thousands
2016
 
2015
 
2016
 
2015
 
 
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
Currency contracts
$
13,224

 
$
3,189

 
$
13,301

 
$
5,563

 
Other income, net
Interest rate swaps
253

 
(3
)
 
253

 
(10
)
 
Other income, net
 
$
13,477

 
$
3,186

 
$
13,554

 
$
5,553

 
 
5. Accumulated Other Comprehensive Loss
The following table presents a roll forward of amounts recognized in accumulated other comprehensive loss by component, net of tax of $4,690, for the six months ended December 31, 2016:

Gains (losses) on cash flow hedges (1)
 
Gains (losses) on available for sale securities
 
Gains (losses) on pension benefit obligation
 
Translation adjustments, net of hedges (2)
 
Total
Balance as of June 30, 2016
$
(2,322
)
 
$
3,488

 
$
(2,551
)
 
$
(106,630
)
 
$
(108,015
)
Other comprehensive income (loss) before reclassifications
7,475

 
(5,756
)
 
36

 
(34,329
)
 
(32,574
)
Amounts reclassified from accumulated other comprehensive loss to net income
(5,594
)
 
2,268

 

 

 
(3,326
)
Net current period other comprehensive income (loss)
1,881

 
(3,488
)
 
36

 
(34,329
)
 
(35,900
)
Balance as of December 31, 2016
$
(441
)
 
$

 
$
(2,515
)
 
$
(140,959
)
 
$
(143,915
)
________________________
(1) Gains (losses) on cash flow hedges include our interest rates swap and cross-currency swap contracts designated in cash flow hedging relationships.
(2) Translation adjustment is inclusive of the effects of our net investment hedges, of which, unrealized gains (losses), net of tax, of $1,107 and $(4,965) have been included in accumulated other comprehensive loss as of December 31, 2016 and June 30, 2016, respectively.
6. Waltham Lease Arrangement
In July 2013, we executed a lease agreement to move our Lexington, Massachusetts, USA operations to a yet to be constructed facility in Waltham, Massachusetts, USA. During the first quarter of fiscal 2016, the building was completed and we commenced lease payments in September 2015 and will make lease payments through September 2026.

16




For accounting purposes, we were deemed to be the owner of the Waltham building during the construction period and accordingly we recorded the construction project costs incurred by the landlord as an asset with a corresponding financing obligation on our balance sheet. We evaluated the Waltham lease in the first quarter of fiscal 2016 and determined the transaction did not meet the criteria for "sale-leaseback" treatment due to our planned subleasing activity over the term of the lease. Accordingly, we began depreciating the asset and incurring interest expense related to the financing obligation recorded on our consolidated balance sheet. We bifurcate the lease payments pursuant to the Waltham lease into (i) a portion that is allocated to the building and (ii) a portion that is allocated to the land on which the building was constructed. The portion of the lease obligations allocated to the land is treated as an operating lease that commenced in fiscal 2014.

Property, plant and equipment, net, included $118,104 and $120,168 as of December 31, 2016 and June 30, 2016, respectively, related to the building. The financing lease obligation and deferred rent credit related to the building on our consolidated balance sheets was $121,050 and $122,801 as of December 31, 2016 and June 30, 2016, respectively.
7. Business Combinations
Acquisition of National Pen Co. LLC
On December 30, 2016, we acquired 100% of the equity interests of National Pen Co. LLC, a manufacturer and marketer of custom writing instruments for small- and medium-sized businesses. At closing, we paid $214,573 in cash, subject to post closing adjustments based on acquired cash, debt and working capital balances. The acquisition supports our strategy to build competitively differentiated supply chain capabilities that we can make available via our mass customization platform, which we bring to market through a portfolio of focused brands. We expect National Pen will also complement our organic investments in technology and supply chain capabilities for promotional products, apparel and gift offerings.
The table below details the consideration transferred to acquire National Pen:
Cash consideration
$
214,573

Estimated post-closing adjustments
(2,369
)
Total purchase price
$
212,204

The excess purchase price over the fair value of National Pen's net assets was recorded as goodwill, which is primarily attributable to the value of their workforce, their manufacturing and marketing process and know-how, as well as synergies which include leveraging their scale-based sourcing channels, integrating into our mass customization platform, and supporting the development of their e-commerce platform. Goodwill has been attributed to the National Pen business unit reportable segment. Upon finalizing our valuation analysis, we expect to allocate a portion of goodwill to the Vistaprint business unit for certain synergies that are expected to be realized by the Vistaprint business unit as a result of the acquisition.
Our preliminary estimate of the fair value of specifically identifiable assets acquired and liabilities assumed as of the date of acquisition is subject to change upon finalizing our valuation analysis, including certain valuation assumptions and tax matters. The final determination may result in changes in the fair value of certain assets and liabilities as compared to our preliminary estimates, which are expected to be finalized prior to the end of fiscal 2017.


17




 
Amount
 
Weighted Average
Useful Life in Years
Tangible assets acquired and liabilities assumed:
 
 
 
      Cash and cash equivalents
$
8,337

 
n/a
      Accounts receivable, net
20,921

 
n/a
      Inventory
19,854

 
n/a
      Other current assets
12,454

 
n/a
      Property, plant and equipment, net
29,472

 
n/a
      Other non-current assets
1,133

 
n/a
      Accounts payable
(12,546
)
 
n/a
      Accrued expenses
(17,967
)
 
n/a
      Other current liabilities
(1,016
)
 
 
      Deferred tax liabilities (1)
(28,645
)
 
n/a
      Long-term liabilities
(9,586
)
 
n/a
Identifiable intangible assets:
 
 
 
      Acquired intangible assets (2)
106,000

 
7-11
Goodwill
83,793

 
n/a
Total purchase price
$
212,204

 
 
_____________________
(1) Calculated based on our preliminary estimates of fair value and subject to change.
(2) Acquired intangible assets include our preliminary estimates of fair value for customer relationships, trade name and developed technology assets and their related useful lives. We expect to finalize our analysis prior to the end of fiscal 2017, and as such these preliminary estimates may change.

National Pen Pro Forma Financial Information
    
National Pen has been included in our consolidated financial statements starting on its acquisition date. For the second quarter of fiscal 2017, the National Pen balance sheet and impact of the acquisition on our cash flow has been included in our consolidated financial statements. Due to the timing of the acquisition, there is no impact to our consolidated statement of operations, other than related transaction costs.

The following unaudited pro forma financial information presents our results as if the National Pen acquisition had occurred on July 1, 2015. The pro forma financial information for all periods presented adjusts for the effects of material business combination items, including estimated amortization of acquired intangible assets and transaction related costs. The unaudited pro forma results are not necessarily indicative of what actually would have occurred had the acquisition been in effect for the periods presented:
 
Six Months Ended December 31,
2016
 
2015
Pro forma revenue
$
1,176,924

 
$
1,022,710

Pro forma net income attributable to Cimpress
8,599

 
74,307

We utilized proceeds from our credit facility in order to finance the acquisition. In connection with the acquisition, we incurred $1,505 in general and administrative expenses during the three and six months ended December 31, 2016, primarily related to legal, financial, and other professional services.

18




8. Goodwill and Acquired Intangible Assets
Goodwill
The carrying amount of goodwill by reportable segment is as follows:

Vistaprint business unit

Upload and Print business units

National Pen business unit
 
All Other
business units

Total
Balance as of June 30, 2016
$
121,752


$
319,373


$

 
$
24,880


$
466,005

Acquisitions (1)




83,793

 


83,793

Effect of currency translation adjustments (2)
(3,527
)
 
(16,920
)


 
(456
)

(20,903
)
Balance as of December 31, 2016
$
118,225


$
302,453


$
83,793

 
$
24,424


$
528,895

_________________

(1) See Note 7 for additional details related to our acquisition of National Pen. Our purchase accounting is preliminary as of December 31, 2016, so we expect this goodwill amount will change as we finalize our analysis prior to the end of fiscal 2017. In conjunction with the finalization of our purchase accounting, we will allocate a portion of goodwill to the Vistaprint business unit as we expect certain synergies will be realized by the Vistaprint business unit as a result of the acquisition.
(2) Relates to goodwill held by subsidiaries whose functional currency is not the U.S. Dollar.
Acquired Intangible Assets
Acquired intangible assets amortization expense for the three and six months ended December 31, 2016 was $9,879 and $20,092, respectively, compared to $9,588 and $19,302 for the prior comparative periods, respectively.
9. Other Balance Sheet Components
Accrued expenses included the following:
 
December 31, 2016
 
June 30, 2016
Compensation costs (1)
$
43,488

 
$
59,207

Income and indirect taxes (2)
66,784

 
39,802

Advertising costs
31,681

 
26,372

Shipping costs (3)
14,118

 
6,843

Interest payable
5,331

 
5,172

Purchases of property, plant and equipment
5,619

 
4,614

Production costs (3)
11,374

 
3,251

Sales returns
4,635

 
2,882

Professional costs
2,342

 
1,543

Other
38,560

 
29,301

Total accrued expenses (4)
$
223,932

 
$
178,987

_____________________
(1) The decrease in compensation costs is primarily due to payment of our fiscal 2016 bonus and long-term incentive program in the first quarter of fiscal 2017. Effective July 1, 2016, we transitioned the annual bonus program to be included in team members' base salary. These amounts are therefore paid on our typical payroll schedule.
(2) The increase in income and indirect taxes is primarily due to increased sales during the second quarter of fiscal 2017 which resulted in additional VAT across several of our locations, as well as an increase in income tax payable.
(3) The increase in shipping and production cost accruals is primarily due to increased sales during the second quarter of fiscal 2017 which is the result of increased seasonal volume, thus increasing shipping and third-party fulfillment costs.
(4) The increase in accrued expenses was also impacted by our acquisition of National Pen, resulting in an additional $17,967 of accruals as of December 31, 2016, which are included in each of the respective categories within the table.


19




Other current liabilities included the following:
 
December 31, 2016
 
June 30, 2016
Current portion of lease financing obligation
$
12,569

 
$
12,569

Current portion of capital lease obligations
10,355

 
8,011

Other
1,310

 
2,055

Total other current liabilities
$
24,234

 
$
22,635

Other liabilities included the following:
 
December 31, 2016
 
June 30, 2016
Contingent earn-out liability
$
24,721

 
$
3,146

Long-term capital lease obligations
26,622

 
21,318

Long-term derivative liabilities
1,962

 
10,949

Other
24,808

 
24,760

Total other liabilities
$
78,113

 
$
60,173

The contingent earn-out liability included within other liabilities relates to the sliding scale earn-out for our 2016 WIRmachenDRUCK acquisition. Under the original terms of the arrangement, a portion of the earn-out attributed to the minority selling shareholders was included as a component of purchase consideration as of the acquisition date, with any subsequent changes to fair value recognized within general and administrative expense.
The remaining portion of the amount payable to the two majority selling shareholders in the WIRmachenDRUCK acquisition was not included as part of the purchase consideration as of the acquisition date as it was contingent upon their post-acquisition employment and planned to be recognized as expense through the required employment period. During the first quarter of fiscal 2017, in response to a statutory tax notice we amended the terms of the compensation portion of the arrangement with the two majority selling shareholders and we removed the post-acquisition employment requirement. As the arrangement was no longer contingent upon continued employment, we accelerated the recognition of the remaining unrecognized compensation expense, $7,034 of additional expense as of the amendment date, as part of general and administrative expense during the first quarter of fiscal 2017.
In addition, the estimated fair value of the contingent liability payable to all selling shareholders in the WIRmachenDRUCk acquisition increased, due to the recent business performance relative to performance targets and the time value impact within the Monte Carlo simulation model. We recognized $6,746 and $15,732 of additional expense for the fair value change during the three and six months ended December 31, 2016, respectively, as part of general and administrative expense. As of December 31, 2016, the total liability is $24,721, of which $21,697 relates to the majority shareholders and $3,024 relates to the minority shareholders, which is further discussed in Note 3.
10. Debt

December 31, 2016

June 30, 2016
Senior secured credit facility
$
599,683

 
$
400,809

7.0% Senior unsecured notes due 2022
275,000


275,000

Other
7,968

 
10,088

Debt issuance costs and debt discounts
(6,538
)

(7,386
)
Total debt outstanding, net
876,113


678,511

Less short-term debt (1)
46,115

 
21,717

Long-term debt
$
829,998


$
656,794

_____________________
(1) Balances as of December 31, 2016 and June 30, 2016 are both inclusive of short-term debt issuance costs and debt discounts of $1,693 in both periods.

20




Our Debt
Our various debt arrangements described below contain customary representations, warranties and events of default. As of December 31, 2016, we were in compliance with all financial and other covenants related to our debt.
Indenture and Senior Unsecured Notes due 2022
On March 24, 2015, we completed a private placement of $275,000 in aggregate principal amount of 7.0% senior unsecured notes due 2022 (the “Notes”). We issued the Notes pursuant to a senior notes indenture dated as of March 24, 2015 among Cimpress N.V., our subsidiary guarantors, and MUFG Union Bank, N.A., as trustee (the "Indenture"). We used the proceeds from the Notes to pay outstanding indebtedness under our unsecured line of credit and our senior secured credit facility and for general corporate purposes.
The Notes bear interest at a rate of 7.0% per annum and mature on April 1, 2022. Interest on the Notes is payable semi-annually on April 1 and October 1 of each year, commencing on October 1, 2015, to the holders of record of the Notes at the close of business on March 15 and September 15, respectively, preceding such interest payment date.

The Notes are senior unsecured obligations and rank equally in right of payment to all our existing and future senior unsecured debt and senior in right of payment to all of our existing and future subordinated debt. The Notes are effectively subordinated to any of our existing and future secured debt to the extent of the value of the assets securing such debt. Subject to certain exceptions, each of our existing and future subsidiaries that is a borrower under or guarantees our senior secured credit facilities will guarantee the Notes.
The Indenture contains various covenants, including covenants that, subject to certain exceptions, limit our and our restricted subsidiaries’ ability to incur and/or guarantee additional debt; pay dividends, repurchase shares or make certain other restricted payments; enter into agreements limiting dividends and certain other restricted payments; prepay, redeem or repurchase subordinated debt; grant liens on assets; enter into sale and leaseback transactions; merge, consolidate or transfer or dispose of substantially all of our consolidated assets; sell, transfer or otherwise dispose of property and assets; and engage in transactions with affiliates.
At any time prior to April 1, 2018, we may redeem some or all of the Notes at a redemption price equal to 100% of the principal amount redeemed, plus a make-whole amount as set forth in the Indenture, plus, in each case, accrued and unpaid interest to, but not including, the redemption date. In addition, at any time prior to April 1, 2018, we may redeem up to 35% of the aggregate outstanding principal amount of the Notes at a redemption price equal to 107.0% of the principal amount thereof, plus accrued and unpaid interest to, but not including, the redemption date, with the net proceeds of certain equity offerings by Cimpress. At any time on or after April 1, 2018, we may redeem some or all of the Notes at the redemption prices specified in the Indenture, plus accrued and unpaid interest to, but not including, the redemption date.
Senior Secured Credit Facility
As of December 31, 2016, we have a senior secured credit facility of $822,000 as follows:
Revolving loans of $690,000 with a maturity date of September 23, 2019
Term loan of $132,000 amortizing over the loan period, with a final maturity date of September 23, 2019
Under the terms of our credit agreement, borrowings bear interest at a variable rate of interest based on LIBOR plus 1.50% to 2.25% depending on our leverage ratio, which is the ratio of our consolidated total indebtedness to our consolidated EBITDA, as defined by the credit agreement. As of December 31, 2016, the weighted-average interest rate on outstanding borrowings was 2.65%, inclusive of interest rate swap rates. We must also pay a commitment fee on unused balances of 0.225% to 0.400% depending on our leverage ratio. We have pledged the assets and/or share capital of several of our subsidiaries as collateral for our outstanding debt as of December 31, 2016.    

21




Other debt
Other debt consists of term loans acquired primarily as part of our fiscal 2015 acquisition of Exagroup SAS. As of December 31, 2016 we had $7,968 outstanding for those obligations that are payable through September 2024.
11. Income Taxes

Income tax expense was $19,601 and $9,787 for the three and six months ended December 31, 2016, respectively, as compared to $6,148 and $9,327 for the prior periods. The increase in income tax expense is attributable to a higher consolidated annual effective tax rate forecasted for fiscal 2017 as compared to fiscal 2016. We are forecasting a higher annual effective tax rate in fiscal 2017 due to an expected decrease to, and less favorable geographical mix of, consolidated pre-tax earnings including continued losses in certain jurisdictions where we are unable to recognize a full tax benefit in the current period. We also have losses in certain jurisdictions where we are able to recognize a tax benefit in the current period, but for which the cash benefit is expected to be realized in a future period. We expect the acquisition of National Pen will have a favorable impact to income tax expense for fiscal 2017. During the three and six months ended December 31, 2016, we recognized a tax benefit of $425 and $4,614, respectively due to share based compensation as compared to $901 and $1,692 for the comparable prior periods. Additionally, income tax expense for the same prior periods in fiscal 2016 was reduced by $893 related to the extension of the fiscal 2015 US R&D credit.
On October 1, 2013, we made changes to our corporate entity operating structure, including transferring our intellectual property among certain of our subsidiaries, primarily to align our corporate entities with our evolving operations and business model. The transfer of assets occurred between wholly owned legal entities within the Cimpress group that are based in different tax jurisdictions. As the impact of the transfer was the result of an intra-entity transaction, any resulting gain or loss and immediate tax impact on the transfer is eliminated and not recognized in the consolidated financial statements under U.S. GAAP. The transferor entity recognized a gain on the transfer of assets that was not subject to income tax in its local jurisdiction. Our subsidiary based in Switzerland was the recipient of the intellectual property. In accordance with Swiss tax law, we are entitled to amortize the fair market value of the intellectual property received at the date of transfer over five years for tax purposes. As a result of this amortization, we are expecting a loss for Swiss tax purposes during fiscal year 2017.
As of December 31, 2016, we had a net liability for unrecognized tax benefits included in the balance sheet of $4,894, including accrued interest and penalties of $258. We recognize interest and, if applicable, penalties related to unrecognized tax benefits in the provision for income taxes. Of the total amount of unrecognized tax benefits, approximately $2,337 will reduce the effective tax rate if recognized. It is reasonably possible that a reduction in unrecognized tax benefits may occur within the next twelve months in the range of $400 to $500 related to the lapse of applicable statutes of limitations. We believe we have appropriately provided for all tax uncertainties.
We conduct business in a number of tax jurisdictions and, as such, are required to file income tax returns in multiple jurisdictions globally. The years 2013 through 2016 remain open for examination by the United States Internal Revenue Service and the years 2011 through 2016 remain open for examination in the various states and non-US tax jurisdictions in which we file tax returns.
We believe that our income tax reserves are adequately maintained taking into consideration both the technical merits of our tax return positions and ongoing developments in our income tax audits. However, the final determination of our tax return positions, if audited, is uncertain, and there is a possibility that final resolution of these matters could have a material impact on our results of operations or cash flows.
12. Noncontrolling Interests
In certain of our strategic investments we have purchased a controlling equity stake, but there remains a minority portion of the equity that is owned by a third party. The balance sheet and operating activity of these entities are included in our consolidated financial statements and we adjust the net income in our consolidated statement of operations to exclude the noncontrolling interests' proportionate share of results. We present the proportionate share of equity attributable to the redeemable noncontrolling interests as temporary equity within our consolidated balance sheet and the proportionate share of noncontrolling interests not subject to a redemption provision that is outside of our control as equity.

22




Redeemable noncontrolling interests
On April 15, 2015, we acquired 70% of the outstanding shares of Exagroup SAS. The remaining 30% is considered a redeemable noncontrolling equity interest, as it is redeemable in the future and not solely within our control. The Exagroup noncontrolling interest, redeemable at a fixed amount of €39,000, was recorded at its fair value as of the acquisition date and will be adjusted to its redemption value on a periodic basis, if that amount exceeds its carrying value. As of December 31, 2016, the redemption value is less than the carrying value, and therefore no adjustment is required.

On April 3, 2014, we acquired 97% of the outstanding corporate capital of Pixartprinting S.p.A. The remaining 3% was considered a redeemable noncontrolling equity interest, as it was redeemable for cash based on financial results and was not solely within our control. During the quarter ended December 31, 2016, we purchased the remaining equity interest for €10,406 ($10,947 based on the exchange rate as of the redemption date).

    We previously owned a 51% controlling interest in a joint business arrangement with Plaza Create Co. Ltd., a leading Japanese retailer of photo products, to expand our market presence in Japan. During the quarter ended December 31, 2016, we purchased the remaining 49% noncontrolling interest for $9,352. The purchase was recognized as an equity transaction, which resulted in the difference between the carrying value of the noncontrolling interest and purchase price, adjusted within additional paid-in capital.
Noncontrolling interest
On August 7, 2014, we made a capital investment in Printi LLC as described in Note 13. The noncontrolling interest was recorded at its estimated fair value as of the investment date. The allocation of the net loss of the operations to the noncontrolling interest considers our stated liquidation preference in applying the loss to each party.
The following table presents the reconciliation of changes in our noncontrolling interests:
 
 
Redeemable noncontrolling interests
 
Noncontrolling interest
Balance as of June 30, 2016
 
$
65,301

 
$
351

Capital contribution from noncontrolling interest
 
1,404

 

Accretion to redemption value recognized in net loss attributable to noncontrolling interest (1)
 
372

 

Net loss attributable to noncontrolling interest
 
(1,312
)
 
7

Purchase of noncontrolling interests

(20,299
)
 

Foreign currency translation
 
(3,642
)
 
(35
)
Balance as of December 31, 2016
 
$
41,824

 
$
323

                  
(1) During the quarter ended December 31, 2016, the Pixartprinting noncontrolling interest was purchased and the adjustment was recognized to adjust the carrying value to the redemption amount.

13. Variable Interest Entity ("VIE")
On August 7, 2014, we made a capital investment in Printi LLC, which operates in Brazil. This investment provides us access to a newer market and the opportunity to drive longer-term growth in Brazil. As of December 31, 2016, we have a 49.99% equity interest in Printi. Based upon the level of equity investment at risk, Printi is considered a variable interest entity. The shareholders of Printi share profits and voting control on a pro-rata basis. While we do not manage the day to day operations of Printi, we do have the unilateral ability to exercise participating voting rights for specific transactions and as such no one shareholder is considered to be the primary beneficiary. However, certain significant shareholders cannot transfer their equity interests without our approval and as a result are considered de facto agents on our behalf in accordance with ASC 810-10-25-43.
In aggregating our rights, as well as those of our de facto agents, the group as a whole has both the power to direct the activities that most significantly impact the entity's economic performance and the obligation to absorb losses and the right to receive benefits from the entity. In situations where a de facto agency relationship is present, one party is required to be identified as the primary beneficiary and the evaluation requires significant judgment. The factors considered include the presence of a principal/agent relationship, the relationship and significance of activities to the reporting entity, the variability associated with the VIE's anticipated economics and the design of the

23




VIE. The analysis is qualitative in nature and is based on weighting the relative importance of each of the factors in relation to the specifics of the VIE arrangement. Upon our investment we performed an analysis and concluded that we are the party that is most closely associated with Printi, as we are most exposed to the variability of the economics and therefore considered the primary beneficiary.
We have call options with certain employee shareholders to increase our ownership in Printi incrementally over an eight-year period. As the employees' restricted stock in Printi is contingent on post-acquisition employment, share-based compensation will be recognized over the four-year vesting period. The awards are considered liability awards and will be marked to fair value each reporting period. In order to estimate the fair value of the award as of December 31, 2016, we utilized a lattice model with a Monte Carlo simulation. The current fair value of the award is $5,998 and we have recognized $398 and $784 in general and administrative expense for the three and six months ended December 31, 2016, respectively, compared to $410 and $781 in the prior periods, respectively.
14. Segment Information
Our operating segments are based upon the manner in which our operations are managed and the availability of separate financial information reported internally to the Chief Executive Officer, who is our Chief Operating Decision Maker (“CODM”) for purposes of making decisions about how to allocate resources and assess performance. As of December 31, 2016 we have several operating segments under our management reporting structure which are reported in the following four reportable segments:
Vistaprint business unit - Includes the operations of our Vistaprint-branded websites focused on the North America, Europe, Australia and New Zealand markets, and our Webs-branded business, which is managed with the Vistaprint-branded digital business in the previously listed geographies.
Upload and Print business units - Includes the results of our druck.at, Exagroup, Easyflyer, Printdeal, Pixartprinting, Tradeprint, and WIRmachenDRUCK branded businesses.
National Pen business unit - Includes the global operations of our National Pen branded businesses, which manufacture and market custom writing instruments and promotional products, apparel and gifts.
All Other business units - Includes the operations of our Albumprinter and Most of World business units and newly formed Corporate Solutions business unit. Our Most of World business unit is focused on our emerging market portfolio, including operations in Brazil, China, India and Japan. The Corporate Solutions business unit focuses on delivering volume and revenue via partnerships. These business units have been combined into one reportable segment based on materiality.
Consistent with our historical reporting, the cost of our global legal, human resource, finance, facilities management, software and manufacturing engineering, the global component of our IT operations functions, and certain start-up costs related to new product introductions and manufacturing technologies are generally not allocated to the reporting segments and are instead reported and disclosed under the caption "Corporate and global functions." Corporate and global functions is a cost center and does not meet the definition of an operating segment. Under our new incentive compensation plan we granted PSUs during the first quarter of fiscal 2017. The PSU expense value is based on a Monte Carlo fair value analysis and is required to be expensed on an accelerated basis. In order to ensure comparability in measuring our business unit results, we allocate the straight-line portion of the fixed grant value to our business units. Any expense in excess of the amount as a result of the fair value measurement of the PSUs and the accelerated expense profile of the awards is recognized within corporate and global functions.
Adjusted net operating profit is the primary metric by which our CODM measures segment financial performance. Certain items are excluded from segment adjusted net operating profit, such as acquisition-related amortization and depreciation, expense recognized for contingent earn-out related charges, including the changes in fair value of contingent consideration and compensation expense related to cash-based earn-out mechanisms dependent upon continued employment, share-based compensation related to investment consideration, certain impairment expense and restructuring charges. A portion of the interest expense associated with our Waltham lease is included as expense in adjusted net operating profit and allocated based on headcount to the appropriate business unit or corporate and global function. The interest expense represents a portion of the cash rent payment and is considered an operating expense for purposes of measuring our segment performance. There are no internal revenue transactions between our operating segments, and we do not allocate non-operating income to our

24




segment results. All intersegment transfers are recorded at cost for presentation to the CODM, for example, we allocate costs related to products manufactured by our global network of production facilities to the applicable operating segment. There is no intercompany profit or loss recognized on these transactions.
The following factors, among others, may limit the comparability of adjusted net operating profit by segment:
We do not allocate global support costs across operating segments or corporate and global functions.
Some of our acquired operations in our Upload and Print business units and All Other business units segments are burdened by the costs of their local finance, HR, and other administrative support functions, whereas other business units leverage our global functions and do not receive an allocation for these services.
Our All Other business units reporting segment includes our Most of World business unit, which has operating losses as it is in its early stage of investment relative to the scale of the underlying business.
Our balance sheet information is not presented to the CODM on an allocated basis, and therefore we do not present asset information by segment.
Revenue by segment is based on the business unit-specific websites through which the customer’s order was transacted. Due to the timing of our acquisition of National Pen on December 30, 2016, the National Pen business unit did not impact our statements of operations for the periods presented and has been excluded from the tables below.
The following tables set forth revenue, adjusted net operating profit by reportable segment, total income from operations and total income before taxes.
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2016
 
2015
 
2016
 
2015
Revenue:
 
 
 
 
 
 
 
Vistaprint business unit
$
379,414

 
$
354,783

 
$
664,836

 
$
622,252

Upload and Print business units
152,388

 
93,277

 
284,345

 
169,815

All Other business units
45,049

 
48,214

 
71,383

 
79,955

Total revenue
$
576,851

 
$
496,274

 
$
1,020,564

 
$
872,022



25




 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2016
 
2015
 
2016
 
2015
Adjusted net operating profit by segment:
 
 
 
 


 


Vistaprint business unit
$
101,572

 
$
115,734

 
$
159,789

 
$
180,196

Upload and Print business units
19,338

 
15,520

 
35,452

 
26,970

All Other business units
(1,968
)
 
6,881

 
(11,577
)
 
5,796

Total adjusted net operating profit by segment
118,942

 
138,135

 
183,664

 
212,962

Corporate and global functions
(68,463
)

(54,592
)
 
(132,400
)
 
(106,540
)
Acquisition-related amortization and depreciation
(10,019
)
 
(9,655
)
 
(20,232
)
 
(19,437
)
Earn-out related charges (1)
(7,010
)
 
(3,413
)
 
(23,257
)
 
(3,702
)
Share-based compensation related to investment consideration
(601
)
 
(1,735
)
 
(4,704
)
 
(2,537
)
Certain impairments (2)

 
(3,022
)
 

 
(3,022
)
Restructuring related charges
(1,100
)
 
(110
)
 
(1,100
)
 
(381
)
Interest expense for Waltham lease
1,956

 
2,001

 
3,926

 
2,351

Total income from operations
33,705

 
67,609

 
5,897

 
79,694

Other income, net
30,549

 
7,690

 
28,417

 
16,932

Interest expense, net
(9,631
)
 
(10,160
)
 
(19,535
)
 
(18,286
)
Income before income taxes
$
54,623

 
$
65,139

 
$
14,779

 
$
78,340

___________________
(1) Includes expense recognized for the change in fair value of contingent consideration and compensation expense related to cash-based earn-out mechanisms dependent upon continued employment.
(2) Includes the impact of impairments or abandonments of goodwill and other long-lived assets as defined by ASC 350 - "Intangibles - Goodwill and Other" or ASC 360 - "Property, plant, and equipment."

 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2016
 
2015
 
2016
 
2015
Depreciation and amortization:
 
 
 
 
 
 
 
Vistaprint business unit
$
14,813

 
$
10,195

 
$
26,086

 
$
20,057

Upload and Print business units
13,398

 
10,519

 
27,508

 
20,549

All Other business units
3,655

 
4,921

 
7,259

 
9,970

Corporate and global functions
5,111

 
6,170

 
11,529

 
11,487

Total depreciation and amortization
$
36,977

 
$
31,805

 
$
72,382

 
$
62,063

Enterprise Wide Disclosures:
The following tables set forth revenues by geographic area and groups of similar products and services:
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2016
 
2015
 
2016
 
2015
United States
$
223,510

 
$
207,663

 
$
411,465

 
$
387,076

Non-United States (1)
353,341

 
288,611

 
609,099

 
484,946

Total revenue
$
576,851

 
$
496,274

 
$
1,020,564

 
$
872,022

 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2016
 
2015
 
2016
 
2015
Physical printed products and other (2)
$
562,233

 
$
480,217

 
$
990,947

 
$
839,245

Digital products/services
14,618

 
16,057

 
29,617

 
32,777

Total revenue
$
576,851

 
$
496,274

 
$
1,020,564

 
$
872,022



26




___________________
(1) Our non-United States revenue includes the Netherlands, our country of domicile.
(2) Other revenue includes miscellaneous items which account for less than 1% of revenue.
The following tables set forth long-lived assets by geographic area:
 
December 31, 2016
 
June 30, 2016
Long-lived assets (3):
 

 
 

Netherlands
$
94,834

 
$
91,053

Canada
87,082

 
89,888

Switzerland
43,731

 
38,501

Italy
36,201

 
34,086

United States
51,010

 
32,977

France
22,055

 
24,561

Australia
22,583

 
24,358

Japan
19,950

 
23,213

Jamaica
22,004

 
22,604

Other
63,880

 
53,059

Total
$
463,330

 
$
434,300

___________________
(3) Excludes goodwill of $528,895 and $466,005, intangible assets, net of $292,591 and $216,970, the Waltham lease asset of $118,104 and $120,168, and deferred tax assets of $18,344 and $26,093 as of December 31, 2016 and June 30, 2016, respectively.
15. Commitments and Contingencies
Lease Commitments
We have commitments under operating leases for our facilities that expire on various dates through 2026, including the Waltham lease arrangement discussed in Note 6. Total lease expense, net of sublease income for the three and six months ended December 31, 2016 was $4,021 and $6,292, respectively, and $2,747 and $6,849 for the three and six months ended December 31, 2015, respectively. The decrease in total lease expense during fiscal 2016 as compared to the prior comparable periods is due to the move to our Waltham, Massachusetts facility during the first quarter of fiscal 2016 and the treatment of the related lease similar to a capital lease, with cash payments allocated to depreciation expense and interest expense.
We also lease certain machinery and plant equipment under both capital and operating lease agreements that expire at various dates through 2022. The aggregate carrying value of the leased equipment under capital leases included in property, plant and equipment, net in our consolidated balance sheet at December 31, 2016, is $35,882, net of accumulated depreciation of $22,465; the present value of lease installments not yet due included in other current liabilities and other liabilities in our consolidated balance sheet at December 31, 2016 amounts to $36,977.
Purchase Obligations
At December 31, 2016, we had unrecorded commitments under contract of $74,388, which were primarily composed of commitments for production and computer equipment purchases of approximately $28,717. Production and computer equipment purchases relates partially to a two year purchase commitment for equipment with one of our suppliers. In addition, we had purchase commitments for third-party web services of $5,000, professional and consulting fees of approximately $10,212, inventory purchase commitments of $2,819, commitments for advertising campaigns of $1,692, and other unrecorded purchase commitments of $25,948.

27




Other Obligations
We have an outstanding installment obligation of $8,027 related to the fiscal 2012 intra-entity transfer of the intellectual property of our subsidiary Webs, Inc., which results in tax being paid over a 7.5 year term and has been classified as a deferred tax liability in our consolidated balance sheet as of December 31, 2016. Other obligations also includes a contingent earn-out liability for our recent WIRmachenDRUCK acquisition, based on the achievement of certain financial targets, payable at our option in cash or ordinary shares in fiscal 2018 of $24,721. Refer to Note 9 for additional discussion related to the contingent earn-out liability. In addition, we have deferred payments related to our fiscal 2015 and 2016 acquisitions of $2,434 in aggregate.
Legal Proceedings
We are not currently party to any material legal proceedings. Although we cannot predict with certainty the results of litigation and claims to which we may be subject from time to time, we do not expect the resolution of any of our current matters to have a material adverse impact on our consolidated results of operations, cash flows or financial position. In all cases, at each reporting period, we evaluate whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. We expense the costs relating to our legal proceedings as those costs are incurred.

16. Subsequent Events

On January 23, 2017, the Supervisory Board of Cimpress N.V. approved a plan to restructure the company and implement organizational changes that will deeply decentralize the company’s operations in order to improve accountability for customer satisfaction and capital returns, simplify decision-making, and improve the speed of execution.

We intend to transfer approximately 3,000 team members that are currently part of central teams into our business units. We also intend to reduce the scope of certain other roles and functions that are currently performed centrally, which would lead to the elimination of approximately 160 positions, or approximately 1.6 percent of our current workforce, and reduce planned hiring in targeted areas. As part of the changes, we intend to eliminate the positions of four Cimpress executive officers who, as a result, will leave the company.

We expect to complete the majority of the changes during the third quarter of fiscal year 2017. Certain of the planned actions are subject to mandatory consultations with employees, works councils and governmental authorities. We estimate that we will incur an aggregate pre-tax restructuring charge of approximately $28,000 to $31,000, which includes $22,000 to $25,000 of severance-related expense and approximately $6,000 of other restructuring charges. Of the total estimated restructuring charge, we expect approximately $19,000 to $21,000 of cash expenditures, of which the majority is expected to be paid by the end of fiscal year 2017, and approximately $9,000 to $10,000 of non-cash expenditures, consisting primarily of accelerated share-based compensation expense. The actual timing and costs of the plan may differ from our current expectations and estimates.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
    
This Report contains forward-looking statements that involve risks and uncertainties. The statements contained in this Report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including but not limited to our statements about anticipated income and revenue growth rates, future profitability and market share, new and expanded products and services, geographic expansion and planned capital expenditures. Without limiting the foregoing, the words “may,” “should,” “could,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “designed,” “potential,” “continue,” “target,” “seek” and similar expressions are intended to identify forward-looking statements. All forward-looking statements included in this Report are based on information available to us up to, and including the date of this document, and we disclaim any obligation to update any such forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain important factors, including those set forth in this “Management's Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” and elsewhere in this Report. You should

28




carefully review those factors and also carefully review the risks outlined in other documents that we file from time to time with the United States Securities and Exchange Commission.
Executive Overview
Cimpress, the world leader in mass customization, is a technology driven company that aggregates, largely via the Internet, large volumes of small, individually customized orders for a broad spectrum of print, signage, apparel and similar products. We fulfill those orders with manufacturing capabilities which include Cimpress owned and operated manufacturing facilities and a network of third-party fulfillers to create customized products for customers on-demand. We bring our products to market through a portfolio of focused brands serving the needs of micro, small and medium sized businesses, resellers and consumers. These brands include Vistaprint, our global brand for micro business marketing products and services, as well as brands that we have acquired that serve the needs of various market segments, including resellers, small- and medium-sized businesses with differentiated service needs, and consumers purchasing products for themselves and their families.
As of December 31, 2016, we have several operating segments under our management reporting structure which are reported in the following four reportable segments: Vistaprint business unit, National Pen business unit, Upload and Print business units, and All Other business units. The Vistaprint business unit represents our Vistaprint-branded websites focused on the North America, Europe, Australia and New Zealand markets, and our Webs-branded business, which is managed with the Vistaprint-branded digital business. The National Pen business unit represents our newest acquisition, the leading manufacturer and marketer of customized writing instruments for small- and medium-sized businesses. The Upload and Print business units segment includes the druck.at, Exagroup, Easyflyer, Printdeal, Pixartprinting, Tradeprint, and WIRmachenDRUCK branded businesses. The All Other business units segment includes the operations of our Albumprinter and Most of World business units and Corporate Solutions business unit, which is focused on delivering volume and revenue via partnerships.
In evaluating the financial condition and operating performance of our business, management focuses on revenue growth, constant-currency revenue growth, operating income, adjusted net operating profit after tax (NOPAT) and cash flow from operations. A summary of these key financial metrics for the three and six months ended December 31, 2016 as compared to the three and six months ended December 31, 2015 are as follows:
Second Quarter 2017
Reported revenue increased by 16% to $576.9 million.
Consolidated constant-currency revenue increased by 18% and excluding acquisitions completed in the last four quarters increased by 8%.
Operating income decreased $33.9 million to $33.7 million.
Adjusted NOPAT decreased $31.9 million to $50.6 million.
Year to Date 2017
Reported revenue increased by 17% to $1,020.6 million.
Consolidated constant-currency revenue increased by 18% and excluding acquisitions completed in the last four quarters increased by 7%.
Operating income decreased $73.8 million to $5.9 million.
Adjusted NOPAT decreased $53.0 million to $45.9 million.
Cash provided by operating activities decreased $47.7 million to $114.7 million.
For the quarter and year-to-date results, the increase in reported revenue growth was primarily due to the addition of the revenue of our recently acquired WIRmachenDRUCK brand, as well as continued growth in the Vistaprint business unit and Upload and Print businesses acquired more than twelve months prior.
The decrease in operating income for the three and six months ended December 31, 2016 was negatively impacted by the following items:
Increased organic investments, which include costs that impact our gross margin, including shipping price reductions, expanded design services, and new product introduction;

29




Increased temporary labor costs at our Canadian production facility during the peak holiday season, as well as increased third-party fulfillment and shipping costs due to production inefficiencies, which negatively impacted gross margin by approximately 200 basis points in the aggregate;
Increased investments in our mass customization platform and expansion of production and information technology capabilities;
Declines from the termination of two partner contracts, within our Albumprinter and Corporate Solutions businesses;
Increased share-based compensation during the current periods, primarily driven by our new long-term incentive program;
Significant acquisition-related expense associated with our WIRmachenDRUCK contingent earn-out arrangement; and
Fluctuations in currency rates, which we hedge with derivative currency contracts, but do not apply hedge accounting and recognize the offsetting impact below the line within other income.
The decrease in adjusted NOPAT (a non-GAAP financial measure) was also negatively impacted by the items described above, with the exception of the expense associated with our WIRmachenDRUCK contingent earn-out arrangement, of which, the expense is excluded from adjusted NOPAT, and the impact of our derivative currency contracts for which we do not apply hedge accounting and any realized gains are included in adjusted NOPAT.
On January 25, 2017, we announced a plan to restructure the company and implement organizational changes that will deeply decentralize the company’s operations in order to improve accountability for customer satisfaction and capital returns, simplify d