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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________
Form 10-Q
(Mark One)
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended
September 30, 2019
or
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.) 
Building D, Xerox Technology Park A91 H9N9,
Dundalk, Co. Louth
Ireland
(Address of Principal Executive Offices)
Registrant’s telephone number, including area code: 353 42 938 8500
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class
 
Trading Symbol(s)
 
Name of Exchange on Which Registered
Ordinary Shares, par value of €0.01
 
CMPR
 
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 every Interactive Data File required to be submitted 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 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, smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
  þ
Accelerated filer
Non-accelerated filer
 
 
Smaller reporting company
 
 
 
 
Emerging growth company
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o 
     Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).  Yes      No þ
As of October 25, 2019, there were 27,898,571 Cimpress N.V. ordinary shares outstanding.

 



CIMPRESS N.V.
QUARTERLY REPORT ON FORM 10-Q
For the Three Months Ended September 30, 2019

TABLE OF CONTENTS
 
 
Page
PART I FINANCIAL INFORMATION
 
Item 1. Financial Statements (unaudited)
     Consolidated Balance Sheets as of September 30, 2019 and June 30, 2019
     Consolidated Statements of Operations for the three months ended September 30, 2019 and 2018
     Consolidated Statements of Comprehensive Income (Loss) for the three months ended September 30, 2019 and 2018
     Consolidated Statements of Shareholders' Equity for the three months ended September 30, 2019 and 2018
     Consolidated Statements of Cash Flows for the three months ended September 30, 2019 and 2018
     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)


September 30,
2019

June 30,
2019
Assets
 


 

Current assets:
 


 

Cash and cash equivalents
$
31,234


$
35,279

Accounts receivable, net of allowances of $8,781 and $7,313, respectively
68,518


60,646

Inventory
82,282


66,310

Prepaid expenses and other current assets
87,161


78,065

Total current assets
269,195


240,300

Property, plant and equipment, net
362,045


490,755

Operating lease assets, net
176,677



Software and website development costs, net
70,090


69,840

Deferred tax assets
57,527


59,906

Goodwill
711,670


718,880

Intangible assets, net
245,514


262,701

Other assets
46,751


25,994

Total assets
$
1,939,469


$
1,868,376

Liabilities, noncontrolling interests and shareholders’ equity
 


 

Current liabilities:
 


 

Accounts payable
$
182,858


$
185,096

Accrued expenses
216,000


194,715

Deferred revenue
35,533


31,780

Short-term debt
63,136

 
81,277

Operating lease liabilities, current
36,274



Other current liabilities
12,714

 
27,881

Total current liabilities
546,515


520,749

Deferred tax liabilities
37,967


44,531

Long-term debt
1,164,696


942,290

Lease financing obligation

 
112,096

Operating lease liabilities, non-current
146,678



Other liabilities
53,708


53,716

Total liabilities
1,949,564


1,673,382

Commitments and contingencies (Note 14)
 
 
 
Redeemable noncontrolling interests
65,507


63,182

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 28,483,314 and 30,445,669 shares outstanding, respectively
615


615

Treasury shares, at cost, 15,597,313 and 13,634,958 shares, respectively
(969,833
)

(737,447
)
Additional paid-in capital
415,984


411,079

Retained earnings
560,596


537,422

Accumulated other comprehensive loss
(82,964
)

(79,857
)
Total shareholders' equity
(75,602
)
 
131,812

Total liabilities, noncontrolling interests and shareholders’ equity
$
1,939,469


$
1,868,376

See accompanying notes.


1


CIMPRESS N.V.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited in thousands, except share and per share data)
 
Three Months Ended September 30,
 
2019
 
2018
Revenue
$
633,959

 
$
588,981

Cost of revenue (1)
325,665

 
302,471

Technology and development expense (1)
63,167

 
57,063

Marketing and selling expense (1)
160,917

 
182,788

General and administrative expense (1)
43,623

 
41,176

Amortization of acquired intangible assets
13,018

 
11,301

Restructuring expense (1)
2,190

 
170

Income (loss) from operations
25,379

 
(5,988
)
Other income, net
15,674

 
10,252

Interest expense, net
(15,087
)
 
(13,777
)
Income (loss) before income taxes
25,966

 
(9,513
)
Income tax expense
6,115

 
5,481

Net income (loss)
19,851

 
(14,994
)
Add: Net loss attributable to noncontrolling interest
180

 
355

Net income (loss) attributable to Cimpress N.V.
$
20,031

 
$
(14,639
)
Basic net income (loss) per share attributable to Cimpress N.V.
$
0.67

 
$
(0.47
)
Diluted net income (loss) per share attributable to Cimpress N.V.
$
0.66

 
$
(0.47
)
Weighted average shares outstanding — basic
29,747,035

 
30,883,617

Weighted average shares outstanding — diluted
30,529,472

 
30,883,617

____________________________________________
(1) Share-based compensation is allocated as follows:
 
Three Months Ended September 30,
 
2019
 
2018
Cost of revenue
$
88

 
$
115

Technology and development expense
1,734

 
2,208

Marketing and selling expense
(1,311
)
 
1,363

General and administrative expense
4,239

 
5,230

Restructuring expense
664

 


See accompanying notes.

2


CIMPRESS N.V.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited in thousands)
 
Three Months Ended September 30,
 
2019
 
2018
Net income (loss)
$
19,851

 
$
(14,994
)
Other comprehensive income (loss), net of tax:

 
 
Foreign currency translation losses, net of hedges
(1,560
)
 
(2,545
)
Net unrealized (losses) gains on derivative instruments designated and qualifying as cash flow hedges
(7,188
)
 
610

Amounts reclassified from accumulated other comprehensive loss to net income (loss) on derivative instruments
4,151

 
803

Comprehensive income (loss)
15,254

 
(16,126
)
Add: Comprehensive loss attributable to noncontrolling interests
1,670

 
715

Total comprehensive income (loss) attributable to Cimpress N.V.
$
16,924

 
$
(15,411
)
See accompanying notes.

3



CIMPRESS N.V.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(unaudited in thousands)
 
Ordinary Shares
 
Treasury Shares
 
 
 
 
 
 
 
 
 
Number of
Shares
Issued
 
Amount
 
Number
of
Shares
 
Amount
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated Other
Comprehensive
Loss
 
Total
Shareholders’
Equity
Balance at June 30, 2018
44,080


$
615


(13,206
)

$
(685,577
)

$
395,682


$
452,756


$
(69,814
)

$
93,662

Restricted share units vested, net of shares withheld for taxes

 

 
20

 
64

 
(1,533
)
 

 

 
(1,469
)
Grant of restricted share awards

 

 
(2)
 
(288
)
 

 

 

 
(288
)
Share-based compensation expense

 

 

 

 
8,856

 

 

 
8,856

Net loss attributable to Cimpress N.V.

 

 

 

 

 
(14,639
)
 

 
(14,639
)
Adoption of new accounting standard

 

 

 

 

 
(3,246
)
 

 
(3,246
)
Net unrealized gain on derivative instruments designated and qualifying as cash flow hedges

 

 

 

 

 

 
1,413

 
1,413

Foreign currency translation, net of hedges

 

 

 

 

 

 
(2,185
)
 
(2,185
)
Balance at September 30, 2018
44,080

 
$
615

 
(13,188
)
 
$
(685,801
)
 
$
403,005

 
$
434,871

 
$
(70,586
)
 
$
82,104


Balance at June 30, 2019
44,080


$
615


(13,635
)

$
(737,447
)

$
411,079


$
537,422


$
(79,857
)

$
131,812

Restricted share units vested, net of shares withheld for taxes




4


87


(259
)





(172
)
Grant of restricted share awards




(2
)

(187
)







(187
)
Share-based compensation expense








5,164






5,164

Purchase of ordinary shares




(1,964
)

(232,286
)







(232,286
)
Net income attributable to Cimpress N.V.










20,031




20,031

Adoption of new accounting standards










3,143




3,143

Net unrealized loss on derivative instruments designated and qualifying as cash flow hedges












(3,037
)

(3,037
)
Foreign currency translation, net of hedges












(70
)

(70
)
Balance at September 30, 2019
44,080


$
615


(15,597
)

$
(969,833
)

$
415,984


$
560,596


$
(82,964
)

$
(75,602
)
See accompanying notes.



4


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

Three Months Ended September 30,
 
2019

2018
Operating activities
 


 

Net income (loss)
$
19,851


$
(14,994
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 


 

Depreciation and amortization
42,535


40,718

Share-based compensation expense
5,414


8,916

Deferred taxes
(960
)

(3,963
)
Unrealized gain on derivatives not designated as hedging instruments included in net income (loss)
(14,527
)

(5,766
)
Effect of exchange rate changes on monetary assets and liabilities denominated in non-functional currency
5,028


(2,856
)
Other non-cash items
1,365


745

Changes in operating assets and liabilities:
 




Accounts receivable
(6,595
)

(7,291
)
Inventory
(6,410
)

(11,316
)
Prepaid expenses and other assets
737


783

Accounts payable
(11,038
)

1,586

Accrued expenses and other liabilities
27,505


15,658

Net cash provided by operating activities
62,905


22,220

Investing activities
 


 

Purchases of property, plant and equipment
(14,193
)
 
(21,026
)
Business acquisitions, net of cash acquired
(4,272
)
 
(18,000
)
Purchases of intangible assets

 
(22
)
Capitalization of software and website development costs
(12,471
)
 
(11,233
)
Proceeds from the sale of assets
670


318

Other investing activities
903

 
395

Net cash used in investing activities
(29,363
)

(49,568
)
Financing activities


 


Proceeds from borrowings of debt
277,785

 
245,096

Payments of debt
(74,392
)
 
(206,692
)
Payments of debt issuance costs

 
(1,458
)
Payments of withholding taxes in connection with equity awards
(359
)
 
(1,766
)
Payments of finance lease obligations
(2,719
)
 
(4,182
)
Purchase of ordinary shares
(231,883
)
 

Other financing activities
(1,437
)
 
645

Net cash (used in) provided by financing activities
(33,005
)
 
31,643

Effect of exchange rate changes on cash
(4,582
)
 
(454
)
Net (decrease) increase in cash and cash equivalents
(4,045
)
 
3,841

Cash and cash equivalents at beginning of period
35,279

 
44,227

Cash and cash equivalents at end of period
$
31,234

 
$
48,068

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
9,384

 
$
7,549

Income taxes
4,472

 
5,449

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

 
2,825

Property and equipment acquired under finance leases

 
3,565

Amounts accrued related to business acquisitions
2,645

 
5,832

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
Cimpress is a strategically focused group of more than a dozen businesses that specialize in mass customization, via which we deliver large volumes of individually small-sized customized orders for a broad spectrum of print, signage, photo merchandise, invitations and announcements, writing instruments, packaging, apparel and other categories. We invest in and build customer-focused, entrepreneurial mass customization businesses for the long term, which we manage in a decentralized, autonomous manner. Mass customization is a core element of the business model of each Cimpress business. We drive competitive advantage across Cimpress through a select few shared strategic capabilities that have the greatest potential to create Cimpress-wide value. We limit all other central activities to only those which absolutely must be performed centrally.
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 presentation 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.     Operating results for the three months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending June 30, 2020 or for any other period.

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. Investments in entities in which we cannot exercise significant influence, and the related equity securities do not have a readily determinable fair value, are accounted for using the cost method and are included in other assets on the consolidated balance sheets.

Significant Accounting Policies

Our significant accounting policies are described in Note 2 in our consolidated financial statements included in the Form 10-K for our year ended June 30, 2019. There have been no material changes to our significant accounting policies during the three months ended September 30, 2019, except the adoption of the new lease accounting standard, as discussed below.
Share-based Compensation
    
Total share-based compensation expense was $5,414 and $8,916 for the three months ended September 30, 2019 and 2018, respectively.    

During fiscal 2018, we issued supplemental performance share units ("supplemental PSUs") to certain members of management (excluding Robert Keane, our Chairman and CEO) that were incremental to our typical long-term incentive awards. The supplemental PSUs are subject to a three-year cumulative financial performance condition intended to provide a stretch goal for participants in addition to service vesting and share price performance conditions. During the three months ended September 30, 2018 we recognized $1,894 of share-based compensation expense related to supplemental PSUs and we subsequently reversed this expense in the second quarter of fiscal 2019, as we concluded the achievement of the three-year performance condition was no longer probable. As of September 30, 2019 we continue to believe the awards are not probable of achievement. If, in a future period, we determine that it is probable that the financial performance condition will be achieved based on our financial performance, we will cumulatively catch up the expense in that period.


6


Other Income, Net
The following table summarizes the components of other income, net:
 
 
 
2019

2018
Gains on derivatives not designated as hedging instruments (1)
$
19,357


$
7,373

Currency-related (losses) gains, net (2)
(3,412
)

2,097

Other (losses) gains
(271
)

782

Total other income, net
$
15,674


$
10,252


_____________________
(1) Primarily relates to both realized and unrealized gains (losses) on derivative currency forward and option contracts not designated as hedging instruments.
(2) We have significant non-functional currency intercompany financing relationships that we may change at times and are subject to currency exchange rate volatility. The currency-related (losses) gains, net for the three months ended September 30, 2019 and 2018 are primarily driven by this intercompany activity. In addition, we have certain cross-currency swaps designated as cash flow hedges, which hedge the remeasurement of certain intercompany loans, both presented in the same component above. The unrealized gain related to cross-currency swaps was $4,678 for the three months ended September 30, 2019 while we had an unrealized loss of $837 for the three months ended September 30, 2018.
Net Income (Loss) Per Share Attributable to Cimpress N.V.
Basic net income (loss) per share attributable to Cimpress N.V. is computed by dividing net income (loss) attributable to Cimpress N.V. by the weighted-average number of ordinary shares outstanding for the respective period. Diluted net income (loss) 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 performance share units ("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 September 30,
 
2019
 
2018
Weighted average shares outstanding, basic
29,747,035

 
30,883,617

Weighted average shares issuable upon exercise/vesting of outstanding share options/RSUs/RSAs
782,437

 

Shares used in computing diluted net income (loss) per share attributable to Cimpress N.V.
30,529,472

 
30,883,617

Weighted average anti-dilutive shares excluded from diluted net income (loss) per share attributable to Cimpress N.V. (1)

 
1,222,905

_____________________
(1) In the periods in which a net loss is recognized, the impact of share options, RSUs, and RSAs is not included as they are anti-dilutive.
Lease Accounting
Lease accounting - adoption of ASC 842

On July 1, 2019, we adopted ASC 842, Leases, using a modified retrospective transition approach. Under the modified retrospective approach, we recognized any cumulative impacts as of the adoption date within retained earnings on our consolidated balance sheet. We did not adjust the prior comparable period. Additionally, as part of our transition, we elected several practical expedients that streamlined the transition to the new guidance whereby we did not reassess the following:

whether a lease under the prior standard continues to meet the definition of a lease under the new standard;
whether the application of the new standard would have an impact on the classification of our existing leases, with the exception of our build-to-suit leases; and
the existence of any initial direct costs associated with our leases.

7



We also elected the practical expedient to account for our lease components as a single lease component rather than separating them into lease and nonlease components, which would have resulted in recognizing only the lease components in the measurement of our lease assets and liabilities.

We elected the short-term lease exception policy, permitting us to not apply the recognition requirements of ASC 842 to short-term leases, which are defined as leases with a term of twelve months or less. Short-term leases are not recorded on our consolidated balance sheet and are expensed on a straight-line basis over the lease term in our consolidated statement of operations. We determine the lease term by including the exercise of renewal options that are considered reasonably certain at lease inception.

The following table summarizes the cumulative effect of adopting the new lease standard as of the adoption date of July 1, 2019:
Consolidated Balance Sheet
As reported at
June 30, 2019
 
ASC 842 adjustments
 
Adjusted balance at
July 1, 2019
Assets
 
 
 
 
 
Prepaid expenses and other current assets
$
78,065

 
$
(59
)
 
$
78,006

Property, plant and equipment, net
490,755

 
(121,254
)
 
369,501

Operating lease assets, net

 
169,668

 
169,668

Deferred tax assets
59,906

 
(817
)
 
59,089

Liabilities and Shareholders' Equity
 
 
 
 
 
Operating lease liabilities, current
$

 
$
37,342

 
$
37,342

Other current liabilities
27,881

 
(12,569
)
 
15,312

Lease financing obligation
112,096

 
(112,096
)
 

Operating lease liabilities, non-current

 
139,041

 
139,041

Other liabilities
53,716

 
(7,169
)
 
46,547

Retained earnings
537,422

 
2,989

 
540,411


    
The new standard impacted the classification of our build-to-suit leases for our Waltham, Massachusetts and Dallas, Texas building leases, which under the new standard resulted in a change of their classification to operating leases. On July 1, 2019, we de-recognized the existing lease assets included within property, plant and equipment, net of $121,254, the related lease financing obligations of $124,665, and associated deferred rent of $418. This change resulted in an $817 decrease to deferred tax assets and a net increase to retained earnings of $2,989. In addition, on July 1, 2019, we recognized operating lease assets of $169,668 and operating lease liabilities of $176,383, inclusive of our Waltham, Massachusetts lease which commenced prior to the transition date. The difference between the operating lease assets and liabilities resulted from the reclassification of deferred rent and tenant allowance balances presented in other financial statement lines of the consolidated balance sheet, which are now included in the operating lease assets.

For the first quarter of fiscal year 2020, the change in lease classification for our build-to-suit leases resulted in a reduction to operating income within our consolidated statement of operations of $1,860, with a corresponding decrease to interest expense, net. In our consolidated statement of cash flows, the change in classification resulted in a decrease to cash from operating activities and increase to cash from financing activities of $989. Other than the impact from our build-to-suit leases, the new standard did not have a material impact on our consolidated statement of operations and consolidated statement of cash flows. Refer to Note 13 for additional lease disclosure.

Lease accounting policy

We determine if an arrangement contains a lease at contract inception. We consider an arrangement to be a lease if it conveys the right to control an identifiable asset for a period of time.

Lease right-of-use ("ROU") assets and liabilities for operating and finance leases are recognized based on the present value of the future lease payments over the lease term at lease commencement date. As most of our leases do not provide an implicit interest rate, we use our incremental borrowing rate based on the information

8


available at the lease commencement date. Our incremental borrowing rate approximates the interest rate on a collateralized basis with similar terms and payments, and in economic environments where the leased asset is located. ROU assets also include any lease payments made at or before the lease commencement, as well as any initial direct costs incurred. Lease incentives received from the lessor are recognized as a reduction to the ROU asset. Variable lease payments are excluded from the operating lease assets and lease liabilities and recognized in the period in which the obligation for those payments is incurred.

Our initial determination of the lease term is based on the facts and circumstances that exist at lease commencement. The lease term may include the effect of options to extend or terminate the lease when it is reasonably certain that those options will be exercised. We consider these options reasonably certain to be exercised based on our assessment of economic incentives, including the fair market rent for equivalent properties under similar terms and conditions, the costs of relocating, the availability of comparable replacement assets, and any related disruption to operations that would be experienced by not renewing the lease.

Operating leases are included in operating lease assets and current and non-current operating lease liabilities in the consolidated balance sheets. Finance lease assets are included in property, plant, and equipment, net, and the related liabilities are included in other current liabilities and other liabilities in the consolidated balance sheets.

We also have leases of equipment and real estate which we have subleased to third parties, making us the lessor. Most of these subleases meet the criteria for operating lease classification and the related sublease income is recognized on a straight-line basis over the lease term within the consolidated statement of operations. To a lesser extent, we have leases in which we are the lessees and classify the leases as finance leases and we have subleased the asset under similar terms, resulting in their classification as direct financing leases. For direct financing leases, we recognize a sublease receivable within prepaid expenses and other current assets and other assets.
Recently Issued or Adopted Accounting Pronouncements
New Accounting Standards Adopted
In August 2018, the FASB issued Accounting Standards Update No. 2018-15 "Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40)" (ASU 2018-15), which requires a customer in a cloud computing arrangement that is a service contract to follow the internal use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as incurred. The standard would be effective on July 1, 2020 and we early adopted new standard on July 1, 2019. The standard did not have a material impact on our consolidated financial statements.
In August 2017, the FASB issued Accounting Standards Update No. 2017-12, "Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities (Topic 815)," (ASU 2017-12), which better aligns a company’s financial reporting for hedging activities with the economic objectives of those activities. We adopted the amendment on its effective date of July 1, 2019. The standard requires a modified retrospective transition approach, and we recognized the cumulative effect of the change within shareholders' equity as of the date of adoption.
Upon transitioning to the new standard on July 1, 2019, we reversed the cumulative effect of expense previously recognized in earnings for the ineffective portion of our interest rate swap contracts, which resulted in an adjustment to retained earnings and accumulated other comprehensive loss within our consolidated balance sheet of $153, net of tax. We will prospectively recognize any ineffectiveness associated with any effective and designated cash flow hedges within accumulated other comprehensive loss, rather than in earnings. These changes did not 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 leases. The standard also retains a distinction between finance leases and operating leases. We adopted the standard on its effective date of July 1, 2019. Refer to the information above for additional details of the adoption.

9


Issued Accounting Standards to be Adopted
In June 2016, the FASB issued Accounting Standards Update No. 2016-13 "Financial Instruments—Credit Losses (Topic 326)" (ASU 2016-13), which introduces a new accounting model for recognizing credit losses on certain financial instruments based on an estimate of current expected credit losses. The standard is effective for us on July 1, 2020. We do not expect the effect of ASU 2016-13 to have a material impact on our consolidated financial statements.
3. Fair Value Measurements
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. 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:
 
September 30, 2019
 
Total
 
Quoted Prices in
Active
Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Cross-currency swap contracts
$
5,924

 
$

 
$
5,924

 
$

Currency forward contracts
36,072

 

 
36,072

 

Currency option contracts
8,665

 

 
8,665

 

Total assets recorded at fair value
$
50,661

 
$

 
$
50,661

 
$

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Interest rate swap contracts
$
(18,390
)
 
$

 
$
(18,390
)
 
$

Total liabilities recorded at fair value
$
(18,390
)
 
$

 
$
(18,390
)
 
$



10


 
June 30, 2019
 
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
$
144

 
$

 
$
144

 
$

Currency forward contracts
15,268

 

 
15,268

 

Currency option contracts
4,765

 

 
4,765

 

Total assets recorded at fair value
$
20,177

 
$

 
$
20,177

 
$

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Interest rate swap contracts
$
(12,895
)
 
$

 
$
(12,895
)
 
$

Cross-currency swap contracts
(915
)
 

 
(915
)
 

Currency forward contracts
(2,486
)
 

 
(2,486
)
 

Currency option contracts
(42
)
 

 
(42
)
 

Total liabilities recorded at fair value
$
(16,338
)
 
$

 
$
(16,338
)
 
$


During the quarter ended September 30, 2019 and year ended June 30, 2019, 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 respective counterparties' nonperformance risk in the fair value measurement. However, as of September 30, 2019, 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.

As of September 30, 2019 and June 30, 2019, the carrying amounts of our cash and cash equivalents, accounts receivable, accounts payable, and other current liabilities approximated their estimated fair values. As of September 30, 2019 and June 30, 2019 the carrying value of our debt, excluding debt issuance costs and debt discounts, was $1,239,222 and $1,035,585, respectively, and the fair value was $1,256,305 and $1,045,334, respectively. Our debt at September 30, 2019 includes variable-rate debt instruments indexed to LIBOR that resets periodically, as well as 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.

11


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 change 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. On July 1, 2019, we adopted the new hedge accounting standard, in which we no longer recognize the ineffective portion of an effective hedge within earnings, rather any ineffectiveness associated with any effective and designated hedge is recognized within accumulated other comprehensive loss. Refer to Note 2 for additional details.
The change in the fair value of derivatives not designated as hedges is recognized directly in earnings as a component of other income, net.
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.
Amounts reported in accumulated other comprehensive loss related to interest rate swap contracts will be reclassified to interest expense, net as interest payments are accrued or made on our variable-rate debt. As of September 30, 2019, we estimate that $2,887 will be reclassified from accumulated other comprehensive loss to interest expense during the twelve months ending September 30, 2020. As of September 30, 2019, we had nine outstanding interest rate swap contracts indexed to USD LIBOR. These instruments were designated as cash flow hedges of interest rate risk and have varying start dates and maturity dates through December 2025.
Interest rate swap contracts outstanding:
 
Notional Amounts
Contracts accruing interest as of September 30, 2019
 
$
500,000

Contracts with a future start date
 

Total
 
$
500,000


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 September 30, 2019, we had two outstanding cross-currency swap contracts designated as cash flow hedges with a total notional amount of $124,808, both maturing during June 2024. 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.
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 September 30, 2019, we estimate that $3,332 of income will be reclassified from accumulated other comprehensive loss to interest expense, net during the twelve months ending September 30, 2020.

12


Other Currency Contracts
We execute currency forward and option contracts in order to mitigate our exposure to fluctuations in various currencies against our reporting currency, the U.S. Dollar.
As of September 30, 2019, we had nine currency forward contracts designated as net investment hedges with a total notional amount of $294,991, maturing during various dates through April 2024. We entered into these contracts to hedge the risk of changes in the U.S. Dollar equivalent value of a portion of our net investment in two consolidated subsidiaries that have Euro as their functional currency. Amounts reported in accumulated other comprehensive loss are recognized as a component of our cumulative translation adjustment.
We have elected to not apply hedge accounting for all other currency forward and option contracts. During the three months ended September 30, 2019 and 2018, 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 and option contracts. 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 September 30, 2019, we had the following outstanding currency derivative contracts that were not designated for hedge accounting and were used to hedge fluctuations in the U.S. Dollar value of forecasted transactions or balances denominated in Australian Dollar, British Pound, Canadian Dollar, Danish Krone, Euro, Indian Rupee, Mexican Peso, New Zealand Dollar, Norwegian Krone, Philippine Peso and Swedish Krona:
Notional Amount
 
Effective Date
 
Maturity Date
 
Number of Instruments
 
Index
$660,880
 
November 2017 through September 2019
 
Various dates through October 2024
 
653
 
Various


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 September 30, 2019 and June 30, 2019. Our derivative asset and liability balances will fluctuate with interest rate and currency exchange rate volatility.
 
September 30, 2019
 
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 current assets / other assets
 
$

 
$

 
$

 
Other current liabilities / other liabilities
 
$
(18,390
)
 
$

 
$
(18,390
)
Cross-currency swaps
Other current assets
 
5,924

 

 
5,924

 
Other current liabilities
 

 

 

Derivatives in net investment hedging relationships
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency forward contracts
Other non-current assets
 
14,835

 

 
14,835

 
Other current liabilities / other liabilities
 

 

 

Total derivatives designated as hedging instruments

 
$
20,759

 
$

 
$
20,759

 

 
$
(18,390
)
 
$

 
$
(18,390
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency forward contracts
Other current assets / other assets
 
$
22,412

 
$
(1,175
)
 
$
21,237

 
Other current liabilities / other liabilities
 
$

 
$

 
$

Currency option contracts
Other current assets / other assets
 
8,666

 
(1
)
 
8,665

 
Other current liabilities / other liabilities
 

 

 

Total derivatives not designated as hedging instruments
 
 
$
31,078

 
$
(1,176
)
 
$
29,902

 

 
$

 
$

 
$


14



June 30, 2019

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

$
144


$


$
144


Other current liabilities / other liabilities

$
(12,895
)

$


$
(12,895
)
Cross-currency swaps
Other non-current assets







Other liabilities

(915
)



(915
)
Derivatives in net investment hedging relationships
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency forward contracts
Other non-current assets

4,514




4,514


Other liabilities

(2,397
)



(2,397
)
Total derivatives designated as hedging instruments


$
4,658


$


$
4,658




$
(16,207
)

$


$
(16,207
)
















Derivatives not designated as hedging instruments















Currency forward contracts
Other current assets / other assets

$
11,865


$
(1,111
)

$
10,754


Other current liabilities / other liabilities

$
(127
)

$
38


$
(89
)
Currency option contracts
Other current assets / other assets
 
4,793

 
(28
)
 
4,765

 
Other current liabilities / other liabilities
 
(42
)
 

 
(42
)
Total derivatives not designated as hedging instruments


$
16,658


$
(1,139
)

$
15,519




$
(169
)

$
38


$
(131
)

The following table presents the effect of our derivative financial instruments designated as hedging instruments and their classification within comprehensive income (loss) for the three months ended September 30, 2019 and 2018:
 
Amount of Gain (Loss) Recognized in Comprehensive Income (Loss) on Derivatives
 
Three Months Ended September 30,
 
2019
 
2018
Derivatives in cash flow hedging relationships
 
 
 
Interest rate swaps (1)
$
(4,590
)
 
$
872

Cross-currency swaps
(2,598
)
 
(262
)
Derivatives in net investment hedging relationships
 
 
 
Cross-currency swaps

 
1,790

Currency forward contracts
12,718

 
1,886

Total
$
5,530

 
$
4,286

___________________
(1) Upon transitioning to the new hedge accounting standard on July 1, 2019, we reversed the cumulative effect of expense recognized for the ineffective portion of our interest rate swap contracts, which resulted in an adjustment to accumulated other comprehensive loss of $153, net of tax, which is included within the interest rate swap loss recognized for the three months ended September 30, 2019.


15


The following table presents reclassifications out of accumulated other comprehensive loss for the three months ended September 30, 2019 and 2018:
 
Amount of Net Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income
 
Affected line item in the
Statement of Operations
 
Three Months Ended September 30,
 
 
 
2019
 
2018
 
 
Derivatives in cash flow hedging relationships
 
 
 
 
 
Interest rate swaps
$
(30
)
 
$
(169
)
 
Interest expense, net
Cross-currency swaps
5,564

 
1,240

 
Other income, net
Total before income tax
5,534

 
1,071

 
Income before income taxes
Income tax
(1,383
)
 
(268
)
 
Income tax expense
Total
$
4,151

 
$
803

 
 


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 and de-designated derivative financial instruments that no longer qualify as hedging instruments in the period.
 
Amount of Gain (Loss) Recognized in Net Income (Loss)
 
Affected line item in the
Statement of Operations
 
Three Months Ended September 30,
 
 
 
2019
 
2018
 
 
Currency contracts
$
19,357


$
7,373

 
Other income, net
Interest rate swaps (1)


204

 
Other income, net
Total
$
19,357

 
$
7,577

 
 

_____________________
(1) Upon our adoption of the new hedge accounting standard on July 1, 2019, we prospectively recognize any ineffectiveness associated with any effective and designated hedges within accumulated other comprehensive loss, rather than in earnings.
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 $1,929 for the three months ended September 30, 2019:

Gains (losses) on cash flow hedges (1)
 
Gains (losses) on pension benefit obligation
 
Translation adjustments, net of hedges (2)
 
Total
Balance as of June 30, 2019
$
(11,282
)

$
(204
)

$
(68,371
)

$
(79,857
)
Other comprehensive loss before reclassifications
(7,188
)



(70
)

(7,258
)
Amounts reclassified from accumulated other comprehensive loss to net income (loss)
4,151