10-Q 1 vprt3311410q.htm 10-Q VPRT 3.31.14 10Q

 
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 March 31, 2014
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
___________________
Vistaprint 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
____________________
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). See definitions of "large accelerated filer," "accelerated filer," "non-accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (check one):
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 April 25, 2014, there were outstanding 33,285,752 ordinary shares, par value 0.01 per share, of Vistaprint N.V.
 



VISTAPRINT N.V.
QUARTERLY REPORT ON FORM 10-Q
For the Three and Nine Months Ended March 31, 2014

TABLE OF CONTENTS
 
 
Page
 
 
 50
 
 
 
 

2


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
VISTAPRINT N.V.
CONSOLIDATED BALANCE SHEETS
(Unaudited in thousands, except share and per share data)

March 31,
2014
 
June 30,
2013
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
46,545

 
$
50,065

Marketable securities
10,927

 

Accounts receivable, net of allowances of $122 and $104, respectively
20,339

 
22,026

Inventory
7,416

 
7,620

Prepaid expenses and other current assets
40,813

 
20,520

Total current assets
126,040

 
100,231

Property, plant and equipment, net
313,854

 
280,022

Software and web site development costs, net
12,985

 
9,071

Deferred tax assets
5,335

 
581

Goodwill
144,313

 
140,893

Intangible assets, net
24,840

 
30,337

Other assets
31,182

 
29,184

Investment in equity interests
13,457

 
11,248

Total assets
$
672,006

 
$
601,567

Liabilities and shareholders’ equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
32,830

 
$
22,597

Accrued expenses
100,150

 
103,338

Deferred revenue
23,776

 
18,668

Deferred tax liabilities
1,182

 
1,466

Current portion of long-term debt
16,375

 
8,750

Other current liabilities
3,127

 
207

Total current liabilities
177,440

 
155,026

Deferred tax liabilities
5,410

 
12,246

Other liabilities
25,442

 
14,734

Long-term debt
185,578

 
230,000

Total liabilities
393,870

 
412,006

Commitments and contingencies (Note 14)


 


Noncontrolling interest (Note 12)
5,741

 

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 33,272,556 and 32,791,338 shares outstanding, respectively
615

 
615

Treasury shares, at cost, 10,808,071 and 11,289,289 shares, respectively
(384,530
)
 
(398,301
)
Additional paid-in capital
309,097

 
299,659

Retained earnings
341,806

 
299,144

Accumulated other comprehensive income (loss)
5,407

 
(11,556
)
Total shareholders' equity
272,395

 
189,561

Total liabilities, noncontrolling interest and shareholders’ equity
$
672,006

 
$
601,567

See accompanying notes.

3


VISTAPRINT N.V.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited in thousands, except share and per share data)
 
Three Months Ended
March 31,
 
Nine Months Ended
March 31,
 
2014
 
2013
 
2014
 
2013
Revenue
$
286,185

 
$
287,684

 
$
932,081

 
$
887,412

Cost of revenue (1)
100,903

 
99,107

 
317,482

 
301,284

Technology and development expense (1)
42,434

 
43,004

 
127,555

 
120,706

Marketing and selling expense (1)
109,118

 
109,966

 
335,679

 
344,327

General and administrative expense (1)
28,491

 
25,874

 
85,195

 
78,087

Income from operations
5,239

 
9,733

 
66,170

 
43,008

Other income (expense), net
(116
)
 
260

 
(8,151
)
 
(559
)
Interest expense, net
(1,725
)
 
(1,283
)
 
(4,868
)
 
(3,709
)
Income before income taxes and loss in equity interests
3,398

 
8,710

 
53,151

 
38,740

Income tax provision
999

 
2,264

 
7,819

 
10,587

Loss in equity interests
1,058

 
580

 
2,704

 
1,023

Net income
1,341

 
5,866

 
42,628

 
27,130

Add: Net loss attributable to noncontrolling interest
34

 

 
34

 

Net income attributable to Vistaprint N.V.
$
1,375

 
$
5,866

 
$
42,662

 
$
27,130

Basic net income per share attributable to Vistaprint N.V.
$
0.04

 
$
0.18

 
$
1.30

 
$
0.81

Diluted net income per share attributable to Vistaprint N.V.
$
0.04

 
$
0.17

 
$
1.24

 
$
0.78

Weighted average shares outstanding — basic
33,249,419

 
33,267,073

 
32,921,016

 
33,441,581

Weighted average shares outstanding — diluted
34,356,990

 
34,394,467

 
34,425,288

 
34,636,650

____________________________________________
(1) Share-based compensation is allocated as follows:
 
Three Months Ended March 31,
 
Nine Months Ended
March 31,
 
2014

2013
 
2014
 
2013
Cost of revenue
$
55

 
$
104

 
$
193

 
$
309

Technology and development expense
1,022

 
2,297

 
5,900

 
6,903

Marketing and selling expense
876

 
1,594

 
4,153

 
4,733

General and administrative expense
3,639

 
4,175

 
11,604

 
12,842


See accompanying notes.



4


VISTAPRINT N.V.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited in thousands)

 
Three Months Ended March 31,
 
Nine Months Ended
March 31,
 
2014
 
2013
 
2014
 
2013
Net income
$
1,341

 
$
5,866

 
$
42,628

 
$
27,130

Other comprehensive income:

 

 

 

Foreign currency translation
(227
)
 
(4,657
)
 
10,764

 
3,569

Net unrealized gain (loss) on derivative instruments designated and qualifying as cash flow hedges
(70
)
 
617

 
(138
)
 
102

Net unrealized gain on available-for-sale securities
6,283

 

 
6,283

 

Comprehensive income
7,327

 
1,826

 
59,537

 
30,801

Comprehensive loss attributable to noncontrolling interest
88

 

 
88

 

Total comprehensive income attributable to Vistaprint N.V.
$
7,415

 
$
1,826

 
$
59,625

 
$
30,801


See accompanying notes.








5


VISTAPRINT N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited in thousands)
 
Nine Months Ended March 31,
 
2014
 
2013
Operating activities

 
 

Net income
$
42,628

 
$
27,130

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

 
 

Depreciation and amortization
49,346

 
46,993

Share-based compensation expense
21,850

 
24,787

Excess tax (benefits) shortfall derived from share-based compensation awards
(5,467
)
 
1,808

Deferred taxes
(10,954
)
 
(4,130
)
Loss in equity interests
2,704

 
1,023

Non-cash gain on equipment

 
(1,414
)
Abandonment of long-lived assets

 
977

Unrealized loss on derivative instruments included in net income
2,655

 

Effect of exchange rate changes on monetary assets and liabilities denominated in non-functional currency
983

 
23

Other non-cash items
729

 
125

Changes in operating assets and liabilities:


 
 

Accounts receivable
2,293

 
(1,134
)
Inventory
352

 
(1,159
)
Prepaid expenses and other assets
(9,217
)
 
7,242

Accounts payable
7,979

 
(3,278
)
Accrued expenses and other liabilities
(7,835
)
 
4,325

Net cash provided by operating activities
98,046

 
103,318

Investing activities
 

 
 

Purchases of property, plant and equipment
(53,999
)
 
(66,523
)
Proceeds from sale of assets
137

 
1,750

Purchases of intangible assets
(202
)
 
(452
)
Purchase of available-for-sale securities
(4,629
)
 

Capitalization of software and website development costs
(7,339
)
 
(5,579
)
Investment in equity interests
(4,994
)
 
(12,753
)
Issuance of note receivable

 
(512
)
Net cash used in investing activities
(71,026
)
 
(84,069
)
Financing activities
 

 
 

Proceeds from borrowings of long-term debt
109,000

 
79,712

Payments of long-term debt and debt issuance costs
(147,150
)
 
(71,714
)
Payments of withholding taxes in connection with vesting of restricted share units
(8,400
)
 
(2,460
)
Purchase of ordinary shares

 
(36,290
)
Excess tax benefits (shortfall) derived from share-based compensation awards
5,467

 
(1,808
)
Proceeds from issuance of ordinary shares
4,274

 
2,024

Capital contribution from noncontrolling interest
4,821

 

Net cash used in financing activities
(31,988
)
 
(30,536
)
Effect of exchange rate changes on cash
1,448

 
390

Net decrease in cash and cash equivalents
(3,520
)
 
(10,897
)
Cash and cash equivalents at beginning of period
50,065

 
62,203

Cash and cash equivalents at end of period
$
46,545

 
$
51,306

See accompanying notes.

6


VISTAPRINT N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited in thousands, except share and per share data)
1. Description of the Business
The Vistaprint group of companies offers micro businesses the ability to market their businesses with a broad range of brand identity and promotional products, marketing services and digital solutions. Through the use of proprietary Internet-based graphic design software, localized websites, proprietary order receiving and processing technologies and advanced computer integrated production facilities, we offer a broad spectrum of products, such as business cards, website hosting, apparel, signage, promotional gifts, brochures, online marketing and creative services. We focus on serving the marketing, graphic design and printing needs of the micro business market, generally businesses or organizations with fewer than 10 employees and usually 2 or fewer. We also provide personalized products for home and family use.
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 a 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.
The consolidated financial statements include the accounts of Vistaprint 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 can exercise significant influence, but do not own a majority equity interest or otherwise control, are accounted for using the equity method and are included as investments in equity interests on the consolidated balance sheets.
Operating results for the three and nine months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the year ending June 30, 2014 or for any other period. The consolidated balance sheet at June 30, 2013 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, 2013 included in the 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 our long-lived assets and goodwill, advertising expense and related accruals, share-based compensation, accounting for business combinations, income taxes, and litigation and contingencies, among others. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results could differ from those estimates.
Marketable Securities
We have investments in marketable equity securities and determine the appropriate classification of our investments at the date of purchase and reevaluate the classifications as of the balance sheet date. Our marketable securities are classified as "available-for-sale" and carried at fair value, with the unrealized gains and losses, net of taxes, reported as a separate component of accumulated other comprehensive income (loss), if applicable. We review our investments for other-than-temporary impairment whenever the fair value of an investment is less than amortized cost and evidence indicates that an investment's carrying amount is not recoverable within a reasonable period of time. Any decline in value that is determined to be other than temporary is recognized as expense in our consolidated statement of operations in the period the impairment is identified.

7


Net Income Per Share Attributable to Vistaprint N.V.
Basic net income per share attributable to Vistaprint N.V. is computed by dividing net income attributable to Vistaprint N.V. by the weighted-average number of ordinary shares outstanding for the respective period. Diluted net income per share attributable to Vistaprint N.V. gives effect to all potentially dilutive securities, including share options, restricted share units (“RSUs”) and restricted share awards ("RSAs"), 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 March 31,
 
Nine Months Ended March 31,
 
2014
 
2013
 
2014
 
2013
Weighted average shares outstanding, basic
33,249,419

 
33,267,073

 
32,921,016

 
33,441,581

Weighted average shares issuable upon exercise/vesting of outstanding share options/RSUs/RSAs
1,107,571

 
1,127,394

 
1,504,272

 
1,195,069

Shares used in computing diluted net income per share attributable to Vistaprint N.V.
34,356,990

 
34,394,467

 
34,425,288

 
34,636,650

Weighted average anti-dilutive shares excluded from diluted net income per share attributable to Vistaprint N.V.
906,850

 
1,512,722

 
916,209

 
1,137,103

Share-Based Compensation
During the three and nine months ended March 31, 2014, we recorded share-based compensation expense of $5,592 and $21,850, respectively, and $8,170 and $24,787 during the three and nine months ended March 31, 2013, respectively. As of March 31, 2014, there was $41,956 of total unrecognized compensation cost related to non-vested share-based compensation arrangements, net of estimated forfeitures. This cost is expected to be recognized over a weighted average period of 2.86 years.
Derivative Financial Instruments

We record all derivatives on the consolidated balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative as being a hedging relationship, and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability or firm commitment attributable to a particular risk are considered fair value hedges. Derivatives designated and qualifying as hedges of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transaction in a cash flow hedge. We also enter into derivative contracts that are intended to economically hedge certain of our risks, even though we may not elect to apply hedge accounting or the instrument may not qualify for hedge accounting. The changes in the fair value of derivatives not designated as being in hedging relationships are recorded directly in earnings as a component of other expense, net. In accordance with the fair value measurement guidance, our accounting policy is to measure the credit risk of our derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio. We execute our derivative instruments with financial institutions that we judge to be credit-worthy, defined as institutions that hold an investment grade credit rating.

Restructuring

Restructuring costs are recorded in connection with initiatives designed to improve efficiency or enhance competitiveness. Restructuring initiatives require us to make estimates in several areas, including expenses for severance and other employee separation costs and the ability to generate sublease income to terminate lease obligations at the estimated amounts. One-time termination benefits are expensed at the date we notify the employee, unless the employee must provide future service beyond the statutory minimum retention period, in

8


which case the benefits are expensed ratably over the future service period. Liabilities for costs associated with an exit or disposal activity are recognized when the liability is incurred, as opposed to when management commits to an exit plan, and are measured at fair value. Restructuring costs are included as a component of each related operating expense within our consolidated statement of operations.
Leases

We categorize leases at their inception as either operating or capital leases. Costs for operating leases that include incentives such as payment escalations or rent abatements are recognized on a straight-line basis over the term of the lease. Additionally, inducements received are treated as a reduction of our costs over the term of the agreement. Leasehold improvements are capitalized at cost and amortized over the shorter of their expected useful life or the life of the lease, excluding renewal periods. For lease arrangements where we are deemed to be involved in the construction of structural improvements prior to the commencement of the lease or take some level of construction risk, we are considered the owner of the assets during the construction period. Accordingly, as the lessor incurs the construction project costs, the assets and corresponding financial obligation are recorded in our consolidated balance sheet. Once the construction is completed, if the lease meets certain “sale-leaseback” criteria, we will remove the asset and related financial obligation from the balance sheet and treat the building lease as either an operating or capital lease based on our assessment of the guidance. If upon completion of construction, the project does not meet the “sale-leaseback” criteria, the lease will be treated as a financing obligation and we will depreciate the asset over its estimated useful life for financial reporting purposes.
Recently Issued or Adopted Accounting Pronouncements

None.
3. Investments and Fair Value Measurements
The following table summarizes our investments in available-for-sale securities:
 
March 31, 2014
 
Amortized Cost Basis
 
Unrealized gain
 
Estimated Fair Value
Available-for-sale securities
 
 
 
 
 
Plaza Create Co. Ltd. common shares (1)
$
4,644

 
$
6,283

 
$
10,927

Total investments in available-for-sale securities
$
4,644

 
$
6,283

 
$
10,927

________________________
(1) On February 28, 2014, we purchased shares in our publicly traded Japanese joint venture partner. Refer to Note 12 for further discussion of the separate joint business arrangement.
We did not have any outstanding available-for-sale securities for the year ended June 30, 2013.
The following tables summarize our financial assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy:
 
March 31, 2014
 
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
$
10,927

 
$
10,927

 
$

 
$

Interest rate swap contracts
124

 

 
124

 

Currency forward contracts
401

 

 
401

 

Total assets recorded at fair value
$
11,452

 
$
10,927

 
$
525

 
$

 


 


 


 


Liabilities


 


 


 


Interest rate swap contracts
$
(189
)
 
$

 
$
(189
)
 
$

Currency forward contracts
(3,056
)
 

 
(3,056
)
 

Total liabilities recorded at fair value
$
(3,245
)
 
$

 
$
(3,245
)
 
$


9


 
June 30, 2013
 
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
$
344

 
$

 
$
344

 
$

Currency forward contracts
70

 

 
70

 

Total assets recorded at fair value
$
414

 
$

 
$
414

 
$

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Interest rate swap contracts
$
(70
)
 
$

 
$
(70
)
 
$

Currency forward contracts
(203
)
 

 
(203
)
 

Total liabilities recorded at fair value
$
(273
)
 
$

 
$
(273
)
 
$

The fair value of our Level 1 financial assets are based on quoted market prices of the identical underlying security. The fair values of our Level 2 financial assets and liabilities are obtained using quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets in markets that are not active; and inputs other than quoted prices, e.g., interest rates and yield curves. During the three and nine months ended March 31, 2014 and March 31, 2013 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 counterparty's 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 March 31, 2014, 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 March 31, 2014 and June 30, 2013, the carrying amounts of cash and cash equivalents, receivables, accounts payable, and other current liabilities approximated their estimated fair values. As of March 31, 2014 the carrying value of our debt was $201,953 and the fair value was $206,657. As of June 30, 2013, we performed an evaluation of the estimated fair value of our debt and determined that the fair value approximates the carrying value of the liability. Our debt is a variable rate debt instrument indexed to LIBOR that resets periodically. 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
Hedges of Interest Rate Risk
We enter into interest rate swap contracts to manage differences in the amount of our known or expected cash payments related to our debt. Our objective in using interest rate derivatives is to add stability to interest expense and to manage our exposure to interest rate movements. Interest rate swaps designated as cash flow

10


hedges involve the receipt of variable amounts from a counterparty in exchange for us making fixed-rate payments over the life of the derivative agreements without exchange of the underlying notional amount.
The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. If a derivative is deemed to be ineffective, the ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three and nine months ended March 31, 2014, we did not hold any interest rate derivative instruments that were determined to be ineffective.
Amounts reported in accumulated other comprehensive income (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. Assuming these derivative instruments continue to qualify for hedge accounting, as of March 31, 2014, we estimate that $539 will be reclassified from accumulated other comprehensive income (loss) to interest expense during the twelve months ending March 31, 2015. As of March 31, 2014, we had 8 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 maturity dates from 2014 - 2017. As the start date of certain contracts has not yet commenced, the notional amount of our outstanding contracts is in excess of the variable-rate debt being hedged as of the balance sheet date.
Interest rate swap contracts outstanding:
 
Notional Amounts
Contracts accruing interest as of March 31, 2014
 
$
165,000

Contracts with a future start date (1)
 
65,000

Total
 
$
230,000

_____________________
(1) These contracts will replace a portion of our current contracts when they expire.
Hedges of Currency Risk
We execute currency forward contracts in order to mitigate our exposure to fluctuations in various currencies against our reporting currency, the U.S. dollar. We use currency derivatives, specifically currency forward contracts, to manage this exposure. During the nine months ended March 31, 2014, we had both currency forward contract activity for which we elected hedge accounting and activity for which we did not elect hedge accounting. In evaluating our currency hedging program and ability to achieve hedge accounting in light of certain changes in our legal entity cash flows, we considered the benefits of hedge accounting relative to the additional economic cost of trade execution and administrative burden. Based on this analysis, we decided to not seek hedge accounting for our currency forward contracts outstanding as of March 31, 2014, but we may elect to apply hedge accounting in future scenarios. As a result, during the three and nine months ended March 31, 2014, we have experienced increased volatility within other income (expense), net in our consolidated statements of operations from unrealized gains and losses on the mark-to-market of outstanding currency forward contracts. We expect this volatility to continue in future periods for contracts for which we do not apply hedge accounting.
The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period in which the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings as a component of other income (expense), net. As of March 31, 2014, we have no outstanding currency forward contracts that qualify for hedge accounting and, as such, there are no current balances to be reclassified into earnings over the next twelve months.
    As of March 31, 2014, 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 Canadian Dollar, Danish Krone, The Euro, Great British Pound, Indian Rupee, New Zealand Dollar, Norwegian Krone, Singapore Dollar, Swedish Krona, and Swiss Franc:
Notional Amount
 
Effective Date
 
Maturity Date
 
Number of Instruments
 
Index
 
Hedge Designation
$138,531
 
July 2013 through March 2014
 
Various through March 2015
 
157
 
Various
 
Non-designated

11


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 March 31, 2014 and June 30, 2013:
 
March 31, 2014
 
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
Interest rate swaps
Other non-current assets
 
$
209

 
$
(85
)
 
$
124

 
Other current liabilities/other liabilities
 
$
(189
)
 
$

 
$
(189
)
Total derivatives designated as hedging instruments

 
$
209

 
$
(85
)
 
$
124

 

 
$
(189
)
 
$

 
$
(189
)


 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

Currency forward contracts
Other current assets
 
$
558

 
$
(157
)
 
$
401

 
Other current liabilities
 
$
(3,213
)
 
$
157

 
$
(3,056
)
Total derivatives not designated as hedging instruments

 
$
558

 
$
(157
)
 
$
401

 

 
$
(3,213
)
 
$
157

 
$
(3,056
)
 
June 30, 2013
 
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
Interest rate swaps
Other non-current assets
 
$
400

 
$
(56
)
 
$
344

 
Other current liabilities/other liabilities
 
$
(81
)
 
$
11

 
$
(70
)
Currency forward contracts
Other current assets
 
83

 
(13
)
 
70

 
Other current liabilities
 
(208
)
 
5

 
(203
)
Total derivatives designated as hedging instruments

 
$
483

 
$
(69
)
 
$
414

 

 
$
(289
)
 
$
16

 
$
(273
)


 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

Currency forward contracts
Other current assets
 
$

 
$

 
$

 
Other current liabilities
 
$

 
$

 
$

Total derivatives not designated as hedging instruments

 
$

 
$

 
$

 

 
$

 
$

 
$


12


The following table presents the effect of our derivative financial instruments designated as hedging instruments and their classification within comprehensive income for the three and nine months ended March 31, 2014 and 2013:
Derivatives in Hedging Relationships
 
Amount of Gain (Loss) Recognized in Comprehensive Income on Derivatives (Effective Portion)
 
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
 
 
2014
 
2013
 
2014
 
2013
Currency contracts that hedge revenue

$


$
1,058


$
(107
)

$
407

Currency contracts that hedge cost of revenue



(137
)

59


(55
)
Currency contracts that hedge technology and development expense



(214
)

70


(4
)
Currency contracts that hedge general and administrative expense



(39
)

12


(24
)
Interest Rate Swaps

(132
)

(90
)

(456
)

(367
)
Total loss recognized in comprehensive income during the period

$
(132
)

$
578


$
(422
)

$
(43
)

The following table presents reclassifications out of accumulated other comprehensive income (loss) for the three and nine months ended March 31, 2014 and 2013:
Details about Accumulated Other
Comprehensive Income (Loss) Components
 
Amount Reclassified from Accumulated Other Comprehensive Income (Loss) to Net Income Gain/(Loss)
 
Affected line item in the
Statement of Operations
 
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
 
 
 
2014
 
2013
 
2014
 
2013
 
 
Currency contracts that hedge revenue
 
$

 
$
11

 
$
(120
)
 
$
8

 
Revenue
Currency contracts that hedge cost of revenue
 

 
22

 
(112
)
 
11

 
Cost of revenue
Currency contracts that hedge technology and development expense
 

 
(30
)
 
122

 
(39
)
 
Technology and development expense
Currency contracts that hedge general and administrative expense
 

 
(4
)
 
11

 
(6
)
 
General and administrative expense
Interest Rate Swaps
 
(78
)
 
(48
)
 
(232
)
 
(129
)
 
Interest expense
Total before income tax
 
(78
)
 
(49
)
 
(331
)
 
(155
)
 
Income (loss) before income taxes and loss in equity interests
Income tax benefit
 
16

 
10

 
47

 
10

 
Income tax provision
Total
 
$
(62
)
 
$
(39
)
 
$
(284
)
 
$
(145
)
 
 
The following table presents the mark-to-market and settlement effect of our derivative financial instruments for contracts that we did not designate as hedging instruments, as well as those which have been de-designated and no longer qualify as hedging instruments, recorded within the statement of operations:
Derivatives not classified as hedging instruments under ASC 815
 
Amount of Gain (Loss) Recognized in Income
 
Location of Gain (Loss) Recognized in Income
 
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
 
 
 
2014
 
2013
 
2014
 
2013
 
 
Currency forward contracts
 
$
(1,086
)

$
(164
)

$
(7,526
)

$
(112
)
 
Other income (expense), net

13


5. Accumulated Other Comprehensive Income (Loss)
The following table presents a roll forward of amounts recognized in accumulated other comprehensive income (loss) by component, net of tax of $13, for the nine months ended March 31, 2014:

 
Gains (Losses) on Cash Flow Hedges
 
Gains (losses) on available for sale securities
 
Currency translation adjustments
 
Total
Balance as of June 30, 2013
$
86

 
$

 
$
(11,642
)
 
$
(11,556
)
Other comprehensive income (loss) before reclassifications
(422
)
 
6,283

 
10,818

 
16,679

Amounts reclassified from accumulated other comprehensive income (loss) to net income
284

 

 

 
284

Net current period other comprehensive income (loss)
(138
)
 
6,283

 
10,818

 
16,963

Balance as of March 31, 2014
$
(52
)
 
$
6,283

 
$
(824
)
 
$
5,407

6. Waltham and Lexington Lease Arrangements
In July 2013, we executed a lease agreement to move our Lexington, Massachusetts operations to a yet to be constructed facility in Waltham, Massachusetts. The Waltham lease will commence upon completion of the building, scheduled for the first quarter of fiscal 2016, and will extend eleven years from the commencement date. The cash expected to be paid ratably over the initial eleven year term of the lease is approximately $119,600 starting in September 2015.
Concurrent with the Waltham negotiations, we amended our current Lexington lease, as both leases are held with the same landlord. The amendment to the Lexington lease contained a contingent feature to shorten the current term of the lease to coincide with the rent commencement date of the Waltham lease, and a second contingent feature to adjust the remaining annual rental amounts. Both of the arrangements were contingent upon the lessor obtaining certain building permits for the Waltham lease. If the lessor did not fulfill this obligation, we had the option to cancel the Waltham lease, without penalty, and return to the terms of our original Lexington lease. During the quarter ended March 31, 2014, the lessor obtained all of the requisite building permits for the Waltham building construction, thus resolving the contingent features.
For accounting purposes, we are deemed to be the owner of the Waltham building during the construction period and, accordingly, as of March 31, 2014 we have recorded $8,397 of construction project costs incurred by the landlord as an asset with a corresponding financing obligation. The asset is included as construction in progress in property, plant and equipment, net and the liability is included in other liabilities on our consolidated balance sheet. Once the construction is completed, we will evaluate the Waltham lease in order to determine whether or not the lease meets the criteria for "sale-leaseback" treatment.
Although we will not begin making cash lease payments until the lease commencement date, a portion of the lease obligation attributable to the land is treated for accounting purposes as an operating lease that commenced during the second quarter of fiscal 2014. We bifurcate our future lease payments pursuant to the 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 is being constructed, which will be recorded as rental expense during the construction period. Although this is not currently a cash outlay for us, we recognized rent expense of $375 and $500 in our consolidated statement of operations for the land operating lease during the three months and nine months ended March 31, 2014.

14


7. Goodwill and Acquired Intangible Assets
Goodwill
The carrying amount of goodwill by segment as of June 30, 2013 and March 31, 2014 is as follows:
 
North America
 
Europe
 
Most of World
 
Total
Balance as of June 30, 2013
$
95,790

 
$
44,895

 
$
208

 
$
140,893

Effect of currency translation adjustments (1)
(1,087
)
 
4,507

 

 
3,420

Balance as of March 31, 2014
$
94,703

 
$
49,402

 
$
208

 
$
144,313

_________________
(1) Relates to goodwill on non-U.S. Dollar functional currency legal entities.
Acquired Intangible Assets    
Acquired intangible assets amortization expense was $2,228 and $6,885 for the three and nine months ended March 31, 2014, respectively, and $2,379 and $7,009 for the three and nine months ended March 31, 2013, respectively.
8. Accrued Expenses
Accrued expenses included the following:
 
March 31,
2014
 
June 30,
2013
Compensation Costs (1)
$
32,930

 
$
43,879

Advertising costs
26,191

 
24,824

Income and indirect taxes
14,438

 
12,463

Professional costs (2)
5,268

 
2,470

Shipping costs
4,705

 
4,632

Purchases of property, plant and equipment
3,008

 
1,582

Other
13,610

 
13,488

Total accrued expenses
$
100,150

 
$
103,338

_____________________
(1) The decrease in accrued compensation costs is principally a result of the payment of our fiscal 2013 annual incentive compensation plans in the three months ended September 30, 2013 offset by compensation costs accrued during fiscal 2014.
(2) The increase in professional costs is primarily related to investment banking, legal, financial, and other professional fees associated with our recently announced acquisitions that will close during the fourth quarter, as well as our joint venture in Japan.
9. Debt
On January 17, 2014, we entered into an amendment to our credit agreement resulting in an increase to aggregate loan commitments under the credit agreement of $303,750, to a total of $800,000 by adding new lenders and increasing the commitments of several existing lenders. The new loan commitments include revolving loans of $640,000 and term loans of $160,000. The amendment did not result in any material changes to our debt covenants.     
As of March 31, 2014, we have a committed credit facility of $797,953 as follows:
Revolving loans of $640,000 with a maturity date of February 8, 2018;
Term loan of $157,953 amortizing over the loan period, with a final maturity date of February 8, 2018.
As of March 31, 2014 and June 30, 2013, our debt outstanding was $201,953 and $238,750, respectively.
Under the terms of our credit agreement, borrowings bear interest at a variable rate of interest based on LIBOR plus 1.50% to 2.00% depending on our leverage ratio, which is the ratio of our consolidated total

15


indebtedness to our consolidated earnings before interest, taxes, depreciation and amortization (EBITDA), as defined by the credit agreement. As of March 31, 2014, the weighted-average interest rate on outstanding borrowings was 2.03%, inclusive of interest rate swap activity. We must also pay a commitment fee on unused balances of 0.225% to 0.350% 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 March 31, 2014.
Our credit agreement contains financial and other covenants, including but not limited to limitations on (1) our incurrence of additional indebtedness and liens, (2) the consummation of certain fundamental organizational changes or intercompany activities, for example acquisitions, (3) investments and restricted payments including the amount of purchases of our ordinary shares or payments of dividends, and (4) the amount of consolidated capital expenditures that we may make in each of our fiscal years through June 30, 2018. The credit agreement also contains financial covenants calculated on a trailing twelve month, or TTM, basis that:
our consolidated leverage ratio, which is the ratio of our consolidated indebtedness (*) to our TTM consolidated EBITDA (*), will not exceed 3.25 during the period from March 31, 2014 through December 31, 2014; and 3.0 after March 31, 2015; and
our interest coverage ratio, which is the ratio of our consolidated EBITDA to our consolidated interest expense, will be at least 3.0.
(*) The definitions of EBITDA and consolidated indebtedness are maintained in our credit agreement included as an exhibit to Form 8-K filed on February 13, 2013 and January 22, 2014.
Our agreement also contains customary representations, warranties and events of default. As of March 31, 2014, we were in compliance with all financial and other covenants under the credit agreement.
10. Income Taxes
Income tax expense was $999 and $7,819 for the three and nine months ended March 31, 2014, as compared to $2,264 and $10,587 for the same prior year periods. The decrease is primarily attributable to tax benefits resulting from changes to our corporate entity operating structure that became effective on October 1, 2013 and a lower annual effective tax rate relative to fiscal 2013. We made the changes to our corporate entity operating structure, which included transferring our intellectual property among certain of our subsidiaries, primarily to align our corporate entities with our evolving operations and business model. Additionally, income tax expense for the nine months ended March, 31 2013 was reduced by a one-time currency exchange related tax benefit of $1,918 recognized by one of our Canadian subsidiaries.
On an annual basis, our income tax expense for the majority of our subsidiaries is a function of our operating expenses and cost-based transfer pricing methodologies and not a function of consolidated pre-tax income. As a result, our consolidated annual effective tax rate will typically vary inversely to changes in our consolidated pre-tax income. For fiscal 2014, we are forecasting a lower consolidated annual effective tax rate as compared to 2013, primarily as a result of higher consolidated pre-tax earnings as compared to 2013 and changes to our geographic mix of earnings. Additionally, our fiscal 2014 consolidated annual effective tax rate will be further reduced by tax benefits recognized as a result of the changes to our corporate entity operating structure.    
     As of March 31, 2014, we had a net liability for unrecognized tax benefits included in the balance sheet of approximately $6,099, including accrued interest of $250. There have been no significant changes to the net liability during the three months ended March 31, 2014. Of the total amount of unrecognized tax benefits, approximately, $2,955 will reduce the effective tax rate if recognized. We recognize interest and, if applicable, penalties related to unrecognized tax benefits in the provision for income taxes.
It is reasonably possible that a further change in unrecognized tax benefits may occur within the next twelve months related to the settlement of one or more audits or the lapse of applicable statutes of limitations. However, an estimated range of the impact on the unrecognized tax benefits cannot be quantified at this time. 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 2007 through 2013 remain open for examination by the United States Internal Revenue Service (“IRS”) and the years 2006 through 2013 remain open for examination in the various states and non-US tax jurisdictions in which we file tax returns.

16


One of our subsidiaries, Vistaprint Limited (domiciled in Bermuda), is currently under income tax audit by the IRS. In August 2012, we received a Revenue Agent's Report (“RAR”) from the IRS proposing tax assessments for the 2007 to 2009 tax years. The issue in dispute is the imposition of U.S. federal income tax on effectively connected income associated with the IRS' assertion that Vistaprint Limited has a U.S. Trade or Business. In September 2012, we submitted to the IRS Examination team a written protest stating our formal disagreement with the facts and technical conclusions presented in the RAR and requesting the case be heard by the IRS Office of Appeals. Our hearing in IRS Office of Appeals is scheduled to commence in May 2014.
Vistaprint USA, Incorporated has received Notices of Assessment from the Massachusetts Department of Revenue ("DOR") related to the tax years 2006-2008. Additionally, we have received Notices of Intent to Assess for tax years 2010 and 2011. The Notices contain proposed adjustments to taxable income for these years. The issue in dispute is whether there was appropriate value received with respect to intangible property rights owned by Vistaprint USA, Incorporated and licensed to Vistaprint Limited. The case is currently under review by the DOR Office of Appeals. However, at this stage, we believe it is unlikely that a mutually agreeable resolution will be reached in the DOR Office of Appeals. As a result, we anticipate the DOR Office of Appeals will issue a Letter of Determination within the next few months upholding the DOR’s assessments. Upon receipt of the Letter of Determination, it is our intention to file a petition to have our case heard by the Massachusetts Appellate Tax Board.
    We believe that our income tax reserves associated with these matters are adequate as the positions reported on our tax returns will be sustained on their technical merits. However, final resolution is uncertain and there is a possibility that the final resolution could have a material impact on our financial condition, results of operations or cash flows.
11. Investment in Equity Interests
As of March 31, 2014, the carrying value of our investment in Namex Limited, which includes an indirect investment in a Chinese printing business, was $13,457 in our consolidated balance sheet. Our proportionate ownership share in Namex is 45% and for the three and nine months ended March 31, 2014, we recorded losses of $1,058 and $2,704, respectively, attributable to Namex in our consolidated statement of operations. We have determined that the level of equity investment at risk is not sufficient for the entity to finance its activities without additional financial support and, as a result, Namex represents a variable interest entity. However, through consideration of the most significant activities of the entity in conjunction with the collective shareholders' rights of Namex, we have concluded that we do not have the power to direct the activities that most significantly impact the entity's economic performance, and therefore we do not qualify as the primary beneficiary.
In April 2014, we decided to dispose of our investment in Namex, as recent discussions with management identified different visions in the execution of the long-term strategic direction of the business. We expect to sell all of our Namex shares to Namex's majority shareholder and recognize a loss of up to $14,000 in the fourth fiscal quarter as the carrying value of the investment exceeds the expected proceeds.         
In addition to our equity investment, as of March 31, 2014 we have a contractual loan arrangement with the majority shareholder of Namex, resulting in a loan receivable of $512 that is due with 6.5% per annum interest on or before December 31, 2016, and we expect that the majority shareholder will repay this loan in full in our fourth fiscal quarter. In addition, we executed a convertible debt arrangement with Namex in January 2014, but there are no loans outstanding to Namex under this agreement. We expect to terminate this loan agreement without funding any loans thereunder during our fourth fiscal quarter.    
12. Noncontrolling Interest     
We own 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 three months ended March 31, 2014, we contributed $4,891 in cash and $1,100 in assets, and Plaza Create made an initial capital contribution of $4,818 in cash and assets valued at $955. The balance sheet and results of the joint business arrangement are included in our consolidated financial statements for the period ended March 31, 2014. Plaza Create’s share of the net loss of the operations is included in net loss attributable to noncontrolling interest in the consolidated statement of operation for the period ended March 31, 2014. The 49% noncontrolling equity interest in the business is presented separately as temporary equity in our consolidated balance sheet for the period ended March 31, 2014, due to certain default provisions contained in the agreement.

17


The following table presents the changes in our redeemable noncontrolling interest for the nine months ended March 31, 2014:
 
 
Noncontrolling Interest
Balance as of June 30, 2013
 
$

Capital contribution from noncontrolling interest
 
5,773

Adjustment to noncontrolling interest
 
56

Net loss attributable to noncontrolling interest
 
(34
)
Foreign currency translation
 
(54
)
Balance as of March 31, 2014
 
$
5,741

13. Segment Information

Operating segments are based upon our internal organization structure, the manner in which our operations are managed and the availability of separate financial information reported internally to the Chief Executive Officer, who constitutes our Chief Operating Decision Maker (“CODM”) for purposes of making decision about how to allocate resources and assess performance. We have three geographically based operating segments: North America, Europe, and Most of World, which includes our historical Asia Pacific business and global emerging markets. The CODM measures and evaluates the performance of our operating segments based on revenue and income or loss from operations.
Consistent with our historical reporting,the cost of our North America and Europe legal, human resource, and facilities management functions are not allocated to the reporting segments and instead reported and disclosed under the caption "Corporate and global functions," which includes expenses related to corporate support functions, software and manufacturing engineering, and the global component of our IT operations and customer sales and design support. Effective March 1, 2014 we revised our Most of World ("MOW") internal reporting structure to align to this model and as such have recast our historical segment operating income to reflect those MOW specific costs as part of the Corporate and global function operating loss.
We do not allocate non-operating income to our segment results. There are no internal revenue transactions between our reporting segments and all intersegment transfers are recorded at cost for presentation to the CODM, for example, products manufactured by our Venlo, the Netherlands facility for the MOW segment; therefore, there is no intercompany profit or loss recognized on these transactions. At this time, we do not allocate support costs across operating segments or corporate and global functions, which may limit the comparability of income from operations by segment. 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 and geography is based on the country-specific website through which the customer’s order was transacted. The following tables set forth revenue and income from operations by operating segment.
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
 
2014
 
2013
 
2014

2013
Revenue:
 
 
 
 
 

 
 

North America
$
166,118

 
$
163,029

 
$
520,339

 
$
474,778

Europe
104,177

 
108,255

 
359,912

 
357,307

Most of World
15,890

 
16,400

 
51,830

 
55,327

Total revenue
$
286,185

 
$
287,684

 
$
932,081

 
$
887,412



18


 
Three Months Ended March 31,
 
Nine Months Ended March 31,
 
2014

2013
 
2014

2013
Income (loss) from operations:
 
 
 
 
 

 
 

North America
$
48,749

 
$
50,234

 
$
170,018

 
$
147,335

Europe
26,812

 
25,772

 
99,999

 
82,201

Most of World
(652
)
 
(1,361
)
 
(2,929
)
 
(1,189
)
Corporate and global functions
(69,670
)
 
(64,912
)
 
(200,918
)
 
(185,339
)
Total income from operations
$
5,239

 
$
9,733

 
$
66,170

 
$
43,008

Enterprise Wide Disclosures:
The following tables set forth revenues by geographic area and groups of similar products and services:
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
 
2014
 
2013
 
2014
 
2013
United States
$
155,056

 
$
153,351

 
$
485,765

 
$
446,769

Non-United States (1)
131,129

 
134,333

 
446,316

 
440,643

Total revenue
$
286,185

 
$
287,684

 
$
932,081

 
$
887,412

 
Three Months Ended March 31,
 
Nine Months Ended March 31,
 
2014
 
2013
 
2014
 
2013
Physical printed products and other (2)
$
266,447

 
$
267,483

 
$
871,218

 
$
826,997

Digital products/services
19,738

 
20,201

 
60,863

 
60,415

Total revenue
$
286,185

 
$
287,684

 
$
932,081

 
$
887,412

___________________
(1) Our non-United States revenue includes the Netherlands, our country of domicile. Revenue earned in any individual country outside the United States was not greater than 10% of consolidated revenue for the years presented.
(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:
 
March 31,
2014
 
June 30,
2013
Long-lived assets (3):
 

 
 

Netherlands
$
105,099

 
$
99,521

Canada
99,262

 
90,807

Australia
35,566

 
36,774

United States
40,013

 
35,943

Switzerland
31,626

 
4,522

Jamaica
25,905

 
26,730

Bermuda
7,930

 
14,667

India
5,624

 
4,429

Other
6,996

 
4,884

Total
$
358,021

 
$
318,277

___________________
(3) Excludes goodwill of $144,313 and $140,893, intangible assets, net of $24,840 and $30,337, deferred tax assets of $5,335 and $581 and the investment in equity interests of $13,457 and $11,248 as of March 31, 2014 and June 30, 2013, respectively.


19


14. Commitments and Contingencies
Purchase Obligations
At March 31, 2014, we had unrecorded commitments under contract of $16,235, which were principally composed of inventory purchase commitments of approximately $6,365, production and computer equipment purchases of approximately $4,318, and other unrecorded purchase commitments of $5,552.
Other Obligations
We have an outstanding installment obligation of $17,355 related to the fiscal 2012 intra-entity transfer of Webs' intellectual property, 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 March 31, 2014.
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.
15. Restructuring

In December 2013 we closed our Singapore location, which provided strategic and administrative support services as part of our Most of World Segment. The following table summarizes the total restructuring costs incurred during the three and nine months ended March 31, 2014. There were no such charges during the three and nine months ended March 31, 2013.
 
Three months ended March 31,
 
Nine months ended March 31,
 
2014
 
2014
Employee termination benefits
$

 
$
2,372

Facility termination costs (1)
128

 
742

Total restructuring expense
$
128

 
$
3,114

_____________________
(1) The nine months ended March 31, 2014 include $472 of accelerated depreciation related to property, plant and equipment.

The following table summarizes the restructuring activity for the period ended March 31, 2014:
 
Employee Termination Benefits
 
Facility Termination Costs
Accrued restructuring balance as of June 30, 2013
$

 
$

Restructuring additions
2,372

 
269

Cash payments
(2,293
)
 
(186
)
Accrued restructuring balance as of March 31, 2014
$
79

 
$
83

During the three months ended March 31, 2014, we recognized restructuring expense of $114 in general and administrative expense, $11 in technology and development expense and $3 in marketing and selling expense. During the nine months ended March, 31 2014, we recognized restructuring expense of $2,777 in general and administrative, $268 in technology and development expense and $69 in marketing and selling expense. We do not expect to incur any additional costs related to this restructuring activity in future periods, however estimates may change which could result in additional expense.

20


16. Subsequent Events

Refer to Note 11 for subsequent event disclosure related to the disposal of our minority equity investment in Namex.

On April 1, 2014, we acquired 100% of the outstanding shares of People & Print Group B.V., a leading Dutch online printing company. At closing we paid €20,525 ($28,273 based on the exchange rate as of the date of acquisition) in cash, subject to working capital and other adjustments, and an additional €4,000, subject to warranties and claims made by the seller, is payable in Vistaprint shares in January 2016. In addition to the initial purchase consideration we have agreed to a sliding scale earn-out that is based on calendar year 2015 revenue and EBITDA targets. The earn-out amount is theoretically unlimited and could be significant in relation to the base purchase price. The estimated fair value of the earn-out payment will be included as a component of the purchase price based on an evaluation of the likelihood of achievement of the contractual conditions and weighted probability assumptions of these outcomes and will be recorded in the fourth quarter. We utilized proceeds from our credit facility to finance the acquisition. In connection with the acquisition, we incurred transaction costs related to investment banking, legal, financial, and other professional services of approximately $950 and $1,218 during the three and nine months ended March 31, 2014, which have been recorded in general and administrative expenses.

On April 3, 2014, we acquired 97% of the outstanding shares of Pixartprinting S.p.A., a leading Italian online printing company. At closing we paid €127,850 ($175,896 based on the exchange rate as of the date of acquisition) in cash, subject to working capital and other adjustments, and we may pay up to an additional €10,000 ($13,758 based on the exchange rate as of the date of acquisition) in cash on or after December 31, 2014 based upon the acquired business achieving certain revenue and EBITDA targets for calendar year 2014. The estimated fair value of the earn-out payment will be included as a component of the purchase price based on an evaluation of the likelihood of achievement of the targets and weighted probability assumptions of these outcomes and will be recorded in the fourth quarter. We utilized proceeds from our credit facility to finance the acquisition. In connection with the acquisition, we incurred transaction costs related to investment banking, legal, financial, and other professional services of approximately $2,463 and $2,545 during the three and nine months ended March 31, 2014, which have been recorded in general and administrative expenses.

Due to the recent closing of the transactions, we have not yet completed our initial accounting for the business combinations, and we are unable to provide additional disclosures.

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 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
For the three months ended March 31, 2014, we reported revenue of $286.2 million, representing a decline in both reported and constant-currency revenue of 1% over the same period in the prior year. During the quarter we introduced a new pricing strategy in two of our top markets: the U.S. and Germany, negatively impacting our revenue growth in those regions. We expect our near-term revenue growth rates to improve as our customer base adapts to these changes; however, we expect our growth will continue to be lower than our historical levels. Diluted

21


earnings per share (EPS) for the three months ended March 31, 2014 decreased to $0.04, as compared to $0.17 for the three months ended March 31, 2013. This decline was significantly impacted by transaction costs incurred of approximately $3.7 million, or $0.11 per diluted share, related to our recent acquisitions of Pixartprinting and People & Print Group, as well as our joint business arrangement with Plaza Create in Japan.
For the nine months ended March 31, 2014, we reported revenue of $932.1 million, representing 5% revenue growth in terms of both reported and constant-currency revenue over the same period in the prior year. EPS for the nine months ended March 31, 2014 increased to $1.24, as compared to $0.78 for the nine months ended March 31, 2013. This increase was driven primarily by growth in revenue and better leverage of our advertising and normal operating expense activities, offset by transaction costs incurred of approximately $5.0 million for our strategic investments. For the full year of fiscal 2014, we continue to expect to deliver increased net income margin as a percentage of revenue and EPS improvement relative to our fiscal 2013 performance, despite the expected fourth quarter impact of the loss on the sale of our Namex investment and the recognition of additional transaction costs. Our profitability improvement and lower revenue growth is partly the result of improvements we are making in our North America and European customer value proposition and marketing execution, as we realize the benefits of our recent investment strategy and operating expense efficiency. The changes create near-term revenue headwinds but we believe these are important to our overall strategy, as well as near and long-term profitability.
Our long-term goal is to be the leading online provider of micro business marketing solutions for businesses or organizations with fewer than 10 employees. Additionally, we plan to continue to focus on key market adjacencies where we believe we can drive long-term growth by employing our unique business model and customer value proposition. These adjacencies include digital marketing services, new geographic markets, personalized products for home and family usage and the locally focused customer segment.
The strategy for growth in our core micro business marketing opportunity is to make investments and drive success in the following areas:
Customer Value Proposition.  We believe our average customer currently spends only a small portion of their annual budget for marketing products and services with us. By shifting our success metrics from transactionally focused profit measures to longer-term customer satisfaction and economic measures, we believe we can deliver improvements to our customer experience and value proposition that will significantly increase customer loyalty and lifetime value. Examples of these programs include improving the customer experience on our site, such as ease of use, less cross selling before customers reach the checkout, expanded customer service, and pricing transparency. While we serve customers across the spectrum of micro businesses with fewer than 10 employees, our strength has traditionally been in the smallest and most price sensitive of these customers rather than those with more sophisticated marketing needs and higher expectations. We believe the customer value proposition investments we are making will be foundational to our ability to support the needs of these higher expectations customers. We believe that a majority of the value of our core market opportunity is in these slightly larger micro businesses, and over the next several years, we hope to unlock the potential of this market segment while continuing to drive value for the price sensitive customers we have historically excelled at serving.
Lifetime Value Based Marketing.  We have traditionally acquired customers by targeting micro businesses who are already shopping online through marketing channels such as search marketing, email marketing, and other online advertising. We believe a significant portion of micro businesses in our core markets do not currently use online providers of marketing services. By investing more deeply into existing marketing channels, as well as opening up new channels such as television broadcast, direct mail and social media, we believe we can drive continued new customer growth and reach offline audiences that are not currently looking to online partners for their marketing needs. Regionally, we have made the most progress executing this strategy in North America, where we have gained significant campaign and channel performance data that are helping us optimize advertising efficiencies. We recently executed a more transparent pricing strategy in select markets in North America and Europe, which has resulted in lower revenue growth during the quarter; however, we believe this will drive long-term customer satisfaction. Given our recent revenue performance in Europe, we have made more modest advertising investments in that region, as the current customer economics do not support these higher levels of investment. If we are successful in improving the European customer economics over time, we believe we could then benefit from enhanced advertising investments as we have done in North America.

22


World Class Manufacturing.  We believe our manufacturing processes are best-in-class when it comes to the printing industry. However, when compared to the best manufacturing companies in the world, we believe there is significant opportunity to drive further efficiencies and competitive advantages. By focusing additional top engineering talent on key process approaches, we believe we can make a step-function improvement in product quality and reliability, and significantly lower unit manufacturing costs. We have dedicated resources focused on improving our current processes and developing new and better tools for the future. To date, our execution of this strategy element has been strong, and we believe we have many more opportunities for further enhancements.
Our strategy to drive longer-term growth by addressing market adjacencies is to develop our business in the following areas:
Digital Marketing Services.  We estimate that less than 50% of micro businesses have a website today, but digital marketing services, including websites, email marketing, online search marketing and social media marketing, are a fast-growing part of the small business marketing space. We believe there is great value in helping customers understand the powerful ways in which physical and digital marketing can be combined. Our current digital offering includes websites, email marketing, local search visibility, blogs, search engine optimization, and personalized email domain names. In fiscal 2012, we acquired Webs, Inc. to significantly expand our ability to develop and deliver innovative, customer-focused online marketing solutions. During fiscal 2013 we introduced the Webs white-labeled Pagemodo product to Vistaprint customers and began cross-promotional offers of Vistaprint products to Webs customers. During the first quarter of fiscal 2014 we completed the integration of the Webs site builder technology into the Vistaprint website offering, and we expect that it will take several years to realize the full potential of this combination.
Geographies outside North America and Europe.  For each of the three and nine months ended March 31, 2014, revenue generated outside of North America and Europe accounted for approximately 6% of our total revenue, respectively. We believe that we have significant opportunities to expand our revenue both in the countries we currently serve and in new markets. We intend to further extend our geographic reach by continuing to introduce localized websites in additional countries and languages, expanding our marketing efforts and customer service capabilities, and offering graphic design content, products, payment methodologies and languages specific to local markets. Developing a business in emerging markets is complex, and often requires local expertise and presence. To support our expansion into global emerging markets, during fiscal 2013 we launched our new website, customer service and manufacturing facility in India (after acquiring the assets and hiring the team of a local company). During the current quarter, we launched our joint venture in Japan with Plaza Create, a well known retailer in that country. We plan to continue to invest in these and potentially additional markets in the near term, as they could drive significant growth in the longer term, but expect that these investments will be dilutive to earnings for multiple years and will not become a material source of revenue for the foreseeable future.
Home and Family.  Although we expect to maintain our primary focus on micro business marketing products and services, we also participate in the market for customized home and family products such as invitations, announcements, calendars, holiday cards, embroidered products, and apparel. We continue to add new products and services targeted at the home and family market. We believe that the economies of scale provided by cross sales of these products to our extensive micro business customer base, our large production order volumes and our integrated design and production software and facilities support and will continue to support our effort to profitably grow our home and family business. We expanded our product offerings in fiscal 2012 through the acquisition of Albumprinter, a leading provider of photo books and other photo products in Europe. In fiscal 2013, we began offering Albumprinter white-labeled photo books to Vistaprint customers in Europe. During fiscal 2014, we continue to focus on enhancements of home and family content for our customers by augmenting our already large creative base with more modern offerings and upgraded substrates for key products such as invitations and announcements, as well as improvements for our various photo products.
Locally Focused Customer Segment. Through customer research, we have segmented our market opportunity into three major categories within the large market for marketing products and services used by small businesses with fewer than 10 employees. As described above, Vistaprint has historically gained the most traction in the part of the market with the highest number of small businesses but the lowest per-customer annual spend (“Price Primary” segment). Additionally, via the Vistaprint brand, we actively seek to penetrate the second customer segment of customers with more sophisticated marketing needs who

23


choose their marketing providers not solely on price, but on a blend of value, product quality, customer service and overall experience (“Higher Expectations” segment). While we believe the Vistaprint brand can defend its share in the Price Primary segment and is extensible to Higher Expectations customers, we believe the right approach to the third segment of “Locally Focused” customers - those who choose to work with local graphic designers, agencies, resellers and print shops to meet their marketing needs - is through differentiated brands like Pixartprinting and People & Print Group. These brands specialize in serving graphically-enabled customers via an upload and print business model, offering a very wide and deep range of products and attributes that extend beyond Vistaprint’s current offerings in categories such as flyers and signage. Though this Locally Focused customer segment is largely composed of offline spend, online companies like Pixartprinting and People & Print Group have been successful penetrating this space in their respective geographic markets. We intend to invest in these companies as distinct brands from Vistaprint, much like we do with the Albumprinter brands today.
Results of Operations
The following table presents our operating results for the periods indicated as a percentage of revenue:
 
Three Months Ended March 31,
 
Nine Months Ended
March 31,
 
2014
 
2013
 
2014
 
2013
As a percentage of revenue:
 
 
 
 
 

 
 

Revenue
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of revenue
35.3
 %
 
34.5
 %
 
34.1
 %
 
34.0
 %
Technology and development expense
14.8
 %
 
14.9
 %
 
13.7
 %
 
13.6
 %
Marketing and selling expense
38.1
 %
 
38.2
 %
 
36.0
 %
 
38.8
 %
General and administrative expense 
10.0
 %
 
9.0
 %
 
9.1
 %
 
8.8
 %
Income from operations
1.8
 %
 
3.4
 %
 
7.1
 %
 
4.8
 %
Other income (expense), net
 %
 
 %
 
(0.9
)%
 
 %
Interest expense, net
(0.6
)%
 
(0.4
)%
 
(0.5
)%
 
(0.4
)%
Income before income taxes and loss in equity interests
1.2
 %
 
3.0
 %
 
5.7
 %
 
4.4
 %
Income tax provision
0.3
 %

0.8
 %

0.8
 %

1.2
 %
Loss in equity interests
0.4
 %
 
0.2
 %
 
0.3
 %

0.1
 %
Net income
0.5
 %

2.0
 %

4.6
 %

3.1
 %
Add: Net loss attributable to noncontrolling interest
 %

 %

 %

 %
Net income attributable to Vistaprint N.V.
0.5
 %

2.0
 %

4.6
 %

3.1
 %
In thousands
Three Months Ended March 31,
 
Nine Months Ended March 31,
 
2014
 
2013
 
2014 vs. 2013
 
2014

2013
 
2014 vs. 2013
Revenue
$
286,185


$
287,684

 
(1)%
 
$
932,081

 
$
887,412

 
5%
Revenue
We generate revenue primarily from the sale and shipping of customized manufactured products, and the provision of digital services, website design and hosting, email marketing services, as well as a small percentage from order referral fees and other third-party offerings.
We seek to increase our revenue by increasing the number of customers who purchase from us (“unique active customers”), as well as the amount our customers spend on our offerings (“average bookings per unique active customer”). We use the combination of unique active customers and average bookings per unique active customer to describe our revenue performance as this approach is aligned with the way we manage our business and our efforts to increase our revenue. We believe that metrics relating to our unique active customers and average bookings per unique active customer offer shareholders a useful means of assessing our execution against our strategy. Because changes in one of these metrics may be offset by changes in the other metric, no single factor is determinative of our revenue and profitability trends, and we assess them together to understand their

24


overall impact on revenue and profitability. A number of factors influence our ability to drive increases in these metrics:
Unique active customers.  The consolidated unique active customer count is the number of individual customers who purchased from us in a given period, with no regard to the frequency of purchase. For example, if a single customer makes two distinct purchases within a twelve-month period or is a distinct customer purchasing from Vistaprint and Albumprinter, that customer is tallied only once in the unique active customer count. We determine the uniqueness of a customer by looking at certain customer data. Unique active customers are driven by both the number of new customers we acquire, as well as our ability to retain customers after their first purchase. During our early growth phase, we focused more resources on the acquisition of new customers through the value of our offering and our broad-based marketing efforts targeted at the mass market for micro business customers. As we have grown larger, our acquisition focus has been supplemented with expanded retention efforts, such as email offers, customer service, and expanding our product offering. Our unique active customer count has grown significantly over the years, and we expect it will continue to grow as we see additional opportunity to drive both new customer acquisitions as well as increased retention rates. A retained customer is any unique customer in a specific period who has also purchased in any prior period.
Average bookings per unique active customer.  Average bookings per unique active customer is total bookings, which represents the value of total customer orders received on our websites, for a given period of time divided by the total number of unique active customers, regardless of brand, who purchased during that same period of time. We seek to increase average bookings per unique active customer as a means of increasing revenue. Average bookings per unique active customer are influenced by the frequency that a customer purchases from us, the number of products and feature upgrades a customer purchases in a given period, as well as the mix of tenured customers versus new customers within the unique active customer count, as tenured customers tend to purchase more than new customers. Average bookings per unique active customer have grown over a multi-year period, though they do sometimes fluctuate from one quarter to the next depending upon the type of products we promote during a period and promotional discounts we offer. For example, among other things, seasonal product offerings, such as holiday cards, can cause changes in bookings per customer in our second fiscal quarter ended December 31.
Revenue for the three months ended March 31, 2014 decreased by 1% to $286.2 million compared to the three months ended March 31, 2013 due to a decline in sales across our product and service offerings. During the third quarter, we rolled out significant pricing changes in two of our top markets: the U.S. and Germany. These changes are designed to help us improve customer lifetime value and loyalty over time, but created meaningful near-term revenue headwinds in North America and Europe this quarter. The North American business delivered constant-currency revenue growth of 3% from the prior comparable period. Our European business experienced a decline in constant-currency revenue of 7% during the quarter ended March 31, 2014, as compared to the prior comparative period. Additionally, we continue to expect our fiscal 2014 European revenue growth rate to remain below our historical trends as we reduce certain advertising expenditures with lower returns to make more focused investments in the region. Most of World constant-currency revenue grew by 10% from the prior comparative period.
Revenue for the nine months ended March 31, 2014 increased 5% to $932.1 million compared to the nine months ended March 31, 2013 due to increases in sales across our product and service offerings. The number of consolidated unique active customers declined slightly but was offset by a 7% increase in our average order value for the period, contributing positively to our 5% reported revenue growth. The North American business delivered a solid performance with 10% constant-currency revenue growth, leveraging successful programs to drive customer value that we started two years ago. During the nine months ended March 31, 2014, our European business experienced a 3% decline in constant-currency revenue as we continue to execute marketing improvement initiatives. Most of World constant-currency revenue grew 6% as compared to the prior period. We are implementing changes to our global customer value proposition that we believe will generate higher revenues in the long-term but that create pressure on growth in the near term.
We monitor unique active customers and average bookings per unique active customer on a trailing twelve-month, or TTM, basis. We have historically reported these metrics for our Vistaprint-branded business only; however, in fiscal 2014 we began including the Albumprinter and Webs activity since their respective acquisition dates. We have revised the March 31, 2013 information and presented it on a consolidated basis for comparative

25


purposes. The following table summarizes our consolidated operational revenue metrics for the periods ended March 31, 2014 and 2013:
 
 
TTM Ended March 31,
 
 
2014
 
2013
 
% Increase/(Decrease)
Unique active customers
 
16.8 million
 
16.9 million
 
(1
)%
       New customers
 
9.8 million
 
10.5 million
 
(7
)%
       Retained customers
 
7.0 million
 
6.4 million
 
9
 %
 
 
 
 
 
 
 
Average bookings per unique active customer
 
$
73

 
$
68

 
7
 %
       New customers
 
$
53

 
$
50

 
6
 %
       Retained customers
 
$
101

 
$
96

 
5
 %

Total revenue by geographic segment for the three and nine months ended March 31, 2014 and 2013 is shown in the following table:
In thousands
Three Months Ended
 March 31,
 
 
 
Currency
Impact:
 
Constant-
Currency
 
2014

2013
 
%
Change
 
(Favorable)/Unfavorable
 
Revenue Growth (1)
North America 
$
166,118


$
163,029


2%

1%

3%
Europe
104,177


108,255


(4)%

(3)%

(7)%
Most of World
15,890


16,400


(3)%

13%

10%
Total revenue
$
286,185


$
287,684


(1)%

—%

(1)%
In thousands
Nine Months Ended
 March 31,
 
 
 
Currency
Impact:
 
Constant-
Currency
 
2014

2013
 
%
Change
 
(Favorable)/Unfavorable
 
Revenue Growth (1)
North America 
$
520,339

 
$
474,778

 
10%
 
—%
 
10%
Europe
359,912

 
357,307

 
1%
 
(4)%
 
(3)%
Most of World
51,830

 
55,327

 
(6)%
 
12%
 
6%
Total revenue
$
932,081

 
$
887,412

 
5%
 
—%
 
5%
___________________
(1) Constant-currency revenue growth, a non-GAAP financial measure, represents the change in total revenue between current and prior year periods at constant-currency exchange rates by translating all non-U.S. dollar denominated revenue generated in the current period using the prior year period’s average exchange rate for each currency to the U.S. dollar and excludes the impact of gains or losses on effective currency hedges recognized in revenue. We have provided these non-GAAP financial measures because we believe they provide meaningful information regarding our results on a consistent and comparable basis for the periods presented. Management uses these non-GAAP financial measures, in addition to GAAP financial measures, to evaluate our operating results. These non-GAAP financial measures should be considered supplemental to and not a substitute for our reported financial results prepared in accordance with GAAP.
The following table summarizes our comparative operating expenses for the period:
In thousands
Three Months Ended
March 31,
 
Nine Months Ended
March 31,
 
2014
 
2013
 
2014 vs. 2013
 
2014
 
2013
 
2014 vs. 2013
Cost of revenue
$
100,903

 
$
99,107

 
2%
 
$
317,482

 
$
301,284

 
5%
% of revenue
35.3
%
 
34.5
%
 
 
 
34.1
%
 
34.0
%
 
 
Technology and development expense
$
42,434

 
$
43,004

 
(1)%
 
$
127,555

 
$
120,706

 
6%
% of revenue
14.8
%
 
14.9
%
 
 
 
13.7
%
 
13.6
%
 
 
Marketing and selling expense
$
109,118

 
$
109,966

 
(1)%
 
$
335,679

 
$
344,327

 
(3)%
% of revenue
38.1
%
 
38.2
%
 
 
 
36.0
%
 
38.8
%
 
 
General and administrative expense
$
28,491

 
$
25,874

 
10%
 
$
85,195

 
$
78,087

 
9%
% of revenue
10.0
%
 
9.0
%
 
 
 
9.1
%
 
8.8
%
 
 
Cost of revenue

26


Cost of revenue includes materials used to manufacture our products, payroll and related expenses for production personnel, depreciation of assets used in the production process and in support of digital marketing service offerings, shipping, handling and processing costs, third-party production costs, costs of free products and other related costs of products sold by us. Cost of revenue as a percent of revenue improved during the current three and nine month periods due to favorable pricing and manufacturing process efficiencies.
The increase in cost of revenue of $1.8 million for the three months ended March 31, 2014, as compared to the prior period was primarily due to an increase in fixed costs. Overhead and other related expenses increased $3.5 million as compared to the prior comparative period as we incurred additional fixed costs to support our manufacturing operations. These increases were partially offset by improved material costing of $1.3 million and shipping efficiencies of $0.4 million.
The increase in cost of revenue of $16.2 million for the nine months ended March 31, 2014, as compared to the prior period, was primarily due to an increase in volumes produced. We incurred incremental shipping and temporary labor related costs of $2.8 million and $3.1 million, respectively. The prior year period included a benefit from a non-cash gain related to a free piece of equipment of $1.4 million in our European operations that did not occur in fiscal 2014 and therefore contributed to the $3.1 million increase in overhead and other related expenses during the nine months ended March 31, 2014.
Technology and development expense
Technology and development expense consists primarily of payroll and related expenses for our employees engaged in software and manufacturing engineering, information technology operations, content development, amortization of capitalized software, website development costs and certain acquired intangible assets including developed technology, hosting of our websites, asset depreciation, patent amortization, legal settlements in connection with patent-related claims, and other technology infrastructure-related costs. Depreciation expense for information technology equipment that directly supports the delivery of our digital marketing services products is included in cost of revenue.
The decline in our technology and development expense of $0.6 million for the three months ended March 31, 2014, as compared to the prior comparative period was primarily due to a decrease in share-based compensation expense of $1.3 million, as the restricted share awards granted as part of our fiscal 2012 Webs acquisition were fully vested as of December 31, 2013. Additionally, other technology and development expenses decreased by $0.3 million. These cost declines were partially offset by an increase in payroll and facility-related expenses of $1.0 million, as we increased headcount in our technology development and information technology support organizations to 814 employees at March 31, 2014, compared to 765 employees at March 31, 2013.
The increase in our technology and development expense of $6.8 million for the nine months ended March 31, 2014 was due to increased payroll and facility-related costs of $7.7 million, inclusive of restructuring-related expenses of $0.3 million. Additionally, other technology and development expenses increased $1.1 million as compared to the prior comparative periods primarily due to increased recruitment, hosting services and other costs related to continued investment in our infrastructure. These expense increases were partially offset during the nine months ended March 31, 2014 by a decline in share-based compensation expense of $0.9 million and higher capitalization of software costs of $1.1 million due to an increase in current costs that qualify for capitalization during the fiscal year.
Marketing and selling expense
Marketing and selling expense consists primarily of advertising and promotional costs; payroll and related expenses for our employees engaged in marketing, sales, customer support and public relations activities; amortization of certain acquired intangible assets, including customer relationships and trade names; and third-party payment processing fees.
The decrease in our marketing and selling expenses of $0.8 million and $8.6 million for the three and nine months ended March 31, 2014, respectively, as compared to the prior comparative periods was primarily due to decreased advertising costs of $3.2 million and $17.5 million, respectively, as we executed more strategically focused marketing spend in the given periods, particularly in Europe. Additionally, share-based compensation expense decreased during the three and nine months ended March 31, 2014 by $0.7 million and $0.6 million, respectively, as the restricted share awards granted as part of our fiscal 2012 Webs acquisition were fully vested at

27


December 31, 2013. This reduction in spend was partially offset by increased payroll and facility-related costs of $1.3 million and $6.1 million, respectively, as we continued to expand our marketing organization and our customer service, sales and design support centers. At March 31, 2014, we employed 1,975 employees in these organizations, compared to 1,675 employees at March 31, 2013. In addition, during the three and nine months ended March 31, 2014 other marketing and selling expenses increased by $1.8 million and $3.4 million, respectively, due to increased outside service costs, payment processing fees, and other marketing costs.
General and administrative expense
General and administrative expense consists primarily of general corporate costs, including third-party professional fees, insurance, and payroll and related expenses of employees involved in executive management, finance, legal, and human resources.
The increase in our general and administrative expenses of $2.6 million for the three months ended March 31, 2014, as compared to the same prior year period, was primarily due to an increase of $3.7 million in professional fees for costs incurred related to our recent acquisitions and Japanese joint venture. These increases were partially offset by a net decrease of $1.1 million primarily related to reduced payroll, share-based compensation and recruiting costs. At March 31, 2014, we employed 398 employees in these organizations compared to 391 employees at March 31, 2013.
The growth in our general and administrative expenses of $7.1 million for the nine months ended March 31, 2014, as compared to the prior comparative period was primarily due to restructuring expenses of $2.8 million for the closure of our Singapore office in our Most of World operations and increased professional fees of $5.5 million incurred primarily for certain strategic initiatives during the nine months ended March 31, 2014. These amounts were offset by a decrease in share-based compensation of $1.2 million as compared to the prior fiscal 2013 period.
Other income (expense), net
Other income (expense), net consists of gains and losses from currency exchange rate fluctuations on transactions or balances denominated in currencies other than the functional currency of our subsidiaries, as well as the realized and unrealized gains and losses on our derivative instruments. We incurred $0.1 million and $8.2 million of other expense for the three and nine months ended March 31, 2014, respectively, as compared to $0.3 million of income and $0.6 million of expense, for the prior year periods. The increased expense is primarily due to the net loss of $1.0 million and $7.5 million, respectively, for the three and nine months ended March 31, 2014 recognized on our currency forward contracts for which we did not seek hedge accounting and that did not occur in fiscal 2013. The loss during the three and nine months ended March 31, 2014 was partially offset by a net gain of $0.9 million and $0.7 million, respectively, related to foreign exchange rate fluctuations on our operating accounts. In evaluating our currency hedging program and ability to achieve hedge accounting in light of certain changes in our legal entity cash flows, we considered the benefits of hedge accounting relative to the additional economic cost of trade execution and administrative burden. Based on this analysis, we decided to execute currency forward contracts that do not qualify for hedge accounting. As a result, during the three and nine months ended March 31, 2014, we have experienced increased volatility within other expense, net in our consolidated statements of operations from unrealized gains and losses on the mark-to-market of outstanding currency forward contracts. We expect this volatility to continue in future periods for contracts for which we do not apply hedge accounting.
In addition, changes in our corporate entity operating structure, effective on October 1, 2013 impacted our intercompany transactional and financing activities and have resulted in increased unrealized currency exchange rate losses of $1.9 million and $5.2 million for the three and nine months ended March 31, 2014, respectively, partially offset by realized currency gains of $1.0 million and $2.3 million for the same periods. We may experience increased volatility in exchange rate gains and losses in future periods as a result of these changes.
Interest expense, net
Interest expense, net, which consists primarily of interest paid to financial institutions on outstanding balances on our credit facility and amortization of debt issuance costs was $1.7 million and $4.9 million for the three and nine months ended March 31, 2014, respectively. The increase in interest expense, net as compared to the prior year periods is principally the result of increased borrowings under our credit facility.

28


Income tax provision
In thousands
Three Months Ended March 31,
 
Nine Months Ended March 31,
 
2014
 
2013
 
2014
 
2013
Income tax provision
$
999

 
$
2,264

 
$
7,819

 
$
10,587

Effective tax rate
29.4
%
 
26.0
%
 
14.7
%
 
27.3
%
Income tax expense was $1.0 million and $7.8 million for the three and nine months ended March 31, 2014, respectively, as compared to $2.3 million and $10.6 million, respectively, for the same prior year periods. The decrease is primarily attributable to tax benefits resulting from changes to our corporate entity operating structure that became effective on October 1, 2013 and a lower annual effective tax rate relative to fiscal 2013. We made the changes to our corporate entity operating structure, which included transferring our intellectual property among certain of our subsidiaries, primarily to align our corporate entities with our evolving operations and business model. Additionally, income tax expense for the nine months ended March 31, 2013 was reduced by a one-time currency exchange related tax benefit of $1.9 million recognized by one of our Canadian subsidiaries.
On an annual basis, our income tax expense for the majority of our subsidiaries is a function of our operating expenses and cost-based transfer pricing methodologies and not a function of consolidated pre-tax income. As a result, our consolidated annual effective tax rate will typically vary inversely to changes in our consolidated pre-tax income. For fiscal 2014 we are forecasting a lower consolidated annual effective tax rate as compared to 2013, primarily as a result of higher consolidated pre-tax earnings as compared to 2013 and changes to our geographic mix of earnings. Additionally, our fiscal 2014 consolidated annual effective tax rate will be further reduced by tax benefits recognized as a result of the changes to our corporate entity operating structure.
We are currently under income tax audits in various jurisdictions. We believe that our income tax reserves associated with these matters are adequate as the positions reported on our tax returns will be sustained on their technical merits. However, final resolution is uncertain and there is a possibility that it could have a material impact on our financial condition, results of operations or cash flows. See Note 10 in our accompanying financial statements for additional discussion.
Loss in Equity Interest    
Our share of the loss from our investment in Namex for the three and nine months ended March 31, 2014 was $1.1 million and $2.7 million, respectively, and $0.6 million and $1.0 million, respectively, for the comparative prior periods. In April 2014, we decided to dispose of our investment in Namex, as recent discussions with management identified different visions in the execution of the long-term strategic direction of the business. We expect to sell all of our Namex shares to Namex's majority shareholder and recognize a loss of up to $14.0 million in the fourth fiscal quarter as the carrying value of the investment exceeds the expected proceeds.
Liquidity and Capital Resources
Consolidated Statements of Cash Flows Data:
In thousands
In thousands
Nine Months Ended March 31,
 
2014
 
2013
Net cash provided by operating activities
$
98,046

 
$
103,318

Net cash used in investing activities
(71,026
)
 
(84,069
)
Net cash used in financing activities
(31,988
)
 
(30,536
)
At March 31, 2014, we had $46.5 million of cash and cash equivalents and $202.0 million of outstanding debt. Cash and cash equivalents decreased $3.5 million during the nine months ended March 31, 2014. The cash flows during the nine months ended March 31, 2014 related primarily to the following items:

29


Cash inflows:
Net income of $42.7 million;
Positive adjustments to accrual based net income for non-cash items of $61.8 million primarily related to depreciation and amortization of $49.3 million and share-based compensation costs of $21.9 million; and
Proceeds from borrowing of long-term debt of $109.0 million.
Cash outflows:
Capital expenditures of $54.0 million of which $29.0 million were related to the purchase of manufacturing and automation equipment for our production facilities, $7.5 million were related to the construction of facilities, and $17.5 million were related to purchases of other assets, including information technology infrastructure and office equipment;
Repayments of long-term debt and debt issuance costs of $147.2 million;
Internal costs for software and website development that we have capitalized of $7.3 million;
Increased equity investment in Namex Limited of $5.0 million; and
Investment in available-for-sale securities of $4.6 million.
Additional Liquidity and Capital Resources Information. During the nine months ended March 31, 2014, we financed our operations and strategic investments in capital expenditures through internally generated cash flows from operations and our debt financing. We currently plan to invest approximately $70 million to $80 million in total capital expenditures in fiscal 2014. Due to our recent investments, our current liabilities continue to exceed our current assets; however, we believe that our available cash, cash flows generated from operations, and our debt financing capacity will be sufficient to satisfy our working capital and planned investments to support our long-term growth strategy, including investments in joint ventures and other strategic initiatives, capital expenditure requirements and any share purchase activity, for the foreseeable future.
At March 31, 2014, approximately $45.0 million of our cash and cash equivalents was held by our subsidiaries; and undistributed earnings of our subsidiaries that are considered to be indefinitely reinvested were $126.6 million. However, we do not intend to repatriate such funds as the cash and cash equivalent balances are generally used and available, without legal restrictions, to fund ordinary business operations and investments of the respective subsidiaries. If there is a change in the future, the repatriation of undistributed earnings from certain subsidiaries, in the form of dividends or otherwise, could have tax consequences that may result in material cash outflows.
Debt. On January 17, 2014, we entered into an amendment to our credit agreement resulting in an increase to aggregate loan commitments under the credit agreement by $303.8 million, to a total of $800.0 million by adding new lenders and increasing the commitments of several existing lenders. The new loan commitments consist of revolving loans of $640.0 million and a term loan of $160.0 million. The amendment did not result in any material changes to our debt covenants.     
In the next twelve months we will continue to use, as needed, our revolving credit facility or additional sources of borrowings in order to fund our ongoing operations, support our long-term growth through strategic investments, or purchase our ordinary shares. We have other financial obligations that constitute additional indebtedness based on the definitions within the credit facility. As of March 31, 2014, the amount available for borrowing under our credit facility was as follows, not including the subsequent amendment to our credit agreement described above:

30


In thousands
March 31, 2014
Maximum aggregate available borrowing amounts
$
797,953

Outstanding borrowings of credit facility
201,953

Remaining amount
596,000

Limitations to borrowing due to debt covenants and other obligations (1)
(294,620
)
Amount available for borrowing as of March 31, 2014 (2)
$
301,380

_________________
(1) Our borrowing ability can be limited by our debt covenants each quarter. These covenants may limit our borrowing capacity depending on our leverage, other indebtedness, such as installment obligations and letters of credit, and other factors that are outlined in our credit agreement filed as an exhibit in our Form 8-K filed on February 13, 2013 and January 22, 2014.
(2) The use of available borrowings for share purchases, dividend payments, or corporate acquisitions and dispositions is subject to more restrictive covenants that lower available borrowings for such purposes relative to the general availability described in the above table.

Debt Covenants. Our credit agreement contains financial and other covenants, including but not limited to the following:
(1) The credit agreement contains financial covenants calculated on a trailing twelve month, or TTM, basis that:
our consolidated leverage ratio, which is the ratio of our consolidated indebtedness (*) to our TTM consolidated EBITDA (*), will not exceed 3.25 during the period from March 31, 2014 through December 31, 2014; and (iii) 3.0 after March 31, 2015; and
our interest coverage ratio, which is the ratio of our consolidated EBITDA to our consolidated interest expense, will be at least 3.0.
(2) Purchases of our ordinary shares, payments of dividends, and corporate acquisitions and dispositions are subject to more restrictive consolidated leverage ratio thresholds than those listed above when calculated on a proforma basis in certain scenarios. Also, regardless of our leverage ratio, the credit agreement limits the amount of purchases of our ordinary shares, payments of dividends, corporate acquisitions and dispositions, investments in joint ventures or minority interests, and consolidated capital expenditures that we may make. These limitations can include annual limits that vary from year-to-year and aggregate limits over the term of the credit facility. Therefore, our ability to make desired investments may be limited during the term of our revolving credit facility.
(3) The credit agreement also places limitations on additional indebtedness and liens that we may incur, as well as certain intercompany activities.
(*) The definitions of EBITDA and consolidated indebtedness are maintained in the credit agreement included as an exhibit to Form 8-K filed on February 13, 2013 and January 22, 2014.    
At March 31, 2014, we were in compliance with all financial and other covenants under the credit agreement in effect at that time.
Contractual Obligations
Contractual obligations at March 31, 2014 are as follows:
 In thousands
Payments Due by Period
 
Total
 
Less
than 1
year
 
1-3
years
 
3-5
years
 
More
than 5
years
Operating leases
$
154,569

 
$
12,904

 
$
27,661

 
$
26,784

 
$
87,220

Purchase commitments
16,235

 
16,235

 

 

 

Debt
221,899

 
22,216

 
51,821

 
147,862

 

Other
17,355

 
3,222

 
6,559

 
6,724

 
850

Total (1)
$
410,058

 
$
54,577

 
$
86,041

 
$
181,370

 
$
88,070

___________________
(1) We may be required to make cash outlays related to our unrecognized tax benefits. However, due to the uncertainty of the timing of future cash flows associated with our unrecognized tax benefits, we are unable to make reasonably reliable estimates of the period of cash settlement, if any, with the respective taxing authorities. Accordingly, unrecognized tax benefits of $6.1 million as of March 31, 2014 have

31


been excluded from the contractual obligations table above. For further information on unrecognized tax benefits, see Note 10 to the accompanying consolidated financial statements.
Operating Leases. We rent office space under operating leases expiring on various dates through 2024. Future rental payments required under our leases are an aggregate of approximately $154.6 million. The terms of certain lease agreements require security deposits in the form of bank guarantees and a letter of credit in the amounts of $1.4 million and $0.4 million, respectively. In July 2013, we executed a lease for an eleven-year term to move our Lexington, Massachusetts operations to a new facility in Waltham, Massachusetts, that is expected to commence in the second half of calendar 2015. The table above includes the lease payments associated with our current lease through June 2015, with the Waltham facility payments beginning in September 2015 through the initial eleven-year term of the lease.
Purchase Obligations. At March 31, 2014, we had unrecorded commitments under contract of $16.2 million, which were principally composed of inventory purchase commitments of approximately $6.4 million, production and computer equipment purchases of approximately $4.3 million, and other unrecorded purchase commitments of approximately $5.5 million.
Debt. The term loan outstanding under our credit facility has repayments due on various dates through February 8, 2018, with the revolving loans due on February 8, 2018. Interest payable included in this table is based on the interest rate as of March 31, 2014 and assumes all revolving loan amounts outstanding will not be paid until maturity, but that the term loan amortization payments will be made according to our defined schedule.
Other Obligations. Included above is an installment obligation of $17.4 million related to the fiscal 2012 intra-entity transfer of Webs' intellectual property, 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 March 31, 2014.
Recently Issued or Adopted Accounting Pronouncements
None.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk. Our exposure to interest rate risk relates primarily to our cash, cash equivalents and long-term debt. As of March 31, 2014, our cash and cash equivalents consisted of standard depository accounts which are held for working capital purposes. Due to the nature of our cash and cash