SEC Filings

10-Q
CIMPRESS N.V. filed this Form 10-Q on 11/03/2017
Entire Document
 
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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 September 30, 2017
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from               to               
Commission file number 000-51539
_________________________________
Cimpress N.V.
(Exact Name of Registrant as Specified in Its Charter)
_________________________________
The Netherlands
 
98-0417483
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.) 
Hudsonweg 8
5928 LW Venlo
The Netherlands
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code: 31-77-850-7700
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Exchange on Which Registered
Ordinary Shares, €0.01 par value
 
NASDAQ Global Select Market
_________________________________

Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ     No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  þ
 
Accelerated filer  o
 
Non-accelerated filer  o
 
 
Smaller reporting company  o
 
(Do not check if a smaller reporting company)
 
 
Emerging growth company  o
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  Yes o     No þ
     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 October 27, 2017, there were 31,041,183 Cimpress N.V. ordinary shares, par value 0.01 per share, outstanding.

 



CIMPRESS N.V.
QUARTERLY REPORT ON FORM 10-Q
For the Three Months Ended September 30, 2017

TABLE OF CONTENTS
 
 
Page
PART I FINANCIAL INFORMATION
 
Item 1. Financial Statements (unaudited)
     Consolidated Balance Sheets as of September 30, 2017 and June 30, 2017
     Consolidated Statements of Operations for the three months ended September 30, 2017 and 2016
     Consolidated Statements of Comprehensive Income (Loss) for the three months ended September 30, 2017 and 2016
     Consolidated Statements of Cash Flows for the three months ended September 30, 2017 and 2016
     Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
 
 
 
Part II OTHER INFORMATION
 
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
Signatures








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

September 30,
2017

June 30,
2017
Assets
 


 

Current assets:
 


 

Cash and cash equivalents
$
42,800


$
25,697

Accounts receivable, net of allowances of $4,297 and $3,590, respectively
58,413


48,630

Inventory
56,754


46,563

Prepaid expenses and other current assets
75,921


78,835

Assets held for sale

 
46,276

Total current assets
233,888


246,001

Property, plant and equipment, net
511,890


511,947

Software and website development costs, net
50,312


48,470

Deferred tax assets
78,748


48,004

Goodwill
525,806


514,963

Intangible assets, net
268,678


275,924

Other assets
26,772


34,560

Total assets
$
1,696,094


$
1,679,869

Liabilities, noncontrolling interests and shareholders’ equity
 


 

Current liabilities:
 


 

Accounts payable
$
121,119


$
127,386

Accrued expenses
186,502


175,567

Deferred revenue
39,239


30,372

Short-term debt
19,941

 
28,926

Other current liabilities
86,998

 
78,435

Liabilities held for sale

 
8,797

Total current liabilities
453,799


449,483

Deferred tax liabilities
58,805


60,743

Lease financing obligation
105,679

 
106,606

Long-term debt
800,860


847,730

Other liabilities
108,607


94,683

Total liabilities
1,527,750


1,559,245

Commitments and contingencies (Note 13)
 
 
 
Redeemable noncontrolling interests
83,841


45,412

Shareholders’ equity:
 


 

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



Ordinary shares, par value €0.01 per share, 100,000,000 shares authorized; 44,080,627 shares issued; and 31,020,287 and 31,415,503 shares outstanding, respectively
615


615

Treasury shares, at cost, 13,060,340 and 12,665,124 shares, respectively
(627,002
)

(588,365
)
Additional paid-in capital
366,684


361,376

Retained earnings
432,273


414,771

Accumulated other comprehensive loss
(88,325
)

(113,398
)
Total shareholders’ equity attributable to Cimpress N.V.
84,245


74,999

Noncontrolling interests (Note 10)
258

 
213

Total shareholders' equity
84,503

 
75,212

Total liabilities, noncontrolling interests and shareholders’ equity
$
1,696,094


$
1,679,869

See accompanying notes.

1


CIMPRESS N.V.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited in thousands, except share and per share data)
 
Three Months Ended September 30,
 
2017
 
2016
Revenue
$
563,284

 
$
443,713

Cost of revenue (1)
283,755

 
213,050

Technology and development expense (1)
62,103

 
59,010

Marketing and selling expense (1)
166,093

 
132,668

General and administrative expense (1)
38,778

 
56,580

Amortization of acquired intangible assets
12,633

 
10,213

Restructuring expense (1)
854

 

(Gain) on sale of subsidiaries
(47,545
)
 

Income (loss) from operations
46,613

 
(27,808
)
Other expense, net
(16,312
)
 
(2,132
)
Interest expense, net
(13,082
)
 
(9,904
)
Income (loss) before income taxes
17,219

 
(39,844
)
Income tax (benefit) expense
(6,187
)
 
(9,814
)
Net income (loss)
23,406

 
(30,030
)
Add: Net (income) loss attributable to noncontrolling interest
(43
)
 
927

Net income (loss) attributable to Cimpress N.V.
$
23,363

 
$
(29,103
)
Basic net income (loss) per share attributable to Cimpress N.V.
$
0.75

 
$
(0.92
)
Diluted net income (loss) per share attributable to Cimpress N.V.
$
0.72

 
$
(0.92
)
Weighted average shares outstanding — basic
31,220,311

 
31,570,824

Weighted average shares outstanding — diluted
32,332,162

 
31,570,824

____________________________________________
(1) Share-based compensation is allocated as follows:
 
Three Months Ended September 30,
 
2017
 
2016
Cost of revenue
$
40

 
$
43

Technology and development expense
1,856

 
2,325

Marketing and selling expense
985

 
820

General and administrative expense
3,928

 
8,383

Restructuring expense
103

 


See accompanying notes.

2


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

 
Three Months Ended September 30,
 
2017
 
2016
Net income (loss)
$
23,406

 
$
(30,030
)
Other comprehensive income (loss), net of tax:

 

Foreign currency translation gains, net of hedges
27,307

 
9,178

Net unrealized gains (losses) on derivative instruments designated and qualifying as cash flow hedges
3,571

 
(1,769
)
Amounts reclassified from accumulated other comprehensive loss to net income (loss) on derivative instruments
(2,764
)
 
832

Unrealized loss on available-for-sale-securities

 
(924
)
Gain on pension benefit obligation, net

 
36

Comprehensive income (loss)
51,520

 
(22,677
)
Add: Comprehensive (income) loss attributable to noncontrolling interests
(3,084
)
 
390

Total comprehensive income (loss) attributable to Cimpress N.V.
$
48,436

 
$
(22,287
)
See accompanying notes.


3


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

Three Months Ended September 30,
 
2017

2016
Operating activities
 


 

Net income (loss)
$
23,406


$
(30,030
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 


 

Depreciation and amortization
42,384


35,405

Share-based compensation expense
6,912


11,571

Deferred taxes
(16,589
)

(18,163
)
Gain on sale of subsidiaries
(47,545
)
 

Change in contingent earn-out liability
827

 
16,020

Unrealized loss on derivatives not designated as hedging instruments included in net income (loss)
6,066


1,811

Effect of exchange rate changes on monetary assets and liabilities denominated in non-functional currency
8,386


3,027

Other non-cash items
23


670

Changes in operating assets and liabilities:
 


 

Accounts receivable
(8,839
)

2,917

Inventory
(8,985
)

(1,220
)
Prepaid expenses and other assets
(4,893
)

671

Accounts payable
(1,621
)

(7,952
)
Accrued expenses and other liabilities
16,847


(5,127
)
Net cash provided by operating activities
16,379


9,600

Investing activities
 


 

Purchases of property, plant and equipment
(20,457
)
 
(19,319
)
Proceeds from the sale of subsidiaries, net of transaction costs and cash divested
93,779



Business acquisitions, net of cash acquired
(110
)
 
(580
)
Purchases of intangible assets
(24
)
 
(26
)
Capitalization of software and website development costs
(8,934
)
 
(8,312
)
Other investing activities
(1,956
)
 
785

Net cash provided by (used in) investing activities
62,298


(27,452
)
Financing activities
 
 
 
Proceeds from borrowings of debt
179,532

 
87,000

Payments of debt and debt issuance costs
(237,929
)
 
(82,725
)
Payments of withholding taxes in connection with equity awards
(1,190
)
 
(7,549
)
Payments of capital lease obligations
(4,658
)
 
(3,276
)
Purchase of ordinary shares
(40,674
)
 

Proceeds from issuance of ordinary shares
6,070

 

Issuance of loans
(12,000
)


Proceeds from sale of noncontrolling interest
35,390

 

Net cash used in financing activities
(75,459
)
 
(6,550
)
Effect of exchange rate changes on cash
1,843

 
601

Change in cash held for sale
12,042

 

Net increase (decrease) in cash and cash equivalents
17,103

 
(23,801
)
Cash and cash equivalents at beginning of period
25,697

 
77,426

Cash and cash equivalents at end of period
$
42,800

 
$
53,625

See accompanying notes.





4


CIMPRESS N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(unaudited in thousands)
 
Three Months Ended September 30,
 
2017
 
2016
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
8,430

 
$
5,362

Income taxes
5,369

 
8,555

Non-cash investing and financing activities:
 
 
 
Property and equipment acquired under capital leases
$

 
$
2,077

Amounts accrued related to business acquisitions
50,904

 
21,805

See accompanying notes.

5


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

1. Description of the Business
We are a technology driven company that aggregates, largely via the internet, large volumes of small, individually customized orders for a broad spectrum of print, signage, apparel and similar products. We operate in a largely decentralized manner. Our businesses, discussed in more detail below, fulfill orders with manufacturing capabilities that include Cimpress owned and operated manufacturing facilities and a network of third-party fulfillers to create customized products on-demand. Those businesses bring their products to market through a portfolio of customer-focused brands serving the needs of micro, small and medium sized businesses, resellers and consumers. These brands include Vistaprint, our global brand for micro business marketing products and services, as well as brands that we have acquired that serve the needs of various market segments, including resellers, micro, small and medium sized businesses with differentiated service needs, and consumers purchasing products for themselves and their families.
2. Summary of Significant Accounting Policies
Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and, accordingly, do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting primarily of normal recurring accruals, considered necessary for fair 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 Cimpress N.V., its wholly owned subsidiaries, entities in which we maintain a controlling financial interest, and those entities in which we have a variable interest and are the primary beneficiary. Intercompany balances and transactions have been eliminated.
    
Operating results for the three months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending June 30, 2018 or for any other period. The consolidated balance sheet at June 30, 2017 has been derived from our audited consolidated financial statements at that date but does not include all of the information and notes 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, 2017 included in our Annual Report on Form 10-K filed with the United States Securities and Exchange Commission (the “SEC”).
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We believe our most significant estimates are associated with the ongoing evaluation of the recoverability of our long-lived assets and goodwill, estimated useful lives of assets, share-based compensation, accounting for business combinations, and income taxes and related valuation allowances, among others. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results could differ from those estimates.

Share-based compensation
Total share-based compensation costs were $6,912 and $11,571 for the three months ended September 30, 2017 and 2016, respectively, and we elected to recognize the impact of forfeitures as they occur. During the first quarter of fiscal 2018, we issued 108,606 supplemental performance share awards (which assumes one share for each share award, but based on actual performance that amount can range from zero to 271,515) to certain members of management which contain a service, market and performance condition and vest ratably over a three year service period. As the award contains a performance vesting condition, compensation costs are recorded only if it is probable that the performance condition will be achieved. As of September 30, 2017, we do not consider the

6


performance condition associated with these awards probable and we have not recognized any expense during the current period.
In a future period, if we determine that the achievement of the performance condition is probable, we will cumulatively catch-up the expense and begin recognizing expense in that period. The compensation expense for these awards will be estimated at fair value using a Monte Carlo simulation valuation model. Due to a discretionary element for the performance condition of the awards they will be subject to mark-to-market accounting throughout the performance vesting period.
Sale of Albumprinter
On August 31, 2017 we sold our Albumprinter business, including FotoKnudsen AS, for a total of €78,382 ($93,071 based on the exchange rate as of the date of sale) in cash, net of transaction costs and cash divested (after $11,874 in pre-closing dividends). As a result of the sale, we recognized a gain of $47,545, net of transaction costs, within our consolidated statement of operations for the three months ended September 30, 2017.

The transaction did not qualify for discontinued operations presentation, and as of June 30, 2017, the Albumprinter business assets and liabilities were presented as held-for-sale in our consolidated balance sheet. In connection with the divestiture, we have entered into an agreement with Albumprinter under which Albumprinter will continue to fulfill photo book orders for our Vistaprint business. Additionally, we have agreed to provide Albumprinter with certain transitional support services for a period of up to one year.

Foreign Currency Translation

Our non-U.S. dollar functional currency subsidiaries translate their assets and liabilities denominated in their functional currency to U.S. dollars at current rates of exchange in effect at the balance sheet date, and revenues and expenses are translated at average rates prevailing throughout the period. The resulting gains and losses from translation are included as a component of accumulated other comprehensive loss. Transaction gains and losses and remeasurement of assets and liabilities denominated in currencies other than an entity’s functional currency are included in other expense, net in our consolidated statements of operations.
Other expense, net
The following table summarizes the components of other expense, net:
 
Three Months Ended September 30,
 
2017

2016
(Losses) gains on derivatives not designated as hedging instruments (1)
$
(8,250
)

$
77

Currency-related losses, net (2)
(8,202
)

(2,966
)
Other gains
140


757

Total other expense, net
$
(16,312
)

$
(2,132
)
_____________________
(1) Primarily relates to both realized and unrealized (losses) gains on derivative currency forward and option contracts not designated as hedging instruments.
(2) We have significant non-functional currency intercompany financing relationships, which we may alter at times, and are subject to currency exchange rate volatility. The net currency-related losses for the three months ended September 30, 2017 and 2016 are primarily driven by this intercompany activity. In addition, we have certain cross-currency swaps designated as cash flow hedges, which hedge the remeasurement of certain intercompany loans, both presented in the same component above. Unrealized losses related to cross-currency swaps were $4,110 and $1,434 for the three months ended September 30, 2017 and 2016, respectively.
Net Income (Loss) Per Share Attributable to Cimpress N.V.
Basic net income (loss) per share attributable to Cimpress N.V. is computed by dividing net income (loss) attributable to Cimpress N.V. by the weighted-average number of ordinary shares outstanding for the respective period. Diluted net income (loss) per share attributable to Cimpress N.V. gives effect to all potentially dilutive securities, including share options, restricted share units (“RSUs”), restricted share awards ("RSAs") and performance share units ("PSUs"), if the effect of the securities is dilutive using the treasury stock method. Awards with performance or market conditions are included using the treasury stock method only if the conditions would have been met as of the end of the reporting period and their effect is dilutive.

7



The following table sets forth the reconciliation of the weighted-average number of ordinary shares:
 
Three Months Ended September 30,
 
2017
 
2016
Weighted average shares outstanding, basic
31,220,311

 
31,570,824

Weighted average shares issuable upon exercise/vesting of outstanding share options/RSUs/RSAs (1)
1,111,851

 

Shares used in computing diluted net income (loss) per share attributable to Cimpress N.V.
32,332,162

 
31,570,824

Weighted average anti-dilutive shares excluded from diluted net income (loss) per share attributable to Cimpress N.V.
9,163

 
1,524,854

_____________________
(1) In the periods in which a net loss is recognized, the impact of share options, RSUs, and RSAs is not included as they are anti-dilutive.
Waltham Lease Arrangement
In July 2013, we executed a lease agreement to move our Lexington, Massachusetts, USA operations to a then yet to be constructed facility in Waltham, Massachusetts, USA. During the first quarter of fiscal 2016, the building was completed and we commenced lease payments in September 2015 and will make lease payments through September 2026.
For accounting purposes, we were deemed to be the owner of the Waltham building during the construction period, and accordingly we recorded the construction project costs incurred by the landlord as an asset with a corresponding financing obligation on our balance sheet. We evaluated the Waltham lease in the first quarter of fiscal 2016 and determined that the transaction did not meet the criteria for "sale-leaseback" treatment due to our planned subleasing activity over the term of the lease. Accordingly, we began depreciating the asset and incurring interest expense related to the financing obligation recorded on our consolidated balance sheet. We bifurcate the lease payments pursuant to the Waltham lease into (i) a portion that is allocated to the building and (ii) a portion that is allocated to the land on which the building was constructed. The portion of the lease obligations allocated to the land is treated as an operating lease that commenced in fiscal 2014.

Property, plant and equipment, net, included $115,015 and $116,045 as of September 30, 2017 and June 30, 2017, respectively, related to the building. The financing lease obligation and deferred rent credit related to the building on our consolidated balance sheets was $118,249 and $119,176 as of September 30, 2017 and June 30, 2017, respectively.
Treasury Shares
    
Treasury shares are accounted for using the cost method and are included as a component of shareholders' equity. During the three months ended September 30, 2017, we repurchased 452,820 of our ordinary shares for a total cost of $40,674 inclusive of transaction costs, in connection with our publicly announced share repurchase programs. We did not repurchase any shares in the prior comparative period.
Recently Issued or Adopted Accounting Pronouncements
New Accounting Standards Adopted
In October 2016, the FASB issued Accounting Standards Update No. 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory" (ASU 2016-16), which requires the recognition for income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The new standard is effective for us on July 1, 2018 and permits early adoption. We elected to early adopt the new standard during the first quarter of fiscal 2018, and recognized a reduction to prepaid and other current assets of $24,573, an increase in deferred tax assets of $18,710 and a cumulative-effect adjustment to retained earnings of $5,863. If we had not early adopted, the forecasted fiscal 2018 tax expense would be lower by $9,787.

8


Issued Accounting Standards to be Adopted
In August 2017, the FASB issued Accounting Standards Update No. 2017-12, "Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities (Topic 815)," (ASU 2017-12), which better aligns a company’s financial reporting for hedging activities with the economic objectives of those activities. The amendment is effective for us on July 1, 2019 and permits early adoption, including adoption in an interim period. The standard requires a modified retrospective transition approach, in which the Company will recognize the cumulative effect of the change on the opening balance of each affected component of equity in the statement of financial position as of the date of adoption. We are currently evaluating the impact on our financial statements.
In May 2017, the FASB issued Accounting Standards Update No. 2017-09, "Compensation - Stock Compensation (Topic 718)," (ASU 2017-09), which clarifies the application of Topic 718 when accounting for changes in the terms and conditions of a share-based payment award. The new standard requires changes to the terms or conditions of a share-based payment award to be accounted for under modification accounting unless there is no change to the fair value, vesting conditions and classification of the award after modification. The amendment is effective for us on July 1, 2018 and permits early adoption. The amendment is to be applied prospectively, and we are currently evaluating the impact on our financial statements.
In November 2016, the FASB issued Accounting Standards Update No. 2016-18, "Statement of Cash Flows (Topic 230) Restricted Cash" (ASU 2016-18), which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendment is effective for us on July 1, 2018 and permits early adoption. This amendment will affect the presentation of our statement of cash flows once adopted, and we do not expect it to have material impact on our consolidated financial statements.
In March 2016, the FASB issued Accounting Standards Update No. 2016-04,"Liabilities - Extinguishment of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products" (ASU 2016-04), which requires an entity to recognize breakage for a liability resulting from the sale of a prepaid stored-value product in proportion to the pattern of rights expected to be exercised by the product holder only to the extent that it is probable that a significant reversal of the recognized breakage amount will not subsequently occur. The new standard is effective for us on July 1, 2018. The standard permits early adoption and should be applied either retrospectively to each period presented or by means of a cumulative adjustment to retained earnings as of the beginning of the fiscal year adopted. We do not expect the effect of ASU 2016-04 to have a material impact on our consolidated financial statements.
In March 2016, the FASB issued Accounting Standards Update No. 2016-02,"Leases (Topic 842)" (ASU 2016-02), which requires the recognition of lease assets and lease liabilities by lessees for those leases currently classified as operating leases. The standard also retains a distinction between finance leases and operating leases. The new standard is effective for us on July 1, 2019. The standard permits early adoption. We are currently evaluating our adoption timing and the effect that ASU 2016-02 will have on our consolidated financial statements.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09,"Revenue from Contracts with Customers" (ASU 2014-09), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This guidance will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective beginning after December 15, 2017, which would result in an effective date for us of July 1, 2018. The standard permits the use of either the retrospective or modified retrospective method. We will adopt the new standard in the first quarter of fiscal 2019, and we will apply the modified retrospective approach. We are actively evaluating the impact of the new standard on a business unit by business unit basis through a review of contract terms and material revenue streams. Our ongoing assessment includes both the quantification of any material impacts, as well as the related disclosures.

9


3. Fair Value Measurements
We use a three-level valuation hierarchy for measuring fair value and include detailed financial statement disclosures about fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
Level 1: Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2: Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in markets that are not active and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following tables summarize our assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy:
 
September 30, 2017
 
Total
 
Quoted Prices in
Active
Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Interest rate swap contracts
$
2,047

 
$

 
$
2,047

 
$

Currency forward contracts
1,212

 

 
1,212

 

Total assets recorded at fair value
$
3,259

 
$

 
$
3,259

 
$

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Interest rate swap contracts
$
(668
)
 
$

 
$
(668
)
 
$

Cross-currency swap contracts
(29,294
)
 

 
(29,294
)
 

Currency forward contracts
(27,623
)
 

 
(27,623
)
 

Currency option contracts
(607
)
 

 
(607
)
 

Contingent consideration
(5,734
)
 

 

 
(5,734
)
Total liabilities recorded at fair value
$
(63,926
)
 
$

 
$
(58,192
)
 
$
(5,734
)


10


 
June 30, 2017
 
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
$
1,717

 
$

 
$
1,717

 
$

Total assets recorded at fair value
$
1,717

 
$

 
$
1,717

 
$

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Interest rate swap contracts
$
(483
)
 
$

 
$
(483
)
 
$

Cross-currency swap contracts
(19,760
)
 

 
(19,760
)
 

Currency forward contracts
(14,700
)
 

 
(14,700
)
 

Currency option contracts
(651
)
 

 
(651
)
 

Contingent consideration
(5,453
)
 

 

 
(5,453
)
Total liabilities recorded at fair value
$
(41,047
)
 
$

 
$
(35,594
)
 
$
(5,453
)
During the quarter ended September 30, 2017 and year ended June 30, 2017, there were no significant transfers in or out of Level 1, Level 2 and Level 3 classifications.
The valuations of the derivatives intended to mitigate our interest rate and currency risk are determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each instrument. This analysis utilizes observable market-based inputs, including interest rate curves, interest rate volatility, or spot and forward exchange rates, and reflects the contractual terms of these instruments, including the period to maturity. We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparties' nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements.
Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to appropriately reflect both our own nonperformance risk and the respective counterparties' nonperformance risk in the fair value measurement. However, as of September 30, 2017, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 in the fair value hierarchy.
Contingent consideration obligations are measured at fair value and are based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The valuation of contingent consideration uses assumptions and estimates to forecast a range of outcomes and probabilities for the contingent consideration. Certain contingent consideration obligations are valued using a Monte Carlo simulation model. We assess these assumptions and estimates on a quarterly basis as additional data impacting the assumptions is obtained. Any changes in the fair value of contingent consideration related to updated assumptions and estimates will be recognized within general and administrative expenses in the consolidated statements of operations during the period in which the change occurs.
As part of the acquisition of WIRmachenDRUCK on February 1, 2016, we agreed to a variable contingent payment up to €40,000, previously based on the achievement of a cumulative gross profit target for calendar years 2016 and 2017. During the fourth quarter of fiscal 2017, we determined it was reasonably certain, based on recent performance, that the maximum earn-out would be achieved. Subsequently, during the first quarter of fiscal 2018, we amended the terms of this arrangement to remove the performance target and agreed to pay the maximum amount in January 2018. The fair value of the liability is $46,316 as of September 30, 2017 and represents the present value of the agreed payment amount. Of the total liability, $5,734 is considered contingent consideration and included in the table below and the remaining portion of the liability is classified as a compensation arrangement as discussed in Note 7.

11


The following table represents the changes in fair value of Level 3 contingent consideration:
 
Three Months Ended September 30,
 
2017 (1)
 
2016 (2)
Balance at June 30
$
5,453

 
$
1,212

Fair value adjustment
102

 
1,112

Foreign currency impact
179

 
15

Balance at September 30
$
5,734

 
$
2,339

_____________________
(1) Classified as a current liability as of June 30, 2017 and September 30, 2017 on the consolidated balance sheet.
(2) Classified as a long-term liability as of June 30, 2016 and September 30, 2016 on the consolidated balance sheet.

As of September 30, 2017 and June 30, 2017, the carrying amounts of our cash and cash equivalents, accounts receivable, accounts payable, and other current liabilities approximated their estimated fair values. As of September 30, 2017 and June 30, 2017 the carrying value of our debt, excluding debt issuance costs and debt discounts, was $829,289 and $882,578, respectively, and the fair value was $837,510 and $906,744, respectively. Our debt at September 30, 2017 includes variable rate debt instruments indexed to LIBOR that resets periodically and fixed rate debt instruments. The estimated fair value of our debt was determined using available market information based on recent trades or activity of debt instruments with substantially similar risks, terms and maturities, which fall within Level 2 under the fair value hierarchy. The estimated fair value of assets and liabilities disclosed above may not be representative of actual values that could have been or will be realized in the future.
4. Derivative Financial Instruments
We use derivative financial instruments, such as interest rate swap contracts, cross-currency swap contracts, and currency forward and option contracts, to manage interest rate and foreign currency exposures. Derivatives are recorded in the consolidated balance sheets at fair value. If the derivative is designated as a cash flow hedge or net investment hedge, then the effective portion of changes in the fair value of the derivative is recorded in accumulated other comprehensive loss and is subsequently reclassified into earnings in the period the hedged forecasted transaction affects earnings. If a derivative is deemed to be ineffective, then the ineffective portion of the change in fair value of the derivative is recognized directly in earnings. The change in the fair value of derivatives not designated as hedges is recognized directly in earnings, as a component of other expense, net.
Hedges of Interest Rate Risk
We enter into interest rate swap contracts to manage variability in the amount of our known or expected cash payments related to a portion of our debt. Our objective in using interest rate swaps is to add stability to interest expense and to manage our exposure to interest rate movements. We designate our interest rate swaps as cash flow hedges. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for us making fixed-rate payments over the life of the contract agreements without exchange of the underlying notional amount. Realized gains or losses from interest rate swaps are recorded in earnings, as a component of interest expense, net. A portion of two of our interest rate swap contracts was deemed to be ineffective during the three months ended September 30, 2017. For the ineffective portion, we recognized $31 of gains as part of other expense, net in our consolidated statement of operations during the three months ended September 30, 2017. We did not hold any contracts deemed to be ineffective during the prior comparative period.
Amounts reported in accumulated other comprehensive loss related to interest rate swap contracts will be reclassified to interest expense as interest payments are accrued or made on our variable-rate debt. As of September 30, 2017, we estimate that $510 will be reclassified from accumulated other comprehensive loss to interest expense during the twelve months ending September 30, 2018. As of September 30, 2017, we had eight outstanding interest rate swap contracts indexed to one-month LIBOR. These instruments were designated as cash flow hedges of interest rate risk and have varying start dates and maturity dates through June 2025.
Interest rate swap contracts outstanding:
 
Notional Amounts
Contracts accruing interest as of September 30, 2017
 
$
60,000

Contracts with a future start date
 
240,000

Total
 
$
300,000


12


Hedges of Currency Risk
Cross-Currency Swap Contracts
From time to time, we execute cross-currency swap contracts designated as cash flow hedges or net investment hedges. Cross-currency swaps involve an initial receipt of the notional amount in the hedge currency in exchange for our reporting currency based on a contracted exchange rate. Subsequently, we receive fixed rate payments in our reporting currency in exchange for fixed rate payments in the hedged currency over the life of the contract. At maturity, the final exchange involves the receipt of our reporting currency in exchange for the notional amount in the hedged currency.
Cross-currency swap contracts designated as cash flow hedges are executed to mitigate our currency exposure to the interest receipts as well as the principal remeasurement and repayment associated with certain intercompany loans denominated in a currency other than our reporting currency, the U.S. Dollar. As of September 30, 2017, we had two outstanding cross-currency swap contracts designated as cash flow hedges with a total notional amount of $120,011, both maturing during June 2019. We entered into the two cross-currency swap contracts to hedge the risk of changes in one Euro denominated intercompany loan entered into with one of our consolidated subsidiaries that has the Euro as its functional currency.
Amounts reported in accumulated other comprehensive loss will be reclassified to other expense, net as interest payments are accrued or paid and upon remeasuring the intercompany loan. As of September 30, 2017, we estimate that $1,317 will be reclassified from accumulated other comprehensive loss to other expense, net during the twelve months ending September 30, 2018.
Cross-currency swap contracts designated as net investment hedges are executed to mitigate our currency exposure of net investments in subsidiaries that have reporting currencies other than the U.S. Dollar. As of September 30, 2017, we had two outstanding cross-currency swap contracts designated as net investment hedges with a total notional amount of $122,969, both maturing during April 2019. We entered into the two cross-currency swap contracts to hedge the risk of changes in the U.S. Dollar equivalent value of a portion of our net investment in a consolidated subsidiary that has the Euro as its functional currency. Amounts reported in accumulated other comprehensive loss are recognized as a component of our cumulative translation adjustment.
We did not hold any ineffective cross-currency swaps during the three months ended September 30, 2017 and 2016.
Other Currency Contracts
We execute currency forward and option contracts in order to mitigate our exposure to fluctuations in various currencies against our reporting currency, the U.S. Dollar.
As of September 30, 2017, we had six currency forward contracts designated as net investment hedges with a total notional amount of $175,262, maturing during various dates through October 2022. We entered into these contracts to hedge the risk of changes in the U.S. Dollar equivalent value of a portion of our net investment in a consolidated subsidiary that has the Euro as its functional currency. Amounts reported in accumulated other comprehensive loss are recognized as a component of our cumulative translation adjustment.
We have elected not to apply hedge accounting for all other currency forward and option contracts. During the three months ended September 30, 2017, we have experienced 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 and option contracts. We expect this volatility to continue in future periods for contracts for which we do not apply hedge accounting. Additionally, since our hedging objectives may be targeted at non-GAAP financial metrics that exclude non-cash items such as depreciation and amortization, we may experience increased, not decreased, volatility in our GAAP results as a result of our currency hedging program.
As of September 30, 2017, we had the following outstanding currency derivative contracts that were not designated for hedge accounting and were used to hedge fluctuations in the U.S. Dollar value of forecasted transactions denominated in Australian Dollar, British Pound, Canadian Dollar, Danish Krone, Euro, Indian Rupee,

13


Mexican Peso, New Zealand Dollar, Norwegian Krone, and Swedish Krona:
Notional Amount
 
Effective Date
 
Maturity Date
 
Number of Instruments
 
Index
$449,834
 
June 2016 through September 2017
 
Various dates through March 2019
 
490
 
Various
Financial Instrument Presentation    
The table below presents the fair value of our derivative financial instruments as well as their classification on the balance sheet as of September 30, 2017 and June 30, 2017:
 
September 30, 2017

Asset Derivatives

Liability Derivatives
Derivatives designated as hedging instruments
Balance Sheet line item

Gross amounts of recognized assets

Gross amount offset in consolidated balance sheet

Net amount

Balance Sheet line item

Gross amounts of recognized liabilities

Gross amount offset in consolidated balance sheet

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

$
2,388


$
(341
)

$
2,047


Other current liabilities / other liabilities

$
(668
)

$


$
(668
)
Cross-currency swaps
Other non-current assets
 

 

 

 
Other liabilities
 
(12,425
)
 

 
(12,425
)
Derivatives in Net Investment Hedging Relationships
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cross-currency swaps
Other non-current assets
 

 

 

 
Other liabilities
 
(16,869
)
 

 
(16,869
)
Currency forward contracts
Other non-current assets
 

 

 

 
Other liabilities
 
(15,497
)
 

 
(15,497
)
Total derivatives designated as hedging instruments


$
2,388


$
(341
)

$
2,047




$
(45,459
)

$


$
(45,459
)
















Derivatives not designated as hedging instruments















Currency forward contracts
Other current assets / other assets

$
1,360


$
(148
)

$
1,212


Other current liabilities / other liabilities

$
(13,733
)

$
1,607


$
(12,126
)
Currency option contracts
Other current assets / other assets







Other current liabilities / other liabilities

(607
)



(607
)
Total derivatives not designated as hedging instruments


$
1,360


$
(148
)

$
1,212




$
(14,340
)

$
1,607


$
(12,733
)

14



June 30, 2017

Asset Derivatives

Liability Derivatives
Derivatives designated as hedging instruments
Balance Sheet line item

Gross amounts of recognized assets

Gross amount offset in consolidated balance sheet

Net amount

Balance Sheet line item

Gross amounts of recognized liabilities

Gross amount offset in consolidated balance sheet

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

$
2,072


$
(355
)

$
1,717


Other current liabilities / other liabilities

$
(483
)

$


$
(483
)
Cross-currency swaps
Other non-current assets







Other liabilities

(7,640
)



(7,640
)
Derivatives in Net Investment Hedging Relationships
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cross-currency swaps
Other non-current assets







Other liabilities

(12,120
)



(12,120
)
Currency forward contracts
Other non-current assets







Other liabilities

(9,896
)



(9,896
)
Total derivatives designated as hedging instruments


$
2,072


$
(355
)

$
1,717




$
(30,139
)

$


$
(30,139
)
















Derivatives not designated as hedging instruments















Currency forward contracts
Other current assets / other assets

$


$


$


Other current liabilities / other liabilities

$
(8,033
)

$
3,229


$
(4,804
)
Currency Option Contracts
Other current assets / other assets
 

 

 

 
Other current liabilities / other liabilities
 
(651
)
 

 
(651
)
Total derivatives not designated as hedging instruments


$


$


$




$
(8,684
)

$
3,229


$
(5,455
)
The following table presents the effect of our derivative financial instruments designated as hedging instruments and their classification within comprehensive income (loss) for the three months ended September 30, 2017 and 2016:
Derivatives in Hedging Relationships
Amount of Gain (Loss) Recognized in Comprehensive Income (Loss) on Derivatives (Effective Portion)
 
Three Months Ended September 30,
In thousands
2017
 
2016
Derivatives in Cash Flow Hedging Relationships
 
 
 
Interest rate swaps
$
63

 
$
251

Cross-currency swaps
3,508

 
(2,020
)
Derivatives in Net Investment Hedging Relationships
 
 
 
Cross-currency swaps
(5,124
)
 
(2,059
)
Currency forward contracts
(6,394
)
 
(456
)
 
$
(7,947
)
 
$
(4,284
)

15


The following table presents reclassifications out of accumulated other comprehensive loss for the three months ended September 30, 2017 and 2016:
Details about Accumulated Other
Comprehensive Loss Components
Amount Reclassified from Accumulated Other Comprehensive Income (Loss) to Net Income (Loss)
 
Affected line item in the
Statement of Operations
 
Three Months Ended September 30,
 
 
In thousands
2017
 
2016
 
 
Derivatives in Cash Flow Hedging Relationships
 
 
 
 
 
Interest rate swaps
$
58

 
$
(156
)
 
Interest expense, net
Cross-currency swaps
(3,747
)
 
(953
)
 
Other expense, net
Total before income tax
(3,689
)
 
(1,109
)
 
Income (loss) before income taxes
Income tax
925

 
277

 
Income tax benefit
Total
$
(2,764
)
 
$
(832
)
 
 
The following table presents the adjustment to fair value recorded within the consolidated statements of operations for derivative instruments for which we did not elect hedge accounting, as well as the effect of the ineffective portion and de-designated derivative financial instruments that no longer qualify as hedging instruments in the period:
 
Amount of Gain (Loss) Recognized in Net Income (loss)
 
Location of Gain (Loss) Recognized in Income (Ineffective Portion)
 
Three Months Ended September 30,
 
 
In thousands
2017
 
2016
 
 
Derivatives not designated as hedging instruments
 
 
 
 
 
Currency contracts
$
(8,281
)
 
$
77

 
Other expense, net
Interest rate swaps
31

 

 
Other expense, net
 
$
(8,250
)
 
$
77

 
 
5. Accumulated Other Comprehensive Loss
The following table presents a roll forward of amounts recognized in accumulated other comprehensive loss by component, net of tax of $(986) for the three months ended September 30, 2017:

Gains (losses) on cash flow hedges (1)
 
Gains (losses) on pension benefit obligation
 
Translation adjustments, net of hedges (2)
 
Total
Balance as of June 30, 2017
$
(2,250
)
 
$
(357
)
 
$
(110,791
)
 
$
(113,398
)
Other comprehensive income (loss) before reclassifications
3,571

 

 
24,266

 
27,837

Amounts reclassified from accumulated other comprehensive loss to net income (loss)
(2,764
)
 

 

 
(2,764
)
Net current period other comprehensive income (loss)
807

 

 
24,266

 
25,073

Balance as of September 30, 2017
$
(1,443
)
 
$
(357
)
 
$
(86,525
)
 
$
(88,325
)
________________________
(1) Gains (losses) on cash flow hedges include our interest rates swap and cross-currency swap contracts designated in cash flow hedging relationships.
(2) As of September 30, 2017 and June 30, 2017, the translation adjustment is inclusive of the effects of our net investment hedges, of which, unrealized losses of $28,575 and $17,048, respectively, net of tax, have been included in accumulated other comprehensive loss.

16


6. Goodwill and Acquired Intangible Assets
Goodwill
The carrying amount of goodwill by reportable segment as of September 30, 2017 and June 30, 2017 is as follows:

Vistaprint

Upload and Print

National Pen
 
All Other Businesses

Total
Balance as of June 30, 2017
$
147,207


$
321,805


$
34,520

 
$
11,431


$
514,963

Adjustments (1)
(58
)
 

 
(86
)
 

 
(144
)
Effect of currency translation adjustments (2)
468

 
10,519

 

 

 
10,987

Balance as of September 30, 2017
$
147,617

 
$
332,324

 
$
34,434

 
$
11,431

 
$
525,806

_________________
(1) Includes final purchase accounting adjustments for our National Pen acquisition and a portion of the goodwill adjustment is allocated to the Vistaprint reportable segment for certain synergies that are expected to be realized in the segment.
(2) Relates to goodwill held by subsidiaries whose functional currency is not the U.S. Dollar.
Acquired Intangible Assets
Acquired intangible assets amortization expense for the three months ended September 30, 2017 and 2016 was $12,633 and $10,213, respectively. The increase in acquired intangible asset amortization is primarily related to our December 30, 2016 acquisition of National Pen.
7. Other Balance Sheet Components
Accrued expenses included the following:
 
September 30, 2017
 
June 30, 2017
Compensation costs
$
49,166

 
$
54,487

Income and indirect taxes
35,640

 
34,469

Advertising costs
26,724

 
26,641

Interest payable
10,255

 
5,263

Shipping costs
7,928

 
6,651

Production costs
7,652

 
7,472

Sales returns
5,178

 
4,474

Purchases of property, plant and equipment
3,171

 
3,786

Professional costs
3,243

 
3,021

Other
37,545

 
29,303

Total accrued expenses
$
186,502

 
$
175,567

Other current liabilities included the following:
 
September 30, 2017
 
June 30, 2017
Contingent earn-out liability
$
46,316

 
$
44,049

Current portion of lease financing obligation
12,569

 
12,569

Short-term derivative liabilities
13,078

 
7,243

Current portion of capital lease obligations
11,471

 
11,573

Mandatorily redeemable noncontrolling interest (1)
905

 
901

Other
2,659

 
2,100

Total other current liabilities
$
86,998

 
$
78,435



17


Other liabilities included the following:
 
September 30, 2017
 
June 30, 2017
Long-term derivative liabilities
$
47,199

 
$
31,936

Long-term capital lease obligations
25,712

 
28,306

Mandatorily redeemable noncontrolling interest (1)
2,469

 
2,456

Other (2)
33,227

 
31,985

Total other liabilities
$
108,607

 
$
94,683

_______________________
(1) Relates to the mandatorily redeemable noncontrolling interest of Printi LLC. Refer to Note 11 for additional details.
(2) As of September 30, 2017 and June 30, 2017, other liabilities includes $8,753 and $8,173, respectively, related to share-based compensation awards associated with our investment in Printi LLC. Refer to Note 11 for additional details.
Contingent earn-out liability
Under the original terms of the WIRmachenDRUCK earn-out arrangement, a portion of the earn-out attributed to the minority selling shareholders was included as a component of purchase consideration as of the acquisition date, with any subsequent changes to fair value recognized within general and administrative expense. This earn-out was previously calculated on a sliding scale, based on the achievement of cumulative gross profit against a predetermined target. During the fourth quarter of fiscal 2017, we determined it was reasonably certain, based on recent performance, that the maximum earn-out would be achieved. During the first quarter of fiscal 2018, we amended the terms of this arrangement, to remove the performance condition and we agreed to pay the maximum amount of €40,000 in January 2018.
The liability represents the present value of the agreed payment amount. We recognized $827 and $8,985 of expense during the three months ended September 30, 2017 and 2016 respectively, as part of general and administrative expense. As of September 30, 2017, the total liability is $46,316, of which $40,582 relates to the majority shareholders and $5,734 relates to the minority shareholders.
8. Debt

September 30, 2017
 
June 30, 2017
Senior secured credit facility
$
546,043

 
$
600,037

7.0% Senior unsecured notes due 2022
275,000

 
275,000

Other
8,246

 
7,541

Debt issuance costs and debt discounts (1)
(8,488
)
 
(5,922
)
Total debt outstanding, net
820,801

 
876,656

Less short-term debt (2)
19,941

 
28,926

Long-term debt
$
800,860

 
$
847,730

_____________________
(1) During the three months ended September 30, 2017, we capitalized $3,251 in debt issuance costs, which related to the amendment and restatement to our senior secured credit facility. Refer below for additional details relating to the amendment.
(2) Balances as of September 30, 2017 and June 30, 2017 are inclusive of short-term debt issuance costs and debt discounts of $1,858 and$1,693, respectively.
Our Debt
Our various debt arrangements described below contain customary representations, warranties and events of default. As of September 30, 2017, we were in compliance with all financial and other covenants related to our debt.

18


Senior Secured Credit Facility
On July 13, 2017, we entered into an amendment and restatement agreement for our senior secured credit facility resulting in an increase to aggregate loan commitments under the credit agreement to a total of $1,045,000. The amendment also extended the tenor of our borrowings to a maturity date of July 13, 2022. As of September 30, 2017, we have a committed credit facility of $1,041,250 as follows:
Revolving loans of $745,000 with a maturity date of July 13, 2022
Term loan of $296,250 amortizing over the loan period, with a final maturity date of July 13, 2022.
Under the terms of our credit agreement, borrowings bear interest at a variable rate of interest based on LIBOR plus 1.50% to 2.25% depending on our leverage ratio, which is the ratio of our consolidated total indebtedness to our consolidated EBITDA, as defined by the credit agreement. As of September 30, 2017, the weighted-average interest rate on outstanding borrowings was 3.26%, inclusive of interest rate swap rates. We are also required to pay a commitment fee on unused balances of 0.225% to 0.400% depending on our leverage ratio. We have pledged the assets and/or share capital of several of our subsidiaries as collateral for our outstanding debt as of September 30, 2017.
Indenture and Senior Unsecured Notes due 2022
On March 24, 2015, we completed a private placement of $275,000 in aggregate principal amount of 7.0% senior unsecured notes due 2022 (the “Notes”). We issued the Notes pursuant to a senior notes indenture dated as of March 24, 2015 among Cimpress N.V., our subsidiary guarantors, and MUFG Union Bank, N.A., as trustee (the "Indenture"). We used the proceeds from the Notes to pay outstanding indebtedness under our unsecured line of credit and our senior secured credit facility and for general corporate purposes.
The Notes bear interest at a rate of 7.0% per annum and mature on April 1, 2022. Interest on the Notes is payable semi-annually on April 1 and October 1 of each year, commencing on October 1, 2015, to the holders of record of the Notes at the close of business on March 15 and September 15, respectively, preceding such interest payment date.

The Notes are senior unsecured obligations and rank equally in right of payment to all our existing and future senior unsecured debt and senior in right of payment to all of our existing and future subordinated debt. The Notes are effectively subordinated to any of our existing and future secured debt to the extent of the value of the assets securing such debt. Subject to certain exceptions, each of our existing and future subsidiaries that is a borrower under or guarantees our senior secured credit facilities will guarantee the Notes.
The Indenture contains various covenants, including covenants that, subject to certain exceptions, limit our and our restricted subsidiaries’ ability to incur and/or guarantee additional debt; pay dividends, repurchase shares or make certain other restricted payments; enter into agreements limiting dividends and certain other restricted payments; prepay, redeem or repurchase subordinated debt; grant liens on assets; enter into sale and leaseback transactions; merge, consolidate or transfer or dispose of substantially all of our consolidated assets; sell, transfer or otherwise dispose of property and assets; and engage in transactions with affiliates.
At any time prior to April 1, 2018, we may redeem some or all of the Notes at a redemption price equal to 100% of the principal amount redeemed, plus a make-whole amount as set forth in the Indenture, plus, in each case, accrued and unpaid interest to, but not including, the redemption date. In addition, at any time prior to April 1, 2018, we may redeem up to 35% of the aggregate outstanding principal amount of the Notes at a redemption price equal to 107% of the principal amount thereof, plus accrued and unpaid interest to, but not including, the redemption date, with the net proceeds of certain equity offerings by Cimpress. At any time on or after April 1, 2018, we may redeem some or all of the Notes at the redemption prices specified in the Indenture, plus accrued and unpaid interest to, but not including, the redemption date.
Other debt
Other debt consists of term loans acquired primarily as part of our fiscal 2015 acquisition of Exagroup SAS. As of September 30, 2017 and June 30, 2017 we had $8,246 and $7,541, respectively, outstanding for those obligations that are payable through September 2024.

19


9. Income Taxes

Our income tax benefit was $6,187 and $9,814 for the three months ended September 30, 2017 and 2016, respectively. The income tax benefit for the three months ended September 30, 2017 was lower than the same prior year period primarily due to lower discrete tax benefits from share-based compensation of $448 for the current period as compared to $4,189 for the same prior year period. Excluding the effect of net discrete tax benefits, we are forecasting a higher consolidated annual effective tax rate for fiscal 2018 as compared to fiscal 2017 primarily due to the adoption of ASU 2016-16 (refer to Note 2) as well as a less favorable geographical mix of consolidated earnings. If we had not early adopted ASU 2016-16, the forecasted fiscal 2018 tax expense would be lower by $9,787. In addition, we continue to generate losses in certain jurisdictions where we are unable to recognize a full tax benefit in the current period. The gain from the sale of the Albumprinter group, as described in Note 2, had no impact on our income tax benefit for the current period.
    
On October 1, 2013, we made changes to our corporate entity operating structure, including transferring our intellectual property among certain of our subsidiaries, primarily to align our corporate entities with our evolving operations and business model. Our subsidiary based in Switzerland was the recipient of the intellectual property. In accordance with Swiss tax law, we are entitled to amortize the fair market value of the intellectual property received at the date of transfer over five years for tax purposes. As a result of this amortization, we are expecting a loss for Swiss tax purposes during fiscal year 2018.

As of September 30, 2017, we had a liability for unrecognized tax benefits included in the balance sheet of $5,956, including accrued interest and penalties of $426. We recognize interest and, if applicable, penalties related to unrecognized tax benefits in the provision for income taxes. If recognized, the entire liability for unrecognized tax benefits would reduce our tax expense. It is reasonably possible that a reduction in unrecognized tax benefits may occur within the next twelve months in the range of $1,000 to $1,200 related to the lapse of applicable statutes of limitations. We believe we have appropriately provided for all tax uncertainties.
    
We conduct business in a number of tax jurisdictions and, as such, are required to file income tax returns in multiple jurisdictions globally. The years 2013 through 2017 remain open for examination by the United States Internal Revenue Service (“IRS”) and the years 2011 through 2017 remain open for examination in the various states and non-US tax jurisdictions in which we file tax returns. We believe that our income tax reserves are adequately maintained taking into consideration both the technical merits of our tax return positions and ongoing developments in our income tax audits. However, the final determination of our tax return positions, if audited, is uncertain, and there is a possibility that final resolution of these matters could have a material impact on our results of operations or cash flows.
10. Noncontrolling Interests
In certain of our strategic investments we own a controlling equity stake, but there remains a minority portion of the equity that is owned by a third party. The balance sheet and operating activity of these entities are included in our consolidated financial statements and we adjust the net income (loss) in our consolidated statement of operations to exclude the noncontrolling interests' proportionate share of results. We present the proportionate share of equity attributable to the redeemable noncontrolling interests as temporary equity within our consolidated balance sheet and the proportionate share of noncontrolling interests not subject to a redemption provision that is outside of our control as equity.
Redeemable noncontrolling interests
On April 15, 2015, we acquired 70% of the outstanding shares of Exagroup SAS. The remaining 30% is considered a redeemable noncontrolling equity interest, as it is redeemable in the future and not solely within our control. The Exagroup noncontrolling interest, redeemable at a fixed amount of €39,000, was recorded at its fair value as of the acquisition date and will be adjusted to its redemption value on a periodic basis, if that amount exceeds its carrying value. As of September 30, 2017, the redemption value was less than the carrying value, and therefore no adjustment was required.

On August 23, 2017, we sold approximately 12% of the outstanding shares of our WIRmachenDRUCK subsidiary for a total of €30,000 ($35,390 based on the exchange rate on the date we received the proceeds). The minority equity interest is considered a redeemable noncontrolling interest, as it is redeemable for cash based on future financial results through put and call rights and not solely within our control. The noncontrolling interest was

20


recorded at its fair value as of the sale date and will be adjusted to its redemption value on a periodic basis, with an offset to retained earnings, if that amount exceeds its carrying value. If the formulaic redemption value exceeds the fair value of the noncontrolling interest, then the accretion to redemption value will be offset to the net (income) loss attributable to noncontrolling interest. As of September 30, 2017, the redemption value was less than the carrying value, and therefore no adjustment was required.

The following table presents the reconciliation of changes in our noncontrolling interests:
 
 
Redeemable noncontrolling interests
 
Noncontrolling interest
Balance as of June 30, 2017
 
$
45,412

 
$
213

Net income (loss) attributable to noncontrolling interest
 
(2
)
 
45

Proceeds from sale of noncontrolling interest
 
35,390

 

Foreign currency translation
 
3,041

 

Balance as of September 30, 2017
 
$
83,841

 
$
258


11. Variable Interest Entity ("VIE")
On August 7, 2014, we made a capital investment in Printi LLC, which operates in Brazil. This investment provided us access to a new market and the opportunity to drive longer-term growth in Brazil and other geographies as Printi expands internationally in the future. As of September 30, 2017, we have a 49.99% equity interest in Printi. Based upon the level of equity investment at risk, Printi is considered a variable interest entity. The shareholders of Printi share profits and voting control on a pro-rata basis. While we do not manage the day to day operations of Printi, we do have the unilateral ability to exercise participating voting rights for specific transactions and as such no one shareholder is considered to be the primary beneficiary. However, certain significant shareholders cannot transfer their equity interests without our approval and as a result are considered de facto agents on our behalf in accordance with ASC 810-10-25-43.
In aggregating our rights, as well as those of our de facto agents, the group as a whole has both the power to direct the activities that most significantly impact the entity's economic performance and the obligation to absorb losses and the right to receive benefits from the entity. In situations where a de facto agency relationship is present, one party is required to be identified as the primary beneficiary and the evaluation requires significant judgment. The factors considered include the presence of a principal/agent relationship, the relationship and significance of activities to the reporting entity, the variability associated with the VIE's anticipated economics and the design of the VIE. The analysis is qualitative in nature and is based on weighting the relative importance of each of the factors in relation to the specifics of the VIE arrangement. Upon our investment we performed an analysis and concluded that we are the party that is most closely associated with Printi, as we are most exposed to the variability of the economics and therefore considered the primary beneficiary.
We will purchase an additional 3.7% non-voting economic interest during the fourth quarter of fiscal 2018. In addition, we will acquire the remaining equity interest in Printi through a reciprocal put and call structure, exercisable from March 31, 2021 through a mandatory redemption date of July 31, 2023. As the remaining equity interests are mandatorily redeemable by all parties no later than a specified future date, the noncontrolling interest is within the scope of ASC 480 and is required to be presented as a liability on our consolidated balance sheet. We adjust the liability to its estimated redemption value each reporting period and recognize any changes within interest expense, net in our consolidated statement of operations.
We also have liability-based awards for Printi restricted stock held by Printi employees that are fully vested and marked to fair value each reporting period until cash settlement. As of September 30, 2017, through the use of an option pricing model we estimate the current fair value of the restricted stock to be $8,753 and we have recognized $39 and $386 in general and administrative expense for the three months ended September 30, 2017 and 2016, respectively.
We also have an arrangement to lend two Printi equity holders up to $24,000 that is payable on the date the put or call option is exercised, which will occur no later than July 31, 2023. On July 10, 2017, $12,000 of the loan was drawn and is a long-term loan receivable included within other assets in our consolidated financial statements as of September 30, 2017. The loans carry 8.5% annual interest, and the loans are not contingent upon continued employment. We expect that the loan proceeds will be used to offset our purchase of the remaining noncontrolling interest in the future.

21


12. Segment Information
Our operating segments are based upon the manner in which our operations are managed and the availability of separate financial information reported internally to the Chief Executive Officer, who is our Chief Operating Decision Maker (“CODM”) for purposes of making decisions about how to allocate resources and assess performance. As of September 30, 2017 we have numerous operating segments under our management reporting structure which are reported in the following four reportable segments:
Vistaprint - Includes the operations of our Vistaprint-branded websites focused on the North America, Europe, Australia and New Zealand markets, and our Webs-branded business, which is managed with the Vistaprint-branded digital business in the previously listed geographies.
Upload and Print - Includes the results of our druck.at, Easyflyer, Exagroup, Pixartprinting, Printdeal, Tradeprint, and WIRmachenDRUCK branded businesses.
National Pen - Includes the global operations of our National Pen branded businesses, which manufacture and market custom writing instruments and promotional products, apparel and gifts.
All Other Businesses - Includes the operations of our Most of World and Corporate Solutions businesses. Our Most of World businesses are focused on our emerging market portfolio, including operations in Brazil, China, India and Japan. These businesses have been combined into one reportable segment based on materiality. Our All Other Businesses also includes Albumprinter results through the divestiture date of August 31, 2017.
Central and corporate costs consists primarily of global procurement, a central technology team whose primary focus is building and maintaining certain technology including the mass customization platform, and essential corporate services, such as the corporate finance, communications, strategy and legal functions. Central and corporate costs is a cost center and does not meet the definition of an operating segment.
During the first quarter of fiscal 2018, we began presenting inter-segment fulfillment activity as revenue for the fulfilling business unit for purposes of measuring and reporting our segment financial performance. Any historical inter-segment fulfillment transactions were previously recognized as cost relief for the fulfilling business unit in our presentation to the CODM. We now recognize these transactions as inter-segment revenue for presentation to the CODM; for example, a third-party customer order received by our Corporate Solutions business, which is fulfilled at one of our Vistaprint production facilities, is recognized as inter-segment revenue for our Vistaprint business based on pricing and terms agreed upon between segment management. Inter-segment revenues are recognized only for transactions recognized between our reportable segments and does not include any transactions between businesses within a reportable segment, which are eliminated within each reportable segment. Intercompany revenues are eliminated in our consolidated results.
As part of these changes, we also recast historical segment results to ensure the consistent application of our current inter-segment revenue presentation. For the three months ended September 30, 2016, we increased revenue for our Vistaprint business by $1,113, with a corresponding increase to inter-segment eliminations. We also recast historical segment profitability for the allocation of certain IT costs, which previously burdened our Vistaprint business, but have now been allocated to each of our businesses in fiscal 2018. For the three months ended September 30, 2016, the cost allocation change resulted in an increase to Vistaprint segment profit by $624, with a corresponding decrease to segment profit for Upload and Print and All Other businesses of $161 and $140, respectively, and an increase to our Central and corporate cost center of $323.
For awards granted under our 2016 Performance Equity Plan, the PSU expense value is based on a Monte Carlo fair value analysis and is required to be expensed on an accelerated basis. In order to ensure comparability in measuring our businesses results, we allocate the straight-line portion of the fixed grant value to our businesses. Any expense in excess of the amount as a result of the fair value measurement of the PSUs and the accelerated expense profile of the awards is recognized within Central and corporate costs.
Segment profit (loss) is the primary metric by which our CODM measures segment financial performance and allocates resources. Certain items are excluded from segment profit (loss), such as acquisition-related amortization and depreciation, expense recognized for contingent earn-out related charges, including the changes in fair value of contingent consideration and compensation expense related to cash-based earn-out mechanisms

22


dependent upon continued employment, share-based compensation related to investment consideration, certain impairment expense, and restructuring charges. A portion of the interest expense associated with our Waltham lease is included as expense in segment profit (loss) and allocated based on headcount to the appropriate business or corporate and global function. The interest expense represents a portion of the cash rent payment and is considered an operating expense for purposes of measuring our segment performance. We do not allocate non-operating income to our segment results.
Our All Other Businesses reportable segment includes our Most of World and Corporate Solutions businesses that have operating losses as they are in the early stage of investment relative to the scale of the underlying businesses, which may limit its comparability to other segments regarding profit (loss).
Our balance sheet information is not presented to the CODM on an allocated basis, and therefore we do not present asset information by segment. We do present other segment information to the CODM, which includes purchases of property, plant and equipment and capitalization of software and website development costs, and therefore included that information in the tables below.
Revenue by segment is based on the business-specific websites or sales channel through which the customer’s order was transacted. The following tables set forth revenue, segment profit (loss), total income (loss) from operations and total income (loss) before taxes.
 
Three Months Ended September 30,
 
2017
 
2016
Revenue:
 
 
 
Vistaprint (1)
$
319,043

 
$
286,535

Upload and Print (2)
160,390

 
131,957

National Pen (3)
59,717

 

All Other Businesses (4)
28,054

 
26,334

Total segment revenue
567,204

 
444,826

Inter-segment eliminations
(3,920
)
 
(1,113
)
Total consolidated revenue
$
563,284

 
$
443,713

_____________________
(1) Vistaprint segment revenues include inter-segment revenue of $2,204 and $1,113 for the three months ended September 30, 2017 and 2016, respectively.
(2) Upload and Print segment revenues include inter-segment revenue of $328 for the three months ended September 30, 2017. No inter-segment revenue was recognized in the prior comparable period.
(3) National Pen segment revenues include inter-segment revenue of $446 for the three months ended September 30, 2017. No inter-segment revenue was recognized in the prior comparable period.
(4) All Other Businesses segment revenues include inter-segment revenue of $943 for the three months ended September 30, 2017. No inter-segment revenue was recognized in the prior comparable period.

23


 
Three Months Ended September 30,
 
2017
 
2016
Segment profit (loss):
 
 
 
Vistaprint
$
30,895

 
$
25,272

Upload and Print
14,768

 
13,451

National Pen
1,185

 

All Other Businesses
(7,551
)
 
(9,752
)
Total segment profit
39,297

 
28,971

Central and corporate costs
(28,257
)

(28,186
)
Acquisition-related amortization and depreciation
(12,687
)
 
(10,213
)
Earn-out related charges (1)
(1,137
)
 
(16,247
)
Share-based compensation related to investment consideration
(40
)
 
(4,103
)
Restructuring related charges
(854
)
 

Interest expense for Waltham lease
1,911

 
1,970

Gain on the purchase or sale of subsidiaries (2)
48,380

 

Total income (loss) from operations
46,613

 
(27,808
)
Other expense, net
(16,312
)
 
(2,132
)
Interest expense, net
(13,082
)
 
(9,904
)
Income (loss) before income taxes
$
17,219

 
$
(39,844
)
___________________
(1) Includes expense recognized for the change in fair value of contingent consideration and compensation expense related to cash-based earn-out mechanisms dependent upon continued employment.
(2) Includes the impact of the gain on the sale of Albumprinter, as well as a bargain purchase gain as defined by ASC 805-30 for an acquisition in which the identifiable assets acquired and liabilities assumed are greater than the consideration transferred, that was recognized in general and administrative expense in our consolidated statement of operations during the three months ended September 30, 2017.
 
Three Months Ended September 30,
 
2017
 
2016
Depreciation and amortization:
 
 
 
Vistaprint
$
16,774

 
$
14,771

Upload and Print
14,720

 
14,465

National Pen
5,095

 

All Other Businesses
2,287

 
3,604

Central and corporate costs
3,508

 
2,565

Total depreciation and amortization
$
42,384

 
$
35,405


 
Three Months Ended September 30,
 
2017
 
2016
Purchases of property, plant and equipment:
 
 
 
Vistaprint
$
13,664

 
$
11,209

Upload and Print
3,257

 
4,800

National Pen
2,490

 

All Other Businesses
671

 
2,639

Central and corporate costs
375

 
671

Total purchases of property, plant and equipment
$
20,457

 
$
19,319


24


 
Three Months Ended September 30,
 
2017
 
2016
Capitalization of software and website development costs:
 
 
 
Vistaprint
$
5,573

 
$
3,134

Upload and Print
774

 
444

National Pen

 

All Other Businesses
968

 
1,268

Central and corporate costs
1,619

 
3,466

Total capitalization of software and website development costs
$
8,934

 
$
8,312

The following tables set forth long-lived assets by geographic area:
 
September 30, 2017
 
June 30, 2017
Long-lived assets (1):
 

 
 

Netherlands
$
92,414

 
$
83,223

Canada
86,268

 
85,926

Switzerland
48,806

 
49,017

Italy
44,375

 
44,423

United States
39,727

 
64,034

Australia
23,474

 
22,961

France
22,774

 
22,794

Jamaica
21,203

 
21,492

Japan
20,771

 
20,686

Other
73,062

 
64,377

Total
$
472,874

 
$
478,933

___________________
(1) Excludes goodwill of $525,806 and $514,963, intangible assets, net of $268,678 and $275,924, the Waltham lease asset of $115,015 and $116,045, and deferred tax assets of $78,748 and $48,004 as of September 30, 2017 and June 30, 2017, respectively.
13. Commitments and Contingencies
Lease Commitments
We have commitments under operating leases for our facilities that expire on various dates through 2026, including the Waltham lease arrangement discussed in Note 2. Total lease expense, net of sublease income, for the three months ended September 30, 2017 and 2016 was $4,244 and $2,271, respectively.
We lease certain machinery and plant equipment under both capital and operating lease agreements that expire at various dates through 2027. The aggregate carrying value of the leased buildings and equipment under capital leases included in property, plant and equipment, net in our consolidated balance sheet at September 30, 2017, is $39,072, net of accumulated depreciation of $29,636; the present value of lease installments not yet due included in other current liabilities and other liabilities in our consolidated balance sheet at September 30, 2017 amounts to $37,183.
Purchase Obligations
At September 30, 2017, we had unrecorded commitments under contract of $83,919, which were primarily composed of commitments for third-party web services of $28,180. In addition, we had purchase commitments for production and computer equipment purchases of approximately $9,628, inventory purchase commitments of $6,795, commitments for advertising campaigns of $4,706, professional and consulting fees of approximately $4,036, and other unrecorded purchase commitments of $30,574.

25


Other Obligations
We have an outstanding installment obligation of $5,659 related to the fiscal 2012 intra-entity transfer of the intellectual property of our subsidiary Webs, Inc., which results in tax being paid over a 7.5 year term and has been classified as a deferred tax liability in our consolidated balance sheet as of September 30, 2017. Other obligations also include a liability related to our fiscal 2016 WIRmachenDRUCK acquisition, payable in January 2018 of $46,316. Refer to Note 7 for additional discussion. In addition, we have deferred payments related to our other acquisitions of $4,588 in aggregate.
Legal Proceedings
We are not currently party to any material legal proceedings. Although we cannot predict with certainty the results of litigation and claims to which we may be subject from time to time, we do not expect the resolution of any of our current matters to have a material adverse impact on our consolidated results of operations, cash flows or financial position. In all cases, at each reporting period, we evaluate whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. We expense the costs relating to our legal proceedings as those costs are incurred.

14. Restructuring Charges

Restructuring costs include one-time employee termination benefits, acceleration of share-based compensation, and other related costs including third-party professional and outplacement services. We recognized restructuring charges of $854 during the three months ended September 30, 2017, of which, $727 related to a restructuring initiative within our All Other Businesses reportable segment and an additional $127 related to our prior January 2017 restructuring initiative. We do not expect any material charges to be incurred in future periods for either of these initiatives. There were no restructuring expenses incurred during the three months ended September 30, 2016.

The following table summarizes the restructuring activity during the three months ended September 30, 2017:
 
Severance and Related Benefits
 
Other Restructuring Costs
 
Total
Accrued restructuring liability as of June 30, 2017
$
4,602

 
$
208

 
$
4,810

Restructuring Charges
854

 

 
854

Cash payments
(3,926
)
 
(156
)
 
(4,082
)
Non-cash charges (1)
(103
)
 

 
(103
)
Accrued restructuring liability as of September 30, 2017
$
1,427

 
$
52

 
$
1,479

_____________________
(1) Non-cash charges include acceleration of share-based compensation expenses.
15. Subsequent Events

On November 1, 2017, we announced our Vistaprint business plans to reorganize its business, which will result in a reduction in headcount and other operating costs. These changes are intended to simplify operations and more closely align functions to increase the speed of execution. We expect to complete the majority of the changes during the second quarter of fiscal 2018. These planned actions are subject to mandatory consultations with employees, work councils and governmental authorities in certain jurisdictions. Based on a preliminary assessment of the potential action, we expect that these changes will result in a pre-tax restructuring charge during the second quarter of fiscal 2018 of approximately $15,000 to $17,000, including non-cash charges relating to share-based compensation of approximately $400. The actual timing and costs of the plan may differ from our current expectations and estimates.

26


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, expenses, seasonality of certain of our businesses, the impact of changes in accounting standards, our anticipated effective tax rate, deferred tax assets, and the sufficiency of our tax reserves, sufficiency of our cash, legal proceedings, the impact of our restructuring initiatives, and the impact of exchange rate and currency volatility. 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
We are a technology driven company that aggregates, largely via the internet, large volumes of small, individually customized orders for a broad spectrum of print, signage, apparel and similar products. We operate in a largely decentralized manner. Our businesses, discussed in more detail below, fulfill orders with manufacturing capabilities that include Cimpress owned and operated manufacturing facilities and a network of third-party fulfillers to create customized products on-demand. Those businesses bring their products to market through a portfolio of customer-focused brands serving the needs of micro, small and medium sized businesses, resellers and consumers. These brands include Vistaprint, our global brand for micro business marketing products and services, as well as brands that we have acquired that serve the needs of various market segments, including resellers, micro, small and medium sized businesses with differentiated service needs, and consumers purchasing products for themselves and their families.
As of September 30, 2017, we have numerous operating segments under our management reporting structure which are reported in the following four reportable segments: Vistaprint, Upload and Print, National Pen, and All Other Businesses. Vistaprint represents our Vistaprint websites focused on the North America, Europe, Australia and New Zealand markets, and our Webs business, which is managed with the Vistaprint digital business. Upload and Print includes the druck.at, Easyflyer, Exagroup, Pixartprinting, Printdeal, Tradeprint, and WIRmachenDRUCK businesses. National Pen includes the global operations of our National Pen business, which manufactures and markets custom writing instruments and promotional products, apparel and gifts for small- and medium-sized businesses. All Other Businesses segment includes the operations of our Most of World and Corporate Solutions businesses, and the Albumprinter business, through its divestiture on August 31, 2017.
During the first quarter of fiscal 2018, we began presenting inter-segment fulfillment activity as revenue for the fulfilling business unit for purposes of measuring and reporting our segment financial performance. We have revised historical results to reflect the consistent application of our current accounting methodology. In addition, we adjusted our historical segment profitability for the allocation of certain IT costs that are allocated to each of our businesses in fiscal 2018, to better reflect where those resources are consumed. Refer to Note 12 for additional details of these changes.
Financial Summary
In evaluating the financial condition and operating performance of our business, management focuses on revenue growth, constant-currency revenue growth, operating income, adjusted net operating profit (NOP), cash flow from operations and unlevered free cash flow. During the first quarter of fiscal 2018, we removed the 'cash tax attributable to the current period' portion of our prior adjusted net operating profit measure as management no longer uses this metric. A summary of these key financial metrics for the three months ended September 30, 2017 as compared to the three months ended September 30, 2016 follows:

27


Reported revenue increased by 27% to $563.3 million.
Consolidated constant-currency revenue increased by 24% and excluding acquisitions and divestitures completed in the last four quarters increased by 12%.
Operating income increased $74.4 million to $46.6 million.
Adjusted net operating profit (a non-GAAP financial measure which were refer to as adjusted NOP) increased from $2.7 million to $10.4 million.
Cash provided by operating activities increased $6.8 million to $16.4 million.
Unlevered free cash flow (a non-GAAP financial measure) increased from $(14.7) million to $(6.5) million.
For the first quarter of fiscal 2018, the increase in reported revenue growth was primarily due to the addition of the revenue of our National Pen business, which we acquired in the second quarter of fiscal 2017 and therefore did not contribute to the prior comparative period, as well as continued growth in the Vistaprint business and Upload and Print businesses.
The following items positively impacted our operating income for the three months ended September 30, 2017, leading to the increase in operating income as compared to the prior period:
The sale of our Albumprinter business, which resulted in a $47.5 million gain in the current period.
The net decrease in acquisition-related expense of $16.7 million, due to the following:
Earn-out related charges decreased $15.1 million, which relates to our WIRmachenDRUCK contingent earn-out out, which we adjusted in fiscal 2017 to increase the fair value to the maximum potential payout.
Acquisition-related share based compensation decreased $4.1 million, due to a one-time modification expense related to our Tradeprint acquisition during the prior period.
These decreases were partially offset by an increase in amortization of acquired intangible assets of $2.5 million, due to our fiscal 2017 acquisition of National Pen.
Operating income and adjusted NOP increased versus the comparative period a year ago due to increased profitability in our Vistaprint and Upload and Print businesses, primarily driven by revenue growth and improved efficiency in operating expenses. We have also realized cost savings from our prior year restructuring action, which was announced in January 2017.
On November 1, 2017, we announced our Vistaprint business plans to reorganize its business, which will result in a reduction in headcount and other operating costs. These changes are intended to simplify operations and more closely align functions to increase the speed of execution. We expect to complete the majority of the changes during the second quarter of fiscal 2018 and, we estimate an aggregate pre-tax restructuring charge of approximately $15 million to $17 million, including non-cash charges relating to share-based compensation of approximately $0.4 million. Once the actions are complete, we expect to realized net operation expense savings in fiscal 2018.
Consolidated Results of Operations
Consolidated Revenue
We generate revenue primarily from the sale and shipping of customized manufactured products, and by providing digital services, website design and hosting, and email marketing services, as well as a small percentage from order referral fees and other third-party offerings.
For the three months ended September 30, 2017, our reported revenue increased, partly due to the addition of revenue from our National Pen business that we acquired on December 30, 2016. Currency fluctuations positively impacted our fiscal 2017 reported revenue growth. The increases in constant-currency revenue excluding acquisitions and divestitures for which there is no comparable year-over-year revenue were driven by continued growth in the Vistaprint business, as well as growth in our Upload and Print businesses. Our Most of World portfolio and Corporate Solutions business continue to grow, but off a relatively small base.

28


Our total revenue by reportable segment for the three months ended September 30, 2017 and 2016 is shown in the following table:
In thousands
Three Months Ended September 30,
 
 
 
Currency
Impact:
 
Constant-
Currency
 
Impact of Acquisitions/ Divestitures:
 
Constant- Currency revenue growth
 
2017
 
2016
 
%
Change
 
(Favorable)/Unfavorable
 
Revenue Growth (1)
 
(Favorable)/Unfavorable
 
Excluding acquisitions/ divestitures (2)
Vistaprint
$
319,043

 
$
286,535

 
11%
 
(1)%
 
10%
 
—%
 
10%
Upload and Print
160,390

 
131,957

 
22%
 
(6)%
 
16%
 
—%
 
16%
National Pen
59,717

 

 
100%
 
—%
 
100%
 
(100)%
 
—%
All Other Businesses (3)
28,054

 
26,334

 
7%
 
(2)%
 
5%
 
35%
 
40%
   Inter-segment eliminations
(3,920
)

(1,113
)
 
 
 
 
 
 
 
 
 
 
Total revenue
$
563,284

 
$
443,713

 
27%
 
(3)%
 
24%
 
(12)%
 
12%
_________________
(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. Our reportable segments-related growth is inclusive of inter-segment revenues, which are eliminated in our consolidated results.
(2) Constant-currency revenue growth excluding acquisitions/divestitures, a non-GAAP financial measure, excludes revenue results for businesses in the period in which there is no comparable year-over-year revenue. Revenue from our fiscal 2017 acquisitions is excluded from fiscal 2018 revenue growth for quarters with no comparable year-over-year revenue. For example, revenue from National Pen, which we acquired on December 30, 2016 in Q2 2017, is excluded from Q1 2018 revenue growth and will be excluded in Q2 2018 as well since there are no full quarter results in the comparable period, but revenue will be included for Q3, and Q4 2018 revenue growth. Our reportable segments-related growth is inclusive of inter-segment revenues, which are eliminated in our consolidated results.
(3) The All Other businesses include the revenue of the Albumprinter business until the sale completion date of August 31, 2017. Constant currency revenue growth excluding acquisitions/divestitures, excludes the revenue results for Albumprinter.
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.
Consolidated Cost of Revenue
Cost of revenue includes materials used to manufacture our products, payroll and related expenses for production and design services 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 we sell. Cost of revenue as a percent of revenue increased during the three months ended September 30, 2017, primarily due to costs associated with new product and service launches, introduction of lower margin products, increased third-party fulfillment and shipping costs, and the increased weight of our Upload and Print portfolio, which as a percentage of revenue has a higher cost of revenue than our Vistaprint business.
 
Three Months Ended September 30,
 
2017
 
2016
Cost of revenue
$
283,755

 
$
213,050

% of revenue
50.4
%
 
48.0
%
For the three months ended September 30, 2017, our cost of revenue increased by $25.9 million in our Vistaprint business, primarily due to increased production volume, product mix, and planned investments including expanded design services, new product introduction, including via third-party fulfillers. We had $25.8 million of additional costs from our National Pen acquisition which was not included in the prior comparable period. Cost of revenue for our Upload and Print businesses also increased by $21.8 million, primarily driven by revenue growth in our Pixartprinting, Printdeal and WIRmachenDRUCK businesses, as well as unfavorable currency impacts.

29


Consolidated Operating Expenses
The following table summarizes our comparative operating expenses for the periods:

In thousands
 
Three Months Ended September 30,
 
 
 
2017
 
2016
 
2017 vs. 2016
Technology and development expense
$
62,103

 
$
59,010

 
5
 %
% of revenue
11.0
 %
 
13.3
%
 
 
Marketing and selling expense
$
166,093

 
$
132,668

 
25
 %
% of revenue
29.5
 %
 
29.9
%
 
 
General and administrative expense
$
38,778

 
$
56,580

 
(31
)%
% of revenue
6.9
 %
 
12.8
%
 


Amortization of acquired intangible assets
$
12,633

 
$
10,213

 
24
 %
% of revenue
2.2
 %
 
2.3
%
 


Restructuring expense
$
854

 
$

 
100
 %
% of revenue
0.2
 %
 
%
 


(Gain) on sale of subsidiaries
$
(47,545
)

$

 
(100
)%
% of revenue
(8.4
)%

%
 


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 and content development, as well as amortization of capitalized software and website development costs, including 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 growth in our technology and development expenses of $3.1 million for the three months ended September 30, 2017 as compared to the prior comparative period was primarily due to our fiscal 2017 acquisition of National Pen, which resulted in $3.2 million of additional expense in the current period, without any costs in the prior comparable period. We also recognized increased depreciation expense of $1.0 million, primarily related to past investments in infrastructure-related assets. These increases were partially offset by compensation-related cost savings that resulted from our January 2017 restructuring initiative.
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; direct-mail advertising costs; and third-party payment processing fees. Our Vistaprint and National Pen businesses have higher marketing and selling costs structures, as compared to our Upload and Print businesses.
Our marketing and selling expenses increased by $33.4 million during the three months ended September 30, 2017 as compared to the prior comparative period, primarily due to the addition of National Pen which incurred $23.9 million of marketing and selling expense during the three months ended September 30, 2017 primarily for direct-mail advertising and telesales costs that were not in our prior comparable period. In addition, advertising expense for other businesses increased by $6.2 million, which is primarily a result of additional advertising spend in the Vistaprint business. Other increases included payroll and employee-related costs, inclusive of share-based compensation, as we expanded our marketing and customer service, sales support organization through our recent acquisitions and continued investment in the Vistaprint business customer service resources in order to provide higher value services to our customers.
General and administrative expense
General and administrative expense consists primarily of transaction costs, including third-party

30


professional fees, insurance and payroll and related expenses of employees involved in executive management, finance, legal, strategy, human resources, and procurement.
During the three months ended September 30, 2017, general and administrative expenses decreased by $17.8 million, primarily due to a decrease in acquisition-related charges of $19.2 million related to the WIRmachenDRUCK earn-out and additional expense in the prior period for the acceleration of vesting terms of certain restricted share awards associated with our investment in Printi and acquisition of Tradeprint. We also recognized a bargain purchase gain of $0.9 million related to a small acquisition within our All Other Businesses reportable segment during the three months ended September 30, 2017. Payroll and share-based compensation expense decreased by $2.2 million, primarily due to compensation-related cost savings realized from our January 2017 restructuring initiative. Other decreases in expense include lower travel, training and recruitment costs. These decreases were partially offset by an additional $5.7 million of expense from our National Pen business which has no expense in our prior period results.
Amortization of acquired intangible assets
Amortization of acquired intangible assets consists of amortization expense associated with separately identifiable intangible assets capitalized as part of our acquisitions, including customer relationships, trade names, developed technologies, print networks, and customer and referral networks. Amortization of acquired intangible assets increased by $2.4 million during the three months ended September 30, 2017, as compared to the three months ended September 30, 2016, primarily due to amortization for our fiscal 2017 acquisition of National Pen.
Restructuring expense
Restructuring expense consists of costs directly incurred as a result of a restructuring initiative, inclusive of employee-related termination costs, third party professional fees, facility exit costs and write-off of abandoned assets.
The restructuring expense of $0.9 million that was recognized during the three months ended September 30, 2017 consists of costs directly incurred as a result of a restructuring initiative within our All Other Businesses segment, as well as charges related to our January 2017 restructuring initiative. These costs included employee-related termination costs. Refer to Note 14 for additional details regarding the restructuring plan. No restructuring costs were recognized in the prior comparable period.
Gain on sale of subsidiaries
During the three months ended September 30, 2017, we recognized a gain on the sale of our Albumprinter business of $47.5 million, net of transaction costs. The amount of our gain on the sale of Albumprinter was impacted by the partial allocation of goodwill to our Vistaprint business in past periods, as well as minimal carrying value of Albumprinter's acquired intangible assets at the time of the sale and currency impacts. Refer to Note 2 for additional details.
Other Consolidated Results
Other expense, net
Other expense, net generally 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 some of our derivative instruments. In evaluating our currency hedging program and ability to achieve hedge accounting in light of 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 certain currency derivative contracts that do not qualify for hedge accounting. The following table summarizes the components of other expense:

31


 
Three Months Ended September 30,
 
2017

2016
(Losses) gains on derivatives not designated as hedging instruments
$
(8,250
)

$
77

Currency-related losses, net
(8,202
)

(2,966
)
Other gains
140


757

Total other expense, net
$
(16,312
)

$
(2,132
)
The increase in other expense, net during the three months ended September 30, 2017, when compared to the prior comparative period, is primarily due to the currency exchange rate volatility impacting our derivatives that are not designated as hedging instruments. We expect volatility to continue in future periods as we do not currently apply hedge accounting for most of our derivative currency contracts. We also experienced increased currency-related losses due to currency exchange rate volatility on our non-functional currency intercompany relationships, which we may alter at times. The impact of certain cross-currency swap contracts designated as cash flow hedges are included in our current-related losses, net, offsetting the impact of certain non-functional currency intercompany relationships.
In addition, during the three months ended September 30, 2017 and 2016, we recognized other gains of $0.1 million and $0.8 million, respectively. The gains in the prior comparable period related primarily to insurance recoveries.
Interest expense, net
Interest expense, net was $13.1 million and $9.9 million for the three months ended September 30, 2017 and 2016, respectively. Interest expense, net primarily consists of interest paid on outstanding debt balances, amortization of debt issuance costs, interest related to capital lease obligations and realized gains (losses) on effective interest rate swap contracts and certain cross-currency swap contracts. We expect interest expense to be higher relative to historical trends as a result of increased borrowing levels on our senior secured credit facility which was expanded in July 2017, increased capital lease obligations for machinery and equipment, and higher interest rates. Refer to Note 8 for additional details regarding the credit facility amendment.
Income tax (benefit) expense
 
Three Months Ended September 30,
 
2017
 
2016
Income tax (benefit) expense
$
(6,187
)
 
$
(9,814
)
Effective tax rate
(35.9
)%
 
24.6
%

Our income tax benefit was $6.2 million and $9.8 million for the three months ended September 30, 2017 and 2016, respectively. The income tax benefit for the three months ended September 30, 2017 was lower than the same prior year period primarily due to lower discrete tax benefits from share-based compensation $0.4 million for the current period as compared to $4.2 million for the same prior year period. Excluding the effect of net discrete tax benefits, we are forecasting a higher consolidated annual effective tax rate for fiscal 2018 as compared to fiscal 2017 primarily due to the adoption of ASU 2016-16 (refer to Note 2) as well as a less favorable geographical mix of consolidated earnings. If we had not early adopted ASU 2016-16, the forecasted fiscal 2018 tax expense would be lower by $9.8 million. In addition, we continue to generate losses in certain jurisdictions where we are unable to recognize a full tax benefit in the current period. The gain from the sale of the Albumprinter group, as described in Note 2, had no impact on our income tax benefit for the current period.

We believe that our income tax reserves are adequately maintained taking into consideration both the technical merits of our tax return positions and ongoing developments in our income tax audits. However, the final determination of our tax return positions, if audited, is uncertain, and there is a possibility that final resolution of these matters could have a material impact on our results of operations or cash flows. See Note 9 in our accompanying consolidated financial statements for additional discussion.

32


Reportable Segment Results
Our segment financial performance is measured based on segment profit which excludes certain non-operational items including acquisition-related expenses, certain impairments and restructuring charges.
Vistaprint
 
Three Months Ended September 30,
 
2017
 
2016
 
2017 vs. 2016
Reported Revenue
$
319,043


$
286,535

 
11
%
Segment Profit
30,895


25,272

 
22
%
% of revenue
10
%
 
9
%
 
 
Segment Revenue
Vistaprint's reported revenue growth for the three months ended September 30, 2017 of 11% was positively affected by currency impacts of 1%, resulting in constant-currency growth of 10%. The Vistaprint constant-currency growth was due to growth in both repeat customers and new customer bookings. While both new and repeat customer bookings contributed to this revenue growth, we continue to see stronger growth resulting from improved customer satisfaction among repeat customers. Revenue from our focus product categories including signage, marketing materials and promotional products and apparel continued to grow faster than the overall segment.
Segment Profitability
Vistaprint's segment profit increased for the three months ended September 30, 2017 as compared to the prior period, primarily due to savings from our 2017 restructuring activities. We continue to experience some headwinds in segment profit from our planned investments that ramped in fiscal 2017, which included expanded design services, reduced shipping prices and new product introduction that have negatively impacted gross profit. While these investments put pressure on current period profitability, we expect that these investments will attract higher-value customers and improve customer loyalty.
Upload and Print
 
Three Months Ended September 30,
 
2017
 
2016
 
2017 vs. 2016
Reported Revenue
$
160,390

 
$
131,957

 
22
%
Segment Profit
14,768

 
13,451

 
10
%
% of revenue
9
%

10
%
 
 
Segment Revenue
The reported revenue growth of 22% for the three months ended September 30, 2017 was positively affected by currency impacts of 6%, resulting in constant-currency growth of 16%. The Upload and Print constant-currency revenue growth was primarily driven by continued growth from our Exagroup, Pixartprinting, Printdeal and WIRmachenDRUCK businesses. Each of our other Upload and Print businesses continue to grow at varying rates.
Segment Profitability
The increase in segment profit for the three months ended September 30, 2017 as compared to the prior period was primarily due to incremental gross profits, driven by the revenue growth described above. The gross profit increases were partially offset by planned investments including increased advertising initiatives, technology enhancements intended to enable rapid new product introduction and improved connection points to the mass customization platform, and the expansion of the Upload and Print support organization.

33


National Pen
 
Three Months Ended September 30,
 
2017

2016

2017 vs. 2016
Reported Revenue
$
59,717

 
n/a
 
n/a
Segment Profit
1,185

 
n/a
 
n/a
% of revenue
2
%
 
n/a
 
 
Segment Revenue and Profitability
As we acquired National Pen on December 30, 2016 there are no comparative operating results presented. For the three months ended September 30, 2017 reported revenue was $59.7 million and segment profit was $1.2 million. As National Pen profitability has traditionally been highly seasonal, we expect most profits to occur in the second quarter of our fiscal year.
All Other Businesses
 
Three Months Ended September 30,
 
2017
 
2016
 
2017 vs. 2016
Reported Revenue
$
28,054

 
$
26,334

 
7
%
Segment Loss
(7,551
)
 
(9,752
)
 
23
%
% of revenue
(27
)%
 
(37
)%
 
 
Segment Revenue
The All Other Businesses revenue increased 7% during the three months ended September 30, 2017, and was positively affected by currency impacts of 2%. Revenue growth was negatively impacted by the divestiture of our Albumprinter business, which we completed on August 31, 2017. Our constant-currency growth, excluding the impacts of our Albumprinter business was 40%, primarily driven by continued growth in our Most of World portfolio, as well as growth in our Corporate Solutions business.
Segment Profitability
The decrease in segment loss for the three months ended September 30, 2017 as compared to the prior period is primarily due to incremental gross profit, driven by revenue growth volume absorption in our Most of World businesses. In addition, the revenue growth in our Most of World and Corporate Solutions businesses has resulted in improved operating expense efficiencies.
Liquidity and Capital Resources
Consolidated Statements of Cash Flows Data:
In thousands
 
Three Months Ended September 30,
 
2017
 
2016
Net cash provided by operating activities
$
16,379

 
$
9,600

Net cash provided by (used in) investing activities
62,298

 
(27,452
)
Net cash used in financing activities
(75,459
)
 
(6,550
)
At September 30, 2017, we had $42.8 million of cash and cash equivalents and $829.3 million of outstanding debt, excluding debt issuance costs and debt discounts. We expect cash and cash equivalents and outstanding debt levels to fluctuate over time depending on our working capital needs, as well as our organic investment, share repurchase and acquisition activity. The cash flows during the three months ended September 30, 2017 related primarily to the following items:

34


Cash inflows:
Net income of $23.4 million
Adjustments for non-cash items of $0.5 million primarily related to negative adjustments for our gain on the sale of our Albumprinter business of $47.5 million and non-cash tax related items of $16.6 million, partially offset by positive adjustments for depreciation and amortization of $42.4 million, unrealized currency-related gains of $14.5 million, share-based compensation costs of $6.9 million and the change of our contingent earn-out liability of $0.8 million
Proceeds from the sale of our Albumprinter business of $93.8 million, net of transaction costs
Proceeds from the sale of noncontrolling interest, related to our WIRmachenDRUCk business of $35.4 million
Proceeds from the issuance of ordinary shares from the exercise of share options of $6.1 million
Cash outflows:
Payments of debt and debt issuance costs of $58.4 million, net of proceeds
Purchases of our ordinary shares of $40.7 million
Capital expenditures of $20.5 million of which $4.6 million were related to the purchase of manufacturing and automation equipment for our production facilities, $1.9 million were related to the purchase of land, facilities and leasehold improvements, and $14.0 million were related to computer and office equipment
Issuance of loans of $12.0 million to two equity holders of our Printi business (refer to Note 11 for additional details)
Internal costs for software and website development that we have capitalized of $8.9 million
Changes in working capital balances of $7.5 million primarily driven by seasonality trends in our National Pen business which results in increases in accounts receivable and inventory during the first quarter, partially offset by increases in accrued expense and other liabilities amongst several of our businesses
Payments for capital lease arrangements of $4.7 million
Payments of withholding taxes in connection with share awards of $1.2 million
Additional Liquidity and Capital Resources Information. During the three months ended September 30, 2017, we financed our operations and strategic investments through internally generated cash flows from operations and debt financing. As of September 30, 2017, a significant portion 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 $28.4 million. We do not intend to repatriate these 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 could result in material cash outflows.
Debt. On July 13, 2017, we ex