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EX-31.1 - EXHIBIT 31.1 CERTIFICATION OF CEO - CIMPRESS N.V.cmprex3119301510-q.htm
EX-31.2 - EXHIBIT 31.2 CERTIFICATION OF CFO - CIMPRESS N.V.cmprex3129301510-q.htm
EX-32.1 - EXHIBIT 32.1 CERTIFICATION PURSUANT TO SECTION 906 OF SARBANES-OXLEY ACT - CIMPRESS N.V.cmprex3219301510-q.htm
EX-10.1 - EXHIBIT 10.1 FORM OF ANNUAL AWARD AGREEMENT - CIMPRESS N.V.cmprex101formannualaward.htm




 
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, 2015
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
____________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ     No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Exchange Act Rule 12b-2). See definitions of "large accelerated filer," "accelerated filer," "non-accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (check one):
Large accelerated filer  þ
 
Accelerated filer  o
 
Non-accelerated filer  o
 
 
Smaller reporting company  o
 
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).  
Yes o     No þ
As of October 23, 2015, there were 31,402,943 of Cimpress N.V. ordinary shares, par value 0.01 per share, outstanding.
 




CIMPRESS N.V.
QUARTERLY REPORT ON FORM 10-Q
For the Three Months Ended September 30, 2015

TABLE OF CONTENTS
 
 
Page
 
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of September 30, 2015 and June 30, 2015
Consolidated Statements of Operations for the three months ended September 30, 2015 and 2014
Consolidated Statements of Comprehensive Loss for the three months ended September 30, 2015 and 2014
Consolidated Statements of Cash Flows for the three months ended September 30, 2015 and 2014
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,
2015

June 30,
2015
Assets
 


 

Current assets:
 


 

Cash and cash equivalents
$
93,816


$
103,584

Marketable securities
5,745

 
6,910

Accounts receivable, net of allowances of $351 and $372, respectively
38,699


32,145

Inventory
19,835


18,356

Prepaid expenses and other current assets
59,274


55,103

Total current assets
217,369


216,098

Property, plant and equipment, net
495,097


467,511

Software and web site development costs, net
23,332


22,109

Deferred tax assets
19,016


17,172

Goodwill
408,767


400,629

Intangible assets, net
155,471


151,063

Other assets
24,621


25,213

Total assets
$
1,343,673


$
1,299,795

Liabilities, noncontrolling interests and shareholders’ equity
 


 

Current liabilities:
 


 

Accounts payable
$
65,768


$
65,875

Accrued expenses
179,155


172,826

Deferred revenue
23,378


23,407

Deferred tax liabilities
1,752


1,043

Short-term debt
18,001


21,057

Other current liabilities
23,889


21,470

Total current liabilities
311,943


305,678

Deferred tax liabilities
49,970


48,007

Lease financing obligation
107,233


93,841

Long-term debt
637,316


493,039

Other liabilities
62,019


52,073

Total liabilities
1,168,481


992,638

Commitments and contingencies (Note 14)





Redeemable noncontrolling interests
65,120


57,738

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 31,388,226 and 33,203,065 shares outstanding, respectively
615


615

Treasury shares, at cost, 12,692,401 and 10,877,562 shares, respectively
(547,448
)

(412,132
)
Additional paid-in capital
324,370


324,281

Retained earnings
442,804


435,052

Accumulated other comprehensive loss
(110,653
)

(98,909
)
Total shareholders’ equity attributable to Cimpress N.V.
109,688


248,907

Noncontrolling interest
384

 
512

Total shareholders' equity
110,072

 
249,419

Total liabilities, noncontrolling interests and shareholders’ equity
$
1,343,673


$
1,299,795

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,
 
2015
 
2014
Revenue
$
375,748

 
$
333,932

Cost of revenue (1)
157,283

 
130,220

Technology and development expense (1)
51,086

 
43,905

Marketing and selling expense (1)
122,135

 
111,827

General and administrative expense (1)
33,159

 
31,121

Income from operations
12,085

 
16,859

Other income, net
9,242

 
12,135

Interest expense, net
(8,126
)
 
(3,345
)
Income before income taxes
13,201

 
25,649

Income tax provision
3,940

 
2,232

Net income
9,261

 
23,417

Add: Net loss attributable to noncontrolling interests
749

 
277

Net income attributable to Cimpress N.V.
$
10,010

 
$
23,694

Basic net income per share attributable to Cimpress N.V.
$
0.31

 
$
0.73

Diluted net income per share attributable to Cimpress N.V.
$
0.30

 
$
0.71

Weighted average shares outstanding — basic
32,528,583

 
32,386,820

Weighted average shares outstanding — diluted
33,534,808

 
33,154,436

____________________________________________
(1) Share-based compensation is allocated as follows:
 
Three Months Ended September 30,
 
2015
 
2014
Cost of revenue
$
26

 
$
31

Technology and development expense
1,330

 
927

Marketing and selling expense
411

 
914

General and administrative expense
4,423

 
3,870


See accompanying notes.



2



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

 
Three Months Ended September 30,
 
2015
 
2014
Net income
$
9,261

 
$
23,417

Other comprehensive loss, net of tax:
 
 
 
Foreign currency translation loss, net of hedges
(9,203
)
 
(46,257
)
Net unrealized (loss) gain on derivative instruments designated and qualifying as cash flow hedges
(926
)
 
299

Amounts reclassified from accumulated other comprehensive income to net income on derivative instruments
226

 
213

Unrealized loss on available-for-sale-securities
(1,261
)
 
(4,254
)
Unrealized gain (loss) on pension benefit obligation
45

 
(103
)
Comprehensive loss
(1,858
)
 
(26,685
)
Add: Comprehensive loss attributable to noncontrolling interests
124

 
1,051

Total comprehensive loss attributable to Cimpress N.V.
$
(1,734
)
 
$
(25,634
)

See accompanying notes.








3



CIMPRESS N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited in thousands)
 
Three Months Ended September 30,
 
2015

2014
Operating activities
 


 

Net income
$
9,261


$
23,417

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


 

Depreciation and amortization
30,258


24,459

Share-based compensation expense
6,190


5,742

Excess tax benefits derived from share-based compensation awards
(1,709
)

(319
)
Deferred taxes
(3,644
)

(4,157
)
Unrealized gain on derivative instruments included in net income
(2,052
)

(3,468
)
Change in fair value of contingent consideration

 
3,677

Effect of exchange rate changes on monetary assets and liabilities denominated in non-functional currency
(7,793
)

(10,112
)
Other non-cash items
887


541

Gain on proceeds from insurance
(1,587
)
 

Changes in operating assets and liabilities excluding the effect of business acquisitions:
 


 

Accounts receivable
(5,943
)

(2,566
)
Inventory
(1,710
)

(497
)
Prepaid expenses and other assets
3,157


16,787

Accounts payable
10,520


6,452

Accrued expenses and other liabilities
(10,118
)

(7,336
)
Net cash provided by operating activities
25,717


52,620

Investing activities
 


 

Purchases of property, plant and equipment
(24,393
)
 
(16,684
)
Business acquisitions, net of cash acquired
(22,815
)
 
(25,907
)
Purchases of intangible assets
(357
)
 
(85
)
Capitalization of software and website development costs
(4,910
)
 
(3,539
)
Proceeds from insurance
2,075



Net cash used in investing activities
(50,400
)

(46,215
)
Financing activities
 


 

Proceeds from borrowings of debt
214,999

 
100,000

Payments of debt and debt issuance costs
(73,318
)
 
(103,012
)
Payments of withholding taxes in connection with equity awards
(2,741
)
 
(1,511
)
Payments of capital lease obligations
(2,183
)
 
(1,261
)
Excess tax benefits derived from share-based compensation awards
1,709

 
319

Purchase of ordinary shares
(127,793
)
 

Proceeds from issuance of ordinary shares
282

 
845

Capital contribution from noncontrolling interest
5,141

 

Other financing
(85
)


Net cash provided by (used in) financing activities
16,011


(4,620
)
Effect of exchange rate changes on cash and cash equivalents
(1,096
)

(3,372
)
Net decrease in cash and cash equivalents
(9,768
)

(1,587
)
Cash and cash equivalents at beginning of period
103,584


62,508

Cash and cash equivalents at end of period
$
93,816


$
60,921

See accompanying notes.

4




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

 
Three Months Ended September 30,
 
2015
 
2014
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
2,994


$
3,271

Income taxes
4,709


5,296

 
 
 
 
Supplemental schedule of non-cash investing and financing activities:
 
 
 
Capitalization of construction costs related to financing lease obligation
$
13,688

 
$
12,966

Property and equipment acquired under capital leases
2,393

 
3,201

Amounts due for acquisitions of businesses
19,292

 
23,632

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 and manufacturing-driven company that aggregates, via the Internet, large volumes of small, individually customized orders for a broad spectrum of print, signage, apparel and similar products. We produce those orders in highly automated, capital and technology intensive production facilities in a manner that we believe makes our production techniques significantly more competitive than those of traditional suppliers. We bring our products to market through a portfolio of focused brands serving the needs of small and medium businesses and consumers. These brands include Vistaprint, our global brand for micro business marketing products and services, as well as brands we have acquired that serve the needs of various market segments including resellers, small and medium 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. Investments in entities in which we can exercise significant influence, but do not own a majority equity interest or otherwise control, are accounted for using the equity method and are included as investments in equity interests on the consolidated balance sheets.

Operating results for the three months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending June 30, 2016 or for any other period. The consolidated balance sheet at June 30, 2015 has been derived from our audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended June 30, 2015 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.
Insurance Recoveries
During the three months ended September 30, 2015, we received $6,192 in cash for the initial payment towards an insurance settlement for property damage related to a fire that occurred at our Venlo, Netherlands production facility. The insurance proceeds were used to offset incurred losses, including the write-off of the net book value of damaged machinery, equipment and inventory, as well as property related cleanup costs. We recognized a net gain of $1,587 on the recovery of the machinery and equipment in excess of carrying value, as a

6



component of other income, net in our consolidated statement of operations. We expect to finalize the settlement of our insurance claim during the year ended June 30, 2016.
Share-Based Compensation
During the three months ended September 30, 2015 and 2014, we recorded share-based compensation expense of $6,190 and $5,742, respectively. As of September 30, 2015, there was $49,926 of total unrecognized compensation cost related to non-vested share-based compensation arrangements, net of estimated forfeitures. This cost is expected to be recognized over a weighted average period of 2.5 years.
Foreign Currency Translation
Our non-U.S. dollar functional currency subsidiaries translate their assets and liabilities denominated in their functional currency to U.S. dollars at current rates of exchange in effect at the balance sheet date, and revenues and expenses are translated at average rates prevailing throughout the period. The resulting gains and losses from translation are included as a component of accumulated other comprehensive loss. Transaction gains and losses and remeasurement of assets and liabilities denominated in currencies other than an entity’s functional currency are included in other income, net in our consolidated statements of operations.
Other Income, net
The following table summarizes the components of other income, net:
 
Three Months Ended September 30,
 
2015
 
2014
Gains on derivative instruments (1)
$
2,367

 
$
3,451

Currency related gains, net (2)
5,034

 
8,663

Other gains (3)
1,841

 
21

Total other income, net
$
9,242

 
$
12,135

_____________________
(1) Includes both realized and unrealized gains (losses) on derivative instruments.
(2) We have significant non-functional currency intercompany financing relationships subject to currency exchange rate volatility primarily due to changes in our corporate entity operating structure, effective October 1, 2013, which required us to alter our intercompany transactional and financing activities. The net currency related gains for the three months ended September 30, 2015 and 2014, are primarily driven by this intercompany activity.
(3) Includes a gain of $1,587 related to insurance proceeds received for an insurance claim resulting from a fire at our Venlo, Netherlands production facility.
Net Income Per Share Attributable to Cimpress N.V.
Basic net income per share attributable to Cimpress N.V. is computed by dividing net income attributable to Cimpress N.V. by the weighted-average number of ordinary shares outstanding for the respective period. Diluted net income per share attributable to Cimpress N.V. gives effect to all potentially dilutive securities, including share options, restricted share units (“RSUs”) and restricted share awards ("RSAs"), if the effect of the securities is dilutive using the treasury stock method. Awards with performance or market conditions are included using the treasury stock method only if the conditions would have been met as of the end of the reporting period and their effect is dilutive.

The following table sets forth the reconciliation of the weighted-average number of ordinary shares:
 
Three Months Ended September 30,
 
2015
 
2014
Weighted average shares outstanding, basic
32,528,583

 
32,386,820

Weighted average shares issuable upon exercise/vesting of outstanding share options/RSUs/RSAs
1,006,225

 
767,616

Shares used in computing diluted net income per share attributable to Cimpress N.V.
33,534,808

 
33,154,436

Weighted average anti-dilutive shares excluded from diluted net income per share attributable to Cimpress N.V.
79,976

 
1,065,898


7




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, 2015, we purchased 1,976,250 of our ordinary shares for a total cost of $140,211, inclusive of transaction costs, in connection with our publicly announced share purchase programs.
Recently Issued or Adopted Accounting Pronouncements
New Accounting Standards Adopted
In April 2015, the Financial Accounting Standards Board issued Accounting Standards Update No. 2015-03,"Interest- Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs," (ASU 2015-03), which requires an entity to present debt issuance costs related to recognized debt liability in the balance sheet as a direct deduction from the carrying amount of that debt liability. The new standard is effective for us on July 1, 2016 and early adoption is permitted. We elected to early adopt this new guidance effective for the first quarter of fiscal year 2016 and we have applied the changes retrospectively to all periods presented. The adoption of this standard did not have a material effect on our consolidated financial statements.
New Accounting Standards to be Adopted
In September 2015, the Financial Accounting Standards Board issued Accounting Standards Update No. 2015-16,"Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments," (ASU 2015-16) which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The new standard is effective for us on July 1, 2016 and we do not expect the adoption of this standard to have a material effect on our consolidated financial statements.
In July 2015, Financial Accounting Standards Board issued Accounting Standards Update No. 2015-11,"Simplifying the Measurement of Inventory," which requires an entity to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completions, disposal, and transportation. The new standard is effective for us on July 1, 2016. The standard permits early adoption and should be applied prospectively as of the interim or annual period of adoption. We are currently evaluating the effect ASU 2015-11 will have on our consolidated financial statements but do not expect it to have a material impact.

In February 2015, the Financial Accounting Standards Board issued Accounting Standards Update No. 2015-02,"Consolidation (Topic 810): Amendments to the Consolidation Analysis," (ASU 2015-02) which places more emphasis in the consolidation evaluation on variable interests other than fee arrangements such as principal investment risk (for example, debt or equity interests), guarantees of the value of the assets or liabilities of the VIE, written put options on the assets of the VIE, or similar obligations. The new standard is effective for us on July 1, 2016. The standard permits early adoption and the use of a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. We are currently evaluating the effect ASU 2015-02 will have on our consolidated financial statements but do not expect it to have a material impact.
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09,"Revenue from Contracts with Customers," (ASU 2014-09) which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This guidance will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The FASB has elected to defer the effective date to fiscal years beginning after December 15, 2017, which would result in an effective date for us of July 1, 2018, with early application permitted one year earlier. The standard permits the use of either the retrospective or cumulative catch-up transition method. We are currently evaluating the adoption method and effect that ASU 2014-09 will have on our consolidated financial statements but do not expect it to have a material impact.

8



3. Fair Value Measurements
The following table summarizes our investments in available-for-sale securities:
 
September 30, 2015
 
Amortized Cost Basis (2)
 
Unrealized gain
 
Estimated Fair Value
Available-for-sale securities
 
 
 
 
 
Plaza Create Co. Ltd. common shares (1)
$
4,035

 
$
1,710

 
$
5,745

Total investments in available-for-sale securities
$
4,035

 
$
1,710

 
$
5,745

 
June 30, 2015
 
Amortized Cost Basis (2)
 
Unrealized gain
 
Estimated Fair Value
Available-for-sale securities
 
 
 
 
 
Plaza Create Co. Ltd. common shares (1)
$
3,939

 
$
2,971

 
$
6,910

Total investments in available-for-sale securities
$
3,939

 
$
2,971

 
$
6,910


________________________
(1) On February 28, 2014, we purchased shares in our publicly traded Japanese joint venture partner. Refer to Note 11 for further discussion of the separate joint business arrangement.
(2) Amortized cost basis represents our initial investment adjusted for currency translation.
We use a three-level valuation hierarchy for measuring fair value and include detailed financial statement disclosures about fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
Level 1: Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2: Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in markets that are not active and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

9



The following tables summarize our assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy:
 
September 30, 2015
 
Total
 
Quoted Prices in
Active
Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Available-for-sale securities
$
5,745

 
$
5,745

 
$

 
$

Currency forward contracts
4,223

 

 
4,223

 

Total assets recorded at fair value
$
9,968

 
$
5,745

 
$
4,223

 
$

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Interest rate swap contracts
$
(1,905
)
 
$

 
$
(1,905
)
 
$

Cross-currency swap contracts
(8,347
)
 

 
(8,347
)
 

Currency forward contracts
(668
)
 

 
(668
)
 

Contingent consideration
(7,881
)
 

 

 
(7,881
)
Total liabilities recorded at fair value
$
(18,801
)
 
$

 
$
(10,920
)
 
$
(7,881
)

 
June 30, 2015
 
Total
 
Quoted Prices in
Active
Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Available-for-sale securities
$
6,910

 
$
6,910

 
$

 
$

Currency forward contracts
1,902

 

 
1,902

 

Total assets recorded at fair value
$
8,812

 
$
6,910

 
$
1,902

 
$

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Interest rate swap contracts
$
(1,150
)
 
$

 
$
(1,150
)
 
$

Cross-currency swap contracts
(8,433
)
 

 
(8,433
)
 

Currency forward contracts
(407
)
 

 
(407
)
 

Contingent consideration
(7,833
)
 

 

 
(7,833
)
Total liabilities recorded at fair value
$
(17,823
)
 
$

 
$
(9,990
)
 
$
(7,833
)
During the quarter ended September 30, 2015 and the year ended June 30, 2015, there were no significant transfers in or out of Level 1, Level 2 and Level 3 classifications.
The valuations of the derivatives intended to mitigate our interest rate and currency risk are determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each instrument. This analysis utilizes observable market-based inputs, including interest rate curves, interest rate volatility, or spot and forward exchange rates, and reflects the contractual terms of these instruments, including the period to maturity. We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty's nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements.
Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to appropriately reflect both our own nonperformance risk and the respective counterparties' nonperformance risk in the fair value measurement. However, as of September 30, 2015, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our

10



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.
During the third quarter of fiscal 2015, we amended the terms of our contingent consideration arrangement related to our fiscal 2014 acquisition of Printdeal (formerly known as People & Print Group). The original terms provided for contingent consideration payable based upon the achievement of an initial calendar year 2014 earnings before interest, taxes, depreciation and amortization (EBITDA) margin threshold but ultimately payable based on revenue and EBITDA performance for calendar year 2015. We amended the terms to pay a fixed amount of €15,000, of which €8,000 was paid in March 2015 ($8,547 based on the exchange rate as of the date of payment) and the remaining €7,000 ($7,881 based on the exchange rate as of September 30, 2015) is payable during the fourth quarter of fiscal 2016.
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. 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 the Printdeal contingent liability is no longer variable, we do not expect any additional adjustments to fair value prior to payment.
During the three months ended September 30, 2015 and 2014, the following table represents the changes in fair value of Level 3 contingent consideration:
 
2015
2014
Balance at June 30 (1)
$
7,833

$
16,072

Fair value adjustment

3,677

Cash payments


Foreign currency impact
48

(1,194
)
Balance at September 30 (2)
$
7,881

$
18,555

_____________________
(1) Of the total contingent consideration outstanding as of June 30, 2015 and 2014, $7,833 and $6,276 was classified as a current liability, respectively. As of June 30, 2014, $9,796 was classified as a long-term liability.
(2) Of the total contingent consideration outstanding as of September 30, 2015 and 2014, $7,881 and $8,876 was classified as a current liability, respectively. As of September 30, 2014, $9,679 was classified as a long-term liability.

As of September 30, 2015 and June 30, 2015, the carrying amounts of our cash and cash equivalents, accounts receivables, accounts payable, and other current liabilities approximated their estimated fair values. As of September 30, 2015 and June 30, 2015 the carrying value of our debt, excluding debt issuance costs and debt discounts was $663,861 and $523,036, respectively, and the fair value was $665,751 and $539,752, respectively. Our debt at September 30, 2015 includes a variable rate debt instrument 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
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 our debt. Our objective in using interest rate derivatives is to add stability to interest expense and to manage our exposure to interest rate movements. 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 derivative 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.


11



The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in accumulated other comprehensive (loss) income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. If a derivative is deemed to be ineffective, the ineffective portion of the change in fair value of the derivative is recognized directly in earnings. During the three months ended September 30, 2015, we held one interest rate derivative instrument that was determined to be ineffective. We did not hold any interest rate derivative instruments that were determined to be ineffective during the three months ended September 30, 2014.
Amounts reported in accumulated other comprehensive (loss) income 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, 2015, we estimate that $788 will be reclassified from accumulated other comprehensive (loss) income to interest income during the twelve months ending September 30, 2016. As of September 30, 2015, we had seven 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 from December 2015 through June 2019.
Interest rate swap contracts outstanding:
 
Notional Amounts
Contracts accruing interest as of September 30, 2015
 
$
215,000

Contracts with a future start date
 
65,000

Total
 
$
280,000

Hedges of Currency Risk
Cross-Currency Swap Contracts
From time to time, we execute cross-currency swap contracts in order to mitigate our currency exposure of net investments in subsidiaries that have reporting currencies other than U.S. Dollar. Cross-currency swaps designated as net investment hedges 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 derivative contract. At maturity, the final exchange involves the receipt of our reporting currency in exchange for the notional amount in the hedged currency.
As of September 30, 2015, we had two outstanding cross-currency swap contracts with a total notional amount of $122,969, both maturing during April 2019. During the three months ended September 30, 2015, we recorded unrealized losses, net of tax, in accumulated other comprehensive (loss) income as a component of cumulative translation adjustment in the amount $419. 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.
Currency Forward Contracts
We execute currency forward contracts in order to mitigate our exposure to fluctuations in various currencies against our reporting currency, the U.S. Dollar. We do not elect hedge accounting for our current currency forward contract activity; however, we may elect to apply hedge accounting in future scenarios. The change in the fair value of currency forward contracts is recognized directly in earnings, as a component of other income, net. During the three months ended September 30, 2015 and 2014, we have experienced volatility within other income, net in our consolidated statements of operations from unrealized gains and losses on the mark-to-market of outstanding currency forward contracts. 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, 2015, we had the following outstanding currency forward contracts that were not designated for hedge accounting and were used to hedge fluctuations in the U.S. Dollar value of forecasted transactions denominated in Australian Dollar, Canadian Dollar, Danish Krone, Euro, Great British Pound, Indian

12



Rupee, New Zealand Dollar, Norwegian Krone, Swedish Krona, and Swiss Franc:
Notional Amount
 
Effective Date
 
Maturity Date
 
Number of Instruments
 
Index
$239,933
 
September 2014 through June 2015
 
Various dates through December 2016
 
318
 
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, 2015 and June 30, 2015:
 
September 30, 2015

Asset Derivatives

Liability Derivatives
Derivatives designated as hedging instruments
Balance Sheet line item

Gross amounts of recognized assets

Gross amount offset in consolidated balance sheet

Net amount

Balance Sheet line item

Gross amounts of recognized liabilities

Gross amount offset in consolidated balance sheet

Net amount
Interest rate swaps
Other non-current assets

$


$


$


Other current liabilities / other liabilities

$
(1,874
)

$


$
(1,874
)
Cross-currency swaps
Other non-current assets
 

 

 

 
Other liabilities
 
(8,347
)
 

 
(8,347
)
Total derivatives designated as hedging instruments


$


$


$




$
(10,221
)

$


$
(10,221
)
















Derivatives not designated as hedging instruments















Interest rate swaps
Other non-current assets
 
$

 
$

 
$

 
Other liabilities
 
$
(31
)
 
$

 
$
(31
)
Currency forward contracts
Other current assets / other assets

5,239


(1,016
)

4,223


Other current liabilities / other liabilities

(1,981
)

1,313


(668
)
Total derivatives not designated as hedging instruments


$
5,239


$
(1,016
)

$
4,223




$
(2,012
)

$
1,313


$
(699
)

June 30, 2015

Asset Derivatives

Liability Derivatives
Derivatives designated as hedging instruments
Balance Sheet line item

Gross amounts of recognized assets

Gross amount offset in consolidated balance sheet

Net amount

Balance Sheet line item

Gross amounts of recognized liabilities

Gross amount offset in consolidated balance sheet

Net amount
Interest rate swaps
Other non-current assets

$


$


$


Other current liabilities / other liabilities

$
(1,087
)

$


$
(1,087
)
Total derivatives designated as hedging instruments


$


$


$




$
(1,087
)

$


$
(1,087
)
















Derivatives not designated as hedging instruments















Currency forward contracts
Other current assets

$
3,256


$
(1,354
)

$
1,902


Other current liabilities

$
(1,792
)

$


$
(1,792
)
Total derivatives not designated as hedging instruments


$
3,256


$
(1,354
)

$
1,902




$
(1,792
)

$


$
(1,792
)

13



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, 2015 and 2014:
Derivatives in Hedging Relationships
Amount of Gain (Loss) Recognized in Comprehensive (Loss) Income on Derivatives (Effective Portion)
 
Three Months Ended September 30,
In thousands
2015
 
2014
Interest rate swaps
$
(926
)
 
$
299

Cross-currency swaps
419

 

 
$
(507
)
 
$
299

The following table presents reclassifications out of accumulated other comprehensive (loss) income for the three months ended September 30, 2015 and 2014:
Details about Accumulated Other
Comprehensive (Loss) Income Components
Amount Reclassified from Accumulated Other Comprehensive (Loss) Income to Net Income Gain/(Loss)
 
Affected line item in the
Statement of Operations
 
Three Months Ended September 30,
 
 
In thousands
2015
 
2014
 
 
Interest rate swaps
$
(302
)
 
$
(284
)
 
Interest expense, net
Total before income tax
(302
)
 
(284
)
 
Income (loss) before income taxes and loss in equity interests
Income tax
76

 
71

 
Income tax provision
Total
$
(226
)
 
$
(213
)
 
 
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 our de-designated derivative financial instruments that no longer qualify as hedging instruments in the period:
Derivatives not classified as hedging instruments
Amount of Gain (Loss) Recognized in Income
 
Location of Gain (Loss) Recognized in Income (Ineffective Portion)
 
Three Months Ended September 30,
 
 
In thousands
2015
 
2014
 
 
Currency contracts
$
2,374

 
$
3,451

 
Other income, net
Interest rate swaps
(7
)
 

 
Other income, net
 
$
2,367

 
$
3,451

 
 
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 $195, for the three months ended September 30, 2015:

Gains (losses) on cash flow hedges
 
Gains (losses) on available for sale securities
 
Losses on pension benefit obligation
 
Translation adjustments, net of hedges (1)
 
Total
Balance as of June 30, 2015
$
(1,405
)
 
$
2,971

 
$
(3,112
)
 
$
(97,363
)
 
$
(98,909
)
Other comprehensive (loss) income before reclassifications
(926
)
 
(1,261
)
 
45

 
(9,828
)
 
(11,970
)
Amounts reclassified from accumulated other comprehensive (loss) income to net income
226

 

 

 

 
226

Net current period other comprehensive (loss) income
(700
)
 
(1,261
)
 
45

 
(9,828
)
 
(11,744
)
Balance as of September 30, 2015
$
(2,105
)
 
$
1,710

 
$
(3,067
)
 
$
(107,191
)
 
$
(110,653
)
________________________
(1) Translation adjustment is inclusive of the effects of our net investment hedges, of which, unrealized losses, net of tax of $7,596 have been included in other comprehensive loss for the three months ended September 30, 2015.

14



6. Waltham Lease Arrangement
In July 2013, we executed a lease agreement to move our Lexington, Massachusetts, USA operations to a yet to be constructed facility in Waltham, Massachusetts, USA. During the current quarter, 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 the transaction did not meet the criteria for "sale-leaseback" treatment. 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 $117,676 and $104,315 as of September 30, 2015 and June 30, 2015, respectively, related to the building. The financing lease obligation and deferred rent credit related to the building on our consolidated balance sheets was $119,588 and $104,315, respectively, as of September 30, 2015 and June 30, 2015.
7. Business Combinations, Goodwill and Acquired Intangible Assets
    
During the three months ended September 30, 2015, we acquired two businesses that were not material either individually or in the aggregate to our quarterly results. Complementing our Upload and Print Business Units segment, we acquired all of the outstanding capital stock of Tradeprint Distribution Limited (formerly known as Fairprint Distribution Limited) and Litotipografia Alcione S.r.l. on July 31, 2015 and July 29, 2015, respectively. The aggregate consideration for these two acquisitions was $25,366, net of cash acquired. The consideration was allocated to the fair value of the assets acquired and liabilities assumed based on estimated fair values as of the respective acquisition dates. The aggregate allocation to goodwill, intangible assets, and net tangible assets was $9,390, $14,359 and $1,617, respectively.
Goodwill is calculated as the excess of the consideration over the fair value of the net assets, including intangible assets, and is primarily related to expected synergies from the transaction. The goodwill for the two acquisitions is not deductible for tax purposes, and has been attributed to our Upload and Print Business Units. The results of these acquisitions have been included in the consolidated financial statements from the date of purchase and are not material for the three months ended September 30, 2015.
Goodwill
The carrying amount of goodwill by segment as of June 30, 2015 and September 30, 2015 is as follows:

Vistaprint Business Unit

Upload and Print Business Units

All Other Business Units

Total
Balance as of June 30, 2015 (1)
$
124,636


$
250,487


$
25,506


$
400,629

Acquisitions (2)


9,390




9,390

Adjustments


29




29

Effect of currency translation adjustments (3)
(1,994
)

1,316


(603
)

(1,281
)
Balance as of September 30, 2015
$
122,642


$
261,222


$
24,903


$
408,767

_________________
(1) Our segment reporting was revised during the three months ended September 30, 2015 and, as such, we have re-allocated our goodwill by segment for the period ended June 30, 2015. In connection with our change in operating segments, there was an immaterial re-allocation of historical goodwill in the period. See Note 13 for additional details.
(2) During the quarter ended September 30, 2015 we acquired two businesses for a combined $25,366, net of cash acquired, resulting in $9,390 of additional goodwill.
(3) Relates to goodwill held by subsidiaries whose functional currency is not the U.S. Dollar.

15



Acquired Intangible Assets
Acquired intangible assets amortization expense for the three months ended September 30, 2015 and 2014 was $9,714 and $6,908 respectively. Amortization expense has increased in the first quarter of fiscal 2016 primarily due to our recent acquisitions of Exagroup, druck.at, and Tradeprint.
8. Other Balance Sheet Components
Accrued expenses included the following:
 
September 30, 2015
 
June 30, 2015
Compensation costs (1)
$
40,048


$
62,759

Income and indirect taxes
33,536


25,495

Advertising costs
23,940


20,275

Acquisition-related consideration payable
16,024

 
17,400

Interest
10,454

 
5,731

Shipping costs
6,445


2,471

Purchases of property, plant and equipment
4,930


3,030

Professional costs
1,829


2,396

Other
41,949


33,269

Total accrued expenses
$
179,155


$
172,826

_____________________
(1) The decrease in compensation costs is primarily due to accrued bonus and long-term incentive payments made in the first quarter of fiscal 2016.
Other current liabilities included the following:
 
September 30, 2015
 
June 30, 2015
Short-term portion of lease financing obligation
$
12,570

 
$
10,475

Short-term capital lease obligations
7,498

 
7,497

Other
3,821

 
3,498

Total other current liabilities
$
23,889

 
$
21,470

Other liabilities included the following:
 
September 30, 2015
 
June 30, 2015
Long-term capital lease obligations
$
27,804

 
$
18,304

Long-term derivative liabilities
10,227

 
9,816

Other
23,988

 
23,953

Total other liabilities
$
62,019

 
$
52,073


16



9. Debt

September 30, 2015

June 30, 2015
7.0% Senior unsecured notes due 2022
$
275,000


$
275,000

Senior secured credit facility
378,328

 
232,000

Other
10,533

 
11,536

Uncommitted credit facility


4,500

Debt issuance costs and debt discounts
(8,544
)

(8,940
)
Total debt outstanding, net
655,317


514,096

Less short-term debt (1)
18,001

 
21,057

Long-term debt
$
637,316


$
493,039

_____________________
(1) Balances as of September 30, 2015 and June 30, 2015 are inclusive of short-term debt issuance costs and debt discounts of $1,665 and $1,662, respectively.
Our Debt
Our various debt arrangements described below contain customary representations, warranties and events of default. As of September 30, 2015, we were in compliance with all financial and other covenants related to our debt.
Indenture and Senior Unsecured Notes due 2022
On March 24, 2015, we completed a private placement of $275,000 in aggregate principal amount of 7.0% senior unsecured notes due 2022 (the “Notes”). We issued the Notes pursuant to a senior notes indenture dated as of March 24, 2015 among Cimpress N.V., our subsidiary guarantors, and MUFG Union Bank, N.A., as trustee (the "Indenture"). We used the proceeds from the Notes to pay outstanding indebtedness under our unsecured line of credit and our senior secured credit facility and for general corporate purposes.
The Notes bear interest at a rate of 7.0% per annum and mature on April 1, 2022. Interest on the Notes is payable semi-annually on April 1 and October 1 of each year, commencing on October 1, 2015, to the holders of record of the Notes at the close of business on March 15 and September 15, respectively, preceding such interest payment date.

The Notes are senior unsecured obligations and rank equally in right of payment to all our existing and future senior unsecured debt and senior in right of payment to all of our existing and future subordinated debt. The Notes are effectively subordinated to any of our existing and future secured debt to the extent of the value of the assets securing such debt. Subject to certain exceptions, each of our existing and future subsidiaries that is a borrower under or guarantees our senior secured credit facilities will guarantee the Notes.
The Indenture contains various covenants, including covenants that, subject to certain exceptions, limit our and our restricted subsidiaries’ ability to incur and/or guarantee additional debt; pay dividends, repurchase shares or make certain other restricted payments; enter into agreements limiting dividends and certain other restricted payments; prepay, redeem or repurchase subordinated debt; grant liens on assets; enter into sale and leaseback transactions; merge, consolidate or transfer or dispose of substantially all of our consolidated assets; sell, transfer or otherwise dispose of property and assets; and engage in transactions with affiliates.
At any time prior to April 1, 2018, we may redeem some or all of the Notes at a redemption price equal to 100% of the principal amount redeemed, plus a make-whole amount as set forth in the Indenture, plus, in each case, accrued and unpaid interest to, but not including, the redemption date. In addition, at any time prior to April 1, 2018, we may redeem up to 35% of the aggregate outstanding principal amount of the Notes at a redemption price equal to 107.0% of the principal amount thereof, plus accrued and unpaid interest to, but not including, the redemption date, with the net proceeds of certain equity offerings by Cimpress. At any time on or after April 1, 2018, we may redeem some or all of the Notes at the redemption prices specified in the Indenture, plus accrued and unpaid interest to, but not including, the redemption date.

17



Senior Secured Credit Facility
As of September 30, 2015, we have a senior secured credit facility of $842,000 as follows:
Revolving loans of $690,000 with a maturity date of September 23, 2019
Term loan of $152,000 amortizing over the loan period, with a final maturity date of September 23, 2019
Under the terms of our credit agreement, borrowings bear interest at a variable rate of interest based on LIBOR plus 1.50% to 2.25% depending on our leverage ratio, which is the ratio of our consolidated total indebtedness to our consolidated EBITDA, as defined by the credit agreement. As of September 30, 2015, the weighted-average interest rate on outstanding borrowings was 2.26%, inclusive of interest rate swap rates. We must also pay a commitment fee on unused balances of 0.225% to 0.400% depending on our leverage ratio. We have pledged the assets and/or share capital of several of our subsidiaries as collateral for our outstanding debt as of September 30, 2015.    
Other debt
Other debt consists of term loans acquired primarily as part of our fiscal 2015 acquisition of Exagroup SAS. As of September 30, 2015 we had $10,282 outstanding for those obligations that are payable through September 2024.
10. Income Taxes
Income tax expense was $3,940 and $2,232 for the three months ended September 30, 2015 and 2014, respectively. The increase in income tax expense is attributable to a higher consolidated annual effective tax rate forecasted for fiscal 2016 as compared to fiscal 2015. We are forecasting a higher annual effective tax rate in fiscal 2016 due to an expected decrease to, and less favorable geographical mix of, consolidated pre-tax earnings combined with an increase in losses in certain jurisdictions where we are unable to recognize a tax benefit in the current period. We also have losses in certain jurisdictions where we are able to recognize a tax benefit in the current period, but for which the cash benefit is expected to be realized in a future period.
On October 1, 2013, we made changes to our corporate entity operating structure, including transferring our intellectual property among certain of our subsidiaries, primarily to align our corporate entities with our evolving operations and business model. The transfer of assets occurred between wholly owned legal entities within the Cimpress group that are based in different tax jurisdictions. As the impact of the transfer was the result of an intra-entity transaction, any resulting gain or loss and immediate tax impact on the transfer is eliminated and not recognized in the consolidated financial statements under U.S. GAAP. The transferor entity recognized a gain on the transfer of assets that was not subject to income tax in its local jurisdiction. However, the recipient entity will receive a tax benefit associated with the future amortization of the fair market value of the intellectual property received, which for tax purposes will occur over a period of five years in accordance with the applicable tax laws.
As of September 30, 2015, we had a net liability for unrecognized tax benefits included in the balance sheet of approximately $5,248, including accrued interest of $363. We recognize interest and, if applicable, penalties related to unrecognized tax benefits in the provision for income taxes. Of the total amount of unrecognized tax benefits, approximately $2,341 will reduce the effective tax rate if recognized.
It is reasonably possible that a further reduction in unrecognized tax benefits in the range of $1,400 to
$1,700 may occur within the next twelve months related to an audit settlement or 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 2012 through 2015 remain open for examination by the United States Internal Revenue Service (“IRS”) and the years 2006 through 2015 remain open for examination in the various states and non-US tax jurisdictions in which we file tax returns.
Cimpress USA Incorporated received Notices of Assessment from the Massachusetts Department of Revenue ("DOR") for the tax years 2006-2008 and 2010-2011. The Notices contain adjustments to taxable income for these years. The issue in dispute is whether the DOR has the right to impute royalty income to Cimpress USA Incorporated in the years at issue associated with the use of certain intangible property by Vistaprint Limited, even

18



though that intangible property was transferred for a lump-sum payment to Vistaprint Limited in an earlier year that is closed to adjustment by virtue of the governing statute of limitations. In July 2014, we filed an Application for Abatement with the DOR Office of Appeals to appeal the DOR’s findings; however, our appeal was denied. In August 2014, we filed a petition to have our case heard by the Massachusetts Appellate Tax Board. The hearing for our case is set to begin in December 2015. We intend to contest these assessments to the fullest extent possible.
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.
11. Noncontrolling Interests
In certain of our strategic investments we have purchased a controlling equity stake, but there remains a minority portion of the equity that is owned by a third party. The balance sheet and operating activity of these entities are included in our consolidated financial statements and we adjust the net income in our consolidated statement of operations to exclude the noncontrolling interests' proportionate share of results. We present the proportionate share of equity attributable to the redeemable noncontrolling interests as temporary equity within our consolidated balance sheet and the proportionate share of noncontrolling interests not subject to a redemption provision that is outside of our control as equity.
Redeemable noncontrolling interests
On April 15, 2015, we acquired 70% of the outstanding shares of Exagroup. The remaining 30% is considered a redeemable noncontrolling equity interest, as it is redeemable in the future and not solely within our control. The redeemable noncontrolling interest 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, 2015, the redemption value is less than the carrying value and therefore no adjustment has been made.

On April 3, 2014, we acquired 97% of the outstanding corporate capital of Pixartprinting S.p.A. The remaining 3% is considered a redeemable noncontrolling equity interest, as it is redeemable for cash based on future financial results and not solely within our control. The redeemable noncontrolling interest was recorded at its fair value as of the acquisition 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. During the three months ended September 30, 2015, we increased the carrying amount of the redeemable noncontrolling interest by $2,258 to reflect the estimated redemption value as of September 30, 2015. The fair value of the noncontrolling interest exceeds the carrying value as of September 30, 2015.
    We own a 51% controlling interest in a joint business arrangement with Plaza Create Co. Ltd., a leading Japanese retailer of photo products, to expand our market presence in Japan. During the three months ended September 30, 2015, we contributed an additional $5,350 in cash and Plaza Create made a capital contribution of $5,142 in cash to the joint business. We have a call option to acquire the remaining 49% of the business if Plaza Create materially breaches any of its contracts with us. If we materially breach any of our contracts with Plaza Create, Plaza Create has an option to put its shares to us. As the exercise of this put option is not solely within our control, the noncontrolling equity interest in the business is presented as temporary equity in our consolidated balance sheet. As of September 30, 2015, it is not probable that the noncontrolling interest will be redeemable.
Noncontrolling interest
On August 7, 2014, we made a capital investment in Printi LLC as described in Note 12. The noncontrolling interest was recorded at its estimated fair value as of the investment date. The allocation of the net loss of the operations to the noncontrolling interest considers our stated liquidation preference in applying the loss to each party.

19



The following table presents the reconciliation of changes in our noncontrolling interests:
 
 
Redeemable noncontrolling interests
 
Noncontrolling interest
Balance as of June 30, 2015
 
$
57,738

 
$
512

Capital contribution from noncontrolling interest
 
5,142

 

Accretion to redemption value
 
2,258

 

Net loss attributable to noncontrolling interest
 
(648
)
 
(101
)
Adjustment to noncontrolling interest



(22
)
Foreign currency translation
 
630

 
(5
)
Balance as of September 30, 2015
 
$
65,120

 
$
384

12. Variable Interest Entity ("VIE")
On August 7, 2014, we made a capital investment in Printi LLC, which operates in Brazil. This investment provides us access to a newer market and the opportunity to drive longer-term growth in Brazil. As of September 30, 2015, 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 have call options to increase our ownership in Printi incrementally over an eight-year period with certain employee shareholders. As the employees' restricted stock in Printi is contingent on post-acquisition employment, share-based compensation will be recognized over the four-year vesting period. The awards are considered liability awards and will be marked to fair value each reporting period. In order to estimate the fair value of the award as of September 30, 2015, we utilized a lattice model with a Monte Carlo simulation. The current fair value of the award is $5,998 and we have recognized $371 in general and administrative expense for the three months ended September 30, 2015.
13. Segment Information
During the first quarter of fiscal 2016, we revised our internal organizational and reporting structure resulting in changes to our reportable segments. 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. We have several operating segments under our management reporting structure which are reported in the following three reportable segments:
Vistaprint Business Unit - Includes the operations of our Vistaprint-branded websites focused on the North America, Europe, Australia and New Zealand markets, and our Webs-branded business, which is managed with the Vistaprint-branded digital business in the previously listed geographies.
Upload and Print Business Units - Aggregates the operations of our druck.at, Exagroup, Easyflyer, Printdeal, Pixartprinting, and Tradeprint branded businesses. These operating segments have been aggregated into one reportable segment based on the similarity of their products, markets and economic characteristics.
All Other Business Units - Includes the operations of our Albumprinter and Most of World business units and newly formed Corporate Solutions business unit. Our Most of World business unit is focused on our emerging market portfolio, including operations in Brazil, China, India and Japan. The results of the newly formed Corporate Solutions business unit were previously part of the Vistaprint Business Unit and will focus on delivering volume and revenue via partnerships. These business units have been combined into one reportable segment based on materiality.
Consistent with our historical reporting, the cost of our global legal, human resource, finance, facilities management, software and manufacturing engineering, and the global component of our IT operations functions are generally not allocated to the reporting segments and are instead reported and disclosed under the caption "Corporate and global functions." Corporate and global functions is a cost center and does not meet the definition of

20



an operating segment. We have revised our presentation of all prior periods presented to reflect our revised segment reporting.
In addition, during the first quarter of fiscal 2016 we introduced adjusted net operating profit as the primary metric by which our CODM measures segment financial performance. Certain items such as acquisition-related amortization and depreciation, expense recognized for the changes in the fair value of contingent consideration and compensation expense related to cash-based earn-out mechanisms dependent upon continued employment, share-based compensation related to investment consideration and restructuring charges are excluded from segment adjusted net operating profit. A portion of the interest expense associated with our Waltham lease is allocated to Vistaprint Business Unit and included as expense in adjusted net operating profit. The interest expense represents a portion of the cash rent payment and is considered an operating expense for purposes of measuring our segment performance. There are no internal revenue transactions between our operating segments, and we do not allocate non-operating income to our segment results. All intersegment transfers are recorded at cost for presentation to the CODM, for example, we allocate costs related to products manufactured by our global network of production facilities to the applicable operating segment. There is no intercompany profit or loss recognized on these transactions.
The following factors, among others, may limit the comparability of adjusted net operating profit by segment:
We do not allocate global support costs across operating segments or corporate and global functions.
Some of our acquired operations in our Upload and Print Business Units and All Other Business Units segments are burdened by the costs of their local finance, HR, and other administrative support functions, whereas other business units leverage our global functions and do not receive an allocation for these services.
Our All Other Business Units reporting segment includes our Most of World business unit, which has operating losses as it is in its early stage of investment relative to the scale of the underlying business.
Our balance sheet information is not presented to the CODM on an allocated basis, and therefore we do not present asset information by segment.
Revenue by segment is based on the business unit-specific websites through which the customer’s order was transacted. The following tables set forth revenue, adjusted net operating profit by reportable segment and total income from operations.
 
Three Months Ended September 30,
 
2015
 
2014
Revenue:
 
 
 
Vistaprint Business Unit
$
265,190

 
$
260,057

Upload and Print Business Units
76,538

 
38,729

All Other Business Units
34,020

 
35,146

Total revenue
$
375,748

 
$
333,932



21



 
Three Months Ended September 30,
 
2015
 
2014
Adjusted net operating profit by segment:


 


Vistaprint Business Unit
$
66,252

 
$
70,077

Upload and Print Business Units
10,887

 
4,520

All Other Business Units
359

 
2,192

Total adjusted net operating profit by segment
77,498

 
76,789

Corporate and global functions
(54,619
)
 
(48,848
)
Acquisition-related amortization and depreciation
(9,782
)
 
(6,908
)
Change in fair value of contingent consideration (earn-out related charges) (1)

 
(3,677
)
Share-based compensation related to investment consideration
(1,091
)
 
(497
)
Restructuring charges
(271
)
 

Interest expense for Waltham lease
350

 

Total income from operations
$
12,085

 
$
16,859

___________________
(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.
 
Three Months Ended September 30,
 
2015
 
2014
Depreciation and amortization:
 
 
 
Vistaprint Business Unit
$
9,861

 
$
10,239

Upload and Print Business Units
10,052

 
5,812

All Other Business Units
4,383

 
3,807

Corporate and global functions
5,962

 
4,601

Total depreciation and amortization
$
30,258

 
$
24,459

Enterprise Wide Disclosures:
The following tables set forth revenues by geographic area and groups of similar products and services:
 
Three Months Ended September 30,
 
2015
 
2014
 
 
 
 
United States
$
179,413

 
$
165,318

Non-United States (2)
196,335

 
168,614

Total revenue
$
375,748

 
$
333,932

 
Three Months Ended September 30,
 
2015
 
2014
 
 
 
 
Physical printed products and other (3)
$
360,148


$
315,121

Digital products/services
15,600


18,811

Total revenue
$
375,748


$
333,932

___________________
(2) Our non-United States revenue includes the Netherlands, our country of domicile. Revenue earned in any other individual country other than the United States was not greater than 10% of consolidated revenue for the periods presented.
(3) Other revenue includes miscellaneous items which account for less than 1% of revenue.

22



The following tables set forth long-lived assets by geographic area:
 
September 30, 2015
 
June 30, 2015
Long-lived assets (4):
 

 
 

Canada
$
98,432

 
$
99,474

Netherlands
93,498

 
98,288

Switzerland
40,064

 
41,357

United States
30,494

 
31,417

Italy
33,995

 
28,548

Australia
24,173

 
26,908

Jamaica
23,433

 
23,814

France
23,134

 
21,449

Japan
19,525

 
16,219

Other
38,299

 
29,946

Total
$
425,047

 
$
417,420

___________________
(4) Excludes goodwill of $408,767 and $400,629, intangible assets, net of $155,471 and $151,063, the Waltham lease asset of $117,676 and $104,315 , and deferred tax assets of $19,016 and $17,172 as of September 30, 2015 and June 30, 2015, respectively.
14. Commitments and Contingencies
Lease Commitments
We have commitments under operating leases for our facilities that expire on various dates through 2026, including the Waltham lease arrangement discussed in Note 6. Total lease expense, net of sublease income for the three months ended September 30, 2015 and 2014 was $4,102 and $4,388, respectively.
We also lease certain machinery and plant equipment under both capital and operating lease agreements that expire at various dates through 2020. The aggregate carrying value of the leased equipment under capital leases included in property, plant and equipment, net in our consolidated balance sheet at September 30, 2015, is $36,119, net of accumulated depreciation of $19,835; 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, 2015 amounts to $32,791.
Purchase Obligations
At September 30, 2015, we had unrecorded commitments under contract of $26,466, which were principally composed of inventory purchase commitments of approximately $2,124, production and computer equipment purchases of approximately $13,983, and other unrecorded purchase commitments of $10,359.
Other Obligations
We have an outstanding installment obligation of $12,508 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, 2015. Other obligations also include the remaining fixed contingent consideration payment related to our fiscal 2014 acquisition of Printdeal of $7,881 payable during the fourth quarter of fiscal 2016 and deferred payments related to our acquisitions of druck.at and Litotipografia Alcione S.r.l. of $3,237 and $2,195, respectively.

23



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.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
    
This Report contains forward-looking statements that involve risks and uncertainties. The statements contained in this Report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including but not limited to our statements about anticipated income and revenue growth rates, future profitability and market share, new and expanded products and services, geographic expansion and planned capital expenditures. Without limiting the foregoing, the words “may,” “should,” “could,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “designed,” “potential,” “continue,” “target,” “seek” and similar expressions are intended to identify forward-looking statements. All forward-looking statements included in this Report are based on information available to us up to, and including the date of this document, and we disclaim any obligation to update any such forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain important factors, including those set forth in this “Management's Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” and elsewhere in this Report. You should carefully review those factors and also carefully review the risks outlined in other documents that we file from time to time with the United States Securities and Exchange Commission.
Executive Overview
Cimpress, the world leader in mass customization, is a technology and manufacturing-driven company that aggregates, via the Internet, large volumes of small, individually customized orders for a broad spectrum of print, signage, apparel and similar products. We produce those orders in highly automated, capital and technology intensive production facilities in a manner that we believe makes our production techniques significantly more competitive than those of traditional suppliers. We bring our products to market through a portfolio of focused brands serving the needs of small and medium businesses and consumers. These brands include Vistaprint, our global brand for micro business marketing products and services, as well as brands that we have acquired that serve the needs of various market segments, including resellers, small and medium businesses with differentiated service needs, and consumers purchasing products for themselves and their families.
During the first quarter of fiscal 2016, we modified our internal organizational and reporting structure, resulting in the Vistaprint Business Unit, the Upload and Print Business Units, and the All Other Business Units constituting our reportable segments. The Vistaprint Business Unit represents our Vistaprint-branded websites focused on the North America, Europe, Australia and New Zealand markets, and our Webs-branded business, which is managed with the Vistaprint-branded digital business. The Upload and Print Business Units is an aggregation of the druck.at, Exagroup, Easyflyer, Printdeal, Pixartprinting, and Tradeprint branded businesses. The All Other Business Units segment includes the operations of our Albumprinter and Most of World business units and newly formed Corporate Solutions business unit, which historically was part of the Vistaprint Business Unit and is focused on delivering volume and revenue via partnerships.
In evaluating the financial condition and operating performance of our business, management focuses on revenue growth, constant-currency revenue growth, operating income, adjusted net operating profit after tax (NOPAT) and cash flow from operations. A summary of these key financial metrics for the three months ended September 30, 2015, as compared to the three months ended September 30, 2014 are as follows:
Reported revenue increased by 13% to $375.7 million.
Consolidated constant-currency revenue increased by 21% and excluding acquisitions increased by 11%.
Operating income decreased $4.8 million to $12.1 million.

24



Adjusted net operating profit after tax (NOPAT) decreased $6.2 million to $16.4 million and is defined in the Non-GAAP Financial Measure section below.
Cash provided by operating activities decreased $26.9 million to $25.7 million.
Our reported revenue growth was primarily due to the addition of revenue of our recently acquired brands of Exagroup and druck.at, as well as continued growth in the Vistaprint Business Unit. Operating income and adjusted NOPAT declined compared to the period a year ago, as the increased profits of our Upload and Print Business Units were more than offset by our investments in expanding product selection and software development in our business, increased advertising costs for the Vistaprint Business Unit, as well as investments in markets in which we seek to develop a long-term presence such as India, Japan and Brazil. We made these investments because we believe they will collectively enable us to scale and strengthen our competitive position and enhance long-term shareholder value.
Our Priorities
Extending our history of success into our third decade, and beyond, is important to us. To that end we work to optimize our business according to two priorities:
1.
Strategic Objective: To be the world leader in mass customization.
2.
Financial Objective: To maximize intrinsic value per share, defined as (a) the unlevered free cash flow per share that, in our best judgment, will occur between now and the long-term future, appropriately discounted to reflect our cost of capital, minus (b) net debt per share.
Cimpress’ focus on mass customization lies at the intersection of three overlapping areas:
Empowering People to Make an Impression (what we are passionate about) - Cimpress empowers people to make an impression through individually meaningful physical products. In other words, we make it easy and affordable for our customers to convey, in tangible and enduring media, the thoughts, design aesthetics, messages and/or sentiments that are important to them, their customers, their organization or their loved ones.
Computer Integrated Manufacturing (where we can be the best in the world) - Computer integrated manufacturing (CIM) harnesses the power of software and IT networks to automate the flow of information, allowing individual processes to exchange information with each other, to schedule activities, to initiate actions, and to route and control all aspects of our manufacturing process. Throughout our history, a differentiating capability of Cimpress has been our ability to develop software systems to integrate every step of the value chain, from browser-based design creation and ordering through to shipment. This greatly reduces the marginal cost of processing information related to each individual, customized order. Low-volume custom products traditionally have a very high per-unit cost of production because, in the absence of computer integration, there are significant fixed costs related to conveying information that is required to process each order.
Large Scale in Small Quantities (what drives our economic engine) - The third aspect of the Cimpress focus on mass customization is an understanding of how we generate economic value. Mass customization enables the production of small quantities, but large scale is the most important driver of competitive advantage in the Cimpress business model. When we have increased the volume of orders that we process and produce we have seen material improvement to quality, product selection, speed and cost. In fiscal 2015, we processed over 46 million unique ordered items, and during peak production weeks we produced well over 1 million orders per week.

25



Results of Operations
The following table presents our operating results for the periods indicated as a percentage of revenue:
 
Three months ended September 30,
 
2015
 
2014
As a percentage of revenue:
 
 
 

Revenue
100.0
 %
 
100.0
 %
Cost of revenue
41.9
 %
 
39.0
 %
Technology and development expense
13.6
 %
 
13.1
 %
Marketing and selling expense
32.5
 %
 
33.5
 %
General and administrative expense 
8.8
 %
 
9.3
 %
Income from operations
3.2
 %
 
5.1
 %
Other income, net
2.5
 %
 
3.6
 %
Interest expense, net
(2.2
)%
 
(1.0
)%
Income before income taxes
3.5
 %
 
7.7
 %
Income tax provision
1.0
 %

0.7
 %
Net income
2.5
 %
 
7.0
 %
Add: Net loss attributable to noncontrolling interests
0.2
 %
 
0.1
 %
Net income attributable to Cimpress N.V.
2.7
 %
 
7.1
 %

In thousands
 
Three Months Ended September 30,
 
 
 
2015
 
2014
 
2015 vs. 2014
Revenue
$
375,748

 
$
333,932

 
13
%
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.     
Total revenue by reportable segment for the three months ended September 30, 2015 and 2014 are shown in the following table. Revenue for the three months ended September 30, 2015 includes the impact of Tradeprint and Alcione from their respective acquisition dates in our Upload and Print Business Units segment:
In thousands
Three Months Ended September 30,
 
 
 
Currency
Impact:
 
Constant-
Currency
 
Impact of Acquisitions:
 
Constant- Currency Revenue Growth
 
2015
 
2014
 
%
Change
 
(Favorable)/Unfavorable
 
Revenue Growth (1)
 
(Favorable)/Unfavorable
 
Excluding Acquisitions (2)
Vistaprint Business Unit
$
265,190

 
$
260,057

 
2%
 
6%
 
8%
 
—%
 
8%
Upload and Print Business Units
76,538


38,729


98%
 
20%
 
118%
 
(87)%
 
31%
All Other Business Units
34,020

 
35,146

 
(3)%
 
13%
 
10%
 
(4)%
 
6%
Total revenue
$
375,748

 
$
333,932

 
13%
 
8%
 
21%
 
(10)%
 
11%
___________________
(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.
(2) Constant-Currency Revenue Growth Excluding Acquisitions, a non-GAAP financial measure, excludes revenue results for businesses and brands in the period in which there is no comparable year over year revenue. For example, revenue from Easyflyer, Exagroup and druck.at, which we acquired in Q4 2015, is excluded from Q1 2016 revenue growth. Similarly, we acquired Tradeprint and Alcione in Q1 of fiscal 2016 and as such, revenue from these businesses is excluded from 2016 revenue growth,
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

26



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.
Vistaprint Business Unit    
Reported revenue for the three months ended September 30, 2015 increased 2% to $265.2 million as compared to the three months ended September 30, 2014. Our reported revenue growth was negatively affected by currency impacts of 6% during the quarter ended September 30, 2015 resulting in constant-currency revenue growth of 8%. The Vistaprint Business Unit constant-currency growth was primarily due to repeat customer bookings growth, with more modest growth in new customer bookings. Performance continues to be stronger in North American and Australian markets than most markets in Europe where we have more substantial customer value proposition changes to make in order to appeal more broadly to higher expectations customers. Despite this, we continue to see improvement in our customer Net Promoter Score™ (which polls our customers on their willingness to recommend us to friends and colleagues based on a score of 0 to 10) in markets around the world.
We continue our transformation efforts of our customer value proposition in our largest business, the Vistaprint brand. This multi-year transformation began in 2011 and is intended over time to improve customer loyalty and long-term returns through improvements to pricing consistency and transparency, site experience, customer communications, product selection, product quality, merchandising, marketing messaging and customer service. Although some of these efforts continue to create revenue headwinds in certain markets, we are realizing benefits from these investments in fiscal 2016 through improved customer retention rates and our increased Net Promoter Score.
Upload and Print Business Units    
Reported revenue for the three months ended September 30, 2015 increased to $76.5 million from $38.7 million in the comparative period primarily due to the addition of aggregate revenues of $33.7 million from the brands we acquired in the fourth quarter of fiscal 2015 and the first quarter of fiscal 2016. Additionally, we continue to see strong constant-currency revenue growth rates from Pixartprinting and Printdeal, which were acquired more than a year ago.
All Other Business Units
Reported revenue for three months ended September 30, 2015 decreased to $34.0 million from $35.1 million in the prior comparable period, primarily due to negative impacts from currency of 13%.
The following table summarizes our comparative operating expenses for the period:
In thousands
 
Three Months Ended September 30,
 
 
 
2015
 
2014
 
2015 vs. 2014
Cost of revenue
$
157,283

 
$
130,220

 
21
%
% of revenue
41.9
%
 
39.0
%
 
 
Technology and development expense
$
51,086

 
$
43,905

 
16
%
% of revenue
13.6
%
 
13.1
%
 
 
Marketing and selling expense
$
122,135

 
$
111,827

 
9
%
% of revenue
32.5
%
 
33.5
%
 
 
General and administrative expense
$
33,159

 
$
31,121

 
7
%
% of revenue
8.8
%
 
9.3
%
 
 
Cost of revenue
Cost of revenue includes materials used to manufacture our products, payroll and related expenses for production personnel, depreciation of assets used in the production process and in support of digital marketing service offerings, shipping, handling and processing costs, third-party production costs, costs of free products and other related costs of products sold by us. Cost of revenue as a percent of revenue increased during the year ended September 30, 2015, as the operations we acquired in fiscal 2014 and 2015 have a lower gross margin profile than our traditional business and are growing faster; however, these companies have lower marketing and selling costs.

27



The Vistaprint Business Unit cost of revenue increased to $90.2 million for the quarter ended September 30, 2015 from $86.9 million primarily due to increased costs associated with production volume and product mix of $8.2 million. In addition, we incurred $1.9 million of expense in excess of our insurance recoveries related to a fire in our Venlo manufacturing facility during the three months ended September 30, 2015. This increase was partially offset by currency related benefits, reductions in raw material pricing, shipping costs and other productivity and efficiency gains of $6.8 million.
The Upload and Print Business Units cost of revenue increased to $50.8 million for the three months ended September 30, 2015 from $28.4 million primarily due to incremental manufacturing costs of $23.4 million for the operations acquired in the fourth quarter of fiscal 2015 and first quarter of fiscal 2016.
The All Other Business Units cost of revenue increased to $16.3 million for the three months ended September 30, 2015 from $14.9 million, primarily due to increased costs associated with production volume.         
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; amortization of capitalized software, website development costs and certain acquired intangible assets, including developed technology, hosting of our websites, asset depreciation, patent amortization, legal settlements in connection with patent-related claims, and other technology infrastructure-related costs. Depreciation expense for information technology equipment that directly supports the delivery of our digital marketing services products is included in cost of revenue.
The growth in our technology and development expenses of $7.2 million for the three months ended September 30, 2015 as compared to the prior comparative period was primarily due to increased payroll, share-based compensation and facility-related costs of $4.8 million as a result of increased headcount in our technology development and information technology support organizations. The increase in headcount is partly due to hiring in this strategic investment area, and partly due to headcount from acquired businesses. Technology infrastructure-related costs increased by $1.5 million, primarily due to increased software maintenance and licensing costs, as well as increased IT cloud service costs. Depreciation and amortization expense increased by $0.6 million primarily due to expense related to our fourth quarter fiscal 2015 acquisitions. In addition, other technology and development expense increased $0.5 million primarily due to increased consulting fees. Also during the three months ended September 30, 2015, we had higher net capitalization of software costs of $0.2 million due to an increase in costs that qualified for capitalization during the fiscal 2015 as compared to fiscal 2014.
Marketing and selling expense
Marketing and selling expense consists primarily of advertising and promotional costs; payroll and related expenses for our employees engaged in marketing, sales, customer support and public relations activities; amortization of certain acquired intangible assets, including customer relationships and trade names; and third-party payment processing fees.
The increase in our marketing and selling expenses of $10.3 million during the three months ended September 30, 2015 , as compared to the three months ended September 30, 2014, was partially due to increased advertising costs of $6.4 million. Our advertising cost increase was primarily due to product-focused television ad investments in both the the U.S. and Canada for the Vistaprint Business Unit, as well as increased activity from our recently acquired brands. Our payroll and facility-related costs, inclusive of share-based compensation expense, increased by $1.4 million, as we expanded our marketing and customer service, sales and design support organization through our recent acquisitions and continued investment in the Vistaprint Business Unit customer service resources in order to provide higher value services to our customers. Amortization expense increased by $2.8 million for the three months ended September 30, 2015 as a result of the customer and trademark related intangible assets related to our 2015 and 2016 acquisitions. The increase in marketing and selling expense was partially offset by decreased depreciation costs, employee travel, training, and recruitment costs of $0.3 million.

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General and administrative expense
General and administrative expense consists primarily of transaction costs, including third-party professional fees, insurance and payroll and related expenses of employees involved in executive management, finance, legal, and human resources.
During the three months ended September 30, 2015 our general and administrative expenses increased as compared to fiscal 2014 by $2.0 million due to increased payroll, share-based compensation expense and facility-related costs and third-party professional fees of $3.1 million and $1.3 million, respectively. In addition, other general and administrative expenses increased by $1.3 million primarily due to increased employee travel, training, and recruitment costs. The increase in general and administrative expense was partially offset by a decrease in expense of $3.7 million as compared to the prior period related to changes in the fair value of the contingent consideration liabilities for both Printdeal and Pixartprinting which did not recur during the three months ended September 30, 2015.
Other income, net
Other income, 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 our derivative instruments for which we do not apply hedge accounting. 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 currency forward contracts that do not qualify for hedge accounting. The following table summarizes the components of other income, net:
 
Three months ended September 30,
 
2015
 
2014
Gains on derivative instruments
$
2,367

 
$
3,451

Currency related gains, net
5,034

 
8,663

Other gains
1,841

 
21

Total other income, net
$
9,242

 
$
12,135

During the three months ended September 30, 2015, we recognized net gains of $9.2 million in other income as compared to net gains of $12.1 million during the three months ended September 30, 2014. The decrease in other income primarily relates to our intercompany transactional and financing activities, as we have significant non-functional currency intercompany relationships subject to currency exchange rate volatility that resulted in a gain of $5.0 million during the three months ended September 30, 2015, as compared to $8.7 million in gain in the prior comparative quarter.
In addition, we recognized net gains of $2.4 million on our currency forward contracts during the three months ended September 30, 2015, as compared to net gains of $3.5 million that were recognized during the prior comparative quarter. We expect this volatility to continue in future periods as we do not currently apply hedge accounting for our currency forward contracts. The recognition of a $1.6 million gain related to insurance proceeds received for property damage resulting from a fire at our Venlo, Netherlands production facility partially offset the decreased currency gain activity for the three months ended September 30, 2015.
Interest expense, net
Interest expense, net was $8.1 million and $3.3 million for the three months ended September 30, 2015 and 2014, respectively. Interest expense, net primarily consists of interest paid on outstanding debt balances, amortization of debt issuance costs and interest related to capital lease obligations. The increase in interest expense, net is primarily a result of increased borrowing levels under our credit facility and the issuance of our senior unsecured notes in March 2015. We expect interest expense, net to increase in future periods relative to historical trends as a result of our senior unsecured notes, our Waltham lease arrangement, and increased capital lease obligations for machinery and equipment.

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Income tax provision
 
Three Months Ended September 30,
 
2015
 
2014
Income tax provision
$
3,940

 
$
2,232

Effective tax rate
29.8
%
 
8.7
%
Income tax expense was $3.9 million and $2.2 million for the three months ended September 30, 2015 and 2014, respectively. The increase in income tax expense is attributable to a higher consolidated annual effective tax rate forecasted for fiscal 2016 as compared to fiscal 2015. We are forecasting a higher annual effective tax rate in fiscal 2016 due to an expected decrease to and less favorable geographical mix of consolidated pre-tax earnings combined with an increase in losses in certain jurisdictions where we are unable to recognize a tax benefit in the current period. We also have losses in certain jurisdictions where we are able to recognize a tax benefit in the current period, but for which the cash benefit is expected to be realized in a future period. We expect our cash income taxes related to fiscal 2016 to be higher than our income tax expense primarily as a result of these deferred cash tax benefits.
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 10 in our accompanying consolidated financial statements for additional discussion.
Liquidity and Capital Resources
Consolidated Statements of Cash Flows Data:
In thousands
 
Three Months Ended September 30,
 
2015

2014
Net cash provided by operating activities
$
25,717

 
$
52,620

Net cash used in investing activities
(50,400
)
 
(46,215
)
Net cash provided by (used in) financing activities
16,011

 
(4,620
)
At September 30, 2015, we had $93.8 million of cash and cash equivalents and $663.9 million of outstanding debt, excluding debt issuance costs and debt discounts. Cash and cash equivalents decreased by $9.8 million during the three months ended September 30, 2015. We expect cash and cash equivalents to fluctuate over time depending on our working capital needs and acquisition activity. The cash flows during the three months ended September 30, 2015 related primarily to the following items:
Cash inflows:
Net income of $9.3 million;
Adjustments for non-cash items of $22.1 million primarily related to positive adjustments for depreciation and amortization of $30.3 million and share-based compensation costs of $6.2 million, offset by negative adjustments for unrealized currency-related gains of $7.8 million;
Proceeds of debt of $141.7 million, net of payments;
Proceeds from an initial insurance claim settlement of $6.2 million, of which $4.1 million is presented as cash from operations and $2.1 million is presented as cash from investing activities; and
Capital contribution from a noncontrolling interest of $5.1 million.
Cash outflows:
Purchases of our ordinary shares of $127.8 million;

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Capital expenditures of $24.4 million of which $11.9 million were related to the purchase of manufacturing and automation equipment for our production facilities, $9.3 million were related to the purchase of land, facilities and leasehold improvements, and $3.2 million were related to purchases of other capital assets, including facility improvements and office equipment;
Payments for acquisitions, net of cash acquired, of $22.8 million;
Internal costs for software and website development that we have capitalized of $4.9 million;
Changes in working capital balances of $4.1 million primarily driven by an increase in accounts receivable;
Payments of withholding taxes in connection with share awards of $2.7 million; and
Payments for capital lease arrangements of $2.2 million.
Additional Liquidity and Capital Resources Information. During the year ended September 30, 2015, we financed our operations and strategic investments through internally generated cash flows from operations and debt financing. As of September 30, 2015, approximately $93.5 million of our cash and cash equivalents was held by our subsidiaries, and undistributed earnings of our subsidiaries that are considered to be indefinitely reinvested were $61.4 million. We do not intend to repatriate such funds as the cash and cash equivalent balances are generally used and available, without legal restrictions, to fund ordinary business operations and investments of the respective subsidiaries. If there is a change in the future, the repatriation of undistributed earnings from certain subsidiaries, in the form of dividends or otherwise, could have tax consequences that could result in material cash outflows.
Debt. On March 24, 2015, we completed a private placement of $275.0 million of 7.0% senior unsecured notes due 2022. The proceeds from the sales of the notes were used to repay existing outstanding indebtedness under our unsecured line of credit and senior secured credit facility and for general corporate purposes. As of September 30, 2015, we have aggregate loan commitments from our senior secured credit facility totaling $842.0 million. The loan commitments consist of revolving loans of $690.0 million and the remaining term loans of $152.0 million.
We have other financial obligations that constitute additional indebtedness based on the definitions within the credit facility. As of September 30, 2015, the amount available for borrowing under our senior secured credit facility was as follows:

In thousands

September 30, 2015
Maximum aggregate available for borrowing
$
842,000

Outstanding borrowings of senior secured credit facilities
(378,328
)
Remaining amount
463,672

Limitations to borrowing due to debt covenants and other obligations (1)
(32,958
)
Amount available for borrowing as of September 30, 2015 (2)
$
430,714

_________________
(1) Our borrowing ability under our senior secured credit facility can be limited by our debt covenants each quarter. These covenants may limit our borrowing capacity depending on our leverage, other indebtedness, such as notes, capital leases, letters of credit, and any other debt, as well as other factors that are outlined in the credit agreement.
(2) The use of available borrowings for share purchases, dividend payments, or corporate acquisitions is subject to more restrictive covenants that can lower available borrowings for such purposes relative to the general availability described in the above table.
Debt Covenants. Our credit agreement contains financial and other covenants, including but not limited to the following:
(1) The credit agreement contains financial covenants calculated on a trailing twelve month, or TTM, basis that:
our total leverage ratio, which is the ratio of our consolidated total indebtedness (*) to our TTM consolidated EBITDA (*), will not exceed 4.50 to 1.00.

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our senior secured leverage ratio, which is the ratio of our consolidated senior secured indebtedness (*) to our TTM consolidated EBITDA (*), will not exceed 3.25 to 1.00.
our interest coverage ratio, which is the ratio of our consolidated EBITDA to our consolidated interest expense, will be at least 3.00 to 1.00.
(2) Purchases of our ordinary shares, payments of dividends, and corporate acquisitions and dispositions are subject to more restrictive consolidated leverage ratio thresholds than those listed above when calculated on a proforma basis in certain scenarios. Also, regardless of our leverage ratio, the credit agreement limits the amount of purchases of our ordinary shares, payments of dividends, corporate acquisitions and dispositions, investments in joint ventures or minority interests, and consolidated capital expenditures that we may make. These limitations can include annual limits that vary from year-to-year and aggregate limits over the term of the credit facility. Therefore, our ability to make desired investments may be limited during the term of our senior secured credit facility.
(3) The credit agreement also places limitations on additional indebtedness and liens that we may incur, as well as on certain intercompany activities.

(*) The definitions of EBITDA, consolidated total indebtedness, and consolidated senior secured indebtedness are maintained in our credit agreement included as an exhibit to our Form 8-K filed on February 13, 2013, as amended by amendments no. 1 and no. 2 to the credit agreement included as exhibits to our Forms 8-K filed on January 22, 2014 and September 25, 2014.

The indenture under which our 7.0% senior unsecured notes due 2022 are issued 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.
Our credit agreement and senior unsecured notes indenture also contain customary representations, warranties and events of default. As of September 30, 2015, we were in compliance with all financial and other covenants under the credit agreement and senior unsecured notes indenture.
Other debt. Other debt consists of term loans primarily acquired as part of our fiscal 2015 acquisition of Exagroup SAS. As of September 30, 2015 we had $10.5 million outstanding for those obligations that are payable through September 2024.
Our expectations for fiscal year 2016. Our current liabilities continue to exceed our current assets; however, we believe that our available cash, cash flows generated from operations, and our availability under our committed debt financing will be sufficient to satisfy our liabilities and planned investments to support our long-term growth strategy for the foreseeable future. We endeavor to invest large amounts of capital that we believe will generate returns that are above our weighted average cost of capital. We consider any use of cash that we expect to require more than 12 months to return our invested capital to be an allocation of capital. For fiscal 2016 we expect to allocate capital to the following broad categories and consider our capital to be fungible across all of these categories:
Large, discrete, internally developed projects that we believe can, over the longer term provide us with materially important competitive capabilities and/or positions in new markets, such as investments in our software, service operations and other supporting capabilities for our integrated platform, costs incurred for post-merger integration efforts and expansion into new geographic markets.
Other organic investments intended to maintain or improve our competitive position or support growth, such as costs to develop new products and expand product attributes, production and IT capacity expansion, Vistaprint Business Unit related advertising costs and the continued investment in our employees.
Purchase of ordinary shares
Corporate acquisitions and similar Investments
Reduction of debt

32



Contractual Obligations
Contractual obligations at September 30, 2015 are as follows:
 In thousands
Payments Due by Period
 
Total
 
Less
than 1
year
 
1-3
years
 
3-5
years
 
More
than 5
years
Operating leases, net of subleases
$
39,212

 
$
6,835

 
$
10,868

 
$
8,707

 
$
12,802

Build-to-suit lease
131,247

 
12,569

 
25,139

 
25,139

 
68,400

Purchase commitments
26,466

 
26,466

 

 

 

Senior unsecured notes and interest payments
400,125

 
19,250

 
38,500

 
38,500

 
303,875

Other debt and interest payments
407,463

 
25,315

 
53,289

 
327,153

 
1,706

Capital leases
33,050

 
11,127

 
15,640

 
5,641

 
642

Other
25,820

 
11,160

 
9,916

 
4,744

 

Total (1)
$
1,063,383

 
$
112,722

 
$
153,352

 
$
409,884

 
$
387,425

___________________
(1) We may be required to make cash outlays related to our uncertain tax positions. However, due to the uncertainty of the timing of future cash flows associated with our uncertain tax positions, we are unable to make reasonably reliable estimates of the period of cash settlement, if any, with the respective taxing authorities. Accordingly, uncertain tax positions of $5.2 million as of September 30, 2015 have been excluded from the contractual obligations table above. For further information on uncertain tax positions, see Note 10 to the accompanying consolidated financial statements.
Operating Leases. We rent office space under operating leases expiring on various dates through 2024. Future minimum rental payments required under our leases are an aggregate of approximately $39.2 million. The terms of certain lease agreements require security deposits in the form of bank guarantees and a letter of credit in the amount of $2.0 million and $1.6 million, respectively.
Build-to-suit lease. Represents the cash payments for our facility in Waltham, Massachusetts, USA. Please refer to Note 6 in the accompanying consolidated financial statements for additional details.
Purchase Commitments. At September 30, 2015, we had unrecorded commitments under contract of $26.5 million, which were composed of inventory purchase commitments of approximately $2.1 million, production and computer equipment purchases of approximately $14.0 million, and other unrecorded purchase commitments of $10.4 million.
Senior unsecured notes and interest payments. Our 7.0% senior unsecured notes due 2022 bear interest at a rate of 7.0% per annum and mature on April 1, 2022. Interest on the notes will be payable semi-annually on April 1 and October 1 of each year, commencing on October 1, 2015 and has been included in the table above.
Other debt and interest payments. The term loans of $152.0 million outstanding under our credit agreement have repayments due on various dates through September 23, 2019, with the revolving loans outstanding of $226.3 million due on September 23, 2019. Interest payable included in this table is based on the interest rate as of September 30, 2015 and assumes all revolving loan amounts outstanding will not be paid until maturity, but that the term loan amortization payments will be made according to our defined schedule. Interest payable includes the estimated impact of our interest rate swap agreements. In addition, we assumed term loan debt as part of certain of our fiscal 2015 acquisitions and as of September 30, 2015 we had $10.5 million outstanding for those obligations that have repayments due on various dates through September 2024.
Capital leases. We lease certain machinery and plant equipment under capital lease agreements that expire at various dates through 2020. The aggregate carrying value of the leased equipment under capital leases included in property, plant and equipment, net in our consolidated balance sheet at September 30, 2015, is $36.1 million, net of accumulated depreciation of $19.8 million. 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, 2015 amounts to $32.8 million.


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Other Obligations. Other obligations include an installment obligation of $12.5 million related to the fiscal 2012 intra-entity transfer of the intellectual property of our subsidiary Webs, Inc., which resulted 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, 2015. Other obligations also include the contingent consideration payment related to our fiscal 2014 acquisition of Printdeal of $7.9 million and deferred payments related to our acquisitions of druck.at and Litotipografia Alcione S.r.l. of $3.2 million and $2.2 million, respectively. Please refer to Note 3 in the accompanying consolidated financial statements for details related to the Printdeal obligation and Note 7 for details related to the Litotipografia Alcione S.r.l. acquisition.
Non-GAAP Financial Measure
Adjusted net operating profit after tax (NOPAT) presented below is a supplemental measure of our performance that is not required by, or presented in, accordance with GAAP. This metric is the primary metric by which we measure our consolidated financial performance and is intended to supplement investors' understanding of our operating results. Adjusted NOPAT is defined as GAAP operating income excluding certain items such as acquisition-related amortization and depreciation, 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, share-based compensation related to investment consideration and restructuring charges. The interest expense associated with our Waltham lease, as well as realized gains (losses) on currency forward contracts that do not qualify for hedge accounting, are included in adjusted NOPAT. We do not, nor do we suggest that investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.
The table below sets forth operating income and adjusted net operating profit after tax for each of the three months ended September 30, 2015 and 2014:
 
Three Months Ended September 30,
 
2015

2014
GAAP Operating Income
$
12,085

 
$
16,859

Less: Cash taxes attributable to current period (see below)
(6,833
)
 
(5,313
)
Exclude expense (benefit) impact of:


 


Acquisition-related amortization and depreciation
9,782

 
6,908

Change in fair value of contingent consideration (earn-out related charges) (1)
289

 
3,677

Share-based compensation related to investment consideration
802

 
497

Restructuring Costs
271

 

Less: Interest expense associated with Waltham lease
(350
)
 

Include: Realized gain (loss) on currency forward contracts not included in operating income
316

 
(17
)
Adjusted NOPAT (2)
$
16,362

 
$
22,611




 


Cash taxes paid in the current period
$
4,709

 
$
5,296

Less: cash taxes related to prior periods
359

 
(2,860
)
Plus: cash taxes attributable to the current period but not yet paid
921

 
936

Plus: cash impact of excess tax benefit on equity awards attributable to current period
1,709

 
2,796

Less: installment payment related to the transfer of intellectual property in a prior year
(865
)
 
(855
)
Cash taxes attributable to current period
$
6,833

 
$
5,313

_________________
(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) Adjusted NOPAT will include the impact of impairments of goodwill and other long-lived assets as defined by ASC 350 - "Intangibles - Goodwill and Other" and discontinued operations as defined by ASC 205-20 in periods in which they occur.

34



Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk. Our exposure to interest rate risk relates primarily to our cash, cash equivalents and debt.
As of September 30, 2015, our cash and cash equivalents consisted of standard depository accounts which are held for working capital purposes. We do not believe we have a material exposure to interest rate fluctuations related to our cash and cash equivalents.
As of September 30, 2015, we had $378.3 million of variable rate debt and $12.5 million of variable rate installment obligation related to the fiscal 2012 intra-entity transfer of Webs' intellectual property. As a result, we have exposure to market risk for changes in interest rates related to these obligations. In order to mitigate our exposure to interest rate changes related to our variable rate debt, we execute interest rate swap contracts to fix the interest rate on a portion of our outstanding long-term debt with varying maturities. As of September 30, 2015, a hypothetical 100 basis point increase in rates, inclusive of our outstanding interest rate swaps, would result in an increase of interest expense of approximately $2.4 million over the next 12 months.
Currency Exchange Rate Risk. We conduct business in multiple currencies through our worldwide operations but report our financial results in U.S. dollars. We manage these risks through normal operating activities and, when deemed appropriate, through the use of derivative financial instruments. We have policies governing the use of derivative instruments and do not enter into financial instruments for trading or speculative purposes. The use of derivatives is intended to reduce, but do not entirely eliminate, the impact of adverse currency exchange rate movements. A summary of our currency risk is as follows:
Translation of our non-U.S. dollar revenues and expenses: Revenue and related expenses generated in currencies other than the U.S. dollar could result in higher or lower net income when, upon consolidation, those transactions are translated to U.S. dollars. When the value or timing of revenue and expenses in a given currency are materially different, we may be exposed to significant impacts on our net income and non-GAAP financial metrics, such as EBITDA.
Our most significant net currency exposures by volume are in the British Pound, Canadian Dollar, Euro and Swiss Franc, although our exposures to these and other currencies fluctuate, particularly in our fiscal second quarter. Beginning in the fourth quarter of fiscal 2015, our currency hedging objectives are targeted at reducing volatility in our forecasted U.S. dollar-equivalent EBITDA in order to protect our debt covenants. Since EBITDA excludes non-cash items such as depreciation and amortization that are included in net income, we may experience increased, not decreased, volatility in our GAAP results due to our hedging approach.
In addition, we elect to execute currency forward contracts that do not qualify for hedge accounting. As a result, we may experience volatility in our consolidated statements of operations due to (i) the impact of unrealized gains and losses reported in other income, net on the mark-to-market of outstanding contracts and (ii) realized gains and losses recognized in other income, net, whereas the offsetting economic gains and losses are reported in the line item of the underlying cash flow, for example, revenue.
Translation of our non-U.S. dollar assets and liabilities: Each of our subsidiaries translates its assets and liabilities to U.S. dollars at current rates of exchange in effect at the balance sheet date. The resulting gains and losses from translation are included as a component of accumulated other comprehensive (loss) income on the consolidated balance sheet. Fluctuations in exchange rates can materially impact the carrying value of our assets and liabilities.

We have currency exposure arising from our net investments in foreign operations. We enter into cross-currency swap contracts to mitigate the impact of currency rate changes on certain net investments.
Remeasurement of monetary assets and liabilities: Transaction gains and losses generated from remeasurement of monetary assets and liabilities denominated in currencies other than the functional currency of a subsidiary are included in other income, net on the consolidated statements of operations. Certain of our subsidiaries hold intercompany loans with another group company, which may be different from the functional currency of one of the subsidiary loan parties. Due to the significance of these balances, the revaluation of intercompany loans can have a material impact on other income, net. We expect these

35



impacts may be volatile in the future, although they do not have a U.S. dollar cash impact for the consolidated group and therefore have currently elected not to hedge this exposure. A hypothetical 10% change in currency exchange rates was applied to total net monetary assets denominated in currencies other than the functional currencies at the balance sheet dates to compute the impact these changes would have had on our income before taxes in the near term. A hypothetical decrease in exchange rates of 10% against the functional currency of our subsidiaries would have resulted in an increase of $21.3 million and $13.5 million on our income before taxes for the three months ended September 30, 2015 and 2014, respectively.

36