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EX-32.1 - EXHIBIT 32.1 CERTIFICATION PURSUANT TO SECTION 906 OF SARBANES-OXLEY ACT - CIMPRESS N.V.ex32106301710-k.htm
EX-23.1 - EXHIBIT 23.1 PRICEWATERHOUSECOOPERS LLP CONSENT - CIMPRESS N.V.ex231pricewaterhousecooper.htm
EX-31.2 - EXHIBIT 31.2 CERTIFICATION OF CFO - CIMPRESS N.V.ex31206301710-k.htm
EX-31.1 - EXHIBIT 31.1 CERTIFICATION OF CEO - CIMPRESS N.V.ex31106301710-k.htm
EX-21.1 - EXHIBIT 21.1 SUBSIDIARIES OF CIMPRESS N.V. - CIMPRESS N.V.ex211.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________
Form 10-K
(Mark One)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended June 30, 2017
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from               to               
Commission file number 000-51539
_________________________________
Cimpress N.V.
(Exact Name of Registrant as Specified in Its Charter)
_________________________________
The Netherlands
 
98-0417483
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.) 
Hudsonweg 8
5928 LW Venlo
The Netherlands
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code: 31-77-850-7700
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Exchange on Which Registered
Ordinary Shares, €0.01 par value
 
NASDAQ Global Select Market
_________________________________
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.  Yes o     No þ
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  þ
 
Accelerated filer  o
 
Non-accelerated filer  o
 
 
Smaller reporting company  o
 
(Do not check if a smaller reporting company)
 
 
Emerging growth company  o
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨    
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).  Yes o     No þ
The aggregate market value of the ordinary shares held by non-affiliates of the registrant was approximately $2.66 billion on December 31, 2016 (the last business day of the registrant's most recently completed second fiscal quarter) based on the last reported sale price of the registrant's ordinary shares on the NASDAQ Global Select Market.
As of August 4, 2017, there were 31,303,590 Cimpress N.V. ordinary shares, par value 0.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive proxy statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended June 30, 2017. Portions of such proxy statement are incorporated by reference into Items 10, 11, 12, 13, and 14 of Part III of this Annual Report on Form 10-K.
 

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CIMPRESS N.V.
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended June 30, 2017

TABLE OF CONTENTS
 
 
Page
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
 
Item 15.
 








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

World Leader in Mass Customization
Cimpress’ strategic objective is to defend and extend its position as the world leader in mass customization. Mass customization is a business model that allows companies to deliver major improvements to customer value across a wide variety of customized printed product categories. Companies that master mass customization are able to produce, with the reliability, quality and affordability of mass production, small individual orders where each one embodies the personal relevance inherent to customized products.

masscustomizationbreaks.jpg
 
          The chart illustrates this concept. The horizontal axis represents the volume of production of a given product; the vertical axis represents the cost of producing one unit of that product. Traditionally, the only way to manufacture at a low unit cost was to produce a large volume of that product: mass-produced products fall in the lower right hand corner of the chart. Custom-made products (i.e., those produced in small volumes for a very specific purpose) historically incurred very high unit costs: they fall in the upper left hand side of the chart.
          Mass customization breaks this trade off, enabling low volume, low cost production of individually unique products. Very importantly, relative to traditional alternatives mass customization creates value in many ways, not just lower cost. Other advantages can include faster production, greater personal relevance, elimination of obsolete stock, better design, flexible shipping options, more product choice, and higher quality.
Mass customization delivers a breakthrough in customer value particularly in markets in which the worth of a physical product is inherently tied to a specific, unique use or application. For instance, there is limited value to a marketing brochure that is the same brochure as is used by many other companies: the business owner needs to describe what is unique about his or her endeavor. Likewise, a photo mug is more personally relevant if it shows pictures of someone’s own friends and family. Before mass customization, producing a high quality custom product

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required high per-order setup costs, so it simply was not economical to produce a customized product in low quantities.
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) - Low-volume custom products traditionally have a very high per-unit cost because of significant fixed costs related to conveying and using information that is required to process each order. Throughout our history, a differentiating capability of Cimpress has been our ability to develop systems to integrate every step of the value chain, from design creation to delivery. This greatly reduces the marginal cost of processing information related to each individual, customized order. We use computer integrated manufacturing, which 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 a broad range of activities related to the specification and production of physical goods.
Large Scale in Small Quantities (what drives our economic engine) - By large scale we mean a large volume of orders; by small quantities we mean small individual orders. Large scale is an important driver of our competitive advantage because increasingly larger volumes of orders allow us to sort and then produce those orders in increasingly focused processes. This allows us to generate economic value by capturing a portion of the per-unit cost difference that exists between relatively high-volume, specialized processes and low volume (job shop) processes. When we have increased the volume of orders that we process and produce we have seen material improvements in quality, product selection, speed and cost. Cimpress' businesses process tens of millions of uniquely customized items per year.
Our Corporate Strategy
We believe the mass customization opportunity is very large, with extremely diverse and continuously changing customer segments, product categories, go-to-market methods, business maturity levels, technologies and emerging opportunities. We face competition from hundreds of smaller, customer-focused companies as well as very large firms. Focus, nimbleness and speed are critical for Cimpress if we are to serve customers well. Given this context, we have chosen a deeply decentralized organizational strategy through which we hope to “stay small as we get big”.
Our strategy is to invest in and build customer-focused, entrepreneurial, mass customization businesses for the long term, which we manage in a decentralized, autonomous manner. We drive competitive advantage across Cimpress by investing in a select few shared capabilities that have the greatest potential to create company-wide value. We limit all other central activities to only those which we believe absolutely must be performed centrally.
Organizational Structure
On January 23, 2017, the Supervisory Board of Cimpress N.V. approved a plan to restructure the company and implement organizational changes that decentralized the company’s operations in order to improve accountability for customer satisfaction and capital returns, simplify decision-making, improve the speed of execution, further develop our cadre of general managers, and release entrepreneurial energy. In order to enact the plan, we transferred approximately 3,000 team members that were part of central teams into our businesses. We also reduced the scope of certain other roles and functions that were previously performed centrally, which led to the termination of approximately 135 team members, and reduction of planned hiring in targeted areas. We also eliminated the positions of four Cimpress executive officers who, as a result, left the company.
Several groups that previously were part of our corporate and global functions, including significant portions of our technology, manufacturing and supply chain, finance, legal and other related groups, have been decentralized into our operating segments. The majority of the groups that transferred into our operating segments joined our Vistaprint business and to a much smaller extent our Upload and Print businesses.

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Corporate and global functions now consist primarily of global procurement, a central technology team whose primary focus is building the mass customization platform, and essential corporate services, such as the corporate finance, communications, strategy and legal functions.

cmpr063020_chart-49961.jpg
Market and Industry Background
Mass Customization Opportunity
Product:
Geography:
Customer:
 - Small format
 - North America
 - Businesses (micro, small,
 - Large format
 - Europe
    medium, large)
 - Promotional products and gifts
 - Australia/New Zealand
 - Graphic designers, resellers,
 - Decorated apparel
 - South America
    and print providers
 - Packaging
 - Asia Pacific
 - Teams, associations and
 - Photo products
 
    groups
 - Invitations and announcements
 
 - Consumers (home and family)
Large traditional markets undergoing disruptive innovation
We believe that our mass customization business model can deliver great customer value across a diverse set of product applications, including marketing materials such as business cards, brochures, catalogs and flyers; signage and displays; promotional products; writing instruments; decorated apparel and bags; fabrics and textiles; keepsakes and gifts, packaging, photo products, invitations and announcements. Many different customers appreciate access to affordable, high quality, customized products in these categories, including businesses of all sizes, teams, associations and groups, consumers, and resellers and designers who serve customers in these groups.
The product categories and customers listed above constitute a large market opportunity that is highly fragmented. We believe that the vast majority of the markets to which mass customization could apply is still served by traditional business models that force customers either to produce in large quantities per order or to pay a high price per unit.
We believe that these large and fragmented markets are moving away from small traditional suppliers that employ job shop business models to fulfill a relatively small number of customer orders and toward companies such as Cimpress that aggregate a relatively large number of orders and fulfill them via focused supply chain and production capabilities at relatively high volumes, thereby achieving the benefits of mass customization. We believe we are early in the process of what will be a multi-decade shift from job-shop business models to mass customization.

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Cimpress' current revenue represents a very small fraction of this market opportunity. Even though we believe Cimpress is the largest single player in this market, there are many other companies who are pursuing mass customization and/or business models that incorporate many aspects of mass customization. These non-traditional suppliers include both large firms and hundreds of focused smaller firms. We believe that Cimpress and competitors who have built their business around a mass customization model are “disruptive innovators” to these large markets because we enable small volume production of personalized high quality products at an affordable price. Disruptive innovation, a term coined by Harvard Business School professor Clayton Christensen, describes a process by which a product or service takes root initially in simple applications at the bottom of a market (such as free business cards for the most price sensitive of micro-businesses) and then moves up market, eventually displacing established competitors (such as those in the markets mentioned above).
We believe this opportunity to deliver substantially better customer value and to therefore disrupt very large traditional industries can translate into tremendous future opportunity for Cimpress if we execute well and constantly improve our business model over a long period of time. Until recently, we focused primarily on a narrow set of customers within the list above (micro businesses and consumers) with a very limited product offering. With acquisitions and via internal investments over the last several years, we have extended our ability to serve our traditional customers and have also gained a capability to serve larger businesses as well as resellers who, in turn, serve many different types of customers.
As we continue to evolve as a business, our understanding of these markets and their relative attractiveness is also evolving. Our expansion into the “upload and print” space, promotional products, apparel, gifts and packaging, as well as new geographic markets has significantly increased the size of our addressable market opportunity. We base our market size and attractiveness estimates upon considerable research and analysis; however we consider our estimates to be only approximate. Despite the imprecise nature of our estimates, we believe that our understanding is directionally correct and that we operate in an enormous aggregate market with significant opportunity for Cimpress to grow should we be successful in delivering a differentiated and attractive value proposition to customers.
Today, we believe that the revenue opportunity for low-to-medium order quantities (i.e. still within our focus of small-sized individual orders) in the four product categories below is over $100 billion annually in North America and Europe. The addition of other geographies and the consumer products space adds at least 50% to this number:
Small format marketing materials such as business cards, flyers, leaflets, inserts, brochures and magazines. Businesses of all sizes are the main end users of short-and-medium run lengths (per order quantities below 2,500 units for business cards and below 20,000 units for other materials).
Large format products such as banners, signs, tradeshow displays, and point-of-sale displays. Businesses of all sizes are the main end users of short-and-medium run lengths (less than 1,000 units).
Promotional products, apparel and gifts including decorated apparel, bags and textiles, and hard goods such as pens, USB sticks, and drinkware. The end users of short-and-medium runs of these products range from businesses to teams, associations and groups, as well as consumers.
Packaging products, such as corrugated board packaging, folded cartons, bags and labels. Businesses are the primary end users for short-and-medium runs (below 10,000 units).




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Our Opportunity: Over $100 billion total addressable market in North America and Europe
presentation1a02.jpg
Our Business
Today’s Cimpress includes 13 previously independent businesses that we have acquired plus Vistaprint and several small startup businesses, which we grew organically. Prior to its acquisition, each of our acquired companies pursued business models which embodied the principles of mass customization. In other words, each provided a standardized set of products that could be configured and customized by customers, could be ordered in relatively low volumes, and could produce via relatively standardized, homogeneous production processes either internally and/or through third parties.
The majority of our businesses are driven by sophisticated, standardized processes and software. These technologies are designed to readily scale as the number of orders received per day increases. In particular, the more individual jobs we receive in a given time period, the more efficiently we can sort and route jobs with homogeneous production processes to given nodes of our internal production systems or of our third party supply chain. This sortation and subsequent process automation improves production efficiency. We believe that our strategy of systematizing our service and production systems enables us to deliver value to customers much more effectively than traditional competitors.
We operate production facilities in Australia, Austria, Brazil, Canada, China, France, India, Ireland, Italy, Japan, Mexico, the Netherlands, the United Kingdom and the United States. Importantly, we also work with a network of several hundred external fulfillers located across the globe. We believe that the improvements we have made and the future improvements we intend to make in software technologies that support the design, sortation, scheduling, production and delivery processes provide us with significant competitive advantage. In many cases we can produce and ship an order the same day we receive it. Our supply chain systems and processes seek to drive reduced inventory and working capital requirements as well as faster delivery to customers. In certain of our company-owned manufacturing facilities, software schedules the near-simultaneous production of different customized products that have been ordered by the same customer, allowing us to produce and deliver multi-part orders quickly and efficiently.
We believe that the standard business cards sold by our Vistaprint business provide a concrete example of the potential of our mass customization business model to deliver significant customer value and to develop strong profit franchises in large markets that were previously low growth and commoditized. The current Vistaprint operations for a typical order of 250 business cards in Europe and North America require less than 14 seconds of human labor for all of pre-press, printing, cutting and packaging, versus an hour or more for traditional printers. Combined with advantages of scale in purchasing of materials, our self-service ordering, pre-press automation, auto-scheduling and automated manufacturing processes enable us to produce standard business cards at a

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fraction of the cost of typical traditional printers with very consistent quality and delivery reliability. Achieving this type of efficiency took us more than a decade and required massive volume, significant engineering investments and significant capital. Standard Vistaprint business cards (which account for approximately 28% of the Vistaprint business' total bookings for fiscal 2017) represent a mature, highly refined, and highly profitable example of the power of mass customization. Even though we do not expect many other products to reach this extreme level of automation, we do currently produce multiple other product categories (such as flyers, brochures, signage, mugs, calendars, pens, t-shirts, hats, embroidered soft goods, rubber stamps, photobooks, labels and holiday cards) via analogous methods whose volume and processes are well along the spectrum of mass customization relative to traditional suppliers and thus provide great customer value and a strong, profitable and growing revenue stream.
We believe that the potential for scale-based advantages are not limited to large, automated production lines. Other advantages include the ability to systematically and automatically sort through the voluminous "long tail" of diverse and uncommon orders in order to group them into more homogeneous categories, and to route them to production nodes that are specialized for that category of operations and/or which are geographically proximate to the customer. In such cases, even though the daily production volume of a given production node is small in comparison to our highest volume production lines, the homogeneity and volume we are able to achieve is nonetheless significant relative to traditional suppliers of the long tail product in question; thus our relative efficiency gains remain substantial. For this type of long tail production, we rely heavily on third-party fulfillment partnerships, which allow us to offer a very diverse set of products. We acquired most of our capabilities in this area via our investments in Exaprint, Printdeal, Pixartprinting and WIRmachenDRUCK. For instance, the product assortment of each of these four businesses is measured in the tens of thousands, versus just a few hundred at Vistaprint traditionally. This deep and broad product offering is important to many customers.
Our Businesses
We have adopted a multi-business approach, which we believe will help us effectively develop value propositions that resonate strongly with very different parts of our large and fragmented addressable market for mass customization. As such, we have structured our organization to provide significant autonomy and decentralization for the individual businesses. We believe that this autonomy allows for greater customer responsiveness, increased focus, and more innovation than if we were to manage our customer value proposition centrally.
We have many localized websites serving countries in North America, Europe, Asia Pacific and South America. Our websites offer a broad assortment of tools and features allowing customers to create a product design or upload their own complete design, and place an order on a completely self-service basis or with varying levels of assistance.
As of June 30, 2017, our businesses were organized into the following four reportable segments:
1.
Vistaprint:
Includes the operations of our Vistaprint-branded websites focused on the North America, Europe, Australia and New Zealand markets, and our Webs-branded business, which is managed with the Vistaprint-branded digital business in these same geographies.
vistaprint2014logodetail.jpg
Our Vistaprint business helps more than 17 million micro businesses (companies with fewer than 10 employees) create beautiful, professional quality marketing products at affordable prices and at low volumes. To help our customers market in the digital world, the teams at our Pagemodo and Webs brands develop intuitive DIY solutions that are brought to market via their own brands as well as via the Vistaprint brand.
2.
Upload and Print:
Includes the operations of our druck.at, Easyflyer, Exagroup, Pixartprinting, Printdeal, Tradeprint, and WIRmachenDRUCK businesses.
Businesses regularly turn to trusted graphic professionals (either internal to their firm or at third parties) for advice and design services in order to create great looking, customized products like magazines,

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brochures, flyers, catalogs, packaging, posters, presentation folders, signs, banners, logo apparel, business cards, labels, corporate gifts and more. These Cimpress businesses focus on serving graphic professionals: local printers, print resellers, graphic artists, advertising agencies and other customers with professional desktop publishing skill sets.
druckatlogo280x1141a02.jpg
Druck.at, based in Austria, is a leading provider of customized web-to-print products including multi-page brochures, folders, flyers, business cards, signs and banners.
logo-easy.jpg
Easyflyer, based in France, provides customers with a range of small and large format printed products available online, with a focus on providing the best customer experience.
exaprintlogo.jpg
Exaprint, based in France, is an online printer that exclusively serves the needs of print, design and marketing professionals. It offers a wide range of printed products, with a strong focus on both small format products like business cards, flyers and brochures and large-format products like banners, posters, roll-ups and rigid signage.
pixartprintinga01.jpg
Pixartprinting, based in Italy, is a leading web-to-print company serving customers across Europe. The company provides printing services for graphic design agencies, print resellers and local printers.
printdeala17.jpg
Printdeal, a Dutch company with a focus on the “upload and print” market, specializes in high-volume, large-format printing. Printdeal also has offices in Belgium.
tradeprintlogo300x56.jpg
Tradeprint, a leading online trade printer in the UK, serves local printers, print buyers and graphic arts professionals. Tradeprint offers customized products including flyers, leaflets, business cards, booklets, posters, letterheads and more.
wmdlogobrandpage.jpg
WIRmachenDRUCK, a German web-to-print company, offers graphic designers and print resellers an exciting range of highly customized products at low-cost prices, from promotional products to customized beverage cans.
3.
National Pen:
Includes the global operations of our National Pen business and a few smaller brands that are focused on custom writing instruments and promotional products, apparel and gifts for small- and medium-sized businesses.
a4216088.jpg
On December 30, 2016, we acquired 100% of the equity interests of National Pen Co. LLC, the leading provider of a wide array of customized writing instruments for small- and medium-sized businesses in more than 20 countries. The company also sells other promotional products, including travel mugs, water bottles, tech gadgets and trade show items.
National Pen's scale and vertical integration in writing instruments complements our organic investments in technology and supply chain capabilities for promotional products, apparel and gift offerings. It serves about a million small business customers through a successful direct mail marketing and telesales approach, as well as a small growing e-commerce business.
4.
All Other Businesses:
Includes the operations of our Albumprinter, Most of World, and Corporate Solutions businesses. These businesses have been combined into one reportable segment based on materiality.

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a2016albumprinterlgoo.jpg
Albumprinter, a photo products business serving consumer needs in Europe, including in the Netherlands, Belgium, Sweden, Norway and the United Kingdom, via several brands. On July 21, 2017 we entered into a definitive agreement to sell our Albumprinter business. Refer to Note 2 in the accompanying notes to the consolidated financial statements included in Item 8 of Part II of this Report for additional details.
picture1a02.jpg
Corporate Solutions, a business serving the needs of retail partners, small- and medium-sized businesses and third-party merchants and franchise businesses. This is achieved via partnership with third party firms and with two internal startup businesses: Vistaprint Corporate and Cimpress Open.
printilogorgb.jpg  ysda01.jpg
Most of World, focused on our emerging market portfolio, including operations in Brazil, China, India and Japan. Most of World is a small, but fast growing portfolio, building foundations in regions with large market opportunities.

vistaprint2014logodetail.jpg
Our products
Customers visiting our websites can select the type of product they wish to design from our broad range of available products and services for the business, reseller and home and family markets. The combined product assortment across our businesses is extensive, including offerings in the following product categories: business cards, marketing materials such as flyers and postcards, digital and marketing services, writing instruments, signage, decorated apparel, promotional products and gifts, packaging, textiles and magazines and catalogs.
Central procurement
We are focused on achieving the lowest total cost in our strategic sourcing efforts by concentrating on quality, logistics, technology and cost, while also striving to use responsible sourcing practices within our supply chain. Our efforts include the procurement of high quality materials and equipment that meet our strict specifications at a low total cost across a growing number of manufacturing locations, with an increasing focus on supplier compliance with our sustainable paper procurement policy as well as our Supplier Code of Conduct. Additionally, we work to develop and implement logistics, warehousing, and outbound shipping strategies to provide a balance of low-cost material availability while limiting our inventory exposure. We believe investing in a strategic supply chain management capability that is tightly integrated with our other manufacturing teams helps us benefit from our large scale, improve efficiency and reduce costs, and increase the sustainability of our business.
Our Proprietary Technology, including our Mass Customization Platform
We rely on our advanced proprietary technology to market to, attract and retain our customers, to enable customers to create graphic designs and place orders on our websites, and to aggregate and produce multiple orders from all over the world. Technology is core to our competitive advantage, as without it we would not be able to produce custom orders in small quantities while achieving the economics that are more analogous to mass produced items.
Each of our businesses uses a mix of proprietary and third-party technology that supports the specific needs of that business. Over the past few years, many of our businesses have begun to modernize and modularize their technology to enable us to launch new products, provide a better customer experience, more easily connect to our mass customization platform technologies, and, where it makes sense, to leverage third-party technologies where we do not need to bear the cost of maintaining proprietary technologies. For example, our businesses are increasingly using third-party software for capabilities such as a shopping cart or customer reviews, which are areas that we can benefit from providing a more e-commerce standard experience, and better leverage engineering resources to focus on technologies from which we derive competitive advantage.
We are currently building a mass customization platform, which is a collection of software services, application programming interfaces and related technology that can be leveraged across our businesses and third parties. Different businesses can deploy different combinations of these services, depending on what capabilities these businesses need to complement their existing technology stack. This multi-year investment is still in its early stages, though many of our businesses are leveraging some of the technologies that have already been developed and/or shared by other businesses. The capabilities that are available in the mass customization platform today include customer-facing technologies, such as those that enable customers to visualize their designs on various

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products, as well as manufacturing, supply chain, and logistics technologies that automate various stages of the production and delivery of a product to a customer. The anticipated benefits of the mass customization platform include improved speed to market for new product introduction, and more cost-efficient cost of production and customer delivery. Over time, we believe we can generate significant customer and shareholder value from increased specialization of production facilities, aggregated scale from multiple businesses, increased product offerings and shared technology development costs.
Technology Development
We intend to continue developing and enhancing our customer-facing and manufacturing, supply chain and logistics technologies and processes. We have designed (and/or are upgrading) our website technologies and infrastructure to accommodate future geographic expansion and growth in the number of customer visits, orders, and product and service offerings. This architecture makes our applications highly scalable and offers our customers fast system responsiveness. In addition, our production technologies for aggregating jobs in preparation for manufacturing are designed to readily scale as we grow. We have engineering and research and development centers in multiple businesses. We also develop technology centrally, primarily at our offices in Switzerland, India, the Netherlands, the Czech Republic and the United States. We are constantly seeking to strengthen our manufacturing and supply chain capabilities through engineering disciplines such as automation, manufacturing, choice of equipment, product manufacturability, materials science, process control and color control. Our technology and development expenses were approximately $243 million (11% of total revenues), $210 million (12% of total revenues) and $187 million (12% of total revenues) in the fiscal years ended June 30, 2017, 2016 and 2015, respectively.
Competition
The markets for the products we produce and sell are intensely competitive, highly fragmented and geographically dispersed, with many existing and potential competitors. We compete on the basis of breadth and depth of product offerings; price; convenience; quality; technology; design content, tools, and assistance; customer service; ease of use; and production and delivery speed. It is our intention to offer a broad selection of high-quality products as well as related services at low price points and in doing so, offer our customers an attractive value proposition. Our current competition includes a combination of the following:

traditional offline suppliers and graphic design providers;

online printing and graphic design companies, many of which provide products and services similar to ours;

office superstores, drug store chains, food retailers and other major retailers targeting small business and consumer markets;

wholesale printers;

self-service desktop design and publishing using personal computer software;

email marketing services companies;

website design and hosting companies;

suppliers of customized apparel, promotional products and gifts;

online photo product companies;

internet firms and retailers;

online providers of custom printing services that outsource production to third party printers; and

providers of other digital marketing such as social media, local search directories and other providers.
As we expand our geographic reach, product and service portfolio and customer base, our competition increases. Our geographic expansion creates competition with companies that have a multi-national presence as

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well as experienced local firms. Product offerings such as photo products, websites, email marketing, signage, apparel and promotional products have resulted in new competition as we entered those markets. We encounter competition from large retailers offering a wide breadth of products and highly focused companies specializing in a subset of our customers or product offerings. Given the state of maturity of the online mass customization market, we believe that in aggregate, offline providers remain our biggest competition.
Barriers to entry have been lowered in many of our markets, and new players have entered the mass customization space, enabled by asset-light models, software-driven print-fulfillment platforms, innovation in production technology, and/or benefits of an intense focus on a niche product or geographic market. We believe that the long-term leaders in mass customization will be the companies that are innovative and agile, but also bring significant scale-based advantages to drive value to customers in the form of product selection, quality and cost, as well as service.
Environmental Responsibility
We regularly evaluate ways to minimize the impact of our operations on the environment. Our past efforts have substantially reduced the energy consumption of our operations. In fiscal 2017, we converted the vast majority of the paper we use in our Cimpress owned production facilities to FSC (Forest Stewardship Council) certified paper. FSC is an international non-profit organization committed to promoting the practice of sustainable forestry worldwide. FSC certification confirms that the paper comes from responsibly managed forests that meet FSC’s environmental and social standards.
Also, in fiscal 2017, we conducted an extensive planning process to reduce Cimpress’ carbon emissions at a rate in line with science-based targets established in 2015 by the United Nations Global Compact and others. As a result, we are embarking on a path to reduce emissions, through a combination of abatement measures and renewable energy sourcing. 
Intellectual Property
We seek to protect our proprietary rights through a combination of patents, copyrights, trade secrets, and trademarks and contractual restrictions. We enter into confidentiality and proprietary rights agreements with our employees, consultants and business partners, and control access to, and distribution of, our proprietary information.
As of June 30, 2017, we held 295 issued patents worldwide, and we continue to file new patent applications around the world. Subject to our continued payment of required patent maintenance fees, our currently issued patents will expire between December 2017 and June 2035. We hold 222 trademark registrations in various jurisdictions globally.
Business Segment and Geographic Information
As of June 30, 2017, our reportable operating segments consisted of (a) Vistaprint, (b) Upload and Print, which includes our druck.at, Easyflyer, Exagroup, Pixartprinting, Printdeal, Tradeprint, and WIRmachenDRUCK businesses, (c) National Pen, which includes the global operations of our National Pen business, and (d) All Other Businesses, which include our Albumprinter business, our Most of World businesses and our Corporate Solutions business. Our Most of World businesses operate in China, India and Japan and (via partial equity ownership) Brazil. For more segment and geographic information about our revenues, adjusted net operating profit and long-lived assets, see Item 8 of Part II, “Financial Statements and Supplementary Data — Note 16 — Segment Information” and Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The descriptions of our business, products, and markets in this section apply to all of our operating segments.
Seasonality
Our profitability has historically been highly seasonal. Our second fiscal quarter, ending December 31, includes the majority of the holiday shopping season and has become our strongest quarter for sales of our consumer-oriented products, such as holiday cards, calendars, photo books, and personalized gifts.


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Operating income during the second fiscal quarter represented 86%, and 62% of annual operating income in the years ended June 30, 2016 and 2015, respectively, and during the year ended June 30, 2017, in a period we recognized a loss from operations, the second quarter remained the only profitable quarter during the year.
Employees
As of June 30, 2017, we had approximately 10,700 full-time and approximately 900 temporary employees worldwide.
Corporate Information
Cimpress N.V. (formerly named Vistaprint N.V.) was incorporated under the laws of the Netherlands on June 5, 2009 and on August 30, 2009 became the publicly traded parent company of the Cimpress group of entities. We maintain our registered office at Hudsonweg 8, 5928 LW Venlo, the Netherlands. Our telephone number in the Netherlands is +31-77-850-7700. As a result of our change of domicile from Bermuda to the Netherlands on August 30, 2009, the common shareholders of Vistaprint Limited became ordinary shareholders of Vistaprint N.V. and Vistaprint N.V. became the publicly traded parent company of the Vistaprint group of entities. Vistaprint Limited, the immediate predecessor corporation to Vistaprint N.V., was incorporated under the laws of Bermuda in April 2002.
Available Information
We are registered as a reporting company under the U.S. Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act. Accordingly, we file or furnish with the U.S. Securities and Exchange Commission, or the SEC, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy statements as required by the Exchange Act and the rules and regulations of the SEC. The public may read and copy our reports, proxy statements and other materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room is available by calling 1-800-SEC-0330. In addition, the SEC maintains an Internet website that contains reports, proxy and information statements and other information regarding issuers, such as Cimpress N.V, that file electronically with the SEC. The address of this website is www.sec.gov. We make available, free of charge through our United States website, the reports, proxy statements, amendments and other materials we file with or furnish to the SEC as soon as reasonably practicable after we electronically file or furnish such materials with or to the SEC. The address of our United States website is www.cimpress.com. We are not including the information contained on our website, or information that can be accessed by links contained on our website, as a part of, or incorporating it by reference into, this Annual Report on Form 10-K.
Item 1A. Risk Factors
Our future results may vary materially from those contained in forward-looking statements that we make in this Report and other filings with the SEC, press releases, communications with investors, and oral statements due to the following important factors, among others. Our forward-looking statements in this Report and in any other public statements we make may turn out to be wrong. These statements can be affected by, among other things, inaccurate assumptions we might make or by known or unknown risks and uncertainties or risks we currently deem immaterial. Consequently, no forward-looking statement can be guaranteed. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise.
Risks Related to Our Business
If our long-term growth strategy is not successful, our business and financial results could be harmed.

We may not achieve our long-term objectives, and our investments in our business may fail to impact our results and growth as anticipated. Some of the factors that could cause our business strategy to fail to achieve our objectives include, among others:

our failure to adequately execute our strategy or anticipate and overcome obstacles to achieving our strategic goals;

our failure to develop our mass customization platform or the failure of the platform to drive the efficiencies and competitive advantage we expect;

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our failure to manage the growth, complexity, and pace of change of our business and expand our operations;

our failure to acquire, at a value-accretive price or at all, businesses that enhance the growth and development of our business or to effectively integrate the businesses we do acquire into our business;

our inability to purchase or develop technologies and other key assets and capabilities to increase our efficiency, enhance our competitive advantage, and scale our operations;

our failure to realize the anticipated benefits of the decentralization of our operations;

the failure of our current supply chain to provide the resources we need at the standards we require and our inability to develop new or enhanced supply chains;

our failure to acquire new customers and enter new markets, retain our current customers, and sell more products to current and new customers;

our failure to address inefficiencies and performance issues in some of our businesses and markets;

our failure to sustain growth in relatively mature markets;

our failure to promote, strengthen, and protect our brands;

our failure to effectively manage competition and overlap within our brand portfolio;

the failure of our current and new marketing channels to attract customers;

our failure to realize expected returns on our capital allocation decisions;

unanticipated changes in our business, current and anticipated markets, industry, or competitive landscape;

our failure to attract and retain skilled talent needed to execute our strategy and sustain our growth; and

general economic conditions.
If our strategy is not successful, then our revenue, earnings, and value may not grow as anticipated or may decline, we may not be profitable, our cash flow may be negatively impacted, our reputation and brands may be damaged, and the price of our shares may decline. In addition, we may change our strategy from time to time, which can cause fluctuations in our financial results and volatility in our share price.

Purchasers of customized products may not choose to shop online, which would limit our acquisition of new customers that are necessary to the success of our business.

We sell most of our products and services through the Internet. Because the online market for most of our products and services is not mature, our success depends in part on our ability to attract customers who have historically purchased products and services we offer through offline channels. Specific factors that could prevent prospective customers from purchasing from us as an online retailer include:

concerns about buying customized products without face-to-face interaction with design or sales personnel;

the inability to physically handle and examine product samples before making a purchase;

delivery time associated with Internet orders;

concerns about the security of online transactions and the privacy of personal information;

delayed or lost shipments or shipments of incorrect or damaged products;


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limited access to the Internet; and

the inconvenience associated with returning or exchanging purchased items.

In addition, our internal research shows that an increasing number of current and potential customers access our websites using smart phones or tablets and that our website visits using traditional computers may be declining. Designing and purchasing custom designed products on a smart phone, tablet, or other mobile device is more difficult than doing so with a traditional computer due to limited screen sizes and bandwidth constraints. If our customers and potential customers have difficulty accessing and using our websites and technologies, then our revenue could decline.

We may not succeed in promoting and strengthening our brands, which could prevent us from acquiring new customers and increasing revenues.     

A primary component of our business strategy is to promote and strengthen our brands to attract new and repeat customers, and we face significant competition from other companies in our markets who also seek to establish strong brands. To promote and strengthen our brands, we must incur substantial marketing expenses and establish a relationship of trust with our customers by providing a high-quality customer experience, which requires us to invest substantial amounts of our resources. Our ability to provide a high-quality customer experience is also dependent on external factors over which we may have little or no control, such as the reliability and performance of our suppliers, third-party carriers, and communication infrastructure providers. If we are unable to promote our brands or provide customers with a high-quality customer experience, we may fail to attract new customers, maintain customer relationships, and sustain or increase our revenues.
We manage our business for long-term results, and our quarterly and annual financial results will often fluctuate, which may lead to volatility in our share price.

Our revenues and operating results often vary significantly from period to period due to a number of factors, and as a result comparing our financial results on a period-to-period basis may not be meaningful. We prioritize our two uppermost objectives (leadership in mass customization and maximizing intrinsic value per share) even at the expense of shorter-term results and generally do not manage our business to maximize current period financial results, including our GAAP net (loss) income and operating cash flow and other results we report. Many of the factors that lead to period-to-period fluctuations are outside of our control; however, some factors are inherent in our business strategies. Some of the specific factors that could cause our operating results to fluctuate from quarter to quarter or year to year include among others:

investments in our business in the current period intended to generate longer-term returns, where the shorter-term costs will not be offset by revenue or cost savings until future periods, if at all;

seasonality-driven or other variations in the demand for our products and services, in particular during our second fiscal quarter;

currency and interest rate fluctuations, which affect our revenues, costs, and fair value of our assets and liabilities;

our hedging activity;

our ability to attract visitors to our websites and convert those visitors into customers;

our ability to retain customers and generate repeat purchases;

shifts in revenue mix toward less profitable products and brands;

the commencement or termination of agreements with our strategic partners, suppliers, and others;

our ability to manage our production, fulfillment, and support operations;

costs to produce and deliver our products and provide our services, including the effects of inflation;


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our pricing and marketing strategies and those of our competitors;

expenses and charges related to our compensation arrangements with our executives and employees, including expenses and charges relating to the new long-term incentive compensation program we launched at the beginning of fiscal year 2017;

costs and charges resulting from litigation;

significant increases in credits, beyond our estimated allowances, for customers who are not satisfied with our products;

changes in our income tax rate;

costs to acquire businesses or integrate our acquired businesses;

financing costs;

impairments of our tangible and intangible assets including goodwill; and

the results of our minority investments and joint ventures.
 
Some of our expenses, such as office leases, depreciation related to previously acquired property and equipment, and personnel costs, are relatively fixed, and we may be unable to, or may not choose to, adjust operating expenses to offset any revenue shortfall. Accordingly, any shortfall in revenue may cause significant variation in operating results in any period. Our operating results may sometimes be below the expectations of public market analysts and investors, in which case the price of our ordinary shares will likely decline.
We may not be successful in developing our mass customization platform or in realizing the anticipated benefits of the platform.
A key component of our strategy is the development of a mass customization platform. The process of developing new technology is complex, costly, and uncertain, and the development effort could be disruptive to our business and existing systems. We must make long-term investments, develop or obtain appropriate intellectual property, and commit significant resources before knowing whether our mass customization platform will be successful and make us more effective and competitive. As a result, there can be no assurance that we will successfully complete the development of the platform or that we will realize expected returns on the capital expended to develop the platform.
In addition, we are aware that other companies are developing platforms that could compete with ours. If a competitor were to develop and reach scale with a platform before we do, our competitive position could be harmed.
Our global operations, decentralized organizational structure, and expansion place a significant strain on our management, employees, facilities, and other resources and subject us to additional risks.

We are a global company with production facilities, offices, and localized websites in many countries across six continents, and we have decentralized our organizational structure and operations. We expect to establish operations, acquire or invest in businesses, and sell our products and services in additional geographic regions, including emerging markets, where we may have limited or no experience. We may not be successful in all regions and markets in which we invest or where we establish operations, which may be costly to us. We are subject to a number of risks and challenges that relate to our global operations, decentralization, and expansion, including, among others:

difficulty managing operations in, and communications among, multiple locations, businesses, and time zones;

difficulty complying with multiple tax laws, treaties, and regulations and limiting our exposure to onerous or unanticipated taxes, duties, and other costs;


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our failure to improve and adapt our financial and operational controls to manage our decentralized business and comply with our legal obligations;

local regulations that may restrict or impair our ability to conduct our business as planned;

protectionist laws and business practices that favor local producers and service providers;

our inexperience in marketing and selling our products and services within unfamiliar countries and cultures;

challenges of working with local business partners;

our failure to properly understand and develop graphic design content and product formats and attributes appropriate for local tastes;

disruptions caused by political and social instability that may occur in some countries;

corrupt business practices, such as bribery or the willful infringement of intellectual property rights, that may be common in some countries or in some sales channels and markets;

difficulty expatriating cash from some countries;

difficulty importing and exporting our products across country borders and difficulty complying with customs regulations in the many countries where we sell products;

disruptions or cessation of important components of our international supply chain;

the challenge of complying with disparate laws in multiple countries;

restrictions imposed by local labor practices and laws on our business and operations; and

failure of local laws to provide a sufficient degree of protection against infringement of our intellectual property.

There is considerable uncertainty about the economic and regulatory effects of the United Kingdom's exit from the European Union (commonly referred to as "Brexit"). The UK is one of our largest markets in Europe, but we currently ship products to UK customers primarily from continental Europe. If Brexit results in greater restrictions on imports and exports between the UK and the EU or increased regulatory complexity, then our operations and financial results could be negatively impacted.

In addition, we are exposed to fluctuations in currency exchange rates that may impact items such as the translation of our revenues and expenses, remeasurement of our intercompany balances, and the value of our cash and cash equivalents and other assets and liabilities denominated in currencies other than the U.S. dollar, our reporting currency. While we engage in hedging activities to mitigate some of the net impact of currency exchange rate fluctuations, our financial results may differ materially from expectations as a result of such fluctuations. For example, the Brexit vote has caused significant currency volatility that was mitigated in the near term by our currency hedging programs but that could potentially hurt our financial results in the future.

Acquisitions and strategic investments may be disruptive to our business.

An important way in which we pursue our strategy is to selectively acquire businesses, technologies, and services and to make minority investments in businesses and joint ventures. The time and expense associated with finding suitable businesses, technologies, or services to acquire or invest in can be disruptive to our ongoing business and divert our management's attention. In addition, we have needed in the past, and may need in the future, to seek financing for acquisitions and investments, which may not be available on terms that are favorable to us, or at all, and can cause dilution to our shareholders, cause us to incur additional debt, or subject us to covenants restricting the activities we may undertake.


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Our acquisitions and strategic investments may fail to achieve our goals.

An acquisition, minority investment, or joint venture may fail to achieve our goals and expectations for a number of reasons including the following:

The business we acquired or invested in may not perform as well as we expected.

We may overpay for acquired businesses, which can, among other things, negatively affect our intrinsic value per share.

We may fail to integrate acquired businesses, technologies, services, or internal systems effectively, or the integration may be more expensive or take more time than we anticipated.

The management of our minority investments and joint ventures may be more expensive or may take more resources than we expected.

We may not realize the anticipated benefits of integrating acquired businesses into our mass customization platform.

We may encounter unexpected cultural or language challenges in integrating an acquired business or managing our minority investment in a business.

We may not be able to retain customers and key employees of the acquired businesses, and we and the businesses we acquire or invest in may not be able to cross sell products and services to each other's customers.

We generally assume the liabilities of businesses we acquire, which could include liability for an acquired business' violation of law that occurred before we acquired it. In addition, we have historically acquired smaller, privately held companies that may not have as strong a culture of legal compliance or as robust financial controls as a larger, publicly traded company like Cimpress, and if we fail to implement adequate training, controls, and monitoring of the acquired companies, we could also be liable for post-acquisition legal violations.

Our acquisitions and minority investments can negatively impact our financial results.

Acquisitions and minority investments can be costly, and some of our acquisitions and investments may be dilutive, leading to reduced earnings. Acquisitions and investments can result in increased expenses including impairments of goodwill and intangible assets if financial goals are not achieved, assumptions of contingent or unanticipated liabilities, amortization of acquired intangible assets, and increased tax costs.

In addition, the accounting for our acquisitions requires us to make significant estimates, judgments, and assumptions that can change from period to period, based in part on factors outside of our control, which can create volatility in our financial results. For example, we often pay a portion of the purchase price for our acquisitions in the form of an earn-out based on performance targets for the acquired companies, which can be difficult to forecast. We accrue liabilities for estimated future contingent earn-out payments based on an evaluation of the likelihood of achievement of the contractual conditions underlying the earn-out and weighted probability assumptions of the required outcomes. If in the future our assumptions change and we determine that higher levels of achievement are likely under our earn-outs, we will need to pay and record additional amounts to reflect the increased purchase price. These additional amounts could be significant and could adversely impact our results of operations. In addition, earn-out provisions can lead to disputes with the sellers about the achievement of the earn-out performance targets, and earn-out performance targets can sometimes create inadvertent incentives for the acquired company's management to take short-term actions designed to maximize the earn-out instead of benefiting the business.
If we are unable to attract visitors to our websites and convert those visitors to customers, our business and results of operations could be harmed.
Our success depends on our ability to attract new and repeat customers in a cost-effective manner. We rely on a variety of methods to draw visitors to our websites and promote our products and services, such as purchased search results from online search engines such as Google and Yahoo!, email, direct mail, advertising banners and

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other online links, broadcast media, and word-of-mouth customer referrals. If the search engines on which we rely modify their algorithms, terminate their relationships with us, or increase the prices at which we may purchase listings, our costs could increase, and fewer customers may click through to our websites. If we are not effective at reaching new and repeat customers, if fewer customers click through to our websites, or if the costs of attracting customers using our current methods significantly increase, then traffic to our websites would be reduced, our revenue and net income could decline, and our business and results of operations would be harmed.
Seasonal fluctuations in our business place a strain on our operations and resources.
Our profitability has historically been highly seasonal. Our second fiscal quarter includes the majority of the holiday shopping season and accounts for a disproportionately high portion of our earnings for the year, primarily due to higher sales of home and family products such as holiday cards, calendars, photo books, and personalized gifts. In addition, the National Pen business we acquired in December 2016 has historically generated nearly all of its profits during the December quarter. Our operating income during the second fiscal quarter represented more than 60% of annual operating income in the years ended June 30, 2016 and 2015, and during the year ended June 30, 2017, in a period we recognized a loss from operations, the second quarter remained the only profitable quarter during the year. In anticipation of increased sales activity during our second fiscal quarter holiday season, we typically incur significant additional capacity related expenses each year to meet our seasonal needs, including facility expansions, equipment purchases and leases, and increases in the number of temporary and permanent employees. Lower than expected sales during the second quarter would likely have a disproportionately large impact on our operating results and financial condition for the full fiscal year. In addition, if our manufacturing and other operations are unable to keep up with the high volume of orders during our second fiscal quarter or we experience inefficiencies in our production, then our costs may be significantly higher, and we and our customers can experience delays in order fulfillment and delivery and other disruptions. If we are unable to accurately forecast and respond to seasonality in our business, our business and results of operations may be materially harmed.

Our hedging activity could negatively impact our results of operations and cash flows.

We have entered into derivatives to manage our exposure to interest rate and currency movements. If we do not accurately forecast our results of operations, execute contracts that do not effectively mitigate our economic exposure to interest rates and currency rates, elect to not apply hedge accounting, or fail to comply with the complex accounting requirements for hedging, our results of operations and cash flows could be volatile, as well as negatively impacted. Also, our hedging objectives may be targeted at non-GAAP financial metrics, which could result in increased volatility in our GAAP results.

We face risks related to interruption of our operations and lack of redundancy.

Our production facilities, websites, infrastructure, supply chain, customer service centers, and operations may be vulnerable to interruptions, and we do not have redundancies or alternatives in all cases to carry on these operations in the event of an interruption. In addition, because we are dependent in part on third parties for the implementation and maintenance of certain aspects of our communications and production systems, we may not be able to remedy interruptions to these systems in a timely manner or at all due to factors outside of our control. Some of the events that could cause interruptions in our operations or systems are, among others:

fire, natural disasters, or extreme weather

labor strike, work stoppage, or other issues with our workforce

political instability or acts of terrorism or war

power loss or telecommunication failure

attacks on our external websites or internal network by hackers or other malicious parties

undetected errors or design faults in our technology, infrastructure, and processes that may cause our websites to fail

inadequate capacity in our systems and infrastructure to cope with periods of high volume and demand


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human error, including poor managerial judgment or oversight

Any interruptions to our systems or operations could result in lost revenue, increased costs, negative publicity, damage to our reputation and brands, and an adverse effect on our business and results of operations. Building redundancies into our infrastructure, systems and supply chain to mitigate these risks may require us to commit substantial financial, operational, and technical resources, in some cases before the volume of our business increases with no assurance that our revenues will increase.

We face intense competition, and we expect our competition to continue to increase.

The markets for small business marketing products and services and home and family custom products, including the printing and graphic design market, are intensely competitive, highly fragmented, and geographically dispersed. The competitive landscape for e-commerce companies continues to change as new e-commerce businesses are introduced and traditional “bricks and mortar” businesses establish an online presence. Competition may result in price pressure, reduced profit margins and loss of market share and brand recognition, any of which could substantially harm our business and financial results. Current and potential competitors include (in no particular order):

traditional offline suppliers and graphic design providers;

online printing and graphic design companies, many of which provide products and services similar to ours;

office superstores, drug store chains, food retailers and other major retailers targeting small business and consumer markets;

wholesale printers;

self-service desktop design and publishing using personal computer software;

email marketing services companies;

website design and hosting companies;

suppliers of customized apparel, promotional products and gifts;

online photo product companies;

Internet firms and retailers;

online providers of custom printing services that outsource production to third party printers; and

providers of other digital marketing such as social media, local search directories and other providers.

Many of our current and potential competitors have advantages over us, including longer operating histories, greater brand recognition or loyalty, more focus on a given subset of our business, or significantly greater financial, marketing, and other resources. Many of our competitors currently work together, and additional competitors may do so in the future through strategic business agreements or acquisitions. In addition, we have in the past and may in the future choose to collaborate with some of our existing and potential competitors in strategic partnerships that we believe will improve our competitive position and financial results. It is possible, however, that such ventures will be unsuccessful and that our competitive position and financial results will be adversely affected as a result of such collaboration.

Failure to meet our customers' price expectations would adversely affect our business and results of operations.

Demand for our products and services is sensitive to price for almost all of our businesses, and changes in our pricing strategies, including shipping pricing, have had a significant impact on the numbers of customers and orders in some regions, which in turn affects our revenues, profitability, and results of operations. Many factors can significantly impact our pricing and marketing strategies, including the costs of running our business, our

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competitors' pricing and marketing strategies, and the effects of inflation. If we fail to meet our customers' price expectations, our business and results of operations may suffer.

Failure to protect our information systems and the confidential information of our customers, employees, and business partners against security breaches or thefts could damage our reputation and brands, subject us to litigation and enforcement actions, and substantially harm our business and results of operations.

Our business involves the receipt, storage, and transmission of customers' personal and payment card information, as well as confidential information about our business, employees, suppliers, and business partners, some of which is entrusted to third-party service providers, partners, and vendors. Our information systems and those of third parties with which we share information are vulnerable to an increasing threat of cyber security risks, including physical and electronic break-ins, computer viruses, and phishing and other social engineering scams, among other risks. As security threats evolve and become more sophisticated and more difficult to detect and defend against, a hacker or thief may defeat our security measures, or those of our third-party service provider, partner, or vendor, and obtain confidential or personal information, and we or the third party may not discover the security breach and theft of information for a significant period of time after the breach occurs. We may need to expend significant resources to protect against security breaches and thefts of data or to address problems caused by breaches or thefts, and we may not be able to anticipate cyber attacks or implement adequate preventative measures. Any compromise or breach of our information systems or the information systems of third parties with which we share information could, among other things:

damage our reputation and brands;

expose us to losses, litigation, enforcement actions, and possible liability;

result in a failure to comply with legal and industry privacy regulations and standards;

lead to the misuse of our and our customers' confidential or personal information; or

cause interruptions in our operations.

We are subject to the laws of many states, countries, and regions and industry guidelines and principles governing the collection, use, retention, disclosure, sharing, and security of data that we receive from and about our customers and employees. Any failure or perceived failure by us to comply with any of these laws, guidelines, or principles could result in actions against us by governmental entities or others, a loss of customer confidence, and damage to our brands, any of which could have an adverse effect on our business. In addition, the regulatory landscape is constantly changing, as various regulatory bodies enact new laws concerning privacy, data retention, data transfer and data protection. For example, the recent General Data Protection Regulation in Europe includes operational and compliance requirements that are different than those currently in place and also includes significant penalties for non-compliance. Complying with these varying and changing requirements could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business and operating results.

We rely heavily on email to market to and communicate with customers, and email communications are subject to regulatory and reputation risks.

Various private entities attempt to regulate the use of commercial email solicitation by blacklisting companies that the entities believe do not meet their standards, which results in those companies' emails being blocked from some Internet domains and addresses. Although we believe that our commercial email solicitations comply with all applicable laws, from time to time some of our Internet protocol addresses appear on some of these blacklists, which can interfere with our ability to market our products and services, communicate with our customers, and operate and manage our websites and corporate email accounts. Further, we have contractual relationships with partners that market our products and services on our behalf, and some of our marketing partners engage third-party email marketers with which we do not have any contractual or other relationship. Although our contracts with our partners generally require that they comply with all applicable laws relating to email solicitations, we do not always have control over the third-party email marketers that our partners engage. If one of our partners or another third party were to send emails marketing our products and services in violation of applicable anti-spam or other laws, then our reputation could be harmed and we could potentially be liable for their actions.

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We are subject to safety, health, and environmental laws and regulations, which could result in
liabilities, cost increases, or restrictions on our operations.

We are subject to a variety of safety, health and environmental, or SHE, laws and regulations in each of the jurisdictions in which we operate. These laws and regulations govern, among other things, air emissions, wastewater discharges, the storage, handling and disposal of hazardous and other regulated substances and wastes, soil and groundwater contamination and employee health and safety. We use regulated substances such as inks and solvents, and generate air emissions and other discharges at our manufacturing facilities, and some of our facilities are required to hold environmental permits. If we fail to comply with existing SHE requirements, or new, more stringent SHE requirements applicable to us are imposed, we may be subject to monetary fines, civil or criminal sanctions, third-party claims, or the limitation or suspension of our operations. In addition, if we are found to be responsible for hazardous substances at any location (including, for example, offsite waste disposal facilities or facilities at which we formerly operated), we may be responsible for the cost of cleaning up contamination, regardless of fault, as well as to claims for harm to health or property or for natural resource damages arising out of contamination or exposure to hazardous substances.

In some cases we pursue self-imposed socially responsible policies that are more stringent than is typically required by laws and regulations, for instance in the areas of worker safety, team member social benefits and environmental protection. The costs of this added SHE effort are often substantial and could grow over time.

The loss of key personnel or an inability to attract and retain additional personnel could affect our ability to successfully grow our business.

We are highly dependent upon the continued service and performance of our senior management and key technical, marketing, and production personnel, any of whom may cease their employment with us at any time with minimal advance notice. We face intense competition for qualified individuals from many other companies in diverse industries. The loss of one or more of our key employees may significantly delay or prevent the achievement of our business objectives, and our failure to attract and retain suitably qualified individuals or to adequately plan for succession could have an adverse effect on our ability to implement our business plan.

Our credit facility and the indenture that governs our senior notes restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.

Our senior secured credit facility, which we refer to as our credit facility, and the indenture that governs our 7.0% senior unsecured notes due 2022, which we refer to as our senior notes, contain a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our best interest, including restrictions on our ability to:

incur additional indebtedness, guarantee indebtedness, and incur liens;

pay dividends or make other distributions or repurchase or redeem capital stock;

prepay, redeem, or repurchase certain subordinated debt;

issue certain preferred stock or similar redeemable equity securities;

make loans and investments;

sell assets;

enter into transactions with affiliates;

alter the businesses we conduct;

enter into agreements restricting our subsidiaries’ ability to pay dividends; and

consolidate, merge, or sell all or substantially all of our assets.

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As a result of these restrictions, we may be limited in how we conduct our business, grow in accordance with our strategy, compete effectively, or take advantage of new business opportunities. In addition, the restrictive covenants in the credit facility require us to maintain specified financial ratios and satisfy other financial condition tests. Our ability to meet those financial ratios and tests can be affected by events beyond our control, and we may be unable to meet them.

A default under our indenture or credit facility would have a material, adverse effect on our business.
    
Our failure to make scheduled payments on our debt or our breach of the covenants or restrictions under the indenture that governs our senior notes or under our credit facility could result in an event of default under the applicable indebtedness. Such a default would have a material, adverse effect on our business and financial condition, including the following, among others:

Our lenders could declare all outstanding principal and interest to be due and payable, and we and our subsidiaries may not have sufficient assets to repay that indebtedness.

Our secured lenders could foreclose against the assets securing their borrowings.

Our lenders under the credit facility could terminate all commitments to extend further credit under that facility.

We could be forced into bankruptcy or liquidation.

Our material indebtedness and interest expense could adversely affect our financial condition.

As of June 30, 2017, our total debt was $882.6 million, made up of $275.0 million of senior notes, $600.0 million of loan obligations under our credit facility and $7.5 million of other debt. We had unused commitments of $211.8 million under our credit facility (after giving effect to letter of credit obligations).

Subject to the limits contained in the credit facility, the indenture that governs our senior notes, and our other debt instruments, we may be able to incur substantial additional debt from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. If we do so, the risks related to our level of debt could intensify. Specifically, our level of debt could have important consequences, including the following:

making it more difficult for us to satisfy our obligations with respect to our debt;

limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions, or other general corporate requirements;

requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures, acquisitions, and other general corporate purposes;

increasing our vulnerability to general adverse economic and industry conditions;


exposing us to the risk of increased interest rates as some of our borrowings, including borrowings under our credit facility, are at variable rates of interest;

limiting our flexibility in planning for and reacting to changes in the industry and marketplaces in which we compete;

placing us at a disadvantage compared to other, less leveraged competitors; and

increasing our cost of borrowing.


21


We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to make scheduled payments on or refinance our debt obligations depends on our financial condition and operating performance, which are subject to economic and competitive conditions and to various financial, business, legislative, regulatory, and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness. If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional debt or equity capital, or restructure or refinance our indebtedness. We may not be able to effect any such alternative measures, if necessary, on commercially reasonable terms or at all.

If we cannot make scheduled payments on our debt, we will be in default. Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, would materially and adversely affect our financial position and results of operations.

Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.

Borrowings under our credit facility are at variable rates of interest and expose us to interest rate risk. If interest rates were to increase, our debt service obligations on the variable rate indebtedness would increase even if the amount borrowed remained the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease. As of June 30, 2017, 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 $5.4 million over the next 12 months. Although we generally enter into interest rate swaps that involve the exchange of floating for fixed rate interest payments in order to reduce interest rate volatility, we might not maintain interest rate swaps with respect to all of our variable rate indebtedness, and any swaps we enter into may not fully mitigate our interest rate risk.

Border controls and duties and restrictions on cross-border commerce may negatively impact our business.

Many governments impose restrictions on shipping goods into their countries, as well as protectionist measures such as customs duties and tariffs that may apply directly to product categories comprising a material portion of our revenues. The customs laws, rules and regulations that we are required to comply with are complex and subject to unpredictable enforcement and modification. As a result of these restrictions, we have from time to time experienced delays in shipping our manufactured products into certain countries, and changes in cross-border regulations could have a significant negative effect on our business. For example, the current United States administration has signaled the possibility of major changes in trade policy between the United States and other countries, such as the disallowance of tax deductions for imported merchandise or the imposition of additional tariffs or duties on imported products. Because we produce most physical products for our United States customers at our facilities in Canada and Mexico and we source most materials for our products outside the United States, including large amounts of sourcing from China, major changes in tax policy or trade relations could adversely affect our business and results of operations.
If we are unable to protect our intellectual property rights, our reputation and brands could be damaged, and others may be able to use our technology, which could substantially harm our business and financial results.

We rely on a combination of patents, trademarks, trade secrets and copyrights and contractual restrictions to protect our intellectual property, but these protective measures afford only limited protection. Despite our efforts to protect our proprietary rights, unauthorized parties may be able to copy or use technology or information that we consider proprietary. There can be no guarantee that any of our pending patent applications or continuation patent applications will be granted, and from time to time we face infringement, invalidity, intellectual property ownership, or similar claims brought by third parties with respect to our patents. In addition, despite our trademark registrations throughout the world, our competitors or other entities may adopt names, marks, or domain names similar to ours, thereby impeding our ability to build brand identity and possibly leading to customer confusion. Enforcing our

22


intellectual property rights can be extremely costly, and a failure to protect or enforce these rights could damage our reputation and brands and substantially harm our business and financial results.

Intellectual property disputes and litigation are costly and could cause us to lose our exclusive rights, subject us to liability, or require us to stop some of our business activities.

From time to time, we receive claims from third parties that we infringe their intellectual property rights, that we are required to enter into patent licenses covering aspects of the technology we use in our business, or that we improperly obtained or used their confidential or proprietary information. Any litigation, settlement, license, or other proceeding relating to intellectual property rights, even if we settle it or it is resolved in our favor, could be costly, divert our management's efforts from managing and growing our business, and create uncertainties that may make it more difficult to run our operations. If any parties successfully claim that we infringe their intellectual property rights, we might be forced to pay significant damages and attorney's fees, and we could be restricted from using certain technologies important to the operation of our business.

Our business is dependent on the Internet, and unfavorable changes in government regulation of the Internet, e-commerce, and email marketing could substantially harm our business and financial results.

Due to our dependence on the Internet for most of our sales, laws specifically governing the Internet, e-commerce, and email marketing may have a greater impact on our operations than other more traditional businesses. Existing and future laws, such as laws covering pricing, customs, privacy, consumer protection, or commercial email, may impede the growth of e-commerce and our ability to compete with traditional “bricks and mortar” retailers. Existing and future laws or unfavorable changes or interpretations of these laws could substantially harm our business and financial results.

The failure of our business partners to use legal and ethical business practices could negatively impact our business.

We contract with multiple business partners in an increasing number of jurisdictions worldwide, including sourcing the raw materials for the products we sell from an expanding number of suppliers and contracting with third-party merchants and manufacturers for the placement and fulfillment of customer orders. Although we require our suppliers, fulfillers, and merchants to operate in compliance with all applicable laws, including those regarding corruption, working conditions, employment practices, safety and health, and environmental compliance, we cannot control their business practices. We may not be able to adequately vet, monitor, and audit our many business partners (or their suppliers) throughout the world, and our decentralized structure heightens this risk, as not all of our businesses have equal resources to manage their business partners. If any of them violates labor, environmental, or other laws or implements business practices that are regarded as unethical, our reputation could be severely damaged, and our supply chain and order fulfillment process could be interrupted, which could harm our sales and results of operations.

If we were required to review the content that our customers incorporate into our products and interdict the shipment of products that violate copyright protections or other laws, our costs would significantly increase, which would harm our results of operations.

Because of our focus on automation and high volumes, the vast majority of our sales do not involve any human-based review of content. Although our websites' terms of use specifically require customers to make representations about the legality and ownership of the content they upload for production, there is a risk that a customer may supply an image or other content for an order we produce that is the property of another party used without permission, that infringes the copyright or trademark of another party, or that would be considered to be defamatory, hateful, obscene, or otherwise objectionable or illegal under the laws of the jurisdiction(s) where that customer lives or where we operate. If we were to become legally obligated to perform manual screening of customer orders, our costs would increase significantly, and we could be required to pay substantial penalties or monetary damages for any failure in our screening process.

We are subject to customer payment-related risks.

We accept payments for our products and services on our websites by a variety of methods, including credit or debit card, PayPal, check, wire transfer or other methods. In some geographic regions, we rely on one or two third party companies to provide payment processing services. If any of the payment processing or other

23


companies with which we have contractual arrangements became unwilling or unable to provide these services to us or they or we are unable to comply with our contractual requirements under such arrangements, then we would need to find and engage replacement providers, which we may not be able to do on terms that are acceptable to us or at all, or to process the payments ourselves. Any of these scenarios could be disruptive to our business as they could be costly and time consuming and may unfavorably impact our customers.

As we offer new payment options to our customers, we may be subject to additional regulations, compliance requirements and fraud risk. For some payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lower our profit margins or require that we charge our customers more for our products. We are also subject to payment card association and similar operating rules and requirements, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules and requirements, we may be subject to fines and higher transaction fees and lose our ability to accept credit and debit card payments from our customers or facilitate other types of online payments, and our business and operating results could be materially adversely affected.

In addition, we may be liable for fraudulent transactions conducted on our websites, such as through the use of stolen credit card numbers. To date, quarterly losses from payment fraud have not exceeded 1% of total revenues in any quarter, but we continue to face the risk of significant losses from this type of fraud.

We may be subject to product liability or environmental compliance claims if people, property, or the environment are harmed by the products we sell.

Some of the products we sell may expose us to product liability or environmental compliance claims relating to issues such as personal injury, death, property damage, or the use or disposal of environmentally harmful substances and may require product recalls or other actions. Any claims, litigation, or recalls could be costly to us and damage our brands and reputation.

Our inability to use or maintain domain names in each country or region where we currently or intend to do business could negatively impact our brands and our ability to sell our products and services in that country or region.

We may not be able to prevent third parties from acquiring domain names that use our brand names or other trademarks or that otherwise infringe or decrease the value of our trademarks and other proprietary rights. If we are unable to use or maintain a domain name in a particular country or region, then we could be forced to purchase the domain name from an entity that owns or controls it, which we may not be able to do on commercially acceptable terms or at all; we may incur significant additional expenses to develop a new brand to market our products within that country; or we may elect not to sell products in that country.

We do not collect indirect taxes in all jurisdictions, which could expose us to tax liabilities.

In some of the jurisdictions where we sell products and services, we do not collect or have imposed upon us sales, value added or other consumption taxes, which we refer to as indirect taxes. The application of indirect taxes to e-commerce businesses such as Cimpress is a complex and evolving issue, and in many cases, it is not clear how existing tax statutes apply to the Internet or e-commerce. For example, some state governments in the United States have imposed or are seeking to impose indirect taxes on Internet sales. If a government entity claims that we should have been collecting indirect taxes on the sale of our products in a jurisdiction where we have not been doing so, then we could incur substantial tax liabilities for past sales.

If we are unable to retain security authentication certificates, which are supplied by a limited number of third party providers over which we exercise little or no control, our business could be harmed.

We are dependent on a limited number of third party providers of website security authentication certificates that are necessary for conducting secure transactions over the Internet. Despite any contractual protections we may have, these third party providers can disable or revoke, and in the past have disabled or revoked, our security certificates without our consent, which would render our websites inaccessible to some of our customers and could discourage other customers from accessing our sites. Any interruption in our customers' ability or willingness to access our websites if we do not have adequate security certificates could result in a material loss of revenue and profits and damage to our brands.

24



Risks Related to Our Corporate Structure

Challenges by various tax authorities to our international structure could, if successful, increase our effective tax rate and adversely affect our earnings.

We are a Dutch limited liability company that operates through various subsidiaries in a number of countries throughout the world. Consequently, we are subject to tax laws, treaties and regulations in the countries in which we operate, and these laws and treaties are subject to interpretation. From time to time, we are subject to tax audits, and the tax authorities in these countries could claim that a greater portion of the income of the Cimpress N.V. group should be subject to income or other tax in their respective jurisdictions, which could result in an increase to our effective tax rate and adversely affect our results of operations. For more information about audits to which we are currently subject refer to Note 13 “Income Taxes” in the accompanying notes to the consolidated financial statements included in Item 8 of Part II of this Report.

Changes in tax laws, regulations and treaties could affect our tax rate and our results of operations.

A change in tax laws, treaties or regulations, or their interpretation, of any country in which we operate could result in a higher tax rate on our earnings, which could result in a significant negative impact on our earnings and cash flow from operations. There are currently multiple initiatives for comprehensive tax reform underway in key jurisdictions where we have operations, including the United States and Switzerland. We continue to assess the impact of various international tax reform proposals and modifications to existing tax treaties in all jurisdictions where we have operations that could result in a material impact on our income taxes. We cannot predict whether any specific legislation will be enacted or the terms of any such legislation. However, if such proposals were enacted, or if modifications were to be made to certain existing treaties, the consequences could have a materially adverse impact on us, including increasing our tax burden, increasing costs of our tax compliance or otherwise adversely affecting our financial condition, results of operations and cash flows.

Our intercompany arrangements may be challenged, which could result in higher taxes or penalties and an adverse effect on our earnings.

We operate pursuant to written transfer pricing agreements among Cimpress N.V. and its subsidiaries, which establish transfer prices for various services performed by our subsidiaries for other Cimpress group companies. If two or more affiliated companies are located in different countries, the tax laws or regulations of each country generally will require that transfer prices be consistent with those between unrelated companies dealing at arm's length. With the exception of certain jurisdictions where we have obtained rulings or advance pricing agreements, our transfer pricing arrangements are not binding on applicable tax authorities, and no official authority in any other country has made a determination as to whether or not we are operating in compliance with its transfer pricing laws. If tax authorities in any country were successful in challenging our transfer prices as not reflecting arm's length transactions, they could require us to adjust our transfer prices and thereby reallocate our income to reflect these revised transfer prices. A reallocation of taxable income from a lower tax jurisdiction to a higher tax jurisdiction would result in a higher tax liability to us. In addition, if the country from which the income is reallocated does not agree with the reallocation, both countries could tax the same income, resulting in double taxation.

Our Articles of Association, Dutch law and the independent foundation, Stichting Continuïteit Cimpress, may make it difficult to replace or remove management, may inhibit or delay a change of control or may dilute shareholder voting power.

Our Articles of Association, or Articles, as governed by Dutch law, limit our shareholders' ability to suspend or dismiss the members of our management board and supervisory board or to overrule our supervisory board's nominees to our management board and supervisory board by requiring a supermajority vote to do so under most circumstances. As a result, there may be circumstances in which shareholders may not be able to remove members of our management board or supervisory board even if holders of a majority of our ordinary shares favor doing so.

In addition, an independent foundation, Stichting Continuïteit Cimpress, or the Foundation, exists to safeguard the interests of Cimpress N.V. and its stakeholders, which include but are not limited to our shareholders, and to assist in maintaining Cimpress' continuity and independence. To this end, we have granted the Foundation a call option pursuant to which the Foundation may acquire a number of preferred shares equal to the same number of ordinary shares then outstanding, which is designed to provide a protective measure against unsolicited take-

25


over bids for Cimpress and other hostile threats. If the Foundation were to exercise the call option, it may prevent a change of control or delay or prevent a takeover attempt, including a takeover attempt that might result in a premium over the market price for our ordinary shares. Exercise of the preferred share option would also effectively dilute the voting power of our outstanding ordinary shares by one half.

We have limited flexibility with respect to certain aspects of capital management and certain corporate transactions.

Subject to specified exceptions, Dutch law requires shareholder approval for many corporate actions, such as the approval of dividends, authorization to issue new shares or purchase outstanding shares, and corporate acquisitions of a certain size. Situations may arise where the flexibility to issue shares, pay dividends, purchase shares, acquire other companies, or take other corporate actions without a shareholder vote would be beneficial to us, but is not available under Dutch law.

Because of our corporate structure, our shareholders may find it difficult to pursue legal remedies against the members of our supervisory board or management board.

Our Articles and our internal corporate affairs are governed by Dutch law, and the rights of our shareholders and the responsibilities of our supervisory board and management board are different from those established under United States laws. For example, under Dutch law derivative lawsuits are generally not available, and our supervisory board and management board are responsible for acting in the best interests of the company, its business and all of its stakeholders generally (including employees, customers and creditors), not just shareholders. As a result, our shareholders may find it more difficult to protect their interests against actions by members of our supervisory board or management board than they would if we were a U.S. corporation.

Because of our corporate structure, our shareholders may find it difficult to enforce claims based on United States federal or state laws, including securities liabilities, against us or our management team.

We are incorporated under the laws of the Netherlands, and the vast majority of our assets are located outside of the United States. In addition, some of our officers and management board members reside outside of the United States. In most cases, a final judgment for the payment of money rendered by a U.S. federal or state court would not be directly enforceable in the Netherlands. Although there is a process under Dutch law for petitioning a Dutch court to enforce a judgment rendered in the United States, there can be no assurance that a Dutch court would impose civil liability on us or our management team in any lawsuit predicated solely upon U.S. securities or other laws. In addition, because most of our assets are located outside of the United States, it could be difficult for investors to place a lien on our assets in connection with a claim of liability under U.S. laws. As a result, it may be difficult for investors to enforce U.S. court judgments or rights predicated upon U.S. laws against us or our management team outside of the United States.

We may not be able to make distributions or purchase shares without subjecting our shareholders to Dutch withholding tax.

A Dutch withholding tax may be levied on dividends and similar distributions made by Cimpress N.V. to its shareholders at the statutory rate of 15% if we cannot structure such distributions as being made to shareholders in relation to a reduction of par value, which would be non-taxable for Dutch withholding tax purposes. We have purchased our shares and may seek to purchase additional shares in the future. Under our Dutch Advanced Tax Ruling, a purchase of shares should not result in any Dutch withholding tax if we hold the purchased shares in treasury for the purpose of issuing shares pursuant to employee share awards or for the funding of acquisitions. However, if the shares cannot be used for these purposes, or the Dutch tax authorities successfully challenge the use of the shares for these purposes, such a purchase of shares may be treated as a partial liquidation subject to the 15% Dutch withholding tax to be levied on the difference between our average paid in capital per share for Dutch tax purposes and the redemption price per share, if higher.

We may be treated as a passive foreign investment company for United States tax purposes, which may subject United States shareholders to adverse tax consequences.

If our passive income, or our assets that produce passive income, exceed levels provided by law for any taxable year, we may be characterized as a passive foreign investment company, or a PFIC, for United States federal income tax purposes. If we are treated as a PFIC, U.S. holders of our ordinary shares would be subject to a

26


disadvantageous United States federal income tax regime with respect to the distributions they receive and the gain, if any, they derive from the sale or other disposition of their ordinary shares.

We believe that we were not a PFIC for the tax year ended June 30, 2017 and we expect that we will not become a PFIC in the foreseeable future. However, whether we are treated as a PFIC depends on questions of fact as to our assets and revenues that can only be determined at the end of each tax year. Accordingly, we cannot be certain that we will not be treated as a PFIC in future years.

If a United States shareholder acquires 10% or more of our ordinary shares, it may be subject to increased United States taxation under the “controlled foreign corporation” rules. Additionally, this may negatively impact the demand for our ordinary shares.

If a United States shareholder owns 10% or more of our ordinary shares, it may be subject to increased United States federal income taxation (and possibly state income taxation) under the “controlled foreign corporation” rules. In general, if a U.S. person owns (or is deemed to own) at least 10% of the voting power of a non-U.S. corporation, or “10% U.S. Shareholder,” and if such non-U.S. corporation is a “controlled foreign corporation,” or “CFC,” for an uninterrupted period of 30 days or more during a taxable year, then such 10% U.S. Shareholder who owns (or is deemed to own) shares in the CFC on the last day of the CFC's taxable year must include in its gross income for United States federal income tax (and possibly state income tax) purposes its pro rata share of the CFC's “subpart F income,” even if the "subpart F income" is not distributed. In general, a non-U.S. corporation is considered a CFC if one or more 10% U.S. Shareholders together own more than 50% of the voting power or value of the corporation on any day during the taxable year of the corporation. “Subpart F income” consists of, among other things, certain types of dividends, interest, rents, royalties, gains, and certain types of income from services and personal property sales.
The rules for determining ownership for purposes of determining 10% U.S. Shareholder and CFC status are complicated, depend on the particular facts relating to each investor, and are not necessarily the same as the rules for determining beneficial ownership for SEC reporting purposes. For taxable years in which we are a CFC for an uninterrupted period of 30 days or more, each of our 10% U.S. Shareholders will be required to include in its gross income for United States federal income tax purposes its pro rata share of our "subpart F income," even if the subpart F income is not distributed by us. We currently do not believe we are a CFC. However, whether we are treated as a CFC can be affected by, among other things, facts as to our share ownership that may change. Accordingly, we cannot be certain that we will not be treated as a CFC in future years.
The risk of being subject to increased taxation as a CFC may deter our current shareholders from acquiring additional ordinary shares or new shareholders from establishing a position in our ordinary shares. Either of these scenarios could impact the demand for, and value of, our ordinary shares.
We will pay taxes even if we are not profitable on a consolidated basis, which could harm our results of operations.

The intercompany service and related agreements among Cimpress N.V. and its direct and indirect subsidiaries ensure that many of the subsidiaries realize profits based on their operating expenses. As a result, if the Cimpress group is less profitable, or even not profitable on a consolidated basis, many of our subsidiaries will be profitable and incur income taxes in their respective jurisdictions.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We own real property including the following manufacturing operations that provide support across our businesses:
A 582,000 square foot facility located near Windsor, Ontario, Canada primarily services our Vistaprint business.
A 492,000 square foot facility located in Shelbyville, Tennessee, USA, primarily services our National Pen business.
A 362,000 square foot facility located in Venlo, the Netherlands primarily services our Vistaprint business.
A 130,000 square foot facility located in Kisarazu, Japan primarily services our Japanese market.

27


A 124,000 square foot facility located in Deer Park, Australia primarily services our Vistaprint business.
A 97,000 square feet, located near Montpellier, France primarily services our Upload and Print businesses.

As of June 30, 2017, a summary of our currently occupied leased spaces is as follows:
Business Segment (1)
 
Square Feet
 
Type
 
Lease Expirations
Vistaprint
 
640,799

 
Technology development, marketing, customer service and administrative
 
December 2018 - November 2026
Upload & Print
 
584,837

 
Technology development, marketing, customer service, manufacturing and administrative
 
July 2017 - December 2025
National Pen
 
314,533

 
Marketing, customer service, manufacturing and administrative
 
December 2022 - April 2027
All Other Businesses
 
258,453

 
Technology development, marketing, customer service, manufacturing and administrative
 
July 2017 - August 2023
Other (2)
 
86,902

 
Corporate strategy, technology development and prototyping laboratory
 
May 2018 - June 2023
___________________
(1) Many of our leased properties are utilized by multiple business segments, but each have been assigned to the segment that occupies the majority of our leased space.
(2) Includes locations that are exclusively corporate or global functions.

We believe that the total space available to us in the facilities we own or lease, and space that is obtainable by us on commercially reasonable terms, will meet our needs for the foreseeable future.
Item 3. Legal Proceedings
The information required by this item is incorporated by reference to the information set forth in Item 8 of Part II, “Financial Statements and Supplementary Data — Note 17 — Commitments and Contingencies,” in the accompanying notes to the consolidated financial statements included in this Report.
Item 4. Mine Safety Disclosures
None.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The ordinary shares of Cimpress N.V. are traded on the NASDAQ Global Select Market (the "NASDAQ") under the symbol “CMPR.” As of July 31, 2017, there were approximately 11 holders of record of our ordinary shares, although there is a much larger number of beneficial owners. The following table sets forth, for the periods indicated, the high and low sale price per share of our ordinary shares on the NASDAQ:
 
High
 
Low
Fiscal 2016:
 

 
 

First Quarter
$
86.95

 
$
63.15

Second Quarter
$
94.57

 
$
74.57

Third Quarter
$
91.84

 
$
67.89

Fourth Quarter
$
101.77

 
$
86.93

 
 
 
 
Fiscal 2017:
 

 
 

First Quarter
$
104.18

 
$
88.31

Second Quarter
$
102.95

 
$
80.47

Third Quarter
$
99.99

 
$
79.15

Fourth Quarter
$
94.47

 
$
78.80


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Dividends
We have never paid or declared any cash dividends on our ordinary shares, and we do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain all future earnings to finance the growth and operations of our business, purchase our ordinary shares, or pay down our debt. Under Dutch law, we may pay dividends only out of profits shown on our annual accounts prepared in accordance with Dutch generally accepted accounting principles and adopted by our shareholders, and only to the extent our equity exceeds the sum of the paid and called up portion of our ordinary share capital and the reserves that must be maintained in accordance with provisions of Dutch law and our articles of association. In addition, the terms of our outstanding indebtedness restrict our ability to pay dividends, as further described in Item 8 of Part II, "Financial Statements and Supplementary Data - Note 10 - Debt," and in Management's Discussion and Analysis of Financial Condition and Results of Operations section of this report.
Issuer Purchases of Equity Securities
On March 22, 2017, in order to provide us with flexibility to repurchase our ordinary shares at times when our management believes it may be beneficial for our business, our Supervisory Board authorized the repurchase of up to 6,300,000 of our issued and outstanding ordinary shares on the open market (including block trades that satisfy the safe harbor provisions of Rule 10b-18 pursuant to the U.S. Securities Exchange Act of 1934), through privately negotiated transactions, or in one or more self-tender offers. This share repurchase authorization expires on May 15, 2018, and we may or may not choose to make repurchases under this authorization.

We did not repurchase any shares during the three months ended June 30, 2017, and 6,300,000 shares remain available for repurchase under this program, subject to certain limitations imposed by our debt covenants.


29


Performance Graph

The following graph compares the cumulative total return to shareholders of Cimpress N.V. ordinary shares relative to the cumulative total returns of the NASDAQ Composite index and the Research Data Group (RDG) Internet Composite index. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our ordinary shares and in each of the indexes on June 30, 2012 and the relative performance of each investment is tracked through June 30, 2017.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Among Cimpress N.V., the NASDAQ Composite Index
and the RDG Internet Composite Index


cmpr063020_chart-57306.jpg
 
 
Year Ended June 30,
 
 
2012
 
2013
 
2014
 
2015
 
2016
 
2017
Cimpress N.V. 
 
$
100.00

 
$
152.85

 
$
125.26

 
$
260.56

 
$
286.32

 
$
292.66

NASDAQ Composite
 
100.00

 
117.69

 
155.50

 
177.19

 
173.36

 
221.11

RDG Internet Composite
 
100.00

 
127.63

 
177.39

 
194.48

 
237.94

 
320.94

The share price performance included in this graph is not necessarily indicative of future share price performance.

30


Item 6. Selected Financial Data
The following financial data should be read in conjunction with our consolidated financial statements, the related notes and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Report. The historical results are not necessarily indicative of the results to be expected for any future period.
 
Year Ended June 30,
 
2017 (a)
 
2016 (b)
 
2015 (c)
 
2014 (d)
 
2013 (e)
 
(In thousands, except share and per share data)
Consolidated Statements of Operations Data:
 
 
 
 
 

 
 

 
 

Revenue
$
2,135,405

 
$
1,788,044

 
$
1,494,206

 
$
1,270,236

 
$
1,167,478

Net (loss) income attributable to Cimpress N.V.
(71,711
)
 
54,349

 
92,212

 
43,696

 
29,435

Net (loss) income per share attributable to Cimpress N.V.:
 
 
 
 
 
 
 
 
 

Basic
$
(2.29
)
 
$
1.72

 
$
2.82

 
$
1.33

 
$
0.89

Diluted
$
(2.29
)
 
$
1.64

 
$
2.73

 
$
1.28

 
$
0.85

Shares used in computing net (loss) income per share attributable to Cimpress N.V.:
 
 
 
 
 
 
 
 
 

Basic
31,291,581

 
31,656,234

 
32,644,870

 
32,873,234

 
33,209,172

Diluted
31,291,581

 
33,049,454

 
33,816,498

 
34,239,909

 
34,472,004


 
Year Ended June 30,
 
2017 (a)
 
2016 (b)
 
2015 (c)
 
2014 (d)
 
2013 (e)
 
(In thousands)
Consolidated Statements of Cash Flows Data:
 
 
 
 
 

 
 

 
 

Net cash provided by operating activities
$
156,736

 
$
247,358

 
$
242,022

 
$
153,739

 
$
141,808

Purchases of property, plant and equipment
(74,157
)
 
(80,435
)
 
(75,813
)
 
(72,122
)
 
(78,999
)
Purchases of ordinary shares
(50,008
)
 
(153,467
)
 

 
(42,016
)
 
(64,351
)
Business acquisitions, net of cash acquired
(204,875
)
 
(164,412
)
 
(123,804
)
 
(216,384
)
 

Net proceeds of debt
196,933

 
167,316

 
54,207

 
207,946

 
8,051


 
Year Ended June 30,
 
2017 (a)
 
2016 (b)
 
2015 (c)
 
2014 (d)
 
2013 (e)
 
(In thousands)
Consolidated Balance Sheet Data:
 
 
 
 
 

 
 

 
 

Cash, cash equivalents and marketable securities (f)
$
25,697

 
$
85,319

 
$
110,494

 
$
76,365

 
$
50,065

Working capital (f)
(203,482
)
 
(135,095
)
 
(89,580
)
 
(83,560
)
 
(54,795
)
Total assets
1,679,869

 
1,463,869

 
1,299,794

 
985,495

 
598,632

Total long-term debt, excluding current portion (g)
847,730

 
656,794

 
493,039

 
408,150

 
227,700

Total shareholders’ equity
75,212

 
166,076

 
249,419

 
232,457

 
189,561

___________________
(a) Includes the impact of the acquisition of National Pen on December 30, 2016. See Note 7 in our accompanying financial statements in this Report for a discussion of this acquisition.
(b) Includes the impact of the acquisitions of Litotipografia Alcione S.r.l. on July 29, 2015, Tradeprint Distribution Limited on July 31, 2015, and WIRmachenDRUCK GmbH on February 1, 2016. See Note 7 in our accompanying financial statements in this Report for a discussion of these acquisitions.
During fiscal 2016, we adopted Accounting Standards Update (ASU) 2016-09 requiring the recognition of excess tax benefits as a component of income tax expense, these benefits were historically recognized in equity. As the standard required a prospective method of adoption, our fiscal 2017 and 2016 net income includes $8.0 million and $3.5 million income tax benefits, respectively, due to the adoption that did not occur in the prior comparable periods presented above.
(c) Includes the impact of the acquisitions of FotoKnudsen AS on July 1, 2014, FL Print SAS on April 9, 2015, Exagroup SAS on April 15, 2015 and druck.at Druck-und Handelsgesellschäft mbH on April 17, 2015, as well as our investment in Printi LLC on August 7, 2014. See Notes 7, 14 and 15 in our accompanying financial statements in this Report for a discussion of these transactions.
(d) Includes the impact of the acquisitions of Printdeal B.V. on April 1, 2014 and Pixartprinting S.p.A. on April 3, 2014, as well as our investment in a joint business arrangement with Plaza Create Co. Ltd. in February 2014.
(e) Includes the impact of our July 10, 2012 equity investment in Namex Limited. During the fourth quarter of fiscal 2014 we disposed of this investment and recognized a loss on the sale of $12.7 million.

31


(f) We define working capital as current assets less current liabilities. Our working capital profile has evolved since fiscal 2013 as we have made long-term investments that seek to drive shareholder value through acquisitions, ordinary share purchases, and other strategic initiatives. We have financed these investments through a mix of cash on hand, cash flows generated from operations and external debt financing.
(g) 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, the indebtedness outstanding under our senior secured credit facility and for general corporate purposes. See Note 10 in our accompanying financial statements in this Report for additional discussion. The year-over-year increases in long-term debt have largely been driven by the funding of our recent acquisitions, as outlined in Note 7.

Item 7. 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
We are a technology driven company that aggregates, largely via the internet, large volumes of small, individually customized orders for a broad spectrum of print, signage, apparel and similar products. We operate in a largely decentralized manner. Our businesses, discussed in more detail below, fulfill orders with manufacturing capabilities that include Cimpress owned and operated manufacturing facilities and a network of third-party fulfillers to create customized products on-demand. Those businesses bring their products to market through a portfolio of customer-focused brands serving the needs of micro, small and medium sized businesses, resellers and consumers. These brands include Vistaprint, our global brand for micro business marketing products and services, as well as brands that we have acquired that serve the needs of various market segments, including resellers, micro, small and medium sized businesses with differentiated service needs, and consumers purchasing products for themselves and their families.
As of June 30, 2017, we have numerous operating segments under our management reporting structure which are reported in the following four reportable segments: Vistaprint, Upload and Print, National Pen, and All Other Businesses. Vistaprint represents our Vistaprint websites focused on the North America, Europe, Australia and New Zealand markets, and our Webs business, which is managed with the Vistaprint- digital business. Upload and Print includes the druck.at, Easyflyer, Exagroup, Pixartprinting, Printdeal, Tradeprint, and WIRmachenDRUCK businesses. National Pen includes the global operations of our National Pen business, which manufactures and markets custom writing instruments and promotional products, apparel and gifts for small- and medium-sized businesses. All Other Businesses segment includes the operations of our Albumprinter, Most of World and Corporate Solutions businesses.
Financial Summary
In evaluating the financial condition and operating performance of our business, management focuses on revenue growth, constant-currency revenue growth, operating income and adjusted net operating profit after tax (NOPAT). A summary of these key financial metrics for the year ended June 30, 2017 as compared to the year ended June 30, 2016 follows:
Fiscal Year 2017
Reported revenue increased by 19% to $2,135.4 million.

32


Consolidated constant-currency revenue increased by 21% and excluding acquisitions completed in the last four quarters increased by 8%.
Operating income decreased $123.9 million to an operating loss of $45.7 million.
Adjusted NOPAT decreased $75.2 million to $64.6 million.
For our fiscal year 2017, the increase in reported revenue growth was primarily due to the addition of the revenue of our WIRmachenDRUCK business, which we acquired in fiscal 2016 and therefore only partially contributed to the prior comparative period, and our recently acquired National Pen business, as well as continued growth in the Vistaprint business and Upload and Print businesses acquired more than twelve months prior.
The following items negatively impacted our operating income for the year ended June 30, 2017, leading to the decrease in operating income as compared to the prior period:
Increased organic investments in fiscal year 2017 compared to fiscal year 2016, which materially weighed on profitability. These investments include costs that impact our gross profit such as shipping price reductions, expanded design services, and new product introduction.
Significant acquisition-related expense associated with our WIRmachenDRUCK contingent earn-out arrangement, due to its continued strong performance, as well as $7.1 million of amortization expense for acquired intangible assets of our newly acquired National Pen business.
Restructuring-related charges related to our reorganization, which was announced in January 2017, resulting in one-time employee termination costs as well as third party professional fees.
Declines from the termination of two partner contracts within our Albumprinter and Corporate Solutions businesses.
Increased third-party fulfillment and shipping costs during the second quarter of fiscal 2017 due to production inefficiencies in our Vistaprint business.
Increased share-based compensation, excluding restructuring related charges, during the current fiscal year primarily driven by our new long-term incentive program and the accelerated vesting of equity awards from two acquisition-related arrangements.
The decrease in adjusted NOPAT (a non-GAAP financial measure) was also negatively impacted by the items described above, with the exception of the restructuring-related charges, the expense associated with our WIRmachenDRUCK contingent earn-out arrangement and the National Pen intangible asset amortization, as these expenses are excluded from adjusted NOPAT.
Primarily as a result of the organizational changes announced on January 25, 2017, we incurred aggregate pre-tax restructuring charges of $26.7 million during the year ended June 30, 2017. The restructuring is substantially complete and we do not expect material charges in future quarters related to these changes. In fiscal 2018 as compared to the current period, we expect to realize net operating expense savings of approximately $50 million and pre-tax cash flow from operations savings of approximately $35 million, as a result of these reductions in headcount and related non-compensation savings.
Consolidated Results of Operations
Consolidated Revenue
We generate revenue primarily from the sale and shipping of customized manufactured products, and by providing digital services, website design and hosting, and email marketing services, as well as a small percentage from order referral fees and other third-party offerings.
For the years ended June 30, 2017 and 2016, our reported revenue increased, primarily due to the addition of revenue from our WIRmachenDRUCK business acquired on February 1, 2016 and our National Pen business acquired on December 30, 2016. Currency fluctuations negatively impacted our fiscal 2017 and 2016 reported revenue growth. The increases in constant-currency revenue excluding acquisitions for which there is no comparable year-over-year revenue were driven by continued growth in the Vistaprint business, as well as growth in our Upload and Print businesses acquired more than twelve months prior, which were partially offset by declines from the termination of two partner contracts within our Albumprinter and Corporate Solutions businesses.

33


Total revenue by reportable segment for the years ended June 30, 2017, 2016 and 2015 is shown in the following tables:
In thousands
Year Ended June 30,
 
 
 
Currency
Impact:
 
Constant-
Currency
 
Impact of Acquisitions:
 
Constant- Currency revenue growth
 
2017 (1)
 
2016 (2)
 
%
Change
 
(Favorable)/Unfavorable
 
Revenue Growth (4)
 
(Favorable)/Unfavorable
 
Excluding acquisitions (5)
Vistaprint
$
1,305,285

 
$
1,217,162

 
7%
 
2%
 
9%
 
—%
 
9%
Upload and Print
588,613

 
432,638

 
36%
 
3%
 
39%
 
(26)%
 
13%
National Pen
112,712

 

 
100%
 
—%
 
100%
 
(100)%
 
—%
All Other Businesses
128,795

 
138,244

 
(7)%
 
—%
 
(7)%
 
—%
 
(7)%
Total revenue
$
2,135,405

 
$
1,788,044

 
19%
 
2%
 
21%
 
(13)%
 
8%
In thousands
Year Ended June 30,
 
 
 
Currency
Impact:
 
Constant-
Currency
 
Impact of Acquisitions:
 
Constant- Currency revenue growth
 
2016 (2)
 
2015 (3)
 
%
Change
 
(Favorable)/Unfavorable
 
Revenue Growth (4)
 
(Favorable)/Unfavorable
 
Excluding acquisitions (5)
Vistaprint
$
1,217,162

 
$
1,149,706

 
6%
 
4%
 
10%
 
—%
 
10%
Upload and Print
432,638

 
197,075

 
120%
 
7%
 
127%
 
(100)%
 
27%
National Pen

 

 
—%
 
—%
 
—%
 
—%
 
—%
All Other Businesses
138,244

 
147,425

 
(6)%
 
8%
 
2%
 
—%
 
2%
Total revenue
$
1,788,044

 
$
1,494,206

 
20%
 
4%
 
24%
 
(13)%
 
11%
_________________
(1) Fiscal 2017 includes the impact of National Pen from its acquisition date of December 30, 2016 in our National Pen segment.
(2) Fiscal 2016 includes the impact of Alcione, Tradeprint and WIRmachenDRUCK from their respective acquisition dates in our Upload and Print segment
(3) Fiscal 2015 includes from their respective acquisition dates, the impact of FotoKnudsen and Printi which are part of our All Other Businesses segment, as well as Easyflyer, Exagroup and druck.at which are part of our Upload and Print segment
(4) 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.
(5) Constant-currency revenue growth excluding acquisitions, a non-GAAP financial measure, excludes revenue results for businesses in the period in which there is no comparable year-over-year revenue. Revenue from our fiscal 2016 acquisitions is excluded from fiscal 2017 revenue growth for quarters with no comparable year-over-year revenue. For example, revenue from Tradeprint, which we acquired in Q1 2016, is excluded from Q1 2017 revenue growth since there are no full quarter results in the comparable period, but revenue from Tradeprint is included in Q2, Q3, and Q4 2017 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 financial measures, to evaluate our operating results. These non-GAAP financial measures should be considered supplemental to and not a substitute for our reported financial results prepared in accordance with GAAP.
Consolidated Cost of Revenue
Cost of revenue includes materials used to manufacture our products, payroll and related expenses for production and design services personnel, depreciation of assets used in the production process and in support of digital marketing service offerings, shipping, handling and processing costs, third-party production costs, costs of free products and other related costs of products sold by us. Cost of revenue as a percent of revenue increased during the year ended June 30, 2017, primarily due to costs associated with new product and service launches, introduction of lower margin products, increased third-party fulfillment and shipping costs, and the increased weight of our Upload and Print portfolio, which as a percentage of revenue has higher cost of revenue than our traditional business.
 
Year Ended June 30,
 
2017
 
2016
 
2015
Cost of revenue
$
1,036,975

 
$
773,640

 
$
568,572

% of revenue
48.6
%
 
43.3
%
 
38.1
%

34


For the year ended June 30, 2017, our cost of revenue increased due to $123.6 million of additional costs from our Upload and Print businesses, primarily due to the impact of our fiscal 2016 WIRmachenDRUCK acquisition which only partially contributed to the prior comparable period. In addition, the costs from our Vistaprint business increased by $91.1 million, primarily due to increased production volume; product mix; and planned investments including expanded design services, new product introduction, including via third-party fulfillers, and shipping price reductions that also result in higher shipping costs. The Vistaprint business also recognized higher costs from production inefficiencies in our second fiscal quarter resulting from higher temporary labor costs at our Canadian production facility, as well as inefficiencies that caused us to quickly turn to more expensive third-party fulfillers and use more expedited shipping during the peak holiday season. We recognized an additional $48.6 million of manufacturing costs from our National Pen business, which was acquired on December 30, 2016 and is therefore not included in the comparable period.
Cost of revenue for the year ended June 30, 2016 increased due to $157.5 million of higher costs in our Upload and Print businesses, largely due to incremental manufacturing costs of $143.8 million from our fiscal 2016 acquisitions of WIRmachenDRUCK and Tradeprint and increased manufacturing volume from our Pixartprinting and Printdeal businesses. In addition, the Vistaprint cost of revenue increased by $44.5 million, due to increased costs associated with production volume and product mix of $38.6 million and an $11.0 million loss for the abandonment of various proprietary production technologies, partially offset by aggregate benefits of currency, productivity and efficiency gains of $5.1 million.
Consolidated Operating Expenses
The following table summarizes our comparative operating expenses for the periods:

In thousands
 
Year Ended June 30,
 
2017
 
2016
 
2015
Technology and development expense
$
243,230

 
$
210,080

 
$
186,770

% of revenue
11.4
%
 
11.7
%
 
12.5
%
Marketing and selling expense
$
610,932

 
$
508,502

 
$
472,079

% of revenue
28.6
%
 
28.4
%
 
31.5
%
General and administrative expense
$
207,569

 
$
145,844

 
$
142,996

% of revenue
9.7
%
 
8.2
%
 
9.6
%
Amortization of acquired intangible assets
$
46,145

 
$
40,563

 
$
24,263

% of revenue
2.2
%
 
2.3
%
 
1.6
%
Restructuring expense
$
26,700

 
$
381

 
$
3,202

% of revenue
1.3
%
 
0.0
%
 
0.2
%
Impairment of goodwill and acquired intangible assets
$
9,556

 
$
30,841

 
$

% of revenue
0.4
%
 
1.7
%
 
%
Technology and development expense
Technology and development expense consists primarily of payroll and related expenses for our employees engaged in software and manufacturing engineering, information technology operations and content development, as well as amortization of capitalized software and website development costs, including hosting of our websites, asset depreciation, patent amortization, legal settlements in connection with patent-related claims, and other technology infrastructure-related costs. Depreciation expense for information technology equipment that directly supports the delivery of our digital marketing services products is included in cost of revenue.
The growth in our technology and development expenses of $33.2 million for the year ended June 30, 2017 as compared to the prior comparative period was primarily due to increased headcount-related expenses in our technology development and information technology support organizations of $15.8 million. The increase in headcount supports the continued development of our software-based mass customization platform as well as investments to enhance existing capabilities and address each of our businesses' specific needs. This increase is partially offset by headcount reductions as a result of the third quarter fiscal 2017 restructuring initiative. All employee severance related charges are reflected separately in restructuring expense. Additionally, our recent

35


acquisition of National Pen has resulted in increased technology and development expenses of $5.9 million for the year ended June 30, 2017, without costs in the prior comparable period. Other increases in technology and development expense include technology infrastructure-related costs, primarily due to increased IT cloud service costs, as well as software maintenance and licensing costs.
The growth in our technology and development expenses of $23.3 million for the year ended June 30, 2016 as compared to the prior comparative period was due to increased payroll, share-based compensation and facility-related costs of $14.7 million, as a result of increased headcount in our technology development and information technology support organizations. The increase in headcount is partly due to increases in software and manufacturing engineering resources related to the development of a software-based mass customization platform as well as expand product offerings, and partly due to headcount from acquired businesses. Technology infrastructure-related costs increased by $8.8 million, primarily due to increased software maintenance and licensing costs, as well as increased IT cloud service costs. Other technology and development expenses increased by $0.8 million primarily due to increased depreciation expense related to increased investments in computer software and equipment. Also during the year ended June 30, 2016, we had higher net capitalization of software costs of $1.0 million, due to an increase in costs that qualified for capitalization during the fiscal year.
Marketing and selling expense
Marketing and selling expense consists primarily of advertising and promotional costs; payroll and related expenses for our employees engaged in marketing, sales, customer support and public relations activities; direct-mail advertising costs; and third-party payment processing fees. Our Vistaprint and National Pen businesses have higher marketing and selling costs structures, as compared to our Upload and Print businesses.
Our marketing and selling expenses increased by $102.4 million during the year ended June 30, 2017 as compared to the prior comparative period, primarily due to the addition of National Pen which incurred $47.9 million of marketing and selling expense during the year ended June 30, 2017 primarily for direct-mail advertising and telesales costs that were not in our prior comparable period. In addition, advertising expense increased by $31.8 million, which is primarily a result of additional advertising spend in the Vistaprint business. Other increases include payroll and employee-related costs, inclusive of share-based compensation, as we expanded our marketing and customer service, sales support organization through our recent acquisitions and continued investment in the Vistaprint business customer service resources in order to provide higher value services to our customers.
Our marketing and selling expenses increased by $36.4 million during the year ended June 30, 2016 as compared to the prior period primarily due to increased advertising expense of $19.6 million as a result of product-focused television ad investments in both the U.S. and Canada during the first quarter of fiscal 2016 as well as strategic investments in certain European markets which included increased paid search and television ad spend during the fourth quarter of fiscal 2016 for the Vistaprint business. In addition, increased activity from the businesses we acquired during the fiscal years 2016 and 2015 also contributed to the increase in advertising expense. Our payroll and facility-related costs, inclusive of share-based compensation, increased $8.6 million, as we expanded our marketing and customer service, sales and design support organization through our recent acquisitions and continued investment in the Vistaprint businesses customer service resources in order to provide higher value services to our customers. Payment processing and third-party services were $5.7 million higher than the prior period, primarily due to increased order volumes. Other marketing and selling costs increased by $2.5 million, primarily due to increased travel and training costs.
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, strategy, human resources, and central procurement.
During the year ended June 30, 2017, general and administrative expenses increased by $61.7 million, as compared to the prior comparative period, driven by $37.3 million of incremental expense for the WIRmachenDRUCK earn-out primarily due to continued strong performance during fiscal 2017 and our expectation that a maximum payout will be achieved. Payroll, share-based compensation and facility-related costs increased by $12.0 million, due to additional expense recognized for the acceleration of vesting terms of certain restricted share awards associated with our investment in Printi and acquisition of Tradeprint, as well as an increase in share-based compensation resulting from our new long-term incentive program. These increases are partially offset by the

36


decrease in compensation expense due to headcount reductions as a result of the third quarter fiscal 2017 restructuring initiative. We also recognized an additional $12.4 million of expense from our acquisition of National Pen.
During the year ended June 30, 2016 our general and administrative expenses increased by $2.8 million, as compared to the prior period. The increase in fiscal 2016 was partially driven by increased payroll and facility-related costs of $4.5 million, as compared to the prior comparative period. We incurred additional expense of $6.0 million during the year ended June 30, 2016, related to contingent compensation arrangements from our WIRmachenDRUCK and Easyflyer acquisitions. In addition, our employee travel, training, and recruitment costs and third-party professional fees increased by $3.8 million, as compared to the prior comparative period. Other general and administrative costs increased by $3.4 million, which primarily related to third-party consulting fees. The increase was partially offset by the recognition of $14.9 million of expense during the year ended June 30, 2015, to remeasure the contingent consideration liabilities related to the Printdeal and Pixartprinting acquisitions which did not recur in fiscal 2016.
Amortization of acquired intangible assets
Amortization of acquired intangible assets consists of amortization expense associated with separately identifiable intangible assets capitalized as part of our acquisitions, including customer relationships, trade names, developed technologies, print networks, and customer and referral networks. Amortization of acquired intangible assets increased by $5.6 million during the year ended June 30, 2017, as compared to the year ended June 30, 2016, primarily due to amortization for our fiscal 2017 acquisition of National Pen and fiscal 2016 acquisition of WIRmachenDRUCK.
Amortization of acquired intangible assets increased $16.3 million during the year ended June 30, 2016 as compared to the year ended June 30, 2015, primarily due to our fiscal 2016 acquisitions of WIRmachenDruck and Tradeprint, as well as a full year of amortization related to our fiscal 2015 acquisitions.
Restructuring expense
Restructuring expense consists of costs directly incurred as a result of a restructuring initiative, inclusive of employee-related termination costs, third party professional fees, facility exit costs and write-off of abandoned assets.
The restructuring expense of $26.7 million that was recognized during the year ended June 30, 2017 consists of costs directly incurred as a result of our January 2017 restructuring initiative, inclusive of employee-related termination costs, third-party professional fees and our write-off of abandoned assets. Refer to Note 18 for additional details regarding the restructuring plan.
Impairment of goodwill and acquired intangible assets
For the years ended June 30, 2017 and 2016, we recognized impairment charges of $9.6 million and $30.8 million for our Tradeprint and Exagroup reporting units, respectively. These impairments were a result of their under performance during the impairment period, combined with lower profit outlooks when compared to the initial deal model upon which we based our purchase accounting. There were no impairment charges related to goodwill or acquired intangible assets during the year ended June 30, 2015. Refer to Note 8 for additional information relating to the impairments.
Other Consolidated Results
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 some of our derivative instruments. In evaluating our currency hedging program and ability to achieve hedge accounting in light of our legal entity cash flows, we considered the benefits of hedge accounting relative to the additional economic cost of trade execution and administrative burden. Based on this analysis, we decided to execute certain currency derivative contracts that do not qualify for hedge accounting. The following table summarizes the components of other income:

37


 
Year Ended June 30,
 
2017

2016

2015
Gains on derivatives not designated as hedging instruments
$
936


$
14,026


$
9,317

Currency-related gains, net
5,577


6,864


10,245

Other gains
3,849


5,208


572

Total other income, net
$
10,362


$
26,098


$
20,134

The decrease in net gains during the year ended June 30, 2017, when compared to the prior comparative periods, is primarily due to the currency exchange rate volatility impacting our derivatives that are not designated as hedging instruments. We expect this volatility to continue in future periods as we do not currently apply hedge accounting for most of our derivative currency contracts. We also experienced lower currency-related gains due to currency exchange rate volatility on our non-functional currency intercompany relationships. These lower net gains are partially offset by the impact of certain cross-currency swap contracts designated as cash flow hedges.
In addition, during the year ended June 30, 2017, we recognized other gains of $3.8 million, which consist primarily of gains related to the sale of marketable securities. During fiscal year 2016, we recognized other gains of $5.2 million, primarily related to insurance recoveries.
Interest expense, net
Interest expense, net was $44.0 million, $38.2 million, and $16.7 million for the years ended June 30, 2017, 2016 and 2015, respectively. Interest expense, net primarily consists of interest paid on outstanding debt balances, amortization of debt issuance costs, interest related to capital lease obligations and realized gains (losses) on effective interest rate swap contracts and certain cross-currency swap contracts. We expect interest expense to be higher relative to historical trends as a result of increased borrowing levels on our senior secured credit facility which was expanded in July 2017, increased capital lease obligations for machinery and equipment, and if interest rates increase. Refer to Note 10 for additional details.
Income tax (benefit) provision
 
Year Ended June 30,
 
2017
 
2016
 
2015
Income tax (benefit) provision
$
(7,118
)
 
$
15,684

 
$
10,441

Effective tax rate
9.0
%
 
23.7
%
 
10.5
%

The increase in income tax benefit for the year ended June 30, 2017 from income tax expense in prior periods is primarily attributable to pre-tax losses for the year ended June 30, 2017 as compared to pre-tax earnings for the fiscal years ended June 30, 2016 and 2015. This, combined with a more favorable geographical mix of earnings in fiscal year 2017, has resulted in a lower effective tax rate for the year. In addition, we recorded a larger goodwill impairment charge in fiscal year 2016 as compared to fiscal year 2017 (discussed in Note 8) which is non-deductible for tax purposes. This was offset by increased nondeductible acquisition-related charges in fiscal year 2017 as compared to fiscal year 2016. Also, in fiscal year 2017 we recognized increased tax benefits associated with the vesting of share-based compensation awards, research and development credits and other incentives (primarily in the U.S. and Italy) as compared to fiscal year 2016. Our tax rate was higher in fiscal year 2016 as compared to fiscal year 2015 primarily due to the nondeductible goodwill impairment charge in fiscal year 2016.

Our cash paid for income taxes for fiscal 2017 is higher than our income tax expense primarily as a result of non-cash tax benefits relating to tax losses for which the cash benefit is expected to occur in a future period. We expect our cash paid for income taxes for fiscal 2018 to be lower compared to fiscal 2017.

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 13 in our accompanying consolidated financial statements for additional discussion.


38


Reportable Segment Results
Our primary metric used to measure segment financial performance is adjusted net operating profit which excludes certain non-operational items including acquisition-related expenses, certain impairments and restructuring charges.
Vistaprint
 
Year Ended June 30,
 
 
 
 
 
2017
 
2016
 
2015
 
2017 vs. 2016
 
2016 vs. 2015
Reported Revenue
$
1,305,285


$
1,217,162

 
$
1,149,706

 
7
 %
 
6
%
Adjusted Net Operating Profit (1)
165,193


213,027

 
193,048

 
(22
)%
 
10
%
% of revenue
13
%
 
18
%
 
17
%
 
 
 
 
_________________
(1) During the fourth quarter of fiscal 2017, we identified errors related to our unaudited segment profitability disclosures that were recast and reported during the third quarter of fiscal 2017. The impact of these errors have been revised for all periods presented. Refer to Note 16 for additional details.
Segment Revenue
Vistaprint's reported revenue growth for the year ended June 30, 2017 of 7% was negatively affected by currency impacts of 2%, resulting in constant-currency growth of 9%. The Vistaprint constant-currency growth was due to growth in both repeat customers and new customer bookings. While both new and repeat customer bookings contributed to this revenue growth, we continue to see stronger growth resulting from improved customer satisfaction among repeat customers. Performance continues to be stronger in the North American and Australian markets, with improving results in certain European markets. Revenue from our focus product categories including signage, marketing materials and promotional products and apparel is growing faster than the overall segment. In addition, some of our customer value proposition efforts, including our continued roll-out of shipping price reductions, have created revenue headwinds in certain markets, including France, Germany, the Netherlands, United Kingdom and the United States, but we expect these investments will attract higher-value customers and improve customer loyalty in future periods.
The Vistaprint business reported revenue growth of 6% for the year ended June 30, 2016 was negatively affected by currency impacts of 4%, resulting in constant-currency growth of 10%. The constant-currency revenue growth is due to repeat customer bookings growth, with improving growth in new customer bookings. We experienced strong revenue growth in the same focus product categories discussed above, and performance was stronger in North America and Australia.
Segment Profitability
Vistaprint's adjusted net operating profit decreased for the year ended June 30, 2017 as compared to the prior period, primarily due to the roll-out of planned investments including shipping price reductions, expanded design services and new product introduction that have negatively impacted gross profit. While these investments have reduced our current period profitability, we expect that these investments will attract higher-value customers and improve customer loyalty in future periods. These increases in planned investments were partially offset by operating expense efficiencies and incremental profits from revenue growth.
Adjusted net operating profit increased for the year ended June 30, 2016 as compared to the prior period, primarily due to $35.6 million in additional gross profit as a result of revenue growth, partially offset by an increase in planned advertising spend.
Upload and Print
 
Year Ended June 30,
 
 
 
 
 
2017
 
2016
 
2015
 
2017 vs. 2016
 
2016 vs. 2015
Reported Revenue
$
588,613

 
$
432,638

 
$
197,075

 
36
%
 
120
%
Adjusted Net Operating Profit
63,833

 
58,643

 
23,511

 
9
%
 
149
%
% of revenue
11
%
 
14
%

12
%
 
 
 
 

39


Segment Revenue
The reported revenue growth of 36% for the year ended June 30, 2017 was primarily due to the addition of revenue from our fiscal 2016 acquisition of WIRmachenDRUCK. The reported revenue growth was negatively affected by currency impacts during the year ended June 30, 2017 of 3%. The Upload and Print constant-currency revenue growth excluding revenue from businesses acquired in the past twelve months was 13%, primarily driven by continued growth from our Pixartprinting, Printdeal and Exagroup businesses. Our growth in constant currency revenue excluding recent acquisitions has moderated as we passed the acquisition anniversary of some of the slower-growing acquisitions, and we also have seen some moderation in the growth rates of businesses we acquired in prior years.
For the year ended June 30, 2016, our reported revenue growth includes the addition of aggregate revenue of $205.4 million, from the businesses we acquired in fiscal 2016 and fiscal 2015 for quarters with no comparable revenue. The Upload and Print constant-currency revenue growth excluding revenue from businesses acquired in the past twelve months was 27% for the year ended June 30, 2016, due to continued strong performance from our Pixartprinting and Printdeal businesses, which we acquired in fiscal 2014.
Segment Profitability
The increase in adjusted net operating profit for the year ended June 30, 2017 as compared to the prior period is primarily due to our WIRmachenDRUCK business, which we acquired in fiscal 2016 and did not have a full comparable fiscal year, partially offset by a decline in the profitability of our Tradeprint business, as well as continued investments in oversight, technology, and marketing.
Upload and Print adjusted net operating profit increased for the year ended June 30, 2016, as compared to the prior period, primarily as a result of higher adjusted net operating profit of $21.4 million from the businesses we acquired during the fourth quarter of fiscal 2015 and fiscal 2016. In addition, both the Pixartprinting and Printdeal businesses have increased their contribution to adjusted net operating profit due to growth in revenue and improvements in gross margin.
National Pen
 
Year Ended June 30,
 
 
 
 
 
2017

2016

2015
 
2017 vs. 2016
 
2016 vs. 2015
Reported Revenue
$
112,712

 
n/a
 
n/a
 
n/a
 
n/a
Adjusted Net Operating Loss
(2,225
)
 
n/a
 
n/a
 
n/a
 
n/a
% of revenue
(2
)%
 
n/a
 
n/a
 
 
 
 
Segment Revenue and Profitability
As we acquired National Pen on December 30, 2016 there are no comparative operating results presented. For the year ended June 30, 2017 reported revenue was $112.7 million and adjusted net operating loss was $2.2 million. As National Pen profitability has traditionally been highly seasonal, we expect the first and second quarters of our fiscal year to be its strongest for both revenue and profitability.
All Other Businesses
 
Year Ended June 30,
 
 
 
 
 
2017
 
2016
 
2015
 
2017 vs. 2016
 
2016 vs. 2015
Reported Revenue
$
128,795

 
$
138,244

 
$
147,425

 
(7
)%
 
(6
)%
Adjusted Net Operating Profit (Loss)
(30,747
)
 
(8,924
)
 
10,699

 
(245
)%
 
183
 %
% of revenue
(24
)%
 
(6
)%

7
%
 
 
 
 
Segment Revenue
The All Other Businesses revenue decline for the year ended June 30, 2017 was due to the termination of certain partner contracts in both our Corporate Solutions and Albumprinter businesses. These declines were

40


partially offset by growth in Albumprinter's direct to consumer business and Corporate Solutions' new lines of business, as well as growth in our Most of World portfolio which continues to grow off a relatively small base.
Reported revenue was negatively affected by currency impacts during the year ended June 30, 2016 of 8%. The All Other business units constant-currency revenue growth of 2% for the year ended June 30, 2016 was primarily due to strong growth in our Most of World businesses, as well as the direct to consumer portion of our Albumprinter business partially offset by the decline in partner revenue in both our Corporate Solutions and Albumprinter businesses. The Most of World portfolio continued to grow faster than other parts of this segment, but is small relative to the size of the other components.
Segment Profitability
The decline in adjusted net operating profit for the year ended June 30, 2017 as compared to the prior period is primarily due to the reduction in partner related profits of $17.8 million, as well as increased investment in our Corporate Solutions and Most of World businesses, partially offset by growth in our Albumprinter business.
The All Other Businesses adjusted net operating profit decline for the year ended June 30, 2016 as compared to the prior period is due to continued investment in our Most of World portfolio and a decline in partner related profits of $5.7 million.
Liquidity and Capital Resources
Consolidated Statements of Cash Flows Data:
In thousands
 
Year Ended June 30,
 
2017
 
2016

2015
Net cash provided by operating activities
$
156,736

 
$
247,358

 
$
242,022

Net cash used in investing activities
(301,789
)
 
(265,538
)
 
(217,190
)
Net cash provided by (used in) financing activities
104,578

 
(5,338
)
 
25,166

At June 30, 2017, we had $37.7 million of cash and cash equivalents (inclusive of $12.0 million of cash classified as held for sale) and $882.6 million of outstanding debt, excluding debt issuance costs and debt discounts. The decline in cash and cash equivalent assets during the period, was primarily due to the implementation of a cash pooling program during fiscal 2017 for certain of our European bank accounts. We expect cash and cash equivalents and outstanding debt levels to fluctuate over time depending on our working capital needs, as well as our organic investment, share repurchase and acquisition activity. The cash flows during the year ended June 30, 2017 related primarily to the following items:
Cash inflows:
Proceeds of debt of $196.9 million, net of payments
Adjustments for non-cash items of $230.0 million primarily related to positive adjustments for depreciation and amortization of $158.4 million, share-based compensation costs of $48.6 million, the change of our contingent earn-out liability of $39.4 million, unrealized currency-related gains of $10.1 million, impairment of goodwill and acquired intangible assets of $9.6 million offset by negative adjustments for non-cash tax related items of $41.4 million
Proceeds from the sale of available-for-sale securities of $6.3 million
Proceeds from the issuance of ordinary shares from the exercise of share options of $6.2 million
Proceeds from the sale of assets of $4.5 million
Changes in working capital balances of $1.2 million primarily driven by an increase in accounts payable


41


Cash outflows:
Net loss of $72.2 million
Payments for acquisitions, net of cash acquired, of $204.9 million
Capital expenditures of $74.2 million of which $36.0 million were related to the purchase of manufacturing and automation equipment for our production facilities, $12.9 million were related to the purchase of land, facilities and leasehold improvements, and $25.3 million were related to computer and office equipment
Purchases of our ordinary shares of $50.0 million
Internal costs for software and website development that we have capitalized of $37.3 million
Purchase of noncontrolling interests of $20.2 million
Payments for capital lease arrangements of $15.9 million
Payments of withholding taxes in connection with share awards of $14.6 million
Additional Liquidity and Capital Resources Information. During the year ended June 30, 2017, we financed our operations and strategic investments through internally generated cash flows from operations and debt financing. As of June 30, 2017, a significant portion of our cash and cash equivalents was held by our subsidiaries, and undistributed earnings of our subsidiaries that are considered to be indefinitely reinvested were $27.4 million. We do not intend to repatriate these funds as the cash and cash equivalent balances are generally used and available, without legal restrictions, to fund ordinary business operations and investments of the respective subsidiaries. If there is a change in the future, the repatriation of undistributed earnings from certain subsidiaries, in the form of dividends or otherwise, could have tax consequences that could result in material cash outflows.
Debt. On July 13, 2017, we executed an amendment to our senior secured credit facility that, among other things, expanded the total capacity to $1,045.0 million, which includes $745.0 million of revolving loans and $300.0 million of term loans. We expect to use our expanded credit facility to fund investments intended to support our long-term growth strategy. Refer to Note 10 for additional details.
As of June 30, 2017, we had aggregate loan commitments from our senior secured credit facility totaling $814.0 million. The loan commitments consisted of revolving loans of $690.0 million and the remaining term loans of $124.0 million. We have other financial obligations that constitute additional indebtedness based on the definitions within the credit facility. As of June 30, 2017, the amount available for borrowing under our senior secured credit facility was as follows:

In thousands

June 30, 2017
Maximum aggregate available for borrowing
$
814,000

Outstanding borrowings of senior secured credit facilities
(600,037
)
Remaining amount
213,963

Limitations to borrowing due to debt covenants and other obligations (1)
(2,195
)
Amount available for borrowing as of June 30, 2017 (2)
$
211,768

_________________
(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.

42


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.
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 June 30, 2017, we were in compliance with all financial and other covenants under the credit agreement and senior unsecured notes indenture.
Other debt. Other debt primarily consists of term loans acquired as part of our fiscal 2015 acquisition of Exagroup SAS. As of June 30, 2017 we had $7.5 million outstanding for other debt payable through September 2024.
Our expectations for fiscal year 2018. We believe that our available cash, cash flows generated from operations, and cash available under our committed debt financing will be sufficient to satisfy our liabilities and planned investments to support our long-term growth strategy for at least the next twelve months. 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 2018 we expect to allocate capital to the following broad categories and consider our capital to be fungible across all of these categories:
Organic investments will continue to be made across a wide spectrum of activities. These range from large, discrete, projects that we believe can provide us with materially important competitive capabilities and/or market positions over the longer term to smaller investments intended to maintain or improve our competitive position and support value-creating revenue growth.
Purchases of ordinary shares
Corporate acquisitions and similar investments

43


Reduction of debt
Contractual Obligations
Contractual obligations at June 30, 2017 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
$
50,143

 
$
13,344

 
$
18,339

 
$
11,948

 
$
6,512

Build-to-suit lease
109,248

 
12,569

 
25,138

 
25,138

 
46,403

Purchase commitments
29,697

 
29,697



 



Senior unsecured notes and interest payments
371,250

 
19,250

 
38,500

 
38,500

 
275,000

Other debt and interest payments
658,843

 
53,084

 
600,436

 
3,239

 
2,084

Capital leases
41,310

 
13,916

 
18,311

 
5,830

 
3,253

Other
64,584

 
59,827

 
4,757

 

 

Total (1)
$
1,325,075

 
$
201,687

 
$
705,481

 
$
84,655

 
$
333,252

___________________
(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 $5.4 million as of June 30, 2017 have been excluded from the contractual obligations table above. For further information on uncertain tax positions, see Note 13 to the accompanying consolidated financial statements.
Operating Leases. We rent office space under operating leases expiring on various dates through 2026. Future minimum rental payments required under our leases are an aggregate of approximately $50.1 million. The terms of certain lease agreements require security deposits in the form of bank guarantees and letters of credit in the amount of $3.8 million.
Build-to-suit lease. Represents the cash payments for our leased facility in Waltham, Massachusetts, USA. Please refer to Note 2 in the accompanying consolidated financial statements for additional details.
Purchase Commitments. At June 30, 2017, we had unrecorded commitments under contract of $29.7 million. Purchase commitments consisted of professional and consulting fees of approximately $5.7 million, commitments for production and computer equipment purchases of approximately $5.5 million, third-party web services of $5.0 million, commitments for advertising campaigns of $2.6 million, inventory purchase commitments of $2.4 million, and other unrecorded purchase commitments of $8.5 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 is payable semi-annually on April 1 and October 1 of each year and has been included in the table above.
Other debt and interest payments. At June 30, 2017, the term loans of $124.0 million outstanding under our credit agreement have repayments due on various dates through September 23, 2019, with the revolving loans outstanding of $476.0 million due on September 23, 2019. Interest payable included in this table is based on the interest rate as of June 30, 2017 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. On July 13, 2017, we amended our credit agreement to, among other things, expand the total capacity and extend the term of our term loans and revolving loans. Refer to Note 10 for additional information.
In addition, we have term loan debt which consists primarily of debt assumed as part of certain of our fiscal 2015 acquisitions, and as of June 30, 2017 we had $7.5 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 2022. The aggregate carrying value of the leased equipment under capital leases

44


included in property, plant and equipment, net in our consolidated balance sheet at June 30, 2017, is $40.8 million, net of accumulated depreciation of $26.6 million. The present value of lease installments not yet due included in other current liabilities and other liabilities in our consolidated balance sheet at June 30, 2017 amounts to $39.9 million.
Other Obligations. Other obligations includes the following:
Earn-out liability related to the WIRmachenDRUCK acquisition of $44.0 million, payable at our option in cash or ordinary shares, based on the achievement of a cumulative gross margin target for calendar years 2016 and 2017.
Loan arrangement with two Printi employees, which includes an initial draw on the loans in the amount of $12,000 during the first quarter of fiscal 2018. Refer to Note 15 for additional details.
Deferred payments related to our fiscal 2015 and 2016 acquisitions of $2.1 million, in aggregate.
Installment obligation of $6.5 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 June 30, 2017.
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 earn-out related charges, including 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, certain impairment expense 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.
This non-GAAP financial measure is provided to enhance investors' understanding of our current operating results from the underlying and ongoing business for the same reasons it is used by management. For example, as we have become more acquisitive over recent years we believe excluding the costs related to the purchase of a business (such as amortization of acquired intangible assets, contingent consideration, or impairment of goodwill) provides further insight into the performance of the underlying acquired business in addition to that provided by our GAAP operating income. As another example, as we do not apply hedge accounting for our currency forward contracts, we believe inclusion of realized gains and losses on these contracts that are intended to be matched against operational currency fluctuations provides further insight into our operating performance in addition to that provided by our GAAP operating income. 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.

45


The table below sets forth operating income and adjusted net operating profit after tax for each of the years ended June 30, 2017, 2016 and 2015:
 
Year Ended June 30,
 
2017
 
2016
 
2015
GAAP operating (loss) income
$
(45,702
)
 
$
78,193

 
$
96,324

Less: Cash taxes attributable to current year (see below)
(31,104
)
 
(32,236
)
 
(24,986
)
Exclude expense (benefit) impact of:
 
 


 
 
Acquisition-related amortization and depreciation
46,402

 
40,834

 
24,264

Earn-out related charges (1)
40,384

 
6,378

 
15,275

Share-based compensation related to investment consideration
9,638

 
4,835

 
3,570

Certain impairments (2)
9,556

 
41,820

 

Restructuring related charges
26,700

 
381

 
3,202

Less: Interest expense associated with Waltham lease
(7,727
)
 
(6,287
)
 

Include: Realized gains on currency derivatives not included in operating income
16,474

 
5,863

 
7,450

Adjusted NOPAT (3)
$
64,621

 
$
139,781

 
$
125,099


 
 
 
 
 
Cash taxes paid in the current period (4)(5)
$
49,342

 
$
19,750

 
$
14,284

Less: cash taxes paid and related to prior periods (4)
(10,319
)
 
934

 
(5,477
)
Plus: cash taxes attributable to the current period but not yet (received) paid
(5,650
)
 
9,298

 
6,667

Plus: cash impact of excess tax benefit on equity awards attributable to current period
8,003

 
5,574

 
12,932

Less: cash tax (paid) received related to NOPAT exclusion items
(681
)
 

 

Less: installment payment related to the transfer of intellectual property
(9,591
)
 
(3,320
)
 
(3,420
)
Cash taxes attributable to current period
$
31,104

 
$
32,236

 
$
24,986

_________________
(1) Includes expense recognized for the change in fair value of contingent consideration and compensation expense related to cash-based earn-out mechanisms dependent upon continued employment.
(2) Includes the impact of certain impairments of goodwill and other long-lived assets as defined by ASC 350 - "Intangibles - Goodwill and Other".
(3) Adjusted NOPAT will include the impact of discontinued operations as defined by ASC 205-20 in periods in which they occur.
(4) For the fiscal year ended June 30, 2016, cash taxes paid in the current period includes a cash tax refund of $8,479, which is subsequently eliminated from cash taxes attributable to the current period as it relates to a refund of a prior years' taxes generated as a result of a prior year excess share-based compensation deduction. Therefore, the impact is not included in adjusted NOPAT for the current period.
(5) Overall cash taxes paid were higher in fiscal year 2017 as compared to fiscal year 2016 due to a.) the aforementioned cash tax refund received in fiscal year 2016, b.) increased prior year tax payments made in fiscal year 2017 primarily related to our Upload and Print businesses, and c.) one-time tax costs associated with National Pen post-acquisition restructuring.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). To apply these principles, we must make estimates and judgments that affect our reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. In some instances, we reasonably could have used different accounting estimates and, in other instances, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from our estimates. We base our estimates and judgments on historical experience and other assumptions that we believe to be reasonable at the time under the circumstances, and we evaluate these estimates and judgments on an ongoing basis. We refer to accounting estimates and judgments of this type as critical accounting policies and estimates, which we discuss further below. This section should be read in conjunction with Note 2, "Summary of Significant Accounting Policies," of our audited consolidated financial statements included elsewhere in this Report.
Revenue Recognition. We generate revenue primarily from the sale and shipping of customized manufactured products, as well as providing digital services, website design and hosting, email marketing services, and order referral fees. We recognize revenue arising from sales of products and services, net of discounts and applicable indirect taxes, when it is realized or realizable and earned. We consider revenue realized or realizable and earned when there is persuasive evidence of an arrangement, a product has been shipped or service rendered with no significant post-delivery obligation on our part, the net sales price is fixed or determinable and collection is reasonably assured. For arrangements with multiple deliverables, we allocate revenue to each deliverable based on

46


the relative selling price for each deliverable. We determine the relative selling price using a hierarchy of (1) company specific objective and reliable evidence, then (2) third-party evidence, then (3) best estimate of selling price. Shipping, handling and processing charges billed to customers are included in revenue at the time of shipment or rendering of service. Revenues from sales of prepaid orders on our websites are deferred until shipment of fulfilled orders or until the prepaid service has been rendered.
A reserve for estimated sales returns and allowances is recorded as a reduction of revenue, based on historical experience or specific identification of an event necessitating a reserve. This reserve is dependent upon customer return practices and will vary during the year due to volume or specific reserve requirements. Sales returns have not historically been significant to our net revenue and have been within our estimates.
Share-Based Compensation. We measure share-based compensation costs at fair value, and recognize the expense over the period that the recipient is required to provide service in exchange for the award, which generally is the vesting period. We recognize the impact of forfeitures as they occur.
Starting in fiscal 2017, we primarily issued performance share units, or PSUs, which are estimated at fair value on the date of grant, which is fixed throughout the vesting period. The fair value is determined using a Monte Carlo simulation valuation model. As the PSUs include both a service and market condition the related expense is recognized using the accelerated expense attribution method over the requisite service period for each separately vesting portion of the award. For PSUs that meet the service vesting condition, the expense recognized over the requisite service period will not be reversed if the market condition is not achieved.
Income Taxes. As part of the process of preparing our consolidated financial statements, we calculate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our current tax expense, including assessing the risks associated with tax positions, together with assessing temporary and permanent differences resulting from differing treatment of items for tax and financial reporting purposes. We recognize deferred tax assets and liabilities for the temporary differences using the enacted tax rates and laws that will be in effect when we expect temporary differences to reverse. We assess the ability to realize our deferred tax assets based upon the weight of available evidence both positive and negative. To the extent we believe that it is more likely than not that some portion or all of the deferred tax assets will not be realized, we establish a valuation allowance. Our estimates can vary due to the profitability mix of jurisdictions, foreign exchange movements, changes in tax law, regulations or accounting principles, as well as certain discrete items. In the event that actual results differ from our estimates or we adjust our estimates in the future, we may need to increase or decrease income tax expense, which could have a material impact on our financial position and results of operations.
We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when we believe that certain positions might be challenged despite our belief that our tax return positions are in accordance with applicable tax laws. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit, new tax legislation, or the change of an estimate based on new information. To the extent that the final outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made. Interest and, if applicable, penalties related to unrecognized tax benefits are recorded in the provision for income taxes.
Software and Website Development Costs. We capitalize eligible salaries and payroll-related costs of employees who devote time to the development of our websites and internal-use computer software. Capitalization begins when the preliminary project stage is complete, management with the relevant authority authorizes and commits to the funding of the software project, and it is probable that the project will be completed and the software will be used to perform the function intended. These costs are amortized on a straight-line basis over the estimated useful life of the software, which is three years. Our judgment is required in determining whether a project provides new or additional functionality, the point at which various projects enter the stages at which costs may be capitalized, assessing the ongoing value and impairment of the capitalized costs, and determining the estimated useful lives over which the costs are amortized. Historically we have not had any significant impairments of our capitalized software and website development costs.
Business Combinations. We recognize the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The fair value of identifiable intangible assets is based on detailed cash flow valuations that use information and assumptions provided by management. The

47


valuations are dependent upon a myriad of factors including historical financial results, estimated customer renewal rates, projected operating costs and discount rates. We estimate the fair value of contingent consideration at the time of the acquisition using all pertinent information known to us at the time to assess the probability of payment of contingent amounts or through the use of a Monte Carlo simulation model. We allocate any excess purchase price over the fair value of the net tangible and intangible assets acquired and liabilities assumed to goodwill. The assumptions used in the valuations for our acquisitions may differ materially from actual results depending on performance of the acquired businesses and other factors. While we believe the assumptions used were appropriate, different assumptions in the valuation of assets acquired and liabilities assumed could have a material impact on the timing and extent of impact on our statements of operations.
Goodwill is assigned to reporting units as of the date of the related acquisition. If goodwill is assigned to more than one reporting unit, we utilize a method that is consistent with the manner in which the amount of goodwill in a business combination is determined. Costs related to the acquisition of a business are expensed as incurred.
Goodwill, Indefinite-Lived Intangible Assets, and Other Definite Lived Long-Lived Assets. We evaluate goodwill and indefinite-lived intangible assets for impairment annually or more frequently when an event occurs or circumstances change that indicate that the carrying value may not be recoverable. We have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. We consider the timing of our most recent fair value assessment and associated headroom, the actual operating results as compared to the cash flow forecasts used in those fair value assessments, the current long-term forecasts for each reporting unit, and the general market and economic environment of each reporting unit. In addition to the specific factors mentioned above, we assess the following individual factors on an ongoing basis such as:
A significant adverse change in legal factors or the business climate;
An adverse action or assessment by a regulator;
Unanticipated competition;
A loss of key personnel; and
A more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of.
If the results of the qualitative analysis were to indicate that the fair value of a reporting unit is less than its carrying value, the quantitative test is required. Under the quantitative approach, we estimate the fair values of our reporting units using a discounted cash flow methodology. This analysis requires significant judgment and is based on our strategic plans and estimation of future cash flows, which is dependent on internal forecasts. Our annual analysis also requires significant judgment including the identification and aggregation of reporting units, as well as the determination of our discount rate and perpetual growth rate assumptions.

During fiscal 2017, we adopted the new goodwill accounting standard, which changes how we test goodwill for impairment by eliminating step two from the goodwill impairment test. We are now required to compare the fair value of the reporting unit with its carrying value and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value.
We had a change in the composition of our Tradeprint reporting unit during our third quarter of fiscal 2017. This change, when combined with an updated profit outlook that was lower than originally forecasted as of the acquisition date, indicated that it is more likely than not that the fair value of the reporting unit is below the carrying amount. As a result, we performed the required testing which led to our recognition of a full goodwill impairment charge of $6.3 million associated with our Tradeprint reporting unit. Since our third quarter analysis, there have been no indications that additional impairment exists in any of our reporting units as of June 30, 2017.
We also performed a recoverability test of Tradeprint's long-lived assets and recognized an additional impairment charge of $3.3 million, relating to its acquired intangible assets. We are required to evaluate the estimated useful lives and recoverability of definite lived long-lived assets (for example, customer relationships, developed technology, property, and equipment) on an ongoing basis when indicators of impairment are present. For purposes of the recoverability test, long-lived assets are grouped with other assets and liabilities at the lowest

48


level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The test for recoverability compares the undiscounted future cash flows of the long-lived asset group to its carrying value. If the carrying values of the long-lived asset group exceed the undiscounted future cash flows, the assets are considered to be potentially impaired. The next step in the impairment measurement process is to determine the fair value of the individual net assets within the long-lived asset group. If the aggregate fair values of the individual net assets of the group are less than the carrying values, an impairment charge is recorded equal to the excess of the aggregate carrying value of the group over the aggregate fair value. The loss is allocated to each long-lived asset within the group based on their relative carrying values, with no asset reduced below its fair value. The identification and evaluation of a potential impairment requires judgment and is subject to change if events or circumstances pertaining to our business change.
Recently Issued or Adopted Accounting Pronouncements
See Item 8 of Part II, “Financial Statements and Supplementary Data — Note 2 — Summary of Significant Accounting Policies — Recently Issued or Adopted Accounting Pronouncements."


49


Item 7A. 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 June 30, 2017, 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 June 30, 2017, we had $600.0 million of variable rate debt and $6.5 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 June 30, 2017, 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 $5.4 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 does 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 (loss) 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 (loss) income and non-GAAP financial metrics, such as EBITDA.
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 (loss) income, we may experience increased, not decreased, volatility in our GAAP results due to our hedging approach. Our most significant net currency exposures by volume are in the Euro and British Pound.
In addition, we elect to execute currency derivatives 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 denominated in a currency other than their functional currency. Due to the significance of these balances, the revaluation of intercompany loans can have a material impact on other income, net. We expect these impacts may be volatile in the future, although our largest intercompany loans do not have a U.S. dollar cash impact for the consolidated group because they are either 1) U.S. dollar loans or 2) we elect to hedge certain non-U.S. dollar loans with cross currency

50


swaps. 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. The balances are inclusive of the notional value of any cross currency swaps designated as cash flow hedges. A hypothetical decrease in exchange rates of 10% against the functional currency of our subsidiaries would have resulted in an increase of $61.3 million, $21.3 million, and $18.8 million on our income before taxes for the years ended June 30, 2017, 2016 and 2015, respectively.

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Item 8. Financial Statements and Supplementary Data
CIMPRESS N.V.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
 
Consolidated Balance Sheets
 
Consolidated Statements of Operations
 
Consolidated Statements of Comprehensive (Loss) Income
 
Consolidated Statements of Shareholders’ Equity
 
Consolidated Statements of Cash Flows
 
Notes to Consolidated Financial Statements
 


52


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Supervisory Board and Shareholders of Cimpress N.V.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive (loss) income, shareholders’ equity and cash flows present fairly, in all material respects, the financial position of Cimpress N.V. and its subsidiaries as of June 30, 2017 and June 30, 2016, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2017 based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As described in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A, management has excluded National Pen from its assessment of internal control over financial reporting as of June 30, 2017, because it was acquired by the Company in a purchase business combination during fiscal 2017. We have also excluded National Pen from our audit of internal control over financial reporting. National Pen is a wholly-owned subsidiary whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent $91.3 million and $112.7 million, respectively, of the related consolidated financial statement amounts as of and for the year ended June 30, 2017.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts
August 11, 2017


53


CIMPRESS N.V.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

June 30,
2017

June 30,
2016
Assets
 


 

Current assets:
 


 

Cash and cash equivalents
$
25,697


$
77,426

Marketable securities

 
7,893

Accounts receivable, net of allowances of $3,590 and $490, respectively
48,630


32,327

Inventory
46,563


18,125

Prepaid expenses and other current assets
78,835


64,997

Assets held for sale
46,276

 

Total current assets
246,001


200,768

Property, plant and equipment, net
511,947


493,163

Software and web site development costs, net
48,470


35,212

Deferred tax assets
48,004


26,093

Goodwill
514,963


466,005

Intangible assets, net
275,924


216,970

Other assets
34,560


25,658

Total assets
$
1,679,869


$
1,463,869

Liabilities, noncontrolling interests and shareholders’ equity
 


 

Current liabilities:
 


 

Accounts payable
$
127,386


$
86,682

Accrued expenses
175,567


178,987

Deferred revenue
30,372


25,842

Short-term debt
28,926

 
21,717

Other current liabilities
78,435

 
22,635

Liabilities held for sale
8,797

 

Total current liabilities
449,483


335,863

Deferred tax liabilities
60,743


69,430

Lease financing obligation
106,606

 
110,232

Long-term debt
847,730


656,794

Other liabilities
94,683


60,173

Total liabilities
1,559,245


1,232,492

Commitments and contingencies (Note 17)
 
 
 
Redeemable noncontrolling interests
45,412


65,301

Shareholders’ equity:
 


 

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



Ordinary shares, par value €0.01 per share, 100,000,000 shares authorized; 44,080,627 shares issued; and 31,415,503 and 31,536,732 shares outstanding, respectively
615


615

Treasury shares, at cost,12,665,124 and 12,543,895 shares, respectively
(588,365
)

(548,549
)
Additional paid-in capital
361,376


335,192

Retained earnings
414,771


486,482

Accumulated other comprehensive loss
(113,398
)

(108,015
)
Total shareholders’ equity attributable to Cimpress N.V.
74,999


165,725

Noncontrolling interests (Note 14)
213

 
351

Total shareholders' equity
75,212

 
166,076

Total liabilities, noncontrolling interests and shareholders’ equity
$
1,679,869


$
1,463,869

See accompanying notes.

54


CIMPRESS N.V.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
 
Year Ended June 30,
 
2017
 
2016
 
2015
Revenue
$
2,135,405

 
$
1,788,044

 
$
1,494,206

Cost of revenue (1)
1,036,975

 
773,640

 
568,572

Technology and development expense (1)
243,230

 
210,080

 
186,770

Marketing and selling expense (1)
610,932

 
508,502

 
472,079

General and administrative expense (1)
207,569

 
145,844

 
142,996

Amortization of acquired intangible assets
46,145

 
40,563

 
24,263

Restructuring expense (1)
26,700

 
381

 
3,202

Impairment of goodwill and acquired intangible assets
9,556

 
30,841

 

(Loss) income from operations
(45,702
)
 
78,193

 
96,324

Other income, net
10,362

 
26,098

 
20,134

Interest expense, net
(43,977
)
 
(38,196
)
 
(16,705
)
(Loss) income before income taxes
(79,317
)
 
66,095

 
99,753

Income tax (benefit) provision
(7,118
)
 
15,684

 
10,441

Net (loss) income
(72,199
)
 
50,411

 
89,312

Add: Net loss attributable to noncontrolling interest
488

 
3,938

 
2,900

Net (loss) income attributable to Cimpress N.V.
$
(71,711
)
 
$
54,349

 
$
92,212

Basic net (loss) income per share attributable to Cimpress N.V.
$
(2.29
)
 
$
1.72

 
$
2.82

Diluted net (loss) income per share attributable to Cimpress N.V.
$
(2.29
)
 
$
1.64

 
$
2.73

Weighted average shares outstanding — basic
31,291,581

 
31,656,234

 
32,644,870

Weighted average shares outstanding — diluted
31,291,581

 
33,049,454

 
33,816,498

____________________________________________
(1) Share-based compensation is allocated as follows:
 
Year Ended June 30,
 
2017
 
2016
 
2015
Cost of revenue
$
289

 
$
72

 
$
78

Technology and development expense
8,724

 
5,892

 
4,139

Marketing and selling expense
4,857

 
1,591

 
1,952

General and administrative expense
28,500

 
16,273

 
17,906

Restructuring expense
6,257