CIMPRESS plc 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations This Report contains forward-looking statements that involve risks and uncertainties. The statements contained in this Report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including but not limited to our statements about the anticipated growth and development of our businesses and revenues, the potential effects of the COVID-19 pandemic and our expectations with respect to our business and financial results during and after the pandemic, our expectations with respect to our market and market share during and after the pandemic, sufficiency of our liquidity position, our future compliance with our debt covenants, legal proceedings, and sufficiency of our tax reserves. 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 various important factors, including but not limited to flaws in the assumptions and judgments upon which our forecasts and estimates are based; the development, severity, and duration of the COVID-19 pandemic; our failure to anticipate and react to the effects of the pandemic on our customers, supply chain, markets, team members, and business; our inability to take the actions that we plan to take or the failure of those actions to achieve the results we expect; loss or unavailability of key personnel or our inability to recruit talented personnel to drive performance of our businesses; the failure of businesses we acquire or invest in to perform as expected; unanticipated changes in our markets, customers, or businesses; changes in the laws and regulations, or in the interpretation of laws and regulations, that affect our businesses; our failure to manage the growth and complexity of our business and expand our operations; our failure to maintain compliance with the covenants in our debt documents or to pay our debts when due; competitive pressures; general economic conditions; and other factors described in our Form 10-K for the fiscal year ended June 30, 2020 and the other documents that we periodically file with the SEC. Executive Overview Cimpress is a strategically focused group of more than a dozen businesses that specialize in mass customization, via which we deliver large volumes of individually small-sized customized orders for a broad spectrum of print, signage, photo merchandise, invitations and announcements, writing instruments, packaging, apparel and other categories. We invest in and build customer-focused, entrepreneurial mass customization businesses for the long term, which we manage in a decentralized, autonomous manner. We drive competitive advantage across Cimpress through a select few shared strategic capabilities that have the greatest potential to create Cimpress-wide value. We limit all other central activities to only those which absolutely must be performed centrally. As of December 31, 2020, we have numerous operating segments under our management reporting structure that are reported in the following five reportable segments: Vistaprint, PrintBrothers, The Print Group, National Pen, and All Other Businesses. Refer to Note 12 in our accompanying consolidated financial statements for additional information relating to our reportable segments and our segment financial measures. COVID-19 The pandemic and related restrictions continue to have a negative impact on our businesses, customers and the markets that we serve. Our year-over-year decline in reported revenue improved in the second quarter of fiscal 2021 as compared to the first quarter of fiscal 2021 due to favorable currency movements and acquisition timing; and otherwise it was flat compared to last quarter, despite sequentially intensified restrictions in various jurisdictions in which we sell our products. Even with the impacts of the pandemic, we continue to hire talent and make investments in technology, data, new product introduction, customer experience improvements, and branding that are designed to build on our competitive advantages and enable our businesses to grow as we come out of the pandemic. We don't know how long that will take, and while the promise of COVID-19 vaccinations gives us optimism, recently we see increasingly severe restrictions in many of our major markets that are impacting small business activity and our revenue. We continue to maintain flexibility in our cost structure, while at the same time increasing investment in areas we believe will generate high return on investment beyond the pandemic. We believe our financial results have been stronger through the pandemic than traditional offline competitors as a result of our diverse product portfolio and economically advantaged business model, which gives us confidence in our ability to grow as we come out of the pandemic. 28 Financial Summary The primary financial metric by which we set quarterly and annual budgets both for individual businesses and Cimpress wide is our adjusted free cash flow before cash interest expense related to borrowing; however, in evaluating the financial condition and operating performance of our business, management considers a number of metrics including revenue growth, organic constant-currency revenue growth, operating income, adjusted EBITDA, cash flow from operations and adjusted free cash flow. A summary of these key financial metrics for the three and six months ended December 31, 2020 as compared to the three and six months ended December 31, 2019 follows: Second Quarter Fiscal 2021 • Revenue decreased by 4% to $786.1 million. • Revenue decreased by 9% when excluding the impact of currency fluctuations and acquisitions ("organic constant-currency revenue growth," a non-GAAP financial measure). • Operating income decreased by $27.4 million to $94.2 million. • Adjusted EBITDA (a non-GAAP financial measure) decreased by $42.1 million to $143.4 million. Year to Date Fiscal 2021 • Revenue decreased by 6% to $1,372.6 million. • Organic constant-currency revenue decreased by 10%. • Operating income decreased by $16.8 million to $130.2 million. • Adjusted EBITDA decreased by $33.1 million to $231.9 million. • Cash provided by operating activities decreased by $8.9 million to $256.2 million. • Adjusted free cash flow (a non-GAAP financial measure) decreased by $0.7 million to $212.9 million. For the second quarter of fiscal year 2021, our revenue declined year-over-year as the COVID-19 pandemic continues to negatively impact our results. These results vary by segment because each business has different product mix and customers with unique challenges. Revenue from event-driven and some small business products continued to decline, partially offset by revenue from new products introduced in reaction to the pandemic such as face masks (about 5% of total revenue for the quarter) and consumer products in Vistaprint and BuildASign that in total grew 6% year-over-year, excluding invitations and announcements which is an event-driven category. For the second quarter of fiscal 2021, operating income decreased by $27.4 million, due to the gross profit decline driven by the decrease in revenue described above. Additionally, we incurred $4.5 million of expense for pandemic-related products, most notably for disposable masks in National Pen, for which pricing and demand have dropped. The negative impact of the pandemic on demand was partially offset by variable cost controls and fixed cost savings, but the gross margin profile of our revenue mix was unfavorable compared to last year particularly in Vistaprint, and advertising and operating expenses increased with increased investments in talent and strategic projects. Operating income benefited from $4.0 million of COVID-19-related government incentives, primarily to offset wages for manufacturing and customer service team members in countries where demand decreased but roles were maintained. Adjusted EBITDA decreased year-over-year, primarily due to the gross profit decrease described above. Adjusted EBITDA excludes restructuring charges and share-based compensation expense, and includes the realized gains or losses on our currency derivatives intended to hedge adjusted EBITDA. The net year-over-year impact of currency on consolidated adjusted EBITDA was negative by approximately $4.0 million. 29 Consolidated Results of Operations Consolidated Revenue Our businesses generate revenue primarily from the sale and shipment of customized manufactured products. To a much lesser extent (and primarily in our Vistaprint business) we provide digital services, website design and hosting, and email marketing services, as well as generate a small percentage of revenue from order referral fees and other third-party offerings. For additional discussion relating to segment revenue results, refer to the "Reportable Segment Results" section included below. Total revenue and revenue growth by reportable segment for the three and six months ended December 31, 2020 and 2019 are shown in the following table: In thousands Three Months Ended December 31, Currency Impact: Constant- Currency Impact of Acquisitions/Divestitures: Constant- Currency Revenue Growth 2020 2019 % Change (Favorable)/Unfavorable Revenue Growth (1) (Favorable)/Unfavorable Excluding Acquisitions/Divestitures (2) Vistaprint (3) $ 436,317 $ 433,305 1% (3)% (2)% (4)% (6)% PrintBrothers 121,806 126,617 (4)% (7)% (11)% —% (11)% The Print Group 76,204 87,699 (13)% (6)% (19)% —% (19)% National Pen 114,692 127,985 (10)% (3)% (13)% —% (13)% All Other Businesses 55,365 49,774 11% 3% 14% —% 14% Inter-segment eliminations (18,239) (5,047) Total revenue $ 786,145 $ 820,333 (4)% (3)% (7)% (2)% (9)% In thousands Six Months Ended December 31, Currency Impact: Constant- Currency Impact of Acquisitions/Divestitures: Constant- Currency Revenue Growth 2020 2019 % Change (Favorable)/Unfavorable Revenue Growth (1) (Favorable)/Unfavorable Excluding Acquisitions/Divestitures (2) Vistaprint (3) $ 765,608 $ 776,476 (1)% (2)% (3)% (2)% (5)% PrintBrothers 221,918 235,907 (6)% (6)% (12)% (1)% (13)% The Print Group 142,641 159,957 (11)% (5)% (16)% —% (16)% National Pen 182,341 198,148 (8)% (2)% (10)% —% (10)% All Other Businesses 98,843 92,050 7% 3% 10% —% 10% Inter-segment eliminations (38,706) (8,246) Total revenue $ 1,372,645 $ 1,454,292 (6)% (2)% (8)% (2)% (10)% _________________ (1) Constant-currency revenue growth, a non-GAAP financial measure, represents the change in total revenue between current and prior year periods at constant-currency exchange rates by translating all non-U.S. dollar denominated revenue generated in the current period using the prior year period’s average exchange rate for each currency to the U.S. dollar. Our reportable segments-related growth is inclusive of inter-segment revenues, which are eliminated in our consolidated results. (2) Constant-currency revenue growth excluding acquisitions/divestitures, a non-GAAP financial measure, excludes revenue results for businesses in the period in which there is no comparable year-over-year revenue. Our reportable segments-related growth is inclusive of inter-segment revenues, which are eliminated in our consolidated results. (3) The Vistaprint segment includes revenue from our 99designs business since its acquisition date of October 1, 2020. 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. 30 Consolidated Cost of Revenue Cost of revenue includes materials used by our businesses to manufacture their 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 and design costs, costs of free products and other related costs of products our businesses sell. In thousands Three Months Ended December 31, Six Months Ended December 31, 2020 2019 2020 2019 Cost of revenue $ 385,979 $ 394,018 $ 684,823 $ 719,683 % of revenue 49.1 % 48.0 % 49.9 % 49.5 % For the three and six months ended December 31, 2020, consolidated cost of revenue decreased by $8.0 million and $34.9 million, respectively, due to reduced demand-dependent cost of goods sold including third-party fulfillment, material, and shipping costs which decreased across several of our segments that continued to be impacted by the COVID-19 pandemic. For the three and six months ended December 31, 2020, we realized approximately $2.5 million and $5.6 million, respectively, of wage offset benefits from government incentives in locations where demand decreased materially but roles were maintained. These decreases were partially offset by $4.5 million and $5.5 million of expense during the three and six months ended December 31, 2020, respectively, related to losses associated with the decline in market demand and pricing for disposable masks. Consolidated Operating Expenses The following table summarizes our comparative operating expenses for the following periods: In thousands Three Months Ended December 31, Six Months Ended December 31, 2020 2019 2020 vs. 2019 2020 2019 2020 vs. 2019 Technology and development expense $ 65,036 $ 64,427 1% $ 123,525 $ 127,594 (3)% % of revenue 8.3 % 7.9 % 9.0 % 8.8 % Marketing and selling expense $ 182,322 $ 173,336 5% $ 320,472 $ 334,253 (4)% % of revenue 23.2 % 21.1 % 23.3 % 23.0 % General and administrative expense $ 42,979 $ 51,910 (17)% $ 84,791 $ 95,533 (11)% % of revenue 5.5 % 6.3 % 6.2 % 6.6 % Amortization of acquired intangible assets $ 13,453 $ 13,150 2% $ 26,758 $ 26,168 2% % of revenue 1.7 % 1.6 % 1.9 % 1.8 % Restructuring expense $ 2,182 $ 1,897 15% $ 2,096 $ 4,087 (49)% % of revenue 0.3 % 0.2 % 0.2 % 0.3 % Technology and development expense Technology and development expense consists primarily of payroll and related expenses for 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, 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. Technology and development expenses increased by $0.6 million for the three months ended December 31, 2020 and decreased by $4.1 million for the six months ended December 31, 2020, as compared to the prior comparative periods. The increase for the second quarter of fiscal 2021 was due to fluctuations in currency exchange rates. Both periods benefited from decreases in costs from our fiscal 2020 reorganization of our central technology and Vistaprint teams as well as continued reductions in discretionary spend including travel and training expenses. 31 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, National Pen and BuildASign businesses have higher marketing and selling costs as a percentage of revenue as compared to our PrintBrothers and The Print Group businesses. Our marketing and selling expenses during the three months ended December 31, 2020 increased by $9.0 million as compared to the prior comparative period, driven primarily by increased spend in our Vistaprint business due to further expanded return on advertising spend targets, as well as increased brand sponsorships and upper-funnel advertising investment along with associated agency fees. These increases were partially offset by reductions in advertising across several of our other businesses as they continue to control advertising spend levels in line with demand. For the six months ended December 31, 2020, marketing and selling expenses decreased by $13.8 million, as compared to the prior year. The decrease from the prior comparative period is primarily due to the year-over-year reduction in advertising spend in our Vistaprint business, which is partially offset by progressive increases in upper-funnel advertising investments. We also recognized a decrease in marketing costs in our National Pen business of $7.9 million, primarily due to pandemic-related initiatives to lower costs, which included reductions to direct mail prospecting activities and cost savings from initiatives intended to reduce costs in service centers. 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 procurement. For the three and six months ended December 31, 2020, general and administrative expenses decreased by $8.9 million and $10.7 million, respectively, as compared to the prior comparative periods, primarily due to lower professional fees as a result of the non-recurrence of costs related to strategic projects in our Vistaprint business, as well as the Cimpress' cross-border merger to Ireland in fiscal year 2020. For both periods, we also realized lower share-based compensation costs and discretionary spend. 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 $0.3 million and $0.6 million for the three and six months ended December 31, 2020, respectively as compared to the three and six months ended December 31, 2019. The increase is driven by the acquisition of 99designs, as discussed in Note 7 in our accompanying consolidated financial statements, partially offset by the reduction of amortization expense in our BuildASign business as certain intangible assets became fully amortized during the current quarter. Restructuring expense Restructuring expense consists of costs directly incurred as a result of restructuring initiatives, and includes employee-related termination costs, third party professional fees and facility exit costs. During the three and six months ended December 31, 2020, we recognized restructuring expense of $2.2 million and $2.1 million, respectively, due to actions taken in The Print Group reportable segment which are intended to streamline certain activities within the segment. We recognized restructuring expense of $1.9 million and $4.1 million, respectively in the three and six months ended December 31, 2019 due to prior year actions taken in our Vistaprint business. 32 Other Consolidated Results Other (expense) income, net Other (expense) 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 programs and ability to qualify for 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 execute certain currency derivative contracts that do not qualify for hedge accounting. The following table summarizes the components of other (expense) income, net: In thousands Three Months Ended December 31, Six Months Ended December 31, 2020 2019 2020 2019 (Losses) gains on derivatives not designated as hedging instruments $ (19,020) $ (11,666) $ (32,515) $ 7,691 Currency-related gains (losses), net 1,809 2,645 5,884 (767) Other gains (losses) 13 (19) 679 (290) Total other (expense) income, net $ (17,198) $ (9,040) $ (25,952) $ 6,634 The decrease in other (expense) income, net was primarily due to the currency exchange rate volatility impacting our derivatives that are not designated as hedging instruments, of which our Euro and British Pound contracts are the most significant exposures that we economically hedge. We expect volatility to continue in future periods, as we do not apply hedge accounting for most of our derivative currency contracts. We also experienced currency-related gains due to currency exchange rate volatility on our non-functional currency intercompany relationships, which we may alter from time to time. The impact of certain cross-currency swap contracts designated as cash flow hedges is included in our currency-related gains (losses), net, offsetting the impact of certain non-functional currency intercompany relationships. Interest expense, net Interest expense, net primarily consists of interest paid on outstanding debt balances, amortization of debt issuance costs, debt discounts, interest related to finance lease obligations and realized gains (losses) on effective interest rate swap contracts and certain cross-currency swap contracts. Interest expense, net increased by $14.4 million and $29.9 million during the three and six months ended December 31, 2020, as compared to the prior comparable periods. This is primarily due to the additional $200.0 million offering of our 7% senior unsecured notes in February 2020 and issuance of our $300.0 million 12% second lien notes in May 2020. Income tax expense In thousands Three Months Ended December 31, Six Months Ended December 31, 2020 2019 2020 2019 Income tax expense (benefit) $ 12,954 $ (93,795) $ 19,748 $ (87,680) Effective tax rate 27.6 % (96.8) % 45.3 % (71.4) % Income tax expense for the three and six months ended December 31, 2020 increased as compared to the prior year primarily attributable to the discrete tax benefit of $114.1 million related to Swiss Tax Reform recorded in the three months ended December 31, 2019. Excluding this benefit, tax expense would have decreased, primarily attributable to decreased pre-tax income for the three and six months ended December 31, 2020 as compared to the same prior year periods. Excluding the effect of discrete tax adjustments, our estimated annual effective tax rate is higher for fiscal 2021 as compared to fiscal 2020 primarily due to increased non-deductible interest expense. Our effective tax rate continues to be negatively impacted by losses in certain jurisdictions where we are unable to recognize a tax benefit in the current period. 33 We believe that our income tax reserves are adequately maintained by 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 therefore there is a possibility that final resolution of these matters could have a material impact on our results of operations or cash flows. Refer to Note 10 in our accompanying consolidated financial statements for additional discussion. Reportable Segment Results Our segment financial performance is measured based on segment EBITDA, which is defined as operating income plus depreciation and amortization; plus share-based compensation expense related to investment consideration; plus earn-out related charges; plus certain impairments; plus restructuring related charges; less gain on purchase or sale of subsidiaries. Vistaprint In thousands Three Months Ended December 31, Six Months Ended December 31, 2020 2019 2020 vs. 2019 2020 2019 2020 vs. 2019 Reported Revenue $ 436,317 $ 433,305 1% $ 765,608 $ 776,476 (1)% Segment EBITDA 112,331 138,858 (19)% 202,488 226,161 (10)% % of revenue 26 % 32 % 26 % 29 % Segment Revenue Vistaprint's reported revenue decline for the three and six months ended December 31, 2020 was positively affected by currency impacts of 3% and 2%, respectively. When excluding the benefit from the recent acquisition of 99designs, Vistaprint's organic constant-currency revenue decline was 6% for the three months ended December 31, 2020 and 5% for the six months ended December 31, 2020. The revenue decline was primarily driven by the impact of the pandemic on customer demand, partially offset by the sale of pandemic-related products, such as face masks. During the second quarter of fiscal 2021, heightened pandemic-related restrictions in certain countries negatively impacted revenue for some business products and event-related consumer products like invitations and announcements, while Vistaprint delivered growth in photo products and other holiday products. Segment Profitability For the three and six months ended December 31, 2020, the decrease to Vistaprint's segment EBITDA was primarily due to a decline in gross profit driven by the revenue decrease described above, as well as a revenue mix shift to lower margin products during the second quarter of fiscal 2021. This was combined with increased investment in advertising which included expanded return on advertising spend targets and progressive increases in upper-funnel advertising investments (including related agency fees) and brand-based sponsorships. Additionally, an increase in operating expenses was driven by continued hiring and increased spend related to customer experience, partially offset by technology savings from our fiscal 2020 restructuring and reduced spend for consulting projects compared to the prior year periods. For the three and six months ended December 31, 2020, Vistaprint received $2.4 million and $4.9 million, respectively in government incentives to offset wages in locations where demand decreased materially but roles were maintained. Vistaprint's segment EBITDA was positively impacted by currency movements for both periods presented. 34 PrintBrothers In thousands Three Months Ended December 31, Six Months Ended December 31, 2020 2019 2020 vs. 2019 2020 2019 2020 vs. 2019 Reported Revenue $ 121,806 $ 126,617 (4)% $ 221,918 $ 235,907 (6)% Segment EBITDA 16,457 16,459 —% 26,172 27,236 (4)% % of revenue 14 % 13 % 12 % 12 % Segment Revenue PrintBrothers' reported revenue decline for the three and six months ended December 31, 2020 was positively affected by currency impacts of 7% and 6%, respectively, resulting in a constant-currency revenue decline, excluding the impact of acquisitions, of 11% and 13%, respectively. The revenue decline was due to impacts from COVID-19, as the pandemic continued to have a negative effect on demand in the quarter, though less so than our upload and print businesses serving southern European and UK markets. Segment Profitability PrintBrothers' segment EBITDA decreased slightly during the three and six months ended December 31, 2020 as compared to the prior comparative periods, due primarily to the revenue declines described above. A portion of the decline in segment EBITDA driven by the revenue decline was partially offset by discretionary cost controls and government incentive program benefits of $0.9 million and $1.8 million for the three and six months ended December 2020, respectively. PrintBrothers' segment EBITDA was positively impacted by currency movements for both periods presented. The Print Group In thousands Three Months Ended December 31, Six Months Ended December 31, 2020 2019 2020 vs. 2019 2020 2019 2020 vs. 2019 Reported Revenue $ 76,204 $ 87,699 (13)% $ 142,641 $ 159,957 (11)% Segment EBITDA 12,569 18,105 (31)% 24,752 31,739 (22)% % of revenue 16 % 21 % 17 % 20 % Segment Revenue The Print Group's reported revenue decline for the three and six months ended December 31, 2020 was positively affected by currency impacts of 6% and 5%, respectively, resulting in a decrease in revenue on a constant-currency basis of 19% and 16%, respectively. The revenue decline was due to impacts from the COVID-19 pandemic as these trends worsened when compared to the first quarter of fiscal year 2021, due to new lockdowns in the geographies that these businesses serve. These businesses benefited from the introduction of new products relevant to the pandemic and leveraged by other Cimpress businesses in Europe, which increased inter-segment sales that are included in segment results but eliminated at the consolidated level. Segment Profitability The Print Group's segment EBITDA decreased during the three and six months ended December 31, 2020, as compared to the prior comparative periods, primarily driven by the revenue decline described above. This was partially offset by discretionary cost controls, benefits from government incentives totaling $0.7 million and $1.3 million, respectively, and efficiency gains from leveraging our mass customization platform to shift production to lower-cost sources. The Print Group's segment EBITDA was positively impacted by currency movements for both periods presented. 35 National Pen In thousands Three Months Ended December 31, Six Months Ended December 31, 2020 2019 2020 vs. 2019 2020 2019 2020 vs. 2019 Reported Revenue $ 114,692 $ 127,985 (10)% $ 182,341 $ 198,148 (8)% Segment EBITDA 18,728 28,099 (33)% 8,057 18,249 (56)% % of revenue 16 % 22 % 4 % 9 % Segment Revenue National Pen's reported revenue decrease for the three and six months ended December 31, 2020 was positively affected by currency impacts of 3% and 2%, respectively, resulting in constant-currency revenue decline of 13% and 10%, respectively. This performance is slightly worse than year-over-year revenue results during the first quarter of fiscal year 2021, but still significantly better than the results during the height of pandemic impact in the fourth quarter of fiscal year 2020. National Pen executed well on its holiday peak in light of the pandemic, but revenue was muted compared to last year. National Pen's sales to larger businesses continue to be negatively impacted due to cancelled trade shows and other large-scale events. Product sales to other Cimpress businesses continued to supplement some of the lost volume from lower demand. Segment Profitability The decrease in National Pen's segment EBITDA for the three and six months ended December 31, 2020 was due to the revenue decline described above. The impacts of lower revenue on National Pen's fixed cost base negatively impacted profitability this quarter in comparison to the year ago periods, partially offset by reduced variable cost, advertising and discretionary spend. National Pen was negatively impacted by the sale of disposable masks at a loss, as well as the recognition of an inventory reserves to reduce the carrying value of all remaining disposable masks held in inventory to current market prices of $4.4 million and $5.4 million, respectively, for the three and six months ended December 31, 2020. National Pen's segment EBITDA was positively impacted by currency movements for both periods presented. All Other Businesses In thousands Three Months Ended December 31, Six Months Ended December 31, 2020 2019 2020 vs. 2019 2020 2019 2020 vs. 2019 Reported Revenue (1) $ 55,365 $ 49,774 11% $ 98,843 $ 92,050 7% Segment EBITDA (1) 10,657 3,668 191% 19,266 5,385 258% % of revenue 19 % 7 % 19 % 6 % ___________________ (1) Our All Other Businesses segment includes the results of our VIDA acquisition from July 2, 2018 through the divestiture date of April 10, 2020. This segment consists of BuildASign, which is a larger and profitable business, and two small, rapidly evolving early-stage businesses through which Cimpress is expanding to new markets. These early-stage businesses continue to have operating losses as previously described and as planned. Segment Revenue All Other Businesses' constant-currency revenue excluding the impact of acquisitions increased by 14% and 10% for the three and six months ended December 31, 2020, respectively. This was primarily driven by continued growth at BuildASign, whose home décor and pandemic-focused signage products continued to generate strong results. In addition, the business benefited from higher volumes of political signage in comparison to the prior year due to the 2020 election season in the United States. BuildASign's strong stand-alone execution is compounded by the business increasingly leveraging our mass customization platform to drive new product introduction and improve customer experience. Revenue also grew year-over-year in our smaller Printi and YSD businesses. 36 Segment Profitability Within the All Other Businesses segment, each business improved its profitability for the three and six months ended December 31, 2020 as compared to the comparable periods, with the overall improvement primarily driven by revenue growth and advertising efficiency in BuildASign. Printi and YSD reduced losses through revenue growth and improved efficiency. Our divestiture of loss-making VIDA in the fourth quarter of fiscal year 2020 also contributed to year-over-year profit improvements in the second quarter. Central and Corporate Costs Central and corporate costs consist primarily of the team of software engineers that is building our mass customization platform; shared service organizations such as global procurement; technology services such as hosting and security; administrative costs of our Cimpress India offices where numerous Cimpress businesses have dedicated business-specific team members; and corporate functions including our Board of Directors, CEO, and the team members necessary for managing corporate activities, such as treasury, tax, capital allocation, financial consolidation, internal audit and legal. These costs also include certain unallocated share-based compensation costs. Central and corporate costs decreased by $7.4 million and $10.1 million during the three and six months ended December 31, 2020, respectively, as compared to the prior year periods, due to lower professional fees, share-based compensation expense and discretionary spend, including travel and training costs. Liquidity and Capital Resources Consolidated Statements of Cash Flows Data In thousands Six Months Ended December 31, 2020 2019 Net cash provided by operating activities $ 256,168 $ 265,097 Net cash used in investing activities (76,677) (53,816) Net cash used in financing activities (191,754) (207,390) At December 31, 2020, we had $36.9 million of cash and cash equivalents and $1,315.4 million of debt, excluding debt issuance costs, and debt premiums and discounts. Under the terms of our April 28, 2020 credit facility amendment, we are required to use cash balances in excess of $100.0 million, if any, to repay the revolving loans under our senior secured credit facility. The cash flows during the six months ended December 31, 2020 related primarily to the following items: Cash inflows: • Net income of $23.8 million • Adjustments for non-cash items of $136.3 million primarily related to positive adjustments for depreciation and amortization of $85.9 million, share-based compensation costs of $13.5 million and unrealized currency-related losses of $29.4 million • The changes in operating assets and liabilities were a source of cash during the period, driven by increases in accounts payable and accrued expenses, largely driven by our seasonally strong second quarter Cash outflows: • Payments of debt of $171.5 million, net of borrowings and inclusive of debt issuance costs • Acquisition of 99designs for $36.4 million, net of cash acquired and excluding the deferred payment and post-closing adjustment that are payable February 15, 2022 • Internal and external costs of $26.4 million for software and website development that we have capitalized 37 • Capital expenditures of $16.8 million of which the majority related to the purchase of manufacturing and automation equipment for our production facilities and computer and office equipment • Payment of withholding taxes in connection with share awards of $5.6 million • Purchase of noncontrolling interest of $5.1 million and distribution to noncontrolling interest holders of $4.6 million • Payments for finance lease arrangements of $3.3 million Additional Liquidity and Capital Resources Information. During the six months ended December 31, 2020, we financed our operations and strategic investments through internally generated cash flows from operations and debt financing. As of December 31, 2020, a portion of our cash and cash equivalents were held by our subsidiaries, and undistributed earnings of our subsidiaries that are considered to be indefinitely reinvested were $40.4 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. We have historically allocated a material amount of capital to purchases of our ordinary shares and corporate acquisitions. The April 2020 amendment to our credit facility prohibits us from repurchasing our shares and limits acquisitions for the period in which the financial maintenance covenants associated with our senior secured credit facility are suspended. Debt. As of December 31, 2020, we had aggregate loan commitments from our senior secured credit facility totaling $994.4 million. The loan commitments consisted of revolving loan borrowings of $260.0 million and term loans of $144.4 million. We have other financial obligations that constitute additional indebtedness based on the definitions within the credit facility. As of December 31, 2020, the amount available for borrowing under our senior secured credit facility was as follows: In thousands December 31, 2020 Maximum aggregate available for borrowing $ 994,375 Outstanding borrowings of senior secured credit facility (404,375) Remaining amount 590,000 Limitations to borrowing due to debt covenants and other obligations (1) (4,950) Amount available for borrowing as of December 31, 2020 (2) $ 585,050 _________________ (1) As of December 31, 2020, our pre-existing financial maintenance covenants are suspended and we are in compliance with the new restrictions in place, with the primary maintenance covenant during the suspension period that we must maintain liquidity above $50.0 million. Refer to Note 9 in our accompanying consolidated financial statements for further description of the restrictions in place during the covenant suspension period. (2) Share purchases, dividend payments, and corporate acquisitions are subject to more restrictive covenants, and therefore we may not be able to use the full amount available for borrowing for these purposes. Debt Covenants . The April 2020 amendment to our senior secured facility suspended our pre-existing financial maintenance covenants until December 31, 2021, including the total and senior secured leverage covenants and interest coverage ratio covenant. Refer to Note 9 in our accompanying consolidated financial statements for additional information. Other Debt . Other debt primarily consists of term loans acquired through our various acquisitions or used to fund certain capital investments. As of December 31, 2020, we had $11.0 million outstanding for other debt payable through March 2025. 38 Contractual Obligations Contractual obligations at December 31, 2020 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 (1) (2) $ 154,721 $ 37,085 $ 54,324 $ 33,877 $ 29,435 Purchase commitments 226,290 121,172 89,243 15,875 — Senior unsecured notes and interest payments 831,000 42,000 84,000 84,000 621,000 Second lien notes and interest payments 462,000 36,000 72,000 354,000 — Other debt and interest payments (3) 520,394 51,548 88,050 380,796 — Finance leases, net of subleases (1) 20,304 6,729 9,651 3,123 801 Other 45,369 943 44,426 — — Total (4) $ 2,260,078 $ 295,477 $ 441,694 $ 871,671 $ 651,236 ___________________ (1) Operating and finance lease payments included above include only amounts which are fixed under lease agreements. Our leases may also incur variable expenses, which are not included in these payments. (2) On January 6, 2021, we amended our Waltham lease agreement to reduce the amount of space leased. As part of the agreement, we will pay $8.8 million in two equal installments, which includes both an early termination penalty and the rent we would have otherwise paid for the terminated space through June 30, 2021. We have separately entered into a lease agreement for a new office space in Waltham, Massachusetts, which will commence on June 1, 2021. The amended lease terms, combined with the new lease agreement, will result in a reduction to total lease commitments of $47.5 million, exclusive of the termination penalty. Refer to Note 13 in our accompanying consolidated financial statements for additional details. (3) Other debt and interest payments include the effects of interest rate swaps, whether they are expected to be payments or receipts of cash. We have excluded the effect of interest rate swaps of $0.6 million within the more than five years category above as that period extends beyond the term of our debt and the interest rate swaps do not yet offset contractual interest payments. (4) 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 $8.1 million as of December 31, 2020 have been excluded from the contractual obligations table above. For further information on uncertain tax positions, see Note 9 in our accompanying consolidated financial statements for additional details. Operating Leases . We rent office space under operating leases expiring on various dates through 2034. The terms of certain lease agreements require security deposits in the form of bank guarantees and letters of credit in the amount of $2.1 million. Purchase Commitments . At December 31, 2020, we had unrecorded commitments under contract of $226.3 million. Purchase commitments consisted of third-party web services of $97.6 million, production and computer equipment purchases of $24.9 million, inventory and third-party fulfillment purchase commitments of $18.4 million, advertising of $17.8 million, commitments for professional and consulting fees of $8.4 million and other unrecorded purchase commitments of $59.2 million. Senior Unsecured Notes and Interest Payments. Our senior unsecured notes due 2026 bear interest at a rate of 7.0% per annum and mature on June 15, 2026. Interest on the notes is payable semi-annually on June 15 and December 15 of each year and has been included in the table above. Second Lien Notes and Interest Payments. Our senior secured notes due 2025 bear interest at a rate of 12.0% per annum and mature on May 15, 2025. Interest on the notes is payable semi-annually on May 15 and November 15 of each year and has been included in the table above. At our option, we may elect to pay interest on up to 50.0% of the then outstanding principal amount of the notes as paid-in-kind and applied to the outstanding principal balance of the notes. Other Debt and Interest Payments. At December 31, 2020, the term loans of $144.4 million outstanding under our credit agreement had repayments due on various dates through November 15, 2024, with the revolving loans outstanding under our $260.0 million revolving credit facility due on November 15, 2024. Interest payable included in this table is based on the interest rate as of December 31, 2020, and assumes all LIBOR-based revolving loan amounts outstanding will not be paid until maturity, but that the term loan amortization payments will 39 be made according to our defined schedule and all Prime rate based revolving loan amounts will be paid within a year. Interest payable includes the estimated impact of our interest rate swap agreements. In addition, we have other debt which consists primarily of term loans acquired through our various acquisitions or used to fund certain capital investments, and as of December 31, 2020 we had $11.0 million outstanding for those obligations that have repayments due on various dates through March 2025. Finance Leases. We lease certain machinery and plant equipment under finance lease agreements that expire at various dates through 2027. The aggregate carrying value of the leased equipment under finance leases included in property, plant and equipment, net in our consolidated balance sheet at December 31, 2020, is $60.5 million, net of accumulated depreciation of $41.6 million. The present value of lease installments not yet due included in other current liabilities and other liabilities in our consolidated balance sheet at December 31, 2020 amounts to $24.9 million. Other Obligations . Other obligations include deferred payments related to previous acquisitions of $45.4 million in the aggregate.This balance includes the deferred payment related to the 99designs acquisition totaling $43.7 million. Refer to Note 7 in our accompanying consolidated financial statements for additional details. Additional Non-GAAP Financial Measures Adjusted EBITDA and adjusted free cash flow presented below, and constant-currency revenue growth and constant-currency revenue growth excluding acquisitions/divestitures presented in the consolidated results of operations section above, are supplemental measures of our performance that are not required by, or presented in accordance with, GAAP. Adjusted EBITDA is defined as GAAP operating income plus depreciation and amortization plus share-based compensation expense plus proceeds from insurance plus earn-out related charges plus certain impairments plus restructuring related charges plus realized gains or losses on currency derivatives less interest expense related to our Waltham, Massachusetts office lease less gain on purchase or sale of subsidiaries. Adjusted EBITDA is the primary profitability metric by which we measure our consolidated financial performance and 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 certain derivative 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. Adjusted free cash flow is the primary financial metric by which we set quarterly and annual budgets both for individual businesses and Cimpress-wide. Adjusted free cash flow is defined as net cash provided by operating activities less purchases of property, plant and equipment, purchases of intangible assets not related to acquisitions, and capitalization of software and website development costs that are included in net cash used in investing activities, plus the payment of contingent consideration in excess of acquisition-date fair value and gains on proceeds from insurance that are included in net cash provided by operating activities, if any. We use this cash flow metric because we believe that this methodology can provide useful supplemental information to help investors better understand our ability to generate cash flow after considering certain investments required to maintain or grow our business, as well as eliminate the impact of certain cash flow items presented as operating cash flows that we do not believe reflect the cash flow generated by the underlying business. Our adjusted free cash flow measure has limitations as it may omit certain components of the overall cash flow statement and does not represent the residual cash flow available for discretionary expenditures. For example, adjusted free cash flow does not incorporate our cash payments to reduce the principal portion of our debt or cash payments for business acquisitions. Additionally, the mix of property, plant and equipment purchases that we choose to finance may change over time. We believe it is important to view our adjusted free cash flow measure only as a complement to our entire consolidated statement of cash flows. 40 The table below sets forth operating income and adjusted EBITDA for the three and six months ended December 31, 2020 and 2019: In thousands Three Months Ended December 31, Six Months Ended December 31, 2020 2019 2020 2019 GAAP operating income $ 94,194 $ 121,595 $ 130,180 $ 146,974 Exclude expense (benefit) impact of: Depreciation and amortization 43,597 42,356 85,887 84,891 Share-based compensation expense (1) 5,243 8,325 13,526 13,075 Certain impairments and other adjustments (215) 936 568 760 Restructuring-related charges 2,182 1,897 2,096 4,087 Realized (losses) gains on currency derivatives not included in operating income (1,578) 10,408 (361) 15,246 Adjusted EBITDA $ 143,423 $ 185,517 $ 231,896 $ 265,033 _________________ (1) The adjustment for share-based compensation expense excludes the portion of share-based compensation expense included in restructuring related charges, if any, to avoid double counting. The table below sets forth net cash provided by operating activities and adjusted free cash flow for the three and six months ended December 31, 2020 and 2019: In thousands Six Months Ended December 31, 2020 2019 Net cash provided by operating activities $ 256,168 $ 265,097 Purchases of property, plant and equipment (16,790) (28,094) Capitalization of software and website development costs (26,445) (23,417) Adjusted free cash flow $ 212,933 $ 213,586 41