Item 2. Management’s Discussion and Analysis
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 financial results, continued global supply chain disruptions and the expected impacts of those disruptions on our business, our expectations with respect to National Pen's move from Ireland to the Czech Republic, our expectations with respect to our competitive position and market share, sufficiency of our liquidity position, legal proceedings, currency volatility, 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 and the timing and pace of economic recovery; 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 make the investments that we plan to make or the failure of those investments to achieve the results we expect; our failure to execute on the transformation of the Vista business; 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, including possible impacts of the conflict in Ukraine on Depositphotos' operations; 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 the 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.
In October 2021 our Vistaprint business and reportable segment introduced a new parent brand "Vista", reflecting the business' ongoing transformation into the expert design and marketing partner for small businesses around the world. This new parent brand encompasses VistaPrint, 99designs by Vista, VistaCreate, and Vista Corporate Solutions. This move should help open customers' minds to allow us to serve a broader set of their needs across a wide range of products and solutions that includes design, social media and web presence as well as print. No changes were made to our internal organizational and reporting structure as a result of this rebranding, but we will refer to this reportable segment as "Vista" from here forward and throughout this document.
As of March 31, 2022, we have numerous operating segments under our management reporting structure that are reported in the following five reportable segments: Vista, 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.
The effects of the pandemic on Cimpress have continued to diminish in terms of its impact on demand, but we continue to experience volatility as COVID-19 variants emerge and government restrictions are put in place. Our businesses continue to experience supply chain challenges as a facet of pandemic impacts which has created both difficulties and opportunities for Cimpress businesses. Each of our reportable segments has seen material cost increases of product substrates like paper, production materials like aluminum plates, freight and shipping charges,
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energy costs and higher compensation costs due to a more competitive labor market. Our scale-based shared strategic capabilities and supplier relationships provide competitive advantages for our businesses to weather these challenges. Through data capabilities, our businesses are regularly testing new pricing approaches, and in all businesses there have been pricing increases that are partially offsetting the increased costs.
We continue to hire talent and make investments in technology, data, new product introduction, customer experience improvements, and branding, especially in our Vista business, that are designed to build on our competitive advantages and drive sustainable growth.
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; 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. Reconciliations of our non-GAAP financial measures are included within the "Consolidated Results of Operations" and "Additional Non-GAAP Financial Measures" sections of Management's Discussion and Analysis. A summary of these key financial metrics for the three and nine months ended March 31, 2022 as compared to the three and nine months ended March 31, 2021 follows:
Third Quarter Fiscal Year 2022
• Revenue increased by 15% to $657.4 million.
• Constant-currency revenue (a non-GAAP financial measure) increased by 19% and by 17% when excluding acquisitions completed in the last four quarters.
• Operating loss in creased by $12.7 million from $(15.7) million to $(28.4) million.
• Adjusted EBITDA (a non-GAAP financial measure) decreased by $21.4 million to $33.6 million.
• Diluted net loss per share attributable to Cimpress plc increased to $(2.75) from $(1.50) in the comparative period.
Year to Date Fiscal Year 2022
• Revenue increased by 12% to $2,164.7 million.
• Constant-currency revenue (a non-GAAP financial measure) increased by 13% and by 11% when excluding acquisitions completed in the last four quarters.
• Operating income decreased by $40.0 million to $74.5 million.
• Adjusted EBITDA (a non-GAAP financial measure) decreased by $43.6 million to $243.3 million.
• Diluted net loss per share attributable to Cimpress plc increased to $(0.91) from $(0.67) in the comparative period.
• Cash provided by operating activities decreased by $87.2 million to $131.7 million.
• Adjusted free cash flow (a non-GAAP financial measure) decreased by $111.2 million to $39.7 million.
For the third quarter of fiscal year 2022, the increase in reported revenue was primarily due to the continued recovery of demand. Reported revenue benefited from the addition of revenue from Depositphotos, which was acquired on October 1, 2021 and is included in our Vista business. Revenue also benefited from pricing changes in many of our businesses, which continued to be one tool we used to mitigate inflationary cost pressures that have arisen from ongoing supply chain challenges. Revenue for customized face masks was much lower as compared to the prior year because demand for pandemic-related products has diminished. Currency exchange fluctuations also had a negative effect during the current quarter.
For the three months ended March 31, 2022, the increase in operating loss was primarily due to increased investments in our Vista business. These investments include hiring across several strategic initiatives, as well as increased advertising spend driven by mid- and upper-funnel advertising and higher performance advertising driven by expanded payback thresholds. The current quarter was also negatively impacted by inflationary cost pressures, which were not fully mitigated through price increases in certain businesses and product categories. Share based compensation expense also increased year over year largely because the comparative period's annual grant cycle
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was delayed until the middle of the third quarter of fiscal year 2021 while the current period's grants occurred during the first quarter of fiscal year 2022. Profit improvement in The Print Group, PrintBrothers, and National Pen segments driven by strong revenue growth, as well as the non-recurrence of a $19.9 million impairment in the year-ago period partially offset the items described above.
Adjusted EBITDA decreased year over year, primarily for the same reasons operating income decreased. Adjusted EBITDA excludes restructuring charges, share-based compensation expense, and non-cash gains on the sale of assets, 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 approximately $2.9 million for the current quarter.
Diluted net loss per share attributable to Cimpress plc increased for the three months ended March 31, 2022 due to the items described above and increased income tax expense driven by the establishment of a partial valuation allowance on deferred tax assets primarily related to Swiss tax reform benefits recognized in fiscal year 2020 that we no longer expect to fully realize. This was partially offset by unrealized currency gains caused by exchange rate volatility and decreased interest expense due to our debt refinancing during the fourth quarter of fiscal 2021.
Consolidated Results of Operations
Consolidated Revenue
Our businesses generate revenue primarily from the sale and shipment of customized manufactured products. We also generate revenue, to a much lesser extent (and primarily in our Vista business), from digital services, graphic design services, website design and hosting, and email marketing services, as well as 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.
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Total revenue and revenue growth by reportable segment for the three and nine months ended March 31, 2022 and 2021 are shown in the following table:
In thousands Three Months Ended March 31, Currency
Impact: Constant-
Currency Impact of Acquisitions/Divestitures: Constant- Currency Revenue Growth
2022 2021 %
Change (Favorable)/Unfavorable Revenue Growth (1) (Favorable)/Unfavorable Excluding Acquisitions/Divestitures (2)
Vista $ 349,216 $ 321,965 8% 2% 10% (2)% 8%
PrintBrothers 119,960 93,997 28% 9% 37% (1)% 36%
The Print Group 75,361 59,945 26% 9% 35% —% 35%
National Pen 72,243 62,220 16% 3% 19% —% 19%
All Other Businesses 48,486 44,062 10% (1)% 9% (4)% 5%
Inter-segment eliminations (7,854) (8,827)
Total revenue $ 657,412 $ 573,362 15% 4% 19% (2)% 17%
In thousands Nine Months Ended March 31, Currency
Impact: Constant-
Currency Impact of Acquisitions/Divestitures: Constant- Currency Revenue Growth
2022 2021 %
Change (Favorable)/Unfavorable Revenue Growth (1) (Favorable)/Unfavorable Excluding Acquisitions/Divestitures (2)
Vista $ 1,146,810 $ 1,082,332 6% 1% 7% (3)% 4%
PrintBrothers 383,011 315,915 21% 5% 26% (1)% 25%
The Print Group 238,311 202,586 18% 4% 22% —% 22%
National Pen 266,224 244,561 9% 1% 10% —% 10%
All Other Businesses 154,076 142,905 8% —% 8% (5)% 3%
Inter-segment eliminations (23,705) (47,533)
Total revenue $ 2,164,727 $ 1,940,766 12% 1% 13% (2)% 11%
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(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. For example, revenue from 99designs, which we acquired on October 1, 2020 in Q2 2021, is excluded from revenue growth in Q1 of fiscal year 2022 since there are no full quarter results in the comparable period, but revenue is included in revenue growth for Q2 through Q4 of fiscal year 2022. Our reportable segments-related growth is inclusive of inter-segment revenues, which are eliminated in our consolidated results.
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.
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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 March 31, Nine Months Ended March 31,
2022 2021 2022 2021
Cost of revenue $ 347,452 $ 296,533 $ 1,110,378 $ 976,115
% of revenue 52.9 % 51.7 % 51.3 % 50.3 %
For the three and nine months ended March 31, 2022, cost of revenue increased by $50.9 million and $134.3 million, respectively, primarily due to demand-dependent cost of goods sold, including third-party fulfillment, material and shipping costs. During the current fiscal year, we've experienced increasing impacts from global supply chain challenges that resulted in increased costs for product substrates like paper, production materials like aluminum plates, freight and shipping charges, and energy costs. Compensation costs are also higher due to a more competitive labor market. The overall impact of increased costs, net of pricing and manufacturing efficiencies, had varying impacts on our businesses during the three and nine months ended March 31, 2022. It remains a challenging environment, and we expect higher input costs and supply constraints to persist, although we are unable to predict for how long. We believe we are advantaged in this environment versus smaller competitors because our scale provides us with a stronger supplier negotiation position for both costs and availability of supply.
Consolidated Operating Expenses
The following table summarizes our comparative operating expenses for the following periods:
In thousands
Three Months Ended March 31, Nine Months Ended March 31,
2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021
Technology and development expense $ 75,291 $ 62,572 20% $ 212,835 $ 186,097 14%
% of revenue 11.5 % 10.9 % 9.8 % 9.6 %
Marketing and selling expense $ 194,618 $ 154,472 26% $ 577,931 $ 474,944 22%
% of revenue 29.6 % 26.9 % 26.7 % 24.5 %
General and administrative expense $ 50,888 $ 62,358 (18)% $ 144,162 $ 147,149 (2)%
% of revenue 7.7 % 10.9 % 6.7 % 7.6 %
Amortization of acquired intangible assets $ 14,180 $ 13,506 5% $ 41,520 $ 40,264 3%
% of revenue 2.2 % 2.4 % 1.9 % 2.1 %
Restructuring expense (1) $ 3,420 $ (382) (995)% $ 3,418 $ 1,714 99%
% of revenue 0.5 % (0.1) % 0.2 % 0.1 %
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(1) Refer to Note 14 in our accompanying consolidated financial statements for additional details relating to restructuring expense.
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 $12.7 million and $26.7 million, respectively, for the three and nine months ended March 31, 2022, as compared to the prior comparative periods. This increase is primarily driven by higher compensation costs due to increased investment from hiring, the timing of our annual
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merit cycle and prior-year delay of our share-based compensation grants to the middle of the third quarter of fiscal year 2021, mainly in the Vista business and our central technology group. Other operating costs also increased in part due to increases in demand.
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 Vista, 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 due to differences in the customers that they serve.
For the three and nine months ended March 31, 2022, marketing and selling expenses increased by $40.1 million and $103.0 million, respectively, as compared to the prior periods. The largest increase in marketing and selling expenses was in our Vista business, which increased by $34.5 million and $81.0 million, respectively. The increase in Vista was primarily driven by higher headcount in areas such as user experience design, brand and data & analytics as well as higher mid- and upper-funnel advertising and performance advertising from expanded payback thresholds. Advertising expense also increased for our remaining businesses in total by $2.6 million and $13.6 million, respectively, for the three and nine months ended March 31, 2022, due to higher demand and more normalized payback thresholds in the current periods.
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 nine months ended March 31, 2022, general and administrative expenses decreased by $11.5 million and $3.0 million, respectively, as compared to the prior-year periods, due to the non-recurrence of lease-related impairment and abandonment charges that were recognized in the third quarter of fiscal year 2021 of $19.9 million. This was partially offset by increases to share-based compensation costs due to the prior year's delayed timing of the annual grant cycle, mainly in our Vista business and our central teams. The non-recurrence of temporary cost-control measures from the year-ago nine month period also drove a year-over-year increase in corporate costs. The current fiscal year benefited from a non-cash gain of $3.3 million recognized during the second fiscal quarter as a result of our purchase and sale of a previously leased facility. Refer to Note 2 of the accompanying consolidated financial statements for additional details.
Other Consolidated Results
Other income (expense), net
Other income (expense), net generally consists of gains and losses from currency exchange rate fluctuations on transactions or balances denominated in currencies other than the functional currency of our subsidiaries, as well as the realized and unrealized gains and losses on some of our derivative instruments. In evaluating our currency hedging 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 income (expense), net:
In thousands
Three Months Ended March 31, Nine Months Ended March 31,
2022 2021 2022 2021
Gains (losses) on derivatives not designated as hedging instruments $ 11,210 $ 18,724 $ 31,017 $ (13,791)
Currency-related gains, net (672) (8,841) 5,202 (2,957)
Other gains (losses) 1,783 (98) 2,111 581
Total other income (expense), net $ 12,321 $ 9,785 $ 38,330 $ (16,167)
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The increase in other income (expense), 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 also recognize the impact from de-designated interest swap contracts that are no longer highly effective, which resulted in unrealized losses during the current period. We expect volatility to continue in future periods, as we do not apply hedge accounting for most of our derivative currency contracts.
We 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, 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 decreased by $4.8 million and $14.4 million, respectively, during the three and nine months ended March 31, 2022, as compared to the prior year periods. This is primarily due to our Term Loan B refinancing during the fourth quarter of fiscal 2021 that resulted in a reduction to our weighted-average interest rate on our outstanding borrowings in the current year.
Income tax expense
In thousands
Three Months Ended March 31, Nine Months Ended March 31,
2022 2021 2022 2021
Income tax expense $ 29,529 $ 3,927 $ 56,208 $ 23,675
Effective tax rate (73.2) % (11.2) % 149.9 % 273.5 %
Income tax expense for the three and nine months ended March 31, 2022 increased versus the prior comparative periods due to establishing a partial valuation allowance on Swiss deferred tax assets of $29.6 million primarily related to Swiss tax reform benefits recognized in fiscal 2020 that we no longer expect to fully realize.
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 proceeds from insurance; 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.
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Vista
In thousands
Three Months Ended March 31, Nine Months Ended March 31,
2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021
Reported Revenue $ 349,216 $ 321,965 8% $ 1,146,810 $ 1,082,332 6%
Segment EBITDA 27,386 64,333 (57)% 188,114 266,821 (29)%
% of revenue 8 % 20 % 16 % 25 %
Segment Revenue
Vista's reported revenue growth for the three and nine months ended March 31, 2022 was negatively affected by a currency impact of 2% and 1%, respectively. When excluding the benefit from the recent acquisitions of Depositphotos and 99designs, Vista's organic constant-currency revenue growth was 8% and 4%, respectively. Vista's revenue growth was driven by product categories such as business cards, signage, marketing materials, and promotional products. Revenue from business cards and small format marketing materials improved year over year, but were still below pre-pandemic levels. During the third quarter of the current fiscal year we executed on the migration of Vista's customer-facing website in the United States to a new platform, which performed better than expectations, but did have a negative impact on revenue. In addition, revenue related to customized face masks declined from the prior periods as the demand for pandemic-related products declined.
Segment Profitability
For the three and nine months ended March 31, 2022, segment EBITDA declined by $36.9 million and $78.7 million, respectively, largely driven by increased operating expenses related to growth investments including hiring of talent, especially in user experience, design, product management, and data and analytics. These organic investments are in support of Vista's multi-year transformation journey to become the expert design and marketing partner to the world's small businesses. Additionally, Vista's advertising expense increased by $16.8 million and $36.1 million, respectively, driven by higher mid- and upper-funnel advertising and expanded performance advertising payback thresholds, which were more constrained during the prior-year periods when the effects of the pandemic on this segment were more severe. Gross profit was negatively impacted during the third quarter of fiscal year 2022 by inflationary cost pressures from higher material, inbound freight and energy costs that had a year-over-year net impact of approximately $9.0 million. These inflationary pressures did not have a material net impact during the first half of the current fiscal year. The decline in profitability was also affected by government subsidy benefits in the prior comparative periods of $1.9 million and $6.8 million, respectively, which did not recur during the three and nine months ended March 31, 2022. These decreases were partially offset by profit improvement driven by the revenue growth described above.
PrintBrothers
In thousands
Three Months Ended March 31, Nine Months Ended March 31,
2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021
Reported Revenue $ 119,960 $ 93,997 28% $ 383,011 $ 315,915 21%
Segment EBITDA 12,392 7,560 64% 47,280 33,732 40%
% of revenue 10 % 8 % 12 % 11 %
Segment Revenue
PrintBrothers' reported revenue growth for the three and nine months ended March 31, 2022 was negatively affected by a currency impact of 9% and 5%, respectively, resulting in a constant-currency revenue growth of 37% and 26%, respectively. This strong growth was driven in part by relatively stricter pandemic-related lockdowns in the prior year periods, as well as growth from new product introductions and price increases made to address inflationary cost increases. Additionally, the PrintBrothers network and relative size allowed these businesses to address opportunities to meet customer demand when competition could not. We also benefited from the timing of elections in Germany during the current fiscal year, which drove sales of signage products, flyers and brochures.
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Segment Profitability
PrintBrothers' segment EBITDA during the three and nine months ended March 31, 2022, as compared to the prior periods, increased despite increased input costs, driven by the constant-currency revenue growth described above, the higher margin impact of new products, and improved efficiencies as the businesses in this segment better leverage their combined capabilities.
The Print Group
In thousands
Three Months Ended March 31, Nine Months Ended March 31,
2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021
Reported Revenue $ 75,361 $ 59,945 26% $ 238,311 $ 202,586 18%
Segment EBITDA 11,923 6,475 84% 42,670 31,227 37%
% of revenue 16 % 11 % 18 % 15 %
Segment Revenue
The Print Group's reported revenue for the three and nine months ended March 31, 2022 was negatively affected by a currency impact of 9% and 4%, respectively, resulting in an increase to revenue on a constant-currency basis of 35% and 22%, respectively, due to signs of overall economic recovery in many of the European countries in which we compete and leveraging new products introduced in recent years, as well as pricing actions taken to mitigate inflationary cost pressures. During the first quarter of the current fiscal year we benefited from the timing of elections in Italy, which drove demand for signage products, flyers and brochures.
Segment Profitability
The increase in The Print Group's segment EBITDA during the three and nine months ended March 31, 2022, as compared to the prior periods, was primarily driven by the constant-currency revenue growth described above. In addition, The Print Group continues to benefit from the introduction of new products with higher margins, as well as improved efficiencies as the group better leverages its combined capabilities.
National Pen
In thousands Three Months Ended March 31, Nine Months Ended March 31,
2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021
Reported Revenue $ 72,243 $ 62,220 16% $ 266,224 $ 244,561 9%
Segment EBITDA (898) (3,324) (73)% 22,653 4,733 379%
% of revenue (1) % (5) % 9 % 2 %
Segment Revenue
For the three and nine months ended March 31, 2022, National Pen's revenue growth was negatively affected by currency impacts of 3% and 1%, respectively, resulting in constant-currency revenue growth of 19% and 10%, respectively. National Pen's revenue has improved across geographic markets and channels, including web and mail order channels. This improvement is due to businesses reopening and a return of in-person events in some markets, despite a decline in revenue from pandemic-related products including masks produced on behalf of other Cimpress businesses.
Segment Profitability
The increase in National Pen's segment EBITDA for the three and nine months ended March 31, 2022 was due in part to the revenue increase described above, as well as improvements in gross profit driven by a normalized mix of products and decline in lower-margin pandemic-related products, partially offset by higher freight costs. National Pen also made permanent cost reductions in the prior year that benefited segment EBITDA for the nine months ended March 31, 2022, but had no year-over-year impact in the current quarter as we've lapped the benefits of those savings. The increased profitability was also caused by the non-recurrence of the prior periods' inventory reserve to reduce the carrying value of disposable masks held in inventory to market prices of $0.8 million and $6.2 million, respectively.
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All Other Businesses
In thousands
Three Months Ended March 31, Nine Months Ended March 31,
2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021
Reported Revenue $ 48,486 $ 44,062 10% $ 154,076 $ 142,905 8%
Segment EBITDA 6,044 6,515 (7)% 17,199 25,781 (33)%
% of revenue 12 % 15 % 11 % 18 %
This segment consists of BuildASign, which is a larger and profitable business, and two early-stage businesses that we continue to manage at a relatively modest operating loss as previously described and planned. We expect fluctuations in growth as each of their business models evolve in function of customer feedback, testing, and entrepreneurial pivoting.
Segment Revenue
All Other Businesses' constant-currency revenue growth, excluding the impact of acquisitions, was 5% and 3%, respectively, during the three and nine months ended March 31, 2022. This growth was driven by recovery of demand for both our Printi business and signage products offered by BuildASign, partially offset by a decline in demand for home decor products that had benefited during the pandemic period.
Segment Profitability
The decrease in segment EBITDA for the three and nine months ended March 31, 2022 was due to a combination of factors including inflationary pressures on input costs including shipping, materials and labor during the current periods.
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 increased by $3.8 million and $13.7 million, respectively, during the three and nine months ended March 31, 2022, as compared to the prior-year periods, due to the prior year timing of our annual share-based compensation grant, as well as the end of temporary cost-control measures from the year-ago period which drove a year-over-year increase in corporate costs. In addition, our continued investments in our mass customization platform through additional hiring in cost-efficient talent markets and increased volumes contributed to higher central operating costs year over year.
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Liquidity and Capital Resources
Consolidated Statements of Cash Flows Data
In thousands
Nine Months Ended March 31,
2022 2021
Net cash provided by operating activities $ 131,716 $ 218,948
Net cash used in investing activities (48,627) (101,147)
Net cash used in financing activities (98,746) (130,185)
The cash flows during the nine months ended March 31, 2022 related primarily to the following items:
Cash inflows:
• Adjustments for non-cash items of $156.6 million primarily related to adjustments for depreciation and amortization of $133.4 million, share-based compensation costs of $36.2 million, and deferred taxes of $26.6 million, which were partially offset by negative adjustments for unrealized currency-related gains of $31.5 million
• Proceeds from the maturity of held-to-maturity securities of $93.7 million
• Total net working capital impacts of $6.1 million were a source of cash. Accounts payable and accrued expense inflows were partially offset by inventory, accounts receivable and other asset outflows
Cash outflows:
• Net loss of $18.7 million
• Business acquisitions for $75.3 million, net of cash acquired, primarily related to the Depositphotos acquisition which includes $0.6 million of the deferred payment and post-closing adjustment
• Internal and external costs of $49.9 million for software and website development that we have capitalized
• $43.6 million for the payment of purchase consideration included in the 99designs acquisition's fair value
• Capital expenditures of $42.1 million of which the majority related to the purchase of manufacturing and automation equipment for our production facilities
• Payments for debt of $11.1 million
• Payments for finance lease arrangements, excluding the payment associated with the purchase option exercise included below, of $7.2 million
• Purchase and sale of a previously leased facility that resulted in a net payment of $4.7 million due to our exercise of the lease purchase option and subsequent sale
• A $4.0 million distribution to noncontrolling interest holders
• Payment of withholding taxes in connection with share awards of $3.1 million
• Payment for the settlement of a derivative designated as a net investment hedge of $1.9 million
• Financing fees of $1.4 million from our fourth quarter fiscal year 2021 credit facility amendment that we have capitalized
Additional Liquidity and Capital Resources Information. At March 31, 2022, we had $161.5 million of cash and cash equivalents, $107.8 million of marketable securities and $1,730.7 million of debt, excluding debt issuance costs and debt premiums and discounts. During the three and nine months ended March 31, 2022, we financed our operations and strategic investments through internally generated cash flows from operations and cash on hand. We expect to finance our future operations through our cash, investments, operating cash flow and borrowings under our debt arrangements.
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Our consolidated net leverage ratio as calculated per our amended and restated senior secured credit agreement dated as of May 17, 2021 (the "Restated Credit Agreement") was 4.44 times trailing-twelve-month adjusted EBITDA as of March 31, 2022, and higher than our net leverage ratio in recent quarters. The increase in our net leverage ratio was largely due to an increase to net debt driven by cash outflows for seasonal net working capital and the $43.6 million deferred payment related to the acquisition of 99designs. The decrease in our adjusted EBITDA for the trailing twelve months ended March 31, 2022 also caused our leverage ratio to increase, driven primarily by increased organic investments in Vista that continue to weigh on our profitability. We expect to delever from the current leverage level in fiscal year 2023.
As of March 31, 2022, 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 $46.6 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.
Contractual Obligations
Contractual obligations at March 31, 2022 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) $ 83,960 $ 29,457 $ 39,193 $ 11,147 $ 4,163
Purchase commitments 207,456 86,289 81,675 39,491 —
Senior unsecured notes and interest payments 789,000 42,000 84,000 663,000 —
Senior secured credit facility and interest payments (2) 1,413,472 62,064 119,269 115,232 1,116,907
Other debt 9,285 3,123 5,174 988 —
Finance leases, net of subleases (1) 15,543 6,191 7,527 1,825 —
Other 8,555 8,555 — — —
Total (3) $ 2,527,271 $ 237,679 $ 336,838 $ 831,683 $ 1,121,070
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(1) Operating and finance lease payments above include only amounts which are fixed under lease agreements. Our leases may also incur variable expenses which are not reflected in the contractual obligations above.
(2) Senior secured credit facility and interest payments include the effects of interest rate swaps, whether they are expected to be payments or receipts of cash.
(3) 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 $9.2 million as of March 31, 2022 have been excluded from the contractual obligations table above. See Note 10 in our accompanying consolidated financial statements for further information on uncertain tax positions.
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 $1.4 million in the aggregate.
Purchase Commitments. At March 31, 2022, we had unrecorded commitments under contract of $207.5 million. Purchase commitments consisted of third-party web services of $106.6 million, inventory and third-party fulfillment purchase commitments of $58.9 million, advertising of $20.7 million, software of $3.9 million, commitments for professional and consulting fees of $3.4 million, production and computer equipment purchases of $4.8 million and other unrecorded purchase commitments of $9.2 million.
Debt. As of March 31, 2022, we have borrowings under our Restated Credit Agreement of $1,121.4 million consisting of the Term Loan B, which amortizes over the loan period, with a final maturity date of May 17, 2028. Our $250.0 million revolver under our Restated Credit Agreement has $244.2 million unused as of March 31, 2022. There are no drawn amounts on the revolver, but our outstanding letters of credit reduce our unused balance. Our unused balance can be drawn at any time so long as we are in compliance with our debt covenants.
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Senior Unsecured Notes and Interest Payments. Our $600.0 million of 2026 Notes 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.
Senior Secured Credit Facility and Interest Payments. At March 31, 2022, the Term Loan B of $1,121.4 million outstanding under our Restated Credit Agreement had repayments due on various dates through May 17, 2028, and we did not have any amounts drawn under our Revolving Credit Facility due on May 17, 2026. Interest payable included in this table is based on the interest rate as of March 31, 2022, and assumes all LIBOR-based 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.
Debt Covenants. The Restated Credit Agreement and the indenture that governs our 7.0% Senior Notes due 2026 contain covenants that restrict or limit certain activities and transactions by Cimpress and our subsidiaries. As of March 31, 2022, we were in compliance with all covenants under our Restated Credit Agreement and the indenture governing our 2026 Notes. Refer to Note 9 in our accompanying consolidated financial statements for additional information.
Other Debt. In addition, we have other debt which consists primarily of term loans acquired through our various acquisitions or used to fund certain capital investments. As of March 31, 2022, we had $9.3 million outstanding for those obligations that have repayments due on various dates through March 2027.
Finance Leases. We lease certain machinery and plant equipment under finance lease agreements that expire at various dates through 2028. The aggregate carrying value of the leased equipment under finance leases included in property, plant and equipment, net in our consolidated balance sheet at March 31, 2022 is $19.1 million, net of accumulated depreciation of $39.7 million. The present value of lease installments not yet due included in other current liabilities and other liabilities in our consolidated balance sheet at March 31, 2022 amounts to $21.8 million.
Other Obligations. Other obligations consist of deferred payments relating to previous acquisitions, including the deferred payment relating to our Depositphotos acquisition that is payable in October 2022 and small deferred acquisition liabilities for other, smaller acquisitions. Refer to Note 7 in the 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
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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.
The table below sets forth operating (loss) income and adjusted EBITDA for the three and nine months ended March 31, 2022 and 2021:
In thousands Three Months Ended March 31, Nine Months Ended March 31,
2022 2021 2022 2021
GAAP operating (loss) income $ (28,437) $ (15,697) $ 74,483 $ 114,483
Exclude expense (benefit) impact of:
Depreciation and amortization 43,651 42,809 133,397 128,696
Proceeds from insurance — 122 — 122
Share-based compensation expense 12,704 9,545 36,215 23,071
Certain impairments and other adjustments 277 20,563 (3,216) 21,131
Restructuring-related charges 3,420 (382) 3,418 1,714
Realized gains (losses) on currency derivatives not included in operating (loss) income (1) 2,011 (1,936) (987) (2,297)
Adjusted EBITDA $ 33,626 $ 55,024 $ 243,310 $ 286,920
_________________
(1) These realized gains (losses) include only the impacts of currency derivatives for which we do not apply hedge accounting. See Note 4 in our accompanying consolidated financial statements for further information.
The table below sets forth net cash provided by operating activities and adjusted free cash flow for the nine months ended March 31, 2022 and 2021:
In thousands Nine Months Ended March 31,
2022 2021
Net cash provided by operating activities (1) $ 131,716 $ 218,948
Purchases of property, plant and equipment (42,142) (22,736)
Capitalization of software and website development costs (49,875) (45,321)
Adjusted free cash flow $ 39,699 $ 150,891
_________________
(1) The decrease of net cash provided by operating activities was driven by the decrease in operating income as described earlier in this section, as well as unfavorable year-over-year impacts from changes in working capital due to significant cash preservation measures in place during the prior comparative period.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.