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 financial results, the persistence of higher costs and supply chain disruptions and the expected impacts of those costs and disruptions on our business; the planned divestiture of our business in China; the expected impacts of our mass customization platform; our competitive advantages; the expected effects of our advertising spend; sufficiency of our liquidity position; 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 supply chain constraints, inflation, and the ongoing COVID-19 pandemic; our inability to mitigate increases in our costs by increasing our prices and taking other measures; 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; our failure to develop and deploy our mass customization platform or the failure of the platform to drive the efficiencies and competitive advantages we expect; the anticipated exercise of the PrintBrothers put options; 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, including the possibility of an economic downturn in some or all of our markets; and other factors described in this Report and 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 of printing and related products, via which we deliver large volumes of individually small-sized customized orders. Our products include a broad range of marketing materials, business cards, signage, promotional products, logo apparel, packaging, books and magazines, wall decor, photo merchandise, invitations and announcements, and other categories. Mass customization is a core element of the business model of each Cimpress business and is a competitive strategy which seeks to produce goods and services to meet individual customer needs with near mass production efficiency. As of September 30, 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 11 in our accompanying consolidated financial statements for additional information relating to our reportable segments and our segment financial measures. Our businesses continue to experience supply chain challenges including rising input costs and some areas of disruption. Each of our reportable segments has seen material cost increases of product substrates like paper, production materials like aluminum plates, freight and shipping charges, energy costs and higher compensation costs due to inflationary pressures and a more competitive labor market. We believe 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. 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 25 "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 months ended September 30, 2022 as compared to the three months ended September 30, 2021 follows: • Revenue increased by 7% to $703.4 million. • Constant-currency revenue increased by 15% and by 14% when excluding the revenue of acquired companies for the first twelve months after acquisition (both non-GAAP financial measures). • Operating income decreased by $34.9 million to an operating loss of $18.0 million. • Adjusted EBITDA (a non-GAAP financial measure) decreased by $22.0 million to $45.6 million. • Diluted net loss per share attributable to Cimpress plc increased to $(0.97) from $(0.26) in the comparative period. • Cash provided by operating activities decreased by $61.8 million to an outflow of $(25.3) million. • Adjusted free cash flow (a non-GAAP financial measure) decreased by $64.6 million to a use of cash of $(52.3) million. For the first quarter of fiscal year 2023, the increase in reported revenue was primarily due to growth across all businesses and markets through increased pricing and customer demand. Reported revenue slightly benefited from our recent acquisitions, with the majority of the additional revenue attributable to Depositphotos, which was acquired on October 1, 2021 and is included in our Vista business. Pricing changes made during the past year improved our revenue on a year-over-year basis, as these actions were one tool we used to mitigate inflationary cost pressures that have arisen from ongoing supply chain challenges. Currency exchange fluctuations had a significant negative effect on revenue during the current quarter. For the three months ended September 30, 2022, the decrease in operating income was primarily due to increased investments in our Vista business. These investments include the impact of hiring in Vista throughout fiscal year 2022, as well as increased advertising spend driven by mid- and upper-funnel advertising. Inflationary pressures on input costs and wages were significantly offset by actions taken to pass these increases to customers in the form of increased pricing. We also recognized an increase in restructuring charges of $2.1 million, which were partially offset by savings from the related actions taken in our Vista business in the fourth quarter of fiscal year 2022. Adjusted EBITDA decreased year over year, primarily for the same reasons operating income decreased. Adjusted EBITDA excludes restructuring charges, share-based compensation expense, certain impairments, 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 a benefit of approximately $7.9 million. Diluted net loss per share attributable to Cimpress plc increased for three months ended September 30, 2022 primarily for the same reasons operating income decreased, partially offset by unrealized currency gains caused by exchange rate volatility. Cash from operations decreased $61.8 million year over year due to the decrease in operating income described above, as well as decreased working capital cash flows of $42.5 million, largely driven by higher inventory levels as our businesses increased raw materials on hand to minimize availability risk during our seasonally significant second quarter and thereafter. Adjusted free cash flow decreased by $64.6 million, due to the operating cash flow decrease described above, as well as a $3.1 million increase in capital expenditures. 26 Consolidated Results of Operations Consolidated Revenue Our businesses generate revenue primarily from the sale and shipment of customized 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. Total revenue and revenue growth by reportable segment for the three months ended September 30, 2022 and 2021 are shown in the following table: In thousands Three Months Ended September 30, 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 $ 369,369 $ 349,480 6% 4% 10% (2)% 8% PrintBrothers 132,699 125,357 6% 17% 23% (1)% 22% The Print Group 76,823 72,820 6% 18% 24% —% 24% National Pen 81,666 69,264 18% 6% 24% —% 24% All Other Businesses 51,827 47,871 8% —% 8% —% 8% Inter-segment eliminations (8,969) (7,193) Total revenue $ 703,415 $ 657,599 7% 8% 15% (1)% 14% 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 September 30, 2022 2021 Cost of revenue $ 377,735 $ 338,989 % of revenue 53.7 % 51.5 % For the three months ended September 30, 2022, cost of revenue increased by $38.7 million as compared to the prior period, primarily due to demand-dependent cost of goods sold, including third-party fulfillment, material and shipping costs. We've continued to experience 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 the combination of a more competitive labor market and the inflationary environment in many jurisdictions where we operate. The overall impact of increased costs, net of pricing increases and manufacturing efficiencies, had varying impacts on our businesses during the three months ended September 30, 2022. 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. 27 Consolidated Operating Expenses The following table summarizes our comparative operating expenses for the following periods: In thousands Three Months Ended September 30, 2022 2021 Technology and development expense $ 74,475 $ 67,277 % of revenue 10.6 % 10.2 % Marketing and selling expense $ 200,930 $ 174,697 % of revenue 28.6 % 26.6 % General and administrative expense $ 54,072 $ 46,548 % of revenue 7.7 % 7.1 % Amortization of acquired intangible assets $ 12,350 $ 13,458 % of revenue 1.8 % 2.0 % Restructuring expense (1) $ 1,820 $ (309) % of revenue 0.3 % 0.0 % _____________________ (1) Refer to Note 13 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 $7.2 million for the three months ended September 30, 2022, as compared to the prior year. This increase is primarily driven by $4.4 million of higher compensation costs primarily due to increases from our inflation-adjusted annual merit cycle and market adjustments. Other operating costs increased due to higher customer demand, as well as increased travel and training costs. These increases were partially offset by cost savings resulting from restructuring actions that reduced headcount in the fourth quarter of fiscal year 2022. 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 months ended September 30, 2022, marketing and selling expenses increased $26.2 million as compared to the prior year. The largest increase in marketing and selling expenses was in our Vista business, which had increased advertising costs of $20.0 million and increased internal marketing and customer service costs of $4.9 million. The increases to Vista spend were primarily driven by higher mid- and upper-funnel advertising and year-over-year growth in headcount for areas such as user experience, design, brand and data and analytics. Marketing and selling expense also increased across each of our other reportable segments for the three months ended September 30, 2022, primarily due to higher customer demand. 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 months ended September 30, 2022, general and administrative expenses increased by $7.5 million as compared to the prior year, partly due to $2.4 million of expense related to the termination of one of our 28 leased office locations as we continue to optimize our office footprint with many of our team members operating under a remote-first model. There were also increases of $1.7 million to compensation costs from the impacts of our inflation-adjusted annual merit cycle and higher headcount year over year. Other cost increases included higher travel and training costs. Other Consolidated Results Other income, net Other income, net generally consists of gains and losses from currency exchange rate fluctuations on transactions or balances denominated in currencies other than the functional currency of our subsidiaries, as well as the realized and unrealized gains and losses on some of our derivative instruments. In evaluating our currency hedging 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, net: In thousands Three Months Ended September 30, 2022 2021 Gains on derivatives not designated as hedging instruments $ 28,645 $ 13,327 Currency-related (losses) gains, net (197) 323 Other losses (1,051) (480) Total other income, net $ 27,397 $ 13,170 The increase in other 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 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 (losses) 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 $0.9 million during the three months ended September 30, 2022, as compared to the prior year period, primarily due to an increase in interest income earned on our cash and marketable securities that more than offset the increase to interest expense that was driven by higher interest rates. Income tax expense In thousands Three Months Ended September 30, 2022 2021 Income tax expense $ 9,365 $ 9,381 Effective tax rate (60.9) % 212.2 % Income tax expense for the three months ended September 30, 2022 decreased versus the prior comparative period due to decreased profits. 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 29 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 9 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. Vista During the fourth quarter of fiscal year 2022, we revised our internal reporting to reallocate certain third-party technology costs that were previously held within our Central and corporate costs to our Vista business and reportable segment. These include certain third-party costs that are variable in nature and the cost variability is primarily driven by decisions or volumes in the Vista business. We revised our presentation of all prior periods presented to reflect our updated segment reporting, which decreased both Vista segment EBITDA and Central and corporate costs by $1.1 million for the three months ended September 30, 2021. In thousands Three Months Ended September 30, 2022 2021 2022 vs. 2021 Reported Revenue $ 369,369 $ 349,480 6% Segment EBITDA 30,737 66,920 (54)% % of revenue 8 % 19 % Segment Revenue Vista's reported revenue growth for the three months ended September 30, 2022 was negatively affected by a currency impact of 4%. Vista's organic constant-currency revenue growth was 8% when excluding the benefit from the recent acquisition of Depositphotos. Constant-currency growth remained strong throughout the quarter in Europe, and in North America, revenue growth was soft in July but accelerated to double-digit growth in August and September, largely driven by the compounding benefits of our new platform and year-over-year pricing increases. From a product perspective, the strongest growth was in the categories of promotional products, apparel, and gifts (PPAG), marketing materials, signage and business cards. Revenue growth was negatively impacted by a decline in face mask sales of $5.0 million year over year. Segment Profitability For the three months ended September 30, 2022, segment EBITDA declined by $36.2 million. The decrease to segment EBITDA continues to be driven by the impact of higher investment levels. Gross profit declined slightly year-over-year as higher revenue, including from price increases, was more than offset by cost inflation and negative currency impacts; however, gross profit increased when excluding the year-over-year currency impact. Vista's advertising expense increased by $20.0 million, driven by higher mid- and upper-funnel advertising which we are testing in certain markets as we believe it may improve awareness and consideration with customers and prospects, as well as reduce our reliance on paid search advertising. There were also increased operating expenses of $13.2 million, driven mainly by $7.3 million of higher organic compensation costs related primarily to growth investments including the hiring of talent, especially in user experience, design, product management, and data and analytics, as well as the impacts of inflation-adjusted merit increases effective July 1, 2022, that were larger than recent years. 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. This year-over-year increase in compensation costs was smaller than for the fourth quarter of fiscal year 2022 as we significantly curtailed additional hiring in the current quarter. The increased expense from investment in headcount was partially offset by the benefit of recent restructuring actions. Increased investment in our acquired VistaCreate (Depositphotos) business also negatively impacted Vista's segment EBITDA results by approximately $2.1 million. 30 PrintBrothers In thousands Three Months Ended September 30, 2022 2021 2022 vs. 2021 Reported Revenue $ 132,699 $ 125,357 6% Segment EBITDA 14,991 16,283 (8)% % of revenue 11 % 13 % Segment Revenue PrintBrothers' reported revenue growth for the three months ended September 30, 2022 was negatively affected by a currency impact of 17%, resulting in a constant-currency revenue growth of 23%. This strong growth was driven by the recent introduction of new products, growth in order volumes and price increases implemented to address inflationary cost increases. Segment Profitability PrintBrothers' segment EBITDA during the three months ended September 30, 2022, as compared to the prior period, decreased due to year-over-year currency fluctuations that had a negative impact of $2.1 million. Despite a challenging supply chain and inflationary environment, segment EBITDA grew year-over-year when excluding the impact of currency, driven by the constant-currency revenue growth described above. We continue to invest in key areas within these businesses to exploit scale advantages and improve their cost competitiveness. These businesses also continue to adopt technologies that are part of our mass customization platform, which we believe will further improve customer value and the efficiency of each business over the long term. The Print Group In thousands Three Months Ended September 30, 2022 2021 2022 vs. 2021 Reported Revenue $ 76,823 $ 72,820 6% Segment EBITDA 12,220 14,389 (15)% % of revenue 16 % 20 % Segment Revenue The Print Group's reported revenue for the three months ended September 30, 2022 was negatively affected by a currency impact of 18%, resulting in an increase to revenue on a constant-currency basis of 24%. Constant-currency revenue growth was driven by price increases that have been implemented over the past year to address inflationary cost increases, as well as volume growth from several core product categories and more recently introduced products. Segment Profitability The decrease in The Print Group's segment EBITDA during the three months ended September 30, 2022, as compared to the prior year, was driven by negative impacts from year-over-year currency fluctuations of $2.1 million. Excluding the impact of currency, segment EBITDA was flat year-over-year as the benefits from the revenue growth described above were largely offset by cost increases that included higher input costs driven by ongoing supply chain disruptions and higher energy costs. National Pen In thousands Three Months Ended September 30, 2022 2021 2022 vs. 2021 Reported Revenue $ 81,666 $ 69,264 18% Segment EBITDA (1,297) (8,048) (84)% % of revenue (2) % (12) % 31 Segment Revenue For the three months ended September 30, 2022, National Pen's revenue growth was negatively affected by currency impacts of 6%, resulting in constant-currency revenue growth of 24%. Direct marketing, e-commerce, and direct sales channels continued to collectively drive the revenue growth. Growth across these channels was driven by price increases that have been implemented over the past year to address inflationary cost increases, as well as volume growth in core writing instruments. The year-over-year decline in face mask sales impacted National Pen's revenue by approximately $4.0 million, which was partially offset by a change in customer terms that positively impacted the timing of revenue recognition by $2.2 million. Segment Profitability The increase in National Pen's segment EBITDA for the three months ended September 30, 2022 was driven by the combination of strong revenue growth, gross margin expansion, a timing-related decrease in advertising as a percent of revenue, limited operating expense growth, and savings from the recent decision to shut down its operations in Japan. All Other Businesses In thousands Three Months Ended September 30, 2022 2021 2022 vs. 2021 Reported Revenue $ 51,827 $ 47,871 8% Segment EBITDA 6,178 4,891 26% % of revenue 12 % 10 % This segment consists of BuildASign, which is a larger and profitable business, and Printi, an early-stage business that we have managed at a relatively modest operating loss as previously described and planned. Segment Revenue All Other Businesses' constant-currency revenue growth was 8% during the three months ended September 30, 2022. BuildASign's signage products grew at double-digit rates, with a modest decline in home decor products. Printi delivered strong revenue growth in the first quarter of fiscal year 2023 across product lines and channels. Segment Profitability The increase in segment EBITDA for the three months ended September 30, 2022 was due to higher revenue and increased marketing efficiencies at both businesses. As Printi grows, it continues to increase gross margins and contribution margins, driving closer to delivering a positive contribution to segment EBITDA. During the fourth quarter of fiscal year 2022, we decided to divest our small, loss-making business in China (YSD), which is reported as part of this segment. We expect this divestiture to be completed during the second quarter of the current fiscal year. Our loss was lower this quarter due to the decreased operating expenses as we prepared to divest the business. 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. During the fourth quarter of fiscal year 2022, we revised our internal reporting to reallocate certain third-party technology costs that were previously held within our Central and corporate costs to our Vista business. We 32 have revised our presentation of all prior periods presented to reflect our revised segment reporting. Refer to Note 11 in our accompanying consolidated financial statements for additional details. Central and corporate costs increased by $0.4 million during the three months ended September 30, 2022, as compared to the prior period, due to compensation increases as a result of our inflation-adjusted annual merit cycle, hiring in our mass customization platform, and volume-related increases to central operating costs. Partially offsetting the compensation increases were savings from actions taken in the fourth quarter of fiscal 2022 to reduce headcount. In addition, unallocated share-based compensation was lower versus the prior year, due in part because we granted RSUs and share options instead of PSUs in the current quarter. Liquidity and Capital Resources Consolidated Statements of Cash Flows Data In thousands Three Months Ended September 30, 2022 2021 Net cash (used in) provided by operating activities $ (25,251) $ 36,567 Net cash used in investing activities (101,043) (13,181) Net cash used in financing activities (11,780) (10,351) The cash flows during the three months ended September 30, 2022 related primarily to the following items: Cash inflows: • Adjustments for non-cash items of $37.9 million primarily related to adjustments for depreciation and amortization of $40.9 million and share-based compensation costs of $10.6 million, which were partially offset by negative adjustments for unrealized currency-related gains of $14.8 million, and deferred taxes of $1.0 million • Cash proceeds from derivative contracts of $14.6 million, which includes $7.8 million from the early termination of certain contracts • Proceeds from the maturity of held-to-maturity securities of $10.0 million Cash outflows: • Net loss of $24.7 million • Purchase of held-to-maturity securities for $84.0 million • Total net working capital impacts of $38.4 million were a use of cash. The majority of this change in net working capital is impacted by increases to inventory that is held to mitigate the risk of supply availability due to ongoing supply chain disruptions • Internal and external costs of $15.3 million for software and website development that we have capitalized • Capital expenditures of $11.8 million of which the majority related to the purchase of manufacturing and automation equipment for our production facilities • $3.7 million of distributions to noncontrolling interest holders • Repayments of debt, net of proceeds from debt, for $3.3 million • Payments for finance lease arrangements of $2.4 million • Payment of withholding taxes in connection with share awards of $2.2 million Additional Liquidity and Capital Resources Information. At September 30, 2022, we had $132.1 million of cash and cash equivalents, $124.2 million of marketable securities and $1,683.0 million of debt, excluding debt issuance costs and debt premiums and discounts. During the three months ended September 30, 2022, we 33 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. Noncontrolling Interests. The put options for several of our noncontrolling interests are exercisable during the first half of fiscal year 2023. Exercising a put option is at the discretion of each noncontrolling interest holder, which creates uncertainty around the timing of our cash outflow should an option be exercised. The total estimated redemption value for these noncontrolling interests' put options as of September 30, 2022 is $89.0 million, of which $4.7 million has already been exercised in the second quarter of fiscal 2023. Refer to Note 10 in our accompanying consolidated financial statements for additional details. Indefinitely Reinvested Earnings. As of September 30, 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 $49.7 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 September 30, 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) $ 67,132 $ 23,189 $ 27,070 $ 8,142 $ 8,731 Purchase commitments 251,010 137,201 99,476 14,333 — Senior unsecured notes and interest payments 768,000 42,000 84,000 642,000 — Senior secured credit facility and interest payments (2) 1,410,602 71,425 144,679 137,085 1,057,413 Other debt 6,698 2,499 3,867 332 — Finance leases, net of subleases (1) 15,070 5,490 7,321 2,168 91 Other 8,463 8,463 — — — Total (3) $ 2,526,975 $ 290,267 $ 366,413 $ 804,060 $ 1,066,235 ___________________ (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 $9.1 million as of September 30, 2022 have been excluded from the contractual obligations table above. See Note 9 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 2037. The terms of certain lease agreements require security deposits in the form of bank guarantees and letters of credit, with $1.7 million in the aggregate outstanding as of September 30, 2022. Purchase Commitments. At September 30, 2022, we had unrecorded commitments under contract of $251.0 million. Purchase commitments consisted of inventory, third-party fulfillment and digital service purchase commitments of $86.7 million; third-party cloud services of $81.0 million; advertising of $15.2 million; software of $42.2 million; commitments for professional and consulting fees of $5.0 million; production and computer equipment purchases of $6.0 million; and other unrecorded purchase commitments of $14.9 million. Senior Secured Credit Facility and Interest Payments. As of September 30, 2022, we have borrowings under our Restated Credit Agreement of $1,076.3 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 34 Agreement has $243.8 million unused as of September 30, 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, and any amounts drawn under the revolver will be due on May 17, 2026. Interest payable included in the above table is based on the interest rate as of June 30, 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. 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. 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 September 30, 2022, we were in compliance with all covenants under our Restated Credit Agreement and the indenture governing our 2026 Notes. Refer to Note 8 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 September 30, 2022, we had $6.7 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 September 30, 2022 is $19.3 million, net of accumulated depreciation of $38.2 million. The present value of lease installments not yet due included in other current liabilities and other liabilities in our consolidated balance sheet at September 30, 2022 amounts to $21.1 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, subject to any outstanding indemnification claims. 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 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 35 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 income and adjusted EBITDA for the three months ended September 30, 2022 and 2021: In thousands Three Months Ended September 30, 2022 2021 GAAP operating (loss) income $ (17,967) $ 16,939 Exclude expense (benefit) impact of: Depreciation and amortization 40,942 44,432 Share-based compensation expense 10,475 11,006 Certain impairments and other adjustments 3,456 (780) Restructuring-related charges 1,820 (309) Realized gains (losses) on currency derivatives not included in operating (loss) income (1) 6,869 (3,672) Adjusted EBITDA $ 45,595 $ 67,616 _________________ (1) These realized gains (losses) include only the impacts of certain currency derivative contracts that are intended to hedge our exposure to foreign currencies 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 three months ended September 30, 2022 and 2021: In thousands Three Months Ended September 30, 2022 2021 Net cash (used in) provided by operating activities (1) $ (25,251) $ 36,567 Purchases of property, plant and equipment (11,758) (8,624) Purchases of intangible assets not related to acquisitions — — Capitalization of software and website development costs (15,330) (15,639) Adjusted free cash flow $ (52,339) $ 12,304 _________________ (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 changes in working capital due largely to increased inventory levels intended to mitigate supply chain risks during our seasonally significant second quarter. 36