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; our planned cost reductions and the expected effects of the cost reductions; the expected impacts of our mass customization platform; our competitive advantages; the expected effects of mid- and upper-funnel advertising in Vista; 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 lingering effects of the COVID-19 pandemic; our inability to mitigate increases in our costs by increasing our prices and taking other measures; our inability to make the cost reductions that we plan to make or the failure of the cost reductions to affect our financial results as expected; 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 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; 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 December 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 11 in our accompanying consolidated financial statements for additional information relating to our reportable segments and our segment financial measures. 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 six months ended December 31, 2022 as compared to the three and six months ended December 31, 2021 follows: 26 Second Quarter Fiscal Year 2023 • Revenue was flat at $845.2 million. • Constant-currency revenue increased by 6% and by 5% when excluding the revenue of acquired companies for the first twelve months after acquisition (both non-GAAP financial measures). • Operating income decreased by $52.4 million to $33.6 million. • Adjusted EBITDA (a non-GAAP financial measure) decreased by $30.9 million to $111.2 million. • Diluted net (loss) income per share attributable to Cimpress plc decreased from income of $2.08 to a loss of $5.34 per share in the current period. Year to Date Fiscal Year 2023 • Revenue increased by 3% to $1,548.6 million. • Constant-currency revenue increased by 10% and by 9% when excluding the revenue of acquired companies for the first twelve months after acquisition (both non-GAAP financial measures). • Operating income decreased by $87.3 million to $15.6 million. • Adjusted EBITDA (a non-GAAP financial measure) decreased by $52.9 million to $156.8 million. • Diluted net (loss) income per share attributable to Cimpress plc decreased from income of $1.82 to a loss of $6.31 in the current period. • Cash provided by operating activities decreased by $124.0 million to $55.9 million. • Adjusted free cash flow (a non-GAAP financial measure) decreased by $121.1 million to $0.1 million. For the three months ended December 31, 2022, reported revenue was flat year over year, and currency exchange fluctuations had a significant negative effect on revenue. Constant-currency revenue grew across all segments including growth in revenue from new customers in the Vista business; however, constant-currency revenue from consumer products in Vista and BuildASign during this seasonally important quarter was down slightly. The increase in constant-currency revenue was due to growth across all businesses including the impact of increased pricing during the past twelve months, as these actions were one tool we used to mitigate inflationary cost pressures. For the three months ended December 31, 2022, the decrease in operating income was primarily due to the impact of cost inflation, as well as unfavorable product mix shifts in our Vista business, which both weighed on gross margins. Inflationary pressures on raw materials, energy and labor were partially offset by actions taken to increase pricing. We also recognized an increase in restructuring charges of $10.9 million, primarily related to exiting our businesses in Japan and China, as well as increased advertising spend mainly in Vista, driven by mid- and upper-funnel advertising. These cost increases were partially offset by cost containment measures put in place during the current quarter, which offset some of the year-over-year decline in gross profit. 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 $6.5 million for the three months ended December 31, 2022. Diluted net loss per share attributable to Cimpress plc increased for the three months ended December 31, 2022 primarily due to an increase in income tax expense of $108.8 million, driven by the recognition of a valuation allowance against Swiss deferred tax assets, for which we concluded recognition was no longer supported; the decrease in operating income as described above; and the effects of unrealized currency losses caused by exchanged rate volatility that more than offset realized gains recognized in the current quarter. As described above, the impact of cost inflation, net of price increases, continues to weigh on year-over-year profitability, and, in the Vista business, unfavorable product mix shift also was a significant contributor to a year-over-year reduction in gross profit. Each of our reportable segments has seen material increases in the cost of product substrates like paper, production materials like aluminum plates, freight and shipping charges, energy and 27 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. However, during the second quarter of the current fiscal year, we put in place further operating cost containment measures that helped offset some of these impacts. Over the remainder of the fiscal year, we plan to take further steps to significantly reduce our cost base in support of expanding profitability as we exit the fiscal year. During the six months ended December 31, 2022, cash from operations decreased $124.0 million year over year due to the decrease in operating income described above, as well as decreased working capital cash flows of $77.6 million, largely driven by the continuation of elevated inventory levels that are intended to minimize availability risk, as well as less favorable benefits from accounts payable due in part to timing. Adjusted free cash flow decreased year over year by $121.1 million for the six months ended December 31, 2022, due to the operating cash flow decrease described above. 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 and six months ended December 31, 2022 and 2021 are shown in the following table: In thousands Three Months Ended December 31, Currency Impact: Constant- Currency Impact of Acquisitions/Divestitures: Constant- Currency Revenue Growth 2022 2021 % Change (Favorable)/Unfavorable Revenue Growth (1) (Favorable)/Unfavorable Excluding Acquisitions/Divestitures (2) Vista $ 437,736 $ 448,114 (2)% 4% 2% —% 2% PrintBrothers 148,598 137,694 8% 12% 20% (2)% 18% The Print Group 89,336 90,130 (1)% 12% 11% —% 11% National Pen 120,621 124,717 (3)% 6% 3% —% 3% All Other Businesses 59,998 57,719 4% (1)% 3% —% 3% Inter-segment eliminations (11,087) (8,658) Total revenue $ 845,202 $ 849,716 (1)% 7% 6% (1)% 5% In thousands Six Months Ended December 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 $ 807,105 $ 797,594 1% 4% 5% —% 5% PrintBrothers 281,297 263,051 7% 15% 22% (2)% 20% The Print Group 166,159 162,950 2% 15% 17% —% 17% National Pen 202,287 193,981 4% 7% 11% —% 11% All Other Businesses 111,825 105,590 6% —% 6% —% 6% Inter-segment eliminations (20,056) (15,851) Total revenue $ 1,548,617 $ 1,507,315 3% 7% 10% (1)% 9% _________________ (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. 28 (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. Consolidated Cost of Revenue Cost of revenue includes materials used by our businesses to manufacture their products, payroll and related expenses for production and design services personnel, depreciation of assets used in the production process and in support of digital marketing service offerings, shipping, handling and processing costs, third-party production and design costs, costs of free products and other related costs of products our businesses sell. In thousands Three Months Ended December 31, Six Months Ended December 31, 2022 2021 2022 2021 Cost of revenue $ 455,393 $ 423,937 $ 833,128 $ 762,926 % of revenue 53.9 % 49.9 % 53.8 % 50.6 % For the three and six months ended December 31, 2022, cost of revenue increased by $31.5 million and $70.2 million, respectively, as compared to the prior year periods, primarily due to the continued effects of 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, as well as additional variable cost increases driven by the constant-currency revenue growth described above. Compensation costs were 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 and six months ended December 31, 2022. We expect higher input costs 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 December 31, Six Months Ended December 31, 2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021 Technology and development expense $ 77,723 $ 70,267 11% $ 152,198 $ 137,544 11% % of revenue 9.2 % 8.3 % 9.8 % 9.1 % Marketing and selling expense $ 205,148 $ 208,616 (2)% $ 406,078 $ 383,313 6% % of revenue 24.3 % 24.6 % 26.2 % 25.4 % General and administrative expense $ 49,791 $ 46,726 7% $ 103,863 $ 93,274 11% % of revenue 5.9 % 5.5 % 6.7 % 6.2 % Amortization of acquired intangible assets $ 12,362 $ 13,882 (11)% $ 24,712 $ 27,340 (10)% % of revenue 1.5 % 1.6 % 1.6 % 1.8 % Restructuring expense (1) $ 11,207 $ 307 3,550% $ 13,027 $ (2) 651,450% % of revenue 1.3 % 0.0 % 0.8 % 0.0 % _____________________ (1) Refer to Note 13 in our accompanying consolidated financial statements for additional details relating to restructuring expense. 29 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 $7.5 million and $14.7 million for the three and six months ended December 31, 2022, respectively, as compared to the prior year periods. This increase is primarily driven by increased volume-related third-party technology costs due in part to higher customer demand. In addition, compensation costs increased year-over-year by $1.4 million and $4.4 million for the three and six months ended December 31, 2022, respectively, due to increases from our inflation-adjusted annual merit cycle and market adjustments. Other operating costs increased due to higher 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 and six months ended December 31, 2022, marketing and selling expenses decreased by $3.5 million and increased by $22.8 million, respectively, as compared to the prior year periods. The decrease for the three months ended December 31, 2022 was primarily driven by favorable impacts from currency exchange rate fluctuations, partially offset by increased advertising spend of $5.1 million, with increased spend across most businesses. The increased spend for the six months ended December 31, 2022 was due to higher advertising spend of $25.8 million across Cimpress (including increases in mid- and upper-funnel spend, partially offset by lower performance advertising in Vista) and higher compensation costs in Vista year over year. General and administrative expense General and administrative expense consists primarily of transaction costs, including third-party professional fees, insurance and payroll and related expenses of employees involved in executive management, finance, legal, strategy, human resources and procurement. For the three and six months ended December 31, 2022, general and administrative expenses increased by $3.1 million and $10.6 million, respectively, as compared to the prior year periods. Compensation costs increased year over year from higher headcount and the impacts of our inflation-adjusted annual merit cycle. Other cost increases included higher travel and training costs and consulting spend. Other Consolidated Results Other (expense) income, net Other (expense) income, net generally consists of gains and losses from currency exchange rate fluctuations on transactions or balances denominated in currencies other than the functional currency of our subsidiaries, as well as the realized and unrealized gains and losses on some of our derivative instruments. In evaluating our currency hedging programs and ability to qualify for hedge accounting in light of our legal entity cash flows, we considered the benefits of hedge accounting relative to the additional economic cost of trade execution and administrative burden. Based on this analysis, we execute certain currency derivative contracts that do not qualify for hedge accounting. 30 The following table summarizes the components of other (expense) income, net: In thousands Three Months Ended December 31, Six Months Ended December 31, 2022 2021 2022 2021 (Losses) gains on derivatives not designated as hedging instruments $ (24,196) $ 6,481 $ 4,449 $ 19,808 Currency-related gains, net 6,227 5,551 6,030 5,874 Other gains (losses) 577 807 (474) 327 Total other (expense) income, net $ (17,392) $ 12,839 $ 10,005 $ 26,009 The decrease in other (expense) income, net was primarily due to the currency exchange rate volatility impacting our derivatives that are not designated as hedging instruments, of which our Euro and British Pound contracts are the most significant exposures that we economically hedge. We expect volatility to continue in future periods, as we do not apply hedge accounting for most of our derivative currency contracts. We 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. In addition, accretion adjustments related to our mandatorily redeemable noncontrolling interests are recognized in interest expense, net. Refer to Note 7 in the accompanying consolidated financial statements for additional details. Interest expense, net increased by $3.2 million and $2.3 million during the three and six months ended December 31, 2022, respectively, as compared to the prior year periods, primarily due to an accretion adjustment of $2.1 million during the second quarter of fiscal year 2023 for our mandatorily redeemable noncontrolling interests. In addition, the interest expense, net increase was impacted by a higher weighted-average interest rate, partially offset by an increase in interest income earned on our cash and marketable securities. Income tax expense In thousands Three Months Ended December 31, Six Months Ended December 31, 2022 2021 2022 2021 Income tax expense $ 126,129 $ 17,298 $ 135,494 $ 26,679 Effective tax rate (1,016.3) % 23.6 % (487.6) % 34.3 % Income tax expense for the three and six months ended December 31, 2022 increased versus the prior comparative periods. During the second quarter of fiscal 2023, we recorded a full valuation allowance on Swiss deferred tax assets of $116.7 million primarily related to Swiss tax reform benefits recognized in fiscal 2020 and tax loss carryforwards. As of December 31, 2022, we concluded that objective and verifiable negative evidence of recent losses in Switzerland outweighed more subjective positive evidence of anticipated future income. 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 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 31 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 $1.9 million and $3.0 million, respectively, for the three and six months ended December 31, 2021. In thousands Three Months Ended December 31, Six Months Ended December 31, 2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021 Reported Revenue $ 437,736 $ 448,114 (2)% $ 807,105 $ 797,594 1% Segment EBITDA 55,157 90,766 (39)% 85,894 157,686 (46)% % of revenue 13 % 20 % 11 % 20 % Segment Revenue Vista's reported revenue growth for the three and six months ended December 31, 2022 was negatively affected by a currency impact of 4% in both periods. Vista's organic constant-currency revenue growth was 2% and 5%, respectively, for the three and six months ended December 31, 2022. Constant-currency revenue growth remained stronger in Europe, and constant-currency revenue in North America was flat during the typically seasonally significant second quarter. From a product perspective, the strongest growth was in the promotional products, apparel and gifts (PPAG) category, while holiday cards and invitations and announcements declined year over year particularly in the U.S. market. For the three and six months ended December 31, 2022, revenue growth was negatively impacted year over year by a decline in face mask sales of $3.4 million and $8.5 million, respectively, as well as lower revenue year over year of $2.6 million and $3.2 million, respectively, due to our planned exit from the Japanese market. Segment Profitability For the three and six months ended December 31, 2022, segment EBITDA declined by $35.6 million and $71.8 million, respectively. Gross profit declined year over year due to cost inflation partially offset by price increases, unfavorable changes in product mix, and negative currency impacts. Vista is experiencing the fastest growth in categories like promotional products, apparel and gifts that have lower gross margins despite higher average order values. Vista's advertising expense increased by $3.5 million and $23.5 million for the three and six months ended December 31, 2022, respectively, 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. The increase to higher mid- and upper-funnel advertising spend was partially offset by reduced performance advertising spend for both periods presented. For the three and six months ended December 31, 2022, operating expenses increased $6.1 million and $10.6 million, respectively, year over year. The increase for the year-to-date period is primarily due to increased growth investments made last year, which is lower sequentially as the investments have largely been lapped during the current quarter. These cost increases primarily relate to growth investments that include 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. Increased investment in our VistaCreate business (acquired with Depositphotos in October 2021) also negatively impacted Vista's segment EBITDA results by approximately $2.1 million for the six months ended December 31, 2022. The investments are partially offset by the benefits from recent restructuring actions as well as further cost savings actions. 32 PrintBrothers In thousands Three Months Ended December 31, Six Months Ended December 31, 2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021 Reported Revenue $ 148,598 $ 137,694 8% $ 281,297 $ 263,051 7% Segment EBITDA 19,509 18,605 5% 34,500 34,888 (1)% % of revenue 13 % 14 % 12 % 13 % Segment Revenue PrintBrothers' reported revenue growth for the three and six months ended December 31, 2022 was negatively affected by currency impacts of 12% and 15%, respectively, resulting in a constant-currency revenue growth of 20% and 22%, respectively. 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 Despite a challenging supply chain and inflationary environment, PrintBrothers' segment EBITDA for the three months ended December 31, 2022 grew year over year, driven by the constant-currency revenue growth described above, as well as profit contribution from a business acquired in the last twelve months. For the six months ended December 31, 2022, Euro-based profitability increases were more than offset by year-over-year currency fluctuations. Currency exchange fluctuations negatively impacted segment EBITDA year over year by $1.8 million and $3.9 million, for the three and six months ended December 31, 2022, respectively. We continue to focus on 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 December 31, Six Months Ended December 31, 2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021 Reported Revenue $ 89,336 $ 90,130 (1)% $ 166,159 $ 162,950 2% Segment EBITDA 13,681 16,358 (16)% 25,901 30,747 (16)% % of revenue 15 % 18 % 16 % 19 % Segment Revenue The Print Group's reported revenue for the three and six months ended December 31, 2022 was negatively affected by a currency impact of 12% and 15%, respectively, resulting in an increase to revenue on a constant-currency basis of 11% and 17%, respectively. Constant-currency revenue growth was largely driven by price increases that have been implemented over the past year to address inflationary cost increases. Segment Profitability The decrease in The Print Group's segment EBITDA during the three and six months ended December 31, 2022, as compared to the prior year periods, was driven by cost increases that included higher input costs that are impacted by ongoing supply chain disruptions and higher shipping and energy costs, which more than offset the benefits from the revenue growth described above. For the three and six months ended December 31, 2022, currency exchange fluctuations negatively impacted segment EBITDA year over year by $1.7 million and $3.9 million, respectively. 33 National Pen In thousands Three Months Ended December 31, Six Months Ended December 31, 2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021 Reported Revenue $ 120,621 $ 124,717 (3)% $ 202,287 $ 193,981 4% Segment EBITDA 24,783 31,599 (22)% 23,486 23,551 —% % of revenue 21 % 25 % 12 % 12 % Segment Revenue For the three and six months ended December 31, 2022, National Pen's revenue growth was negatively affected by currency impacts of 6% and 7%, respectively, resulting in constant-currency revenue growth of 3% and 11%, respectively. 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 in new product categories that include bags and drinkware. The year-over-year decline in face mask sales impacted National Pen's revenue by approximately $3.2 million and $7.3 million for the three and six months ended December 21, 2022, respectively. Segment Profitability The decrease in National Pen's segment EBITDA for the three and six months ended December 31, 2022 was driven by negative currency impacts of $5.2 million and $5.4 million, respectively. Both gross margin and contribution margin were flat year over year when excluding currency impacts. National Pen has benefited from the start of cost reductions related to inbound and outbound freight costs that are more significant for this business given the extent of the supply chain that originates in China. All Other Businesses In thousands Three Months Ended December 31, Six Months Ended December 31, 2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021 Reported Revenue $ 59,998 $ 57,719 4% $ 111,825 $ 105,590 6% Segment EBITDA 5,406 6,264 (14)% 11,584 11,155 4% % of revenue 9 % 11 % 10 % 11 % 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 3% and 6% during the three and six months ended December 31, 2022, respectively. BuildASign's signage products grew at double-digit rates, while home decor products were flat during the seasonally significant second quarter. Printi delivered solid revenue growth across product lines and channels. Segment Profitability The decrease in segment EBITDA for the three months ended December 31, 2022 as compared to the three months ended December 31, 2021, was due to higher input costs that had a larger impact during BuildASign's seasonally important second quarter and its home decor products. The increase in segment EBITDA for the six months ended December 31, 2022 as compared to the six months ended December 31, 2021, was driven by higher revenue and increased marketing efficiencies at both businesses during the first quarter of the current year. 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. Our loss was lower this quarter due to the decreased operating expenses as we prepared to divest the business, which was completed in early January 2023. 34 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 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 $0.9 million and $0.5 million during the three and six months ended December 31, 2022, respectively, as compared to the prior periods, due to compensation increases as a result of our inflation-adjusted annual merit cycle and volume-related technology 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 favorable versus the prior year, due in part to the granting of RSUs and options for most employees during the current year, as compared to PSUs in prior years. Liquidity and Capital Resources Consolidated Statements of Cash Flows Data In thousands Six Months Ended December 31, 2022 2021 Net cash provided by operating activities $ 55,875 $ 179,911 Net cash used in investing activities (106,569) (77,281) Net cash used in financing activities (112,715) (49,357) The cash flows during the six months ended December 31, 2022 related primarily to the following items: Cash inflows: • Net loss of $163.3 million, adjusted for non-cash items of $254.2 million primarily related to adjustments for deferred taxes of $116.9 million, depreciation and amortization of $81.8 million, unrealized currency-related losses of $20.9 million, and share-based compensation costs of $22.7 million Cash outflows: • Exercise of PrintBrothers' and BuildASign minority equity interest holders' put options for $95.6 million; refer to Note 10 in the accompanying consolidated financial statements for additional details • Total net working capital impacts of $35.1 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 and unfavorable changes to accounts payable, accrued expenses and other liabilities • Purchase of held-to-maturity securities for $51.7 million, net of maturities • Internal and external costs of $29.2 million for software and website development that we have capitalized • Capital expenditures of $26.5 million of which the majority related to the purchase of manufacturing and automation equipment for our production facilities • Repayments of debt, net of proceeds from debt, for $6.6 million • Payments for finance lease arrangements of $4.3 million 35 • $3.7 million of distributions to noncontrolling interest holders • Payment of withholding taxes in connection with share awards of $2.4 million Additional Liquidity and Capital Resources Information. At December 31, 2022, we had $111.3 million of cash and cash equivalents, $102.2 million of marketable securities and $1,707.0 million of debt, excluding debt issuance costs and debt premiums and discounts. During the six months ended December 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. Indefinitely Reinvested Earnings. As of December 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 $51.8 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 December 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) $ 77,213 $ 23,747 $ 28,262 $ 8,164 $ 17,040 Purchase commitments 235,619 139,177 84,609 11,833 — Senior unsecured notes and interest payments 747,000 42,000 84,000 621,000 — Senior secured credit facility and interest payments (2) 1,487,487 83,383 170,949 162,034 1,071,121 Other debt 6,734 2,549 4,000 185 — Finance leases, net of subleases (1) 25,572 6,741 8,247 3,304 7,280 Other 6,838 6,838 — — — Total (3) $ 2,586,463 $ 304,435 $ 380,067 $ 806,520 $ 1,095,441 ___________________ (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 $9.5 million as of December 31, 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 manufacturing facilities and 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 $1.8 million in the aggregate outstanding as of December 31, 2022. Purchase Commitments. At December 31, 2022, we had unrecorded commitments under contract of $235.6 million. Purchase commitments consisted of third-party cloud services of $87.5 million; inventory, third-party fulfillment and digital service purchase commitments of $69.6 million; software of $28.9 million; advertising of $20.9 million; production and computer equipment purchases of $5.8 million; commitments for professional and consulting fees of $4.2 million; and other unrecorded purchase commitments of $18.8 million. Senior Secured Credit Facility and Interest Payments. As of December 31, 2022, we have borrowings under our Restated Credit Agreement of $1,100.2 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 Revolving Credit Facility under our Restated 36 Credit Agreement has $243.7 million unused as of December 31, 2022. There are no drawn amounts on the Revolving Credit Facility, 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 if any loans made under the Revolving Credit Facility are outstanding on the last day of any fiscal quarter, then we are subject to a financial maintenance covenant that the First Lien Leverage Ratio (as defined in the Restated Credit Agreement) calculated as of the last day of such quarter shall not exceed 3.25 to 1.00. Any amounts drawn under the Revolving Credit Facility 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. 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 December 31, 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 December 31, 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 December 31, 2022 is $23.6 million, net of accumulated depreciation of $35.6 million. The present value of lease installments not yet due included in other current liabilities and other liabilities in our consolidated balance sheet at December 31, 2022 amounts to $27.1 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 37 activities less purchases of property, plant and equipment, purchases of intangible assets not related to acquisitions, and capitalization of software and website development costs that are included in net cash used in investing activities, plus the payment of contingent consideration in excess of acquisition-date fair value and gains on proceeds from insurance that are included in net cash provided by operating activities, if any. We use this cash flow metric because we believe that this methodology can provide useful supplemental information to help investors better understand our ability to generate cash flow after considering certain investments required to maintain or grow our business, as well as eliminate the impact of certain cash flow items presented as operating cash flows that we do not believe reflect the cash flow generated by the underlying business. Our adjusted free cash flow measure has limitations as it may omit certain components of the overall cash flow statement and does not represent the residual cash flow available for discretionary expenditures. For example, adjusted free cash flow does not incorporate our cash payments to reduce the principal portion of our debt or cash payments for business acquisitions. Additionally, the mix of property, plant and equipment purchases that we choose to finance may change over time. We believe it is important to view our adjusted free cash flow measure only as a complement to our entire consolidated statement of cash flows. The table below sets forth operating income and adjusted EBITDA for the three and six months ended December 31, 2022 and 2021: In thousands Three Months Ended December 31, Six Months Ended December 31, 2022 2021 2022 2021 GAAP operating income $ 33,578 $ 85,981 $ 15,611 $ 102,920 Exclude expense (benefit) impact of: Depreciation and amortization 40,874 45,314 81,816 89,746 Share-based compensation expense 11,547 12,505 22,022 23,511 Certain impairments and other adjustments (925) (2,713) 2,531 (3,493) Restructuring-related charges 11,207 307 13,027 (2) Realized gains (losses) on currency derivatives not included in operating income (1) 14,901 674 21,770 (2,998) Adjusted EBITDA $ 111,182 $ 142,068 $ 156,777 $ 209,684 _________________ (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 six months ended December 31, 2022 and 2021: In thousands Six Months Ended December 31, 2022 2021 Net cash provided by operating activities $ 55,875 $ 179,911 Purchases of property, plant and equipment (26,490) (26,539) Capitalization of software and website development costs (29,246) (32,134) Adjusted free cash flow $ 139 $ 121,238