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, including profitability, cash flows, liquidity, and capital allocation; the expected effects of our cost reductions and recent restructuring, including future cost savings and restructuring charges; the expected impacts of our mass customization platform; the expected effects of mid- and upper-funnel advertising in Vista; sufficiency of our liquidity position; legal proceedings; and sufficiency of our tax reserves and expectation pf a reduction in unrecognized tax benefits. 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; the failure of our 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; costs and disruptions caused by acquisitions and minority investments; 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 March 31, 2023, 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. We announced plans on March 23, 2023 to reduce costs within our Vista business and our central teams and implement organizational changes to support expanded profitability, reduced leverage and increased speed, focus, and accountability. These plans resulted in a restructuring charge of $30.1 million during the current quarter, with additional immaterial charges expected to be recognized during the fourth quarter of fiscal 2023. This restructuring action provided a small cost savings benefit during the current quarter due to the timing of the action, but we expect this action to deliver approximately $100 million of annualized pre-tax cost savings. 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 28 "Consolidated Results of Operations" and "Additional Non-GAAP Financial Measures" sections of Management's Discussion and Analysis. A summary of these key financial metrics for the three and nine months ended March 31, 2023 as compared to the three and nine months ended March 31, 2022 follows: Third Quarter Fiscal Year 2023 • Revenue increased by 13% to $742.2 million. • Constant-currency revenue increased 16% when excluding the revenue of acquired companies for the first twelve months after acquisition (a non-GAAP financial measure). • Operating income increased by $16.2 million to a loss of $12.2 million. • Adjusted EBITDA (a non-GAAP financial measure) increased by $35.5 million to $69.1 million. • Diluted net loss per share attributable to Cimpress plc increased to a loss of $1.88 from a loss of $2.75 in the comparative period. Year to Date Fiscal Year 2023 • Revenue increased by 6% to $2,290.8 million. • Constant-currency revenue increased by 12% and 11% when excluding the revenue of acquired companies for the first twelve months after acquisition (both non-GAAP financial measures). • Operating income decreased by $71.1 million to $3.4 million. • Adjusted EBITDA (a non-GAAP financial measure) decreased by $17.4 million to $225.9 million. • Diluted net loss per share attributable to Cimpress plc decreased to a loss of $8.19 from a loss of $0.91 in the comparative period. • Cash provided by operating activities decreased by $63.2 million to $68.5 million. • Adjusted free cash flow (a non-GAAP financial measure) decreased by $52.9 million to an outflow of $13.2 million. For the three months ended March 31, 2023, reported revenue growth accelerated, mainly in our Vista business as product mix shifted back toward faster-growing small business products and we are comparing to a weaker period in the prior-year quarter that included the migration of Vista's U.S. website onto the new technology platform. Our Vista business experienced growth in new customer count and new customer bookings across all major markets. Promotional products, apparel, and gifts (PPAG) was our fastest-growing product category, with business cards, marketing materials, packaging and labels, and signage all showing strong year-over-year growth as well. Revenue growth in most Cimpress businesses continued to benefit from year-over-year increases in pricing, which has been one tool used to mitigate inflationary cost pressures. Currency exchange fluctuations had a negative effect during the current quarter. For the three months ended March 31, 2023, the increase in operating income was primarily due to the incremental profit from the revenue growth described above. Gross profit growth benefited from higher volumes and the reduced net impact of cost inflation. We also realized cost efficiencies in advertising spend, and lower compensation and consulting-related operating expenses. These items were partially offset by an increase in restructuring charges primarily related to actions taken during the current quarter to reduce costs in the Vista business and in our central teams. Adjusted EBITDA increased year over year for the three months ended March 31, 2023, primarily for the same reasons operating income increased. 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 $1.6 million for the three months ended March 31, 2023. Diluted net loss per share attributable to Cimpress plc increased for the three months ended March 31, 2023 primarily due to the improved operating loss described above, as well as significantly lower income tax expense year over year. These improvements were partially offset by increased interest expense and year-over- 29 year impact from the net effect of unrealized currency losses caused by exchange rate volatility that more than offset realized gains recognized in the current quarter. During the nine months ended March 31, 2023, cash from operations decreased $63.2 million year over year due primarily to less favorable working capital inflows of $22.0 million, largely driven by less favorable benefits from accounts payable due in part to timing, as well as negative working capital impacts from higher inventory levels that were intended to mitigate supply chain issues. Cash from operations was also negatively impacted year over year by higher cash interest costs and restructuring payments due to actions taken to reduce costs over the past year. Adjusted free cash flow decreased year over year by $52.9 million for the nine months ended March 31, 2023, due to the operating cash flow decrease described above, partially offset by lower capitalized software and capitalized expenditures. 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 nine months ended March 31, 2023 and 2022 are shown in the following table: In thousands Three Months Ended March 31, Currency Impact: Constant- Currency Impact of Acquisitions/Divestitures: Constant- Currency Revenue Growth 2023 2022 % Change (Favorable)/Unfavorable Revenue Growth (1) (Favorable)/Unfavorable Excluding Acquisitions/Divestitures (2) Vista $ 396,642 $ 349,216 14% 2% 16% —% 16% PrintBrothers 139,569 119,960 16% 5% 21% 1% 22% The Print Group 85,504 75,361 13% 6% 19% —% 19% National Pen 81,113 72,243 12% 3% 15% —% 15% All Other Businesses 49,037 48,486 1% —% 1% —% 1% Inter-segment eliminations (9,701) (7,854) Total revenue $ 742,164 $ 657,412 13% 3% 16% —% 16% In thousands Nine Months Ended March 31, Currency Impact: Constant- Currency Impact of Acquisitions/Divestitures: Constant- Currency Revenue Growth 2023 2022 % Change (Favorable)/Unfavorable Revenue Growth (1) (Favorable)/Unfavorable Excluding Acquisitions/Divestitures (2) Vista $ 1,203,747 $ 1,146,810 5% 4% 9% (1)% 8% PrintBrothers 420,866 383,011 10% 12% 22% (1)% 21% The Print Group 251,663 238,311 6% 11% 17% —% 17% National Pen 283,400 266,224 6% 6% 12% —% 12% All Other Businesses 160,862 154,076 4% —% 4% —% 4% Inter-segment eliminations (29,757) (23,705) Total revenue $ 2,290,781 $ 2,164,727 6% 6% 12% (1)% 11% _________________ (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. 30 (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. 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 March 31, Nine Months Ended March 31, 2023 2022 2023 2022 Cost of revenue $ 394,908 $ 347,452 $ 1,228,036 $ 1,110,378 % of revenue 53.2 % 52.9 % 53.6 % 51.3 % For the three and nine months ended March 31, 2023, cost of revenue increased by $47.5 million and $117.7 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. Although input costs were higher year over year during the third quarter of fiscal 2023, we started to see some easing across many product substrates, and we began to pass the anniversary of input cost increases, so the year-over-year impact lessened. 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, was minimal in the current quarter, though still a negative year-over-year impact for the nine months ended March 31, 2023. Consolidated Operating Expenses The following table summarizes our comparative operating expenses for the following periods: In thousands Three Months Ended March 31, Nine Months Ended March 31, 2023 2022 2023 vs. 2022 2023 2022 2023 vs. 2022 Technology and development expense (1) $ 78,287 $ 75,291 4% $ 230,485 $ 212,835 8% % of revenue 10.5 % 11.5 % 10.1 % 9.8 % Marketing and selling expense (1) $ 187,234 $ 194,618 (4)% $ 593,312 $ 577,931 3% % of revenue 25.2 % 29.6 % 25.9 % 26.7 % General and administrative expense (1) $ 52,578 $ 50,888 3% $ 156,441 $ 144,162 9% % of revenue 7.1 % 7.7 % 6.8 % 6.7 % Amortization of acquired intangible assets $ 11,239 $ 14,180 (21)% $ 35,951 $ 41,520 (13)% % of revenue 1.5 % 2.2 % 1.6 % 1.9 % Restructuring expense (2) $ 30,115 $ 3,420 781% $ 43,142 $ 3,418 (1,162)% % of revenue 4.1 % 0.5 % 1.9 % 0.2 % _____________________ (1) As a result of the March 2023 cost reduction action described above, we expect to realize cost savings in future periods. The cost savings benefit during the current period was not material. (2) Refer to Note 13 in our accompanying consolidated financial statements for additional details relating to restructuring expense. 31 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 $3.0 million and $17.7 million for the three and nine months ended March 31, 2023, 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 $0.5 million and $4.4 million for the three and nine months ended March 31, 2023, 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 recent restructuring actions that reduced headcount. Marketing and selling expense Marketing and selling expense consists primarily of advertising and promotional costs; payroll and related expenses for our employees engaged in marketing, sales, customer support and public relations activities; direct-mail advertising costs; and third-party payment processing fees. Our Vista, National Pen and BuildASign businesses have higher marketing and selling costs as a percentage of revenue as compared to our PrintBrothers and The Print Group businesses due to differences in the customers that they serve. For the three and nine months ended March 31, 2023, marketing and selling expenses decreased by $7.4 million and increased by $15.4 million, respectively, as compared to the prior-year periods. The decrease for the three months ended March 31, 2023 was primarily driven by lower costs in our Vista business of $11.7 million, due in part to lower advertising spend. These decreases were partially offset by increased advertising spend collectively across all our other businesses of $4.9 million. The increased spend for the nine months ended March 31, 2023 was due to higher advertising spend of $26.6 million across Cimpress (including increases in mid- and upper-funnel spend, partially offset by lower performance advertising in Vista during the first half of the current fiscal year), partially offset by lower 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 nine months ended March 31, 2023, general and administrative expenses increased by $1.7 million and $12.3 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. For the nine months ended March 31, 2023, we recognized an additional $2.2 million of expense related to the termination of one of our leased office locations as we continue to optimize our office footprint with many of our team members operating under a remote-first model. These increases were partially offset by lower share-based compensation expense due to forfeitures from our recent restructuring actions, as well as favorability due to different timing of expense from our granting of RSUs and options for most employees during the current year, as compared to PSUs in prior years. 32 Restructuring expense Restructuring costs include one-time employee termination benefits, acceleration of share-based compensation, write-off of assets, costs to exit loss-making operations, and other related costs including third-party professional and outplacement services. All restructuring costs are excluded from segment and adjusted EBITDA. For the three and nine months ended March 31, 2023, restructuring expenses increased by $26.7 million and $39.7 million, respectively, as compared to the prior-year periods. This increase is largely driven by $29.5 million of costs recognized in the current quarter related to the previously described action taken in our Vista business and central teams during March 2023 that were intended to reduce costs and support expanded profitability, reduced leverage, and increased speed, focus and accountability. The remaining increase relates to other actions announced earlier in the year to prioritize our investments and exit the Japanese and Chinese markets. Refer to Note 13 in the accompanying consolidated financial statements for additional details. 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 March 31, Nine Months Ended March 31, 2023 2022 2023 2022 (Losses) gains on derivatives not designated as hedging instruments $ (2,428) $ 11,210 $ 2,021 $ 31,017 Currency-related gains (losses), net 4,187 (672) 10,217 5,202 Other (losses) gains (382) 1,783 (856) 2,111 Total other income, net $ 1,377 $ 12,321 $ 11,382 $ 38,330 The decrease 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 net 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 $6.3 million and $8.6 million during the three and nine months ended March 31, 2023, respectively, as compared to the prior-year periods, primarily due to a higher weighted-average interest rate (net of interest rate swaps) driving the majority of the interest expense increases, partially offset by an increase in interest income earned on our cash and marketable securities of $2.2 million and $5.8 million, respectively. In addition, we recognized accretion adjustments of $1.2 million and $3.3 million during the three and 33 nine months ended March 31, 2023, respectively, for our mandatorily redeemable noncontrolling interests, which did not occur in the prior periods. Income tax expense In thousands Three Months Ended March 31, Nine Months Ended March 31, 2023 2022 2023 2022 Income tax expense $ 8,475 $ 29,529 $ 143,969 $ 56,208 Effective tax rate (20.5) % (73.2) % (208.3) % 149.9 % Tax expense decreased for the three months ended March 31, 2023 versus the prior comparable period due to the partial valuation allowance on Swiss deferred tax assets of $29.6 million recorded during the three months ended March 31, 2022. Tax expense increased for the nine months ended March 31, 2023 versus the prior comparable period due to the full valuation allowance on Swiss deferred tax assets of $116.7 million recorded during the nine months ended March 31, 2023. 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 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 $4.9 million, respectively, for the three and nine months ended March 31, 2023. In thousands Three Months Ended March 31, Nine Months Ended March 31, 2023 2022 2023 vs. 2022 2023 2022 2023 vs. 2022 Reported Revenue $ 396,642 $ 349,216 14% $ 1,203,747 $ 1,146,810 5% Segment EBITDA 60,392 25,534 137% 146,286 183,220 (20)% % of revenue 15 % 7 % 12 % 16 % Segment Revenue Vista's reported revenue growth for the three and nine months ended March 31, 2023 was negatively affected by a currency impact of 2% and 4%, respectively. Vista's organic constant-currency revenue growth was 16% and 8%, respectively, for the three and nine months ended March 31, 2023. Constant-currency revenue growth was driven by new customer count and new customer bookings growth across all major markets, as well as increased repeat customer bookings. From a product perspective, the strongest growth was in the promotional products, apparel and gifts (PPAG) category, as well as business cards, marketing materials, packaging and signage. For the three and nine months ended March 31, 2023, holiday cards and invitations and announcements declined, particularly in the U.S. market, which had a more pronounced impact during our seasonally significant second quarter. For the three and nine months ended March 31, 2023, revenue growth was negatively impacted year over year by a decline in face mask sales of $1.7 million and $10.2 million, respectively, as well as lower revenue year over year of $2.1 million and $5.4 million, respectively, due to our planned exit from the Japanese market. 34 Segment Profitability For the three months ended March 31, 2023, segment EBITDA increased by $34.9 million, through a combination of factors including revenue growth described above. Gross margins were flat year over year as inflationary cost pressures began to lessen and further price increases were implemented. In addition, advertising spend decreased $4.1 million year over year, as a result of increased efficiency and a reduction in spend in non-core categories. We also continue to test a higher mix of mid- and upper-funnel advertising spend compared to lower-funnel spend, which we believe should help us improve awareness and consideration with customers and prospects with less reliance on paid search advertising. We delivered some operating expense efficiencies this quarter, although the cost reduction implemented and announced in March did not materially benefit the quarter. For the nine months ended March 31, 2023, segment EBITDA decreased by $36.9 million, due in part to cost inflation that had a larger net impact on our results during the first half of fiscal 2023. Product mix weighed on Vista's gross margins during the first half of fiscal year 2023, when we experienced the fastest growth in product categories like PPAG that have lower gross margins although higher average order values. Changes in currency exchange rates had a negative impact during the nine months ended March 31, 2023. Vista's advertising expense increased by $19.4 million year over year, driven by higher mid- and upper funnel advertising spend, mainly during the first half of fiscal 2023. Operating expenses also increased $3.0 million due to increased growth investments made last year, which we've fully lapped during the current quarter and were starting to be offset by cost reductions implemented in March 2023. PrintBrothers In thousands Three Months Ended March 31, Nine Months Ended March 31, 2023 2022 2023 vs. 2022 2023 2022 2023 vs. 2022 Reported Revenue $ 139,569 $ 119,960 16% $ 420,866 $ 383,011 10% Segment EBITDA 15,886 12,392 28% 50,386 47,280 7% % of revenue 11 % 10 % 12 % 12 % Segment Revenue PrintBrothers' reported revenue growth for the three and nine months ended March 31, 2023 was negatively affected by currency impacts of 5% and 12%, respectively. When excluding the benefit from a small recent acquisition, organic constant-currency revenue growth was 22% and 21%, respectively. This strong performance was driven by 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 and nine months ended March 31, 2023 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. Currency exchange fluctuations negatively impacted segment EBITDA year over year by $0.5 million and $4.4 million, for the three and nine months ended March 31, 2023, 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 March 31, Nine Months Ended March 31, 2023 2022 2023 vs. 2022 2023 2022 2023 vs. 2022 Reported Revenue $ 85,504 $ 75,361 13% $ 251,663 $ 238,311 6% Segment EBITDA 13,589 11,923 14% 39,490 42,670 (7)% % of revenue 16 % 16 % 16 % 18 % 35 Segment Revenue The Print Group's reported revenue for the three and nine months ended March 31, 2023 was negatively affected by a currency impact of 6% and 11%, respectively, resulting in an increase to revenue on a constant-currency basis of 19% 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, as well as volume growth and increased order fulfillment for other Cimpress businesses. Segment Profitability The increase in The Print Group's segment EBITDA during the three months ended March 31, 2023, as compared to the prior year, was driven by the revenue growth described above, as well as gross margin improvements due to lower shipping costs and benefits from a higher mix of insourced order production. The decrease in The Print Group's segment EBITDA during the nine months ended March 31, 2023 as compared to the prior year was largely due to higher input costs that are impacted by supply chain disruptions and higher shipping and energy costs, which had a larger impact during the first half of fiscal 2023. For the three and nine months ended March 31, 2023, currency exchange fluctuations negatively impacted segment EBITDA year over year by $0.6 million and $4.4 million, respectively. National Pen In thousands Three Months Ended March 31, Nine Months Ended March 31, 2023 2022 2023 vs. 2022 2023 2022 2023 vs. 2022 Reported Revenue $ 81,113 $ 72,243 12% $ 283,400 $ 266,224 6% Segment EBITDA (3,336) (898) (271)% 20,150 22,653 (11)% % of revenue (4) % (1) % 7 % 9 % Segment Revenue For the three and nine months ended March 31, 2023, National Pen's revenue growth was negatively affected by currency impacts of 3% and 6%, respectively, resulting in constant-currency revenue growth of 15% and 12%, 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. Year-over-year revenue growth was negatively impacted by our planned exit from the Japanese market by approximately $2.6 million and $9.9 million for the three and nine months ended March 31, 2023, respectively, as well as the decline in face mask sales by approximately $1.2 million and $8.5 million, respectively. Segment Profitability The decrease in National Pen's segment EBITDA for the three and nine months ended March 31, 2023 was driven by negative currency impacts of $1.1 million and $6.5 million, respectively. During the third quarter of fiscal 2023, segment EBITDA was negatively impacted by contribution margin compression due to increased ad spend across direct mail and web channels, as well as unfavorable product mix shifts to newer product introductions. In addition, operating expenses increased due to higher tech spend and customer service costs driven by higher sales volumes. For the nine months ended March 31, 2023, segment EBITDA benefited from lower advertising spend during the first half of the year, as well as less pronounced impacts from product mix shifts during that same period. All Other Businesses In thousands Three Months Ended March 31, Nine Months Ended March 31, 2023 2022 2023 vs. 2022 2023 2022 2023 vs. 2022 Reported Revenue $ 49,037 $ 48,486 1% $ 160,862 $ 154,076 4% Segment EBITDA 5,036 6,044 (17)% 16,620 17,199 (3)% % of revenue 10 % 12 % 10 % 11 % 36 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. This segment also included results from our recently divested YSD business that was completed during the third quarter of fiscal 2023. Segment Revenue All Other Businesses' constant-currency revenue growth was 1% and 4% during the three and nine months ended March 31, 2023, respectively. BuildASign generates the majority of revenue in this segment, and for the three months ended March 31, 2023 revenue was flat year over year and grew for the nine months ended March 31, 2023, with mixed performance by product line. Printi delivered solid revenue growth across product lines and channels due to price increases implemented over the past year. Segment Profitability The decrease in segment EBITDA for the three and nine months ended March 31, 2023 as compared to the prior comparative periods, was primarily due to lower gross margins driven by higher input costs that had a larger impact on BuildASign's home decor products, including increased labor and marketing costs. 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. 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 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 teams 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 decreased by $1.6 million and $2.1 million during the three and nine months ended March 31, 2023, respectively, as compared to the prior periods, driven by favorability from unallocated share-based compensation due to changes in the mix of equity instruments and forfeitures from recent cost reduction actions. These decreases were partially offset by compensation increases as a result of our inflation-adjusted annual merit cycle and volume-related technology costs. Liquidity and Capital Resources Consolidated Statements of Cash Flows Data In thousands Nine Months Ended March 31, 2023 2022 Net cash provided by operating activities $ 68,474 $ 131,716 Net cash used in investing activities (108,351) (48,627) Net cash used in financing activities (125,766) (98,746) The cash flows during the nine months ended March 31, 2023 related primarily to the following items: Cash inflows: • Adjustments for non-cash items of $309.7 million primarily related to adjustments for depreciation and amortization of $121.6 million, deferred taxes of $116.0 million, share-based compensation costs of $31.4 million, and unrealized currency-related losses of $25.5 million. 37 Cash outflows: • Net loss of $213.1 million • 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 $28.1 million were a use of cash, primarily due to timing impacts from unfavorable changes to accounts payable, partially offset by an inflow from accrued expenses driven by an increase in restructuring-related accruals of $15.3 million. Refer to Note 13 in the accompanying consolidated financial statements for additional details. • Internal and external costs of $44.2 million for software and website development that we have capitalized • Capital expenditures of $37.5 million of which the majority related to the purchase of manufacturing and automation equipment for our production facilities • Purchase of held-to-maturity securities for $23.9 million, net of maturities • Repayments of debt, net of proceeds from debt, for $9.7 million • Payments for finance lease arrangements of $6.0 million • Payment of withholding taxes in connection with share awards of $3.8 million • $3.7 million of distributions to noncontrolling interest holders Additional Liquidity and Capital Resources Information. At March 31, 2023, we had $115.0 million of cash and cash equivalents, $74.8 million of marketable securities and $1,710.2 million of debt, excluding debt issuance costs and debt premiums and discounts. During the nine months ended March 31, 2023, 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. In light of our recently implemented cost savings measures and our expectation of continued profitability expansion and cash flow generation, we expect our liquidity to increase in the fourth quarter of fiscal year 2023 and in fiscal year 2024. We have historically used excess cash and cash equivalents for organic investments, share repurchases, acquisitions and equity investments, and debt reduction. We remain committed to reducing our net leverage through a combination of increased profits and lower net debt in line with the detailed plan we outlined in our investor update on March 24, 2023. Therefore, through fiscal year 2024 we expect capital allocation beyond current levels of organic investment to favor net debt reduction, which could include repurchases of our 7.0% Senior Notes due 2026. Indefinitely Reinvested Earnings. As of March 31, 2023, 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 $53.7 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. 38 Contractual Obligations Contractual obligations at March 31, 2023 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) $ 80,970 $ 23,915 $ 29,538 $ 7,936 $ 19,581 Purchase commitments 205,974 130,133 74,924 917 — Senior unsecured notes and interest payments 747,000 42,000 84,000 621,000 — Senior secured credit facility and interest payments (2) 1,497,863 89,310 181,419 170,739 1,056,395 Other debt 7,678 2,977 4,127 574 — Finance leases, net of subleases (1) 32,256 6,117 9,085 3,168 13,886 Total (3) $ 2,571,741 $ 294,452 $ 383,093 $ 804,334 $ 1,089,862 ___________________ (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 $9.6 million as of March 31, 2023 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 $1.5 million in the aggregate outstanding as of March 31, 2023 . Purchase Commitments. At March 31, 2023, we had unrecorded commitments under contract of $206.0 million. Purchase commitments consisted of third-party cloud services of $79.4 million; inventory, third-party fulfillment and digital service purchase commitments of $79.2 million; software of $16.9 million; advertising of $10.1 million; production and computer equipment purchases of $2.5 million; commitments for professional and consulting fees of $3.5 million; and other unrecorded purchase commitments of $14.4 million. Senior Secured Credit Facility and Interest Payments. As of March 31, 2023, we have borrowings under our Restated Credit Agreement of $1,102.5 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 Credit Agreement has $244.0 million unused as of March 31, 2023. 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 March 31, 2023 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 March 31, 2023, 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. 39 Other Debt. In addition, we have other debt which consists primarily of term loans acquired through our various acquisitions or used to fund certain capital investments. As of March 31, 2023, we had $7.7 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 March 31, 2023 is $28.8 million, net of accumulated depreciation of $36.9 million. The present value of lease installments not yet due included in other current liabilities and other liabilities in our consolidated balance sheet at March 31, 2023 amounts to $37.1 million. Other Obligations. In February 2023, we made a $6.8 million deferred payment for our Depositphotos acquisition, resulting in no outstanding acquisition-related deferred liabilities as of March 31, 2023. 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 proceeds from insurance that are included in net cash provided by operating activities, if any. We use this cash flow metric because we believe that this methodology can provide useful supplemental information to help investors better understand our ability to generate cash flow after considering certain investments required to maintain or grow our business, as well as eliminate the impact of certain cash flow items presented as operating cash flows that we do not believe reflect the cash flow generated by the underlying business. Our adjusted free cash flow measure has limitations as it may omit certain components of the overall cash flow statement and does not represent the residual cash flow available for discretionary expenditures. For example, adjusted free cash flow does not incorporate our cash payments to reduce the principal portion of our debt or cash payments for business acquisitions. Additionally, the mix of property, plant and equipment purchases that we choose to finance may change over time. We believe it is important to view our adjusted free cash flow measure only as a complement to our entire consolidated statement of cash flows. 40 The table below sets forth operating income and adjusted EBITDA for the three and nine months ended March 31, 2023 and 2022: In thousands Three Months Ended March 31, Nine Months Ended March 31, 2023 2022 2023 2022 GAAP operating (loss) income $ (12,197) $ (28,437) $ 3,414 $ 74,483 Exclude expense (benefit) impact of: Depreciation and amortization 39,751 43,651 121,567 133,397 Share-based compensation expense 7,242 12,704 29,264 36,215 Certain impairments and other adjustments (549) 277 1,982 (3,216) Restructuring-related charges 30,115 3,420 43,142 3,418 Realized gains (losses) on currency derivatives not included in operating (loss) income (1) 4,783 2,011 26,553 (987) Adjusted EBITDA $ 69,145 $ 33,626 $ 225,922 $ 243,310 _________________ (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 nine months ended March 31, 2023 and 2022: In thousands Nine Months Ended March 31, 2023 2022 Net cash provided by operating activities $ 68,474 $ 131,716 Purchases of property, plant and equipment (37,486) (42,142) Capitalization of software and website development costs (44,181) (49,875) Adjusted free cash flow $ (13,193) $ 39,699