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 revenue, profitability, liquidity, and net leverage; future impacts of our March 2023 restructuring; our expectations for the sale of our Jamaica facility; 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 and inflation; our inability to make the investments in our business 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; disruptions caused by political instability and war in Ukraine, Israel, or elsewhere; 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 our Annual Report on Form 10-K for the fiscal year ended June 30, 2023 and the documents that we periodically file with the SEC. Executive Overview Cimpress is a strategically focused collection of 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 and services 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, design and digital marketing services, and other categories. Mass customization is a core element of the business model of each Cimpress business and is a competitive strategy which seeks to produce goods and services to meet individual customer needs with near mass production efficiency. As of September 30, 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. During the current quarter, we revised our adjusted free cash flow definition to include proceeds from the sale of assets, which we believe provides useful information regarding the net cash deployed for the purchase of capital assets by incorporating any cash that is recovered from the subsequent sale of any assets. We have revised all periods presented to incorporate this change. 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 net cash interest payments; 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 months ended September 30, 2023 as compared to the three months ended September 30, 2022 follows: 25 • Revenue increased by 8% to $757.3 million. • Organic constant-currency revenue increased 4% (a non-GAAP financial measure). • Operating income increased by $52.1 million to $34.1 million. • Adjusted EBITDA (a non-GAAP financial measure) increased by $43.1 million to $88.7 million. • Diluted net income (loss) per share attributable to Cimpress plc increased to income of $0.17 from a loss of $(0.97) in the prior fiscal year. • Cash provided by operating activities increased by $67.5 million to $42.3 million. • Adjusted free cash flow (a non-GAAP financial measure) increased by $63.1 million to $10.9 million. For the three months ended September 30, 2023, the increase in reported revenue was primarily due to growth across our Vista, PrintBrothers and National Pen reportable segments. Revenue growth in our Vista business was driven by order growth, in particular from new customers, and higher average order values driven by both product mix and pricing. Revenue in our Vista business grew year over year across all product categories, with the fastest growth coming from promotional products, apparel, and gifts (PPAG) while marketing materials, packaging and labels, and signage also showed strong year-over-year growth. Currency exchange fluctuations had a positive effect on revenue growth during the current quarter. The increase to operating income during the three months ended September 30, 2023 was driven by higher gross profit that benefited from the revenue growth described above, as well as gross margin expansion. The operating income increase also benefited from improved leverage of advertising spend as a percentage of revenue and reduced operating expenses driven by the prior-year cost reduction actions, as well as lower restructuring costs by $2.2 million as a result of actions that were completed during the prior year. Adjusted EBITDA increased year over year, primarily driven by the operating income growth described above, but the increase was partially offset by a $3.5 million year-over-year net unfavorable currency impact. Adjusted EBITDA excludes restructuring charges, share-based compensation expense, certain impairments, and gains on the sale of assets, and includes the realized gains or losses on our currency derivatives intended to hedge adjusted EBITDA. Diluted net income (loss) per share attributable to Cimpress plc increased year over year for the three months ended September 30, 2023, primarily due to the operating income increase as described above and a $1.4 million gain on the purchase of a portion of our 2026 Notes during the current quarter, but the increase was partially offset by lower realized and unrealized currency gains caused by exchange rate volatility, as well as higher interest expense driven by an increased weighted-average interest rate. During the three months ended September 30, 2023, cash from operations increased $67.5 million year over year due primarily to the increase in net income as described above, as well as a favorable shift in working capital outflows of $31.8 million, which was largely driven by the prior-year increases in inventory levels that were intended to minimize availability risk due to supply chain disruptions, which has reversed in the current quarter. This favorable impact was partially offset by higher cash taxes of $11.5 million, due in part to increased prior year assessments in one jurisdiction driven by profitability growth, as well as higher net cash interest payments of $7.9 million. Adjusted free cash flow increased by $63.1 million for the three months ended September 30, 2023, due to the operating cash flow increase described above, as well as higher proceeds from the sale of assets, primarily driven by the sale of our previously owned manufacturing facility in Japan. These increases were partially offset by higher 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 social media 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. 26 Total revenue and revenue growth by reportable segment for the three months ended September 30, 2023 and 2022 are shown in the following table: In thousands Three Months Ended September 30, Currency Impact: Constant- Currency Impact of Acquisitions/Divestitures: Constant- Currency Revenue Growth 2023 2022 % Change (Favorable)/Unfavorable Revenue Growth (1) (Favorable)/Unfavorable Excluding Acquisitions/Divestitures (2) Vista $ 396,647 $ 369,369 7% (1)% 6% —% 6% PrintBrothers 152,221 132,699 15% (9)% 6% —% 6% The Print Group 80,539 76,823 5% (8)% (3)% —% (3)% National Pen 87,255 81,666 7% (2)% 5% —% 5% All Other Businesses 51,800 51,827 —% (1)% (1)% —% (1)% Inter-segment eliminations (11,168) (8,969) Total revenue $ 757,294 $ 703,415 8% (4)% 4% —% 4% _________________ (1) Constant-currency revenue growth, a non-GAAP financial measure, represents the change in total revenue between current and prior year periods at constant-currency exchange rates by translating all non-U.S. dollar denominated revenue generated in the current period using the prior year period’s average exchange rate for each currency to the U.S. dollar. Our reportable segments-related growth is inclusive of inter-segment revenues, which are eliminated in our consolidated results. (2) Constant-currency revenue growth excluding acquisitions/divestitures, a non-GAAP financial measure, excludes revenue results for businesses in the period in which there is no comparable year-over-year revenue. Our reportable segments-related growth is inclusive of inter-segment revenues, which are eliminated in our consolidated results. 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 September 30, 2023 2022 Cost of revenue $ 398,783 $ 377,735 % of revenue 52.7 % 53.7 % For the three months ended September 30, 2023, cost of revenue increased by $21.0 million as compared to the prior year, primarily driven by fluctuations in currency exchange rates of $15.5 million, as well as increased shipping costs year over year due to both volume increases and higher fuel surcharges. Production costs increased year over year due to volume growth and product mix shifts in some of our businesses as well as higher labor costs from the combination of a more competitive labor market and the inflationary environment in many jurisdictions where we operate. These cost increases were partially offset by lower input costs for some key substrates like paper, and savings that resulted from the March 2023 cost reduction actions. 27 Consolidated Operating Expenses The following table summarizes our comparative operating expenses for the following periods: In thousands Three Months Ended September 30, 2023 2022 Technology and development expense $ 74,330 $ 74,475 % of revenue 9.8 % 10.6 % Marketing and selling expense $ 192,188 $ 200,930 % of revenue 25.4 % 28.6 % General and administrative expense $ 48,341 $ 54,072 % of revenue 6.4 % 7.7 % Amortization of acquired intangible assets $ 9,886 $ 12,350 % of revenue 1.3 % 1.8 % Restructuring expense (1) $ (334) $ 1,820 % of revenue 0.0 % 0.3 % _____________________ (1) Refer to Note 13 in our accompanying consolidated financial statements for additional details relating to restructuring expense. Technology and development expense Technology and development expense consists primarily of payroll and related expenses for employees engaged in software and manufacturing engineering, information technology operations, and content development, as well as amortization of capitalized software and website development costs, including hosting of our websites, asset depreciation, patent amortization, and other technology infrastructure-related costs. Depreciation expense for information technology equipment that directly supports the delivery of our digital marketing services products is included in cost of revenue. Technology and development expenses decreased by $0.1 million for the three months ended September 30, 2023 as compared to the prior year. The decrease is largely attributable to lower cash compensation costs of $2.0 million, due primarily to cost savings resulting from the March 2023 restructuring actions that reduced headcount, which were partially offset by the effect of our annual merit cycle and market adjustments. This net compensation decrease was partially offset by higher volume-related third-party technology costs due in part to increased customer demand, as well as the increased adoption of customer-facing technologies that are part of the mass customization platform. In addition, amortization expense from capitalized software increased $2.0 million, driven by the higher capitalized asset base. Marketing and selling expense Marketing and selling expense consists primarily of advertising and promotional costs; payroll and related expenses for our employees engaged in marketing, sales, customer support, and public relations activities; direct-mail advertising costs; and third-party payment processing fees. Our Vista, National Pen, and BuildASign businesses have higher marketing and selling costs as a percentage of revenue as compared to our PrintBrothers and The Print Group businesses due to differences in the customers that they serve. For the three months ended September 30, 2023, marketing and selling expenses decreased by $8.7 million as compared to the prior year. The expense decrease was due to lower compensation costs of $3.2 million due in part to the March 2023 cost reduction actions. Other cost decreases include lower third-party consulting spend, mainly in our Vista business, and lower building costs driven by actions taken over the past year to further optimize our real estate footprint for many of our team members operating under a remote-first model. Advertising spend was also lower by $1.0 million across Cimpress, due to the decrease of advertising spend in our Vista business of $10.2 million driven by lower mid- and upper-funnel spend, which was largely offset by advertising spend increases across our other businesses, most notably driven by an increase in our National Pen business due in part to timing effects of direct mail campaigns. 28 General and administrative expense General and administrative expense consists primarily of transaction costs, including third-party professional fees, insurance, and payroll and related expenses of employees involved in executive management, finance, legal, strategy, human resources, and procurement. For the three months ended September 30, 2023, general and administrative expenses decreased by $5.7 million as compared to the prior year. The decrease was driven by the nonrecurrence of $2.4 million of expense related to the prior-year termination of one of our leased office locations as we've continued to optimize our real estate footprint with many of our team members operating under a remote-first model, as well as the reduction of third-party consulting spend. The exit of our business in China during fiscal year 2023 also decreased our general and administrative expenses by $0.7 million versus the prior year. Other Consolidated Results Other income, net Other income, net generally consists of gains and losses from currency exchange rate fluctuations on transactions or balances denominated in currencies other than the functional currency of our subsidiaries, as well as the realized and unrealized gains and losses on some of our derivative instruments. In evaluating our currency hedging programs and ability to qualify for hedge accounting in light of our legal entity cash flows, we considered the benefits of hedge accounting relative to the additional economic cost of trade execution and administrative burden. Based on this analysis, we execute certain currency derivative contracts that do not qualify for hedge accounting. The following table summarizes the components of other income, net: In thousands Three Months Ended September 30, 2023 2022 Gains on derivatives not designated as hedging instruments $ 8,312 $ 28,645 Currency-related losses, net (2,699) (197) Other gains (losses) 806 (1,051) Total other income, net $ 6,419 $ 27,397 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 losses due to currency exchange rate volatility on our non-functional currency intercompany relationships, which we may alter from time to time. Gains on the revaluation of non-functional currency debt and on a cross-currency swap contract designated as a cash flow hedge are included in our currency-related losses, net, offsetting the impact of certain non-functional currency intercompany relationships. Interest expense, net Interest expense, net primarily consists of interest paid on outstanding debt balances, amortization of debt issuance costs, debt discounts, interest related to finance lease obligations, accretion adjustments related to our mandatorily redeemable noncontrolling interests, and realized gains (losses) on effective interest rate swap contracts and certain cross-currency swap contracts. Interest expense, net increased by $4.4 million during the three months ended September 30, 2023 as compared to the prior year, primarily due to a higher weighted-average interest rate (net of interest rate swaps) and partially offset by an increase in interest income earned on our cash and marketable securities of $1.2 million. 29 Income tax expense In thousands Three Months Ended September 30, 2023 2022 Income tax expense $ 8,122 $ 9,365 Effective tax rate 64.0 % (60.9) % Income tax expense for the three months ended September 30, 2023 decreased versus the prior comparative period due to various immaterial discrete items in both periods, offset by increased tax on increased profits as we reported pre-tax income for the three months ended September 30, 2023 and a pre-tax loss in the prior comparative period. 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. The effects of currency exchange rate fluctuations impact segment EBITDA and we do not allocate to segment EBITDA any gains or losses that are realized by our currency hedging program. Vista In thousands Three Months Ended September 30, 2023 2022 2023 vs. 2022 Reported Revenue $ 396,647 $ 369,369 7% Segment EBITDA 74,424 30,737 142% % of revenue 19 % 8 % Segment Revenue Vista's reported revenue growth for the three months ended September 30, 2023 was positively affected by a currency impact of 1%, and constant-currency revenue growth was 6%. The constant-currency growth was reduced by higher backlog versus the prior year of approximately $4.3 million that we expect to benefit revenue throughout the remainder of the fiscal year. Overall revenue growth was driven by approximately even contribution from order growth and higher average order values from both product mix and pricing. Revenue grew across product categories with the fastest growth continuing in the promotional products, apparel, and gifts (PPAG) category, while marketing materials, packaging and labels, and signage all grew strongly year over year. Segment Profitability For the three months ended September 30, 2023, segment EBITDA increased by $43.7 million, due in part to gross profit growth as a result of the revenue growth described above, diminishing effects of inflationary pressure on key input costs and the benefit of cost reduction actions implemented in March 2023. These collective benefits also resulted in stronger gross margins versus the prior year that was offset in part by unfavorable product mix changes from a gross margin perspective, since the fastest growth was in product categories like PPAG that have lower gross margins despite higher average order values. Vista benefited from $10.2 million of lower advertising costs as compared to the prior-year period, a result of improved advertising efficiencies and lower spend in mid- and upper- funnel channels in which we were conducting heavy testing last year. Operating expenses, excluding the effect of restructuring costs which do not impact segment EBITDA, decreased $15.1 million primarily due to savings 30 resulting from cost reduction actions implemented in March 2023, partially offset by the effect of merit increases. Changes in currency exchange rates had a slightly positive impact year over year. PrintBrothers In thousands Three Months Ended September 30, 2023 2022 2023 vs. 2022 Reported Revenue $ 152,221 $ 132,699 15% Segment EBITDA 19,826 14,991 32% % of revenue 13 % 11 % Segment Revenue PrintBrothers' reported revenue growth for the three months ended September 30, 2023 was positively affected by currency impacts of 9%, resulting in an increase to revenue on a constant-currency basis of 6%. Constant currency growth was driven primarily by continued order volume growth in the segment's largest business, and to a lesser extent from pricing improvements. Segment Profitability PrintBrothers' segment EBITDA for the three months ended September 30, 2023 grew year over year, driven by the constant-currency revenue growth described above, as well as gross margin expansion which benefited from favorable product mix shifts, as well as operating expense efficiencies. Currency exchange fluctuations positively impacted segment EBITDA year over year by $1.5 million. The Print Group In thousands Three Months Ended September 30, 2023 2022 2023 vs. 2022 Reported Revenue $ 80,539 $ 76,823 5% Segment EBITDA 13,608 12,220 11% % of revenue 17 % 16 % Segment Revenue The Print Group's reported revenue for the three months ended September 30, 2023 was positively affected by a currency impact of 8%, resulting in a decrease to revenue on a constant-currency basis of 3%. Constant-currency revenue decline was negatively impacted by the non-recurrence of a prior-year revenue benefit of $2.0 million from a change in commercial terms. Excluding this item, constant-currency revenue growth would have been flat. Revenue from reseller customer channels declined and this was offset by growth in direct customer channels and favorable product mix shifts. Segment Profitability The increase in The Print Group's segment EBITDA during the three months ended September 30, 2023 as compared to the prior year was largely driven by gross profit growth as gross margins expanded materially, benefiting from a reduction in key input costs such as materials, shipping, and utilities, as well as improved manufacturing efficiencies. Currency exchange fluctuations positively impacted segment EBITDA year over year by $1.0 million. 31 National Pen In thousands Three Months Ended September 30, 2023 2022 2023 vs. 2022 Reported Revenue $ 87,255 $ 81,666 7% Segment EBITDA (8,303) (1,297) (540)% % of revenue (10) % (2) % Segment Revenue For the three months ended September 30, 2023, National Pen's revenue growth was positively affected by currency impacts of 2%, resulting in constant-currency revenue growth of 5%. Constant-currency revenue growth was dampened by a prior-year revenue benefit of $2.2 million due to a change in customer terms that impacted the timing of revenue recognition, as well as revenue growth headwinds from the prior-year exit from the Japanese market of $1.7 million. National Pen continued to deliver strong growth in its e-commerce channel and from fulfillment for other Cimpress businesses. Segment Profitability The decrease in National Pen's segment EBITDA for the three months ended September 30, 2023 was driven by the aforementioned revenue impacts, higher external marketing spend and the impact of currency changes. National Pen's direct mail advertising is expensed earlier than the related revenue, and therefore we expect a portion of the higher spend to benefit revenue during the second quarter of the current fiscal year. Currency exchange fluctuations negatively impacted segment EBITDA year over year by $1.8 million. All Other Businesses In thousands Three Months Ended September 30, 2023 2022 2023 vs. 2022 Reported Revenue $ 51,800 $ 51,827 —% Segment EBITDA 6,458 6,178 5% % of revenue 12 % 12 % This segment includes 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 decreased by 1% during the three months ended September 30, 2023. BuildASign generates the majority of revenue in this segment, and revenue declined slightly year over year as real estate signage product sales were down, driven by exposure to trends in the U.S. real estate market. Other signage products grew in this business. Printi delivered revenue growth across product lines and channels supported by price increases implemented over the past year. Segment Profitability The increase in segment EBITDA for the three months ended September 30, 2023, as compared to the prior year, was primarily due to the fiscal year 2023 exit of our business in China, which drove a small loss in the year-ago period. 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 tax, treasury, internal audit, legal, sustainability, corporate communications, remote first enablement, consolidated reporting and compliance, investor 32 relations, and the functions of our CEO and CFO. These costs also include certain unallocated share-based compensation costs. Central and corporate costs decreased by $2.8 million during the three months ended September 30, 2023 as compared to the prior year's first quarter, driven by lower compensation costs due to savings from the March 2023 cost reduction actions, as well as lower third-party consulting spend. Liquidity and Capital Resources Consolidated Statements of Cash Flows Data In thousands Three Months Ended September 30, 2023 2022 Net cash provided by (used in) operating activities $ 42,254 $ (25,251) Net cash used in investing activities (10,826) (101,043) Net cash used in financing activities (35,065) (11,780) The cash flows during the three months ended September 30, 2023 related primarily to the following items: Cash inflows: • Net income of $4.6 million • Adjustments for non-cash items of $44.3 million primarily related to adjustments for depreciation and amortization of $39.9 million, share-based compensation costs of $12.5 million, partially offset by unrealized currency-related gains of $4.4 million and deferred taxes of $1.1 million • Proceeds from the maturity of held-to-maturity securities of $20.5 million • Proceeds from the sale of assets of $5.6 million, which primarily included proceeds from the sale of our Japanese manufacturing facility following our prior year exit from the Japanese market. Cash outflows: • Capital expenditures of $22.6 million, of which the majority related to the purchase of manufacturing and automation equipment for our production facilities • Internal and external costs of $14.4 million for software and website development that we have capitalized • Total outflow from net working capital of $6.6 million, primarily due to timing impacts from unfavorable changes to accounts payable • Purchases of a portion of our 2026 Notes of $19.8 million. Refer to Note 8 in the accompanying consolidated financial statements for additional details. • Payment of withholding taxes in connection with share awards of $8.4 million, primarily driven by the annual vesting of share grants during August 2023 • Repayments of debt, net of proceeds from borrowings, of $3.6 million • Payments for finance lease arrangements of $2.8 million Additional Liquidity and Capital Resources Information. At September 30, 2023, we had $125.2 million of cash and cash equivalents, $22.6 million of marketable securities, and $1,621.0 million of debt, excluding debt issuance costs and debt premiums and discounts. During the three months ended September 30, 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. 33 We have historically used excess cash and cash equivalents for organic investments, share repurchases, acquisitions and equity investments, and debt reduction. During the first quarter of fiscal 2024, we allocated $19.8 million of capital toward the purchase of a portion of our 2026 Notes. We expect to continue reducing our net leverage through fiscal year 2024. Beyond fiscal year 2024, we expect to have the flexibility to opportunistically deploy capital that enhances our intrinsic value per share even while maintaining leverage similar to or below our pre-pandemic levels. Supply Chain Financing Program. As part of our ongoing efforts to manage our liquidity, we work with our suppliers to optimize our terms and conditions, which include the extension of payment terms. We facilitate a voluntary supply chain finance program through a financial intermediary, which provides certain suppliers the option to be paid by the financial intermediary earlier than the due date of the applicable invoice. The decision to sell receivables due from us is at the sole discretion of both the suppliers and the financial institution. Our responsibility is limited to making payment on the terms originally negotiated with each supplier, regardless of whether a supplier participates in the program. We do not believe there is a risk that our payment terms will be shortened in the near future. Refer to Note 2 of the accompanying consolidated financial statements for additional information. Indefinitely Reinvested Earnings. As of September 30, 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 $70.0 million. We do not intend to repatriate these funds as the cash and cash equivalent balances are generally used and available, without legal restrictions, to fund ordinary business operations and investments of the respective subsidiaries. If there is a change in the future, the repatriation of undistributed earnings from certain subsidiaries, in the form of dividends or otherwise, could have tax consequences that could result in material cash outflows. Contractual Obligations Contractual obligations at September 30, 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) $ 82,031 $ 21,336 $ 27,126 $ 14,848 $ 18,721 Purchase commitments 285,698 218,404 43,461 12,833 11,000 2026 Notes and interest payments 637,833 36,899 600,934 — — Senior secured credit facility and interest payments (2) 1,466,500 96,659 188,851 1,180,990 — Other debt 6,483 3,287 2,910 286 — Finance leases, net of subleases (1) 33,916 7,839 8,793 4,577 12,707 Total (3) $ 2,512,461 $ 384,424 $ 872,075 $ 1,213,534 $ 42,428 ___________________ (1) Operating and finance lease payments above include only amounts which are fixed under lease agreements. Our leases may also incur variable expenses which are not reflected in the contractual obligations above. (2) Senior secured credit facility and interest payments include the effects of interest rate swaps, whether they are expected to be payments or receipts of cash. (3) We may be required to make cash outlays related to our uncertain tax positions. However, due to the uncertainty of the timing of future cash flows associated with our uncertain tax positions, we are unable to make reasonably reliable estimates of the period of cash settlement, if any, with the respective taxing authorities. Accordingly, uncertain tax positions of $9.1 million as of September 30, 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 September 30, 2023. Purchase Commitments. At September 30, 2023, we had unrecorded commitments under contract of $285.7 million. Purchase commitments consisted of third-party fulfillment and digital services of $142.6 million; third-party cloud services of $65.3 million; software of $22.2 million; advertising of $11.3 million; commitments for professional and consulting fees of $7.2 million; production and computer equipment purchases of $3.6 million; and other commitments of $33.5 million. 34 Senior Secured Credit Facility and Interest Payments. As of September 30, 2023, we have borrowings under our Restated Credit Agreement of $1,087.4 million, consisting of the Term Loan B, which amortizes over the loan period, with a final maturity date of May 17, 2028. Our $250.0 million Revolving Credit Facility with a maturity date of May 17, 2026, under our Restated Credit Agreement, has $244.2 million unused as of September 30, 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 September 30, 2023 and assumes all Term SOFR-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. The LIBOR sunset occurred on June 30, 2023, and, under the terms of our Restated Credit Agreement, our benchmark rate transitioned to Term SOFR in July 2023. 2026 Notes and Interest Payments. Our $527.1 million 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. During the three months ended September 30, 2023, we purchased an aggregate principal amount of $21,165 for a purchase price of $19,815, as well as the related settlement of unpaid interest, which resulted in the recognition of a gain on the extinguishment of debt of $1,372. Debt Covenants. The Restated Credit Agreement and the indenture that governs our 2026 Notes contain covenants that restrict or limit certain activities and transactions by Cimpress and our subsidiaries. As of September 30, 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. Other Debt. In addition, we have other debt which consists primarily of term loans acquired through our various acquisitions or used to fund certain capital investments. As of September 30, 2023, we had $6.5 million outstanding for those obligations that have repayments due on various dates through November 2027. Finance Leases. We lease certain facilities, machinery, and plant equipment under finance lease agreements that expire at various dates through 2028. The aggregate carrying value of the leased equipment under finance leases included in property, plant and equipment, net in our consolidated balance sheet at September 30, 2023 is $28.7 million, net of accumulated depreciation of $36.2 million. The present value of lease installments not yet due included in other current liabilities and other liabilities in our consolidated balance sheet at September 30, 2023 amounts to $37.8 million. 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 not already included in operating income plus earn-out related charges plus certain impairments plus restructuring related charges plus realized gains or losses on currency derivatives less the gain or loss on purchase or sale of subsidiaries as well as the disposal of assets. 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, for acquisitions, 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, 35 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. During the current quarter, we revised our adjusted free cash flow definition to include proceeds from the sale of assets, which we believe provides useful information regarding the net cash deployed for the purchase of capital assets by incorporating any cash that is recovered from the subsequent sale of any assets. We have revised all periods presented to incorporate this change. 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 proceeds from sale of assets, 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 months ended September 30, 2023 and 2022: In thousands Three Months Ended September 30, 2023 2022 GAAP operating income (loss) $ 34,100 $ (17,967) Exclude expense (benefit) impact of: Depreciation and amortization 39,942 40,942 Share-based compensation expense 12,453 10,475 Certain impairments and other adjustments 525 3,456 Restructuring-related charges (334) 1,820 Realized gains on currency derivatives not included in operating income (loss) (1) 2,050 6,869 Adjusted EBITDA $ 88,736 $ 45,595 _________________ (1) These realized gains (losses) include only the impacts of certain currency derivative contracts that are intended to hedge our adjusted EBITDA exposure to foreign currencies for which we do not apply hedge accounting. Refer to Note 4 in our accompanying consolidated financial statements for further information. The table below sets forth net cash provided by (used in) operating activities and adjusted free cash flow for the three months ended September 30, 2023 and 2022: In thousands Three Months Ended September 30, 2023 2022 Net cash provided by (used in) operating activities $ 42,254 $ (25,251) Purchases of property, plant and equipment (22,565) (11,758) Capitalization of software and website development costs (14,397) (15,330) Proceeds from the sale of assets (1) 5,636 122 Adjusted free cash flow (1) $ 10,928 $ (52,217) _________________ (1) During the current quarter, we revised our adjusted free cash flow definition to include proceeds from the sale of assets. We have revised all periods presented to incorporate this change. 36