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 liquidity, net leverage, and capital allocation opportunities; future payment terms with suppliers; legal proceedings; our expectations with respect to our valuation allowance; 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; 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. Overview Cimpress is a strategically focused collection of businesses that specialize in print mass customization. We have five reportable segments: Vista, PrintBrothers, The Print Group, National Pen, and All Other Businesses. For further details on our reportable segments, refer to Note 11 in our accompanying consolidated financial statements. 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 and six months ended December 31, 2023 as compared to the three and six months ended December 31, 2022 follows: Second Quarter Fiscal Year 2024 • Revenue increased by 9% to $921.4 million. • Organic constant-currency revenue growth (a non-GAAP financial measure) was 6%. • Operating income increased by $74.1 million to $107.7 million. • Adjusted EBITDA (a non-GAAP financial measure) increased by $55.3 million to $166.4 million. • Diluted net income (loss) per share attributable to Cimpress plc increased to income of $2.14 from a loss of $5.34 in the prior fiscal year. 28 Year to Date Fiscal Year 2024 • Revenue increased by 8% to $1,678.7 million. • Organic constant-currency revenue growth (a non-GAAP financial measure) was 5%. • Operating income increased by $126.2 million to $141.8 million. • Adjusted EBITDA (a non-GAAP financial measure) increased by $98.4 million to $255.2 million. • Diluted net income (loss) per share attributable to Cimpress plc increased to income of $2.31 from a loss of $6.31 in the prior fiscal year. • Cash provided by operating activities increased by $161.3 million to $217.2 million. • Adjusted free cash flow (a non-GAAP financial measure) increased by $159.4 million to $160.9 million. For the three and six months ended December 31, 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 growth in total customer count and the continued increase of revenue per customer. Revenue in our Vista business grew year over year across all major product categories and markets. The second fiscal quarter is seasonally significant for Vista's sales of consumer products, and this category delivered strong growth during the current period. Currency exchange fluctuations had a positive effect on revenue growth during the current quarter. The increase to operating income during the three and six months ended December 31, 2023 was driven by higher gross profit that benefited from the revenue growth described above as well as gross margin expansion. Operating income also benefited from improved leverage of advertising spend as a percentage of revenue and reduced operating expenses driven by prior-year cost reduction actions, as well as lower restructuring costs of $10.7 million and $12.9 million, respectively, as a result of actions that were completed during the prior year. Adjusted EBITDA increased during the three and six months ended December 31, 2023, primarily driven by the operating income growth described above, which was was partially offset by $8.0 million and $11.5 million of year-over-year net unfavorable currency impacts, respectively. 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 and six months ended December 31, 2023, primarily due to the operating income increase described above and $109.3 million and $110.6 million of decreases to income tax expense, respectively. The reduced income tax expense was due to the recognition of a full valuation allowance on Swiss deferred tax assets in the prior periods. These increases to income were partially offset by higher interest expense of $2.0 million and $6.4 million, respectively, driven by an increased weighted-average interest rate. Net currency impacts on net income for the three months ended December 31, 2023 were positive year over year due to lower unrealized losses on our derivative contracts, while the net currency impacts on net income for the six months ended December 31, 2023 were negative year over year, primarily due to lower realized gains on our derivative contracts. These fluctuations were primarily caused by currency exchange rate volatility. During the six months ended December 31, 2023, cash from operations increased $161.3 million year over year due primarily to the increase in operating income as described above, as well as a favorable shift in working capital inflows of $88.7 million, which was driven in part by the normalization of working capital trends. This favorable impact was partially offset by higher cash taxes of $15.3 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 $14.7 million. Adjusted free cash flow increased by $159.4 million for the six months ended December 31, 2023, due to the operating cash flow increase described above, as well as $4.6 million 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 $7.5 million of higher capitalized expenditures. 29 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. Total revenue and revenue growth by reportable segment for the three and six months ended December 31, 2023 and 2022 are shown in the following table: In thousands Three Months Ended December 31, Currency Impact: Constant- Currency Impact of Acquisitions/Divestitures: Constant- Currency Revenue Growth 2023 2022 % Change (Favorable)/Unfavorable Revenue Growth (1) (Favorable)/Unfavorable Excluding Acquisitions/Divestitures (2) Vista $ 485,151 $ 437,736 11% (2)% 9% —% 9% PrintBrothers 165,148 148,598 11% (6)% 5% —% 5% The Print Group 93,268 89,336 4% (5)% (1)% —% (1)% National Pen 130,572 120,621 8% (3)% 5% —% 5% All Other Businesses 60,283 59,998 0% 0% 0% —% 0% Inter-segment eliminations (13,059) (11,087) Total revenue $ 921,363 $ 845,202 9% (3)% 6% —% 6% In thousands Six Months Ended December 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 $ 881,798 $ 807,105 9% (1)% 8% —% 8% PrintBrothers 317,369 281,297 13% (7)% 6% —% 6% The Print Group 173,807 166,159 5% (7)% (2)% —% (2)% National Pen 217,827 202,287 8% (3)% 5% —% 5% All Other Businesses 112,083 111,825 0% (1)% (1)% —% (1)% Inter-segment eliminations (24,227) (20,056) Total revenue $ 1,678,657 $ 1,548,617 8% (3)% 5% —% 5% _________________ (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. 30 In thousands Three Months Ended December 31, Six Months Ended December 31, 2023 2022 2023 2022 Cost of revenue $ 463,423 $ 455,393 $ 862,206 $ 833,128 % of revenue 50.3 % 53.9 % 51.4 % 53.8 % For the three months ended December 31, 2023, cost of revenue increased by $8.0 million year over year, primarily driven by unfavorable changes in currency exchange rates of $12.8 million as well as higher production and shipping costs due to volume growth and product mix shifts in some of our businesses. These cost increases were partially offset by lower input costs, savings that resulted from the March 2023 cost reduction actions, a favorable indirect tax ruling in the current quarter that provided a benefit of $3.0 million, and a $2.6 million timing-related benefit which was offset by a negative impact during the first fiscal quarter of the current fiscal year. Cost of revenue increased $29.1 million for the six months ended December 31, 2023, as compared to the prior-year period, primarily driven by unfavorable changes in currency exchange rates of $28.3 million. Production volume growth also contributed to the year-to-date increase, while lower input costs, the March 2023 cost reduction actions, and the aforementioned favorable indirect tax ruling partially offset these increases. Consolidated Operating Expenses The following table summarizes our comparative operating expenses for the following periods: In thousands Three Months Ended December 31, Six Months Ended December 31, 2023 2022 2023 vs. 2022 2023 2022 2023 vs. 2022 Technology and development expense $ 79,961 $ 77,723 3% $ 154,291 $ 152,198 1% % of revenue 8.7 % 9.2 % 9.2 % 9.8 % Marketing and selling expense $ 211,843 $ 205,148 3% $ 404,031 $ 406,078 (1)% % of revenue 23.0 % 24.3 % 24.1 % 26.2 % General and administrative expense $ 48,793 $ 49,791 (2)% $ 97,134 $ 103,863 (6)% % of revenue 5.3 % 5.9 % 5.8 % 6.7 % Amortization of acquired intangible assets $ 9,181 $ 12,362 (26)% $ 19,067 $ 24,712 (23)% % of revenue 1.0 % 1.5 % 1.1 % 1.6 % Restructuring expense (1) $ 483 $ 11,207 (96)% $ 149 $ 13,027 (99)% % of revenue 0.1 % 1.3 % 0.0 % 0.8 % _____________________ (1) Refer to Note 13 in our accompanying consolidated financial statements for additional details relating to restructuring expense. Technology and development expense Technology and development expense consists primarily of payroll and related expenses for employees engaged in software and manufacturing engineering, information technology operations, and content development, as well as amortization of capitalized software and website development costs, including hosting of our websites, asset depreciation, patent amortization, and other technology infrastructure-related costs. Depreciation expense for information technology equipment that directly supports the delivery of our digital marketing services products is included in cost of revenue. Technology and development expenses increased by $2.2 million and $2.1 million for the three and six months ended December 31, 2023, respectively, as compared to the prior-year periods. The increase is largely attributable to increased amortization expense from capitalized software of $1.9 million and $4.0 million, respectively, driven by the higher capitalized asset base and fluctuations in currency exchange rates. There were also increased share-based compensation costs of $1.6 million and $2.9 million, respectively, due to a higher grant value and the impact from our 2024 PSU grants that have an accelerated expense profile as well as expense volatility from changes in the estimated attainment of the related performance condition. These increases were partially offset by lower cash compensation costs of $1.6 million and $3.5 million, respectively, due primarily to cost savings resulting from the March 2023 restructuring actions that reduced headcount. 31 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 December 31, 2023, marketing and selling expenses increased by $6.7 million, primarily due to higher advertising spend of $6.7 million, which is largely driven by our Vista and National Pen businesses. Payment processing fees also increased $1.7 million, as compared to the prior year, due to increased order volumes. Additionally, share-based compensation costs increased $1.4 million, due to a higher grant value and the impact from our 2024 PSU grants that have an accelerated expense profile as well as expense volatility from changes in the estimated attainment of the related performance condition. These cost increases are offset in part by lower cash compensation costs of $3.1 million, primarily due to the cost reductions that were implemented in March 2023. For the six months ended December 31, 2023, marketing and selling expenses decreased by $2.0 million as compared to the prior year period. The decrease was caused by lower cash compensation costs due in part to the March 2023 cost reduction actions, as well as 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. These cost decreases were offset in part by higher advertising spend of $5.6 million, largely due to higher spend in our Vista and National Pen businesses, as well as increased share-based compensation costs of $1.1 million driven by the 2024 PSU grants. General and administrative expense General and administrative expense consists primarily of transaction costs, including third-party professional fees, insurance, and payroll and related expenses of employees involved in executive management, finance, legal, strategy, human resources, and procurement. For the three and six months ended December 31, 2023, general and administrative expenses were flat and decreased by $6.7 million, respectively, as compared to the prior-year periods. The year-to-date decrease was driven by a $3.0 million reduction of third-party consulting spend, the nonrecurrence of $2.4 million of expense related to the prior-year termination of one of our leased office locations, and the exit of our business in China during fiscal year 2023 that reduced our general and administrative expenses by $1.8 million versus the prior year. Cash compensation decreased by $1.9 million and $2.5 million for the three and six months ended December 31, 2023, respectively, largely driven by a reduction to long-term incentive compensation expense, due to lower than previously estimated attainment levels in certain Cimpress businesses, as well as cost savings from the March 2023 cost reductions. These decreases were partially offset by costs from our annual merit increase cycle and increases to share-based compensation costs of $3.3 million and $4.4 million, respectively, as compared to the prior-year periods, largely due to the 2024 PSU grants. Other Consolidated Results Other (expense) income, net Other (expense) income, net generally consists of gains and losses from currency exchange rate fluctuations on transactions or balances denominated in currencies other than the functional currency of our subsidiaries, as well as the realized and unrealized gains and losses on some of our derivative instruments. In evaluating our currency hedging programs and ability to qualify for hedge accounting in light of our legal entity cash flows, we considered the benefits of hedge accounting relative to the additional economic cost of trade execution and administrative burden. Based on this analysis, we execute certain currency derivative contracts that do not qualify for hedge accounting. 32 The following table summarizes the components of other (expense) income, net: In thousands Three Months Ended December 31, Six Months Ended December 31, 2023 2022 2023 2022 (Losses) gains on derivatives not designated as hedging instruments $ (13,668) $ (24,196) $ (5,356) $ 4,449 Currency-related gains, net 13,062 6,227 10,363 6,030 Other gains (losses) 215 577 1,021 (474) Total other (expense) income, net $ (391) $ (17,392) $ 6,028 $ 10,005 The decrease in other (expense) income, net was primarily due to the currency exchange rate volatility impacting our derivatives that are not designated as hedging instruments, of which our Euro and British Pound contracts are the most significant exposures that we economically hedge. We expect volatility to continue in future periods, as we do not apply hedge accounting for most of our derivative currency contracts. We experience 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 $2.0 million and $6.4 million during the three and six months ended December 31, 2023, respectively, as compared to the prior year periods, 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 $0.6 million and $1.9 million, respectively. Gain on extinguishment of debt For the three and six months ended December 31, 2023, we have recognized gains on the extinguishment of debt of $0.3 million and $1.7 million, respectively, resulting from the purchase of 2026 Notes' principal of $5.0 million and $26.2 million, respectively. Refer to Note 8 in our accompanying consolidated financial statements for additional details. Income tax expense In thousands Three Months Ended December 31, Six Months Ended December 31, 2023 2022 2023 2022 Income tax expense $ 16,795 $ 126,129 $ 24,917 $ 135,494 Effective tax rate 21.8 % (1,016.3) % 27.8 % (487.6) % Income tax expense for the three and six months ended December 31, 2023 decreased versus the prior comparative period. During the second quarter of fiscal year 2023, we recorded a full valuation allowance on Swiss deferred tax assets of $116.7 million primarily related to Swiss tax reform benefits recognized in fiscal year 2020 and tax loss carryforwards. This was partially offset by increased tax on increased profits as we reported pre-tax income for the three and six months ended December 31, 2023 and pre-tax losses in the prior comparative periods. Given our current earnings and anticipated future earnings, we believe that there is a reasonable possibility that within the next 12 months, sufficient positive evidence may become available to allow us to reach a conclusion that a significant portion of our valuation allowance will no longer be needed. A release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense in the period the release is recorded. However, the timing and amount of the valuation allowance release, if any, are unknown as this is subject to change on the basis of the level of profitability that we are able to actually achieve in future periods. 33 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 not already included in operating income; 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 as well as the disposal of assets. 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 December 31, Six Months Ended December 31, 2023 2022 2023 vs. 2022 2023 2022 2023 vs. 2022 Reported Revenue $ 485,151 $ 437,736 11% $ 881,798 $ 807,105 9% Segment EBITDA 103,176 55,157 87% 177,600 85,894 107% % of revenue 21 % 13 % 20 % 11 % Segment Revenue Vista's reported revenue growth for the three and six months ended December 31, 2023 was positively affected by a currency impact of 2% and 1%, respectively, and constant-currency revenue growth was 9% and 8%, respectively. Revenue growth was driven by growth in total customer count, paired with the continued increase of revenue per customer. Revenue grew across all major product categories and markets. The second fiscal quarter is seasonally significant for Vista's sales of consumer products, and this category delivered strong growth during the current period. Segment Profitability For the three and six months ended December 31, 2023, segment EBITDA increased by $48.0 million and $91.7 million, respectively. Gross profit growth was driven by the revenue growth described above, lower input costs, efficiency gains, and customer experience improvements. During the current quarter Vista's gross profit benefited $3.0 million from a favorable indirect tax ruling. Vista's advertising spend as a percentage of revenue decreased due to efficiency gains and focus. Operating expenses, excluding the effect of restructuring costs which do not impact segment EBITDA, decreased $5.9 million and $20.2 million, respectively, primarily due to savings resulting from cost reduction actions implemented in March 2023, partially offset by inflationary cost increases such as the effect of merit increases on compensation costs. Changes in currency exchange rates had a positive impact on segment EBITDA of $3.6 million and $4.3 million, respectively, as compared to the prior-year periods. PrintBrothers In thousands Three Months Ended December 31, Six Months Ended December 31, 2023 2022 2023 vs. 2022 2023 2022 2023 vs. 2022 Reported Revenue $ 165,148 $ 148,598 11% $ 317,369 $ 281,297 13% Segment EBITDA 28,341 19,509 45% 48,167 34,500 40% % of revenue 17 % 13 % 15 % 12 % Segment Revenue PrintBrothers' reported revenue growth for the three and six months ended December 31, 2023 was positively affected by currency impacts of 6% and 7%, respectively, with revenue increasing on a constant-currency 34 basis by 5% and 6%, respectively. Constant-currency growth was driven primarily by continued order volume growth, partially offset by customers purchasing lower quantities in certain product categories. Segment Profitability PrintBrothers' segment EBITDA for the three and six months ended December 31, 2023 grew year over year, driven by the constant-currency revenue growth described above, as well as gross margin expansion which benefited from lower input costs and operating expense efficiencies. Additionally, PrintBrothers benefited from a favorable timing item of $2.6 million in the three months ended December 31, 2023, which offset unfavorability in the first quarter and therefore does not impact the six month period. Segment EBITDA also benefited from $1.5 million of government incentives during the three and six months ended December 31, 2023. Currency exchange fluctuations positively impacted segment EBITDA year over year by $1.5 million and $3.0 million, respectively. The Print Group In thousands Three Months Ended December 31, Six Months Ended December 31, 2023 2022 2023 vs. 2022 2023 2022 2023 vs. 2022 Reported Revenue $ 93,268 $ 89,336 4% $ 173,807 $ 166,159 5% Segment EBITDA 18,442 13,681 35% 32,050 25,901 24% % of revenue 20 % 15 % 18 % 16 % Segment Revenue The Print Group's reported revenue for the three and six months ended December 31, 2023 was positively affected by a currency impact of 5% and 7%, respectively, with revenue decreasing on a constant-currency basis by 1% and 2%, respectively. This segment is continuing to see order growth, which was partially offset by customers purchasing lower quantities in certain product categories and headwinds in the reseller channel, which is more prominent in The Print Group. Segment Profitability The increase in The Print Group's segment EBITDA during the three and six months ended December 31, 2023 as compared to the prior-year periods was largely driven by $4.6 million and $9.8 million of gross profit growth, respectively, as gross margins expanded materially, benefiting from a reduction in key input costs such as materials and shipping. Segment EBITDA also benefited from a reduction in long-term incentive compensation expense of $2.1 million and $1.1 million for the three and six months ended December 31, 2023, respectively, due to lower forecasted payouts for business-specific long-term incentive awards. Currency exchange fluctuations positively impacted segment EBITDA year over year by $1.0 million and $2.0 million, respectively. National Pen In thousands Three Months Ended December 31, Six Months Ended December 31, 2023 2022 2023 vs. 2022 2023 2022 2023 vs. 2022 Reported Revenue $ 130,572 $ 120,621 8% $ 217,827 $ 202,287 8% Segment EBITDA 25,865 24,783 4% 17,562 23,486 (25)% % of revenue 20 % 21 % 8 % 12 % Segment Revenue For the three and six months ended December 31, 2023, National Pen's revenue growth was positively affected by currency impacts of 3%, with constant-currency revenue growth of 5% in both periods. National Pen continued to deliver strong growth in its e-commerce channel and from fulfillment for other Cimpress businesses. Segment Profitability The increase in National Pen's segment EBITDA for the three months ended December 31, 2023 was driven by revenue growth described above, partially offset by increased advertising spend in their e-commerce 35 channels and higher compensation costs. Currency exchange fluctuations had an immaterial effect on segment EBITDA during the current fiscal quarter. The decrease in National Pen's segment EBITDA for the six months ended December 31, 2023 was driven by higher external marketing spend, primarily to support their e-commerce channel, as well as higher operating expenses. Currency exchange fluctuations had a negative year-over-year impact of $1.6 million for the six months ended December 31, 2023. All Other Businesses In thousands Three Months Ended December 31, Six Months Ended December 31, 2023 2022 2023 vs. 2022 2023 2022 2023 vs. 2022 Reported Revenue $ 60,283 $ 59,998 0% $ 112,083 $ 111,825 0% Segment EBITDA 7,983 5,406 48% 14,441 11,584 25% % of revenue 13 % 9 % 13 % 10 % This segment includes BuildASign and Printi, an early-stage business that we have managed at a relatively modest operating loss. Segment Revenue All Other Businesses' constant-currency revenue was flat and decreased by 1% during the three and six months ended December 31, 2023, respectively. BuildASign generates the majority of revenue in this segment, and revenue declined slightly year over year as this business continued to experience lower revenue for real estate-related products as well as home decor products in the seasonally significant second quarter. Other signage products grew in this business. Printi revenue continued to grow. Segment Profitability The increase in segment EBITDA for the three and six months ended December 31, 2023, as compared to the prior year, was partly due to $2.0 million and $3.3 million of lower long-term incentive compensation expense, respectively, as compared to the prior year periods, due to lower forecasted payouts for business-specific long-term incentive awards. Segment EBITDA also benefited from the fiscal year 2023 exit of our business in China, which drove $1.1 million and $1.8 million of losses in the respective year-ago periods. Central and Corporate Costs Central and corporate costs consist primarily of the team of software engineers that is building our mass customization platform; shared service organizations such as global procurement; technology services such as 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 relations, and the functions of our CEO and CFO. These costs also include certain unallocated share-based compensation costs. During the three months ended December 31, 2023, central and corporate costs increased by $2.2 million as compared to the prior-year period, largely driven by $5.4 million of increased share-based compensation expense due to due to a higher grant value and the impact from our 2024 PSU grants that have an accelerated expense profile as well as expense volatility from changes in the estimated attainment of the related performance condition. This increase was partially offset by lower cash compensation expense of $2.2 million due to savings from the March 2023 cost reductions, as well as lower third-party consulting spend of $1.6 million as compared to the prior-year period. Central and corporate costs decreased by $0.6 million during the six months ended December 31, 2023, as compared to the year-ago period, largely driven by $3.4 million of lower third-party consulting spend, partially offset by compensation cost increases of $2.6 million. The higher compensation costs were driven by increased share-based compensation costs due to the 2024 PSU awards, partially offset by the benefit from the March 2023 cost reduction actions. 36 Liquidity and Capital Resources Consolidated Statements of Cash Flows Data In thousands Six Months Ended December 31, 2023 2022 Net cash provided by operating activities $ 217,200 $ 55,875 Net cash used in investing activities (30,395) (106,569) Net cash used in financing activities (47,155) (112,715) The cash flows during the six months ended December 31, 2023 related primarily to the following items: Cash inflows: • Net income of $64.8 million • Adjustments for non-cash items of $98.7 million primarily related to adjustments for depreciation and amortization of $79.0 million and share-based compensation costs of $30.1 million, partially offset by unrealized currency-related gains of $5.8 million, deferred taxes of $2.1 million, and the gain on extinguishment of debt of $1.7 million • Net working capital inflow of $53.6 million, primarily due to timing impacts from favorable changes to accounts payable, as well as further reductions to inventory following the prior year build up of safety stock to mitigate the risk of supply chain disruptions • Proceeds from the maturity of held-to-maturity securities of $25.9 million • Proceeds from the sale of assets of $6.0 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 $34.0 million, of which the majority related to the purchase of manufacturing and automation equipment for our production facilities • Internal and external costs of $28.3 million for software and website development that we have capitalized • Payments for early redemption of our 2026 Notes of $24.5 million • Payment of withholding taxes in connection with share awards of $10.2 million, primarily driven by the annual vesting of share grants during August 2023 • Repayments of debt, net of proceeds from borrowings, of $7.2 million • Payments for finance lease arrangements of $4.9 million Additional Liquidity and Capital Resources Information. At December 31, 2023, we had $274.2 million of cash and cash equivalents, $17.2 million of marketable securities, and $1,626.3 million of debt, excluding debt issuance costs and debt premiums and discounts. During the six months ended December 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. We have historically used excess cash and cash equivalents for organic investments, share repurchases, acquisitions and equity investments, and debt reduction. During the first half of fiscal year 2024, we allocated $24.5 million of capital toward the purchase of a portion of our 2026 Notes, and we will continue to consider using excess liquidity to repurchase our debt. We have significantly reduced our net leverage over the last year primarily through increased profitability driven by the combination of returns from past investments, the focusing of our growth investments, restrained growth of operating expenses, and the easing of inflationary pressure on our input costs. This increased profitability and resultant cash flow generation should provide the opportunity to continue to delever 37 our balance sheet while also opportunistically allocating capital that enhances our intrinsic value per share. Our Board of Directors has authorized the repurchase of up to $150.0 million of Cimpress shares. This authorization does not have an expiration date or a defined time frame for repurchases. We evaluate share repurchases, as any other use of capital, relative to our view of the impact on our intrinsic value per share compared against other opportunities; therefore, any repurchases will be price dependent. 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 to enable the extension of our payment terms with certain suppliers. We do not believe there is a substantial 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 December 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 $72.9 million. We do not intend to repatriate these funds as the cash and cash equivalent balances are generally used and available, without legal restrictions, to fund ordinary business operations and investments of the respective subsidiaries. If there is a change in the future, the repatriation of undistributed earnings from certain subsidiaries, in the form of dividends or otherwise, could have tax consequences that could result in material cash outflows. Contractual Obligations Contractual obligations at December 31, 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) $ 83,729 $ 21,011 $ 27,366 $ 16,416 $ 18,936 Purchase commitments 208,113 149,449 36,956 10,708 11,000 2026 Notes and interest payments 613,508 36,549 576,959 — — Senior secured credit facility and interest payments (2) 1,460,636 97,851 189,196 1,173,589 — Other debt 5,824 3,350 2,318 156 — Finance leases, net of subleases (1) 44,015 9,750 9,169 10,759 14,337 Total (3) $ 2,415,825 $ 317,960 $ 841,964 $ 1,211,628 $ 44,273 ___________________ (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 December 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 2028. The terms of certain lease agreements require security deposits in the form of bank guarantees and letters of credit, with $2.7 million in the aggregate outstanding as of December 31, 2023. Purchase Commitments. At December 31, 2023, we had unrecorded commitments under contract of $208.1 million. Purchase commitments consisted of third-party fulfillment and digital services of $93.4 million; third-party cloud services of $56.1 million; software of $17.4 million; advertising of $6.9 million; commitments for professional and consulting fees of $6.0 million; production and computer equipment purchases of $2.5 million; and other commitments of $25.9 million. Senior Secured Credit Facility and Interest Payments. As of December 31, 2023, we have borrowings under our Restated Credit Agreement of $1,098.4 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 38 May 17, 2026, under our Restated Credit Agreement, has $243.3 million unused as of December 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 December 31, 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. 2026 Notes and Interest Payments. Our $522.1 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 six months ended December 31, 2023, we purchased an aggregate principal amount of $26.2 million for a purchase price of $24.5 million, as well as the related settlement of unpaid interest, which resulted in the recognition of a gain on the extinguishment of debt of $1.7 million. 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 December 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. Other Debt. In addition, we have other debt which consists primarily of term loans acquired through our various acquisitions or used to fund certain capital investments. As of December 31, 2023, we had $5.8 million outstanding for those obligations that have repayments due on various dates through September 2027. Finance Leases. We lease certain facilities, machinery, and plant equipment under finance lease agreements that expire at various dates through 2037. The aggregate carrying value of the leased equipment under finance leases included in property, plant and equipment, net in our consolidated balance sheet at December 31, 2023 is $29.2 million, net of accumulated depreciation of $38.9 million. The present value of lease installments not yet due included in other current liabilities and other liabilities in our consolidated balance sheet at December 31, 2023 amounts to $40.1 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, 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 fiscal year, we revised our adjusted free cash flow 39 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 and six months ended December 31, 2023 and 2022: In thousands Three Months Ended December 31, Six Months Ended December 31, 2023 2022 2023 2022 GAAP operating income $ 107,679 $ 33,578 $ 141,779 $ 15,611 Exclude expense (benefit) impact of: Depreciation and amortization 39,089 40,874 79,031 81,816 Share-based compensation expense 17,649 11,547 30,102 22,022 Certain impairments and other adjustments 589 (925) 1,114 2,531 Restructuring-related charges 483 11,207 149 13,027 Realized gains on currency derivatives not included in operating income (1) 945 14,901 2,995 21,770 Adjusted EBITDA $ 166,434 $ 111,182 $ 255,170 $ 156,777 _________________ (1) These realized gains 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 operating activities and adjusted free cash flow for the six months ended December 31, 2023 and 2022: In thousands Six Months Ended December 31, 2023 2022 Net cash provided by operating activities $ 217,200 $ 55,875 Purchases of property, plant and equipment (33,955) (26,490) Capitalization of software and website development costs (28,344) (29,246) Proceeds from the sale of assets (1) 5,988 1,365 Adjusted free cash flow (1) $ 160,889 $ 1,504 _________________ (1) During the first quarter of fiscal year 2024, 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. 40