.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________
Form 10-Q
| (Mark One) | ||||||||
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||
| For the quarterly period ended | September 30, 2022 | |||||||
| or | ||||||||
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||
| For the transition period from to | ||||||||
Commission file number 000-51539
_________________________________
(Exact Name of Registrant as Specified in Its Charter)
_________________________________
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | ||||||||||
(Address of Principal Executive Offices)
Registrant’s telephone number, including area code: 353 42 938 8500
Securities Registered Pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of Exchange on Which Registered | ||||||||||||
______________________________
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
þ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | |||||||||||||
| Smaller reporting company | |||||||||||||||||
| Emerging growth company | |||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ☐ No þ
As of October 24, 2022, there were 26,232,581 Cimpress plc ordinary shares outstanding.
CIMPRESS PLC
QUARTERLY REPORT ON FORM 10-Q
For the Three Months Ended September 30, 2022
TABLE OF CONTENTS
| Page | ||||||||
| PART I FINANCIAL INFORMATION | ||||||||
| Item 1. Financial Statements (unaudited) | ||||||||
| Consolidated Balance Sheets as of September 30, 2022 and June 30, 2022 | ||||||||
| Consolidated Statements of Operations for the three months ended September 30, 2022 and 2021 | ||||||||
| Consolidated Statements of Comprehensive Loss for the three months ended September 30, 2022 and 2021 | ||||||||
| Consolidated Statements of Shareholders' Deficit for the three months ended September 30, 2022 and 2021 | ||||||||
| Consolidated Statements of Cash Flows for the three months ended September 30, 2022 and 2021 | ||||||||
| Notes to Consolidated Financial Statements | ||||||||
| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | ||||||||
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | ||||||||
| Item 4. Controls and Procedures | ||||||||
| PART II OTHER INFORMATION | ||||||||
| Item 1A. Risk Factors | ||||||||
| Item 6. Exhibits | ||||||||
| Signatures | ||||||||
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CIMPRESS PLC
CONSOLIDATED BALANCE SHEETS
(unaudited in thousands, except share and per share data)
| September 30, 2022 | June 30, 2022 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Marketable securities | |||||||||||
Accounts receivable, net of allowances of $6,652 and $6,140, respectively | |||||||||||
| Inventory | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Operating lease assets, net | |||||||||||
| Software and website development costs, net | |||||||||||
| Deferred tax assets | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Marketable securities, non-current | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities, noncontrolling interests and shareholders’ deficit | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses | |||||||||||
| Deferred revenue | |||||||||||
| Short-term debt | |||||||||||
| Operating lease liabilities, current | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Deferred tax liabilities | |||||||||||
| Long-term debt | |||||||||||
| Operating lease liabilities, non-current | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | |||||||||||
Commitments and contingencies (Note 12) | |||||||||||
| Redeemable noncontrolling interests | |||||||||||
| Shareholders’ deficit: | |||||||||||
| Preferred shares, nominal value €0.01 per share, 100,000,000 shares authorized; none issued and outstanding | |||||||||||
Ordinary shares, nominal value €0.01 per share, 100,000,000 shares authorized; 44,196,093 and 44,083,569 shares issued, respectively; 26,224,846 and 26,112,322 shares outstanding, respectively | |||||||||||
Treasury shares, at cost, 17,971,247 shares for both periods presented | ( | ( | |||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total shareholders' deficit | ( | ( | |||||||||
| Total liabilities, noncontrolling interests and shareholders’ deficit | $ | $ | |||||||||
See accompanying notes.
1
CIMPRESS PLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited in thousands, except share and per share data)
| Three Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Revenue | $ | $ | |||||||||
| Cost of revenue (1) | |||||||||||
| Technology and development expense (1) | |||||||||||
| Marketing and selling expense (1) | |||||||||||
| General and administrative expense (1) | |||||||||||
| Amortization of acquired intangible assets | |||||||||||
| Restructuring expense (1) | ( | ||||||||||
| (Loss) income from operations | ( | ||||||||||
| Other income, net | |||||||||||
| Interest expense, net | ( | ( | |||||||||
| (Loss) income before income taxes | ( | ||||||||||
| Income tax expense | |||||||||||
| Net loss | ( | ( | |||||||||
| Add: Net (income) attributable to noncontrolling interests | ( | ( | |||||||||
| Net loss attributable to Cimpress plc | $ | ( | $ | ( | |||||||
| Basic and diluted net loss per share attributable to Cimpress plc | $ | ( | $ | ( | |||||||
| Weighted average shares outstanding — basic and diluted | |||||||||||
____________________________________________
(1) Share-based compensation is allocated as follows:
| Three Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cost of revenue | $ | $ | |||||||||
| Technology and development expense | |||||||||||
| Marketing and selling expense | |||||||||||
| General and administrative expense | |||||||||||
| Restructuring expense | |||||||||||
See accompanying notes.
2
CIMPRESS PLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited in thousands)
| Three Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Other comprehensive (loss) income, net of tax: | |||||||||||
| Foreign currency translation losses, net of hedges | ( | ( | |||||||||
| Net unrealized gains (losses) on derivative instruments designated and qualifying as cash flow hedges | ( | ||||||||||
| Amounts reclassified from accumulated other comprehensive loss to net loss on derivative instruments | ( | ||||||||||
| Comprehensive loss | ( | ( | |||||||||
| Add: Comprehensive loss (income) attributable to noncontrolling interests | ( | ||||||||||
| Total comprehensive loss attributable to Cimpress plc | $ | ( | $ | ( | |||||||
See accompanying notes.
3
CIMPRESS PLC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
(unaudited in thousands)
| Ordinary Shares | Deferred Ordinary Shares | Treasury Shares | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Number of Shares Issued | Amount | Number of Shares Issued | Amount | Number of Shares | Amount | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Shareholders’ Deficit | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | ( | $ | ( | $ | $ | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Restricted share units vested, net of shares withheld for taxes | — | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss attributable to Cimpress plc | — | — | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Redeemable noncontrolling interest accretion to redemption value | — | — | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net unrealized gain on derivative instruments designated and qualifying as cash flow hedges | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation, net of hedges | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | ( | $ | ( | $ | $ | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | ( | $ | ( | $ | $ | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Restricted share units vested, net of shares withheld for taxes | — | — | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss attributable to Cimpress plc | — | — | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Redeemable noncontrolling interest accretion to redemption value | — | — | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net unrealized gain on derivative instruments designated and qualifying as cash flow hedges | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation, net of hedges | — | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | ( | $ | ( | $ | $ | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
See accompanying notes.
4
CIMPRESS PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited in thousands)
| Three Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Operating activities | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Share-based compensation expense | |||||||||||
| Deferred taxes | ( | ( | |||||||||
| Unrealized gain on derivatives not designated as hedging instruments included in net loss | ( | ( | |||||||||
| Effect of exchange rate changes on monetary assets and liabilities denominated in non-functional currency | ( | ||||||||||
| Other non-cash items | ( | ||||||||||
| Changes in operating assets and liabilities, net of effects of businesses acquired: | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Inventory | ( | ( | |||||||||
| Prepaid expenses and other assets | ( | ||||||||||
| Accounts payable | ( | ||||||||||
| Accrued expenses and other liabilities | |||||||||||
| Net cash (used in) provided by operating activities | ( | ||||||||||
| Investing activities | |||||||||||
| Purchases of property, plant and equipment | ( | ( | |||||||||
| Capitalization of software and website development costs | ( | ( | |||||||||
| Proceeds from the sale of assets | |||||||||||
| Purchases of marketable securities | ( | ||||||||||
| Proceeds from maturity of held-to-maturity investments | |||||||||||
| Other investing activities | ( | ||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Financing activities | |||||||||||
| Proceeds from borrowings of debt | |||||||||||
| Payments of debt | ( | ( | |||||||||
| Payments of debt issuance costs | ( | ( | |||||||||
| Payments of purchase consideration included in acquisition-date fair value | ( | ||||||||||
| Payments of withholding taxes in connection with equity awards | ( | ( | |||||||||
| Payments of finance lease obligations | ( | ( | |||||||||
| Distributions to noncontrolling interests | ( | ||||||||||
| Other financing activities | |||||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Effect of exchange rate changes on cash | ( | ( | |||||||||
| Net (decrease) increase in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
| Supplemental disclosures of cash flow information | |||||||||||
| Cash paid during the period for: | |||||||||||
| Interest | $ | $ | |||||||||
| Income taxes | |||||||||||
| Non-cash investing and financing activities | |||||||||||
| Property and equipment acquired under finance leases | |||||||||||
| Amounts accrued related to property, plant and equipment | |||||||||||
| Amounts accrued related to capitalized software development costs | |||||||||||
| Amounts accrued related to business acquisitions | |||||||||||
See accompanying notes.
5
CIMPRESS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited in thousands, except share and per share data)
1. Description of the Business
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Cimpress plc, its wholly owned subsidiaries, entities in which we maintain a controlling financial interest, and those entities in which we have a variable interest and are the primary beneficiary. Intercompany balances and transactions have been eliminated. Investments in entities in which we cannot exercise significant influence, and for which the related equity securities do not have a readily determinable fair value, are included in other assets on the consolidated balance sheets; otherwise the investments are recognized by applying equity method accounting. Our equity method investments are included in other assets on the consolidated balance sheets.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We believe our most significant estimates are associated with the ongoing evaluation of the recoverability of our long-lived assets and goodwill, estimated useful lives of assets, share-based compensation, accounting for business combinations, and income taxes and related valuation allowances, among others. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results could differ from those estimates.
Revision of Prior Period Financial Statements
Foreign Currency Gains Associated with Intercompany Loan Hedge
During the quarter ended December 31, 2021, we identified an error related to the recognition of foreign currency gains that were included in other income (expense), net within our consolidated statements of operations, associated with a net investment hedge. In May 2021, we designated a €300,000 intercompany loan as a net investment hedge to hedge the risk of changes in the U.S. dollar equivalent value of a portion of our net investment in one of our consolidated subsidiaries that has the Euro as its functional currency. As this hedging instrument was designated as a net investment hedge, all foreign currency gains and losses should be recognized in accumulated other comprehensive loss as part of currency translation adjustment. For the three months ended September 30, 2021, we incorrectly recognized $9,027 , respectively, of gains in other income (expense), net. This error overstated other income (expense), net; income (loss) before income taxes; and net income for both periods but did not have an impact on cash provided by operating activities, since it is a non-cash currency item. Included below are the revisions made for each period presented.
6
| Consolidated Balance Sheets | As of September 30, 2021 | ||||||||||||||||
| Reported | Adjustments | Revised | |||||||||||||||
| Accumulated other comprehensive loss | $ | ( | $ | $ | ( | ||||||||||||
| Retained earnings | ( | ||||||||||||||||
| Consolidated Statements of Operations | Three months ended September 30, 2021 | ||||||||||||||||
| Reported | Adjustments | Revised | |||||||||||||||
| Other income (expense), net | $ | $ | ( | $ | |||||||||||||
| Income (loss) before income taxes | ( | ||||||||||||||||
| Net income (loss) | ( | ( | |||||||||||||||
| Net income (loss) attributable to Cimpress plc | ( | ( | |||||||||||||||
| Net income (loss) per share attributable to Cimpress plc: | |||||||||||||||||
| Basic | $ | $ | ( | $ | ( | ||||||||||||
| Diluted | $ | $ | ( | $ | ( | ||||||||||||
| Consolidated Statements of Comprehensive Loss | Three months ended September 30, 2021 | ||||||||||||||||
| Reported | Adjustments | Revised | |||||||||||||||
| Net income (loss) | $ | $ | ( | $ | ( | ||||||||||||
| Foreign currency translation losses, net of hedges | ( | ( | |||||||||||||||
| Consolidated Statements of Shareholders' Deficit | Three months ended September 30, 2021 | ||||||||||||||||
| Reported | Adjustments | Revised | |||||||||||||||
| Net income (loss) attributable to Cimpress plc | $ | $ | ( | $ | ( | ||||||||||||
| Foreign currency translation, net of hedges | ( | ||||||||||||||||
| Consolidated Statements of Cash Flows | Three months ended September 30, 2021 | ||||||||||||||||
| Reported | Adjustments | Revised | |||||||||||||||
| Net income (loss) | $ | $ | ( | $ | ( | ||||||||||||
| Effect of exchange rate changes on monetary assets and liabilities denominated in non-functional currency | ( | ||||||||||||||||
7
Marketable Securities
We hold certain investments that are classified as held-to-maturity (HTM) as we have the intent and ability to hold them to their maturity dates. Our policy is to invest in the following permitted classes of assets: overnight money market funds invested in U.S. Treasury securities and U.S. government agency securities, U.S. Treasury securities, specifically U.S. Treasury bills, notes, and bonds, U.S. government agency securities, bank time deposits, commercial paper, corporate notes and bonds, and medium term notes. We generally invest in securities with a maturity of two years or less. As the investments are classified as held-to-maturity they are recorded at amortized cost and interest income is recorded as it is earned within interest expense, net.
We will continue to assess our securities for impairment when the fair value is less than amortized cost to determine if any risk of credit loss exists. As our intent is to hold the securities to maturity, we must assess whether any credit losses related to our investments are recoverable and determine if it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. We did not record an allowance for credit losses and we recognized no impairments for these marketable securities during the three months ended September 30, 2022 and 2021.
The following is a summary of the net carrying amount, unrealized gains, unrealized losses, and fair value of held-to-maturity securities by type and contractual maturity as of September 30, 2022 and June 30, 2022.
| September 30, 2022 | |||||||||||||||||
| Amortized cost | Unrealized losses | Fair value | |||||||||||||||
| Due within one year or less: | |||||||||||||||||
| Commercial paper | $ | $ | ( | $ | |||||||||||||
| Corporate debt securities | ( | ||||||||||||||||
| Total due within one year or less | $ | $ | ( | $ | |||||||||||||
| Due between one and two years: | |||||||||||||||||
| Corporate debt securities | $ | $ | ( | $ | |||||||||||||
| U.S. government securities | ( | ||||||||||||||||
| Total held-to-maturity securities | $ | $ | ( | $ | |||||||||||||
| June 30, 2022 | |||||||||||||||||
| Amortized cost | Unrealized losses | Fair value | |||||||||||||||
| Due within one year or less: | |||||||||||||||||
| Corporate debt securities | $ | $ | ( | $ | |||||||||||||
| Total held-to-maturity securities | $ | $ | ( | $ | |||||||||||||
Other Income, Net
The following table summarizes the components of other income, net:
| Three Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Gains on derivatives not designated as hedging instruments (1) | $ | $ | |||||||||
| Currency-related (losses) gains, net (2) | ( | ||||||||||
| Other losses | ( | ( | |||||||||
| Total other income, net | $ | $ | |||||||||
_____________________
(1) Includes realized and unrealized gains and losses on derivative currency forward and option contracts not designated as hedging instruments,as well as the ineffective portion of certain interest rate swap contracts that were de-designated from hedge accounting in the prior period. For contracts not designated as hedging instruments, we realized gains of $14,621 and losses of $3,672 for the three months ended September 30, 2022 and 2021, respectively. Refer to Note 4 for additional details relating to our derivative contracts.
(2) Currency-related (losses) gains, net primarily relates to significant non-functional currency intercompany financing relationships that we may change at times and are subject to currency exchange rate volatility. In addition, we have a cross-currency swap designated as a cash flow hedge which hedges the remeasurement of an intercompany loan. Refer to Note 4 for additional details relating to this cash flow hedge.
8
Net Loss Per Share Attributable to Cimpress plc
Basic net loss per share attributable to Cimpress plc is computed by dividing net loss attributable to Cimpress plc by the weighted-average number of ordinary shares outstanding for the respective period. Diluted net loss per share attributable to Cimpress plc gives effect to all potentially dilutive securities, including share options, restricted share units (“RSUs”), warrants, and performance share units ("PSUs"), if the effect of the securities is dilutive using the treasury stock method. Awards with performance or market conditions are included using the treasury stock method only if the conditions would have been met as of the end of the reporting period and their effect is dilutive.
The following table sets forth the reconciliation of the weighted-average number of ordinary shares:
| Three Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Weighted average shares outstanding, basic and diluted | |||||||||||
| Weighted average anti-dilutive shares excluded from diluted net loss per share attributable to Cimpress plc (1)(2) | |||||||||||
(1) In the periods in which a net loss is recognized, the impact of share options, RSUs and warrants is not included as they are anti-dilutive.
Recently Issued or Adopted Accounting Pronouncements
Adopted Accounting Standards
In May 2021, the FASB issued Accounting Standards Update No. 2021-04 "Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40)" (ASU 2021-04), which provides authoritative guidance for the accounting treatment of contracts in an entity's own equity when calculating earnings per share. We adopted the standard on July 1, 2022. We recognize freestanding equity-classified warrants on our consolidated balance sheet and as the standard is applied prospectively, there was no impact on our consolidated financial statements in the current period.
Issued Accounting Standards to be Adopted
3. Fair Value Measurements
We use a three-level valuation hierarchy for measuring fair value and include detailed financial statement disclosures about fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
•Level 1: Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
•Level 2: Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in markets that are not active and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
•Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
9
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following tables summarize our assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy:
| September 30, 2022 | |||||||||||||||||||||||
| Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Interest rate swap contracts | $ | $ | — | $ | $ | — | |||||||||||||||||
| Cross-currency swap contracts | — | — | |||||||||||||||||||||
| Currency forward contracts | — | — | |||||||||||||||||||||
| Currency option contracts | — | — | |||||||||||||||||||||
| Total assets recorded at fair value | $ | $ | — | $ | $ | — | |||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Currency forward contracts | $ | ( | $ | — | $ | ( | $ | — | |||||||||||||||
| Total liabilities recorded at fair value | $ | ( | $ | — | $ | ( | $ | — | |||||||||||||||
| June 30, 2022 | |||||||||||||||||||||||
| Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Interest rate swap contracts | $ | $ | — | $ | $ | — | |||||||||||||||||
| Currency forward contracts | — | — | |||||||||||||||||||||
| Currency option contracts | — | — | |||||||||||||||||||||
| Total assets recorded at fair value | $ | $ | — | $ | $ | — | |||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Cross-currency swap contracts | $ | ( | $ | — | $ | ( | $ | — | |||||||||||||||
| Currency forward contracts | ( | — | ( | — | |||||||||||||||||||
| Currency option contracts | ( | — | ( | — | |||||||||||||||||||
| Total liabilities recorded at fair value | $ | ( | $ | — | $ | ( | $ | — | |||||||||||||||
During the three months ended September 30, 2022 and year ended June 30, 2022, there were no significant transfers in or out of Level 1, Level 2 and Level 3 classifications.
The valuations of the derivatives intended to mitigate our interest rate and currency risk are determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each instrument. This analysis utilizes observable market-based inputs, including interest rate curves, interest rate volatility, or spot and forward exchange rates, and reflects the contractual terms of these instruments, including the period to maturity. We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparties' nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements.
Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to appropriately reflect both our own nonperformance risk and the respective counterparties' nonperformance risk in the fair value measurement. However, as of September 30, 2022, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall
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valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 in the fair value hierarchy.
As of September 30, 2022 and June 30, 2022, the carrying amounts of our cash and cash equivalents, accounts receivable, accounts payable and other current liabilities approximated their estimated fair values. As of September 30, 2022 and June 30, 2022, the carrying value of our debt, excluding debt issuance costs and debt premiums and discounts, was $1,682,977 and $1,705,365 , respectively, and the fair value was $1,511,108 and $1,600,627 , respectively. Our debt at September 30, 2022 includes variable-rate debt instruments indexed to LIBOR that resets periodically, as well as fixed-rate debt instruments. The estimated fair value of our debt was determined using available market information based on recent trades or activity of debt instruments with substantially similar risks, terms and maturities, which fall within Level 2 under the fair value hierarchy.
As of September 30, 2022 and June 30, 2022 our held-to-maturity marketable securities were held at an amortized cost of $124,175 and $49,952 , respectively, while the fair value was $123,001 and $49,406 , respectively. The securities were valued using quoted prices for identical assets in active markets, which fall into Level 1 under the fair value hierarchy.
The estimated fair value of assets and liabilities disclosed above may not be representative of actual values that could have been or will be realized in the future.
4. Derivative Financial Instruments
We use derivative financial instruments, such as interest rate swap contracts, cross-currency swap contracts, and currency forward and option contracts, to manage interest rate and foreign currency exposures. Derivatives are recorded in the consolidated balance sheets at fair value. If a derivative is designated as a cash flow hedge or net investment hedge, then the change in the fair value of the derivative is recorded in accumulated other comprehensive loss and subsequently reclassified into earnings in the period the hedged forecasted transaction affects earnings. We have designated one intercompany loan as a net investment hedge, and any unrealized currency gains and losses on the loan are recorded in accumulated other comprehensive loss. Additionally, any ineffectiveness associated with an effective and designated hedge is recognized within accumulated other comprehensive loss.
The change in the fair value of derivatives not designated as hedges is recognized directly in earnings as a component of other income, net.
Hedges of Interest Rate Risk
We enter into interest rate swap contracts to manage variability in the amount of our known or expected cash payments related to a portion of our debt. Our objective in using interest rate swaps is to add stability to interest expense and to manage our exposure to interest rate movements. We designate our interest rate swaps as cash flow hedges. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for us making fixed-rate payments over the life of the contract agreements without exchange of the underlying notional amount. Realized gains or losses from interest rate swaps are recorded in earnings as a component of interest expense, net. Amounts reported in accumulated other comprehensive loss related to interest rate swap contracts will be reclassified to interest expense, net as interest payments are accrued or made on our variable-rate debt.
As of September 30, 2022, we estimate that $6,490 will be reclassified from accumulated other comprehensive loss to interest expense, net during the twelve months ending September 30, 2023. As of September 30, 2022, we had fourteen effective outstanding interest rate swap contracts indexed to USD LIBOR. These hedges have varying start and maturity dates through April 2028.
| Interest rate swap contracts outstanding: | Notional Amounts | |||||||
Contracts accruing interest as of September 30, 2022 | $ | |||||||
| Contracts with a future start date | ||||||||
| Total | $ | |||||||
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Hedges of Currency Risk
Cross-Currency Swap Contracts
From time to time, we execute cross-currency swap contracts designated as cash flow hedges or net investment hedges. Cross-currency swaps involve an initial receipt of the notional amount in the hedge currency in exchange for our reporting currency based on a contracted exchange rate. Subsequently, we receive fixed rate payments in our reporting currency in exchange for fixed rate payments in the hedged currency over the life of the contract. At maturity, the final exchange involves the receipt of our reporting currency in exchange for the notional amount in the hedged currency.
Cross-currency swap contracts designated as cash flow hedges are executed to mitigate our currency exposure to the interest receipts as well as the principal remeasurement and repayment associated with certain intercompany loans denominated in a currency other than our reporting currency, the U.S. dollar. As of September 30, 2022, we had one outstanding cross-currency swap contract designated as a cash flow hedge with a total notional amount of $58,478 , maturing during June 2024. We entered into the cross-currency swap contract to hedge the risk of changes in one Euro-denominated intercompany loan entered into with one of our consolidated subsidiaries that has the Euro as its functional currency.
Amounts reported in accumulated other comprehensive loss will be reclassified to other income, net as interest payments are accrued or paid and upon remeasuring the intercompany loan. As of September 30, 2022, we estimate that $2,132 of income will be reclassified from accumulated other comprehensive loss to interest expense, net during the twelve months ending September 30, 2023.
Other Currency Hedges
We execute currency forward and option contracts in order to mitigate our exposure to fluctuations in various currencies against our reporting currency, the U.S. dollar. These contracts or intercompany loans may be designated as hedges to mitigate the risk of changes in the U.S. dollar equivalent value of a portion of our net investment in consolidated subsidiaries that have the Euro as their functional currency. Amounts reported in accumulated other comprehensive loss are recognized as a component of our cumulative translation adjustment.
In April 2022 we early terminated all of our currency forward contracts designated as net investment hedges, and as of September 30, 2022 we had no currency forward contracts designated as net investment hedges. We have one intercompany loan designated as a net investment hedge with a total notional amount of $364,524 that matures in May 2028.
We have elected to not apply hedge accounting for all other currency forward and option contracts. During the three months ended September 30, 2022 and 2021, we experienced volatility within other income, net, in our consolidated statements of operations from unrealized gains and losses on the mark-to-market of outstanding currency forward and option contracts. We expect this volatility to continue in future periods for contracts for which we do not apply hedge accounting. Additionally, since our hedging objectives may be targeted at non-GAAP financial metrics that exclude non-cash items such as depreciation and amortization, we may experience increased, not decreased, volatility in our GAAP results as a result of our currency hedging program.
As of September 30, 2022, we had the following outstanding currency derivative contracts that were not designated for hedge accounting and were used to hedge fluctuations in the U.S. dollar value of forecasted transactions or balances denominated in Australian Dollar, British Pound, Canadian Dollar, Danish Krone, Euro, Indian Rupee, Japanese Yen, Mexican Peso, New Zealand Dollar, Norwegian Krone, Philippine Peso, Swiss Franc and Swedish Krona:
| Notional Amount | Effective Date | Maturity Date | Number of Instruments | Index | ||||||||||||||||||||||
| $ | December 2020 through September 2022 | Various dates through September 2024 | ||||||||||||||||||||||||
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Financial Instrument Presentation
The table below presents the fair value of our derivative financial instruments as well as their classification on the balance sheet as of September 30, 2022 and June 30, 2022. Our derivative asset and liability balances fluctuate with interest rate and currency exchange rate volatility.
| September 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| Asset Derivatives | Liability Derivatives | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance Sheet line item | Gross amounts of recognized assets | Gross amount offset in Consolidated Balance Sheet | Net amount | Balance Sheet line item | Gross amounts of recognized liabilities | Gross amount offset in Consolidated Balance Sheet | Net amount | ||||||||||||||||||||||||||||||||||||||||
| Derivatives designated as hedging instruments | |||||||||||||||||||||||||||||||||||||||||||||||
| Derivatives in cash flow hedging relationships | |||||||||||||||||||||||||||||||||||||||||||||||
| Interest rate swaps | Other assets | $ | $ | $ | Other current liabilities / other liabilities | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Cross-currency swaps | Other assets | Other liabilities | |||||||||||||||||||||||||||||||||||||||||||||
| Total derivatives designated as hedging instruments | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||
| Derivatives not designated as hedging instruments | |||||||||||||||||||||||||||||||||||||||||||||||
| Currency forward contracts | Other current assets / other assets | $ | $ | ( | $ | Other current liabilities / other liabilities | $ | ( | $ | $ | ( | ||||||||||||||||||||||||||||||||||||
| Currency option contracts | Other current assets / other assets | Other liabilities | |||||||||||||||||||||||||||||||||||||||||||||
| Total derivatives not designated as hedging instruments | $ | $ | ( | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||||||||||||||||||||
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| June 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| Asset Derivatives | Liability Derivatives | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance Sheet line item | Gross amounts of recognized assets | Gross amount offset in Consolidated Balance Sheet | Net amount | Balance Sheet line item | Gross amounts of recognized liabilities | Gross amount offset in Consolidated Balance Sheet | Net amount | ||||||||||||||||||||||||||||||||||||||||
| Derivatives designated as hedging instruments | |||||||||||||||||||||||||||||||||||||||||||||||
| Derivatives in cash flow hedging relationships | |||||||||||||||||||||||||||||||||||||||||||||||
| Interest rate swaps | Other current assets / other assets | $ | $ | $ | Other current liabilities / other liabilities | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Cross-currency swaps | Other assets | Other liabilities | ( | $ | ( | ||||||||||||||||||||||||||||||||||||||||||
| Total derivatives designated as hedging instruments | $ | $ | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||||||||||||
| Derivatives not designated as hedging instruments | |||||||||||||||||||||||||||||||||||||||||||||||
| Currency forward contracts | Other current assets / other assets | $ | $ | ( | $ | Other current liabilities / other liabilities | $ | ( | $ | $ | ( | ||||||||||||||||||||||||||||||||||||
| Currency option contracts | Other current assets / other assets | ( | Other current liabilities / other liabilities | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Total derivatives not designated as hedging instruments | $ | $ | ( | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||||||||||||||||||||
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The following table presents the effect of our derivative financial instruments designated as hedging instruments and their classification within comprehensive loss for the three months ended September 30, 2022 and 2021:
| Three Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Derivatives in cash flow hedging relationships | |||||||||||
| Interest rate swaps | $ | $ | |||||||||
| Cross-currency swaps | ( | ||||||||||
| Derivatives in net investment hedging relationships | |||||||||||
| Intercompany loan | |||||||||||
| Currency forward contracts | |||||||||||
| Total | $ | $ | |||||||||
The following table presents reclassifications out of accumulated other comprehensive loss for the three months ended September 30, 2022 and 2021:
| Amount of Net Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income | Affected line item in the Statement of Operations | |||||||||||||
| Three Months Ended September 30, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Derivatives in cash flow hedging relationships | ||||||||||||||
| Interest rate swaps | $ | $ | Interest expense, net | |||||||||||
| Cross-currency swaps | ( | Other income, net | ||||||||||||
| Total before income tax | ( | (Loss) income before income taxes | ||||||||||||
| Income tax | ( | Income tax expense | ||||||||||||
| Total | $ | ( | $ | |||||||||||
The following table presents the adjustment to fair value recorded within the consolidated statements of operations for the three months ended September 30, 2022 and 2021 for derivative instruments for which we did not elect hedge accounting and de-designated derivative financial instruments that did not qualify as hedging instruments.
| Affected line item in the Statement of Operations | ||||||||||||||
| Three Months Ended September 30, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Currency contracts | $ | |||||||||||||