Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion and analysis of the financial condition and results of our operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes of Emerald Holding, Inc. included in Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and the related notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2022 (the “Annual Report”), as filed with the SEC. You should review the disclosures under the headings “Cautionary Note Regarding Forward-Looking Statements” and “Item 1A. Risk Factors” in the Annual Report, for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. All references to the “Company”, “us,” “we,” “our,” and all similar expressions are references to Emerald Holding, Inc., together with its consolidated subsidiaries, unless otherwise expressly stated or the context otherwise requires.
Overview
Emerald is a leading operator of business-to-business trade shows in the United States. Leveraging our shows as key market-driven platforms, we combine our events with effective industry insights, digital tools, and data-focused solutions to create uniquely rich experiences. Emerald strives to build its customers’ businesses by creating opportunities that deliver tangible results.
All of our trade show franchises typically hold market-leading positions within their respective industry verticals, with significant brand value established over a long period of time. Each of our shows is scheduled to stage at least annually, with certain franchises offering multiple editions per year. As our shows are frequently the largest and most well attended in their respective industry, we are able to attract high-quality attendees, including those who have the authority to make purchasing decisions on the spot or subsequent to the show. The participation of these attendees makes our trade shows “must-attend” events for our exhibitors, further reinforcing the leading positions of our trade shows within their respective industry verticals. Our attendees use our shows to fulfill procurement needs, source new suppliers, reconnect with existing suppliers, identify trends, learn about new products and network with industry peers, which we believe are factors that make our shows difficult to replace with non-face-to-face events. Our portfolio of trade shows is well-balanced and diversified across both industry sectors and customers.
In addition to organizing our trade shows, conferences and other events, we also operate content and content-marketing websites, related digital products, and produce publications, each of which is aligned with a specific sector for which we organize an event. We also offer business-to-business commerce and digital merchandising solutions, serving the needs of manufacturers and retailers, through our Elastic Suite platform. In addition to their respective revenues, these products complement our live events and provide us year-round channels of customer acquisition and development.
Reportable Segments
As described in Note 15, Segment Information, our business is organized into two reportable segments, consistent with the information provided to our Chief Executive Officer, who is considered the chief operating decision-maker ("CODM"). The CODM evaluates our performance based on the results of seven executive brand portfolios, which represent our seven operating segments. Based on an evaluation of economic similarities and the nature of services and types of customers, five of these operating segments have been aggregated into two reportable segments, the "Commerce" reportable segment and the "Design, Creative and Technology" reportable segment. The remaining two operating segments do not meet the quantitative thresholds to be considered reportable operating segments and are included in the “All Other” category. In addition, we have a "Corporate-Level Activities" category consisting of finance, legal, information technology and administrative functions.
The following discussion provides additional detailed disclosure for the two reportable segments, the "All Other" category and the "Corporate-Level Activity" category:
Commerce: This segment includes events and services covering merchandising, licensing, retail sourcing and marketing to enable professionals to make informed decisions and meet consumer demands.
Design, Creative and Technology: This segment includes events and services that support a wide variety of industries connecting businesses and professionals with products, operational strategies, and integration opportunities to drive new business and streamline processes and creative solutions.
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All Other: This category consists of Emerald’s remaining operating segments, which provide diverse events, services and e-commerce software solutions, but are not aggregated with the reportable segments. Each of the operating segments in the All Other category do not meet the criteria to be a separate reportable segment.
Corporate-Level Activity: This category consists of Emerald’s finance, legal, information technology and administrative functions.
Organic Growth Drivers
We are primarily focused on generating organic growth by understanding and leveraging the drivers for increased exhibitor and attendee participation at trade shows and providing year-round services that provide incremental value to those customers. Creating new opportunities for exhibitors to influence their market, engage with significant buyers, generate incremental sales and expand their brand’s awareness in their industry builds further demand for exhibit space and strengthens the value proposition of a trade show, which generally allows us to modestly increase booth space pricing annually across our portfolio. At the same time, our trade shows provide attendees with the opportunity to enhance their industry connectivity, develop relationships with targeted suppliers and distributors, discover new products, learn about new industry developments, celebrate their industry’s achievements and, in certain cases, obtain continuing professional education credits, which we believe increases their propensity to return and, consequently, drives high recurring participation among our exhibitors. By investing in and promoting these tangible and return-on-investment linked outcomes, we believe we will be able to continue to enhance the value proposition for our exhibitors and attendees alike, thereby driving strong demand and premium pricing for exhibit space, sponsorship opportunities and attendee registration.
Acquisitions
We are also focused on growing our national footprint through the acquisition of high-quality events that are leaders in their specific industry verticals. Since the Onex Acquisition in June 2013, we have completed 25 strategic acquisitions, with purchase prices, excluding the $335.0 million acquisition of George Little Management, ranging from approximately $5.0 million to approximately $142.2 million, and annual revenues ranging from approximately $1.3 million to approximately $25.6 million. Historically, we have completed acquisitions at earnings before interest, taxes, depreciation, and amortization ("EBITDA") purchase multiples that are typically in the mid-to-high single digits. Our acquisitions have historically been structured as asset deals that have resulted in the generation of long-lived tax assets, which in turn have reduced our purchase multiples when incorporating the value of the created tax assets. In the future, we intend to look for acquisitions with similarly attractive valuation multiples.
Trends and Other Factors Affecting Our Business
There are a number of existing and developing factors and trends which impact the performance of our business, and the comparability of our results from year to year and from quarter to quarter, including:
•Impact of COVID-19 — The pandemic spread of COVID-19 and the related government restrictions and social distancing measures implemented in the United States and throughout the world significantly impacted our business from mid-March 2020 through the end of fiscal 2021, with live events resuming in the United States beginning late in the second quarter of 2021. While we were able to resume our full schedule of events during 2022, the ongoing effects of COVID-19 on our operations continued to negatively affect our financial results and liquidity. In particular, the uncertainty of timing and amount of proceeds from event cancellation insurance caused significant variability in our year to year and quarter to quarter results, which continued throughout 2022 and into the first part of 2023. This variability has affected the comparability of results in these periods to pre-COVID-19 results and may affect comparability in future periods.
•Market Fragmentation — The trade show industry is highly fragmented, with the four largest companies, including Emerald, comprising only 9% of the wider U.S. market according to the International Globex Report 2022. This has afforded us the opportunity to acquire other trade show businesses, a growth opportunity we expect to continue pursuing. These acquisitions may affect our growth trends, impacting the comparability of our financial results on a year-over-year basis.
26
•Overall Economic Environment and Industry Sector Cyclicality — Our results of operations are correlated, in part, with the economic performance of the industry sectors that our trade shows serve, as well as the state of the overall economy, which may be affected by factors such as inflation and supply chain interruption. Overall economic conditions and inflationary pressure may also affect exhibitors’ or attendees’ willingness or ability to travel to attend our in-person events.
•Increases in Inflation and Interest Rates — Heightened levels of inflation present risk for us in terms of increased labor costs, venue costs and other expenses that may not be able to be passed on to customers through increased pricing. In addition, due to inflationary pressures, rising interest rates may increase our financing and borrowing costs on new and existing debt.
•Lag Time — As the majority of our exhibit space is sold during the twelve months prior to each trade show, there is often a timing difference between changes in the economic conditions of an industry sector vertical and their effect on our results of operations. This lag time can result in a counter-cyclical impact on our results of operations.
•Variability in Quarterly Results — Our business is seasonal, with trade show revenues typically reaching their highest levels during the first and fourth quarters of each calendar year, entirely due to the timing of our trade shows. This seasonality is typical within the trade show industry. However, as a result of outside circumstances such as COVID-19, future results may not align with this historical trend. Since event revenue is recognized when a particular event is held, we may also experience fluctuations in quarterly revenue and cash flows based on the movement of annual trade show dates from one quarter to another. Our presentation of Adjusted EBITDA and Organic revenue accounts for these quarterly movements and the timing of shows, where applicable and material.
How We Assess the Performance of Our Business
In assessing the performance of our business, we consider a variety of performance and financial measures. The key indicators of the financial condition and operating performance of our business are revenues, Organic revenue, cost of revenues, selling, general and administrative expenses, interest expense, depreciation and amortization, income taxes, Adjusted EBITDA and Free Cash Flow.
Revenues
We generate revenues primarily from selling trade show exhibit space to exhibitors on a per square foot basis. Other trade show revenue streams include conferences, sponsorships, ancillary exhibition fees and attendee registration fees. Exhibitors contract for their booth space and sponsorships up to a year in advance of the trade show. Fees are typically invoiced and collected in full prior to the trade show or event. Additionally, we generate revenue through digital media and print publications that complement our trade shows. We also engage third-party sales agents to support our marketing efforts. Other marketing service revenue contracts are invoiced and recognized in the period the advertising services are delivered. Typically, the fees we charge are collected after the publications are issued.
We define “Organic revenue growth” and “Organic revenue decline” as the growth or decline, respectively, in our revenue from one period to the next, adjusted for the revenue impact of: (i) acquisitions and dispositions, (ii) discontinued events and (iii) material show scheduling adjustments. We disclose changes in Organic revenue because we believe it assists investors and analysts in comparing Emerald’s operating performance across reporting periods on a consistent basis by excluding items that we do not believe reflect a true comparison of the trends of the existing event calendar given changes in timing or strategy. Management and our Board of Directors evaluate changes in Organic revenue to understand underlying revenue trends of its events. Organic revenue is not defined under GAAP, and has limitations as an analytical tool, and you should not consider such measure either in isolation or as a substitute for analyzing our results as reported under GAAP. Some of these limitations include that Organic revenue reflects certain adjustments that we consider not to be indicative of our ongoing operating performance. Because not all companies use identical calculations, our presentation of Organic revenue may not be comparable to other similarly titled measures used by other companies.
Organic Revenue
Organic revenue is a supplemental non-GAAP financial measure of performance and is not based on any standardized methodology prescribed by GAAP. Organic revenue should not be considered in isolation or as an alternative to revenues or other measures determined in accordance with GAAP. Also, Organic revenue is not necessarily comparable to similarly titled measures used by other companies.
27
The most directly comparable GAAP measure to Organic revenue is revenues. For a reconciliation of Organic revenue to revenues as reported, see Footnote 3 to the table under the heading “Results of Operations—Three Months Ended March 31, 2023, Compared to the Three Months Ended March 31, 2022.”
Other Income
We maintain event cancellation insurance to protect against losses due the unavoidable cancellation, postponement, relocation and enforced reduced attendance at events due to certain covered causes, including losses caused by natural disasters such as hurricanes. While these causes included event cancellation caused by the outbreak of communicable diseases, including COVID-19, for the years ended December 31, 2021 and 2020, Emerald’s renewed event cancellation insurance policies for 2022 and 2023 do not cover losses due to event cancellations caused by the outbreak of communicable diseases, including COVID-19. Our Other Income during the three months ended March 31, 2022, as presented in this Quarterly Report is primarily comprised of received or confirmed event cancellation insurance claim and insurance litigation settlement proceeds.
Cost of Revenues
•Decorating Expenses. We work with general service contractors to both set up communal areas of our trade shows and provide services to our exhibitors, who primarily contract directly with the general service contractors. We will usually select a single general service contractor for an entire show, although it is possible to bid out packages of work within a single show on a piecemeal basis to different task-specific specialists.
•Sponsorship Costs. We often enter into long-term sponsorship agreements with industry trade associations whereby the industry trade association endorses and markets the show to its members in exchange for a percentage of the show’s revenue.
•Venue Costs. Venue costs represent rental costs for the venues, usually convention centers or hotels, where we host our trade shows. Given that convention centers are typically owned by local governments who have a vested interest in stimulating business activity in and attracting tourism to their cities, venue costs typically represent a small percentage of our total cost of revenues.
•Costs of Other Marketing Services. Costs of other marketing services represent paper, printing, postage, contributor and other costs related to digital media and print publications.
•Other Event-Related Expenses. Other event-related costs include temporary labor for services such as security, shuttle buses, speaker fees, food and beverage expenses and event cancellation insurance.
Selling, General and Administrative Expenses
•Labor Costs. Labor costs represent the cost of employees who are involved in sales, marketing, planning and administrative activities. The actual on-site set-up of the events is contracted out to third-party vendors and is included in cost of revenues.
•Miscellaneous Expenses. Miscellaneous expenses are comprised of a variety of other expenses, including advertising and marketing costs, promotion costs, credit card fees, travel expenses, printing costs, office supplies and office rental expense. Direct trade show costs are recorded in cost of revenues. All other costs are recorded in selling, general and administrative expenses.
Interest Expense
For the periods presented in this report, interest expense principally represents interest payments and certain other fees paid to lenders under our Amended and Restated Senior Secured Credit Facilities.
Depreciation and Amortization
We have historically grown our business through acquisitions and, in doing so, have acquired significant intangible assets, the value of some of which is amortized over time. These acquired intangible assets, unless determined to be indefinite-lived, are amortized over extended periods of three to thirty years from the date of each acquisition for reporting under accounting principles generally accepted in the United States of America (“GAAP”) purposes, or fifteen years for tax purposes. This amortization expense reduces our taxable income.
28
Income Taxes
Income tax expense consists of U.S. federal, state, local and foreign taxes based on income in the jurisdictions in which we operate.
We record deferred tax charges or benefits primarily associated with our utilization or generation of net operating loss carryforwards and book-to-tax differences related to amortization of goodwill, amortization of intangible assets, depreciation, stock-based compensation charges and deferred financing costs.
Adjusted EBITDA
Adjusted EBITDA is a key measure of our performance. We define Adjusted EBITDA as net income before (i) interest expense, (ii) provision for (benefit from) income taxes, (iii) goodwill impairments, (iv) intangible asset impairments, (v) depreciation and amortization, (vi) stock-based compensation, (vii) deferred revenue adjustment and (viii) other items that we believe are not part of our core operations. We present Adjusted EBITDA because we believe it assists investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance.
Management and our Board of Directors use Adjusted EBITDA to assess our financial performance and believe it is helpful in highlighting trends because it excludes the results of decisions that are outside the control of management, while other performance metrics can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which we operate and capital investments. We reference Adjusted EBITDA frequently in our decision-making because it provides supplemental information that facilitates internal comparisons to the historical operating performance of prior periods.
Adjusted EBITDA is not defined under GAAP and has limitations as an analytical tool, and you should not consider such measure either in isolation or as a substitute for analyzing our results as reported under GAAP. Some of these limitations include that Adjusted EBITDA excludes certain normal recurring expenses and one-time cash adjustments that we consider not to be indicative of our ongoing operating performance. Because not all companies use identical calculations, our presentation of Adjusted EBITDA may not be comparable to other similarly titled measures used by other companies.
The most directly comparable GAAP measure to Adjusted EBITDA is net income (loss). For a reconciliation of Adjusted EBITDA to net income, see Footnote 2 to the table under the heading “Results of Operations—Three Months Ended March 31, 2023, Compared to Three Months Ended March 31, 2022.”
Cash Flow Model
We typically have favorable cash flow characteristics, as described below (see “Liquidity and Capital Resources—Cash Flows”), as a result of our high profit margins, low capital expenditures and consistent negative working capital, excluding cash on hand. Our working capital, excluding cash on hand, is negative due to the fact that our current assets are generally lower than our current liabilities. Current assets primarily include accounts receivable and prepaid expenses, while current liabilities primarily include accounts payable and deferred revenues. Cash received prior to an event is recorded as deferred revenue on our balance sheet and recognized as revenue upon completion of each trade show. The implication of having negative working capital, excluding cash on hand, is that changes in working capital represent a source of cash as our business grows. As a result of COVID-19, the accounts receivable and deferred revenue balances related to cancelled events have been reclassified to Cancelled event liabilities in the condensed consolidated balance sheets, as the net amount represents balances which we expect will be refunded to our customers.
The primary driver for our negative working capital, excluding cash on hand, is the sales cycle for a trade show, which typically begins during the twelve months prior to a show. In the interim period between the current show and the following show, we continue to sell to new and past exhibitors and collect payments on contracted exhibit space. Our exhibitors pay in full in advance of each trade show, whereas the bulk of direct expenses are paid close to or after the show. Cash deposits start to be received as early as twelve months prior to a show taking place and the balance of booth space fees are typically received in cash one month prior to a show taking place. This highly efficient cash flow model, where cash is received in advance of expenses to be paid, creates a working capital benefit.
Free Cash Flow
In addition to net cash provided by operating activities presented in accordance with GAAP, we present Free Cash Flow because we believe it is a useful indicator of liquidity that provides information to our management and investors about the amount of cash generated from our core operations that, after capital expenditures, can be used for the repayment of indebtedness, paying of dividends, repurchasing of shares of our common stock and strategic initiatives, including investing in our business and making strategic acquisitions.
29
Free Cash Flow is a supplemental non-GAAP financial measure of liquidity and is not based on any standardized methodology prescribed by GAAP. Free Cash Flow should not be considered in isolation or as an alternative to net cash provided by operating activities or other measures determined in accordance with GAAP. Also, Free Cash Flow is not necessarily comparable to similarly titled measures used by other companies.
The most directly comparable GAAP measure to Free Cash Flow is net cash provided by operating activities. For a reconciliation of Free Cash Flow to net cash provided by operating activities, see Footnote 5 to the table under the heading “Results of Operations—Three Months Ended March 31, 2023, Compared to Three Months Ended March 31, 2022.”
Results of Operations
Three Months Ended March 31, 2023, Compared to Three Months Ended March 31, 2022
The tables in this section summarize key components of our results of operations for the periods indicated.
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Three Months Ended
March 31, |
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2023 |
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2022 |
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Variance $ |
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Variance % |
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(unaudited)
(dollars in millions) |
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Statement of income and comprehensive
income data: |
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Revenues |
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$ |
122.3 |
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$ |
98.5 |
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|
$ |
23.8 |
|
|
|
24.2 |
% |
Other income, net |
|
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— |
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|
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23.7 |
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|
|
(23.7 |
) |
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NM |
|
Cost of revenues |
|
|
43.2 |
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|
|
34.2 |
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|
|
9.0 |
|
|
|
26.3 |
% |
Selling, general and administrative expenses(1) |
|
|
48.8 |
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|
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46.6 |
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|
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2.2 |
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|
|
4.7 |
% |
Depreciation and amortization expense |
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13.5 |
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14.3 |
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(0.8 |
) |
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|
(5.6 |
%) |
Goodwill impairment charge(2) |
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— |
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6.3 |
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(6.3 |
) |
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NM |
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Intangible asset impairment charges(3) |
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— |
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1.6 |
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(1.6 |
) |
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NM |
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Operating income |
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16.8 |
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19.2 |
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(2.4 |
) |
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(12.5 |
%) |
Interest expense |
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8.0 |
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3.9 |
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4.1 |
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105.1 |
% |
Interest income |
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1.1 |
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|
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— |
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1.1 |
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NM |
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Other expense |
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0.1 |
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— |
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0.1 |
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NM |
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Income before income taxes |
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9.8 |
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15.3 |
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(5.5 |
) |
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(35.9 |
%) |
Provision for (benefit from) income taxes |
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2.7 |
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(0.8 |
) |
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3.5 |
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(437.5 |
%) |
Net income and comprehensive income |
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$ |
7.1 |
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$ |
16.1 |
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$ |
(9.0 |
) |
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(55.9 |
%) |
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Other financial data (unaudited): |
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Adjusted EBITDA(4) |
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$ |
36.5 |
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$ |
49.3 |
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$ |
(12.8 |
) |
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(26.0 |
%) |
Free Cash Flow(5) |
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$ |
5.2 |
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$ |
29.8 |
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$ |
(24.6 |
) |
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(82.6 |
%) |
Organic revenue(6) |
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$ |
122.1 |
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$ |
104.4 |
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$ |
17.7 |
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17.0 |
% |
(1)Selling, general and administrative expense for the three months ended March 31, 2023 and 2022 included $4.2 million and $5.6 million, respectively, in acquisition-related transaction, transition and integration costs, including legal, audit and advisory fees. Also included in selling, general and administrative expense for each of the three months ended March 31, 2023 and 2022 was stock-based compensation expense of $2.1 million.
(2)Goodwill impairment charge for the three months ended March 31, 2022 represents a non-cash charge of $6.3 million, in connection with the Company's interim testing of goodwill for impairment.
(3)Intangible asset impairment charge for the three months ended March 31, 2022 represents a non-cash charge of $1.6 million for certain indefinite-lived trade name intangible assets in connection with the Company’s interim testing of intangibles for impairment.
(4)In addition to net income presented in accordance with GAAP, we use Adjusted EBITDA to measure our financial performance. Adjusted EBITDA is a supplemental non-GAAP financial measure of operating performance and is not based on any standardized methodology prescribed by GAAP. Adjusted EBITDA should not be considered in isolation or as alternatives to net income, cash flows from operating activities or other measures determined in accordance with GAAP. Also, Adjusted EBITDA is not necessarily comparable to similarly titled measures presented by other companies.
30
We define Adjusted EBITDA as net income before (i) interest expense, net, (ii) provision for (benefit from) income taxes, (iii) goodwill impairments, (iv) intangible asset impairments, (v) depreciation and amortization, (vi) stock-based compensation, (vii) deferred revenue adjustment and (viii) other items that we believe are not part of our core operations. We present Adjusted EBITDA because we believe it assists investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. Management and our Board of Directors use Adjusted EBITDA to assess our financial performance and believe it is helpful in highlighting trends because it excludes the results of decisions that are outside the control of our management, while other performance metrics can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which we operate and capital investments. We reference Adjusted EBITDA frequently in our decision-making because it provides supplemental information that facilitates internal comparisons to the historical operating performance of prior periods. Adjusted EBITDA is not defined under GAAP and has limitations as an analytical tool, and you should not consider such measure either in isolation or as a substitute for analyzing our results as reported under GAAP. Some of these limitations include that Adjusted EBITDA excludes certain normal recurring expenses and one-time cash adjustments that we consider not to be indicative of our ongoing operative performance. Because not all companies use identical calculations, our presentation of Adjusted EBITDA may not be comparable to other similarly titled measures used by other companies.
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Three Months Ended
March 31, |
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2023 |
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2022 |
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(unaudited) |
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(dollars in millions) |
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Net income |
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$ |
7.1 |
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$ |
16.1 |
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Add (Deduct): |
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Interest expense, net |
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6.9 |
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3.9 |
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Provision for (benefit from) income taxes |
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2.7 |
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(0.8 |
) |
Goodwill impairment charge(a) |
|
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— |
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6.3 |
|
Intangible asset impairment charge(b) |
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— |
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1.6 |
|
Depreciation and amortization expense |
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13.5 |
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14.3 |
|
Stock-based compensation expense(c) |
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2.1 |
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2.1 |
|
Deferred revenue adjustment(d) |
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— |
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0.2 |
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Other items(e) |
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4.2 |
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5.6 |
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Adjusted EBITDA |
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$ |
36.5 |
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$ |
49.3 |
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Deduct: |
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Event cancellation insurance proceeds |
|
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— |
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23.7 |
|
Adjusted EBITDA excluding event cancellation insurance proceeds |
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$ |
36.5 |
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$ |
25.6 |
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(a)Represents non-cash goodwill impairment charges for the three months ended March 31, 2022, in connection with the Company’s interim testing of goodwill for impairment.
(b)Represents non-cash intangible asset impairment charges for the three months ended March 31, 2022, in connection with the Company’s interim testing of intangibles for impairment.
(c)Represents costs related to stock-based compensation associated with certain employees’ participation in the 2013 Stock Option Plan (“2013 Plan”), the 2017 Omnibus Equity Plan (the “2017 Plan”) and the 2019 Employee Stock Purchase Plan (the “ESPP”).
(d)Represents deferred revenue acquired in the PlumRiver acquisition that was marked down to the acquisition date fair value due to purchase accounting rules. If the business had been continuously owned by us throughout the related contract period, the fair value adjustment of $0.2 million for PlumRiver for the three months ended March 31, 2022, would not have been required and the revenues for the three months ended March 31, 2022, would have been higher by $0.2 million.
(e)Other items for the three months ended March 31, 2023 included: (i) $0.7 million in acquisition-related transaction costs; (ii) $1.7 million in acquisition-related integration and restructuring-related transition costs, including a one-time severance expense of $0.5 million and (iii) $1.8 million in non-recurring legal, audit and consulting fees. Other items for the three months ended March 31, 2022 included: (i) $4.3 million in non-cash expense related to the remeasurement of contingent consideration, (ii) $0.4 million in non-recurring legal, audit and consulting fees, (iii) $0.8 million in acquisition-related transaction costs and (iv) $0.1 million in transition expenses.
31
(5)In addition to net cash provided by operating activities presented in accordance with GAAP, we present Free Cash Flow because we believe it is a useful indicator of liquidity that provides information to our management and investors about the amount of cash generated from our core operations that, after capital expenditures, can be used for the repayment of indebtedness, paying of dividends, repurchasing of shares of our common stock and strategic initiatives, including investing in our business and making strategic acquisitions. Free Cash Flow is a supplemental non-GAAP financial measure of liquidity and is not based on any standardized methodology prescribed by GAAP. Free Cash Flow should not be considered in isolation or as an alternative to cash flows from operating activities or other measures determined in accordance with GAAP. Also, Free Cash Flow is not necessarily comparable to similarly titled measures used by other companies.
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Three Months Ended
March 31, |
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2023 |
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2022 |
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|
|
(unaudited) |
|
|
|
(dollars in millions) |
|
Net Cash Provided by Operating Activities |
|
$ |
8.9 |
|
|
$ |
33.0 |
|
Less: |
|
|
|
|
|
|
Capital expenditures |
|
|
3.7 |
|
|
|
3.2 |
|
Free Cash Flow |
|
$ |
5.2 |
|
|
$ |
29.8 |
|
(6)In addition to revenues presented in accordance with GAAP, we present Organic revenue because we believe it assists investors and analysts in comparing Emerald’s operating performance across reporting periods on a consistent basis by excluding items that we do not believe reflect a true comparison of the trends of the existing event calendar given changes in timing or strategy. Our management and Board of Directors evaluate changes in Organic revenue to understand underlying revenue trends of its events. Our presentation of Organic revenue adjusts revenue for (i) acquisition revenue and (ii) scheduling adjustments.
Organic revenue is a supplemental non-GAAP financial measure of performance and is not based on any standardized methodology prescribed by GAAP. Organic revenue should not be considered in isolation or as an alternative to revenues or other measures determined in accordance with GAAP. Also, Organic revenue is not necessarily comparable to similarly titled measures used by other companies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, |
|
|
|
|
|
|
|
|
|
2023 |
|
|
2022 |
|
|
Variance $ |
|
|
Variance % |
|
|
|
(unaudited)
(dollars in millions) |
|
Revenues |
|
$ |
122.3 |
|
|
$ |
98.5 |
|
|
$ |
23.8 |
|
|
|
24.2 |
% |
Add (deduct): |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition revenues |
|
|
(0.2 |
) |
|
|
— |
|
|
|
|
|
|
|
Scheduling adjustments(1) |
|
|
— |
|
|
|
5.9 |
|
|
|
|
|
|
|
Organic revenue |
|
$ |
122.1 |
|
|
$ |
104.4 |
|
|
$ |
17.7 |
|
|
|
17.0 |
% |
(1)For the three months ended March 31, 2023, represents revenues from three events that staged in the first quarter of fiscal year 2023, but staged later in fiscal year 2022, offset by revenues from one event that staged in the first quarter of fiscal year 2022, but is scheduled to stage later in fiscal 2023.
Revenues
Revenues of $122.3 million for the three months ended March 31, 2023 increased $23.8 million, or 24.2%, from $98.5 million for the comparable period in 2022, primarily due to an increase in Organic revenue. See “Commerce Segment – Revenues,” “Design, Creative and Technology Segment – Revenues,” and “All Other Category – Revenues” below for a discussion of the factors contributing to the changes in total revenues.
32
Other Income, net
Other income, net, for the three months ended March 31, 2022 of $23.7 million was related to event cancellation insurance claims proceeds, all of which were received during the period. See “Commerce Segment – Other Income, net,” “Design, Creative and Technology Segment – Other Income, net,” and “All Other Category – Other Income, net” below for a discussion of other income, net by segment.
Cost of Revenues
Cost of revenues of $43.2 million for the three months ended March 31, 2023 increased $9.0 million, or 26.3%, from $34.2 million for the comparable period in 2022, primarily due to an increase in Organic revenue. See “Commerce Segment – Cost of Revenues,” “Design, Creative and Technology Segment – Cost of Revenues” and “All Other Category – Cost of Revenues” below for a discussion of the factors contributing to the changes in total cost of revenues.
Selling, General and Administrative Expense
Total selling, general and administrative expense consists primarily of compensation and employee-related costs, sales commissions and incentive plans, stock-based compensation expense, marketing expenses, information technology expenses, travel expenses, facilities costs, consulting fees and public reporting costs. Selling, general and administrative expenses of $48.8 million for the three months ended March 31, 2023 increased $2.2 million, or 4.7%, from $46.6 million for the comparable period in 2022. See “Commerce Segment – Selling, General and Administrative Expenses”, “Design, Creative and Technology Segment – Selling, General and Administrative Expenses”, “All Other category – Selling, General and Administrative Expense” and “Corporate – Selling, General and Administrative Expense” below for a discussion of the factors contributing to the changes in total selling, general and administrative expense.
Depreciation and Amortization Expense
Depreciation and amortization expense of $13.5 million for the three months ended March 31, 2023, decreased $0.8 million, or 5.6%, from $14.3 million for the comparable period in 2022. See “Commerce Segment – Depreciation and Amortization Expense,” “Design, Creative and Technology Segment – Depreciation and Amortization Expense,” “All Other Category – Depreciation and Amortization Expense” and “Corporate – Depreciation and Amortization Expense” below for a discussion of the factors contributing to the changes in total depreciation and amortization expense.
Segment Results for the Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022
Commerce
The following represents the change in revenue, expenses and operating income in the Commerce reportable segment for the three months ended March 31, 2023 and 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, |
|
|
|
|
|
|
|
|
|
2023 |
|
|
2022 |
|
|
Variance $ |
|
|
Variance % |
|
|
|
(unaudited)
(dollars in millions) |
|
|
|
|
|
|
|
Revenues |
|
$ |
70.0 |
|
|
$ |
56.7 |
|
|
$ |
13.3 |
|
|
|
23.5 |
% |
Other income, net |
|
|
— |
|
|
|
1.1 |
|
|
|
(1.1 |
) |
|
NM |
|
Cost of revenues |
|
|
19.1 |
|
|
|
15.7 |
|
|
|
3.4 |
|
|
|
21.7 |
% |
Selling, general and administrative
expense |
|
|
11.5 |
|
|
|
10.3 |
|
|
|
1.2 |
|
|
|
11.7 |
% |
Depreciation and amortization expense |
|
|
6.8 |
|
|
|
8.0 |
|
|
|
(1.2 |
) |
|
|
(15.0 |
%) |
Operating income |
|
$ |
32.6 |
|
|
$ |
23.8 |
|
|
$ |
8.8 |
|
|
|
37.0 |
% |
Revenues
During the three months ended March 31, 2023, revenues for the Commerce reportable segment increased $13.3 million, or 23.5%, to $70.0 million from $56.7 million for the comparable period in the prior year. The primary driver was an increase in Organic revenue of $10.5 million, or 18.5%, to $67.2 million from $56.7 million for the comparable period in the prior year. This growth was driven by a $10.9 million, or 19.9%, increase to $65.6 million from $54.7 million in trade show revenue from events that staged in the same period in both years, offset by lower other marketing services revenues. The Commerce reportable segment revenues were also increased by a $2.7 million scheduling adjustment in the first quarter of 2023.
33
Other Income, net
Other income, net of $1.1 million was recorded for the Commerce reportable segment related to event cancellation insurance proceeds during the quarter ended March 31, 2022. All of the $1.1 million of other income, net for the Commerce reportable segment was received during the three months ended March 31, 2022.
Cost of Revenues
During the three months ended March 31, 2023, cost of revenues for the Commerce reportable segment increased $3.4 million, or 21.7%, to $19.1 million from $15.7 million for the comparable period in the prior year. The primary driver was an increase in organic cost of revenues of $1.8 million, or 11.5%, to $17.5 million from $15.7 million for the comparable period in the prior year. This growth was driven by events that staged in same period in both years. The Commerce reportable segment cost of revenues were also increased by a $1.7 million scheduling adjustment in the first quarter of 2023.
Selling, General and Administrative Expense
During the three months ended March 31, 2023, selling, general and administrative expense for the Commerce reportable segment increased $1.2 million, or 11.7%, to $11.5 million from $10.3 million for the comparable period in 2022. The primary driver of the increase was the salaries and benefits associated with the acquisitions of Bulletin in July 2022 and Lodestone in January 2023.
Depreciation and Amortization Expense
During the three months ended March 31, 2023, depreciation and amortization expense for the Commerce reportable segment decreased $1.2 million, or 15.0%, to $6.8 million from $8.0 million for the comparable period in 2022. The decrease was driven by a decrease in amortization expense attributable to the December 2021 acquisition of MJBiz.
Design, Creative and Technology
The following represents the change in revenue, expenses and operating income in the Design, Creative and Technology reportable segment for the three months ended March 31, 2023 and 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, |
|
|
|
|
|
|
|
|
|
2023 |
|
|
2022 |
|
|
Variance $ |
|
|
Variance % |
|
|
|
(unaudited)
(dollars in millions) |
|
|
|
|
|
|
|
Revenues |
|
$ |
46.7 |
|
|
$ |
37.5 |
|
|
$ |
9.2 |
|
|
|
24.5 |
% |
Other income, net |
|
|
— |
|
|
|
21.9 |
|
|
|
(21.9 |
) |
|
NM |
|
Cost of revenues |
|
|
21.8 |
|
|
|
16.5 |
|
|
|
5.3 |
|
|
|
32.1 |
% |
Selling, general and administrative
expense |
|
|
11.8 |
|
|
|
10.3 |
|
|
|
1.5 |
|
|
|
14.6 |
% |
Depreciation and amortization expense |
|
|
4.8 |
|
|
|
4.5 |
|
|
|
0.3 |
|
|
|
6.7 |
% |
Goodwill impairment charge |
|
|
— |
|
|
|
5.8 |
|
|
|
(5.8 |
) |
|
NM |
|
Intangible asset impairment charge |
|
|
— |
|
|
|
1.6 |
|
|
|
(1.6 |
) |
|
NM |
|
Operating income |
|
$ |
8.3 |
|
|
$ |
20.7 |
|
|
$ |
(12.4 |
) |
|
|
(59.9 |
%) |
34
Revenues
During the three months ended March 31, 2023, revenues for the Design, Creative and Technology reportable segment increased $9.2 million, or 24.5%, to $46.7 million from $37.5 million for the comparable period in 2022. The primary driver was an increase in Organic revenue of $5.7 million, or 15.7%, to $41.9 million from $36.2 million for the comparable period in the prior year. This growth was driven by a $6.2 million, or 20.2%, increase to $36.9 million from $30.7 million in trade show revenue from events that staged in the same period in both years and $0.3 million generated from newly launched events, offset by lower other marketing services revenues. The Design, Creative and Technology reportable segment revenues were also increased by a $3.2 million scheduling adjustment in the first quarter of 2023.
Other Income, net
Other income, net of $21.9 million was recorded for the Design, Creative and Technology reportable segment related to event cancellation insurance proceeds during the quarter ended March 31, 2022. All of the $21.9 million of other income, net for the Design, Creative and Technology reportable segment was received during the three months ended March 31, 2022.
Cost of Revenues
During the three months ended March 31, 2023, cost of revenues for the Design, Creative and Technology reportable segment increased $5.3 million, or 32.1%, to $21.8 million from $16.5 million for the comparable period in 2022. The primary driver was an increase in organic cost of revenues of $4.1 million, or 25.8%, to $20.0 million from $15.9 million for the comparable period in the prior year. This growth was driven by a $3.6 million, or 23.8%, increase to $18.7 million from $15.1 million in trade show cost of revenue from events that staged in the same period in both years and $0.5 million from newly launched events, offset by lower other marketing services cost of revenues. The acquisition of Advertising Week in June 2022 generated $0.3 million of incremental cost of revenues during the three months ended March 31, 2023. The Design, Creative and Technology reportable segment cost of revenues were also increased by a $1.2 million scheduling adjustment in the first quarter of 2023.
Selling, General and Administrative Expense
During the three months ended March 31, 2023, selling, general and administrative expense for the Design, Creative and Technology reportable segment increased $1.5 million, or 14.6%, to $11.8 million from $10.3 million for the comparable period in 2022. The primary driver of the increase was the salaries and benefits associated with the acquisition of Advertising Week in June 2022.
Depreciation and Amortization Expense
During the three months ended March 31, 2023, depreciation and amortization expense for the Design, Creative and Technology reportable segment increased $0.3 million, or 6.7%, to $4.8 million from $4.5 million for the comparable period in 2022. The increase was driven by incremental amortization attributable to the June 2022 acquisition of Advertising Week as well as the January 2023 acquisition of Lodestone.
Goodwill Impairment Charge
Due to a change in operating segments and reporting units, management was required to perform an interim goodwill impairment assessment of its old and new reporting units during the first quarter of 2022. As a result of this assessment, a $5.8 million non-cash goodwill impairment charge was recorded in connection with reporting units under the Design, Creative and Technology reportable segment. No goodwill impairment charges were recorded in the Design, Creative and Technology reportable segment during the three months ended March 31, 2023.
Intangible Asset Impairment Charge
In connection with the change in operating segments described above, management performed impairment assessments of indefinite-lived intangible assets during the first quarter of 2022, and as a result, recognized a non-cash impairment charge related to certain indefinite-lived intangible assets under the Design, Creative and Technology segment of $1.6 million. No intangible asset impairment charges were recorded in the Design, Creative and Technology reportable segment during the three months ended March 31, 2023.
35
All Other Category
The following represents the change in revenue, expenses and operating loss in the All Other category for the three months ended March 31, 2023 and 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, |
|
|
|
|
|
|
|
|
|
2023 |
|
|
2022 |
|
|
Variance $ |
|
|
Variance % |
|
|
|
(unaudited)
(dollars in millions) |
|
|
|
|
|
Revenues |
|
$ |
5.6 |
|
|
$ |
4.3 |
|
|
$ |
1.3 |
|
|
|
30.2 |
% |
Other income, net |
|
|
— |
|
|
|
0.7 |
|
|
|
(0.7 |
) |
|
NM |
|
Cost of revenues |
|
|
2.3 |
|
|
|
2.0 |
|
|
|
0.3 |
|
|
|
15.0 |
% |
Selling, general and administrative
expense |
|
|
4.3 |
|
|
|
5.5 |
|
|
|
(1.2 |
) |
|
|
(21.8 |
%) |
Depreciation and amortization expense |
|
|
1.1 |
|
|
|
0.8 |
|
|
|
0.3 |
|
|
|
37.5 |
% |
Goodwill impairment charge |
|
|
— |
|
|
|
0.5 |
|
|
|
(0.5 |
) |
|
NM |
|
Operating loss |
|
$ |
(2.1 |
) |
|
$ |
(3.8 |
) |
|
$ |
1.7 |
|
|
|
(44.7 |
%) |
Revenues
During the three months ended March 31, 2023, revenues for the All Other category increased $1.3 million, or 30.2%, to $5.6 million from $4.3 million for the comparable period in 2022. The primary driver of the increase was $1.2 million of additional software subscription revenues.
Other Income, net
Other income, net of $0.7 million was recorded for the All Other category related to event cancellation insurance proceeds during the quarter ended March 31, 2022. All of the $0.7 million of other income, net for the All Other category was received during the three months ended March 31, 2022.
Cost of Revenues
During the three months ended March 31, 2023, cost of revenues for the All Other category increased $0.3 million, or 15.0%, to $2.3 million from $2.0 million for the comparable period in 2022. The primary driver of the increase was growth in costs associated with the Company's software subscription business.
Selling, General and Administrative Expense
During the three months ended March 31, 2023, selling, general and administrative expense for the All Other category decreased $1.2 million, or 21.8%, to $4.3 million from $5.5 million for the comparable period in 2022. The decrease was primarily related to contractor and consulting expense savings in the Company’s software subscription business.
Depreciation and Amortization Expense
During the three months ended March 31, 2023, depreciation and amortization expense for the All Other category increased $0.3 million, or 37.5%, to $1.1 million from $0.8 million for the comparable period in 2022. The increase was attributable to the continued development of the Company's Elastic software subscription platform.
Goodwill Impairment Charge
Due to the change in operating segments and reporting units described above, management was required to perform an interim goodwill impairment assessment of its old and new reporting units during the first quarter of 2022. As a result of this assessment, a $0.5 million non-cash goodwill impairment charge was recorded in connection with trade show brands in reporting units under the All Other category. No goodwill impairment charges were recorded in the All Other category during the three months ended March 31, 2023.
36
Corporate Category
The following represents the change in operating expenses in the Corporate category for the three months ended March 31, 2023 and 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, |
|
|
|
|
|
|
|
|
|
2023 |
|
|
2022 |
|
|
Variance $ |
|
|
Variance % |
|
|
|
(unaudited)
(dollars in millions) |
|
|
|
|
Selling, general and administrative
expense |
|
$ |
21.2 |
|
|
$ |
20.5 |
|
|
$ |
0.7 |
|
|
|
3.4 |
% |
Depreciation and amortization expense |
|
|
0.8 |
|
|
|
1.0 |
|
|
|
(0.2 |
) |
|
|
(20.0 |
%) |
Total operating expenses |
|
$ |
22.0 |
|
|
$ |
21.5 |
|
|
$ |
0.5 |
|
|
|
2.3 |
% |
Selling, General and Administrative Expense
During the three months ended March 31, 2023, selling, general and administrative expense for the Corporate category increased $0.7 million, or 3.4%, to $21.2 million from $20.5 million for the comparable period in 2022. The increase was primarily attributable to higher salaries and one-time transaction and insurance settlement related costs, offset by contingent consideration adjustments recorded during the three months ended March 31, 2022.
Depreciation and Amortization Expense
During the three months ended March 31, 2023, depreciation and amortization expense for the Corporate category decreased $0.2 million, or 20.0%, to $0.8 million from $1.0 million for the comparable period in 2022. The decrease is attributable to lower corporate capitalized software.
Interest Expense
Interest expense of $8.0 million for the three months ended March 31, 2023 increased $4.1 million, or 105.1%, from $3.9 million for the comparable period in 2022. The increase was attributable to a higher effective interest rate of 7.03% on our outstanding indebtedness for the three months ended March 31, 2023 compared to 2.64% for the comparable period in the prior year.
Interest Income
Interest income of $1.1 million for the three months ended March 31, 2023 increased from zero for the comparable period in 2022. The increase was primarily attributable to an increase in our cash balance due to the receipt of event cancellation insurance claim and insurance litigation settlement proceeds in 2022 as well as rising interest rates during fiscal 2023.
Provision for (benefit from) Income Taxes
For the three months ended March 31, 2023, the Company recorded a provision for income taxes of $2.7 million which resulted in an effective tax rate of 27.6% for the three months ended March 31, 2023. The Company recorded a benefit from income taxes of $0.8 million and an effective tax rate of negative 5.2% for the three months ended March 31, 2022. The change in the effective tax rate for the three months ended March 31, 2023 is attributable to the timing of current period and full year projected results.
37
Net Income
Net income of $7.1 million for the three months ended March 31, 2023 represented a $9.0 million decline from net income of $16.1 million for the comparable period in 2022. The key drivers of the decrease were the recognition of other income, net of $23.7 million related to event cancellation insurance claim proceeds during the three months ended March 31, 2022 and higher interest expense during the three months ended March 31, 2023, partially offset by higher income from on-going operations and the absence of non-cash goodwill and intangible asset impairment charges in the three months ended March 31, 2023.
Adjusted EBITDA
Adjusted EBITDA of $36.5 million for the three months ended March 31, 2023 decreased by $12.8 million from $49.3 million for the comparable period in 2022. The decrease in Adjusted EBITDA was primarily attributable to the $9.0 million decrease in net income described above, as well as lower addbacks for depreciation and amortization and one-time costs.
Liquidity and Capital Resources
The assumptions used to estimate the Company’s liquidity in recent years have been subject to greater uncertainty as a result of COVID-19, because the Company had never previously cancelled or postponed all upcoming events for a period of over a year due to a pandemic. While the Company was able to resume a full schedule of events during 2022, the ongoing effects of COVID-19 on the Company’s operations continued to negatively affect its financial results and liquidity. In particular, the uncertainty of timing and amount of proceeds from event cancellation insurance caused significant variability in the Company’s year to year and quarter to quarter results that continued throughout 2022 and into the first part of 2023, which has affected the comparability of results in these periods to pre-COVID-19 results and may affect comparability in future periods.
Management cannot estimate with certainty whether event exhibitors and attendees will attend the Company’s events in numbers similar to pre-pandemic editions now that events have fully resumed. Therefore, current estimates of revenues and the associated impact on liquidity could differ significantly in the future.
On August 3, 2022, the Company reached an agreement to settle outstanding insurance litigation relating to event cancellation insurance for proceeds of $148.6 million. Other income, net recognized through December 31, 2022 related to insurance claim and settlement proceeds received totaled $367.2 million. During the three months ended March 31, 2022, we recorded other income, net of $23.7 million, related to event cancellation insurance claim proceeds deemed to be realizable by management. All of the other income, net recognized during the three months ended March 31, 2022 was received during the period.
Emerald’s renewed event cancellation insurance policies for 2023 do not cover losses due to event cancellations caused by the outbreak of communicable diseases, including COVID-19. In the event of a future outbreak of communicable disease, including variants or resurgences of COVID-19, forced cancellations or reductions in attendance of our in-person events would negatively impact our financial results and liquidity, and we would not have the benefit of cancellation insurance coverage to mitigate this impact.
As of March 31, 2023, the Company had $415.3 million of borrowings outstanding under the Amended and Restated Term Loan Facility and no borrowings outstanding under the Amended and Restated Revolving Credit Facility. In addition, as of March 31, 2023, the Company had cash and cash equivalents of $217.3 million. As of March 31, 2023, the Company was in compliance with the covenants contained in the Amended and Restated Senior Secured Credit Facilities.
Based on our available sources of financing, cash from operations and receipt of insurance recoveries, management believes that the Company’s current financial resources will be sufficient to fund its liquidity requirements for the next twelve months.
Share Repurchase Plan
On October 5, 2020, our Board authorized and approved a new $20.0 million share repurchase program (the “October 2020 share repurchase program”). Share repurchases may be made from time to time through and including December 31, 2021, subject to early termination or extension by the Board, through open market purchases, block transactions, privately negotiated purchases or otherwise. On October 29, 2021, our Board approved an extension and expansion of the October 2020 share repurchase program, which allowed for the repurchase of an additional $20.0 million of our common stock through December 31, 2022. The share repurchase program may be suspended or discontinued at any time without notice. We settled the repurchase of 255,584 shares of our common stock for $0.9 million during the three months ended March 31, 2022 under this repurchase program.
38
On October 26, 2022, our Board approved an extension and expansion of the October 2020 share repurchase program, which allows for the repurchase of $20.0 million of our common stock through December 31, 2023, subject to early termination or extension by the Board. We settled the repurchase of 5,064,140 shares for $16.9 million during the three months ended March 31, 2023 under this repurchase program. There was $3.0 million remaining available for share repurchases under the October 2022 Share Repurchase Program as of March 31, 2023. The share repurchase program may be suspended or discontinued at any time without notice.