CPI Card Group Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unless stated otherwise, financial amounts below are in millions of dollars. CPI provides payment-card products and services, including debit and credit cards, prepaid debit cards, personalization and instant issuance.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $82.7 | $71.7 | $228.0 | $205.4 |
| Gross profit / margin | $30.6 / 37.0% | $25.4 / 35.4% | $79.3 / 34.8% | $69.1 / 33.7% |
| Operating income | $13.5 | $7.7 | $26.0 | $21.1 |
| Net income (loss) | $5.8 | $(0.7) | $8.8 | $(2.7) |
| Diluted EPS | $0.52 | $(0.06) | $0.79 | $(0.24) |
| Segment EBITDA | $17.5 | $12.0 | $38.3 | $32.7 |
- Q3 sales rose 15.4%; nine-month sales rose 11.0%. Products drove the increase: Q3 product sales were $43.5 million versus $34.0 million, while services were $39.2 million versus $37.7 million.
- Debit and Credit sales increased 21.8% in Q3 and 19.4% year to date, supported by dual-interface EMV cards, Second Wave cards, CPI On-Demand personalization and COVID-related government disbursement work. Prepaid Debit sales were nearly flat in Q3 but down 8.4% for the nine months.
- Operating margin was 16.3% in Q3 versus 10.8%; for nine months it was 11.4% versus 10.2%. Q3 improvement reflected higher Debit and Credit sales and gross margin, plus lower operating expenses.
- Interest expense was $6.3 million in Q3 and $19.2 million for nine months, modestly higher than the respective prior-year periods. Nine-month 2020 income taxes included a $2.2 million benefit, primarily reflecting CARES Act provisions; 2019 included $3.6 million of tax expense.
Cash flow, debt and liquidity
- Cash and cash equivalents were $50.3 million at September 30, 2020, up from $18.7 million at year-end 2019. Current assets were $141.7 million and current liabilities $47.6 million.
- Nine-month operating cash flow from continuing operations was $10.2 million, compared with cash use of $3.0 million in 2019. Accounts receivable growth used $16.2 million of cash, primarily due to higher sales and timing.
- Capital expenditures used $3.3 million; financing activities provided $24.8 million, including proceeds from the new senior facility. Cash increased by $31.7 million over the period.
- Reported long-term debt, net of discount and issuance costs, was $335.8 million. Principal outstanding was $312.5 million on the First Lien Term Loan and $30.0 million on the Senior Credit Facility. The latter bears 9.5% interest and ranks ahead of the term loan; respective maturities are August 2022 and May 2022. The prior revolving facility was terminated.
- Credit agreements impose restrictive covenants, including a requirement for at least $25 million of adjusted EBITDA over the previous four consecutive fiscal quarters. Management said available cash and operating cash flows were expected to fund debt service, operations, capital spending, leases and working capital, but gave no specific forward financial guidance.
Material changes, outlook and risks
- Management said customer demand remained below expectations, primarily due to COVID-19. Operations remained open as essential support to financial services, but branch closures or reduced hours, fewer new and replacement cards, and lower retail traffic weighed on some products. Future effects on demand, supply, staffing and financial performance remained uncertain.
- Debit and Credit benefited from contactless-card mix, pricing and higher personalization volumes; Prepaid Debit faced weaker volumes and unfavorable cost absorption. Management cautioned that COVID-related disruption could continue to affect sales, supply chain, costs and covenant compliance.
- A $6.0 million litigation settlement gain benefited 2019 nine-month results and did not recur in 2020. The 2019 comparison also included Canadian operations sold in April 2019.
- CPI recorded an estimated $2.1 million sales-tax liability at September 30, 2020 for historical activity in certain states. The estimate may change and could exceed the recorded amount; recoveries from customers may reduce expense when collection is probable. The company also revised prior-period statements for immaterial sales-tax and depreciation items.
- COVID-related changes in performance or valuation could require a goodwill impairment test; no triggering event requiring a quantitative test was identified as of September 30. Goodwill totaled $47.2 million, all in Debit and Credit.
- A derivative suit was settled and dismissed with prejudice in April 2020; the company agreed to governance reforms, with fees paid by its insurer. Management reported no liability for the settlement at period end. Disclosure controls were deemed effective.
Important facts for investors to verify
- Whether COVID-related demand and supply effects, including weaker Prepaid Debit and branch-dependent sales, persisted after quarter-end.
- Compliance with the $25 million adjusted EBITDA covenant and the company’s ability to service or refinance debt approaching 2022 maturities.
- The final amount and timing of historical state sales-tax exposure, including potential interest and penalties and customer recoveries.
- Cash conversion and working-capital trends, particularly collection of the sharply higher accounts receivable balance.
- The sustainability of margin improvements and the contribution of higher-priced dual-interface cards, government-disbursement work and other temporary or mix-related factors.
- Whether CARES Act tax benefits and the recorded income-tax receivable are realized as estimated, and whether COVID-related conditions prompt a goodwill impairment test.