CPI Card Group Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods. Unless noted otherwise, amounts are USD millions. CPI designs, manufactures, personalizes and fulfills payment cards, serving financial institutions and prepaid debit programs through its Debit and Credit and Prepaid Debit segments.
Financial performance
| Metric | Q3 2021 | Q3 2020 | First nine months 2021 | First nine months 2020 |
|---|---|---|---|---|
| Net sales | $99.6 | $82.7 | $281.9 | $228.0 |
| Gross profit | $37.7 | $30.6 | $110.5 | $79.3 |
| Gross margin | 37.8% | 37.0% | 39.2% | 34.8% |
| Operating income | $16.7 | $13.5 | $50.3 | $26.0 |
| Net income | $6.6 | $5.8 | $15.3 | $8.8 |
| Diluted EPS | $0.56 | $0.52 | $1.30 | $0.79 |
| Segment EBITDA | $20.3 | $17.5 | $56.8 | $38.3 |
Q3 sales rose 20.4%, led by Debit and Credit growth of 21.4% and Prepaid Debit growth of 14.0%. Management attributed growth to contactless-card adoption, new customers, higher instant-issuance sales and replenishment of prepaid customer inventories. Q3 operating margin was 16.8%, versus 16.3% a year earlier. Higher revenue and operating leverage lifted gross profit, while labor costs and higher corporate expenses partially offset gains. Nine-month sales increased 23.6%; nine-month results also reflect a $5.0 million debt-extinguishment loss.
Cash flow, debt and liquidity
- Cash provided by operating activities was $14.5 million for the first nine months, compared with $10.2 million in 2020. The increase reflected higher earnings and $9.8 million of income-tax refunds, partly offset by a $21.8 million inventory build and other working-capital uses.
- Capital expenditures were $4.8 million; cash used in investing activities was $4.7 million. Cash declined by $36.8 million during the period to $20.9 million at September 30, 2021.
- Long-term debt, net of financing costs, was $303.3 million, comprising $310 million principal of 8.625% senior secured notes due March 2026. Cash plus debt implies net debt of approximately $282.4 million. The company reported no ABL borrowings and $50 million of stated availability under its revolver, subject to the borrowing base and facility terms.
- In March 2021, CPI issued the notes and entered a $50 million ABL revolver, using proceeds and cash to repay its prior term loan and senior credit facility. Refinancing-related charges included a $2.6 million make-whole premium and $5.0 million loss on debt extinguishment. Notes and revolver include restrictive covenants and specified circumstances requiring offers to repay notes.
- Current assets were $138.0 million and current liabilities $51.9 million at September 30. The company said cash flows and cash on hand should be adequate for debt service, operations, capital spending, leases and working capital, while noting this is not assured.
Outlook, risks and unusual items
- No numerical revenue, earnings or margin guidance is provided. Management expected labor and supply-chain challenges and related costs to increase through Q4 2021 and beyond; it may not pass all cost increases to customers. Elevated demand and staffing/material constraints were extending production lead times and could delay or lose customer opportunities.
- COVID-related supply constraints included longer lead times and higher costs for raw materials and components, a global chip shortage, shipping delays and labor availability issues. The filing also flagged potential added costs and labor disruption from the proposed OSHA vaccination/testing standard.
- Management identified material weaknesses in internal controls involving IT user-access privileges and review/authorization of certain purchasing and revenue transactions. Disclosure controls were deemed ineffective as of September 30, 2021; no resulting financial statement misstatement had been identified. Remediation was underway, but the company gave no assurance it would be sufficient.
- Smart Packaging Solutions sued CPI over four patents relating to antenna technology used in contactless products, seeking unspecified damages and equitable relief. CPI intended to defend the case; the outcome and possible loss could not be estimated, and no liability was recorded.
- A $1.2 million estimated sales-tax liability remained recorded; further exposure could not be reasonably estimated. The filing also cites $1.1 million of executive severance expense in the nine-month period and $1.1 million in Q3, as well as increased compliance-related compensation and fees.
Important facts for investors to verify
- Whether supply, labor and chip constraints, higher input costs and extended lead times affect Q4 delivery, margins or customer retention.
- Progress in remediating the material weaknesses ahead of the company’s accelerated-filer and auditor-attestation requirements.
- Debt-service capacity, ABL borrowing-base availability, covenant compliance and any required excess-cash-flow repayments.
- Developments in the patent litigation and changes to the sales-tax estimate or other contingencies.
- Whether sales growth and operating leverage persist after the prior-year COVID-related demand weakness and customer inventory replenishment.