CPI Card Group Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed March 6, 2020. Results below are generally for continuing operations unless noted. The filing also reports fourth-quarter results.
Business context
CPI provides payment cards and related personalization, packaging, fulfillment, and instant-issuance services. Its reportable segments are U.S. Debit and Credit, U.S. Prepaid Debit, and Other. It serves more than 2,000 direct customers. The Canadian subsidiary was sold on April 1, 2019; the U.K. business had been sold in 2018 and is presented as discontinued operations.
Financial results and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Net sales | $278.1 million | $255.8 million |
| Gross profit / margin | $91.3 million / 32.8% | $78.6 million / 30.7% |
| Operating income / margin | $25.5 million / 9.2% | $4.6 million / 1.8% |
| Net loss from continuing operations | $4.3 million | $14.8 million |
| Total net loss, including discontinued operations | $4.5 million | $37.5 million |
| Cash from operating activities, continuing operations | $3.0 million | $7.1 million |
- Product sales rose 15.1% to $143.9 million; services sales rose 2.6% to $134.1 million.
- Segment EBITDA, as defined by the company, was $41.2 million versus $22.7 million. This is a non-GAAP segment measure, not net income.
- Cash and cash equivalents were $18.7 million at year-end, down from $20.3 million. Working capital was $52.4 million, versus $43.2 million.
- Capital expenditures were $4.2 million. Inventory increased $10.4 million, a principal factor in lower operating cash flow.
- First Lien Term Loan principal was $312.5 million (balance-sheet debt, net of unamortized discounts and costs, was $307.8 million); year-end rate was 6.71%. Net leverage was 8.0 times adjusted EBITDA under the loan definition. Cash interest paid was $23.0 million.
- The filing says the company was covenant-compliant at December 31, 2019 and had no required excess-cash-flow payment related to 2019.
Material changes and fourth quarter
- Sales increased 8.7% year over year, led by U.S. Debit and Credit, up 19.3%, reflecting higher dual-interface EMV card volumes and personalization and fulfillment sales, including Card@Once. Its gross margin rose to 31.2% from 28.0%.
- U.S. Prepaid Debit sales declined 7.0% to $64.3 million; the company cited lower customer volumes, particularly in Q4, and prior-year portfolio wins that did not recur.
- Q4 consolidated sales rose 6.0% year over year. U.S. Debit and Credit sales increased 24.2%, while U.S. Prepaid Debit sales fell 34.6% to $11.2 million, which management attributed to customer-order timing. Q4 operating income was $3.9 million, versus an operating loss of $0.4 million a year earlier.
- Operating results included a $6.0 million cash litigation-settlement gain. Excluding this unusual item, reported operating income and year-over-year improvement would have been lower.
- The FY 2018 comparison includes $22.7 million of discontinued-operation net loss, principally associated with the U.K. disposal, including impairment and sale losses. The Canadian sale generated $1.5 million of cash proceeds in 2019.
Outlook, risks, contingencies, and other items
- Outlook: The filing provides no quantified forward guidance. Management said existing cash and operating cash flows were expected to be adequate for debt service, operations, capital expenditures, leases, and working capital, while cautioning that it could not provide assurance.
- Subsequent financing: On March 6, 2020, the company entered into a $30 million super-senior term facility, senior in priority to the $312.5 million First Lien Term Loan, and terminated its revolving facility. The new loan matures May 17, 2022, bears floating interest at Eurodollar plus 8.5% or base rate plus 7.5%, and requires at least $25 million of defined adjusted EBITDA for each applicable trailing-four-quarter test period beginning March 31, 2020. Early prepayments before February 15, 2022 may incur a make-whole premium.
- Key risks: High leverage, floating-rate interest expense, restrictive debt covenants and refinancing needs; customer and supplier concentration; cybersecurity, privacy, and payment-brand compliance; manufacturing or supply-chain disruption; competition and technology shifts, including mobile payments; and economic or trade-related pressures. The top customer accounted for about 18% of 2019 sales and the top five about 42%; four principal suppliers provided approximately 91% of purchased microchips.
- Tax and legal: The company recorded $3.7 million of income tax expense despite a $0.7 million pretax loss, including a $3.2 million partial valuation allowance related to interest-deduction limitations. The derivative suit settlement was preliminarily approved, with final court approval pending as of the filing; the insurer was to pay counsel fees and expenses. In a separate patent matter, the PTAB found the asserted patent claims unpatentable; the company appealed, and the appeal decision was pending.
- Trading and controls: The shares were suspended from Nasdaq in January 2020 and began OTCQX quotation; they remained listed on the TSX. Management concluded disclosure controls and internal control over financial reporting were effective at year-end. The auditor did not attest to internal control effectiveness.
Most important facts for investors to verify
- Review the March 2020 super-senior financing terms, liquidity runway, interest burden, covenant calculations, and ability to meet the $25 million EBITDA test.
- Assess whether operating cash generation can improve after the 2019 inventory build and whether reported profitability is sustainable without the $6.0 million settlement gain.
- Track recovery or further weakness in U.S. Prepaid Debit, customer-order timing, and concentration among major customers and chip suppliers.
- Check subsequent status of the derivative settlement and patent appeal, along with payment-brand compliance and any cybersecurity or supply interruptions.
- Confirm current trading venue, liquidity, and listing status; the filing describes a January 2020 Nasdaq suspension and OTCQX quotation.