CPI Card Group Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. The company provides payment-card products and services, including debit and credit cards, prepaid debit services, personalization, fulfillment and instant issuance. Amounts below are in U.S. dollars; financial figures are in millions unless noted.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $105.9 | $124.6 | $341.7 | $349.3 |
| Gross profit | $36.2 | $48.4 | $120.1 | $128.3 |
| Gross margin | 34.1% | 38.9% | 35.1% | 36.7% |
| Operating income | $13.0 | $23.4 | $51.1 | $56.5 |
| Net income | $3.9 | $11.9 | $21.3 | $24.1 |
| Diluted EPS | $0.33 | $1.01 | $1.79 | $2.05 |
| Operating cash flow | Not separately presented | Not separately presented | $22.3 | $11.7 |
- Q3 sales declined 15.0% year over year, primarily because of lower product volumes in Debit and Credit. Products revenue fell 22.2%; Services fell 5.3%.
- For the first nine months, sales declined 2.2%: Products fell 6.4%, partly offset by 4.1% growth in Services. Lower volumes were partly offset by price increases implemented primarily in 2022.
- Q3 gross profit declined 25.4% and net income declined 67.6%. Management cited lower sales and higher production costs for the quarterly gross-profit and margin decline. Nine-month margin pressure primarily reflected higher production costs.
- Segment sales in Q3 were $83.8 million for Debit and Credit (down 15.8%) and $22.3 million for Prepaid Debit (down 11.8%). Nine-month segment sales were $279.0 million (down 2.4%) and $63.3 million (down 1.1%), respectively. Prepaid Debit profitability was affected by lower volumes and increased labor and other costs associated with a production staffing-model change.
- Company-reported segment EBITDA, a non-GAAP measure, was $16.9 million in Q3 versus $27.2 million, and $62.7 million for nine months versus $67.0 million.
Cash, liquidity and debt
- Cash was $10.5 million at September 30, 2023, versus $11.0 million at year-end 2022. Working capital was $115.2 million, compared with $99.6 million at year-end.
- Nine-month operating cash flow was $22.3 million, up from $11.7 million. Collections on receivables and lower inventory purchases contributed; higher employee incentive payments partly offset the improvement. Capital expenditures were $6.1 million, compared with $14.4 million a year earlier.
- Cash used in financing was $16.9 million. The company paid $17.0 million of Senior Notes principal and $10.0 million on the ABL Revolver, while drawing $13.0 million on the revolver.
- Long-term debt, net of financing costs, was $272.7 million: $267.9 million of 8.625% Senior Notes due March 2026 and $8.0 million outstanding on the ABL Revolver. The revolver has stated capacity of $75 million; actual availability is subject to facility terms and borrowing-base limitations. Debt principal and interest payments are projected at $335.0 million in total, including $24.1 million of interest expected within 12 months.
- The balance sheet reported a stockholders’ deficit of $56.7 million. Management stated that cash, operating cash flow and current liquidity should be adequate for debt service and ongoing operating, capital and working-capital needs, while noting that this depends on generating excess operating cash flow.
Outlook, risks and unusual items
- The filing provides no specific numerical revenue, earnings or cash-flow guidance. Management described customer caution amid economic uncertainty, reduced card-program spending, and customer inventory reduction after supply-chain lead times improved. Banking-sector stress had also contributed to lower Debit and Credit demand.
- Key disclosed risks include customer demand and inventory-management variability; economic and banking-market conditions; supply-chain disruption and supplier concentration; production costs and execution; cybersecurity and operational interruptions; and substantial debt, debt-service needs and restrictive covenants.
- A patent suit by Smart Packaging Solutions alleges infringement involving contactless-card antenna technology. The court case is stayed pending patent review; three of four patents had been invalidated and one remained under review. The company had recorded no liability and said it could not estimate a possible loss.
- The company is participating in Delaware’s unclaimed-property voluntary disclosure program; any potential loss was not reasonably estimable. No material changes in internal control over financial reporting were reported, and management concluded disclosure controls were effective.
- The Q3 effective tax rate was 37.7%, versus 25.8% a year earlier; the nine-month rate was 30.5%, versus 28.5%. The company attributed the increase mainly to limits on executive-compensation tax deductions, with an additional quarterly comparison effect related to a prior-year valuation-allowance change.
Important facts for investors to verify
- Whether card volumes, especially Debit and Credit product demand, stabilize as customers work down inventories and respond to banking and economic conditions.
- Whether higher production and staffing costs persist and how they affect gross margins and segment profitability.
- Actual revolver availability, borrowing-base headroom, debt covenant compliance, and the company’s capacity to meet debt service through the 2026 Senior Notes maturity.
- Developments in the remaining patent review and the Delaware unclaimed-property matter, including any change in estimated exposure or recorded liability.
- Whether operating cash flow remains sufficient to fund working capital, investment and debt obligations; management’s liquidity assessment depends on future cash generation.