CPI Card Group Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. Unless otherwise noted, financial amounts are in millions of dollars. CPI designs, produces, personalizes, packages and fulfills payment cards and related products and services, primarily in the U.S. and Canada.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $71.0 | $61.0 | $187.3 | $166.3 |
| Gross profit / margin | $23.3 / 32.8% | $19.4 / 31.9% | $57.6 / 30.8% | $50.8 / 30.5% |
| Operating income / margin | $4.7 / 6.6% | $3.4 / 5.5% | $5.0 / 2.7% | $2.2 / 1.3% |
| Continuing-operations net loss | $(1.1) | $(0.8) | $(7.6) | $(8.7) |
| Net loss, including discontinued operation | $(6.1) | $(0.7) | $(30.1) | $(7.4) |
| Basic and diluted loss per share | $(0.55) | $(0.06) | $(2.70) | $(0.67) |
| Segment EBITDA, continuing operations | $9.0 | $7.9 | $18.9 | $15.6 |
- Revenue mix: Q3 product sales were $34.7 million and services were $36.3 million. Sales rose 16.4% in Q3 and 12.7% year to date. U.S. Debit and Credit and U.S. Prepaid Debit both grew; U.S. Prepaid Debit increased 27.4% year to date, mainly from new portfolio wins with existing customers.
- Profitability: Q3 gross profit and operating income improved, supported by higher sales, emerging products and solutions, and better cost absorption. Nine-month operating income also increased, though restructuring charges and higher operating expenses weighed on results.
- Cash flow: Continuing operations used $1.8 million of operating cash in the first nine months, compared with $4.1 million used in 2017. Continuing-operations capital expenditures were $5.0 million. Cash declined $10.4 million from year-end to $12.8 million; discontinued operations used a further $2.9 million of operating cash.
- Debt and liquidity: The term loan principal was $312.5 million ($305.3 million carrying value) at a 7.02% rate, versus 5.96% at year-end 2017. Cash was $12.8 million; $19.95 million was available under the revolver, with additional availability subject to leverage conditions. The company reported covenant compliance and did not expect a 2018 excess-cash-flow prepayment. The term loan matures in 2022 and the revolver in 2020.
- Balance sheet: Total assets were $207.1 million and total liabilities $349.5 million at September 30; stockholders’ deficit was $142.3 million.
Material changes and unusual items
- CPI completed the sale of its U.K. retail-card operations on August 3, 2018, and reports the business as discontinued. Consideration was approximately $4.5 million; net cash proceeds were $0.3 million after repayment of associated liabilities, excluding tax benefits. The sale and related operations contributed a $22.6 million nine-month discontinued-operations net loss, including a $7.2 million loss on sale, $7.6 million of impairment charges, and a $4.0 million foreign-currency translation adjustment released to earnings.
- Continuing-operations revenue increased, but card pricing remained under pressure: excluding dual-interface EMV cards, Q3 EMV card volume increased to 22.1 million from 19.5 million while average selling price fell to $0.77 from $0.86. For the nine months, volume was 57.7 million versus 56.6 million and ASP was $0.78 versus $0.85.
- The company decided to consolidate three U.S. personalization operations into two facilities. Nine-month charges included $2.4 million of accelerated depreciation, $0.6 million of severance and $0.4 million of lease termination costs.
- CPI adopted ASC 606 using the modified retrospective method from January 1, 2018; prior-year comparative results were not restated. The new rules generally recognize certain card-production revenue over time. For the first nine months, reported revenue was $2.9 million lower for products and $1.2 million higher for services than it would have been without adoption; gross profit was $0.6 million higher.
- No dividends were declared in the periods reported for 2018; the quarterly dividend program had been discontinued in August 2017.
Outlook, risks and contingencies
The filing provides no numerical financial guidance. Management stated that operating cash flows, cash on hand and available borrowing capacity were expected to be adequate for debt service, capital expenditures, leases, working capital and ongoing operations, while noting no assurance. Risks include substantial debt and interest expense, competitive and pricing pressure, customer retention and demand, operational and cybersecurity disruptions, card-brand certification requirements, supplier dependence, and legal and regulatory matters. Management reported no material change in previously disclosed risk factors.
- The proposed settlement of the securities class action was awaiting court approval; a settlement hearing was scheduled for February 5, 2019. CPI recorded an immaterial estimated liability at September 30, 2018.
- A related derivative suit was stayed pending final determination of the class action. Separate patent and trade-secret litigation remained ongoing; the patent case was stayed pending a Patent Trial and Appeal Board decision expected by January 2019.
- Management concluded disclosure controls were effective as of September 30, 2018. The filing reports no material off-balance-sheet arrangements.
Key facts for investors to verify
- Whether continuing-operations growth and margin gains persist despite declining EMV card ASPs and increased operating and interest costs.
- Cash conversion, working-capital needs, revolver availability and compliance with debt covenants, given the debt load and limited cash balance.
- The final cash and tax effects of the U.K. disposal and whether discontinued-operation losses are fully reflected in future comparisons.
- The effects of ASC 606 on revenue timing and comparability with prior periods.
- Final approval and cost of the securities litigation settlement, and developments in the other legal proceedings.