CPI Card Group Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; filed August 8, 2022. CPI Card Group provides payment-card products and related personalization, fulfillment, and instant-issuance services, primarily in the United States.
Financial performance
Amounts are in millions of dollars except per-share data. Comparisons are with the corresponding 2021 period.
| Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 |
|---|---|---|---|---|
| Net sales | $113.3 | $93.2 | $224.7 | $182.3 |
| Gross profit / margin | $40.6 / 35.8% | $37.1 / 39.8% | $79.8 / 35.5% | $72.8 / 39.9% |
| Operating income / margin | $15.1 / 13.3% | $15.8 / 16.9% | $33.0 / 14.7% | $33.6 / 18.4% |
| Net income | $6.2 | $6.2 | $12.2 | $8.6 |
| Diluted EPS | $0.52 | $0.53 | $1.04 | $0.74 |
| Operating cash flow | Not separately presented for Q2 | $(8.1) | $22.7 |
Q2 sales grew 21.6%, led by Products, while Services declined. For the first half, sales increased 23.3%; products rose to $137.3 million from $94.2 million, while services were nearly flat at $87.5 million versus $88.1 million. First-half net income improved primarily because of sales growth and lower prior-year debt-refinancing costs. Q2 net income was essentially flat despite higher sales, as increased material, labor, and SG&A expenses offset growth.
Q2 gross margin contracted 4.0 percentage points year over year. Debit and Credit sales rose 29.3% in Q2, but segment gross margin declined to 36.2% from 38.8%. Prepaid Debit sales fell 5.7%, and its gross margin declined to 33.6% from 43.3%. Management attributed margin pressure principally to higher materials and labor costs.
Liquidity, cash flow, and debt
- Cash was $9.1 million at June 30, down from $20.7 million at year-end 2021. Working capital was $99.4 million, up from $80.9 million.
- First-half operating cash flow was negative $8.1 million, versus positive $22.7 million a year earlier. Higher receivables ($12.3 million) and inventories ($17.9 million) were major uses of cash; inventory included purchases to mitigate supply constraints.
- Capital expenditures were $8.2 million, compared with $3.7 million in H1 2021. Cash declined by $11.6 million during the first half.
- At quarter-end, principal debt comprised $290 million of 8.625% Senior Notes due 2026 and $25 million drawn on the ABL Revolver. The balance-sheet debt carrying value was $309.7 million, net of deferred financing costs. The revolver had $50 million available, subject to borrowing-base and other restrictions.
- In March 2022, CPI redeemed $20 million of Senior Notes at 103% of principal, funded with revolver borrowings. The company reported projected principal and interest payments of $417.1 million on borrowings, including $26 million of interest expected over the next 12 months.
Outlook, risks, and unusual items
- No quantified revenue or earnings guidance is provided. Management said labor, supply-chain, and inflationary pressures may continue through 2022 and possibly beyond, and that cost inflation could affect profitability.
- COVID-19-related disruption, labor availability, longer production lead times, material shortages and higher freight costs remain concerns. Management also highlighted the global microchip shortage and potential constraints on contact-chip supply, as well as uncertainty sourcing recovered ocean-bound plastic from Haiti for Second Wave cards.
- The company said it believes cash from operations and current cash resources will be adequate for debt service, operations, capital expenditures, leases, and working capital, but gave no assurance.
- Disclosure controls and procedures were deemed ineffective at June 30 because of previously reported material weaknesses in internal control over financial reporting. Remediation work was ongoing; management reported no resulting material misstatements or changes to previously reported results.
- A patent-infringement suit concerning antenna technology is stayed pending patent-office reexaminations. The company could not estimate a possible loss and recorded no liability. An estimated $0.9 million sales-tax liability was accrued; the amount may change.
- The Russia-Ukraine conflict had not materially affected results or financial condition as of the filing, but CPI cited possible further supply, inflation, trade, and cybersecurity effects. The company also had a second CARES Act employer Social Security tax installment due by the end of 2022 that remained unpaid at June 30.
Investor facts to verify
- Whether sales growth can be sustained while gross margins recover from higher input and labor costs.
- Whether receivables and inventory convert to cash and operating cash flow improves after the first-half working-capital outflow.
- Revolver availability and borrowing-base headroom, covenant compliance, and the company’s capacity to service substantial fixed-rate debt.
- Progress and testing of internal-control remediation, including whether material weaknesses are resolved.
- Developments in the patent case, sales-tax estimates, and supply availability for chips and recovered-plastic materials.