CPI Card Group Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. CPI provides payment-card products and services, including debit and credit cards, prepaid debit card services, personalization and instant issuance. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $93.2 | $71.4 | $182.3 | $145.3 |
| Gross profit | $37.1 | $23.1 | $72.8 | $48.7 |
| Gross margin | 39.8% | 32.3% | 39.9% | 33.5% |
| Operating income | $15.8 | $5.0 | $33.6 | $12.5 |
| Net income | $6.2 | $1.3 | $8.6 | $3.0 |
| Diluted EPS | $0.53 | $0.11 | $0.74 | $0.27 |
| Operating cash flow | Not presented separately | Not presented separately | $22.7 | $12.0 |
- Q2 revenue rose 30.6% year over year. Debit and Credit revenue increased 25.0% to $72.9 million; Prepaid Debit increased 50.6% to $20.4 million.
- For the first half, gross margin improved to 39.9% from 33.5%, while operating margin rose to 18.4% from 8.6%. Management attributed improvement primarily to higher volumes, customer growth, contactless-card mix and operating leverage.
- Six-month interest expense was $16.0 million, versus $12.9 million. The company also recorded a $5.0 million debt-extinguishment loss and a $2.6 million make-whole premium associated with refinancing.
- Cash and equivalents were $30.7 million at June 30, down from $57.6 million at year-end. Current assets were $135.5 million and current liabilities $53.7 million. Operating cash flow was partly offset by $3.5 million of investing outflows and $46.1 million of financing outflows, including debt refinancing costs and repayments.
- At June 30, debt consisted of $310 million principal amount of 8.625% senior secured notes due 2026; reported long-term debt, net of financing costs, was $302.9 million. There were no ABL Revolver borrowings, with $50 million available subject to the borrowing base. The notes are secured and subject to restrictive covenants.
- Total assets were $248.4 million and stockholders’ deficit was $129.3 million at June 30.
Material changes and unusual items
- In March 2021, CPI issued $310 million of 8.625% senior notes and entered a $50 million asset-based revolving facility, using proceeds, cash and initial revolver borrowings to retire its prior term loan and senior credit facility. CPI later repaid the $15 million revolver draw in Q2.
- Six-month operating cash flow benefited from higher earnings and tax-refund collections, but was reduced by a $15.6 million inventory build, including purchases to address anticipated demand and supply constraints.
- Prior-year figures were revised for immaterial sales-tax and depreciation items; the filing says the adjustments did not materially affect the statements.
Outlook, management commentary and risks
- The filing provides no quantified revenue or earnings guidance. Management said increased demand, production lead times, labor constraints and supply-chain pressures were expected to continue through the second half of 2021 and beyond.
- Higher raw-material, component and labor costs, shipping delays, hiring challenges and a global chip shortage may pressure margins and delivery performance. CPI may be unable to pass all cost increases on to customers. Chip availability could also force migration to more expensive products.
- Supply of recovered ocean-bound plastic used in Second Wave cards may be affected by political unrest in Haiti and reliance on single-source suppliers.
- CPI reported a patent-infringement suit filed by Smart Packaging Solutions concerning antenna technology used in contactless products. Damages sought were unspecified; CPI had not been formally served and had recorded no liability because the outcome could not be reliably estimated. CPI said it intended to defend the case.
- The estimated historical sales-tax liability was $1.5 million at June 30 and may change or exceed the estimate. The company recorded a $0.5 million sales-tax benefit in the first half from customer recoveries and changes in the estimate.
- CPI expected to become an accelerated filer effective December 31, 2021, bringing an external audit of internal controls under Sarbanes-Oxley Section 404 and added compliance costs. Management reported disclosure controls were effective at June 30, 2021.
Important facts for investors to verify
- Whether card demand, contactless-card growth and customer replenishment remain strong, and whether reported margin gains persist.
- How labor, chip, raw-material and shipping constraints affect production capacity, delivery, customer retention and cost pass-through.
- Debt-service capacity under the 8.625% notes, ABL borrowing-base availability, covenant terms and future excess-cash-flow repayment obligations.
- Developments in the patent litigation and the estimated sales-tax exposure.
- Progress and costs of accelerated-filer and Section 404 compliance.