CPI Card Group Inc. (Nasdaq: PMTS) — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparisons are to 2020. The filing also discusses fourth-quarter performance. CPI provides payment-card production, personalization, packaging, fulfillment and instant-issuance services. Its reportable segments are Debit and Credit, Prepaid Debit and Other (corporate expenses).
Financial performance
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net sales | $375.1 million | $312.2 million | +20.2% |
| Gross profit / margin | $141.4 million / 37.7% | $110.3 million / 35.3% | Margin +2.4 percentage points |
| Operating income / margin | $59.5 million / 15.9% | $38.4 million / 12.3% | +54.9% |
| Net income | $15.9 million | $16.1 million | −1.2% |
| Operating cash flow | $20.2 million | $22.1 million | −$1.9 million |
| Cash and cash equivalents at year-end | $20.7 million | $57.6 million | −$36.9 million |
- Annual product sales were $199.6 million (+16.1%); services sales were $175.5 million (+25.2%). Growth reflected higher contactless-card volumes, new customer onboarding, Card@Once sales, and prepaid customer replenishment and acquired portfolios.
- Debit and Credit sales rose 18.3% to $296.2 million; Prepaid Debit sales rose 24.6% to $79.2 million. Segment gross margins increased to 37.1% and 39.7%, respectively, partly reflecting higher volume and operating leverage, offset by labor-cost increases.
- Interest expense increased to $30.6 million from $25.4 million. The company also recorded a $5.0 million debt-extinguishment loss and $7.9 million of income-tax expense, versus a $3.3 million tax benefit in 2020. These items largely offset stronger operating results.
- Inventory increased $33.2 million to $58.0 million, as CPI built stock to mitigate supply constraints. Cash used in investing activities was $9.9 million, including $10.1 million of capital expenditures. Working capital was $80.9 million, down from $95.6 million.
Fourth-quarter results
- Net sales rose 10.8% to $93.2 million; Debit and Credit sales increased 11.3% to $77.4 million and Prepaid Debit sales increased 6.4% to $15.9 million.
- Gross profit was $30.9 million versus $31.0 million; gross margin declined to 33.2% from 36.8%, primarily due to higher labor costs.
- Operating income decreased to $9.2 million from $12.4 million. SG&A, excluding depreciation and amortization, increased to $20.3 million from $16.9 million, driven by compensation, healthcare, professional fees and compliance costs.
Debt, liquidity and capital
- In March 2021, CPI issued $310 million of 8.625% senior secured notes due 2026 and established a $50 million asset-based revolving credit facility (ABL). Proceeds and other funds refinanced prior facilities. At year-end, notes principal outstanding was $310 million; the ABL had no borrowings and $50 million of availability. Balance-sheet long-term debt, net of financing costs, was $303.6 million.
- Management said cash and expected operating cash flows should be adequate for debt service, operations, capital expenditures, leases and working capital, while noting this depends on generating excess operating cash flow. Projected principal and interest payments on borrowings totaled $431.4 million; $27.0 million of interest was expected over the next 12 months.
- After year-end, CPI announced a planned $20 million notes redemption at 103% of principal, to be funded with ABL borrowings. On March 3, 2022, it amended the ABL to increase capacity to $75 million and establish SOFR-based pricing.
- No cash dividends were expected in the near future; there were no share repurchases in 2021 or 2020.
Outlook, risks and unusual matters
- No specific quantitative revenue or earnings guidance is provided. Management expected labor and supply-chain pressures, higher input and shipping costs, and extended production lead times to continue through 2022 and possibly beyond. CPI warned that it may not pass all added costs to customers and that constraints could delay or cost it business.
- Management anticipated 2022 capital expenditures above 2021 levels to expand capacity, improve efficiency and broaden capabilities. Microchips were a key supply exposure: four suppliers provided about 92% of 2021 chip and antenna purchases, and one supplier about 64%. Recovered ocean-bound plastic for Second Wave cards also relied on a single supplier in Haiti.
- Customer concentration is significant: one customer represented approximately 18% of 2021 sales, and the top ten direct customers accounted for nearly two-thirds. Most customer arrangements do not guarantee medium- or long-term order volumes.
- Material internal-control issue: Management concluded internal control over financial reporting and disclosure controls were ineffective at December 31, 2021. KPMG issued an adverse opinion on internal control, citing material weaknesses involving risk assessment and staffing, revenue-system access and report changes, journal-entry review, sales-price accuracy, and purchasing approvals. The weaknesses did not result in identified material misstatements; management described remediation efforts. KPMG gave an unqualified opinion on the financial statements.
- Smart Packaging Solutions sued CPI in April 2021, alleging infringement of four antenna-related patents and seeking unspecified damages and equitable relief. CPI reported it could not estimate the outcome or possible loss and had recorded no liability.
- CPI recorded a $1.0 million estimated sales-tax liability at year-end and a $0.6 million sales-tax benefit in 2021. The estimate may change; the filing says the range of additional reasonably possible loss cannot be predicted.
- Other risks include substantial debt and restrictive covenants, inflation and customer demand, cyber and data-security exposure, PCI compliance, competition from digital payments, and majority ownership by the Tricor Funds (approximately 58% at year-end).
Key facts for investors to verify
- Progress and independent validation of remediation of the material weaknesses, including whether controls become effective.
- Whether inventory buffers and supplier alternatives can support demand, especially given microchip and Haiti-sourced material concentration, and how much cost inflation can be passed through.
- Customer retention, order volumes and concentration, particularly the 18% customer exposure and top-ten share of sales.
- Debt-service capacity and covenant headroom after the planned notes redemption and ABL increase, including actual borrowing costs and principal reduction.
- Developments in the patent litigation and the sales-tax liability, for which the filing provides no clear estimate of potential additional exposure.