CPI Card Group Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Unless otherwise noted, financial amounts are in millions of dollars; the filing reports them in thousands. CPI provides payment-card products and services, including debit, credit, prepaid debit, personalization, and instant issuance solutions.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $89.1 | $74.0 | +20.4% |
| Gross profit / margin | $35.7 / 40.1% | $25.6 / 34.7% | +39.3%; +5.4 percentage points |
| Operating income / margin | $17.8 / 19.9% | $7.5 / 10.1% | +136.9%; +9.8 percentage points |
| Net income | $2.4 | $1.8 | +37.2% |
| Diluted EPS | $0.21 | $0.16 | +$0.05 |
| Segment EBITDA | $17.0 | $11.6 | +45.7% |
| Cash from operating activities | $0.1 | $3.2 | Down $3.1 |
| Capital expenditures | $2.5 | $0.9 | Up $1.6 |
Sales growth reflected higher contactless dual-interface card volumes, new customers, increased personalization and instant-issuance activity, government disbursement work, and prepaid debit portfolio wins. Both reportable segments improved gross profit and operating income, aided by higher volumes and operating leverage. Interest expense rose to $9.0 million from $6.1 million; Q1 2021 also included a $5.0 million debt-extinguishment loss and a $2.6 million make-whole premium. The 2020 comparison included a CARES Act tax benefit; Q1 2021 income tax expense was $1.4 million (36.1% effective rate), versus a $0.5 million benefit in 2020.
Balance sheet, debt and liquidity
- At March 31, cash was $24.9 million, down from $57.6 million at year-end 2020. Current assets were $133.2 million and current liabilities $45.7 million.
- Reported long-term debt was $317.5 million, net of deferred financing costs; debt principal comprised $310 million of 8.625% senior secured notes due 2026 and $15 million drawn on a $50 million asset-based revolver. The revolver is subject to a borrowing base.
- On March 15, CPI issued the notes and established the revolver, using proceeds, cash on hand and revolver borrowings to repay and terminate its prior term loan and senior credit facility. The refinancing generated $5.0 million of extinguishment loss and $9.5 million of debt issuance costs.
- Operating cash flow was limited by working-capital investment, including increases in receivables and inventory. Inventory rose to $33.5 million from $24.8 million, in part to support expected demand and mitigate potential supply constraints.
- Management stated that cash, together with expected operating cash flows, should be adequate for debt service, operations, capital spending, lease obligations and working capital, while cautioning that it could not provide assurance.
Outlook, risks and unusual items
- The filing provides no specific financial guidance or quantified outlook. Management says the effects of COVID-19 remain uncertain. Supply-chain constraints and higher raw-material prices, labor availability, costs and turnover may continue; all operations remained open.
- Debt agreements impose restrictive covenants, including limits on additional debt, liens, distributions, investments and asset transfers. If revolver availability falls below $5 million, borrowing is subject to a fixed-charge-coverage test. The notes may require early repayment after specified events, including certain asset sales, change of control, or an annual excess-cash-flow calculation.
- On April 20, 2021, Smart Packaging Solutions filed a patent-infringement suit alleging infringement of four antenna-technology patents and seeking unspecified damages and equitable relief. CPI had not been formally served, intends to defend the case, and recorded no liability; potential exposure was not reliably estimable.
- CPI accrued $1.8 million for estimated historical state sales taxes, interest and penalties, up from $1.7 million at year-end. The estimate may change and may exceed the recorded amount.
- COVID-related supply and labor effects, customer demand, substantial indebtedness, covenant compliance, cybersecurity, production disruption, competition, and legal and tax matters are among the risks identified. No material off-balance-sheet arrangements were reported.
Most important facts for investors to verify
- Whether revenue growth and margin improvement persist after the quarter’s government-disbursement work and favorable volume mix.
- Working-capital conversion and cash generation, given the sharp decline in operating cash flow and higher inventory and receivables.
- Debt-service capacity under the new 8.625% notes, revolver borrowing-base availability, covenant headroom, and any excess-cash-flow repayment requirement.
- Potential cost and outcome of the patent litigation and the eventual amount of historical sales-tax liabilities.
- Whether supply-chain, raw-material pricing and labor pressures affect costs, service levels, or growth.