CPI Card Group Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. CPI provides payment-card products and services, primarily in the United States, through Debit and Credit, Prepaid Debit, and corporate segments. Amounts below are U.S. dollars in millions unless noted.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $115.0 | $113.3 | $235.8 | $224.7 |
| Gross profit | $40.8 | $40.6 | $83.9 | $79.8 |
| Gross margin | 35.5% | 35.8% | 35.6% | 35.5% |
| Operating income | $17.5 | $15.1 | $38.1 | $33.0 |
| Net income | $6.5 | $6.2 | $17.4 | $12.2 |
| Diluted EPS | $0.55 | $0.52 | $1.46 | $1.04 |
| Operating cash flow | Not presented separately | Not presented separately | $10.3 | $(8.1) |
Q2 revenue increased 1.5% year over year: services rose 15.0% to $51.0 million, while products fell 7.3% to $63.9 million. First-half sales increased 4.9%. First-half EBITDA, as defined by the company, was $45.8 million versus $39.8 million; Q2 EBITDA was $21.5 million versus $18.6 million.
Q2 net income grew 6.0%, while first-half net income rose 43.1%. Lower operating expenses and interest expense supported operating-income growth. The Q2 effective tax rate increased to 38.9% from 22.1%, primarily due to limits on executive-compensation tax deductions; first-half rates were 28.6% and 31.0%, respectively.
Liquidity, cash flow and debt
- At June 30, cash was $11.2 million; working capital was $116.3 million, compared with $99.6 million at year-end 2022. Current assets were $170.1 million and current liabilities $53.8 million.
- First-half operating cash flow was $10.3 million, versus cash used of $8.1 million a year earlier. Capital expenditures were $6.6 million, leaving approximately $3.7 million of operating cash flow after capital expenditures, a simple derived measure.
- Reported long-term debt, net of deferred financing costs, was $284.4 million. Principal outstanding was $270.0 million on 8.625% Senior Notes due March 2026 and $18.0 million under the ABL revolver. The revolver facility is $75 million; actual additional borrowing availability is not clearly stated.
- The company retired $15.0 million of Senior Notes principal in the first half. It reported projected principal and interest payments of $359.9 million over the debt term, including $24.7 million of interest expected in the next 12 months.
- Total assets were $300.1 million and stockholders’ deficit was $63.0 million. Management said operating cash flows and current cash were expected to cover debt service, operations, capital expenditures, leases, and working-capital needs, while noting this was not assured.
Changes, outlook and risks
- Management attributed first-half sales growth mainly to Debit and Credit personalization, Card@Once services, contactless cards, and price increases. Q2 Debit and Credit sales slipped 1.0%, reflecting lower product volumes, including lower eco-focused card volumes; higher personalization and Card@Once services partly offset the decline.
- Prepaid Debit Q2 sales increased 13.6%, primarily from higher volumes with existing customers. First-half Prepaid Debit gross profit and margin declined, in part due to costs of changing the production staffing model.
- Management cited economic slowdown and banking-sector uncertainty as factors contributing to weaker demand in Debit and Credit. It also warned that customers may reduce inventories built up during 2022 as supply-chain lead times improve. No specific financial guidance or numerical outlook is provided in the filing text.
- Key stated risks include customer and card-program demand, bank and financial-market disruptions, customer inventory practices, supply-chain constraints and costs, cybersecurity, and substantial indebtedness. The 8.625% notes and variable-rate ABL borrowing expose the company to significant debt-service requirements.
- A patent suit by Smart Packaging Solutions alleges infringement involving antenna technology. The case is stayed; two of four patents had been invalidated in patent-office review and two remained under review through September 2023. The company recorded no liability and said the possible loss could not be estimated. A Delaware unclaimed-property voluntary disclosure review also remains underway, with potential loss not reasonably estimable.
- Management reported disclosure controls were effective as of June 30, 2023, and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Confirm subsequent-quarter sales, especially Debit and Credit product volumes, customer inventory levels, and personalization and Card@Once demand.
- Track cash conversion, inventory and accrued-liability movements, and capital spending against operating cash flow.
- Review ABL borrowing availability and covenants, debt repayment or refinancing plans, and the cost of servicing the 8.625% notes.
- Check the outcome of the remaining patent reviews and any developments in the unclaimed-property disclosure process.
- Assess whether customer demand, banking-sector conditions, and the staffing-model transition affect margins and management’s cash-flow expectations.