CPI Card Group Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. CPI is a payment technology company providing financial payment cards, card personalization and fulfillment, prepaid debit services, and instant card issuance. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $71.4 | $66.9 | $145.3 | $133.8 |
| Gross profit / margin | $23.2 / 32.4% | $22.4 / 33.5% | $48.9 / 33.6% | $43.9 / 32.8% |
| Operating income / margin | $2.5 / 3.5% | $10.1 / 15.1% | $10.2 / 7.0% | $13.7 / 10.2% |
| Segment EBITDA | $6.6 | $13.0 | $18.4 | $20.9 |
| Net income (loss) | $0.1 | $1.5 | $2.5 | $(1.5) |
| Diluted earnings (loss) per share | $0.01 | $0.14 | $0.22 | $(0.14) |
At June 30, cash and cash equivalents were $54.4 million, current assets $132.2 million, and current liabilities $44.9 million. Working capital was $87.4 million. Long-term debt carrying value was $334.8 million; principal included a $312.5 million First Lien Term Loan and $30.0 million Senior Credit Facility. The respective stated rates were 6.38% and 9.50%. The term loan matures August 2022 and the senior facility May 2022. Six-month net interest expense was $12.9 million.
For the six months, operating activities provided $12.0 million, investing activities used $1.6 million, and financing activities provided $25.4 million. Cash increased by $35.8 million from year-end 2019. Capital expenditures were $1.6 million, and cash interest paid was $11.5 million.
Material changes versus comparable periods
- Q2 sales rose 6.7%; first-half sales rose 8.7%. Debit and Credit sales increased 14.1% in Q2 and 18.1% year to date, supported by dual-interface EMV cards, Second Wave cards, on-demand personalization, and government disbursement work.
- Prepaid Debit sales fell 15.2% in Q2 and 14.2% for the first half. Management attributed weakness principally to COVID-19-related reductions in retail traffic and, for the first half, the prior-year benefit from regulatory-related customer activity.
- First-half gross profit and gross margin improved, driven by Debit and Credit. Q2 gross margin declined year over year as Prepaid Debit sales weakness reduced cost absorption.
- Operating income was lower despite higher sales. Comparisons were affected by a $6.0 million litigation settlement gain recorded in Q2 2019 and a $2.7 million estimated sales-tax expense recorded in Q2 2020.
- First-half continuing-operations net income improved from a $1.5 million loss to $2.6 million income, helped by higher sales and a larger tax benefit. The 2020 tax benefit included CARES Act-related benefits; the effective tax rate was unusually high at 191.5%.
Outlook, risks, and unusual items
- No specific revenue, earnings, or cash-flow guidance is provided. Management said COVID-19’s longer-term effects remain uncertain. Operations remained open as essential services, but the company reported lower-than-expected demand and warned of possible further effects from customer demand, supply constraints, workforce impacts, and economic conditions.
- The company stated that cash and expected operating cash flows should be adequate for debt service, operations, capital expenditures, lease obligations, and working capital, while noting this is not assured. Debt agreements restrict certain actions and require at least $25 million of defined adjusted EBITDA for the preceding four consecutive quarters at applicable quarter-ends. The filing does not state the company’s covenant calculation or clearly report covenant headroom.
- The $2.7 million estimated sales-tax liability relates to states where the company is evaluating economic nexus and customer exemption documentation. Management expects the estimate to change and says it could exceed the recorded amount; potential customer recoveries could reduce future expense.
- The company applied for CARES Act tax relief and deferred employer Social Security payments. Eligibility and the ultimate benefit are not assured. The income-tax receivable was $9.4 million at June 30 and related primarily to prior-year federal tax receivables, including anticipated NOL carrybacks.
- COVID-19-related deterioration could trigger a quantitative goodwill impairment test in future periods; no triggering event requiring such a test was identified at June 30. Goodwill was $47.2 million.
- A shareholder derivative suit was settled and dismissed with prejudice in April 2020; the company agreed to governance reforms, and its insurer covered plaintiff counsel fees. The company also disclosed routine legal matters that it did not expect to have a material adverse effect.
Most important facts for investors to verify
- Whether the $2.7 million sales-tax estimate increases, and the extent to which customer exemption evidence or recoveries change the exposure.
- COVID-19’s continuing effect on card volumes, prepaid retail activity, customer orders, suppliers, and operating costs.
- Defined adjusted EBITDA compliance with the $25 million rolling-four-quarter covenant and the company’s available covenant headroom.
- Debt service and refinancing capacity ahead of the 2022 facility maturities, given substantial debt and stated interest costs.
- The realization and timing of CARES Act tax benefits and the $9.4 million income-tax receivable.
- Whether weaker performance or changed market conditions require a goodwill impairment assessment.