CPI Card Group Inc. — Q1 2019 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2019, compared with Q1 2018. CPI designs, manufactures, personalizes, packages and fulfills payment cards, with a smaller gift- and loyalty-card business. The U.K. business is presented as discontinued operations. The sale of the Canadian subsidiary closed April 1, 2019, after quarter-end; management expected no material cash or gain/loss impact.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $66.9 million | $54.9 million |
| Gross profit / margin | $21.5 million / 32.2% | $14.4 million / 26.3% |
| Operating income (loss) / margin | $3.6 million / 5.3% | ($2.4) million / (4.3)% |
| Segment EBITDA (company-defined) | $7.9 million | $2.8 million |
| Net loss from continuing operations | ($3.1) million | ($5.7) million |
| Net loss / diluted loss per share | ($3.1) million / ($0.27) | ($7.3) million / ($0.65) |
| Cash used in operating activities, continuing operations | $10.2 million | $1.6 million |
At March 31, 2019, cash was $7.9 million; total assets were $205.6 million and stockholders’ deficit was $152.5 million. Long-term debt was $306.3 million net of discounts and financing costs ($312.5 million principal); the term-loan rate was 7.35%. Net interest expense was $6.3 million. The company reported $19.95 million of revolver availability, no revolver borrowings outstanding, and a 9.9x net leverage ratio. Additional borrowing beyond stated availability is subject to facility terms, including a 7.0x leverage condition. The company said it was covenant-compliant.
Cash used in investing activities was $2.1 million, primarily capital expenditures. The company borrowed and repaid $5.0 million on its revolver during the quarter. Operating cash use reflected incentive-compensation payments, higher inventory to support growth and higher receivables. Current assets were $77.7 million and current liabilities were $36.3 million.
Changes versus the prior comparable period
- Sales rose 21.9%, led by U.S. Debit and Credit, up 31.7% to $48.9 million, mainly from higher EMV card production—including dual-interface cards—and personalization and fulfillment. U.S. Prepaid Debit sales increased 7.9% to $16.7 million. “Other” sales declined 37.8% to $1.7 million.
- Gross margin improved to 32.2% from 26.3%. Management attributed improvement to product mix, overhead absorption, lower depreciation following the prior-year facility consolidation, and cost initiatives.
- Operating income improved from a loss to a profit. Higher sales and gross profit were partly offset by higher operating expenses and interest expense. The prior-year quarter included $0.8 million of accelerated depreciation and $0.3 million of severance related to U.S. facility consolidation.
- Continuing-operations net loss narrowed, while operating cash use increased substantially year over year due primarily to working-capital movements.
Outlook, risks and unusual items
- No specific numerical guidance was provided. Management believed operating cash flows, cash on hand and available borrowing capacity would be adequate for debt service, operations, capital expenditures, leases and working capital, while cautioning that it could not provide assurance.
- Key disclosed risks include substantial debt and refinancing needs, restrictive debt terms, limited capital-raising capacity, competition and customer retention, production and supply-chain disruptions, cybersecurity and data-protection events, and dependence on payment-brand certifications.
- The IPO securities class action was settled and dismissed with prejudice in February 2019. A related derivative action resumed; the company said the claims were without merit, but potential loss was not probable or estimable and no liability was recorded.
- In a separate patent dispute, the Patent Trial and Appeal Board found all claims of the company’s patent unpatentable; CPI appealed in March 2019. The infringement suit was administratively dismissed pending final patent-validity determination. Related trade-secret litigation remained ongoing.
- Adoption of lease accounting on January 1, 2019 added $8.0 million of operating right-of-use assets and $8.8 million of operating lease liabilities. A partial valuation allowance of $0.8 million on certain deferred tax assets contributed to the quarter’s $0.4 million tax expense despite a pretax loss.
Important facts for investors to verify
- Whether EMV and dual-interface card demand, product mix and margin gains are sustainable, and how much reflects timing or prior-year comparison effects.
- Cash conversion and working-capital trends, particularly inventory, receivables and accrued expenses, given $10.2 million of continuing-operations operating cash use.
- Debt-service capacity, the 9.9x net leverage ratio, revolver availability under the credit agreement, and upcoming facility maturities.
- Progress and financial effects of the April 1 Canadian subsidiary sale, including customer migration and any residual costs.
- Developments in the derivative and patent/trade-secret matters, including potential financial or operational consequences.