CPI Card Group Inc. — Q1 2022 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2022. CPI provides payment-card products and services, including card production, personalization, fulfillment and instant issuance, primarily in the United States. Reportable segments are Debit and Credit, Prepaid Debit and Other (corporate expenses). Unless stated otherwise, amounts below are in millions of dollars.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $111.4 | $89.1 |
| Gross profit / margin | $39.3 / 35.3% | $35.7 / 40.1% |
| Operating income / margin | $18.0 / 16.1% | $17.8 / 19.9% |
| Net income | $6.0 | $2.4 |
| Diluted EPS | $0.51 | $0.21 |
| Cash from operating activities | $(16.0) | $0.1 |
- Sales rose 25.1%, mainly from Debit and Credit, where revenue increased 31.8% to $92.0 million. Prepaid Debit sales were essentially flat at $19.5 million.
- Gross profit increased 10.0%, but gross margin fell 4.8 percentage points. Management cited higher labor and materials costs. Debit and Credit EBITDA was $26.1 million versus $22.4 million; Prepaid Debit EBITDA was $6.6 million versus $7.6 million. Total segment EBITDA, a non-GAAP measure, was $21.2 million versus $17.0 million.
- Net income improved partly because Q1 2021 included a $5.0 million debt-extinguishment loss; Q1 2022 included a $0.4 million loss on early redemption of notes. Q1 2022 tax expense was $3.7 million, with a 38.2% effective tax rate.
- Cash was $12.1 million at March 31, down from $20.7 million at year-end. Working capital was $99.4 million, versus $80.9 million at year-end. Operating cash use reflected higher receivables and inventory and lower accrued expenses. Capital expenditures were $3.2 million.
- Debt at quarter-end included $290 million principal of 8.625% Senior Notes due 2026 and $30 million outstanding under the ABL revolver. The revolver capacity was increased to $75 million; $45 million was available. Long-term debt, net of deferred financing costs, was $314.4 million. CPI redeemed $20 million of notes using revolver borrowings.
Material changes versus prior period
Product sales rose to $68.3 million from $47.0 million, while services sales increased to $43.1 million from $42.1 million. Higher card volumes, contactless and eco-focused cards, and instant-issuance sales supported Debit and Credit growth. Higher labor and material costs compressed margins in both operating segments. SG&A and other operating expenses also rose, including costs associated with increased staffing and Sarbanes-Oxley compliance.
Outlook, risks and unusual items
- The filing provides no quantified revenue or earnings guidance. Management expects labor and supply-chain pressures, higher costs and extended production lead times to continue through 2022 and possibly beyond; CPI may not pass all cost increases to customers.
- COVID-19-related supply constraints, microchip shortages, inflation, shipping delays and labor availability may affect production and customer delivery. The Russia-Ukraine conflict may add supply-chain, cost and cybersecurity risks. Political instability in Haiti poses a specific sourcing risk for recovered ocean-bound plastic used in Second Wave cards.
- Management stated that cash, operating cash flows and borrowing capacity are expected to fund debt service, operations, capital expenditures, leases and working capital, while noting this is not assured. Projected principal and interest payments on borrowings totaled $421.9 million; $25.9 million was expected within 12 months.
- Disclosure controls and procedures were not effective at March 31 due to previously reported material weaknesses in internal control over financial reporting. No material misstatements were identified; remediation work is ongoing and the weaknesses are not yet considered remediated.
- A patent infringement case concerning contactless-card antenna technology is stayed pending patent reexamination; the company cannot estimate a possible loss and has recorded no liability. An estimated sales-tax liability of $1.0 million was accrued; the ultimate amount may change.
Important facts for investors to verify
- Whether elevated inventory and receivables convert to cash, and whether operating cash flow improves after the Q1 working-capital outflow.
- Whether labor, materials and supply constraints continue to erode margins or delay customer deliveries, and how much cost CPI can pass through.
- Debt-service capacity, revolver availability and covenant headroom, particularly if borrowing availability falls below $7.5 million.
- Progress in remediating internal-control material weaknesses and the status and potential exposure of the patent and sales-tax matters.