CPI Card Group Inc. — 2020 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020; filed February 25, 2021. Unless stated otherwise, financial amounts below are in U.S. dollars.
Business context
CPI Card Group designs, manufactures, personalizes, packages and fulfills payment cards, and provides instant card issuance and related services. Its reportable segments are Debit and Credit, Prepaid Debit, and Other (primarily corporate expenses). The company operates U.S. facilities and serves about 2,000 direct customers. It sold its Canadian subsidiary in April 2019 and its U.K. business in 2018.
Key financial results
| Metric | 2020 | 2019 |
|---|---|---|
| Net sales | $312.2 million | $278.1 million |
| Gross profit / gross margin | $110.3 million / 35.3% | $91.1 million / 32.8% |
| Income from operations / operating margin | $38.4 million / 12.3% | $24.7 million / 8.9% |
| Net income (loss) from continuing operations | $16.2 million | $(5.0) million |
| Net income (loss), including discontinued operations | $16.1 million | $(5.1) million |
| Cash provided by operating activities, continuing operations | $22.1 million | $3.0 million |
| Capital expenditures | $7.1 million | $4.2 million |
| Cash and cash equivalents at year-end | $57.6 million | $18.7 million |
| Working capital at year-end | $95.6 million | $50.5 million |
| Net interest expense | $25.4 million | $24.9 million |
Full-year product sales rose 19.5% to $172.0 million and services sales rose 4.5% to $140.2 million. Debit and Credit sales increased 17.5% to $250.4 million; Prepaid Debit sales declined 1.1% to $63.6 million. Two customers represented approximately 29% of 2020 sales combined.
In Q4 2020, sales were $84.1 million, up 15.9% year over year; income from operations was $12.4 million versus $3.7 million. Continuing-operations net income was $7.3 million versus a $2.3 million loss in Q4 2019.
Debt and liquidity
At year-end, principal outstanding was $312.5 million under the First Lien Term Loan and $30.0 million under the Senior Credit Facility. The debt balance reported on the balance sheet was $336.7 million before the $8.0 million current-maturity classification and after unamortized discount and financing costs. The facilities mature in August 2022 and May 2022, respectively, and are secured by substantially all company assets. Stated year-end rates were 5.5% on the term loan and 9.5% on the Senior Credit Facility.
The Senior Credit Facility requires at least $25 million of defined adjusted EBITDA for the preceding four quarters. Debt agreements also restrict, among other things, additional borrowing, asset sales, investments and distributions, and require certain excess-cash-flow prepayments. The company classified $8.0 million of principal as current and said it would offer that amount for prepayment under the agreements. Management stated that cash and operating cash flows should be adequate for debt service and operating needs, but this depends on future cash generation.
Changes, outlook and notable items
- Sales growth and improved gross margin were driven mainly by higher volumes and pricing of contactless dual-interface EMV cards, including Second Wave cards made with recovered ocean-bound plastic, as well as CPI On-Demand personalization and COVID-related government disbursement work.
- COVID-19 reduced demand in some areas, including instant issuance and prepaid retail-related activity. All operations remained open, but management said the pandemic’s longer-term effects on demand, supply, workforce, operations and financial condition remained uncertain. No numerical financial guidance was provided.
- 2020 included a $3.3 million income tax benefit, reflecting CARES Act provisions and a valuation-allowance change related to interest deductions. The reported effective tax rate was negative 25.6%.
- The company recorded an estimated $1.7 million sales-tax liability at year-end; its estimate may change and could be exceeded. A $633,000 increase to the contingency estimate was recorded in Q4, partly offset by probable customer recoveries.
- 2019 operating results included a $6.0 million cash litigation settlement gain. The case was dismissed with prejudice in 2019. A separate derivative suit was settled in 2020 with governance reforms; the insurer covered plaintiff counsel fees and no company liability was recorded.
- The filing corrected prior-period amounts for items management considered immaterial, including estimated sales-tax expense and depreciation. It reports no material adverse effect from routine legal proceedings.
- Shares were suspended from Nasdaq in January 2020 and are quoted on OTCQX and traded on the Toronto Stock Exchange. The company said it intended to seek Nasdaq relisting when eligible, without assurance of success. Concentrated ownership by the Tricor Funds was approximately 59% in total.
Investor facts to verify
- Debt covenant compliance, the required excess-cash-flow offer, and refinancing plans ahead of the 2022 maturities; review how adjusted EBITDA is defined in the credit agreements.
- Cash conversion and working-capital quality, particularly the increase in unbilled receivables to $10.6 million and the inventory build to $24.8 million.
- Whether sales-tax exposure exceeds the $1.7 million estimate, including potential interest, penalties and customer recoveries.
- Durability of card-volume growth and margins as COVID-related disbursement work, bank-branch activity and prepaid retail demand change; assess customer concentration and single-source component exposure.
- Trading liquidity and listing risks following Nasdaq suspension, as well as the impact of majority ownership and related change-of-control provisions.
The financial statements received an unqualified independent audit opinion. Management concluded disclosure controls and internal control over financial reporting were effective as of year-end; the auditor was not required to attest to internal-control effectiveness.