What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-08 compared with 2023-05-09 · 82 added, 61 removed, 163 unchanged (47% of the section changed)

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and its subsidiaries.

For an understanding of the significant factors that influenced our results, the following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2023.

This management’s discussion and analysis should also be read in conjunction with the management’s discussion and analysis and consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission (“SEC”).

Cautionary Statement Regarding Forward-Looking Information

Certain statements and information in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 (as well as information included in other written or oral statements we make from time to time) may contain or constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

Certain statements and information in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2023 (as well as information included in other written or oral statements we make from time to time) may contain or constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

The words “believe,” “estimate,” “project,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could,” “continue,” “committed,” “attempt,” “target,” “objective,” “guides,” “seek,” “focus,” “provides guidance,” “provides outlook” or other similar expressions are intended to identify forward-looking statements, which are not historical in nature.

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adverse conditions in the banking system and financial markets, including the failure of banks and financial institutions;

a deterioration in general economic conditions, including rising inflation and resulting in reduced consumer confidence and business spending, and a decline in consumer credit worthiness impacting demand for our products;

a deterioration in general economic conditions, including inflationary conditions and resulting in reduced consumer confidence and business spending, and a decline in consumer credit worthiness impacting demand for our products;

a disruption or other failure in our supply chain, including as a result of the Russia-Ukraine conflict and with respect to single source suppliers, or the failure or inability of suppliers to comply with our code of conduct or contractual requirements, or political unrest in countries in which our suppliers operate, resulting in increased costs and inability to pass those costs on to our customers and extended production lead times and difficulty meeting customers’ delivery expectations;

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We believe some customers have reduced demand for our products and services and we may experience reduced demand from customers in the future due to the following:

o Certain economic indicators continue to point towards the likelihood that the U.S.

economy will experience a recession in the near future, which may cause our customers to have concerns about the broader economic environment and reduce overall spending, including on card programs or other products and services we offer.

o Certain banks have recently experienced negative liquidity events, including some being taken over by industry regulators and others experiencing deposit outflows, deteriorating share prices and limited access to capital, leading to cautionary signals and uncertainty in the financial services industry.

● Certain economic indicators continue to point towards the likelihood that the U.S.

economy will experience an economic slowdown or recession in the near future, which we believe has caused, and may in the future cause, some of our customers to have concerns about the broader economic environment and therefore reduce overall spending, including on card programs or other products and services we offer.

● Certain banks have experienced negative liquidity events, including some being taken over by industry regulators and others experiencing deposit outflows, deteriorating share prices and limited access to capital, leading to cautionary signals and uncertainty in the financial services industry.

Following these events, we experienced reduced demand in the Debit and Credit segment.

o Some of our customers may have anticipated supply-chain-related delays and correspondingly increased their own inventory of the Company’s products on hand during 2022.

● We have experienced inflationary pressure in our supply chain, as well as delays and difficulties in sourcing key materials and components needed for our products.

We have seen improvements in many areas and our production lead times have improved significantly, however we continue to have challenges in some areas which have resulted in increased costs of certain raw materials and components, longer supplier lead times and unpredictability.

We continue to take actions to limit the impact of these dynamics.

● Some of our customers may have anticipated supply-chain-related delays and correspondingly increased their own inventory of the Company’s products on hand during 2022.

As supply-chain lead times have improved and given the economic concerns noted above, some customers may now be more focused on reducing their inventory levels.

Results of Operations

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Three Months Ended

Six Months Ended

(dollars in thousands)

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Gross profit margin

(1) For the three months ended March 31, 2023 and 2022, net sales and cost of sales each include $0.3 million and less than $0.1 million of intersegment eliminations, respectively.

The following discussion of our consolidated results of operations and segment results refers to the three months ended March 31, 2023 compared to the corresponding period in the prior year.

* Calculation not meaningful

(1) For the three months ended June 30, 2023, and 2022, net sales and cost of sales each include less than $0.1 million of intersegment eliminations.

For the six months ended June 30, 2023, and 2022, net sales and cost of sales each include $0.3 million and $0.1 million of intersegment eliminations, respectively.

The following discussion of our consolidated results of operations and segment results refers to the three and six months ended June 30, 2023, compared to the corresponding periods in the prior year.

The results of operations should be read in conjunction with the discussion of our segment results of operations, which provide more detailed discussions concerning certain components of the Condensed Consolidated Statements of Income.

Net sales increased $9.4 million, or 8.5%, for the three months ended March 31, 2023 compared to the corresponding period in the prior year, driven by the Debit and Credit segment.

The increase was primarily due to increased sales of higher-priced contactless card products and personalization services and includes benefits from price increases.

Net sales increased for the three months ended June 30, 2023.

Services net sales increased due to higher personalization sales in our Debit and Credit segment, as well as higher sales in our Prepaid segment, partially offset by a decrease in Products net sales in the Debit and Credit segment, due to lower volumes.

Net sales also benefited from price increases.

Net sales increased for the six months ended June 30, 2023, primarily due to increased sales in our Debit and Credit segment, driven by increased sales of personalization, Card@Once services and contactless card products.

Net sales also benefited from price increases, which were primarily implemented in 2022.

Gross Profit and Gross Profit Margin:

Gross profit increased $3.8 million, or 9.7%, for the three months ended March 31, 2023 compared to the corresponding period in the prior year.

Gross profit margin was 35.7%, compared to 35.3% in the corresponding period in the prior year.

The increase in gross profit was primarily due to operating leverage from higher net sales, including benefits from price increases, partially offset by inflationary impacts on materials costs and expenses associated with a production staffing model change in our Prepaid business.

Gross profit was relatively consistent for the three months ended June 30, 2023.

Gross profit increased for the six months ended June 30, 2023, primarily due to increased net sales and operating leverage, including the benefit of price increases.

Gross profit margin was relatively consistent for both the three and six months ended June 30, 2023.

Operating Expenses:

Operating expenses increased $1.2 million, or 5.6%, for the three months ended March 31, 2023 compared to the corresponding period in the prior year, primarily due to a $1.9 million increase in compensation expenses, mainly in the “Other” segment, as a result of increased employee headcount and salary increases, partially offset by a $0.7 million decrease in professional services and other costs.

Operating expenses decreased for the three and six months ended June 30, 2023.

For the three months ended June 30, 2023, the decrease was primarily due to lower operating expenses in our Prepaid Debit segment and decreased professional services.

Compensation expense slightly increased, as the impacts of increased employee headcount, salary increases and compensation related to an executive retention agreement were offset by lower employee short-term incentive compensation.

For the six months ended June 30, 2023, the decrease was primarily due to decreased professional services and lower operating expenses in our Prepaid Debit segment, which were partially offset by an increase in compensation related expenses, mainly in the “Other” segment, as a result of increased employee headcount and salary increases.

Interest, net :

Interest expense decreased $1.1 million, or 13.8%, for the three months ended March 31, 2023 compared to the corresponding period in the prior year, primarily due to lower outstanding principal balances on our borrowings.

Interest expense decreased for the three and six months ended June 30, 2023, primarily due to lower outstanding principal balances on our borrowings.

For the six months ended June 30, 2022, interest expense also included a $0.6 million premium paid relating to the $20.0 million early redemption of the 8.625% Senior Secured Notes due 2026 (the “Senior Notes”).

Other Expense, net:

Other expense, net decreased $0.3 million, or 71.2%, for the three months ended March 31, 2023 compared to the corresponding period in the prior year, primarily due to lower unamortized deferred financing cost write-offs as a result of reduced retirements of our 8.625% Senior Secured Notes due 2026 (the “Senior Notes”) compared to the corresponding period in the prior year.

Other expense, net was relatively consistent for the both the three and six months ended June 30, 2023.

Income Tax Expense:

Our effective tax rate on pre-tax income was 20.7% and 38.2% for the three months ended March 31, 2023 and 2022, respectively.

The decrease in our effective tax rate for the three months ended March 31, 2023 compared to the corresponding period in the prior year, was a result of increased deductibility of interest costs due to a tax election made by the Company in the third quarter of 2022 and the reduction of a valuation allowance in the first quarter of 2023 related to a state’s law change.

Our effective tax rate on pre-tax income was 38.9% and 22.1% for the three months ended June 30, 2023, and 2022, respectively, and 28.6% and 31.0% for the six months ended June 30, 2023, and 2022, respectively.

The increase in the effective tax rate for the three months ended June 30, 2023, was primarily due to tax deduction limitations on executive compensation.

The decrease in the effective tax rate for the six months ended June 30, 2023, was a result of increased deductibility of interest costs due to a tax election made in the third quarter of 2022 and the reduction of a valuation allowance in the first quarter of 2023 related to a state tax law change.

Segment Discussion

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Six Months Ended

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Income from operations

Net sales for Debit and Credit increased $10.0 million, or 10.8%, for the three months ended March 31, 2023 compared to the corresponding period in the prior year.

Products net sales increased primarily due to increased sales from existing customers, including benefits from the transition to contactless cards and price increases.

Services net sales increased as a result of higher personalization sales due to higher sales from existing customers, including benefits from prices increases, and higher Card@Once services driven by a higher printer install base.

Gross profit margin

Net sales for Debit and Credit decreased for the three months ended June 30, 2023, primarily due to a decrease in Products net sales, driven by declines in eco-focused card volumes, partially offset by increases in other contactless card sales, new customer sales and higher non-EMV card sales.

The decrease in Product net sales was partially offset by an increase in Services net sales, primarily due to higher personalization sales, driven by our print-on-demand services, and higher Card@Once services driven by a higher printer install base.

Net Sales also benefited from price increases, which were primarily implemented in 2022.

Net sales for Debit and Credit increased for the six months ended June 30, 2023, primarily due to an increase in Services net sales due to higher personalization sales and higher Card@Once services driven by a higher printer install base.

Products net sales increased primarily due to new customer sales, increased sales to existing customers driven by contactless cards sales, and increased sales of non-EMV cards.

Net Sales also benefited from price increases.

Gross Profit and Gross Profit Margin:

Gross profit for Debit and Credit increased $6.0 million, or 18.5%, for the three months ended March 31, 2023 compared to the corresponding period in the prior year, primarily due to the net sales increase described above.

Gross profit margin increased to 37.4% during the three months ended March 31, 2023, compared to 35.0% in the corresponding period in the prior year.

The increase in gross margin was primarily due to operating leverage from higher net sales, including the benefit of price increases, partially offset by inflationary impacts on materials costs .

Gross profit for Debit and Credit decreased for the three months ended June 30, 2023, primarily due to higher production costs and lower sales volumes.

Gross profit for Debit and Credit increased for the six months ended June 30, 2023, primarily due to the net sales increase described above.

Gross profit margin slightly decreased for the three months ended June 30, 2023, primarily due to higher production costs and lower sales volumes .

Gross profit margin slightly increased for the six months ended June 30, 2023, primarily due to operating leverage from higher net sales, including the benefit of price increases.

Income from Operations:

Income from operations for Debit and Credit increased $5.9 million, or 24.5%, for the three months ended March 31, 2023 compared to the corresponding period in the prior year, due primarily to the factors discussed in “Gross Profit and Gross Profit Margin” above.

The changes in income from operations for Debit and Credit for the three and six months ended June 30, 2023, were primarily due to the factors discussed in “Gross Profit and Gross Profit Margin” above and decreases in operating expenses related to compensation related expenses and professional services.

Prepaid Debit:

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Six Months Ended

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Income from operations

Net sales for Prepaid Debit decreased $0.3 million, or 1.7%, for the three months ended March 31, 2023 compared to the corresponding period in the prior year, primarily due to decreased volumes partially offset by the benefit of price increases.

Gross profit margin

Net sales for Prepaid Debit increased for the three and six months ended June 30, 2023, primarily due to increased volumes from existing customers.

Gross Profit and Gross Profit Margin:

Gross profit for Prepaid Debit decreased $2.1 million, or 30.3%, for the three months ended March 31, 2023 compared to the corresponding period in the prior year.

Gross profit margin for Prepaid Debit decreased to 25.7% for the three months ended March 31, 2023 compared to 36.2% in the corresponding period in the prior year.

The decreases were primarily due to expenses incurred related to a change in our production staffing model, as we transitioned positions staffed with temporary workers to permanent employees, and lower net sales.

Gross profit for Prepaid Debit increased for the three months ended June 30, 2023, primarily due to higher net sales.

Gross profit for Prepaid Debit decreased for the six months ended June 30, 2023, primarily due to expenses incurred related to a change in our production staffing model, partially offset by higher sales.

Gross profit margin increased for the three months ended June 30, 2023, primarily due to increased operating leverage from higher net sales.

Gross profit margin for Prepaid Debit decreased for the six months ended June 30, 2023, primarily due to expenses incurred related to a change in our production staffing model.

Income from Operations:

Income from operations for Prepaid Debit decreased $2.3 million, or 38.4%, for the three months ended March 31, 2023 compared to the corresponding period in the prior year, primarily due to lower gross profit and an increase in operating expenses due to increased compensation costs.

Income from operations for Prepaid Debit increased for the three and six months ended June 30, 2023, primarily due to the factors discussed in “Gross Profit and Gross Profit Margin” above and lower operating expenses.

As the Other segment is comprised entirely of corporate expenses, income from operations for Other consists of operating expenses shown below.

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Operating Expenses:

Other operating expenses increased $1.0 million, or 8.3%, for the three months ended March 31, 2023 compared to the corresponding period in the prior year, primarily due to a $1.5 million increase in compensation expenses due to the factors described in the consolidated discussion above, partially offset by a $0.5 million decrease in professional services and other costs.

Other operating expenses decreased for the three months ended June 30, 2023, primarily due to decreased professional services.

Other operating expenses increased for the six months ended June 30, 2023, primarily due to increased compensation expenses as a result of increased employee headcount and salary increases, partially offset by a decrease in professional services.

Liquidity and Capital Resources

At March 31, 2023, we had $14.2 million of cash and cash equivalents.

As of June 30, 2023, we had $11.2 million of cash and cash equivalents.

Our ability to make investments in and grow our business, service our debt and improve our debt leverage ratios, while maintaining strong liquidity, will depend upon our ability to generate excess operating cash flows through our operating subsidiaries.

Although we can provide no assurances, we believe that our cash flows from operations,

combined with our current cash levels, will be adequate to fund debt service requirements and provide cash, as required, to support our ongoing operations, capital expenditures, lease obligations and working capital needs.

Although we can provide no assurances, we believe that our cash flows from operations, combined with our current cash levels, will be adequate to fund debt service requirements and provide cash, as required, to support our ongoing operations, capital expenditures, lease obligations and working capital needs.

On March 15, 2021, we completed a private offering of $310.0 million aggregate principal amount of the Senior Notes and related guarantees at an issue price of 100%.

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The Company is required to offer to pay 50% of excess cash flow if the net leverage ratio exceeds 4.5 to 1;

25% if the net leverage ratio is between 4 to 1 and 4.5 to 1, and 0% if the net leverage ratio is no more than 4 to 1.

25% if the net leverage ratio is between 4 to 1 and 4.5 to 1, and 0% if the net leverage ratio is less than or equal to 4 to 1.

Any required prepayments are to be made within 125 days after the issuance of the Company’s annual financial statements.

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As permitted by the indenture governing the Senior Notes, the Company may from time to time repurchase some or all of the Senior Notes in open market transactions, in privately negotiated transactions or otherwise.

The Company may redeem some or all of the Senior Notes pursuant to the terms of the indenture at a redemption price initially set at 104.313% of the principal amount of the notes to be redeemed, and reducing over time to 100%, in each case plus accrued and unpaid interest.

Beginning March 15, 2023, the Company may redeem some or all of the Senior Notes pursuant to the terms of the indenture at a redemption price initially set at 104.313% of the principal amount of the notes to be redeemed, and reducing over time to 100%, in each case plus accrued and unpaid interest.

The timing and amount of any such redemptions or repurchases will depend upon market conditions, contractual commitments, the Company’s capital needs and other factors.

As of the three months ended March 31, 2023, the Company had $277.0 million aggregate principal amount outstanding on the Senior Notes, plus accrued and unpaid interest.

As of June 30, 2023, the Company had $270.0 million aggregate principal amount outstanding on the Senior Notes, plus accrued and unpaid interest.

On March 15, 2021, we entered into a Credit Agreement with Wells Fargo Bank, National Association providing for an ABL Revolver of up to $50.0 million.

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We may select a one, three or six month term SOFR, which is adjusted for a credit spread of 0.10% to 0.30% depending on the term selected.

Through March 31, 2023, the applicable interest rate margin ranges from 1.50% to 1.75% depending on the average excess availability of the facility for the most recently completed quarter.

The unused portion of the ABL Revolver commitment accrues a monthly unused line fee, 0.50% per annum through March 31, 2023, multiplied by the aggregate amount of Revolver commitments less the average Revolver usage during the immediately preceding month.

Through March 31, 2023, the applicable interest rate margin ranged from 1.50% to 1.75% depending on the average excess availability of the facility for the most recently completed quarter.

The unused portion of the ABL Revolver commitment accrued a monthly unused line fee, 0.50% per annum through March 31, 2023, multiplied by the aggregate amount of Revolver commitments less the average Revolver usage during the immediately preceding month.

The interest rate margin and unused line fee percentage changed, effective April 1, 2023, to between 1.25% and 1.75% (interest rate margin) and 0.375% and 0.50% (unused line fee).

Amounts borrowed and outstanding under the ABL Revolver are required to be repaid in full, together with any accrued and unpaid interest, on the earliest to occur of March 15, 2026 and the date that is 90 days prior to the maturity of the Senior Notes (and may be subject to earlier mandatory prepayment upon certain events).

As of the three months ended March 31, 2023, the Company had $13.0 million in ABL Revolver borrowings outstanding, plus accrued and unpaid interest.

As of June 30, 2023, the Company had $18.0 million in ABL Revolver borrowings outstanding, plus accrued and unpaid interest.

Operating Activities

Cash provided by operating activities for the three months ended March 31, 2023 was $8.0 million compared to cash used in operating activities of $16.0 million during the three months ended March 31, 2022.

Cash generated from earnings for the three months ended March 31, 2023 was partially offset by a decrease in accrued expenses of $11.4 million, primarily related to payments on accrued interest and employee performance incentive compensation during the period, and an increase in inventories by $1.5 million.

These changes were partially offset by a decrease in accounts receivable of $4.3 million primarily due to lower net sales in the first quarter of 2023 compared to the fourth quarter of 2022.

Cash provided by operating activities for the six months ended June 30, 2023 was $10.3 million compared to cash used in operating activities of $8.1 million during the six months ended June 30, 2022.

The increase in cash provided by operating activities was primarily generated from earnings for the six months ended June 30, 2023, and was aided by reductions in accounts receivable in 2023 due to lower sales growth compared to the prior year period, and a decrease in inventory purchases in 2023 as inventory levels were increased in 2022 to help mitigate supply-chain constraints.

These positive increases to cash flow were partially offset by higher employee performance incentive compensation payments and lower incentive compensation and sales-based accruals in 2023.

Investing Activities

Cash used in investing activities for the three months ended March 31, 2023 was $4.1 million, compared to $3.1 million during the three months ended March 31, 2022.

Cash used in investing activities for the six months ended June 30, 2023 was $6.5 million, compared to $8.2 million during the six months ended June 30, 2022.

Cash used in investing activities was related primarily to capital expenditures, including investments to support the business, such as machinery and information technology equipment.

As presented in our supplemental disclosures of non-cash information on the statement of cash flows, finance leases were executed for the acquisition of right-of-use machinery and equipment assets totaling $2.2 million during the three months ended March 31, 2023, compared to $3.5 million during the corresponding period in the prior year.

As presented in our supplemental disclosures of non-cash information on the statement of cash flows, finance leases

were executed for the acquisition of right-of-use machinery and equipment assets totaling $2.2 million during the six months ended June 30, 2023, compared to $3.1 million during the corresponding period in the prior year.

Financing Activities

During the three months ended March 31, 2023, cash used in financing activities was $0.8 million.

Proceeds from the ABL Revolver were $8.0 million, we retired $8.0 million of Senior Notes and we paid $0.8 million of principal on financing leases.

During the three months ended March 31, 2022, cash provided by financing activities was $10.6 million.

Proceeds from the ABL Revolver were $30.0 million and in connection with the ABL Amendment, we paid $0.3 million of debt issuance costs.

During the six months ended June 30, 2023, cash used in financing activities was $3.7 million.

Proceeds from the ABL Revolver of $13.0 million were offset by payments of $14.9 million to retire the Senior Notes and $1.7 million for principal on financing leases.

During the six months ended June 30, 2022, cash provided by financing activities was $4.7 million.

Net proceeds from the ABL Revolver were $25.0 million and we paid $0.3 million of debt issuance costs in connection with the Amendment to the ABL Revolver.

A portion of the proceeds from the ABL Revolver were used to redeem $20.0 million of Senior Notes and to pay $0.6 million of early redemption costs.

We received $2.1 million under financing leases and we paid $0.6 million of principal on financing leases.

We received $2.1 million and paid $1.4 million of principal on financing leases.

Working Capital

Our working capital as of March 31, 2023 was $110.9 million, compared to $99.6 million as of March 31, 2022.

The increase in our working capital as of March 31, 2023 was primarily due to a decrease in accrued expenses of $10.6 million, an increase in cash of $3.1 million and increased inventories of $1.3 million, partially offset by decreased accounts receivable of $4.4 million.

Our working capital as of June 30, 2023 was $116.3 million, compared to $99.6 million as of December 31, 2022.

The increase in our working capital as of June 30, 2023 was primarily due to an increase in inventories of $6.8 million, a decrease in accrued expenses of $9.6 million, and decreased deferred revenue and customer deposits of $2.8 million, partially offset by decreased accounts receivable of $5.3 million.

Our working capital needs are typically highest in the first and third quarters due to the timing of payments for interest on outstanding borrowings and employee incentive compensation.

The majority of our interest payments are due in the first and third quarters.

Material Cash Requirements

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Debt Service Requirements

As of March 31, 2023, the total projected principal and interest payments on our borrowings were $363.5 million, primarily related to the Senior Notes, of which $25.0 million of interest is expected to be paid in the next 12 months.

As of June 30, 2023, the total projected principal and interest payments on our borrowings were $359.9 million, primarily related to the Senior Notes, of which $24.7 million of interest is expected to be paid in the next 12 months.

The remaining interest payments are expected to be paid over the remaining term of the Senior Notes, which mature in 2026, and the principal is due upon maturity.

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A purchase obligation is an agreement to purchase goods or services that is enforceable, legally binding, and specifies all significant terms.

As of March 31, 2023, there have not been any material changes to the purchase obligations disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

As of June 30, 2023, there have not been any material changes to the purchase obligations disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts and disclosures in the financial statements and accompanying notes.

financial statements and accompanying notes.

Actual results could differ from those estimates.

Our Critical Accounting Policies and Estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, for which there were no material changes as of March 31, 2023, included:

Our Critical Accounting Policies and Estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, for which there were no material changes as of June 30, 2023, included:

● Revenue recognition, including estimates of work performed but not completed , and

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis