What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-07 compared with 2023-08-08 · 76 added, 75 removed, 170 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 June 30, 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 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.

Certain statements and information in this Quarterly Report on Form 10-Q for the quarter ended September 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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These risks and uncertainties include, but are not limited to:

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

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;

our failure to retain our existing customers or identify and attract new customers;

the unpredictability of our operating results, including an inability to anticipate changes in customer inventory management practices and its impact on our business;

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

a disruption or other failure in our supply chain, including as a result of the Russia-Ukraine or other foreign conflicts 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;

our failure to retain our existing customers or identify and attract new customers;

our status as an accelerated filer and complying with Section 404 of the Sarbanes-Oxley Act of 2002 and the costs associated with such compliance and implementation of procedures thereunder;

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the effects of restrictions, delays or interruptions in our ability to source raw materials and components used in our products from foreign countries;

the effects on the global economy of the ongoing military action by Russia in Ukraine;

the effects on the global economy of the ongoing military action by Russia in Ukraine and other foreign conflicts;

costs and potential liabilities associated with compliance or failure to comply with regulations, customer contractual requirements and evolving industry standards regarding consumer privacy and data use and security;

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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:

● 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.

● Some large banks point toward the possibility that the U.S.

economy will experience an economic slowdown in the near future, which we believe has caused, and may continue to cause, some of our customers, particularly in the banking and financial services industry, to have concerns about the broader economic environment and therefore reduce overall spending, delay spending into future periods, or request pricing concessions, including on card programs or other products and services we offer.

● Some of our customers 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, we believe some customers are now more focused on reducing their inventory levels.

● 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.

● 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

Nine Months Ended

September 30,

(dollars in thousands)

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* 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.

(1) For both the three months ended September 30, 2023, and 2022, net sales and cost of sales each include $0.3 million of intersegment eliminations.

For the nine months ended September 30, 2023, and 2022, net sales and cost of sales each include $0.6 million and $0.4 million of intersegment eliminations, respectively.

The following discussion of our consolidated results of operations and segment results refers to the three and nine months ended September 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 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 decreased for the three months ended September 30, 2023, primarily due to decreased Products net sales in our Debit and Credit segment, due to lower volumes.

Net sales decreased for the nine months ended September 30, 2023, primarily due to decreased Products net sales due to lower volumes, partially offset by higher personalization and Card@Once services, in our Debit and Credit segment.

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

Gross Profit and Gross Profit Margin:

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.

Gross profit and gross profit margin decreased for the three months ended September 30, 2023, primarily due to lower net sales and higher production costs.

Gross profit and gross profit margin decreased for the nine months ended September 30, 2023, primarily due to higher production costs.

Operating Expenses:

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.

Operating expenses decreased for the three and nine months ended September 30, 2023.

For the three months ended September 30, 2023, the decrease was primarily due to a decrease in professional services.

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

For the nine months ended September 30, 2023, the decrease was primarily due to a decrease in professional services, partially offset by an increase in compensation expenses.

Compensation expenses increased due to the impacts of compensation related to an executive retention agreement and increased employee headcount and salary increases, partially offset by lower employee short-term incentive compensation.

Interest, net :

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”).

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

For the nine months ended September 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 was relatively consistent for the both the three and six months ended June 30, 2023.

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

Income Tax Expense:

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.

Our effective tax rate on pre-tax income was 37.7% and 25.8% for the three months ended September 30, 2023, and 2022, respectively, and 30.5% and 28.5% for the nine months ended September 30, 2023, and 2022, respectively.

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

The effective tax rate for the three months ended September 30, 2023, also increased due to the reduction of the federal valuation allowance as a result of increased deductibility of interest costs due to a tax election made by the Company in the third quarter of 2022.

Segment Discussion

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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 for Debit and Credit decreased for the three months ended September 30, 2023, primarily due to a decrease in Products net sales, driven by volume declines in contactless cards, including eco-focused, as well as EMV cards.

Net sales for Debit and Credit decreased for the nine months ended September 30, 2023, primarily due to a decrease in Products net sales, driven by volume declines in eco-focused and EMV cards, partially offset by increased sales of other contactless and non-EMV cards.

The decrease in Products net sales was partially offset by an increase in

Services net sales due to higher card personalization sales and higher Card@Once services driven by a higher printer installation 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 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.

Gross profit and gross profit margin for Debit and Credit decreased for the three months ended September 30, 2023, primarily due to lower net sales and higher production costs.

Gross profit and gross profit margin for Debit and Credit decreased for the nine months ended September 30, 2023, primarily due to higher production costs.

Income from Operations:

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.

Income from operations for Debit and Credit decreased for the three and nine months ended September 30, 2023, primarily due to the factors discussed in “Gross Profit and Gross Profit Margin” above, partially offset by decreases in operating expenses related to compensation related expenses and professional services.

Prepaid Debit:

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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.

Net sales for Prepaid Debit decreased for the three and nine months ended September 30, 2023, primarily due to decreased volumes from existing customers.

For the nine months ended September 30, 2023, the decrease in net sales was offset by the benefit of price increases, which were primarily implemented in 2022.

Gross Profit and Gross Profit Margin:

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.

Gross profit and gross profit margin for Prepaid Debit decreased for the three months ended September 30, 2023, primarily due to lower net sales, and increased labor costs as a result of a change in our production staffing model.

Gross profit and gross profit margin for Prepaid Debit decreased for the nine months ended September 30, 2023, primarily due to increased labor costs and other expenses as a result of a change in our production staffing model, as well as lower net sales.

Income from Operations:

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.

Income from operations for Prepaid Debit decreased for the three and nine months ended September 30, 2023, primarily due to the factors discussed in “Gross Profit and Gross Profit Margin” above.

For the nine months ended September 30, 2023, income from operations also benefited from 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 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.

Other operating expenses decreased for the three months ended September 30, 2023, primarily due to lower employee short-term incentive compensation and decreased professional services, partially offset by increased compensation expenses driven by compensation related to an executive retention agreement, increased employee headcount and salary increases.

Other operating expenses were relatively consistent for the nine months ended September 30, 2023, as increased compensation expenses as a result of compensation related to an executive retention agreement and increased employee headcount and salary increases, were offset by decreases in professional services, employee short-term incentive compensation and employee healthcare expenses.

Liquidity and Capital Resources

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

As of September 30, 2023, we had $10.5 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.

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

As of September 30, 2023, the Company had $267.9 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.

On March 3, 2022, we entered into Amendment No.

1 to the Credit Agreement, which amended the ABL Revolver to among other things, increased the available borrowing capacity to $75.0 million, increased the uncommitted accordion feature to $25.0 million and revised the interest rate provisions to replace the prior LIBOR benchmark with updated benchmark provisions using the secured overnight financing rate (“SOFR”) as administered by the Federal Reserve Bank of New York.

1 to the Credit Agreement, which amended the ABL Revolver to among other things, increase the available borrowing capacity to $75.0 million, increase the uncommitted accordion feature to $25.0 million and revise the interest rate provisions to replace the prior LIBOR benchmark with updated benchmark provisions using the secured overnight financing rate (“SOFR”) as administered by the Federal Reserve Bank of New York.

On October 11, 2022, we entered into Amendment No.

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

As of September 30, 2023, the Company had $8.0 million in ABL Revolver borrowings outstanding, plus accrued and unpaid interest.

Operating Activities

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.

Cash provided by operating activities for the nine months ended September 30, 2023 was $22.3 million compared to $11.7 million during the nine months ended September 30, 2022.

The increase in cash provided by operating activities compared to the prior year period was primarily generated by reductions in accounts receivable, due to collections on outstanding receivables as of the prior year end, 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 in 2023 related to 2022 performance.

Investing Activities

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 six months ended June 30, 2023, compared to $3.1 million during the corresponding period in the prior year.

Cash used in investing activities for the nine months ended September 30, 2023 was $5.9 million, compared to $14.3 million during the nine months ended September 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, although at a slower pace than 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 $7.0 million during the nine months ended September 30, 2023, compared to $7.8 million during the corresponding period in the prior year.

Financing Activities

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.

During the nine months ended September 30, 2023, cash used in financing activities was $16.9 million.

Proceeds from the ABL Revolver of $13.0 million were offset by payments of $10.0 million on the ABL Revolver and payments of $17.0 million to retire a portion of the Senior Notes, and $2.7 million of principal on financing leases.

During the nine months ended September 30, 2022, cash provided by financing activities was $3.5 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.

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Working Capital

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 as of September 30, 2023 was $115.2 million, compared to $99.6 million as of December 31, 2022.

The increase in our working capital as of September 30, 2023 was primarily due to a decrease in accrued expenses of $12.1 million, a decrease in accounts payable of $7.5 million, an increase in inventories of $5.7 million, and decreased deferred revenue and customer deposits of $2.8 million, partially offset by decreased accounts receivable of $13.0 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.

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Debt Service Requirements

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.

As of September 30, 2023, the total projected principal and interest payments on our borrowings were $335.0 million, primarily related to the Senior Notes, of which $24.1 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 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.

As of September 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.

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 June 30, 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 September 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