What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-05 compared with 2024-05-07 · 74 added, 54 removed, 170 unchanged (43% 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, 2024.

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, 2023 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, 2024 (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 “Exchange Act”).

The words “believe,” “estimate,” “project,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could,” “continue,” “committed,” “attempt,” “aim,” “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.

Certain statements and information in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2024 (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 “Exchange Act”).

The words “believe,” “estimate,” “project,” “expect,” “anticipate,” “affirm,” “plan,” “intend,” “foresee,” “should,” “would,” “could,” “continue,” “committed,” “attempt,” “aim,” “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.

These forward-looking statements, including statements about our strategic initiatives and market opportunities, are based on our current expectations and beliefs concerning future developments and their potential effect on us and other information currently available.

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the highly competitive, saturated and consolidated nature of our marketplace;

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;

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;

new and developing technologies that make our existing technology solutions and products obsolete or less relevant or our failure to introduce new products and services in a timely manner;

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We define “Group Service Providers” as reseller or card processor organizations that assist small card issuers, such as credit unions, with managing their credit and debit card programs, including managing the Financial Payment Card issuance process, core banking operations and other financial services.

We serve our customers through a network of high-security production and card services facilities in the United States, each of which is audited for compliance with the standards of the Payment Card Industry Security Standards Council (the “PCI Security Standards Council”) by one or more of the Payment Card Brands.

We serve our customers through a network of high-security production and card services facilities in the United States, each of which is audited for compliance with the standards of the Payment Card Industry Security Standards Council (“PCI Security Standards Council”) by one or more of the Payment Card Brands.

Many of our customers require us to comply with PCI Security Standards Council requirements that relate to the provision of our products and services.

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Trends and Uncertainties That May Affect our Financial Performance

We believe the following may have a meaningful impact on our business performance and may negatively influence our financial and operating results:

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

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

economy may 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.

We have experienced reduced demand from some of our customers for certain products and services during 2023 through the first half of 2024.

This reduced demand impacted our financial and operating results during this period and may continue to have an impact on future periods.

This reduced demand appears to have been the result of some of the following factors:

● Some of our customers, particularly in the banking and financial services industry, have had and may continue to have concerns about the broader economic environment, which has resulted in reduced overall spending or delayed spending 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 became and continue to remain more focused on reducing their inventory levels.

As supply chain lead times improved, and given the economic concerns noted above, we believe some customers became more focused on reducing their inventory levels and may continue to do so in the future.

● Certain banks experienced negative liquidity events, including takeover by industry regulators and deposit outflows, or increased loan loss reserves, each of which had the effect of deteriorating share prices and limiting access to capital, leading to cautionary signals and uncertainty in the financial services industry.

Following some of these events, we experienced reduced demand in the Debit and Credit segment and may experience reduced demand in the future.

Following some of these events, we experienced reduced demand in the Debit and Credit segment and we may experience reduced demand again if such events occur in the future.

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, 2024 and 2023, net sales and cost of sales each include $0.2 million and $0.3 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, 2024, compared to the corresponding period in the prior year.

(1) For the three months ended June 30, 2024 and 2023, net sales and cost of sales each include $0.6 million and less than $0.1 million of intersegment eliminations, respectively.

For the six months ended June 30, 2024 and 2023, net sales and cost of sales each include $0.9 million and $0.3 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, 2024, 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 decreased for the three months ended March 31, 2024, primarily due to decreased Products net sales driven by lower volumes in our Debit and Credit segment , partially offset by higher S ervices net sales in both our Prepaid Debit and Debit and Credit segments.

Net sales increased for the three months ended June 30, 2024, primarily due to increased S ervices net sales in both our Debit and Credit and Prepaid Debit segments.

Net sales decreased for the six months ended June 30, 2024, primarily due to decreased Products net sales driven by lower card volumes in our Debit and Credit segment , partially offset by higher S ervices net sales in both our Prepaid Debit and Debit and Credit segments.

Gross Profit and Gross Profit Margin:

Gross profit decreased for the three months ended March 31, 2024, primarily due to lower net sales, partially offset by lower production costs.

Gross profit in the prior year period was negatively impacted by expenses related to the implementation of a change in our production staffing model as we completed the transition of temporary worker positions to permanent employee positions in our Prepaid Debit segment.

Gross profit margin increased for the three months ended March 31, 2024, primarily due to lower production costs.

Gross profit increased for the three months ended June 30, 2024, primarily due to higher net sales and gross profit margin was relatively consistent.

Gross profit was relatively consistent for the six months ended June 30, 2024, and gross profit margin increased.

The prior year period was negatively impacted by expenses related to the implementation of a change in our production staffing model as we completed the transition of temporary worker positions to permanent employee positions in our Prepaid Debit segment.

Operating Expenses:

Operating expenses increased for the three months ended March 31, 2024, primarily due to compensation related expenses including executive retention and severance, as well as other increased stock compensation.

Retention expense includes approximately $2.0 million related to an executive retention package announced in 2023, including stock compensation.

Operating expenses increased for the three months ended June 30, 2024, primarily due to increased compensation related expenses in our Other and Debit and Credit segments, including increased stock compensation.

Operating expenses increased for the six months ended June 30, 2024, primarily due to increased compensation related expenses, including increased stock compensation, severance, and compensation related to an executive retention agreement entered into in June 2023.

Retention expense in 2024 includes approximately $2.0 million related to an executive retention package announced in 2023, including stock compensation, compared to $1.0 million in the comparable prior year period.

Operating expenses for both the three and six months ended June 30, 2024 were impacted by higher expenses in our Prepaid Debit segment.

Interest, net :

Interest expense decreased for the three months ended March 31, 2024, primarily due to lower outstanding principal balances on our borrowings.

Interest expense decreased for the three and six months ended June 30, 2024, primarily due to lower outstanding principal balances on our borrowings.

Other Expense, net:

Other expense, net was relatively consistent for the three months ended March 31, 2024.

Other expense, net was relatively consistent for both the three and six months ended June 30, 2024.

Income Tax Expense:

Our effective tax rates on pre-tax income were 28.7% and 20.7% for the three months ended March 31, 2024 and 2023, respectively.

Our tax rate in the first quarter of 2023 was positively impacted by the reduction of a valuation allowance related to a state’s law change.

Our effective tax rates on pre-tax income were 27.7% and 38.9% for the three months ended June 30, 2024 and 2023, respectively, and 28.2% and 28.6% for the six months ended June 30, 2024 and 2023, respectively.

The decrease in our effective tax rate for the three months ended June 30, 2024, compared to the corresponding period in the prior year was primarily due to limitation of executive compensation deductibility related to the former CEO’s retention agreement, recognized in the second quarter of 2023.

The effective tax rate for the six months ended June 30, 2024, was consistent with the rate in the comparable period in the prior year as the limitation of executive compensation deductibility recognized in the second quarter of 2023 was offset by a reduction in a valuation allowance related to interest deductibility due to a state tax law change recognized in the first quarter of 2023.

Segment Discussion

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Three Months Ended

Six Months Ended

(dollars in thousands)

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Gross profit margin

Net sales for Debit and Credit decreased for the three months ended March 31, 2024, primarily due to a decrease in Products net sales, driven by volume declines in contactless and EMV cards, partially offset by higher personalization and Card@Once services .

Net sales for Debit and Credit increased for the three months ended June 30, 2024, primarily due to higher personalization and Card@Once services .

Net sales for Debit and Credit decreased for the six months ended June 30, 2024, primarily due to a decrease in Products net sales, partially offset by increased Services net sales.

The decrease in Products net sales was driven by volume declines in contactless and EMV cards.

The increase in Services net sales was driven by higher personalization and Card@Once services .

Gross Profit and Gross Profit Margin:

Gross profit and gross profit margin for Debit and Credit decreased for the three months ended March 31, 2024, primarily due to lower net sales.

Gross profit for Debit and Credit increased for the three months ended June 30, 2024, primarily due to higher net sales.

Gross profit margin was relatively consistent for the three months ended June 30, 2024.

Gross profit and gross profit margin for Debit and Credit decreased for the six months ended June 30, 2024, primarily due to lower net sales.

Income from Operations:

Income from operations for Debit and Credit decreased for the three months ended March 31, 2024, primarily due to the factors discussed in “Gross Profit and Gross Profit Margin” above, as well as increased compensation-related operating expenses.

Income from operations for Debit and Credit for the three and six months ended June 30, 2024, was impacted primarily by the factors discussed in “Gross Profit and Gross Profit Margin” above, as well as increased compensation-related operating expenses.

Prepaid Debit:

Three Months Ended

Six Months Ended

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Gross profit margin

Net sales for Prepaid Debit increased for the three months ended March 31, 2024, primarily due to increased volumes from existing customers.

Net sales for Prepaid Debit increased for the three and six months ended June 30, 2024, primarily due to increased sales to existing customers.

Gross Profit and Gross Profit Margin:

Gross profit and gross profit margin for Prepaid Debit increased for the three months ended March 31, 2024, primarily due to higher net sales and lower production costs.

Gross profit and gross margin in the prior year period were negatively impacted by expenses related to the implementation of a change in our production staffing model as we completed the transition of temporary worker positions to permanent employee positions.

Gross profit for Prepaid Debit increased for the three months ended June 30, 2024, primarily due to higher net sales, partially offset by increased labor costs.

Gross profit margin decreased compared to the prior year period primarily due to increased labor costs .

Gross profit and gross profit margin for Prepaid Debit increased for the six months ended June 30, 2024, primarily due to higher net sales.

Gross profit and gross profit margin in the prior year period were negatively impacted by expenses related to the implementation of a change in our production staffing model as we completed the transition of temporary worker positions to permanent employee positions.

Income from Operations:

Income from operations for Prepaid Debit increased for the three months ended March 31, 2024, primarily due to the factors discussed in “Gross Profit and Gross Profit Margin” above.

Income from operations for Prepaid Debit for the three and six months ended June 30, 2024, was impacted primarily by the factors discussed in “Gross Profit and Gross Profit Margin” above and higher operating expenses in the second quarter of 2024.

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

Three Months Ended

Six Months Ended

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Operating Expenses:

Other operating expenses increased for the three months ended March 31, 2024, primarily due to an increase in compensation related expenses, including the factors discussed in consolidated “Operating Expenses” above.

Other operating expenses increased for the three and six months ended June 30, 2024, primarily due to an increase in compensation related expenses, including the factors discussed in consolidated “Operating Expenses” above, partially offset by lower professional fees for the six months ended June 30, 2024.

Liquidity and Capital Resources

At March 31, 2024, we had $17.1 million of cash and cash equivalents.

At June 30, 2024, we had $7.5 million of cash and cash equivalents.

Our primary source of liquidity has been cash generated from our operating activities, which has been driven from net income and fluctuations in working capital.

Our working capital fluctuates primarily due to the timing of tax payments, timing of receipts from customers, inventory purchases, payments of employee incentive programs and interest payments on our 8.625% Senior Secured Notes due 2026 (the “Senior Notes”), with the interest payments being due in the first and third quarters of the year.

Our working capital fluctuates primarily due to the timing of tax payments, timing of receipts from customers, inventory purchases, share repurchases (including the repurchase of incremental shares from Parallel49), payments of employee incentive programs and interest payments on our outstanding debt, with the interest payments being due in the first and third quarters of the year.

Our ability to make investments in and grow our business, service our debt and improve our debt leverage ratios, while maintaining strong liquidity, depends on 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, and our senior secured revolving credit facility (the “ABL Revolver”) with available borrowing capacity of $74.7 million as of March 31, 2024, will be adequate to fund debt service requirements and provide cash, as required, to support our ongoing operations, capital expenditures, lease obligations, share

repurchases and working capital needs.

Although we can provide no assurances, we believe that our cash flows from operations, combined with our current cash levels, and our senior secured revolving credit facility (the “2026 ABL Revolver”) with available borrowing capacity of $69.6 million as of June 30, 2024, will be adequate to fund debt service requirements and provide cash, as required, to support our ongoing operations, capital expenditures, lease obligations, share repurchases and working capital needs.

Our future cash flows could be impacted by a variety of factors, some of which are beyond our control.

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Cash Flows from Operating Activities

Cash provided by operating activities increased for the three months ended March 31, 2024 to $8.9 million from $8.0 million for the three months ended March 31, 2023 primarily due to lower employee performance incentive compensation payments in 2024 related to 2023 performance as compared to those made in 2023 related to 2022 performance, partially offset by a $5.0 million payment pursuant to an agreement entered into on June 2, 2023 with the Company’s prior Chief Executive Officer, who departed in the first quarter of 2024, as well as increased inventory purchases.

Cash provided by operating activities decreased for the six months ended June 30, 2024 to $4.1 million from $10.3 million for the six months ended June 30, 2023 primarily due to lower net income and changes in working capital.

Working capital changes included incentives related to a customer contract entered into in the first quarter of 2024, and a $5.0 million payment pursuant to an agreement entered into on June 2, 2023 with the Company’s prior Chief Executive Officer, who departed in the first quarter of 2024, partially offset by lower employee performance incentive compensation payments in 2024 related to 2023 performance as compared to those made in 2023 related to 2022 performance.

We anticipate inventory levels to continue to be higher in 2024 compared to 2023 levels as a result of the capacity reservation agreement we entered into with one of our suppliers in 2022, which will be in effect through 2025.

Additionally, we anticipate cash flows from operating activities to be negatively impacted in the second and fourth quarters of 2024 due to incentives related to a customer contract entered into in the first quarter of 2024.

As of March 31, 2024, we had the following outstanding borrowings:

Additionally, we anticipate cash flows from operating activities to be negatively impacted in the fourth quarter of 2024 due to incentives related to the customer contract as described above.

As of June 30, 2024, we had the following outstanding borrowings:

(dollars in thousands)

2026 Senior Notes

2026 ABL Revolver

Unamortized deferred financing costs

Total long-term debt

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

2026 Senior Notes

On March 15, 2021, we completed an offering of $310.0 million aggregate principal amount of 8.625% Senior Secured Notes due 2026 (the “2026 Senior Notes”) and related guarantees at an issue price of 100%.

The 2026 Senior Notes bear interest at a rate of 8.625% per annum and mature on March 15, 2026.

Interest is payable on the 2026 Senior Notes on March 15 and September 15 of each year.

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

We may redeem some or all of the Senior Notes in 2024, subject to market and other conditions.

Pursuant to the terms of the indenture, redemptions would be priced at 102.156% of the principal amount of any notes to be redeemed from March 16, 2024 through March 15, 2025, and reducing to 100% thereafter, 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, our capital needs and other factors.

On March 15, 2021, we entered into a Credit Agreement with Wells Fargo Bank, National Association providing for an ABL Revolver.

2026 ABL Revolver

On March 15, 2021, we entered into a Credit Agreement with Wells Fargo Bank, National Association providing for the 2026 ABL Revolver.

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

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The applicable interest rate margin ranges from 1.25% 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,

between 0.375% to 0.50% per annum, multiplied by the aggregate amount of Revolver commitments less the average Revolver usage during the immediately preceding month.

The unused portion of the 2026 ABL Revolver commitment accrues a monthly unused line fee, between 0.375% to 0.50% per annum, multiplied by the aggregate amount of Revolver commitments less the average Revolver usage during the immediately preceding month.

Amounts borrowed and outstanding under the 2026 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 2026 Senior Notes (and may be subject to earlier mandatory prepayment upon certain events).

Refer to Note 15, “Subsequent Events” of the Condensed Consolidated Financial Statements in this report for information regarding the refinancing of both the 2026 Senior Notes and the 2026 ABL Revolver that occurred in July 2024.

Cash Priorities

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We primarily use cash in investing activities for capital expenditures.

During the three months ended March 31, 2024, capital expenditures, including investments to support the business, such as machinery and information technology equipment, totaled $1.5 million.

During the six months ended June 30, 2024, capital expenditures, including investments to support the business, such as machinery and information technology equipment, totaled $2.7 million.

During 2023, we commenced work on relocating and modernizing our production facility in Indiana.

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This authorization expires on December 31, 2024.

During the three months ended March 31, 2024, we repurchased 68,258 shares of our common stock at an average price of $18.29 per share excluding commissions, or $1.2 million in aggregate, on a trade date basis.

In accordance with the Stock Repurchase Agreement entered into on December 6, 2023, we are obligated to purchase from Tricor Pacific Capital Partners (Fund IV) US, LP (“Parallel49”), which is one of the Company’s majority stockholders, three times the number of shares of the Company’s common stock acquired by the Company in the open market over the period December 6, 2023 through March 31, 2024 from non-Parallel49 holders.

As of March 31, 2024, the Company was obligated to repurchase 244,314 shares from Parallel49 at an average price of $18.03 per share, and the related payment of $4.4 million was made in April 2024.

We had $14.1 million remaining in our share repurchase authorization as of March 31, 2024.

During the six months ended June 30, 2024, the Company repurchased 352,750 shares of its common stock at an average price of $18.14 per share, excluding commissions, or $6.4 million in aggregate, on a trade date basis.

This amount includes 244,314 shares purchased from one of our majority shareholders at an average price of $18.03 per share, in accordance with the Stock Repurchase Agreements entered into with Tricor Pacific Capital Partners (Fund IV) US, LP (“Parallel49”).

As of June 30, 2024, the Company is obligated to repurchase an additional 120,534 shares at an average price of $18.23 per share from Parallel49.

This obligation is based on a multiple of the number of shares the Company purchased in the open market between April 1, 2024 and June 30, 2024, payment for which is due in the third quarter of 2024.

We had $11.2 million remaining in our share repurchase authorization as of June 30, 2024.

We may purchase shares through open market purchases or through privately negotiated transactions, the extent and timing of which will depend upon a variety of factors, including market conditions, regulatory requirements and other corporate considerations, as determined by us.

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Debt Service Requirements

As of March 31, 2024, the total projected principal and interest payments on our borrowings were $314.8 million, primarily related to the Senior Notes, of which $23.5 million of interest is expected to be paid in the next 12 months.

As described in Note 15, “Subsequent Events” of the Condensed Consolidated Financial Statements in this report, we refinanced our 2026 Senior Notes and 2026 ABL Revolver in July 2024.

As of July 11, 2024, the total projected principal and interest payments on our borrowings are $433.9 million, primarily related to the 2029 Senior Notes, of which $15.0 million of interest is expected to be paid in the next 12 months.

These expected interest payments do not include premium and accrued interest of $13.2 million that was paid in connection with the refinancing of the 2026 Senior Notes.

The remaining interest payments are expected to be paid over the remaining term of the 2029 Senior Notes, which mature in 2029, 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, 2024, 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, 2023.

As of June 30, 2024, 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, 2023.

Critical Accounting Policies and Estimates

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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, 2023, for which there were no material changes as of March 31, 2024, included:

Our Critical Accounting Policies and Estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023, for which there were no material changes as of June 30, 2024, 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