Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation s
References to the “Company,” “our,” “us” or “we” refer to CPI Card Group Inc. 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, 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 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. Such forward-looking statements, because they relate to future events, are by their very nature subject to many important risks and uncertainties that could cause actual results or other events to differ materially from those contemplated .
These risks and uncertainties include, but are not limited to: 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; the unpredictability of our operating results, including an inability to anticipate changes in customer inventory management practices and its impact on our business; a disruption or other failure in our supply chain, including as a result of 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, or inflationary pressures, 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 inability to recruit, retain and develop qualified personnel, including key personnel, and implement effective succession processes; adverse conditions in the banking system and financial markets, including the failure of banks and financial institutions; system security risks, data protection breaches and cyber-attacks; interruptions in our operations, including our information technology systems, or in the operations of the third parties that operate computing infrastructure on which we rely; our inability to develop, introduce and commercialize new products and services; the usage, or lack thereof, of artificial intelligence technologies; our substantial indebtedness, including inability to make debt service payments or refinance such indebtedness; the restrictive terms of our indebtedness and covenants of future agreements governing indebtedness and the resulting restraints on our ability to pursue our business strategies; our status as an accelerated filer and complying with the Sarbanes-Oxley Act of 2002 and the costs associated with such compliance and implementation of procedures thereunder; our failure to maintain effective internal control over financial reporting; disruptions in production at one or more of our facilities; problems in production quality, materials and process and costs relating to product defects and any related product liability and/or warranty claims; environmental, social and governance (“ESG”) preferences and demands of various stakeholders and our ability to conform to such preferences and demands and to comply with any related regulatory requirements; the effects of climate change, negative perceptions of our products due to the impact of our products and production processes on the environment and other ESG-related risks; damage to our reputation or brand image; disruptions in production due to weather conditions, climate change, political instability or social unrest; our inability to adequately protect our trade secrets and intellectual property rights from misappropriation, infringement claims brought against us and risks related to open source software; defects in our software and computing systems; our limited ability to raise capital; costs and impacts to our financial results relating to the obligatory collection of sales tax and claims for uncollected sales tax in states that impose sales tax collection requirements on out-of-state businesses or unclaimed property, as well as potential new U.S. tax legislation increasing the corporate income tax rate and challenges to our income tax positions; our inability to successfully execute on our divestitures or acquisitions; our inability to realize the full value of our long-lived assets; our inability to renew licenses with key technology licensors; the highly competitive, saturated and consolidated nature of our marketplace; costs and potential liabilities associated
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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; our failure to operate our business in accordance with the Payment Card Industry Security Standards Council security standards or other industry standards; 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 ongoing foreign conflicts; our failure to comply with environmental, health and safety laws and regulations that apply to our products and the raw materials we use in our production processes; risks associated with the majority stockholders’ ownership of our stock; potential conflicts of interest that may arise due to our board of directors being comprised in part of directors who are principals of our majority stockholders; the influence of securities analysts over the trading market for and price of our common stock; failure to meet the continued listing standards of the Nasdaq Global Market; the impact of stockholder activism or securities litigation on the trading price and volatility of our common stock; our inability to fully execute on our share repurchase program strategy; certain provisions of our organizational documents and other contractual provisions that may delay or prevent a change in control and make it difficult for stockholders other than our majority stockholders to change the composition of our board of directors; our ability to comply with a wide variety of complex laws and regulations and the exposure to liability for any failure to comply; the effect of legal and regulatory proceedings; and other risks that are described in Part I, Item 1A – Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on March 7, 2024, in Part II, Item 1A – Risk Factors of this Quarterly Report on Form 10-Q and our other reports filed from time to time with the Securities and Exchange Commission (the “SEC”).
We caution and advise readers not to place undue reliance on forward-looking statements, which speak only as of the date hereof. These statements are based on assumptions that may not be realized and involve risks and uncertainties that could cause actual results or other events to differ materially from the expectations and beliefs contained herein. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise.
Overview
We are a payments technology company and leading provider of comprehensive Financial Payment Card solutions in the United States. We define “Financial Payment Cards” as credit, debit and Prepaid Debit Cards (as defined below) issued on the networks of the “Payment Card Brands” (Visa, Mastercard ® , American Express ® and Discover ® ). We define “Prepaid Debit Cards” as debit cards issued on the networks of the Payment Card Brands, but not linked to a traditional bank account. We also offer an instant card issuance solution, which provides customers the ability to issue a personalized debit or credit card within the bank branch to individual cardholders. We have established a leading position in the Financial Payment Card solutions market through more than 20 years of experience.
We serve a diverse set of several thousand customers which includes direct customers and indirect customer relationships whereby CPI provides Financial Payment Card solutions to a customer through a Group Service Provider (as defined below). Our customers include some of the largest issuers of debit and credit cards in the United States, the largest Prepaid Debit Card program managers in the United States, numerous financial technology companies (“fintechs”), as well as independent community banks, credit unions and Group Service Providers. 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 (“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. Our network of high-security production facilities allows us to optimize our solutions offerings and to serve the needs of our diverse customer base.
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Driven by a combination of our strong relationships, quality, technology, innovation, and supply-chain management, we believe we have strong positions in the following markets:
● the U.S. prepaid debit market, including the largest U.S. Prepaid Debit Card program managers;
● the U.S. small-to mid-sized financial institutions market, which includes independent community banks and credit unions;
● the U.S. large issuer market, serving some of the largest U.S. debit and credit card issuers; and
● the U.S. fintech market, where we produce and personalize Financial Payment Cards for financial technology companies.
Our business consists of the following reportable segments:
● Debit and Credit, which primarily produces Financial Payment Cards and provides integrated card services, including digital services, to card-issuing financial institutions primarily in the United States;
● Prepaid Debit, which primarily provides integrated prepaid card services to Prepaid Debit Card program managers primarily in the United States; and
● “Other,” which includes corporate expenses.
Trends and Uncertainties That May Affect our Financial Performance
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 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 we may experience reduced demand again if such events occur in the future.
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Results of Operations
The following table presents the components of our condensed consolidated statements of operations for each of the periods presented:
Three Months Ended
Six Months Ended
June 30,
June 30,
2024
2023
$ Change
% Change
2024
2023
$ Change
% Change
(dollars in thousands)
Net sales: (1)
Products
$
63,844
$
63,946
$
(102)
(0.2)
%
$
122,002
$
139,736
$
(17,734)
(12.7)
%
Services
54,974
51,014
3,960
7.8
%
108,752
96,076
12,676
13.2
%
Total net sales
118,818
114,960
3,858
3.4
%
230,754
235,812
(5,058)
(2.1)
%
Cost of sales (1)
76,430
74,135
2,295
3.1
%
146,848
151,893
(5,045)
(3.3)
%
Gross profit
42,388
40,825
1,563
3.8
%
83,906
83,919
(13)
(0.0)
%
Operating expenses
27,479
23,333
4,146
17.8
%
54,852
45,829
9,023
19.7
%
Income from operations
14,909
17,492
(2,583)
(14.8)
%
29,054
38,090
(9,036)
(23.7)
%
Other expense, net:
Interest, net
(6,530)
(6,740)
210
(3.1)
%
(12,955)
(13,521)
566
(4.2)
%
Other expense, net
(78)
(78)
—
—
%
(143)
(192)
49
(25.5)
%
Income before taxes
8,301
10,674
(2,373)
(22.2)
%
15,956
24,377
(8,421)
(34.5)
%
Income tax expense
(2,300)
(4,151)
1,851
(44.6)
%
(4,500)
(6,981)
2,481
(35.5)
%
Net income
$
6,001
$
6,523
$
(522)
(8.0)
%
$
11,456
$
17,396
$
(5,940)
(34.1)
%
Gross profit margin
35.7%
35.5%
36.4%
35.6%
(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:
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 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.
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Operating Expenses:
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 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 both the three and six months ended June 30, 2024.
Income Tax Expense:
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
Debit and Credit:
Three Months Ended
Six Months Ended
June 30,
June 30,
2024
2023
$ Change
% Change
2024
2023
$ Change
% Change
(dollars in thousands)
Net sales
$
95,620
$
93,194
$
2,426
2.6
%
$
183,593
$
195,179
$
(11,586)
(5.9)
%
Gross profit
$
34,164
$
33,038
$
1,126
3.4
%
$
65,659
$
71,222
$
(5,563)
(7.8)
%
Income from operations
$
25,389
$
25,081
$
308
1.2
%
$
48,143
$
55,107
$
(6,964)
(12.6)
%
Gross profit margin
35.7%
35.5%
35.8%
36.5%
Net Sales:
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 .
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Gross Profit and Gross Profit Margin:
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 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
June 30,
June 30,
2024
2023
$ Change
% Change
2024
2023
$ Change
% Change
(dollars in thousands)
Net sales
$
23,815
$
21,821
$
1,994
9.1
%
$
48,013
$
40,951
$
7,062
17.2
%
Gross profit
$
8,224
$
7,787
$
437
5.6
%
$
18,247
$
12,697
$
5,550
43.7
%
Income from operations
$
6,909
$
7,628
$
(719)
(9.4)
%
$
15,654
$
11,305
$
4,349
38.5
%
Gross profit margin
34.5%
35.7%
38.0%
31.0%
Net Sales:
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 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 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.
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Other:
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
June 30,
June 30,
2024
2023
$ Change
% Change
2024
2023
$ Change
% Change
(dollars in thousands)
Operating expenses
$
17,389
$
15,217
$
2,172
14.3
%
$
34,743
$
28,322
$
6,421
22.7
%
Operating Expenses:
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 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, 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 “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. These factors include, but are not limited to, changes in economic conditions, especially those impacting our customers, and the pricing, terms and availability of goods and services that we purchase, and financings that we enter into.
Cash Flows from Operating Activities
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 fourth quarter of 2024 due to incentives related to the customer contract as described above.
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Financing
As of June 30, 2024, we had the following outstanding borrowings:
June 30,
December 31,
2024
2023
(dollars in thousands)
2026 Senior Notes
$
267,897
$
267,897
2026 ABL Revolver
4,000
—
Unamortized deferred financing costs
(2,243)
(2,900)
Total long-term debt
$
269,654
$
264,997
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.
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. 1 to the Credit Agreement, which amended the 2026 ABL Revolver. The amendment, 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. On October 11, 2022, we entered into Amendment No. 2 to the Credit Agreement, which amended the 2026 ABL Revolver to adjust certain monthly document delivery terms and to clarify the treatment of certain inventory. We primarily utilize our 2026 ABL Revolver to provide general liquidity and to support shorter term financing requirements.
Borrowings under the amended 2026 ABL Revolver bear interest at a rate per annum equal to the applicable term SOFR adjusted for a credit spread, plus an applicable interest rate margin. 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. 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 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).
Other
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.
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Cash Priorities
Capital Expenditures
We primarily use cash in investing activities for capital expenditures. 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. We anticipate this project will extend into 2025. Total capital expenditures, net for this project are anticipated to increase cash used in investing activities and assets acquired under lease arrangements in both 2024 and 2025.
Share Repurchase Authorization and Activity
On November 2, 2023, our board of directors approved a share repurchase plan authorizing us to repurchase up to $20.0 million of our common stock, par value $0.001 per share. This authorization expires on December 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.
Material Cash Requirements
Our material cash requirements include interest payments on our long-term debt, operating and finance lease payments, and purchase obligations to support our operations.
Debt Service Requirements
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. We have estimated our future interest payments assuming no additional borrowings under the 2029 ABL Revolver, no early redemptions of principal on the 2029 Senior Notes, and no debt issuances or renewals upon the maturity dates of our notes. However, we may borrow additional amounts under the 2029 ABL Revolver, redeem principal on the 2029 Senior Notes early or refinance all or a portion of our borrowings in future periods.
Leases
We lease equipment and real property for production and services. Refer to Part II, Item 8, Financial Statements and Supplementary Data , Note 9, Financing and Operating Leases, in our Annual Report on Form 10-K for the year ended December 31, 2023 for details on our leasing arrangements, including future maturities of our operating lease liabilities.
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In February 2024, we entered into a build-to-suit lease agreement to relocate and modernize our operations at our Fort Wayne, Indiana production facility, which is set to commence the later of: (i) the landlord’s delivery of exclusive possession of the premises and (ii) March 1, 2025. Under this lease agreement, we will pay an annual base rent of $0.9 million subject to an annual rent increase of 2.0%. The lease is for ten years and includes two consecutive options to extend the term of the lease by five years for each such option.
Purchase Obligations
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, 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
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, 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
● Income taxes, including estimates regarding future compensation for covered individuals, valuation allowances and uncertain tax positions.
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