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 September 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 September 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
19
Table of Contents
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 our significant stockholder group’s 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 significant stockholder group; 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 significant stockholder group 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.
20
Table of Contents
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 experienced reduced demand from some of our customers for certain products and services during 2023 and the nine months ended September 30, 2024, which impacted our financial and operating results. We believe the reduced demand was the result of economic and supply chain-related concerns, whereby certain customers increased their inventory of our products during 2022 and then focused on reducing their inventory levels in subsequent periods and may continue to further reduce their inventory levels before returning to normalized purchasing behavior.
Additionally, liquidity concerns in the banking and financial services industry led to takeover of some banking and financial institutions by industry regulators during this period, which also affected demand.
Although we believe the environment is improving and we experienced increased card volume sales and results in our Debit and Credit segment during the third quarter of 2024, we may experience reduced demand if any of the foregoing events continue or reoccur in the future.
21
Table of Contents
Results of Operations
The following table presents the components of our condensed consolidated statements of operations and comprehensive income for each of the periods presented:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2024
2023
$ Change
% Change
2024
2023
$ Change
% Change
(dollars in thousands)
Net sales: (1)
Products
$
69,648
$
55,689
$
13,959
25.1
%
$
191,650
$
195,425
$
(3,775)
(1.9)
%
Services
55,103
50,174
4,929
9.8
%
163,855
146,250
17,605
12.0
%
Total net sales
124,751
105,863
18,888
17.8
%
355,505
341,675
13,830
4.0
%
Cost of sales (1)
80,053
69,711
10,342
14.8
%
226,901
221,604
5,297
2.4
%
Gross profit
44,698
36,152
8,546
23.6
%
128,604
120,071
8,533
7.1
%
Operating expenses
26,900
23,191
3,709
16.0
%
81,752
69,020
12,732
18.4
%
Income from operations
17,798
12,961
4,837
37.3
%
46,852
51,051
(4,199)
(8.2)
%
Other expense, net:
Interest, net
(13,458)
(6,714)
(6,744)
100.4
%
(26,413)
(20,235)
(6,178)
30.5
%
Loss on debt extinguishment
(2,987)
(25)
(2,962)
*
%
(2,987)
(243)
(2,744)
*
%
Other expense, net
(534)
(28)
(506)
*
%
(677)
(2)
(675)
*
%
Income before taxes
819
6,194
(5,375)
(86.8)
%
16,775
30,571
(13,796)
(45.1)
%
Income tax benefit (expense)
474
(2,337)
2,811
(120.3)
%
(4,026)
(9,318)
5,292
(56.8)
%
Net income
$
1,293
$
3,857
$
(2,564)
(66.5)
%
$
12,749
$
21,253
$
(8,504)
(40.0)
%
Gross profit margin
35.8%
34.1%
36.2%
35.1%
* Calculation not meaningful
(1) For the three months ended September 30, 2024 and 2023, net sales and cost of sales each include $0.2 million and $0.3 million of intersegment eliminations, respectively. For the nine months ended September 30, 2024 and 2023, net sales and cost of sales each include $1.0 million and $0.6 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, 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 operations and comprehensive income.
Net Sales:
Net sales increased for the three months ended September 30, 2024, primarily due to increased Products net sales driven by higher card volumes in our Debit and Credit segment, as well as higher S ervices net sales in both our Debit and Credit and Prepaid Debit segments.
Net sales increased for the nine months ended September 30, 2024, primarily due to higher S ervices net sales in our Prepaid Debit segment and higher personalization services net sales in our Debit and Credit segment, partially offset by decreased Products net sales driven by lower card volumes in our Debit and Credit segment .
Gross Profit and Gross Profit Margin:
Gross profit and gross profit margin increased for the three and nine months ended September 30, 2024, primarily due to operating leverage from sales growth described above.
22
Table of Contents
Operating Expenses:
Operating expenses increased for the three months ended September 30, 2024, primarily due to increased compensation-related expenses, including increased employee performance-based incentive compensation and executive severance, partially offset by decreased impacts from an executive retention agreement entered into with our former CEO in 2023.
Operating expenses increased for the nine months ended September 30, 2024, primarily due to increased compensation-related expenses, including increased employee performance-based incentive compensation, stock compensation, salary expense, and executive severance, partially offset by decreased impacts from an executive retention agreement entered into with our former CEO in 2023.
Interest, net :
Interest expense increased for the three and nine months ended September 30, 2024, primarily due to payment of an early redemption premium of $5.8 million related to the redemption of the $267.9 million 8.625% Senior Secured Notes due 2026 (the “2026 Senior Notes”). Interest expense for the three months ended September 30, 2024 also increased due to the impact of the higher interest rates on the $285.0 million aggregate principal amount of 10.000% Senior Secured Notes due 2029 (the “2029 Senior Notes”) issued in July 2024 compared to the 2026 Senior Notes.
Loss on Debt Extinguishment:
During the three and nine months ended September 30, 2024, we recorded a $3.0 million loss on debt extinguishment relating to the unamortized deferred financing costs in connection with the redemption of the 2026 Senior Notes and the refinancing of our ABL Revolver Credit Agreement in July 2024.
Other Expense, net:
Other expense, net increased for both the three and nine months ended September 30, 2024, primarily due to expenses incurred related to a secondary offering of our common shares. See Note 10, “Stockholders’ Deficit” of the condensed consolidated financial statements for further information.
Income Tax Expense:
Our effective tax rates on pre-tax income were (57.9)% and 37.7% for the three months ended September 30, 2024 and 2023, respectively, and 24.0% and 30.5% for the nine months ended September 30, 2024 and 2023, respectively. The benefit recognized for the three months ended September 30, 2024 and the decrease in the effective tax rate for the nine months ended September 30, 2024 related to increased deductibility of stock compensation realized upon certain stock option exercises and restricted stock unit vesting. The effective tax rate for the three and nine months ended September 30, 2023 was impacted by limitation of executive compensation deductibility related to the former CEO’s retention agreement.
23
Table of Contents
Segment Discussion
Debit and Credit:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2024
2023
$ Change
% Change
2024
2023
$ Change
% Change
(dollars in thousands)
Net sales
$
99,755
$
83,780
$
15,975
19.1
%
$
283,348
$
278,959
$
4,389
1.6
%
Gross profit
$
36,131
$
28,381
$
7,750
27.3
%
$
101,790
$
99,603
$
2,187
2.2
%
Income from operations
$
27,035
$
20,791
$
6,244
30.0
%
$
75,178
$
75,898
$
(720)
(0.9)
%
Gross profit margin
36.2%
33.9%
35.9%
35.7%
Net Sales:
Net sales for Debit and Credit increased for the three months ended September 30, 2024, primarily due to higher volume of contactless cards, including eco-focused cards.
Net sales for Debit and Credit increased for the nine months ended September 30, 2024, primarily due to increased Services net sales, partially offset by a decrease in Products net sales. The increase in Services net sales was driven by higher personalization and Card@Once services . The decrease in Products net sales was driven by volume declines in contact-only EMV cards, partially offset by higher volumes of contactless cards and increased Card@Once printer sales.
Gross Profit and Gross Profit Margin:
Gross profit and gross profit margin for Debit and Credit increased for the three and nine months ended September 30, 2024, primarily due to operating leverage from sales growth described above.
Income from Operations:
Income from operations for Debit and Credit increased for the three months ended September 30, 2024, primarily due to the factors discussed in “Gross Profit and Gross Profit Margin” above, partially offset by increased compensation-related operating expenses. Income from operations for Debit and Credit was relatively consistent for the nine months ended September 30, 2024.
Prepaid Debit:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2024
2023
$ Change
% Change
2024
2023
$ Change
% Change
(dollars in thousands)
Net sales
$
25,173
$
22,335
$
2,838
12.7
%
$
73,186
$
63,286
$
9,900
15.6
%
Gross profit
$
8,567
$
7,771
$
796
10.2
%
$
26,814
$
20,468
$
6,346
31.0
%
Income from operations
$
7,111
$
6,631
$
480
7.2
%
$
22,765
$
17,936
$
4,829
26.9
%
Gross profit margin
34.0%
34.8%
36.6%
32.3%
Net Sales:
Net sales for Prepaid Debit increased for the three and nine months ended September 30, 2024, primarily due to increased sales to existing customers of higher-priced packaging solutions.
Gross Profit and Gross Profit Margin:
Gross profit for Prepaid Debit increased for the three months ended September 30, 2024, primarily due to higher net sales. Gross profit margin was relatively consistent compared to the prior year period .
24
Table of Contents
Gross profit and gross profit margin for Prepaid Debit increased for the nine months ended September 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 and nine months ended September 30, 2024, primarily due to the factors discussed in “Gross Profit and Gross Profit Margin” above.
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
Nine Months Ended
September 30,
September 30,
2024
2023
$ Change
% Change
2024
2023
$ Change
% Change
(dollars in thousands)
Operating expenses
$
16,348
$
14,461
$
1,887
13.0
%
$
51,091
$
42,783
$
8,308
19.4
%
Operating Expenses:
Other operating expenses increased for the three and nine months ended September 30, 2024, primarily due to an increase in compensation-related expenses, including the factors discussed in consolidated “Operating Expenses” above.
25
Table of Contents
Liquidity and Capital Resources
At September 30, 2024, we had $14.7 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 Senior Notes, 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 “2029 ABL Revolver”) with available borrowing capacity of $72.7 million as of September 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 nine months ended September 30, 2024 to $16.7 million from $22.3 million for the nine months ended September 30, 2023 primarily due to changes in working capital. Working capital changes included increased inventory purchases related to the capacity reservation agreement we entered into with one of our suppliers in 2022, 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-based incentive compensation payments in 2024 related to 2023 performance as compared to those made in 2023 related to 2022 performance. 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.
Financing
As of September 30, 2024, we had the following outstanding borrowings:
September 30,
December 31,
2024
2023
(dollars in thousands)
2029 Senior Notes
$
285,000
$
—
2026 Senior Notes
—
267,897
Unamortized deferred financing costs
(4,848)
(2,900)
Total long-term debt
$
280,152
$
264,997
2029 Senior Notes
On July 11, 2024 (the “Closing Date”), we completed a private offering by our wholly-owned subsidiary, CPI CG Inc. (the “Issuer”), of $285.0 million aggregate principal amount of 10.000% Senior Secured Notes due 2029 and related guarantees at an issue price of 100%. The notes and related guarantees were offered and sold in a private transaction exempt from the registration requirements of the Securities Act of 1933, as amended, to persons reasonably believed to be qualified institutional buyers in accordance with Rule 144A under the Securities Act and outside the United States to certain non-U.S. persons in compliance with Regulation S under the Securities Act.
Net proceeds from the 2029 Senior Notes, together with cash on hand, were used to redeem the entire principal balance of $267.9 million of 8.625% Senior Secured Notes due 2026 (the “2026 Senior Notes”) as of the Closing Date, and to pay related fees, an early redemption premium of 2.156%, and other expenses. The early redemption premium paid is recorded in “Interest, net” on the condensed consolidated statement of operations and comprehensive income for the three and nine months ended September 30, 2024.
26
Table of Contents
The 2029 Senior Notes mature on July 15, 2029. Interest is payable on the 2029 Senior Notes on January 15 and July 15 of each year, beginning on January 15, 2025. The 2029 Senior Notes are guaranteed by us and our domestic subsidiaries (other than the Issuer), and are secured by substantially all of the assets of the Issuer and the guarantors, subject to customary exceptions. We may be required to make an offer to repurchase the 2029 Senior Notes, upon the occurrence of certain events including a change of control or certain asset sales.
2029 ABL Revolver
On the Closing Date, we and CPI CG Inc. as borrower (the “Borrower”), entered into a credit agreement (the “ABL Credit Agreement”) with JPMorgan Chase Bank, N.A., as lender, administrative agent and collateral agent, providing for an asset-based, senior secured revolving credit facility (the “2029 ABL Revolver”) of up to $75.0 million (the “Maximum Revolver Amount”). The 2029 ABL Revolver is guaranteed by us and our subsidiaries (other than certain excluded subsidiaries), and is secured by substantially all of the assets of the Company, the Borrower and the subsidiary guarantors, subject to customary exceptions.
The 2029 ABL Revolver consists of revolving loans, letters of credit and swing line loans provided by lenders, with a sublimit on letters of credit outstanding at any time of $10.0 million. The 2029 ABL Revolver also includes an uncommitted accordion feature whereby the Borrower may increase the 2029 ABL Revolver commitment by an aggregate amount not to exceed $25.0 million, subject to certain conditions. The 2029 ABL Revolver matures on the earliest to occur of July 11, 2029 and the date that is 91 days prior to the maturity of the 2029 Senior Notes.
As of the Closing Date, we had $4.0 million of outstanding borrowings under a prior Credit Agreement with Wells Fargo Bank, N.A. entered into in March 2021 (the “2026 ABL Revolver”). We used initial borrowings under the 2029 ABL Revolver, together with cash on hand and proceeds under the notes, to repay in full and terminate the 2026 ABL Revolver and to pay related fees and expenses, and will use future borrowings for general corporate purposes.
Borrowings under the 2029 ABL Revolver bear interest at a rate per annum that ranges based on the applicable term secured overnight financing rate (“SOFR”) as administered by the Federal Reserve Bank of New York plus 1.50% to 1.75%, (subject, in each case, to a credit spread adjustment of 0.10%) based on the average daily borrowing capacity under the 2029 ABL Revolver over the most recently completed month. The unused portion of the 2029 ABL Revolver commitment accrues a commitment fee, which ranges from 0.375% to 0.50% per annum, based on the average daily excess availability under the 2029 ABL Revolver over the immediately preceding month.
The 2029 ABL Revolver includes limitations on the Borrower’s ability to borrow in certain situations, including limitations based on the calculation of borrowing capacity and further limitations that are triggered if the amount available to borrow under the ABL Revolver is less than the greater of $7.5 million and 10% of the Maximum Revolver Amount. The borrowing capacity represents the net availability under the ABL Revolver and is calculated as the lesser of a) the total of certain eligible assets, including cash, accounts receivable and inventories, further reduced by stated contribution percentages and adjustments (“Borrowing Base”) and b) the Maximum Revolver Amount. The Borrowing Base is further reduced by credit line reserves, letters of credit, as well as the loan ledger balance outstanding on the ABL Revolver. Additionally, commencing with the month immediately following a date on which borrowing capacity is below the greater of $7.5 million and 10% of the Maximum Revolver Amount and until such time that borrowing capacity equals or exceeds the greater of $7.5 million and 10% of the Maximum Revolver Amount for 30 consecutive days, the Company must maintain a fixed charge coverage ratio (as defined in the Credit Agreement for the ABL Revolver) of at least 1.00 to 1.00, calculated for the trailing 12 months, in order to borrow under the ABL Revolver.
Cash Priorities
Capital Expenditures
We primarily use cash in investing activities for capital expenditures. During the nine months ended September 30, 2024, capital expenditures, including investments to support the business, such as machinery and information technology equipment, totaled $4.2 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 2025.
27
Table of Contents
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 nine months ended September 30, 2024, we repurchased 473,284 shares of its common stock at an average price of $18.16 per share, excluding commissions, or $8.6 million in aggregate, on a trade date basis. This amount includes 364,848 shares purchased from a stockholder that was part of our majority stockholder group at an average price of $18.09 per share, in accordance with the Stock Repurchase Agreements entered into with Tricor Pacific Capital Partners (Fund IV) US, LP (“Parallel49”).
We had $11.2 million remaining in our share repurchase authorization as of September 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 of September 30, 2024, the total projected principal and interest payments on our borrowings are $429.7 million, primarily related to the 2029 Senior Notes, of which $29.2 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 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.
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 September 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
28
Table of Contents
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 September 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.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.