Q2 2021 CPI Card Group Inc Earnings Call

Scott Scheirman: Spectrum by Card-at-Once contributed to 2021 net sales growth, and we now have over 12,000 Card-at-Once instant issuance solutions installed across more than 1,700 US financial institutions. Our fourth strategic priority is market-competitive business model, as we remain focused on driving increased productivity and efficiency. We continue to invest in our core business to gain efficiencies and expand capabilities, enabling us to allocate resources to provide customers unmatched solutions, innovation, and world-class service. To summarize, we believe CPI is well-positioned to capitalize on market opportunities in an industry that continues to grow and evolve. Execution on our four strategic priorities of deep customer focus, market-leading quality products and customer service, continuous innovation, and a market-competitive business model is enabling us to attract and retain our traditional customers, as well as growing fintech companies.

Spectrum by Card-at-Once contributed to 2021 net sales growth, and we now have over 12,000 Card-at-Once instant issuance solutions installed across more than 1,700 US financial institutions. Our fourth strategic priority is market-competitive business model, as we remain focused on driving increased productivity and efficiency. We continue to invest in our core business to gain efficiencies and expand capabilities, enabling us to allocate resources to provide customers unmatched solutions, innovation, and world-class service. To summarize, we believe CPI is well-positioned to capitalize on market opportunities in an industry that continues to grow and evolve. Execution on our four strategic priorities of deep customer focus, market-leading quality products and customer service, continuous innovation, and a market-competitive business model is enabling us to attract and retain our traditional customers, as well as growing fintech companies.

Scott Scheirman: We are proud of the strong financial results we delivered in the first half of 2021, and look forward to continuing to successfully implement our strategic priorities in the future. I will now turn the call over to our CFO, John Lowe, to review our second quarter and first half financial and operating highlights in more detail. John?

We are proud of the strong financial results we delivered in the first half of 2021, and look forward to continuing to successfully implement our strategic priorities in the future. I will now turn the call over to our CFO, John Lowe, to review our second quarter and first half financial and operating highlights in more detail. John?

John Lowe: Thank you, Scott. Good morning, everyone. I will begin my overview of our results from the second quarter and first half of 2021 on slide nine. Second quarter net sales increased 31% compared with the second quarter of 2020 to $93 million. Net sales growth was driven by a 25% increase from our debit and credit segment, and a 51% increase from our prepaid debit segment. Results in both segments were primarily driven by new customer growth, as Scott described earlier, and from the ongoing transition to contactless cards, as well as growth with existing customers. As a reminder, contactless cards have additional technology and generally have a higher selling price than contact-only cards. Our prior year net sales in the second quarter and first half were also impacted in both segments by lower customer demand than expected, which we believe was primarily attributable to the COVID-19 pandemic.

John Lowe: Thank you, Scott. Good morning, everyone. I will begin my overview of our results from the second quarter and first half of 2021 on slide nine. Second quarter net sales increased 31% compared with the second quarter of 2020 to $93 million. Net sales growth was driven by a 25% increase from our debit and credit segment, and a 51% increase from our prepaid debit segment. Results in both segments were primarily driven by new customer growth, as Scott described earlier, and from the ongoing transition to contactless cards, as well as growth with existing customers. As a reminder, contactless cards have additional technology and generally have a higher selling price than contact-only cards. Our prior year net sales in the second quarter and first half were also impacted in both segments by lower customer demand than expected, which we believe was primarily attributable to the COVID-19 pandemic.

John Lowe: Second quarter gross profit was $37 million, up 61% over the second quarter of last year. Gross margins for the second quarter increased 750 basis points year over year to 39.8%, primarily due to operating leverage from higher net sales. SG&A expenses increased in the second quarter compared to the prior year, mainly due to higher selling and performance incentive compensation due to strong business performance, and from increased healthcare expenses. During the second quarter, we generated net income of $6.2 million, or $0.53 diluted earnings per share, compared to $1.3 million of net income and $0.11 diluted earnings per share in the second quarter of 2020. Adjusted EBITDA was $19.3 million, an increase of 91% year over year, compared to $10.1 million in the second quarter of 2020. The increase was largely due to net sales growth and operating leverage of the business.

Second quarter gross profit was $37 million, up 61% over the second quarter of last year. Gross margins for the second quarter increased 750 basis points year over year to 39.8%, primarily due to operating leverage from higher net sales. SG&A expenses increased in the second quarter compared to the prior year, mainly due to higher selling and performance incentive compensation due to strong business performance, and from increased healthcare expenses. During the second quarter, we generated net income of $6.2 million, or $0.53 diluted earnings per share, compared to $1.3 million of net income and $0.11 diluted earnings per share in the second quarter of 2020. Adjusted EBITDA was $19.3 million, an increase of 91% year over year, compared to $10.1 million in the second quarter of 2020. The increase was largely due to net sales growth and operating leverage of the business.

John Lowe: Our adjusted EBITDA margin increased 650 basis points to 20.7%. Turning to slide ten, first half net sales increased 25% year over year to $182 million, driven by a 21% increase in net sales from our debit and credit segment, and 42% net sales growth from our prepaid debit segment. The primary growth drivers included growth of new and existing customers, the ongoing transition to contactless payment cards, and higher overall volumes in our prepaid debit segment. Year to date, we generated gross profit of nearly $73 million, up 49% from the first half of 2020, due to strong net sales growth and operating leverage. On a year-to-date basis, we expanded gross margins by 640 basis points year over year. SG&A expenses increased in the first half of 2021 compared to the prior year due to similar reasons as the second quarter increase I described earlier.

Our adjusted EBITDA margin increased 650 basis points to 20.7%. Turning to slide ten, first half net sales increased 25% year over year to $182 million, driven by a 21% increase in net sales from our debit and credit segment, and 42% net sales growth from our prepaid debit segment. The primary growth drivers included growth of new and existing customers, the ongoing transition to contactless payment cards, and higher overall volumes in our prepaid debit segment. Year to date, we generated gross profit of nearly $73 million, up 49% from the first half of 2020, due to strong net sales growth and operating leverage. On a year-to-date basis, we expanded gross margins by 640 basis points year over year. SG&A expenses increased in the first half of 2021 compared to the prior year due to similar reasons as the second quarter increase I described earlier.

Per share during the second quarter last year net.

Net income was $6.2 million.

387% higher than last year and.

And adjusted EBITDA increased by 91% to $19.3 million.

Our second quarter and first half net sales growth was driven by earning new customers, including in the Fintech space. Additionally, the ongoing shift to contactless cards drove net sales growth and higher average selling prices in our debit and credit segment.

We also won new business and increased volumes with existing customers and our prepaid debit segment.

Our performance has resulted in strong cash flow.

John Lowe: Additionally, we incurred incremental compliance costs beginning in the second quarter relating to CPI triggering accelerated filer status, and expect these costs to increase in the second half of 2021. Year to date, our net income was $8.6 million, or $0.74 diluted earnings per share. This is inclusive of pre-tax debt extinguishment costs of $5 million, and a $2.6 million May hold premium and interest expense, which resulted from the termination of our senior credit facility and first-line term loan in the first quarter of 2021. Excluding these items, and adjusted for the income tax effect, adjusted net income was $14.4 million in the first half of 2021, or $1.23 adjusted diluted earnings per share. This compares to $3 million of net income, or $0.27 earnings per diluted share in the first half of 2020.

Additionally, we incurred incremental compliance costs beginning in the second quarter relating to CPI triggering accelerated filer status, and expect these costs to increase in the second half of 2021. Year to date, our net income was $8.6 million, or $0.74 diluted earnings per share. This is inclusive of pre-tax debt extinguishment costs of $5 million, and a $2.6 million May hold premium and interest expense, which resulted from the termination of our senior credit facility and first-line term loan in the first quarter of 2021. Excluding these items, and adjusted for the income tax effect, adjusted net income was $14.4 million in the first half of 2021, or $1.23 adjusted diluted earnings per share. This compares to $3 million of net income, or $0.27 earnings per diluted share in the first half of 2020.

Further executed on our capital strategy during the first half of 2021.

We refinanced our debt in the first quarter and paid down to $15 million balance on our ABL revolver to zero in the second quarter continuing to deleverage the balance sheet we.

We accomplished this while investing nearly $20 million in the business to meet our customer needs as the partner of choice.

In addition, we are excited about our recent listing on the NASDAQ stock exchange. We are now trading under the ticker PMT up on the NASDAQ global market.

I want to say, how proud I am of the organization and the progress we have made we extend our gratitude to our employees for their dedication and commitment to safety and serving our customers through the difficult and unpredictable Covid 19 pandemic.

Turning to slide six.

We continue to maintain a steadfast commitment to achieve our vision and strategic priorities.

John Lowe: Year to date, adjusted EBITDA, which excludes the pre-tax debt extinguishment loss and May Hold premium, was $41.4 million, up 84% compared with the first half of 2020. Turning to our segments on slide 11, second quarter debit and credit segment net sales were up 25% year over year to nearly $73 million. During the quarter, we benefited from new and existing customer growth, year-over-year volume increases in contactless card product sales and personalization, and growth in our Card-at-Once instant issuance solutions and CPI on Demand. Income from operations for the debit and credit segment for the second quarter increased $9.6 million, or 89% year over year, to $20 million. Higher net sales and operating leverage drove the strong performance in the second quarter.

Year to date, adjusted EBITDA, which excludes the pre-tax debt extinguishment loss and May Hold premium, was $41.4 million, up 84% compared with the first half of 2020. Turning to our segments on slide 11, second quarter debit and credit segment net sales were up 25% year over year to nearly $73 million. During the quarter, we benefited from new and existing customer growth, year-over-year volume increases in contactless card product sales and personalization, and growth in our Card-at-Once instant issuance solutions and CPI on Demand. Income from operations for the debit and credit segment for the second quarter increased $9.6 million, or 89% year over year, to $20 million. Higher net sales and operating leverage drove the strong performance in the second quarter.

Executing on these priorities has resulted in customer growth and strong financial performance in the first half of 2021.

Our priorities are first deep customer focus SEC.

Market, leading quality products and customer service.

<unk> continuous innovation and force a market competitive business model.

Turning to slide seven.

Beginning with our first priority deep customer focus we continue to listen to the needs of our customers and focus our energy on helping to deliver unique and differentiated solutions that elevate their customer's experience, we strive to be the trusted partner in the payments and exceed expectations through collaboration and the delivery of high <unk>.

Quality and innovative products and services.

John Lowe: For the first half, debit and credit segment net sales were up 21% year over year to nearly $143 million, and income from operations was up 74% year over year to $40 million. Net sales from our prepaid debit segment increased 51% year over year to $20.4 million in the second quarter of 2021. The strong growth included greater sales volumes with existing customers, including the replenishment of inventory, as the prior year was impacted by lower retail store traffic associated with COVID-19 restrictions. Prepaid debit segment income from operations was $7.6 million in the second quarter of 2021, up over 100% from the prior year. Income from operations for the first half of 2021 was $14.6 million, a 93% increase over the prior year, driven by strong net sales growth and favorable cost absorption. Turning to slide 12, our cash balance as of 30 June 2021 was $30.7 million.

For the first half, debit and credit segment net sales were up 21% year over year to nearly $143 million, and income from operations was up 74% year over year to $40 million. Net sales from our prepaid debit segment increased 51% year over year to $20.4 million in the second quarter of 2021. The strong growth included greater sales volumes with existing customers, including the replenishment of inventory, as the prior year was impacted by lower retail store traffic associated with COVID-19 restrictions. Prepaid debit segment income from operations was $7.6 million in the second quarter of 2021, up over 100% from the prior year. Income from operations for the first half of 2021 was $14.6 million, a 93% increase over the prior year, driven by strong net sales growth and favorable cost absorption. Turning to slide 12, our cash balance as of 30 June 2021 was $30.7 million.

Evidence of our focus on the first priority and our ability to deliver end to end solutions to our thousands of direct and indirect customers, including the acquisition of new customers in the attractive small to medium financial institution space and the fast growing fintech space.

These customers are choosing CPI to design produce personalized and fulfill their payment solution needs through our innovative products and services.

We continue to succeed in our prepaid debit segment, where our high quality tamper evident packaging an innovative robust designs makes CPI to market later.

Our strong position with demonstrated by earning new portfolios, including another large U S national chain and additional volumes with our existing customers that drove net sales growth in the first half of 2021.

We are proud of our long standing trusted customer relationships, which includes large medium size and small financial institutions bank platforms and processes that support those institutions and program managers that support the prepaid industry.

Our second priority is to provide market, leading quality products and five star customer service by.

By effectively executing on this priority we further establish CPI as a partner of choice.

For example in the first half of 2021, we launched the Earth's wildcard made with recycled PVC featuring up to 85% up cycled plastic dependents on design.

The recycled plastic card joins the Earth wise high contact card and our second wave card. The first to market payment card featuring a core made with recovered ocean bound plastic.

John Lowe: During the second quarter, we paid off the outstanding balance on our ABL revolver of $15 million, resulting in $50 million available for borrowing, and bringing total available liquidity to more than $80 million at the end of the second quarter. We ended the second quarter with total debt principal outstanding of $310 million, down from $325 million at 31 March and more than $340 million at year-end 2020. Our net debt leverage ratio as of 30 June 2021 was less than 4x, a strong improvement from 5x at the end of 2020. In the first half of the year, we generated $22.7 million in cash from operating activities and spent $3.7 million on capital expenditures. This resulted in free cash flow for the first six months of $19 million, an improvement of $8.6 million compared to the prior year.

During the second quarter, we paid off the outstanding balance on our ABL revolver of $15 million, resulting in $50 million available for borrowing, and bringing total available liquidity to more than $80 million at the end of the second quarter. We ended the second quarter with total debt principal outstanding of $310 million, down from $325 million at 31 March and more than $340 million at year-end 2020. Our net debt leverage ratio as of 30 June 2021 was less than 4x, a strong improvement from 5x at the end of 2020. In the first half of the year, we generated $22.7 million in cash from operating activities and spent $3.7 million on capital expenditures. This resulted in free cash flow for the first six months of $19 million, an improvement of $8.6 million compared to the prior year.

We are proud of our Earth elements portfolio, which now includes three different eco focused option.

We are the U S market leader in the growing eco focused payment card space as evidenced by selling over $33 million eco focused cards since introducing this portfolio in 2019, we.

We believe our equal focus portfolio, not only helps our customers and providing equal focus solutions for their customers.

Also allows them to support their own corporate ESG goals, our third priority continuous innovation means collaboratively with our customers to deliver unique and differentiated products and solutions that elevate their customer's experience and enhance their brands.

This comes in the form of Eco focused solutions.

Payment card solutions to support the migration to contactless payments.

John Lowe: During the first six months of 2021, we invested over $15 million in inventories to support the business and help mitigate supply chain constraints. Our cash flow from operations also included $6 million in cash income tax refunds, primarily from CARES Act filings. Our first half 2021 results exhibited our commitment to our capital priorities, which are maintaining ample liquidity, investing in the business, and deleveraging the balance sheet. To summarize, we believe the top and bottom line momentum we have achieved thus far in 2021 demonstrates our ability to grow the business and execute on our strategies. While our focus is always on gaining share through new and existing customer growth, our quarter-to-quarter net sales can fluctuate.

During the first six months of 2021, we invested over $15 million in inventories to support the business and help mitigate supply chain constraints. Our cash flow from operations also included $6 million in cash income tax refunds, primarily from CARES Act filings. Our first half 2021 results exhibited our commitment to our capital priorities, which are maintaining ample liquidity, investing in the business, and deleveraging the balance sheet. To summarize, we believe the top and bottom line momentum we have achieved thus far in 2021 demonstrates our ability to grow the business and execute on our strategies. While our focus is always on gaining share through new and existing customer growth, our quarter-to-quarter net sales can fluctuate.

The flexibility of our CPI on demand essentially issued personalization solutions or card at once solution that utilizes our plug and play software as a service platform to Insulet issued payment cards in branch.

And our market leading prepaid solutions.

A recent example, providing our customers in the end solutions is our collaboration with unifying money and premium digital banking service, which now offers our second wave card solution for its unified Premier credit card.

Our second wave payment cards enabled fintech by unifying money to engage a growing market of environmentally conscious consumers, while helping reduce first use plastic and diverting plastic waste from entering the ocean.

John Lowe: As we look forward, certain drivers of our net sales growth in the first half of 2021, including strong net sales growth due to new customer onboarding volumes, may not repeat in the second half. In addition, like many companies, we are experiencing increasing costs and operational impacts related to labor shortages and global supply chain constraints. While small in the first half, these impacts are expected to be greater as we look forward. We are actively working on initiatives related to these impacts. In addition to our ongoing focus on our supply chain, which has and will continue to include investments in inventory, we also plan to continue to invest in equipment to increase efficiencies and capacity, and provide greater capabilities for our customers. We are also focused on our employee recruiting and retention strategies to support our operations.

As we look forward, certain drivers of our net sales growth in the first half of 2021, including strong net sales growth due to new customer onboarding volumes, may not repeat in the second half. In addition, like many companies, we are experiencing increasing costs and operational impacts related to labor shortages and global supply chain constraints. While small in the first half, these impacts are expected to be greater as we look forward. We are actively working on initiatives related to these impacts. In addition to our ongoing focus on our supply chain, which has and will continue to include investments in inventory, we also plan to continue to invest in equipment to increase efficiencies and capacity, and provide greater capabilities for our customers. We are also focused on our employee recruiting and retention strategies to support our operations.

This is yet another example of a growing fintech company that looks to CPI as they expand their offerings into the payment card space.

In addition to growth in environmentally focused solutions <unk> payment card market continues with the ongoing transition to higher priced contactless solutions, which has led to increased year over year demand across our debit and credit segment with feature card personalization and card at once solutions.

We estimated that approximately 30% of U S debit and credit cards in circulation than at the end of 2020, where contactless enabled and believe that number will be close to 50% by the end of 2021. This.

This is consistent with the recent statements by visa regarding their penetration of contactless enabled debit and credit cards in the market.

John Lowe: We will evaluate and pursue various initiatives to help address these impacts. In summary, we are proud of the progress we have made to improve our financial performance in the first half of 2021, including strengthening our balance sheet, and enhancing liquidity. As always, we remain committed and focused on providing high-quality products and solutions to our customers. I will now pass the call back to Scott for some closing remarks. Scott?

We will evaluate and pursue various initiatives to help address these impacts. In summary, we are proud of the progress we have made to improve our financial performance in the first half of 2021, including strengthening our balance sheet, and enhancing liquidity. As always, we remain committed and focused on providing high-quality products and solutions to our customers. I will now pass the call back to Scott for some closing remarks. Scott?

We believe the contactless transition will continue and expect approximately 80% of U S debit and credit cards to be contactless enabled by the end of 2025.

The latest innovation from part at once our software as a service instant issuance offering with the addition of our premium spectrum printer solution, which enables issuers to produce a more defined higher resolution payment card.

Scott Scheirman: Thanks, John. We are pleased with our business performance in the first half of 2021, which I attribute to the hard work of our 1,000-plus employees that strive every day to make CPI a better company. We believe that we are well-positioned to deliver on our strategies as we enter the second half of the year. We displayed solid execution throughout our business, which was reflected by our strong net sales growth and margin expansion. In wrapping up, we remain committed to being the partner of choice by providing market-leading quality products, and customer service through a market-competitive business model. Thank you for joining our call today.

Scott Scheirman: Thanks, John. We are pleased with our business performance in the first half of 2021, which I attribute to the hard work of our 1,000-plus employees that strive every day to make CPI a better company. We believe that we are well-positioned to deliver on our strategies as we enter the second half of the year. We displayed solid execution throughout our business, which was reflected by our strong net sales growth and margin expansion. In wrapping up, we remain committed to being the partner of choice by providing market-leading quality products, and customer service through a market-competitive business model. Thank you for joining our call today.

Spectrum by card at loans contributed to 2021 net sales growth and we now have over 12000 Carter wants instant issuance solution will falls across more than 1700 U S financial institutions.

Our fourth strategic priority is market competitive business model as we remain focused on driving increased productivity and efficiency.

We continue to invest in our core business to gain efficiencies and expand capabilities, enabling us to allocate resources to provide customers unmatched solution innovation and world class service.

To summarize we believe CPI is well positioned to capitalize on market opportunities in an industry that continues to grow and evolve.

Scott Scheirman: This concludes today's call. Thank you for joining, and you may now disconnect your lines.

[Operator]: This concludes today's call. Thank you for joining, and you may now disconnect your lines.

Execution on our four strategic priorities of deep customer focus market, leading quality products and customer service continuous innovation in a market competitive business model is enabling us to attract and retain our traditional customers as well as growing fintech companies.

We are proud of the strong financial results, we delivered in the first half of 2021 and look forward to continuing to successfully implement a strategic priority in the future.

I will now turn the call over to our CFO, John Lowe to review, our second quarter, and first half financial and operating highlights in more detail John.

Thank you Scott and good morning, everyone.

I'll begin my review of our results from the second quarter and first half of 2021 on slide nine.

Second quarter net sales increased 31% compared with the second quarter of $2000.20 million to $93 million net.

Net sales growth was driven by a 25% increase from our debit and credit segment and a 51% increase from our prepaid debit segment.

Results in both segments were primarily driven by new customer growth Scott described earlier.

And from the ongoing transition to contactless cards as well as growth with existing customers. As a reminder, contactless cards have additional technology and generally have a higher selling price and contract only clients.

Prior year net sales in the second quarter and first half were also impacted in both segments by lower customer demand than expected, which we believe was primarily attributable to the Covid 19 pandemic SEC.

<unk> quarter gross profit was $37 million of.

Of 61% over the second quarter of last year gross margins for the second quarter increased 750 basis points year over year to 39, 8%, primarily due to operating leverage from higher net sales.

SG&A expenses increased in the second quarter compared to the prior year, mainly due to higher selling and performance incentive compensation due to strong business performance and from increased healthcare expenses.

During the second quarter, we generated net income of $6.2 million or.

We're 53 cents diluted earnings per share compared to $1.3 million of net income and 11 diluted earnings per share in the second quarter of 2020.

Adjusted EBITDA was $19.3 million, an increase of 91% year over year compared to $10.1 million in the second quarter of 2020. The increase was largely due to net sales growth and operating leverage of the business. Our adjusted EBITDA margin increased 650 basis points to 27.

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Turning to slide 10.

First half net sales increased 25% year over year to $182 million driven by a 21% increase in net sales from our debit and credit segment and 42% net sales growth from our prepaid debit segment.

The primary growth drivers included growth of new and existing customers the ongoing transition to contactless payment cards and higher overall volumes and a prepaid debit segment.

Year to date, we generated gross profit of nearly $73 million up 49% from the first half of 2020 due to strong net sales growth and operating leverage on a year to date basis, we expanded gross margins by 640 basis points year over year.

SG&A expenses increased in the first half of 2021 compared to the prior year due to similar reasons as the second quarter increase I described earlier.

Additionally, we incurred incremental compliance costs beginning in the second quarter related to CPI, triggering accelerated filer status and expect these costs to increase in the second half of 2021.

Year to date, our net income was $8.6 million for 74 diluted earnings per share. This is inclusive of pre tax debt extinguishment costs of $5 million and a $2.6 million make whole premium and interest expense, which resulted from the termination of our senior credit facility.

Lien term loan in the first quarter of 2021 <unk>.

Excluding these items and adjusted for the income tax effect adjusted net income was $14.4 million in the first half of 2021.

Our $1.23, adjusted diluted earnings per share.

This compares to $3 million of net income or <unk> 27 earnings per diluted share in the first half of 2020.

Year to date, adjusted EBITDA, which excludes the pre tax debt extinguishment loss and make whole premium was $41.4 million up 84% compared with the first half of 2020.

Turning to our segments on slide 11 SEC.

Second quarter debit and credit segment net sales were up 25% year over year to nearly $73 million during the quarter, we benefited from new and existing customer growth year over year volume increases in contactless card product sales, Ian personalization and growth in our <unk> instant issuance solutions and CPI on demand.

Income from operations for the debit and credit segment for the second quarter increased $9.6 million or 89% year over year to $20 million higher net sales and operating leverage drove the strong performance in the second quarter.

For the first half debit and credit segment net sales were up 21% year over year to nearly $143 million and income from operations was up 74% year over year to $40 million.

Net sales from our prepaid debit segment increased 51% year over year to $24 million in the second quarter of 2021.

The strong growth included greater sales volumes with existing customers, including the replenishment of inventory of the prior year was impacted by lower retail store traffic associated with Covid 19 restrictions.

Prepaid debit segment income from operations was $7.6 million in the second quarter of 2021 up over 100% from the prior year.

Income from operations for the first half of 2021 was $14.6, million% to 93% increase over the prior year driven by strong net sales growth and favorable cost absorption turn.

On to slide 12.

Our cash balance as of June $32021.37 million.

During the second quarter, we paid off the outstanding balance on our ABL revolver of $15 million, resulting in $50 million available for borrowing and bringing total available liquidity to more than $80 million at the end of the second quarter.

We ended the second quarter with total debt principal outstanding of $310 million down from 325 million at March 31.

And more than $340 million at year end 2020.

Our net debt leverage ratio as of June 32021 was less than four times, a strong improvement from five times at the end of 2020.

In the first half of the year, we generated $22.7 million in cash from operating activities and spent $3.7 million on capital expenditures. This resulted in free cash flow for the first six months of $19 million, an improvement of $8.6 million compared to the prior year.

During the first six months of 2021, we invested over $15 million in inventories to support the business and help mitigate supply chain constraints.

Cash flow from operations also included $6 million in cash income tax refunds, primarily from cares Act filings.

Our first half 'twenty 'twenty, one results exhibited our commitment to our capital priorities, which are maintaining ample liquidity investing.

Investing in the business and deleveraging the balance sheet.

To summarize we believe the top and bottom line momentum we have achieved thus far in 2021 demonstrates our ability to grow the business and execute on our strategies.

While our focus is always on gaining share through new and existing customer growth or quarter to quarter net sales can fluctuate as we look forward certain drivers of our net sales growth in the first half of 2021, including strong net sales growth due to new customer Onboarding volumes may not repeat in the second half.

In addition, like many companies, we are experiencing increasing costs and operational impacts related to labor shortages and global supply chain constraints.

While small in the first half these impacts are expected to be greater as we look forward.

We are actively working on initiatives related to these impacts in addition to our ongoing focus on our supply chain, which has and will continue to include investments in inventory. We also plan to continue to invest in equipment to increase efficiencies and capacity and provide greater capabilities for our customers.

We are also focused on our employee recruiting and retention strategies to support our operations.

We will evaluate and pursue various initiatives to help address these impacts.

In summary, we are proud of the progress we have made to improve our financial performance in the first half of 2021, including strengthening our balance sheet and enhancing liquidity.

Always we remain committed and focused on providing high quality products and solutions to our customers.

I will now pass the call back to Scott for some closing remarks Scott.

Thanks, John we are pleased with our business performance in the first half of 2021, which I attribute to the hard work of our 1000 plus employees that strive every day to make CPI a better company. We believe that we are well positioned to deliver on our strategy as we enter the second half of the year.

We displayed solid execution throughout our business, which was reflected by our strong net sales growth and margin expansion in wrapping up we remain committed to being the partner of choice by providing market, leading quality products and customer service through a market competitive business model. Thank.

Thank you for joining our call today.

This concludes today's call. Thank you for joining and you may now disconnect your lines.

[music].