CPI Card Group Inc. Reports Fourth Quarter and Full Year 2015 Results
Fourth Quarter Net Sales of $93.6 million and Pro Forma Adjusted Diluted EPS of $0.16
Initiates Quarterly Dividend
Announces 2016 Financial Outlook
Call scheduled for Wednesday, February 24, 2016 at 5:00 p.m. Eastern Time
Littleton, Colo. February 24, 2016 -- CPI Card Group Inc. (Nasdaq: PMTS; TSX: PNT) (“CPI Card Group” or the “Company”) today reported financial results for the fourth quarter and full fiscal year ended December 31, 2015.
Fourth Quarter 2015 Highlights
- Net sales were $93.6 million, an increase of 6.5% over the prior year period.
- Adjusted EBITDA was $21.8 million, or 23.3% of net sales, up 20.8% over the prior year period.
- Net loss from continuing operations was $(1.6) million, or $(0.03) per share, compared with net income from continuing operations of $5.6 million in the prior year period. Fourth quarter 2015 net loss from continuing operations reflects the impact of a $4.7 million, or $(0.06) per share, accelerated amortization charge of debt issuance cost and discount primarily related to the early repayment of $112.5 million of debt using the proceeds from the Company’s initial public offering (“IPO”), and a charge of $6.9 million, or $(0.08) per share, related to the settlement of the Company’s Phantom Stock Plan in conjunction with the IPO.
- Adjusted net income from continuing operations was $8.8 million, or $0.16 per share on a pro forma diluted basis, an increase of 7.6% over the prior year period.
Full Year 2015 Highlights
- Net sales were $374.1 million, an increase of 43.3% over the prior year.
- Adjusted EBITDA was $96.2 million, or 25.7% of net sales, up 77.5% over the prior year.
- Net income from continuing operations was $31.3 million, an increase of 95.7% over the prior year.
- Adjusted net income from continuing operations was $47.3 million, or $0.83 per share on a pro forma basis, an increase of 107.6% over the prior year.
- On October 15, 2015, CPI Card Group Inc. completed its initial public offering (“IPO”), issuing 15,000,000 shares of common stock at $10.00 per share.
“Our fourth-quarter results cap a strong 2015 for CPI Card Group. Our performance is a testament to the strength of our business model and leading position in the North American payment cards solutions market. Looking ahead, we will remain focused on executing our strategic growth initiatives in 2016, which include expanding with our existing client base, penetrating new market verticals, introducing additional products and services, and selectively pursuing strategic acquisitions. I am optimistic about the breadth of growth opportunities available to us, and believe we are well positioned to continue capitalizing on the on-going EMV card conversion within the U.S. financial card market, as well as increasing demand for card personalization and other value-added services,” said Steve Montross, president and chief executive officer of CPI Card Group.
Mr. Montross added, “The quarterly dividend program announced today is a reflection of our strong cash flow and our confidence in our long-term growth prospects, as well as our commitment to enhancing total value for our shareholders.”
Fourth Quarter and Full Year 2015 Segment Information
U.S. Debit and Credit:
Net sales increased 11.2% to $67.5 million in the fourth quarter of 2015 from $60.7 million in prior year period. Gross profit increased 13.8% to $23.6 million from $20.8 million in the prior year period, and gross profit margin expanded to 35.0% from 34.2% in the prior year period. Income from operations increased to $16.9 million from $14.7 million in the fourth quarter of 2014, while operating margins expanded to 25.0% from 24.2% in the prior year period. EBITDA grew 23.7% to $19.0 million, or 28.2% of net sales, from $15.4 million, or 25.3% of net sales, in the fourth quarter of 2014. The growth in the U.S. Debit and Credit segment was driven by the continued conversion of financial payment cards from magnetic stripe to EMV, with the number of EMV chip cards sold increasing by 21.3% as compared with the fourth quarter of 2014. For the year ended December 31, 2015, the U.S. Debit and Credit segment net sales increased 72.3% compared with the prior year.
U.S. Prepaid Debit:
Net sales for the fourth quarter grew 1.4% to $12.4 million from $12.2 million in the fourth quarter of 2014. Gross profit increased 4.0% to $4.1 million from $3.9 million in the prior year, and gross profit margin expanded to 33.1% from 32.3% in the prior year. Income from operations increased 4.3% to $2.7 million from $2.6 million in the fourth quarter of 2014, while operating margins increased to 21.9% from 21.3% in the prior year period. EBITDA was $3.3 million, or 26.3% of net sales, compared with $3.3 million, or 27.3% of net sales, in the fourth quarter of 2014. The growth of U.S. Prepaid Debit segment revenues in the fourth quarter of 2015 reflects solid retail prepaid sales across the customer base, partially offset by the timing of product refreshes and program launches and strong replenishments by certain prepaid program managers in the prior year period. For the year ended December 31, 2015, U.S. Prepaid Debit segment net sales increased 11.1% compared with the prior year.
Net sales decreased 2.3% to $10.8 million from $11.0 million in the fourth quarter of 2014. U.K. Limited net sales in the fourth quarter of 2015 were negatively impacted by approximately $(0.5) million due to unfavorable foreign currency exchange rate fluctuations. On a constant currency basis, U.K. Limited net sales increased 1.9% compared with the fourth quarter of 2014. Gross profit increased 3.8% to $3.0 million from $2.9 million in the prior year, and gross profit margin expanded to 28.1% from 26.4% in the prior year. Income from operations increased 2.0% year-over-year to $1.3 million, while operating margins expanded to 12.0% from 11.5% in the prior year period. Income from operations benefitted from lower depreciation expense in the fourth quarter of 2015 compared to 2014. EBITDA was $1.5 million, or 13.9% of net sales, the same as the fourth quarter of 2014. For the year ended December 31, 2015, U.K. Limited segment net sales declined 2.3% compared with the prior year. On a constant currency basis, U.K. Limited segment net sales for the year ended December 31, 2015 increased 4.9% compared with the prior year.
Interest expense, net, increased to $10.2 million from $2.1 million in the fourth quarter of 2014, reflecting higher debt levels as a result of the new $435.0 million Term Loan B facility that the Company put in place during August 2015. Interest expense in the fourth quarter of 2015 includes accelerated amortization of debt issuance costs and discount of $4.7 million related primarily to the early repayment of $112.5 million of debt using proceeds from the Company’s IPO in October 2015 and higher average debt balances compared with the fourth quarter of 2014. The effective tax rate was 36.3% for the fiscal year ended December 31, 2015.
Earnings per Share
Giving effect to the 15,000,000 common share issuance from the Company’s IPO in October 2015, pro forma adjusted diluted earnings per share from continuing operations was $0.16 and $0.14 for the three months ended December 31, 2015 and 2014, respectively, while adjusted diluted earnings per share from continuing operations, using actual weighted-average diluted shares outstanding, was $0.16 and $0.20, respectively. Pro forma adjusted diluted earnings per share from continuing operations for the years ended December 31, 2015 and 2014 was $0.83 and $0.40, respectively, and adjusted diluted earnings per share from continuing operations was $1.05 and $0.55, respectively. On a GAAP basis, diluted loss per share was $(0.04) for both the fourth quarter and full year 2015, compared with $(0.18) and $(0.76) for the fourth quarter and full year in 2014, respectively.
Balance Sheet, Cash Flow and Liquidity
Total debt outstanding was $309.0 million at December 31, 2015 net of deferred debt issuance costs and discount of $12.5 million, compared with $426.5 million at September 30, 2015 and $178.8 million at December 31, 2014. The decline in debt during 2015 reflects the use of $112.5 million of cash proceeds from the Company’s IPO to repay debt and an additional repayment in the fourth quarter of $10.0 million with available cash on hand.
Net cash provided by operations for the fiscal year ended December 31, 2015 was $43.9 million compared to $26.6 million in 2014. Cash provided by operating activities in fiscal 2015 included a payment of $13.9 million related to the settlement of the Company’s Phantom Stock Plan in conjunction with the IPO. Capital expenditures totaled $18.7 million for the year ended December 31, 2015, resulting in free cash flow of $25.3 million for fiscal year 2015. Excluding the payment of $13.9 million related to the settlement of the Company’s Phantom Stock Plan, free cash flow was $39.1 million in fiscal 2015, compared with $9.7 million in fiscal 2014.
At December 31, 2015, the Company had $13.6 million of cash and cash equivalents and $39.9 million of unused borrowing capacity under the Company’s revolving credit facility.
Quarterly Dividend Program
CPI Card Group announced today in a separate release that its Board of Directors initiated a quarterly dividend program. The first quarterly dividend of $0.045 per share is payable on April 7, 2016 to stockholders of record at the close of business on March 17, 2016. The declaration and payment of any future dividends will be subject to the discretion of the CPI Card Group Board of Directors, who will evaluate the Company's dividend program from time to time based on factors that it deems relevant.
Full Year 2016 Financial Outlook
The Company’s financial outlook for 2016 is as follows:
- Net sales between $431 million and $445 million representing growth of 15.2% to 18.9%
- Adjusted EBITDA between $111 million and $116 million representing growth of 15.4% to 20.6%
- Pro forma adjusted diluted earnings per share of $0.92 to $0.97 representing growth of 10.8% to 16.9%
Non-GAAP Financial Measures
In addition to financial results reported in accordance with U.S. generally accepted accounting principles (GAAP), we have provided the following non-GAAP financial measures in this release: Adjusted Net Income from Continuing Operations, Adjusted Diluted Earnings per Share from Continuing Operations, EBITDA, Adjusted EBITDA, Pro Forma Adjusted Diluted Earnings per Share from Continuing Operations, Free Cash Flow, Free Cash Flow, excluding Phantom Stock Plan settlement, and Constant Currency. These non-GAAP financial measures are utilized by management in comparing our operating performance on a consistent basis. We believe that these financial measures are appropriate to enhance an overall understanding of our underlying operating performance trends compared to historical and prospective periods and our peers. Management also believes that these measures are useful to investors in their analysis of our results of operations and provide improved comparability between fiscal periods. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information calculated in accordance with GAAP. Our non-GAAP measures may be different from similarly titled measures of other companies. Investors are encouraged to review the reconciliation of these non-GAAP measures to their most directly comparable GAAP financial measures included in Exhibit D to this press release.
Adjusted Net Income from Continuing Operations and Adjusted Diluted Earnings per Share from Continuing Operations
Adjusted Net Income from Continuing Operations and Adjusted Earnings per Share from Continuing Operations (calculated on a diluted basis) exclude restructuring and other similar costs, gains or losses on extinguishment of debt, the impact of stock-based compensation expense, amortization of intangible assets, and other non-operational, non-cash or non-recurring losses, net of their income tax impact. The tax rates used to calculate Adjusted Net Income and Adjusted Earnings per Share are based on the Company’s long-term expected effective tax rate estimate for each period presented. We believe that Adjusted Net Income from Continuing Operations and Adjusted Earnings per Share from Continuing Operations are useful in assessing our financial performance by excluding items that are not indicative of our core operating performance or that may obscure trends useful in evaluating our continuing results of operations. We also present Adjusted Diluted Earnings per Share on a pro forma basis to give effect to our issuance of 15,000,000 shares of common stock in our IPO as if these shares were outstanding at the beginning of all periods presented.
EBITDA represents earnings before interest, taxes, depreciation and amortization. EBITDA is presented because it is an important supplemental measure of performance and it is frequently used by analysts, investors and other interested parties in the evaluation of companies in our industry. EBITDA is also presented and compared by analysts and investors in evaluating our ability to meet debt service obligations. Other companies in our industry may calculate EBITDA differently. EBITDA is not a measurement of financial performance under GAAP and should not be considered as an alternative to cash flow from operating activities or as a measure of liquidity or an alternative to net income as indicators of operating performance or any other measures of performance derived in accordance with GAAP. Because EBITDA is calculated before recurring cash charges, including interest expense and taxes, and is not adjusted for capital expenditures or other recurring cash requirements of the business, it should not be considered as a measure of discretionary cash available to invest in the growth of the business.
Adjusted EBITDA is defined as EBITDA adjusted for restructuring costs, stock-based compensation expense, gains or losses on extinguishment of debt and other items that are unusual in nature or infrequently occurring, as set forth in the reconciliation on Exhibit D. Adjusted EBITDA is also a defined term in our existing credit agreement, which generally conforms to the definition above, and impacts certain credit measures and compliance targets within the credit agreement. Adjusted EBITDA is intended to show our unleveraged, pre-tax operating results and therefore reflects our financial performance based on operational factors, excluding non-operational, non-cash or non-recurring losses or gains. Adjusted EBITDA has important limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for, analysis of our results as reported under GAAP. For example, Adjusted EBITDA does not reflect: (a) our capital expenditures, future requirements for capital expenditures or contractual commitments; (b) changes in, or cash requirements for, our working capital needs; (c) the significant interest expenses, or the cash requirements necessary to service interest or principal payments, on our debt; (d) tax payments that represent a reduction in cash available to us; (e) any cash requirements for the assets being depreciated and amortized that may have to be replaced in the future; or (f) the impact of earnings or charges resulting from matters that we and the lenders under our credit agreement may not consider indicative of our ongoing operations. In particular, our definition of Adjusted EBITDA allows us to add back certain non-cash, non-operating or non-recurring charges that are deducted in calculating net income, even though these are expenses that may recur, vary greatly and are difficult to predict and can represent the effect of long-term strategies as opposed to short-term results.
In addition, certain of these expenses can represent the reduction of cash that could be used for other corporate purposes. Further, although not included in the calculation of Adjusted EBITDA below, the measure may at times allow us to add estimated cost savings and operating synergies related to operational changes ranging from acquisitions to dispositions to restructurings and/or exclude one-time transition expenditures that we anticipate we will need to incur to realize cost savings before such savings have occurred. Further, management and various investors use the ratio of total debt less cash to Adjusted EBITDA (which includes a full pro-forma last-twelve-month impact of acquisitions), or "net debt leverage", as a measure of our financial strength and ability to incur incremental indebtedness when making key investment decisions and evaluating us against peers.
Free Cash Flow
We define Free Cash Flow as cash flow from operations less capital expenditures, and we use this metric in analyzing our ability to service and repay our debt and to forecast future periods. However, this measure does not represent funds available for investment or other discretionary uses since it does not deduct cash used to service our debt.
Constant currency results show our current period operating results as if foreign currency exchange rates had remained the same as those in effect in the prior year period. We present certain constant currency results to facilitate comparisons to our historical operating results.
About CPI Card Group Inc.
CPI Card Group is a leading provider in payment card production and related services, offering a single source for financial and prepaid debit cards including EMV chip, personalization, instant issuance, fulfillment and mobile payment services. With more than 20 years of experience in the payments market and as a trusted partner to financial institutions, CPI’s solid reputation of product consistency, quality and outstanding customer service supports our position as a leader in the market. Serving our customers from nine locations throughout the United States, Canada and the United Kingdom, we have the largest network of high security facilities in North America, each of which is certified by one or more of the payment brands: Visa, MasterCard, American Express, Discover and Interac in Canada. Learn more at www.cpicardgroup.com.
Conference Call and Webcast
CPI Card Group Inc. will host a conference call on February 24, 2016 at 5:00 p.m. EST to discuss its fourth quarter and full year 2015 results. To participate in the Company's live conference call via telephone or online:
Participant Toll-Free Dial-In Number: (877) 881-8051
Participant International Dial-In Number: (440) 996-5681
Conference ID: 28140856
Webcast Link: http://edge.media-server.com/m/p/9uuvowax
Participants are advised to login for the live webcast 10 minutes prior to the scheduled start time. A webcast replay and transcript of the conference call will be available on CPI Card Group Inc.’s Investor Relations web site: http://www.cpicardgroup.com/investor-relations/
Following the completion of the conference call, a replay of the conference call will be available from 8:30 p.m. ET on February 24, 2016 until 11:59 p.m. ET on March 2, 2016. To access the replay, please dial (855) 859-2056 or (404) 537-3406; Conference ID: 28140856.
Statements in this press release that are not statements of historical fact are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward looking statements may be identified by terms such as statements about our plans, objectives, expectations, assumptions or future events. The words “may,” “will,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “continue” and other similar expressions are intended to identify forward-looking statements. These statements involve risks and uncertainties that could cause actual results to differ materially from those described in such statements. These risks and uncertainties include, among others: material breaches in the security of our systems; market acceptance of developing technologies that make Financial Payment Cards less relevant; a slower or less widespread adoption of EMV and Dual-Interface EMV technology than we anticipate; difficulties in our production processes; defects in our software; our failure to operate our business in accordance with the PCI security standards or other industry standards such as Payment Card Brand certification standards; extension of card expiration cycles; a decline in U.S. and global market and economic conditions; failure to identify, attract and retain new customers or a failure to maintain our relationships with our major customers; our substantial indebtedness; infringement on our intellectual property rights, or claims that our technology is infringing on third-party intellectual property; failure to meet our customers’ demands in a timely manner; competition and/or price erosion in the payment card industry; our dependence on licensing arrangements; inability to renew leases for our facilities; interruptions in our IT systems or production capabilities; the restrictive terms of our credit facility and covenants of future agreements governing indebtedness; non-compliance with, and changes in, laws in foreign jurisdictions in which we operate and sell our products; challenges related to our acquisition strategy; our dependence on specialized equipment from third party suppliers; and other risk factors or uncertainties identified from time to time in our filings with the Securities and Exchange Commission (“SEC”). Although CPI Card Group Inc. believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Reference is made to a more complete discussion of forward-looking statements and applicable risks contained under the captions “Forward-Looking Statements” and “Risk Factors” in CPI Card Group Inc. Prospectus filed with the SEC on October 9, 2015 pursuant to Rule 424(b) under the Securities Act of 1933, as amended. CPI Card Group Inc. undertakes no obligation to update or revise any of its forward-looking statements, whether as a result of new information, future events or otherwise.
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CPI Card Group Inc.
Earnings Release Supplemental Financial Information
February 24, 2016
Exhibit A Consolidated Statements of Operations and Comprehensive (Loss) Income - Unaudited for the three months and years ended December 31, 2015 and 2014
Exhibit B Consolidated Balance Sheets - Unaudited as of December 31, 2015 and 2014
Exhibit C Consolidated Statements of Cash Flows - Unaudited for the years ended December 31, 2015 and 2014
Exhibit D Supplemental GAAP to Non-GAAP Reconciliation - Unaudited for the three months and years ended December 31, 2015 and 2014
Exhibit E Summary Segment Information – Unaudited for the three months and years ended December 31, 2015 and 2014
Exhibit F 2016 Guidance: Adjusted Net Income and Earnings per Share