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CPI Card Group Inc. Reports First Quarter 2016 Results

LITTLETON, Colo., May 11, 2016 (BUSINESS WIRE) -- CPI Card Group Inc. PMTS, -2.30% (PNT) (“CPI Card Group” or the “Company”) today reported financial results for the first quarter ended March 31, 2016.

First Quarter 2016 Highlights

  • U.S. Debit and Credit EMV [®] chip card shipments were 41.4 million, a 66.1% increase over the prior year period and a 6.6% sequential increase from the fourth quarter of 2015.
  • Net sales were $86.4 million, an increase of 11.7% over the prior year period.
  • Adjusted EBITDA was $18.8 million, or 21.7% of net sales, up 13.1% over the prior year period.
  • Net income from continuing operations was $5.7 million, or $0.10 per share, compared with net income from continuing operations of $6.0 million in the prior year period.
  • Adjusted net income from continuing operations was $7.1 million, or $0.13 per share on a diluted basis, compared with $7.3 million the prior year period.

“Our first quarter results were slightly below expectations, with the primary impact resulting from lower than expected EMV card shipments,” said Steve Montross, president and chief executive officer of CPI Card Group. “Based on discussions with customers and other market participants, including chip suppliers, it has become clear that two separate adverse trends have developed in the U.S. EMV card market that will delay into 2017 the anticipated growth in sales of EMV cards by the card manufacturers to the card issuers. First, the carryover into 2016 of unissued EMV card inventories at the large issuers and processors is much greater than anticipated, and accordingly, their EMV card purchases are being curtailed until inventories return to normal levels. Second, we are seeing evidence of slower than anticipated EMV conversions for the small to mid-sized issuers at the processor level, which leads us to expect a delay to 2017 of a portion of EMV card demand by this market segment that we had expected in 2016. As a result of these trends, we are reducing our full-year 2016 guidance range. Despite our reduced 2016 outlook, we continue to see significant growth opportunity for CPI Card Group driven by the ongoing industry migration to EMV chip cards, given that approximately 50% of total debit and credit cards issued in the United States are EMV cards today, the high replacement rate of financial payment cards, as well as the continued strong demand for our value-added services including card personalization, fulfillment, and our Card@Once solution.”

Full Year 2016 Financial Outlook

The aforementioned market trends will impact the U.S. market demand in 2016 for EMV card production at a level that is significantly below our prior expectations for the year. Accordingly, we currently anticipate that our U.S. Debit and Credit net sales will be significantly below our original expectations for 2016 and those provided in our previous full year guidance. The Company’s current financial outlook for 2016 is revised as follows:

  • Net sales between $335 million and $355 million
  • Adjusted EBITDA between $75 million and $82 million
  • Adjusted diluted earnings per share of $0.50 to $0.58

First Quarter 2016 Segment Information

U.S. Debit and Credit:

Net sales increased 30.0% to $65.1 million in the first quarter of 2016 from $50.1 million in prior year period. Gross profit increased 37.9% to $23.2 million from $16.8 million in the prior year period, and gross profit margin expanded to 35.6% from 33.6% in the prior year period. Income from operations increased to $17.1 million from $11.0 million in the first quarter of 2015, while operating margins expanded to 26.2% from 21.9% in the prior year period. EBITDA grew 50.4% to $18.9 million, or 29.1% of net sales, from $12.6 million, or 25.1% of net sales, in the first quarter of 2015. 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 66.1% compared with the first quarter of 2015, and 6.6% compared to the fourth quarter of 2015.

U.S. Prepaid Debit:

Net sales for the first quarter decreased 29.2% to $12.3 million from $17.4 million in the first quarter of 2015. Gross profit was $4.1 million compared with $6.7 million in the prior year period, and gross profit margin was 33.0% compared with 38.4% in the prior year period. Income from operations in the first quarter of 2016 was $2.7 million compared with $5.3 million in the prior year period, while operating margins were 21.8% compared with 30.5% in the prior year period. EBITDA was $3.3 million, or 26.5% of net sales, compared with $6.0 million, or 34.3% of net sales, in the first quarter of 2015. The year-over-year decline of U.S. Prepaid Debit segment revenues primarily reflects the timing of the refresh of packaging designs by a significant customer during the first quarter of 2015, which did not recur in the first quarter of 2016.

U.K. Limited:

Net sales were $6.2 million in the first quarter of 2016, which was unchanged from the prior year period, and were negatively impacted by approximately $0.4 million due to unfavorable foreign currency exchange rate fluctuations. On a constant currency basis, U.K. Limited net sales increased 5.8% compared with the first quarter of 2015. Gross profit increased 21.3% to $1.6 million from $1.3 million in the prior year period, and gross profit margin expanded to 25.8% from 21.3% in the prior year period. Income from operations was $0.1 million in the first quarter of 2016, compared with a slight loss in the prior year period. EBITDA was $0.2 million, or 3.5% of net sales, compared with $0.2 million in the prior year period.

Other:

Interest expense, net, increased to $5.0 million from $1.9 million in the first quarter of 2015, reflecting higher average debt balances. The effective tax rate was 33.0% for the quarter ended March 31, 2016.

Earnings per Share

Adjusted diluted earnings per share from continuing operations was $0.13 for the quarter ended March 31, 2016, compared with $0.13 in the first quarter of 2015 after giving effect to the 15,000,000 common share issuance from the Company’s IPO in October 2015. Adjusted diluted earnings per share from continuing operations, calculated using actual weighted-average diluted shares outstanding, was $0.13 for the first quarter of 2016 compared with $0.18 for the first quarter of 2015. On a GAAP basis, diluted earnings per share was $0.10 for the first quarter of 2016, compared with a loss of $0.15 for the first quarter of 2015. Included in EPS during the three months ended March 31, 2015 were preferred stock dividends of $12.6 million.

Balance Sheet, Cash Flow and Liquidity

Total debt outstanding was $309.5 million at March 31, 2016, net of deferred debt issuance costs and discount of $12.0 million, compared with $309.0 million at December 31, 2015 and $172.3 million at March 31, 2015.

Net cash provided by operations for the quarter ended March 31, 2016 was $16.8 million compared to $12.7 million in the first quarter of 2015. Capital expenditures totaled $3.8 million for the quarter ended March 31, 2016, resulting in free cash flow of $13.0 million for the first quarter of 2016, compared with $7.0 million in the first quarter of 2015.

At March 31, 2016, the Company had $26.9 million of cash and cash equivalents and $39.9 million of unused borrowing capacity under its revolving credit facility.

Quarterly Dividend

CPI Card Group announced today that its Board of Directors has approved the payment of a quarterly dividend. The dividend of $0.045 per share is payable on July 7, 2016 to stockholders of record at the close of business on June 16, 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.

Share Repurchases

Under a separate press release, CPI Card Group announced today that its Board of Directors has approved a stock repurchase plan of up to $20 million, and not to exceed 2,827,105 shares, of its common stock over the next twelve months.

Commenting on the share repurchase plan, Steve Montross stated, “Our new share repurchase program reflects our confidence in our long-term growth prospects, our financial flexibility, and our commitment to enhancing total shareholder value.”

EMV [®] is a registered trademark or trademark of EMVCo LLC in the United States and other countries.

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, 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 Diluted Earnings per Share from Continuing Operations exclude the impact of stock-based compensation expense, amortization of intangible assets, performance bonuses in connection with the EFT...


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