Jeff Hochstadt: Thanks, John, and good morning, everyone. I will begin my overview on Slide 8. The fourth quarter environment was generally what we expected as customers remain cautious with spending and continue to work down their inventory levels. The sales decline had a negative effect on margins as we lost operating leverage, although we continue to manage discretionary spending tightly. Overall, fourth quarter net sales declined 19%. Net income decreased 78%, and adjusted EBITDA declined 27% compared to the prior year period. For the full year, net sales decreased 7%, net income declined 34% and adjusted EBITDA fell 8% as reductions in operating expenses helped to offset the impacts of the sales and gross margin decline.
Net income for both the quarter and the year was negatively impacted by accruals for the previously announced Executive Retention Award as well as higher tax rates. Despite the reduction in net income, we were able to significantly increase our free cash flow for the year, more than doubling last year’s level due to improvements in working capital and tight management of capital spending. We were also able to maintain a relatively consistent net leverage ratio ending the year at 3.1x. Turning to the detailed fourth quarter results on Slide 9. The 19% sales decline was comprised of a 22% decrease in our debit and credit segment and a 5% decline in prepaid. Within debit and credit, the primary driver of this decline was reduced card sales. We saw this decline across contactless, contact and non-EMV cards.
Sales of eco-focused cards declined compared to some very large orders in the prior year period but did increase relative to the third quarter as we filled some good-sized orders in the fourth quarter. Card@Once’s instant issuance sales increased in the fourth quarter compared to prior year, driven by growth in both solution sales and transaction processing fees, while other personalization services declined. The sales declines for both the debit and credit and prepaid segments also reflect very challenging comparisons with the 2022 fourth quarter when debit and credit sales increased 35% and prepaid grew 39%. Gross profit in the 2023 fourth quarter declined 25% from prior year and the gross profit margin decreased from 37.6% to 34.4%, although it did increase slightly from the third quarter level.
Compared to the prior year period, the lower sales levels negatively affected gross margin due to the impact on fixed costs within cost of sales and margin was also impacted by higher material costs, primarily chips, partially offset by labor efficiencies in our prepaid segment. SG&A expenses, including depreciation and amortization were consistent with the prior year period as lower selling expenses and professional services costs. were partially offset by higher compensation expenses. The increase in compensation expenses was driven by approximately $3 million of accruals related to the previously announced Chief Executive Retention Award, including a stock compensation component and a higher headcount in salaries, partially offset by lower short-term incentive compensation expenses.
Our tax rate in the fourth quarter increased to 29.8% compared to 19.4% in the prior year quarter, which brought our full year rate of 30.4%. The increased full year tax rate for 2023 primarily reflects limitations on deductibility of executive compensation related to the executive retention package and favorable adjusted items in the prior year. We currently expect the 2024 rate to be fairly similar to the 2023 level. Net income in the fourth quarter decreased 78% to $2.7 million, and adjusted EBITDA decreased 27% to $19.9 million. Adjusted EBITDA margin declined from 21.5% in the prior year to 19.3% as a result of the reduced sales levels and related lower gross margins. As mentioned, the net income decline also reflects the impacts of the executive retention and award accrual, which is not included in adjusted EBITDA and a higher tax rate, partially offset by lower interest expense.
Turning now to our full year results on Slide 10. For the full year, net sales decreased 7% with the debit and credit segment down 8% and prepaid debit down 2%. Debit and credit sales declines primarily reflect lower eco-focused card sales compared to very large orders in 2022 and declines in contact cards, partially offset by increases in volumes of other contactless cards. For the year, contactless cards, including eco-focus cards represented just over 80% of the volume of secured cards we sold, up from just over 75% in 2022. Card@Once instant issuance sales increased for the year, driven primarily by transaction processing fees. Pricing contributed approximately two percentage points of growth in 2023, primarily related to actions taken in 2022.
Full year gross profit decreased 12% from the prior year, with gross profit margin decreasing from 36.9% to 35.0% driven by lower sales levels and increased material costs, partially offset by pricing benefits and lower freight costs. Total SG&A expenses decreased by $2.7 million as reduced professional services expense more than offset an increase in total compensation expense. The total compensation expense increase was primarily driven by accruals of $7 million related to the CEO Executive Retention Award and higher salaries and headcount, partially offset by lower short-term incentive compensation expense. The final $2 million accrual for the Executive Retention Award will be incurred in the first quarter of 2024. Full year net income decreased 34% to $24 million, and adjusted EBITDA decreased 8% to $89.5 million.
Adjusted EBITDA margin decreased from 20.5% in the prior year to 20.1%, driven by the reduced sales levels, partially offset by lower operating expenses. The net income decline also reflects the Executive Retention Award and a higher tax rate, partially offset by lower interest expense. Turning now to our segments on Slide 11. I discussed the segment sales drivers earlier, so I will just discuss segment profitability on this slide. Income from operations for the debit and credit segment decreased 39% in the fourth quarter and declined 14% for the full year. Income declines in both periods were driven by decreased sales and higher material costs, partially offset by lower operating expenses. Prepaid Debit segment income from operations increased 35% in the fourth quarter to $7 million, with growth driven by comparisons with some large expenses incurred in the fourth quarter of 2022 and by labor efficiencies.
