FIRST QUARTER HIGHLIGHTS
- Revenue in line with Q1 2019
- Improved gross margin, selling expenses and net income compared to Q1 2019
- ERP update – shifting focus to achieving post-implementation efficiencies
- Working capital improvement
- COVID-19 updates
BRAMPTON, Ontario–(BUSINESS WIRE)–DATA Communications Management Corp. (TSX: DCM):
|
FIRST QUARTER 2020 COMPARISON TO Q1, 2019 AND Q4, 2019: |
|
|
First Quarter Highlights (vs. Q1, 2019) |
First Quarter Highlights (vs. Q4, 2019) |
|
Revenue of $77.4 million, compared to $78.5 million |
Revenue of $77.4 million, compared to $71.5 million |
|
Cost of sales of $55.8 million, compared to $57.8 million |
Cost of sales of $55.8 million, compared to $54.0 million |
|
Gross margin of 28.0%, compared to 26.4% |
Gross margin of 28.0%, compared to 24.5% |
|
Adjusted EBITDA of $10.5 million, compared to $7.9 million |
Adjusted EBITDA of $10.5 million, compared to $5.5 million |
|
Net income of $2.2 million, compared to net loss of $(0.3) million |
Net income of $2.2 million, compared to net loss of $(4.0) million |
DATA Communications Management Corp. (TSX: DCM) (“DCM” or the “Company”), a leading provider of marketing and business communication solutions to companies across North America, announces its condensed interim consolidated financial results for the three months ended March 31, 2020.
“I am cautiously optimistic that our first quarter 2020 results bode well for us going forward, given the first quarter of 2019 was the only quarter in 2019 not adversely affected by our ERP launch. On its face, that makes the first quarter of 2019 the most challenging of prior year quarters to compare against. In addition to a comparison of the first quarter of 2019, the comparison above to the fourth quarter of 2019 provides further perspective as to your company’s return to progress,” said Michael Coté, President of DCM.
“Our focus in 2019 – interrupted by our ERP launch in June – was a continuation of the focus, and progress made, in 2018. We made progress for the first five months of 2019 returning to more stabilized results in the fourth quarter of 2019.”
“Our ‘return to progress’ in the first quarter of 2020 has your company continuing to focus on five business priorities:
- Core enterprise customers;
- Improving gross margins;
- Reducing SG&A;
- Improving working capital and paying down debt; and
- Digital innovation to support future growth.”
“The impact of the COVID-19 pandemic on our economy and business make it difficult to predict our financial performance for the balance of the year, however your company’s return to progress, reflected in our first quarter 2020 results, reinforces that your company remains a trusted partner to so many of Canada’s leading brands. While we do not expect our return to progress to present itself as a neat straight-line for the remainder of the year, we will ensure, for the balance of 2020, that your company remains flexible and able to adapt to the uncertainty of the economy and the changing needs of our clients.”
PROGRESS ON ERP TRANSITION
As a result of the significant disruption in DCM’s business caused by the implementation of a new ERP system since June 3, 2019, the Company’s liquidity has been constrained by delays in production, shipments and billings to its customers. Significant progress continued to be made throughout the first quarter of 2020 and system issues and data quality were substantively remediated during the fourth quarter of 2019. Production and shipping volumes returned to more normal levels commensurate with activity prior to the implementation of the new ERP system and DCM continues to work on invoice corrections and accounts receivable collection efforts.
Management of DCM has diagnosed the issues that impacted 2019 and is working to strengthen its system processes and financial controls in 2020. DCM has shifted its focus to achieving post-implementation efficiencies, including providing additional training to employees in each business area, simplifying business processes and improving efficiencies in the system as designed. Management is also creating a detailed business process improvement plan to reduce some of the complexities that were designed into the configuration of the system.
COVID-19 GLOBAL PANDEMIC
Management of DCM has been closely monitoring and responding to developments related to COVID-19, including the current and potential impact on global and local economies in the jurisdictions where it operates. While safeguarding the well-being of individuals is the Company’s principal concern, it remains focused on continuity plans and preparedness measures at each of its locations. Several measures designed to ensure continued operation have been implemented to date, including temporary layoffs, wage rollbacks for senior executives and director level employees, shift reductions, reductions in non-essential spending and deferral of other expenses and payments where practical and the Company continues to evaluate and assess further actions.
As businesses begin re-opening post-COVID-19, a growing number are taking part in a program that encourages companies to practice safe hygiene and distancing. DCM is a part of a national program, The POST Promise, designed to help Canadians confidently and safely take the first steps back into public spaces and the workplace.
To date, DCM has not experienced any material disruptions in its supply chain due to COVID-19. Nor has DCM experienced any material credit collection delinquencies related to COVID-19, although certain customers have stretched their payment terms.
IMPAIRMENT
DCM performs an annual impairment analysis of goodwill at the CGU levels during the fourth quarter of each fiscal year, except when there are changes in circumstances that would indicate that the recoverable amount of the CGUs would be lower than their net carrying amount. DCM performed its annual impairment analysis as of December 31, 2019 which showed that the recoverable amounts were greater than the net carrying amounts for all CGUs and no impairment charges were recognized during the year ended December 31, 2019.
As of March 31, 2020, DCM assessed whether there was any indication of impairment. As described above, COVID-19 had an impact on DCM, including all CGUs. Despite DCM continuing to operate as an essential services provider, the Company has experienced a reduction in demand and overall activity, which resulted in temporary layoffs and a number of other actions to reduce spending to lessen the financial impact on the business. In addition, the Company qualified for and received $6.1 million under the Canada Emergency Wage Subsidy, of which $1.6 million was recorded in the first quarter of 2020. DCM concluded that an indication of impairment does exist, and performed an impairment analysis as of March 31, 2020.
It was concluded that there was no impairment of goodwill for the DCM, DCM Burlington, Thistle and Perennial CGUs as at March 31, 2020.
GOVERNMENT GRANTS
DCM has to date qualified for, and received, approximately $6.1 million under the CEWS with $1.6 million of that amount attributable to the first quarter of 2020, and the balance of $4.5 million attributable to the second quarter. DCM met the eligibility criteria using the cash method to calculate its revenue decline for CEWS for Period 1, and accordingly also qualified for Period 2 of this program. Under the cash revenue method, DCM’s revenue was more than 15% lower in March 2020 than in March 2019. However, under the accrual method, DCM’s revenue for the month of March was comparable to that in the prior year. At this time, DCM does not expect to meet the eligibility criteria for Period 3 or additional periods, as its cash revenue has improved considerably on a relative month over month comparison and collections activities have returned to more normal levels.
RESULTS OF OPERATIONS
All financial information in this press release is presented in Canadian dollars and in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”).
TABLE 1 The following table sets out selected historical consolidated financial information for the periods noted.
| For the periods ended March 31, 2020 and 2019 | January 1 to March 31, 2020 | January 1 to March 31, 2019 | ||||||
| (in thousands of Canadian dollars, except share and per share amounts, unaudited) | ||||||||
| Revenues | $ |
77,415 |
$ |
78,549 |
||||
| Cost of revenues |
55,774 |
57,787 |
||||||
| Gross profit |
21,641 |
20,762 |
||||||
| Selling, general and administrative expenses |
17,185 |
17,158 |
||||||
| Restructuring expenses |
743 |
1,682 |
||||||
|
17,928 |
18,840 |
|||||||
| Income before finance costs, other income and income taxes |
3,713 |
1,922 |
||||||
| Finance costs | ||||||||
| Interest expense, net |
2,101 |
2,132 |
||||||
| Debt modification (gains) losses |
(4 |
) |
— |
|||||
| Amortization of transaction costs |
110 |
137 |
||||||
|
2,207 |
2,269 |
|||||||
| Other Income | ||||||||
| Government grant income |
1,622 |
— |
||||||
| Income (loss) before income taxes |
3,128 |
(347 |
) |
|||||
| Income tax (recovery) expense | ||||||||
| Current |
— |
32 |
||||||
| Deferred |
918 |
(56 |
) |
|||||
|
918 |
(24 |
) |
||||||
| Net income (loss) for the period | $ |
2,210 |
$ |
(323 |
) |
|||
| Basic earnings (loss) per share | $ |
0.05 |
$ |
(0.02 |
) |
|||
| Diluted earnings (loss) per share | $ |
0.05 |
$ |
(0.02 |
) |
|||
| Weighted average number of common shares outstanding, basic |
43,047,030 |
21,523,515 |
||||||
| Weighted average number of common shares outstanding, diluted |
43,047,030 |
21,523,515 |
||||||
| As at March 31, 2020 and December 31, 2019 | As at March 31, 2020 | As at December 31, 2019 | ||||||
| (in thousands of Canadian dollars, unaudited) | ||||||||
| Current assets | $ |
105,780 |
$ |
101,642 |
||||
| Current liabilities | $ |
71,128 |
73,554 |
|||||
| Total assets | $ |
215,969 |
214,372 |
|||||
| Total non-current liabilities | $ |
140,257 |
141,859 |
|||||
| Shareholders’ equity (deficit) | $ |
4,584 |
$ |
(1,041 |
) |
|||
TABLE 2 The following table sets out selected historical consolidated financial information for the periods noted. See “Non-IFRS Measures” section above for more details.
| For the periods ended March 31, 2020 and 2019 | January 1 to March 31, 2020 | January 1 to March 31, 2019 | ||||||
| (in thousands of Canadian dollars, except percentage amounts, unaudited) | ||||||||
| Revenues | $ |
77,415 |
$ |
78,549 |
||||
| Gross profit | $ |
21,641 |
$ |
20,762 |
||||
| Gross profit, as a percentage of revenues |
28 |
% |
26.4 |
% |
||||
| Selling, general and administrative expenses | $ |
17,185 |
$ |
17,158 |
||||
|
As a percentage of revenues |
22.2 |
% |
21.8 |
% |
||||
| Adjusted EBITDA (see Table 3) | $ |
10,479 |
$ |
7,859 |
||||
|
As a percentage of revenues |
13.5 |
% |
10 |
% |
||||
| Net income (loss) for the period | $ |
2,210 |
$ |
(323 |
) |
|||
| Adjusted net income (see Table 4) | $ |
2,764 |
$ |
1,225 |
||||
|
As a percentage of revenues |
3.6 |
% |
1.6 |
% |
||||
TABLE 3 The following table provides reconciliations of net income (loss) to EBITDA and of net income (loss) to Adjusted EBITDA for the periods noted. See “Non-IFRS Measures” section above for more details.
|
EBITDA and Adjusted EBITDA reconciliation |
||||||||
| For the periods ended March 31, 2020 and 2019 | January 1 to March 31, 2020 | January 1 to March 31, 2019 | ||||||
| (in thousands of Canadian dollars, unaudited) | ||||||||
| Net income (loss) for the period | $ |
2,210 |
$ |
(323 |
) |
|||
| Interest expense, net |
2,101 |
2,132 |
||||||
| Debt modification (gains) losses |
(4 |
) |
— |
|||||
| Amortization of transaction costs |
110 |
137 |
||||||
| Current income tax expense |
— |
32 |
||||||
| Deferred income tax expense (recovery) |
918 |
(56 |
) |
|||||
| Depreciation of property, plant and equipment |
942 |
1,119 |
||||||
| Amortization of intangible assets |
1,076 |
647 |
||||||
| Depreciation of the ROU Asset |
2,383 |
2,077 |
||||||
| EBITDA | $ |
9,736 |
$ |
5,765 |
||||
| Restructuring expenses |
743 |
1,682 |
||||||
| One-time business reorganization costs (1) |
— |
412 |
||||||
| Adjusted EBITDA | $ |
10,479 |
$ |
7,859 |
||||
|
(1) One-time business reorganization costs include non-recurring headcount reduction expenses for employees that did not qualify as restructuring costs. This also includes one-time expenses for the JV that was dissolved on July 12, 2019. |
||||||||
TABLE 4 The following table provides reconciliations of net (loss) income to Adjusted net income and a presentation of Adjusted net income per share for the periods noted. See “Non-IFRS Measures” section above for more details.
| For the periods ended March 31, 2020 and 2019 | January 1 to March 31, 2020 | January 1 to March 31, 2019 | ||||||
| (in thousands of Canadian dollars, except share and per share amounts, unaudited) | ||||||||
| Net income (loss) for the period | $ |
2,210 |
$ |
(323 |
) |
|||
| Restructuring expenses |
743 |
1,682 |
||||||
| One-time business reorganization costs (1) |
— |
412 |
||||||
| Tax effect of the above adjustments |
(189 |
) |
(546 |
) |
||||
| Adjusted net income | $ |
2,764 |
$ |
1,225 |
||||
| Adjusted net income per share, basic and diluted | $ |
0.06 |
$ |
0.06 |
||||
| Weighted average number of common shares outstanding, basic and diluted |
43,047,030 |
21,523,515 |
||||||
| Number of common shares outstanding, basic and diluted |
43,047,030 |
|
21,523,515 |
|
||||
|
(1) One-time business reorganization costs include non-recurring headcount reduction expenses for employees that did not qualify as restructuring costs. This also includes one-time expenses for the JV that was dissolved on July 12, 2019. |
||||||||
REVENUES
For the three months ended March 31, 2020, DCM recorded revenues of $77.4 million, a decrease of $1.1 million or 1.4% compared with the same period in 2019. The slight decline in revenue was as a direct result of lower production revenue in the quarter, generally in line with budget given anticipated client demand expectations. However, this decline was offset by strong performance in our financial services, public sector and healthcare vertical markets, growth of cannabis label business and the timing of client orders in the first quarter of 2020. Lower levels of production compared to the first quarter of 2019 include lower sales in our retail-focused vertical market, including in connection with the advance of COVID-19 in the last half of March. The first quarter of 2020 also benefited from production shortfalls in the fourth quarter which shifted into the new year, which were attributable to credit constraints with vendors, particularly in the month of December 2019.
COST OF REVENUES AND GROSS PROFIT
For the three months ended March 31, 2020, cost of revenues decreased to $55.8 million from $57.8 million for the same period in 2019, resulting in a $2.0 million or 3.5% decrease over the same period last year.
Gross profit for the three months ended March 31, 2020 was $21.6 million, which represented an increase of $0.9 million or 4.2% from $20.8 million for the same period in 2019. Gross profit as a percentage of revenues increased to 28.0% for the three months ended March 31, 2020, compared to 26.4% for the same period in 2019. Gross profit as a percentage of revenues for the three months ended March 31, 2020 was positively impacted by (i) the benefits from the cost saving initiatives implemented in the second and third quarter of 2019, resulting in a reduction in salaries and wages, (ii) sale of the loose-leaf binders and index tab business in the second quarter of 2019 resulting in improved production margins, (iii) continued discipline to improve pricing with customers, and (iv) the loss of lower margin customers. The increase was slightly offset by lower margins attributable to third-party product resales work in the first quarter of 2020.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (“SG&A”) expenses for the three months ended March 31, 2020 of $17.2 million, or 22.2% of total revenues, remained consistent with the comparative prior period in 2019 of $17.2 million, or 21.8% of total revenues. SG&A expenses for the three months ended March 31, 2020 benefited from a reduction in selling, commissions and other sales expenses of $1.7 million, whereas general and administrative expenses increased by $1.7 million. The decrease in selling, commissions and expenses was primarily attributed to the benefits from the cost saving initiatives implemented in the second and third quarter of 2019, resulting in a reduction in salaries and wages. The increase in general and administrative expenses was primarily attributed to increased professional services surrounding the ERP system, an increase in amortization costs related to the ERP intangible asset which commenced in June 2019, increased salaries and wages for employees that have resumed normal responsibilities following the launch of the ERP system in June 2019 and no longer have their salaries and wages capitalized, and other ERP project expenses that are no longer eligible for capitalization. This increase was offset by a reduction in salaries and wages due to benefits from cost saving initiatives implemented in the second and third quarter of 2019, and lower discretionary compensation.
RESTRUCTURING EXPENSES
Cost reductions and enhancement of operating efficiencies have been an area of focus for DCM over the past five years in order to improve margins and better align costs with the declining revenues experienced by the Company in its traditional business, a trend being faced by the traditional printing industry for several years now.
For the three months ended March 31, 2020, DCM incurred restructuring expenses of $0.7 million compared to $1.7 million in the same period in 2019. For the three months ended March 31, 2020, the restructuring costs related to headcount reductions due to combining billing and credit/collections into one team for greater synergies across the cash management process. For the three months ended March 31, 2019, the restructuring costs related to (i) headcount reductions due to the closure of the Brossard, Quebec facility, and (ii) headcount reductions to direct and indirect labour from various facilities across DCM as cost savings initiatives to improve gross margin.
GOODWILL ANALYSIS
DCM will continue to evaluate its operating costs for further efficiencies as part of its commitment to improving its gross margins and lowering its selling, general and administration expenses.
DCM performs an annual impairment analysis of goodwill at the CGU levels during the fourth quarter of each fiscal year, except when there are changes in circumstances that would indicate that the recoverable amount of the CGUs would be lower than their net carrying amount. DCM performed its annual impairment analysis as of December 31, 2019 which showed that the recoverable amounts were greater than the net carrying amounts for all CGUs and no impairment charges were recognized during the year ended December 31, 2019.
As of March 31, 2020, DCM assessed whether there was any indication of impairment. As described above, COVID-19 had an impact on DCM, including all CGUs. Despite DCM continuing to operate as an essential services provider, the Company has experienced a reduction in demand and overall activity, which resulted in temporary layoffs and a number of other actions to reduce spending to lessen the financial impact on the business. In addition, the Company qualified for and received $6.1 million under the Canada Emergency Wage Subsidy, of which $1.6 million was recorded in the first quarter of 2020. DCM concluded that an indication of impairment does exist, and performed an impairment analysis as of March 31, 2020.
Revenue growth rates and operating margins were based on the 2020 budget internally approved and presented to the Board and further projected over a five-year period. The budget was revised to reflect management’s expected decline in operating activity as a direct result of COVID-19. Furthermore, a discount rate of 13.75% (2019 – 14.3%) was used for all of the CGUs.
It was concluded that there was no impairment of goodwill for the DCM, DCM Burlington, Thistle and Perennial CGUs as at March 31, 2020.
OTHER INCOME
Other income includes government grant income received from the CEWS. DCM has to date qualified for, and received, approximately $6.1 million with $1.6 million of that amount attributable to the first quarter of 2020 and the balance of $4.5 million attributable to the second quarter of 2020.
ADJUSTED EBITDA
For the three months ended March 31, 2020, Adjusted EBITDA was $10.5 million or 13.5% of revenues, after adjusting EBITDA for the $0.7 million in restructuring charges, compared to $7.9 million or 10.0% of revenues in the same period in 2019.
The increase in Adjusted EBITDA, for the three months ended March 31, 2020 over the prior year comparative period was primarily due to (i) improved gross margin and reduction in selling, commissions, and other selling expenses realized through cost reductions from ongoing cost savings initiatives implemented in the second and third quarter of 2019, (ii) improved gross margin from continued discipline to improve pricing with customers, (iii) reduction in other discretionary compensation, and (iv) receipt of the CEWS grant income.
FINANCE COSTS
Finance costs including interest on debt outstanding under DCM’s credit facilities, interest accretion expense and income related to certain debt obligations discounts / premiums, interest on pension obligations, debt modification gains/losses, amortization of debt transaction costs and interest expense on lease liabilities under IFRS 16 was $2.1 million for the three months ended March 31, 2020 compared to $2.1 million for the same period in 2019. Interest expense for the three months ended March 31, 2020 increased due to the total increased debt as at March 31, 2020 due to an additional $7.0 million loan obtained from Crown in the third quarter of 2019 and an increase in the Bank Credit Facility throughout 2019 and the first quarter of 2020. In addition, there was an increase in the interest rate for the Crown Facility by 200 basis points per annum effective December 19, 2019. This was offset by accretion income related to the debt premiums recorded in the fourth quarter of 2019 on both the Bank Credit Facility and the Crown Facility.
INCOME TAXES
DCM reported income before income taxes of $3.1 million and a net income tax expense of $0.9 million for the three months ended March 31, 2020 compared to a loss before income taxes of $0.3 million and a net income tax expense of $24.0 thousand for the three months ended March 31, 2019. The change from a net income tax recovery to an expense was due to the change in the estimated taxable income for the three months ended March 31, 2020. The deferred income tax expense for the three months ended March 31, 2020 was adjusted for any changes in estimates of future reversals of temporary differences, including estimated changes in tax loss carryforwards.
NET INCOME
Net income for the three months ended March 31, 2020 was $2.2 million compared to a net loss of $0.3 million for the same period in 2019.
The increase in comparable profitability for the three months ended March 31, 2020 was primarily due to (i) improved margins and reduction in selling, commissions, and other selling expenses realized through cost reductions from ongoing cost savings initiatives implemented in the second and third quarter of 2019, (ii) improved margins from continued discipline to improve pricing with customers, (iii) reduction in other discretionary compensation, (iv) receipt of the CEWS grant income, and (v) reduction in restructuring initiatives during the quarter.
ADJUSTED NET INCOME
Adjusted net income for the three months ended March 31, 2020 was $2.8 million compared to Adjusted net income of $1.2 million for the same period in 2019.
The increase in comparable profitability for the three months ended March 31, 2020 was primarily due to (i) improved margins and reduction in selling, commissions, and other selling expenses realized through cost reductions from ongoing cost savings initiatives implemented in the second and third quarter of 2019, (ii) improved margins from continued discipline to improve pricing with customers, (iii) reduction in other discretionary compensation and (iv) receipt of the CEWS grant income.
CASH FLOW FROM OPERATIONS
During the three months ended March 31, 2020, cash flows generated by operating activities were $2.0 million compared to cash flows generated by operating activities of $10.1 million during the same period in 2019.
Contacts
Mr. Michael Coté
President
DATA Communications Management Corp.
Tel: (905) 791-3151
Mr. James E. Lorimer
Chief Financial Officer
DATA Communications Management Corp.
Tel: (905) 791-3151
[email protected]
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