DATA Communications Management Corp. Announces Second Quarter 2020 Results

SECOND QUARTER HIGHLIGHTS

  • Gross profit increased to $19.6 million, up 24.9% compared to the prior year
  • Gross margin percentage of 30.7%, a significant improvement from 22.6% in the prior year
  • Adjusted EBITDA of $13.5 million, a 203.4% improvement
  • Net income of $4.2 million compared to a net loss of $3.8 million in the second quarter of 2019
  • Revolving line of credit balance of $19.8 million as of August 6, 2020, down from $27.5 million as of June 30, 2020 and $36.8 million as of March 31, 2020

BRAMPTON, Ontario–(BUSINESS WIRE)–DATA Communications Management Corp. (TSX: DCM):

Second Quarter Highlights (vs. Q2, 2019)

First-Half Highlights (vs. H1, 2019)

Revenue of $63.9 million, compared with $69.6 million

 

Revenue of $141.4 million, compared with $148.2 million

Cost of sales of $44.3 million, compared with $53.9 million

 

Cost of sales of $100.1 million, compared with $111.7 million

Gross margin of 30.7%, compared with 22.6%

 

Gross margin of 29.2%, compared with 24.6%

Adjusted EBITDA of $13.5 million, compared with $4.4 million

 

Adjusted EBITDA of $23.9 million, compared with $12.3 million

Net income of $4.2 million, compared with net loss of $3.8 million

 

Net income of $6.4 million, compared with net loss of $4.1 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 consolidated financial results for the three and six months ended June 30, 2020.

“Revenues from our large, enterprise clients have proven to be, for the most part, quite resilient through the first half of 2020. In fact, year over year growth from our core enterprise clients has helped offset revenue declines we experienced in the second quarter amongst our smaller, more transactional-focused clients, including clients in certain retail sectors. These smaller clients have been most affected by the COVID-19 pandemic,” said Michael Coté, President.

“While revenue in the second quarter was off 8.2% compared to last year, we achieved improved margins and profitability from a number of initiatives taken in the past twelve months to reduce our cost structure. Notably, improvements in gross profit and gross margin for the first half of 2020 are owing to increased operating efficiencies in our business gained through actions implemented in the second half of 2019 and the first half of 2020, together with COVID-19 related cost reduction measures taken in Q2 2020 including temporary layoffs, wage roll-backs and other expense reductions. We also benefited from positive margin trends in products sold in the second quarter. SG&A expenses, while comparable to those in the prior period, were favourable if adjusted to exclude ERP capitalization expense.”

“The balance outstanding on our revolving line of credit was $19.8 million as at August 6, 2020, which was down $7.7 million from $27.5 million at June 30, 2020, and $17.0 million lower than the $36.8 million balance drawn at March 31, 2020. Most recently, the declines in our revolver balance are primarily a function of our focused efforts to convert our top customers from our legacy “bill-as-released” billing practice to a more appropriate “bill and hold” model. We have also continued to make progress on reducing the balances on our aged accounts receivable since the beginning of the year. These and other working capital initiatives continue to be a significant priority for us for the balance of the year.”

PROGRESS ON ERP

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 was constrained by delays in production, shipments and billings to its customers. Significant progress continued to be made throughout the first and second quarters of 2020 and system issues and data quality were substantively remediated during the fourth quarter of 2019. Production and shipping volumes have 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 executing 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 mitigate the financial impact on our business have been implemented to date, including temporary layoffs, wage rollbacks for senior executives, director level and other employees, shift reductions, reductions in non-essential spending and deferral of other expenses and payments where practical. The Company continues to evaluate and assess further actions that may be required.

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.

GOVERNMENT GRANTS

DCM has to date qualified for, and received, approximately $6.2 million under the Canada Emergency Wage Subsidy or 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 continues to assess whether it may meet the CEWS eligibility criteria for future periods, as well as other subsidies that may be available due to the impact of COVID-19 on its business.

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”).

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 June 30, 2020 and 2019

April 1 to

June 30, 2020

 

April 1 to

June 30, 2019

 

January 1 to

June 30, 2020

 

January 1 to

June 30, 2019

(in thousands of Canadian dollars, except share and per share amounts, unaudited)

 

Revenues

$

63,936

 

 

$

69,623

 

 

 

$

141,351

 

 

$

148,172

 

 

 

 

 

 

 

 

 

 

Gross profit

19,630

 

 

15,721

 

 

 

41,271

 

 

36,483

 

 

 

 

 

 

 

 

 

 

Gross profit, as a percentage of revenues

30.7

%

 

22.6

 

%

 

29.2

%

 

24.6

 

%

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

15,441

 

 

15,530

 

 

 

32,626

 

 

32,688

 

 

As a percentage of revenues

24.2

%

 

22.3

 

%

 

23.1

%

 

22.1

 

%

 

 

 

 

 

 

 

 

Adjusted EBITDA

13,459

 

 

4,436

 

 

 

23,938

 

 

12,295

 

 

As a percentage of revenues

21.1

%

 

6.4

 

%

 

16.9

%

 

8.3

 

%

 

 

 

 

 

 

 

 

Net income (loss) for the period

4,232

 

 

(3,754

)

 

 

6,442

 

 

(4,077

)

 

 

 

 

 

 

 

 

 

Adjusted net income (loss)

4,686

 

 

(1,057

)

 

 

7,450

 

 

167

 

 

As a percentage of revenues

7.3

%

 

(1.5

)

%

 

5.3

%

 

0.1

 

%

 

 

 

 

 

 

 

 

Basic and diluted earnings (loss) per share

$

0.10

 

 

$

(0.17

)

 

 

$

0.15

 

 

$

(0.19

)

 

Adjusted net income (loss) per share, basic and diluted

$

0.11

 

 

$

(0.05

)

 

 

$

0.17

 

 

$

0.01

 

 

Weighted average number of common shares outstanding, basic

43,047,030

 

21,523,515

 

 

43,047,030

 

21,523,515

 

Weighted average number of common shares outstanding, diluted

43,047,030

 

21,523,515

 

 

43,047,030

 

21,523,515

 

REVENUES

For the three months ended June 30, 2020, DCM recorded revenues of $63.9 million, a decrease of $5.7 million or 8.2% compared with the same period in 2019. For the six months ended June 30, 2020, DCM recorded revenues of $141.4 million, a decrease of $6.8 million or 4.6% compared with the same period in 2019. The decrease in revenues for the three and six months ended June 30, 2020 was primarily attributable to lower demand resulting from the impact of the COVID-19 pandemic in the second quarter of 2020. The decline in revenues was partially offset by strong performance in the first quarter of 2020 in our financial services, public sector and healthcare vertical markets, and growth of cannabis label business, and one-time COVID-19 related wins in the second quarter of 2020. In the second quarter of 2019, production revenue in June was negatively impacted by the launch of our new ERP system.

COST OF REVENUES AND GROSS PROFIT

For the three months ended June 30, 2020, cost of revenues decreased to $44.3 million from $53.9 million for the same period in 2019, resulting in a $9.6 million or 17.8% decrease over the same period last year.

Gross profit for the three months ended June 30, 2020 was $19.6 million, which represented an increase of $3.9 million or 24.9% from $15.7 million for the same period in 2019. Gross profit as a percentage of revenues increased to 30.7% for the three months ended June 30, 2020, compared to 22.6% for the same period in 2019.

For the six months ended June 30, 2020, cost of revenues decreased to $100.1 million from $111.7 million for the same period in 2019, resulting in a $11.6 million or 10.4% decrease over the same period last year.

Gross profit for the six months ended June 30, 2020 was $41.3 million, which represented an increase of $4.8 million or 13.1% from $36.5 million for the same period in 2019. Gross profit as a percentage of revenues increased to 29.2% for the six months ended June 30, 2020, compared to 24.6% for the same period in 2019. Gross profit as a percentage of revenues for the three and six months ended June 30, 2020 was positively impacted by (i) realizing the full benefits from the cost saving initiatives implemented particularly in the second and third quarters of 2019, resulting in a reduction in salaries and wages, (ii) more normalized levels of operations and margins following remediation of the ERP system challenges experienced in June 2019 (iii) lower levels of casual labour and temporary staffing following remediation of the ERP system challenges, along with temporary lay-offs and other cost saving measures in reaction to the impact of COVID-19 on revenues (iv) sale of the loose-leaf binders and index tab business in the second quarter of 2019 resulting in improved production margins, (v) continued discipline to improve pricing with customers, and (vi) 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, and lower sales in the second quarter of 2020 thereby resulting in weaker absorption of fixed overhead costs.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative (“SG&A”) expenses for the three months ended June 30, 2020 of $15.4 million, or 24.2% of total revenues, remained consistent with the comparative prior period in 2019 of $15.5 million, or 22.3% of total revenues. SG&A for the six months ended June 30, 2020 of $32.6 million, or 23.08% of total revenues, remained consistent with the comparative prior period in 2019 of $32.7 million, or 22.06% of total revenues. SG&A expenses for the three and six months ended June 30, 2020 benefited from a reduction in selling, commissions and other sales expenses of $0.8 million and $2.5 million, respectively, whereas general and administrative expenses increased by $0.7 million and $2.5 million, respectively. The decrease in selling, commissions and other sales expenses was primarily attributed to the benefits from the cost saving initiatives implemented in the second and third quarters 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 and no longer have their salaries and wages capitalized, increases in casual labour and temporary staffing to assist with the ERP post-implementation remediation 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 quarters of 2019, and lower compensation and discretionary spending in response to the impact of COVID-19 on the business. SG&A expenses in the second quarter of 2020 were also positively impacted by temporary lay-offs, wage roll backs and other cost saving measures to mitigate the impact of COVID-19. SG&A expenses for the three and six months ended June 30, 2020 would be favourable in comparison to last year if adjusted to exclude the addition of capitalized ERP expenses.

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 June 30, 2020, DCM incurred restructuring expenses of $0.3 million compared to $3.2 million in the same period in 2019. For the six months ended June 30, 2020, DCM incurred restructuring expenses of $1.0 million compared to $4.9 million in the same period in 2019. Restructuring costs for the three and six months ended June 30, 2020 related to headcount reductions from the billings and credit/collections departments to integrate the groups into one team to achieve greater synergies across the cash management process, and other various headcount reductions to indirect labour as cost savings initiatives to improve gross margin. Restructuring costs for the three and six months ended June 30, 2019 related to headcount reductions from (i) the closure of its Brossard, Quebec facility which was announced in March 2019, (ii) the sale of its loose-leaf binders and index tab business in May 2019, (iii) process improvements in manufacturing to improve efficiencies and gross margins, and (iv) process improvements in its SG&A functions to reduce costs and enhance productivity.

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.

OTHER INCOME

Other income includes government grant income received from the CEWS (see note 18 of the interim condensed consolidated financial statements). DCM has to date qualified for, and received, approximately $6.2 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 June 30, 2020, Adjusted EBITDA was $13.5 million or 21.1% of revenues, after adjusting EBITDA for $0.3 million in restructuring charges, compared to $4.4 million or 6.4% of revenues in the same period in 2019. For the six months ended June 30, 2020, Adjusted EBITDA was $23.9 million or 16.9% of revenues, after adjusting EBITDA for the $1.0 million in restructuring charges, compared to $12.3 million or 8.3% of revenues in the same period in 2019.

The increase in Adjusted EBITDA for the three and six months ended June 30, 2020 over the prior year comparative period was primarily due to (i) improved gross margins and reductions 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 margins from continued discipline to improve pricing with customers, (iii) temporary lay-offs and reductions in compensation and discretionary spending in response to the impact of COVID-19 on the business, 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 $2.7 million for the three months ended June 30, 2020 compared to $2.2 million for the same period in 2019, and was $4.9 million for the six months ended June 30, 2020 compared to $4.4 million for the same period in 2019. Interest expense for the for the three and six months ended June 30, 2020 had a slight decrease due to the reduction in the prime rates, thereby reducing the interest expense on the Credit Facility. In the fourth quarter of 2019 and first quarter of 2020, DCM recorded debt premiums on the Credit Facility and Crown Facility, which resulted in recognition of accretion income during 2020. This decrease was offset by an increase in interest expense due to an increase in total debt as at June 30, 2020 due to an additional $7.0 million loan obtained from Crown in the third quarter of 2019 and higher levels drawn under the Bank Credit Facility throughout 2019 and the first and second quarters 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.

INCOME TAXES

DCM reported income before income taxes of $5.8 million and a net income tax expense of $1.5 million for the three months ended June 30, 2020 compared to a loss before income taxes of $5.2 million and a net income tax recovery of $1.4 million for the same period in 2019.

DCM reported income before income taxes of $8.9 million and a net income tax expense of $2.5 million for the six months ended June 30, 2020 compared to a loss before income taxes of $5.5 million and a net income tax recovery of $1.4 million for the same period in 2019.

The change from a net income tax recovery to a net income tax expense was due to the change in the estimated taxable income for the three and six months ended June 30, 2020. The deferred income tax expense was adjusted for any changes in estimates of future reversals of temporary differences, including estimated changes in tax loss carryforwards.

NET INCOME (LOSS)

Net income for the three months ended June 30, 2020 was $4.2 million compared to a net loss of $3.8 million for the same period in 2019. Net income for the six months ended June 30, 2020 was $6.4 million compared to a net loss of $4.1 million for the same period in 2019.

The increase in comparable profitability for the three and six months ended June 30, 2020 was primarily due to (i) improved margins and reduction in selling, commissions, and other selling expenses realized through headcount reductions due to 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) temporary lay-offs and reductions in compensation and discretionary expenses in response to the impact of COVID-19 on the business, (iv) receipt of the CEWS grant income, and (v) reduction in restructuring initiatives.

ADJUSTED NET INCOME (LOSS)

Adjusted net income for the three months ended June 30, 2020 was $4.7 million compared to adjusted net loss of $1.1 million for the same period in 2019. Adjusted net income for the six months ended June 30, 2020 was $7.5 million compared to adjusted net income of $0.2 million for the same period in 2019.

The increase in comparable profitability for the three and six months ended June 30, 2020 was primarily due to (i) improved margins and reduction in selling, commissions, and other selling expenses realized through headcount reductions due to 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) temporary lay-offs and reduction in other discretionary compensation and expenses in response to the impact of COVID-19 on the business and (iv) receipt of the CEWS grant income.

CASH FLOW FROM OPERATIONS

During the six months ended June 30, 2020, cash flows generated by operating activities were $15.3 million compared to cash flows generated by operating activities of $13.5 million during the same period in 2019. Current period cash flow from operations, before adjusting for changes in working capital, generated a total of $18.7 million compared with $5.3 million for the same period last year. Current period cash flows from operations were positively impacted primarily due to an increase in the net income which stems from the improved margins and reduction in selling, commissions, and other selling expenses realized through headcount reductions due to ongoing cost savings initiatives implemented in the second and third quarter of 2019 and temporary cost saving measures related to COVID-19 in the second quarter of 2020. Contributions to defined benefit pension plans and payments for severances and lease terminations related to DCM’s restructuring initiatives stayed consistent compared to the same period last year. However, income tax payments were lower by $1.2 million compared to the same period last year.

Changes in working capital during the six months ended June 30, 2020 used $3.4 million in cash compared with $8.2 million of cash generated in the prior period. In the prior comparable period before the launch of the ERP system in June 2019, DCM’s focus was to better align payments to its vendors with cash receipts from its customers given many of its customers opt to store their finished goods product in DCM’s warehouses and pay upon taking shipment of product which extends the time to collection. This alignment and deferral in payment resulted in an increase to accounts payable and accrued liabilities by $4.7 million. In the current period, DCM continued to manage the cash flow challenges encountered with timely collection of billings remaining from the ERP transition in June 2019. In the third and fourth quarters of 2019, billing volumes progressively increased throughout the quarters as the Company began catching up on its backlog of orders, with continued efforts into the first and second quarters of 2020. Furthermore, DCM initiated clean-up efforts in the first and second quarters of 2020 to address the inaccurate billings previously issued, thereby constraining the invoicing team and causing further delay in timely billings and deterioration of collection efforts. This resulted in liquidity constraints whereby the Company was required to obtain additional financing in 2019 and manage payments to suppliers to maintain cash for working capital requirements. However in the second quarter of 2020, DCM started to see an inflow of cash from its billing efforts resulting in a decrease in trade receivables of $2.3 million. The improvement in the cash position has also allowed DCM to increase payments to vendors resulting in a cash outflow of $6.2 million.

INVESTING ACTIVITIES

For the six months ended June 30, 2020, $0.1 million in cash flows were used for investing activities compared with $2.

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

ir@datacm.com

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