DIRTT Environmental Solutions Ltd. (“DIRTT” or the “Company”) (TSX: DRT), an interior construction company that uses technology for client-driven design and manufacturing, today announced its financial results for the three months ended March 31, 2019. All financial information in this news release is in Canadian dollars, unless otherwise stated.
First quarter 2019 vs. first quarter 2018
- Revenue of $86.3 million vs. $80.7 million (up 6.9%)
- Gross profit percentage of 39.5% vs. 43.9%
- Adjusted gross profit percentage1 of 41.6% vs. 46.1%
- Operating expenses of $40.9 million2 vs. $30.3 million
- Adjusted operating expenses1,3 of $23.9 million vs. $25.0 million
- Adjusted EBITDA1,3 of $11.0 million vs. $12.7 million
- Adjusted EBITDA %1,3 of 12.8% vs. 15.7%
- Net loss of $7.8 million3 or ($0.09) per share vs. net income of $3.6 million or $0.04 per share
(1) See "Non-IFRS Measures".
(2) Includes $9.1 million of stock-based compensation expenses.
(3) In the current quarter, Adjusted EBITDA and Adjusted operating expenses were impacted by the prospective adoption of a new accounting standard for operating leases, which had the impact of increasing depreciation by $1.4 million and finance costs by $0.3 million with a corresponding reduction in rent expense. The change in accounting policy increased 2019 Adjusted EBITDA by $1.7 million, or 2.0%, and decreased Adjusted operating expenses by $1.7 million over the comparable 2018 period.
Our 6.9% first quarter revenue growth was largely driven by increased penetration into the healthcare market and was consistent with our expectations. Our gross profit decreased 4.4%, compared to the same quarter in 2018. As discussed in our 2018 year-end reporting, this downward pressure on margins was expected and reflects higher direct material costs at our tile production facility. It also reflects the impact of headcount additions made in mid-2018 as we prepared for growth later that year. Our gross profit margins remained relatively consistent with those achieved in the fourth quarter of 2018, after taking into account the impact of fixed costs on a lower revenue base.
Adjusted EBITDA was $11.0 million compared to $12.7 million in 2018, after including the $1.7 million positive effect of the new leasing standard adopted prospectively in 2019. This reflects lower gross profit for the reasons mentioned above and foreign exchange losses in the period. Adjusted operating expenses as a whole remained consistent with the prior year.
The incidence of post-delivery tile warping (caused by regulatory-driven composition changes to the MDF substrate we use and as discussed in last quarter reporting) decreased in the quarter due to the season’s lower humidity. Gross profit and adjusted EBITDA, however, were impacted by the cost of temporary solutions to prevent further warping, mainly in the form of higher material costs. We are in the midst of determining a permanent solution, including the potential use of higher resin-content substrates and/or the application of a pre-finishing sealant. In-depth testing and cost analysis are underway. In the meantime, we are working with our distribution partners to ensure tiles are handled and stored appropriately to mitigate the risk of warping.
We continue to make progress in our strategic business review. Specific to sales and marketing, we’ve engaged an internationally-recognized consulting firm to provide a data-driven, in-depth analysis of DIRTT’s current marketing approach with results expected in Q3 of this year. The resulting evaluation will support the development and execution of our marketing strategy, with the goal of strategically positioning us for increased market penetration and long-term business opportunities. Our search continues for the best candidate for the newly-created role of chief commercial officer.
Looking to the balance of 2019, we are on track with our intent to list our common stock on Nasdaq during the second half of this year. We reaffirm our prior guidance of between 5% and 10% revenue growth for 2019, but note that adjusted net income and adjusted EBITDA , which we had previously forecasted to increase commensurately with revenue, will now reflect the impacts of the sales and marketing consulting engagement in the amount of $2.6 million and $2 million of one-time US listing costs.
First quarter financial review
Revenue for the first quarter of 2019 increased by $5.6 million, or 6.9%, over the first quarter of 2018. Revenue in the first quarter of 2018 included an estimated $5 million to $10 million (6%-12% of 2018 revenue) of projects that were delayed from the fourth quarter of 2017 to the first quarter of 2018 as a result of record-breaking hurricanes in the southern United States impacting 2017 project schedules.
Compared to 2018, product and associated transportation revenues increased by $7.6 million or 10%, of which approximately $4.5 million relates to a 5% increase in the US dollar compared to the Canadian dollar, offset by a $2 million reduction in installation revenues. The decrease in installation revenues is primarily due to the timing of projects. Except under certain circumstances, DIRTT’s approach is to have installations services undertaken by our Distribution Partners, and accordingly, the Company is not anticipating significant growth in this revenue stream.
Year-over-year healthcare sales increased 39% over 2018. Proportionally, as a percentage of product and transportation revenue, they increased from 16% in 2018 to 20% in 2019, reflecting the impact of a large project and continued penetration into the healthcare sector.
Gross Profit / Gross Profit % / Adjusted Gross Profit / Adjusted Gross Profit %
Gross profit and gross profit % decreased to $34.1 million or 39.5% of revenue in the first quarter of 2019, from $35.4 million or 43.9% of revenue in the first quarter of 2018. The current quarter was impacted by approximately $2.0 million of costs incurred to mitigate further warping of DIRTT’s tiles, which adversely impacted gross profit % by approximately 2.3%. The balance of the decrease reflects additions to headcount during 2018 in anticipation of higher volumes in the second half of 2018. Gross profit as a percentage of sales was 0.7% lower than the 40.2% recorded in the fourth quarter of 2018. This decrease was primarily due to the impact of fixed manufacturing costs and depreciation on lower revenue. In addition, the current quarter increase in materials costs was partially offset by $0.7 million of lower tile deficiency repair costs and warranty provisions incurred in the fourth quarter.
Adjusted gross profit and adjusted gross profit % decreased to $35.9 million or 41.6% of revenue in the first quarter of 2019, from $37.2 million or 46.1% of revenue in the 2018 period for the same reasons as described above. Relative to the prior quarter, adjusted gross profit % was 0.3% lower than the 41.9% recorded in the fourth quarter of 2018. This decrease was primarily due to the impact of fixed manufacturing costs on lower revenue. In addition, the current quarter increase in materials costs was partially offset by $0.7 million of lower tile deficiency repair costs and warranty provisions incurred in the fourth quarter.
Operating Expenses / Adjusted Operating Expenses
Adjusted operating expenses exclude the impact of depreciation, stock-based compensation and reorganization costs. Adjusted operating expenses decreased $1.1 million to $23.9 million in the first quarter of 2019, compared to $25.0 million in the first quarter of 2018. Adjusted operating expenses were impacted by the prospective adoption of a new accounting standard for operating leases. The change in accounting policy decreased Adjusted operating expenses by $1.7 million as $1.4 million of increased depreciation was subtracted in the calculation of Adjusted operating expenses and $0.3 million was classified as finance costs.
Sales and marketing expenses decreased $2.3 million from $12.7 million in the first quarter of 2018 to $10.4 million in the first quarter of 2019, reflecting ongoing and targeted reductions of non-revenue-generating costs. In the first quarter of 2019, DIRTT spent $1.9 million less on travel, meals and entertainment costs and reductions related to a specific trade show. None of these expense reductions are expected to have an impact on sales revenue.
General and administrative expenses increased $0.5 million to $8.9 million in the first quarter of 2019, compared to $8.4 million in the same period of 2018. This was mainly due to $0.9 million of professional fees related to the anticipated US listing.
Operations support expenditures increased to $5.4 million in the first quarter of 2019, compared to $4.8 million in the same period of 2018. The increase is largely attributable to $0.4 million of consultant costs incurred to assist with the evaluation of current operations and the rectification of the tile warping issue.
Technology and development expenses increased from $1.9 million in the first quarter of 2018 to $3.7 million in the first quarter of 2019. This increase was due to a $1.5 million reduction of capitalized salaries as a result of the current mix of projects undertaken by the software development team. Capitalized development activities in 2018 included work on initiatives related to DIRTT Timber and DIRTT for Life, whose scope was reduced in the second half of 2018. Additionally, a portion of the current efforts of the ICE software development team include projects related to business process improvements that are not eligible for capitalization.
Stock-based compensation was $9.1 million in the first quarter of 2019, compared to $0.4 million of 2018. This reflected a fair value adjustment of $8.0 million due to the significant increase in stock price relative to December 31, 2018, with no fair value adjustment in 2018. The fair value adjustment was a result of the cash surrender feature put in place for employee stock options, subsequent to the Company ceasing to qualify as a foreign private issuer. Once a US registration statement is filed and accepted by the Securities Exchange Commission, the company will cease accounting for the intrinsic value of the outstanding stock options at the end of the reporting period as a liability. In addition, the effect of stock options, performance share units and deferred share units issued in the third quarter of 2018 increased the outstanding amounts, with no such comparable issuances in 2017.
Reorganization costs of $3.5 million were recorded in the first quarter of 2019, compared to $2.1 million in the prior year period. No further material expenditures are anticipated in 2019.
Adjusted EBITDA / Adjusted EBITDA %
First quarter 2019 adjusted EBITDA decreased to $11.0 million, or 12.8% of revenue, from $12.7 million, or 15.7% of revenue, in the same period of 2018. This reflects the $1.3 million decrease in gross profit as a result of higher cost of sales, including costs associated with rectifying tile deficiencies, a $1.1 million decrease in adjusted operating expenses and the impact of $1.4 million of additional foreign exchange losses, offset by the $1.7 million benefit of the new accounting standard for leases, as noted above.
Net income (loss) / Adjusted Net Income
Net loss was $7.8 million or ($0.09) per share in the first quarter of 2019 compared to net income of $3.6 million or $0.04 per share for the first quarter of 2018. The decrease is a result of higher operating expenses and lower gross profit. Net loss in the first quarter of 2019 includes the impact of $8.0 million stock-based compensation fair value adjustment and $3.5 million of reorganization costs (Q1 2018 - $2.1 million). Excluding these costs, adjusted net income was $2.7 million or $0.03 per share for the first quarter of 2019, a decrease of $2.4 million from $5.1 million adjusted net income or $0.06 per share in the first quarter of 2018.
Liquidity and Capital Resources
As at March 31, 2019, the Company held cash and cash equivalents of $72.2 million, a decrease of $0.6 million from December 31, 2018. During the first quarter, the Company repaid $7.4 million of long-term debt outstanding with cash on hand, without penalty. In addition, the Company has access to an undrawn US$18.0 million revolving operating facility.
Conference Call and Webcast Details
A conference call and webcast for the investment community is scheduled for Thursday, May 9, 2019 at 8:00 a.m. MDT (10:00 a.m. EDT). The call and webcast will be hosted by Kevin O’Meara, chief executive officer; Geoff Krause, chief financial officer; and Kim MacEachern, director of investor relations.
To join by telephone, dial +1-877-479-7708 (toll-free in North America) or +1-647-427-2478 (international). Please dial in 10 minutes prior to the start time. For the live webcast (in listen-only mode) visit https://edge.media-server.com/m6/p/kjs28j9c.
Investors are invited to submit questions to email@example.com before and during the call. Supplemental information slides will be available with the webcast, and at dirtt.net/investors prior to the call start.
A replay of the call and webcast will be available from 11:00 a.m. MDT (1:00 p.m. EDT) on May 9, 2019 until 9:59 p.m. MDT (11:59 p.m. EDT) on May 16, 2019:
- By phone at +1-855-859-2056 with passcode 9477656;
- Online at https://edge.media-server.com/m6/p/kjs28j9c; and
- On DIRTT’s website at dirtt.net/financial-reports.
DIRTT is a building process powered by technology. The name stands for Doing It Right This Time. The company uses its proprietary ICE® software to design, manufacture and install fully customized interior environments. The technology drives DIRTT’s advanced manufacturing and provides certainty on cost, schedule and the final result. Complete interior spaces are constructed faster, cleaner and more sustainably. DIRTT’s manufacturing facilities are located in Phoenix, Savannah and Calgary. DIRTT works with nearly 100 sales partners globally and trades on the Toronto Stock Exchange under the symbol "DRT." For more information visit dirtt.net/investors.
The term "Adjusted Gross Profit", “Adjusted Gross Profit %”, "Adjusted Operating Expenses", "Adjusted EBITDA", "Adjusted EBITDA %", “Adjusted Net Income” and “Net cash flows provided by operating activities before changes in non-cash working capital” are financial measures used by DIRTT that are not standard measures under International Financial Reporting Standards ("IFRS") as adopted by the Canadian Institute of Chartered Accountants. DIRTT’s method of calculating Adjusted Gross Profit, Adjusted Gross Profit %, Adjusted Operating Expenses, Adjusted EBITDA, Adjusted EBITDA %, Adjusted Net Income and Net cash flows provided by operating activities before changes in non-cash working capital may differ from the methods used by other issuers. Therefore, these non-IFRS measures may not be comparable to the same measures presented by other issuers.
Adjusted Gross Profit is gross profit before deductions for depreciation and amortization of equipment, tooling and intangible assets for manufacturing-related assets. Adjusted Gross Profit % is Adjusted Gross Profit divided by revenue. We use these measures to assess our manufacturing and operating performance. As manufacturing volumes and revenue rise, production synergies tend to permit improvements in gross profit, subject to variability in monthly manufacturing volumes and product/service revenue mix.
Adjusted Operating Expenses is Operating Expenses before deductions for depreciation and amortization of non-manufacturing related assets, stock-based compensation expenses and reorganization costs. We use this as a measure of the efficiency and effectiveness of our sales and marketing efforts and overall administrative support efforts by comparing them to prior period results.
Adjusted EBITDA is net income before interest, taxes, depreciation and amortization, plus: non-cash foreign exchange gains or losses on debt revaluation; stock-based compensation expenses; reorganization costs; and any other non-recurring gains or losses. Adjusted EBITDA % is calculated as Adjusted EBITDA divided by revenue. We use these measures as a performance measure as they are widely used by securities analysts and investors to evaluate financial performance, as well we use these measures to assess our ability to generate cash flows, service debt, pay current taxes and fund capital expenditures.
“Adjusted Net Income” is net income (loss) excluding the tax effected impact of reorganization costs and stock-based compensation fair value adjustment.
"Net cash flows provided by operating activities before changes in non-cash working capital" are net cash flows provided by operating activities and adding back the change in non-cash working capital.
For a reconciliation of these non-IFRS measure see DIRTT’s annual and interim Management Discussion and Analysis, complete copies of which are available on the Company’s website at www.dirtt.net and on SEDAR at www.sedar.com.
Special Note Regarding Forward-Looking Statements
Certain information and statements contained in this news release constitute “forward-looking information” and “forward-looking statements” (collectively, “Forward-Looking Information”) as defined under applicable Canadian securities laws and the Company hereby cautions investors about important factors that could cause the Company’s actual results or outcomes to differ materially from those projected in any Forward-Looking Information contained in this news release. Any statements that express, or involve discussions as to, expectations, beliefs, plans, objectives, assumptions or future events or performance (often, but not always, through the use of words or phrases such as “will likely result”, “are expected to”, “will continue”, “is anticipated”, “believes”, “estimated”, “intends”, “plans”, “projection” and “outlook”), are not historical facts and may be forward-looking and may involve estimates, assumptions and uncertainties which could cause actual results or outcomes to differ materially from those expressed in such Forward-Looking Information. In particular and without limitation, this news release contains Forward-Looking Information pertaining to the following: comments with respect to the Company's revenue, objectives and priorities for 2019 and beyond; project timetables; its growth strategies and opportunities; its ability to meet working capital requirements and financial obligations; use and deployment of the Company’s capital; and its outlook for its operations and the Canadian, US and international economies, and in particular, the US and Canadian construction industry.
With respect to Forward-Looking Information contained in this news release, assumptions have been made regarding the Company, among other things:
- its ability to manage its growth;
- competition in its industry;
- its ability to enhance current products and develop and introduce new products;
- its ability to obtain components and products from suppliers on a timely basis and on favorable terms;
- its ability to obtain qualified staff and equipment in a timely and cost-efficient manner;
- the regulatory framework governing taxes in Canada and the US and any other jurisdictions in which the Company currently or may conduct its business in the future;
- future development plans for its assets unfolding as currently envisioned;
- future capital expenditures to be made by the Company;
- future sources of funding for its capital program;
- its ability to list on an accredited US exchange;
- the impact of increasing competition on the Company; and
- its success in identifying risks to its business and managing the risks mentioned below.
The Company’s actual results or outcomes could differ materially from those expressed in the Forward-Looking Information as a result of the risks normally encountered in its industry such as:
- risks related to additional capital requirements;
- fluctuations in commodity prices;
- credit risks;
- foreign exchange rate;
- operating results and financial condition fluctuations on a quarterly and annual basis;
- history of losses;
- maintaining and managing growth;
- risks related to new technology;
- competition risks;
- risks related to intellectual property;
- customer base and market acceptance;
- software and product defects and design risks;
- availability of key supplies;
- dependence of key personnel;
- the effect of government regulation;
- risks related to physical facilities;
- legal risks;
- risks related to future acquisitions;
- reliance on third parties; and
- risks related to Forward-Looking Information.
Since actual results or outcomes could differ materially from those expressed in the Forward-Looking Information provided by or on behalf of the Company, investors and others should not place undue reliance on any such Forward- Looking Information.
DIRTT cautions that the foregoing lists of factors are not exhaustive. Further, Forward-Looking Information is made as of the date hereof, and the Company undertakes no obligation to update Forward-Looking Information to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events, except as required by applicable Canadian securities laws. New factors emerge from time to time, and it is not possible for DIRTT’s management to predict all of these factors and to assess in advance the impact of each such factor on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in Forward-Looking Information. No assurance can be given that these expectations will prove to be correct and such Forward-Looking Information contained in this news release should not be unduly relied upon. In addition, this news release may contain Forward-Looking Information attributed to third party industry sources.
For a detailed description of the risks and uncertainties facing the Company and its business and affairs, readers should refer to the Company's annual financial statements, management’s discussion and analysis and annual information form for the year ended December 31, 2018, all of which are available at http://www.sedar.com.