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. Current period cash flow from operations, before adjusting for changes in working capital, generated a total of $8.0 million compared with $4.2 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 cost reductions from ongoing cost savings initiatives implemented in the second and third quarter of 2019. Contributions to defined benefit pension plans and income taxes payments were also reduced by $0.7 million compared to the same period last year. Current year payments for severances and lease termination related to DCM's restructuring initiatives decreased $0.2 million compared to the same period last year.
Changes in working capital during the three months ended March 31, 2020 used $6.0 million in cash compared with $6.0 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 $6.8 million. In the current year, DCM continues to manage the cash flow challenges encountered with issuing accurate and timely billings as a result of the ERP transition in June 2019, resulting in a further increase in trade receivables of $5.4 million since December 31, 2019. In the third and fourth quarter 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 quarter of 2020. Furthermore, DCM initiated clean-up efforts in the first quarter 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.
INVESTING ACTIVITIES
For the three months ended March 31, 2020, $49.0 thousand in cash flows were used for investing activities compared with $2.3 million during the same period in 2019. During the three months ended March 31, 2019, $0.5 million of cash was primarily used to invest in IT equipment and costs related to leasehold improvements to set up production equipment, and $1.8 million of cash was used to further invest in the development of DCM's new ERP system.
FINANCING ACTIVITIES
For the three months ended March 31, 2020, cash flow used for financing activities was $1.9 million compared with $5.2 million paid during the same period in 2019.
A total of $0.5 million in outstanding principal amounts under its various credit facilities were repaid during the current period compared with $1.4 million during the comparative period. DCM amended its FPD Credit Facilities on July 25, 2019 to defer principal amounts up until June 2020 which explains the reduction of the repayments on the credit facilities from the comparative period. In addition, $0.5 million was repaid during the period related to the vendor take-back promissory note issued in connection with the acquisition of Perennial compared with $2.7 million in the prior comparative period in connection with the DCM Burlington and Thistle VTBs, which were fully repaid in the first quarter of 2019, and BOLDER Graphics VTB, of which $0.3 million was repaid. Lastly, proceeds of $2.2 million was received in the current period, which represents the draw on DCM's revolving credit facility with the Bank compared with $1.7 million during the comparative period to fund its working capital requirements, and manage cash flow to compensate for the slow down in the collection process as a result of the ERP disruptions.
OUTLOOK
Production revenue was largely unaffected by the impact of COVID-19 in the first quarter of 2020, given levels of backlog with DCM's large enterprise customers. In mid-March, COVID-19 began to negatively impact the Company’s retail-related business lines, and this accelerated in the second quarter, with lower levels of production in particular at DCM Burlington and other retail related lines across the Company. Levels of cash collections in the second half of March deteriorated rapidly, as customers assessed the impact of COVID-19 on their own working capital, however these have since stabilized to more normal levels.
The Company has initiated a number of actions to manage costs through this period of uncertainty, including temporary layoffs, shift reductions, rollbacks of management and senior executive salaries, reductions in non-essential spending and deferral of other expenses and payments where practical. DCM continues to evaluate the COVID-19 situation closely and assess further actions that may be required in the event of a prolonged disruption. At this point in time, DCM believes that actions taken have adequately positioned the Company for the current environment, although management continues to assess opportunities for further cost reduction. We expect many of these decisions and actions to further benefit the Company for the balance of 2020 that these will help offset some of the negative impact expected to our financial performance for the second and third quarters in particular due to COVID-19.
While we are presently anticipating a return to a more normal level of business in the fourth quarter, as pandemic restrictions ease across Canada and the United States, it is not currently possible to accurately quantify the impact of the pandemic on the Company’s operations or financial results or the length of time over which this impact may continue. These possible impacts may include: changes in our customer’s needs and their buying behavior; impact to DCM’s operating locations due to ongoing public gathering restrictions to limit the spreading of the virus; and the timing of loosening such restrictions on businesses and the general public. However, DCM is working closely with its customers to assist in this transition.
Management of DCM continues to assess the impact of COVID-19 on the Company’s business, as well as further government responses and assistance that may benefit the Company, in the form of tax rebates, holidays, grants and subsidies introduced in response to the impact of the ongoing COVID-19 pandemic.
As at June 19, 2020, there were outstanding borrowings of $25.4 million under the revolving facilities portion of the Bank Credit Facility, compared to $36.8 million as at March 31, 2020, an improvement of approximately $11.4 million. And on June 19, 2020, the Company had $8.2 million in available credit pursuant to its revolving Bank Credit Facility, compared to $4.6 million as at March 31, 2020. The Company has to date qualified for and received approximately $6.1 million under the Canadian Emergency Wage Subsidy relief program with $1.6 million of that amount attributable to the first quarter of 2020 and the balance attributable to the second quarter. At this time DCM does not expect to meet the eligibility criteria for pay period 3 or further periods of this program. DCM expects to make certain payments at the end of June 2020 relating to sales taxes and input tax credit payments which had been deferred pursuant to federal and provincial temporary relief measures related to COVID-19.
Working capital improvement is a significant priority for your company; both the timely collection of accounts receivable and better matching of production costs to revenue. The substantial progress made in remediating ERP issues from 2019 is expected to help return our accounts receivable to more acceptable levels by the end of 2020. We are also well-advanced in changing our legacy practice of billing, which we call “bill-as-released” or “BAR”, where we incur the costs of producing finished goods for our clients, warehouse these products for extended periods of time, yet do not issue invoices until the finished goods are actually shipped. Just prior to the end of the first quarter we initiated a project to convert our top 15 BAR clients, who represent approximately two-thirds of our BAR products, to a model which better and more timely matches the receipt of revenue to when we incur production related expenses. We plan to convert all BAR customers from that legacy practice of billing and, in doing so, further improve our working capital.
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.
Due to the impact of COVID-19, the Company continues to defer most of its planned spending on capital expenditures and technology development initiatives. It is expected this spending will re-commence once better visibility in the balance of the year is available. Digital innovation investment remains a priority for capital spending initiatives for DCM in 2020 and the coming years.
About DATA Communications Management Corp.
DCM is a communication solutions partner that adds value for major companies across North America by creating more meaningful connections with their customers. DCM pairs customer insights and thought leadership with cutting-edge products, modular enabling technology and services to power its clients’ go-to market strategies. DCM helps its clients manage how their brands come to life, determine which channels are right for them, manage multimedia campaigns, deploy location-specific and 1:1 marketing, execute custom loyalty programs, and fulfill their commercial printing needs all in one place.
DCM's extensive experience has positioned it as an expert at providing communication solutions across many verticals, including the financial, retail, healthcare, consumer health, energy, and not-for-profit sectors. As a result of its locations throughout Canada and in the United States (Chicago, Illinois and New York, New York), it is able to meet its clients’ varying needs with scale, speed, and efficiency - no matter how large or complex the ask. DCM is able to deliver advanced data security, regulatory compliance, and bilingual communications, both in print and/or digital formats.
FORWARD-LOOKING STATEMENTS
Certain statements in this press release constitute “forward-looking” statements that involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance, objectives or achievements of DCM, or industry results, to be materially different from any future results, performance, objectives or achievements expressed or implied by such forward-looking statements. When used in this press release, words such as “may”, “would”, “could”, “will”, “expect”, “anticipate”, “estimate”, “believe”, “intend”, “plan”, and other similar expressions are intended to identify forward-looking statements. These statements reflect DCM’s current views regarding future events and operating performance, are based on information currently available to DCM, and speak only as of the date of this press release. These forward-looking statements involve a number of risks, uncertainties and assumptions and should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether or not such performance or results will be achieved. Many factors could cause the actual results, performance, objectives or achievements of DCM to be materially different from any future results, performance, objectives or achievements that may be expressed or implied by such forward-looking statements. The principal factors, assumptions and risks that DCM made or took into account in the preparation of these forward-looking statements include: risks relating to the impact of the COVID-19 pandemic, a rapidly evolving situation the impact of which could be material on DCM’s business, liquidity and results of operations; DCM's new enterprise resource planning ("ERP") system has failed to perform as planned and interrupted operational transactions during and following the implementation, which has, and may continue to, materially and adversely affect DCM's financial liquidity and operations and results of operations; there are material uncertainties associated with the resolution of the liquidity challenges currently facing DCM that may cast significant doubt as to the ability of DCM to meet its obligations as they come due; there is no assurance that management’s initiatives for dealing with these events and conditions will be successful and there are risks in the expected timing of resolution thereof and the possible effects of these issues if they are not resolved; DCM’s ability to continue as a going concern is dependent upon its ability to return DCM to profitability, generate positive cash flows from operations, and obtain such additional financing as may be required; risks relating to DCM’s ability to access sufficient capital, including, without limitation, under its existing revolving credit facility, on favourable terms to fund its liquidity and business plans from internal and external sources; the risk that a material weakness in internal control of financial reporting, could, if uncorrected, result in a future misstatement of revenues that may result in a material misstatement of DCM's annual or interim consolidated financial statements if not prevented or detected on a timely basis; the risk that DCM will not be successful in implementing amendments to the terms of its existing credit facilities including, without limitation, the financial covenants of DCM under these facilities; the limited growth in the traditional printing industry and the potential for further declines in sales of DCM’s printed business documents relative to historical sales levels for those products; the risk that changes in the mix of products and services sold by DCM will adversely affect DCM’s financial results; the risk that DCM may not be successful in reducing the size of its legacy print business, realizing the benefits expected from restructuring and business reorganization initiatives, reducing costs, reducing and repaying its long term debt, and growing its digital and marketing communications businesses; the risk that DCM may not be successful in managing its organic growth; DCM’s ability to invest in, develop and successfully market new digital and other products and services; competition from competitors supplying similar products and services, some of whom have greater economic resources than DCM and are well-established suppliers; DCM’s ability to grow its sales or even maintain historical levels of its sales of printed business documents; the impact of economic conditions on DCM’s businesses; risks associated with acquisitions and/or investments in joint ventures by DCM; the failure to realize the expected benefits from the acquisitions it has made and risks associated with the integration and growth of such businesses; increases in the costs of paper and other raw materials used by DCM; and DCM’s ability to maintain relationships with its customers and suppliers. Additional factors are discussed elsewhere in this press release and under the headings "Liquidity and capital resources" and “Risks and Uncertainties” in DCM’s management’s discussion and analysis and in DCM’s other publicly available disclosure documents, as filed by DCM on SEDAR (www.sedar.com). Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results may vary materially from those described in this press release as intended, planned, anticipated, believed, estimated or expected. Unless required by applicable securities law, DCM does not intend and does not assume any obligation to update these forward-looking statements.
NON-IFRS MEASURES
This press release includes certain non-IFRS measures as supplementary information. Except as otherwise noted, when used in this press release, EBITDA means earnings before interest and finance costs, taxes, depreciation and amortization. Adjusted EBITDA means EBITDA adjusted for restructuring expenses and one-time business reorganization costs. Adjusted net income (loss) means net income (loss) adjusted for restructuring expenses, one-time business reorganization costs and the tax effects of those items. Adjusted net income (loss) per share (basic and diluted) is calculated by dividing Adjusted net income (loss) for the period by the weighted average number of common shares of DCM (basic and diluted) outstanding during the period. In addition to net income (loss), DCM uses non-IFRS measures including Adjusted net income (loss), Adjusted net income (loss) per share, EBITDA and Adjusted EBITDA to provide investors with supplemental measures of DCM’s operating performance and thus highlight trends in its core business that may not otherwise be apparent when relying solely on IFRS financial measures. DCM also believes that securities analysts, investors, rating agencies and other interested parties frequently use non-IFRS measures in the evaluation of issuers. DCM’s management also uses non-IFRS measures in order to facilitate operating performance comparisons from period to period, prepare annual operating budgets and assess its ability to meet future debt service, capital expenditure and working capital requirements. Adjusted net income (loss), Adjusted net income (loss) per share, EBITDA and Adjusted EBITDA are not earnings measures recognized by IFRS and do not have any standardized meanings prescribed by IFRS. Therefore, Adjusted net income (loss), Adjusted net income (loss) per share, EBITDA and Adjusted EBITDA are unlikely to be comparable to similar measures presented by other issuers.
Investors are cautioned that Adjusted net income (loss), Adjusted net income (loss) per share, EBITDA and Adjusted EBITDA should not be construed as alternatives to net income (loss) determined in accordance with IFRS as an indicator of DCM’s performance. For a reconciliation of net income (loss) to EBITDA and a reconciliation of net income (loss) to Adjusted EBITDA, see Table 3 above. For a reconciliation of net income (loss) to Adjusted net income (loss) and a presentation of Adjusted net income (loss) per share, see Table 4 above.
Condensed interim consolidated statements of financial position |
|||||
(in thousands of Canadian dollars, unaudited) |
March 31, 2020
|
|
December 31, 2019
|
||
|
|
|
|
||
Assets |
|
|
|
||
Current assets |
|
|
|
||
Trade receivables |
91,801 |
|
|
86,451 |
|
Inventories |
11,997 |
|
|
12,580 |
|
Prepaid expenses and other current assets |
1,982 |
|
|
2,611 |
|
|
105,780 |
|
|
101,642 |
|
Non-current assets |
|
|
|
||
Other non-current assets |
800 |
|
|
828 |
|
Deferred income tax assets |
4,405 |
|
|
6,648 |
|
Restricted cash |
515 |
|
|
515 |
|
Property, plant and equipment |
12,169 |
|
|
13,062 |
|
Right-of-use assets |
54,153 |
|
|
56,381 |
|
Pension assets |
4,083 |
|
|
156 |
|
Intangible assets |
17,091 |
|
|
18,167 |
|
Goodwill |
16,973 |
|
|
16,973 |
|
|
|
|
|
||
|
215,969 |
|
|
214,372 |
|
|
|
|
|
||
Liabilities |
|
|
|
||
Current liabilities |
|
|
|
||
Bank overdraft |
1,013 |
|
|
1,093 |
|
Trade payables and accrued liabilities |
50,144 |
|
|
51,743 |
|
Current portion of credit facilities |
4,915 |
|
|
3,887 |
|
Current portion of promissory notes |
— |
|
|
492 |
|
Current portion of lease liabilities |
8,252 |
|
|
8,252 |
|
Provisions |
3,103 |
|
|
3,886 |
|
Income taxes payable |
1,917 |
|
|
2,068 |
|
Deferred revenue |
1,784 |
|
|
2,133 |
|
|
71,128 |
|
|
73,554 |
|
Non-current liabilities |
|
|
|
||
Provisions |
471 |
|
|
192 |
|
Credit facilities |
75,491 |
|
|
74,760 |
|
Promissory notes |
2,106 |
|
|
2,095 |
|
Lease liabilities |
51,740 |
|
|
53,514 |
|
Deferred income tax liabilities |
215 |
|
|
402 |
|
Pension obligations |
7,260 |
|
|
7,958 |
|
Other post-employment benefit plans |
2,974 |
|
|
2,938 |
|
|
211,385 |
|
|
215,413 |
|
|
|
|
|
||
Equity |
|
|
|
||
Shareholders’ equity |
|
|
|
||
Shares |
256,045 |
|
|
256,045 |
|
Warrants |
853 |
|
|
853 |
|
Contributed surplus |
2,324 |
|
|
2,300 |
|
Translation reserve |
276 |
|
|
254 |
|
Deficit |
(254,914 |
) |
|
(260,493 |
) |
|
4,584 |
|
|
(1,041 |
) |
|
|
|
|
||
|
215,969 |
|
|
214,372 |
|
Condensed interim consolidated statements of operations |
|||||
(in thousands of Canadian dollars, except per share amounts, unaudited) |
For the three months ended March 31, 2020 |
|
For the three months ended March 31, 2019 |
||
|
$ |
|
$ |
||
|
|
|
|
||
Revenues |
77,415 |
|
|
78,549 |
|
|
|
|
|
||
Cost of revenues |
55,774 |
|
|
57,787 |
|
|
|
|
|
||
Gross profit |
21,641 |
|
|
20,762 |
|
|
|
|
|
||
Expenses |
|
|
|
||
Selling, commissions and expenses |
7,615 |
|
|
9,305 |
|
General and administration expenses |
9,570 |
|
|
7,853 |
|
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 on long term debt and pensions, net |
1,211 |
|
|
1,231 |
|
Interest expense on lease liabilities |
890 |
|
|
901 |
|
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 |
) |
Condensed interim consolidated statements of comprehensive income (loss) |
|||||
(in thousands of Canadian dollars, unaudited) |
For the three months ended March 31, 2020 |
|
For the three months ended March 31, 2019 |
||
|
$ |
|
$ |
||
|
|
|
|
||
Net income (loss) for the period |
2,210 |
|
|
(323 |
) |
|
|
|
|
||
|
|
|
|
||
Other comprehensive income (loss): |
|
|
|
||
|
|
|
|
||
Items that may be reclassified subsequently to net income (loss) |
|
|
|
||
Foreign currency translation |
22 |
|
|
31 |
|
|
22 |
|
|
31 |
|
|
|
|
|
||
Items that will not be reclassified to net income (loss) |
|
|
|
||
Re-measurements of pension and other post-employment benefit obligations |
4,507 |
|
|
(249 |
) |
Taxes related to pension and other post-employment benefit adjustment above |
(1,138 |
) |
|
65 |
|
|
3,369 |
|
|
(184 |
) |
|
|
|
|
||
Other comprehensive income (loss) for the period, net of tax
|
3,391 |
|
|
(153 |
) |
|
|
|
|
||
Comprehensive income (loss) for the period |
5,601 |
|
|
(476 |
) |
|
|
|
|
||
|
|
|
|
||
Condensed interim consolidated statements of changes in shareholders' equity (deficit) |
||||||||||||
(in thousands of Canadian dollars, unaudited) |
Shares |
Warrants |
Contributed surplus |
Translation reserve |
Deficit |
Total equity |
||||||
|
$ |
$ |
$ |
$ |
$ |
$ |
||||||
|
|
|
|
|
|
|
||||||
Balance as at December 31, 2018 |
251,217 |
|
806 |
|
1,841 |
|
242 |
|
(246,594 |
) |
7,512 |
|
|
|
|
|
|
|
|
||||||
Net loss for the period |
— |
|
— |
|
— |
|
— |
|
(323 |
) |
(323 |
) |
Other comprehensive loss for the period |
— |
|
— |
|
— |
|
31 |
|
(184 |
) |
(153 |
) |
Total comprehensive loss for the period |
— |
|
— |
|
— |
|
31 |
|
(507 |
) |
(476 |
) |
|
|
|
|
|
|
|
||||||
Share-based compensation expense |
— |
|
— |
|
74 |
|
— |
|
— |
|
74 |
|
|
|
|
|
|
|
|
||||||
Balance as at March 31, 2019 |
251,217 |
|
806 |
|
1,915 |
|
273 |
|
(247,101 |
) |
7,110 |
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
||||||
Balance as at December 31, 2019 |
256,045 |
|
853 |
|
2,300 |
|
254 |
|
(260,493 |
) |
(1,041 |
) |
|
|
|
|
|
|
|
||||||
Net income for the period |
— |
|
— |
|
— |
|
— |
|
2,210 |
|
2,210 |
|
Other comprehensive income for the period |
— |
|
— |
|
— |
|
22 |
|
3,369 |
|
3,391 |
|
Total comprehensive income for the period |
— |
|
— |
|
— |
|
22 |
|
5,579 |
|
5,601 |
|
|
|
|
|
|
|
|
||||||
Share-based compensation expense |
— |
|
— |
|
24 |
|
— |
|
— |
|
24 |
|
|
|
|
|
|
|
|
||||||
Balance as at March 31, 2020 |
256,045 |
|
853 |
|
2,324 |
|
276 |
|
(254,914 |
) |
4,584 |
|
Condensed interim consolidated statements of cash flows |
|||||||
(in thousands of Canadian dollars, unaudited) |
For the three months ended March 31, 2020 |
|
For the three months ended March 31, 2019 |
||||
|
$ |
|
$ |
||||
|
|
|
|
||||
Cash provided by |
|
|
|
||||
|
|
|
|
||||
Operating activities |
|
|
|
||||
Net income (loss) for the period |
$ |
2,210 |
|
|
$ |
(323 |
) |
Adjustments to net income (loss) |
|
|
|
||||
Depreciation of property, plant and equipment |
942 |
|
|
1,119 |
|
||
Amortization of intangible assets |
1,076 |
|
|
647 |
|
||
Depreciation of right-of-use-assets |
2,383 |
|
|
2,077 |
|
||
Interest expense on lease liability |
864 |
|
|
901 |
|
||
Share-based compensation expense |
24 |
|
|
74 |
|
||
Pension expense |
130 |
|
|
148 |
|
||
Loss on disposal of property, plant and equipment |
— |
|
|
55 |
|
||
Provisions |
743 |
|
|
1,682 |
|
||
Amortization of transaction costs and debt modification (gains) losses |
105 |
|
|
137 |
|
||
Accretion of non-current liabilities and related interest expense |
200 |
|
|
112 |
|
||
Other post-employment benefit plans, net |
36 |
|
|
65 |
|
||
Income tax expense (recovery) |
918 |
|
|
(24 |
) |
||
|
9,631 |
|
|
6,670 |
|
||
Changes in working capital |
(5,958 |
) |
|
5,967 |
|
||
Contributions made to pension plans, net |
(248 |
) |
|
(242 |
) |
||
Provisions paid |
(1,247 |
) |
|
(1,429 |
) |
||
Income taxes paid |
(151 |
) |
|
(831 |
) |
||
|
2,027 |
|
|
10,135 |
|
||
|
|
|
|
||||
Investing activities |
|
|
|
||||
Purchase of property, plant and equipment |
(49 |
) |
|
(503 |
) |
||
Purchase of intangible assets |
— |
|
|
(1,788 |
) |
||
|
(49 |
) |
|
(2,291 |
) |
||
|
|
|
|
||||
Financing activities |
|
|
|
||||
Proceeds from credit facilities |
2,185 |
|
|
1,676 |
|
||
Repayment of credit facilities |
(476 |
) |
|
(1,383 |
) |
||
Repayment of other liabilities |
(100 |
) |
|
(100 |
) |
||
Repayment of promissory notes |
(505 |
) |
|
(2,731 |
) |
||
Transaction costs |
(223 |
) |
|
(108 |
) |
||
Lease payments |
(2,798 |
) |
|
(2,549 |
) |
||
|
(1,917 |
) |
|
(5,195 |
) |
||
|
|
|
|
||||
Decrease in bank overdraft during the period |
61 |
|
|
2,649 |
|
||
Bank overdraft – beginning of period |
$ |
(1,093 |
) |
|
$ |
(3,999 |
) |
Effects of foreign exchange on cash balances |
19 |
|
|
(7 |
) |
||
Bank overdraft – end of period |
$ |
(1,013 |
) |
|
$ |
(1,357 |
) |
