UPDATED 2/26/20 1:00PM EST After releasing results on Tuesday, DIRTT shares plunged 33% by noon on Wednesday, trading at $2.51 per share. Shares in the wall maker traded as high as $9.30 in the past 52-weeks.
DIRTT Environmental Solutions Ltd. Monday announced its financial results for the three months and twelve months ended December 31, 2019. All financial information in this news release is presented in U.S. dollars, unless otherwise stated.
Fourth Quarter 2019
Revenue of $53.2 million
Gross Profit Margin of 25.3%
Adjusted Gross Profit Margin1 of 33.4%
Net loss of $7.5 million or $(0.09)/share
Net loss margin of (14.2)%
Adjusted EBITDA1 of $(3.4) million
Adjusted EBITDA Margin1 of (6.4)%
Fiscal 2019
Revenue of $247.7 million
Gross Profit Margin of 34.9%
Adjusted Gross Profit Margin1 of 39.5%
Net loss of $4.4 million or $(0.05)/share
Net loss margin of (1.8)%
Adjusted EBITDA1 of $18.2 million
Adjusted EBITDA Margin1 of 7.4%
Notes: (1) See “Non-GAAP Financial Measures”. We have revised our calculations of Adjusted Gross Profit Margin and Adjusted EBITDA for the periods presented.
Management Commentary
“2019 was a strategically important year for DIRTT but also one that included challenges,” stated Kevin O’Meara, chief executive officer. “While we are confidently moving forward with the many sales and marketing and operational initiatives laid out in our strategic plan, we are still in the early stages of implementing that plan and continue to experience the effects of disruption in sales activity levels stemming from the distraction of significant management changes during 2018 on a long sales cycle combined with the immature and transitional state of our sales and marketing function. This adversely affected revenue in the fourth quarter, which was down sequentially from the third quarter of 2019. We have been experiencing a similar sequential percentage decrease in the first two months of 2020 relative to the first two months of the fourth quarter of 2019. Given the slower start to the year, 2020 may be a lower revenue year than 2019.
“We have a strong group of Distribution Partners that understand the road map and are dedicating time, money and effort behind our strategic plan. This is evidenced by the seven existing Distribution Partners with whom we recently developed a comprehensive plan to expand geographically and address currently underserved markets. These are strong partners who, in aggregate, generated 14% of DIRTT’s sales in 2019. Further, the majority of our extensive partner network is well positioned to continue driving small- to mid-size projects while we establish the internal capabilities that we expect, over time, will drive growth for us and our Distribution Partners through a pipeline of larger projects.
“In addition, we are encouraged by the results to date of our targeted approach to growing strategic national accounts, including discussions with new and existing accounts. The opportunities from these accounts often entail a multi-year sales effort and generally start with smaller projects, growing over time as the commercial relationship strengthens. We expect several small projects from new strategic accounts to commence in the second half of 2020. Finally, within our commercial function, we are hiring within our sales and marketing organization and remain committed to achieving our goal of filling all open positions by the end of 2020.
“Although it remains too early to quantify the impact that our progress will have on revenues for 2020, we are intently focused on exiting the year with the organizational foundation in place to support our strategic plan and achieve our financial targets for 2023, which call for revenue of $450 million to $550 million and an Adjusted EBITDA Margin of 18% - 22%.”
Steve Parry, board chair, added, “While the type of organizational transformation DIRTT is undergoing requires time and patience to execute, the Board is enthusiastic about the comprehensive strategic plan the company is implementing. We are confident that it is the right plan with the right management team to deliver on DIRTT’s significant potential within the interior construction market.”
Fourth Quarter Financial Review
Revenue for the fourth quarter of 2019 declined to $53.2 million compared to $74.4 million reported in the prior year period. In the fourth quarter, we experienced continued disruption in sales activity levels, particularly with respect to larger size projects, stemming from the distraction of significant management changes during 2018 on a long sales cycle combined with the immature and transitional state of our sales and marketing function. Comparatively, the fourth quarter of 2018 included two large projects, one in healthcare and one in commercial and totaling approximately $9.2 million, that were not replaced in 2019.
Correspondingly, gross profit for the fourth quarter of 2019 declined to $13.5 million from $27.6 million in the prior year period. Gross profit margin decreased to 25.3% in the fourth quarter from 37.1% in the prior year period.
Gross profit was impacted by approximately $2.2 million of costs due to abnormally low capacity utilization rates due to the decline in revenues. In December 2019 and into the first quarter of 2020, we began taking steps to address our excess labor capacity in these periods of lower activity with a combination of planned shutdowns during slower periods and a 14% head count reduction of factory employees. We will continue to monitor activity levels over the course of the year and adjust as necessary although we believe productivity and efficiency improvements will enable us to return to 2018 revenue levels without reinstating headcount.
Gross profit was also negatively impacted by an incremental $2.5 million provision. This provision specifically relates to certain non-structural timber projects installed between 2016 and 2019, with total project revenue of $1.7 million, which we recently determined may not meet certain building class fire retardant specifications under which they were sold. We have reserved a $2.5 million liability in the event removal and replacement of the timber is required, while at the same time we are investigating less costly solutions and potential recovery from third parties and our insurers.
Adjusted Gross Profit Margin, which excludes the costs of under-utilized capacity, decreased to 33.4% in the fourth quarter of 2019 compared to 40.2% in the prior year period, due primarily to the impact of the incremental timber provision and the impact of record revenues in the prior year on fixed costs relative to normal capacity utilization levels.
Sales and marketing expenses decreased to $8.0 million for the fourth quarter of 2019 from $10.5 million in the prior year period. The decline was caused by a combination of decreased commission expense on lower revenue and ongoing discipline to eliminate non-sales generating travel, meals and entertainment costs and expenses related to trade shows.
General and administrative expenses decreased to $6.6 million for the fourth quarter of 2019 from $7.1 million for the prior year period. Reduced personnel costs including a reduction in our provision for variable compensation was offset by $0.9 million of higher professional fees related to ongoing litigation.
Operations support expenses increased to $3.3 million for the fourth quarter of 2019 from $2.1 million in the prior year period largely due to investments in personnel and related travel costs to enhance project execution and better support Distribution Partners, consistent with our strategic plan.
Technology and development expenses increased to $1.9 million for the fourth quarter of 2019 from $1.1 million in the prior year period due primarily to reduced capitalization of salaries due to the current mix of projects as well as certain personnel costs that were previously classified as cost of sales of technical services in the prior year.
Net loss for the fourth quarter of 2019 was $7.5 million or $(0.09)/share compared to net income in the prior year period of $3.1 million or $0.04/share. The decrease reflects reduced gross profit as discussed above partially offset by impairment charges in 2018 that did not recur in 2019. Increased foreign exchange losses were substantially offset by income tax recoveries in the period. Net loss margin was (14.2)% for the fourth quarter of 2019.
Adjusted EBITDA and Adjusted EBITDA Margin for the three months ended December 31, 2019 decreased to a loss of $(3.4) million or (6.4)% from earnings of $10.2 million or 13.7% in the same period of 2018. In the current period, we revised our calculation of Adjusted EBITDA for the current and prior periods to exclude the impacts of foreign exchange on balance sheet monetary items to better reflect the performance and comparability of DIRTT’s underlying operations amongst periods.
Full Year Financial Review
Revenue for the year ended December 31, 2019 declined to $247.7 million from $274.7 million in the prior year period. The decrease reflects the continued effects of disruption in sales activity levels particularly as it relates to larger projects beginning in 2018 and carrying through 2019. This disruption stems from the distraction of significant management changes during 2018 on a long sales cycle combined with the immature and transitional state of our sales and marketing function, which limited our ability to take advantage of growth opportunities in our market for 2019. While we have a stable base of business of small- to mid-size projects, we are actively working to build the pipeline with our partners, and our new strategic accounts and large project teams.
Gross profit and gross profit margin decreased to $86.4 million and 34.9% respectively for the year ended December 31, 2019 from $107.0 million and 39.0%, respectively, in the prior year. The primary driver of the declines was the negative leverage on fixed costs as a result of lower revenue combined with the $2.5 million incremental timber provision, as previously discussed. Adjusted Gross Profit and Adjusted Gross Profit Margin decreased to $97.9 million and 39.5%, respectively, in 2019 from $116.5 million and 42.4%, respectively, in the prior year period. Excluded from Adjusted Gross Profit calculations in 2019 are $2.2 million of overhead costs associated with operating at abnormally low capacity levels, as described above.
Sales and marketing expenses declined to $33.9 million for the year ended December 31, 2019 from $40.6 million in the prior year period. Included in these expenses were $2.0 million of one time consulting costs related to the sales and marketing plan developed with the assistance of an internationally recognized consulting firm, offset by a $3.4 million reduction in commission expense on lower revenue, $2.6 million elimination of non-sales generating travel, meals and entertainment expenses and lower salary and benefit expenses due to reductions in sales and marketing headcount year over year.
General and administrative expenses decreased to $27.6 million for the year ended December 31, 2019 from $28.7 million in the prior year period. In 2019, personnel costs were lower as a result of reductions in headcount and variable compensation, offset by $2.6 million of costs related to the listing of our Common Shares on Nasdaq and $1.3 million in costs associated with ongoing litigation. Comparatively, in 2018, we incurred $2.1 million of costs related to proxy defense and certain special committee costs which did not reoccur in 2019.
Operations support expenses increased to $11.0 million for the year ended December 31, 2019, from $8.1 million for the prior year period. The increase is attributable to consultant costs of $1.1 million incurred to assist with the evaluation of current operations and to assist with the rectification of the tile warping issue and to increased personnel costs due to higher headcount to better support project execution and support of our Distribution Partners.
Technology and development expenses increased to $7.8 million for the year ended December 31, 2019, compared to $4.2 million for the prior year period. These increases are due to a $1.7 million decrease in capitalized salaries for the year ended December 31, 2019, as the current mix of projects undertaken by us included a higher portion of efforts related to business process improvements that were not eligible for capitalization. Additionally, we incurred additional salary and benefit costs of $0.7 million that were classified as cost of sales of technical services during the year ended December 31, 2018.
Net loss for the year ended December 31, 2019 was $4.4 million or $(0.05)/share vs. net income of $5.6 million or $0.07/share for the prior year period. The decline is primarily the result of a $20.6 million decrease in gross profit margin, $5.7 million of one-time costs, $1.3 million of litigation costs and a $4.5 million increase in foreign exchange loss. These cost increases were offset by a $3.4 million reduction in commission expenses, a $2.8 million reduction in reorganization expenditures, a $8.7 million impairment in 2018 with no impairments in 2019, a $2.1 million one-time cost in 2018 related to advisory and other costs associated with activist defense and special committee of the Board of Directors with no such costs in 2019, a $2.3 million reduction in income tax expense, and other operating expenditure reductions. Net loss margin was (1.8)% for the year ended December 31, 2019.
One-time costs in 2019 include $2.0 million related to the sales and marketing engagement, $2.6 million associated with the listing of our Common Shares on Nasdaq and $1.1 million of operations consulting costs.
Adjusted EBITDA and Adjusted EBITDA Margin for full year 2019 decreased to $18.2 million and 7.4% respectively from $39.1 million and 14.2%, respectively, in the full year 2018. This reflects an $18.6 million decrease in Adjusted Gross Profit, the $2.2 million cost of unutilized capacity, the impacts of one-time and litigation costs mentioned above, partially offset by ongoing cost reductions. As noted previously, in the current period, we changed our calculation of Adjusted EBITDA to exclude the impacts of foreign exchange on balance sheet monetary items to improve measurement of DIRTT’s underlying operations.
As of December 31, 2019, we held cash and cash equivalents of $47.2 million with no debt.