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DATA Communications Management Corp. Announces First Quarter Financial Results for 2019

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HIGHLIGHTS

FIRST QUARTER 2019

  • Revenues of $78.5 million compared with $88.5 million in the prior
    year; the prior period included significantly higher volume from one
    particular customer
  • Gross margin as a percentage of revenue improved to 26.4% from 24.3%
    in the prior year comparative period
  • Reduction in selling, general & administrative expenses by $0.5
    million versus the same quarter last year
  • Adjusted EBITDA of $7.9 million, compared to $6.4 million in the prior
    year (See Table 2 and “Non-IFRS Measures” below). Excluding the
    effects of adopting IFRS 16 Leases (“IFRS 16”), Adjusted EBITDA
    was $5.4 million
  • Net loss of $0.3 million, including restructuring expenses of $1.7
    million compared to net income of $1.8 million, including
    restructuring expenses of $0.1 million in the prior comparative period
  • Adjusted net income of $1.2 million, compared to $2.1 million in the
    prior comparative period (See Table 3 and “Non-IFRS Measures” below).
    Excluding the effects of adopting IFRS 16, Adjusted net income was
    $1.7 million
  • Adopts new accounting standard IFRS 16 Leases effective January
    1, 2019

RECENT EVENTS

  • DCM announces it has entered into a significant multi-year agreement
    to provide innovative technology solutions to a large provincial
    health services network
  • Sale of loose-leaf binders and index tab business to Southwest
    Business Products Ltd (“Southwest”) and long-term supply agreement
    with Southwest
  • Strategic decision to outsource Brossard, Quebec stationery production
    and expand existing tier two supplier agreement for the provision of
    stationery

BRAMPTON, Ontario–(BUSINESS WIRE)–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 months ended March 31, 2019.

“We continue to focus your Company’s efforts on providing additional
products and services to our core client base. In addition, with the
enhanced retail and consumer insight capabilities Perennial brings to
DCM, we are capturing new client business due to the innovative ideas
and exceptional executional capabilities we are presenting to clients.
Our “pitched and pending” sales pipeline is at historic highs with both
current and new clients,” said Gregory J. Cochrane, CEO.

CONTINUING THE PIVOT
DCM announced its Business Solutions Group was
recently awarded a significant multi-year agreement to provide
innovative technology solutions to a large provincial healthcare
services network as it transforms its clinical information systems to
become more integrated with enhanced automation tools. Key components to
be provided by DCM include scanners, printers, patient identification
solutions, consumables including labels, as well as ongoing support
services.

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“This long-standing customer of DCM in our traditional business has
trusted DCM to consult, evaluate, recommend and execute a business
solutions platform which will dramatically modernize the way this
province delivers health care services to its customers,” said Mr.
Cochrane. “By recommending the appropriate technology and business
processes to this client, DCM is now seen as a total enterprise
solutions provider instead of a print production vendor. DCM began to
record revenue in the second quarter of 2019 under this agreement.”

DCM recently announced the sale of its loose-leaf binders and index tab
business to Southwest, which closed on May 2, 2019. The sale was made by
way of an asset purchase agreement in which certain assets were sold and
certain liabilities were assumed by Southwest in exchange for cash
proceeds to DCM. At the same time, DCM entered into a long-term supply
agreement with Southwest as a preferred vendor of binders, index tabs
and related products. DCM expects to incur restructuring costs of
approximately $0.4 million in connection with this initiative in the
second quarter of 2019 primarily related to a reduction in headcount.
This transaction aligns with DCM’s strategy to focus on products and
solutions that are critical to its top customers, and to source non-core
offerings from other leading providers where it makes strategic sense.

Consistent with this theme, in early March 2019, DCM initiated plans to
outsource its Brossard, Quebec stationery production to a long-standing
tier two supplier. DCM also expanded its pre-existing supply agreement
with this partner. Effective May 1, 2019, DCM closed the Brossard,
Quebec facility, which primarily produced stationery products including
business cards and letterhead and relocated the facility’s digital print
on demand production to other DCM sites. As a result of the Brossard
closure, DCM incurred restructuring costs of approximately $0.5 million
in the first quarter of 2019 for severance costs. While DCM does not
expect material changes in revenue or margins from this initiative, it
allows DCM to better serve its customers with a seamless offering, and
to avoid additional investment in what it sees as a declining business
segment.

In the first quarter of 2019, DCM also initiated direct and indirect
labour savings across a number of its facilities as part of its
strategic focus on improving overall profitability. DCM incurred
restructuring costs of $1.2 million in the first quarter of 2019 for
severance costs associated with this reduction of employees. Total
annualized savings from these reduced labour costs are estimated to be
$1.2 million.

EXTENSION OF BANK CREDIT FACILITY
On March 5, 2019, DCM entered
into a second amendment to its credit agreement with a Canadian
chartered bank in relation to its revolving credit facility (“Bank
Credit Facility”). Significant terms of the amendment made to the credit
facility include an extension of the maturity date to January 31, 2023,
from its original maturity date of March 31, 2020; a reduction in the
prime rate margin on advances by 15 basis points from 0.75% per annum to
0.60% per annum; the elimination of an early termination fee in the
event the credit facility is terminated or repaid prior to maturity; and
amendments related to the calculation of certain financial covenants as
a result of the adoption of IFRS 16 effective for reporting periods on
or after January 1, 2019. The amendments related to IFRS 16 include
clarification that the calculation of DCM’s fixed charge coverage ratio
under the Bank Credit Facility will be completed on a basis that
substantially has the same effect as the results prior to the adoption
of IFRS 16 whereby lease payments will also be deducted from EBITDA, in
addition to all other adjustments previously allowed per the credit
agreement. As a result, definitions of certain terms related to IFRS 16
were added to the credit agreement. DCM’s financial covenant ratio with
the bank remains unchanged. On April 29, 2019, DCM entered into a lease
agreement with the bank pursuant to a master lease agreement dated July
31, 2018 in connection with the Gallus hybrid label press which was
fully commissioned earlier in the month.

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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, 2019 and 2018    

Jan. 1 to
Mar. 31,
2019 (1)

   

Jan. 1 to
Mar. 31,
2018

(in thousands of Canadian dollars, except share and per share
amounts, unaudited)
    $     $
Revenues 78,549 88,516
Cost of revenues     57,787       67,041  
Gross profit 20,762 21,475
Selling, general and administrative expenses 17,158 17,672
Restructuring expenses 1,682 64
Acquisition costs           43  
Income before finance costs and income taxes     1,922       3,696  
Finance costs
Interest expense, net 2,132 1,137
Amortization of transaction costs     137       143  
      2,269       1,280  
(Loss) income before income taxes     (347 )     2,416  
 
Income tax (recovery) expense
Current 32 843
Deferred     (56 )     (190 )
      (24 )     653  
Net (loss) income for the period     (323 )     1,763  
 
Basic and diluted (loss) earnings per share (0.02 ) 0.09
Weighted average number of common shares outstanding, basic and
diluted
21,523,515 20,039,159
 
 
As at March 31, 2019 and December 31, 2018

As at Mar. 31,
2019 (1)

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As at Dec. 31,
2018

(in thousands of Canadian dollars, unaudited)     $     $
Current assets 85,810 85,455
Current liabilities 72,756 64,716
 
Total assets 202,879 142,231
Total non-current liabilities 123,013 70,003
 
Shareholders’ equity     7,110       7,512  
(1)     2019 results include the impact of the adoption of new accounting
standard IFRS 16. Refer to note 3 of the condensed interim
consolidated financial statements for the three months ended March
31, 2019 and related management’s discussion & analysis for further
details of the impact of the adoption of new accounting standards.
 

Table 2 The following table provides reconciliations of
net (loss) income to EBITDA and of net (loss) income to Adjusted EBITDA
for the periods noted. See “Non-IFRS Measures”.

       

EBITDA and Adjusted EBITDA Reconciliation

             
For the periods ended March 31, 2019 and 2018 January 1 to March 31, 2019

January 1 to
March 31, 2018

(in thousands of Canadian dollars, unaudited)        
     

Proforma
without IFRS 16
adjustment

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IFRS 16
adjustments

    As reported     As reported
Net (loss) income for the period (1)     $ 178       $ (501 )     $ (323 )     $ 1,763  
       
Interest expense, net (1) 1,231 901 2,132 1,137
Amortization of transaction costs 137 137 143
Current income tax expense 32 32 843
Deferred income tax recovery (56 ) (56 ) (190 )
Depreciation of property, plant and equipment 1,119 1,119 1,148
Amortization of intangible assets 647 647 1,069
Depreciation of ROU Asset (1)           2,077       2,077        
EBITDA $ 3,288 $ 2,477 $ 5,765 $ 5,913
 
Restructuring expenses 1,682 1,682 64
One-time business reorganization costs (2) 412 412 332
Acquisition costs                       43  
Adjusted EBITDA     $ 5,382       $ 2,477       $ 7,859       $ 6,352  
(1)     2019 results include the impact of the adoption of new accounting
standard IFRS 16. Refer to note 3 of the condensed interim
consolidated financial statements for the three months ended March
31, 2019 and related management’s discussion & analysis for further
details of the impact of the adoption of new accounting standards.
 
(2) One-time business reorganization costs include non-recurring
headcount reduction expenses for employees that did not qualify as
restructuring costs.
 

Table 3 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”.

         

Adjusted Net Income Reconciliation

               
For the periods ended March 31, 2019 and 2018 January 1 to March 31, 2019

January 1 to
March 31, 2018

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

Proforma
without IFRS 16
adjustment

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IFRS 16
adjustments

    As reported     As reported
Net (loss) income for the period (1)       $ 178       $ (501 )     $ (323 )     $ 1,763  
       
Restructuring expenses 1,682 1,682 64
One-time business reorganization costs (2) 412 412 332
Acquisition costs 43
Tax effect of the above adjustments       (546 )           (546 )     (103 )
Adjusted net income       $ 1,726       $ (501 )     $ 1,225       $ 2,099  
 
Adjusted net income per share, basic and diluted       $ 0.08       $ (0.02 )     $ 0.06       $ 0.09  
Weighted average number of common shares outstanding, basic and
diluted
      21,523,515     21,523,515     21,523,515     20,039,159
Number of common shares outstanding, basic and diluted       21,523,515     21,523,515     21,523,515     20,039,159
(1)     2019 results include the impact of the adoption of new accounting
standard IFRS 16. Refer to note 3 of the condensed interim
consolidated financial statements for the three months ended March
31, 2019 and related management’s discussion & analysis for further
details of the impact of the adoption of new accounting standards.
 
(2) One-time business reorganization costs include non-recurring
headcount reduction expenses for employees that did not qualify as
restructuring costs.
 

Revenues
For the three months ended March 31, 2019,
DCM recorded revenues of $78.5 million, a decrease of $10.0 million or
11.3% compared with the same period in 2018. The first quarter of 2018
included significantly higher volume than normal from one particular
customer, by approximately $4.9 million compared to this year. The
decrease in relative revenues for the three months ended March 31, 2019
was also due to (i) the loss of a lower margin customer, (ii) the timing
of orders, (iii) some softness in spend from certain customers, and (iv)
certain non-recurring work. The decrease was partially offset by (i) an
increase in revenues from new customers in the Cannabis industry, (ii)
year over year growth from a large customer in the financial services
industry which was onboarded in late 2017, (iii) gains in wallet share
from existing customers with new applications and (iv) the acquisition
of Perennial which was not reflected in the comparative period as the
acquisition was completed in the second quarter of 2018.

Cost of Revenues and Gross Profit
For the three
months ended March 31, 2019, cost of revenues decreased to $57.8 million
from $67.0 million for the same period in 2018, resulting in a $9.2
million or 13.8% decrease over the same period last year. Excluding the
effects of adopting IFRS 16, cost of revenues for the three months ended
March 31, 2019 was $58.1 million.

Gross profit for the three months ended March 31, 2019 was
$20.8 million, which represented a decrease of $0.7 million or 3.3% from
$21.5 million for the same period in 2018. Gross profit as a percentage
of revenues increased to 26.4% for the three months ended March 31,
2019, compared to 24.3% for the same period in 2018. Excluding the
effects of adopting IFRS 16, gross profit for the three months ended
March 31, 2019 was $20.4 million or 26.0% as a percentage of revenues.
The increase in gross profit as a percentage of revenues for the three
months ended March 31, 2019 was positively impacted by (i) higher
margins attributed to the acquisition of Perennial which was not
reflected in the comparative period, (ii) continued refinement of DCM’s
pricing discipline, (iii) cost reductions realized from prior cost
savings initiatives, and (iv) improvements in product mix compared to
last year. The increase in gross profit as a percentage of revenues was,
however, partially offset by the impact of paper and other raw materials
price increases leading to somewhat compressed margins on contracts with
certain existing customers.

Selling, General and Administrative Expenses (“SG&A”)
SG&A
expenses for the three months ended March 31, 2019 decreased
$0.5 million or 2.9% to $17.2 million, or 21.8% of total revenues,
compared to $17.7 million, or 20.0% of total revenues, for the same
period of 2018. After deducting one-time business reorganization costs,
SG&A expenses were $16.8 million, or 21.3% of total revenues compared to
$17.4 million or 19.7% of revenues in the prior period. The decrease in
SG&A expenses for the three months ended March 31, 2019 was primarily
attributable to (i) benefits from the cost saving initiatives
implemented in the last two quarters of 2018, and (ii) reduction of
amortization expense of intangible assets that were fully amortized in
the fourth quarter of 2018. The decrease was partially offset by an
increase in SG&A from the acquisition of Perennial which was not
reflected in the comparative period, and an increase in non-recurring
headcount reduction expenses for employees that did not qualify as
restructuring costs.

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Restructuring Expenses
Cost reductions and
enhancement of operating efficiencies have been an area of focus for DCM
over the past four 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, 2019, DCM incurred restructuring
expenses of $1.7 million compared to $0.1 million in the same period in
2018. In 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.

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.

Adjusted EBITDA
For the three months ended March 31,
2019, Adjusted EBITDA increased by $1.5 million to $7.9 million, or
10.0% of revenues, after adjusting EBITDA for the $1.7 million in
restructuring charges and $0.4 million of one-time business
reorganization costs. The adoption of IFRS 16 resulted in a higher
Adjusted EBITDA for the first quarter of 2019 due to changes in the
recognition and classification of lease payments from cost of sales and
SG&A expenses to depreciation of $2.1 million and interest expense of
$0.9 million, respectively. Excluding the effects of adopting IFRS 16,
Adjusted EBITDA for the three months ended March 31, 2019 was $5.4
million, or 6.9% of revenues. The decrease of $1.0 million in Adjusted
EBITDA for the three months ended March 31, 2019 over the same period
last year excluding IFRS 16 was attributable to a decrease in revenues,
with a corresponding decrease in gross profit. The decline was offset
due to the acquisition of Perennial which was not reflected in the
comparative period, and a reduction in SG&A.

Interest Expense
Interest expense including interest
on debt outstanding under DCM’s credit facilities, interest accretion
expense related to certain debt obligations recorded at fair value, and
interest expense on lease liabilities under IFRS 16 was $2.1 million for
the three months ended March 31, 2019 compared to $1.1 million for the
same period in 2018. Excluding the effects of adopting IFRS 16, interest
expense for the three months ended March 31, 2019 was $1.2 million.
Interest expense for the three months ended March 31, 2019 was
relatively consistent with the same period in the prior year excluding
IFRS 16. The slight increase was primarily due to the Crown facility,
secured in 2018 to fund the acquisition of Perennial and repay the
outstanding balance on its subordinated debt facility with Bridging
Financing Inc. (“Bridging Credit Facility”), which was not reflected in
the comparative period as the facility was obtained in the second
quarter of 2018. The increase was offset by a reduction in the unwinding
of discount which was included in interest expense of the Eclipse and
Thistle VTBs that were repaid during the current period.

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Income Taxes
DCM reported a loss before income taxes
of $0.3 million and a net income tax recovery of $24 thousand for the
three months ended March 31, 2019 compared to income before income taxes
of $2.4 million and a net income tax expense of $0.7 million for the
three months ended March 31, 2018. The decrease in the current income
tax expense to a recovery position was due to the reduction of DCM’s
estimated taxable income for the three months ended March 31, 2019. The
deferred income tax recovery for the three months ended March 31, 2019
primarily relates to changes in estimates of future reversals of
temporary differences.

Net Loss
Net loss for the three months ended March
31, 2019 was $0.3 million compared to a net income of $1.8 million for
the same period in 2018. Excluding the effects of adopting IFRS 16, net
income for the three months ended March 31, 2019 was $0.2 million. The
decrease in comparable profitability for the three months ended March
31, 2019 was primarily due to (i) the decrease in revenues, with a
corresponding decline in the gross profit, and (ii) an increase in
restructuring expenses. This decrease was partially offset by (i)
continued implementation of the refined discipline in DCM’s pricing
strategy resulting in an increase in gross margin as a percentage of
revenues, (ii) cost benefits as a result of the restructuring efforts
implemented in the last two quarters of 2018, and (iii) a reduction in
SG&A expense.

Adjusted Net Income
Adjusted net income for the three
months ended March 31, 2019 was $1.2 million compared to Adjusted net
income of $2.1 million for the same period in 2018. The adoption of IFRS
16 resulted in a lower Adjusted net income for the first quarter of 2019
by $0.5 million due to changes in net income as discussed in Table 1.
Excluding the effects of adopting IFRS16, Adjusted net income for the
three months ended March 31, 2019 was $1.7 million. The decrease in
comparable profitability for the three months ended March 31, 2019 was
primarily due to the decrease in revenues, with a corresponding decline
in the gross margin. This decrease was partially offset by (i) continued
implementation of the refined discipline in DCM’s pricing strategy
resulting in an increase in the gross margin as a percentage of
revenues, (ii) cost benefits as a result of the restructuring efforts
implemented in the last two quarters of 2018, and (iii) a reduction in
SG&A expense.

CASH FLOW FROM OPERATIONS
During the three months ended
March 31, 2019, cash flows generated by operating activities were $10.1
million compared to cash flows generated by operating activities of $6.1
million during the same period in 2018. Current period cash flow from
operations, after adjusting for non-cash items, generated a total of
$6.7 million compared with $5.5 million for the same period last year.
As a result of the adoption of IFRS 16, $2.5 million in lease payments
are now presented as cash used for financing activities in the condensed
interim consolidated statement of cash flow for the period ended March
31, 2019. In the prior year comparative period, this was classified as a
reduction of operating activities thereby contributing to the variance
in cash flow from operations year over year. In addition, current period
cash flows from operations were negatively impacted by the decrease in
revenues however this was slightly offset by an improvement in gross
margin and a decline in SG&A expenses.

Changes in working capital during the three months ended March 31, 2019
generated $6.0 million in cash compared with $3.7 million of cash
generated in the prior year. $6.8 million of the increase in current
period working capital was primarily a result of DCM’s continued efforts
to better align the timing of payments to its suppliers with collections
on outstanding receivables from its customers. This was slightly offset
by higher volumes in inventory purchases thereby reducing working
capital by $1.2 million.

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Lastly, there were lower payments for severances and lease termination
payments related to DCM’s restructuring initiatives totaling $1.4
million during the current period compared with $2.2 million for the
same period last year.

INVESTING ACTIVITIES
For the three months ended March 31,
2019, $2.3 million in cash flows were used for investing activities
compared with $1.4 million during the same period in 2018. In the
current period, $0.5 million of cash was primarily used to invest in IT
equipment and costs related to leasehold improvements to set up
production equipment compared with $0.

Contacts

Mr. Gregory J. Cochrane
Chief Executive Officer
DATA
Communications Management Corp.
Tel: (905) 791-3151

Mr. James E. Lorimer
Chief Financial Officer
DATA
Communications Management Corp.
Tel: (905) 791-3151
[email protected]

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