BRAMPTON, Ontario--(BUSINESS WIRE)--May 14, 2018--DATA Communications Management Corp. (TSX:DCM) (“DCM” or the "Company"), a leading provider of business communication solutions to companies across North America, announced its consolidated financial results for the three months ended March 31, 2018.

STRATEGIC ACQUISITION

DCM completed the acquisition of Perennial Group of Companies ("Perennial"), on May 8, 2018, (the "Closing Date"). The acquisition includes Perennial Inc., one of Canada’s leading design firms focused on creating and delivering design strategies for major retail brands in Canada and around the world, and The Finished Line Studios Inc., an independent, multi–function creative, execution and production art studio. Perennial generated approximately $7.0 million in revenues (unaudited) for the fiscal year ended July 31, 2017, and has offices in Toronto and Bolton, Ontario.

Perennial was acquired for a total purchase price of approximately $13.2 million after giving effect to a preliminary positive working capital adjustment of $1.2 million, related primarily to Perennial's strong cash and accounts receivable balances at closing. The purchase price of the Perennial acquisition was satisfied as follows: $8.2 million in cash, $2.5 million through the issuance of 1,394,856 common shares of DCM ("Common Shares"), and $2.5 million in the form of a subordinated, unsecured, interest bearing vendor take-back promissory notes (the "VTB"). The VTB is repayable as follows: $1.0 million payable on the first anniversary of the Closing Date, $1.0 million on the second anniversary of the Closing Date and $0.5 million on the third anniversary of the Closing Date. The purchase price will be subject to certain post-closing adjustments.

NEW TERM LOAN FACILITY

On April 30, 2018, DCM established the Crown Facility in the principal amount of $12.0 million. The Crown Facility was made available in one advance, with an effective date of May 7, 2018, bears interest at a rate equal to 10% per annum and is payable on a quarterly basis. The loan facility has a five (5) year term beginning on May 7, 2018 and can be repaid at any time after twenty-four (24) months, subject to prepayment fee, upon ten (10) days prior written notice to Crown. The Crown Facility is subordinated in right of payment to the prior payment in full of DCM’s indebtedness under the Bank Credit Agreement and the IAM Credit Agreements and is secured by a conventional security on all of the assets of DCM and its subsidiaries. The Crown Facility limits spending on capital expenditures by DCM to an aggregate amount not to exceed $5.0 million during any fiscal year. In addition, a total of 960,000 warrants have been issued to Crown in connection with the Crown Facility. Each warrant entitles the holder to acquire one Common Share at an exercise price of $1.75 for a period of five years, commencing on May 8, 2018.

Under the terms of the Crown Facility agreement, DCM must maintain (i) a fixed charge ratio, at the end of each quarter, of no less than (a)1.1 to 1.0 for the fiscal quarter ending June 30, 2018, (b) 1.25 to 1.0 for the fiscal quarter ending September 30, 2018 and (c) 1.4 to 1.0 for each fiscal quarter thereafter; and (ii) a net debt to EBITDA ratio, of no more than 4.0 to 1.0 for each quarter up until December 31, 2019 and 3.0 to 1.0 for each quarter thereafter.

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”).

EBITDA and Adjusted EBITDA Reconciliation

Adjusted Net (Loss) Income Reconciliation

Revenues

For the three months ended March 31, 2018, DCM recorded revenues of $88.5 million, an increase of 26.2% or $18.4 million compared with the same period in 2017. Excluding the effects of adopting IFRS 15, for the three months ended March 31, 2018, revenues were $14.6 million, or 20.8%, higher than the same period last year. The increase in revenues for the three months ended March 31, 2018 was primarily due to additional revenues from the acquisitions of Eclipse, Thistle and BOLDER Graphics, new revenues contributed by a major Canadian Schedule I bank which DCM won late in the third quarter of 2017, increased volumes in labels work for a major retailer, and a one-time increase in volume from a long-standing customer which generated $8.9 million in higher revenues relative to the same period last year. The increase in revenues was partially offset by the reduction in spend by certain customers, particularly in the retail and financial institutions sectors due to a technological shift in the way they conduct business and the timing of orders which DCM expects will occur in the second quarter of 2018. Overall, DCM continues to benefit from the growth initiatives it effected throughout 2017 to help offset some of the secular declines experienced by the industry.

Cost of Revenues and Gross Profit

For the quarter ended March 31, 2018, cost of revenues increased to $67.0 million from $53.8 million for the same period in 2017, resulting in a $13.3 million or 24.7% increase over the same period last year. Excluding the effects of the adjustments upon adoption of IFRS 15, cost of revenues increased by $10.7 million or 19.9% relative to the same period last year. Gross profit for the quarter ended March 31, 2018 was $21.5 million, which represented an increase of $5.1 million or 31.3% from $16.4 million for the same period in 2017. Excluding the effects of adopting IFRS 15, gross profit increased by $3.9 million or 23.6% relative to the same period last year. Gross profit as a percentage of revenues increased to 24.3% for the quarter ended March 31, 2018 compared to 23.3% for the same period in 2017 however, after excluding the effects of adopting IFRS 15, gross profit as a percentage of revenues was 23.9% for the three months ended March 31, 2018. The increase in gross profit as a percentage of revenues for the quarter ended March 31, 2018 was due to higher gross margins attributed to Eclipse, Thistle and BOLDER Graphics. Gross margin increase was also due to the refinement of DCM's pricing discipline and cost reductions realized from prior cost savings initiatives implemented in 2017. The increase in gross profit as a percentage of revenues was, however, partially offset by changes in product mix.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses for the quarter ended March 31, 2018 increased $2.6 million or 17.6% to $17.7 million compared to $15.0 million in the same period in 2017. Excluding the effects of adopting IFRS 9 and 15, SG&A expenses were $2.4 million higher for the three months ended March 31, 2018 when compared to the same period last year. As a percentage of revenues, these costs were 20.0% (or 20.6% before the affects of adopting IFRS 9 and 15) of revenues for the three months ended March 31, 2018 and 2017, respectively. The increase in SG&A expenses for the quarter ended March 31, 2018 was primarily attributable to the acquisitions of Eclipse, Thistle and BOLDER Graphics, additional professional fees and higher sales commission costs commensurate with the increase in revenues.

Restructuring Expense s

For the quarter ended March 31, 2018, DCM incurred net restructuring expenses $0.1 million compared to $1.9 million in the same period in 2017. DCM incurred $1.2 million of restructuring costs related to 1) headcount reductions in indirect labour as a result of the plant consolidations completed during the current quarter, in addition to reductions of certain individuals within the sales and administrative functions, and 2) costs incurred to facilitate the closure and consolidation of the Multiple Pakfold, BOLDER Graphics and Granby, Quebec facilities into DCM's Brampton, Ontario, Calgary, Alberta and Drummondville, Quebec facilities, respectively. Total restructuring costs were offset by a recovery of $1.1 million related to the termination of DCM's lease agreement for its Granby, Quebec facility.

For the three months ended March 31, 2017, $2.2 million of restructuring costs were incurred related to headcount reductions in DCM's indirect labour force across its operations, which were designed to streamline DCM's order-to-production process. These restructuring costs were offset by a recovery of $0.3 million related to a sub-lease of a closed facility in Richmond Hill, Ontario.

Adjusted EBITDA

For the quarter ended March 31, 2018, Adjusted EBITDA was $6.4 million, or 7.2% of revenues, after adjusting EBITDA for the $0.1 million in restructuring charges and $0.3 million of one-time business reorganization costs. Excluding the effects of adopting IFRS 9 and 15, Adjusted EBITDA was $5.3 million or 6.3% of revenues for the three months ended March 31, 2018 compared with an Adjusted EBITDA of $2.9 million or 4.2% for the same period last year. The $3.4 million increase in Adjusted EBITDA for the three months ended March 31, 2018 over the first quarter of 2017 was attributable to higher gross profit as a result of revenues contributed by DCM's core business, in addition to the Eclipse, Thistle and BOLDER Graphics acquisitions, improved pricing initiatives implemented part-way through the prior year, and cost savings from the restructuring efforts carried out in the second half of 2017. This was partially offset by higher SG&A expenses.

Interest Expense

Interest expense, including interest on debt outstanding under DCM’s credit facilities, on certain unfavourable lease obligations related to closed facilities, and on DCM’s employee benefit plans and including interest accretion expense related to certain debt obligations recorded at fair value, was $1.1 million for the three months ended March 31, 2018 compared to $1.0 million for the same period in 2017. Interest expense for the three months ended March 31, 2018 was higher than the same periods in the prior year primarily due to the increase in the debt outstanding under DCM's credit facilities in order to fund a portion of the upfront cash components of the purchase price, settle certain debt assumed and pay for related costs incurred to complete the acquisitions of Eclipse, Thistle and BOLDER Graphics in 2017.

Income Taxes

DCM reported income before income taxes of $2.4 million and a net income tax expense of $0.7 million for the quarter ended March 31, 2018 compared to a loss before income taxes of $2.6 million and a net income tax recovery of $0.5 million for the quarter ended March 31, 2017. Excluding the impacts of adopting IFRS 9 and 15, the net income tax expense was $0.4 million for the three months ended March 31, 2018. The current income tax expense was due to the taxes payable on DCM's estimated taxable income for the three months ended March 31, 2018. The deferred income tax recovery for the three month periods ended March 31, 2018 primarily relates to changes in estimates of future reversals of temporary differences, primarily representing adjustments due to the adoption of IFRS 15 including the full utilization of loss carryforwards and new temporary differences that arose during the three month period ended March 31, 2018.

Net Income

Net income for the quarter ended March 31, 2018 was $1.8 million compared to net loss of $2.1 million for the same period in 2017. Excluding the impacts of adopting IFRS 9 and 15, net income for the three months ended March 31, 2018 was $0.9 million. The increase in comparable profitability for the quarter ended March 31, 2018 was primarily due to the increase in revenues which included the post-acquisition financial results of Eclipse, Thistle and BOLDER Graphics, in addition to a refined discipline in DCM's pricing strategy and cost reductions as a result of the restructuring efforts made in 2017. This increase was partially offset by higher SG&A expenses and higher interest expenses for the three months ended March 31, 2018 the three months ended March 31, 2018.

Adjusted Net Income

Adjusted net income for the quarter ended March 31, 2018 was $2.1 million compared to Adjusted net income of $0.3 million for the same period in 2017. Excluding the impacts of adopting IFRS 9 and 15, Adjusted net income for the three months ended March 31, 2018 was $1.3 million. The increase in comparable profitability for the three months ended March 31, 2018 was due to higher revenues and gross margin, despite higher SG&A expenses and, to a lesser extent, higher interest expense in 2018.

CASH FLOW FROM OPERATIONS

During the three months ended March 31, 2018, cash flows generated by operating activities were $6.1 million compared to cash flows used for operating activities of $1.6 million during the same period in 2017. A total of $5.5 million of current year cash flows resulted from operations, after adjusting for non-cash items, compared with $1.5 million in 2017. Current period cash flows from operations were positively impacted by the increase in revenues and better gross margins from improved pricing discipline however this was slightly offset by a $2.6 million increase in SG&A expense over the prior year comparative period. Changes in working capital during the three months ended March 31, 2018 generated $3.7 million in cash compared with $0.9 million of cash used in the prior year. Given the increase in trade receivables as a result of higher sales in the current quarter, there was a corresponding increase in accounts payable for higher volumes in inventory purchases and related manufacturing costs. Timing of payments to suppliers are fairly commensurate with collections on outstanding receivables from DCM's customers. In addition, $2.2 million of cash was used to make payments primarily related to severances and lease termination costs, compared with $1.7 million of payments in 2017. Contributions made to the Company's pension plans were $0.3 million, which decreased from $0.5 million in the prior year while income tax payments increased by $0.6 million for the three months ended March 31, 2018.

INVESTING ACTIVITIES

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