Decisive Dividend Corporation Reports Financial Results for the Quarter and Year Ended December 31, 2018

(TheNewswire)

April 25, 2019 / TheNewswire / Kelowna, British Columbia: Decisive Dividend Corporation (TSX-V: DE) (the “Corporation” or “Decisive”) reported its financial results for the quarter and year ended December 31, 2018. All amounts are expressed in Canadian dollars. The Corporation’s audited consolidated financial statements as well as its management’s discussion and analysis (“MD&A”) are posted on SEDAR and on Decisive’s website.

James Paterson, Chief Executive Officer of Decisive, noted:

 “Doubling the number of businesses within the organization during the year has added strength and resiliency to Decisive. The additions of Slimline and Hawk enabled Decisive to report significantly higher revenue in the fourth quarter of this year versus Q4 2017, which positioned the group to withstand a number of challenges that the organization faced during the quarter. Steel tariffs on Unicast’s Chinese production negatively impacted its profitability, warm weather through the fall decreased demand for Blaze King’s products, and production limits on Alberta oil and the resulting decrease in oil and gas activity limited sales in Hawk. Despite these headwinds, which have continued through the start of 2019, management is confident in the long-term prospects for each of its businesses and will continue with its strategy of acquiring successful manufacturing companies that provide steady and growing dividend payments to its shareholders. Since acquiring its first business in 2015, to the date of this release, Decisive has acquired four businesses and has paid over $8.5 million in dividends.”  

2018 Annual Financial and Operating highlights:

• Sales for the year ended December 31, 2018 were $38.0 million, up $14.5 million, or 62%, over the year ended December 31, 2017.

  Gross profit for the year ended December 31, 2018 was $13.2 million, up $3.2 million, or 32%, over the year ended December 31, 2017. Gross profit percent declined to 35% for the year ended December 31, 2018, compared to 43% for the year ended December 31, 2017.

  Adjusted EBITDA* for the year ended December 31, 2018, as defined in the Corporation’s MD&A, was $4.6 million, a $0.8 million increase over the year ended December 31, 2017 adjusted EBITDA of $3.8 million.

  Profit for the year ended December 31, 2018 was $0.6 million, or $0.07 per share, compared to $0.5 million, or $0.09 per share for year ended December 31, 2017.

  In May 2018, the Corporation acquired Slimline Manufacturing Ltd., an agricultural and industrial machinery manufacturing company based in Penticton, British Columbia, for $7.0 million. The acquisition was funded through an increase in Decisive’s credit facilities and $1.1 million in Decisive shares.

• In June 2018, the Corporation acquired Hawk Machine Works Ltd., a machining and tooling company based in Linden, Alberta, for $12.3 million. The consideration paid consisted of $9.6 million in cash and $2.7 million in Decisive shares. The cash portion of the acquisition was funded through a best efforts public offering of common shares, including an over-allotment option, that in total raised net proceeds of $13.6 million.

  During the year, Decisive declared $3.2 million in dividends, compared to $2.1 million for the year ended December 31, 2017.

Q4 2018 Financial and Operating highlights:

• Sales for the fourth quarter were $13.6 million, up 81% over Q4 2017;

  Gross profit for the fourth quarter was $3.8 million compared to $3.2 million in Q4 2017. Gross profit percent declined to 28% in the fourth quarter, compared to 42% in Q4 2017.

  Adjusted EBITDA* for the quarter, as defined in the Corporation’s MD&A, was $1.2 million, compared to Q4 2017 adjusted EBITDA of $1.8 million.

  A loss of $0.1 million, or $0.01 per share, was generated in the quarter as compared to profit of $0.6 million, or $0.09 per share in Q4 2017.    

  The loss for the quarter was impacted by $1.1 million in aggregate non-cash charges in Unicast relating to inventory write downs and allowances, bad debt expenses, and goodwill impairment charges.

* Adjusted EBITDA is defined as earnings before finance costs, income taxes, depreciation, amortization, foreign exchange gains or losses, other non-cash items such as gains or losses recognized on the fair value of contingent consideration items, asset impairment and restructuring costs, and any unusual non-operating one-time items such as acquisition costs.  Adjusted EBITDA is not a defined performance measure under International Financial Reporting Standards (IFRS) and therefore may not be comparable to similar measures presented by other issuers, but it is used by Management to assess the performance of the Corporation and its segments. See the MD&A for a reconciliation of applicable IFRS measures to non-IFRS measures.

Discussion of 2018 Annual Performance

Sales for the year ended December 31, 2018 for the Group increased to $38.0 million, 62% over the prior year. The primary drivers of the increase were the contributions of Slimline and Hawk from their acquisition dates of, May 30, 2018 and June 28, 2018 respectively.

Gross profit percentage for the Group over the same period declined from 43% to 35%, primarily driven by the change in overall product mix in the period related to the acquisitions of Slimline and Hawk. However, it should be noted that the 2018 annual results only include the two historically slowest quarters of the year for Slimline, and Hawk’s gross profit in Q4 2018 was negatively affected by the slowdown in oil and gas activity in Western Canada. Additionally, Blaze King’s gross profit percent decreased by two percentage points relative to 2017, primarily as a result of raw material price and labour cost increases during the year that preceded the pricing increases implemented in Q3 2018. Also, Unicast gross profit was negatively affected by tariffs on Chinese steel products sold into the United States, raw material price increases in the year, and aggregate non-cash inventory write downs and allowances of $0.3 million.

In each subsidiary there are substantial fixed costs that do not meaningfully fluctuate with product demand in the short-term. Such costs are included in both manufacturing costs and operating expenses. Overall operating expenses increased from $8.9 million in 2017 to $12.8 million in 2018. The primary drivers of the year-over-year increase were: financing costs which increased by $0.2 million; occupancy costs which increased by $0.4 million; professional fees which increased by $0.7 million; salaries, wages and benefits which increased by $1.6 million; and selling, general and administration costs which increased by $0.9 million. Specifically, the increase in financing costs is a result of the additional debt issued in 2018 in connection with the acquisitions completed during the year. The increase in professional fees is due primarily to $0.5 million in acquisition costs incurred in 2018. The increases in occupancy costs, salaries, wages and benefits, and selling, general and administration costs were based primarily on increased scale with the acquisitions of Slimline and Hawk, and some increases were also experienced in Blaze King, Unicast and Head Office. Included in salaries, wages and benefits and selling, general and administration costs in Blaze King for 2018 are $0.8 million (2017 - $0.7 million) of research and development costs. Included in selling, general and administration costs in Unicast for 2018 are $0.1 million in non-cash bad debt expenses (2017 - $nil).

Adjusted EBITDA for the year ended December 31, 2018 was $4.6 million, a $0.8 million increase compared to 2017. Adjusted EBITDA increased due primarily to the acquisitions of Slimline and Hawk in Q2 2018 but was also affected by the gross profit challenges and increased operating costs noted above.

The negative effect of the above noted tariffs on Unicast’s profitability also resulted in a $0.7 million non-cash impairment loss being recorded against Unicast’s goodwill. The Company conducted its annual goodwill impairment testing on a value-in-use basis, using estimated future cash flows that considered past experience, economic trends and industry trends, including tariffs on Chinese steel products sold into the United States. These tests indicated that the carrying amount of Unicast’s assets exceeded their recoverable amounts resulting in a goodwill impairment loss. These forecasts represent management’s best estimates at a specific point in time, and as a result are subject to measurement uncertainty, specifically with respect to the ultimate duration of the above noted tariff regime.

Foreign exchange gains and losses also impacted overall profit differences between Q4 2018 and Q4 2017. The 2018 unrealized foreign exchange gains were a result of the $0.11 increase in the value of the United States dollar, relative to the Canadian dollar, through the year. Conversely, in 2017 the unrealized foreign exchange losses were a result of the $0.09 decrease in the value of the United States dollar through the year.

Discussion of Fourth Quarter 2018 Performance

Sales for Q4 2018 increased by 80% relative to Q4 2017, which was driven by the acquisitions of Slimline and Hawk. Similarly, the $0.6 million, or 19%, increase in gross profit was also primarily driven by the addition of the Slimline and Hawk results. Gross profit percentage overall decreased by 14 percentage points in Q4 2018 compared to Q4 2017. The decrease was due partially to the change in overall product mix in the relative periods, with the acquisitions of Slimline and Hawk, and also as a result of gross profit decreases in Blaze King and Unicast. Blaze King sold 9% fewer units in Q4 of this year versus Q4 last year and was negatively affected by certain fixed overhead costs and inventory adjustments that did not fluctuate with the decrease in sales. Steel tariffs on Unicast’s products sourced in China and sold into the United States negatively affected gross profit in the quarter. Unicast also recorded a total of $0.3 million in non-cash inventory write downs and allowances in Q4 2018, which further reduced gross profit. Sales and gross profit in Hawk were also lower than expected for the quarter due to the impact of production limits imposed by the Alberta government, and the general decrease in oil and gas activity in Western Canada in Q4 2018. Also impacting gross profit and gross profit percentages in the quarter were higher levels of depreciation and amortization being included in manufacturing costs for Slimline and Hawk in Q4 2018, than were included earlier in the year.

Overall operating expenses increased from $2.3 million in Q4 2017 to $4.0 million in Q4 2018. The primary drivers of the increase relative to Q4 2017 were: amortization and depreciation which increased by $0.1 million; occupancy costs which increased by $0.2 million; professional fees which increased by $0.1 million; salaries, wages and benefits which increased by $0.7 million; and selling, general and administration costs which increased by $0.5 million. The above increases were based primarily on increased scale with the acquisitions of Slimline and Hawk, but also on increases in Blaze King, Unicast and Head Office. Included in selling, general and administration costs in Unicast for Q4 2018 are $0.1 million in non-cash bad debt expenses.

Adjusted EBITDA for Q4 2018 was $1.2 million compared to $1.8 million in Q4 2017. The decrease was a result of the gross profit challenges in the quarter and the effect of increased operating costs noted above.  

As noted above, the negative effect of the above noted tariffs on Unicast’s profitability also resulted in a $0.7 million non-cash impairment loss being recorded against Unicast’s goodwill in Q4 2018, which negatively affected profit for the quarter.

Foreign exchange gains and losses also impacted overall profit differences between Q4 2018 and Q4 2017. The Q4 2018 unrealized foreign exchange gains were a result of the $0.07 increase in the value of the United States dollar, relative to the Canadian dollar, in the last three months of the year. In Q4 2017, the Group recorded unrealized foreign exchange losses for the quarter.  

Outlook

The Company continued to execute on its growth strategy in 2018. During the year, the Company completed two acquisitions: Slimline and Hawk. These transactions further diversify the Group, significantly expand its manufacturing customer base, and strategically strengthen its product offerings.

In completing the acquisitions of Slimline and Hawk in late Q2 2018, the number of subsidiaries under the Group’s leadership doubled in a very short time. The benefit of these acquisitions was demonstrated in the second half of 2018, with increases in sales, gross profits and adjusted EBITDA. Moreover, the expanded scale of the Group better positions Decisive to withstand near-term fluctuations in demand driven by weather, seasonality or other macro-economic factors and therefore sustain a base level of cash flow for servicing the Company’s debt obligations and its monthly dividend. This was demonstrated in Q4 2018 where several different challenges were faced by more than one member of the Group, yet collectively the Group still generated $1.2 million of Adjusted EBITDA. In the second half of 2018, the period where all four subsidiaries contributed, the Group generated $3.8 million of Adjusted EBITDA, made debt principal and interest payments of $1.2 million, and paid dividends of $2.0 million. Decisive was established to acquire a growing stable of successful manufacturing companies for the long term, and the acquisitions completed in 2018 certainly fit with the Company’s long-term vision.

Since its first acquisition in February 2015, to the end of 2018 Decisive has:

• Generated $13.2 million in adjusted EBITDA;

  Made debt principal and interest payments of $4.9 million; and

  Paid dividends of $7.2 million.

To date in 2019, the Company has:

• Made additional debt principal and interest payments of $0.6 million, bringing the aggregate amount of debt principal and interest payments since February 2015 to $5.5 million; and

• Paid dividends of $1.3 million,  bringing the aggregate amount of dividends paid since February 2015 to $8.5 million.

As of the date of this MD&A, the Company had a net cash position of $2.9 million.

The increased scale and diversity of the Group will continue to be important into 2019, where headwinds centered on tariffs related to Chinese steel products and oil and gas activity slowdowns in Western Canada will continue to negatively affect operations.  

Given the increased scale of the overall organization, and the objective of continuing growth through further acquisitions, the Company bolstered its management team in the later part of 2018. A full-time chief operating officer and a new chief financial officer were added, which also allowed the former chief financial officer to transition into a chief corporate development officer role within the Company.  Management believes that the Group is well positioned for future growth and is actively seeking further acquisitions to bolster its diversity, which adds strength and resilience to operations.  Management also believes that continuing to follow a balanced and disciplined acquisition approach is the best path to generating shareholder value.

Management remains confident in its strategic and operational plans and in its seasoned leadership.  Decisive is committed to enhancing customer service in its subsidiaries and growing the sales teams to accommodate a plan of steady growth. The Company continues to develop and expand its network of referral sources that regularly present it with potential acquisitions. Company management also independently assesses certain markets and regions to identify potential targets. While deal flow is considered strong, Decisive is disciplined in the investment choices it makes as acquisitions must adhere to Decisive’s investment parameters. Therefore, there can be no assurance that acquisitions of target companies meeting management’s standards will be concluded.

About Decisive Dividend Corporation

Decisive Dividend Corporation is an acquisition-oriented company, focusing on the manufacturing sector.  The Corporation uses a disciplined acquisition strategy to identify already profitable, established companies that have strong management teams, generate steady cash flow, operate in non-cyclical markets, and have opportunity for future growth.

Neither the TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of the contents of this News Release.

FOR FURTHER INFORMATION PLEASE CONTACT:

David Redekop, Director and Chief Corporate Development Officer

or

Rick Torriero, Chief Financial Officer

#201, 1674 Bertram Street

Kelowna, BC V1Y 9G4

Telephone: (250) 870-9146

Sign up for email notifications of all Company press releases at www.decisivedividend.com.

Cautionary Statements

Forward-Looking Statements

Certain statements contained in this press release constitute forward-looking information. These statements relate to future events or future performance. The use of any of the words “could”, “intend”, “expect”, “believe”, “will”, “projected”, “estimated” and similar expressions and statements relating to matters that are not historical facts are intended to identify forward-looking information and are based on management’s current beliefs, assumptions and expectations as to the outcome and timing of such future events.  Actual future results may differ materially. In particular, this press release contains forward-looking information relating to the proposed financings.  Risk factors that could cause actual results or outcomes to differ materially from the results expressed or implied by forward-looking information include, among other things: the failure to successfully complete the proposed financings; identification of target companies meeting the Corporation’s standards; and all other risks associated with the businesses carried on by operating subsidiaries of the Corporation.  The Corporation cautions the reader that the above list of risk factors is not exhaustive.  The forward-looking information contained in this release is made as of the date hereof and the Corporation is not obligated to update or revise any forward-looking information, whether as a result of new information, future events or otherwise, except as required by applicable securities laws. Because of the risks, uncertainties and assumptions contained herein, investors should not place undue reliance on forward-looking information. The foregoing statements expressly qualify any forward-looking information contained herein.

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