CALGARY, Alberta, Oct. 30, 2018 (GLOBE NEWSWIRE) -- DIRTT Environmental Solutions Ltd. (“DIRTT” or the “Company”) (TSX: DRT), an interior construction company that uses technology for client-driven design and manufacturing, today announced its financial results for the three and nine months ended September 30, 2018. This news release contains references to Canadian dollars and United States dollars. Canadian dollars are referred to as “$” and United States dollars are referred to as “US$”.

THIRD QUARTER 2018 HIGHLIGHTS

• Revenue increased, respectively, by $12.6 million or 15.0% to $96.6 million, and by $38.9 million or 17.8% to $258.0 million for the third quarter and year-to-date periods of 2018, compared to the same periods of 2017, reflecting increased sales activity in Canada and the US, including continued penetration into the healthcare market;
• Adjusted Gross Profit %(1) increased respectively to 45.5% (2017 - 44.8%) and 44.9% (2017 - 43.9%) in the third quarter and year-to-date periods of 2018, reflecting increased leverage on fixed manufacturing costs, partially offset by higher materials and direct labor costs primarily due to product  mix;
• Adjusted EBITDA(1) increased respectively by 65.2% to $17.8 million and 128.7% to $38.7 million in the third quarter and year-to-date periods of 2018 over the same periods of 2017, due to increased sales activity and gross profit margins in both periods, with no corresponding increase in Adjusted SG&A;
• Adjusted EBITDA %(1) increased respectively to 18.4% (2017 - 12.8%) and 15.0% (2017 - 7.7%) in the third quarter and year-to-date periods of 2018; and
• Net loss increased respectively to $4.9 million ($0.06 per share) and $0.5 million ($0.01 per share) in the third quarter and year-to-date periods 2018, from net income of $4.2 million ($0.05 per share) and net loss of $0.1 million ($0.00 per share) for the same periods of 2017, reflecting the impact of a $14.8 million impairment expense of DIRTT for Life and DIRTT Timber assets.
  
  Note: (1) See "Non-IFRS Measures".

“DIRTT’s revenue performance this quarter illustrates the growing recognition of the industry’s need for a long-term construction solution that embraces technology and responds to individual building needs,” says Kevin O’Meara, who was appointed DIRTT’s chief executive officer in September 2018. “The quarter’s strong operational financial results also demonstrate the contribution that enhanced fiscal discipline can make to our performance going forward.

“Since I joined DIRTT, the executive leadership team has undertaken a comprehensive review of the company’s key markets, customer segments, operations and investment targets. While this review is ongoing, we recently decided to exit our DIRTT for Life residential services. The pure residential market requires different resources to address fully — resources we believe are better allocated to DIRTT’s core markets.

“In addition, we are shifting the way we approach the timber market with our DIRTT Timber solution. Although we remain very enthusiastic about the potential of DIRTT Timber, the North American timber market itself is still in its early stages and needs to develop significantly. Accordingly, we are moving from aggressive development to a commercialized approach focused on large, standalone timber projects and timber as a pull-through for other DIRTT solutions. This requires significantly less timber capacity and we will therefore be right-sizing our capacity by the end of this year.”

Mr. O’ Meara concludes, “DIRTT is one of the most exciting companies in construction today. The combination of our virtual reality technology, product design, precise manufacturing and partner network makes DIRTT a remarkable and logical answer to the industry’s most pressing challenges. As issues such as labor shortage and compressed schedules become more and more prevalent, I believe DIRTT’s market opportunity will continue to expand. I look forward to leading this outstanding company forward.”

Summary Financial Results

Note: (1) See "Non-IFRS Measures".

Revenue
Revenue for the third quarter of 2018 increased by $12.6 million, or 15.0%, over the third quarter of 2017. On a year-to-date basis, revenue increased by $38.9 million, or 17.8%, over the same period of 2017. These increases are attributable to a general increase in sales activity across a range of industry segments. Third quarter revenues were positively impacted by a stronger US dollar in 2018 compared to 2017. During the third quarter, DIRTT continued to increase its penetration into the healthcare market. As a percentage of total revenue, sales to healthcare increased in the third quarter from 21% in 2017 to 27% and in the year-to-date period from 17% in 2017 to 20%. Apart from acute healthcare solutions, DIRTT’s solutions are industry agnostic.

Gross Profit / Adjusted Gross Profit / Gross Profit % / Adjusted Gross Profit %
Gross profit and gross profit % increased to $42.0 million or 43.5% of revenue in the third quarter of 2018, from $35.9 million or 42.7% of revenue in the third quarter of 2017. Adjusted Gross Profit and Adjusted Gross Profit % increased to $44.0 million or 45.5% of revenue in the third quarter of 2018, from $37.6 million or 44.8% of revenue in the third quarter of 2017. Gross profit % and Adjusted Gross Profit % increased as a result of improved installation margins and increased leverage on fixed manufacturing overhead costs, partially offset by higher direct materials and labor costs due to variability of product mix. Increases in depreciation included in cost of goods sold (“COGS”) for the third quarter and year-to-date periods of 2018 over the same period of 2017 reflect investments in manufacturing equipment in 2017.

For the year-to-date period, gross profit and gross profit % increased to $110.1 million or 42.7% of revenue in 2018, from $92.8 million or 42.3% of revenue in 2017. Adjusted Gross Profit and Adjusted Gross Profit % increased to $115.9 million or 44.9% of revenue in the first nine months of 2018, from $96.2 million or 43.9% of revenue in the same period of 2017. Gross profit % and Adjusted Gross Profit % as well as depreciation included in COGS increased for the same reasons as described above.

SG&A Expenses / Adjusted SG&A Expenses

In the third quarter of 2018, SG&A expenses increased to $33.0 million from $29.9 million in the same period of 2017, an increase of $3.1 million or 10.2%. Approximately $2.9 million of reorganization costs, comprised primarily of severance and related costs associated with executive changes announced in the third quarter of 2018, were included in the quarter's SG&A. Adjusted SG&A expenses decreased by $0.3 million, or 1.3%, to $26.1 million in third quarter of 2018, from $26.5 million in the same period of 2017. This decrease reflects reductions in non-essential travel and entertainment, office and other expenditures, substantially offset by increased salaries on a slightly higher headcount compared to the third quarter of 2017 and commissions on larger sales volume.

In the first nine months of 2018, SG&A expenses increased to $94.2 million from $90.8 million in the same period of 2017. Reorganization costs included in SG&A, associated with certain management changes, totaled $6.0 million in the first nine months of 2018. Adjusted SG&A expenses in the first nine months of 2018 decreased by $0.6 million or 0.8% to $77.7 million in 2018 from $78.3 million in the same period of 2017. Increased salaries due to a slightly higher headcount, and commissions on larger sales volume, as well as one-time costs associated with activist defense ($1.8 million) and the special committee of the board of directors ($0.9 million) were more than offset by reductions in non-essential travel and entertainment, office and other expenditures as well as targeted reductions in non-revenue generating marketing and tradeshow expenses.

Asset Impairment
In the third quarter of 2018, management commenced a review of its solution lines and, as a result, decided to exit its DIRTT for Life residential services in October 2018. In addition, management decided to shift from the early stage development of its DIRTT Timber market to a commercialized approach focused on large, standalone timber projects and timber as a pull-through for other DIRTT solutions. Management concluded that this strategy requires significantly less timber capacity than currently exists and is therefore taking steps to right-size its timber capacity by the end of 2018. Management also determined these decisions to be an indicator of impairment of the assets related to both of these solution lines as at September 30, 2018.

DIRTT for Life had intangible assets with a carrying value of $1.7 million at September 30, 2018. As these assets cannot be resold and there is no future use for the assets, the entire carrying amount was impaired and a corresponding impairment charge of $1.7 million was recorded in the third quarter of 2018.

Management also performed an assessment of the carrying values of DIRTT Timber’s property, plant and equipment, and intangible assets. The net book value of the assets was evaluated against the greater of value-in-use and fair value, less cost of disposal. The value-in-use of the timber assets reflects current assets for timber projects on a standalone basis and the pull-through impact to other DIRTT solutions. In its evaluation, management determined it was unable to reliably quantify the pull-through impact of timber on other DIRTT solutions. As a result, management concluded that the fair value less cost of disposal exceeded the standalone value-in-use of its timber assets. The equipment related to the timber market was custom built for DIRTT and there is no active market for resale. Therefore, the fair value was determined to be management’s estimate of scrap value for the specialized assets and an estimated resale value for less specialized assets that cannot be redeployed for DIRTT’s other solutions. Management estimated the expected resale values based on the current market and on experience of management in the industry. The fair value less cost of disposal of the timber assets was estimated to be $1.5 million. This assessment resulted in an additional impairment charge of $13.1 million in the third quarter, of which $8.0 million related to tangible assets and $5.1 million related to intangible assets.

Adjusted EBITDA / Adjusted EBITDA %
In the third quarter of 2018, Adjusted EBITDA increased by $7.0 million or 65.2% to $17.8 million, from $10.8 million in the third quarter of 2017. Adjusted EBITDA % for the third quarter of 2018 also increased to 18.4% from 12.8% in the third quarter of 2017. On a year-to-date basis, Adjusted EBITDA increased by $21.8 million or 128.7% to $38.7 million in 2018, from $16.9 million in the same period of 2017. Adjusted EBITDA % improved to 15.0% in the first nine months of 2018, from 7.7% in the same period of 2017. These improvements in profitability for the quarter and year-to-date periods reflect a 15.0% and 17.8% increase in sales activity in the third quarter and year-to-date periods, respectively, without a corresponding increase in Adjusted SG&A costs.

Liquidity and Capital Resources
At September 30, 2018, we had $54.5 million in cash and cash equivalents, compared to $79.6 million at December 31, 2017. We also had access to an undrawn US$18.0 million revolving credit facility.

Outlook
DIRTT provides a comprehensive interior construction solution empowered by best-in-class technology that addresses challenges frequently encountered within conventional construction. Such challenges include cost overruns, labor shortages, inconsistent quality and time delays. Of the approximate US$1.2 trillion construction market in the United States [Source: US Census Bureau 2017], there is an immediately addressable market of at least US$50 billion in the primary focus areas of commercial (which includes corporate, education, government and certain residential) and healthcare. The Company is focused on developing the strategies, disciplines and processes necessary to increase penetration of this largely untapped market.

The establishment of a permanent leadership team is a critical step toward this goal. DIRTT announced the completion of its CEO search on September 10, 2018, with the hiring of Kevin O'Meara. At the same time, DIRTT also announced the departure of its executive chairman, Mogens Smed. Management is undertaking a comprehensive review of DIRTT’s market opportunities and operations to develop a long-term strategy that drives continued profitable growth. In particular, we are defining the investments and actions necessary to accelerate market penetration using our existing Partner network, and to increase overall operational efficiency. To increase liquidity for its US shareholders, DIRTT is also actively working toward registering with the Securities and Exchange Commission (SEC), including a listing on an accredited US exchange.

The Company was pleased with the results of the third quarter with revenues of $96.6 million, an increase of 15.0% over the same period of 2017. Adjusted EBITDA also increased to $17.8 million or 18.4% of revenues, demonstrating the leverage possible in the business within our manufacturing, sales and administrative activities. While DIRTT’s revenues remain subject to inter-quarter volatility, the second half of the year has historically been the strongest, with 2018 being no different. The Company remains on track to achieve its stated Adjusted EBITDA % target of between 13% and 15% for 2018.

Non-IFRS Measures
Adjusted Gross Profit, Adjusted Gross Profit %, Adjusted SG&A, Adjusted EBITDA, Adjusted EBITDA % and cash provided by operating activities before changes in non-cash working capital are non-IFRS measures. Non-IFRS measures do not have a standard meaning as prescribed by IFRS, and are therefore unlikely to be comparable to similar measures presented and calculated by other companies. DIRTT believes the non-IFRS measures are useful supplemental measures that may assist investors in assessing DIRTT’s business. The non-IFRS measures should not be considered as the sole measure of the Company’s performance and should not be considered in isolation from, or as a substitute for, analysis of its financial statements. For a reconciliation of these non-IFRS measures as well as the rationale for management’s use of such measures, see the Company’s management’s discussion and analysis for the three and nine months ended September 30, 2018, available at http://www.sedar.com.

Conference Call and Webcast Details
A conference call and webcast for the investment community is scheduled for Wednesday, October 31, 2018 at 10 a.m. ET (8 a.m. MT) to discuss the third quarter results in greater detail. The call and webcast will be hosted by CEO Kevin O'Meara, CFO Geoff Krause, and the director of investor relations, Kim MacEachern.

To join:

• By telephone, dial +1 877-479-7708 (toll-free in North America). Please dial in 10 minutes prior to the start time.
• For the live webcast (in listen-only mode), visit https://edge.media-server.com/m6/p/69jrnpfn

Investors are invited to submit questions to ir@dirtt.net before and during the call. Supplemental information slides will be available with the webcast and at dirtt.net/investors, prior to the start of the call.

A replay of the conference call will be available:

• By phone at +1 855-859-2056 with passcode 3659956, from 1:00 p.m. ET (11:00 a.m. MT) on October 31, 2018 until 11:59 p.m. ET (9:59 p.m. MT) on November 7, 2018;
• Online at https://edge.media-server.com/m6/p/69jrnpfn; and
• On DIRTT’s website at https://www.dirtt.net/investors/financial-reports/

About DIRTT
DIRTT is a building process powered by technology. The name stands for Doing It Right This Time. The company uses its proprietary ICE® software to design, manufacture and install fully customized interior environments. The technology drives DIRTT’s advanced manufacturing and provides certainty on cost, schedule and the final result. Complete interior spaces are constructed faster, cleaner and more sustainably. DIRTT’s manufacturing facilities are located in Phoenix, Savannah, Kelowna and Calgary. DIRTT works with nearly 100 sales partners globally. DIRTT trades on the Toronto Stock Exchange under the symbol "DRT." For more information visit dirtt.net/investors.

Special Note Regarding Forward-Looking Statements
Certain information and statements contained in this news release constitute “forward-looking information” and “forward-looking statements” (collectively, “Forward-Looking Information”) as defined under applicable Canadian securities laws and the Company hereby cautions investors about important factors that could cause the Company’s actual results or outcomes to differ materially from those projected in any Forward-Looking Information contained in this news release. Any statements that express, or involve discussions as to, expectations, beliefs, plans, objectives, assumptions or future events or performance (often, but not always, through the use of words or phrases such as “will likely result”, “are expected to”, “will continue”, “is anticipated”, “believes”, “estimated”, “intends”, “plans”, “projection” and “outlook”), are not historical facts and may be forward-looking and may involve estimates, assumptions and uncertainties which could cause actual results or outcomes to differ materially from those expressed in such Forward-Looking Information.

In particular and without limitation, this news release contains Forward-Looking Information pertaining to the following: comments with respect to the Company's revenue, objectives and priorities for 2018 and beyond; project timetables; its growth strategies and opportunities; its ability to meet working capital requirements and financial obligations; use and deployment of the Company’s capital; and its outlook for its operations and the Canadian, US and international economies, and in particular, the US and Canadian construction industry.

With respect to Forward-Looking Information contained in this news release, assumptions have been made regarding the Company, among other things:

• its ability to manage its growth;
• competition in its industry;
• its ability to enhance current products and develop and introduce new products;
• its ability to obtain components and products from suppliers on a timely basis and on favorable terms;
• its ability to obtain qualified staff and equipment in a timely and cost-efficient manner;
• the regulatory framework governing taxes in Canada and the US and any other jurisdictions in which the Company currently or may conduct its business in the future;
• future development plans for its assets unfolding as currently envisioned;
• future capital expenditures to be made by the Company;
• future sources of funding for its capital program;
• its ability to list on an accredited US exchange;
• the impact of increasing competition on the Company; and
• its success in identifying risks to its business and managing the risks mentioned below.

The Company’s actual results or outcomes could differ materially from those expressed in the Forward-Looking Information as a result of the risks normally encountered in its industry such as:

• risks related to additional capital requirements;
• fluctuations in commodity prices;
• credit risks;
• foreign exchange rate and fiscal matters;
• operating results and financial condition fluctuations on a quarterly and annual basis;
• history of losses;
• maintaining and managing growth;
• risks related to new technology;
• competition risks;
• risks related to intellectual property;
• customer base and market acceptance;
• software and product defects and design risks;
• availability of key supplies;
• dependence of key personnel;
• the effect of government regulation;
• risks related to physical facilities;
• legal risks;
• risks related to future acquisitions;
• reliance on third parties;
• risks related to Forward-Looking Information; and
• conflicts of interest.

Since actual results or outcomes could differ materially from those expressed in the Forward-Looking Information provided by or on behalf of the Company, investors and others should not place undue reliance on any such Forward- Looking Information.

DIRTT cautions that the foregoing lists of factors are not exhaustive. Further, Forward-Looking Information is made as of the date hereof, and the Company undertakes no obligation to update Forward-Looking Information to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events, except as required by applicable Canadian securities laws. New factors emerge from time to time, and it is not possible for DIRTT’s management to predict all of these factors and to assess in advance the impact of each such factor on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in Forward-Looking Information. No assurance can be given that these expectations will prove to be correct and such Forward-Looking Information contained in this news release should not be unduly relied upon. In addition, this news release may contain Forward-Looking Information attributed to third party industry sources.

For a detailed description of the risks and uncertainties facing the Company and its business and affairs, readers should refer to the Company's annual financial statements, management’s discussion and analysis and annual information form for the year ended December 31, 2017, all of which are available at http://www.sedar.com.

Market and Industry Data

Certain market and industry data contained in this news release is based upon information from government or other third-party publications, reports and websites or based on estimates derived from such publications, reports and websites. Government and other third-party publications and reports do not guarantee the accuracy or completeness of their information. While the Company believes this data to be reliable, market and industry data is subject to variations and cannot be verified with complete certainty due to limits on the availability and reliability of raw data, the voluntary nature of the data-gathering process and other limitations and uncertainties inherent in any statistical survey.