DIRTT Releases Q2 2022 Financial Results
DIRTT Environmental Solutions Ltd. (“DIRTT” or the “Company”) (Nasdaq: DRTT, TSX: DRT), a global leader in industrialized construction, today announced its financial results for the three months ended June 30, 2022. All financial information in this news release is presented in U.S. dollars, unless otherwise stated.
Second Quarter 2022
- Revenue of $44.7 million
- Gross profit margin of 14.0%
- Adjusted Gross Profit Margin of 18.9%
- Net loss of $19.3 million
- Net loss margin of (43.1%)
- Adjusted EBITDA of ($9.4) million
- Adjusted EBITDA Margin of (21.1%)
- Total available liquidity of $31.0 million, including $19.7 million of unrestricted cash
“The increased activity levels and growth, particularly in the commercial sector, that began late in the first quarter of 2022 are continuing,” stated Benjamin Urban, CEO. “As a result, second quarter revenues of $44.7 million were within the expected guidance range and represented an increase of 16.8% and 8.8% over the first quarter of 2022 and the second quarter of 2021, respectively.”
“With demand continuing to increase, our immediate focus is to unlock manufacturing capacity, continue to improve revenues and profitability while accelerating our near-term progress towards breakeven and ultimately long-term profitability. Having experienced manufacturing capacity constraints during the second quarter, we increased our overall manufacturing headcount by 9% in the Calgary factory and we will continue to add, as necessary, in anticipation of higher activity in the third and fourth quarters. We also commenced operational improvements on our Reflect and Inspire product lines to increase overall productive capacity and improve lead times, with such improvements expected to be complete by mid third quarter 2022. DIRTT is realigning the organization, driving efficiency and actively reinvesting to focus on our strengths, including additional investments in the ICE team and investing to support the long-term success of our partners.”
“We have taken further steps to flatten our organizational structure to increase overall effectiveness and optimize our fixed salaried cost base. This resulted in the elimination of 36 salaried positions and additional annual cost reductions of approximately $5 million. In this process, the key objectives include breaking down interdepartmental silos, increasing cross functional communication and joint accountabilities, improving overall productivity across the organization and enhancing DIRTT’s overall approach to Construction Partner recruitment, onboarding, management and accountability.”
Geoffrey Krause, CFO, added “While revenues were in line with expectations and grew sequentially, cash usage remained high in the quarter primarily due to one-time reorganization costs and costs associated with the change of the Board of Directors, working capital build and ongoing inflationary pressures on raw materials and labor costs which weighed on gross margin. As a result, we are actively taking steps to recover DIRTT’s historic gross margin levels, and announced a further 10% price increase effective July 21, 2022, which is in addition to the 5% price increase effective June 1, 2022. Given these price increases along with our cost improvement efforts, we expect that as revenues improve, we can continue to progress toward an improvement in net loss, achieving the ultimate goal of Adjusted EBITDA breakeven and approaching cash flow breakeven in the fourth quarter of 2022.”
“Our 12-month forward pipeline, including leads, increased by 13% to $359 million from $318 million at April 1, 2022 and importantly, does not reflect the impacts of the aforementioned price increases. While the current 12-month forward pipeline is a positive indicator of the Company’s future revenue potential, in the context of continued global macroeconomic uncertainty and possible recession risks, our fiscal year 2022 revenue guidance remains unchanged at $175 to $185 million. The midpoint of our 2022 guidance represents an approximately 22% increase over actual 2021 revenue of $147.6 million.”
Mr. Urban concluded, “Today we also announced certain leadership changes as we continue to refocus our organization, including the departure of Charles Kraus, Senior Vice President and General Counsel and Colin Blehm, Vice President Product Development, and the promotion of Nandini Somayaji to Senior Vice President Talent, General Counsel and Corporate Secretary, and Trevor Didluck to Vice President Product Development. Geoffrey Krause, DIRTT’s current Chief Financial Officer, announced his intention to retire from the Company, effective September 30, 2022. A search for a successor is underway. I would like to thank them all for their service and dedication to the Company.”
Second Quarter Financial Review
Revenues for the quarter ended June 30, 2022 were $44.7 million, an increase of 16.8% and 8.8% over the first quarter of 2022 and the second quarter of 2021, respectively, and within the guidance range of between $43 million and $47 million. We continue to see increasing demand that commenced in the first quarter of 2022, particularly in the workplace sector, as pandemic related health restrictions are removed, and employees return to offices.
Gross profit and gross profit margin for the quarter ended June 30, 2022 was $6.3 million or 14.0% of revenue, a decrease of $2.9 million or 32% from $9.2 million or 22.4% of revenue for the quarter ended June 30, 2021. The decrease in gross profit margin largely reflects the continued impact of significant inflationary increases in the realized cost of materials, transportation and packaging in excess of realized price increases and incremental fixed costs of our manufacturing facility in Rock Hill, South Carolina, as well as pressures on labor rates, partially offset by an improved fixed cost leverage as compared to the prior periods as a result of higher activity. The second quarter included labor costs and inefficiency associated with adding and training manufacturing employees in Calgary and Savannah following the closure of the Phoenix Facility. These cost increases have been mitigated by the 5% price increase effective June 1, 2022 as well as an additional 10% price increase effective July 21, 2022 which we expect to see the impacts of beginning mid third quarter 2022. The Company also benefited from a weakening Canadian Dollar this quarter with a $0.8 million benefit on Canadian dollar denominated manufacturing costs.
Adjusted Gross Profit and Adjusted Gross Profit Margin (see “– Non-GAAP Financial Measures”) for the quarter ended June 30, 2022 was $8.5 million or 18.9%, respectively, a decrease from $11.3 million or 27.4%, respectively, for the quarter ended June 30, 2021.
Sales and marketing expenses increased by $0.2 million to $7.8 million for the three months ended June 30, 2022 from $7.6 million for the three months ended June 30, 2021. The increase was largely related to an increase of $0.9 million in travel, meals and entertainment expenses as business activity has increased and restrictions on travel have eased, offset by lower salary and benefit expenses due to planned headcount reductions as part of the cost reduction initiatives.
General and administrative expenses decreased $0.9 million to $6.9 million for the three months ended June 30, 2022 from $7.8 million for the three months ended June 30, 2021. In the quarter, approximately $0.3 million of professional fees associated with the contested election of directors was more than offset by lower salaries and benefits costs. Reductions in salaries and benefits includes planned headcount reductions as part of cost reduction initiatives as well as the impact of the CEO vacancy in the period.
Operations support expenses increased by $0.3 million from $2.2 million for the three months ended June 30, 2021 to $2.5 million. The increase was due to lower costs capitalized to internal projects with the completion of the South Carolina Facility and Dallas DIRTT Experience Centre and an increase in salaries and benefits of $0.2 million compared to the previous year same period.
Technology and development expenses for the three month period ended June 30, 2022 were consistent with prior period costs as $0.2 million of lower capitalized costs due to fewer internal projects were offset by reductions in salaries and benefits expense.
For the three months ended June 30, 2022, we incurred $5.2 million in reorganization costs. Actual costs were higher than the originally anticipated $4.4 million due to additional termination benefits arising in June 2022 with the departure of two executives.
Net loss for the three months ended June 30, 2022 was $19.3 million compared to $9.7 million for the three months ended June 30, 2021. The higher net loss is primarily the result of the lower gross profit margin explained above, a $4.2 million increase in operating expenses, a $3.4 million reduction in government subsidies, and a $0.5 million increase in interest expense offset by a $1.3 million increase in foreign exchange gain.
Adjusted EBITDA (see “Non-GAAP Financial Measures”) for the quarter ended June 30, 2022 was a $9.4 million loss or (21.1)%, a decline of $2.6 million from a $6.8 million loss or (16.6)% for the quarter ended June 30, 2021. Reductions for the quarter were due to the above noted reasons. For the quarter ended June 30, 2022, reorganization costs of $5.2 million were added back in the calculation of Adjusted EBITDA.
The full text of DIRTT’s 2Q22 earnings release, including tables, and webcast replay of the company’s July 28 conference call may be accessed at https://www.dirtt.com/investors/.
About DIRTT Environmental Solutions
DIRTT is a global leader in industrialized construction. DIRTT’s system of physical products and digital tools empowers organizations, together with construction and design leaders, to build high-performing, adaptable, interior environments. Operating in the workplace, healthcare, education, and public sector markets, DIRTT’s system provides total design freedom, and greater certainty in cost, schedule and outcomes.
Headquartered in Calgary, AB Canada, DIRTT trades on Nasdaq under the symbol “DRTT” and on the Toronto Stock Exchange under the symbol “DRT”.