Pivot Technology Solutions, Inc. Reports Fourth Quarter, Annual 2019 Results

TORONTO, March 30, 2020 /CNW/ - Pivot Technology Solutions, Inc. (TSX: PTG), ("Pivot", "Company"), a full-service information technology provider, today reported its financial results for the three and twelve months ended December 31, 2019. All figures are in US dollars unless otherwise stated.

FOURTH QUARTER OVERVIEW

• Revenue was $307.2 million, compared to $301.6 million in Q4 2018
• Gross profit was $42.9 million, compared to $42.5 million in Q4 2018
• Gross profit margin was 14.0%, compared to 14.1% in Q4 2018
• Adjusted EBITDA¹ increased 56.2% to $7.5 million², compared to $4.8 million in Q4 2018
• The Company recognized a pre-tax gain of $22.3 million on the Smart Edge sale
• Net income attributable to shareholders was $16.3 million, compared to $0.5 million in Q4 2018
• Diluted earnings per share ("EPS") was $0.41 in Q4 2019, compared to $0.01 in Q4 2018

For comparability, fourth quarter results expressed in Canadian dollars ("C$"), translated at 1.3201

• Revenue was C$405.5 million in Q4 2019, compared to C$399.5 million in Q4 2018
• Gross profit was C$56.6 million, compared to C$56.0 million in Q4 2018
• Adjusted EBITDA¹ was C$9.8 million in Q4 2019, compared to C$6.2 million in Q4 2018
• The Company recognized a pre-tax gain of C$29.6 million on the Smart Edge sale
• Net income available to shareholders was C$21.6 million, compared to C$0.6 million in Q4 2018
• Diluted earnings per share was C$0.54, compared to C$0.01 in Q4 2018

¹ _{Non-GAAP Measure. See Non-GAAP Measures section of this news release.}
² _{including the year over year favourable impact of the implementation of IFRS 16 of approximately $1.2 million}

2019 OVERVIEW

• Revenue was $1.22 billion in 2019, compared to $1.37 billion in 2018
• Gross profit was $164.0 million in 2019, compared to $163.2 million in 2018
• Gross profit margin was 13.5% in 2019, compared to 11.9% in 2018
• Adjusted EBITDA^1,3 was $26.8 million in 2019, an increase of 72.4% compared to $15.5 million in 2018
• Net income available to shareholders was $14.0 million in 2019, compared to a loss of $4.6 million in 2018; excluding the gain on sale of Smart Edge and the impact from IFRS 16, net income available to shareholders increased $1.5 million
• Diluted earnings per share was $0.35 in 2019, compared to a loss of $0.12 in 2018
• Adjusted Debt⁴ as at December 31, 2019 decreased by $21.6 million compared to the prior year, primarily as a result of the Smart Edge sale; as a result, the Adjusted debt to Adjusted EBITDA¹ ratio improved year over year from 5.00 to 2.10
• The Company repurchased 237,310 shares at a cost of $0.3 million through its NCIB

For comparability, fiscal 2019 results expressed in Canadian dollars ("C$"), translated at 1.3269

• Revenue was C$1.62 billion in 2019, compared to C$1.78 billion in 2018
• Gross profit was C$217.7 million in 2019, compared to C$211.4 million in 2018
• Adjusted EBITDA^1,3 was C$35.5 million in 2019, compared to C$20.1 million in 2018
• Net income available to shareholders was C$18.5 million in 2019, compared to a loss of C$5.9 million in 2018
• Diluted earnings per share was C$0.46 in 2019, compared to a loss of C$0.15 in 2018

³_{including the year over year favourable impact of the implementation of IFRS 16 of approximately $5.2 million}
⁴ _{Non-GAAP Measure. See Non-GAAP Measures section of this news release.}

MANAGEMENT COMMENTARY

"2019 was a transformational year for Pivot.   We successfully managed through volume changes with our two major customers, returning to overall revenue growth in Q4, 2019.   The increase in revenue was achieved by driving sizeable revenue growth of 6% from non-major customers.  In addition, during the quarter, we successfully sold our Smart Edge assets to Intel for $27 million, generating significant cash for the business and strengthening our balance sheet," said Kevin Shank, CEO.  "Further, we entered into an agreement with Intel designating Pivot as a non-exclusive preferred system integrator and channel partner for Smart Edge based solutions.  As a result, Pivot retains the ability to sell, deploy, and manage Smart Edge solutions going forward.   Looking at the entire year, Pivot continued to grow stronger as gross profit dollars grew, gross margin percentage increased, expenses declined, and overall adjusted earnings were significantly higher," added Mr. Shank.   

"Adjusted EBITDA was up 56.2% to $7.5 million in the fourth quarter, while diluted EPS came in at $0.41, which includes the gain on sale of the Smart Edge assets," said David Toews, Chief Financial Officer.  "The sale of Smart Edge generated a cash infusion which strengthened the Company's balance sheet, allowing Pivot to continue focusing on our capital allocation priorities.  As part of the Company's integration initiative, we combined certain U.S. wholly owned subsidiaries and related business units through a merger. This allows us to centralize several functional areas, which we expect will generate cost reductions, while improving controls and creating efficiencies."

The Company introduced a new non-GAAP measure called Adjusted Debt.  Adjusted Debt is defined as current liabilities, plus long-term other financial liabilities, less lease obligations and current assets.  The Company believes Adjusted Debt normalizes the impact of changes in working capital and therefore it is a more relevant indicator of the Company's net debt position.

"Our Adjusted Debt was $56.1 million at December 31, 2019 compared to $77.7 million for 2018. This represents a 28% improvement in this important metric year over year. The combination of this reduced Adjusted Debt with our improved Adjusted EBITDA improved, Pivot's Adjusted Debt to Adjusted EBITDA ratio to 2.1x in 2019 from 5.0x in 2018," added Mr. Toews.

2019 BUSINESS AND OPERATING HIGHLIGHTS

• On October 25, 2019 the Company completed the sale of its Smart Edge technology to Intel Corporation ("Intel") for gross consideration of $27.0 million – $25.0 million cash on closing, and $2.0 million to be paid 18 months after closing, subject to customary holdback terms and conditions.
• In connection with the sale of Smart Edge, Pivot and Intel have entered into a three-year preferred channel partner agreement, which designates Pivot as a non-exclusive preferred system integrator and channel partner for Smart Edge based solutions.
• The Company completed the integration of certain U.S. wholly owned subsidiaries and related business units through a merger.
• The Company announced the promotion of Scott Ward to the newly created position of Chief Revenue Officer to lead the sales team, and to work closely with strategic partners to expand Pivot's addressable market.
• The Normal Course Issuer Bid ("NCIB") was utilized to repurchase 237,310 shares during the fourth quarter.
• The Company announced Christopher Formant and Vic Bhagat were appointed to serve as members of the Board of Directors.
• Pivot renewed its credit agreement for five years on more favourable terms with a lending group represented by JPMorgan Chase Bank. The amended agreement expires on May 14, 2024.

DIVIDEND AND NORMAL COURSE ISSUER BID

As previously announced, the Company paid its regular quarterly dividend in the amount of C$0.04 per common share on March 16, 2020 to common shareholders of record on February 28, 2020. During the fourth quarter, the Company paid $1.2 million in common share dividends or C$0.04 per share. This dividend has been designated as an "eligible dividend" for Canadian tax purposes.

On June 19, 2019, the Company received regulatory approval for an NCIB to purchase up to 3,791,395 common shares of the Company, or approximately 10% of the Company's total public float at prevailing market prices, in accordance with the rules of the Toronto Stock Exchange.  This represents the fourth NCIB the Company has undertaken and will run from June 24, 2019 to June 23, 2020. In December 2019, the Company entered into an Automatic Share Purchase Plan with Echelon Wealth Partners, Inc. ("Echelon") for the purposes of permitting the purchase of common shares under the NCIB at times when the Company would not be permitted to purchase due to regulatory restrictions or blackout periods.  During the fourth quarter, the Company acquired 237,310 shares through the NCIB.  From January 1, 2020 to March 27, 2020, the Company has acquired 824,115 shares through the NCIB bringing the total shares acquired under this NCIB to 1,061,425 shares.

FOURTH QUARTER AND 2019 RESULTS SUMMARY

Fourth quarter 2019 revenues were $307.2 million, a 1.9% increase from the comparative period.  This increase was primarily attributable to an increase in product sales, and growth from the Company's non-major customers which increased from $241.0 million in Q4 2018 to $254.8 million in Q4 2019, an increase of 5.8%. 

Total revenue of $1.22 billion for 2019 decreased $155.5 million compared to 2018.  The decline was mainly attributable to a decrease in product sales due to reduced volumes from major customers which decreased from $411.0 million in 2018 to $232.5 million in 2019.  Partially offsetting this decline was an increase in non-major customers from $962.7 million in 2018 to $985.6 million in 2019, an increase of 2.4%.   

Pivot provided services were $20.1 million in Q4 2019 and $79.8 million for the full year, down from $25.1 million in Q4 2018 and $89.2 in 2018.  The decline in Pivot Provided services is primarily due to certain workforce services contracts winding down in 2018, combined with two large non-recurring deployment services projects being completed in 2018, partially offset by a new deployment project which began in 2019.

Third-party services of $19.0 million and $71.5 million for Q4 2019 and the full year, respectively, increased by $2.4 million or 14.5% for Q4 2019, and increased $2.7 million or 4.0% compared to 2018.  The increase in third party services is primarily driven by the timing of certain contracts and renewals.

Gross profit was $42.9 million in Q4 2019, representing an increase of 0.9% compared to Q4 2018, with a gross profit margin of 14.0% in Q4 2019 compared to 14.1% in Q4 2018.   Gross profit increased 0.5% in 2019 compared to 2018, with gross profit margin increasing to 13.5% in 2019 from 11.9% in 2018.  The improvement in gross profit for Q4 2019 and for the year is mainly driven by the change in the customer mix and cost reduction efforts. 

Selling general and administrative expenses ("SG&A") of $35.4 million for Q4 2019 decreased 6.1% versus the comparative period.  SG&A of $137.2 million for 2019 decreased 7.0% compared to 2018. The decrease in SG&A was driven by changes in accounting for leases (IFRS 16), the capitalization of certain Smart Edge costs and cost reduction activities.

The Company's sale of Smart Edge resulted in a pre-tax gain of $22.3 million before transaction costs of $0.9 million during Q4 2019.  

Adjusted EBITDA¹ was $7.5 million in the fourth quarter, an increase of 56.2% over the prior period.   Adjusted EBITDA¹ was $26.8 million in 2019, an increase of 72.4% compared to 2018. 

2020 OUTLOOK

Management believes Pivot's opportunities to create shareholder value through its product and advanced services strategy are robust and the secular trends driving IT spending, particularly spending on solutions and services, are positive and expected to grow in line with the overall market's expected growth rate in 2020.  While the impact of COVID-19 has been minimal to date, there is uncertainty around its duration and the potential impact on future business conditions.  Management is closely monitoring how COVID-19 is affecting Pivot's operations and is taking measures and precautions to protect and inform its employees.

The Company is monitoring trade discussions between the U.S. and China and the potential impact of tariffs; however, the long-term impact of these discussions has not yet been determined. 

The Company continually seeks to expand its position in the global IT market organically and through selective acquisitions. 

QUARTERLY AND ANNUAL RESULTS MATERIALS

The Company's outlook is contained in its Management's Discussion and Analysis ("MD&A") for the three and twelve months ended December 31, 2019, which is available at www.pivotts.com and at www.sedar.com.

SELECTED FINANCIAL INFORMATION AND OPERATING RESULTS

(in thousands of U.S. dollars except per share amounts)	2019	2018	2017
Financial Results
Revenue	1,218,124	1,373,630	1,511,641
Gross profit	164,030	163,153	168,751
Income before depreciation and amortization, finance expense, change in fair value of liabilities and other expense (income) (Adjusted EBITDA^1)	26,788	15,539	24,118
Net income (loss)	13,718	(4,470)	(5,628)
Net income (loss) attributable to shareholders	13,967	(4,591)	(6,057)
Earnings (loss) per share attributable to shareholders:
Basic ($)	$ 0.35	$ (0.12)	$ (0.15)
Diluted ($)	$ 0.35	$ (0.12)	$ (0.15)
Cash dividends declared	4,776	4,900	4,973
Financial Position (at year end)
Total assets	421,398	421,319	527,883
Other financial liabilities – current	111,247	100,184	136,897
Other financial liabilities – non-current portion	11,547	1,178	2,443
(in thousands of U.S. dollars)	2019	2018	2017
Income (loss) before income taxes	20,684	(3,463)	2,800
Depreciation and amortization	14,615	11,352	11,257
Finance expense	6,027	6,120	5,450
Change in fair value of liabilities	1,208	653	209
Other expense (income)	(15,746)	877	4,402
Adjusted EBITDA^1	26,788	15,539	24,118

Key metrics on consolidated debt

Adjusted debt

(in thousands of U.S. dollars)	2019	2018
Current liabilities	379,007	401,240
Other financial liabilities – non-current portion	11,547	1,178
Less: Lease obligations – total	(14,449)	-
Less: Current assets	(319,958)	(324,685)
Adjusted debt^1	56,147	77,733

Adjusted Debt¹ normalizes the impact of the changes in working capital as well as the impact of IFRS 16 in 2019, and therefore, management believes that it is a more relevant indicator of the Company's debt position and is a more comparable metric with industry peers. The decrease of Adjusted Debt¹ in 2019 was mainly due to the proceeds of $25.0 million from the sale of Smart Edge assets.

Below are the key metrics of our consolidated debt as at December 31, 2019 and 2018.

	2019	2018
Adjusted Debt^1 to Adjusted EBITDA^1	2.10	5.00
Net interest coverage^1	4.44	2.54

The improvement in both of these key metrics in 2019 was due to the higher Adjusted EBITDA and margin generated from operations, as well as the proceeds from the sale of Smart Edge.

NON-GAAP MEASURES

The Company uses certain non-GAAP measures to evaluate its performance, defined below. These terms do not have any standardized meaning prescribed within IFRS and therefore may not be comparable to similar measures presented by other issuers. Such measures should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS such as net income (loss).

Adjusted EBITDA

"Adjusted EBITDA" is defined as gross profit less selling, general and administrative expenses, and corresponds to income (loss) before income taxes, depreciation and amortization, finance expense, change in fair value of liabilities, and other expense (income). 

Management believes Adjusted EBITDA is an important indicator of the Company's operating performance as it excludes certain items that are either non-cash expenses, items that cannot be influenced by management in the short term, and items that do not impact core operating performance, demonstrating the Company's ability to generate liquidity through operating cash flow to fund working capital needs, service outstanding debt and fund future capital expenditures.  Adjusted EBITDA is used by some investors and analysts for the purposes of valuing an issuer.  The intent of Adjusted EBITDA is to provide additional useful information to investors and analysts and is also used by management as an internal performance measurement. 

Reconciliations of "income (loss) before income taxes" to "Adjusted EBITDA" are provided under the headings "SELECTED FINANCIAL INFORMATION AND OPERATING RESULTS".

Adjusted Debt

"Adjusted Debt" is defined as current liabilities, plus long-term other financial liabilities, less lease obligations and current assets.

The Company's working capital is financed by an asset-based lending facility. The amount drawn on the facility generally fluctuates inversely with changes in other working capital. The Adjusted Debt normalizes the impact of the changes in working capital and therefore, management believes that it is a more relevant indicator of the Company's net debt position.

Adjusted Debt to Adjusted EBITDA

"Adjusted Debt to Adjusted EBITDA" is defined as Adjusted Debt divided by the trailing twelve-month Adjusted EBITDA. The Company uses this measure as an indication of its liquidity position and its ability to generate income to service the debt excluding the impacts of working capital fluctuations.

Net Interest Coverage 

"Net Interest Coverage" is defined as Adjusted EBITDA divided by finance expense on a trailing twelve-month basis.

FOURTH QUARTER CONFERENCE CALL

At 8:30 a.m. eastern Tuesday, March 31, 2020, the Company will host a conference call featuring management's quarterly remarks and follow-up question and answer period with analysts. The conference call can be accessed live by dialing [phone] five minutes prior to the scheduled start time. 

A telephone recording of the call will be available for one week (until midnight April 7, 2020) by dialing [phone] and entering passcode 2018367 followed by the number sign.

ABOUT PIVOT TECHNOLOGY SOLUTIONS

Pivot is an industry-leading information technology services and solutions provider to many of the world's most successful companies, including members of the Fortune 1000, as well as governments and educational institutions. By leveraging its extensive original equipment manufacturer (OEM) partnerships and its own fulfillment, professional, deployment, workforce and managed services, Pivot supports the IT infrastructure needs of its clients. For more information, visit www.pivotts.com.

FORWARD LOOKING STATEMENTS  

Information in this press release contain forward-looking statements, including statements relating to the growth of the Company and the IT market in 2020.  Forward-looking statements are based on assumptions of future events that the Company believes are reasonable based upon information currently available. Actual results could vary significantly from these estimates.  Readers are cautioned that assumptions used in the preparation of such information may prove to be incorrect.  These assumptions include estimates of the profitability of its operations; growth in IT spending, particularly solutions and services, being in line with the overall market's expected growth rate in future periods; the IT market's growth in 2020 notwithstanding the COVID-19 pandemic and possible supply chain disruption; availability of borrowings under the Company's credit facilities and access to other sources of capital; the improved operational results generated from operational efficiency initiatives; the successful implementation of the initiatives identified in the MD&A as part of the advancement of its strategy; that the Company will be in a financial position to declare and pay a dividend in subsequent periods; or that the Company will be in a financial position to or that it will repurchase any additional shares for cancellation under the NCIB.

Events or circumstances may cause actual results to differ materially from those predicted as a result of numerous known and unknown risks, uncertainties, and other factors, many of which are beyond the control of the Company.  Some of those important factors, but certainly not all, that could cause actual results to differ materially from those indicated by such forward-looking statements are: (i) that the information is based on estimated results; (ii) the possible unavailability of financing; (iii) lack of resources to fund growth; (iv) cost reductions in future periods being less significant than the annualized amount calculated based on prior periods; (v) start-up risks associated with new lines of business and product lines; (vi) general operating risks; (vii) dependence on third parties; (viii) changes in government regulation; (ix) the effects of competition; * dependence on senior management, (xi) the impact of Canadian and/or U.S. economic conditions, including the impact of international trade disputes; (xii) disruptions to the business resulting from pandemics or epidemics (such as the COVID-19 outbreak); (xiii) fluctuations in currency exchange rates and interest rates; (xiv) uncertainty with respect to the ability of the Company to pay a quarterly dividend in subsequent periods; (xv) uncertainty with respect to the number of shares to be repurchased for cancellation by the Company under the NCIB; and (xvi) the other risks described in the Company's AIF for the year ended December 31, 2019 under the heading "Risk Factors", available at sedar.com and pivotts.com.  Readers are cautioned not to place undue reliance on any forward-looking statements.  The Company expressly disclaims any intention or obligation to update or revise any forward-looking information, whether as a result of new information, future events or otherwise, except as required in accordance with applicable securities laws.

SOURCE Pivot Technology Solutions, Inc

James Bowen, CFA, Pivot Technology Solutions, [email protected], 416-519-9442

Related Links

http://www.pivotts.com/