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Pivot Technology Solutions Reports Second Quarter 2014 Results

Company reports improving margins despite fall in revenues

CARLSBAD, CA, Aug. 28, 2014 /CNW/ - Pivot Technology Solutions, Inc. ("Pivot" or the "Company") (TSX-V: PTG), today publishes its results for the second quarter ended June 30, 2014.  

Financial highlights Q2 2014

  • Revenues of $302.7 million, down 5.9% compared to Q2 2013 attributable mainly to fluctuations in product sales to major customers.
  • Product sales of $263.7 million, down 9.0% compared to Q2 2013
  • Service revenues up 24.2% to $36.6 million compared to Q2 2013
  • Gross profit up $1.2 million, or 3.2%, to $38.2 million from the same period in the prior year, despite the fall in revenues. 
  • Gross margin for the quarter was 12.6%, up from 11.5% in Q2 2013.  The margin improvement was attributable to a more advantageous product sales mix and an increase in service revenues.
  • Adjusted EBITDA* came in at $7.7 million, down marginally (1.8%) from Q2 2013 and up 23.8% from Q1 2014.
  • Series A Preferred Share dividends of $0.7 million were declared during Q2 2014.
  • Adjusted for changes in non-cash working capital balances, the Company generated $5.4 million in cash from operating activities, as compared to $4.2 million for the same period last year.
  • The contingent consideration due, related to the acquisition of ProSys was paid in full during the quarter.  The payments due in relation to the ACS acquisition were made in the first six months of 2014, with final settlement subsequent to quarter's end.

Financial Highlights H1 2014

  • Revenues of $622.0 million, up 8.0% compared to H1 2013.
  • Gross profit up 10.1% to $73.7 million from the same period in the prior year, representing a gross margin of 11.8%, up from 11.6% for H1 2013.
  • Adjusted EBITDA* up 23.7% to $13.9 million, as compared to H1 2013.
  • Adjusted for changes in non-cash working capital balances, the Company generated $9.6 million in cash from operating activities, compared to $4.2 million for the same period last year.

Management commentary

Warren Barnes, CEO of Pivot, commented, "Despite lower product sales to major customers, which resulted in revenues slightly below Q2 2013, we managed to improve our profitability margins.  Continued expansion of our services business was the main driver for this improvement.  For the first half year of 2014, we are ahead as compared to 2013 for both revenues and adjusted EBITDA*.  Generally, the business continues to perform well.  While revenues from non-major accounts grew a relatively modest 4% for the quarter, we achieved 30% growth from these accounts year-to-date.  Part of this growth was attributable to good momentum in penetrating new accounts as well as our efforts to expand services."

Kerri Brass, CFO of Pivot, stated, "This quarter saw improvement in gross profit and margins compared to Q2 2013.  Our higher-margin services business accounted for 12.1% of total revenues, as compared to 9.2% for the same period last year, contributing to an improvement of our gross margin by 1.1 percentage points to 12.6%.  This improvement also resulted in an adjusted EBITDA* only marginally behind last year's second quarter, despite lower revenues. For the half year, we recorded a nearly 24% adjusted EBITDA* improvement compared to 2013." 

Mr. Barnes concluded, "We see no material change in the general business climate, which remains positive.  We therefore expect we will continue to perform in line with seasonal patterns typical for our business.  Our focus remains on growth and improved profitability, and we intend to continue our drive to expand our services business, as well as penetrate new accounts.  Internally, we also aim to improve our performance through cross-selling opportunities for both products and services, and by further aligning our support functions with the selling and delivery arms of the business."

Q2 2014 Financial Review   

Revenues came in at $302.7 million, down 5.9% from Q2 2013 and down 5.2% from Q1 2014.  The decrease was attributable primarily to fluctuations in product sales to major customers.  Sales from the Company's major customers declined by $26.4 million, partially offset by 3.9%, or $7.5 million, growth from other customers.

The decline for the quarter and year-to-date in revenues from major customers is attributable to a number of factors, including, but not limited to, timing of major projects and replenishments and competitive pressures on pricing.  Management considers this normal quarterly volatility, and not indicative of a change in relationship with these customers, nor a change in business climate.

Overall product sales decreased by 9.0%, or $26.0 million, to $263.7 million, as compared to the same quarter in the prior year.  Sequentially, product sales decreased by 7.0%.  The fall in product sales was offset partially by continued strong performance of the Company's services business, which recorded a 24.2% increase over last year's second quarter, and a 9.2% increase over Q1 2014.  The growth in services revenues was driven primarily by Pivot's operating companies ProSys and ARC.  ARC's growth in services revenues resulted from the Company gaining ground in its state and local government market, while the growth at ProSys was attributable mainly to its First Call service, an enhanced service offering where customers add live support to purchased vendor support contracts via a fully staffed call center.

Gross profit of $38.2 million was up 3.2%, or $1.2 million, from Q2 2013, and up 7.6%, or $2.7 million, from Q1 2014, despite lower revenues.  Gross profit margins of 12.6% were up from 11.5% in Q2 2013 and up from 11.1% in Q1 2014.  The increase in gross profit and gross profit margins was attributable primarily to growth of the Company's higher margin service offerings and a selective focus on higher margin product sales.

The Company recorded adjusted EBITDA* for Q2 2014 of $7.7 million, down 1.8% from Q2 2013, and up 23.8% from Q1 2014. The change in adjusted EBITDA* compared to the same period last year was attributable to slightly higher selling and administrative expenses.  Compared to Q1 2014, the increase in adjusted EBITDA* was due to a more favourable revenue mix between product sales and service offerings.

Selling and administrative expenses for Q2 2014 increased by 4.5%, or $1.3 million, to $30.5 million, as compared to Q2 2013, attributable mainly to an increase in headcount and lower marketing development funds.

On April 3, 2014 the Company entered into an interest rate forward swap agreement ("Swap") with PNC Bank to mitigate the risk of fluctuating interest rates.  Under the terms of the Swap, the interest rate will vary between 4.655% and 5.155% on $50 million of the amount outstanding under the ABL Credit Facility.  This range of rates will be in effect from April 7, 2016, through November 13, 2018.

The Company recorded a change in the fair value of liabilities of $1.3 million, consisting of a $0.54 million increment to the contingent consideration related to acquisitions, and $0.74 million related to the Swap to mitigate the risk of fluctuating interest rates. 

Series A Preferred Share dividends of $0.7 million were declared during Q2 2014, reflecting a fixed cumulative preferential dividend at the rate of 6% per annum. 

Adjusted for changes in non-cash working capital balances, the Company generated $5.4 million in cash from operating activities, as compared to $4.2 million for the same period last year.  As at June 30, 2014, total cash on hand was $16.2 million, down from $22.0 million for December 31, 2013, and up from $9.6 million for March 31, 2014.  The changes in cash on hand were related mainly to movements in working capital.

Normal fluctuations in revenue performance, which are common place in the industry, drive significant movements in working capital, in particular with regards to accounts receivable, inventory and accounts payable.  As such, movements in working capital balances are largely volume related, however, the Company focuses on driving improvement in its business processes to optimize the use of its secured borrowing facilities and effectively manage working capital.

H1 2014 Financial Review

Revenues for the six months ended June 30, 2014 increased by $46.1 million, or 8.0%, to $622.0 million, as compared to the same period last year, driven both by increased product sales and increased revenues from services. 

Service revenues for the first half of 2014 increased by $21.8 million, or 45.2%, to $70.2 million.  Product sales increased by $25.1 million, or 4.8%, to $547.4 million, attributable mainly to non-major customer growth of $71.2 million, offset partially by a decrease in product sales to major customers of $46.2 million

Gross profit for the period increased by $6.8 million, or 10.1%, over the same period in the prior year.  Growth of revenues from the Company's services business resulted in gross margin of 11.8% for the six months ended June 30, 2014, compared with 11.6% for the same period in 2013. 

Adjusted EBITDA* for H1 2014 was $13.9 million, up by $2.7 million, or 23.7% from the same period last year.  Growth in adjusted EBITDA* was driven by higher revenues, as well as improved gross margins. 

Adjusted for changes in non-cash working capital balances, the Company generated $9.6 million in cash from operating activities, as compared to $4.2 million for the same period last year.

Conference Call

Management will host a conference call on August 28, 2014 at 11:00 am ET.

DATE:

Thursday, August 28, 2014



TIME:

11:00 a.m. ET



DIAL IN NUMBER:

+1 647-427-7450
+1 888-231-8191



TAPED REPLAY:

+1 416-849-0833

+1 855-859-2056

 

Available from August 28, 2014 14:00 ET to September 4, 2014 23:59 ET

 

Reference number: 87706819

Subsequently, a recording of the call will be posted on the Company's website: www.pivotts.com.

About Pivot Technology Solutions, Inc.
Together with its portfolio companies and partners, Pivot delivers solutions that enable organizations to design, build, implement and maintain computing and communication infrastructure that addresses their unique business needs. Pivot's approach supports improvement of business performance, helps organizations reduce capital and operating expenses, and accelerates the delivery of new products and services to end-customers. With over 2,000 customers, many of whom are Fortune 1000 companies, Pivot extends its value added solutions to help organizations of all sizes improve operating efficiency, reduce complexity and enhance service delivery through virtualization and cloud computing. Pivot enables businesses to extend their enterprise through mobility solutions to better connect business partners and customers. Pivot has offices throughout North America and can be found online at www.pivotts.com.

Forward Looking Statement
This news release contains statements that, to the extent they are not recitations of historical fact, may constitute "forward-looking statements" within the meaning of applicable Canadian securities laws. Forward-looking statements include statements regarding the general business climate, Pivot's growth, new accounts and opportunities, improving results and the assumptions underlying any of the foregoing. Pivot uses words such as "may", "would", "could", "will", "likely", "expect", "believe", "intend" and similar expressions to identify forward-looking statements. Any such forward-looking statements are based on assumptions and analyses made by Pivot in light of its experience and its perception of historical trends, current conditions and expected future developments, including the assumption that opportunities identified by Pivot may lead to revenue and income growth, that Pivot will be able to continue to realize synergies through the implementation of its integration efforts,  that the general business climate will continue to be unchanged as well as other factors Pivot believes are appropriate under the relevant circumstances. However, whether actual results and developments will conform to Pivot's expectations and predictions is subject to any number of risks, assumptions and uncertainties. Many factors could cause Pivot's actual results, to differ materially from those expressed or implied by the forward-looking statements contained in this news release. These factors include, without limitation: uncertainty in the global economic environment; delays in the purchasing decisions of Pivot's customers; the competition Pivot faces in its industry and/or marketplace; the possibility of technical, logistical or planning issues in connection with the deployment of Pivot's products or services; the possibility that Pivot will not be able to further align its support functions with the selling and delivery arms of the business; and the possibility that Pivot will be unable to capitalize on opportunities it has identified in the manner and timeframe anticipated.  The "forward-looking statements" contained herein speak only as of the date of this press release and, unless required by applicable law, the Company undertakes no obligation to publicly update or revise such information, whether as a result of new information, future events or otherwise.

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 this release.  

Pivot Technology Solutions

SELECTED FINANCIAL INFORMATION

Full financial statements and related Management Discussion and Analysis can be found on SEDAR and the Company's website www.pivotts.com 

All figures are in US $ '000s


Three months ended June 30,


Six months ended June 30,


(unaudited)


(unaudited)


2014

2013


2014

2013







Revenues

302,708

321,677


622,035

575,961

Cost of sales

264,508

284,651


548,372

509,054

Gross profit

38,200

37,026


73,663

66,907


Selling and administrative expenses

30,518

29,205


59,775

55,677

Adjusted EBITDA*

7,682

7,821


13,888

11,230


Depreciation and amortization

2,882

2,840


5,747

5,656


Transaction costs

192

-


192

1,754


Interest expense

1,760

1,479


3,087

4,040


Goodwill impairment

-

11,000


-

11,000


Change in fair value of liabilities

1,274

(9,428)


5,033

(9,812)


Other income

40

298


(116)

11

Income (loss) before income taxes

1,534

1,632


(55)

(1,419)

Provision for income taxes

583

943


(37)

2,707

Net and comprehensive income (loss)

951

689


(18)

(4,126)

*Non-IFRS Financial Measures
The Company internally measures its performance and results of initiatives through a number of measures that are not recognized under IFRS and may not be comparable to similar measures used by other companies.  

*Adjusted EBITDA
In the Company's financial reporting, adjusted EBITDA is a non-IFRS measure which is defined as gross profit less selling and administrative expenses, and corresponds to income before income taxes, depreciation and amortization, transaction costs, interest expense, change in fair value of liabilities and other income or expense.  Management believes this is an important indicator as adjusted EBITDA excludes 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 also used by 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.  Adjusted EBITDA is not a recognized measure under IFRS, has no standardized meaning and is therefore unlikely to be comparable to similar measures used by other companies.  Readers are cautioned that this term should not be construed as an alternative to net income determined in accordance with IFRS.

The following provides a reconciliation of adjusted EBITDA* to income before income taxes: 


Three months ended June 30,


Six months ended June 30,


(unaudited)


(unaudited)


2014

2013


2014

2013







Income (loss) before income taxes

1,534

1,632


(55)

(1,419)


Depreciation and amortization

2,882

2,840


5,747

5,656


Transaction costs

192

-


192

1,754


Interest expense

1,760

1,479


3,087

4,040


Goodwill impairment

-

11,000


-

11,000


Change in fair value of liabilities

1,274

(9,428)


5,033

(9,812)


Other income

40

298


(116)

11


Adjusted EBITDA*

7,682

7,821


13,888

11,230

 

SOURCE Pivot Technology Solutions, Inc.