DIRTT Announces Record Results for Q3 2015

CALGARY, AB – November 3, 2015 -DIRTT Environmental Solutions Ltd. (“DIRTT” or the “Company”) (TSX: DRT), a leading technology-enabled designer, manufacturer and installer of fully customized, prefabricated interiors, today announced its financial results for the three- and nine-month periods ended September 30, 2015. This news release contains references to Canadian dollars and United States dollars. Canadian dollars are referred to as “$” and United States dollars are referred to as “US$”.

Selected Highlights

For the three- and nine-month periods ended September 30, 2015 the Company reported:

• Revenue for the quarter increased by $15.4 million, or 33.1%, over Q3 2014, to $62.1 million, and by $42.3 million, or 32.7%, to $171.6 million, compared with the first nine months of 2014;
• Trailing 12-month revenue was $229.6 million, a 40.3% increase over the prior trailing 12-month period ($163.6 million);
• Adjusted gross profit as a percentage of revenue (see “Non-IFRS Measures”) for the three and nine months ended September 30, 2015 increased to 45.8% and 43.8%, compared with 42.3% and 42.2% in the prior year periods, respectively;
• Adjusted EBITDA (see “Non-IFRS Measures”) increased by $5.9 million over Q3 2014 to $11.2 million, and by $12.1 million to $22.2 million over the first nine months of 2014;
• Net cash flows provided by operating activities before changes in non-cash working capital (see “Non-IFRS Measures”) of $11.9 million for the quarter, an increase of $6.0 million over Q3 2014, and $24.2 million for the first nine months of 2015, an increase of $14.0 million over the prior year period;
• Filing of a patent infringement claim against Allsteel Inc.;
• Launch of new residential interior and timber frame construction offerings at its annual sales, marketing and training initiative, DIRTT Connext™, held in Chicago;
• Entry into a strategic collaboration with Corning Incorporated to bring Corning^® Willow^® Glass to DIRTT’s suite of interior construction solutions; and
• Completion of a bought-deal financing on June 4, 2015 for gross proceeds of approximately $43.2 million.

“Growing awareness of DIRTT’s brand and the high-quality solutions we offer, underpinned by sound industry fundamentals, drove very strong top line growth in our business in the third quarter as we built on the momentum we saw develop in June,” said DIRTT CEO Mogens Smed. “We generated record quarterly revenue without a meaningful contribution from larger contracts, which speaks to the growing strength of mid-sized projects which form our core business, the overall diversity of our customer base, and the value we can offer over traditional construction.”

“A combination of factors including favorable product mix and steady manufacturing volumes all contributed to expanding margins in the third quarter,” said DIRTT President Scott Jenkins. “Our excellent results demonstrate both the scalability of our business and the leverage in our model as we reach new heights and reap the rewards of our previous investments aimed at driving growth. Looking ahead, we remain committed to investing in new solutions, enhancing our manufacturing capabilities and ultimately adding capacity to support longer-term value creation.”

Summary Financial Results

Note: ⁽¹⁾ See “Non-IFRS Measures”.

Revenue

Revenue increased by $15.4 million, or 33.1%, for the three months ended September 30, 2015 compared with the same period in 2014. Revenue increased by $42.3 million, or 32.7%, for the nine months ended September 30, 2015 compared with the same period in 2014. The increase in revenue was the result of continued momentum throughout North American markets, as well as the strengthening US dollar. During the third quarter of 2015, the Company saw the contribution from the energy sector as a percentage of total revenue drop from 22% in Q3 2014 to 6% in Q3 2015. The drop was likely the result of falling energy prices over the last year. This decline was more than offset by increases in revenue from the financial, insurance and real estate; management, professional and scientific services; retail trade; and manufacturing sectors. These results demonstrate the overall strength in North American construction, and the diversity of DIRTT’s network, reach and unique offerings.

During the three and nine months ended September 30, 2015, DIRTT recognized revenue of $0.1 million and $8.5 million, respectively, from the previously announced US$30.0 million contract awarded to DIRTT and its DP Agile OFIS of Houston, Texas.

Adjusted Gross Profit

Adjusted gross profit as a percentage of revenue increased to 45.8% for the three months ended September 30, 2015 from 42.3% in for same period in 2014. Adjusted gross profit as a percentage of revenue increased to 43.8% for the nine months ended September 30, 2015 compared with 42.2% for the same period in 2014. The increase was due primarily to significantly higher revenue and reduced material costs in the 2015 periods compared with the same periods in 2014. The higher overall production volumes in the 2015 periods allowed DIRTT to more effectively leverage the fixed component of cost of goods sold, which also contributed to the higher adjusted gross profit percentage. During the three and nine months ended September 30, 2015, material costs as a percentage of revenue improved by 3.1% and 1.2%, respectively, compared with the same periods in 2014. The decrease in material costs was primarily due to product mix and leverage from higher revenue levels, partially offset by the stronger US dollar.

Higher production volumes enable better absorption of fixed costs included in cost of goods sold, such as facilities costs and indirect labor costs, particularly as the sales and production volumes were generally more consistent on a month-to-month basis throughout the 2015 periods compared with the same 2014 periods. Periods with consistent monthly manufacturing volumes tend to generate higher gross profit than those where manufacturing levels vary more significantly from month to month. During the three and nine months ended September 30, 2015, indirect labor and product costs, which are mostly fixed costs, improved by 1.3% and 0.7% as a percentage of revenue, respectively, compared with the same periods in 2014.

The stronger US dollar also contributed to higher adjusted gross profit in the three- and nine- month periods ended September 30, 2015, as the positive impact on US dollar revenue exceeded the negative impact on US dollar-based production costs.

Adjusted SG&A Expenses

Adjusted selling, general and administrative expenses (“Adjusted SG&A”) is SG&A before deductions for non-cash depreciation and amortization of non-manufacturing related assets and stock-based compensation expenses. See Non-IFRS Measures for a reconciliation. Adjusted SG&A as a percentage of revenue decreased by 2.8% from 32.1% to 29.3% in the three months ended September 30, 2015 compared with the same period in 2014. Adjusted SG&A expenses on a dollar amount basis increased by $3.2 million, or 21.4%, for the three months ended September 30, 2015 compared with the same period in 2014. The most significant changes can be attributed directly to sales-related efforts, as commission expense for internal sales representatives and industry specific experts increased by $1.3 million, and salaries and benefits increased by $0.3 million. These costs reflect personnel additions focused on generating and supporting higher business volumes. Higher commission costs are in line with the greater revenue volumes in the current quarter. Other significant increases in adjusted SG&A in the current quarter included travel and marketing costs of $0.8 million, which again are largely focused on sales and marketing and business development initiatives.

Adjusted SG&A as a percentage of revenue decreased by 2.2% from 34.5% to 32.3% in the nine months ended September 30, 2015 compared with the same period in 2014. Adjusted SG&A expenses on a dollar amount basis increased by $10.7 million, or 24.0%, in the nine months ended September 30, 2015 compared with the same period in 2014. The change was principally due to increases in commission expense of $3.0 million, salaries and benefits of $2.9 million, and travel and marketing costs of $2.6 million. The increase in commission expense and salaries and benefits are due to the same reasons discussed above. The increase in travel and marketing costs in the 2015 period was due primarily to DIRTT Connext, the previously discussed annual sales, marketing and training initiative held in Chicago in June. The total cost for DIRTT Connext in 2015 was $2.3 million, compared with $1.3 million in the prior year.

The stronger US dollar contributed to the overall increase in adjusted SG&A expenses across the organization in the three- and nine-month periods ended September 30, 2015, as certain of these expenditures are denominated in US$.

Adjusted EBITDA

Adjusted EBITDA grew by $5.9 million, or 112.9%, for the three months ended September 30, 2015 compared with the same period in 2014. The change was mainly due to the $15.4 million increase in revenue and the resulting improvement in adjusted gross profit of $8.7 million. These amounts were partially offset by higher adjusted SG&A expenses of $3.2 million for the reasons discussed above.

Adjusted EBITDA grew by $12.1 million, or 119.4%, for the nine months ended September 30, 2015 compared with the same period in 2014. The change was mainly due to the $42.3 million improvement in revenue and the resulting increase in adjusted gross profit of $20.6 million. These amounts were partially offset by higher adjusted SG&A expenses of $10.7 million for the reasons discussed above.

Outlook

Construction is a major global industry and consists of building new structures, making additions and modifications to existing structures, as well as conducting maintenance, repair and leasehold improvements on existing structures. The total US construction market was US$962 billion in 2014, of which US$618 billion was attributable to non-residential building and US$344 billion was attributable to residential building [Source: US Census Bureau ]. This includes both new building and renovation projects. Total US non-residential and residential construction spending is forecasted to grow to US$723 billion and US$529 billion, respectively, in 2018 [Source: FMI US Markets Construction Overview 2015]. DIRTT believes conventional construction activities are fraught with challenges including cost overruns, quality issues, labor shortages, and time delays and increasingly organizations are looking for a better way to build out their interior spaces, whether for new buildings or renovations.

DIRTT’s growth strategy consists of five key initiatives: (1) increasing penetration of existing markets by providing continued support and increased investment to existing DPs throughout North America; (2) expanding into new geographies, such as the Middle East, by capitalizing on recent and continued investment alongside new international DPs; (3) penetrating new vertical markets such as the healthcare, education and residential sectors; (4) continuing to invest in ICE and new innovative interior construction solutions such as the Enzo Approach, residential interiors and timber frame construction; and (5) partnering with industry leaders to monetize innovative solutions – a recent example is the Corning^® Willow^® Glass initiative signed in February 2015.

With the recent launch of residential and timber frame solutions at DIRTT Connext, DIRTT has officially entered into these markets. The Company does not expect to see meaningful revenue from these markets in the near term.

Management believes DIRTT Solutions are a superior alternative to conventional construction in all sectors of the construction industry, and that a continued increase in construction activity can be expected to result in an ongoing improvement in revenue. The Company plans to invest additional resources, including the further development of ICE and the development of new DIRTT Solutions and test projects, to pursue further opportunities in healthcare, education and government, and new opportunities in the hospitality and residential sectors of the construction industry. DIRTT’s product development team has been and, we expect will continue to be, expanded to address industry-specific challenges and opportunities.

The American Institute of Architects’ (AIA) Architecture Billings Index (ABI) can be a useful leading economic indicator of how non-residential billing activity could trend. The most recent September billing and inquiries numbers continued to show growth, building on an improving trend following poor weather in the first two months of this year. Billing activity continued to be positive in the Midwest, South and West, with the Northeast region showing uneven demand for design services. Both DIRTT and the AIA believe these numbers point to improved fundamentals that could support growth across all segments of the building industry for the next nine to 12 months.

We believe that continued softness in global commodity pricing could result in further weakness for the energy sector. We have recently received verbal notification that the remainder of the gross US$30.0 million contract announced in mid-2014 has been deferred until further notice. We remain confident that the remainder of this contract will go forward when energy prices improve. Growth in non-energy related sectors is more than offsetting the current weakness in the energy sector, which currently represents approximately 12% of our revenue.

Liquidity and Capital Resources

At September 30, 2015, DIRTT had $92.3 million in cash and cash equivalents compared with $39.8 million at December 31, 2014. At September 30, 2015, the Company had an undrawn US$18.0 million revolving operating facility.

Non-IFRS Measures

Adjusted gross profit, adjusted gross profit %, adjusted SG&A, adjusted SG&A as a percentage of revenue, EBITDA, adjusted EBITDA, and cash provided by operating activities before changes in non-cash working capital are non-IFRS measures used by management to assess the Company’s performance and financial condition. Consequently, they 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 the financial performance and the cash anticipated to be generated by 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.

Conference Call Details

DIRTT will host a conference call and webcast on Wednesday, November 4, 2015 at 9 a.m. ET, 7 a.m. MT to discuss its third quarter results in greater detail. President Scott Jenkins and CFO Derek Payne will host the call.

To access the conference call by telephone dial +1 647.427.7450 (Toronto and international callers) or 1.888.231.8191 (toll-free in North America). Please call 10 minutes prior to the start of the call. In addition, a live webcast (listen only mode) of the conference call will be available at:

http://event.on24.com/r.htm?e=1080343&s=1&k=5C2AE36EE95DADC8EA79CFED138647C6

Investors are invited to submit questions by email before and during the conference call. Please send them to ir@dirtt.net.

A replay of the conference call will be available at +1 416.849.0833 or 1.855.859.2056 by entering the passcode 65050922,from noon (ET) Wednesday, November 4, 2015 to midnight (ET) Wednesday, November 11, 2015 or through the webcast archives at http://www.newswire.ca or on DIRTT’s website at ir.dirtt.net/.

About DIRTT

DIRTT Environmental Solutions (Doing it Right This Time) uses its proprietary 3D software to design, manufacture and install fully customized prefabricated interiors. The Company’s customers in the corporate, government, education and healthcare sectors benefit from DIRTT’s precise design and costing; rapid lead times with the highest levels of customization and flexibility; and faster, cleaner construction.

DIRTT’s manufacturing facilities are in Phoenix, Savannah, Kelowna and Calgary. DIRTT’s team supports 101 DPs throughout North America, the Middle East and Asia. DIRTT trades on the Toronto Stock Exchange under the symbol “DRT.” For more information visit www.dirtt.net.

For further information, please contact:

Scott Jenkins
President
sjenkins@dirtt.net
403.723.5009

or

Derek Payne
Chief Financial Officer
dpayne@dirtt.net
403.313.9879

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 2015 and beyond; project timetables; its growth strategies and opportunities; its ability to meet working capital requirements and financial obligations; use of proceeds from the bought deal offering; and its outlook for its operations and the Canadian, US and international economies, and in particular, the US 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 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;
• 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:

• maintaining and managing growth;
• history of losses;
• risks related to new technology;
• competition risks;
• operating results and financial condition fluctuations on a quarterly and annual basis;
• risks related to intellectual property;
• risks related to additional capital requirements;
• customer base and market acceptance;
• software and product defects and design risks;
• availability of key supplies;
• dependence on key personnel;
• commodity price risk;
• credit risk;
• the effect of government regulation;
• risks related to international expansion;
• risks related to physical facilities;
• legal risks;
• foreign currency and fiscal matters;
• risks related to future acquisitions;
• risks related to Forward-Looking Information;
• reliance on third parties; 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, 2014, 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. Accordingly, the accuracy, currency and completeness of this information cannot be guaranteed. DIRTT has not independently verified any of the data from government or other third party sources referred to in this press release or ascertained the underlying assumptions relied upon by such sources.