Extended Warranty operating income increased 35% for the twelve months ended December 31, 2020 compared to the same period for 2019, while non-GAAP adjusted EBITDA increased 27% for the twelve months ended December 31, 2020, compared to the same period for 2019; both increases were partially driven by the acquisition of PWI on December 1, 2020;
Kingsway Financial Services Inc. (“Kingsway” or the “Company”) today announced its operating results for the three and twelve months ended December 31, 2020, which includes the following highlights: Kingsway Reports Fourth Quarter and Full Year 2020 Results
- Net cash provided by operating activities improved to $1.7 million for the twelve months ended December 31, 2020, compared to cash used in operating activities of ($0.8) million during the same period in 2019;
- GAAP net loss was ($2.5) million and ($5.4) million for the three and twelve months ended December 31, 2020, compared to a GAAP net loss of ($3.1) million and ($4.3) million for the same periods in 2019; Non-GAAP adjusted income (loss) was $1.0 million and ($1.0) million for the three and twelve months ended December 31, 2020, compared to a Non-GAAP adjusted loss of ($0.7) million and ($3.4) million for the same periods in 2019.
On December 1, 2020, Kingsway closed on its acquisition of PWI Holdings, Inc. (collectively with its subsidiaries Preferred Warranties, Inc., Superior Warranties, Inc., Preferred Warranties of Florida, Inc., and Preferred Nationwide Reinsurance Company, Ltd., “PWI”) for a total purchase price of $24.4 million (subject to customary adjustments). The addition of PWI further strengthens Kingsway’s position in the vehicle service contract and extended warranty industry.
In connection with the acquisition, Kingsway fully repaid a legacy loan (the “KWH Legacy Loan”) to Kingsway Warranty Holdings LLC (“KWH”). Kingsway financed the acquisition and the payoff of the KWH Legacy Loan with a combination of debt financing provided by CIBC Bank USA and cash on hand. KWH borrowed a total of $25.7 million, $24.7 million in the form of a term loan and $1 million in the form of a revolver (together, the “KWH New Loan”). The KWH New Loan has a variable interest rate, with the initial annual interest rate equal to 3.75%. The KWH New Loan requires quarterly principal and interest payments and the term loan matures on December 1, 2025. Based upon current interest rates, Kingsway anticipates incurring slightly less total interest expense under the KWH New Loan than the KWH Legacy Loan.
Non-GAAP Adjusted (Loss) Income
For the three months ended December 31, 2020, non-GAAP adjusted (loss) income improved from a loss of ($0.7) million in 2019 to income of $1.0 million in 2020, while for the twelve months ended December 31, 2020 non-GAAP adjusted loss improved from ($3.4) million in 2019 to ($1.0) million in 2020.
Reconciliations of net loss to non-GAAP adjusted (loss) income are presented in the attached schedules.
Extended Warranty
The Extended Warranty service fee and commission revenue increased 3.3% (or $1.5 million) to $47.6 million for the year ended December 31, 2020 compared with $46.1 million for the year ended December 31, 2019. Service fee and commission revenue was impacted by the following in 2020:
- A $2.5 million increase due to the inclusion of PWI in 2020 following its acquisition effective December 1, 2020;
- A $2.2 million increase at Geminus primarily due to the inclusion of only ten months of results in the 2019 period post-acquisition, which was partially offset by lower contract sales due to the COVID-19 pandemic;
- A $0.3 million increase in PWSC revenue, driven by the stronger housing market in the second half of 2020;
- A $2.9 million decrease at Trinity driven by reduced revenues from its equipment breakdown and maintenance support services due to the loss of a major customer and impacts from the COVID-19 pandemic, which was partially offset by an increase in revenues from its extended warranty services product; and
- A $0.6 million decrease at IWS, due primarily to lower contract sales due to the COVID-19 pandemic.
The Extended Warranty operating income was $6.2 million for the year ended December 31, 2020 compared with $4.6 million for the year ended December 31, 2019. The 35% increase in operating income is primarily due to the following:
- A $0.7 million increase due to the inclusion of PWI in 2020 following its acquisition effective December 1, 2019;
- A $1.1 million increase at Geminus primarily due to the inclusion of Geminus for the entire twelve months of 2020 following its acquisition effective March 1, 2019, as well as cost control initiatives in place due to the COVID-19 pandemic;
- A $0.8 million increase at PWSC, primarily due to increased revenue and lower general and administrative expenses due to cost control initiatives in place due to the COVID-19 pandemic and continuing operating efficiencies;
- A $0.3 million decrease at IWS primarily due to a decrease in revenue, partially offset by cost control initiatives in place due to the COVID-19 pandemic; and
- A $0.7 million decrease at Trinity driven by reduced revenues in its equipment breakdown and maintenance support services, partially offset by a related decrease in cost of services sold, operating expenses and increased margin on the extended warranty services product, compared to 2019.
Extended Warranty Non-GAAP adjusted EBITDA increased by $1.5 million (or 27%) to $7.0 million for the twelve months ended December 31, 2020, compared with $5.5 million for the same period in 2019, primarily due to the increase in Extended Warranty operating income as explained above.
Reconciliations of operating income to Extended Warranty Non-GAAP adjusted EBITDA are presented in the attached schedules.
Leased Real Estate
The Leased Real Estate contractually-fixed rental income was $13.4 million for the years ended December 31, 2020 and 2019. Operating (loss) income was ($0.5) million and $2.8 million for the years ended December 31, 2020 and 2019, respectively. The 2020 operating loss includes litigation expenses of $1.3 million and litigation settlement-related fees of $2.6 million, while 2020 operating income includes $0.6 million of litigation expenses.
In March 2021, the Company reached a settlement agreement that resolves litigation brought against certain of the Company’s subsidiaries (the “CMC Settlement Agreement”). In connection with the CMC Settlement Agreement, the Company recorded a liability of $2.6 million for the 80% management fee due to DGI-BNSF Corp. (“DGI”) at December 31, 2020, which is included in general and administrative expenses in the consolidated statement of operations for the year ended December 31, 2020. Of the $2.6 million, $1.6 million relates to rental income collected in periods prior to 2020.
Refer to Note 29, “Commitments and Contingencies,” to the Company’s 2019 Annual Report on Form 10-K for further information regarding the litigation. Refer to Note 27, “Commitments and Contingencies,” to the Company’s 2020 Annual Report on Form 10-K, that the Company anticipates filing on or before March 31, 2021, for further information regarding the CMC Settlement Agreement.
Impact of COVID-19
In March 2020, the outbreak of COVID-19 caused by a novel strain of the coronavirus was recognized as a pandemic by the World Health Organization, and the outbreak has become increasingly widespread in the United States, including in the markets in which we operate. The COVID-19 outbreak has had a notable impact on general economic conditions, including but not limited to the temporary closures of many businesses; “shelter in place” and other governmental regulations; and reduced consumer spending due to both job losses and other effects attributable to COVID-19. There remain many unknowns and the Company continues to monitor the expected trends and related demand for its services and has and will continue to adjust its operations accordingly.
The near-term impacts of COVID-19 are primarily with respect to the Extended Warranty segment. As consumer spending has been impacted, including a decline in the purchase of new and used vehicles, and many businesses through which the Company distributes its products either remain closed or are open but with capacity constraints, the Company has seen cash flows being affected by a reduction in new warranty sales for vehicle service agreements. With respect to homeowner warranties, Kingsway saw an initial reduction in new enrollments in its home warranty programs associated with the impact of COVID-19 on new home sales in the United States.
The Company could experience other potential impacts as a result of COVID-19, including, but not limited to, potential impairment charges to the carrying amounts of goodwill, indefinite-lived intangibles and long-lived assets, the loss in value of investments, as well as the potential for adverse impacts on the Company’s debt covenant financial ratios. Actual results may differ materially from the Company’s current estimates as the scope of COVID-19 evolves or if the duration of business disruptions is longer than initially anticipated. The Company continues to monitor the impact of the COVID-19 outbreak closely. However, the extent to which the COVID-19 outbreak will impact Kingway’s operations or financial results is uncertain.
About the Company
Kingsway is a holding company that owns or controls subsidiaries primarily in the extended warranty, asset management and real estate industries. The common shares of Kingsway are listed on the New York Stock Exchange under the trading symbol “KFS.”
Non U.S. GAAP Financial Measure
The Company believes that non-GAAP adjusted net earnings (loss) and non-GAAP adjusted EBITDA, when presented in conjunction with comparable GAAP measures, provide useful information about the Company’s operating results and enhances the overall ability to assess the Company’s financial performance. The Company uses non-GAAP adjusted net earnings (loss) and non-GAAP adjusted EBITDA, together with other measures of performance under GAAP, to compare the relative performance of operations in planning, budgeting and reviewing the performance of its business. Non-GAAP adjusted net earnings (loss) and non-GAAP adjusted EBITDA allow investors to make a more meaningful comparison between the Company’s core business operating results over different periods of time. The Company believes that non-GAAP adjusted net earnings (loss) and non-GAAP adjusted EBITDA, when viewed with the Company’s results under GAAP and the accompanying reconciliations, provide useful information about the Company’s business without regard to potential distortions. By eliminating potential differences in results of operations between periods caused by the factors listed in the attached schedules, the Company believes that non-GAAP adjusted net earnings (loss) and non-GAAP adjusted EBITDA can provide useful additional basis for comparing the current performance of the underlying operations being evaluated.
Forward-Looking Statements
This press release includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are not historical facts, and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. Words such as “expects,” “believes,” “anticipates,” “intends,” “estimates,” “seeks” and variations and similar words and expressions are intended to identify such forward-looking statements; however, the absence of any such words does not mean that a statement is a not a forward-looking statement. Such forward-looking statements relate to future events or future performance, but reflect Kingsway management’s current beliefs, based on information currently available. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward-looking statements. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to the section entitled “Risk Factors” in the Company’s 2019 Annual Report on Form 10-K and subsequent Form 10-Qs and Form 8-Ks filed with the Securities and Exchange Commission. Additional information will also be set forth in the Company’s 2020 Annual Report on Form 10-K, which the Company anticipates filing on or before March 31, 2021. Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.
Additional Information
Additional information about Kingsway, including a copy of its Annual Reports can be accessed on the EDGAR section of the U.S. Securities and Exchange Commission’s website at www.sec.gov, on the Canadian Securities Administrators’ website at www.sedar.com, or through the Company’s website at www.kingsway-financial.com.
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