CALGARY, ALBERTA--(Marketwire - March 7, 2013) - CriticalControl Solutions Corp. (TSX:CCZ) today reported its financial results for the year ended December 31, 2012.
"We have executed on our strategic objectives, increased our recurring revenue and reduced our debt by $1.6 million, despite the challenging environment," said Alykhan Mamdani, President & CEO of CriticalControl. "Our continued investment in new products, sales and marketing will provide improved and sustainable long term viability."
Annual 2012 highlights
- Total revenue of $46.8 million in 2012 represents a 5% decrease from $49.4 million in 2011. Increased revenue (primarily recurring) of $1.9 million from the DGL, Vertex and GMI acquisitions, an increase of $1.5 million in recurring revenue from Canadian and US Energy Services, and the impact of foreign exchange were more than offset by a $4.0 million drop in revenue from the Corporation's Service Bureau Operations and a decline of $2.0 million in non-recurring revenue from US and Canadian Energy Services.
- Revenue from the Canadian Energy Services business increased by 11%, to $12.8 million in 2012 from $11.5 million in 2011. The increase in revenue (primarily recurring) of $1.8 million from the acquisitions of DGL and Vertex, and an increase of $0.2 million in recurring revenue from other sources, was partially offset by decreases in non-recurring revenue of $0.6 million.
- Revenue from the US Energy Services business increased slightly from $17.6 million in 2011 to $17.7 million in 2012. Increased revenue (primarily recurring) of $0.1 million from the acquisition of GMI, an increase of $1.3 million in recurring revenue from other sources, and the impact of foreign exchange were offset by decreases in non-recurring revenue of $1.4 million.
- Revenue from the Corporation's Service Bureau Operations decreased by 20%, from $20.4 million in 2011 to $16.4 million in 2012 due in part to the completion of two large imaging contracts in 2011 that were not replaced.
Gross margin (1) percentage
- Gross margin percentage for the Corporation increased from 36.0% in 2011 to 37.2% in 2012. Although total revenue for the Corporation declined by $2.5 million for the year, management was able to control the impact by improving gross margin on revenue to the point where earnings before taxes was only impacted by $0.4 million, or 13.8% of the revenue decline. The impact on gross margin before depreciation and amortization was $0.2 million, or 6.9% of the revenue decline.
- Canadian Energy Services gross margin percentage decreased from 63.2% in 2011 to 57.1% in 2012. However, when the impact of the lower margin activities of Vertex and DGL are excluded, the decrease is much less significant, from 63.2% in 2011 to 61.6% in 2012.
- US Energy Services gross margin percentage increased by 3.9 points from 24.6% in 2011 to 28.5% in 2012. The increase was driven by a focus on recurring revenue, pricing initiatives and cost control.
- Service Bureau Operations gross margin percentage increased from 30.6% in 2011 to 31.1% in 2012.
Selling and administrative expenses
- Selling and administrative expenses for the Corporation decreased by $0.1 million from $14.4 million in 2011 to $14.3 million in 2012, despite the additional expenses associated with the acquisition of DGL and Vertex.
- Selling and administrative expenses for the Service Bureau Operations decreased by $0.5 million compared to 2011, which is primarily attributable to reduced sales and marketing activities, reduced administrative and human resources salaries, and reduced office rent in Winnipeg.
- Selling and administrative expenses for the Canadian Energy Services business increased by $0.7 million compared to 2011, primarily related to increased sales and marketing activities, increased facility costs and amortization of intangibles in relation to the acquisitions of DGL and Vertex, and increased salaries in relation to strategic hires.
- Selling and administrative expenses for the US Energy Services business increased by $0.4 million compared to 2011, primarily due to increased staffing to position the business for growth, increased employee benefit costs, some of which were included in cost of revenue for 2011, and certain costs moving from Corporate to US Energy Services.
- Selling and administrative expenses for Corporate decreased by $0.6 million compared to 2011, which is primarily attributable to non-recurring costs in 2011, reduced staffing, reduced reliance on consultants, and certain costs moving from Corporate to US Energy Services.
Other operating expenses
- Other operating expenses increased by $0.5 million compared to 2011. Termination costs declined from 2011 to 2012, but this was more than offset by the 2012 loss on disposal of leasehold improvements resulting from moving locations in Winnipeg, and favorable onerous lease and contingent consideration provision estimate changes netted with the 2011 expenses that did not recur in 2012. For the Corporation as a whole, the impact of leasehold improvements charged to loss on disposal in Winnipeg was offset by the impact of the reversal of related deferred lease inducements. The reversal of deferred lease inducements, however, was charged to cost of revenue and selling and administrative expenses, not other operating expenses.
- Earnings before tax decreased by $1.2 million from $1.5 million in 2011 to $0.3 million in 2012. When the impact of changes in estimates, unrealized foreign exchange, 2011 unexpected Edmonton rent adjustments included in 2012, and increased research and development costs in 2012 are excluded, the decline in earnings before tax is only $358 thousand, of which $319 thousand represents increased depreciation and amortization.
Cash flow, working capital (1) and debt
- Working capital decreased by $2.2 million from $4.4 million in 2011 to $2.3 million in 2012. The 2012 number is impacted by US$1.5 million coming due in November 2013 on a promissory note that management plans to refinance over 12 months with its bank.
- In spite of decreased earnings, net cash from operating activities increased by $1.9 million, from $1.5 million in 2011 to $3.4 million in 2012.
- Total loans and borrowings, net of cash, decreased by $1.7 million from 2011 to 2012, despite an additional $1.0 million of debt incurred related to the DGL acquisition.
Outlook and forward looking statements
Investment in gas exploration and production in the Canadian Western Sedimentary basin remains unstable, and management expects volatility in exploration during 2013. During 2012, the Corporation replaced a significant amount of recurring revenue from shut-in wells with revenue from product innovation and new products coming to market. Growth in 2013 will be dependent upon the Corporation successfully exploiting products it has recently brought to market, innovation of existing solutions, and the introduction of new products in order to replace revenue from depleted or shut-in wells. Current interest in the Corporation's new products and innovations on existing products provides management optimism for modest growth in its Canadian Energy Services business segment.
Continued growth in the Corporation's Canadian Energy Services business segment is dependent upon the success of the Corporation's sales effort, market acceptance of the Company's innovations and new products, and the successful and timely development of other products in 2013, all of which constitute risk factors that may negatively impact growth and create risk of the Corporation being unable to replace recurring revenue from depleted or shut-in wells.
During 2011, exploration activity in the Appalachian basin related primarily to shale gas and the deployment of multi-frac wells. This spur in activity invited greater competition into the region, primarily related to fabrication. The volatility in the price of gas during 2012 reduced exploration, and competition has subsequently declined. The uncertainty caused by the influx and departure of competition has created an opportunity for the Corporation's US Energy Services business, which has operated in the region for the past 35 years. The size of the Corporation's field staff, historic operations and track record have resulted in the division becoming the preferred vendor for measurement related services to a number of customers. This has resulted in strong 2012 growth in recurring field services, and management expects to retain this level of activity into 2013.
The Corporation is building a sales team in the Appalachian basin to maximize penetration in the region with its technology products, which have been revamped for the US market. The Corporation intends to roll out its technologies to existing customers in the first half of 2013 and, given the investment in sales, expects growth in the second half of 2013.
Growth from the Corporation's US Energy business is dependent upon acceptance of the Corporation's technology solutions, the success of its sales capability and the successful hiring and training of staff to manage growth, none of which can be guaranteed. These risk factors, should they arise, will negatively affect management's outlook and reduce the Corporation's profitability.
The current economic environment in Canada and the changing nature of print and document management service businesses has resulted in companies with related ability or capacity entering into the imaging market, resulting in increased competition for the Corporation's Service Bureau Operations. In addition, offshore players are increasing their reach into Canada and are offering discounted data entry services, which erode overall margins. Management expects this trend to continue into 2013 and beyond. During 2012, management attempted to drive efficiencies from its existing operations to become more competitive and to target its solutions away from commoditized imaging and data entry services in order to improve margins. Management was not able to make the transition in 2012 and therefore the weak 2012 results are expected to continue into 2013.
The Corporation has signed a contract with a large financial institution to provide day-forward imaging services and is negotiating the scope of work and the completion of a pilot. This contract should result in growth commencing in Q4 of 2013.
Based on change in operational management for the Service Bureau Operations late in 2012, combined with changes in sales personnel and approach, management is optimistic that it can generate revenue and profit growth in 2014.
Management's longer term outlook for the Service Bureau Operations is subject to the successful change in its sales strategy and the success of its sales capability, which cannot be assured. The failure to mitigate these risks would result in reduced performance from expectations. In addition, the contract signed with a large financial institution for day-forward imaging is dependent upon the completion of the pilot and the financial institution's ability to change its business processes, the timing of which carries uncertainty, which may in turn push revenue expectations to a later date.
In a world of escalating globalization, with an increasingly transient workforce, enterprises are constrained from maintaining their knowledge and are forced to focus on their key market advantages to remain competitive. CriticalControl provides these enterprises with secure and cost effective solutions for the completion of document and information intensive business processes through an integrated offering of software, outsourced services and optimized business processes.