CriticalControl Solutions Corp.
TSX : CCZ

CriticalControl Solutions Corp.

August 04, 2011 16:30 ET

CriticalControl Announces 2011 Second Quarter Financial Results

CriticalControl delivers 14th consecutive profitable quarter

CALGARY, ALBERTA--(Marketwire - Aug. 4, 2011) - CriticalControl Solutions Corp., (TSX:CCZ) today reported its financial results for the three month and six month periods ended June 30, 2011.

"Outside of the change in the nature of our fabrication business in the US, our gas measurement business in Canada and the US remains strong and our Service Bureau Operation continues to deliver operating results ahead of budget," said Alykhan Mamdani, President and CEO of CriticalControl. "Given the strategic initiatives already under execution and the early signs of success in growing the demand for our fabrication business for shale gas development, management is confident of exceeding past profitability in 2012."

Quarter ended June 30, 2011 – Q2 Highlights

Revenue

  • Revenue decreased 2% to $12.5 million in Q2 2011 from $12.8 million in Q2 2010. Year-to-date revenue decreased 4% from $25.8 million in 2010 to $24.8 million in 2011.
  • Revenue from the Service Bureau Operations increased by 11%, from $4.8 million in Q2 2010 to $5.3 million in Q2 2011. Year-to-date revenue increased by 10% from $9.9 million in 2010 to $11.0 million in 2011. The revenue increase is primarily reflective of a gradual recovery from recessionary pressures in 2010.
  • Revenue from the Canadian Energy Services business increased by 4% from $2.7 million in Q2 2010 to $2.8 million in Q2 2011. Year-to-date revenue increased by 2% from $5.6 million in 2010 to $5.8 million in 2011.
  • Revenue from the US Energy Services business declined by 16% to $4.4 million in Q2 2011 from $5.3 million in Q2 2010. Year-to-date revenue decreased by 22% from $10.3 million in 2010 to $8.1 million in 2011. The revenue decrease relates primarily to a decline in non-recurring fabrication and assembly of gas measurement and related equipment.

Gross margin percentage

  • Gross margin percentage decreased to 35.3% in Q2 2011 from 40.5% in Q2 2010. Year-to-date margin percentage decreased to 36.3% in 2011 from 39.1% in 2010.
  • Service Bureau Operations gross margin percentage increased to 32.8% in Q2 2011 from 30.8% in Q2 2010 (31.7% year-to-date in 2011 from 28.3% in 2010) resulting from streamlined operations and improved economies of scale.
  • Energy Services gross margin percentage decreased to 37.1% in Q2 2011 from 46.5% in Q2 2010 (40.0% year-to-date in 2011 from 45.8% in 2010). The primary drivers of the reduced gross margin percentages were the costs associated with transition in the US to accommodate fabrication of equipment for complex gas measurement infrastructure, the loss in economies of scale in the US due to reduced revenue, and the increased costs in the US associated with the outsourcing of the fabrication for certain pieces of equipment.

Selling and administrative expenses

  • Selling and administrative expenses increased 9% from $3.4 million in Q2 2010 to $3.7 million in Q2 2011. Year-to-date selling and administrative expenses increased 2% from $7.0 million in 2010 to $7.1 million in 2011.
  • Year-to-date selling and administrative expenses for the Service Bureau Operations decreased by 12% from 2010 to 2011 primarily due to reduced costs related to the streamlining of overhead costs for companies acquired in 2009 as part of the integration of business units.
  • Year-to-date selling and administrative expenses for the Energy Services business increased by 17% primarily related to the acquisition of TSM and the additional costs associated with the office in Girard, Ohio.
  • Year-to-date selling and administrative expenses for Corporate increased by 9%, which was primarily attributable to the changeover to IFRS and actual audit fees in excess of the estimate accrued in 2010.

Earnings

  • Net earnings decreased by $0.8 million for both the quarter and year-to-date to $0.2 million and $0.7 million respectively.
  • Earnings before income tax decreased by $1.1 million for the quarter and year-to-date to $0.3 million and $1.1 million respectively. Interest and unwinding of discounts of $0.1 million (year-to-date - $0.2 million) and depreciation and amortization of $0.7 million (year-to-date - $1.2 million) were charged to earnings during the quarter.
  • Improved profitability in the Service Bureau Operations was offset by the impact of the above mentioned reduced revenue from the US Energy Services business.

Strong balance sheet

  • Total long-term debt (inclusive of current portion) decreased by $2.4 million or 24% from June 30, 2010 to June 30, 2011, despite an additional $1.3 million of debt incurred related to 2010 acquisitions.

Launch of ProStream

  • The Corporation launched the first phase of its data consolidation development effort through the introduction of ProStream. All of the Corporation's software and data are now accessed through a unified website in the US and Canada through www.prostream.com.
  • The launch of ProStream in the US will enable the Corporation to provide digital chart integration services to all its existing and potential US customers, regardless of where they operate, through unified infrastructure.

Continued US expansion

  • On April 1, 2011, the Corporation acquired certain assets of Gas Measurement and Integration of Buckhannon, West Virginia ("GMI") for US$0.4 million cash and an US$0.8 million promissory note through its wholly owned US subsidiary, GAS Analytical Service, Inc. ("Gas"). The business of GMI acquired by CriticalControl includes the provision of gas measurement products and services, inclusive of gas chart integration, to clients in the Appalachian Basin in North Eastern US.

Outlook

The Corporation's Service Bureau Operations has expanded in early 2011 through strategic penetration of certain key government and national clients. Continued expansion is dependent upon the continued success of the Corporation's strategy and continued strengthening of the general economy. Although management is optimistic in this regard, it will continue to be vigilant in its integration efforts to consolidate its acquired operations to remain both competitive and profitable.

During 2010, several new producers entered into the Corporation's market in the North Eastern United States and drilling shifted from conventional wells to the exploration and development of shale plays. The demand on existing infrastructure and available resources resulted in a marked decline in conventional wells in the first half of 2011 over 2010.

Management is transitioning its business in the Marcellus region of the Appalachian Basin in response to the shift from predominantly conventional drilling in 2010 to drilling associated with the development of the Marcellus shale formation. This transition consists of the ramp up of field service capability and the expansion of the Corporation's fabrication facility in Indiana, Pennsylvania.

In the first half of 2010, revenue from the Corporation's fabrication business fell sharply due to the shift in demand in conventional gas measurement infrastructure in favour of the more complex gas measurement infrastructure used to measure shale gas. Whereas the Corporation was able to sustain higher margins in 2010 due the economies of scale in the fabrication of conventional infrastructure, these economies of scale need to be rebuilt for the infrastructure currently in demand. Until the completion of the Corporation's facility expansion and the ramp up in capability, the Corporation is meeting its current demand for complex gas measurement infrastructure by outsourcing the fabrication of larger pieces of equipment. As a result of the costs associated with the transition, the loss in economies of scale and the outsourced fabrication of certain pieces, margins for the Corporation's fabrication have substantially declined.

While management expects its profitability from US operations to increase with its expansion of field services and from the launch of ProStream and the associated integration of its chart integration infrastructure, margins related to fabrication will increase, but will continue to be impacted due to the increasingly competitive nature of the business compared to 2010.

Although the Corporation acquired GMI in April 2011, the office of GMI was not consolidated until Q3 2011. The associated cost synergies are expected to be realized in Q3 and Q4 of 2011.

Management is of the opinion that discoveries of natural gas in shale formations in the US such as Eagleford and Woodford in addition to Marcellus will keep natural gas supplies elevated in North America for the immediate future. Accordingly, management anticipates gas producers will continue to invest in lower cost exploration and production regions as natural gas prices remain low. In anticipation of this trend, management will pursue its strategic expansion goals in the US in 2011 and 2012.

Given the 27% non cyclical increase in fabrication revenue between Q1 and Q2 of 2011 (from $1,962 in Q1 to $2,495 in Q2 2011), the further expected increase in Q3 and Q4 of 2011, the increase in margin resulting from being able to fabricate more assemblies within the organization due to the expansion of the Corporation's facilities in Indiana, the expansion of the Corporation's core business into other parts of Pennsylvania, the benefits of the consolidation of the GMI acquisition, and the cost benefits of conversion of all the Corporation's US gas chart integration clients onto ProChart and ProStream in Q4 2011, management is confident that its US Energy Services business will increase in profitability in Q4 and move past 2010 records in 2012. Achievement of the Corporation's objectives are based on a number of assumptions including the general economic environment, management's ability to continue to streamline general and administrative expenses from acquired companies, and continued gas exploration and development activity in the North Eastern US. 40% to 50% of the Corporation's 2011 revenue is expected to be generated from the US.

Forward looking statements

Management's US expansion strategy is based upon the premise of continuing low gas prices and the investment of gas producers in lower cost, US based basins. There can be no definite assurance that management will be successful in identifying and expanding into these basins, or whether these basins will be economically viable.

Management's outlook in increasing its US based fabrication revenue is dependent upon the success of its plan to improve competitiveness through the expansion of its Indiana facility and improve its sales capability, the success and sufficiency of which cannot be assured.

Management expects to be able to increase margins over the longer term through the launch of its ProStream database and the expansion of its field services capability in the US. Both of these premises are based upon the acceptance of the Corporation's offering in the US, the success of which is dependent upon success of the Corporation's sales team and customer acceptance, which cannot be assured.

A deterioration of the economic climate or the prevalence of uncertainty for a lengthy period of time may materially affect management's outlook, in which case management's profitability targets will become dependent upon the Corporation's ability to further expand its core offering and market reach—both organically and through acquisition, which may require a longer timeframe to achieve.

About CriticalControl:

CriticalControl delivers outsourced solutions for information intensive and document intensive transactional processes. Through the implementation of technology, workflow and economies of scale we are able to provide highly secure control over sensitive information and processes in a cost effective manner.

Contact Information

  • CriticalControl Solutions Corp.
    Alykhan Mamdani
    President & CEO
    (403) 705-7500