CALGARY, ALBERTA--(Marketwire - May 2, 2012) - CriticalControl Solutions Corp. (TSX:CCZ) today reported its financial results for the three months ended March 31, 2012.
"Our strategic investments over the past year in our energy services business produced solid growth," said Alykhan Mamdani, President and CEO of CriticalControl. "Continued success and corresponding profitability will require the vigilant execution of our corporate strategy of expanding our business lines deeper into our oil and gas clients' business processes and penetrating the midstream operations of existing and new clients."
Quarter ended March 31, 2012 highlights
- Total revenue of $12.9 million for the three months ended March 31, 2012 represents a 6% increase from the same period in 2011, driven by growth from the Corporation's Energy Services business in Canada and the US.
- Revenue from the Corporation's Service Bureau Operations decreased by 15%, from $5.6 million in Q1 2011 to $4.8 million in Q1 2012, driven by the completion of two large imaging projects in Q3 2011.
- Revenue from the Canadian Energy Services business increased by 15%, to $3.4 million in Q1 2012 from $3.0 million in Q1 2011, resulting from the acquisitions of Vertex in Q4 2011 and DGL early in Q1 2012.
- Revenue from the US Energy Services business increased significantly by 30%, to $4.7 million in Q1 2012 from $3.6 million in Q1 2011, driven by organic growth of recurring revenue from the Corporation's sales efforts and the realignment of its fabrication business.
Gross margin percentage
- Gross margin percentage for the Corporation of 38% in Q1 2011 compared to 37% in Q1 2012.
- Service Bureau Operations gross margin percentage remained consistent at 31%.
- Canadian Energy Services gross margin percentage declined from 62% in Q1 2011 to 57% in Q1 2012, primarily attributable to lower margins associated with the DGL acquisition, economic factors putting pressure on gas producers, and increasing labour costs due to oil sands activity.
- US Energy Services gross margin percentage of 28% in Q1 2011 compared to 27% in Q1 2012.
Selling and administrative expenses
- Selling and administrative expenses for the Corporation increased by 11% from $3.4 million in Q1 2011 to $3.8 million in Q1 2012.
- Selling and administrative expenses for the Service Bureau Operations increased by $87,000, primarily due to amortization.
- Selling and administrative expenses for the Canadian Energy Services business increased by $191,000, primarily related to increased sales and marketing activities, facility costs related to acquisitions, and strategic hires.
- Selling and administrative expenses for the US Energy Services business increased by $177,000 due to increased staffing to position the business for growth, increased sales and marketing activities, and facility lease costs related to the Pennsylvania expansion to facilitate more complicated fabricated assemblies.
- Selling and administrative expenses for Corporate decreased by $78,000 attributable to non-recurring costs in 2011.
Other operating expenses
- Other operating expenses increased by $243,000 from Q1 2011 to Q1 2012, primarily related to costs associated with downsizing the Winnipeg operations and one-time integration costs associated with the DGL acquisition.
- Net earnings for the quarter decreased by $464,000 when compared to Q1 2011 to $50,000, primarily because of strategic investments in sales and research & development, non-recurring restructuring costs, and increased amortization.
Cash flow and balance sheet
- Working capital increased by $0.5 million (14%) from $3.5 million at March 31, 2011 to $4.0 million at March 31, 2012. From December 31, 2011 to March 31, 2012, working capital decreased by $0.5 million.
- Net cash from operations increased from $45,000 in Q1 2011 to $2.0 million in Q1 2012.
- Total loans and borrowings increased by $0.3 million from March 31, 2011 to March 31, 2012 despite an additional $1.8 million of debt incurred related to 2011 and 2012 acquisitions. Total loans and borrowings decreased by $0.4 million from December 31, 2011 to March 31, 2012 despite an additional $1.0 million of debt incurred related to 2012 acquisitions.
CriticalControl continues to grow during a period of industry changes and commodity price volatility. In an effort to drive stronger margins, management consolidated the imaging and data entry operations in Winnipeg with the Edmonton and Toronto service bureaus in late March and early April 2012, reducing full time staff by approximately 22 and resulting in a regional office rather than a full service bureau in Winnipeg. Management expects costs from the change in 2012 to offset any gain in margin and savings in operating costs, but the change is expected to have a positive impact on profitability in 2013 and onward.
Management is pleased with the reported results of its drive to increase revenue in its US Energy Services business. Management expects revenue for 2012 from its US Energy Services business to be in line with the second half of 2011, resulting in a significantly higher contribution to income in 2012. Profitability is expected to be impacted in 2012 by increased overhead associated with staff additions in finance, sales and operations in the US. Management expects this impact to be countered by increased efficiencies gained from the continued implementation of the Corporation's gas chart integration technologies from Canada across all US operations during the first half of 2012, and other efficiencies.
Gas prices did not stabilize at the lows seen at the end of 2011 as generally expected, but instead declined further during the first quarter of 2012. Management has seen an escalation in the shut in of low production gas wells during this period, putting additional downward pressure on the Corporation's historic revenue streams. Management has undertaken an ambitious expansion of its technologies in its Canadian Energy Services business in late 2011 in order to offset the decreased revenue caused by the shut ins. This effort was based on transforming the Corporation's historic volumetric business (consisting of managing gas measurement and composition production data) into a full scale system to manage oil and gas production data from the well head to the financial accounting system. This effort includes expansion into the management of oil, and oil related production data, and the expansion of managing production data deeper into the Corporation's client base to business processes that use the data currently provided by the Corporation's solutions. The expansion includes the acquisition of Vertex whereby the Corporation derived the capability to manage volumetric data through midstream operations, including the functions of daily allocations, production accounting and financial accounting. Additionally, the acquisition of assets from DGL early in 2012 resulted in the Corporation gaining the ability to manage the production accounting and financial accounting business processes of producers on an outsourced basis.
The necessity of executing management's plan to offset declining revenue from its historic revenue base is even more essential given the reduced gas prices seen in Q1 2012. In addition to its existing research & development budget, the Corporation expects to spend up to $500,000 in 2012 to rewrite certain applications acquired by the Corporation. Unless the Corporation is successful in its current strategy, revenue from the Corporation's historic revenue streams will diminish significantly, which will impact profitability.
Notwithstanding these additional costs, the increased associated sales and marketing costs already being incurred, and the price of natural gas being significantly lower than previously predicted, management is optimistic that its efforts will bear fruit by increasing revenue in 2012 to offset any revenue loss from the shut in of less productive wells and to pay for the Corporation's increased costs. Management's plan, if successful, will result in improved margins in 2012 and strong revenue and profit growth in 2013.
There were certain costs incurred in Q1 2012 that management does not expect to continue going forward in relation to the Winnipeg downsizing and the integration of DGL. These costs are expected to total at least $340 thousand and include termination benefits of approximately $150,000, onerous lease charges of $50,000 and selling and administrative expenses of at least $140,000.
Forward looking statements
Management expects to be able to sustain sufficient revenue from clients currently served by its Winnipeg office to pay for continued costs in Winnipeg, and contribute sufficient margin to its Edmonton and Toronto operations to positively impact overall profitability. Retention of such revenue during the transition cannot be assured and the failure of retention will reduce revenue from the Service Bureau Operations business segment without increasing profitability.
Management's outlook in increasing its US based fabrication, assembly and equipment revenue in 2012 to the levels achieved in the second half of 2011 cannot be assured as such revenue is not recurring. Additionally, the Corporation's fabrication, assembly and equipment business is now geared towards larger equipment used in shale gas production, the continued development of which is dependent upon the financial viability of gas production in the Marcellus shale play. The financial viability of gas production in the Marcellus shale play is not yet predictable and can only be proven with the passage of time.
Expected profitability in the Corporation's US operations will be dependent upon the acceptance of the Corporation's clients in the US of the Corporation's technologies, and general economic conditions including the price of natural gas, neither of which can be assured or predicted.
The Corporation has undertaken a strategic direction to penetrate further into the Corporation's client base in Canada with integrated technologies. There can be no assurance of client acceptance of this strategy, nor can there be assurance that the Corporation will be successful in the integration of its current technologies with those that have been recently acquired.
The continued decline in gas prices during Q1 2012 has had a negative impact on the Corporation's recurring revenue. Representations have been made that the current growth in the Corporation's business is offsetting the decline. The pace of shut in of non-profitable wells is not predictable in the current economic climate. Should the number of wells being shut in increase, management's guidance will be negatively impacted.
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.