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9.0 Financial Performance
9.1 Services Revenue
Services revenue was $55.4 million in the year ended March 31, 2008, an increase of $7.6 million or 16% from revenue in 2006–07. Approximately 4% of the increase was due to an increase in average billing rates. Approximately 12% was due to increased business activity.
Services Revenue (in thousands of dollars)
| 2007-08 | 2006-07 | Change | ||||
| $ | % | |||||
| Construction services | $ 27,499 | $ 24,943 | $ 2,556 | 10% | ||
| Contracting services | 6 085 | 4,879 | 1,206 | 25% | ||
| Construction and contracting services | 33,584 | 61% | 29,822 | 62% | 3,762 | 13% |
| Environmental services | 8,144 | 7,163 | 981 | 14% | ||
| Project and program management services | 11,983 | 9,014 | 2,969 | 33% | ||
| Infrastructure support services | 1,747 | 1,827 | (80) | -4% | ||
| Related services | 21,874 | 39% | 18,004 | 38% | 3,870 | 21% |
| $ 55,458 | $ 47,826 | $ 7,632 | 16% | |||
Construction services revenue
Revenue from contract management increased by 10% over the previous year, driven by increases in average billing rates, volume of work and other factors including changes in the nature and size of individual construction projects from year to year and the effort required to manage the projects.
Contracting services revenue
Contracting services revenue increased by 25%, driven by an increase in average billing rates, the volume of contracts tendered and other factors. These included the client’s increased demand for value-added services related to contracting, a change in the size and complexity of contracts tendered from year to year and the effort required to award the contracts.
Related services revenue
Revenue from related services increased by 21% in 2007–08 over 2006–07. This increase was driven by a decrease in the percentage of total revenue generated from construction and contracting services to 61% from 62% in the previous fiscal year, and an increase in the percentage generated from related services to 39%, from 38%. Some of the fluctuation in revenue reflects cyclical variations in demand related to the client’s program implementation. Notably, revenue from project and program management services increased by 33%. On the other hand, infrastructure support services revenue decreased by 4% reflecting a decrease in demand for services related to energy performance, facilities management and facilities decommissioning.
Interest revenue
Interest revenue, which is generated from the Corporation’s average current account bank balance, declined to $258,000 in the year ended March 31, 2008, a decline of $7,000 or approximately 3% from 2006–07. This small variance is the result of a decrease in the average monthly cash balance to $5.8 million in 2007–08 from $6.3 million in 2006–07 offset partially by a small increase in the average interest rate to 4.19% in 2007–08 from 4.12% in the previous year.
Interest Revenue (in thousands of dollars)
| 2007-08 | 2006-07 | Change | |
| $ | % | ||
| $ 258 | $ 265 | $ (7) | -3% |
9.2 Expenses
Salaries and employee benefits
Salaries increased to $38.5 million in 2007–08, an increase of $5.4 million or by approximately 16% over the previous fiscal year. An increase in the number of DCC employees accounted for approximately 11% of the increase; inflation and performancebased salary increases accounted for about 5%.
Employee benefits increased to $10.8 million in 2007–08, an increase of $1.3 million or approximately 14% over 2006–07. This increase is largely related to the increase in salaries offset partially by a decrease in the cost of benefits as a percentage of salary from 28.5% to 28% due mainly to a reduction in the costs associated with payments made for the buy-back of pensionable service by certain employees.
Salaries and Employee Benefits (in thousands of dollars)
| 2007-08 | 2006-07 | Change | ||
| $ | % | |||
| Salaries | $ 38,559 | $ 33,136 | $ 5,423 | 16% |
| Benefits | 10,784 | 9,456 | 1,328 | 14% |
| $ 49,343 | $ 42,592 | $ 6,751 | 16% | |
| Benefits as a percentage of salaries | 28% | 28.5% | -0.5% | |
Operating and administrative expenses
Operating and administrative expenses were $6.2 million for 2007–08, an increase of 432,000 or approximately 7% over the previous fiscal year. A variety of factors influenced these expenses:
- Rent expenses increased by approximately 19% due to additional office space procured at regional and head office locations to accommodate growth in personnel.
- Employee training and development costs increased by approximately 7%. Expressed as a percentage of salary cost, training and development in 2007–08 was 2.5% compared to 2.8% in the previous year.
- Office supplies and equipment expense decreased by 19%. In 2006–07 additional costs were incurred to accommodate the expansion and hiring of additional resources.
- Travel costs increased by 11%, primarily due to increased business activity and the development of the service lines.
- Staff relocation costs increased by approximately 38% with an increase in the number of relocations.
- Computer software and equipment expenses decreased by 25% due to exceptional spending on the Human Resources Information System (HRIS) implementation in 2006–07. Software maintenance costs increased by 10%, due primarily to purchase of new software applications.
- Leased office equipment expenses increased by 20% due to an increase in the number and the cost of equipment such as copiers, printers and faxes and printers which is tied to the increase in staff, facilities and business activity.
- Client services and communications costs increased by 11%, partially due to the costs associated with the development of an internal communications strategy and related toolkit for managers.
Operating and Administrative Expenses (in thousands of dollars)
| 2007-08 | 2006-07 | Change | ||
| $ | % | |||
| Rent | $ 1,496 | $ 1,258 | $ 238 | 19% |
| Employee training and development | 978 | 916 | 62 | 7% |
| Professional services | 753 | 743 | 10 | 1% |
| Telephone and data communications | 720 | 688 | 32 | 5% |
| Office supplies and equipment | 388 | 479 | (91) | -19% |
| Travel | 512 | 463 | 49 | 11% |
| Staff relocation | 370 | 268 | 102 | 38% |
| Computer software and equipment | 126 | 167 | (41) | -25% |
| Software maintenance | 148 | 135 | 13 | 10% |
| Leased office equipment | 143 | 119 | 24 | 20% |
| Client services and communications | 131 | 118 | 13 | 11% |
| Recruiting costs | 104 | 100 | 4 | 4% |
| Other overhead expenses | 359 | 391 | 17 | 5% |
| $ 6,228 | $ 5,845 | $ 432 | 7% | |
Amortization of property, plant and equipment
Amortization of property, plant and equipment decreased by 3% or $30,000 during fiscal 2007–08 and was due to the lower levels of capital expenditures in fiscal 2007-08 compared to the previous fiscal year.
Amortization (in thousands of dollars)
| 2007-08 | 2006-07 | Change | ||
| $ | % | |||
| Amortization of property, plant and equipment | $ 851 | $ 881 | $ (30) | -3% |
9.3 Net (loss)
The loss for the year ended March 31, 2008 was $706,000 compared to a loss of $1.2 million in the previous year. Although service revenues increased 16%, the gross margin declined to 40% from 41% as the increase in salaries and benefits costs exceeded the increase in the average billing rate. Overhead salaries and benefits as a percentage of services revenues decreased to 29% in 2007–08 from 30% in the previous year, contributing to improved overall results. Consistent with the Corporation’s financial management policy, the losses of the past two fiscal years will be taken into consideration in determining the financial plans and budgets for the 2008-09 fiscal year.
Net (loss) (in thousands of dollars)
| 2007-08 | 2006-07 | Change | ||
| $ | % | |||
| Net (loss) | $ (706) | $ (1,227) | $ 521 | -42% |
9.4 Liquidity and Capital Resources
The Corporation’s financial management policy and financial statements assume that the Corporation is a going concern and its stated mandate will continue for the foreseeable future. DCC’s financial management policy is to generate sufficient cash to meet its anticipated operating and capital requirements and settle its financial obligations as they become due. In determining the amount of cash reserves carried for operating needs, the Corporation considers the risks inherent in its operations; particularly the risks associated with potential and unanticipated changes to the amount or timing of construction project expenditures by DND.
To fulfill its mandate and remain ready and able to serve its client at all times, the Corporation must constantly react to changing business conditions and be able to financially support and sustain its operations when sudden or unanticipated business changes occur. As a result, the Corporation allows for reasonable levels of operating contingencies in determining the amount of cash reserves it carries. Management constantly monitors and reviews cash levels to determine their appropriateness. Any surpluses or shortfalls that may occur occasionally are taken into consideration in formulating future business plans. In particular, cash surpluses judged to be in excess of operating requirements are returned to the client through the setting of billing rates for future services.
Cash
The Corporation does not have segregated cash reserves. Cash that exceeds short-term operational requirements is invested in accordance with the investment policy approved by the Board of Directors.
The cash balance at March 31, 2008 was $6.135 million, a decrease of $1.7 million or 22% from the previous year. During fiscal 2007–08, the Corporation experienced a shortfall of $925,000 in cash from operating activities and spent $785,000 on capital expenditures.
Due from related parties
In 2007–08 there was a major fluctuation in trade receivables caused by an increase in the average number of days that accounts were outstanding to 53 at March 31, 2008 from 42 days at the end of fiscal 2006–07. A significant amount of receivables were not collected until the first week of the new fiscal year.
Current liabilities were $4.3 million at March 31, 2008, a decrease of $782,000 or 15% from March 31, 2007. The variance is primarily attributable to three factors: a decrease of $902,000 in the accounts payable trade, entirely attributable to the Public Works and Government Services Canada funded payable, a decrease of $100,000 in goods and services tax (GST) payable; and an increase of $250,000 in the accrual amount associated with vacation, furlough and overtime expenses.
Other factors that affect this balance from year to year include the amount of the current portion of employee future benefits and the timing of expenditure incurrence and payment.
Liquidity and Capital Resources (in thousands of dollars)
| 2007-08 | 2006-07 | Change | ||
| $ | % | |||
| Cash | $ 6,135 | $ 7,845 | $ (1,710) | -22% |
| Due from related parties | $ 9,500 | $ 7,351 | $ 2,149 | 29% |
| Current liabilities | $ 4,340 | $ 5,122 | $ (782) | -15% |
9.5 Provision for Employee Future Benefits
The Corporation records a liability for the estimated cost of severance, including health care benefits for its retirees. This estimate is actuarially determined. The accrued severance and other benefits balance as at March 31, 2008 was $9.8 million, an increase of $1.7 million or approximately 21% from the previous fiscal year. The balance increased by the amount of benefits accrued in the current fiscal year of $2 million and decreased by the amount of benefits paid in the current fiscal year of $327,000. The provision for employee future benefits fluctuates from year to year due to a combination of factors including the inflation rate, workforce changes, changes in the discount rate (which is determined by reference to market interest rates), changes in the average rate of salary increases, and changes to the average expected remaining service lifetime of active employees, due to the changing demographics. Note 5 to the financial statements describes the actuarial assumptions used in determining the provision. This liability is primarily long term in nature and the Corporation estimates the current payout amount based on the best information available. Although the Corporation has not specifically segregated funds for this obligation, it has sufficient capital resources to meet its employee future benefit payment obligations as they become due.
Provision for Employee Future Benefits (in thousands of dollars)
| 2007-08 | 2006-07 | Change | ||
| $ | % | |||
| Accrued future benefits | $ 10,013 | $ 8,313 | $ 1,700 | 20% |
| Less: current portion | 228 | 237 | (9) | -4% |
| Long-term portion | $ 9,785 | $ 8,076 | $ 1,709 | 21% |
9.6 Capital Expenditures
The Corporation’s capital expenditures for fiscal 2007–08 totaled $785,000, a decrease of $208,000 or 21% from the previous year. The decrease is mainly due to the large amount of spending on leasehold improvements and the purchase of furniture and supplies for new office space which occurred in the previous fiscal year.
Capital Expenditures (in thousands of dollars)
| 2007-08 | 2006-07 | Change | ||
| $ | % | |||
| Software | $ 226 | $ 251 | $ (25) | -10% |
| Computer equipment | 453 | 376 | 77 | 20% |
| Furniture and equipment | 97 | 279 | (182) | -65% |
| Leasehold improvements | 9 | 87 | (78) | -90% |
| $ 785 | $ 993 | $ (208) | -21% | |
9.7 Actual Performance Versus Plan
The 2007–08 to 2011–12 Corporate Plan Summary (the Plan) was tabled in the House of Commons in summer 2007.
The table below indicates the Corporation’s actual performance for fiscal 2007–08 compared to the projections in the Plan. Services revenue was $2 million or 4% above plan due mainly to higher than planned business volume.
Interest revenue was $72,000 or 39% above Plan. This variance is due to higher than planned average interest rates during the year.
Salaries and employee benefits were $2.9 million or 6% higher than Plan. This increase is largely the result of a combination of higher than planned staff growth and increases in salaries and benefits. Operating and administrative expenses were consistent with the Plan.
Amortization of property, plant and equipment was $128,000 or 13% lower than Plan. This variance is the result of the lower level of capital expenditures compared to Plan.
The Corporation had planned for a break even position for fiscal 2007–08. Although revenues were higher than planned, higher than expected increases to salaries and employee benefits cost contributed to a loss of $706,000.
Capital expenditures were $334,000 or 30% lower than Plan. This decrease is due to lower than expected spending for furniture and equipment as well as leasehold improvements.
Actual Performance Versus Plan (in thousands of dollars)
| Actual | Plan | Change | ||
| 2007-08 | 2007-08 | $ | % | |
| Revenue | ||||
| Services | $ 55,458 | $ 53,418 | $ 2,040 | 4% |
| Interest | 258 | 186 | 72 | 39% |
| 55,716 | 53,604 | 2,112 | 4% | |
| Expenses | ||||
| Salaries and employee benefits | 49,343 | 46,462 | 2,881 | 6% |
| Operating and administrative | 6,228 | 6,161 | 67 | 1% |
| Amortization of property, plant and equipment | 851 | 979 | (128) | -13% |
| 56,422 | 53,602 | 2,820 | 5% | |
| Net income | $ (706) | $ 2 | $ (708) | -354% |
| Capital expenditures | $ 785 | $ 1,119 | $ (334) | -30% |
Five-Year Summary Financial Information (in thousands of dollars)
| 2007-08 | 2006-07 | 2005-06 | 2004-05 | 2003-04 | |
| Revenue | |||||
| Services | $ 55,458 | $ 47,826 | $ 42,481 | $ 34,641 | $ 29,417 |
| Interest | 258 | 265 | 164 | 93 | 126 |
| 55,716 | 48,091 | 42,645 | 34,734 | 29,543 | |
| Expenses | |||||
| Salaries and employee benefits | 49,343 | 42,592 | 35,310 | 28,671 | 24,009 |
| Operating and administrative | 6,228 | 5,845 | 5,108 | 4,268 | 4,428 |
| Amortization of property, plant and equipment | 851 | 881 | 769 | 808 | 830 |
| 56,422 | 49,318 | 41,187 | 33,747 | 29,267 | |
| Net (loss) income | $ (706) | $ (1,227) | $ 1,458 | $ 987 | $ 276 |
| Retained earnings, beginning of year | 4,092 | 5,319 | 3,861 | 2,874 | 2,598 |
| Retained earnings, end of year | $ 3,386 | $ 4,092 | $ 5,319 | $ 3,861 | $ 2,874 |
| Assets | |||||
| Cash | $ 6,135 | $ 7,845 | $ 7,295 | $ 5,152 | $ 4,307 |
| Accounts receivable, related parties, prepaids and advances | 9,847 | 7,850 | 7,648 | 6,152 | 5,306 |
| Property, plant and equipment | 1,529 | 1,595 | 1,483 | 1,504 | 1,444 |
| $ 17,511 | $ 17,290 | $ 16,426 | $ 12,808 | $ 11,057 | |
| Liabilities | |||||
| Accounts payable, related parties and accrued liabilities | $ 4,112 | $ 4,885 | $ 4,216 | $ 3,361 | $ 3,655 |
| Provision for employee benefits | 10,013 | 8,313 | 6,891 | 5,586 | 4,528 |
| 14,125 | 13,198 | 11,107 | 8,947 | 8,183 | |
| Capital stock and retained earnings | |||||
| Common shares | - | - | - | - | - |
| Retained earnings | 3,386 | 4,092 | 5,319 | 3,861 | 2,874 |
| 3,386 | 4,092 | 5,319 | 3,861 | 2,874 | |
| $ 17,511 | $ 17,290 | $ 16,426 | $ 12,808 | $ 11,057 | |
| Cash flows from (used in) | |||||
| Operating activities | $ (925) | $ 1,543 | $ 2,891 | $ 1,713 | $ 1,467 |
| Acquisitions of property, plant and equipment | (785) | (993) | (748) | (868) | (1,392) |
(1,710)
| 550 |
2,143 |
845 |
75 |
| |
| Cash, beginning of year | 7,845 | 7,295 | 5,152 | 4,307 | 4,232 |
| Cash, end of year | $ 6,135
| $ 7,845 |
$ 7,295 |
$ 5,152 |
$ 4,307 |
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