Carlo D’Agnolo, CEO of ICT: “In 2012, markets were dominated by a continued reluctance to invest in IT, with modest signs of recovery seen in the summer. However, this upturn did not persist and after summer we were again confronted with a decline in demand and a consequent drop in employee productivity. As a result, our revenue for the year was down slightly compared to the previous year, while our operating result showed a sharp decline.
To improve profitability we implemented restructuring measures for both Germany and the Netherlands, mainly to reduce indirect costs. Regarding our professionals we are balancing between keeping the right level of expertise in anticipation of an actual market rebound, and being cost-conscious in the face of the current market reality. In 2013, the focus will be on further implementing the announced measures on the one hand and on pursuing the opportunities we clearly see in a number of our markets on the other hand.”
Notes to the results
ICT’s total revenue fell by 3% to € 77.8 million (2011: € 80.2 million). Revenue at ICT Netherlands declined by 4% to € 62.1 million (2011: € 64.9 million). Where in the first half of the year a slight increase in revenue was realized, revenue fell sharply in the second half, as a result of continuous low demand in IT markets and a consequent low utilisation rate.
In 2012, revenue at ICT Germany amounted to € 15.7 million, a modest increase of 3% compared to the previous year (€ 15.3 million). This increase was realized in the second half of the year, when revenue amounted to € 7.9 million compared to € 7.5 million in 2011. In Germany, ICT was able to improve its average return per hour. In the Netherlands it was raised slightly.
The cost of sales, mostly material, expenses and outsourced work, increased marginally to € 9.0 million (2011: € 8.9 million). Personnel costs increased slightly from € 49.8 million in 2011 to € 50.0 million this year. Operating costs decreased slightly, marketing costs increased but this was more than compensated by a reduction in other operating costs.
The total operating result before exceptional items for the year 2012 declined to € 1.7 million (2011: € 4.0 million). The operating result in the Netherlands fell sharply to € 3.8 million for the full year 2012 from € 6.7 million in 2011. This was the result of lower utilisation levels, especially December showed very low productivity levels. The lower number of direct employees in the Netherlands compared to last year also impacted the result. ICT Germany continued to make a loss also in 2012, but the operating results, before exceptional items, did improve compared to the previous year, from an operating loss of €2.7 million to an operating loss of € 2.0 million.
In Germany the operating result in Automotive has improved in 2012 compared to 2011. The result of the Neustadt operation that focused on non-Automotive activities deteriorated compared to 2011. This operation was divested at the end of 2012. The average utilization rate in Germany was lower than in the previous year, but improved in the second half of the year compared to the first half and was better than the second half in 2011. During 2012, ICT Germany has implemented the same infrastructure, i.e. systems, procedures, etc., as in The Netherlands. This has made it feasible to reduce the number of indirect cost substantially. Also the number of offices has been reduced. The full impact of this will be visible as -per first half 2013.
The operating margin before exceptional items for the group came in at 2.2% in 2012 compared to 5.0% in 2011.
Due to the bankruptcy of real estate company Eurocommerce in the second quarter of this year, ICT recognized a provision for onerous contracts, pertaining to the rent of the building in Deventer. ICT will no longer receive rental income from subletting part of this office building to Eurocommerce.
Early 2013 ICT has reached agreement with the owner of the building to pay-off its rental obligations since a co-tenant has been found. The decision was made to give up additional office space to meet the wishes of the co-lessee. The onerous contract provision at 2012 year-end was re-measured based on this new situation.
In addition, the offices in Braunschweig are no longer used. The total provision taken for onerous contracts amounts to € 1.8 million. The rental cost for these facilities and some other for which the conditions have been renegotiated, will reduce substantially as of 2013.
To enhance the profitability in both the Netherlands and Germany, ICT has implemented a number of cost reducing measures. The implementation of the group ERP system has been one of the preconditions to reduce costs in Germany. It has improved controls and delivery of effective management information. Both in the Netherlands and Germany, ICT has taken measures to further reduce the number of indirect staff notably in support areas such as Finance, IT and secretarial support. Including the divestment costs of the Neustadt activities the total cost are € 1.2 million. In addition, goodwill on ICT Germany was impaired by € 277,000, which reflects the proportional amount of goodwill that can be appropriated to the Neustadt operation relative to the overall goodwill pertaining to ICT Software Engineering GmbH. Including this impairment, the total divestment cost for Neustadt amounted to € 637,000.
German operations did not recover at a level that was earlier anticipated, with the measures explained above we believe the operation is well positioned to reach at least break-even in 2013, and thereafter should generate profits albeit at a lower level than anticipated previously. This view has led to the decision to impair goodwill for ICT Germany for a further € 2 million in addition to the € 10.2 million that was impaired in 2011.
Goodwill for the Improve Quality Services B.V. acquisition was reduced by € 1.5 million in view of the developments of results over the last years and the expectation that its profitability should improve albeit at a slower pace than early felt feasible.
In addition ICT adjusted its 2011 financial accounts to reflect its obligation to purchase the remaining 25% in the share capital of Improve. The estimated liability at year-end 2011 reduced as a result of a lower profit before tax which is the basis for the calculation of the purchase price of the remaining 25%. As a consequence, € 477,000 was recognized as a gain in the profit and loss accounts of 2012.
Towards the end of 2012, ICT reached an agreement with the works council regarding a new pension structure. The final pay pension scheme has been converted into an average pay pension scheme. As a result the pension liability on the restated balance sheet per end 2011 of € 0.7 million was released in the last quarter of 2012.
The Deferred Tax Asset for accumulated fiscal losses by ICT Software Engineering GmbH was written-off. End 2011 we held € 717,000 of carry forward losses on the balance sheet. Following a review of IFRS principles, it was decided to no longer recognize these. This does not imply that carry forward losses cannot be used to compensate any future profits.
The balance of interest income and interest charges increased to € 538,000 in 2012 (2011: € 326,000).
The group cash position was € 5.9 million at year-end 2012 compared to € 8.1 million 2011. Working capital was at a higher level at year end mainly as a consequence of the tax receivable. The company continues to focus on proper cash management, though we are faced with markets in which customers demand longer payment terms.
Relevant events occurring after balance sheet date
On 1 January 2013, 15% of the remaining 25% were acquired of Improve Quality Services. Although the initial contract stipulated that all remaining shares should be acquired, the contract was amended in order to allow the acquisition of the remaining 10% shares at a later date. The fair value for the remaining shares is estimated at an amount of € 580,000. The remaining 10% of the shares will be acquired on 1 January 2015.
At the end of 2012 the company had 772 FTEs compared to 794 at year-end 2011. In Germany, FTEs stood at 161 at the start of the year and 141 at year end 2012. This is essentially the impact of the divestment of the Neustadt operation. In the Netherlands, the number of FTEs went from 619 FTEs at the start of 2012 to 617 at year-end 2012. The number of FTEs in Poland was 14 at year-end 2012, the same as year-end 2011. Staff turnover was approximately 14%, with the turnover in Germany higher than in The Netherlands. Absence due to illness went down to 2.3% (2.8% in 2011).
ICT, in line with the strategy approved by the AGM 2 years ago, focuses on adding value through providing specialised expertise and added-value solutions based on innovative technology. This will enable the company to improve profitability and create growth going forward. ICT has developed a market approach based on verticals (functional application areas). This approach will start on a fully fledged basis as per 2013 and verticals will become the primary operating segment as per early 2013.
To make a shift to being a house with a solid mix of expertise areas including system integrator capabilities, ICT increasingly offers project based solutions which it manages itself or on time & material basis. Where relevant, ICT will continue to offer secondment solutions.
ICT meets the growing demand among its clients for affordable and proven solutions by offering repeatable and scalable innovative solutions that take into account the entire product lifecycle. Affordable solutions are also driven by making smarter use of near- and off-shoring. In addition to its successful recruitment drive in Poland, ICT is exploring options elsewhere.
Retaining and sharing knowledge within the organization is an important element in increasing the added value provided to clients. ICT employees are educated and challenged on a continuing basis, this also creates a positive environment from a recruitment perspective.
In view of the reported loss and the resultant cash outflows over the year 2012, management proposes to the shareholders, with approval of the Supervisory Board, not to distribute a dividend over fiscal year 2012. ICT feels it is in the interest of the company and its stakeholders to keep cash available to finance further efficiency measures and organic growth in the key business areas.
2012 was characterized by the postponement of investment decisions by our clients across all our markets, which put revenues and profit under pressure. We expect the economic climate to remain difficult. On the other hand, the range of measures that management has taken are expected to have a positive effect starting early 2013. Given the volatility, ICT feels it is inadvisable to express an outlook for 2013.
Developments per division
On 1 April 2012, HUMIQ was renamed ICT.
As a result of the decline in the number of projects during the year 2012, the utilization levels in the Netherlands decreased accordingly. In addition, the overall number of professionals in the Netherlands was lower due to the selective recruitment policy in combination with some layoffs of professionals with a structurally low utilization rate. This will improve productivity in 2013. The unfavorable timing of the Christmas holidays also impacted productivity. Revenue and consequently operating result decreased, especially in the second half of the year.
To improve profitability of the Dutch activities a number of measures were taken to further reduce indirect costs. These will take effect as from the first half 2013.
The recruitment activities remain focused on selectively hiring new direct employees taking into account the anticipated growth of the activities in the high-tech machine building sector. This has resulted in an increase of the number of direct employees in the second half, from 460 in August to 480 in December.
ICT’s vertical Industrial Automation showed favorable developments in the first half of the year, particularly in the area of Water. ICT acquired a number of new contracts in the first months of the year, such as the assignment with Hoogheemraadschap Rijnland. The second half of the year showed a slow down compared to the first half although several contacts were signed such as the contract with Watermaatschappij Limburg. Over the year Industrial Automation showed a positive result.
The Logistics Vertical experienced a slow year, due to the postponement of investment decisions on client side. This resulted in a slow down of new contracts. The second half of the year gained pace. ICT invested in developing targeted propositions based on our new Supply Chain Platform. A partner contract with Motorola was signed. Investments in the team have been made to ensure we are well equipped in all varieties of logistics, such as harbor logistics.
In the vertical Machine & Systems, mostly active in the OEM market, ICT’s results suffered from lower utilization. On the positive side, ICT has a large long term customer base providing relatively stable turnover. We invested in the expansion of hardware know-how and we added a know-how cluster for Windows Azure in our Groningen location, to boost the focus on Cloud Computing. We also continued to expand our partner networks, adding CoDeSys to enable us to deliver services such as machine control, product development and software services to our clients more effectively and more quickly.
Within Healthcare a successful pilot was completed with the Catharina Hospital in Eindhoven which resulted in the market launch of the innovative application mPACSView.
The Energy vertical serves the upcoming market for sustainable energy. ICT’s role in the Power Matching City project as smart grid technology partner and the partnership with GreenFlux for delivery of a platform of charging points for electronic transportation is merely the starting point of ICT’s presence in this market.
Improve Quality Services
In 2012 the market for training lagged behind as the economic situation made companies decide to postpone or even cancel training budgets. Improve however continues to invest in developing and updating courses to keep its leading market position. Revenue in 2012 increased slightly, but the operating result decreased as a result of lower occupancy degree of its courses. From 2013 onwards Improve is focusing more and more on consultancy and certifying training. Flexible staffing supports profitability at lower demand levels.
Revenue in 2012 stabilized compared to the previous year, both Prorail related revenue as well as revenue from other clients. The operating result in 2012 was also more or less on the same level as last year. The first half showed an increase in both revenue and operating result which was offset by a slight drop in the second half of the year. For 2013, we expect the revenue from ProRail to slightly grow, as well as the revenue from other customers.
ICT Germany did not contribute to the operating result in 2012, though its results did show an improvement compared to the previous year. ICT Germany welcomed more than 10 new customers and in addition to that a small number of former customers found their way back to ICT. This was reflected in an increase in revenue.
To further improve the returns of the German activities, a number of cost saving measures have been put in place. This was initiated by the implementation of the same systems and procedures which are used in The Netherlands. Also the number of offices in Germany was reduced. In December 2012, ICT divested its activities in Neustadt as they no longer complemented ICT’s core business and were structurally loss making. All remaining activities are in the Automotive Vertical. Although we are confident that the measures taken should lead to an at least break-even operation in 2013, profitability for 2014 and beyond is expected to be more moderate than anticipated 12 months ago.
Heavy emphasis was set on growth through the recruitment of new staff. Staff turnover, however, remained high due to the very tight German labour market. Nevertheless ICT managed to keep the absolute number of staff at the same level. ICT paid considerable attention to the organisation in Poland in 2012.
Last year was a volatile year for the Automotive sector. The drop in sales in the European automotive market and hesitation in other markets such as Asia caused that Tier-1 suppliers and OEMs became more reluctant to hire seconded expertise and to start software engineering projects. As a consequence, we saw delays in projects at Tier-1s and OEMs, which led to delays in the start-up of projects that negatively impacted the average utilization rate. Although volatile, the geographical integration of our automotive activities in both the Netherlands and Germany has shown already first signals of synergy.
In view of the potential of the German market and the position ICT Germany has managed to build, ICT is confident about its opportunities in the German market. Further development of solutions for the Automotive industry will be key in 2013.