Calian Technologies Ltd.
TSX : CTY

Calian Technologies Ltd.

May 05, 2010 13:09 ET

Calian Reports Second Quarter Results

In line with management expectations

OTTAWA, ONTARIO--(Marketwire - May 5, 2010) - (All amounts in this release are in Canadian Dollars)

Calian Technologies Ltd. (TSX:CTY) today released unaudited results for the second quarter ended March 31, 2010. Revenues for the quarter were $53 million, a decrease of 11% from the $60 million reported in the same quarter of the previous year. Net earnings were $3.1 million or $0.40 per share basic and diluted, compared to $5.2 million or $0.67 per share basic and diluted in the same quarter of the previous year. For the six-month period ending March 31, 2010, the Company reported revenues of $105 million and net earnings of $6.5 million or $0.84 per share basic and diluted, compared to revenues of $115 million and net earnings of $8.5 million or $1.09 per share basic and diluted in the prior year.

"Results for the quarter were in line with management's expectations, albeit lower than the prior year. Similar to last quarter, SED revenues were down substantially as certain large satellite engineering projects were essentially completed during the prior fiscal year. Also, custom manufacturing services abated to more traditional levels as peak demand from our main customer receded in accordance with reduced U.S. military requirements. Our BTS division experienced a slight drop in revenues due to federal government spending restraints in the last quarter of the government fiscal year. Also, the wrap-up of our Olympic security readiness review resulted in reduced activity levels on that particular contract" stated Ray Basler, President and CEO.

"As expected, realized margins were also depressed. With lower levels of activity, SED did not achieve the economies of scale and the resultant high margins experienced in the prior period. Accordingly, margins gravitated towards traditional levels. BTS margins also decreased slightly, a reflection of the mix of business and also the competitive pressures experienced in our short-term staffing group relative to last year" continued Basler.

"Overall, we met our internal expectations for the quarter and with continuing strong cash flows, we have continued our quarterly dividend at $0.20 per share for the quarter. We have an excellent backlog of work and a strong base of customers which gives us confidence in meeting our guidance issued today" continued Basler.

While we believe that market potential remains strong and while we are expecting exciting opportunities to materialize in the future, we do not expect to match the unprecedented level of performance achieved in 2009. Therefore, management expects to return to more traditional levels of revenues and earnings for the balance of 2010. While revenues ultimately realized will be dependent on the extent and timing of future contract awards, at this stage in the year we expect revenues for 2010 to be in the range of $205 million to $225 million and net earnings per share in the range of $1.50 to $1.80 per share.

About Calian

Calian sells technology services to industry and government in Canada and around the world. Calian provides customers with ready access to an exceptional team of engineers, telecommunications and technology professionals, health care professionals and other highly qualified staff. The Business and Technology Services Division augments customer workforces with flexible short and long-term placements, recruitment and outsourcing of engineering, health care professionals and other skilled professionals. The Systems Engineering Division plans, designs and implements solutions for many of the world's space agencies and leading communications satellite manufacturers and operators, as well as providing contract manufacturing services for customers in North America.

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DISCLAIMER

Certain information included in this press release is forward-looking and is subject to important risks and uncertainties. The results or events predicted in these statements may differ materially from actual results or events. Such statements are generally accompanied by words such as "intend", "anticipate", "believe", "estimate", "expect" or similar statements. Factors which could cause results or events to differ from current expectations include, among other things: the impact of price competition; scarce number of qualified professionals; the impact of rapid technological and market change; loss of business or credit risk with major customers; technical risks on fixed price projects; general industry and market conditions and growth rates; international growth and global economic conditions, and including currency exchange rate fluctuations; and the impact of consolidations in the business services industry. For additional information with respect to certain of these and other factors, please see the Company's most recent annual report and other reports filed by Calian with the Ontario Securities Commission. Calian disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. No assurance can be given that actual results, performance or achievement expressed in, or implied by, forward-looking statements within this disclosure will occur, or if they do, that any benefits may be derived from them.

CALIAN TECHNOLOGIES LTD.
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
(Canadian dollars in thousands, except per share data)
         
         
  Three months ended
March 31
  Six months ended
March 31
 
  2010   2009   2010   2009  
Revenues $ 53,141   $ 59,922   $ 105,249   $ 115,020  
Cost of revenues 43,055   46,141   84,473   89,691  
Gross profit 10,086   13,781   20,776   25,329  
Selling and marketing 1,233   1,223   2,488   2,405  
General and administration 3,769   3,968   7,674   8,188  
Facilities 716   779   1,446   1,533  
Stock option compensation (Note 9) 3   22   14   69  
Amortization 223   272   443   539  
Prior years investment tax credits (Note 8) -   (311 ) -   (311 )
Earnings before other income and expense, interest income and income tax expense 4,142   7,828   8,711   12,906  
Unrealized gain (loss) on fair value of conversion options of long-term investment (Note 6) (18 ) 5   62   (250 )
Loss on share exchange (Note 6) -   (125 ) -   (125 )
Interest income (Note 7) 192   160   381   397  
Earnings before income tax expense 4,316   7,868   9,154   12,928  
Income tax expense – current 1,109   2,597   2,379   4,283  
Income tax expense – future 125   70   250   125  
  1,234   2,667   2,629   4,408  
NET EARNINGS 3,082   5,201   6,525   8,520  
Retained earnings, beginning of period 36,213   35,223   42,692   35,148  
Excess of purchase price over stated capital on repurchase of shares (Note 9) -   (1,815 ) (793 ) (3,865 )
Dividends (1,557 ) (1,159 ) (10,686 ) (2,353 )
Retained earnings, end of period $ 37,738   $ 37,450   $ 37,738   $ 37,450  
Net earnings per share: (Note 10)                
  Basic $ 0.40   $ 0.67   $ 0.84   $ 1.09  
  Diluted $ 0.40   $ 0.67   $ 0.84   $ 1.09  
Weighted average number of shares: (Note 10)                
  Basic 7,770,011   7,726,110   7,768,091   7,838,997  
  Diluted 7,798,922   7,745,254   7,796,724   7,848,933  
 
 
CALIAN TECHNOLOGIES LTD.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(Canadian dollars in thousands)
       
       
  March 31, 2010 September 30, 2009  
ASSETS      
       
CURRENT ASSETS      
  Cash  $ 36,271 $ 43,662  
  Accounts receivable 34,778 32,816  
  Work in process 2,963 2,766  
  Prepaid expenses (Note 5) 3,532 5,656  
  Future income taxes 855 1,472  
  Derivative assets (Note 13) 90 679  
  78,489 87,051  
LONG-TERM INVESTMENT (Note 6) 3,261 3,037  
EQUIPMENT 4,465 4,300  
INTANGIBLE 340 420  
GOODWILL 9,518 9,518  
  $ 96,073 $ 104,326  
       
LIABILITIES AND SHAREHOLDERS' EQUITY      
       
CURRENT LIABILITIES      
  Accounts payable and accrued liabilities $ 20,076 $ 22,644  
  Unearned contract revenue 18,957 20,792  
  Derivative liabilities (Note 13) 15 377  
  39,048 43,813  
CONTINGENCIES (Note 11)      
       
SHAREHOLDERS' EQUITY      
  Share capital (Note 9)  18,703 17,719  
  Contributed surplus (Note 9) 204 285  
  Retained earnings 37,738 42,692  
  Accumulated other comprehensive income (loss) 380 (183 )
  57,025 60,513  
  $ 96,073 $ 104,326  
 
 
CALIAN TECHNOLOGIES LTD.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Canadian dollars in thousands)
 
 
  Three months ended
March 31
Six months ended
March 31
 
  2010   2009 2010   2009  
Net earnings $ 3,082   $ 5,201 $ 6,525   $ 8,520  
  Unrealized gain (loss) on translating financial statements of self-sustaining foreign operation, net of tax of nil (2009 – nil) (47 ) 43 (72 ) 300  
  Unrealized gain (loss) on fair value of host contract component of long-term investment, net of tax of nil (2009 – nil) -   4 -   (382 )
  Change in deferred gain on derivatives designated as cash flow hedges, net of tax of $224 and $367 year to date (2009 - $729 and $536 year to date) 465   1,518 763   1,115  
Other comprehensive income 418   1,565 691   1,033  
Comprehensive income $ 3,500   $ 6,766 $ 7,216   $ 9,553  
 
 
CALIAN TECHNOLOGIES LTD.
UNAUDITED CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE LOSS
(Canadian dollars in thousands)
 
 
  March 31, 2010   September 30, 2009  
Unrealized cumulative loss on translating financial statements of self-sustaining foreign operation $ (382 ) $ (310 )
Unrealized cumulative gain on fair value of host contract component of long-term investment -   128  
Deferred gain (loss) on derivatives designated as cash flow hedges 762   (1 )
Accumulated other comprehensive income (loss), end of period 380   (183 )
Retained earnings, end of period 37,738   42,692  
Accumulated other comprehensive income (loss) and retained earnings, end of period $ 38,118   $ 42,509  
 
 
CALIAN TECHNOLOGIES LTD.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Canadian dollars in thousands)
 
 
  Three months
March 31
  Six months
March 31
 
    2010     2009     2010     2009  
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES                        
Net earnings $ 3,082   $ 5,201   $ 6,525   $ 8,520  
Items not affecting cash:                        
  Interest accreted on host contract component of long-term investment (Note 7)   (149 )   (113 )   (290 )   (230 )
  Employee stock purchase plan compensation expense   20     9     32     18  
  Stock option compensation (Note 9)   3     22     14     69  
  Write-off of Nortel receivable   -     -     -     757  
  Amortization   223     272     443     539  
  Future income tax expense   125     70     250     125  
  Unrealized (gain) loss on fair value of conversion options of long-term investment (Note 6)   18     (5 )   (62 )   250  
  Loss on share exchange (Note 6)   -     125     -     125  
    3,322     5,581     6,912     10,173  
Change in non-cash working capital                        
  Accounts receivable   (2,578 )   (5,277 )   (2,258 )   (11,309 )
  Work in process   596     657     (197 )   (354 )
  Prepaid expenses (Note 5)   2,454     22     2,123     (254 )
  Accounts payable and accrued liabilities   3,460     8,259     (944 )   7,213  
  Unearned contract revenue   (3,713 )   (3,925 )   (1,835 )   (6,779 )
    3,541     5,317     3,801     (1,310 )
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES                        
  Issuance of common shares   375     283     1,013     283  
  Dividends   (1,557 )   (1,159 )   (10,686 )   (2,353 )
  Repurchase of shares (Note 9)   -     (2,185 )   (918 )   (4,848 )
    (1,182 )   (3,061 )   (10,591 )   (6,918 )
CASH FLOWS USED IN INVESTING ACTIVITIES                        
  Equipment expenditures   (262 )   (470 )   (528 )   (955 )
    (262 )   (470 )   (528 )   (955 )
FOREIGN CURRENCY ADJUSTMENT   (48 )   43     (73 )   300  
NET CASH INFLOW (OUTFLOW)   2,049     1,829     (7,391 )   (8,883 )
CASH, BEGINNING OF PERIOD   34,222     16,615     43,662     27,327  
CASH, END OF PERIOD $ 36,271   $ 18,444   $ 36,271   $ 18,444  
 
 
 
CALIAN TECHNOLOGIES LTD.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the periods ended March 31, 2010 and 2009
(Canadian dollars in thousands, except per share amounts)
(Unaudited)

1. ACCOUNTING POLICIES

These interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles. They do not include all of the information and notes required by generally accepted accounting principles for annual financial statements.

These interim consolidated financial statements have been prepared using the same accounting policies used in the preparation of the audited annual consolidated financial statements for the year ended September 30, 2009 with the exception of the application of the accounting policy described in Note 2. These interim consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements. 

2. ADOPTION OF NEW ACCOUNTING POLICY

Effective October 1, 2009, management adopted amended Section 3855, Financial Instruments – Recognition and Measurement. Based on the amendments, management has the choice of classifying the host contract portion of its investment in AIM Healthcare Group (AIM) as an Available-For-Sale asset or as a Loans and Receivables asset. Management chose to classify the host contract as a Loans and Receivables asset. Loans and Receivable assets are recognized at amortized cost. At October 1, 2009, the carrying amount of the investment was decreased by $128 with a corresponding adjustment to Accumulated Other Comprehensive Income to return the investment to amortized cost. The value of the embedded derivative is still adjusted to fair value through net income.

In December 2009, the CICA issued EIC-175 Multiple Deliverable Revenue Arrangements. This new EIC will be applicable to financial statements relating to the Company's annual financial statements beginning on October 1, 2011. Earlier adoption is permitted. The abstract addresses some aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. The Company does not expect to early adopt this abstract.

3. ACCOUNTING ESTIMATES

For the periods ended March 31, 2010 and March 31, 2009, no material changes in estimates have been made.

Effective October 1, 2009, the Company modified its depreciation methodology from declining balance to straight-line depreciation, with amortization calculated over 5 to 10 years, to better reflect the estimated usage of the Company's equipment and intangible. The change did not have a material impact on the financial statements.

4. SEASONALITY

The Company's revenues and earnings have historically been subject to some quarterly seasonality due to the timing of vacation periods and statutory holidays.

5. PREPAID EXPENSES

    March 31, 2010   September 30, 2009
Prepaid operating expenses $ 790 $ 635
Milestone advance to subcontractor   2,742   5,021
  $ 3,532 $ 5,656

6. LONG-TERM INVESTMENT

On July 11, 2006, the Company invested $3,623 in Med-Emerg International Inc. (Med-Emerg) in the form of convertible preferred shares which included $116 of acquisition costs. On January 20, 2009, Med-Emerg announced that it successfully merged with AIM Health Group Inc. (AIM) in an all-stock transaction. At that time, Calian surrendered its preferred shares in Med-Emerg in exchange for a secured convertible debenture of AIM with a face value of $3,897. The share exchange resulted in a loss on exchange of $125.

The non-interest bearing debenture is convertible into 6,831,372 common shares of AIM at the Company's option. AIM is also entitled to cause the debenture to be converted into common shares when in any given 6-month period, trading volumes of AIM common shares exceed 1,089,642 shares and the weighted average share price is at least $0.57. Conversion is limited to 50% of the debenture in any 6-month period. On a fully converted basis, this investment represents a 6% interest based on the current number of common shares outstanding. The debenture is subordinated to secured creditors of record on January 20, 2009 and any bank indebtedness. The debenture is due to be redeemed in two instalments; $1,000 payable in cash on January 1, 2011 and the remaining $2,897 payable on July 11, 2011 in cash or AIM common shares at the option of AIM based on the then fair market value of the common shares.

Carrying value of long-term investment:

Med-Emerg long-term investment, at cost $ 3,623  
Med-Emerg cumulative unrealized gain on conversion options   (1,878 )
Med-Emerg cumulative interest accretion on host contract   897  
Med-Emerg fair value of investment on January 20, 2009, prior to exchange $ 2,642  
Loss on share exchange   (125 )
AIM Long-term investment, at cost $ 2,517  
AIM cumulative unrealized gain on conversion options   97  
AIM cumulative interest accretion on host contract   647  
Carrying value of investment at March 31, 2010 $ 3,261  

The Company's long-term investment is considered a hybrid instrument as it includes rights of conversion to common shares. The conversion options are considered to be embedded derivatives to be separated and valued independent of the underlying host contract. The conversion options are measured at fair value with changes in fair value recorded in net income. The fair value of the conversion options applies the following data and assumptions to the Black-Scholes option pricing model:

AIM 60 day weighted average share price $0.17  
Risk free interest rate 1.07 %
Actual stock price volatility 101 %
Expected life of options 1.25 years  

Under the Black-Scholes model, a one cent increase (decrease) in AIM share price would result in a $15 increase (decrease) in the fair value of the conversion options. A 10% increase (decrease) in the volatility of AIM stock price would result in a $32 increase (decrease) in the fair value of the conversion option. AIM shares are traded on the TSX Venture Exchange and currently trade in limited volume.

7. INTEREST INCOME

Interest income is comprised of the following amounts:

  Three months ended
March 31
Six months ended
March 31
  2010 2009 2010 2009
Interest earned on cash balances $ 43 $ 47 $ 91 $ 167
Accreted interest on host contract component of long-term investment 149 113 290 230
Interest income $ 192 $ 160 $ 381 $ 397

8. PRIOR YEARS INVESTMENT TAX CREDITS

During the second quarter of 2009, the Company received an assessment from the Canada Revenue Agency regarding the Company's re-filing of its 2006 scientific research and experimental development (R&D) claim allowing additional R&D costs to be claimed. As a result the Company received a refund of $311 of investment tax credits related to its 2006 R&D activities.

9. SHARE CAPITAL

Employee Share Purchase Plan

During the second quarter of 2010 (2009), the Company issued 31,661 (24,049) shares under the Company's Employee Share Purchase Plan at an average price of $10.87 ($11.77).

Share repurchase

During the quarter ending (and six-month period ending) March 31, 2010, the Company acquired $NIL (53,170) of its outstanding common shares at an average price of $17.24 per share for a total of $NIL ($918) including related expenses, through normal course issuer bids in place during the period. During the quarter ending (and six-month period ending) March 31, 2009, the Company acquired 174,700 (467,300) of its outstanding common shares at an average price of $12.48 ($10.35) per share for a total of $2,185 ($4,848) including related expenses, through normal course issuer bids in place during the period. The excess of the purchase price over the stated capital of the shares was charged to retained earnings. 

Stock options

The Company has an established stock option plan, which provides that the Board of Directors may grant stock options to eligible directors and employees. Under the plan, eligible directors and employees are granted the right to purchase shares of common stock at a price established by the Board of Directors on the date the options are granted but in no circumstances below fair market value of the shares at the date of grant. A total of 500,000 common shares are authorized for issuance under the plan, of which 250,000 are issued at March 31, 2010. At March 31, 2010 there were 89,800 options outstanding. No options were issued during the six-month period ending March 31, 2010.

During the quarter ended and six-month period ending March 31, 2010 and relating to options issued in prior years, under the fair value based method, stock-option compensation expense within general and administrative costs of $3 and $14 was recorded related to stock options compared to $22 and $69 recorded in the quarter and six-month period ended March 31, 2009. The offsetting credit was applied to contributed surplus. 

The compensation costs related to the issuance of options during the year ended September 30, 2009 were calculated using the Black-Scholes option pricing model using the following assumptions:

Risk free interest rate 2.3 %
Expected dividend yield 7.2 %
Stock price volatility 26.7 %
Expected life of options 3.47 years  

10. NET EARNINGS PER SHARE

The diluted weighted average number of shares has been calculated as follows:

  Three months ended
March 31
Six months ended
March 31
  2010 2009 2010 2009
Weighted average number of shares – basic 7,770,011 7,726,110 7,768,091 7,838,997
Addition to reflect the dilutive effect of employee stock options 28,911 19,144 28,633 9,936
Weighted average number of shares – diluted 7,798,922 7,745,254 7,796,724 7,848,933

Options that are anti-dilutive because the exercise price was greater than the average market price of the common shares are not included in the computation of diluted earnings per share. For the quarter ending (and six-month period ending) March 31, 2010, no options were considered anti-dilutive. For the quarter ending (and six-month period ending) March 31, 2009, 230,855 (240,064) options were excluded from the above computation of diluted weighted average number of shares.

11. CONTINGENCIES

In the normal course of business, the Company is party to employee related claims. The potential outcomes related to existing matters faced by the Company are not determinable at this time. The Company intends to defend these actions, and management believes that the resolution of these matters will not have a material adverse effect on the Company's financial condition.

12. SEGMENTED INFORMATION

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, regarding how to allocate resources and assess performance. The Company's chief operating decision maker is the Chief Executive Officer. The Company operates in two reportable segments described below, defined by their primary type of service offering, namely Systems Engineering and Business and Technology Services.

  • Systems Engineering involves planning, designing and implementing solutions that meet a customer's specific business and technical needs, primarily in the satellite communications sector.
  • Business and Technology Services involves both short and long-term placements of personnel to augment customers' workforces (Staffing) as well as the long-term management of projects, facilities and customer business processes (Outsourcing).

The Company evaluates performance and allocates resources based on earnings before interest and income taxes. The accounting policies of the segments are the same as those described in the significant accounting policies note in the audited annual consolidated financial statements.

Three months ended March 31, 2010  
  Systems Engineering Business and Technology Services Corporate   Total  
Revenues $ 15,726 $ 37,415 $ -   $ 53,141  
Earnings before other expense, interest income and income tax expense   2,622   2,120   (600 )   4,142  
Unrealized loss on fair value of conversion options of long-term investment (Note 6)                 (18 )
Interest income (Note 7)                 192  
Income tax expense                 (1,234 )
Net earnings               $ 3,082  
                     
                     
                 
Total assets other than cash and goodwill $ 16,509 $ 33,599 $ 176 $ 50,284
Goodwill   -   9,518   -   9,518
Cash   -   -   36,271   36,271
Total assets $ 16,509 $ 43,117 $ 36,447 $ 96,073
Equipment and intangible expenditures $ 121 $ 141 $ - $ 262
   
   
Three months ended March 31, 2009  
    Systems Engineering   Business and Technology Services   Corporate     Total  
Revenues $ 20,982 $ 38,940 $ -   $ 59,922  
Earnings before other income, interest income and income tax expense   5,951   2,666   (789 )   7,828  
Unrealized gain on fair value of conversion options of long-term investment (Note 6)                 5  
Loss on share exchange (Note 6)                 (125 )
Interest income (Note 7)                 160  
Income tax expense                 (2,667 )
Net earnings               $ 5,201  
         
         
September 30, 2009                
Total assets other than cash and goodwill $ 17,436 $ 33,625 $ 85 $ 51,146
Goodwill   -   9,518   -   9,518
Cash   -   -   43,662   43,662
Total assets $ 17,436 $ 43,143 $ 43,747 $ 104,326
Equipment and intangible expenditures $ 755 $ 637 $ - $ 1,392
                 
                 
                 
Six months ended March 31, 2010  
    Systems Engineering   Business and Technology Services   Corporate     Total  
Revenues $ 30,703 $ 74,546 $ -   $ 105,249  
Earnings before other income, interest income and income tax expense   5,021   4,926   (1,236 )   8,711  
Unrealized gain on fair value of conversion options of long-term investment (Note 6)                 62  
Interest income (Note 7)                 381  
Income tax expense                 (2,629 )
Net earnings               $ 6,525  
   
                     
                     
Six months ended March 31, 2009  
    Systems Engineering   Business and Technology Services   Corporate     Total  
Revenues $ 40,684 $ 74,336 $ -   $ 115,020  
Earnings before other expense, interest income and income tax expense   9,561   4,816   (1,471 )   12,906  
Unrealized loss on fair value of conversion options of long-term investment (Note 6)                 (250 )
Loss on share exchange (Note 6)                 (125 )
Interest income (Note 7)                 397  
Income tax expense                 (4,408 )
Net earnings               $ 8,520  
   
                     

13. HEDGING

Foreign currency risk related to contracts
The Company is exposed to foreign currency fluctuations on its cash balance, accounts receivable, accounts payable and future cash flows related to contracts denominated in a foreign currency. Future cash flows will be realized over the life of the contracts. The Company utilizes derivative financial instruments, principally in the form of forward exchange contracts, in the management of its foreign currency exposures. The Company's objective is to manage and control exposures and secure the Company's profitability on existing contracts and therefore, the Company's policy is to hedge 100% of its foreign currency exposure. The Company does not utilize derivative financial instruments for trading or speculative purposes. The Company applies hedge accounting when appropriate documentation and effectiveness criteria are met.

The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives to specific firm contractually related commitments on projects. 

The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. Hedge ineffectiveness has historically been insignificant.

The forward foreign exchange contracts primarily require the Company to purchase or sell certain foreign currencies with or for Canadian dollars at contractual rates. At March 31, 2010, the Company had the following forward foreign exchange contracts:

Type Notional Currency Maturity   Equivalent Cdn. Dollars   Fair Value March 31, 2010
SELL 20,997 USD April 2010 $ 21,414 $ 86
SELL 16,486 EURO April 2010   22,648   2
BUY 194 GPB April 2010   297   2
Derivative assets           $ 90
               
BUY 3,195 USD April 2010 $ 3,259 $ 14
BUY 13,815 EURO April 2010   18,979   1
Derivative liabilities           $ 15

A 10% strengthening (weakening) of the Canadian dollar against the following currencies at March 31, 2010 would have increased (decreased) other comprehensive income as related to the forward foreign exchange contracts by the amounts shown below.

  March 31,2010  
USD $ 1,809  
EURO 367  
GBP (30 )
  $ 2,146  

Management Discussion and Analysis – March 31, 2010:

(Canadian dollars in thousands, except per share data)

RESULTS OF OPERATIONS

Revenues:

For the second quarter 2010, revenues were $53,141 compared to $59,922 reported for the same period in 2009 representing an 11% decrease over the prior year. For the six-month period ending March 31, 2010 revenues were $105,249 compared to $115,020 for 2009.

Systems Engineering's (SED) revenues were $15,726 in the quarter and $30,703 on a year-to-date basis representing a decrease of 25% from the $20,982 and $40,684 recorded last year. As expected, the second quarter returned to more traditional levels of activity in both the satellite engineering and contract manufacturing sectors due to the completion or near-completion of several large contracts in 2009 and decreased demand in the custom manufacturing area. Due to the project nature of its business, the SED division is susceptible to significant variation in volumes of activity from period to period.

Business and Technology Services (BTS) revenues were $37,415 in the quarter and $74,546 on a year-to-date basis representing a decrease of 4% and a 0.3% increase from the $38,940 and $74,336 for the same period last year. Belt-tightening by government departments in the last quarter of the government fiscal year and completion of a certain contract that will not be re-competed until later in the year, contributed to the drop in revenues. Also, the increased activity related to the Olympic readiness review came to an end early in the quarter.

Management expects that the marketplace over the next few quarters will continue to be very competitive. The market conditions for SED are expected to be positive and should present new opportunities. However, overall revenues are expected to recede to more traditional levels until new programs are captured. Current BTS backlog is expected to provide a solid level of activity on existing contracts and new opportunities are expected to be available. However, the timing of future contract awards, customer demand in the short-term and the impact of government spending restrictions will ultimately determine BTS revenues for the next few quarters.

Gross margin:

Gross margin was 19.0% in the second quarter of 2010, compared to the 23.0% reported in the second quarter a year ago. On a year-to-date basis the Company reported margins of 19.7% compared to 22.0% for the same period last year. The consolidated gross margin for 2010 was affected by lower margins realized in both divisions and was also biased by the smaller proportion of SED revenues.

Gross margin in Systems Engineering was 25.5% this quarter compared to 34.1% in the second quarter of 2009 and was 25.5% for the six-month period ending March 31, 2010 compared to 30.5% for the same period last year. With the level of business returning to more traditional levels, especially in the contract manufacturing sector, economies of scale achieved in the prior year could not be realized. Also, the retirement of a technical risk on a certain contract in the second quarter of last year helped boost the margins in that period.

Gross margin in Business and Technology Services was 16.2% compared to the 17.0% reported in the second quarter of 2009 and 17.3% for the six-month period compared to 17.4% for the same period last year. Gross margin for the quarter decreased compared to last year as a result of a slight change in project mix during the quarter. Also, the highly competitive nature of the short-term staffing market since the economic downturn continues to make it difficult to sustain prior year margin levels.

Because of the significant difference in gross margin between each of the two divisions, the overall gross margin of the Company is dependent on the relative level of revenue generated from each division. Management will continue to focus on execution in order to maximize margins. However, the highly competitive environment faced by SED and BTS coupled with the continued volatility of the Canadian dollar could impact margins. In addition, management does not expect that the margins realized by SED throughout the balance of 2010 will equate to those earned for comparable quarters in 2009. 

Operating expenses:

Selling and marketing, general and administration and facilities totalled $5,718 or 10.8% of revenues in the second quarter of 2010 compared to $5,970 or 10.0% of revenues reported in the second quarter of 2009. For the six-month period ending March 31, 2010 operating expenses totalled $11,608 compared to $12,126 in 2009, which included an allowance for doubtful accounts of $757 set up against the Nortel accounts receivable. 

Operating expenses are down compared to the same quarter in the prior year mainly as a result of decreased compensation related to lower profitability. Selling and marketing costs are up marginally as a result of increased activity in this area. For the balance of 2010, management expects to maintain its current level of operating expenses as a percentage of revenues.

Interest income:

Interest income for the second quarter of 2010 was $192 compared to $160 in 2009. For the six-month period ending March 31, 2010, interest income was $381 compared to $397 in 2009. Interest income is comprised of interest earned on the Company's cash balances and accrued interest related to the investment in AIM Health Group Inc. (AIM). Interest income increased over the prior year's second quarter due to the compounding effect of accreted interest on the investment in AIM.

Unrealized gain (loss) on fair value of conversion options of long-term investment:

The Company recorded a loss of $18 for the quarter and a gain of $62 on a year-to-date basis compared to a gain of $5 and a loss of $250 for 2009 relating to the fair value of conversion options of long-term investment. The reported unrealized gain or loss is a reflection of the movement in quoted market prices of AIM shares.

Income taxes:

The provision for income taxes for the second quarter of 2010 was $1,234 or 28.6% of earnings before tax compared to $2,667 in 2009 or 33.9% of earnings before tax. On a year-to-date basis, the provision for income taxes was $2,629 or 28.7% of earnings before tax compared to $4,408 in 2009 or 34.1% of earnings before tax. The decrease in the realized tax rate is the result of a continued decrease in prescribed federal and provincial tax rates, the recognition of an adjustment related to the 2009 tax returns, and the non-taxable nature of the changes in the AIM investment. The effective tax rate for 2010, prior to considering the impact of non-taxable transactions, is expected to be approximately 30%.

Net earnings:

As a result of the foregoing, in the second quarter of 2010 the Company recorded net earnings of $3,082 or $0.40 per share basic and diluted, compared to $5,201 or $0.67 per share basic and diluted in the same quarter of the prior year. For the six-month period ending March 31, 2010 the Company reported net earnings of $6,525 or $0.84 per share basic and diluted compared to $8,520 or $1.09 per share basic and diluted in the same period of the prior year.

BACKLOG

The Company's backlog at March 31, 2010 was $970 million with terms extending to fiscal 2018. This compares to $873 million reported at the end of September 2009. Contracted Backlog represents maximum potential revenues remaining to be earned on signed contracts, whereas Option Renewals represent customers' options to further extend existing contracts under similar terms and conditions.

Most fee for service contracts provide the customer with the ability to adjust the timing and level of effort throughout the contract life and as such the amount actually realized could be materially different from the original contract value. The following table represents management's best estimate of the backlog realization for 2010, 2011 and beyond based on management's current visibility into customers' existing requirements.

Management's estimate of the realizable portion (current utilization rates and known customer requirements) is less than the total value of signed contracts and related options by approximately $210 million. The majority of this amount relates to the health services support contract. The Company's policy is to reduce the reported contractual backlog once it receives confirmation from the customer that indicates the utilization of the full contract value may not materialize.

(dollars in millions) Fiscal 2010 Fiscal 2011 Beyond 2011 Estimated
realizable
portion of
Backlog
Excess
over
estimated
realizable
portion
TOTAL
Contracted Backlog $ 70 $ 107 $ 116 $ 293 $ 106 $ 399
Option Renewals 29 41 397 467 104 571
TOTAL $ 99 $ 148 $ 513 $ 760 $ 210 $ 970
             
Business and Technology Services $ 72 $ 120 $ 480 $ 672 $ 210 $ 882
Systems Engineering 27 28 33 88 - 88
TOTAL $ 99 $ 148 $ 513 $ 760 $ 210 $ 970

FINANCIAL CONDITION AND CASHFLOWS

Operating activities:

Cash inflows from operating activities for the six-month period ending March 31, 2010 were $3,801 compared to cash outflows of $1,310 in 2009. Although earnings decreased this year, working capital element changes were not as severe as in the prior year. Working capital fluctuations are in line with the ebbs and flows of the business. Specifically accounts receivable and accounts payable had increased during the six-month period ending March 31, 2009 mainly as a result of an increase in business and the achievement of several milestones late in the second quarter of 2009. The market for the Systems Engineering Division is characterized by long-term contracts with billings tied to milestones achieved, which often results in significant working capital requirements. Conversely, given the nature of this business, it is sometimes possible to negotiate advance payments on contracts. Such advance payments give rise to unearned revenue that will be realized as revenue over the course of the contract. As at March 31, 2010, the Company's total unearned revenue amounted to $18,957. This compares to $6,631 one year earlier, with the increase primarily attributable to a significant advance payment from ESA related to the recently signed contract for a third deep space antenna.

Financing activities:

During the six-month period ending March 31, 2010, the Company paid quarterly dividends totalling $0.37 per share compared to 2009 when the Company paid quarterly dividends totalling $0.30 per share. In the first quarter of 2010, the Company also paid a special dividend of $1.00 in recognition of the exceptional performance in 2009. The Company intends to continue with its quarterly dividend policy for the foreseeable future.

During the six-month period ending March 31, 2010, the Company repurchased 53,170 common shares through its normal course issuer bid at an average price of $17.24 compared to the previous year when the Company repurchased 467,300 shares at an average price of $10.35.

Capital resources:

At March 31, 2010 the Company had a short-term credit facility of $10,000 with a Canadian chartered bank that bears interest at prime and is secured by assets of the Company. An amount of $612 was drawn to issue a letter of credit to meet customer contractual requirements. Management believes that Calian has sufficient cash resources to continue to finance its working capital requirements and pay a quarterly dividend.

ADOPTION OF NEW ACCOUNTING RULES AND IMPACT ON 2010 FINANCIAL RESULTS

Effective October 1, 2009, management adopted amended Section 3855, Financial Instruments – Recognition and Measurement. Based on the amendments, management has the choice of classifying the host contract portion of its investment in AIM Healthcare Group (AIM) as an Available-For-Sale asset or as a Loans and Receivable asset. Management chooses to classify the host contract as a Loans and Receivables. Loans and Receivable assets are recognized at amortized cost. At September 30, 2009, the carrying amount of the investment was decreased by $128 with a corresponding adjustment to Accumulated Other Comprehensive Income.

SELECTED QUARTERLY FINANCIAL DATA

  Q2/10 Q1/10 Q4/09 Q3/09 Q2/09 Q1/09 Q4/08 Q3/08
                 
Revenues $ 53,141 $ 52,108 $ 54,365 $ 57,845 $ 59,922 $ 55,098 $ 48,904 $ 50,964
Net earnings $ 3,082 $ 3,443 $ 3,449 $ 4,483 $ 5,201 $ 3,319 $ 2,715 $ 3,330
                 
Net earnings per share                
  Basic $ 0.40 $ 0.44 $ 0.45 $ 0.58 $ 0.67 $ 0.42 $ 0.33 $ 0.40
  Diluted $ 0.40 $ 0.44 $ 0.44 $ 0.58 $ 0.67 $ 0.42 $ 0.33 $ 0.40

SEASONALITY

The Company's operations are subject to some quarterly seasonality due to the timing of vacation periods and statutory holidays. Typically the Company's first and last quarter will be negatively impacted as a result of the Christmas season and summer vacation period. During these periods, the Company can only invoice for work performed and is also required to pay for statutory holidays. This results in reduced levels of revenues and in a drop in gross margins. This seasonality may not be apparent in the overall results of the Company depending on the impact of the realized sales mix of its various projects.

OUTLOOK

Management believes the Company is well positioned for long-term sustained growth. The Company operates in markets that will continue to require the services that the Company offers. To further assure itself of a stable source of revenues, the Company will focus on increasing the percentage of its revenues derived from recurring business while pursuing new business in adjacent markets.

The Systems Engineering Division has been working within a stable satellite sector for the last two years and the division is expecting new opportunities to arise as systems adopting the latest technologies will be required by customers to maintain and improve their service offerings. Management is also confident that systems such as MSTAR will continue to be in demand in the security and surveillance market although it cannot predict the timing and extent of future orders. Custom manufacturing activity levels will continue to be directly dependant upon SED's customers' requirements. The continued volatility of the Canadian dollar could impact the Systems Engineering Division's competitiveness when bidding against foreign competition on projects denominated in foreign currencies.

The Business and Technology Services Division's services are adaptable to many different markets. Currently, its strength lies in providing program management and delivery services to the Department of National Defence. Management believes that this department and many others within the federal government will continue to require more support services from private enterprises to supplement their current workforce. Management believes that the types of service the division offers will continue to be attractive to government agencies going forward.

GUIDANCE

Fiscal 2009 was truly an exceptional year for the Company. While we believe that market potential remains strong, we do not expect to continue the unprecedented level of performance achieved in 2009 and therefore management expects to return to more traditional levels of revenues and earnings for 2010. While revenues ultimately realized will be dependent on the extent and timing of future contract awards, at this early stage in the year we expect revenues for 2010 to be in the range of $205 million to $225 million and net earnings per share in the range of $1.50 to $1.80 per share.

INTERNATIONAL FINANCIAL REPORTING STANDARDS

The Canadian Accounting Standards Board has recently confirmed that Canadian publicly accountable enterprises will be required to report under International Financial Reporting Standards (IFRS) as replacement guidance for the Canadian generally accepted accounting principles (Canadian GAAP). IFRS uses a conceptual framework similar to current Canadian GAAP, but there are significant differences in recognition, measurement and disclosures. In addition, it is expected that IFRS at the transition date will differ from current IFRS. The Company expects to issue its first financial statement in accordance with IFRS effective with its three-month period ending December 31, 2011.

In order to prepare for the conversion to IFRS, the Company has developed an IFRS changeover plan. This plan addresses key elements of the Company's conversion to IFRS including:

  • Accounting policy changes and financial reporting requirements;
  • Education and training requirements;
  • Impacts on business activities and on Information technology and data systems;
  • Internal control over financial reporting

We have also established a formal governance structure for the conversion to IFRS. The initiative is lead by the Chief Financial Officer who reports regularly to the Chief Executive Officer. The Chief Financial Officer also reports quarterly to the Audit Committee of the Board of Directors on the status of the project and the implications of the changeover to IFRS.

During 2009, we completed the high-level diagnostic gap and impact analysis between Canadian GAAP and IFRS applicable to the Company. In the first quarter of 2010, we began assessing the key differences between current IFRS and Canadian GAAP. By the end of 2010, we expect to have completed our detailed analysis and also completed all the required changes to our systems, processes and internal controls for purposes of dual-reporting in fiscal 2011.

During the balance of 2010 we will complete the necessary work required to quantify the impact of the changeover to IFRS on the Company's financial position and result of operations at date of transition and affecting the reporting for 2011 and 2012 based on standards published at that date. We will continue to monitor changes to IFRS and assess the impact that these new standards will have on the Company's financial results and on the Company's changeover plan. These changes may have an impact on the Company's consolidated financial statements; however it is too early in the Company's changeover process to provide quantification of those effects. Based on the Company's work to date, we believe that the areas with potential impact will be around hedge accounting documentation and overall disclosure requirements.

INTERNAL CONTROLS OVER FINANCIAL REPORTING

During the most recent interim quarter ending March 31, 2010, there have been no changes in the design of the Company's internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting.

FORWARD-LOOKING STATEMENT

Certain information included in this management discussion and analysis is forward-looking and is subject to important risks and uncertainties. The results or events predicted in these statements may differ materially from actual results or events. Such statements are generally accompanied by words such as "intend", "anticipate", "believe", "estimate", "expect" or similar statements. Factors which could cause results or events to differ from current expectations include, among other things: the impact of price competition; scarce number of qualified professionals; the impact of rapid technological and market change; loss of business or credit risk with major customers; technical risks on fixed price projects; general industry and market conditions and growth rates; international growth and global economic conditions, currency exchange rate fluctuations; and the impact of consolidations in the business services industry. For additional information with respect to certain of these and other factors, please see the Company's most recent annual report and other reports filed by the Company with the Ontario Securities Commission. Calian disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. No assurance can be given that actual results, performance or achievement expressed in, or implied by, forward-looking statements within this disclosure will occur, or if they do, that any benefits may be derived from them.

The foregoing discussion and analysis should be read in conjunction with the financial statements for the second quarter of 2010, and with the Management Discussion and Analysis in the 2009 annual report, including the section on risks and opportunities.

Contact Information

  • Calian Technologies Ltd.
    Ray Basler
    President and Chief Executive Officer
    306-931-3425
    or
    Calian Technologies Ltd.
    Jacqueline Gauthier
    Chief Financial Officer
    613-599-8600
    ir@calian.com
    www.calian.com