OTTAWA, ONTARIO--(Marketwired - Feb. 5, 2014) - Calian Technologies Ltd. (TSX:CTY) today released unaudited results for the first quarter ended December 31, 2013. Revenues for the quarter were $51.8 million, an 11% decrease from the $57.9 million reported in the same quarter of the previous year. Net earnings were $2.8 million or $0.38 per share basic and diluted, compared to $3.4 million or $0.45 per share basic and diluted in the same quarter of the previous year.
"We have mixed feelings about the first quarter results released today. While we did expect a contraction in revenues, the extent of curtailment in government spending was more than anticipated. Certain programs have been delayed while others were cancelled, providing for a very unpredictable business environment. These effects have been felt in varying degrees by both of our divisions. While we fully appreciate the benefits associated with the present level of diversification within our current business, we also recognize the need to evolve further as growth in other sectors is paramount to fend off the effects of the present down-cycle in government spending. Our acquisition of Med-Team along with the ongoing development of a portfolio of ancillary communication products are definitely steps in the right direction" stated Ray Basler, President and CEO.
"Overall consolidated gross margin percentages were in line with the prior year with SED showing an improvement while BTS experienced a decline. Had SED margins not benefited from the recovery of investment tax credits related to activities in a prior year, overall consolidated margins would have been slightly lower than the same period last year. BTS margins continue to be challenged by intensified competition for new work. For the near term, we expect that margins on new work in both divisions will continue to be under pressure. While we will continue to seek ways of realizing cost savings, we also recognize the importance of investing in business development activities to evolve our service lines for the attainment of future growth" continued Basler.
"Despite the ongoing difficulties associated with our present business environment, we continue to generate substantial profits and cash flows. This allows us to maintain our healthy dividend and still take advantage of beneficial share buy-back opportunities through our normal course issuer bid. At the same time, we have a very healthy balance sheet and will remain on the lookout for acquisition opportunities that could economically and strategically enhance our service offerings or our competitive position" stated Basler.
While the decrease in the company's first quarter performance was somewhat expected, we now anticipate that it may take longer than initially foreseen to experience a rebound in certain market segments. In particular, the continued roll out of the cost cutting initiatives by both the federal government and DND may limit available opportunities and increase competitive pressures thereby negatively impacting short term projections for both revenues and profitability. Ultimately, revenues realized will be dependent on the extent and timing of future contract awards as well as customer utilization of existing contracting vehicles. Based on currently available information and our assessment of the marketplace, we expect revenues for fiscal 2014 to be in the range of $220 million to $240 million and net earnings in the range of $1.55 to $1.80 per share.
About Calian
Calian employs over 2,400 people with offices and projects that span Canada, U.S. and international markets. The company's capabilities include the provision of business and technology services to industry and government in the health, operations and maintenance, IT services and training domains as well as the design, manufacturing and maintenance of complex systems to the communications and defence sectors. Our goal is to be the best company to work for, buy from and invest in. The Business and Technology Services (BTS) Division is headquartered in Ottawa. This division augments customer workforces with flexible short and long-term placements of individuals and teams, provides access to critical recruiting capabilities and delivers outsourcing services for a variety of technical and professional functions. Our strength lies in understanding clients' needs, recruiting highly qualified personnel who understand and meet those needs, and then effectively managing those personnel within our customers' framework. Calian's Systems Engineering Division (SED) plans, designs and implements complex communication systems for many of the world's space agencies and leading satellite manufacturers and operators. SED also provides contract manufacturing services for both private sector and military customers in North America.
For further information, please visit our website at www.calian.com, or contact us at ir@calian.com
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 INTERIM CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION | |||||||||
| As at December 31, 2013 and September 30, 2013 | |||||||||
| (Canadian dollars in thousands) | |||||||||
NOTES |
December 31, 2013 |
September 30, 2013 |
|||||||
| ASSETS | |||||||||
| CURRENT ASSETS | |||||||||
| Cash | $ | 27,028 | $ | 29,782 | |||||
| Accounts receivable | 36,815 | 37,903 | |||||||
| Work in process | 11,890 | 9,764 | |||||||
| Prepaid expenses | 1,003 | 1,346 | |||||||
| Derivative assets | 8 | 98 | 89 | ||||||
| Total current assets | 76,834 | 78,884 | |||||||
| NON-CURRENT ASSETS | |||||||||
| Equipment | 3,429 | 3,514 | |||||||
| Application software | 578 | 585 | |||||||
| Acquired intangibles | 10 | 4,053 | 3,808 | ||||||
| Goodwill | 11,324 | 10,781 | |||||||
| Total non-current assets | 19,384 | 18,688 | |||||||
| TOTAL ASSETS | $ | 96,218 | $ | 97,572 | |||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||
| CURRENT LIABILITIES | |||||||||
| Accounts payable and accrued liabilities | $ | 21,004 | $ | 24,634 | |||||
| Unearned contract revenue | 5,785 | 4,059 | |||||||
| Share repurchase obligation | 5 | 2,520 | 947 | ||||||
| Derivative liabilities | 8 | 66 | 14 | ||||||
| Total current liabilities | 29,375 | 29,654 | |||||||
| NON-CURRENT LIABILITIES | |||||||||
| Deferred tax liabilities | 1,201 | 1,121 | |||||||
| Total non-current liabilities | 1,201 | 1,121 | |||||||
| TOTAL LIABILITIES | 30,576 | 30,775 | |||||||
| SHAREHOLDERS' EQUITY | |||||||||
| Issued capital | 5 | 19,488 | 19,746 | ||||||
| Contributed surplus | 231 | 216 | |||||||
| Retained earnings | 46,151 | 47,089 | |||||||
| Accumulated other comprehensive loss | (228 | ) | (254 | ) | |||||
| TOTAL SHAREHOLDERS' EQUITY | 65,642 | 66,797 | |||||||
| $ | 96,218 |
$ | 97,572 |
||||||
| The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements. |
| CALIAN TECHNOLOGIES LTD. | ||||||||
| UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF PROFIT | ||||||||
| For the three-month periods ended December 31, 2013 and 2012 | ||||||||
| (Canadian dollars in thousands, except per share data) | ||||||||
| NOTES | Three months ended December 31, 2013 |
Three months ended December 31, 2012 |
||||||
| Revenues | $ | 51,802 | $ | 57,906 | ||||
| Cost of revenues | 42,004 | 46,999 | ||||||
| Gross profit | 9,798 | 10,907 | ||||||
| Selling and marketing | 994 | 1,064 | ||||||
| General and administration | 4,326 | 4,564 | ||||||
| Facilities | 816 | 809 | ||||||
| Profit before interest income and income tax expense | 3,662 | 4,470 | ||||||
| Interest income | 74 | 91 | ||||||
| Profit before income tax expense | 3,736 | 4,561 | ||||||
| Income tax expense - current | 990 | 1,143 | ||||||
| Income tax expense - deferred | (30 | ) | 17 | |||||
| Total income tax expense | 960 | 1,160 | ||||||
| NET PROFIT FOR THE PERIOD | $ | 2,776 | $ | 3,401 | ||||
| NET PROFIT PER SHARE: | ||||||||
| Basic | 6 | $ | 0.38 | $ | 0.45 | |||
| Diluted | 6 | $ | 0.38 | $ | 0.45 | |||
| The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements. |
| CALIAN TECHNOLOGIES LTD. | ||||||||
| UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF PROFIT AND | ||||||||
| OTHER COMPREHENSIVE INCOME (LOSS) | ||||||||
| For the three-month periods ended December 31, 2013 and 2012 | ||||||||
| (Canadian dollars in thousands) | ||||||||
| NOTES | Three months ended December 31, 2013 |
Three months ended December 31, 2012 |
||||||
| PROFIT FOR THE PERIOD | $ | 2,776 | $ | 3,401 | ||||
| Other comprehensive income, net of tax | ||||||||
| Change in deferred gain or loss on derivatives designated as cash flow hedges, net of tax of $9 (2013 -$286) | 26 | (776 | ) | |||||
| Other comprehensive income (loss), net of tax | 26 | (776 | ) | |||||
| TOTAL COMPREHENSIVE INCOME FOR THE PERIOD | $ | 2,802 | $ | 2,625 | ||||
| The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements. |
| CALIAN TECHNOLOGIES LTD. | ||||||||||||||||||||
| UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY | ||||||||||||||||||||
| For the three-months ended December 31, 2013 and 2012 | ||||||||||||||||||||
| (Canadian dollars in thousands, except per share data) | ||||||||||||||||||||
| Notes | Issued capital |
Contri- buted surplus |
Retained earnings |
Cash flow hedging reserve |
Total | |||||||||||||||
| Balance October 1, 2013 | $ | 19,746 | $ | 216 | $ | 47,089 | $ | (254 | ) | $ | 66,797 | |||||||||
| Total comprehensive income | - | - | 2,776 | 26 | 2,802 | |||||||||||||||
| Dividends ($0.28 per share) | - | - | (2,071 | ) | - | (2,071 | ) | |||||||||||||
| Issue of shares under stock option plan | 5 | - | - | - | - | - | ||||||||||||||
| Stock option plan compensation expense | 5 | - | 15 | - | - | 15 | ||||||||||||||
| Share repurchase | 5 | (44 | ) | - | (284 | ) | - | (328 | ) | |||||||||||
| Share purchase agreement - reclassification | 5 | (214 | ) | - | (1,359 | ) | - | (1,573 | ) | |||||||||||
| Balance December 31, 2013 | $ | 19,488 | $ | 231 | $ | 46,151 | $ | (228 | ) | $ | 65,642 | |||||||||
| Notes | Issued capital |
Contri- buted surplus |
Retained earnings |
Cash flow hedging reserve |
Total | |||||||||||||||
| Balance October 1, 2012 | $ | 19,949 | $ | 164 | $ | 47,186 | $ | 697 | $ | 67,996 | ||||||||||
| Total comprehensive income | - | - | 3,401 | (776 | ) | 2,625 | ||||||||||||||
| Dividends ($0.28 per share) | - | - | (2,136 | ) | - | (2,136 | ) | |||||||||||||
| Issue of shares under stock option plan | 5 | 99 | (6 | ) | - | - | 93 | |||||||||||||
| Stock option plan compensation expense | 5 | - | 16 | - | - | 16 | ||||||||||||||
| Share repurchase | 5 | (110 | ) | - | (748 | ) | - | (858 | ) | |||||||||||
| Share purchase agreement - reclassification | 5 | - | - | (14 | ) | - | (14 | ) | ||||||||||||
| Balance December 31, 2012 | $ | 19,938 | $ | 174 | $ | 47,689 | $ | (79 | ) | $ | 67,722 | |||||||||
| The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements. |
| CALIAN TECHNOLOGIES LTD. | |||||||||
| UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||||
| For the three-month periods ended December 31, 2013 and 2012 | |||||||||
| (Canadian dollars in thousands) | |||||||||
| NOTES | Three months ended December 31, 2013 |
Three months ended December 31, 2012 |
|||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||
| Profit for the period | $ | 2,776 | $ | 3,401 | |||||
| Items not affecting cash: | |||||||||
| Interest income | (74 | ) | (91 | ) | |||||
| Income tax expense | 960 | 1,160 | |||||||
| Employee stock purchase plan and option plan compensation expense | 32 | 33 | |||||||
| Amortization | 403 | 409 | |||||||
| 4,097 | 4,912 | ||||||||
| Change in non-cash working capital | |||||||||
| Accounts receivable | 1,266 | 8,306 | |||||||
| Work in process | (2,126 | ) | 1,862 | ||||||
| Prepaid expenses | 343 | (671 | ) | ||||||
| Accounts payable and accrued liabilities | (3,714 | ) | (6,294 | ) | |||||
| Unearned contract revenue | 1,726 | (4,504 | ) | ||||||
| 1,592 | 3,611 | ||||||||
| Interest received | 79 | 100 | |||||||
| Income tax paid | (1,307 | ) | (1,323 | ) | |||||
| 364 | 2,388 | ||||||||
| CASH FLOWS USED IN FINANCING ACTIVITIES | |||||||||
| Issuance of common shares | 6 | - | 93 | ||||||
| Dividends | (2,071 | ) | (2,136 | ) | |||||
| Repurchase of shares | 5 | (328 | ) | (858 | ) | ||||
| (2,399 | ) | (2,901 | ) | ||||||
| CASH FLOWS USED IN INVESTING ACTIVITIES | |||||||||
| Equipment and application software expenditures | (175 | ) | (122 | ) | |||||
| Acquisition | 10 | (544 | ) | - | |||||
| (719 | ) | (122 | ) | ||||||
| NET CASH OUTFLOW | (2,754 | ) | (635 | ) | |||||
| CASH, BEGINNING OF PERIOD | 29,782 | 31,998 | |||||||
| CASH, END OF PERIOD | $ | 27,028 | $ | 31,363 | |||||
| The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements. |
| CALIAN TECHNOLOGIES LTD. |
| NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS For the three-month periods ended December 31, 2013 and 2012 |
| (Canadian dollars in thousands, except per share amounts) (Unaudited) |
1. BASIS OF PREPARATION
Calian Technologies Ltd. ("the Company"), incorporated under the Canada Business Corporations Act, and its wholly-owned subsidiaries provide technology services to industry and government. The address of its registered office and principal place of business is 340 Legget Drive, Ottawa, Ontario K2K 1Y6.
These unaudited interim condensed consolidated financial statements are expressed in Canadian dollar and have been prepared in accordance with International Accounting Standard ("IAS") 34 - Interim Financial Reporting, as issued by the International Accounting Standard Board ("IASB"). These unaudited interim consolidated financial statements have been prepared using accounting policies consistent with International Financial Reporting Standards ("IFRS") and in accordance with the accounting policies the Company adopted in its annual consolidated financial statements for the year ended September 30, 2013 and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report for the year ended September 30, 2013. These unaudited interim financial statements do not include all of the information required in annual financial statements.
These unaudited interim condensed consolidated financial statements were authorized for issuance by the Board of Directors on February 5, 2014.
2. FUTURE CHANGES IN ACCOUNTING POLICIES
IFRS 9 Financial instruments
IFRS 9 was issued in November 2009 introducing new requirements for the classification and measurement of financial assets. IFRS9 was further amended in October 2010 to include the requirements for the classification and measurement of financial liabilities and derecognition.
IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the multiple rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. The new standard also requires a single impairment method to be used, replacing the multiple impairment methods in IAS 39. IFRS 9 is effective for annual periods beginning on or after January 1, 2015. The Company is currently evaluating the impact of this standard on its consolidated financial statements.
3. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
Estimates:
The preparation of financial statements in conformity with IFRS requires the Company's management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods presented. Actual results could differ from those estimates.
There were no significant changes in estimates or approaches to determining estimates in the periods presented.
4. SEASONALITY
The results of operations for the interim periods are not necessarily indicative of the results of operations for the full year.
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. ISSUED CAPITAL
Share repurchase
During the three months ended December 31, 2013 (2012), the Company acquired 16,500 (41,870) of its outstanding common shares at an average price of $19.91 ($20.51) per share for a total of $328 ($858) 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. The plan provides for a 10% rolling maximum number of options available for grant. As at December 31, 2013, a total of 737,983 common shares are reserved for issuance under the plan with 240,000 options currently outstanding of which 197,000 are exercisable. No options were issued during the period.
Share repurchase obligation
The Company has an agreement with a third party which provides for automatic repurchases of the Company's shares without the Company having the ability to influence the purchases. The financial liability is determined as the present value of the maximum redemption amount at each of the reporting periods. The reclassification adjustment is made by reducing issued capital and retained earnings with an offsetting adjustment to the share repurchase obligation account. An income adjustment will result for any shares repurchased below the maximum amount per share. The amount of income recognized in the period is insignificant.
6. NET PROFIT PER SHARE
The diluted weighted average number of shares has been calculated as follows:
| Three months ended | ||
| December 31 | ||
| 2013 | 2012 | |
| Weighted average number of shares - basic | 7,392,516 | 7,634,555 |
| Addition to reflect the dilutive effect of employee stock options | 7,094 | 3,014 |
| Weighted average number of shares - diluted | 7,399,610 | 7,637,569 |
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 three-month period ended December 31, 2013 (2012), NIL (155,000) options were excluded from the above computation.
Profit for the period is the measure of profit or loss used to calculate Net profit per share.
7. 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 provides business and technology services to industry and government in the health, operations and maintenance, IT services and training.
The Company evaluates performance and allocates resources based on earnings before interest income and income taxes. The accounting policies of the segments are the same as those described in Note 2 - Summary of significant accounting policies to the financial statements for the quarter ended December 31, 2013.
| Three months ended December 31, 2013 |
||||||||||
| Business and | ||||||||||
| Systems | Technology | |||||||||
| Engineering | Services | Corporate | Total | |||||||
| Revenues | $ | 14,530 | $ | 37,272 | $ | - | $ | 51,802 | ||
| Profit before interest income and income tax expense | 2,459 | 1,734 | (531 | ) | 3,662 | |||||
| Interest income | 74 | |||||||||
| Income tax expense | (960 | ) | ||||||||
| Profit for the period | $ | 2,776 | ||||||||
| As at December 31, 2013 | ||||||||||
| Total assets other than cash and goodwill | $ | 23,004 | $ | 34,711 | $ | 151 | $ | 57,866 | ||
| Goodwill | - | 11,324 | - | 11,324 | ||||||
| Cash | - | - | 27,028 | 27,028 | ||||||
| Total assets | $ | 23,004 | $ | 46,035 | $ | 27,179 | $ | 96,218 | ||
| Equipment and intangible expenditures | $ | 98 | $ | 77 | $ | - | $ | 175 | ||
| Three months ended December 31, 2012 | |||||||||||
| Business and | |||||||||||
| Systems | Technology | ||||||||||
| Engineering | Services | Corporate | Total | ||||||||
| Revenues | $ | 17,952 | $ | 39,954 | $ | - | $ | 57,906 | |||
| Profit before interest income and income tax expense | 2,835 | 2,201 | (566 | ) | 4,470 | ||||||
| Interest income | 91 | ||||||||||
| Income tax expense | (1,160 | ) | |||||||||
| Profit for the period | $ | 3,401 | |||||||||
| As at September 30, 2013 | |||||||||||
| Total assets other than cash and goodwill | $ | 19,909 | $ | 37,001 | $ | 99 | $ | 57,009 | |||
| Goodwill | - | 10,781 | - | 10,781 | |||||||
| Cash | - | - | 29,782 | 29,782 | |||||||
| Total assets | $ | 19,909 | $ | 47,782 | $ | 29,881 | $ | 97,572 | |||
| Equipment and intangible expenditures | $ | 412 | $ | 323 | $ | - | $ | 725 | |||
8. HEDGING
Foreign currency risk related to contracts
The Company is exposed to foreign currency exchange 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 u sed 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 December 31, 2013, the Company had the following forward foreign exchange contracts:
| Fair Value | |||||||
| Equivalent | December 31, | ||||||
| Type | Notional | Currency | Maturity | Cdn. Dollars | 2013 | ||
| SELL | 21,928 | USD | January 2014 | $ | 23,386 | $ | 64 |
| SELL | 4,273 | EURO | January 2014 | 6,297 | 34 | ||
| Derivative assets | $ | 98 | |||||
| BUY | 1,219 | EURO | January 2014 | $ | 1,796 | $ | 10 |
| SELL | 1,000 | USD | September 2015 | 1,057 | 6 | ||
| SELL | 1,000 | USD | September 2016 | 1,057 | 6 | ||
| SELL | 1,000 | USD | September 2017 | 1,057 | 6 | ||
| BUY | 12,834 | USD | January 2014 | 13,687 | 38 | ||
| Derivative liabilities | $ | 66 | |||||
A 10% strengthening of the Canadian dollar against the following currencies at December 31, 2013 would have decreased other comprehensive income as related to the forward foreign exchange contracts by the amounts shown below.
| December 31, | |||
| 2013 | |||
| EURO | $ | (648 | ) |
| USD | (448 | ) | |
| $ | (1,096 | ) | |
9. CONTINGENCIES
In the normal course of business, the Company is party to business and 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.
10. ACQUISITION
Primacy Management Inc. ("Primacy")
Under the contingent consideration arrangement, the Company is required to pay the former shareholders of Primacy an additional $400 and $600 if Primacy attains specified levels of earnings before interest, taxes, depreciation and amortization (EBITDA) for the years ending February 28, 2013 and 2014 respectively. During the year ended September 30, 2013, the Company paid the full $400 related to the first year earn-out. Management believes that Primacy will achieve its earn-out target in the second period.
Med-Team Clinic Inc. ("Med-Team")
On December 31, 2013, the Company acquired all of the outstanding shares of Med-Team for consideration of $916 of which $600 was paid on the date of closing, $48 is payable upon determining the final working capital acquired and $268 is payable contingently as described below. Med-Team's principal business activity relates to the management of medical clinics. Med-Team was acquired so as to expand the Company's health service offerings. The acquisition is a business combination to which IFRS3 Business Combination applies.
Under the contingent consideration arrangement, the Company is required to pay the former shareholders of Med-Team an additional $300 if Med-Team attains specified levels of EBITDA for the years ending December 31, 2014 and 2015.
Acquisition-related costs amounting to $40 have been excluded from the consideration and have been recognized as an expense in the current period, within the general and administration line item in the consolidated statement of net profits.
The following are the assets acquired and liabilities recognized at the date of the acquisition:
| Current assets: | |||
| Cash | $ | 56 | |
| Trade receivables | 139 | ||
| $ | 195 | ||
| Non-current assets: | |||
| Equipment | $ | 4 | |
| Intangibles recognized at time of acquisition | 381 | ||
| $ | 385 | ||
| Current liabilities: | |||
| Trade payables and accrued liabilities | (107 | ) | |
| Deferred tax liability recognized at time of acquisition | (100 | ) | |
| (207 | ) | ||
| Net assets acquired | $ | 373 | |
| Goodwill arising on acquisition: | |||
| Total consideration | $ | 916 | |
| Less: fair value of identifiable net assets acquired | (373 | ) | |
| Goodwill acquired on acquisition | $ | 543 | |
Goodwill that arose on the acquisition of Med-Team relates to the future new patient flow of the clinic. None of the goodwill arising on the acquisition is expected to be deductible for tax purposes.
Amortization of Intangibles:
Intangibles are made up of the existing and recurring patient flow. Intangibles will be amortized over 5 years.
Management Discussion and Analysis - December 31, 2013:
(Canadian dollars in thousands, except per share data)
RESULTS OF OPERATIONS
Revenues:
For the first quarter of 2014, revenues were $51,802 compared to $57,906 reported for the same period in 2013 representing an 11% decrease from the prior year.
Systems Engineering's (SED) revenues were $14,530 in the quarter representing an 19% decrease for the quarter from the $17,952 recorded last year. Manufacturing related revenues were down substantially relative to the first quarter of last year. This represents a continuation of the trend, reflecting reduced defence spending by DND as well as US defence prime contractors and led to a rightsizing of our manufacturing workforce during the quarter. Revenues generated from engineering projects were consistent with the prior period with a strong showing in the area of ancillary product sales. 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 $37,272 in the quarter representing a 7% decrease from the $39,954 for the same period last year. With a significant portion of the BTS revenues generated by the Federal government, the demand for services in most of the BTS market segments continued to be affected by the government spending cuts. We were most affected in our operations and maintenance group as DND wound down our existing vehicle maintenance contract and decided not to re- compete the work requirement. Likewise our short term staffing group experienced a drop in demand as well as significant competitive pressures on available work. Fortunately we are starting to reap the benefits of our health initiatives, making the health market segment the only one to show year over year revenue gains. The division continues to invest in business development in sectors outside of the federal government in an effort to diversify into new markets and lessen the dependence on federal government revenues. Some successes have been made to date with the win of several beach head contracts in other areas in health and training.
Management expects that the marketplace for the near term will continue to be unsettled and very competitive. SED is expected to face a challenging environment in the manufacturing area at least for the near term. Also, the timing of new engineering opportunities is always subject to delay. Current BTS backlog provides a reasonable level of revenue assurance on existing contracts and new opportunities continue to arise. However, continued cuts in federal government spending are expected to have a continued effect on near term revenues. The nature and extent of future government spending constraints remain uncertain and therefore, future revenues ultimately will be determined by customer demand on existing contracts as well as the timing of future contract awards.
Gross margin:
Gross margin was 18.9% in the first quarter of 2014, compared to the 18.8% reported in the first quarter a year ago. The consolidated gross margin for the first quarter 2014 reflects a combination of higher margins in SED partially offset by downward pressure being experienced in the margins of traditional service lines of the BTS division.
Gross margin in Systems Engineering was 26.3% this quarter compared to 23.4% in the first quarter of 2013. SED margins for the first quarter included investment tax credits ("ITC") recovery related to fiscal 2013. When excluding these ITC, margins are more in line with those experienced in the first quarter of 2013. Margins experienced in the first quarter when excluding the effects of ITCs, are indicative of expected future margins on projects.
Gross margin in Business and Technology Services was 16.0% compared to the 16.8% reported in the first quarter of 2013. The traditional BTS business which is concentrated with the federal government continued to experience margin pressure. Strong competition on new work is expected to negatively affect margins at least for the near term.
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 operational execution and diligent negotiation of supplier costs in order to maximize margins. However, increased competition is expected to maintain the pressure on margins in both divisions. The volatility of the Canadian dollar is always an influencing factor for margins on new work in the SED division when denominated in foreign currencies.
Operating expenses:
Selling and marketing, general and administration and facilities totalled $6,137 or 11.8% of revenues in the first quarter of 2014 compared to $6,437 or 11.1% of revenues reported in the first quarter of 2013. Through its continued efforts, management was able to reduce its operating costs compared to the first quarter of 2013. However, with the significant decrease in revenues, total operating expenses as a percentage of revenues increased slightly. Management will continue to challenge discretionary spending, however, even in these difficult market conditions, prudent investments in business development are still required in order to continue the evolution of our service lines and broadening of our target markets.
Interest income:
Interest income for the first quarter of 2014 was $74 compared to $91 in 2013. Interest income earned on cash balances was consistent with the prior year.
Income taxes:
The provision for income taxes for the first quarter of 2014 was $960 or 25.7% of earnings before tax compared to $1,160 in 2013 or 25.4% of earnings before tax. The effective tax rate for 2014, prior to considering the impact of non-taxable transactions, is expected to be approximately 26.5%.
Net earnings:
As a result of the foregoing, in the first quarter of 2014 the Company recorded net earnings of $2,776 or $0.38 per share basic and diluted, compared to $3,401 or $0.45 per share basic and diluted in the same quarter of the prior year.
BACKLOG
The Company's backlog at December 31, 2013 was $418 million with terms extended to fiscal 2018. This compares to $450 million reported at September 30, 2013. 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 2014, 2015 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 $137 million. 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 2014 | Fiscal 2015 | Beyond 2015 | Estimated realizable portion of Backlog |
|
Excess over estimated realizable portion |
TOTAL | ||||||
| Contracted Backlog | $ | 122 | $ | 54 | $ | 12 | $ | 199 | $ | 137 | $ | 336 | |
| Option Renewals | 11 | 31 | 51 | 82 | - | 82 | |||||||
| TOTAL | $ | 133 | $ | 85 | $ | 63 | $ | 281 | $ | 137 | $ | 418 | |
| Business and | $ | 104 | $ | 74 | $ | 55 | $ | 233 | $ | 137 | $ | 370 | |
| Technology Services | |||||||||||||
| Systems Engineering | 29 | 11 | 8 | 48 | - | 48 | |||||||
| TOTAL | $ | 133 | $ | 85 | $ | 63 | $ | 281 | $ | 137 | $ | 418 | |
FINANCIAL CONDITION AND CASHFLOWS
Operating activities:
Cash inflows from operating activities for the period ending December 31, 2013 were $364 compared to $2,388 in 2013. This year's decrease is the result of lower cash earnings coupled with the working capital fluctuations associated with the ebbs and flows of the business. The market for the Systems Engineering Division is characterized by 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 December 31, 2013, the Company's total unearned revenue amounted to $5,785. This compares to $4,059 at September 30, 2013, with the increase primarily attributable to advance billings for work to be performed in a future period.
Financing activities:
During the period ending December 31, 2013, the Company paid a quarterly dividend of $0.28 per share compared to 2013 when the Company paid $0.28 per share. The Company intends to continue with its quarterly dividend policy for the foreseeable future.
During the period ending December 31, 2013, the Company repurchased 16,500 common shares through its normal course issuer bid at an average price of $19.91 compared to the previous year when the Company repurchased 41,870 shares at an average price of $20.51.
Capital resources:
At December 31, 2013 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 used 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 FINANCIAL RESULTS
The Company did not adopt any new accounting policies this quarter.
SELECTED QUARTERLY FINANCIAL DATA
| Q1/14 | Q4/13 | Q3/13 | Q2/13 | Q1/13 | Q4/12 | Q3/12 | Q2/12 | ||||||||||
| Revenues | $ | 51,802 | $ | 57,502 | $ | 58,123 | $ | 58,932 | $ | 57,906 | $ | 58,137 | $ | 59,343 | $ | 61,635 | |
| Net earnings | $ | 2,776 | $ | 3,024 | $ | 3,276 | $ | 3,354 | $ | 3,401 | $ | 3,364 | $ | 3,484 | $ | 3,669 | |
| Net earnings per share | |||||||||||||||||
| Basic | $ | 0.38 | $ | 0.41 | $ | 0.43 | $ | 0.44 | $ | 0.45 | $ | 0.44 | $ | 0.45 | $ | 0.48 | |
| Diluted | $ | 0.38 | $ | 0.41 | $ | 0.43 | $ | 0.44 | $ | 0.45 | $ | 0.44 | $ | 0.45 | $ | 0.48 | |
SEASONALITY
The Company's operations are subject to some quarterly seasonality due to the timing of vacation periods and statutory holida ys. 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 continues to believe that the Company is well positioned for sustained growth in the long term. 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 continue to focus on increasing the percentage of its revenues derived from recurring business while pursuing new business in adjacent and non-government markets.
The Systems Engineering Division has been working within a sustainable satellite sector and the division is expecting new opportunities to arise as systems adopting the latest technologies will be required by customers wishing to maintain and improve their service offerings. Custom manufacturing activity levels will continue to be directly dependent upon SED's customers' requirements. Continuing volatility in orders is anticipated as both government and commercial customers are curtailing traditional spending patterns. While capital procurements by DND are relied upon to provide upcoming manufacturing opportunities, recent delays and deferrals are creating intense competition for available work. The recent weakening of the Canadian dollar positively impacts the Systems Engineering Division's competitiveness on projects denominated in foreign currencies.
The Business and Technology Services Division's services are adaptable to many different markets. Currently, its strength lie s in providing program management and delivery services to the Department of National Defence. Management believes that in the long term, this department and many others within the federal government will continue to require more support services from private enterprises to supplement their current workforce. However, current cost cutting initiatives in the federal government have already had a negative impact on traditional BTS revenue sources and it is anticipated that the continued roll out of these initiatives could further impact demand, at least in the short term. Management believes that the types of service the division offers will continue to be attractive to government agencies in the long term and the division continues to assess how it can address new markets and seek new opportunities outside of the Federal Government. The acquisition of Primacy Management has bolstered the division's performance and it is expected that Primacy will continue to meet and exceed the financial targets established as part of the acquisition.
GUIDANCE
While the decrease in the company's first quarter performance was somewhat expected, we now anticipate that it may take longer than initially foreseen to experience a rebound in certain market segments. In particular, the continued roll out of the cost cutting initiatives by both the federal government and DND may limit available opportunities and increase competitive pressures thereby negatively impacting short term projections for both revenues and profitability. Ultimately, revenues realized will be dependent on the extent and timing of future contract awards as well as customer utilization of existing contracting vehicles. Based on currently available information and our assessment of the marketplace, we expect revenues for fiscal 2014 to be in the range of $220 million to $240 million and net earnings in the range of $1.55 to $1.80 per share.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
During the most recent interim quarter ending December 31, 2013, there have been no changes in the design of the Company's internal controls over financial reporting that have materially affected, or are 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 C ommission. 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 first quarter of 2014, and with the Management Discussion and Analysis in the 2013 annual report, including the section on risks and opportunities.
Contact Information:
President and Chief Executive Officer
306-931-3425
Jacqueline Gauthier
Chief Financial Officer
613-599-8600