OTTAWA, ONTARIO--(Marketwire - Nov. 9, 2011) - Calian Technologies Ltd. (TSX:CTY) today released unaudited results for the fourth quarter ended September 30, 2011. Revenues for the quarter were $55.4 million, a 5% increase from the $52.9 million reported in the same quarter of the previous year. Net earnings were $3.3 million or $0.43 per share basic and diluted, compared to $3.2 million or $0.42 per share basic and diluted in the same quarter of the previous year. For the year 2011, the Company reported revenues of $226.7 million and net earnings of $13.2 million or $1.71 per share basic and diluted, compared to revenues of $215.7 million and net earnings of $13.6 million or $1.75 per share basic and diluted in the prior year.
"We were pleased to end the fiscal year on a strong note with both divisions showing increased revenues relative to the prior year. Our SED division had a strong quarter with steady levels of activity in both its manufacturing and engineering groups. Likewise, our BTS division continued its positive momentum producing solid revenues with an uptick in activity in both its short term staffing and outsourcing groups. Overall for the year, consolidated revenues increased in excess of 5%, a substantial achievement in today's volatile business environment" stated Ray Basler, President and CEO.
"Gross margins were strong for the quarter with SED realizing improved margins relative to the prior year due to excellent project execution and efficient close-outs of certain projects. BTS margins continued to exhibit the effects of continued competitive pressures, although overall margins are still healthy. A recent realignment of the BTS division will allow us to better pursue our target markets with a goal of enhancing growth while maintaining overall margins" continued Basler.
"Today, we also announced an increase in our quarterly dividend to $0.26 per share. This represents an increase of 4% over the most recent quarter and an 18% increase over the amount paid in the same quarter last year. Including the reinvestment of dividends, our shareholders realized a modest single digit return for the fiscal year; not significant in absolute terms, but still bettering the overall return of the TSX by more than 7% during the same period. We are proud to have generated significant earnings and cash flows that have once again translated into a superior return for our shareholders" continued Basler.
While growth has been modest this last year, we are proud of our accomplishments within a very competitive landscape, particularly during this period of continued worldwide political and economic uncertainty. We believe that our key markets will remain strong, although we recognize the potential for government cost cutting initiatives and increased competitive pressures. 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 available information and our assessment of the marketplace, we expect revenues for 2012 to be in the range of $230 million to $250 million and net earnings per share in the range of $1.65 to $1.90 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 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.
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 CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS |
| (Canadian dollars in thousands, except per share data) |
| Three months ended September 30 |
Year ended September 30 |
||||||||||||
| 2011 | 2010 | 2011 | 2010 | ||||||||||
| Revenues | $ | 55,429 | $ | 52,911 | $ | 226,651 | $ | 215,725 | |||||
| Cost of revenues | 44,474 | 42,559 | 183,809 | 172,943 | |||||||||
| Gross profit | 10,955 | 10,352 | 42,842 | 42,782 | |||||||||
| Selling and marketing | 1,287 | 1,056 | 5,304 | 4,770 | |||||||||
| General and administration | 3,796 | 3,744 | 15,550 | 15,310 | |||||||||
| Facilities | 885 | 881 | 3,345 | 3,105 | |||||||||
| Stock option compensation (Note 8) | 19 | 3 | 69 | 20 | |||||||||
| Amortization | 289 | 253 | 1,128 | 944 | |||||||||
| Earnings before other expense, interest income and income tax expense | 4,679 | 4,415 | 17,446 | 18,633 | |||||||||
| Unrealized loss on fair value of conversion options of investment (Note 6) | - | (2 | ) | - | (52 | ) | |||||||
| Interest Income | 121 | 215 | 817 | 753 | |||||||||
| Earnings before income tax expense | 4,800 | 4,628 | 18,263 | 19,334 | |||||||||
| Income tax expense – current | 1,424 | 1,234 | 4,557 | 5,195 | |||||||||
| Income tax expense – future | 38 | 154 | 525 | 529 | |||||||||
| 1,462 | 1,388 | 5,082 | 5,724 | ||||||||||
| NET EARNINGS | $ | 3,338 | $ | 3,240 | $ | 13,181 | $ | 13,610 | |||||
| Retained earnings, beginning of period | 43,203 | 39,317 | 39,769 | 42,692 | |||||||||
| Adjustment to opening retained earnings for a change in accounting policy (Note 2) | - | (367 | ) | - | (367 | ) | |||||||
| Excess of purchase price over stated capital on repurchase of shares (Note 8) | (427 | ) | (724 | ) | (1,287 | ) | (2,226 | ) | |||||
| Dividends | (1,923 | ) | (1,697 | ) | (7,472 | ) | (13,940 | ) | |||||
| Retained earnings, end of period | $ | 44,191 | $ | 39,769 | $ | 44,191 | $ | 39,769 | |||||
| Net earnings per share: (Note 9) | |||||||||||||
| Basic | $ | 0.43 | $ | 0.42 | $ | 1.71 | $ | 1.75 | |||||
| Diluted | $ | 0.43 | $ | 0.42 | $ | 1.71 | $ | 1.75 | |||||
| Weighted average number of shares: (Note 9) | |||||||||||||
| Basic | 7,688,050 | 7,715,538 | 7,697,217 | 7,756,584 | |||||||||
| Diluted | 7,702,631 | 7,743,536 | 7,715,165 | 7,790,825 | |||||||||
| CALIAN TECHNOLOGIES LTD. |
| UNAUDITED CONSOLIDATED BALANCE SHEETS |
| (Canadian dollars in thousands) |
| September 30, | September 30, | |||||
| 2011 | 2010 | |||||
| ASSETS | (Note 2) | |||||
| CURRENT ASSETS | ||||||
| Cash | $ | 30,742 | $ | 29,055 | ||
| Accounts receivable | 35,181 | 33,954 | ||||
| Work in process | 6,960 | 3,576 | ||||
| Prepaid expenses (Note 5) | 2,751 | 6,329 | ||||
| Future income taxes | 480 | 696 | ||||
| Derivative assets (Note 12) | 451 | 158 | ||||
| Investment (Note 6) | - | 953 | ||||
| 76,565 | 74,721 | |||||
| INVESTMENT (Note 6) | - | 2,464 | ||||
| EQUIPMENT | 4,069 | 4,611 | ||||
| INTANGIBLE | 440 | 543 | ||||
| GOODWILL | 9,518 | 9,518 | ||||
| $ | 90,592 | $ | 91,857 | |||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||
| CURRENT LIABILITIES | ||||||
| Accounts payable and accrued liabilities | $ | 18,594 | $ | 17,024 | ||
| Unearned contract revenue | 8,026 | 16,002 | ||||
| Derivative liabilities (Note 12) | 1,054 | 48 | ||||
| 27,674 | 33,074 | |||||
| CONTINGENCIES (Note 10) | ||||||
| SHAREHOLDERS' EQUITY | ||||||
| Share capital (Note 8) | 19,091 | 18,689 | ||||
| Contributed surplus (Note 8) | 219 | 171 | ||||
| Retained earnings | 44,191 | 39,769 | ||||
| Accumulated other comprehensive income (loss) | (583 | ) | 154 | |||
| 62,918 | 58,783 | |||||
| $ | 90,592 | $ | 91,857 | |||
| CALIAN TECHNOLOGIES LTD. |
| UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) |
| (Canadian dollars in thousands) |
| Three months ended September 30 |
Year ended September 30 |
||||||||
| 2011 | 2010 | 2011 | 2010 | ||||||
| Net earnings | $ 3,338 | $ 3,240 | $ 13,181 | $ 13,610 | |||||
| Unrealized gain (loss) on translating financial statements of self-sustaining foreign operation, net of tax of nil (2010 – nil) | 78 | (43 | ) | 22 | (47 | ) | |||
| Change in deferred gain (loss) on derivatives designated as cash flow hedges, net of tax of $433 and $312 (2010 - $171 and $246 year to date) | (1,057 | ) | 355 | (759 | ) | 512 | |||
| Other comprehensive income (loss) | (979 | ) | 312 | (737 | ) | 465 | |||
| Comprehensive income | $ 2,359 | $ 3,552 | $ 12,444 | $ 14,075 | |||||
| CALIAN TECHNOLOGIES LTD. |
| UNAUDITED CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE |
| INCOME (LOSS) AND RETAINED EARNINGS |
| (Canadian dollars in thousands) |
| September 30, 2011 |
September 30, 2010 | |||||
| Unrealized cumulative loss on translating financial statements of self-sustaining foreign operation, net of tax | $ | (335 | ) | $ | (357 | ) |
| Deferred gain (loss) on derivatives designated as cash flow hedges, net of tax | (248 | ) | 511 | |||
| Accumulated other comprehensive income (loss), end of period, net of tax | (583 | ) | 154 | |||
| Retained earnings, end of period | 44,191 | 39,769 | ||||
| Accumulated other comprehensive income (loss) and retained earnings, end of period | $ | 43,608 | $ | 39,923 | ||
| CALIAN TECHNOLOGIES LTD. |
| UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS |
| (Canadian dollars in thousands) |
| Three months September 30 |
Year ended September 30 |
||||||||||||
| 2011 | 2010 | 2011 | 2010 | ||||||||||
| CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES | |||||||||||||
| Net earnings | $ | 3,338 | $ | 3,240 | $ | 13,181 | $ | 13,610 | |||||
| Items not affecting cash: | |||||||||||||
| Interest accreted on host contract component of investment (Note 7) | - | (160 | ) | (480 | ) | (560 | ) | ||||||
| Employee stock purchase plan compensation expense | 16 | 17 | 68 | 61 | |||||||||
| Stock option compensation (Note 8) | 19 | 3 | 69 | 20 | |||||||||
| Amortization | 289 | 253 | 1,128 | 944 | |||||||||
| Future income tax expense | 38 | 154 | 525 | 529 | |||||||||
| Unrealized loss on fair value of conversion options of investment (Note 6) | - | 2 | - | 52 | |||||||||
| 3,700 | 3,509 | 14,491 | 14,656 | ||||||||||
| Change in non-cash working capital | |||||||||||||
| Accounts receivable | 8,841 | 1,281 | (1,294 | ) | (996 | ) | |||||||
| Work in process | (2,402 | ) | 501 | (3,384 | ) | (810 | ) | ||||||
| Prepaid expenses (Note 5) | (1,465 | ) | 1,315 | 3,578 | (673 | ) | |||||||
| Accounts payable and accrued liabilities | 473 | (2,286 | ) | 1,276 | (1,000 | ) | |||||||
| Unearned contract revenue | (3,080 | ) | (4,048 | ) | (7,976 | ) | (9,029 | ) | |||||
| 6,067 | 272 | 6,691 | 2,148 | ||||||||||
| CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES | |||||||||||||
| Issuance of common shares | - | 175 | 519 | 1,188 | |||||||||
| Dividends | (1,923 | ) | (1,698 | ) | (7,472 | ) | (13,940 | ) | |||||
| Repurchase of shares (Note8) | (494 | ) | (838 | ) | (1,487 | ) | (2,578 | ) | |||||
| (2,417 | ) | (2,361 | ) | (8,440 | ) | (15,330 | ) | ||||||
| CASH FLOWS USED IN INVESTING ACTIVITIES | |||||||||||||
| Equipment expenditures Investment |
(118 2,897 |
) |
(493 - |
) |
(483 3,897 |
) |
(1,378 - |
) |
|||||
| 2,779 | (493 | ) | 3,414 | (1,378 | ) | ||||||||
| FOREIGN CURRENCY ADJUSTMENT | 78 | (43 | ) | 22 | (47 | ) | |||||||
| NET CASH INFLOW (OUTFLOW) | 6,507 | (2,625 | ) | 1,687 | (14,607 | ) | |||||||
| CASH, BEGINNING OF PERIOD | 24,235 | 31,680 | 29,055 | 43,662 | |||||||||
| CASH, END OF PERIOD | $ | 30,742 | $ | 29,055 | $ | 30,742 | $ | 29,055 | |||||
| CALIAN TECHNOLOGIES LTD. |
| NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS |
| For the periods ended September 30, 2011 and 2010 |
| (Canadian dollars in thousands, except per share amounts) |
| (Unaudited) |
- 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, 2010 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.
- CHANGE IN ACCOUNTING POLICY
Effective October 1, 2010, the Company changed its accounting policy with regards to the recognition of warranty costs related to fixed price contracts. Previously a provision for warranty claims was established when revenue was recognized, based on the warranty terms and prior claim experience. To better align revenue recognized with the warranty obligations, warranty costs are now included in estimated total contract costs at the beginning of the project and flow through cost of revenues when a warranty claim is made. Revenue is recognized using the percentage completion method based on management's best estimate of the costs to complete each contract. This change in accounting policy is applied retroactively to October 1, 2009 with a reduction in the warranty provision of $3,715 (through accounts payable and accrued liabilities), an increase in unearned contract revenue of $4,239, a decrease in taxes payable of $157 (through accounts payable and accrued liabilities) and a reduction in opening retained earnings of $367. The impact on the net income for the quarter and the year ended September 30, 2011 is not material.
- ACCOUNTING ESTIMATES
For the periods ended September 30, 2011 and September 30, 2010, no material changes in estimates have been made.
- 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.
- PREPAID EXPENSES
| September 30 | ||||
| 2011 | 2010 | |||
| Prepaid operating expenses | $ | 1,233 | $ | 705 |
| Milestone advance to subcontractor | 1,518 | 5,624 | ||
| $ | 2,751 | $ | 6,329 | |
- INVESTMENT
On July 11, 2006, the Company invested $3,623 in Med-Emerg International Inc. (Med-Emerg) in the form of convertible preferred shares and on January 20, 2009, Med-Emerg announced a merger with AIM Health Group Inc. (AIM). 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. On January 6, 2011, AIM repaid $1,000 of the debenture in cash. Subsequently, on June 30, 2011, the remaining convertible debenture was settled through the issuance of a new convertible debenture and on August 31 2011, AIM repaid the remaining amount of the debenture. The carrying value of the investment was as follows:
| 2011 | 2010 | |||||
| AIM investment, at cost on January 20, 2009 | $ | 2,517 | $ | 2,517 | ||
| AIM cumulative unrealized loss on conversion options | (17 | ) | (17 | ) | ||
| AIM cumulative interest accretion on host contract | 1,397 | 917 | ||||
| Payments during 2011 | (3,897 | ) | - | |||
| Carrying value of investment at September 30 | $ | - | $ | 3,417 | ||
- INTEREST INCOME
Interest income is comprised of the following amounts:
| Three months ended September 30 |
Year ended September 30 |
|||||||
| 2011 | 2010 | 2011 | 2010 | |||||
| Interest earned on cash balances Interest earned on investment |
$ |
85 36 |
$ |
55 - |
$ |
301 36 |
$ |
193 - |
| Accreted interest on host contract component of investment | - | 160 | 480 | 560 | ||||
| Interest income | $ | 121 | $ | 215 | $ | 817 | $ | 753 |
- SHARE CAPITAL
Employee Share Purchase Plan
During the year ending September 30, 2011 (2010), the Company issued 22,888 (31,661) shares under the Company's Employee Share Purchase Plan at an average price of $14.06 ($10.87).
Share repurchase
During the fourth quarter (and year) ending September 30, 2011, the Company acquired 27,200 (81,600) of its outstanding common shares at an average price of $18.18 ($18.23) per share for a total of $494 ($1,487) including related expenses, through normal course issuer bids in place during the period. During the fourth quarter (and year) ending September 30, 2010, the Company acquired 47,320 (147,950) of its outstanding common shares at an average price of $17.71 ($17.43) per share for a total of $838 ($2,578) 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. During the year ending September 30, 2011 the Company granted 95,000 options to directors and officers at an average price of $18.65 per share with 28,000 options vesting immediately and 67,000 options vesting over a period of two years. The options expire on February 14, 2016. The weighted average fair value of options granted was $1.27 per option. A total of 500,000 common shares are authorized for issuance under the plan, of which 345,000 are issued at September 30, 2011. At September 30, 2011 there were 150,000 options outstanding.
- NET EARNINGS PER SHARE
The diluted weighted average number of shares has been calculated as follows:
| Three months ended September 30 |
Year ended September 30 |
|||
| 2011 | 2010 | 2011 | 2010 | |
| Weighted average number of shares – basic | 7,688,050 | 7,715,538 | 7,697,217 | 7,756,584 |
| Addition to reflect the dilutive effect of employee stock options | 14,581 | 27,998 | 17,948 | 34,241 |
| Weighted average number of shares – diluted | 7,702,631 | 7,743,536 | 7,715,165 | 7,790,825 |
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 and year ending September 30, 2010 and the three-month period ending September 30, 2011, no options were excluded from the above computation. For the year ending September 30, 2011, 95,000 were excluded from the above computation.
- 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.
- 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 long-term and 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 other expense, interest income 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 September 30, 2011 |
||||||||||
| Systems Engineering |
Business and Technology Services |
Corporate | Total | |||||||
| Revenues | $ | 16,810 | $ | 38,619 | $ | - | $ | 55,429 | ||
| Earnings before interest income and income tax expense | 3,078 | 2,261 | (660 | ) | 4,679 | |||||
| Interest income (Note 7) | 121 | |||||||||
| Income tax expense | (1,462 | ) | ||||||||
| Net earnings | $ | 3,338 | ||||||||
Three months ended September 30, 2010 |
||||||||||
| Systems Engineering |
Business and Technology Services | Corporate | Total | |||||||
| Revenues | $ | 15,651 | $ | 37,260 | $ | - | $ | 52,911 | ||
| Earnings before other expense, interest income and income tax expense | 2,625 | 2,443 | (653 | ) | 4,415 | |||||
| Unrealized loss on fair value of conversion options of investment (Note 6) | (2 | ) | ||||||||
| Interest income (Note 7) | 215 | |||||||||
| Income tax expense | (1,388 | ) | ||||||||
| Net earnings | $ | 3,240 | ||||||||
Year ended September 30, 2011 |
||||||||||
| Systems Engineering |
Business and Technology Services | Corporate | Total | |||||||
| Revenues | $ | 65,716 | $ | 160,935 | $ | - | $ | 226,651 | ||
| Earnings before other income, interest income and income tax expense | 10,257 | 9,754 | (2,565 | ) | 17,446 | |||||
| Interest income (Note 7) | 817 | |||||||||
| Income tax expense | (5,082 | ) | ||||||||
| Net earnings | $ | 13,181 | ||||||||
| Total assets other than cash and goodwill | $ | 16,257 | $ | 33,962 | $ | 113 | $ | 50,332 | ||
| Goodwill | - | 9,518 | - | 9,518 | ||||||
| Cash | - | - | 30,742 | 30,742 | ||||||
| Total assets | $ | 16,257 | $ | 43,480 | $ | 30,855 | $ | 90,592 | ||
| Equipment and intangible expenditures | $ | 352 | $ | 131 | $ | - | $ | 483 | ||
Year ended September 30, 2010 |
||||||||||
| Systems Engineering |
Business and Technology Services | Corporate | Total | |||||||
| Revenues | $ | 64,000 | $ | 151,725 | $ | - | $ | 215,725 | ||
| Earnings before other income, interest income and income tax expense | 11,203 | 9,983 | (2,553 | ) | 18,633 | |||||
| Unrealized loss on fair value of conversion options of investment (Note 6) | (52 | ) | ||||||||
| Interest income (Note 7) | 753 | |||||||||
| Income tax expense | (5,724 | ) | ||||||||
| Net earnings | $ | 13,610 | ||||||||
| Total assets other than cash and goodwill | $ | 16,507 | $ | 33,287 | $ | 3,490 | $ | 53,284 | ||
| Goodwill | - | 9,518 | - | 9,518 | ||||||
| Cash | - | - | 29,055 | 29,055 | ||||||
| Total assets | $ | 16,507 | $ | 42,805 | $ | 32,545 | $ | 91,857 | ||
| Equipment and intangible expenditures | $ | 668 | $ | 710 | $ | - | $ | 1,378 | ||
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 excluding its exposure arising from the Company's US subsidiary. 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 September 30, 2011, the Company had the following forward foreign exchange contracts:
Type |
Notional | Currency | Maturity | Equivalent Cdn. Dollars |
Fair Value September 30, 2011 |
|||
| BUY | 14,295 | USD | October 2011 | $ 14,613 | $ 371 | |||
| SELL | 1,000 | USD | September 2015 | 1,057 | 9 | |||
| SELL | 1,000 | USD | September 2016 | 1,057 | 9 | |||
| SELL | 1,000 | USD | September 2017 | 1,057 | 9 | |||
| BUY | 3,829 | EURO | October 2011 | 5,329 | 48 | |||
| BUY | 167 | GPB | October 2011 | 268 | 5 | |||
| Derivative assets | 451 | |||||||
| SELL | 35,703 | USD | October 2011 | $ 36,497 | $ 927 | |||
| SELL | 10,249 | EURO | October 2011 | 14,265 | 127 | |||
| Derivative liabilities | $ 1,054 |
A 10% strengthening (weakening) of the Canadian dollar against the following currency at September 30, 2011 would have increased (decreased) other comprehensive income as related to the forward foreign exchange contracts by the amounts shown below.
| 2011 | |||
| USD | $ | 2,272 | |
| EURO | 927 | ||
| GBP | (26 | ) | |
| $ | 3,173 | ||
Management Discussion and Analysis – September 30, 2011:
(Canadian dollars in thousands, except per share data)
RESULTS OF OPERATIONS
Revenues:
For the fourth quarter 2011, revenues were $55,429 compared to $ 52,911 reported for the same period in 2010 representing a 5% increase from the prior year. For the year ending September 30, 2011 revenues were $ 226,651 compared to $ 215,725 for 2010 representing a 5% increase from the prior year.
Systems Engineering's (SED) revenues were $ 16,810 in the quarter and $ 65,716 on a year-to-date basis representing an increase of 7% and 3% from the $ 15,651 and $ 64,000 recorded last year. Although the project mix has changed, the overall level of activity is consistent with the same quarter of the previous year. 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 $ 38,619 in the quarter and $ 160,935 on a year-to-date basis representing an increase of 4% for the quarter and 6% for the year compared to the $ 37,260 and $ 151,725 achieved for the same period of last year. In addition to additional revenues derived from new contracts, BTS experienced steady activity this year on most of its contracts realizing gains in both its outsourcing and staffing groups.
Management expects that the marketplace over the next year will continue to be very competitive. The market conditions for SED are expected to continue to be positive and present new opportunities, although the related timing is always subject to change. Current BTS backlog will provide a solid level of activity on existing contracts and new opportunities are expected to arise, although potential government cutbacks could have an impact. The timing of future contract awards and customer demand will ultimately determine revenues for the next year.
Gross margin:
Gross margin was 19.8% in the fourth quarter of 2011, compared to the 19.6% reported in the fourth quarter a year ago. On a year-to-date basis the Company reported margins of 18.9% compared to 19.8% for the same period last year. The consolidated gross margin for the fourth quarter 2011 reflects strong execution on SED contracts and the annual margins are in line with expectations; reflecting continued downward pressure on margins.
Gross margin in Systems Engineering was 27.7% this quarter compared to 26.6% in the fourth quarter of 2010 and was 25.0% for the year ending September 30, 2011 compared to 26.7% for the same period last year. Although margins for the fourth quarter benefited from strong execution, the gross margin for fiscal 2011 was generally in line with expectations and reflects a very competitive landscape in all of SED markets.
Gross margin in Business and Technology Services was 16.3% compared to the 16.6% reported in the fourth quarter of 2010 and 16.4% for the year compared to 16.9% for the same period last year. Gross margin for the quarter and the year are slightly below the prior year and reflect an ever changing project mix.
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. Increased competition continues to put downward pressure on margins in both divisions. The volatility of the Canadian dollar could impact margins on new work in the SED division.
Operating expenses:
Selling and marketing, general and administration and facilities totalled $5,968 or 10.8% of revenues in the fourth quarter of 2011 compared to $5,681 or 10.7% of revenues reported in the fourth quarter of 2010. For the year ending September 30, 2011 operating expenses totalled $24,199 or 10.7% compared to $23,185 or 10.7% in 2010. Operating expenses were relatively stable and in line with the overall level of revenues.
Interest income:
Interest income for the fourth quarter of 2011 was $121 compared to $215 in 2010. No interest was accrued on the AIM investment in the fourth quarter of 2011. For the year ending September 30, 2011, interest income was $817 compared to $753 in 2010. 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 as a result of increased interest rates.
Unrealized loss on fair value of conversion options of investment:
During 2010, the Company recorded a loss of $2 for the quarter and $52 on a year-to-date basis relating to the fair value of conversion options of investment. The reported unrealized gain or loss is a reflection of the movement in quoted market prices of AIM shares and the remaining term of the related conversion privilege. With the debenture coming due in fiscal 2011, the fair value of options was insignificant during the year resulting in no gain or loss in 2011.
Income taxes:
The provision for income taxes for the fourth quarter of 2010 was $1,462 or 30.5% of earnings before tax compared to $1,388 in 2010 or 30.0% of earnings before tax. On a year-to-date basis, the provision for income taxes was $5,082 or 27.8% of earnings before tax compared to $5,724 in 2010 or 29.6% 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 effective tax rate for 2012, prior to considering the impact of non-taxable transactions, is expected to be approximately 27%.
Net earnings:
As a result of the foregoing, in the fourth quarter of 2011 the Company recorded net earnings of $3,338 or $0.43 per share basic and diluted, compared to $3,240 or $0.42 per share basic diluted in the same quarter of the prior year. For the year ending September 30, 2011 the Company reported net earnings of $13,181 or $1.71 per share basic and diluted compared to $13,610 or $1.75 per share basic and diluted in the same period of the prior year.
BACKLOG
The Company's backlog at September 30, 2011 was $703 million with terms extending to fiscal 2018. This compares to $962 million reported at September 30, 2010. 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 2012, 2013 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 $125 million. During the third quarter of 2011, the Company reduced its backlog by $122 million based on DND exercising year eight and nine of the Health Services contract with funding levels consistent with those recently experienced. While the excess funding is still available to DND, this was considered an indication that this portion of the contracted backlog would not materialize. 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 2012 | Fiscal 2013 | Beyond 2013 | Estimated realizable portion of Backlog | Excess over estimated realizable portion | TOTAL | |||||
| Contracted Backlog | $ 169 | $ 111 | $ 68 | $ 348 | $ 58 | $ 406 | |||||
| Option Renewals | 14 | 28 | 187 | 229 | 67 | 296 | |||||
| TOTAL | $ 183 | $ 139 | $ 255 | $ 577 | $ 125 | $ 702 | |||||
| Business and Technology Services | $ 142 | $ 127 | $ 237 | $ 506 | $ 125 | $ 631 | |||||
| Systems Engineering | 41 | 12 | 18 | 71 | - | 71 | |||||
| TOTAL | $ 183 | $ 139 | $ 255 | $ 577 | $ 125 | $ 702 |
FINANCIAL CONDITION AND CASHFLOWS
Operating activities:
Cash inflows from operating activities for the year ending September 30, 2011 were $6,691 compared to $2,148 in 2010. This year's increase is the result of working capital fluctuations in line 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 September 30, 2011, the Company's total unearned revenue amounted to $8,026. This compares to $16,002 one year earlier, with the decrease primarily attributable to work progressing on the third deep space antenna contract for ESA.
Financing activities:
During the year ending September 30, 2011, the Company paid quarterly dividends totalling $0.97 per share compared to 2010 when the Company paid quarterly dividends totalling $0.79 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 year ending September 30, 2011, the Company repurchased 81,600 common shares through its normal course issuer bid at an average price of $18.23 compared to the previous year when the Company repurchased 147,950 shares at an average price of $17.43.
Investment activities:
During the year, the Company received $3,897 as full payment of a debenture held in AIM Health Group.
Capital resources:
At September 30, 2011 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 FINANCIAL RESULTS
Effective October 1, 2010, the Company changed its accounting policy with regards to the recognition of warranty costs related to fixed price contracts. Previously a provision for warranty claims was established when revenue was recognized, based on the warranty terms and prior claim experience. To better align revenue recognized with the warranty obligations, warranty costs are now included in estimated total contract costs at the beginning of the project and flow through cost of revenues when a warranty claim is made. Revenue is recognized using the percentage completion method based on management's best estimate of the costs to complete each contract. This change in accounting policy is applied retroactively to October 1, 2009 with a reduction in the warranty provision of $3,715 (through accounts payable and accrued liabilities), an increase in unearned contract revenue of $4,239, a decrease in taxes payable of $157 (through accounts payable and accrued liabilities) and a reduction in opening retained earnings of $367. The impact on the net income for the quarter and the nine-month period ended June 30, 2010 is not material.
SELECTED QUARTERLY FINANCIAL DATA
| Q4/11 | Q3/11 | Q2/11 | Q1/11 | Q4/10 | Q3/10 | Q2/10 | Q1/10 | ||||||||||
| Revenues | $ | 55,429 | $ | 58,529 | $ | 59,433 | $ | 53,260 | $ | 52,911 | $ | 57,565 | $ | 53,141 | $ | 52,108 | |
| Net earnings | $ | 3,338 | $ | 3,451 | $ | 3,254 | $ | 3,138 | $ | 3,240 | $ | 3,845 | $ | 3,082 | $ | 3,443 | |
| Net earnings per share | |||||||||||||||||
| Basic | $ | 0.43 | $ | 0.45 | $ | 0.42 | $ | 0.41 | $ | 0.42 | $ | 0.49 | $ | 0.40 | $ | 0.44 | |
| Diluted | $ | 0.43 | $ | 0.45 | $ | 0.42 | $ | 0.41 | $ | 0.42 | $ | 0.49 | $ | 0.40 | $ | 0.44 | |
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 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 to 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. Custom manufacturing activity levels will continue to be directly dependent 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 and the division continues to assess how it can service new markets and increase new opportunities available to the division.
GUIDANCE
While growth has been modest this last year, we are proud of our accomplishments within a very competitive landscape, particularly during this period of continued worldwide political and economic uncertainty. We believe that our key markets will remain strong, although we recognize the potential for government cost cutting initiatives and increased competitive pressures. 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 available information and our assessment of the marketplace, we expect revenues for 2012 to be in the range of $230 million to $250 million and net earnings per share in the range of $1.65 to $1.90 per share.
INTERNATIONAL FINANCIAL REPORTING STANDARDS
The Canadian Accounting Standards Board has announced 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) effective for fiscal years beginning after January 1, 2011. Therefore, the Company will adopt IFRS as the basis of preparation for its interim and annual financial statements for periods beginning on October 1, 2011 with a transition date of October 1, 2010 to allow for comparative financial information. 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 in effect at the time of reporting the Company's first IFRS financial statements will evolve from current IFRS and may result in additional differences.
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; and
- Disclosure controls and procedures.
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 2010, the following activities were performed:
- A detailed assessment was substantially completed for all key standards and significant accounting policy choices including IFRS 1 elective exemption choices using IFRS standards in effect on date of transition;
- The creation of a duplicate IFRS compliant environment to track all adjusting IFRS entries for the Company's opening balance sheet and throughout the Company's dual reporting period of October 1, 2010 to September 30, 2011;
- A detailed assessment was performed of required changes to internal controls. Management concluded that internal controls applicable to the Company's reporting process under Canadian GAAP are fundamentally the same as those required in the Company's IFRS reporting environment;
- A detailed assessment was performed and minimal changes to disclosure controls and procedures were identified. Disclosure controls and procedures have been updated to include all data required for financial statements disclosures under IFRS;
- A detailed assessment has been completed of the impact of IFRS on key performance indicators and business activities such as compensation arrangements, hedging activities and risk management practices.
- A detailed assessment was performed of required changes to internal controls, systems, processes and documentation. With the exception of adjusting the Company's hedging documentation to reflect IFRS standard requirements, no significant changes were required;
- A complete IFRS financial statement model was built and reviewed by management and the board of directors;
- Data collection for the opening balance sheet is in progress; and
- Key finance employees responsible to carry out the IFRS conversion were provided with adequate training and resources throughout this process. The Company also held an IFRS information session with all members of the board of directors. The Audit Committee is also appraised quarterly on IFRS standards and policy choices available to the Company.
For 2011 the following activities were performed:
- Monitored standards to be issued by the IASB and provided the related training on such. Assessed the impact of new IASB standards on the Company's opening balance sheet and its financial position and results of operations throughout the conversion period;
- Completed the data collection to assess the impact of adopting IFRS. Data collection for each quarter in fiscal 2011 was performed shortly following the closing of each quarter under Canadian GAAP;
- Completed 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 comparative year 2011 and the first reporting year 2012;
- Prepared fiscal 2011 quarterly financial statements under IFRS standards, in preparation for reporting comparative information in 2012; the Company's first year of reporting under IFRS.
First-time adoption of IFRS:
IFRS 1 – First-Time Adoption of International Financial Reporting Standards generally requires that a first-time adopter apply IFRS accounting policies retrospectively to all periods presented in its first IFRS compliant financial statements. IFRS 1 also provides certain mandatory and optional exemptions to the full retrospective application. The most significant optional exemptions applicable to the Company are summarized on page 22 of the Company's Management Discussion and Analysis in the 2010 Annual Report. During fiscal 2011, the Company has not identified any additional elections to be considered by management.
Expected areas of significance:
The Company's key changes in accounting policies required under IFRS standards are summarized on page 22 and 23 of the Company's Management Discussion and Analysis in the 2010 Annual Report. The differences identified in this document should not be regarded as an exhaustive list and other changes may result from the Company's conversion to IFRS. Furthermore, as a result of changes in circumstances, such as economic conditions or operations, and the inherent uncertainty from the use of assumptions, the actual impacts may be different from those presented. During fiscal 2011, the Company did not identify any additional changes in accounting policy to be considered by management.
Many of the differences identified between IFRS and Canadian GAAP have now been quantified. We have not yet prepared a full set of annual financial statements under IFRS; therefore, amounts are unaudited. Based on the Company's work to date, we do not expect that the conversion to IFRS will result in a significant impact on the financial position or results of operations of the Company and believe that the areas of higher potential impact will be around overall presentation and disclosure requirements. However, our assessment of the impacts of certain potential differences will not be finalized until the Company has prepared a full set of annual financial statements under IFRS, the future impacts of converting to IFRS will depend on the particular circumstances prevailing in those years.
The International Accounting Standards Board (IASB) has a number of ongoing projects on its agenda. Management continues to monitor standards to be issued by the IASB, but does not expect these standards to be mandatory for the Company's fiscal 2012 financial statements. The summary of key expected changes summarized on page 22 and 23 of the Company's Management Discussion and Analysis in the 2010 Annual Report was completed with the expectation that we will apply IFRS standards expected to be effective at the date of conversion. However, management will only make final decisions regarding early adoption of any new standards as they are issued by the IASB.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
During the most recent interim quarter ending September 30, 2011, 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 fourth quarter of 2011, and with the Management Discussion and Analysis in the 2010 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
ir@calian.com
info@calian.com
www.calian.com