Calian Technologies Ltd.

TSX : CTY


Calian Technologies Ltd.

May 07, 2014 11:45 ET

Calian Reports Second Quarter Results

(All amounts in this release are in Canadian Dollars)

OTTAWA, ONTARIO--(Marketwired - May 7, 2014) - Calian Technologies Ltd. (TSX:CTY) today released unaudited results for the second quarter ended March 31, 2014. Revenues for the quarter were $51.2 million, a 13% decrease from the $58.9 million reported in the same quarter of the previous year. Net earnings were $2.4 million or $0.32 per share basic and diluted, compared to $3.4 million or $0.44 per share basic and diluted in the same quarter of the previous year.

"The results released today were disappointing relative to the prior year. Contraction in government spending has definitely taken its toll on both of our divisions. Constraints, delays and cancellations within both DND and US defence primes, have resulted in reduced throughput. This has particularly affected maintenance and training services in our BTS division as well as manufacturing services at our SED division. This in turn has had an impact on profitability, not only in the form of reduced gross margin dollars, but also in the underutilization of certain fixed-cost capabilities. On the positive side, we have experienced year over year growth in our health group at BTS as well as our ancillary communications products segment at SED. Of course, with reduced revenues and margins, we are paying particular attention to discretionary costs in an effort to mitigate some of the impact." stated Ray Basler, President and CEO.

"While we are obviously disappointed with the last quarter results, we are encouraged by recent contract wins. SED backlog was replenished late in the quarter through a number of wins ranging from a significant multi-year satellite ground segment contract to a reappearance of manufacturing related orders from longstanding defence customers. While work has started on all of these new contracts, it will be a few months before significant material and subcontract throughputs are realized Overall, we are anticipating some improvement in the second half of the year" continued Basler.

"We have also seized the opportunity to acquire Amtek Engineering Services Ltd., a longstanding and trusted partner in many defence pursuits. Not only will the Amtek acquisition provide an appropriate return on our investment, it will certainly put Calian in a stronger position when the inevitable upturn in defence spending arrives" stated Basler.

While the company's second quarter performance was certainly below historical standards, it is a direct reflection of constrained government spending and the related increase in competitive pressures. We are anticipating some improvement in the last half of the year, but we still expect that it may take some time to experience any significant 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 thereby negatively impacting short term projections for both revenues and profitability. Fortunately recent contract signings have solidified the SED backlog and provided for added revenue confidence. 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 $215 million to $235 million and net earnings in the range of $1.45 to $1.70 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, training, IT services and operations and maintenance 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 delivers outsourcing services for a variety of technical and professional functions and provides health services to numerous domestic customers. 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.

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 March 31, 2014 and September 30, 2013
(Canadian dollars in thousands)

NOTES
March 31,
2014
September 30,
2013
ASSETSCURRENT ASSETS
Cash $ 23,061 $ 29,782
Accounts receivable 44,201 37,903
Work in process 11,860 9,764
Prepaid expenses 1,291 1,346
Derivative assets 8 10 89
Total current assets 80,423 78,884
NON-CURRENT ASSETS
Equipment 3,279 3,514
Application software 535 585
Acquired intangible assets 10 3,898 3,808
Goodwill 11,324 10,781
Total non-current assets 19,036 18,688
TOTAL ASSETS $ 99,459 $ 97,572
LIABILITIES AND SHAREHOLDERS' EQUITYCURRENT LIABILITIES
Accounts payable and accrued liabilities $ 22,810 $ 24,634
Unearned contract revenue 7,009 4,059
Share repurchase obligation 5 - 947
Derivative liabilities 8 158 14
Total current liabilities 29,977 29,654
NON-CURRENT LIABILITIES
Deferred tax liabilities 1,247 1,121
Total non-current liabilities 1,247 1,121
TOTAL LIABILITIES 31,224 30,775
SHAREHOLDERS' EQUITY
Issued capital 5 20,161 19,746
Contributed surplus 246 216
Retained earnings 47,813 47,089
Accumulated other comprehensive income (loss) 15 (254 )
TOTAL SHAREHOLDERS' EQUITY 68,235 66,797
$
99,459
$
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 and six-month periods ended March 31, 2014 and 2013
(Canadian dollars in thousands, except per share data)
NOTES Three months
ended
March 31, 2014
Three months
ended
March 31, 2013
Six months
ended
March 31, 2014
Six months ended
March 31, 2013
Revenues $ 51,186 $ 58,932 $ 102,988 $ 116,838
Cost of revenues 42,142 48,028 84,146 95,027
Gross profit 9,044 10,904 18,842 21,811
Selling and marketing 859 1,015 1,853 2,079
General and administration 4,274 4,569 8,600 9,133
Facilities 822 769 1,638 1,578
Profit before interest income and income tax expense 3,089 4,551 6,751 9,021
Interest income 66 79 140 170
Profit before income tax expense 3,155 4,630 6,891 9,191
Income tax expense - current 831 1,259 1,821 2,402
Income tax expense - deferred (40 ) 17 (70 ) 34
Total income tax expense 791 1,276 1,751 2,436
NET PROFIT FOR THE PERIOD $ 2,364 $ 3,354 $ 5,140 $ 6,755
EARNINGS PER SHARE:
Basic 6 $ 0.32 $ 0.44 $ 0.70 $ 0.89
Diluted 6 $ 0.32 $ 0.44 $ 0.70 $ 0.89



The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

CALIAN TECHNOLOGIES LTD.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three and six-month periods ended March 31, 2014 and 2013
(Canadian dollars in thousands)
NOTES Three months
ended
March 31, 2014
Three
months
ended
March 31,
2013
Six months
ended
March 31,
2014
Six months
ended
March 31,
2013
PROFIT FOR THE PERIOD $ 2,364 $ 3,354 $ 5,140 $ 6,755
Other comprehensive income, net of tax
Change in deferred gain or loss on derivatives designated as cash flow hedges, net of tax of $88 and $98 (2013 - $34 and $320) 243 (91 ) 269 (867 )
Other comprehensive income (loss), net of tax 243 (91 ) 269 (867 )
TOTAL COMPREHENSIVE INCOME FOR THE PERIOD $ 2,607 $ 3,263 $ 5,409 $ 5,888



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 six-months ended March 31, 2014 and 2013
(Canadian dollars in thousands, except per share data)
Notes Issued capital Contributed surplus Retained earnings Cash flow
hedging reserve
Total
Balance October 1, 2013 $ 19,746 $ 216 $ 47,089 $ (254 ) $ 66,797
Total comprehensive income - - 5,140 269 5,409
Dividends ($0.56 per share) - - (4,137 ) - (4,137 )
Issue of shares under the employee share purchase plan 5 465 - - - 465
Issue of shares under stock option plan 5 - - - - -
Stock option plan compensation expense 5 - 30 - - 30
Share repurchase 5 (174 ) - (1,102 ) - (1,276 )
Share purchase agreement - reclassification 5 124 - 823 - 947
Balance March 31, 2014 $ 20,161 $ 246 $ 47,813 $ 15 $ 68,235
Notes Issued capital Contributed surplus Retained earnings Cash flow
hedging reserve
Total
Balance October 1, 2012 $ 19,949 $ 164 $ 47,186 $ 697 $ 67,996
Total comprehensive income - - 6,755 (867 ) 5,888
Dividends ($0.56 per share) - - (4,272 ) - (4,272 )
Issue of shares under the employee share purchase plan 5 424 - - - 424
Issue of shares under stock option plan 5 99 (6 ) - - 93
Stock option plan compensation expense 5 - 32 - - 32
Share repurchase 5 (204 ) - (1,384 ) - (1,588 )
Share purchase agreement - reclassification 5 7 - 53 - 60
Balance March 31, 2013 $ 20,275 $ 190 $ 48,338 $ (170 ) $ 68,633



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 six-month periods ended March 31, 2014 and 2013
(Canadian dollars in thousands)
NOTES Six months ended
March 31, 2014
Six months ended
March 31, 2013
CASH FLOWS FROM OPERATING ACTIVITIES
Profit for the period $ 5,140 $ 6,755
Items not affecting cash:
Interest income (140 ) (170 )
Income tax expense 1,751 2,436
Employee stock purchase plan and option plan compensation expense 64 66
Amortization 822 813
7,637 9,900
Change in non-cash working capital
Accounts receivable (6,340 ) (2,671 )
Work in process (2,096 ) 818
Prepaid expenses 55 (751 )
Accounts payable and accrued liabilities (742 ) 2,941
Unearned contract revenue 2,950 (4,066 )
1,464 6,171
Interest received 150 188
Income tax paid (1,863 ) (2,313 )
(249 ) 4,046
CASH FLOWS USED IN FINANCING ACTIVITIES
Issuance of common shares 5 388 449
Dividends (4,137 ) (4,272 )
Repurchase of shares 5 (1,276 ) (1,588 )
(5,025 ) (5,411 )
CASH FLOWS USED IN INVESTING ACTIVITIES
Equipment and application software expenditures (242 ) (290 )
Acquisition 10 (1,205 ) (400 )
(1,447 ) (690 )
NET CASH OUTFLOW (6,721 ) (2,055 )
CASH, BEGINNING OF PERIOD 29,782 31,998
CASH, END OF PERIOD $ 23,061 $ 29,943

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 March 31, 2014 and 2013
(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 dollars 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 condensed 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 condensed consolidated 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 May 7, 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 March 31, 2014 (2013), the Company acquired 48,000 (35,300) of its outstanding common shares at an average price of $19.75 ($20.68) per share for a total of $948 ($730) including related expenses, through normal course issuer bids in place during the period. During the six months ended March 31, 2014 (2013), the Company acquired 64,500 (77,170) of its outstanding common shares at an average price of $19.79 ($20.59) per share for a total of $1,276 ($1,588) 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 March 31, 2014, a total of 735,391 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.

Employee Share Purchase Plan

During the three and six-month period ended March 31, 2014 (2013), the Company issued 22,075 (23,346) shares under the Company's Employee Share Purchase Plan at an average price of $17.54 ($15.22) for a total of $388 ($355).

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
March 31
Six months ended
March 31
2014201320142013
Weighted average number of shares - basic7,369,7377,614,1107,381,1277,624,283
Addition to reflect the dilutive effect of employee stock options5,7368,3836,3158,333
Weighted average number of shares - diluted7,375,4737,622,4937,387,4427,632,616

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 and six-month period ended March 31, 2014 (2013), 155,000 (NIL) 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 year ended September 30, 2013.


Three months ended March 31, 2014
Systems
Engineering
Business and
Technology
Services
Corporate Total
Revenues$ 12,380 $ 38,806$ - $ 51,186
Profit before interest income and income tax expense1,916 1,686(513)3,089
Interest income 66
Income tax expense (791)
Profit for the period $ 2,364
Total assets other than cash and goodwill$ 28,010 $ 36,892$ 172 $ 65,074
Goodwill- 11,324- 11,324
Cash- -23,061 23,061
Total assets$ 28,010 $ 48,216$ 23,233 $ 99,459
Equipment and intangible expenditures$ 42 $ 59$ - $ 101
Three months ended March 31, 2013
Systems
Engineering
Business and
Technology
Services
Corporate Total
Revenues$ 16,029 $ 42,903$ - $ 58,932
Profit before interest income and income tax expense3,083 2,039(571)4,551
Interest income 79
Income tax expense (1,276)
Profit for the period $ 3,354
Six months ended March 31, 2014
Systems
Engineering
Business and
Technology
Services
Corporate Total
Revenues$ 26,910 $ 76,078$ - $ 102,988
Profit before interest income and income tax expense4,375 3,420(1,044)6,751
Interest income 140
Income tax expense (1,751)
Profit for the period $ 5,140
Six months ended March 31, 2013
Systems
Engineering
Business and
Technology
Services
Corporate Total
Revenues$ 33,981 $ 82,857$ - $ 116,838
Profit before interest income and income tax expense5,918 4,240(1,137)9,021
Interest income 170
Income tax expense (2,436)
Profit for the period $ 6,755
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 used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. Hedge ineffectiveness has historically been insignificant.

The forward foreign exchange contracts primarily require the Company to purchase or sell certain foreign currencies with or for Canadian dollars at contractual rates. At March 31, 2014, the Company had the following forward foreign exchange contracts:


Type
NotionalCurrency MaturityEquivalent
Cdn. Dollars
Fair Value
March 31, 2014
SELL53,230USD April 2014$ 58,846$ 8
BUY430EURO April 20146551
BUY236GBP April 20144351
Derivative assets$ 10
SELL3,000EURO April 2014$ 4,569$ 8
SELL1,000USD September 20151,10548
SELL1,000USD September 20161,10548
SELL1,000USD September 20171,10548
BUY32,568USD April 201436,0046
Derivative liabilities$ 158

A 10% strengthening of the Canadian dollar against the following currencies at March 31, 2014 would have decreased other comprehensive income as related to the forward foreign exchange contracts by the amounts shown below.

March 31, 2014
EURO$ 356
USD2,378
GBP(40)
$ 2,694

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 period ended March 31, 2014 (2013), the Company paid respectively $600 ($400) related to the first and second year earn-out.

Med-Team Clinic Inc. ("Med-Team")

On December 31, 2013, the Company acquired all of the outstanding shares of Med-Team for consideration of $930 of which $661 was paid on the date of closing. A discounted amount of $269 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 Combinations applies.

Under the contingent consideration arrangement, the Company is required to pay the former shareholders of Med-Team $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 statements of profit.

The following are the assets acquired and liabilities recognized at the date of the acquisition:

Current assets:
Cash$ 56
Trade receivables171
$ 227
Non-current assets:
Equipment$ 4
Intangible assets recognized at time of acquisition381
$ 385
Current liabilities:
Trade payables and accrued liabilities(125)
Deferred tax liability recognized at time of acquisition(100)
(225)
Net assets acquired$ 387
Goodwill arising on acquisition:
Total consideration$ 930
Less: fair value of identifiable net assets acquired(387)
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 Intangible assets:

Intangible assets are made up of the existing and recurring patient flow. Intangible assets will be amortized over 5 years.

11. SUBSEQUENT EVENT

On May 6, 2014, the Company acquired all of the outstanding shares of Amtek Engineering Services Ltd. (Amtek) for consideration of $5,700 of which $3,900 was paid in cash on the date of closing and $1,800 is payable contingently as described below. Amtek's principal business activity relates to the provision of full-spectrum systems engineering and technical services supporting the Department of National Defence (DND), other government departments, and industry. The acquisition is a business combination and will be accounted for in accordance with IFRS3 - Business Combination.

Under the contingent consideration arrangement, the Company is required to pay the former shareholders of Amtek $1,800 if Amtek attains specified levels of EBITDA for the years ending April 30, 2014 and 2015.

Management Discussion and Analysis - March 31, 2014:

(Canadian dollars in thousands, except per share data)

RESULTS OF OPERATIONS

Revenues:

For the second quarter of 2014, revenues were $51,186 compared to $58,932 reported for the same period in 2013 representing a 13% decrease from the prior year. For the six-month period ending March 31, 2014 revenues were $102,988 compared to $116,838 for 2013, a decrease of 12%

Systems Engineering's (SED) revenues were $12,380 in the quarter and $26,910 on a year-to-date basis representing a 23% and 20% decrease respectively when compared to the $16,029 and $33,981 recorded last year. While manufacturing related revenues were similar to last quarter, they were down substantially relative to the second quarter of last year. This represents a continuation of the trend, reflecting reduced defence spending by DND as well as US defence prime contractors. While engineering utilization remained very high, actual revenues generated from engineering projects were down from the same quarter last year. This is primarily a reflection of lower materials and subcontracts in the project mix. Consistent with the prior period, we experienced another 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 $38,806 in the quarter and $76,078 on a year-to-date basis representing a decrease of 10% and 8% respectively from the $42,903 and $82,857 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 at the beginning of this fiscal year and decided not to re-compete the work requirement. Our short term staffing group continued to experience reductions in demand coupled with significant competitive pressures on available work. In the second quarter, our training group was also negatively impacted by DND reducing its uptake on available training contracts; an example of further constraints on defence spending. Fortunately our health initiatives continued to provide positive results, showing year over year revenue gains both for the quarter and year to date. 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.

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. Our recently strengthened 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 prolonged 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 17.7% in the second quarter of 2014, compared to the 18.5% reported in the second quarter a year ago. On a year-to-date basis the Company reported margins of 18.3% compared to 18.7% for the same period last year. The consolidated gross margin for the second quarter 2014 reflects downward pressure being experienced in both of our divisions.

Gross margin in Systems Engineering was 26.9% this quarter compared to 27.7% in the second quarter of 2013 and was 27.1% for the six-month period ended March 31, 2014 compared to 25.4% for the same period last year. With the project mix biased towards labour as opposed to lower-margin materials and subcontracts, SED margins for the second quarter remained relatively high. Also, higher levels of investment tax credit ("ITC") recovery in the current year accounted for the increased margins on a year to date business.

Gross margin in Business and Technology Services was 15.0% compared to the 15.1% reported in the second quarter of 2013. For the six-month period ended March 31, 2014 gross margin was 15.5% compared to the 15.9% reported for the same period last year. The traditional BTS business which is concentrated with the federal government continued to experience margin pressure and strong competition on new work will likely negate any significant improvement 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 $12,091 or 11.7% of revenues on a year-to-date basis compared to $12,790 or 11.0% of revenues reported in 2013. Through its continued efforts, management was able to reduce its operating costs compared to fiscal 2013. However, with the 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.

Income taxes:

The provision for income taxes on a year-to-date basis was $1,751 or 25.4% of earnings before tax compared to $2,436 in 2013 or 26.5% of earnings before tax. The effective tax rate for 2014, prior to considering the impact of non-taxable transactions and adjustments to reflect actual tax provision as filed, is expected to be approximately 26.5%.

Net earnings:

As a result of the foregoing, in the second quarter of 2014 the Company recorded net earnings of $2,364 or $0.32 per share basic and diluted, compared to $3,354 or $0.44 per share basic and diluted in the same quarter of the prior year. For the six-month period ending March 31, 2014, the Company reported net earnings of $5,140 or $0.70 per share basic and diluted compared to $6,755 or $0.89 per share basic and diluted in the same period of the prior year.

BACKLOG

The Company's backlog at March 31, 2014 was $419 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 $128 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 2014Fiscal 2015Beyond 2015 Estimated realizable portion of Backlog Excess over estimated realizable portionTOTAL
Contracted Backlog$ 102$ 97$ 38 $ 237 $ 114$ 351
Option Renewals-2826 54 1468
TOTAL$ 102$ 125$ 64 $ 291 $ 128$ 419
Business and Technology Services$ 76$ 97$ 39 $ 212 $ 128$ 340
Systems Engineering262825 79 -79
TOTAL$ 102$ 125$ 64 $ 291 $ 128$ 419

FINANCIAL CONDITION AND CASHFLOWS

Operating activities:

Cash outflows from operating activities for the six-month period ending March 31, 2014 were $249 compared to cash inflows of $4,046 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 March 31, 2014, the Company's total unearned revenue amounted to $7,009. 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 six month period ending March 31, 2014 (2013), the Company paid quarterly dividends of $0.56 ($0.56) per share. The Company intends to continue with its quarterly dividend policy for the foreseeable future.

During the six-month period ending March 31, 2014, the Company repurchased 64,500 common shares through its normal course issuer bid at an average price of $19.79 compared to the previous year when the Company repurchased 77,170 shares at an average price of $20.59.

Capital resources:

At March 31, 2014 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

Q2/14 Q1/14Q4/13Q3/13Q2/13Q1/13Q4/12Q3/12
Revenues$ 51,186 $ 51,802$ 57,502$ 58,123$ 58,932$ 57,906$ 58,137$ 59,343
Net earnings$ 2,364 $ 2,776$ 3,024$ 3,276$ 3,354$ 3,401$ 3,364$ 3,484
Net earnings per share
Basic$ 0.32 $ 0.38$ 0.41$ 0.43$ 0.44$ 0.45$ 0.44$ 0.45
Diluted$ 0.32 $ 0.38$ 0.41$ 0.43$ 0.44$ 0.45$ 0.44$ 0.45

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 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 recent strengthening of SED's backlog provides an added degree of confidence for the realization of future revenues.

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 and cancellations 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 lies 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 company's second quarter performance was certainly below historical standards, it is a direct reflection of constrained government spending and the related increase in competitive pressures. We are anticipating some improvement in the last half of the year, but we still expect that it may take some time to experience any significant 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 thereby negatively impacting short term projections for both revenues and profitability. Fortunately recent contract signings have solidified the SED backlog and provided for added revenue confidence. 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 $215 million to $235 million and net earnings in the range of $1.45 to $1.70 per share.

INTERNAL CONTROLS OVER FINANCIAL REPORTING

During the most recent interim quarter ending March 31, 2014, 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 Commission. Calian disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. No assurance can be given that actual results, performance or achievement expressed in, or implied by, forward-looking statements within this disclosure will occur, or if they do, that any benefits may be derived from them.

The foregoing discussion and analysis should be read in conjunction with the financial statements for the second quarter of 2014, and with the Management Discussion and Analysis in the 2013 annual report, including the section on risks and opportunities.

Contact Information

  • Ray Basler
    President and Chief Executive Officer
    306-931-3425

    Jacqueline Gauthier
    Chief Financial Officer
    613-599-8600