Calian Reports Third Quarter Results: Strong Momentum Continues
(All amounts in this release are in Canadian Dollars)
- Press Release
- Source: Calian Technologies Ltd.
- On 1:00 pm EDT, Wednesday August 5, 2009
OTTAWA, ONTARIO--(Marketwire - 08/05/09) - Calian Technologies Ltd. (TSX:CTY - News) today released unaudited results for the third quarter ended June 30, 2009. Revenues for the quarter were $57.8 million, an increase of 14% from the $51.0 million reported in the same quarter of the previous year. Net earnings were $4.5 million or $0.58 per share basic and diluted, compared to $3.3 million or $0.40 per share basic and diluted in the same quarter of the previous year. For the nine-month period ending June 30, 2009, the Company reported revenues of $172.9 million and net earnings of $13.0 million or $1.67 per share basic and diluted, compared to revenues of $144.3 million and net earnings of $7.8 million or $0.94 per share basic and diluted in the prior year.
"We once again achieved excellent results for the quarter. Consolidated revenues were up 14% from last year with both divisions contributing to the increase. Our SED division achieved a 19% increase in revenues relative to the same quarter last year as it continued to have exceptional manufacturing throughput with demand from our key customers remaining strong. In addition, our engineering group continued to contribute to the revenue mix, albeit on a smaller scale as several contracts in this group are nearing completion. Our BTS division also realized a significant increase, reporting revenues that were 11% higher than the third quarter of last year. This increase is attributed to higher customer take-up on existing DND contracts augmented by a growing revenue stream from new contracts signed since last year. Also, the staffing segment of BTS, which has been adversely affected by the recent economic downturn, has shown some signs of recovery primarily in the government sector" stated Ray Basler, President and CEO.
"Exceptional margins in SED were the result of continued strong utilization in the manufacturing group, steady project execution and gains realized on contractual close-outs of certain projects. In the BTS division, the economic slowdown has placed increased pressure on margins, particularly in the commercial sector and accordingly our gross margin percentage is down slightly year over year. However, due to the higher weighting of SED revenues, our overall consolidated margins are well above those achieved last year" continued Basler.
Fiscal 2009 has been an exceptional year for the Company so far and we continue to expect solid results for the year as a whole. While we believe that market potential remains strong, we do anticipate some softness in certain sectors for the near term and therefore management expects to return to more traditional levels of revenues and earnings leading into 2010. While revenues ultimately realized will be dependent on the extent and timing of future contract awards, revenues for the year are expected to be in the range of $215 million to $230 million and net earnings per share in the range of $2.00 to $2.20 per share.
About Calian
Calian sells technology services to industry and government in Canada and around the world. Calian provides customers with ready access to an exceptional team of engineers, telecommunications and technology professionals, health care professionals and other highly qualified staff. The Business and Technology Services Division augments customer workforces with flexible short and long-term placements, recruitment and outsourcing of engineering, health care professionals and other skilled professionals. The Systems Engineering Division plans, designs and implements solutions for many of the world's space agencies and leading communications satellite manufacturers and operators, as well as providing contract manufacturing services for customers in North America.
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 Nine months ended
June 30 June 30
------------------------------------------------------------------------
2009 2008 2009 2008
------------------------------------------------------------------------
Revenues $57,845 $50,964 $172,865 $144,261
Cost of revenues 45,004 40,480 134,695 116,065
------------------------------------------------------------------------
Gross profit 12,841 10,484 38,170 28,196
Selling and marketing 1,271 1,304 3,676 3,808
General and
administration 3,985 3,486 12,173 9,899
Facilities 790 771 2,323 2,367
Stock option
compensation (Note 7) 19 26 88 97
Amortization of
equipment 272 265 771 788
Amortization of
intangibles 20 78 60 234
Prior years investment
tax credits (Note 9) - - (311) -
------------------------------------------------------------------------
Earnings before other
income and expense,
interest income
and income tax expense 6,484 4,554 19,390 11,003
Unrealized gain (loss)
on fair value of
conversion options
of long-term investment
(Note 5) 18 83 (232) (179)
Loss on share exchange
(Note 5) - - (125) -
Interest income (Note 6) 141 290 538 966
------------------------------------------------------------------------
Earnings before income
tax expense 6,643 4,927 19,571 11,790
------------------------------------------------------------------------
Income tax expense -
current 2,090 1,556 6,373 3,875
Income tax expense -
future 70 41 195 121
------------------------------------------------------------------------
2,160 1,597 6,568 3,996
------------------------------------------------------------------------
NET EARNINGS 4,483 3,330 13,003 7,794
Retained earnings,
beginning of period 37,450 33,520 35,148 31,852
Excess of purchase price
over stated capital on
repurchase
of shares (Note 7) - (1,177) (3,865) (1,976)
Dividends (1,308) (1,234) (3,661) (3,231)
------------------------------------------------------------------------
Retained earnings, end
of period $40,625 $34,439 $40,625 $34,439
------------------------------------------------------------------------
------------------------------------------------------------------------
Net earnings per
share: (Note 8)
Basic $0.58 $0.40 $1.67 $0.94
------------------------------------------------------------------------
------------------------------------------------------------------------
Diluted $0.58 $0.40 $1.67 $0.94
------------------------------------------------------------------------
------------------------------------------------------------------------
Weighted average number
of shares: (Note 8)
Basic 7,666,417 8,230,902 7,783,865 8,284,408
------------------------------------------------------------------------
------------------------------------------------------------------------
Diluted 7,722,074 8,230,902 7,804,888 8,284,408
------------------------------------------------------------------------
------------------------------------------------------------------------
CALIAN TECHNOLOGIES LTD.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(Canadian dollars in thousands)
June 30, September 30,
2009 2008
------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $28,856 $27,327
Accounts receivable 38,319 33,304
Work in process 2,426 4,761
Prepaid expenses and other 890 701
Future income taxes 2,101 2,060
Derivative assets (Note 12) 145 521
------------------------------------------------------------------------
72,737 68,674
LONG-TERM INVESTMENT (Note 5) 2,846 3,165
EQUIPMENT 4,944 4,494
INTANGIBLES 20 80
GOODWILL 9,518 9,518
------------------------------------------------------------------------
$90,065 $85,931
------------------------------------------------------------------------
------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $24,846 $20,430
Unearned contract revenue 8,479 12,290
Derivative liabilities (Note 12) 561 1,606
------------------------------------------------------------------------
33,886 34,326
------------------------------------------------------------------------
COMMITMENT AND CONTINGENCIES (Note 10)
SHAREHOLDERS' EQUITY
Share capital (Note 7) 16,701 16,975
Contributed surplus (Note 7) 439 429
Retained earnings 40,625 35,148
Accumulated other comprehensive loss (1,586) (947)
------------------------------------------------------------------------
56,179 51,605
------------------------------------------------------------------------
$90,065 $85,931
------------------------------------------------------------------------
------------------------------------------------------------------------
CALIAN TECHNOLOGIES LTD.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Canadian dollars in thousands)
Three months ended Nine months ended
June 30 June 30
------------------------------------------------------------------------
2009 2008 2009 2008
------------------------------------------------------------------------
Net earnings $4,483 $3,330 $13,003 $7,794
Unrealized gain (loss) on
translating financial
statements of self-sustaining
foreign operation, net of
tax of nil (2008 - nil) (104) (11) 196 45
Unrealized gain (loss) on
fair value of host contract
component of long-term
investment, net of tax of
nil (2008 - nil) 81 (100) (301) (73)
Change in deferred gain (loss)
on derivatives
designated as cash flow hedges,
net of tax of $792
and $257 year to date (2008 -
$15 and $662 year to date) (1,649) 30 (534) (1,309)
------------------------------------------------------------------------
Other comprehensive loss (1,672) (81) (639) (1,337)
------------------------------------------------------------------------
Comprehensive income $2,811 $3,249 $12,364 $6,457
------------------------------------------------------------------------
------------------------------------------------------------------------
CALIAN TECHNOLOGIES LTD.
UNAUDITED CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE LOSS
(Canadian dollars in thousands)
June 30, September 30,
2009 2008
------------------------------------------------------------------------
Unrealized cumulative loss on translating
financial statements of self-sustaining
foreign operation $(198) $(394)
Unrealized cumulative gain on fair value of
host contract component of long-term
investment 84 385
Deferred loss on derivatives designated as
cash flow hedges (1,472) (938)
------------------------------------------------------------------------
Accumulated other comprehensive loss, end of
period (1,586) (947)
------------------------------------------------------------------------
Retained earnings, end of period 40,625 35,148
------------------------------------------------------------------------
Accumulated other comprehensive loss and
retained earnings, end of period $39,039 $34,201
------------------------------------------------------------------------
------------------------------------------------------------------------
CALIAN TECHNOLOGIES LTD.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Canadian dollars in thousands)
Three months Nine months
June 30 June 30
------------------------------------------------------------------------
2009 2008 2009 2008
------------------------------------------------------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES
Net earnings $4,483 $3,330 $13,003 $7,794
Items not affecting cash:
Interest accreted on host
contract component of long
term investment (Note 6) (109) (108) (339) (308)
Employee stock purchase plan
compensation expense 16 12 34 30
Stock option compensation 19 26 88 97
Amortization 292 343 831 1,022
Future income tax expense 70 41 195 121
Unrealized (gain) loss on fair
value of conversion
options of long-term
investment (Note 5) (18) (83) 232 179
Loss on share exchange (Note 5) - - 125 -
------------------------------------------------------------------------
4,753 3,561 14,169 8,935
Change in non-cash
working capital
Accounts receivable 5,735 (6,438) (4,817) (4,247)
Work in process 2,689 (955) 2,335 (790)
Prepaid expenses and other 65 (488) (189) (773)
Accounts payable and accrued
liabilities (4,281) 3,935 2,932 1,825
Unearned contract revenue 2,780 2,372 (3,999) 6,550
------------------------------------------------------------------------
11,741 1,987 10,431 11,500
------------------------------------------------------------------------
CASH FLOWS USED IN FINANCING
ACTIVITIES
Issuance of common shares 349 - 632 220
Dividend (1,308) (1,234) (3,661) (3,231)
Repurchase of shares - (1,413) (4,848) (2,365)
------------------------------------------------------------------------
(959) (2,647) (7,877) (5,376)
------------------------------------------------------------------------
CASH FLOWS USED IN INVESTING
ACTIVITIES
Equipment expenditures (266) (136) (1,221) (576)
------------------------------------------------------------------------
(266) (136) (1,221) (576)
FOREIGN CURRENCY ADJUSTMENT (104) (11) 196 45
NET CASH INFLOW (OUTFLOW) 10,412 (807) 1,529 5,593
CASH, BEGINNING OF PERIOD 18,444 24,477 27,327 18,077
------------------------------------------------------------------------
CASH, END OF PERIOD $28,856 $23,670 $28,856 $23,670
------------------------------------------------------------------------
------------------------------------------------------------------------
CALIAN TECHNOLOGIES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the periods ended June 30, 2009 and 2008
(Canadian dollars in thousands, except per share amounts)
(Unaudited)
1. ACCOUNTING POLICIES
These interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles. They do not include all of the information and notes required by generally accepted accounting principles for annual financial statements.
These interim consolidated financial statements have been prepared using the same accounting policies used in the preparation of the audited annual consolidated financial statements for the year ended September 30, 2008 with the exception of the application of the accounting policy described in Note 2. These interim consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements.
2. ADOPTION OF NEW ACCOUNTING POLICY
Effective October 1, 2008 the Company adopted Section 3064, Goodwill and intangible assets, replacing Section 3062, Goodwill and other intangible assets and Section 3450, Research and development costs. It establishes standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets. Standards concerning goodwill are unchanged from the standards included in the previous Section 3062. Standards concerning intangible assets specify criteria for recognition of intangible assets. The adoption of this new Section did not have a material impact on the Company's consolidated financial statements.
3. ACCOUNTING ESTIMATES
For the periods ended June 30, 2009 and June 30, 2008, there has been no material change in estimates of amounts reported in prior interim periods or of amounts related to prior fiscal years.
4. SEASONALITY
The Company's revenues and earnings have historically been subject to some quarterly seasonality due to the timing of vacation periods and statutory holidays.
5. LONG-TERM INVESTMENT
On July 11, 2006, the Company invested $3,623 in Med-Emerg International Inc. (Med-Emerg) in the form of convertible preferred shares which included $116 of acquisition costs. On January 20, 2009, Med-Emerg announced that it successfully merged with AIM Health Group Inc. (AIM) in an all-stock transaction. At that time, Calian surrendered its preferred shares in Med-Emerg in exchange for a secured convertible debenture of AIM with a face value of $3,897. The share exchange resulted in a loss on exchange of $125.
The non-interest bearing debenture is convertible into 6,831,372 common shares of AIM at the Company's option. AIM is also entitled to cause the debenture to be converted into common shares when in any given 6-month period, trading volumes of AIM common shares exceed 1,089,642 shares and the weighted average share price is at least $0.57. Conversion is limited to 50% of the debenture in any 6-month period. On a fully converted basis, this investment represents a 6% interest based on the current number of common shares outstanding. The debenture is subordinated to secured creditors on January 20, 2009 and any bank indebtedness. The debenture is due to be redeemed in two instalments; $1,000 payable in cash on January 1, 2011 and the remaining $2,897 payable on July 11, 2011 in cash or AIM common shares at the option of AIM based on the then fair market value of the common shares.
� Fair value of long-term investment: -------------------------------------------------------------------------- Long-term investment, at cost $2,517 Cumulative unrealized gain on conversion options 23 Cumulative interest accretion on host contract 241 Cumulative unrealized gain on fair value of host contract component 65 -------------------------------------------------------------------------- Fair value of investment at June 30, 2009 $2,846 -------------------------------------------------------------------------- --------------------------------------------------------------------------
The Company's long-term investment is considered a hybrid instrument as it includes rights of conversion to common shares. The conversion options are considered to be embedded derivatives to be separated and valued independent of the underlying host contract.
The conversion options are measured at fair value with changes in fair value recorded in net income. The fair value of the conversion options applies the following data and assumptions to the Black-Scholes option pricing model:
� AIM 30 day weighted average share price $0.08 Risk free interest rate 1.2% Actual stock price volatility 94% Expected life of options 2 years
Under the Black-Scholes model, a one cent increase (decrease) in AIM share price would result in $10 increase (decrease) in the fair value of the conversion options. A 10% increase (decrease) in the volatility of AIM share price would result in $15 increase (decrease) in the fair value of the conversion option. AIM shares are traded on the TSX Venture Exchange and currently trade in limited volume.
Fair value of the host contract component is determined using interest rates in effect at each reporting period. A 1% increase (decrease) to the interest rate would result in $48 decrease (increase) in the fair value of the host contract component. The interest rate used at June 30, 2009 is 16.8% and represents an approximation of the borrowing rate available for companies with risk profiles similar to AIM based on the current interest rate for junior debt.
6. INTEREST INCOME
�
Interest income is comprised of the following amounts:
--------------------------------------------------------------------------
Three months ended Nine months ended
June 30 June 30
2009 2008 2009 2008
--------------------------------------------------------------------------
Interest earned on cash balances $32 $182 $199 $658
Accreted interest on host contract
component of long-term investment 109 108 339 308
--------------------------------------------------------------------------
Interest income $141 $290 $538 $966
--------------------------------------------------------------------------
7. SHARE CAPITAL
Share repurchase
The Company did not acquire any shares during the three-month period ending June 30, 2009. During the nine-month period ending June 30, 2009, the Company acquired 467,300 of its outstanding common shares at an average price of $10.35 per share for a total of $4,848 including related expenses, through normal course issuer bids in place during the period. During the quarter ending (and nine-month period ending) June 30, 2008 the Company acquired 112,600 (185,900) of its outstanding common shares at an average price of $12.52 ($12.72) per share for a total of $1,413 ($2,365) including related expenses, through normal course issuer bids in place during the period. The excess of the purchase price over the stated capital of the shares was charged to retained earnings.
Stock options
The Company has an established stock option plan, which provides that the Board of Directors may grant stock options to eligible directors and employees. Under the plan, eligible directors and employees are granted the right to purchase shares of common stock at a price established by the Board of Directors on the date the options are granted but in no circumstances below fair market value of the shares at the date of grant. A total of 500,000 common shares are authorized for issuance under the plan, of which 250,000 are issued at June 30, 2009.
During the nine-month period ending June 30, 2009 the Company granted 85,000 options to directors and officers at an average price of $9.05 per share with 24,200 options vesting immediately and 60,800 options vesting over a period of two years. The options expire on November 12, 2013. The weighted average fair value of options granted during the nine months ended June 30, 2009 was $0.96 per option. At June 30, 2009 there were 224,000 options outstanding of which 156,600 are exercisable.
During the quarter ended and nine-month period ended June 30, 2009, under the fair value based method, stock-option compensation expense within general and administrative costs of $19 and $88 was recorded related to stock options compared to $26 and $97 recorded in the quarter ended and nine-month period ended June 30, 2008. The offsetting credit was applied to contributed surplus.
The compensation costs related to the issuance of options during the nine-month period ended June 30, 2009 were calculated using the Black-Scholes option pricing model using the following assumptions:
�
Risk free interest rate 2.3%
Expected dividend yield 7.2%
Stock price volatility 26.7%
Expected life of options 3.47 years
8. NET EARNINGS PER SHARE
The diluted weighted average number of shares has been calculated as
follows:
--------------------------------------------------------------------------
Three months Nine months
ended June 30 ended June 30
2009 2008 2009 2008
--------------------------------------------------------------------------
Weighted average number of
shares - basic 7,666,417 8,230,902 7,783,865 8,284,408
Addition to reflect the
dilutive effect of employee
stock options 55,656 - 21,023 -
--------------------------------------------------------------------------
Weighted average number of
shares - diluted 7,722,074 8,230,902 7,804,888 8,284,408
--------------------------------------------------------------------------
Options that are anti-dilutive because the exercise price was greater than the average market price of the common shares are not included in the computation of diluted earnings per share. For the quarter ending (and nine-month period ending) June 30, 2009, 168,344 (215,977) options were excluded from the above computation of diluted weighted average number of common shares because they were anti-dilutive. For the periods ending June 30, 2008, 165,000 options were excluded from the above computation of diluted weighted average number of shares.
9. PRIOR YEARS INVESTMENT TAX CREDITS
During the second quarter of 2009, the Company received an assessment from the Canada Revenue Agency regarding the Company's re-filing of its 2006 scientific research and experimental development (R&D) claim allowing additional R&D costs to be claimed. As a result the Company received a refund of $311 of investment tax credits related to its 2006 R&D activities.
10. COMMITMENT AND CONTINGENCIES
During the year 2000, the Company entered into a 10-year lease for an office building in the Ottawa area expiring in April 2010. The Company currently has an agreement with a sub-tenant to lease a significant portion of the space for a period extending to the end of the lease period. The Company is required to assume the remaining portion of the costs associated with this facility. Unless the sub-lessee defaults on future payments, it is expected that the current provision of $377 will be sufficient to cover the Company's share of the costs. The lease payments including operating costs relating to the excess space amount to approximately $984 per year.
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.
11. SEGMENTED INFORMATION
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, regarding how to allocate resources and assess performance. The Company's chief operating decision maker is the Chief Executive Officer. The Company operates in two reportable segments described below, defined by their primary type of service offering, namely Systems Engineering and Business and Technology Services.
- Systems Engineering involves planning, designing and implementing solutions that meet a customer's specific business and technical needs, primarily in the satellite communications sector.
- Business and Technology Services involves both short and long-term placements of personnel to augment customers' workforces (Staffing) as well as the long-term management of projects, facilities and customer business processes (Outsourcing).
The Company evaluates performance and allocates resources based on earnings before interest and income taxes. The accounting policies of the segments are the same as those described in the significant accounting policies note in the audited annual consolidated financial statements.
�
Three months ended June 30, 2009
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Business and
Systems Technology
Engineering Services Corporate Total
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Revenues $19,054 $38,791 $- $57,845
Earnings before other
income, interest
income and income tax
expense 4,522 2,769 (807) 6,484
Unrealized gain on fair
value of conversion
options of long-term
investment (Note 5) 18
Interest income (Note 6) 141
Income tax expense 2,160
--------------------------------------------------------------------------
Net earnings $4,483
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Total assets other than
cash and goodwill $16,801 $34,717 $173 $51,691
Goodwill - 9,518 - 9,518
Cash - - 28,856 28,856
--------------------------------------------------------------------------
Total assets $16,801 $44,235 $29,029 $90,065
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months ended June 30, 2008
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Business and
Systems Technology
Engineering Services Corporate Total
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Revenues $15,986 $34,978 $- $50,964
Earnings before other
income, interest income
and income tax expense 2,541 2,654 (641) 4,554
Unrealized gain on
fair value of
conversion options of
long-term investment
(Note 5) 83
Interest income (Note 6) 290
Income tax expense 1,597
--------------------------------------------------------------------------
Net earnings $3,330
--------------------------------------------------------------------------
--------------------------------------------------------------------------
September 30, 2008
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Business and
Systems Technology
Engineering Services Corporate Total
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Total assets other than
cash and goodwill $16,813 $32,196 $77 $49,086
Goodwill - 9,518 - 9,518
Cash - - 27,327 27,327
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Total assets $16,813 $41,714 $27,404 $85,931
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Nine months ended June 30, 2009
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Business and
Systems Technology
Engineering Services Corporate Total
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Revenues $59,738 $113,127 - $172,865
Earnings before other
expense, interest
income and income tax
expense 14,083 7,585 (2,278) 19,390
Unrealized loss on fair
value of conversion
options of long-term
investment (Note 5) (232)
Loss on share exchange
(Note 5) (125)
Interest income (Note 6) 538
Income tax expense 6,568
--------------------------------------------------------------------------
Net earnings $13,003
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Nine months ended June 30, 2008
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Business and
Systems Technology
Engineering Services Corporate Total
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Revenues $44,520 $99,741 $- $ 144,261
Earnings before other
expense, interest income
and income tax expense 6,564 6,250 (1,811) 11,003
Unrealized loss on fair
value of conversion
options of long-term
investment (Note 5) (179)
Interest income 966
Income tax expense 3,996
--------------------------------------------------------------------------
Net earnings $7,794
--------------------------------------------------------------------------
--------------------------------------------------------------------------
12. HEDGING
Foreign currency risk related to contracts
The Company is exposed to foreign currency fluctuations on its cash balance, accounts receivable, accounts payable and future cash flows related to contracts denominated in a foreign currency. Future cash flows will be realized over the life of the contracts. The Company utilizes derivative financial instruments, principally in the form of forward exchange contracts, in the management of its foreign currency exposures. The Company's objective is to manage and control exposures and secure the Company's profitability on existing contracts and therefore, the Company's policy is to hedge 100% of its foreign currency exposure. The Company does not utilize derivative financial instruments for trading or speculative purposes. The Company applies hedge accounting when appropriate documentation and effectiveness criteria are met.
The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives to specific firm contractually related commitments on projects.
The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. Hedge ineffectiveness is 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 June 30, 2009, the Company had the following forward foreign exchange contracts:
�
----------------------------------------------------------- -------------
Equivalent Fair Value
Type Notional Currency Maturity Cdn. Dollars June 30, 2009
----------------------------------------------------------- -------------
BUY 4,539 USD July 2009 $5,219 $60
BUY 13,953 EURO July 2009 22,655 84
BUY 133 GBP July 2009 253 1
----------------------------------------------------------- -------------
Derivative
assets $145
----------------------------------------------------------- -------------
----------------------------------------------------------- -------------
SELL 30,151 USD July 2009 $34,667 $399
SELL 27,000 EURO July 2009 43,839 162
----------------------------------------------------------- -------------
Derivative
liabilities $561
----------------------------------------------------------- -------------
A 10% strengthening (weakening) of the Canadian dollar against the
following currency at June 30, 2009 would have increased (decreased) other
comprehensive income by the amounts shown below.
June 30, 2009
----------------------------------
USD $2,130
EURO 2,068
GBP -
----------------------------------
$4,198
----------------------------------
----------------------------------
Management Discussion and Analysis - June 30, 2009:
(Canadian dollars in thousands, except per share data)
RESULTS OF OPERATIONS
Revenues:
For the third quarter of 2009, revenues were $57,845 compared to $50,964 reported in the third quarter of 2008 representing a 14% increase over the prior year. For the nine-month period ending June 30, 2009 revenues were $172,865 compared to $144,261 for 2008.
Systems Engineering's (SED) revenues were $19,054 in the quarter and $59,738 on a year-to-date basis representing an increase of 19% and 34% from the $15,986 and $44,520 recorded last year. During the third quarter of 2009, SED experienced continued strength in all of its markets with the manufacturing group contributing significantly to the revenue increase. 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 $38,791 in the quarter and $113,127 on a year-to-date basis representing an increase of 11% and 13% from the $34,978 and $99,741 for the same period last year. This improvement is attributed to the expanded scope of work on renewals of existing contracts as well as recent contract wins for new services.
Management expects that the marketplace in 2009 will continue to be very competitive. While the third quarter was exceptional for SED, certain large contracts are nearing completion and market visibility is reduced. Accordingly, a reduction of revenues is anticipated for the near term. With recent contract renewals and the continued strength in the level of services required by the federal government, the BTS division is optimistic for the balance of the year. At this time, it is also expected that services will continue to be provided to Nortel until the conclusion of their restructuring under creditor protection.
While the Company estimates its backlog remaining to be earned in 2009 at $51 million, the revenue profile of existing contracts will have an impact in revenues ultimately realized. Overall, management is expecting a respectable increase from the level of business achieved in the last quarter of 2008.
Gross margin:
Gross margin was 22.2% in the third quarter of 2009, compared to the 20.6% reported in the third quarter a year ago. On a year-to-date basis the Company reported margins of 22.1% compared to 19.5% for the same period last year. The consolidated gross margin for 2009 was positively impacted by the increase in realized margins at the SED division.
Gross margin in Systems Engineering was 32.1% this quarter compared to 24.9% in the third quarter of 2008 and was 31.0% for the nine-month period ending June 30, 2009 compared to 23.9% for the same period last year. The growing level of manufacturing business, which offers excellent staff utilization and economies of scale, coupled with excellent progress on our satellite communication projects and retiring technical risks related to certain contracts nearing completion positively impacted the year to date margins.
Gross margin in Business and Technology Services was 17.3% compared to the 18.6% reported in the third quarter of 2008 and 17.4% for the nine-month period compared to 17.6% for the same period last year. Gross margin for the quarter has decreased compared to last year due to increased competitiveness during these difficult economic times and increased costs on a contract ending in March 2010. Otherwise, BTS gross margin is in line with the prior year.
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. The highly competitive environment faced by SED and BTS coupled with the volatility of the Canadian dollar are expected to keep margins under pressure. For the first nine months of the year, the realized margins were positively impacted by several non-recurring items. For the balance of the year, management believes that realized margins will return to levels commensurate with the Company's typical mix of business.
Operating expenses:
Selling and marketing, general and administration and facilities totalled $6,046 or 10.5% of revenues in the third quarter of 2009 compared to $5,561 or 10.9% of revenues reported in the third quarter of 2008. For the nine-month period ending June 30, 2009 operating expenses totalled $18,172 compared to $16,074 in 2008 and include an allowance for doubtful accounts of $894 set up against the Nortel accounts receivable. As a result of the Company's continuous cost control activities, expenditure increases were kept at a level commensurate with the support requirements of our operations. Looking ahead, management believes that the Company has the capacity for an increased level of business without significantly affecting operating costs.
Prior Years Investment Tax Credits
During this second quarter of 2009 the Company recorded additional investment tax credits of $311 with respect to its re-filing of its fiscal year 2006 R&D claims. The company does not have any other R&D claims outstanding.
Interest income:
Interest income for the third quarter of 2009 was $141 compared to $290 in 2008. For the nine-month period ending June 30, 2009, interest income was $538 compared to $966 in 2008. The decrease in interest income is attributable to a decrease in interest rates.
Unrealized gain (loss) on fair value of conversion options of long-term investment:
The Company recorded a gain of $18 for the quarter and a loss of $232 on a year-to-date basis compared to a gain of $83 and loss of $179 for 2008 relating to the fair value of conversion options of long-term investment. The reported unrealized gain or loss is a reflection of the movement in quoted market prices of AIM Health Group Inc. (AIM) shares.
Loss on share exchange:
On January 20, 2009, Med-Emerg announced that it successfully merged with AIM in an all-stock transaction. At that time, Calian surrendered its preferred shares in Med-Emerg in exchange for a secured convertible debenture of AIM with a face value of $3,897. The share exchange resulted in a loss on exchange of $125.
Income taxes:
The provision for income taxes for the third quarter of 2009 was $2,160 or 32.5% of earnings before tax compared to $1,597 in 2008 or 32.4% of earnings before tax. On a year-to-date basis, the provision for income taxes was $6,568or 33.6% of earnings before tax compared to $3,996 in 2008 or 33.9% of earnings before tax. As a result of changes in prescribed federal and provincial tax rates, the effective tax rate for 2009, prior to considering the impact of non-taxable transactions, is expected to be approximately 33%.
Net earnings:
As a result of the foregoing, in the third quarter of 2009 the Company recorded net earnings of $4,483 or $0.58 per share basic and diluted, compared to $3,330 or $0.40 per share basic and diluted in the same quarter of the prior year. For the nine-month period ending June 30, 2009 the Company reported net earnings of $13,003 or $1.67 per share basic and diluted compared to $7,794 or $0.94 per share basic and diluted in the same period of the prior year.
BACKLOG
The Company's backlog at June 30, 2009 was $1,069 million with terms extending to fiscal 2014. This compares to $940 million reported at the end of September 2008. 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 2009, 2010 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 $393 million. The majority of this amount relates to the health services support contract. Based on existing requirements, the customer for the health services support contract does not foresee a significant increase in spending in future years. Should additional requirements for the Company's services under these contracts not materialize; the excess will not be realized. The Company's policy is to reduce the reported contractual backlog once it receives official confirmation from the customer that indicates the utilization of the full contract value will not materialize.
�
Estimated Excess over
realizable estimated
Fiscal Fiscal Beyond portion of realizable
(dollars in millions) 2009 2010 2010 Backlog portion TOTAL
--------------------------------------------------------------------------
Contracted Backlog $51 $88 $86 $225 $187 $412
Option Renewals - 40 411 451 206 657
--------------------------------------------------------------------------
--------------------------------------------------------------------------
TOTAL $51 $128 $497 $676 $393 $1,069
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Business and
Technology Services $37 $112 $477 $626 $393 $1,019
Systems Engineering 14 16 20 50 - 50
--------------------------------------------------------------------------
--------------------------------------------------------------------------
TOTAL $51 $128 $497 $676 $393 $1,069
--------------------------------------------------------------------------
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FINANCIAL CONDITION AND CASHFLOWS:
Operating activities
Cash inflows from operating activities for the nine-month period ending June 30, 2009 were $10,431 compared to cash inflows of $11,500 in 2008. Working capital elements changed in line with the ebbs and flows of the business. Specifically accounts receivable and accounts payable increased from September 2008 mainly as a result of an increase in business and the achievement of several milestones late in the quarter. The market for the Systems Engineering Division is characterized by long-term contracts with billings tied to milestones achieved, which often results in significant working capital requirements. Conversely, given the nature of this business, it is sometimes possible to negotiate advance payments on contracts. Such advance payments give rise to unearned revenue that will be realized as revenue over the course of the contract. As at June 30, 2009, the Company's total unearned revenue amounted to $8,479. This compares to $12,290 at September 30, 2008.
Financing activities:
During the nine-month period ending June 30, 2009, the Company paid a dividend of $0.47 per share compared to 2008 when the Company paid $0.39 per share. The Company intends to continue with its quarterly dividend policy for the foreseeable future.
During the nine-month period ending June 30, 2009, the Company repurchased 467,300 common shares through its normal course issuer bid at an average price of $10.35 compared to the previous year when the Company repurchased 185,900 shares at an average price of $12.72.
Capital resources
At June 30, 2009 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 against which no amounts were drawn. 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 2008 FINANCIAL RESULTS
Effective October 1, 2008 the Company adopted Section 3064, Goodwill and intangible assets, replacing Section 3062, Goodwill and other intangible assets and Section 3450, Research and development costs. It establishes standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets. Standards concerning goodwill are unchanged from the standards included in the previous Section 3062. Standards concerning intangible assets specify criteria for recognition of intangible assets. The adoption of this new Section does not have a material impact on the Company's consolidated financial statements.
�
SELECTED QUARTERLY FINANCIAL DATA
Q3/09 Q2/09 Q1/09 Q4/08 Q3/08 Q2/08 Q1/08 Q4/07
Revenues $57,845 $59,922 $55,098 $48,904 $50,964 $47,413 $45,884 $45,715
Net
earnings $4,483 $5,201 $3,319 $2,715 $3,330 $2,284 $2,180 $2,136
Net earnings
per share
Basic $0.58 $0.67 $0.42 $0.33 $0.40 $0.28 $0.26 $0.26
Diluted $0.58 $0.67 $0.42 $0.33 $0.40 $0.28 $0.26 $0.26
SEASONALITY
The Company's operations are subject to some quarterly seasonality due to the timing of vacation periods and statutory holidays. Typically the Company's first and last quarter will be negatively impacted as a result of the Christmas season and summer vacation period. During these periods, the Company can only invoice for work performed and is also required to pay for statutory holidays. This results in reduced levels of revenues and in a drop in gross margins. This seasonality may not be apparent in the overall results of the Company depending on the impact of the realized sales mix of its various projects.
OUTLOOK
Management believes the Company is well positioned for long-term sustained growth. The Company operates in markets that will continue to require the services that the Company offers. To further assure itself of a stable source of revenues, the Company will focus on increasing the percentage of its revenues derived from recurring business while pursuing new business in adjacent markets. Potential acquisitions, focused on adding complementary businesses to the Company's mix, could also be a possible source of growth.
The Systems Engineering Division had been working within a somewhat improved satellite sector for the last two years and, consistent with any project related business, demand for its products and services can be somewhat erratic. While management believes that new systems adopting the latest technologies will be required by commercial customers to maintain and improve their long-term service offerings, the current market turmoil is expected to have a near-term dampening effect on revenues as startups are constrained by financing availability and larger established players restrict capital expenditures to preserve cash resources. Management remains confident that systems such as MSTAR will continue to be in demand in the security and surveillance market although it cannot predict the timing and extent of future orders. The continued volatility of the Canadian dollar will 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. Although the division can experience delays and spending constraints from time to time within certain federal government departments, management believes that the types of service the division offers will continue to be attractive to government agencies going forward. The recent contract renewals and signing of new contracts has provided added confidence that the division's growth trend will continue.
The current economic uncertainty will undoubtedly present substantial challenges to all governments and businesses. While not immune to the current economic downturn, management believes that the company's strong backlog and customer base coupled with the diversification of its two divisions will provide reduced susceptibility relative to other entities.
GUIDANCE
Fiscal 2009 has been an exceptional year for the Company so far and we continue to expect solid results for the year as a whole. While we believe that market potential remains strong, we do anticipate some softness in certain sectors for the near term and therefore management expects to return to more traditional levels of revenues and earnings leading into 2010. While revenues ultimately realized will be dependent on the extent and timing of future contract awards, revenues for the year are expected to be in the range of $215 million to $230 million and net earnings per share in the range of $2.00 to $2.20 per share.
INTERNATIONAL FINANCIAL REPORTING STANDARDS
The Canadian Accounting Standards Board has recently confirmed that Canadian publicly accountable enterprises will be required to report under International Financial Reporting Standards (IFRS) as replacement guidance for the Canadian generally accepted accounting principles (Canadian GAAP). IFRS uses a conceptual framework similar to current Canadian GAAP, but there are significant differences in recognition, measurement and disclosures. The changeover will occur no later than fiscal year beginning January 1, 2011. The Company expects to issue its first financial statement in accordance with IFRS effective with its three-month period ending December 31, 2011. In order to prepare for the conversion to IFRS, the Company has developed an IFRS changeover plan. This plan addresses key elements of the Company's conversion to IFRS including:
� Accounting policy changes and financial reporting requirements; Education and training requirements; Information technology and data systems impacts; Internal control over financial reporting; Impacts on business activities
The plan highlights the need to identify key accounting policy changes as the first step in the conversion process. Once these changes have been identified, other elements of the plan will be addressed. In order to facilitate this identification process, the plan provides for early and on-going education and training to be provided to selected employees involved in the transition.
The Company is currently in the process of assessing the differences between IFRS and the Corporation's current accounting policies, as well as the alternatives available on adoption. Changes in accounting policies are likely. These changes may have an impact on the Company's consolidated financial statements; however it is too early in the Company's changeover process to provide quantification of those effects.
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 plan and progress are also reviewed quarterly by the Audit Committee of our Board of Directors.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
During the most recent interim quarter ending June 30, 2009, 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 first quarter of 2009, and with the Management Discussion and Analysis in the 2008 annual report, including the section on risks and opportunities.
Contact:
Contacts:
Calian Technologies Ltd.
Ray Basler
President and Chief Executive Officer
306-931-3425
Calian Technologies Ltd.
Jacqueline Gauthier
Chief Financial Officer
613-599-8600
ir@calian.com
www.calian.com
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