Calian Reports First Quarter Results: Quarterly Profit Increases 4% Over Prior Year
OTTAWA, ONTARIO, Feb 3, 2010 (Marketwire via COMTEX) --
Companies: Calian Technologies Ltd (CLNFF), Calian Technologies Ltd (CTY)
Calian Technologies Ltd. (TSX:CTY) today released unaudited results for the first quarter ended December 31, 2009. Revenues for the quarter were $52.1 million, a decrease of 5% from the $55.1 million reported in the same quarter of the previous year. Net earnings were $3.4 million or $0.44 per share basic and diluted, compared to $3.3 million or $0.42 per share basic and diluted in the same quarter of the previous year.
"Once again, we achieved a strong quarter to start a new fiscal year. Our BTS division recorded a notable increase in revenues over the same quarter last year as activity on newly acquired contracts and contract renewals started to ramp up. As expected, our SED division did not repeat the spectacular results achieved in the prior year. SED revenues were down substantially as satellite engineering projects that produced significant revenues in 2009 were completed during that year. Also, we have experienced a dampening of production requirements on certain custom manufacturing contracts with U.S. based customers. Despite the downturn relative to 2009, SED revenues are still in line with historical pre-2009 levels" stated Ray Basler, President and CEO.
"Overall our margins remained strong despite the lower proportion of higher margin SED revenues. SED margins decreased slightly due to the absence of the economies of scale associated with the high volume realized in the prior year. Conversely, the BTS margins showed improvement as higher margins were realized on contract renewals along with a favorable shift experienced in the overall service mix. Despite similar net earnings, our earnings per share increased relative to last year due to the successful share repurchases made over the past number of quarters" continued Basler.
"The real highlight of the past few months has been the number and value of contract signings. Our SED division was able to secure the contract with ESA for a third deep space antenna and renew its operations contract with the Canadian Space Agency. Likewise, our BTS division won a number of key contract renewals and in early January, won a new requirement from the Canadian Defence Academy for training support services. In total, these new contracts and renewals represent over $150 million of business with time frames extending out to 2015. These signings have significantly added to our already robust backlog and certainly help to solidify key revenues steams for the future. In addition, we are pleased to announce that our regular quarterly dividend has been increased to 20 cents per share, an increase of over 17% from the previous 17 cents per share" stated Basler.
While we believe that market potential remains strong, we do not expect to match the unprecedented level of performance achieved in 2009. Therefore, management expects to return to more traditional levels of revenues and earnings for the balance of 2010. While revenues ultimately realized will be dependent on the extent and timing of future contract awards, at this stage in the year we expect revenues for 2010 to be in the range of $205 million to $225 million and net earnings per share in the range of $1.50 to $1.80 per share.
About Calian
Calian sells technology services to industry and government in Canada and around the world. Calian provides customers with ready access to an exceptional team of engineers, telecommunications and technology professionals, health care professionals and other highly qualified staff. The Business and Technology Services Division augments customer workforces with flexible short and long-term placements, recruitment and outsourcing of engineering, health care professionals and other skilled professionals. The Systems Engineering Division plans, designs and implements solutions for many of the world's space agencies and leading communications satellite manufacturers and operators, as well as providing contract manufacturing services for customers in North America.
For further information, please visit our website at www.calian.com, or contact us at ir@calian.com
DISCLAIMER
Certain information included in this press release is forward-looking and is subject to important risks and uncertainties. The results or events predicted in these statements may differ materially from actual results or events. Such statements are generally accompanied by words such as "intend", "anticipate", "believe", "estimate", "expect" or similar statements. Factors which could cause results or events to differ from current expectations include, among other things: the impact of price competition; scarce number of qualified professionals; the impact of rapid technological and market change; loss of business or credit risk with major customers; technical risks on fixed price projects; general industry and market conditions and growth rates; international growth and global economic conditions, and including currency exchange rate fluctuations; and the impact of consolidations in the business services industry. For additional information with respect to certain of these and other factors, please see the Company's most recent annual report and other reports filed by Calian with the Ontario Securities Commission. Calian disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. No assurance can be given that actual results, performance or achievement expressed in, or implied by, forward-looking statements within this disclosure will occur, or if they do, that any benefits may be derived from them.
CALIAN TECHNOLOGIES LTD.
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
(Canadian dollars in thousands, except per share data)
-------------------------
Three months
ended December 31
------------ ------------
2009 2008
------------ ------------
Revenues $ 52,108 $ 55,098
Cost of revenues 41,418 43,550
------------ ------------
Gross profit 10,690 11,548
Selling and marketing 1,255 1,182
General and administration 3,905 4,220
Facilities 730 754
Stock option compensation (Note 8) 11 47
Amortization 220 267
------------ ------------
Earnings before other income and expense, interest
income and income tax expense 4,569 5,078
Unrealized gain (loss) on fair value of conversion
options of long-term investment (Note 6) 80 (255)
Interest income (Note 7) 189 237
------------ ------------
Earnings before income tax expense 4,838 5,060
------------ ------------
Income tax expense - current 1,270 1,686
Income tax expense - future 125 55
------------ ------------
1,395 1,741
------------ ------------
NET EARNINGS $ 3,443 $ 3,319
Retained earnings, beginning of period 42,692 35,148
Excess of purchase price over stated capital on
repurchase of shares (Note 8) (793) (2,050)
Dividends (9,129) (1,194)
------------ ------------
Retained earnings, end of period $ 36,213 $ 35,223
------------ ------------
------------ ------------
Net earnings per share: (Note 9)
Basic $ 0.44 $ 0.42
------------ ------------
------------ ------------
Diluted $ 0.44 $ 0.42
------------ ------------
------------ ------------
Weighted average number of shares: (Note 9)
Basic 7,766,170 7,951,885
------------ ------------
------------ ------------
Diluted 7,796,452 7,951,885
------------ ------------
------------ ------------
CALIAN TECHNOLOGIES LTD.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(Canadian dollars in thousands)
December 31, 2009 September 30, 2009
----------------- ------------------
ASSETS
CURRENT ASSETS
Cash $ 34,222 $ 43,662
Accounts receivable 32,513 32,816
Work in process 3,559 2,766
Prepaid expenses (Note 5) 5,837 5,656
Future income taxes 1,205 1,472
Derivative assets (Note 12) 116 679
----------------- ------------------
77,452 87,051
LONG-TERM INVESTMENT (Note 6) 3,130 3,037
EQUIPMENT 4,458 4,300
INTANGIBLE 308 420
GOODWILL 9,518 9,518
----------------- ------------------
$ 94,866 $ 104,326
----------------- ------------------
----------------- ------------------
LIABILITIES AND SHAREHOLDERS'
EQUITY CURRENT LIABILITIES
Accounts payable and accrued
liabilities $ 17,102 $ 22,644
Unearned contract revenue 22,670 20,792
Derivative liabilities (Note 12) 389 377
----------------- ------------------
40,161 43,813
----------------- ------------------
CONTINGENCIES (Note 10)
SHAREHOLDERS' EQUITY
Share capital (Note 8) 18,325 17,719
Contributed surplus (Note 8) 205 285
Retained earnings 36,213 42,692
Accumulated other comprehensive
loss (38) (183)
----------------- ------------------
54,705 60,513
----------------- ------------------
$ 94,866 $ 104,326
----------------- ------------------
----------------- ------------------
CALIAN TECHNOLOGIES LTD.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Canadian dollars in thousands)
Three months
ended December 31
--------------------
2009 2008
--------- ----------
Net earnings $ 3,443 $ 3,319
Unrealized gain (loss) on translating financial
statements of self-sustaining foreign operation, net
of tax of nil (December 31, 2008 - nil) (25) 257
Unrealized gain (loss) on fair value of host contract
component of long-term investment, net of tax of nil - (386)
Change in deferred gain (loss) on derivatives
designated as cash flow hedges, net of tax of $143
(December 31, 2008 - tax recovery of $194) 298 (403)
---------- ----------
Other comprehensive income (loss) 273 (532)
---------- ----------
Comprehensive income $ 3,716 $ 2,787
---------- ----------
---------- ----------
CALIAN TECHNOLOGIES LTD.
UNAUDITED CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE LOSS
(Canadian dollars in thousands)
December September
31, 2009 30, 2009
----------- -----------
Unrealized cumulative loss on translating financial $ (335) $ (310)
statements of self-sustaining foreign operation
Unrealized cumulative gain on fair value of host
contract component of long-term investment - 128
Deferred gain (loss) on derivatives designated as
cash flow hedges 297 (1)
----------- -----------
Accumulated other comprehensive loss, end of period (38) (183)
----------- -----------
Retained earnings, end of period 36,213 42,692
----------- -----------
Accumulated other comprehensive loss and retained $ 36,175 $ 42,509
earnings, end of period
----------- -----------
----------- -----------
CALIAN TECHNOLOGIES LTD.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Canadian dollars in thousands)
Three months
ended December 31
---------------------
2009 2008
---------- ----------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net earnings $ 3,443 $ 3,319
Items not affecting cash:
Interest accreted on host contract component of
long-term investment (Note 7) (141) (117)
Employee stock purchase plan compensation expense 12 9
Stock option compensation (Note 8) 11 47
Write-off of Nortel receivable - 757
Amortization 220 267
Future income tax expense 125 55
Unrealized (gain) loss on fair value of conversion
options of long-term investment (Note 6) (80) 255
---------- ----------
3,590 4,592
Change in non-cash working capital
Accounts receivable 320 (6,032)
Work in process (793) (1,011)
Prepaid expenses (Note 5) (331) (276)
Accounts payable and accrued liabilities (4,406) (1,046)
Unearned contract revenue 1,878 (2,854)
---------- ----------
258 (6,627)
---------- ----------
CASH FLOWS USED IN FINANCING ACTIVITIES
Issuance of common shares 638 -
Dividends (9,128) (1,194)
Repurchase of shares (918) (2,663)
---------- ----------
(9,408) (3,857)
---------- ----------
CASH FLOWS USED IN INVESTING ACTIVITIES
Equipment expenditures (265) (485)
---------- ----------
(265) (485)
FOREIGN CURRENCY ADJUSTMENT (25) 257
---------- ----------
NET CASH OUTFLOW (9,440) (10,712)
CASH, BEGINNING OF PERIOD 43,662 27,327
---------- ----------
CASH, END OF PERIOD $ 34,222 $ 16,615
---------- ----------
---------- ----------
CALIAN TECHNOLOGIES LTD. NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS For the periods ended December 31, 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 period ended September 30, 2009 with the exception of the application of the accounting policy described in Note 2. These interim consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements.
2. ADOPTION OF NEW ACCOUNTING POLICY
Effective October 1, 2009, management adopted amended Section 3855, Financial Instruments - Recognition and Measurement. Based on the amendments, management has the choice of classifying the host contract portion of its investment in AIM Healthcare Group (AIM) as an Available-For-Sale asset or as a Loans and Receivables asset. Management chooses to classify the host contract as a Loans and Receivables asset. Loans and Receivable assets are recognized at amortized cost. At October 1, 2009, the carrying amount of the investment was decreased by $128 with a corresponding adjustment to Accumulated Other Comprehensive Income.
In December 2009, the CICA issued EIC-175 Multiple Deliverable Revenue Arrangements. This new EIC will be applicable to financial statements relating to the Company's annual financial statements beginning on October 1, 2011. Earlier adoption is permitted. The abstract addresses some aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. The Company does not expect to early adopt this abstract.
3. ACCOUNTING ESTIMATES
For the periods ended December 31, 2009 and December 31, 2008, there has been no material change in estimates of amounts reported in prior interim periods or of amounts related to prior fiscal years.
Effective October 1, 2009, the Company modified its depreciation methodology from declining balance to straight-line depreciation, with amortization calculated over 5 to 10 years, to better reflect the estimated usage of the Company's equipment and intangible. The change did not have a material impact on the financial statements.
4. SEASONALITY
The Company's revenues and earnings have historically been subject to some quarterly seasonality due to the timing of vacation periods and statutory holidays.
5. PREPAID EXPENSES
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December 31, 2009 September 30, 2009
--------------------------------------------------------------------------
Prepaid operating expenses $ 966 $ 635
Milestone advance to subcontractor 4,871 5,021
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$ 5,837 $ 5,656
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6. LONG-TERM INVESTMENT
On July 11, 2006, the Company invested $3,623 in Med-Emerg International Inc. (Med-Emerg) in the form of convertible preferred shares which included $116 of acquisition costs. On January 20, 2009, Med-Emerg announced that it successfully merged with AIM Health Group Inc. (AIM) in an all-stock transaction. At that time, Calian surrendered its preferred shares in Med-Emerg in exchange for a secured convertible debenture of AIM with a face value of $3,897. The share exchange resulted in a loss on exchange of $125.
The non-interest bearing debenture is convertible into 6,831,372 common shares of AIM at the Company's option. AIM is also entitled to cause the debenture to be converted into common shares when in any given 6-month period, trading volumes of AIM common shares exceed 1,089,642 shares and the weighted average share price is at least $0.57. Conversion is limited to 50% of the debenture in any 6-month period. On a fully converted basis, this investment represents a 6% interest based on the current number of common shares outstanding. The debenture is subordinated to secured creditors of record on January 20, 2009 and any bank indebtedness. The debenture is due to be redeemed in two instalments; $1,000 payable in cash on January 1, 2011 and the remaining $2,897 payable on July 11, 2011 in cash or AIM common shares at the option of AIM based on the then fair market value of the common shares.
Carrying value of long-term investment:
-------------------------------------------------------------------------- Med-Emerg long-term investment, at cost $ 3,623 Med-Emerg cumulative unrealized gain on conversion options (1,878) Med-Emerg cumulative interest accretion on host contract 897 -------------------------------------------------------------------------- Med-Emerg fair value of investment on January 20, 2009, prior to exchange $ 2,642 Loss on share exchange (125) -------------------------------------------------------------------------- AIM Long-term investment, at cost $ 2,517 AIM cumulative unrealized gain on conversion options 115 AIM cumulative interest accretion on host contract 498 -------------------------------------------------------------------------- Carrying value of investment at December 31, 2009 $ 3,130 -------------------------------------------------------------------------- --------------------------------------------------------------------------
The Company's long-term investment is considered a hybrid instrument as it includes rights of conversion to common shares. The conversion options are considered to be embedded derivatives to be separated and valued independent of the underlying host contract. The conversion options are measured at fair value with changes in fair value recorded in net income. The fair value of the conversion options applies the following data and assumptions to the Black-Scholes option pricing model:
AIM 60 day weighted average share price $0.16
Risk free interest rate 1.08%
Actual stock price volatility 98.9%
Expected life of options 1.5 years
Under the Black-Scholes model, a one cent increase (decrease) in AIM share price would result in a $13 increase (decrease) in the fair value of the conversion options. A 10% increase (decrease) in the volatility of AIM stock price would result in an $38 increase (decrease) in the fair value of the conversion option. AIM shares are traded on the TSX Venture Exchange and currently trade in limited volume.
7. INTEREST INCOME
Interest income is comprised of the following amounts:
--------------------------------------------------------------------------
Three months ended
December 31
2009 2008
--------------------------------------------------------------------------
Interest earned on cash balances $ 48 $ 120
Accreted interest on host contract component of long-
term investment 141 117
--------------------------------------------------------------------------
Interest income $ 189 $ 237
--------------------------------------------------------------------------
8. SHARE CAPITAL
Share repurchase
During the first quarter ending December 31, 2009, the Company acquired 53,170 of its outstanding common shares at an average price of $17.24 per share for a total of $918 including related expenses, through normal course issuer bids in place during the period. During the quarter ending December 31, 2008 the Company acquired 292,600 of its outstanding common shares at an average price of $9.07 per share for a total of $2,663 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.
Share issue
During the first quarter ending December 31, 2009, the Company issued 62,238 shares as a result of option exercises. Cash proceeds from exercise were $638. In addition, $80 was reclassified from contributed surplus to common shares.
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 December 31, 2009.
During the quarter ending December 31, 2008 the Company granted 85,000 options to directors and officers at a 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 18, 2013. The fair value of options granted during the period ended December 31, 2008 was $0.96 per option. At December 31, 2009 there were 93,200 options outstanding of which 74,600 are exercisable at an average price of $12.56.
During the quarter ending December 31, 2009 and relating to options issued in prior years, under the fair value based method, stock-option compensation expense of $11 was recorded compared to $47 recorded in the quarter ended December 31, 2008. The offsetting credit was applied to contributed surplus.
The compensation costs related to the issuance of options during the year ending September 30, 2009 were calculated using the Black-Scholes option pricing model using the following assumptions:
Risk free interest rate 2.3%
Expected dividend yield 7.2%
Stock price volatility 26.7%
Expected life of options 3.47 years
9. NET EARNINGS PER SHARE
The diluted weighted average number of shares has been calculated as follows:
--------------------------------------------------------------------------
Three months
ended December 31
2009 2008
--------------------------------------------------------------------------
Weighted average number of shares - basic 7,766,170 7,951,885
Addition to reflect the dilutive effect of
employee stock options 30,282 -
--------------------------------------------------------------------------
Weighted average number of shares - diluted 7,796,452 7,951,885
--------------------------------------------------------------------------
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 period ending December 31, 2009, no options were considered anti-dilutive. For the period ending December 31, 2008, 250,000 options were excluded from the above computation of diluted weighted average number of shares.
10. CONTINGENCIES
In the normal course of business, the Company is party to employee related claims. The potential outcomes related to existing matters faced by the Company are not determinable at this time. The Company intends to defend these actions, and management believes that the resolution of these matters will not have a material adverse effect on the Company's financial condition.
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 December 31, 2009
----------------------------------------------------------------------------
Business
and
Systems Technology
Engineering Services Corporate Total
----------------------------------------------------------------------------
Revenues $ 14,977 $ 37,131 $ - $ 52,108
Earnings before other income,
interest income and income tax
expense 2,399 2,806 (636) 4,569
Unrealized gain on fair value of
conversion options of long-term
investment (Note 6) 80
Interest income (Note 7) 189
Income tax expense 1,395
----------------------------------------------------------------------------
Net earnings $ 3,443
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total assets other than cash and
goodwill $ 19,448 $ 31,408 $ 270 $ 51,126
Goodwill - 9,518 - 9,518
Cash - - 34,222 34,222
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Total assets $ 19,448 $ 40,926 $ 34,492 $ 94,866
----------------------------------------------------------------------------
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Equipment and intangible
expenditures $ 104 $ 161 $ - $ 265
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended December 31, 2008
---------------------------------------------------------------------------
Business
and
Systems Technology
Engineering Services Corporate Total
---------------------------------------------------------------------------
Revenues $ 19,702 $ 35,396 $ - $ 55,098
Earnings before other expense,
interest income and income tax
expense 3,610 2,150 (682) 5,078
Unrealized loss on fair value of
conversion options of long-term
investment (Note 6) (255)
Interest income (Note 7) 237
Income tax expense 1,741
---------------------------------------------------------------------------
Net earnings $ 3,319
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September 30, 2009
---------------------------------------------------------------------------
Total assets other than cash and
goodwill $ 17,436 $ 33,625 $ 85 $ 51,146
Goodwill - 9,518 - 9,518
Cash - - 43,662 43,662
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Total assets $ 17,436 $ 43,143 $ 43,747 $ 104,326
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Equipment and intangible
expenditures $ 755 $ 637 $ - $ 1,392
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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 has historically been insignificant.
The forward foreign exchange contracts primarily require the Company to purchase or sell certain foreign currencies with or for Canadian dollars at contractual rates. At December 31, 2009, the Company had the following forward foreign exchange contracts:
--------------------------------- -------- -------- ----------- ---------
Type Fair
Equivalent Value
Cdn. December
Notional Currency Maturity Dollars 31, 2009
--------------------------------- -------- -------- ----------- ---------
January
BUY 3,948 USD 2010 $ 4,092 $ 56
January
BUY 13,831 EURO 2010 20,689 58
January
BUY 49 GPB 2010 81 2
--------------------------------- -------- -------- ---------------------
Derivative assets $ 116
--------------------------------- -------- -------- ---------------------
--------------------------------- -------- -------- ---------------------
--------------------------------- -------- -------- ---------------------
January
SELL 22,288 USD 2010 $ 23,104 $ 321
January
SELL 16,268 EURO 2010 24,334 68
--------------------------------- -------- -------- ---------------------
Derivative liabilities $ 389
--------------------------------- -------- -------- ---------------------
--------------------------------- -------- -------- ---------------------
A 10% strengthening (weakening) of the Canadian dollar against the following currencies at December 31, 2009 would have increased (decreased) other comprehensive income as related to the forward foreign exchange contracts by the amounts shown below.
December
31,2009
--------------
USD $ 1,502
EURO 284
GBP (8)
--------------
$ 1,778
--------------
--------------
Management Discussion and Analysis - December 31, 2009: (Canadian dollars in thousands, except per share data)
RESULTS OF OPERATIONS
Revenues:
For the first quarter 2010, revenues were $52,108 compared to $55,098 reported for the same period in 2009 representing a 5% decrease over the prior year.
Systems Engineering's (SED) revenues were $14,977 in the quarter representing a decrease of 24% from the $19,702 recorded last year in the same quarter. As expected, with the completion or near-completion of several large contracts in 2009 and lower levels of backlog in the custom manufacturing area, the first quarter returned to more traditional levels of activity in both the satellite engineering and contract manufacturing sectors. Due to the project nature of its business, the SED division is susceptible to significant variation in volumes of activity from period to period.
Business and Technology Services (BTS) revenues were $37,131 in the quarter representing an increase of 5% from the $35,396 for the same period last year. This revenue growth results mainly from continued organic growth on recently renewed long-term contracts and the ramp-up on several new smaller contracts.
Management expects that the marketplace over the next few quarters will continue to be very competitive. The market conditions for SED are expected to be positive and should present new opportunities. However, overall revenues are expected to return to more traditional levels until new programs are captured. With a solid level of activity on existing contracts heading into 2010 and new opportunities available in the marketplace, BTS revenue levels are expected to improve over the prior year. However, the timing of future contract awards will ultimately determine BTS revenues for the next few quarters.
Gross margin:
Gross margin was 20.5% in the first quarter of 2010, compared to the 21.0% reported in the first quarter a year ago. The consolidated gross margin was somewhat lower due to the smaller proportion of SED revenues.
Gross margin in Systems Engineering was 25.6% this quarter compared to 26.7% in the first quarter of 2009. While excellent project execution and retiring of risks on certain projects contributed to the strong margin during the quarter, it was lower than the first quarter of last year due to the reduced level of activity in the contract manufacturing sector.
Gross margin in Business and Technology Services was 18.5% compared to the 17.7% reported in the first quarter of 2009. Gross margin for the quarter increased compared to last year as a result of an improved project mix mainly attributable to the recently signed contracts.
Because of the significant difference in gross margin between each of the two divisions, the overall gross margin of the Company is dependent on the relative level of revenue generated from each division. Management will continue to focus on execution in order to maximize margins. However, the highly competitive environment faced by SED and BTS coupled with the continued volatility of the Canadian dollar could impact margins. In addition, management does not expect that the margins realized by SED in 2009 and early 2010 to be sustained throughout 2010 and believes that margins will abate somewhat over the course of the year.
Operating expenses:
Selling and marketing, general and administration and facilities totalled $5,890 or 11.3 % of revenues in the first quarter of 2010 compared to $6,156 or 11.2% of revenues reported in the first quarter of 2009. Operating expenses are down compared to the same quarter in the prior year as the first quarter 2009 amounts contained a substantial provision for Nortel receivables. Otherwise operating expenses have increased somewhat to account for increased activity in the BTS division. 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.
Interest income:
Interest income for the first quarter of 2010 was $189 compared to $237 in 2009. Interest income is comprised of interest earned on the Company's cash balances and accrued interest related to the investment in AIM. Although average cash balances have increased over the prior year, interest income earned on cash balances decreased significantly in 2010 as a result of a significant decrease in interest rates during the year.
Unrealized gain (loss) on fair value of conversion options of long-term investment:
The Company recorded a gain of $80 for the quarter compared to a loss of $255 for the quarter 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.
Income taxes:
For this period, the provision for income taxes was $1,395 or 28.8% of earnings before tax compared to $ 1,741 in 2009 or 34.4% of earnings before tax. The decrease in realized tax rate results mainly from a continued decrease in prescribed federal and provincial tax rates and the non-taxable nature of the AIM investment. The effective tax rate for 2010, prior to considering the impact of non-taxable transactions, is expected to be approximately 31%.
Net earnings:
As a result of the foregoing, in the first quarter of 2010 the Company recorded net earnings of $3,443 or $0.44 per share basic and diluted, compared to $3,319 or $0.42 per share basic and diluted in the same quarter of the prior year.
BACKLOG
The Company's backlog at December 31, 2009 was $931 million with terms extending to fiscal 2018. This compares to $873 million reported at the end of September 2009. Contracted Backlog represents maximum potential revenues remaining to be earned on signed contracts, whereas Option Renewals represent customers' options to further extend existing contracts under similar terms and conditions.
Most fee for service contracts provide the customer with the ability to adjust the timing and level of effort throughout the contract life and as such the amount actually realized could be materially different from the original contract value. The following table represents management's best estimate of the backlog realization for 2010, 2011 and beyond based on management's current visibility into customers' existing requirements.
Management's estimate of the realizable portion (current utilization rates and known customer requirements) is less than the total value of signed contracts and related options by approximately $208 million. The majority of this amount relates to the health services support contract. The Company's policy is to reduce the reported contractual backlog once it receives confirmation from the customer that indicates the utilization of the full contract value may not materialize.
Estimated Excess over
realizable estimated
Fiscal Fiscal Beyond portion of realizable
(dollars in millions) 2010 2011 2011 Backlog portion TOTAL
---------------------------------------------------------------------------
Contracted Backlog $ 126 $ 119 139 $ 384 $ 96 $ 480
Option Renewals 3 14 322 339 112 451
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TOTAL $ 129 $ 133 461 $ 723 $ 208 $ 931
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Business and
Technology Services $ 93 $ 109 429 $ 631 $ 208 $ 839
Systems Engineering 36 24 32 92 - 92
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TOTAL $ 129 $ 133 461 $ 723 $ 208 $ 931
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FINANCIAL CONDITION AND CASHFLOWS:
Operating activities
Cash inflows from operating activities for the period ending December 31, 2009 were $258 compared to cash outflows of $6,627 in 2008. This improvement of $6,885 results from a slight increase in profitability, positive changes in working capital and an increase in advance customer payments. Working capital elements changed in line with the ebbs and flows of the business. 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 December 31, 2009, the Company's total unearned revenue amounted to $22,670. This compares to $10,676 one year earlier, with the increase primarily attributable to a significant advance payment from ESA related to the recently signed contract for a third deep space antenna.
Financing activities:
During the period ending December 31, 2009, the Company paid a quarterly dividend of $0.17 per share compared to 2008 when the Company paid $0.15 per share. The Company also paid a special dividend of $1.00 in recognition of the exceptional profits earned in 2009. The Company intends to continue with its quarterly dividend policy for the foreseeable future.
During the period ending December 31, 2009, the Company repurchased 53,170 common shares through its normal course issuer bid at an average price of $17.24 compared to the previous year when the Company repurchased 292,600 shares at an average price of $9.07.
Capital resources
At December 31, 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 2010 FINANCIAL RESULTS
Effective October 1, 2009, management adopted amended Section 3855, Financial Instruments - Recognition and Measurement. Based on the amendments, management has the choice of classifying the host contract portion of its investment in AIM Healthcare Group (AIM) as an Available-For-Sale asset or as a Loans and Receivable asset. Management chooses to classify the host contract as a Loans and Receivables. Loans and Receivable assets are recognized at amortized cost. At September 30, 2009, the carrying amount of the investment was decreased by $128 with a corresponding adjustment to Accumulated Other Comprehensive Income.
SELECTED QUARTERLY FINANCIAL DATA
Q1/10 Q4/09 Q3/09 Q2/09
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Revenues $ 52,108 $ 54,365 $ 57,845 $ 59,922
Net earnings $ 3,443 $ 3,449 $ 4,483 $ 5,201
Net earnings per share
Basic $ 0.44$ 0.45$ 0.58 $ 0.67
Diluted $ 0.44$ 0.44$ 0.58 $ 0.67
Q1/09 Q4/08 Q3/08 Q2/08
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Revenues $ 55,098 $ 48,904 $ 50,964 $ 47,413
Net earnings $ 3,319 $ 2,715 $ 3,330 $ 2,284
Net earnings per share
Basic $ 0.42 $ 0.33 $ 0.40 $ 0.28
Diluted $ 0.42 $ 0.33 $ 0.40 $ 0.28
SEASONALITY
The Company's operations are subject to some quarterly seasonality due to the timing of vacation periods and statutory holidays. Typically the Company's first and last quarter will be negatively impacted as a result of the Christmas season and summer vacation period. During these periods, the Company can only invoice for work performed and is also required to pay for statutory holidays. This results in reduced levels of revenues and in a drop in gross margins. This seasonality may not be apparent in the overall results of the Company depending on the impact of the realized sales mix of its various projects.
OUTLOOK
Management believes the Company is well positioned for long-term sustained growth. The Company operates in markets that will continue to require the services that the Company offers. To further assure itself of a stable source of revenues, the Company will focus on increasing the percentage of its revenues derived from recurring business while pursuing new business in adjacent markets. The Systems Engineering Division has been working within a stable satellite sector for the last two years and the division is expecting new opportunities to arise as systems adopting the latest technologies will be required by customers to maintain and improve their service offerings. Management is also confident that systems such as MSTAR will continue to be in demand in the security and surveillance market although it cannot predict the timing and extent of future orders. The continued volatility of the Canadian dollar could impact the Systems Engineering Division's competitiveness when bidding against foreign competition on projects denominated in foreign currencies.
The Business and Technology Services Division's services are adaptable to many different markets. Currently, its strength lies in providing program management and delivery services to the Department of National Defence. Management believes that this department and many others within the federal government will continue to require more support services from private enterprises to supplement their current workforce. Management believes that the types of service the division offers will continue to be attractive to government agencies going forward.
While not immune to the current economic uncertainty, 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 was truly an exceptional year for the Company. While we believe that market potential remains strong, we do not expect to continue the unprecedented level of performance achieved in 2009 and therefore management expects to return to more traditional levels of revenues and earnings for 2010. While revenues ultimately realized will be dependent on the extent and timing of future contract awards, at this early stage in the year we expect revenues for 2010 to be in the range of $205 million to $225 million and net earnings per share in the range of $1.50 to $1.80 per share.
INTERNATIONAL FINANCIAL REPORTING STANDARDS
The Canadian Accounting Standards Board has recently confirmed that Canadian publicly accountable enterprises will be required to report under International Financial Reporting Standards (IFRS) as replacement guidance for the Canadian generally accepted accounting principles (Canadian GAAP). IFRS uses a conceptual framework similar to current Canadian GAAP, but there are significant differences in recognition, measurement and disclosures. In addition, it is expected that IFRS at the transition date will differ from current IFRS. The Company expects to issue its first financial statement in accordance with IFRS effective with its three-month period ending December 31, 2011.
In order to prepare for the conversion to IFRS, the Company has developed an IFRS changeover plan. This plan addresses key elements of the Company's conversion to IFRS including:
- Accounting policy changes and financial reporting requirements;
- Education and training requirements;
- Impacts on business activities and on Information technology and data systems;
- Internal control over financial reporting
We have also established a formal governance structure for the conversion to IFRS. The initiative is lead by the Chief Financial Officer who reports regularly to the Chief Executive Officer. The Chief Financial Officer also reports quarterly to the Audit Committee of the Board of Directors on the status of the project and the implications of the changeover to IFRS.
During 2009, we completed the high-level diagnostic gap and impact analysis between Canadian GAAP and IFRS applicable to the Company. In the first quarter of 2010, we began assessing the key differences between current IFRS and Canadian GAAP. By the end of 2010, we expect to have completed our detailed analysis and also completed all the required changes to our systems, processes and internal controls for purposes of dual-reporting in fiscal 2011.
During the balance of 2010 we will complete the necessary work required to quantify the impact of the changeover to IFRS on the Company's financial position and result of operations at date of transition and affecting the reporting for 2011 and 2012 based on standards published at that date. We will continue to monitor changes to IFRS and assess the impact that these new standards will have on the Company's financial results and on the Company's changeover plan. These changes may have an impact on the Company's consolidated financial statements; however it is too early in the Company's changeover process to provide quantification of those effects. Based on the Company's work to date, we believe that the areas with potential impact will be around hedge accounting documentation and overall disclosure requirements.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
During the most recent interim quarter ending December 31, 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 2010, and with the Management Discussion and Analysis in the 2009 annual report, including the section on risks and opportunities.
SOURCE: Calian Technologies Ltd.
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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Companies: Calian Technologies Ltd (CLNFF), Calian Technologies Ltd (CTY)
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