OTTAWA, ONTARIO--(Marketwire - Aug. 10, 2011) -
(All amounts in this release are in Canadian Dollars)
Calian Technologies Ltd. (TSX:CTY) today released unaudited results for the third quarter ended June 30, 2011. Revenues for the quarter were $58.5 million, a 2% increase from the $57.6 million reported in the same quarter of the previous year. Net earnings were $3.5 million or $0.45 per share basic and diluted, compared to $3.8 million or $0.49 per share basic and diluted in the same quarter of the previous year. For the nine-month period ending June 30, 2011, the Company reported revenues of $171.2 million and net earnings of $9.8 million or $1.28 per share basic and diluted, compared to revenues of $162.8 million and net earnings of $10.4 million or $1.33 per share basic and diluted in the prior year.
"Results for the quarter were once again in line with management expectations with both divisions reporting revenues marginally above the same quarter last year. Our BTS division was negatively impacted by a slowdown in government spending leading up to, and following, the recent federal election. Both our short term staffing and longer term outsourcing segments continue to see excellent opportunities, which bodes well for longer term growth potential. Revenues in the SED division were consistent with those achieved in the same quarter last year as well as with recent quarters as both project related revenue and manufacturing revenues have remained steady. Recently signed contracts are expected to fill the revenue gap associated with the wind down of projects nearing completion", stated Ray Basler, President and CEO.
"As expected, overall margins have decreased from last year. Margins in the SED division are lower than last year due to the reducing mix of work associated with projects signed before the Canadian dollar strengthened significantly. Also, competitive pressures have served to tighten margins on new work. The BTS division's margins remain relatively steady, despite a business mix that is somewhat different from the prior year. We expect continued pressures on new opportunities as customers seek to reduce costs and competitors become more aggressive. That being said, we expect to maintain our win ratios by continuing to provide the quality service for which we are well known, priced accordingly", continued Basler.
Overall, while growth has been modest this quarter, we are proud of our accomplishments within a very competitive landscape, particularly during this period of continued worldwide economic uncertainty. We believe that our key markets will remain strong, although we recognize the potential impact due to government cost cutting initiatives. Ultimately, revenues realized will be dependent on the extent and timing of future contract awards as well as customer utilization of existing contracting vehicles. We remain confident in our ability to achieve results within the range of our previously issued guidance. Accordingly, we expect revenues for 2011 to be in the range of $220 million to $230 million and net earnings per share in the range of $1.55 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 | Nine months ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues | $ | 58,529 | $ | 57,565 | $ | 171,222 | $ | 162,814 | ||||||||
Cost of revenues | 47,662 | 45,911 | 139,335 | 130,384 | ||||||||||||
Gross profit | 10,867 | 11,654 | 31,887 | 32,430 | ||||||||||||
Selling and marketing | 1,418 | 1,226 | 4,017 | 3,714 | ||||||||||||
General and administration | 3,865 | 3,892 | 11,754 | 11,566 | ||||||||||||
Facilities | 789 | 778 | 2,460 | 2,224 | ||||||||||||
Stock option compensation (Note 8) | 19 | 3 | 50 | 17 | ||||||||||||
Amortization | 274 | 248 | 839 | 691 | ||||||||||||
Earnings before other expense, interest income and income tax expense | |
4,502 |
|
|
|
5,507 |
|
|
|
12,767 |
|
|
|
14,218 |
|
|
Unrealized gain (loss) on fair value of conversion options of long-term investment (Note 6) | |
- |
|
|
|
(112 |
) |
|
|
- |
|
|
|
(50 |
) |
|
Interest income (Note 7) | 229 | 157 | 696 | 538 | ||||||||||||
Earnings before income tax expense | 4,731 | 5,552 | 13,463 | 14,706 | ||||||||||||
Income tax expense – current | 1,005 | 1,582 | 3,133 | 3,961 | ||||||||||||
Income tax expense – future | 275 | 125 | 487 | 375 | ||||||||||||
1,280 | 1,707 | 3,620 | 4,336 | |||||||||||||
NET EARNINGS | 3,451 | 3,845 | 9,843 | 10,370 | ||||||||||||
Retained earnings, beginning of period as previously stated |
|
41,705 |
|
|
|
37,738 |
|
|
|
39,769 |
|
|
|
42,692 |
|
|
Adjustment to opening retained earnings for a change in accounting policy (Note 2) | |
- |
|
|
|
(367 |
) |
|
|
- |
|
|
|
(367 |
) |
|
Excess of purchase price over stated capital on repurchase of shares (Note 8) | |
(29 |
) |
|
|
(709 |
) |
|
|
(860 |
) |
|
|
(1,502 |
) |
|
Dividends | (1,924 | ) | (1,557 | ) | (5,549 | ) | (12,243 | ) | ||||||||
Retained earnings, end of period | $ | 43,203 | $ | 38,950 | $ | 43,203 | $ | 38,950 | ||||||||
Net earnings per share: (Note 9) | ||||||||||||||||
Basic | $ | 0.45 | $ | 0.49 | $ | 1.28 | $ | 1.33 | ||||||||
Diluted | $ | 0.45 | $ | 0.49 | $ | 1.28 | $ | 1.33 | ||||||||
Weighted average number of shares: (Note 9) | ||||||||||||||||
Basic | 7,694,950 | 7,774,618 | 7,700,272 | 7,770,267 | ||||||||||||
Diluted | 7,714,850 | 7,803,460 | 7,716,955 | 7,799,039 |
CALIAN TECHNOLOGIES LTD. | ||||
UNAUDITED CONSOLIDATED BALANCE SHEETS | ||||
(Canadian dollars in thousands) | ||||
June 30, 2011 |
September 30, 2010 |
|||
ASSETS | (Note 2) | |||
CURRENT ASSETS | ||||
Cash | $ 24,235 | $ 29,055 | ||
Accounts receivable | 43,793 | 33,954 | ||
Work in process | 4,559 | 3,576 | ||
Prepaid expenses (Note 5) | 1,286 | 6,329 | ||
Future income taxes | 92 | 696 | ||
Derivative assets (Note 12) | 1,087 | 158 | ||
Short-term portion of investment (Note 6) | 1,397 | 953 | ||
76,449 | 74,721 | |||
LONG-TERM INVESTMENT (Note 6) | 1,500 | 2,464 | ||
EQUIPMENT | 4,235 | 4,611 | ||
INTANGIBLE | 445 | 543 | ||
GOODWILL | 9,518 | 9,518 | ||
$ 92,147 | $ 91,857 | |||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||
CURRENT LIABILITIES | ||||
Accounts payable and accrued liabilities | $ 17,747 | $ 17,024 | ||
Unearned contract revenue | 11,107 | 16,002 | ||
Derivative liabilities (Note 12) | 335 | 48 | ||
29,189 | 33,074 | |||
CONTINGENCIES (Note 10) | ||||
SHAREHOLDERS' EQUITY | ||||
Share capital (Note 8) | 19,159 | 18,689 | ||
Contributed surplus (Note 8) | 200 | 171 | ||
Retained earnings | 43,203 | 39,769 | ||
Accumulated other comprehensive income | 396 | 154 | ||
62,958 | 58,783 | |||
$ 92,147 | $ 91,857 | |||
CALIAN TECHNOLOGIES LTD. | |||||||||||||
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | |||||||||||||
(Canadian dollars in thousands) | |||||||||||||
Three months ended June 30 |
Nine months ended June 30 |
||||||||||||
2011 | 2010 | 2011 | 2010 | ||||||||||
Net earnings | $ 3,451 | $ 3,845 | $ 9,843 | $ 10,370 | |||||||||
Unrealized gain (loss) on translating financial statements of self-sustaining foreign operation, net of tax of nil (2010 – nil) | (10 | ) | 68 | (56 | ) | (4 | ) | ||||||
Change in deferred gain (loss) on derivatives designated as cash flow hedges, net of tax of $57 and $122 year to date (2010 - $292 and $75 year to date) | (138 | ) | (606 | ) | 298 | 157 | |||||||
Other comprehensive income (loss) | (148 | ) | (538 | ) | 242 | 153 | |||||||
Comprehensive income | $ 3,303 | $ 3,307 | $ 10,085 | $ 10,523 | |||||||||
CALIAN TECHNOLOGIES LTD. | ||||||
UNAUDITED CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME | ||||||
(Canadian dollars in thousands) | ||||||
June 30, 2011 |
September 30, 2010 (Note 2) |
|||||
Unrealized cumulative loss on translating financial statements of self-sustaining foreign operation | $ (413 | ) | $ (357 | ) | ||
Deferred gain on derivatives designated as cash flow hedges | 809 | 511 | ||||
Accumulated other comprehensive income, end of period | 396 | 154 | ||||
Retained earnings, end of period | 43,203 | 39,769 | ||||
Accumulated other comprehensive income and retained earnings, end of period | $ 43,599 | $ 39,923 | ||||
CALIAN TECHNOLOGIES LTD. | |||||||||||||
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||||||||
(Canadian dollars in thousands) | |||||||||||||
Three months June 30 |
Nine months June 30 |
||||||||||||
2011 | 2010 | 2011 | 2010 | ||||||||||
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES | |||||||||||||
Net earnings | $ 3,451 | $ 3,845 | $ 9,843 | $ 10,370 | |||||||||
Items not affecting cash: | |||||||||||||
Interest accreted on host contract component of long-term investment (Note 7) | (159 | ) | (110 | ) | (479 | ) | (400 | ) | |||||
Employee stock purchase plan compensation expense | 16 | 12 | 52 | 44 | |||||||||
Stock option compensation (Note 8) | 19 | 3 | 50 | 17 | |||||||||
Amortization | 274 | 248 | 839 | 691 | |||||||||
Future income tax expense | 275 | 125 | 487 | 375 | |||||||||
Unrealized (gain) loss on fair value of conversion options of long-term investment (Note 6) | - | 112 | - | 50 | |||||||||
3,876 | 4,235 | 10,792 | 11,147 | ||||||||||
Change in non-cash working capital | |||||||||||||
Accounts receivable | (1,012 | ) | (19 | ) | (10,135 | ) | (2,277 | ) | |||||
Work in process | (2,277 | ) | (1,114 | ) | (982 | ) | (1,311 | ) | |||||
Prepaid expenses (Note 5) | 1,750 | (4,111 | ) | 5,043 | (1,988 | ) | |||||||
Accounts payable and accrued liabilities | (18 | ) | 2,232 | 802 | 1,288 | ||||||||
Unearned contract revenue | (1,381 | ) | (3,146 | ) | (4,896 | ) | (4,981 | ) | |||||
938 | (1,923 | ) | 624 | 1,878 | |||||||||
CASH FLOWS USED IN FINANCING ACTIVITIES | |||||||||||||
Issuance of common shares | 59 | - | 519 | 1,013 | |||||||||
Dividends | (1,924 | ) | (1,557 | ) | (5,549 | ) | (12,243 | ) | |||||
Repurchase of shares (Note 8) | (33 | ) | (822 | ) | (993 | ) | (1,740 | ) | |||||
(1,898 | ) | (2,379 | ) | (6,023 | ) | (12,970 | ) | ||||||
CASH FLOWS FROM (USED IN) IN INVESTING ACTIVITIES | |||||||||||||
Equipment expenditures | (69 | ) | (358 | ) | (365 | ) | (886 | ) | |||||
Investment | - | - | 1,000 | - | |||||||||
(69 | ) | (358 | ) | 635 | (886 | ) | |||||||
FOREIGN CURRENCY ADJUSTMENT | (10 | ) | 69 | (56 | ) | (4 | ) | ||||||
NET CASH OUTFLOW | (1,039 | ) | (4,591 | ) | (4,820 | ) | (11,982 | ) | |||||
CASH, BEGINNING OF PERIOD | 25,274 | 36,271 | 29,055 | 43,662 | |||||||||
CASH, END OF PERIOD | $ 24,235 | $ 31,680 | $ 24,235 | $ 31,680 |
CALIAN TECHNOLOGIES LTD. |
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS |
For the periods ended June 30, 2011 and 2010 |
(Canadian dollars in thousands, except per share amount) |
(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, 2010 with the exception of the application of the accounting policy described in Note 2. These interim consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements.
2. CHANGE IN ACCOUNTING POLICY
Effective October 1, 2010, the Company changed its accounting policy with regards to the recognition of warranty costs related to fixed price contracts. Previously a provision for warranty claims was established when revenue was recognized, based on the warranty terms and prior claim experience. To better align revenue recognized with the warranty obligations, warranty costs are now included in estimated total contract costs at the beginning of the project and flow through cost of revenues when a warranty claim is made. Revenue is recognized using the percentage completion method based on management's best estimate of the costs to complete each contract. This change in accounting policy is applied retroactively to October 1, 2009 with a reduction in the warranty provision of $3,715 (through accounts payable and accrued liabilities), an increase in unearned contract revenue of $4,239, a decrease in taxes payable of $157 (through accounts payable and accrued liabilities) and a reduction in opening retained earnings of $367. The impact on the net income for the quarter and the nine-month period ended June 30, 2010 is not material.
3. ACCOUNTING ESTIMATES
For the periods ended June 30, 2011 and 2010, no material changes in estimates have been made.
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
June 30 | September 30 | |||
2011 | 2010 | |||
Prepaid operating expenses | $ | 1,034 | $ | 705 |
Milestone advance to subcontractor | 252 | 5,624 | ||
$ | 1,286 | $ | 6,329 |
6. INVESTMENT
On July 11, 2006, the Company invested $3,623 in Med-Emerg International Inc. (Med-Emerg) in the form of convertible preferred shares and on January 20, 2009, Med-Emerg announced a merger with AIM Health Group Inc. (AIM). At that time, Calian surrendered its preferred shares in Med-Emerg in exchange for a secured convertible debenture of AIM with a face value of $3,897. On January 6, 2011, AIM repaid $1,000 of the debenture in cash.
On June 30, 2011, the remaining convertible debenture was settled through the issuance of a new convertible debenture. Under the new agreement, the Company received $697 in cash on July 7, 2011 with the remaining amounts due under the new convertible debenture to be satisfied by payments of $700 on December 15, 2011 and $1,500 on December 30, 2013. The debenture carries an annual interest rate of 10% and is convertible into common shares of AIM at the rate of $0.30 per share. AIM is also entitled to cause the debenture to be converted into common shares at the rate of $0.40 per share when in any given 6 month period, trading volume of AIM common shares exceed 1,089,642 shares and the weighted average share price is at least $0.46. 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 subordinate to bank indebtedness and also, under certain circumstances, future borrowings. The debenture is subject to early repayment by AIM in whole or in part upon meeting prescribed notice requirements.
On July 22, 2011 AIM informed the Company that pursuant to AIM entering into a definitive support agreement on July 6, 2011 with Imperial Capital Group Ltd. (ICG), upon satisfaction of all of the conditions of the definitive support agreement between AIM and ICG, a change of control of AIM should occur during the fourth quarter of 2011. In that event, AIM expects to repay the full amount of the debenture.
Carrying value of investment:
June 30, 2011 | September 30, 2010 | |||||
AIM investment, at cost on January 20, 2009 | $ | 2,517 | $ | 2,517 | ||
AIM cumulative unrealized loss on conversion options | (17 | ) | (17 | ) | ||
AIM cumulative interest accretion on host contract | 1,397 | 917 | ||||
Payment January 2011 | (1,000 | ) | - | |||
Carrying value of investment at June 30, 2011 prior to the exchange | $ | 2,897 | $ | 3,417 | ||
June 30, 2011 | ||||||
AIM investment, at fair value at date of exchange | $ | 2,897 | ||||
10% Debenture, at fair value | 2,575 | |||||
Conversion feature, at fair value | 322 | |||||
Carrying value of investment at June 30, 2011 after the exchange | $ | 2,897 | ||||
Short-term portion of investment | $ | 1,397 | ||||
Long-term portion of investment | $ | 1,500 |
The Company's investment is considered a hybrid instrument as it includes a receivable component as well as rights to convert to common shares. The Company has elected to treat the new debenture host contract as a loan and receivable and as such will recognize it using amortized cost. The conversion options are considered to be embedded derivatives to be separated and valued independently 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:
Debenture: | due December | due December | ||||
2011 | 2013 | |||||
Amount: | $ | 700 | $ | 1,500 | ||
AIM 60 day weighted average share price | $ | 0.16 | $ | 0.16 | ||
Risk free interest rate | 1.02 | % | 1.88 | % | ||
Actual stock price volatility | 77 | % | 90 | % | ||
Expected life of options | 0.5 year | 2.5 years |
Under the Black-Scholes model, a one cent increase (decrease) in AIM stock price would result in a $38 increase (decrease) in the fair value of the conversion options. A 10% increase (decrease) in the volatility of AIM stock price would result in a $55 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
Three months ended | Nine months ended | |||||||
June 30 | June 30 | |||||||
2011 | 2010 | 2011 | 2010 | |||||
Interest earned on cash balances | $ | 69 | $ | 47 | $ | 216 | $ | 138 |
Accreted interest on host contract component of investment | 160 | 110 | 480 | 400 | ||||
Interest income | $ | 229 | $ | 157 | $ | 696 | $ | 538 |
8. SHARE CAPITAL
Employee Share Purchase Plan
During the nine-month period ending June 30, 2011 (2010), the Company issued 22,888 (31,661) shares under the Company's Employee Share Purchase Plan at an average price of $14.06 ($10.87).
Share repurchase
During the quarter ending June 30, 2011 (2010), the Company acquired 1,800 (47,460) of its outstanding common shares at an average price of $18.74 ($17.29) per share for a total of $33 ($822) including related expenses, through a normal course issuer bid in place during the period. During the nine-month period ending June 30, 2011 (2010), the Company acquired 54,400 (100,630) of its outstanding common shares at an average price of $18.26 ($17.30) for a total of $993 ($1,740) including related expenses. The excess of the purchase price over the stated capital of the shares was charged to retained earnings.
Stock options
The Company has an established stock option plan, which provides that the Board of Directors may grant stock options to eligible directors and employees. Under the plan, eligible directors and employees are granted the right to purchase shares of common stock at a price established by the Board of Directors on the date the options are granted but in no circumstances below fair market value of the shares at the date of grant. During the nine-month period ending June 30, 2011 the Company granted 95,000 options to directors and officers at an average price of $18.65 per share with 28,000 options vesting immediately and 67,000 options vesting over a period of two years. The options expire on February 14, 2016. The weighted average fair value of options granted was $1.27 per option. A total of 500,000 common shares are authorized for issuance under the plan, of which 345,000 are issued at June 30, 2011. At June 30, 2011 there were 150,000 options outstanding.
9. NET EARNINGS PER SHARE
The diluted weighted average number of shares has been calculated as follows:
Three months ended | Nine months ended | |||
June 30 | June 30 | |||
2011 | 2010 | 2011 | 2010 | |
Weighted average number of shares – basic | 7,694,950 | 7,774,618 | 7,700,272 | 7,770,267 |
Addition to reflect the dilutive effect of employee stock options | 19,900 | 28,842 | 16,683 | 28,772 |
Weighted average number of shares – diluted | 7,714,850 | 7,803,460 | 7,716,955 | 7,799,039 |
Options that are anti-dilutive because the exercise price was greater than the average market price of the common shares are not included in the computation of diluted earnings per share. For the three and nine-month periods ending June 30, 2010 and the three-month period ending June 30, 2011, no options were excluded from the above computation. For the nine-month period ending June 30, 2011, 95,000 were excluded from the above computation.
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.
The Company evaluates performance and allocates resources based on earnings before other expense, interest income and income taxes. The accounting policies of the segments are the same as those described in the significant accounting policies note in the audited annual consolidated financial statements.
Three months ended June 30, 2011 | ||||||||||
Business and | ||||||||||
Systems | Technology | |||||||||
Engineering | Services | Corporate | Total | |||||||
Revenues | $ | 18,243 | $ | 40,286 | $ | - | $ | 58,529 | ||
Earnings before interest income and income tax expense | 2,840 | 2,301 | (639 | ) | 4,502 | |||||
Interest income (Note 7) | 229 | |||||||||
Income tax expense | (1,280 | ) | ||||||||
Net earnings | $ | 3,451 | ||||||||
Total assets other than cash and goodwill | $ | 15,011 | $ | 40,327 | $ | 3,056 | $ | 58,394 | ||
Goodwill | - | 9,518 | - | 9,518 | ||||||
Cash | - | - | 24,235 | 24,235 | ||||||
Total assets | 15,011 | 49,845 | 27,291 | $ | 92,147 | |||||
Equipment and intangible expenditures | $ | 47 | $ | 22 | $ | - | $ | 69 | ||
Three months ended June 30, 2010 | ||||||||||
Business and | ||||||||||
Systems | Technology | |||||||||
Engineering | Services | Corporate | Total | |||||||
Revenues | $ | 17,646 | $ | 39,919 | $ | - | $ | 57,565 | ||
Earnings before other expense, interest income and income tax | ||||||||||
expense | 3,557 | 2,614 | (664 | ) | 5,507 | |||||
Unrealized loss on fair value of conversion options of long-term | ||||||||||
investment (Note 6) | (112 | ) | ||||||||
Interest income (Note 7) | 157 | |||||||||
Income tax expense | (1,707 | ) | ||||||||
Net earnings | $ | 3,845 | ||||||||
September 30, 2010 | ||||||||||
Total assets other than cash and goodwill | $ | 16,507 | $ | 33,287 | $ | 3,490 | $ | 53,284 | ||
Goodwill | - | 9,518 | - | 9,518 | ||||||
Cash | - | - | 29,055 | 29,055 | ||||||
Total assets | $ | 16,507 | $ | 42,805 | $ | 32,545 | $ | 91,857 | ||
Equipment and intangible expenditures | $ | 668 | $ | 710 | $ | - | $ | 1,378 | ||
Nine months ended June 30, 2011 | ||||||||||
Business and | ||||||||||
Systems | Technology | |||||||||
Engineering | Services | Corporate | Total | |||||||
Revenues | $ | 48,906 | $ | 122,316 | $ | - | $ | 171,222 | ||
Earnings before interest income and income tax expense | 7,179 | 7,493 | (1,905 | ) | 12,767 | |||||
Interest income (Note 7) | 696 | |||||||||
Income tax expense | (3,620 | ) | ||||||||
Net earnings | $ | 9,843 |
Nine months ended June 30, 2010 | ||||||||||
Business and | ||||||||||
Systems | Technology | |||||||||
Engineering | Services | Corporate | Total | |||||||
Revenues | $ | 48,349 | $ | 114,465 | $ | - | $ | 162,814 | ||
Earnings before other expense, interest income and income tax | ||||||||||
expense | 8,578 | 7,540 | (1,900 | ) | 14,218 | |||||
Unrealized loss on fair value of conversion options of long-term | ||||||||||
investment (Note 6) | (50 | ) | ||||||||
Interest income (Note 7) | 538 | |||||||||
Income tax expense | (4,336 | ) | ||||||||
Net earnings | $ | 10,370 |
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 excluding its exposure arising from the Company's US subsidiary. The Company does not utilize derivative financial instruments for trading or speculative purposes. The Company applies hedge accounting when appropriate documentation and effectiveness criteria are met.
The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives to specific firm contractually related commitments on projects.
The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. Hedge ineffectiveness has historically been insignificant.
The forward foreign exchange contracts primarily require the Company to purchase or sell certain foreign currencies with or for Canadian dollars at contractual rates. At June 30, 2011, the Company had the following forward foreign exchange contracts:
Equivalent | Fair Value | ||||||
Type | Notional | Currency | Maturity | Cdn. Dollars | June 30, 2011 | ||
SELL | 35,594 | USD | August 2011 | $ | 35,014 | $ | 684 |
SELL | 1,000 | USD | September 2015 | 1,057 | 93 | ||
SELL | 1,000 | USD | September 2016 | 1,057 | 93 | ||
SELL | 1,000 | USD | September 2017 | 1,057 | 93 | ||
SELL | 11,040 | EURO | August 2011 | 15,565 | 124 | ||
Derivative assets | $ | 1,087 | |||||
BUY | 14,065 | USD | August 2011 | $ | 13,836 | $ | 270 |
BUY | 5,531 | EURO | August 2011 | 7,798 | 62 | ||
BUY | 85 | GPB | August 2011 | 243 | 3 | ||
Derivative liabilities | $ | 335 |
A 10% strengthening (weakening) of the Canadian dollar against the following currency at June 30, 2011 would have increased (decreased) other comprehensive income as related to the forward foreign exchange contracts by the amounts shown below.
June 30, | ||
2011 | ||
USD | $ | 1,873 |
EURO | 636 | |
GBP | - | |
$ | 2,509 |
Management Discussion and Analysis – June 30, 2011:
(Canadian dollars in thousands, except per share data)
RESULTS OF OPERATIONS
Revenues:
For the third quarter 2011, revenues were $58,529 compared to $57,565 reported for the same period in 2010 representing a 2% increase from the prior year. For the nine month period ending June 30, 2011 revenues were $171,222 compared to $162,814 for 2010 an increase of 5%.
Systems Engineering's (SED) revenues were $18,243 in the quarter and $48,906 on a year-to-date basis representing a 3% increase from the $17,646 and a 1% increase from the $48,349 year-to-date recorded last year. Although the project mix has changed, the overall level of activity is consistent with the same quarter of the previous year. Due to the project nature of its business, the SED division is susceptible to significant variation in volumes of activity from period to period.
Business and Technology Services (BTS) revenues were $40,286 in the quarter and $122,316 on a year-to-date basis representing an increase of 1% for the quarter compared to the $39,919 and a 7% increase compared to $114,465 year-to-date for the same period last year. This quarter's results for BTS were impacted by a delay in government spending following the recent federal election. Overall the short-term staffing group continues to generate solid activity levels while the division's long-term outsourcing contracts experienced a slight decrease in revenues following a record level of activity in the second quarter of this year.
Management expects that the marketplace over the next year will continue to be very competitive. The market conditions for SED are expected to continue to be positive and should present new opportunities, although the related timing is somewhat uncertain. Current BTS backlog will provide a solid level of activity on existing contracts and new opportunities are expected to arise. However, the timing of future contract awards and customer demand will ultimately determine revenues for the next year.
Gross margin:
Gross margin was 18.6% in the third quarter of 2011, compared to the 20.2% reported in the third quarter a year ago. On a year- to-date basis the Company reported margins of 18.6 % compared to 19.9% for the same period last year. The consolidated gross margin for the third quarter 2011 was in line with expectations and reflects a continued downward pressure on margins.
Gross margin in Systems Engineering was 24.1% this quarter compared to 28.7% in the third quarter of 2010 and was 24.0% for the nine month period ending June 30, 2011 compared to 26.7% for the same period last year. The gross margin for SED reflects pressures associated with a very competitive landscape as well as the impact of an exceptionally strong Canadian dollar.
Gross margin in Business and Technology Services was 16.1% compared to the 16.5% reported in the third quarter of 2010. Gross margin for this third quarter 2011 is reflective of the current mix of business and therefore is representative of expected margins in the near term. For the nine-month period ending June 30, 2011 gross margin was 16.5% compared to the 17.0% reported for the same period last year; a reflection of the continued competitive pressures on margins.
Because of the significant difference in gross margin between each of the two divisions, the overall gross margin of the Company is dependent on the relative level of revenue generated from each division. Management will continue to focus on execution in order to maximize margins. Increased competition continues to put downward pressure on margins in both divisions. The volatility of the Canadian dollar will continue to impact margins on new work in the SED division.
Operating expenses:
Selling and marketing, general and administration and facilities totalled $6,072 or 10.4% of revenues in the third quarter of 2011 compared to $5,896 or 10.2% of revenues reported in the third quarter of 2010. Operating expenses are stable and in line with the overall level of revenues. For the nine-month period ending June 30, 2011 operating expenses totaled $18,231 compared to $17,504 in 2010.
Interest income:
Interest income for the third quarter of 2011 was $229 compared to $157 in 2010. For the nine-month period ending June 30, 2011 interest income was $696 compared to $538 in 2010. Interest income is comprised of interest earned on the Company's cash balances and accrued interest related to the investment in AIM Health Group Inc. (AIM). Interest income increased as a result of increased interest rates.
Unrealized gain on fair value of conversion options of investment:
For the quarter ended June 30, 2010 the Company recorded a loss of $112 relating to the fair value of conversion options of investment. The reported unrealized loss is a reflection of the movement in quoted market prices of AIM shares and the remaining term of the related conversion privilege. With only 9 months remaining on the conversion feature at September 30, 2010, the fair value of the conversion options was estimated at NIL with no changes reported at June 30, 2011. Therefore no gain or loss was recorded this quarter or on a year-to-date basis.
Income taxes:
The provision for income taxes for the third quarter of 2011 was $1,280 or 27.1 % of earnings before tax compared to $1,707 in 2010 or 30.7% of earnings before tax. On a year-to-date basis, the provision for income taxes was $3,620 or 26.9% of earnings before tax compared to $4,336 or 29.5% of earnings before tax. The decrease in the realized tax rate is the result of a continued decrease in prescribed federal and provincial tax rates. The effective tax rate for 2011, prior to considering the impact of non- taxable transactions, is expected to be approximately 28%.
Net earnings:
As a result of the foregoing, in the third quarter of 2011 the Company recorded net earnings of $3,451 or $0.45 per share basic and diluted, compared to $3,845 or $0.49 per share basic and diluted in the same quarter of the prior year. For the nine-month period ending June 30, 2011, the Company reported net earnings of $9,843 or $1.28 per share basic and diluted compared to $10,370 or $1.33 per share basic and diluted in the same period of the prior year.
BACKLOG
The Company's backlog at June 30, 2011 was $734 million with terms extending to fiscal 2018. This compares to $962 million reported at September 30, 2010. Contracted Backlog represents maximum potential revenues remaining to be earned on signed contracts, whereas Option Renewals represent customers' options to further extend existing contracts under similar terms and conditions.
Most fee for service contracts provide the customer with the ability to adjust the timing and level of effort throughout the contract life and as such the amount actually realized could be materially different from the original contract value. The following table represents management's best estimate of the backlog realization for 2011, 2012 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 $123 million. In June 2011, the Company reduced its backlog by $122 million based on DND exercising year eight and nine of the contract with funding levels consistent with those recently experienced. While the excess funding is still available to DND, this was considered an indication that this portion of the contracted backlog would not materialize. The Company's policy is to reduce the reported contractual backlog once it receives confirmation from the customer that indicates the utilization of the full contract value may not materialize.
(dollars in millions) | Fiscal 2011 | Fiscal 2012 | Beyond 2012 | Estimated realizable portion of Backlog |
Excess over estimated realizable portion |
TOTAL | ||||||
Contracted Backlog | $ | 52 | $ | 145 | $ | 178 | $ | 375 | $ | 54 | $ | 429 |
Option Renewals | - | 16 | 220 | 236 | 69 | 305 | ||||||
TOTAL | $ | 52 | $ | 161 | $ | 398 | $ | 611 | $ | 123 | $ | 734 |
Business and | $ | 37 | $ | 131 | $ | 367 | $ | 535 | $ | 123 | $ | 658 |
Technology Services | ||||||||||||
Systems Engineering | 15 | 30 | 31 | 76 | - | 76 | ||||||
TOTAL | $ | 52 | $ | 161 | $ | 398 | $ | 611 | $ | 123 | $ | 734 |
FINANCIAL CONDITION AND CASHFLOWS
Operating activities:
Cash inflows from operating activities for the nine-month period ending June 30, 2011 were $624 compared to $1,878 in 2010. This year's decrease is mainly as the result of working capital fluctuations, mostly with changes in accounts receivable levels, in line with the ebbs and flows of the business. The market for the Systems Engineering Division is characterized by contracts with billings tied to milestones achieved, which often results in significant working capital requirements. Conversely, given the nature of this business, it is sometimes possible to negotiate advance payments on contracts. Such advance payments give rise to unearned revenue that will be realized as revenue over the course of the contract. As at June 30, 2011, the Company's total unearned revenue amounted to $11,107. This compares to $16,022 at September 30, 2010, with the decrease primarily attributable to work progressing on the third deep space antenna contract for ESA.
Financing activities:
During the nine month period ending June 30, 2011, the Company paid quarterly dividends of $0.72 per share compared to 2010 when the Company paid $0.57 per share of quarterly dividends and a $1.00 special dividend. The Company intends to continue with its quarterly dividend policy for the foreseeable future.
During the nine-month period ending June 30, 2011, the Company repurchased 54,400 common shares through its normal course issuer bid at an average price of $18.26 compared to the previous year when the Company repurchased 100,630 shares at an average price of $17.30.
Capital resources:
At June 30, 2011 the Company had a short-term credit facility of $10,000 with a Canadian chartered bank that bears interest at prime and is secured by assets of the Company. An amount of $612 was drawn to issue a letter of credit to meet customer contractual requirements. Management believes that Calian has sufficient cash resources to continue to finance its working capital requirements and pay a quarterly dividend.
ADOPTION OF NEW ACCOUNTING RULES AND IMPACT ON FINANCIAL RESULTS
Effective October 1, 2010, the Company changed its accounting policy with regards to the recognition of warranty costs related to fixed price contracts. Previously a provision for warranty claims was established when revenue was recognized, based on the warranty terms and prior claim experience. To better align revenue recognized with the warranty obligations, warranty costs are now included in estimated total contract costs at the beginning of the project and flow through cost of revenues when a warranty claim is made. Revenue is recognized using the percentage completion method based on management's best estimate of the costs to complete each contract. This change in accounting policy is applied retroactively to October 1, 2009 with a reduction in the warranty provision of $3,715 (through accounts payable and accrued liabilities), an increase in unearned contract revenue of $4,239, a decrease in taxes payable of $157 (through accounts payable and accrued liabilities) and a reduction in opening retained earnings of $367. The impact on the net income for the quarter and the nine-month period ended June 30, 2010 is not material.
SELECTED QUARTERLY FINANCIAL DATA
Q3/11 | Q2/11 | Q1/11 | Q4/10 | Q3/10 | Q2/10 | Q1/10 | Q4/09 | ||||||||||
Revenues | $ | 58,529 | $ | 59,433 | $ | 53,260 | $ | 52,911 | $ | 57,565 | $ | 53,141 | $ | 52,108 | $ | 54,365 | |
Net earnings | $ | 3,451 | $ | 3,254 | $ | 3,138 | $ | 3,240 | $ | 3,845 | $ | 3,082 | $ | 3,443 | $ | 3,449 | |
Net earnings per | |||||||||||||||||
share | |||||||||||||||||
Basic | $ | 0.45 | $ | 0.42 | $ | 0.41 | $ | 0.42 | $ | 0.49 | $ | 0.40 | $ | 0.44 | $ | 0.45 | |
Diluted | $ | 0.45 | $ | 0.42 | $ | 0.41 | $ | 0.42 | $ | 0.49 | $ | 0.40 | $ | 0.44 | $ | 0.44 |
SEASONALITY
The Company's operations are subject to some quarterly seasonality due to the timing of vacation periods and statutory holidays. Typically the Company's first and last quarter will be negatively impacted as a result of the Christmas season and summer vacation period. During these periods, the Company can only invoice for work performed and is also required to pay for statutory holidays. This results in reduced levels of revenues and in a drop in gross margins. This seasonality may not be apparent in the overall results of the Company depending on the impact of the realized sales mix of its various projects.
OUTLOOK
Management believes the Company is well positioned for sustained growth. The Company operates in markets that will continue to require the services that the Company offers. To further assure itself of a stable source of revenues, the Company 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. Custom manufacturing activity levels will continue to be directly dependent upon SED's customers' requirements. The continued volatility of the Canadian dollar could impact the Systems Engineering Division's competitiveness when bidding against foreign competition on projects denominated in foreign currencies.
The Business and Technology Services Division's services are adaptable to many different markets. Currently, its strength lies in providing program management and delivery services to the Department of National Defence. Management believes that this department and many others within the federal government will continue to require more support services from private enterprises to supplement their current workforce. Management believes that the types of service the division offers will continue to be attractive to government agencies going forward and the division continues to assess how it can service new markets and increase new opportunities available to the division.
GUIDANCE
Overall, while growth has been modest this quarter, we are proud of our accomplishments within a very competitive landscape, particularly during this period of continued worldwide economic uncertainty. We believe that our key markets will remain strong, although we recognize the potential impact due to government cost cutting initiatives. Ultimately, revenues realized will be dependent on the extent and timing of future contract awards as well as customer utilization of existing contracting vehicles. We remain confident in our ability to achieve results within the range of our previously issued guidance. Accordingly, we expect revenues for 2011 to be in the range of $220 million to $230 million and net earnings per share in the range of $1.55 to $1.80 per share.
INTERNATIONAL FINANCIAL REPORTING STANDARDS
The Canadian Accounting Standards Board has announced that Canadian publicly accountable enterprises will be required to report under International Financial Reporting Standards (IFRS) as replacement guidance for the Canadian generally accepted accounting principles (Canadian GAAP) effective for fiscal years beginning after January 1, 2010. Therefore, the Company will adopt IFRS as the basis of preparation for its interim and annual financial statements for periods beginning on October 1, 2011 with a transition date of October 1, 2010 to allow for comparative financial information. IFRS uses a conceptual framework similar to current Canadian GAAP, but there are significant differences in recognition, measurement and disclosures. In addition, it is expected that IFRS in effect at the time of reporting the Company's first IFRS financial statements will evolve from current IFRS and may result in additional differences.
In order to prepare for the conversion to IFRS, the Company has developed an IFRS changeover plan. This plan addresses key elements of the Company's conversion to IFRS including:
We have also established a formal governance structure for the conversion to IFRS. The initiative is lead by the Chief Financial Officer who reports regularly to the Chief Executive Officer. The Chief Financial Officer also reports quarterly to the Audit Committee of the Board of Directors on the status of the project and the implications of the changeover to IFRS.
During 2010, the following activities were performed:
For 2011 the following activities are in progress:
First-time adoption of IFRS:
IFRS 1 – First-Time Adoption of International Financial Reporting Standards generally requires that a first-time adopter apply IFRS accounting policies retrospectively to all periods presented in its first IFRS compliant financial statements. IFRS 1 also provides certain mandatory and optional exemptions to the full retrospective application. The most significant optional exemptions applicable to the Company are summarized on page 22 of the Company's Management Discussion and Analysis in the 2010 Annual Report. During the first nine months of 2011, the Company has not identified any additional elections to be considered by management.
Expected areas of significance:
The Company's key changes in accounting policies required under IFRS standards are summarized on page 22 and 23 of the Company's Management Discussion and Analysis in the 2010 Annual Report. The differences identified in this document should not be regarded as an exhaustive list and other changes may result from the Company's conversion to IFRS. Furthermore, as a result of changes in circumstances, such as economic conditions or operations, and the inherent uncertainty from the use of assumptions, the actual impacts may be different from those presented. During the first nine months of 2011, the Company did not identify any additional changes in accounting policy to be considered by management.
Many of the differences identified between IFRS and Canadian GAAP have now been quantified. We have not yet prepared a full set of annual financial statements under IFRS; therefore, amounts are unaudited. Based on the Company's work to date, we do not expect that the conversion to IFRS will result in a significant impact on the financial position or results of operations of the Company and believe that the areas of higher potential impact will be around overall presentation and disclosure requirements. However, our assessment of the impacts of certain potential differences will not be finalized until the Company has prepared a full set of annual financial statements under IFRS, the future impacts of converting to IFRS will depend on the particular circumstances prevailing in those years.
The International Accounting Standards Board (IASB) has a number of ongoing projects on its agenda. Management continues to monitor standards to be issued by the IASB, but we do not expect these standards to be mandatory for the Company's fiscal 2012 financial statements. The summary of key expected changes summarized on page 22 and 23 of the Company's Management Discussion and Analysis in the 2010 Annual Report was completed with the expectation that we will apply IFRS standards expected to be effective at the date of conversion. However, management will only make final decisions regarding early adoption of any new standards as they are issued by the IASB.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
During the most recent interim quarter ending June 30, 2011, there have been no changes in the design of the Company's internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting.
FORWARD-LOOKING STATEMENT
Certain information included in this management discussion and analysis is forward-looking and is subject to important risks and uncertainties. The results or events predicted in these statements may differ materially from actual results or events. Such statements are generally accompanied by words such as "intend", "anticipate", "believe", "estimate", "expect" or similar statements. Factors which could cause results or events to differ from current expectations include, among other things: the impact of price competition; scarce number of qualified professionals; the impact of rapid technological and market change; loss of business or credit risk with major customers; technical risks on fixed price projects; general industry and market conditions and growth rates; international growth and global economic conditions, currency exchange rate fluctuations; and the impact of consolidations in the business services industry. For additional information with respect to certain of these and other factors, please see the Company's most recent annual report and other reports filed by the Company with the Ontario Securities Commission. Calian disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. No assurance can be given that actual results, performance or achievement expressed in, or implied by, forward-looking statements within this disclosure will occur, or if they do, that any benefits may be derived from them.
The foregoing discussion and analysis should be read in conjunction with the financial statements for the third quarter of 2011, and with the Management Discussion and Analysis in the 2010 annual report, including the section on risks and opportunities.
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