KANATA, ONTARIO--(CCNMatthews - May 4, 2006) -
(All amounts in this release are in Canadian Dollars)
Calian Technologies Ltd. (TSX:CTY) today released unaudited results for the second quarter ended March 31, 2006. Revenues for the quarter were $48.5 million, an increase of 25% from the $38.7 million reported in the same quarter of the previous year. Net earnings were $2.3 million or $0.27 per share basic and diluted, compared to $1.8 million or $.21 per share basic and diluted in the same quarter of the previous year.
"While the overall results are ahead of the second quarter of last year, the shift in proportions toward Business and Technology Services (BTS) has continued" stated Ray Basler, President and CEO. "The BTS division has shown a significant year over year increase, due in large part to the Health Services Contract, but other areas are seeing increased performance as well" continued Basler. "The SED division had revenues similar to last quarter, but down relative to last year. The wind down of large longer-term contracts continued to impact SED's non-labor throughput during the quarter. However, the future is looking positive as we are starting to see more activity within certain segments of the division and we expect that this will translate into increased opportunities heading into next year" said Basler.
For the balance of 2006, we expect continued solid performance in the BTS division despite the wind-down of the call center contract. The SED division is starting to see signs of recovery in the satellite communications market; however, we do not anticipate any significant impact on revenues until fiscal 2007. Based on this present outlook, management's expects that consolidated revenues for 2006 will be in the range of $185 million to $195 million and net earnings per share in the range of $0.90 to $1.00.
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.
CALIAN TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
(dollars in thousands except per share data)
Three months ended Six months ended
March 31 March 31
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2006 2005 2006 2005
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Revenues $48,469 $38,688 $95,833 $76,725
Cost of revenues 39,737 31,209 78,979 62,321
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Gross profit 8,732 7,479 16,854 14,404
Selling and marketing 1,314 1,357 2,563 2,744
General and administration 3,338 2,464 6,560 4,759
Facilities 705 693 1,382 1,349
Amortization of capital
assets 253 280 515 548
Amortization of intangibles 78 99 156 198
Prior year investment tax
credits (Note 5) (409) - (409) -
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Earnings before interest
and income taxes 3,453 2,586 6,087 4,806
Interest income, net 136 154 238 310
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Earnings before income
taxes 3,589 2,740 6,325 5,116
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Income taxes - current 1,212 1,022 2,159 1,900
Income taxes - future 55 (34) 130 (40)
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1,267 988 2,289 1,860
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NET EARNINGS 2,322 1,752 4,036 3,256
Retained earnings,
beginning of period 26,841 20,581 25,807 19,740
Excess of purchase price
over stated capital
on repurchase of
shares (Note 9) (712) - (712) -
Dividend (682) (672) (1,362) (1,335)
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Retained earnings, end of
period $27,769 $21,661 $27,769 $21,661
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Earnings per share:
(Note 4)
Basic $0.27 $0.21 $0.47 $0.39
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Diluted $0.27 $0.21 $0.47 $0.39
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Weighted average number
of shares: (Note 4)
Basic 8,489,765 8,403,165 8,497,019 8,361,228
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Diluted 8,534,740 8,495,296 8,541,952 8,453,525
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CALIAN TECHNOLOGIES LTD.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
March 31, September 30,
2006 2005
ASSETS
CURRENT ASSETS
Cash and cash equivalents 22,784 $17,889
Accounts receivable 24,936 35,843
Note receivable 186 172
Work in process 4,338 3,609
Prepaid expenses and other 561 825
Future income taxes 2,099 2,166
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54,904 60,504
NOTE RECEIVABLE 186 186
CAPITAL ASSETS 3,541 3,551
INTANGIBLES 860 1,016
GOODWILL 9,518 9,518
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$69,009 $74,775
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued
liabilities $19,114 $24,343
Unearned contract revenue 4,695 7,312
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23,809 31,655
FUTURE INCOME TAXES 106 43
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$23,915 $31,698
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CONTINGENCIES (Note 7)
COMMITMENTS (Note 8)
SHAREHOLDERS' EQUITY
Share capital (Note 9)
Retained earnings $17,325 $17,270
27,769 25,807
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45,094 43,077
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$69,009 $74,775
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CALIAN TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Three months ended Six months ended
March 31 March 31
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2006 2005 2006 2005
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CASH FLOWS FROM (USED IN)
OPERATING ACTIVITIES
Net earnings $2,322 $1,752 $4,036 $3,256
Items not affecting cash:
Interest on note receivable (7) (10) (14) (20)
Employee Share Purchase
Plan compensation expense 9 8 17 16
Amortization 331 379 671 746
Future income taxes 55 (34) 130 (40)
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2,710 2,095 4,840 3,958
Change in non-cash
working capital
Accounts receivable 6,544 220 10,907 (3,393)
Work in process (1,476) (1,690) (729) 33
Prepaid expenses and
other 548 (9) 264 242
Accounts payable and
accrued liabilities 1,109 2,185 (2,044) 160
Unearned contract revenue (2,095) (3,671) (2,617) (2,578)
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7,340 (870) 10,621 (1,578)
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CASH FLOWS USED IN
FINANCING ACTIVITIES
Issuance of common
shares 216 278 224 557
Dividend (682) (672) (1,362) (1,335)
Repurchase of shares,
including cost associated
with repurchase (Note 9) (881) - (881) -
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(1,347) (394) (2,019) (778)
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CASH FLOWS USED IN
INVESTING ACTIVITIES
Acquisition of capital
assets (152) (260) (505) (420)
Business acquisition (355) (3,202)
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(507) (260) (3,707) (420)
NET CASH INFLOW (OUTFLOW) 5,486 (1,524) 4,895 (2,776)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 17,298 29,745 17,889 30,997
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CASH AND CASH EQUIVALENTS,
END OF PERIOD $22,784 $28,221 $22,784 $28,221
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CALIAN TECHNOLOGIES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the periods ended March 31, 2006 and 2005
(dollars in thousands)
(Unaudited)
1. ACCOUNTING POLICIES
These interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles except that these interim consolidated financial statements do not provide full note disclosure.
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, 2005. These interim consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements.
2. ACCOUNTING ESTIMATES
For the period ended March 31, 2006 and December 31, 2005, there have been no material changes in estimates of amounts reported in prior interim periods or of amounts related to prior fiscal years.
3. 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.
4. EARNINGS PER SHARE
The diluted weighted average number of shares has been calculated as
follows:
Three Months ended Six months ended
March 31 March 31
2006 2005 2006 2005
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Weighted average number of
shares - basic 8,489,765 8,403,165 8,497,019 8,361,228
Additions to reflect the
dilutive effect of
employee stock options 12,360 92,131 12,552 92,297
Shares to be issued for
Titan acquisition 32,615 - 32,381 -
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Weighted number of shares
- diluted 8,534,740 8,495,296 8,541,952 8,453,525
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5. PRIOR YEAR INVESTMENT TAX CREDITS
During the quarter, the Company received an assessment from the Canada Revenue Agency regarding its 2004 scientific research and experimental development (R&D) claim allowing additional R&D costs to be claimed. As a result the Company recorded $409 of investment tax credits related to its 2004 and 2005 R&D activities which are available to be recovered from taxes already paid. The investment tax credits have been recorded against income taxes otherwise payable.
6. 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 March 31, 2006
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Business and
Systems Technology
Engineering Services Corporate Total
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Revenues $9,018 $39,451 $- $48,469
Earnings before interest
and income taxes 1,763 2,308 (618) 3,453
Interest income, net 136
Income taxes 1,267
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Net earnings $2,322
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Total assets other than
cash and goodwill $11,783 $24,341 $583 $36,707
Goodwill 9,518
Cash 22,784
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Total assets $69,009
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Three months ended March 31, 2005
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Business and
Systems Technology
Engineering Services Corporate Total
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Revenues $12,999 $25,689 $- $38,688
Earnings before interest
and income taxes 1,812 1,238 (464) 2,586
Interest income, net 154
Income taxes 988
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Net earnings 1,752
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Year Ended September 30, 2005
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Business and
Systems Technology
Engineering Services Corporate Total
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Total assets other than
cash and goodwill $14,578 $32,257 $533 $47,368
Goodwill 9,518 9,518
Cash 17,889
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Total assets $74,775
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Six months ended March 31, 2006
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Business and
Systems Technology
Engineering Services Corporate Total
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Revenues $17,897 $77,936 $- $95,833
Earnings before interest
and income taxes 2,673 4,640 (1,226) 6,087
Interest income, net 238
Income taxes 2,289
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Net earnings $4,036
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Six months ended March 31, 2005
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Business and
Systems Technology
Engineering Services Corporate Total
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Revenues $26,138 $50,587 $- $76,725
Earnings before interest
and income taxes 3,463 2,209 (866) 4,806
Interest income, net 310
Income taxes 1,860
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Net earnings $3,256
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7. CONTINGENCIES
On January 24, 2005, the Company was served with a civil lawsuit by way of a Statement of Claim filed in the Ontario Superior Court of Justice claiming $100 million in damages from the Company and an employee of the Company for breach of confidence, breach of fiduciary duty and unlawful interference with economic interests. The claim relates to the limitation of expenditure contract awarded in December 2004 by the Department of National Defence for the provision and management of Health Service Providers. The contract value for the initial 5-year period is in excess of $400 million with the potential for 5 additional option years worth an additional $480 million in total. The Company intends to vigorously defend the claim, including the basis of the claim and the amounts being sought. The plaintiff also filed a complaint with the Canadian International Trade Tribunal (CITT) related to this contract award. In June 2005, the Tribunal issued its determination, confirming Calian as the successful bidder. On July 15, 2005, the plaintiff applied to the Federal Court of Appeal seeking to set aside the decision of the CITT by seeking a judicial review of that decision. On April 26, 2006, the Federal Court of Appeal released its determination and dismissed the application for judicial review and upheld the CITT decision. The likely outcome of the civil lawsuit cannot be determined at this time.
During the second quarter of 2006, the Company amended its agreement for the final payment of its acquisition in 2004 of Titan Consulting Group Ltd. The amended agreement resulted in the Company paying cash of $355 on February 28, 2006 with the option to pay the final $355 either in cash or through the issuance of shares on August 31, 2006. The Company's accrued liabilities include the liability associated with the final payment due August 31, 2006. Based on the share price at March 31, 2006, if the Company were to issue shares; 32,615 shares would be issuable. These shares are included in the dilutive earnings per share calculation.
8. COMMITMENTS
As part of its e-business strategy, during the year 2000, the Company entered into a 10-year lease for an office building in the Ottawa area expiring in April 2010. Upon exit of the e-business sector in 2001, the Company did not have any requirements for the space and accordingly sublet the excess space to a third party for a period of 5 years ending May 2006. During 2005, the Company entered into a new agreement with the existing sub-tenant to lease a significant portion of the space for a 5-year period extending to April 2010 at the current market price. As a result, the Company will be required to assume a portion of the costs associated with this facility. Unless the sub-lessee defaults on future payments, it is expected that the current provision of $2,000 will be sufficient to cover the Company's share of the costs. The lease payments including operating costs relating to the excess space amount to approximately $940 per year.
9. SHARE REPURCHASE
During the second quarter of 2006, the Company acquired 82,100 of its outstanding common shares at an average price of $10.72 per share for a total of $881 including related expenses, through the Normal Course Issuer Bid initiated in November 2005. The excess of the purchase price over the average stated capital of the shares has been charged to retained earnings.
Management Discussion and Analysis - March 31, 2006:
RESULTS OF OPERATIONS
Revenues:
For the second quarter of 2006, revenues were $48.5 million, compared to $38.7 million reported in the second quarter of 2005 and for the six-month period ending March 31, 2006 revenues were $95.8 compared to $76.7 million, representing an increase of 25% from the prior year, both for the quarter and on a year-to-date basis.
Systems Engineering's revenues were $9.0 million in the quarter and $17.9 million on a year-to-date basis representing a 30% decrease from the $13.0 million and $26.1 million recorded respectively last 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. During the first six months of 2006, SED continued the wind down on several of its larger long-term contracts. Although there was significant activity with customers in other market segments, it was not sufficient to compensate for the reduced non-labour throughput on these contracts.
Business and Technology Services reported a 54% increase with revenues of $39.5 million for the quarter and $77.9 million on a year-to-date basis compared to $25.7 million and $50.6 million respectively for the same periods of last year. The majority of the increase is due to the inclusion of revenues relating to the Health Services Support contract with the balance of the division continuing to report modest growth.
Management believes that increases in other areas of the business for the second half of 2006 will counteract the reduced revenues associated with the cancelled call center services contract.
Gross margin:
Gross margin was 18.0% in the second quarter of 2006, which is significantly lower than the 19.3% reported in the second quarter a year ago. On a year-to-date basis the Company reported margins of 17.6% compared to 18.8% for the same period last year. The decrease is attributable to a change in divisional proportions with the Business and Technology Services accounting for a greater percentage of the overall revenue base.
Gross margin in Systems Engineering was 28.9% this quarter compared to 24% in the second quarter of 2005, For the six-month period ending March 31, 2006, gross margin was 26.4% compared to 23.4%. The SED division is currently realizing excellent gross margins due to solid execution and retiring risk on its large contracts nearing completion combined with a higher labour content in its revenue base.
Gross margin in Business and Technology Services was 15.5% compared to the 17% reported in the second quarter of 2005 and 15.6% for the six-month period compared to 16.4% for the same period last year. The margin reported in the second quarter of 2005 was unusually high. The current margin percentage for this division is in line with prior quarters.
For the balance of 2006, management believes it can maintain current overall margin levels.
Operating expenses:
Selling, marketing, general and administration expenses totalled $5.4 million or 11.1% of revenues in the second quarter of 2006 compared to the $4.5 million or 11.7% of revenues reported in the second quarter of 2005. For the six-month period ending March 31, 2006, operating expenses totalled $10.5 million in 2006 compared to $8.9 million in 2005. Operating expenses as a percentage of revenues decreased in 2006 has a result of the scalability of the Company's back office. The increase in absolute dollars is mainly attributable to the inclusion of operating expenses relating to the Health Services Support contract and increased corporate compliance costs. Operating expenses are expected to remain similar for the balance of the year.
Prior year investment tax credits:
As indicated in Note 5, during the quarter the Company recorded additional investment tax credits (ITC) of $409 with respect to 2004 and 2005. These ITC recoverable were applied against income tax otherwise payable.
Income taxes
The provision for income taxes for the second quarter of 2006 was $1.3 million or 35.3% of earnings before tax compared to $1.0 million in 2005 or 36.1% of earnings before tax. On a year-to-date basis, the provision for incomes taxes was $2.3 million or 36.2% of earnings before tax compared to $1.9 million in 2005 or 36.4% of earnings before tax, in line with current effective income tax rates.
Net earnings:
As a result of the foregoing, in the second quarter of 2006 the Company recorded net earnings of $2.3 million or $0.27 per share basic and diluted, compared to $1.8 million or $0.21 per share basic and diluted in the same quarter of the prior year with the Company reporting for the six-month period ending March 31, 2006 net earnings of $4.0 million or $0.47 per share basic and diluted compared to $3.3 million or $0.39 per share basic and diluted in the same period of the prior year.
BACKLOG
The backlog at March 31, 2006 is $1,052 million with terms extending to fiscal 2014. This compares to $1,098 million reported at the end of September 30, 2005. Contracted Backlog represents 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 contracts provide the customer with the ability to adjust the timing and level of effort throughout the contract life and as such the following represents management's best estimate of the ultimate backlog and related consumption profile.
(dollars in millions) TOTAL Fiscal Fiscal Beyond
2006 2007
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Contracted Backlog $461 $74 115 $272
Option Renewals 590 1 14 575
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TOTAL $1,051 $75 $129 $847
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Business and
Technology Services $1,016 $60 $119 $837
Systems Engineering 35 15 10 10
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TOTAL $1,051 $75 $129 $847
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FINANCIAL CONDITION AND CASHFLOWS:
Cash inflows from operating activities for the six-month period ending March 31, 2006 were $10.6 million as compared with a cash outflow of $1.6 million during the same period in 2005. Working capital decreased from September 30, 2005 in line with the ebbs and flows of the business. Specifically, accounts receivable decreased as a result of receiving large milestone billings accrued near year-end and receiving several large government payments shortly before March 31, 2006. Accounts payable decreased as a result of the payment of a large supplier milestone which was recorded near year-end.
During the same six-month period, the Company also paid $3.2 million related to the Titan acquisition with the final payment of $0.4 million due on August 31, 2006.
As a result of its steady cash inflows, the Company repurchased 82,100 shares at an average price of $10.72 per share for a total of $881 and continued to pay a quarterly dividend. During the second quarter of 2006 and 2005, the Company paid a dividend of 8 cents per share or $0.7 million.
The company was the beneficiary of earlier than normal payments on certain government contracts in March 2006, and accordingly management believes that cash flows will be negatively impacted in the next quarter as government payment cycles revert back to normal timeframes.
SEASONALITY
The Company's operations have historically been 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 in the long-term. The Company operates in markets that will continue to require the services that the Company delivers. 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. Its acquisition strategy, focused on adding complementary businesses to the Company's mix, will also be a potential source of growth.
The Systems Engineering Division has been working within a depressed satellite sector for the last few years. In addition, several large satellite operators have recently been purchased using highly leveraged financial structures and industry consolidation continues. We believe this may impact capital spending, which in turn may reduce new opportunities in the near term. However, management believes that new systems adopting the latest technologies will be required in the medium term to maintain and improve service offerings. Although management is confident that systems such as MSTAR will continue to be in demand in the security and surveillance market it cannot predict the timing and extent of future orders. The continued strengthening of the Canadian dollar will impact the Systems Engineering Division's competitiveness when bidding against foreign competition on projects denominated in US dollars and EUROs.
The Business and Technology Services Division's services are adaptable to many different markets. Currently, its strength lies in providing program management and delivery services to the Department of National Defence. Management believes that this department and many others within the federal government will continue to require more support services from private enterprises to supplement their current workforce. Although Calian has experienced delays during the last few years, management believes that the types of service the division offers will continue to be attractive to government agencies going forward. The acquisition of Titan coupled with existing standing agreements for SAP and Peoplesoft resources, positions Calian to take advantage of the expected growth in government ERP requirements. With the call center services contract lapsing, management believes that it can effectively refocus its resources on traditional business to offset the impact on earnings.
Due to significant signings in the past year in the BTS division coupled with a few large contracts nearing completion in the SED division, our backlog is heavily weighted towards BTS. While BTS enjoys a more favourable outlook, the market environment for SED is showing signs of improvement. However, given the lead times involved in the satellite sector, it may not translate into enhanced opportunities in the short term. Accordingly, the company expects to experience a shift in both revenue and profitability proportions towards the Business and Technology Services division. As the BTS division traditionally earns lower margins, the changing mix will continue to have a dampening effect on operating profit percentages.
As indicated in Note 7 of the Company's financial statements, the Company was served with a civil lawsuit by way of a Statement of Claim for $100 million in damages from the Company and an employee of the Company. The Company intends to vigorously defend the claim, including the basis of the claim and the amounts being sought. The plaintiff also filed a complaint with the Canadian International Trade Tribunal (CITT) related to this contract award. In June 2005, the Tribunal issued its determination, confirming Calian as the successful bidder. On July 15, 2005, the plaintiff applied to the Federal Court of Appeal seeking to set aside the decision of the CITT by seeking a judicial review of that decision. On April 26, 2006, the Federal Court of Appeal released its determination and dismissed the application for judicial review and upheld the CITT decision. The likely outcome of the civil lawsuit cannot be determined at this time.
GUIDANCE
Our current base of business for 2006 is firmer in some segments than others and when taken in conjunction with the above information related to the current market conditions and demand, and after taking into consideration the impact of the call center contract being wound down, the Company expects 2006 revenues to be in the range of $185 million to $195 million and net earnings per share in the range of $0.90 to $1.00.
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, 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 the Company with the Ontario Securities Commission. Calian disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. No assurance can be given that actual results, performance or achievement expressed in, or implied by, forward-looking statements within this disclosure will occur, or if they do, that any benefits may be derived from them.
The foregoing discussion and analysis should be read in conjunction with the financial statements for the second quarter of 2006, and with the Management Discussion and Analysis in the 2005 annual report, including the section on risks and opportunities.
FOR FURTHER INFORMATION PLEASE CONTACT:
Calian Technologies Ltd.
Ray Basler
President and Chief Executive Officer
(306) 931-3425
Calian Technologies Ltd.
Jacqueline Gauthier
Chief Financial Officer
(613) 599-8600
