KANATA, ONTARIO--(Marketwire - Feb. 6, 2008) - Calian Technologies Ltd. (TSX:CTY) today released unaudited results for the first quarter ended December 31, 2007. Revenues for the quarter were $45.9 million, an increase of 2% from the $45.1 million reported in the same quarter of the previous year. Net earnings were $2.2 million or $0.26 per share basic and diluted, compared to $2.0 million or $0.24 per share basic and diluted in the same quarter of the previous year.
"While achievements were mixed within our two divisions, we are very pleased with the overall consolidated results. The SED division saw continued momentum within a rejuvenated satellite industry and posted a 17% increase in revenues compared to the same quarter last year. With similar margins and tight control of operating expenses, SED was able to achieve a significant improvement in divisional contribution. At the same time, the BTS division experienced a 4% reduction in revenues. Reduced spending on staffing services coupled with an unusually long holiday shut down in certain federal government departments contributed to the decline" stated Ray Basler, President and CEO. "Despite this slowdown, we have maintained our focus on retaining and building customer relationships to ensure a continued strong presence in the staffing segment and to be poised to take advantage of the opportunities once the constraints ease. The traditional outsourcing segment of our BTS division continues to perform well under longer-term contracts and we are seeing a number of contract extensions."
"The SED division is projected to be strong for the balance of the year and with some expected recovery in the BTS division, we are optimistic for the quarters ahead. Our strong cash flow provides us with a solid financial foundation for the future as well as allowing us to provide a healthy dividend stream to our shareholders" continued Basler.
Management anticipates solid performance from both divisions over the balance of the year and based on the current outlook, consolidated revenues for fiscal 2008 are expected to be in the range of $190 million to $210 million and net earnings per share in the range of $1.10 to $1.25.
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, 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.
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
(dollars in thousands, except per share data)
Three months ended
December 31
(Unaudited)
---------------------------------------------------------------------
2007 2006
---------------------------------------------------------------------
Revenues $45,884 $45,066
Cost of revenues 37,180 36,507
---------------------------------------------------------------------
Gross profit 8,704 8,559
Selling and marketing 1,254 1,284
General and administration 3,208 3,237
Facilities 784 694
Stock option compensation (Note 7) 40 -
Amortization of equipment 258 271
Amortization of intangibles 78 78
---------------------------------------------------------------------
Earnings before other expense, interest
income and income tax expense 3,082 2,995
Unrealized loss on fair value of conversion
options of long-term investment (Note 5) (108) (69)
Interest income (Note 6) 349 238
---------------------------------------------------------------------
Earnings before income tax expense 3,323 3,164
---------------------------------------------------------------------
Income tax expense - current 1,103 1,098
Income tax expense - future 40 30
---------------------------------------------------------------------
1,143 1,128
---------------------------------------------------------------------
NET EARNINGS 2,180 2,036
Retained earnings, beginning of period 31,852 28,448
Adjustment to opening retained earnings:
Unrealized loss on fair value of conversion
options of long-term investment at
October 1, 2006 - (1,391)
Accreted interest on host contract component of
long-term investment at October 1, 2006 - 68
Excess of purchase price over stated capital
on repurchase of shares (Note 7) (534) -
Dividend (999) (840)
---------------------------------------------------------------------
Retained earnings, end of period $32,499 $28,321
---------------------------------------------------------------------
---------------------------------------------------------------------
Net earnings per share: (Note 8)
Basic $0.26 $0.24
---------------------------------------------------------------------
---------------------------------------------------------------------
Diluted $0.26 $0.24
---------------------------------------------------------------------
---------------------------------------------------------------------
Weighted average number of shares: (Note 8)
Basic 8,323,298 8,403,554
---------------------------------------------------------------------
---------------------------------------------------------------------
Diluted 8,323,298 8,403,554
---------------------------------------------------------------------
---------------------------------------------------------------------
CALIAN TECHNOLOGIES LTD.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
December 31, September 30,
2007 2007
(Unaudited) (Unaudited)
---------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $22,516 $18,077
Accounts receivable 29,028 32,375
Work in process 3,450 3,744
Prepaid expenses and other 869 502
Future income taxes 1,325 1,111
Derivative assets (Note 12) 177 250
---------------------------------------------------------------------
57,365 56,059
LONG-TERM INVESTMENT (Note 5) 3,171 3,162
EQUIPMENT 3,411 3,527
INTANGIBLES 314 392
GOODWILL 9,518 9,518
---------------------------------------------------------------------
$73,779 $72,658
---------------------------------------------------------------------
---------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $14,071 $16,958
Unearned contract revenue 8,620 5,160
Derivative liabilities (Note 12) 566 98
---------------------------------------------------------------------
23,257 22,216
---------------------------------------------------------------------
COMMITMENT AND CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY
Share capital (Note 7) 17,211 17,309
Contributed surplus (Note 7) 350 310
Retained earnings 32,499 31,852
Accumulated other comprehensive income 462 971
---------------------------------------------------------------------
50,522 50,442
---------------------------------------------------------------------
$73,779 $72,658
---------------------------------------------------------------------
---------------------------------------------------------------------
CALIAN TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
Three months Three months
ended ended
December 31, December 31,
2007 2006
(Unaudited) (Unaudited)
---------------------------------------------------------------------
Net earnings $2,180 $2,036
Unrealized gain (loss) on translating
financial statements of self-sustaining
foreign operation net of tax of nil
(December 31, 2006 - nil) (5) 75
Unrealized gain on fair value of host
contract component of long-term investment,
net of tax of nil(December 31, 2006 - nil) 20 53
Change in deferred gain on derivatives
designated as cash flow hedges, net of tax
of $265 (December 31, 2006 - $184) (524) (327)
---------------------------------------------------------------------
Other comprehensive loss (509) (199)
---------------------------------------------------------------------
Comprehensive income $1,671 $1,837
---------------------------------------------------------------------
---------------------------------------------------------------------
CALIAN TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME
(dollars in thousands)
December 31, September 30,
2007 2007
(Unaudited) (Unaudited)
---------------------------------------------------------------------
Unrealized cumulative loss on translating
financial statements of self-sustaining
foreign operation $(527) $(522)
Unrealized cumulative gain on fair value
of host contract component of
long-term investment 451 431
Deferred gain on derivatives designated
as cash flow hedges 538 1,062
---------------------------------------------------------------------
Accumulated other comprehensive income,
end of period $462 $971
---------------------------------------------------------------------
Retained earnings, end of period 32,499 31,852
---------------------------------------------------------------------
Accumulated other comprehensive income
and retained earnings, end of period $32,961 $32,823
---------------------------------------------------------------------
---------------------------------------------------------------------
CALIAN TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Three months ended
December 31
(Unaudited)
---------------------------------------------------------------------
2007 2006
---------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $2,180 $2,036
Items not affecting cash:
Interest accreted on note receivable - (4)
Interest accreted on host contract component
of long-term investment (Note 6) (98) (80)
Employee stock purchase plan
compensation expense 9 9
Stock option compensation expense 40 -
Amortization 336 349
Future income taxes 40 30
Unrealized loss on fair value of conversion
options of long-term investment 108 69
---------------------------------------------------------------------
2,615 2,409
Change in non-cash working capital
Accounts receivable 3,717 (2,345)
Work in process 294 (2,307)
Prepaid expenses and other (367) (413)
Accounts payable and accrued liabilities (4,126) (1,474)
Unearned contract revenue 4,084 (468)
---------------------------------------------------------------------
6,217 (4,598)
---------------------------------------------------------------------
CASH FLOWS USED IN FINANCING ACTIVITIES
Issuance of common shares - 24
Dividend (999) (840)
Repurchase of shares (632) -
---------------------------------------------------------------------
(1,631) (816)
---------------------------------------------------------------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Equipment expenditures (142) (418)
---------------------------------------------------------------------
FOREIGN CURRENCY ADJUSTMENT (5) 75
---------------------------------------------------------------------
NET CASH INFLOW (OUTFLOW) 4,439 (5,757)
CASH, BEGINNING OF PERIOD 18,077 17,018
---------------------------------------------------------------------
CASH, END OF PERIOD $22,516 $11,261
---------------------------------------------------------------------
---------------------------------------------------------------------
CALIAN TECHNOLOGIES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the periods ended December 31, 2007 and December 31, 2006
(dollars in thousands, except per share amounts)
(Unaudited)
1. ACCOUNTING POLICIES
These interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles. They do not include all of the information and notes required by generally accepted accounting principles for annual financial statements.
These interim consolidated financial statements have been prepared using the same accounting policies used in the preparation of the audited annual consolidated financial statements for the year ended September 30, 2007 with the exception of the application of the accounting policies 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 POLICIES
Effective October 1, 2007 the Company adopted the following new accounting standards.
Capital management
The new standard 1535 - Capital disclosures requires the Company to disclose information about the Company's objectives, policies and processes for the management of its capital.
Financial Instruments - Disclosures and Presentation
The new standards 3862 - Financial Instruments - Disclosures and 3863 - Financial Instruments - Presentation require the disclosure of information with regards to the significance of financial instruments for the Company's financial position and performance and the nature and extent of risks arising from financial instruments to which the Company is exposed during the period and at the balance sheet date, and how the Company manages those risks.
Financial instrument classification is as follows:
Cash Held for trading Accounts receivable Loans and receivables Derivative assets and liabilities Held for trading Long-term investment - Conversion option Held for trading Long-term investment - Host contract Available-for-sale Accounts payable and accrued liabilities Other liabilities
3. ACCOUNTING ESTIMATES
For the periods ended December 31, 2007 and December 31, 2006, other than the changes required in adopting new accounting standards as described in Note 2, there have been no material changes in estimates of amounts reported in prior interim periods or of amounts related to prior fiscal years.
4. SEASONALITY
The Company's revenues and earnings have historically been subject to some quarterly seasonality due to the timing of vacation periods and statutory holidays.
5. LONG TERM INVESTMENT
On July 11, 2006, the Company invested $3,623 in Med-Emerg International Inc. (Med-Emerg) in the form of convertible preferred shares. The investment cost included acquisition costs of $116. The preferred shares will be convertible into 8,750,000 common shares of Med-Emerg at the Company's option. After two years, Med-Emerg is also entitled to cause the preferred shares to be converted into common shares when trading volumes of Med-Emerg common shares exceed 600,000 shares and the weighted daily average share price is at least $0.46 USD in the preceding 60 days. On a fully converted basis, this investment represents a 13% interest based on the current number of common shares outstanding. In the event the shares are not converted by July 11, 2011, the preferred shares will be redeemed, and at the option of Med-Emerg, the face value will be satisfied either in cash or in Med-Emerg common shares based on the then fair market value of the common shares.
Fair value of long-term investment: --------------------------------------------------------------------- Long-term investment, at cost $3,623 Cumulative unrealized loss of conversion options (1,393) Cumulative unrealized gain on fair value of host contract component 451 Cumulative interest accretion on host contract 490 --------------------------------------------------------------------- Fair value of investment at December 31, 2007 $3,171 --------------------------------------------------------------------- ---------------------------------------------------------------------
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:
Med-Emerg share price at December 31, 2007 0.14
Risk free interest rate 3.36%
Actual stock price volatility 105.9%
Expected life of options 3.5 years
Under the Black-Scholes model, a one cent increase (decrease) in Med-Emerg share price would result in $80 increase (decrease) in the fair value of the conversion options. A 10% increase (decrease) in the volatility of Med-Emerg stock price would result in $90 increase (decrease) in the fair value of the conversion option. Med-Emerg shares are traded on the OTC Bulletin Board and currently trade in limited volume.
Fair value of the host contract component is determined using interest rates in effect at each reporting period. A 1% increase (decrease) to the interest rate would result in $80 decrease (increase) in the fair value of the host contract component. The interest rate used at December 31, 2007 is 12.94% and represents an approximation of the borrowing rate available for companies with risk profiles similar to Med-Emerg.
6. INTEREST INCOME
Interest income is comprised of the following amounts:
---------------------------------------------------------------------
Three months ended
December 31
2007 2006
---------------------------------------------------------------------
Interest earned on cash balances $251 $154
Accreted interest on host contract component
of long-term investment 98 80
Accreted interest on note receivable - 4
---------------------------------------------------------------------
Interest income $349 $238
---------------------------------------------------------------------
7. SHARE CAPITAL
Share repurchase
During the first quarter ending December 31, 2007, the Company acquired 47,200 of its outstanding common shares at an average price of $13.35 per share for a total of $632 including related expenses, through normal course issuer bids in place during the period. No shares were repurchased during the period ending December 31, 2006. The excess of the purchase price over the stated capital of the shares has been charged to retained earnings.
Stock options
The Company has an established stock option plan, which provides that the Board of Directors may grant stock options to eligible directors and employees. Under the plan, eligible directors and employees are granted the right to purchase shares of common stock at a price established by the Board of Directors on the date the options are granted but in no circumstances below fair market value of the shares at the date of grant. A total of 250,000 common shares have been authorized for issuance under the plan, of which 165,000 have been issued at December 31, 2007.
During the quarter ended December 31, 2007 under the fair value based method, compensation expense related to general and administrative costs of $40 was recorded related to stock options granted in previous periods. The offsetting credit was applied to contributed surplus. The compensation costs reflected in the financial statements for the year were calculated using the Black-Scholes option pricing model using the following assumptions:
Risk free interest rate 4.0%
Expected dividend yield 3.4%
Stock price volatility 31.9%
Expected life of options 3.3 years
8. NET EARNINGS PER SHARE
The diluted weighted average number of shares has been calculated as
follows:
---------------------------------------------------------------------
Three months ended
December 31
2007 2006
---------------------------------------------------------------------
Weighted average number of shares - basic 8,323,298 8,403,554
Addition to reflect the dilutive effect
of employee stock options - -
---------------------------------------------------------------------
Weighted average number of
shares - diluted 8,323,298 8,403,554
---------------------------------------------------------------------
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 ended December 31, 2007, 165,000 options were excluded from the above computation of diluted weighted average number of common shares because they were anti-dilutive (December 31, 2006: Nil).
9. COMMITMENT AND CONTINGENCIES
During the year 2000, the Company entered into a 10-year lease for an office building in the Ottawa area expiring in April 2010. The Company currently has an agreement with a sub-tenant to lease a significant portion of the space for a period extending to the end of the lease period. The Company is required to assume the remaining portion of the costs associated with this facility. Unless the sub-lessee defaults on future payments, it is expected that the current provision of $1,178 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 $990 per year.
In the normal course of business, the Company is party to employee related claims. The potential outcomes related to existing matters faced by the Company are not determinable at this time. The Company intends to defend these actions, and management believes that the resolution of these matters will not have a material adverse effect on the Company's financial condition.
10. CAPITAL MANAGEMENT
The Company's objective is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. Management defines capital as the Company's shareholders' equity excluding accumulated other comprehensive income relating to cash flow hedges. The Company does not have any debt and therefore net earnings generated from operations are available for reinvestment in the Company or distribution to the Company's shareholders. The Board of Directors does not establish quantitative return on capital criteria for management; but rather promotes year over year sustainable profitable growth. The Board of Directors also reviews on a quarterly basis the level of dividends paid to the Company's shareholders and monitors the share repurchase program activities. The Company does not have a defined share repurchase plan and buy and sell decisions are made on a specific transaction basis and depend on market prices and regulatory restrictions.
There were no changes in the Company's approach to capital management during the period. Neither the Company nor any of its subsidiaries is subject to externally imposed capital requirements.
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 as well as the long-term management of projects, facilities and customer business processes.
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, 2007
---------------------------------------------------------------------
---------------------------------------------------------------------
Business and
Systems Technology
Engineering Services Corporate Total
---------------------------------------------------------------------
Revenues $14,131 $31,753 $- $45,884
Earnings before other
expense, interest and
income tax expense 1,627 2,016 (561) 3,082
Unrealized loss on fair
value of conversion
options of long-term
investment (Note 5) (108)
Interest income 349
Income tax expense 1,143
---------------------------------------------------------------------
Net earnings $2,180
---------------------------------------------------------------------
Total assets other than
cash and goodwill $14,113 $27,354 $278 $41,745
Goodwill - 9,518 - 9,518
Cash - - 22,516 22,516
---------------------------------------------------------------------
Total assets $14,113 $36,872 $22,794 $73,779
---------------------------------------------------------------------
---------------------------------------------------------------------
Three months ended December 31, 2006
---------------------------------------------------------------------
---------------------------------------------------------------------
Business and
Systems Technology
Engineering Services Corporate Total
---------------------------------------------------------------------
Revenues $12,110 $32,956 $- $45,066
Earnings before other
expense, interest
and income tax expense 1,244 2,315 (564) 2,995
Unrealized loss on fair
value of conversion
options of long-term
investment (69)
Interest income 238
Income tax expense 1,128
---------------------------------------------------------------------
Net earnings $2,036
---------------------------------------------------------------------
---------------------------------------------------------------------
September 30, 2007
---------------------------------------------------------------------
---------------------------------------------------------------------
Business and
Systems Technology
Engineering Services Corporate Total
---------------------------------------------------------------------
Total assets other
than cash and goodwill $16,004 $28,904 $155 $45,063
Goodwill - 9,518 - 9,518
Cash - - 18,077 18,077
---------------------------------------------------------------------
Total assets $16,004 $38,422 $18,232 $72,658
---------------------------------------------------------------------
---------------------------------------------------------------------
12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Market Risk
Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates will affect the Company's income or the value of its holding of financial instruments.
Foreign currency risk related to contracts
The Company is exposed to foreign currency fluctuations on its cash balance, accounts receivable, accounts payable and future cash flows related to contracts denominated in a foreign currency. Future cash flows will be realized over the life of the contracts. The Company utilizes derivative financial instruments, principally in the form of forward exchange contracts, in the management of its foreign currency exposures. The Company's objective is to manage and control exposures and secure the Company's profitability on existing contracts and therefore, the Company's policy is to hedge 100% of its foreign currency exposure. The Company does not utilize derivative financial instruments for trading or speculative purposes. The Company applies hedge accounting when appropriate documentation and effectiveness criteria are met.
The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives to specific firm contractually related commitments on projects.
The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. Hedge ineffectiveness is insignificant.
The forward foreign exchange contracts primarily require the Company to purchase or sell certain foreign currencies with or for Canadian dollars at contractual rates. At December 31, 2007, the Company had the following forward foreign exchange contracts:
---------------------------------------------------------------------------
Type Notional Currency Maturity Equivalent Fair Value
Cdn. Dollars December 31, 2007
---------------------------------------------------------------------------
BUY 14,197 USD January 2008 13,899 $175
BUY 67 EURO January 2008 95 1
BUY 63 GBP January 2008 122 1
---------------------------------------------------------------------------
Derivative
assets $177
---------------------------------------------------------------------------
SELL 45,243 USD January 2008 44,293 $557
SELL 458 EURO January 2008 653 9
---------------------------------------------------------------------------
Derivative
liabilities $566
---------------------------------------------------------------------------
A 10% strengthening (weakening) of the Canadian dollar against the following currency at December 31, 2007 would have decreased (increased) other comprehensive income by the amounts shown below.
December 31,
2007
------------
USD $3,078
EURO 57
GBP (12)
------------
$3,122
------------
------------
Foreign currency risk on US-based subsidiary
The Company is exposed to foreign currency fluctuations related to its net investment in a US-based subsidiary denominated in US dollars. The Company does not hedge its investment in the subsidiary as the currency position is considered long term in nature. At December 31, 2007 the net investment in the US-based subsidiary was $1,727. A 10% strengthening (weakening) of the Canadian dollar against the US dollar at December 31, 2007 would have decreased (increased) OCI by $163.
Interest rate risk
The Company is not directly exposed to interest-rate risk. However, the fair value of the host contract component of the long-term investment which is determined on a discounted cash flow basis will be affected by interest rate fluctuations. A 1% increase (decrease) to the interest rate would result in $80 decrease (increase) in the fair value of the investment.
Credit risk
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company's accounts receivable and its foreign exchange contracts.
The Company's exposure to credit risk with its customers is influenced mainly by the individual characteristics of each customer. The Company's customers are for the most part, federal and provincial government departments and large private companies. A significant portion of the Company's accounts receivable is from long-time customers and at December 31, 2007 60% of its accounts receivable were with the Government of Canada. Over the last five years, the Company has not suffered any credit related losses with any of its customers.
The Company limits its exposure to credit risks from counter-parties to derivative financial instruments by dealing only with major financial institutions. Management does not expect any counter-parties to fail to meet their obligations.
The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was:
---------------------------------------------------------------------
December 31 September 30
2007 2007
---------------------------------------------------------------------
Cash $22,516 $18,077
Accounts receivable 29,028 32,375
Derivative assets 177 250
Long-term investment 3,171 3,162
---------------------------------------------------------------------
$54,892 $53,864
---------------------------------------------------------------------
The aging of accounts receivable at the reporting date was:
---------------------------------------------------------------------
December 31 September 30
2007 2007
---------------------------------------------------------------------
Current $27,108 $31,581
Past due (61-120 days) 1,868 673
Past due (greater than 120 days) 52 121
---------------------------------------------------------------------
$29,028 $32,375
---------------------------------------------------------------------
Based on historic default rates, the Company believes that there are minimal requirements for an allowance for doubtful accounts.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company's approach to managing liquidity risk is to ensure, as far as possible, that it will always have sufficient liquidity to meet liabilities when due. At December 31, 2007 the Company has a cash balance of $22,516 and has an unsecured credit facility, subject to annual renewal. The credit facility permits the Company to borrow funds up to an aggregate of $10 million. As at December 31, 2007 there were no direct borrowings under the Company's credit facility. All of the Company's financial liabilities have contractual maturities of less than 30 days.
Fair Value
The fair value of cash, accounts receivable, accounts payable and accrued liabilities approximates their carrying values due to their short-term maturity.
Fair value of the forward exchange contracts reflects the cash flows due to or from the Company if settlement had taken place on December 31, 2007.
The fair value of the conversion options of the long-term investment is calculated using the Black-Scholes model that incorporates current market price, the contractual price and the volatility of the underlying instrument, the expected life of the option and the time value of money. The fair value of the host contract component of the long-term investment is calculated on a discounted cash flow basis using externally available yields used for investments of similar risk.
Management Discussion and Analysis - December 31, 2007:
(dollars in thousands, except per share data)
RESULTS OF OPERATIONS
Revenues:
For the first quarter of 2008, revenues increased by 2% to $45,884, compared to $45,066 reported in the first quarter of 2007.
Systems Engineering's (SED) revenues were $14,131 in the quarter representing an increase of 17% from the $12,110 recorded in the first quarter of last year. During the first quarter of 2008, SED continued the momentum of recent quarters and delivered and executed solidly on all contracts. 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 $31,753 in the quarter representing a decrease of 4% from the $32,956 million for the same period of last year. The decrease in revenues is a direct reflection of a continued tightening of federal government spending on short-term staffing services and a longer than usual shutdown period during the holiday season.
Management expects that the marketplace in 2008 will continue to be very competitive. The market conditions for SED continue to be strong and with the current level of business in hand, it is expected that SED will deliver solid revenue growth over the prior year. The market place for BTS is starting to show signs of improvement. However, the eventual easing of the recent constraints within the federal government and the timing of future contract wins will ultimately determine the BTS revenue growth for the balance of the year.
Gross margin:
Gross margin was 19.0% in the first quarter of 2008, identical to the 19.0% reported in the first quarter a year ago. Both divisions reported similar margins year over year with Systems Engineering reporting 21.1% this quarter compared to 21.2% in the first quarter of 2007 and Business and Technology Services reporting 18.0% compared to the 18.1% reported in the first quarter of 2007.
Because of the significant difference in gross margin between each of the two divisions, the overall gross margin of the Company is dependent on the relative level of revenue generated from each division. The highly competitive environment faced by SED and BTS coupled with the strengthened Canadian dollar continues to put pressure on margins. However, by continuing to focus on execution, management believes that this impact can be negated and realized margins can be maintained at levels consistent with the prior year.
Operating expenses:
Selling, marketing, general and administration, facilities totaled $5,246 or 11.4% of revenues in the first quarter of 2008 compared to $5,215 or 11.6% of revenues reported in the first quarter of 2007. Management's approach of continually reviewing operating efficiencies allowed the Company to maintain operating expenses near prior year levels. For 2008, management believes that it can continue to maintain its operating expenses within the percentage of revenues experienced in 2007.
Interest income:
Interest income for the first quarter of 2008 was $349 compared to $238 in 2007. The increase in interest income is attributable to an increase in average cash on hand compared to the prior year.
Unrealized gain on fair value of conversion options of long-term investment The Company recorded a loss of $108 for the quarter relating to the fair value of conversion options of long-term investment, primarily as a result of a one cent decrease in Med-Emerg share price compared to the beginning of the quarter.
Income taxes
The provision for income taxes for the first quarter of 2008 was $1,143 or 34.4% of earnings before tax compared to $1,128 in 2007 or 35.7% of earnings before tax. The 2008 provision was positively impacted by changes in prescribed tax rates with the federal and various provincial governments which were enacted prior to December 31, 2007.
Net earnings:
As a result of the foregoing, in the first quarter of 2008 the Company recorded net earnings of $2,180 or $0.26 per share basic and diluted, compared to $2,036 or $0.24 per share basic and diluted in the same quarter of the prior year.
BACKLOG
The Company's backlog at December 31, 2007 was $959 million with terms extending to fiscal 2014. This compares to $960 million reported at the end of September 2007. 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 2008, 2009 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 $342 million. The majority of this amount relates to the health services support contract. Based on existing requirements, the customer for the health services support contract does not foresee a significant increase in spending in future years. Should additional requirements for the Company's services under these contracts not materialize; the excess will not be realized. The Company's policy is to reduce the reported contractual backlog once it receives official confirmation from the customer that indicates the utilization of the full contract value will not materialize.
(dollars in Fiscal Fiscal Beyond Estimated Excess over TOTAL
millions) 2008 2009 2009 realizable estimated
portion of realizable
Backlog portion
----------------------------------------------------------------------
Contracted
Backlog $116 $87 $39 $242 $165 $407
Option Renewals 10 15 350 375 177 552
----------------------------------------------------------------------
TOTAL $126 $102 $389 $617 $342 $959
----------------------------------------------------------------------
----------------------------------------------------------------------
Business and
Technology
Services $90 $86 $373 $549 $342 $891
Systems
Engineering 36 16 16 68 - 68
----------------------------------------------------------------------
TOTAL $126 $102 $389 $617 $342 $959
----------------------------------------------------------------------
----------------------------------------------------------------------
FINANCIAL CONDITION AND CASHFLOWS:
Operating activities
Cash inflows from operating activities for the three-month period ending December 31, 2007 were $6,217 compared to cash outflows of $4,598 in the first quarter of 2007. Working capital elements changed in line with the ebbs and flows of the business. Specifically, accounts receivable and accounts payable decreased as a result of lower activity near the end of 2007 and unearned contract revenues increased as a result of receiving customer advance payments near quarter end. 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, 2007, the Company's total unearned revenue amounted to $8,620. This compares to $2,806 one year earlier.
Financing activities:
During the quarter ending December 31, 2007 the Company paid a dividend of $0.12 per share compared to $0.10 per share during the same period of 2007.
During the first quarter of 2008, the Company repurchased 47,200 common shares through its normal course issuer bid at an average price of $13.35.
At December 31, 2007 there were 165,000 options outstanding at an average price of $13.22 expiring at various dates between February 4, 2012 and August 21, 2012.
Capital resources
At December 31, 2007 the Company had a short-term credit facility of $10,000 with a Canadian chartered bank that bears interest at prime and is secured by assets of the Company against which no amounts were drawn. Management believes that Calian has sufficient cash resources to continue to finance its working capital requirements and pay a quarterly dividend.
ADOPTION OF NEW ACCOUNTING RULES AND IMPACT ON 2008 FINANCIAL RESULTS
As described in Note 2 to these interim financial statements, the Company was required to adopt new accounting rules which came in effect for the Company's first fiscal quarter 2008.
SELECTED QUARTERLY FINANCIAL DATA
Q1/08 Q4/07 Q3/07 Q2/07
-----------------------------------------------------------------
Revenues $45,884 $45,715 $48,226 $50,852
Net earnings $2,180 $2,136 $2,501 $2,532
Net earnings per share
Basic $0.26 $0.26 $0.30 $0.30
Diluted $0.26 $0.26 $0.30 $0.30
-----------------------------------------------------------------
Q1/07 Q4/06 Q3/06 Q2/06
-----------------------------------------------------------------
Revenues $45,066 $41,067 $45,946 $48,469
Net earnings $2,036 $1,815 $772 $2,322
Net earnings per share
Basic $0.24 $0.22 $0.09 $0.27
Diluted $0.24 $0.22 $0.09 $0.27
-----------------------------------------------------------------
SEASONALITY
The Company's operations are subject to some quarterly seasonality due to the timing of vacation periods and statutory holidays. Typically the Company's first and last quarter will be negatively impacted as a result of the Christmas season and summer vacation period. During these periods, the Company can only invoice for work performed and is also required to pay for statutory holidays. This results in reduced levels of revenues and in a drop in gross margins. This seasonality may not be apparent in the overall results of the Company depending on the impact of the realized sales mix of its various projects.
OUTLOOK
Management believes the Company is well positioned for long-term sustained growth. The Company operates in markets that will continue to require the services that the Company offers. To further assure itself of a stable source of revenues, the Company will focus on increasing the percentage of its revenues derived from recurring business while pursuing new business in adjacent markets. Potential acquisitions, focused on adding complementary businesses to the Company's mix, could also be a possible source of growth.
Over the last year, the SED division has experienced a rejuvenated market, following several years of a depressed satellite sector and extensive industry consolidation. Accordingly, SED is currently experiencing increased demand for its products and services. Management believes that new 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 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 the division has seen delays and spending constraints within certain federal government departments, management believes that the types of service the division offers will continue to be attractive to government agencies going forward.
GUIDANCE
For 2008, management expects continued solid performance in both divisions. The BTS division will continue pursuing new opportunities in traditional markets and build upon recent successes. The SED division is expected to continue to benefit from the recovery in the satellite communications market, even with the always-present risk of program delays associated with this sector. Based on the above, management expects that consolidated revenues for 2008 will be in the range of $190 million to $210 million and net earnings per share in the range of $1.10 to $1.25.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
During the most recent interim quarter ending December 31, 2007, 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 2008, and with the Management Discussion and Analysis in the 2007 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
