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Calian Reports Fourth Quarter Results Fourth quarter profitability up 27% from prior year (All amounts in this release are in Canadian Dollars) OTTAWA, ONTARIO--(MARKET WIRE)--Nov 12, 2008 -- Calian Technologies Ltd. (Toronto:CTY.TO - News) today released unaudited
results for the fourth quarter ended September 30, 2008.
Revenues for the quarter were $48.9 million, an increase
of 7% from the $45.7 million reported in the same quarter
of the previous year. Net earnings were $2.7 million or
$0.33 per share basic and diluted, compared to $2.1 million
or $0.26 per share basic and diluted in the same quarter
of the previous year. For the year 2008, the Company reported
revenues of $193.2 million and net earnings of $10.5 million
or $1.27 per share basic and diluted, compared to revenues
of $190 million and net earnings of $9.2 million or $1.10
per share basic and diluted in the prior year.
"The results this quarter exceeded our expectations with quarterly profit up 27% from the same quarter last year. On an annual basis, we closed the year with profits increasing 15% year over year. Continued high demand for our products and services coupled with high labour utilization, excellent project control and risk retirement on certain projects contributed to an impressive quarter for SED. At the same time our BTS division was able to continue its momentum as it recovered nicely from the market softness experienced earlier in the year. Fortunately, the diversification of our two divisions allowed us to address these short term challenges from previous quarters while maintaining overall profitability. I am delighted by the fact that both divisions posted earnings contributions that were at least 25% higher than the fourth quarter of last year" stated Ray Basler, President and CEO. "While we continue to face a very competitive marketplace as well as an unsettled global financial environment, we remain confident in our ability to generate solid profitability and positive cash flows. With our strong backlog and sound balance sheet, we will enter 2009 with a solid foundation from which to build for the future" continued Basler. Management expects continued growth for 2009, although the extent will depend on the timing and magnitude of various contract awards. Based on the current outlook, consolidated revenues for 2009 are expected to be in the range of $195 million to $215 million and net earnings per share in the range of $1.25 to $1.40. About Calian Calian sells technology services to industry and government in Canada and around the world. Calian provides customers with ready access to an exceptional team of engineers, telecommunications and technology professionals, health care professionals and other highly qualified staff. The Business and Technology Services Division augments customer workforces with flexible short and long-term placements, recruitment and outsourcing of engineering, health care professionals and other skilled professionals. The Systems Engineering Division plans, designs and implements solutions for many of the world's space agencies and leading communications satellite manufacturers and operators, as well as providing contract manufacturing services for customers in North America. DISCLAIMER Certain information included in this press release is forward-looking and is subject to important risks and uncertainties. The results or events predicted in these statements may differ materially from actual results or events. Such statements are generally accompanied by words such as "intend", "anticipate", "believe", "estimate", "expect" or similar statements. Factors which could cause results or events to differ from current expectations include, among other things: the impact of price competition; scarce number of qualified professionals; the impact of rapid technological and market change; loss of business or credit risk with major customers; technical risks on fixed price projects; general industry and market conditions and growth rates; international growth and global economic conditions, and including currency exchange rate fluctuations; and the impact of consolidations in the business services industry. For additional information with respect to certain of these and other factors, please see the Company's most recent annual report and other reports filed by Calian with the Ontario Securities Commission. Calian disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. No assurance can be given that actual results, performance or achievement expressed in, or implied by, forward-looking statements within this disclosure will occur, or if they do, that any benefits may be derived from them.
CALIAN TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
(Canadian dollars in thousands, except per share data)
Three months ended
September 30 Year ended
(Unaudited) September 30
------------------------------------------------------------------------
2008 2007 2008 2007
------------------------------------------------------------------------
Revenues $48,904 $45,715 $193,165 $189,859
Cost of revenues 39,261 36,971 155,326 153,982
------------------------------------------------------------------------
Gross profit 9,643 8,744 37,839 35,877
Selling and marketing 1,046 1,078 4,854 4,973
General and
administration 3,310 3,135 13,209 12,926
Facilities 751 809 3,118 3,017
Stock option
compensation (Note 7) 22 152 119 310
Amortization
of equipment 274 394 1,062 1,193
Amortization
of intangibles 78 78 312 312
------------------------------------------------------------------------
Earnings before other
income (expense),
interest income and
income tax expense 4,162 3,098 15,165 13,146
Unrealized gain (loss)
on fair value of
conversion options
of long-term
investment (Note 5) (159) (55) (338) 106
Interest income (Note 6) 300 282 1,266 958
------------------------------------------------------------------------
Earnings before
income tax expense 4,303 3,325 16,093 14,210
------------------------------------------------------------------------
Income tax
expense - current 1,659 1,182 5,534 4,911
Income tax expense
(recovery) - future (71) 7 50 94
------------------------------------------------------------------------
1,588 1,189 5,584 5,005
------------------------------------------------------------------------
NET EARNINGS 2,715 2,136 10,509 9,205
Retained earnings,
beginning of period 34,439 31,099 31,852 28,448
Adjustment to opening
retained earnings:
Unrealized loss on
fair value of
conversion options
and accreted
interest on host
contract component
of long-term
investment at
October 1, 2006 - - - (1,323)
Excess of purchase
price over stated
capital on
repurchase of
shares (Note 7) (784) (380) (2,760) (953)
Dividend (1,222) (1,003) (4,453) (3,525)
------------------------------------------------------------------------
Retained earnings,
end of period $35,148 $31,852 $35,148 $31,852
------------------------------------------------------------------------
------------------------------------------------------------------------
Net earnings per
share: (Note 8)
Basic $0.33 $0.26 $1.27 $1.10
------------------------------------------------------------------------
------------------------------------------------------------------------
Diluted $0.33 $0.26 $1.27 $1.10
------------------------------------------------------------------------
------------------------------------------------------------------------
Weighted average
number of shares:
(Note 8)
Basic 8,137,968 8,367,714 8,247,798 8,387,663
------------------------------------------------------------------------
------------------------------------------------------------------------
Diluted 8,137,968 8,367,714 8,247,798 8,387,663
------------------------------------------------------------------------
------------------------------------------------------------------------
CALIAN TECHNOLOGIES LTD.
CONSOLIDATED BALANCE SHEETS
(Canadian dollars in thousands)
September 30, September 30,
2008 2007
-----------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $27,327 $18,077
Accounts receivable 33,304 32,375
Work in process 4,761 3,744
Prepaid expenses and other 701 502
Future income taxes 2,060 1,111
Derivative assets (Note 12) 521 250
-----------------------------------------------------------------
68,674 56,059
LONG-TERM INVESTMENT (Note 5) 3,165 3,162
EQUIPMENT 4,494 3,527
INTANGIBLES 80 392
GOODWILL 9,518 9,518
-----------------------------------------------------------------
$85,931 $72,658
-----------------------------------------------------------------
-----------------------------------------------------------------
LIABILITIES AND
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued
liabilities $20,430 $16,958
Unearned contract revenue 12,290 5,160
Derivative liabilities (Note 12) 1,606 98
-----------------------------------------------------------------
34,326 22,216
-----------------------------------------------------------------
COMMITMENT AND CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY
Share capital (Note 7) 16,975 17,309
Contributed surplus (Note 7) 429 310
Retained earnings 35,148 31,852
Accumulated other comprehensive
income (loss) (947) 971
-----------------------------------------------------------------
51,605 50,442
-----------------------------------------------------------------
$85,931 $72,658
-----------------------------------------------------------------
-----------------------------------------------------------------
CALIAN TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Canadian dollars in thousands)
Three months ended
September 30 Year ended
(Unaudited) September 30
------------------------------------------------------------------------
2008 2007 2008 2007
------------------------------------------------------------------------
Net earnings $2,715 $2,136 $10,509 $9,205
Unrealized gain (loss)
on translating
financial statements
of self-sustaining
foreign operation,
net of tax of nil
(2007 - nil) 83 (114) 128 (199)
Unrealized gain (loss)
on fair value of host
contract component
of long-term
investment, net of
tax of nil (2007 - nil) 27 22 (46) 12
Change in deferred gain
(loss) on derivatives
designated as cash
flow hedges, net of
tax of $349 and
$1,012 year to date
(2007 - $213 and $650
year to date) (691) 378 (2,000) 1,153
------------------------------------------------------------------------
Other comprehensive
income (loss) (581) 286 (1,918) 966
------------------------------------------------------------------------
Comprehensive income $2,134 $2,422 $8,591 $10,171
------------------------------------------------------------------------
------------------------------------------------------------------------
CALIAN TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME
(Canadian dollars in thousands)
September 30
------------------------------------------------------------------------
2008 2007
Unrealized cumulative loss on translating
financial statements of self-sustaining
foreign operation $(394) $(522)
Unrealized cumulative gain on fair value of host
contract component of long-term investment 385 431
Deferred gain (loss) on derivatives designated as
cash flow hedges (938) 1,062
------------------------------------------------------------------------
Accumulated other comprehensive income (loss),
end of period $(947) $971
------------------------------------------------------------------------
Retained earnings, end of period 35,148 31,852
------------------------------------------------------------------------
Accumulated other comprehensive income (loss) and
retained earnings, end of period $34,201 $32,823
------------------------------------------------------------------------
------------------------------------------------------------------------
CALIAN TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Canadian dollars in thousands)
Three months ended
September 30 Year ended
(Unaudited) September 30
------------------------------------------------------------------------
2008 2007 2008 2007
------------------------------------------------------------------------
CASH FLOWS FROM (USED IN)
OPERATING ACTIVITIES
Net earnings $2,715 $2,136 $10,509 $9,205
Items not
affecting cash:
Interest accreted on
note receivable - (4) - (14)
Interest accreted
on host contract
component of
long-term investment
(Note 6) (80) (81) (388) (325)
Employee stock
purchase plan
compensation expense 12 8 42 34
Stock option
compensation 22 152 119 310
Amortization 352 472 1,374 1,505
Future income tax
expense (71) 7 50 94
Unrealized loss (gain)
on fair value of
conversion options
of long-term
investment 159 55 338 (106)
------------------------------------------------------------------------
3,109 2,745 12,044 10,703
Change in non-cash
working capital
Accounts receivable 4,185 647 (62) (5,267)
Work in process (227) 2,042 (1,017) (23)
Prepaid expenses
and other 573 399 (200) (9)
Accounts payable and
accrued liabilities (629) (350) 1,196 (618)
Unearned contract
revenue 187 1,271 6,737 1,813
------------------------------------------------------------------------
7,198 6,754 18,698 6,599
------------------------------------------------------------------------
CASH FLOWS FROM
(USED IN) FINANCING
ACTIVITIES
Issuance of
common shares - - 220 252
Dividend (1,222) (1,003) (4,453) (3,525)
Repurchase of shares (949) (451) (3,314) (1,132)
------------------------------------------------------------------------
(2,171) (1,454) (7,547) (4,405)
------------------------------------------------------------------------
CASH FLOWS FROM
(USED IN) INVESTING
ACTIVITIES
Notes receivable - 200 - 200
Equipment
expenditures (1,453) (279) (2,029) (1,136)
------------------------------------------------------------------------
(1,453) (79) (2,029) (936)
FOREIGN CURRENCY
ADJUSTMENT 83 (114) 128 (199)
NET CASH INFLOW 3,657 5,107 9,250 1,059
CASH, BEGINNING
OF PERIOD 23,670 12,970 18,077 17,018
------------------------------------------------------------------------
CASH, END OF PERIOD $27,327 $18,077 $27,327 $18,077
------------------------------------------------------------------------
------------------------------------------------------------------------
CALIAN TECHNOLOGIES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the periods ended September 30, 2008 and 2007
(Canadian dollars in thousands, except per share amounts)
(Unaudited)1. ACCOUNTING POLICIES These interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles. They do not include all of the information and notes required by generally accepted accounting principles for annual financial statements. These interim consolidated financial statements have been prepared using the same accounting policies used in the preparation of the audited annual consolidated financial statements for the year ended September 30, 2008 with the exception of the application of the accounting 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 issued by the Canadian Institute of Chartered Accountants. Capital management Section 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 Section 3862, Financial Instruments - Disclosures, and 3863, Financial Instruments - Presentation replace section 3861, Financial Instruments - Disclosure and Presentation. These sections 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 September 30, 2008 and September 30, 2007, there has been no material change in estimates of amounts reported in prior interim periods or of amounts related to prior fiscal years. 4. SEASONALITY The Company's revenues and earnings have historically been subject to some quarterly seasonality due to the timing of vacation periods and statutory holidays. 5. LONG-TERM INVESTMENT On July 11, 2006, the Company invested $3,623 in Med-Emerg International Inc. (Med-Emerg) in the form of convertible preferred shares. 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 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 on conversion options (1,623) Cumulative interest accretion on host contract 780 Cumulative unrealized gain on fair value of host contract component 385 -------------------------------------------------------------- Fair value of investment at September 30, 2008 $3,165 -------------------------------------------------------------- -------------------------------------------------------------- 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 September 30, 2008 $0.095 Risk free interest rate 2.21 % Actual stock price volatility 121.6 % Expected life of options 2.75 years Under the Black-Scholes model, a one cent increase (decrease) in Med-Emerg share price would result in $59 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 $57 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 $69 decrease (increase) in the fair value of the host contract component. The interest rate used at September 30, 2008 is 13.22% and represents an approximation of the borrowing rate available for companies with risk profiles similar to Med-Emerg based on BBB credit rating. 6. INTEREST INCOME Interest income is comprised of the following amounts:
Three months ended Year ended
September 30 September 30
------------------------------------------------------------------------
2008 2007 2008 2007
------------------------------------------------------------------------
Interest earned on
cash balances $220 $197 $878 $619
Accreted interest on
host contract component
of long-term investment 80 81 388 325
Accreted interest on
note receivable - 4 - 14
------------------------------------------------------------------------
Interest income $300 $282 $1,266 $958
------------------------------------------------------------------------7. SHARE CAPITAL Share repurchase During the fourth quarter (and year) ending September 30, 2008, the Company acquired 78,600 (264,500) of its outstanding common shares at an average price of $12.08 ($12.53) per share for a total of $949 ($3,314) including related expenses, through normal course issuer bids in place during the period. During the fourth quarter (and year) ending September 30, 2007, the Company acquired 34,200 (87,100) of its outstanding common shares at an average price of $13.16 ($12.98) per share for a total of $451 ($1,132) including related expenses through normal course issuer bids in place during the period. The excess of the purchase price over the stated capital of the shares 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 September 30, 2008. During the fourth quarter (and year) ending September 30, 2008 under the fair value based method, compensation expense related to general and administrative costs of $22 ($119) was recorded related to stock options granted in previous periods, compared to $152 ($310) recorded in 2007. The offsetting credit was applied to contributed surplus. The compensation costs reflected in the financial statements for 2008 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 Year ended
September 30 September 30
2008 2007 2008 2007
--------------------------------------------------------------------------
Weighted average
number of shares - basic 8,137,968 8,367,714 8,247,798 8,387,663
Addition to reflect the
dilutive effect of
employee stock options - - - -
--------------------------------------------------------------------------
Weighted average number
of shares - diluted 8,137,968 8,367,714 8,247,798 8,387,663
--------------------------------------------------------------------------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 September 30, 2008, 165,000 options were excluded from the above computation of diluted weighted average number of common shares because they were anti-dilutive (September 30, 2007: 165,000). 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 $752 will be sufficient to cover the Company's share of the costs. The lease payments including operating costs relating to the excess space amount to approximately $984 per year. In the normal course of business, the Company is party to employee related claims. The potential outcomes related to existing matters faced by the Company are not determinable at this time. The Company intends to defend these actions, and management believes that the resolution of these matters will not have a material adverse effect on the Company's financial condition. 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 and provide the ability to continue as a going concern. 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 (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 September 30, 2008
----------------------------------------------------------------------
----------------------------------------------------------------------
Business and
Systems Technology
Engineering Services Corporate Total
----------------------------------------------------------------------
----------------------------------------------------------------------
Revenues $15,182 $33,722 $- $48,904
Earnings before other
expense, interest
income and income
tax expense 2,471 2,345 (654) 4,162
Unrealized loss on fair
value of conversion
options of long-term
investment (Note 5) (159)
Interest income
(Note 6) 300
Income tax expense 1,588
----------------------------------------------------------------------
Net earnings $ 2,715
----------------------------------------------------------------------
----------------------------------------------------------------------
Three months ended September 30, 2007
----------------------------------------------------------------------
----------------------------------------------------------------------
Business and
Systems Technology
Engineering Services Corporate Total
----------------------------------------------------------------------
----------------------------------------------------------------------
Revenues $14,306 $31,409 $- $45,715
Earnings before other
expense, interest
income and income
tax expense 1,899 1,860 (661) 3,098
Unrealized loss on fair
value of conversion
options of long-term
investment (Note 5) (55)
Interest income
(Note 6) 282
Income tax expense 1,189
----------------------------------------------------------------------
Net earnings $ 2,136
----------------------------------------------------------------------
----------------------------------------------------------------------
Year ended September 30, 2008
----------------------------------------------------------------------
----------------------------------------------------------------------
Business and
Systems Technology
Engineering Services Corporate Total
----------------------------------------------------------------------
----------------------------------------------------------------------
Revenues $59,702 $133,463 $- $193,165
Earnings before other
expense, interest income
and income
tax expense 9,035 8,595 (2,465) 15,165
Unrealized loss on fair
value of conversion
options of long-term
investment (Note 5) (338)
Interest income (Note 6) 1,266
Income tax expense 5,584
----------------------------------------------------------------------
Net earnings $10,509
----------------------------------------------------------------------
----------------------------------------------------------------------
Total assets other than
cash and goodwill $16,813 $32,196 $77 $49,086
Goodwill - 9,518 - 9,518
Cash - - 27,327 27,327
----------------------------------------------------------------------
Total assets $16,813 $41,714 $27,404 $85,931
----------------------------------------------------------------------
----------------------------------------------------------------------
Equipment expenditures $682 $1,347 $- $2,029
----------------------------------------------------------------------
----------------------------------------------------------------------
Year ended September 30, 2007
----------------------------------------------------------------------
----------------------------------------------------------------------
Business and
Systems Technology
Engineering Services Corporate Total
----------------------------------------------------------------------
----------------------------------------------------------------------
Revenues $55,586 $134,003 $- $189,859
Earnings before other
income, interest income
and income tax expense 6,515 9,143 (2,512) 13,146
Unrealized gain on fair
value of conversion
options of long-term
investment (Note 5) 106
Interest income (Note 6) 958
Income tax expense 5,005
----------------------------------------------------------------------
Net earnings $9,205
----------------------------------------------------------------------
----------------------------------------------------------------------
$45,063
Total assets other than
cash and goodwill $16,254 $28,654 $155 9,518
Goodwill - 9,518 - 18,077
Cash - - 18,077
----------------------------------------------------------------------
Total assets $16,254 $38,172 $18,232 $72,658
----------------------------------------------------------------------
----------------------------------------------------------------------
Equipment Expenditures $748 $388 $- $1,136
----------------------------------------------------------------------
----------------------------------------------------------------------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 September 30, 2008, the Company had the following forward foreign exchange contracts:
---------------------------------------------------------- -----------
Fair Value
Equivalent September
Type Notional Currency Maturity Cdn. Dollars 30, 2008
---------------------------------------------------------- -----------
BUY 15,669 USD October 2008 $16,163 $512
SELL 433 EURO October 2008 658 9
---------------------------------------------------------- -----------
Derivative
assets $521
---------------------------------------------------------- -----------
---------------------------------------------------------- -----------
SELL 49,001 USD October 2008 $50,547 $1,600
BUY 25 EURO October 2008 38 1
BUY 446 GDP October 2008 849 5
---------------------------------------------------------- -----------
Derivative
liabilities $1,606
---------------------------------------------------------- -----------
A 10% strengthening (weakening) of the Canadian dollar against the
following currency at September 30, 2008 would have decreased (increased)
other comprehensive income by the amounts shown below.
September 30,
2008
------------
USD $3,548
EURO 60
GBP (84)
------------
$3,524
------------
------------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 September 30, 2008 the net investment in the US-based subsidiary was $2,026. A 10% strengthening (weakening) of the Canadian dollar against the US dollar at September 30, 2008 would have decreased (increased) OCI by $190. 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 $69 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. At September 30, 2008 62% of its accounts receivable were due from 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:
-----------------------------------------------------------------------
2008 2007
-----------------------------------------------------------------------
Cash $27,327 $18,077
Accounts receivable 33,304 32,375
Derivative assets 521 250
Long-term investment 3,165 3,162
-----------------------------------------------------------------------
$64,317 $53,864
-----------------------------------------------------------------------
The aging of accounts receivable at the reporting date was:
-----------------------------------------------------------------------
September 30 September 30
2008 2007
-----------------------------------------------------------------------
Current $31,689 $31,581
Past due (61-120 days) 1,364 673
Past due (greater than 120 days) 251 121
-----------------------------------------------------------------------
$33,304 $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 September 30, 2008 the Company has a cash balance of $27,327 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 September 30, 2008 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 September 30, 2008. 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. 13. SUBSEQUENT EVENTS On October 18, 2008 WorldSpace Inc. filed voluntary petitions for reorganization under Chapter 11 of the US Bankruptcy Code. The Company had certain contracts with WorldSpace and accordingly related assets are considered unrecoverable. In addition, the Company was required to unwind foreign exchange agreements related to future revenues expected from the WorldSpace contracts. The overall impact on net earnings is $267, which will be reflected in the first quarter earnings of fiscal 2009. On October 22, 2008, Med-Emerg International Inc. (Med-Emerg) announced that it has entered into a definitive agreement with AIM Health Group Inc. (AIM) whereby Med-Emerg and AIM will merge in an all-stock transaction. The Company has entered into a voting agreement, via its preferred share investment in Med-Emerg, to vote in favor of the plan. As part of the plan, Calian will surrender its preferred shares in Med-Emerg in exchange for a secured convertible debenture of AIM with features similar to the preferred shares. The plan is subject to customary regulatory and court approvals. This transaction, once executed, is not expected to significantly impact the cash flows of the Company's investment. The accounting treatment to fair value the investment is expected to remain the same however, any impact to the financial statements will only be determinable at that time. Management Discussion and Analysis - September 30, 2008: (Canadian dollars in thousands, except per share data) RESULTS OF OPERATIONS Revenues: For the fourth quarter (year end) of 2008, revenues were $48,904, compared to $45,715 reported in the fourth quarter of 2007 representing a 7% increase. For the year ending September 30, 2008 revenues were $193,165 a 2% increase with the $189,859 reported for 2007. Systems Engineering's (SED) revenues were $15,182 in the quarter and $59,702 on a year-to-date basis representing an increase of 6% and 7% respectively from the $14,306 and $55,856 recorded last year. During the fourth quarter of 2008, SED continued to experience high-level utilization rates 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 $33,722 in the quarter and $133,463 on a year-to-date basis representing an increase of 7% for the quarter compared to the $31,409 achieved in the same quarter a year ago, allowing BTS to regain and report annual revenues in line with the prior year. BTS was able to recuperate from a disappointing second quarter but continues to face tightened federal government spending on short-term staffing services and procurement delays related to amendments to some of the Company's existing contracts. Management expects that the marketplace in 2009 will continue to be very competitive. The market conditions for SED are expected to be stable and should present new opportunities in 2009. The expected renewal of several large BTS contracts with the federal government provides additional optimism as we enter 2009. However, the timing of future contract awards will ultimately determine BTS revenue growth for the next 12 months. While the Company begins the year with $165 million of backlog to be earned in 2009, the above noted variables will have an impact in revenues ultimately realized. Overall, management is expecting modest increases from the level of business achieved in 2008. Gross margin: Gross margin was 19.7% in the fourth quarter of 2008, compared to the 19.1% reported in the fourth quarter a year ago. On a year-to-date basis the Company reported margins of 19.6% compared to 18.9% for the same period last year. The consolidated gross margin for 2008 was positively impacted by the increase in realized margins at the SED division. Gross margin in Systems Engineering was 25.0% this quarter compared to 23.7% in the fourth quarter of 2007 and was 24.2% for the year ending September 30, 2008 compared to 21.6% for the same period last year. The increased labour component of sales combined with excellent project execution and retirement of risk on certain contracts allowed the division to report above average margins. Gross margin in Business and Technology Services was 17.3% compared to the 17.1% reported in the fourth quarter of 2007 and 17.5% for the year ending September 30, 2008 compared to 17.8% for the same period last year. BTS gross margin is in line with the prior year as its revenue mix remained consistent with 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 volatility of the Canadian dollar is expected to impact margins. By continuing to focus on execution, management believes that realized margins in the near term can be maintained at current levels. Operating expenses: Selling, marketing, general and administration, facilities totalled $5,107 of revenues in the fourth quarter of 2008 compared to $5,022 of revenues reported in the fourth quarter of 2007. For the year ending September 30, 2008 operating expenses totalled $21,181 or 11.0% compared to $20,916 or 11.0% in 2007. As a result of the Company's continuous cost control activities, expenditure increases were kept in line with the increase in business. Facility expenses, which include costs associated with office space, have been relatively stable over the past several years. 2008 costs were somewhat higher as minor repairs were required to certain leased facilities. The Company's Kanata operations were moved to new facilities at the end of 2008. Overall facility costs are not expected to increase significantly in 2009. Looking ahead, management believes that the Company has the capacity for an increased level of business without significantly affecting operating costs. Interest income: Interest income for the fourth quarter of 2008 was $300 compared to $282 in 2007. The increase in interest income is attributable to an increase in average cash on hand compared to the prior year. For the year ending September 30, 2008, interest income was $1,266 compared to $958 in 2007. Unrealized loss on fair value of conversion options of long-term investment: The Company recorded a loss of $159 for the quarter and a loss of $338 on a year-to-date basis compared to a loss of $55 and a gain of $106 for 2007 relating to the fair value of conversion options of long-term investment. The reported unrealized gain or loss is a direct reflection of the movement in quoted market prices of Med-Emerg shares. Income taxes: The provision for income taxes for the fourth quarter of 2008 was $1,588 or 36.9% of earnings before tax compared to $1,189 in 2007 or 35.8% of earnings before tax. On a year-to-date basis, the provision for income taxes was $5,584 or 34.7% of earnings before tax compared to $5,005 in 2007 or 35.2% of earnings before tax. The 2008 income tax expense included adjustments related to the prior year income tax return. The 2007 income tax expense was positively impacted by the non-taxable gains related to the valuation of the long-term investment. As a result of changes in prescribed federal and provincial tax rates, the effective tax rate for 2009, prior to considering the impact of non-taxable transactions, is expected to be approximately 33.5% . Net earnings: As a result of the foregoing, in the fourth quarter of 2008 the Company recorded net earnings of $2,715 or $0.33 per share basic and diluted, compared to $2,136 or $0.26 per share basic and diluted in the same quarter of the prior year. For the year ending September 30, 2008 the Company reported net earnings of $10,509 or $1.27 per share basic and diluted compared to $9,205 or $1.10 per share basic and diluted in the same period of the prior year. BACKLOG The Company's backlog at September 30, 2008 was $940 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 2009, 2010 and beyond based on management's current visibility into customers' existing requirements. Management's estimate of the realizable portion (current utilization rates and known customer requirements) is less than the total value of signed contracts and related options by approximately $389 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 Estimated Excess over
millions) realizable estimated
Fiscal Fiscal Beyond portion of realizable
2009 2010 2010 Backlog portion TOTAL
Contracted
Backlog $151 $40 $19 $210 $179 $389
Option Renewals 10 43 288 341 210 551
------------------------------------------------------------------------
TOTAL $161 $83 $307 $551 $389 $940
------------------------------------------------------------------------
------------------------------------------------------------------------
Business and
Technology
Services $106 $80 $294 $480 $389 $869
Systems
Engineering 55 3 13 71 - 71
------------------------------------------------------------------------
TOTAL $161 $83 $307 $551 $389 $940
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------------------------------------------------------------------------FINANCIAL CONDITION AND CASHFLOWS: Operating activities Cash flows from operating activities for the year ending September 30, 2008 improved by $12,099 compared to 2007 due to increased profitability, positive changes in working capital and a significant increase in advance customer payments. Working capital elements changed in line with the ebbs and flows of the business. The market for the Systems Engineering Division is characterized by long-term contracts with billings tied to milestones achieved, which often results in significant working capital requirements. Conversely, given the nature of this business, it is sometimes possible to negotiate advance payments on contracts. Such advance payments give rise to unearned revenue that will be realized as revenue over the course of the contract. As at September 30, 2008, the Company's total unearned revenue amounted to $12,290. This compares to $5,160 one year earlier. Financing activities: As a result of continuing earnings and a strong cash position, the Company once again increased its dividend in 2008. The Company paid $4,453 in dividends or $0.54 cents per share compared to 2007 when the Company paid $3,525 in dividends or $0.42 cents per share. The Company intends to continue with its quarterly dividend policy for the foreseeable future. During the year ending September 30, 2008, the Company repurchased 264,500 common shares through its normal course issuer bid at an average price of $12.53 compared to the previous year when the Company repurchased 87,100 at an average price of $12.98. At September 30, 2008 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 September 30, 2008 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 of 2008.
SELECTED QUARTERLY FINANCIAL DATA
Q4/08 Q3/08 Q2/08 Q1/08 Q4/07 Q3/07 Q2/07 Q1/07
Revenues $48,904 $50,964 $47,413 $45,884 $45,715 $48,226 $50,852 $45,066
Net
earnings $2,715 $3,330 $2,284 $2,180 $2,136 $2,501 $2,532 $2,036
Net earnings
per share
Basic $0.33 $0.40 $0.28 $0.26 $0.26 $0.30 $0.30 $0.24
Diluted $0.33 $0.40 $0.28 $0.26 $0.26 $0.30 $0.30 $0.24SEASONALITY The Company's operations are subject to some quarterly seasonality due to the timing of vacation periods and statutory holidays. Typically the Company's first and last quarter will be negatively impacted as a result of the Christmas season and summer vacation period. During these periods, the Company can only invoice for work performed and is also required to pay for statutory holidays. This results in reduced levels of revenues and in a drop in gross margins. This seasonality may not be apparent in the overall results of the Company depending on the impact of the realized sales mix of its various projects. OUTLOOK Management believes the Company is well positioned for long-term sustained growth. The Company operates in markets that will continue to require the services that the Company offers. To further assure itself of a stable source of revenues, the Company will focus on increasing the percentage of its revenues derived from recurring business while pursuing new business in adjacent markets. Potential acquisitions, focused on adding complementary businesses to the Company's mix, could also be a possible source of growth. The Systems Engineering Division had been working within a somewhat improved satellite sector for the last two years and the division is currently experiencing stable 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 volatility of the Canadian dollar will impact the Systems Engineering Division's competitiveness when bidding against foreign competition on projects denominated in foreign currencies. The Business and Technology Services Division's services are adaptable to many different markets. Currently, its strength lies in providing program management and delivery services to the Department of National Defence. Management believes that this department and many others within the federal government will continue to require more support services from private enterprises to supplement their current workforce. Although the division 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 Management expects continued growth for 2009, although the extent will depend on the timing of various contract awards. Accordingly, based on the current outlook, consolidated revenues for 2009 are expected to be in the range of 195 million to $215 million and net earnings per share in the range of $1.25 to $1.40 INTERNAL CONTROLS OVER FINANCIAL REPORTING During the most recent interim quarter ending September 30, 2008, 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 fourth quarter of 2008, and with the Management Discussion and Analysis in the 2007 annual report, including the section on risks and opportunities. Contact: Contacts:
Calian Technologies Ltd.
Ray Basler
President and Chief Executive Officer
306-931-3425
Calian Technologies Ltd.
Jacqueline Gauthier
Chief Financial Officer
613-599-8600
http://www.calian.com
ir@calian.com
Source: Calian Technologies Ltd.
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