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Press release from Marketwire

Calian Reports Third Quarter Results: Continued Improvement Over Last Quarter

Wednesday, August 04, 2010

Calian Reports Third Quarter Results: Continued Improvement Over Last Quarter12:41 EDT Wednesday, August 04, 2010OTTAWA, ONTARIO--(Marketwire - Aug. 4, 2010) - Calian Technologies Ltd. (TSX:CTY) today released unaudited results for the third quarter ended June 30, 2010. Revenues for the quarter were $57.6 million, in line with the $57.8 million reported in the same quarter of the previous year. Net earnings were $3.8 million or $0.49 per share basic and diluted, compared to $4.5 million or $0.58 per share basic and diluted in the same quarter of the previous year. For the nine-month period ending June 30, 2010, the Company reported revenues of $162.8 million and net earnings of $10.4 million or $1.33 per share basic and diluted, compared to revenues of $172.9 million and net earnings of $13.0 million or $1.67 per share basic and diluted in the prior year."Results for the quarter exceeded management's expectations. From a revenue perspective, both divisions were able to execute strongly on existing contracts, and new signings contributed to the throughput. While revenues were flat when compared to the 3rd quarter last year, we did show an impressive increase of 8% over the previous quarter. SED revenues were bolstered by an improvement in manufacturing related revenues from both RIM and DRS. Also higher activity levels on the ESA antenna contributed to the growth from last quarter. BTS revenues were also positively impacted by the ramp up on new contract signings and successful contract renewals" stated Ray Basler, President and CEO."As expected, realized margins were lower than the same quarter last year, however, we did see some improvement over the previous quarter. I am very pleased that we have been able to maintain our margins, particularly in light of the highly competitive business environment and the continued volatility of foreign currencies relative to the Canadian dollar" continued Basler."Overall, we exceeded our internal expectations for the quarter and with continuing strong cash flows, we have increased our quarterly dividend to $0.22. This represents a 10% increase in the quarterly dividend, which has grown by 30% over the last year. With an excellent backlog of work and a strong customer base we have confidence in meeting our improved guidance issued today" continued Basler.We believe that market potential remains strong and while we are expecting exciting opportunities to materialize in the future, we do not expect to match the unprecedented level of performance achieved in 2009. Management's expectation is for the return to more traditional levels of revenues and earnings for the balance of 2010. Revenues ultimately realized will be dependent on the extent and timing of future contract awards and the degree to which the summer holiday season affects the last quarter. At this juncture, we expect revenues for 2010 to be in the range of $210 million to $225 million and net earnings per share in the range of $1.65 to $1.85 per share.About CalianCalian 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.comDISCLAIMERCertain information included in this press release is forward-looking and is subject to important risks and uncertainties. The results or events predicted in these statements may differ materially from actual results or events. Such statements are generally accompanied by words such as "intend", "anticipate", "believe", "estimate", "expect" or similar statements. Factors which could cause results or events to differ from current expectations include, among other things: the impact of price competition; scarce number of qualified professionals; the impact of rapid technological and market change; loss of business or credit risk with major customers; technical risks on fixed price projects; general industry and market conditions and growth rates; international growth and global economic conditions, and including currency exchange rate fluctuations; and the impact of consolidations in the business services industry. For additional information with respect to certain of these and other factors, please see the Company's most recent annual report and other reports filed by Calian with the Ontario Securities Commission. Calian disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. No assurance can be given that actual results, performance or achievement expressed in, or implied by, forward-looking statements within this disclosure will occur, or if they do, that any benefits may be derived from them. CALIAN TECHNOLOGIES LTD. UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS (Canadian dollars in thousands, except per share data) Three months ended Nine months ended June 30 June 30 ------------------------------------------- 2010 2009 2010 2009 ------------------------------------------- Revenues $ 57,565 $ 57,845 $ 162,814 $ 172,865 Cost of revenues 45,911 45,004 130,384 134,695 ------------------------------------------- Gross profit 11,654 12,841 32,430 38,170 Selling and marketing 1,226 1,271 3,714 3,676 General and administration 3,892 3,985 11,566 12,173 Facilities 778 790 2,224 2,323 Stock option compensation (Note 9) 3 19 17 88 Amortization of equipment 248 272 691 771 Amortization of intangibles - 20 - 60 Prior years investment tax credits (Note 8) - - - (311) ------------------------------------------- Earnings before other income and expense, interest income and income tax expense 5,507 6,484 14,218 19,390 Unrealized gain (loss) on fair value of conversion options of long-term investment (Note 6) (112) 18 (50) (232) Loss on share exchange (Note 6) - - - (125) Interest income (Note 7) 157 141 538 538 ------------------------------------------- Earnings before income tax expense 5,552 6,643 14,706 19,571 ------------------------------------------- Income tax expense - current 1,582 2,090 3,961 6,373 Income tax expense - future 125 70 375 195 ------------------------------------------- 1,707 2,160 4,336 6,568 ------------------------------------------- NET EARNINGS 3,845 4,483 10,370 13,003 Retained earnings, beginning of period 37,738 37,450 42,692 35,148 Excess of purchase price over stated capital on repurchase of shares (Note 9) (709) - (1,502) (3,865) Dividends (1,557) (1,308) (12,243) (3,661) ------------------------------------------- Retained earnings, end of period $ 39,317 $ 40,625 $ 39,317 $ 40,625 ------------------------------------------- ------------------------------------------- Net earnings per share: (Note 10) Basic $ 0.49 $ 0.58 $ 1.33 $ 1.67 ------------------------------------------- ------------------------------------------- Diluted $ 0.49 $ 0.58 $ 1.33 $ 1.67 ------------------------------------------- ------------------------------------------- Weighted average number of shares: (Note 10) Basic 7,774,618 7,666,417 7,770,267 7,783,865 ------------------------------------------- ------------------------------------------- Diluted 7,803,460 7,722,074 7,799,039 7,804,888 ------------------------------------------- ------------------------------------------- CALIAN TECHNOLOGIES LTD. UNAUDITED CONSOLIDATED BALANCE SHEETS (Canadian dollars in thousands) June 30, 2010 September 30, 2009 ----------------------------------- ASSETS CURRENT ASSETS Cash $ 31,680 $ 43,662 Accounts receivable 35,360 32,816 Work in process 4,077 2,766 Prepaid expenses (Note 5) 7,644 5,656 Future income taxes 1,018 1,472 Derivative assets (Note 13) 365 679 ----------------------------------- 80,144 87,051 LONG-TERM INVESTMENT (Note 6) 3,259 3,037 EQUIPMENT 4,473 4,300 INTANGIBLE 442 420 GOODWILL 9,518 9,518 ----------------------------------- $ 97,836 $ 104,326 ----------------------------------- ----------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued liabilities $ 22,675 $ 22,644 Unearned contract revenue 16,024 20,792 Derivative liabilities (Note 13) 1,182 377 ----------------------------------- 39,881 43,813 ----------------------------------- CONTINGENCIES (Note 11) SHAREHOLDERS' EQUITY Share capital (Note 9) 18,589 17,719 Contributed surplus (Note 9) 207 285 Retained earnings 39,317 42,692 Accumulated other comprehensive loss (158) (183) ----------------------------------- 57,955 60,513 ----------------------------------- $ 97,836 $ 104,326 ----------------------------------- ----------------------------------- CALIAN TECHNOLOGIES LTD. UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Canadian dollars in thousands) Three months ended Nine months ended June 30 June 30 ------------------------------------------- 2010 2009 2010 2009 ------------------------------------------- Net earnings $ 3,845 $ 4,483 $ 10,370 $ 13,003 Unrealized gain (loss) on translating financial statements of self-sustaining foreign operation, net of tax of nil (2009 - nil) 68 (104) (4) 196 Unrealized gain (loss) on fair value of host contract component of long-term investment, net of tax of nil (2009 - nil) - 81 - (301) Change in deferred gain (loss) on derivatives designated as cash flow hedges, net of tax of $292 and $75 (2009 - $792 and $257 year to date) (606) (1,649) 157 (534) ------------------------------------------- Other comprehensive income (538) (1,672) 153 (639) ------------------------------------------- Comprehensive income $ 3,307 $ 2,811 $ 10,523 $ 12,364 ------------------------------------------- ------------------------------------------- CALIAN TECHNOLOGIES LTD. UNAUDITED CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE LOSS (Canadian dollars in thousands) June 30, 2010 September 30, 2009 ------------------------------------- Unrealized cumulative loss on translating financial statements of self-sustaining foreign operation, net of tax $ (314) $ (310) Unrealized cumulative gain on fair value of host contract component of long-term investment, net of tax - 128 Deferred gain (loss) on derivatives designated as cash flow hedges, net of tax 156 (1) ------------------------------------- Accumulated other comprehensive loss, end of period, net of tax (158) (183) ------------------------------------- Retained earnings, end of period 39,317 42,692 ------------------------------------- Accumulated other comprehensive loss and retained earnings, end of period $ 39,159 $ 42,509 ------------------------------------- ------------------------------------- CALIAN TECHNOLOGIES LTD. UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (Canadian dollars in thousands) Three months June 30 Nine months June 30 ----------------------------------------- 2010 2009 2010 2009 ----------------------------------------- CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES Net earnings $ 3,845 $ 4,483 $ 10,370 $ 13,003 Items not affecting cash: Interest accreted on host contract component of long- term investment (Note 7) (110) (109) (400) (339) Employee stock purchase plan compensation expense 12 16 44 34 Stock option compensation (Note 9) 3 19 17 88 Write-off of Nortel receivable - - - 757 Amortization 248 292 691 831 Future income tax expense 125 70 375 195 Unrealized (gain) loss on fair value of conversion options of long-term investment (Note 6) 112 (18) 50 232 Loss on share exchange (Note 6) - - - 125 ----------------------------------------- 4,235 4,753 11,147 14,926 Change in non-cash working capital Accounts receivable (19) 5,735 (2,277) (5,574) Work in process (1,114) 2,689 (1,311) 2,335 Prepaid expenses (Note 5) (4,111) 65 (1,988) (189) Accounts payable and accrued liabilities 2,232 (4,281) 1,288 2,932 Unearned contract revenue (3,146) 2,780 (4,981) (3,999) ----------------------------------------- (1,923) 11,741 1,878 10,431 ----------------------------------------- CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES Issuance of common shares - 349 1,013 632 Dividends (1,557) (1,308) (12,243) (3,661) Repurchase of shares (Note 9) (822) - (1,740) (4,848) ----------------------------------------- (2,379) (959) (12,970) (7,877) ----------------------------------------- CASH FLOWS USED IN INVESTING ACTIVITIES Equipment expenditures (358) (266) (886) (1,221) ----------------------------------------- (358) (266) (886) (1,221) FOREIGN CURRENCY ADJUSTMENT 69 (104) (4) 196 NET CASH INFLOW (OUTFLOW) (4,591) 10,412 (11,982) 1,529 CASH, BEGINNING OF PERIOD 36,271 18,444 43,662 27,327 ----------------------------------------- CASH, END OF PERIOD $ 31,680 $ 28,856 $ 31,680 $ 28,856 ----------------------------------------- ----------------------------------------- CALIAN TECHNOLOGIES LTD. NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS For the periods ended June 30, 2010 and 2009 (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, 2009 with the exception of the application of the accounting policy described in Note 2. These interim consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements.2. ADOPTION OF NEW ACCOUNTING POLICY Effective October 1, 2009, management adopted amended Section 3855, Financial Instruments - Recognition and Measurement. Based on the amendments, management has the choice of classifying the host contract portion of its investment in AIM Healthcare Group (AIM) as an Available-For-Sale asset or as a Loans and Receivables asset. Management chose to classify the host contract as a Loans and Receivables asset. Loans and Receivable assets are recognized at amortized cost. At October 1, 2009, the carrying amount of the investment was decreased by $128 with a corresponding adjustment to Accumulated Other Comprehensive Income to return the investment to amortized cost. The value of the embedded derivative is still adjusted to fair value through net income.In December 2009, the CICA issued EIC-175 Multiple Deliverable Revenue Arrangements. This new EIC will be applicable to financial statements relating to the Company's annual financial statements beginning on October 1, 2011. Earlier adoption is permitted. The abstract addresses some aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. The Company does not expect to early adopt this abstract.3. ACCOUNTING ESTIMATES For the periods ended June 30, 2010 and June 30, 2009, no material changes in estimates have been made. Effective October 1, 2009, the Company modified its depreciation methodology from declining balance to straight-line depreciation, with amortization calculated over 5 to 10 years, to better reflect the estimated usage of the Company's equipment and intangible. The change did not have a material impact on the financial statements.4. SEASONALITY The Company's revenues and earnings have historically been subject to some quarterly seasonality due to the timing of vacation periods and statutory holidays.5. PREPAID EXPENSES --------------------------------------------------------------------- June 30, 2010 September 30, 2009 --------------------------------------------------------------------- Prepaid operating expenses $ 755 $ 635 Milestone advance to subcontractor 6,889 5,021 --------------------------------------------------------------------- $ 7,644 $ 5,656 --------------------------------------------------------------------- 6. LONG-TERM INVESTMENT On July 11, 2006, the Company invested $3,623 in Med-Emerg International Inc. (Med-Emerg) in the form of convertible preferred shares which included $116 of acquisition costs. On January 20, 2009, Med-Emerg announced that it successfully merged with AIM Health Group Inc. (AIM) in an all-stock transaction. At that time, Calian surrendered its preferred shares in Med-Emerg in exchange for a secured convertible debenture of AIM with a face value of $3,897. The share exchange resulted in a loss on exchange of $125.The non-interest bearing debenture is convertible into 6,831,372 common shares of AIM at the Company's option. AIM is also entitled to cause the debenture to be converted into common shares when in any given 6-month period, trading volumes of AIM common shares exceed 1,089,642 shares and the weighted average share price is at least $0.57. Conversion is limited to 50% of the debenture in any 6-month period. On a fully converted basis, this investment represents a 6% interest based on the current number of common shares outstanding. The debenture is subordinated to secured creditors of record on January 20, 2009 and any bank indebtedness. The debenture is due to be redeemed in two instalments; $1,000 payable in cash on January 1, 2011 and the remaining $2,897 payable on July 11, 2011 in cash or AIM common shares at the option of AIM based on the then fair market value of the common shares. Carrying value of long-term investment: -------------------------------------------------------------------------- Med-Emerg long-term investment, at cost $ 3,623 Med-Emerg cumulative unrealized gain on conversion options (1,878) Med-Emerg cumulative interest accretion on host contract 897 -------------------------------------------------------------------------- Med-Emerg fair value of investment on January 20, 2009, prior to exchange $ 2,642 Loss on share exchange (125) -------------------------------------------------------------------------- AIM Long-term investment, at cost $ 2,517 AIM cumulative unrealized loss on conversion options (15) AIM cumulative interest accretion on host contract 757 -------------------------------------------------------------------------- Carrying value of investment at June 30, 2010 $ 3,259 -------------------------------------------------------------------------- -------------------------------------------------------------------------- The Company's long-term investment is considered a hybrid instrument as it includes rights of conversion to common shares. The conversion options are considered to be embedded derivatives to be separated and valued independent of the underlying host contract. The conversion options are measured at fair value with changes in fair value recorded in net income. The fair value of the conversion options applies the following data and assumptions to the Black-Scholes option pricing model: AIM 60 day weighted average share price $0.11 Risk free interest rate 1.01% Actual stock price volatility 65% Expected life of options 1.0 years Under the Black-Scholes model, a one cent increase (decrease) in AIM share price would result in a $1 increase (decrease) in the fair value of the conversion options. A 10% increase (decrease) in the volatility of AIM stock price would result in a $5 increase (decrease) in the fair value of the conversion option. AIM shares are traded on the TSX Venture Exchange and currently trade in limited volume.7. INTEREST INCOME Interest income is comprised of the following amounts: --------------------------------------------------------------------------- Three months Nine months ended June 30 ended June 30 2010 2009 2010 2009 --------------------------------------------------------------------------- Interest earned on cash balances $ 47 $ 32 $ 138 $ 199 Accreted interest on host contract component of long-term investment 110 109 400 339 --------------------------------------------------------------------------- Interest income $ 157 $ 141 $ 538 $ 538 --------------------------------------------------------------------------- 8. PRIOR YEARS INVESTMENT TAX CREDITS During the second quarter of 2009, the Company received an assessment from the Canada Revenue Agency regarding the Company's re-filing of its 2006 scientific research and experimental development (R&D) claim allowing additional R&D costs to be claimed. As a result the Company received a refund of $311 of investment tax credits related to its 2006 R&D activities.9. SHARE CAPITAL Employee Share Purchase PlanDuring the second quarter of 2010 (2009), the Company issued 31,661 (24,049) shares under the Company's Employee Share Purchase Plan at an average price of $10.87 ($11.77).Share repurchaseDuring the quarter ending (and nine-month period ending) June 30, 2010, the Company acquired 47,460 (100,630) of its outstanding common shares at an average price of $17.29 ($17.30) per share for a total of $822 ($1,740) including related expenses, through normal course issuer bids in place during the period. The Company did not acquire any shares during the three-month period ending June 30, 2009. During the nine-month period ending June 30, 2010, the Company acquired 467,300 of its outstanding common shares at an average price of $10.35 per share for a total of $4,848 including related expenses, through normal course issuer bids in place during the period. The excess of the purchase price over the stated capital of the shares was charged to retained earnings. Stock optionsThe Company has an established stock option plan, which provides that the Board of Directors may grant stock options to eligible directors and employees. Under the plan, eligible directors and employees are granted the right to purchase shares of common stock at a price established by the Board of Directors on the date the options are granted but in no circumstances below fair market value of the shares at the date of grant. A total of 500,000 common shares are authorized for issuance under the plan, of which 250,000 are issued at June 30, 2010. At June 30, 2010 there were 89,800 options outstanding. No options were issued during the nine-month period ending June 30, 2010.During the quarter ended and nine-month period ending June 30, 2010 and 2009 and relating to options issued in prior years, under the fair value based method, stock-option compensation expense within general and administrative costs of $3 and $17 was recorded related to stock options compared to $19 and $88 recorded in the quarter and nine-month period ended June 30, 2009. The offsetting credit was applied to contributed surplus. The compensation costs during the nine-month period ended June 30, 2010 related to the issuance of options were calculated using the Black-Scholes option pricing model using the following assumptions: Risk free interest rate 2.3% Expected dividend yield 7.2% Stock price volatility 26.7% Expected life of options 3.47 years 10. NET EARNINGS PER SHARE The diluted weighted average number of shares has been calculated as follows: ------------------------------------------------------------------------- Three months ended June 30 Nine months ended June 30 2010 2009 2010 2009 ------------------------------------------------------------------------- Weighted average number of shares - basic 7,774,618 7,666,417 7,770,267 7,783,865 Addition to reflect the dilutive effect of employee stock options 28,842 55,656 28,772 21,023 ------------------------------------------------------------------------- Weighted average number of shares - diluted 7,803,460 7,722,074 7,799,039 7,804,888 ------------------------------------------------------------------------- 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 quarter ending (and nine-month period ending) June 30, 2010, no options were considered anti-dilutive. For the quarter ending (and nine-month period ending) June 30, 2009, 168,344 (215,977) options were excluded from the above computation of diluted weighted average number of shares.11. CONTINGENCIES In the normal course of business, the Company is party to employee related claims. The potential outcomes related to existing matters faced by the Company are not determinable at this time. The Company intends to defend these actions, and management believes that the resolution of these matters will not have a material adverse effect on the Company's financial condition. 12. 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 June 30, 2010 -------------------------------------------------------------------------- -------------------------------------------------------------------------- Business and Systems Technology Engineering Services Corporate Total -------------------------------------------------------------------------- -------------------------------------------------------------------------- Revenues $ 17,646 $ 39,919 $ - $ 57,565 Earnings before other expense, interest income and income tax expense 3,557 2,614 (664) 5,507 Unrealized loss on fair value of conversion options of long-term investment (Note 6) (112) Interest income (Note 7) 157 Income tax expense (1,707) -------------------------------------------------------------------------- Net earnings $ 3,845 -------------------------------------------------------------------------- -------------------------------------------------------------------------- Total assets other than cash and goodwill $ 19,479 $ 36,993 $ 166 $ 56,638 Goodwill - 9,518 - 9,518 Cash - - 31,680 31,680 -------------------------------------------------------------------------- Total assets $ 19,479 $ 46,511 $ 31,846 $ 97,836 -------------------------------------------------------------------------- -------------------------------------------------------------------------- Equipment and intangible expenditures $ 361 $ 525 $ - $ 886 -------------------------------------------------------------------------- -------------------------------------------------------------------------- Three months ended June 30, 2009 Business and Systems Technology Engineering Services Corporate Total -------------------------------------------------------------------------- -------------------------------------------------------------------------- Revenues $ 19,054 $ 38,791 $ - $ 57,845 Earnings before other income, interest income and income tax expense 4,522 2,769 (807) 6,484 Unrealized gain on fair value of conversion options of long-term investment (Note 6) 18 Interest income (Note 7) 141 Income tax expense 2,160 -------------------------------------------------------------------------- Net earnings $ 4,483 -------------------------------------------------------------------------- -------------------------------------------------------------------------- September 30, 2009 -------------------------------------------------------------------------- -------------------------------------------------------------------------- Business and Systems Technology Engineering Services Corporate Total -------------------------------------------------------------------------- -------------------------------------------------------------------------- Total assets other than cash and goodwill $ 17,436 $ 33,625 $ 85 $ 51,146 Goodwill - 9,518 - 9,518 Cash - - 43,662 43,662 -------------------------------------------------------------------------- Total assets $ 17,436 $ 43,143 $ 43,747 $ 104,326 -------------------------------------------------------------------------- -------------------------------------------------------------------------- Equipment and intangible expenditures $ 755 $ 637 $ - $ 1,392 -------------------------------------------------------------------------- -------------------------------------------------------------------------- Nine months ended June 30, 2010 Business and Systems Technology Engineering Services Corporate Total -------------------------------------------------------------------------- -------------------------------------------------------------------------- Revenues $ 48,349 $ 114,465 $ - $ 162,814 Earnings before other income, interest income and income tax expense 8,578 7,540 (1,900) 14,218 Unrealized loss on fair value of conversion options of long-term investment (Note 6) (50) Interest income (Note 7) 538 Income tax expense (4,336) -------------------------------------------------------------------------- Net earnings $ 10,370 -------------------------------------------------------------------------- -------------------------------------------------------------------------- Nine months ended June 30, 2009 Business and Systems Technology Engineering Services Corporate Total -------------------------------------------------------------------------- -------------------------------------------------------------------------- Revenues $ 59,738 $ 113,127 $ - $ 172,865 Earnings before other expense, interest income and income tax expense 14,083 7,585 (2,278) 19,390 Unrealized loss on fair value of conversion options of long-term investment (Note 6) (232) Loss on share exchange (Note 6) (125) Interest income (Note 7) 538 Income tax expense 6,568 -------------------------------------------------------------------------- Net earnings $ 13,003 -------------------------------------------------------------------------- -------------------------------------------------------------------------- 13. HEDGINGForeign currency risk related to contractsThe Company is exposed to foreign currency fluctuations on its cash balance, accounts receivable, accounts payable and future cash flows related to contracts denominated in a foreign currency. Future cash flows will be realized over the life of the contracts. The Company utilizes derivative financial instruments, principally in the form of forward exchange contracts, in the management of its foreign currency exposures. The Company's objective is to manage and control exposures and secure the Company's profitability on existing contracts and therefore, the Company's policy is to hedge 100% of its foreign currency exposure. The Company does not utilize derivative financial instruments for trading or speculative purposes. The Company applies hedge accounting when appropriate documentation and effectiveness criteria are met.The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives to specific firm contractually related commitments on projects. The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. Hedge ineffectiveness has historically been insignificant.The forward foreign exchange contracts primarily require the Company to purchase or sell certain foreign currencies with or for Canadian dollars at contractual rates. At June 30, 2010, the Company had the following forward foreign exchange contracts: --------------------------------------------------------------------------- Fair Value Equivalent June 30, Type Notional Currency Maturity Cdn. Dollars 2010 --------------------------------------------------------------------------- BUY 5,740 USD July 2010 $ 5,930 $ 181 BUY 7,023 EURO July 2010 8,967 176 BUY 332 GPB July 2010 520 8 --------------------------------------------------------------------------- Derivative assets $ 365 --------------------------------------------------------------------------- --------------------------------------------------------------------------- --------------------------------------------------------------------------- SELL 27,401 USD July 2010 $ 28,307 $ 865 SELL 12,684 EURO July 2010 16,195 317 --------------------------------------------------------------------------- Derivative liabilities $ 1,182 --------------------------------------------------------------------------- --------------------------------------------------------------------------- A 10% strengthening (weakening) of the Canadian dollar against the following currencies at June 30, 2010 would have increased (decreased) other comprehensive income as related to the forward foreign exchange contracts by the amounts shown below. June 30,2010 --------------- USD $ 1,861 EURO 691 GBP (53) --------------- $ 2,499 --------------- --------------- Management Discussion and Analysis - June 30, 2010:(Canadian dollars in thousands, except per share data)RESULTS OF OPERATIONSRevenues:For the third quarter 2010, revenues were $57,565 compared to $57,845 reported for the same period in 2009 basically unchanged from the prior year. For the nine-month period ending June 30, 2010 revenues were $162,814 compared to $172,865 for 2009 representing a 6% decrease from the prior year. Systems Engineering's (SED) revenues were $17,646 in the quarter and $48,349 on a year-to-date basis representing a decrease of 7 % and 19% from the $19,054 and $59,738 recorded last year. As expected, revenues are back to more traditional levels of activity in both the satellite engineering and contract manufacturing sectors due to the completion or near-completion of several large contracts in 2009 and decreased demand in the custom manufacturing area. 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 $39,919 in the quarter and $114,465 on a year-to-date basis representing an increase of 3% and 1% from the $38,791 and $113,127 for the same period last year. Although some improvements were realized this quarter, belt-tightening by government departments in the last quarter of the government fiscal year and completion of a certain contract that will not be re-competed until later in the year, contributed to low revenue growth for the nine month period.Management expects that the marketplace over the next few quarters will continue to be very competitive. The market conditions for SED are expected to be positive and should present new opportunities. However, overall revenues are expected to recede to more traditional levels until new programs are captured. Current BTS backlog is expected to provide a solid level of activity on existing contracts and new opportunities are expected to be available. However, the timing of future contract awards and customer demand in the short-term will ultimately determine BTS revenues for the next quarter. Gross margin:Gross margin was 20.2% in the third quarter of 2010, compared to the 22.2% reported in the third quarter a year ago. On a year-to-date basis the Company reported margins of 19.9% compared to 22.1% for the same period last year. The consolidated gross margin for 2010 was affected by lower margins realized in both divisions and was also biased by the smaller proportion of SED revenues.Gross margin in Systems Engineering was 28.7 % this quarter compared to 32.1% in the third quarter of 2009 and was 26.7% for the nine-month period ending June 30, 2010 compared to 31.0% for the same period last year. With the level of business returning to more traditional levels, especially in the contract manufacturing sector, economies of scale achieved in the prior year could not be realized.Gross margin in Business and Technology Services was 16.5% compared to the 17.3% reported in the third quarter of 2009 and 17.0% for the nine-month period compared to 17.4% for the same period last year. Gross margin for the quarter decreased compared to last year as a result of a slight change in project mix during the quarter. Also, the highly competitive nature of the short-term staffing market since the economic downturn continues to present challenges to sustaining prior year margin levels.Because of the significant difference in gross margin between each of the two divisions, the overall gross margin of the Company is dependent on the relative level of revenue generated from each division. Management will continue to focus on execution in order to maximize margins. However, the highly competitive environment faced by SED and BTS coupled with the continued volatility of the Canadian dollar could impact margins. In addition, management does not expect that the margins realized by SED throughout the balance of 2010 will equate to those earned for comparable quarters in 2009. Operating expenses:Selling and marketing, general and administration and facilities totalled $5,896 or 10.2 % of revenues in the third quarter of 2010 compared to $6,046 or 10.5% of revenues reported in the third quarter of 2009. For the nine-month period ending June 30, 2010 operating expenses totalled $17,504 or 10.8% compared to $18,172 or 10.5% in 2009 which included an allowance for doubtful accounts of $757 set up against the Nortel accounts receivable. Operating expenses for the quarter were relatively stable and in line with the overall level of revenues. For the balance of 2010, management expects to maintain its current level of operating expenses as a percentage of revenues.Interest income:Interest income for the third quarter of 2010 was $157 compared to $141 in 2009. For the nine-month period ending June 30, 2010, interest income was $538 compared to $538 in 2009. Interest income is comprised of interest earned on the Company's cash balances and accrued interest related to the investment in AIM Health Group Inc. (AIM). Unrealized gain (loss) on fair value of conversion options of long-term investment:The Company recorded a loss of $112 for the quarter and $50 on a year-to-date basis compared to a gain of $18 and a loss of $232 for 2009 relating to the fair value of conversion options of long-term investment. The reported unrealized gain or loss is a reflection of the movement in quoted market prices of AIM shares.Income taxes:The provision for income taxes for the third quarter of 2010 was $1,707 or 30.7% of earnings before tax compared to $2,160 in 2009 or 32.5% of earnings before tax. On a year-to-date basis, the provision for income taxes was $4,336 or 29.5% of earnings before tax compared to $6,568 in 2009 or 33.6% of earnings before tax. The decrease in the realized tax rate is the result of a continued decrease in prescribed federal and provincial tax rates, the recognition of an adjustment related to the 2009 tax returns, and the non-taxable nature of the changes in the AIM investment. The effective tax rate for 2010, prior to considering the impact of non-taxable transactions, is expected to be approximately 30%. Net earnings:As a result of the foregoing, in the third quarter of 2010 the Company recorded net earnings of $3,845 or $0.49 per share basic and diluted, compared to $4,483 or $0.58 per share basic and diluted in the same quarter of the prior year. For the nine-month period ending June 30, 2010 the Company reported net earnings of $10,370 or $1.33 per share basic and diluted compared to $13,003 or $1.67 per share basic and diluted in the same period of the prior year. BACKLOGThe Company's backlog at June 30, 2010 was $962 million with terms extending to fiscal 2018. This compares to $873 million reported at the end of September 2009. Contracted Backlog represents maximum potential revenues remaining to be earned on signed contracts, whereas Option Renewals represent customers' options to further extend existing contracts under similar terms and conditions. Most fee for service contracts provide the customer with the ability to adjust the timing and level of effort throughout the contract life and as such the amount actually realized could be materially different from the original contract value. The following table represents management's best estimate of the backlog realization for 2010, 2011 and beyond based on management's current visibility into customers' existing requirements. Management's estimate of the realizable portion (current utilization rates and known customer requirements) is less than the total value of signed contracts and related options by approximately $215 million. The majority of this amount relates to the health services support contract. The Company's policy is to reduce the reported contractual backlog once it receives confirmation from the customer that indicates the utilization of the full contract value may not materialize. Estimated Excess over realizable estimated (dollars in Fiscal Fiscal Beyond portion of realizable millions) 2010 2011 2011 Backlog portion TOTAL ------------------------------------------------------- Contracted Backlog $ 50 $ 156 $ 154 $ 360 $ 109 $ 469 Option Renewals 1 13 372 386 107 493 --------------------------------------------------------------------------- TOTAL $ 51 $ 169 $ 526 $ 746 $ 216 $ 962 --------------------------------------------------------------------------- --------------------------------------------------------------------------- Business and Technology Services $ 36 $ 133 $ 491 $ 660 $ 216 $ 876 Systems Engineering 15 36 35 86 - 86 --------------------------------------------------------------------------- TOTAL $ 51 $ 169 $ 526 $ 746 $ 216 $ 962 --------------------------------------------------------------------------- --------------------------------------------------------------------------- FINANCIAL CONDITION AND CASHFLOWSOperating activities:Cash inflows from operating activities for the nine-month period ending June 30, 2010 were $1,878 compared to $10,431 in 2009. This year's decrease is the result of lower earnings coupled with working capital fluctuations in line with the ebbs and flows of the business, such as increases to work in process and further milestone advances to subcontractors. 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 June 30, 2010, the Company's total unearned revenue amounted to $16,024. This compares to $20,792 one year earlier, with the decrease primarily attributable to work progressing on the third deep space antenna contract for ESA.Financing activities:During the nine-month period ending June 30, 2010, the Company paid quarterly dividends totalling $0.57 per share compared to 2009 when the Company paid quarterly dividends totalling $0.47 per share. In the first quarter of 2010, the Company also paid a special dividend of $1.00 in recognition of the exceptional performance in 2009. The Company intends to continue with its quarterly dividend policy for the foreseeable future. During the nine-month period ending June 30, 2010, the Company repurchased 100,630 common shares through its normal course issuer bid at an average price of $17.29 compared to the previous year when the Company repurchased 467,300 shares at an average price of $10.35.Capital resources:At June 30, 2010 the Company had a short-term credit facility of $10,000 with a Canadian chartered bank that bears interest at prime and is secured by assets of the Company. An amount of $612 was drawn to issue a letter of credit to meet customer contractual requirements. Management believes that Calian has sufficient cash resources to continue to finance its working capital requirements and pay a quarterly dividend.ADOPTION OF NEW ACCOUNTING RULES AND IMPACT ON 2010 FINANCIAL RESULTSEffective October 1, 2009, management adopted amended Section 3855, Financial Instruments - Recognition and Measurement. Based on the amendments, management has the choice of classifying the host contract portion of its investment in AIM Healthcare Group (AIM) as an Available-For-Sale asset or as a Loans and Receivable asset. Management chooses to classify the host contract as a Loans and Receivables. Loans and Receivable assets are recognized at amortized cost. At September 30, 2009, the carrying amount of the investment was decreased by $128 with a corresponding adjustment to Accumulated Other Comprehensive Income.SELECTED QUARTERLY FINANCIAL DATA Q3/10 Q2/10 Q1/10 Revenues $ 57,565 $ 53,141 $ 52,108 Net earnings $ 3,845 $ 3,082 $ 3,443 Net earnings per share Basic $ 0.49 $ 0.40 $ 0.44 Diluted $ 0.49 $ 0.40 $ 0.44 Q4/09 Q3/09 Q2/09 Q1/09 Q4/08 Revenues $ 54,365 $ 57,845 $ 59,922 $ 55,098 $ 48,904 Net earnings $ 3,449 $ 4,483 $ 5,201 $ 3,319 $ 2,715 Net earnings per share Basic $ 0.45 $ 0.58 $ 0.67 $ 0.42 $ 0.33 Diluted $ 0.44 $ 0.58 $ 0.67 $ 0.42 $ 0.33 SEASONALITYThe Company's operations are subject to some quarterly seasonality due to the timing of vacation periods and statutory holidays. Typically the Company's first and last quarter will be negatively impacted as a result of the Christmas season and summer vacation period. During these periods, the Company can only invoice for work performed and is also required to pay for statutory holidays. This results in reduced levels of revenues and in a drop in gross margins. This seasonality may not be apparent in the overall results of the Company depending on the impact of the realized sales mix of its various projects.OUTLOOK Management believes the Company is well positioned for long-term sustained growth. The Company operates in markets that will continue to require the services that the Company offers. To further assure itself of a stable source of revenues, the Company will focus on increasing the percentage of its revenues derived from recurring business while pursuing new business in adjacent markets. The Systems Engineering Division has been working within a stable satellite sector for the last two years and the division is expecting new opportunities to arise as systems adopting the latest technologies will be required by customers to maintain and improve their service offerings. Management is also confident that systems such as MSTAR will continue to be in demand in the security and surveillance market although it cannot predict the timing and extent of future orders. Custom manufacturing activity levels will continue to be directly dependant upon SED's customers' requirements. The continued volatility of the Canadian dollar could impact the Systems Engineering Division's competitiveness when bidding against foreign competition on projects denominated in foreign currencies. The Business and Technology Services Division's services are adaptable to many different markets. Currently, its strength lies in providing program management and delivery services to the Department of National Defence. Management believes that this department and many others within the federal government will continue to require more support services from private enterprises to supplement their current workforce. Management believes that the types of service the division offers will continue to be attractive to government agencies going forward. GUIDANCE Fiscal 2009 was truly an exceptional year for the Company. While we believe that market potential remains strong, we do not expect to continue the unprecedented level of performance achieved in 2009 and therefore management expects to return to more traditional levels of revenues and earnings for 2010. While revenues ultimately realized will be dependent on the extent and timing of future contract awards, at this juncture we expect revenues for 2010 to be in the range of $210 million to $225 million and net earnings per share in the range of $1.65 to $1.85 per share.INTERNATIONAL FINANCIAL REPORTING STANDARDSThe Canadian Accounting Standards Board has recently confirmed that Canadian publicly accountable enterprises will be required to report under International Financial Reporting Standards (IFRS) as replacement guidance for the Canadian generally accepted accounting principles (Canadian GAAP). IFRS uses a conceptual framework similar to current Canadian GAAP, but there are significant differences in recognition, measurement and disclosures. In addition, it is expected that IFRS at the transition date will differ from current IFRS. The Company expects to issue its first financial statement in accordance with IFRS effective with its three-month period ending December 31, 2011. In order to prepare for the conversion to IFRS, the Company has developed an IFRS changeover plan. This plan addresses key elements of the Company's conversion to IFRS including: -- Accounting policy changes and financial reporting requirements; -- Education and training requirements; -- Impacts on business activities and on Information technology and data systems; -- Internal control over financial reporting We have also established a formal governance structure for the conversion to IFRS. The initiative is lead by the Chief Financial Officer who reports regularly to the Chief Executive Officer. The Chief Financial Officer also reports quarterly to the Audit Committee of the Board of Directors on the status of the project and the implications of the changeover to IFRS. During 2009, we completed the high-level diagnostic gap and impact analysis between Canadian GAAP and IFRS applicable to the Company. During the first three quarters of 2010, we have made significant progress in assessing the key differences between current IFRS and Canadian GAAP and we are on target to complete our detailed analysis and also complete all the required changes to our systems, processes and internal controls for purposes of dual-reporting beginning in fiscal 2011. During the fourth quarter of 2010 we will complete the necessary work required to quantify the impact of the changeover to IFRS on the Company's financial position and result of operations at date of transition and affecting the reporting for 2011 and 2012 based on standards published at that date. We will continue to monitor changes to IFRS and assess the impact that these new standards will have on the Company's financial results and on the Company's changeover plan. These changes may have an impact on the Company's consolidated financial statements; however it is too early in the Company's changeover process to provide quantification of those effects. Based on the Company's work to date, we believe that the areas with potential impact will be around hedge accounting documentation and overall disclosure requirements. INTERNAL CONTROLS OVER FINANCIAL REPORTING During the most recent interim quarter ending June 30, 2010, 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 STATEMENTCertain 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 second quarter of 2010, and with the Management Discussion and Analysis in the 2009 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 or Calian Technologies Ltd. Jacqueline Gauthier Chief Financial Officer 613-599-8600