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Press release from Marketwire

Calian Reports Second Quarter Results: Results in Line With Expectations

(All amounts in this release are in Canadian Dollars)

Wednesday, May 11, 2011

Calian Reports Second Quarter Results: Results in Line With Expectations11:35 EDT Wednesday, May 11, 2011OTTAWA, ONTARIO--(Marketwire - May 11, 2011) - Calian Technologies Ltd. (TSX:CTY) today released unaudited results for the second quarter ended March 31, 2011. Revenues for the quarter were $59.4 million, a 12% increase from the $53.1 million reported in the same quarter of the previous year. Net earnings were $3.3 million or $0.42 per share basic and diluted, compared to $3.1 million or $0.40 per share basic and diluted in the same quarter of the previous year. For the six-month period ending March 31, 2011, the Company reported revenues of $112.7 million and net earnings of $6.4 million or $0.83 per share basic and diluted, compared to revenues of $105.2 million and net earnings of $6.5 million or $0.84 per share basic and diluted in the prior year."Results for the quarter were once again in line with management expectations. Revenues were strong compared to the second quarter of the prior year. Our BTS division realized a 17% improvement in quarterly revenues as customer utilization was significantly higher on certain long-term contracts and our shorter term staffing group made substantial revenue gains as well. Revenues in the SED division were consistent with those achieved in the second quarter last year as well as the previous quarter. Project related revenue remains steady and manufacturing revenues have stabilized as well. Of course the project nature of the SED business makes it susceptible to potential revenue volatility over the longer term", stated Ray Basler, President and CEO."As expected, overall margins have decreased from last year. Lower utilization levels in the SED division coupled with an exceedingly strong Canadian dollar have served to dampen SED margins relative to last year. The BTS division's margins remain virtually unchanged from the same quarter last year, a significant accomplishment given the shifting mix of business as we aggressively pursue our growth agenda. The larger proportion of BTS revenues naturally has a dilutive effect on overall margins. We expect continued competitive pressures on new opportunities, however, we remain confident in the quality and value of our service offerings which has yielded excellent revenue growth to date" continued Basler."Overall, our diversified service lines have once again resulted in revenue and profitability gains despite softness in some areas. We have the financial depth and a solid backlog of work from which to grow and we are confident in our long term ability to generate increased profits, cash flows and dividends to our shareholders" continued Basler.We believe that our key markets will remain strong, although we are cognizant of the potential impact of government cost cutting initiatives and overseas military deployment reductions. Ultimately, revenues realized will be dependent on the extent and timing of future contract awards. With private sector revenues showing positive momentum, we are gaining confidence in our ability to meet our previously issued guidance. Accordingly, we expect revenues for 2011 to remain in the range of $215 million to $235 million and net earnings per share in the range of $1.50 to $1.80 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.DISCLAIMERCertain 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 March 31Six months ended March 312011201020112010Revenues$ 59,433$ 53,141$ 112,693$ 105,249Cost of revenues48,79343,05591,67384,473Gross profit10,64010,08621,02020,776Selling and marketing1,3111,2332,5992,488General and administration3,9653,7697,8897,674Facilities8387161,6711,446Stock option compensation (Note 8)3133114Amortization279223565443Earnings before other income and expense, interest income and income tax expense4,2164,1428,2658,711Unrealized gain (loss) on fair value of conversion options of long-term investment (Note 6)-(18)-62Interest income (Note 7)236192467381Earnings before income tax expense4,4524,3168,7329,154Income tax expense – current1,0961,1092,1282,379Income tax expense – future1021252122501,1981,2342,3402,629NET EARNINGS3,2543,0826,3926,525Retained earnings, beginning of period as previously stated40,92736,21339,76942,692Adjustment to opening retained earnings for a change in accounting policy (Note 2)-(367)-(367)Excess of purchase price over stated capital on repurchase of shares (Note 8)(549)-(831)(793)Dividends(1,927)(1,557)(3,625)(10,686)Retained earnings, end of period$ 41,705$ 37,371$ 41,705$ 37,371Net earnings per share: (Note 9)Basic$ 0.42$ 0.40$ 0.83$ 0.84Diluted$ 0.42$ 0.40$ 0.83$ 0.84Weighted average number of shares: (Note 9)Basic7,695,0067,770,0117,702,9347,768,091Diluted7,709,9347,798,9227,720,7647,796,724CALIAN TECHNOLOGIES LTD.UNAUDITED CONSOLIDATED BALANCE SHEETS(Canadian dollars in thousands)March 31, 2011September 30, 2010ASSETS(Note 2)CURRENT ASSETSCash$ 25,274$ 29,055Accounts receivable42,34133,954Work in process2,2813,576Prepaid expenses (Note 5)3,0366,329Future income taxes307696Derivative assets (Note 12)477158Investment (Note 6)-95373,71674,721LONG-TERM INVESTMENT (Note 6)2,7372,464EQUIPMENT4,4044,611INTANGIBLE481543GOODWILL9,5189,518$ 90,856$ 91,857LIABILITIES AND SHAREHOLDERS' EQUITYCURRENT LIABILITIESAccounts payable and accrued liabilities$ 16,746$ 17,024Unearned contract revenue12,48716,002Derivative liabilities (Note 12)894829,32233,074CONTINGENCIES (Note 10)SHAREHOLDERS' EQUITYShare capital (Note 8)19,09818,689Contributed surplus (Note 8)187171Retained earnings41,70539,769Accumulated other comprehensive income54415461,53458,783$ 90,856$ 91,857CALIAN TECHNOLOGIES LTD.UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(Canadian dollars in thousands)Three months ended March 31Six months ended March 312011201020112010Net earnings$ 3,254$ 3,082$ 6,392$ 6,525Unrealized loss on translating financial statements of self-sustaining foreign operation, net of tax of nil (2010 – nil)(17)(47)(46)(72)Change in deferred gain (loss) on derivatives designated as cash flow hedges, net of tax of $20 and $178 year to date (2010 - $224 and $367 year to date)(51)465436763Other comprehensive income (loss)(68)418390691Comprehensive income$ 3,186$ 3,500$ 6,782$ 7,216CALIAN TECHNOLOGIES LTD.UNAUDITED CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME(Canadian dollars in thousands)March 31, 2011September 30, 2010Unrealized cumulative loss on translating financial statements of self-sustaining foreign operation$ (403)$ (357)Deferred gain on derivatives designated as cash flow hedges947511Accumulated other comprehensive income, end of period544154Retained earnings, end of period41,70539,769Accumulated other comprehensive income and retained earnings, end of period$ 42,249$ 39,923CALIAN TECHNOLOGIES LTD.UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (Canadian dollars in thousands)Three months March 31Six months March 312011201020112010CASH FLOWS FROM (USED IN) OPERATING ACTIVITIESNet earnings$ 3,254$ 3,082$ 6,392$ 6,525Items not affecting cash:Interest accreted on host contract component of long-term investment (Note 7)(160)(149)(320)(290)Employee stock purchase plan compensation expense21203632Stock option compensation (Note 8)3133114Amortization279223565443Future income tax expense102125212250Unrealized (gain) loss on fair value of conversion options of long-term investment (Note 6)-18-(62)3,5273,3226,9166,912Change in non-cash working capitalAccounts receivable(9,205)(2,578)(9,123)(2,258)Work in process(5)5961,295(197)Prepaid expenses (Note 5)8442,4543,2932,123Accounts payable and accrued liabilities5,5213,460820(944)Unearned contract revenue(422)(3,713)(3,515)(1,835)2603,541(314)3,801CASH FLOWS USED IN FINANCING ACTIVITIESIssuance of common shares3223754601,013Dividends(1,927)(1,557)(3,625)(10,686)Repurchase of shares (Note 8)(634)-(960)(918)(2,239)(1,182)(4,125)(10,591)CASH FLOWS FROM (USED IN) IN INVESTING ACTIVITIESEquipment expenditures(172)(262)(296)(528)Investment1,000-1,000-828(262)704(528)FOREIGN CURRENCY ADJUSTMENT(17)(48)(46)(73)NET CASH INFLOW (OUTFLOW)(1,168)2,049(3,781)(7,391)CASH, BEGINNING OF PERIOD26,44234,22229,05543,662CASH, END OF PERIOD$ 25,274$ 36,271$ 25,274$ 36,271CALIAN TECHNOLOGIES LTD.NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTSFor the periods ended March 31, 2011 and 2010(Canadian dollars in thousands, except per share amounts)(Unaudited)ACCOUNTING POLICIESThese interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles. They do not include all of the information and notes required by generally accepted accounting principles for annual financial statements.These interim consolidated financial statements have been prepared using the same accounting policies used in the preparation of the audited annual consolidated financial statements for the year ended September 30, 2010 with the exception of the application of the accounting policy described in Note 2. These interim consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements.CHANGE IN ACCOUNTING POLICYEffective October 1, 2010, the Company changed its accounting policy with regards to the recognition of warranty costs related to fixed price contracts. Previously a provision for warranty claims was established when revenue was recognized, based on the warranty terms and prior claim experience. To better align revenue recognized with the warranty obligations, warranty costs are now included in estimated total contract costs at the beginning of the project and flow through cost of revenues when a warranty claim is made. Revenue is recognized using the percentage completion method based on management's best estimate of the costs to complete each contract. This change in accounting policy is applied retroactively to October 1, 2009 with a reduction in the warranty provision of $3,715 (through accounts payable and accrued liabilities), an increase in unearned contract revenue of $4,239, a decrease in taxes payable of $157 (through accounts payable and accrued liabilities) and a reduction in opening retained earnings of $367. The impact on the net income for fiscal 2010 and the quarter and the six-month period ended March 31, 2010 is not material.ACCOUNTING ESTIMATESFor the periods ended March 31, 2011 and 2010, no material changes in estimates have been made. SEASONALITY The Company's revenues and earnings have historically been subject to some quarterly seasonality due to the timing of vacation periods and statutory holidays.PREPAID EXPENSESMarch 31 September 3020112010Prepaid operating expenses$ 728$ 705Milestone advance to subcontractor2,3085,624$ 3,036$ 6,329INVESTMENTOn 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.On January 6, 2011, AIM repaid $1,000 of the debenture in cash. The remaining non-interest bearing debenture, with a face value of $2,897, is convertible into 5,078,000 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 remaining debenture of $2,897 is payable on July 11, 2011 in cash or AIM common shares at the option of AIM based on the then fair market value of the common shares. Carrying value of investment:Med-Emerg investment, at cost$ 3,623Med-Emerg cumulative unrealized loss on conversion options(1,878)Med-Emerg cumulative interest accretion on host contract897Med-Emerg fair value of investment on January 20, 2009, prior to exchange$ 2,642Loss on share exchange(125)AIM investment, at cost$ 2,517AIM cumulative unrealized loss on conversion options(17)AIM cumulative interest accretion on host contract1,237Payment January 2011(1,000)Carrying value of investment at March 31, 2011$ 2,737The Company's 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. AIM shares are traded on the TSX Venture Exchange and currently trade in limited volume. With only three months remaining on the conversion feature, the fair value of the conversion options is estimated at NIL. INTEREST INCOMEThree months ended March 31Six months ended March 3120112010 20112010Interest earned on cash balances$ 76$ 43$ 147$ 91Accreted interest on host contract component of investment160149320290Interest income $ 236 $ 192 $ 467 $ 381SHARE CAPITAL Employee Share Purchase Plan During the second quarter of 2011 (2010), the Company issued 22,888 (31,661) shares under the Company's Employee Share Purchase Plan at an average price of $14.06 ($10.87). Share repurchase During the quarter ending March 31, 2011, the Company acquired 34,800 of its outstanding common shares at an average price of $18.22 per share for a total of $634 including related expenses, through a normal course issuer bid in place during the period. No shares were acquired during the second quarter of 2010. During the six-month period ending March 31, 2011 (2010), the Company acquired 52,600 (53,170) of its outstanding common shares at an average price of $18.23 ($17.24) for a total of $960 ($918) including related expenses. The excess of the purchase price over the stated capital of the shares was charged to retained earnings. Stock options The Company has an established stock option plan, which provides that the Board of Directors may grant stock options to eligible directors and employees. Under the plan, eligible directors and employees are granted the right to purchase shares of common stock at a price established by the Board of Directors on the date the options are granted but in no circumstances below fair market value of the shares at the date of grant. During the quarter ending March 31, 2011 the Company granted 95,000 options to directors and officers at an average price of $18.65 per share with 28,000 options vesting immediately and 67,000 options vesting over a period of two years. The options expire on February 14, 2016. The weighted average fair value of options granted during the quarter ended March 31, 2011 was $1.27 per option. A total of 500,000 common shares are authorized for issuance under the plan, of which 345,000 are issued at March 31, 2011. At March 31, 2011 there were 156,600 options outstanding.NET EARNINGS PER SHAREThe diluted weighted average number of shares has been calculated as follows:Three months endedMarch 31Six months ended March 312011201020112010Weighted average number of shares – basic7,695,0067,770,0117,702,9347,768,091Addition to reflect the dilutive effect of employee stock options14,92828,91117,83028,633Weighted average number of shares – diluted7,709,9347,798,9227,720,7647,796,724Options 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 periods ending March 31, 2011, 95,000 options were excluded from the above computation of diluted weighted average number of shares. For the periods ending March 31, 2010 no options were excluded from the above computation.CONTINGENCIESIn 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. SEGMENTED INFORMATIONOperating 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 long-term and 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 other expense, interest income and income taxes. The accounting policies of the segments are the same as those described in the significant accounting policies note in the audited annual consolidated financial statements. Three months ended March 31, 2011Systems EngineeringBusiness and Technology ServicesCorporateTotalRevenues$ 15,492$ 43,941$ -$ 59,433Earnings before interest income and income tax expense2,1212,740(645)4,216Interest income (Note 7)236Income tax expense(1,198)Net earnings$ 3,254Total assets other than cash and goodwill$ 17,881$ 35,287$ 2,896$ 56,064Goodwill-9,518-9,518Cash--25,27425,274Total assets17,88144,80528,170$ 90,856Equipment and intangible expenditures$ 123$ 49$ -$ 172Three months ended March 31, 2010Systems EngineeringBusiness and Technology ServicesCorporateTotalRevenues$ 15,726$ 37,415$ -$ 53,141Earnings before other income, interest income and income tax expense2,6222,120(600)4,142Unrealized loss on fair value of conversion options of long-term investment (Note 6)(18)Interest income (Note 7)192Income tax expense(1,234)Net earnings$ 3,082September 30, 2010Total assets other than cash and goodwill$ 16,507$ 33,287$ 3,490$ 53,284Goodwill-9,518-9,518Cash--29,05529,055Total assets$ 16,507$ 42,805$ 32,545$ 91,857Equipment and intangible expenditures$ 668$ 710$ -$ 1,378Six months ended March 31, 2011Systems EngineeringBusiness and Technology ServicesCorporateTotalRevenues$ 30,663$ 82,030$ -$ 112,693Earnings before other income, interest income and income tax expense4,3395,192(1,266)8,265Interest income (Note 7)467Income tax expense(2,340)Net earnings$ 6,392Six months ended March 31, 2010Systems EngineeringBusiness and Technology ServicesCorporateTotalRevenues$ 30,703$ 74,546$ -$ 105,249Earnings before other income, interest income and income tax expense5,0214,926(1,236)8,711Unrealized gain on fair value of conversion options of long-term investment (Note 6)62Interest income (Note 7)381Income tax expense(2,629)Net earnings$ 6,52512. 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 excluding its exposure arising from the Company's US subsidiary. The Company does not utilize derivative financial instruments for trading or speculative purposes. The Company applies hedge accounting when appropriate documentation and effectiveness criteria are met.The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives to specific firm contractually related commitments on projects. The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. Hedge ineffectiveness has historically been insignificant.The forward foreign exchange contracts primarily require the Company to purchase or sell certain foreign currencies with or for Canadian dollars at contractual rates. At March 31, 2011, the Company had the following forward foreign exchange contracts: TypeNotionalCurrencyMaturityEquivalent Cdn. DollarsFair Value March 31, 2011SELL36,367USDApril 2011$ 35,467$ 205SELL1,000USDSeptember 20151,05788SELL1,000USDSeptember 20161,05788SELL1,000USDSeptember 20171,05788BUY5,496EUROApril 20117,5448Derivative assets $ 477BUY12,124USDApril 2011$ 11,824$ 69SELL12,397EUROApril 201117,01719BUY156GPBApril 20112431Derivative liabilities $ 89A 10% strengthening (weakening) of the Canadian dollar against the following currency at March 31, 2011 would have increased (decreased) other comprehensive income as related to the forward foreign exchange contracts by the amounts shown below. March 31, 2011USD$ 2,154EURO569GBP(24)$ 2,699Management Discussion and Analysis – March 31, 2011:(Canadian dollars in thousands, except per share data)RESULTS OF OPERATIONS Revenues: For the second quarter 2011, revenues were $59,433 compared to $53,141 reported for the same period in 2010 representing a 12% increase from the prior year. For the six month period ending March 31, 2011 revenues were $112,693 compared to $105,249 for 2010 an increase of 7%.Systems Engineering's (SED) revenues were $15,492 in the quarter and $30,663 on a year-to-date basis representing a slight decrease from the $15,726 and $30,703 recorded last year. Although the project mix has changed, the overall level of activity is consistent with the same quarter of the previous year. Due to the project nature of its business, the SED division is susceptible to significant variation in volumes of activity from period to period.Business and Technology Services (BTS) revenues were $43,941 in the quarter and $82,030 on a year-to-date basis representing an increase of 17% for the quarter compared to the $37,415 and a 10% increase compared to $74,546 year-to-date for the same period last year. During the quarter BTS experienced increased activity in its short-term staffing group as well as higher activity levels on certain of its long term outsourcing contracts. Management expects that the marketplace over the next year will continue to be very competitive. The market conditions for SED are expected to continue positive and should present new opportunities, although the related timing is somewhat uncertain. Current BTS backlog will provide a solid level of activity on existing contracts and new opportunities are expected to arise. However, the timing of future contract awards and customer demand will ultimately determine revenues for the next year. Gross margin: Gross margin was 17.9% in the second quarter of 2011, compared to the 19.0% reported in the second quarter a year ago. On a year-to-date basis the Company reported margins of 18.7% compared to 19.7% for the same period last year. The consolidated gross margin for the second quarter 2011 was in line with expectations and reflects a continued downward pressure on margins.Gross margin in Systems Engineering was 23.0% this quarter compared to 25.5% in the second quarter of 2010 and was 24.0% for the six month period ending March 31, 2011 compared to 25.5% for the same period last year. The gross margin for SED reflects pressures associated with a very competitive landscape as well as the impact of an exceptionally strong Canadian dollar.Gross margin in Business and Technology Services was 16.1% compared to the 16.2% reported in the second quarter of 2010. Gross margin for this second quarter 2011 is reflective of the current mix of business and therefore is representative of expected margins in the near term. For the six-month period ending March 31, 2011 gross margin was 16.7% compared to the 17.3% reported for the same period last year. This is a reflection of the continued competitive pressures on margins along with an increased revenue mix towards long-term contracts which typically attract lower margins.Because of the significant difference in gross margin between each of the two divisions, the overall gross margin of the Company is dependent on the relative level of revenue generated from each division. Management will continue to focus on execution in order to maximize margins. Increased competition continues to put downward pressure on margins in both divisions. The volatility of the Canadian dollar will continue to impact margins on new work in the SED division. Operating expenses: Selling and marketing, general and administration and facilities totalled $6,114 or 10.3% of revenues in the second quarter of 2011 compared to $5,718 or 10.8% of revenues reported in the second quarter of 2010. Operating expenses are stable and in line with the overall level of revenues. For the six-month period ending March 31, 2011 operating expenses totaled $12,159 compared to $11,608 in 2010. Interest income: Interest income for the second quarter of 2011 was $236 compared to $192 in 2010. For the six-month period ending March 31, 2011 interest income was $467 compared to $381 in 2010. Interest income is comprised of interest earned on the Company's cash balances and accrued interest related to the investment in AIM Health Group Inc. (AIM). Interest income increased as a result of increased interest rates. Unrealized gain on fair value of conversion options of investment: For the quarter ended March 31, 2010 the Company recorded a loss of $18 relating to the fair value of conversion options of investment. The reported unrealized gain is a reflection of the movement in quoted market prices of AIM shares and the remaining term of the related conversion privilege. With only 9 months remaining on the conversion feature at September 30, 2010, the fair value of the conversion options was estimated at NIL with no changes reported at March 31, 2011. Therefore no gain or loss was recorded this quarter or on a year-to-date basis. Income taxes: The provision for income taxes for the second quarter of 2011 was $1,198 or 26.9 % of earnings before tax compared to $1,234 in 2010 or 28.6% of earnings before tax. On a year-to-date basis, the provision for income taxes was $2,340 or 26.8% of earnings before tax compared to $2,629 or 28.7% of earnings before tax. The decrease in the realized tax rate is the result of a continued decrease in prescribed federal and provincial tax rates. The effective tax rate for 2011, prior to considering the impact of non-taxable transactions, is expected to be approximately 28%. Net earnings: As a result of the foregoing, in the second quarter of 2011 the Company recorded net earnings of $3,254 or $0.42 per share basic and diluted, compared to $3,082 or $0.40 per share basic and diluted in the same quarter of the prior year. For the six-month period ending March 31, 2011, the Company reported net earnings of $6,392 or $0.83 per share basic and diluted compared to $6,525 or $0.84 per share basic and diluted in the same period of the prior year. BACKLOG The Company's backlog at March 31, 2011 was $886 million with terms extending to fiscal 2018. This compares to $924 million reported at September 30, 2010. Contracted Backlog represents maximum potential revenues remaining to be earned on signed contracts, whereas Option Renewals represent customers' options to further extend existing contracts under similar terms and conditions. Most fee for service contracts provide the customer with the ability to adjust the timing and level of effort throughout the contract life and as such the amount actually realized could be materially different from the original contract value. The following table represents management's best estimate of the backlog realization for 2011, 2012 and beyond based on management's current visibility into customers' existing requirements. Management's estimate of the realizable portion (current utilization rates and known customer requirements) is less than the total value of signed contracts and related options by approximately $251 million. The majority of this amount relates to the health services support contract. The Company's policy is to reduce the reported contractual backlog once it receives confirmation from the customer that indicates the utilization of the full contract value may not materialize.(dollars in millions)Fiscal 2011Fiscal 2012Beyond 2012Estimated realizable portion of BacklogExcess over estimated realizable portionTOTALContracted Backlog$ 96$ 111$ 74$ 281$ 117$ 398Option Renewals348303354134488TOTAL$ 99$ 159$ 377$ 635$ 251$ 886Business and Technology Services$ 74$ 126$ 357$ 557$ 251$ 808Systems Engineering2533207878TOTAL$ 99$ 159$ 377$ 635$ 251$ 886 FINANCIAL CONDITION AND CASHFLOWS Operating activities: Cash outflows from operating activities for the six-month period ending March 31, 2011 were $314 compared to cash inflows of $3,801 in 2010. This year's decrease is mainly as the result of working capital fluctuations in line with the ebbs and flows of the business. The market for the Systems Engineering Division is characterized by contracts with billings tied to milestones achieved, which often results in significant working capital requirements. Conversely, given the nature of this business, it is sometimes possible to negotiate advance payments on contracts. Such advance payments give rise to unearned revenue that will be realized as revenue over the course of the contract. As at March 31, 2011, the Company's total unearned revenue amounted to $12,487. This compares to $16,002 at September 30, 2010, with the decrease primarily attributable to work progressing on the third deep space antenna contract for ESA. Financing activities: During the six month period ending March 31, 2011, the Company paid quarterly dividends of $0.47 per share compared to 2010 when the Company paid $0.37 per share of quarterly dividends and a $1.00 special dividend. The Company intends to continue with its quarterly dividend policy for the foreseeable future. During the six-month period ending March 31, 2011, the Company repurchased 52,600 common shares through its normal course issuer bid at an average price of $18.23 compared to the previous year when the Company repurchased 53,170 shares at an average price of $17.24. Capital resources: At March 31, 2011 the Company had a short-term credit facility of $10,000 with a Canadian chartered bank that bears interest at prime and is secured by assets of the Company. An amount of $612 was drawn to issue a letter of credit to meet customer contractual requirements. Management believes that Calian has sufficient cash resources to continue to finance its working capital requirements and pay a quarterly dividend. ADOPTION OF NEW ACCOUNTING RULES AND IMPACT ON FINANCIAL RESULTS Effective October 1, 2010, the Company changed its accounting policy with regards to the recognition of warranty costs related to fixed price contracts. Previously a provision for warranty claims was established when revenue was recognized, based on the warranty terms and prior claim experience. To better align revenue recognized with the warranty obligations, warranty costs are now included in estimated total contract costs at the beginning of the project and flow through cost of revenues when a warranty claim is made. Revenue is recognized using the percentage completion method based on management's best estimate of the costs to complete each contract. This change in accounting policy is applied retroactively to October 1, 2009 with a reduction in the warranty provision of $3,715 (through accounts payable and accrued liabilities), an increase in unearned contract revenue of $4,239, a decrease in taxes payable of $157 (through accounts payable and accrued liabilities) and a reduction in opening retained earnings of $367. The impact on the net income for fiscal 2010 and the quarter and the six-month period ended March 31, 2010 is not material. SELECTED QUARTERLY FINANCIAL DATA Q2/11Q1/11Q4/10Q3/10Q2/10Q1/10Q4/09Q3/09Revenues$59,433$ 53,260$ 52,911$ 57,565$ 53,141$ 52,108$ 4,365$ 57,845Net earnings$ 3,254$ 3,138$ 3,240$ 3,845$ 3,082$ 3,443$ 3,449$ 4,483Net earnings per shareBasic$ 0.42$ 0.41$ 0.42$ 0.49$ 0.40$ 0.44$ 0.45$ 0.58Diluted$ 0.42$ 0.41$ 0.42$ 0.49$ 0.40$ 0.44$ 0.44$ 0.58 SEASONALITY The Company's operations are subject to some quarterly seasonality due to the timing of vacation periods and statutory holidays. Typically the Company's first and last quarter will be negatively impacted as a result of the Christmas season and summer vacation period. During these periods, the Company can only invoice for work performed and is also required to pay for statutory holidays. This results in reduced levels of revenues and in a drop in gross margins. This seasonality may not be apparent in the overall results of the Company depending on the impact of the realized sales mix of its various projects. OUTLOOK Management believes the Company is well positioned for sustained growth. The Company operates in markets that will continue to require the services that the Company offers. To further assure itself of a stable source of revenues, the Company will focus on increasing the percentage of its revenues derived from recurring business while pursuing new business in adjacent markets. The Systems Engineering Division has been working within a stable satellite sector for the last two years and the division is expecting new opportunities to arise as systems adopting the latest technologies will be required by customers to maintain and improve their service offerings. Management is also confident that systems such as MSTAR will continue to be in demand in the security and surveillance market although it cannot predict the timing and extent of future orders. Custom manufacturing activity levels will continue to be directly dependent upon SED's customers' requirements. The continued volatility of the Canadian dollar could impact the Systems Engineering Division's competitiveness when bidding against foreign competition on projects denominated in foreign currencies. The Business and Technology Services Division's services are adaptable to many different markets. Currently, its strength lies in providing program management and delivery services to the Department of National Defence. Management believes that this department and many others within the federal government will continue to require more support services from private enterprises to supplement their current workforce. Management believes that the types of service the division offers will continue to be attractive to government agencies going forward and the division continues to assess how it can service new markets and increase new opportunities available to the division. GUIDANCE We believe that our key markets will remain strong, although we are cognizant of the potential impact of government cost cutting initiatives and overseas military deployment reductions. Ultimately, revenues realized will be dependent on the extent and timing of future contract awards. With private sector revenues showing positive momentum, we are gaining confidence in our ability to meet our previously issued guidance. Accordingly, we expect revenues for 2011 to remain in the range of $215 million to $235 million and net earnings per share in the range of $1.50 to $1.80 per share. INTERNATIONAL FINANCIAL REPORTING STANDARDS The Canadian Accounting Standards Board has announced that Canadian publicly accountable enterprises will be required to report under International Financial Reporting Standards (IFRS) as replacement guidance for the Canadian generally accepted accounting principles (Canadian GAAP) effective for fiscal years beginning after January 1, 2010. Therefore, the Company will adopt IFRS as the basis of preparation for its interim and annual financial statements for periods beginning on October 1, 2011 with a transition date of October 1, 2010 to allow for comparative financial information. IFRS uses a conceptual framework similar to current Canadian GAAP, but there are significant differences in recognition, measurement and disclosures. In addition, it is expected that IFRS in effect at the time of reporting the Company's first IFRS financial statements will evolve from current IFRS and may result in additional differences.In order to prepare for the conversion to IFRS, the Company has developed an IFRS changeover plan. This plan addresses key elements of the Company's conversion to IFRS including: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; and Disclosure controls and procedures. We have also established a formal governance structure for the conversion to IFRS. The initiative is lead by the Chief Financial Officer who reports regularly to the Chief Executive Officer. The Chief Financial Officer also reports quarterly to the Audit Committee of the Board of Directors on the status of the project and the implications of the changeover to IFRS. During 2010, the following activities were performed: A detailed assessment was substantially completed for all key standards and significant accounting policy choices including IFRS 1 elective exemption choices using IFRS standards in effect on date of transition; The creation of a duplicate IFRS compliant environment to track all adjusting IFRS entries for the Company's opening balance sheet and throughout the Company's dual reporting period of October 1, 2010 to September 30, 2011; A detailed assessment was performed of required changes to internal controls. Management concluded that internal controls applicable to the Company's reporting process under Canadian GAAP are fundamentally the same as those required in the Company's IFRS reporting environment; A detailed assessment was performed and minimal changes to disclosure controls and procedures were identified. Disclosure controls and procedures have been updated to include all data required for financial statements disclosures under IFRS; A detailed assessment has been completed of the impact of IFRS on key performance indicators and business activities such as compensation arrangements, hedging activities and risk management practices. A detailed assessment was performed of required changes to internal controls, systems, processes and documentation. With the exception of adjusting the Company's hedging documentation to reflect IFRS standard requirements, no significant changes were required; A complete IFRS financial statement model was built and reviewed by management and the board of directors; Data collection for the opening balance sheet is in progress; and Key finance employees responsible to carry out the IFRS conversion were provided with adequate training and resources throughout this process. The Company also held an IFRS information session with all members of the board of directors. The Audit Committee is also appraised quarterly on IFRS standards and policy choices available to the Company. For 2011 the following activities are in progress:Monitor standards to be issued by the IASB and provide the related training on such. Assess the impact of new IASB standards on the Company's opening balance sheet and its financial position and results of operations throughout the conversion period; Complete the data collection and finalize the assessment of the impact of adopting IFRS. Data collection for each quarter in fiscal 2011 is performed shortly following the closing of each quarter under Canadian GAAP; 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 comparative year 2011 and the first reporting year 2012; Prepare fiscal 2011 quarterly financial statements under IFRS standards, in preparation for reporting comparative information in 2012; the Company's first year of reporting under IFRS. First-time adoption of IFRS: IFRS 1 – First-Time Adoption of International Financial Reporting Standards generally requires that a first-time adopter apply IFRS accounting policies retrospectively to all periods presented in its first IFRS compliant financial statements. IFRS 1 also provides certain mandatory and optional exemptions to the full retrospective application. The most significant optional exemptions applicable to the Company are summarized on page 22 of the Company's Management Discussion and Analysis in the 2010 Annual Report. During the first six months of 2011, the Company has not identified any additional elections to be considered by management. Expected areas of significance: The Company's key changes in accounting policies required under IFRS standards are summarized on page 22 and 23 of the Company's Management Discussion and Analysis in the 2010 Annual Report. The differences identified in this document should not be regarded as an exhaustive list and other changes may result from the Company's conversion to IFRS. Furthermore, as a result of changes in circumstances, such as economic conditions or operations, and the inherent uncertainty from the use of assumptions, the actual impacts may be different from those presented. During the first six months of 2011, the Company did not identify any additional changes in accounting policy to be considered by management.Many of the differences identified between IFRS and Canadian GAAP have now been quantified. We have not yet prepared a full set of annual financial statements under IFRS; therefore, amounts are unaudited. Based on the Company's work to date, we do not expect that the conversion to IFRS will result in a significant impact on the financial position or results of operations of the Company and believe that the areas of higher potential impact will be around overall presentation and disclosure requirements. However, our assessment of the impacts of certain potential differences will not be finalized until the Company has prepared a full set of annual financial statements under IFRS, the future impacts of converting to IFRS will depend on the particular circumstances prevailing in those years.The International Accounting Standards Board (IASB) has a number of ongoing projects on its agenda. Management continues to monitor standards to be issued by the IASB, but we do not expect these standards to be mandatory for the Company's fiscal 2012 financial statements. The summary of key expected changes summarized on page 22 and 23 of the Company's Management Discussion and Analysis in the 2010 Annual Report was completed with the expectation that we will apply IFRS standards expected to be effective at the date of conversion. However, management will only make final decisions regarding early adoption of any new standards as they are issued by the IASB. INTERNAL CONTROLS OVER FINANCIAL REPORTING During the most recent interim quarter ending March 31, 2011, there have been no changes in the design of the Company's internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting. FORWARD-LOOKING STATEMENT Certain information included in this management discussion and analysis is forward-looking and is subject to important risks and uncertainties. The results or events predicted in these statements may differ materially from actual results or events. Such statements are generally accompanied by words such as "intend", "anticipate", "believe", "estimate", "expect" or similar statements. Factors which could cause results or events to differ from current expectations include, among other things: the impact of price competition; scarce number of qualified professionals; the impact of rapid technological and market change; loss of business or credit risk with major customers; technical risks on fixed price projects; general industry and market conditions and growth rates; international growth and global economic conditions, currency exchange rate fluctuations; and the impact of consolidations in the business services industry. For additional information with respect to certain of these and other factors, please see the Company's most recent annual report and other reports filed by the Company with the Ontario Securities Commission. Calian disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. No assurance can be given that actual results, performance or achievement expressed in, or implied by, forward-looking statements within this disclosure will occur, or if they do, that any benefits may be derived from them.The foregoing discussion and analysis should be read in conjunction with the financial statements for the second quarter of 2011, and with the Management Discussion and Analysis in the 2010 annual report, including the section on risks and opportunities.FOR FURTHER INFORMATION PLEASE CONTACT: Ray BaslerCalian Technologies Ltd.President and Chief Executive Officer306-931-3425ORJacqueline GauthierCalian Technologies Ltd.Chief Financial Officer613-599-8600ir@calian.comwww.calian.com