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Press release from Marketwire

Calian Reports Second Quarter Results

(All amounts in this release are in Canadian Dollars)

Wednesday, May 08, 2013

Calian Reports Second Quarter Results

11:41 EDT Wednesday, May 08, 2013

OTTAWA, ONTARIO--(Marketwired - May 8, 2013) -

(All amounts in this release are in Canadian Dollars)

Calian Technologies Ltd. (TSX:CTY) today released unaudited results for the second quarter ended March 31, 2013. Revenues for the quarter were $58.9 million, a 4% decrease from the $61.6 million reported in the same quarter of the previous year. Net earnings were $3.4 million or $0.44 per share basic and diluted, compared to $3.7 million or $0.48 per share basic and diluted in the same quarter of the previous year. For the six-month period ended March 31, 2013, the Company reported revenues of $116.8 million and net earnings of $6.8 million or $0.89 per share basic and diluted, compared to revenues of $118.4 million and net earnings of $7.3 million or $0.95 per share basic and diluted in the prior year.

"Overall, I am pleased with the quarterly results released today, particularly in light of a very difficult federal government marketplace. While a revenue drop is always concerning, I take solace in the fact that it is a direct reflection of the current volatility in the marketplace and not related to our performance or quality of service. That being said, we will continue to be diligent to ensure that we seize available opportunities to expand our service offerings into adjacent and complementary markets. This will be vital as government and defence markets complete the necessary adjustments to eventually reach a state of stabilization. While the SED division was relatively flat compared to last year, our BTS division was hardest hit by government cutbacks. Fortunately, our significant backlog coupled with our strong financial position puts us in a solid position to weather the storm. I am confident that the evolution of our service lines and our recent pursuits in non-government markets will bear fruit and continue to reduce our reliance on those sectors currently experiencing volatility" stated Ray Basler, President and CEO.

"Gross margin percentages were in line with the same quarter last year. However, certain non-recurring items in the SED division served to mitigate the lower margins experienced by our BTS division. While margins on signed contracts are quite predictable, we expect margins on new work to be under pressure, at least for the balance of the year. We will continue to focus on utilization factors and input costs to ensure that margins are enhanced wherever possible" continued Basler.

"Despite the present difficult business environment, we continue to generate substantial profits and strong cash flows. This gives us the confidence to maintain our healthy dividend while at the same time using our normal course issuer bid to repurchase shares should buying opportunities arise. At the same time, we will remain vigilant for opportunities to economically and strategically enhance our service offerings through acquisition" stated Basler.

The company's second quarter performance was negatively impacted by the unsettled business environment in which we currently operate and we continue to remain guarded in our expectations for the balance of the year. In particular, the continued manifestation of the federal government's cost cutting initiatives along with the related increase in competitive pressures have further reduced short term expectations for both revenues and profitability. Ultimately, revenues realized will be dependent on the extent and timing of future contract awards as well as customer utilization of existing contracting vehicles. Based on results to date, along with currently available information and our assessment of the marketplace, we expect revenues for fiscal 2013 to be in the range of $230 million to $245 million and net earnings in the range of $1.60 to $1.85 per share.

About Calian

Calian employs over 2,400 people with offices and projects that span Canada, U.S. and international markets. The company's capabilities include the provision of business and technology services to industry and government in the health, operations and maintenance, IT services and training domains as well as the design, manufacturing and maintenance of complex systems to the communications and defence sectors. Our goal is to be the best company to work for, buy from and invest in. The Business and Technology Services (BTS) Division is headquartered in Ottawa. This division augments customer workforces with flexible short and long-term placements of individuals and teams, provides access to critical recruiting capabilities and delivers outsourcing services for a variety of technical and professional functions. Our strength lies in understanding clients' needs, recruiting highly qualified personnel who understand and meet those needs, and then effectively managing those personnel within our customers' framework. Calian's Systems Engineering Division (SED) plans, designs and implements complex communication systems for many of the world's space agencies and leading satellite manufacturers and operators. SED also provides contract manufacturing services for both private sector and military customers in North America.

For further information, please visit our website at www.calian.com, or contact us at ir@calian.com

DISCLAIMER

Certain information included in this press release is forward-looking and is subject to important risks and uncertainties. The results or events predicted in these statements may differ materially from actual results or events. Such statements are generally accompanied by words such as "intend", "anticipate", "believe", "estimate", "expect" or similar statements. Factors which could cause results or events to differ from current expectations include, among other things: the impact of price competition; scarce number of qualified professionals; the impact of rapid technological and market change; loss of business or credit risk with major customers; technical risks on fixed price projects; general industry and market conditions and growth rates; international growth and global economic conditions, 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 CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
As at March 31, 2013 and September 30, 2012
(Canadian dollars in thousands)

NOTES
March 31, 2013 September 30, 2012
ASSETS
CURRENT ASSETS
Cash $ 29,943 $ 31,998
Accounts receivable 44,596 40,928
Work in process 8,628 9,446
Prepaid expenses 1,458 1,480
Derivative assets 9 177 234
Total current assets 84,802 84,086
NON-CURRENT ASSETS
Equipment 3,670 3,854
Application software 548 615
Acquired intangibles 4,080 4,352
Goodwill 10,781 10,781
Total non-current assets 19,079 19,602
TOTAL ASSETS $ 103,881 $ 103,688
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 23,811 $ 19,853
Unearned contract revenue 9,326 13,392
Share repurchase obligation 5 1,149 1,209
Derivative liabilities 9 27 26
Total current liabilities 34,313 34,480
NON-CURRENT LIABILITIES
Deferred tax liabilities 935 1,212
Total non-current liabilities 935 1,212
TOTAL LIABILITIES 35,248 35,692
SHAREHOLDERS' EQUITY
Issued capital 5 20,275 19,949
Contributed surplus 190 164
Retained earnings 48,338 47,186
Accumulated other comprehensive income (loss) (170) 697
TOTAL SHAREHOLDERS' EQUITY 68,633 67,996

$ 103,881

$ 103,688
CALIAN TECHNOLOGIES LTD.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF PROFIT
For the three-month and six-month periods ended March 31, 2013 and 2012
(Canadian dollars in thousands, except per share data)
NOTES Three
months
ended
March 31, 2013
Three
months
ended
March 31, 2012
Six months
ended
March 31, 2013
Six months
ended
March 31, 2012
Revenues $ 58,932 $ 61,635 $ 116,838 $ 118,448
Cost of revenues 48,028 50,085 95,027 95,987
Gross profit 10,904 11,550 21,811 22,461
Selling and marketing 1,015 1,053 2,079 2,021
General and administration 4,569 4,777 9,133 9,115
Facilities 769 833 1,578 1,644
Profit before interest income and income tax expense 4,551 4,887 9,021 9,681
Interest income 6 79 84 170 163
Profit before income tax expense 4,630 4,971 9,191 9,844
Income tax expense - current 1,259 1,240 2,402 2,446
Income tax expense - deferred 17 62 34 138
Total income tax expense 1,276 1,302 2,436 2,584
NET PROFIT FOR THE PERIOD $ 3,354 $ 3,669 $ 6,755 $ 7,260
EARNINGS PER SHARE:
Basic 7 $ 0.44 $ 0.48 $ 0.89 $ 0.95
Diluted 7 $ 0.44 $ 0.48 $ 0.89 $ 0.95
CALIAN TECHNOLOGIES LTD.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF PROFIT
AND OTHER COMPREHENSIVE INCOME (LOSS)
For the three-month and six-month periods ended March 31, 2013 and 2012
(Canadian dollars in thousands)
NOTES Three months
ended
March 31, 2013
Three months
ended
March 31, 2012
Six months
ended
March 31, 2013
Six months
ended
March 31, 2012
PROFIT FOR THE PERIOD $ 3,354 $ 3,669 $ 6,755 $ 7,260
Other comprehensive income, net of tax
Unrealized loss on translating financial statements of an investment in a foreign operation, net of tax of nil (2012 - nil) - (18 ) - (47 )
Change in deferred gain or loss on derivatives designated as cash flow hedges, net of tax of $34 and $320 (2012 - $47 and $336) (91 ) 128 (867 ) 910
Other comprehensive income (loss), net of tax (91 ) 110 (867 ) 863
TOTAL COMPREHENSIVE INCOME FOR THE PERIOD $ 3,263 $ 3,779 $ 5,888 $ 8,123
CALIAN TECHNOLOGIES LTD.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the six-month periods ended March 31, 2013 and 2012
(Canadian dollars in thousands, except per share data)
Notes Issued capital Contri-buted
surplus
Retained earnings Foreign
currency
trans-
lation
reserve
Cash flow
hedging
reserve
Total
Balance October 1, 2012 $ 19,949 $ 164 $ 47,186 $ - $ 697 $ 67,996
Total comprehen-sive income - - 6,755 - (867 ) 5,888
Dividends ($0.56 per share) - - (4,272 ) - - (4,272 )
Issue of shares under employee share purchase plan 5 424 - - - - 424
Issue of shares under stock option plan 5 99 (6 ) - - - 93
Stock option plan compensa-
tion expense
5 - 32 - - - 32
Share repurchase 5 (204 ) - (1,384 ) - - (1,588 )
Share purchase agreement - reclassi-fication 5 7 - 53 - - 60
Balance March 31, 2013 $ 20,275 $ 190 $ 48,338 $ - $ (170 ) $ 68,633
Notes Issued capital Contri-buted
surplus
Retained
earnings
Foreign
currency
trans-
lation
reserve
Cash flow
hedging
reserve
Total
Balance October 1, 2011 $ 19,018 $ 219 $ 43,345 $ 22 $ (248 ) $ 62,356
Comprehen-sive income - - 7,260 (47 ) 910 8,123
Dividends ($0.52 per share) - - (3,987 ) - - (3,987 )
Issue of shares under employee share purchase plan 5 418 - - - - 418
Issue of shares under stock option plan 5 716 (124 ) - - - 592
Stock option plan compensa-
tion expense
5 - 38 - - - 38
Share repurchase 5 (167 ) - (1,014 ) - - (1,181 )
Share purchase agreement - reclassi-fication 5 (3 ) - - - - (3 )
Balance March 31, 2012 $ 19,982 $ 133 $ 45,604 $ (25 ) $ 662 $ 66,356
CALIAN TECHNOLOGIES LTD.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six-month periods ended March 31, 2013 and 2012
(Canadian dollars in thousands)
NOTES Six months
ended
March 31, 2013
Six months
ended
March 31, 2012
CASH FLOWS FROM OPERATING ACTIVITIES
Profit for the period $ 6,755 $ 7,260
Items not affecting cash:
Interest income 6 (170 ) (163 )
Income tax expense 2,436 2,584
Employee stock purchase plan and option plan compensation expense 66 75
Amortization 813 590
9,900 10,346
Change in non-cash working capital
Accounts receivable (2,671 ) (6,916 )
Work in process 818 (2,548 )
Prepaid expenses (751 ) 541
Accounts payable and accrued liabilities 2,941 657
Unearned contract revenue (4,066 ) 3,669
6,171 5,749
Interest received 188 163
Income tax paid (2,313 ) (2,944 )
4,046 2,968
CASH FLOWS USED IN FINANCING ACTIVITIES
Issuance of common shares 5 449 942
Dividends (4,272 ) (3,987 )
Repurchase of shares 5 (1,588 ) (1,181 )
(5,411 ) (4,226 )
CASH FLOWS USED IN INVESTING ACTIVITIES
Equipment and application software expenditures (290 ) (595 )
Acquisition (400 ) (3,812 )
(690 ) (4,407 )
FOREIGN CURRENCY ADJUSTMENT - (47 )
NET CASH OUTFLOW (2,055 ) (5,712
CASH, BEGINNING OF PERIOD 31,998 30,742
CASH, END OF PERIOD $ 29,943 $ 25,030
CALIAN TECHNOLOGIES LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three-month and six-month periods ended March 31, 2013 and 2012
(Canadian dollars in thousands, except per share amounts)
(Unaudited)

1. BASIS OF PREPARATION

Calian Technologies Ltd. ("the Company"), incorporated under the Canada Business Corporations Act, and its wholly-owned subsidiaries provide technology services to industry and government. The address of its registered office and principal place of business is 340 Legget Drive, Ottawa, Ontario K2K 1Y6.

These interim condensed consolidated financial statements are expressed in Canadian dollar and have been prepared in accordance with International Accounting Standard ("IAS") 34 - Interim Financial Reporting, as issued by the International Accounting Standard Board ("IASB"). These interim consolidated financial statements have been prepared using accounting policies consistent with International Financial Reporting Standards ("IFRS") and in accordance with the accounting policies the Company adopted in its annual consolidated financial statements for the year ended September 30, 2012 and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report for the year ended September 30, 2012. These unaudited interim financial statements do not include all of the information required in annual financial statements.

These unaudited interim condensed consolidated financial statements for the three-month and six-month periods ended March 31, 2013 were authorized for issuance by the Board of Directors on May 8, 2013.

2. FUTURE CHANGES IN ACCOUNTING POLICIES

IFRS 9 Financial instruments

IFRS 9 was issued in November 2009 introducing new requirements for the classification and measurement of financial assets. IFRS9 was further amended in October 2010 to include the requirements for the classification and measurement of financial liabilities and derecognition.

IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the multiple rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. The new standard also requires a single impairment method to be used, replacing the multiple impairment methods in IAS 39. IFRS 9 is effective for annual periods beginning on or after January 1, 2015. The Company is currently evaluating the impact of this standard on its consolidated financial statements.

IFRS 10 Consolidated financial statements

IFRS 10 establishes principles for the presentation of consolidated financial statements when an entity controls one or more other entities. IFRS 10 replaces IAS 27 - Consolidated and Separate Financial Statements and is effective for annual periods beginning on or after January 1, 2013. Earlier application is permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements.

IFRS 12 Disclosure of interests in other entities

IFRS 12 is a new and comprehensive standard on disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off-balance sheet vehicles. The standard requires an entity to disclose information regarding the nature and risks associated with its interests in other entities and the effects of those interests on its financial position, financial performance and cash flows. IFRS 12 will be effective for the Company's fiscal years beginning on or after January 1, 2013, with earlier application permitted. The Company has not yet assessed the impact of the adoption of this standard on its consolidated financial statements.

IFRS 13 Fair value measurement

IFRS 13 is intended to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRS. The standard will be effective for the Company's fiscal years beginning on or after January 1, 2013, with earlier application permitted. The Company has not yet assessed the impact of the adoption of this standard on its consolidated financial statements.

IAS 1 Presentation of financial statements

In June 2011, the IASB amended IAS 1 - Presentation of financial statements. The principal change resulting from the amendments to IAS 1 is a requirement to group together items within other comprehensive income that may be reclassified to the statement of net earnings. The amendments also reaffirm existing requirements that items in other comprehensive income and net earnings should be presented as either a single statement or two consecutive statements. The amendment to IAS 1 will be effective for the Company's fiscal years beginning on or after January 1, 2013, with earlier application permitted. The Company does not expect any changes to its consolidated financial statement presentation from this amendment as the items within other comprehensive income that may be reclassified to the statement of comprehensive income are already grouped together.

IAS 1 Presentation of financial statements (as part of the Annual Improvements to IFRS issued in May 2012)

In May 2012, the IASB amended IAS 1 - Presentation of financial statements. IAS1 requires an entity that changes accounting policies retrospectively or makes a retrospective restatement or reclassification to present a third statement of financial position as at the beginning of the preceding period. the amendments to IAS1 clarify that an entity is required to present a third statement of financial position only when the retrospective application, restatement or reclassification has a material effect on the information in the third statement of financial position and that related notes are not required to accompany the third statement of financial position. The amendment to IAS 1 will be effective for the Company's fiscal years beginning on or after January 1, 2013, with earlier application permitted. The Company does not expect any changes to its consolidated financial statement presentation from this amendment.

IAS 28 Investments in associates and joint ventures

IAS 28 was re-issued by the IASB in May 2011 in order to conform to changes as a result of the issuance of IFRS 10, IFRS11, and IFRS 12. IAS 28 continues to prescribe the accounting for investments in associates, but is now the only source of guidance describing the application of the equity method. The amended IAS 28 will be applied by all entities that are investors with joint control of, or significant influence over, an investee. The amended version of IAS 28 is effective for financial years beginning on or after January 1, 2013, with earlier application permitted. The Company is evaluating the impact of the amendments to IAS 28 on its consolidated financial statements.

3. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

Estimates:

The preparation of financial statements in conformity with IFRS requires the Company's management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods presented. Actual results could differ from those estimates.

4. SEASONALITY

The results of operations for the interim periods are not necessarily indicative of the results of operations for the full year. 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. ISSUED CAPITAL

Share repurchase

During the three and six-month periods ended March 31, 2013, the Company acquired 35,300 (77,170) of its outstanding common shares at an average price of $20.68 ($20.59) per share for a total of $730 ($1,588) including related expenses, through normal course issuer bids in place during the period. During the three and six-month periods ended March 31, 2012, the Company acquired 1,500 (66,700) of its outstanding common shares at an average price of $17.59 ($17.70) per share for a total of $26 ($1,181) 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 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. The plan provides for a 10% rolling maximum number of options available for grant. As at March 31, 2013, a total of 760,183 common shares are reserved for issuance under the plan with 240,000 options currently outstanding of which 187,000 are exercisable. No options were issued during the period.

Employee Share Purchase Plan

During the three and six-month period ended March 31, 2013 (2012), the Company issued 23,346 (23,674) shares under the Company's Employee Share Purchase Plan at an average price of $15.22 ($14.76) for a total of $355 ($350).

Stock repurchase obligation

The Company has an agreement with a third party which provides for automatic repurchases of the Company's shares without the Company having the ability to influence the purchases. The financial liability is determined as the present value of the maximum redemption amount at each of the reporting periods. The reclassification adjustment is made by reducing issued capital and retained earnings with an offsetting adjustment to the share repurchase obligation account. An income adjustment will result for any shares repurchased below the maximum amount per share. The amount of income recognized in the period is insignificant.

6. INTEREST INCOME

Interest income is comprised of the following amounts:

Three months ended
March 31
Six months ended
March 31
2013 2012 2013 2012
Interest earned on cash balances $ 88 $ 84 $ 188 $ 163
Accreted interest on contingent consideration (9 ) - (18 ) -
Interest income $ 79 $ 84 $ 170 $ 163

7. EARNINGS PER SHARE

The diluted weighted average number of shares has been calculated as follows:

Three months ended
March 31
Six months ended
March 31
2013 2012 2013 2012
Weighted average number of shares - basic 7,614,110 7,647,053 7,624,283 7,645,710
Addition to reflect the dilutive effect of employee stock options 8,383 11,077 8,333 11,638
Weighted average number of shares - diluted 7,622,493 7,658,130 7,632,616 7,657,348

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 three-month period ending March 31, 2013 and 2012, no options were excluded from the above computation. For the six-month period ending March 31, 2013 and 2012, NIL (95,000) options were excluded from the above computation.

Profit for the period is the measure of profit or loss used to calculate earnings per share.

8. 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 provides business and technology services to industry and government in the health, operations and maintenance, IT services and training.

The Company evaluates performance and allocates resources based on earnings before interest income and income taxes. The accounting policies of the segments are the same as those described in Note 2 - Summary of significant accounting policies to the financial statements for the quarter ended March 31, 2013.


Three months ended March 31, 2013
Systems
Engineering
Business and
Technology
Services
Corporate Total
Revenues $ 16,029 $ 42,903 $ - $ 58,932
Profit before interest income and income tax expense 3,083 2,031 (571 ) 4,551
Interest income (Note 6) 79
Income tax expense (1,276 )
Profit for the period $ 3,354
Total assets other than cash and goodwill $ 24,135 $ 38,852 $ 170 $ 63,157
Goodwill - 10,781 - 10,781
Cash - - 29,943 29,943
Total assets $ 24,135 $ 49,633 $ 30,113 $ 103,881
Equipment and intangible expenditures $ 152 $ 16 $ - $ 168

Three months ended March 31, 2012
Systems
Engineering
Business and
Technology
Services
Corporate Total
Revenues $ 16,140 $ 45,495 $ - $ 61,635
Profit before interest income and income tax expense 2,874 2,892 (879 ) 4,887
Interest income (Note 6) 84
Income tax expense (1,302 )
Profit for the period $ 3,669

Six months ended March 31, 2013
Systems
Engineering
Business and
Technology
Services
Corporate Total
Revenues $ 33,981 $ 82,857 $ - $ 116,838
Profit before interest income and income tax expense 5,918 4,240 (1,137 ) 9,021
Interest income (Note 6) 170
Income tax expense (2,436 )
Profit for the period $ 6,755
Six months ended March 31, 2012
Systems
Engineering
Business and
Technology
Services
Corporate Total
Revenues $ 32,557 $ 85,891 $ - $ 118,448
Profit before interest income and income tax expense 5,772 5,414 (1,505 ) 9,681
Interest income (Note 6) 163
Income tax expense (2,584 )
Profit for the period $ 7,260

As at September 30, 2012
Total assets other than cash and goodwill $ 23,753 $ 36,277 $ 879 $ 60,909
Goodwill - 10,781 - 10,781
Cash - - 31,998 31,998
Total assets $ 23,753 $ 47,058 $ 32,877 $ 103,688
Equipment and intangible expenditures $ 529 $ 525 $ - $ 1,054
Acquired intangibles $ - $ 4,670 $ - $ 4,670
Acquired goodwill $ - $ 1,263 $ - $ 1,263

9. HEDGING

Foreign currency risk related to contracts

The Company is exposed to foreign currency exchange 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 March 31, 2013, the Company had the following forward foreign exchange contracts:


Type
Notional Currency Maturity Equivalent
Cdn. Dollars
Fair Value
March 31, 2013
SELL 1,000 USD September 2015 $ 1,057 $ 41
SELL 1,000 USD September 2016 1,057 41
SELL 1,000 USD September 2017 1,057 41
SELL 29,398 USD April 2013 29,886 18
SELL 4,197 EURO April 2013 5,502 36
BUY 40 GPB April 2013 64 -
Derivative assets $ 177
BUY 21,647 USD April 2013 $ 22,006 $ 13
BUY 1,619 EURO April 2013 2,122 14
Derivative liabilities $ 27

A 10% strengthening (weakening) of the Canadian dollar against the following currencies at March 31, 2013 would have increased (decreased) other comprehensive income (loss) as related to the forward foreign exchange contracts by the amounts shown below.

March 31, 2013
EURO $ 336
USD 1,092
GBP (2 )
$ 1,426

10. 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.

11. ACQUISITION

Under the contingent consideration arrangement, the Company is required to pay the former shareholders of Primacy Management Inc. an additional $400 and $600 if Primacy attains specified levels earnings before interest, taxes, depreciation and amortization (EBITDA) for the years ending February 28, 2013 and 2014 respectively. During the quarter, the Company paid the full $400 related to the first year earn-out. Management believes that Primacy can achieve its earn-out target in the second period.

Management Discussion and Analysis - March 31, 2013 :
(Canadian dollars in thousands, except per share data)

RESULTS OF OPERATIONS

Revenues:

For the second quarter of 2013, revenues were $58,932 compared to $61,635 reported for the same period in 2012 representing a 4% decrease from the prior year. For the six-month period ending March 31, 2013 revenues were $116,838 compared to $118,448 for 2012, a decrease of 1%.

Systems Engineering's (SED) revenues were $16,029 in the quarter and $33,981 on a year-to-date basis representing a relatively flat quarter, but still up 4% on a year-to-date basis when compared to the $16,140 and $32,557 recorded last year. Manufacturing related revenues were once again down relative to the same quarter of last year as levels of activity in the defence area has slowed somewhat. Revenues generated from engineering projects were sufficient to compensate for the shortfall. 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 $42,903 in the quarter and $82,857 on a year-to-date basis representing a decrease of 6% and 4% respectively from the $45,495 and $85,891 for the same period last year. With the exception of the Health Services contract, the demand for services in the BTS market segments was affected by the government spending cuts. Current year revenues also reflect the removal of the US division and the inclusion of Primacy Management.

Management expects that the marketplace for the remainder of the year will continue to be unpredictable and very competitive. The market conditions for SED are expected to be moderate and while new opportunities are anticipated, the related timing of project awards, particularly in today's unsettled business environment is always subject to change. Current BTS backlog provides a base level of activity on most existing contracts and new longer term opportunities continue to arise, although revenues generated from these new opportunities would not have a significant impact on revenues for the last half of the year. Cuts in federal government spending have, and will continue to, impact future revenues in certain segments. The nature and extent of future spending constraints remain uncertain and therefore, revenues for the year will ultimately be determined by customer demand and the timing of future contract awards.

Gross margin:

Gross margin was 18.5% in the second quarter of 2013, compared to the 18.7% reported in the second quarter a year ago. On a year-to-date basis the Company reported margins of 18.7% compared to 19.0% for the same period last year. This reflects a combination of higher margins in SED offset by lower margins on traditional service lines of the BTS division which continued to experience downward pressure.

Gross margin in Systems Engineering was 27.7% this quarter compared to 26.5% in the second quarter of 2012 and was 25.4% for the six-month period ended March 31, 2013 compared to 26.3% for the same period last year. SED margins were up significantly during the quarter; a reflection of positive closeouts on certain engineering projects coupled with the recording of additional investment tax credits received relative to the prior year. Due to the non-recurring nature of these items that positively impacted margins in the current quarter, it is anticipated that margins may decline somewhat in the last half of the year.

Gross margin in Business and Technology Services was 15.1% compared to the 16.0% reported in the second quarter of 2012. For the six-month period ended March 31, 2013 gross margin was 15.9% compared to the 16.2% reported for the same period last year. The decrease in gross margin in the BTS division was somewhat impacted by additional statutory costs related to the Easter holiday which would normally fall during the third quarter. However gross margins were also affected by the intense competition as more bidders vie for market share in a shrinking government and defence marketplace. Competitive pressure on margins when bidding for new work is expected to remain strong; accordingly, holding BTS margins at current levels for the balance of the year will be a challenge.

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 and aggressive negotiation of input costs in order to maximize margins. However, increasing competition is expected to maintain the pressure on margins in both divisions. The volatility of the Canadian dollar is always an influencing factor for margins on new work in the SED division when denominated in foreign currencies.

Operating expenses:

Selling and marketing, general and administration and facilities totalled $6,353 or 10.8% of revenues in the second quarter of 2013 compared to $6,663 or 10.8% of revenues reported in the second quarter of 2012. We have been very diligent in reviewing discretionary spending patterns to ensure that operating expenses remain in line with revenues.

Interest income:

Interest income for the second quarter of 2013 was $79 compared to $84 in 2012 and on a year-to-date basis was $170 in 2013 compared to $163 in 2012.

Income taxes:

The provision for income taxes for the second quarter of 2013 was $1,276 or 27.6% of earnings before tax compared to $1,302 in 2012 or 26.2% of earnings before tax and on a year-to-date basis was $2,436 or 26.5% of earnings before tax compared to $2,584 in 2012 or 26.3% of earnings before tax. The effective tax rate for 2013, prior to considering the impact of non-taxable transactions, is expected to be approximately 26.5%.

Net earnings:

As a result of the foregoing, in the second quarter of 2013 the Company recorded net earnings of $3,354 or $0.44 per share basic and diluted, compared to $3,669 or $0.48 per share basic and diluted in the same quarter of the prior year. For the six-month period ending March 31, 2013, the Company reported net earnings of $6,755 or $0.89 per share basic and diluted compared to $7,260 or $0.95 per share basic and diluted in the same period of the prior year.

BACKLOG

The Company's backlog at March 31, 2013 was $512 million with terms extended to fiscal 2018. This compares to $553 million reported at September 30, 2012. 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 2013, 2014 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 $124 million. 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 2013 Fiscal 2014 Beyond 2014 Estimated realizable portion of Backlog Excess over estimated realizable portion TOTAL
Contracted Backlog $ 102 $ 92 $ 17 $ 211 $ 60 $ 271
Option Renewals 4 53 120 177 64 241
TOTAL $ 106 $ 145 $ 137 $ 388 $ 124 $ 512
Business and Technology Services $ 79 $ 117 $ 125 $ 321 $ 124 $ 445
Systems Engineering 27 28 12 67 - 67
TOTAL $ 106 $ 145 $ 137 $ 388 $ 124 $ 512

FINANCIAL CONDITION AND CASHFLOWS

Operating activities:

Cash inflows from operating activities for the six-month period ending March 31, 2013 were $4,046 compared to cash inflows of $2,968 in 2012. This year's increase is mainly the result of working capital fluctuations in line with the ebbs and flows of the business and a decrease of $4,066 in unearned revenues. 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, 2013, the Company's total unearned revenue amounted to $9,326. This compares to $13,392 at September 30, 2012, with the decrease primarily attributable to execution of work that had previously been paid in advance.

Financing activities:

During the six month period ending March 31, 2013, the Company paid quarterly dividends of $0.56 per share compared to 2012 when the Company paid $0.52 per share. The Company intends to continue with its quarterly dividend policy for the foreseeable future.

During the six-month period ending March 31, 2013, the Company repurchased 77,170 common shares through its normal course issuer bid at an average price of $20.59 compared to the previous year when the Company repurchased 66,700 shares at an average price of $17.79.

Investing activities:

During the period ended March 31, 2012, the Company acquired all of the outstanding shares of Primacy Management Inc. for cash consideration of $5,244 of which $4,000 was paid during the second quarter of 2012, net of cash assumed of $188. During the period ended March 31, 2013, the Company paid $400 on account of the earn-out provisions for the first year.

Capital resources:

At March 31, 2013 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 used 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

The Company did not adopt any new accounting policies this quarter.

SELECTED QUARTERLY FINANCIAL DATA

Q2/13 Q1/13 Q4/12 Q3/12 Q2/12 Q1/12 Q4/11 Q3/11
Revenues $ 58,932 $ 57,906 $ 58,137 $ 59,343 $ 61,635 $ 56,813 $ 55,429 $ 58,529
Net earnings $ 3,354 $ 3,401 $ 3,364 $ 3,484 $ 3,669 $ 3,591 $ 3,338 $ 3,451
Net earnings per share
Basic $ 0.44 $ 0.45 $ 0.44 $ 0.45 $ 0.48 $ 0.47 $ 0.43 $ 0.45
Diluted $ 0.44 $ 0.45 $ 0.44 $ 0.45 $ 0.48 $ 0.47 $ 0.43 $ 0.45

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 depended on the impact of the realized sales mix of its various projects.

OUTLOOK

Management believes the Company is well positioned for sustained growth in the long term. The Company operates in markets that will continue to require the services that the Company offers. To further assure itself of a stable source of revenues, the Company will continue to focus on increasing the percentage of its revenues derived from recurring business while pursuing new business in adjacent and non-government markets.

The Systems Engineering Division has been working within a relatively stable satellite sector 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. Custom manufacturing activity levels will continue to be directly dependent upon SED's customers' requirements and some volatility in orders is anticipated. Capital procurements by DND are expected to provide upcoming opportunities, although they are not expected to materialize until next year. 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 in the long term, this department and many others within the federal government will continue to require more support services from private enterprises to supplement their current workforce. However, current cost cutting initiatives in the federal government have already had a negative impact on traditional BTS revenue sources and it is anticipated that the continued roll out of these initiatives could further impact demand, at least in the short term. Management believes that the types of service the division offers will continue to be attractive to government agencies in the long term and the division continues to assess how it can address new markets and seek new opportunities outside of the Federal Government. The acquisition of Primacy Management has bolstered the division's performance and it is expected that Primacy will continue to meet the financial targets established as part of the acquisition.

GUIDANCE

The company's second quarter performance was negatively impacted by the unsettled business environment in which we currently operate and we continue to remain guarded in our expectations for the balance of the year. In particular, the continued manifestation of the federal government's cost cutting initiatives along with the related increase in competitive pressures have further reduced short term expectations for both revenues and profitability. Ultimately, revenues realized will be dependent on the extent and timing of future contract awards as well as customer utilization of existing contracting vehicles. Based on results to date, along with currently available information and our assessment of the marketplace, we expect revenues for fiscal 2013 to be in the range of $230 million to $245 million and net earnings in the range of $1.60 to $1.85 per share.

INTERNAL CONTROLS OVER FINANCIAL REPORTING

During the most recent interim quarter ended March 31, 2013, there have been no changes in the design of the Company's internal controls over financial reporting that have materially affected, or are 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 2013, and with the Management Discussion and Analysis in the 2012 annual report, including the section on risks and opportunities.

FOR FURTHER INFORMATION PLEASE CONTACT:

Contact Information:
Ray Basler
President and Chief Executive Officer
306-931-3425


Jacqueline Gauthier
Chief Financial Officer
613-599-8600

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