SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 6-K
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of: May 2008 Commission File Number: 1-31402
CAE INC.
(Name of Registrant)
8585 Cote de Liesse
Saint-Laurent, Quebec
Canada H4T 1G6
(Address of Principal Executive Offices)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:
Form 20-F Form 40-F X
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): X
Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the SEC pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:
Yes No X
If Yes is marked, indicate the file number assigned to the registrant in connection with Rule 12g3-2(b): N/A
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CAE Inc. | ||||
Date: May 14, 2008 | By: | /s/ Hartland Paterson | ||
| ||||
Name: | Hartland J. Paterson | |||
Title: | Vice President Legal, General Counsel | |||
and Corporate Secretary |
CAE reports fourth quarter and full-year results for fiscal year 2008
Montreal, May 14, 2008 (NYSE: CGT; TSX: CAE) CAE today reported financial results for the fourth quarter and fiscal year ended March 31, 2008. Earnings from continuing operations were $47.0 million ($0.19 per share) this quarter, compared to $35.1 million ($0.14 per share) in the fourth quarter of last year. Earnings from continuing operations for the year were $164.8 million ($0.65 per share) compared to $129.1 million ($0.51 per share) last year. All financial information is in Canadian dollars.
Summary of consolidated results | ||||||||||||||
(millions,except operating | FY2008 | FY2007 | Q4-2008 | Q3-2008 | Q2-2008 | Q1-2008 | Q4-2007 | |||||||
margins) | ||||||||||||||
| ||||||||||||||
Revenue | $ | 1,423.6 | 1,250.7 | 366.6 | 344.8 | 353.9 | 358.3 | 337.3 | ||||||
Earnings before interest | ||||||||||||||
and income taxes | ||||||||||||||
(EBIT) | $ | 251.5 | 189.4 | 69.7 | 61.7 | 62.1 | 58.0 | 53.3 | ||||||
As a % of revenue | % | 17.7 | 15.1 | 19.0 | 17.9 | 17.5 | 16.2 | 15.8 | ||||||
Earnings from | ||||||||||||||
continuing operations | $ | 164.8 | 129.1 | 47.0 | 40.1 | 39.0 | 38.7 | 35.1 | ||||||
Results from | ||||||||||||||
discontinued operations | $ | (12.1 | ) | (1.7 | ) | (11.4 | ) | (0.6 | ) | (0.1 | ) | - | (0.8 | ) |
Net earnings | $ | 152.7 | 127.4 | 35.6 | 39.5 | 38.9 | 38.7 | 34.3 | ||||||
Backlog | $ | 2,899.9 | 2,774.6 | 2,899.9 | 2,710.7 | 2,513.3 | 2,599.5 | 2,774.6 |
Consolidated revenue this quarter was $366.6 million compared to $337.3 million in the fourth quarter last year. Consolidated revenue for the year was $1.424 billion, compared to $1.251 billion in 2007.
Net earnings, including the impact of discontinued operations, were $35.6 million in the fourth quarter and $152.7 million for the year.
Fourth-quarter consolidated earnings before interest and taxes(1) (EBIT) were $69.7 million, or 19.0% of revenue. EBIT for the year was $251.5 million, or 17.7% of revenue compared with $193.1 million last year, or 15.4% of revenue excluding the effect of non-recurring items.
All business segments contributed to our strong performance for the year, said Robert E. Brown, CAEs President and Chief Executive Officer. We have experienced steady growth in revenue, earnings and new order activity in both the military and civil sectors. Our profit margin has improved overall despite the foreign exchange headwind. We continued to make investments in long term growth, while still finishing the year with strong positive free cash flow and a healthy balance sheet. Given our financial strength and balanced market position, we are increasingly confident about our future. We have flexibility to pursue our growth initiatives and at the same time, consider additional
1
means to enhance shareholder value. The Board of Directors has decided to increase CAEs quarterly dividend to $0.03 per share.
Business segment highlights
During the fourth quarter, Training and Services/Civil selected Kuala Lumpur as the location for its Southeast Asian training hub and announced a partnership with AirAsia to develop an aviation centre of excellence. We also signed a contract with the government of India to provide pilot training in two national flight academies. We now have an average of 108 RSEUs (Revenue Simulator Equivalent Units) and we expect a 10% increase by the end of fiscal 2009.
CAE won orders for nine civil full-flight simulators (FFSs) during the fourth quarter, bringing the total number to 37. Since the start of the new fiscal year, we have announced five orders, and we currently expect to receive approximately 34 orders for the year as a whole. As we have done in the past, we intend to update this estimate as the year progresses. Over the year, we continued to lead the industry with the design of prototype simulators, including development of the first full-flight simulators for Embraer Phenom 100 and 300, Boeing 747-8, and China Aviation Industry Corporation I (AVIC I) Advanced Regional Jet 21 (ARJ21) aircraft. Our breakthrough product, the CAE 5000 Series FFS, was certified to Level D and customer training has commenced. In May, we renewed the collective agreement of our Montreal unionized employees for five years.
We were awarded a number of new military contracts this year that totalled $746.1 million, an increase of $16 million from our year-end announcement. We enjoyed strong order growth in the U.S., and signed new contracts with the Australian Defence Forces and the German Armed Forces. The Government of Canada qualified a CAE-led team as the only team compliant for C-130J and CH-47 aircrew training capability that is expected to soon be required by Canada. We received orders to develop military prototype simulators for Alenia Aermacchi, Boeing and Korean Aerospace Industries. We also combined different acquisitions into Presagis, an industry-leading company specializing in COTS modelling and simulation software.
Civil segments
Training & Services/Civil (TS/C)
Financial results | ||||||||
(amounts in millions, except | ||||||||
operating margins, RSEU and | ||||||||
FFSs deployed) | FY2008 | FY2007 | Q4-2008 | Q3-2008 | Q2-2008 | Q1-2008 | Q4-2007 | |
|
||||||||
Revenue | $ | 382.1 | 336.9 | 104.5 | 92.8 | 90.0 | 94.8 | 91.7 |
Segment operating income | $ | 73.5 | 64.3 | 23.8 | 15.5 | 14.6 | 19.6 | 21.3 |
Operating margins | % | 19.2 | 19.1 | 22.8 | 16.7 | 16.2 | 20.7 | 23.2 |
Backlog | $ | 963.3 | 951.6 | 963.3 | 896.1 | 887.5 | 853.4 | 951.6 |
RSEU | 108 | 99 | 110 | 109 | 106 | 105 | 101 | |
FFSs deployed | 124 | 114 | 124 | 123 | 119 | 117 | 114 | |
|
For the fourth quarter, revenue in the TS/C segment increased 14% over the same period last year as a result of strong demand in our training centres and the addition of nine Revenue Simulator Equivalent Units (RSEUs) to our training network. For the year, revenue grew by 13% to reach $382.1 million, despite the appreciation of the Canadian dollar.
Segment operating income was $23.8 million (22.8% of revenue) in the fourth quarter, compared to $15.5 million (16.7% of revenue) last quarter and $21.3 million (23.2% of revenue) in the fourth quarter last year. The year-over-year increase is due to a strong demand and performance across our
2
training centres, a gain of $0.5 million from the disposal of one FFS and the appreciation of the Canadian dollar against the euro and the U.S. dollar. The segment operating income increased by $2.5 million over the same period last year despite one-time gains amounting to $2.4 million, recognized in the fourth quarter of last year.
For the year, segment operating income increased 14% to $73.5 million (19.2% of revenue), compared to $64.3 million (19.1% of revenue) last year.
New orders for the year totalled $452.5 million, and segment backlog reached $963.3 million at the end of the year. The book-to-sales ratio was 1.2x.
Simulation Products/Civil (SP/C) | ||||||||
Financial results | ||||||||
(amounts in millions, except | ||||||||
operating margins) | FY2008 | FY2007 | Q4-2008 | Q3-2008 | Q2-2008 | Q1-2008 | Q4-2007 | |
|
||||||||
Revenue | $ | 435.3 | 348.1 | 106.5 | 103.5 | 112.3 | 113.0 | 97.6 |
Segment operating income | $ | 94.9 | 60.4 | 23.8 | 25.2 | 26.2 | 19.7 | 15.3 |
Operating margins | % | 21.8 | 17.4 | 22.3 | 24.3 | 23.3 | 17.4 | 15.7 |
Backlog | $ | 381.8 | 352.8 | 381.8 | 388.7 | 373.3 | 413.3 | 352.8 |
|
Revenue in the SP/C segment was $106.5 million during the fourth quarter, up by 9% over the same period last year. Revenue for the year reached $435.3 million, an increase of 25% over the prior year. The benefits from the higher level of activity during the year were partially offset by the appreciation of the Canadian dollar.
Segment operating income was $23.8 million (22.3% of revenue) in the fourth quarter, up by 56% over the same period last year. The increase is the result of higher volume, improved program execution and lower costs.
For the year, segment operating income increased 57% to $94.9 million (21.8% of revenue), which reflects positive sustained cost performance and strong volume.
During the year, we received orders for 37 civil FFSs. Orders for the year totalled $466.9 million, and segment backlog reached $381.8 million at the end of the year.
Military segments
Combined revenue in the fourth quarter for the Military business as a whole was $155.6 million and combined operating income was $22.1 million, resulting in an operating margin of 14.2% .
Combined revenue for the year was $606.2 million and combined operating income was $83.1 million, resulting in an operating margin of 13.7% .
Combined new orders totaled $746.1 million, up 25% compared to $595.8 million booked in fiscal 2007. For the year, the book-to-sales ratio was 1.2x.
Military results in the fourth quarter were impacted by the negotiation of a customers contract change order, which included the alignment of the contract currency with the customers currency. The resulting gain was partially offset by charges that we incurred by cost reduction initiatives through the reorganization of our military operations. Overall, these two events resulted in a net $3 million gain.
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Simulation Products/Military (SP/M) | ||||||||
Financial results | ||||||||
(amounts in millions, except | ||||||||
operating margins) | FY2008 | FY2007 | Q4-2008 | Q3-2008 | Q2-2008 | Q1-2008 | Q4-2007 | |
|
||||||||
Revenue | $ | 383.7 | 357.5 | 101.5 | 89.6 | 97.1 | 95.5 | 92.2 |
Segment operating income | $ | 51.7 | 39.1 | 14.5 | 11.5 | 13.4 | 12.3 | 9.5 |
Operating margins | % | 13.5 | 10.9 | 14.3 | 12.8 | 13.8 | 12.9 | 10.3 |
Backlog | $ | 765.1 | 635.8 | 765.1 | 704.4 | 535.3 | 560.5 | 635.8 |
|
Revenue in the SP/M segment was $101.5 million for the fourth quarter, up by 10% over the same period last year. Higher activity on some European programs and the depreciation of the Canadian dollar during the comparable quarter contributed to this increase. Revenue was $383.7 million for the year. The 7% increase over fiscal 2007 stems mainly from higher activity in the U.S., which was partially offset by a stronger Canadian dollar for the year as a whole.
Segment operating income this quarter was $14.5 million (14.3% of revenue), up 53% year over year. This increase is partially due to a gain on a customers contract change order, which was partially offset by charges arising from the reorganization of our global military operations.
Segment operating income for the year was $51.7 million (13.5% of revenue), up 32% year over year. Increased activity in the U.S., lower expenditures and a favourable program mix all contributed to the improved performance.
New orders for the year totalled $530.0 million and segment backlog reached $765.1 million at the end of the year, for a book-to-sales ratio of 1.4x.
Training & Services/Military (TS/M) | ||||||||
Financial results | ||||||||
(amounts in millions, except | ||||||||
operating margins) | FY2008 | FY2007 | Q4-2008 | Q3-2008 | Q2-2008 | Q1-2008 | Q4-2007 | |
|
||||||||
Revenue | $ | 222.5 | 208.2 | 54.1 | 58.9 | 54.5 | 55.0 | 55.8 |
Segment operating income | $ | 31.4 | 33.7 | 7.6 | 9.5 | 7.9 | 6.4 | 6.1 |
Operating margins | % | 14.1 | 16.2 | 14.0 | 16.1 | 14.5 | 11.6 | 10.9 |
Backlog | $ | 789.7 | 834.4 | 789.7 | 721.5 | 717.2 | 772.3 | 834.4 |
|
Revenue in the TS/M segment was $54.1 million for the fourth quarter, down by 3% over the same period last year. The decrease is mainly due to the stronger Canadian dollar, partially offset by higher training and service activities in the U.S.
Revenue for the year in the TS/M segment was $222.5 million, up by 7% over last year.
Segment operating income was $7.6 million this quarter, up 25% from the same period last year. Segment operating income was impacted by charges from the reorganization of our global military operations.
Segment operating income for the year was $31.4 million, down from $33.7 million last year. The decrease is mainly the result of a release of claims payment related to AVTS during the first quarter of fiscal 2007. Excluding this item, segment operating income would have been $2.1 million higher than last year.
New orders this year totalled $216.1 million and segment backlog reached $789.7 million at the end of the year. The book-to-sales ratio was 1.0x.
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Cash flow and financial position
This year we generated $260.9 million of net cash provided by continuing operations. We invested $189.5 million in capital expenditures, and received $137.7 million in non-recourse financing. As a result, we generated free cash flow(2) of $173.4 million.
Net debt(3) was $124.1 million at March 31, 2008, a reduction of $8.9 million from last year.
CAE will pay an increased dividend of $0.03 per share on June 30, 2008 to shareholders of record at the close of business on June 13, 2008.
Additional consolidated financial results
Discontinued operations
We realized a net loss of $12.1 million this year from discontinued operations: we wrote off a balance receivable of $10.0 million ($8.5 million net of tax recovery) related to the disposal of the sawmill division of CAEs discontinued Forestry Systems unit. The sale of these assets was concluded during fiscal year 2003. The dispute for further payment was in arbitration. The arbitration ceased mid-way in April 2008 when the buyer was the subject of a petition for receivership and was understood to be insolvent. We incurred an additional loss of $2.2 million (net of tax recovery) from discontinued operations related to the divestiture of a non-core telecommunications operation in Germany.
Backlog
The consolidated backlog was $2.900 billion at the end of this year, compared to $2.775 billion at the end of last year. New orders of $1.666 billion were added to backlog, offset by $1.424 billion in revenue generated from backlog and a decrease of $117 million as a result of foreign exchange movements.
Capital expenditures
Capital expenditures for the year were $189.5 million and we expect that total capital expenditures will be at a similar level in fiscal 2009.
Income taxes
Income taxes were $69.2 million this year, representing an effective tax rate of 30%. We expect the effective income tax rate for fiscal 2009 to remain approximately 30%.
You will find a more detailed discussion of our results by segment in the Managements Discussion and Analysis (MD&A) as well as in our consolidated financial statements which are posted on our website at www.cae.com/Q4FY08.
Conference call
CAE will host a conference call today at 1:00 p.m. EST for analysts, institutional investors and the media. North American participants can listen to the conference by dialing +1-866-540-8136 or +1-514-868-1042. Overseas participants can dial +800-6578-9868 or +1-514-868-1042. The conference call will also be audio Webcast live for the public at www.cae.com.
CAE is a world leader in providing simulation and modelling technologies and integrated training solutions for the civil aviation industry and defence forces around the globe. With annual revenues exceeding C$1 billion, CAE employs approximately 6,000 people at more than 75 sites and training locations in 20 countries. We have the largest installed base of civil and military full-flight simulators
5
and training devices. More than 75,000 crewmembers train yearly in our global network of 27 civil aviation and military training centres. We also offer modelling and simulation software to various market segments and through CAEs professional services division, we assist customers with a wide range of simulation-based needs.
Certain statements made in this news release, including, but not limited to, statements that are not historical facts, are forward-looking and are subject to important risks, uncertainties and assumptions. The results or events predicted in these forward-looking statements may differ materially from actual results or events. These statements do not reflect the potential impact of any non-recurring or other special items or events that are announced or completed after the date of this news release, including mergers, acquisitions, or other business combinations and divestitures.
You will find more information about the risks and uncertainties associated with our business in the MD&A section of our annual report and annual information form for the year ended March 31, 2007. These documents have been filed with the Canadian securities commissions and are available on our website (www.cae.com), on SEDAR (www.sedar.com) and a free copy is available upon request to CAE. They have also been filed with the U.S. Securities and Exchange Commission under Form 40-F and are available on EDGAR (www.sec.gov). You will also find on our web site the English MD&A for the fiscal year 2008. The forward-looking statements contained in this news release represent our expectations as of May 14, 2008 and, accordingly, are subject to change after this date.
We do not update or revise forward-looking information even if new information becomes available unless legislation requires us to do so. You should not place undue reliance on forward-looking statements.
Notes
(1) Earnings before interest and taxes (EBIT) is a non-GAAP measure that shows us how we have performed before the effects of certain financing decisions and tax structures. We track EBIT because we believe it makes it easier to compare our performance with previous periods, and with companies and industries that do not have the same capital structure or tax laws.
(2) Free cash flow is a non-GAAP measure that tells us how much cash we have available to build the business, repay debt and meet ongoing financial obligations. We use it as an indicator of our financial strength and liquidity. We calculate it by taking the net cash generated by our continuing operating activities, subtracting all capital expenditures (including growth capital expenditures and capitalized costs) and dividends paid, and then adding the proceeds from sale and leaseback arrangements and other asset-specific financing (including non-recourse debt). Dividends are deducted in the calculation of free cash flow because we consider them an obligation, like interest on debt, which means that amount is not available for other uses.
(3) Net debt is a non-GAAP measure we use to monitor how much debt we have after taking into account liquid assets such as cash and cash equivalents. We use it as an indicator of our overall financial position, and calculate it by taking our total long-term debt (debt that matures in more than one year), including the current portion, and subtracting cash and cash equivalents.
Media contact:
Nathalie Bourque, Vice President, Public Affairs and Global Communications, (514) 734-5788, nathalie.bourque@cae.com
Investor relations:
Andrew Arnovitz, Vice President, Investor Relations and Strategy, (514) 734-5760, andrew.arnovitz@cae.com
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Consolidated Balance Sheets | ||||||
(Unaudited) | ||||||
As at March 31 (amounts in millions of Canadian dollars) | 2008 | 2007 | ||||
| ||||||
Assets | ||||||
Current assets | ||||||
Cash and cash equivalents | $ | 255.7 | $ | 150.2 | ||
Accounts receivable | 255.0 | 219.8 | ||||
Inventories | 229.9 | 203.8 | ||||
Prepaid expenses | 32.7 | 23.5 | ||||
Income taxes recoverable | 39.0 | 24.7 | ||||
Future income taxes | 14.1 | 3.7 | ||||
| ||||||
826.4 | 625.7 | |||||
Property, plant and equipment, net | 1,046.8 | 986.6 | ||||
Future income taxes | 64.3 | 81.5 | ||||
Intangible assets | 62.0 | 36.0 | ||||
Goodwill | 115.5 | 96.9 | ||||
Other assets | 138.2 | 129.5 | ||||
| ||||||
$ | 2,253.2 | $ | 1,956.2 | |||
| ||||||
Liabilities and Shareholders Equity | ||||||
Current liabilities | ||||||
Accounts payable and accrued liabilities | $ | 482.7 | $ | 403.9 | ||
Deposits on contracts | 209.3 | 184.8 | ||||
Current portion of long-term debt | 27.3 | 27.2 | ||||
Future income taxes | 16.8 | 4.9 | ||||
| ||||||
736.1 | 620.8 | |||||
Long-term debt | 352.5 | 256.0 | ||||
Deferred gains and other long-term liabilities | 184.9 | 232.7 | ||||
Future income taxes | 31.2 | 16.8 | ||||
| ||||||
1,304.7 | 1,126.3 | |||||
| ||||||
Shareholders Equity | ||||||
Capital stock | 418.9 | 401.7 | ||||
Contributed surplus | 8.3 | 5.7 | ||||
Retained earnings | 644.5 | 510.2 | ||||
Accumulated other comprehensive loss | (123.2 | ) | (87.7 | ) | ||
| ||||||
948.5 | 829.9 | |||||
| ||||||
$ | 2,253.2 | $ | 1,956.2 | |||
|
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Consolidated Statements of Earnings | |||||||||||||
Three months ended | Twelve months ended | ||||||||||||
(Unaudited) | March 31 | March 31 | |||||||||||
((amounts in millions of Canadian dollars, except per share amounts) | 2008 | 2007 | 2008 | 2007 | |||||||||
| |||||||||||||
Revenue | $ | 366.6 | $ | 337.3 | $ | 1,423.6 | $ | $1,250.7 | |||||
| |||||||||||||
Earnings before interest and income taxes | $ | 69.7 | $ | 53.3 | $ | 251.5 | $ | 189.4 | |||||
Interest expense, net | 4.7 | 3.5 | 17.5 | 10.6 | |||||||||
| |||||||||||||
Earnings before income taxes | $ | 65.0 | $ | 49.8 | $ | 234.0 | $ | 178.8 | |||||
Income tax expense | 18.0 | 14.7 | 69.2 | 49.7 | |||||||||
| |||||||||||||
Earnings from continuing operations | $ | 47.0 | $ | 35.1 | $ | 164.8 | $ | 129.1 | |||||
Results of discontinued operations | (11.4 | ) | (0.8 | ) | (12.1) | (1.7 | ) | ||||||
| |||||||||||||
Net earnings | $ | 35.6 | $ | 34.3 | $ | 152.7 | $ | 127.4 | |||||
| |||||||||||||
Basic earnings per share from continuing operations | $ | 0.19 | $ | 0.14 | $ | 0.65 | $ | 0.51 | |||||
| |||||||||||||
Diluted earnings per share from continuing operations | $ | 0.18 | $ | 0.14 | $ | 0.65 | $ | 0.51 | |||||
| |||||||||||||
Basic earnings per share | $ | 0.14 | $ | 0.14 | $ | 0.60 | $ | 0.51 | |||||
| |||||||||||||
Diluted earnings per share | $ | 0.14 | $ | 0.14 | $ | 0.60 | $ | 0.50 | |||||
| |||||||||||||
Weighted average number of shares outstanding (basic) | 253.9 | 251.4 | 253.4 | 251.1 | |||||||||
| |||||||||||||
Weighted average number of shares outstanding (diluted) | 254.9 | 253.7 | 254.6 | 253.0 | |||||||||
| |||||||||||||
Consolidated Statements of Retained Earnings | |||||||||||||
Three months ended | Twelve months ended | ||||||||||||
(Unaudited) | March 31 | March 31 | |||||||||||
(amounts in millions of Canadian dollars) | 2008 | 2007 | 2008 | 2007 | |||||||||
| |||||||||||||
Retained earnings at beginning of period | $ | 611.4 | $ | 478.4 | $ | 510.2 | $ | 392.8 | |||||
Transition adjustments Financial instruments | - | - | (8.3 | ) | - | ||||||||
Net earnings | 35.6 | 34.3 | 152.7 | 127.4 | |||||||||
Dividends | (2.5 | ) | (2.5 | ) | (10.1 | ) | (10.0 | ) | |||||
| |||||||||||||
Retained earnings at end of period | $ | 644.5 | $ | 510.2 | $ | 644.5 | $ | 510.2 | |||||
|
8
Consolidated Statements of Comprehensive Income | |||||||||||||
Three months ended | Twelve months ended | ||||||||||||
(Unaudited) | March 31 | March 31 | |||||||||||
(amounts in millions of Canadian dollars) | 2008 | 2007 | 2008 | 2007 | |||||||||
| |||||||||||||
Net earnings | $ | 35.6 | $ | 34.3 | $ | 152.7 | $ | 127.4 | |||||
| |||||||||||||
Other comprehensive (loss) income, net of income | |||||||||||||
taxes: | |||||||||||||
Foreign Currency Translation Adjustment | |||||||||||||
Net foreign exchange gains (losses) on translation | |||||||||||||
of financial statements of self-sustaining | |||||||||||||
foreign operations | 63.7 | (3.0 | ) | (50.2 | ) | 26.1 | |||||||
Net change in (losses) gains on certain long-term | |||||||||||||
debt denominated in foreign currency and | |||||||||||||
designated as hedges on net investments of | |||||||||||||
self-sustaining foreign operations | (1.3 | ) | 1.3 | 15.7 | 1.5 | ||||||||
Income tax adjustment | (1.2 | ) | - | (0.6 | ) | (0.1 | ) | ||||||
| |||||||||||||
61.2 | (1.7 | ) | (35.1 | ) | 27.5 | ||||||||
| |||||||||||||
Net Changes in Cash Flow Hedge | |||||||||||||
Net change in (losses) gains on derivative items | |||||||||||||
designated as hedges of cash flows | (14.1 | ) | - | 29.7 | - | ||||||||
Reclassifications to income or to the related | |||||||||||||
non-financial assets or liabilities | (6.3 | ) | - | (25.2 | ) | - | |||||||
Income tax adjustment | 6.6 | - | (1.4 | ) | - | ||||||||
| |||||||||||||
(13.8 | ) | - | 3.1 | - | |||||||||
|
|
|
| ||||||||||
Total other comprehensive income (loss) | 47.4 | (1.7 | ) | (32.0 | ) | 27.5 | |||||||
| |||||||||||||
Comprehensive income | $ | 83.0 | $ | 32.6 | $ | 120.7 | $ | 154.9 | |||||
|
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Consolidated Statements of Cash Flows | ||||||||||||
Twelve months | ||||||||||||
Three months ended | ended | |||||||||||
March 31 | ||||||||||||
(Unaudited) | March 31 | |||||||||||
(amounts in millions of Canadian dollars) | 2008 | 2007 | 2008 | 2007 | ||||||||
|
||||||||||||
Operating activities | ||||||||||||
Net earnings | $ | 35.6 | $ | 34.3 | $ | 152.7 | $ | 127.4 | ||||
Results of discontinued operations | 11.4 | 0.8 | 12.1 | 1.7 | ||||||||
|
||||||||||||
Earnings from continuing operations | 47.0 | 35.1 | 164.8 | 129.1 | ||||||||
Adjustments to reconcile earnings to cash flows from operating activities: | ||||||||||||
Depreciation | 15.1 | 14.6 | 60.6 | 55.0 | ||||||||
Financing cost amortization | 0.2 | 0.2 | 0.8 | 0.8 | ||||||||
Amortization and write down of intangible and other | ||||||||||||
assets | 4.2 | 5.2 | 16.9 | 15.8 | ||||||||
Future income taxes | (3.7 | ) | (25.6 | ) | 26.4 | (14.2 | ) | |||||
Investment tax credits | 5.6 | 13.8 | 15.4 | 19.3 | ||||||||
Stock-based compensation plans | (1.1 | ) | 10.2 | (0.8 | ) | 24.6 | ||||||
Employee future benefits, net | 0.4 | (0.4 | ) | 0.1 | (0.9 | ) | ||||||
Other | (10.0 | ) | (7.6 | ) | (7.6 | ) | (10.4 | ) | ||||
Changes in non-cash working capital | 73.2 | 46.7 | (15.7 | ) | 20.2 | |||||||
|
||||||||||||
Net cash provided by operating activities | 130.9 | 92.2 | 260.9 | 239.3 | ||||||||
|
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Investing activities | ||||||||||||
Business acquisitions (net of cash and cash equivalents acquired) | (1.1 | ) | 0.5 | (41.8 | ) | (4.4 | ) | |||||
Proceeds from disposal of discontinued operations (net of cash and | ||||||||||||
cash equivalents disposed) | - | 2.8 | - | (3.8 | ) | |||||||
Capital expenditures | (48.3 | ) | (33.8 | ) | (189.5 | ) | (158.1 | ) | ||||
Deferred development costs | (2.6 | ) | (2.7 | ) | (16.5 | ) | (3.0 | ) | ||||
Deferred pre-operating costs | (3.0 | ) | (3.2 | ) | (3.9 | ) | (5.9 | ) | ||||
Other | (1.2 | ) | (5.5 | ) | (5.5 | ) | (2.9 | ) | ||||
|
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Net cash used in investing activities | (56.2 | ) | (41.9 | ) | (257.2 | ) | (178.1 | ) | ||||
|
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Financing activities | ||||||||||||
Net borrowing under revolving unsecured credit facilities | (30.0 | ) | - | - | (0.6 | ) | ||||||
Proceeds from long-term debt, net of transaction costs and | ||||||||||||
debt basis adjustment | 16.0 | 13.3 | 141.1 | 45.8 | ||||||||
Reimbursement of long-term debt | (16.5 | ) | (28.6 | ) | (37.4 | ) | (39.8 | ) | ||||
Dividends paid | (2.4 | ) | (2.5 | ) | (9.8 | ) | (9.8 | ) | ||||
Common stock issuance | 0.2 | 6.4 | 13.9 | 10.0 | ||||||||
Other | (0.1 | ) | (1.1 | ) | (5.9 | ) | (2.1 | ) | ||||
|
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Net cash (used in) provided by financing activities | (32.8 | ) | (12.5 | ) | 101.9 | 3.5 | ||||||
|
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Effect of foreign exchange rate changes on cash and cash | ||||||||||||
equivalents | 12.8 | (0.5 | ) | (0.1 | ) | 4.4 | ||||||
|
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Net increase in cash and cash equivalents | 54.7 | 37.3 | 105.5 | 69.1 | ||||||||
Cash and cash equivalents at beginning of period | 201.0 | 112.9 | 150.2 | 81.1 | ||||||||
|
||||||||||||
Cash and cash equivalents at end of period | $ | 255.7 | $ | 150.2 | $ | 255.7 | $ | 150.2 | ||||
|
10
Fourth quarter report 2008
Managements discussion and analysis for the fourth quarter and year ended March 31, 2008
May 14, 2008
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
1 | . | HIGHLIGHTS | 3 | |
2 | . | INTRODUCTION | 7 | |
3 | . | ABOUT CAE | 8 | |
3.1 | WHO WE ARE | 8 | ||
3.2 | OUR VISION | 9 | ||
3.3 | OUR STRATEGY AND KEY PERFORMANCE DRIVERS | 9 | ||
3.4 | CAPABILITY TO EXECUTE STRATEGY AND DELIVER RESULTS | 13 | ||
3.5 | OUR OPERATIONS | 13 | ||
3.6 | FOREIGN EXCHANGE | 17 | ||
3.7 | NON-GAAP AND OTHER FINANCIAL MEASURES | 19 | ||
4 | . | CONSOLIDATED RESULTS | 22 | |
4.1 | RESULTS OF OUR OPERATIONS FOURTH QUARTER OF FISCAL 2008 | 22 | ||
4.2 | RESULTS OF OUR OPERATIONS FISCAL 2008 | 24 | ||
4.3 | RESULTS OF OUR OPERATIONS FISCAL 2007 VS FISCAL 2006 | 27 | ||
4.4 | EARNINGS EXCLUDING NON-RECURRING ITEMS | 28 | ||
4.5 | GOVERNMENT COST-SHARING | 32 | ||
4.6 | CONSOLIDATED ORDERS AND BACKLOG | 33 | ||
5 | . | RESULTS BY SEGMENT | 34 | |
5.1 | CIVIL SEGMENTS | 35 | ||
5.2 | MILITARY SEGMENTS | 40 | ||
6 | . | CONSOLIDATED CASH MOVEMENTS AND LIQUIDITY | 44 | |
6.1 | CONSOLIDATED CASH MOVEMENTS | 45 | ||
6.2 | SOURCES OF LIQUIDITY | 46 | ||
6.3 | CONTRACTUAL OBLIGATIONS | 47 | ||
7 | . | CONSOLIDATED FINANCIAL POSITION | 48 | |
7.1 | CONSOLIDATED CAPITAL EMPLOYED | 48 | ||
7.2 | VARIABLE INTEREST ENTITIES | 51 | ||
7.3 | OFF BALANCE SHEET ARRANGEMENTS | 52 | ||
7.4 | FINANCIAL INSTRUMENTS | 53 | ||
8 | . | ACQUISITIONS, BUSINESS COMBINATIONS AND DIVESTITURES | 55 | |
8.1 | ACQUISITIONS | 55 | ||
8.2 | DISCONTINUED OPERATIONS | 55 | ||
9 | . | BUSINESS RISK AND UNCERTAINTY | 57 | |
10 | . | CHANGES IN ACCOUNTING STANDARDS | 61 | |
10.1 | SIGNIFICANT CHANGES IN ACCOUNTING STANDARDS FISCAL 2006 TO 2008 | 61 | ||
10.2 | FUTURE CHANGES IN ACCOUNTING STANDARDS | 63 | ||
10.3 | CRITICAL ACCOUNTING ESTIMATES | 64 | ||
11 | . | SUBSEQUENT EVENT | 68 | |
12 | . | CONTROLS AND PROCEDURES | 69 | |
12.1 | EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES | 69 | ||
12.2 | INTERNAL CONTROL OVER FINANCIAL REPORTING | 69 | ||
13 | . | OVERSIGHT ROLE OF AUDIT COMMITTEE AND BOARD OF DIRECTORS | 69 | |
14 | . | ADDITIONAL INFORMATION | 70 | |
15 | . | SELECTED FINANCIAL INFORMATION | 70 |
2
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
1. HIGHLIGHTS
FINANCIAL
FOURTH QUARTER OF FISCAL 2008
Higher revenue over last quarter and year over year
· | Consolidated revenue was $366.6 million this quarter, $21.8 million higher than last quarter and $29.3 million higher than the same quarter last year. |
Higher earnings and earnings per share from continuing operations over last quarter and year over year
· | Earnings from continuing operations were $47.0 million (or $0.19 per share) this quarter, compared to $40.1 million (or $0.16 per share) last quarter, and $35.1 million (or $0.14 per share) in the fourth quarter of last year. |
Positive free cash flow1 at $89.4 million
· | Net cash provided by continuing operations was $130.9 million this quarter, including a positive impact from non-cash working capital accounts as it is normally the case for the fourth quarter of the year. Net cash provided by continuing operations was $61.0 million last quarter and $92.2 million in the fourth quarter of last year; |
· | Capital expenditures were $48.3 million this quarter, compared to $21.1 million last quarter and $33.8 million in the fourth quarter of last year; |
· | Non-recourse financing2 of $16.0 million was raised this quarter. |
FISCAL 2008
Higher revenue year over year
· Consolidated revenue was $1,423.6 million this year, $172.9 million or 14% higher than last year.
Higher earnings, net earnings and earnings per share
· | Earnings from continuing operations were $164.8 million (or $0.65 per share) this year, compared to $129.1 million (or $0.51 per share) last year; |
· | Net earnings higher than last year by $25.3 million or 20%, despite a loss from discontinued operations of $12.1 million. |
Positive free cash flow at $173.4 million
· | Net cash provided by continuing operations was $260.9 million this year, compared to $239.3 million last year; |
· | Capital expenditures were $189.5 million this year, compared to $158.1 million last year; |
· | Non-recourse financing of $137.7 million this year, compared to $34.0 million last year. |
1 Non-GAAP measure (see Section 3.7) .
2 Non-GAAP measure (see Section 3.7) .
3
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
Capital employed3 is higher in support of our growth initiatives
· | Capital employed increased by 11% or $109.7 million this year, ending at $1,072.6 million; |
· | Property, plant and equipment and other assets increased by $96.3 million; |
· | Non-cash working capital decreased by $20.0 million in fiscal 2008, ending at negative $138.1 million; |
· | Net debt4 decreased by $8.9 million this year, ending at $124.1 million. |
ORDERS
· | Total order intake was $1,665.5 million, up 14% over last year; |
· | Total backlog5 was $2,899.9 million as at March 31, 2008, 5% higher than last year. |
Civil segments
Training & Services/Civil awarded over $450 million in contracts
· | Signed a 20-year agreement to become an authorized training provider for the Bombardier Global Express aircraft, Global 5000 aircraft, Global Express XRS aircraft and Bombardier Challenger 300 aircraft; |
· | Signed a five-year contract with Flight Options to become the exclusive provider for all Flight Options maintenance technician training until 2012; |
· | Signed a series of contracts with Air Canada granting us responsibility over the airlines Toronto and Vancouver centres for training centre operation services; |
· | Signed a contract with first-time customer Mooney Airplane Company, to develop a series of web-based maintenance training modules; |
· | Signed a five-year agreement with Hawker Pacific to provide maintenance training for Hawker Pacific and its clients within the Southeast Asia region; |
· | Signed a three-year contract with Global Vectra Helicorp for helicopter training as well as a training contract with United Arab Emirates Empire Aviation Group and Prestige Jet for business jet training at the Emirates-CAE Flight Training Centre (ECFT); |
· | Signed a contract valued at more than $50 million over the next 10 years with AirAsia which gives CAE the responsibility of managing the pilot training for all of AirAsias current and future pilots; |
· | Signed a five-year contract with Dassault Falcon Jet as a preferred provider for maintenance training for Dassault employees; |
· | Signed a five-year contract with first-time customer Sentient, to exclusively cover the expansion which resulted from Sentients acquisition of TAG USA; |
· | Signed a five-year contract with XOJET, to support the renewal of their exclusive contract with Citation X training. |
3 Non-GAAP measure (see Section 3.7) .
4 Non-GAAP measure (see Section 3.7) .
5 Non-GAAP measure (see Section 3.7) .
4
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
Simulation Products/Civil won over $460 million of orders including 37 full-flight simulators (FFSs)
A320 FFSs
· | One to Ansett Flight Simulator Centre; |
· | One to Air France; |
· | One to Etihad Airways; |
· | Two to US Airways; |
· | One to Lufthansa Flight Training. |
B737 FFSs
· | One to Lion Air; |
· | One to Virgin Blue; |
· | One to Air Algérie; |
· | One to Alteon Training; |
· | One B737 FFS CAE 5000 Series to Qantas; |
· | Two B737-800 FFSs to Xiamen Airlines. |
B747 (400 and 8 models) FFSs
· | One to Nippon Cargo Airlines; |
· | One to Cargolux International Airlines; |
· | One to Alteon Training; |
· | One to Lufthansa Flight Training. |
B777 FFSs
· | One to Emirates; |
· | One to Virgin Blue; |
· | One to Delta Airlines. |
B787 FFSs
· | Two to Japan Airlines; |
· | One to Continental Airlines. |
A330/340 FFSs
· | One A330/340 FFS to the Federal Aviation Administration (FAA); |
· | One A330 FFS to US Airways; |
· | One A330 FFS to an undisclosed international airline customer. |
Other
· | One Embraer 190 FFS to Flight Training Finance; |
· | Two B757 FFSs to an undisclosed customer; |
· | One Embraer 145 FFS to Hainan Airlines; |
· | One undisclosed FFS platform to Alteon Training; |
· | Two Phenom 100 FFSs CAE 5000 Series to the Embraer CAE Training Services joint venture; |
· | One EMB-190 FFS to Hainan Airlines; |
· | One Bombardier Global Express FFS to ECFT; |
· | One Dash 8 Q400 FFS CAE 5000 series to Lufthansa Flight Training; |
· | One Hawker Beechcraft FFS CAE 5000 series to ECFT. |
5
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
Military segments
Simulation Products/Military won orders for $530 million for new training systems and upgrades
· | Two MRH90 full flight and mission simulators (FFMSs) and training facilities for the Australian Defence Forces; |
· | One C-130H and one KDC-10 full mission simulators (FMSs) for the Royal Netherlands Air Force; |
· | One S-70B Seahawk and one AS332 Super Puma helicopter simulators for the Republic of Singapore Air Force; |
· | One prototype M-346 flight training device (FTD) to provide the Initial Training Capability for Alenia Aermacchis new M-346 advanced lead-in fighter trainer aircraft; |
· | One NH90 full mission simulator (FMS) for the French Air Force. The contract was awarded to Helicopter Training Media International, a joint venture in which CAE holds 50% ownership; |
· | One handling qualities simulator to Korean Aerospace Industries (KAI); |
· | Increased scope for the integration of the Eurofighter full mission simulator and cockpit trainer; |
· | One MH-60R tactical operational flight trainer (TOFT) for the U.S. Navy; |
· | One MH-60S operational flight trainer (OFT) for the U.S. Navy; |
· | One MH-60S OFT and one MH-60S weapons tactics trainer (WTT) for the U.S. Navy; |
· | One prototype P-8A OFT for Boeings new P-8A Poseidon maritime patrol and anti-submarine warfare aircraft; |
· | Concurrency upgrades on the C-130J and KC-130J simulators operated by the U.S. Air Force, U.S. Marine Corps and U.K. Royal Air Force; |
· | Modification of two CH-53 simulators for the German Army Aviation School in Bueckeburg; |
· | Software upgrade for the C-130J device suite provided to the British Royal Air Force; |
· | Software upgrade for the U.S. Air Force C-130J device suite; |
· | Upgrades for the U.S. Navys MH-60S and P-3C OFTs. |
Training & Services/Military awarded contracts for more than $210 million
· | Continuation of avionics software upgrades, integrated logistics support and data management services for the Canadian Forces CF-18 aircraft; |
· | Contractor logistics and maintenance support for the LASAR and MH47 devices provided to the U.S. Special Forces Operations; |
· | Maintenance and support services for the Royal Netherlands Air Forces C-130H and KDC-10 full mission simulators; |
· | Maintenance and support services for the NATO Airborne Early Warning and Control Forces E3A AWACS simulator, located in Europe; |
· | Simulator maintenance and support services to the 160th Special Operation Aviation Regiment Airborne for the U.S. Army; |
· | Contractor logistics, engineering maintenance, pilot instruction, courseware development and training system support for the C-130J for the U.S. Air Force. |
ACQUISITIONS AND JOINT VENTURES
· | Integration into our results of Engenuity Technologies Inc. (Engenuity) acquired as of April 13, 2007. Engenuity develops commercial-off-the-shelf (COTS) simulation and visualization software for the aerospace and defence markets; |
6
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
· | Integration into our results of MultiGen-Paradigm Inc. (Multigen) acquired as of May 10, 2007. MultiGen is a supplier of real-time COTS software for creating and visualizing solutions and creates industry standard visual simulation file formats; |
· | Integration into our results of 76% of the outstanding shares of Macmet Technologies Limited (Macmet) acquired as of July 11, 2007. Macmet is a company based in Bangalore, India which assembles, repairs and upgrades flight simulators, tank and gunnery trainers, as well as develops software required for simulations; |
· | Integration into our results of Flightscape Inc. (Flightscape) acquired as of August 29, 2007. Flightscape provides expertise in flight data analysis and flight sciences and develops software solutions that enable the effective study and understanding of recorded flight data to improve safety, maintenance and flight operations. |
2. INTRODUCTION
In this report, we, us, our, CAE and company refer to CAE Inc. and its subsidiaries. Unless we have indicated otherwise:
· | This year and 2008 mean the fiscal year ending March 31, 2008; |
· | Last year, prior year and a year ago mean the fiscal year ended March 31, 2007; |
· | Dollar amounts are in Canadian dollars. |
This report was prepared as of May 14, 2008, and includes our managements discussion and analysis (MD&A), consolidated financial statements and notes for the year and the three-month period ended March 31, 2008. We have written it to help you understand our business, performance and financial condition for fiscal 2008. Except as otherwise indicated, all financial information has been reported according to Canadian generally accepted accounting principles (GAAP).
For additional information, please refer to our annual consolidated financial statements for this fiscal year, which you will find in this annual report for the year ended March 31, 2008. The MD&A provides you with a view of CAE as seen through the eyes of management and helps you understand the company from a variety of perspectives:
· | Our vision, our strategy and key performance drivers; |
· | Our operations; |
· | Foreign exchange; |
· | Financial measures; |
· | Acquisitions, business combinations and divestitures; |
· | Business risk and uncertainty; |
· | Controls and procedures; |
· | The oversight role of the Audit Committee and Board of Directors. |
You will find our most recent annual report and annual information form (AIF) on our website at www.cae.com, on SEDAR at www.sedar.com or on EDGAR at www.sec.gov.
7
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
ABOUT MATERIAL INFORMATION
This report includes the information we believe is material to investors after considering all circumstances, including potential market sensitivity. We consider something to be material if:
· | It results in, or would reasonably be expected to result in, a significant change in the market price or value of our shares, or; |
· | It is quite likely that a reasonable investor would consider the information to be important in making an investment decision. |
ABOUT FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements about our markets, future financial performance, business strategy, plans, goals and objectives. Forward-looking statements normally contain words like believe, expect, anticipate, intend, continue, estimate, may, will, should and similar expressions.
We have based these statements on estimates and assumptions that we believed were reasonable when the statements were prepared. Our actual results could be substantially different because of the risks and uncertainties associated with our business, or because of events that are announced or completed after the date of this report, including mergers, acquisitions, other business combinations and divestitures. You will find more information about the risks and uncertainties associated with our business in Business risk and uncertainty in this MD&A.
We do not update or revise forward-looking information even if new information becomes available unless legislation requires us to do so. You should not place undue reliance on forward-looking statements.
3. | ABOUT CAE |
3.1 | WHO WE ARE |
CAE is a world leader in providing simulation and modelling technologies and integrated training services to the civil aviation industry and defence forces around the globe.
We design, manufacture and supply simulation equipment and provide training and services. This includes integrated modelling, simulation and training solutions for commercial airlines, business aircraft operators, aircraft manufacturers and military organizations, and a global network of training centres for pilots, and in some instances, cabin crew and maintenance workers.
Our full-flight simulators (FFSs) replicate aircraft performance in a full array of situations and environmental conditions. Sophisticated visual systems simulate hundreds of airports around the world, as well as a wide range of landing areas and flying environments. These work with motion and sound to create a realistic training environment for pilots and crews at all levels.
Founded in 1947 and headquartered in Montreal, Canada, CAE has built an excellent reputation and long-standing customer relationships based on more than 60 years of experience, strong technical capabilities, a highly trained workforce and global reach. CAE employs approximately 6,000 people at more than 75 sites and training locations in 20 countries. Approximately 93% of CAEs annual revenues come from worldwide exports and international activities.
8
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
CAEs common shares are listed on the following exchanges:
· | Toronto Stock Exchange, under the symbol CAE; |
· | New York Stock Exchange, under the symbol CGT. |
3.2 OUR VISION
Our vision is to be a world leader in modelling, simulation and technical training to enhance safety and to lower risk and costs in complex environments.
We are ranked number one or two in the world in most of our core businesses, but competition is intense and maintaining our technological leadership and cost effectiveness is key to continued success. We have been successful at changing the way we do business, strengthening our financial position and building a solid foundation for creating shareholder value in the future.
Our focus continues to be to position CAE for growth and to move ahead in achieving our vision.
3.3 OUR STRATEGY AND KEY PERFORMANCE DRIVERS
Our strategy
We have transformed ourselves over the past few years, evolving from a supplier of equipment, primarily in North America, to a global provider of integrated training solutions. We have diversified our interests between civil and military markets, and among the various regions of the world. In fiscal 2008, approximately 60% of our revenues were generated outside North America and those originating in high growth areas like Asia, the Middle East and South America have grown by approximately 25% over last year. By continuing to grow the proportion of our civil and military training and services activity, we believe CAE will benefit from results that are increasingly more stable and predictable. We are continuing to execute our growth strategy by prudently and purposefully investing to meet the long-term needs of our aerospace and defence customers.
To achieve this, our 2008 priorities included:
· | Diversifying our revenues across businesses and regions for more stability; |
· | Sustaining our healthy financial position; |
· | Continuing to engage our employees; |
· | Improving customer intimacy and satisfaction; |
· | Launching new technologies; |
· | Strengthening our relationships with original equipment manufacturers; |
· | Implementing our emerging market strategy and executing our pilot provisioning initiative. |
Diversifying our revenues across businesses and regions for more stability
Revenue from our two military segments combined for 43% of consolidated revenue and the civil segments represented the balance of 57%. Combined training and services revenue from both civil and military segments totalled 43%, while products represented 57%. Approximately 60% of our revenues were generated outside North America and those originating in high-growth areas like Asia, the Middle East and South America have grown by approximately 25% over last year. By continuing to grow the proportion of our civil and military training and services activity in a diversified market, we believe CAE should benefit from results that are increasingly more stable and predictable.
9
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
Sustaining our healthy financial position
Our net debt at the end of the year was $124.1 million, representing a net debt to total financing ratio of 25% (after adjustment for operating leases).
Continuing to engage our employees
In March 2007, we conducted an employee survey to measure the level of employee engagement, as well as the key concepts identified as critical to CAE. Results released in the first quarter of fiscal 2008 showed that overall, employee engagement levels significantly improved since our last survey in 2004. In fact, our employee engagement levels increased from 42% in 2004 to 72% in 2007. CAE is committed to continually improving our performance and developing internal strategies to support our success. Our commitment and efforts were recognized in October 2007, when we were chosen as one of Canadas Top 100 Employers, one of Montreals Top 15 Employers, as well as being chosen by the Financial Post as one of Canadas 10 Best Companies to Work For and as one of the countrys Best Employers for New Canadians by Mediacorp Canada. CAEs most valuable asset is its employees, and these awards recognize their efforts to make CAE a company of the highest calibre.
Improving customer intimacy and satisfaction
CAEs customer advisory boards and technical advisory boards involve airlines and operators worldwide. By listening carefully to customers, we are able to gain a deep understanding of their needs and respond with innovative product and service offerings that help improve the safety and efficiency of their operations.
Launching new technologies
During fiscal 2008, the first CAE 5000 Series FFS, an A320 FFS located at CAEs Burgess Hill training centre in the United Kingdom, achieved Level D certification, the highest qualification for flight simulators by the U.K.s Civil Aviation Authority (CAA). In addition, we expanded the technology and applied it to other platforms.
Strengthening our relationships with original equipment manufacturers
We provide training solutions for most major aircraft platforms manufactured by the worlds leading original equipment manufacturers (OEMs). In addition to our long-standing relationships with Boeing and Airbus, we have furthered our involvement with Embraer with the formation of a joint venture for training on the new Phenom 100 and 300 light jets. As well, we have achieved an industry first with the receipt of Level D certification for two CAE-built Dassault Falcon 7X FFSs, which form part of an entitlement training agreement with Dassault. We entered into a 20-year agreement with Bombardier under which CAE became Bombardiers authorized training provider for the Global Express and Challenger 300 aircrafts. We also established a close relationship with Korean Aerospace Industries (KAI). We are designing and manufacturing a generic handling qualities simulator to be used as an integral part of the KAI-led Korean Helicopter Program development. In addition, we are assisting KAI with the development of P-3C training systems for the Korean Navy. Finally, we were awarded one prototype M-346 flight training device to provide the initial training capability for Alenia Aermacchis new M-346 advanced lead-in fighter trainer aircraft.
Implementing our emerging market strategy and executing our pilot provisioning initiative
We signed a contract to become the managing partner of the Indian governments flight training academy: Indira Gandhi Rashtriya Uran Akademi (IGRUA). We also formalized and signed a joint venture agreement with the Airport Authority of India (AAI) to develop the Rajiv Gandhi National Flying Training Institute (RGNFTI). Both IGRUA and RGNFTI are expected to become members of the CAE Global Academy, subject to agreement on the terms and conditions of membership. This will increase the CAE Global Academy capacity by 400 students.
10
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
Key performance drivers
We have defined 10 key attributes that give us a competitive advantage and drive our performance.
Technological leadership
We pride ourselves on our technological leadership. Pilots around the world view our simulation as the closest thing to the true experience of flight. CAE has consistently led the evolution of flight training and simulation systems technology with a number of industry firsts. We have simulated the entire range of large civil aircraft, a large number of the leading regional and business aircraft and a number of civil helicopters. We are an industry leader in providing simulation and training solutions for fixed-wing transport aircraft, maritime patrol aircraft and helicopter platforms for the military. We also have extensive knowledge, experience and credibility in designing and developing simulators for prototype aircraft of major aircraft manufacturers.
Product design and reliability
We design our simulators so customers can easily upgrade them, giving them more flexibility and opportunity as products change or new air-worthiness regulations are introduced.
Our simulators are typically rated among the highest in the industry for reliability. This is a key benefit because simulators operate in high-duty cycles of up to 20 hours a day.
Long-term customer relationships
Because of our focus on quality of service and our ability to consistently meet or exceed our customers standards, we have had many long-term relationships with major airlines and ministries of defence around the world some even spanning decades.
Large and diversified fleet of FFSs
We operate a fleet of more than 120 FFSs to meet the wide range of operational requirements of our customers. Our fleet includes FFSs for various types of aircraft from major manufacturers, including commercial jets, business jets and military helicopters.
Leveraging synergies between our products and services
Our broad array of flight training products allows us to tailor solutions to each customers specific requirements, which makes us unique. Our segments work closely together because the sale of training equipment and related services are often part of the same program.
Customer support
We maintain a strong focus on after-sales support, which is often critical in winning additional sales contracts.
11
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
Global coverage
We have operations in 20 countries on five continents and sell into many more countries. This broad geographic coverage allows us to respond quickly and cost effectively to customer needs and new business opportunities while respecting the regulations and customs of the local market.
Training methodology
We revolutionized the way aviation training is performed when we introduced our CAE Simfinity based training solutions and courseware. We achieved wide distribution by installing the high-fidelity simulation software in our FFSs and leveraging this into training devices and solutions that are used throughout the training cycle. This effectively brings the virtual aircraft cockpit into the classroom at the earliest stages of ground school training, making it a more effective and efficient training experience overall. Because our CAE Simfinity devices are part of a suite of fully integrated training solutions, customers can use these devices to perform any updates and upgrades.
Capacity to control costs
We continue to focus on becoming more efficient while lowering costs. Successfully controlling costs depends on our ability to obtain the data, equipment, consumables and other supplies that are required to carry out our operations at competitive prices.
Our Global Strategic Sourcing group is focusing on improving long-term cost control and sourcing strategies with our major suppliers. It is sharing this knowledge globally across our business and implementing best practices in procurement. It is also analyzing costs to source supplies at the lowest cost over the life of a FFS, and this may lead to developing long-term alliances with some of our suppliers to ensure there is always an adequate supply of materials.
Enlarging our relationships with original equipment manufacturers (OEMs)
In fiscal 2005, we signed a 20-year agreement to become the Dassault authorized training provider for the Falcon 7X, the Falcon 900 EX, and the Falcon 2000 EX. To date, we successfully deployed the program in both our U.K. and North East Training Centres, as well as building two Falcon 7X FFSs and two Falcon 900/2000 EX FFSs. As part of the program with Dassault, we are delivering full wet entitlement training on these platforms, in addition to servicing the aircraft operator in its continued pilot and maintenance training requirements.
In fiscal 2008, we signed a 20-year agreement to become the Exclusive authorized training provider for the Bombardier Global Express aircraft, Global 5000 aircraft, Global Express XRS aircraft and Bombardier Challenger 300 aircraft. The agreement covers both pilot and maintenance training. Under the agreement, we will build and deploy all future simulators required to support aircraft delivered base in our training centres, as well as delivering full wet training. To date, we deployed one Global Express simulator in the U.K. training centre and announced that we will build a second Global Express for our joint venture, the Emirates-CAE Flight Training centre. We will deploy one Bombardier Challenger 300 aircraft in our North East Training Center during fiscal 2009. We also plan to install another Bombardier Challenger 300 aircraft in an off-shore site during fiscal 2010.
In fiscal 2008, we formalized a joint venture agreement with Embraer to provide comprehensive pilot and ground crew training to Embraer customers of Phenom 100 VLJ and Phenom 300 LJ.
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MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
3.4 CAPABILITY TO EXECUTE STRATEGY AND DELIVER RESULTS
Our resources and processes ensure we can carry out our strategy and deliver results. We have two other attributes that are critical to our success:
Our financial position
At March 31, 2008, our net debt was $124.1 millions, representing a net debt to total financing ratio of 25% (after adjustment for operating leases). With our strong balance sheet, available credit and the cash we are able to generate from operations, we have adequate funding in place or available to sustain our current development projects. See section 7, Consolidated financial position for a more detailed discussion.
A skilled workforce and experienced management team
At the end of fiscal 2008, we had approximately 6,000 employees. The skills of our workforce have a significant impact on the efficiency and effectiveness of our operations. While competition for well-trained and skilled employees is high, we have been successful at attracting and retaining people because of our quality reputation as an industry leader, our commitment to providing an engaging and challenging work environment and by offering competitive compensation.
We also have an experienced management team with a proven track record in the aerospace industry. Strong leadership and governance are critical to the successful implementation of our corporate strategy. We are focusing on leadership development of key executives and members of senior management.
3.5 OUR OPERATIONS
CAE serves two markets globally:
· | The civil market includes aircraft manufacturers, major commercial airlines, regional airlines, business aircraft operators, helicopter operators, training centres and pilot provisioning; |
· | The military market includes OEMs and defence forces worldwide. |
We manage our operations and report our results in four segments, one for products and one for services, for each market. Each segment is a significant contributor to our overall results.
CIVIL MARKET
Training & Services/Civil (TS/C)
Provides business and commercial aviation training for all flight and ground personnel and all associated services
Our TS/C segment is the second largest provider of civil aviation training services in the world, and serves all sectors of the market including general aviation, regional airlines, commercial airlines and business aviation. We also offer a full range of support services, such as training centre management, simulator maintenance services, spare parts inventory management, curriculum development and consulting services. We have achieved our leading position through acquisitions, joint ventures and by building new facilities. We currently have more than 120 FFSs installed in more than 20 training centres around the world. We intend to increase the number of revenue simulator equivalent units (RSEUs) in our network to maintain our position and address new market opportunities. We are
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MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
developing our training network to meet the long-term, steady stream of recurring training needs so we rely less on new aircraft deliveries to drive revenue.
Simulation Products/Civil (SP/C)
Designs, manufactures and supplies civil flight simulation training devices and visual systems
Our SP/C segment is the world leader in civil flight simulation. We design and manufacture more civil FFSs and visual systems for major and regional carriers, third-party training centres and OEMs than any other company. We have a wealth of experience in developing simulators for new types of aircraft, including over 20 models in the past and, more recently, the Boeing 787, Boeing 747-8, Airbus A380 and Dassault Falcon 7X. We also offer a full range of support services including sales of spare parts, simulator updates and simulator relocations.
Market trends and outlook
We continue to have a positive outlook for the civil market because of the following trends:
· | New platforms and strong aircraft backlogs; |
· | Strong demand in emerging markets; |
· | Continued growth in revenue per passenger kilometre; |
· | Growing demand for trained crew members; |
· | Economic factors. |
New platforms and strong aircraft backlogs New aircraft platforms
OEMs are introducing new platforms, which will drive worldwide demand for simulators and training services. The Boeing 787, Boeing 747-8, Airbus A350XWB, Embraer 190, Dassault Falcon 7X, Embraer Phenom 100 VLJ and 300 LJ aircraft and the Eclipse 500 VLJ are some recent examples.
New platforms will drive the demand for new kinds of simulators. One of our strategic priorities is to partner with manufacturers to strengthen relationships and position ourselves for future opportunities. For example, CAE has been designated as Bombardiers authorized training provider for the Global Express, Global 5000, and Global Express XRS aircraft programs. CAE has also established a joint venture with Embraer to provide comprehensive training for the new Phenom 100 VLJ and Phenom 300 LJ aircraft. It is important to note that deliveries of new model aircrafts are susceptible to delays of program launches, which in turn will affect the timing of our orders and deliveries.
Strong aircraft orders contribute to lengthy backlogs
In calendar 2007, Boeing received a total of 1,413 net orders for new aircraft and Airbus received a total of 1,341 orders. While the pace of order activity will likely slow in calendar 2008, their strong delivery forecast and increased production of narrow body models are expected to help generate opportunities for our full portfolio of training products and services.
Strong demand in emerging markets New and emerging markets
Emerging markets such as Asia-Pacific, the Indian sub-continent and the Middle East continue to experience high growth in air traffic, strong economic growth and an increasing liberalization of air policy and bilateral air agreements. We expect these markets to drive the demand for FFSs and training centres. Furthermore, CAE has been introducing new products designed specifically to address new and emerging markets, such as the CAE 5000 Series full-flight simulator and CAE TrueTM Environment for more realistic air traffic control environment simulation.
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MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
Continued growth in revenue per passenger kilometre Steady growth in air travel
While passenger traffic growth is expected to slow slightly from the strong growth in calendar year 2007, we anticipate that steady growth in passenger traffic should continue for the foreseeable future. Passenger growth in calendar year 2007 increased by 7.4% compared to 2006 figures according to the International Air Transport Association (IATA). This is barring any major developments such as regional political instability, acts of terrorism, pandemics, major economic recession or other world events. In addition, the recent record-high oil prices are negatively affecting the profitability of commercial airline operations.
Continued success of low-cost airlines
The success of low-cost airlines continues to be a factor driving activity in the civil aviation market, and the demand for simulation products and training services. In calendar year 2007, low-cost airline capacity in Europe represented 30% of the total seats in market availability, a 6% increase over calendar year 2006, whereas low-cost flights in North America accounted for 18% of the total flight activity, a 17% increase over calendar year 2006. These percentages are expected to grow as low-cost airlines expand their fleet. In the Asia-Pacific region, low-cost airlines are likely to represent 25% market share by 2012. CAE clients such as Ryanair and IndiGo are representative of low-cost carriers expanding their fleet and capacity, thus spurring increasing demand for pilot and crew training equipment and CAE services such as pilot training and provisioning.
Growing demand for trained crew members Worldwide demand is increasing
Growth in the civil aviation market is continuing to drive the demand for pilots, maintenance technicians and flight attendants worldwide, which is creating a shortage of qualified crew members. The shortage is even more pronounced because of aging demographics, fewer military pilots transferring to civil airlines, and low enrolment in technical schools. Emerging markets like India and China are experiencing this even more severely because air traffic is growing at a more rapid pace than in developed countries, and the infrastructure available to meet the current and projected demand for crew members is lacking.
This creates opportunities for pilot provisioning, our turnkey service that includes recruiting, screening, selection and training. It is also prompting us to seek out partners to develop a global pipeline for developing and supplying pilots to meet market demand.
A shortage is also surfacing on the maintenance technician side and has created an opportunity for CAE to accelerate its technical training solutions. This trend is, to a lesser degree, also affecting cabin crew, where we are also exploring new training solutions.
New pilot certification process requires simulation-based training
Simulation-based pilot certification training will begin taking on an even greater role with the new Multi-crew Pilot License (MPL) certification process developed by the International Civil Aviation Organization (ICAO) and which is expected to be approved for adoption in the near future by individual national regulatory bodies. The MPL process places more emphasis on simulation-based training to develop ab initio students into first officers for modern aircraft. MPL is expected to be widely adopted in emerging markets like China, India and Southeast Asia where there is the greatest requirement for a large supply of qualified pilots in the most efficient and effective manner.
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MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
Economics factors
Economic growth rates continue to be supportive of demand for air travel globally, despite the economic slowing in mature markets like the U.S. A portion of CAEs commercial aerospace business is dependent on markets outside North America, which continue to be robust. We are, however, monitoring a number of factors which could constrain growth in the broader global market: sustained high prices for jet fuel, which is a stress on the airline industry; the possibility of a protracted economic recession in the U.S., which could impact global growth; and the availability of credit resources to aircraft operators given the recent tightening of credit markets.
MILITARY MARKET
Simulation Products/Military (SP/M)
Designs, manufactures and supplies advanced military training equipment and software tools for air forces, armies and navies
Our SP/M segment is a world leader in the design and production of military flight simulation equipment. We develop simulation equipment, training systems and software tools for a variety of military aircraft, including fast jets, helicopters and maritime patrol and transport aircraft. We have designed the broadest range of military helicopter simulators in the world. Our military simulators provide high-fidelity combat environments that include interactive enemy and friendly forces, as well as weapon and sensor systems. We have delivered simulation products and training systems to the military forces of more than 35 countries, including all of the U.S. services. We have also developed more training systems for the C-130 Hercules aircraft than any other company.
Training & Services/Military (TS/M)
Supplies turnkey training and operations solutions, support services, systems maintenance and modelling and simulation solutions
Our TS/M segment provides contractor logistics support, maintenance services and simulator training at over 60 sites around the world. It also provides a variety of modelling and simulation-based services.
Market trends and outlook
While we expect defence budgets around the world to continue to grow modestly, including in the United States which is the worlds largest defence market, we believe that our share of that spending will increase for the following reasons:
· | Demand for our type of specialized products and services is growing; |
· | The nature of warfare has changed. |
Demand for our type of specialized products and services is growing New aircraft platforms
One of our strategic priorities is to partner with manufacturers in the military market to strengthen relationships and position ourselves for future opportunities. Original equipment manufacturers are introducing new platforms that will drive worldwide demand for simulators and training. For example, Boeing is developing a new maritime patrol aircraft called the P-8A Poseidon, NH Industries is starting to deliver the NH90 helicopter, EADS CASA is aggressively marketing the C-295 transport aircraft worldwide, and Sikorsky is offering new models of its H-60 helicopter to armies and navies worldwide, all of which fuel the demand for new simulators and training.
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MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
Trend towards outsourcing
With finite defence budgets and resources, defence forces and governments continue to scrutinize expenditures to find ways to save money and allow active-duty personnel to focus on operational requirements. There has been a growing trend among defence forces to outsource a variety of training services and we expect this trend to continue. Governments are outsourcing training services because they can be delivered more quickly and more cost-effectively. For example, CAE is part of a consortium that is expected to begin offering NH90 training to Germany and other militaries in 2008.
Greater use of simulation
More defence forces and governments are adopting simulation in training programs because it improves realism, significantly lowers costs, reduces operational demands on aircraft, and lowers risk compared to operating actual weapon system platforms. Using a simulator for training also reduces actual aircraft flying hours and allows training for situations where an actual aircraft and/or its crew and passengers would be at risk.
Extension and upgrade of existing weapon system platforms
Original equipment manufacturers are extending the life of existing weapon system platforms by introducing upgrades or adding new features, which increases the demand for upgrading simulators to meet the new standards.
The nature of warfare has changed Demand for networking
The nature of warfare has changed. Allies are cooperating and creating joint and coalition forces, which is driving the demand for joint and networked training and operations. Training devices can be networked to train different crews and allow for networked training across a range of platforms.
Growing acceptance of synthetic training for mission rehearsal
There is a growing trend among defence forces to use synthetic training to meet more of their training requirements. Synthetic environment software allows defence clients to plan sophisticated missions and carry out full mission rehearsals as a complement to traditional live training or mission preparation. Synthetic training offers militaries a cost-effective way to provide realistic training for a wide variety of scenarios while ensuring they maintain a high state of readiness. For example, in calendar 2007 we delivered a MH-47G combat mission simulator to the U.S. Armys 160th Special Operations Aviation Regiment that features the CAE-developed Common Environment/Common Database (CE/CDB). The CE/CDB promises to significantly enhance rapid simulation-based mission rehearsal capabilities.
3.6 FOREIGN EXCHANGE
We report all dollar amounts in Canadian dollars. We value assets, liabilities and transactions that are measured in foreign currencies using various exchange rates as required by GAAP.
The tables below show the variations of the closing and average exchange rates for our three main operating currencies. The variation in rates lowered this years earnings from continuing operations (after tax) by approximately $6.4 million compared to fiscal 2007.
17
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
We used the foreign exchange rates below to value our assets, liabilities and backlog in Canadian dollars at the end of each of the following periods:
2008 | 2007 | Increase (decrease) | ||
|
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U.S. dollar (US$ or USD) | 1.0279 | 1.1529 | (11 | %) |
Euro () | 1.6244 | 1.5418 | 5 | % |
British pound (£ or GBP) | 2.0407 | 2.2697 | (10 | %) |
|
We used the average foreign exchange rates below to value our revenues and expenses:
2008 | 2007 | Increase (decrease) | ||
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U.S. dollar (US$ or USD) | 1.0331 | 1.1385 | (9 | %) |
Euro () | 1.4626 | 1.4598 | - | |
British pound (£ or GBP) | 2.0733 | 2.1550 | (4 | %) |
|
Three areas of our business are affected by changes in foreign exchange rates:
· | Our networks of civil and military training centres |
Most of our training network revenue and costs are in local currencies. Changes in the value of local currencies relative to the Canadian dollar therefore have an impact on the networks net profitability and net investment. Under GAAP, gains or losses in the net investment in a self-sustaining subsidiary that result from changes in foreign exchange rates are deferred in the foreign currency translation adjustment (accumulated other comprehensive loss), which is part of the shareholders equity section of the balance sheet. Any effect of the fluctuation between currencies on the net profitability has an immediate translation impact on the earnings statement and an impact on year-to-year and quarter-to-quarter comparisons. | |
· | Our simulation products operations outside of Canada (Germany, U.S., U.K., Australia and India) |
Most of the revenue and costs in these operations from self-sustaining subsidiaries are generated in their local currency except for some data and equipment they buy in different currencies from time to time as well as any work performed by our Canadian manufacturing operations. Changes in the value of the local currency relative to the Canadian dollar therefore have a translation impact on the operations net profitability and net investment when expressed in Canadian dollars. | |
· | Our simulation products operations in Canada |
Although the net assets of our Canadian operations are not exposed to changes in the value of foreign currencies (except for receivables and payables in foreign currencies), approximately 85% of our revenue generated from Canada is in foreign currencies (mostly the U.S. dollar and euro), while a significant portion of our expenses are in Canadian dollars. | |
We generally hedge the milestone payments in sales contracts denominated in foreign currencies to protect ourselves from some of the foreign exchange exposure. Since less than 100% of our revenues is hedged, it is impossible to completely offset the effects of changing foreign currency values, leaving some residual exposure that can affect the statement of earnings. | |
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MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
Over the long term, our manufacturing operations in Canada are exposed to changes in the value of the Canadian dollar because we do not enter into hedges of expected future revenues until the contracts are signed.
During the third quarter of fiscal 2008, we entered into a hedging program for a portion of our U.S. dollar denominated purchases over the next 12 months resulting in a fixed Canadian dollar equivalent cost for inputs in our manufacturing process. In addition, we entered into a hedge to fix into Canadian dollars the interest cost and principal repayment of a U.S. dollar denominated debt maturing in June 2009.
Sensitivity analysis
We conducted a sensitivity analysis to determine the current impact of variations in the value of foreign currencies. We evaluated the sources of foreign currency revenues and expenses and determined that our consolidated exposure to foreign currency mainly occurs in two areas:
· | Foreign currency revenues and expenses in Canada for the manufacturing business we hedge these revenues as well as some of the expenses; |
· | Translation of foreign currency operations of self-sustaining subsidiaries in foreign countries this has a natural hedge. Our exposure is mainly in our operating profits. |
First we calculated the revenue and expenses per currency to determine the operating income in each currency. Then we deducted the amount of hedged revenues and hedged expenses to determine a net exposure by currency. Next we added the net exposure from the self-sustaining subsidiaries to determine the consolidated foreign exchange exposure in different currencies.
Finally, we conducted a sensitivity analysis to determine the impact of a change of one cent in the Canadian dollar against each of the other four currencies. The table below shows the typical impact of this change, after taxes, on our yearly revenue and operating income, as well as our net exposure:
Exposure (amounts in millions) | Revenue | Operating income | Hedging | Net exposure | |
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U.S. dollar (US$ or USD) | 7.8 | 2.5 | (1.7 | ) | 0.8 |
Euro () | 3.3 | 0.7 | (0.5 | ) | 0.2 |
British pound (£ or GBP) | 1.0 | 0.2 | (0.1 | ) | 0.1 |
Australian dollar (AUD$ or AUD) | 0.7 | 0.1 | | 0.1 | |
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3.7 NON-GAAP AND OTHER FINANCIAL MEASURES
This MD&A includes non-GAAP and other financial measures. Non-GAAP measures are useful supplemental information but may not have a standardized meaning according to GAAP. You should not confuse this information with, or use it as an alternative for, performance measures calculated according to GAAP. You should also not use them to compare with similar measures from other companies.
Backlog
Backlog is a non-GAAP measure that tells us the expected value of orders we have received but have not yet executed.
· | For the SP/C, SP/M and TS/M segments, we consider an item part of our backlog when we have a legally binding commercial agreement with a client that includes enough detail about each partys obligations to form the basis for a contract or an order; |
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MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
· | Military contracts are usually executed over a long-term period and some of them must be renewed each year. For the SP/M and TS/M segments, we only include a contract item in backlog when the customer has authorized and received funding for it; |
· | For the TS/C segment, we include revenues from customers with both long-term and short-term contracts when these customers commit to paying us training fees, or when we reasonably expect them from current customers. |
The book-to-sale ratio is calculated as being total orders divided by total revenue in the period.
Capital employed
Capital employed is a non-GAAP measure we use to evaluate and monitor how much we are investing in our business. We measure it from two perspectives: Capital used:
· | For the company as a whole, we take total assets (not including cash and cash equivalents), and subtract total liabilities (not including long-term debt and its current portion); |
· | For each segment, we take the total assets (not including cash and cash equivalents, tax accounts and other non-operating assets), and subtract total liabilities (not including tax accounts, long-term debt and its current portion and other non-operating liabilities). |
Source of capital:
· We add net debt to total shareholders equity to understand where our capital is coming from.
Maintenance and growth capital expenditure
Maintenance capital expenditure is a non-GAAP measure we use to calculate the capital investment needed to sustain current level of economic activity.
Growth capital expenditure is a non-GAAP measure we use to calculate the capital investment needed to increase the current level of economic activity.
EBIT
Earnings before interest and taxes (EBIT) is a non-GAAP measure that shows us how we have performed before the effects of certain financing decisions and tax structures. We track EBIT because we believe it makes it easier to compare our performance with previous periods, and with companies and industries that do not have the same capital structure or tax laws.
Free cash flow
Free cash flow is a non-GAAP measure that tells us how much cash we have available to build the business, repay debt and meet ongoing financial obligations. We use it as an indicator of our financial strength and liquidity. We calculate it by taking the net cash generated by our continuing operating activities, subtracting all capital expenditures (including growth capital expenditures and capitalized costs) and dividends paid, and then adding the proceeds from sale and leaseback arrangements and other asset-specific financing (including non-recourse debt). Dividends are deducted in the calculation of free cash flow because we consider them an obligation, like interest on debt, which means that amount is not available for other uses. In the first quarter of fiscal 2009, we intend to change our definition to exclude from the free cash flow, the growth capital expenditures, capitalized costs and its corresponding asset specific financing (including non-recourse debt).
20
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
Gross margin
Gross margin is a financial measure equivalent to the segment operating income excluding selling, general and administrative expenses.
Net debt
Net debt is a non-GAAP measure we use to monitor how much debt we have after taking into account liquid assets such as cash and cash equivalents. We use it as an indicator of our overall financial position, and calculate it by taking our total long-term debt (debt that matures in more than one year), including the current portion, and subtracting cash and cash equivalents.
Non-cash working capital
Non-cash working capital is a non-GAAP measure we use to monitor how much money we have committed in the day-to-day operation of our business. We calculate it by taking current assets (not including cash and cash equivalents or the current portion of assets held for sale) and subtracting current liabilities (not including the current portion of long-term debt or the current portion of liabilities related to assets held for sale).
Non-recourse financing
Non-recourse financing to CAE is a non-GAAP measure we use to classify debt, when recourse against the debt is limited to the assets, equity interest and undertaking of a subsidiary, and not CAE Inc.
Non-recurring items
Non-recurring items is a non-GAAP measure we use to identify items that are outside the normal course of business because they are infrequent, unusual and/or do not represent a normal trend of the business. We believe that highlighting significant non-recurring items and providing operating results without them is useful supplemental information that allows for a better analysis of our underlying and ongoing operating performance.
Return on capital employed
Return on capital employed (ROCE) is a non-GAAP measure that we use to evaluate the profitability of our invested capital. We calculate this ratio over a rolling four-quarter period by taking earnings from continuing operations excluding non-recurring items and interest expenses, after tax, divided by the average capital employed. In addition, we also calculate this ratio adjusting earnings and capital employed to reflect the ordinary off-balance sheet operating leases.
Revenue simulator equivalent unit
Revenue simulator equivalent unit (RSEU) is a financial measure we use to show the total average number of FFSs available to generate revenue during the period. For example, in the case of a 50/50 flight training joint venture, we will report only 50% of the FFSs deployed under this joint venture as an RSEU. If a FFS is being powered down and relocated, it will not be included as an RSEU until the FFS is re-installed and available to generate revenue.
Segment operating income
Segment operating income (SOI) is a non-GAAP measure and our key indicator of each segments financial performance. This measure gives us a good indication of the profitability of each segment because it does not include the impact of any items not specifically related to the segments performance. These items are presented in the reconciliation between total segment operating income and EBIT (See Note 25 of the consolidated financial statements).
21
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
4. | CONSOLIDATED RESULTS |
4.1 | RESULTS OF OUR OPERATIONS FOURTH QUARTER OF FISCAL 2008 |
Summary of consolidated results | ||||||||||
(amounts in millions, except per share amounts) | Q4-2008 | Q3-2008 | Q2-2008 | Q1-2008 | Q4-2007 | |||||
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Revenue | $ | 366.6 | 344.8 | 353.9 | 358.3 | 337.3 | ||||
Earnings before interest and income taxes | ||||||||||
(EBIT) | $ | 69.7 | 61.7 | 62.1 | 58.0 | 53.3 | ||||
As a % of revenue | % | 19.0 | 17.9 | 17.5 | 16.2 | 15.8 | ||||
Interest expense, net | $ | 4.7 | 4.8 | 5.4 | 2.6 | 3.5 | ||||
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Earnings from continuing operations (before | ||||||||||
taxes) | $ | 65.0 | 56.9 | 56.7 | 55.4 | 49.8 | ||||
Income tax expense | $ | 18.0 | 16.8 | 17.7 | 16.7 | 14.7 | ||||
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Earnings from continuing operations | $ | 47.0 | 40.1 | 39.0 | 38.7 | 35.1 | ||||
Results from discontinued operations | $ | (11.4 | ) | (0.6 | ) | (0.1 | ) | - | (0.8 | ) |
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Net earnings | $ | 35.6 | 39.5 | 38.9 | 38.7 | 34.3 | ||||
Basic EPS from continuing operations | $ | 0.19 | 0.16 | 0.15 | 0.15 | 0.14 | ||||
Diluted EPS from continuing operations | $ | 0.18 | 0.16 | 0.15 | 0.15 | 0.14 | ||||
Basic and diluted EPS | $ | 0.14 | 0.16 | 0.15 | 0.15 | 0.14 | ||||
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Summary of results excluding non-recurring items | ||||||||||
(amounts in millions, except per share | ||||||||||
amounts) | Q4-2008 | Q3-2008 | Q2-2008 | Q1-2008 | Q4-2007 | |||||
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Earnings from continuing operations (before | ||||||||||
taxes) | $ | 65.0 | 56.9 | 56.7 | 55.4 | 48.7 | ||||
Net earnings from continuing operations | $ | 47.0 | 40.1 | 39.0 | 38.7 | 35.1 | ||||
Basic EPS from continuing operations | $ | 0.19 | 0.16 | 0.15 | 0.15 | 0.14 | ||||
Diluted EPS from continuing operations | $ | 0.18 | 0.16 | 0.15 | 0.15 | 0.14 | ||||
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Revenue was 6% higher than last quarter and 9% higher year over year
Revenue was $21.8 million higher than last quarter mainly because:
· | SP/Ms revenue increased by $11.9 million, or 13%, mainly due to high activity levels on some U.S. and European programs; |
· TS/Cs revenue increased by $11.7 million, or 13%, mainly due to a strong demand in all of our training centres, translating into a higher utilization rate and an increase of one RSEU from last quarter;
· | SP/Cs revenue increased by $3.0 million, or 3%, mainly attributed to higher volume from a stronger level of orders during the third and fourth quarters. |
These results included a positive impact from the depreciation of the Canadian dollar against the U.S. dollar and the euro in the fourth quarter.
Revenue was $29.3 million higher than the same period last year largely because:
· | TS/Cs revenue increased by $12.8 million, or 14%, mainly due to a strong demand in all of our training centres, translating into a higher utilization rate and nine more RSEU than in the same period last year; |
22
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
· | SP/Ms revenue increased by $9.3 million, or 10%, mainly due to higher activity on some European programs, combined with the integration into our results of the newly-acquired companies Engenuity, Multigen and Macmet; |
· | SP/Cs revenue increased by $8.9 million, or 9%, due to a higher number of orders. |
The growth of 9% over last year was achieved despite the appreciation of the Canadian dollar against the euro, the British pound and the U.S. dollar. Excluding this appreciation, the growth would have been approximately 15%.
You will find more details in Results by segment.
EBIT6 was $8.0 million higher than last quarter and $16.4 million higher year over year
EBIT for this quarter was $69.7 million, or 19.0% of revenue.
Compared to the last quarter, EBIT was up by 13%, or $8.0 million. Increased segment operating income7 from the TS/C and SP/M segments were partially offset by a decrease in the SP/C and TS/M segments.
Year over year, EBIT was up by 31%, or $16.4 million, mainly because of higher segment operating income from all four segments. Segment operating income increased by $8.5 million for SP/C, $5.0 million for SP/M, $2.5 million for TS/C and $1.5 million for TS/M despite the appreciation of the Canadian dollar. Excluding non-recurring items8 from last year, EBIT increased by $17.5 million.
You will find more details in Reconciliation of non-recurring items and Results by segment.
Net interest expense was similar to last quarter and $1.2 million higher year over year
Net interest expense was similar to last quarter as a result of a small decrease in interest on long-term debt, offset by a higher amortization of deferred financing charges.
Net interest expense was higher than the same period last year mainly because of higher interest expense of $1.0 million on long-term debt attributed to higher debt levels, as well as higher amortization of deferred financing charges relating to the non-recourse financing secured during the first quarter of fiscal 2008.
Effective income tax rate is 28% this quarter
Income taxes this quarter were $18.0 million, representing an effective tax rate of 28%, compared to 30% for the last quarter and 30% in the fourth quarter of fiscal 2007.
The tax rate was lower in the fourth quarter of fiscal 2008 mainly because of a change in the mix of income from various jurisdictions and of a reduction of future Canadian tax rates.
Excluding non-recurring items, income tax expense was:
· | $18.0 million for this quarter, representing an effective tax rate of 28%; |
· | $16.8 million for the third quarter, representing an effective tax rate of 30%; |
· | $13.6 million for the fourth quarter last year, representing an effective tax rate of 28%. |
You will find more details in Reconciliation of non-recurring items.
6 Non-GAAP measure (see Section 3.7) .
7 Non-GAAP measure (see Section 3.7) .
8 Non-GAAP measure (see Section 3.7) .
23
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
Net loss from discontinued operations was $11.4 million this quarter
Net loss from discontinued operations was higher this quarter and year over year mainly because:
· | We wrote off a balance receivable of $10.0 million ($8.5 million after tax). This $10.0 million amount was related to the disposal, in fiscal 2003, of the assets of the sawmill division of the Companys Forestry Systems. We were in arbitration over a dispute for further payment. The arbitration ceased mid-way in April 2008 when the buyer was the subject of a petition for receivership and was understood to be insolvent; |
· | We recorded a loss of $2.2 million (net of tax recovery of $1.0 million) in connection with the divesture of the telecommunication department of CAE Elektronic GmbH through a sales agreement with an exclusive buyer in the fourth quarter of fiscal 2008. |
4.2 RESULTS OF OUR OPERATIONS FISCAL 2008 | |||||||
Summary of consolidated results | |||||||
(amounts in millions, except per | |||||||
share amounts) | FY2008 | FY2007 | FY2006 | ||||
| |||||||
Revenue | $ | 1,423.6 | 1,250.7 | 1,107.2 | |||
Gross margin9 | $ | 438.0 | 364.4 | 266.2 | |||
As a % of revenue | % | 30.8 | 29.1 | 24.0 | |||
| |||||||
Earnings before interest and income taxes | |||||||
(EBIT) | $ | 251.5 | 189.4 | 104.0 | |||
As a % of revenue | % | 17.7 | 15.1 | 9.4 | |||
Interest expense, net | $ | 17.5 | 10.6 | 16.2 | |||
| |||||||
Earnings from continuing operations (before | |||||||
taxes) | $ | 234.0 | 178.8 | 87.8 | |||
Income tax expense | $ | 69.2 | 49.7 | 18.2 | |||
| |||||||
Earnings from continuing operations | $ | 164.8 | 129.1 | 69.6 | |||
Results from discontinued operations | $ | (12.1 | ) | (1.7 | ) | (6.0 | ) |
| |||||||
Net earnings | $ | 152.7 | 127.4 | 63.6 | |||
Basic and diluted EPS from continuing | |||||||
operations | $ | 0.65 | 0.51 | 0.28 | |||
Basic EPS | $ | 0.60 | 0.51 | 0.25 | |||
Diluted EPS | $ | 0.60 | 0.50 | 0.25 | |||
|
9 Non-GAAP measure (see Section 3.7) .
24
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
Summary of results excluding non-recurring items | ||||
(amounts in millions, except per share amounts) | FY2008 | FY2007 | FY2006 | |
| ||||
Earnings from continuing operations | ||||
(before taxes) | $ | 234.0 | 181.1 | 122.9 |
Net earnings from continuing | ||||
operations | $ | 164.8 | 129.3 | 85.5 |
Basic and diluted EPS from | ||||
continuing operations | $ | 0.65 | 0.51 | 0.35 |
|
Revenue was 14% or $172.9 million higher than last year
All four segments had higher revenue compared to last year:
· | SP/Cs revenue increased by $87.2 million, or 25%, mainly due to stronger order intake throughout the current fiscal year and higher revenue recorded on simulators that were already manufactured and for which we signed sales contracts during this year. In addition, we obtained customer acceptance of a simulator that was recorded as a sale-type capital lease transaction during the first quarter of this year; |
· | TS/Cs revenue increased by $45.2 million, or 13%, mainly due to an increase of nine RSEUs, as well as strong demand for training, which reflects the healthy state of the aerospace industry; |
· | SP/Ms revenue increased by $26.2 million, or 7%, due to the integration into our results of newly-acquired companies Engenuity, Multigen and Macmet, combined with a higher activity level, mainly in the United States; |
· | TS/Ms revenue increased by $14.3 million, or 7%, due to increased revenue from some support services for various German military bases, an increase in training services for the U.S. Air Force, higher activities on North American and Australian support services contracts and the integration into our results of newly-acquired companies Engenuity and Kesem. |
You will find more details in Results by segment.
Gross margin was $73.6 million higher than last year
Gross margin was $438.0 million this year or 30.8% of revenue compared to $364.4 million or 29.1% of revenue last year. The increase comes from volume and improvement in all four segments.
EBIT was $62.1 million higher than last year
EBIT for the year was $251.5 million, or 17.7% of revenue.
EBIT was up by 33%, or $62.1 million, over last year because of higher segment operating income from the SP/C, SP/M and TS/C segments, which increased their segment operating income by $34.5 million, $12.6 million and $9.2 million respectively despite the appreciation of the Canadian dollar against the U.S. dollar and the British pound.
EBIT was affected by the following non-recurring items in fiscal 2007 totalling $3.7 million:
· | Costs relating to the restructuring plan of $8.1 million; |
· | Payment related to the release of claims related to the AVTS program received in the first quarter for which we recorded £ 2.1 million ($4.4 million). |
Excluding these non-recurring items, EBIT was $193.1 million (15.4% of revenue) last year.
You will find more details in Reconciliation of non-recurring items and Results by segment.
25
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
Net interest expense was $6.9 million higher than last year | ||||||
FY2007 | FY2006 | |||||
(amounts in millions) | to FY2008 | to FY2007 | ||||
| ||||||
Net interest, prior period | $ | 10.6 | $ | 16.2 | ||
Increase (decrease) in interest on long-term debt | 5.4 | (3.1 | ) | |||
Decrease in interest income | 1.8 | 2.1 | ||||
Increase in capitalized interest | (0.6 | ) | (1.3 | ) | ||
Increase (decrease) in amortization of deferred financing charges | 0.4 | (1.7 | ) | |||
Other | (0.1 | ) | (1.6 | ) | ||
| ||||||
Increase (decrease) in net interest expense from the prior period | $ | 6.9 | $ | (5.6 | ) | |
| ||||||
Net interest, current period | $ | 17.5 | $ | 10.6 | ||
|
Net interest expense was $17.5 million this year, which is 65% or $6.9 million higher than last year. This is mainly attributed to:
· | Higher interest expense on overall long-term debt: | |
In fiscal 2008, we raised an additional debt of $107.5 million. | ||
· | Increased amortization of deferred financing costs: | |
In fiscal 2008, we incurred higher amortization of deferred financing charges from the non-recourse financing secured in the first quarter. | ||
· | Lower interest income: | |
Cash on hand was higher in fiscal 2008 compared to fiscal 2007, however earned interest income decreased due to lower interest rates; | ||
Reduction of interest income in fiscal 2008 due to the accretion of discounts on the long-term notes receivable settled, in full, during the second quarter of fiscal 2007. | ||
The increase in net interest expense was offset by:
· | Increased capitalized interest: | |
In fiscal 2008 compared to fiscal 2007, we had a higher level of assets under construction to support our growth initiatives. | ||
Effective income tax rate is 30%
This fiscal year, income taxes were $69.2 million, representing an effective tax rate of 30%, compared to 28% for the same period last year.
The lower tax rate in fiscal 2007 was the result of the reduction in valuation allowance in the U.K. and other tax recoveries.
We expect the effective income tax rate for fiscal 2009 to be approximately 30%.
You will find more details in Reconciliation of non-recurring items.
26
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
Net loss from discontinued operations was $12.1 million
Net loss from discontinued operations was $12.1 million this year, $10.4 million higher than last year. This was mainly attributed to:
· | We wrote off a balance receivable of $10.0 million ($8.5 million after tax) in the fourth quarter of fiscal 2008. This $10.0 million amount was related to the disposal, in fiscal 2003, of the assets of the sawmill division of the Companys Forestry Systems. We were in arbitration over a dispute for further payment. The arbitration ceased mid-way in April 2008 when the buyer was the subject of a petition for receivership and was understood to be insolvent; |
· | We recorded a loss in the fourth quarter of fiscal 2008 of $2.2 million (net of tax recovery of $1.0 million) in connection with the divesture of the telecommunication department of CAE |
Elektronic GmbH through a sales agreement with an exclusive buyer. | |
4.3 RESULTS OF OUR OPERATIONS FISCAL 2007 VS FISCAL 2006
Revenue
Revenue grew in fiscal 2007, an increase of $143.5 million, or 13%, from the year before. Growth in each of the four segments was mainly because of:
· | Stronger order intake and a higher number of deliveries in the SP/C segment; |
· | Higher order intake, particularly in the U.S. and the U.K., for the SP/M segment; |
· | Stronger demand for training and the average increase of one RSEU for the TS/C segment; |
· | Higher activities on U.S. and German support service contracts and the integration of Kesem in the TS/M segment. |
EBIT
EBIT was $189.4 million in fiscal 2007. This included the effect of an increase in segment operating income for all segments (almost 50% from SP/C) and a decrease in the costs related to the restructuring plan. EBIT would have been $193.1 million excluding non-recurring items mainly related to the restructuring plan.
EBIT was $104.0 million in fiscal 2006. This included a net foreign exchange gain on the reduction of the net investment in certain self-sustaining foreign subsidiaries, a gain on exiting the Dornier 328Jet (Do328J) platform, a write-down related to deferred bid costs and additional restructuring charges. EBIT would have been $136.8 million before these items.
27
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
Net interest
Net interest in fiscal 2007 was $5.6 million lower than fiscal 2006, mainly because of:
· | Lower interest expense on overall long-term debt: | |
We repaid the Amsterdam asset-backed financing at the end of the third quarter of fiscal 2006; | ||
We repaid the $20 million senior note tranche in fiscal 2006. | ||
· | Reduced amortization of deferred financing costs: | |
We had lower amortization of deferred costs from the new credit facility; | ||
In fiscal 2006, we wrote off all of the unamortized deferred financing charges related to our previous revolving credit facility. | ||
· | Increased capitalized interest: | |
We had a higher level of assets under construction at the end of the year compared to fiscal 2006. | ||
Income taxes
We recorded an income tax expense of $49.7 million in fiscal 2007, representing an effective tax rate of 28% compared to 21% for the same period in fiscal 2006. We recorded additional benefits of $9.0 million in the fourth quarter of fiscal 2006 due to the reduction in valuation allowance on U.S. net operating losses and other tax recoveries.
Discontinued operations
We recorded a net loss of $1.7 million from discontinued operations in fiscal 2007, mainly because of:
· | The net loss from discontinued operations that we incurred fiscal 2006 from our former Cleaning Technologies business; |
· | Interest expense related to debt not directly attributed to continuing operations. We paid this using the proceeds of the sale of the Marine Controls segment that we also recorded in fiscal 2006. |
We recorded a net loss of $6.0 million from discontinued operations in fiscal 2006 because of adjustments to pension provisions and other obligations from discontinued operations.
4.4 EARNINGS EXCLUDING NON-RECURRING ITEMS
The table below shows how non-recurring items10 have affected our results in each of the reporting periods. We believe this supplemental information is a useful indication of our performance before these non-recurring items. It is important, however, not to confuse this information with, or use it as an alternative for, net earnings calculated according to GAAP.
10 Non-GAAP measure (see Section 3.7) .
28
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
Reconciliation of non-recurring items Fourth quarter of fiscal 2008 | ||||||||||||||||||||
Q4-2008 | Q3-2008 | Q4-2007 | ||||||||||||||||||
(amounts in millions, | ||||||||||||||||||||
except per share | before | after | per | before | after | per | before | after | per | |||||||||||
amounts) | tax | tax | share | tax | tax | share | tax | tax | share | |||||||||||
|
||||||||||||||||||||
Earnings from | ||||||||||||||||||||
continuing | ||||||||||||||||||||
operations | $ | 65.0 | $ | 47.0 | $ | 0.19 | $ | 56.9 | $ | 40.1 | $ | 0.16 | $ | 49.8 | $ | 35.1 | $ | 0.14 | ||
EBIT: | ||||||||||||||||||||
Restructuring plan | ||||||||||||||||||||
- restructuring | ||||||||||||||||||||
charge | - | - | - | - | - | - | (1.5 | ) | (1.2 | ) | - | |||||||||
- other costs | ||||||||||||||||||||
associated with | ||||||||||||||||||||
the restructuring | ||||||||||||||||||||
plan | - | - | - | - | - | - | 0.4 | 1.2 | - | |||||||||||
|
||||||||||||||||||||
Earnings from | ||||||||||||||||||||
continuing | ||||||||||||||||||||
operations | ||||||||||||||||||||
excluding non- | ||||||||||||||||||||
recurring items | ||||||||||||||||||||
(non-GAAP | ||||||||||||||||||||
measure) | $ | 65.0 | $ | 47.0 | $ | 0.19 | $ | 56.9 | $ | 40.1 | $ | 0.16 | $ | 48.7 | $ | 35.1 | $ | 0.14 | ||
|
29
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
Reconciliation of non-recurring items for the 12-month period ending March 31
Fiscal 2008 | Fiscal 2007 | Fiscal 2006 | ||||||||||||||||||||||
(amounts in millions, except per | before | after | per | before | after | per | before | after | per | |||||||||||||||
share amounts) | tax | tax | share | tax | tax | share | tax | tax | share | |||||||||||||||
|
||||||||||||||||||||||||
Earnings from continuing | ||||||||||||||||||||||||
operations | $ | 234.0 | $ | 164.8 | $ | 0.65 | $ | 178.8 | $ | 129.1 | $ | 0.51 | $ | 87.8 | $ | 69.6 | $ | 0.28 | ||||||
EBIT: | ||||||||||||||||||||||||
Restructuring plan | ||||||||||||||||||||||||
- restructuring charge | - | - | - | 1.2 | 1.0 | - | 18.9 | 14.1 | 0.06 | |||||||||||||||
- other costs associated with the | ||||||||||||||||||||||||
restructuring plan | - | - | - | 6.9 | 5.5 | 0.03 | 15.1 | 11.3 | 0.05 | |||||||||||||||
Release of claims payment | - | - | - | (4.4 | ) | (3.1 | ) | (0.01 | ) | - | - | - | ||||||||||||
Foreign exchange gain | - | - | - | - | - | - | (5.3 | ) | (5.7 | ) | (0.02 | ) | ||||||||||||
Write-down of deferred bid costs | - | - | - | - | - | - | 5.9 | 5.1 | 0.02 | |||||||||||||||
Exit from the Do328J platform | - | - | - | - | - | - | (1.8 | ) | (1.0 | ) | (0.01 | ) | ||||||||||||
Interest expense, net: | ||||||||||||||||||||||||
Early repayment of notes | ||||||||||||||||||||||||
receivable | - | - | - | (1.4 | ) | (1.4 | ) | (0.01 | ) | - | - | - | ||||||||||||
Accretion of discounts on notes | ||||||||||||||||||||||||
receivable | - | - | - | - | - | - | (1.6 | ) | (1.6 | ) | (0.01 | ) | ||||||||||||
Early settlement of high-cost | ||||||||||||||||||||||||
long-term debt | - | - | - | - | - | - | 2.8 | 2.0 | 0.01 | |||||||||||||||
Write-down of unamortized | ||||||||||||||||||||||||
deferred financing costs | - | - | - | - | - | - | 1.1 | 0.7 | - | |||||||||||||||
Income tax expense: | ||||||||||||||||||||||||
Tax recoveries | - | - | - | - | (1.8 | ) | (0.01 | ) | - | (9.0 | ) | (0.03 | ) | |||||||||||
|
||||||||||||||||||||||||
Earnings from continuing | ||||||||||||||||||||||||
operations excluding non-recurring | ||||||||||||||||||||||||
items | ||||||||||||||||||||||||
(non-GAAP measure) | $ | 234.0 | $ | 164.8 | $ | 0.65 | $ | 181.1 | $ | 129.3 | $ | 0.51 | $ | 122.9 | $ | 85.5 | $ | 0.35 | ||||||
|
30
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
Restructuring plan
We completed the final expenses related to the restructuring plan in fiscal 2007. In the past, these expenses included costs related to the re-engineering of our business processes including a component associated with the first phase of the deployment of the ERP system. As at April 1, 2007, the costs related to the first phase of the ERP deployment ended. Current costs associated with additional phases of the deployment of the ERP system are not considered restructuring costs and will not be presented as a non-recurring item.
Release of claims payment Landmark Consortium
As a member of the Landmark Consortium (formed to pursue the AVTS project), we received a payment in the first quarter of fiscal 2007 and recorded £2.1 million ($4.4 million) as a non-recurring item because it was related to the release of claims.
Foreign exchange gain
We reduced our net investment in certain self-sustaining subsidiaries in fiscal 2006, and transferred corresponding amounts of foreign exchange gain or losses accumulated in the accumulated other comprehensive loss account to the statement of earnings. This resulted in a non-recurring pre-tax gain of $5.3 million. The reduction of capitalization in self-sustaining subsidiaries is not part of our day-to-day operations and we do not consider any impact on the results to be recurring.
Write-down of deferred bid costs
In the first quarter of fiscal 2006, we wrote down deferred bid costs (incurred post selection) amounting to $5.9 million accumulated on major military programs for which we were selected and for which, subsequent to selection, the likelihood of success was significantly reduced. Of the $5.9 million, $4.4 million was related to the AVTS program.
Exit from the Dornier 328 Jet platform
In the third quarter of fiscal 2006, we reached a decision to no longer offer training services for the Do328J aircraft. We sold two Do328J FFSs that quarter, for a net gain of $1.8 million.
Early repayment of notes receivable
During the second quarter of fiscal 2007, we received an early payment in full of secured subordinated promissory long-term notes receivable previously recorded in other assets. The amount was part of the consideration for our sale in 2002 of Ultrasonics and Ransohoff. We recognized $1.4 million in interest revenue during the second quarter of 2007 as a result of the repayment, because of the accretion of discounts on the long-term notes receivable.
Accretion of discount on notes receivable
In the fourth quarter of fiscal 2006, we had $2.2 million in additional interest from the accretion of discount on notes receivable. Only $0.6 million of this amount was considered recurring each year until maturity.
31
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
Early settlement of high-cost, long-term debts
In the third quarter of fiscal 2006, we took advantage of available liquidity and the strong Canadian dollar to prepay a higher cost, asset-backed financing arrangement that was in place when we acquired Schreiner Aviation Training. The Amsterdam asset-backed financing was 22.7 million, and the prepayment resulted in a one-time, pre-tax charge totalling $2.8 million.
Write-down of unamortized deferred financing costs
We closed the new credit facility on July 7, 2005 and wrote down unamortized deferred financing costs of $1.1 million in the second quarter of fiscal 2006. These costs were related to the original credit facility that had been in place.
Tax recoveries
During the first quarter of fiscal 2007, we recognized as a non-recurring item the reduced valuation allowance on net operating losses in the U.K. This led to the recognition of a cumulative $1.8 million in tax assets ($2.0 million in tax assets in the first quarter of 2007, net of a $0.2 million reversal in the second quarter of 2007).
4.5 GOVERNMENT COST-SHARING
We continue to invest in new and innovative technologies to respond to growth opportunities and to maintain our technological leadership.
During fiscal 2006, we launched Project Phoenix, a $630million, six-year R&D initiative to improve leading-edge technologies and to develop additional applications that reinforce our industry position as a world leader in simulation, modelling and services.
The Government of Canada agreed, through Technology Partnerships Canada (TPC), to invest up to 30% ($189 million) of the value of the program. We also signed an agreement in fiscal 2007 with the Government of Québec for Investissement Québec to contribute up to $31.5 million to Project Phoenix over six years. We recognize a liability to repay these contributions when conditions arise and the repayment thereof is reflected in the consolidated statements of earnings when royalties become due.
This year, the two governments contributed a total of $62.4 million to Project Phoenix. We recorded $42.1 million as a reduction of R&D expenses and $20.3 million for fixed assets or other capitalized costs.
We have also been involved in various other TPC projects on R&D programs in the past few years that involve visual systems and advanced flight simulation technology for civil applications and networked simulation for military applications. We recorded royalty expenses of $8.8 million for these TPC projects this year.
32
MANAGEMENTS DISCUSSION AND ANALYSIS | FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008 | ||||||||
| |||||||||
The table below lists the contribution and royalties for all programs: | |||||||||
(amounts in millions) | FY2008 | FY2007 | FY2006 | ||||||
| |||||||||
Contribution: | |||||||||
Phoenix | $ | 62.4 | $ | 52.1 | $ | 17.3 | |||
Previous programs | - | - | 7.5 | ||||||
| |||||||||
Total contribution | $ | 62.4 | $ | 52.1 | $ | 24.8 | |||
Amount capitalized | (20.3 | ) | (7.1 | ) | (3.8 | ) | |||
| |||||||||
Amounts credited to income | $ | 42.1 | $ | 45.0 | $ | 21.0 | |||
Royalty expense | (8.8 | ) | (7.5 | ) | (6.6 | ) | |||
| |||||||||
Impact of contribution on earnings(1) | $ | 33.3 | $ | 37.5 | $ | 14.4 | |||
Approximate impact of contribution on ITCs (25%) (1) | (8.3 | ) | (9.4 | ) | (3.6 | ) | |||
| |||||||||
Approximate pre-tax impact of contribution to various R&D | |||||||||
programs | $ | 25.0 | $ | 28.1 | $ | 10.8 | |||
|
(1) | We estimate that every $100 of net contribution we receive under various programs reduces the amount of ITCs by approximately $25 to $30 that would otherwise be available. |
The above table does not reflect the additional R&D expenses that we incurred to secure the TPC funding. We must spend approximately $100 of eligible costs in order to receive approximately $30 in contributions.
4.6 CONSOLIDATED ORDERS AND BACKLOG
Our consolidated backlog was $2,899.9 million at the end of this year, which is 5% higher than last year. New orders of $1,665.5 million were added to backlog this year, offset by $1,423.6 million in revenue generated from backlog and a decrease of $116.6 million mainly caused by the appreciation during the year of the Canadian dollar against the British pound and the U.S. dollar.
Change in backlog | |||||||||
As at March 31 | |||||||||
(amounts in millions) | FY2008 | FY2007 | FY2006 | ||||||
| |||||||||
Backlog, beginning of period | $ | 2,774.6 | $ | 2,460.0 | $ | 2,504.7 | |||
+ orders | 1,665.5 | 1,455.2 | 1,238.7 | ||||||
- revenue | (1,423.6 | ) | (1,250.7 | ) | (1,107.2 | ) | |||
+/- adjustments (mainly FX) | (116.6 | ) | 110.1 | (176.2 | ) | ||||
| |||||||||
Backlog, end of period | $ | 2,899.9 | $ | 2,774.6 | $ | 2,460.0 | |||
| |||||||||
You will find more details in Results by segment, below. |
33
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
5. RESULTS BY SEGMENT
We manage our business and report our results in four segments:
Civil segments:
· | Training & Services/Civil (TS/C); |
· | Simulation Products/Civil (SP/C). |
Military segments:
· | Simulation Products/Military (SP/M); |
· | Training & Services/Military (TS/M). |
Transactions between segments are mainly transfers of simulators from SP/C to TS/C and are recorded at cost at the consolidated level.
If we can measure a segments use of jointly used assets, costs and liabilities (mostly corporate costs), we allocate them to the segment in that proportion. If we cannot measure a segments use, we allocate in proportion to the segments cost of sales.
KEY PERFORMANCE INDICATORS | |||||||||
Segment operating income | |||||||||
(amounts in millions, except operating | |||||||||
margins) | FY2008 | FY2007 | Q4-2008 | Q3-2008 | Q2-2008 | Q1-2008 | Q4-2007 | ||
|
|||||||||
Civil segments | |||||||||
Training & Services/Civil | $ | 73.5 | 64.3 | 23.8 | 15.5 | 14.6 | 19.6 | 21.3 | |
% | 19.2 | 19.1 | 22.8 | 16.7 | 16.2 | 20.7 | 23.2 | ||
Simulation Products/Civil | $ | 94.9 | 60.4 | 23.8 | 25.2 | 26.2 | 19.7 | 15.3 | |
% | 21.8 | 17.4 | 22.3 | 24.3 | 23.3 | 17.4 | 15.7 | ||
|
|||||||||
Military segments | |||||||||
Simulation Products/Military | $ | 51.7 | 39.1 | 14.5 | 11.5 | 13.4 | 12.3 | 9.5 | |
% | 13.5 | 10.9 | 14.3 | 12.8 | 13.8 | 12.9 | 10.3 | ||
Training & Services/Military | $ | 31.4 | 33.7 | 7.6 | 9.5 | 7.9 | 6.4 | 6.1 | |
% | 14.1 | 16.2 | 14.0 | 16.1 | 14.5 | 11.6 | 10.9 | ||
|
|||||||||
Total segment operating income | $ | 251.5 | 197.5 | 69.7 | 61.7 | 62.1 | 58.0 | 52.2 | |
Other (expense) income expenses | $ | - | (8.1 | ) | - | - | - | - | 1.1 |
|
|||||||||
EBIT | $ | 251.5 | 189.4 | 69.7 | 61.7 | 62.1 | 58.0 | 53.3 | |
|
We use segment operating income to measure the profitability of our four operating segments, and to help us make decisions about allocating resources. We calculate segment operating income by using a segments net earnings before other income, interest, income taxes and discontinued operations. This allows us to assess the profitability of a segment before the impact of developments not specifically related to its performance.
34
MANAGEMENTS DISCUSSION AND ANALYSIS | FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008 | ||||||||||
|
|||||||||||
Capital employed | |||||||||||
March 31 | December 31 | September 30 | June 30 | March 31 | |||||||
(amounts in millions) | 2008 | 2007 | 2007 | 2007 | 2007 | ||||||
|
|||||||||||
Civil segments | |||||||||||
Training & Services/Civil | $ | 868.3 | 774.3 | 762.5 | 734.7 | 759.1 | |||||
Simulation Products/Civil | $ | (81.9 | ) | (38.7 | ) | (26.9 | ) | (13.0 | ) | (59.8 | ) |
|
|||||||||||
Military segments | |||||||||||
Simulation Products/Military | $ | 68.4 | 100.1 | 98.1 | 90.1 | 54.5 | |||||
Training & Services/Military | $ | 136.5 | 138.4 | 135.8 | 142.4 | 132.8 | |||||
|
|||||||||||
$ | 991.3 | 974.1 | 969.5 | 954.2 | 886.6 | ||||||
|
5.1 CIVIL SEGMENTS
TRAINING & SERVICES/CIVIL
TS/C was awarded over $116 million in contracts this quarter.
· | Signed a five-year contract with first-time customer Sentient, to exclusively cover the expansion which resulted from Sentients acquisition of TAG USA; |
· | Signed a five-year contract with XOJET, to support the renewal of their exclusive contract with Citation X training. |
Expansion and new initiatives
Emerging Markets
Asia
· | We selected Kuala Lumpur, Malaysia as our location for our Southeast Asian training hub, following a partnership with AirAsia and the government of Malaysia. As part of the agreement, we will add another Airbus A320 FFS and an Airbus A330 FFS to the Kuala Lumpur training centre within the next 10 months. This partnership is a result of our expansion strategy within emerging markets, as we intend to increase our capacity in the region over the next 18 months. The new major CAE-AirAsia training hub in Malaysia is designed to meet the strong demand for aircrew training within Southeast Asia, one of the worlds most rapidly growing aviation markets; |
· | We completed the expansion of the Zhuhai Flight Training Centre. We committed to adding three assets to this training centre: an Airbus A320 FFS, an Airbus A330 FFS and a Boeing B737-800 FFS. |
Middle East
· | We obtained Level D accreditation by the European Joint Aviation Authorities (JAA), the U.S. Federal Aviation Authority (FAA) and the United Arab Emirates General Civil Aviation Authority on the Gulfstream G450/550 business jet training programs; |
· | We will expand the Emirates-CAE Flight Training Centre with one Bombardier Global Express FFS and one Hawker Beechcraft FFS CAE 5000 series. |
35
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
India
· | We signed two contracts. One was for a joint venture with the Airport Authority of India (AAI) to develop the Rajiv Gandhi National Flying Training Institute (RGNFTI) and another to become the managing partner of the Indian governments Indira Gandhi Rashtriya Uran Akademi (IGRUA) flight training academy; |
· | We are in the process of establishing the first independant Indian aviation training centre in Bangalore, India. The centre will serve India-based airlines and the surrounding region. The centre will be part of the CAE-Airbus cooperation and will initially offer pilot, cabin crew and maintenance training as well as flight operations support on the Airbus A320 and the Boeing B737. The training centre will also serve the needs of CAE Global Academy, a new training alliance intended to address the global shortage of pilots. |
Europe
· | We formalized a joint venture agreement with Embraer to provide comprehensive pilot and ground crew training to Embraer customers of the Phenom 100 VLJ and Phenom 300 LJ. Commencing calendar 2009, CAE will offer training programs for the Phenom 100 VLJ and Phenom 300 LJ aircraft at CAEs Burgess Hill Training Centre, U.K.; |
· | We have expansion plans for the U.K. training centre, by introducing three additional simulator bays; |
· | We signed a 10-year agreement to lease an Airbus A380 FFS and related training devices to Air France, enabling the companies to collaborate in A380 training requirements. The event marks the first time an A380 FFS has been deployed within CAEs training network; |
· | We added one B737 FFS at the CAE Aviation Training Centre in Amsterdam. |
America
· | We will expand the North East Training Centre, from six simulator bays to fifteen, to meet increased training demands; |
· | We integrated into our results the newly-acquired company Flightscape Inc. (Flightscape) as of August 29, 2007. The acquisition is expected to complement our innovative training solutions aimed at enhancing the efficiency and safety of its customers. Flightscape provides expertise in flight data analysis and flight sciences and develops software solutions that enable the effective study and understanding of recorded flight data to improve safety, maintenance and flight operations; |
· | We achieved industry firsts with the receipt of Level D certification, the highest qualification for flight simulators, by the FAA and JAA for two CAE-built Dassault Falcon 7X FFSs. We also received Level D certification on the Gulfstream G450/550 FFS; |
· | We signed a 20-year agreement to become an authorized training provider for the Bombardier Global Express aircraft, Global 5000 aircraft, Global Express XRS aircraft and Bombardier Challenger 300 aircraft; |
· | We signed a series of contracts with Air Canada granting us responsibility over the airlines Toronto and Vancouver centres for training centre operation services; |
· | We signed a contract with first-time customer Mooney Airplane Company, to develop a series of web-based maintenance training modules. |
.
36
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
Financial results | ||||||||
(amounts in millions, except operating | ||||||||
margins, RSEU and FFSs deployed) | FY2008 | FY2007 | Q4-2008 | Q3-2008 | Q2-2008 | Q1-2008 | Q4-2007 | |
| ||||||||
Revenue | $ | 382.1 | 336.9 | 104.5 | 92.8 | 90.0 | 94.8 | 91.7 |
Segment operating income | $ | 73.5 | 64.3 | 23.8 | 15.5 | 14.6 | 19.6 | 21.3 |
Operating margins | % | 19.2 | 19.1 | 22.8 | 16.7 | 16.2 | 20.7 | 23.2 |
Amortization & depreciation | $ | 52.0 | 45.5 | 12.9 | 12.5 | 13.5 | 13.1 | 12.4 |
Capital expenditures | $ | 161.8 | 108.1 | 41.6 | 14.1 | 79.3 | 26.8 | 27.7 |
Capital employed | $ | 868.3 | 759.1 | 868.3 | 774.3 | 762.5 | 734.7 | 759.1 |
Backlog | $ | 963.3 | 951.6 | 963.3 | 896.1 | 887.5 | 853.4 | 951.6 |
RSEU11 | 108 | 99 | 110 | 109 | 106 | 105 | 101 | |
FFSs deployed | 124 | 114 | 124 | 123 | 119 | 117 | 114 | |
|
Revenue up by 13% over last quarter and by 14% year over year
The increase over last quarter and year over year was mainly attributed to a strong demand in all of our training centres, translating into a higher utilization rate, one more RSEU from last quarter and nine more RSEU than in the same period last year. The growth year over year was achieved despite an appreciation of the Canadian dollar against the British pound, the euro and the U.S. dollar.
Revenue was $382.1 million this year, which is 13% or $45.2 million higher than last year
The growth over last year was attributed to an increase of nine RSEUs, as well as a strong demand for training, which reflects the healthy state of the aerospace industry. The growth over last year was achieved despite an appreciation of the Canadian dollar against the British pound and the U.S. dollar. This year, TS/Cs revenue would have been approximately $24 million higher if the average foreign exchange rate had been comparable to last year.
Segment operating income was $23.8 million (22.8% of revenue) this quarter
Segment operating income was $23.8 million (22.8% of revenue) this quarter, compared to $15.5 million (16.7% of revenue) in the last quarter and $21.3 million (23.2% of revenue) in the same period last year.
Segment operating income increased by $8.3 million, or 54%, over last quarter. This increase is due to a strong demand and performance across all of our training centres, a gain of $0.5 million from the disposal of one FFS, and the depreciation of the Canadian dollar against the euro and the U.S. dollar. The segment operating income increased by $2.5 million over the same period last year despite one-time gains amounting to $2.4 million, recognized in the fourth quarter of last year.
Segment operating income was $73.5 million, which is 14% or $9.2 million higher than last year
Segment operating income was $73.5 million (19.2% of revenue) this year, compared to $64.3 million (19.1% of revenue) over last year. TS/Cs operating margin was similar to last year, resulting from a $45.2 million increase in revenue, partially offset by the appreciation of the Canadian dollar against the British pound and the U.S. dollar and costs associated with the expansion of our network and the ramp-up of new training programs. This year, TS/Cs segment operating income would have been approximately $6.4 million higher if the average foreign exchange rate had been comparable to last year.
11 Non-GAAP measure (see Section 3.7) .
37
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
TS/Cs operating margin was relatively unaffected by foreign exchange fluctuations. However, over last year, the appreciation of the Canadian dollar reduced the translation value of the segments revenue and operating income.
Capital employed increased by $109.2 million over last year
Capital employed was higher mainly because of additional simulators in the network, combined with the integration into our results of the newly-acquired Flightscape, our investment in subsidiary companies as well as by foreign exchange fluctuation.
Capital expenditures at $41.6 million this quarter and $161.8 million for the year
Capital expenditures were higher this year mainly because of the ongoing investment to grow our training network and the buyback of some leased simulators that were already part of our network and, therefore, included in our maintenance capital expenditures.
Backlog up by 1% over last year | ||||||
(amounts in millions) | FY2008 | FY2007 | ||||
| ||||||
Backlog, beginning of period | $ | 951.6 | $ | 809.0 | ||
+ orders | 452.5 | 452.5 | ||||
- revenue | (382.1 | ) | (336.9 | ) | ||
+/- adjustments (mainly FX) | (58.7 | ) | 27.0 | |||
| ||||||
Backlog, end of period | $ | 963.3 | $ | 951.6 | ||
| ||||||
This years book-to-sale ratio was 1.2x. | ||||||
SIMULATION PRODUCTS/CIVIL |
SP/C was awarded contracts for the following 9 FFSs this quarter:
· | One EMB-190 FFS to Hainan Airlines; |
· | One A320 FFS CAE 5000 series to Lufthansa; |
· | One B747-8 FFS to Lufthansa; |
· | Two B737-800 FFSs to Xiamen Airlines; |
· | One B777 FFS to Delta Airlines; |
· | One Bombardier Global Express FFS to Emirates-CAE Flight Training Centre (ECFT); |
· | One Hawker Beechcraft FFS CAE 5000 series to ECFT; |
· | One A330 FFS to an undisclosed international airline customer. |
This brings SP/Cs total order intake for the year to 37 FFSs.
Products and new initiatives
· | We introduced a new feature for Simulation Products: CAE True Environment. This product offers a dynamic and comprehensive air traffic control environment and provides a more immersive, realistic, and higher fidelity training environment. CAE True Environment is available for the CAE 5000 Series and CAE 7000 Series FFSs, and CAE Simfinity training devices; |
· | We received Level D certification, the highest performance rating for flight training equipment, by the European Joint Aviation Authorities (JAA) and the Japan Civil Aviation Bureau on four CAE-built FFSs with electric motion. The simulators, two Boeing 737-800 and one A320 for Flight |
38
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
Simulation Company, and one Boeing 737-800 for Japan Airlines, are the first FFSs with electric motion for Airbus and Boeing aircraft to ever receive Level D certification;
· | We received Level D certification by the Direction Générale de lAviation Civile (DGAC), Frances civil aviation authority, for the CAE Tropos-6000 visual system and 3.2 megapixel Liquid Crystal on Silicon projectors of a CAE-built Airbus A320 FFS for Air France; |
· | We achieved Level D certification by the United Kingdoms Civil Aviation Authority on our first CAE 5000 Series A320 FFS. |
Financial results | |||||||||||||||
(amounts in millions, except operating | |||||||||||||||
margins) | FY2008 | FY2007 | Q4-2008 | Q3-2008 | Q2-2008 | Q1-2008 | Q4-2007 | ||||||||
|
|||||||||||||||
Revenue | $ | 435.3 | 348.1 | 106.5 | 103.5 | 112.3 | 113.0 | 97.6 | |||||||
Segment operating income | $ | 94.9 | 60.4 | 23.8 | 25.2 | 26.2 | 19.7 | 15.3 | |||||||
Operating margins | % | 21.8 | 17.4 | 22.3 | 24.3 | 23.3 | 17.4 | 15.7 | |||||||
Amortization & depreciation | $ | 6.9 | 9.4 | 1.8 | 1.6 | 2.0 | 1.5 | 2.9 | |||||||
Capital expenditures | $ | 4.6 | 14.4 | 1.2 | 1.2 | 1.4 | 0.8 | 1.8 | |||||||
Capital employed | $ | (81.9 | ) | (59.8 | ) | (81.9 | ) | (38.7 | ) | (26.9 | ) | (13.0 | ) | (59.8 | ) |
Backlog | $ | 381.8 | 352.8 | 381.8 | 388.7 | 373.3 | 413.3 | 352.8 | |||||||
|
Revenue up by 3% over last quarter and by 9% year over year
The increase over last quarter was mainly attributed to the higher volume from a stronger level of orders during the third and fourth quarters.
Revenue increased year over year because of the higher number of orders, partially offset by the negative impact of the appreciation of the Canadian dollar against the U.S. dollar on sales contracts signed during the current fiscal year.
Revenue was $435.3 million for the year, which is 25% or $87.2 million higher than last year
The increase was attributed to stronger order intake throughout the current fiscal year, as well as revenue recorded on simulators that were already manufactured and for which we signed sales contracts during the second quarter of this year. In addition, we obtained customer acceptance of a simulator that was recorded as a sale-type capital lease transaction during the first quarter of this year.
Segment operating income down by 6% over last quarter and up by 56% year over year
SP/Cs segment operating income remains strong despite the appreciation of the Canadian dollar. The decrease over last quarter was principally due to the mix of different programs. The increase year over year was attributed to higher volume, improved program execution as well as lower costs.
Segment operating income was $94.9 million for the year, which is 57% or $34.5 million higher than last year
This year, SP/Cs operating margin was 21.8%, compared to 17.4% last year, reflecting the advantage of a positive sustained cost performance as well as strong demand and volume. This year, we delivered to our customers 29 FFSs compared to 25 in fiscal 2007.
SP/Cs revenue was negatively impacted by the appreciation of the Canadian dollar against the U.S. dollar. However, this negative impact was partially mitigated because our sale contracts are hedged upon signing at the prevailing rate. This year, a majority of SP/Cs revenue was generated from sales previously hedged against currency fluctuations.
39
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
Capital employed decreased over last quarter and over last year
Capital employed was lower mainly due to lower working capital accounts. This was primarily due to a higher collection of accounts receivable, predominantly during the fourth quarter of this year, combined with a higher level of accounts payable at year-end.
Backlog up by 8% over last year | ||||||
(amounts in millions) | FY2008 | FY2007 | ||||
| ||||||
Backlog, beginning of period | $ | 352.8 | $ | 284.4 | ||
+ orders | 466.9 | 406.9 | ||||
- revenue | (435.3 | ) | (348.1 | ) | ||
+/- adjustments | (2.6 | ) | 9.6 | |||
| ||||||
Backlog, end of period | $ | 381.8 | $ | 352.8 | ||
| ||||||
This years book-to-sale ratio was 1.1 x. |
5.2 MILITARY SEGMENTS
SIMULATION PRODUCTS/MILITARY
SP/M was awarded $140 million in orders this quarter, including:
· | One S-70B Seahawk and one AS332 Super Puma helicopter simulators for the Republic of Singapore Air Force; |
· | One MH-60S OFT and one MH-60S weapons tactics trainer (WTT) for the U.S. Navy; |
· | The prototype P-8A Operational Flight Trainer for Boeings new P-8A Poseidon maritime patrol and anti-submarine warfare aircraft; |
· | One prototype M-346 flight training device (FTD) to provide the initial training capability for Alenia Aermacchis new M-346 advanced lead-in fighter trainer aircraft. |
Products and new initiatives
· | We unveiled Presagis, a new modelling and simulation software company, as part of our military simulation products business. We combined our acquisitions of Engenuity Technologies, MultiGen-Paradigm and TERREX and an existing CAE commercial-off-the-shelf (COTS) software team to create an independent, industry-leading company specializing in COTS modelling and simulation software; |
· | We acquired 76% of the outstanding shares of Macmet Technologies Limited (Macmet), based in Bangalore, India. |
40
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
Financial results | ||||||||
(amounts in millions, except operating | ||||||||
margins) | FY2008 | FY2007 | Q4-2008 | Q3-2008 | Q2-2008 | Q1-2008 | Q4-2007 | |
|
||||||||
Revenue | $ | 383.7 | 357.5 | 101.5 | 89.6 | 97.1 | 95.5 | 92.2 |
Segment operating income | $ | 51.7 | 39.1 | 14.5 | 11.5 | 13.4 | 12.3 | 9.5 |
Operating margins | % | 13.5 | 10.9 | 14.3 | 12.8 | 13.8 | 12.9 | 10.3 |
Amortization & depreciation | $ | 10.5 | 9.0 | 2.8 | 3.0 | 2.5 | 2.2 | 2.6 |
Capital expenditures | $ | 7.3 | 5.5 | 2.1 | 1.5 | 2.4 | 1.3 | 1.8 |
Capital employed | $ | 68.4 | 54.5 | 68.4 | 100.1 | 98.1 | 90.1 | 54.5 |
Backlog | $ | 765.1 | 635.8 | 765.1 | 704.4 | 535.3 | 560.5 | 635.8 |
|
Revenue up by 13% over last quarter and by 10% year over year
The increase over last quarter was mainly due to high activity levels on some U.S. and European programs, combined with the decrease in value of the Canadian dollar against the U.S. dollar and the euro during the quarter.
The increase year over year was mainly due to higher activity on some European programs, combined with the integration into our results of the newly-acquired companies Engenuity, Multigen and Macmet. The increase was partially offset by reduced activity on some U.S. programs and the appreciation of the Canadian dollar against the U.S. dollar during the period.
Revenue was $383.7 million this year, which is 7% or $26.2 million higher than last year
The increase reflects the integration of the above-mentioned acquisitions, combined with a higher activity level, mainly in the United States. This increase was partially offset by the appreciation of the Canadian dollar against the U.S. dollar.
Segment operating income up by 26% over last quarter and by 53% year over year
SP/Ms segment operating income increased over last quarter and year over year mainly due to the renegotiation of a contract change order, which included the alignment of the contract currency with the clients currency resulting in a gain on a financial instrument. This increase was partially offset by costs incurred in the reorganization of our worldwide military segments.
Segment operating income was $51.7 million this year, which is 32% or $12.6 million higher than last year
SP/Ms segment operating income was higher than last year for the same reasons stated above, combined with an increased level of activity in the United States, lower costs and a favourable program mix.
Capital employed decreased over last quarter
The decrease this quarter was mainly because of lower working capital accounts, principally resulting from increased deposits on contracts and a higher level of accounts payable at year-end.
41
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
Backlog up by 20% over last year | ||||||
(amounts in millions) | FY2008 | FY2007 | ||||
| ||||||
Backlog, beginning of period | $ | 635.8 | $ | 540.5 | ||
+ orders | 530.0 | 421.3 | ||||
- revenue | (383.7 | ) | (357.5 | ) | ||
+/- adjustments (mainly FX) | (17.0 | ) | 31.5 | |||
| ||||||
Backlog, end of period | $ | 765.1 | $ | 635.8 | ||
|
This years book-to-sale ratio was 1.4x.
TRAINING & SERVICES/MILITARY
TS/M was awarded $78 million in orders this quarter, including:
· | Maintenance and support services for the NATO Airborne Early Warning and Control Forces E3A AWACS simulator, located in Europe; |
· | Simulator maintenance and support services to the 160th Special Operation Aviation Regiment Airborne for the U.S. Army; |
· | Contractor logistics, engineering maintenance, pilot instruction, courseware development and training system support of the C-130J and C-130E/H for the U.S. Air Force. |
Services and new initiatives
· | We were notified this year by the Government of Canada that we were the only compliant bidder to become Canadas C-130J and CH-47 operational training systems provider. We expect to respond to a request for proposal whereby the Government of Canada will acquire equipment and aircrew training services over 20 years for Canadas tactical airlift aircraft and helicopter fleets; |
· | We are having continued success winning business related to training systems and services for the NH90 helicopter. During the third quarter of fiscal 2008, we won a contract to provide two MRH90 full-flight and mission simulators (FFMSs) to the Commonwealth of Australia. As a prime contractor and Authorised Engineering Organisation for the Commonwealth, we will provide overall project management, systems engineering and integrated logistics support. |
Financial results | ||||||||
(amounts in millions, except operating | ||||||||
margins) | FY2008 | FY2007 | Q4-2008 | Q3-2008 | Q2-2008 | Q1-2008 | Q4-2007 | |
| ||||||||
Revenue | $ | 222.5 | 208.2 | 54.1 | 58.9 | 54.5 | 55.0 | 55.8 |
Segment operating income | $ | 31.4 | 33.7 | 7.6 | 9.5 | 7.9 | 6.4 | 6.1 |
Operating margins | % | 14.1 | 16.2 | 14.0 | 16.1 | 14.5 | 11.6 | 10.9 |
Amortization & depreciation | $ | 8.1 | 6.9 | 1.8 | 2.4 | 2.2 | 1.7 | 1.9 |
Capital expenditures | $ | 15.8 | 30.1 | 3.4 | 4.3 | 4.3 | 3.8 | 2.5 |
Capital employed | $ | 136.5 | 132.8 | 136.5 | 138.4 | 135.8 | 142.4 | 132.8 |
Backlog | $ | 789.7 | 834.4 | 789.7 | 721.5 | 717.2 | 772.3 | 834.4 |
|
Revenue down by 8% over last quarter and by 3% year over year
The decrease over last quarter was mainly attributable to increased revenue in the third quarter from some support services for various German military bases as well as a cost recovery during the third quarter, resulting from our annual labour rates review with the Government of Canada. The decrease was partially offset by the depreciation of the Canadian dollar against the U.S. dollar and the euro during the quarter.
42
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
The decrease year over year was mainly due to the appreciation of the Canadian dollar against the U.S. dollar and the British pound, partially offset by an increase in training service activities in the United States, as well as the integration into our results of the newly-acquired companies Engenuity and Kesem.
Revenue was $222.5 million this year, which is 7% or $14.3 million higher than last year
The increase was mainly a result of support services for various German military bases, annual rates review with the Government of Canada, increase in training services for the U.S. Air Force, higher activities on North American and Australian support services contracts and the integration into our results of the newly-acquired companies Engenuity and Kesem. This increase was partially offset by the appreciation of the Canadian dollar against the U.S. dollar and the British pound.
Segment operating income down by 20% over last quarter and up by 25% year over year
This quarter, segment operating income included an improved cost performance on certain maintenance services contracts, partially offset by costs incurred in the reorganization of our worldwide military segments. This mainly explains the increase year over year.
Compared to last quarter, despite the above-mentioned elements, segment operating income was lower due to the intense activity in the third quarter from some support services for various German military bases as well as the cost recovery resulting from our annual rates review with the Government of Canada during the third quarter. Furthermore, during the third quarter we received a dividend from a U.K.-based investment of TS/M. The dividend is a component of TS/Ms recurring business, even though it is not received evenly throughout the year.
Segment operating income was $31.4 million this year, which is 7% or $2.3 million lower than last year
The decrease over last year was mainly due to the one-time payment we received from the U.K. government during the first quarter of fiscal 2007 in relation to the AVTS project. Excluding this onetime payment, the segment operating margin would result in a 7%, or $2.1 million, increase compared to last year, mainly resulting from the above-mentioned factors contributing to the increase in revenue and by a more significant impact of the dividend received during fiscal 2008 from the U.K -based investment of TS/M.
Capital employed decreased over last quarter
The decrease this quarter was mainly because of lower working capital accounts, partially offset by additional investments for the NH90 training program in Germany and the decrease in value of the Canadian dollar against the euro.
43
MANAGEMENTS DISCUSSION AND ANALYSIS | FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008 | |||||
| ||||||
Backlog down by 5% over last year | ||||||
(amounts in millions) | FY2008 | FY2007 | ||||
| ||||||
Backlog, beginning of period | $ | 834.4 | $ | 826.1 | ||
+ orders | 216.1 | 174.5 | ||||
- revenue | (222.5 | ) | (208.2 | ) | ||
+/- adjustments (mainly FX) | (38.3 | ) | 42.0 | |||
| ||||||
Backlog, end of period | $ | 789.7 | $ | 834.4 | ||
| ||||||
This years book-to-sale ratio was 1.0x. |
Combined military performance favourable over last year
Our combined military revenue increased by $7.1 million, or 5%, over last quarter, by $7.6 million, or 5%, year over year and $40.5 million, or 7%, over last year. You will find more details in the above Results by segment sections of SP/M and TS/M.
Excluding the net impact of $3.0 million resulting from the change order renegotiation gain and costs incurred in the reorganization of our military segments, our combined military operating margins would have been 12.0% this quarter and 13.1% this year. This favourably compares to the combined military operating margins of 10.5% in the fourth quarter of fiscal 2007 and 12.1% (excluding the AVTS onetime payment) in fiscal 2007, hence demonstrating the continuous improved profitability of our military business.
Combined military book-to-sale ratio for the year was 1.2x.
6. CONSOLIDATED CASH MOVEMENTS AND LIQUIDITY
We actively manage liquidity and regularly monitor the factors that could affect it, including:
· | Cash generated from operations, including timing of milestone payments and management of working capital; |
· | Capital expenditure requirements; |
· | Scheduled repayments of long-term debt obligations, our credit capacity and expected future debt market conditions. |
44
MANAGEMENTS DISCUSSION AND ANALYSIS | FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008 | ||||||||
| |||||||||
6.1 CONSOLIDATED CASH MOVEMENTS | |||||||||
(amounts in millions) | FY2008 | FY2007 | FY2006 | ||||||
| |||||||||
Cash provided by continuing operating | |||||||||
activities* | $ | 276.6 | $ | 219.1 | $ | 146.8 | |||
Changes in non-cash working capital | (15.7 | ) | 20.2 | 79.1 | |||||
| |||||||||
Net cash provided by continuing | |||||||||
operations | $ | 260.9 | $ | 239.3 | $ | 225.9 | |||
Capital expenditures | (189.5 | ) | (158.1 | ) | (130.1 | ) | |||
Other capitalized costs | (25.9 | ) | (11.8 | ) | (12.4 | ) | |||
Cash dividends | (9.8 | ) | (9.8 | ) | (9.7 | ) | |||
Non-recourse financing12 | 137.7 | 34.0 | 26.5 | ||||||
| |||||||||
Free cash flow13 | |||||||||
$ | 173.4 | $ | 93.6 | $ | 100.2 | ||||
Business acquisitions (net of cash and | |||||||||
cash equivalents acquired) | (41.8 | ) | (4.4 | ) | 2.6 | ||||
Other cash movements, net | 8.0 | 7.9 | 19.6 | ||||||
Proceeds from disposal of discontinued | |||||||||
operations | - | (3.8 | ) | - | |||||
Non-recourse financing | (137.7 | ) | (34.0 | ) | (26.5 | ) | |||
Effect of foreign exchange rate changes | |||||||||
on cash and cash equivalents | (0.1 | ) | 4.4 | (7.6 | ) | ||||
| |||||||||
Net increase in cash before proceeds | |||||||||
and repayment of long-term debt | $ | 1.8 | $ | 63.7 | $ | 88.3 | |||
| |||||||||
* before changes in non-cash working capital |
12 Non-GAAP measure (see Section 3.7) .
13 Non-GAAP measure (See Section 3.7) .
45
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
Free cash flow was $173.4 million this year, 85% or $79.8 million higher than last year
This year, the increase in free cash flow was mainly attributable to an increase in net cash provided by continuing operations and an increase in non-recourse financing on property, plant and equipment offset by higher capital expenditures.
Capital expenditures and other capitalized costs increased by $45.5 million this year
Total capital expenditures of $189.5 million this year included:
· | The major milestone delivery of the first Dassault Falcon 7X training program; |
· | The buyback of some leased simulators that were already part of our network and, therefore included in our maintenance capital expenditures14; |
· | The ongoing investment to grow our training network. |
This year, our growth capital expenditures15 were $106.2 million and our maintenance capital expenditures were $83.3 million.
Total other capitalized costs of $25.9 million included mainly deferred development costs, pre-operating costs.
Non-recourse financing
During fiscal year 2008, the Company obtained senior secured financing for two new civil aviation training centres. The drawdown to March 31, 2008 was for an approximate aggregate amount of $107.5 million (US$45.7 million and £29.6 million) after taking into consideration the effect of foreign exchange swap arrangements entered in relation to this financing transaction.
6.2 SOURCES OF LIQUIDITY
We have committed lines of credit at floating rates, each provided by a syndicate of lenders. We and some of our subsidiaries can borrow funds directly from these credit facilities to cover operating and general corporate expenses and to issue letters of credit and bank guarantees.
The total amount available through these committed bank lines as at March 31, 2008 was $573.6 million, of which $129.6 million (or 23%) was used for letters of credit. The total amount available at March 31, 2007 was $615.3 million, of which $139.7 million (or 23%) was used. Due to the fact that our revolving credit facilities are denominated in U.S. dollars and euros, total availability decreased due to the appreciation of the Canadian dollar, whereas our utilization remained unchanged from prior year. There were no borrowings under the facilities as at March 31, 2008 or at March 31, 2007.
We also have the ability to borrow in various currencies through non-committed operating lines of $4.9 million. We had not drawn down on these operating lines as at March 31, 2008.
Long-term debt was $379.8 million as at March 31, 2008 compared to $283.2 million at the end of the previous fiscal year. The short-term portion of the long-term debt was $27.3 million at March 31, 2008 compared to $27.2 million at the end of the previous fiscal year. The main variations in debt over the year (other than normal contractual amortization of existing debt) are described below.
14 Non-GAAP measure (see Section 3.7) .
15 Non-GAAP measure (see Section 3.7) .
46
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
We raised senior secured financing of $107.5 million (US$45.7 million and £29.6 million) for two civil aviation training centres. The debt is non-recourse to CAE and amortizes over two separate periods until June 2014 and June 2018.
We borrowed an additional $10.7 million (7.3 million) for our 25% share on the debt facility for the German NH90 project for a total of $52.8 million (32.5 million). The project company has a 175.5 million in non-recourse financing to finance the build-out of the project. Following the build-out period, the debt will be non-recourse to CAE and has a final maturity of December 2019.
We also raised an additional $10.8 million (US$10.1 million) to finance the acquisition of two FFSs for the Zhuhai Training Centre, as well as the expansion of that training centre for a total of $24.4 million (US$23.8 million) as of March 31, 2008. This additional financing represented our 49% share of the term debt for the joint venture. The debts are non-recourse to CAE and have various maturities to August 2013.
We have an unsecured facility in place for $35.0 million to finance the cost of the ERP system. We can draw down on this facility on a quarterly basis with monthly repayments over a term of seven years beginning at the end of the first month following each quarterly disbursement. We have borrowed $11.3 million to date for costs incurred to implement the new system.
We have an unsecured Export Development Canada (EDC) Performance Security Guarantee (PSG) account for $102.8 million (US$100 million). This is an uncommitted revolving facility for performance bonds, advance payment guarantees or similar instruments. As of March 31, 2008, we had $54.9 million outstanding compared to $65.6 million as at March 31, 2007. Due to the fact that the majority of the guarantees are issued in U.S. dollars, the variation was principally due to the appreciation of the Canadian dollar.
6.3 CONTRACTUAL OBLIGATIONS
We enter into contractual obligations and commercial commitments in the normal course of our business. These include debentures and notes and others. The table below shows when they mature.
Contractual obligations | ||||||||||||||
as at March 31, 2008 | ||||||||||||||
(amounts in millions) | 2009 | 2010 | 2011 | 2012 | 2013 | Thereafter | Total | |||||||
|
||||||||||||||
Long-term debt | $ | 27.6 | $ | 92.8 | $ | 28.0 | $ | 20.1 | $ | 72.3 | $ | 133.6 | $ | 374.4 |
Capital lease | 0.7 | 0.7 | 6.7 | - | - | - | 8.1 | |||||||
Operating leases | 59.1 | 55.2 | 54.9 | 55.0 | 41.7 | 162.8 | 428.7 | |||||||
Purchase obligations | 25.2 | 14.1 | 7.4 | 6.8 | 0.9 | - | 54.4 | |||||||
Other long-term obligations | 0.7 | - | - | - | - | - | 0.7 | |||||||
|
||||||||||||||
Total | $ | 113.3 | $ | 162.8 | $ | 97.0 | $ | 81.9 | $ | 114.9 | $ | 296.4 | $ | 866.3 |
|
We also had total committed credit facilities of $444.0 million available as at March 31, 2008 compared to $475.6 million at March 31, 2007. Due to the fact that the credit facilities are denominated in U.S. dollars and euros, the decrease in available credit mainly resulted from the appreciation of the Canadian dollar, whereas the utilization remained relatively similar to last year.
47
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
We have purchase obligations related to agreements that are enforceable and legally binding. Most are agreements with subcontractors to provide services for long-term contracts that we have with our clients. The terms of the agreements are significant because they set out obligations to buy goods or services in fixed or minimum amounts, at fixed, minimum or variable prices and at approximate times.
As at March 31, 2008 we had other long-term liabilities that are not included in the table above. These include some accrued pension liabilities, deferred revenue, deferred gains on assets and various other long-term liabilities. Cash obligations on accrued employee pension liability depend on various elements including market returns, actuarial gains and losses and the interest rate.
We did not include future income tax liabilities since future payments of income taxes depend on the amount of taxable earnings and on whether there are tax loss carry-forwards available.
7. | CONSOLIDATED FINANCIAL POSITION |
7.1 | CONSOLIDATED CAPITAL EMPLOYED |
As at March 31 | As at March 31 | |||||
(amounts in millions) | 2008 | 2007 | ||||
| ||||||
Use of capital: | ||||||
Non-cash working capital | $ | (138.1 | ) | $ | (118.1 | ) |
Property, plant and equipment, net | 1,046.8 | 986.6 | ||||
Other long-term assets | 380.0 | 343.9 | ||||
Other long-term liabilities | (216.1 | ) | (249.5 | ) | ||
| ||||||
Total capital employed | $ | 1,072.6 | $ | 962.9 | ||
| ||||||
Source of capital: | ||||||
Net debt | $ | 124.1 | $ | 133.0 | ||
Shareholders equity | 948.5 | 829.9 | ||||
| ||||||
Source of capital | $ | 1,072.6 | $ | 962.9 | ||
|
Capital employed16 increased 11% over last year
The increase was mainly the result of higher property, plant and equipment, higher other long-term assets and lower other long-term liabilities offset by lower non-cash working capital.
Our return on capital employed17 (ROCE) was 16.8% (14.5% adjusted for operating leases) this year compared to 14.7% (12.1% adjusted for operating leases) for last year.
Non-cash working capital18 decreased by $20.0 million
The decrease was mainly from an increase of accounts payable and other accrued liabilities, and deposits on contracts, partially offset by higher accounts receivable, inventories and income taxes recoverable.
16 Non-GAAP measure (see Section 3.7) .
17 Non-GAAP measure (see Section 3.7) .
18 Non-GAAP measure (see Section 3.7) .
48
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
Net property, plant and equipment up $60.2 million
The increase from capital expenditures of $189.5 million was mainly offset by normal depreciation of $60.6 million and by a negative impact of $38.9 million caused by foreign exchange variation.
Net debt lower than last year
The decrease was largely caused by the appreciation of the Canadian dollar against our foreign denominated debt and $1.8 million net increase in cash, before proceeds and repayment of long-term debt, partially offset by assumption of debt held by acquired businesses.
Change in net debt | ||||||
As at March 31 | As at March 31 | |||||
(amounts in millions) | 2008 | 2007 | ||||
| ||||||
Net debt, beginning of period | $ | 133.0 | $ | 190.2 | ||
Impact of cash movements on net debt (see | ||||||
table in the cash movements section) | (1.8 | ) | (63.7 | ) | ||
Business acquisitions and others | 11.8 | - | ||||
Effect of foreign exchange rate changes on | ||||||
long-term debt | (18.9 | ) | 6.5 | |||
| ||||||
Decrease in net debt during the period | (8.9 | ) | (57.2 | ) | ||
| ||||||
Net debt, end of period | $ | 124.1 | $ | 133.0 | ||
|
Shareholders equity
The $118.6 million increase in equity was mainly because of higher net earnings ($152.7 million) and the proceeds from the share issue and contributed surplus ($19.8 million) offset by a decrease in accumulated other comprehensive loss ($35.5 million). This was after accounting for dividends ($10.1 million).
Outstanding share data
Our articles of incorporation authorize the issue of an unlimited number of common shares, and an unlimited number of preferred shares issued in series. We had a total of 253,969,836 common shares issued and outstanding as at March 31, 2008 with total share capital of $418.9 million. We also had 4,602,374 options outstanding, of which 2,543,545 were exercisable. We have not issued any preferred shares to date.
As at April 30, 2008, we had a total of 254,008,182 common shares issued and outstanding.
Dividend policy
We paid a dividend of $0.01 per share each quarter in fiscal 2008. These dividends were eligible under the Income Tax Act (Canada) and its provincial equivalents.
Our Board of Directors has the discretion to set the amount and timing of any dividend. The Board reviews the dividend policy once a year based on the cash requirements of our operating activities, liquidity requirements and projected financial position. We expect to pay annual dividends of approximately $30 million based on our revised dividend policy and the 254.0 million common shares outstanding as at March 31, 2008.
49
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
Guarantees
We issued letters of credit and performance guarantees for $108.9 million in the normal course of business this year, compared to $149.1 million last fiscal year. The amount was lower this year as a result of the expiry of a simulator deployment guarantee and lower levels of advance payment guarantees.
Non-recourse project financing
We arranged project financing for the Medium Support Helicopter (MSH) program in 1997 after entering the program with the U.K. Ministry of Defence. The contract was awarded to a consortium, CAE Aircrew Training Services Plc (Aircrew). The capital value of the assets supplied by Aircrew is over $200 million.
We have a 14% interest in CVS Leasing Ltd., which owns the simulators operated by the training centre. We manufactured and sold the FFSs to CVS Leasing Ltd., which then leased them to Aircrew for the full term of the MSH contract. Because we have a majority interest in Aircrew, we have consolidated their financial statements in our results. Future minimum lease payments associated with the FFSs leased to Aircrew are approximately $103 million as at March 31, 2008 and are included in this section in the discussion of operating leases as contractual obligations. The amount is also disclosed in Note 20 to the consolidated financial statements.
In April 2005, Helicopter Flight Training Services GmbH (HFTS), an industrial consortium in which we have 25% ownership contracted a project-financing facility of 175.5 million to fund the acquisition of assets needed to fulfill a 14.5 -year training services contract on the NH90 helicopter platform for the German Armed Forces. We account for 25% of the outstanding project-financing debt using the proportionate consolidation method. This was $52.8 million (32.5 million) as at March 31, 2008, and was included in the amount disclosed in Note 12 to the consolidated financial statements.
We increased the amount of financing for the Zhuhai Flight Training Centre this year. The recorded debt represents our 49% joint venture share of term-debt to acquire simulators and repay existing debt maturities, on a non-recourse basis, for the joint venture. The term-debt was arranged through several financial institutions. Borrowings bear interest on a floating rate of U.S. Libor plus a spread, and have various amortizations to August 2013. We had $24.4 million outstanding (US$23.7 million) as at March 31, 2008. This is included in the amount disclosed in Note 12 to the consolidated financial statements.
In June 2007 we concluded a non-recourse financing for two newly established civil aviation training centres. The debt is non-recourse to the Company and is secured by the assets of the training centers and is cross-guaranteed and cross-collateralized by the cash-flow generated by the two training centres. The debt was fully drawn down by March 31, 2008 for a gross amount of $107.5 million (US$105.0 million). This is included in the amount disclosed in Note 12 to the consolidated financial statements.
Pension obligations
We maintain defined benefit and defined contribution pension plans. We expect to contribute approximately $2.6 million more than the annual required contribution for current services to satisfy a portion of the underfunded liability of the defined benefit pension plan. We will continue to contribute to the underfunded liability until we have met the plans funding obligations.
50
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
7.2 VARIABLE INTEREST ENTITIES
Note 24 to the consolidated financial statements summarizes the total assets and total liabilities of the significant entities in which we have a variable interest (variable interest entities or VIEs). They are listed by segment and include sale and leaseback structures and partnership arrangements.
Sale and leaseback
We have entered into sale and leaseback arrangements with special purpose entities (SPEs). These arrangements relate to FFSs used in our training centres for military and civil aviation. These leases expire at various dates up to 2023, except for an arrangement that expires in 2037. Typically, we have the option to purchase the equipment at a specific price at a specific time during the term of the lease. Some leases include renewal options at the end of the term. In some cases, we provided guarantees of the residual value of the equipment when the leases expire or on the day we exercise our purchase option.
These SPEs are financed by secured long-term debt and third-party equity investors who, in certain cases, benefit from tax incentives. The equipment serves as collateral for the SPEs long-term debt.
Our variable interests in these SPEs are solely through fixed purchase price options and residual value guarantees, except in one case where the variable interest is equity and a subordinated loan. We also provide administrative services to the SPE in return for a market fee.
Some of these SPEs are VIEs. At the end of fiscal 2008 and 2007, we were the primary beneficiary for one of them. The assets and liabilities of this VIE are fully consolidated into our consolidated financial statements as at March 31, 2008 and 2007, even before we classified it as a VIE and CAE as the primary beneficiary.
We are not the primary beneficiary for any of the other SPEs that are VIEs, and consolidation is not appropriate under the Accounting Guideline (AcG)-15 of the Canadian Institute of Chartered Accountants Handbook. Our maximum potential exposure to losses relating to these non-consolidated SPEs was $42.0 million at the end of fiscal 2008 ($47.1 million in 2007).
Partnership arrangements
We enter into partnership arrangements to provide military simulation products and training and services for the military and civil segments.
Our involvement with entities related to these partnership arrangements is mainly through investments in their equity and/or in subordinated loans and manufacturing and long-term training and services contracts. While some of these entities are VIEs, we are not the primary beneficiary so these entities have not been consolidated. We continue to account for these investments under the equity method and record our share of the net earnings or losses based on the terms of the partnership arrangement. As at March 31, 2008 and 2007, our maximum off-balance sheet exposure to losses related to these non-consolidated VIEs, other than from their contractual obligations, was not material.
51
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
7.3 OFF BALANCE SHEET ARRANGEMENTS
Most of our off balance sheet obligations are from operating lease obligations related to two segments:
· | The TS/C segment, which operates a fleet of over 120 simulators in our and others training centres. We have entered into sale and leaseback transactions with a number of different financial institutions and treat them as operating leases; |
· | The TS/M segment, which operates a training centre for the MSH project with the U.K. Ministry of Defence to provide simulation services. The operating lease commitments are between the operating company (which has the service agreement with the U.K. Ministry of Defence) and the asset company (which owns the assets). These leases are non-recourse to CAE. |
Sale and leaseback transactions
The sale and leaseback of certain FFSs installed in our global network of training centres is a key element in our financing strategy to support investment in the civil and military training and services business. It provides us with a cost-effective, long-term source of fixed-cost financing. A sale and leaseback transaction can only be executed after a FFS has received certification by regulatory authorities and is installed and available to customers for training.
Sale and leaseback transactions are generally structured as leveraged leases with an owner participant. Before completing a sale and leaseback consolidated transaction, we record the cost to manufacture the simulator as a capital expenditure and include it as a fixed asset on the consolidated balance sheet. When the sale and leaseback transaction is executed, we record the transaction as a disposal of a fixed asset and the cash proceeds are about the same as the fair market value of the FFS.
We record the difference between the proceeds received and our manufacturing cost (roughly the margin that we would record if we had completed a FFS sale to a third party) under deferred gains and other long-term liabilities. We then amortize it over the term of the sale and leaseback transaction as a reduction of rental expense, net of the guaranteed residual value where appropriate. At the end of the term of the sale and leaseback transaction, we take the guaranteed residual value into income if the value of the underlying FFS has not decreased.
We did not enter into any additional sale and leaseback transactions this year and, as a result, proceeds from the sale and leaseback of assets are nil for this year and last year.
In fiscal 2008, we bought back three FFSs that had initially been financed under a sale and leaseback transaction for a total consideration of $43.0 million.
The table below lists sale and leaseback transactions for FFSs that were in service in TS/C training centres as of March 31, 2008. They appear as operating leases in our consolidated financial statements.
52
MANAGEMENTS DISCUSSION AND ANALYSIS | FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008 | ||||||||||||
| |||||||||||||
Existing FFSs under sale and leaseback | |||||||||||||
(amounts in | Number of | Initial | Unamortized | ||||||||||
millions, unless | FFSs | Lease | term | Imputed | deferred | Residual value | |||||||
otherwise noted) | Fiscal year | (units) | obligations | (years) | interest rate | gain | guarantee | ||||||
| |||||||||||||
SimuFlite | 2002 to 2005 | 14 | $ | 133.6 | 10 to 20 | 5.5 to 6.7% | $ | 10.1 | $ | - | |||
CAE Inc. | 2000-2002 | 4 | 51.9 | 20-21 | 6.4 to 7.6% | 28.3 | 17.4 | ||||||
Denver | |||||||||||||
training centres | 2003 | 5 | 60.5 | 20 | 5.0% | 24.9 | - | ||||||
Zhuhai Xiang Yi | |||||||||||||
Aviation | |||||||||||||
Technology | |||||||||||||
Company | |||||||||||||
Limited joint | |||||||||||||
venture(1) | 2003 | 5 | 17.4 | 15 | 3.0% | - | - | ||||||
Other | - | 2 | 10.1 | 8 | 7.1 to 7.9% | - | - | ||||||
| |||||||||||||
Total | 30 | $ | 273.5 | $ | 63.3 | $ | 17.4 | ||||||
| |||||||||||||
Annual lease payments | |||||||||||||
(upcoming 12 months) | $ | 27.9 | |||||||||||
| |||||||||||||
(1) We have a 49% interest in this joint venture. |
The rental expenses related to operating leases of the FFSs under the sale and leaseback arrangements were $27.6 million for fiscal 2008, compared to $32.4 million last year.
You can find more details about operating lease commitments in Notes 20 and 26 to the consolidated financial statements.
7.4 FINANCIAL INSTRUMENTS
We are exposed to various financial risks in the normal course of our business. We enter into forward and swap contracts to manage our exposure to fluctuations in foreign exchange rates, interest rates and changes in share price which have an effect on our stock-based compensation costs. We also continually assess whether the derivatives we use in hedging transactions are effective in offsetting changes in fair value or cash flows of hedged items. We enter into these transactions to reduce our exposure to risk and volatility, and not for speculative reasons. We only deal with highly rated counterparties.
Our policy is to hedge every new foreign currency-denominated manufacturing contract when it is signed and executed. We only hedge future revenue exposure when contracts are signed. We have adopted a contract-by-contract hedging strategy rather than an overall strategy based on the contracts we expect to sign. We eliminate the risk associated with the signed contracts by entering into forward exchange contracts (see Note 17 to the financial statements for more details). At the end of fiscal 2008, approximately 9% of the total value of the outstanding contracts were not hedged. The non-hedged portion results from short timing issues between contract signature and hedging transactions as well as a number of small contracts that remain not hedged. Furthermore, this year we entered into hedges of certain foreign currency denominated costs for our Canadian operations. As a result, we entered into a hedge to cover the foreign currency costs of our manufacturing process, as well as on the interest and principal repayment of U.S. denominated debt maturing in June 2009.
53
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
We enter into foreign exchange forward contracts to manage our exposure when we make a sale in a foreign currency. The amount and timing of the maturity of these forward contracts vary depending on a number of factors, including milestone billings and the use of foreign materials and/or sub-contractors. The hedged costs are entered on the basis of the forecasted and committed costs that will be incurred. We had $837.6 million Canadian-dollar equivalent in forward contracts at the end of fiscal 2008 ($586.0 million on sales contracts and $251.6 million on buy contracts), compared to $604.1 million ($512.7 million on sales contracts and $91.4 million on buy contracts), at the end of the previous year. The increase was mainly because of a higher number of foreign currency denominated revenue contracts being hedged, and additional hedging for foreign currency denominated manufacturing costs and debt-related exposure.
We use financial instruments to manage our exposure to changing interest rates and to adjust our mix of fixed and floating interest rate debt on long-term debt. The mix was 72% fixed-rate and 28% floating-rate at the end of this year, compared to 60% fixed-rate and 40% floating-rate at the end of fiscal 2007. The higher portion of fixed-rate debt results from no utilization of floating-rate borrowings under the revolving credit facility, combined with this years issuance of non-recourse debt which was completely composed of fixed-rate debt.
We also hedge to reduce our exposure to changes in our share price because it affects the cost of our deferred share unit (DSU) programs. A settlement hedge contract covered 2,155,000 CAE common shares as at March 31 2008 compared to 1,495,000 the previous year.
We used the following methods and assumptions to estimate the fair value of the financial instruments:
· | Cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are valued at their carrying amounts on the consolidated balance sheet. This is an appropriate estimate of their fair value because of their short-term maturities; |
· | Capital leases are valued using the discounted cash flow method; |
· | The value of long-term debt is estimated based on discounted cash flows using current interest rates on debt with similar terms and remaining maturities; |
· | The net fair value of our cross currency and interest swaps are determined using valuation techniques and are calculated as the present value of the estimated future cash flows using an appropriate market based yield curve. Assumptions are based on market conditions prevailing at each consolidated balance sheet date; |
· | Forward foreign exchange contracts are represented by the estimated amounts that we would receive or pay to settle the contracts on the date of the consolidated balance sheet. |
54
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
8. | ACQUISITIONS, BUSINESS COMBINATIONS AND DIVESTITURES |
8.1 | ACQUISITIONS |
The Company acquired four businesses for a total cost, including acquisition costs, of $52.4 million which was payable primarily in cash. The total costs do not include potential additional consideration of $12 million that is contingent on certain conditions being satisfied, which, if met, would be recorded as additional goodwill.
Engenuity Technologies Inc.
During the first quarter, the Company acquired Engenuity Technologies Inc. (Engenuity) which develops commercial-off-the-shelf (COTS) simulation and visualization software for the aerospace and defence markets.
MultiGen-Paradigm Inc.
During the first quarter, the Company acquired MultiGen-Paradigm Inc. (MultiGen), a supplier of real-time COTS software for creating and visualizing simulation solutions and creates industry standard visual simulation file formats.
Macmet Technologies Limited
During the second quarter, the Company acquired 76% of the outstanding shares of Macmet Technologies Limited (Macmet). Macmet assembles, repairs and upgrades flight simulators, tank and gunnery trainers, as well as develops software required for simulations.
As part of this agreement, the Company was given a call option on the remaining 24% of outstanding shares. The call option expires six years from the acquisition completion date. At the expiry of the call option period, the remaining shareholders of Macmet can exercise a put option and require the Company to purchase the remaining outstanding shares. As such, the Company considers that all outstanding shares have been purchased and 100% of Macmets results have been consolidated by the Company since the acquisition date.
Flightscape Inc.
During the second quarter, the Company acquired Flightscape Inc. (Flightscape), which provides expertise in flight data analysis and flight sciences and develops software solutions that enable the effective study and understanding of recorded flight data to improve safety, maintenance and flight operations.
8.2 DISCONTINUED OPERATIONS
CAE Elektronik GmbH Telecommunication Department
During fiscal 2008, in order to concentrate on its core business, the Company has decided to discontinue its German telecommunication department. This department develops and sells unified messaging software for various clients and other office software solutions. As well, the business offers services in both standardized and customer-specific software communication solutions for voice-over-IP and ISDN-environment. CAE Elektronik GmbH is in the process of divesting its telecommunication department through a sales agreement with an exclusive buyer. The transaction resulted in the recognition of a net loss in discontinued operations amounting to $2.2 million, net of a tax recovery of $1.0 million during the fourth quarter of fiscal 2008.
55
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
Marine Controls
On February 3, 2005, the Company completed the sale of the substantial components of the Marine Controls segment to L-3 Communications Corporation (L-3), for a cash consideration of $238.6 million. The Company received from L-3 in fiscal 2007 notices of claims for indemnification pursuant to the Sale and Purchase Agreement (SPA). At this time, neither the outcome of these matters nor the potential future payments, if any, are determinable. The Company intends to assert all available defences against these claims. The aggregate liability for claims made under the SPA is limited to US$25 million.
The results of the Marine Controls segment have been reported as discontinued operations since the second quarter of fiscal 2005 and have been reclassified in previously reported statements.
Cleaning Technologies and other discontinued operations
In fiscal 2004, the Company completed the sale of its last Cleaning Technologies business, Alpheus Inc., to Cold Jet Inc. The Company was entitled to receive further consideration based on the performance of the business until 2007 and also had certain obligations to Cold Jet Inc. During fiscal 2006, an agreement was reached to settle the further consideration and cancel the outstanding obligations of the Company. Cold Jet paid the Company an amount of $0.2 million.
During the second quarter of fiscal 2007, the Company received early payment, in full, of $9.3 million in secured subordinated promissory long-term notes previously recorded in other assets. These notes, with a carrying value of $7.9 million, were received by the Company as part of the consideration for its sale in 2002 of Ultrasonics and Ransohoff. The repayment resulted in the recognition of $1.4 million of interest revenue during the second quarter due to the accretion of discounts on the long-term notes receivable. The parties have also concluded discussions regarding adjustments to working capital provisions. As a result of these discussions, the Company collected and recorded an additional amount of approximately $0.1 million (net of tax recovery of $0.1 million).
Also, during fiscal 2006, the Company incurred additional costs of $3.4 million related to its former Cleaning Technologies business mostly in connection with the revaluation of a pension liability and the reversal of an unrecognized tax asset, and recorded $0.9 million for other discontinued operations.
Forestry Systems
On May 2, 2003, the Company completed the sale of one of its Forestry Systems businesses to Carmanah Design and Manufacturing. The Company was entitled to receive further consideration based on the performance of the business. During the first quarter of fiscal 2007, a settlement was concluded and the Company received a payment of $0.2 million (net of tax expense of $0.1 million).
On August 16, 2002, the Company sold substantially all the assets of the sawmill division of its Forestry Systems. The Company was entitled to receive further cash consideration from the sale based on operating performance of the disposed business for the three-year period from August 2002 to August 2005. In November 2005, the Company was notified by the buyers that, in their view, the targeted level of operating performance which would trigger further payment had not been achieved. The Company completed a review of the buyers books and records and, in January 2006, launched legal proceedings to collect the payment that it believes is owed to the Company. During the third and fourth quarter of fiscal 2008, the Company recognized fees in connection with the evaluation and litigation exercise amounting to $1.2 million (net of tax recovery of $0.2 million). For fiscal 2007 and 2006, the Company incurred $0.9 million (net of tax recovery of $0.2 million) and $0.2 million (net of tax recovery of $0.1 million), respectively.
56
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
Until recently, this dispute had been referred to arbitration and was in the discovery of evidence phase. As discussed in Subsequent Event, a loss in the amount of $8.5 million (net of tax recovery of $1.5 million) has been recorded during fiscal 2008 because the buyer was the subject of a petition for receivership and is understood to be insolvent subsequent to the balance sheet date.
9. BUSINESS RISK AND UNCERTAINTY
We operate in several industry segments that have various risks and uncertainties. Management and the Board discuss the principal risks facing our business, particularly during the annual strategic planning and budgeting processes. These are described below.
Management attempts to mitigate risks that may affect our future performance through a process of identifying, assessing, reporting and managing risks that are significant from a corporate perspective.
Length of sales cycle
The sales cycle for our products and services is long and unpredictable, ranging from six to 18 months for civil aviation applications and from six to 24 months or longer for military applications. During the time when customers are evaluating our products and services, we may incur expenses and management time. Making these expenditures in a quarter that has no corresponding revenue will affect our operating results and could increase the volatility of our share price.
Product evolution
The civil aviation and military markets we operate in are characterized by changes in customer requirements, new aircraft models and evolving industry standards. If we do not accurately predict the needs of our existing and prospective customers or develop product enhancements that address evolving standards and technologies, we may lose current customers and be unable to bring on new customers. This could reduce our revenue. The evolution of the technology could also have an impact on the value of our fleet of FFSs.
Level of defence spending
A significant portion of our revenue comes from sales to military customers around the world. In fiscal 2008, for example, sales by the SP/M and TS/M segments accounted for 43% of our revenue. We are either the primary contractor or a subcontractor for various programs by Canadian, U.S., European, and other foreign governments. If funding for a government program is cut, we could lose future revenue, which could have a negative effect on our operations. If countries we have contracts with significantly lower their military spending, there could be a material negative effect on our sales and earnings.
Civil aviation industry
A significant portion of our revenue comes from supplying equipment and training services to the commercial and business airline industry.
While a few major airlines continue to face financial difficulties, the surge of new aircraft orders continued in 2008, which is positive. Most of these aircraft are destined for carriers in the Middle East and Asia. Most North American and some European airlines have been experiencing a slight contraction in their capacity.
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MANAGEMENTS DISCUSSION AND ANALYSIS
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Fluctuating prices for airplane fuel also have a material effect on the profitability of many airlines. This effect is most visible in the North American market, where some legacy carriers have emerged from Chapter 11 while others have recently filed under Chapter 11. If fuel prices remain high for a sustained period, deliveries of new aircraft could be delayed or cancelled, which would negatively affect the demand for our training equipment and services.
Additionally, recent developments since mid-2007 in the credit market point to constraints on the availability of credit generally. If this situation persists it may affect the ability of airlines and other to purchase new aircraft, which would also negatively affect the demand for our training equipment and services.
We are also exposed to credit risk on accounts receivable from our customers, but have adopted policies to ensure we are not significantly exposed to any individual customer. Our policies include analyzing the financial position of our customers and regularly reviewing their credit quality. We also subscribe from time to time to credit insurance and, in some instances, require a bank letter of credit.
Competition
We sell our simulation equipment and training services in highly competitive markets, and new entrants are emerging and others are positioning themselves to take advantage of the current positive market. Some of our competitors are larger than we are, and have greater financial, technical, marketing, manufacturing and distribution resources. In addition, some competitors have well-established relationships with aircraft manufacturers, airlines and governments, which may give them an advantage when competing for projects for these organizations. We also face competition from Alteon Training L.L.C., a Boeing subsidiary, which may have certain pricing and other competitive advantages over CAE due to its status within the Boeing group of companies.
We obtain most of our contracts through competitive bidding processes that subject us to the risk of spending a substantial amount of time and effort on proposals for contracts that may not be awarded to us. We cannot be certain that we will continue to win contracts through competitive bidding processes at the same rate as we have in the past.
Foreign exchange
Approximately 93% of our revenue is generated in foreign currencies and this will continue to be the case. Conversely, a larger proportion of our operating expenses are in Canadian dollars. Any significant change in the value of the Canadian dollar will cause volatility in our results of operations, cash flow and financial condition from period to period. We have various hedging programs to partially offset this exposure. The Canadian dollar has also made Canada a more expensive manufacturing environment for us. If the Canadian dollar further increases in value, it will negatively affect our financial results and our competitive position compared to other equipment manufacturers in jurisdictions where operating costs are lower.
Doing business in foreign countries
We have operations in over 20 countries and sell our products and services to customers around the world. Sales to customers outside Canada and the U.S. made up approximately 60% of revenue in fiscal 2008. We expect sales outside Canada and the U.S. to continue to represent a significant portion of revenue for the foreseeable future. As a result, we are subject to the risks of doing business internationally.
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MANAGEMENTS DISCUSSION AND ANALYSIS
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These include foreign exchange risk, as discussed above, and the risk that laws and regulations in host countries will change, which can have an effect on:
· | The cost and complexity of using foreign representatives and consultants; |
· | Tariffs, embargoes, controls and other restrictions that may affect the free flow of goods, information and capital; |
· | The complexities of managing and operating an enterprise and complying with laws in multiple jurisdictions; |
· | General changes in economic and geopolitical conditions. |
Our currency hedging activities may not successfully mitigate foreign exchange risk.
Fixed-price and long-term supply contracts
We provide our products and services mainly through fixed-price contracts that require us to absorb cost overruns, even though it can be difficult to estimate all of the costs associated with these contracts or to accurately project the level of sales we may ultimately achieve. In addition, a number of contracts to supply equipment and services to commercial airlines are long-term agreements that run up to 20 years. While these contracts can be adjusted for increases in inflation and costs, the adjustments may not fully offset the increases, which could negatively affect the results of our operations.
Product integration and program management risk
Our business could be negatively affected if our products do not successfully integrate or operate with other sophisticated software, hardware, computing and communications systems that are also continually evolving. If we experience difficulties on a project or do not meet project milestones, we may have to devote more engineering and other resources than originally anticipated. While we believe we have recorded adequate provisions for losses on fixed-price contracts, it is possible that fixed-price and long-term supply contracts could subject us to additional losses that exceed obligations under the terms of the contracts.
Government-funded military programs
Like most companies that supply products and services to governments, we can be audited and reviewed from time to time. Any adjustments that result from government audits and reviews may have a negative effect on our results of operations. Some costs may not be reimbursed or allowed in negotiations of fixed-price contracts. We may also be subject to a higher risk of legal actions and liabilities than companies that cater only to the private sector, which could have a materially negative effect on our operations.
If we fail to comply with government regulations and requirements, we could be suspended or barred from government contracts or subcontracts for a period of time, which would negatively affect our revenue from operations and profitability and could have a negative effect on our reputation and ability to procure other government contracts in the future.
Research and development activities
We have carried out some of our research and development initiatives with the financial support of government agencies, including the Government of Canada through Technology Partnerships Canada and the Government of Québec through Investissement Québec. If we do not receive this financial support in the future, there is a risk that we may not be able to replace this with other government risk-sharing programs and sustain our level of financial performance and research and development activities.
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MANAGEMENTS DISCUSSION AND ANALYSIS
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Protection of intellectual property
We rely in part on trade secrets and contractual restrictions, such as confidentiality agreements and licences, to establish and protect our proprietary rights. These may not be effective in preventing a misuse of our technology or in deterring others from developing similar technologies. We may be limited in our ability to acquire or enforce our intellectual property rights in some countries.
Intellectual property
Our products contain sophisticated software and computer systems that are supplied to us by third parties. These may not always be available to us. Our production of simulators often depends on receiving confidential or proprietary data on the functions, design and performance of a product or system that our simulators are intended to simulate. We may not be able to obtain this data on reasonable terms, or at all.
Infringement claims could be brought against us or against our customers. We may not be successful in defending these claims and we may not be able to develop processes that do not infringe on the rights of third parties, or obtain licences on terms that are commercially acceptable, if at all.
Litigation related to our intellectual property rights could be lengthy and costly and could negatively affect our operations or financial results, whether or not we are successful in defending a claim.
Environmental liabilities
We use, generate, store, handle and dispose of hazardous materials at our operations, and used to at some of our discontinued or sold operations. Past operators at some of our sites also carried out these activities.
New laws and regulations, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination, new clean-up requirements or claims on environmental indemnities we have given may mean we have to incur substantial costs. This could have a materially negative effect on our financial condition and results of operations.
We have made provisions for claims we know about and remediation we expect will be required, but there is a risk that our provisions are not sufficient.
In addition, our discontinued operations are largely uninsured against such claims, so an unexpectedly large environmental claim against a discontinued operation could reduce our profitability in the future.
Liability claims arising from casualty losses
Because of the nature of our business, we may be subject to liability claims, including claims for serious personal injury or death, arising from:
· | Accidents or disasters involving training equipment we have sold or aircraft for which we have provided training equipment or services; |
· | Our pilot provisioning; |
· | Our live flight training operations. |
We may also be subject to product liability claims relating to equipment and services our discontinued operations sold in the past. We cannot be certain that our insurance coverage will be sufficient to cover one or more substantial claims.
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MANAGEMENTS DISCUSSION AND ANALYSIS
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Warranty or other product-related claims
We manufacture simulators that are highly complex and sophisticated. These may contain defects that are difficult to detect and correct. If our products fail to operate correctly or have errors, there could be warranty claims or we could lose customers. Correcting these defects could require significant capital investment. If a defective product is integrated into our customers equipment, we could face product liability claims based on damages to the customers equipment. Any claims, errors or failures could have a negative effect on our operating results and business. We cannot be certain that our insurance coverage will be sufficient to cover one or more substantial claims.
Regulatory rules imposed by aviation authorities
We are required to comply with regulations imposed by aviation authorities. These regulations may change without notice, which could disrupt our sales and operations. Any changes imposed by a regulatory agency, including changes to safety standards imposed by aviation authorities such as the U.S. Federal Aviation Administration, could mean we have to make unplanned modifications to our products and services, causing delays and resulting in cancelled sales. We cannot predict the impact of changing laws or regulations might have on our operations. Any changes could have a materially negative effect on our results of operations or financial condition.
Sales or licences of certain CAE products require regulatory approvals
The sale or licence of many of our products is subject to regulatory controls. These can prevent us from selling to certain countries, and require us to obtain from one or more governments an export licence or other approvals to sell certain technology such as military-related simulators or other training equipment, including military data or parts. These regulations change often and we cannot be certain that we will be permitted to sell or license certain products to customers, which could cause a potential loss of revenue for us. Failing to comply with any of these regulations in countries where we operate could result in fines and other material sanctions.
Key personnel
Our continued success will depend in part on our ability to retain and attract key personnel with the relevant skill, expertise and experience. Our compensation policy is designed to mitigate this risk.
Integration of businesses acquired
The success of our acquisitions depend on our ability to crystallize synergies both in terms of successfully marketing our broadened product offering as well as efficiently consolidating the operations of the business acquired into our existing operations.
Enterprise resource planning
We are investing time and money in an ERP system. If the system does not operate as expected or when expected, it may be difficult for us to claim compensation or correction from the supplier. We may not be able to realize the expected value of the system and this may have a negative effect on our operations, profitability and reputation.
10. | CHANGES IN ACCOUNTING STANDARDS |
10.1 | SIGNIFICANT CHANGES IN ACCOUNTING STANDARDS FISCAL 2006 TO 2008 |
We prepare our financial statements according to Canadian GAAP as published by the Accounting Standards Board (AcSB) of the Canadian Institute of Chartered Accountants (CICA) in its Handbook Sections, Accounting Guidelines (AcG) and Emerging Issues Committee (EIC).
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MANAGEMENTS DISCUSSION AND ANALYSIS
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Accounting changes
On April 1, 2007, the Company adopted CICA Handbook Section 1506, Accounting Changes. This standard establishes criteria for changing accounting policies, along with the accounting treatment and disclosure regarding changes in accounting policies, estimates and correction of errors. There was no effect to the companys consolidated financial statements.
Financial instruments and hedging relationships
On April 1, 2007, the Company adopted CICA Handbook Section 1530, Comprehensive Income, Section 3855, Financial Instruments Recognition and Measurement and Section 3865, Hedges. The impact of these new standards is presented as a transitional adjustment in opening retained earnings and opening accumulated other comprehensive loss, as applicable. As a result, the comparative consolidated financial statements have not been restated except for the foreign currency translation adjustment, which is now disclosed as part of accumulated other comprehensive income.
Section 3855 requires that financial assets and financial liabilities, including derivative financial instruments, be recognized on the consolidated balance sheet when the Company becomes a party to the contractual provisions of the financial instrument. On initial recognition, all financial instruments subject to Section 3855, including embedded derivative financial instruments that are not clearly and closely related to the host contract, must be measured at fair value. Financial assets and financial liabilities are initially recognized at fair value and are classified into one of these five categories: held-for-trading, held-to-maturity investments, loans and receivables, other financial liabilities and available-for-sale financial instruments. They are subsequently accounted for based on their classification. The classification depends on the purpose for which the financial instruments were acquired and their characteristics. Except in very limited circumstances, the classification is not changed subsequent to initial recognition.
Section 3865 specifies the conditions for applying hedge accounting and how hedge accounting may be applied for each of the permitted hedging strategies. When derivative financial instruments are used to manage the Companys exposure, the Company determines whether hedge accounting can be applied to each derivative financial instrument. Where hedge accounting can be applied, a hedging relationship is designated as a fair value hedge, a cash flow hedge or a hedge of a net investment in a self-sustaining foreign operation.
The impact of the adoption of the new accounting standards was recognized as an adjustment to the carrying amount of the related financial assets and liabilities and recorded in Shareholders equity as at April 1, 2007. The transition adjustment resulted in a decrease of $8.3 million recorded to retained earnings and $3.5 million recorded to accumulated other comprehensive loss.
These accounting standards and the impact of these changes on the Companys consolidated financial statements are discussed in Note 2 Change in Accounting Policies to the annual consolidated financial statements.
Stock-based compensation for employees eligible to retire before the vesting date
In the third quarter of fiscal 2007, we adopted EIC-162, Stock-Based Compensation for Employees Eligible to Retire Before the Vesting Date. This change was required for all companies under Canadian GAAP for interim financial statements ending on or after December 31, 2006.
The abstract stipulates that the stock-based compensation expense for employees who will become eligible for retirement during the vesting period be recognized over the period from the grant date to the date the employee becomes eligible to retire. In addition, if an employee is eligible to retire on the
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MANAGEMENTS DISCUSSION AND ANALYSIS
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grant date, the compensation expense must be recognized at that date. The abstract also requires us to retroactively restate prior periods.
Adopting EIC-162 had the following impact on our consolidated financial statements:
10.2 FUTURE CHANGES IN ACCOUNTING STANDARDS
Financial instrument disclosures and presentation
In December 2006, the AcSB issued CICA Handbook Section 3862, Financial instruments Disclosures and Section 3863, Financial instruments Presentation. Under these new sections, entities will be required to disclose information that enables users to evaluate the significance of a financial instrument to an entitys financial position and performance. These sections are effective for interim and annual financial statements relating to fiscal years beginning on or after October 1, 2007. The Company is currently evaluating the impact of these new standards.
Capital disclosure
In December 2006, the AsCB issued Handbook Section 1535, Capital Disclosures, which establishes guidelines for the disclosure of information regarding an entitys capital and how it is managed. This standard requires disclosure of an entitys objectives, policies and processes for managing capital, quantitative data about what the entity regards as capital and whether the entity has complied with any capital requirements and, if it has not complied, the consequences of such non-compliance. This standard is effective for interim and annual financial statements relating to fiscal years beginning on or after October 1, 2007. The Company is currently evaluating the impact of this new standard.
Inventories
In March 2007, the AcSB approved new Section 3031, Inventories, which will replace existing Section 3030 with the same title. The new section establishes that inventories should be measured at the lower of cost and net realizable value, with guidance on the determination of cost, including allocation of overheads and other costs to inventory and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The final standard is effective for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2008. The Company is currently evaluating the impact of this new standard.
Intangible Assets
In November 2007, the AcSB approved new Section 3064, Goodwill and Intangible Assets, replacing Sections 3062, Goodwill and Other Intangible Assets, and 3450, Research and Development Costs.
New Section 3064 incorporates material from International Accounting Standard (IAS) 38, Intangible Assets, addressing when an internally developed intangible asset meets the criteria for recognition as an asset. The AcSB also approved amendments to Section 1000, Financial Statement Concepts, and Accounting Guideline AcG-11, Enterprises in the Development Stage. The amendments to AcG-11 provide consistency with Section 3064. EIC-27, Revenues and Expenditures during the Pre-operating
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MANAGEMENTS DISCUSSION AND ANALYSIS
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Period, will not apply to entities that have adopted Section 3064. These changes are effective for fiscal years beginning on or after October 1, 2008, with earlier adoption permitted. The Company is currently evaluating the impact of this standard which will be applied for the fiscal year beginning April 1, 2009.
International Financial Reporting Standards (IFRS)
In January 2006, the AcSB adopted a strategic plan calling for the adoption of IFRSs by publicly accountable enterprises in Canada, after a specified transition period. The AcSB has recently confirmed January 1, 2011 as the changeover date (i.e., the date IFRSs will replace current Canadian standards and interpretations as GAAP for this category of reporting entity). As a result, the Company is required to prepare its consolidated financial statements in accordance with IFRSs for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011, which, in the Companys case would result in the application of IFRS for the fiscal year beginning April 1, 2011, at the latest. On February 13, 2008, the Canadian Securities Administrators (CSA) issued, for public comment, a Concept Paper proposing that listed companies be permitted to adopt IFRSs earlier, for financial years beginning on or after January 1, 2009. The Company is currently evaluating the impact of adopting IFRS on its consolidated financial statements.
10.3 CRITICAL ACCOUNTING ESTIMATES
Because we prepare our consolidated financial statements according to GAAP, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses for the period reported. We regularly review the estimates as they relate to the following areas, among others:
· | Accounting for long-term contracts; |
· | Useful lives; |
· | Employee future benefits; |
· | Income taxes; |
· | Impairment of long-lived assets; |
· | Fair value of certain financial instruments; |
· | Goodwill and intangibles. |
Management makes these estimates based on its best knowledge of current events and actions that we may undertake in the future. Significant changes in estimates and/or assumptions could result in impairment of certain assets, and actual results could differ from those estimates.
Our critical accounting policies are those that we believe are the most important in determining its financial condition and results and require significant subjective judgment by management. We consider an accounting estimate to be critical if it requires management to make assumptions about matters that were highly uncertain at the time the estimate was made, if different estimates could have reasonably been used or if there are likely to be changes, from period to period, in the estimate that would have a material effect on our financial condition or results of operations.
See the Notes to the consolidated financial statements for a summary of our significant accounting policies, including the accounting policies discussed below.
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MANAGEMENTS DISCUSSION AND ANALYSIS
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Revenue recognition
Multiple-element arrangements
We sometimes enter into multiple-element revenue arrangements which may include, for example, a combination of designing, engineering and manufacturing of flight simulators, spare parts and maintenance.
A multiple-element arrangement is separated into more than one unit of accounting, and applicable revenue recognition criteria is considered separately for the different units of accounting if all of the following criteria are met:
· | The delivered item has value to the customer on a stand-alone basis; |
· | There is objective and reliable evidence of the fair value of the undelivered item (or items); |
· | If the arrangement includes a general right of return for the delivered item and delivery or performance of the undelivered item is considered probable and substantially in the control of the vendor. |
The allocation of the revenue from a multiple deliverable agreement is based on fair value of an undelivered item as evidenced by the price of the item regularly charged by the Company on an individual basis or on other basis covered by the concept of vendor-specific objective evidence as presented in the Statement of Position (SOP) 97-2, Software Revenue Recognition issued by the American Institute of Certified Public Accountants. The Company does enter into stand-alone transactions on a regular basis in regards to the sale of spare parts and maintenance arrangements, therefore the price charged when the elements are sold separately is readily available. The process for determining fair value of undelivered items, with respect to the design, engineering and manufacturing of flight simulators, entails evaluating each transaction and taking into account the unique features of each deal.
The applicable revenue recognition criteria for the separated units of accounting in regards to the individual design, engineering and manufacturing of flight simulators, spare parts and maintenance elements are described below.
Long-term contracts
We recognize revenue from long-term contracts for the design, engineering and manufacturing of flight simulators using the percentage-of-completion method when there is persuasive evidence of an arrangement, when the fee is fixed or determinable, and when collection is reasonably certain. Under this method, revenue and earnings are recorded as related costs are incurred, based on the percentage of actual costs incurred to date related to the estimated total costs to complete the contract. The cumulative impact of any revisions in cost and earnings estimates are reflected in the period in which the need for a revision becomes known. Provision for estimated contract losses, if any, are recognized in the period in which the loss is determined.
We measure contract losses at the amount by which the estimated total costs exceed the estimated total revenue from the contract. We record warranty provisions when revenue is recognized, based on past experience. We generally do not provide customers with a right of return or complimentary upgrade. We bill customers for post-delivery support separately and recognize revenue over the support period.
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Product maintenance
We recognize revenue from maintenance contracts in earnings on a straight-line basis over the contract period. In situations where it is clear that we will incur costs other than on a straight-line method, based on historical evidence, we recognize revenue over the contract period in proportion to the costs we expect to incur in performing services under the contract.
Spare parts
Revenue from the sale of spare parts is recognized when there is persuasive evidence of an arrangement, delivery has occurred, the fee is fixed or determinable and collection is reasonably assured.
Software arrangements
We also enter into software arrangements to sell, independently or in multiple-element arrangements, standalone software, services, maintenance and software customization. We recognize revenue from software arrangements according to the guidance set out in the SOP 97-2, as described, in more details as follows:
· | Stand-alone products |
Revenue from software licence arrangements that do not require significant production, modification, or customization of software, is recognized when there is persuasive evidence of an arrangement, delivery has occurred, the fee is fixed or determinable and collection is reasonably assured. | |
· | Consulting services |
Revenues from direct consulting or training services that are provided to customers are recognized as the services are rendered. | |
· | Maintenance |
Maintenance and support revenues are recognized ratably over the term of the related agreements. | |
· | Multiple-element arrangements |
We sometimes enter into multiple-element revenue software arrangements, which may include any combination of software, services or training, customization and maintenance. In these instances, the fee is allocated to the various elements as previously described. | |
· | Long-term software arrangements |
Revenue from fixed-price software arrangements and software customization contracts that require significant production, modification or customization of software are also recognized under the percentage-of-completion method. | |
Training services
We recognize training services when persuasive evidence of an arrangement exists, the fee is fixed or can be determined, recovery is reasonably certain and the services have been rendered.
Income taxes
We use the tax liability method to account for income taxes. Under this method, future income tax assets and liabilities are determined according to differences between the carrying value and the tax bases of assets and liabilities.
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This method also requires us to recognize future tax benefits, such as net operating loss carryforwards, to the extent that the realization of such benefits is more likely than not. A valuation allowance is recognized when, in managements opinion, it is more likely than not that the future income tax assets will not be realized.
We measure future tax assets and liabilities by applying enacted or substantively enacted rates and laws at the date of the consolidated financial statements for the years in which we expect the temporary differences to be reversed.
We do not provide for income taxes on undistributed earnings of foreign subsidiaries that are not expected to be repatriated in the foreseeable future.
We deduct investment tax credits (ITCs) from research and development (R&D) activities from the related costs, and include them in the determination of net earnings when there is reasonable assurance that the credits will be realized. ITCs arising from the acquisition or development of property, plant and equipment and deferred development costs are deducted from the cost of those assets, and amortization is calculated on the net amount.
We are subject to examination by taxation authorities in various jurisdictions. Because the determination of tax liabilities and ITCs recoverable involves certain uncertainties in interpreting complex tax regulations, we use managements best estimates to determine potential tax liabilities and ITCs. Differences between the estimates and the actual amount of taxes and ITCs are recorded in net earnings at the time they can be determined.
Valuation of goodwill and intangible assets
Goodwill is tested for impairment at least annually or more often if events or changes in circumstances indicate it might be impaired.
We test for impairment by comparing the fair value of our reporting units with their carrying amount. When the carrying amount of the reporting unit exceeds the fair value, we compare, in a second step, the fair value of goodwill related to the reporting unit to its carrying value, and recognize an impairment loss equal to the excess. The fair value of a reporting unit is calculated based on one or more generally accepted valuation techniques.
We perform the annual review of goodwill as at December 31 of each year. We did not determine that a charge was required following the review as at December 31, 2005, December 31, 2006 and December 31, 2007.
We account for our business combinations under the purchase method of accounting, which requires that the total cost of an acquisition be allocated to the underlying net assets based on their respective estimated fair values. Part of this allocation process requires us to identify and attribute values and estimated lives to the intangible assets acquired. This involves considerable judgment and often involves the use of significant estimates and assumptions, including those relating to future cash flows, discount rates and asset lives. Determining these values and estimates subsequently affects the amount of amortization expense to be recognized in future periods over the intangible assets estimated useful lives.
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Deferred development costs
We charge research costs to consolidated earnings in the period they are incurred. We also charge development costs to consolidated earnings in the period they are incurred unless they meet all of the criteria for deferral according to CICA Handbook Section 3450, Research and Development Costs and we are reasonably assured of their recovery. We deduct government contributions for research and development activities from the related costs or assets, if they are deferred. We start amortizing development costs deferred to future periods when the product is produced commercially, and we charge the costs to consolidated earnings based on anticipated sales of the product when possible, over a period not exceeding five years using the straight-line method.
Pre-operating costs
We defer costs incurred during the pre-operating period for all new operations related to training centres. Pre-operating costs are incremental in nature and Management considers them to be recoverable from the future operations of the new training centre. We no longer capitalize costs when a training centre opens. We amortize deferred pre-operating costs over a five-year period using the straight-line method.
Transaction costs
We record transaction costs related to the issuance or acquisition of financial assets and liabilities (other than those classified as held-for-trading) with the asset or liability to which they are associated and we amortize them using the effective-interest rate method. We amortize costs related to sale and leaseback agreements and the revolving unsecured term credit facilities on a straight-line basis over the term of the related financing agreements.
Employee future benefits
We maintain defined benefit pension plans that provide benefits based on the length of service and final average earnings. The service costs and the pension obligations are actuarially determined using the projected benefit method prorated on employee service and Managements best estimate of expected plan investment performance, salary escalation and retirement ages of employees. For the purpose of calculating the expected return on the plan assets, the relevant assets are valued at fair value. The excess of the net actuarial gain (loss) over 10% of the greater of the benefit obligation and the fair value of plan assets is amortized over the remaining service period of active employees. Past service costs, arising from plan amendments, are deferred and amortized on a straight-line basis over the average remaining service life of active employees at the date of amendment.
When a curtailment arises, any unamortized past service costs associated with the reduction of future services is recognized immediately. Also, the increase or decrease in benefit obligations is recognized as a loss or gain, net of unrecognized actuarial gains or losses. Finally, when an event gives rise to both a curtailment and a settlement of obligations, the curtailment is accounted for prior to the settlement.
11. SUBSEQUENT EVENT
The Company has been in arbitration with the buyer of the Companys assets of the sawmill division of its Forestry Systems, which was sold to the buyer in fiscal 2003, because of a dispute over a further payment owed to the Company by the buyer (refer to Note 5 of the consolidated financial statements). The arbitration ceased mid-way in April 2008 when the buyer was the subject of a petition for receivership and is understood to be insolvent. A write off of $8.5 million (net of a tax recovery of $1.5 million), has been accounted for in fiscal 2008 because, in accordance with the relevant
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accounting pronouncements, the Company deems that the impairment conditions existed at the date of the consolidated financial statements.
12. CONTROLS AND PROCEDURES
The internal auditor reports regularly to management on any weaknesses it finds in our internal control and these reports are reviewed by the Audit Committee.
12.1 EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our disclosure controls and procedures are designed to provide reasonable assurance that information is accumulated and communicated to our President and Chief Executive Officer (CEO) and Chief Financial Officer (CFO) and other members of management, so we can make timely decisions about required disclosure.
Under the supervision of the President and CEO and the CFO, management evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) under the U.S. Securities Exchange Act of 1934, as of March 31, 2008. The President and CEO and the CFO concluded from the evaluation that the design and operation of our disclosure controls and procedures were effective as at March 31, 2008, and ensure that information is recorded, processed, summarized and reported within the time periods specified under Canadian and U.S. securities laws.
12.2 INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) under the U.S Securities Exchange Act of 1934. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting, and the preparation of financial statements for external purposes in accordance with GAAP. Management evaluated the design and operation of our internal controls over financial reporting as of March 31, 2008, based on the framework and criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and has concluded that our internal control over financial reporting is effective. Management did not identify any material weaknesses.
There were no changes in our internal controls over financial reporting that occurred during fiscal year 2008 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
13. OVERSIGHT ROLE OF AUDIT COMMITTEE AND BOARD OF DIRECTORS
The Audit Committee reviews our annual MD&A and related consolidated financial statements with management and the external auditor and recommends them to the Board of Directors for their approval. Management and our internal auditor also provide the Audit Committee with regular reports assessing our internal controls and procedures for financial reporting. The external auditor reports regularly to management on any weaknesses it finds in our internal control, and these reports are reviewed by the Audit Committee.
69
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008
14. ADDITIONAL INFORMATION
You will find additional information about CAE, including our most recent AIF, on our website at www.cae.com, or on SEDAR at www.sedar.com or on EDGAR at www.sec.gov.
15. SELECTED FINANCIAL INFORMATION
70
MANAGEMENTS DISCUSSION AND ANALYSIS | FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008 | |||||
| ||||||
SELECTED QUARTERLY INFORMATION | ||||||
| ||||||
(unaudited - amounts in millions except per share | ||||||
| ||||||
amounts) | Q1 | Q2 | Q3 | Q4 | Total | |
| ||||||
Fiscal 2008 | ||||||
Revenue | $ | 358.3 | 353.9 | 344.8 | 366.6 | 1,423.6 |
Earnings from continuing operations | $ | 38.7 | 39.0 | 40.1 | 47.0 | 164.8 |
Basic earnings per share from continuing operations | $ | 0.15 | 0.15 | 0.16 | 0.19 | 0.65 |
Diluted earnings per share from continuing operations | $ | 0.15 | 0.15 | 0.16 | 0.18 | 0.65 |
Net earnings | $ | 38.7 | 38.9 | 39.5 | 35.6 | 152.7 |
Basic earnings per share | $ | 0.15 | 0.15 | 0.16 | 0.14 | 0.60 |
Diluted earnings per share | $ | 0.15 | 0.15 | 0.16 | 0.14 | 0.60 |
Average number of shares outstanding (basic) | 252.4 | 253.5 | 253.8 | 253.9 | 253.4 | |
Average exchange rate, U.S. dollar to Canadian dollar | $ | 1.10 | 1.04 | 0.98 | 1.00 | 1.03 |
| ||||||
Fiscal 2007 | ||||||
Revenue | $ | 301.8 | 280.4 | 331.2 | 337.3 | 1,250.7 |
Earnings from continuing operations | $ | 33.0 | 31.3 | 29.7 | 35.1 | 129.1 |
Basic earnings per share from continuing operations | $ | 0.13 | 0.12 | 0.12 | 0.14 | 0.51 |
Diluted earnings per share from continuing operations | $ | 0.13 | 0.12 | 0.12 | 0.14 | 0.51 |
Net earnings | $ | 32.4 | 31.0 | 29.7 | 34.3 | 127.4 |
Basic earnings per share | $ | 0.13 | 0.12 | 0.12 | 0.14 | 0.51 |
Diluted earnings per share | $ | 0.13 | 0.12 | 0.12 | 0.14 | 0.50 |
Average number of shares outstanding (basic) | 250.8 | 251.0 | 251.2 | 251.4 | 251.1 | |
Average exchange rate, U.S. dollar to Canadian dollar | $ | 1.12 | 1.12 | 1.14 | 1.17 | 1.14 |
| ||||||
Fiscal 2006 | ||||||
Revenue | $ | 266.0 | 280.3 | 276.6 | 284.3 | 1,107.2 |
Earnings from continuing operations | $ | 20.1 | 17.6 | 17.3 | 14.6 | 69.6 |
Basic earnings per share from continuing operations | $ | 0.08 | 0.07 | 0.07 | 0.06 | 0.28 |
Diluted earnings per share from continuing operations | $ | 0.08 | 0.07 | 0.07 | 0.06 | 0.28 |
Net earnings | $ | 20.1 | 16.9 | 17.4 | 9.2 | 63.6 |
Basic earnings per share | $ | 0.08 | 0.07 | 0.07 | 0.04 | 0.25 |
Diluted earnings per share | $ | 0.08 | 0.07 | 0.07 | 0.04 | 0.25 |
Average number of shares outstanding (basic) | 248.8 | 249.8 | 250.2 | 250.5 | 249.8 | |
Average exchange rate, U.S. dollar to Canadian dollar | $ | 1.24 | 1.20 | 1.17 | 1.15 | 1.19 |
|
71
MANAGEMENTS DISCUSSION AND ANALYSIS | FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008 | |||||||||||||||||||
| ||||||||||||||||||||
SELECTED SEGMENT | ||||||||||||||||||||
INFORMATION (ANNUAL) | Simulation Products | Training & Services | Total | |||||||||||||||||
(unaudited - amounts in | ||||||||||||||||||||
millions, except operating | 2008 | 2007 | 2006 | 2008 | 20077 | 2006 | 2008 | 2007 | 2006 | |||||||||||
margin) | ||||||||||||||||||||
| ||||||||||||||||||||
Civil | ||||||||||||||||||||
Revenue | $ | 435.3 | $ | 348.1 | $ | 257.0 | $ | 382.1 | $ | 336.9 | $ | 322.3 | $ | 817.4 | $ | 685.0 | $ | 579.3 | ||
Segment operating income | 94.9 | 60.4 | 29.9 | 73.5 | 64.3 | 57.1 | 168.4 | 124.7 | 87.0 | |||||||||||
Operating margins (%) | 21.8 | 17.4 | 11.6 | 19.2 | 19.1 | 17.7 | 20.6 | 18.2 | 15.0 | |||||||||||
| ||||||||||||||||||||
Military | ||||||||||||||||||||
Revenue | $ | 383.7 | $ | 357.5 | $ | 327.4 | $ | 222.5 | $ | 208.2 | $ | 200.5 | $ | 606.2 | $ | 565.7 | $ | 527.9 | ||
Segment operating income | 51.7 | 39.1 | 27.0 | 31.4 | 33.7 | 18.7 | 83.1 | 72.8 | 45.7 | |||||||||||
Operating margins (%) | 13.5 | 10.9 | 8.2 | 14.1 | 16.2 | 9.3 | 13.7 | 12.9 | 8.7 | |||||||||||
| ||||||||||||||||||||
Total | ||||||||||||||||||||
Revenue | $ | 819.0 | $ | 705.6 | $ | 584.4 | $ | 604.6 | $ | 545.1 | $ | 522.8 | $ | 1,423.6 | $ | 1 250.7 | $ | 1 107.2 | ||
Segment operating income | 146.6 | 99.5 | 56.9 | 104.9 | 98.0 | 75.8 | 251.5 | 197.5 | 132.7 | |||||||||||
Operating margins (%) | 17.9 | 14.1 | 9.7 | 17.4 | 18.0 | 14.5 | 17.7 | 15.8 | 12.0 | |||||||||||
| ||||||||||||||||||||
Other | - | (8.1 | ) | (28.7 | ) | |||||||||||||||
| ||||||||||||||||||||
EBIT | $ | 251.5 | $ | 189.4 | $ | 104.0 | ||||||||||||||
|
72
MANAGEMENTS DISCUSSION AND ANALYSIS | FOR THE FOURTH QUARTER AND YEAR ENDED MARCH 31, 2008 | |||||||||||
| ||||||||||||
SELECTED SEGMENT | ||||||||||||
INFORMATION (FOURTH | ||||||||||||
QUARTER ENDING | Simulation Products | Training & Services | Total | |||||||||
MARCH 31) | ||||||||||||
(unaudited - amounts in | ||||||||||||
millions, except operating | ||||||||||||
margin) | 2008 | 2007 | 2008 | 2007 | 2008 | 2007 | ||||||
| ||||||||||||
Civil | ||||||||||||
Revenue | $ | 106.5 | $ | 97.6 | $ | 104.5 | $ | 91.7 | $ | 211.0 | $ | 189.3 |
Segment operating income | 23.8 | 15.3 | 23.8 | 21.3 | 47.6 | 36.6 | ||||||
Operating margins (%) | 22.3 | 15.7 | 22.8 | 23.2 | 22.6 | 19.3 | ||||||
| ||||||||||||
Military | ||||||||||||
Revenue | $ | 101.5 | $ | 92.2 | $ | 54.1 | $ | 55.8 | $ | 155.6 | $ | 148.0 |
Segment operating income | 14.5 | 9.5 | 7.6 | 6.1 | 22.1 | 15.6 | ||||||
Operating margins (%) | 14.3 | 10.3 | 14.0 | 10.9 | 14.2 | 10.5 | ||||||
| ||||||||||||
Total | ||||||||||||
Revenue | $ | 208.0 | $ | 189.8 | $ | 158.6 | $ | 147.5 | $ | 366.6 | $ | 337.3 |
Segment operating income | 38.3 | 24.8 | 31.4 | 27.4 | 69.7 | 52.2 | ||||||
Operating margins (%) | 18.4 | 13.1 | 19.8 | 18.6 | 19.0 | 15.5 | ||||||
| ||||||||||||
Other | - | 1.1 | ||||||||||
| ||||||||||||
EBIT | $ | 69.7 | $ | 53.3 | ||||||||
|
73
CAE Inc. | ||
CONSOLIDATED FINANCIAL STATEMENTS | ||
MARCH 31, 2008 | ||
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING | 2 | |
INDEPENDENT AUDITORS REPORT | 2 | |
CONSOLIDATED BALANCE SHEETS | 4 | |
CONSOLIDATED STATEMENTS OF EARNINGS | 5 | |
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS | 5 | |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | 6 | |
CONSOLIDATED STATEMENT OF ACCUMULATED OTHER COMPREHENSIVE LOSS | 6 | |
CONSOLIDATED STATEMENTS OF CASH FLOWS | 7 | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 8 | |
NOTE 1 | NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES | 8 |
NOTE 2 | CHANGES IN ACCOUNTING POLICIES | 15 |
NOTE 3 | BUSINESS ACQUISITIONS AND COMBINATIONS | 20 |
NOTE 4 | INVESTMENT IN JOINT VENTURES | 21 |
NOTE 5 | DISCONTINUED OPERATIONS AND LONG-TERM ASSETS HELD FOR SALE | 22 |
NOTE 6 | ACCOUNTS RECEIVABLE | 24 |
NOTE 7 | INVENTORIES | 24 |
NOTE 8 | PROPERTY, PLANT AND EQUIPMENT | 25 |
NOTE 9 | INTANGIBLE ASSETS | 25 |
NOTE 10 | GOODWILL | 25 |
NOTE 11 | OTHER ASSETS | 26 |
NOTE 12 | DEBT FACILITIES | 27 |
NOTE 13 | DEFERRED GAINS AND OTHER LONG-TERM LIABILITIES | 30 |
NOTE 14 | INCOME TAXES | 31 |
NOTE 15 | CAPITAL STOCK AND CONTRIBUTED SURPLUS | 33 |
NOTE 16 | STOCK-BASED COMPENSATION PLANS | 34 |
NOTE 17 | FINANCIAL INSTRUMENTS | 38 |
NOTE 18 | SUPPLEMENTARY CASH FLOWS INFORMATION | 43 |
NOTE 19 | CONTINGENCIES | 43 |
NOTE 20 | COMMITMENTS | 44 |
NOTE 21 | GOVERNMENT COST-SHARING | 44 |
NOTE 22 | EMPLOYEE FUTURE BENEFITS | 46 |
NOTE 23 | RESTRUCTURING COSTS | 52 |
NOTE 24 | VARIABLE INTEREST ENTITIES | 53 |
NOTE 25 | OPERATING SEGMENTS AND GEOGRAPHIC INFORMATION | 54 |
NOTE 26 | DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES57 | |
NOTE 27 | COMPARATIVE FINANCIAL STATEMENTS | 70 |
NOTE 28 | SUBSEQUENT EVENT | 70 |
1
Managements Report on Internal Control over Financial Reporting
Management of CAE is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f), 15d-15(f) under the Securities Exchange Act of 1934). CAEs internal control over financial reporting is a process designed under the supervision of CAEs President and Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Companys financial statements for external reporting purposes in accordance with Canadian generally accepted accounting principles.
As of March 31, 2008, Management conducted an assessment of the effectiveness of the Companys internal control over financial reporting based on the framework and criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organization of the Treadway Commission. Based on this assessment, Management concluded that the Companys internal control over financial reporting as of March 31, 2008 was effective.
Managements assessment of the effectiveness of the Companys internal control over financial reporting as of March 31, 2008 has been audited by PricewaterhouseCoopers LLP, an independent auditor.
Independent Auditors Report
To the Shareholders of CAE Inc.
We have completed integrated audits of the consolidated financial statements and internal control over financial reporting of CAE Inc. (the Company) as at March 31, 2008 and 2007 and audit of its 2006 consolidated financial statements. Our opinions, based on our audits, are presented below.
Consolidated financial statements
We have audited the accompanying consolidated balance sheets of the Company as at March 31, 2008 and 2007, and the related consolidated statement of earnings, retained earnings, comprehensive income, accumulated other comprehensive loss and cash flows for each of the three years in the period ended March 31, 2008. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits of the Companys financial statements as at March 31, 2008 and 2007 and for each of the years in the two year period then ended in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). We conducted our audit of the Companys financial statements for the year ended March 31, 2006 in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
2
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as at March 31, 2008 and 2007 and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2008 in accordance with Canadian generally accepted accounting principles.
As described in note 2 to the consolidated financial statements, the Company has changed its accounting for financial instruments and hedging relationships.
Internal control over financial reporting
We have also audited the Companys internal control over financial reporting as at March 31, 2008, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on the effectiveness of the Companys internal control over financial reporting based on our audit.
We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as at March 31, 2008 based on criteria established in Internal Control Integrated Framework issued by the COSO.
Chartered Accountants
May 13, 2008
Montreal, Quebec, Canada
3
Consolidated Balance Sheets | ||||||
|
||||||
As at March 31 | ||||||
|
|
|
||||
(amounts in millions of Canadian dollars) | 2008 | 2007 | ||||
|
|
|
|
|
||
Assets | ||||||
|
|
|
||||
Current assets | ||||||
|
|
|
||||
Cash and cash equivalents | $ | 255.7 | $ | 150.2 | ||
|
|
|
||||
Accounts receivable (Note 6) | 255.0 | 219.8 | ||||
|
|
|
||||
Inventories (Note 7) | 229.9 | 203.8 | ||||
|
|
|
||||
Prepaid expenses | 32.7 | 23.5 | ||||
|
|
|
||||
Income taxes recoverable | 39.0 | 24.7 | ||||
|
|
|
||||
Future income taxes (Note 14) | 14.1 | 3.7 | ||||
|
|
|
|
|
||
826.4 | 625.7 | |||||
|
|
|
||||
Property, plant and equipment, net (Note 8) | 1,046.8 | 986.6 | ||||
|
|
|
||||
Future income taxes (Note 14) | 64.3 | 81.5 | ||||
|
|
|||||
Intangible assets (Note 9) | 62.0 | 36.0 | ||||
|
|
|||||
Goodwill (Note 10) | 115.5 | 96.9 | ||||
|
|
|
||||
Other assets (Note 11) | 138.2 | 129.5 | ||||
|
|
|
|
|
||
$ | 2,253.2 | $ | 1,956.2 | |||
|
||||||
Liabilities and Shareholders Equity | ||||||
|
|
|
||||
Current liabilities | ||||||
|
|
|
||||
Accounts payable and accrued liabilities | $ | 482.7 | $ | 403.9 | ||
|
|
|
||||
Deposits on contracts | 209.3 | 184.8 | ||||
|
|
|
||||
Current portion of long-term debt (Note 12) | 27.3 | 27.2 | ||||
|
|
|
||||
Future income taxes (Note 14) | 16.8 | 4.9 | ||||
|
|
|
|
|
||
736.1 | 620.8 | |||||
|
|
|
||||
Long-term debt (Note 12) | 352.5 | 256.0 | ||||
|
|
|
||||
Deferred gains and other long-term liabilities (Note 13) | 184.9 | 232.7 | ||||
|
|
|
||||
Future income taxes (Note 14) | 31.2 | 16.8 | ||||
|
|
|
|
|
||
1,304.7 | 1,126.3 | |||||
|
|
|
|
|
||
Shareholders Equity | ||||||
|
|
|
||||
Capital stock (Note 15) | 418.9 | 401.7 | ||||
|
|
|
||||
Contributed surplus (Note 15) | 8.3 | 5.7 | ||||
|
|
|
||||
Retained earnings | 644.5 | 510.2 | ||||
|
|
|
||||
Accumulated other comprehensive loss | (123.2 | ) | (87.7 | ) | ||
|
|
|
|
|
||
948.5 | 829.9 | |||||
|
|
|
|
|
||
$ | 2,253.2 | $ | 1,956.2 | |||
|
Contingencies and commitments (Notes 19 and 20)
The accompanying notes form an integral part of these Consolidated Financial Statements.
4
Consolidated Statements of Earnings | |||||||||
|
| ||||||||
Years ended March 31 | |||||||||
| |||||||||
(amounts in millions of Canadian dollars, except per share amounts) | 2008 | 2007 | 2006 | ||||||
|
|
|
|
|
|
| |||
Revenue | $ | 1,423.6 | $ | 1,250.7 | $ | 1,107.2 | |||
| |||||||||
Earnings before interest and income taxes (Note 25) | $ | 251.5 | $ | 189.4 | $ | 104.0 | |||
|
|
|
| ||||||
Interest expense, net (Note 12) | 17.5 | 10.6 | 16.2 | ||||||
|
|
|
|
|
|
| |||
Earnings before income taxes | $ | 234.0 | $ | 178.8 | $ | 87.8 | |||
|
|
|
| ||||||
Income tax expense (Note 14) | 69.2 | 49.7 | 18.2 | ||||||
|
|
|
|
|
|
| |||
Earnings from continuing operations | $ | 164.8 | $ | 129.1 | $ | 69.6 | |||
|
|
|
| ||||||
Results of discontinued operations (Note 5) | (12.1 | ) | (1.7 | ) | (6.0 | ) | |||
|
|
|
|
|
|
| |||
Net earnings | $ | 152.7 | $ | 127.4 | $ | 63.6 | |||
| |||||||||
Basic and diluted earnings per share from continuing operations | $ | 0.65 | $ | 0.51 | $ | 0.28 | |||
| |||||||||
Basic earnings per share | $ | 0.60 | $ | 0.51 | $ | 0.25 | |||
| |||||||||
Diluted earnings per share | $ | 0.60 | $ | 0.50 | $ | 0.25 | |||
| |||||||||
Weighted average number of shares outstanding (basic) (Note 15) | 253.4 | 251.1 | 249.8 | ||||||
| |||||||||
Weighted average number of shares outstanding (diluted) (Note 15) | 254.6 | 253.0 | 252.1 | ||||||
| |||||||||
The accompanying notes form an integral part of these Consolidated Financial Statements. | |||||||||
Consolidated Statements of Retained Earnings | |||||||||
|
|||||||||
Years ended March 31 | |||||||||
| |||||||||
(amounts in millions of Canadian dollars) | 2008 | 2007 | 2006 | ||||||
|
|
| |||||||
Retained earnings at beginning of year | $ | 510.2 | $ | 392.8 | $ | 339.2 | |||
|
|
| |||||||
Transition adjustments Financial instruments (Note 2) | (8.3 | ) | - | - | |||||
|
| ||||||||
Net earnings | 152.7 | 127.4 | 63.6 | ||||||
|
| ||||||||
Dividends | (10.1 | ) | (10.0 | ) | (10.0 | ) | |||
|
|
| |||||||
Retained earnings at end of year | $ | 644.5 | $ | 510.2 | $ | 392.8 | |||
| |||||||||
The accompanying notes form an integral part of these Consolidated Financial Statements. |
5
Consolidated Statements of Comprehensive Income | |||||||||||
|
|||||||||||
Years ended March 31 | |||||||||||
| |||||||||||
(amounts in millions of Canadian dollars) | 2008 | 2007 | 2006 | ||||||||
|
|
| |||||||||
Net earnings | $ | 152.7 | $ | 127.4 | $ | 63.6 | |||||
|
| ||||||||||
Other comprehensive (loss) income, net of income taxes: | |||||||||||
|
| ||||||||||
Foreign Currency Translation Adjustment | |||||||||||
|
|||||||||||
Net foreign exchange (losses) gains on translation of financial | |||||||||||
|
| ||||||||||
statements of self-sustaining foreign operations | (50.2 | ) | 26.1 | (49.2 | ) | ||||||
|
|||||||||||
Net change in gains on certain long-term debt denominated in | |||||||||||
|
|||||||||||
foreign currency and designated as hedges on net | |||||||||||
|
| ||||||||||
investments of self-sustaining foreign operations | 15.7 | 1.5 | 4.6 | ||||||||
|
| ||||||||||
Reclassifications to income | - | - | (5.3 | ) | |||||||
|
| ||||||||||
Income tax adjustment | (0.6 | ) | (0.1 | ) | 1.0 | ||||||
|
|
| |||||||||
(35.1 | ) | 27.5 | (48.9 | ) | |||||||
|
|
| |||||||||
Net Changes in Cash Flow Hedge | |||||||||||
|
|||||||||||
Net change in gains on derivative items designated as hedges | |||||||||||
|
| ||||||||||
of cash flows | 29.7 | - | - | ||||||||
|
|||||||||||
Reclassifications to income or to the related non-financial | |||||||||||
|
| ||||||||||
assets or liabilities | (25.2 | ) | - | - | |||||||
|
| ||||||||||
Income tax adjustment | (1.4 | ) | - | - | |||||||
|
|
| |||||||||
3.1 | - | - | |||||||||
|
|
| |||||||||
Total other comprehensive (loss) income | (32.0 | ) | 27.5 | (48.9 | ) | ||||||
|
|
| |||||||||
Comprehensive income | $ | 120.7 | $ | 154.9 | $ | 14.7 | |||||
| |||||||||||
The accompanying notes form an integral part of these Consolidated Financial Statements. | |||||||||||
Consolidated Statement of Accumulated Other Comprehensive Loss | |||||||||||
Accumulated | |||||||||||
Foreign Currency | Other | ||||||||||
As at and for the year ended March 31, 2008 | Translation | Cash Flow Comprehensive | |||||||||
(amounts in millions of Canadian dollars) | Adjustment | Hedge | Loss | ||||||||
| |||||||||||
Foreign currency translation adjustment reclassification | $ | (87.7 | ) | $ | - | $ | (87.7 | ) | |||
Transition adjustments Financial instruments (Note 2) | - | (3.5 | ) | (3.5 | ) | ||||||
| |||||||||||
Balance in accumulated other comprehensive loss on | |||||||||||
April 1, 2007 | $ | (87.7 | ) | $ | (3.5 | ) | $ | (91.2 | ) | ||
Details of other comprehensive loss: | |||||||||||
Net change in (losses) gains | (34.5 | ) | 29.7 | (4.8 | ) | ||||||
Reclassifications to income or to the related non financial | |||||||||||
assets or liabilities | - | (25.2 | ) | (25.2 | ) | ||||||
Income tax adjustment | (0.6 | ) | (1.4 | ) | (2.0 | ) | |||||
| |||||||||||
Total other comprehensive loss for year | $ | (35.1 | ) | $ | 3.1 | $ | (32.0 | ) | |||
| |||||||||||
Balance in accumulated other comprehensive loss | $ | (122.8 | ) | $ | (0.4 | ) | $ | (123.2 | ) | ||
| |||||||||||
The accompanying notes form an integral part of these Consolidated Financial Statements. |
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Consolidated Statements of Cash Flows | |||||||||
Years ended March 31 | |||||||||
(amounts in millions of Canadian dollars) | 2008 | 2007 | 2006 | ||||||
| |||||||||
Operating Activities | |||||||||
Net earnings | $ | 152.7 | $ | 127.4 | $ | 63.6 | |||
Results of discontinued operations (Note 5) | 12.1 | 1.7 | 6.0 | ||||||
| |||||||||
Earnings from continuing operations | 164.8 | 129.1 | 69.6 | ||||||
Adjustments to reconcile earnings to cash flows from operating activities: | |||||||||
Depreciation | 60.6 | 55.0 | 52.5 | ||||||
Financing cost amortization | 0.8 | 0.8 | 2.2 | ||||||
Amortization and write down of intangible and other assets | 16.9 | 15.8 | 22.9 | ||||||
Future income taxes (Note 14) | 26.4 | (14.2 | ) | 5.1 | |||||
Investment tax credits | 15.4 | 19.3 | (11.8 | ) | |||||
Stock-based compensation plans (Note 16) | (0.8 | ) | 24.6 | 12.2 | |||||
Employee future benefits, net | 0.1 | (0.9 | ) | (2.0 | ) | ||||
Other | (7.6 | ) | (10.4 | ) | (3.9 | ) | |||
Changes in non-cash working capital (Note 18) | (15.7 | ) | 20.2 | 79.1 | |||||
| |||||||||
Net cash provided by continuing operating activities | 260.9 | 239.3 | 225.9 | ||||||
Net cash provided by discontinued operating activities | - | - | 2.1 | ||||||
| |||||||||
Net cash provided by operating activities | 260.9 | 239.3 | 228.0 | ||||||
| |||||||||
Investing Activities | |||||||||
Business acquisitions (net of cash and cash equivalents acquired) (Note 3) | (41.8 | ) | (4.4 | ) | 2.6 | ||||
Proceeds from disposal of discontinued operations (net of cash and cash | |||||||||
equivalents disposed) (Note 5) | - | (3.8 | ) | (4.9 | ) | ||||
Capital expenditures | (189.5 | ) | (158.1 | ) | (130.1 | ) | |||
Deferred development costs | (16.5 | ) | (3.0 | ) | (1.8 | ) | |||
Deferred pre-operating costs | (3.9 | ) | (5.9 | ) | (0.7 | ) | |||
Other | (5.5 | ) | (2.9 | ) | (9.9 | ) | |||
| |||||||||
Net cash used in continuing investing activities | (257.2 | ) | (178.1 | ) | (144.8 | ) | |||
Net cash used in discontinued investing activities | - | - | (2.3 | ) | |||||
| |||||||||
Net cash used in investing activities | (257.2 | ) | (178.1 | ) | (147.1 | ) | |||
| |||||||||
Financing Activities | |||||||||
Net borrowing under revolving unsecured credit facilities (Note 12) | - | (0.6 | ) | (30.7 | ) | ||||
Proceeds from long-term debt, net of transaction costs and debt basis | |||||||||
adjustment (Note 12) | 141.1 | 45.8 | 32.1 | ||||||
Reimbursement of long-term debt (Note 12) | (37.4 | ) | (39.8 | ) | (65.7 | ) | |||
Dividends paid | (9.8 | ) | (9.8 | ) | (9.7 | ) | |||
Common stock issuance (Note 15) | 13.9 | 10.0 | 8.0 | ||||||
Other | (5.9 | ) | (2.1 | ) | 11.6 | ||||
| |||||||||
Net cash provided by (used in) continuing financing activities | 101.9 | 3.5 | (54.4 | ) | |||||
Net cash provided by discontinued financing activities | - | - | 1.2 | ||||||
| |||||||||
Net cash provided by (used in) financing activities | 101.9 | 3.5 | (53.2 | ) | |||||
| |||||||||
Effect of foreign exchange rate changes on cash and cash equivalents | (0.1 | ) | 4.4 | (8.1 | ) | ||||
| |||||||||
Net increase in cash and cash equivalents | 105.5 | 69.1 | 19.6 | ||||||
Cash and cash equivalents at beginning of year | 150.2 | 81.1 | 61.5 | ||||||
| |||||||||
Cash and cash equivalents at end of year | $ | 255.7 | $ | 150.2 | $ | 81.1 | |||
| |||||||||
Supplementary Cash Flows Information (Note 18) | |||||||||
The accompanying notes form an integral part of these Consolidated Financial Statements. |
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Notes to the Consolidated Financial Statements
Years ended March 31, 2008, 2007 and 2006 (amounts in millions of Canadian dollars)
Note 1 Nature of Operations and Significant Accounting Policies
Nature of operations
CAE Inc. (or the Company) designs, manufactures and supplies simulation equipment and services and develops integrated training solutions for the military, commercial airlines, business aircraft operators and aircraft manufacturers. CAEs flight simulators replicate aircraft performance in normal and abnormal operations as well as a comprehensive set of environmental conditions utilizing visual systems that contain an extensive database of airports, other landing areas, flying environments, motion and sound cues to create a fully immersive training environment. The Company offers a full range of flight training devices based on the same software used in its simulators. The Company also operates a global network of training centres in locations around the world.
The Companys operations are managed through four segments:
(i) | Simulation Products/Civil Designs, manufactures and supplies civil flight simulators, training devices and visual systems; |
(ii) | Simulation Products/Military Designs, manufactures and supplies advanced military training products for air, land and sea applications; |
(iii) | Training & Services/Civil Provides business and commercial aviation training and related services; |
(iv) | Training & Services/Military Supplies military turnkey training and operational solutions, support services, life extensions, systems maintenance and modelling and simulation solutions. |
Generally accepted accounting principles and financial statement presentation
The Companys accounting policies and those of its subsidiaries conform, in all material respects, to Canadian generally accepted accounting principles (GAAP), as defined by the Canadian Institute of Chartered Accountants (CICA). In some respects, these accounting principles differ from United States generally accepted accounting principles (U.S. GAAP). The main differences are described in Note 26.
Except where otherwise indicated, all amounts in these consolidated financial statements are expressed in Canadian dollars.
Use of estimates
The preparation of consolidated financial statements in conformity with GAAP requires CAEs management (Management) to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses for the period reported. Management reviews its estimates on an ongoing basis, particularly as they relate to accounting for long-term contracts, useful lives, employee future benefits, income taxes, impairment of long-lived assets, fair value of certain financial instruments, goodwill and intangibles, based on Managements best knowledge of current events and actions that the Company may undertake in the future. Actual results could differ from those estimates; significant changes in estimates and/or assumptions could result in the impairment of certain assets.
Basis of consolidation
The consolidated financial statements include the accounts of CAE Inc. and of all its majority-owned subsidiaries, and variable interest entities for which the Company is the primary beneficiary. They also include the Companys proportionate share of assets, liabilities and earnings of joint ventures in which the Company has an interest (refer to Note 4). All significant intercompany accounts and transactions have been eliminated. Investments over which the Company exercises significant influence are accounted for using the equity method and portfolio investments are accounted for at fair value unless there is no readily available market value.
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Revenue Recognition
Multiple-element arrangements
The Company sometimes enters into multiple-element revenue arrangements, which may include a combination of design, engineering and manufacturing of flight simulators, spare parts and maintenance. A multiple-element arrangement is separated into more than one unit of accounting, and applicable revenue recognition criteria is considered separately for the different units of accounting if all of the following criteria are met:
(i) | The delivered item has value to the customer on a stand-alone basis; |
(ii) | There are objective and reliable evidence of the fair value of the undelivered item (or items); |
(iii) | If the arrangement includes a general right of return related to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in the control of the vendor. |
The allocation of the revenue from a multiple deliverable agreement is based on fair value of an undelivered item as evidenced by the price of the item regularly charged by the Company on an individual basis or on other foundations covered by the concept of vendor-specific objective evidence as presented in the Statement of Position (SOP) 97-2, Software Revenue Recognition issued by the American Institute of Certified Public Accountants. The Company does enter into stand-alone transactions on a regular basis in regards to the sale of spare parts and maintenance arrangements, therefore the price charged when the elements are sold separately is readily available. The process for determining fair value of undelivered items, with respect to the design, engineering and manufacturing of flight simulators, entails evaluating each transaction and taking into account the unique features of each deal.
The applicable revenue recognition criteria for the separated units of accounting in regards to the individual design, engineering and manufacturing of flight simulators, spare parts and maintenance elements are described below.
Long-term contracts
Revenue from long-term contracts for the design, engineering and manufacturing of flight simulators is recognized using the percentage-of-completion method when there is persuasive evidence of an arrangement, when the fee is fixed or determinable and when collection is reasonably certain. Under this method, revenue and earnings are recorded as related costs are incurred, on the basis of the percentage of actual costs incurred to date, related to the estimated total costs to complete the contract. The cumulative impact of any revisions in cost and earning estimates are reflected in the period in which the need for a revision becomes known. Provisions for estimated contract losses, if any, are recognized in the period in which the loss is determined. Contract losses are measured at the amount by which the estimated total costs exceed the estimated total revenue from the contract. Warranty provisions are recorded when revenue is recognized, based on past experience. Generally, no right of return or complementary upgrade is provided to customers. Post-delivery customer support is billed separately, and revenue is recognized over the support period.
Product maintenance
Revenue from maintenance contracts is recognized in earnings on a straight-line basis over the contract period. In situations when it is clear that costs will be incurred by using a basis other than a straight-line method, based on historical evidence, revenue is recognized over the contract period in proportion to the costs expected to be incurred in performing services under the contract.
Spare parts
Revenue from the sale of spare parts is recognized when there is persuasive evidence of an arrangement, delivery has occurred, the fee is fixed or determinable and collection is reasonably assured.
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Software arrangements
The Company also enters into software arrangements to sell, independently or in multiple-element arrangements, stand-alone software, services, maintenance and software customization. Revenue from software arrangements is recognized in accordance with the guidance set out in the SOP 97-2 as described in more detail as follows:
(i) | Stand-alone products |
Revenue from software license arrangements that do not require significant production, modification, or customization of software, is recognized when there is persuasive evidence of an arrangement, delivery has occurred, the fee is fixed or determinable and collection is reasonably assured. | |
(ii) | Consulting services |
Revenues arising from direct consulting or training services that are provided to customers are recognized as the services are rendered. | |
(iii) | Maintenance |
Maintenance and support revenues are recognized ratably over the term of the related agreements. | |
(iv) | Multiple-element arrangements |
The Company sometimes enters into multiple-element revenue software arrangements, which may include any combination of software, services or training, customization and maintenance. In such instances, the fee is allocated to the various elements as previously described. | |
(v) | Long-term software arrangements |
Revenues from fixed-price software arrangements and software customization contracts that require significant production, modification, or customization of software are also recognized under the percentage-of-completion method. | |
Training services
Training services are recognized when persuasive evidence of an arrangement exists, the fee is fixed or determinable, recovery is reasonably certain and the services have been rendered.
Foreign currency translation
Self-sustaining foreign operations
Assets and liabilities of self-sustaining foreign operations are translated at exchange rates in effect at the balance sheet date and revenue and expenses are translated at the average exchange rates for the period. Foreign gains or losses arising from the translation into Canadian dollars are included in accumulated other comprehensive loss, which is a separate component of shareholders' equity.
Amounts related to foreign currency translation in accumulated other comprehensive loss are released to the Consolidated Statement of Earnings when the Company reduces its overall net investment in foreign operations by way of a reduction in capital or through the settlement of long-term intercompany balances, which had been considered part of the Companys overall net investment.
Foreign currency transactions
Monetary assets and liabilities denominated in currencies other than the functional currency are translated at the prevailing exchange rate at the balance sheet date. Non-monetary assets and liabilities denominated in currencies other than the functional currency and revenue and expense items are translated into the functional currency using the exchange rate prevailing at the dates of the respective transactions. Translation gains or losses are included in the determination of earnings, except those related to long-term intercompany account balances, which form part of the overall net investment in foreign operations, and those arising from the translation of debt denominated in foreign currencies and designated as hedges on the overall net investments of self-sustaining foreign operations which are included in the accumulated other comprehensive loss.
Cash and cash equivalents
Cash and cash equivalents consist of cash and highly-liquid investments with original terms to maturity of 90 days or less at date of purchase.
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Accounts receivable
Receivables are carried at amortized cost using the effective interest method, net of a provision for doubtful accounts, based on expected recoverability. The Company is involved in a program under which it sells certain of its accounts receivable to a third party for a cash consideration without recourse to the Company. These transactions are accounted for when the Company is considered to have surrendered control over the transferred accounts receivable. Losses and gains on these transactions are recognized in net earnings.
Inventories
Long-term contract inventories resulting from applying the percentage-of-completion method to account for revenues for most of the Companys long-term contracts are included as part of inventories and consist of materials, direct labour, relevant manufacturing overhead, and estimated contract margins.
Work in process is stated at the lower of cost and net realizable value. The cost of work in process includes material, labour, and an allocation of manufacturing overhead.
Raw materials are valued at the lower of average cost and replacement cost. Spare parts to be used in the normal course of business are valued at the lower of cost and replacement cost.
Long-lived assets
Property, plant and equipment and amortization
Property, plant and equipment are recorded at cost less accumulated depreciation, net of any impairment charges. The declining balance and straight-line methods are used to calculate amortization over the estimated useful lives of the assets as follows:
Method | Rates/ Years | |
| ||
Buildings and improvements | Declining balance / Straight-line | 5 to 10% / 10 to 20 years |
Simulators | Straight-line (10% residual) | Not exceeding 25 years |
Machinery and equipment | Declining balance / Straight-line | 20 to 35% / 3 to 10 years |
|
Asset retirement obligations
Asset retirement obligations are recognized in the period in which the Company incurs a legal obligation associated to the retirement of an asset. The obligation is measured initially at fair value discounted to its present value using a credit-adjusted risk-free interest rate, and the resulting costs are capitalized into the carrying value of the related assets. The associated liability is accreted to the estimated fair value of the obligation at the settlement date through periodic accretion charges to earnings. Costs related to asset retirement obligations are depreciated over the remaining useful life of the underlying asset.
The Company has a known conditional asset retirement obligation which is the asbestos remediation activities to be performed in the future, that is not reasonably estimable due to insufficient information about the timing and method of settlement of the obligation. Accordingly, this obligation has not been recorded in the consolidated financial statements because the fair value cannot be reasonably estimated. A liability for this obligation will be recorded in the period when sufficient information regarding timing and method of settlement becomes available to make a reasonable estimate of the liabilitys fair value.
Leases
The Company enters into leases in which substantially all the benefits and risks of ownership transferred to the Company are recorded as capital leases and classified as property, plant and equipment and long-term borrowings. All other leases are classified as operating leases under which leasing costs are expensed in the period in which they are incurred and straight-line over the terms of the lease. Gains, net of transaction costs, related to the sale and leaseback of simulators are deferred and the net gains in excess of the residual value guarantees are amortized over the term of the lease. When at the time of the sale and leaseback transactions, the fair value of the asset is less than the carrying value, the difference is recognized as a loss in the Companys net earnings immediately. The residual value guarantees are ultimately recognized in the Companys net earnings upon expiry of the related sale and leaseback agreement.
Interest capitalization
Interest costs relating to the construction of simulators, buildings for training centres and other internally developed assets are capitalized as part of the cost of property, plant and equipment. Capitalization of interest ceases when the asset is completed and ready for productive use.
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Intangible assets with definite useful lives and amortization
Intangible assets with definite useful lives are recorded at their fair value at the acquisition date. Amortization is calculated using the straight-line method for all intangible assets over their estimated useful lives as follows:
Weighted | ||
Average | ||
Amortization | Amortization | |
Period | Period | |
|
||
Trade names | 2 to 20 years | 18 |
Customer relations | 4 to 10 years | 9 |
Customer contractual agreements | 10 to 15 years | 11 |
Technology | 5 to 10 years | 10 |
Enterprise resource planning and other software | 5 to 10 years | 7 |
Other intangible assets | 3 to 20 years | 15 |
|
Impairment of long-lived assets
Long-lived assets or asset groups are reviewed for impairment upon the occurrence of events or changes in circumstances indicating that the carrying value of the assets may not be recoverable, as measured by comparing its carrying amount to the estimated undiscounted future cash flows generated by their use and eventual disposal. Impairment, if any, is measured as the excess of the carrying amount of the asset or asset group over its fair value.
Other assets
Research and development (R&D) costs
Research costs are charged to consolidated earnings in the period in which they are incurred. Development costs are also charged to consolidated earnings in the period incurred unless they meet all the criteria for deferral, as per CICA Handbook Section 3450, Research and Development Costs, and their recovery is reasonably assured. Government contribution arising from research and development activities is deducted from the related costs or assets, if deferred. Amortization of development costs deferred to future periods commences with the commercial production of the product and is charged to consolidated earnings based on anticipated sales of the product, when possible, over a period not exceeding five years using the straight-line method.
Pre-operating costs
The Company defers costs incurred during the pre-operating period for all new operations related to training centres. Pre-operating costs are incremental in nature and are considered by Management to be recoverable from the future operations of the new training centre. Capitalization ceases upon the opening of the training centre. Deferred pre-operating costs are amortized over a five-year period using the straight-line method.
Deferred financing costs
Deferred financing costs related to the revolving unsecured term credit facilities and sale and leaseback agreements are included in other assets and amortized on a straight-line basis over the term of the related financing agreements.
Restricted cash
The Company is required to hold a defined amount of cash as collateral under the terms of subsidiaries external bank financing, government-related sales contracts and business acquisition arrangements.
Business combinations and goodwill
Acquisitions are accounted for using the purchase method and, accordingly, the results of operations of the acquired business are included in the Consolidated Statements of Earnings effective on their respective dates of acquisition.
Goodwill represents the excess of the cost of acquired businesses over the net of the amounts assigned to identifiable assets acquired and liabilities assumed. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate a potential impairment in value.
The impairment test consists of a comparison of the fair value of the Companys reporting units with their carrying amount. When the carrying amount of the reporting unit exceeds its fair value, the Company compares, in a second phase, the fair value of goodwill related to the reporting unit to its carrying value
12
and recognizes, if required, an impairment loss equal to the excess. The fair value of a reporting unit is calculated based on one or more fair value measures, including present value techniques of estimated future cash flows and estimated amounts at which the unit, as a whole, could be purchased or sold in a current transaction between willing unrelated parties. If the carrying amount of the reporting unit exceeds its fair value, the second phase requires the fair value of the reporting unit to be allocated to the underlying assets and liabilities of that reporting unit, resulting in an implied fair value of goodwill. If the carrying amount of that reporting units goodwill exceeds the implied fair value of that goodwill, an impairment loss equal to the excess is recorded in consolidated net earnings.
Income taxes and investment tax credits
The Company uses the tax liability method to account for income taxes. Under this method, future income tax assets and liabilities are determined according to differences between the carrying value and the tax bases of assets and liabilities.
This method also requires the recognition of future tax benefits, such as net operating loss carryforwards, to the extent that the realization of such benefits is more likely than not. A valuation allowance is recognized to the extent that, in the opinion of Management, it is more likely than not that the future income tax assets will not be realized.
Future tax assets and liabilities are measured by applying enacted or substantively enacted rates and laws at the date of the consolidated financial statements for the years in which the temporary differences are expected to reverse.
The Company does not provide for income taxes on undistributed earnings of foreign subsidiaries that are not expected to be repatriated in the foreseeable future.
Investment tax credits (ITCs) arising from R&D activities are deducted from the related costs and are accordingly included in the determination of net earnings when there is reasonable assurance that the credits will be realized. ITCs arising from the acquisition or development of property, plant and equipment and deferred development costs are deducted from the cost of those assets with amortization calculated on the net amount.
The Company is subject to examination by taxation authorities in various jurisdictions. The determination of tax liabilities and ITCs recoverable involve certain uncertainties in the interpretation of complex tax regulations. Therefore, the Company provides for potential tax liabilities and ITCs recoverable based on Managements best estimates. Differences between the estimates and the ultimate amounts of taxes and ITCs are recorded in net earnings at the time they can be determined.
Stock-based compensation plans
The Companys stock-based compensation plans consist of five individual plans: an Employee Stock Option Plan (ESOP), an Employee Stock Purchase Plan (ESPP), a Deferred Share Unit (DSU) plan for executives, a Long-Term Incentive Deferred Share Unit (LTI-DSU) plan and a Long-Term Incentive Restricted Share Unit (LTI-RSU) plan. All plans are described in Note 16.
Using the fair value method, compensation expense is measured at the grant date and recognized over the service period with a corresponding increase to contributed surplus in shareholders equity. The Company estimates the fair value of options using the Black-Scholes option pricing model. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, valuation models generally require the input of highly-subjective assumptions including expected stock price volatility.
In Note 16, pro forma consolidated net earnings and pro forma basic and diluted net earnings per share figures are presented as if the fair value based method of accounting had been used to account for stock options granted to employees during fiscal 2003.
A compensation expense is also recognized for the Companys portion of the contributions made under the ESPP and for the grant date amount of vested units at their respective valuations for the DSU, LTI-DSU and LTI-RSU plans. Any subsequent changes in the Companys stock price affect the compensation expense. The Company has entered into equity swap agreements with major Canadian financial institutions in order to reduce its cash and earnings exposure related to the fluctuation in the Companys share price relating to the DSU and LTI-DSU programs.
13
CAE's practice is to issue options in May of each fiscal year or at the time of hiring of new employees or new appointments. In both instances these options vest equally over four years. Any consideration paid by plan participants on the exercise of share options or the purchase of shares is credited to share capital together with any related stock-based compensation expense.
Since the adoption of Emerging Issues Committee (EIC)-162, Stock-Based Compensation for Employees Eligible to Retire Before the Vesting Date, during fiscal 2007, the Company recognizes the stock-based compensation expense for employees who will become eligible for retirement during the vesting period over the period from grant date to the date the employee becomes eligible to retire. In addition, if an employee is eligible to retire on the grant date, the compensation expense must be recognized at that date unless the employee is under contract which, in that case, the compensation expense must be recognized over the term of the contract.
Employee future benefits
The Company maintains defined benefit pension plans that provide benefits based on length of service and final average earnings. The service costs and the pension obligations are actuarially determined using the projected benefit method prorated on employee service and Managements best estimate of expected plan investment performance, salary escalation and retirement ages of employees. For the purpose of calculating the expected return on plan assets, the relevant assets are valued at fair value. The excess of the net actuarial gain (loss) over 10% of the greater of the benefit obligation and the fair value of plan assets is amortized over the remaining service period of active employees. Past service costs, arising from plan amendments, are deferred and amortized on a straight-line basis over the average remaining service lives of active employees at the date of amendment.
When a curtailment arises, any unamortized past service costs associated with the reduction of future services is recognized immediately. Also, the increase or decrease in benefit obligations is recognized as a loss or gain, net of unrecognized actuarial gains or losses. Finally, when an event gives rise to both a curtailment and a settlement of obligations, the curtailment is accounted for prior to the settlement.
Earnings per share
Earnings per share are calculated by dividing consolidated net earnings available for common shareholders by the weighted average number of common shares outstanding during the year. The diluted weighted average number of common shares outstanding is calculated by taking into account the dilution that would occur if the securities or other agreements for the issuance of common shares were exercised or converted into common shares at the later of the beginning of the period or the issuance date unless it is anti-dilutive. The treasury stock method is used to determine the dilutive effect of the stock options. The treasury stock method is a method of recognizing the use of proceeds that could be obtained upon the exercise of options and warrants in computing diluted earnings per share. It assumes that any proceeds would be used to purchase common shares at the average market price during the period.
Disposal of long-lived assets and discontinued operations
Long-lived assets to be disposed of by sale are measured at the lower of their carrying amounts or fair value less selling costs and are not amortized as long as they are classified as assets to be disposed of by sale. Operating results of a companys components disposed of by sale or being classified as held-for-sale are reported as discontinued operations if the operations and cash flows of those components have been, or will be, eliminated from the Companys current operations pursuant to the disposal and if the Company does not have significant continuing involvement in the operations of the component after the disposal transaction. A component of an enterprise includes operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the Companys operations and cash flows.
Hedging relationships and derivative financial instruments
On April 1, 2007, the Company adopted CICA Handbook Section 1530, Comprehensive Income, Section 3855, Financial Instruments Recognition and Measurement and Section 3865, Hedges, which provide accounting guidelines for recognition and measurement of financial assets, financial liabilities and non-financial derivatives, and describe when and how hedge accounting may be applied. The Companys adoption of these financial instruments standards resulted in changes in the accounting for financial instruments and hedges which are further described in Note 2.
14
Government cost sharing
Contributions from Industry Canada under the Technology Partnerships Canada program (TPC) and from Investissement Québec for costs incurred in R&D programs, are recorded as a reduction of costs or as a reduction of capitalized costs.
A liability to repay the government contribution is recognized when conditions arise and the repayment thereof is reflected in the consolidated statements of earnings when royalties become due.
Severance, termination benefits and costs associated with exit and disposal activities
In accordance with EIC-134, Accounting for Severance and Termination Benefits and EIC-135, Accounting for Costs Associated with Exit and Disposal Activities (Including Costs Incurred in a Restructuring), the Company recognizes severance benefits that do not vest when the decision is made to terminate the employee. Special termination benefits are accounted for when Management commits to a plan that specifically identifies all significant actions to be taken and commits the entity to the event that obligates it under the terms of the contract with its employees to pay such termination benefits. Such termination benefits and the benefit arrangement are communicated to the employees in sufficient detail to enable them to determine the type and amount of benefits they will receive when their employment is terminated. All other costs associated with restructuring, exit and disposal activities are recognized in the period in which they are incurred and measured at their fair value.
Disclosure of guarantees
The Company discloses information concerning certain types of guarantees that may require payments, contingent on specified types of future events. In the normal course of business, CAE issues letters of credit and performance guarantees.
Note 2
Changes in Accounting Policies
Accounting changes
On April 1, 2007, the Company adopted CICA Handbook Section 1506, Accounting Changes. This standard establishes criteria for changing accounting policies, along with the accounting treatment and disclosure regarding changes in accounting policies, estimates and correction of errors. The application of this revised standard had no effect to the Companys consolidated financial statements.
Financial instruments and hedging relationships
On April 1, 2007, the Company adopted CICA Handbook Section 1530, Comprehensive Income, Section 3855, Financial Instruments Recognition and Measurement and Section 3865, Hedges, which provide accounting guidelines for recognition and measurement of financial assets, financial liabilities and non-financial derivatives, and describe when and how hedge accounting may be applied.
The Companys adoption of these financial instruments standards resulted in changes in the accounting for financial instruments and hedges. The impact of these new standards is presented as a transitional adjustment in opening retained earnings and opening accumulated other comprehensive loss, as applicable. The comparative consolidated financial statements have not been restated except for the foreign currency translation adjustment, which is now disclosed as a part of accumulated other comprehensive loss. The resulting changes in the accounting for financial instruments and hedges due to the adoption of these accounting standards are described further.
(i) | Comprehensive income |
Comprehensive income, established under CICA Section 1530, is a standard that provides guidance on the presentation of comprehensive income which is defined as the change in shareholders equity, from transactions and other events and circumstances from non-owner sources, and is composed of the Companys net earnings and other comprehensive income (loss). | |
Other comprehensive income (loss) refers to revenues, expenses, gains and losses that are recognized in comprehensive income (loss), but excluded from net earnings, and includes net changes in unrealized foreign exchange gains (losses) on translating financial statements of self-sustaining foreign operations, net changes in gains (losses) on items designated as hedges on net investments including reclassification to earnings and net changes in gains (losses) on derivative items designated as hedges of cash flows and net changes on financial assets classified as available for sale, all net of income taxes. | |
15
(ii) | Financial assets and financial liabilities |
Section 3855 requires that financial assets and financial liabilities, including derivative financial instruments, be recognized on the consolidated balance sheet when the Company becomes a party to the contractual provisions of the financial instrument. On initial recognition, all financial instruments subject to Section 3855, including embedded derivative financial instruments that are not clearly and closely related to the host contract, must be measured at fair value. Financial assets and financial liabilities are initially recognized at fair value and are classified into one of these five categories: held-for-trading, held-to-maturity investments, loans and receivables, other financial liabilities and available-for-sale financial instruments. They are subsequently accounted for based on their classification as described below. The classification depends on the purpose for which the financial instruments were acquired and their characteristics. Except in very limited circumstances, the classification is not changed subsequent to initial recognition. | |
Held-for-trading
Financial instruments classified as held-for-trading are carried at fair value at each balance sheet date with the changes in fair value recorded in net earnings in the period in which these changes arise. Section 3855 allows an entity to designate any financial instrument as held-for-trading on initial recognition or adoption of the accounting standard if reliable fair values are available, even if that instrument would not otherwise satisfy the definition of held-for-trading (fair value option).
Held-to-maturity investments, loans and receivables and other financial liabilities
Financial instruments classified as held-to-maturity investments, loans and receivables, and other financial liabilities are carried at amortized cost using the effective interest method. The interest income or expense is included in net earnings in the period. The Companys long-term debt, including related debt issue costs, is accounted for at the amortized cost using the effective interest method.
Available-for-sale
Financial instruments classified as available-for-sale are carried at fair value at each balance sheet date with the changes in fair value recorded in other comprehensive income (loss) in the period in which the changes arise. Securities that are classified as available-for-sale and do not have a readily available market value are recorded at cost. Available-for-sale securities are written down to fair value through earnings whenever it is necessary to reflect other-than-temporary impairment. Upon de-recognition, all cumulative gains or losses are then recognized in net earnings.
As a result of the adoption of these new standards, the Company has classified its cash and cash equivalents as held-for-trading. Accounts receivable are classified as loans and receivables. Except for a minority interest investment classified as available-for-sale, the Companys investments consist of equity of entities subject to significant influence and joint ventures which are excluded from the scope of this standard. Accounts payable and accrued liabilities and long-term debt, including interest payable, are classified as other financial liabilities, all of which are measured at amortized cost using the effective interest method. All derivative instruments are classified as held-for-trading.
(iii) | Derivatives and hedge accounting |
Derivatives | |
All derivative instruments are recorded in the consolidated balance sheets at fair value at each balance sheet date. Derivatives may be embedded in other financial instruments or in a non-financial contract (host contract). Prior to the adoption of the new standards, such embedded derivatives were not accounted for separately from the host contract. Under the new standards, embedded derivatives are treated as separate derivatives if their economic characteristics and risks are not clearly and closely related to those of the host contract, the terms of the embedded derivative are the same as those of a stand-alone derivative, and the combined contract is not held for trading or designated at fair value. These embedded derivatives are measured at fair value at each balance sheet date with subsequent changes recognized in net earnings in the period in which the changes arise. | |
16
Hedge accounting
Under the new standards, all derivatives are recorded at fair value. The method of recognizing fair value gains and losses depends on whether derivatives are held for trading or are designated as hedging instruments, and, if the latter, the nature of the risks being hedged. All gains and losses from changes in the fair value of derivatives not designated as hedges are recognized in the consolidated statements of earnings. When derivatives are designated as hedges, the Company classifies them either as: (a) hedges of the change in fair value of recognized assets or liabilities or firm commitments (fair value hedges); or (b) hedges of the variability in highly probable future cash flows attributable to a recognized asset or liability, or a forecasted transaction (cash flow hedges).
Fair value hedge
The Company has outstanding and discontinued interest rate swap contracts, which it designates as fair value hedges related to variations of the fair value of its long-term debt due to change in LIBOR interest rates. In a fair value hedge relationship outstanding on the transition date, gains or losses from the measurement of derivative hedging instruments at fair value are recorded in earnings, while gains or losses on the hedged items attributable to the hedged risks are accounted for as an adjustment to the carrying amount of hedged items and are recorded in earnings. For the fair value hedge that was discontinued prior to the transaction date, the carrying amount of the hedged item is adjusted by the remaining balance of any deferred gain or loss on the hedging item. The adjustment is amortized in earnings.
Cash flow hedge
The Company has forward exchange and swap contracts, which it designates as cash flow hedges of forecasted transactions. In the case that all the critical terms of the hedging items and the forecasted transactions coincide (such as dates, quantities, delivery location), the Company assumes the hedge to be perfectly effective against changes in the overall fair value of the forecasted transactions. Otherwise, the amounts and timing of future cash flows are projected on the basis of their contractual terms and estimated progress on projects. The aggregate cash flows over time form the basis for identifying the effective portion of gains and losses on the derivative instruments designated as cash flow hedges of forecasted transactions. The effective portion of changes in the fair value of derivative instruments that are designated and qualify as cash flow hedges is recognized in comprehensive income (loss). Any gain or loss in fair value relating to the ineffective portion is recognized immediately in earnings. Amounts accumulated in other comprehensive income (loss) are reclassified to the consolidated statements of earnings in the period in which the hedged item affects earnings or are included in the initial carrying value of the related non financial asset acquired or liability incurred. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in other comprehensive income (loss) at that time remains in other comprehensive income (loss) until the forecasted transaction is eventually recognized in the consolidated statements of earnings. When it is probable that a forecasted transaction will not occur, the cumulative gain or loss that was reported in other comprehensive income (loss) is recognized immediately in earnings.
Hedge of self-sustaining foreign operations
The Company has designated certain long-term debt as a hedge of its overall net investments in self-sustaining foreign operations. The portion of gains or losses on the hedging item that is determined to be an effective hedge is recognized in other comprehensive income, while the ineffective portion is recorded in net earnings.
Transaction costs
Under the new standards, transaction costs related to the issuance or acquisition of financial assets and liabilities (other than those classified as held-for-trading) may be either all recognized into earnings as incurred, or are recorded with the asset or liability to which they are associated and amortized using the effective-interest rate method. Previously, the Company had deferred these costs and amortized them over the life of the related financial asset or liability.
The Company elected to record transaction costs with the asset or liability to which they are associated and amortize them using the effective-interest rate method. As a result, the Company reclassified deferred financing costs, resulting in an adjustment to long-term debt on April 1, 2007.
17
The impact on the consolidated balance sheet was as follows as at April 1, 2007: | |||||||||
(amounts in millions) | Reclassification | Increase (decrease) | Total | ||||||
| |||||||||
Assets | |||||||||
Accounts receivable | $ | - | $ | 7.8 | $ | 7.8 | |||
Inventories | - | 1.2 | 1.2 | ||||||
Income taxes recoverable | - | 5.5 | 5.5 | ||||||
Property, plant and equipment, net | - | (0.7 | ) | (0.7 | ) | ||||
Other assets | (1.5 | ) | 4.4 | 2.9 | |||||
| |||||||||
$ | (1.5 | ) | $ | 18.2 | $ | 16.7 | |||
| |||||||||
Liabilities | |||||||||
Accounts payable and accrued | |||||||||
liabilities | $ | - | $ | 7.7 | $ | 7.7 | |||
Deposits on contracts | - | 3.2 | 3.2 | ||||||
Current portion of long-term debt | (0.1 | ) | - | (0.1 | ) | ||||
Long-term debt | (1.4 | ) | 2.5 | 1.1 | |||||
Deferred gains and other long-term | |||||||||
liabilities | - | 16.6 | 16.6 | ||||||
| |||||||||
$ | (1.5 | ) | $ | 30.0 | $ | 28.5 | |||
Shareholders Equity | |||||||||
Retained earnings | $ | - | $ | (8.3 | ) | $ | (8.3 | ) | |
Accumulated other comprehensive | |||||||||
loss | - | (3.5 | ) | (3.5 | ) | ||||
| |||||||||
$ | (1.5 | ) | $ | 18.2 | $ | 16.7 | |||
|
The following table summarizes the required transition adjustments upon adoption of the relevant standards as at April 1, 2007:
Accumulated other | ||||||
(amounts in millions) | Retained earnings | comprehensive loss | ||||
| ||||||
Financial instruments classified | ||||||
as held-for-trading | $ | (0.3 | ) | $ | - | |
Effect of discontinued hedging relations | (2.6 | ) | - | |||
Carrying value difference of financial | ||||||
instruments recognized as held-to- | ||||||
maturity, loans and receivables and | ||||||
other financial liabilities carried at | ||||||
amortized cost using the effective | ||||||
interest method | (0.1 | ) | - | |||
Fair value of cash flow hedges | (0.1 | ) | (6.0 | ) | ||
Effect of initial recognition of embedded | ||||||
derivatives | (9.4 | ) | - | |||
Other | 0.3 | 0.9 | ||||
Income tax adjustment | 3.9 | 1.6 | ||||
| ||||||
$ | (8.3 | ) | $ | (3.5 | ) | |
|
All derivative financial instruments, including embedded derivatives that are not clearly and closely related to those of the host instrument, are recorded on the consolidated balance sheet at fair value. The Company does not use any derivative financial instruments for trading or speculative purposes. Short-term and long-term derivative assets have been included as part of accounts receivable and other assets respectively, while short-term and long-term derivative liabilities have been included as part of accounts payable and accrued liabilities, and deferred gains and other long-term liabilities, in that order. Gains and losses of financial instruments classified as held-for-trading, net of taxes, including derivatives not qualifying for hedge accounting in accordance with the new standards and which were not previously recorded at fair value, have been recognized in the opening balance of retained earnings. Adjustments, net of taxes, arising from the difference at transition between the carrying value of financial instruments recognized as held-to-maturity, loans and receivables and other financial liabilities carried at amortized cost using the effective interest method and their carrying value as at March 31, 2007, have been recognized in the opening balance of retained earnings. Other adjustments including those arising as a result of re-measuring hedging instruments designated as cash flow hedges are recognized in the opening balance of accumulated other comprehensive income and opening retained earnings, net of taxes.
18
The effects of the initial recognition of embedded derivatives have been recognized in the opening balance of retained earnings. Finally, the cumulative translation adjustment balance previously disclosed as a separate component of shareholders equity has been reclassified to accumulated other comprehensive loss.
Future changes to accounting standards
Financial instrument disclosures and presentation
In December 2006, the AcSB issued CICA Handbook Section 3862, Financial instruments Disclosures and Section 3863, Financial instruments Presentation. Under these new sections, entities will be required to disclose information that enables users to evaluate the significance of a financial instrument to an entitys financial position and performance. These sections are effective for interim and annual financial statements relating to fiscal years beginning on or after October 1, 2007. The Company is currently evaluating the impact of these new standards.
Capital disclosure
In December 2006, the AcSB issued Handbook Section 1535, Capital Disclosures, which establishes guidelines for the disclosure of information regarding an entitys capital and how it is managed. This standard requires disclosure of an entitys objectives, policies and processes for managing capital, quantitative data about what the entity regards as capital and whether the entity has complied with any capital requirements and, if it has not complied, the consequences of such non-compliance. This standard is effective for interim and annual financial statements relating to fiscal years beginning on or after October 1, 2007. The Company is currently evaluating the impact of this new standard.
Inventories
In March 2007, the AcSB approved new Section 3031, Inventories, which will replace existing Section 3030 with the same title. The new section establishes that inventories should be measured at the lower of cost and net realizable value, with guidance on the determination of cost, including allocation of overheads and other costs to inventory and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The final standard is effective for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2008. The Company is currently evaluating the impact of this new standard.
Intangible assets
In November 2007, the AcSB approved new Section 3064, Goodwill and Intangible Assets, replacing Sections 3062, Goodwill and Other Intangible Assets, and 3450, Research and Development Costs. New Section 3064 incorporates material from International Accounting Standard (IAS) 38, Intangible Assets, addressing when an internally developed intangible asset meets the criteria for recognition as an asset. The AcSB also approved amendments to Section 1000, Financial Statement Concepts, and Accounting Guideline AcG-11, Enterprises in the Development Stage. The amendments to AcG-11 provide consistency with Section 3064. EIC-27, Revenues and Expenditures during the Pre-operating Period, will not apply to entities that have adopted Section 3064. These changes are effective for fiscal years beginning on or after October 1, 2008, with earlier adoption permitted. The Company is currently evaluating the impact of this standard which will be applied for the fiscal year beginning April 1, 2009.
International Financial Reporting Standards (IFRS)
In January 2006, the AcSB adopted a strategic plan calling for the adoption of IFRSs by publicly accountable enterprises in Canada, after a specified transition period. The AcSB has recently confirmed January 1, 2011 as the changeover date (i.e., the date IFRSs will replace current Canadian standards and interpretations as GAAP for this category of reporting entity). As a result, the Company is required to prepare its consolidated financial statements in accordance with IFRSs for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011, which, in the Companys case would result in the application of IFRS for the fiscal year beginning April 1, 2011, at the latest. On February 13, 2008, the Canadian Securities Administrators (CSA) issued, for public comment, a Concept Paper proposing that listed companies be permitted to adopt IFRSs earlier, for financial years beginning on or after January 1, 2009. The Company is currently evaluating the impact of adopting IFRS on its consolidated financial statements.
19
Note 3 Business Acquisitions and Combinations
Fiscal 2008
The Company acquired four businesses for a total cost, including acquisition costs, of $52.4 million which was payable primarily in cash. The total costs do not include potential additional consideration of $12 million that is contingent on certain conditions being satisfied, which, if met, would be recorded as additional goodwill.
Engenuity Technologies Inc.
During the first quarter, the Company acquired Engenuity Technologies Inc. (Engenuity) which develops commercial-off-the-shelf (COTS) simulation and visualization software for the aerospace and defence markets.
MultiGen-Paradigm Inc.
During the first quarter, the Company acquired MultiGen-Paradigm Inc. (MultiGen), a supplier of real-time COTS software for creating and visualizing simulation solutions and creating industry standard visual simulation file formats.
Macmet Technologies Limited
During the second quarter, the Company acquired 76% of the outstanding shares of Macmet Technologies Limited (Macmet). Macmet assembles, repairs and upgrades flight simulators, tank and gunnery trainers, as well as develops software required for simulations.
As part of this agreement, the Company was given a call option on the remaining 24% of outstanding shares. The call option expires six years from the acquisition completion date. At the expiry of the call option period, the remaining shareholders of Macmet can exercise a put option and require the Company to purchase the remaining outstanding shares. As such, the Company considers that all outstanding shares have been purchased and 100% of Macmets results have been consolidated by the Company since the acquisition date.
Flightscape Inc.
During the second quarter, the Company acquired Flightscape Inc. (Flightscape), which provides expertise in flight data analysis and flight sciences and develops software solutions that enable the effective study and understanding of recorded flight data to improve safety, maintenance and flight operations.
Fiscal 2007
Kesem International PTY Ltd
During the third quarter, the Company acquired all the issued and outstanding shares of Kesem International Pty Ltd (Kesem), which offers a range of professional services to support design, analysis and experimentation in the defence and homeland security markets. Total consideration for this acquisition, excluding acquisition costs of $0.3 million, amounted to AUD$5.0 million ($4.6 million) payable in cash.
Fiscal 2006
Terrain Experts Inc.
During the first quarter, the Company acquired all the issued and outstanding shares of Terrain Experts Inc. (Terrex), which develops software tools for terrain database generation and visualization. Total consideration for this acquisition was US$11.1 million ($14.0 million) payable in common shares issued by CAE and a nominal cash portion.
20
The total net assets of all acquisitions are summarized as follows: | |||||||||
|
|
||||||||
(amounts in millions) | 2008 | 2007 | 2006 | ||||||
|
|||||||||
Current assets(1) | $ | 13.7 | $ | 0.9 | $ | 1.9 | |||
|
|||||||||
Current liabilities | (23.4 | ) | (1.1 | ) | (2.1 | ) | |||
|
|||||||||
Property, plant and equipment | 2.3 | 0.1 | 0.3 | ||||||
|
|||||||||
Other assets | 2.8 | - | 3.3 | ||||||
|
|||||||||
Intangible assets | |||||||||
|
|||||||||
Trade names | 1.5 | 0.1 | 0.3 | ||||||
|
|||||||||
Technology | 20.8 | 0.1 | 1.6 | ||||||
|
|||||||||
Customer relations | 5.9 | 0.6 | 0.8 | ||||||
|
|||||||||
Goodwill(2) | 28.8 | 4.1 | 4.5 | ||||||
|
|||||||||
Future income taxes | (5.6 | ) | (0.2 | ) | 0.5 | ||||
|
|||||||||
Long-term debt | (1.8 | ) | - | - | |||||
|
|||||||||
Long-term liabilities | (2.1 | ) | (0.2 | ) | - | ||||
|
|
||||||||
Fair value of net assets acquired, excluding | |||||||||
|
|||||||||
cash position at acquisition | 42.9 | 4.4 | 11.1 | ||||||
|
|||||||||
Cash position at acquisition | 9.5 | 0.5 | 2.9 | ||||||
|
|||||||||
Fair value of net assets acquired | 52.4 | 4.9 | 14.0 | ||||||
|
|||||||||
Less: Call/put option payable | (1.1 | ) | - | - | |||||
|
|||||||||
Issuance of 1,000,000 shares (Note 15) | - | - | (6.1 | ) | |||||
|
|||||||||
Shares to be issued(3) | - | - | (7.6 | ) | |||||
|
|||||||||
Total cash consideration(4) | $ | 51.3 | $ | 4.9 | $ | 0.3 | |||
|
(1) | Excluding cash on hand. |
(2) | This goodwill is not deductible for tax purposes. |
(3) | Had been accounted for as a liability pending issuance. |
(4) | The total cash consideration includes acquisition costs of $4.0 million in fiscal 2008, $0.3 million in fiscal 2007 and $0.2 million for fiscal 2006. |
The net assets of Engenuity are segregated between the Simulation Products/Military and Training & Services/Military segments. The net assets of Terrex, MultiGen and Macmet are included in the Simulation Products/Military segment. The net assets of Flightscape are included in the Training & Services/Civil segment. The net assets of Kesem are included in the Training & Services/Military segment.
The above-listed acquisitions were accounted for under the purchase method and the operating results have been included from their acquisition date.
Note 4
Investment in Joint Ventures
The Companys consolidated balance sheets and consolidated statements of earnings and cash flows include, on a proportionate consolidation basis, the impact of its joint venture companies of Zhuhai Xiang Yi Aviation Technology Company Limited 49%, Helicopter Training Media International GmbH 50%, Helicopter Flight Training Services GmbH 25%, the Emirates-CAE Flight Training center 50% (starting fiscal 2007), Embraer CAE Training Services LLC 49% (starting fiscal 2008), and Hatsoff Helicopter Training Private Limited 50% (starting fiscal 2008).
Except for the Helicopter Training Media International GmbH joint venture, whose operations are essentially focused on designing, manufacturing and supplying advanced helicopter military training product applications, the other joint venture companies operations are focused on providing civil and military aviation training and related services.
21
The impact on the Companys consolidated financial statements from all joint ventures is as follows:
(amounts in millions) | 2008 | 2007 | 2006 | |||||||
|
||||||||||
Assets | ||||||||||
Current assets | $ | 33.8 | $ | 24.5 | $ | 22.0 | ||||
Property, plant and equipment and other non-current | ||||||||||
assets | 163.1 | 159.4 | 42.7 | |||||||
Liabilities | ||||||||||
Current liabilities | 22.9 | 12.0 | 10.9 | |||||||
Long-term debt (including current portion) | 75.9 | 59.2 | 26.2 | |||||||
|
||||||||||
Earnings | ||||||||||
Revenue | $ | 60.6 | $ | 50.0 | $ | 42.0 | ||||
Net earnings | 11.8 | 6.8 | 4.0 | |||||||
Segmented operating income | ||||||||||
Simulation Products/Military | 0.6 | 1.4 | (0.2 | ) | ||||||
Training and Services/Civil | 14.0 | 7.5 | 5.2 | |||||||
Training and Services/Military | (0.5 | ) | (0.2 | ) | (0.5 | ) | ||||
|
||||||||||
Cash flows from (used in) | ||||||||||
Operating activities | $ | 22.1 | $ | 4.6 | $ | 12.2 | ||||
Investing activities | (20.1 | ) | (39.2 | ) | (26.5 | ) | ||||
Financing activities | 17.3 | 29.9 | 26.3 | |||||||
|
||||||||||
Note 5 | Discontinued Operations and Long-term Assets Held for Sale |
Discontinued operations
CAE Elektronik GmbH Telecommunication Department
During fiscal 2008, in order to concentrate on its core business, the Company has decided to discontinue its German telecommunication department. This department develops and sells unified messaging software for various clients and other office software solutions. As well, the business offers services in both standardized and customer-specific software communication solutions for voice-over-IP and ISDN-environment. CAE Elektronik GmbH is in the process of divesting its telecommunication department through a sales agreement with an exclusive buyer. The transaction resulted in the recognition of a net loss in discontinued operations amounting to $2.2 million, net of a tax recovery of $1.0 million during the fourth quarter of fiscal 2008.
Marine Controls
On February 3, 2005, the Company completed the sale of the substantial components of the Marine Controls segment to L-3 Communications Corporation (L-3), for a cash consideration of $238.6 million. The Company received from L-3 in fiscal 2007 notices of claims for indemnification pursuant to the Sale and Purchase Agreement (SPA), including in respect of allegations that the Company was in breach of certain representations and warranties in the SPA. At this time, neither the outcome of these matters nor the potential future payments, if any, are determinable. The Company intends to assert all available defences against these claims. The aggregate liability for claims made under the SPA is limited to US$25 million.
The results of the Marine Controls segment have been reported as discontinued operations since the second quarter of fiscal 2005 and have been reclassified in previously reported statements.
22
Cleaning Technologies and other discontinued operations
In fiscal 2004, the Company completed the sale of its last Cleaning Technologies business, Alpheus Inc., to Cold Jet Inc. The Company was entitled to receive further consideration based on the performance of the business until 2007 and also had certain obligations to Cold Jet Inc. During fiscal 2006, an agreement was reached to settle the further consideration and cancel the outstanding obligations of the Company. Cold Jet paid the Company an amount of $0.2 million.
During the second quarter of fiscal 2007, the Company received early payment, in full, of $9.3 million in secured subordinated promissory long-term notes previously recorded in other assets. These notes, with a carrying value of $7.9 million, were received by the Company as part of the consideration for its sale in 2002 of Ultrasonics and Ransohoff. The repayment resulted in the recognition of $1.4 million of interest revenue during the second quarter due to the accretion of discounts on the long-term notes receivable. The parties have also concluded discussions regarding adjustments to working capital provisions. As a result of these discussions, the Company collected and recorded an additional amount of approximately $0.1 million (net of tax recovery of $0.1 million).
Also, during fiscal 2006, the Company incurred additional costs of $3.4 million related to its former Cleaning Technologies business mostly in connection with the revaluation of a pension liability and the reversal of an unrecognized tax asset, and recorded $0.9 million for other discontinued operations.
Forestry Systems
On May 2, 2003, the Company completed the sale of one of its Forestry Systems businesses to Carmanah Design and Manufacturing. The Company was entitled to receive further consideration based on the performance of the business. During the first quarter of fiscal 2007, a settlement was concluded and the Company received a payment of $0.2 million (net of tax expense of $0.1 million).
On August 16, 2002, the Company sold substantially all the assets of the sawmill division of its Forestry Systems. The Company was entitled to receive further cash consideration from the sale based on operating performance of the disposed business for the three-year period from August 2002 to August 2005. In November 2005, the Company was notified by the buyers that, in their view, the targeted level of operating performance which would trigger further payment had not been achieved. The Company completed a review of the buyers books and records and in January 2006, launched legal proceedings to collect the payment that it believes is owed to the Company. During the third and fourth quarter of fiscal 2008, the Company recognized fees in connection with the evaluation and litigation exercise amounting to $1.2 million (net of tax recovery of $0.2 million). For fiscal 2007 and 2006, the Company incurred $0.9 million (net of tax recovery of $0.2 million) and $0.2 million (net of tax recovery of $0.1 million), respectively.
Until recently, this dispute had been referred to arbitration and was in the discovery of evidence phase. As discussed in Note 28, Subsequent Event, a write off of a balance receivable in the amount of $8.5 million (net of tax recovery of $1.5 million) has been recorded during fiscal 2008 because the buyer was the subject of a petition for receivership and is understood to be insolvent subsequent to the balance sheet date.
23
Summarized financial information for the discontinued operations is as follows: | |||||||||||||
Summary of discontinued operations | |||||||||||||
| |||||||||||||
(amounts in millions, except per share amounts) | 2008 | 2007 | 2006 | ||||||||||
|
| ||||||||||||
Net loss from CAE Elektronik GmbH Telecommunication | |||||||||||||
Department, 2008 net of tax recovery of $1.0 | $ | (2.2 | ) | $ | - | $ | - | ||||||
Net loss from Marine Controls, 2008 net of tax recovery of | |||||||||||||
$0.1; 2007 net of tax recovery of $0.2; 2006 net of | |||||||||||||
tax expense of $0.7 | (0.2 | ) | (1.1 | ) | (1.7 | ) | |||||||
Net earnings (loss) from Cleaning Technologies and other | |||||||||||||
discontinued operations, 2007 net of tax recovery of | |||||||||||||
$0.1 ; 2006 net of tax expense of $1.0 | - | 0.1 | (4.1 | ) | |||||||||
Net loss from Forestry Systems, 2008 net of tax recovery | |||||||||||||
of $1.7; 2007 net of tax recovery of $0.1; 2006 net of | |||||||||||||
tax recovery of $0.1 | (9.7 | ) | (0.7 | ) | (0.2 | ) | |||||||
|
|
|
|
|
|
| |||||||
Net loss from discontinued operations | $ | (12.1 | ) | $ | (1.7 | ) | $ | (6.0 | ) | ||||
| |||||||||||||
Basic and diluted net loss per share from discontinued | |||||||||||||
operations | $ | (0.05 | ) | $ | (0.01 | ) | $ | (0.02 | ) | ||||
| |||||||||||||
Note 6 | Accounts Receivable | ||||||||||||
(amounts in millions) | 2008 | 2007 | |||||||||||
| |||||||||||||
Trade | $ | 156.8 | $ | 136.2 | |||||||||
Allowance for doubtful accounts | (7.4 | ) | (4.4 | ) | |||||||||
Accrued receivables | 48.5 | 45.7 | |||||||||||
Derivative assets | 17.2 | - | |||||||||||
Other receivables | 39.9 | 42.3 | |||||||||||
| |||||||||||||
$ | 255.0 | $ | 219.8 | ||||||||||
|
The Company has an agreement to sell third-party receivables to a financial institution for an amount of up to $50 million. Under the terms and conditions of the agreement, the Company continues to act as a collection agent. The selected accounts receivable are sold to a third party for a cash consideration on a non-recourse basis to the Company. As at March 31, 2008, $43.7 million (2007 $29.0 million) of specific accounts receivable were sold to the financial institution pursuant to this agreement. Proceeds (net of $0.5 million in fees, 2007 $0.6 million) of the sale were used for general corporate purposes and to repay borrowings under the Companys credit facilities.
Note 7 | Inventories | ||||
(amounts in millions) | 2008 | 2007 | |||
| |||||
Long-term contracts | $ | 138.9 | $ | 112.7 | |
Work in progress | 56.0 | 66.1 | |||
Raw materials, supplies and manufactured products | 35.0 | 25.0 | |||
| |||||
$ | 229.9 | $ | 203.8 | ||
|
24
Note 8 | Property, Plant and Equipment | ||||||||||||
(amounts in millions) | 2008 | 2007 | |||||||||||
| |||||||||||||
Net | Net | ||||||||||||
Accumulated | Book | Accumulated | Book | ||||||||||
Cost | Depreciation | Value | Cost | Depreciation | Value | ||||||||
| |||||||||||||
Land | $ | 23.2 | $ | - | $ | 23.2 | $ | 21.2 | $ | - | $ | 21.2 | |
Buildings and improvements | 244.4 | 80.2 | 164.2 | 238.9 | 72.6 | 166.3 | |||||||
Simulators | 756.5 | 111.5 | 645.0 | 645.5 | 92.4 | 553.1 | |||||||
Machinery and equipment | 193.6 | 125.4 | 68.2 | 185.0 | 117.3 | 67.7 | |||||||
Assets under capital lease(1) | 33.3 | 23.6 | 9.7 | 34.4 | 22.6 | 11.8 | |||||||
Assets under construction | 136.5 | - | 136.5 | 166.5 | - | 166.5 | |||||||
| |||||||||||||
$ | 1,387.5 | $ | 340.7 | $ | 1,046.8 | $ | 1,291.5 | $ | 304.9 | $ | 986.6 | ||
| |||||||||||||
(1) Includes simulators, and machinery and equipment. | |||||||||||||
The average remaining amortization period for the simulators is 14 years. |
Note 9 | Intangible Assets | |||||||||||
(amounts in millions) | 2008 | 2007 | ||||||||||
| ||||||||||||
Net | Net | |||||||||||
Accumulated | Book | Accumulated | Book | |||||||||
Cost | Amortization | Value | Cost | Amortization | Value | |||||||
| ||||||||||||
Trade names | $ | 12.2 | $ | 2.5 | $ | 9.7 | $ | 12.2 | $ | 1.7 | $ | 10.5 |
Customer relations | 8.4 | 1.0 | 7.4 | 1.7 | 0.3 | 1.4 | ||||||
Customer contractual | ||||||||||||
agreements | 6.8 | 3.2 | 3.6 | 7.6 | 2.9 | 4.7 | ||||||
Technology | 21.9 | 2.5 | 19.4 | 1.6 | 0.5 | 1.1 | ||||||
Enterprise resource planning | ||||||||||||
(ERP) and other software | 27.6 | 7.6 | 20.0 | 20.7 | 3.9 | 16.8 | ||||||
Other intangible assets | 4.0 | 2.1 | 1.9 | 3.3 | 1.8 | 1.5 | ||||||
| ||||||||||||
$ | 80.9 | $ | 18.9 | $ | 62.0 | $ | 47.1 | $ | 11.1 | $ | 36.0 | |
| ||||||||||||
The continuity of intangible assets is as follows: |
(amounts in millions) | 2008 | 2007 | ||||
| ||||||
Opening balance | $ | 36.0 | $ | 30.5 | ||
Acquisitions (Note 3) | 28.2 | 0.8 | ||||
ERP and other software additions | 7.2 | 8.8 | ||||
Other additions | 1.1 | - | ||||
Amortization | (7.8 | ) | (3.8 | ) | ||
Foreign exchange | (2.7 | ) | (0.3 | ) | ||
| ||||||
Closing balance | $ | 62.0 | $ | 36.0 | ||
| ||||||
The annual amortization expense for the next five years will be approximately $7.5 million. |
Note 10 | Goodwill | |||||||||||||
(amounts in millions) | 2008 | |||||||||||||
| ||||||||||||||
Simulation | Training & | Simulation | Training & | |||||||||||
Products/Civil | Services/Civil | Products/Military Services/Military | Total | |||||||||||
| ||||||||||||||
Opening balance | $ | - | $ | - | $ | 54.6 | $ | 42.3 | $ | 96.9 | ||||
Acquisitions (Note 3) | - | 0.8 | 28.0 | - | 28.8 | |||||||||
Foreign exchange | - | - | (6.3 | ) | (3.9 | ) | (10.2 | ) | ||||||
| ||||||||||||||
Closing balance | $ | - | $ | 0.8 | $ | 76.3 | $ | 38.4 | $ | 115.5 | ||||
| ||||||||||||||
(amounts in millions) | 2007 | |||||||||||||
| ||||||||||||||
Simulation | Training & | Simulation | Training & | |||||||||||
Products/Civil | Services/Civil | Products/Military | Services/Military | Total | ||||||||||
| ||||||||||||||
Opening balance | $ | - | $ | - | $ | 54.2 | $ | 37.8 | $ | 92.0 | ||||
Acquisitions (Note 3) | - | - | - | 4.1 | 4.1 | |||||||||
Foreign exchange | - | - | 0.4 | 0.4 | 0.8 | |||||||||
| ||||||||||||||
Closing balance | $ | - | $ | - | $ | 54.6 | $ | 42.3 | $ | 96.9 | ||||
|
25
Note 11 | Other Assets | |||||
(amounts in millions) | 2008 | 2007 | ||||
| ||||||
Restricted cash | $ | 8.6 | $ | 2.8 | ||
Investment in and advances to CVS Leasing Ltd. (i) | 41.7 | 43.5 | ||||
Deferred development costs, net of accumulated amortization of | ||||||
$26.7 (2007 $23.8) (ii) | 20.0 | 10.2 | ||||
Deferred pre-operating costs, net of accumulated amortization of | ||||||
$23.6 (2007 $21.6) (iii) | 12.7 | 13.1 | ||||
Deferred financing costs, net of accumulated amortization of $17.0 | ||||||
(2007 $15.3) | ) | 3.5 | 7.5 | |||
Long-term receivables | 2.0 | 3.9 | ||||
Accrued benefit asset (Note 22) | 25.9 | 24.1 | ||||
Other, net of accumulated amortization of $6.7 (2007 $5.7) | 10.1 | 24.4 | ||||
Long-term derivative assets | 13.7 | - | ||||
| ||||||
$ | 138.2 | $ | 129.5 | |||
|
(i) | The Company leads a consortium, which was contracted by the United Kingdom (U.K.) Ministry of Defence (MoD) to design, construct, manage, finance and operate an integrated simulator-based aircrew training facility for the Medium Support Helicopter (MSH) fleet of the Royal Air Force. |
The contract covers a 40-year period, which can be terminated by the MoD after 20 years, in 2018. | |
In connection with the contract, the Company has established CAE Aircrew Training Plc (Aircrew). The Companys investment in the subsidiary is valued at 77% with the balance being accounted for as a minority investment of the other consortium partners. This subsidiary has leased the land from the MoD, built the facility and operates the training centre. Aircrew has been consolidated with the accounts of the Company since its inception. | |
In addition, the Company has a 14% minority shareholding and has advanced funds to CVS Leasing Ltd. (CVS), the entity that owns the simulators and other equipment leased to Aircrew. | |
(ii) | R&D expenditures aggregated to $110.8 million during the year (2007 $95.0 million; 2006 $91.3 million), of which $16.5 million represents development costs that qualify for a deferral pursuant to CICA requirements (2007 $3.0 million; 2006 $1.8 million). The Company has recorded government contribution against these amounts (refer to Note 21). |
The total of deferred development costs amortized during the year amounted to $2.9 million (2007 $4.8 million, 2006 $13.1 million). | |
(iii) | The Company defers costs incurred during the pre-operating period for all new operations. Capitalization ceases and amortization begins when operations commence. In fiscal 2008, $3.9 million was capitalized (2007 $5.9 million) and an amortization of $2.0 million was taken (2007 3.0 million; 2006 $4.0 million). |
26
Note 12 | Debt Facilities | |||||||||||||||||||
A. | Long-term debt | |||||||||||||||||||
(amounts in millions) | 2008 | 2007 | ||||||||||||||||||
| ||||||||||||||||||||
Gross | Transaction Debt Basis | Gross | Transaction Debt Basis | |||||||||||||||||
Amount | Costs Adjustment Net Debt | Amount | Costs Adjustment Net Debt | |||||||||||||||||
| ||||||||||||||||||||
Recourse debt | ||||||||||||||||||||
(i) Senior notes (US$60.0 maturing | ||||||||||||||||||||
June 2009 and US$33.0 | ||||||||||||||||||||
maturing June 2012) | $ | 95.6 | $ | (0.2 | ) | $ | 4.3 | $ | 99.7 | $ | 107.2 | $ | - | $ - | $ | 107.2 | ||||
(ii) Revolving unsecured term credit | ||||||||||||||||||||
facilities, 5 years maturing July | ||||||||||||||||||||
2010; US $400.0 and, 100.0 | - | - | - | - | - | - | - | - | ||||||||||||
ii) Term loans, maturing in May and | ||||||||||||||||||||
June 2011 (outstanding as at | ||||||||||||||||||||
March 31, 2008 18.3 and | ||||||||||||||||||||
3.6, as at March 31, 2007 | ||||||||||||||||||||
22.8 and 4.5) | 35.6 | - | - | 35.6 | 42.1 | - | - | 42.1 | ||||||||||||
(iv) Grapevine Industrial Development | ||||||||||||||||||||
Corporation bonds, secured, | ||||||||||||||||||||
maturing in January 2010 and | ||||||||||||||||||||
2013 (US $27.0) | 27.7 | - | - | 27.7 | 31.1 | - | - | 31.1 | ||||||||||||
(v) Miami Dade County Bonds, | ||||||||||||||||||||
maturing in March 2024 | ||||||||||||||||||||
(US $11.0) | 11.3 | - | - | 11.3 | 12.7 | - | - | 12.7 | ||||||||||||
(vi) Other debt, maturing in December | ||||||||||||||||||||
2014 | 11.3 | - | - | 11.3 | 9.5 | - | - | 9.5 | ||||||||||||
(vii) Obligations under capital lease | ||||||||||||||||||||
commitments | 8.1 | - | - | 8.1 | 11.1 | - | - | 11.1 | ||||||||||||
Non-recourse debt (1) | ||||||||||||||||||||
(viii) Term loan of £12.7 secured, | ||||||||||||||||||||
maturing in October 2016 | ||||||||||||||||||||
(outstanding as at March 31, | ||||||||||||||||||||
2008 £4.0, as at March 31, | ||||||||||||||||||||
2007 £4.5) | 8.2 | - | - | 8.2 | 10.3 | - | - | 10.3 | ||||||||||||
(ix) Term loan maturing in December | ||||||||||||||||||||
2019 (outstanding as at March | ||||||||||||||||||||
31, 2008 32.5, as at March | ||||||||||||||||||||
31, 2007 25.2) | 52.8 | (1.3 | ) | - | 51.5 | 38.8 | - | - | 38.8 | |||||||||||
(x) Term loans with various maturities | ||||||||||||||||||||
to August 2013 (outstanding as | ||||||||||||||||||||
at March 31, 2008 US$18.1, | ||||||||||||||||||||
¥40.7 as at March 31, 2007 | ||||||||||||||||||||
US $17.7) | 24.4 | - | - | 24.4 | 20.4 | - | - | 20.4 | ||||||||||||
(xi) Term loan maturing in 2014 | ||||||||||||||||||||
(outstanding as a March 31, | ||||||||||||||||||||
2008 US $19.5, £12.7) | 46.0 | (2.3 | ) | - | 43.7 | - | - | - | - | |||||||||||
Term loan maturing in 2018 | ||||||||||||||||||||
(outstanding as at March 31, | ||||||||||||||||||||
2008 US $26.2, £16.9) | 61.5 | (3.2 | ) | - | 58.3 | - | - | - | - | |||||||||||
| ||||||||||||||||||||
$ | 382.5 | $ | (7.0 | ) | $ | 4.3 | $ | 379.8 | $ | 283.2 | $ | - | $ - | $ | 283.2 | |||||
Less: | ||||||||||||||||||||
Current portion of long-term debt | 27.6 | (1.0 | ) | - | 26.6 | 25.3 | - | - | 25.3 | |||||||||||
Current portion of capital lease | 0.7 | - | - | 0.7 | 1.9 | - | - | 1.9 | ||||||||||||
| ||||||||||||||||||||
$ | 354.2 | $ | (6.0 | ) | $ | 4.3 | $ | 352.5 | $ | 256.0 | $ | - | $ - | $ | 256.0 | |||||
|
(1) | Non-recourse debt to CAE, as a parent company, is classified as such when recourse against the debt in a subsidiary is limited to the assets, equity interest and undertaking of such subsidiary. |
27
(i) | Pursuant to a private placement, the Company borrowed US$93 million (2007 US$93 million). These unsecured senior notes rank equally with term bank financings with fixed repayment amounts of US$60.0 million in 2009 and US$33.0 million in 2012. Fixed interest is payable semi- annually in June and December at an average rate of 7.6%. The Company has entered into an interest rate swap agreement converting the fixed interest rate into the equivalent of a three- month LIBOR borrowing rate plus 3.6% on US$33.0 million of the senior notes. The Company has an outstanding interest rate swap contract that replaced a swap contract that had previously been put in place when the debt was raised. The existing swap contract is designated as a fair value hedge of its private placement resulting in changes in LIBOR interest rates. With regards to the outstanding fair value hedge, the gains or losses on the hedged items attributable to the hedged risk are accounted for as an adjustment to the carrying value of the hedged items. While for the fair value hedge that was discontinued prior to the transaction date, the carrying amount of the hedged item is adjusted by the remaining balance of any deferred gain or loss on the hedging item. As such, the debt basis adjustment has been recorded with the private placement as an increase to the gross long-term debt amount. |
(ii) | On July 7, 2005, the Company entered into a revolving credit agreement. This revolving unsecured term credit facility (US$400.0 million and 100.0 million) has a committed term of five years maturing in July 2010. The facility has covenants covering minimum shareholders equity, interest coverage and debt coverage ratios. The applicable interest rate on this revolving term credit facility is at the option of the Company, based on the banks prime rate, bankers acceptances or LIBOR plus a spread which depends on the credit rating assigned by Standard & Poors Rating Services. |
(iii) | The Company, in association with Iberia Lineas de España, combined their aviation training operations in Spain. The operators financed the acquisition of the simulators from CAE and Iberia through asset-backed financing maturing in May and June 2011. As part of the lease agreements, should the October 2003 agreement be terminated, CAE and Iberia will be obliged to repurchase the simulators they contributed, in proportion to the fair value of the simulators, for a total amount equal to the outstanding balance under the financing agreement. Quarterly capital repayments are made for the term of the financing. The implicit interest rate is 4.60%. The net book value of the simulators being financed, as at March 31, 2008, is equal to approximately $85.0 million (52.3 million) [2007 - $79.7 million (51.7 million)]. |
(iv) | Airport Improvement Revenue Bonds were issued by the Grapevine Industrial Development Corporation, Grapevine, Texas for amounts of US$8.0 million and US$19.0 million, and mature in 2010 and 2013, respectively. Real property, improvements, fixtures and specified simulation equipment secure the bonds. The rates are set periodically by the remarketing agent based on market conditions. The rate for bonds maturing in 2010 is set on a weekly basis. The rate for bonds maturing in 2013 is set on an annual basis and is subject to a maximum rate of 10% permissible under current applicable laws. As at March 31, 2008, the combined rate for both series was approximately 4.69% (2007 4.77%). The security is limited to an amount not exceeding the outstanding balance of the loans which represents US$27.0 million as at March 31, 2008. Also, a letter of credit has been issued to support the bonds for the outstanding amount of the loans. |
(v) | The Miami Dade County Bonds, maturing in March 2024 (US$11.0 million), are secured by a simulator. As at March 31, 2008, the applicable floating rate, which is reset weekly, was 4.57%. |
Also, a letter of credit has been issued to support the bonds for the outstanding amount of the loans. | |
(vi) | An unsecured $35.0 million facility to secure financing for the cost of the establishment of enterprise resource planning (ERP) system. A drawdown under the facility can be made only once the costs are incurred, on a quarterly basis, with monthly repayments over a term of seven years beginning at the end of the first month following each quarterly disbursement. The average interest rate on the borrowings is approximately 6.2%. |
(vii) | These capital leases are related to the leasing of various equipment and a simulator. The effective interest rate of the lease, which matures in June 2010, was 6.3% as at March 31, 2008. |
28
(viii) | The Company arranged project financing, which was refinanced during December 2004 for one of its subsidiaries to finance its MSH program for the MoD in the U.K. The credit facility includes a term loan that is secured by the project assets of the subsidiary and a bi-annual repayment is required until 2016. The financing is non-recourse to CAE. Interest on the loans is charged at a rate approximating LIBOR plus 0.85%. The Company has entered into an interest rate swap totalling £3.7 million, fixing the interest rate at 6.31%. The book value of the assets pledged as collateral for the credit facility as at March 31, 2008 is £31.2 million (2007 £27.4 million). |
(ix) | Term loan, maturing in December 2019, representing CAEs proportionate share of the German NH90 project. The total amount available for the project Company under the facility is 175.5 million. The debt is non-recourse to CAE. The borrowings bear interest at a EURIBOR rate and are currently swapped to a fixed rate of 4.8%. |
(x) | Term loans representing CAEs proportionate share of term debt for the acquisition of simulators and expansion of the building, on a non-recourse basis, for its joint venture in Zhuhai Xiang Yi Aviation Technology Company Limited. The term debt has been arranged through several financial institutions. Borrowings are denominated in U.S. dollars and Chinese Yuan Renminbi (¥). |
The U.S. dollar based borrowings bear interest on a floating rate basis of U.S. LIBOR plus a spread ranging from 0.45% to 1% and have maturities between August 2008 and August 2013. The ¥ based borrowings bear interest at fixed and floating rates with final maturities between September 2008 and December 2010. | |
(xi) | During fiscal year 2008, the Company obtained senior secured financing for two new civil aviation training centres. The drawdown to March 31, 2008 was for an approximate aggregate amount of $107.5 million (US$45.7 million and £29.6 million after taking into consideration the effect of foreign exchange swap arrangements entered in relation to this financing transaction). The drawdown is separated into two Tranches with principal and interest. Tranche A is being amortized quarterly beginning in December 2008 with a final maturity of June 2014 and principal and interest of Tranche B being amortized quarterly beginning in July 2014 until final maturity of June 2018. The combined coupon rate of the post-swap debt amounts to 8.28%. The debt is non-recourse to the Company and is secured by the assets of the training centres and is cross-guaranteed and crosscollateralized by the cash-flow generated by the two training centres. |
Payments required in each of the next five fiscal years to meet the retirement provisions of the long-term debt and capital leases are as follows:
(amounts in millions) | Long-term debt | Capital lease | Total | |||
| ||||||
2009 | $ | 27.6 | $ | 0.7 | $ | 28.3 |
2010 | 92.8 | 0.7 | 93.5 | |||
2011 | 28.0 | 6.7 | 34.7 | |||
2012 | 20.1 | - | 20.1 | |||
2013 | 72.3 | - | 72.3 | |||
Thereafter | 133.6 | - | 133.6 | |||
| ||||||
$ | 374.4 | $ | 8.1 | $ | 382.5 | |
|
As at March 31, 2008, CAE is in compliance with its financial covenants.
B. Short-term debt
The Company has an unsecured and uncommitted bank line of credit available in Euros totalling $4.9 million (2007 - $4.6 million; 2006 - $41.2 million), none of which is used as at March 31, 2008 (2007 - Nil; 2006 - Nil). The line of credit bears interest at a Euro base rate.
29
C. | Interest expense, net | |||||||||
Details of interest expense (income) are as follows: | ||||||||||
(amounts in millions) | 2008 | 2007 | 2006 | |||||||
|
||||||||||
Long-term debt interest expense | $ | 23.9 | $ | 18.5 | $ | 21.6 | ||||
Amortization of deferred financing costs and other | 2.7 | 2.3 | 4.0 | |||||||
Interest capitalized | (4.7 | ) | (4.1 | ) | (2.8 | ) | ||||
|
||||||||||
Interest on long-term debt | 21.9 | 16.7 | 22.8 | |||||||
|
||||||||||
Interest income | (3.0 | ) | (4.8 | ) | (6.9 | ) | ||||
Other interest expense (income), net | (1.4 | ) | (1.3 | ) | 0.3 | |||||
|
||||||||||
Interest income, net | (4.4 | ) | (6.1 | ) | (6.6 | ) | ||||
|
||||||||||
Interest expense, net | $ | 17.5 | $ | 10.6 | $ | 16.2 | ||||
|
The Companys interest income is mainly a result of interest revenue on cash on hand and advances to CVS Leasing Ltd. (CVS). CVS is an entity that owns simulators and other equipment used to train U.K.
Ministry of Defence pilots at the Companys Benson Air | Force | Base Training | Centre. | ||
The Company owns a minority shareholding of 14% in CVS. | |||||
Note 13 | Deferred Gains and Other Long-Term Liabilities | ||||
(amounts in millions) | 2008 | 2007 | |||
|
|||||
Deferred gains on sale and leasebacks (i) | $ | 63.3 | $ | 84.0 | |
Deferred revenue | 21.3 | 20.3 | |||
Deferred gains | 8.1 | 15.0 | |||
Employee benefits obligation (Note 22) | 29.2 | 26.9 | |||
Non-controlling interest (ii) | 20.2 | 18.2 | |||
Long-term portion of purchase agreement (iii) | - | 7.9 | |||
Long-term payable to Investissement Québec | 0.7 | 1.4 | |||
Long-term derivative liabilities | 9.1 | - | |||
LTI RSU/DSU compensation obligation | 22.0 | 35.3 | |||
Other | 11.0 | 23.7 | |||
|
|||||
$ | 184.9 | $ | 232.7 | ||
|
(i) | The related amortization for the year amounts to $3.8 million (2007 $4.0 million; 2006 $3.9 million). |
(ii) | Non-controlling interest of 20% of the civil training centres in Madrid combined with 23% in Military CAE Aircrew Training Centre. |
(iii) | During the current fiscal year, the Company repaid, in full, the long-term liability previously due as a result of a purchase agreement for data and parts delivered to CAE Inc. by Dassault Aviation on specific sales orders. |
30
Note 14 Income Taxes
A reconciliation of income taxes at Canadian statutory rates with the reported income taxes is as follows:
(amounts in millions) | 2008 | 2007 | 2006 | ||||||
|
|||||||||
Earnings before income taxes and discontinued operations | $ | 234.0 | $ | 178.8 | $ | 87.8 | |||
Canadian statutory income tax rates | 31.80 | % | 32.08 | % | 31.41 | % | |||
|
|||||||||
Income taxes at Canadian statutory rates | $ | 74.4 | $ | 57.4 | $ | 27.6 | |||
Difference between Canadian statutory rates and those | |||||||||
applicable to foreign subsidiaries | (5.5 | ) | (2.8 | ) | 0.3 | ||||
Losses not tax effected | 4.1 | 0.3 | 2.8 | ||||||
Tax benefit of operating losses not previously recognized | (1.8 | ) | (2.3 | ) | (9.1 | ) | |||
Tax benefit of capital losses not previously recognized | - | - | (0.8 | ) | |||||
Non-taxable capital gain | (0.2 | ) | (0.6 | ) | (0.3 | ) | |||
Non-deductible items | 5.0 | 2.4 | 1.4 | ||||||
Prior years tax adjustments and assessments | (2.0 | ) | (1.0 | ) | (0.9 | ) | |||
Impact of change in income tax rates on future income taxes | (2.4 | ) | (1.2 | ) | 1.9 | ||||
Non-taxable research and development tax credits | (0.9 | ) | (0.8 | ) | (0.9 | ) | |||
Large corporation tax | - | - | 0.7 | ||||||
Other tax benefit not previously recognized | (2.5 | ) | (3.2 | ) | (2.9 | ) | |||
Exchange translation items | - | - | (0.7 | ) | |||||
Other | 1.0 | 1.5 | (0.9 | ) | |||||
|
|||||||||
Total income tax expense | $ | 69.2 | $ | 49.7 | $ | 18.2 | |||
|
Significant components of the provision for the income tax expense attributable to continuing operations are as follows:
(amounts in millions) | 2008 | 2007 | 2006 | ||||||
|
|||||||||
Current income tax expense | $ | 42.8 | $ | 63.9 | $ | 13.1 | |||
Future income tax expense (recovery) | |||||||||
Tax benefit of operating losses not previously recognized | (1.8 | ) | (2.3 | ) | (9.1 | ) | |||
Tax benefit of capital losses not previously recognized | - | - | (0.8 | ) | |||||
Impact of change in income tax rates on future income | |||||||||
taxes | (2.4 | ) | (1.2 | ) | 1.9 | ||||
Other tax benefit not previously recognized | (2.5 | ) | (3.2 | ) | (2.9 | ) | |||
Change related to temporary differences | 33.1 | (7.5 | ) | 16.0 | |||||
|
|||||||||
Total income tax expense | $ | 69.2 | $ | 49.7 | $ | 18.2 | |||
|
31
The tax effects of temporary differences that give rise to future tax liabilities and assets are as follows:
(amounts in millions) | 2008 | 2007 | ||||
| ||||||
Future income tax assets | ||||||
Non-capital loss carryforwards | $ | 39.0 | $ | 39.7 | ||
Capital loss carryforwards | 2.4 | 6.5 | ||||
Intangible assets | 11.7 | 27.1 | ||||
Amounts not currently deductible | 20.0 | 23.4 | ||||
Deferred revenues | 10.7 | 17.3 | ||||
Tax benefit carryover | 4.6 | 10.4 | ||||
Unclaimed research & development expenditures | 3.9 | - | ||||
Other | - | 1.4 | ||||
| ||||||
92.3 | 125.8 | |||||
Valuation allowance | (20.6 | ) | (25.3 | ) | ||
| ||||||
$ | 71.7 | $ | 100.5 | |||
| ||||||
Future income tax liabilities | ||||||
Investment tax credits | $ | (18.3 | ) | $ | (22.5 | ) |
Property, plant and equipment | (13.9 | ) | (9.7 | ) | ||
Percentage-of-completion versus completed contract | (8.8 | ) | (2.3 | ) | ||
Deferred research & development expenses | (0.2 | ) | (2.5 | ) | ||
Other | (0.1 | ) | - | |||
| ||||||
(41.3 | ) | (37.0 | ) | |||
| ||||||
Net future income tax assets | $ | 30.4 | $ | 63.5 | ||
| ||||||
Net current future income tax asset | $ | 14.1 | $ | 3.7 | ||
Net non-current future income tax asset | 64.3 | 81.5 | ||||
Net current future income tax liability | (16.8 | ) | (4.9 | ) | ||
Net non-current future income tax liability | (31.2 | ) | (16.8 | ) | ||
| ||||||
$ | 30.4 | $ | 63.5 | |||
|
As at March 31, 2008, the Company has accumulated non-capital losses carried forward relating to operations in Canada for approximately $16.6 million. For financial reporting purposes, a net future income tax asset of $4.9 million has been recognized in respect of these loss carryforwards.
As at March 31, 2008, the Company has accumulated non-capital losses carried forward relating to operations in the United States for approximately $23.8 million (US$23.1 million). For financial reporting purposes, a net future income tax asset of $7.6 million (US$7.4 million) has been recognized in respect of these loss carryforwards.
The Company has accumulated non-capital tax losses carried forward relating to its operations in other countries of approximately $87.6 million. For financial reporting purposes, a net future income tax asset of $17.4 million has been recognized.
The Company also has accumulated capital losses carried forward relating to operations in the United States for approximately $6.8 million (US$6.6 million). For financial reporting purposes, no future income tax asset was recognized, as a full valuation allowance was taken.
32
The non-capital losses for income tax purposes expire as follows: | ||||
Other | ||||
(amounts in millions) | United States | countries | ||
Expiry date | (US$) | (CA$) | ||
| ||||
2012 | $ | 13.6 | $ | 2.8 |
2013 | 7.4 | 2.8 | ||
2014 2028 | 2.1 | 46.1 | ||
No expiry date | - | 52.5 | ||
| ||||
$ | 23.1 | $ | 104.2 | |
|
The valuation allowance principally relates to loss carryforward benefits where realization is not likely due to a history of loss carryforwards, and to the uncertainty of sufficient taxable earnings in the future, together with time limitations in the tax legislation giving rise to the potential benefit. In 2008, $4.3 million (2007 $5.5 million) of the valuation allowance balance was reversed based on the assessment of the Company that it is more likely than not that the future income tax benefits will be realized.
Note 15 Capital Stock and Contributed Surplus
Capital Stock
Authorized
The Company is authorized to issue an unlimited number of common shares without par value and an unlimited number of preferred shares without par value, issuable in series.
The preferred shares may be issued with rights and conditions to be determined by the Board of Directors, prior to their issue. To date, the Company has not issued any preferred shares.
Issued
A reconciliation of the issued and outstanding common shares of the Company is as follows:
2008 | 2007 | 2006 | |||||||
| |||||||||
(amounts in millions, except number of | Number | Stated | Number | Stated | Number | Stated | |||
shares) | of shares | value | of shares | value | of shares | value | |||
| |||||||||
Balance at beginning of year | 251,960,449 | $ | 401.7 | 250,702,430 | $ | 389.0 | 248,070,329 | $ | 373.8 |
Shares issued (a) | 169,851 | 0.8 | - | - | 1,091,564 | 6.9 | |||
Stock options exercised | 1,814,095 | 13.9 | 1,236,895 | 10.0 | 1,497,540 | 8.0 | |||
Transfer of contributed surplus | |||||||||
upon exercise of stock | |||||||||
options | - | 2.2 | - | 2.5 | - | - | |||
Stock dividends | 25,441 | 0.3 | 21,124 | 0.2 | 42,997 | 0.3 | |||
| |||||||||
Balance at end of year | 253,969,836 | $ | 418.9 | 251,960,449 | $ | 401.7 | 250,702,430 | $ | 389.0 |
|
33
(a) | On November 30, 2007, the Company issued 169,851 common shares at a price of $4.71 per share for the fourth and final tranche payment for the purchase of CAE Professional Services (Canada) Inc. |
On May 20, 2005, the Company issued 1,000,000 common shares at a price of $6.13 per share for the acquisition of Terrain Experts Inc. On November 30, 2005, the Company issued 91,564 common shares at a price of $8.07 per share for the second tranche payment of CAE Professional Services (Canada) Inc. (formerly Greenley & Associates Inc. [G&A]). | |
The following is a reconciliation of the denominators for the basic and diluted earnings per share computations:
2008 | 2007 | 2006 | |||
| |||||
Weighted average number of common shares | |||||
outstanding Basic | 253,406,176 | 251,110,476 | 249,806,204 | ||
Effect of dilutive stock options | 1,160,474 | 1,894,730 | 2,325,422 | ||
| |||||
Weighted average number of common shares | |||||
outstanding Diluted | 254,566,650 | 253,005,206 | 252,131,626 | ||
|
Options to acquire 1,144,704 common shares (2007 1,397,200; 2006 2,269,150) have been excluded from the above calculation since their inclusion would have an anti-dilutive effect.
Contributed surplus | |||||||||
A reconciliation of contributed surplus is as follows: | |||||||||
(amounts in millions) | 2008 | 2007 | 2006 | ||||||
| |||||||||
Balance at beginning of year | $ | 5.7 | $ | 5.6 | $ | 3.5 | |||
Transfer to common stock upon exercise of stock | |||||||||
options | (2.2 | ) | (2.5 | ) | - | ||||
Stock-based compensation (Note 16) | 4.8 | 2.6 | 2.1 | ||||||
| |||||||||
Balance at end of year | $ | 8.3 | $ | 5.7 | $ | 5.6 | |||
| |||||||||
Note 16 | Stock-Based Compensation Plans |
Employee stock option plan
Under the Companys long-term incentive program, options may be granted to its officers and other key employees of its subsidiaries to purchase common shares of the Company at a subscription price of 100% of the market value at the date of the grant. Market value is determined to be equivalent to the closing price of the common shares on the Toronto Stock Exchange (TSX) on the last day of trading prior to the effective date of the grant.
As at March 31, 2008, a total of 6,124,896 common shares remained authorized for issuance under the Employee Stock Option Plan (ESOP). The options are exercisable during a period not to exceed six years, and are not exercisable during the first 12 months after the date of the grant. The right to exercise all of the options accrues over a period of four years of continuous employment from the grant date. However, if there is a change of control of the Company, the options outstanding become immediately exercisable by option holders. Options are adjusted proportionately for any stock dividends or stock splits attributed to the common shares of the Company.
34
A reconciliation of the outstanding options is as follows: | |||||||||||||||||
Years ended March 31 | 2008 | 2007 | 2006 | ||||||||||||||
|
|||||||||||||||||
Weighted | Weighted | Weighted | |||||||||||||||
Average | Average | Average | |||||||||||||||
Number | Exercise | Number | Exercise | Number | Exercise | ||||||||||||
of Options | Price | of Options | Price | of Options | Price | ||||||||||||
|
|||||||||||||||||
Options outstanding at beginning | |||||||||||||||||
of year | 5,441,915 | $ | 7.57 | 6,347,235 | $ | 7.66 | 8,208,675 | $ | 7.52 | ||||||||
Granted | 1,167,588 | $ | 14.06 | 647,700 | $ | 9.13 | 568,200 | $ | 5.96 | ||||||||
Exercised | (1,814,095 | ) | $ | 7.66 | (1,236,895 | ) | $ | 8.07 | (1,497,540 | ) | $ | 5.29 | |||||
Forfeited | (47,034 | ) | $ | 9.57 | (316,125 | ) | $ | 10.60 | (932,100 | ) | $ | 9.21 | |||||
Expired | (146,000 | ) | $ | 12.59 | - | $ | - | - | $ | - | |||||||
|
|||||||||||||||||
Options outstanding at end of year | 4,602,374 | $ | 9.00 | 5,441,915 | $ | 7.57 | 6,347,235 | $ | 7.66 | ||||||||
|
|||||||||||||||||
Options exercisable at end of year | 2,543,545 | $ | 7.26 | 2,986,135 | $ | 8.58 | 2,775,850 | $ | 9.90 | ||||||||
|
|||||||||||||||||
The following table summarizes information about the Companys ESOP as at March 31, 2008: | |||||||||||||||||
Options Outstanding | Options Exercisable | ||||||||||||||||
|
|||||||||||||||||
Weighted | |||||||||||||||||
Average | Weighted | Weighted | |||||||||||||||
Remaining | Average | Average | |||||||||||||||
Range of | Number | Contractual | Exercise | Number | Exercise | ||||||||||||
Exercise Prices | Outstanding | Life (Years) | Price | Exercisable | Price | ||||||||||||
|
|||||||||||||||||
$4.08 to $6.03 | 1,764,295 | 2.03 | $ | 5.17 | 1,329,270 | $ | 5.02 | ||||||||||
$6.19 to $9.12 | 1,070,075 | 3.13 | $ | 7.73 | 610,100 | $ | 6.71 | ||||||||||
$10.31 to $14.10 | 1,768,004 | 3.46 | $ | 13.59 | 604,175 | $ | 12.72 | ||||||||||
|
|||||||||||||||||
Total | 4,602,374 | 2.84 | $ | 9.00 | 2,543,545 | $ | 7.26 | ||||||||||
|
For the year ended March 31, 2008, compensation cost for CAEs stock options was recognized in consolidated net earnings with a corresponding credit of $4.8 million (fiscal 2007 $2.6 million, fiscal 2006 $2.1 million) to contributed surplus using the fair value method of accounting for awards that were granted since 2004.
The assumptions used for purposes of the option calculations outlined in this note are presented below:
2008 | 2007 | 2006 | |||||||
|
|||||||||
Assumptions used in the Black-Scholes options pricing | |||||||||
model: | |||||||||
Dividend yield | 0.28 | % | 0.44 | % | 0.67 | % | |||
Expected volatility | 33.0 | % | 45.0 | % | 47.0 | % | |||
Risk-free interest rate | 4.64 | % | 4.38 | % | 4.0 | % | |||
Expected option term | 4 | 4 | 6 | ||||||
Weighted average fair value of options granted | $ | 4.57 | $ | 3.57 | $ | 2.84 | |||
|
Disclosure of pro forma information required under CICA Handbook Section 3870
During the year ended March 31, 2003, the Company granted 1,767,000 options to purchase common shares. The weighted average grant date fair value of options granted during this period amounted to $5.84 per option. To compute the pro forma compensation cost, the Black-Scholes valuation model was used to determine the fair value of the options granted. Pro forma net earnings and pro forma basic and diluted net earnings per share are presented below:
(amounts in millions, except per share amounts) | 2008 | 2007 | 2006 | |||||
|
||||||||
Net earnings, as reported | $ | 152.7 | $ | 127.4 | $ | 63.6 | ||
Pro forma impact | - | (0.1 | ) | (0.7 | ) | |||
|
||||||||
Pro forma net earnings | $ | 152.7 | $ | 127.3 | $ | 62.9 | ||
|
||||||||
Pro forma basic net earnings per share | $ | 0.60 | $ | 0.51 | $ | 0.25 | ||
Pro forma diluted net earnings per share | $ | 0.60 | $ | 0.50 | $ | 0.25 | ||
|
35
Employee Stock Purchase Plan
The Company maintains an Employee Stock Purchase Plan (ESPP) to enable employees of the Company and its participating subsidiaries to acquire CAE common shares through regular payroll deductions or lump-sum payment plus employer contributions. The Plan allows employees to contribute up to 18% of their annual base salary. The Company and its participating subsidiaries match the first $500 employee contribution and contribute $1 for every $2 on additional employee contributions, up to a maximum of 3% of the employees base salary. The plan provides for tax deferral of employee and employer contribution through a Registered Retirement Saving Plan (RRSP) and Deferred Profit Sharing Plan (DPSP). Common shares of the Company are purchased by the ESPP trustee on behalf of the participants on the open market, through the facilities of the TSX. The Company recorded compensation expense in the amount of $3.9 million (2007 $3.1 million; 2006 $2.1 million) in respect of employer contributions under the Plan.
Deferred Share Unit Plan
The Company maintains a Deferred Share Unit (DSU) plan for executives, whereby an executive may elect to receive any cash incentive compensation in the form of deferred share units. The plan is intended to enhance the Companys ability to promote a greater alignment of interests between executives and the shareholders of the Company. A deferred share unit is equal in value to one common share of the Company. The units are issued on the basis of the average closing board lot sale price per share of CAE common shares on the TSX during the last 10 days on which such shares traded prior to the date of issue. The units also accrue dividend equivalents payable in additional units in an amount equal to dividends paid on CAE common shares. Deferred share units mature upon termination of employment, whereupon an executive is entitled to receive the fair market value of the equivalent number of common shares, net of withholdings, in cash.
In fiscal 2000, the Company adopted a DSU plan for non-employee directors. A non-employee director holding less than the Minimum Holdings of common shares of the Company receives the Board retainer and attendance fees in the form of deferred share units. Minimum Holdings means not less than the number of common shares or deferred share units equivalent in fair market value to three times the annual retainer fee payable to a director for service on the Board. A non-employee director holding no less than the Minimum Holdings of common shares may elect to participate in the plan in respect of part or all of his or her retainer and attendance fees. The terms of the plan are essentially identical to the key executive DSU Plan except that units are issued on the basis of the closing board lot sale price per share of CAE common shares on the TSX during the last day on which the common share traded prior to the date of issue.
The Company records the cost of the DSU plan as compensation expense. As at March 31, 2008, 405,680 units were outstanding at a value of $4.7 million (2007 425,092 units at a value of $5.4 million; 2006 388,972 units at a value of $3.6 million). A total number of 63,128 units were redeemed during the fiscal year ended March 31, 2008 under both DSU plans in accordance with their respective plan text, for a total of $0.8 million. For the period ended March 31, 2008, March 31, 2007 and March 31, 2006, no DSUs were cancelled.
Long-Term Incentive (LTI) Deferred Share Unit Plan
All CAE Long-Term Incentive Deferred Share Unit Plans (LTI-DSU) are intended to enhance the Companys ability to promote a greater alignment of interests between executives and shareholders of the Company. LTI-DSUs are granted to executives and senior management of the Company. A LTI-DSU is equal in value to one common share at a specific date. The LTI-DSU also accrued dividend equivalents payable in additional units in an amount equal to dividends paid on CAE common shares. With the exception of the fiscal year 2004 plan which precludes the redemption of vested DSUs upon participants voluntary resignation, eligible participants are entitled to receive a cash payment equivalent to the fair market value of the number of vested DSUs held upon any termination of employment. Upon termination of employment for reasons of retirement, unvested units will continue to vest at the latest by November 30th of the year following the retirement date. For participants subject to section 409A of the United States Internal Revenue Code, vesting of unvested units takes place at time of retirement.
Fiscal year 2004 plan
The fiscal year 2004 plan stipulates that granted units vest equally over four years. All the units issued under that Plan are now vested. As at March 31, 2008, 517,702 LTI-DSU units were outstanding (March 31, 2007 548,097 units). The expense recorded in fiscal 2008 was $0.1 million (2007 $0.2 million; 2006 $1.6 million).
36
Fiscal year 2005 plan
The fiscal year 2005 plan has replaced the fiscal year 2004 plan for succeeding years. The Plan stipulates that granted units vest equally over five years and that following a take-over bid, all unvested units will vest immediately. In fiscal 2008, the Company issued 481,577 LTI-DSU units (2007 527,714 units) and as at March 31, 2008, 1,824,762 LTI-DSU units were outstanding (2007 1,392,653 units outstanding). The expense recorded in fiscal 2008 was $3.2 million (2007 $7.5 million; 2006 $2.8 million).
Since fiscal 2004, the Company entered into contracts to reduce its earnings exposure to the fluctuations in its share price (refer to Note 17).
Long-Term Incentive Restricted Share Unit Plan
In May 2004, the Company adopted a Long-Term Incentive Performance Based Restricted Shares Unit Plan (LTI-RSU) for its executives and senior management. The LTI-RSU plan is intended to enhance the Companys ability to attract and retain talented individuals, and also to promote a greater alignment of interest between eligible participants and the Companys shareholders. The LTI-RSU Plan is set up as a stock-based performance plan.
LTI-RSUs granted pursuant to this plan vest after three years from their grant date. LTI-RSUs are vested as follows:
(i) | 100% of the units, if CAE shares have appreciated at least 33% (10% annual compounded growth) during the timeframe; |
(ii) | 50% of the units, if CAE shares have appreciated at least 24% (7.5% annual compounded growth) but less than 33% during the timeframe. |
No LTI-RSUs vest if the market value of the common shares has appreciated less than 24% during the specified timeframe. In addition, no proportional vesting is to occur for any appreciation resulting between 24% and 33% during the specified timeframe. Participants subject to loss of employment, other than voluntarily or for cause, are entitled to conditional pro-rata vesting. In fiscal 2008, the Company issued no LTI-RSU units (2007 770,948 units) under the fiscal 2005 plan and as at March 31, 2008, 1,065,710 LTI- RSU units were outstanding (2007 2,009,666 units outstanding) under that plan. The expense recorded in fiscal 2008 was $3.1 million (2007 $12.1 million; 2006 $3.5 million).
In May 2007, the Company amended the fiscal year 2005 plan for fiscal year 2008 and subsequent years. The LTI-RSU plan is intended to enhance the Companys ability to attract and retain talented individuals and also to promote a greater alignment of interest between eligible participants and the Companys shareholders. The LTI-RSU plan is set up as a stock-based performance plan.
LTI-RSUs granted pursuant to the revised plan vest after three years from their grant date. LTI-RSUs are vested as follows:
(i) | 100% of the units, if CAE shares have appreciated by a minimum annual compounded growth defined as the Bank of Canada 10-year risk-free rate of return on the grant date plus 350 basis points (3.50%) over the valuation period, or, in the case of pro-rated vesting, as of the end of the pro-ration period. For 2008 fiscal year grant, this represents a target of 8% of annual growth compounded over the three year period; |
(ii) | 50% of the units, if based on the grant price, the closing average price of the common CAE shares has met or exceeded the performance of the Standard & Poors Aerospace and Defence Index (S&P A&D index), adjusted for dividends, or, in the case of pro-rated vesting, as of the end of the pro-ration period. |
Participants subject to loss of employment, other than voluntarily or for cause, are entitled to conditional pro-rata vesting. In fiscal 2008, the Company issued 352,258 LTI-RSU units, and as at March 31, 2008, 340,974 LTI-RSU units were outstanding. The expense recorded in fiscal 2008 was $0.5 million.
37
Note 17
Financial Instruments
Under its risk management policy, the Company enters into foreign exchange and interest rate derivative instruments, of which a certain portion is designated as cash flow hedges of forecasted transactions in order to reduce the financial risk regarding its exposure to fluctuations in foreign exchange rates and interest rates. The Company does not use any derivative financial instruments for trading or speculative purposes.
Foreign currency risks
The Company entered into foreign exchange forward contracts and foreign exchange swaps to manage its risks associated with foreign currency exchange rates. As at March 31, 2008, the Company had entered into foreign currency forward contracts totalling $837.6 million (buy contracts $251.6 million and sell contracts totalling $586.0 million) to mainly reduce the foreign currency risks associated with certain sales commitments and expected purchase transactions denominated in foreign currencies. The Company designates a certain portion of its foreign exchange forward contracts as cash flow hedges and applies hedge accounting as prescribed under CICA Section 3865, Hedges.
The Company has entered into foreign exchange swap agreements for its senior secured financing, obtained during this fiscal year, to convert a portion of this US dollar denominated debt into British pounds (GBP or £) to finance its civil aviation training centre in United Kingdom. The Company designates two USD to GBP cross-currency swap agreements, as cash flow hedges, with notional amounts of $5.7 million (£2.8 million) and $17.3 million (£8.5 million) amortizing in accordance with the repayment schedule of the debt until June 2014 and June 2018 respectively.
38
Consolidated foreign exchange transactions outstanding | |||||||
(amounts in millions, except average rate) | 2008 | 2007 | |||||
| |||||||
Notional | Average | Notional | Average | ||||
Currencies (sold/bought) | Amount(1) | Rate | Amount(1) | Rate | |||
| |||||||
USD/CDN | |||||||
Less than 1 year | $ | 311.0 | 0.9674 | $ | 223.3 | 0.8697 | |
Between 1 and 3 years | 85.2 | 0.9483 | 54.3 | 0.8908 | |||
Between 3 to 5 years | 5.8 | 0.9183 | 15.7 | 0.9007 | |||
USD/EUR | |||||||
Less than 1 year | 4.2 | 1.2957 | 11.0 | 1.2964 | |||
Between 1 and 3 years | - | - | 4.0 | 1.2957 | |||
USD/AUD | |||||||
Less than 1 year | 0.2 | 0.8772 | - | - | |||
CDN/EUR | |||||||
Less than 1 year | 29.4 | 1.4875 | 12.9 | 1.5360 | |||
Between 1 and 3 years | 3.2 | 1.4714 | 5.4 | 1.4666 | |||
Between 3 and 5 years | - | - | 1.5 | 1.4642 | |||
EUR/CDN | |||||||
Less than 1 year | 96.1 | 0.6705 | 94.9 | 0.6649 | |||
Between 1 and 3 years | 26.3 | 0.6660 | 29.4 | 0.6712 | |||
Between 3 and 5 years | 0.7 | 0.6559 | 1.5 | 0.6934 | |||
EUR/AUD | |||||||
Less than 1 year | 2.7 | 0.5827 | 1.0 | 0.5800 | |||
Between 1 and 3 years | 0.9 | 0.5674 | 1.6 | 0.5586 | |||
EUR/USD | |||||||
Less than 1 year | 4.2 | 0.7280 | - | - | |||
GBP/CDN | |||||||
Less than 1 year | 4.1 | 0.4926 | 4.1 | 0.4796 | |||
Between 1 and 3 years | 48.8 | 0.5007 | 47.5 | 0.4964 | |||
CDN/GBP | |||||||
Less than 1 year | - | - | 0.5 | 2.2783 | |||
Between 1 and 3 years | 10.0 | 1.9500 | - | - | |||
GBP/EUR | |||||||
Less than 1 year | - | - | 19.4 | 0.6821 | |||
GBP/USD | |||||||
Less than 1 year | - | - | 20.0 | 0.5181 | |||
CDN/USD | |||||||
Less than 1 year | 118.4 | 0.9829 | 52.3 | 1.1564 | |||
Between 1 and 3 years | 86.4 | 0.9860 | 3.8 | 1.0986 | |||
| |||||||
$ | 837.6 | $ | 604.1 | ||||
| |||||||
(1) Exchange rates as at the end of the respective fiscal year were used to translate amounts in foreign currencies. |
During fiscal year 2008, hedge accounting was discontinued for certain foreign exchange forward contracts when it became probable that the original anticipated transactions would not occur by the end of the originally specified period. As a result, a gain of $0.9 million was recorded in net earnings.
Also, a gain of $0.9 million, representing the ineffective portion of the change in fair value of the cash flow hedges, was recognized in net earnings.
The estimated net amount of existing losses reported in accumulated other comprehensive loss that is expected to be reclassified into earnings during the next 12 months is $1.8 million.
39
Credit risk
The Company is exposed to credit risk on cash and cash equivalents, trade receivables and long-term contracts. The credit risk on cash and cash equivalents is mitigated by the fact that they are in place with major financial institutions. Its customers are primarily established companies with publicly available credit ratings or government agencies, factors that facilitate monitoring of the risk. In addition, the Company typically receives substantial non-refundable deposits on contracts. The Company closely monitors its exposure to major airlines in order to mitigate its risk to the extent possible. As well, the Companys credit exposure is further reduced by the sale of third-party receivables (see Note 6 Accounts Receivable) to a financial institution on a non-recourse basis.
The Company is exposed to credit risk in the event of non-performance by counterparties to its derivative financial instruments. The Company minimizes this exposure by entering into contracts with counterparties that are of high credit quality. Collateral or other security to support financial instruments subject to credit risk is usually not obtained. The credit standing of counterparties is regularly monitored.
Interest rate exposure
The Company bears some interest rate fluctuation risk on its variable long-term debt (including rates) and some fair value risk on its fixed interest long-term debt. As at March 31, 2008, the Company has entered into seven interest rate swap agreements with four different financial institutions to mitigate these risks for a total notional value of $133.1 million.
One agreement, with a notional value of $33.9 million (US$33.0 million), has converted fixed interest rate debt into a floating rate whereby the Company pays the equivalent of a three-month LIBOR borrowing rate, plus 3.6%, and receives a fixed interest rate of 7.76% up to June 2012. The Company designates this interest rate swap contract as a fair value hedge.
During the fiscal year, the Company obtained senior secured financing for an amount of $107.5 million for two new civil aviation training centres. The drawdown to March 31, 2008 was for the full amount (US$45.7 million and £29.6 million after taking into consideration the effect of foreign exchange swaps arrangements entered in relation to this financing transaction). The Company designates the following interest rate swap contracts as cash flow hedges:
(i) | Two USD-denominated floating-to-fixed swaps with notional amounts of $4.5 million (US$4.4 million) and $13.4 million (US$13.0 million) amortizing in accordance with the repayment schedule of the debt until June 2014 and June 2018, respectively. The Company pays a weighted average fixed interest rate of 8.09%; |
(ii) | Two GBP-denominated floating-to-fixed swaps with notional amounts of $5.7 million (£2.8 million) and $17.3 million (£8.5 million) amortizing in accordance with the repayment schedule of the debt until June 2014 and June 2018, respectively. The Company pays a weighted average fixed interest rate of 8.39%. |
The remaining contracts, which are designated as cash flow hedges, convert a floating interest rate debt into a fixed rate for a notional value of $58.2 million, whereby the Company will receive quarterly LIBOR and pay fixed interest payments as follows:
(i) | Amortizing based on a repayment schedule of the debt until October 2016 on $7.7 million (£3.8 million), the Company will pay quarterly fixed annual interest rates of 6.31%; |
(ii) | Accreting swap based on a borrowing schedule until December 2019 on $50.6 million (31.1 million), the Company will pay a semi-annual fixed annual interest rate of 4.78%. |
After considering these swap agreements, as at March 31, 2008, 72% of the long-term debt bears fixed interest rates.
Stock-based compensation cost
Since March 2004, the Company entered into four equity swap agreements with three major Canadian financial institutions to reduce its cash and net earnings exposure to fluctuations in its share price relating to the DSU and LTI-DSU programs. Pursuant to the agreement, the Company receives the economic benefit of dividends and a share price appreciation while providing payments to the financial institution for the institutions cost of funds and any share price depreciation. The net effect of the equity swap partly offsets movements in the Companys share price impacting the cost of the DSU and LTI-DSU programs and is reset monthly. As at March 31, 2008, the equity swap agreements covered 2,155,000 common shares of the Company.
40
Hedge of self-sustaining foreign operations
The Company has designated a portion of its senior notes totalling US$ 33.0 million as at March 31, 2008 (2007 US$ 93.0 million) as a hedge of self-sustaining foreign operations and is being used to hedge the Companys exposure to foreign exchange risk on these investments. Gains or losses on the translation of the designated portion of its senior notes are recognized in other comprehensive income to offset any gains or losses on translation of the net investments in the self-sustaining foreign operations. During the third quarter of fiscal 2008, US$ 60.0 million of senior notes, maturing in June 2009, was de-designated as a hedge of self-sustaining foreign operations. Accordingly, from the de-designation date, the change in carrying value of this portion of the senior notes as a result of change in foreign currency is recorded in earnings. However, a highly effective cash flow hedge was obtained to cover the interest payments and final maturity of this debt.
The following methods and assumptions have been used to estimate the fair value of the financial instruments:
(i) | Cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are valued at their carrying amounts on the Consolidated Balance Sheets, which represent an appropriate estimate of their fair values due to their short-term maturities; |
(ii) | Capital leases are valued using the discounted cash flow method; |
(iii) | The value of long-term debt is estimated based on discounted cash flows using current interest rates for debt with similar terms and remaining maturities; |
(iv) | The net fair value of the Companys cross currency and interest rate swaps are determined using valuation techniques and are calculated as the present value of the estimated future cash flows using an appropriate market based yield curve. Assumptions are based on market conditions prevailing at each Consolidated Balance Sheets date; |
(v) | Forward foreign exchange contracts are represented by the estimated amounts that the Company would receive or pay to settle the contracts at the Consolidated Balance Sheets date. |
The fair value of all derivative and non-derivative financial instruments was as follows as at March 31, 2008:
Fair value | Carrying amount | |||||||
(amounts in millions) | Assets | Liabilities | Assets | Liabilities | ||||
| ||||||||
Derivative financial instruments designated as fair value | ||||||||
hedges | ||||||||
Interest rate swap agreements | $ | 1.3 | $ | - | $ | 1.3 | $ | - |
| ||||||||
Derivative financial instruments designated as cash flow | ||||||||
hedges | ||||||||
Foreign exchange forward contracts | $ | 13.7 | $ | 12.8 | $ | 13.7 | $ | 12.8 |
Foreign currency swap agreements | 1.6 | 0.1 | 1.6 | 0.1 | ||||
Interest rate swap agreements | 2.3 | 4.3 | 2.3 | 4.3 | ||||
| ||||||||
$ | 17.6 | $ | 17.2 | $ | 17.6 | $ | 17.2 | |
| ||||||||
Derivative financial instruments classified as held for | ||||||||
trading | ||||||||
Foreign exchange forward contracts | $ | 8.6 | $ | 3.4 | $ | 8.6 | $ | 3.4 |
Foreign exchange embedded derivatives | 3.4 | 12.1 | 3.4 | 12.1 | ||||
| ||||||||
$ | 12.0 | $ | 15.5 | $ | 12.0 | $ | 15.5 | |
| ||||||||
Total derivative financial instruments | $ | 30.9 | $ | 32.7 | $ | 30.9 | $ | 32.7 |
| ||||||||
Non-derivative financial instruments designated as | ||||||||
hedges of net investments of self-sustaining foreign | ||||||||
operations | ||||||||
Long-term debt | $ | - | $ | 37.2 | $ | - | $ | 33.9 |
Other non-derivative financial instruments | ||||||||
Long-term debt | - | 352.1 | - | 348.6 | ||||
| ||||||||
Total non-derivative financial instruments | $ | - | $ | 389.3 | $ | - | $ | 382.5 |
| ||||||||
Total financial instruments | $ | 30.9 | $ | 422.0 | $ | 30.9 | $ | 415.2 |
|
41
Letters of credit and guarantees
As at March 31, 2008, the Company had outstanding letters of credit and performance guarantees in the amount of $108.9 million (2007 $149.1 million) issued in the normal course of business. These guarantees are issued under mainly the Revolving Term Credit Facility as well as the Performance Securities Guarantee (PSG) account provided by Export Development Corporation (EDC) and under other standby facilities available to the Company through various financial institutions.
The advance payment guarantees are related to progress/milestone payments made by our customers and are reduced or eliminated upon delivery of the product. The contract performance guarantees are linked to the completion of the intended product or service rendered by CAE and at the satisfaction of the customer. It represents 10% to 20% of the overall contract amount. The customer releases the Company from these guarantees at the signature of a certificate of completion. The letter of credit for the operating lease obligation provides credit support for the benefit of the owner participant in the September 30, 2003 sale and leaseback transaction and varies according to the payment schedule of the lease agreement.
(amounts in millions) | 2008 | 2007 | ||
|
||||
Advance payment | $ | 48.9 | $ | 68.7 |
Contract performance | 4.7 | 6.7 | ||
Operating lease obligation | 24.2 | 27.2 | ||
Simulator deployment obligation | 20.8 | 40.7 | ||
Other | 10.3 | 5.8 | ||
|
||||
Total | $ | 108.9 | $ | 149.1 |
|
All of the advance payment guarantees were issued under the EDC PSG account.
Residual value guarantees sale and leaseback transactions
Following certain sale and leaseback transactions, the Company has agreed to guarantee the residual value of the underlying equipment in the event that the equipment is returned to the lessor and the net proceeds of any eventual sale do not cover the guaranteed amount. The maximum amount of exposure is $17.4 million (2007 $52.1 million), of which $8.2 million matures in 2020 and $9.2 million in 2023. Of this amount, as at March 31, 2008, $17.4 million is recorded as a deferred gain (2007 $33.1 million).
Indemnifications
In certain instances when CAE sells businesses, the Company may retain certain liabilities for known exposures and provide indemnification to the buyer with respect to future claims for certain unknown liabilities that exist, or arise from events occurring, prior to the sale date, including liabilities for taxes, legal matters, environmental exposures, product liability, and other obligations. The terms of the indemnifications vary in duration, from one to two years for certain types of indemnities, terms for tax indemnifications that are generally aligned to the applicable statute of limitations for the jurisdiction in which the divestiture occurred, and terms for environmental liabilities that typically do not expire. The maximum potential future payments that the Company could be required to make under these indemnifications are either contractually limited to a specified amount or unlimited. The Company believes that other than the liabilities already accrued, the maximum potential future payments that it could be required to make under these indemnifications are not determinable at this time, as any future payments would be dependent on the type and extent of the related claims, and all available defenses, which cannot be estimated. However, historically, costs incurred to settle claims related to these indemnifications have not been material to the Company's consolidated financial position, results of operations or cash flows.
42
Note 18 | Supplementary Cash Flows Information | |||||||||
(amounts in millions) | 2008 | 2007 | 2006 | |||||||
|
||||||||||
Cash provided by (used in) non-cash working capital: | ||||||||||
Accounts receivable | $ | 8.5 | $ | (39.2 | ) | $ | (31.9 | ) | ||
Inventories | (20.9 | ) | (14.8 | ) | 13.8 | |||||
Prepaid expenses | (8.7 | ) | 4.0 | (7.9 | ) | |||||
Income taxes recoverable | (18.6 | ) | 20.2 | ( 7.5 | ) | |||||
Accounts payable and accrued liabilities | 4.4 | 22.5 | 58.9 | |||||||
Deposits on contracts | 19.6 | 27.5 | 53.7 | |||||||
|
||||||||||
Changes in non-cash working capital | $ | (15.7 | ) | $ | 20.2 | $ | 79.1 | |||
|
||||||||||
Supplemental cash flow disclosure: | ||||||||||
Interest paid | $ | 24.0 | $ | 17.1 | $ | 21.9 | ||||
Income taxes paid (received) | $ | 28.0 | $ | (1.4 | ) | $ | 13.7 | |||
|
||||||||||
Supplemental statements of earnings disclosure: | ||||||||||
Foreign exchange gain | $ | 12.6 | $ | 2.9 | $ | 8.4 | ||||
|
||||||||||
Note 19 | Contingencies |
In the normal course of operations, the Company is party to a number of lawsuits, claims and contingencies. Accruals are made in instances where it is probable that liabilities will be incurred and where such liabilities can be reasonably estimated. Although it is possible that liabilities may be incurred in instances for which no accruals have been made, the Company has no reason to believe that the ultimate outcome of these matters will have a material impact on its consolidated financial position.
43
Note 20 Commitments
Significant contractual purchase obligations and future minimum lease payments under operating leases are as follows:
Years ending March 31 | ||||||||||
(amounts in millions) | SP/C | SP/M | TS/C | TS/M | Total | |||||
|
||||||||||
2009 | $ | 8.1 | $ | 11.7 | $ | 40.8 | $ | 23.7 | $ | 84.3 |
2010 | 4.9 | 7.9 | 35.8 | 20.7 | 69.3 | |||||
2011 | 2.7 | 4.9 | 35.2 | 19.5 | 62.3 | |||||
2012 | 2.0 | 2.7 | 40.1 | 17.0 | 61.8 | |||||
2013 | 0.3 | 0.4 | 32.0 | 9.9 | 42.6 | |||||
Thereafter | 0.3 | 0.4 | 138.3 | 23.8 | 162.8 | |||||
|
||||||||||
$ | 18.3 | $ | 28.0 | $ | 322.2 | $ | 114.6 | $ | 483.1 | |
|
As at March 31, 2008, included in the total contractual purchase obligations and future minimum lease payments under operating lease is an amount of $103.3 million (March 31, 2007 $136.0 million, March 31, 2006 $140.7 million) designated as commitments to CVS Leasing Ltd., an entity in which the Company has a 14% minority shareholding.
Of the total $483.1 million disclosed as being commitments as at March 31, 2008, $54.4 million represent contractual purchase obligations.
Note 21
Government Cost-Sharing
The Company has signed agreements with various governments whereby the latter shares in the cost, based on expenditures incurred by the Company, of certain R&D programs for modelling and services, visual systems and advanced flight simulation technology for civil applications and networked simulation for military applications.
Project Phoenix
During fiscal 2006, the Company announced a plan to invest $630 million in Project Phoenix, an R&D program that will span the next six years. In the same year, the Government of Canada and the Company signed an agreement for a contribution of approximately 30% ($189 million) of the value of CAE's R&D program. The Government of Canada support will reduce by approximately 25% the amount of income tax credit otherwise available. This agreement is included in the Technology Partnerships Canada (TPC) program created by Industry Canada to invest strategically in research and development, to encourage private sector investment, and to increase technological capabilities in the Canadian industry. The contribution will be repayable, based on consolidated revenues, starting in fiscal 2012 and ending in fiscal 2030, or earlier, should a predetermined royalty level, which exceeds the amount of maximum contributions, be reached.
During fiscal 2007, the Company signed an agreement with the Government of Québec, which will participate in Project Phoenix. The Québec governments support will take the form of a contribution up to $31.5 million over six years, repayable by royalties. Investissement Québec handles the contribution. The contribution will be repayable, based on consolidated revenues, starting in fiscal 2012 and ending in fiscal 2030, or earlier should a predetermined royalty level which exceeds the amount of maximum contributions be reached. The government contribution recognized by the Company in fiscal 2007, related to this agreement signed with the Government, is based on costs incurred starting in June 2005.
44
The following table provides information regarding contributions recognized and amounts not yet received for the aggregate project:
(amounts in millions) | 2008 | 2007 | ||||||
| ||||||||
Outstanding contribution receivable, | ||||||||
beginning of year | $ | 18.4 | $ | 10.0 | ||||
Contributions | 62.4 | 52.1 | ||||||
Payments received | (56.6 | ) | (43.7 | ) | ||||
| ||||||||
Outstanding contribution receivable, | ||||||||
end of year | $ | 24.2 | $ | 18.4 | ||||
| ||||||||
Previous programs | ||||||||
The Company had also signed previous R&D agreements with the Government of Canada, in order to | ||||||||
share in a portion of specific costs incurred by the Company on previous R&D programs. The initiative | ||||||||
was intended to broaden the Company's technological capabilities in flight simulation systems, by | ||||||||
developing components that will lower the cost and weight of flight simulators and technologies to reduce | ||||||||
the cost of initial training. These programs are repayable in the form of royalties to March 2011 and | ||||||||
March 2013, based on future sales for civil and military programs respectively. | ||||||||
Aggregate information about programs | ||||||||
The following table provides information on the aggregate contributions recognized and aggregate royalty | ||||||||
expenditures recognized for all programs: | ||||||||
(amounts in millions) | 2008 | 2007 | 2006 | |||||
| ||||||||
Contributions credited to capitalized costs: | ||||||||
Project Phoenix | $ | 20.3 | $ | 7.1 | $ | 3.8 | ||
Contributions credited to income: | ||||||||
Project Phoenix | 42.1 | 45.0 | 13.5 | |||||
Previous programs | - | - | 7.5 | |||||
| ||||||||
Total contributions: | ||||||||
Project Phoenix | $ | 62.4 | $ | 52.1 | $ | 17.3 | ||
Previous programs | - | - | 7.5 | |||||
| ||||||||
Royalty expenses: | ||||||||
Project Phoenix | $ | - | $ | - | $ | - | ||
Previous programs | 8.8 | 7.5 | 6.6 | |||||
|
The cumulative contributions recognized by the Company, since their respective inceptions, for all current government cost-sharing programs still active as at March 31, 2008 amounts to $212.3 million. The cumulative sum of royalty expenses recognized by the Company since their respective inceptions, for all current government cost-sharing programs still active as at March 31, 2008, amounts to $32.0 million.
45
Note 22
Employee Future Benefits
Defined future benefits
The Company has two registered funded defined-benefit pension plans in Canada (one for employees and one for designated executives) that provide benefits based on length of service and final average earnings. The Company also maintains a pension plan for employees in the Netherlands and in the United Kingdom that provides benefits based on similar provisions.
In addition, the Company maintains a supplemental arrangement plan in Canada and two in Germany (CAE Elektronik GmbH plan and CAE Beyss GmbH plan [Beyss]) to provide defined benefits. These supplemental arrangements are the sole obligation of the Company, and there is no requirement to fund it. However, the Company is obligated to pay the benefits when they become due. Under the Canadian supplemental arrangement, once the designated employee retires from the Company, the Company is required to secure the obligation for that employee. As at March 31, 2008, the Company has issued letters of credit totalling $23.1 million (2007 $21.2 million) to secure these obligations under the Canadian supplemental arrangement.
Contributions reflect actuarial assumptions of future investment returns, salary projections and future service benefits. Plan assets are represented primarily by Canadian and foreign equities, government and corporate bonds.
In fiscal 2007, the Company closed some of its training centres in Europe, resulting in a curtailment gain of $0.9 million.
46
The changes in pension obligations, in fair value of assets and the financial position of the funded pension plans are as follows:
2008 | 2007 | |||||||||||||||||
|
||||||||||||||||||
(amounts in million) | Canadian | Foreign | Total | Canadian | Foreign | Total | ||||||||||||
|
||||||||||||||||||
Change in pension obligations | $ | 191.7 | $ | 21.9 | $ | 213.6 | $ | 175.4 | $ | 15.6 | $ | 191.0 | ||||||
Adjustment U.K. plan | - | - | - | - | 4.1 | 4.1 | ||||||||||||
Current service cost | 6.0 | 0.6 | 6.6 | 6.0 | 0.8 | 6.8 | ||||||||||||
Interest cost | 10.0 | 1.0 | 11.0 | 9.1 | 0.9 | 10.0 | ||||||||||||
Curtailment | - | - | - | - | (0.9 | ) | (0.9 | ) | ||||||||||
Employee contributions | 2.2 | 0.3 | 2.5 | 2.2 | 0.3 | 2.5 | ||||||||||||
Pension benefits paid | (10.2 | ) | (0.3 | ) | (10.5 | ) | (11.6 | ) | (0.2 | ) | (11.8 | ) | ||||||
Actuarial loss (gain) | (5.8 | ) | 1.2 | (4.6 | ) | 10.6 | (0.6 | ) | 10.0 | |||||||||
Foreign exchange variation | - | 0.6 | 0.6 | - | 1.9 | 1.9 | ||||||||||||
|
||||||||||||||||||
Pension obligation at end of year | $ | 193.9 | $ | 25.3 | $ | 219.2 | $ | 191.7 | $ | 21.9 | $ | 213.6 | ||||||
|
||||||||||||||||||
Change in faire value of plan assets: | ||||||||||||||||||
Fair value of plan assets at beginning of year | $ | 163.1 | $ | 23.3 | $ | 186.4 | $ | 144.7 | $ | 15.9 | $ | 160.6 | ||||||
Adjustment U.K. plan | - | - | - | - | 3.4 | 3.4 | ||||||||||||
Actual return on plan assets | 4.2 | 0.1 | 4.3 | 18.1 | 1.1 | 19.2 | ||||||||||||
Pension benefits paid | (10.2 | ) | (0.3 | ) | (10.5 | ) | (11.6 | ) | (0.2 | ) | (11.8 | ) | ||||||
Employee contributions | 2.2 | 0.3 | 2.5 | 2.2 | 0.3 | 2.5 | ||||||||||||
Employer contributions | 9.3 | - | 9.3 | 9.7 | 0.9 | 10.6 | ||||||||||||
Foreign exchange variation | - | 0.5 | 0.5 | - | 1.9 | 1.9 | ||||||||||||
|
||||||||||||||||||
Fair value of plan assets at end of year | $ | 168.6 | $ | 23.9 | $ | 192.5 | $ | 163.1 | $ | 23.3 | $ | 186.4 | ||||||
|
||||||||||||||||||
Financial position plan (deficit) surplus | $ | (25.3 | ) | $ | (1.4 | ) | $ | (26.7 | ) | $ | (28.6 | ) | $ | 1.4 | $ | (27.2 | ) | |
Unrecognized net actuarial loss (gain) | 46.0 | 1.4 | 47.4 | 46.5 | (1.0 | ) | 45.5 | |||||||||||
Unamortized past service cost | 4.6 | - | 4.6 | 5.1 | - | 5.1 | ||||||||||||
|
||||||||||||||||||
Amount recognized at end of year | $ | 25.3 | $ | - | $ | 25.3 | $ | 23.0 | $ | 0.4 | $ | 23.4 | ||||||
|
||||||||||||||||||
Amount recognized in: | ||||||||||||||||||
Other assets (Note 11) | $ | 25.3 | $ | 0.6 | $ | 25.9 | $ | 23.0 | $ | 1.1 | $ | 24.1 | ||||||
Other long-term liabilities | - | (0.6 | ) | (0.6 | ) | - | (0.7 | ) | (0.7 | ) | ||||||||
|
||||||||||||||||||
$ | 25.3 | $ | - | $ | 25.3 | $ | 23.0 | $ | 0.4 | $ | 23.4 | |||||||
|
|
47
Included in the above pension obligation and fair value of plan assets at end of year are the following amounts in respect of plans that are in deficit (the two Canadian funded plans and the United Kingdom plan and Netherlands plan [since fiscal 2008]).
2008 | 2007 | |||||||||||||||||
|
||||||||||||||||||
(amounts in millions) | Canadian | Foreign | Total | Canadian | Foreign | Total | ||||||||||||
|
||||||||||||||||||
Pension obligation at end of year | $ | 193.9 | $ | 25.3 | $ | 219.2 | $ | 191.7 | $ | 4.8 | $ | 196.5 | ||||||
|
||||||||||||||||||
Fair value of plan assets at end of year | $ | 168.6 | $ | 23.9 | $ | 192.5 | $ | 163.1 | $ | 4.1 | $ | 167.2 | ||||||
|
||||||||||||||||||
Financial position plan deficit | $ | (25.3 | ) | $ | (1.4 | ) | $ | (26.7 | ) | $ | (28.6 | ) | $ | (0.7 | ) | $ | (29.3 | ) |
|
||||||||||||||||||
Pension obligations related to the supplemental arrangements are as follows: | ||||||||||||||||||
2008 | 2007 | |||||||||||||||||
|
||||||||||||||||||
(amounts in millions) | Canadian | Foreign | Total | Canadian | Foreign | Total | ||||||||||||
|
||||||||||||||||||
Change in pension obligations: | ||||||||||||||||||
Pension obligation at beginning of year | $ | 23.8 | $ | 9.8 | $ | 33.6 | $ | 21.7 | $ | 8.8 | $ | 30.5 | ||||||
Current service cost | 1.6 | 0.2 | 1.8 | 1.3 | 0.2 | 1.5 | ||||||||||||
Interest cost | 1.3 | 0.4 | 1.7 | 1.1 | 0.4 | 1.5 | ||||||||||||
Pension benefits paid | (1.3 | ) | (0.5 | ) | (1.8 | ) | (1.2 | ) | (0.5 | ) | (1.7 | ) | ||||||
Actuarial loss | 2.3 | (0.2 | ) | 2.1 | 0.9 | 0.1 | 1.0 | |||||||||||
Foreign exchange variation | - | 0.5 | 0.5 | - | 0.8 | 0.8 | ||||||||||||
|
||||||||||||||||||
Pension obligation at end of year | 27.7 | 10.2 | 37.9 | 23.8 | 9.8 | 33.6 | ||||||||||||
|
||||||||||||||||||
Financial position plan deficit | (27.7 | ) | (10.2 | ) | (37.9 | ) | (23.8 | ) | (9.8 | ) | (33.6 | ) | ||||||
Unrecognized net actuarial loss | 7.9 | 1.4 | 9.3 | 5.8 | 1.6 | 7.4 | ||||||||||||
|
||||||||||||||||||
Amount recognized in other long-term | ||||||||||||||||||
liabilities at end of year | $ | (19.8 | ) | $ | (8.8 | ) | $ | (28.6 | ) | $ | (18.0 | ) | $ | (8.2 | ) | $ | (26.2 | ) |
|
48
The net pension cost for funded pension plans for the years ended March 31 included the following components:
(amounts in millions) | 2008 | 2007 | 2006 | ||||||
| |||||||||
Current service cost | $ | 6.6 | $ | 6.8 | $ | 4.7 | |||
Plan Plan expenses | - | - | 0.3 | ||||||
Interest cost on pension obligations | 11.0 | 10.0 | 10.1 | ||||||
Actual return on plan assets | (4.3 | ) | (19.2 | ) | (13.3 | ) | |||
Net actuarial loss on benefit obligation | (4.6 | ) | 10.0 | 9.0 | |||||
| |||||||||
Pension cost before adjustments to recognize the long-term | |||||||||
nature of plans | 8.7 | 7.6 | 10.8 | ||||||
| |||||||||
Adjustments to recognize long-term nature of plans: | |||||||||
Difference between expected return and actual return on plan | |||||||||
assets | (8.2 | ) | 8.1 | 4.2 | |||||
Difference between actuarial loss recognized for the year and | |||||||||
actual actuarial loss on benefit obligations for the year | 6.4 | (7.4 | ) | (6.7 | ) | ||||
Difference between amortization of past service cost for the | |||||||||
year and actual plan amendments for the year | 0.5 | 0.5 | 0.5 | ||||||
| |||||||||
Total adjustment | (1.3 | ) | 1.2 | (2.0 | ) | ||||
| |||||||||
Net pension cost | 7.4 | 8.8 | 8.8 | ||||||
Curtailment | - | (0.9 | ) | - | |||||
| |||||||||
Net pension cost including curtailment | $ | 7.4 | $ | 7.9 | $ | 8.8 | |||
| |||||||||
The following components are combinations of the items presented above: | |||||||||
(amounts in millions) | 2008 | 2007 | 2006 | ||||||
| |||||||||
Expected return on plan assets | $ | (12.5 | ) | $ | (11.1 | ) | $ | (9.1 | )) |
Amortization of net actuarial loss | 1.8 | 2.6 | 2.3 | ||||||
Amortization of past service costs | 0.5 | 0.5 | 0.5 | ||||||
|
49
With respect to the supplemental arrangements, the net pension cost is as follows: | |||||||||
(amounts in millions) | 2008 | 2007 | 2006 | ||||||
|
|||||||||
Current service cost | $ | 1.8 | $ | 1.5 | $ | 1.1 | |||
Interest cost on pension obligations | 1.7 | 1.5 | 1.2 | ||||||
Net actuarial loss on benefit obligations | 2.1 | 1.0 | 5.1 | ||||||
|
|||||||||
Pension cost before adjustments to recognize the long-term | |||||||||
nature of plans | 5.6 | 4.0 | 7.4 | ||||||
|
|||||||||
Adjustments to recognize the long-term nature of plans: | |||||||||
Difference between actuarial loss recognized for the year and | |||||||||
actual actuarial loss on benefit obligations for the year | (1.8 | ) | (0.6 | ) | (5.0 | ) | |||
|
|||||||||
Net pension cost | $ | 3.8 | $ | 3.4 | $ | 2.4 | |||
|
|||||||||
The following component is a combination of the items presented above: | |||||||||
(amounts in millions) | 2008 | 2007 | 2006 | ||||||
|
|||||||||
Amortization of net actuarial loss | $ | 0.3 | $ | 0.4 | $ | 0.1 | |||
|
Additional information on Canadian funded pension plan assets weighted average asset allocations by asset category are as follows:
Allocation of Plan Assets at | ||||
Measurement Dates | ||||
Asset Category | December 31, 2007 | December 31, 2006 | ||
|
||||
Equity securities | 62 | % | 65 | % |
Fixed-income securities | 38 | % | 35 | % |
|
||||
Total | 100 | % | 100 | % |
|
The target allocation percentage for equity securities is 63%, which includes a mix of Canadian, U.S. and international equities, and for the fixed-income securities is 37%, which must be rated BBB or higher. Individual asset classes are allowed to fluctuate slightly and are rebalanced regularly. CAE, through its fund managers, is responsible for investing the assets so as to achieve return in line with underlying market indexes. The investment policy has been modified at the end of December 2005 to allow active management of Canadian equities, which represents approximately 35% of the fund.
Netherlands Pension Plan assets are invested through an insurance company, and the asset allocation is approximately 75% in fixed income, 24% in equities and 1% in cash.
The asset allocation for the United Kingdom Pension Plan asset is approximately 64% in equities, 27% in fixed income and 9% in cash.
Additional information on employer contributions: | ||||||||
Funded Plan | Supplemental Arrangements | |||||||
(amounts in millions) | Canadian | Foreign | Canadian | Foreign | ||||
|
||||||||
Actual contribution fiscal 2007 | $ | 9.7 | $ | 0.9 | $ | 1.2 | $ | 0.5 |
Actual contribution fiscal 2008 | 9.3 | - | 1.3 | 0.5 | ||||
Expected contribution fiscal 2009 (unaudited) | 9.2 | 1.0 | 1.3 | 0.4 | ||||
|
50
Additional information about benefit payments expected to be paid in future years:
Funded Plans | Supplemental Arrangements | |||||||||||
Years ending March 31 | ||||||||||||
(amounts in millions unaudited) | Canadian | Foreign | Canadian | Foreign | ||||||||
|
||||||||||||
2009 | $ | 10.0 | $ | 0.4 | $ | 1.3 | $ | 0.5 | ||||
2010 | 10.9 | 0.3 | 1.3 | 0.6 | ||||||||
2011 | 11.9 | 0.6 | 1.4 | 0.5 | ||||||||
2012 | 13.0 | 0.8 | 1.6 | 0.6 | ||||||||
2013 | 14.2 | 0.8 | 1.7 | 0.5 | ||||||||
2014 - 2018 | 89.6 | 5.4 | 11.2 | 2.6 | ||||||||
|
||||||||||||
Significant assumptions (weighted average): | ||||||||||||
2008 | 2007 | |||||||||||
Canadian | Foreign | Canadian | Foreign | |||||||||
|
||||||||||||
Pension obligations as of March 31: | ||||||||||||
Discount rate | 5.50 | % | 5.40 | % | 5.25 | % | 4.70 | % | ||||
Compensation rate increases | 3.50 | % | 1.80 | % | 3.50 | % | 1.90 | % | ||||
Net pension cost: | ||||||||||||
Expected return on plan assets | 7.00 | % | 5.50 | % | 7.00 | % | 5.60 | % | ||||
Discount rate | 5.25 | % | 4.70 | % | 5.25 | % | 4.30 | % | ||||
Compensation rate increases | 3.50 | % | 1.90 | % | 3.50 | % | 1.80 | % | ||||
|
For the purpose of calculating the expected return on plan assets, historical and expected future returns were considered separately for each class of assets based on the asset allocation and the investment policy.
The Company measures its benefit obligations and fair value of plan assets for accounting purposes on December 31 of each year.
The most recent actuarial valuation of the pension plans for funding purposes was on September 30, 2007 for the Canadian employee funded plans. The next required valuation will be on December 31, 2009 for both funded plans.
An actuarial valuation of the funded United Kingdom plan is made every three years on March 31. The last actuarial valuation was filed on March 31, 2006.
The most recent actuarial valuation of the pension plans for funding purposes was on December 31, 2005 for the Netherlands employee funded plan. The next required valuation will be on December 31, 2008.
Defined contribution plans
The Company maintains an Employee Stock Purchase Plan (ESPP) to enable Company employees and its participating subsidiaries to acquire CAE common shares through regular payroll deductions plus employer contributions. The Plan allows employees to contribute up to 18% of their annual base salary. The Company and its participating subsidiaries match the first $500 employee contribution and contribute $1 for every $2 on additional employee contributions, up to a maximum of 3% of the employees base salary. Refer to Note 16, Stock-based Compensation Plans for further details and compensation expense recorded during the period.
All of the Companys U.S. employees may participate in defined contribution saving plans. These plans are subject to U.S. federal tax limitations and provide for voluntary employee salary deduction contributions. The Companys defined contribution plans formulas are based on a percentage of salary. The Companys 2008 contribution was $2.9 million ($2.1 million in 2007 and $1.8 million in 2006).
In addition, the Company offered some foreign employees defined contribution pension plans (other than Canadian and U.S.) for which the formula is based on a percentage of salary. The Companys 2008 contribution was $0.1 million (2007 $0.1 million, 2006 $0.1 million).
51
Note 23
Restructuring Costs
During the fourth quarter of 2005, following a comprehensive review of current performance and the strategic orientation of its operations, the Company announced a broad Restructuring Plan (third initiative) aimed at the elimination of existing duplications between the civil and military segments and the achievement of a more competitive cost structure. The plan, which included a workforce reduction of approximately 450 employees and the closing of redundant facilities, had a significant effect on the Companys operations in Montreal and around the world, including some European and U.S. training centres. A restructuring charge of $24.5 million, consisting mainly of severance and other related costs, was included in the net earnings (loss) of the fourth quarter of fiscal 2005. Since fiscal 2005, cumulative restructuring charges of $44.6 million, consisting mainly of employee termination costs and other related costs, have been recorded in the Companys results. The restructuring initiative is completed.
The following table provides the restructuring charge for each reportable segment:
(amounts in millions) | 2008 | 2007 | 2006 | ||||||
|
|||||||||
Simulation Products/Civil | $ | - | $ | - | $ | 2.8 | |||
Simulation Products/Military | - | - | 4.3 | ||||||
Training & Services/Civil | - | 1.2 | 11.6 | ||||||
Training & Services/Military | - | - | 0.2 | ||||||
|
|||||||||
$ | - | $ | 1.2 | $ | 18.9 | ||||
|
|||||||||
The continuity of the restructuring provision is as follows: | |||||||||
Employee | |||||||||
Termination | Other | ||||||||
(amounts in millions) | Costs | Costs | Total | ||||||
|
|||||||||
Balance of provision as at March 31, 2004 | $ | 0.5 | $ | 0.1 | $ | 0.6 | |||
Costs charged to expenses | 20.8 | 3.7 | 24.5 | ||||||
Payments made | (12.1 | ) | (1.8 | ) | (13.9 | ) | |||
|
|||||||||
Balance of provision as at March 31, 2005 | 9.2 | 2.0 | 11.2 | ||||||
Costs charged to expenses | 12.6 | 6.3 | 18.9 | ||||||
Payments made | (9.3 | ) | (7.6 | ) | (16.9 | ) | |||
Foreign exchange | (0.5 | ) | (0.1 | ) | (0.6 | ) | |||
|
|||||||||
Balance of provision as at March 31, 2006 | 12.0 | 0.6 | 12.6 | ||||||
Reversal of provision | (1.9 | ) | - | (1.9 | ) | ||||
Costs charged to expenses | - | 3.1 | 3.1 | ||||||
Payments made | (7.6 | ) | (3.2 | ) | (10.8 | ) | |||
Foreign exchange | 0.4 | - | 0.4 | ||||||
|
|||||||||
Balance of provision as at March 31, 2007 | $ | 2.9 | $ | 0.5 | $ | 3.4 | |||
|
|||||||||
Reclassifications to other liabilities | (1.5 | ) | - | (1.5 | ) | ||||
Payments made | (1.3 | ) | (0.5 | ) | (1.8 | ) | |||
Foreign exchange | (0.1 | ) | - | (0.1 | ) | ||||
|
|||||||||
Balance of provision as at March 31, 2008 | $ | - | $ | - | $ | - | |||
|
52
Note 24
Variable Interest Entities
The following table summarizes, by segment and as per Canadian GAAP, the total assets and total liabilities of the significant variable interest entities (VIEs) in which the Company has a variable interest as at March 31:
(amounts in millions) | 2008 | 2007 | ||||||
|
||||||||
Assets Liabilities | Assets | Liabilities | ||||||
|
||||||||
Training and Services/Civil: | ||||||||
|
||||||||
Sale and leaseback structures | ||||||||
|
||||||||
Air Canada Training Centre Fiscal 2000 | $ | 13.3 | $ | 13.3 | $ | 14.0 | $ | 14.0 |
|
||||||||
Emirates-CAE Flight Training Centre Fiscal 2002(1) | 11.9 | 11.9 | 12.5 | 12.5 | ||||
|
||||||||
Toronto Training Centre Fiscal 2002 | 11.4 | 11.4 | 11.9 | 11.9 | ||||
|
||||||||
Denver/Dallas Fiscal 2003 | 51.8 | 51.8 | 54.1 | 54.1 | ||||
|
||||||||
SimuFlite Fiscal 2004 | 73.6 | 73.6 | 76.8 | 76.8 | ||||
|
|
|||||||
Assets and liabilities of non-consolidated VIEs subject to | ||||||||
|
||||||||
disclosure | $ | 162.0 | $ | 162.0 | $ | 169.3 | $ | 169.3 |
|
||||||||
Training and Services/Military: | ||||||||
|
||||||||
Sale and leaseback structures | ||||||||
|
|
|||||||
Aircrew Training Centre Fiscal 1998 | $ | 65.6 | $ | 48.5 | $ | 63.7 | 50.0 | |
|
|
|||||||
Consolidated assets and liabilities before allowing for its | ||||||||
|
||||||||
classification as a VIE and the Company being the primary | ||||||||
|
||||||||
beneficiary | $ | 65.6 | $ | 48.5 | $ | 63.7 | $ | 50.0 |
|
||||||||
Simulation Products/Military: | ||||||||
|
||||||||
Partnership arrangements | ||||||||
|
||||||||
Eurofighter Simulation Systems Fiscal 1999 | $ | 112.4 | $ | 108.0 | $ | 125.8 | $ | 121.7 |
|
|
|||||||
Assets and liabilities of non-consolidated VIEs subject to | ||||||||
|
||||||||
disclosure | $ | 112.4 | $ | 108.0 | $ | 125.8 | $ | 121.7 |
|
(1)The sale and leaseback structure was entered into when the asset was located in the Companys Toronto Training Centre. The asset has since been relocated. On October 4, 2006, the asset was contributed to the Emirates-CAE Flight Training Centre.
The liabilities recognized as a result of consolidating this VIE do not represent additional claims on the Companys general assets; rather, they represent claims against the specific assets of the consolidated VIE. Conversely, assets recognized as a result of consolidating this VIE do not represent additional assets that could be used to satisfy claims against the Companys general assets. Additionally, the consolidation of this VIE did not result in any change in the underlying tax, legal or credit exposure of the Company.
Sale and leaseback structures
A key element of CAEs finance strategy to support the investment in its civil and military training and services business is the sale and leaseback of certain FFSs installed in the Companys global network of training centres. This provides CAE with a cost-effective long-term source of fixed-cost financing. A sale and leaseback structure arrangement can be executed only after the FFS has achieved certification by regulatory authorities (i.e. the simulator is installed and is available to customers for training). The sale and leaseback structures are typically structured as leveraged leases with an owner-participant.
The Company has entered into sale and leaseback arrangements with special purpose entities (SPEs). These arrangements relate to simulators used in the Companys training centres for the military and civil aviation segments. These leases expire at various dates up to 2023, with the exception of one in 2037. Typically, the Company has the option to purchase the equipment at a specific time during the lease terms at a specific purchase price. Some leases include renewal options at the end of the term. In some cases, the Company has provided guarantees for the residual value of the equipment at the expiry date of the leases or at the date the Company exercises its purchase option. Secured long-term debt and third-party equity investors who, in certain cases, benefit from tax incentives finance these SPEs. The equipment serves as collateral for the long-term debt of the SPEs.
53
The Companys variable interests in these SPEs are solely through fixed purchase price options and residual value guarantees, except for one case where it is in the form of equity and subordinated loan. In another case, the Company also provides administrative services to the SPE in return for a market fee.
The Company concluded that some of these SPE are VIEs. At the end of fiscal 2008 and 2007, the company is the primary beneficiary for one of them. The assets and liabilities of this VIE are fully consolidated into the Companys consolidated financial statements as at March 31, 2008 and March 31, 2007 before allowing for its classification as a VIE and the Company being the primary beneficiary.
For all of the other SPEs that are VIEs, the Company is not the primary beneficiary and consolidation is not appropriate under AcG-15. As at March 31, 2008, the Companys maximum potential exposure to losses relating to these non-consolidated SPEs was $42.0 million ($47.1 million in 2007).
Partnership arrangements
The Company entered into partnership arrangements to provide manufactured military simulation products as well as training and services for both the military and civil segments.
The Companys involvement with entities, in connection with these partnership arrangements, is mainly through investments in their equity and/or in subordinated loans and through manufacturing and long-term training service contracts. The Company concluded that certain of these entities are VIEs, but the Company is not the primary beneficiary. Accordingly, these entities have not been consolidated. The Company continues to account for these investments under the equity method, recording its share of the net earnings or loss based on the terms of the partnership arrangements. As at March 31, 2008 and 2007, the Companys maximum off-balance sheet exposure to losses related to these non-consolidated VIEs, other than from its contractual obligations, was not material.
Note 25 Operating Segments and Geographic Information
The Company elected to organize its businesses based principally on products and services. Effective April 1, 2005, the Company changed its internal organizational structure such that operations are managed through four segments:
(i) | Simulation Products/Civil Designs, manufactures and supplies civil flight simulators, training devices and visual systems; |
(ii) | Simulation Products/Military Designs, manufactures and supplies advanced military training products for air, land and sea applications; |
(iii) | Training & Services/Civil Provides business and commercial aviation training and related services; |
(iv) | Training & Services/Military Supplies military turnkey training and operational solutions, support services, life extensions, systems maintenance and modelling and simulation solutions. |
Results by segment
The profitability measure employed by the Company for making decisions about allocating resources to segments and assessing segment performance is earnings before other income (expense), interest, income taxes and discontinued operations (hereinafter referred to as segment operating income).The accounting principles used to prepare the information by operating segments are the same as those used to prepare the Companys Consolidated Financial Statements. Transactions between operating segments are mainly simulator transfers from the Simulation Products/Civil segment to the Training & Services/Civil segment, which are recorded at cost. The method used for the allocation of assets jointly used by operating segments and costs and liabilities jointly incurred (mostly corporate costs) between operating segments is based on the level of utilization when determinable and measurable, otherwise the allocation is made based on a proportion of each segments cost of sales.
54
Simulation Products | Training & Services | Total | |||||||||||||||||
(amounts in millions) | 2008 | 2007 | 2006 | 2008 | 2007 | 2006 | 2008 | 2007 | 2006 | ||||||||||
| |||||||||||||||||||
External revenue | $ | 435.3 | $ | 348.1 | $ | 257.0 | $ | 382.1 | $ | 336.9 | $ | 322.3 | $ | 817.4 | $ | 685.0 | $ | 579.3 | |
Segment | |||||||||||||||||||
Operating Income | 94.9 | 60.4 | 29.9 | 73.5 | 64.3 | 57.1 | 168.4 | 124.7 | 87.0 | ||||||||||
Depreciation and | |||||||||||||||||||
amortization | |||||||||||||||||||
Civil | · Property, plant | ||||||||||||||||||
and equipment | 4.7 | 5.2 | 5.5 | 44.5 | 39.5 | 36.6 | 49.2 | 44.7 | 42.1 | ||||||||||
· Intangible and | |||||||||||||||||||
other assets | 2.2 | 4.2 | 5.8 | 7.5 | 6.0 | 6.7 | 9.7 | 10.2 | 12.5 | ||||||||||
Capital | |||||||||||||||||||
expenditures | 4.6 | 14.4 | 5.7 | 161.8 | 108.1 | 87.5 | 166.4 | 122.5 | 93.2 | ||||||||||
| |||||||||||||||||||
External revenue | $ | 383.7 | $ | 357.5 | $ | 327.4 | $ | 222.5 | $ | 208.2 | $ | 200.5 | $ | 606.2 | $ | 565.7 | $ | 527.9 | |
Segment | |||||||||||||||||||
Operating Income | 51.7 | 39.1 | 27.0 | 31.4 | 33.7 | 18.7 | 83.1 | 72.8 | 45.7 | ||||||||||
Depreciation and | |||||||||||||||||||
amortization | |||||||||||||||||||
Military | · Property, plant | ||||||||||||||||||
and equipment | 6.0 | 6.0 | 6.1 | 5.4 | 4.3 | 4.3 | 11.4 | 10.3 | 10.4 | ||||||||||
· Intangible and | |||||||||||||||||||
other assets | 4.5 | 3.0 | 7.7 | 2.7 | 2.6 | 2.7 | 7.2 | 5.6 | 10.4 | ||||||||||
Capital | |||||||||||||||||||
expenditures | 7.3 | 5.5 | 6.0 | 15.8 | 30.1 | 30.9 | 23.1 | 35.6 | 36.9 | ||||||||||
| |||||||||||||||||||
External revenue | $ | 819.0 | $ | 705.6 | $ | 584.4 | $ | 604.6 | $ | 545.1 | $ | 522.8 | $ | 1,423.6 | $ | 1,250.7 | $ | 1,107.2 | |
Segment | |||||||||||||||||||
Operating Income | 146.6 | 99.5 | 56.9 | 104.9 | 98.0 | 75.8 | 251.5 | 197.5 | 132.7 | ||||||||||
Depreciation and | |||||||||||||||||||
amortization | |||||||||||||||||||
Total | · Property, plant | ||||||||||||||||||
and equipment | 10.7 | 11.2 | 11.6 | 49.9 | 43.8 | 40.9 | 60.6 | 55.0 | 52.5 | ||||||||||
· Intangible and | |||||||||||||||||||
other assets | 6.7 | 7.2 | 13.5 | 10.2 | 8.6 | 9.4 | 16.9 | 15.8 | 22.9 | ||||||||||
Capital | |||||||||||||||||||
expenditures | 11.9 | 19.9 | 11.7 | 177.6 | 138.2 | 118.4 | 189.5 | 158.1 | 130.1 | ||||||||||
|
55
Earnings before interest and income taxes
The following table provides reconciliation between total Segment Operating Income and earnings before interest and income taxes:
(amounts in millions) | 2008 | 2007 | 2006 | |||||
| ||||||||
Total Segment Operating Income | $ | 251.5 | $ | 197.5 | $ | 132.7 | ||
Foreign exchange gain on the reduction of the investment in | ||||||||
certain self-sustaining subsidiaries(a) | - | - | 5.3 | |||||
Restructuring charge (Note 23) | - | (1.2 | ) | (18.9 | ) | |||
Other costs associated with the Restructuring Plan(b) | - | (6.9 | ) | (15.1 | ) | |||
| ||||||||
Earnings before interest and income taxes | $ | 251.5 | $ | 189.4 | $ | 104.0 | ||
|
(a) | The Company reduced the capitalization of its certain self-sustaining subsidiaries. Accordingly, the corresponding amount of foreign exchange accumulated in the accumulated other comprehensive loss was transferred to the Consolidated Statements of Earnings. |
(b) | In the past, the Company incurred costs, which were excluded from the determination of segment operating income, related to the re-engineering of the Companys business processes including a component associated with the first phase of the deployment of the ERP system. As at April 1, 2007, the costs related with the first phase of the ERP deployment have ended. Current costs associated with additional phases of the deployment of the ERP system are not considered restructuring costs and will be included in the determination of segment operating income. |
Assets employed by segment
CAE uses assets employed to assess resources allocated to each segment. Assets employed include accounts receivable, inventories, prepaid expenses, property, plant and equipment, goodwill, intangible assets and other assets. Assets employed exclude cash, income tax accounts, assets held for sale and assets of certain non-operating subsidiaries.
As at March 31 | As at March 31 | |||
(amounts in millions) | 2008 | 2007 | ||
| ||||
Simulation Products/Civil | $ | 208.3 | $ | 188.0 |
Simulation Products/Military | 302.8 | 251.2 | ||
Training & Services/Civil | 1,067.6 | 973.8 | ||
Training & Services/Military | 219.8 | 208.7 | ||
| ||||
Total assets employed | 1,798.5 | 1,621.7 | ||
| ||||
Assets not included in assets employed | 454.7 | 334.5 | ||
| ||||
Total assets | $ | 2,253.2 | $ | 1,956.2 |
|
56
Geographic information
The Company markets its products and services in over 20 countries. Sales are attributed to countries based on the location of customers.
(amounts in millions) | 2008 | 2007 | 2006 | ||||
|
|||||||
Revenue from external customers | |||||||
Canada | $ | 98.4 | $ | 137.5 | $ | 100.1 | |
United States | 468.9 | 398.6 | 393.5 | ||||
United Kingdom | 102.2 | 98.1 | 80.2 | ||||
Germany | 162.6 | 153.3 | 153.3 | ||||
Netherlands | 98.0 | 92.4 | 104.6 | ||||
Other European countries | 145.5 | 127.1 | 41.3 | ||||
China | 71.1 | 56.3 | 56.4 | ||||
United Arab Emirates | 53.3 | 52.5 | 61.7 | ||||
Other Asian countries | 81.8 | 70.8 | 54.9 | ||||
Australia | 78.1 | 33.1 | 25.2 | ||||
Other countries | 63.7 | 31.0 | 36.0 | ||||
|
|||||||
$ | 1,423.6 | $ | 1,250.7 | $ | 1,107.2 | ||
|
|||||||
As at March 31 | As at March 31 | ||||||
(amounts in millions) | 2008 | 2007 | |||||
|
|||||||
Property, plant and equipment, goodwill and intangible assets | |||||||
Canada | $ | 205.9 | $ | 145.5 | |||
United States | 297.2 | 290.1 | |||||
South America | 66.1 | 55.5 | |||||
United Kingdom | 166.3 | 142.8 | |||||
Spain | 95.4 | 89.9 | |||||
Germany | 67.2 | 53.3 | |||||
Netherlands | 134.0 | 140.8 | |||||
Other European countries | 61.3 | 62.7 | |||||
United Arab Emirates | 63.6 | 72.8 | |||||
Asia | 54.3 | 44.1 | |||||
Other countries | 13.0 | 22.0 | |||||
|
|||||||
$ | 1,224.3 | $ | 1,119.5 | ||||
|
|||||||
Note 26 | Differences Between Canadian and United States Generally Accepted Accounting | ||||||
Principles |
The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (Canadian GAAP), which differ in certain respects from those principles that the Company would have followed if its consolidated financial statements had been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP).
As required by the United States Securities and Exchange Commission (SEC), the effect of these principal differences on the Companys consolidated financial statements is described and quantified as follows:
57
Reconciliation of net earnings in Canadian GAAP to U.S. GAAP | |||||||||
Years ended March 31 | |||||||||
(amounts in millions, except per share amounts) | Notes | 2008 | 2007 | 2006 | |||||
| |||||||||
Net earnings in accordance with Canadian GAAP | $ | 152.7 | $ | 127.4 | $ | 63.6 | |||
Results of discontinued operations in accordance | |||||||||
with Canadian GAAP | (12.1 | ) | (1.7 | ) | (6.0 | ) | |||
| |||||||||
Earnings from continuing operations in accordance with | |||||||||
Canadian GAAP | $ | 164.8 | $ | 129.1 | $ | 69.6 | |||
Deferred development costs excluding amortization noted below | A | 1.8 | (3.4 | ) | (5.4 | ) | |||
Amortization of deferred development costs | A | 2.9 | 4.8 | 13.1 | |||||
Deferred pre-operating costs excluding amortization noted below | B | (1.6 | ) | (6.9 | ) | 2.0 | |||
Amortization of pre-operating costs | B | 2.0 | 3.0 | 4.0 | |||||
Financial instruments | C,J | 4.9 | 7.0 | 7.9 | |||||
Reduction of the net investment in self-sustaining operations | E | - | - | (5.3 | ) | ||||
Stock-based compensation | I | (5.9 | ) | 5.2 | 2.2 | ||||
Future income tax relating to the above adjustments | (5.9 | ) | (2.9 | ) | (7.6 | ) | |||
| |||||||||
Earnings from continuing operations U.S. GAAP | $ | 163.0 | $ | 135.9 | $ | 80.5 | |||
Results of discontinued operations in accordance with | |||||||||
U.S. GAAP | (12.1 | ) | (1.7 | ) | (6.0 | ) | |||
| |||||||||
Net earnings in accordance with U.S. GAAP | $ | 150.9 | $ | 134.2 | $ | 74.5 | |||
| |||||||||
Basic and diluted earnings per share from continuing | |||||||||
operations in accordance with U.S. GAAP | $ | 0.64 | $ | 0.54 | $ | 0.32 | |||
| |||||||||
Basic and diluted results per share from discontinued operations | |||||||||
in accordance with U.S. GAAP | $ | (0.05 | ) $ | (0.01 | ) | $ | (0.02 | ) | |
| |||||||||
Basic and diluted net earnings per share in accordance with | |||||||||
U.S. GAAP | $ | 0.59 | $ | 0.53 | $ | 0.30 | |||
| |||||||||
Dividends per common share | $ | 0.04 | $ | 0.04 | $ | 0.04 | |||
| |||||||||
Weighted average number of common shares outstanding | |||||||||
(Basic) | 253.4 | 251.1 | 249.8 | ||||||
| |||||||||
Weighted average number of common shares outstanding | |||||||||
(Diluted) | 254.6 | 253.0 | 252.1 | ||||||
|
58
Comprehensive income in accordance with U.S. GAAP | ||||||||
Years ended March 31 | ||||||||
(amounts in millions) | Notes | 2008 | 2007 | 2006 | ||||
| ||||||||
Net earnings in accordance with U.S. GAAP | $ | 150.9 | $ | 134.2 | $ | 74.5 | ||
| ||||||||
Other comprehensive (loss) income | ||||||||
Defined Benefit Adjustment | ||||||||
Net change in actuarial gains (losses) | F,G | (5.9 | ) | - | - | |||
Change in accumulated minimum pension liability | F,G | - | 17.0 | (0.2 | ) | |||
Reclassifications to income | F,G | 2.7 | - | - | ||||
Income tax adjustment | F,G | (0.5 | ) | (5.3 | ) | 0.1 | ||
| ||||||||
$ | (3.7 | ) | $ | 11.7 | $ | (0.1 | ) | |
| ||||||||
Foreign Currency Translation Adjustment | ||||||||
Net foreign exchange (losses) gains on translation of | ||||||||
financial statements of self-sustaining foreign | ||||||||
operations | E,F | (50.2 | ) | 26.1 | (49.2 | ) | ||
Net change in gains of certain long-term debt denominated | ||||||||
in foreign currency and designated as hedges on net | ||||||||
investments on self-sustaining foreign operations | C,F | 15.7 | 1.5 | 4.6 | ||||
Income tax adjustment | E,F | (0.6 | ) | (0.1 | ) | 1.0 | ||
| ||||||||
(35.1 | ) | 27.5 | (43.6 | ) | ||||
| ||||||||
Total other comprehensive (loss) income in accordance with | ||||||||
U.S. GAAP | (38.8 | ) | 39.2 | (43.7 | ) | |||
| ||||||||
Comprehensive income in accordance with U.S. GAAP | $ | 112.1 | $ | 173.4 | $ | 30.8 | ||
| ||||||||
Accumulated Other Comprehensive Loss in accordance with U.S. GAAP | ||||||||
Years ended March 31 | ||||||||
(amounts in millions) | Notes | 2008 | 2007 | 2006 | ||||
| ||||||||
Accumulated other comprehensive loss in accordance with | ||||||||
U.S. GAAP, beginning of year | $ | (115.8 | ) | $ | (122.0 | ) $ | (78.3 | ) |
Other comprehensive (loss) income in accordance with U.S. | ||||||||
GAAP | (38.8 | ) | 39.2 | (43.7 | ) | |||
Unrecognized actuarial gains and losses and past service | ||||||||
costs on defined benefit pension plan, net of tax | ||||||||
recovery of $nil (2007$14.9) | G | - | (33.0 | ) | - | |||
| ||||||||
Accumulated other comprehensive loss in accordance with | ||||||||
U.S. GAAP, end of year | $ | (154.6 | ) | $ | (115.8) $ (122.0) | |||
|
59
Reconciliation of shareholders equity in Canadian GAAP to U.S. GAAP | ||||||||
As at March 31 | ||||||||
(amounts in millions) | Notes | 2008 | 2007 | 2006 | ||||
| ||||||||
Shareholders equity in accordance with Canadian GAAP | $ | 948.5 | $ | 829.9 | $ | 672.2 | ||
Deferred development costs, | ||||||||
net of tax recovery of $6.3 (2007 $12.7; 2006 $13.3) | A | (13.7 | ) | (12.0 | ) | (12.8 | ) | |
Deferred pre-operating costs, | ||||||||
net of tax recovery of $3.9 (2007 $4.5; 2006 $2.9) | B | (8.8 | ) | (8.6 | ) | (6.3 | ) | |
Financial instruments, | ||||||||
net of tax recovery of $0.2 (2007 $5.5; 2006 $7.7) | C,J | (0.5 | ) | (12.9 | ) | (17.7 | ) | |
Defined benefit and other post-retirement benefit, | ||||||||
net of tax recovery of $17.5 (2007 - $18.0; 2006 $8.4) | G | (43.7 | ) | (40.0 | ) | (18.7 | ) | |
Stock-based compensation, | ||||||||
net of tax expense of $1.0 (2007 - $3.3; 2006 $1.6) | I | 2.1 | 7.0 | 3.1 | ||||
| ||||||||
Shareholders equity in accordance with U.S. GAAP | $ | 883.9 | $ | 763.4 | $ | 619.8 | ||
|
60
Consolidated balance sheets in accordance with U.S. GAAP | |||||||||||||
As at March 31 | |||||||||||||
(amounts in millions) | Notes | 2008 | 2007 | ||||||||||
| |||||||||||||
Canadian | U.S. | Canadian | U.S. | ||||||||||
GAAP | GAAP | GAAP | GAAP | ||||||||||
Assets | |||||||||||||
Current assets | |||||||||||||
Cash and cash equivalents | $ | 255.7 | $ | 255.7 | $ | 150.2 | $ | 150.2 | |||||
Accounts receivable | C | 237.8 | 238.3 | 219.8 | 221.2 | ||||||||
Derivative instruments | C | 17.2 | 19.0 | - | 8.7 | ||||||||
Inventories | C | 229.9 | 229.9 | 203.8 | 206.0 | ||||||||
Prepaid expenses | C | 32.7 | 32.7 | 23.5 | 23.6 | ||||||||
Income taxes recoverable | 39.0 | 39.0 | 24.7 | 24.7 | |||||||||
Future income taxes | B,C | 14.1 | 14.2 | 3.7 | 8.4 | ||||||||
| |||||||||||||
$ | 826.4 | $ | 828.8 | $ | 625.7 | $ | 642.8 | ||||||
| |||||||||||||
Property, plant and equipment, net | J | 1,046.8 | 1,046.8 | 986.6 | 984.3 | ||||||||
Future income taxes | A,B,C,G,I | 64.3 | 71.7 | 81.5 | 125.0 | ||||||||
Derivative instruments | C | 13.7 | 14.9 | - | 8.6 | ||||||||
Intangible assets | 62.0 | 62.0 | 36.0 | 36.0 | |||||||||
Goodwill | 115.5 | 115.5 | 96.9 | 96.9 | |||||||||
Other assets | A,B,G,L | 124.5 | 65.9 | 129.5 | 68.2 | ||||||||
| |||||||||||||
$ | 2,253.2 | $ | 2,205.6 | $ | 1,956.2 | $ | 1,961.8 | ||||||
| |||||||||||||
Liabilities and shareholders equity | |||||||||||||
Current liabilities | |||||||||||||
Accounts payable and accrued | |||||||||||||
liabilities | C,G,I | $ | 459.1 | $ | 459.8 | $ | 403.9 | $ | 404.4 | ||||
Deposits on contracts | C | 209.3 | 210.2 | 184.8 | 187.9 | ||||||||
Derivative instruments | C | 23.6 | 28.5 | - | 14.8 | ||||||||
Current portion of long-term debt | 27.3 | 27.3 | 27.2 | 27.2 | |||||||||
Future income taxes | A,C,I | 16.8 | 13.1 | 4.9 | 8.3 | ||||||||
| |||||||||||||
$ | 736.1 | $ | 738.9 | $ | 620.8 | $ | 642.6 | ||||||
| |||||||||||||
Long-term debt | C,L | 352.5 | 348.2 | 256.0 | 254.5 | ||||||||
Deferred gains and other long-term | |||||||||||||
liabilities | C,G,I,J | 175.8 | 207.2 | 232.7 | 251.8 | ||||||||
Derivative instruments | C | 9.1 | 11.7 | - | 25.3 | ||||||||
Future income taxes | C,I,G | 31.2 | 15.7 | 16.8 | 24.2 | ||||||||
| |||||||||||||
$ | 1,304.7 | $ | 1,321.7 | $ | 1,126.3 | $ | 1,198.4 | ||||||
| |||||||||||||
Shareholders Equity | |||||||||||||
Capital stock | D,H | $ | 418.9 | $ | 663.1 | $ | 401.7 | $ | 645.9 | ||||
Contributed surplus | I | 8.3 | 7.6 | 5.7 | 6.3 | ||||||||
Retained earnings | A,B,C,D,E,H,I,J,L | 644.5 | 367.8 | 510.2 | 227.0 | ||||||||
Accumulated other comprehensive | |||||||||||||
loss | C,E,G | (123.2 | ) | (154.6 | ) | (87.7 | ) | (115.8 | ) | ||||
| |||||||||||||
$ | 948.5 | $ | 883.9 | $ | 829.9 | $ | 763.4 | ||||||
| |||||||||||||
$ | 2,253.2 | $ | 2,205.6 | $ | 1,956.2 | $ | 1,961.8 | ||||||
| |||||||||||||
Consolidated statements of cash flows
Under U.S. GAAP reporting, separate subtotals within operating, financing and investment activities would not be presented.
The reconciliation of cash flows under Canadian GAAP to conform to U.S. GAAP is as follows:
Years ended March 31 | ||||||||||
(amounts in millions) | Notes | 2008 | 2007 | 2006 | ||||||
|
||||||||||
Net cash provided by operating activities in | ||||||||||
accordance with Canadian GAAP | $ | 260.9 | $ | 239.3 | $ | 228.0 | ||||
Deferred development costs | A | (16.5 | ) | (3.0 | ) | (1.8 | ) | |||
Deferred pre-operating costs | B | (3.9 | ) | (5.9 | ) | (0.7 | ) | |||
|
||||||||||
Net cash provided by operating activities in | ||||||||||
accordance with U.S. GAAP | $ | 240.5 | $ | 230.4 | $ | 225.5 | ||||
|
||||||||||
Net cash used in investing activities in accordance | ||||||||||
with Canadian GAAP | $ | (257.2 | ) | $ | (178.1 | ) | $ | (147.1 | ) | |
Deferred development costs | A | 16.5 | 3.0 | 1.8 | ||||||
Deferred pre-operating costs | B | 3.9 | 5.9 | 0.7 | ||||||
|
||||||||||
Net cash used in investing activities in accordance | ||||||||||
with U.S. GAAP | $ | (236.8 | ) | $ | (169.2 | ) | $ | (144.6 | ) | |
|
||||||||||
Net cash provided by (used in) financing activities in | ||||||||||
accordance with U.S. GAAP | $ | 101.9 | $ | 3.5 | $ | (53.2 | ) | |||
|
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Reconciliation items
A) | Deferred development costs |
Under U.S. GAAP, development costs are expensed as incurred. Under Canadian GAAP, certain development costs are capitalized and amortized over their estimated useful lives if they meet the criteria for deferral. | |
B) | Deferred pre-operating costs |
Under U.S. GAAP, pre-operating costs are expensed as incurred. Under Canadian GAAP, the amounts are deferred and amortized over five years based on the expected period and pattern of benefit of the deferred expenditures. | |
C) | Financial instruments |
Prior to April 1, 2007 | |
Foreign currency derivatives | |
Under Canadian GAAP, the Companys derivatives, not used for speculative purposes and that did not qualify for hedge accounting were carried at fair value on the consolidated balance sheet, with changes in fair value recognized into earnings. There was no difference in accounting between Canadian GAAP and U.S. GAAP in respect to these derivatives. | |
The derivatives embedded within host contracts were not separately accounted for and the Companys derivatives that qualified and had been designated as part of a hedging relationship were off-balance sheet items. The Company recognized the gains and losses on foreign currency derivatives entered into for hedging purposes in income concurrently with the recognition of the transactions being hedged. | |
For U.S. GAAP, the Company recognized all of its derivatives, including embedded derivatives in host contracts, on the consolidated balance sheet at fair value with realized and unrealized gains and losses resulting from the change in fair value of derivatives recognized in earnings as the gains and losses arise and not concurrently with the recognition of the transactions being hedged. | |
Interest rate swap | |
Under Canadian GAAP, the interest payments relating to interest rate swaps were recorded in net earnings over the life of the underlying transaction on an accrual basis as an adjustment to interest income or interest expense. Also the deferred gain on interest rate swaps was amortized against the interest expense of the relevant long-term debt over the remaining terms of the swaps. | |
Under U.S. GAAP, the interest rate swaps were recorded on the consolidated balance sheet at fair value with changes in fair value recognized into earnings. The Company did not apply the optional hedge accounting provisions of SFAS 133, Accounting for Derivative Instruments and Hedging Activities, SFAS 138, Accounting for Certain Derivative Instruments and Hedging Activities an amendment of SFAS 133 and SFAS 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. As a result, the amortization of the deferred gain and the remaining unamortized amount on interest rate swaps under Canadian GAAP is reversed for the purposes of U.S. GAAP. | |
Effective April 1, 2007 | |
The Company adopted CICA section 3855 Financial Instruments Recognition and Measurement, which requires the Company to recognize all of its derivative instruments (whether designated in hedging relationships or not, or embedded within hybrid instruments) at fair value on the consolidated balance sheet. | |
Under Canadian GAAP, the accounting for changes in fair value (i.e. gains and losses) of derivatives instruments depends on whether it has been designated and qualifies as part of a hedging relationship as per provision of CICA section 3865 - Hedges. | |
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Cash Flow Hedges
For strategies designated as cash flow hedges, the effective portion of the changes in the fair value of the derivative is accumulated in OCI until the variability in the cash flow being hedged is recognized in earnings in future accounting periods. For cash flow hedges, if a derivative instrument is designated as a hedge and meets the criteria for hedge effectiveness, earnings offset is available, but only to the extent that the hedge in effective. The ineffective portion of cash flow is recorded in earnings in the current period.
Under U.S. GAAP, realized and unrealized gains and losses resulting from the change in fair value of derivatives that qualifies and has been designated as part of a hedging relationship are recognized in earnings as the gains and losses arise and not concurrently with the recognition of the transactions being hedged, as the Company has not chosen to apply the optional hedge accounting provisions of SFAS 133, 138 and 149 for cash flow hedges. As such, all amounts accumulated in OCI under Canadian GAAP were reversed into earnings and retained earnings for US GAAP purposes.
Fair Value Hedges
The Company has an outstanding interest rate swap contract that replaced a swap contract that had previously been put in place when the private placement was raised. The existing swap contract is designated as a fair value hedge of its private placement resulting in changes in LIBOR interest rates. With regards to the outstanding fair value hedge, the gains or losses on the hedged items attributable to the hedged risk are accounted for as an adjustment to the carrying value of the hedged items. While for the fair value hedge that was discontinued prior to the transaction date, the carrying amount of the hedged item is adjusted by the remaining balance of any deferred gain or loss on the hedging item. As such, the debt basis adjustment has been recorded with the private placement as an increase to the gross long-term debt amount.
Under U.S. GAAP, the interest rate swaps are recorded on the consolidated balance sheet at fair value with changes in fair value recognized into earnings. The Company did not apply the optional hedge accounting provisions of SFAS 133, 138 and 149 for Fair value hedges. As a result, the debt basis adjustment has been recorded in earnings for U.S. GAAP purposes.
Embedded Foreign Currency Derivatives
Under Canadian GAAP, the Company elects to record, as a single contract, an embedded foreign currency derivative in a host contract that is not a financial instrument, provided:
(i) | it is not leveraged; |
(ii) | it does not contain an option feature; and |
(iii) | it requires payments denominated in a currency that is commonly used in contracts to purchase or sell non-financial items in the economic environment in which the transaction takes place (for example, a relatively stable and liquid currency that is commonly used in local business transactions or external trade). |
This policy choice is not permitted under U.S. GAAP. U.S. GAAP would require the embedded derivative to be bifurcated from the host contract (unless the currency happens to be the functional currency of one of the substantial parties to the contract or is the routinely denominated currency for that particular good or service).
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D) | Reduction in stated capital |
On July 7, 1994, the Company applied a portion of its deficit as a reduction of its stated capital in the amount of $249.3 million. Under U.S. GAAP, the reduction of stated capital would not be permitted. | |
E) | Foreign currency translation adjustment |
In fiscal 2006, the Company transferred to consolidated earnings an amount of $5.3 million as a result of reductions in net investments in self-sustaining foreign operations. Under U.S. GAAP, the reduction in currency translation adjustment account is not permitted. | |
F) | Comprehensive income |
SFAS 130 Reporting Comprehensive Income, requires the disclosure of comprehensive income which is defined as the changes in equity other than those resulting from investments by owners and distributions to owners. | |
Comprehensive income is comprised of net earnings and OCI. OCI for U.S. GAAP purposes includes defined benefit adjustment and foreign currency translation. Under Canadian GAAP, the Company adopted CICA section 1530 Comprehensive Income only as at April 1, 2007 (Note 2). Under Canadian GAAP, adjustments required for defined benefit and other post-retirement benefit (refer to G) does not currently exist. | |
G) | Defined benefit and other post-retirement benefit |
Until the application of FAS 158, Accounting for Defined Benefit Plans and Other Post-Retirement Benefits an amendment of FAS Statements No. 87, 88 ,106 and 132(R), the provisions under U.S. GAAP of FAS 87, Employers' Accounting for Pensions, require that if the accumulated benefit obligation exceeds the market value of plan assets, a minimum pension liability for the excess is recognized to the extent that the liability recorded in the consolidated balance sheet is less than the minimum liability. Any portion of the additional liability that relates to unrecognized past service costs is recognized as an intangible asset while the remainder is charged to comprehensive income. The concept of additional minimum liability does not currently exist under Canadian GAAP. | |
As at March 31, 2007, the Company prospectively adopted FAS 158. Under this statement, the over-funded or under-funded status of a defined benefit pension and other post-retirement benefit plans must be recognized as an asset or liability on the consolidated balance sheet. Any unrecognized actuarial gains or losses, prior service cost or credits and unrecognized net transitional assets or obligations must be recognized as a component of accumulated other comprehensive income. This concept does not currently exist under Canadian GAAP. | |
H) | Share issue costs |
Under Canadian GAAP, costs related to share issuance can be presented in retained earnings, net of taxes. In fiscal 2004, the Company included share issued costs of $5.1 million into its retained earnings. Under U.S. GAAP, these costs were recorded as a reduction of capital stock. | |
I) | Stock-based compensation |
Under Canadian GAAP, the Company has adopted EIC-162 in the third quarter of fiscal 2007, with restatement of prior periods. Under U.S. GAAP, the Company adopted SFAS No. 123R (revised 2004), Share-Based Payment, on April 1, 2006, which has the same requirements as EIC-162 under Canadian GAAP except that FAS 123R is to be applied prospectively from April 1, 2006 to new option awards that have retirement eligibility provisions. Consequently, this creates a discrepancy in the compensation expense reported in each year. | |
J) | Interest on receivables and payables |
Prior to April 1 2007, under U.S. GAAP, when evaluating the fair value of a non-interest bearing note receivable or payable, the current market interest rate for transactions with similar terms should have been used for the discounting of that financial instrument. | |
65
As described in Note 2, Canadian GAAP related to this matter was amended to be consistent with | ||
U. | S. GAAP on a prospective basis effective April 1, 2007. | |
K) | Accounting for joint ventures | |
U. | S. GAAP requires the Companys investments in joint ventures to be accounted for using the equity | |
method. However, under an accommodation of the SEC, accounting for joint ventures need not to be reconciled from Canadian to U.S. GAAP. The different accounting treatment affects only display and classification and not earnings or shareholders equity. | ||
L) | Transaction costs | |
Prior to April 1 2007, under Canadian GAAP, transaction costs on long-term debt were presented in Other assets as a deferred charge. U.S. GAAP requires that transactions costs be reported as a direct reduction of the long-term debt. As described in Note 2, Canadian GAAP related to this matter was amended to be consistent with U.S. GAAP on a prospective basis effective April 1, 2007. | ||
Change in accounting policy
Accounting for stock-based compensation
Prior to April 1, 2003, CAE had elected to measure stock-based compensation using the intrinsic value base method of accounting. In that instance, however, under SFAS 123, the Company is required to make pro forma disclosures of net earnings, basic earnings per share and diluted earnings per share using the fair value method of accounting for stock-based compensation granted prior to April 1, 2003. Since all stock-based compensation granted prior to April 1, 2003 have ended, for fiscal year 2008 and for subsequent years, the accounting differences have been eliminated.
Pro forma net earnings and pro forma basic and diluted net earnings per share are presented as follows:
(amounts in millions, except per share amounts) | 2008 | 2007 | 2006 | |||||
|
|
| ||||||
Net earnings, as reported per U.S. GAAP | $ | 150.9 | $ | 134.2 | $ | 74.5 | ||
|
| |||||||
Additional compensation expense recorded | - | 3.0 | 2.5 | |||||
|
|
| ||||||
Net earnings before the effect of stock-based compensation | $ | 150.9 | $ | 137.2 | $ | 77.0 | ||
|
| |||||||
Pro forma impact | - | (3.0 | ) | (4.2 | ) | |||
|
|
| ||||||
Pro forma net earnings | $ | 150.9 | $ | 134.2 | $ | 72.8 | ||
|
|
| ||||||
Pro forma basic and diluted net earnings per share | 0.59 | 0.53 | 0.29 | |||||
|
Under Canadian GAAP, since the adoption of Emerging Issues Committee (EIC)-162, Stock-Based Compensation for Employees Eligible to Retire Before the Vesting Date, during fiscal 2007, the Company recognizes the stock-based compensation expense for employees who will become eligible for retirement during the vesting period over the period from grant date to the date the employee becomes eligible to retire. In addition, if an employee is eligible to retire on the grant date, the compensation expense must be recognized at that date unless the employee is under contract which, in that case, the compensation expense must be recognized over the term of the contract.
Under U.S. GAAP, the Company adopted SFAS No. 123R (revised 2004), Share-Based Payment, on April 1, 2006, which has the same requirements as EIC-162 under Canadian GAAP except FAS 123R is to be applied prospectively from April 1, 2006 to new option awards that have retirement eligibility provisions. The nominal vesting period approach is continued for any option awards granted prior to adopting FAS 123R and for the remaining portion of unvested outstanding options.
Defined benefit pension and other post-retirement plans
In September 2006, the FASB issued FAS 158. FAS 158 requires an entity to: (i) recognize the over-funded or under-funded status of a benefit plan as an asset or liability in the balance sheet; (ii) recognize the existing unrecognized net gains and losses, unrecognized prior-service costs and credits, and unrecognized net transition assets or obligations in other comprehensive income; and (iii) measure defined benefit plan assets and obligations as of the year-end balance sheet date. This statement is effective prospectively at the end of fiscal year 2007 in respect to the recognition requirements described in (i) and (ii) above and have been adopted. In regards to the measurement date changes mentioned in (iii) above, the effective date is the end of fiscal year 2009.
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Accounting for uncertainty in income taxes
On April 1, 2007, the Company adopted the provisions of the FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes an Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FASB No. 109 and prescribes a recognition threshold and a measurement attribute for the consolidated financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance as to derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. There was no change in the income tax reserves of the Company at April 1, 2007, upon the adoption of FIN 48.
Future changes to accounting standards
Fair value measurements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, to increase consistency and comparability in fair value measurements and to expand their disclosures. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements. The new standard includes a definition of fair value as well as a framework for measuring fair value. The standard is effective for fiscal periods beginning after November 15, 2007 and should be applied prospectively, except for certain financial instruments where it must be applied retrospectively as a cumulative-effect adjustment to the balance of opening retained earnings in the year of adoption. The Company is currently evaluating the impact of this standard on its consolidated financial statements.
In February 2008, FASB issued a Staff Position (FSP) FAS 157-1: Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13. This FSP amends FASB Statement No. 157, Fair Value Measurements, to exclude FASB Statement No. 13, Accounting for Leases, and other accounting pronouncements that address fair value measurements for purposes of lease classification or measurement under Statement 13. However, this scope exception does not apply to assets acquired and liabilities assumed in a business combination that are required to be measured at fair value under FASB Statement No. 141, Business Combinations, or No. 141 (revised 2007), Business Combinations, regardless of whether those assets and liabilities are related to leases.
In February 2008, FASB issued FSP FAS 157-2: Effective Date of FASB Statement No. 157. This FSP delays the effective date of FASB Statement No. 157, Fair Value Measurements, for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scope of this FSP.
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The fair value option for financial assets and financial liabilities
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115 Accounting for Certain Investments in Debt and Equity Securities. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is expected to expand the use of fair value measurement. This statement is effective as of the beginning of the first fiscal year that begins after November 15, 2007. This statement should not be applied retrospectively to fiscal years beginning prior to the effective date, except as permitted under certain circumstances if adopted early.The Company is currently evaluating the impact of this standard on its consolidated financial statements.
Business combination and non-controlling interests in consolidated financial statements
In December 2007, FASB issued SFAS No. 141(R), Business Combinations, and No. 160, Non-controlling Interests in Consolidated Financial Statements. These statements require a greater number of acquired assets and assumed liabilities to be measured at fair value as at the acquisition date. As well, liabilities related to contingent consideration should be remeasured to fair value at each subsequent reporting period. In addition, an acquirer should expense all acquisition-related costs in the pre-acquisition period. Finally; non-controlling interests in subsidiaries should initially to be measured at fair value and classified as a separate component of equity. These statements are effective for fiscal years beginning after December 15, 2008. The Company is currently evaluation the impact of this standard on its consolidated financial statements.
Offsetting of amounts related to certain contracts
In April 2007, FASB issued FSP FIN 39-1 Amendment of FASB Interpretation No.39, Offsetting of Amounts Related to Certain Contracts. This FSP replaces the terms conditional contracts and exchange contracts with the term derivative instruments as defined in FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. It also permits a reporting entity to offset fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement that have been offset in accordance with the related accounting literature. This staff position is effective for fiscal years beginning after November 15, 2007 although early application is permitted. This staff position should be applied retrospectively as a change in accounting principle for all financial statements presented. The Company is currently evaluation the impact of this standard on its consolidated financial statements.
Additional U.S. GAAP disclosures | |||||||||||||||||
i) Statements of earnings | |||||||||||||||||
Years ended March 31 | |||||||||||||||||
(amounts in millions) | 2008 | 2007 | 2006 | ||||||||||||||
|
|||||||||||||||||
Canadian | U.S. | Canadian | U.S. | Canadian | U.S. | ||||||||||||
GAAP | GAAP | GAAP | GAAP | GAAP | GAAP | ||||||||||||
Revenues from sales of simulators(1) | $ | 819.0 | $ | 813.7 | $ | 705.6 | $ | 699.0 | $ | 584.4 | $ | 584.4 | |||||
Revenues from sales of training and | |||||||||||||||||
services(1) | $ | 604.6 | $ | 604.6 | $ | 545.1 | $ | 545.4 | $ | 522.8 | $ | 522.8 | |||||
Cost of sales from simulators | $ | 500.3 | $ | 501.5 | $ | 427.5 | $ | 427.5 | $ | 386.8 | $ | 386.8 | |||||
Cost of sales from training and services $ | 353.7 | $ | 353.7 | $ | 308.8 | $ | 312.7 | $ | 314.2 | $ | 308.2 | ||||||
Research and development expenses(2) $ | 78.1 | $ | 72.9 | $ | 80.3 | $ | 78.9 | $ | 62.6 | $ | 54.9 | ||||||
Rental expenses | $ | 66.1 | $ | 66.1 | $ | 72.6 | $ | 72.6 | $ | 80.5 | $ | 80.5 | |||||
Selling, general and administrative | |||||||||||||||||
expenses | $ | 186.5 | $ | 192.4 | $ | 166.9 | $ | 161.7 | $ | 133.5 | $ | 131.3 | |||||
Foreign exchange gain | $ | (12.6 | ) | $ | (26.1 | ) | $ | (2.9 | ) | $ | (15.4 | ) | $ | (8.4 | ) $ | (10.7 | ) |
Interest expense, net | $ | 17.5 | $ | 19.6 | $ | 10.6 | $ | 9.8 | $ | 16.2 | $ | 15.9 | |||||
|
(1) | Taxes assessed by government authorities that are directly imposed on revenue-producing transactions between the Company and customers are excluded from revenues. |
(2) | Research and development expense is before governments contribution. |
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ii) Balance sheet
Accounts payable and accrued liabilities on a U.S. GAAP basis are presented as follows:
As at March 31 | |||||||||||
(amounts in millions) | 2008 | 2007 | |||||||||
| |||||||||||
Accounts payable trade | $ | 180.4 | $ | 166.8 | |||||||
Contract liabilities | 77.9 | 71.1 | |||||||||
Income tax payable | 8.0 | 8.6 | |||||||||
Other accrued liabilities | 193.5 | 157.9 | |||||||||
| |||||||||||
Accounts payable and accrued liabilities | $ | 459.8 | $ | 404.4 | |||||||
| |||||||||||
Accounts receivable from governments | amounted | to | $ | 77.2 | million | as | of | March | 31, | 2008 | |
(2007 - $62.7 million). |
iii) Income taxes
The components of earnings (loss) before income taxes and income taxes on a Canadian GAAP basis are as follows:
Years ended March 31 | ||||||||
(amounts in millions) | 2008 | 2007 | 2006 | |||||
| ||||||||
Earnings (loss) before income taxes | ||||||||
Canada | $ | 147.2 | $ | 38.8 | $ | (19.0 | ) | |
Other countries | 86.8 | 140.0 | 106.8 | |||||
| ||||||||
$ | 234.0 | $ | 178.8 | $ | 87.8 | |||
| ||||||||
Current income taxes | ||||||||
Canada | $ | 30.8 | $ | 53.8 | $ | 4.2 | ||
Other countries | 12.0 | 10.1 | 8.9 | |||||
| ||||||||
$ | 42.8 | $ | 63.9 | $ | 13.1 | |||
| ||||||||
Future income taxes | ||||||||
Canada | $ | 19.9 | $ | (41.2 | ) | $ | (7.0 | ) |
Other countries | 6.5 | 27.0 | 12.1 | |||||
| ||||||||
$ | 26.4 | $ | (14.2 | ) | $ | 5.1 | ||
| ||||||||
Total income tax expense | $ | 69.2 | $ | 49.7 | $ | 18.2 | ||
| ||||||||
iv) Product warranty costs |
The Company has warranty obligations in connection to the sale of its civil and military simulators. The original warranty period is usually for a two-year period. The cost incurred to provide for these warranty obligations are estimated and recorded as an accrued liability at the time revenue is recognized. The Company estimates its warranty cost for a given product based on past experience. The change in the Company's accrued warranty liability on a Canadian and U.S. GAAP basis, is as follows:
As at March 31 | ||||||
(amounts in millions) | 2008 | 2007 | ||||
| ||||||
Accrued warranty liability at beginning of year | $ | 10.7 | $ | 8.7 | ||
Warranty settlements during the year | (5.9 | ) | (5.2 | ) | ||
Warranty provisions | 7.5 | 6.8 | ||||
Adjustments for changes in estimates | 0.3 | 0.4 | ||||
| ||||||
Accrued warranty liability at the end of year | $ | 12.6 | $ | 10.7 | ||
| ||||||
Note 27
Comparative Financial Statements
The comparative Consolidated Financial Statements have been reclassified from statements previously presented to conform to the presentation adopted in the current year.
Note 28
Subsequent event
The Company has been in arbitration with the buyer of the Companys assets of the sawmill division of its Forestry Systems, which was sold to the buyer in fiscal 2003, because of a dispute over a further payment owed to the Company by the buyer (Note 5). The arbitration ceased mid-way in April 2008 when the buyer was the subject of a petition for receivership and is understood to be insolvent. A write off, in the amount of $8.5 million (net of a tax recovery of $1.5 million), has been accounted for in the fiscal 2008 because, in accordance with the relevant accounting pronouncements, the Company deems that the impairment conditions existed at the date of the consolidated financial statements.
70