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 2007 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 31, 2007 | 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 2007
Montreal, May 31, 2007 (NYSE: CGT; TSX: CAE) CAE today reported financial results for the fourth quarter and fiscal year ended March 31, 2007. Net earnings were $34.3 million ($0.14 per share) this quarter, compared to $9.2 million ($0.04 per share) in the fourth quarter of last year. Net earnings for the year were $127.4 million ($0.51 per share) compared to $63.6 million ($0.25 per share) last year. All financial information is in Canadian dollars.
Summary of consolidated results | ||||||||
(millions, except operating margins) | FY07 | FY06 | Q4-07 | Q3-07 | Q2-07 | Q1-07 | Q4-06 | |
Revenue | $ | 1,250.7 | 1,107.2 | 337.3 | 331.2 | 280.4 | 301.8 | 284.3 |
Earnings before interest | ||||||||
$ | 189.4 | 104.0 | 53.3 | 44.2 | 44.8 | 47.1 | 9.1 | |
and income taxes (EBIT) | ||||||||
As a % of revenue | % | 15.1 | 9.4 | 15.8 | 13.3 | 16.0 | 15.6 | 3.2 |
Net Earnings | $ | 127.4 | 63.6 | 34.3 | 29.7 | 31.0 | 32.4 | 9.2 |
Backlog | $ | 2,774.6 | 2,460.0 | 2,774.6 | 2,711.9 | 2,584.0 | 2,433.2 | 2,460.0 |
(Comparable periods have been restated to reflect a change in stock-based compensation expenses (EIC-162))(1) |
Net earnings from continuing operations for the quarter, excluding non-recurring items(2), were $35.1 million ($0.14 per share) this quarter, compared to $23.0 million ($0.09 per share) in the same quarter of last year. On the same basis, net earnings from continuing operations for the year were $129.3 million, a 51% increase year over year.
Consolidated revenue this quarter was $337.3 million, $53.0 million higher than the fourth quarter of 2006. Consolidated revenue for the year was $1.251 billion, compared to $1.107 billion in 2006.
Fourth-quarter consolidated earnings before interest and taxes(3) (EBIT) were $53.3 million, or 15.8% of revenue, and $52.2 million, or 15.5% of revenue excluding non-recurring items. EBIT increased sequentially by 21% mainly from higher income in the Training & Services / Civil segment, which was partially offset by a decrease in the other segments. EBIT for the year was $189.4 million, or 15.1% of revenue compared to $104.0 million or 9.4% of revenue. Not including the effect of non-recurring items, EBIT for the year was $193.1 million, or 15.4% of revenue compared to $136.8 million or 12.4% of revenue in 2006.
Our financial results show an improvement in profitability as well as in the quality of the earnings, all supported by positive cash flows, said Robert E. Brown, CAEs President and Chief Executive Officer. We are continuing to see good opportunities in our core markets and we are addressing them with innovative, industry leading solutions. CAE is growing from a position of strength: we have dedicated employees, a solid reputation, a healthy balance sheet and extensive customer relationships.
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Business segment highlights
During the fourth quarter CAE won orders for seven civil full-flight simulators (FFSs), bringing the total number to 34. Orders for the year were comprised of 10 Airbus platforms, 22 Boeing, one Embraer and one ATR aircraft. Since the start of the new fiscal year, we have announced 10 orders, and we currently expect to receive approximately 30 orders for the year as a whole. As we have done in the past, we intend to update this estimate as the year progresses. At the end of the year, we launched a breakthrough product, the CAE 5000 Series FFS, for which we have received orders from launch customers including Ryanair, Lufthansa Flight Training, and CAE Civil Training & Services.
In Civil Training & Services, we secured more than $450 million in new training contracts this year including 50 new business aviation contracts and 20 new commercial and regional aviation contracts with airlines around the world. During the quarter we announced our plans to open CAEs first Indian flight training centre in Bangalore.
We were awarded a number of new military contracts this year for a total of $596 million, including a range of programs for the Australian, British, Canadian, German, U.S., and Italian forces. During the year we continued to make acquisitions in the modelling and simulation area to expand our capabilities and R&D efforts. We acquired Kesem International in Australia and since the new year, we have acquired Engenuity Technologies in Canada and MultiGen-Paradigm in the U.S. to further accelerate our market strategy.
Simulation Products/Civil (SP/C) | ||||||||
Financial results | ||||||||
(millions, except operating margins) | FY07 | FY06 | Q4-07 | Q3-07 | Q2-07 | Q1-07 | Q4-06 | |
Revenue | $ | 348.1 | 257.0 | 97.6 | 92.1 | 84.2 | 74.2 | 78.0 |
Segment operating income | $ | 60.4 | 29.9 | 15.3 | 15.5 | 18.7 | 10.9 | 9.3 |
Operating margins | % | 17.4 | 11.6 | 15.7 | 16.8 | 22.2 | 14.7 | 11.9 |
Backlog | $ | 352.8 | 284.4 | 352.8 | 340.0 | 313.2 | 297.5 | 284.4 |
(Comparable periods have been restated to reflect a change in stock-based compensation expenses (EIC-162))(1) |
Revenue in the SP/C segment was $97.6 million during the fourth quarter, up by 25% over the same period last year. Revenue increased as a result of the high number of recent orders, and because we achieved some important milestones on several projects. Revenue for the year was $348.1 million, which is 35% higher than in 2006. Higher order and delivery activity account for this increase.
Segment operating income was $15.3 million, up by 65% over the same period last year. This increase is mainly due to higher revenue this quarter, improved productivity, and contributions by the provincial and federal governments to Project Phoenix, our research and development program. Segment operating income was similar to the third quarter despite higher revenue due to intensified development efforts on our new CAE 5000 Series simulator, which we recently launched.
For the year, segment operating income was $60.4 million, which is 102% higher than the prior year. The improvement stems from higher revenue, improved program execution and contributions to project Phoenix.
During the year, we received orders for 34 civil full-flight simulators. Bookings for the year totalled $406.9 million, and segment backlog reached $352.8 million at the end of the year.
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Training & Services/Civil (TS/C) | ||||||||
Financial results | ||||||||
(millions, except operating margins) | FY07 | FY06 | Q4-07 | Q3-07 | Q2-07 | Q1-07 | Q4-06 | |
Revenue | $ | 336.9 | 322.3 | 91.7 | 83.1 | 78.4 | 83.7 | 81.1 |
Segment operating income | $ | 64.3 | 57.1 | 21.3 | 13.5 | 11.2 | 18.3 | 14.9 |
Operating margins | % | 19.1 | 17.7 | 23.2 | 16.2 | 14.3 | 21.9 | 18.4 |
Backlog | $ | 951.6 | 809.0 | 951.6 | 905.6 | 842.9 | 817.6 | 809.0 |
(Comparable periods have been restated to reflect a change in stock-based compensation expenses (EIC-162))(1) |
For the fourth quarter, revenue in the TS/C segment increased 10% over last quarter and by 13% from the same period last year. The increase from last quarter results from higher demand in most of our training centres and the addition of four Revenue Simulator Equivalent Units (RSEUs) to our training network, which are now beginning to ramp up to capacity. For the year, revenue was $336.9 million, which is 5% higher than last year. There was stronger demand for aviation training but average RSEUs only increased by one unit during the year as a result of several simulator redeployments. As well, the appreciation of the Canadian dollar offset the some of the increase in volume.
Segment operating income was $21.3 million (23.2% of revenue) in the fourth quarter, compared to $13.5 million (16.2% of revenue) last quarter and $14.9 million (18.4% of revenue) in the fourth quarter last year. In addition to stronger demand, we recognized a gain during the quarter of $1.1 million on the disposal of a simulator as part of our ongoing fleet management activities. During the quarter, we also gained $1.3 million following negotiations with a business partner.
For the year, segment operating income was $64.3 million (19.1% of revenue), which is 13% higher than last year. Segment operating income outpaced revenue growth as a result of higher volume and increased operational efficiencies, which more than offset the impact of a stronger Canadian dollar and the fact that average RSEUs increased by only one unit.
New orders for the year totalled $452.5 million, and segment backlog reached $951.6 million at the end of the year.
Simulation Products/Military (SP/M) | ||||||||
Financial results | ||||||||
(millions, except operating margins) | FY07 | FY06 | Q4-07 | Q3-07 | Q2-07 | Q1-07 | Q4-06 | |
Revenue | $ | 357.5 | 327.4 | 92.2 | 105.2 | 64.3 | 95.8 | 77.5 |
Segment operating income | $ | 39.1 | 27.0 | 9.5 | 11.2 | 7.3 | 11.1 | 6.8 |
Operating margins | % | 10.9 | 8.2 | 10.3 | 10.6 | 11.4 | 11.6 | 8.8 |
Backlog | $ | 635.8 | 540.5 | 635.8 | 609.0 | 626.3 | 475.2 | 540.5 |
(Comparable periods have been restated to reflect a change in stock-based compensation expenses (EIC-162))(1) |
Revenue in the SP/M segment was $92.2 million for the fourth quarter, up by 19% over the same period last year. Higher activity on some US programs and the depreciation of the Canadian dollar during the comparable quarter contributed to this increase. Revenue was $357.5 million for the year. The 9% increase over 2006 stems from a higher order intake in the U.S. and the U.K., which was partially offset by a stronger Canadian dollar for the year as a whole.
Segment operating income this quarter was $9.5 million, up 40% year over year. The increase is due to higher revenues and contributions by Investissement Québec to Project Phoenix. Higher revenues and lower amortization expenses on deferred development costs contributed to a 45% increase in segment operating income for the year, which reached $39.1 million.
New orders for the year totalled $421.3 million and segment backlog reached $635.8 million at the end of the year. We expect variations in the level of order bookings between quarters in both Military
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segments because of the unique nature of military contracts and the irregular timing in which they are awarded. As well, variations exist in the level of revenue that is recognized during a quarter as this is often dependent on reaching specific program performance milestones.
Training & Services/Military (TS/M) | ||||||||
Financial results | ||||||||
(millions, except operating margins) | FY07 | FY06 | Q4-07 | Q3-07 | Q2-07 | Q1-07 | Q4-06 | |
Revenue | $ | 208.2 | 200.5 | 55.8 | 50.8 | 53.5 | 48.1 | 47.7 |
Segment operating income | $ | 33.7 | 18.7 | 6.1 | 6.8 | 9.3 | 11.5 | 3.2 |
Operating margins | % | 16.2 | 9.3 | 10.9 | 13.4 | 17.4 | 23.9 | 6.7 |
Backlog | $ | 834.4 | 826.1 | 834.4 | 857.3 | 801.6 | 842.9 | 826.1 |
(Comparable periods have been restated to reflect a change in stock-based compensation expenses (EIC-162))(1) |
Revenue in the TS/M segment was $55.8 million for the fourth quarter, up by 17% over the same period last year. The increase is due to the acquisition of Kesem in Australia and increased revenue from our Medium Support Helicopter Aircrew Training Facility in the U.K. and at our C-130 training centre in Tampa, U.S. Revenue was $208.2 million for the year, which is 4% higher than 2006 as a result of more activity on U.S. and German support services contracts and the integration of Kesem. These gains were partially offset by a stronger Canadian dollar for the year as a whole.
Segment operating income was $6.1 million this quarter, compared to $3.2 million in the same period last year.
Segment operating income for the year was $33.7 million compared to $18.7 million last year. The increase in income is the result of higher revenue and higher contributions to Project Phoenix. In addition, we received a release of claims payment related to AVTS during the first quarter this year. The first quarter last year included the write-down of deferred bid costs related to AVTS.
New orders this year totalled $174.5 million and segment backlog reached $834.4 million at the end of the year.
Combined revenue this quarter for the Military business as a whole was $148.0 million and combined operating income was $15.6 million, resulting in an operating margin of 10.5% .
Combined revenue this year was $565.7 million and combined operating income was $72.8 million, resulting in an operating margin of 12.9% .
Cash flow and financial position
This year we generated $239.3 million of net cash from continuing operations. We invested $158.1 million in capital expenditures, and received $34.0 million in non-recourse financing. As a result, we generated free cash flow(4) of $93.6 million.
Net debt(5) was $133.0 million at March 31, 2007, a reduction of 30% from last year.
CAE will pay a dividend of $0.01 per share on June 29, 2007 to shareholders of record at the close of business on June 15, 2007.
Additional consolidated financial results
The consolidated backlog was $2.775 billion at the end of this year, compared to $2.460 billion at the end of last year. New orders of $1.455 billion were added to backlog and favourable impact of $110.1 million due mainly to foreign exchange movements. This was partly offset by $1.251 billion of revenues generated from backlog.
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Capital expenditures for the year were $158.1 million and we expect that total capital expenditures will be of similar magnitude in fiscal 2008.
Income taxes were $49.7 million this year, representing an effective tax rate of 28%. Excluding non-recurring items, the effective tax rate was 29%. We expect the effective income tax rate for fiscal 2008 to be 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 http://www.cae.com/financialsQ4FY07.
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 dialling 1(866) 542-4236 or (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 services to the civil aviation industry and defence forces around the globe. We design, manufacture and supply simulation equipment and offer 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.
With annual revenues of over CDN$1 billion, CAE operates in 19 countries around the world. CAE has sold nearly 700 simulators and training devices to airlines, aircraft manufacturers, training centres and defence forces for air and ground purposes in more than 40 countries. With over 110 full-flight simulators in more than 20 aviation training centres, serving approximately 3,500 airlines, aircraft operators and manufacturers across the globe, CAE licenses its simulation software to various market segments and has a professional services division assisting 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, 2006. These documents have been filed with the Canadian securities commissions and are available on our website (www.cae.com) and on SEDAR (www.sedar.com). They have also been filed with the US Securities and Exchange Commission under Form 40-F and are available on EDGAR (www.sec.gov). The forward-looking statements contained in this news release represent our expectations as of May 31, 2007 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.
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Notes
(1) All comparative prior periods have been retroactively restated for a recent change in accounting standards (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.
(2) Non recurring items do not have any standardized meaning prescribed by Canadian generally accepted accounting principles (GAAP). We consider an item to be non-recurring when it is outside the normal course of business either because it appears infrequently, is unusual or does not represent a normal business trend. Please refer to CAE Inc.s 2007 Annual MD&A dated March 31, 2007 for more details.
(3) Earnings before interest and taxes (EBIT) is a measure that shows us how we have performed before the effect of certain financing decisions and tax structures. It does not have any standardized meaning prescribed by Canadian generally accepted accounting principles (GAAP). Please refer to CAE Inc.s 2007 Annual MD&A dated March 31, 2007 for more details.
(4) Free cash flow is a 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 sales and leaseback arrangements and other asset-specific financing (including non-recourse debt). Free cash flow does not have any standardized meaning prescribed by Canadian generally accepted accounting principles (GAAP). Please refer to CAE Inc.s 2007 Annual MD&A dated March 31, 2007 for more details.
(5) Net debt is a measure we use to monitor how much debt we have after taking into account liquid assets such as cash and cash equivalents. Net debt does not have any standardized meaning prescribed by Canadian generally accepted accounting principles (GAAP). Please refer to CAE Inc.s 2007 Annual MD&A dated March 31, 2007 for more details.
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On the Web: www.cae.com
Media contact:
Nathalie Bourque, Vice President, Global Communications, (514) 734-5788, nathalie.bourque@cae.com
Investor relations:
Andrew Arnovitz, Director, Investor Relations, (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) | 2007 | 2006 | ||||
Restated | ||||||
Assets | ||||||
Current assets | ||||||
Cash and cash equivalents | $ | 150.2 | $ | 81.1 | ||
Accounts receivable | 219.8 | 172.6 | ||||
Inventories | 203.8 | 180.9 | ||||
Prepaid expenses | 23.5 | 25.2 | ||||
Income taxes recoverable | 24.7 | 75.7 | ||||
Future income taxes | 3.7 | 5.7 | ||||
625.7 | 541.2 | |||||
Property, plant and equipment, net | 986.6 | 832.1 | ||||
Future income taxes | 81.5 | 78.2 | ||||
Intangible assets | 36.0 | 30.5 | ||||
Goodwill | 96.9 | 92.0 | ||||
Other assets | 129.5 | 136.2 | ||||
Long-term assets held for sale | - | 5.9 | ||||
$ | 1,956.2 | $ | 1,716.1 | |||
Liabilities and Shareholders Equity | ||||||
Current liabilities | ||||||
Accounts payable and accrued liabilities | $ | 403.9 | $ | 373.7 | ||
Deposits on contracts | 184.8 | 146.4 | ||||
Current portion of long-term debt | 27.2 | 10.4 | ||||
Future income taxes | 4.9 | 14.5 | ||||
620.8 | 545.0 | |||||
Long-term debt | 256.0 | 260.9 | ||||
Deferred gains and other long-term liabilities | 232.7 | 211.2 | ||||
Future income taxes | 16.8 | 26.8 | ||||
1,126.3 | 1,043.9 | |||||
Shareholders Equity | ||||||
Capital stock | 401.7 | 389.0 | ||||
Contributed surplus | 5.7 | 5.6 | ||||
Retained earnings | 510.2 | 392.8 | ||||
Cumulative translation adjustment | (87.7 | ) | (115.2 | ) | ||
829.9 | 672.2 | |||||
$ | 1,956.2 | $ | 1,716.1 |
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Consolidated Statements of Earnings | |||||||||||||
Three months ended | Twelve months ended | ||||||||||||
March 31 | March 31 | ||||||||||||
(Unaudited) | |||||||||||||
(amounts in millions of Canadian dollars, except per share amounts) | 2007 | 2006 | 2007 | 2006 | |||||||||
Restated | Restated | ||||||||||||
Revenue | $ | 337.3 | $ | 284.3 | $ | 1,250.7 | $ | 1,107.2 | |||||
Earnings before interest and income taxes | $ | 53.3 | $ | 9.1 | $ | 189.4 | $ | 104.0 | |||||
Interest expense, net | 3.5 | 0.9 | 10.6 | 16.2 | |||||||||
Earnings before income taxes | $ | 49.8 | $ | 8.2 | $ | 178.8 | $ | 87.8 | |||||
Income tax expense (recovery) | 14.7 | (6.4 | ) | 49.7 | 18.2 | ||||||||
Earnings from continuing operations | $ | 35.1 | $ | 14.6 | $ | 129.1 | $ | 69.6 | |||||
Results of discontinued operations | (0.8 | ) | (5.4 | ) | (1.7 | ) | (6.0 | ) | |||||
Net earnings | $ | 34.3 | $ | 9.2 | $ | 127.4 | $ | 63.6 | |||||
Basic and diluted earnings per share from continuing | |||||||||||||
operations | $ | 0.14 | $ | 0.06 | $ | 0.51 | $ | 0.28 | |||||
Basic earnings per share | $ | 0.14 | $ | 0.04 | $ | 0.51 | $ | 0.25 | |||||
Diluted earnings per share | $ | 0.14 | $ | 0.04 | $ | 0.50 | $ | 0.25 | |||||
Weighted average number of shares outstanding (basic) | 251.4 | 250.5 | 251.1 | 249.8 | |||||||||
Weighted average number of shares outstanding (diluted) | 253.7 | 253.4 | 253.0 | 252.1 | |||||||||
Consolidated Statements of Retained Earnings | |||||||||||||
Three months ended | Twelve months ended | ||||||||||||
(Unaudited) | March 31 | March 31 | |||||||||||
(amounts in millions of Canadian dollars) | 2007 | 2006 | 2007 | 2006 | |||||||||
Retained earnings at beginning of period, as previously | |||||||||||||
reported | $ | 478.4 | $ | 388.8 | $ | 395.7 | $ | 340.8 | |||||
Change in accounting policy EIC-162 | - | (2.7 | ) | (2.9 | ) | (1.6 | ) | ||||||
Retained earnings at beginning of period, restated | $ | 478.4 | $ | 386.1 | $ | 392.8 | $ | 339.2 | |||||
Net earnings | 34.3 | 9.2 | 127.4 | 63.6 | |||||||||
Dividends | (2.5 | ) | (2.5 | ) | (10.0 | ) | (10.0 | ) | |||||
Retained earnings at end of period | $ | 510.2 | $ | 392.8 | $ | 510.2 | $ | 392.8 |
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Consolidated Statements of Cash Flows | ||||||||||||
Three months ended | Twelve months ended | |||||||||||
(Unaudited) | March 31 | March 31 | ||||||||||
(amounts in millions of Canadian dollars) | 2007 | 2006 | 2007 | 2006 | ||||||||
Restated | Restated | |||||||||||
Operating Activities | ||||||||||||
Net earnings | $ | 34.3 | $ | 9.2 | $ | 127.4 | $ | 63.6 | ||||
Results of discontinued operations | 0.8 | 5.4 | 1.7 | 6.0 | ||||||||
Earnings from continuing operations | 35.1 | 14.6 | 129.1 | 69.6 | ||||||||
Adjustments to reconcile earnings to cash flows from operating | ||||||||||||
activities: | ||||||||||||
Depreciation | 14.6 | 12.7 | 55.0 | 52.5 | ||||||||
Amortization of deferred financing costs | 0.2 | 0.3 | 0.8 | 2.2 | ||||||||
Amortization and write down of intangible and other assets | 5.2 | 7.7 | 15.8 | 22.9 | ||||||||
Future income taxes | (25.6 | ) | 7.5 | (14.2 | ) | 5.1 | ||||||
Investment tax credits | 13.8 | (6.1 | ) | 19.3 | (11.8 | ) | ||||||
Stock-based compensation plans | 10.2 | 2.8 | 24.6 | 12.2 | ||||||||
Employee future benefit net | (0.4 | ) | 0.6 | (0.9 | ) | (2.0 | ) | |||||
Other | (7.6 | ) | 1.8 | (10.4 | ) | (3.9 | ) | |||||
Changes in non-cash working capital | 46.7 | 25.6 | 20.2 | 79.1 | ||||||||
Net cash provided by continuing operating activities | 92.2 | 67.5 | 239.3 | 225.9 | ||||||||
Net cash provided by discontinued operating activities | - | - | - | 2.1 | ||||||||
Net cash provided by operating activities | 92.2 | 67.5 | 239.3 | 228.0 | ||||||||
Investing Activities | ||||||||||||
Business acquisitions (net of cash and cash equivalents acquired) | 0.5 | - | (4.4 | ) | 2.6 | |||||||
Proceeds from disposal of discontinued operations (net of cash | ||||||||||||
and cash equivalents disposed) | 2.8 | - | (3.8 | ) | (4.9 | ) | ||||||
Capital expenditures | (33.8 | ) | (42.3 | ) | (158.1 | ) | (130.1 | ) | ||||
Deferred development costs | (2.7 | ) | (1.4 | ) | (3.0 | ) | (1.8 | ) | ||||
Deferred pre-operating costs | (3.2 | ) | (0.3 | ) | (5.9 | ) | (0.7 | ) | ||||
Other | (5.5 | ) | (0.7 | ) | (2.9 | ) | ( 9.9 | ) | ||||
Net cash used in continuing investing activities | (41.9 | ) | (44.7 | ) | (178.1 | ) | (144.8 | ) | ||||
Net cash used in discontinued investing activities | - | - | - | (2.3 | ) | |||||||
Net cash used in investing activities | (41.9 | ) | (44.7 | ) | (178.1 | ) | (147.1 | ) | ||||
Financing Activities | ||||||||||||
Net borrowing under revolving unsecured credit facilities | - | (21.0 | ) | (0.6 | ) | (30.7 | ) | |||||
Proceeds from long-term debt | 13.3 | 6.3 | 45.8 | 32.1 | ||||||||
Reimbursement of long-term debt | (28.6 | ) | (3.8 | ) | (39.8 | ) | (65.7 | ) | ||||
Dividends paid | (2.5 | ) | (2.5 | ) | (9.8 | ) | (9.7 | ) | ||||
Common stock issuance | 6.4 | 1.8 | 10.0 | 8.0 | ||||||||
Other | (1.1 | ) | 9.8 | (2.1 | ) | 11.6 | ||||||
Net cash (used in) provided by continuing financing activities | (12.5 | ) | (9.4 | ) | 3.5 | (54.4 | ) | |||||
Net cash provided by discontinued financing activities | - | - | - | 1.2 | ||||||||
Net cash (used in) provided by financing activities | (12.5 | ) | (9.4 | ) | 3.5 | (53.2 | ) | |||||
Effect of foreign exchange rate changes on cash and cash | ||||||||||||
equivalents | (0.5 | ) | 1.0 | 4.4 | (8.1 | ) | ||||||
Net increase in cash and cash equivalents | 37.3 | 14.4 | 69.1 | 19.6 | ||||||||
Cash and cash equivalents at beginning of period | 112.9 | 66.7 | 81.1 | 61.5 | ||||||||
Cash and cash equivalents at end of period | $ | 150.2 | $ | 81.1 | $ | 150.2 | $ | 81.1 | ||||
Cash and cash equivalents related to: | ||||||||||||
Continuing operations | $ | 150.2 | $ | 81.1 | ||||||||
Discontinued operations | - | - | ||||||||||
$ | 150.2 | $ | 81.1 |
9
FINANCIAL REPORT
FOR THE FOURTH QUARTER
AND YEAR ENDED MARCH 31, 2007
03 | 1 | . | Highlights | |||
06 | 2 | . | Introduction | |||
06 | 3 | . | About CAE | |||
06 | 3.1 | Who we are | ||||
07 | 3.2 | Our vision | ||||
07 | 3.3 | Our strategy and key performance drivers | ||||
10 | 3.4 | Capability to execute strategy and deliver results | ||||
10 | 3.5 | Our operations | ||||
13 | 3.6 | Foreign exchange | ||||
14 | 3.7 | Non-GAAPand other financial measures | ||||
15 | 4. Consolidated results | |||||
16 | 4.1 | Results of our operations | fourth quarter of fiscal 2007 | |||
17 | 4.2 | Results of our operations | fiscal 2007 | |||
18 | 4.3 | Results of our operations | fiscal 2006 vs fiscal 2005 | |||
19 | 4.4 | Earnings excluding non-recurring items | ||||
21 | 4.5 | Government cost-sharing | ||||
22 | 4.6 | Consolidated orders and backlog | ||||
22 | 5 | . | Results by segment | |||
23 | 5.1 | Civil segments | ||||
26 | 5.2 | Military segments | ||||
28 | 6 | . | Consolidated cash movements and liquidity | |||
28 | 6.1 | Consolidated cash movements | ||||
29 | 6.2 | Sources of liquidity | ||||
29 | 6.3 | Contractual obligations | ||||
30 | 7 | . | Consolidated financial position | |||
30 | 7.1 | Consolidated capital employed | ||||
31 | 7.2 | Variable interest entities | ||||
32 | 7.3 | Off balance sheet arrangements | ||||
33 | 7.4 | Financial instruments | ||||
33 | 8 | . | Acquisitions, business combinations and divestitures | |||
33 | 8.1 | Acquisitions and joint ventures | ||||
35 | 8.2 | Discontinued operations and assets held for | sale | |||
36 | 9 | . | Business risk and uncertainty | |||
39 | 10 | . | Changes in accounting standards | |||
39 | 10.1 | Significant changes in accounting standards | | |||
fiscal 2005 to 2007 | ||||||
40 | 10.2 | Future changes in accounting standards | ||||
41 | 10.3 | Critical accounting estimates | ||||
44 | 11 | . | Subsequent events | |||
45 | 12 | . | Controls and procedures | |||
45 | 12.1 | Evaluation of disclosure controls and procedures | ||||
45 | 12.2 | Internal control over financial reporting | ||||
45 | 13 | . | Oversight role of Audit Committee and Board of Directors | |||
45 | 14 | . | Additional information | |||
45 | 15 | . | Selected financial information |
2 | CAE 2007 Q4 REPORT
MANAGEMENTS DISCUSSION AND ANALYSIS
May 31, 2007, for the fourth quarter and the year ended March 31, 2007
1. HIGHLIGHTS
FINANCIAL
FOURTH QUARTER OF FISCAL 2007
Higher revenue over last quarter and year over year
Higher earnings, net earnings and earnings per share year over year
Positive free cash flow2 at $52.8 million
FISCAL 2007
Higher revenue year over year
Consolidated revenue was $1,250.7 million this year, $143.5 million or 13% higher than last year.
Higher earnings, net earnings and earnings per share
Positive free cash flow at $93.6 million
Capital employed3 is higher in support of growth initiatives
ORDERS
Civil segments
Simulation Products/Civil won over $400 million of orders including 34 full-flight simulators (FFSs)
A320 FFSs
1Non-G AAP measure (see Section 3.7) .
2Non-G AAP measure (see Section 3.7) .
3Non-G AAP measure (see Section 3.7) .
4Non-G AAP measure (see Section 3.7) .
5Non-G AAP measure (see Section 3.7) .
6Non-G AAP measure (see Section 3.7) .
CAE 2007 Q4 REPORT | 3
A320 FFS-5200
One to Lufthansa
A330/340 FFSs
B737 FFSs
B737 FFS-5200
Five to Ryanair
B777 FFSs
B787 FFSs
Other
Training & Services/Civil awarded over $450 million in contracts
Military segments
Simulation Products/Military won orders for more than $400 million for new training systems and upgrades
Simulators and upgrades
Trainers and upgrades and training devices
4 | CAE 2007 Q4 REPORT
Other
Training & Services/Military awarded contracts for $175 million
PRODUCTS
RESTRUCTURING ACTIVITIES ANNOUNCED IN FEBRUARY 2005
We completed the rationalization of our Montreal footprint. | ||
This quarter marked the end of the restructuring activities for TS/C, which included: | ||
relocating a total of 22 FFSs and retiring or selling five FFSs. We relocated or finished relocating 15 FFSs in fiscal 2007 (including seven in the fourth quarter) with one remaining FFS to be relocated in fiscal 2008, the costs of which will be absorbed in our continuing operations results. | ||
closing training centres in six locations. Only the Alcala centre, Maastricht flight school and Dallas facility were closed in fiscal 2007. | ||
streamlining the organization by reducing layers of management. | ||
On March 14, 2007, CAE and Iberia Airlines officially opened the new wing of the CAE Aviation Training Centre in Madrid, giving customers access to 11 full-flight simulators (FFSs). | ||
We implemented the first phase of our new enterprise resource planning (ERP) system this year in seven of the countries where TS/C operates training centres. | ||
We introduced a number of operational initiatives to improve our processes and increase operational efficiencies as part of TS/Cs Six Sigma initiative. | ||
ACQUISITIONS AND JOINT VENTURES
CAE 2007 Q4 REPORT | 5
2. INTRODUCTION
In this report, we, us, our, CAEand companyrefer to CAE Inc. and its subsidiaries. Unless we have indicated otherwise:
This report was prepared as of May 31, 2007, and includes our managements discussion and analysis (MD&A), financial statements and notes for the year and the three-month period ended March 31, 2007. We have written it to help you understand our business, performance and financial condition for fiscal 2007.
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:
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, 2007.
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.
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:
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, shouldand 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 uncertaintyin 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, CAE has built an excellent reputation and long-standing customer relationships based on 60 years of experience, strong technical capabilities, a highly trained workforce and global reach. More than 5,000 employees work in production and training facilities in 19 countries around the world. Approximately 90% of CAEs annual revenues come from worldwide exports and international activities.
6 | CAE 2007 Q4 REPORT
CAEs common shares are listed on the following exchanges:
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 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 to a provider of integrated training solutions. When our President and Chief Executive Officer joined CAE in August 2004, he launched an in-depth strategic review of our markets, customers and other stakeholders as well as our own internal resources and capabilities.
As a result, we refined our strategic direction by focusing on a wide range of simulation and training products and services for two core markets civil and military and selling the Marine Controls division. We also focused on achieving operational synergies, protecting our technological leadership and restoring financial health to ensure our stability and long-term growth.
To achieve this, our 2007 priorities included:
Complete the remaining elements of our restructuring plan
In February 2005, we announced a formal restructuring plan to achieve our strategy, to leverage our core capabilities and to institute a platform for sustainable, profitable business.
The plan focused on six key areas:
We spent the last two years implementing this plan. While some activities started towards the end of fiscal 2005, fiscal 2006 was a transition year as we revised our business processes and cost structure.
We completed the final elements of the restructuring plan in fiscal 2007 by:
Continue to strengthen relationships with customers and original equipment manufacturers
Paramount to CAEs success is ensuring that we develop products and services that help ensure the success and satisfaction of our customers. CAE is focused on listening closely to customers so we can develop innovative solutions designed to enhance safety and efficiency. CAE has established a Customer Advisory Board C AB) and Technical Advisory Board (TAB) specifically to solicit candid feedback and input from our customer base. The CAB and TAB help shape CAEs product and service offerings, and provide valuable insight for future technology developments. For example, both the CAB and TAB had significant input on the development of the new CAE 5000 Series full-flight simulator.
CAE 2007 Q4 REPORT | 7
Also, one of our strategic priorities is to develop a competitive training service that is cost effective and increases revenue per simulator and the proportion of training services (wet training) versus selling leased time on training devices (dry training) in our global network of training centres.
We are pursuing a number of initiatives to help meet the growing demand for trained pilots including:
This year we announced a training joint venture with Embraer for crews of the new Phenom 100 Very Light Jet (VLJ) and Phenom 300 Light Jet (LJ).
We are continuing to strengthen relationships and partnerships with original equipment manufacturers. For example, EADS CASA selected CAE as its preferred training systems provider for the C-295 aircraft, and we are currently developing C-295 simulators for the EADS CASA training centre in Spain and the Brazilian Air Force. We are also working with EADS CASA to support other C-295 aircraft programs around the world. Boeing selected CAE to provide the training systems for the U.S. Air Forces C-130 Avionics Modernization Program, and Boeing also recognized CAE with its Outstanding Supplier Award for outstanding responsiveness and support during development of new business opportunities.
Continue to improve our financial performance
We are showing earnings growth, positive steady free cashflow and reduction in net debt. We also reduced the manufacturing costs for simulation equipment we sell to third parties and install in our global network of training centres.
We also reduced the cycle time for manufacturing and producing products in modules to help lower costs.
Continue to re-engage our employees around the world
We benefit from an employee base that is diversified, well educated and experienced. We must also have an employee base that is highly engaged. Our commitment to communicate clearly and on a timely basis and to share ideas across levels and functions is critical to this effort.
We have a number of initiatives in place to foster employee engagement around the world, including our Employee engagement survey, forums with the CEO and Group Presidents, focus groups and our new employee recognition program, which was initially piloted among 1,200 engineers and scientists in our Montreal office.
Our 2007 Employee engagement survey revealed that almost 90% of our employees believe in the value of our products and services. We had a 30% improvement from our 2005 survey, and our results were higher than average for global companies.
Maintain our technological leadership
We continue to invest in new and innovative technologies. Project Phoenix is the $630 million R&D initiative we launched in fiscal 2006 to improve leading-edge technologies and develop new applications that reinforce our industry position as a world leader in simulation, modelling and services.
We consulted with customers to develop innovative products and service solutions that enhance their operational efficiencies and mitigate operational risks.
We made key acquisitions, expanding our modelling and simulation capabilities and R&D efforts in key markets:
Fiscal 2007
KESEM International Pty Ltd. (KESEM).
Early fiscal 2008
We also launched the CAE 5000 Series full-flight simulator, a breakthrough product designed to meet training requirements for high-volume commercial narrow-body aircraft, such as the B737 and the A320, and the emerging VLJs in the business jet market. The 5000 Series expands our portfolio of simulation and training solutions, which is already the most comprehensive offering in the industry. We developed the new simulator based on input from customers, our technical advisory boards, our own training instructors and strong and effective coordination with regulatory agencies worldwide.
8 | CAE 2007 Q4 REPORT
Target growth in our core markets
There are four elements to our growth initiatives:
We have emerged from our restructuring as a company that is well diversified between products and services and between the civil and military markets. We are now more oriented towards services and technology, and we have a solid financial base and a balanced business. These are key strengths that we plan to sustain and build on as we position ourselves for growth.
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 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 over 110 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 sales 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.
Global coverage
We have operations in 19 countries on five continents. 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 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 Simfinity® devices are part of a suite of fully integrated training solutions, customers can use these devices to perform any updates and upgrades.
CAE 2007 Q4 REPORT | 9
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. They are sharing this knowledge globally across our business and implementing best practices in procurement. They are 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.
Innovation for the future
Innovation has always been at the heart of our business and success over our 60-year history. It is key to helping chart our future success.
A core group of people have been exploring different opportunities to build on our key strengths and tap new, emerging and adjacent markets to invest in during the year.
Opportunities that build on our technology, leverage customer intimacy and capitalize on our knowledge of training and the development of course curriculum are the main focus.
We are also exploring other areas such as medical simulation, transportation and others, where our existing capabilities can help other markets mitigate risks, guide decision-making and create operational efficiencies.
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, 2007, our net debt was $133.0 million, representing a net debt to market capitalization ratio of less than 5%. 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 2007, we had more than 5,000 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 and 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:
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
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 original equipment manufacturers than any other company. We have a wealth of experience in developing prototype simulators for new types of aircraft, including over 20 models in the past and, more recently, the Airbus A380 and Dassault 7X. We also offer a full range of support services including sales of spare parts, simulator updates and simulator relocations.
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 and inventory management, curriculum development and consulting services. We have achieved our leading position through acquisitions, joint ventures and by building
10 | CAE 2007 Q4 REPORT
new facilities. We currently have more than 110 FFSs installed in 24 training centres around the world. We intend to increase the number of RSEUs in our network to maintain our position and address new market opportunities. We are 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.
Market trends and outlook
We continue to have a positive outlook for the civil market because of the following trends:
Positive economic indicators
GDP and growth in corporate profits driving business aviation market
Business aviation is experiencing a strong and growing training market because fleets are active, projections for business jet deliveries are high and new operators are entering the market. We expect the development of the very light jet (VLJ) and light jet (LJ) segments to lead to opportunities for training and other services in the future.
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.
Continued growth in revenue per passenger kilometre
Steady growth in air travel
We anticipate the long-term, steady growth in passenger traffic that recently recommenced and to continue for the foreseeable future. We expect this to be slightly above the average annual growth from 1995 to 2005 of 5.2% . This is barring any major developments such as excessive fuel prices, regional political instability, acts of terrorism, pandemics or other world events.
Continued growth of low-cost airlines
The growth of low-cost airlines continues to be a major factor driving activity in the civil aviation market, and the demand for simulation products and training services. In 2006, low-cost airlines represented more than 27% of capacity in the U.S., and more than 24% in Europe. These percentages are expected to grow as low-cost airlines expand their fleets. In the Asia-Pacific region, low-cost airlines represented just 9% of capacity in 2006, but this represents a jump of over 55% from 2005. CAE clients such as Ryanair and IndiGo are representative of low-cost carriers expanding their fleets and capacity, thus spurring increasing demand for pilot training equipment and services.
Slower activity in mature markets
High fuel costs and intense domestic competition are affecting the performance of many commercial airlines in mature markets such as North America. The North American market has started to show two key signs of recovery:
Strong aircraft orders and new platforms
New aircraft platforms
Original equipment manufacturers are introducing new platforms, which will drive worldwide demand for simulators and training. The Boeing 787, Boeing 747-8, Airbus A350XWB, Embraer 190, Embraer Phenom 100 and 300 and the Eclipse 500 VLJs 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.
Strong aircraft orders
In calendar 2006, Boeing received a total of 1,044 orders for new aircraft and Airbus received 824 orders. 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. It is important to note that deliveries of new model aircrafts are susceptible to delays of program launches, which may affect our deliveries.
CAE 2007 Q4 REPORT | 11
Growing demand for trained pilots
Worldwide demand is increasing
Growth in the civil aviation market is continuing to drive the demand for pilots worldwide, which is creating a shortage of qualified pilots. The shortage is even more pronounced because of aging demographics and fewer military pilots transferring to civil airlines. Emerging markets like India and China are experiencing this even more severely because air traffic is growing more quickly there than in developed countries, and there is less infrastructure to meet the current and projected demand for pilots.
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. On July 19, 2006, we launched CAE Global Academy, a new training alliance designed to address the global shortage of pilots. We signed agreements with three Flight Training Organizations (FTOs) this year and added three more FTO members to the CAE Global Academy in April 2007.
New pilot certification process requires simulation-based training
The aviation industry is expected to adopt another certification process for training pilots in 2007. The International Civil Aviation Organization (ICAO) multi-crew pilot licence (MPL) requires more simulation-based training, which we expect to be positive for our business.
MILITARY MARKET
Simulation Products/Military (SP/M)
Designs, manufactures and supplies advanced military training equipment 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 and training systems for a variety of military aircraft, including fighter 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 weapons and military sensors. We have delivered simulation products and training systems to the military forces of more than 35 countries, including all of the US services. We have also developed more training systems for the C-130 Hercules 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 by 2 to 3% a year, we believe that our share of that spending will increase for the following reasons:
Demand for our type of 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, NH Industries is starting to deliver the NH90 helicopter, and EADS CASA is aggressively marketing the C-295 transport worldwide, all of which fuel the demand for new types of simulators.
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, we won a new contract this year with the United States Marine Corps to provide engineering support services for the AV-8B and KC-130 training systems.
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 systems 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.
12 | CAE 2007 Q4 REPORT
Extension and upgrade of existing weapon systems 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. For example, we won a contract in fiscal 2007 to upgrade the Royal Navys EH101 Merlin Training System for their maritime patrol helicopters as part of the Merlin Capability Sustainment Programme.
The nature of warfare is changing
Demand for networking
The nature of warfare is changing. Allies are co-operating and creating joint and coalition forces, which is driving the demand for joint and networked training and operations. For example, we received a contract this year to design and manufacture MH-60R tactical operational flight trainers for the U.S. Navy. These devices can be networked to train both flight and rear crews, and support the U.S. Navys Simulator Master Plan to allow for networked training for their range of platforms.
Growing acceptance of synthetic training
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, we are currently fulfilling a contract with the United States Army to deliver a Synthetic Environment Core (SE-Core) Database Virtual Environment Development (DVED).
3.6 FOREIGN EXCHANGE
We believe that disclosing the impact of foreign exchange on our results is useful supplemental information because it allows you to compare performance before the effect of foreign exchange, which can have a significant impact on our operations and financial results.
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 $2.4 million compared to fiscal 2006, and partly offset our operational improvements.
We used the foreign exchange rates below to value our assets, liabilities and backlog in Canadian dollars at the end of the last two fiscal years:
Increase | ||||
2007 | 2006 | (Decrease) | ||
| ||||
U.S. dollar (US$ or USD) | 1.1529 | 1.1671 | (1 | %) |
Euro () | 1.5418 | 1.4169 | 9 | % |
British pound (£ or GBP) | 2.2697 | 2.0299 | 12 | % |
| ||||
We used the average foreign exchange rates below to value our revenues and expenses: | ||||
| ||||
Increase | ||||
2007 | 2006 | (Decrease) | ||
| ||||
U.S. dollar (US$ or USD) | 1.1385 | 1.1938 | (5 | %) |
Euro () | 1.4598 | 1.4553 | | |
British pound (£ or GBP) | 2.1550 | 2.1341 | 1 | % |
| ||||
Three areas of our business are affected | by changes in foreign exchange rates: |
CAE 2007 Q4 REPORT | 13
Our manufacturing 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 the expenses is in Canadian dollars.
As a general policy, we hedge the milestone payments in contracts denominated in foreign currencies to protect ourselves from some of the foreign exchange exposure. It is impossible, however, to completely offset the effects of changing foreign currency values, leaving some residual exposure that can affect the statement of earnings.
Our manufacturing operations in Canada are exposed to changes in the value of the Canadian dollar over the long term because we do not enter into hedges of expected future revenues until the contracts are signed. When revenue is translated into Canadian dollars, our revenue and margins can fluctuate.
Sensitivity analysis
We conducted a sensitivity analysis to determine the 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:
First we calculated the revenue and expenses per currency to determine the operating income in each currency. Then we subtracted the amount of hedged revenues 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 revenue and operating income, as well as our net exposure:
Operating | |||||
Exposure (amounts in millions) | Revenue | income | Hedging | Net exposure | |
| |||||
U.S. dollar (US$ or USD) | 5.4 | 1.8 | (1.4 | ) | 0.4 |
Euro () | 1.9 | 0.3 | (0.2 | ) | 0.1 |
British pound (£ or GBP) | 0.4 | Not material | Not material | Not material | |
Australian dollar (AUD$ or AUD) | 0.3 | Not material | Not material | Not material | |
| |||||
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.
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 monitor how much we are investing in our business. We measure it from two perspectives:
Capital used
Sources of capital
We add net debt to total shareholders equity to understand where our capital is coming from.
14 | CAE 2007 Q4 REPORT
Maintenance and growth capital expenditure
Maintenance capital expenditure is a non-GAAP measure we use to calculate the capital investment needed to sustain current levels 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 E BIT) 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.
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 tied up 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 the subsidiary, and not the parent company.
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.
Revenue per simulator
Revenue per simulator is a financial measure we calculate by dividing the revenue of TS/C for the period (on an annualized basis) by the related revenue simulator equivalent unit.
Revenue simulator equivalent unit
Revenue simulator equivalent unit (RSEU) is a financial measure we use to show the total 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 a RSEU. If a FFS is being powered down and relocated, it will not be included as a 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 27 to the consolidated financial statement).
4. CONSOLIDATED RESULTS
We have retroactively restated all comparative prior periods to account for a recent change in accounting standards E IC-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 and annual financial statements ending on or after December 31, 2006.
You will find more details in section 10, Changes in accounting standards.
CAE 2007 Q4 REPORT | 15
4.1 RESULTS OF OUR OPERATIONS FOURTH QUARTER OF FISCAL 2007 | |||||||||||||||
Summary of consolidated results | |||||||||||||||
| |||||||||||||||
(amounts in millions, except per share amounts) | Q4-2007 | Q3-2007 | Q2-2007 | Q1-2007 | Q4-2006 | ||||||||||
| |||||||||||||||
Revenue | $ | 337.3 | $ | 331.2 | $ | 280.4 | $ | 301.8 | $ | 284.3 | |||||
Earnings before interest and income taxes (EBIT) | 53.3 | 44.2 | 44.8 | 47.1 | 9.1 | ||||||||||
As a % of revenue | 15.8 | % | 13.3 | % | 16.0 | % | 15.6 | % | 3.2 | % | |||||
Interest expense, net | 3.5 | 2.9 | 1.2 | 3.0 | 0.9 | ||||||||||
| |||||||||||||||
Earnings from continuing operations (before taxes) | $ | 49.8 | $ | 41.3 | $ | 43.6 | $ | 44.1 | $ | 8.2 | |||||
Income tax expense (recovery) | 14.7 | 11.6 | 12.3 | 11.1 | (6.4 | ) | |||||||||
| |||||||||||||||
Earnings from continuing operations | $ | 35.1 | $ | 29.7 | $ | 31.3 | $ | 33.0 | $ | 14.6 | |||||
Results from discontinued operations | (0.8 | ) | | (0.3 | ) | (0.6 | ) | (5.4 | ) | ||||||
| |||||||||||||||
Net earnings | $ | 34.3 | $ | 29.7 | $ | 31.0 | $ | 32.4 | $ | 9.2 | |||||
Basic and diluted EPS from continuing operations | 0.14 | 0.12 | 0.12 | 0.13 | 0.06 | ||||||||||
Basic and diluted EPS | 0.14 | 0.12 | 0.12 | 0.13 | 0.04 | ||||||||||
| |||||||||||||||
We have restated comparable periods to reflect a change in the stock-based compensation expense (EIC-162). | |||||||||||||||
Summary of results excluding non-recurring items | |||||||||||||||
| |||||||||||||||
(amounts in millions, except per share amounts) | Q4-2007 | Q3-2007 | Q2-2007 | Q1-2007 | Q4-2006 | ||||||||||
| |||||||||||||||
Earnings from continuing operations (before taxes) | $ | 48.7 | $ | 44.1 | $ | 43.9 | $ | 44.4 | $ | 31.7 | |||||
Net earnings from continuing operations | 35.1 | 32.0 | 31.2 | 31.0 | 23.0 | ||||||||||
Basic and diluted EPS from continuing operations | 0.14 | 0.13 | 0.12 | 0.12 | 0.09 | ||||||||||
|
We have restated comparable periods to reflect a change in the stock-based compensation expense (EIC-162).
Revenue was 2% higher than last quarter and 19% higher year over year
Revenue was $6.1 million higher than last quarter even though SP/M revenue decreased by $13.0 million or 12%. SP/C increased its revenue by 6%, TS/C by 10% and TS/M by 10% this quarter while the decrease in SP/Ms revenue was mainly because of unusually high activity on some European programs in the third quarter.
All four segments had higher revenue compared to the same period last year:
You will find more details in Results by segment.
EBIT7 was $9.1 million higher than last quarter and $44.2 million higher year over year
EBIT for this quarter was $53.3 million, or 15.8% of revenue, and $52.2 million, or 15.5% of revenue excluding non-recurring items. This quarter we reversed a net provision of $1.1 million relating to the restructuring plan. You will find more details in
Reconciliation of non-recurring items.
Compared to last quarter, EBIT was up by 21% or $9.1 million. Segment operating income8 for TS/C increased by $7.8 million but was partly offset by a decrease in the other segments. Lower activity related to the restructuring plan increased EBIT by $3.9 million. EBIT last quarter was $47.0 million, or 14.2% of revenue, excluding non-recurring items.
EBIT was up by $44.2 million over last year because of higher segment operating income in all four segments, which increased segment operating income overall by $18.0 million. EBIT was also up because restructuring activity was lower this quarter, compared to the expense of $25.1 million for the same period a year ago.
You will find more details in Reconciliation of non-recurring items and Results by segment.
Net interest expense was $0.6 million higher than last quarter and $2.6 million higher year over year
Net interest expense was 21% higher than last quarter because of slightly higher interest on long-term debt and lower capitalized interest. These were partly offset by higher interest income.
Net interest expense was higher than the same period last year because of:
7Non-G AAP measure (see Section 3.7) .
8Non-G AAP measure (see Section 3.7) .
16 | CAE 2007 Q4 REPORT
Effective income tax rate is 30% this quarter
Income taxes this quarter were $14.7 million, representing an effective tax rate of 30%, compared to 28% for the last quarter and a tax recovery of $6.4 million in the fourth quarter of fiscal 2006.
The recovery in the fourth quarter of last year was mainly attributed to the recognition of $9.0 million of tax assets from the reduction of the valuation allowance on our net operating losses in the U.S. and other recoveries. This recognition was mainly because of the further improvement in profitability of our U.S. operations.
Excluding non-recurring items, income tax expense was:
You will find more details in Reconciliation of non-recurring items.
Net loss from discontinued operations was $0.8 million higher this quarter and $4.6 million lower year over year
Net loss from discontinued operations this quarter was mainly because of a net loss from Forestry Systems. Consulting and legal fees that were recorded this quarter were partly offset by a net gain from property sold that was classified as assets held for sale. Compared to the same period last year, the net loss from discontinued operations was lower mainly because of our former Cleaning Technologies business for which, in fiscal 2006, we incurred significant costs that were mostly related to the revaluation of a pension liability and a reversal of an unrecognized tax asset.
4.2 RESULTS OF OUR OPERATIONS FISCAL 2007 | |||||||
Summary of consolidated results | |||||||
| |||||||
(amounts in millions, except per share amounts) | 2007 | 2006 | 2005 | ||||
| |||||||
Revenue | $ | 1,250.7 | 1,107.2 | 986.2 | |||
Gross margin9 | $ | 364.4 | 266.2 | 217.6 | |||
As a % of revenue | % | 29.1 | 24.0 | 22.1 | |||
| |||||||
Earnings (loss) before interest and income taxes (EBIT) | $ | 189.4 | 104.0 | (372.9 | ) | ||
As a % of revenue | % | 15.1 | 9.4 | | |||
Interest expense, net | $ | 10.6 | 16.2 | 32.1 | |||
| |||||||
Earnings (loss) from continuing operations (before taxes) | $ | 178.8 | 87.8 | (405.0 | ) | ||
Income tax expense (recovery) | $ | 49.7 | 18.2 | (100.6 | ) | ||
| |||||||
Earnings (loss) from continuing operations | $ | 129.1 | 69.6 | (304.4 | ) | ||
Results from discontinued operations | $ | (1.7 | ) | (6.0 | ) | 104.8 | |
| |||||||
Net earnings (loss) | $ | 127.4 | 63.6 | (199.6 | ) | ||
Basic and diluted EPS from continuing operations | $ | 0.51 | 0.28 | (1.23 | ) | ||
Basic EPS | $ | 0.51 | 0.25 | (0.81 | ) | ||
Diluted EPS | $ | 0.50 | 0.25 | (0.81 | ) | ||
| |||||||
We have restated comparable periods to reflect a change in the stock-based compensation expense (EIC-162). | |||||||
Summary of results excluding non-recurring items | |||||||
| |||||||
(amounts in millions, except per share amounts) | 2007 | 2006 | 2005 | ||||
| |||||||
Earnings from continuing operations (before taxes) | $ | 181.1 | 122.9 | 65.5 | |||
Net earnings from continuing operations | $ | 129.3 | 85.5 | 47.2 | |||
Basic and diluted EPS from continuing operations | $ | 0.51 | 0.35 | 0.19 | |||
|
We have restated comparable periods to reflect a change in the stock-based compensation expense (EIC-162).
Revenue was 13% or $143.5 million higher than last year
The increase in revenue over last year was due to growth in all four segments, and mainly from the SP/C and SP/M segments. SP/C revenue was 35% or $91.1 million higher because of the large number of new orders and a higher number of deliveries. SP/M revenue was 9% or $30.1 million higher because of higher order intake particularly in the U.S. and the U.K.
You will find more details in Results by segment.
Gross margin was $98.2 million higher than last year
Gross margin was $364.4 million this year or 29.1% of revenue compared to $266.2 million or 24.0% of revenue last year. The increase comes from improvement in all four segments.
9Non-G AAP measure (see Section 3.7) .
CAE 2007 Q4 REPORT | 17
EBIT was $85.4 million higher than last year
EBIT was $189.4 million for the year, or 15.1% of revenue, and $193.1 million, or 15.4% of revenue excluding non-recurring items mainly related to the restructuring plan, which we completed this quarter.
EBIT was up by $85.4 million over last year because of the increase in segment operating income for all segments (almost 50% from SP/C) and a decrease this year in the costs related to the restructuring plan.
EBIT was affected by various non-recurring items in fiscal 2006 totalling $32.8 million:
Excluding these non-recurring items, EBIT was $136.8 million (12.4% of revenue).
You will find more details in Reconciliation of non-recurring itemsand Results by segment.
Net interest expense was $5.6 million lower than last year
FY2006 | FY2005 | |||||
(amounts in millions) | to FY2007 | to FY2006 | ||||
| ||||||
Net interest, prior period | $ | 16.2 | $ | 32.1 | ||
Decrease in interest on long-term debt | (3.1 | ) | (12.3 | ) | ||
(Increase)/decrease in interest income | 2.1 | (1.2 | ) | |||
(Increase)/decrease in capitalized interest | (1.3 | ) | 3.0 | |||
Decrease in amortization of deferred financing charges | (1.7 | ) | (5.7 | ) | ||
Other | (1.6 | ) | 0.3 | |||
| ||||||
Decrease in net interest expense from the prior period | $ | (5.6 | ) | $ | (15.9 | ) |
| ||||||
Net interest, current period | $ | 10.6 | $ | 16.2 | ||
|
Net interest expense was $10.6 million this year, which is 35% or $5.6 million lower than last year. This is 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 last year. | ||
Effective income tax rate is 28%
Income taxes were $49.7 million this year, representing an effective tax rate of 28%, compared to 21% for the same period last year. We recorded additional benefits of $9.0 million in the fourth quarter of fiscal 2006 because of the reduction in valuation allowance on U.S. net operating losses and other tax recoveries.
Income tax expense, excluding non-recurring items, was:
We expect the effective income tax rate for fiscal 2008 to be approximately 30%. You will find more details in Reconciliation of non-recurring items.
Net loss from discontinued operations was $4.3 million lower than last year
Net loss from discontinued operations was $1.7 million this year, which is 72% or $4.3 million lower than last year. This is mainly because of:
4.3 RESULTS OF OUR OPERATIONS FISCAL 2006 VS FISCAL 2005
Revenue
Revenue grew in fiscal 2006, a significant increase of $121.0 million, or 12%, from the year before. Growth in each of the four segments was mainly because of:
18 | CAE 2007 Q4 REPORT
EBIT
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 Do328J platform, a write-down related to deferred bid costs and additional restructuring charges. EBIT would have been $136.8 million before these items.
EBIT was negative $372.9 million in fiscal 2005. This included the effect of impairment and restructuring charges. If the impairment and restructuring charges, and the offsetting recognition of additional investment tax credits related to fiscal 2000 to 2004 are not included, EBIT for fiscal 2005 was $88.4 million.
Net interest
Net interest was $15.9 million lower than fiscal 2005, mainly because:
ncome taxes
We had a net tax recovery of $100.6 million in fiscal 2005 mainly because of the large impairment charge. This was partly offset by a recognition of $23.5 million in tax assets. We recorded an income tax expense of $18.2 million in fiscal 2006.
Discontinued operations
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. We reported a gain of $104.8 million in fiscal 2005, which was mainly from the sale of the Marine Controls segment.
4.4 EARNINGS EXCLUDING NON-RECURRING ITEMS
The table below shows how non-recurring items 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.
Reconciliation of non-recurring items Fourth quarter of fiscal 2007
(amounts in millions, except per share amounts) | ||||||||||||||||||||
| ||||||||||||||||||||
Q4-2007 | Q3-2007 | Q4-2006 | ||||||||||||||||||
| ||||||||||||||||||||
before | after | per | before | after | per | before | after | per | ||||||||||||
tax | tax | share | tax | tax | share | tax | tax | share | ||||||||||||
| ||||||||||||||||||||
Earnings from continuing | ||||||||||||||||||||
operations | $ | 49.8 | $ | 35.1 | $ | 0.14 | $ | 41.3 | $ | 29.7 | $ | 0.12 | $ | 8.2 | $ | 14.6 | $ | 0.06 | ||
EBIT: | ||||||||||||||||||||
Restructuring plan | ||||||||||||||||||||
restructuring charge | (1.5 | ) | (1.2 | ) | | 2.3 | 2.0 | 0.01 | 13.8 | 10.3 | 0.04 | |||||||||
other costs associated | ||||||||||||||||||||
with the restructuring plan | 0.4 | 1.2 | | 0.5 | 0.3 | | 11.3 | 8.7 | 0.03 | |||||||||||
Interest expense, net: | ||||||||||||||||||||
Accretion of discounts | ||||||||||||||||||||
on notes receivable | | | | | | | (1.6 | ) | (1.6 | ) | (0.01 | ) | ||||||||
Income tax expense: | ||||||||||||||||||||
Tax recoveries | | | | | | | | (9.0 | ) | (0.03 | ) | |||||||||
| ||||||||||||||||||||
Earnings from continuing | ||||||||||||||||||||
operations excluding | ||||||||||||||||||||
non-recurring items | ||||||||||||||||||||
(non-GAAP measure) | $ | 48.7 | $ | 35.1 | $ | 0.14 | $ | 44.1 | $ | 32.0 | $ | 0.13 | $ | 31.7 | $ | 23.0 | $ | 0.09 | ||
|
We restated comparable periods to reflect a change in the stock-based compensation expense (EIC-162).
CAE 2007 Q4 REPORT | 19
Reconciliation of non-recurring items for the 12-month period ending March 31 | |||||||||||||||||||||||||
| |||||||||||||||||||||||||
(amounts in millions, except per share amounts) | |||||||||||||||||||||||||
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Fiscal 2007 | Fiscal 2006 | Fiscal 2005 | |||||||||||||||||||||||
| |||||||||||||||||||||||||
before | after | per | before | after | per | before | after | per | |||||||||||||||||
tax | tax | share | tax | tax | share | tax | tax | share | |||||||||||||||||
| |||||||||||||||||||||||||
Earnings from continuing | |||||||||||||||||||||||||
operations | $ | 178.8 | $ | 129.1 | $ | 0.51 | $ | 87.8 | $ | 69.6 | $ | 0.28 | $ | (405.0 | ) $ | (304.4 | ) $ | (1.23 | ) | ||||||
EBIT: | |||||||||||||||||||||||||
Restructuring plan | |||||||||||||||||||||||||
restructuring charge | 1.2 | 1.0 | | 18.9 | 14.1 | 0.06 | 24.5 | 16.7 | 0.07 | ||||||||||||||||
other costs associated | |||||||||||||||||||||||||
with the restructuring plan | 6.9 | 5.5 | 0.03 | 15.1 | 11.3 | 0.05 | 7.7 | 5.7 | 0.02 | ||||||||||||||||
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 Dornier | |||||||||||||||||||||||||
328J platform | | | | (1.8 | ) | (1.0 | ) | (0.01 | ) | | | | |||||||||||||
Additional ITC recognition | |||||||||||||||||||||||||
(FY2000-FY2004) | | | | | | | (14.2 | ) | (10.1 | ) | (0.04 | ) | |||||||||||||
Impairment charge | | | | | | | 443.3 | 354.2 | 1.43 | ||||||||||||||||
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 debts | | | | 2.8 | 2.0 | 0.01 | 9.2 | 8.6 | 0.03 | ||||||||||||||||
Write-down of unamortized | |||||||||||||||||||||||||
deferred financing costs | | | | 1.1 | 0.7 | | | | | ||||||||||||||||
Income tax expense: | |||||||||||||||||||||||||
Tax recoveries | | (1.8 | ) | (0.01 | ) | | (9.0 | ) | (0.03 | ) | | (23.5 | ) | (0.09 | ) | ||||||||||
| |||||||||||||||||||||||||
Earnings from continuing | |||||||||||||||||||||||||
operations excluding | |||||||||||||||||||||||||
non-recurring items | |||||||||||||||||||||||||
(non-GAAP measure) | $ | 181.1 | $ | 129.3 | $ | 0.51 | $ | 122.9 | $ | 85.5 | $ | 0.35 | $ | 65.5 | $ | 47.2 | $ | 0.19 | |||||||
|
We have restated comparable periods to reflect a change in the stock-based compensation expense (EIC-162).
Restructuring plan
We had a net reversal of $1.1 million this quarter, which resulted in an expense of $8.1 million for the year. The reversal relates to a provision that was set up in fiscal 2006 to cover the eventual severance cost for TS/C. We estimated the provision on the probable cost of terminating certain employees based on the different scenarios. The actual severance costs were lower following option by these employees. This reversal was partly offset by costs incurred to relocate the remaining simulators and to implement our ERP system. We completed the relocation of 15 FFSs this year. This leaves one to be relocated in fiscal 2008, the costs of which will be absorbed in our continuing operations results. In order to better serve our client, we consolidated our training services and, as a consequence, we closed three training centres this year: in Alcala, Spain, the Maastricht flight school in the Netherlands and the facility in Dallas in the U.S.
Early repayment of notes receivable
In the second quarter of fiscal 2007, we received an early payment, in full, of secured, subordinated promissory long-term notes receivable that we had recorded in other assets. The amount was part of the consideration for our sale of Ultrasonics and Ransohoff in 2002. We recognized $1.4 million in interest revenue in the second quarter as a result of the repayment, because of the accretion of discounts on the long-term notes receivable.
Licence and release of claims payment Landmark Consortium
As a member of the Landmark Consortium (formed to pursue the AVTS project), we licensed the use of our intellectual property in relation to the AVTS project to the U.K. Ministry of Defence (the Authority) in the first quarter of fiscal 2007. The contract also releases all Landmark Consortium members of all claims and potential claims they might make against the Authority relating to the change in the approach to procurement for the AVTS program. Our share of the contract is valued at £4.2 million ($8.8 million). We received the payment in the first quarter and recorded £2.1 million ($4.4 million) as a non-recurring item because it was related to the release of claims. We recorded the remaining £2.1 million ($4.4 million), which related to a licence of intellectual property, in the corresponding military segments.
20 | CAE 2007 Q4 REPORT
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.
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.
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 currency translation adjustment C TA) 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 328J platform
In the third quarter of fiscal 2006, we reached a decision to no longer offer training services for the Dornier 328 Jet (Do328J) aircraft. We sold two Do328J FFSs that quarter, for a net gain of $1.8 million.
Additional ITCs recognition (fiscal 2000 to 2004)
While ITCs are a normal part of our business, in fiscal 2005 we recognized additional ITCs of $14.2 million, increasing SP/C operating income by $9.8 million in the first quarter of fiscal 2005, and SP/M operating income that quarter by $4.4 million. The additional credits were from a change we made to our estimate of ITCs recoverable in fiscal 2003 and 2004, based on an audit by tax authorities of R&D expenditures we claimed from fiscal 2000 to 2002.
Tax recoveries
We consider the following tax recoveries to be non-recurring because they were not part of our day-to-day operations:
Impairment charge
In the third quarter of fiscal 2005, we began a comprehensive review of the performance and strategic orientation of our business units. This revealed several factors that had a significant impact mainly on the civil segment (which we now operate as the SP/C and TS/C segments). We recorded an impairment charge of $443.3 million as at December 31, 2004. You can find more details in our consolidated financial statements for fiscal 2005.
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 $630-million, 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 this year with the Government of Québec for Investissement Québec to contribute $31.5 million to Project Phoenix over six years. We recognize a liability to repay these contributions when conditions arise. The repayment is reflected in the consolidated statements of earnings when royalties become due.
This year, the two governments contributed a total of $52.1 million to Project Phoenix. We recorded $45.0 million as a reduction of R&D expenses and $7.1 million for fixed assets or other capitalized costs. We recognized the contribution relating to the agreement with the Government of Québec based on costs incurred since June 2005.
CAE 2007 Q4 REPORT | 21
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 $7.5 million for these TPC projects this year.
The table below lists the contribution and royalties for all programs: | |||||||||
| |||||||||
(amounts in millions) | 2007 | 2006 | 2005 | ||||||
| |||||||||
Contribution: | |||||||||
Phoenix | $ | 52.1 | $ | 17.3 | $ | | |||
Previous programs | | 7.5 | 10.8 | ||||||
| |||||||||
Total contribution | $ | 52.1 | $ | 24.8 | $ | 10.8 | |||
Amount capitalized | (7.1 | ) | (3.8 | ) | (0.9 | ) | |||
| |||||||||
Amounts credited to income | $ | 45.0 | $ | 21.0 | $ | 9.9 | |||
Royalty expense | (7.5 | ) | (6.6 | ) | (5.9 | ) | |||
| |||||||||
Impact of contribution on earnings (1) | $ | 37.5 | $ | 14.4 | $ | 4.0 | |||
Approximate impact of contribution on ITCs (25%) | (9.4 | ) | (3.6 | ) | (1.0 | ) | |||
| |||||||||
Approximate pre-tax impact of contribution | |||||||||
to various R&D programs | $ | 28.1 | $ | 10.8 | $ | 3.0 | |||
|
(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 contribution.
4.6 CONSOLIDATED ORDERS AND BACKLOG
Our consolidated backlog was $2,774.6 million at the end of this year, which is 13% higher than last year. New orders of $1,455.2 million were added to backlog this year, offset by $1,250.7 million in revenue generated from backlog and an increase of $110.1 million mainly from the decrease in value of the Canadian dollar against the euro and the British pound.
Change in backlog | |||||||||
| |||||||||
As at March 31, | |||||||||
(amounts in millions) | 2007 | 2006 | 2005 | ||||||
| |||||||||
Backlog, beginning of period | $ | 2,460.0 | $ | 2,504.7 | $ | 2,292.4 | |||
+ orders | 1,455.2 | 1,238.7 | 1,342.6 | ||||||
revenue | (1,250.7 | ) | (1,107.2 | ) | (986.2 | ) | |||
+/ adjustments (mainly FX) | 110.1 | (176.2 | ) | (144.1 | ) | ||||
| |||||||||
Backlog, end of period | $ | 2,774.6 | $ | 2,460.0 | $ | 2,504.7 | |||
| |||||||||
You will find more details in Results by segment, below. |
5. RESULTS BY SEGMENT
We manage our business and report our results in four segments:
Civil segments:
Military segments:
The SP/C and SP/M segments operate as an integrated organization that shares substantially all engineering, development, global procurement, program management and manufacturing functions.
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.
22 | CAE 2007 Q4 REPORT
KEY PERFORMANCE INDICATORS | ||||||||||||||
Segment operating income | ||||||||||||||
| ||||||||||||||
(amounts in millions, except operating margins) | FY2007 | FY2006 | Q4-2007 | Q3-2007 | Q2-2007 | Q1-2007 | Q4-2006 | |||||||
| ||||||||||||||
Civil segments | ||||||||||||||
Simulation Products/Civil | $ | 60.4 | 29.9 | 15.3 | 15.5 | 18.7 | 10.9 | 9.3 | ||||||
% | 17.4 | 11.6 | 15.7 | 16.8 | 22.2 | 14.7 | 11.9 | |||||||
Training & Services/Civil | $ | 64.3 | 57.1 | 21.3 | 13.5 | 11.2 | 18.3 | 14.9 | ||||||
% | 19.1 | 17.7 | 23.2 | 16.2 | 14.3 | 21.9 | 18.4 | |||||||
| ||||||||||||||
Military segments | ||||||||||||||
Simulation Products/Military | $ | 39.1 | 27.0 | 9.5 | 11.2 | 7.3 | 11.1 | 6.8 | ||||||
% | 10.9 | 8.2 | 10.3 | 10.6 | 11.4 | 11.6 | 8.8 | |||||||
Training & Services/Military | $ | 33.7 | 18.7 | 6.1 | 6.8 | 9.3 | 11.5 | 3.2 | ||||||
% | 16.2 | 9.3 | 10.9 | 13.4 | 17.4 | 23.9 | 6.7 | |||||||
| ||||||||||||||
Total segment operating income | $ | 197.5 | 132.7 | 52.2 | 47.0 | 46.5 | 51.8 | 34.2 | ||||||
Other (expense) income expenses | $ | (8.1 | ) | (28.7 | ) | 1.1 | (2.8 | ) | (1.7 | ) | (4.7 | ) | (25.1 | ) |
| ||||||||||||||
EBIT | $ | 189.4 | 104.0 | 53.3 | 44.2 | 44.8 | 47.1 | 9.1 | ||||||
| ||||||||||||||
We have restated comparable periods to reflect a change in the stock-based compensation expense (EIC-162). |
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 things not specifically related to its performance.
Capital employed | |||||||||||
| |||||||||||
(amounts in millions) | March 31 | December 31 | September 30 | June 30 | March 31 | ||||||
2007 | 2006 | 2006 | 2006 | 2006 | |||||||
| |||||||||||
Civil segments | |||||||||||
Simulation Products/Civil | $ | (59.8 | ) | (3.0 | ) | (13.6 | ) | (19.0 | ) | (37.7 | ) |
Training & Services/Civil | $ | 759.1 | 714.8 | 639.6 | 618.7 | 614.9 | |||||
| |||||||||||
Military segments | |||||||||||
Simulation Products/Military | $ | 54.5 | 34.7 | 57.7 | 48.0 | 49.3 | |||||
Training & Services/Military | $ | 132.8 | 136.6 | 129.2 | 119.2 | 111.5 | |||||
| |||||||||||
$ | 886.6 | 883.1 | 812.9 | 766.9 | 738.0 | ||||||
|
We use capital employed to understand how much we are investing in our business. We calculate it by taking each segments total assets (not including cash and cash equivalents, tax accounts and other non-operating assets), and subtracting total liabilities (not including tax accounts, long-term debt and its current portion, and other non-operating liabilities).
5.1 CIVIL SEGMENTS
SIMULATION PRODUCTS/CIVIL
SP/C was awarded the following FFS contracts this quarter:
Order intake this quarter was seven FFSs, bringing SP/Cs total order intake for the year to 34 FFSs.
CAE 2007 Q4 REPORT | 23
Financial results | |||||||||||||||
| |||||||||||||||
(amounts in millions, except operating margins) | FY2007 | FY2006 | Q4-2007 | Q3-2007 | Q2-2007 | Q1-2007 | Q4-2006 | ||||||||
| |||||||||||||||
Revenue | $ | 348.1 | 257.0 | 97.6 | 92.1 | 84.2 | 74.2 | 78.0 | |||||||
Segment operating income | $ | 60.4 | 29.9 | 15.3 | 15.5 | 18.7 | 10.9 | 9.3 | |||||||
Operating margins | % | 17.4 | 11.6 | 15.7 | 16.8 | 22.2 | 14.7 | 11.9 | |||||||
Amortization & depreciation | $ | 9.4 | 11.3 | 2.9 | 2.3 | 2.1 | 2.1 | 2.2 | |||||||
Capital expenditures | $ | 14.4 | 5.7 | 1.8 | 0.9 | 3.5 | 8.2 | 2.5 | |||||||
Capital employed | $ | (59.8 | ) | (37.7 | ) | (59.8 | ) | (3.0 | ) | (13.6 | ) | (19.0 | ) | (37.7 | ) |
Backlog | $ | 352.8 | 284.4 | 352.8 | 340.0 | 313.2 | 297.5 | 284.4 | |||||||
|
We have restated comparable periods to reflect a change in the stock-based compensation expense (EIC-162).
Revenue up by 6% from last quarter and by 25% year over year
Revenue increased over last quarter and last year because of the higher number of recent orders and because we achieved some important milestones on several projects.
Revenue was $348.1 million for the year, which is 35% or $91.1 million higher than last year
The increase reflects stronger order intake and a higher number of deliveries this year (25 deliveries this year compared to 18 in fiscal 2006).
Segment operating income similar to last quarter and up by 65% year over year
Segment operating income was similar to last quarter despite an increase in revenue. Operating margins are down from last quarter mainly because:
SP/Cs segment operating income was higher than last year because revenue was higher, we improved productivity and we started recognizing Investissement Québecs contribution to Project Phoenix this fiscal year.
Segment operating income was $60.4 million for the year, which is 102% or $30.5 million higher than last year
The increase reflects higher revenue, improved program execution and higher contributions to Project Phoenix from Technology Partnership Canada and Investissement Québec.
Capital employed decreased over last quarter and over last year
Capital employed was lower mainly because of lower working capital accounts. This was because we collected a large number of milestone-based receivables this quarter.
Backlog up by 24% over last year
(amounts in millions) | FY2007 | FY2006 | ||||
| ||||||
Backlog, beginning of period | $ | 284.4 | $ | 273.5 | ||
+ orders | 406.9 | 284.4 | ||||
revenue | (348.1 | ) | (257.0 | ) | ||
+/ adjustments (mainly FX) | 9.6 | (16.5 | ) | |||
| ||||||
Backlog, end of period | $ | 352.8 | $ | 284.4 | ||
| ||||||
This years book-to-sale ratio is 1.2x. | ||||||
TRAINING & SERVICES/CIVIL | ||||||
TS/C was awarded over $140 million in contracts this quarter. |
Expansion and new initiatives
In fiscal 2007, we opened one new training centre, expanded two and announced plans for an additional one: | ||
The six-bay North East Training Centre near the Morristown, New Jersey airport officially started training in January 2007. | ||
The four-bay expansion at the Burgess Hill Training Centre also officially opened in January 2007. | ||
The new four-bay wing of the CAE Aviation Training Centre near Barajas Airport in Spain officially opened in March 2007. | ||
We announced our intention to open our first Indian flight training centre in Bangalore in fiscal 2008. | ||
We pushed forward with our strategy to sell more wet training (total services training) and launched our pilot provisioning strategy. | ||
24 | CAE 2007 Q4 REPORT
We received Level D certification on the second Dassault 900EX EASy / 2000EX EASy FFS and started the maintenance training program on the Dassault Falcon 7X. We received Interim Level C qualification on the worlds first Dassault 7X FFS on April 20, 2007. | ||
Dassault approved our Falcon 2000EX EASy maintenance training course, and certified the course according to the Dassault Falcon Training Policy Manual (FTPM). We are to provide training to instructors according to the standards in the FTPM. | ||
We also: | ||
Added three new flight training organizations to the CAE Global Academy, bringing the number of schools in the network to six and increasing the supply of pilots who will graduate annually and be licensed from over 600 to over 1,000. | ||
Signed agreements with Ryanair and Interglobe Aviation Limited (IndiGo) to train a total of 1,490 pilots over the next four years for possible employment with them. | ||
Continue to see the benefits of our wet services and pilot supply initiatives as our revenue mix shifts. This strategy also allows us to expand our product offering and enhance our value proposition to customers. | ||
Launched Emirates-CAE Flight Training, the first-ever Gulfstream 550 business jet training program in the Persian Gulf region, and welcomed the first customers. | ||
We launched the Innovation Group, an initiative aimed at identifying opportunities for us to leverage our expertise and leading- edge simulation technologies in adjacent markets. | ||
Financial results
(amounts in millions, except operating margins, | ||||||||
RSEU and FFSs deployed) | FY2007 | FY2006 | Q4-2007 | Q3-2007 | Q2-2007 | Q1-2007 | Q4-2006 | |
| ||||||||
Revenue | $ | 336.9 | 322.3 | 91.7 | 83.1 | 78.4 | 83.7 | 81.1 |
Segment operating income | $ | 64.3 | 57.1 | 21.3 | 13.5 | 11.2 | 18.3 | 14.9 |
Operating margins | % | 19.1 | 17.7 | 23.2 | 16.2 | 14.3 | 21.9 | 18.4 |
Amortization & depreciation | $ | 45.5 | 43.3 | 12.4 | 11.8 | 10.7 | 10.6 | 10.7 |
Capital expenditures | $ | 108.1 | 87.5 | 27.7 | 32.5 | 30.1 | 17.8 | 21.3 |
Capital employed | $ | 759.1 | 614.9 | 759.1 | 714.8 | 639.6 | 618.7 | 614.9 |
Backlog | $ | 951.6 | 809.0 | 951.6 | 905.6 | 842.9 | 817.6 | 809.0 |
RSEU 10 | 99 | 98 | 101 | 97 | 99 | 98 | 95 | |
FFSs deployed | 114 | 108 | 114 | 110 | 110 | 110 | 108 | |
|
We have restated comparable periods to reflect a change in the stock-based compensation expense (EIC-162).
Revenue was $91.7 million this quarter, up 10% over last quarter
The 10% increase from last quarter is attributed to a strong demand in most of our training centres and an increase of four units in RSEUs. The decrease in value in the quarter of the Canadian dollar against the euro, British pound and the U.S. dollar also made a small contribution.
Revenue was $336.9 million this year, which is 5% higher than last year
This growth in revenue is mainly because of the strong demand for training, which reflects the healthy state of the aerospace industry, and because of the average increase of one RSEU. This is despite the 5% increase in value of the Canadian dollar against the U.S. dollar during the year.
Segment operating income was $21.3 million (23.2% of revenue)
Segment operating income was higher this quarter because of a gain of $1.1 million from the disposal of one used FFS and a net gain of $1.3 million following the negotiation of various agreements with a business partner. Segment operating income would otherwise have been $18.9 million (20.6% of revenue), 40% or $5.4 million higher than last quarter, and 27% or $4.0 million higher than the same period last year.
Segment operating income grew by 13% over last year, to $64.3 million
The increase was due to the higher activity level and improved operational efficiencies. This is despite a 5% increase in value of the Canadian dollar against the U.S. dollar and minimal change in our average number of RSEUs over last year.
Capital employed increased over last year
Capital employed was higher mainly because of the formalization of the ECFT joint venture, an increase in working capital tied to revenue growth, an increase in capital spending on various investments that exceeded our amortization and depreciation expenses for the quarter, an increase in our working capital and the impact of foreign exchange.
10Non-GAAP measure (see Section 3.7) .
CAE 2007 Q4 REPORT | 25
Capital expenditures at $27.7 million this quarter and $108.1 million for the year
Capital expenditures were higher this year mainly because of the ongoing investment in the Dassault Falcon 7X training program, our expansion and conversion of the Burgess Hill (U.K.) and Madrid training centres, and new simulators being added to our network.
Backlog up by 18% over last year
(amounts in millions) | FY2007 | FY2006 | ||||
| ||||||
Backlog, beginning of period | $ | 809.0 | $ | 829.6 | ||
+ orders | 452.5 | 346.9 | ||||
revenue | (336.9 | ) | (322.3 | ) | ||
+/ adjustments (mainly FX) | 27.0 | (45.2 | ) | |||
| ||||||
Backlog, end of period | $ | 951.6 | $ | 809.0 | ||
| ||||||
This years book-to-sale ratio was 1.3x. | ||||||
5.2 MILITARY SEGMENTS | ||||||
SIMULATION PRODUCTS/MILITARY |
SP/M was awarded $118.5 million in orders this quarter, including:
Financial results
(amounts in millions, except operating margins) | FY2007 | FY2006 | Q4-2007 | Q3-2007 | Q2-2007 | Q1-2007 | Q4-2006 | |
| ||||||||
Revenue | $ | 357.5 | 327.4 | 92.2 | 105.2 | 64.3 | 95.8 | 77.5 |
Segment operating income | $ | 39.1 | 27.0 | 9.5 | 11.2 | 7.3 | 11.1 | 6.8 |
Operating margins | % | 10.9 | 8.2 | 10.3 | 10.6 | 11.4 | 11.6 | 8.8 |
Amortization & depreciation | $ | 9.0 | 13.8 | 2.6 | 1.9 | 2.3 | 2.2 | 5.9 |
Capital expenditures | $ | 5.5 | 6.0 | 1.8 | 1.5 | 0.9 | 1.3 | 3.0 |
Capital employed | $ | 54.5 | 49.3 | 54.5 | 34.7 | 57.7 | 48.0 | 49.3 |
Backlog | $ | 635.8 | 540.5 | 635.8 | 609.0 | 626.3 | 475.2 | 540.5 |
|
We have restated comparable periods to reflect a change in the stock-based compensation expense (EIC-162).
Revenue down by 12% over last quarter and up by 19% year over year
The decrease over last quarter was mainly due to an unusually high level of activity on some European programs last quarter, particularly the Eurofighter program. This was partly offset by increased activity on some U.S. programs and the decrease in value of the Canadian dollar against the U.S. dollar, the euro and the British pound during the quarter.
The increase over last year was mainly due to higher activity on some U.S. programs and the decrease in value during the period of the Canadian dollar against the U.S. dollar, the euro and the British pound.
Revenue was $357.5 million this year, which is 9% or $30.1 million higher than last year
The increase reflects the higher level of order intake, particularly in the United States and the United Kingdom. This was partly offset by an increase in value of the Canadian dollar against the U.S. dollar.
Segment operating income down by 15% over last quarter and up by 40% year over year
The decrease over last quarter was mainly because we wrote down some deferred licence costs that we re-negotiated with one of our suppliers to give us more flexibility.
SP/Ms segment operating income was higher than last year because revenue was higher as explained above, and because we started recognizing Investissement Québecs contribution to Project Phoenix this fiscal year.
26 | CAE 2007 Q4 REPORT
Segment operating income was $39.1 million this year, which is 45% or $12.1 million higher than last year
This was mainly because of the increase in revenue as explained above, combined with lower amortization expense from the write-down last year of some deferred development costs.
Capital employed increased over last quarter
The increase this quarter was mainly because of higher working capital accounts.
Backlog up by 18% over last year
(amounts in millions) | FY2007 | FY2006 | ||||
| ||||||
Backlog, beginning of period | $ | 540.5 | $ | 511.3 | ||
+ orders | 421.3 | 364.4 | ||||
revenue | (357.5 | ) | (327.4 | ) | ||
+/ adjustments (mainly FX) | 31.5 | (7.8 | ) | |||
| ||||||
Backlog, end of period | $ | 635.8 | $ | 540.5 | ||
| ||||||
This years book-to-sale ratio is 1.2x. | ||||||
TRAINING & SERVICES/MILITARY |
TS/M was awarded the following major contracts this quarter:
Financial results
(amounts in millions, except operating margins) | FY2007 | FY2006 | Q4-2007 | Q3-2007 | Q2-2007 | Q1-2007 | Q4-2006 | |
| ||||||||
Revenue | $ | 208.2 | 200.5 | 55.8 | 50.8 | 53.5 | 48.1 | 47.7 |
Segment operating income | $ | 33.7 | 18.7 | 6.1 | 6.8 | 9.3 | 11.5 | 3.2 |
Operating margins | % | 16.2 | 9.3 | 10.9 | 13.4 | 17.4 | 23.9 | 6.7 |
Amortization & depreciation | $ | 6.9 | 7.0 | 1.9 | 1.7 | 1.8 | 1.5 | 1.6 |
Capital expenditures | $ | 30.1 | 30.9 | 2.5 | 7.8 | 6.4 | 13.4 | 15.5 |
Capital employed | $ | 132.8 | 111.5 | 132.8 | 136.6 | 129.2 | 119.2 | 111.5 |
Backlog | $ | 834.4 | 826.1 | 834.4 | 857.3 | 801.6 | 842.9 | 826.1 |
|
Comparable periods have been restated to reflect a change in the stock-based compensation expense (EIC-162).
Revenue up by 10% over last quarter and by 17% year over year
Revenue improved this quarter because:
Revenue was $208.2 million this year, which is 4% or $7.7 million higher than last year
The increase is mainly due to higher activities on U.S. and German support services contracts and the integration of Kesem, which were partly offset by the increase in value of the Canadian dollar against the U.S. dollar.
Segment operating income down by 10% over last quarter and up by 91% year over year
Segment operating income decreased from last quarter despite an increase in revenue, mainly because we received a dividend last quarter from a TS/M investment in the U.K. Segment operating income would have been stable from last quarter if the impact of the dividend was not included.
The increase over last year was mainly because of higher revenue as explained above, combined with higher contributions from TPC and because we started recognizing Investissement Québecs contribution to project Phoenix in this fiscal year.
Segment operating income was $33.7 million this year, which is 80% or $15.0 million higher than last year
This was mainly due to:
CAE 2007 Q4 REPORT | 27
Capital employed decreased over last quarter | ||||||
The decrease this quarter was mainly because of lower working capital accounts. | ||||||
Backlog stable over last year | ||||||
| ||||||
(amounts in millions) | FY2007 | FY2006 | ||||
| ||||||
Backlog, beginning of period | $ | 826.1 | $ | 890.3 | ||
+ orders | 174.5 | 243.0 | ||||
revenue | (208.2 | ) | (200.5 | ) | ||
+/ adjustments (mainly FX) | 42.0 | (106.7 | ) | |||
| ||||||
Backlog, end of period | $ | 834.4 | $ | 826.1 | ||
|
This years book-to-sale ratio is 0.8x.
Combined military book-to-sale ratio for the year was 1.1x.
6. CONSOLIDATED CASH MOVEMENTS AND LIQUIDITY
We actively manage liquidity and regularly monitor the factors that could affect it, including:
6.1 CONSOLIDATED CASH MOVEMENTS | |||||||||
| |||||||||
(amounts in millions) | 2007 | 2006 | 2005 | ||||||
| |||||||||
Cash provided by continuing operating activities* | $ | 219.1 | $ | 146.8 | $ | 95.2 | |||
Changes in non-cash working capital | 20.2 | 79.1 | 84.2 | ||||||
| |||||||||
Net cash provided by continuing operations | $ | 239.3 | $ | 225.9 | $ | 179.4 | |||
Capital expenditures | (158.1 | ) | (130.1 | ) | (118.0 | ) | |||
Other capitalized costs | (11.8 | ) | (12.4 | ) | (7.4 | ) | |||
Proceeds from sale and leaseback of assets | | | 43.8 | ||||||
Cash dividends | (9.8 | ) | (9.7 | ) | (24.0 | ) | |||
Non-recourse financing11 | 34.0 | 26.5 | | ||||||
| |||||||||
Free cash flow | $ | 93.6 | $ | 100.2 | $ | 73.8 | |||
Other cash movements, net | 3.5 | 12.0 | (89.5 | ) | |||||
Proceeds from disposal of discontinued operations | (3.8 | ) | | 239.4 | |||||
Non-recourse financing | (34.0 | ) | (26.5 | ) | | ||||
Effect of foreign exchange rate changes on cash and cash equivalents | 4.4 | (7.6 | ) | (2.3 | ) | ||||
| |||||||||
Net increase in cash before proceeds and repayment of long-term debt | $ | 63.7 | $ | 78.1 | $ | 221.4 | |||
| |||||||||
*before changes in non-cash working capital |
Free cash flow was $93.6 million this year, slightly below last year
Capital expenditures and other capitalized costs increased by $27.4 million this year
Growth capital expenditures12of $118.9 million this year were for:
Maintenance capital expenditures13were $39.2 million this year.
We received $34.0 million in non-recourse financing this year related to the NH90 program and a TS/C joint venture in China. Last year, we received $26.5 million for the same programs.
11Non-GAAP measure (see Section 3.7) .
12Non-GAAP measure (see Section 3.7) .
13Non-GAAP measure (see Section 3.7) .
28 | CAE 2007 Q4 REPORT
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, 2007 was $615.3 million, of which $139.7 million (or 23%) was used for letters of credit. The total amount available at March 31, 2006, was $608.5 million, of which $125.2 million (or 21%) was used. The slightly higher use this year is because we issued additional letters of credit and bank guarantees. There were no borrowings under the facilities as at March 31, 2007, or at March 31, 2006.
We also have the ability to borrow in various currencies through non-committed operating lines of $4.6 million. We had not drawn down on these operating lines as at March 31, 2007.
Long-term debt was $283.2 million as at March 31, 2007, compared to $271.3 million at the end of the previous fiscal year. The short-term portion of the long-term debt was $27.2 million at March 31, 2007, compared to $10.4 million at the end of the previous fiscal year. The short-term portion was higher mainly because we incurred additional debt with a 12-month maturity this quarter. The main variations in debt over the year (other than normal contractual amortization of existing debt) are described below.
We decided this quarter to use our strong cash position to prepay the senior notes tranche that was to mature in June 2007. This reduction in debt was offset somewhat by the additional non-recourse financing we raised this quarter for the German NH90 project and the Zhuhai Training Centre.
We raised $19.1 million for our 25% share of the initial drawdown on the debt facility for the German NH90 project. 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 June 2021.
We also raised $13.9 million to finance the acquisition of two FFSs for the Zhuhai Training Centre and to repay a short-term loan that matured in March 2007. This additional financing represented our 49% share of the term debt for the joint venture. The debts are non-recourse to CAE and have final maturities of March 2008 and December 2009.
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 $9.5 million to date for costs incurred to date to implement the new system.
We have an unsecured EDC Performance Security Guarantee (PSG) account for $115.3 million (US$100 million). This is an uncommitted revolving facility for performance bonds, advance payment guarantees or similar instruments. As of March 31, 2007, we had drawn $65.6 million. This is higher than the $26.0 million as of March 31, 2006, because the volume of simulator sales was higher this year.
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 you when they mature.
Contractual obligations
As at March 31, 2007 | ||||||||||||||
(amounts in millions) | 2008 | 2009 | 2010 | 2011 | 2012 | Thereafter | Total | |||||||
| ||||||||||||||
Long-term debt | $ | 25.3 | $ | 14.2 | $ | 94.6 | $ | 16.0 | $ | 9.8 | $ | 112.2 | $ | 272.1 |
Capital lease | 1.9 | 0.8 | 0.8 | 7.6 | | | 11.1 | |||||||
Operating leases | 73.0 | 74.3 | 57.5 | 57.8 | 60.4 | 225.3 | 548.3 | |||||||
Purchase obligations | 27.2 | 9.8 | | | | | 37.0 | |||||||
Other long-term obligations | 7.9 | 3.9 | 2.0 | 1.8 | 1.8 | 2.9 | 20.3 | |||||||
| ||||||||||||||
Total | $ | 135.3 | $ | 103.0 | $ | 154.9 | $ | 83.2 | $ | 72.0 | $ | 340.4 | $ | 888.8 |
|
We also had total committed credit facilities of $475.6 million available as at March 31, 2007, compared to $483.3 million at March 31, 2006. The slight decrease in available credit was because we used it to issue bank guarantees.
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. Our other long-term obligations include $14.5 million in repayments under various government assistance programs.
As at March 31, 2007, we had other long-term liabilities that are not included in the table above. These include some accrued pension liabilities, deferred revenue, 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.
CAE 2007 Q4 REPORT | 29
7. | CONSOLIDATED FINANCIAL POSITION |
7.1 | CONSOLIDATED CAPITAL EMPLOYED |
As at March 31 | As at March 31 | |||||
(amounts in millions) | 2007 | 2006 | ||||
| ||||||
Use of capital: | ||||||
Non-cash working capital | $ | (118.1 | ) | $ | (74.5 | ) |
Property, plant and equipment, net | 986.6 | 832.1 | ||||
Other long-term assets | 343.9 | 336.9 | ||||
Net assets held for sale (current and long-term) | | 5.9 | ||||
Other long-term liabilities | (249.5 | ) | (238.0 | ) | ||
| ||||||
Total capital employed | $ | 962.9 | $ | 862.4 | ||
| ||||||
Source of capital: | ||||||
Net debt | $ | 133.0 | $ | 190.2 | ||
Shareholders equity | 829.9 | 672.2 | ||||
| ||||||
Source of capital | $ | 962.9 | $ | 862.4 | ||
| ||||||
We have restated comparable periods to reflect a change in the stock-based compensation expense (EIC-162). |
Capital employed increased 12%
The increase was mainly because of higher property, plant and equipment, partly offset by lower non-cash working capital and higher other long-term liabilities.
Non-cash working capital decreased by $43.6 million
The decrease was mainly because of a reduction in the income taxes recoverable account which is driven by a reduction of unused federal income taxes credit applied to offset the current year tax expense and by various tax reimbursements from Québec and other foreign jurisdictions.
Net property, plant and equipment up $154.5 million
The increase was from new capital expenditures of $158.1 million and $34.6 million of foreign exchange, partly offset by normal depreciation of $55.0 million.
Net debt lower than at the beginning of the year
This was mainly because of a $63.7 million net increase in cash, before proceeds and repayment of long-term debt. The amount was reduced by the depreciation of the Canadian dollar against our foreign denominated debt.
Change in net debt | ||||||
| ||||||
As at March 31 | As at March 31 | |||||
(amounts in millions) | 2007 | 2006 | ||||
| ||||||
Net debt, beginning of period | $ | 190.2 | $ | 285.8 | ||
Impact of cash movements on net debt (see table in the cash movements section) | (63.7 | ) | (78.1 | ) | ||
Effect of foreign exchange rate changes on long-term debt | 6.5 | (17.5 | ) | |||
| ||||||
Decrease in net debt during the period | (57.2 | ) | (95.6 | ) | ||
| ||||||
Net debt, end of period | $ | 133.0 | $ | 190.2 | ||
|
Shareholders equity
The $157.7 million increase in equity was mainly because of higher net earnings ($127.4 million), the proceeds from the share issue and contributed surplus ($12.8 million) and the positive change in the currency translation adjustment account ($27.5 million), which was a result of the decrease in the value of the Canadian dollar. This was after accounting for dividends ($10.0 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 251,960,449 common shares issued and outstanding as at March 31, 2007, with total share capital of $401.7 million. We also had 5,441,915 options outstanding, of which 2,986,135 were exercisable. We have not issued any preferred shares to date.
As at April 30, 2007, we had a total of 252,089,796 common shares issued and outstanding.
Dividend policy
We paid a dividend of $0.01 per share each quarter in fiscal 2007. These dividends were eligible under the Income Tax Act (Canada) and its provincial equivalents.
30 | CAE 2007 Q4 REPORT
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 $10 million based on our current dividend policy and the 252.0 million common shares outstanding as at March 31, 2007.
Guarantees
We issued letters of credit and performance guarantees for $149.1 million in the normal course of business this year, compared to $98.6 million last fiscal year. The amount was higher this year mainly because of additional project-related requirements.
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 $136 million as at March 31, 2007, and are included in this section in the discussion of operating leases as contractual obligations. The amount is also disclosed in Note 21 to the consolidated financial statements.
In April 2005, Helicopter Flight Training Services GmbH (HFTS), an industrial consortium we have a 25% ownership in, 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 $38.8 million (25.2 million) as at March 31, 2007, and was included in the amount disclosed in Note 12 to the consolidated financial statements.
We negotiated new financing for the Zhuhai Training Centre this year. The recorded debt represents our 49% 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 maturities between March 2008 and December 2009. According to the debt agreements, the joint venture may draw an additional US$6.4 million (our proportionate 49% share is US$3.1 million) in fiscal 2008 to pay for simulators. We had $20.4 million outstanding (US$17.7 million) as at March 31, 2007. 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 $3.0 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.
7.2 VARIABLE INTEREST ENTITIES
Note 26 to the consolidated financial statements summarizes the total assets and total liabilities of the significant entities we have a variable interest in (variable interest entities or VIEs). They are listed by segment and include sale and leaseback entities 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 for civil and military aviation in our training centres. These leases expire at different times up to 2023. Generally, we have the option of buying 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 sometimes 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. At the end of fiscal 2006, we also had a variable interest in another SPE through a cost sharing construction agreement. The agreement ended this year so we no longer have a variable interest in this SPE.
We also provide administrative services to the SPE for a fee.
Some of these SPEs are VIEs. At the end of fiscal 2007 and 2006, we were the primary beneficiary for one of them. The assets and liabilities of this VIE are fully consolidated in our consolidated financial statements as at March 31, 2007 and 2006, 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 AcG-15. Our maximum potential exposure to losses relating to these non-consolidated SPEs was $47.1 million at the end of fiscal 2007 ($47.7 million in 2006).
CAE 2007 Q4 REPORT | 31
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 loss based on the terms of the partnership arrangement. As at March 31, 2007 and 2006, our maximum off-balance sheet exposure to losses related to these non-consolidated VIEs, other than from their contractual obligations, was not material.
7.3 OFF BALANCE SHEET ARRANGEMENTS
Most of our off balance sheet obligations are from operating lease obligations related to two segments:
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. In fiscal 2006, we bought back five FFSs that had initially been financed under a sale and leaseback transaction for a total consideration of $47.3 million. We also completed the refinancing of two FFSs for a net asset value of US$13.8 million, and converted one FFS from an operating lease into a capital lease to minimize the tax impact associated with the relocation of the FFS to the Brazil training centre. As a result, proceeds from the sale and leaseback of assets are nil for this year and last year.
The table below lists sale and leaseback transactions for FFSs that were in service in TS/C training centres as of March 31, 2007. They appear as operating leases in our consolidated financial statements.
Existing FFSs under sale and leaseback
Number | Initial | Imputed | Unamortized | Residual | ||||||||
(amounts in millions, | Fiscal | of FFSs | Lease | term | interest | deferred | value | |||||
unless otherwise noted) | year | (units) | obligations | (years) | rate | gain | guarantee | |||||
| ||||||||||||
5.5 | % to | |||||||||||
SimuFlite | 2002 to 2005 | 14 | $ | 167.2 | 10 to 20 | 6.7 | % | $ | 12.2 | $ | - | |
Toronto training centre | 2002 | 2 | 37.4 | 21 | 6.4 | % | 15.4 | 9.2 | ||||
Air Canada training centre | 2000 | 2 | 27.7 | 20 | 7.6 | % | 13.7 | 8.2 | ||||
Denver/Dallas | ||||||||||||
training centres | 2003 | 5 | 72.3 | 20 | 5.0 | % | 27.1 | | ||||
China Southern joint venture (1) | 2003 | 5 | 18.2 | 15 | 3.0 | % | | | ||||
2.9 | % to | |||||||||||
Other | | 5 | 15.3 | 3 | to 8 | 7.0 | % | 15.6 | 34.7 | |||
| ||||||||||||
33 | $ | 338.1 | $ | 84.0 | $ | 52.1 | ||||||
| ||||||||||||
Annual lease payments | ||||||||||||
(upcoming 12 months) | $ | 33.8 | ||||||||||
| ||||||||||||
(1)We have a 49% interest in this joint venture. |
32 | CAE 2007 Q4 REPORT
The rental expenses related to operating leases of the FFSs under the sale and leaseback arrangements were $32.4 million for fiscal 2007, compared to $38.3 million last year.
You can find more details about operating lease commitments in Notes 21 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, swap and option 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 18 to the financial statements for more details). At the end of fiscal 2007, approximately 14% of the total value of the outstanding contracts were not hedged. The non-hedged portion relates mainly to a former contract and provides a natural hedge to certain purchases that are open to currency exposure.
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 varies depending on a number of factors, including milestone billings and the use of foreign materials and/or sub-contractors. We had $604.1 million Canadian-dollar equivalent in forward contracts at the end of fiscal 2007, compared to $322.3 million at the end of the previous year. The increase was mainly because of a higher number of foreign currency denominated revenue contracts being hedged, as well as some additional hedging for purchase 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 60% fixed-rate and 40% floating-rate at the end of this year, compared to 62% fixed-rate and 38% floating-rate at the end of fiscal 2006.
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 1,495,000 CAE shares as at March 31, 2007, compared to 600,000 the previous year. We used the following methods and assumptions to estimate the fair value of the financial instruments:
The table below lists the fair value and the carrying amount of the financial instruments as at March 31:
(amounts in millions) | 2007 | 2006 | ||||||||
| ||||||||||
Fair | Carrying | Fair | Carrying | |||||||
value | amount | value | amount | |||||||
| ||||||||||
Long-term debt | $ | 288.5 | $ | 283.2 | $ | 277.9 | $ | 271.3 | ||
Net forward foreign exchange contracts | (7.6 | ) | | 5.4 | | |||||
Interest rate swap contracts | 1.0 | | (1.5 | ) | | |||||
|
8. | ACQUISITIONS, BUSINESS COMBINATIONS AND DIVESTITURES |
8.1 | ACQUISITIONS AND JOINT VENTURES |
Kesem International PTY Ltd
On December 22, 2006, CAE 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, was AUD$5.0 million ($4.6 million) payable in cash in four instalments as follows:
i. | AUD$3.5 million ($3.1 million) at closing date. |
ii. | AUD$0.5 million ($0.5 million) in fiscal 2007. |
iii. | AUD$0.5 million ($0.5 million) in fiscal 2008. |
iv. | AUD$0.5 million ($0.5 million) in fiscal 2009. |
CAE 2007 Q4 REPORT | 33
In the fourth quarter of fiscal 2007, the parties agreed to the distributable working capital adjustment and no significant adjustment was required.
Emirates-CAE Flight Training Centre (ECFT) joint venture company
On October 4, 2006, we decided, with Emirates, to strengthen our partnership by transforming an existing teaming agreement into a 50/50 joint venture company. ECFT provides training for airline and business aircraft pilots for specific types of aircraft, training for aircraft maintenance personnel for particular aircraft and maintenance services for training devices. The two parties have agreed to transfer their existing Dubai flight training assets to ECFT, to be entitled to equal profits, losses and dividends of the business and to share equally in managing all operating, financing and investing activities of the joint venture company.
Terrain Experts Inc.
On May 20, 2005, we 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 in three instalments as follows:
i. | 1,000,000 shares representing US$4.8 million (approximately $6.1 million issued at a price of $6.13 per share, the closing price of the common shares on the Toronto Stock Exchange (TSX) on May 20, 2005), and US$0.2 million ($0.3 million) together in cash |
representing US$5.0 million ($6.4 million) at the closing date.
ii. | US$3.6 million through the issuance of CAE shares in fiscal 2007 (12 months following the closing of the acquisition) to be calculated at the TSX stock price on the date of issuance. In fiscal 2007, we settled the second instalment of the payment related to the acquisition in the amount of US$3.6 million with cash rather than shares. |
iii. | US$2.5 million through the issuance of CAE shares in fiscal 2008 (24 months following the closing of the transaction) to be calculated at the TSX stock price on the date of issuance, which we may settle in cash rather than shares. |
In fiscal 2007, we completed the purchase price allocation for this acquisition, and no adjustments were required.
CAE Professional Services (Canada) Inc. (formerly identified as Greenley & Associates Inc.)
On November 30, 2004, we acquired all the issued and outstanding shares of CAE Professional Services C anada) Inc. (formerly Greenley & Associates Inc. G &A]), which provides project management, human factors, modelling and simulation services. Total consideration for this acquisition was $4.4 million, payable in equivalent common shares issued by CAE in four instalments as follows: 424,628 shares (representing $2.0 million) at the closing date, $0.8 million in fiscal 2006, $0.8 million in fiscal 2007, and 169,851 shares (representing $0.8 million at the transaction date) to be issued on November 30, 2007.
The number of shares to satisfy the first and the fourth payments was calculated based on the average closing share price ($4.71 per share) of CAE common shares on the TSX for the 20-day period ending two days prior to November 30, 2004. The 91,564 shares issued to satisfy the second payment was based on the average closing share price of CAE common shares on the TSX for the 20-day period ending two days before the date of issuance ($8.07 per share). The third payment of $0.8 million was initially considered to be satisfied through the issuance of shares based on the average closing share price of CAE common shares on the TSX for the 20-day period ending two days before the date of issuance. In fiscal 2007, however, we settled the third payment with cash rather than shares. In the second quarter of fiscal 2006, we completed the purchase price allocation for this acquisition, and no adjustments were required.
Servicios de Instruccion de Vuelo, S.L.
In February 2004, CAE and Iberia Lineas Aereas de España, SA (Iberia) agreed to combine their aviation training operations in Spain after receiving regulatory clearance from the Spanish authorities to start operations, under an agreement entered into in October 2003. On May 27, 2004, in connection with the financing of the combined operations, Iberia and CAE Servicios Globales de Instruccion de Vuelo (España), S.L. (SGIV), a wholly-owned subsidiary of CAE, contributed the net assets of their respective training centre facilities to Servicios de Instruccion de Vuelo, S.L. (SIV), with SGIV obtaining ownership of 80% of SIV. SIV financed the acquisition of the assets from SGIV and Iberia through an asset-backed financing transaction (see Note 12 to the financial statements for more details).
As part of this transaction, if the October 2003 agreement is terminated, SGIV and Iberia will be obliged to repurchase the assets they contributed, in proportion to the fair market value of the assets, for a total amount equal to the outstanding balance under the financing transaction.
As part of the May 27, 2004 agreement, Iberia was to subsequently transfer a simulator that it was leasing from a third party to SIV, in exchange for a cash consideration of $5.7 million (3.5 million). This transaction was accounted for as an increased contribution of property, plant and equipment and in long-term debt with a cash consideration equivalent to the net asset value.
34 | CAE 2007 Q4 REPORT
In addition, as part of the agreement, SIV has agreed to fund an amount up to a maximum of $2.4 million (1.5 million) to cover any payments made by Iberia to former employees in order to indemnify Iberia for potential costs to be incurred due to certain employment matters. Based on managements best estimate of SIVs potential liability, $2.4 million (1.5 million) has been accrued as part of the purchase price and accounted for as goodwill.
Flight Training Centre Chile S.A.
On April 22, 2004, we acquired all the issued and outstanding shares of Flight Training Centre Chile S.A. (FTC Chile, located in Santiago, Chile) from LAN Chile S.A. for total cash consideration of $0.9 million (US$0.7 million). The balance of the purchase price was paid in two instalments of US$0.3 million in fiscal 2006 and US$0.8 million in fiscal 2007. This acquisition expanded our pilot-training operations into the South American market.
8.2 DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
Discontinued operations
Marine Controls
On February 3, 2005, we 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. This amount was subject to the approval by L-3 of the net working capital of the Marine Controls segment. The parties completed the discussions regarding the net working capital in the second quarter of fiscal 2007 and L-3 was paid for the difference in the net working capital. We 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 we were 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. We intend to assert all available defences against these claims. The aggregate liability for claims made under the SPA is limited to US$25 million.
During the second and third quarters of fiscal 2006, according to the purchase agreement, L-3 acquired the two components of the Marine Controls segment that were subject to regulatory approvals, and assumed our guarantee of $53.0 million (£23 million) of project-financed related debt for the U.K. Astute Class submarine training program.
The results of the Marine Controls segment have been reported as discontinued operations since the second quarter of fiscal 2005. Interest expense relating to debt not directly attributable to the continuing operations and paid with the proceeds of the sale of the Marine Controls business has been allocated to discontinued operations based on its share of net assets.
Cleaning Technologies and Other Discontinued Operations
In fiscal 2004, we completed the sale of our last Cleaning Technologies business, Alpheus Inc., to Cold Jet Inc. We were entitled to receive further consideration based on the performance of the business until 2007 and also had certain obligations to Cold Jet Inc. In fiscal 2006, an agreement was reached to settle the further consideration and cancel our outstanding obligations. Cold Jet paid us an amount of $0.2 million.
In the second quarter of fiscal 2007, we 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 CAE 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, we collected and recorded an additional amount of approximately $0.1 million (net of tax recovery of $0.1 million).
Also, in fiscal 2006, we incurred additional costs of $3.4 million related to our 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, we completed the sale of one of our Forestry Systems businesses to Carmanah Design and Manufacturing. We were entitled to receive further consideration based on the performance of the business. In the first quarter of fiscal 2007, a settlement was concluded and we received a payment of $0.2 million (net of tax expense of $0.1 million).
On August 16, 2002, we sold substantially all the assets of the sawmill division of Forestry Systems. We were 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, we were notified by the buyers that, in their view, the targeted level of operating performance which would trigger further payment had not been achieved. We have completed a review of the buyers books and records and, in January 2006 launched legal proceedings to collect the payment that we believe is owed to us. In the fourth quarter of fiscal 2007, we recognized fees in connection with the evaluation and litigation exercise amounting to $0.9 million (net of tax recovery of $0.2 million). For fiscal 2006, the Company incurred $0.2 million (net of tax recovery of $0.1 million). In fiscal 2005, no such fees were incurred. This dispute has been referred to arbitration and is currently in the discovery of evidence phase.
CAE 2007 Q4 REPORT | 35
Long-term assets held for sale
As part of our global expansion, we announced in the third quarter of fiscal 2005 that we would be opening a new business aviation-training centre in Morris County, New Jersey. The new training centre became operational in fiscal 2007. As a result, the valuation of two redundant training centre buildings, one located in Dallas, Texas and a second located in Marietta, Georgia, were adjusted to their fair value in fiscal 2005 and reclassified as assets held for sale, and previously reported amounts have been reclassified. Also, as part of a review of our performance and strategic orientation, we decided to close our training centre located in Maastricht, Netherlands in the third quarter of fiscal 2006. As a result, the property was reclassified as an asset held for sale.
In the second quarter of fiscal 2007, we sold for $3.6 million the aggregate land and building in Dallas, Texas and Marietta, Georgia, which was previously reported as assets held for sale. As a result of this transaction, we recorded a loss on the sale of $0.2 million (net of tax recovery of $0.1 million).
In the last quarter of fiscal 2007, we sold the remaining long-term assets held for sale in Maastricht, Netherlands for $2.8 million. As a result of this transaction, we recorded a gain on the sale of $0.2 million (net of tax expense of $0.1 million).
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 (Boeing 777) and evolving industry standards such as our CAE 5000 Series recently launched. 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 2007, for example, sales by the SP/M and TS/M segments accounted for 45% 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 major airlines continue to face financial difficulties, we have seen a surge of new aircraft orders in 2007, which is encouraging. Most of these aircraft are destined for carriers in the Middle East and Asia.
Fluctuating prices for airplane fuel also have a material effect on the profitability of many airlines. 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.
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 positioning themselves to take advantage of a positive market outlook. 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.
36 | CAE 2007 Q4 REPORT
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 90% of our revenue is generated in foreign currencies and this will continue to be the case. Conversely, a smaller 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 developed various cash flow hedging programs to partly offset this exposure. The Canadian dollar has also made Canada a more expensive manufacturing environment for us. If the Canadian dollar 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 many 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 2007. 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.
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:
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.
ntegration 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 assistance.
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.
CAE 2007 Q4 REPORT | 37
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 our past 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 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. 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.
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, cause delays and result 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 virtually all of our products is subject to regulatory controls. These can prevent us from selling to certain countries, and require us to get 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 can 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.
Enterprise resource planning
We are investing time and money in a new 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.
Integration of business acquired
The success of our acquisitions depend on our ability to cristallize synergies both in terms of broadening our product offering as well as consolidating the operations of the business acquired as part of our existing operations.
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10. | CHANGES IN ACCOUNTING STANDARDS |
10.1 | SIGNIFICANT CHANGES IN ACCOUNTING STANDARDS FISCAL 2005 TO 2007 |
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.
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 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:
Consolidation of variable interest entities
On January 1, 2005, we adopted AcG-15, Consolidation of Variable Interest Entities, retroactively, without restating prior periods. AcG-15 provides a framework for identifying variable interest entities (VIEs) and determining when an entity should include the assets, liabilities and results of operations of a VIE in its consolidated financial statements.
In general, a VIE is a corporation, partnership, limited-liability corporation, trust, or any other legal structure used to conduct activities or hold assets that either:
AcG-15 requires a VIE to be consolidated if a party with an ownership, contractual or other financial interest in the VIE (a variable interest holder) is exposed to a majority of the risk of loss from the VIEs activities, is entitled to receive a majority of the VIEs residual returns (if no party is exposed to a majority of the VIEs losses), or both (the primary beneficiary). Upon consolidation, the primary beneficiary generally must initially record all of the VIEs assets, liabilities and non-controlling interests at fair value at the date the enterprise became the primary beneficiary. For variable interest entities created before AcG-15 was initially adopted, the assets, liabilities and non-controlling interests of these entities must be initially consolidated as if the entities were always consolidated based on majority voting interest. AcG-15 also requires disclosure about VIEs that the variable interest holder is not required to consolidate but in which it has a significant variable interest.
The adoption of AcG-15 on January 1, 2005 resulted in an increase in total assets, liabilities and retained earnings of $46.9 million, $43.7 million, and $3.3 million respectively and a decrease in the currency translation adjustment of $0.1 million in the fiscal 2005 consolidation financial statements.
The table below shows the impact on each item in the balance sheet as of January 1, 2005:
(amounts in millions) | Consolidated in fiscal 2005 | ||
| |||
Assets | |||
Property, plant and equipment, net | $ | 46.9 | |
| |||
$ | 46.9 | ||
Liabilities | |||
Accounts payable and accrued liabilities | $ | 0.6 | |
Long-term debt (including current portion) | 41.3 | ||
Future tax liabilities | 1.8 | ||
| |||
$ | 43.7 | ||
Shareholders equity | |||
Retained earnings | $ | 3.3 | |
Currency translation adjustment | (0.1 | ) | |
| |||
$ | 46.9 | ||
|
CAE 2007 Q4 REPORT | 39
When we consolidated this VIE, we recognized liabilities that represent claims against the specific assets of the consolidated VIE, and not additional claims on our general assets. Assets recognized as a result of consolidating this VIE cannot be used to satisfy claims against our general assets. In addition, consolidating this VIE did not result in any change in the underlying tax, legal or credit exposure for us.
Generally accepted accounting principles and presentation of financial statements
On April 1, 2004, we adopted CICA Handbook Section 1100, Generally Accepted Accounting Principles and Section 1400, General Standards of Financial Statement Presentation. Section 1100 describes what constitutes Canadian GAAP and its sources and provides guidance on sources to consult when selecting accounting policies and appropriate disclosure when a matter is not dealt with explicitly in the primary sources of GAAP, thereby reclassifying GAAP hierarchy. Section 1400 clarifies fair presentation according to GAAP and provides general guidance on financial presentation. Adopting these standards did not have any material effect on our consolidated financial statements.
Hedging relationships
On April 1, 2004, we adopted AcG-13, Hedging Relationships, and EIC-128, Accounting for Trading, Speculative or Non-Hedging Derivative Financial Instruments on a prospective basis. AcG-13 addresses the identification, designation, documentation and effectiveness of hedging relationships when applying hedge accounting and discontinuing the use of hedge accounting. It requires companies to document all information related to hedging relationships, including the effectiveness of the hedges. Adopting this guideline did not have a material effect on our consolidated financial statements.
Employee future benefits
On April 1, 2004, we adopted CICA Handbook Section 3461, Disclosure Requirements Employee Future Benefits. It requires us to describe each type of plan, the date the plan assets and liabilities were valued, the effective date of the last actuarial evaluation and details of the plan assets by major category.
10.2 FUTURE CHANGES IN ACCOUNTING STANDARDS
Financial instruments recognition and measurement hedges and comprehensive income
In January 2005, the Accounting Standards Board (AcSB) issued three new standards dealing with financial instruments: (i) Financial Instruments Recognition and Measurement, (ii) Hedges and (iii) Comprehensive Income. These sections are required for public companies for interim and annual financial statements relating to fiscal years beginning on or after October 1, 2007. These standards are based on U.S. FASB Statement 115 (Accounting for Certain Investments in Debt and Equity Securities), Statement 130 (Reporting Comprehensive Income), Statement 133 (Accounting for Derivative Instruments and Hedging Activities) and IAS 39 of the International Accounting Standards (IAS) Board (Financial Instruments Recognition and Measurement).
CICA Handbook Section 3855, Financial Instruments Recognition and Measurement prescribes when a financial instrument should be recognized on the balance sheet and the method for measuring fair value or cost-based measures. It also specifies how financial instrument gains and losses should be presented.
CICA Handbook Section 3865, Hedges allows optional treatment as long as hedges are designated as either fair value hedges, cash flow hedges or hedges of a net investment in a self-sustaining foreign operation.
For a fair value hedge, the gain or loss that is attributed to the hedged risk is recognized in net income in the period of change, together with the offsetting loss or gain on the hedged item that is attributed to the hedged risk. The carrying amount of the hedged item is adjusted for the hedged risk.
For a cash flow hedge or for a hedge of a net investment in a self-sustaining foreign operation, the effective portion of the hedging items gain or loss is initially reported in other comprehensive income and then reclassified as net income when the hedged item affects net income.
CICA Handbook Section 1530, Comprehensive Income and amended Section 3250, Surplus (renamed Section 3251, Equity) require enterprises to present comprehensive income and its components as well as net income in its financial statements, and to present separately changes in equity during the period and components of equity, including comprehensive income, at the end of the period.
We are currently evaluating the impact of this new standard.
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Financial instrument disclosures and presentation
In April 2005, the AcSB issued CICA Handbook Section 3861, Financial instruments Disclosure and presentation. This section establishes standards for presentation of financial instruments and non-financial derivatives and identifies information that should be disclosed about them. This section applies to fiscal years beginning on or after October 1, 2006. In December 2006, the AcSB issued CICA Handbook Section 3862, Financial instruments Disclosures and Section 3863, Financial instruments Presentation. These standards revise Section 3861. 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 apply to fiscal years beginning on or after October 1, 2007. We are currently evaluating the impact of this new standard.
Accounting changes
In 2006, the CICA has issued a new section of the CICA Handbook, Section 1506, Accounting Changes. The application of this section is required for public companies for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2007. This new section establishes criteria for changes in accounting policies, along with the accounting treatment and disclosure regarding changes in accounting policies, estimates and correction of errors. This standard will be applied prospectively beginning April 1st, 2007. We are currently evaluating the impact of this new standard.
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. We are 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 expected to be issued by mid 2007 effective for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2008. We are currently evaluating the impact of this new standard.
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:
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.
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.
CAE 2007 Q4 REPORT | 41
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 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 relative to the estimated total costs to complete the contract. The cumulative effect of any revisions to 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 by the amount 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.
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 occured, 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 SOP 97-2 as described in more detail as follows:
(i) | 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. | |
(ii) | Consulting services |
Revenue 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 |
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. | |
(v) | 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. | |
42 | CAE 2007 Q4 REPORT
Training services
We recognize training services when there is persuasive evidence of an arrangement, 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.
This method also requires us to recognize future tax benefits, such as net operating loss carry forwards, when the realization of these 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 rates and laws that have been enacted or substantively enacted at the date of the consolidated financial statements for the years when 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 (loss) when there is reasonable assurance that the credits will be realized. ITCs 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 (loss) 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. Based on the impairment test performed as at December 31, 2004, we concluded that a goodwill impairment charge was required. We did not determine that a charge was required following the review as at December 31, 2005 and December 31, 2006.
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.
Deferred development costs
We charge research costs to consolidated earnings (loss) in the period they are incurred. We also charge development costs to consolidated earnings (loss) 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 (loss) based on anticipated sales of the product whenever possible, over a period of up to 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.
CAE 2007 Q4 REPORT | 43
Deferred financing costs
We defer costs incurred with the issuance of long-term debt and amortize them on a straight-line basis over the term of the related debt. We amortize costs related to sale and leaseback agreements on a straight-line basis over the term of the lease.
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 the restructuring of a benefit plan gives rise to both a curtailment and a settlement of obligations, the curtailment is accounted for prior to the settlement.
11. SUBSEQUENT EVENTS
ENGENUITY
In April 2007, the Company acquired 14,948,215 common shares of Engenuity Technologies Inc. (Engenuity) representing approximately 85.7% of the total outstanding number thereof. On May 25, 2007, the holders of common shares of Engenuity adopted a special resolution approving the amalgation of Engenuity with 4341392 Canada Inc., a wholly owned subsidiary of CAE Inc. per the amalgation agreement. As a result, Engenuity becomes a wholly owned subsidiary of CAE Inc. Engenuity develops commercial-off-the-shelf C OTS) simulation and visualization software for the aerospace and defence markets. Total consideration for this acquisition, including acquisition costs, amounted to $23.4 million in cash.
The preliminary fair value of net assets acquired are summarized as follows:
(amounts in millions) | |||
| |||
Current assets (1) | $ | 6.4 | |
Current liabilities | (10.4 | ) | |
Property, plant and equipment | 1.5 | ||
Other assets | 7.4 | ||
Intangible assets | 8.7 | ||
Goodwill(2) | 11.8 | ||
Long-term liabilities | (4.5 | ) | |
| |||
Fair value of net assets acquired, excluding cash position at acquisition | 20.9 | ||
Cash position at acquisition | 2.5 | ||
| |||
Total consideration | 23.4 | ||
|
(1) | Excluding cash on hand |
(2) | This goodwill is not deductible for tax purposes |
The allocation of the purchase price is based on Managements best estimate of the fair value of assets and liabilities. Allocation involves a number of estimates as well as the gathering of information over a number of months. The allocation of the purchase price is preliminary and is expected to be completed in the near future. The net assets of Engenuity, excluding income taxes, will be included in both the Simulation Products/Military and Training & Services/Military segment.
MULTIGEN-PARADIGM INC.
In April 2007, the Company signed an agreement with Parallax Capital Partners, LLC and others to acquire MultiGen-Paradigm Inc., for approximately US$16 million in cash. The acquisition was completed in May 2007.
44 | CAE 2007 Q4 REPORT
12. CONTROLS AND PROCEDURES
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.
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, 2007. 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, 2007, 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, 2007, based on the framework and criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission C OSO), and has concluded that our internal control over financial reporting is effective. Management did not identify any material weaknesses.
We implemented the first phase of our new ERP system in the TS/C segment and Management ensured that proper internal controls over financial reporting were established and maintained.
With the exception of the above mentioned, we did not make other changes to these controls this fiscal year 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.
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
Selected annual information for the past five years
(unaudited amounts in millions, | 2007 | 2006 | 2005 | 2004 | 2003 | ||||||
except per share amounts) | Restated | Restated | Restated | ||||||||
| |||||||||||
Revenue | $ | 1,250.7 | $ | 1,107.2 | $ | 986.2 | $ | 938.4 | $ | 976.8 | |
Earnings (loss) from continuing operations | 129.1 | 69.6 | (304.4 | ) | 45.5 | 113.9 | |||||
Net earnings (loss) | 127.4 | 63.6 | (199.6 | ) | 62.1 | 117.2 | |||||
| |||||||||||
Financial position: | |||||||||||
Total assets | $ | 1,956.2 | $ | 1,716.1 | $ | 1,699.7 | $ | 2,308.7 | $ | 2,356.5 | |
Total net debt | 133.0 | 190.2 | 285.8 | 529.6 | 757.1 | ||||||
| |||||||||||
Per share: | |||||||||||
Basic earnings (loss) from | |||||||||||
continuing operations | $ | 0.51 | $ | 0.28 | $ | (1.23 | ) | $ | 0.20 | $ | 0.52 |
Diluted earnings (loss) from | |||||||||||
continuing operations | 0.51 | 0.28 | (1.23 | ) | 0.19 | 0.52 | |||||
Basic net earnings (loss) | 0.51 | 0.25 | (0.81 | ) | 0.27 | 0.53 | |||||
Diluted net earnings (loss) | 0.50 | 0.25 | (0.81 | ) | 0.27 | 0.53 | |||||
Dividends | 0.04 | 0.04 | 0.10 | 0.12 | 0.12 | ||||||
Shareholders equity | 3.30 | 2.69 | 2.63 | 3.94 | 3.42 | ||||||
|
CAE 2007 Q4 REPORT | 45
Selected quarterly information | ||||||||
| ||||||||
(unaudited amounts in millions | Q1 | Q2 | Q3 | Q4 | Total | |||
except per share amounts) | Restated | Restated | ||||||
| ||||||||
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 (Restated) | ||||||||
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 | ||
| ||||||||
Fiscal 2005 (Restated) | ||||||||
Revenue | $ | 230.9 | 235.1 | 257.5 | 262.7 | 986.2 | ||
Earnings (loss) from continuing operations | $ | 18.4 | 13.0 | (345.4 | ) | 9.6 | (304.4 | ) |
Basic earnings (loss) per share from | ||||||||
continuing operations | $ | 0.07 | 0.05 | (1.40 | ) | 0.04 | (1.23 | ) |
Diluted earnings (loss) per share from | ||||||||
continuing operations | $ | 0.07 | 0.05 | (1.40 | )1 | 0.04 | (1.23 | ) |
Net earnings (loss) | $ | 23.8 | 14.2 | (346.7 | ) | 109.1 | (199.6 | ) |
Basic earnings (loss) per share | $ | 0.10 | 0.06 | (1.40 | ) | 0.44 | (0.81 | ) |
Diluted earnings (loss) per share | $ | 0.10 | 0.05 | (1.40 | ) | 0.44 | (0.81 | ) |
Average number of shares | ||||||||
outstanding (basic) | 246.7 | 246.8 | 247.0 | 247.8 | 247.1 | |||
Average exchange rate, U.S. dollar | ||||||||
to Canadian dollar | $ | 1.36 | 1.31 | 1.22 | 1.23 | 1.28 | ||
|
1The effect of stock options potentially exercisable on loss per share from continuing operations was anti-dilutive; therefore, basic and diluted loss per share from continuing are the same.
46 | CAE 2007 Q4 REPORT
Selected segment information (annual) | |||||||||||||||||||||
| |||||||||||||||||||||
(unaudited amounts in millions | |||||||||||||||||||||
except operating margin) | Simulation Products | Training & Services | Total | ||||||||||||||||||
| |||||||||||||||||||||
2007 | 2006 | 2005 | 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | |||||||||||||
Restated | Restated | Restated | Restated | Restated | Restated | ||||||||||||||||
| |||||||||||||||||||||
Civil | |||||||||||||||||||||
Revenue | $ | 348.1 | $ | 257.0 | $ | 213.4 | $ | 336.9 | $ | 322.3 | $ | 306.8 | $ | 685.0 | $ | 579.3 | $ | 520.2 | |||
Segment operating income | 60.4 | 29.9 | 7.8 | 64.3 | 57.1 | 39.8 | 124.7 | 87.0 | 47.6 | ||||||||||||
Operating margins (%) | 17.4 | 11.6 | 3.7 | 19.1 | 17.7 | 13.0 | 18.2 | 15.0 | 9.2 | ||||||||||||
| |||||||||||||||||||||
Military | |||||||||||||||||||||
Revenue | $ | 357.5 | $ | 327.4 | $ | 278.9 | $ | 208.2 | $ | 200.5 | $ | 187.1 | $ | 565.7 | $ | 527.9 | $ | 466.0 | |||
Segment operating income | 39.1 | 27.0 | 26.5 | 33.7 | 18.7 | 20.8 | 72.8 | 45.7 | 47.3 | ||||||||||||
Operating margins (%) | 10.9 | 8.2 | 9.5 | 16.2 | 9.3 | 11.1 | 12.9 | 8.7 | 10.2 | ||||||||||||
| |||||||||||||||||||||
Total | |||||||||||||||||||||
Revenue | $ | 705.6 | $ | 584.4 | $ | 492.3 | $ | 545.1 | $ | 522.8 | $ | 493.9 | $ | 1,250.7 | $ | 1,107.2 | $ | 986.2 | |||
Segment operating income | 99.5 | 56.9 | 34.3 | 98.0 | 75.8 | 60.6 | 197.5 | 132.7 | 94.9 | ||||||||||||
Operating margins (%) | 14.1 | 9.7 | 7.0 | 18.0 | 14.5 | 12.3 | 15.8 | 12.0 | 9.6 | ||||||||||||
| |||||||||||||||||||||
Other | (8.1 | ) | (28.7 | ) | (467.8 | ) | |||||||||||||||
| |||||||||||||||||||||
EBIT | $ | 189.4 | $ | 104.0 | $ | (372.9 | ) | ||||||||||||||
| |||||||||||||||||||||
Selected segment information (fourth quarter ending March 31) | |||||||||||||||||||||
| |||||||||||||||||||||
(unaudited amounts in millions | |||||||||||||||||||||
except operating margin) | Simulation Products | Training & Services | Total | ||||||||||||||||||
| |||||||||||||||||||||
2007 | 2006 | 2007 | 2006 | 2007 | 2006 | ||||||||||||||||
Restated | Restated | Restated | |||||||||||||||||||
| |||||||||||||||||||||
Civil | |||||||||||||||||||||
Revenue | $ | 97.6 | $ | 78.0 | $ | 91.7 | $ | 81.1 | $ | 189.3 | $ | 159.1 | |||||||||
Segment operating income | 15.3 | 9.3 | 21.3 | 14.9 | 36.6 | 24.2 | |||||||||||||||
Operating margins (%) | 15.7 | 11.9 | 23.2 | 18.4 | 19.3 | 15.2 | |||||||||||||||
| |||||||||||||||||||||
Military | |||||||||||||||||||||
Revenue | $ | 92.2 | $ | 77.5 | $ | 55.8 | $ | 47.7 | $ | 148.0 | $ | 125.2 | |||||||||
Segment operating income | 9.5 | 6.8 | 6.1 | 3.2 | 15.6 | 10.0 | |||||||||||||||
Operating margins (%) | 10.3 | 8.8 | 10.9 | 6.7 | 10.5 | 8.0 | |||||||||||||||
| |||||||||||||||||||||
Total | |||||||||||||||||||||
Revenue | $ | 189.8 | $ | 155.5 | $ | 147.5 | $ | 128.8 | $ | 337.3 | $ | 284.3 | |||||||||
Segment operating income | 24.8 | 16.1 | 27.4 | 18.1 | 52.2 | 34.2 | |||||||||||||||
Operating margins (%) | 13.1 | 10.4 | 18.6 | 14.1 | 15.5 | 12.0 | |||||||||||||||
| |||||||||||||||||||||
Other | 1.1 | (25.1 | ) | ||||||||||||||||||
| |||||||||||||||||||||
EBIT | $ | 53.3 | $ | 9.1 | |||||||||||||||||
|
CAE 2007 Q4 REPORT | 47
49 | Managements Report on Internal Control Over Financial Reporting |
49 | Independent Auditors Report |
51 | Consolidated Balance Sheets |
52 | Consolidated Statements of Earnings |
52 | Consolidated Statements of Retained Earnings |
53 | Consolidated Statements of Cash Flows |
54 | Notes to the Consolidated Financial Statements |
54 | Note 1 Nature of Operations and Significant Accounting Policies |
62 | Note 2 Business Acquisitions and Combinations |
64 | Note 3 Investment in Joint Ventures |
65 | Note 4 Discontinued Operations and Long-Term Assets Held for Sale |
67 | Note 5 Impairment of Goodwill, Tangible and Intangible Assets |
67 | Note 6 Accounts Receivable |
67 | Note 7 Inventories |
68 | Note 8 Property, Plant and Equipment |
68 | Note 9 Intangible Assets |
69 | Note 10 Goodwill |
69 | Note 11 Other Assets |
70 | Note 12 Debt Facilities |
72 | Note 13 Deferred Gains and Other Long-Term Liabilities |
73 | Note 14 Income Taxes |
75 | Note 15 Capital Stock and Contributed Surplus |
76 | Note 16 Cumulative Translation Adjustment |
76 | Note 17 Stock-Based Compensation Plans |
79 | Note 18 Financial Instruments |
82 | Note 19 Supplementary Cash Flows Information |
83 | Note 20 Contingencies |
83 | Note 21 Commitments |
83 | Note 22 Government Cost-Sharing |
84 | Note 23 Employee Future Benefits |
88 | Note 24 Investment Tax Credits |
89 | Note 25 Restructuring Costs |
90 | Note 26 Variable Interest Entities |
92 | Note 27 Operating Segments and Geographic Information |
95 | Note 28 Differences Between Canadian and United States Generally |
Accepted Accounting Principles
104 | Note 29 Comparative Financial Statements |
104 | Note 30 Subsequent Events |
48 | CAE 2007 Q4 REPORT
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, 2007, 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, 2007 was effective.
Managements assessment of the effectiveness of the Companys internal control over financial reporting as of March 31, 2007 has been audited by PricewaterhouseCoopers LLP, an independent auditor.
R. E. Brown | A. Raquepas |
President and Chief Executive Officer | Vice President |
Chief Financial Officer | |
Montreal, Canada | |
May 31, 2007 |
Independent Auditors Report
To the Shareholders of CAE Inc.
We have completed an integrated audit of the 2007 consolidated financial statements and internal control over financial reporting of CAE Inc. (the Company) as of March 31, 2007 and audits of its 2006 and 2005 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 of March 31, 2007 and 2006, and the related consolidated statements of earnings, retained earnings and cash flows for each of the three years in the period ended March 31, 2007. 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 audit of the Companys financial statements as of March 31, 2007 and for the year 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 audits of the Companys financial statements as of March 31, 2006 and for each of the two years in the period 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. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2007 and 2006 and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2007 in accordance with Canadian generally accepted accounting principles.
As described in note 1 to the consolidated financial statements, the Company has changed its accounting for stock-based compensation.
CAE 2007 Q4 REPORT | 49
Internal control over financial reporting
We have also audited managements assessment, included in the accompanying Managements Report on Internal Control over Financial Reporting, that the Company maintained effective internal control over financial reporting as of March 31, 2007, 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 opinions on managements assessment and 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, evaluating managements assessment, testingand evaluatingthe designand operating effectiveness of internalcontrol, and performing such otherprocedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
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, managements assessment that the Company maintained effective internal control over financial reporting as of March 31, 2007 is fairly stated, in all material respects, based on criteria established in Internal Control Integrated Framework issued by the COSO. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2007 based on criteria established in Internal Control Integrated Framework issued by the COSO.
50 | CAE 2007 Q4 REPORT
Consolidated Balance Sheets | ||||||
As at March 31 | ||||||
| ||||||
(amounts in millions of Canadian dollars) | 2007 | 2006 | ||||
| ||||||
Restated | ||||||
(Note 1) | ||||||
Assets | ||||||
Current assets | ||||||
Cash and cash equivalents | $ | 150.2 | $ | 81.1 | ||
Accounts receivable (Note 6) | 219.8 | 172.6 | ||||
Inventories (Note 7) | 203.8 | 180.9 | ||||
Prepaid expenses | 23.5 | 25.2 | ||||
Income taxes recoverable | 24.7 | 75.7 | ||||
Future income taxes (Note 14) | 3.7 | 5.7 | ||||
| ||||||
625.7 | 541.2 | |||||
Property, plant and equipment, net (Note 8) | 986.6 | 832.1 | ||||
Future income taxes (Note 14) | 81.5 | 78.2 | ||||
Intangible assets (Note 9) | 36.0 | 30.5 | ||||
Goodwill (Note 10) | 96.9 | 92.0 | ||||
Other assets (Note 11) | 129.5 | 136.2 | ||||
Long-term assets held for sale (Note 4) | | 5.9 | ||||
| ||||||
$ | 1,956.2 | $ | 1,716.1 | |||
| ||||||
Liabilities and Shareholders Equity | ||||||
Current liabilities | ||||||
Accounts payable and accrued liabilities | $ | 403.9 | $ | 373.7 | ||
Deposits on contracts | 184.8 | 146.4 | ||||
Current portion of long-term debt (Note 12) | 27.2 | 10.4 | ||||
Future income taxes (Note 14) | 4.9 | 14.5 | ||||
| ||||||
620.8 | 545.0 | |||||
Long-term debt (Note 12) | 256.0 | 260.9 | ||||
Deferred gains and other long-term liabilities (Note 13) | 232.7 | 211.2 | ||||
Future income taxes (Note 14) | 16.8 | 26.8 | ||||
| ||||||
1,126.3 | 1,043.9 | |||||
| ||||||
Shareholders Equity | ||||||
Capital stock (Note 15) | 401.7 | 389.0 | ||||
Contributed surplus (Note 15) | 5.7 | 5.6 | ||||
Retained earnings | 510.2 | 392.8 | ||||
Cumulative translation adjustment (Note 16) | (87.7 | ) | (115.2 | ) | ||
| ||||||
829.9 | 672.2 | |||||
| ||||||
$ | 1,956.2 | $ | 1,716.1 | |||
|
Contingencies and commitments (Notes 20 and 21)
The accompanying notes form an integral part of these Consolidated Financial Statements.
R.E.Brown | L. R. Wilson | |
Director | Director |
CAE 2007 Q4 REPORT | 51
Consolidated Statements of Earnings | |||||||||
Years ended March 31 | |||||||||
| |||||||||
(amounts in millions of Canadian dollars, except per share amounts) | 2007 | 2006 | 2005 | ||||||
| |||||||||
Restated | Restated | ||||||||
(Note 1) | (Note 1) | ||||||||
Revenue | $ | 1,250.7 | $ | 1,107.2 | $ | 986.2 | |||
| |||||||||
Earnings (loss) before interest and income taxes (Note 27) | $ | 189.4 | $ | 104.0 | $ | (372.9 | ) | ||
Interest expense, net (Note 12) | 10.6 | 16.2 | 32.1 | ||||||
| |||||||||
Earnings (loss) before income taxes | $ | 178.8 | $ | 87.8 | $ | (405.0 | ) | ||
Income tax expense (recovery) (Note 14) | 49.7 | 18.2 | (100.6 | ) | |||||
| |||||||||
Earnings (loss) from continuing operations | $ | 129.1 | $ | 69.6 | $ | (304.4 | ) | ||
Results of discontinued operations (Note 4) | (1.7 | ) | (6.0 | ) | 104.8 | ||||
| |||||||||
Net earnings (loss) | $ | 127.4 | $ | 63.6 | $ | (199.6 | ) | ||
| |||||||||
Basic and diluted earnings (loss) per share from continuing operations | $ | 0.51 | $ | 0.28 | $ | (1.23 | ) | ||
| |||||||||
Basic earnings (loss) per share | $ | 0.51 | $ | 0.25 | $ | (0.81 | ) | ||
| |||||||||
Diluted earnings (loss) per share | $ | 0.50 | $ | 0.25 | $ | (0.81 | ) | ||
| |||||||||
Weighted average number of shares outstanding (basic) (Note 15) | 251.1 | 249.8 | 247.1 | ||||||
| |||||||||
Weighted average number of shares outstanding (diluted) (Note 15) | 253.0 | 252.1 | 247.9 | ||||||
| |||||||||
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) | 2007 | 2006 | 2005 | ||||||
| |||||||||
Retained earnings at beginning of year, as previously reported | $ | 395.7 | $ | 340.8 | $ | 562.1 | |||
Change in accounting policy (Note 1) | |||||||||
AcG-15 | | | 3.3 | ||||||
EIC-162 | (2.9 | ) | (1.6 | ) | (1.9 | ) | |||
| |||||||||
Retained earnings at beginning of year, restated | $ | 392.8 | $ | 339.2 | $ | 563.5 | |||
Net earnings (loss) | 127.4 | 63.6 | (199.6 | ) | |||||
Dividends | (10.0 | ) | (10.0 | ) | (24.7 | ) | |||
| |||||||||
Retained earnings at end of year | $ | 510.2 | $ | 392.8 | $ | 339.2 | |||
| |||||||||
The accompanying notes form an integral part of these Consolidated Financial | Statements. |
52 | CAE 2007 Q4 REPORT
Consolidated Statements of Cash Flows | |||||||||
Years ended March 31 | |||||||||
|
|||||||||
(amounts in millions of Canadian dollars) | 2007 | 2006 | 2005 | ||||||
|
|||||||||
Restated | Restated | ||||||||
Operating Activities | (Note 1) | (Note 1) | |||||||
Net earnings (loss) | $ | 127.4 | $ | 63.6 | $ | (199.6 | ) | ||
Results of discontinued operations (Note 4) | 1.7 | 6.0 | (104.8 | ) | |||||
|
|||||||||
Earnings (loss) from continuing operations | 129.1 | 69.6 | (304.4 | ) | |||||
Adjustments to reconcile earnings to cash flows from operating activities: | |||||||||
Impairment of goodwill, tangible and intangible assets (Note 5) | | | 443.3 | ||||||
Depreciation | 55.0 | 52.5 | 55.1 | ||||||
Amortization of deferred financing costs | 0.8 | 2.2 | 7.2 | ||||||
Amortization and write down of intangible and other assets | 15.8 | 22.9 | 19.7 | ||||||
Future income taxes | (14.2 | ) | 5.1 | (114.1 | ) | ||||
Investment tax credits | 19.3 | (11.8 | ) | (29.2 | ) | ||||
Stock-based compensation plans (Note 17) | 24.6 | 12.2 | 5.5 | ||||||
Employee future benefit net | (0.9 | ) | (2.0 | ) | 0.9 | ||||
Other | (10.4 | ) | (3.9 | ) | 11.2 | ||||
Changes in non-cash working capital (Note 19) | 20.2 | 79.1 | 84.2 | ||||||
|
|||||||||
Net cash provided by continuing operating activities | 239.3 | 225.9 | 179.4 | ||||||
Net cash provided by discontinued operating activities | | 2.1 | 21.6 | ||||||
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Net cash provided by operating activities | 239.3 | 228.0 | 201.0 | ||||||
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Investing Activities | |||||||||
Business acquisitions (net of cash and cash equivalents acquired) (Note 2) | (4.4 | ) | 2.6 | (13.8 | ) | ||||
Proceeds from disposal of discontinued operations | |||||||||
(net of cash and cash equivalents disposed) (Note 4, 19) | (3.8 | ) | (4.9 | ) | 239.4 | ||||
Capital expenditures | (158.1 | ) | (130.1 | ) | (118.0 | ) | |||
Proceeds from sale and leaseback of assets | | | 43.8 | ||||||
Deferred development costs | (3.0 | ) | (1.8 | ) | (9.9 | ) | |||
Deferred pre-operating costs | (5.9 | ) | (0.7 | ) | (1.7 | ) | |||
Other | (2.9 | ) | ( 9.9 | ) | 4.2 | ||||
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Net cash (used in) provided by continuing investing | activities | (178.1 | ) | (144.8 | ) | 144.0 | |||
Net cash used in discontinued investing activities | | (2.3 | ) | (5.8 | ) | ||||
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Net cash (used in) provided by investing activities | (178.1 | ) | (147.1 | ) | 138.2 | ||||
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Financing Activities | |||||||||
Net borrowing under revolving unsecured credit facilities (Note 12) | (0.6 | ) | (30.7 | ) | (273.7 | ) | |||
Proceeds from long-term debt (Note 12) | 45.8 | 32.1 | 3.4 | ||||||
Reimbursement of long-term debt (Note 12) | (39.8 | ) | (65.7 | ) | (50.5 | ) | |||
Dividends paid | (9.8 | ) | (9.7 | ) | (24.0 | ) | |||
Common stock issuance (Note 15) | 10.0 | 8.0 | 3.6 | ||||||
Other | (2.1 | ) | 11.6 | 0.7 | |||||
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Net cash provided by (used in) continuing financing activities | 3.5 | (54.4 | ) | (340.5 | ) | ||||
Net cash provided by discontinued financing activities | | 1.2 | 3.2 | ||||||
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Net cash provided by (used in) financing activities | 3.5 | (53.2 | ) | (337.3 | ) | ||||
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Effect of foreign exchange rate changes on cash and cash equivalents | 4.4 | (8.1 | ) | (2.3 | ) | ||||
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Net increase (decrease) in cash and cash equivalents | 69.1 | 19.6 | (0.4 | ) | |||||
Cash and cash equivalents at beginning of year | 81.1 | 61.5 | 61.9 | ||||||
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Cash and cash equivalents at end of year | $ | 150.2 | $ | 81.1 | $ | 61.5 | |||
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Cash and cash equivalents related to: | |||||||||
Continuing operations | $ | 150.2 | $ | 81.1 | $ | 57.1 | |||
Discontinued operations (Note 4) | | | 4.4 | ||||||
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$ | 150.2 | $ | 81.1 | $ | 61.5 | ||||
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Supplementary Cash Flows Information (Note 19) | |||||||||
The accompanying notes form an integral part of these Consolidated Financial Statements. |
CAE 2007 Q4 REPORT | 53
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 2007, 2006 and 2005 (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 modeling and simulation solutions. |
Prior to fiscal 2006, the Companys operations were broken down into the following operating segments: Military Simulation & Training (Military), Civil Simulation & Training (Civil) and Marine Controls (Marine) until the latters disposal in the fourth quarter of fiscal 2005.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENT PRESENTATION
The accounting policies of CAE Inc. and 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 28. 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 of long-term contracts, useful lives, employee future benefits, income taxes, impairment of long-lived assets and goodwill, 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 3). 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 using the cost method.
On January 1, 2005, the Company adopted CICA Accounting Guideline -15 (AcG-15), Consolidation of Variable Interest Entities, on a retroactive basis without restatement of prior periods. AcG-15 provides a framework for identifying variable interest entities (VIEs) and for determining when an entity should include the assets, liabilities and results of operations of a VIE in its consolidated financial statements.
In general, a VIE is a corporation, partnership, limited-liability corporation, trust, or any other legal structure used to conduct activities or hold assets that either (1) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (2) has a group of equity owners that lack the power to make significant decisions about activities, or (3) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations.
54 | CAE 2007 Q4 REPORT
AcG-15 requires a VIE to be consolidated if a variable interest holder (a party with an ownership, contractual or other financial interest in the VIE) is exposed to a majority of the risk of loss from the VIEs activities, is entitled to receive a majority of the VIEs residual returns (if no party is exposed to a majority of the VIEs losses), or both (the primary beneficiary). Upon consolidation, the primary beneficiary generally must initially record all of the VIEs assets, liabilities and non-controlling interests at fair value at the date the enterprise became the primary beneficiary. However, for variable interest entities created prior to the initial adoption of AcG-15, the assets, liabilities and non-controlling interests of these entities must be initially consolidated as if the entities were always consolidated based on the majority voting interest. AcG-15 also requires disclosures on VIEs that the variable interest holder is not required to consolidate, but in which it has a significant variable interest.
The adoption of AcG-15 on January 1, 2005 resulted in an increase in total assets, liabilities, and retained earnings of $46.9 million, $43.7 million, and $3.3 million, respectively and a decrease in the currency translation adjustment of $0.1 million in the fiscal 2005 consolidated financial statements (refer to Note 26).
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 are 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 is 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 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
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 earnings 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 occured, the fee is fixed or determinable and collection is reasonably assured.
CAE 2007 Q4 REPORT | 55
NOTE 1 NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTD)
Software arrangements
The Company also enters into software arrangements to sell, independently or in multiple-element arrangements, standalone software, services, maintenance and software customization. Revenue from software arrangements is recognized in accordance with the guidance set out 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 the cumulative translation adjustment account, which is a separate component of shareholders equity. Accumulated amounts in the cumulative translation adjustment account are released to the Consolidated Statements of Earnings when the Company reduces its 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 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 net investment in foreign operations, and those arising from the translation of foreign currency debt that has been designated as a hedge of the net investment in subsidiaries, which are included in the cumulative translation adjustment account.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of highly-liquid investments with original terms to maturity of 90 days or less.
ACCOUNTS RECEIVABLE
Receivables are recorded at fair value, 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 (loss).
INVENTORIES
Raw materials are valued at the lower of 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.
56 | CAE 2007 Q4 REPORT
Work in process is stated at the lower of average cost and net realizable value. The cost of work in process includes material, labour, and an allocation of manufacturing overhead.
Long-term contract inventories resulting from applying the percentage-of-completion method to account for revenues for most of the Companys long-term contracts have been reclassified from accounts receivable to be included as part of inventories and consist of materials, direct labour, relevant manufacturing overhead, and estimated contract margins.
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% 10% / 10 | to 20 | years |
Simulators | Straight-Line (10% residual) | Not exceeding 25 | years | |
Machinery and equipment | Declining balance / Straight-Line | 20% 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.
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 term 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 (loss) immediately. The residual value guarantees are ultimately recognized in the Companys net earnings (loss) 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.
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 | 17 years | 16 |
Customer relations | 5 | to | 10 years | 8 |
Customer contractual agreements | 10 | to | 15 years | 11 |
Enterprise resource planning and other software | 5 to 7 years | 6 | ||
Other intangible assets | 5 | to | 20 years | 12 |
|
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.
CAE 2007 Q4 REPORT | 57
NOTE 1 NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTD)
OTHER ASSETS
Research and development costs
Research costs are charged to consolidated earnings (loss) in the period in which they are incurred. Development costs are also charged to consolidated earnings (loss) 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 (loss) 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 fiveyear period using the straight-line method.
Deferred financing costs
Costs incurred with the issuance of long-term debt are deferred and amortized on a straight-line basis over the term of the related debt. Costs related to sale and leaseback agreements are amortized on a straight-line basis over the term of the lease.
Restricted cash
Under the terms of subsidiaries external bank financing and some government-related sales contracts, the Company is required to hold a defined amount of cash as collateral.
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 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 (loss).
NCOME 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 carry forwards, 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 research and development (R&D) activities are deducted from the related costs and are accordingly included in the determination of net earnings (loss) 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.
58 | CAE 2007 Q4 REPORT
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 (loss) 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 17.
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 17, pro forma consolidated net earnings (loss) and pro forma basic and diluted net earnings (loss) 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. Since fiscal 2004, the Company entered into an equity swap agreement with a major Canadian institution 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.
CAEs 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 in the third quarter of 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.
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 live 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 (loss) 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.
CAE 2007 Q4 REPORT | 59
NOTE 1 NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTD)
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
The Company enters into forward, swap and option contracts to reduce the financial risk related to its exposure to fluctuations in interest rates and foreign exchange rates. The interest rate risk associated with certain long-term debt is hedged through interest rate swaps. The foreign currency risk associated with certain purchase and sales commitments denominated in a foreign currency is hedged through a combination of forward contracts and options. The Company does not use any derivative financial instruments for trading or speculative purposes.
Effective April 1, 2004, the Company prospectively adopted CICA Accounting Guideline (AcG) AcG-13, Hedging Relationships and CICA Emerging Issues Committee Abstract 128 (EIC-128), Accounting for Trading, Speculative or Non-Hedging Derivative Financial Instruments. AcG-13 addresses the identification, designation, documentation and effectiveness of hedging relationships for the purpose of applying hedge accounting, and the discontinuance of hedge accounting. Under this guideline, complete documentation of the information related to hedging relationships is required, and the effectiveness of the hedges must be demonstrated and documented. EIC-128 deals with the issue of how to account for a freestanding derivative financial instrument that gives rise to a financial asset or liability and does not qualify for hedge accounting. The adoption of this guideline and abstract did not have a material impact on the Companys Consolidated Financial Statements.
Gains and losses on foreign currency contracts designated as effective as hedges are recognized in the Consolidated Statements of Earnings during the same period as the underlying revenues and expenses. For interest rate swaps, the difference between the swap rate and the actual rate is reflected against the related interest expense. CAE assesses, on an ongoing basis, whether the derivatives that are used in hedging transactions are effective in offsetting changes in fair values or cash flows of hedged items.
Realized and unrealized gains or losses associated with derivative instruments, which have been terminated or cease to be effective prior to maturity, are deferred under other current, or non-current, assets or liabilities on the Consolidated Balance Sheets and recognized in earnings (loss) in the period in which the underlying hedged transaction is recognized. In the event a designated hedged item is sold, extinguished or matured prior to the termination of the related derivative instrument, any realized or unrealized gain or loss on such derivative instrument is recognized in earnings (loss). Interest payments relating to swap contracts are recorded in net earnings (loss) over the life of the underlying transaction using the accrual method as an adjustment to interest income or interest expense.
GOVERNMENT COST SHARING
Contributions from Industry Canada under the Technology Partnerships Canada program (TPC) and from Investissement Québec for costs incurred in research and development (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. 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. CAE has applied these guidelines for severance termination benefits and other restructuring costs as described in Note 25.
60 | CAE 2007 Q4 REPORT
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.
CHANGE IN ACCOUNTING POLICY
EIC-162: Stock-Based Compensation for Employees Eligible to Retire Before the Vesting Date
During the third quarter of fiscal 2007, the Company adopted EIC-162, Stock-Based Compensation for Employees Eligible to Retire Before the Vesting Date. This 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 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. The abstract requires retroactive restatement of prior periods.
The impact, in these consolidated financial statements, of adopting EIC-162 is an increase to contributed surplus by $0.2 million on April 1, 2005 and a decrease to contributed surplus by $0.2 million on April 1, 2006. Also, the adoption of the abstract resulted in a cumulative charge of $1.9 million to retained earnings on April 1, 2004, $1.6 million on April 1, 2005 and $2.9 million on April 1, 2006. In addition, the Company was impacted by a $2.2 million increase to the stock-based compensation expense for the fiscal year ended March 31, 2006 and $0.1 million decrease for the fiscal year ended March 31, 2005. This standard had a $0.01 and a nil impact on the basic and diluted earnings per share for the fiscal years ending March 31, 2006, and March 31, 2005 respectively.
FUTURE CHANGES TO ACCOUNTING STANDARDS
Financial instruments recognition and measurement, hedges and comprehensive income
In January 2005, the Accounting Standards Board (AcSB) issued three new standards dealing with financial instruments: (i) Financial Instruments Recognition and Measurement; (ii) Hedges; and (iii) Comprehensive Income. These sections are required for public companies for interim and annual financial statements relating to fiscal years beginning on or after October 1, 2006.
CICA Handbook Section 3855, Financial Instruments Recognition and Measurement prescribes when a financial instrument should be recognized on the balance sheet and the measurement method, using fair value. It also specifies how financial instrument gains and losses should be presented.
CICA Handbook Section 3865, Hedges allows optional treatment providing that hedges be designated as either fair value hedges, cash flow hedges or hedges of a net investment in a self-sustaining foreign operation. For a fair value hedge, the gain or loss attributable to the hedged risk is recognized in net income in the period of change together with the offsetting loss or gain on the hedged item attributable to the hedged risk. The carrying amount of the hedged item is adjusted for the hedged risk. For a cash flow hedge or for a hedge of a net investment in a self-sustaining foreign operation, the effective portion of the hedging items gain or loss is initially reported in Other Comprehensive Income and subsequently reclassified to net income when the hedged item affects net income.
CICA Handbook Section 1530, Comprehensive Income, and has amended Section 3250, Surplus, by renaming it Section 3251, Equity. These standards require enterprises to present comprehensive income and its components as well as net income in its financial statements and to separately present changes in equity during the period as well as components of equity at the end of the period, including comprehensive income.
The Company is currently evaluating the impact of this new standard.
Financial instrument disclosures and presentation
In April 2005, the AcSB issued CICA Handbook Section 3861, Financial instruments Disclosure and presentation. This section establishes standards for presentation of financial instruments and non-financial derivatives and identifies information that should be disclosed about them. This section applies to fiscal years beginning on or after October 1, 2006. In December 2006, the AcSB issued CICA Handbook Section 3862, Financial instruments Disclosures and Section 3863, Financial instruments Presentation. These standards revise Section 3861. 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 apply to fiscal years beginning on or after October 1, 2007. The Company is currently evaluating the impact of this new standard.
CAE 2007 Q4 REPORT | 61
NOTE 1 NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTD)
Accounting changes
In 2006, the CICA has issued a new section of the CICA Handbook, Section 1506, Accounting Changes. The application of this section is required for public companies for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2007. This new section establishes criteria for changes in accounting policies, along with the accounting treatment and disclosure regarding changes in accounting policies, estimates and correction of errors. This standard will be applied prospectively beginning April 1, 2007. The Company is currently evaluating the impact of this new standard.
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 expected to be issued by mid 2007 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.
NOTE 2 BUSINESS ACQUISITIONS AND COMBINATIONS
KESEM INTERNATIONAL PTY LTD
On December 22, 2006, 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 in four instalments as follows:
(i) | AUD$3.5 million ($3.1 million) at closing date |
(ii) | AUD$0.5 million ($0.5 million) in fiscal 2007 |
(iii) | AUD$0.5 million ($0.5 million) in fiscal 2008 |
(iv) | AUD$0.5 million ($0.5 million) in fiscal 2009. |
During the fourth quarter of fiscal 2007, the parties have agreed to the distributable working capital adjustment and no significant adjustment was required.
As outlined in the purchase agreement, $1.0 million of the purchase price, paid by CAE on the acquisition date, shall be held in a trust account until the respective instalment date. The last two instalments are subject to adjustments based on the level of revenue for the period ending June 2007 and on the value of awarded contracts for the period ending December 2007. Any changes in the total consideration will be accounted for as a change in goodwill.
The acquisition was accounted for under the purchase method and the operating results have been included from its acquisition date. The allocation of the purchase price is based on Managements best estimate of the fair value of assets and liabilities. Allocation involves a number of estimates as well as the gathering of information over a number of months.
TERRAIN EXPERTS INC.
On May 20, 2005, 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 $11.1 million ($14.0 million) payable in common shares issued by CAE and a nominal cash portion in three instalments as follows:
(i) | 1,000,000 shares representing US$4.8 million (approximately $6.1 million issued at a price of $6.13 per share, the closing price of the common shares on the Toronto Stock Exchange (TSX) on May 20, 2005), and US$0.2 million ($0.3 million) together in cash representing US$5.0 million ($6.4 million) at the closing date. |
62 | CAE 2007 Q4 REPORT | |
(ii) | US$3.6 million through the issuance of CAE shares in fiscal 2007 (twelve months following the closing of the acquisition) to be calculated at the TSX stock price on the date of issuance. During fiscal 2007, the Company settled the second instalment of the payment related to the acquisition in the amount of US$3.6 million with cash rather than shares. |
(iii) | US$2.5 million through the issuance of CAE shares in fiscal 2008 (twenty four months following the closing of the transaction) to be calculated at the TSX stock price on the date of issuance. |
During fiscal 2007, the Company completed the purchase price allocation for this acquisition, and no adjustments were required.
CAE PROFESSIONAL SERVICES (CANADA) INC. (FORMERLY IDENTIFIED AS GREENLEY & ASSOCIATES INC.)
On November 30, 2004, the Company acquired all the issued and outstanding shares of CAE Professional Services (Canada) Inc. (formerly Greenley & Associates Inc. [G&A]), which provides services in the areas of project management, human factors, modelling and simulation. Total consideration for this acquisition amounted to $4.4 million payable in equivalent common shares issued by CAE in four instalments as follows: 424,628 shares (representing $2.0 million) at the closing date; $0.8 million in fiscal 2006; $0.8 million in fiscal 2007; and 169,851 shares (representing $0.8 million at the transaction date) to be issued on November 30, 2007. The number of shares issued (to be issued) to satisfy the first and the fourth payments was calculated based on the average closing share price ($4.71 per share) of CAE common shares on the TSX for the 20-day period ending two days prior to November 30, 2004. The 91,564 shares issued to satisfy the second payment was based on the average closing share price of CAE common shares on the TSX for the 20-day period ending two days before the date of issuance ($8.07 per share). The third payment of $0.8 million was initially considered to be satisfied through the issuance of shares based on the average closing share price of CAE common shares on the TSX for the 20-day period ending two days before the date of issuance. However, during fiscal 2007, the Company settled the third payment with cash rather than shares. During the second quarter of fiscal 2006, the Company completed the purchase price allocation for this acquisition, and no adjustments were required.
SERVICIOS DE INSTRUCCION DE VUELO, S.L
In February 2004, CAE and Iberia Lineas Aereas de España, SA (Iberia) agreed to combine their aviation training operations in Spain after receiving regulatory clearance from the Spanish authorities to commence operations, under an agreement entered into in October 2003.
On May 27, 2004, in connection with the financing of the combined operations, CAE Servicios Globales de Instruccion de Vuelo (España), S.L. (SGIV), a wholly-owned subsidiary of CAE, and Iberia contributed the net assets of their respective training centre facilities to Servicios de Instruccion de Vuelo, S.L. (SIV), with SGIV obtaining ownership of 80% of SIV. SIV financed the acquisition of the assets from SGIV and Iberia through an asset-backed financing transaction (refer to Note 12).
As part of this transaction, should the October 2003 agreement be terminated, SGIV and Iberia will be obliged to repurchase the assets they contributed, in proportion to the fair market value of the assets, for a total amount equal to the outstanding balance under the financing transaction.
As part of the May 27, 2004 agreement (the Agreement), Iberia was to subsequently transfer a simulator that it was leasing from a third party to SIV in exchange for a cash consideration of $5.7 million (E3.5 million). This transaction was accounted for as an increased contribution of property, plant and equipment and in long-term debt with a cash consideration equivalent to the net asset value.
In addition, as part of the Agreement, SIV has agreed to fund an amount up to a maximum of $2.4 million (E1.5 million) to cover any payments made by Iberia to former employees in order to indemnify Iberia for potential costs to be incurred due to certain employment matters. Based on Managements best estimate of SIVs potential liability, an amount of $2.4 million (E1.5 million) has been accrued as part of the purchase price and accounted for as goodwill.
FLIGHT TRAINING CENTRE CHILE S.A.
On April 22, 2004, the Company acquired all the issued and outstanding shares of Flight Training Centre Chile S.A. (FTC Chile, located in Santiago, Chile) from LAN Chile S.A. for total cash consideration of $0.9 million (US$0.7 million). The balance of the purchase price was paid in two instalments of US$0.3 million in fiscal 2006 and US$0.8 million in fiscal 2007. This acquisition expanded the Companys pilot-training operations into the South American market.
CAE 2007 Q4 REPORT | 63
NOTE 2 BUSINESS ACQUISITIONS AND COMBINATIONS (CONTD)
The net assets contributed by Iberia to SIV and net assets acquired from Kesem, Terrex, G&A and FTC Chile are summarized as follows:
2007 | 2006 | 2005 | ||||||||||||||||
(amounts in millions) | Kesem | Terrex | G&A | SIV | FTC Chile | Total | ||||||||||||
|
||||||||||||||||||
Current assets(1) | $ | 0.9 | $ | 1.9 | $ | 2.1 | $ | 4.6 | $ | 0.2 | $ | 6.9 | ||||||
Current liabilities | (1.1 | ) | (2.1 | ) | (1.2 | ) | (0.1 | ) | (0.1 | ) | (1.4 | ) | ||||||
Property, plant and equipment | 0.1 | 0.3 | 0.3 | 73.1 | 2.2 | 75.6 | ||||||||||||
Other assets | | 3.3 | 0.5 | | | 0.5 | ||||||||||||
Intangible assets | ||||||||||||||||||
Trade names | 0.1 | 0.3 | 0.3 | | | 0.3 | ||||||||||||
Technology | 0.1 | 1.6 | | | | | ||||||||||||
Customer relations | 0.6 | 0.8 | 0.5 | 7.2 | | 7.7 | ||||||||||||
Other intangibles | | | 0.1 | | | 0.1 | ||||||||||||
Goodwill(2) | 4.1 | 4.5 | 2.5 | 6.9 | | 9.4 | ||||||||||||
Future income taxes | (0.2 | ) | 0.5 | (0.5 | ) | | 0.4 | (0.1 | ) | |||||||||
Long-term debt | | | (0.2 | ) | (61.8 | ) | | (62.0 | ) | |||||||||
Long-term liabilities | (0.2 | ) | | | (2.4 | ) | (0.3 | ) | (2.7 | ) | ||||||||
|
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Fair value of net assets | ||||||||||||||||||
acquired, excluding cash | ||||||||||||||||||
position at acquisition | 4.4 | 11.1 | 4.4 | 27.5 | 2.4 | 34.3 | ||||||||||||
Cash position at acquisition | 0.5 | 2.9 | | | | | ||||||||||||
|
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Fair value of net assets acquired | 4.9 | 14.0 | 4.4 | 27.5 | 2.4 | 34.3 | ||||||||||||
Less: Balance of purchase price | | | | | (1.5 | ) | (1.5 | ) | ||||||||||
Issuance of 1,000,000 shares (Note 15) | | (6.1 | ) | | | | | |||||||||||
Issuance of 424,628 shares (Note 15) | | | (2.0 | ) | | | (2.0 | ) | ||||||||||
Shares to be issued(3) | | (7.6 | ) | (2.4 | ) | | | (2.4 | ) | |||||||||
Non-controlling interest | | | | (14.6 | ) | | (14.6 | ) | ||||||||||
|
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Total cash consideration(4): | $ | 4.9 | $ | 0.3 | $ | $ | 12.9 | $ | 0.9 | $ | 13.8 | |||||||
|
(1) | Excluding cash on hand |
(2) | This goodwill is not deductible for tax purposes |
(3) | Has been accounted for as a liability pending issuance |
(4) | The total cash consideration for the acquisition of Kesem includes acquisition costs of $0.3 million |
The net assets of Kesem are included in the Training & Services/Military segment. The net assets of Terrex are included in the Simulation Products/Military segment. The net assets of G&A are included in the Training & Services/Military segment. The net assets of SIV and FTC are included in Training & Services/Civil segment.
NOTE 3 INVESTMENT IN JOINT VENTURES
The Companys consolidated balance sheets and consolidated statements of earnings and cash flows as at March 31, 2007 and for the year then ended 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%, and since October 4, 2006, the Emirates-CAE Flight Training center 50%.
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%, and Helicopter Flight Training Services GmbH 25% as at March 31, 2006, and for the year then ended but only includes the joint venture company of Zhuhai Xiang Yi Aviation Technology Company Limited 49% for the fiscal year ending March 31, 2005.
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.
64 | CAE 2007 Q4 REPORT
The impact on the Companys consolidated financial statements from all joint ventures is as follows:
(amounts in millions) | 2007 | 2006 | 2005 | ||||||
| |||||||||
Assets | |||||||||
Current assets | $ | 24.5 | $ | 22.0 | $ | 8.1 | |||
Property, plant and equipment and other non-current assets | 159.4 | 42.7 | 17.6 | ||||||
Liabilities | |||||||||
Current liabilities | 12.0 | 10.9 | 1.3 | ||||||
Long-term debt (including current portion) | 59.2 | 26.2 | | ||||||
| |||||||||
Earnings | |||||||||
Revenue | $ | 50.0 | $ | 42.0 | $ | 10.8 | |||
Net earnings | 6.8 | 4.0 | 3.7 | ||||||
Segmented operating income | |||||||||
Simulation Products/Military | 1.4 | (0.2 | ) | | |||||
Training and Services/Civil | 7.5 | 5.2 | 4.1 | ||||||
Training and Services/Military | (0.2 | ) | (0.5 | ) | | ||||
| |||||||||
Cash flows from (used in): | |||||||||
Operating activities | $ | 4.6 | $ | 12.2 | $ | 5.8 | |||
Investing activities | (39.2 | ) | (26.5 | ) | (14.0 | ) | |||
Financing activities | 29.9 | 26.3 | (0.1 | ) | |||||
|
NOTE 4 DISCONTINUED OPERATIONS AND LONG-TERM ASSETS HELD FOR SALE
DISCONTINUED OPERATIONS
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. This amount was subject to the approval by L-3 of the net working capital of the Marine Controls segment. The parties have completed the discussions regarding the net working capital in the second quarter of fiscal 2007 and L-3 was paid for the difference in the net working capital. 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.
During the second and third quarters of fiscal 2006, in accordance with the purchase agreement, L-3 acquired the two components of the Marine Controls segment that were subject to regulatory approvals, and assumed the Companys guarantee of $53.0 million (£23 million) of project-financed related debt for the U.K. Astute Class submarine training program.
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. Interest expense relating to debt not directly attributable to the continuing operations and paid with the proceeds of the sale of the Marine Controls business has been allocated to discontinued operations based on its share of net assets.
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.
CAE 2007 Q4 REPORT | 65
NOTE 4 DISCONTINUED OPERATIONS AND LONG-TERM ASSETS HELD FOR SALE (CONTD)
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 has completed a review of the buyers books and records and has, in January 2006, launched legal proceedings to collect the payment that it believes is owed to the Company. During the fourth quarter of fiscal 2007, the Company recognized fees in connection with the evaluation and litigation exercise amounting to $0.9 million (net of tax recovery of $0.2 million). For fiscal 2006, the Company incurred $0.2 million (net of tax recovery of $0.1 million). In fiscal 2005, no such fees were incurred. This dispute has currently been referred to arbitration and is in the discovery of evidence phase.
LONG-TERM ASSETS HELD FOR SALE
As part of its global expansion, the Company announced in its third quarter of fiscal 2005 that it would be opening a new business aviation training centre in Morris County, New Jersey. The new training centre became operational in fiscal 2007. As a result, the valuation of two redundant training centre buildings, one located in Dallas, Texas and a second located in Marietta, Georgia, were adjusted to their fair value in fiscal 2005 and reclassified as assets held for sale, and previously reported amounts have been reclassified. Also, as part of a review of its performance and strategic orientation, the Company decided to close its training centre located in Maastricht, Netherlands during the third quarter of fiscal 2006. As a result, property was reclassified as assets held for sale.
In the second quarter of fiscal 2007, the Company sold for $3.6 million the aggregate land and building in Dallas, Texas and Marietta, Georgia, which was previously reported as being held for sale. As a result of this transaction, the Company recorded a loss on the sale of $0.2 million (net of tax recovery of $0.1 million).
During the last quarter of fiscal 2007, the Company sold the remaining long-term assets held for sale in Maastricht, Netherlands for $2.8 million. As a result of this transaction, the Company recorded a net gain on the sale of $0.2 million (net of tax expense of $0.1 million). Summarized financial information for the discontinued operations is as follows:
SUMMARY OF DISCONTINUED OPERATIONS
(amounts in millions, except per share amounts) | 2007 | 2006 | 2005 | |||||||||
| ||||||||||||
Revenue | ||||||||||||
Marine Controls | $ | | $ | | $ | 109.6 | ||||||
| ||||||||||||
$ | | $ | | $ | 109.6 | |||||||
| ||||||||||||
Gain on sale of Marine Controls, | ||||||||||||
net of $25.1 tax expense | $ | | $ | | $ | 103.9 | ||||||
Net (loss) earnings from Marine Controls, | ||||||||||||
2007 net of tax recovery of | $0.2; 2006 net of | tax | ||||||||||
expense of $0.7; 2005 net of tax expense of $3.8 | (1.1 | ) | (1.7 | ) | 5.5 | |||||||
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; 2005 net of tax expense of Nil | 0.1 | (4.1 | ) | (4.4 | ) | |||||||
Net loss from Forestry Systems, | ||||||||||||
2007 net of tax recovery of | $0.1; 2006 net of | tax | ||||||||||
recovery of $0.1; 2005 net of tax expense of Nil | (0.7 | ) | (0.2 | ) | | |||||||
Net loss from Training & Services/Civil, | ||||||||||||
2007 net of tax expense of Nil | ; 2006 net of tax | |||||||||||
expense of Nil; 2005 net of tax recovery of $0.1 | | | (0.2 | ) | ||||||||
| ||||||||||||
Net (loss) earnings from discontinued operations | $ | (1.7 | ) | $ | (6.0 | ) | $ | 104.8 | ||||
| ||||||||||||
Basic and diluted net (loss) earnings per share from | ||||||||||||
discontinued operations | $ | (0.01 | ) | $ | (0.02 | ) | $ | 0.42 | ||||
|
66 | CAE 2007 Q4 REPORT
NOTE 5 IMPAIRMENT OF GOODWILL, TANGIBLE AND INTANGIBLE ASSETS
During fiscal 2005, CAEs management performed a comprehensive review of the current performance and strategic orientation of its reporting units. This strategic review revealed that several factors had severely and persistently affected mainly the civil business, including the enduring adverse economic environment of the airline industry. This created a new market reality, slower than anticipated training outsourcing opportunities (due to pilot-related restructuring efforts at some major airlines), escalating cost of manufacturing full-flight simulators, the erosion of the 30 to 50-seat regional jet market and the appreciation of the Canadian dollar. These elements had caused the recalibration of some key assumptions in civils strategic planning, which led to the review of the carrying amount of certain assets, including goodwill, intangible assets acquired in previous acquisitions, inventory levels for the regional jet market, non-performing training equipment and certain other assets.
Therefore, based on this review, as at March 31, 2005, the Company recorded a $443.3 million impairment charge, all of which is virtually related to its civil segments, as follows:
(amounts in millions) | 2005 | |||||
| ||||||
Goodwill | $ | 205.2 | ||||
Customer relations | 86.7 | |||||
Trade names and other intangible assets | 20.4 | |||||
Property, plant and equipment (simulators) | 78.4 | |||||
Inventories | 33.3 | |||||
Other assets | 19.3 | |||||
| ||||||
$ | 443.3 | |||||
| ||||||
NOTE 6 ACCOUNTS RECEIVABLE | ||||||
| ||||||
(amounts in millions) | 2007 | 2006 | ||||
| ||||||
Trade | $ | 136.2 | $ | 107.2 | ||
Allowance for doubtful accounts | (4.4 | ) | (4.8 | ) | ||
Accrued receivables | 45.7 | 35.1 | ||||
Other receivables | 42.3 | 35.1 | ||||
| ||||||
$ | 219.8 | $ | 172.6 | |||
|
The Company has an agreement to sell third-party receivables to a financial institution for an amount of up to $35.0 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, 2007, $29.0 million (2006 - $6.7 million) of specific accounts receivable were sold to the financial institution pursuant to this agreement. Proceeds (net of $0.6 million in fees, 2006 - $0.5 million) of the sale were used to repay borrowings under the Companys credit facilities.
NOTE 7 INVENTORIES | ||||
| ||||
(amounts in millions) | 2007 | 2006 | ||
| ||||
Long-term contracts | $ | 112.7 | $ | 87.7 |
Work in progress | 66.1 | 66.6 | ||
Raw materials, supplies and manufactured products | 25.0 | 26.6 | ||
| ||||
$ | 203.8 | $ | 180.9 | |
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CAE 2007 Q4 REPORT | 67
NOTE 8 PROPERTY, PLANT AND EQUIPMENT | ||||||||||||||
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(amounts in millions) | 2007 | 2006 | ||||||||||||
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Net | Net | |||||||||||||
Accumulated | book | Accumulated | book | |||||||||||
Cost depreciation | value | Cost | depreciation | value | ||||||||||
|
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Land | $ | 21.2 | $ | | $ | 21.2 | $ | 20.2 | $ | | $ | 20.2 | ||
Buildings and improvements | 238.9 | 72.6 | 166.3 | 220.6 | 65.8 | 154.8 | ||||||||
Simulators | 645.5 | 92.4 | 553.1 | 528.5 | 77.9 | 450.6 | ||||||||
Machinery and equipment | 185.0 | 117.3 | 67.7 | 169.0 | 103.4 | 65.6 | ||||||||
Assets under capital lease (1) | 34.4 | 22.6 | 11.8 | 32.2 | 20.3 | 11.9 | ||||||||
Assets under construction | 166.5 | | 166.5 | 129.0 | | 129.0 | ||||||||
|
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$ | 1,291.5 | $ | 304.9 | $ | 986.6 | $ | 1,099.5 | $ | 267.4 | $ | 832.1 | |||
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(1) Includes simulators and machinery and equipment. | ||||||||||||||
The average remaining amortization period for the simulators is 14 years. | ||||||||||||||
NOTE 9 INTANGIBLE ASSETS | ||||||||||||||
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(amounts in millions) | 2007 | 2006 | ||||||||||||
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||||||||||||||
Net | Net | |||||||||||||
Accumulated | book | Accumulated | book | |||||||||||
Cost amortization | value | Cost | amortization | value | ||||||||||
|
||||||||||||||
Trade names | $ | 12.2 | $ | 1.7 | $ | 10.5 | $ | 12.2 | $ | 0.9 | $ | 11.3 | ||
Customer relations | 1.7 | 0.3 | 1.4 | 1.2 | 0.2 | 1.0 | ||||||||
Customer contractual agreements | 7.6 | 2.9 | 4.7 | 7.7 | 3.0 | 4.7 | ||||||||
Enterprise resource planning (ERP) | ||||||||||||||
and other software | 20.7 | 3.9 | 16.8 | 12.0 | 1.5 | 10.5 | ||||||||
Other intangible assets | 4.9 | 2.3 | 2.6 | 4.0 | 1.0 | 3.0 | ||||||||
|
||||||||||||||
$ | 47.1 | $ | 11.1 | $ | 36.0 | $ | 37.1 | $ | 6.6 | $ | 30.5 | |||
|
||||||||||||||
The continuity of intangible assets is | as follows: | |||||||||||||
|
||||||||||||||
(amounts in millions) | 2007 | 2006 | ||||||||||||
|
||||||||||||||
Opening balance | $ | 30.5 | $ | 27.9 | ||||||||||
Acquisitions (Note 2) | 0.8 | 2.7 | ||||||||||||
ERP and other software additions | 8.8 | 3.9 | ||||||||||||
Amortization | (3.8 | ) | (3.2 | ) | ||||||||||
Foreign exchange | (0.3 | ) | (0.8 | ) | ||||||||||
|
||||||||||||||
Closing balance | $ | 36.0 | $ | 30.5 | ||||||||||
|
||||||||||||||
The annual amortization expense for the next five years will be approximately $3.8 million. |
68 | CAE 2007 Q4 REPORT
NOTE 10 GOODWILL | |||||||||||||
| |||||||||||||
(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 2) | | | | 4.1 | 4.1 | ||||||||
Foreign exchange | | | 0.4 | 0.4 | 0.8 | ||||||||
| |||||||||||||
Closing balance | $ | | $ | | $ | 54.6 | $ | 42.3 | $ | 96.9 | |||
| |||||||||||||
(amounts in millions) | 2006 | ||||||||||||
| |||||||||||||
Simulation | Training | Simulation | Training | ||||||||||
Products/Civil | Services/Civil | Products/Military | Services/Military | Total | |||||||||
| |||||||||||||
Opening balance(1) | $ | | $ | | $ | 52.5 | $ | 39.6 | $ | 92.1 | |||
Acquisitions (Note 2) | | | 4.5 | | 4.5 | ||||||||
Foreign exchange | | | (2.8 | ) | (1.8 | ) | (4.6 | ) | |||||
| |||||||||||||
Closing balance | $ | | $ | | $ | 54.2 | $ | 37.8 | $ | 92.0 | |||
|
(1) | As at April 1, 2005, following the changes in its internal organizational structure related to the operating segments of the Company, goodwill has been reassigned to the reporting segment using a related fair value allocation approach. |
NOTE 11 OTHER ASSETS | |||||
| |||||
(amounts in millions) | 2007 | 2006 | |||
| |||||
Restricted cash | $ | 2.8 | $ | 1.5 | |
Investment in and advances to CVS | Leasing Ltd. (i) | 43.5 | 39.0 | ||
Deferred development costs, net of | accumulated amortization of $27.4 (2006 $22.6) (ii) | 24.7 | 26.1 | ||
Deferred pre-operating costs, net of accumulated amortization of $21.6 (2006 $18.6) (iii) | 13.1 | 9.2 | |||
Deferred financing costs, net of accumulated amortization of $15.3 (2006 $14.5) | 7.5 | 7.4 | |||
Long-term receivables (iv) | 3.9 | 11.7 | |||
Accrued benefit asset (Note 23) | 24.1 | 20.8 | |||
Other, net of accumulated amortization of $5.7 million (2006 $3.6 million) | 9.9 | 20.5 | |||
| |||||
$ | 129.5 | $ | 136.2 | ||
|
(i) | The Company leads a consortium, which was contracted by the United Kingdom (U.K.) Ministry of Defense (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 a subsidiary, CAE Aircrew Training Plc (Aircrew), of which it owns 78% with the balance held by 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. In March 2005, CVS refinanced its operations through an amount of £70.6 million of financing, which expires in October 2016. | |
(ii) | R&D expenditures aggregated to $95.0 million during the year (2006 $91.3 million; 2005 $93.5 million), of which $3.0 million represents development costs that qualify for a deferral pursuant to CICA requirements (2006 $1.8 million; 2005 $9.9 million). |
The Company has recorded government contribution against these amounts (refer to Note 22). | |
The total of deferred development costs amortized during the year amounted to $4.8 million (2006 $13.1 million, 2005 $3.9 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 2007, $5.9 million was capitalized (2006 $0.7 million) and an amortization of $3.0 million was taken (2006 $4.0 million; 2005 $6.1 million). |
(iv) | During fiscal 2007, the Company received early payment, in full, of $9.3 million for the secured subordinated promissory long- term notes. For fiscal 2006, long-term receivables included secured subordinated promissory notes in connection with the sale of its various Cleaning Technologies businesses totalling $8.5 million. The notes bore interest at rates ranging from 3% to 7%. |
CAE 2007 Q4 REPORT | 69
NOTE 12 DEBT FACILITIES | ||||||
A. | LONG-TERM DEBT | |||||
| ||||||
(amounts in millions) | 2007 | 2006 | ||||
| ||||||
Recourse debt | ||||||
(i) | Senior notes | $ | 107.2 | $ | 126.1 | |
(ii) | Revolving unsecured term credit facilities, | |||||
5 years maturing July 2010; | ||||||
US$400.0 (outstanding as at March 31, 2007 USNil, as at March 31, 2006 USNil) | | | ||||
5 years maturing July 2010, | ||||||
E100.0 (outstanding as at March 31, 2007 Nil, as at March 31, 2006 Nil) | | | ||||
(iii) | Term loans, maturing in May and June 2011 | |||||
(outstanding as at March 31, 2007 E22.8 and E4.5, as at March 31, 2006 | ||||||
E26.9 and E5.3) | 42.1 | 45.6 | ||||
(iv) | Grapevine Industrial Development Corporation bonds, | |||||
secured, maturing in January 2010 and 2013 (US$27.0) | 31.1 | 31.5 | ||||
(v) | Miami Dade County Bonds, maturing in March 2024 (US$11.0) | 12.7 | 12.8 | |||
(vi) | Other debt, maturing in December 2012 | 9.5 | 4.9 | |||
(vii) | Obligations under capital lease commitments | 11.1 | 13.5 | |||
Non-recourse debt (1) | ||||||
(viii) | Term loan of £12.7 secured, maturing in October 2016 | |||||
(outstanding as at March 31, 2007 £4.5, as at March 31, 2006 £5.3) | 10.3 | 10.7 | ||||
(ix) | Term loan maturing in June 2021 | |||||
(outstanding as at March 31, 2007 E25.2, as at March 31, 2006 E13.9) | 38.8 | 19.7 | ||||
(x) | Term loans maturing in December 2009 | |||||
(outstanding as at March 31, 2007 US$17.7, as at March 31, 2006 US$5.6) | 20.4 | 6.5 | ||||
| ||||||
$ | 283.2 | $ | 271.3 | |||
Less: | ||||||
Current portion of | long-term debt | 25.3 | 8.0 | |||
Current portion of | capital lease | 1.9 | 2.4 | |||
| ||||||
$ | 256.0 | $ | 260.9 | |||
|
(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. |
(i) | Pursuant to a private placement, the Company borrowed US$108 million. During the last quarter of fiscal 2007, CAE prepaid the US$15.0 million dollar tranche, which matured in June 2007. 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. |
(ii) | On July 7, 2005, the Company entered into a revolving credit agreement. This revolving unsecured term credit facility (US$400.0 million and E100.0 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, 2007, is equal to approximately $79.7 million (E51.7 million) (2006 $76.8 million [ E54.2 million]). |
70 | CAE 2007 Q4 REPORT
(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, 2007, the combined rate for both series was approximately 4.77% (2006 3.92%). 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, 2007. 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, 2007, the applicable floating rate, which is reset weekly, was 4.78%. 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 6.1%. |
(vii) | These capital leases are related to the leasing of various equipment and simulators. The effective interest rate on obligations under capital leases, which have staggered maturities until June 2010 was approximately 6.18% as at March 31, 2007 (2006 5.92%). |
(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 £4.2 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, 2007, is £27.4 million (2006 £26.9 million). |
(ix) | Term loan, maturing in June 2021, representing CAEs proportionate share (25%) of the German NH90 project. The total amount available for the project Company under the facility is E175.5 million. The debt is non-recourse to CAE. The borrowings bear interest at a EURIBOR rate and are currently swapped to fixed rate of 3.8%. |
(x) | The other debt is the result of CAEs proportionate share (49%) of term debt for the acquisition of simulators on a non-recourse basis, for its joint venture in the Zhuhai Training Center. The term debt has been arranged through several financial institutions. |
Borrowings bear interest on a floating rate basis of U.S. Libor plus a spread ranging from 0.3% to 1%, and have maturities between March 2008 and December 2009. In accordance with the debt agreements, the joint venture may draw up to an additional US$6.4 million (CAEs proportionate 49% share: US$3.1 million) during FY2008 to fund payments for simulators. | |
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 | |||
| ||||||
2008 | $ | 25.3 | $ | 1.9 | $ | 27.2 |
2009 | 14.2 | 0.8 | 15.0 | |||
2010 | 94.6 | 0.8 | 95.4 | |||
2011 | 16.0 | 7.6 | 23.6 | |||
2012 | 9.8 | | 9.8 | |||
Thereafter | 112.2 | | 112.2 | |||
| ||||||
$ | 272.1 | $ | 11.1 | $ | 283.2 | |
| ||||||
As at March 31, 2007, CAE is in full compliance with its financial covenants. |
B. SHORT-TERM DEBT
The Company has an unsecured and uncommitted bank line of credit available in Euros totalling $4.6 million (2006 $41.2 million; 2005 $31.0 million), of which none is used as at March 31, 2007 (2006 Nil; 2005 $11.2 million). The line of credit bears interest at a Euro base rate.
CAE 2007 Q4 REPORT | 71
NOTE 12 DEBT FACILITIES (CONTD) | |||||||||
C. NTEREST EXPENSE, NET | |||||||||
Details of interest expense (income) are as follows: | |||||||||
| |||||||||
(amounts in millions) | 2007 | 2006 | 2005 | ||||||
| |||||||||
Long-term debt interest expense | $ | 18.5 | $ | 21.6 | $ | 35.3 | |||
Amortization of deferred financing costs and other | 2.3 | 4.0 | 9.7 | ||||||
Allocation of interest expense to discontinued operations | | | (1.4 | ) | |||||
Interest capitalized | (4.1 | ) | (2.8 | ) | (5.8 | ) | |||
| |||||||||
Interest on long-term debt | 16.7 | 22.8 | 37.8 | ||||||
| |||||||||
Interest income | (4.8 | ) | (6.9 | ) | (5.7 | ) | |||
Other interest expense (income), net | (1.3 | ) | 0.3 | | |||||
| |||||||||
Interest income, net | (6.1 | ) | (6.6 | ) | (5.7 | ) | |||
| |||||||||
Interest expense, net | $ | 10.6 | $ | 16.2 | $ | 32.1 | |||
|
The Companys year-to-date interest income is a result of interest revenue due to the accretion of discounts on the long-term notes receivable settled, in full, during the second quarter of fiscal 2007, to interest revenue on cash on hand and to advances to CVS Leasing Ltd. (CVS). CVS is an entity that owns simulators and other equipment used to train U.K. Ministry of Defense 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) | 2007 | 2006 | ||
| ||||
Restated | ||||
(Note 1) | ||||
Deferred gains on sale and leasebacks (i) | $ | 84.0 | $ | 87.5 |
Deferred revenue | 20.3 | 31.3 | ||
Deferred gains | 15.0 | 6.6 | ||
Employee benefits obligation (Note 23) | 26.9 | 23.9 | ||
Government cost-sharing (Note 22) | 14.5 | 12.2 | ||
Non-controlling interest (ii) | 18.2 | 17.6 | ||
Long-term portion of purchase agreement (iii) | 7.9 | 8.1 | ||
Long-term payable to Investissement Québec | 1.4 | 2.1 | ||
LTI RSU/DSU compensation obligation | 35.3 | 14.5 | ||
Other | 9.2 | 7.4 | ||
| ||||
$ | 232.7 | $ | 211.2 | |
|
(i) | The related amortization for the year amounts to $4.0 million (2006 $3.9 million; 2005 $3.5 million). |
(ii) | Non-controlling interest of 20% of the civil training centres in Madrid combined with 22% in Military CAE Aircrew Training Centre. |
(iii) | Long-term portion of purchase agreement for data and parts delivered to CAE Inc. by Dassault Aviation on specific sales orders. The annual payments will be E2.6 in April 2008 and E2.6 million in April 2009. |
72 | CAE 2007 Q4 REPORT
NOTE 14 INCOME TAXES
A reconciliation of income taxes at Canadian statutory rates with the reported income taxes is as follows:
(amounts in millions) | 2007 | 2006 | 2005 | |||||||
| ||||||||||
Restated | Restated | |||||||||
(Note 1) | (Note 1) | |||||||||
Earnings (loss) before income taxes and discontinued operations | $ | 178.8 | $ | 87.8 | $ | (405.0 | ) | |||
Canadian statutory income tax rates | 32.08 | % | 31.41 | % | 31.27 | % | ||||
| ||||||||||
Income taxes at Canadian statutory rates | $ | 57.4 | $ | 27.6 | $ | (126.6 | ) | |||
Difference between Canadian statutory rates and those | ||||||||||
applicable to foreign subsidiaries | (2.8 | ) | 0.3 | (12.2 | ) | |||||
Goodwill impairment | | | 61.7 | |||||||
Losses not tax effected | 0.3 | 2.8 | 2.7 | |||||||
Tax benefit of | operating losses not previously recognized | (2.3 | ) | (9.1 | ) | (12.2 | ) | |||
Tax benefit of | capital losses not previously recognized | | (0.8 | ) | (11.3 | ) | ||||
Non-taxable capital gain | (0.6 | ) | (0.3 | ) | (0.1 | ) | ||||
Non-deductible items | 2.4 | 1.4 | 4.2 | |||||||
Prior years tax adjustments and assessments | (1.0 | ) | (0.9 | ) | (3.6 | ) | ||||
Impact of change in income tax rates on future income taxes | (1.2 | ) | 1.9 | (1.0 | ) | |||||
Non-taxable research and development tax credits | (0.8 | ) | (0.9 | ) | (1.5 | ) | ||||
Large corporation tax | | 0.7 | | |||||||
Other tax benefit not previously recognized | (3.2 | ) | (2.9 | ) | | |||||
Exchange translation items | | (0.7 | ) | | ||||||
Other | 1.5 | (0.9 | ) | (0.7 | ) | |||||
| ||||||||||
Total income tax expense (recovery) | $ | 49.7 | $ | 18.2 | $ | (100.6 | ) | |||
| ||||||||||
Significant components of the provision for the income tax expense attributable to continuing operations are as follows: | ||||||||||
| ||||||||||
(amounts in millions) | 2007 | 2006 | 2005 | |||||||
| ||||||||||
Current income tax expense | $ | 63.9 | $ | 13.1 | $ | 13.5 | ||||
Future income tax expense (recovery) | ||||||||||
Tax benefit of operating losses not previously recognized | (2.3 | ) | (9.1 | ) | (12.2 | ) | ||||
Tax benefit of capital losses not previously recognized | | (0.8 | ) | (11.3 | ) | |||||
Impact of change in income tax rates on future income taxes | (1.2 | ) | 1.9 | (1.0 | ) | |||||
Other tax benefit not previously recognized | (3.2 | ) | (2.9 | ) | | |||||
Fixed asset impairment | | | (72.6 | ) | ||||||
Change related to temporary differences | (7.5 | ) | 16.0 | (17.0 | ) | |||||
| ||||||||||
Total income tax expense (recovery) | $ | 49.7 | $ | 18.2 | $ | (100.6 | ) | |||
|
CAE 2007 Q4 REPORT | 73
NOTE 14 INCOME TAXES (CONTD) | ||||||
The tax effects of temporary differences that give rise to future tax liabilities and assets are as follows: | ||||||
| ||||||
(amounts in millions) | 2007 | 2006 | ||||
| ||||||
Restated | ||||||
(Note 1) | ||||||
Future income tax assets | ||||||
Non-capital loss carryforwards | $ | 39.7 | $ | 55.7 | ||
Capital loss carryforwards | 6.5 | 6.5 | ||||
Intangible assets | 27.1 | 31.5 | ||||
Amounts not currently deductible | 23.4 | 20.2 | ||||
Deferred revenues | 17.3 | 13.5 | ||||
Tax benefit carryover | 10.4 | 10.1 | ||||
Deferred research & development expenses | | 7.0 | ||||
Other | 1.4 | 2.5 | ||||
| ||||||
125.8 | 147.0 | |||||
Valuation allowance | (25.3 | ) | (37.5 | ) | ||
| ||||||
$ | 100.5 | $ | 109.5 | |||
| ||||||
Future income tax liabilities | ||||||
Investment tax credits | $ | (22.5 | ) | $ | (22.6 | ) |
Property, plant and equipment | (9.7 | ) | (28.5 | ) | ||
Percentage-of-completion versus completed contract | (2.3 | ) | (15.8 | ) | ||
Deferred research & development expenses | (2.5 | ) | | |||
| ||||||
(37.0 | ) | (66.9 | ) | |||
| ||||||
Net future income tax assets | $ | 63.5 | $ | 42.6 | ||
| ||||||
Net current future income tax asset | $ | 3.7 | $ | 5.7 | ||
Net non-current future income tax asset | 81.5 | 78.2 | ||||
Net current future income tax liability | (4.9 | ) | (14.5 | ) | ||
Net non-current future income tax liability | (16.8 | ) | (26.8 | ) | ||
| ||||||
$ | 63.5 | $ | 42.6 | |||
|
As at March 31, 2007, the Company has accumulated non-capital losses carried forward relating to operations in Canada for approximately $2.8 million. For financial reporting purposes, a net future income tax asset of $0.8 million has been recognized in respect of these loss carry forwards.
As at March 31, 2007, the Company has accumulated non-capital losses carried forward relating to operations in the United States for approximately $48.4 million (US$42.0 million). For financial reporting purposes, a net future income tax asset of $16.9 million (US$14.6 million) has been recognized in respect of these loss carry forwards.
The Company has accumulated non-capital tax losses carried forward relating to its operations in other countries of approximately $83.6 million. For financial reporting purposes, a net future income tax asset of $15.4 million has been recognized.
The Company also has accumulated capital losses carried forward relating to operations in Canada for approximately $5.3 million. For financial reporting purposes, a net future income tax asset of $0.6 million has been recognized.
The Company also has accumulated capital losses carried forward relating to operations in the United States for approximately $15.4 million (US$13.3 million). For financial reporting purposes, no future income tax asset was recognized, as a full valuation allowance was taken.
74 | CAE 2007 Q4 REPORT
The non-capital losses for income tax purposes expire as follows: | ||||
| ||||
United States | Other countries | |||
(amounts in millions) | (US$) | (CA$) | ||
| ||||
Expiry date: | ||||
2008 | $ | | $ | |
2009 | 4.3 | | ||
2010 | | | ||
2011 | 10.7 | | ||
2012 | 18.1 | | ||
2013 2024 | 7.8 | 10.9 | ||
No expiry date | | 75.5 | ||
| ||||
$ | 40.9 | $ | 86.4 | |
|
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 2007, $5.5 million (2006 $16.7 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: | |||||||||
| |||||||||
2007 | 2006 | 2005 | |||||||
(amounts in millions, | Number | stated | Number | stated | Number | stated | |||
except number of shares) | of shares | value | of shares | value | of shares | value | |||
| |||||||||
Balance at beginning of year | 250,702,430 | $ | 389.0 | 248,070,329 | $ | 373.8 | 246,649,180 | $ | 367.5 |
Shares issued (Note 2)(a) (b) | | | 1,091,564 | 6.9 | 424,628 | 2.0 | |||
Stock options exercised | 1,236,895 | 10.0 | 1,497,540 | 8.0 | 869,620 | 3.6 | |||
Transfer of contributed surplus | |||||||||
upon exercise of stock options | | 2.5 | | | | | |||
Stock dividends | 21,124 | 0.2 | 42,997 | 0.3 | 126,901 | 0.7 | |||
| |||||||||
Balance at end of year | 251,960,449 | $ | 401.7 | 250,702,430 | $ | 389.0 | 248,070,329 | $ | 373.8 |
|
(a) | 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]). |
(b) | On November 30, 2004, the Company issued 424,628 common shares at a price of $4.71 per share for the first tranche payment of CAE Professional Services (Canada) Inc. |
CAE 2007 Q4 REPORT | 75
NOTE 15 CAPITAL STOCK AND CONTRIBUTED SURPLUS (CONTD)
The following is a reconciliation of the denominators for the basic and diluted earnings (loss) per share computations:
2007 | 2006 | 2005 | |||
| |||||
Weighted average number of common shares outstanding | Basic | 251,110,476 | 249,806,204 | 247,060,580 | |
Effect of dilutive stock options | 1,894,730 | 2,325,422 | 812,273 | ||
| |||||
Weighted average number of common shares outstanding | Diluted | 253,005,206 | 252,131,626 | 247,872,853 | (1) |
|
(1) | For fiscal 2005, the effect of stock options potentially exercisable on pro forma net loss per share was anti-dilutive; therefore, basic and diluted pro forma net loss per share are the same. |
Options to acquire 1,397,200 common shares (2006 2,269,150; 2005 4,635,100) 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) | 2007 | 2006 | 2005 | |||||||
| ||||||||||
Restated | Restated | |||||||||
(Note 1) | (Note 1) | |||||||||
Balance at beginning of year | $ | 5.6 | $ | 3.5 | $ | 2.1 | ||||
Transfer to common stock upon exercise of stock options | (2.5 | ) | | | ||||||
Stock-based compensation (Note 17) | 2.6 | 2.1 | 1.4 | |||||||
| ||||||||||
Balance at end of year | $ | 5.7 | $ | 5.6 | $ | 3.5 | ||||
| ||||||||||
NOTE 16 CUMULATIVE TRANSLATION ADJUSTMENT | ||||||||||
The net change in the currency translation adjustment account is as follows: | ||||||||||
| ||||||||||
(amounts in millions) | 2007 | 2006 | ||||||||
| ||||||||||
Balance at beginning of year | $ | (115.2 | ) | $ | (66.3 | ) | ||||
Effect of changes in exchange rates during the year: | ||||||||||
On net investment in self-sustaining subsidiaries, | ||||||||||
net of tax recovery of $0.2 (2006 tax recovery of $2.2) | 26.3 | (47.0 | ) | |||||||
On certain long-term debt denominated in foreign currencies | ||||||||||
designated as a hedge of net investments in self-sustaining | ||||||||||
foreign subsidiaries, net of tax expense of $0.3 | ||||||||||
(2006 tax expense of | $0.9) | 1.2 | 3.7 | |||||||
Portion included in income as a result of reductions in net | ||||||||||
investments in self-sustaining foreign operations, | ||||||||||
net of taxes of nil (2006 tax expense of $0.3) | | (5.6 | ) | |||||||
| ||||||||||
Balance at end of year | $ | (87.7 | ) | $ | (115.2 | ) | ||||
|
NOTE 17 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 and 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 as the closing price of the common shares on the TSX on the last day of trading prior to the effective date of the grant.
76 | CAE 2007 Q4 REPORT
As at March 31, 2007, a total of 9,484,076 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. 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.
A reconciliation of the outstanding options is as follows: | ||||||||||||
| ||||||||||||
Years ended March 31 | 2007 | 2006 | 2005 | |||||||||
| ||||||||||||
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 | 6,347,235 | $ | 7.66 | 8,208,675 | $ | 7.52 | 8,128,370 | $ | 7.51 | |||
Granted | 647,700 | $ | 9.13 | 568,200 | $ | 5.96 | 2,046,650 | $ | 5.68 | |||
Exercised | (1,236,895 | ) | $ | 8.07 | (1,497,540 | ) | $ | 5.29 | (869,620 | ) | $ | 4.15 |
Forfeited | (316,125 | ) | $ | 10.60 | (932,100 | ) | $ | 9.21 | (809,725 | ) | $ | 6.77 |
Expired | | $ | | | $ | | (287,000 | ) | $ | 6.43 | ||
| ||||||||||||
Options outstanding at end of year | 5,441,915 | $ | 7.57 | 6,347,235 | $ | 7.66 | 8,208,675 | $ | 7.52 | |||
| ||||||||||||
Options exercisable at end of year | 2,986,135 | $ | 8.58 | 2,775,850 | $ | 9.90 | 3,731,085 | $ | 8.76 | |||
| ||||||||||||
The following table summarizes information about the Companys ESOP as at March 31, 2007: | ||||||||||||
| ||||||||||||
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 | 2,879,215 | 2.98 | $ | 5.02 | 1,584,235 | $ | 5.03 | |||||
$6.19 to $9.20 | 1,165,500 | 4.30 | $ | 7.82 | 11,400 | $ | 8.08 | |||||
$10.31 to $14.60 | 1,397,200 | 0.92 | $ | 12.62 | 1,390,500 | $ | 12.63 | |||||
| ||||||||||||
Total | 5,441,915 | 2.73 | $ | 7.57 | 2,986,135 | $ | 8.58 | |||||
|
For the year ended March 31, 2007, compensation cost for CAEs stock options was recognized in consolidated net earnings (loss) with a corresponding credit of $2.6 million (fiscal 2006 $2.1 million, fiscal 2005 $1.4 million) to contributed surplus using the fair value method of accounting for awards that were granted since 2004. Due to the application of EIC-162, which requires retroactive restatement of prior periods, the compensation cost for CAE stock options have been restated (refer to Note 1).
The assumptions used for purposes of the option calculations outlined in this note are presented below: | |||||||||
| |||||||||
2007 | 2006 | 2005 | |||||||
| |||||||||
Assumptions used in the Black-Scholes options pricing model: | |||||||||
Dividend yield | 0.44 | % | 0.67 | % | 1.26 | % | |||
Expected volatility | 45.0 | % | 47.0 | % | 40.0 | % | |||
Risk-free interest rate | 4.38 | % | 4.0 | % | 5.75 | % | |||
Expected option term | 4 | 6 | 6 | ||||||
Weighted average fair value of options granted | $ | 3.57 | $ | 2.84 | $ | 2.27 | |||
|
CAE 2007 Q4 REPORT | 77
NOTE 17 STOCK-BASED COMPENSATION PLANS (CONTD)
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 (loss) and pro forma basic and diluted net earnings (loss) per share are presented below:
(amounts in millions, except per share amounts) | 2007 | 2006 | 2005 | ||||||
| |||||||||
Restated | Restated | ||||||||
(Note 1) | (Note 1) | ||||||||
Net earnings (loss), as reported | $ | 127.4 | $ | 63.6 | $ | (199.6 | ) | ||
Pro forma impact | (0.1 | ) | (0.7 | ) | (1.9 | ) | |||
| |||||||||
Pro forma net earnings (loss) | $ | 127.3 | $ | 62.9 | $ | (201.5 | ) | ||
| |||||||||
Pro forma basic net earnings (loss) per share | $ | 0.51 | $ | 0.25 | $ | (0.82 | ) | ||
Pro forma diluted net earnings (loss) per share (1) | $ | 0.50 | $ | 0.25 | $ | (0.82 | ) | ||
|
(1) | For fiscal 2005, the effect of stock options potentially exercisable on pro forma net loss per share was anti-dilutive; therefore, the basic and diluted pro forma net loss per share are the same. |
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 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. Employees may contribute to the plan through payroll deductions or a lump-sum contribution. The employee and employer contribution may be invested in the employee Register Retirement Saving Plan (RRSP) or 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 $3.1 million (2006 $2.1 million; 2005 $1.4 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 Toronto Stock Exchange 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 5,000 common shares of the Company receives the Board retainer and attendance fees in the form of deferred share units. A non-employee director holding at least 5,000 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 Toronto Stock Exchange 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, 2007, 425,092 units were outstanding at a value of $5.4 million (2006 388,972 units at a value of $3.6 million; 2005 343,116 units at a value of $1.9 million). A total numberof 24,176 units were redeemed during the fiscal year endedMarch 31, 2007 under both DSU Plans in accordance with their respective plan text, for a total of $0.2 million. For the year ended March 31, 2007, March 31, 2006 and March 31, 2005 no DSUs were cancelled.
LONG-TERM INCENTIVE (LTI) DEFERRED SHARE UNIT PLAN
Both 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 managers of the Company. A LTI-DSU is equal in value to one common share net of withholding tax 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.
78 | CAE 2007 Q4 REPORT
April 2003 Plan
The April 2003 LTI-DSU Plan stipulates that granted units vest equally over four years and can be redeemed for cash. Upon termination of employment for reasons of long-term disability, involuntary termination, retirement or death, eligible participants with vested LTI-DSU units will be entitled to receive the fair market value of the equivalent number of CAE common shares. As at March 31, 2007, 548,097 LTI-DSU units were outstanding (March 31, 2006 657,036 units). The expense recorded in fiscal 2007 was $0.2 million (2006 $1.6 million; 2005 $0.8 million). Due to the application of EIC-162, which requires retroactive restatement of prior periods, the expense amounts have been restated.
May 2004 Plan
The May 2004 LTI-DSU Plan has replaced the April 2003 LTI-DSU Plan for succeeding years. The May 2004 LTI-DSU Plan stipulates that granted units vest equally over five years and can be redeemed for cash. Upon termination of employment, eligible participants with vested DSU units will be entitled to receive the fair market value of the equivalent number of CAE common shares. In fiscal 2007, the Company issued 527,714 LTI-DSU units (2006 430,503 units) and as at March 31, 2007, 1,392,653 LTI-DSU units were outstanding (2006 916,722 units outstanding). The expense recorded in fiscal 2007 was $7.5 million (2006 $2.8 million; 2005 $0.8 million). Due to the application of EIC-162, which requires retroactive restatement of prior periods, the expense amounts have been restated.
Since fiscal 2004, the Company entered into contracts to reduce its earnings exposure to the fluctuations in its share price (refer to Note 18).
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 managers. 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 2007, the Company issued 770,948 LTI-RSU units (2006 637,561 units) and as at March 31, 2007, 2,009,666 LTI-RSU units were outstanding (2006 1,224,918 units outstanding). The expense recorded in fiscal 2007 was $12.1 million (2006 $3.5 million; 2005 $0.4 million). Due to the application of EIC-162, which requires retroactive restatement of prior periods, the expense amounts have been restated.
NOTE 18 FINANCIAL INSTRUMENTS
FOREIGN CURRENCY RISK
The Company entered into forward foreign exchange contracts totalling $604.1 million (buy contracts $91.4 million and sell contracts totalling $512.7 million). The total net unrealized loss as of March 31, 2007, is $7.6 million (unrealized gain on buy contracts of $0.8 million and unrealized loss on sell contracts of $8.4 million).
CAE 2007 Q4 REPORT | 79
NOTE 18 FINANCIAL INSTRUMENTS (CONTD) | ||||||
Consolidated foreign exchange transactions outstanding | ||||||
|
||||||
(amounts in millions, except average rate) | 2007 | 2006 | ||||
|
||||||
Notional | Average | Notional | Average | |||
Currencies (Sold/Bought) | amount (1) | rate | amount(1) | rate | ||
|
||||||
USD/CDN | ||||||
Less than 1 year | $ | 223.3 | 0.8697 | $ | 184.6 | 0.8448 |
Between 1 and 3 years | 54.3 | 0.8908 | 71.2 | 0.8600 | ||
Between 3 to 5 years | 15.7 | 0.9007 | 2.9 | 0.8783 | ||
USD/EUR | ||||||
Less than 1 year | 11.0 | 1.2964 | 5.7 | 1.2590 | ||
Between 1 and 3 years | 4.0 | 1.2957 | 9.1 | 1.2852 | ||
CDN/EUR | ||||||
Less than 1 year | 12.9 | 1.5360 | 2.1 | 1.4003 | ||
Between 1 and 3 years | 5.4 | 1.4666 | | | ||
Between 3 and 5 years | 1.5 | 1.4642 | | | ||
EUR/CDN | ||||||
Less than 1 year | 94.9 | 0.6649 | 10.5 | 0.6758 | ||
Between 1 and 3 years | 29.4 | 0.6712 | 13.3 | 0.6387 | ||
Between 3 and 5 years | 1.5 | 0.6934 | 3.5 | 0.6118 | ||
EUR/AUD | ||||||
Less than 1 year | 1.0 | 0.5800 | | | ||
Between 1 and 3 years | 1.6 | 0.5586 | | | ||
GBP/CDN | ||||||
Less than 1 year | 4.1 | 0.4796 | 1.9 | 0.4476 | ||
Between 1 and 3 years | 47.5 | 0.4964 | ||||
CDN/GBP | ||||||
Less than 1 year | 0.5 | 2.2783 | | | ||
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 | 52.3 | 1.1564 | 17.5 | 1.1616 | ||
Between 1 and 3 years | 3.8 | 1.0986 | | | ||
|
||||||
$ | 604.1 | $ | 322.3 | |||
|
||||||
(1) Exchange rates as at the end of the respective fiscal year were used to translate amounts in foreign currencies. |
CREDIT RISK
The Company is exposed to credit risk on billed and unbilled accounts receivable. However, 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.
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. 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.
80 | CAE 2007 Q4 REPORT
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, 2007, the Company has entered into three interest rate swap agreements with three different financial institutions to mitigate these risks for a total notional value of $86.2 million. One agreement, with a notional value of $38.1 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 remaining contracts convert a floating interest rate debt into a fixed rate for a notional value of $48.1 million, whereby the Company will receive quarterly LIBOR and pay fixed interest payments as follows:
After considering these swap agreements, as at March 31, 2007, 60% of the long-term debt bears fixed interest rates.
STOCK-BASED COMPENSATION COST
In March 2004, June 2006 and March 2007 the Company entered into three equity swap agreements with three major Canadian financial institutions to reduce its cash and 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, 2007, the equity swap agreement covered 1,495,000 common shares of the Company.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions have been used to estimate the fair value of the financial instruments:
The fair value and the carrying amount of the financial instruments as at March 31 are as follows:
(amounts in millions) | 2007 | 2006 | ||||||||
| ||||||||||
Fair | Carrying | Fair | Carrying | |||||||
value | amount | value | amount | |||||||
| ||||||||||
Long-term debt | $ | 288.5 | $ | 283.2 | $ | 277.9 | $ | 271.3 | ||
Net forward foreign exchange contracts | (7.6 | ) | | 5.4 | | |||||
Interest rate swap contracts | 1.0 | | (1.5 | ) | | |||||
|
LETTERS OF CREDIT AND GUARANTEES
As at March 31, 2007, the Company had outstanding letters of credit and performance guarantees in the amount of $149.1 million (2006 $98.6 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.
CAE 2007 Q4 REPORT | 81
NOTE 18 FINANCIAL INSTRUMENTS (CONTD) | ||||
| ||||
(amounts in millions) | 2007 | 2006 | ||
| ||||
Advance payment | $ | 68.7 | $ | 34.0 |
Contract performance | 6.7 | 13.0 | ||
Operating lease obligation | 27.2 | 27.3 | ||
Simulator deployment obligation | 40.7 | 19.6 | ||
Other | 5.8 | 4.7 | ||
| ||||
Total | $ | 149.1 | $ | 98.6 |
| ||||
Of the $68.7 million of advance payment guarantees, $65.6 million are 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 $52.1 million (2006 $52.4 million), of which $12.3 million matures in 2008, $22.4 million in 2009, $8.2 million in 2020 and $9.2 million in 2023. Of this amount, as at March 31, 2007, $33.1 million is recorded as a deferred gain (2006 $33.1 million).
N DEMNIFICATIONS
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, costs incurred to settle claims related to these indemnifications have not been material to the Companys consolidated financial position, results of operations or cash flows.
NOTE 19 SUPPLEMENTARY CASH FLOWS INFORMATION | |||||||||
Cash provided by (used in) non-cash working capital is as follows: | |||||||||
| |||||||||
(amounts in millions) | 2007 | 2006 | 2005 | ||||||
| |||||||||
Accounts receivable | $ | (39.2 | ) | $ | (31.9 | ) | $ |
8 19.3 |
|
Inventories | (14.8 | ) | 13.8 | 53.3 | |||||
Prepaid expenses | 4.0 | (7.9 | ) | 0.5 | |||||
Income taxes recoverable | 20.2 | (7.5 | ) | 28.5 | |||||
Accounts payable and accrued liabilities | 22.5 | 58.9 | (43.7 | ) | |||||
Deposits on contracts | 27.5 | 53.7 | 26.3 | ||||||
| |||||||||
Decrease in non-cash working capital | $ | 20.2 | $ | 79.1 | $ | 84.2 | |||
| |||||||||
Interest paid | $ | 17.1 | $ | 21.9 | $ | 38.2 | |||
Income taxes (recovered) paid, net | $ | (1.4 | ) | $ | 13.7 | $ | |||
| |||||||||
Supplemental statements of earnings disclosure: | |||||||||
Foreign exchange gain | $ | 2.9 | $ | 8.4 | $ | 5.2 | |||
|
PROCEEDS FROM DISPOSAL OF DISCONTINUED OPERATIONS
For fiscal 2007, the net cash outflows regarding the proceeds from disposal of discontinued operations as reported in the Consolidated Statements of Cash Flows, are composed of a cash payment to L-3 in the amount of $10.2 million for the net working capital adjustments of the Marine Controls segment, offset, in part, by a cash receipt of $6.4 million from the sale of the aggregate land and building, which was previously classified as being held for sale.
82 | CAE 2007 Q4 REPORT
NOTE 20 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.
NOTE 21 COMMITMENTS
Significant contractual purchase obligations and future minimum lease payments under operating leases are as follows:
(amounts in millions) | SP/C | SP/M | TS/C | TS/M | Total | |||||
| ||||||||||
Years ending March 31, | ||||||||||
2008 | $ | 7.3 | $ | 12.2 | $ | 54.7 | $ | 26.0 | $ | 100.2 |
2009 | 2.9 | 6.3 | 51.5 | 23.4 | 84.1 | |||||
2010 | 0.4 | 2.7 | 34.0 | 20.4 | 57.5 | |||||
2011 | 0.2 | 1.9 | 35.5 | 20.2 | 57.8 | |||||
2012 | | 0.6 | 42.1 | 17.7 | 60.4 | |||||
Thereafter | 0.3 | 0.4 | 187.4 | 37.2 | 225.3 | |||||
| ||||||||||
$ | 11.1 | $ | 24.1 | $ | 405.2 | $ | 144.9 | $ | 585.3 | |
|
As at March 31, 2007, included in the total contractual purchase obligations and future minimum lease payments under operating lease is an amount of $136.0 million (March 31, 2006 $140.7 million, March 31, 2005 $187.0 million) designated as commitments to CVS Leasing Ltd., an entity in which the Company has a 14% minority shareholding.
Of the total $585.3 million disclosed as being commitments as at March 31, 2007, $37.0 million represent contractual purchase obligations.
NOTE 22 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 CAEs 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 $31.5 million contribution 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.
CAE 2007 Q4 REPORT | 83
NOTE 22 GOVERNMENT COST-SHARING (CONTD)
The following table provides information regarding contributions recognized and amounts not yet received for the aggregate project:
(amounts in millions) | 2007 | 2006 | ||||
| ||||||
Outstanding contribution receivable, beginning of year | $ | 10.0 | $ | |||
Contributions | 52.1 | 17.3 | ||||
Payments received | (43.7 | ) | (7.3 | ) | ||
| ||||||
Outstanding contribution receivable, end of year | $ | 18.4 | $ | 10.0 | ||
|
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 Companys 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) | 2007 | 2006 | 2005 | ||||
| |||||||
Contributions credited to | capitalized costs: | ||||||
Project Phoenix | $ | 7.1 | $ | 3.8 | $ | | |
Previous programs | | | 0.9 | ||||
Contributions credited to | income: | ||||||
Project Phoenix | 45.0 | 13.5 | | ||||
Previous programs | | 7.5 | 9.9 | ||||
| |||||||
Total contributions: | |||||||
Project Phoenix | $ | 52.1 | $ | 17.3 | $ | | |
Previous programs | | 7.5 | 10.8 | ||||
| |||||||
Royalty expenses: | |||||||
Project Phoenix | | | | ||||
Previous programs | $ | 7.5 | $ | 6.6 | $ | 5.9 | |
|
The cumulative contributions recognized by the Company, since their respective inceptions, for all current government cost sharing programs still active as at March 31, 2007 amounts to $149.9 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, 2007 amounts to $23.2 million.
As at March 31, 2007, the Companys short-term and long-term liabilities, in relation to future repayments of the aggregate R&D programs, amounted to $7.5 million and $14.5 million respectively. As at March 31, 2006, the Companys liability, in relation to future repayments of the aggregate R&D programs, amounted to $18.9 million, of which, $6.7 million was paid during fiscal 2007.
NOTE 23 EMPLOYEE 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, 2007, the Company has issued letters of credit totalling $21.2 million (2006 $20.0 million) to secure these obligations under the Canadian supplemental arrangement.
84 | CAE 2007 Q4 REPORT
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.
The changes in pension obligations, in fair value of assets and the financial position of the funded pension plans are as follows:
(amounts in millions) | 2007 | 2006 | ||||||||||||||||
|
||||||||||||||||||
Canadian | Foreign | Total | Canadian | Foreign | Total | |||||||||||||
|
||||||||||||||||||
Change in pension obligations | ||||||||||||||||||
Pension obligation at beginning of year | $ | 175.4 | $ | 15.6 | $ | 191.0 | $ | 158.7 | $ | 15.3 | $ | 174.0 | ||||||
Adjustment U.K. plan | | 4.1 | 4.1 | | | | ||||||||||||
Current service cost | 6.0 | 0.8 | 6.8 | 4.2 | 0.5 | 4.7 | ||||||||||||
Interest cost | 9.1 | 0.9 | 10.0 | 9.5 | 0.6 | 10.1 | ||||||||||||
Curtailment | | (0.9 | ) | (0.9 | ) | | | | ||||||||||
Employee contributions | 2.2 | 0.3 | 2.5 | 2.5 | 0.4 | 2.9 | ||||||||||||
Pension benefits paid | (11.6 | ) | (0.2 | ) | (11.8 | ) | (8.2 | ) | (0.1 | ) | (8.3 | ) | ||||||
Actuarial loss (gain) | 10.6 | (0.6 | ) | 10.0 | 8.7 | 0.3 | 9.0 | |||||||||||
Foreign exchange variation | | 1.9 | 1.9 | | (1.4 | ) | (1.4 | ) | ||||||||||
|
||||||||||||||||||
Pension obligation at end of year | 191.7 | 21.9 | 213.6 | 175.4 | 15.6 | 191.0 | ||||||||||||
|
||||||||||||||||||
Change in fair value of plan assets | ||||||||||||||||||
Fair value of plan asset at | ||||||||||||||||||
beginning of year | 144.7 | 15.9 | 160.6 | 128.2 | 14.8 | 143.0 | ||||||||||||
Adjustment U.K. plan | | 3.4 | 3.4 | | | | ||||||||||||
Actual return on plan assets | 18.1 | 1.1 | 19.2 | 11.9 | 1.4 | 13.3 | ||||||||||||
Pension benefits paid | (11.6 | ) | (0.2 | ) | (11.8 | ) | (8.2 | ) | (0.1 | ) | (8.3 | ) | ||||||
Plan expenses | | | | (0.3 | ) | | (0.3 | ) | ||||||||||
Employee contributions | 2.2 | 0.3 | 2.5 | 2.5 | 0.4 | 2.9 | ||||||||||||
Employer contributions | 9.7 | 0.9 | 10.6 | 10.6 | 0.9 | 11.5 | ||||||||||||
Foreign exchange variation | | 1.9 | 1.9 | | (1.5 | ) | (1.5 | ) | ||||||||||
|
||||||||||||||||||
Fair value of plan assets at end of year | 163.1 | 23.3 | 186.4 | 144.7 | 15.9 | 160.6 | ||||||||||||
|
||||||||||||||||||
Financial position plan (deficit)/surplus | (28.6 | ) | 1.4 | (27.2 | ) | (30.7 | ) | 0.3 | (30.4 | ) | ||||||||
Unrecognized net actuarial loss | 46.5 | (1.0 | ) | 45.5 | 45.9 | (0.4 | ) | 45.5 | ||||||||||
Unamortized past service cost | 5.1 | | 5.1 | 5.6 | | 5.6 | ||||||||||||
|
||||||||||||||||||
Amount recognized at end of year | $ | 23.0 | $ | 0.4 | $ | 23.4 | $ | 20.8 | $ | (0.1 | ) | $ | 20.7 | |||||
|
||||||||||||||||||
Amount recognized in | ||||||||||||||||||
Other assets (Note 11) | $ | 23.0 | $ | 1.1 | $ | 24.1 | $ | 20.8 | $ | $ | 20.8 | |||||||
Other longterm liabilities | | (0.7 | ) | (0.7 | ) | | (0.1 | ) | (0.1 | ) | ||||||||
|
||||||||||||||||||
$ | 23.0 | $ | 0.4 | $ | 23.4 | $ | 20.8 | $ | (0.1 | ) | $ | 20.7 | ||||||
|
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).
(amounts in millions) | 2007 | 2006 | ||||||||||||||
|
||||||||||||||||
Canadian | Foreign | Total | Canadian | Foreign | Total | |||||||||||
|
||||||||||||||||
Pension obligation at end of year | $ | 191.7 | $ | 4.8 | $ | 196.5 | $ | 175.4 | $ | $ | 175.4 | |||||
|
||||||||||||||||
Fair value of plan assets at end of year | $ | 163.1 | $ | 4.1 | $ | 167.2 | $ | 144.7 | $ | $ | 144.7 | |||||
|
||||||||||||||||
Financial position plan deficit | $ | (28.6 | ) | $ | (0.7 | ) | $ | (29.3 | ) | $ | (30.7 | ) | $ | $ | (30.7 | ) |
|
CAE 2007 Q4 REPORT | 85
NOTE 23 EMPLOYEE FUTURE BENEFITS (CONTD)
Pension obligations related to the supplemental arrangements are as follows (excluding Beyss pension plan):
(amounts in millions) | 2007 | 2006 | ||||||||||||||||
|
||||||||||||||||||
Canadian | Foreign | Total | Canadian | Foreign | Total | |||||||||||||
|
||||||||||||||||||
Change in pension obligations | ||||||||||||||||||
Pension obligation at beginning of year | $ | 21.7 | $ | 5.9 | $ | 27.6 | $ | 16.1 | $ | 6.4 | $ | 22.5 | ||||||
Current service cost | 1.3 | 0.2 | 1.5 | 0.9 | 0.2 | 1.1 | ||||||||||||
Interest cost | 1.1 | 0.2 | 1.3 | 1.0 | 0.2 | 1.2 | ||||||||||||
Pension benefits paid | (1.2 | ) | (0.3 | ) | (1.5 | ) | (1.4 | ) | (0.3 | ) | (1.7 | ) | ||||||
Actuarial loss | 0.9 | 0.1 | 1.0 | 5.1 | | 5.1 | ||||||||||||
Foreign exchange variation | | 0.5 | 0.5 | | (0.6 | ) | (0.6 | ) | ||||||||||
|
||||||||||||||||||
Pension obligation at end of year | 23.8 | 6.6 | 30.4 | 21.7 | 5.9 | 27.6 | ||||||||||||
|
||||||||||||||||||
Financial position plan deficit | (23.8 | ) | (6.6 | ) | (30.4 | ) | (21.7 | ) | (5.9 | ) | (27.6 | ) | ||||||
Unrecognized net actuarial loss | 5.8 | 1.6 | 7.4 | 5.2 | 1.5 | 6.7 | ||||||||||||
|
||||||||||||||||||
Amount recognized in other | ||||||||||||||||||
long-term liabilities at end of year | $ | (18.0 | ) | $ | (5.0 | ) | $ | (23.0 | ) | $ | (16.5 | ) | $ | (4.4 | ) | $ | (20.9 | ) |
|
||||||||||||||||||
The net pension cost for funded pension plans for the years ended March 31 included the following components: | ||||||||||||||||||
|
||||||||||||||||||
(amounts in millions) | 2007 | 2006 | 2005 | |||||||||||||||
|
||||||||||||||||||
Current service cost | $ | 6.8 | $ | 4.7 | $ | 3.6 | ||||||||||||
Plan expenses | | 0.3 | 0.3 | |||||||||||||||
Interest cost on pension obligations | 10.0 | 10.1 | 9.0 | |||||||||||||||
Actual return on plan assets | (19.2 | ) | (13.3 | ) | (12.6 | ) | ||||||||||||
Net actuarial loss on benefit obligation | 10.0 | 9.0 | 15.4 | |||||||||||||||
Past service cost arising from plan amendments in the period | | | 0.9 | |||||||||||||||
|
||||||||||||||||||
Pension cost before adjustments to recognize the long-term nature of plans | 7.6 | 10.8 | 16.6 | |||||||||||||||
|
||||||||||||||||||
Adjustments to recognize long-term nature of | plans: | |||||||||||||||||
Difference between expected return and actual return on plan assets | 8.1 | 4.2 | 4.8 | |||||||||||||||
Difference between actuarial loss recognized for the year and | ||||||||||||||||||
actual actuarial loss on benefit obligations | for the year | (7.4 | ) | (6.7 | ) | (14.0 | ) | |||||||||||
Difference between amortization of past service cost for the | ||||||||||||||||||
year and actual plan amendments | for the year | 0.5 | 0.5 | (0.4 | ) | |||||||||||||
|
||||||||||||||||||
Total adjustment | 1.2 | (2.0 | ) | (9.6 | ) | |||||||||||||
|
||||||||||||||||||
Net pension cost | 8.8 | 8.8 | 7.0 | |||||||||||||||
Curtailment | (0.9 | ) | | | ||||||||||||||
Curtailment/settlement of discontinued operations | | | 1.3 | |||||||||||||||
|
||||||||||||||||||
Net pension cost including curtailment/settlement of discontinued operations | $ | 7.9 | $ | 8.8 | $ | 8.3 | ||||||||||||
|
||||||||||||||||||
The following components are combinations of the items presented above: | ||||||||||||||||||
|
||||||||||||||||||
(amounts in millions) | 2007 | 2006 | 2005 | |||||||||||||||
|
||||||||||||||||||
Expected return on plan assets | $ | (11.1 | ) | $ | (9.1 | ) | $ | (7.8 | ) | |||||||||
Amortization of net actuarial loss | 2.6 | 2.3 | 1.4 | |||||||||||||||
Amortization of past service costs | 0.5 | 0.5 | 0.5 | |||||||||||||||
|
86 | CAE 2007 Q4 REPORT
With respect to the supplemental arrangements, the net pension cost is as follows: | |||||||||
| |||||||||
(amounts in millions) | 2007 | 2006 | 2005 | ||||||
| |||||||||
Current service cost | $ | 1.5 | $ | 1.1 | $ | 0.8 | |||
Interest cost on pension obligations | 1.3 | 1.2 | 1.0 | ||||||
Net actuarial loss on benefit obligations | 1.0 | 5.1 | 1.0 | ||||||
| |||||||||
Pension cost before adjustments to recognize the long-term nature of plans | 3.8 | 7.4 | 2.8 | ||||||
| |||||||||
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 | (0.6 | ) | (5.0 | ) | (1.0 | ) | |||
| |||||||||
Net pension cost | 3.2 | 2.4 | 1.8 | ||||||
| |||||||||
Curtailment/settlement of discontinued operations | | | (0.4 | ) | |||||
| |||||||||
Net pension cost including curtailment/settlement of discontinued operations | $ | 3.2 | $ | 2.4 | $ | 1.4 | |||
| |||||||||
The following components are combinations of the items presented above: | |||||||||
| |||||||||
(amounts in millions) | 2007 | 2006 | 2005 | ||||||
| |||||||||
Amortization of net actuarial loss | $ | 0.4 | $ | 0.1 | $ | | |||
|
With regard to the Beyss plan, the deficit as at March 31, 2007 is $3.2 million ($2.9 million as at March 31, 2006) and this amount is recognized entirely in other long-term liabilities (Note 13) which means that there is no unrecognized amount for this plan. The 2007 net pension cost for this plan is $0.1 million.
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 | ||||
| ||||
December 31, | December 31, | |||
Asset Category | 2006 | 2005 | ||
| ||||
Equity securities | 65 | % | 63 | % |
Fixed-income securities | 35 | % | 37 | % |
| ||||
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 74% in fixed income and 26% in equities.
The asset allocation for the United Kingdom Pension Plan asset is approximately 31% in fixed income and 69% in equities. Additional information on employer contributions:
Funded Plan | Supplemental Arrangements | |||||||||
| ||||||||||
(amounts in millions) | Canadian | Foreign | Canadian | Foreign | ||||||
| ||||||||||
Actual contribution | fiscal 2006 | $ | 10.6 | $ | 0.9 | $ | 1.4 | $ | 0.3 | |
Actual contribution | fiscal 2007 | 9.7 | 0.9 | 1.2 | 0.3 | |||||
Expected contribution | fiscal 2008 (unaudited) | 9.1 | 0.9 | 1.2 | 0.4 | |||||
|
CAE 2007 Q4 REPORT | 87
NOTE 23 EMPLOYEE FUTURE BENEFITS (CONTD) | |||||||||||||
Additional information about benefit payments expected to be paid in future years: | |||||||||||||
| |||||||||||||
Funded Plans | Supplemental Arrangements | ||||||||||||
| |||||||||||||
(amounts in millions) | Canadian | Foreign | Canadian | Foreign | |||||||||
| |||||||||||||
Years ending March 31, | |||||||||||||
2008 | $ | 10.2 | $ | 0.2 | $ | 1.2 | $ | 0.4 | |||||
2009 | 10.9 | 0.4 | 1.2 | 0.4 | |||||||||
2010 | 11.7 | 0.3 | 1.3 | 0.4 | |||||||||
2011 | 12.7 | 0.5 | 1.4 | 0.3 | |||||||||
2012 | 13.7 | 0.8 | 1.4 | 0.3 | |||||||||
2013 2017 | 84.7 | 4.5 | 9.0 | 1.6 | |||||||||
| |||||||||||||
Significant assumptions | (weighted average): | ||||||||||||
| |||||||||||||
2007 | 2006 | ||||||||||||
Canadian | Foreign | Canadian | Foreign | ||||||||||
| |||||||||||||
Pension obligations as of | March 31: | ||||||||||||
Discount rate | 5.25 | % | 4.70 | % | 5.25 | % | 4.15 | % | |||||
Compensation rate increases | 3.50 | % | 1.90 | % | 3.50 | % | 1.80 | % | |||||
Net pension cost: | |||||||||||||
Expected return on plan assets | 7.00 | % | 5.60 | % | 6.50 | % | 5.00 | % | |||||
Discount rate | 5.25 | % | 4.30%(1) | 6.00 | % | 4.15 | % | ||||||
Compensation rate increases | 3.50 | % | 1.80%(1) | 4.50 | % | 1.80 | % | ||||||
|
(1) Note that, due to the inclusion of the U.K. plan in 2007, these assumptions are different than those used to value the pension obligation as at March 31, 2006.
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 December 31, 2004 for the Canadian employee funded plans. The next required valuation will be on December 31, 2007 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 filled on March 31, 2006.
The funded plan in the Netherlands and the three supplemental arrangements are valued annually on December 31.
NOTE 24 INVESTMENT TAX CREDITS
The Company is subject to a review by the taxation authorities in various jurisdictions. The determination of tax liabilities and investment tax credits (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 earnings at the time they can be determined. In the first quarter of fiscal 2005, an amount of $11.4 million, net of tax of $4.7 million, of ITCs was recognized in net earnings and $0.4 million was recorded against deferred development costs. These amounts related to the results of reviews by the taxation authorities for fiscal years 2000 to 2002 and to Managements reassessment of its best estimate of potential tax liabilities for the subsequent fiscal years. On a per segment basis, gross ITCs were recognized as follows: Simulation Products/Civil at $9.8 million, Simulation Products/ Military at $4.4 million and discontinued operations at $1.9 million.
88 | CAE 2007 Q4 REPORT
For fiscal 2005, the following table provides the earnings from continuing operations before interest and income taxes amounts by segment, including and excluding ITC provisions reversed based on recent tax reviews:
Including | Excluding | ||||
ITC Provisions | ITC Provisions | ||||
(amounts in millions) | Reversed (1) | Reversed (1) | |||
| |||||
Simulation Products/Civil | $ | 7.8 | $ | (2.0 | ) |
Simulation Products/Military | 26.5 | 22.1 | |||
| |||||
$ | 34.3 | $ | 20.1 | ||
|
(1) Restated (Note 1)
NOTE 25 RESTRUCTURING COSTS
In fiscal 2004 and 2005, the Company proceeded with three measures intended to restore its profitability, cash flows and return on investment. The first two initiatives were announced at the end of the fourth quarter of fiscal 2004 and were carried out during the first and second quarters of fiscal 2005.
The first initiative resulted in a restructuring charge of $8.2 million that was recorded in the results of the fourth quarter of fiscal 2004. An amount of $0.7 million related to the sale of its Marine Controls segment has been allocated to discontinued operations. The charge included severance and other involuntary termination costs that related mainly to the workforce reduction of approximately 250 employees in the Montreal plant, following the loss of a major simulation equipment contract to a competitor. The complete amount was disbursed during the first and second quarters of fiscal 2005.
The second initiative was designed to integrate a number of functions at certain European training centres. A restructuring charge of $1.8 million, mainly for severance and other costs, was also recorded in the results of the fourth quarter of fiscal 2004. During fiscal 2005, an amount of $1.2 million was disbursed, leaving a provision of $0.6 million, mostly paid during the second quarter of fiscal 2006.
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, and including additional expenditures of $1.2 million incurred this year, have been recorded in the Companys results. The restructuring initiative is substantially completed.
The following table provides the restructuring charge for each reportable segment: | ||||||
| ||||||
(amounts in millions) | 2007 | 2006 | 2005 | |||
| ||||||
Simulation Products/Civil | $ | | $ | 2.8 | $ | 7.6 |
Simulation Products/Military | | 4.3 | 10.8 | |||
Training & Services/Civil | 1.2 | 11.6 | 4.9 | |||
Training & Services/Military | | 0.2 | 1.2 | |||
| ||||||
$ | 1.2 | $ | 18.9 | $ | 24.5 | |
|
CAE 2007 Q4 REPORT | 89
NOTE 25 RESTRUCTURING COSTS (CONTD) | |||||||||
The continuity of the restructuring provision is as follows: | |||||||||
| |||||||||
Employee | |||||||||
termination | Other | ||||||||
(amounts in millions) | costs | costs | Total | ||||||
| |||||||||
Costs charged to expenses | $ | 8.7 | $ | 0.6 | $ | 9.3 | |||
Payments made | (8.2 | ) | (0.5 | ) | (8.7 | ) | |||
| |||||||||
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 | |||
|
NOTE 26 VARIABLE INTEREST ENTITIES
The following table summarizes, by segment, 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) | 2007 | 2006 | ||||||
| ||||||||
Assets | Liabilities | Assets | Liabilities | |||||
| ||||||||
Training and Services/Civil: | ||||||||
Sale and leaseback structures | ||||||||
Air Canada Training Centre Fiscal 2000 | $ | 14.0 | $ | 14.0 | $ | 14.7 | $ | 14.7 |
Emirates-CAE Flight Training Centre Fiscal 2002(1) | 12.5 | 12.5 | 13.1 | 13.1 | ||||
Toronto Training Centre Fiscal 2002 | 11.9 | 11.9 | 12.4 | 12.4 | ||||
Denver/Dallas Fiscal 2003 | 54.1 | 54.1 | 56.4 | 56.4 | ||||
SimuFlite Fiscal 2004 | 76.8 | 76.8 | 80.0 | 80.0 | ||||
North East Training Centre Fiscal 2006 | | | 28.4 | 28.4 | ||||
| ||||||||
Assets and liabilities of non-consolidated VIEs subject to disclosure | $ | 169.3 | $ | 169.3 | $ | 205.0 | $ | 205.0 |
| ||||||||
Training and Services/Military: | ||||||||
Sale and leaseback structures | ||||||||
Aircrew Training Centre Fiscal 1998 | $ | 63.7 | $ | 50.0 | $ | 56.3 | $ | 45.9 |
| ||||||||
Consolidated assets and liabilities before allowing for its | ||||||||
classification as a VIE and the Company being the primary beneficiary | $ | 63.7 | $ | 50.0 | $ | 56.3 | $ | 45.9 |
| ||||||||
Simulation Products/Military: | ||||||||
Partnership arrangements | ||||||||
Eurofighter Simulation Systems Fiscal 1999 | $ | 125.8 | $ | 121.7 | $ | 221.5 | $ | 218.2 |
| ||||||||
Assets and liabilities of non-consolidated VIEs subject to disclosure | $ | 125.8 | $ | 121.7 | $ | 221.5 | $ | 218.2 |
|
(1) | The sale and leaseback structure was entered into when the asset was located in the Companys Toronto Training Center. The asset has since been relocated. On October 4, 2006, the asset was contributed to the Emirates-CAE Flight Training Centre. |
90 | CAE 2007 Q4 REPORT
The detailed impact per balance sheet item is as follows as of January 1, 2005: | |||
| |||
Consolidated in | |||
(amounts in millions) | fiscal 2005 | ||
| |||
Assets | |||
Property, plant and equipment | $ | 46.9 | |
| |||
$ | 46.9 | ||
Liabilities | |||
Accounts payable and accrued liabilities | $ | 0.6 | |
Long-term debt (including current portion) | 41.3 | ||
Future income tax liabilities | 1.8 | ||
| |||
$ | 43.7 | ||
Shareholders Equity | |||
Retained earnings | $ | 3.3 | |
Currency translation adjustment | (0.1 | ) | |
| |||
$ | 46.9 | ||
|
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.
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. As at March 31, 2006, the Company also had a variable interest in another specific SPE through the form of a cost sharing construction agreement. During fiscal 2007, the cost sharing construction agreement has ended and, as a result as at March 31, 2007, the Company no longer has a variable interest in this SPE.
The Company concluded that some of these SPE are VIEs for which CAE is the primary beneficiary of only one as at March 31, 2007 and March 31, 2006. The assets and liabilities of this VIE are fully consolidated into the Companys consolidated financial statements as at March 31, 2007 and March 31, 2006 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, 2007, the Companys maximum potential exposure to losses relating to these non-consolidated SPEs was $47.1 million ($47.7 million in 2006).
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.
CAE 2007 Q4 REPORT | 91
NOTE 26 VARIABLE INTEREST ENTITIES (CONTD)
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, 2007 and 2006, 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 27 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. |
Due to this change, the corresponding items of segment information for earlier periods have been reclassified to conform to the new internal organization. The accounting policies of each segment are the same as those described in Note 1.
Prior to fiscal 2006, the Companys operations were broken down into the following operating segments: Military Simulation & Training (Military), Civil Simulation & Training (Civil) and Marine Controls (Marine) until the latters disposal in the fourth quarter of fiscal 2005.
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) net, interest, income taxes and discontinued operations (hereinafter referred to as Segment Operating Income). The Simulation Products/Civil and the Simulation Products/Military segments operate under an integrated organization sharing substantially all engineering, development, global procurement, program management and manufacturing functions. 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.
92 | CAE 2007 Q4 REPORT
Simulation Products | Training & Services | Total | |||||||||||||||||
(amounts in millions) | 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | ||||||||||
| |||||||||||||||||||
Restated | Restated | Restated | Restated | Restated | Restated | ||||||||||||||
(Note 1) | (Note 1) | (Note 1) | (Note 1) | (Note 1) | (Note 1) | ||||||||||||||
Civil | |||||||||||||||||||
External revenue | $ | 348.1 | $ | 257.0 | $ | 213.4 | $ | 336.9 | $ | 322.3 | $ | 306.8 | $ | 685.0 | $ | 579.3 | $ | 520.2 | |
Segment Operating Income | 60.4 | 29.9 | 7.8 | 64.3 | 57.1 | 39.8 | 124.7 | 87.0 | 47.6 | ||||||||||
Depreciation and amortization | |||||||||||||||||||
| Property, plant and equipment | 5.2 | 5.5 | 7.5 | 39.5 | 36.6 | 34.9 | 44.7 | 42.1 | 42.4 | |||||||||
| Intangible and other assets | 4.2 | 5.8 | 4.6 | 6.0 | 6.7 | 10.4 | 10.2 | 12.5 | 15.0 | |||||||||
Capital expenditures | 14.4 | 5.7 | 10.9 | 108.1 | 87.5 | 100.6 | 122.5 | 93.2 | 111.5 | ||||||||||
| |||||||||||||||||||
Military | |||||||||||||||||||
External revenue | $ | 357.5 | $ | 327.4 | $ | 278.9 | $ | 208.2 | $ | 200.5 | $ | 187.1 | $ | 565.7 | $ | 527.9 | $ | 466.0 | |
Segment Operating Income | 39.1 | 27.0 | 26.5 | 33.7 | 18.7 | 20.8 | 72.8 | 45.7 | 47.3 | ||||||||||
Depreciation and amortization | |||||||||||||||||||
| Property, plant and equipment | 6.0 | 6.1 | 8.7 | 4.3 | 4.3 | 4.0 | 10.3 | 10.4 | 12.7 | |||||||||
| Intangible and other assets | 3.0 | 7.7 | 0.7 | 2.6 | 2.7 | 4.0 | 5.6 | 10.4 | 4.7 | |||||||||
Capital expenditures | 5.5 | 6.0 | 4.4 | 30.1 | 30.9 | 2.1 | 35.6 | 36.9 | 6.5 | ||||||||||
| |||||||||||||||||||
Total | |||||||||||||||||||
External revenue | $ | 705.6 | $ | 584.4 | $ | 492.3 | $ | 545.1 | $ | 522.8 | $ | 493.9 | $ | 1,250.7 | $ | 1,107.2 | $ | 986.2 | |
Segment Operating Income | 99.5 | 56.9 | 34.3 | 98.0 | 75.8 | 60.6 | 197.5 | 132.7 | 94.9 | ||||||||||
Depreciation and amortization | |||||||||||||||||||
| Property, plant and equipment | 11.2 | 11.6 | 16.2 | 43.8 | 40.9 | 38.9 | 55.0 | 52.5 | 55.1 | |||||||||
| Intangible and other assets | 7.2 | 13.5 | 5.3 | 8.6 | 9.4 | 14.4 | 15.8 | 22.9 | 19.7 | |||||||||
Capital expenditures | 19.9 | 11.7 | 15.3 | 138.2 | 118.4 | 102.7 | 158.1 | 130.1 | 118.0 | ||||||||||
|
EARNINGS (LOSS) BEFORE INTEREST AND INCOME TAXES
The following table provides a reconciliation between total Segment Operating Income and earnings (loss) before interest and income taxes:
(amounts in million) | 2007 | 2006 | 2005 | ||||||
| |||||||||
Restated | Restated | ||||||||
(Note 1) | (Note 1) | ||||||||
Total Segment Operating Income | $ | 197.5 | $ | 132.7 | $ | 94.9 | |||
Foreign exchange gain on the reduction of the investment in | |||||||||
certain self-sustaining subsidiaries(a) | | 5.3 | | ||||||
Impairment of goodwill, tangible and intangible assets (Note 5) | | | (443.3 | ) | |||||
Restructuring charge (Note 25) | (1.2 | ) | (18.9 | ) | (24.5 | ) | |||
Other costs associated with the Restructuring Plan (b) | (6.9 | ) | (15.1 | ) | | ||||
| |||||||||
Earnings (loss) before interest and income taxes | $ | 189.4 | $ | 104.0 | $ | (372.9 | ) | ||
|
(a) | The Company reduced the capitalization of its certain self-sustaining subsidiaries. Accordingly, the corresponding amount of foreign exchange accumulated in the cumulative translation adjustment account was transferred to the Consolidated Statements of Earnings. |
(b) | Since the beginning of fiscal year 2006, the Company has also incurred incremental costs related to its Restructuring Plan which are included in earnings (loss) according to GAAP. These costs are not included in the Segment Operating Income. A significant portion relates to the re-engineering of the Companys business processes from which a portion is associated with the deployment of the ERP system (excluding the portion capitalized). |
The Company also incurred costs related to the review of its strategy and other costs associated with its restructuring activities. | |
CAE 2007 Q4 REPORT | 93
NOTE 27 OPERATING SEGMENTS AND GEOGRAPHIC INFORMATION (CONTD)
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) | 2007 | 2006 | ||
| ||||
Simulation Products/Civil | $ | 188.0 | $ | 163.5 |
Simulation Products/Military | 251.2 | 225.2 | ||
Training & Services/Civil | 973.8 | 833.8 | ||
Training & Services/Military | 208.7 | 166.7 | ||
| ||||
Total assets employed | 1,621.7 | 1,389.2 | ||
| ||||
Assets not included in assets employed | 334.5 | 326.9 | ||
| ||||
Total assets | $ | 1,956.2 | $ | 1,716.1 |
|
GEOGRAPHIC INFORMATION
The Company markets its products and services in over 19 countries. Sales are attributed to countries based on the location of customers.
(amounts in millions) | 2007 | 2006 | 2005 | |||
| ||||||
Revenue from external customers | ||||||
Canada | $ | 137.5 | $ | 100.1 | $ | 81.4 |
United States | 398.6 | 393.5 | 413.5 | |||
United Kingdom | 98.1 | 80.2 | 85.3 | |||
Germany | 153.3 | 153.3 | 110.2 | |||
Netherlands | 92.4 | 104.6 | 56.8 | |||
Other European countries | 127.1 | 41.3 | 81.1 | |||
China | 56.3 | 56.4 | 37.9 | |||
United Arab Emirates | 52.5 | 61.7 | | |||
Other Asian countries | 70.8 | 54.9 | 31.6 | |||
Other countries | 64.1 | 61.2 | 88.4 | |||
| ||||||
$ | 1,250.7 | $ | 1,107.2 | $ | 986.2 | |
| ||||||
As at March 31 | As at March 31 | |||||
(amounts in millions) | 2007 | 2006 | ||||
| ||||||
Property, plant and equipment, goodwill and intangible assets | ||||||
Canada | $ | 145.5 | $ | 169.0 | ||
United States | 290.1 | 296.8 | ||||
South America | 55.5 | 40.9 | ||||
United Kingdom | 142.8 | 100.3 | ||||
Spain | 89.9 | 84.9 | ||||
Germany | 53.3 | 30.1 | ||||
Netherlands | 140.8 | 133.6 | ||||
Other European countries | 62.7 | 65.5 | ||||
United Arab Emirates | 72.8 | 0.4 | ||||
Asia | 44.1 | 25.2 | ||||
Other countries | 22.0 | 7.9 | ||||
| ||||||
$ | 1,119.5 | $ | 954.6 | |||
|
94 | CAE 2007 Q4 REPORT
NOTE 28 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 have 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:
RECONCILIATION OF NET EARNINGS (LOSS) IN CANADIAN GAAP TO U.S. GAAP | |||||||||||
Years ended March 31 | |||||||||||
| |||||||||||
(amounts in millions, except per share amounts) | Notes | 2007 | 2006 | 2005 | |||||||
| |||||||||||
Restated | Restated | ||||||||||
(Note 1) | (Note 1) | ||||||||||
Net earnings (loss) in accordance with Canadian GAAP | $ | 127.4 | $ | 63.6 | $ | (199.6 | ) | ||||
Results of discontinued operations in accordance with Canadian GAAP | (1.7 | ) | (6.0 | ) | 104.8 | ||||||
| |||||||||||
Earnings (loss) from continuing operations | |||||||||||
in accordance with Canadian GAAP | 129.1 | 69.6 | (304.4 | ) | |||||||
Deferred development costs excluding amortization noted below | A | (3.4 | ) | (5.4 | ) | 3.4 | |||||
Amortization of deferred development costs | A | 4.8 | 13.1 | 3.9 | |||||||
Deferred pre-operating costs excluding amortization noted below | B | (6.9 | ) | 2.0 | 5.6 | ||||||
Amortization of pre-operating costs | B | 3.0 | 4.0 | 6.1 | |||||||
Financial instruments | C, M | 7.0 | 7.9 | (4.8 | ) | ||||||
Variable interest entities | G | | | 1.1 | |||||||
Reduction of the net investment in selfsustaining operations | H | | (5.3 | ) | | ||||||
Goodwill impairment | E | | | (11.6 | ) | ||||||
Stock-based compensation | L | 5.2 | 2.2 | (0.1 | ) | ||||||
Future income tax relating to the above adjustments | (2.9 | ) | (7.6 | ) | 2.4 | ||||||
| |||||||||||
Earnings (loss) from continuing operations | |||||||||||
before cumulative effect of accounting change U.S. GAAP | $ | 135.9 | $ | 80.5 | $ | (298.4 | ) | ||||
Results of discontinued operations in accordance | |||||||||||
with U.S. GAAP | A, B, C, H | (1.7 | ) | (6.0 | ) | 98.9 | |||||
| |||||||||||
Net earnings (loss) before cumulative effect | |||||||||||
of accounting change U.S. GAAP | $ | 134.2 | $ | 74.5 | $ | (199.5 | ) | ||||
Cumulative effect of accounting change on prior years | D, G | | | (0.6 | ) | ||||||
| |||||||||||
Net earnings (loss) in accordance with U.S. GAAP | $ | 134.2 | $ | 74.5 | $ | (200.1 | ) | ||||
| |||||||||||
Basic and diluted earnings (loss) per share from continuing operations | |||||||||||
in accordance with U.S. GAAP | $ | 0.54 | $ | 0.32 | $ | (1.21 | ) | ||||
| |||||||||||
Basic and diluted results per share from discontinued | operations | ||||||||||
in accordance with U.S. GAAP | $ | (0.01 | ) | $ | (0.02 | ) | $ | 0.40 | |||
| |||||||||||
Basic and diluted net earnings (loss) per share before | cumulative | ||||||||||
effect of accounting change in accordance with U.S. GAAP | $ | 0.53 | $ | 0.30 | $ | (0.81 | ) | ||||
| |||||||||||
Basic and diluted net earnings (loss) per share in accordance with U.S. GAAP | $ | 0.53 | $ | 0.30 | $ | (0.81 | ) | ||||
| |||||||||||
Dividends per common share | $ | 0.04 | $ | 0.04 | $ | 0.10 | |||||
| |||||||||||
Weighted average number of common shares outstanding (basic) | 251.1 | 249.8 | 247.1 | ||||||||
| |||||||||||
Weighted average number of common shares outstanding (diluted) | 253.0 | 252.1 | 247.9 | ||||||||
|
CAE 2007 Q4 REPORT | 95
NOTE 28 DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTD)
COMPREHENSIVE INCOME
Years ended March 31 | |||||||||||||
| |||||||||||||
(amounts in millions) | Notes | 2007 | 2006 | 2005 | |||||||||
| |||||||||||||
Net earnings (loss) in accordance with U.S. GAAP | $ | 134.2 | $ | 74.5 | $ | (200.1 | ) | ||||||
Change in accumulated minimum pension liability, | |||||||||||||
net of taxes expense of $5.3; 2006 net of tax recovery of $0.1; | |||||||||||||
2005 net of tax recovery of | $1.7 | J | 11.7 | (0.1 | ) | (4.2 | ) | ||||||
Change in foreign currency translation adjustments | G, H, I | 27.5 | (43.6 | ) | (41.3 | ) | |||||||
| |||||||||||||
Comprehensive income | $ | 173.4 | $ | 30.8 | $ | (245.6 | ) | ||||||
| |||||||||||||
ACCUMULATED OTHER COMPREHENSIVE LOSS IN ACCORDANCE WITH U.S. GAAP | |||||||||||||
Years ended March 31 | |||||||||||||
| |||||||||||||
(amounts in millions) | Notes | 2007 | 2006 | 2005 | |||||||||
| |||||||||||||
Accumulated other comprehensive loss at beginning of year | $ | (122.0 | ) | $ | (78.3 | ) | $ | (32.8 | ) | ||||
Foreign currency translation adjustment | H | 27.5 | (43.6 | ) | (41.3 | ) | |||||||
Change in minimum pension liability | J | 11.7 | (0.1 | ) | (4.2 | ) | |||||||
Unrecognized actuarial gains and losses and | |||||||||||||
past service costs on defined benefit pension plan, | |||||||||||||
net of tax recovery $14.9 | J | (33.0 | ) | | | ||||||||
| |||||||||||||
Accumulated other comprehensive loss at end of year | $ | (115.8 | ) | $ | (122.0 | ) | $ | (78.3 | ) | ||||
| |||||||||||||
RECONCILIATION OF SHAREHOLDERS EQUITY IN CANADIAN GAAP TO U.S. GAAP | |||||||||||||
As at March 31 | |||||||||||||
| |||||||||||||
(amounts in millions) | Notes | 2007 | 2006 | ||||||||||
| |||||||||||||
Restated | |||||||||||||
(Note 1) | |||||||||||||
Shareholders equity in accordance with Canadian GAAP | $ | 829.9 | $ | 672.2 | |||||||||
Deferred development costs, net of tax recovery of | $ | 12.7 | (2006 $13.3) | A | (12.0 | ) | (12.8 | ) | |||||
Deferred pre-operating costs, net of tax recovery of $4.5 (2006 $2.9) | B | (8.6 | ) | (6.3 | ) | ||||||||
Financial instruments, net of tax recovery of $5.5 (2006 $7.7) | C, M | (12.9 | ) | (17.7 | ) | ||||||||
Defined benefit and other post-retirement benefit, net of tax recovery of $18.0 | |||||||||||||
(2006 $8.4 | ) | J | (40.0 | ) | (18.7 | ) | |||||||
Stock-based compensation, net of tax expense of $3.3 (2006 $1.6) | L | 7.0 | 3.1 | ||||||||||
| |||||||||||||
Shareholders equity in accordance with U.S. GAAP | $ | 763.4 | $ | 619.8 | |||||||||
|
96 | CAE 2007 Q4 REPORT
CONSOLIDATED BALANCE SHEETS IN ACCORDANCE WITH U.S. GAAP | ||||||||||||||
As at March 31 | ||||||||||||||
| ||||||||||||||
(amounts in millions) | Notes | 2007 | 2006 | |||||||||||
| ||||||||||||||
Canadian | U.S. | Canadian | U.S. | |||||||||||
GAAP | GAAP | GAAP | GAAP | |||||||||||
Restated | ||||||||||||||
(Note 1) | ||||||||||||||
Assets | ||||||||||||||
Current assets | ||||||||||||||
Cash and cash equivalents | $ | 150.2 | $ | 150.2 | $ | 81.1 | $ | 81.1 | ||||||
Accounts receivable | C | 219.8 | 221.2 | 172.6 | 172.6 | |||||||||
Derivative instruments | C | | 8.7 | | 4.5 | |||||||||
Inventories | C | 203.8 | 206.0 | 180.9 | 180.9 | |||||||||
Prepaid expenses | C | 23.5 | 23.6 | 25.2 | 25.2 | |||||||||
Income taxes recoverable | 24.7 | 24.7 | 75.7 | 75.7 | ||||||||||
Future income taxes | C | 3.7 | 8.4 | 5.7 | 9.1 | |||||||||
| ||||||||||||||
$ | 625.7 | $ | 642.8 | $ | 541.2 | $ | 549.1 | |||||||
| ||||||||||||||
Property, plant and equipment, net | M | $ | 986.6 | $ | 984.3 | $ | 832.1 | $ | 832.1 | |||||
Future income taxes | A, B, C, E, G, J, L | 81.5 | 125.0 | 78.2 | 109.5 | |||||||||
Derivative instruments | C | | 8.6 | | 3.2 | |||||||||
Intangible assets | J | 36.0 | 36.0 | 30.5 | 36.1 | |||||||||
Goodwill | 96.9 | 96.9 | 92.0 | 92.0 | ||||||||||
Other assets | A, B, J | 129.5 | 68.2 | 136.2 | 100.9 | |||||||||
Long-term assets held for sale | | | 5.9 | 5.9 | ||||||||||
| ||||||||||||||
$ | 1,956.2 | $ | 1,961.8 | $ | 1,716.1 | $ | 1,728.8 | |||||||
| ||||||||||||||
Liabilities and shareholders equity | ||||||||||||||
Current liabilities | ||||||||||||||
Accounts payable and accrued liabilities | C | $ | 403.9 | $ | 404.4 | $ | 373.7 | $ | 373.7 | |||||
Deposits on contracts | C | 184.8 | 187.9 | 146.4 | 146.4 | |||||||||
Derivative instruments | C | | 14.8 | | 11.2 | |||||||||
Current portion of long-term | ||||||||||||||
debt due within one year | 27.2 | 27.2 | 10.4 | 10.4 | ||||||||||
Future income taxes | C | 4.9 | 8.3 | 14.5 | 15.9 | |||||||||
| ||||||||||||||
$ | 620.8 | $ | 642.6 | $ | 545.0 | $ | 557.6 | |||||||
| ||||||||||||||
Long-term debt | O | $ | 256.0 | $ | 254.5 | $ | 260.9 | $ | 260.9 | |||||
Deferred gains and other long-term liabilities | C, J, L, M | 232.7 | 251.8 | 211.2 | 239.2 | |||||||||
Derivative instruments | C | | 25.3 | | 21.9 | |||||||||
Future income taxes | C, L | 16.8 | 24.2 | 26.8 | 29.4 | |||||||||
| ||||||||||||||
$ | 1,126.3 | $ | 1,198.4 | $ | 1,043.9 | $ | 1,109.0 | |||||||
| ||||||||||||||
Shareholders Equity | ||||||||||||||
Capital stock | F, K | $ | 401.7 | $ | 645.9 | $ | 389.0 | $ | 633.2 | |||||
Contributed surplus | L | 5.7 | 6.3 | 5.6 | 5.8 | |||||||||
Retained earnings | A, B, C, D, E, F, | |||||||||||||
G, H, K, L | 510.2 | 227.0 | 392.8 | 102.8 | ||||||||||
Currency translation adjustment | H, I | (87.7 | ) | | (115.2 | ) | | |||||||
Accumulated other comprehensive loss | H, J | | (115.8 | ) | | (122.0 | ) | |||||||
| ||||||||||||||
$ | 829.9 | $ | 763.4 | $ | 672.2 | $ | 619.8 | |||||||
| ||||||||||||||
$ | 1,956.2 | $ | 1,961.8 | $ | 1,716.1 | $ | 1,728.8 | |||||||
|
CAE 2007 Q4 REPORT | 97
NOTE 28 DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTD)
CONSOLIDATED STATEMENT 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 | 2007 | 2006 | 2005 | ||||||
| ||||||||||
Restated | Restated | |||||||||
(Note 1) | (Note 1) | |||||||||
Net cash provided by operating activities | ||||||||||
in accordance with Canadian GAAP | $ | 239.3 | $ | 228.0 | $ | 201.0 | ||||
Deferred development costs | A | (3.0 | ) | (1.8 | ) | (9.9 | ) | |||
Deferred pre-operating costs | B | (5.9 | ) | (0.7 | ) | (1.7 | ) | |||
Variable interest entities | G | | | 5.6 | ||||||
Deferred pre-operating costs related to discontinued operations | B | | | (0.4 | ) | |||||
| ||||||||||
Net cash provided by operating activities in accordance with U.S. GAAP | $ | 230.4 | $ | 225.5 | $ | 194.6 | ||||
| ||||||||||
Net cash (used in) provided by investing activities | ||||||||||
in accordance with Canadian GAAP | $ | (178.1 | ) | $ | (147.1 | ) | $ | 138.2 | ||
Deferred development costs | A | 3.0 | 1.8 | 9.9 | ||||||
Deferred pre-operating costs | B | 5.9 | 0.7 | 1.7 | ||||||
Deferred pre-operating costs related to discontinued operations | B | | | 0.4 | ||||||
| ||||||||||
Net cash (used in) provided by investing activities | ||||||||||
in accordance with U.S. GAAP | $ | (169.2 | ) | $ | (144.6 | ) | $ | 150.2 | ||
| ||||||||||
Net cash provided by (used in) financing activities | ||||||||||
in accordance with Canadian GAAP | $ | 3.5 | $ | (53.2 | ) | $ | (337.3 | ) | ||
Variable interest entities | G | | | (5.6 | ) | |||||
| ||||||||||
Net cash provided by (used in) financing activities | ||||||||||
in accordance with U.S. GAAP | $ | 3.5 | $ | (53.2 | ) | $ | (342.9 | ) | ||
|
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. The difference between U.S. GAAP and Canadian GAAP represents the gross development costs capitalized in the respective year, net of the reversal of amortization expense recorded for Canadian GAAP relating to amounts previously capitalized (refer to Note 11). | |
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. The difference between U.S. GAAP and Canadian GAAP represents the gross pre-operating costs capitalized in the respective year, net of the reversal of amortization expense recorded for Canadian GAAP relating to amounts previously capitalized (refer to Note 11). | |
C) | Financial instruments |
Derivative financial instruments | |
Under Canadian GAAP, the Company recognizes the gains and losses on forward contracts entered into for hedging purposes in income concurrently with the recognition of the transactions being hedged. The interest payments relating to swap contracts are recorded in net earnings (loss) over the life of the underlying transaction on an accrual basis as an adjustment to interest income or interest expense. Under U.S. GAAP, all derivatives, including embedded derivatives in host contracts, are recorded on the consolidated balance sheet at fair value. Realized and unrealized gains and losses resulting from the valuation of derivatives at market value are recognized in net (loss) earnings as the gains and losses arise and not concurrently with the recognition of the transactions being hedged, as the Company does not apply the optional hedge accounting provisions of Statement of Financial Accounting Standards (SFAS) 133, 138 and 149. | |
98 | CAE 2007 Q4 REPORT
Interest rate swap | ||
Under Canadian GAAP, the deferred gain on interest rate swaps are 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 do not qualify for hedge accounting and are recorded on the consolidated balance sheet at fair value. As a result, the amortization of the deferred gain on interest rate swaps under Canadian GAAP is reversed for the purposes of U.S. GAAP. | ||
D) | Adjustments for changes in accounting policies | |
Under U.S. GAAP, the cumulative effect of certain accounting changes had to be included in earnings (loss) in the year of the change. Under Canadian GAAP, the impact is reflected through retained earnings. | ||
E) | Goodwill impairment | |
Under Canadian GAAP, upon the purchase of Schreiner, a foreign exchange gain was recorded in fiscal 2002 as a reduction of goodwill on the forward contract hedge of the foreign currency denominated purchase price. Under U.S. GAAP, this gain was recorded in earnings. In fiscal 2005, Management performed a comprehensive review of current performance and strategic orientation of its business units, which led to the review of the carrying amount of certain assets such as the goodwill of Schreiner. Accordingly, an additional impairment charge of $7.9 million (net of tax of $3.7 million) was recorded in earnings as per U.S. GAAP. | ||
F) | 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. | ||
G) | Variable interest entities | |
The Company enters into sale and leaseback arrangements with special purposes entities (SPEs) relating to simulation equipment used in the Companys training centre. Prior to the adoption of Financial Accounting Standards Board (FASB) Interpretation (FIN) No. 46 Consolidation of Variable Interest Entities, the Company consolidated SPEs when their legal stated capital represented less than 3% of their assets. Under those rules, three SPEs were consolidated. | ||
In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities. This interpretation clarifies how to apply Accounting Research Bulletin (ARB) No. 51, Consolidated Financial Statements, to those entities defined as Variable Interest Entities, when equity investors are not considered to have a controlling financial interest or they have not invested enough equity to allow the entity to finance its activities without additional subordinated financial support from other parties. This interpretation requires that existing unconsolidated variable interest entities be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. An entity that holds a significant variable interest but is not the primary beneficiary is subject to specific disclosure requirements. | ||
In December 2003, the FASB revised FIN 46 (FIN 46R) to make certain technical corrections and address certain implementation issues that had arisen. FIN 46R provided a new framework for identifying Variable Interest Entities (VIEs) and for determining when a company should include the assets, liabilities, non-controlling interests and results of activities of a VIE in its consolidated financial statements. The Company was required to replace FIN 46 provisions with FIN 46R provisions to all newly created post-January 31, 2003 entities as at the end of the first period ending after March 15, 2005. Beginning April 1, 2004, as a foreign private issuer, the company applied the provisions of FIN 46R to entities created before February 1, 2003. The Company adopted FIN 46R on April 1, 2004. | ||
The Company, upon adoption of FIN 46R, concluded that two out of the three SPEs that were consolidated under the old rules were no longer required to be consolidated. The impact on the Companys net earnings (loss) of the deconsolidation was $0.6 million. | ||
A | similar accounting standard under Canadian GAAP, AcG 15, Consolidation of Variable Interest Entities, has been adopted by the Company on January 1, 2005. Due to a different application date between Canadian and U.S. GAAP, the Company had to record, in fiscal 2005, a decrease of $0.6 million (net of taxes of $0.5 million) in its net earnings (loss) as per U.S. GAAP. | |
In fiscal 2006, the Company decided to repurchase the asset (simulator) previously included in the consolidated VIE thereby eliminating the requirement to consolidate the VIE in the Companys consolidated financial statement, under the variable interest entity notion. | ||
H) | Foreign currency translation adjustment | |
Under U.S. GAAP, foreign currency translation adjustment is included as a component of comprehensive income. Under Canadian GAAP, the concept of comprehensive income will be applicable, for the Company, starting on April 1, 2007 and until the application of the new standards, the currency translation adjustment is included as a component of shareholders equity. In fiscal 2006, the Company transferred to consolidated earnings (loss) an amount of $5.3 million (2005 $6.6 million, included in results of discontinued operations) 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. | ||
I) | Comprehensive income | |
U. | S. GAAP requires disclosure of comprehensive income, which includes net income and other comprehensive income. Other comprehensive income includes currency translation adjustments, change in minimum pension liability and defined benefit and other post-retirement adjustment. Under Canadian GAAP, the requirement to report comprehensive income will be applicable for the Company on April 1, 2007. | |
CAE 2007 Q4 REPORT | 99
NOTE 28 DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTD)
J) | 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, required 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. | |
During fiscal 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. | |
K) | 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. | |
L) | 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 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. | |
M) | Interest on Receivables and Payables |
Under U.S. GAAP, when evaluating the fair value of a non-interest bearing note payable, a current market interest rate for transactions with similar terms should be used for the discounting. | |
N) | 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. | |
O) | Transaction costs |
Under Canadian GAAP, transaction costs on long-term debt are presented in Other assets as a deferred charge. U.S. GAAP requires that transaction costs be reported as a direct reduction of long-term debt. | |
ACCOUNTING CHANGES
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 (loss), basic earnings (loss) per share and diluted earnings (loss) per share using the fair value method of accounting for stock-based compensation granted prior to April 1, 2003.
Pro forma net earnings (loss) and pro forma basic and diluted net earnings (loss) per share are presented as follows:
(amounts in millions, except per share amounts) | 2007 | 2006 | 2005 | ||||||
| |||||||||
Net earnings (loss), as reported per U.S. GAAP | $ | 134.2 | $ | 74.5 | $ | (200.1 | ) | ||
Additional compensation expense recorded | 3.0 | 2.5 | 2.0 | ||||||
| |||||||||
Net earnings (loss) before the effect of stock-based compensation | 137.2 | 77.0 | (198.1 | ) | |||||
Pro forma impact | (3.0 | ) | (4.2 | ) | (6.4 | ) | |||
| |||||||||
Pro forma net earnings (loss) | 134.2 | 72.8 | (204.5 | ) | |||||
| |||||||||
Pro forma basic and diluted net earnings (loss) per share | 0.53 | 0.29 | (0.83 | ) | |||||
|
Under Canadian GAAP, as described in Note 1, the Company has adopted EIC-162 in the third quarter of fiscal 2007, with restatement of prior periods. EIC-162 requires that the stock-based compensation expense for employees who will become eligible for retirement during the vesting period be recognized 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.
100 | CAE 2007 Q4 REPORT
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.
Inventory Costs
In November 2004, FASB issued SFAS No. 151, Inventory Costs, to clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current period charges, and to require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance was effective for inventory costs incurred during fiscal 2007 and there were no adjustments in the companys consolidated financial statements.
Quantifying Misstatements in the Financial Statements
In September 2006, the SEC Staff issued Staff Accounting Bulletin (SAB) 108, Quantifying Misstatements in the Financial Statements. SAB 108 requires that misstatements identified in the current year financial statements which result from misstatements of prior year financial statements be quantified and evaluated using a dual approach that includes both an income statement and balance sheet assessment of any misstatement. The guidance was effective for fiscal years ending after November 15, 2006 and there were no adjustments in the companys consolidated financial statements.
Defined benefit pension and other postretirement 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. In regards to the measurement date changes mentioned in (iii) above, the effective date is the end of fiscal year 2009. The effect of implementing FAS 158 is outlined in the table as follows:
As at March 31, 2007 | |||||||||
| |||||||||
(amounts in millions) | |||||||||
| |||||||||
Amounts prior | Effect | ||||||||
to adopting | of adopting | ||||||||
FAS 158 | FAS 158 | As reported | |||||||
Assets | |||||||||
Intangible assets | $ | 0.4 | $ | (0.4 | ) | $ | | ||
Other assets | 24.1 | (22.0 | ) | 2.1 | |||||
Future income taxes | 3.1 | 14.9 | 18.0 | ||||||
Liabilities | |||||||||
Accounts payable and accrued liabilities | | (1.7 | ) | (1.7 | ) | ||||
Deferred gains and other long-term liabilities | (37.4 | ) | (23.8 | ) | (61.2 | ) | |||
Shareholders Equity | |||||||||
Accumulated other comprehensive loss | 7.0 | 33.0 | 40.0 | ||||||
|
RECENTLY ISSUED ACCOUNTING STANDARDS
Accounting for Uncertainty in Income Taxes
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109 (FIN 48). This interpretation prescribes a more likely than not recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition of a tax position, classification of a liability for unrecognized tax benefits, accounting for interest and penalties, and expanded income tax disclosures. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of this interpretation on its consolidated financial statements.
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. 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.
CAE 2007 Q4 REPORT | 101
NOTE 28 DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTD)
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. This statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective on April 1, 2008. The Company is currently evaluating the impact of this standard on its consolidated financial statements.
Accounting for Servicing of Financial Assets
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets. The new standard, which is an amendment to SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities a replacement of FASB Statement No. 125, requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable and permits, but does not require, the subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value. If an entity uses derivative instruments to mitigate the risks inherent in servicing assets and servicing liabilities, it can simplify its accounting since SFAS No. 156 permits income statement recognition of the potential offsetting changes in fair value of those servicing assets and servicing liabilities and derivative instruments in the same accounting period. SFAS No. 156 is effective for all separately recognized servicing assets and liabilities acquired or issued after the beginning of an entitys fiscal year that begins after September 15, 2006. The Company is currently evaluating 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) | 2007 | 2006 | 2005 | |||||||||||||||
| ||||||||||||||||||
Canadian | U.S. | Canadian | U.S. | Canadian | U.S. | |||||||||||||
GAAP | GAAP | GAAP | GAAP | GAAP | GAAP | |||||||||||||
Revenues from sales of simulators (1) | $ | 705.6 | $ | 699.0 | $ | 584.4 | $ | 584.4 | $ | 492.3 | $ | 489.4 | ||||||
Revenues from sales of | ||||||||||||||||||
training and services (1) | $ | 545.1 | $ | 545.4 | $ | 522.8 | $ | 522.8 | $ | 493.9 | $ | 493.9 | ||||||
Cost of sales from simulators | $ | 427.5 | $ | 427.5 | $ | 386.8 | $ | 386.8 | $ | 332.1 | $ | 332.1 | ||||||
Cost of sales from training and services | $ | 308.8 | $ | 312.7 | $ | 314.2 | $ | 308.2 | $ | 284.3 | $ | 268.8 | ||||||
Research and development expenses (2) | $ | 80.3 | $ | 78.9 | $ | 62.6 | $ | 54.9 | $ | 55.7 | $ | 63.0 | ||||||
Rental expenses | $ | 72.6 | $ | 72.6 | $ | 80.5 | $ | 80.5 | $ | 94.0 | $ | 94.0 | ||||||
Selling, general and | ||||||||||||||||||
administrative expenses | $ | 166.9 | $ | 161.7 | $ | 133.5 | $ | 131.3 | $ | 122.7 | $ | 122.8 | ||||||
Foreign exchange gain | $ | (2.9 | ) | $ | (15.4 | ) | $ | (8.4 | ) | $ | (10.7 | ) | $ | (5.2 | ) | $ | (2.5 | ) |
Impairment charges | $ | | $ | $ | | $ | $ | 443.3 | $ | 440.4 | ||||||||
Interest expense | $ | 10.6 | $ | 9.8 | $ | 16.2 | $ | 15.9 | $ | 32.1 | $ | 33.9 | ||||||
|
(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. |
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) | 2007 | 2006 | ||
| ||||
Accounts payable trade | $ | 166.8 | $ | 133.6 |
Contract liabilities | 71.1 | 88.7 | ||
Income tax payable | 8.6 | 2.5 | ||
Other accrued liabilities | 157.9 | 148.9 | ||
| ||||
Accounts payable and accrued liabilities | $ | 404.4 | $ | 373.7 |
| ||||
Accounts receivable from governments amounted to $62.7 million as of March 31, 2007 (2006 $51.2 million). |
102 | CAE 2007 Q4 REPORT
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) | 2007 | 2006 | 2005 | ||||||
| |||||||||
Earnings (loss) before income taxes | |||||||||
Canada | $ | 38.8 | $ | (19.0 | ) | $ | (86.9 | ) | |
Other countries | 140.0 | 106.8 | (318.1 | ) | |||||
| |||||||||
$ | 178.8 | $ | 87.8 | $ | (405.0 | ) | |||
| |||||||||
Current income taxes | |||||||||
Canada | $ | 53.8 | $ | 4.2 | $ | (1.8 | ) | ||
Other countries | 10.1 | 8.9 | 15.3 | ||||||
| |||||||||
$ | 63.9 | $ | 13.1 | $ | 13.5 | ||||
| |||||||||
Future income taxes | |||||||||
Canada | $ | (41.2 | ) | $ | (7.0 | ) | $ | (26.0 | ) |
Other countries | 27.0 | 12.1 | (88.1 | ) | |||||
| |||||||||
$ | (14.2 | ) | $ | 5.1 | $ | (114.1 | ) | ||
| |||||||||
Total income tax expense (recovery) | $ | 49.7 | $ | 18.2 | $ | (100.6 | ) | ||
|
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 Companys accrued warranty liability on a Canadian and U.S. GAAP basis, is as follows:
As at March 31 | ||||||
| ||||||
(amounts in millions) | 2007 | 2006 | ||||
| ||||||
Accrued warranty liability at beginning of year | $ | 8.7 | $ | 5.3 | ||
Warranty settlements during the year | (5.2 | ) | (4.1 | ) | ||
Warranty provisions | 6.8 | 6.9 | ||||
Adjustments for changes in estimates | 0.4 | 0.6 | ||||
| ||||||
Accrued warranty liability at the end of year | $ | 10.7 | $ | 8.7 | ||
|
v) Impairment of goodwill, tangible and intangible assets
During fiscal 2005, the Company recorded an impairment charge of $443.3 million as per Canadian GAAP. For U.S. GAAP purposes, the impairment was different as the Company expenses development and pre-operating costs when incurred and because the carrying amount of goodwill is different for Canadian and U.S. GAAP (refer to E).
Accordingly, the Company recorded a $440.4 million impairment charge for U.S. GAAP purposes, virtually all related to its Civil business, detailed as follows:
(amounts in millions) | 2005 | |
| ||
Goodwill | $ | 216.8 |
Customer relations | 86.7 | |
Trade names | 20.4 | |
Property, plant and equipment (simulators) | 78.4 | |
Inventories | 33.3 | |
Other assets | 4.8 | |
| ||
$ | 440.4 | |
|
CAE 2007 Q4 REPORT | 103
NOTE 29 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 30 SUBSEQUENT EVENTS
ENGENUITY
In April 2007, the Company acquired 14,948,215 common shares of Engenuity Technologies Inc. (Engenuity) representing approximately 85.7% of the total outstanding number thereof. On May 25 2007, the holders of common shares of Engenuity adopted a special resolution approving the amalgamation of Engenuity with 4341392 Canada Inc., a wholly-owned subsidiary of CAE Inc. per the amalgamation agreement. As a result, Engenuity became a wholly-owned subsidiary of CAE Inc. Engenuity develops commercial-off-the-shelf (COTS) simulation and visualization software for the aerospace and defence markets. Total consideration for this acquisition, including acquisition costs, amounted to $23.4 million in cash.
The preliminary fair value of net assets acquired are summarized as follows:
(amounts in millions) | |||
| |||
Current assets (1) | $ | 6.4 | |
Current liabilities | (10.4 | ) | |
Property, plant and equipment | 1.5 | ||
Other assets | 7.4 | ||
Intangible assets | 8.7 | ||
Goodwill(2) | 11.8 | ||
Long-term liabilities | (4.5 | ) | |
| |||
Fair value of net assets acquired, excluding cash position at acquisition | 20.9 | ||
Cash position at acquisition | 2.5 | ||
| |||
Total consideration: | $ | 23.4 | |
|
(1) | Excluding cash on hand |
(2) | This goodwill is not deductible for tax purposes |
The allocation of the purchase price is based on Managements best estimate of the fair value of assets and liabilities. Allocation involves a number of estimates as well as the gathering of information over a number of months. The allocation of the purchase price is preliminary and is expected to be completed in the near future. The net assets of Engenuity, excluding income taxes, will be included in both the Simulation Products/Military and Training & Services/Military segment.
MULTIGEN-PARADIGM INC.
In April 2007, the Company signed an agreement with Parallax Capital Partners, LLC and others to acquire MultiGen-Paradigm Inc., for approximately US$16 million in cash. The acquisition was completed in May 2007.
104 | CAE 2007 Q4 REPORT