CAE Inc. Form 6-K Summary: Third Quarter Fiscal 2010
Business Context and Reporting Period
This filing covers the third quarter of fiscal 2010 ended December 31, 2009. CAE Inc. is a global leader in simulation and modeling technologies and integrated training services for civil aviation and defense forces. The company operates through four segments: Training & Services/Civil (TS/C), Simulation Products/Civil (SP/C), Simulation Products/Military (SP/M), and Training & Services/Military (TS/M). All financial figures are reported in Canadian dollars (CAD).
Key Financial Metrics
| Metric | Q3 2010 | Q3 2009 (Restated) | YTD 9 Months 2010 |
|---|---|---|---|
| Revenue | $382.9 million | $424.6 million | $1,130.4 million |
| Net Earnings | $37.7 million ($0.15/share) | $52.1 million ($0.20/share) | $104.0 million ($0.41/share) |
| EBIT | $60.7 million (15.9% margin) | $77.6 million (18.3% margin) | $167.0 million |
| Free Cash Flow | $0.3 million | $70.3 million | $64.1 million |
| Net Debt | $271.6 million | N/A | $271.6 million |
| Backlog | $2,917.1 million | N/A | $2,917.1 million |
Material Changes vs. Prior Period
- Revenue Decline: Consolidated revenue decreased 10% year-over-year (YoY) to $382.9 million. The decline was driven primarily by the Civil segments, specifically Simulation Products/Civil (down 39% due to lower order intake and a cancellation) and Training & Services/Civil (down 15% due to market softness and foreign exchange impacts).
- Military Growth: Military segments offset some civil weakness. Simulation Products/Military revenue increased 12% YoY, and Training & Services/Military revenue increased 15% YoY.
- Earnings Impact: Net earnings fell 28% YoY to $37.7 million. Excluding a $3.9 million restructuring charge, adjusted earnings were $40.3 million ($0.16/share).
- Cash Flow Volatility: Free cash flow dropped significantly to $0.3 million from $70.3 million in the prior year quarter, largely due to unfavorable changes in non-cash working capital.
- Foreign Exchange: The appreciation of the Canadian dollar negatively impacted reported revenue and operating income, particularly in the civil training segment.
Guidance, Outlook, and Management Commentary
- Market Outlook: Management notes the civil aerospace market is stabilizing at low levels, with a gradual recovery expected to benefit the training segment before the products segment. The defense business continues to grow globally.
- Order Targets: The company aims to secure approximately 20 Full-Flight Simulator (FFS) orders for the fiscal year. Year-to-date, 14 FFS orders have been announced.
- Restructuring: A restructuring plan announced in May 2009 is ongoing, with a total expected charge of $34 million. $32.2 million has been incurred year-to-date, with completion expected by the end of the fiscal year.
- Acquisitions: CAE is diversifying into healthcare, acquiring ICCU Imaging Inc. and VIMEDIX Virtual Medical Imaging Training Systems Inc. in late 2009/early 2010.
- Tax Rate: The effective tax rate for the quarter was 30%, with an expected full-year rate of approximately 29%.
Investor Verification Checklist
- Civil Market Recovery: Verify the pace of stabilization in the commercial aviation sector and the impact on future simulator orders.
- Restructuring Execution: Monitor the completion of the $34 million restructuring plan and the realization of associated cost savings.
- Foreign Exchange Sensitivity: Assess the ongoing impact of the strong Canadian dollar on revenue translation and profitability.
- Healthcare Diversification: Evaluate the strategic fit and financial contribution of the new healthcare acquisitions (ICCU and VIMEDIX).
- Working Capital Management: Review the drivers behind the significant decrease in free cash flow and the increase in non-cash working capital.