CAE Inc. Q1 Fiscal 2010 Summary (Ended June 30, 2009)
Business Context and Reporting Period
This Form 6-K reports the unaudited financial results for CAE Inc. for the first quarter of fiscal 2010, ended June 30, 2009. CAE is a global leader in simulation and modeling technologies and integrated training services for civil aviation and defense sectors. The quarter was characterized by a major global reorganization to size the business to market conditions, offsetting softness in the civil aerospace market with strength in military segments.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 (Restated) |
|---|---|---|
| Revenue | $383.0 million | $392.1 million |
| Net Earnings | $27.2 million ($0.11/share) | $47.3 million ($0.19/share) |
| Adjusted Net Earnings (Excl. Restructuring) | $46.1 million ($0.18/share) | $47.3 million |
| EBIT | $45.1 million (11.8% margin) | $72.6 million (18.5% margin) |
| Adjusted EBIT (Excl. Restructuring) | $72.3 million (18.9% margin) | $72.6 million |
| Free Cash Flow | ($29.7 million) | ($42.6 million) |
| Net Debt | $340.7 million | $285.1 million (Q4 2009) |
| Backlog | $3,278.2 million | $3,181.8 million (Q4 2009) |
Material Changes vs. Prior Period
- Restructuring Charge: A one-time charge of $27.2 million (approx. $18.9 million after tax) was recorded for severance and pension costs related to a workforce reduction of approximately 700 employees. This was the primary driver for the decline in reported net earnings and EBIT.
- Revenue Decline: Consolidated revenue decreased 2% year-over-year ($9.1 million) and 13% quarter-over-quarter. The decline was driven by a 39% drop in the Simulation Products/Civil segment due to lower order intake and production levels.
- Segment Performance:
- Civil: Training & Services/Civil revenue increased 4% year-over-year, aided by emerging markets and a weaker Canadian dollar. Simulation Products/Civil revenue fell 39%.
- Military: Combined military revenue increased 27% year-over-year ($185.2 million), with Simulation Products/Military up 34% and Training & Services/Military up 17%. Military operating income rose 50% year-over-year.
- Acquisition: CAE acquired Bell Aliant's Defence, Security and Aerospace (DSA) business unit for $17.7 million in May 2009, adding to the military backlog.
Guidance, Outlook, and Risks
- Restructuring Outlook: Total restructuring costs are now expected to be approximately $32 million. Management anticipates $15 million in annual recurring savings from the initiative.
- Market Outlook: Civil aerospace demand remains depressed due to the global economic recession, with reduced airline capacity and aircraft deliveries. However, military segments are resilient, supported by government desires to increase simulation usage to reduce training costs.
- Capital Markets: In June 2009, CAE issued senior notes totaling $137.1 million (C$15M and US$105M) with an average term of 8.5 years and a 7.15% blended interest rate. Proceeds were used to repay maturing debt and for general corporate purposes.
- Risks: Key risks include the global economic slowdown impacting civil aviation, foreign exchange volatility (CAD strength negatively impacting results), and the timing of military contract awards.
- Dividend: A quarterly dividend of $0.03 per share is declared, payable September 30, 2009.
Investor Verification Checklist
- Restructuring Execution: Verify the timeline and cost realization of the 700-employee reduction and the projected $15 million annual savings.
- Civil Order Intake: Monitor the Simulation Products/Civil segment for signs of recovery in full-flight simulator (FFS) orders, which are critical for future revenue.
- Foreign Exchange Exposure: Assess the impact of the strengthening Canadian dollar on future earnings, as a significant portion of revenue is foreign-denominated.
- Debt Service: Review the impact of the new senior notes issuance on interest expense and liquidity, given the 7.15% interest rate.
- Accounting Changes: Note the adoption of CICA Handbook Section 3064, which requires expensing pre-operating costs, affecting comparability with prior periods.