CAE INC - Q3 Fiscal 2011 Financial Summary
Business Context and Reporting Period
CAE INC, a global leader in simulation and training solutions for civil aviation and defense, reported financial results for the third quarter ended December 31, 2010 (Fiscal Year 2011). The company operates through Military and Civil segments, providing full-flight simulators, training services, and modeling technologies.
Key Financial Metrics
| Metric | Q3 2011 | Q3 2010 | YTD 2011 | YTD 2010 |
|---|---|---|---|---|
| Revenue (C$ millions) | 411.3 | 382.9 | 1,164.6 | 1,130.4 |
| Net Earnings (C$ millions) | 40.7 | 37.7 | 120.1 | 104.0 |
| Earnings Per Share (C$) | 0.16 | 0.15 | 0.47 | 0.41 |
| EBIT (C$ millions) | 64.8 | 60.7 | 188.9 | 167.0 |
| EBIT Margin | 15.8% | 15.9% | 16.2% | 14.8% |
| New Orders (C$ millions) | 514.4 | 315.8 | 1,378.3 | 946.8 |
| Backlog (C$ millions) | 3,215.3 | 2,917.1 | 3,215.3 | 2,917.1 |
| Operating Cash Flow (C$ millions) | 32.2 | 21.8 | 56.5 | 118.3 |
| Free Cash Flow (C$ millions) | 5.0 | N/A | N/A | N/A |
| Net Debt (C$ millions) | 285.6 | N/A | N/A | N/A |
Note: Free Cash Flow is a non-GAAP measure defined by the company. Net Debt is calculated as total long-term debt less cash and cash equivalents.
Material Changes vs. Prior Period
- Revenue Growth: Q3 revenue increased 7% year-over-year, driven by a 9% increase in Civil segments and a 6% increase in Military segments.
- Profitability: Net earnings rose 8% to C$40.7 million. EBIT increased to C$64.8 million, aided by the absence of a C$3.9 million restructuring charge recorded in Q3 2010.
- Order Intake: New orders surged 63% to C$514.4 million, resulting in a book-to-sales ratio of 1.25x for the quarter.
- Currency Impact: Foreign currency translation negatively impacted Q3 revenue by C$16.8 million and net earnings by C$2.1 million compared to the prior year.
- Segment Performance:
- Military: Simulation products revenue grew 9% to C$153.7 million. Training and services remained stable.
- Civil: Training and services revenue jumped 21% to C$124.3 million, offsetting a 9% decline in simulation products revenue.
Guidance, Outlook, and Risks
- Outlook: Management expects a strong fourth quarter and anticipates finishing fiscal 2011 with high single-digit revenue growth. Double-digit revenue growth is projected for fiscal 2012 based on current backlog and near-term program wins.
- Strategic Wins: CAE secured a 10-year, C$250 million contract as prime contractor for KC-135 training for the U.S. Air Force, marking a milestone in military services outsourcing.
- Risks and Contingencies:
- Government Funding: Prolonged U.S. government budget approval processes have caused delays in funding for selected programs, potentially shifting expected revenue from the second half of fiscal 2011 to fiscal 2012.
- Foreign Exchange: Continued negative translation impacts on revenue and earnings due to the strength of the Canadian dollar.
- Forward-Looking Statements: Results may differ materially due to risks associated with mergers, acquisitions, and global economic conditions.
- Dividends: A quarterly dividend of C$0.04 per share is declared, payable March 31, 2011.
Investor Verification Checklist
- Verify the impact of the U.S. government budget delays on the timing of revenue recognition for the KC-135 and other military contracts.
- Confirm the sustainability of the 21% growth in Civil Training and Services revenue following the renewal of long-term airline agreements.
- Monitor the trajectory of Net Debt, which increased by C$7.1 million in the quarter, and the company's ability to maintain free cash flow.
- Review the specific contribution of "New Core Markets" (Healthcare, Mining, Energy) to the Training and Services segment margins.
- Assess the foreign exchange hedging strategies given the C$70.1 million negative translation impact on revenue year-to-date.