CAE Inc. Form 6-K Summary: Second Quarter Fiscal 2010
Business Context and Reporting Period
This filing covers the second quarter of fiscal 2010 ended September 30, 2009. CAE Inc. is a global leader in simulation and modelling 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.
Key Financial Metrics
| Metric | Q2 2010 | Q2 2009 (Restated) | Change |
|---|---|---|---|
| Revenue | $364.5 million | $406.7 million | (10%) |
| Net Earnings | $39.1 million | $49.0 million | (20%) |
| Earnings Per Share (Diluted) | $0.15 | $0.19 | (21%) |
| EBIT | $61.2 million | $76.0 million | (19%) |
| EBIT Margin | 16.8% | 18.7% | -190 bps |
| Free Cash Flow | $93.5 million | $42.5 million | +120% |
| Net Debt | $257.8 million | $340.7 million (Q1 2010) | Down $82.9M QoQ |
| Backlog | $3,034.8 million | $3,278.2 million (Q1 2010) | Down 7% QoQ |
Material Changes vs. Prior Period
- Revenue Decline: Consolidated revenue decreased 10% year-over-year, driven primarily by a 44% drop in the Simulation Products/Civil (SP/C) segment due to lower order intake, facility shutdowns, and furlough days. The Training & Services/Civil (TS/C) segment also saw a 5% decline due to market softness in North America and Europe.
- Military Growth: The Military segments offset some civil weakness. Simulation Products/Military (SP/M) revenue increased 9% year-over-year, and Training & Services/Military (TS/M) revenue increased 3%.
- Restructuring Charges: A restructuring charge of $1.1 million was recorded in Q2 2010 (part of a total expected $32 million program). This compares to a $27.2 million charge in Q1 2010 and nil in Q2 2009.
- Cash Flow Improvement: Free cash flow surged to $93.5 million, up $51.0 million year-over-year, largely due to a significant decrease in investment in non-cash working capital.
- Foreign Exchange: The strengthening of the Canadian dollar negatively impacted revenue translation and working capital accounts, though it reduced the net debt balance.
Guidance, Outlook, and Risks
- Outlook: Management expects continued strong growth in military segments and an eventual recovery in civil segments. The company anticipates total Full-Flight Simulator (FFS) sales of approximately 20 units for fiscal 2010.
- Restructuring: The company is executing a plan to reduce costs and size the workforce (approx. 700 employees) to match market conditions, with completion expected by the end of fiscal 2010.
- Tax Rate: The effective tax rate for the quarter was 27%. Management expects the average effective tax rate for fiscal 2010 to be approximately 29%.
- Risks: Key risks include the global economic recession impacting the civil aerospace sector, pricing pressure in simulation products, and the strength of the Canadian dollar relative to operating currencies. The company notes that actual results could differ from forward-looking statements due to market sensitivity and credit market conditions.
Investor Verification Checklist
- Backlog Adjustments: Verify the $167.0 million reduction in backlog, which includes $128.4 million in foreign exchange adjustments and a $38.6 million reassessment of TS/C revenue expectations.
- SP/C Recovery: Monitor the Simulation Products/Civil segment for signs of recovery, given the 44% revenue drop and extended facility shutdowns.
- Restructuring Progress: Track the execution of the $32 million restructuring plan and its impact on future operating margins.
- Foreign Exchange Exposure: Assess the impact of the strong Canadian dollar on future earnings, as approximately 97% of revenue generated in Canada is in foreign currencies.
- Dividend: Confirm the upcoming dividend payment of $0.03 per share payable December 31, 2009.