Business Context and Reporting Period
Company: CAE Inc.
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Fiscal Year ended March 31, 2009 (FY2009) and Fourth Quarter (Q4) ended March 31, 2009.
Business Overview: CAE is a global leader in simulation and modeling technologies and integrated training solutions for civil aviation and defense sectors. The company operates four segments: Simulation Products/Civil, Training & Services/Civil, Simulation Products/Military, and Training & Services/Military.
Key Financial Metrics
| Metric (CAD Millions) | FY2009 | FY2008 | Q4 2009 | Q4 2008 |
|---|---|---|---|---|
| Revenue | $1,662.2 | $1,423.6 | $438.8 | $366.6 |
| EBIT | $303.6 | $251.5 | $78.1 | $69.7 |
| EBIT Margin | 18.3% | 17.7% | 17.8% | 19.0% |
| Net Earnings | $199.4 | $152.7 | $51.3 | $35.6 |
| Diluted EPS (Continuing Ops) | $0.79 | $0.65 | $0.20 | $0.18 |
| Free Cash Flow | $106.4 | $162.3 | $33.9 | $118.3 |
| Net Debt | $285.1 | $124.1 | N/A | N/A |
| Backlog | $3,181.8 | $2,899.9 | $3,181.8 | $2,899.9 |
Material Changes vs. Prior Period
- Revenue Growth: Annual revenue increased 17% to $1.66 billion, driven by a 26% increase in Military Simulation Products revenue and a 21% increase in Civil Training & Services revenue. Q4 revenue rose 20% year-over-year.
- Profitability: Net earnings increased 31% to $199.4 million. Earnings from continuing operations rose 22% to $200.5 million.
- Order Intake: Total new orders reached a record $1.94 billion. Military orders hit a record $1.09 billion, while civil orders totaled $847 million.
- Cash Flow: Free cash flow decreased 34% to $106.4 million, primarily due to a $78.9 million increase in non-cash working capital (inventory buildup) and higher dividends.
- Debt: Net debt increased by $161 million to $285.1 million, attributed to lower cash balances, foreign exchange impacts on foreign-denominated debt, and debt assumed in acquisitions.
Guidance, Outlook, and Management Commentary
- Restructuring Initiative: Management announced a restructuring plan to size the company to market conditions. This includes laying off 700 employees (10% of the workforce), with 380 cuts in the coming weeks and the remainder in the fall. An estimated restructuring expense of $34 million is expected in Q1 FY2010.
- Cost Containment: Immediate measures include a global salary freeze for management and most employees, five mandatory furlough days, overtime limits, and early retirement incentives. These are expected to generate $15 million in annualized recurring savings.
- Market Outlook: Management expects civil orders to decline due to the global economic downturn and credit constraints. However, the military business remains strong. The company anticipates a 10% increase in average annual Revenue Simulator Equivalent Units (RSEUs) by the end of FY2010.
- Project Falcon: Announced a five-year R&D investment plan of up to $714 million to expand modeling and simulation technologies, with up to $250 million in repayable investment from the Government of Canada.
- Tax Rate: The effective tax rate for FY2009 was 29%. Management expects the rate for FY2010 to be approximately 31%.
Investor Verification Checklist
- Restructuring Costs: Verify the timing and magnitude of the $34 million restructuring charge in FY2010 and its impact on near-term earnings.
- Civil Order Trends: Monitor the expected decline in civil orders and the company's ability to maintain margins amidst the global economic slowdown.
- Working Capital: Review the $104.3 million increase in inventory (unbilled sales) and its effect on future cash conversion cycles.
- Foreign Exchange Exposure: Assess the impact of the weakening Canadian dollar on future revenue translation versus cost structures, given 95% of revenue is foreign-denominated.
- Debt Covenants: Confirm continued compliance with financial covenants given the increase in net debt to $285.1 million.