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CAE earns $63-million in Q1, increases dividend

2019-08-14 10:12 ET - News Release

Mr. Marc Parent reports


CAE Inc. had revenue of $825.6-million for the first quarter of fiscal 2020, compared with $722.0-million in the first quarter last year. First quarter net income attributable to equityholders was $61.5-million (23 cents per share) compared with $69.4-million (26 cents per share) last year. Net income before specific items in the first quarter of fiscal 2020 was $63.2-million (24 cents per share).

First quarter segment operating income was $110.9-million (13.4 per cent of revenue) compared with $98.5-million (13.6 per cent of revenue) in the first quarter of last year. Segment operating income before specific items in the first quarter of fiscal 2020 was $113.3-million (13.7 per cent of revenue). All financial information is in Canadian dollars unless otherwise indicated.

"CAE had a good start to the fiscal year with 14-per-cent revenue growth, 15-per-cent-higher operating income and over $940-million of orders for a $9.4-billion backlog," said Marc Parent, CAE's president and chief executive officer. "Performance was led by civil, which delivered 29-per-cent operating income growth and showed continued strong demand for CAE's innovative training solutions. The Bombardier business aircraft training business integration is progressing well, and we signed long-term training contracts with airline partners, including LATAM, SAS and Air Europa. In defence, we had strong top-line growth and lower operating income, which reflect quarterly variability and an income growth profile more heavily weighted to the second-half of the year. The defence pipeline remained strong with over $4.2-billion of bids and proposals pending customer decisions. In health care, revenue momentum from new products and an expanded sales force continued into the first quarter. As we look to the remainder of the fiscal year, our outlook for CAE's annual growth remains unchanged. In keeping with our capital allocation priorities and underscoring our positive long-term view, I am pleased to announce that CAE's board of directors has approved a one-cent or 10-per-cent increase to CAE's quarterly dividend, which becomes 11 cents per share, effective Sept. 30, 2019. This represents CAE's ninth consecutive dividend increase in as many years."

                       SUMMARY OF CONSOLIDATED RESULTS              
 (in millions of Canadian dollars, except operating margins and per-share amounts) 

                                                                   Q1 2020   Q1 2019

Revenue                                                             $825.6    $722.0
Segment operating income (SOI)                                      $110.9     $98.5
Operating margins                                                    13.4%     13.6%
SOI before specific items                                           $113.3     $98.5
Operating margins  before specific items                             13.7%     13.6%
Net income                                                           $63.0     $71.6
Net income attributable to equityholders of the company              $61.5     $69.4
Earnings per share (EPS)                                             $0.23     $0.26
Net income before specific items                                     $63.2     $69.4
EPS before specific items                                            $0.24     $0.26
Total backlog                                                     $9,362.2  $8,046.3

Civil aviation training solutions

First quarter civil revenue was $477.6-million, up 11 per cent compared with the same quarter last year. Segment operating income was $98.6-million (20.6 per cent of revenue) compared with $78.3-million (18.2 per cent of revenue) in the first quarter last year. First quarter segment operating income before specific items was $101.0-million (21.1 per cent of revenue), up 29 per cent compared with the first quarter last year. First quarter civil training centre utilization was 76 per cent.

During the quarter, civil signed training solutions contracts valued at $693.8-million, including multiyear pilot training agreements with airlines, including LATAM, SAS and Air Europa; and a new five-year pilot training contract with Philippines AirAsia, which incorporates the highly innovative and data-driven CAE Rise training system. Civil sold nine full-flight simulators (FFSs) during the quarter, including three to Southwest Airlines for the Boeing 737MAX, one to Korean Air for the Airbus A330 and one to Hawaiian Airlines for the Boeing 787.

The civil book-to-sales ratio was 1.45 times for the quarter and 1.54 times for the last 12 months. The civil backlog at the end of the quarter was a $5.1-billion.

Defence and security

First quarter defence revenue was $320.5-million, up 19 per cent compared with the same quarter last year, and segment operating income was $15.1-million (4.7 per cent of revenue), down 30 per cent compared with the first quarter last year, reflecting quarterly variability and an income growth profile more heavily weighted to the second-half of the year.

During the quarter, defence booked orders for $219.5-million, including contracts with Lockheed Martin for C-130J simulators for the U.S. Air Force and U.S. Marine Corps. Other notable orders include a contract with L3 MAS to continue providing in-service support for the Royal Canadian Air Force's CF-18 aircraft, and contracts to upgrade the German Eurofighter and Tornado aircraft simulators. New awards also included contracts for naval training solutions for the Canadian surface combatant program and upgrades to the Swedish Navy's naval warfare training system.

The defence book-to-sales ratio was 0.68 times for the quarter and 0.83 times for the last 12 months (excluding contract options). The defence backlog, including options and CAE's interest in joint ventures, at the end of the quarter was $4.3-billion. The defence pipeline remains strong with over $4.2-billion of bids and proposals pending customer decisions.

Health care

First quarter health care revenue was $27.5-million compared with $22.8-million in the same quarter last year, and first quarter segment operating loss was $2.8-million, compared with a loss of $1.3-million in the first quarter last year.

Health care announced a new CAE centre of excellence for simulation-based education at ESPA-Montreal, the first health care education and industry partnership devised to impact patient care in Quebec, Canada. As well, during the quarter, health care delivered a custom simulator to Baylis Medical to support its cardiovascular transseptal puncture systems for physicians. As well, it collaborated with the Canadian Association of Schools of Nursing to develop courseware packages for student nurses that can be practiced with the CAE Juno manikin.

Additional financial highlights

Free cash flow was negative $102.1-million for the quarter compared with negative $85.8-million in the first quarter last year. The decrease in free cash flow results mainly from a higher investment in non-cash working capital, partially offset by an increase in cash provided by operating activities and lower maintenance capital expenditures. CAE usually sees a higher level of investment in non-cash working capital accounts during the first half of the fiscal year and tends to see a portion of these investments reverse in the second half.

Income taxes this quarter were $13.0-million, representing an effective tax rate of 17 per cent, compared with 13 per cent for the first quarter last year. The tax rate was higher due to the impact of tax audits in Canada last year, partially offset by a change in the mix of income from various jurisdictions.

Net finance expense this quarter was $34.9-million, $18.9-million higher than the first quarter of fiscal 2019, mainly from higher interest on long-term debt due to the issuance of unsecured senior notes in the fourth quarter of fiscal 2019 to finance the acquisition of the Bombardier BAT business and higher interest on lease liabilities as a result of the adoption of IFRS 16 (international financial reporting standards).

Growth and maintenance capital expenditures totalled $89.0-million this quarter.

Net debt at the end of the quarter was $2,312.7-million for a net-debt-to-capital ratio of 49.4 per cent. This compares with net debt of $1,882.2-million and a net-debt-to-capital ratio of 43.9 per cent at the end of the preceding quarter. Excluding the impacts of the adoption of IFRS 16, net debt would have been $2,058.4-million this quarter for a net-debt-to-capital ratio of 46.3 per cent.

Return on capital employed (ROCE) was 11.9 per cent this quarter compared with 12.6 per cent in the first quarter last year, before specific items. Excluding the impacts of the adoption of IFRS 16, ROCE before specific items would have been 12.0 per cent this quarter.

CAE will pay a dividend of 11 cents per share effective Sept. 30, 2019, to shareholders of record at the close of business on Sept. 13, 2019.

During the three months ended June 30, 2019, CAE repurchased and cancelled a total of 58,131 common shares under the normal course issuer bid (NCIB), at a weighted average price of $34.41 per common share, for a total consideration of $2.0-million.

Management outlook for fiscal year 2020 unchanged

CAE's core markets benefit from secular growth and the company expects to continue exceeding underlying market growth in fiscal year 2020. In civil, the company expects to continue building on its positive momentum in training, increasing market share and securing new customer partnerships with its innovative training solutions. Civil expects operating income to grow in the upper-20-per-cent range on continued strong demand for its training solutions, including maintaining a leading share of FFS sales, and the integration of the recently acquired Bombardier BAT business. In defence, the company expects mid-to-high-single-digit-percentage operating income growth as it delivers from backlog and continues to win opportunities from a large pipeline. CAE expects health care to achieve double-digit growth under its new leadership, expanded sales force and the continued launch of innovative products. Financing growth opportunities remains CAE's top capital allocation priority and continues to be driven by, and supportive of, growing customer training outsourcings in its large core markets. The company prioritizes market-led capital investments that offer sustainable and profitable growth and accretive returns and support its strategy to be the recognized worldwide training partner of choice. CAE currently expects total annual capital expenditures to increase modestly, by approximately 10 to 15 per cent, in fiscal 2020, primarily to keep pace with growing demand for training services from its existing customers and to secure new long-term customer contracts. Management's expectations are based on the prevailing positive market conditions and customer receptivity to CAE's training solutions, as well as material assumptions contained in this press release, the quarterly management's discussion and analysis (MD&A), and in CAE's MD&A for fiscal year 2019.

Corporate social responsibility

CAE creates significant value for customers, shareholders and its employees. CAE products and services contribute to improvements in aviation safety, ensure defence forces are mission ready and help medical professionals save lives -- a noble purpose that is a source of pride for CAE's more than 10,000 employees worldwide. As the largest civil aviation training company in the world, and the only pure-play aviation training company, it has an unwavering customer focus and commitment to innovation. CAE also plays an important role developing talent in its industry. "Women account for less than 5 per cent of the global pilot pool and yet over 300,000 new pilots will be needed in civil aviation over the next decade," said Mr. Parent. "As the aviation training leader, we take it upon ourselves to ensure the industry accesses the full available talent pool. Among several exciting CAE initiatives, we launched the CAE women-in-flight scholarship to encourage more women to consider becoming pilots." Bolstering talent is one of CAE's top strategic priorities and the company continually strives to be an employer of choice, ensuring that it engages and attracts the best people. Among several programs, CAE launched a diversity and inclusion initiative aimed firstly at gender balance. The objective is to ensure that women at CAE can realize their full potential as equal partners with men in the work force and have every opportunity for advancement. CAE was selected for the 2019 Bloomberg Gender-Equality Index, which highlights 230 firms globally that are considered trailblazers in their commitment to transparency in work place gender reporting.

IFRS 16, Leases

Effective April 1, 2019, CAE adopted IFRS 16, Leases, which introduces a single-lessee accounting model and eliminates the classification of leases as either operating or finance leases. The main impact of IFRS 16 to CAE is the recognition of a right-of-use asset and a lease liability for substantially all leases. This change results in a decrease of the company's operating lease expense and an increase of its finance and depreciation expenses. The financial results reported in the news release for the fiscal year ended March 31, 2019, do not reflect the accounting changes required by IFRS 16 as the company adopted the standard using the modified retrospective application as of April 1, 2019. For more detailed information, including the expected impacts of the transition to IFRS 16, refer to note No. 2 of the interim consolidated financial statements for the quarter ended June 30, 2019.

Detailed information

Readers are strongly advised to view a more detailed discussion of our results by segment in the MD&A and CAE's consolidated financial statements, which are posted on the company's website.

CAE's consolidated financial statements and MD&A for the quarter ended June 30, 2019, have been filed with the Canadian Securities Administrators on SEDAR and are available on the company's website. They have also been filed with the U.S. Securities and Exchange Commission (SEC) and are available on the SEC's website. Holders of CAE's securities may also request a printed copy of the company's consolidated financial statements and MD&A free of charge by contacting investor relations (investor.relations@cae.com).

Conference call Q1 fiscal year 2020

Mr. Parent, Sonya Branco, vice-president, finance, and chief financial officer, and Andrew Arnovitz, vice-president, strategy and investor relations, will conduct an earnings conference call today at 1:30 p.m. ET. The call is intended for analysts, institutional investors and the media. Participants can listen to the conference by dialling 1-877-586-3392 or 1-416-981-9024. The conference call will also be audio webcast live for the public at the company's website.

CAE is a global leader in training for the civil aviation, defence and security, and health care markets. Backed by a record of more than 70 years of industry firsts, the company continues to help define global training standards with its innovative virtual-to-live training solutions to make flying safer, maintain defence force readiness and enhance patient safety. CAE has the broadest global presence in the industry, with over 10,000 employees, 160 sites and training locations in over 35 countries.

Non-GAAP (generally accepted accounting principles) and other financial measures

This news release includes non-GAAP and other financial measures. Non-GAAP measures are useful supplemental information but may not have a standardized meaning according to GAAP. These measures should not be confused with, or used as an alternative for, performance measures calculated according to GAAP. They should also not be used to compare with similar measures from other companies.

                           CONSOLIDATED INCOME STATEMENT                  
           (in millions of Canadian dollars, except per-share amounts)

                                                                 Three months ended June 30,
                                                                         2019          2018

Revenue                                                            $    825.6    $    722.0   
Cost of sales                                                           581.9         503.3       
Gross profit                                                       $    243.7    $    218.7   
Research and development expenses                                        31.9          31.3        
Selling, general and administrative expenses                            113.3         102.7       
Other gains -- net                                                       (0.3)         (5.2)       
After tax share in profit of equity accounted investees                 (12.1)         (8.6)       
Operating profit                                                   $    110.9    $     98.5    
Finance expense -- net                                                   34.9          16.0        
Earnings before income taxes                                       $     76.0    $     82.5    
Income tax expense                                                       13.0          10.9        
Net income                                                         $     63.0    $     71.6    
Attributable to                                                                             
Equityholders of the company                                       $     61.5    $     69.4    
Non-controlling interests                                                 1.5           2.2         
Earnings per share attributable to equityholders of the company                             
Basic and diluted                                                  $     0.23    $     0.26    

We seek Safe Harbor.

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