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Growth is in
our vision
Annual Report
Fiscal year ended March 31, 2010
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cae.com
Our vision is to be
the partner of choice for customers operating in
complex mission-critical environments by providing the
most accessible and most innovative modelling and
simulation-based solutions to enhance safety, improve
effi ciency, and help solve challenging problems.
1 Corporate Profi le
29 Management’s Discussion and
1 Financial Highlights
2 Global Reach
Analysis
80 Management’s Report on Internal
Control over Financial Reporting
4 Chairman’s Message
80 Independent Auditor’s Report
6 Message to Shareholders
82 Consolidated Financial Statements
10 Defence
16 Civil
22 New Core Markets
24 Social Responsibility
27 Financial Review
87 Notes to Consolidated Financial
Statements
138 Board of Directors and Offi cers
139 Shareholder and Investor Information
140 Forward Looking Statements
As an eTree member, CAE Inc. is committed to meeting shareholder needs while
Contains 47% post-consumer
being environmentally friendly. For each shareholder that receives electronic
copies of shareholder communications, CAE will plant a tree through Tree
Canada, the leader in Canadian urban reforestation.
Certifi ed EcoLogo and FSC Mixed Sources
Manufactured using biogas energy
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Corporate Profi le
CAE is a world leader in providing simulation and modelling technologies and integrated training solutions for the civil
aviation industry and defence forces around the globe. With annual revenues exceeding C$1.5 billion, CAE employs more
than 7,000 people at more than 100 sites and training locations in more than 20 countries. We have the largest installed
base of civil and military full-fl ight simulators and training devices. Through our global network of 29 civil aviation and
military training centres, we train more than 75,000 crewmembers yearly. We also offer modelling and simulation software
to various market segments and, through CAE’s professional services division, we assist customers with a wide range of
simulation-based needs. www.cae.com
Financial Highlights
(amounts in millions, except per share amounts)
2010
2009
2008
Operating results
Continuing operations
Revenue
Earnings
Net earnings
Backlog
Financial position
Net cash provided by continuing operating activities
Capital expenditures
Total assets
Total long term debt, net of cash
Per share
Earnings from continuing operations
Net earnings (basic)
Dividends
Shareholders’ equity
Revenue Distribution Fiscal 2010
53%
47%
55%
45%
Defence
Civil
Products
Services
1,526.3
1,662.2
1,423.6
144.5
144.5
202.2
201.1
163.4
151.3
3,042.8
3,181.8
2,899.9
267.0
130.9
2,621.9
179.8
0.56
0.56
0.12
4.52
194.4
203.7
2,665.8
285.1
257.0
189.5
2,243.2
124.1
0.79
0.79
0.12
4.70
0.64
0.60
0.04
3.71
29%
36%
35%
United States
of America
Asia
Australia
Canada
Middle East
South America
Europe
CAE Annual Report 2010 | 1
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• ANCHORAGE
VANCOUVER
•
VICTORIA •
• SEATTLE
McCHORD •
• COLD LAKE
• MOOSE JAW
MINNEAPOLIS •
MONTREAL
• BAGOTVILLE
MIRABEL
SUDBURY •
PETAWAWA
TORONTO •
••
•
•
• TRENTON
OTTAWA
•
GAGETOWN
• MONCTON
•
• HALIFAX
GREENWOOD
DENVER
•
RICHARDSON
LITTLE ROCK
• MORRISTOWN
SAN JOSE •
PHOENIX •
SAN DIEGO •
•MESA
• •
TUCSON
DAVIS-MONTHAN
OKLAHOMA CITY
•
•
•
• DALLAS
DYESS •
•
KEESLER •
HOLLOMAN
• MEXICO CITY
•
•
• HAMPTON ROADS
• CHERRY POINT
CHARLOTTE
TAMPA •
DOBBINS
• ORLANDO
• MIAMI
• LIMA
• SANTIAGO
BELO HORIZONTE •
SÃO PAULO •
CAE Global Reach
NORTH AMERICA
LEGEND
■ Aviation Training
■ Aviation Services
CAE Global Academy
● Military Training
● Military Services
▲ Simulation Products Operations
▼ CAE Professional Services
◆ Presagis Offi ces
◆ CAE Healthcare
◆ CAE Mining
● Expansion
2 | CAE Annual Report 2010
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CANADA
▼
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Bagotville
Cold Lake
Gagetown
Greenwood
Halifax
Mirabel
Moncton
■ ■ ▲▼◆ ◆ Montreal
●
■ ▼
●
◆
■ ■ ▼◆
●
■ ■
▼
Moose Jaw
Ottawa
Petawawa
Sudbury
Toronto
Trenton
Vancouver
Victoria
SOUTH AMERICA
BRAZIL
◆
■
CHILE
■ ◆
MEXICO
●
PERU
◆
Belo Horizonte
São Paulo
Santiago
Mexico City
Lima
■
■ ▼◆
■
◆
●
◆ ◆
■
● ▲ ▼
◆
Oklahoma City
Orlando
Phoenix
Richardson
San Diego
San Jose
Seattle
Tampa
Tucson
UNITED STATES
■
■
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■ ■ ●
●
◆
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▼
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Anchorage
Charlotte
Cherry Point
Dallas
Davis-Monthan
Denver
Dobbins
Dyess
Hampton Roads
Holloman
Keesler
Little Rock
McChord
Miami
Minneapolis
Morristown
•
EU
BEL
■ ●
FRA
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BRINKWORTH
BURGESS HILL
BENSON
WELLS
LYNEHAM
•
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YEOVILTON
CULDROSE
•
•
•
•
•
BRUSSELS
•PARIS
•
VÉLIZY
AMSTERDAM
DEN HELDER
•
•
NORDHOLZ
JAGEL
KIEL
•
•
•
• • LAAGE
WITTMUND
• FASSBERG
•
WUNSTORF •
BUECKEBURG •
•
• NOERVENICH
•
• BUECHEL
STOLBERG
• HOLZDORF
GEILENKIRCHEN
LECHFELD •
• FUERSTENFELDBRUCK
• NEUBURG
MOSCOW •
• SESTO CALENDE
PISA •
• VITERBO
•
ROME
ABU DHABI •
• JEDDAH
• DUBAI
MADRID •
• EVORA
• DOUALA
• DELHI
• RAE BARELI
• GONDIA
OKINAWA •
ZHUHAI •
BANGALORE •
LANGKAWI •
KUALA LUMPUR •
• SINGAPORE
JOHANNESBURG •
AUSTRALIA
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BRISBANE
OAKEY ••
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ADELAIDE •
RICHMOND •
CANBERRA •
• SYDNEY
• NOWRA
MELBOURNE •
AFRICA
CAMEROON
Douala
SOUTH AFRICA
◆
Johannesburg
ASIA
CHINA
■
INDIA
■ ▲ ●
◆
JAPAN
●
MALAYSIA
■ ■
Zhuhai
Bangalore
Delhi
Gondia
Rae Bareli
Okinawa
Kuala Lumpur
Langkawi
SINGAPORE
■ ● ▲
Singapore
CAE Annual Report 2010 | 3
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BELGIUM
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Fassberg
Fuerstenfeldbruck
Geilenkirchen
Holzdorf
Jagel
Kiel
Laage
Lechfeld
Neuburg
Noervenich
Nordholz
Stolberg
Wittmund
Wunstorf
ITALY
●
■
■ ●
●
NETHERLANDS
Pisa
Rome
Sesto Calende
Viterbo
■ ●
●
PORTUGAL
Amsterdam
Den Helder
Evora
Moscow
RUSSIA
■
SPAIN
■
Madrid
UNITED KINGDOM
● ●
Benson
◆
Brinkworth
■ ▲ ▼
Burgess Hill
●
Culdrose
●
Lyneham
◆
Wells
●
Yeovilton
MIDDLE EAST
UNITED ARAB EMIRATES
■
■
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Abu Dhabi
Dubai
Jeddah
OCEANIA
AUSTRALIA
▼
●
▲
▼
▼
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●
◆
● ●
■ ▲
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Amberley
Brisbane
Canberra
Melbourne
Nowra
Oakey
Perth
Richmond
Sydney
Townsville
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4 | CAE Annual Report 2010
4 | CAE Annual Report 2010
Chairman’s Message
Your company performed well in diffi cult markets in fi scal year 2010. Geographical
diversifi cation and revenue balance among our operating segments allowed the company to
end the year with a healthy fi nancial position, and well-positioned to continue to pursue
our growth objectives.
At mid-year, we appointed a new Chief Executive Offi cer, Marc Parent, upon the retirement of Robert E. Brown.
On behalf of the Board of Directors, I hasten to acknowledge Mr. Brown’s signifi cant contribution to CAE during the past
fi ve years. He led and executed the strategic changes that have produced a healthy portfolio of products and services in
the right markets.
Marc Parent, who joined the company in 2005, has an intimate knowledge of CAE’s operations and a proven
performance record. Mr. Parent served most recently as Executive Vice President and Chief Operating Offi cer and joined
the Board of Directors in November 2008. He is an outstanding leader and we are confi dent that he will continue to lead
CAE to new levels of success.
On behalf of the Board, we are pleased with the direction of the company and with the tangible results to date from the
execution of major corporate initiatives. One of our tasks is to ensure that executive and management compensation is
fully aligned with the interests of shareholders. In this regard, CAE is proud to have received from Korn Ferry and Les
Affaires an Excellence in Corporate Governance award for our compensation policies and programs.
On behalf of our shareholders, I would like to thank all CAE employees for their contribution to the company’s
development. The CAE brand is stronger for your efforts.
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Lynton R. Wilson
Chairman of the Board
CAE Annual Report 2010 | 5
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6 | CAE Annual Report 2010
Message to Shareholders
CAE performed well in fi scal year 2010 despite a very diffi cult civil aviation market and we are
emerging gradually from the downturn with a unique global position in civil aviation, continued
growth prospects in defence and a solid fi nancial base.
Our total revenue reached $1.53 billion compared to $1.66 billion generated a year ago. Contributing to this result was the
continued double-digit growth we achieved in our defence segments, which helped to offset the impacts of the economic
downturn and the contraction of the civil aviation market. This past year was challenging but it gave us the opportunity to
test the merits of our diversifi cation strategy. Taken together with the measures we took to improve and align our cost base,
we demonstrated the resiliency of CAE’s business model. Our consolidated net earnings, including a restructuring charge of
$34.1 million, were $144.5 million compared to $201.1 million in fi scal year 2009. We maintained our lead in a competitive
market and continued to have a solid backlog of $3.0 billion.
Our overall performance in fi scal year 2010 provided more evidence of how CAE has become less vulnerable to the cyclicality
of new civil aircraft deliveries, with about two-thirds of our civil market activities now involved in the provision of training and
services, which depends more on the vast installed base of commercial, business and general aircraft worldwide. In terms of
our diversifi cation by industry sector, more than half of our revenue was derived from defence products and services, and from a
geographic standpoint, about one-third of our revenue was generated in high growth markets such as Asia, the Middle East and
South America, which continued to exhibit strong demand for our products and services during the downturn. These results
demonstrate the sound balance we have achieved in our overall business mix and validate our diversifi cation strategy.
Highlights
In defence, we concluded the year with a strong fourth quarter that increased total orders to $969.1 million. We signed contracts
during the year with the defence forces of 21 nations, including a multi-year $250 million contract in support of Canada’s
CH-147 Chinook helicopter training requirements. We also signed contracts to upgrade the helicopter simulators and expand
training services at CAE’s Medium Support Helicopter Aircrew Training Facility in the U.K. for both the Royal Air Force and
Royal Netherlands Air Force. As well, we continued to demonstrate our global leadership in providing C-130 training systems
and services by expanding our C-130 training centre in Tampa, Florida and winning contracts to support the Indian Air Force,
U.S. Air Force Special Operations Command and several other militaries. These contracts increase our recurring revenue and
provide long-term stability for CAE.
In civil aerospace, we maintained our leadership in a diffi cult and competitive environment. We sold 20 full-fl ight simulators,
mainly to customers in Asia and the Middle East and we maintained more than a 70% share of the competed market. We further
developed our relationships with aircraft manufacturers, a prime example being the selection of CAE by Bombardier to support
CAE Annual Report 2010 | 7
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in the design, integration and development of the CSeries aircraft program, and in the aircraft’s entry-into-service
training program. In training and services, we booked orders during the year with an expected value of $351 million,
including a contract from the U.S. Federal Aviation Administration, which selected CAE to train its own pilots under
a new fi ve-year agreement. As well, we reached an important milestone with our fi rst Multi-crew Pilot License beta
program with a contract from AirAsia. Demand for training and services in the emerging markets continued to be
strong and we signed a ten-year contract renewal to train LAN pilots at our Santiago training centre. We generated
solid margins in our overall Civil business despite lower utilization in our training centres and lower revenue from the
sale of products.
We made more progress during the year to further diversify CAE for long-term sustainable growth by leveraging our
core capabilities of modelling, simulation and training into New Core Markets, including healthcare and mining. We
made a number of small acquisitions to develop our capabilities in the healthcare fi eld by providing us with subject
matter expertise, products and distribution channels. On the mining sector front, following the end of the fi scal year,
we advanced our entry into mine simulation and optimization through the acquisition of Datamine, a company with
proven expertise and global customer reach. Similar to civil aviation and defence, these new market sectors have
mission-critical needs for safety and effi ciency and CAE is already helping to address them.
We are 7,000 people strong
and the world is our market.
Outlook
For CAE overall, we are increasingly optimistic about the future.
Patience will still be required as the civil aerospace market works its way back from a deep downturn but recovery
is now clearly underway. The effects of the civil aviation downturn experienced last year, particularly in terms of
market pressure on pricing, as well as the lower production volume, will continue to affect us in fi scal year 2011
as we work our way through our products backlog. However, higher volumes and margins in training and services
should provide some relief. Ultimately, we believe that when the civil aviation market fully recovers, our combined
Civil business can achieve similar levels of performance as it did during the last market up-cycle.
We expect our Defence business to continue to deliver solid growth and profi tability. Government spending
constraints are a factor for all defence companies, but the cost effi ciency and effectiveness of simulation-based
training make CAE’s solutions even more relevant. As well, we specialize in training systems for aircraft types that
are germane to national security in a world of persistent low-intensity confl icts. Our backlog is strong and the
underlying drivers for more simulation-based training in defence, along with a healthy pipeline of opportunities for
the outsourcing of training and maintenance services, give us reason to believe our growth in this area is sustainable
over the long-term.
From a geographic perspective, our strong local presence in emerging markets such as Southeast Asia, the Indian
sub-continent, the Middle East and South America will remain an important source of stability and a growth driver
8 | CAE Annual Report 2010
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for CAE. Among many initiatives, we are strengthening our presence in India with a joint venture helicopter training centre in
Bangalore, which will be operational during the 2010 calendar year. Our New Core Markets, even though still at an early stage,
give us another reason for our optimism. There is large market potential and we expect these new business endeavours to
become material parts of CAE in the future.
Our fi rm commitment to innovation and research and development helps to ensure our market leadership. This fi scal year
we embarked on a $714 million, fi ve-year R&D investment plan to expand our current technologies, develop new ones and
increase our capabilities beyond training. The launch of our CAE 3000 Series family of helicopter mission trainers, funded under
our R&D program, is a tangible example of our innovation. We are also planning investments over a seven-year period of up to
$274 million in R&D to support our entry in our New Core Markets.
Through several years of strong performance and prudent capital management, we have a healthy balance sheet and the
means to support our growth. In addition to our ongoing R&D investments and strategic investments in New Core Markets, we
continue to seek opportunities to acquire businesses that complement our ability to serve customers in our different markets.
Taking all of these factors into account, we believe CAE is in a good position to prosper in the years ahead as the civil aviation
market recovery takes hold, as our defence business continues to produce strong results, and as we continue growing our New
Core Markets.
Acknowledgements
It is a privilege and an honour for me to lead CAE and follow in the footsteps of Robert E. Brown, an outstanding mentor, who
retired from CAE on September 30, 2009.
I am very proud of this company and its history of innovation and technology breakthroughs.
From its Canadian base in Montreal, CAE has spread its wings to 23 countries in every continent except Antarctica, with
customers in 100 countries. We have expanded from the civil aircraft market into defence and are now positioning ourselves for
further diversifi cation into new industry sectors where our knowledge and rigour can make a difference in safety and effi ciency.
The CAE brand is admired globally, a powerful calling card throughout the world. The company has credibility in all segments
of aviation, a depth and breadth of expertise that is unmatched in the industry. Most important of all, customers think highly of
CAE. The company is known for world-class training tools, delivered by the best people.
Our brand is our people. They have made CAE the industry leader it is today and our more than 7,000 employees will drive its
future success. By listening, adapting and tailoring solutions to meet customer needs, they make our brand stronger.
In closing, I take this opportunity to thank the members of the CAE team around the world for their dedication and service to the
company. I wish to acknowledge the governments of Canada and Québec for partnering with CAE in our long-term R&D initiatives.
My thanks also to our Board of Directors for their support and counsel and to our shareholders for their confi dence in CAE.
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President and Chief Executive Offi cer
Marc Parent
CAE Annual Report 2010 | 9
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CAE has delivered simulation equipment and training services to the defence forces of more than 35 countries,
including every branch of the U.S. military.
6 | CAE Annual Report 2010
10 | CAE Annual Report 2010
Defence
Vast Installed Base
More than 50 defence forces in 35 countries consider CAE a trusted partner, as do many of
the world’s largest defence contractors and original equipment manufacturers. This includes
relationships with all branches of the U.S. forces.
We are #1 in the virtual air market, providing simulation equipment, training systems and
services, and software tools for fast jets, helicopters, lead-in fi ghters, maritime patrol and
tanker/transport aircraft. Our broad expertise extends to modelling and simulation solutions
for land and naval forces.
Our defence business is well diversifi ed. Our revenues are derived from many countries and
from different budgets within them. This revenue diversity is supported by our global network
and broad range of solutions which include six interrelated areas of our defence market value
chain: simulators, upgrades, maintenance and support, turnkey training, professional services
and commercial-off-the-shelf software.
CAE has a strong local presence, centres of excellence and long-standing relationships in
seven key markets: Australia, Canada, India, Germany, Singapore, United Kingdom, and the
United States. These are most of the countries representing the highest per capita defence
spending in the world.
Two forces are driving new demand for CAE’s modelling, simulation and training services.
Cost – Tight budgets are forcing defence forces to seek ways to spend more effi ciently.
Cost savings from the increased use of modelling and simulation are considerable. This is also
leading defence forces to outsource training and maintenance services to industry.
Performance – Defence forces are increasingly embracing modelling and simulation for training
and mission rehearsal. A key demand driver is the persistence of low-intensity confl icts globally
which require more effective and more accessible mission rehearsal capabilities.
Governments and defence forces have explicitly expressed their intention to increase simulation
training. By providing high-fi delity, highly realistic virtual environments that include interactive
enemy and friendly forces, as well as weapon and sensor systems, CAE simulators allow for
better training while keeping defence forces safe.
CAE Annual Report 2010 | 11
Defence
CAE is #1 in the virtual
air market
New Realities
Simulation training
costs 10 times less
than live training
(U.S. Air Force estimate)
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CAE is the simulation supplier of choice for many original equipment manufacturers, including Alenia Aermacchi for its
new M-346 advanced lead-in fi ghter trainer.
6 | CAE Annual Report 2010
12 | CAE Annual Report 2010
Defence
New Aircraft Deliveries
Defence forces will require approximately 300 full mission simulators over the next fi ve years.
CAE is well-positioned to serve a good portion of this market because we have proven
credentials. We are renowned for innovative solutions that improve the mission readiness of
defence forces operating helicopters, transport aircraft, tanker aircraft, maritime patrol aircraft
and lead-in jet trainers in some of the most demanding environments.
We believe the current aircraft platforms we have experience in will have long program lives,
driving steady demand for our products, services and solutions through the current decade.
CAE is participating in numerous major aircraft platforms such as the C-130J Hercules
(transport aircraft), P-8A Poseidon (maritime patrol aircraft), A330 (multi-role tanker transport),
NH90 (helicopter), Eurofi ghter Typhoon (multirole fi ghter), M-346 (lead-in fi ghter trainer), Hawk
(lead-in fi ghter trainer), MH-60S and MH-60R (maritime helicopters) and the CH-47 (heavy lift
helicopter).
Defence
Nearly 10,000
new aircraft are
expected to be in
service by 2015
New Opportunities
CAE is expanding in a multi-billion dollar market in which modelling and simulation are applied
beyond training. Our CAE Professional Services division is already 600 people strong, giving us
the expertise and critical mass to tackle the most complex and challenging issues.
In the defence market, CAE Professional Services can improve capability and operational
planning by allowing decision-makers to “see’’ what happens in synthetic environments. This
advanced visualization supports mission rehearsal, procurement and command-and-control
decisions – increasing both safety and effi ciency.
Visualization improves
decision-making
in mission-critical
environments
Beyond defence, we apply human factors engineering and simulation to support collaboration
among public safety and security agencies, elevate emergency preparedness in critical
infrastructure such as power generation systems and transportation, as well as enable high
technology fi rms to test new concepts.
CAE Annual Report 2010 | 13
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CAE is developing a solution to help pilots land safely in extremely degraded visual conditions such as brownouts.
14 | CAE Annual Report 2010
Defence
R&D – Leadership through Innovation
Innovation is part of our DNA, a powerful driving force that has positioned our company as a global leader in
modelling and simulation technologies.
In defence markets, we lead the industry in simulation and training for fi xed-wing transport aircraft, maritime
patrol aircraft and helicopter platforms. We are also developing solutions by applying modelling and
simulation technology beyond training into operations. CAE’s Augmented Visionics System (AVS) and CAE’s
Volume-based Intelligence, Surveillance and Reconnaissance (VISR) system are two new lines of products
developed to benefi t dangerous military operations.
Defence
Helping pilots see in adverse conditions
One of the most dangerous conditions for helicopter pilots in operations today is losing their
visual reference to the ground and their environment during landing, in-fl ight, or take-off due
to adverse weather conditions or the re-circulation of dust and dirt by the main rotor. Using
state-of-the-art sensor technologies and simulation capabilities, CAE’s Advanced Visionics
System (AVS) allows helicopter pilots to “see through” the most extreme conditions. This
innovative solution combines the CAE-developed common database (CDB) with 3D sensor
data to update the visual database in real-time for display of a synthetic image that provides an
accurate depiction of the landing or take-off area.
Helping convoys detect road-side explosives
CAE is developing solutions that will help detect improvised explosive devices (IEDs), also
known as roadside bombs. Relying on real-time updates on a common database, CAE is
adapting an application of the AVS to play an important role in the counter-IED campaign.
This new application is CAE’s Volume-based Intelligence, Surveillance and Reconnaissance
(VISR). The VISR system integrates advanced sensor technologies with enhanced sensor and
synthetic displays to dramatically improve situation awareness and provide real-time intelligence
and IED detection to convoy commanders. Essentially, the VISR system will be able to detect
any new element in a physical territory by comparing it to previous scans of that same terrain.
By doing so in real-time, CAE’s VISR system can detect changes to the environment which
could be used to conceal explosives, thereby allowing convoy commanders to make informed
military decisions and ultimately helping them to save lives.
CAE’s AVS brings
simulation into the
cockpit
CAE’s VISR improves
convoy safety
CAE Annual Report 2010 | 15
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CAE Global Academy is the world’s largest network of ab initio fl ight training organizations with a capacity of
training more than 1,800 pilot cadets annually, in North America, Europe, Africa, Asia and Australia.
6 | CAE Annual Report 2010
16 | CAE Annual Report 2010
6 | CAE Annual Report 2010
Civil
Vast Installed Base
Pilots must train regularly to maintain their certifi cation. CAE’s training business relies mainly on
the already-installed base of aircraft in operation globally, making our civil business more stable
and more predictable.
As the largest provider of commercial aviation training and one of the two largest in business
aviation, CAE is well-positioned to expand its presence in this growth market.
We have the broadest global network of training centres and fl ight schools and we offer the
widest array of products and services of any company of our kind, serving the commercial,
business, helicopter and general aviation markets.
Defence
An estimated 42,000
aircraft are in service
globally
New Realities
CAE is taking a leadership position in responding to looming shortages of crew members,
particularly pilots, in many parts of the world.
In the emerging markets of India, China, Southeast Asia, the Middle East and South America,
demand for pilots, cabin crews and maintenance technicians is outstripping supply.
In developed markets, a pilot shortage is looming due to aging demographics, fewer military-
trained pilots entering the civilian market and low enrollment in technical schools.
An average of
18,000 new pilots are
required annually over
the next 20 years
(Airbus and Boeing estimate)
We have built CAE Global Academy into the world’s largest network of ab initio – “from the
beginning’’ – fl ight schools, with 9 schools in 11 locations.
CAE has also innovated by providing turnkey pilot provisioning solutions, including recruitment,
screening, selection and training.
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CAE Annual Report 2010 | 17
Lorem ipsum dolor sit amet,
consectetur adipiscing elit. Proin ut
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urna pellentesque pretium.
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CAE has designed simulators for more than 130 aircraft types, such as the A380, the world’s largest commercial airliner.
This image was generated by the CAE Tropos™-6000 visual system.
18 | CAE Annual Report 2010
6 | CAE Annual Report 2010
Civil
New Aircraft Deliveries
The growth rate for global passenger air traffi c averaged 4.8% over the past 20 years. Major
aircraft manufacturers believe the next two decades will see the same growth, with some
declines along the way as in 2009. As the #1 company in competed full-fl ight simulator sales
and a leader in pilot training, CAE is ready for the market upturn when it comes.
What’s more, although new aircraft deliveries have been slumping in North America and Europe,
emerging markets have remained strong. Air travel in these countries has continued to expand
and is expected to outpace future growth in developed markets. By being fi rst to recognize
opportunities in emerging markets, CAE has become a partner of choice for operators and
governments, and is already benefi tting from strong demand for its products and services.
CAE offers training solutions to operators of most all major production aircraft types, and is
well positioned in recently introduced or planned fuel-effi cient aircraft platforms such as the
Airbus A380, Boeing 747-8, Boeing 787, Airbus A350 XWB, Embraer 190, Dassault Falcon
7X, Embraer Phenom 100 VLJ, 300 LJ, COMAC ARJ21, Mitsubishi Regional Jet and the
Bombardier CSeries.
Defence
Global air traffi c is
projected to grow
4.8% per year
New Opportunities
Simulation-based
training can improve
helicopter safety
CAE’s 3000 Series civil helicopter mission simulator promises to improve civil helicopter safety
by shifting more pilot training to simulators. This previously underserved market is ripe for our
training solutions since most training is currently done on real aircraft. Opportunities include
direct sales of full-fl ight simulators and fl ight training devices to helicopter operators, as well as
initial and recurrent training in CAE training centres.
Launched in February 2010 at Heli-Expo, the world’s largest helicopter conference, the CAE
3000 Series is a family of affordable multi-mission simulators designed primarily for light
and medium helicopters. The fi rst production simulator will be available for training by the
summer of 2010. The CAE 3000 Series is part of a comprehensive suite of helicopter-specifi c
training solutions for offshore, emergency medical services, law enforcement, electronic
newsgathering, long line, high-altitude, corporate and other operations. Training in a CAE 3000
Series helicopter simulator costs less than training in a turbine-powered helicopter, extends the
service availability of aircraft fl eets (saving capital cost), and frees up fl eet aircraft for revenue-
generating operations (saving opportunity cost).
CAE Annual Report 2010 | 19
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The CAE 3000 Series helicopter mission simulator offers unprecedented realism to help improve safety for
civil helicopter operators.
6 | CAE Annual Report 2010
20 | CAE Annual Report 2010
Civil
R&D – Setting the Standards
In civil markets, we have consistently set the standard of performance in simulation systems and
fl ight training. We maintain our leadership by listening to our customers and developing products,
services and solutions that meet their needs.
Defence
Bringing effi ciency to aircraft development
Original equipment manufacturers (OEMs) and suppliers can optimize the aircraft development
process by using CAE’s advanced modelling and simulation technologies and systems
engineering expertise. This know-how is embodied in the CAE Augmented Engineering
Environment™ (AEE), a suite of products and services that allows OEMs to make extensive use
of simulation as they move through the various phases of aircraft development, from concept
exploration through to entry-into-service.
Approximately 10%
of CAE’s revenues
are reinvested in R&D
annually
CAE AEE provides the tools and framework to allow the integration and testing of models
and hardware from different organizations and backgrounds in a collaborative environment.
Major product releases in 2010 included connectivity tools to ease the use of third party
models, a management tool to facilitate integration and a customizable generic cockpit for
conceptual design and initial integration. Bombardier is making use of CAE AEE to support the
development of the new CSeries aircraft.
Making synthetic environments feel real
One of the key factors in the effectiveness of simulation training devices is the degree to which
they portray realistic views of the synthetic environment. This is particularly critical to training
tasks that involve low-level military fl ight operations. More content means increased realism
and improved cues for the trainee but the issue of cost looms large. Simply put, acquiring or
manually modelling every detail in a specifi c geographical area is usually cost prohibitive.
Motif Compositing is CAE’s breakthrough technology that addresses the challenge of adding
realistic content to databases while doing so cost-effectively. Motif Compositing brings rich
correlated content to the virtual world and matches all geo-specifi c attributes in the source
data. It automatically enriches sparse source content through smart rules and algorithms that
are tailored for hundreds of terrain types throughout the world.
CAE’s Motif Compositing
technology automates
the development of
database content to
cost-effectively deliver
enhanced realism
CAE Annual Report 2010 | 21
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CAE Healthcare manages the medical simulation centres of the Faculty of Medicine of Université de
Montréal and of The Michener Institute in Toronto.
6 | CAE Annual Report 2010
22 | CAE Annual Report 2010
New Core Markets
CAE is proud of its leadership in providing modelling and simulation-based solutions to a global customer
base in the defence and aerospace markets. While continuing to grow in these markets, we believe there are growth opportunities
in other industry sectors where our expertise is most relevant.
CAE has spent considerable time analyzing and gaining insight into new vertical markets where modelling, simulation and technical
training expertise can be applied with compelling results. Three target sectors show the best promise: healthcare, mining and energy.
Decisions were guided by 6 criteria
Market penetration and growth strategy
• The required solution is mission-critical
• Safety is imperative, with little margin for error
• Partnerships
• Acquisitions
• Cost of training on real equipment is very high
• Strong R&D commitment
• Task complexity is very high, the more complex the more
• Leveraging CAE brand and leadership
attractive
• Market size easily compensates the price of entry
• Opportunity for CAE to establish a leadership position
CAE is determined to achieve the same level of excellence in these new markets as in our current markets. To this end, we
are investing up to $274 million in new R&D over the next seven years to support our market penetration and growth strategy.
The Québec government has agreed to participate with up to $100 million in contribution.
3 target sectors
Healthcare
CAE Healthcare is applying CAE’s training, simulation and modelling expertise as well as best practices from aviation to the
healthcare industry in order to improve patient safety and increase effi ciency.
Mining
CAE brings unique expertise to the mining industry in large database management, scenario simulation and technical training.
CAE plans to introduce simulation-based mine planning, scheduling and training in an industry where safety is paramount and
task complexity is very high.
Energy
CAE will offer modelling and simulation-based solutions designed for the energy industry, aimed at production, distribution and
marketing.
CAE Annual Report 2010 | 23
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CAE employees of Haitian origin offered a plaque to CAE and its employees in recognition of CAE’s contribution
to help the people of Haiti.
24 | CAE Annual Report 2010
Social Responsibility
CAE conducts its business within a framework of sustainable development and responsible management. CAE is committed
to leadership and excellence in environmental performance while maintaining a proud tradition of community support and
involvement with the active participation of its more than 7,000 employees.
Community
Defence
Defence
The umbrella walk
launches CAE’s annual
Centraide campaign
CAE and its employees are generous and reliable supporters of local communities, with giving
focused mainly on education, health and charitable causes. Through direct donations or
activity-based fund-raising, CAE and its employees make a difference in their communities –
and in areas of the world with particular needs – every year.
One of the leading annual causes is Centraide Montreal, an umbrella organization that provides
funding to some 360 non-profi t agencies in the Greater Montreal Area. In 2010, CAE and its
employees donated $625,000.
CAE employees from around the world responded to an appeal to support the people of Haiti
in the wake of the earthquake which ravaged the country. The result was $388,500 in total
donations, with employees giving almost $103,000, CAE doubling the contribution and the
Canadian government matching the individual donations of employees in Canada. As well, a
CAE employee volunteered his time as part of a medical team, spending two weeks in Haiti as
a surgical attendant in a make-shift clinic.
Throughout the year, CAE employees organized various events that raised money for local
charities or donated time for a good deed. Following are some examples of initiatives around
the globe.
In Alaska, CAE employees participated in the Anchorage Adopt-a-Trail Program. They picked
up litter and carried out landscaping and painting projects on a fi ve-mile section of trail.
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CAE’s Sao Paulo’s
Adopt-a-Child
Christmas tree
In Australia, 14 employees helped raise $2,900 as part of a national campaign to increase
awareness of men’s health issues. The participants did not shave during the month of November
and solicited donations based on the look of their mustache.
In Brazil, employees bought shoes and clothing, while CAE purchased toys and other gifts, for
impoverished children.
CAE Annual Report 2010 | 25
Social Responsibility
Commitment to environmental responsibility is refl ected in CAE’s research, development,
training and manufacturing activities.
CAE is continually improving its performance by developing simulators with lower operating
costs, scheduled maintenance requirements and energy consumption. Its expanding range of
training technologies – from computer-based training to e-Learning, self-paced learning and
CAE Simfi nityTM devices – also contribute to a reduced environmental footprint.
In its manufacturing activities, CAE is making constant progress in recycling, waste reduction,
lowering energy consumption and pollution prevention. In addition, compliance with
governmental regulations has resulted in a reduction in electronic waste.
The assessment of CAE’s environmental footprint would be incomplete without taking into
account the compelling benefi ts of modelling and simulation solutions. For example, it is
estimated that 18.5 million gallons of jet fuel are saved annually by using a CAE Boeing 747
full-fl ight simulator for pilot training instead of an actual aircraft. Considering that CAE trains
more than 75,000 crew members annually, the reduction in jet fuel consumption – and the
associated reduction in greenhouse gas emissions – is impressive. In both civil aircraft and
military training, the proliferation of modelling and simulation also reduces wear and tear on
equipment, and in the case of defence exercises, on civil infrastructure such as roads and
bridges.
Simulation-based training also contributes to making commercial fl ying among the safest
forms of transportation. For defence forces, the use of modelling and simulation for training
and mission rehearsal avoids injuries and allows forces personnel to be better prepared for
their mission.
Environment
Defence
CAE received the
BOMA Go Green
Plus certifi cation for
the environmental
performance of its
Montreal plant
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18.5 million gallons
of fuel are saved
annually by using
a CAE full-fl ight
simulator
26 | CAE Annual Report 2010
Financial
Review
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CAE Annual Report 2010 | 27
1. HIGHLIGHTS
2. INTRODUCTION
3. ABOUT CAE
3.1 Who we are
3.2 Our vision
3.3 Our strategy and value proposition
3.4 Our capability to execute strategy and deliver results
3.5 Our operations
3.6 Foreign exchange
3.7 Non-GAAP and other fi nancial measures
4. CONSOLIDATED RESULTS
4.1 Results of our operations – fourth quarter of fi scal 2010
4.2 Results of our operations – fi scal 2010
4.3 Restructuring
4.4 Results of our operations – fi scal 2009 versus fi scal 2008
4.5 Consolidated orders and backlog
5. RESULTS BY SEGMENT
5.1 Civil segments
5.2 Military segments
6. CONSOLIDATED CASH MOVEMENTS AND LIQUIDITY
6.1 Consolidated cash movements
6.2 Sources of liquidity
6.3 Government cost-sharing
6.4 Contractual obligations
7. CONSOLIDATED FINANCIAL POSITION
7.1 Consolidated capital employed
7.2 Variable interest entities
7.3 Off balance sheet arrangements
7.4 Financial instruments
8. ACQUISITIONS, BUSINESS COMBINATIONS AND DIVESTITURES
8.1 Acquisitions
9. BUSINESS RISK AND UNCERTAINTY
9.1 Risks relating to the industry
9.2 Risks relating to the Company
9.3 Risks relating to the market
10. CHANGES IN ACCOUNTING POLICIES
10.1 Signifi cant changes in accounting policies – fi scal 2010
10.2 Future changes in accounting standards
10.3 Critical accounting estimates
11. SUBSEQUENT EVENTS
12. CONTROLS AND PROCEDURES
12.1 Evaluation of disclosure controls and procedures
12.2 Internal control over fi nancial reporting
13. OVERSIGHT ROLE OF AUDIT COMMITTEE AND BOARD OF DIRECTORS
14. ADDITIONAL INFORMATION
15. SELECTED FINANCIAL INFORMATION
28 | CAE Annual Report 2010
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Management’s Discussion and Analysis
for the fourth quarter and year ended March 31, 2010
1. HIGHLIGHTS
FINANCIAL
FOURTH QUARTER OF FISCAL 2010
Higher revenue over last quarter and lower revenue year over year
Consolidated revenue was $395.9 million this quarter, $13.0 million or 3% higher than last quarter and $42.9 million or 10% lower
than the same quarter last year.
Net earnings and diluted earnings per share were higher than last quarter and lower year over year
Net earnings were $40.5 million (or $0.16 per share) this quarter, compared to $37.7 million (or $0.15 per share) last quarter,
representing an increase of $2.8 million or 7%, and compared to $52.7 million (or $0.21 per share) in the fourth quarter of last year,
representing a decrease of $12.2 million or 23%;
A restructuring charge of $1.9 million was booked this quarter, compared to $3.9 million last quarter and nil in the fourth quarter of
last year. Excluding the restructuring charge, earnings from continuing operations were $42.3 million this quarter (or $0.16 per
share) and $40.3 million (or $0.16 per share) last quarter.
Positive free cash flow1 at $114.9 million
Net cash provided by continuing operations was $148.7 million this quarter, compared to $21.8 million last quarter and
$71.8 million in the fourth quarter of last year;
Maintenance capital expenditures and other assets were $26.2 million this quarter, compared to $14.2 million last quarter and
$29.8 million in the fourth quarter of last year;
Cash dividends were $7.6 million this quarter, last quarter and in the fourth quarter of last year.
FISCAL 2010
Lower revenue year over year
Consolidated revenue was $1,526.3 million this year, $135.9 million or 8% lower than last year.
Lower net earnings and diluted earnings per share
Net earnings were $144.5 million (or $0.56 per share) this year, compared to $201.1 million (or $0.79 per share) last year,
representing a decrease of $56.6 million or 28%;
A restructuring charge of $34.1 million was booked this year compared to nil last year. Excluding the restructuring charge, earnings
from continuing operations were $168.6 million (or $0.66 per share).
Positive free cash flow at $179.0 million
Net cash provided by continuing operations was $267.0 million this year, compared to $194.4 million last year;
Maintenance capital expenditures and other assets were $66.5 million this year, compared to $60.2 million last year;
Cash dividends were $30.3 million this year, compared to $29.6 million last year.
Capital employed1 ending at $1,335.6 million
Capital employed
Capital employed decreased by $147.3 million or 10% this year;
Property, plant and equipment decreased by $155.2 million;
Non-cash working capital increased by $20.0 million in fiscal 2010, ending at negative $40.4 million;
Net debt1 decreased by $105.3 million this year, ending at $179.8 million.
ORDERS1
The book-to-sales ratio for the quarter was 1.59x (combined civil was 1.11x and combined military was 1.98x). The ratio for the last
12 months was 1.03x (combined civil was 0.84x and combined military was 1.20x);
Total order intake was $1,574.9 million, down 19% over last year;
Total backlog1 was $3,042.8 million as at March 31, 2010, 4% lower than last year.
Training & Services/Civil obtained contracts expected at $351.2 million
Training & Services/Civil obtained contracts expected at $351.2 million
Signed a contract with sponsoring airline AirAsia for our first Multi-crew Pilot License (MPL) beta program that will adhere to new
performance-based Approved Training Organization (ATO) certification requirements developed by Transport Canada and based
on International Civil Aviation Organization (ICAO) guidelines. Graduates of our first MPL beta program are expected to enter the
initial operating experience (IOE) program to become A320 First Officers with AirAsia;
Signed a contract with the Kingdom of Saudi Arabia to deliver a CAE Flightscape flight recorder and analysis laboratory;
Extended our training service agreement with Brussels Airlines through calendar 2012 on an exclusive basis for AVRO, A320,
A330 and B737-300 simulator training;
1 Non-GAAP measure (see Section 3.7).
CAE Annual Report 2010 | 29
Management’s Discussion and Analysis
Awarded by the Federal Aviation Administration (FAA) a Multiple Award for General Aviation and Business Aircraft Pilot Training for
five years;
Signed LAN Airlines to a ten-year contract renewal for B767 training at our Santiago training centre;
Signed training service contracts or extensions with existing customers at Emirates-CAE Flight Training (ECFT) in Dubai. Clients
include AMAC Aerospace, Falcon Aviation Services, Jet Aviation, Kingfisher Airlines, MSC Aviation and Transaero Airlines;
Signed a ten-year agreement with Air Transat to provide dry lease training for its A310 and A330 fleet at our Montreal training
centre;
Signed a contract to provide wet initial training to 28 CRJ200 crews from Volga Avia Express at our Madrid training centre;
Signed contracts with Air Astana, Wind Rose Aviation Company and Avianca.
Simulation Products/Civil won $254.6 million of orders including a total of 20 full-flight simulators (FFSs)
CAE 5000 Series A320 FFSs
Two to Bahrain Mumtalakat Holding Company (Mumtalakat).
CAE 7000 Series ARJ21-700 FFSs
Two to COMAC Shanghai Customer Service Co. Ltd.
CAE 7000 Series ATR72-500 FFSs
One to Mount Cook Airlines;
One to Lion Air.
CAE 7000 Series Boeing 737-800 FFSs
One to Malaysian Airlines System;
One to Skymark Airlines.
CAE 7000 Series Boeing 737-900ER FFSs
Two to Lion Air.
Other
One CAE 5000 Series B737NG FFS to Kenya Airways;
One CAE 5000 Series Beech King B200 FFS to Lufttransport AS;
One CAE 5000 Series Cessna Citation CJ1 FFS to Korean Air;
One CAE 7000 Series A320 FFS to Shanghai Eastern Flight Training Company;
One CAE 7000 Series A330 FFS to Shanghai Eastern Flight Training Company;
One CAE 7000 Series A330/340 convertible FFS to Saudi Arabian Airlines;
One CAE 7000 Series Boeing 777-300ER FFS to Turkish Airlines;
One CAE 7000 Series Embraer 170/190 FFS to Mumtalakat;
One CSeries aircraft FFS to Bombardier;
One engineering development simulator to Bombardier.
During the third quarter, the segment also received a cancellation of a simulator order from a prior year.
Simulation Products/Military won $545.7 million of orders for new training systems and upgrades
Simulation Products/Military won $545.7 million of orders for new training systems and upgrades
One CH-147F training suite to Canada’s Department of National Defence (DND) under the Operational Training Systems Provider
(OTSP) program in support of Canada’s new fleet of 15 CH-147F Chinook medium-to-heavy lift helicopters;
A comprehensive academic training system for the C-130 and KDC-10 aircraft, which includes a CAE SimfinityTM virtual simulator
(VSIM) and multimedia courseware, to the Royal Netherlands Air Force;
Major upgrade on one CH-47 FMS used by the Royal Netherlands Air Force;
Major product enhancements to the CAE GESI command and staff training system for the German Army;
Upgrade on one Tornado simulator used by the German Air Force;
Major upgrades on two CAE-built CH-53 full-mission simulators (FMSs) operated at the German Army Aviation school in
Bückeburg;
Ground-based tactical mission trainers to Lockheed Martin to be used by the U.K. military;
A330 Multi-Role Tanker Transport part-task trainers and integrated procedures trainers to be used by the United Arab Emirates
(UAE) and the Royal Saudi Air Force (RSAF);
One HC/MC-130J FMS for the U.S. Air Force Special Operations Command;
One C-130H FMS, avionics part-task trainer, computer-based training and instructional courseware, brief/debrief stations and a
training management information system to an undisclosed customer;
Major upgrades on two CH-47 FMSs used by the U.K. Royal Air Force;
Major upgrades on two MH-60S operational flight trainers used by the U.S. Navy.
30 | CAE Annual Report 2010
Management’s Discussion and Analysis
Training & Services/Military awarded contracts for more than $423.0 million
Training & Services/Military awarded contracts for more than $423.0 million
A 20-year in-service support contract for the CH-147F aircrew training program to Canada’s DND under the OTSP program;
Continued to provide training support services as part of the U.S. Air Force’s C-130J Maintenance and Aircrew Training System
program and C-130E/H Aircrew Training System program;
Continued development and services as part of the Synthetic Environment Core (SE Core) program;
A nine-year training services contract with the Royal Netherlands Air Force to train its Chinook aircrews at our Medium Support
Helicopter Aircrew Training Facility (MSHATF) in the U.K.;
Simulator maintenance and support services to the German Ministry of Defence on various types of simulators for the German
Army and Air Force;
A one-year contract to continue to provide avionics software upgrades, integrated logistics support and data management services
for the Canadian Forces’ CF-18 aircraft;
A three-year contract with the Royal Netherlands Navy to provide Lynx simulator maintenance and technical logistics support;
C-130H training services for a Middle East customer;
An amendment to our existing PFI training contract with the United Kingdom Royal Air Force to provide training on two
CH-47 Chinook simulators to be upgraded at our U.K. training centre in Benson;
Increased management and support services for the Australian Defence Forces aircraft simulators;
A multi-year C-130H pilot training contract to an undisclosed customer.
ACQUISITIONS AND JOINT VENTURES
We acquired Bell Aliant’s Defence, Security and Aerospace (DSA) business unit through an asset purchase agreement in the firs t
quarter of fiscal 2010. DSA supplies real-time software and systems for simulation training defence and integrated lifecycle
information management for the aerospace and defence industries;
We acquired Seaweed Systems Inc. (Seaweed) during the second quarter of fiscal 2010. Seaweed has embedded graphics
solutions for the military and aerospace market, with experience in the development of safety critical graphic drivers;
We acquired ICCU Imaging Inc. (ICCU) during the third quarter of fiscal 2010. ICCU specializes in developing multimedia educative
material and offering educational solutions to help medical providers perform a focused bedside ultrasound examination;
We acquired VIMEDIX Virtual Medical Imaging Training Systems Inc. (VIMEDIX) during the fourth quarter of fiscal 2010. VIMEDIX
specializes in developing virtual reality animated transthoracic echocardiograph simulators and advanced echographic simulation
training;
We acquired part of Immersion Corporation’s (Immersion) medical simulation business unit through an asset purchase agreement
during the fourth quarter of fiscal 2010. Immersion’s medical line of business designs, manufactures, and markets computer-based
virtual reality simulation training systems with realistic touch feedback that allows clinicians and students to practice and improve
minimally invasive surgical skills in an environment that poses no risk to patients;
We entered into two joint ventures during fiscal 2010: Rotorsim S.r.l (50% participation) and Embraer CAE Training Services (U.K.)
Limited (49% participation);
Following the end of fiscal 2010, we announced the acquisition of The Datamine Group (Datamine). Datamine is a supplier of
mining optimization software tools and services.
OTHER
Effective April 1, 2009, we adopted CICA Handbook Section 3064, Goodwill and Intangible Assets. Since adopting the new
standard, we expense our pre-operating costs as they are incurred. We have retroactively restated comparative prior period
information. You will find more details in Change in accounting standards;
On May 14, 2009, we introduced actions required to size our company to current and expected market conditions. The plan has
now been completed. You will find more details in Restructuring;
On June 8, 2009, we announced that we issued senior notes for $15.0 million and US$105.0 million by way of a private placement;
On June 21, 2009, we, in collaboration with the Québec government, announced an investment of up to $274.0 million in a new
research and development (R&D) program extending up to seven years to leverage our modelling, simulation and training services
expertise into our new core markets of healthcare, mining and energy;
On July 24, 2009, we, the Solidarity Fund QFL and Société générale de financement du Québec (SGF) announced the creation of
a limited partnership to provide qualifying customers competitive lease financing for our civil flight simulation equipment
manufactured in Québec and exported around the world;
Effective October 1, 2009, our former Executive Vice President and Chief Operating Officer, Marc Parent, succeeded
Robert E. Brown as our President and CEO;
On April 6, 2010, we announced that we finalized an agreement to refinance our existing credit facility due to expire in July 2010.
The new agreement is a committed three-year revolving credit facility of US$450.0 million with an option to increase to a total
amount of up to US$650.0 million.
CAE Annual Report 2010 | 31
Management’s Discussion and Analysis
2.
INTRODUCTION
In this report, we, us, our, CAE and Company refer to CAE Inc. and its subsidiaries. Unless we have indicated otherwise:
This year and 2010 mean the fiscal year ending March 31, 2010;
Last year, prior year and a year ago mean the fiscal year ended March 31, 2009;
Dollar amounts are in Canadian dollars.
This report was prepared as of May 13, 2010, and includes our management’s discussion and analysis (MD&A) for the year and the
three-month period ended March 31, 2010 and the consolidated financial statements and notes for the year ended March 31, 2010.
We have written it to help you understand our business, performance and financial condition for fiscal 2010. Except as otherwise
indicated, all financial information has been reported in accordance with Canadian generally accepted accounting principles (GAAP).
All quarterly information disclosed in the MD&A is based on unaudited figures.
For additional information, please refer to our annual consolidated financial statements for this fiscal year, which you will find in this
annual report for the year ended March 31, 2010. The MD&A provides you with a view of CAE as seen through the eyes of
management and helps you understand the company from a variety of perspectives:
management and helps you understand the company from a variety of perspectives:
Our vision;
Our strategy and value proposition;
Our capability to execute strategy and deliver results;
Our operations;
Foreign exchange;
Non-GAAP and other financial measures;
Consolidated results;
Acquisitions, business combinations and divestitures;
Business risk and uncertainty;
Controls and procedures;
Oversight role of the Audit Committee and Board of Directors.
You will find our most recent annual report and annual information form (AIF) on our website at www.cae.com, on SEDAR at
www.sedar.com or on EDGAR at www.sec.gov.
ABOUT MATERIAL INFORMATION
This report includes the information we believe is material to investors after considering all circumstances, including potential market
sensitivity. We consider something to be material if:
It results in, or would reasonably be expected to result in, a significant change in the market price or value of our shares, or;
It is quite likely that a reasonable investor would consider the information to be important in making an investment decision.
ABOUT FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements about our activities, events and developments that we expect or anticipate may occur
in the future including, for example, statements about our business outlook, assessment of market conditions, strategies, future plans,
future sales, pricing for our major products and capital spending. Forward-looking statements normally contain words like believe,
expect, anticipate, intend, continue, estimate, may, will, should and similar expressions. Such statements are not guarantees of future
performance. They are based on management’s expectations and assumptions regarding historical trends, current conditions and
expected future developments, as well as other factors that we believe are appropriate in the circumstances.
We have based these statements on estimates and assumptions that we believed were reasonable when the statements were
prepared. Our actual results could be substantially different because of the risks and uncertainties associated with our business.
Important risks that could cause such differences include, but are not limited to, the length of sales cycle, rapid product evolution, level
of defence spending, condition of the civil aviation industry, competition, availability of critical inputs, foreign exchange rate
occurrences and doing business in foreign countries. Additionally, differences could arise because of events that are announced or
completed after the date of this report, including mergers, acquisitions, other business combinations and divestitures. You will find
more information about the risks and uncertainties affecting our business in Business risk and uncertainty in the MD&A.
We do not update or revise forward-looking information even if new information becomes available unless legislation requires us to do
so. You should not place undue reliance on forward-looking statements.
32 | CAE Annual Report 2010
Management’s Discussion and Analysis
3. ABOUT CAE
3.1 Who we are
CAE is a world leader in providing simulation and modelling technologies and integrated training services primarily to the civil aviation
industry and defence forces around the globe.
We design, develop, manufacture and supply simulation tools and equipment and provide a wide range of training and other modelling
and simulation-based services. This includes integrated modelling, simulation and training solutions for commercial airlines, business
aircraft operators, aircraft manufacturers and military organizations. We are launching some of these solutions for healthcare
education and service providers and the mining industry. We also operate a global network of training centres serving pilots and
maintenance staff.
Our main products include full-flight simulators (FFSs), which replicate aircraft performance in a full array of situations and
environmental conditions. Sophisticated visual systems simulate hundreds of airports around the world, as well as a wide range of
landing areas and flying environments. These work with motion and sound to create a realistic training environment for pilots and
crews at all levels.
Founded in 1947 and headquartered in Montreal, Canada, CAE has built an excellent reputation and long-standing customer
relationships based on more than 60 years of experience, strong technical capabilities, a highly trained workforce and global reach.
CAE employs more than 7,000 people at more than 100 sites and training locations in more than 20 countries. Revenue from
worldwide exports and international activities accounted for 90% of CAE’s total revenue in 2010.
CAE’s common shares are listed on the Toronto Stock Exchange and the New York Stock Exchange, under the symbol CAE.
3.2 Our vision
Our vision is for CAE to be synonymous with safety, efficiency and mission readiness. We intend to be the partner of choice for
customers operating in complex mission-critical environments by providing the most accessible and most innovative modelling and
simulation-based solutions to enhance safety, improve efficiency, and help solve challenging problems.
3.3 Our strategy and value proposition
Our strategy
We are a world-leading provider of modelling and simulation-based training and decision support solutions. We currently serve
customers in two primary markets: civil aerospace and defence. We have begun to extend our capabilities into new markets of
simulation-based training and optimization solutions in healthcare, mining and energy.
A key tenet of our strategy in our core civil aerospace and defence markets is to derive an increasing proportion of our business from
the existing fleet. This would include providing solutions for customers in support of the global fleet of civilian and military aircraft.
Historically, the primary driver of our business was the delivery of new commercial aircraft. Over the past few years, we have engaged
in a strategy to diversify our revenue base away from the volatility of new commercial aircraft deliveries. Our SP/C segment, which in
fiscal 2010 represented approximately 19% of our consolidated revenue, is most dependent on this market driver. The balance of our
business involves mainly more stable and recurring sources of revenue like training and services as well as military simulation
products and services.
In addition to diversifying our interests between customer markets, our strategy has also involved more balance between products,
which tend to be more short-term and cyclical, and services, which tend to be more long term and stable. As well, we continue to
diversify our interests globally. This is intended to bring our solutions closer to our customers’ home bases, which we think is a distinct
competitive advantage. This also allows us to be less dependent on any one market and since business conditions are rarely identical
in all regions of the world, we believe this provides a degree of stability to our performance. We are investing in both the mature and
emerging markets to capitalize on current and future growth opportunities. Approximately one third of our revenue comes from the
U.S., one third from Europe and one third from the rest of the world. We consider the maintenance of our sound capital structure a
priority. We continue to execute our growth strategy by selectively investing to meet the long-term needs of our aerospace and
defence customers and to seed our initiatives in our new core markets.
Value proposition
The value we provide customers is the ability to enhance the safety of their operations, improve their mission readiness for potentially
dangerous situations and lower their costs by helping them become more operationally efficient. We offer a complete range of
products and services that can be arranged in a customized package to suit our customers’ needs and can be adapted as their needs
evolve over the lifecycle of their operations. We offer the broadest global reach of any of our competitors. As a result, we are able to
provide solutions in proximity to our customers, which is an important cost-benefit consideration for them.
CAE Annual Report 2010 | 33
Management’s Discussion and Analysis
Our core competencies and competitive advantages include:
World-leading modelling and simulation technology;
Comprehensive knowledge of training and learning methodologies for the operation of complex systems using modeling and
simulation;
Total array of training products and services solutions;
Broad-reaching customer intimacy;
Extensive global coverage;
High-brand equity;
Proven systems engineering and program management processes;
Best-in-class customer support;
Well established in new and emerging markets.
World-leading modelling and simulation technology
We pride ourselves on our technological leadership. Pilots around the world view our simulation as the closest thing to the t rue
experience of flight. We have consistently led the evolution of flight training and simulation systems technology with a number of
industry firsts. We have simulated the entire range of large civil aircraft, a large number of the leading regional and business aircraft
and a number of civil helicopters. We are an industry leader in providing simulation and training solutions for fixed-wing transport
aircraft, maritime patrol aircraft and helicopter platforms for the military. We also have extensive knowledge, experience and credibility
in designing and developing simulators for prototype aircraft of major aircraft manufacturers. We are now applying this capability to
new markets, such as healthcare and mining.
Comprehensive knowledge of training and learning methodologies for the operation of complex systems using modelling and
simulation
We revolutionized the way aviation training is performed when we introduced our CAE SimfinityTM-based training solutions
and courseware. These training devices effectively bring the virtual aircraft cockpit into the classroom at the earliest stages of ground
school training, making it a more effective and efficient training experience overall. We build upon the CAE SimfinityTM product line to
develop the trainers that are used in the Airbus pilot and maintenance technician training programs. We also developed e-Learning
solutions to enable pilots and technicians to train anytime and anywhere.
Total array of training products and services solutions
We have the broadest and most comprehensive range of aviation training products and services in the industry, and thus we are the
best positioned to tailor solutions to meet the specific needs of individual operators. Our portfolio of training solutions is mor e
operationally oriented and scenario based to ensure aviation professionals receive the most practical training possible for the
situations they may face. Our approach is to first understand an operator’s needs and objectives, and then to propose an opti mal
solution that is made up of various elements of our product and service portfolio.
Broad-reaching customer intimacy
We have been in business for more than 60 years and have relationships with many of the world’s airlines and the governments of
approximately 50 different national defence forces, including all branches of the U.S. forces. Our customer advisory boards and
technical advisory boards involve airlines and operators worldwide. By listening carefully to customers, we are able to gain a deep
understanding of their needs and respond with innovative product and service offerings that help improve the safety and efficiency of
their operations.
Extensive global coverage
We have operations and offer training and support services in more than 20 countries on five continents and sell into many more
countries. Our broad geographic coverage allows us to respond quickly and cost effectively to customer needs and new business
opportunities while respecting the regulations and customs of the local market. We operate a fleet of more than 160 full-flight and
full-mission simulators in 29 civil and military training centres to meet the wide range of operational requirements of our customers.
Our fleet includes simulators for various types of aircraft from major manufacturers, including commercial jets, business jets and
helicopters, both civil and military.
High-brand equity
Our simulators are typically rated among the highest in the industry for reliability and availability. This is a key benefit because
simulators normally operate in high-duty cycles of up to 20 hours a day.
We design our products so customers can upgrade them, giving them more flexibility and opportunity as products change or new
air-worthiness regulations are introduced.
As we enter new markets like healthcare and mining, we find that the CAE brand is widely regarded as the benchmark for modelling
and simulation-based technology and for training services.
34 | CAE Annual Report 2010
Management’s Discussion and Analysis
Proven systems engineering and program management processes
We continue to develop solutions and deliver technically complex programs within schedule to ensure that there are trained and
mission-ready aircrew and combat troops around the world. This includes MH-60 simulators for the U.S. Navy, C-130J simulators for
U.S. and Canadian Defence Forces, NH90 simulators for the Royal Australian Air Force, Royal Netherlands Navy and German Navy,
the maritime P-3C operational flight and tactics trainers for the German Navy and the M-346 jet trainer simulator for the Italian Air
Force. These and other programs combined with our continued investment in R&D continue to strengthen our technological leadership
and strengthen our management expertise to deliver complex programs that feature sensor simulation for maritime operations,
synthetic tactical environments for naval and fighter operations as well as our visualization and common database technologies that
deliver rich, immersive synthetic environments for the most effective training possible.
Best-in-class customer support
We maintain a strong focus on after-sales support, which is often critical in winning additional sales contracts as well as important
update and maintenance services business. Our customer support practices, including a web-based customer portal, performance
dashboard, and automated report cards, have resulted in enhanced customer support according to customer comments and
feedback.
Well established in new and emerging markets
Our approach to global markets is to model ourselves as a multi-domestic rather than a foreign company. This has enabled us to be a
first mover into growth markets like China, India, the Middle East, South America and Southeast Asia.
3.4 Our capability to execute strategy and deliver results
Our resources and processes help ensure that we can carry out our strategy and deliver results. We have three other attributes that
are critical to our success:
Our financial position
At March 31, 2010, our net debt was $179.8 million, representing an adjusted net debt to capital ratio of 23% (including the present
value of operating leases). With cash we are able to generate from operations, our strong balance sheet and available credit, we have
adequate funding in place or available to sustain our current development projects. See Section 7, Consolidated financial position, for
a more detailed discussion. As at March 31, 2010, we are in compliance with our financial covenants.
A skilled workforce and experienced management team
At the end of fiscal 2010, we had more than 7,000 employees. The skills of our workforce have a significant impact on the efficiency
and effectiveness of our operations. While competition for well-trained and skilled employees is high, we have been successful at
attracting and retaining people because of our quality reputation as an industry leader, our commitment to providing an engaging and
challenging work environment and by offering competitive compensation.
We also have an experienced management team with a proven track record in the aerospace industry. Strong leadership and
governance are critical to the successful implementation of our corporate strategy. We are focusing on leadership development of key
executives and members of senior management.
Proven ability to adapt to changing market conditions
We have restructured our business during fiscal 2010. We have institutionalized a culture of continuous improvement and cost
reduction. Despite major headwinds like the surging Canadian dollar this past year, we managed to maintain profitability and enhance
our market position. We continue to focus on becoming more efficient by lowering costs without affecting the quality of our products
and services.
3.5 Our operations
We primarily serve two markets globally:
We primarily serve two markets globally:
The civil market includes aircraft manufacturers, major commercial airlines, regional airlines, business aircraft operators, helicopter
operators, training centres, pilot provisioning and flight training organizations;
The military market includes original equipment manufacturers (OEMs), government agencies and defence forces worldwide.
We manage our operations and report our results in four segments, one for products and one for services, for each market. Each
segment is a significant contributor to our overall results.
CAE Annual Report 2010 | 35
Management’s Discussion and Analysis
CIVIL MARKET
Training & Services/Civil (TS/C)
Provides business and commercial aviation training for flight and ground personnel and associated services
Our TS/C business is the largest provider of commercial aviation training services in the world and the second largest provider of
business aviation training services. CAE has the broadest global network of training centres and we serve all sectors of the civil
aviation market including general aviation, regional airlines, commercial airlines and business aviation. We offer a full ran ge of
services, including training centre operations, pilot training, aircraft technician training services, simulator spare parts inventory
management, curriculum development, consulting services and e-Learning solutions. We are a leader in flight sciences, using flight
data analysis to enable the effective study and understanding of recorded flight data to improve airline safety, maintenance and flight
operations. As well, we are offering airlines a long-term solution to pilot recruitment with our pilot provisioning capability. We achieved
our leading position through acquisitions, joint ventures and organic investments in new facilities. We currently have 148 FFSs in
operation and we provide aviation training and services in more than 20 countries around the world, including aviation training centres,
flight training organizations (FTOs) and third-party locations. We make selective investments to add new revenue simulator equivalent
units (RSEUs) to our network to maintain our position, increase our market share, and address new market opportunities. We are
developing our training network primarily to meet the long-term, steady stream of recurring training needs from the existing fleet, so
that we continue to become less dependent on new aircraft deliveries to drive revenue.
Simulation Products/Civil (SP/C)
Designs, manufactures and supplies civil flight simulation, training devices and visual systems
Our SP/C segment is a world leader in the provision of civil flight simulation equipment. We design and manufacture more civil FFSs
and visual systems for major and regional carriers, third-party training centres and OEMs than any other company. We have a wealth
of experience in developing simulators for new types of aircraft, including over 20 models and, more recently, the Bombardier CSeries
and Global Express, Boeing 747-8 and 787, Airbus A380, Embraer Phenom 100/300, Dassault Falcon 7X and the Commercial Aircraft
Corporation of China, Ltd (COMAC) ARJ21. We also offer a full range of support services including simulator updates, maintenance
services, sales of spare parts and simulator relocations.
Market trends and outlook
Demand for commercial air transportation decreased over the past year in light of the global economic recession. Air carriers adjusted
by reducing flight capacity, most notably in North America and Europe. So far, these conditions have resulted in a moderate decrease
in the global active fleet of commercial aircraft, which is one of the key drivers for our training business. As well, we have seen a high
proportion of existing business jets put up for sale, which compete with the supply of new aircraft. This has also meant fewer flight
cycles and flight crews and consequently less demand for training.
A portion of our training services’ revenue comes from recurrent training that is essential to support the existing global in-service
aircraft fleet, which totals approximately 40,000 aircraft. While the recurrent training segment is relatively more stable, capacity
reduction from airlines and business jet operators has impacted training demand on several platforms. Specifically, we have seen
lower training activity commensurate with airline capacity reductions and some reductions in aircraft deliveries in business aviation,
resulting in lower capacity utilization and pricing pressure in general. As well, pilot movements within and between airlines have been
lower, resulting in less training demand. Our training business, to a certain extent, also relies on new aircraft deliveries. In business
aviation, a number of aerospace companies have said they expect business jet deliveries to bottom out in calendar 2010 and
gradually recover thereafter.
More recently, we have seen demand for air travel and air cargo show signs that market conditions are recovering. We expect
demand for air transportation to resume its long-term growth trajectory as conditions improve. Despite recent market setbacks, newly
revised forecasts from major aircraft OEMs still point to an approximate doubling of the global aircraft fleet over the next two decades.
These assumptions continue to support our underlying strategy as a global provider of aviation training services.
flown
in Western markets. We were successful
In the SP/C segment, new simulation product orders were lower this year as a result of airline capital constraints and lower aircraft
leadership position with 20 sales during
capacity
fiscal 2010, representing a competed market share of more than 70%. During the last year in the market down-cycle, we experienced
acute pricing pressure for the sale of simulation products as a result of CAE and our competitors pursuing fewer market opportunities.
These factors, combined with a strong Canadian dollar, have resulted in lower margins on orders booked this year in our SP/C segment
backlog. Our SP/C segment normally lags the civil aerospace cycle by approximately 12 months. We expect market conditions to
gradually improve and to eventually be reflected in our performance as we make our way through an SP/C backlog that represents the
brunt of the down-cycle.
in maintaining our
We believe that over the medium-to-long term, the aerospace business, and more specifically the training products and services
segments, will continue to experience growth. Recognizing that this is a dynamic market, we continue to monitor key economic and
market factors that could impact our business and potentially change our outlook. Actual and potential changes in production rates and
aircraft order cancellations by the major OEMs are important determinants in the level of demand for some of our products and solutions.
The impact of the global economic recession is most acute in mature markets like the U.S. and Europe. Economic growth in emerging
markets has slowed somewhat from its previous robust pace. However, on a percentage basis, economic growth in these regions
continues to outpace the typical growth rate in mature markets. We anticipate positive world GDP growth in the current 2010 calendar
year.
36 | CAE Annual Report 2010
Management’s Discussion and Analysis
The following trends support our positive medium-to-long-term view for the civil market:
Aircraft backlogs;
New and more fuel-efficient aircraft platforms;
Demand in emerging markets arising from secular growth and a need for infrastructure to support air travel;
Expected long-term growth in air travel;
Long-term demand for trained crew members;
New international requirements for the qualification of flight simulation training devices (FSTDs).
Aircraft backlogs
In calendar 2009, Boeing received a total of 142 net orders (firm orders less cancellations) for new aircraft and Airbus received a total
of 271 net orders. For the three-month period ending March 31, 2010, net aircraft orders for Boeing and Airbus were 83 and 60,
respectively. While the pace of order activity has slowed dramatically in calendar 2009, Boeing and Airbus continue to work through
lower but still strong backlog levels and this should help generate opportunities for our full portfolio of training products and services.
In calendar 2009, Boeing reported a total of 481 commercial airplane deliveries, while Airbus reported 498 deliveries for the same
period. For the three-month period ending March 31, 2010, Boeing reported 108 deliveries, while Airbus reported 122 deliveries.
Recently Boeing and Airbus have announced production rate increases for both wide-body and narrow-body aircraft. The increases
will take some time to implement and should ultimately translate into higher demand for training products and services.
In the business jet segment, aircraft order deferrals and cancellations have led a number of business aircraft manufacturers to lower
their production rates.
New and more fuel-efficient aircraft platforms
OEMs have announced plans to introduce, or have already introduced, new platforms that will drive worldwide demand for simulators
and training services. The Boeing 747-8 and 787, Airbus A350XWB, Embraer 190, Dassault Falcon 7X, Embraer Phenom 100 VLJ
and 300 LJ aircraft, Mitsubishi Regional Jet, COMAC ARJ21 and the Bombardier CSeries are some recent examples.
New platforms will drive the demand for new kinds of simulators and training programs. One of our strategic priorities is to partner with
manufacturers to strengthen relationships and position ourselves for future opportunities. For example, during fiscal 2010, we signed
contracts with Bombardier to use our modelling and simulation expertise to support the design, development and validation of the new
CSeries aircraft, and we will also develop the prototype CSeries FFS. We also have a joint venture with Embraer that is providing
comprehensive training for the new Phenom 100 VLJ and will provide training for the Phenom 300 LJ aircraft. Deliveries of new model
aircraft are susceptible to program launch delays, which in turn will affect the timing of our orders and deliveries.
Demand in emerging markets arising from secular growth and a need for infrastructure to support air travel
Emerging markets such as Southeast Asia, the Indian sub-continent and the Middle East are expected to experience higher air traffic
and economic growth over the long term than mature markets, as well as an increasing liberalization of air policy and bilateral air
agreements. We expect these markets to drive the long-term demand for FFSs and training centres.
Expected long-term growth in air travel
Passenger traffic declined 3.5% in calendar 2009 compared to 2008. We anticipate that passenger traffic will resume its growth in the
long term. There have been signs in recent months that passenger traffic as well as cargo traffic are recovering. In the first quarter of
calendar 2010, passenger traffic increased 8.6% compared to the first quarter of calendar 2009. Over the past 20 years, air travel
grew at an average of 4.8% and we expect that over the next 20 years both passenger and cargo travel will meet or slightly exceed
this growth. Possible impediments to the steady growth progression in air travel include major disruptions like regional political
instability, acts of terrorism, pandemics, natural disasters, a sharp and sustained increase in fuel costs, major prolonged economic
recessions or other major world events.
Long-term demand for trained crew members
Worldwide demand is expected to increase over the long term
Growth in the civil aviation market has driven the demand for pilots, maintenance technicians and flight attendants worldwide, which
has created a shortage of qualified crew members in some markets. The shortage is impacted by aging demographics, fewer military
pilots transferring to civil airlines, and low enrolment in technical schools. In emerging markets like India and China,
long-term air traffic growth is expected to outpace the growth expected in developed countries, and the infrastructure available to meet
the projected demand for crew members is lacking.
This shortage creates opportunities for pilot provisioning, our turnkey service that includes recruiting, screening, selection and training.
It is also prompting us to seek out partners to develop a global pipeline for developing and supplying pilots to meet market demand.
A global shortage of maintenance technicians has created an opportunity for us to accelerate our technical training solutions. This
trend is, to a lesser degree, also affecting cabin crew, for whom we are also exploring new training solutions.
New pilot certification process requires simulation-based training
Simulation-based pilot certification training will begin taking on an even greater role with the Multi-crew Pilot License (MPL)
certification process developed by the International Civil Aviation Organization (ICAO) which may be adopted in the near future by
individual national regulatory bodies. The MPL process places more emphasis on simulation-based training to develop ab initio
students into first officers for modern aircraft. In the fourth quarter of fiscal 2010, we launched an MPL beta program with AirAsia using
new performance-based requirements developed by Transport Canada. If the MPL process is adopted in emerging markets like
China, India and Southeast Asia where there is the greatest need for a large supply of qualified pilots, trained in an efficient and
effective manner, it would result in increased use of simulation-based training.
CAE Annual Report 2010 | 37
Management’s Discussion and Analysis
New international requirements for the qualification of flight simulation training devices
During the summer of 2009, the International Civil Aviation Organization (ICAO) published a strategic analysis intended to define flight
simulation requirements for the qualification of the new seven ICAO standard FSTDs in the 190 ICAO member States. The ICAO
document was drafted by members of the international regulatory community, pilot representative bodies, airlines, and the training and
flight simulation industry. The ICAO group conducted a fundamental review to establish the simulation fidelity levels required to
support each of the required training tasks for each type of pilot license, qualification, rating or training type. The resulting conclusions
have already started to become the basis of reference for all national and international standards for a complete range of seven
FSTDs.
The ICAO document states that the top-fidelity ICAO Standard FSTD (Type VII) is required to support each of the required training
tasks contained in a number of crucial training to proficiency contexts including recurrent and initial training, MPL and the Airline
Transport Pilot License. It also confirms and recognizes the long-term necessity of high-fidelity FSTDs for such highly critical training
contexts. The qualification requirements of the ICAO Type VII simulator require a higher fidelity of simulation (including visuals,
motion, sound and air traffic control simulation) than today’s level D simulator requirements and we believe the increased demands for
more realistic and more immersive training aligns well with our strengths in aviation training as a global modelling and simulation
technology leader.
MILITARY MARKET
We generate revenue in six interrelated areas of the defence market value chain. We provide simulation products such as full-mission
simulators (FMS); we perform updates and upgrades to simulators; we provide maintenance and support services; we offer turnkey
training services; we have a range of capabilities to provide simulation-based professional services for analysis, training and
operational decision-making; and we have a software business called Presagis, which develops and sells commercial-off-the-shelf
modelling and simulation software solutions to mid-tier markets.
Our strategy in the defence market has been to globalize and diversify our military business. We have diversified our interes ts across
a broad range of national markets and related defence budgets to have a more resilient and predictable stream of military business.
We are a leading supplier of simulation and training solutions and have a significant local presence in seven countries. Through the
successful execution of our strategy, we see tangible positive results from our efforts. Over the past two fiscal years (2009 and 2010),
we have achieved record military order intake totalling over $2 billion. The strong and diverse base of business that we have
developed, combined with the encouraging trends that we see in the global defence market, specifically related to our modelling and
simulation niche, give us confidence that we can continue to grow for the foreseeable future.
We approach the world’s defence markets by leveraging our global footprint and our in-country expertise. We have a local presence
and centres of excellence in key markets including the U.S., U.K., Canada, Germany, Australia, India and Singapore. We have
developed global operating processes which allow us to place a high level of decision-making autonomy within the regions while
leveraging the full breadth of our products, services and capabilities. This results in greater efficiency and stronger customer
relationships.
Simulation Products/Military (SP/M)
Designs, manufactures and supplies advanced military training equipment and software tools for air forces, armies and navies
Our SP/M segment is a world leader in the design and production of military flight simulation equipment. We develop simulation
equipment, training systems and software tools for a variety of military aircraft, including fast jets, helicopters, maritime patrol and
tanker/transport aircraft. We also offer simulation-based solutions for land and naval forces. We have designed the broadest range of
military helicopter simulators in the world, and we have also developed more training systems for the C-130 Hercules aircraft than any
other company. Our military simulators provide high-fidelity combat environments that include interactive enemy and friendly forces,
as well as simulated weapon and sensor systems. We have delivered simulation products and training systems to more than
50 military operators in approximately 35 countries, including all of the U.S. services.
Training & Services/Military (TS/M)
Supplies turnkey training services, support services, systems maintenance and modelling and simulation solutions
Our TS/M segment provides turnkey training services and training systems integration expertise to global military forces. We also
provide a range of training support services such as contractor logistics support, maintenance services and simulator training at over
60 sites around the world. TS/M additionally provides a variety of modelling and simulation-based professional and defence services.
Market trends and outlook
As a result of successful deliveries on prior programs, we are well positioned on a range of military platforms involving transport
aircraft, aerial refuelling tankers, helicopters, lead-in fighter trainers, and maritime patrol aircraft. These aircraft segments specifically
include the C-130J Hercules transport aircraft, P-8A Poseidon and P-3C Orion maritime patrol aircraft, A330 Multi-Role Tanker
Transport, NH90 helicopter, M-346 and Hawk lead-in fighter trainers, S-70 and H-60 helicopter variants, CH-47 Chinook heavy-lift
helicopter, Unmanned Aerial Vehicles (UAVs) and other aircraft that form part of the backbone of defence forces globally. Our positive
outlook is supported by the expectation that these aircraft types will continue to be in demand globally. These platforms involve newer
aircraft types with long program lives ahead of them and we believe this will drive opportunities for us over the next decade. Our focus
in these specific market segments is an important distinction for us as a defence contractor as we believe they are vital to the
maintenance of a defence force’s operational capability and readiness. We believe that we have minimal exposure to platform t ypes
that may be viewed as more discretionary by the defence establishment and therefore more susceptible to defence spending
constraints.
38 | CAE Annual Report 2010
Management’s Discussion and Analysis
We anticipate ongoing rationalization of defence budgets globally and for overall spending to remain stable in some markets or
modestly decrease in others such as the U.S., which is the world’s largest defence market. We believe, however, that defence
spending in the areas involving our products and services will be stable or increase modestly as a result of:
spending in the areas involving our products and services will be stable or increase modestly as a result of:
Explicit desire of governments and defence forces to increase the use of modelling and simulation;
Growing demand for our specialized modelling and simulation-based products and services;
High cost of operating live assets for training which leads to more use of simulation;
Current nature of warfare which requires joint forces training and mission rehearsal.
We expect that approximately 10,000 new military manned aircraft will be deployed into global military fleets over the next five years
and this will generate demand for approximately 300 FMSs. While we do not today address all platforms and all markets, we are able
to serve a good portion of this expected demand.
Explicit desire of governments and defence forces to increase the use of modelling and simulation
Also helping to drive our military business is the explicit desire of governments and defence forces to increase the use of modelling
and simulation for analysis, training, and operational decision-making. Unlike commercial aerospace where the use of simulation is
widely proliferated, the use of simulation in defence has to date been more limited. For example, the Australian government issued a
Defence White Paper in 2009 specifically calling for increased use of modelling and simulation to relieve bottlenecks in training. This
echoes the sentiments expressed by other militaries globally, especially those expressed by the U.S. defence community. Simulation
offers a number of advantages that address an ever-increasing global threat level and new economic constraints that are pressuring
top-line defence spending. The cost savings from the use of modelling and simulation are considerable. The U.S. Air Force estimates
that live training is approximately 10 times more costly than simulation-based training. The cost of fuel, detrimental environmental
impacts, and significant wear and tear on weapon systems all point to the greater use of simulation and synthetic training. This type of
training is critical for ensuring the readiness of global defence forces as they face new and challenging threats.
Growing demand for our specialized modelling and simulation-based products and services
New aircraft platforms
One of our strategic priorities is to partner with manufacturers in the military market to strengthen relationships and position ourselves
for future opportunities. Original equipment manufacturers are introducing new platforms that will drive worldwide demand for
simulators and training. For example, Boeing is developing a new maritime patrol aircraft called the P-8A Poseidon, NH Industries is
delivering the NH90 helicopter, EADS is aggressively marketing the A330 MRTT and C-295 transport aircraft worldwide,
Lockheed Martin is doubling production of the C-130 aircraft, Alenia Aermacchi is successfully marketing the M-346 advanced lead-in
fighter trainer and Sikorsky is offering new models of its H-60 helicopter to armies and navies worldwide, all of which fuel the demand
for new simulators and training, and for all of which we have products at different development and production stages.
Trend towards outsourcing of training and maintenance services
With finite defence budgets and resources, defence forces and governments continue to scrutinize expenditures to find ways to save
money and allow active-duty personnel to focus on operational requirements. There has been a growing trend among defence forces
to outsource a variety of training services and we expect this trend to continue. Governments are outsourcing training servic es
because they can be delivered more quickly and more cost effectively. For example, we have won or participated in contracts of this
nature in Canada, Germany, Australia, the U.K. and the U.S.
Extension and upgrade of existing weapon system platforms
Original equipment manufacturers are extending the life of existing weapon system platforms by introducing upgrades or adding new
features, which increases the demand for upgrading simulators to meet the new standards. For example, several OEMs are offering
global militaries operating C-130 aircraft a suite of avionics upgrades, which in turn leads to a requirement for major upgrades to
existing C-130 training systems or potential new C-130 training systems. We have recently expanded our C-130 Tampa Training
Center with a new C-130H FMS featuring an upgraded glass cockpit avionics suite.
High cost of operating live assets for training which leads to more use of simulation
More defence forces and governments are adopting simulation in training programs because it improves realism, significantly lowers
costs, reduces operational demands on aircraft that are being depreciated faster than originally planned, and lowers risk compared to
operating actual weapon system platforms. Using a simulator for training also reduces actual aircraft flying hours and allows training
for situations where an actual aircraft and/or its crew and passengers would be at risk.
CAE Annual Report 2010 | 39
Management’s Discussion and Analysis
Current nature of warfare which requires joint forces training and mission rehearsal
Demand for networking
Allies are cooperating and creating joint and coalition forces, which is driving the demand for joint and networked training and
operations. Training devices can be networked to train different crews and allow for networked training across a range of platforms.
Growing acceptance of synthetic training for mission rehearsal
There is a growing trend among defence forces to use synthetic training to meet more of their training requirements. Synthetic
environment software allows defence clients to plan sophisticated missions and carry out full-mission rehearsals as a complement to
traditional live training or mission preparation. Synthetic training offers militaries a cost-effective way to provide realistic training for a wide
variety of scenarios while ensuring they maintain a high state of readiness. For example, over the past years we have delivered
MH-47G and MH-60L combat mission simulators to the U.S. Army’s 160th Special Operations Aviation Regiment that feature the
CAE-developed Common Environment/Common Database (CE/CDB). The CE/CDB promises to significantly enhance rapid
simulation-based mission rehearsal capabilities.
HEALTHCARE MARKET
The simulation-based aviation training model is becoming universally recognized as one of the effective ways to prepare healthcare
professionals to care for patients and respond to critical situations while reducing the overall risk to patients. Through partnerships
with experts in the healthcare field, we are leveraging our knowledge, experience and best practices in simulation-based aviation
training to work with healthcare experts to deliver innovative education, technologies and service solutions to improve the safety and
efficiency of the healthcare industry. Currently, our healthcare services range from providing simulation-based training solutions to
managing simulation-based training centres.
During the year, CAE Healthcare further developed its capabilities in two areas: training centre solutions and medical solutions. We
leveraged our broad expertise in managing aviation simulation centres to expand our offering for healthcare simulation centres,
including training centre management services and training solutions, as well as the launch of the CAE OWLTM system. The
CAE OWLTM system is used for optimizing the way training is conducted. In the area of medical solutions, we entered the imaging and
surgical training fields; both of which are important focus areas for us and where CAE Healthcare can leverage CAE’s core simulation
and modeling capabilities. The acquisitions of ICCU and VIMEDIX give us the ability to offer a complete solution for bedside
ultrasound training by combining simulators with a comprehensive curriculum. The acquisition of three medical product lines from
Immersion enables our entry into the training field for minimally invasive surgical procedures.
We estimate that the total global market for simulation-based healthcare training will be in excess of $1.5 billion by 2012. Although the
market potential in this area is large, as our initiative is still in its infancy stage, the results are not yet material for CAE.
3.6 Foreign exchange
We report all dollar amounts in Canadian dollars. We value assets, liabilities and transactions that are measured in foreign currencies
using various exchange rates as required by GAAP.
The tables below show the variations of the closing and average exchange rates for our three main operating currencies. We used the
foreign exchange rates below to value our assets, liabilities and backlog in Canadian dollars at the end of each of the following
periods:
U.S. dollar (US$ or USD)
Euro (€)
British pound (£ or GBP)
We used the average foreign exchange rates below to value our revenues and expenses:
U.S. dollar (US$ or USD)
Euro (€)
British pound (£ or GBP)
2010
1.02
1.37
1.54
2010
1.09
1.54
1.74
2009
1.26
1.67
1.80
2009
1.13
1.59
1.91
Decrease
(19%)
(18%)
(14%)
Decrease
(4%)
(3%)
(9%)
The effect of translating the results of our self-sustaining subsidiaries into Canadian dollars resulted in a decrease in this year’s
earnings from continuing operations (after tax) by approximately $4.0 million compared to fiscal 2009.
Three areas of our business are affected by changes in foreign exchange rates:
Our network of civil and military training centres
Most of our training network revenue and costs are in local currencies. Changes in the value of local currencies relative to the
Canadian dollar therefore have an impact on the network’s net profitability and net investment. Under GAAP, gains or losses in the
net investment in a self-sustaining subsidiary that result from changes in foreign exchange rates are deferred in the foreign
currency translation adjustment (accumulated other comprehensive loss), which is part of the shareholders’ equity section of the
balance sheet. Any effect of the fluctuation between currencies on the net profitability has an immediate translation impact on the
statement of earnings and an impact on year-to-year and quarter-to-quarter comparisons.
40 | CAE Annual Report 2010
Management’s Discussion and Analysis
Our simulation products operations outside of Canada (Germany, U.S., U.K., Australia and India)
Most of the revenue and costs in these operations from self-sustaining subsidiaries are generated in their local currency except for
some data and equipment bought in different currencies from time to time as well as any work performed by our Canadian
manufacturing operations. Changes in the value of the local currency relative to the Canadian dollar therefore have a translation
impact on the operation’s net profitability and net investment when expressed in Canadian dollars.
Our simulation products operations in Canada
Although the net assets of our Canadian operations are not exposed to changes in the value of foreign currencies (except for
receivables and payables in foreign currencies), a significant portion of our annual revenue generated from Canada is in foreign
currencies, while a significant portion of our expenses are in Canadian dollars.
We generally hedge the milestone payments in sales contracts denominated in foreign currencies to protect ourselves from some
of the foreign exchange exposure. Since less than 100% of our revenue is hedged, it is not possible to completely offset the effects
of changing foreign currency values, which leaves some residual exposure that can affect the statement of earnings.
We continue to hold a portfolio of currency hedging positions intended to mitigate the risk to a portion of future revenues presented
by the current high-level volatility of the Canadian dollar versus the U.S. currency. The hedges are intended to cover a portion of
the revenue in order to allow the unhedged portion to match the foreign cost component of the contract. With respect to the
remaining expected future revenues, our manufacturing operations in Canada remain exposed to changes in the value of the
Canadian dollar.
To reduce the variability of specific U.S. and euro-denominated manufacturing costs, we hedged the foreign currency costs
incurred in our manufacturing process.
Sensitivity analysis
We conducted a sensitivity analysis to determine the current impact of variations in the value of foreign currencies. We evaluated the
sources of foreign currency revenues and expenses and determined that our consolidated exposure to foreign currency mainly occurs
in two areas:
Foreign currency revenues and expenses in Canada for the manufacturing business – we hedge a portion of these exposures;
Translation of foreign currency operations of self-sustaining subsidiaries in foreign countries. Our exposure is mainly in our
operating profits.
First we calculated the revenue and expenses per currency to determine the operating income in each currency. Then we deducted
the amount of hedged revenues to determine a net exposure by currency. Next we added the net exposure from the self-sustaining
subsidiaries to determine the consolidated foreign exchange exposure in different currencies.
Finally, we conducted a sensitivity analysis to determine the impact of a change of one cent in the Canadian dollar against each of the
other four currencies. The table below shows the typical impact of this change, after taxes, on our yearly revenue and operating
income, as well as our net exposure:
Exposure (amounts in millions)
U.S. dollar (US$ or USD)
Euro (€)
British pound (£ or GBP)
Australian dollar (AUD$ or AUD)
Revenue
6.4
2.7
0.7
0.8
Operating
Income
1.8
0.8
0.3
–
Hedging
(1.4)
(0.2)
(0.2)
–
Net Exposure
0.4
0.6
0.1
–
3.7 Non-GAAP and other financial measures
This MD&A includes non-GAAP and other financial measures. Non-GAAP measures are useful supplemental information but may not have
a standardized meaning according to GAAP. You should not confuse this information with, or use it as an alternative for, performance
measures calculated according to GAAP. You should also not use them to compare with similar measures from other companies.
Backlog
Backlog is a non-GAAP measure that represents the expected value of orders we have received but have not yet executed.
Backlog is a non-GAAP measure that represents the expected value of orders we have received but have not yet executed.
For the SP/C, SP/M and TS/M segments, we consider an item part of our backlog when we have a legally binding commercial
agreement with a client that includes enough detail about each party’s obligations to form the basis for a contract or an order;
Military contracts are usually executed over a long-term period and some of them must be renewed each year. For the SP/M and
TS/M segments, we only include a contract item in backlog when the customer has authorized the contract item and has received
funding for it;
For the TS/C segment, we include revenues from customers with both long-term and short-term contracts when these customers
commit to paying us training fees, or when we reasonably expect them from current customers.
The book-to-sales ratio is the total orders divided by total revenue in the period.
CAE Annual Report 2010 | 41
Management’s Discussion and Analysis
Capital employed
Capital employed is a non-GAAP measure we use to evaluate and monitor how much we are investing in our business. We measure it
from two perspectives:
Capital used:
Capital used:
For the company as a whole, we take total assets (not including cash and cash equivalents), and subtract total liabilities
(not including long-term debt and its current portion);
For each segment, we take the total assets (not including cash and cash equivalents, tax accounts and other non-operating
assets), and subtract total liabilities (not including tax accounts, long-term debt and its current portion and other non-operating
liabilities).
Source of capital:
Source of capital:
We add net debt to total shareholders’ equity to understand where our capital is coming from.
Maintenance and growth capital expenditure
Maintenance capital expenditure is a non-GAAP measure we use to calculate the investment needed to sustain the current level of
economic activity.
Growth capital expenditure is a non-GAAP measure we use to calculate the investment needed to increase the current level of
economic activity.
EBIT
Earnings before interest and taxes (EBIT) is a non-GAAP measure that shows us how we have performed before the effects of certain
financing decisions and tax structures. We track EBIT because we believe it makes it easier to compare our performance with
previous periods, and with companies and industries that do not have the same capital structure or tax laws.
Free cash flow
Free cash flow is a non-GAAP measure that shows us how much cash we have available to build the business, repay debt and meet
ongoing financial obligations. We use it as an indicator of our financial strength and liquidity. We calculate it by taking t he net cash
generated by our continuing operating activities, subtracting maintenance capital expenditures, other assets and dividends paid and
adding proceeds from the sale of property, plant and equipment. Dividends are deducted in the calculation of free cash flow.
Gross margin
Gross margin is a non-GAAP measure equivalent to the segment operating income excluding selling, general and administrative
expenses.
Net debt
Net debt is a non-GAAP measure we use to monitor how much debt we have after taking into account liquid assets such as cash and
cash equivalents. We use it as an indicator of our overall financial position, and calculate it by taking our total long-term debt, including
the current portion, and subtracting cash and cash equivalents.
Non-cash working capital
Non-cash working capital is a non-GAAP measure we use to monitor how much money we have committed in the day-to-day
operation of our business. We calculate it by taking current assets (not including cash and cash equivalents or the current portion of
assets held-for-sale) and subtracting current liabilities (not including the current portion of long-term debt or the current portion of
liabilities related to assets held-for-sale).
Non-recourse financing
Non-recourse financing to CAE is a non-GAAP measure we use to classify debt, when recourse against the debt is limited to the
assets, equity interest and undertaking of a subsidiary, and not CAE Inc.
Return on capital employed
Return on capital employed (ROCE) is a non-GAAP measure that we use to evaluate the profitability of our invested capital. We
calculate this ratio over a rolling four-quarter period by taking earnings from continuing operations excluding interest expense, after
tax, divided by the average capital employed. In addition, we also calculate this ratio adjusting earnings and capital employed to reflect
the ordinary off-balance sheet operating leases.
Revenue simulator equivalent unit
Revenue simulator equivalent unit (RSEU) is a financial measure we use to show the total average number of FFSs available to
generate revenue during the period. For example, in the case of a 50/50 flight training joint venture, we will report only 50% of the
FFSs deployed under this joint venture as an RSEU. If a FFS is being powered down and relocated, it will not be included as an
RSEU until the FFS is re-installed and available to generate revenue.
Segment operating income
Segment operating income (SOI) is a non-GAAP measure and our key indicator of each segment’s financial performance. This
measure gives us a good indication of the profitability of each segment because it does not include the impact of any items not
specifically related to the segment’s performance. We calculate it by using earnings before other income (expense), interest, income
taxes and discontinued operations. These items are presented in the reconciliation between total segment operating income and EBIT
(See Note 27 of the consolidated financial statements).
42 | CAE Annual Report 2010
4. CONSOLIDATED RESULTS
All comparative prior period information of fiscal 2009 has been retroactively restated for a change in accounting standards, which
affected our accounting treatment for pre-operating costs. You will find more details in change in accounting standards.
4.1 Results of our operations – fourth quarter of fiscal 2010
Management’s Discussion and Analysis
Summary of consolidated results
(amounts in millions, except per share amounts)
Revenue
Total segment operating income1
Restructuring charge
Earnings before interest and income taxes (EBIT)
As a % of revenue
Interest expense, net
Earnings from continuing operations (before taxes)
Income tax expense
Net earnings
Basic and diluted EPS
Q4-2010
395.9
64.9
(1.9)
63.0
15.9
5.5
57.5
17.0
40.5
0.16
$
$
$
$
%
$
$
$
$
$
Q3-2010 Q2-2010
364.5
62.3
(1.1)
61.2
16.8
7.4
53.8
14.7
39.1
0.15
382.9
64.6
(3.9)
60.7
15.9
6.5
54.2
16.5
37.7
0.15
Q1-2010
383.0
72.3
(27.2)
45.1
11.8
6.6
38.5
11.3
27.2
0.11
Q4-2009
438.8
79.6
–
79.6
18.1
5.1
74.5
21.8
52.7
0.21
The fourth quarter of fiscal 2009 has been restated to reflect a change in the accounting treatment for pre-operating costs.
Revenue was 3% higher than last quarter and 10% lower year over year
Revenue was $13.0 million higher than last quarter mainly because:
Revenue was $13.0 million higher than last quarter mainly because:
TS/C’s revenue increased by $11.2 million, or 11%, mainly due to a change in our training revenue mix combined with an increase
of flight training organizations’ (FTOs) activities. The increase was partially offset by the negative effect from the stronger Canadian
dollar;
SP/M’s revenue increased by $8.9 million, or 6%, mainly due to an increase in volume this quarter, particularly from our Canadian
programs. The increase was partially offset by a negative foreign exchange impact;
TS/M’s revenue increased by $1.0 million, or 1%, mainly as a result of a higher level of activity in our Professional Services
business, partially offset by a negative foreign exchange impact;
SP/C’s revenue decreased by $8.1 million, or 11%, mainly due to lower production levels resulting from a decline in order intake.
Revenue was $42.9 million lower than the same period last year largely because:
SP/C’s revenue decreased by $42.8 million, or 40%, mainly due to lower production levels resulting from a decline in order intake;
TS/C’s revenue decreased by $7.8 million, or 6%, mainly due to the negative effect from the stronger Canadian dollar and to the
market softness in Europe. The decrease was partially offset by the contribution of additional RSEUs to our network, by the
increase of FTOs’ activities and by higher revenue generated in the emerging markets;
SP/M’s revenue increased by $5.7 million, or 4%, primarily due to the integration into our results of Bell Aliant’s former
Defence, Security and Aerospace (DSA) business unit, acquired in May 2009, in addition to an increase in volume, particularly from
our Canadian programs. The increase was partially offset by a negative foreign exchange impact;
TS/M’s revenue increased by $2.0 million, or 3%, mainly due to a strong level of activity in our Professional Services business,
combined with an increase in training services in Europe. The increase was partially offset by a negative foreign exchange impact.
You will find more details in Results by segment.
EBIT1 was $2.3 million higher than last quarter and $16.6 million lower year over year
EBIT for this quarter was $63.0 million, or 15.9% of revenue. EBIT was up $2.3 million, or 4%, compared to last quarter, and down
$16.6 million, or 21%, year over year. A restructuring charge of $1.9 million was booked this quarter, compared to $3.9 million last
quarter and nil in the fourth quarter of last year.
Compared to last quarter, segment operating income was up by $0.3 million. Increases of $3.6 million from TS/C and $2.4 million from
SP/M were partially offset by decreases of $3.2 million and $2.5 million from TS/M and SP/C, respectively.
Year over year, segment operating income was down by 18%, or $14.7 million. SP/C, TS/C and SP/M experienced decreases in
segment operating income of $9.6 million, $4.1 million and $1.0 million, respectively, while TS/M’s segment operating income
remained stable.
You will find more details in Results by segment.
1 Non-GAAP measure (see Section 3.7).
CAE Annual Report 2010 | 43
Management’s Discussion and Analysis
Net interest expense was $1.0 million lower than last quarter and $0.4 million higher year over year
Net interest expense was lower than last quarter mainly because of lower average foreign exchange rates and higher capitalized
interest for assets under construction. The year-over-year increase on net interest expense was mainly because of an increase on
long-term debt and other interests, partially offset by an increase in capitalized interests for assets under construction and lower
average foreign exchange rates.
Effective income tax rate is 30% this quarter
Income taxes this quarter were $17.0 million, representing an effective tax rate of 30%, compared to 30% for the last quarter and 29%
in the fourth quarter of fiscal 2009.
4.2 Results of our operations – fiscal 2010
Summary of consolidated results
(amounts in millions, except per share amounts)
Revenue
Gross margin1
As a % of revenue
Total segment operating income
Restructuring charge
Earnings before interest and income taxes (EBIT)
As a % of revenue
Interest expense, net
Earnings from continuing operations (before taxes)
Income tax expense
Earnings from continuing operations
Results from discontinued operations
Net earnings
Basic and diluted EPS from continuing operations
Basic EPS
Diluted EPS
FY2010
1,526.3
452.2
29.6
264.1
(34.1)
230.0
15.1
26.0
204.0
59.5
144.5
–
144.5
0.56
0.56
0.56
FY2009
1,662.2
499.9
30.1
305.8
–
305.8
18.4
20.2
285.6
83.4
202.2
(1.1)
201.1
0.79
0.79
0.79
FY2008
1,423.6
437.1
30.7
250.6
–
250.6
17.6
17.5
233.1
69.7
163.4
(12.1)
151.3
0.64
0.60
0.59
$
$
%
$
$
$
%
$
$
$
$
$
$
$
$
$
Fiscal 2009 and fiscal 2008 have been restated to reflect a change in the accounting treatment for pre-operating costs.
Revenue was 8% or $135.9 million lower than last year
Revenue was lower than last year mainly because:
SP/C’s revenue decreased by $193.4 million, or 41%, mainly due to lower production levels resulting from a decline in order intake.
The decrease was partially offset by more favourable rates on revenue hedging contracts this year;
TS/C’s revenue decreased by $27.0 million, or 6%, mainly due to market softness in North America and Europe and to the negative
effect from the stronger Canadian dollar. The decrease was partially offset by the contribution of additional RSEUs to our network,
by the increase of FTOs’ activities and by higher revenue generated in the emerging markets;
SP/M’s revenue increased by $62.1 million, or 13%, mainly due to an increase in volume and the integration into our results of
DSA, acquired in May 2009. The increase was partially offset by a negative foreign exchange impact;
TS/M’s revenue increased by $22.4 million, or 9%, mainly as a result of a higher level of activity in our Professional Services
business and increased training services in Europe. The increase was partially offset by a negative foreign exchange impact.
You will find more details in Results by segment.
Gross margin was $47.7 million lower than last year
The gross margin was $452.2 million this year, or 29.6% of revenue compared to $499.9 million or 30.1% of revenue last year. As a
percentage of revenue, gross margin was stable when compared to last year.
EBIT was $75.8 million lower than last year
EBIT this year was $230.0 million, or 15.1% of revenue. EBIT was down $75.8 million, or 25%, compared to last year. A restructuring
charge of $34.1 million was booked this year, compared to nil last year.
Segment operating income was down by 14%, or $41.7 million. Decreases in segment operating income for the civil segments of
$42.7 million for SP/C and $11.9 million for TS/C were partially offset by increases for the military segments of $8.0 million and
$4.9 million for SP/M and TS/M respectively.
You will find more details in Results by segment.
1 Non-GAAP measure (see Section 3.7).
44 | CAE Annual Report 2010
Net interest expense was $5.8 million higher than last year
(amounts in millions)
Net interest, prior period
Increase in interest on long-term debt
Decrease in interest income
Decrease (increase) in capitalized interest
(Decrease) increase in amortization of deferred financing charges
Other
Increase in net interest expense from the prior period
Net interest, current period
Management’s Discussion and Analysis
FY2009 to
FY2008 to
FY2010
20.2
1.5
–
1.9
(0.3)
2.7
5.8
26.0
FY2009
17.5
3.0
0.4
(1.2)
0.5
–
2.7
20.2
$
$
$
$
$
$
Net interest expense was $26.0 million this year, which is $5.8 million or 29% higher than last year. This is mainly attributed
Net interest expense was $26.0 million this year, which is $5.8 million or 29% higher than last year. This is mainly attributed to:
Higher interest expense on overall long-term debt, mainly resulting from the net increase of senior notes for $15.0 million and
US$45.0 million by way of a private placement in the first quarter of fiscal 2010, the net increase in capital leases, and issuance of
new debts;
Decrease in capitalized interests for assets under construction;
Increase in other interest expense.
Effective income tax rate is 29%
This fiscal year, income taxes were $59.5 million, representing an effective tax rate of 29%, compared to 29% for the same period last
year.
4.3 Restructuring
On May 14, 2009, we introduced actions required to size our company to current and expected market conditions. Approximately
700 employees were affected. A restructuring charge of $34.1 million, consisting mainly of severance and other related costs,
including the associated pension expense, was included in net earnings in fiscal 2010. The plan has been completed.
The following summarizes the restructuring costs and remaining provision for fiscal 2010:
(amounts in millions)
Provision as at March 31, 2009
Expenses recorded
Payments made
Foreign exchange
Provision as at March 31, 2010
Employee
Termination
Costs
–
23.5
(19.0)
(0.4)
4.1
$
$
$
$
Other
Costs
–
10.6
(8.2)
(0.1)
2.3
$
$
Total
–
34.1
(27.2)
(0.5)
6.4
4.4 Results of our operations – fiscal 2009 versus fiscal 2008
Revenue
Revenue grew to $1,662.2 million in fiscal 2009, $238.6 million or 17% higher than fiscal 2008. Growth in each of the four segments was mainly
due to:
A higher level of activity on various simulator contracts awarded in fiscal 2009, for both helicopters (NH90, Super Puma) and
transport aircraft (C-130, KDC-10) for the SP/M segment;
The integration into our results of the fiscal 2009 acquisitions of Sabena Flight Academy and Academia Aeronautica de Evora S.A.
and the August 2007 acquisition of Flightscape Inc., as well as the contribution of additional RSEUs into our network for the TS/C
segment. The increase was partially offset by market softness in North America and preliminary indications of softness in Europe;
A higher level of activity in fiscal 2009 in addition to more revenue recorded for simulators that were already manufactured prior to
2009 for which we signed sales contracts during that year for the SP/C segment;
A strong level of activity in our Professional Services business, revenue generated from the recently began maintenance phase of
the Synthetic Environment Core (SE Core) program in the U.S. and an increased level of effort on some of our maintenance
service contracts in Germany for the TS/M segment.
Revenue was also positively impacted by the depreciation of the Canadian dollar against the U.S. dollar and the euro.
EBIT
EBIT was $305.8 million, or 18.4% of revenue, in fiscal 2009, representing an increase of $55.2 million or 22% over the fiscal 2008
EBIT of $250.6 million. The increase was due to higher segment operating income from the SP/M, TS/C and TS/M segments, which
increased their segment operating income by $36.0 million, $15.4 million and $7.0 million respectively. The increase was partially
offset by a decrease in SP/C’s segment operating income of $3.2 million.
CAE Annual Report 2010 | 45
Management’s Discussion and Analysis
Net interest
Net interest was $20.2 million in fiscal 2009, a $2.7 million or 15% increase over fiscal 2008. This was mainly due to:
Net interest was $20.2 million in fiscal 2009, a $2.7 million or 15% increase over fiscal 2008. This was mainly due to:
Higher interest expense on overall long-term debt and increased amortization of deferred financing costs, mainly related to the
non-recourse financing secured at the end of the first quarter of fiscal 2008;
Lower interest income resulting from lower cash on hand in fiscal 2009 compared to fiscal 2008, in addition to lower interest rates.
The increase in net interest expense was partially offset by an increase in capitalized interest. In fiscal 2009, compared to fiscal 2008,
we had a higher level of assets under construction to support our growth initiatives.
Income taxes
We recorded an income tax expense of $83.4 million in fiscal 2009, representing an effective tax rate of 29%, compared to 30% in
fiscal 2008. The lower tax rate in fiscal 2009 was mainly due to a change in the mix of income from various jurisdictions.
Discontinued operations
Net loss from discontinued operations was $1.1 million in fiscal 2009, mainly attributed to fees incurred in the litigation initiated by us
for further payment following the disposal, in fiscal 2003, of the assets of the sawmill division of our Forestry Systems.
4.5 Consolidated orders and backlog
Our consolidated backlog was $3,042.8 million at the end of fiscal 2010, which is 4% lower than last year. New orders of
$1,574.9 million increased the backlog this year, while $1,526.3 million in revenue was generated from the backlog.
Backlog down by 4% over last year
(amounts in millions)
Backlog, beginning of period
+ orders
- revenues
+/- adjustments
Backlog, end of period
FY2010
3,181.8
1,574.9
(1,526.3)
(187.6)
3,042.8
$
$
FY2009
2,899.9
1,940.2
(1,662.2)
3.9
3,181.8
$
$
FY2008
2,774.6
1,665.5
(1,423.6)
(116.6)
2,899.9
$
$
In addition to the negative foreign exchange impact resulting from the stronger Canadian dollar, the fiscal 2010 adjustments include
the following:
the following:
A downward revision of $44.5 million made in TS/C to incorporate the impact of revised revenue expectations for contracts signed
with customers, reflecting current market conditions;
Contracts acquired in the DSA acquisition have been included in the backlog of SP/M and TS/M for a total of $177.8 million.
The book-to-sales ratio for the quarter was 1.59x. The ratio for the last 12 months was 1.03x.
You will find more details in Results by segment, below.
5. RESULTS BY SEGMENT
We manage our business and report our results in four segments:
Civil segments:
Civil segments:
Training & Services/Civil (TS/C);
Simulation Products/Civil (SP/C).
Military segments:
Military segments:
Simulation Products/Military (SP/M);
Training & Services/Military (TS/M).
Transactions between segments are mainly transfers of simulators from SP/C to TS/C and are recorded at cost at the consolidated level.
If we can measure a segment’s use of jointly used assets, costs and liabilities (mostly corporate costs), we allocate them to the
segment in that proportion. If we cannot measure a segment’s use, we allocate in proportion to the segment’s cost of sales.
46 | CAE Annual Report 2010
KEY PERFORMANCE INDICATORS
Segment operating income
(amounts in millions,
except operating margins)
Civil segments
Training & Services/Civil
Simulation Products/Civil
Military segments
Simulation Products/Military
Training & Services/Military
Total segment operating income (SOI)
Restructuring charge
EBIT
Management’s Discussion and Analysis
FY2010
FY2009 Q4-2010 Q3-2010 Q2-2010 Q1-2010 Q4-2009
$
%
$
%
$
%
$
%
$
$
$
75.1
17.3
49.4
17.4
95.7
17.5
43.9
16.7
264.1
(34.1)
230.0
87.0
18.9
92.1
19.3
87.7
18.1
39.0
16.2
305.8
–
305.8
21.0
18.5
8.9
13.8
25.8
17.3
9.2
13.4
64.9
(1.9)
63.0
17.4
17.0
11.4
15.7
23.4
16.7
12.4
18.4
64.6
(3.9)
60.7
15.9
15.5
12.4
19.4
24.3
17.7
9.7
16.1
62.3
(1.1)
61.2
20.8
18.1
16.7
20.1
22.2
18.7
12.6
18.9
72.3
(27.2)
45.1
25.1
20.7
18.5
17.2
26.8
18.7
9.2
13.8
79.6
–
79.6
Comparative periods of fiscal 2009 have been restated to reflect a change in the accounting treatment for pre-operating costs.
Capital employed
(amounts in millions)
Civil segments
Training & Services/Civil
Simulation Products/Civil
Military segments
Simulation Products/Military
Training & Services/Military
March 31
2010
December 31
2009
September 30
2009
$
$
$
$
$
969.8
29.6
147.0
174.2
1,320.6
995.0
39.9
181.9
196.4
1,413.2
1,018.9
28.5
167.6
173.9
1,388.9
June 30
2009
1,093.2
25.6
174.6
172.5
1,465.9
March 31
2009
1,151.4
(53.9)
148.8
162.2
1,408.5
The comparative period of fiscal 2009 has been restated to reflect a change in the accounting treatment for pre-operating costs.
5.1 Civil segments
FISCAL 2010 EXPANSIONS AND NEW INITIATIVES
We launched a new suite of products and services as part of Bombardier’s CSeries aircraft program called the CAE Augmented
Engineering EnvironmentTM. The CAE Augmented Engineering EnvironmentTM includes a modelling and simulation environment
that allows OEMs to evaluate, test, and validate a range of aircraft models and systems during the development phase. We
complement the delivery of the CAE Augmented Engineering EnvironmentTM with engineering design and support services
throughout the development phase of the aircraft program;
We launched the CAE 3000 Series helicopter mission simulator product family for the previously underserved civil helicopter
market. Our new simulation capability offers unprecedented realism for helicopter-specific mission training, including offshore,
emergency medical services, law enforcement, long line, high-altitude, corporate, and other operations. We are the first to
incorporate artificially intelligent human form and moving vehicle dynamic simulation for civil helicopter training tasks and mission
scenarios. The first CAE 3000 Series will be available for training by the summer of 2010;
We will begin offering Bell 412 training programs later in the year in Mexico, for which Bell Helicopter is providing aircraft systems
and performance data and technical support;
We added a Bombardier Global Express FFS and training program at the Emirates-CAE Flight Training (ECFT) joint venture in
Dubai, bringing the total number of simulators at the facility to 12;
We, together with the Solidarity Fund QFL and SGF, announced the creation of a limited partnership to provide qualifying
customers competitive lease financing for our civil flight simulation equipment manufactured in Québec and exported around the
world.
TRAINING & SERVICES/CIVIL
TS/C obtained contracts this quarter expected to generate future revenues of $123.6 million, including:
TS/C obtained contracts this quarter expected to generate future revenues of $123.6 million, including:
A contract with sponsoring airline AirAsia for our first MPL beta program that will adhere to new performance-based ATO
certification requirements developed by Transport Canada and based on ICAO guidelines. Graduates of our first MPL beta
program are expected to enter the IOE program to become A320 First Officers with AirAsia;
A contract with the Kingdom of Saudi Arabia to deliver a CAE Flightscape flight recorder and analysis laboratory;
Extended our training service agreement with Brussels Airlines through calendar 2012 on an exclusive basis for AVRO, A320,
A330 and B737-300 simulator training;
A contract awarded by the FAA for a Multiple Award for General Aviation and Business Aircraft Pilot Training for five years;
A ten-year contract renewal for B767 training at our Santiago training centre with LAN airlines.
CAE Annual Report 2010 | 47
Management’s Discussion and Analysis
Financial results
(amounts in millions
except operating margins, RSEU and FFSs
deployed)
Revenue
Segment operating income
Operating margins
Amortization & depreciation
Capital expenditures
Capital employed
Backlog
RSEU1
FFSs deployed
$
$
%
$
$
$
$
FY2010
433.5
75.1
17.3
65.2
79.5
969.8
728.7
129
148
FY2009 Q4-2010 Q3-2010 Q2-2010 Q1-2010 Q4-2009
121.4
25.1
20.7
16.1
52.7
1,151.4
1,006.4
123
141
102.8
15.9
15.5
15.7
18.9
1,018.9
792.3
128
144
460.5
87.0
18.9
62.3
168.9
1,151.4
1,006.4
118
141
114.7
20.8
18.1
16.9
23.7
1,093.2
906.9
130
142
102.4
17.4
17.0
17.1
13.0
995.0
755.9
129
146
113.6
21.0
18.5
15.5
23.9
969.8
728.7
131
148
Comparative periods of fiscal 2009 have been restated to reflect a change in the accounting treatment for pre-operating costs.
Revenue up by 11% over last quarter and down by 6% year over year
The increase from last quarter was mainly attributable to the change in our training revenue mix combined with an increase in FTOs’
activities. The increase was partially offset by the negative effect from the stronger Canadian dollar.
The decrease year over year was mainly attributed to the negative effect from the stronger Canadian dollar and to the market softness
in Europe. The decrease was partially offset by the contribution of additional RSEUs to our network, by the increase in FTOs’ activities
and by higher revenue generated in the emerging markets.
Revenue was $433.5 million this year, 6% or $27.0 million lower than last year
The decrease over last year was mainly attributed to the market softness in North America and Europe and to the negative effect from
the stronger Canadian dollar. The decrease was partially offset by the contribution of additional RSEUs to our network, by the
increase in FTOs’ activities and by higher revenue generated in the emerging markets.
Segment operating income up by 21% over last quarter and down by 16% year over year
Segment operating income was $21.0 million (18.5% of revenue) this quarter, compared to $17.4 million (17.0% of revenue) last
quarter and $25.1 million (20.7% of revenue) in the same period last year.
Segment operating income increased by $3.6 million, or 21%, over last quarter. The increase was mainly attributable to the change in
our training revenue mix and by an increase in our FTOs’ activities. The increase was partially offset by the negative effect from the
stronger Canadian dollar.
Year-over-year segment operating income decreased by $4.1 million, or 16%, mainly due to the negative effect from the stronger
Canadian dollar and to market softness in Europe. As well, last year’s segment operating income included the realization of a
one-time gain resulting from finalization of a contribution to a venture. The decrease was partially offset by higher income from FTOs’
activities and by the cost containment measures taken this year.
Segment operating income was $75.1 million, down 14% or $11.9 million over last year
Segment operating income was $75.1 million (17.3% of revenue) this year, compared to $87.0 million (18.9% of revenue) last year.
The decrease over last year was attributed to the market softness in Europe and North America combined with the negative effect
from the stronger Canadian dollar. The decrease was partially offset by the cost containment measures taken this year, by the
contribution of additional RSEUs to our network, by the gain on the disposal of three used FFSs, in addition to higher segment
operating income generated in the emerging markets and from FTOs’ activities. As well, last year’s segment operating income
included a realization of cost savings due to the successful integration of a venture and a one-time realization of cost savings from the
integration of another venture.
Capital expenditures at $23.9 million this quarter and $79.5 million for the year
Maintenance capital expenditures were $9.3 million for the quarter and $32.0 million for the year. Growth capital expenditures were
$14.6 million for the quarter and $47.5 million for the year. We continue to selectively expand the training network to address
additional market share and in response to training demands from our customers.
Capital employed decreased by $25.2 million over last quarter and by $181.6 million over last year
Capital employed decreased over the last quarter mainly due to the impact of foreign exchange fluctuations partially offset by the
increase in non-cash working capital.
Capital employed decreased over the prior year mainly due to the impact of foreign exchange and by the decrease in non-cash
working capital.
1 Non-GAAP measure (see Section 3.7).
48 | CAE Annual Report 2010
Backlog down by 28% over last year
(amounts in millions)
Backlog, beginning of period
+ orders
- revenues
+/- adjustments (mainly FX)
Backlog, end of period
Management’s Discussion and Analysis
FY2010
1,006.4
351.2
(433.5)
(195.4)
728.7
$
$
FY2009
963.3
463.7
(460.5)
39.9
1,006.4
$
$
Adjustments include the foreign exchange impact and a downward revision of $44.5 million made during the year to incorporate the
impact of revised revenue expectations for contracts signed with customers, reflecting current market conditions.
This quarter’s book-to-sales ratio was 1.09x. The ratio for the last 12 months was 0.81x.
SIMULATION PRODUCTS/CIVIL
SP/C was awarded contracts for the following 6 FFSs this quarter:
SP/C was awarded contracts for the following 6 FFSs this quarter:
One CAE 7000 Series Boeing 777-300ER FFS to Turkish Airlines;
One CAE 7000 Series Boeing 737-800 FFS to Skymark Airlines;
One CAE 7000 Series ATR 72-500 FFS and two CAE 7000 Series Boeing 737-900ER FFSs to Lion Air;
One CAE 7000 Series A330/A340 convertible FFS to Saudi Arabian Airlines.
This brings SP/C’s order intake for the year to 20 FFSs.
During the fourth quarter, a change order contract amendment was signed with Mumtalakat to switch their order for an A330/340 FFS
to an Embraer 170/190 FFS.
Financial results
(amounts in millions
except operating margins)
Revenue
Segment operating income
Operating margins
Amortization & depreciation
Capital expenditures
Capital employed
Backlog
FY2010
284.1
49.4
17.4
6.5
14.7
29.6
252.4
$
$
%
$
$
$
$
FY2009 Q4-2010 Q3-2010 Q2-2010 Q1-2010 Q4-2009
107.3
18.5
17.2
2.1
1.7
(53.9)
288.2
477.5
92.1
19.3
6.8
5.6
(53.9)
288.2
63.9
12.4
19.4
1.7
0.5
28.5
254.5
83.1
16.7
20.1
1.5
1.3
25.6
293.6
64.5
8.9
13.8
1.7
12.3
29.6
252.4
72.6
11.4
15.7
1.6
0.6
39.9
244.1
Revenue down by 11% over last quarter and 40% year over year
The decrease over last quarter was primarily due to lower production levels resulting from a decline in order intake and less revenue
recognized this quarter for simulator sales not accounted for using the percentage-of-completion method. In the prior quarter, the
cancellation of an order, for which the production of the simulator was already in progress, had a negative effect on revenue for that period.
The year-over-year decrease was primarily due to lower production levels resulting from a decline in order intake.
Revenue was $284.1 million for the year, 41% or $193.4 million lower than last year
The decrease in revenue was primarily due to lower production levels resulting from a decline in order intake. The decrease was
partially offset by more favourable rates on revenue hedging contracts this year.
Segment operating income down by 22% over last quarter and 52% year over year
Segment operating income was $8.9 million (13.8% of revenue) this quarter, compared to $11.4 million (15.7% of revenue) last
quarter and $18.5 million (17.2% of revenue) in the same period last year.
The decrease over last quarter was primarily due to decreased volume and a lower utilization of funds from our R&D cost-sharing
programs.
The year-over-year decrease was mainly due to lower volume, lower prices on orders booked this year resulting from more intense
competition as a consequence of the current market environment and a decrease in the utilization of funds from our R&D cost-sharing
programs. The decrease was partially offset by a favourable impact resulting from the revaluation of our non-cash working capital
accounts denominated in foreign currencies.
Segment operating income was $49.4 million for the year, 46% or $42.7 million lower than last year
Segment operating income was $49.4 million (17.4% of revenue) this year, compared to $92.1 million (19.3% of revenue) last year.
The decrease was primarily due to lower volume and a decline in project margins, resulting from challenging market conditions . The
decrease was partially offset by a positive impact resulting from our favourable hedging rates.
CAE Annual Report 2010 | 49
Management’s Discussion and Analysis
Capital employed decreased by $10.3 million from last quarter and increased by $83.5 million over last year
Capital employed decreased from last quarter mainly as a result of lower non-cash working capital accounts. This was primarily due to
a higher collection of accounts receivable, in addition to a reduction of our inventory levels and contracts in progress. The decrease
was partially offset by an increase in our property, plant and equipment, resulting from the purchase of a building in India for
CAE Simulation Technologies Private Ltd and lower deposits on contracts.
Capital employed was higher than last year, mainly due to higher non-cash working capital accounts. This was principally due to lower
levels of accounts payable and accrued liabilities and an increase in the value of our foreign exchange contracts, partially offset by
lower accounts receivable. The increase was also due to higher property, plant and equipment, resulting from the purchase of a
building in India for CAE Simulation Technologies Private Ltd.
Backlog down by 12% over last year
(amounts in millions)
Backlog, beginning of period
+ orders
- revenues
+/- adjustments (mainly FX)
Backlog, end of period
FY2010
288.2
254.6
(284.1)
(6.3)
252.4
$
$
FY2009
381.8
383.2
(477.5)
0.7
288.2
$
$
This quarter’s book-to-sales ratio was 1.15x. The ratio for the last 12 months was 0.90x.
5.2 Military segments
FISCAL 2010 EXPANSIONS AND NEW INITIATIVES
We continued our development of an Augmented Visionics System (AVS) to enable helicopter pilots to operate safely in the most
extreme conditions, including landing in brownouts when dust recirculation caused by rotor downwash obscures the pilot’s view
during critical maneuvering operations at very low altitudes. During fiscal 2010, we conducted several successful tests of our AVS
solution at the U.S. Department of Defence Yuma Proving Grounds;
We are developing the CAE Volume-Based Intelligence, Surveillance and Reconnaissance System (CAE VISR), which integrates
advanced sensor technologies and a Common Database (CDB) similar to our augmented visionics system (AVS) to help
dramatically improve situational awareness and provide real-time intelligence gathering, information rendering and visualization,
and improvised explosive device (IED) detection to battlefield commanders. The goal of our VISR program is to develop an
effective system for IED detection;
We are collaborating with the National Aerospace Laboratory (NLR) in the Netherlands, an independent technological institute
responsible for applied research in aerospace and defence, on a wide range of R&D projects designed to expand the role of
modelling and simulation at the NLR;
We, together with Hindustan Aeronautics Limited (HAL), held a ceremony to lay the foundation stone for a new helicopter training
centre in Bangalore, which will be operated by the Helicopter Academy to Train by Simulation of Flying (HATSOFF), an
equally-owned joint venture between HAL and CAE. In early 2010, HATSOFF announced that the first simulator for the Bell 412
would be arriving in India and be operational by mid-summer 2010;
We completed a major upgrade of the CAE-built Lynx Mk8 FMS for the Royal Navy, as well as delivered a new Lynx cockpit
procedures trainer (LCPT) and a CAE SimfinityTM system-based trainer (SBT) located at the Royal Naval Air Station (RNAS)
Yeovilton, U.K. This suite of training equipment has given the Royal Navy a comprehensive suite of synthetic training devices in
support of the Lynx Mk8 maritime helicopter;
We expanded our C-130 training centre located in Tampa, Florida with the addition of a new C-130H full-mission simulator. The
new simulator which is being used to train the RSAF, features Esterline CMC Electronics’ C-130 glass cockpit avionics system,
which CMC offers to global C-130 operators considering avionics modernization programs for existing C-130 Hercules aircraft.
SIMULATION PRODUCTS/MILITARY
SP/M was awarded $222.7 million in orders this quarter, including:
SP/M was awarded $222.7 million in orders this quarter, including:
One CH-147F training suite to Canada’s DND under the OTSP program in support of Canada’s new fleet of 15 CH-147F Chinook
medium-to-heavy lift helicopters;
A comprehensive academic training system for the C-130 and KDC-10 aircraft, which includes CAE SimfinityTM virtual simulators
(VSIM) and multimedia courseware, to the Royal Netherlands Air Force.
Financial results
(amounts in millions
except operating margins)
Revenue
Segment operating income
Operating margins
Amortization & depreciation
Capital expenditures
Capital employed
Backlog
FY2010
545.6
95.7
17.5
11.3
5.8
147.0
868.0
$
$
%
$
$
$
$
50 | CAE Annual Report 2010
FY2009 Q4-2010 Q3-2010 Q2-2010 Q1-2010 Q4-2009
143.6
26.8
18.7
3.8
2.0
148.8
893.0
118.5
22.2
18.7
2.6
1.5
174.6
1,072.5
137.4
24.3
17.7
3.2
1.1
167.6
889.8
483.5
87.7
18.1
11.4
6.5
148.8
893.0
140.4
23.4
16.7
2.7
2.3
181.9
815.3
149.3
25.8
17.3
2.8
0.9
147.0
868.0
Management’s Discussion and Analysis
Revenue up by 6% over last quarter and by 4% year over year
The increase over last quarter was mainly due to an increase in volume this quarter, particularly from our Canadian programs. The
increase was partially offset by a negative foreign exchange impact.
The increase year over year was primarily due to the integration into our results of DSA, acquired in May 2009, in addition t o an
increase in volume, particularly from our Canadian programs. The increase was partially offset by a negative foreign exchange impact.
Revenue was $545.6 million this year, 13% or $62.1 million higher than last year
The increase in revenue over last year was mainly due to an increase in volume and the integration into our results of DSA, acquired
in May 2009. The increase was partially offset by a negative foreign exchange impact.
Segment operating income up by 10% over last quarter and down 4% year over year
Segment operating income was $25.8 million (17.3% of revenue) this quarter, compared to $23.4 million (16.7% of revenue) last
quarter and $26.8 million (18.7% of revenue) in the same period last year.
The increase over last quarter was mainly due to the higher volume, as explained above, in addition to a more favourable program
mix. The increase was partially offset by increased R&D activities this quarter.
The year-over-year decrease was mainly due to increased R&D activities and a negative foreign exchange impact. The decrease was
partially offset by the integration into our results of DSA, acquired in May 2009, and a more favourable program mix this quarter.
Segment operating income was $95.7 million this year, 9% or $8.0 million higher than last year
Segment operating income was $95.7 million (17.5% of revenue) this year, compared to $87.7 million (18.1% of revenue) last year.
Segment operating income increased mainly due to the above-mentioned increase in volume and the integration into our results of
DSA, acquired in May 2009. The increase was partially offset by increased R&D activities and a negative foreign exchange impact.
Capital employed decreased by $34.9 million over last quarter and $1.8 million over last year
The decrease over last quarter was primarily due to lower non-cash working capital accounts, mainly due to a decrease in accounts
receivable and increased accounts payable and accrued liabilities.
The decrease over last year was mainly due to lower non-cash working capital accounts, mainly due to a decrease in accounts
receivable and an increase in accounts payable and accrued liabilities, partially offset by an increase in goodwill and other assets.
Backlog down by 3% over last year
(amounts in millions)
Backlog, beginning of period
+ orders
- revenues
+/- adjustments
Backlog, end of period
FY2010
893.0
545.7
(545.6)
(25.1)
868.0
$
$
FY2009
765.1
599.4
(483.5)
12.0
893.0
$
$
Adjustments include the negative foreign exchange impact and certain contracts acquired in the DSA transaction that have been
identified as SP/M related.
This quarter’s book-to-sales ratio was 1.49x. The ratio for the last 12 months was 1.00x.
TRAINING & SERVICES/MILITARY
TS/M was awarded $207.8 million in orders this quarter, including:
TS/M was awarded $207.8 million in orders this quarter, including:
A 20-year in-service support contract for the CH-147F aircrew training program to Canada’s DND under the OTSP program;
The continuation to provide training support services as part of the U.S. Air Force’s C-130J Maintenance and Aircrew Training
System program and C-130E/H Aircrew Training System program;
The continuation to provide development and services as part of the Synthetic Environment Core (SE Core) program.
Financial results
(amounts in millions
except operating margins)
Revenue
Segment operating income
Operating margins
Amortization & depreciation
Capital expenditures
Capital employed
Backlog
FY2010
263.1
43.9
16.7
10.2
30.9
174.2
1,193.7
$
$
%
$
$
$
$
FY2009 Q4-2010 Q3-2010 Q2-2010 Q1-2010 Q4-2009
66.5
9.2
13.8
2.6
6.4
162.2
994.2
60.4
9.7
16.1
2.6
5.8
173.9
1,098.2
68.5
9.2
13.4
2.3
11.4
174.2
1,193.7
67.5
12.4
18.4
3.0
8.2
196.4
1,101.8
66.7
12.6
18.9
2.3
5.5
172.5
1,005.2
240.7
39.0
16.2
8.4
22.7
162.2
994.2
Comparative periods of fiscal 2009 have been restated to reflect a change in the treatment for pre-operating costs.
CAE Annual Report 2010 | 51
Management’s Discussion and Analysis
Revenue up by 1% over last quarter and by 3% year over year
The increase over last quarter mainly resulted from a higher level of activity in our Professional Services business, partially offset by a
negative foreign exchange impact.
The increase year over year was primarily due to a strong level of activity in our Professional Services business, combined with an
increase in training services in Europe. The increase was partially offset by a negative foreign exchange impact.
Revenue was $263.1 million this year, 9% or $22.4 million higher than last year
The increase was mainly the result of a higher level of activity in our Professional Services business and increased training services in
Europe. The increase was partially offset by a negative foreign exchange impact.
Segment operating income down 26% over last quarter and stable year over year
Segment operating income was $9.2 million (13.4% of revenue) this quarter, compared to $12.4 million (18.4% of revenue) last
quarter and $9.2 million (13.8% of revenue) in the same period last year.
The decrease from last quarter was due to a less favourable program mix and a negative foreign exchange impact this quarter.
Segment operating income was stable year over year. The increase in volume was offset by a negative foreign exchange impact.
Segment operating income was $43.9 million this year, 13% or $4.9 million higher than last year
Segment operating income was $43.9 million (16.7% of revenue) this year, compared to $39.0 million (16.2% of revenue) last year.
The increase was primarily due to increased training services in Europe, partially offset by a lower utilization of funds from our R&D
cost-sharing program and a negative foreign exchange impact.
Capital employed decreased by $22.2 million over last quarter and increased $12.0 million over last year
The decrease from last quarter was primarily due to decrease in non-cash working capital accounts, mainly due to a decrease in
accounts receivable and increased accounts payable and accrued liabilities.
The increase over last year was mainly due to an increase in property, plant and equipment, resulting from investments for additional
simulators to support training demand, partially offset by a decrease in non-cash working capital.
Backlog up by 20% over last year
(amounts in millions)
Backlog, beginning of period
+ orders
- revenues
+/- adjustments
Backlog, end of period
FY2010
994.2
423.4
(263.1)
39.2
1,193.7
$
$
FY2009
789.7
493.9
(240.7)
(48.7)
994.2
$
$
Adjustments include the negative foreign exchange impact and certain contracts acquired in the DSA transaction that have been
identified as TS/M related.
This quarter’s book-to-sales ratio was 3.03x. The ratio for the last 12 months was 1.61x.
Combined military performance favourable over last year
For fiscal 2010, our $808.7 million combined military revenue represented an $84.5 million or 12% increase over fiscal 2009 and our
$139.6 million combined military operating income represented a $12.9 million or 10% increase over the same period. You will find
more details in the above Results by segment sections of SP/M and TS/M.
This quarter’s combined military book-to-sales ratio was 1.98x. The ratio for the last 12 months was 1.20x.
6. CONSOLIDATED CASH MOVEMENTS AND LIQUIDITY
We actively manage liquidity and regularly monitor the factors that could affect it, including:
Cash generated from operations, including timing of milestone payments and management of working capital;
Capital expenditure requirements;
Scheduled repayments of long-term debt obligations, our credit capacity and expected future debt market conditions.
52 | CAE Annual Report 2010
6.1 Consolidated cash movements
(amounts in millions)
FY2010
FY2009
FY2008 Q4-2010
Q3-2010
Q4-2009
Management’s Discussion and Analysis
Cash provided by continuing operating activities*
$ 270.6
$ 289.5
$
273.9 $
87.6
$
62.2 $
Changes in non-cash working capital
(3.6)
(95.1)
(16.9)
61.1
Net cash provided by continuing operations
$ 267.0
$ 194.4
$
257.0 $ 148.7
$
Maintenance capital expenditures
Proceeds from disposal of property, plant and
(53.5)
(54.5)
(83.3)
(23.0)
(40.4)
21.8 $
(9.4)
equipment
Other assets
Cash dividends
Free cash flow1
Growth capital expenditures
Deferred development costs
Other cash movements, net
Business acquisitions (net of cash and cash
equivalents acquired)
Effect of foreign exchange rate changes on cash and
cash equivalents
Net increase (decrease) in cash before proceeds
and repayment of long-term debt
* before changes in non-cash working capital
8.8
(13.0)
(30.3)
–
(5.7)
(29.6)
–
(5.5)
(9.8)
–
(3.2)
(7.6)
0.3
(4.8)
(7.6)
$ 179.0
$ 104.6
$
158.4 $ 114.9
$
0.3 $
34.4
(77.4)
(14.6)
5.6
(149.2)
(106.2)
(25.5)
(10.5)
(4.1)
(16.5)
8.0
(5.2)
1.5
(34.7)
(41.5)
(41.8)
(5.1)
(32.1)
17.7
(0.1)
(11.7)
(14.7)
(3.3)
2.1
(6.7)
(4.6)
(35.1)
(3.1)
(3.4)
(2.4)
0.9
$
25.8
$
(83.0) $
1.8 $
68.9
$
(26.9) $
(8.7)
76.9
(5.1)
71.8
(27.7)
–
(2.1)
(7.6)
Comparative periods of fiscal 2009 and fiscal 2008 have been restated to reflect a change in the accounting treatment for
pre-operating costs.
Free cash flow was $114.9 million for the quarter
Free cash flow was $114.6 million higher than last quarter and $80.5 million higher year over year.
The increase from last quarter was mainly due to a favourable change in non-cash working capital and cash provided by continuing
operating activities, partially offset by an increase in maintenance capital expenditures.
The increase year over year was mainly due to a favourable change in non-cash working capital and cash provided by continuing
operating activities.
Free cash flow was $179.0 million this year
Free cash flow was 71% or $74.4 million higher than last year.
The increase in free cash flow was mainly due to a favourable change in non-cash working capital and proceeds from the disposal of
property, plant and equipment, partially offset by a decrease in cash provided by continuing operating activities and increased other
assets.
Maintenance capital expenditures decreased by $1.0 million, while growth capital expenditures decreased by $71.8 million
this year
Total capital expenditures of $130.9 million this year included the ongoing investment to grow our training network.
6.2 Sources of liquidity
We have committed lines of credit at floating rates, each provided by a syndicate of lenders. We and some of our subsidiaries can
borrow funds directly from these credit facilities to cover operating and general corporate expenses and to issue letters of credit and
bank guarantees.
The total amount available through these committed bank lines at March 31, 2010 was US$400.0 million (2009 – US$400.0 million)
and €100.0 million (2009 – €100.0 million), of which US$189.7 million was used for letters of credit (2009 – US$93.5 million). The
applicable interest rate on this revolving term credit facility is at our option, based on the bank’s prime rate, bankers’ acceptance rates
or LIBOR plus a spread which depends on the credit rating assigned by Standard & Poor’s Rating Services. There were no
borrowings under the facilities as at March 31, 2010 nor as at March 31, 2009.
On April 6, 2010, we announced the conclusion of an agreement to refinance the above-mentioned credit facility, due to expire in July
2010. The new agreement is a committed three-year revolving credit facility of US$450.0 million with an option to increase to a total
amount of up to US$650.0 million.
We have an unsecured and uncommitted bank line of credit available in euros totalling €2.0 million compared to €3.0 million at
March 31, 2009. The line of credit bears interest at a euro base rate. We had not drawn down on this operating line as at
March 31, 2010.
1 Non-GAAP measure (see Section 3.7).
CAE Annual Report 2010 | 53
Management’s Discussion and Analysis
In June 2009, we issued unsecured senior notes for $15.0 million and US$105.0 million by way of a private placement for an average
term at inception of 8.5 years at an average blended interest rate of 7.15% with interest payable semi-annually in June and December.
Of the total proceeds from this debt, US$60.0 million was used to pay maturing notes under the 1997 Note issue, with the balance of
proceeds to be used for general corporate purposes.
During fiscal 2010, we obtained an interest-bearing long-term obligation from the Government of Canada for our participation in
Project Falcon, an R&D program that will continue over five years, for a maximum amount of $250.0 million. The aggregate amount
recognized in fiscal 2010 was $33.8 million (refer to Note 1 of the consolidated financial statements). The discounted value of the debt
recognized amounted to $9.1 million as at March 31, 2010.
We have an unsecured Export Development Canada (EDC) Performance Security Guarantee (PSG) account for US$100.0 million.
This is an uncommitted revolving facility for performance bonds, advance payment guarantees or similar instruments. As at
March 31, 2010, the total outstanding for all these instruments, translated into Canadian dollars, was $100.0 million compared to
$69.7 million as at March 31, 2009. The increase in advance payment guarantees results mainly from increased activity in countries
where bank guarantees are required for payments to be made prior to receiving the goods and equipment, as well as increased
activity on military projects.
Throughout the year, we and our subsidiaries have raised or incurred additional recourse and non-recourse debt in order to finance
our operations and our projects.
As well, during the year, we arranged with a European bank for it to issue advance payment guarantees of approximately $32.4 million
in support of our European military operations.
We believe that our cash and cash equivalents, access to credit facilities and expected free cash flow will enable the pursued growth
of our business, the payment of dividends and will enable us to meet all other expected financial requirements in the near term.
The following table summarizes the long-term debt:
As at March 31
$
2010
294.7
198.0
492.7
As at March 31
2009
240.1
$
240.2
480.3
(amounts in millions)
Total recourse debt
Total non-recourse debt(1)
Total long-term debt
Less:
Current portion of long-term debt
Current portion of capital lease
121.6
4.0
354.7
(1) Non-recourse debt is classified as such when recourse against the debt in a subsidiary is limited to the assets, equity interest and
40.1
11.0
441.6
$
$
undertaking of such subsidiary and not CAE Inc.
6.3 Government cost-sharing
We have signed agreements with various governments whereby the latter shares in the cost, based on expenditures incurred by us, of
certain R&D programs for modelling and simulation, visual systems and advanced flight simulation technology for civil applications and
networked simulation for military applications, as well as for the new markets of simulation-based training in healthcare, mining and
energy.
During fiscal 2006, we launched Project Phoenix, a $630-million, five-to-six-year R&D initiative to improve leading-edge technologies
and to develop additional applications that reinforce our industry position as a world leader in simulation, modelling and services.
The Government of Canada agreed, through Technology Partnerships Canada (TPC), to invest up to 30% ($189 million) of the value
of the program. We also signed an agreement in fiscal 2007 with the Government of Québec for Investissement Québec to contribute
up to $31.5 million to Project Phoenix over five years.
During fiscal 2009, we announced that we will invest up to $714 million in Project Falcon, an R&D program that will continue over five
years. The goal of Project Falcon is to expand our modelling and simulation technologies, develop new ones and increase our
capabilities beyond training into other areas of the aerospace and defence market, such as analysis and operations. Concurrently, the
Government of Canada agreed to participate in Project Falcon through a repayable investment of up to $250 million made throug h the
Strategic Aerospace and Defence Initiative (SADI), which supports strategic industrial research and pre-competitive development
projects in the aerospace, defence, space and security industries (refer to Note 13 of our consolidated financial statements).
During fiscal 2010, we announced that we will invest up to $274 million in Project New Core Markets, an R&D program extending over
seven years. The aim is to leverage our modelling, simulation and training services expertise into the new markets of healthc are,
mining and energy. The Québec government agreed to participate up to $100 million in contributions related to costs incurred before
the end of fiscal 2016.
In addition to these programs, we have also signed, in previous years, R&D agreements with the Government of Canada, in order to
share in a portion of the specific costs incurred by us on previous R&D programs.
You will find more details in Note 23 of our consolidated financial statements.
54 | CAE Annual Report 2010
6.4 Contractual obligations
We enter into contractual obligations and commercial commitments in the normal course of our business. These include debentures
and notes and others. The table below shows when they mature.
Management’s Discussion and Analysis
Contractual obligations
As at March 31, 2010
(amounts in millions)
Long-term debt (excluding interest)
Capital leases (excluding interest)
Operating leases
Purchase obligations
Total
$
2011
40.9
11.0
55.2
5.1
$ 112.2
2012
$ 25.7
4.4
56.3
5.0
$ 91.4
2013
$ 77.9
4.5
42.6
2.5
$ 127.5
2014
$ 33.1
4.7
36.6
–
$ 74.4
2015
$ 32.4
5.0
28.3
–
$ 65.7
Thereafter
$ 249.3
5.5
91.0
–
$ 345.8
Total
$ 459.3
35.1
310.0
12.6
$ 817.0
We also had total availability under the committed credit facilities of US$210.3 million and €100.0 million available as at
March 31, 2010 compared to US$306.5 million and €100.0 million at March 31, 2009.
We have purchase obligations related to agreements that are enforceable and legally binding. Most are agreements with
subcontractors to provide services for long-term contracts that we have with our clients. The terms of the agreements are significant
because they set out obligations to buy goods or services in fixed or minimum amounts, at fixed, minimum or variable prices and at
approximate times.
As at March 31, 2010 we had other long-term liabilities that are not included in the table above. These include some accrued pension
liabilities, deferred revenue, deferred gains on assets and various other long-term liabilities. Cash obligations on accrued employee
pension liability depend on various elements including market returns, actuarial gains and losses and the interest rate.
We did not include future income tax liabilities since future payments of income taxes depend on the amount of taxable earnings and
on whether there are tax loss carry-forwards available.
7. CONSOLIDATED FINANCIAL POSITION
7.1 Consolidated capital employed
(amounts in millions)
Use of capital:
Non-cash working capital1
Property, plant and equipment, net
Other long-term assets
Other long-term liabilities
Total capital employed
Source of capital:
Net debt
Shareholders’ equity
Source of capital
As at March 31
2010
As at March 31
2009
$
(40.4)
1,147.2
511.7
(282.9)
$ 1,335.6
$
179.8
1,155.8
$ 1,335.6
$
(60.4)
1,302.4
463.5
(222.6)
$ 1,482.9
$
285.1
1,197.8
$ 1,482.9
The comparative period has been restated to reflect a change in the accounting treatment for pre-operating costs.
Capital employed decreased 10% over last year
The decrease was mainly the result of lower property, plant and equipment, and an increase in other long-term liabilities, partially
offset by increases in other long-term assets and non-cash working capital.
Our return on capital employed1 (ROCE) was 11.4% (10.9% adjusted for operating leases) this year compared to 16.1%
(14.6% adjusted for operating leases) for last year.
Non-cash working capital increased by $20.0 million
The increase resulted mainly from a decrease in accounts payable and accrued liabilities and to an increase in income taxes
recoverable and was partially offset by a decrease in accounts receivable.
Net property, plant and equipment down $155.2 million
The decrease was mainly due to foreign exchange of $222.1 million and normal depreciation of $75.4 million, partially offset by capital
expenditures of $130.9 million.
Net debt lower than last year
The decrease was largely caused by the appreciation of the Canadian dollar against our foreign-denominated debt and an increase in
cash before proceeds and repayment of long-term debt, partially offset by the assumption of debt held by acquired businesses.
1 Non-GAAP measure (see Section 3.7).
CAE Annual Report 2010 | 55
Management’s Discussion and Analysis
Change in net debt
(amounts in millions)
Net debt, beginning of period
Impact of cash movements on net debt
(see table in the cash movements section)
Business acquisitions, joint ventures and others
Effect of foreign exchange rate changes on long-term debt
(Decrease) increase in net debt during the period
Net debt, end of period
As at March 31
2010
285.1
$
As at March 31
2009
124.1
$
(25.8)
14.8
(94.3)
(105.3)
179.8
$
$
83.0
23.2
54.8
161.0
285.1
$
$
Shareholders’ equity
The $42.0 million decrease in equity was mainly because of the other comprehensive loss of $167.9 million and dividends of
$30.3 million, partially offset by net earnings of $144.5 million.
Outstanding share data
Our articles of incorporation authorize the issue of an unlimited number of common shares, and an unlimited number of preferred
shares issued in series. We had a total of 256,516,994 common shares issued and outstanding as at March 31, 2010 with total share
capital of $441.5 million. We also had 5,818,386 options outstanding of which 1,433,118 were exercisable. We have not issued any
preferred shares to date.
As at April 30, 2010, we had a total of 256,516,993 common shares issued and outstanding.
Dividend policy
We paid a dividend of $0.03 per share each quarter in fiscal 2010. These dividends were eligible under the Income Tax Act (Canada)
and its provincial equivalents.
Our Board of Directors has the discretion to set the amount and timing of any dividend. The Board reviews the dividend policy once a
year based on the cash requirements of our operating activities, liquidity requirements and projected financial position. We expect to
pay dividends of approximately $30.8 million based on our current dividend policy and the 257 million common shares outstanding as
at March 31, 2010.
Guarantees
We issued letters of credit and performance guarantees for $209.1 million in the normal course of business this year, compared to
$115.7 million last fiscal year. The amount was higher this year due to more contractual performance and advance payment
obligations.
Pension obligations
We maintain defined benefit and defined contribution pension plans. We expect to contribute approximately $8.2 million more than the
annual required contribution for current services to satisfy a portion of the underfunded liability of the defined benefit pe nsion plan. We
will continue to contribute to the underfunded liability until we have met the plan’s funding obligations.
7.2 Variable interest entities
Note 26 to the consolidated financial statements summarizes, by segment, the total assets and total liabilities of the significant entities
in which we have a variable interest (variable interest entities or VIEs). They are listed by segment and include sale and leaseback
structures and partnership arrangements.
Sale and leaseback
We have entered into sale and leaseback arrangements with special purpose entities (SPEs). These arrangements relate to FFSs
used in our training centres for both the military and civil aviation segments. These leases expire at various dates up to 2023, except
for an arrangement that expires in 2037. Typically, we have the option to purchase the equipment at a specific purchase price at a
specific time during the term of the lease. Some leases include renewal options at the end of the term. In some cases, we provided
guarantees of the residual value of the equipment at the expiry date of the leases or at the date we exercise our purchase option.
These SPEs are financed by the collateralized long-term debt and third-party equity investors who, in certain cases, benefit from tax
incentives. The equipment serves as collateral for the SPEs’ long-term debt.
Our variable interests in these SPEs are solely through fixed purchase price options and residual value guarantees, except in one
case where it is in the form of equity and subordinated loan. We also provide administrative services to another SPE in return for a
market fee.
Some of these SPEs are VIEs. At the end of fiscal 2010 and 2009, we were the primary beneficiary for one of them. The assets and
liabilities of the VIE are fully consolidated into our consolidated financial statements as at March 31, 2010 and 2009, even before we
classified it as a VIE and CAE as being the primary beneficiary.
We are not the primary beneficiary for any of the other SPEs that are VIEs, and consolidation is not appropriate under Accounting
Guideline (AcG)-15 of the Canadian Institute of Chartered Accountants Handbook. Our maximum potential exposure to losses relating
to these non-consolidated SPEs was $38.7 million at the end of fiscal 2010 ($48.1 million in 2009).
56 | CAE Annual Report 2010
Management’s Discussion and Analysis
Partnership arrangements
We enter into partnership arrangements to provide manufactured military simulation products and training and services for the military
and civil segments. As well, during fiscal 2010, we have joined together with two other parties to form a limited partnership to provide
qualifying customers competitive lease financing for our civil flight simulation equipment (financing vehicle).
Our involvement with entities related to these partnership arrangements is mainly through investments in their equity and/or in
subordinated loans and through manufacturing and long-term training and services contracts. While some of these entities are VIEs,
we are not the primary beneficiary so these entities have not been consolidated. Except for the financing vehicle partnership,
we continue to account for these investments under the equity method and record our share of the net earnings or losses based on
the terms of the partnership arrangement. We account for the financing vehicle partnership formed during fiscal 2010 as an
available-for-sale financial instrument.
As at March 31, 2010 and 2009, our maximum off balance sheet exposure to losses related to these non-consolidated VIEs, other
than from their contractual obligations, was not material.
7.3 Off balance sheet arrangements
Most of our off balance sheet obligations are from operating lease obligations related to two segments:
Most of our off balance sheet obligations are from operating lease obligations related to two segments:
The TS/C segment, which operates a fleet of 148 simulators in our and other training centres. We have entered into sale and
leaseback transactions with a number of different financial institutions and treat them as operating leases;
The TS/M segment, which operates a training centre for the MSH project with the U.K. Ministry of Defence to provide simulation
training services. The operating lease commitments are between the operating company (which has the service agreement with
the U.K. Ministry of Defence) and the asset company (which owns the assets). These leases are non recourse to us.
The sale and leaseback of certain FFSs installed in our global network of training centres is a key element in our current financing
strategy to support investment in the civil and military training and services business. It provides us with a cost-effective, long-term
source of fixed-cost financing. A sale and leaseback transaction can only be executed after a FFS has received certification by
regulatory authorities and is installed and available to customers for training.
Sale and leaseback transactions are generally structured as leases with an owner participant. Before completing a sale and leaseback
transaction, we record the cost to manufacture the simulator as a capital expenditure and include it as a fixed asset on the
consolidated balance sheet. When the sale and leaseback transaction is executed, we record the transaction as a disposal of a fixed
asset and the cash proceeds are comparable to the fair market value of the FFS.
We record the difference between the proceeds received and our manufacturing cost (roughly the margin that we would record if we
had completed a FFS sale to a third party) under deferred gains and other long-term liabilities. We then amortize it over the term of the
sale and leaseback transaction as a reduction of rental expense, net of the guaranteed residual value where appropriate. At the end of
the term of the sale and leaseback transaction, we take the guaranteed residual value into income if the value of the underlying FFS
has not decreased.
We did not enter into any additional sale and leaseback transactions classified as operating leases this year and as a result, proceeds
from the sale and leaseback of assets are nil for this year and last year.
The table below lists sale and leaseback transactions for FFSs that were in service in TS/C training centres as of March 31, 2010.
They appear as operating leases in our consolidated financial statements.
Existing FFSs under sale and leaseback
(amounts in millions
unless otherwise noted)
SimuFlite
CAE Inc.
Denver training centres
Zhuhai Xiang Yi Aviation
Technology Company
Limited joint venture (1)
Other
Total
Annual lease payments
(upcoming 12 months)
Fiscal year
2002 to 2005
2000 to 2002
2003
Number
of FFSs
(units)
14
3
5
2003
–
5
2
29
Lease
obligations
102.1
$
29.3
51.7
14.2
6.8
204.1
27.2
$
$
(1) We have a 49% interest in this joint venture.
Initial
term
(years)
10 to 20
20 to 21
20
Imputed
interest
rate
5.5% to 6.7%
6.4% to 7.6%
5.0%
Unamortized
deferred
gain
7.8
17.9
21.5
$
Residual
value
guarantee
–
$
13.1
–
15
8
3.0%
6.6% to 7.0%
–
–
47.2
$
–
–
13.1
$
The rental expenses related to operating leases of the FFSs under the sale and leaseback arrangements were $27.4 million for
fiscal 2010, compared to $28.9 million last year.
You can find more details about operating lease commitments in Notes 22 and 26 to the consolidated financial statements.
CAE Annual Report 2010 | 57
Management’s Discussion and Analysis
7.4 Financial instruments
We are exposed to various financial risks in the normal course of business. We enter into forward and swap contracts to manage our
exposure to fluctuations in foreign exchange rates, interest rates and changes in share price which have an effect on our stock-based
compensation costs. We also continually assess whether the derivatives we use in hedging transactions are effective in offset ting
changes in fair value or cash flows of hedged items. We enter into these transactions to reduce our exposure to risk and volatility, and
not for speculative reasons. We only deal with highly rated counterparties.
Fair value of financial instruments
The fair value of a financial instrument is the amount at which the financial instrument could be exchanged in an arm’s-length
transaction between knowledgeable and willing parties under no compulsion to act. The fair value of a financial instrument is
determined by reference to the available market information at the balance sheet date. When no active market exists for a financial
instrument, we determine the fair value of that instrument based on valuation methodologies as discussed below. In determining
assumptions required under the valuation model, we primarily use external, readily observable market inputs. Assumptions or inputs
that are not based on observable market data are used when external data is not available. Counterparty credit risk and our own credit
risk have been taken into account when estimating fair value of all financial assets and liabilities, including derivatives.
We used the following methods and assumptions to estimate the fair value of financial instruments:
We used the following methods and assumptions to estimate the fair value of financial instruments:
Cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities approximate their
carrying values due to their short-term maturities;
The fair value of capital leases are estimated using the discounted cash flow method;
The fair value of long-term debt, the long-term obligation and long-term receivables (including advances) are estimated based on
discounted cash flows using current interest rates for instruments with similar terms and remaining maturities;
The fair value of our derivative instruments (including forward contracts, swap agreements and embedded derivatives with
economic characteristics and risks that are not clearly and closely related to those of the host contract) are determined using
valuation techniques and are calculated as the present value of the estimated future cash flows using an appropriate interest rate
yield curve and foreign exchange rate, adjusted for CAE’s and the counterparty’s credit risk. Assumptions are based on market
conditions prevailing at each balance sheet date. Derivative instruments reflect the estimated amounts that we would receive or
pay to settle the contracts at the balance sheet date;
The fair value of available-for-sale investments which do not have readily available market value is estimated using a discounted
cash flow model, which includes some assumptions that are not supportable by observable market prices or rates.
A description of the fair value hierarchy is discussed in Note 19 of our consolidated financial statements.
Financial risk management
Due to the nature of the activities that we carry out and as a result of holding financial instruments, we are primarily exposed to credit
risk, liquidity risk and market risk, especially foreign currency risk and interest rate risk.
Derivative instruments are utilized by us to manage market risk against the volatility in foreign exchange rates, interest rates and
stock-based compensation in order to minimize their impact on our results and financial position. Short-term and long-term derivative
assets have been included as part of accounts receivable and other assets respectively. Short-term and long-term derivative liabilities
have been included as part of accounts payable and accrued liabilities, and other long-term liabilities respectively.
Embedded derivatives are recorded at fair value separately from the host contract when their economic characteristics and risks are
not clearly and closely related to those of the host contract. We may enter into freestanding derivative instruments which are not
eligible for hedge accounting, to offset the foreign exchange exposure of embedded foreign currency derivatives. In such
circumstances, both derivatives are carried at fair value at each balance sheet date with the change in fair value recorded in
consolidated net earnings.
Our policy is not to utilize any derivative financial instruments for trading or speculative purposes. We may choose to designate
derivative instruments, either freestanding or embedded, as hedging items. This process consists of matching derivative hedging
instruments to specific assets and liabilities or to specific firm commitments or forecasted transactions. To some extent, we use
non-derivative financial liabilities to hedge foreign currency exchange rate risk exposures.
Credit risk
Credit risk is defined as our exposure to a financial loss if a debtor fails to meet its obligations in accordance with the terms and
conditions of its arrangements with us. We are exposed to credit risk on our account receivables and certain other assets through our
normal commercial activities. We are also exposed to credit risk through our normal treasury activities on our cash and cash
equivalents, and derivative financial instrument assets.
Credit risks arising from our normal commercial activities are independently managed in regards to customer credit risk. An allowance
for doubtful accounts is established when there is a reasonable expectation that we will not be able to collect all amounts due
according to the original terms of the receivable (see Note 6 of the consolidated financial statements). When a trade receivable is
uncollectible, it is written-off against the allowance account for trade receivables. Subsequent recoveries of amounts previously
written-off are recognized in earnings.
58 | CAE Annual Report 2010
Management’s Discussion and Analysis
Our customers are primarily established companies with publicly available credit ratings and government agencies, which facilitates
risk monitoring. In addition, we typically receive substantial deposits on contracts. We closely monitor our exposure to major airlines in
order to mitigate our risk to the extent possible. Furthermore, our trade accounts receivable are not concentrated to any specific
customers but rather are from a wide range of commercial and government organizations. As well, our credit exposure is further
reduced by the sale of certain of our accounts receivable to a third-party for cash consideration on a non-recourse basis. We do not
hold any collateral as security. The credit risk on cash and cash equivalents are mitigated by the fact that they are in plac e with a
diverse syndicate of major Japanese, North American and European financial institutions.
We are exposed to credit risk in the event of non-performance by counterparties to our derivative financial instruments. We use
several measures to minimize this exposure. First we enter into contracts with counterparties that are of high-credit quality (mainly
A-rated or better). We signed International Swaps & Derivatives Association, Inc. (ISDA) Master Agreements with the majority of
counterparties with whom we trade derivative financial instruments. These agreements make it possible to apply full netting when a
contracting party defaults on the agreement, for each of the transactions covered by the agreement and in force at the time of default.
Also, collateral or other security to support derivative financial instruments subject to credit risk can be requested by us or our
counterparties (or both parties, if need be) when the net balance of gains and losses on each transaction exceeds a threshold defined
in the ISDA Master Agreement. Finally, we monitor the credit standing of counterparties on a regular basis to help minimize credit risk
exposure.
Liquidity risk
Liquidity risk is defined as the potential that we cannot meet a demand for cash or meet our obligations as they become due.
We manage this risk by establishing detailed cash forecasts, as well as long-term operating and strategic plans. The management of
consolidated liquidity requires a constant monitoring of expected cash inflows and outflows which is achieved through a detailed
forecast of our consolidated liquidity position, for adequacy and efficient use of cash resources. Liquidity adequacy is assessed in view
of seasonal needs, growth requirements and capital expenditures, and the maturity profile of indebtedness, including off-balance
sheet obligations. We manage our liquidity risk to maintain sufficient liquid financial resources to fund our operations and meet our
commitments and obligations. In managing our liquidity risk, we have access to revolving unsecured term-credit facilities of
US$400.0 million and €100.0 million. On April 6, 2010, we announced the conclusion of an agreement to refinance the credit facility,
due to expire in July 2010. The new agreement is a committed three-year revolving credit facility of US$450.0 million with an option to
increase to a total amount of up to US$650.0 million. As well, we have an agreement to sell certain of our accounts receivable up to
$50.0 million. We also constantly monitor any financing opportunities to optimize our capital structure and maintain appropriate
financial flexibility.
Market risk
Market risk is defined as our exposure to a gain or a loss to the value of our financial instruments as a result of changes in market
prices, whether those changes are caused by factors specific to the individual financial instruments or its issuer, or factors affecting all
similar financial instruments traded in the market. We are mainly exposed to foreign currency risk and interest rate risk.
Foreign currency risk
Foreign currency risk is defined as our exposure to a gain or a loss in the value of our financial instruments as a result of the
fluctuations in foreign exchange rates. We are exposed to foreign currency rate variability primarily in relation to certain sale
commitments, expected purchase transactions and debt denominated in a foreign currency. As well, our foreign operations are
essentially self-sustaining and these foreign operations’ functional currencies are other than the Canadian dollar (in particular the
U.S. dollar [USD], euro [€] and British pounds [GBP or £]). Our related exposure to the foreign currency rates is primarily through cash
and cash equivalents and other working capital elements of these foreign operations.
The segments also mitigate foreign currency risks by transacting in their functional currency for material procurements, sale contracts
and financing activities.
We use forward foreign currency contracts and foreign currency swap agreements to manage our exposure from transactions in
foreign currencies and to synthetically modify the currency of exposure of certain balance sheet items. These transactions include
forecasted transactions and firm commitments denominated in foreign currencies.
Our foreign currency hedging programs are typically unaffected by changes in market conditions, as related derivative financial
instruments are generally held to maturity, consistent with the objective to fix currency rates on the hedged item.
Our policy is to hedge new foreign currency-denominated manufacturing contracts when they are signed and executed. We generally
hedge future revenue exposure when contracts are signed. During the second quarter of fiscal 2009, we began to create a portfolio of
currency hedging positions intended to mitigate the risk to a portion of future revenues presented by the high-level volatility of the
Canadian dollar versus the U.S. currency. With respect to the remaining expected future revenues, our manufacturing operations in
Canada remain exposed to changes in the value of the Canadian dollar.
We reduce the risk associated with the signed contracts by entering into forward exchange contracts (see Note 19 of the consolidated
financial statements for more details). At the end of fiscal 2010, approximately 21% of the total value of the outstanding contracts was
not hedged. The non-hedged portion results from partial hedging of the contracts in order to take advantage of the natural hedge
provided by project costs in the same currency as the contract. Short timing issues between contract signature and hedging
transactions as well as a number of small contracts remain unhedged.
CAE Annual Report 2010 | 59
Management’s Discussion and Analysis
We enter into foreign exchange forward contracts to manage our exposure when we make a sale in a foreign currency. The amount
and timing of the maturity of these forward contracts vary depending on a number of factors, including milestone billings and the use
of foreign materials and/or sub-contractors. We had $481.1 million Canadian dollar equivalent in forward contracts at the end of
fiscal 2010 ($103.6 million on buy contracts and $377.5 million on sales contracts), compared to $708.9 million ($95.6 million on buy
contracts and $613.3 million on sales contracts) at the end of the previous year. The decrease on sales contracts was mainly because
of a lower number of foreign currency denominated revenue contracts being hedged.
Foreign currency sensitivity analysis
Foreign currency risk arises on financial instruments that are denominated in a foreign currency. Assuming a reasonably possi ble
strengthening of 5% in the relevant foreign currency against the Canadian dollar for the year ended March 31, 2010, the pre-tax
effects on net earnings would have been a negative net adjustment of $2.9 million and a negative net adjustment of $19.1 million on
other comprehensive income.
Interest rate risk
Interest rate risk is defined as our exposure to a gain or a loss to the value of our financial instruments as a result of the fluctuations in
interest rates. We bear some interest rate fluctuation risk on our floating rate long-term debt and some fair value risk on our fixed
interest long-term debt. We mainly manage interest rate risk by fixing project-specific floating rate debt in order to reduce cash flow
variability. We also have a floating rate debt through an unhedged bank borrowing, a specific fair value hedge and other asset-specific
floating rate debt. A mix of fixed and floating interest rate debt is sought to reduce the net impact of fluctuating interest rates.
Derivative financial instruments used to synthetically convert interest rate exposures are mainly on interest rate swap agreements.
We use financial instruments to manage our exposure to changing interest rates and to adjust our mix of fixed and floating interest
rate debt on long-term debt. The mix was 74% fixed-rate and 26% floating-rate at the end of this year (2009 – 72% fixed rate and 28%
floating rate).
Interest rate sensitivity analysis
Assuming a reasonably possible strengthening of 1% in the variable interest rate for the year ended March 31, 2010, the pre-tax
effects on net earnings would have been a negative net adjustment of $0.7 million and a positive net adjustment of $4.6 million on
other comprehensive income. A weakening of 1% in the variable interest rate would result in a positive pre-tax effect on net earnings
of net $0.7 million and a negative net adjustment on other comprehensive income of $5.4 million.
Stock-based compensation cost
We have entered into equity swap agreements with a major Canadian financial institution to reduce our cash and net earnings
exposure to fluctuations in our share price relating to the DSU and LTI-DSU programs. Pursuant to the agreement, we receive the
economic benefit of dividends and a share price appreciation while providing payments to the financial institution for the institution’s
cost of funds and any share price depreciation. The net effect of the equity swap partly offsets movements in our share price
impacting the cost of the DSU and LTI-DSU programs and is reset monthly. As at March 31, 2010, the equity swap agreements
covered 2,155,000 common shares.
Hedge of self-sustaining foreign operations
As at March 31, 2010, we have designated a portion of our senior notes totalling US$138.0 million (2009 – US$33.0 million), as a
hedge of self-sustaining foreign operations and it is being used to hedge our exposure to foreign exchange risk on these investments.
Gains or losses on the translation of the designated portion of our senior notes are recognized in other comprehensive income to
offset any foreign exchange gains or losses on translation of financial statements of self-sustaining foreign operations.
Refer to the Consolidated Statements of Comprehensive Income for the total amount of the change in fair value of financial
instruments designated as cash flow hedges recognized in income for the period and total amount of gains and losses recognized in
other comprehensive income. Also, refer to Note 19 of the consolidated financial statements for the classification of financial
instruments and to Note 20 of the consolidated financial statements for amounts of gains and losses associated with financial
instruments, including derivatives not designated in a hedging relationship.
8. ACQUISITIONS, BUSINESS COMBINATIONS AND DIVESTITURES
8.1 Acquisitions
Fiscal 2010 acquisitions
We acquired five businesses for a total cost, including acquisition costs and excluding balance of purchase price, of $30.7 million
which was paid in cash. The allocation of the purchase prices are preliminary and are expected to be completed in the near future.
The total cost does not include potential additional consideration of $27.9 million that is contingent on certain conditions being
satisfied, which, if met, would be recorded as additional goodwill.
Bell Aliant’s Defence, Security and Aerospace
During the first quarter, we acquired Bell Aliant’s Defence, Security and Aerospace (DSA) business unit through an asset purchase
agreement. DSA supplies real-time software and systems for simulation training defence and integrated lifecycle information
management for the aerospace and defence industries. The working capital adjustment remains unsettled and is currently in dispute.
Seaweed Systems Inc.
During the second quarter, we acquired Seaweed Systems Inc. (Seaweed). Seaweed has embedded graphics solutions for the
military and aerospace market, with experience in the development of safety critical graphic drivers.
60 | CAE Annual Report 2010
Management’s Discussion and Analysis
ICCU Imaging Inc.
During the third quarter, we acquired ICCU Imaging Inc. (ICCU). ICCU specializes in developing multimedia educative material and
offering educational solutions to help medical providers perform a focused bedside ultrasound examination.
VIMEDIX Virtual Medical Imaging Training Systems Inc.
During the fourth quarter, we acquired VIMEDIX Virtual Medical Imaging Training Systems Inc. (VIMEDIX). VIMEDIX specializes in
developing virtual reality animated transthoracic echocardiograph simulators and advanced echographic simulation training.
Immersion Corporation’s Medical Simulation
During the fourth quarter, we acquired part of Immersion Corporation’s (Immersion) medical simulation business unit through an asset
purchase agreement. Immersion’s medical line of business designs, manufactures, and markets computer-based virtual reality
simulation training systems which allow clinicians and students to practice and improve minimally invasive surgical skills.
Fiscal 2009 acquisitions
We acquired three businesses for a total cost, including acquisition costs, of $64.3 million which was payable primarily in cash of
$43.9 million and assumed debt of $20.4 million.
Sabena Flight Academy
During the first quarter of fiscal 2009, we acquired Sabena Flight Academy (Sabena). Sabena offers cadet training, advanced training
and aviation consulting for airlines and self-sponsored pilot candidates.
During the third quarter of fiscal 2010, we recorded an additional purchase price of $4.2 million settled in cash as a final settlement of
contingent consideration. The additional purchase price was recorded as goodwill.
Academia Aeronautica de Evora S.A.
During the second quarter of fiscal 2009, we increased our participation in Academia Aeronautica de Evora S.A. (AAE) to 90%
in a non-cash transaction.
During the second quarter of fiscal 2010, we adjusted the goodwill, initially recorded at $3.7 million, to $4.7 million.
Kestrel Technologies Pte Ltd
During the third quarter of fiscal 2009, we acquired Kestrel Technologies Pte Ltd (Kestrel) which provides consulting and
professional services, and provides simulator maintenance and technical support services.
During the third quarter of fiscal 2010, we recorded an additional purchase price of $0.2 million settled in cash. The additional
purchase price was recorded as goodwill.
The net assets of VIMEDIX, Immersion, ICCU, Sabena and AAE are included in the TS/C segment. The net assets of Seaweed and
Kestrel are included in SP/M. The net assets of DSA are segregated between the SP/M and TS/M segments.
The above-listed acquisitions were accounted for under the purchase method and the operating results have been included from their
acquisition date.
9. BUSINESS RISK AND UNCERTAINTY
We operate in several industry segments that have various risks and uncertainties. Management and the Board discuss the princ ipal
risks facing our business, particularly during the annual strategic planning and budgeting processes. The risks and uncertainties
described below are risks that could materially affect our business, financial condition and results of operation. These risks are
categorized as industry-related risks, risks specific to CAE and risks related to the current market environment. These are not
necessarily the only risks we face; additional risks and uncertainties that are presently unknown to us or that we may currently deem
immaterial may adversely affect our business.
Management attempts to mitigate risks that may affect our future performance through a process of identifying, assessing, reporting
and managing risks that are significant from a corporate perspective.
9.1 Risks relating to the industry
Competition
We sell our simulation equipment and training services in highly competitive markets and new entrants are emerging and others are
positioning themselves to try to take greater market share. Some of our competitors are larger than we are, and have greater financial,
technical, marketing, manufacturing and distribution resources. In addition, some competitors have well-established relationships with,
or are important suppliers to, aircraft manufacturers, airlines and governments, which may give them an advantage when competing
for projects for these organizations. We also face competition from Boeing, which has pricing and other competitive advantages over
CAE with respect to training, update and maintenance services related to Boeing aircraft simulators. During 2009, Boeing launched a
new licencing model for new Boeing aircraft simulators which includes a requirement for simulator manufacturers and service training
operators to pay Boeing a royalty to manufacture, update or upgrade a simulator, and to provide training services on new Boeing
simulators.
We obtain most of our contracts through competitive bidding processes that subject us to the risk of spending a substantial amount of
time and effort on proposals for contracts that may not be awarded to us. We cannot be certain that we will continue to win contracts
through competitive bidding processes at the same rate as we have in the past.
CAE Annual Report 2010 | 61
Management’s Discussion and Analysis
Reduced demand resulting from the recessionary economy and credit constraints for civil market products have lead to heightened
competition for each available sale. This in turn may lead to a reduction in profit on sales won during such a period.
Level of defence spending
A significant portion of our revenue comes from sales to military customers around the world. In fiscal 2010, for example, sales by the
SP/M and TS/M segments accounted for 53% of our revenue. We are either the primary contractor or a subcontractor for various
programs by Canadian, U.S., European, and other foreign governments. If funding for a government program is cut, we could los e
future revenue, which could have a negative effect on our operations. If countries we have contracts with significantly lower their
military spending, there could be a material negative effect on our sales and earnings.
Civil aviation industry
A significant portion of our revenue comes from supplying equipment and training services to the commercial and business airline industry.
Most airlines faced financial difficulties in fiscal 2010 due to the global credit crisis and ensuing economic recession which has
resulted in air cargo and traffic declines.
Jet fuel prices in 2009 abated somewhat from their peak level in 2008. This helped mitigate the airlines’ losses last year. If fuel prices
return to higher levels for a sustained period, there could be a greater impetus for airlines to replace older, less fuel-efficient aircraft.
However, higher fuel costs could also limit the airlines’ available financial resources, and could potentially cause deliveri es of new
aircraft to be delayed or cancelled. Such a reaction would negatively affect the demand for our training equipment and services.
The constraints in the credit market in fiscal 2010 led to the higher cost and diminished availability of credit. This in turn reduced the
ability of airlines and others to purchase new aircraft, negatively affecting the demand for our training equipment and services, and the
purchase of our products. We have seen signs of these constraints easing somewhat in the latter half of fiscal 2010.
We are also exposed to credit risk on accounts receivable from our customers. We have adopted policies to ensure we are not
significantly exposed to any individual customer. Our policies include analyzing the financial position of our customers and regularly
reviewing their credit quality. We also subscribe from time to time to credit insurance and, in some instances, require a bank letter of credit
to secure our customers’ payments to us.
Regulatory rules imposed by aviation authorities
We are required to comply with regulations imposed by aviation authorities. These regulations may change without notice, which could
disrupt our sales and operations. Any changes imposed by a regulatory agency, including changes to safety standards imposed b y
aviation authorities such as the U.S. Federal Aviation Administration, could mean we have to make unplanned modifications to our
products and services, causing delays and resulting in cancelled sales. We cannot predict the impact that changing laws or
regulations might have on our operations. Any changes could have a materially negative effect on our results of operations or financial
condition.
Sales or licences of certain CAE products require regulatory approvals
The sale or licence of many of our products is subject to regulatory controls. These can prevent us from selling to certain countries
and require us to obtain from one or more governments an export licence or other approvals to sell certain technology such as military
related simulators or other training equipment, including military data or parts. These regulations change often and we cannot be
certain that we will be permitted to sell or license certain products to customers, which could cause a potential loss of revenue for us.
Failing to comply with any of these regulations in countries where we operate could result in fines and other material sanctions.
Government-funded military programs
Like most companies that supply products and services to governments, we can be audited and reviewed from time to time. Any
adjustments that result from government audits and reviews may have a negative effect on our results of operations. Some costs may
not be reimbursed or allowed in negotiations of fixed-price contracts. As a result, we may also be subject to a higher risk of legal
actions and liabilities than companies that cater only to the private sector, which could have a materially negative effect on our
operations.
If we fail to comply with government regulations and export controls and national security requirements, we could be suspended or
barred from government contracts or subcontracts for a period of time, which would negatively affect our revenue from operations and
profitability, and could have a negative effect on our reputation and ability to procure other government contracts in the future.
9.2 Risks relating to the Company
Product evolution
The civil aviation and military markets we operate in are characterized by changes in customer requirements, new aircraft models and
evolving industry standards. If we do not accurately predict the needs of our existing and prospective customers or develop product
enhancements that address evolving standards and technologies, we may lose current customers and be unable to bring on new
customers. This could reduce our revenue. The evolution of the technology could also have an impact on the value of our fleet of FFSs.
Research and development activities
We carry out some of our R&D initiatives with the financial support of government, including the Government of Québec through IQ
and the Government of Canada through SADI and TPC. We may not, in the future, be able to replace these existing programs with
other government risk-sharing programs of comparable benefit to us, which could have a negative impact on our financial
performance and research and development activities.
62 | CAE Annual Report 2010
Management’s Discussion and Analysis
Fixed-price and long-term supply contracts
We provide our products and services mainly through fixed-price contracts that require us to absorb cost overruns, even though it can
be difficult to estimate all of the costs associated with these contracts or to accurately project the level of sales we may ultimately
achieve. In addition, a number of contracts to supply equipment and services to commercial airlines and defence organizations are
long-term agreements that run up to 20 years. While some of these contracts can be adjusted for increases in inflation and costs, the
adjustments may not fully offset the increases, which could negatively affect the results of our operations.
Procurement and OEMs encroachment
We are required to procure data, parts, equipment and many other inputs from a wide variety of OEMs and sub-contractors. We are
not always able to find two or more sources for inputs we need, and in the case of specific aircraft simulators and other training
equipment, significant inputs can only be sole sourced. We may therefore be vulnerable to delivery schedule delays, the financial
condition of the sole-source suppliers and their willingness to deal with us. Within their corporate groups, some sole-source suppliers
include businesses that compete with parts of our business.
Warranty or other product-related claims
We manufacture simulators that are highly complex and sophisticated. These may contain defects that are difficult to detect and
correct. If our products fail to operate correctly or have errors, there could be warranty claims or we could lose customers. Correcting
these defects could require significant capital investment. If a defective product is integrated into our customer’s equipment, we could
face product liability claims based on damages to the customer’s equipment. Any claims, errors or failures could have a negative
effect on our operating results and business. We cannot be certain that our insurance coverage will be sufficient to cover on e or more
substantial claims.
Product integration and program management risk
Our business could be negatively affected if our products do not successfully integrate or operate with other sophisticated s oftware,
hardware, computing and communications systems that are also continually evolving. If we experience difficulties on a project or do
not meet project milestones, we may have to devote more engineering and other resources than originally anticipated. While we
believe we have recorded adequate provisions for risks of losses on fixed-price contracts, it is possible that fixed-price and long-term
supply contracts could subject us to additional losses that exceed obligations under the terms of the contracts.
Protection of intellectual property
We rely in part on trade secrets and contractual restrictions, such as confidentiality agreements and licenses, to establish and protect
our proprietary rights. These may not be effective in preventing a misuse of our technology or in deterring others from devel oping
similar technologies. We may be limited in our ability to acquire or enforce our intellectual property rights in some countries.
Intellectual property
Our products contain sophisticated software and computer systems that are supplied to us by third parties. These may not always be
available to us. Our production of simulators often depends on receiving confidential or proprietary data on the functions, design and
performance of a product or system that our simulators are intended to simulate. We may not be able to obtain this data on
reasonable terms, or at all.
Infringement claims could be brought against us or against our customers. We may not be successful in defending these claims and
we may not be able to develop processes that do not infringe on the rights of third parties, or obtain licenses on terms that are
commercially acceptable, if at all.
Litigation related to our intellectual property rights could be lengthy and costly and could negatively affect our operations or financial
results, whether or not we are successful in defending a claim.
Key personnel
Our continued success will depend in part on our ability to retain and attract key personnel with the relevant skills, expertise and
experience. Our compensation policy is designed to mitigate this risk.
Environmental liabilities
We use, generate, store, handle and dispose of hazardous materials at our operations, and used to at some of our discontinued or
sold operations. Past operators at some of our sites also carried out these activities.
New laws and regulations, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination,
new clean-up requirements or claims on environmental indemnities we have given may result in us having to incur substantial costs.
This could have a materially negative effect on our financial condition and results of operations.
We have made provisions for claims we know about and remediation we expect will be required, but there is a risk that our provisions
are not sufficient.
In addition, our discontinued operations are largely uninsured against such claims, so an unexpectedly large environmental claim
against a discontinued operation could reduce our profitability in the future.
CAE Annual Report 2010 | 63
Management’s Discussion and Analysis
Liability claims arising from casualty losses
Because of the nature of our business, we may be subject to liability claims, including claims for serious personal injury or death,
arising from:
Accidents or disasters involving training equipment we have sold or aircraft for which we have provided training equipment or
services;
Our pilot provisioning;
Our live flight training operations.
We may also be subject to product liability claims relating to equipment and services that our discontinued operations sold in the past.
We cannot be certain that our insurance coverage will be sufficient to cover one or more substantial claims.
Integration of businesses acquired
The success of our acquisitions depend on our ability to crystallize synergies both in terms of successfully marketing our br oadened
product offering as well as efficiently consolidating the operations of the business acquired into our existing operations.
Our ability to penetrate new markets
We are attempting to leverage our knowledge, experience and best practices in simulation-based aviation training and optimization to
penetrate the new markets of simulation-based training in healthcare, mining and energy.
As we enter these new markets, unforeseen difficulties and expenditures could arise, which may have an adverse effect on our
operations, profitability and reputation. Penetrating new markets is inherently more difficult than managing within our already
established core markets. The risks associated with entering new markets are greater; however, we believe there is potential for CAE
to develop material revenues in these new business areas over the long term.
Enterprise resource planning
We are investing time and money in an ERP system. If the system does not operate as expected or when expected, it may be difficult
for us to claim compensation or correction from any third party. We may not be able to realize the expected value of the system and
this may have a negative effect on our operations, profitability and reputation.
Length of sales cycle
The sales cycle for our products and services is long and unpredictable, ranging from 6 to 18 months for civil aviation applications and
from 6 to 24 months or longer for military applications. During the time when customers are evaluating our products and services, we
may incur expenses and management time. Making these expenditures in a quarter that has no corresponding revenue will affect our
operating results and could increase the volatility of our share price. We may pre-build certain products in anticipation of orders to
come and to facilitate a faster delivery schedule to gain competitive advantage; if orders for those products do not materialize when
expected, we have to carry the pre-built product in inventory for a period of time until a sale is realized.
9.3 Risks relating to the market
Foreign exchange
Our operations are global with approximately 90% of our revenue generated in foreign currencies, mainly the U.S. dollar, the euro and
the British pound. Our revenue is divided approximately one-third in each of the U.S, Europe and the rest of the world.
Our Canadian operations generate approximately 37% of our revenues with a large portion of our operating costs in Canadian dollars.
When the Canadian dollar increases in value, it negatively affects our foreign currency-denominated revenue and hence our financial
results. When the Canadian dollar decreases in value, it negatively affects our foreign currency-denominated costs and our
competitive position compared to other equipment manufacturers in jurisdictions where operating costs are lower. We have various
hedging programs to partially offset this exposure. However, our currency hedging activities do not entirely mitigate foreign exchange
risk and provide only short-term offsetting benefits.
Business conducted through our foreign operations – mainly Military and Civil training and services – are substantially based in local
currencies. A natural hedge exists by virtue of revenues and operating expenses being in like currencies. However, we face currency
translation exposure with these operations since we consolidate results in Canadian dollars for financial reporting purposes.
Availability of capital
Our main credit facility, which was refinanced in April 2010, is up for renewal in fiscal 2014. We cannot determine at this time whether
the credit facility will be renewed at the same cost, for the same three-year duration and on similar terms as were previously available
this year. Events in the credit market over the past two years have lead to heightened pricing for credit, even for issuers such as CAE
which have seen their credit rating improve during the same period.
64 | CAE Annual Report 2010
Management’s Discussion and Analysis
Pension plans
Pension funding is based on actuarial estimates and is subject to limitations under applicable income tax and other regulations.
Actuarial estimates prepared during the year were based on assumptions related to projected employee compensation levels at the
time of retirement and the anticipated long-term rate of return on pension plan assets. The actuarial funding valuation reports
determine the amount of cash contributions that we are required to contribute into the registered retirement plans. Our latest pension
funding reports show the pension plans to be in a solvency deficit position. Therefore, we are required to make cash funding
contributions. As the pension fund assets consist of a mix of bonds and equities, market conditions in 2008 reduced the market value
of the pension fund assets and only part of this reduction was recovered by the improved market environment of 2009. If this reduced
level of pension fund assets persists to the date of the next funding valuations, we will be required to increase our cash funding
contributions, reducing the availability of such funds for other corporate purposes.
Doing business in foreign countries
We have operations in over 20 countries and sell our products and services to customers around the world. Sales to customers
outside Canada and the U.S. made up approximately 60% of revenue in fiscal 2010. We expect sales outside Canada and the U.S. to
continue to represent a significant portion of revenue in the foreseeable future. As a result, we are subject to the risks of doing
business internationally.
These are the main risks we are facing:
Change in laws and regulations;
Tariffs, embargoes, controls and other restrictions;
General changes in economic and geopolitical conditions;
Complexity and risks of using foreign representatives and consultants.
10. CHANGES IN ACCOUNTING POLICIES
10.1 Significant changes in accounting policies – fiscal 2010
We prepare our financial statements in accordance with Canadian GAAP as published by the Accounting Standards Board (AcSB) of
the Canadian Institute of Chartered Accountants (CICA) in its Handbook Sections, Accounting Guidelines (AcG) and Emerging Issues
Committee (EIC) Abstracts.
Intangible assets
Effective April 1, 2009, we adopted CICA Handbook Section 3064, Goodwill and Intangible Assets, which replaced Sections 3062,
Goodwill and Other Intangible Assets, and 3450, Research and Development Costs. Section 3064 incorporates material from
International Accounting Standard (IAS) 38, Intangible Assets, addressing when an internally developed intangible asset meets the
criteria for recognition as an asset. EIC-27, Revenues and Expenditures during the Pre-Operating Period, no longer applies to entities
that have adopted Section 3064.
Since adopting the new standard, we expense our pre-operating costs as they are incurred. The impact of adopting this accounting
standard, on a retrospective basis, to our consolidated statement of earnings for years ended March 31 is:
(amounts in millions)
Deferred pre-operating costs, net of non-cash items
Income tax adjustment
Adjustment to net earnings
2009
2.2
(0.5)
1.7
$
$
2008
(0.9)
(0.5)
(1.4)
$
$
The following summarizes the impact to earnings per share upon adoption of this accounting standard, on a retrospective basis:
Basic and diluted earnings per share from continuing operations
Basic earnings per share
Diluted earnings per share
$
2009
–
0.01
0.01
$
2008
(0.01)
–
(0.01)
As at March 31, 2010, the impact of adopting this future change to other assets on our consolidated balance sheet was a decrease of
$10.4 million. The retained earnings at April 1, 2007, decreased by $8.6 million, net of tax recovery of $3.6 million.
Our treatment regarding R&D costs was not impacted as a result of this change in accounting standard. Upon adoption of
Section 3064, we have reclassified our deferred costs from other assets to intangible assets.
Financial instruments – disclosures
In September 2009, the AcSB amended Section 3862, Financial Instruments – Disclosures, to require enhanced disclosures about the
relative reliability of the data (or “inputs”) that an entity uses in measuring the fair values of its financial instruments and to reinforce
existing principles of disclosures about liquidity risk. We adopted these amendments during fiscal 2010.
CAE Annual Report 2010 | 65
Management’s Discussion and Analysis
10.2 Future changes in accounting standards
Business Combinations, Consolidated Financial Statements and Non-Controlling Interests
In December 2008, the AcSB approved three new accounting standards Handbook Section 1582, Business Combinations, Section
1601, Consolidated Financial Statements, and Section 1602, Non-Controlling Interests, replacing Section 1581, Business
Combinations and Section 1600, Consolidated Financial Statements. Section 1582 provides the Canadian equivalent to
IFRS 3 – Business Combinations (January 2008) and Sections 1601 and 1602 to IAS 27 – Consolidated and Separate Financial
Statements (January 2008). Section 1582 requires additional use of fair value measurements, recognition of additional assets and
liabilities, and increased disclosure for the accounting of a business combination. The section applies prospectively to busi ness
combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after
January 1, 2011. Entities adopting Section 1582 will also be required to adopt Sections 1601 and 1602. Section 1601 establishes
standards for the preparation of consolidated financial statements. Section 1602 establishes standards for accounting for a
non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination. These standar ds
will require a change in the measurement of non-controlling interests and will require the non-controlling interests to be presented as
part of shareholders’ equity on the balance sheet. In addition, the net earnings will include 100% of the subsidiary’s results and will be
allocated between the controlling interest and non-controlling interest. These standards apply to interim and annual consolidated
financial statements relating to fiscal years beginning on or after January 1, 2011. Earlier adoption is permitted. All three standards are
effective at the same time Canadian public companies will have adopted IFRS, for fiscal year beginning on or after January 1, 2011.
We will be implementing the equivalent IFRS standard and are currently evaluating the impact of adopting IFRS.
Multiple Deliverable Revenue Arrangements
In December 2009, the Emerging Issues Committee issued EIC-175, Multiple Deliverable Revenue Arrangements, which changes the
level of evidence of the standalone selling price required to separate deliverables when more objective evidence of the selli ng price is
not available. This new standard is effective for revenue arrangements with multiple deliverables entered into or materially modified in
the first annual fiscal period beginning on or after January 1, 2011 and is applicable on a prospective basis. Early adoption is
permitted as at the beginning of a fiscal year. We are currently evaluating the impact of adopting EIC-175 on our consolidated financial
statements, to determine whether it will be early adopted. If not early adopted, for our fiscal period beginning April 1, 2011, we will be
implementing IFRS. We are currently evaluating the impact of adopting IFRS.
International Financial Reporting Standards (IFRS)
In February 2008, the Canadian Accounting Standards Board (AcSB) confirmed January 1, 2011 as the date IFRS will replace current
Canadian GAAP for publicly accountable enterprises. While Canadian GAAP and IFRS are both principles based and use comparable
conceptual frameworks, there are significant recognition, measurement, presentation and disclosure differences.
We plan to prepare our interim and annual financial statements in accordance with IFRS for periods commencing on or after
April 1, 2011.
Our IFRS changeover plan
We are implementing a detailed conversion plan to transition to IFRS from Canadian GAAP. We have created an IFRS transition
group that includes finance managers from our corporate function and from the different segments as well as contributors from other
business groups affected by the change. As well, an IFRS-project steering committee has been established to whom we provide
updates on the status of our changeover plan.
The IFRS changeover plan includes five phases expected to be completed according to the following timeline:
DIAGNOSTIC
DESIGN
AND
PLANNING
SOLUTION DEVELOPMENT
IMPLEMENTATION
(in progress)
POST
IMPLEMENTATION
March 31, 2008
August 31, 2008
March 31, 2009
April 1, 2010
IFRS opening
balance sheet
March 31, 2011
March 31, 2012
First IFRS
annual report
October 31, 2009
June 30, 2011
First IFRS
interim report
66 | CAE Annual Report 2010
Management’s Discussion and Analysis
Phase
Diagnostic
Selected Key Activities
Identify significant differences between the existing Canadian
GAAP and IFRS, as relevant to our specific instance. Identify the
impact of these differences on the business, the financial
statements, processes and tax.
Design and
Establish project strategy, infrastructure and timeframe.
planning
Establish a communications process.
Identify internal stakeholders and business areas that may be
affected by the transition and establish the core team, supporting
teams and committees.
Train the core project team.
Status
Completed
Completed
Completed
Completed
Completed
Raise awareness across
the organization and obtain
Completed
management buy-in and instill a tone-at-the-top approach.
Solution
development
Perform a detailed review of all relevant IFRS standards to
identify differences with our current accounting policies and to
select new policies when applicable.
Completed
Train the supporting teams, selected employees and committees
Completed
on specific topics.
Develop a model for our IFRS financial statements.
Identify information gaps and necessary changes in reporting,
processes, systems and controls.
Completed
Completed
Design a process to prepare the IFRS comparative information.
Completed
Prepare an implementation plan to close the information gaps
through the design and development of financial reporting
processes, business-related processes and information systems.
Implementation
Execute the changeover plan at the business unit level.
Perform information collection, including data necessary for the
comparative financial statements and IFRS opening balance
sheet.
Communicate impacts and new policies to external stakeholders.
Completed
In progress
In progress
Through
disclosures
the
interim and annual
Post-
implementation
Prepare IFRS financial statements for the interim periods and the
Starting in fiscal 2012
year-ending March 31, 2012.
CAE Annual Report 2010 | 67
Management’s Discussion and Analysis
Status of the key elements of the changeover plan
Key Element
Accounting Policies
Select the accounting policies
Information technology (IT) and data systems
Determine the changes necessary to information
technology and data systems, including how to
accumulate the data necessary for the fiscal 2011
comparatives
Internal control over financial reporting
Revise existing internal control processes and
procedures to address significant changes to the
existing accounting policies and practices
Disclosure controls and procedures
Assess the disclosure controls and procedures
design and effectiveness implications
Financial reporting expertise
Engage subject matter experts to assist in the
transition
Provide
employees
the appropriate
training
to affected
Business activities
How the changes affect other stakeholders
Budgets and strategic plans
Foreign currency and hedging activities
Debt covenants
68 | CAE Annual Report 2010
Status
Accounting policy decisions have been made with regards to those
available under IFRS and in relation to certain choices available in
accordance with IFRS 1, First-time Adoption of International Financial
Reporting Standards. Some of our preliminary implications are discussed
below.
IFRSs are not static and a small number of amendments to IFRSs are
expected to be mandatory before our date of transition. More significant
changes to IFRS are expected to be published during calendar year 2010;
however, we do not anticipate that these changes will have an effect on
our financial statements until fiscal 2013.
The accounting policy decisions discussed further are based on the
expectation that we will apply the standards at our changeover date as
currently written.
The impacts to our IT system as a result of implementing IFRS are currently
being addressed and are expected to be minor.
We are ensuring that IFRS is integrated in the implementation of our new
ERP systems.
Revision of the existing internal control processes and procedures to
address significant changes to existing accounting policies and practices
are ongoing. We are assessing any issues to our internal control processes
as a result of implementing IFRS. We are also designing and implementing
internal controls for our one-time changeover adjustments and our
comparative year process.
We are assessing the disclosure controls and procedures design as a result
of implementing IFRS.
We have developed reporting tools which will enable us to gather all data
required for financial statement disclosures under IFRS.
We have a dedicated project team that has the appropriate level of IFRS
knowledge.
We have provided training to the extended IFRS project team, key
employees and stakeholders. A formal company-wide training session will
be completed during fiscal 2011 to all key finance people. Additional
training will be ongoing until full adoption of IFRS.
We have provided quarterly updates on the status of the project and our
preliminary accounting policy conclusions to our Audit Committee.
We have identified the different business groups that are affected by the
transition to IFRS from Canadian GAAP and have communicated the
differences to them.
External stakeholders have received communication regarding our IFRS
changeover plan through the interim and annual MD&As.
Processes are being developed to prepare budgets and strategic plans
under IFRS for fiscal 2012.
Hedging documentation required in accordance with IFRS has been
finalized.
We are assessing the implications of IFRS to our debt covenants but do not
expect any impacts that would cause debt covenants to be breached.
Management’s Discussion and Analysis
Selective preliminary accounting policy conclusions
We have identified the following important topics and have compared our current accounting policies to those standards expected to
apply in preparing our IFRS financial statements. As well, we have identified the expected impacts on the opening balance sheet from
retroactive application of IFRS and/or from the IFRS 1 exemptions that are available. The topics selected are those that we believe
are most pertinent to our business.
IFRS 1 requires that first-time adopters select accounting policies that are in compliance with each IFRS effective at the end of a
company’s first IFRS reporting period, and apply those policies to all periods presented in their first IFRS financial statem ents. The
general requirement of IFRS 1 is full retrospective application of all accounting standards; however, certain optional exceptions are
available.
Long-Term Contracts
Current accounting policy
Expected IFRS accounting
policy
Revenue from our long-term contracts for the design, engineering and manufacturing of
flight simulators is recognized using the percentage-of-completion method when there is
persuasive evidence of an arrangement, when the fee is fixed or determinable and when
collection is reasonably certain.
No significant changes have been identified from our current accounting policy. However, a
discussion paper has been published as a result of a joint project of the U.S. Financial
Accounting Standards Board and International Accounting Standards Board that would
replace the existing standards on revenue recognition.
Opening balance sheet impact
No significant opening balance sheet impact is expected based on our current contracts.
Accounting impact on our
continuing operations
Accounting for Joint Ventures
Current accounting policy
Expected IFRS accounting
policy
Not expected to have a significant impact based on our current contracts.
Our financial statements include our proportionate share of assets, liabilities and earnings of
joint ventures in which we have an interest.
No significant changes have been identified from our current accounting policy. However, a
new proposed standard, intended to replace the current IAS 31, Interests in joint ventures, is
expected to eliminate the option to use proportionate consolidation. Instead, the new
standard proposes the use of equity method accounting. It is expected to be effective for our
fiscal 2013.
Opening balance sheet impact
No significant opening balance sheet impact is expected.
Accounting impact on our
continuing operations
Employee Benefits
Current accounting policy
Not expected to have a significant impact until the proposed standard becomes effective.
The excess of the net actuarial gain (loss) over 10% of the greater of the benefit obligation
and the fair value of plan assets is not immediately recognized in earnings but is amortized
over the remaining service period of active employees.
Expected IFRS accounting
policy
Actuarial gains and losses for our defined benefit plans will be recognized in the period in
which they occur on the balance sheet and in other comprehensive income.
Opening balance sheet impact
Accounting impact on our
continuing operations
In accordance with the available IFRS 1 exemption, the cumulative net unrecognized
actuarial gains and losses on our opening balance sheet will be recognized by adjusting the
benefit obligation and retained earnings at the transition date.
All actuarial gains and losses incurred in the period will be fully recognized on the balance
sheet. The excess of the net actuarial gain (loss) over 10% of the greater of the benefit
obligation and the fair value of plan assets will no longer be amortized into earnings.
CAE Annual Report 2010 | 69
Management’s Discussion and Analysis
Leases
Current accounting policy
Canadian GAAP guidance provides certain indicators, primarily quantitative thresholds that
assist in determining whether a lease should be classified as capital or operating.
Expected IFRS accounting
policy
In accordance with IFRS, there are no specific quantitative thresholds; however IFRS
includes additional qualitative indicators that assist in determining lease classification.
Opening balance sheet impact
lease arrangements currently classified as operating
Material
including
sale-leaseback transactions of certain FFSs installed in our global network of training
centres, would instead qualify for finance (capital) lease treatment and thus be recognized on
the balance sheet, as a result of the re-assessment of the arrangements based on qualitative
indicators.
leases,
Accounting impact on our
continuing operations
The assets and related debt of finance (capital) lease arrangements would be recognized on
the consolidated balance sheet. Depreciation and interest expense from finance leases
would generally be recognized over the lease term. Any payments would be recognized as
repayments of capital and interest.
Property, Plant and Equipment – Componentization
Current accounting policy
The cost of an item of property, plant and equipment made up of significant separable
component parts are allocated to the component parts when practicable and when estimates
can be made of the lives of the separate components.
Expected IFRS accounting
policy
Each part of an item of property, plant and equipment with a cost that is significant in relation
to the total cost of the item shall be depreciated separately.
Opening balance sheet impact
No significant opening balance sheet impact is expected.
Accounting impact on our
continuing operations
We will adopt the revised accounting policy on transition to IFRS, but do not expect any
modification to the groupings of our major assets.
Capitalized Interest
Current accounting policy
Expected IFRS accounting
policy
Opening balance sheet impact
Interest costs relating to the construction of simulators, buildings for training centres and
other internally developed assets are capitalized as part of the cost of property, plant and
equipment. Capitalization of interest ceases when the asset is completed and ready for
productive use.
All borrowing costs that are directly attributable to the acquisition, construction or production
of a qualifying asset for which the commencement date for capitalization is on or after the
date of transition must be capitalized as part of the cost of that asset. Other borrowing costs
are recognized as an expense.
In accordance with the available IFRS 1 exemption, we have elected to capitalize borrowing
costs related to qualifying assets for which the commencement date for capitalization is on or
after the date of transition. Unamortized capitalized interest outstanding at the transition date
will be eliminated from costs of the relevant constructed simulators, buildings and other
internally developed assets, by adjusting retained earnings.
Accounting impact on our
continuing operations
No significant impacts have been identified.
70 | CAE Annual Report 2010
Management’s Discussion and Analysis
Income Taxes – Investment Tax Credits (ITCs)
Current accounting policy
ITCs arising from R&D activities are deducted from the related costs and are accordingly
included in the determination of net earnings when there is reasonable assurance that the
credits will be realized. ITCs arising from the acquisition or development of property, plant
and equipment and deferred development costs are deducted from the cost of those assets
with amortization calculated on the net amount.
Expected IFRS accounting
policy
With regards to federal ITCs, because the federal ITC is conditional as it is limited to income
tax payable, it is considered a tax credit.
Opening balance sheet impact
Unamortized federal ITCs previously included as a reduction of deferred development costs
and property, plant and equipment will be eliminated by adjusting retained earnings.
Accounting impact on our
continuing operations
Federal ITCs previously deducted from the related costs in accordance with Canadian GAAP
will instead be recognized as a reduction of the income tax expense.
Income Taxes – Acquirer Deferred Tax Assets (DTA) Arising in a Business Combination
Current accounting policy
Expected IFRS accounting
policy
The recognition of a DTA resulting from the acquirer’s prior year losses arising as a result of
a business combination is part of the purchase price allocation (PPA) and is included in the
determination of goodwill arising in a business combination.
The DTA of the acquirer is a separate transaction from the PPA, therefore excluded in the
determination of goodwill arising in a business combination. Instead the DTA impacts income
tax expense.
Opening balance sheet impact
At the date of transition, goodwill arising in previous business combinations from the
recognition of the DTA of the acquirer will be eliminated by adjusting retained earnings.
Accounting impact on our
continuing operations
We will adopt the revised accounting policy upon transition to IFRS.
Minority Interest (Non-Controlling Interest)
Current accounting policy
Expected IFRS accounting
policy
We currently include non-controlling interests on the balance sheet in Deferred gains and
other long-term liabilities. As well, our net earnings are shown net of any income or losses
attributed to non-controlling interests.
Non-controlling interests will be classified as part of shareholders’ equity and presented
separately in the income statement. Non-controlling interests will be included in the
determination of net income.
Opening balance sheet impact
We will adopt the revised accounting policy on transition to IFRS.
Accounting impact on our
continuing operations
No significant impacts have been identified.
Foreign Currency Translation Adjustment (CTA)
Current accounting policy
Expected IFRS accounting
policy
Opening balance sheet impact
Foreign exchange gains or losses arising from the translation into Canadian dollars of
foreign operations are included in accumulated other comprehensive loss, which is a
separate component of shareholders’ equity.
No significant changes have been identified from our current accounting policy.
IFRS 1 allows a first-time adopter on its date of transition to record its CTA from all its foreign
operations to retained earnings and reset the CTA balance to nil. We have elected to
exercise this option.
Accounting impact on our
continuing operations
No significant impacts have been identified.
CAE Annual Report 2010 | 71
Management’s Discussion and Analysis
Impairment of Long-Lived Assets
Current accounting policy
Expected IFRS accounting
policy
The impairment test for long-lived assets or asset groups is a two-step process. First, if there
is an indicator of impairment, the carrying amount (CA) of the asset is compared to the sum
of its undiscounted cash flows expected to result from its use and eventual disposition. If the
CA is greater, the CA is then compared to the fair value (FV) of the asset. An impairment
may have to be recognized.
Under IFRS, if there are indicators of impairment, impairment testing is a one-step process;
the CA of the asset is directly compared to the recoverable amount, which is the higher of FV
and value in use (VIU). VIU is calculated using the discounted future cash flows expected to
result from the use and eventual disposition of the asset.
Opening balance sheet impact
We have not yet completed our assessment of this impact.
Accounting impact on our
continuing operations
The one-step impairment test under IFRS may result in more frequent write-downs of assets.
Reversals of previous write-downs may be required in future periods.
Contingent Consideration
Current accounting policy
Contingent consideration is recognized at the date of acquisition of a business when the
amount can be reasonably estimated and the outcome is determinable beyond reasonable
doubt. Otherwise, contingent consideration is recognized when resolved. When there are
revisions to the amount of contingent consideration, the fair value of the consideration
issued is recognized as an additional cost of the purchase.
Expected IFRS accounting
policy
Contingent consideration is to be recognized at the date of acquisition at fair value, generally
as a liability.
Opening balance sheet impact
Subsequent re-measurement of contingent consideration, when recognized as a liability, will
be recorded in earnings.
In accordance with the available IFRS 1 exemption, the fair value of remaining contingent
consideration outstanding at the date of transition will be recognized by adjusting retained
earnings.
Accounting impact on our
continuing operations
We will adopt the revised accounting policy upon transition to IFRS. Volatility in our liabilities
and earnings will arise as a result of this change.
Royalty Arrangements with the Government
Current accounting policy
Expected IFRS accounting
policy
Opening balance sheet impact
Royalty arrangements with the government include amounts that we would contingently
repay based on specific criteria. For these arrangements, contingent royalty obligations are
recognized only once the royalty conditions are met.
Repayable royalty arrangements with the government should be recognized as financial
liabilities. The obligation to repay royalties is recorded when the contribution is received and
is estimated based on future projections. Subsequent re-measurement of these obligations
will be recognized in earnings.
An obligation, recorded at a discounted value and accreted over time, will be recorded on the
balance sheet, with an offsetting decrease in retained earnings and increase in assets.
Repayments of this obligation will be recorded as repayment of the principle obligation and
accrued interest and not as a royalty expense incurred during the period.
Accounting impact on our
continuing operations
We will adopt the revised accounting policy upon transition to IFRS. Volatility in our liabilities
and earnings will arise as a result of this change.
Provisions
Current accounting policy
Provisions should be recognized when it is likely (which is generally a higher threshold than
under IFRS) that a future event will confirm that a liability has been incurred.
Expected IFRS accounting
policy
IFRS requires a provision to be recognized when it is probable (more likely than not) that an
outflow of resource will be required to settle the obligation.
Opening balance sheet impact
We have not yet completed our assessment of this impact.
Accounting impact on our
continuing operations
We will adopt the revised accounting policy upon transition to IFRS.
72 | CAE Annual Report 2010
Management’s Discussion and Analysis
The differences identified in this document should not be regarded as an exhaustive list and other changes may result from our
conversion to IFRS. Furthermore, the disclosed impacts of our conversion to IFRS reflect our most recent assumptions, estimates and
expectations, including our assessment of the IFRS expected to be applicable at the time of conversion. As a result of changes in
circumstances, such as economic conditions or operations, and the inherent uncertainty from the use of assumptions, the actual
impacts of our conversion to IFRS may be different from those presented above. We are not able at this moment to reliably quantify
the impacts expected on our consolidated financial statements for these differences.
10.3 Critical accounting estimates
Because we prepare our consolidated financial statements in accordance with GAAP, we are required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements, and the reported amounts of revenue and expenses for the period reported. We regularly
review the estimates as they relate to the following areas, among others:
Revenue recognition;
Income taxes and investment tax credits;
Impairment of goodwill and long-lived assets;
Business combinations;
Research and development (R&D) costs;
Employee future benefits;
Fair value of financial instruments.
Management makes these estimates based on its best knowledge of current events and actions that we may undertake in the futur e.
Significant changes in estimates and/or assumptions could result in impairment or certain assets, and actual results could differ from
those estimates.
Our critical accounting policies are those that we believe are the most important in determining our financial condition and results and
require significant subjective judgment by management. We consider an accounting estimate to be critical if it requires managem ent to
make assumptions about matters that were highly uncertain at the time the estimate was made, if different estimates could have
reasonably been used or if there are likely to be changes, from period to period, in the estimate that would have a material effect on
our financial condition or results of operations.
See the Notes to the consolidated financial statements for a summary of our significant accounting policies, including the accounting
policies discussed below.
Revenue recognition
Long-term contracts
Revenue from long-term contracts for the design, engineering and manufacturing of flight simulators is recognized using the
percentage-of-completion method when there is persuasive evidence of an arrangement, when the fee is fixed or determinable and
when collection is reasonably certain.
to completion. Management conducts monthly
Under this method, revenue is recorded as related costs are incurred, on the basis of the percentage of actual costs incurred to date,
related to the estimated total costs to complete the contract. Recognized revenues and margins are subject to revisions as the
contract progresses
to complete,
percentage-of-completion estimates and revenues and margins recognized, on a contract-by-contract basis. The impact of any
revisions in cost and earning estimates is reflected in the period in which the need for a revision becomes known. Provisions for
estimated contract losses are recognized in the period in which the loss is determined. Contract losses are measured at the amount
by which the estimated total costs exceed the estimated total revenue from the contract. Warranty provisions are recorded when
revenue is recognized based on past experience. Generally, no right of return or complementary upgrade is provided to customers.
Post-delivery customer support is billed separately, and revenue is recognized over the support period.
its estimated costs
reviews of
Multiple-element arrangements
We sometimes enter into multiple-element revenue arrangements which may include a combination of the design, engineering and
manufacturing of flight simulators, as well as the provision of spare parts and maintenance. A multiple-element arrangement is
separated into more than one unit of accounting, and applicable revenue recognition criteria are considered separately for the different
units of accounting if all of the following criteria are met:
(i) The delivered item has value to the customer on a stand-alone basis;
(ii) There is objective and reliable evidence of the fair value of the undelivered item (or items);
(iii) If the arrangement includes a general right of return related to the delivered item, delivery or performance of the undelivered item
is considered probable and substantially in the control of the vendor.
The allocation of the revenue from a multiple deliverable agreement is based on fair value of an undelivered item as evidenced by the
price of the item regularly charged by us on an individual basis. We do enter into stand-alone transactions on a regular basis in
regards to the sale of spare parts and maintenance arrangements, therefore the price charged when the elements are sold separately
is readily available. The process for determining fair value of undelivered items, with respect to the design, engineering and
manufacturing of flight simulators, entails evaluating each transaction and taking into account the unique features of each deal.
CAE Annual Report 2010 | 73
Management’s Discussion and Analysis
Product maintenance
Revenue from maintenance contracts is generally recognized in earnings on a straight-line method over the contract period. In
situations when it is clear that costs will be incurred on other than a straight-line basis, based on historical evidence, we recognize
revenue over the contract period in proportion to the costs expected to be incurred in performing services under the contract.
Spare parts
Revenue from the sale of spare parts is recognized when there is persuasive evidence of an arrangement, delivery has occurred, the
fee is fixed or determinable and collection is reasonably assured.
Software arrangements
We also enter into software arrangements to sell, independently or in multiple-element arrangements, software, services, maintenance
and software customization. Revenue is recognized as follows:
and software customization. Revenue is recognized as follows:
Stand-alone products
Revenue from software licencing arrangements that do not require significant production, modification, or customization of
software, is recognized when there is persuasive evidence of an arrangement, delivery has occurred, the fee is fixed or
determinable and collection is reasonably assured.
Consulting services
Revenues arising from direct consulting or training services that are provided to customers are recognized as the services are
rendered.
Maintenance
Maintenance and support revenues are recognized ratably over the term of the related agreements.
Long-term software arrangements
Revenues from fixed-price software arrangements and software customization contracts that require significant production,
modification or customization of software are recognized under the percentage-of-completion method.
Training services
Revenue from training services is recognized when persuasive evidence of an arrangement exists, the fee is fixed or determinable,
recovery is reasonably certain and the services have been rendered.
For flight schools, cadet training courses are offered mainly by way of ground school and live aircraft flight. During the ground school
phase, revenue is recognized in earnings on a straight-line basis, while during the live aircraft flight phase, revenue is recognized
based on actual flown hours.
Income taxes and investment tax credits
We use the tax liability method to account for income taxes. Under this method, future income tax assets and liabilities are determined
according to differences between the carrying value and the tax bases of assets and liabilities.
This method also requires the recognition of future tax benefits, such as for net operating loss carryforwards, to the extent that the
realization of such benefits is more likely than not. A valuation allowance is recognized to the extent that, in the opinion of
management, it is more likely than not that the future income tax assets will not be realized.
Future tax assets and liabilities are measured by applying enacted or substantively enacted rates and laws at the date of the
consolidated financial statements for the years in which the temporary differences are expected to reverse.
We do not provide for income taxes on undistributed earnings of foreign subsidiaries that are not expected to be repatriated in the
foreseeable future.
Investment tax credits (ITCs) arising from R&D activities are deducted from the related costs, and are accordingly included in the
determination of net earnings when there is reasonable assurance that the credits will be realized. ITCs arising from the acquisition or
development of property, plant and equipment and deferred development costs are deducted from the cost of those assets with
amortization calculated on the net amount.
We are subject to examination by taxation authorities in various jurisdictions. The determination of tax liabilities and ITCs recoverable
involve certain uncertainties in the interpretation of complex tax regulations. Therefore, we provide for potential tax liabilities and ITCs
recoverable based on management’s best estimates. Differences between the estimates and the ultimate amounts of taxes and ITCs
are recorded in net earnings at the time they can be determined.
74 | CAE Annual Report 2010
Management’s Discussion and Analysis
Impairment of goodwill and long-lived assets
Goodwill
Goodwill represents the excess of the cost of acquired businesses over the net of the amounts assigned to identifiable assets
acquired and liabilities assumed. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances
indicate a potential impairment in value.
The impairment test consists of a comparison of the fair value of our reporting units with their carrying amount. When the carrying
amount of the reporting unit exceeds its fair value, we compare, in a second phase, the fair value of goodwill related to the reporting
unit to its carrying value and recognizes as impairment loss equal to the excess. The fair value of a reporting unit is calculated based
on one or more fair value measures, including present value techniques of estimated future cash flows and estimated amounts at
which the unit, as a whole, could be purchased or sold in a current transaction between willing unrelated parties. If the carrying
amount of the reporting unit exceeds its fair value, the second phase requires the fair value of the reporting unit to be allocated to the
underlying assets and liabilities of that reporting unit, resulting in an implied fair value of goodwill. If the carrying amount of that
reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss equal to the excess is recorded in
consolidated net earnings.
We perform the annual review of goodwill as at December 31 of each year. We did not determine that a charge was required following
the review as at December 31, 2007, December 31, 2008 and December 31, 2009.
Long-lived assets
Long-lived assets or asset groups are reviewed for impairment upon the occurrence of events or changes in circumstances indicating
that the carrying value of the assets may not be recoverable, as measured by comparing their carrying amounts to be estimated
undiscounted future cash flows generated by their use and eventual disposal. Impairment, if any, is measured as the excess of the
carrying amount of the asset or asset group over its fair value.
Business combinations
We account for our business combinations under the purchase method of accounting, which requires that the total cost of an
acquisition be allocated to the underlying net assets based on their respective estimated fair values. Part of this allocation process
requires us to identify and attribute values and estimated lives to the assets acquired. This involves considerable judgment and often
involves the use of significant estimates and assumptions, including those relating to future cash flows, discount rates and asset lives.
Determining these values and estimates subsequently affects the amount of amortization expense to be recognized in f uture periods
over the assets’ estimated useful lives.
Research and development (R&D) costs
Research costs are charged to consolidated earnings in the period in which they are incurred. Development costs are also charged to
earnings in the period incurred unless they meet all the specific deferral criteria and their recovery is reasonably assured. Amortization
of development costs deferred to future periods commences with the commercial production of the product and is charged to earnings
based on anticipated sales of the product, when possible, over a period not exceeding five years using the straight-line method.
Employee future benefits
We maintain defined benefit pension plans that provide benefits based on length of service and final average earnings. The service
costs and the pension obligations are actuarially determined using the projected benefit method prorated on employee service and
management’s best estimate of expected plan investment performance, salary escalation and retirement ages of employees. For the
purpose of calculating the expected return on plan assets, the relevant assets are valued at fair value. The excess of the net actuarial
gain (loss) over 10% of the greater of the benefit obligation and the fair value of plan assets is amortized over the remaining service
period of active employees. Past service costs, arising from plan amendments, are deferred and amortized on a straight -line basis
over the average remaining service lives of active employees at the date of amendment.
When a curtailment arises, any unamortized past service costs associated with the reduction of future services is recognized
immediately. Also, the increase or decrease in benefit obligations is recognized as a loss or gain, net of unrecognized actuarial gains
or losses. Finally, when an event gives rise to both a curtailment and a settlement of obligations, the curtailment is accounted for prior
to the settlement.
Fair value of financial instruments
The fair value of a financial instrument is the amount at which the financial instrument could be exchanged in an arm’s-length
transaction between knowledgeable and willing parties under no compulsion to act. The fair value of a financial instrument is
determined by reference to the available market information at the balance sheet date. When no active market exists for a financial
instrument, we determine the fair value of that instrument based on valuation methodologies as discussed below. In determining
assumptions required under a valuation model, we primarily use external, readily observable market data inputs. Assumptions or
inputs that are not based on observable market data incorporate our best estimates of market participant assumptions, and are used
when external data is not available. Counterparty credit risk and the fair values of our own credit risk have been taken into account in
estimating the fair value of all financial assets and financial liabilities, including derivatives.
CAE Annual Report 2010 | 75
Management’s Discussion and Analysis
The following assumptions and valuation methodologies have been used to estimate the fair value of financial instruments:
(i) The fair value of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities
approximate their carrying values due to their short-term maturities;
(ii) The fair value of capital leases are estimated using the discounted cash flow method;
(iii) The fair value of long-term debt, the long-term obligation and long-term receivables (including advances) are estimated based on
discounted cash flows using current interest rates for instruments with similar terms and remaining maturities;
(iv) The fair value of derivative instruments (including forward contracts, swap agreements and embedded derivatives with economic
characteristics and risks that are not clearly and closely related to those of the host contract) are determined using valuation
techniques and are calculated as the present value of the estimated future cash flows using an appropriate interest rate yiel d
curve and foreign exchange rate, adjusted for CAE’s and the counterparty credit risk. Assumptions are based on market
conditions prevailing at each balance sheet date. Derivative instruments reflect the estimated amounts that we would receive or
pay to settle the contracts at the balance sheet date;
(v) The fair value of available-for-sale investments which do not have readily available market value is estimated using a discounted
cash flow model, which includes some assumptions that are not supportable by observable market prices or rates.
11. SUBSEQUENT EVENTS
Credit facility refinancing
On April 6, 2010, we announced the conclusion of an agreement to refinance our existing credit facility due to expire in July 2010. The
new agreement is a committed three-year revolving credit facility of US$450.0 million with an option to increase to a total amount of up
to US$650.0 million.
The Datamine Group
On April 19, 2010, we announced the acquisition of The Datamine Group (Datamine) for an initial total cost of $22.8 million. Datamine
is a supplier of mining optimization software tools and services.
12. CONTROLS AND PROCEDURES
The internal auditor reports regularly to management on any weaknesses it finds in our internal controls and these reports are
reviewed by the Audit Committee.
In accordance with National Instrument 52-109 issued by the Canadian Securities Administrators (CSA), certificates signed by the
President and Chief Executive Officer (CEO) and the Chief Financial Officer (CFO) have been filed. These filings certify the
appropriateness of our disclosure controls and procedures and the design and effectiveness of the internal controls over financial
reporting.
12.1 Evaluation of disclosure controls and procedures
Our disclosure controls and procedures are designed to provide reasonable assurance that information is accumulated and
communicated to our President and CEO and CFO and other members of management, so we can make timely decisions about
required disclosure.
Under the supervision of the President and CEO and the CFO, management evaluated the effectiveness of our disclosure controls
and procedures, as defined in Rule 13a-15(e) and 15d-15(e) under U.S. Securities Exchange Act of 1934, as of March 31, 2010. The
President and CEO and the CFO concluded from the evaluation that the design and operation of our disclosure controls and
procedures were effective as at March 31, 2010, and ensure that information is recorded, processed, summarized and reported within
the time periods specified under Canadian and U.S. securities laws.
12.2 Internal control over financial reporting
Management is responsible for establishing and maintaining adequate internal controls over financial reporting, as defined in
Rule 13a-15(f) and 15d-15(f) under the U.S. Securities Exchange Act of 1934. Internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial reporting, and the preparation of financial statements for
external purposes in accordance with GAAP. Management evaluated the design and operation of our internal controls over financial
reporting as of March 31, 2010, based on the framework and criteria established in Internal Control – Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and has concluded that our internal control over
financial reporting is effective. Management did not identify any material weaknesses.
There were no changes in our internal controls over financial reporting that occurred during fiscal year 2010 that have materially
affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
13. OVERSIGHT ROLE OF AUDIT COMMITTEE AND BOARD OF DIRECTORS
The Audit Committee reviews our annual MD&A and related consolidated financial statements with management and the external
auditor and recommends them to the Board of Directors for their approval. Management and our internal auditor also provide the Audit
Committee with regular reports assessing our internal controls and procedures for financial reporting. The external auditor reports
regularly to management on any weaknesses it finds in our internal control, and these reports are reviewed by the Audit Committee.
14. ADDITIONAL INFORMATION
You will find additional information about CAE, including our most recent AIF, on our website at www.cae.com, or on SEDAR at
www.sedar.com or on EDGAR at www.sec.gov.
76 | CAE Annual Report 2010
15. SELECTED FINANCIAL INFORMATION
Selected quarterly information
Management’s Discussion and Analysis
$
Q4
Q3
Q1
Q2
Total
$
$
$
$
$
$
$
383.0
27.2
0.11
0.11
27.2
0.11
0.11
255.4
255.4 (1)
1.17
364.5
39.1
0.15
0.15
39.1
0.15
0.15
255.6
255.6 (1)
1.10
382.9
37.7
0.15
0.15
37.7
0.15
0.15
255.9
255.9 (1)
1.06
395.9
40.5
0.16
0.16
40.5
0.16
0.16
256.4
256.4 (1)
1.04
1,526.3
144.5
0.56
0.56
144.5
0.56
0.56
255.8
255.8
1.09
(unaudited – amounts in millions, except per share
amounts and exchange rates)
Fiscal 2010
Revenue
Earnings from continuing operations
Basic earnings per share from continuing operations
Diluted earnings per share from continuing operations
Net earnings
Basic earnings per share
Diluted earnings per share
Average number of shares outstanding (basic)
Average number of shares outstanding (diluted)
Average exchange rate, U.S. dollar to Canadian dollar
Fiscal 2009 (2)
Revenue
Earnings from continuing operations
Basic earnings per share from continuing operations
Diluted earnings per share from continuing operations
Net earnings
Basic earnings per share
Diluted earnings per share
Average number of shares outstanding (basic)
Average number of shares outstanding (diluted)
Average exchange rate, U.S. dollar to Canadian dollar
Fiscal 2008 (2)
1,423.6
Revenue
163.4
Earnings from continuing operations
0.64
Basic earnings per share from continuing operations
0.64
Diluted earnings per share from continuing operations
151.3
Net earnings
0.60
Basic earnings per share
0.59
Diluted earnings per share
253.4
Average number of shares outstanding (basic)
254.6
Average number of shares outstanding (diluted)
Average exchange rate, U.S. dollar to Canadian dollar
1.03
$
(1) For these periods, the effect of stock options potentially exercisable was anti-dilutive; therefore, the basic and diluted weighted average
1,662.2
202.2
0.79
0.79
201.1
0.79
0.79
254.8
255.0
1.13
424.6
52.1
0.20
0.20
52.1
0.20
0.20
254.9
254.9 (1)
1.21
438.8
52.7
0.21
0.21
52.7
0.21
0.21
254.9
254.9 (1)
1.25
406.7
49.2
0.19
0.19
49.0
0.19
0.19
254.9
255.4
1.04
392.1
48.2
0.19
0.19
47.3
0.19
0.19
254.3
255.1
1.01
344.8
41.1
0.16
0.16
40.5
0.16
0.16
253.8
254.8
0.98
358.3
38.5
0.15
0.15
38.5
0.15
0.15
252.4
253.8
1.10
353.9
39.2
0.15
0.15
39.1
0.15
0.15
253.5
254.9
1.04
366.6
44.6
0.18
0.17
33.2
0.13
0.13
253.9
254.9
1.00
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
number of shares outstanding are the same.
(2) Comparative periods of fiscal 2009 and fiscal 2008 have been restated to reflect a change in the account treatment for pre-operating costs.
CAE Annual Report 2010 | 77
Management’s Discussion and Analysis
Selected segment information (fourth quarter ending March 31)
(unaudited – amounts in millions, except
operating margins)
Simulation Products
Training & Services
Civil
Revenue
Segment operating income
Operating margins (%)
Military
Revenue
Segment operating income
Operating margins (%)
Total
Revenue
Segment operating income
Operating margins (%)
2010
2009
2010
2009
2010
$
64.5
8.9
13.8
$ 107.3
18.5
17.2
$ 113.6
21.0
18.5
$ 149.3
25.8
17.3
$ 143.6
26.8
18.7
$
68.5
9.2
13.4
$ 213.8
34.7
16.2
$ 250.9
45.3
18.1
$ 182.1
30.2
16.6
$ 121.4
25.1
20.7
$
66.5
9.2
13.8
$ 187.9
34.3
18.3
Other
EBIT
$ 178.1
29.9
16.8
$ 217.8
35.0
16.1
$ 395.9
64.9
16.4
(1.9)
63.0
$
The comparative period has been restated to reflect a change in the accounting treatment for pre-operating costs.
Selected segment information (annual)
(unaudited – amounts in millions, except
operating margins)
Simulation Products
Training & Services
2010
2009
2008
2010
2009
2008
2010
2009
Total
2009
$ 228.7
43.6
19.1
$ 210.1
36.0
17.1
$ 438.8
79.6
18.1
–
$ 79.6
Total
2008
Civil
Revenue
Segment operating income
Operating margins (%)
Military
Revenue
Segment operating income
Operating margins (%)
Total
Revenue
Segment operating income
Operating margins (%)
$ 284.1
49.4
17.4
$ 545.6
95.7
17.5
$ 829.7
145.1
17.5
$ 477.5 $ 435.3 $ 433.5 $ 460.5 $ 382.1 $ 717.6 $ 938.0 $ 817.4
166.9
20.4
124.5
17.3
179.1
19.1
71.6
18.7
87.0
18.9
75.1
17.3
95.3
21.9
92.1
19.3
$ 483.5 $ 383.7 $ 263.1 $ 240.7 $ 222.5 $ 808.7 $ 724.2 $ 606.2
83.7
13.8
139.6
17.3
126.7
17.5
39.0
16.2
32.0
14.4
43.9
16.7
51.7
13.5
87.7
18.1
179.8
18.7
$ 961.0 $ 819.0 $ 696.6 $ 701.2 $ 604.6 $ 1,526.3 $ 1,662.2 $ 1,423.6
250.6
103.6
17.6
17.1
–
Other
EBIT $ 230.0 $ 305.8 $ 250.6
264.1
17.3
(34.1)
305.8
18.4
–
119.0
17.1
147.0
17.9
126.0
18.0
Comparative periods have been restated to reflect a change in the accounting treatment for pre-operating costs.
Selected annual information for the past five years
(unaudited – amounts in millions, except per share amounts)
Revenue
Earnings from continuing operations
Net earnings
Financial position:
Total assets
Total net debt
Per share:
Basic earnings from continuing operations
Diluted earnings from continuing operations
Basic net earnings
Diluted net earnings
Basic dividends
Shareholders’ equity
2009
2010
2006
$ 1,526.3 $ 1,662.2 $ 1,423.6 $ 1,250.7 $ 1,107.2
72.7
66.7
163.4
151.3
202.2
201.1
126.5
124.8
144.5
144.5
2008
2007
$ 2,621.9 $ 2,665.8 $ 2,243.2 $ 1,945.1 $ 1,708.6
190.2
133.0
285.1
124.1
179.8
$
0.56 $
0.56
0.56
0.56
0.12
4.52
0.79 $
0.79
0.79
0.79
0.12
4.70
0.64 $
0.64
0.60
0.59
0.04
3.71
0.50 $
0.50
0.50
0.49
0.04
3.27
0.29
0.29
0.27
0.26
0.04
2.67
Comparative periods have been restated to reflect a change in the accounting treatment for pre-operating costs.
78 | CAE Annual Report 2010
CAE INC.
CONSOLIDATED FINANCIAL STATEMENTS
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
INDEPENDENT AUDITOR’S REPORT
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
Consolidated Statements of Earnings
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Comprehensive (Loss) Income
Consolidated Statement of Accumulated Other Comprehensive Loss
Consolidated Statements of Cash Flows
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Nature of Operations and Signifi cant Accounting Policies
Note 2 Changes in Accounting Policies
Note 3 Business Acquisitions and Combinations
Note 4 Investments in Joint Ventures
Note 5 Discontinued Operations
Note 6 Accounts Receivable
Note 7 Inventories
Note 8 Property, Plant and Equipment
Note 9 Intangible Assets
Note 10 Goodwill
Note 11 Other Assets
Note 12 Accounts Payable and Accrued Liabilities
Note 13 Debt Facilities
Note 14 Deferred Gains and Other Long-Term Liabilities
Note 15 Income Taxes
Note 16 Capital Stock
Note 17 Stock-Based Compensation Plans
Note 18 Capital Management
Note 19 Financial Instruments and Financial Risk Management
Note 20 Supplementary Cash Flows and Earnings Information
Note 21 Contingencies
Note 22 Commitments
Note 23 Government Assistance
Note 24 Employee Future Benefi ts
Note 25 Restructuring Charge
Note 26 Variable Interest Entities
Note 27 Operating Segments and Geographic Information
Note 28 Differences Between Canadian and United States
Generally Accepted Accounting Principles
Note 29 Comparative Financial Statements
Note 30 Subsequent Events
80
80
82
82
83
83
85
85
86
87
87
94
95
97
98
99
99
100
100
101
101
101
102
105
106
108
109
112
112
121
122
122
122
123
127
128
129
131
137
137
CAE Annual Report 2010 | 79
Management’s Report on Internal Control Over Financial Reporting
Management of CAE is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in
Rule 13a-15(f), 15d-15(f) under the Securities Exchange Act of 1934). CAE’s internal control over financial reporting is a process
designed under the supervision of CAE’s President and Chief Executive Officer and Chief Financial Officer to provi de reasonable
assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external
reporting purposes in accordance with Canadian generally accepted accounting principles.
As of March 31, 2010, management conducted an assessment of the effectiveness of the Company’s internal control over the
financial reporting based on the framework and criteria established in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that the
Company’s internal control over financial reporting as of March 31, 2010 was effective.
M. Parent
President and Chief Executive Officer
A. Raquepas
Vice-president, Finance and Chief Financial Officer
Montreal (Canada)
May 13, 2010
Independent Auditor’s Report
To the Shareholders of CAE Inc.
We have completed integrated audits of the consolidated financial statements and internal control over financial reporting of CAE Inc.
(the “Company”) as at March 31, 2010, 2009 and 2008. Our opinions, based on our audits, are presented below.
Consolidated financial statements
We have audited the accompanying consolidated balance sheets of the Company as at March 31, 2010 and 2009, and the related
consolidated statements of earnings, changes in shareholders’ equity, comprehensive (loss) income, accumulated other
comprehensive loss and cash flows for each of the three years in the period ended March 31, 2010. These consolidated financial
statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits of the Company’s financial position as at March 31, 2010 and 2009 and the results of its operations and its
cash flows for each of the three years in the period ended March 31, 2010 in accordance with Canadian generally accepted auditing
standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financi al position of
the Company as at March 31, 2010 and 2009 and the results of its operations and its cash flows for each of the three years in the
period ended March 31, 2010 in accordance with Canadian generally accepted accounting principles.
Internal control over financial reporting
We have also audited the Company’s internal control over financial reporting as at March 31, 2010, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on the effectiveness of the
Company’s internal control over financial reporting based on our audit.
We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal
control over financial reporting includes obtaining an understanding of internal control over financial reporting, assessing the risk that
a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the as sessed
risk, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
80 | CAE Annual Report 2010
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the ass ets of the
company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of c hanges
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as at
March 31, 2010 based on criteria established in Internal Control – Integrated Framework issued by the COSO.
May 13, 2010
Montréal, Quebec, Canada
1 Chartered accountant auditor permit No.12300
Cons olidated Fi nancial Statements
CAE Annual Report 2010 | 81
$
$
2010
312.9
237.5
220.6
126.9
33.7
24.3
7.1
963.0
1,147.2
82.9
125.4
161.9
141.5
$
$
2009
Restated
(Note 2)
195.2
322.4
215.3
118.9
31.3
11.5
5.3
899.9
1,302.4
86.1
99.5
159.1
118.8
$
2,621.9
$
2,665.8
$
$
467.8
199.7
51.1
23.0
741.6
441.6
200.5
82.4
$
$
540.4
203.8
125.6
20.9
890.7
354.7
184.9
37.7
$
1,466.1
$
1,468.0
$
$
$
441.5
10.9
918.8
(215.4)
1,155.8
2,621.9
$
$
$
430.2
10.1
805.0
(47.5)
1,197.8
2,665.8
Consolidated Financial Statements
Consolidated Balance Sheets
As at March 31
(amounts in millions of Canadian dollars)
Assets
Current assets
Cash and cash equivalents
Accounts receivable (Note 6)
Contracts in progress
Inventories (Note 7)
Prepaid expenses
Income taxes recoverable
Future income taxes (Note 15)
Property, plant and equipment, net (Note 8)
Future income taxes (Note 15)
Intangible assets (Note 9)
Goodwill (Note 10)
Other assets (Note 11)
Liabilities and shareholders’ equity
Current liabilities
Accounts payable and accrued liabilities (Note 12)
Deposits on contracts
Current portion of long-term debt (Note 13)
Future income taxes (Note 15)
Long-term debt (Note 13)
Deferred gains and other long-term liabilities (Note 14)
Future income taxes (Note 15)
Shareholders’ equity
Capital stock (Note 16)
Contributed surplus
Retained earnings
Accumulated other comprehensive loss
Contingencies and commitments (Notes 21 and 22)
The accompanying notes form an integral part of these Consolidated Financial Statements.
Approved by the Board:
M. Parent
Director
L. R. Wilson
Director
82 | CAE Annual Report 2010
Consolidated Statements of Earnings
Years ended March 31
(amounts in millions of Canadian dollars, except per share amounts)
Revenue
Earnings before restructuring, interest and income taxes
Restructuring charge (Note 25)
Earnings before interest and income taxes (Note 27)
Interest expense, net (Note 13)
Earnings before income taxes
Income tax expense (Note 15)
Earnings from continuing operations
Results of discontinued operations (Note 5)
Net earnings
Basic and diluted earnings per share from continuing operations
Basic earnings per share
Diluted earnings per share
Weighted average number of shares outstanding (basic) (Note 16)
Weighted average number of shares outstanding (diluted) (Note 16)(1)
Consolidated Financial Statements
2010
2009
Restated
(Note 2)
2008
Restated
(Note 2)
$ 1,526.3 $ 1,662.2 $ 1,423.6
$
$
$
$
$
$
$
$
264.1 $
34.1
230.0 $
305.8 $
–
305.8 $
26.0
20.2
204.0 $
285.6 $
59.5
83.4
144.5 $
–
144.5 $
0.56 $
0.56 $
0.56 $
255.8
255.8
202.2 $
(1.1)
201.1 $
0.79 $
0.79 $
0.79 $
254.8
255.0
250.6
–
250.6
17.5
233.1
69.7
163.4
(12.1)
151.3
0.64
0.60
0.59
253.4
254.6
(1) For fiscal year 2010, the effect of stock options potentially exercisable was anti-dilutive; therefore, the basic and diluted weighted average
number of shares outstanding are the same.
The accompanying notes form an integral part of these Consolidated Financial Statements.
Consolidated Statements of Changes in Shareholders’ Equity
Year ended March 31, 2010
(amounts in millions of Canadian dollars, except number of shares)
Number of
Shares
Common Shares
Stated
Value
Contributed
Surplus
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
Shareholders’
Equity
255,146,443
1,327,220
$ 430.2
7.5
$ 10.1
–
$ 805.0
–
$
(47.5)
–
$ 1,197.8
7.5
–
43,331
–
–
–
–
3.4
0.4
–
–
–
–
(3.4)
–
4.2
–
–
–
–
(0.4)
–
144.5
(30.3)
–
–
–
–
–
–
–
4.2
144.5
(30.3)
–
(167.9)
(167.9)
Balance,
beginning of year
Stock options exercised
Transfer upon exercise of
stock options
Stock dividends
Stock-based
compensation (Note 17)
Net earnings
Dividends
Other comprehensive
loss
Balance,
end of year
256,516,994
$ 441.5
$ 10.9
$ 918.8
$ (215.4)
$ 1,155.8
The total of Retained earnings and Accumulated other comprehensive loss for the year ended March 31, 2010 was $703.4 million (2009 –
$757.5 million; 2008 – $512.1 million).
The accompanying notes form an integral part of these Consolidated Financial Statements.
CAE Annual Report 2010 | 83
Consolidated Financial Statements
Year ended March 31, 2009
(amounts in millions of Canadian dollars, except number of shares)
Number of
Shares
Common Shares
Stated
Value
Contributed
Surplus
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
Shareholders’
Equity
253,969,836
1,077,200
$ 418.9
9.3
$ 8.3
–
$ 634.5
–
$ (122.4)
–
$ 939.3
9.3
–
99,407
–
–
–
–
1.0
1.0
–
–
–
–
(1.0)
–
2.8
–
–
–
–
(1.0)
–
201.1
(29.6)
–
–
–
–
–
–
–
2.8
201.1
(29.6)
–
74.9
74.9
Balance,
beginning of year,
restated
Stock options exercised
Transfer upon exercise
of stock options
Stock dividends
Stock-based compensation
(Note 17)
Net earnings,
restated (Note 2)
Dividends
Other comprehensive
income, restated (Note 2)
Balance,
end of year, restated
255,146,443
$ 430.2
$ 10.1
$ 805.0
$
(47.5)
$ 1,197.8
Year ended March 31, 2008
(amounts in millions of Canadian dollars, except number of shares)
Number of
Shares
Common Shares
Stated
Value
Contributed
Surplus
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
Shareholders’
Equity
Balance,
beginning of year, as
previously reported
Adjustment for change in
accounting policy
(Note 2)
Balance,
beginning of year,
restated
Shares issued
Stock options exercised
Transfer upon exercise
of stock options
Stock dividends
Stock-based compensation
(Note 17)
Net earnings,
restated (Note 2)
Dividends
Other comprehensive loss,
restated (Note 2)
Balance,
251,960,449
$ 401.7
$ 5.7
$ 501.9
$
(91.2)
$ 818.1
–
–
–
(8.6)
–
(8.6)
251,960,449
169,851
1,814,095
$ 401.7
0.8
13.9
$ 5.7
–
–
$ 493.3
–
–
$
(91.2)
–
–
$ 809.5
0.8
13.9
–
25,441
–
–
–
–
2.2
0.3
–
–
–
–
(2.2)
–
4.8
–
–
–
–
(0.3)
–
151.3
(9.8)
–
–
–
–
–
–
–
4.8
151.3
(9.8)
–
(31.2)
(31.2)
end of year, restated
253,969,836
$ 418.9
$ 8.3
$ 634.5
$ (122.4)
$ 939.3
The accompanying notes form an integral part of these Consolidated Financial Statements.
84 | CAE Annual Report 2010
Consolidated Statements of Comprehensive (Loss) Income
Consolidated Financial Statements
Years ended March 31
(amounts in millions of Canadian dollars)
Net earnings
Other comprehensive (loss) income, net of income taxes:
Foreign currency translation adjustment
Net foreign exchange (losses) gains on translation of
2010
2009
Restated
(Note 2)
2008
Restated
(Note 2)
$
144.5
$
201.1
$ 151.3
financial statements of self-sustaining foreign operations
$
(225.0)
$
113.5
$
(49.4)
Net change in gains (losses) on certain long-term debt
denominated in foreign currency and designated as
hedges on net investments in self-sustaining foreign
operations
Reclassifications to income
Income tax
Net changes in cash flow hedge
Net change in gains (losses) on derivative items designated
as hedges of cash flows
Reclassifications to income or to the related
non-financial assets or liabilities
Income tax
Total other comprehensive (loss) income
Comprehensive (loss) income
18.3
0.3
(0.6)
$
(207.0)
$
(7.7)
(1.9)
(1.3)
102.6
15.7
–
(0.6)
$
(34.3)
$
58.1
$
(48.8)
$
29.7
(2.2)
(16.8)
39.1
(167.9)
(23.4)
10.4
10.7
(27.7)
74.9
276.0
$
$
$
$
$
$
(25.2)
(1.4)
3.1
$
$
(31.2)
$ 120.1
The accompanying notes form an integral part of these Consolidated Financial Statements.
Consolidated Statement of Accumulated Other Comprehensive Loss
As at and for the year ended March 31, 2010
(amounts in millions of Canadian dollars)
Balance in accumulated other comprehensive
Foreign
Currency
Translation
Adjustment
loss, beginning of year, as previously reported
$
Adjustment for change in accounting policy (Note 2)
(20.4)
1.0
Cash Flow
Hedge
$
(28.1)
–
Accumulated
Other
Comprehensive
Loss
$
(48.5)
1.0
Balance in accumulated other comprehensive
loss, beginning of year, restated
Details of other comprehensive loss:
Net change in (losses) gains
Reclassifications to income or to the related
non-financial assets or liabilities
Income tax
Total other comprehensive loss for the year
Balance in accumulated other comprehensive
loss, end of year
$
(19.4)
$
(28.1)
$
(47.5)
(206.7)
0.3
(0.6)
(207.0)
(226.4)
$
$
58.1
(2.2)
(16.8)
39.1
$
$
11.0
(148.6)
(1.9)
(17.4)
(167.9)
(215.4)
$
$
The accompanying notes form an integral part of these Consolidated Financial Statements.
CAE Annual Report 2010 | 85
Consolidated Financial Statements
Consolidated Statements of Cash Flows
Years ended March 31
(amounts in millions of Canadian dollars)
Operating activities
Net earnings
Results of discontinued operations (Note 5)
Earnings from continuing operations
Adjustments to reconcile earnings to cash flows from operating activities:
Depreciation
Financing cost amortization
Amortization of intangible and other assets
Future income taxes (Note 15)
Investment tax credits
Stock-based compensation plans (Note 17)
Employee future benefits, net (Note 24)
Amortization of other long-term liabilities
Other
Changes in non-cash working capital (Note 20)
Net cash provided by operating activities
Investing activities
Business acquisitions, net of cash and cash equivalents acquired (Note 3)
Capital expenditures
Proceeds from the disposal of property, plant and equipment
Deferred development costs
Other
Net cash used in investing activities
Financing activities
Proceeds from long-term debt, net of transaction costs and the hedge
accounting adjustment (Note 13)
Repayment of long-term debt (Note 13)
Proceeds from capital lease (Note 13)
Repayment of capital lease (Note 13)
Dividends paid
Common stock issuance (Note 16)
Other
Net cash provided by (used in) financing activities
Effect of foreign exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplementary Cash Flows Information (Note 20)
The accompanying notes form an integral part of these Consolidated Financial Statements.
2010
2009
Restated
(Note 2)
2008
Restated
(Note 2)
$
$
144.5
–
144.5
$
$
201.1
1.1
202.2
$
$
151.3
12.1
163.4
75.4
0.8
17.8
27.2
(8.6)
13.9
(1.4)
(7.3)
8.3
(3.6)
267.0
(34.7)
(130.9)
8.8
(14.6)
(13.0)
71.3
0.8
17.6
8.5
19.9
(11.5)
0.4
(9.6)
(10.1)
(95.1)
194.4
(41.5)
(203.7)
–
(10.5)
(5.7)
$
$
60.6
0.8
14.9
26.9
15.4
(0.8)
0.1
(6.8)
(0.6)
(16.9)
257.0
(41.8)
(189.5)
–
(16.5)
(5.5)
$
$
$
$
$
(184.4)
$
(261.4)
$
(253.3)
$
$
$
$
$
191.0
(118.7)
21.6
(2.0)
(30.3)
7.5
(1.9)
67.2
(32.1)
117.7
195.2
312.9
$
$
$
$
50.3
(27.8)
–
–
(29.6)
9.3
(13.4)
(11.2)
17.7
(60.5)
255.7
$
$
$
$
141.1
(37.4)
–
–
(9.8)
13.9
(5.9)
101.9
(0.1)
105.5
150.2
$
195.2
$
255.7
86 | CAE Annual Report 2010
Notes to the Consolidated Financial Statements
Years ended March 31, 2010, 2009 and 2008 (amounts in millions of Canadian dollars)
NOTE 1 – NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of operations
CAE Inc. (or the Company) designs, manufactures and supplies simulation equipment and services and develops integrated training
solutions for the military, commercial airlines, business aircraft operators, aircraft manufacturers and healthcare education and service
providers. CAE’s flight simulators replicate aircraft performance in normal and abnormal operations as well as a comprehensive set of
environmental conditions utilizing visual systems that contain an extensive database of airports, other landing areas, flying
environments, motion and sound cues to create a fully immersive training environment. The Company offers a range of flight training
devices based on the same software used on its simulators. The Company also operates a global network of training centres in
locations around the world.
The Company’s operations are managed through four segments:
(i) Simulation Products/Civil (SP/C) – Designs, manufactures and supplies civil flight simulators, training devices and visual
systems;
(ii) Simulation Products/Military (SP/M) – Designs, manufactures and supplies advanced military training equipment and software
tools for air forces, armies and navies;
(iii) Training & Services/Civil (TS/C) – Provides business and commercial aviation training for all flight and ground personnel and all
associated services;
(iv) Training & Services/Military (TS/M) – Supplies turnkey training services, support services, systems maintenance and modelling
and simulation solutions.
Generally accepted accounting principles and financial statements presentation
These financial statements have been prepared in accordance with Canadian generally accepted accounting principles (GAAP). In
some respects, these accounting principles differ from United States generally accepted accounting principles (U.S. GAAP). The main
differences are described in Note 28.
Use of estimates
The preparation of consolidated financial statements in conformity with GAAP requires CAE’s management (management) to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and reported amounts of revenues and expenses for the period reported.
Management reviews its estimates on an ongoing basis, particularly as they relate to accounting for long-term contracts, useful lives,
employee future benefits, income taxes, impairment of long-lived assets, asset retirement obligations, fair value of certain financial
instruments, goodwill and intangible assets, based on management’s best knowledge of current events and actions that the Company
may undertake in the future. Actual results could differ from those estimates.
Basis of consolidation
The consolidated financial statements include the accounts of CAE Inc. and of all its majority owned subsidiaries, and variable interest
entities for which the Company is the primary beneficiary. They also include the Company’s proportionate share of assets, liabilities
and earnings of joint ventures in which the Company has an interest (refer to Note 4). All significant intercompany accounts and
transactions have been eliminated. The investments over which the Company exercises significant influence are accounted for using
the equity method and portfolio investments are accounted at fair value unless there is no quoted price in an active market.
The Company determines if a variable interest entity (VIE) (a party with an ownership, contractual or other financial interest) should be
consolidated if it is exposed to a majority of the risk of loss from the VIE’s activities, is entitled to receive a majority of the VIE’s
residual returns (if no party is exposed to a majority of the VIE’s losses), or both (the primary beneficiary). The Company revises its
determination of the accounting for VIEs when certain events occur, such as changes in governing documents or contractual
arrangements. Refer to Note 26 for additional information.
CAE Annual Report 2010 | 87
Notes to the Consolidated Financial Statements
Revenue recognition
Long-term contracts
Revenue from long-term contracts for the design, engineering and manufacturing of flight simulators is recognized using the
percentage-of-completion method when there is persuasive evidence of an arrangement, when the fee is fixed or determinable and
when collection is reasonably certain.
to completion. Management conducts monthly
Under this method, revenue is recorded as related costs are incurred, on the basis of the percentage of actual costs incurred to date,
related to the estimated total costs to complete the contract. Recognized revenues and margins are subject to revisions as the
contract progresses
to complete,
percentage-of-completion estimates and revenues and margins recognized, on a contract-by-contract basis. The impact of any
revisions in cost and earning estimates is reflected in the period in which the need for a revision becomes known. Provisions for
estimated contract losses are recognized in the period in which the loss is determined. Contract losses are measured at the amount
by which the estimated total costs exceed the estimated total revenue from the contract. Warranty provisions are recorded when
revenue is recognized based on past experience. Generally, no right of return or complementary upgrade is provided to customers.
Post-delivery customer support is billed separately, and revenue is recognized over the support period.
its estimated costs
reviews of
Product maintenance
Revenue from maintenance contracts is generally recognized in earnings on a straight-line method over the contract period. In
situations when it is clear that costs will be incurred on other than a straight-line basis, based on historical evidence, revenue is
recognized over the contract period in proportion to the costs expected to be incurred in performing services under the contract.
Spare parts
Revenue from the sale of spare parts is recognized when there is persuasive evidence of an arrangement, delivery has occurred, the
fee is fixed or determinable and collection is reasonably assured.
Software arrangements
The Company also enters into software arrangements to sell, independently or in multiple-element arrangements, software, services,
maintenance and software customization. Revenue is recognized as follows:
(i)
(ii)
Stand-alone products
Revenue from software licensing arrangements that do not require significant production, modification, or customization of
software, is recognized when there is persuasive evidence of an arrangement, delivery has occurred, the fee is fixed or
determinable and collection is reasonably assured.
Consulting services
Revenues arising from direct consulting or training services that are provided to customers are recognized as the services are rendered.
(iii) Maintenance
Maintenance and support revenues are recognized ratably over the term of the related agreements.
(iv)
Long-term software arrangements
Revenues from fixed-price software arrangements and software customization contracts that require significant production,
modification, or customization of software are recognized under the percentage-of-completion method.
Training services
Revenue from training services is recognized when persuasive evidence of an arrangement exists, the fee is fixed or determinable,
recovery is reasonably certain and the services have been rendered.
For flight schools, cadet training courses are offered mainly by way of ground school and live aircraft flight. During the ground school
phase, revenue is recognized in earnings on a straight-line basis, while during the live aircraft flight phase, revenue is recognized
based on actual flown hours.
Multiple-element arrangements
The Company sometimes enters into multiple-element revenue arrangements, which may include a combination of the design,
engineering and manufacturing of flight simulators, as well as the provision of spare parts and maintenance. A multiple-element
arrangement is separated into more than one unit of accounting, and applicable revenue recognition criteria are considered separately
for the different units of accounting if all of the following criteria are met:
(i) The delivered item has value to the customer on a stand-alone basis;
(ii) There is objective and reliable evidence of the fair value of the undelivered item (or items);
(iii) If the arrangement includes a general right of return related to the delivered item, delivery or performance of the undelivered item
is considered probable and substantially in the control of the vendor.
The allocation of the revenue from a multiple deliverable agreement is based on fair value of an undelivered item as evidenced by the
price of the item regularly charged by the Company on an individual basis. The Company enters into stand-alone transactions on a
regular basis in regards to the sale of spare parts and maintenance arrangements; therefore the price charged when the elements are
sold separately is readily available. The process for determining fair value of undelivered items, with respect to the design,
engineering and manufacturing of flight simulators, entails evaluating each transaction and taking into account the unique features of
each deal.
88 | CAE Annual Report 2010
Notes to the Consolidated Financial Statements
Foreign currency translation
Self-sustaining foreign operations
Assets and liabilities of self-sustaining foreign operations are translated at exchange rates in effect at the balance sheet date and
revenue and expenses are translated at the average exchange rates for the period. Foreign exchange gains or losses arising from the
translation into Canadian dollars are included in accumulated other comprehensive loss. Translation gains or losses related to
long-term intercompany account balances, which form part of the overall net investment in foreign operations, and those arising from
the translation of debt denominated in foreign currencies and designated as hedges of the overall net investments in self-sustaining
foreign operations are also included in accumulated other comprehensive loss.
Amounts related to foreign currency translation in accumulated other comprehensive loss are released to the consolidated statement
of earnings when the Company reduces its overall net investment in foreign operations, including a reduction in capital or through the
settlement of long-term intercompany balances, which have been considered part of the Company’s overall net investment.
Foreign currency transactions
Monetary assets and liabilities denominated in currencies other than the functional currency are translated at the prevailing exchange
rate at the balance sheet date. Non-monetary assets and liabilities denominated in currencies other than the functional currency and
revenue and expense items are translated into the functional currency using the exchange rate prevailing at the dates of the
respective transactions.
Cash and cash equivalents
Cash and cash equivalents consist of cash and highly-liquid investments with original terms to maturity of 90 days or less at date of
purchase.
Accounts receivable
Receivables are carried at cost net of a provision for doubtful accounts, based on expected recoverability. The Company is involved in a
program under which it sells certain of its accounts receivable to a third party for cash consideration without recourse to the Company.
These transactions are accounted for when the Company is considered to have surrendered control over the transferred accounts
receivable. Losses and gains on these transactions are recognized in earnings.
Contracts in progress
Contracts in progress resulting from applying the percentage-of-completion method consist of materials, direct labour, relevant
manufacturing overhead and estimated contract margins.
Effective April 1, 2009, contracts in progress are presented as a separate line item on the consolidated balance sheets. In prior years,
contracts in progress were presented as part of inventories, previously named long-term contracts.
Inventories
Work in progress is stated at the lower of specific identification of cost and net realizable value. The cost of work in progress includes
material, labour, and an allocation of manufacturing overhead, based on normal operating capacity.
Raw materials are valued at the lower of average cost and net realizable value. Spare parts to be used in the normal course of
business are valued at the lower of specific identification of cost and net realizable value.
Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion an d the
estimated costs necessary to make the sale. In the case of raw materials and spare parts, replacement cost is generally the best
measure of net realizable value.
Long-lived assets
Property, plant and equipment and amortization
Property, plant and equipment are recorded at cost less accumulated depreciation, net of any impairment charges. The declining
balance and straight-line methods are used to calculate amortization over the estimated useful lives of the assets as follows:
Building and improvements
Simulators
Machinery and equipment
Aircraft
Aircraft engines
Method
Declining balance / Straight line
Straight line (10% residual)
Declining balance / Straight line
Straight line (15% residual)
Based on utilization
Rates / Years
2.5 to 10% / 10 to 20 years
Not exceeding 25 years
20 to 35% / 3 to 10 years
Not exceeding 12 years
Not exceeding 3,000 hours
CAE Annual Report 2010 | 89
Notes to the Consolidated Financial Statements
Asset retirement obligations
Asset retirement obligations are recognized in the period in which the Company incurs a legal obligation associated with the
retirement of an asset. The obligation is measured initially at fair value discounted to its present value using a credit-adjusted
risk-free interest rate, and the resulting costs are capitalized into the carrying value of the related assets. The liability is accreted
through charges to earnings. Costs related to asset retirement obligations are depreciated over the remaining useful life of the
underlying asset.
The Company has a known conditional asset retirement obligation for asbestos remediation activities to be performed in the future,
that is not reasonably estimable due to insufficient information about the timing and method of settlement of the obligation.
Accordingly, this obligation has not been recorded in the consolidated financial statements because the fair value cannot be
reasonably estimated. A liability for this obligation will be recorded in the period when sufficient information regarding timing and
method of settlement becomes available to make a reasonable estimate of the liability’s fair value.
Leases
Leases for which substantially all the benefits and risks of ownership are transferred to the Company are recorded as capital leases
and classified as property, plant and equipment and long-term borrowings. All other leases are classified as operating leases under
which leasing costs are expensed on a straight-line basis over the terms of the lease. Gains, net of transaction costs, related to the
sale and leaseback of simulators are deferred and the net gains in excess of the residual value guarantees are amortized over the
term of the lease. When at the time of the sale and leaseback transactions, the fair value of the asset is less than the carrying value,
the difference is recognized as a loss. The residual value guarantees are ultimately recognized in earnings upon expiry of the related
sale and leaseback agreement unless the Company decides to exercise its early buy-out options, when applicable at fair value. Then,
the related deferred gain from the residual value guarantee is applied against the cost of the asset.
Interest capitalization
Interest costs relating to the construction of simulators, buildings for training centres and other internally developed assets are
capitalized as part of the cost of property, plant and equipment. Capitalization of interest ceases when the asset is complet ed and
ready for productive use.
Intangible assets with definite useful lives and amortization
Intangible assets with definite useful lives are initially recorded at cost being their fair value at the acquisition date. Amortization is
calculated using the straight-line method for all intangible assets over their estimated useful lives as follows:
Deferred development costs
Trade names
Customer relationships
Customer contractual agreements
Technology
Enterprise resource planning and other software
Other intangible assets
Amortization
Period
Not exceeding 5 years
2 to 20 years
3 to 10 years
5 to 12 years
5 to 10 years
1 to 10 years
1 to 20 years
Weighted Average
Amortization Period
5
18
9
11
10
7
15
Research and development (R&D) costs
Research costs are charged to consolidated earnings in the period in which they are incurred. Development costs are also charged to
earnings in the period incurred unless they meet all the specific deferral criteria and their recovery is reasonably assured. Government
contributions arising from research and development activities are deducted from the related costs or capital expenditures.
Amortization of development costs deferred to future periods commences with the commercial production of the product and is
charged to earnings based on anticipated sales of the product, when possible, over a period not exceeding five years using the
straight-line method.
Impairment of long-lived assets
Long-lived assets or asset groups are reviewed for impairment upon the occurrence of events or changes in circumstances indicating
that the carrying value of the assets may not be recoverable, as measured by comparing their carrying amounts to the estimated
undiscounted future cash flows generated by their use and eventual disposal. Impairment, if any, is measured as the excess of the
carrying amount of the asset or asset group over its fair value.
90 | CAE Annual Report 2010
Notes to the Consolidated Financial Statements
Other assets
Deferred financing costs
Deferred financing costs related to the revolving unsecured term credit facilities and sale and leaseback agreements are included in
other assets and amortized on a straight-line basis over the term of the related financing agreements.
Restricted cash
The Company is required to hold a defined amount of cash as collateral under the terms of certain subsidiaries’ external bank
financing, government-related sales contracts and business acquisition arrangements.
Business combinations and goodwill
Acquisitions are accounted for using the purchase method and, accordingly, the results of operations of the acquired business are
included in the consolidated statements of earnings from their respective dates of acquisition.
Goodwill represents the excess of the cost of acquired businesses over the net of the amounts assigned to identifiable assets
acquired and liabilities assumed. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances
indicate a potential impairment in value.
The impairment test consists of a comparison of the fair value of the Company’s reporting units with their carrying amount. W hen the
carrying amount of the reporting unit exceeds its fair value, the Company compares, in a second phase, the fair value of goodwill
related to the reporting unit to its carrying value and recognizes an impairment loss equal to the excess. The fair value of a reporting
unit is calculated based on one or more fair value measures, including present value techniques of estimated future cash flows and
estimated amounts at which the unit, as a whole, could be purchased or sold in a current transaction between willing unrelated
parties. If the carrying amount of the reporting unit exceeds its fair value, the second phase requires the fair value of the reporting unit
to be allocated to the underlying assets and liabilities of that reporting unit, resulting in an implied fair value of goodwill. If the carrying
amount of that reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss equal to the excess is
recorded in consolidated net earnings.
Income taxes and investment tax credits
The Company uses the tax liability method to account for income taxes. Under this method, future income tax assets and liabilities are
determined according to differences between the carrying value and the tax bases of assets and liabilities.
This method also requires the recognition of future tax benefits, such as for net operating loss carryforwards, to the extent that the
realization of such benefits is more likely than not. A valuation allowance is recognized to the extent that, in the opinion of
management, it is more likely than not that the future income tax assets will not be realized.
Future tax assets and liabilities are measured by applying enacted or substantively enacted rates and laws at the date of the
consolidated financial statements for the years in which the temporary differences are expected to reverse.
The Company does not provide for income taxes on undistributed earnings of foreign subsidiaries that are not expected to be
repatriated in the foreseeable future.
Investment tax credits (ITCs) arising from R&D activities are deducted from the related costs and are accordingly included in the
determination of net earnings when there is reasonable assurance that the credits will be realized. ITCs arising from the acquisition or
development of property, plant and equipment and deferred development costs are deducted from the cost of those assets with
amortization calculated on the net amount.
The Company is subject to examination by taxation authorities in various jurisdictions. The determination of tax liabilities and ITCs
recoverable involve certain uncertainties in the interpretation of complex tax regulations. Therefore, the Company provides for
potential tax liabilities and ITCs recoverable based on management’s best estimates. Differences between the estimates and the
ultimate amounts of taxes and ITCs are recorded in net earnings at the time they can be determined.
Stock-based compensation plans
The Company’s stock-based compensation plans consist of five categories of plans: Employee Stock Option Plan (ESOP), Employee
Stock Purchase Plan (ESPP), Deferred Share Unit (DSU) plan, Long-Term Incentive Deferred Share Unit (LTI-DSU) plan and
Long-Term Incentive Restricted Share Unit (LTI-RSU) plan. All plans are described in Note 17.
The Company recognizes the stock-based compensation expense for employees who will become eligible for retirement during the
vesting period over the period from grant date to the date the employee becomes eligible to retire. In addition, if an employee is
eligible to retire on the grant date, the compensation expense is recognized at that date unless the employee is under c ontract, in
which case, the compensation expense is recognized over the term of the contract.
The Company estimates the fair value of options using the Black-Scholes option pricing model. The Black-Scholes option pricing
model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, valuation models generally require the input of highly-subjective assumptions including expected stock price
volatility. Using the fair value method, compensation expense is measured at the grant date and recognized over the service period
with a corresponding increase to contributed surplus in shareholders’ equity.
Compensation expense is also recognized for the Company’s portion of the contributions made under the ESPP and for the grant
date amount of vested units at their respective valuations for the DSU, LTI-DSU and LTI-RSU plans. For DSU and LTI-DSUs, the
Company accrues a liability based on the market price of the Company’s common shares. The fair value of the LTI-RSUs liability is
CAE Annual Report 2010 | 91
Notes to the Consolidated Financial Statements
determined using a binomial model. Any subsequent changes in the Company’s stock price affect the compensation expense. The
Company has entered into equity swap agreements with a major Canadian financial institution in order to reduce its cash and
earnings exposure related to the fluctuation in the Company’s share price relating to the DSU and LTI-DSU programs.
CAE’s practice is to issue options and units in the first quarter of each fiscal year or at the time of hiring of new employees or making
new appointments. Any consideration paid by plan participants on the exercise of share options or the purchase of shares is credited
to share capital together with any related stock-based compensation expense.
Employee future benefits
The Company maintains defined benefit pension plans that provide benefits based on length of service and final average earnings.
The service costs and the pension obligations are actuarially determined using the projected benefit method prorated on employee
service and management’s best estimate of expected plan investment performance, salary escalation and retirement ages of
employees. For the purpose of calculating the expected return on plan assets, the relevant assets are valued at fair value. The excess
of the net actuarial gain (loss) over 10% of the greater of the benefit obligation and the fair value of plan assets is amortized over the
average remaining service period of active employees. Past service costs, arising from plan amendments, are deferred and amortized
on a straight-line basis over the average remaining service lives of active employees at the date of amendment.
When a curtailment arises, any unamortized past service costs associated with the reduction of future services is recognized
immediately. Also, the increase or decrease in benefit obligations is recognized as a loss or gain, net of unrecognized actuarial gains
or losses. Finally, when an event gives rise to both a curtailment and a settlement of obligations, the curtailment is accounted for prior
to the settlement.
Earnings per share
Earnings per share are calculated by dividing consolidated net earnings available for common shareholders by the weighted average
number of common shares outstanding during the year. The diluted weighted average number of common shares outstanding is
calculated by taking into account the dilution that would occur if the securities or other agreements for the issuance of common shares
were exercised or converted into common shares at the later of the beginning of the period or the issuance date unless it is
anti-dilutive. The treasury stock method is used to determine the dilutive effect of the stock options. The treasury stock method is a
method of recognizing the use of proceeds that could be obtained upon the exercise of options and warrants in computing diluted
earnings per share. It assumes that any proceeds would be used to purchase common shares at the average market price during the
period.
Disposal of long-lived assets and discontinued operations
Long-lived assets to be disposed of by sale are measured at the lower of their carrying amounts or fair value less selling costs and are
not amortized as long as they are classified as assets to be disposed of by sale. Operating results of a company’s components
disposed of by sale or being classified as held-for-sale are reported as discontinued operations if the operations and cash flows of
those components have been, or will be, eliminated from the Company’s current operations pursuant to the disposal and if the
Company does not have significant continuing involvement in the operations of the component after the disposal transaction. A
component of an enterprise includes operations and cash flows that can be clearly distinguished, operationally and for financial
reporting purposes, from the rest of the Company’s operations and cash flows.
Financial instruments and hedging relationships
Financial instruments
Financial assets and financial liabilities
Financial assets and financial liabilities, including derivatives, are recognized on the consolidated balance sheet when the Company
becomes a party to the contractual provisions of the financial instrument. On initial recognition, all financial instruments are measured
at fair value. Subsequent measurement of the financial instruments is based on their classification as described below. Financial
assets and financial liabilities are classified into one of these five categories: held–for-trading, held-to-maturity investments, loans and
receivables, other financial liabilities and available-for-sale. The determination of the classification depends on the purpose for which
the financial instruments were acquired and their characteristics.
Held-for-trading
Financial instruments classified as held–for-trading are carried at fair value at each balance sheet date with the change in fair
value recorded in net earnings. The held-for-trading classification is applied when a financial instrument:
Is a derivative, including embedded derivatives accounted for separately from the host contract, but excluding those
derivatives designated as effective hedging instruments;
Has been acquired or incurred principally for the purpose of selling or repurchasing in the near future;
Is part of a portfolio of financial instruments that are managed together and for which there is evidence of a recent actual
pattern of short-term profit-taking; or
Has been irrevocably designated as such by the Company (fair value option).
Held-to-maturity investments, loans and receivables and other financial liabilities
Financial instruments classified as held-to-maturity investments, loans and receivables and other financial liabilities are carried at
amortized cost using the effective interest method. Interest income or expense is included in net earnings in the period.
92 | CAE Annual Report 2010
Notes to the Consolidated Financial Statements
Available-for-sale
Financial instruments classified as available-for-sale are carried at fair value at each balance sheet date. Unrealized gains and
losses, including changes in foreign exchange rates, are recognized in other comprehensive income (loss) (OCI) in the period in
which the changes arise and are transferred to earnings when the assets are derecognized or other than temporary impairment
occurs. Securities classified as available-for-sale which do not have a readily available market value are recorded at cost.
As a result, the following classifications were determined:
(i) Cash and cash equivalents, restricted cash and all derivative instruments are classified as held-for-trading;
(ii) Accounts receivable and long-term receivables are classified as loans and receivables, except for those that the Company
intends to sell immediately or in the near term, which are classified as held-for-trading;
(iii) Portfolio investments are classified as available-for-sale;
(iv) Accounts payable and accrued liabilities and long-term debt, including interest payable, as well as capital lease obligations are
classified as other financial liabilities, all of which are measured at amortized cost using the effective interest rate method;
(v) To date, the Company has not classified any financial asset as held-to-maturity.
Transaction costs
Transaction costs that are directly related to the acquisition or issuance of financial assets and financial liabilities (other than those
classified as held-for-trading) are included in the fair value initially recognized for those financial instruments. These costs are
amortized to earnings using the effective interest rate method.
Offsetting of financial assets and financial liabilities
Financial assets and financial liabilities are offset and the net amount is presented in the consolidated balance sheet when the
Company has a legally enforceable right to set off the recognized amounts and intends to settle on a net basis or to realize the assets
and settle the liabilities respectively.
Hedge accounting
Documentation
At the inception of a hedge, if the Company elects to use hedge accounting, the Company formally documents the designation of the
hedge, the risk management objectives, the hedging relationship between the hedged item and hedging item and the method for
testing the effectiveness of the hedge, which must be reasonably assured over the term of the hedging relationship. The Company
formally assesses, both at inception of the hedge relationship and on an ongoing basis, whether the derivatives that are used in
hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.
Method of accounting
When derivatives are designated as hedges, the Company classifies them either as: (a) hedges of the change in fair value of
recognized assets or liabilities or firm commitments (fair value hedges); or (b) hedges of the variability in highly probable future cash
flows attributable to a recognized asset or liability, a firm commitment or a forecasted transaction (cash flow hedges).
Fair value hedge
The Company has outstanding and discontinued interest rate swap agreements, which it designates or has designated as fair value
hedges related to variations of the fair value of its long-term debt due to changes in LIBOR interest rates. For fair value hedges
outstanding, gains or losses arising from the measurement of derivative hedging instruments at fair value and attributable to the
hedged risks are accounted for as an adjustment to the carrying amount of hedged items and are recorded in earnings. However, for
fair value hedges that were discontinued prior to the adoption of financial instrument standards, carrying amounts of hedged items are
adjusted by the remaining balances of any deferred gains or losses on the hedging items. The adjustment is amortized in earnings.
Cash flow hedge
When all the critical terms of the hedging items and the hedged item coincide (such as dates, quantities and delivery location), the
Company assumes the hedge to be perfectly effective against changes in the overall fair value of the hedged item. Otherwise, the
amounts and timing of future cash flows are projected on the basis of their contractual terms and estimated progress on projects. The
aggregate cash flows, over time, form the basis for identifying the effective portion of gains and losses on the derivative instruments
designated as cash flow hedges. The effective portion of changes in the fair value of derivative instruments that are designated and
qualify as cash flow hedges is recognized in comprehensive income (loss). Any gain or loss in fair value relating to the inef fective
portion is recognized immediately in the consolidated net earnings. Amounts accumulated in OCI are reclassified to earnings in the
period in which the hedged item affects earnings. However, when the forecasted transactions that are hedged items result in
recognition of non-financial assets (for example, inventories or property, plant and equipment), gains and losses previously deferred in
OCI are included in the initial carrying value of the related non-financial assets acquired or liabilities incurred. The deferred amounts
are ultimately recognized in consolidated net earnings as the related non-financial assets are derecognized or amortized.
Hedge accounting is discontinued prospectively when the hedging relationship no longer meets the criteria for hedge accounting or
when the hedging instrument expires or is sold. Any cumulative gain or loss existing in OCI at that time remains in OCI until the
hedged item is eventually recognized in earnings. When it is probable that a hedged transaction will not occur, the cumulative gain or
loss that was reported in OCI is recognized immediately in earnings.
CAE Annual Report 2010 | 93
Notes to the Consolidated Financial Statements
Hedge of self-sustaining foreign operations
The Company has designated certain long-term debt as a hedge of its overall net investment in self-sustaining foreign operations
whose activities are denominated in a currency other than the Company’s functional currency. The portion of gains or losses on the
hedging item that is determined to be an effective hedge is recognized in OCI, net of tax and is limited to the translation gain or loss
on the net investment, while the ineffective portion is recorded in earnings.
Comprehensive income (loss)
Comprehensive income represents the change in shareholders’ equity, from transactions and other events and circumstances from
non-owner sources.
OCI refers to revenues, expenses, gains and losses that are recognized in comprehensive income (loss), but excluded from
consolidated net earnings. OCI includes net changes in unrealized foreign exchange gains (losses) on translating financial statements
of self-sustaining foreign operations, net changes in gains (losses) on items designated as hedges on net investments and as cash
flow hedges, reclassifications to income or to the related non-financial assets or liabilities and net changes on financial assets
classified as available-for-sale, as well as income tax adjustments.
Government assistance
Contributions from Industry Canada under the Technology Partnerships Canada (TPC) program and from Investissement Québec
programs for costs incurred in Project Genèse, Project Phoenix and in previous R&D programs are recorded as a reduction of costs
or as a reduction of capitalized expenditures.
A liability to repay the government contribution is recognized when conditions arise and the repayment thereof is reflected in the
consolidated statements of earnings when royalties become due.
The Company recognizes the government of Canada’s participation in Project Falcon as an interest-bearing long-term obligation. The
initial measurement of the accounting liability recognized to repay to the lender is discounted using the prevailing market rates of
interest, at that time, for a similar instrument (similar as to currency, term, type of interest rate, guarantees or other factors) with a
similar credit rating. The difference between the face value of the long-term obligation and the discounted value of the long-term
obligation is accounted for as a government contribution which is recognized as a reduction of costs or as a reduction of capitalized
expenditures.
Severance, termination benefits and costs associated with exit and disposal activities
The Company recognizes severance benefits that do not vest when the decision is made to terminate the employee. Special
termination benefits are accounted for when management commits to a plan that specifically identifies all significant actions to be
taken and such termination benefits are communicated to the employees in sufficient detail to enable them to determine the type and
amount of benefits they will receive. All other costs associated with restructuring, exit and disposal activities are recognized in the
period in which they are incurred.
Disclosure of guarantees
The Company discloses information concerning certain types of guarantees that may require payments, contingent on specified types
of future events. In the normal course of business, CAE issues letters of credit and performance guarantees.
NOTE 2 – CHANGES IN ACCOUNTING POLICIES
Intangible assets
Effective April 1, 2009, the Company adopted CICA Handbook Section 3064, Goodwill and Intangible Assets, which replaced
Sections 3062, Goodwill and Other Intangible Assets, and 3450, Research and Development Costs. The new Section 3064
incorporates material from International Accounting Standard (IAS) 38, Intangible Assets, addressing when an internally developed
intangible asset meets the criteria for recognition as an asset. EIC-27, Revenues and Expenditures during the Pre-Operating Period,
no longer applies to entities that have adopted Section 3064.
Since adopting the new standard, the Company expenses its pre-operating costs as they are incurred. The impact of adopting this
accounting standard, on a retrospective basis, to the Company’s consolidated statement of earnings for years ended March 31, is:
(amounts in millions)
Deferred pre-operating costs, net of non-cash items
Income tax adjustment
Adjustment to net earnings
2009
2.2
(0.5)
1.7
$
$
2008
(0.9)
(0.5)
(1.4)
$
$
The following summarizes the impact to earnings per share upon adoption of this accounting standard, on a retrospective basis:
Basic and diluted earnings per share from continuing operations
Basic earnings per share
Diluted earnings per share
$
2009
–
0.01
0.01
$
2008
(0.01)
–
(0.01)
94 | CAE Annual Report 2010
Notes to the Consolidated Financial Statements
As at March 31, 2009, the impact of adopting this change to other assets on the Company’s consolidated balance sheet was a
decrease of $10.4 million. The retained earnings at April 1, 2007 decreased by $8.6 million, net of tax recovery of $3.6 million.
The Company’s treatment regarding R&D costs was not impacted as a result of this change in accounting standard. Upon adoption of
Section 3064, the Company has reclassified its deferred costs from other assets to intangible assets.
Financial instruments – disclosures
In September 2009, the AcSB amended CICA Handbook Section 3862, Financial Instruments – Disclosures, to require enhanced
disclosures about the relative reliability of the data (or “inputs”) that an entity uses in measuring the fair values of its financial
instruments and to reinforce existing principles of disclosures about liquidity risk. The Company adopted these amendments during
fiscal 2010.
Future changes to accounting standards
International Financial Reporting Standards (IFRS)
In February 2008, the AcSB confirmed that Canadian GAAP, for publicly accountable enterprises in Canada, will be converged with
IFRS with a changeover date on January 1, 2011. As a result, the Company is required to prepare its consolidated financial
statements in accordance with IFRSs for interim and annual financial statements relating to fiscal year beginning April 1, 2011. The
Company is currently evaluating the impact of adopting IFRS on its consolidated financial statements.
Business Combinations, Consolidated Financial Statements and Non-Controlling Interests
In December 2008, the AcSB approved three new accounting standards CICA Handbook Section 1582, Business Combinations,
Section 1601, Consolidated Financial Statements, and Section 1602, Non-Controlling Interests, replacing Section 1581, Business
Combinations and Section 1600, Consolidated Financial Statements. Section 1582 provides the Canadian equivalent to IFRS 3 –
Business Combinations (January 2008) and Sections 1601 and 1602 to IAS 27 – Consolidated and Separate Financial Statements
(January 2008). Section 1582 requires additional use of fair value measurements, recognition of additional assets and liabilities, and
increased disclosure for the accounting of a business combination. The section applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2011.
Entities adopting Section 1582 will also be required to adopt Sections 1601 and 1602. Section 1601 establishes standards for the
preparation of consolidated financial statements. Section 1602 establishes standards for accounting for a non-controlling interest in a
subsidiary in consolidated financial statements. These standards will require a change in the measurement of non-controlling interests
and will require the non-controlling interests to be presented as part of shareholders’ equity on the balance sheet. In addition, the net
earnings will include 100% of the subsidiary’s results and will be allocated between the controlling interest and non-controlling
interest. These standards apply to interim and annual consolidated financial statements relating to fiscal years beginning on or after
January 1, 2011. Earlier adoption is permitted. All three standards are effective at the same time Canadian public companies will have
adopted IFRS, for fiscal year beginning on or after January 1, 2011. The Company is currently evaluating the impact of these
standards on its consolidated financial statements.
Multiple Deliverable Revenue Arrangements
In December 2009, the Emerging Issues Committee issued EIC-175, Multiple Deliverable Revenue Arrangements, which changes the
level of evidence of the standalone selling price required to separate deliverables when more objective evidence of the selling price is
not available. This new standard is effective for revenue arrangements with multiple deliverables entered into or materially modified in
the first annual fiscal period beginning on or after January 1, 2011 and is applicable on a prospective basis. Early adoption is
permitted as at the beginning of a fiscal year. The Company is currently evaluating the impact of adopting EIC-175 on its consolidated
financial statements.
NOTE 3 – BUSINESS ACQUISITIONS AND COMBINATIONS
Fiscal 2010 acquisitions
The Company acquired five businesses for a total cost, including acquisition costs and excluding balance of purchase price, of
$30.7 million which was paid in cash. The allocation of certain of these purchase prices are preliminary and are expected to be
completed in the near future. The total cost does not include potential additional consideration of $27.9 million that is contingent on
certain conditions being satisfied, which, if met, would be recorded as additional goodwill.
Bell Aliant’s Defence, Security and Aerospace
During the first quarter, the Company acquired Bell Aliant’s Defence, Security and Aerospace (DSA) business unit through an asset
purchase agreement. DSA supplies real-time software and systems for simulation training defence and integrated lifecycle information
management for the aerospace and defence industries. The working capital adjustment remains unsettled and is currently in dispute.
Seaweed Systems Inc.
During the second quarter, the Company acquired Seaweed Systems Inc. (Seaweed). Seaweed has embedded graphics solutions for
the military and aerospace market, with experience in the development of safety critical graphic drivers.
ICCU Imaging Inc.
During the third quarter, the Company acquired ICCU Imaging Inc. (ICCU). ICCU specializes in developing multimedia educative
material and offering educational solutions to help medical providers perform a focused bedside ultrasound examination.
CAE Annual Report 2010 | 95
Notes to the Consolidated Financial Statements
VIMEDIX Virtual Medical Imaging Training Systems Inc.
During the fourth quarter, the Company acquired VIMEDIX Virtual Medical Imaging Training Systems Inc. (VIMEDIX). VIMEDIX
specializes in developing virtual reality animated transthoracic echocardiograph simulators and advanced echographic simulation
training.
Immersion Corporation’s Medical Simulation
During the fourth quarter, the Company acquired part of Immersion Corporation’s (Immersion) medical simulation business unit
through an asset purchase agreement. Immersion’s medical line of business designs, manufactures, and markets computer-based
virtual reality simulation training systems which allow clinicians and students to practice and improve minimally invasive surgical skills.
Fiscal 2009 acquisitions
The Company acquired three businesses for a total cost, including acquisition costs, of $64.3 million which was payable primarily in
cash of $43.9 million and assumed debt of $20.4 million.
Sabena Flight Academy
During the first quarter of fiscal 2009, the Company acquired Sabena Flight Academy (Sabena). Sabena offers cadet training,
advanced training and aviation consulting for airlines and self-sponsored pilot candidates.
During the third quarter of fiscal 2010, the Company recorded an additional purchase price of $4.2 million settled in cash as a final
settlement of contingent consideration. The additional purchase price was recorded as goodwill.
Academia Aeronautica de Evora S.A.
During the second quarter of fiscal 2009, the Company increased its participation in Academia Aeronautica de Evora S.A.
(AAE) to 90% in a non-cash transaction.
During the second quarter of fiscal 2010, the Company adjusted the goodwill, initially recorded at $3.7 million, to $4.7 million.
Kestrel Technologies Pte Ltd
During the third quarter of fiscal 2009, the Company acquired Kestrel Technologies Pte Ltd (Kestrel) which provides consulting
and professional services, and provides simulator maintenance and technical support services.
During the third quarter of fiscal 2010, the Company recorded an additional purchase price of $0.2 million settled in cash. The
additional purchase price was recorded as goodwill.
Fiscal 2008 acquisitions
The Company acquired four businesses for a total cost, including acquisition costs, of $52.4 million which was payable primarily in
cash.
Engenuity Technologies Inc.
During the first quarter of fiscal 2008, the Company acquired Engenuity Technologies Inc. (Engenuity) which develops
commercial-off-the-shelf (COTS) simulation and visualization software for the aerospace and defence markets.
MultiGen-Paradigm Inc.
During the first quarter of fiscal 2008, the Company acquired MultiGen-Paradigm Inc. (MultiGen), a supplier of real-time COTS
software for creating and visualizing simulation solutions and creating industry standard visual simulation file formats.
Macmet Technologies Limited
During the second quarter of fiscal 2008, the Company acquired 76% of the outstanding shares of Macmet Technologies Limited
(Macmet). Macmet assembles, repairs and upgrades flight simulators, tank and gunnery trainers, as well as develops software
required for simulations.
As part of this agreement, the Company was given a call option on the remaining 24% of outstanding shares. The call option expires six
years from the acquisition completion date. At the expiry of the call option period, the remaining shareholders of Macmet can exercise a
put option and require the Company to purchase the remaining outstanding shares. As such, the Company considers that all outstanding
shares have been purchased and 100% of Macmet’s results have been consolidated by the Company since the acquisition date.
Flightscape Inc.
During the second quarter of fiscal 2008, the Company acquired Flightscape Inc. (Flightscape), which provides expertise in flight data
analysis and flight sciences and develops software solutions that enable the effective study and understanding of recorded flight data
to improve safety, maintenance and flight operations.
During the third quarter of fiscal 2009, the Company recorded an additional purchase price for Flightscape of $3.0 million settled in
cash. The additional purchase price was recorded as goodwill.
96 | CAE Annual Report 2010
Summary of total net assets of all acquisitions
(amounts in millions)
Current assets (1)
Current liabilities
Property, plant and equipment
Other assets
Intangible assets
Trade names
Technology
Customer relationships
Other intangible assets
Goodwill (2)
Future income taxes
Long-term debt
Long-term liabilities
Fair value of net assets acquired, excluding cash
position at acquisition
Cash position at acquisition
Fair value of net assets acquired
Less: Purchase price payable
Call/put option payable
Book value of investment at acquisition date
Non-controlling interest
Total cash consideration for acquisitions during the
fiscal year
Add: Additional consideration related to a previous fiscal
Notes to the Consolidated Financial Statements
2010
$ 17.9
(17.0)
1.1
–
2009
$ 12.9
(25.4)
40.2
–
2008
$ 13.7
(23.4)
2.3
2.8
–
7.2
9.6
5.3
23.3
(2.5)
–
(0.2)
$ 44.7
0.4
$ 45.1
(14.4)
–
–
–
0.1
–
10.9
–
21.7
6.4
(19.6)
(4.0)
$ 43.2
5.4
$ 48.6
–
–
(4.5)
(0.2)
1.5
20.8
5.9
–
28.8
(5.6)
(1.8)
(2.1)
$ 42.9
9.5
$ 52.4
–
(1.1)
–
–
$ 30.7
$ 43.9
$ 51.3
year acquisition
Total cash consideration (3)
(1) Excluding cash on hand.
(2) This goodwill includes $17.2 million that is deductible for tax purposes.
(3) The total cash consideration includes acquisition costs of $2.7 million in fiscal 2010, $2.7 million in fiscal 2009 and $4.0 million in fiscal 2008.
3.0
$ 46.9
4.4
$ 35.1
–
$ 51.3
The net assets of Immersion, VIMEDIX, ICCU, Sabena, AAE and Flightscape are included in the Training & Services/Civil segment.
The net assets of Seaweed, Kestrel, MultiGen and Macmet are included in Simulation Products/Military. The net assets of DSA and
Engenuity are segregated between the Simulation Products/Military and Training & Services/Military segments.
The above-listed acquisitions were accounted for under the purchase method and the operating results have been included from their
acquisition date.
NOTE 4 – INVESTMENTS IN JOINT VENTURES
The Company’s consolidated balance sheets and consolidated statements of earnings and cash flows include, on a proportionate
consolidation basis, the impact of its joint venture companies of Zhuhai Xiang Yi Aviation Technology Company Limited – 49%,
Helicopter Training Media International GmbH – 50%, Helicopter Flight Training Services GmbH – 25%, the Emirates-CAE Flight
Training centre – 50%, Embraer CAE Training Services LLC – 49%, HATSOFF Helicopter Training Private Limited – 50%, National
Flying Training Institute Private Limited – 51% (starting fiscal 2009), CAE Bangalore training centre – 50% (starting fiscal 2009),
Rotorsim S.r.l. – 50% (starting fiscal 2010) and Embraer CAE Training Services (U.K.) Limited – 49% (starting fiscal 2010).
Except for the Helicopter Training Media International GmbH joint venture, whose operations are essentially focused on designing,
manufacturing and supplying advanced helicopter military training product applications, the other joint venture companies’ operations
are focused on providing civil and military aviation training and related services.
CAE Annual Report 2010 | 97
Notes to the Consolidated Financial Statements
The impact on the Company’s consolidated financial statements from all joint ventures is as follows:
(amounts in millions)
Assets
Current assets
Property, plant and equipment and other non-current assets
Liabilities
Current liabilities
Long-term debt (including current portion)
Deferred gains and long-term liabilities
Earnings
Revenue
Net earnings
Segmented operating income
Simulation Products/Military
Training and Services/Civil
Training and Services/Military
Cash flows from (used in)
Operating activities
Investing activities
Financing activities
2010
54.0
238.6
33.4
117.2
7.3
89.1
21.4
5.1
15.4
6.8
25.4
(29.4)
6.7
2009
Restated
(Note 2)
2008
Restated
(Note 2)
$
58.4
240.3
$
33.8
163.1
44.9
120.4
4.5
78.9
17.7
6.0
14.5
(0.9)
41.3
(40.1)
34.6
$
$
22.9
75.9
–
60.6
12.1
0.6
14.4
(0.5)
22.1
(20.1)
17.3
$
$
$
$
$
NOTE 5 – DISCONTINUED OPERATIONS
Forestry Systems
On August 16, 2002, the Company sold substantially all the assets of the sawmill division of its Forestry Systems. The Company was
entitled to receive further cash consideration from the sale based on operating performance of the disposed business for the three-year
period from August 2002 to August 2005. In November 2005, the Company was notified by the buyers that, in their view, the targeted
level of operating performance which would trigger further payment had not been achieved. The Company completed a review of the
buyers’ books and records and in January 2006, launched legal proceedings to collect the payment that it believed was owed. Prior to
the termination of the arbitration, for fiscal 2008 and 2007, the Company incurred fees in connection with the evaluation and litigation
exercise amounting to $1.2 million (net of tax recovery of $0.2 million) and $0.9 million (net of tax recovery of $0.2 million), respectively.
Until April 2008, the Company was in arbitration with the buyer because of this dispute. The arbitration ceased mid-way in April 2008
when the buyer was the subject of a petition for receivership and was understood to be insolvent. A write-off, in the amount of
$8.5 million (net of a tax recovery of $1.5 million), was accounted for in fiscal 2008.
Summary of discontinued operations
(amounts in millions, except per share amounts)
Net loss from Forestry Systems, 2010 – $nil;
2009 – net of tax recovery of $0.1; 2008 – net of tax recovery of $1.7
Net loss from other discontinued operations, 2010 – $nil;
2009 – net of tax recovery of $0.1; 2008 – net of tax recovery of $1.1
Results of discontinued operations
Basic and diluted net loss per share from discontinued operations
2010
2009
2008
$
$
$
–
–
–
–
$
(0.7)
$
(9.7)
(0.4)
(1.1)
(0.01)
(2.4)
(12.1)
(0.05)
$
$
$
$
98 | CAE Annual Report 2010
Notes to the Consolidated Financial Statements
NOTE 6 – ACCOUNTS RECEIVABLE
Accounts receivable are carried on the consolidated balance sheet net of an allowance for doubtful accounts. This provision is
established based on the Company’s best estimates regarding the ultimate recovery of balances for which collection is uncertain.
Uncertainty of ultimate collection may become apparent from various indicators, such as a deterioration of the credit situati on of a
given client and delay in collection beyond the contractually agreed upon payment terms. Management regularly reviews accounts
receivable, monitors past due balances and assesses the appropriateness of the allowance for doubtful accounts.
Details of accounts receivable were as follows:
(amounts in millions)
Past due trade receivables
1-30 days
31-60 days
61-90 days
Greater than 90 days
Total
Allowance for doubtful accounts
Current trade receivables
Accrued receivables
Derivative assets
Other receivables
Total accounts receivable
2010
18.2
11.8
9.3
16.8
56.1
(5.6)
84.9
31.7
27.9
42.5
237.5
$
$
$
2009
35.1
12.0
13.1
28.0
88.2
(8.2)
122.9
38.2
32.2
49.1
322.4
$
$
$
The Company has an agreement to sell third-party receivables to a financial institution for an amount of up to $50 million. Under the terms
and conditions of the agreement, the Company continues to act as a collection agent. The selected accounts receivable are sold to a third
party for a cash consideration on a non-recourse basis to the Company. As at March 31, 2010, $36.7 million (2009 – $45.6 million) of
specific accounts receivable were sold to the financial institution pursuant to this agreement. Proceeds were net of $0.5 million in fees
(2009 – $0.8 million).
Changes in allowance for doubtful accounts were as follows:
(amounts in millions)
Allowance for doubtful accounts, beginning of year
Additions
Amounts charged off
Foreign exchange
Allowance for doubtful accounts, end of year
NOTE 7 – INVENTORIES
(amounts in millions)
Work in progress
Raw materials, supplies and manufactured products
The amount of inventories recognized as cost of sales was as follows:
(amounts in millions)
Work in progress
Raw materials, supplies and manufactured products
2010
(8.2)
(3.8)
5.1
1.3
(5.6)
2010
87.8
39.1
126.9
2010
76.8
27.5
104.3
$
$
$
$
$
$
2009
(7.4)
(10.0)
10.3
(1.1)
(8.2)
2009
79.1
39.8
118.9
2009
78.9
64.9
143.8
$
$
$
$
$
$
The amount of provision of inventories recognized as an expense was $2.6 million for fiscal 2010 (2009 – $2.8 million;
2008 – $2.4 million), which was recorded in cost of sales. The carrying amount of inventories pledged as security for loans was
$2.5 million as at March 31, 2010 (2009 – $2.8 million).
CAE Annual Report 2010 | 99
Notes to the Consolidated Financial Statements
NOTE 8 – PROPERTY, PLANT AND EQUIPMENT
(amounts in millions)
Land
Buildings and improvements
Simulators
Machinery and equipment
Aircraft and engines
Assets under capital lease (1)
Assets under construction
$
Cost
23.6
280.2
953.0
206.4
14.7
37.5
107.4
$ 1,622.8
Accumulated
Depreciation
–
$
101.8
208.5
150.1
4.1
11.1
–
475.6
$
$
2010
Net Book
Value
23.6
178.4
744.5
56.3
10.6
26.4
107.4
$ 1,147.2
$
Cost
24.3
273.5
1,020.6
198.2
15.0
44.3
168.7
$ 1,744.6
Accumulated
Depreciation
–
$
91.3
189.1
134.3
2.0
25.5
–
442.2
$
(1) Includes simulators, machinery and equipment, and a building.
The average remaining amortization period for the simulators is 15 years.
NOTE 9 – INTANGIBLE ASSETS
(amounts in millions)
Accumulated
Depreciation
Cost
2010
Net Book
Value
Deferred development costs
Trade names
Customer relationships
Customer contractual agreements
Technology
Enterprise resource planning –
(ERP) and other software
Other intangible assets
$
$
63.6
12.1
35.3
7.1
26.4
43.6
10.1
198.2
$
$
33.4
4.4
6.1
4.5
7.2
14.2
3.0
72.8
$
$
The continuity of intangible assets is as follows:
(amounts in millions)
Balance, beginning of year
Acquisitions (Note 3)
Deferred development cost additions (1)
ERP and other software additions
Other additions
Amortization
Foreign exchange
Balance, end of year
(1) Net of government contributions (refer to Note 23).
Cost
Restated
(Note 2)
52.4
14.8
22.7
8.8
24.0
$
Accumulated
Depreciation
Restated
(Note 2)
30.0
4.2
3.4
4.7
5.3
$
30.2
7.7
29.2
2.6
19.2
29.4
7.1
125.4
$
33.5
4.4
160.6
10.8
2.7
61.1
2010
99.5
22.1
11.2
10.0
5.8
(14.7)
(8.5)
125.4
$
$
$
2009
Net Book
Value
24.3
182.2
831.5
63.9
13.0
18.8
168.7
1,302.4
2009
Net Book
Value
Restated
(Note 2)
22.4
10.6
19.3
4.1
18.7
22.7
1.7
99.5
2009
Restated
(Note 2)
82.0
11.0
6.9
5.4
2.5
(14.2)
5.9
99.5
$
$
$
$
$
$
The estimated annual amortization expense for the next five years will be approximately $15.9 million.
100 | CAE Annual Report 2010
NOTE 10 – GOODWILL
(amounts in millions)
Balance, beginning of year
Acquisitions (Note 3)
Foreign exchange
Balance, end of year
(amounts in millions)
Balance, beginning of year
Acquisitions (Note 3)
Foreign exchange
Balance, end of year
NOTE 11 – OTHER ASSETS
Notes to the Consolidated Financial Statements
SP/C
–
–
–
–
SP/C
–
–
–
–
$
$
$
$
TS/C
27.6
7.2
(5.0)
29.8
TS/C
0.8
24.4
2.4
27.6
$
$
$
$
SP/M
87.9
21.5
(14.2)
95.2
SP/M
76.3
0.3
11.3
87.9
$
$
$
$
TS/M
43.6
–
(6.7)
36.9
TS/M
38.4
–
5.2
43.6
$
$
$
$
2010
Total
159.1
28.7
(25.9)
161.9
$
$
2009
Total
$ 115.5
24.7
18.9
$ 159.1
2010
(amounts in millions)
Restricted cash
Advances to portfolio investment
Investment in portfolio investments(1)
Deferred financing costs, net of accumulated amortization of $18.8 (2009 – $17.9)
Long-term receivables
Accrued benefit assets (Note 24)
Long-term derivative assets
Other, net of accumulated amortization of $8.7 (2009 – $7.8)
2009
Restated
(Note 2)
15.7
45.2
0.8
2.6
1.3
28.4
19.1
5.7
$ 118.8
(1) The Company leads a consortium, which was contracted by the United Kingdom (U.K.) Ministry of Defence (MoD) to design, construct,
manage, finance and operate an integrated simulator-based aircrew training facility for the Medium Support Helicopter (MSH) fleet of the
Royal Air Force. The contract covers a 40-year period, which can be terminated by the MoD after 20 years, in 2018.
In connection with the contract, the Company has established CAE Aircrew Training Plc (Aircrew). The Company’s interest in this
subsidiary is 77%. This subsidiary has leased the land from the MoD, built the facility and operates the training centre. Aircrew has been
consolidated with the accounts of the Company since its inception.
16.2
67.3
1.4
1.4
3.9
29.9
15.1
6.3
141.5
$
$
$
In addition, the Company has a 12% minority shareholding in, and has advanced funds to CVS Leasing Ltd. (CVS), the entity that owns the
simulators and other equipment leased to Aircrew.
During the second quarter of fiscal 2010, the Company, the Solidarity Fund QFL, and the Société Générale de Financement du Québec
announced the creation of Flight Simulator – Capital L.P., a limited partnership to provide qualifying customer’s competitive lease financing
for CAE’s civil flight simulation equipment manufactured in Québec and exported around the world. The Company invested $0.6 million
(US$0.6 million) in this partnership. The Company also committed to fund the partnership with up to 25% of $66.0 million (US$60.0 million)
in advances.
NOTE 12 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
(amounts in millions)
Accounts payable trade
Contract liabilities
Derivative liabilities
Income tax payable
Other accrued liabilities
Accounts payable and accrued liabilities
2010
235.7
46.2
9.3
6.5
170.1
467.8
$
$
2009
257.0
67.2
36.1
8.1
172.0
540.4
$
$
CAE Annual Report 2010 | 101
Notes to the Consolidated Financial Statements
NOTE 13 – DEBT FACILITIES
The following summarizes the long-term debt:
(amounts in millions)
2010
Total recourse debt
Total non-recourse debt(1)
Total long-term debt
Less:
Current portion of long-term debt
Current portion of capital lease
Gross
Amount
Transaction
Costs
Hedge
Accounting
Adjustment
Net
Amount
Gross
Amount
Transaction
Costs
$ 291.4 $
203.0
$ 494.4 $
40.9
11.0
(0.3)
(5.0)
(5.3)
(0.8)
–
$
$
3.6
$ 294.7 $ 234.9
$
–
198.0
246.9
3.6 $ 492.7 $ 481.8
$
–
–
40.1
11.0
122.6
4.0
(0.1)
(6.7)
(6.8)
(1.0)
–
Hedge
Accounting
Adjustment
2009
Net
Amount
$
5.3 $ 240.1
–
240.2
$
5.3 $ 480.3
–
–
121.6
4.0
5.3 $ 354.7
(1) Non-recourse debt is classified as such when recourse against the debt in a subsidiary is limited to the assets, equity interest and
3.6 $ 441.6 $ 355.2
$ 442.5 $
(4.5)
(5.8)
$
$
$
undertaking of such subsidiary and not CAE Inc.
The details of the recourse debt are as follows:
(amounts in millions)
2010
Gross
Amount
Transaction
Costs
Hedge
Accounting
Adjustment
Net
Amount
Gross
Amount
Transaction
Costs
Hedge
Accounting
Adjustment
2009
Net
Amount
(i)
Senior notes (US$60.0 maturing in June
2009 and US$33.0 maturing in June
2012)
(ii) Senior notes ($15.0 and US$45.0 maturing
in June 2016 and US$60.0 maturing in
June 2019)
(iii)
Revolving unsecured term credit facilities,
5 years maturing in July 2010
(US$400.0 and €100.0)
(iv)
Term loans, maturing in May and June
2011 (outstanding as at March 31, 2010
– €7.4 and €1.5, as at March 31, 2009 –
€12.6 and €2.6)
(v)
Grapevine Industrial Development
Corporation bonds, secured, maturing in
March 2010 (US$8.0) and April 2013
(US$19.0)
(vi)
Miami Dade County Bonds, collateralized
by a simulator, maturing in March 2024
(US$11.0)
(vii) Other debt, with various maturities from
April 2010 to September 2016
(viii) Obligations under capital lease
commitments
(ix)
R&D obligation from a government agency
maturing in July 2029
(x)
Term loan, maturing in May 2010
(outstanding as at March 31, 2010 –
€9.7, as at March 31, 2009 – nil)
(xi)
Term loan maturing in January 2020
(outstanding as at March 31, 2010 –
€6.0, as at March 31, 2009 – nil)
(xii) Credit facility maturing in January 2015
(outstanding as at March 31, 2010 –
INR 362.7, as at March 31, 2009 – nil)
$
33.5 $
–
$
3.6 $
37.1 $ 117.2
$
(0.1)
$
5.3 $ 122.4
121.6
(0.1)
–
12.2
19.3
11.2
19.6
35.1
9.1
13.3
–
–
–
–
–
–
–
–
8.3
(0.2)
8.2
–
–
–
121.5
–
–
–
–
12.2
25.5
–
–
–
–
–
–
–
–
19.3
34.0
11.2
13.9
19.6
18.1
35.1
26.2
9.1
13.3
8.1
8.2
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
25.5
–
34.0
–
–
–
–
–
–
–
13.9
18.1
26.2
–
–
–
–
Total recourse debt
$ 291.4 $
(0.3)
$
3.6 $ 294.7 $ 234.9
$
(0.1)
$
5.3 $ 240.1
102 | CAE Annual Report 2010
Notes to the Consolidated Financial Statements
(i) Pursuant to a private placement, the Company borrowed US$33.0 million (2009 – US$93.0 million). These unsecured senior
notes rank equally with term bank financings. Fixed interest is payable semi-annually in June and December at a rate of 7.76%
(2009 – 7.6%). The Company has entered into an interest rate swap agreement converting the fixed interest rate into the
equivalent of a three-month LIBOR borrowing rate plus 3.6%. The Company has an outstanding interest rate swap contract that
replaced a swap contract that had previously been put in place when the debt was raised. The existing swap contract is
designated as a fair value hedge of its private placement resulting in changes in LIBOR interest rates. With regards to the
outstanding fair value hedge, the gains or losses on the hedged items attributable to the hedged risk are accounted for as an
adjustment to the carrying value of the hedged items. For the fair value hedge that was discontinued prior to the transaction date,
the carrying amount of the hedged item is adjusted by the remaining balance of any deferred gain or loss on the hedging item. As
such, the hedge accounting adjustment has been recorded with the private placement as an increase to the gross long -term
debt amount.
(ii)
In fiscal 2010, the Company issued unsecured senior notes for $15.0 million and US$105. 0 million by way of a private
placement for an average term at inception of 8.5 years at an average blended interest rate of 7.15% with interest payable
semi-annually in June and December. The Company has designated the senior note totalling US$105.0 milli on as a hedge of
self-sustaining foreign operations and it is being used to hedge the Company’s exposure to foreign exchange risk on these
investments.
(iii) The facility has covenants covering minimum shareholders’ equity, interest coverage and debt coverage ratios. The applicable
interest rate on this revolving term credit facility is at the option of the Company, based on the bank’s prime rate, bankers’
acceptance rates or LIBOR plus a spread which depends on the credit rating assigned by Standard & Poor’s Rating Services.
(iv) The Company, in association with Iberia Lineas de España, combined their aviation training operations in Spain. Quarterly capital
repayments are made for the term of the financing. The implicit interest rate is 4.60%. The net book value of the simulators being
financed, as at March 31, 2010, is equal to approximately $67.7 million (€49.3 million) [2009 – $89.4 million (€53.5 million)].
(v) The rates are set annually by the remarketing agent based on market conditions. The rate for bonds matured in 2010 was set on
a weekly basis. The rate for bonds maturing in 2013 is set on an annual basis and is subject to a maximum rate of 10%
permissible under current applicable laws. As at March 31, 2010, the rate was 2.35% (2009 – 3.06%). A letter of credit has been
issued to support the bonds for the outstanding amount of the loans.
(vi) As at March 31, 2010, the applicable floating rate, which is reset weekly, was 1.47% (2009 – 3.10%). Also, a letter of credit has
been issued to support the bonds for the outstanding amount of the loan.
(vii) Other debts include an unsecured facility for the financing of the cost of establishment of an enterprise resource planning (ERP)
system. The facility is repayable with monthly repayments over a term of seven years beginning at the end of the first month
following each quarterly disbursement. The average interest rates on these borrowings are approximately 5.4%.
(viii) These capital leases relate to the leasing of various equipment, simulators, and a building. The leases have maturities ranging
from September 2009 to March 2018, and interest rates ranging from 1.89% to 6.09%. The implicit lease rate for the capital lease
related to the building was considered below the market rate upon initial recognition on the date of acquisition. Accordingly, this
capital lease was initially recorded at a fair market value that was lower than its face value. As the debt will be accreted over time,
the full face value of the debt will be recorded at maturity.
(ix) In fiscal 2010, the Company obtained an interest-bearing long-term obligation from the Government of Canada for its participation
in Project Falcon, an R&D program that will continue over five years, for a maximum amount of $250.0 million. The aggregate
amount recognized in fiscal 2010 was $33.8 million (refer to Note 1). The discounted value of the debt recognized amounted to
$9.1 million as at March 31, 2010.
(x) Represents the Company’s proportionate share of the debt in Rotorsim S.r.l., totalling $13.3 million (€9.7 million). The loan bears
a floating interest rate.
(xi) In fiscal 2010, the Company entered into a loan agreement of $8.3 million (€6.0 million) for the financing of one of its subsidiaries.
The loan bears a floating rate of interest of EURIBOR plus a spread.
(xii) In fiscal 2010, the Company entered into a financing facility for certain of its operations in India. The financing facility is comprised
of a term loan of up to $10.6 million (INR 470 million) and working capital facilities of up to an aggregate of $2.8 million
(INR 125 million). Drawdowns can be made in INR or any other major currencies acceptable to the lender. The facility bears a
floating interest rate.
CAE Annual Report 2010 | 103
Notes to the Consolidated Financial Statements
The details of the non-recourse debt are as follows:
(amounts in millions)
2010
Gross
Amount
Transaction
Costs
Hedge
Accounting
Adjustment
Net
Amount
Gross
Amount
Transaction
Costs
Hedge
Accounting
Adjustment
2009
Net
Amount
(i)
(ii)
(iii)
Term loan of £12.7 collateralized,
maturing in October 2016
(outstanding as at March 31, 2010 –
£3.0, as at March 31, 2009 – £3.5)
Term loan maturing in December 2019
(outstanding as at March 31, 2010 –
€43.9, as at March 31, 2009 – €40.9)
Term loans with various maturities to
August 2014 (outstanding as at
March 31, 2010 – US$21.9, ¥32.8 and
HKD nil, as at March 31, 2009 –
US$21.7, ¥59.5 and HKD49.0)
(iv)
Term loan maturing in June 2014
(outstanding as at March 31, 2010 –
US$22.1 and £8.7, as at
March 31, 2009 – US$24.8 and £9.6)
Term loan maturing in June 2018
(outstanding as at March 31, 2010 –
US$43.2 and £8.5, as at
March 31, 2009 – US$43.2 and £8.5)
(v)
Term loan maturing in September 2025
collateralized (outstanding as at
March 31, 2010 – US$14.3, as at
March 31, 2009 – US$6.0)
(vi)
Term loan maturing in January 2020
(outstanding as at March 31, 2010 –
US$3.5, as at March 31, 2009 – nil)
$
4.6 $
–
$
–
$
4.6 $
6.4
$
–
$
– $
6.4
60.3
(0.9)
–
59.4
68.4
(1.2)
–
67.2
27.2
–
35.9
(1.0)
56.9
(2.3)
14.5
(0.8)
3.6
–
–
–
–
–
–
–
27.2
46.3
–
–
46.3
34.9
48.6
(1.8)
–
46.8
54.6
69.6
(3.0)
–
66.6
13.7
7.6
(0.7)
3.6
–
–
–
–
6.9
–
$ 198.0 $ 246.9
$
(6.7)
$
– $ 240.2
Total non-recourse debt
$ 203.0 $
(5.0)
$
(i) The Company arranged project financing, which was refinanced during December 2004 for one of its subsidiaries to finance its
MSH program for the MoD in the U.K. The credit facility includes a term loan that is collateralized by the project assets of the
subsidiary and a bi-annual repayment that is required until 2016. Interest on the loans is charged at a rate approximating LIBOR
plus 0.95%. The Company has entered into an interest rate swap totalling £2.7 million, fixing the interest rate at 6.31%. The book
value of the assets pledged as collateral for the credit facility as at March 31, 2010 is £53.3 million (2009 – £35.8 million).
(ii) Represents CAE’s proportionate share of the German NH90 project. The total amount available for the project Company under
the facility is €175.5 million. The borrowings bear interest at a EURIBOR rate and are currently swapped to a fixed rate of 4.8%.
(iii) Represents CAE’s proportionate share of term debt for the acquisition of simulators and expansion of the building for its joint
venture in Zhuhai Xiang Yi Aviation Technology Company Limited. Borrowings are denominated in U.S. dollars, Chinese Yuan
Renminbi (¥), and Hong Kong dollars (HKD). The U.S. dollar-based borrowings bear interest on a floating rate basis of U.S.
LIBOR plus a spread ranging from 0.50% to 2.00% and have maturities between August 2013 and August 2014. The ¥ based
borrowings bear interest at the local rate of interest with final maturities between December 2010 and June 2012. The HKD
borrowings bore interest at HKD HIBOR plus a spread of 1.5% and matured in April 2009.
(iv) Represents senior secured financing for two civil aviation training centres. Tranche A is being amortized quarterly beginning in
December 2008 and principal and interest of Tranche B being amortized quarterly beginning in July 2014. The debt is
collateralized by the assets of the training centres and is cross-guaranteed and cross-collateralized by the cash-flow generated
by the two training centres. The combined coupon rate of the post-swap debt amounts to 8.28%.
(v) The Company and its partner obtained US$42.1 million of senior collateralized non-recourse financing for the HATSOFF
Helicopter Training Private Limited joint venture, a military aviation training centre in Bangalore, India. The debt begins
semi-annual amortization in September 2013. After taking into consideration the effect of USD-Indian rupees cross currency
swap agreement, the fixed interest rate is 10.35% per annum.
(vi) Represents the Company’s proportionate share in a term loan arranged in fiscal 2010 to finance the Company’s Dubai -based
joint-venture, Emirates-CAE Flight Training LLC. The facility bears interest at a floating rate.
104 | CAE Annual Report 2010
Payments required in each of the next five fiscal years to meet the retirement provisions of the long-term debt and face values of
capital leases are as follows:
Notes to the Consolidated Financial Statements
(amounts in millions)
2011
2012
2013
2014
2015
Thereafter
$
Long-term debt
40.9
25.7
77.9
33.1
32.4
249.3
459.3
$
Capital lease
11.0
$
4.4
4.5
4.7
5.0
5.5
35.1
$
Total
51.9
30.1
82.4
37.8
37.4
254.8
494.4
$
$
As at March 31, 2010, CAE is in compliance with its financial covenants.
Short-term debt
The Company has an unsecured and uncommitted bank line of credit available in euros totalling $2.7 million (2009 – $5.0 million;
2008 – $4.9 million), none of which is used as at March 31, 2010 (2009 – nil). The line of credit bears interest at a euro base rate.
Interest expense, net
Details of interest expense (income) are as follows:
(amounts in millions)
Long-term debt interest expense
Amortization of deferred financing costs and other
Interest capitalized
Interest on long-term debt
Interest income
Other interest expense (income), net
Interest income, net
Interest expense, net
NOTE 14 – DEFERRED GAINS AND OTHER LONG-TERM LIABILITIES
(amounts in millions)
Deferred gains on sale and leasebacks(1)
Deferred revenue
Deferred gains
Employee benefits obligation (Note 24)
Non-controlling interests(2)
Long-term derivative liabilities
LTI-RSU/DSU compensation obligation
License payable
Other
2010
28.4
2.9
(4.0)
27.3
(2.6)
1.3
(1.3)
26.0
$
$
$
$
$
2009
26.9
3.2
(5.9)
24.2
(2.6)
(1.4)
(4.0)
20.2
2008
23.9
2.7
(4.7)
21.9
(3.0)
(1.4)
(4.4)
17.5
$
$
$
$
$
$
$
$
$
$
2010
47.2
46.3
5.2
33.9
18.0
15.1
21.8
7.2
5.8
200.5
$
$
2009
Restated
(Note 2)
52.8
31.6
5.8
32.5
20.1
20.4
17.1
–
4.6
184.9
$
$
(1) The related amortization for the year amounted to $4.2 million (2009 – $4.4 million; 2008 – $3.8 million).
(2) Non-controlling interests of 23% in Military CAE Aircrew Training Centre, 20% of the civil training centres in Madrid and 10% in AAE.
CAE Annual Report 2010 | 105
Notes to the Consolidated Financial Statements
NOTE 15 – INCOME TAXES
A reconciliation of income taxes at Canadian statutory rates with the reported income taxes is as follows:
(amounts in millions except for income tax rates)
2010
Earnings before income taxes and discontinued operations
Canadian statutory income tax rates
Income taxes at Canadian statutory rates
Difference between Canadian statutory rates and those
applicable to foreign subsidiaries
Losses not tax effected
Tax benefit of operating losses not previously recognized
Non-taxable capital gain
Non-deductible items
Prior years’ tax adjustments and assessments
Impact of change in income tax rates on future income taxes
Non-taxable research and development tax credits
Other tax benefit not previously recognized
Foreign exchange fluctuation and other
Total income tax expense
$
$
204.0
30.66 %
62.5
(5.2)
4.1
(1.6)
(0.8)
2.3
1.9
(1.8)
(1.5)
(2.7)
2.3
59.5
$
Significant components of the provision for the income tax expense attributable to continuing operations are as follows:
(amounts in millions)
2010
2009
Restated
(Note 2)
285.6
30.92 %
88.3
$
$
2008
Restated
(Note 2)
233.1
31.80 %
$
$
74.1
(7.2)
5.0
(0.3)
(0.8)
1.8
1.5
(0.6)
(1.0)
(3.0)
(0.3)
83.4
$
2009
Restated
(Note 2)
74.9
(5.6)
4.1
(1.8)
(0.2)
5.9
(2.0)
(2.4)
(0.9)
(2.5)
1.0
69.7
$
2008
Restated
(Note 2)
42.8
$
(1.8)
(2.4)
(2.5)
33.6
69.7
$
$
32.3
$
(1.6)
(2.2)
(2.7)
33.7
59.5
$
(0.3)
(0.6)
(3.0)
12.4
83.4
$
Current income tax expense
Future income tax expense (recovery):
Tax benefit of operating losses not previously recognized
Impact of change in income tax rates on future income taxes
Other tax benefit not previously recognized
Change related to temporary differences
Total income tax expense
106 | CAE Annual Report 2010
Notes to the Consolidated Financial Statements
The tax effects of temporary differences that give rise to future tax liabilities and assets are as follows:
(amounts in millions)
Future income tax assets
Non-capital loss carryforwards
Capital loss carryforwards
Intangible assets
Amounts not currently deductible
Deferred revenues
Tax benefit carryover
Unclaimed research and development expenditures
Unrealized losses on foreign exchange
Financial instruments
Valuation allowance
Future income tax liabilities
Investment tax credits
Property, plant and equipment
Percentage-of-completion versus completed contract
Financial instruments
Intangible assets
Government assistance
Unrealized gain on foreign exchange
Deferred research and development expenses
Other
Net future income tax assets (liabilities)
Net current future income tax asset
Net non-current future income tax asset
Net current future income tax liability
Net non-current future income tax liability
2010
44.8
2.1
–
24.7
6.0
4.6
5.3
2.1
–
89.6
(17.2)
72.4
(12.0)
(23.8)
(18.0)
(4.6)
(13.0)
(6.4)
(6.9)
(0.8)
(2.3)
(87.8)
(15.4)
7.1
82.9
(23.0)
(82.4)
(15.4)
2009
Restated
(Note 2)
$
$
$
$
$
$
$
$
42.8
2.0
1.4
21.3
9.9
6.0
4.5
–
7.4
95.3
(21.4)
73.9
(15.5)
(18.8)
(2.1)
–
–
–
(3.4)
(0.7)
(0.6)
(41.1)
32.8
5.3
86.1
(20.9)
(37.7)
32.8
$
$
$
$
$
$
$
$
As at March 31, 2010, the Company has accumulated non-capital losses carried forward relating to operations in Canada for
approximately $23.9 million. For financial reporting purposes, a net future income tax asset of $6.5 million has been recognized in
respect of these loss carryforwards.
As at March 31, 2010, the Company has accumulated non-capital losses carried forward relating to operations in the United States for
approximately $27.8 million (US$27.4 million). For financial reporting purposes, a net future income tax asset of $8.2 million
(US$8.1 million) has been recognized in respect of these loss carryforwards.
The Company has accumulated non-capital tax losses carried forward relating to its operations in other countries of approximately
$86.5 million. For financial reporting purposes, a net future income tax asset of $18.3 million has been recognized.
The Company also has accumulated capital losses carried forward relating to operations in Canada for approximately $0.1 million.
For financial reporting purposes, no future income tax asset was recognized, as a full valuation allowance was taken.
The Company also has accumulated capital losses carried forward relating to operations in the United States for approximately
$2.0 million (US$2.0 million). For financial reporting purposes, no future income tax asset was recognized, as a full valuation
allowance was taken.
CAE Annual Report 2010 | 107
Notes to the Consolidated Financial Statements
The non-capital losses for income tax purposes expire as follows:
(amounts in millions)
Expiry date
2012
2013
2014
2015
2016
2017
2018
2019 – 2029
No expiry date
$
US$
United States (US$) Other Countries (CA$)
–
–
9.1
0.1
1.9
16.0
4.3
15.9
63.1
110.4
14.6
7.4
–
–
–
–
–
5.4
–
27.4
US$
$
The valuation allowance principally relates to loss carryforward benefits where realization is not likely due to a history of losses, and to
the uncertainty of sufficient taxable earnings in the future. In 2010, $4.3 million (2009 – $3.3 million) of the valuation allowance
balance was reversed based on the assessment of the Company that it is more likely than not that the future income tax benefi ts will
be realized.
NOTE 16 – CAPITAL STOCK
Capital stock
Authorized
The Company is authorized to issue an unlimited number of common shares without par value and an unlimited number of preferred
shares without par value, issuable in series.
The preferred shares may be issued with rights and conditions to be determined by the Board of Directors, prior to their issue. To
date, the Company has not issued any preferred shares.
Issued
A reconciliation of the issued and outstanding common shares of the Company is as follows:
(amounts in millions, except number of shares)
Balance, beginning of year
Shares issued
Stock options exercised
Transfer of contributed surplus
upon exercise of stock options
Stock dividends
Balance, end of year
Number
of Shares
255,146,443
–
1,327,220
2010
Stated
Value
$ 430.2
–
7.5
Number
of Shares
253,969,836
–
1,077,200
2009
Stated
Value
$ 418.9
–
9.3
Number
of Shares
251,960,449
169,851
1,814,095
–
43,331
256,516,994
3.4
0.4
$ 441.5
–
99,407
255,146,443
1.0
1.0
$ 430.2
–
25,441
253,969,836
2008
Stated
Value
401.7
0.8
13.9
2.2
0.3
418.9
$
$
The following is a reconciliation of the denominators for the basic and diluted earnings per share computations:
Weighted average number of common shares outstanding – Basic
Effect of dilutive stock options
Weighted average number of common shares outstanding – Diluted
2010
255,846,631
–
255,846,631
2009
254,756,989
201,817
254,958,806
2008
253,406,176
1,160,474
254,566,650
Options to acquire 2,390,486 common shares (2009 – 1,992,880; 2008 – 1,144,704) have been excluded from the above calculation
since their inclusion would have had an anti-dilutive effect.
108 | CAE Annual Report 2010
Notes to the Consolidated Financial Statements
NOTE 17 – STOCK-BASED COMPENSATION PLANS
Employee Stock Option Plan
Under the Company’s long-term incentive program, options may be granted to its officers and other key employees of its subsidiaries
to purchase common shares of the Company at a subscription price of 100% of the market value at the date of the grant. Market
value is determined as the weighted average closing price of the common shares on the Toronto Stock Exchange (TSX) of the five
days of trading prior to the effective date of the grant.
As at March 31, 2010, a total of 13,720,476 common shares remained authorized for issuance under the Employee Stock Option Plan
(ESOP). The options are exercisable during a period not to exceed six years, and are not exercisable during the first 12 months after
the date of the grant. The right to exercise all of the options vests over a period of four years of continuous employment from the grant
date. However, if there is a change of control of the Company, the options outstanding become immediately exercisable by opti on
holders. Options are adjusted proportionately for any stock dividends or stock splits attributed to the common shares of the Company.
A reconciliation of the outstanding options is as follows:
Years ended March 31
2010
Weighted
Average
Exercise
Price
Number
of Options
2009
Weighted
Average
Exercise
Price
Number
of Options
2008
Weighted
Average
Exercise
Price
Number
of Options
Options outstanding, beginning of year
4,211,150
$
4,602,374
$
9.00
5,441,915
$
7.57
3,102,500
(1,327,220)
(131,769)
12.19
(36,275)
9.87
7.44
5.71
5.84
9.50
829,600
13.09
1,167,588
(1,077,200)
(79,574)
(64,050)
4,211,150
8.62
7.56
12.73
9.87
6.76
$
$
(1,814,095)
(47,034)
(146,000)
4,602,374
2,543,545
$
$
14.06
7.66
9.57
12.59
9.00
7.26
Options outstanding, end of year
5,818,386
$
Options exercisable, end of year
1,433,118
$ 10.76
1,959,690
Granted
Exercised
Forfeited
Expired
The following table summarizes information about the Company’s ESOP as at March 31, 2010:
Range of exercise prices
Options Outstanding
Options Exercisable
$4.96 to $7.29
$7.60 to $11.37
$11.50 to $14.10
Total
Weighted
Average
Remaining
Contractual
Life (Years)
4.44
4.54
3.57
4.20
Number
Outstanding
1,948,100
2,009,650
1,860,636
5,818,386
Weighted
Average
Exercise
Price
6.99
8.03
13.71
9.50
$
$
Number
Exercisable
324,500
363,700
744,918
1,433,118
Weighted
Average
Exercise
Price
5.52
9.12
13.84
10.76
$
$
For the year ended March 31, 2010, compensation cost for CAE’s stock options of $4.2 million (2009 – $2.8 million; 2008 –
$4.8 million) was recognized in consolidated net earnings with a corresponding credit to contributed surplus using the fair value
method of accounting for awards that were granted since 2004.
The assumptions used for purposes of the option calculations outlined in this note are presented below:
Assumptions used in the Black-Scholes options pricing model:
Dividend yield
Expected volatility
Risk-free interest rate
Expected option term
Weighted average fair value of options granted
2010
2009
2008
1.57%
36.0%
2.69%
4 years
2.27
$
0.90%
29.3%
3.50%
4 years
3.62
$
0.28%
33.0%
4.64%
4 years
4.57
$
CAE Annual Report 2010 | 109
Notes to the Consolidated Financial Statements
Employee Stock Purchase Plan
The Company maintains an Employee Stock Purchase Plan (ESPP) to enable employees of the Company and its participating
subsidiaries to acquire CAE common shares through regular payroll deductions or lump-sum payment plus employer contributions.
The ESPP allows employees to contribute up to 18% of their annual base salary. The Company and its participating subsidiaries
match the first $500 employee contribution and contribute $1 for every $2 on additional employee contributions, up to a maxim um of
3% of the employee’s base salary. The plan provides for tax deferral of employee and employer contributions through a Registered
Retirement Saving Plan (RRSP) and Deferred Profit Sharing Plan (DPSP). Common shares of the Company are purchased by the
ESPP trustee on behalf of the participants on the open market, through the facilities of the TSX. The Company recorded
compensation expense in the amount of $4.2 million (2009 – $4.3 million; 2008 – $3.9 million) in respect of employer contributions
under the Plan.
Deferred Share Unit Plan
The Company maintains a Deferred Share Unit (DSU) plan for executives, whereby an executive may elect to receive any cash
incentive compensation in the form of deferred share units. The plan is intended to promote a greater alignment of interests between
executives and the shareholders of the Company. A deferred share unit is equal in value to one common share of the Company. The
units are issued on the basis of the average closing board lot sale price per share of CAE common shares on the TSX during the last
10 days on which such shares traded prior to the date of issue. The units also accrue dividend equivalents payable in additional units
in an amount equal to dividends paid on CAE common shares. Deferred share units mature upon termination of employment,
whereupon an executive is entitled to receive a cash payment equal to the fair market value of the equivalent number of common
shares, net of withholdings.
In fiscal 2000, the Company adopted a DSU plan for non-employee directors. A non-employee director holding less than the minimum
holdings of common shares of the Company receives the Board retainer and attendance fees in the form of deferred share units.
Minimum holdings means no less than the number of common shares or deferred share units equivalent in fair market value to three
times the annual retainer fee payable to a director for service on the Board. A non-employee director holding no less than the
minimum holdings of common shares may elect to participate in the plan in respect of half or all of his or her retainer and part or all of
his or her attendance fees. The terms of the plan are essentially identical to the executive DSU Plan except that units are issued on
the basis of the closing board lot sale price per share of CAE common shares on the TSX during the last day on which the common
shares traded prior to the date of issue.
The Company records the cost of the DSU plans as a compensation expense and accrues its long-term liability in Deferred gains and
other long-term liabilities in the Company’s consolidated balance sheet. The expense recorded in fiscal 2010 was $2.3 million
(2009 – $0.9 million recovery; 2008 – $0.1 million expense).
The following table summarizes the DSU units outstanding:
Years ended March 31
DSUs outstanding, beginning of year
Units granted
Units cancelled
Units redeemed
Dividends paid in units
DSUs outstanding, end of year
2010
469,292
118,864
–
–
7,275
595,431
2009
405,680
80,410
–
(22,526)
5,728
469,292
Long-Term Incentive (LTI) – Deferred Share Unit Plans
All CAE Long-Term Incentive Deferred Share Unit (LTI-DSU) plans are intended to promote a greater alignment of interests between
executives and shareholders of the Company. LTI-DSUs are granted to executives and senior management of the Company. A
LTI-DSU is equal in value to one common share at a specific date. The LTI-DSUs are also entitled to dividend equivalents payable in
additional units in an amount equal to dividends paid on CAE common shares. With the exception of the fiscal year 2004 plan which
precludes the redemption of vested LTI-DSUs upon the participant’s voluntary resignation, eligible participants are entitled to receive
a cash payment equivalent to the fair market value of the number of vested LTI-DSUs held upon any termination of employment.
Upon termination of employment at retirement, unvested units continue to vest until November 30 of the year following the retirement
date. For participants subject to section 409A of the United States Internal Revenue Code, vesting of unvested units takes place at
the time of retirement.
Fiscal year 2004 plan
The fiscal year 2004 plan stipulates that granted units vest equally over four years. All the units issued under that Plan are now
vested. The expense recorded in fiscal 2010 was $0.8 million (2009 – $0.6 million recovery; 2008 – $0.1 million expense).
Fiscal year 2005 plan
The fiscal year 2005 plan replaced the fiscal year 2004 plan for succeeding years. The Plan stipulates that granted units vest equally
over five years and that following a take-over bid, all unvested units vest immediately. The expense recorded in fiscal 2010 was
$8.3 million (2009 – $0.9 million recovery; 2008 – $3.2 million expense).
Since fiscal 2004, the Company entered into equity swap agreements to reduce its earnings exposure to the fluctuations in its share
price (Refer to Note 19).
110 | CAE Annual Report 2010
Notes to the Consolidated Financial Statements
The following table summarizes the LTI-DSU units outstanding:
Years ended March 31
LTI-DSUs outstanding, beginning of year
Units granted
Units cancelled
Units redeemed
Dividends paid in units
LTI-DSUs outstanding, end of year
Fiscal Year 2005 Plan
Fiscal Year 2004 Plan
2010
2,019,169
493,952
(45,680)
(54,387)
34,797
2,447,851
2009
1,824,762
269,806
(6,305)
(97,013)
27,919
2,019,169
2010
407,066
–
(10,719)
(16,785)
5,559
385,121
2009
517,702
–
(14,543)
(101,861)
5,768
407,066
Long-Term Incentive – Restricted Share Unit Plans
Fiscal year 2005 plan
In May 2004, the Company adopted a Long-Term Incentive Performance Based Restricted Shares Unit (LTI-RSU) plan for its
executives and senior management. The LTI-RSU is intended to enhance the Company’s ability to attract and retain talented
individuals, and also to promote a greater alignment of interest between eligible participants and the Company’s shareholders . The
LTI-RSU is a stock-based performance plan.
LTI-RSUs granted pursuant to this plan vest after three years from their grant date and vest as follows:
(i) 100% of the units, if CAE shares have appreciated at least 33% (10% annual compounded growth) during the timeframe;
(ii) 50% of the units, if CAE shares have appreciated at least 24% (7.5% annual compounded growth) but less than 33% during the
timeframe.
No LTI-RSUs vest if the market value of the common shares has appreciated less than 24% during the specified timeframe. In
addition, no proportional vesting occurs for any appreciation between 24% and 33% during the specified timeframe. Participants
subject to loss of employment, other than voluntarily or for cause, are entitled to conditional pro-rata vesting. The expense recorded in
fiscal 2010 was $nil (2009 – $1.3 million recovery; 2008 – $3.1 million expense).
Fiscal year 2008 plan
In May 2007, the Company amended the fiscal year 2005 plan for fiscal 2008 and subsequent years. The LTI-RSU plan is intended to
enhance the Company’s ability to attract and retain talented individuals and also to promote a greater alignment of interest between
eligible participants and the Company’s shareholders. The LTI-RSU plan is a stock-based performance plan.
LTI-RSUs granted pursuant to the revised plan vest after three years from their grant date. LTI-RSUs vest as follows:
(i) 100% of the units, if CAE shares have appreciated by a minimum annual compounded growth defined as the Bank of Canada
10-year risk-free rate of return on the grant date plus 350 basis points (3.50%) over the valuation period, or, in the case of pro-
rated vesting, as of the end of the pro-ration period. For 2010 fiscal year grants, this represents a target of 6.6% (2009 – 7%) of
compound annual growth over the three-year period;
(ii) 50% of the units if, based on the grant price, the closing average price on the common CAE shares has met or exceeded the
performance of the Standard & Poor’s Aerospace and Defence Index (S&P A&D index), adjusted for dividends, or, in the case of
pro-rated vesting, as of the end of the pro-ration period.
Participants subject to loss of employment, other than voluntarily or for cause, are entitled to conditional pro-rata vesting. The
expense recorded in fiscal 2010 was $1.8 million (2009 – $0.4 million; 2008 – $0.5 million).
The following table summarizes the LTI-RSU units outstanding:
Years ended March 31
LTI-RSUs outstanding, beginning of year
Units granted
Units cancelled
Units redeemed
Dividends paid in units
LTI-RSUs outstanding, end of year
Fiscal Year 2008 Plan
Fiscal Year 2005 Plan
2010
762,382
747,014
(70,805)
–
–
1,438,591
2009
340,974
427,711
(6,303)
–
–
762,382
2010
488,627
–
(488,627)
–
–
–
2009
1,065,710
–
(14,349)
(562,734)
–
488,627
CAE Annual Report 2010 | 111
Notes to the Consolidated Financial Statements
NOTE 18 – CAPITAL MANAGEMENT
The Company’s objectives when managing capital are threefold:
(i) Optimize the use of debt for managing the cost of capital of the Company;
(ii) Keep the debt level at an amount where the Company’s financial strength and credit quality is maintained in order to withstand
economic cycles;
(iii) Provide the Company’s shareholders with an appropriate rate of return on their investment.
The Company manages its debt to equity. The Company manages its capital structure and makes corresponding adjustments based
on changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the c apital
structure, the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, or
use cash to reduce debt.
In view of this, the Company monitors its capital on the basis of the adjusted net debt to capital ratio. This ratio is calculated as adjusted
net debt divided by the sum of the adjusted net debt and equity. Adjusted net debt is calculated as total debt (as presented in the
consolidated balance sheet and including non-recourse debt) added to the present value of operating leases (held off balance sheet) less
cash and cash equivalents. Equity comprises all components of shareholders’ equity (i.e. capital stock, contributed surplus, retained
earnings and accumulated other comprehensive loss).
The level of debt versus equity in the capital structure is monitored, and the ratios are as follows:
(amounts in millions)
Total long-term debt
Add: Present value of operating leases (held off balance sheet)
Less: Cash and cash equivalents
Adjusted net debt
Shareholders’ equity
Adjusted net debt : shareholders’ equity
2010
$
492.7
156.8
(312.9)
$
336.6
$ 1,155.8
23:77
2009
Restated
(Note 2)
480.3
215.0
(195.2)
500.1
1,197.8
29:71
$
$
$
The decrease in the adjusted net debt to equity ratio during fiscal 2010 resulted primarily from the decrease in net debt that occurred
as a result of foreign exchange variations and increase in cash.
The Company has certain debt agreements which require the maintenance of a certain level of capital.
NOTE 19 – FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT
Fair value of financial instruments
The fair value of a financial instrument is the amount at which the financial instrument could be exchanged in an arm’s-length
transaction between knowledgeable and willing parties under no compulsion to act. The fair value of a financial instrument is
determined by reference to the available market information at the balance sheet date. When no active market exists for a financial
instrument, the Company determines the fair value of that instrument based on valuation methodologies as discussed below. In
determining assumptions required under a valuation model, the Company primarily uses external, readily observable market data
inputs. Assumptions or inputs that are not based on observable market data incorporate the Company’s best estimates of market
participant assumptions, and are used when external data is not available. Counterparty credit risk and the Company’s own credit risk
have been taken into account when estimating the fair value of all financial assets and financial liabilities, including derivatives.
The following assumptions and valuation methodologies have been used to estimate the fair value of financial instruments:
(i) The fair value of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities
approximate their carrying values due to their short-term maturities;
(ii) The fair value of capital leases are estimated using the discounted cash flow method;
(iii) The fair value of long-term debt, the long-term obligation and long-term receivables (including advances) are estimated based on
discounted cash flows using current interest rates for instruments with similar terms and remaining maturities;
112 | CAE Annual Report 2010
Notes to the Consolidated Financial Statements
(iv) The fair value of derivative instruments (including forward contracts, swap agreements and embedded derivatives with economic
characteristics and risks that are not clearly and closely related to those of the host contract) are determined using valuat ion
techniques and are calculated as the present value of the estimated future cash flows using an appropriate interest rate yield
curve and foreign exchange rate, adjusted for the Company’s and the counterparty credit risk. Assumptions are based on market
conditions prevailing at each balance sheet date. Derivative instruments reflect the estimated amounts that the Company would
receive or pay to settle the contracts at the balance sheet date;
(v) The fair value of available-for-sale investments which do not have readily available market value is estimated using a discounted
cash flow model, which includes some assumptions that are not supportable by observable market prices or rates.
The carrying values and fair values of financial instruments, by class, are as follows:
As at March 31, 2010
(amounts in millions)
Financial assets
Cash and cash equivalents
Accounts receivable(1)
Other assets(1)
Derivative assets
Financial liabilities
Accounts payable and accrued liabilities(1)
Total long-term debt
Other long-term liabilities(1)
Derivative liabilities
Carrying Value
Fair Value
Held-for-
Trading
Available-
for-Sale
Loans &
Receivables
$ 312.9
0.9 (2)
16.2 (4)
43.0
$ 373.0
$
$
–
–
1.4 (5)
–
1.4
$
–
195.9 (3)
22.2 (6)
–
$ 218.1
Total
312.9
196.8
39.8
43.0
592.5
$
$
$ 312.9
196.8
43.4
43.0
$ 596.1
Carrying Value
Fair Value
Held-for-
Trading
$
$
–
–
–
24.4
24.4
Other
Financial
Liabilities
$ 377.3 (7)
494.4 (8)
0.3 (9)
–
$ 872.0
Total
377.3
494.4
0.3
24.4
896.4
$
$
$ 377.3
533.7
0.3
24.4
$ 935.7
(1) Excludes derivative financial instruments that have been presented separately.
(2) Includes certain trade receivables the Company intends to sell immediately or in the near term.
(3) Includes trade receivables, accrued receivables and certain other receivables.
(4) Represents restricted cash.
(5) Represents the Company’s portfolio investments at cost (refer to Note 11).
(6) Includes long-term receivables and advances.
(7) Includes trade accounts payable, accrued liabilities, interest payable and certain payroll-related liabilities.
(8) Excludes transaction costs and the hedge accounting adjustment.
(9) Includes a long-term payable that meets the definition of a financial liability.
CAE Annual Report 2010 | 113
Notes to the Consolidated Financial Statements
As at March 31, 2009
(amounts in millions)
Financial assets
Cash and cash equivalents
Accounts receivable(1)
Other assets(1)
Derivative assets
Carrying Value
Fair Value
Held-for-
Trading
Available-
for-Sale
Loans &
Receivables
$ 195.2
–
15.7 (3)
51.3
$ 262.2
$
$
–
–
0.8 (4)
–
0.8
$
–
270.0 (2)
20.5 (5)
–
$ 290.5
Total
195.2
270.0
37.0
51.3
553.5
$
$
$ 195.2
270.0
38.4
51.3
$ 554.9
Financial liabilities
Accounts payable and accrued liabilities(1)
Total long-term debt
Other long-term liabilities(1)
Derivative liabilities
Carrying Value
Fair Value
Held-for-
Trading
$
–
–
–
56.5
Other
Financial
Liabilities
$ 416.6 (6)
481.8 (7)
0.3 (8)
–
$
Total
416.6
481.8
0.3
56.5
$ 416.6
471.9
0.3
56.5
$
56.5
$ 898.7
$
955.2
$ 945.3
(1) Excludes derivative financial instruments that have been presented separately.
(2) Includes trade receivables, accrued receivables and certain other receivables.
(3) Represents restricted cash.
(4) Represents the Company’s portfolio investments at cost (refer to Note 11).
(5) Includes long-term receivables and advances.
(6) Includes trade accounts payable, accrued liabilities, interest payable and certain payroll-related liabilities.
(7) Excludes transaction costs and the hedge accounting adjustment.
(8) Includes a long-term payable that meets the definition of a financial liability.
The Company did not elect to voluntarily designate any financial instruments as held-for-trading; moreover, there have not been any
changes to the classification of the financial instruments since March 31, 2008.
As part of its financing transactions, the Company, through its subsidiaries, has pledged certain financial assets including cash and
cash equivalents, accounts receivable, other assets and derivative assets. As at March 31, 2010, the aggregate carrying value of
these pledged financial assets amounted to $110.0 million (2009 – $85.3 million).
114 | CAE Annual Report 2010
Notes to the Consolidated Financial Statements
Fair value hierarchy
The following table presents the financial instruments, by class, which are recognized at fair value. The fair value hierarchy reflects
the significance of the inputs used in making the measurements and has the following levels:
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as
prices) or indirectly (i.e., derived from prices);
Level 3: Inputs for the asset or liability that are not based on observable market data (unobservable inputs).
Each type of fair value is categorized based on the lowest level input that is significant to the fair value measurement in its entirety.
(amounts in millions)
Financial assets
Held-for-trading
Forward foreign currency contracts(1)
Embedded foreign currency derivatives(1)
Equity swap agreement
Derivatives used for hedging
Forward foreign currency contracts
Embedded foreign currency derivatives
Foreign currency swap agreements
Interest swap agreements
Financial liabilities
Held-for-trading
Forward foreign currency contracts(1)
Embedded foreign currency derivatives(1)
Derivatives used for hedging
Forward foreign currency contracts
Embedded foreign currency derivatives
Foreign currency swap agreements
Interest rate swap agreements
Level 2
Level 3
$
$
$
$
8.0
0.9
2.2
23.5
0.1
6.3
2.0
43.0
0.3
5.0
5.1
–
–
9.3
19.7
$
$
$
$
–
–
–
–
–
–
–
–
–
–
–
–
4.7
–
4.7
2010
Total
8.0
0.9
2.2
23.5
0.1
6.3
2.0
43.0
0.3
5.0
5.1
–
4.7
9.3
24.4
$
$
$
$
Level 2
Level 3
$
$
$
$
2.4
12.8
1.4
22.7
–
9.5
2.5
51.3
14.0
3.2
25.1
1.3
–
9.6
53.2
$
$
$
$
–
–
–
–
–
–
–
–
–
–
–
–
3.3
–
3.3
2009
Total
2.4
12.8
1.4
22.7
–
9.5
2.5
51.3
14.0
3.2
25.1
1.3
3.3
9.6
56.5
$
$
$
$
(1) Includes derivatives not designated in a hedging relationship, which are presented separately.
Changes in fair value of financial instruments classified in level 3
The following table presents the changes in level 3 instruments in fiscal 2010 that are recognized at fair value. Financial instruments
are classified in this level when the valuation technique is based on at least one significant input that is not observable in the markets.
The valuation technique may also be based, in part, on observable inputs.
(amounts in millions)
Balance, beginning of year
Total realized and unrealized gains (losses)
Included in earnings
Included in other comprehensive income
Purchases, sales, issues and settlements
Transfers into or out of Level 3
Balance, end of year
Derivative Instruments
(3.3)
$
–
(1.4)
–
–
(4.7)
$
Level 3 input sensitivity analysis
For the most significant item valued using techniques without observable inputs (INR/USD cross currency swap), the determination of
the interest rate and liquidity premium has the most significant impact on the valuation. The impact of assuming an increase or
decrease of 1% in either input would result in an increase of fair value of $1.1 million or a decrease of fair value of $1.2 million.
CAE Annual Report 2010 | 115
Notes to the Consolidated Financial Statements
Financial risk management
Due to the nature of the activities that the Company carries out and as a result of holding financial instruments, the Company is
exposed to credit risk, liquidity risk and market risk, including foreign currency risk and interest rate risk.
Derivative instruments are utilized by the Company to manage market risk against the volatility in foreign exchange rates, interest
rates and stock-based compensation in order to minimize their impact on the Company’s results and financial position. Short-term and
long-term derivative assets have been included as part of accounts receivable and other assets respectively. Short-term and
long-term derivative liabilities have been included as part of accounts payable and accrued liabilities, and other long-term liabilities
respectively.
Embedded derivatives are recorded at fair value separately from the host contract when their economic characteristics and risks are
not clearly and closely related to those of the host contract. The Company may enter into freestanding derivative instruments which
are not eligible for hedge accounting, to offset the foreign exchange exposure of embedded foreign currency derivatives. In such
circumstances, both derivatives are carried at fair value at each balance sheet date with the change in fair value recorded in
consolidated net earnings.
The Company’s policy is not to utilize any derivative financial instruments for trading or speculative purposes. The Company may
choose to designate derivative instruments, either freestanding or embedded, as hedging items. This process consists of matching
derivative hedging instruments to specific assets and liabilities or to specific firm commitments or forecasted transactions. To some
extent, the Company uses non-derivative financial liabilities to hedge foreign currency exchange rate risk exposures.
Credit risk
Credit risk is defined as the Company’s exposure to a financial loss if a debtor fails to meet its obligations in accordance with the
terms and conditions of its arrangements with the Company. The Company is exposed to credit risk on its account receivables and
certain other assets through its normal commercial activities. The Company is also exposed to credit risk through its normal treasury
activities on its cash and cash equivalents, and derivative financial instrument assets.
Credit risks arising from the Company’s normal commercial activities are independently managed in regards to customer credit risk.
An allowance for doubtful accounts is established when there is a reasonable expectation that the Company will not be able to collect
all amounts due according to the original terms of the receivables (refer to Note 6). When a trade receivable is uncollectible, it is
written-off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written-off are
recognized in earnings.
The Company’s customers are primarily established companies with publicly available credit ratings and government agencies, which
facilitates risk monitoring. In addition, the Company typically receives substantial deposits on contracts. The Company closely
monitors its exposure to major airlines in order to mitigate its risk to the extent possible. Furthermore, the Company’s trade accounts
receivable are not concentrated in any specific customers but are from a wide range of commercial and government organizations. As
well,
to a
third-party for cash consideration on a non-recourse basis. The Company does not hold any collateral as security. The credit risk on
cash and cash equivalents is mitigated by the fact that they are in place with a diverse syndicate of major Japanese, North American
and European financial institutions.
the Company’s credit exposure
the sale of certain of
its accounts
reduced by
receivable
further
is
The Company is exposed to credit risk in the event of non-performance by counterparties to its derivative financial instruments. The
Company uses several measures to minimize this exposure. First, the Company entered into contracts with counterparties that are of
high credit quality (mainly A-rated or better). The Company signed International Swaps & Derivatives Association, Inc. (ISDA) Master
Agreements with the majority of counterparties with which it trades derivative financial instruments. These agreements make it
possible to apply full netting when a contracting party defaults on the agreement, for each of the transactions covered by the
agreement and in force at the time of default. Also, collateral or other security to support derivative financial instruments subject to
credit risk can be requested by the Company or its counterparties (or both parties, if need be) when the net balance of gains and
losses on each transaction exceeds a threshold defined in the ISDA Master Agreement. Finally, the Company monitors the credit
standing of counterparties on a regular basis to help minimize credit risk exposure.
The carrying amounts presented in the previous financial instrument tables and Note 6 represent the maximum exposure to credit risk
for each respective financial asset as at the relevant dates.
116 | CAE Annual Report 2010
Notes to the Consolidated Financial Statements
Liquidity risk
Liquidity risk is defined as the potential that the Company cannot meet a demand for cash or meet its obligations as they become due.
The Company manages this risk by establishing detailed cash forecasts, as well as long-term operating and strategic plans. The
management of consolidated liquidity requires a constant monitoring of expected cash inflows and outflows which is achieved through
a detailed forecast of the Company’s consolidated liquidity position, for adequacy and efficient use of cash resources. Liquidity
adequacy is assessed in view of seasonal needs, growth requirements and capital expenditures, and the maturity profile of
indebtedness, including off-balance sheet obligations. The Company manages its liquidity risk to maintain sufficient liquid financial
resources to fund its operations and meet its commitments and obligations. In managing its liquidity risk, the Company has access to
revolving unsecured term-credit facilities of US$400 million and €100 million. As well, the Company has an agreement to sell certain
of its accounts receivable up to $50 million. The Company also constantly monitors any financing opportunities to optimize its capital
structure and maintain appropriate financial flexibility.
The following tables present a maturity analysis to the contractual maturity date, of the Company’s financial liabilities based on
expected cash flows. Cash flows from derivatives presented either as derivative assets or liabilities have been included, as the
Company manages its derivative contracts on a gross basis. The amounts are the contractual undiscounted cash flows. All amounts
contractually denominated in foreign currency are presented in Canadian dollar equivalent amounts using the period-end spot rate
except as otherwise stated:
As at March 31, 2010
(amounts in millions)
Non-derivative financial
liabilities
Accounts payable and
accrued liabilities(1)
Total long-term debt(2) (7)
Other long-term liabilities(3) (4)
Derivative financial
instruments
Forward foreign currency
contracts(5)
Outflow
Inflow
Swap derivatives on total
long-term debt(6)
Outflow
Inflow
Carrying
Amount
Contractual
Cash Flows
0-12
Months
13-24
Months
25-36
Months
37-48
Months
49-60
Months Thereafter
$ 377.3
494.4
0.3
$ 872.0
$
377.3
705.5
0.3
$ 1,083.1
$ 377.3
76.7
–
$ 454.0
$
–
55.8
0.1
$ 55.9
$
–
86.3
–
$ 86.3
$
–
79.1
–
$ 79.1
$
–
58.0
–
$ 58.0
$
–
349.6
0.2
$ 349.8
(26.1)
488.4
355.2
(514.6)
(377.9)
78.8
(83.2)
26.8
(26.9)
18.5
(18.4)
9.1
(8.2)
–
–
5.7
$
(20.4)
$ 851.6
92.2
(80.9)
$
(14.9)
$ 1,068.2
8.9
(5.4)
$ (19.2)
$ 434.8
11.1
(8.0)
$
(1.3)
$ 54.6
10.5
(9.0)
$
1.4
$ 87.7
11.4
(9.6)
$
1.9
$ 81.0
11.7
(10.9)
$
1.7
$ 59.7
38.6
(38.0)
$
0.6
$ 350.4
(1) Includes trade accounts payable, accrued liabilities, interest payable and certain payroll-related liabilities.
(2) Contractual cash flows include contractual interest and principal payments related to debt obligations.
(3) Includes a long-term payable that meets the definition of a financial liability.
(4) Excludes derivative financial liabilities which have been presented separately.
(5) Includes forward foreign currency contracts, but excludes all embedded derivatives, either presented as derivative liabilities or derivative
assets. Outflows and inflows are presented in CAD equivalent using the contractual forward foreign currency rate.
(6) Includes interest rate swap and foreign currency swap contracts either designated as cash flow hedges or as fair value hedges of long-term
debt either presented as derivative liabilities or derivative assets.
(7) Excludes transaction costs and the hedge accounting adjustment.
CAE Annual Report 2010 | 117
Notes to the Consolidated Financial Statements
As at March 31, 2009
(amounts in millions)
Non-derivative financial
liabilities
Accounts payable and
accrued liabilities(1)
Total long-term debt(2) (7)
Other long-term liabilities(3) (4)
Derivative financial
instruments
Forward foreign currency
contracts(5)
Outflow
Inflow
Swap derivatives on total
long-term debt(6)
Outflow
Inflow
Carrying
Amount
Contractual
Cash Flows
0-12
Months
13-24
Months
25-36
Months
37-48
Months
49-60
Months
Thereafter
$ 416.6
481.8
0.3
$ 898.7
$
416.6
584.3
0.3
$ 1,001.2
$ 416.6
145.2
–
$ 561.8
$
–
59.8
0.1
$ 59.9
$
–
45.2
0.2
$ 45.4
$
–
104.0
–
$ 104.0
$
–
48.1
–
$ 48.1
$
–
182.0
–
$ 182.0
14.0
0.9
693.8
(678.5)
561.5
(555.9)
102.7
(96.0)
15.5
(13.8)
4.0
(3.6)
10.1
(9.2)
–
–
113.5
(106.5)
8.8
(6.6)
10.3
(7.7)
12.7
(11.1)
11.8
(11.0)
12.7
(11.6)
14.9
$
$ 913.6
22.3
$
$ 1,023.5
7.8
$
$ 569.6
$ 9.3
$ 69.2
3.3
$
$ 48.7
1.2
$
$ 105.2
2.0
$
$ 50.1
57.2
(58.5)
(1.3)
$
$ 180.7
(1) Includes trade accounts payable, accrued liabilities, interest payable and certain payroll-related liabilities.
(2) Contractual cash flows include contractual interest and principal payments related to debt obligations.
(3) Includes a long-term payable that meets the definition of a financial liability.
(4) Excludes derivative financial liabilities which have been presented separately.
(5) Includes forward foreign currency contracts, but excludes all embedded derivatives, either presented as derivative liabilities or derivative
assets. Outflows and inflows are presented in CAD equivalent using the contractual forward foreign currency rate.
(6) Includes interest rate swap and foreign currency swap contracts either designated as cash flow hedges or as fair value hedges of long-term
debt either presented as derivative liabilities or derivative assets.
(7) Excludes transaction costs and the hedge accounting adjustment.
Market risk
Market risk is defined as the Company’s exposure to a gain or a loss to the value of its financial instruments as a result of changes in market
prices, whether those changes are caused by factors specific to the individual financial instruments or its issuer, or factors affecting all similar
financial instruments traded in the market. The Company is mainly exposed to foreign currency risk and interest rate risk.
Foreign currency risk
Foreign currency risk is defined as the Company’s exposure to a gain or a loss in the value of its financial instruments as a result of
fluctuations in foreign exchange rates. The Company is exposed to foreign currency rate variability primarily in relation to certain sale
commitments, expected purchase transactions and debt denominated in a foreign currency. As well, most of its foreign operations are
self-sustaining and these foreign operations’ functional currencies are other than the Canadian dollar (in particular the U.S. dollar
[USD], euro [€] and British pounds [GBP or £]). The Company’s related exposure to the foreign currency rates is primarily through
cash and cash equivalents and other working capital elements of these foreign operations.
The Company also mitigates foreign currency risks, within each segment, by transacting in their functional currency for material
procurement, sale contracts and financing activities.
The Company uses forward foreign currency contracts and foreign currency swap agreements to manage the Company’s exposure
from transactions in foreign currencies and to synthetically modify the currency of exposure of certain balance sheet items. These
transactions include forecasted transactions and firm commitments denominated in foreign currencies.
118 | CAE Annual Report 2010
As at March 31, 2010, the Company has forward foreign currency contracts totalling $481.1 million (buy contracts for $103.6 million
and sell contracts for $377.5 million) mainly to reduce the risk of variability of future cash flows resulting from forecasted transactions
and firm sales commitments.
The consolidated forward foreign currency contracts outstanding were as follows as at March 31:
Notes to the Consolidated Financial Statements
(amounts in millions, except average rate)
Currencies (sold/bought)
USD/CDN
Less than 1 year
Between 1 and 3 years
Between 3 and 5 years
CDN/EUR
Less than 1 year
Between 1 and 3 years
EUR/CDN
Less than 1 year
Between 1 and 3 years
Between 3 and 5 years
EUR/AUD
Less than 1 year
GBP/CDN
Less than 1 year
Between 1 and 3 years
AUD/CDN
Less than 1 year
USD/GBP
Less than 1 year
Between 1 and 3 years
CDN/USD
Less than 1 year
Between 1 and 3 years
Between 3 and 5 years
CDN/GBP
Less than 1 year
SAR/CDN
Less than 1 year
2010
Average
Rate
0.93
0.92
0.90
1.39
1.38
0.67
0.68
0.64
–
0.58
0.57
–
1.72
–
1.06
1.15
1.14
1.54
3.59
Notional
Amount (1)
$ 175.5
45.0
8.4
37.2
2.6
73.6
16.4
0.9
–
32.1
22.3
–
1.9
–
29.4
16.2
16.2
2.0
1.4
$ 481.1
135.5
$ 616.6
2009
Average
Rate
0.84
0.87
0.90
–
–
0.63
0.66
0.66
0.57
0.50
0.53
1.18
1.75
1.72
1.02
–
–
–
–
Notional
Amount (1)
$ 356.1
83.8
13.8
–
–
78.9
22.9
0.8
1.1
39.3
10.9
1.1
2.3
2.3
95.6
–
–
–
–
$ 708.9
219.9
$ 928.8
Total
Effect of master netting agreement
Outstanding amount
(1) Exchange rates as at the end of the respective fiscal year were used to translate amounts in foreign currencies.
The Company has entered into foreign currency swap agreements related to its senior collateralized financing, obtained in 2008, to
convert a portion of the USD-denominated debt into GBP to finance its civil aviation training centre in the United Kingdom. The
Company designated two USD to GBP foreign currency swap agreements, as cash flow hedges, with outstanding notional amounts,
of $3.9 million (£2.5 million) (2009 – $4.9 million [£2.7 million]) and $13.1 million (£8.5 million) (2009 – $15.3 million [£8.5 million]),
respectively, amortized in accordance with the repayment schedule of the debt until June 2014 and June 2018 respectively.
The Company’s foreign currency hedging programs are typically unaffected by changes in market conditions, as related derivative
financial instruments are generally held-to-maturity, consistent with the objective to fix currency rates on the hedged item.
Also, a net loss of $0.5 million (2009 – net loss of $0.4 million; 2008 – net gain $0.9 million) representing the ineffective portion of the
change in fair value of the cash flow hedges and the component of the hedging item’s gain or loss excluded from the assessment of
effectiveness, was recognized in net earnings.
The estimated net amount before tax of existing gains reported in accumulated other comprehensive income that is expected to be
recognized during the next 12 months is $18.5 million. Future fluctuation in market rate (foreign exchange rate and/or interest rate) will
impact the reclassified amount.
CAE Annual Report 2010 | 119
Notes to the Consolidated Financial Statements
Foreign currency risk sensitivity analysis
The following table shows the Company’s exposure to foreign exchange risk of financial instruments and the pre-tax effects on net
earnings and OCI as a result of a reasonably possible strengthening of 5% in the relevant foreign currency against the Canadian
dollar as at March 31. This analysis assumes all other variables remain constant.
(amounts in millions)
Years ended March 31
2010
2009
USD
Net
Earnings
$
$
(1.2)
(1.3)
OCI
$ (14.6)
$ (17.8)
€
Net
Earnings
$
$
(1.8)
(1.5)
$
$
GBP
Net
Earnings
$
$
0.1
0.3
OCI
(2.5)
(4.7)
OCI
(2.0)
(2.1)
$
$
A possible weakening of 5% in the relevant foreign currency against the Canadian dollar would have an opposite impact on pre-tax
consolidated net earnings and OCI.
Interest rate risk
Interest rate risk is defined as the Company’s exposure to a gain or a loss to the value of its financial instruments as a result of the
fluctuations in interest rates. The Company bears some interest rate fluctuation risk on its floating rate long-term debt and some fair
value risk on its fixed interest long-term debt. The Company mainly manages interest rate risk by fixing project-specific floating rate
debt in order to reduce cash flow variability. The Company also has a floating rate debt through an unhedged bank borrowing, a
specific fair value hedge and other asset-specific floating rate debt. A mix of fixed and floating interest rate debt is sought to reduce
the net impact of fluctuating interest rates. Derivative financial instruments used to synthetically convert interest rate exposures are
mainly on interest rate swap agreements.
As at March 31, 2010, the Company has entered into nine interest rate swap agreements with eight different financial institutions to
mitigate these risks for a total notional value of $196.0 million (2009 – $165.1 million). After considering these swap agreements, as at
March 31, 2010, 74% (2009 – 72%) of the long-term debt bears fixed interest rates.
The Company’s interest rate hedging programs are typically unaffected by changes in market conditions, as related derivative
financial instruments are generally held-to-maturity to establish asset and liability management matching, consistent with the objective
to reduce risks arising from interest rate movements. As a result, the changes in variable interest rates do not have a significant
impact on the Company’s consolidated net earnings and OCI.
Interest rate risk sensitivity analysis
In 2010 and 2009, a 1% increase/decrease in interest rates did not have a significant impact on the Company’s net earnings and OCI.
Stock-based compensation cost
The Company has entered into equity swap agreements with a major Canadian financial institution to reduce its cash and net
earnings exposure to fluctuations in its share price relating to the DSU and LTI-DSU programs. Pursuant to the agreement, the
Company receives the economic benefit of dividends and share price appreciation while providing payments to the financial institution
for the institution’s cost of funds and any share price depreciation. The net effect of the equity swap partly offsets movements in the
Company’s share price impacting the cost of the DSU and LTI-DSU programs and is reset monthly. As at March 31, 2010, the equity
swap agreements covered 2,155,000 common shares (2009 – 2,155,000) of the Company. The total gain of $5.2 million
(2009 – loss of $8.4 million) on the swap has been recognized in earnings.
Hedge of self-sustaining foreign operations
As at March 31, 2010, the Company has designated a portion of its senior notes totalling US$138.0 million (2009 – US$33.0 million)
as a hedge of self-sustaining foreign operations. Gains or losses on the translation of the designated portion of its senior notes are
recognized in OCI to offset any foreign exchange gains or losses on translation of financial statements of self-sustaining foreign
operations.
Letters of credit and guarantees
As at March 31, 2010, the Company had outstanding letters of credit and performance guarantees in the amount of $209.1 million
(2009 –$115.7 million) issued in the normal course of business. These guarantees are issued mainly under the Revolving Term Credit
Facility as well as the Performance Securities Guarantee (PSG) account provided by Export Development Corporation (EDC) and
under other standby facilities available to the Company through various financial institutions.
The advance payment guarantees are related to progress/milestone payments made by our customers and are reduced or eliminated
upon delivery of the product. The contract performance guarantees are linked to the completion of the intended product or service
rendered by CAE and to the customer’s requirements. It represents 10% to 20% of the overall contract amount. The customer
releases the Company from these guarantees at the signing of a certificate of completion. The letter of credit for the operating lease
obligation provides credit support for the benefit of the owner participant in the September 30, 2003 sale and leaseback transaction
and varies according to the payment schedule of the lease agreement.
120 | CAE Annual Report 2010
(amounts in millions)
Advance payment
Contract performance
Operating lease obligation
Simulator deployment obligation
Other
Notes to the Consolidated Financial Statements
2010
120.6
52.2
23.9
4.1
8.3
209.1
$
$
2009
61.5
10.1
29.7
5.0
9.4
115.7
$
$
Residual value guarantees – sale and leaseback transactions
For certain sale and leaseback transactions, the Company has agreed to guarantee the residual value of the underlying equipment in
the event that the equipment is returned to the lessor and the net proceeds of any eventual sale do not cover the guaranteed amount.
The maximum amount of exposure is $13.1 million (2009 – $13.1 million), of which $8.2 million matures in 2020 and $4.9 million in
2023. Of this amount, as at March 31, 2010, $13.1 million is recorded as a deferred gain (2009 – $13.1 million).
Indemnifications
In certain instances when CAE sells businesses, the Company may retain certain liabilities for known exposures and provide
indemnification to the buyer with respect to future claims for certain unknown liabilities that exist, or arise from events occurring, prior
to the sale date, including liabilities for taxes, legal matters, environmental exposures, product liability, and other obligations. The
terms of the indemnifications vary in duration, from one to two years for certain types of indemnities, terms for tax indemnifications
that are generally aligned to the applicable statute of limitations for the jurisdiction in which the divestiture occurred, and terms for
environmental liabilities that typically do not expire. The maximum potential future payments that the Company could be required to
make under these indemnifications are either contractually limited to a specified amount or unlimited. The Company believes t hat
other than the liabilities already accrued, the maximum potential future payments that it could be required to make under these
indemnifications are not determinable at this time, as any future payments would be dependent on the type and extent of the related
claims, and all available defenses, which cannot be estimated. However, historically, costs incurred to settle claims related to these
indemnifications have not been material to the Company’s consolidated financial position, results of operations or cash flows.
NOTE 20 – SUPPLEMENTARY CASH FLOWS AND EARNINGS INFORMATION
(amounts in millions)
Cash provided by (used in) non-cash working capital:
Accounts receivable
Contracts in progress
Inventories
Prepaid expenses
Income taxes recoverable
Accounts payable and accrued liabilities
Deposits on contracts
Changes in non-cash working capital
Supplemental cash flow disclosure:
Interest paid
Income taxes paid (received)
Supplemental statements of earnings disclosure:
Foreign exchange (losses) gains on financial instruments
recognized in earnings:
Loans and receivables
Financial assets and financial liabilities required to be
classified as held-for-trading
Other financial liabilities
Foreign exchange (loss) gain
2010
108.1
(17.0)
(11.4)
(5.9)
(1.9)
(78.8)
3.3
(3.6)
29.5
14.8
$
$
$
$
2009
Restated
(Note 2)
2008
Restated
(Note 2)
$
$
$
$
14.7
(67.4)
(7.2)
3.0
18.7
(41.7)
(15.2)
(95.1)
24.6
14.4
$
$
$
$
8.3
(26.2)
5.3
(8.6)
(18.6)
3.3
19.6
(16.9)
24.0
28.0
$
(23.4)
$
17.5
$
(29.5)
4.5
18.9
–
(5.0)
(13.4)
(0.9)
$
$
17.3
24.8
12.6
$
CAE Annual Report 2010 | 121
Notes to the Consolidated Financial Statements
NOTE 21 – CONTINGENCIES
In the normal course of operations, the Company is party to a number of lawsuits, claims and contingencies. Accruals are made in
instances where it is probable that liabilities have been incurred and where such liabilities can be reasonably estimated. Although it is
possible that liabilities may be incurred in instances for which no accruals have been made, the Company does not believe that the
ultimate outcome of these matters will have a material impact on its consolidated financial position.
NOTE 22 – COMMITMENTS
Significant contractual purchase obligations and future minimum lease payments under operating leases are as follows:
Years ending March 31
(amounts in millions)
2011
2012
2013
2014
2015
Thereafter
SP/C
1.2
1.1
0.6
0.2
–
0.2
3.3
$
$
SP/M
5.9
4.3
1.8
0.5
0.1
0.5
13.1
TS/C
36.9
41.5
33.3
30.1
22.9
78.8
243.5
$
$
$
$
TS/M
16.3
14.4
9.4
5.8
5.3
11.5
62.7
$
$
Total
60.3
61.3
45.1
36.6
28.3
91.0
322.6
$
$
As at March 31, 2010, included in the total contractual purchase obligations and future minimum lease payments under operating
leases is $50.4 million (2009 – $74.5 million; 2008 – $103.3 million) designated as commitments to CVS.
Of the total $322.6 million disclosed as being commitments as at March 31, 2010, $12.6 million represent contractual purchase
obligations.
NOTE 23 – GOVERNMENT ASSISTANCE
The Company has signed agreements with various governments whereby the latter share in the cost, based on expenditures incurred
by the Company, of certain R&D programs for modelling and services, visual systems and advanced flight simulation technology for
civil applications and networked simulation for military applications, as well as for the new markets of simulation-based training in
healthcare, mining and energy.
During fiscal 2006, the Company announced Project Phoenix, an R&D program in which the Government of Canada agreed to
contribute approximately 30% ($189 million) of the value of CAE’s R&D program and in which during fiscal 2007, the Government of
Québec agreed to participate in the form of a contribution of up to $31.5 million related to costs incurred before the end of fiscal 2011.
During fiscal 2009, the Company announced that it will invest up to $714 million in Project Falcon, an R&D program that will continue
over five years. The goal of Project Falcon is to expand the Company’s modelling and simulation technologies, develop new one s and
increase its capabilities beyond training into other areas of the aerospace and defence market, such as analysis and operations.
Concurrently, the Government of Canada agreed to participate in Project Falcon through a repayable investment of up to $250 million
made through the Strategic Aerospace and Defence Initiative (SADI), which supports strategic industrial research and pre-competitive
development projects in the aerospace, defence, space and security industries (refer to Note 1 and 13).
During fiscal 2010, the Company announced that it will invest up to $274 million in Project New Core Markets, an R&D program
extending over seven years. The aim is to leverage CAE’s modelling, simulation and training services expertise into the new markets
of healthcare, mining and energy. The Québec government agreed to participate up to $100 million in contributions related to costs
incurred before the end of fiscal 2016.
The following table provides information regarding contributions recognized and amounts not yet received for Project Phoenix, Project
Falcon and Project New Core Markets:
(amounts in millions)
Outstanding contribution receivable, beginning of year
Contributions
Payments received
Outstanding contribution receivable, end of year
2010
23.3
51.1
(59.7)
14.7
$
$
2009
24.2
64.8
(65.7)
23.3
$
$
122 | CAE Annual Report 2010
In addition to these programs, the Company has also signed previous R&D agreements with the Government of Canada, in order to
share in a portion of the specific costs incurred by the Company on previous R&D programs. The following table indicates the effects
of contributions recognized and aggregate royalty expenditures recognized from Project Phoenix, Project Falcon, Project New Core
Markets and previous programs:
Notes to the Consolidated Financial Statements
(amounts in millions)
Contributions credited to capitalized expenditures:
Project Phoenix
Project Falcon
Project New Core Markets
Contributions credited to income:
Project Phoenix
Project Falcon
Project New Core Markets
Total contributions:
Project Phoenix
Project Falcon
Project New Core Markets
Royalty expenses
2010
2009
2008
$
$
$
3.7
5.0
2.5
20.2
19.7
–
23.9
24.7
2.5
9.8
$
$
$
15.1
–
–
49.7
–
–
64.8
–
–
10.1
$
$
$
20.3
–
–
42.1
–
–
62.4
–
–
8.8
The cumulative contributions recognized by the Company, since their respective inceptions, for all current government cost -sharing
programs still active as at March 31, 2010 amount to $328.2 million. The cumulative sum of royalty expenses recognized by the
Company, since their respective inceptions, for all current government cost-sharing programs still active as at March 31, 2010,
amounts to $51.9 million.
NOTE 24 – EMPLOYEE FUTURE BENEFITS
Defined benefit plans
The Company has two registered funded defined-benefit pension plans in Canada (one for employees and one for designated
executives) that provide benefits based on length of service and final average earnings. The Company also maintains a pension plan
for employees in the Netherlands and in the United Kingdom that provides benefits based on similar provisions.
In addition, the Company maintains a supplemental arrangement plan in Canada and two in Germany (CAE Elektronik GmbH plan
and CAE Beyss GmbH plan [Beyss]) to provide defined benefits. These supplemental arrangements are the sole obligation of the
Company, and there is no requirement to fund it. However, the Company is obligated to pay the benefits when they become due.
Under the Canadian supplemental arrangement, once the designated employee accumulates five years of service, the Company is
required to collaterize the obligation for that employee. As at March 31, 2010, the Company has issued letters of credit totalling
$53.3 million (2009 – $22.5 million) to collaterize these obligations under the Canadian supplemental arrangement.
Contributions reflect actuarial assumptions of future investment returns, salary projections and future service benefits. Plan assets are
represented primarily by Canadian and foreign equities, government and corporate bonds.
In fiscal 2009, the Company temporarily amended its early retirement provisions, resulting in additional past service costs of
$3.0 million to defer and amortize on a straight-line basis over the average remaining service period of active employees at the date of
the amendment.
In fiscal 2010, in accordance to its restructuring plan, the Company reduced its workforce; consequently, a curtailment loss of
$1.0 million and a settlement loss of $1.4 million were recognized. Also, the Company temporarily amended its early retirement
provisions, resulting in a special termination benefit cost of $0.2 million. These losses and this special termination benefit cost were
included in the restructuring charge.
CAE Annual Report 2010 | 123
Notes to the Consolidated Financial Statements
The changes in pension obligations, in fair value of plan assets and the financial position of the funded pension plans, are as follows:
(amounts in millions)
Pension obligations,
beginning of year
Current service cost
Interest cost
Curtailment
Settlement
Special termination benefit
Employee contributions
Pension benefits paid
Plan amendments
Actuarial loss (gain)
Foreign exchange
Pension obligations, end of year
Fair value of plan assets,
beginning of year
Actual return on plan assets
Pension benefits paid
Settlement
Employee contributions
Employer contributions
Foreign exchange
Fair value of plan assets,
end of year
Financial position – plan deficit
Unrecognized net actuarial loss
Unamortized past service cost
Amount recognized, end of year
Amount recognized in:
Other assets (Note 11)
Other long-term liabilities (Note 14)
Canadian
Foreign
$
$
$
$
$
$
$
$
153.9
4.6
11.0
(1.9)
(7.7)
0.2
4.2
(9.7)
–
38.5
–
193.1
145.5
30.4
(9.7)
(7.7)
4.2
10.4
–
173.1
(20.0)
42.9
5.0
27.9
27.9
–
27.9
$
$
$
$
$
$
$
$
25.8
0.4
1.4
–
–
–
0.4
(0.4)
–
1.8
(4.8)
24.6
22.8
1.5
(0.4)
–
0.4
2.2
(4.4)
22.1
(2.5)
3.6
0.4
1.5
2.0
(0.5)
1.5
$
$
$
$
$
$
$
$
2010
Total
179.7
5.0
12.4
(1.9)
(7.7)
0.2
4.6
(10.1)
–
40.3
(4.8)
217.7
168.3
31.9
(10.1)
(7.7)
4.6
12.6
(4.4)
195.2
(22.5)
46.5
5.4
29.4
29.9
(0.5)
29.4
Canadian
Foreign
$
$
$
$
$
$
$
$
193.9
6.6
10.7
–
–
–
2.3
(10.1)
2.4
(51.9)
–
153.9
168.6
(24.8)
(10.1)
–
2.3
9.5
–
145.5
(8.4)
29.3
6.5
27.4
27.4
–
27.4
$
$
$
$
$
$
$
$
25.3
0.5
1.5
–
–
–
0.3
(0.3)
0.6
(2.3)
0.2
25.8
23.9
(2.2)
(0.3)
–
0.3
1.0
0.1
22.8
(3.0)
2.8
0.6
0.4
1.0
(0.6)
0.4
$
$
$
$
$
$
$
$
2009
Total
219.2
7.1
12.2
–
–
–
2.6
(10.4)
3.0
(54.2)
0.2
179.7
192.5
(27.0)
(10.4)
–
2.6
10.5
0.1
168.3
(11.4)
32.1
7.1
27.8
28.4
(0.6)
27.8
Included in the above pension obligations and fair value of plan assets at the end of the year are the following amounts in respect of
plans that are in deficit (the two Canadian funded plans and the United Kingdom and Netherlands plan [since fiscal 2008]).
Canadian
193.1
$
173.1
(20.0)
Foreign
24.6
22.1
(2.5)
$
$
$
$
2010
Total
217.7
Canadian
153.9
$
195.2
(22.5)
$
145.5
(8.4)
Foreign
25.8
22.8
(3.0)
$
$
$
$
2009
Total
179.7
168.3
(11.4)
(amounts in millions)
Pension obligations, end of year
Fair value of plan assets, end of
year
Financial position – plan deficit
$
124 | CAE Annual Report 2010
Notes to the Consolidated Financial Statements
The changes in pension obligations related to the supplemental arrangements are as follows:
(amounts in millions)
Pension obligations,
beginning of year
Current service cost
Interest cost
Curtailment
Pension benefits paid
Actuarial loss (gain)
Foreign exchange
Pension obligations, end of year
Financial position – plan deficit
Unrecognized net actuarial loss
Amount recognized in other
Canadian
Foreign
$
$
$
28.7
2.4
2.2
(0.3)
(1.6)
2.9
–
34.3
(34.3)
8.6
$
$
$
$
$
$
9.8
0.1
0.4
–
(0.6)
(0.2)
(1.7)
7.8
(7.8)
0.1
2010
Total
38.5
2.5
2.6
(0.3)
(2.2)
2.7
(1.7)
42.1
(42.1)
8.7
Canadian
Foreign
$
$
$
27.7
2.1
1.5
–
(1.3)
(1.3)
–
28.7
(28.7)
6.2
$
$
$
10.2
0.2
0.5
–
(0.6)
(0.8)
0.3
9.8
(9.8)
0.4
$
$
$
2009
Total
37.9
2.3
2.0
–
(1.9)
(2.1)
0.3
38.5
(38.5)
6.6
long-term liabilities (Note 14)
$
(25.7)
$
(7.7)
$
(33.4)
$
(22.5)
$
(9.4)
$
(31.9)
The net pension cost for funded pension plans for the years ended March 31 included the following components:
(amounts in millions)
Current service cost
Interest cost on pension obligations
Actual return on plan assets
Actuarial loss (gain) on benefit obligations
Plan amendments
Pension cost before adjustments to recognize the long-term nature of plans
Adjustments to recognize the long-term nature of plans:
Difference between expected and actual return on plan assets
Difference between actuarial loss recognized for the year and actual actuarial
loss (gain) on benefit obligations for the year
Difference between amortization of past service cost for the year and actual
plan amendments for the year
Total adjustment
Net pension cost
Curtailment loss
Settlement loss
Special termination benefit cost
Net pension cost including curtailment, settlement and special termination benefit
The following components are combinations of the items presented above:
(amounts in millions)
Expected return on plan assets
Amortization of net actuarial loss
Amortization of past service costs
With respect to the supplemental arrangements, the net pension cost is as follows:
(amounts in millions)
Current service cost
Interest cost on pension obligations
Actuarial loss (gain) on benefit obligations
Pension cost before adjustments to recognize the long-term nature of plans
Adjustments to recognize the long-term nature of plans:
Difference between actuarial loss recognized for the year and actual actuarial
loss (gain) on benefit obligations for the year
Net pension cost
2010
5.0
12.4
(31.9)
40.3
–
25.8
20.9
(39.2)
0.5
(17.8)
8.0
1.0
1.4
0.2
10.6
2010
(11.0)
1.1
0.5
2010
2.5
2.6
2.7
7.8
(2.4)
5.4
2009
7.1
12.2
27.0
(54.2)
3.0
(4.9)
(40.4)
55.7
(2.5)
12.8
7.9
–
–
–
7.9
2009
(13.4)
1.5
0.5
2009
2.3
2.0
(2.1)
2.2
2.7
4.9
$
$
$
$
$
$
$
$
$
$
2008
6.6
11.0
(4.3)
(4.6)
–
8.7
(8.2)
6.4
0.5
(1.3)
7.4
–
–
–
7.4
2008
(12.5)
1.8
0.5
2008
1.8
1.7
2.1
5.6
(1.8)
3.8
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
CAE Annual Report 2010 | 125
Notes to the Consolidated Financial Statements
The following component is a combination of the items presented above:
(amounts in millions)
Amortization of net actuarial loss
2010
0.3
$
2009
0.6
2008
0.3
$
$
Additional information on Canadian-funded pension plan assets – weighted average asset allocations by asset category are as follows:
Asset category
Equity securities
Fixed-income securities
Allocation of Plan Assets at Measurement Dates
December 31, 2009
65%
35%
100%
December 31, 2008
55%
45%
100%
The target allocation percentage for equity securities is 63%, which includes a mix of Canadian, U.S. and international equities, and is
37% for fixed-income securities, which must be rated BBB or higher. Individual asset classes are allowed to fluctuate slightly and are
rebalanced regularly. CAE, through its fund managers, is responsible for investing the assets so as to achieve return in line with
underlying market indexes. During fiscal 2009, in response to volatility in the equity markets, management decided to reduce its
exposure in the equity markets by investing the regular monthly contributions in short-term fixed income securities. Also, the reduction
in equity values contributed to the change in the mix of asset classes in fiscal 2009.
Netherlands Pension Plan assets are invested through an insurance company, and the asset allocation is approximately 74%
(2009 –78%) in fixed income and 26% (2009 – 22%) in equities.
The asset allocation for the United Kingdom Pension Plan assets is approximately 53% (2009 – 52%) in equities and 47%
(2009 – 48%) in fixed income.
Significant assumptions (weighted average):
Pension obligations as of March 31:
Discount rate
Compensation rate increases
Net pension cost:
Expected return on plan assets
Discount rate
Compensation rate increases
Expected average remaining service lifetime
2010
Canadian
Foreign
Canadian
6.25%
3.50%
5.44%
2.04%
7.50%
3.50%
7.00%
7.50%
3.50%
16 years
5.61%
5.64%
1.85%
11 years
7.00%
5.50%
3.50%
15 years
2009
Foreign
5.64%
1.85%
5.65%
5.40%
1.80%
11 years
For the purpose of calculating the expected return on plan assets, historical and expected future returns were considered separately
for each class of assets based on the asset allocation and the investment policy.
The Company measures its benefit obligations and fair value of plan assets for accounting purposes on December 31 of each year.
The most recent actuarial valuation of the pension plans for funding purposes was on September 30, 2007 for the Canadian employee
funded plans. The next required valuation of December 31, 2009 for both funded plans is in progress.
An actuarial valuation of the funded United Kingdom plan is made every three years on March 31. The last actuarial valuation was
filed on March 31, 2009.
The most recent actuarial valuation of the pension plans for funding purposes was on December 31, 2008 for the Netherlands
employee funded plan. The next required valuation of December 31, 2009 is in progress.
126 | CAE Annual Report 2010
Notes to the Consolidated Financial Statements
Defined contribution plans
The Company maintains an Employee Stock Purchase Plan (ESPP) to enable Company employees and its participating subsidiaries
to acquire CAE common shares through regular payroll deductions plus employer contributions. The Plan allows employees to
contribute up to 18% of their annual base salary. The Company and its participating subsidiaries match the first $500 employee
contribution and contribute $1 of every $2 on additional employee contributions, up to a maximum of 3% of the employee’s base
salary. Refer to Note 17 for further details and compensation expense recorded during the period.
All of the Company’s U.S. employees may participate in defined contribution saving plans. These plans are subject to U.S. federal tax
limitations and provide for voluntary employee salary deduction contributions. The formula for the Company’s defined contribution
plans are based on a percentage of salary. The Company’s 2010 contribution was $3.4 million (2009 – $3.7 million, 2008 –
$2.9 million).
In addition, the Company offered defined contribution pension plans to employees of some of its subsidiaries for which the funding
formula is based on a percentage of salary. The Company’s 2010 contribution was $1.7 million (2009 – $1.1 million, 2008 –
$0.7 million).
NOTE 25 – RESTRUCTURING CHARGE
On May 14, 2009, the Company introduced actions required to size the Company to current and expected market conditions.
Approximately 700 employees were affected. A restructuring charge of $34.1million, consisting mainly of severance and other related
costs, including the associated pension expense, was included in the net earnings in fiscal 2010. The plan has been completed.
The following summarizes the restructuring costs for the year ended March 31, 2010:
(amounts in millions)
Provision, beginning of year
Expenses recorded
Payments made
Foreign exchange
Provision, end of year
Employee
Termination
Costs
–
$
23.5
(19.0)
(0.4)
4.1
$
Other
Costs
–
10.6
(8.2)
(0.1)
2.3
$
$
Total
–
34.1
(27.2)
(0.5)
6.4
$
$
The following table provides the restructuring charge for each reportable segment:
(amounts in millions)
Simulation Products/Civil
Simulation Products/Military
Training & Services/Civil
Training & Services/Military
2010
14.7
4.7
13.5
1.2
34.1
$
$
2009
–
–
–
–
–
$
$
$
$
2008
–
–
–
–
–
CAE Annual Report 2010 | 127
Notes to the Consolidated Financial Statements
NOTE 26 – VARIABLE INTEREST ENTITIES
The following table summarizes the total assets and total liabilities by segment of the significant variable interest entities (VIEs) in
which the Company has a variable interest as at March 31:
(amounts in millions)
Training and Services/Civil:
Sale and leaseback structures
Air Canada Training Centre – Fiscal 2000
Toronto Training Centre – Fiscal 2002
Denver/Dallas – Fiscal 2003
SimuFlite – Fiscal 2004
Assets and liabilities of non-consolidated VIEs subject to
disclosure
Training and Services/Military:
Sale and leaseback structures
Aircrew Training Centre – Fiscal 1998
Consolidated assets and liabilities before allowing for its
classification as a VIE and the Company being the primary
beneficiary
Simulation Products/Civil:
Partnership arrangement
Flight simulator – Capital L.P. – Fiscal 2010
Assets and liabilities of non-consolidated VIEs subject to
disclosure
Simulation Products/Military:
Partnership arrangement
Eurofighter Simulation Systems – Fiscal 1999
Assets and liabilities of non-consolidated VIEs subject to
disclosure
2010
2009
Assets
Liabilities
Assets
Liabilities
$
$
12.0
10.3
47.1
67.3
12.0
10.3
47.1
67.3
$
$
12.6
10.9
49.4
70.5
12.6
10.9
49.4
70.5
$
136.7
$
136.7
$
143.4
$
143.4
$
$
$
$
$
$
83.3
$
69.2
$
65.7
$
50.0
83.3
$
69.2
$
65.7
$
50.0
2.5
2.5
62.3
62.3
$
$
$
$
0.2
0.2
54.9
54.9
$
$
$
$
–
–
80.2
80.2
$
$
$
$
–
–
75.0
75.0
Sale and leaseback structures
A key element of CAE’s finance strategy to support the investment in its civil and military training and services business is the sale
and leaseback of certain full-flight simulators (FFSs) installed in the Company’s global network of training centres. This provides CAE
with a cost-effective long-term source of fixed-cost financing. A sale and leaseback structure arrangement can be executed only after
the FFS has achieved certification by regulatory authorities (i.e. the simulator is installed and is available to customers for training).
The sale and leaseback structures are typically structured as leases with an owner participant.
The Company has entered into sale and leaseback arrangements with special purpose entities (SPEs). These arrangements relate to
simulators used in the Company’s training centres for the military and civil aviation segments. These leases expire at various dates up
to 2023, with the exception of one in 2037. Typically, the Company has the option to purchase the equipment at a specific time during
the lease terms at a specific purchase price. Some leases include renewal options at the end of the term. In some cases, the
Company has provided guarantees for the residual value of the equipment at the expiry date of the leases or at the date the Company
exercises its purchase option. Collaterized long-term debt and third-party equity investors who, in certain cases, benefit from tax
incentives, finance these SPEs. The equipment serves as collateral for the long-term debt of the SPEs.
The Company’s variable interests in these SPEs are solely through fixed purchase price options and residual value guarantees,
except for one case where it is in the form of equity and subordinated loan.
The Company concluded that some of these SPEs are VIEs. At the end of fiscal 2010 and 2009, the Company is the primary beneficiary
for one of them. The assets and liabilities of this VIE are fully consolidated into the Company’s consolidated financial statements as at
March 31, 2010 and March 31, 2009.
For all of the other SPEs that are VIEs, the Company is not the primary beneficiary and consolidation is not appropriate. As at
March 31, 2010, the Company’s maximum potential exposure to losses relating to these non-consolidated SPEs was $38.7 million
(2009 –$48.1 million).
Partnership arrangements
The Company entered into partnership arrangements to provide manufactured military simulation products as well as training and
services for both the military and civil segments. As well, during fiscal 2010, we have joined together with two other parties to form a
limited partnership to provide qualifying customers competitive lease financing for the Company’s civil flight simulation equipment
(financing vehicle).
128 | CAE Annual Report 2010
Notes to the Consolidated Financial Statements
The Company’s involvement with entities, in connection with these partnership arrangements, is mainly through investments in their
equity and/or in subordinated loans and through manufacturing and long-term training service contracts. The Company concluded that
certain of these entities are VIEs, but the Company is not the primary beneficiary. Accordingly, these entities have not been
consolidated. Except for the financing vehicle partnership, the Company continues to account for these investments in the Simulation
Products/Military segment under the equity method, recording its share of the net earnings or loss based on the terms of the
partnership arrangements. The Company accounts for the financing vehicle partnership formed during fiscal 2010 as an
available-for-sale financial instrument. As at March 31, 2010 and 2009, the Company’s maximum off-balance sheet exposure to
losses related to these non-consolidated VIEs, other than from its contractual obligations, was not material.
NOTE 27 – OPERATING SEGMENTS AND GEOGRAPHIC INFORMATION
The Company elected to organize its businesses based principally on products and services as follows:
(i) Simulation Products/Civil – Designs, manufactures and supplies civil flight simulators, training devices and visual systems;
(ii) Simulation Products/Military – Designs, manufactures and supplies advanced military training equipment and software tools for
air forces, armies and navies;
(iii) Training & Services/Civil – Provides business and commercial aviation training for all flight and ground personnel and all
associated services;
(iv) Training & Services/Military – Supplies turnkey training services, support services, systems maintenance and modelling and
simulation solutions.
Results by segment
The profitability measure employed by the Company for making decisions about allocating resources to segments and assessing
segment performance is earnings before other income (expense), interest, income taxes and discontinued operations (hereinafter
referred to as segment operating income). The accounting principles used to prepare the information by operating segments are the
same as those used to prepare the Company’s Consolidated Financial Statements. Transactions between operating segments are
mainly simulator transfers from the Simulation Products/Civil segment to the Training & Services/Civil segment, which are recorded at
cost. The method used for the allocation of assets jointly used by operating segments and costs and liabilities jointly incur red (mostly
corporate costs) between operating segments is based on the level of utilization when determinable and measurable, otherwise the
allocation is made based on a proportion of each segment’s cost of sales.
(amounts in millions)
Simulation Products
Training & Services
Total
2010
2009
Restated
(Note 2)
2008
Restated
(Note 2)
2010
2009
Restated
(Note 2)
2008
Restated
(Note 2)
2010
2009
Restated
(Note 2)
2008
Restated
(Note 2)
Civil
External revenue
Segment operating income
Depreciation and amortization
Property, plant and equipment
Intangible and other assets
Capital expenditures
Military
External revenue
Segment operating income
Depreciation and amortization
Property, plant and equipment
Intangible and other assets
Capital expenditures
Total
External revenue
Segment operating income
Depreciation and amortization
Property, plant and equipment
Intangible and other assets
Capital expenditures
$ 284.1 $ 477.5 $ 435.3 $ 433.5 $ 460.5 $ 382.1 $ 717.6
124.5
87.0
92.1
75.1
71.6
95.3
49.4
$ 938.0 $ 817.4
166.9
179.1
4.8
1.7
14.7
4.8
2.0
5.6
4.7
2.1
4.6
56.7
8.5
79.5
54.8
7.5
168.9
44.5
6.0
161.8
61.5
10.2
94.2
59.6
9.5
174.5
49.2
8.1
166.4
$ 545.6 $ 483.5 $ 383.7 $ 263.1 $ 240.7 $ 222.5 $ 808.7 $ 724.2 $ 606.2
83.7
139.6
126.7
51.7
87.7
43.9
39.0
32.0
95.7
6.3
5.0
5.8
6.0
5.4
6.5
6.0
4.5
7.3
7.6
2.6
30.9
5.7
2.7
22.7
5.4
2.3
15.8
13.9
7.6
36.7
11.7
8.1
29.2
11.4
6.8
23.1
$ 829.7 $ 961.0 $ 819.0 $ 696.6 $ 701.2 $ 604.6 $ 1,526.3 $ 1,662.2 $ 1,423.6
250.6
126.0
145.1
119.0
179.8
264.1
103.6
147.0
305.8
11.1
6.7
20.5
10.8
7.4
12.1
10.7
6.6
11.9
64.3
11.1
110.4
60.5
10.2
191.6
49.9
8.3
177.6
75.4
17.8
130.9
71.3
17.6
203.7
60.6
14.9
189.5
CAE Annual Report 2010 | 129
Notes to the Consolidated Financial Statements
Earnings before interest and income taxes
The following table provides reconciliation between total Segment Operating Income and earnings before interest and income taxes:
(amounts in millions)
Total segment operating income
Restructuring charge (Note 25)
Earnings before interest and income taxes
2010
264.1
(34.1)
230.0
2009
305.8
–
305.8
$
$
$
$
2008
250.6
–
250.6
$
$
Assets employed by segment
The Company uses assets employed to assess resources allocated to each segment. Assets employed include accounts receivable,
contracts in progress, inventories, prepaid expenses, property, plant and equipment, goodwill, intangible assets and other assets.
Assets employed exclude cash, income tax accounts and assets of certain non-operating subsidiaries.
(amounts in millions)
Simulation Products/Civil
Simulation Products/Military
Training & Services/Civil
Training & Services/Military
Total assets employed
Assets not included in assets employed
Total assets
2010
$
236.6
424.5
1,150.3
300.1
$ 2,111.5
$
510.4
$ 2,621.9
$
2009
Restated
(Note 2)
257.3
400.1
1,359.3
257.7
$ 2,274.4
$
391.4
$ 2,665.8
Geographic information
The Company markets its products and services in over 20 countries. Sales are attributed to countries based on the location of customers.
(amounts in millions)
Revenue from external customers
Canada
United States
United Kingdom
Germany
Netherlands
Other European countries
China
United Arab Emirates
Other Asian countries
Australia
Other countries
(amounts in millions)
Property, plant and equipment, goodwill and intangible assets
Canada
United States
South America
United Kingdom
Spain
Germany
Belgium
Netherlands
Other European countries
United Arab Emirates
Other Asian countries
Other countries
130 | CAE Annual Report 2010
2010
2009
2008
$
157.7
444.3
148.3
181.3
62.2
154.5
78.9
82.6
97.3
71.7
47.5
$ 1,526.3
2010
$
268.7
355.1
55.8
156.2
85.4
72.5
72.1
96.7
71.0
68.4
119.2
13.4
$ 1,434.5
$
93.8
561.2
124.0
203.8
87.5
174.3
86.3
69.3
117.7
79.2
65.1
$ 1,662.2
$
98.4
468.9
102.2
162.6
98.0
145.5
71.1
53.3
81.8
78.1
63.7
$ 1,423.6
2009
Restated
(Note 2)
$
233.1
422.2
76.1
164.1
95.8
81.1
91.6
129.2
43.7
85.0
126.3
12.8
$ 1,561.0
Notes to the Consolidated Financial Statements
NOTE 28 – DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles
(Canadian GAAP), which differ in certain respects from those principles that the Company would have followed if its consolidated financial
statements had been prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP).
The effect of these principal differences on the Company’s consolidated financial statements is described and quantified as follows:
Reconciliation of consolidated net earnings in Canadian GAAP to U.S. GAAP
(amounts in millions, except per share amounts)
Notes
2010
Net earnings in accordance with Canadian GAAP
Results of discontinued operations in accordance with Canadian GAAP
Earnings from continuing operations in accordance with Canadian GAAP
Deferred development costs excluding amortization
Amortization of deferred development costs
Financial instruments
Reduction of the net investment in self-sustaining operations
Defined benefit and other post-retirement benefit plans
Stock-based compensation
Acquisition-related costs
Future income tax relating to the above adjustments
Non-controlling interests, net of tax
Earnings from continuing operations – U.S. GAAP
Results from discontinued operations in accordance with U.S. GAAP
Net earnings in accordance with U.S. GAAP
Net earnings attributable to the non-controlling interests in accordance with
A
A
B
D
E
F
G
J
$ 144.5
–
$ 144.5
(11.2)
3.4
21.0
0.3
1.1
1.1
(2.7)
(5.3)
1.9
$ 154.1
–
$ 154.1
2009
Restated
(Note 2)
$ 201.1
(1.1)
$ 202.2
(5.7)
3.3
(7.8)
(1.9)
0.2
(2.2)
–
1.6
0.5
$ 190.2
(1.1)
$ 189.1
2008
Restated
(Note 2)
$ 151.3
(12.1)
$ 163.4
1.8
2.9
6.2
–
–
(5.9)
–
(5.4)
2.1
$ 165.1
(12.1)
$ 153.0
U.S. GAAP
J
(1.9)
(0.5)
(2.1)
Net earnings attributable to the equity holders of the Company in accordance
with U.S. GAAP
Basic and diluted earnings per share from continuing operations attributable
to the equity holders of the Company in accordance with U.S. GAAP
Basic and diluted results per share from discontinued operations attributable
to the equity holders of the Company in accordance with U.S. GAAP
Basic and diluted net earnings per share attributable to the equity holders of
the Company in accordance with U.S. GAAP
Dividends per common share
Weighted average number of common shares outstanding (Basic)
Weighted average number of common shares outstanding (Diluted)
$ 152.2
$ 188.6
$ 150.9
$
0.59
$
0.75
$
0.64
$
$
$
–
$
(0.01)
$
(0.05)
0.59
0.12
255.8
255.8
$
$
0.74
0.12
254.8
255.0
$
$
0.59
0.04
253.4
254.6
CAE Annual Report 2010 | 131
Notes to the Consolidated Financial Statements
Consolidated statements of comprehensive income in accordance with U.S. GAAP
(amounts in millions)
Net earnings in accordance with U.S. GAAP
Other comprehensive (loss) income
Available-for-sale financial asset
Net change in fair value on available-for-sale financial asset
Income tax
Defined benefit and other post-retirement benefit plans
Net change in actuarial (losses) gains
Reclassifications to income
Income tax
Notes
2010
$ 154.1
2009
$ 189.1
2008
$ 153.0
$
$
$
$
(1.2)
0.2
(1.0)
(41.2)
3.9
10.1
(27.2)
$
$
$
$
(0.6)
0.1
(0.5)
19.0
2.6
(6.6)
15.0
E
E
E
$
$
$
$
–
–
–
(5.9)
2.7
(0.5)
(3.7)
Foreign currency translation adjustment
Net foreign exchange (losses) gains on translation of financial statements of
self-sustaining foreign operations
D,J
$ (228.3)
$ 114.4
$
(50.2)
Net change in gains (losses) of certain long-term debt denominated in
foreign currency and designated as hedges on net investments in
self-sustaining foreign operations
Income tax
Total other comprehensive (loss) income in accordance with U.S. GAAP
Comprehensive (loss) income in accordance with U.S. GAAP
Comprehensive loss (income) attributable to the non-controlling interests in
D
18.3
(0.6)
$ (210.6)
$ (238.8)
(84.7)
$
(7.7)
(1.4)
$ 105.3
$ 119.8
$ 308.9
15.7
(0.6)
(35.1)
$
$
(38.8)
$ 114.2
accordance with U.S. GAAP
J
$
2.1
$
(0.5)
$
(2.1)
Comprehensive (loss) income attributable to the equity holders of the
Company in accordance with U.S. GAAP
$
(82.6)
$
308.4
$ 112.1
Reconciliation of consolidated shareholders’ equity in Canadian GAAP to U.S. GAAP
(amounts in millions)
Notes
2010
2009
Restated
(Note 2)
2008
Restated
(Note 2)
Shareholders’ equity in accordance with Canadian GAAP
Deferred development costs,
net of tax recovery of $7.8 (2009 – $6.4; 2008 – $6.3)
Financial instruments,
net of tax recovery of $1.0 (2009 – tax expense of $9.8;
2008 – tax recovery of $0.1)
Foreign currency translation adjustment
Defined benefit and other post-retirement benefit plans,
net of tax recovery of $20.8 (2009 – $11.6; 2008 – $17.5)
Stock-based compensation,
net of tax expense of $0.9 (2009 – $0.5; 2008 – $1.0)
Acquisition-related costs,
net of tax recovery of $0.8 (2009 – $nil; 2008 – $nil)
Shareholders’ equity in accordance with U.S. GAAP
$ 1,155.8
$ 1,197.8
$ 939.3
(22.4)
(16.0)
(13.7)
(2.7)
0.8
22.6
0.1
0.7
(0.8)
(57.7)
(30.7)
(43.7)
1.8
1.0
2.1
(1.9)
$ 1,073.7
–
$ 1,174.8
–
$ 883.9
A
B
D
E
F
G
132 | CAE Annual Report 2010
Consolidated balance sheets in accordance with U.S. GAAP
Notes to the Consolidated Financial Statements
(amounts in millions)
Assets
Current assets
Cash and cash equivalents
Accounts receivable
Contracts in progress
Inventories
Prepaid expenses
Income taxes recoverable
Future income taxes
Property, plant and equipment, net
Future income taxes
Intangible assets
Goodwill
Other assets
Notes
H
Canadian
GAAP
2010
U.S.
GAAP
2009
U.S.
GAAP
Canadian
GAAP
Restated
(Note 2)
B
B
B
A,B,E,F,G
A
G
B,E
$
312.9
237.5
220.6
126.9
33.7
24.3
7.1
963.0
1,147.2
82.9
125.4
161.9
141.5
$ 2,621.9
$
$
312.9
244.3
220.6
127.1
33.7
24.3
7.1
970.0
1,144.8
87.2
95.2
170.6
118.3
$ 2,586.1
$
$
195.2
322.4
215.3
118.9
31.3
11.5
5.3
899.9
1,302.4
86.1
99.5
159.1
118.8
$ 2,665.8
$
$
195.2
339.6
215.3
119.5
31.3
11.5
5.3
917.7
1,305.7
90.3
77.1
159.1
104.4
$ 2,654.3
$
Liabilities
Current liabilities
Accounts payable and accrued liabilities
Deposits on contracts
Current portion of long-term debt
Future income taxes
B,E,G
B
B
A,B,F
Long-term debt
Deferred gains and other long-term liabilities
Future income taxes
B
B,E,F,G,J
A,B,E,F
Equity
Capital stock
Contributed surplus
Retained earnings
Accumulated other comprehensive loss
Shareholders’ equity
Non-controlling interests
C
F
A,B,C,D,E,F,G
B,D,E
J
$
467.8
199.7
51.1
23.0
741.6
441.6
200.5
82.4
$ 1,466.1
$
$
491.6
195.1
51.9
21.8
760.4
442.5
232.8
58.7
$ 1,494.4
$
$
540.4
203.8
125.6
20.9
890.7
354.7
184.9
37.7
$ 1,468.0
$
$
549.0
196.4
126.6
26.7
898.7
355.2
177.3
28.2
$ 1,459.4
$
$
441.5
10.9
918.8
(215.4)
$ 1,155.8
–
$ 1,155.8
$ 2,621.9
$
685.7
10.9
645.2
(268.1)
$ 1,073.7
18.0
$ 1,091.7
$ 2,586.1
$
430.2
10.1
805.0
(47.5)
$ 1,197.8
–
$ 1,197.8
$ 2,665.8
$
674.4
10.0
523.7
(33.3)
$ 1,174.8
20.1
$ 1,194.9
$ 2,654.3
Reconciliation items
A) Deferred development costs
Under Canadian GAAP, certain development costs are capitalized and amortized over their estimated useful lives if they meet the
criteria for deferral. Under U.S. GAAP, development costs are expensed as incurred.
In addition, the consolidated statement of cash flow under U.S. GAAP would have the effects of net cash provided by operating
activities being lower and the net cash used in investing activities being lower by $14.6 million (2009 – $10.5 million;
2008 – $16.5 million).
B) Financial instruments
Under Canadian GAAP, the accounting for changes in fair value (i.e. gains and losses) of derivative instruments depends on whether
it has been designated and qualifies as part of a hedging relationship.
CAE Annual Report 2010 | 133
Notes to the Consolidated Financial Statements
Cash flow hedges
For strategies designated as cash flow hedges, the effective portion of the changes in the fair value of the derivative is
accumulated in Other Comprehensive Income (OCI) until the variability in the cash flow being hedged is recognized in earnings
in future accounting periods. For cash flow hedges, if a derivative instrument is designated as a hedge and meets the criteria for
hedge effectiveness, earnings offset is available, but only to the extent that the hedge is effective. The ineffective portion of cash
flow hedges is recorded in earnings in the current period.
Under U.S. GAAP the Company has not applied hedge accounting. As a result, all amounts accumulated in OCI under Canadian
GAAP are reversed into earnings and retained earnings of U.S. GAAP purposes.
Fair value hedges
The Company has an outstanding interest rate swap contract that replaced a swap contract that had previously been put in place
when the private placement was raised. The existing swap contract is designated as a fair value hedge of its private placement
resulting from changes in LIBOR interest rates. With regards to the outstanding fair value hedge, the gains or losses on the
hedged items attributable to the hedged risk are accounted for as an adjustment to the carrying value of the hedged items. For
the fair value hedge that was discontinued prior to the transaction date, the carrying amount of the hedged item is adjusted by the
remaining balance of any deferred gain or loss on the hedging item. As such, the hedge accounting adjustment has been
recorded with the private placement as an increase to the gross long-term debt amount.
Under U.S. GAAP, the interest rate swap is recorded on the consolidated balance sheet at fair value with changes in fair value
recognized in earnings. The Company has not applied hedge accounting. As a result, the hedge accounting adjustment has been
recorded in earnings for U.S. GAAP purposes.
Embedded foreign currency derivatives
Under Canadian GAAP, the Company elects to record, as a single contract, an embedded foreign currency derivative in a host
contract that is not a financial instrument, provided:
(i)
(ii)
(iii)
it is not leveraged;
it does not contain an option feature; and
it requires payments denominated in a currency that is commonly used in contracts to purchase or sell non -financial
items in the economic environment in which the transaction takes place (for example, a relatively stable and liquid
currency that is commonly used in local business transactions or external trade).
This policy choice is not permitted under U.S. GAAP which requires the embedded derivative to be bifurcated from the host
contract, unless the currency is the functional currency of one of the substantial parties to the contract or is the routinely
denominated currency for that particular good or service.
Transaction costs
Under Canadian GAAP, the Company elected to record transaction costs with the asset or liability to which they are associated
thereby reclassifying deferred financing costs from other assets to long-term debt. Under U.S. GAAP, transaction costs are
recorded as deferred financing costs presented in other assets.
C) Capital stock
On July 7, 1994, the Company applied a portion of its deficit as a reduction of its stated capital in the amount of $249.3 million.
Under U.S. GAAP, the reduction of stated capital would not be permitted.
Under Canadian GAAP, costs related to share issuance can be presented in retained earnings, net of tax. In fiscal 2004, the
Company included share issued costs of $5.1 million into its retained earnings. Under U.S. GAAP, these costs were recorded as
a reduction of capital stock.
D) Foreign currency translation adjustment
Under Canadian GAAP, a gain or loss equivalent to a proportionate amount of the exchange gains and losses accumulated in
OCI is recognized in earnings when there has been a reduction in the net investment in a self-sustaining foreign operation. A
reduction in the net investment occurs when there has been a dilution or sale of part or all of the Company’s interest in the
foreign operation or a reduction in the equity of the foreign operation as a result of capital transactions . Under U.S. GAAP, a
reduction in currency translation adjustment account is permitted only upon sale or upon complete or substantially complete
liquidation of an investment in a self-sustaining foreign operation.
The Company measures its reconciliation items in the foreign currency of the related entity. Upon consolidation, the translation of
these items creates a foreign currency translation adjustment.
134 | CAE Annual Report 2010
Notes to the Consolidated Financial Statements
E) Defined benefit and other post-retirement benefit plans
As at March 31, 2007, the Company prospectively adopted SFAS 158, Employer’s Accounting for Defined Benefit Pension and
Other Post Retirement Plans – an amendment of FAS statements No. 87, 88, 106 and 132 (R) (now included in FASB ASC topic
715, Compensation-Retirement Benefits). Under this statement, the over-funded or under-funded status of a defined benefit
pension and other post-retirement benefit plans are recognized as assets or liabilities on the consolidated balance sheet. Any
unrecognized actuarial gains or losses, prior service cost or credits and unrecognized net transitional assets or obligations are
recognized as a component of accumulated other comprehensive income. This concept does not currently exist under Canadian
GAAP.
Under Canadian GAAP, plan assets and obligations are measured as at the date of the annual financial statements or not more
than three months prior to that date. The Company measures its plan assets and obligations on December 31 of each year.
Starting fiscal 2009, under U.S. GAAP, ASC 715 requires defined benefit plan assets and obligations to be measured as at the
year end balance sheet date, March 31 of each year. As a result, the Company recorded a reduction of $2.1 million, net of tax
recovery of $0.8 million, to retained earnings representing the net periodic benefit cost for the period between January 1, 2008
and March 31, 2008.
F) Stock-based compensation
Under Canadian GAAP, the Company has adopted Emerging Issues Committee (EIC)-162, Stock-Based Compensation for
Employees Eligible to Retire Before the Vesting Date, in the third quarter of fiscal 2007, with restatement of prior periods. Under
U.S. GAAP, the Company adopted SFAS 123R, Share-Based Payment (revised 2004), (now included in FASB ASC topic 718,
Compensation-Stock Compensation), on April 1, 2006, which has the same requirements as EIC-162 under Canadian GAAP
except that SFAS 123R is to be applied prospectively from April 1, 2006 to new option awards that have retirement eligibility
provisions. The nominal vesting period approach is continued for any option awards granted prior to adopting ASC 718 and for
the remaining portion of unvested outstanding options. Consequently, this creates a discrepancy in the compensation expense
reported in each year.
G) Business combinations
Under Canadian GAAP, the Company includes, in the determination of a purchase price acquisition-related costs incurred in the
pre-acquisition period. Under U.S. GAAP, these costs are expensed.
Under Canadian GAAP, the Company recognizes contingent consideration when it can be reasonably estimated and determined
beyond reasonable doubt. Under U.S. GAAP, contingent consideration are initially measured at fair value and remeasured to fair
value at each balance sheet date.
H) Accounting for joint ventures
U.S. GAAP requires the Company’s investments in joint ventures to be accounted for using the equity method. However, under
an accommodation of the SEC, accounting for joint ventures needs not be reconciled from Canadian to U.S. GAAP. The different
accounting treatment affects only display and classification and not earnings or shareholders’ equity.
I)
Investment tax credits
Under Canadian GAAP, the Company records its ITCs arising from research and development activities on a net basis against
the costs to which they relate. Under U.S. GAAP, when the Company recognizes its federal ITCs into earnings, the credit is
reflected as a reduction of tax expense.
J) Non-controlling interests
Under Canadian GAAP, non-controlling interests are classified as a liability and net earnings and comprehensive income exclude
the portion attributable to the non-controlling interests. Under U.S. GAAP, non-controlling interests are classified as equity and
net earnings and comprehensive income include the portion attributable to the non-controlling interests.
The changes in non-controlling interests were as follows for the years ended March 31:
(amounts in millions)
Balance, beginning of year
Net earnings
Other comprehensive loss
Acquisition of non-controlling interest
Balance, end of year
2010
20.1
1.9
(4.0)
–
18.0
$
$
2009
19.4
0.5
–
0.2
20.1
$
$
2008
17.3
2.1
–
–
19.4
$
$
CAE Annual Report 2010 | 135
Notes to the Consolidated Financial Statements
Changes in accounting policies
Fair value measurements
In February 2008, the FASB delayed the effective date of ASC 820 for non-financial assets and non-financial liabilities, except for
items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company
has adopted ASC 820 to its non-financial assets and non-financial liabilities in fiscal 2010. The implementation of this guidance did not
have a material impact on the Company’s consolidated financial statements.
Business combination and non-controlling interests in consolidated financial statements
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, and No. 160, Non-controlling Interests in
Consolidated Financial Statements (now included in FASB ASC topic 805, Business Combinations, and ASC 810, Consolidation,
respectively). These statements require a greater number of acquired assets and assumed liabilities to be measured at fair value as
at the acquisition date. As well, liabilities related to contingent consideration should be remeasured to fair value at each subsequent
reporting period. In addition, an acquirer should expense all acquisition-related costs in the pre-acquisition period. Finally,
non-controlling interests in subsidiaries should initially be measured at fair value and classified as a separate component of equity.
The Company adopted these statements in fiscal 2010 and were applied prospectively to business combinations for which the
acquisition date was on or after the beginning of fiscal 2010.
Subsequent events
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (now included in FASB ASC topic 855, Subsequent Events). The
standard addresses the recognition and disclosure of events that occur after the balance sheet date but before the issuance of the
financial statements. As amended by FASB Accounting Standards Update (ASU) No. 2010-09 dated February 2010, an SEC filer is
not required to disclose the date through which subsequent events have been evaluated. The Company adopted this statement
prospectively in fiscal 2010. This statement did not have a material impact on the Company’s consolidated financial statements.
Future changes to accounting standards
Revenue recognition
In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements, an amendment to FASB ASC
topic 605, Revenue Recognition, and ASU No. 2009-14, Certain Revenue Arrangements That Include Software Elements, an
amendment to FASB ASC subtopic 985-605, Software – Revenue Recognition. The updates provide guidance on arrangements that
include software elements, including tangible products that have software components that are essential to the functionality of the
tangible product and will no longer be within the scope of the software revenue recognition guidance, and software-enabled products
that will now be subject to other relevant revenue recognition guidance. The updates provide authoritative guidance on revenue
arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new
guidance, when vendor-specific objective evidence or third-party evidence for deliverables in an arrangement cannot be determined, a
best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling
price method. The updates must be adopted in the same period using the same transition method and are effective prospectively, with
retrospective adoption permitted, for revenue arrangements entered into or materially modified in fiscal years beginning on or after
June 15, 2010. Early adoption is also permitted; however, early adoption during an interim period requires retrospective application
from the beginning of the fiscal year. The Company is currently evaluating the impact of the adoption of the updates on the
consolidated financial statements.
Transfers of financial assets
In June 2009, the FASB issued SFAS 166, Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140
(now included in FASB ASC 860 topic, Transfers and Servicing), which amends the derecognition guidance in SFAS 140. In addition,
this statement removes the concept of a qualifying special-purpose entity and the exception from applying ASC 810-10-15 subtopic,
Variable Interest Entities, to qualifying special-purpose entities. These amendments are effective for financial asset transfers occurring
on or after the first annual reporting period beginning after November 15, 2009 and early adoption is permitted. The Company is
currently evaluating the impact of these amendments on its consolidated financial statements.
Variable Interest Entities
In June 2009, the FASB issued SFAS 167, Amendments to FASB Interpretation No. 46(R) (now included in FASB ASC subtopic
810-10-15, Variable Interest Entities), which amends guidance on variable interest entities. These amendments include requiring an
entity to perform an analysis to determine whether the enterprise’s variable interest gives it controlling financial interest in a variable
interest entity and requiring ongoing reassessment of whether an enterprise is the primary beneficiary. These amendments are
effective as of the beginning of the first fiscal year beginning after November 15, 2009 and early adoption is permitted. The Company
is currently evaluating the impact of these amendments on its consolidated financial statements.
136 | CAE Annual Report 2010
Additional U.S. GAAP disclosure
(amounts in millions)
Notes
H
Canadian
GAAP
2010
U.S.
GAAP
Notes to the Consolidated Financial Statements
Canadian
GAAP
Restated
(Note 2)
2009
U.S.
GAAP
Canadian
GAAP
Restated
(Note 2)
2008
U.S.
GAAP
Revenues from sales of
simulators(1)
Revenues from sales of training
and services(1)
Cost of sales from simulators(2)
Cost of sales from training and
services(2)
Rental expenses
Selling, general
B
$ 829.7
$ 829.2
$ 961.0
$ 969.0
$ 819.0
$ 813.7
B
A,B,E,I
A,B,E,I
$ 696.6
$ 585.2
$ 696.2
$ 609.0
$ 701.2
$ 668.6
$ 701.9
$ 684.4
$ 604.6
$ 571.9
$ 604.6
$ 575.5
$ 415.0
73.9
$
$ 414.7
73.9
$
$ 420.4
72.4
$
$ 423.8
72.4
$
$ 361.1
66.1
$
$ 362.6
66.1
$
$ 192.4
and administrative expenses
(26.1)
$
Foreign exchange loss (gain)
19.6
$
Interest expense, net
(1) Taxes assessed by government authorities that are directly imposed on revenue-producing transactions between the Company and
$ 186.5
(12.6)
$
17.5
$
$ 189.4
(12.8)
$
16.5
$
$ 194.1
0.9
$
20.2
$
$ 196.3
6.7
$
26.9
$
$ 188.1
–
$
26.0
$
F,G
B,D
B
customers are excluded from revenue.
(2) Includes research and development expenses.
NOTE 29 – COMPARATIVE FINANCIAL STATEMENTS
The comparative consolidated financial statements have been reclassified from statements previously presented to conform to the
presentation adopted in the current year.
NOTE 30 – SUBSEQUENT EVENTS
Credit facility refinancing
On April 6, 2010, the Company announced the conclusion of an agreement to refinance its existing credit facility due to expire in
July 2010. The new agreement is a committed three-year revolving credit facility of US$450.0 million with an option to increase to a
total amount of up to US$650.0 million.
The Datamine Group
On April 19, 2010, the Company announced the acquisition of The Datamine Group (Datamine) for an initial total cost of $22.8 million.
Datamine is a supplier of mining optimization software tools and services.
CAE Annual Report 2010 | 137
Board of Directors and Offi cers
BOARD OF DIRECTORS
Lynton R. Wilson, O.C. 1, 3
Chairman of the Board
CAE Inc.
Oakville, Ontario
Marc Parent
President and Chief Executive
Offi cer
CAE Inc.
Lorraine, Québec
Brian E. Barents 1
Corporate Director
Andover, Kansas
John A. (Ian) Craig 2
President
Lanzsmirn Investments
Ottawa, Ontario
H. Garfi eld Emerson, Q.C. 2,3
Principal, Emerson Advisory
and Corporate Director
Toronto, Ontario
Anthony S. Fell, O.C. 3
Corporate Director
Toronto, Ontario
Paul Gagné 2
Chairman
Wajax Income Fund
Montréal, Québec
James F. Hankinson 2,3
Corporate Directort
Toronto, Ontario
E. Randolph (Randy) Jayne II 1
Managing Partner
Heidrick & Struggles International, Inc.
Webster Groves, Missouri
Robert Lacroix, Ph.D 3
Corporate Director
Montréal, Québec
John Manley 1
Counsel
President and CEO of the Canadian
Council of Chief Executives
Ottawa, Ontario
Gen. Peter J. Schoomaker
U.S.A (Ret.) 3
Corporate Director
Tampa, Florida
Katharine B. Stevenson 2
Corporate Director
Toronto, Ontario
Lawrence N. Stevenson 1
Managing Director
Callisto Capital
Toronto, Ontario
OFFICERS
Lynton R. Wilson
Chairman of the Board
Marc Parent
President and Chief Executive
Offi cer
Martin Gagné
Group President
Military Products, Training and
Services
Jeff Roberts
Group President
Civil Simulation Products, Training
and Services
Alain Raquepas
Vice President, Finance and
Chief Financial Offi cer
Antoine Auclair
Vice President and
Corporate Controller
Jacques Ferraro
Treasurer
Hartland J. A. Paterson
Vice President, Legal
General Counsel and
Corporate Secretary
1 Member of the Human Resources Committee
2 Member of the Audit Committee
3 Member of the Corporate Governance Committee
138 | CAE Annual Report 2010
Shareholder and Investor Information
CAE SHARES
CAE’s shares are traded on the
Toronto Stock Exchange (TSX) and on
the New York Stock Exchange (NYSE)
under the symbol “CAE”.
TRANSFER AGENT AND
REGISTRAR
Computershare Trust Company of
Canada
100 University Avenue, 9th Floor
Toronto, Ontario
M5J 2Y1
Tel. 514-982-7555 or
1-800-564-6253
(toll free in Canada and the U.S.)
www.computershare.com
DIVIDEND REINVESTMENT PLAN
Canadian resident registered
shareholders of CAE Inc. who wish
to receive dividends in the form of
CAE Inc. common shares rather
than a cash payment may
participate in CAE’s dividend
reinvestment plan. In order to obtain
the dividend reinvestment plan form,
please contact Computershare Trust
Company of Canada.
DIRECT DEPOSIT DIVIDEND
Canadian resident registered
shareholders of CAE Inc. who
receive cash dividends may elect
to have the dividend payment
deposited directly to their bank
accounts instead of receiving a
cheque. In order to obtain the direct
deposit dividend form, please
contact Computershare Trust
Company of Canada.
DUPLICATE MAILINGS
To eliminate duplicate mailings by
consolidating accounts, registered
shareholders must contact
Computershare Trust Company
of Canada; non-registered
shareholders must contact their
investment brokers.
INVESTOR RELATIONS
Quarterly and annual reports as well
as other corporate documents are
available on our website at www.
cae.com. These documents can
also be obtained from our Investor
Relations department:
trademarks referred to and used
herein remain the property of their
respective owners and may not be
used, changed, copied, altered, or
quoted without the written consent
of the respective owner. All rights
reserved.
Investor Relations
CAE Inc.
8585 Côte-de-Liesse
Saint-Laurent, Québec
H4T 1G6
Tel. 1-866-999-6223
investor.relations@cae.com
Version française
Pour obtenir la version française
du rapport annuel, s’adresser à
investisseurs@cae.com.
2010 ANNUAL MEETING
The Annual Meeting of Shareholders
will be held at 10:30 a.m. (Eastern
Time), Wednesday, August 11, 2010
at the Glenn Gould Studio, CBC
Building, 250 Front Street West,
Toronto, Ontario. The meeting will
also be webcast live on CAE’s
website, www.cae.com.
AUDITORS
PricewaterhouseCoopers LLP
Chartered Accountants
Montréal, Québec
TRADEMARKS
Trademarks and/or registered
trademarks of CAE Inc. and/or its
affi liates include but are not limited
to CAE, CAE & Design, CAE
Medallion, CAE Tropos, CAE
Simfi nity, CAE True Electric Motion,
CAE True Airport, CAE True
Environment, CAE Augmented
Engineering Environment and CAE
Advanced Visionics System. All
other brands and product names
are trademarks or registered
trademarks of their respective
owners. All logos, tradenames and
CORPORATE GOVERNANCE
The following documents pertaining
to CAE’s corporate governance
practices may be accessed either
from CAE’s website (www.cae.com)
or by request from the Corporate
Secretary:
– Board and Board Committee
mandates
– Position descriptions for the Board
Chair, the Committee Chairs and
the Chief Executive Offi cer
– CAE’s Code of Business Conduct,
and the Board Member’s Code of
Conduct
– Corporate Governance Guideline.
Most of the New York Exchange’s
(NYSE) corporate governance listing
standards are not mandatory for
CAE. Signifi cant differences
between CAE’s practices and the
requirements applicable to U.S.
companies listed on the NYSE are
summarized on CAE’s website. CAE
is otherwise in compliance with the
NYSE requirements in all signifi cant
respects.
CAE Annual Report 2010 | 139
FORWARD-LOOKING STATEMENTS
Certain statements made in this annual report are forward-looking statements under the Private Securities Litigation
Reform Act of 1995 and Canadian securities regulations. All statements, other than statements of historical facts, included
herein that pertain to activities, events or developments that we expect or anticipate will or may occur in the future
including, for example, statements about our business outlook, assessment of market conditions, strategies, future plans,
future sales, prices for our major products, inventory levels, capital spending and tax rates are forward-looking statements.
The words “expect”, “anticipate”, “estimate”, “may”, “will”, “should”, “intend”, “believe”, “plan” and similar expressions are
intended to identify forward-looking statements. Such statements are not guarantees of future performance. They are
based on management’s expectations and assumptions regarding historical trends, current conditions and expected
future developments, as well as other factors that we believe are appropriate in the circumstances. Such expectations and
assumptions involve a number of business risks and uncertainties, any of which could cause actual results to differ
materially from those expressed in or implied by the forward-looking statements. The results or events predicted in these
forward-looking statements may differ materially from actual results or events. Important risks that could cause such
differences include, but are not limited to, the length of sales cycle, rapid product evolution, level of defence spending,
condition of the civil aviation industry, competition, availability of critical in-puts, foreign exchange rate of currencies and
doing business in foreign countries. These and other risks that could cause actual results or events to differ materially from
current expectations or assumptions are described in the risk factors section of CAE’s Annual Information Form for the
year ended March 31, 2010, fi led with the Canadian securities commissions and the U.S. Securities and Exchange
Commission. Any forward-looking statements made in this annual report represent our expectations as of May 13, 2010,
and accordingly, are subject to change after such date. We disclaim any intention or obligation to update any forward-
looking statements unless legislation requires us to do so.
140 | CAE Annual Report 2010
Our vision is to be
the partner of choice for customers operating in
complex mission-critical environments by providing the
most accessible and most innovative modelling and
simulation-based solutions to enhance safety, improve
effi ciency, and help solve challenging problems.
1 Corporate Profi le
29 Management’s Discussion and
1 Financial Highlights
2 Global Reach
Analysis
80 Management’s Report on Internal
Control over Financial Reporting
4 Chairman’s Message
80 Independent Auditor’s Report
6 Message to Shareholders
82 Consolidated Financial Statements
10 Defence
16 Civil
22 New Core Markets
24 Social Responsibility
27 Financial Review
87 Notes to Consolidated Financial
Statements
138 Board of Directors and Offi cers
139 Shareholder and Investor Information
140 Forward Looking Statements
As an eTree member, CAE Inc. is committed to meeting shareholder needs while
being environmentally friendly. For each shareholder that receives electronic
copies of shareholder communications, CAE will plant a tree through Tree
Canada, the leader in Canadian urban reforestation.
Contains 47% post-consumer
Certifi ed EcoLogo and FSC Mixed Sources
Manufactured using biogas energy
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Annual Report
Fiscal year ended March 31, 2010
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