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Follow us on Twitter @CAE_Inc.
Follow us on Twitter @CAE_Inc.
cae.com
cae.com
ANNUAL REPORT Fiscal year ended March 31, 2016
ANNUAL REPORT Fiscal year ended March 31, 2016
Follow us on Twitter @CAE_Inc.
cae.com
CYAN
MAGENTA
YELLOW
BLACK CAE
L16303
ANNUAL REPORT Fiscal year ended March 31, 2016
Corporate profile
Corporate profile
CAE is a global leader in the delivery of training for the civil aviation, defence and security, and healthcare markets. We design
CAE is a global leader in the delivery of training for the civil aviation, defence and security, and healthcare markets. We design
and integrate the industry’s most comprehensive training solutions, anchored by the knowledge and expertise of our 8,000
and integrate the industry’s most comprehensive training solutions, anchored by the knowledge and expertise of our 8,000
employees, our world-leading simulation technologies and a track record of service and technology innovation spanning seven
employees, our world-leading simulation technologies and a track record of service and technology innovation spanning seven
decades. Our global presence is the broadest in the industry, with 160 sites and training locations in more than 35 countries,
decades. Our global presence is the broadest in the industry, with 160 sites and training locations in more than 35 countries,
including our joint venture operations, and the world’s largest installed base of flight simulators. Each year, we train more than
including our joint venture operations, and the world’s largest installed base of flight simulators. Each year, we train more than
120,000 civil and defence crewmembers, as well as thousands of healthcare professionals.
120,000 civil and defence crewmembers, as well as thousands of healthcare professionals.
www.cae.com
www.cae.com
Follow us on Twitter @CAE_Inc.
Follow us on Twitter @CAE_Inc.
Check out our first web-based Activity Report
Check out our first web-based Activity Report
We are pleased to inform you that we have prepared a web-based Activity Report. It consolidates information on our company
We are pleased to inform you that we have prepared a web-based Activity Report. It consolidates information on our company
strategy, performance and corporate social responsibility (CSR) into one document. Integrating our reporting in this way enables
strategy, performance and corporate social responsibility (CSR) into one document. Integrating our reporting in this way enables
us to provide stakeholders with a single source of information in key areas. It also signals that CSR is inseparable from our core
us to provide stakeholders with a single source of information in key areas. It also signals that CSR is inseparable from our core
business strategy and activities.
business strategy and activities.
www.cae.com/ActivityReport
www.cae.com/ActivityReport
We are proud to present this consolidated and interactive content about our company!
We are proud to present this consolidated and interactive content about our company!
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S h a p i n g t h e f u t u r e o f t r a i n i n g
S h a p i n g t h e f u t u r e o f t r a i n i n g
As an eTree member, CAE Inc. is committed to meeting shareholder needs while
As an eTree member, CAE Inc. is committed to meeting shareholder needs while
being environmentally friendly. For each shareholder that receives electronic
being environmentally friendly. For each shareholder that receives electronic
copies of shareholder communications, CAE will plant a tree through Tree
copies of shareholder communications, CAE will plant a tree through Tree
Canada, the leader in Canadian urban reforestation. To date CAE has helped
Canada, the leader in Canadian urban reforestation. To date CAE has helped
plant 5,264 trees.
plant 5,264 trees.
Contains FSC® certified post-consumer and 70% virgin fibre
Contains FSC® certified post-consumer and 70% virgin fibre
Certified EcoLogo and FSC® Mix
Certified EcoLogo and FSC® Mix
Manufactured using biogas energy
Manufactured using biogas energy
CYAN
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BLACK CAE
L16303
CHAIRMAN’S MESSAGE
Leveraging CAE’s strengths
The Board of Directors is well satisfied with CAE’s progress. In fiscal 2016, customers
responded positively to our training solutions across all three of our business segments.
Achieving double-digit growth in annual revenue as well as a high level of activity in all
segments confirms that CAE is bringing
the right solutions to market. On behalf
of the Board, I would like to thank
CAE’s experienced management team
and dedicated employees for skillfully
leveraging
unique
combination of strengths to deliver these
solid results.
company’s
the
CAE’s “training partner of choice” vision underpins the company’s strategic plan, defines
its investment proposition and provides the Board confidence in CAE’s future. Given this
positive outlook for long-term sustainable growth, we raised our shareholder dividend
for the fifth consecutive year.
View on governance
The Board fully endorses CAE’s shift in focus from training products to delivering end-
to-end training solutions. As management implements this shift, the Board is keeping a
sharp focus on the oversight of major risks. We are applying best practices and policies
to review CAE’s risk profile and provide informed counsel to the senior management
team. Our fundamental objective is to ensure an appropriate return for the risks we
judiciously assume.
Thoughtful analysis, adherence to the highest ethical standards, active engagement
with management and protection of shareholders’ interests are core responsibilities that
each member of the Board takes to heart.
Progress in corporate social responsibility
In fiscal 2016, Marc Parent and his management team also drove significant changes in
corporate social responsibility (CSR). CAE is now equipped with a materiality matrix and
a 2020 CSR Roadmap. These tools set out CAE’s six core priorities in CSR and are key to
establishing objectives, targets and initiatives that will enable us to generate economic,
environmental and social benefits wherever we operate.
Thank you
I would like to thank my fellow directors for their commitment and sound advice. In
particular, I would like to thank Brian E. Barents, who will not stand for re-election to the
Board, for his many years of dedication. At the same time, I would like to welcome new
Board member Margaret S. (Peg) Billson. Peg is a longtime veteran of the aerospace
industry, current President and CEO of BBA Aviation’s Global Engine Services companies,
and an instrument-rated private pilot.
I also want to thank our shareholders for their continued confidence in our ability to
shape the future of training and deliver solid results. You can count on your Board’s
collective and diverse business experience to work to ensure CAE’s continued success.
Shaping the
future of training
In fiscal 2016, we continued to deliver next-generation
integrated training solutions across the civil aviation,
defence and security, and healthcare sectors. We sat at
the table with airlines, national and international regulatory
bodies, defence forces and medical associations to set
new standards and improve regulations. We joined forces
with customers and suppliers to translate the latest
technologies into innovative products and services. This
is how we are shaping the future of training worldwide.
MESSAGE TO SHAREHOLDERS
Solid progress
Last year, we strengthened an already solid balance sheet. We
delivered double-digit year-over-year increases in both revenue —
$2.5 billion or 12% growth — and net income before specific items
— $230.5 million or 15% growth. Our free cash flow increased to
$248 million, 42% higher than last year, and our backlog grew by
over $1 billion to $6.4 billion. We raised our shareholder dividend for
the fifth consecutive year and introduced a share repurchase plan.
We reinforced our civil aviation leadership and established a new
industry benchmark by selling 53 full-flight simulators worldwide.
Acquiring Lockheed Martin Commercial Flight Training (LMCFT)
supports our “ training partner of choice ” vision by growing our global
training network and assets. We also expanded our live training
capabilities by integrating NATO Flying Training in Canada (NFTC), a
world-renowned military pilot training program.
Winning the contract to provide the U.S. Army with comprehensive
training for its fixed-wing pilots increases our opportunities as a
training systems integrator for air forces globally. In healthcare, we
made significant headway by building the first turnkey healthcare
simulation centre in Turkmenistan and launching five innovative
products to enhance our portfolio.
I attribute these many achievements to three key competitive
differentiators : our highly knowledgeable, skilled and dedicated
employees, an unrivalled global network of aviation training centres,
and a thriving culture of innovation that permeates our entire
organization.
Innovation and synergies
CAE is a much different company than it was just a few short years
ago. We are reinventing ourselves as we are leveraging our leadership
in simulation products to sharpen our focus on providing end-to-end
integrated training solutions. Nearly 60% of our business now comes
from our services. This broader strategic focus is driving sustainable
growth in our core segments by giving us access to a much larger
market. It is also enhancing our stability by increasing the mix of
recurring business in each segment.
We are leveraging synergies between our three core businesses
which share the same six pillars of strength: a high degree of recurring
business, a strong competitive moat, headroom in large markets,
underlying secular tailwinds, the potential for superior returns and of
course our culture of innovation. This unique combination of strengths
creates a compelling risk/return investment proposition for CAE.
In fiscal 2016, we started rolling out a process improvement plan
to change the way we engineer, build, deploy and support our
simulators. Innovation is key to this process; so is our employees’
active participation. I am inspired by the results we are seeing. One
team used its ingenuity to make our CAE 7000XR simulator lighter,
more energy and resource efficient, and easier to maintain.
The strength of our employees
This success story is just one example among many of our employees’
innovation, passion and determination to shape the future of training.
As we become a more customer-centric organization, our employees
are stepping up to the plate to deliver on our vision. This includes our
2,000 flight instructors who are the focus of a new global initiative to
accelerate our shift to a training services company.
I would like to take this opportunity to thank our 8,000 employees for
actively supporting our vision and for keeping the spirit of innovation
alive throughout our organization.
CSR in action
All of us at CAE take pride in the fact that our innovative training
solutions make the world a safer, better and cleaner place. Our
overriding goal is to amplify our contributions in each of our core
markets and communities where we work and live. To achieve this
goal, we are increasingly taking the three dimensions of our corporate
social responsibility—environmental, social and economic—into
account in every decision and action.
Becoming a signatory of the United Nations Global Compact in fiscal
2016 reinforced our commitment to operating responsibly. We are
now one of the 12,000-plus signatories actively working to align
their strategies and operations with universal human rights, labour,
environmental and anti-corruption principles.
Another achievement of which we are all proud at CAE is our
continuously improving health and safety performance across our
key performance indicators. Our governance is more rigorous, our
metrics are more proactive, and our incidents are decreasing.
Looking ahead
As you will read in this report, we see promising growth opportunities
ahead in all of our businesses. We are working from a solid position
with a large backlog in Civil Aviation Training Solutions and Defence
& Security, and a robust bid pipeline across our businesses including
Healthcare. Our unique, comprehensive training solutions and global
reach give us the opportunity to increase our share of the overall
training market. Looking at the current year, we expect to see growth
in all business segments, led primarily by Civil Aviation Training
Solutions.
In summary, the prospects ahead of us are both promising and
exciting. I want to thank our employees for their contribution to this
great success. I would also thank our Board of Directors for their
advice and their support, and obviously our shareholders for their
trust. Today more than ever, CAE is committed to shaping the future
of training.
Table of Contents
Management’s Discussion and Analysis
1. HIGHLIGHTS
INTRODUCTION
2.
3. ABOUT CAE
3.1 Who we are
3.2 Our vision
3.3 Our strategy
3.4 Our operations
3.5 Foreign exchange
3.6 Non-GAAP and other financial measures
4. CONSOLIDATED RESULTS
4.1 Results from operations – fourth quarter of fiscal 2016
4.2 Results from operations – fiscal 2016
4.3 Discontinued operations
4.4 Restructuring costs
4.5 Consolidated orders and total backlog
5. RESULTS BY SEGMENT
5.1 Civil Aviation Training Solutions
5.2 Defence and Security
5.3 Healthcare
6. CONSOLIDATED CASH MOVEMENTS AND LIQUIDITY
6.1 Consolidated cash movements
6.2 Sources of liquidity
6.3 Government assistance
6.4 Contractual obligations
7. CONSOLIDATED FINANCIAL POSITION
7.1 Consolidated capital employed
7.2 Off balance sheet arrangements
7.3 Financial instruments
8. BUSINESS COMBINATIONS
9. EVENT AFTER THE REPORTING PERIOD
10. BUSINESS RISK AND UNCERTAINTY
10.1 Risks relating to the industry
10.2 Risks relating to the Company
10.3 Risks relating to the market
11. RELATED PARTY TRANSACTIONS
12. CHANGES IN ACCOUNTING POLICIES
12.1 New and amended standards adopted
12.2 New and amended standards not yet adopted
12.3 Use of judgements, estimates and assumptions
13. CONTROLS AND PROCEDURES
13.1 Evaluation of disclosure controls and procedures
13.2 Internal control over financial reporting
14. OVERSIGHT ROLE OF AUDIT COMMITTEE AND BOARD OF DIRECTORS
15. ADDITIONAL INFORMATION
16. SELECTED FINANCIAL INFORMATION
Consolidated Financial Statements
Board of Directors and Officers
Shareholder and Investor Information
Forward-Looking Statements
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Management’s Discussion and Analysis
for the fourth quarter and year ended March 31, 2016
1. HIGHLIGHTS
FINANCIAL
FOURTH QUARTER OF FISCAL 2016
Revenue from continuing operations higher compared to last quarter and the fourth quarter of fiscal 2015
− Consolidated revenue from continuing operations was $722.5 million this quarter, $106.2 million or 17% higher than last quarter
and $90.9 million or 14% higher than the fourth quarter of fiscal 2015.
Net income attributable to equity holders of the Company from continuing operations higher compared to last quarter and
lower compared to the fourth quarter of fiscal 2015
− Net income attributable to equity holders of the Company from continuing operations was $61.2 million (or $0.23 per share) this
quarter compared to $57.9 million (or $0.21 per share) last quarter, representing an increase of $3.3 million or 6%, and compared
to $63.3 million (or $0.24 per share) in the fourth quarter of last year, representing a decrease of $2.1 million or 3%;
− Specific items included in net income attributable to equity holders of the Company from continuing operations were restructuring
costs of $16.8 million ($11.6 million after tax or $0.04 per share) this quarter compared to $2.0 million ($1.5 million after tax or
$0.01 per share) recorded last quarter. Net income before specific items1 was $72.8 million and earnings per share before specific
items1 was $0.27 for the quarter compared to $59.4 million (or $0.22 per share) last quarter;
− Net income attributable to equity holders of the Company included a loss from discontinued operations this quarter of
$2.4 million (or $0.01 per share) compared to $0.2 million (or nil per share) last quarter and earnings from discontinued operations
of $0.8 million (or nil per share) in the fourth quarter of fiscal 2015.
Positive free cash flow1 from continuing operations at $12.8 million this quarter
− Net cash provided by continuing operating activities was $51.0 million this quarter, compared to $214.9 million last quarter and
$160.6 million in the fourth quarter of last year;
− Maintenance capital expenditures1 and other asset expenditures were $18.8 million this quarter, $15.7 million last quarter and
$16.7 million in the fourth quarter of last year;
− Proceeds from the disposal of property, plant and equipment were $0.3 million this quarter, nil last quarter and
$6.1 million in the fourth quarter of last year;
− Cash dividends were $19.3 million this quarter, $12.4 million last quarter and $12.0 million in the fourth quarter of last year.
FISCAL 2016
Higher revenue from continuing operations compared to fiscal 2015
− Consolidated revenue from continuing operations was $2,512.6 million, $266.3 million or 12% higher than last year.
Higher net income attributable to equity holders of the Company from continuing operations
− Net income attributable to equity holders of the Company from continuing operations was $239.3 million (or $0.89 per share)
compared to $201.2 million (or $0.76 per share) last year, representing a $38.1 million or 19% increase;
− Specific items included in net income attributable to equity holders of the Company from continuing operations were restructuring
costs of $28.9 million ($20.6 million after tax or $0.08 per share) and a one-time tax item of $29.4 million (or $0.11 per share) this
year. Net income before specific items was $230.5 million and earnings per share before specific items was $0.86 for the year;
− Net income attributable to equity holders of the Company included a loss from discontinued operations of $9.6 million (or $0.04 per
share) compared to earnings from discontinued operations $0.6 million (or nil per share) last year.
Positive free cash flow from continuing operations at $247.7 million
− Net cash provided by continuing operating activities was $345.8 million this year, compared to $268.6 million last year;
− Maintenance capital expenditures and other asset expenditures were $65.1 million this year, compared to $64.3 million last year;
− Dividends received from equity accounted investees were $18.5 million this year, compared to $8.9 million last year;
− Proceeds from the disposal of property, plant and equipment were $1.8 million this year, compared to $7.6 million last year;
− Cash dividends were $56.7 million this year, compared to $46.3 million last year.
Capital employed1 increased by $91.6 million or 3% this year, ending at $2,727.6 million
− Return on capital employed1 (ROCE) was 10.6% this year compared to 10.4% last year;
− Non-cash working capital1 decreased by $12.8 million in fiscal 2016, ending at $188.9 million;
− Property, plant and equipment increased by $11.9 million;
− Net assets held for sale decreased by $45.5 million following the sale of our mining division during the year;
− Other long-term assets and other long-term liabilities increased by $140.8 million and $2.8 million respectively;
− Net debt1 decreased by $162.3 million this year, ending at $787.3 million.
1 Non-GAAP and other financial measures (see Section 3.6).
CAE Annual Report 2016 | 1
Management’s Discussion and Analysis
ORDERS22
− The book-to-sales ratio2 for the quarter was 1.23x (Civil Aviation Training Solutions was 1.33x, Defence and Security was 1.13x
and Healthcare was 1.0x). The ratio for the last 12 months was 1.11x (Civil Aviation Training Solutions was 1.18x, Defence and
Security was 1.02x and Healthcare was 1.0x);
− Total order intake this year was $2,782.0 million, up $420.8 million over last year;
− Total backlog2, including obligated, joint venture and unfunded backlog was $6,372.6 million at March 31, 2016, $1,015.4 million
higher than last year.
Civil Aviation Training Solutions
− Civil Aviation Training Solutions obtained contracts with an expected value of $1,683.0 million, including contracts for 53 full-flight
simulators (FFSs).
Defence and Security
− Defence and Security won contracts valued at $985.6 million.
Healthcare
− Healthcare order intake was valued at $113.4 million.
BUSINESS COMBINATIONS
− On September 30, 2015, we acquired the assets of Bombardier’s Military Aviation Training business (BMAT), a defence training
system integrator for live flying training;
− During the fourth quarter of this year, we concluded a conditional agreement with Lockheed Martin Corporation to acquire
Lockheed Martin Commercial Flight Training (LMCFT), a provider of aviation simulation training equipment and services.
On May 2, 2016, we completed the acquisition of LMCFT. The transaction excludes debt and includes cash remaining in the
company at closing.
OTHER
− On July 24, 2015, we completed the sale of our mining division known as Datamine. The results of our mining division were
reported as discontinued operations during the year;
− During the first quarter of this year, we implemented a process improvement program to realize the benefits from the
transformation of our production processes and product offering which has resulted in a reduction of our workforce;
− On February 19, 2016, we announced that we received approval from the Toronto Stock Exchange (TSX) to purchase, by way of a
normal course issuer bid (NCIB), up to 5,398,643 of our issued and outstanding common shares over a one year period;
− We announced the appointment of Sonya Branco, replacing Stephane Lefebvre, as Vice President, Finance and Chief Financial
Officer of CAE Inc., effective May 23, 2016.
2 Non-GAAP and other financial measures (see Section 3.6).
2 | CAE Annual Report 2016
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 2016 mean the fiscal year ending March 31, 2016;
− Last year, prior year and a year ago mean the fiscal year ended March 31, 2015;
− Dollar amounts are in Canadian dollars.
This report was prepared as of May 19, 2016, and includes our management’s discussion and analysis (MD&A) for the year and the
three-month period ended March 31, 2016 and the consolidated financial statements and notes for the year ended March 31, 2016.
We have prepared it to help you understand our business, performance and financial condition for fiscal 2016. Except as otherwise
indicated, all financial information has been reported in accordance with International Financial Reporting Standards (IFRS). 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 the
annual report for the year ended March 31, 2016. 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:
− Our vision;
− Our strategy;
− Our operations;
− Foreign exchange;
− Non-GAAP and other financial measures;
− Consolidated results;
− Results by segment;
− Consolidated cash movements and liquidity;
− Consolidated financial position;
− Business combinations;
− Event after the reporting period;
− Business risk and uncertainty;
− Related party transactions;
− Changes in accounting policies;
− 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.
CAE Annual Report 2016 | 3
Management’s Discussion and Analysis
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.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements about our activities, events and developments that we expect to or anticipate may
occur in the future including, for example, statements about our vision, strategies, market trends and outlook, future revenues, capital
spending, expansions and new initiatives, financial obligations and expected sales. Forward-looking statements normally contain
words like believe, expect, anticipate, plan, intend, continue, estimate, may, will, should, strategy, future and similar expressions. By
their nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties
associated with our business which may cause actual results in future periods to differ materially from results indicated in
forward-looking statements. While these statements 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 reasonable and appropriate
in the circumstances, readers are cautioned not to place undue reliance on these forward-looking statements as there is a risk that
they may not be accurate.
Important risks that could cause such differences include, but are not limited to, risks relating to the industry such as competition, level
and timing of defence spending, government-funded defence and security programs, constraints within the civil aviation industry,
regulatory rules and compliance, risks relating to CAE such as product evolution, research and development (R&D) activities,
fixed-price and long-term supply contracts, procurement and original equipment manufacturer (OEM) leverage, warranty or other
product-related claims, product integration, protection of our intellectual property, third-party intellectual property, loss of key
personnel, environmental liabilities, claims arising from casualty losses, integration of acquired businesses, our ability to penetrate
new markets, information technology systems including cybersecurity risk, length of sales cycle, continued returns to shareholders
and our reliance on technology and third-party providers, and risks relating to the market such as foreign exchange, political instability,
availability of capital, pension plan funding, doing business in foreign countries including corruption risk and income tax laws.
Additionally, differences could arise because of events announced or completed after the date of this report. You will find more
information in the Business risk and uncertainty section of the MD&A. We caution readers that the risks described above are not
necessarily the only ones we face; additional risks and uncertainties that are presently unknown to us or that we may currently deem
immaterial may adversely affect our business.
Except as required by law, we disclaim any intention or obligation to update or revise any forward-looking statements whether as a
result of new information, future events or otherwise. The forward-looking information and statements contained in this report are
expressly qualified by this cautionary statement.
4 | CAE Annual Report 2016
Management’s Discussion and Analysis
3. ABOUT CAE
3.1 Who we are
CAE is a global leader in delivery of training for the civil aviation, defence and security, and healthcare markets. We design and
integrate the industry’s most comprehensive training solutions, anchored by the knowledge and expertise of our 8,000 employees, our
world-leading simulation technologies and a record of service and technology innovation spanning seven decades. Our global
presence is the broadest in the industry, with 160 sites and training locations in over 35 countries, including our joint venture
operations, and the world’s largest installed base of flight simulators. Each year, we train more than 120,000 civil and defence
crewmembers and thousands of healthcare professionals worldwide.
CAE’s common shares are listed on the Toronto and New York stock exchanges under the symbol CAE.
3.2 Our vision
Our vision is to be the recognized global training partner of choice to enhance safety, efficiency and readiness.
3.3 Our strategy
We address the imperatives of safety, efficiency and readiness for customers in three core markets: civil aviation, defence and
security, and healthcare.
Our capital and other resource allocation decisions are guided by three overarching strategic imperatives: focus on our three core
markets; protect our leadership position through innovation; and grow by providing the most comprehensive solutions worldwide to
enable us to be the recognized global training partner of choice for our customers.
We are a unique, pure-play simulation and training company with a proven record of commitment to our customers’ long-term training
needs.
Six pillars of strength
We believe there are six fundamental strengths that underpin our strategy and position us well for sustainable long-term growth:
− High degree of recurring business;
− Strong competitive moat;
− Headroom in large markets;
− Underlying secular tailwinds;
− Potential for superior returns;
− Culture of innovation.
High degree of recurring business
Nearly 60% of our business is derived from the provision of services and largely involves long-term contracts and training demand
from customers operating under regulation that require them to train on a recurrent basis.
Strong competitive moat
We pride ourselves in building strong customer and partner relationships, which in many cases span several decades, and we are a
market leader across all of our market segments. We offer our customers unique comprehensive solutions with market-leading global
reach and scale.
Headroom in large markets
We provide innovative training solutions to customers in large addressable markets in civil aviation, defence and security and
healthcare with substantial headroom to grow our market share over the long term.
Underlying secular tailwinds
Industry experts expect long-term commercial passenger traffic to grow at a rate of 4.2% annually over the next decade. In defence
and security, we see renewed defence investment as a positive catalyst and an increasing use of simulation-based training. We also
see an increased propensity for customers in both civil aviation and defence and security to outsource their training enterprises. In the
emerging healthcare market, we also see a rising adoption of simulation for education and training of healthcare students and
professionals.
Potential for superior returns
Our rising proportion of revenue from training services provides potential for lower amplitude cyclicality as training is largely driven by
the training requirements of the installed fleet. As well, we have potential to grow at a superior rate to that of our underlying markets
by growing market share.
Culture of innovation
We derive significant competitive advantage as an innovative leader in simulation products and training solutions. As well, we have a
demonstrated flexibility by engaging customers under a variety of partnership models.
CAE Annual Report 2016 | 5
Management’s Discussion and Analysis
3.4 Our operations
We provide integrated training solutions to three markets globally:
− The civil aviation market includes major commercial airlines, regional airlines, business aircraft operators, civil helicopter operators,
aircraft manufacturers, third-party training centres, flight training organizations (FTOs), maintenance repair and overhaul
organizations (MROs) and aircraft finance leasing companies;
− The defence and security market includes defence forces, OEMs, government agencies and public safety organizations worldwide;
− The healthcare market includes hospital and university simulation centres, medical and nursing schools, paramedic organizations,
defence forces, medical societies and OEMs.
CIVIL AVIATION MARKET
We provide comprehensive training solutions for flight, cabin, maintenance and ground personnel in commercial, business and
helicopter aviation, a complete range of flight simulation training devices, as well as ab initio pilot training and crew sourcing services.
We address the total lifecycle needs of the professional pilot, from cadet to captain, with our comprehensive aviation training
solutions. We are the world’s largest provider of commercial aviation training services and the second largest in business aviation
training services. Our deep industry expertise and credibility, installed base, strong relationships and reputation as a trusted partner
enable us to access a broader share of the market than any other company in our industry. We provide aviation training services in
30 countries and through our broad global network of training centres, we serve all sectors of civil aviation including airlines and other
commercial, business and helicopter aviation operators.
Among our thousands of customers, we have long-term training centre operations and training services agreements and joint
ventures with approximately 40 major airlines and aircraft operators around the world. Our range of training solutions includes
products and services offerings for pilot, cabin crew and aircraft maintenance technician training, training centre operations,
curriculum development, courseware solutions and consulting services. We currently operate 261 FFSs, including those operating in
our joint ventures. We offer industry-leading technology with a full solution capability to integrate flight data and simulator data to
better understand the performance of trainees. In the formation of new pilots, CAE operates the largest ab initio flight training network
in the world with 9 academies and a fleet of over 165 aircraft. In the area of resource management, CAE is the global market leader in
the provision of flight crew and technical personnel to airlines, aircraft leasing companies, manufacturers and MRO companies
worldwide.
Quality, fidelity and reliability are hallmarks of the CAE brand in flight simulation and we are the world leader in the development of
civil flight simulators. We continuously innovate our processes and lead the market in the design, manufacture and integration of civil
FFSs for major and regional commercial airlines, third-party training centres and OEMs. We have established a wealth of experience
in developing first-to-market simulators for more than 35 types of aircraft models including the recent development of simulators for
the Airbus A350 XWB and A320Neo, Cirrus SF50, Mitsubishi Regional Jet (MRJ), ATR42/72-600, Bombardier CSeries,
Global 5000/6000 and Global 7000/8000, Dassault Falcon 5X and the Commercial Aircraft Corporation of China, Ltd (COMAC)
ARJ21 and C919. Our flight simulation equipment, including FFSs, are designed to meet the rigorous demands of their long and
active service lives, often spanning a number of decades of continuous use. We also provide best-in-class support with a full range of
services and by leveraging our extensive worldwide network of spare parts and service teams.
Market drivers
Demand for training solutions in the civil aviation market is driven by the following:
− Pilot training and certification regulations;
− Safety and efficiency imperatives of commercial airline operators;
− Expected global growth in air travel;
− Growing active fleet of commercial aircraft;
− Demand for trained aviation professionals.
Pilot training and certification regulations
Civil aviation training has a high degree of recurring business driven by a highly-regulated environment through global and national
standards for pilot licensing and certification, amongst other regulatory requirements. These mandatory and recurring training
requirements are regulated by national and international aviation regulatory authorities such as the International Civil Aviation
Organization (ICAO), European Aviation Safety Agency (EASA), and Federal Aviation Administration (FAA).
Recent pilot certification processes and regulatory requirements drive more simulation-based training. Simulation-based pilot
certification training is taking on a greater role internationally with the Multi-crew Pilot License (MPL), with stall and upset prevention
and recovery training and with the Airline Transport Pilot (ATP) requirements in the U.S. Various national and regional aviation
regulatory agencies have recently published regulatory requirements, standards and guidance on these specific topics.
6 | CAE Annual Report 2016
Management’s Discussion and Analysis
The MPL is an alternative training and licensing methodology which we offer, in addition to the ATP licence. MPL places more
emphasis on simulation-based training to develop ab initio students into First Officers of airliners in a specific airline environment. On
average, current MPL programs in the industry consist of two thirds of ab initio training in flight simulation training devices and the
balance in actual aircraft, whereas traditional training for ab initio licences average 80% to 90% in actual trainer aircraft. Today, there
are approximately 50 nations that have MPL regulations in place and more than 15 of these nations already use these regulations
with training providers and airlines. CAE delivers MPL programs in Asia, the Middle East and Europe with various airlines. As the MPL
methodology continues to gain momentum, it will result in increased use of simulation-based training.
Safety and efficiency imperatives of commercial airline operators
The commercial airline industry is competitive, requiring operators to continuously pursue operational excellence and efficiency
initiatives in order to achieve adequate returns while continuing to maintain the highest safety standards and the confidence of air
travelers. Airlines are finding it increasingly more effective to seek expertise in training from trusted partners such as CAE to address
growing efficiency gaps, pilot capability gaps, evolving regulatory and training environment, and the large number of new aircraft
programs being executed. Partnering with a training provider like CAE gives airlines immediate access to a world-wide fleet of
simulators, courses, programs and instruction capabilities, and allows them flexibility in pursuing aircraft fleet options that suit their
business.
Expected global growth in air travel
Secular growth trend in air travel results in higher demand for flight, cabin, maintenance and ground personnel, which in turn drives
demand for training solutions.
In commercial aviation, the aerospace industry’s widely held expectation is that long-term average growth for air travel will continue at
4.2% annually over the next decade. In calendar 2015, global passenger traffic increased by 6.5% compared to calendar 2014. For
the first three months of calendar 2016, passenger traffic increased by 7.0% compared to the first three months of calendar 2015.
Emerging markets continued to outperform with passenger traffic in the Middle East, Asia and Latin America growing at 10.8%, 8.6%
and 5.3% respectively, while Europe and North America increased 5.4% and 4.7% respectively.
According to the FAA, the total number of business jet flights, which includes all domestic and international flights, remained active
with 1.4% growth over the past 12 months. There is a strong relationship between the level of corporate profitability and economic
growth and demand for business jet travel. In helicopter aviation, demand is driven mainly by the level of offshore activity in the oil and
gas sector, as helicopter operators catering to this sector make up the majority of a relatively small training segment. The current
protracted downturn in petroleum prices has negatively impacted offshore activity for helicopter operators.
Potential impediments to steady growth in air travel include major disruptions such as regional political instability, acts of terrorism,
pandemics, natural disasters, prolonged economic recessions or other major world events.
Growing active fleet of commercial aircraft
As an integrated training solutions provider, our long-term growth is closely tied to the active commercial aircraft fleet.
The global active commercial aircraft fleet has grown by an average of 3.2% annually over the past 20 years and is widely expected to
continue to grow at an approximate average rate of 3.6% annually over the next two decades as a result of increasing emerging
market and low-cost carrier demand and fleet replacement in established markets. From March 2015 to March 2016, the global
commercial aircraft fleet increased by 4.2%, growing by 8.3% in the Middle East and 7.6% in Asia and increasing moderately by 3.3%,
3.2% and 2.0% in Latin America, Europe and North America respectively.
Our strong competitive moat, as defined by our extensive global training network, best-in-class instructors, comprehensive training
programs and strength in training partnerships with airlines allow us to effectively address training needs that arise from a growing
active fleet of aircraft.
We are well positioned to leverage our technology leadership and expertise, including CAE 7000XR Series FFSs and CAE
SimfinityTM procedures trainers, in delivering training equipment solutions that address the growing training needs of airlines that
continue to operate their own training centers.
Major business jet OEMs are continuing with plans to introduce a variety of new aircraft models in the upcoming years. Examples
include Bombardier’s Global 7000/8000, Cessna’s Citation Longitude and Hemisphere, Dassault’s Falcon 5X, Gulfstream’s 500/600,
Cirrus’ SF50 and Pilatus’ PC-24.
Our business aviation training network, comprehensive suite of training programs, key long term OEM partnerships and ongoing
network investments, position us well to effectively address the training demand arising from the entry-into-service of these new
aircraft programs.
CAE Annual Report 2016 | 7
Management’s Discussion and Analysis
Demand for trained aviation professionals
We have large headroom in the training services market driven by a sustained secular demand for trained aviation professionals.
Demand for trained aviation professionals is driven by air traffic growth, pilot retirements and by the number of aircraft deliveries. The
expansion of global economies and airline fleets have resulted in a shortage of qualified personnel needed to fulfil this growing
capacity. Pilot supply constraints include aging crew demographics and fewer military pilots transferring to civil airlines. In a study
released in 2011, ICAO reports that approximately 26,000 new pilots will be needed per year by 2030 globally to support growth in
passenger travel. In support of this growth, the aviation industry will require innovative solutions to match the learning requirements of
a new generation, leading to an increase in demand for simulation-based training services and products.
DEFENCE AND SECURITY MARKET
We are a training systems integrator for defence forces across the air, land and naval domains, and for government organizations
responsible for public safety.
We are a global leader in the development and delivery of integrated live, virtual and constructive (LVC) training solutions for defence
forces. Our expertise spans a broad variety of aircraft, including fighters, helicopters, trainer aircraft, maritime patrol, tanker/transport
aircraft and remotely piloted aircraft, also called unmanned aerial systems (UAS). We also offer training solutions for land and naval
forces, including a range of driver, gunnery and maintenance trainers for tanks and armoured fighting vehicles, constructive simulation
for command and staff training, and naval warfare tactical training systems. We offer training solutions to government organizations
for emergency and disaster management.
Defence forces seek to increasingly leverage virtual training and balance their training approach between live, virtual and constructive
domains to achieve maximum readiness and efficiencies. As such, we have been increasingly pursuing programs requiring the
integration of LVC training and these tend to be larger in size than programs involving only a single dimension of such a solution. CAE
is a first-tier training systems integrator and uniquely positioned to offer our customers a comprehensive range of innovative LVC
solutions, ranging from academic, virtual and live training to immersive, networked mission rehearsal in a synthetic environment. Our
solutions
to
cost-effectively maintain and enhance safety, efficiency, mission readiness and decision-making capabilities. We have a wealth of
including government-owned
experience delivering and operating
government-operated; government-owned contractor-operated; or contractor-owned contractor-operated facilities. Our offerings
include training needs analysis; instructional systems design; learning management information systems; purpose-built facilities;
state-of-the-art synthetic training equipment; curriculum and courseware development; classroom, simulator, and live flying
instruction; maintenance and logistics support; lifecycle support and technology insertion; and financing alternatives.
training solutions across different business models,
combination
designed
services,
products
software
typically
training
include
tools
and
of
a
We have delivered simulation products and training systems to more than 50 defence forces in approximately 35 countries. We
provide training support services such as contractor logistics support, maintenance services, classroom instruction and simulator
training at over 80 sites around the world, including our joint venture operations. Recently, we have increased our support for live
flying training, such as the live training delivered as part of the NATO Flying Training in Canada (NFTC) program, as we help our
customers achieve an optimal balance across their training enterprise.
Market drivers
Demand for training solutions in the defence and security markets is driven by the following:
− Installed base of enduring defence platforms and new customers;
− Explicit desire of governments and defence forces to increase the use of synthetic training;
− Desire to integrate training systems to achieve efficiencies and enhanced preparedness;
− Attractiveness of outsourcing of training and maintenance services;
− Need for synthetic training to conduct integrated, networked mission training, including joint and coalition forces training;
− Relationships with OEMs for simulation and training.
Installed base of enduring defence platforms and new customers
CAE generates a high degree of recurring business from its strong position on enduring platforms, including long-term services
contracts. Most defence forces in mature markets such as the United States have slowed down production of new platforms and
delayed new acquisition programs, which has required military forces to maximize use of their existing platforms. Upgrades, updates,
and life extension programs allow defence forces to leverage existing assets while creating a range of opportunities for simulator
upgrades and training support services. Enduring platforms, such as the C-130 Hercules transport aircraft that is operated by more
than 60 nations, provide a solid installed base from which to generate business. Because of our extensive installed base of simulators
worldwide, our prime contractor position on programs such as the U.S. Air Force KC-135 Aircrew Training System and MQ-1
Predator/MQ-9 Reaper aircrew training, and our experience on key enduring platforms, CAE is well-positioned for recurring product
upgrades/updates as well as maintenance and support services. In addition, there is strong demand for enduring platforms such as
the C-130, P-8A, MH-60R and MQ-1/MQ-9 in markets with growing defence budgets such as Asia and the Middle East, thus providing
opportunities to provide new training systems and services for platforms where CAE has significant experience.
8 | CAE Annual Report 2016
Management’s Discussion and Analysis
Explicit desire of governments and defence forces to increase the use of synthetic training
One of the underlying drivers for CAE’s expertise and capabilities is the increasing use of synthetic training throughout the defence
community. More defence forces and governments are increasingly adopting synthetic training for a greater percentage of their overall
training approach because it improves training effectiveness, reduces operational demands on aircraft, lowers risk compared to
operating actual weapon system platforms and significantly lowers costs. Synthetic training offers defence forces a cost-effective way
to provide realistic training for a wide variety of scenarios while ensuring they maintain a high state of readiness. The higher cost of
live training and the desire to save aircraft for operational use are two factors prompting a greater adoption of synthetic training. The
nature of mission-focused training demands at least some live training; however, the shift to more synthetic training is advancing. The
U.S. Navy reports the share of simulation-based training on some of their existing aircraft platforms could increase to nearly 50% by
2020, and for new aircraft such as the P-8A the training program has been designed for approximately 70% synthetic training.
Because of the high cost associated with conducting live training exercises, most defence forces are beginning to rebalance the mix
of LVC training and shift more of the training curriculum to virtual and constructive simulation. An example are the contracts that CAE
won under the U.S. Air Force KC-135 program to upgrade a range of KC-135 aircrew training devices so that they can be used on the
United States Air Force’s Distributed Training Center Network, thus providing them the ability to conduct distributed, virtual tanker
training.
Desire to integrate training systems to achieve efficiencies and enhanced preparedness
Increased operational tempo combined with limited personnel and budget pressures have prompted defence forces around the world
to seek reliable partners who can help develop, manage and deliver the training systems required to support today’s complex
platforms and operations. Increasingly, defence forces are considering a more integrated and holistic approach to training. To help
manage the complexities and challenges, many training programs are calling for an industry partner to help design and manage the
total training system. CAE refers to this approach as training systems integration (TSI) and has positioned the Company globally as
an independent, platform-agnostic training systems integrator. The overall intent for defence forces is to maximize commonality for
increased efficiencies, cost savings, and most importantly, enhanced capability for mission preparedness. A training systems
integrator can address the overall LVC domain to deliver comprehensive training – from undergraduate individual training all the way
through to operational, multi-service and joint mission training.
Attractiveness of outsourcing of training and maintenance services
Another driver for CAE’s expertise and capabilities is the efficiency gained by our customers from outsourcing some training and
support services. Defence forces and governments continue to manage expenditures to find ways to reduce costs while not impacting
readiness levels, and allow active-duty personnel to focus on operational requirements. There has been a growing trend among
defence forces to consider outsourcing a variety of training services and we expect this trend to continue, which aligns directly with
CAE’s strategy to grow long-term, recurring services business. We believe governments will increasingly look to industry for training
solutions to achieve faster delivery, lower capital investment requirements, and training support required to achieve desired readiness
levels. For example, we are continuing deliveries of new flight training devices that will support comprehensive T-44C aircrew training
services for the U.S. Navy and Marine Corps. These deliveries are part of a long-term contract for CAE to provide T-44C aircrew
training services under a contractor-owned contractor-operated training services program, which is one of the first of its kind in the
United States. We believe this type of training service delivery program will become increasingly attractive to defence forces globally.
Need for synthetic training to conduct integrated, networked mission training, including joint and coalition forces training
There is a growing trend among defence forces to use synthetic training to meet more of their mission training requirements, and
increasingly to integrate and network various training systems so military forces can train in a virtual world. Simulation technology
solutions enable defence customers to plan sophisticated missions and carry out full-mission rehearsals in a synthetic environment as
a complement to traditional live training or mission preparation. Allies are cooperating and creating joint and coalition forces, which
are driving the demand for networked training and operations. Training devices that can be networked to train different crews and
allow for networked training across a range of platforms are increasingly important as the desire to conduct mission rehearsal
exercises in a synthetic environment increases. For example, the Royal Canadian Air Force (RCAF) has released its Simulation
Strategy 2025, which specifically calls for leveraging LVC domains within a networked common synthetic environment. The RCAF is
transforming its training approach from one that relies on aircraft to one that exploits new technologies to train aircrews in a
simulation-focused system that creates a virtual battlespace. The U.S., U.K. and Australian defence forces have published similar
strategies. We are actively promoting open, standard simulation architectures, such as the Common Database, to better enable
integrated and networked mission training.
Relationships with OEMs for simulation and training
We are a desirable partner to original equipment manufacturers because of our experience, global presence, and innovative
technologies. We partner with manufacturers in the defence and security market to strengthen relationships and position for future
opportunities. OEMs have introduced new platforms and continue to upgrade and extend the life of existing platforms, which drives
worldwide demand for training systems. For example, Boeing has developed the P-8A maritime patrol aircraft and has subcontracted
CAE to design and develop P-8A operational flight trainers for the U.S. Navy and Royal Australian Air Force. Boeing continues to
market the P-8A internationally and recently signed a contract to deliver the P-8A to the United Kingdom, which will create further
opportunities for CAE. Other examples of CAE’s relationship with OEMs on specific platforms creating opportunities for training
systems include Airbus Defence & Space on the C295, which is being offered in Canada on the Fixed-Wing Search and Rescue
program, Finmeccanica on the M-346 lead-in fighter trainer, which is being offered in the United States as the T-100 on the U.S. Air
Force’s T-X program and Lockheed Martin on the C-130J Super Hercules transport aircraft, which is being acquired by several
additional international militaries.
CAE is also part of Team Seahawk in partnership with the U.S. Navy and companies such as Lockheed Martin/Sikorsky which is
offering the MH-60R helicopter under the foreign military sales program to international customers. In addition, we have a global
partnership with General Atomics to offer training solutions for the Predator/Reaper family of remotely piloted aircraft.
CAE Annual Report 2016 | 9
Management’s Discussion and Analysis
HEALTHCARE MARKET
We design, manufacture and market simulators and audiovisual and simulation centre management solutions and offer consulting and
courseware for training of medical and allied healthcare students as well as clinicians in educational institutions, hospitals and
defence organizations worldwide.
Simulation-based training is one of the most effective approaches to prepare healthcare practitioners to care for patients and respond
to critical situations while reducing the overall risk to patients. We are leveraging our experience and best practices in
simulation-based aviation training to deliver innovative solutions to improve the safety and efficiency of this industry. The healthcare
simulation market is growing rapidly, with simulation centres becoming the standard in nursing and medical schools.
We offer the broadest range of medical simulation products and services in the market today, including patient, ultrasound and
interventional (surgical) simulators, audiovisual and simulation centre management solutions and courseware for simulation-based
healthcare education and training. We have sold simulators to customers in more than 80 countries that are currently supported by
our network in Australia, Brazil, Canada, Germany, Hungary, India, Singapore, U.K. and U.S. We lead the market in high-fidelity
patient simulators that are uniquely powered by complex models of human physiology to mimic human responses to clinical
interventions. One of our recent innovations, a childbirth simulator for both normal labor and delivery and rare maternal emergencies,
was designed to offer exceptional reliability and realism in the high-fidelity patient simulation market. Our offerings include ongoing
service, support and unlimited, exclusive access to training. We provide comprehensive simulation centre management solutions for
healthcare, where we are a market leader. Through our Healthcare Academy, we are the only company to deliver peer-to-peer
training at customer sites and in our training centres in the U.S., U.K., Germany and Canada. Our Healthcare Academy includes more
than 50 adjunct faculty consisting of nurses, physicians, paramedics and sonographers who, in collaboration with leading healthcare
institutions, have developed more than 500 Simulated Clinical Experience (SCE) courseware packages for our customers. We offer
consulting, professional services and turnkey project management for healthcare simulation programs, and we recently announced a
partnership with the American Society of Anesthesiologists to develop screen-based simulation training for practicing physicians. The
new platform will deliver Maintenance of Certification in Anesthesiology (MOCA) education and allow us to expand access to
simulation-based clinical training. Our OEM team delivers custom training solutions for medical manufacturers, and most recently,
developed a specialized interventional simulator to train physicians to place the new AbioMed Impella heart pump under ultrasound
and fluoroscopy guidance.
Market drivers
Demand for our simulation products and services in the healthcare market is driven by the following:
− Increasing use of simulation in healthcare;
− Growing emphasis on patient safety and outcomes;
− Limited access to live patients during training;
− Medical technology revolution.
Increasing use of simulation in healthcare
Third-party assessments of the global healthcare simulation market, which includes products and services, value the market at
approximately $860 million in 2014 and reports that it is predicted to grow at a compound annual growth rate of 19.1% from 2014 to
2019. North America is the largest market for healthcare simulation, followed by Europe and Asia. The healthcare simulation market
includes both products and services, which are segmented by high-fidelity patient simulators, interventional simulators, mid/low fidelity
task trainers, ultrasound simulators, audiovisual and simulation centre management solutions, simulated clinical environments and
training services. In the U.S., significant demand for healthcare services is driven by, among other factors, longer life expectancy and
the baby boomer generation, resulting in higher healthcare spending. The U.S. Centers for Medicare and Medicaid Services (CMS)
projects that annual national health spending will grow at an average rate of 5.8% annually over the next decade. Increasingly,
hospitals are given incentives to become safer and more efficient which will drive higher demand for training. There is a growing body
of evidence demonstrating that medical simulation improves patient outcomes and reduces medical errors, which can help mitigate
the rate of increase in healthcare costs.
Growing emphasis on patient safety and outcomes
According to a new study by patient-safety researchers published in the British Medical Journal in May 2016, medical errors in
hospitals and other health-care facilities are the third-leading cause of death in the U.S. Training through the use of simulation can
help clinicians gain confidence, knowledge and expertise for improving patient safety in a risk-free environment. Simulation is a
required or recommended element in a growing movement towards High Stakes Assessment and Certification. Examples in the U.S.
include MOCA, Fundamentals of Laparoscopic Surgery (FLS) and Advanced Trauma Life Support (ATLS). Moreover, the
Accreditation Council for Graduate Medical Education (ACGME) is evolving towards outcome-based assessment with specific
benchmarks to measure and compare performance which favours the adoption of simulation products and training.
10 | CAE Annual Report 2016
Management’s Discussion and Analysis
Limited access to live patients during training
Traditionally, medical education has been an apprenticeship model in which the student cares for patients under the supervision of
more experienced staff. In this model, students have a limited role and access to high-risk procedures, rare complications and critical
decision-making skills. The use of simulation in professional education programs complements traditional learning and allows
students exposure and practice to hone their clinical and critical thinking skills for high risk, low frequency events. Simulation provides
consistent, repeatable training and exposure to a broader range of patients and scenarios than one may experience in normal clinical
practice. As an example, our Lucina childbirth simulator is designed to allow healthcare teams to practice both normal deliveries and
complex procedures. The training and education model is evolving, as evidenced by military branches around the world and most
recently the U.S. Pentagon, prohibiting the use of live tissue testing in most medical training. CAE Healthcare simulators provide a
low-risk alternative for practicing life-saving procedures, interprofessional team training, major disaster response and anaesthesia
administration.
Medical technology revolution
Advancements in medical technology are driving the use of simulation. New medical devices and advanced procedures, such as
Intra-Cardiac Echocardiography (ICE), cardiac assist devices, and mechanical ventilation enhancements, require advanced training
solutions, such as simulation, for internal product development and customer training. Regulatory and certification agencies are
increasingly stringent in requesting that clinicians be trained before adopting new disruptive technologies, an undertaking for which
simulation is well suited. As a Partner of Choice with leading OEMs, we continue to collaborate to deliver innovative and custom
training for new technologies, such as the AbioMed Impella heart pump.
3.5 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 IFRS.
The tables below show the variations of the closing and average exchange rates for our three main operating currencies.
We used the closing 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 (€ or EUR)
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 (€ or EUR)
British pound (£ or GBP)
2016
1.30
1.48
1.87
2016
1.31
1.45
1.98
2015
1.27
1.36
1.88
2015
1.14
1.44
1.83
Increase /
(decrease)
2%
9%
(1%)
Increase
15%
1%
8%
For fiscal 2016, the effect of translating the results of our foreign operations into Canadian dollars resulted in an increase in revenue
of $126.1 million and an increase in net income of $11.1 million, when compared to fiscal 2015. We calculated this by translating the
current year’s foreign currency revenue and net income using the average monthly exchange rates from the previous year and
comparing these adjusted amounts to our current year reported results.
CAE Annual Report 2016 | 11
Management’s Discussion and Analysis
Three areas of our business are affected by changes in foreign exchange rates:
− Our network of foreign training and services operations
Most of our foreign training and services revenue and costs are denominated in local currency. Changes in the value of local
currencies relative to the Canadian dollar therefore have an impact on these operations’ net profitability and net investment. Gains
or losses in the net investment in a foreign operation that result from changes in foreign exchange rates are deferred in the foreign
currency translation account (accumulated other comprehensive income), which is part of the equity section of the consolidated
statement of financial position. Any effect of the fluctuation between currencies on the net profitability has an immediate translation
impact on the consolidated income statement and an impact on year-to-year and quarter-to-quarter comparisons. We apply net
investment hedge accounting to hedge our net investments in our U.S. entities. We have designated a portion of the principal
amount of our U.S. dollar private placements as the hedging item of those investments.
− Our production operations outside of Canada (Australia, Germany, India, U.K. and U.S.)
Most of the revenue and costs in these foreign operations 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 have a translation impact on the operations’
net profitability and net investment when expressed in Canadian dollars, as described above.
− Our production operations in Canada
Although the net assets of our Canadian operations are not exposed to changes in the value of foreign currencies (except for cash
balances, receivables and payables in foreign currencies), a significant portion of our annual revenue generated in Canada is in
foreign currencies (mostly U.S. dollar and Euro), while a significant portion of our expenses are in Canadian dollars.
We generally hedge the milestone payments of sales contracts denominated in foreign currencies to mitigate some of the foreign
exchange exposure.
To this effect, we continue to hold a portfolio of currency hedging positions intended to mitigate the risk to a portion of future revenues
presented by the volatility of the Canadian dollar versus foreign currencies. 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. Since not all 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 consolidated income statement. This residual exposure may be higher when currencies experience significant short term volatility.
With respect to the remaining expected future revenues, our operations in Canada remain exposed to changes in the value of the
Canadian dollar.
In order to minimize the impact foreign exchange market fluctuations may have, we also hedge some of 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. For the purposes
of this sensitivity analysis, 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 our manufacturing activities – we hedge a portion of these exposures;
− Translation of foreign currency of operations in foreign countries. Our exposure is mainly in our operating profit.
First we calculated the revenue and expenses per currency from our Canadian operations to determine the operating profit 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 foreign operations to determine the consolidated foreign exchange exposure in different currencies.
Finally, we conducted a sensitivity analysis to determine the impact of a weakening of one cent in the Canadian dollar against each of
the other three currencies. The table below shows the expected impact of this change on our annual revenue and operating profit,
after taxes, as well as our net exposure:
Exposure (amounts in millions)
U.S. dollar (US$ or USD)
Euro (€ or EUR)
British pound (£ or GBP)
$
Revenue
12.0
3.5
1.4
$
Operating
Profit
3.4
0.3
0.1
$
Hedging
(2.7)
(0.2)
(0.1)
$
Net
Exposure
0.7
0.1
-
A possible strengthening of one cent in the Canadian dollar would have the opposite impact.
12 | CAE Annual Report 2016
Management’s Discussion and Analysis
3.6 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. These measures should not be confused with, or used as an alternative for,
performance measures calculated according to GAAP. Furthermore, these non-GAAP measures should not be compared with
similarly titled measures provided or used by other companies.
Backlog
Obligated backlog is a non-GAAP measure that represents the expected value of orders we have received but have not yet executed.
− For the Civil Aviation Training Solutions segment, we consider an item part of our obligated 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 and includes the value of expected future revenues. Expected future revenues from customers under short-term and
long-term training contracts are included when these customers commit to pay us training fees, or when we reasonably expect the
revenue to be generated;
− For the Defence and Security segment, we consider an item part of our obligated 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.
Defence and Security contracts are usually executed over a long-term period but some of them must be renewed each year. For
this segment, we only include a contract item in obligated backlog when the customer has authorized the contract item and has
received funding for it;
− For the Healthcare segment, order intake is typically converted into revenue within one year, therefore we assume that order intake
is equal to revenue and consequently, backlog is nil.
Joint venture backlog is obligated backlog that represents the expected value of our share of orders that our joint ventures have
received but have not yet executed. Joint venture backlog is determined on the same basis as obligated backlog described above.
Unfunded backlog is a non-GAAP measure that represents firm Defence and Security orders we have received but have not yet
executed and for which funding authorization has not yet been obtained. We include unexercised negotiated options which we view as
having a high probability of being exercised, but exclude indefinite-delivery/indefinite-quantity (IDIQ) contracts.
Total backlog includes obligated backlog, joint venture backlog and unfunded backlog.
The book-to-sales ratio is the total orders divided by total revenue in a given period.
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:
− 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 the current portion of long-term debt);
− 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 the current portion of long-term debt, royalty
obligations, employee benefit obligations and other non-operating liabilities).
Source of capital:
− In order to understand our source of capital, we add net debt to total equity.
Capital expenditures (maintenance and growth) from property, plant and equipment
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.
Earnings per share (EPS) before specific items
Earnings per share before specific items is a non-GAAP measure calculated by excluding the effect of restructuring costs and
one-time tax items from the diluted earnings per share from continuing operations attributable to equity holders of the Company. The
effect per share is obtained by dividing the restructuring costs, net of tax, and one-time tax items by the average number of diluted
shares. We track it because we believe it provides a better indication of our operating performance on a per share basis and makes it
easier to compare across reporting periods.
Free cash flow
Free cash flow is a non-GAAP measure that shows us how much cash we have available to invest in growth opportunities, repay debt
and meet ongoing financial obligations. We use it as an indicator of our financial strength and liquidity. We calculate it by taking the
net cash generated by our continuing operating activities, subtracting maintenance capital expenditures, investment in other assets
not related to growth and dividends paid and adding proceeds from the disposal of property, plant and equipment, dividends received
from equity accounted investees and proceeds, net of payments, from equity accounted investees.
CAE Annual Report 2016 | 13
Management’s Discussion and Analysis
Gross profit
Gross profit is a non-GAAP measure equivalent to the operating profit excluding research and development expenses, selling, general
and administrative expenses, other (gains) losses – net, after tax share in profit of equity accounted investees and restructuring costs.
We believe it is useful to management and investors in evaluating our ongoing operational performance.
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 of long-term debt, and subtracting cash and cash equivalents.
Net debt-to-capital is calculated as net debt divided by the sum of total equity plus net debt.
Net income before specific items
Net income before specific items is a non-GAAP measure we use as an alternate view of our operating results. We calculate it by
taking our net income attributable to equity holders of the Company from continuing operations and adding back restructuring costs,
net of tax, and one-time tax items. We track it because we believe it provides a better indication of our operating performance and
makes it easier to compare across reporting periods.
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 and assets held for sale)
and subtracting current liabilities (not including the current portion of long-term debt and liabilities held for sale).
Operating profit
Operating profit is a non-GAAP measure that shows us how we have performed before the effects of certain financing decisions, tax
structures and discontinued operations. We track it 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.
Research and development expenses
Research and development expenses are a financial measure we use to measure the amount of expenditures directly attributable to
research and development activities that we have expensed during the period, net of investment tax credits and government
contributions.
Return on capital employed
Return on capital employed (ROCE) is a non-GAAP measure we use to evaluate the profitability of our invested capital. We calculate
this ratio over a rolling four-quarter period by taking net income attributable to equity holders of the Company excluding net finance
expense, after tax, divided by the average capital employed.
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 taking the operating profit and excluding the impact of
restructuring costs.
Simulator equivalent unit
Simulator equivalent unit (SEU) is an operating measure we use to show the total average number of FFSs available to generate
earnings 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 a SEU. If a FFS is being powered down and relocated, it will not be included as a SEU until the
FFS is re-installed and available to generate earnings.
Utilization rate
Utilization rate is an operating measure we use to assess the performance of our Civil simulator training network. We calculate it by
taking the number of training hours sold on our simulators during the period divided by the practical training capacity available for the
same period.
14 | CAE Annual Report 2016
Management’s Discussion and Analysis
4. CONSOLIDATED RESULTS3
4.1 Results from operations – fourth quarter of fiscal 2016
(amounts in millions, except per share amounts)
Revenue
Cost of sales
Gross profit3
As a % of revenue
Research and development expenses3
Selling, general and administrative expenses
Other gains – net
After tax share in profit of equity accounted investees
Restructuring costs
Operating profit 3
As a % of revenue
Finance income
Finance expense
Finance expense – net
Earnings before income taxes and discontinued operations
Income tax expense (recovery)
As a % of earnings before income taxes and
discontinued operations (income tax rate)
Earnings from continuing operations
(Loss) earnings from discontinued operations
Net income
Attributable to:
Equity holders of the Company
Continuing operations
Discontinued operations
Non-controlling interests
Earnings per share (EPS) attributable to equity holders
of the Company
Basic and diluted - continuing operations
Basic and diluted - discontinued operations
$
$
$
%
$
$
$
$
$
$
%
$
$
$
$
$
%
$
$
$
$
$
$
$
$
$
$
$
Q4-2016 Q3-2016 Q2-2016 Q1-2016 Q4-2015
722.5
511.9
210.6
29.1
26.5
88.9
(10.8)
(10.6)
16.8
99.8
13.8
(2.8)
21.2
18.4
81.4
19.3
24
62.1
(2.4)
59.7
61.2
(2.4)
58.8
0.9
59.7
0.23
(0.01)
0.22
616.3
447.8
168.5
27.3
20.0
81.5
(6.7)
(12.9)
2.0
84.6
13.7
(2.4)
21.4
19.0
65.6
8.5
13
57.1
(0.2)
56.9
57.9
(0.2)
57.7
(0.8)
56.9
0.21
-
0.21
616.8
457.6
159.2
25.8
20.3
69.3
(2.0)
(8.4)
2.4
77.6
12.6
(2.3)
21.4
19.1
58.5
(17.2)
(29)
75.7
(6.5)
69.2
75.3
(6.5)
68.8
0.4
69.2
0.28
(0.02)
0.26
557.0
399.4
157.6
28.3
20.8
71.8
(4.7)
(11.5)
7.7
73.5
13.2
(2.0)
20.7
18.7
54.8
9.8
18
45.0
(0.5)
44.5
44.9
(0.5)
44.4
0.1
44.5
0.17
-
0.17
631.6
449.6
182.0
28.8
19.5
69.4
(5.6)
(6.7)
-
105.4
16.7
(2.3)
20.6
18.3
87.1
20.2
23
66.9
0.8
67.7
63.3
0.8
64.1
3.6
67.7
0.24
-
0.24
Revenue from continuing operations was 17% higher than last quarter and 14% higher compared to the fourth quarter of
fiscal 2015
Revenue from continuing operations was $106.2 million higher than last quarter mainly because:
− Civil Aviation Training Solutions revenue increased by $58.3 million, or 17%, mainly due to higher revenue from our manufacturing
facility due to higher production levels and the timing of sales of partially manufactured simulators. Revenue generated in the
Americas and Europe as a result of higher FFS utilization further contributed to the increase along with a favourable foreign
exchange impact on the translation of foreign operations;
− Defence and Security revenue increased by $40.4 million, or 16%, mainly due to higher revenue from North American programs
and a higher level of activity from Australian programs;
− Healthcare revenue increased by $7.5 million, or 27%, due to higher revenue from simulation centre management solutions, higher
patient simulator revenue as well as an increase in interventional simulator revenue driven mainly by key partnerships with OEMs.
3 Non-GAAP and other financial measures (see Section 3.6).
CAE Annual Report 2016 | 15
Management’s Discussion and Analysis
Revenue from continuing operations was $90.9 million higher than the same period last year largely because:
− Defence and Security revenue increased by $59.0 million, or 25%, mainly due to the integration into our results of the revenues
from BMAT acquired in the second quarter of this year, a favourable foreign exchange impact on the translation of foreign
operations and higher revenue from North American programs;
− Civil Aviation Training Solutions revenue increased by $25.4 million, or 7%, mainly due to a favourable foreign exchange impact on
the translation of foreign operations, higher FFS utilization primarily in Europe, higher revenue from our manufacturing facility as a
result of higher production levels and an increased demand for our crew sourcing business;
− Healthcare revenue increased by $6.5 million, or 22%, mainly due to higher patient simulator revenue and a favourable foreign
exchange impact on the translation of foreign operations.
You will find more details in Results by segment.
Segment operating income4 was $30.0 million higher than last quarter and $11.2 million higher compared to the fourth
quarter of fiscal 2015
Operating profit this quarter was $99.8 million or 13.8% of revenue, compared to $84.6 million or 13.7% of revenue last quarter and
$105.4 million or 16.7% of revenue in the fourth quarter of fiscal 2015. Restructuring costs of $16.8 million were recorded this quarter
compared to $2.0 million last quarter and nil in the fourth quarter of last year. Segment operating income was $116.6 million this
quarter compared to $86.6 million last quarter.
Segment operating income was $30.0 million or 35% higher compared to last quarter. Increases in segment operating income were
$19.7 million, $8.4 million and $1.9 million for Civil Aviation Training Solutions, Defence and Security and Healthcare respectively.4
Segment operating income increased by $11.2 million or 11% over the fourth quarter of fiscal 2015. The increase in segment
operating income of $13.2 million for Civil Aviation Training Solutions was partially offset by decreases of $1.4 million and $0.6 million
for Defence and Security and Healthcare respectively.
You will find more details in Restructuring costs and Results by segment.
Net finance expense was $0.6 million lower compared to last quarter and $0.1 million higher over the fourth quarter of fiscal
2015
Net finance expense was lower this quarter compared to last quarter. The decrease was mainly due to higher interest income and
lower interest expense on accretion of other non-current liabilities.
Net finance expense this quarter was stable compared to the fourth quarter of fiscal 2015.
Income tax rate was 24% this quarter
Income taxes this quarter were $19.3 million, representing an effective tax rate of 24%, compared to 13% last quarter and 23% for the
fourth quarter of fiscal 2015.
The increase in the tax rate over last quarter was mainly due to the change in the mix of income from various jurisdictions and U.S.
tax incentives applicable to domestic manufacturers recognized last quarter.
The increase in the tax rate over the fourth quarter of fiscal year 2015 was mainly due the change in the mix of income from various
jurisdictions.
4 Non-GAAP and other financial measures (see Section 3.6).
16 | CAE Annual Report 2016
4.2 Results from operations – fiscal 2016
(amounts in millions, except per share amounts)
Revenue
Cost of sales
Gross profit
As a % of revenue
Research and development expenses
Selling, general and administrative expenses
Other gains – net
After tax share in profit of equity accounted investees
Restructuring costs
Operating profit
As a % of revenue
Finance income
Finance expense
Finance expense – net
Earnings before income taxes and discontinued operations
Income tax expense
As a % of earnings before income taxes and
discontinued operations (income tax rate)
Earnings from continuing operations
(Loss) earnings from discontinued operations
Net income
Attributable to:
Equity holders of the Company
Continuing operations
Discontinued operations
Non-controlling interests
EPS attributable to equity holders of the Company
Basic and diluted - continuing operations
Basic and diluted - discontinued operations
Management’s Discussion and Analysis
FY2016
2,512.6
1,816.7
FY2015
2,246.3
1,642.6
695.9
27.7
87.6
311.5
(24.2)
(43.4)
28.9
335.5
13.4
(9.5)
84.7
75.2
260.3
20.4
8
239.9
(9.6)
230.3
239.3
(9.6)
229.7
0.6
230.3
0.89
(0.04)
603.7
26.9
64.1
264.6
(20.3)
(37.5)
-
332.8
14.8
(9.8)
80.7
70.9
261.9
57.8
22
204.1
0.6
204.7
201.2
0.6
201.8
2.9
204.7
0.76
-
$
$
$
%
$
$
$
$
$
$
%
$
$
$
$
$
%
$
$
$
$
$
$
$
$
$
$
Revenue from continuing operations was $266.3 million or 12% higher than last year
Revenue from continuing operations was higher than last year mainly because:
− Civil Aviation Training Solutions revenue increased by $134.5 million, or 10%, mainly due to a favourable foreign exchange impact
on the translation of foreign operations, higher FFS utilization in Europe and the Americas, the contribution of newly deployed
simulators in our network, higher revenue from our manufacturing facility as a result of higher production levels and increased
demand for our crew sourcing business;
− Defence and Security revenue increased by $112.7 million, or 13%, mainly due to a favourable foreign exchange impact on the
translation of foreign operations, the integration into our results of the revenues from BMAT acquired in the second quarter of this
year and higher revenue from European programs. The increase was partially offset by lower revenue from North American
programs;
− Healthcare revenue increased by $19.1 million, or 20%, mainly due to higher patient simulator revenue resulting primarily from the
introduction of new products and a favourable foreign exchange impact on the translation of foreign operations.
You will find more details in Results by segment.
CAE Annual Report 2016 | 17
Management’s Discussion and Analysis
Gross profit was $92.2 million higher than last year
Gross profit was $695.9 million this year, or 27.7% of revenue compared to $603.7 million this year, or 26.9% of revenue last year. As
a percentage of revenue, gross profit was higher when compared to last year.
Segment operating income was $31.6 million higher than last year
Operating profit for the year was $335.5 million or 13.4% of revenue, compared to $332.8 million or 14.8% of revenue last year.
Restructuring costs of $28.9 million were recorded this year and segment operating income was $364.4 million.
Segment operating income was $31.6 million or 9% higher compared to last year. Increases in segment operating income were
$26.9 million, $4.2 million and $0.5 million for Civil Aviation Training Solutions, Defence and Security and Healthcare respectively.
You will find more details in Restructuring costs and Results by segment.
Net finance expense was $4.3 million higher than last year
(amounts in millions)
Net finance expense, prior period
Change in finance expense from the prior period:
Increase in finance expense on long-term debt (other than finance leases)
Increase in finance expense on finance leases
Increase in finance expense on royalty obligations
Increase in other finance expense
Increase in borrowing costs capitalized
Increase in finance expense from the prior period
Change in finance income from the prior period:
Increase in interest income on loans and finance lease contracts
Decrease in other finance income
Decrease in finance income from the prior period
Net finance expense, current period
FY2015 to
FY2016
70.9
0.3
0.5
0.1
2.4
0.7
4.0
(0.4)
0.7
0.3
75.2
$
$
$
$
$
$
Net finance expense was $75.2 million this year, $4.3 million or 6% higher than last year. The increase was mainly due to higher
interest expense resulting from letters of credit fees, lower borrowing costs capitalized to certain long-term assets and higher expense
on employee obligations and finance lease obligations.
Income tax rate was 8% this year
This fiscal year, income taxes were $20.4 million, representing an effective tax rate of 8%, compared to 22% for the same period last
year.
This year’s tax rate includes one-time items involving the favourable settlement of tax oppositions in Canada with respect to the tax
treatment of the sale of certain simulators partially offset by the negative impact of certain tax audits. Excluding the effect of these
one-time items and U.S. tax incentive applicable to domestic manufacturers, the income tax rate would have been 20% this year. The
lower tax rate compared to fiscal year 2015 is mainly due to the change in the mix of income from various jurisdictions.
4.3 Discontinued operations
Last year, we decided to divest of our mining division following the decision to focus our resources and capital investment in targeted
growth opportunities in our three core markets: Civil Aviation Training Solutions, Defence and Security and Healthcare. The results of
our mining division are classified and reported separately as discontinued operations.
On July 24, 2015, we completed the sale of our mining division known as Datamine for an amount totaling $31.2 million including the
finalization of the working capital adjustment and excluding a potential consideration of up to $10.0 million that is contingent on certain
financial results being met.
The loss from discontinued operations recorded during the year was $9.6 million compared to earnings from discontinued operations
of $0.6 million last year.
You will find more details in Note 3 of our consolidated financial statements.
18 | CAE Annual Report 2016
Management’s Discussion and Analysis
4.4 Restructuring costs
We implemented a process improvement program this year to realize the benefits from the transformation of our production processes
and product offering to further strengthen our competitive position, which has resulted in a reduction of our workforce. Net
restructuring costs, consisting mainly of severances and other related costs, of $20.6 million after-tax were recognized in net income
in fiscal 2016.
You will find more details in Note 12 of our consolidated financial statements.
4.5 Consolidated orders and total backlog
Our total consolidated backlog was $6,372.6 million at the end of fiscal 2016, which is 19% higher than last year. New orders of
$2,782.0 million were added this year, partially offset by $2,512.6 million in revenue generated from our obligated backlog. The
acquisition of BMAT during the year resulted in an adjustment to obligated backlog of $463.3 million and to unfunded backlog5 of
$86.0 million. In addition to the acquisition of BMAT, obligated backlog adjustments included the revaluation of certain contracts and
the cancelation of two orders from previous years within our Civil Aviation Training Solutions segment as well as foreign exchange
movements. Our joint venture backlog5 was $551.3 million and our unfunded backlog was $756.4 million.
Total backlog up 19% over last year
(amounts in millions)
Obligated backlog, beginning of period
+ orders
- revenue
+ / - adjustments
Obligated backlog, end of period
Joint venture backlog (all obligated)
Unfunded backlog
Total backlog
FY2016
$
4,354.1
2,782.0
(2,512.6)
441.4
5,064.9
551.3
756.4
6,372.6
$
$
FY2015
$
4,205.6
2,361.2
(2,246.3)
33.6
4,354.1
607.8
395.3
5,357.2
$
$
In fiscal 2015, adjustments were mainly related to foreign exchange movements, partially offset by the termination of a contract in
North America and the revaluation of certain contracts within our Defence and Security segment.5
The book-to-sales ratio for the quarter was 1.23x. The ratio for the last 12 months was 1.11x.
You will find more details in Results by segment.
5 Non-GAAP and other financial measures (see Section 3.6).
CAE Annual Report 2016 | 19
Management’s Discussion and Analysis
5. RESULTS BY SEGMENT
We manage our business and report our results in three segments:
− Civil Aviation Training Solutions;
− Defence and Security;
− Healthcare.6
The method used for the allocation of assets jointly used by the operating segments and costs and liabilities jointly incurred (mostly
corporate costs) between operating segments is based on the level of utilization when determinable and measurable, otherwise the
allocation is based on a proportion of each segment’s cost of sales.
Unless otherwise indicated, elements within our segment revenue and segment operating income analysis are presented in order of
magnitude.
KEY PERFORMANCE INDICATORS
Segment operating income
(amounts in millions, except operating margins)
FY2016 FY2015 Q4-2016 Q3-2016 Q2-2016 Q1-2016 Q4-2015
Civil Aviation Training Solutions
Defence and Security
Healthcare
Total segment operating income (SOI)
Restructuring costs
Operating profit
Capital employed6
(amounts in millions)
Civil Aviation Training Solutions
Defence and Security
Healthcare
$
%
$
%
$
%
$
$
$
237.4
16.6
210.5
16.3
75.0
19.1
55.3
16.5
50.1
13.7
57.0
17.0
61.8
16.8
119.8
12.3
115.6
13.5
38.1
13.0
29.7
11.7
28.4
12.6
23.6
12.0
39.5
16.8
7.2
6.3
6.7
7.1
3.5
9.8
364.4
332.8
116.6
(28.9)
-
(16.8)
335.5
332.8
99.8
1.6
5.7
86.6
(2.0)
84.6
1.5
5.9
80.0
(2.4)
77.6
0.6
2.5
4.1
14.0
81.2
105.4
(7.7)
-
73.5
105.4
March 31 December 31 September 30
2015
2015
2016
June 30
March 31
2015
2015
$
$
$
$
2,017.1
2,022.6
2,075.1
2,023.0
1,984.2
720.3
745.7
746.3
749.4
675.5
206.0
218.2
210.4
197.8
206.5
2,943.4
2,986.5
3,031.8
2,970.2
2,866.2
6 Non-GAAP and other financial measures (see Section 3.6).
20 | CAE Annual Report 2016
Management’s Discussion and Analysis
5.1 Civil Aviation Training Solutions
FISCAL 2016 EXPANSIONS AND NEW INITIATIVES
Acquisition
− We announced the conclusion of a conditional agreement with Lockheed Martin Corporation to acquire Lockheed Martin
Commercial Flight Training (LMCFT). The acquisition was completed on May 2, 2016.
Expansions
− We announced five new aviation training programs that are, or will soon be, ready for training. The training programs are for
Bombardier, Gulfstream and Dassault business jets and Sikorsky and Eurocopter helicopters;
− We achieved FAA Level D qualification for the Falcon 900/2000 EASy, located at the Dallas East Training Centre in the U.S.;
− We announced, with Líder Aviação, the expansion of our joint venture training program in Brazil to support initial and recurrent
training for AW139 pilots and enable mission specific training for various operating profiles;
− We entered into a partnership with Gulf Aviation Academy (GAA) to offer additional Embraer 170/190 training services in Europe.
We have relocated GAA’s CAE-built Embraer 170/190 FFS and flight training device to our training centre in Amsterdam to cater to
the increased demand for such training in Europe;
− We inaugurated the second A320 FFS at our Barcelona training centre as part of our training services agreement with Vueling
Airlines, S.A. We also announced that the centre will be extended to provide further classrooms and training facilities to meet
Vueling’s growing training demand requirements.
New programs and products
− We achieved Level D qualification for world’s first A350 XWB full-flight simulator, located at the Airbus Training Centre in Toulouse,
France. We also received qualifications for the A350 fixed based flight training device used for pilot Common Type Ratings;
− We qualified the world’s first simulators equipped with EASA-approved, FAA-approved and ICAO-compliant Upset Prevention and
Recovery Training instructor stations;
− We achieved Level D qualification for the Airbus Helicopters H225 FFS located at our training centre in Oslo, Norway. Our training
centre was also designated an Approved Simulation Centre by Airbus Helicopters making us the first independent simulation
training provider to receive this distinction;
− We announced, together with Bombardier Commercial Aircraft, that we achieved Interim Level C qualification on the FFS for the
new CS100 aircraft.
ORDERS
Civil Aviation Training Solutions obtained contracts this quarter expected to generate future revenues of $522.9 million, including
contracts for 20 FFSs.
FFS contracts awarded for the quarter:
− Five FFSs, including three Boeing 737MAX, one Airbus A320 Neo and one ATR72-600 to Lion Air;
− Five Boeing 737NG FFSs to Southwest Airlines;
− One Boeing 767 FFS to Uzbekistan Airlines;
− One Boeing 737NG FFS to Avenger Flight Group;
− One Airbus A320 FFS to Sofia Flight Training;
− Seven FFSs, including three Airbus A320s, one Boeing 737NG, one Boeing 787, one MD11F and one ATR72-600 to undisclosed
customers.
This brings the civil FFS order intake for the year to 53 FFSs.
Other notable contract awards for the quarter included:
− An agreement with Lion Air for CAE’s EASA compliant Airline Transport Pilot License (ATPL) ground-school training program for
the airline’s three flight schools located in Indonesia;
− An exclusive long-term contract with JetBlue to provide a new competency-based training program for pilots that incorporates
classroom learning, real-world flying experience and instruction in FSSs.
CAE Annual Report 2016 | 21
Management’s Discussion and Analysis
Financial results
(amounts in millions, except operating
margins, SEU, FFSs deployed and
utilization rate)
Revenue
Segment operating income
Operating margins
Depreciation and amortization
Property, plant and equipment
expenditures
Intangible assets and other
assets expenditures
Capital employed
Total backlog
SEU7
FFSs deployed
Utilization rate7
$
$
%
$
$
$
$
$
%
FY2016
FY2015 Q4-2016 Q3-2016 Q2-2016 Q1-2016 Q4-2015
1,429.1
237.4
16.6
133.8
1,294.6
210.5
16.3
120.1
393.0
75.0
19.1
34.8
334.7
55.3
16.5
34.5
365.2
336.2
367.6
50.1
13.7
33.4
57.0
17.0
31.1
61.8
16.8
30.8
92.9
111.3
29.6
21.3
20.6
21.4
29.4
33.7
2,017.1
3,078.6
204
261
71
40.6
1,984.2
2,903.3
197
256
68
8.3
2,017.1
3,078.6
205
261
76
7.6
2,022.6
3,085.6
205
258
73
10.6
2,075.1
3,003.1
202
259
64
7.2
2,023.0
2,789.4
203
258
73
8.8
1,984.2
2,903.3
201
256
70
Revenue up 17% over last quarter and up 7% over the fourth quarter of fiscal 20157
The increase over last quarter was mainly due to higher revenue from our manufacturing facility due to higher production levels and
the timing of sales of partially manufactured simulators. Revenue generated in the Americas and Europe as a result of higher FFS
utilization further contributed to the increase along with a favourable foreign exchange impact on the translation of foreign operations.
The increase over the fourth quarter of fiscal 2015 was mainly due to a favourable foreign exchange impact on the translation of
foreign operations, higher FFS utilization primarily in Europe, higher revenue from our manufacturing facility as a result of higher
production levels and an increased demand for our crew sourcing business.
Revenue was $1,429.1 million this year, 10% or $134.5 million higher than last year
The increase over last year was mainly due to a favourable foreign exchange impact on the translation of foreign operations, higher
FFS utilization in Europe and the Americas, the contribution of newly deployed simulators in our network, higher revenue from our
manufacturing facility as a result of higher production levels and increased demand for our crew sourcing business.
Segment operating income up 36% over last quarter and up 21% over the fourth quarter of fiscal 2015
Segment operating income was $75.0 million (19.1% of revenue) this quarter, compared to $55.3 million (16.5% of revenue) last
quarter and $61.8 million (16.8% of revenue) in the fourth quarter of fiscal 2015.
Segment operating income increased by $19.7 million, or 36%, over last quarter. The increase was mainly due to higher FFS
utilization in Europe and in the Americas and higher revenue from our manufacturing facility. The benefit recognized this quarter
related to the renegotiation of long-term royalty obligations was fully offset by a loss on the termination of a client agreement, a loss
on litigation, the impairment of an asset and by an unfavourable foreign exchange impact from the revaluation of our non-cash
working capital accounts.
Segment operating income increased by $13.2 million, or 21%, over the fourth quarter of fiscal 2015. The increase was mainly due to
higher profitability from our Asian joint ventures, higher FFS utilization in Europe and a favourable foreign exchange impact on the
translation of foreign operations, partially offset by a lower utilization in the Americas and a less favourable program mix from our
manufacturing facility.
Segment operating income was $237.4 million, 13% or $26.9 million higher than last year
Segment operating income was $237.4 million (16.6% of revenue) this year, compared to $210.5 million (16.3% of revenue) last year.
The increase was mainly attributable to higher FFS utilization in Europe, higher profitability from our Asian joint ventures and a
favourable foreign exchange impact on the translation of foreign operations, partially offset by a less favourable program mix from our
manufacturing facility, higher net research and development expenses, last year’s gains on the partial disposal of interests in
investments and the recognition of a deferred tax asset in one of our joint ventures.
Property, plant and equipment expenditures at $29.6 million this quarter and $92.9 million for the year
Maintenance capital expenditures were $8.4 million for the quarter and $34.6 million for the year. Growth capital expenditures were
$21.2 million for the quarter and $58.3 million for the year.
7 Non-GAAP and other financial measures (see Section 3.6).
22 | CAE Annual Report 2016
Management’s Discussion and Analysis
Capital employed decreased $5.5 million from last quarter and increased $32.9 million over last year
The decrease in capital employed from last quarter was mainly due to lower property, plant and equipment and lower intangible
assets resulting primarily from movements in foreign exchange rates. The decrease was partially offset by a higher investment in
non-cash working capital mainly as a result of lower accounts payable and accrued liabilities and lower derivative financial liabilities.
The increase in capital employed over last year was mainly due to a higher investment in equity accounted investees due to increased
profitability within our joint ventures, offset in part by dividends issued, higher intangible assets mainly as a result of movements in
foreign exchange rates and lower derivative financial liabilities. The increase was partially offset by a lower investment in non-cash
working capital.
Total backlog was at $3,078.6 million at the end of the year
(amounts in millions)
Obligated backlog, beginning of period
+ orders
- revenue
+ / - adjustments
Obligated backlog, end of period
Joint venture backlog (all obligated)
Total backlog
FY2016
2,397.7
1,683.0
(1,429.1)
(28.3)
2,623.3
455.3
3,078.6
$
$
$
FY2015
2,161.7
1,512.3
(1,294.6)
18.3
2,397.7
505.6
2,903.3
$
$
$
Fiscal 2016 adjustments are mainly due to the revaluation of certain contracts during the year, the cancelation of two orders from
previous years and foreign exchange movements.
Fiscal 2015 adjustments are mainly due foreign exchange movements.
This quarter's book-to-sales ratio was 1.33x. The ratio for the last 12 months was 1.18x.
5.2 Defence and Security
FISCAL 2016 EXPANSIONS AND NEW INITIATIVES
Acquisition
− We finalized the acquisition of BMAT and are now the prime contractor responsible for the NATO Flying Training in Canada
(NFTC) program, which delivers live flying training.
Expansions
− We delivered a comprehensive CH-147F Chinook training solution to Garrison Petawawa that was used to formally graduate the
Royal Canadian Air Force’s first class of CH-147F aircrews;
− We expanded our collaboration agreement with Eurofighter Simulation Systems related to the provision of visual systems on the
Eurofighter Typhoon Aircrew Synthetic Training Aids program;
− We announced that our CAE Brunei Multi-Purpose Training Centre (MPTC) was certified as an Approved Training Organization
according to the guidelines and procedures established by EASA, which will allow the CAE Brunei MPTC to offer instructor-led
training on the Sikorsky S-92 helicopter;
− We commenced the provision of maintenance and support services on the New Zealand Defence Force's SH-2G(I) helicopter
synthetic training devices;
− We expanded our C-130 training center located in Florida, U.S. with the addition of a new C-130H/L-382 full-mission simulator
featuring the Rockwell Collins Flight2 glass cockpit;
− We delivered a comprehensive T-6C ground-based training system to the Royal New Zealand Air Force and have now
commenced the provision of maintenance and support services at RNZAF Base Ohakea;
− We delivered a new training centre facility and KC-130J weapon systems trainer to the Kuwait Air Force and have now
commenced the provision of on-site training support services.
New programs and products
− We supported the Royal Australian Air Force's (RAAF) participation in Coalition Virtual Flag 15, one of the world's largest virtual air
combat exercises, so that live-flying and simulated aircraft could participate in this joint, multi-national live-virtual-constructive
training exercise;
− The Open Geospatial Consortium (OGC), an international standards consortium supporting interoperable solutions, approved the
CAE-developed Common Database (CDB) as an OGC Best Practice, thus paving the way for the continued proliferation of the
CDB as the preferred architecture for creating and maintaining simulation-based synthetic environments;
− We signed a Memorandum of Understanding with Conair to develop a Wildfire Training and Simulation Centre in British Columbia,
Canada.
CAE Annual Report 2016 | 23
Management’s Discussion and Analysis
ORDERS
Defence and Security was awarded $331.0 million in orders this quarter, including notable contract awards from:
− The U.S. Air Force (USAF) under the KC-135 Aircrew Training System program to upgrade a range of KC-135 aircrew training
devices so that they can be used on the USAF's Distributed Training Center Network;
− Lockheed Martin to provide Phenom 100 synthetic training equipment in support of the U.K.'s Military Flying Training System
program;
− Australia's Department of Defence Capability and Acquisition Sustainment Group to develop a C-130J Fuselage Cargo
Compartment Trainer for the RAAF;
− The Government of Canada to provide the Canadian Forces with simulator maintenance and engineering support services;
− The Government of Canada to provide the Canadian Coast Guard with a CAE 3000 Series helicopter simulator that will feature
cockpits for both the Bell 412EPI and Bell 429 helicopters;
− Boeing to provide a range of upgrades to previously-contracted P-8A operational flight trainers for the U.S. Navy;
− The NATO Support and Procurement Agency to perform a major upgrade on the German Navy's Sea King MK41 helicopter
simulator;
− The U.K. Ministry of Defence to upgrade two of the CH-47 Chinook dynamic mission simulators at CAE's Medium Support
Helicopter Aircrew Training Facility at Royal Air Force Benson in the U.K.
Financial results
$
$
%
$
(amounts in millions, except operating
margins)
Revenue
Segment operating income
Operating margins
Depreciation and amortization
Property, plant and equipment
expenditures
Intangible assets and other
assets expenditures
Capital employed
Total backlog
$
$
$
$
FY2016
FY2015 Q4-2016 Q3-2016 Q2-2016 Q1-2016 Q4-2015
970.1
119.8
12.3
69.8
857.4
115.6
13.5
55.7
293.7
38.1
13.0
20.7
253.3
29.7
11.7
17.0
226.2
28.4
12.6
16.6
196.9
23.6
12.0
15.5
234.7
39.5
16.8
15.2
22.9
30.2
9.4
7.4
4.3
1.8
10.8
17.6
720.3
3,294.0
19.1
675.5
2,453.9
8.1
720.3
3,294.0
3.7
745.7
3,281.6
3.8
2.0
5.5
746.3
3,378.9
749.4
2,642.9
675.5
2,453.9
Revenue up 16% over last quarter and up 25% over the fourth quarter of fiscal 2015
The increase over last quarter was mainly due to higher revenue from North American programs and a higher level of activity from
Australian programs.
The increase over the fourth quarter of fiscal 2015 was mainly due to the integration into our results of the revenues from BMAT
acquired in the second quarter of this year, a favourable foreign exchange impact on the translation of foreign operations and higher
revenue from North American programs.
Revenue was $970.1 million this year, 13% or $112.7 million higher than last year
The increase was mainly due to a favourable foreign exchange impact on the translation of foreign operations, the integration into our
results of the revenues from BMAT acquired in the second quarter of this year and higher revenue from European programs. The
increase was partially offset by lower revenue from North American programs.
Segment operating income up 28% over last quarter and down 4% from the fourth quarter of fiscal 2015
Segment operating income was $38.1 million (13.0% of revenue) this quarter, compared to $29.7 million (11.7% of revenue) last
quarter and was $39.5 million (16.8% of revenue) in the fourth quarter of fiscal 2015.
The increase over last quarter was mainly due to higher volume on North American programs and higher margins on Asian programs,
partially offset by higher net research and development expenses and higher selling, general and administrative expenses. Segment
operating income was also higher as a result of the benefit recognized this quarter related to the renegotiation of long-term royalty
obligations and partially offset by an unfavourable tax assessment in one of our joint ventures and a loss on disposal of assets related
to our process improvement plan.
The decrease from the fourth quarter of fiscal 2015 was mainly due to higher investment tax credits claimed during the fourth quarter
of last year, an unfavourable tax assessment in one of our joint ventures and a loss on disposal of assets related to our process
improvement plan, partially offset by the benefit related to the renegotiation of long-term royalty obligations. The decrease was also
partially offset by higher volume on North American programs, the integration into our results of BMAT and a favourable foreign
exchange impact on the translation of foreign operations, partially offset by higher selling, general and administrative expenses and
higher net research and development expenses.
24 | CAE Annual Report 2016
Management’s Discussion and Analysis
Segment operating income was $119.8 million this year, 4% or $4.2 million higher than last year
Segment operating income was $119.8 million (12.3% of revenue) this year, compared to $115.6 million (13.5% of revenue) last year.
The increase over last year was mainly due to higher margins on North American programs, a favourable foreign exchange impact on
the translation of foreign operations, the integration into our results of BMAT and higher volume on European programs, partially
offset by higher net research and development expenses, higher selling, general and administrative expenses and lower income from
our joint ventures. Segment operating income was also higher as a result of the benefit recognized this year related to the
renegotiation of long-term royalty obligations and partially offset by an unfavourable tax assessment in one of our joint ventures,
higher investment tax credits claimed last year and a loss on disposal of assets related to our process improvement plan.
Capital employed decreased $25.4 million from last quarter and increased $44.8 million over last year
The decrease from last quarter was mainly due to movements in foreign exchange rates on long-term assets, higher other long-term
liabilities and a lower investment in non-cash working capital, partially offset by higher intangible assets.
The increase over last year was mainly due to a higher investment in non-cash working capital, lower other long-term liabilities and an
increase in property, plant and equipment, partially offset by lower other long-term assets and lower capital employed as a result of
the acquisition of BMAT during the year.
Total backlog up 34% compared to last year
(amounts in millions)
Obligated backlog, beginning of period
+ orders
- revenue
+ / - adjustments
Obligated backlog, end of period
Joint venture backlog (all obligated)
Unfunded backlog
Total backlog
FY2016
1,956.4
985.6
(970.1)
469.7
2,441.6
96.0
756.4
3,294.0
$
$
$
FY2015
2,043.9
754.6
(857.4)
15.3
1,956.4
102.2
395.3
2,453.9
$
$
$
Fiscal 2016 adjustments are mainly due to backlog added as a result of the acquisition of BMAT and foreign exchange movements.
Fiscal 2015 adjustments were mainly due to foreign exchange movements, partially offset by the termination of a contract in North
America and the revaluation of certain contracts.
This quarter's book-to-sales ratio was 1.13x. The ratio for the last 12 months was1.02x.
In fiscal 2016, $141.7 million of unfunded backlog was transferred to obligated backlog and $419.8 million was added to the unfunded
backlog.
5.3 Healthcare
FISCAL 2016 EXPANSIONS AND NEW INITIATIVES
Expansions
− We partnered with MedAffinity to integrate their Electronic Health Records system into our LearningSpace simulation centre
management solution, providing more realism in healthcare simulations;
− We signed an exclusive distribution rights agreement with Strategic Operations (STOPS) for Surgical Cut Suit and other simulation
training products globally outside of the United States and further expanded our partnership to include distribution rights for U.S.
civilian training centers and U.S. military customers.
New programs and products
− We announced the release of CAE Vïvo™, a tablet-operated, facilitator-driven software that allows full control over METIman’s
physiology and responses;
− In partnership with the International Nursing Association for Clinical Simulation & Learning (INACSL), we introduced the
INACSL – CAE Healthcare Simulation Fellowship program for healthcare educators and professionals;
− We delivered a next generation training solution to Abiomed for its Impella heart pump training programs which integrated our
ultrasound and patient simulation technology for the first time;
− We released our new Blue Phantom Musculoskeletal ultrasound training model, the world’s first training model for
ultrasound-guided evaluation and procedures for the knee;
CAE Annual Report 2016 | 25
Management’s Discussion and Analysis
New programs and products (cont’d)
− We announced the release of Athena, the only high-fidelity female patient simulator with modeled physiology for healthcare;
− In partnership with the National Research Council of Canada, we announced the launch of NeuroVR, the world’s most advanced
virtual reality neurosurgery simulator for cranial and endoscopic brain surgery procedures;
− In partnership with the American Society of Anesthesiologists, we announced a collaborative agreement to develop screen-based
simulation education for practicing physicians.
ORDERS
CAE Healthcare sales this quarter included:
− Sixteen patient simulators and 29 audiovisual solutions to a public research university in the U.S.;
− Twelve patient simulators and six audiovisual solutions to a state department of health in the U.S.;
− A custom training solution for a global medical device company;
− Five patient simulators and two interventional simulators to a private university in Turkey;
− A turnkey mobile simulation center with a patient simulator and two audiovisual solutions to a public university in Costa Rica.
Financial results
$
$
%
$
(amounts in millions, except operating
margins)
Revenue
Segment operating income
Operating margins
Depreciation and amortization
Property, plant and equipment
expenditures
Intangible assets and other
assets expenditures
Capital employed
$
$
$
FY2016
FY2015 Q4-2016 Q3-2016 Q2-2016 Q1-2016 Q4-2015
113.4
7.2
6.3
14.2
94.3
6.7
7.1
13.3
35.8
3.5
9.8
3.6
28.3
1.6
5.7
3.7
25.4
23.9
1.5
5.9
3.4
0.6
2.5
3.5
29.3
4.1
14.0
3.6
2.0
2.7
0.8
0.5
0.3
0.4
0.5
2.6
206.0
4.6
206.5
0.4
206.0
0.9
218.2
0.8
210.4
0.5
197.8
0.8
206.5
Revenue up 27% over last quarter and up 22% over the fourth quarter of fiscal 2015
The increase over last quarter was mainly due to higher revenue from simulation centre management solutions, higher patient
simulator revenue as well as an increase in interventional simulator revenue driven mainly by key partnerships with OEMs.
The increase over the fourth quarter of fiscal 2015 was mainly due to higher patient simulator revenue and a favourable foreign
exchange impact on the translation of foreign operations.
Revenue was $113.4 million this year, 20% or $19.1 million higher than last year
The increase was mainly due to higher patient simulator revenue resulting primarily from the introduction of new products and a
favourable foreign exchange impact on the translation of foreign operations.
Segment operating income higher over last quarter and lower compared to the fourth quarter of fiscal 2015
Segment operating income was $3.5 million this quarter (9.8% of revenue), compared to $1.6 million (5.7% of revenue) last quarter
and $4.1 million (14.0% of revenue) in the fourth quarter of fiscal 2015.
The increase over last quarter was mainly due to higher volume, partially offset by an increase in selling, general and administrative
expenses driven mainly by a higher investment in marketing expenses.
The decrease from the fourth quarter of fiscal 2015 was mainly due to higher selling, general and administrative expenses as
mentioned above, partially offset by higher volume.
Segment operating income was $7.2 million this year, $0.5 million higher than last year
Segment operating income was $7.2 million (6.3% of revenue) this year, compared to $6.7 million (7.1% of revenue) last year.
The increase over last year was mainly due to higher revenue, partially offset by higher selling, general and administrative expenses
as mentioned above and a less favourable product mix.
Capital employed decreased by $12.2 million from last quarter and by $0.5 million from last year
The decrease from last quarter was mainly due to lower intangible assets mainly as a result of movements in foreign exchange rates.
The decrease from last year was primarily due to lower intangible assets mainly as a result of amortization, partially offset by
movements in foreign exchange rates and lower property, plant and equipment as a result of depreciation, partially offset by capital
expenditures. The decrease was partially offset by higher non-cash working capital resulting mainly from higher accounts receivable
and offset in part by an increase in accounts payable and accrued liabilities.
26 | CAE Annual Report 2016
6. CONSOLIDATED CASH MOVEMENTS AND LIQUIDITY
We 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.8
Management’s Discussion and Analysis
6.1 Consolidated cash movements
(amounts in millions)
Cash provided by continuing operating activities*
Changes in non-cash working capital
Net cash provided by continuing operating activities
Maintenance capital expenditures8
Other assets
Proceeds from the disposal of property, plant
and equipment
Net proceeds from (payments to) equity accounted investees
Dividends received from equity accounted investees
Dividends paid
Free cash flow from continuing operations 8
Growth capital expenditures 8
Capitalized development costs
Common shares repurchased
Other cash movements, net
Business combinations, net of cash and cash
equivalents acquired
Proceeds from partial disposal of interests in investments,
net of cash and cash equivalents disposed
Proceeds from disposal of discontinued operations
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
$
$
$
FY2016
FY2015 Q4-2016
Q3-2016
Q4-2015
348.9 $
(3.1)
345.8 $
(45.4)
(19.7)
337.8 $
(69.2)
268.6 $
(48.5)
(15.8)
100.3 $
(49.3)
51.0 $
(12.7)
(6.1)
108.2 $
106.7
214.9 $
(11.3)
(4.4)
1.8
3.4
18.5
(56.7)
247.7 $
(72.4)
(35.6)
(7.7)
15.9
13.9
-
30.4
7.6
(0.3)
8.9
(46.3)
0.3
(1.3)
0.9
(19.3)
-
4.4
3.2
(12.4)
174.2 $
(95.7)
(41.5)
12.8 $
(27.1)
(12.4)
194.4 $
(17.9)
(7.8)
-
12.7
(2.0)
8.5
-
(7.7)
1.8
0.3
-
1.2
-
1.7
-
-
-
101.1
59.5
160.6
(11.5)
(5.2)
6.1
3.0
1.2
(12.0)
142.2
(29.2)
(9.9)
-
0.8
-
(1.6)
-
5.7
8.8
(16.1)
7.4
11.4
$
197.9 $
65.0 $
(47.2) $
177.8 $
113.7
Free cash flow from continuing operations was $12.8 million for the quarter
Free cash flow was $181.6 million lower than last quarter and $129.4 million lower compared to the fourth quarter of fiscal 2015.
Free cash flow was lower compared to last quarter and the fourth quarter of fiscal 2015 mainly due to a higher investment in non-cash
working capital.
Free cash flow from continuing operations was $247.7 million this year
Free cash flow increased by $73.5 million, or 42%, compared to last year.
Free cash flow was higher compared to last year mainly due to favourable changes in non-cash working capital and an increase in
cash provided by continuing operating activities, partially offset by higher dividends paid in the year.
Capital expenditures were $39.8 million this quarter and $117.8 million for the year
Growth capital expenditures were $27.1 million this quarter and $72.4 million for the year. Our growth capital allocation decisions are
market-driven in nature and are intended to keep pace with the demand of our existing and new customers. Maintenance capital
expenditures were $12.7 million this quarter and $45.4 million for the year.
8 Non-GAAP and other financial measures (see Section 3.6).
CAE Annual Report 2016 | 27
Management’s Discussion and Analysis
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, 2016 was US$550.0 million (2015 – US$550.0 million)
with an option, subject to lender’s consent, to increase to a total amount of US$850.0 million. There was no amount drawn under the
facilities as at March 31, 2016 (2015 – US$18.0 million) and US$111.9 million was used for letters of credit (2015 – US$99.3 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. The current maturity
date of our revolving unsecured term credit facilities is October 2018.
We have an unsecured Export Development Canada (EDC) Performance Security Guarantee (PSG) account for US$125.0 million.
This is an uncommitted revolving facility for performance bonds, advance payment guarantees or similar instruments.
As at March 31, 2016, the total outstanding for these instruments was $57.2 million (2015 – $82.1 million).
We have a facility of €12.5 million with a European bank for the issuance of bank guarantees and letters of credit. The amount used
principally in support of our European defence and security operations as at March 31, 2016 was $9.9 million (2015 – $10.7 million).
We manage a program in which we sell undivided interests in certain of our accounts receivable (current financial assets program) to
a third party for cash consideration for amounts up to US$150.0 million with limited recourse to CAE. As at March 31, 2016,
$105.9 million (2015 – $113.3 million) of specific accounts receivable were sold to a financial institution. In November 2015, we
renewed our current financial asset program allowing for increased monetization through a facility change from CDN$150.0 million to
US$150.0 million.
As at March 31, 2016, we are compliant with all our financial covenants.
We believe that our cash and cash equivalents, access to credit facilities and expected free cash flow will provide sufficient flexibility
for our business, the repurchase of common shares and 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:
(amounts in millions)
Total long-term debt
Less:
Current portion of long-term debt
Current portion of finance leases
Long-term portion of long-term debt
As at March 31
2016
As at March 31
2015
$
1,272.9
$
1,279.8
98.5
20.8
33.7
21.8
$
1,153.6
$
1,224.3
28 | CAE Annual Report 2016
Management’s Discussion and Analysis
6.3 Government assistance
We have agreements with various governments whereby the latter funds a portion of the cost, based on expenditures incurred by CAE, of
certain R&D programs for modeling, simulation and training services expertise.
During fiscal 2014, we announced Project Innovate, an R&D program extending over five and a half years. The goal of Project
Innovate is to expand our modeling and simulation technologies, develop new ones and continue to differentiate our service offering.
Concurrently, the Government of Canada agreed to participate in Project Innovate through a repayable loan of up to $250 million
made through the Strategic Aerospace and Defence Initiative (SADI).
During fiscal 2016, we amended and extended our Project New Core Markets, an R&D program, for an additional four years. The aim
is to leverage our modeling, simulation and training services expertise in healthcare. The Quebec government, through
Investissement Québec, agreed to participate up to $70 million in contributions related to costs incurred before the end of fiscal 2020.
You will find more details in Note 1, Note 14 and Note 22 of our consolidated financial statements.
___
6.4 Contractual obligations
We enter into contractual obligations and commercial commitments in the normal course of our business. The table below represents
our contractual obligations and commitments for the next five years and thereafter:
Contractual obligations
(amounts in millions)
2017
2018
2019
2020
2021 Thereafter
Total
Long-term debt (excluding interest) $
Finance leases (excluding interest)
99.3 $
20.8
28.6 $
17.8
15.4 $
15.6
186.5 $
28.7
23.2 $
26.0
757.0 $ 1,110.0
166.4
57.5
Non-cancellable operating leases
Purchase commitments
49.9
106.7
40.2
67.1
31.4
24.1
27.5
21.2
20.8
14.9
73.4
2.0
243.2
236.0
$
276.7 $
153.7 $
86.5 $
263.9 $
84.9 $
889.9 $ 1,755.6
We also had total availability under the committed credit facilities of US$438.1 million as at March 31, 2016 compared to
US$432.7 million at March 31, 2015.
We have purchase commitments 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
various points in time.
As at March 31, 2016, 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. CAE’s cash obligation in respect of the
accrued employee pension liability depends on various elements including market returns, actuarial gains and losses and interest
rates. We did not include deferred 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.
CAE Annual Report 2016 | 29
Management’s Discussion and Analysis
7. CONSOLIDATED FINANCIAL POSITION
7.1 Consolidated capital employed
(amounts in millions)
Use of capital:
Current assets
Less: cash and cash equivalents
Less: net assets held for sale
Current liabilities
Less: current portion of long-term debt
Non-cash working capital9
Net assets held for sale
Property, plant and equipment
Other long-term assets
Other long-term liabilities
Total capital employed
Source of capital:
Current portion of long-term debt
Long-term debt
Less: cash and cash equivalents
Net debt9
Equity attributable to equity holders of the Company
Non-controlling interests
Source of capital
As at March 31
2016
As at March 31
2015
$
$
$
$
$
$
1,749.6
(485.6)
(1.5)
(1,192.9)
119.3
188.9
1.5
1,473.1
1,774.0
(709.9)
2,727.6
119.3
1,153.6
(485.6)
787.3
1,888.7
51.6
2,727.6
$
$
$
$
$
$
1,562.5
(330.2)
(47.0)
(1,039.1)
55.5
201.7
47.0
1,461.2
1,633.2
(707.1)
2,636.0
55.5
1,224.3
(330.2)
949.6
1,635.2
51.2
2,636.0
Revision to prior period balances
In preparing the consolidated financial statements for the year ended March 31, 2016, we identified an error related to the
reassessment of unrecognized deferred tax assets. The revision recognizes that as deferred tax liabilities arose in fiscal 2012 and
2013, certain additional deferred tax assets should have been recognized in the consolidated financial statements as per the
requirements of IAS 12 – Income Taxes.
You will find more details in Note 1 of our consolidated financial statements.
Capital employed increased $91.6 million, or 3%, over last year
The increase over last year was mainly due to higher other long-term assets and higher property, plant and equipment, partially offset
by a decrease in net assets held for sale and lower non-cash working capital.
Our return on capital employed9 (ROCE) was 10.6% this year compared to 10.4% last year.
Non-cash working capital decreased by $12.8 million9
The decrease was mainly due to higher accounts payable and accrued liabilities, contracts in progress liabilities and provisions and
lower income taxes recoverable, partially offset by higher inventories, accounts receivable and contracts in progress assets and lower
derivative financial liabilities.
Net property, plant and equipment up $11.9 million
The increase was mainly due to $117.8 million of capital expenditures and $34.5 million of movements in foreign exchange rates,
partially offset by depreciation of $121.5 million.
Other long-term assets up $140.8 million
The increase was mainly due to higher intangible assets resulting from the acquisition of BMAT as well as movements in foreign
exchange rates and a higher investment in equity accounted investees as a result of increased profitability within our joint ventures,
partially offset by dividends issued.
Net assets held for sale down $45.5 million
The decrease was due to the sale of our mining division during the year.
9 Non-GAAP and other financial measures (see Section 3.6).
30 | CAE Annual Report 2016
Net debt lower than last year
The decrease was mainly due to the impact of cash movements during the year, primarily as a result of an increase in cash provided
by continuing operating activities, partially offset by capital expenditures and dividends paid in the year.
Management’s Discussion and Analysis
Change in net debt
(amounts in millions)
Net debt, beginning of period
Cash, beginning of period, related to discontinued operations
Impact of cash movements on net debt
(see table in the consolidated cash movements section)
Effect of foreign exchange rate changes on long-term debt
Net finance lease movement
Other
(Decrease) increase in net debt during the period
Net debt, end of period
Net debt-to-capital10
FY2016
949.6
-
(197.9)
20.2
-
15.4
(162.3)
787.3
28.9
$
$
$
$
%
FY2015
856.2
7.7
(65.0)
101.6
31.3
17.8
93.4
949.6
36.0
$
$
$
$
%
Total equity increased by $253.9 million this year10
The increase in equity was mainly due to net income of $230.3 million, a favourable foreign currency translation of $32.1 million and
defined benefit plan remeasurements of $25.2 million, partially offset by dividends of $56.7 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 269,634,816 common shares issued and outstanding as at March 31, 2016 with total share
capital of $601.7 million. In addition, we had 4,834,725 options outstanding under the Employee Stock Option Plan (ESOP).
As at April 30, 2016, we had a total of 269,282,541 common shares issued and outstanding and 4,780,150 options outstanding under
the ESOP.
Repurchase and cancellation of shares
On February 19, 2016, we announced that we received approval from the Toronto Stock Exchange (TSX) to purchase, by way of a
normal course issuer bid (NCIB), up to 5,398,643 of our common shares, representing 2% of our 269,932,164 issued and outstanding
common shares as of February 12, 2016. The NCIB began on February 23, 2016 and will end on February 22, 2017 or on such earlier
date when we complete our purchases or elect to terminate the NCIB. These purchases are made on the open market plus brokerage
fees through the facilities of the TSX and/or alternative trading systems at the prevailing market price at the time of the transaction, in
accordance with TSX’s applicable policies. All common shares purchased pursuant to the NCIB were cancelled.
As at March 31, 2016, we repurchased and cancelled a total of 515,200 common shares, at a weighted average price of $15.01 per
common share, for a total consideration of $7.7 million. The excess of the shares’ repurchase value over their carrying amount of
$6.6 million was charged to retained earnings as share repurchase premiums.
Dividends
We paid a dividend of $0.07 per share in the first quarter and $0.075 per share in the second, third and fourth quarter of fiscal 2016.
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
declare dividends of approximately $80.9 million in fiscal 2017 based on our current dividend and the number of common shares
outstanding as at March 31, 2016.
Guarantees
As at March 31, 2016, we have a total of $212.3 million outstanding letters of credit and performance guarantees which are not
recognized in the consolidated statement of financial position, compared to $218.8 million last fiscal year.
Pension obligations
We maintain defined benefit and defined contribution pension plans. Next year, we expect to contribute approximately $2.1 million
more than the annual required contribution for current services to satisfy a portion of the underfunded liability of the defined benefit
pension plan. In fiscal 2017, contributions necessary to fund our pension obligations are expected to decrease as a result of changes
in the funding rules which will affect defined benefit pension plans in Canada.
10 Non-GAAP and other financial measures (see Section 3.6).
CAE Annual Report 2016 | 31
Management’s Discussion and Analysis
7.2 Off balance sheet arrangements
Although most of our sale and leaseback transactions entered into as part of our Civil Aviation Training Solutions operations are
classified as finance leases and their obligations are included in the consolidated statement of financial position, certain sale and
leaseback transactions are classified as operating leases and are off balance sheet obligations.
Most of our off balance sheet obligations are from obligations related to operating leases for:
− Certain buildings that are leased throughout our training network and production facilities in the normal course of business;
− Certain FFSs that are leased throughout our training network in the normal course of business;
− The operation of our Medium Support Helicopter (MSH) training centre for the U.K. Ministry of Defence to provide simulation
training services;
− Certain aircraft within our live training operations for the Canadian Department of National Defence.
These leases are non-recourse to us.
You can find more details about operating lease commitments in Note 27 of our consolidated financial statements.
In the normal course of business, we manage a program in which we sell undivided interests in certain of our accounts receivable
(current financial assets program) to a third party for cash consideration for an amount up to US$150.0 million with limited recourse to
CAE. We continue to act as a collection agent. These transactions are accounted for when we have considered to have surrendered
control over the transferred accounts receivable. As at March 31, 2016, $105.9 million (2015 – $113.3 million) of specific accounts
receivable were sold to a financial institution.
7.3 Financial instruments
We are exposed to various financial risks in the normal course of business. We enter into forward contracts and swap agreements to
manage our exposure to fluctuations in foreign exchange rates, interest rates and share price which have an effect on our
share-based payments costs. We formally assess, both at inception of the hedge relationship and on an ongoing basis, whether the
derivatives we use in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items in
relation to the hedged risk. We enter into these transactions to reduce our exposure to risk and volatility, and not for trading or
speculative purposes. We only enter into contracts with counterparties that are of high credit quality.
Classification of financial instruments
We have made the following classifications for our financial instruments:
− Cash and cash equivalents, restricted cash and all derivative instruments, except for derivatives designated as effective hedging
instruments, are classified at fair value through profit and loss (FVTPL);
− Accounts receivable, contracts in progress, non-current receivables and advances are classified as loans and receivables, except
for those that we intend to sell immediately or in the near term which are classified at FVTPL;
− Portfolio investments are classified as available-for-sale;
− Accounts payable and accrued liabilities and long-term debt, including interest payable, as well as finance lease obligations and
royalty obligations are classified as other financial liabilities, all of which are carried at amortized cost using the effective interest
method.
Fair value of financial instruments
The fair value of a financial instrument is determined by reference to the available market information at the reporting 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 our own credit risk are taken into account
in estimating the fair value of all financial assets and financial liabilities.
The following assumptions and valuation methodologies have been used to measure the fair value of financial instruments:
− The fair value of accounts receivable, contracts in progress, accounts payable and accrued liabilities approximate their carrying
values due to their short-term maturities;
− The fair value of derivative instruments, which include forward contracts, swap agreements and embedded derivatives accounted
for separately, is determined using valuation techniques and is calculated as the present value of the estimated future cash flows
using an appropriate interest rate yield curve and foreign exchange rate. Assumptions are based on market conditions prevailing at
each reporting date. Derivative instruments reflect the estimated amounts that we would receive or pay to settle the contracts at
the reporting date;
− The fair value of the available-for-sale investment, which does not have a readily available market value, is estimated using a
discounted cash flow model, which includes some assumptions that are not based on observable market prices or rates;
− The fair value of non-current receivables is estimated based on discounted cash flows using current interest rates for instruments
with similar terms and remaining maturities;
− The fair value of provisions, long-term debts and non-current liabilities, including finance lease obligations and royalty obligations,
are estimated based on discounted cash flows using current interest rates for instruments with similar terms and remaining
maturities.
A description of the fair value hierarchy is discussed in Note 29 of our consolidated financial statements.
32 | CAE Annual Report 2016
Management’s Discussion and Analysis
Financial risk management
Due to the nature of the activities that we carry out and as a result of holding financial instruments, we are exposed to credit risk,
liquidity risk and market risk, including foreign currency risk and interest rate risk. Our exposure to credit risk, liquidity risk and market
risk is managed within risk management parameters documented in corporate policies. These risk management parameters remain
unchanged since the previous period, unless otherwise indicated.
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 CAE. We are exposed to credit risk on our accounts receivable 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 assets. Credit risks arising from our normal commercial activities are managed in regards to
customer credit risk.
Our customers are mainly established companies, some of which have publicly available credit ratings, as well as government
agencies, which facilitates risk assessment and monitoring. In addition, we typically receive substantial non-refundable advance
payments for construction contracts. We closely monitor our exposure to major airline companies in order to mitigate our risk to the
extent possible. Furthermore, our trade receivables are not concentrated with specific customers but are held with 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 third-party financial institutions for cash consideration on a limited recourse basis (current financial assets program). We
do not hold any collateral as security. The credit risk on cash and cash equivalents is mitigated by the fact that they are mainly in
place with a diverse group of major 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. 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 offset 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 CAE 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.
The carrying amounts presented in Note 5 and Note 29 of our consolidated financial statements represent the maximum exposure to
credit risk for each respective financial asset as at the relevant dates.
Liquidity risk
Liquidity risk is defined as the potential risk that we cannot meet our cash obligations as they become due.
We manage this risk by establishing cash forecasts, as well as long-term operating and strategic plans. The management of
consolidated liquidity requires a regular monitoring of expected cash inflows and outflows which is achieved through a forecast of our
consolidated liquidity position, for 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 a revolving unsecured credit facility of US$550.0 million, with an option, subject to the
lender’s consent, to increase to a total amount of up to US$850.0 million. As well, we have agreements to sell certain of our accounts
receivable for an amount of up to US$150.0 million (current financial assets program). We also regularly 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 in 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.
We use derivative instruments to manage market risk against the volatility in foreign exchange rates, interest rates and share-based
payments in order to minimize their impact on our results and financial position. Our policy is not to utilize any derivative financial
instruments for trading or speculative purposes.
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 fluctuations
in foreign exchange rates. We are exposed to foreign exchange rate variability primarily in relation to certain sale commitments,
expected purchase transactions and debt denominated in a foreign currency, as well as on our net investment from our foreign
operations which have functional currencies other than the Canadian dollar (in particular the U.S. dollar, euro and British pound). In
addition, these operations have exposure to foreign exchange rates primarily through cash and cash equivalents and other working
capital accounts denominated in currencies other than their functional currencies.
We also mitigate foreign currency risks by having our foreign operations transact in their functional currency for material procurement,
sale contracts and financing activities.
CAE Annual Report 2016 | 33
Management’s Discussion and Analysis
We use forward foreign currency contracts and foreign currency swap agreements to manage our exposure from transactions in
foreign currencies. 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 until their maturity, consistent with the objective to fix currency rates on the hedged item.
Foreign currency risk sensitivity analysis
Foreign currency risk arises on financial instruments that are denominated in a foreign currency. Assuming a reasonably possible
strengthening of 5% in the U.S. dollar, euro and British pound currency against the Canadian dollar as at March 31, 2016, and
assuming all other variables remained constant, the pre-tax effects on net income would have been a negative net adjustment of
$0.7 million (2015 – positive net adjustment of $1.2 million) and a negative net adjustment of $13.1 million (2015 – negative net
adjustment of $25.4 million) on other comprehensive income (OCI). A reasonably possible weakening of 5% in the relevant foreign
currency against the Canadian dollar would have an opposite impact on pre-tax income and OCI.
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 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 have a floating rate debt through our revolving unsecured credit facility and other asset-specific floating rate debts. 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 manage interest rate exposures are mainly 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 90% fixed-rate and 10% floating-rate at the end of this year (2015 – 88% fixed rate and
12% floating rate).
Our interest rate hedging programs are typically unaffected by changes in market conditions, as related derivative financial
instruments are generally held until their maturity to establish asset and liability management matching, consistent with the objective
to reduce risks arising from interest rate movements.
Interest rate risk sensitivity analysis
In fiscal 2016, a 1% increase in interest rates would decrease our net income by $1.3 million (2015 – $1.3 million) and decrease our
OCI by $0.5 million (2015 – $0.4 million) assuming all other variables remained constant. A 1% decrease in interest rates would have
an opposite impact on net income and OCI.
Hedge of share-based payments cost
We have entered into equity swap agreements with three major Canadian financial institutions to reduce our income exposure to
fluctuations in our share price relating to the Deferred Share Unit (DSU), Long-Term Incentive Deferred Share Unit (LTI-DSU) and
Long-Term Incentive Time Based Restricted Share Unit (LTI-TB RSU) programs. Pursuant to the agreement, we receive the
economic benefit of dividends and share price appreciation while providing payments to the financial institutions for the institution’s
cost of funds and any share price depreciation. The net effect of the equity swaps partly offset movements in our share price
impacting the cost of the DSU, LTI-DSU and LTI-TB RSU programs and is reset quarterly. As at March 31, 2016, the equity swap
agreements covered 1,950,000 of our common shares (2015 – 1,900,000).
Hedge of net investments in foreign operations
As at March 31, 2016, we have designated a portion of our senior notes totalling US$417.8 million (2015 – US$417.8 million) and a
portion of the obligations under finance lease totalling US$12.1 million (2015 – US$14.2 million) as a hedge of our net investments in
U.S. entities. Gains or losses on the translation of the designated portion of our senior notes are recognized in OCI to offset any
foreign exchange gains or losses on translation of the financial statements of those U.S. entities.
We have determined that there is no concentration of risks arising from financial instruments and estimated that the information
disclosed above is representative of our exposure to risk during the period.
Refer to the consolidated statement 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 OCI and to
Note 29 of our consolidated financial statements for the classification of financial instruments.
34 | CAE Annual Report 2016
Management’s Discussion and Analysis
8. BUSINESS COMBINATIONS
On September 30, 2015, we acquired the assets of Bombardier’s Military Aviation Training business (BMAT), a defence training
system integrator for a total purchase consideration of $19.8 million, excluding purchase price adjustments. This acquisition
strengthens our core capabilities as a virtual and live training system integrator and further expands our offering into support for live
flying training of future military pilots. Total acquisition costs relating to BMAT amount to $1.3 million and were included in selling,
general and administrative expenses in the consolidated income statement.
The preliminary determination of the fair value of the identifiable assets acquired and liabilities assumed is included in the table below.
The fair value of the acquired identifiable intangible assets and goodwill of $68.8 million is provisional until the valuation for those
assets are finalized. The preliminary goodwill of $49.2 million arising from the acquisition of BMAT is attributable to the advantages
gained, which include:
− Expansion of our offering into support for live flying training;
− Know-how as a training system integrator;
− Experienced workforce with subject matter expertise.
The fair value and the gross contractual amount of the acquired accounts receivable were $2.6 million.
The revenue and segment operating income included in the consolidated income statement from BMAT since the acquisition date is
$52.0 million and $6.1 million respectively. Had BMAT been consolidated from April 1, 2015, the consolidated income statement
would have shown revenue and segment operating income of $93.5 million and $8.8 million respectively. These pro-forma amounts
are estimated based on the operations of the acquired business prior to the business combination by the Company. The amounts are
provided as supplemental information and are not indicative of our future performance.
Net assets acquired and liabilities assumed arising from the acquisition are as follows:
Current assets (1)
Current liabilities
Non-current assets
Intangible assets (2)
Deferred tax
Non-current liabilities
Fair value of net liabilities assumed, excluding cash and cash equivalents
Cash and cash equivalents acquired
Fair value of net assets acquired
Purchase price adjustment receivable
Total purchase consideration, settled in cash
Additional consideration related to previous fiscal years' acquisitions
Total cash consideration
(1) Excluding cash on hand.
(2) This goodwill is partially deductible for tax purposes.
The net assets, including goodwill, of BMAT are included in the Defence and Security segment.
You will find more details in Note 4 of our consolidated financial statements.
Total
$
20.0
(63.1)
5.7
68.8
17.9
(69.3)
$ (20.0)
37.4
17.4
5.4
22.8
0.7
23.5
$
$
$
CAE Annual Report 2016 | 35
Management’s Discussion and Analysis
9. EVENT AFTER THE REPORTING PERIOD
Lockheed Martin Commercial Flight Training
On May 2, 2016, we completed the acquisition of Lockheed Martin Commercial Flight Training (LMCFT), a provider of aviation
simulation training equipment and services for a purchase consideration of $25.7 million. The transaction excludes debt and includes
cash remaining in the company at closing. With this acquisition, we will expand our customer installed base of commercial flight
simulators and obtain a number of useful assets including full-flight simulators, simulator parts and equipment, facilities, technology
and a talented workforce. Management considers it impracticable to disclose information about the fair value of the net assets
acquired since the findings of the valuation exercise are not yet available.
10. BUSINESS RISK AND UNCERTAINTY
We operate in several industry segments that have various risks and uncertainties. Management and the Board discuss quarterly the
principal risks facing our business, as well as annually during the 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.
In order to mitigate the risks that may impact our future performance, management has established an enterprise risk management
process to identify, assess and prioritize these risks. Management develops and deploys risk mitigation strategies that align with our
strategic objectives and business processes. Management reviews the evolution of the principal risks facing our business on a
quarterly basis and the Board oversees the risk management process and validates it through procedures performed by our internal
auditors when it deems necessary. One should carefully consider the following risk factors, in addition to the other information
contained herein, before deciding to purchase CAE common stock.
10.1 Risks relating to the industry
Competition
We sell our simulation equipment and training services in highly competitive markets. New participants have emerged in recent years
and the competitive environment has intensified as aerospace and defence companies position themselves to try to take greater
market share by consolidating existing commercial aircraft simulation companies and by developing their own internal capabilities.
Predominantly defence companies such as Textron and L-3 Communications have acquired commercial aircraft simulator competitors
and, in the case of L-3 Communications, a competing FTO, as a means to diversify their overall exposure to defence markets and
seek growth in the civil aviation market. Lockheed Martin is another example of a defence company that entered the commercial
aircraft simulation market; it has subsequently sold its commercial flight training business to CAE. Most of our competitors in the
simulation and training markets are also involved in other major segments of the aerospace and defence industry beyond simulation
and training. As such, some of them are larger than we are, and may have greater financial, technical, marketing, manufacturing and
distribution resources. In addition, our main competitors are either aircraft manufacturers, or have well-established relationships with
aircraft manufacturers, airlines and governments, which may give them an advantage when competing for projects with these
organizations. In particular, we face competition from Boeing, which has pricing and other competitive advantages over us.
OEMs like Airbus and Boeing have certain advantages in competing with independent training service providers. An OEM controls the
pricing for the data, parts and equipment packages that are often required to manufacture a simulator specific to that OEM’s aircraft,
which in turn is a critical capital cost for any simulation-based training service provider. OEMs may be in a position to demand licence
fees or royalties to permit the manufacturing of simulators based on the OEM’s aircraft, and/or to permit any training on such
simulators. CAE also has some advantages, including being a simulator manufacturer, having the ability to replicate certain aircraft
without data, parts and equipment packages from an OEM and owning a diversified training network that includes joint ventures with
large airline operators which are aircraft customers for OEMs. In addition, we work with some OEMs on business opportunities related
to equipment and training services.
Both Boeing and Airbus have introduced aircraft data simulation packages to supply to all simulator manufacturers for the new
B737 MAX and A350 aircraft, which could potentially reduce CAE’s content related to the simulation of aircraft systems.
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. A significant portion of our revenue is dependent on
obtaining new orders and continuously replenishing our backlog. 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. The presence of new market participants as noted above, and
their efforts to gain market share, creates heightened competition in bidding which may negatively impact pricing and margins.
Economic growth underlies the demand for all of our products and services. Periods of economic recession, constrained credit,
government austerity and/or international commercial sanctions generally lead to heightened competition for each available order.
This in turn typically leads to a reduction in profit on sales won during such a period. Should such conditions occur, we could
experience price and margin erosion.
36 | CAE Annual Report 2016
Management’s Discussion and Analysis
Level and timing of defence spending
A significant portion of our revenues is generated by sales to defence and security customers around the world. We provide products
and services for numerous programs to U.S., Canadian, European, Australian, and other foreign governments as both prime and/or
subcontractors. As defence spending comes from public funds and is always competing with other public interests for funding, there is
a risk associated with the level of spending a particular country may devote to defence as well as the timing of defence contract
awards. Significant cuts to defence spending by mature markets such as the U.S., Canada, Germany, U.K. and Australia could have a
material negative impact on our future revenue, earnings and operations. In order to mitigate the level and timing of defence
procurements, we have established a diversified global business and a strong position on enduring platforms.
Government-funded defence and security 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.
Civil aviation industry
A significant portion of our revenue comes from supplying equipment and training services to the commercial and business airline
industry.
A decrease in jet fuel prices may have a positive impact on airlines’ profitability; however, the long-term ramifications on the
commercial aviation industry remain uncertain. We will continue to monitor the impact on the industry and our operations. Helicopter
aviation training, which represents less than 5% of our Civil Aviation Training Solutions revenue, is driven mainly by the level of
offshore operator activity servicing customers in the oil and gas sector. A protracted downturn in petroleum prices could negatively
impact offshore activity which may, in turn, affect our operating results.
If jet fuel prices attain high 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
deliveries of new aircraft to be delayed or cancelled. Airlines may slow capacity growth or cut capacity should sustained high fuel
costs make the availability of such capacity not economically viable. Such a reaction would negatively affect the demand for our
training equipment and services.
Constraints in the credit market may reduce 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 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 certain 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
by aviation authorities such as the U.S. FAA, could mean that we have to make unplanned modifications to our products and services,
causing delays or resulting in cancelled sales. We cannot predict the impact that changing laws or regulations might have on our
operations. Any changes could present opportunities or, to the contrary, have a materially negative effect on our results of operations
or financial condition.
Sales or licences of certain CAE products require regulatory approvals and compliance
The sale or licence of many of our products is subject to regulatory controls. These can prevent us from selling to certain countries, or
to certain entities or people in or from a country, and require us to obtain from one or more governments an export licence or other
approvals to sell certain technology such as defence and security simulators or other training equipment, including data or parts.
These regulations change often and we cannot be certain that we will be permitted to sell or licence certain products to customers,
which could cause a potential loss of revenue for us.
If we fail to comply with government laws and regulations related to export controls and national security requirements, we could be
fined and/or 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.
CAE Annual Report 2016 | 37
Management’s Discussion and Analysis
10.2 Risks relating to the Company
Product evolution
The civil aviation and defence and security markets in which we operate 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 attract new customers. This could reduce our revenue. The evolution of the technology could also have a negative 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 governments, including the Government of Quebec through
Investissement Québec (IQ) and the Government of Canada through its Strategic Aerospace and Defence Initiative (SADI). The level
of government financial support reflects government policy, fiscal policy and other political and economic factors. We may not, in the
future, be able to replace these existing programs with other government funding and/or risk-sharing programs of comparable benefit
to us, which could have a negative impact on our financial performance and research and development activities.
We receive investment tax credits from federal and provincial governments in Canada and from the federal government in the U.S. on
eligible R&D activities that we undertake. The credits we receive are based on legislation currently enacted. The investment tax
credits available to us can be reduced by changes to the respective governments’ legislation which could have a negative impact on
our financial performance and research and development activities.
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 OEM leverage
We secure data, parts, equipment and many other inputs from a wide variety of OEMs, sub-contractors and other sources. We are not
always able to find two or more sources for inputs that we require 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. This could lead to onerous licencing terms, high licence fees or even
refusal to licence to us the data, parts and equipment packages that are often required to manufacture and operate a simulator based
on an OEM’s aircraft.
Where CAE uses an internally produced simulation model for an aircraft, or develops courseware without using OEM-sourced and
licenced data, parts and equipment, the OEM in question may attempt retaliatory or obstructive actions against CAE to block the
provision of training services or manufacturing, sale and/or deployment for training of a simulator for such aircraft, claiming breach of
its intellectual property rights or other legal basis. Such actions may cause CAE to incur material legal fees and/or may delay or
prevent completion of the simulator development project or provision of training services, which may negatively impact our financial
results.
Similarly, where CAE uses open source software, freeware or commercial off-the-shelf software from a third party, the third party in
question or other persons may attempt retaliatory or obstructive actions against CAE to block the use of such software or freeware,
claiming breach of licence rights or other legal basis. Such actions may cause CAE to incur material legal fees and/or may delay or
prevent completion of the simulator development project or provision of training services, which may negatively impact our financial
results.
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 one 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 software,
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 our intellectual property
We rely, in part, on trade secrets, copyrights and contractual restrictions, such as confidentiality agreements, patents and licences to
establish and protect our proprietary rights. These may not be effective in preventing a misuse of our technology or in deterring others
from developing similar technologies. We may be limited in our ability to acquire or enforce our intellectual property rights in some
countries. 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.
38 | CAE Annual Report 2016
Management’s Discussion and Analysis
Third-party 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 licences on terms that are
commercially acceptable, if at all.
The markets in which we operate are subject to extensive patenting by third parties. Our ability to modify existing products or to
develop new products may be constrained by third-party patents such that we incur incremental costs to licence the use of the patent
or design around the claims made therein.
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. We also have succession plans in place to help identify and
develop an internal pipeline of leadership talent pertaining to both the technical and general management domains.
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.
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 that 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, though to date our
insurance coverage has been adequate to meet any claim.
Integration of acquired businesses
The success of our acquisitions depends on our ability to crystallize synergies both in terms of successfully marketing our broadened
product offering as well as efficiently consolidating the operations of the acquired businesses into our existing operations.
Our ability to penetrate new markets
We are leveraging our knowledge, experience and best practices in simulation-based aviation training and optimization to penetrate
the simulation-based training market in healthcare.
As we operate in this market, unforeseen difficulties and expenditures could arise, which may have an adverse effect on our
operations, profitability and reputation. Penetrating a new market is inherently more difficult than managing within our already
established markets.
Length of sales cycle
The sales cycle for our products and services can be long and unpredictable, ranging from 6 to 18 months for civil aviation
applications and from 6 to 24 months or longer for defence and security applications. During the time when customers are evaluating
our products and services, we may incur expenses and management time. Making these expenditures in a period 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.
Government procurement policies often allow unsuccessful bidders to protest a contract award. The protest of a contract awarded to
CAE may result in the cancellation of our award, extend the period before which we can start recognizing revenue or cause us to incur
material legal fees.
Returns to shareholders
Payment of dividends, the repurchase of shares under our NCIB and other cash or capital returns to our shareholders depend on
various factors, including our operating cash flows, sources of capital, the satisfaction of solvency tests and other financial
requirements, our operations and financial results, as well as CAE’s dividend and other policies which may be reviewed from time to
time.
CAE Annual Report 2016 | 39
Management’s Discussion and Analysis
Information technology systems
We depend on information technology infrastructure and systems, hosted internally or outsourced, to process, transmit and store
electronic data and financial information, to manage business operations and to comply with regulatory, legal, national security,
contractual and tax requirements. These information technology networks and systems are essential to our ability to perform
day-to-day operations and to the effective operation of our business. In addition, our business requires the appropriate and secure
utilization of sensitive and confidential information belonging to third parties such as aircraft OEMs and national defence forces. If the
systems do not operate as expected or when expected, this may have a negative effect on our operations, reporting capabilities,
profitability and reputation. A series of governance processes are in place to mitigate this risk.
We may, from time to time, replace or update our information technology networks and systems. The implementation of, and transition
to, new networks and systems can temporarily disrupt our business activities and result in productivity disruptions.
Reliance on third-party providers for information technology systems and infrastructure management
We have outsourced certain information technology systems maintenance and support services and infrastructure management
functions, to third-party service providers. If these service providers are disrupted or do not perform effectively, it may have a material
adverse impact on our operations and/or we may not be able to achieve the expected cost savings and may have to incur additional
costs to correct errors made by such service providers. Depending on the function involved, such errors may also lead to business
disruption, processing inefficiencies and/or security vulnerability.
Cybersecurity
We may experience cybersecurity threats to our information technology infrastructure and systems, and unauthorized attempts to gain
access to our proprietary or sensitive information, as may our customers, suppliers, subcontractors and joint venture partners. We
may experience similar security threats at customer sites that we operate or manage. We must rely on our own safeguards as well as
the safeguards put in place by our partners to mitigate the threats. Our partners have varying levels of cybersecurity expertise and
safeguards, and their relationships with government contractors, such as CAE, may increase the likelihood that they are targeted by
the same cyber threats we face.
An information technology system failure or non-availability, cyber-attack or breach of systems security could disrupt our operations,
cause the loss of, corruption of, or unauthorized access to business information and data, compromise confidential or classified
information or expose us to regulatory investigation, litigation or contractual penalties. Our customers or governmental authorities may
question the adequacy of our threat mitigation and detection processes and procedures and this could have a negative impact on
existing business or future opportunities. Furthermore, given the highly evolving nature of cyber or other security threats or disruptions
and their increased frequency, the impact of any future incident cannot be easily predicted or mitigated, and the costs related to such
threats or disruptions may not be fully insured or indemnified by other means. We have implemented security controls, policy
enforcement mechanisms, management oversight and monitoring systems in order to prevent, detect and address potential threats.
Any prior cyber-attacks directed at us have not had a material impact on our financial results and we believe our threat detection and
mitigation processes and procedures are adequate.
10.3 Risks relating to the market
Foreign exchange
Our operations are global with approximately 90% of our revenue generated from worldwide exports and international activities
generally denominated in foreign currencies, mainly the U.S. dollar, the Euro and the British pound. Our revenue is generated
approximately one-third in each of the U.S, Europe and the rest of the world.
A significant portion of the revenue generated in Canada is in foreign currencies, while a large portion of our operating costs is in
Canadian dollars. When the Canadian dollar increases in value, it negatively affects our foreign currency-denominated revenue and
hence our financial results. We continue to hold a portfolio of currency hedging positions intended to mitigate the risk to a portion of
future revenues presented by the volatility of the Canadian dollar versus foreign currencies. 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. It is not possible to
completely offset the effects of changing foreign currency values, which leaves some residual exposure that may impact our financial
results. This residual exposure may be higher when currencies experience significant short term volatility. When the Canadian dollar
decreases in value, it negatively affects our foreign currency-denominated costs. In order to minimize the impact foreign exchange
market fluctuations may have, we also hedge some of the foreign currency costs incurred in our manufacturing process.
Business conducted through our foreign operations are substantially based in local currencies. A natural hedge exists by virtue of
revenues and operating expenses being in like currencies. However, changes in the value of foreign currencies relative to the
Canadian dollar creates unhedged currency translation exposure since results are consolidated in Canadian dollars for financial
reporting purposes. Appreciation of foreign currencies against the Canadian dollar would have a positive translation impact and a
devaluation of foreign currencies against the Canadian dollar would have the opposite effect.
Availability of capital
We have various debt facilities with maturities ranging between April 2016 and October 2036. For instance, the current maturity date
of our revolving unsecured term credit facilities is October 2018. We cannot determine at this time whether these facilities will be
refinanced at the same cost, for the same durations and on similar terms as were previously available.
40 | CAE Annual Report 2016
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, amongst others, assumptions about discount rates, future salary
increases and mortality rates. The actuarial funding valuation reports determine the amount of cash contributions that we are required
to make 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 contributions to fund the deficit. 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
funds for other corporate purposes.
Doing business in foreign countries
We have operations in over 35 countries including our joint venture operations and sell our products and services to customers
around the world. Sales to customers outside Canada made up approximately 90% of revenue in fiscal 2016. We expect sales outside
Canada 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, including geopolitical instability.
These are the main risks we are facing:
− Change in laws and regulations;
− Tariffs, embargoes, controls, sanctions and other restrictions;
− General changes in economic and geopolitical conditions;
− Complexity and corruption risks of using foreign representatives and consultants.
Sales to foreign customers are subject to Canadian and foreign laws and regulations, including, without limitation, the Corruption of
Foreign Public Officials Act (Canada), the Foreign Corrupt Practices Act (United States) and other anti-corruption laws. While we have
stringent policies in place to comply with such laws, failure by CAE, our employees, foreign representatives and consultants or others
working on our behalf to comply with it could result in administrative, civil, or criminal liabilities, including suspension, debarment from
bidding for or performing government contracts, which could have a material adverse effect on us. We frequently team with
international subcontractors and suppliers who are also exposed to similar risks.
Political instability
Political instability in certain regions of the world may be prolonged and unpredictable. A prolongation of political instability could lead
to delays or cancellation of orders, deliveries or projects in which we have invested significant resources, particularly when the
customers are state-owned or state-controlled entities. The imposition of economic sanctions on persons and companies conducting
business in the Russian Federation and the depreciation of the Russian Federation currency have not significantly impacted our
operations to date but should this situation continue for a prolonged period there may be a negative impact on our Civil Aviation
Training Solutions revenue. This and other geo-political risks will change over time and CAE must respect any applicable sanctions
and controls applied in the countries in which we carry on business. It is possible that in the markets we serve, unanticipated political
instability could impact our operating results and financial position.
Income tax laws
A substantial portion of our business is conducted in foreign countries and is thereby subject to numerous countries’ tax laws and
fiscal policies. A change in applicable tax laws, treaties or regulations or their interpretation, including any new action to address Base
Erosion and Profit Shifting (BEPS) released by the Organization for Economic Co-Operation and Development (OECD), could result
in a higher effective tax rate on our earnings which could significantly impact our financial results.
11. RELATED PARTY TRANSACTIONS
A list of principal investments which, in aggregate, significantly impact our results or assets is presented in Note 32 of our
consolidated financial statements.
The following table presents our outstanding balances with joint ventures:
(amounts in millions)
Accounts receivable
Contracts in progress: assets
Other assets
Accounts payable and accrued liabilities
Contracts in progress: liabilities
$
2016
42.6
34.5
21.9
20.1
4.3
$
2015
28.7
28.1
29.2
13.9
3.9
Other assets include a finance lease receivable of $14.8 million (2015 – $17.0 million) maturing in October 2022 and carrying an
interest rate of 5.14% per annum, loans receivable of $0.6 million (2015 – $5.7 million) maturing in December 2017 and August 2018
and carrying respectively interest rates of 11% and 5% per annum, and a long-term interest-free receivable of $6.5 million
(2015 – $6.5 million) with no repayment term. As at March 31, 2016 and 2015 there are no provisions held against the receivables
from related parties.
CAE Annual Report 2016 | 41
Management’s Discussion and Analysis
The following table presents our transactions with joint ventures:
(amounts in millions)
Revenue
Purchases
Other income
$
2016
95.3
2.9
2.3
2015
$ 120.6
10.9
2.9
In addition, during fiscal 2016, transactions amounting to $2.2 million (2015 – $2.4 million) were made, at normal market prices, with
organizations of which some of our directors are officers.
Compensation of key management personnel
Key management personnel have the ability and responsibility to make major operational, financial and strategic decisions for the
Company and include certain executive officers. The compensation of key management for employee services is shown below:
(amounts in millions)
Salaries and other short-term employee benefits
Post-employment benefits – defined benefit plans(1)
Share-based payments
(1)Includes net interest on employee benefit obligations.
12. CHANGES IN ACCOUNTING POLICIES
$
$
2016
4.8
1.0
8.6
14.4
2015
4.6
1.5
4.6
10.7
$
$
12.1 New and amended standards adopted
The amendments to IFRS effective for the fiscal year 2016 have no material impact on our consolidated financial statements.
12.2 New and amended standards not yet adopted
IFRS 9 - Financial Instruments
In July 2014, the IASB released the final version of IFRS 9 - Financial Instruments replacing IAS 39 - Financial Instruments:
Recognition and Measurement. IFRS 9 introduces a revised approach for the classification of financial assets based on the
characteristics of the contractual cash flows of the financial assets and the business model in which financial assets are held. IFRS 9
also introduces a new hedge accounting model that is more closely aligned with risk-management activities. The new standard
supersedes all previous versions of IFRS 9 and completes the IASB’s project to replace IAS 39. IFRS 9 is effective for annual periods
beginning on April 1, 2018 for CAE, with earlier application permitted. We are currently evaluating the impact of the new standard on
our consolidated financial statements.
IFRS 15 - Revenue from contracts with customers
In May 2014, the IASB released IFRS 15 - Revenue from Contracts with Customers. The core principle of the new standard is to
recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the
company expects to be entitled in exchange for those goods or services. The new standard also intends to enhance disclosures on
revenue. IFRS 15 supersedes IAS 11 - Construction Contracts and IAS 18 - Revenue and related interpretations. IFRS 15 is effective
for annual periods beginning on April 1, 2018 for CAE, with earlier application permitted. We are currently evaluating the impact of the
new standard on our consolidated financial statements.
IFRS 16 - Leases
In January 2016, the IASB released IFRS 16, Leases. The new standard eliminates the classification of leases as either operating or
finance leases and introduces a single accounting model for the lessee under which a lease liability and a right-of-use asset is
recognized for all leases with a term of more than 12 months. IFRS 16 also substantially carries forward the lessor accounting
requirements; accordingly, a lessor continues to classify its leases as operating leases or finance leases. IFRS 16 supersedes
IAS 17 - Leases and related interpretations. IFRS 16 is effective for annual periods beginning on April 1, 2019 for CAE, with earlier
application permitted for companies that also apply IFRS 15. We are currently evaluating the impact of the new standard on our
consolidated financial statements.
42 | CAE Annual Report 2016
Management’s Discussion and Analysis
12.3 Use of judgements, estimates and assumptions
The preparation of the consolidated financial statements requires management to make judgements, estimates and assumptions that
affect the application of accounting policies, the reported amounts of assets and liabilities and disclosures at the date of the
consolidated financial statements, as well as the reported amounts of revenues and expenses for the period reported. It also requires
management to exercise its judgement in applying accounting policies. The areas involving a high degree of judgement or complexity,
or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed below. Actual results
could differ from those estimates. Changes will be reported in the period in which they are identified.
As at April 1, 2015, we refined the method to estimate the cost of the Canadian defined benefit pension plans and the present value of
the employee benefit obligations. In prior years, the net pension cost was estimated utilizing a single weighted average discount rate
derived from the yield curve used to measure the defined benefit obligations at the beginning of the year. Under the refined method,
individual discount rates are derived from the same yield curve, which reflect the different timing of benefit payments. This change in
accounting estimate is accounted for prospectively. This change does not significantly affect the measurement of the employee
benefit obligations and the total net pension plan cost compared to the previous method.
Business combinations
Business combinations are accounted for in accordance with the acquisition method. The consideration transferred and the acquiree’s
identifiable assets, liabilities and contingent liabilities are measured at their fair value. Depending on the complexity of determining
these valuations, we either consult with independent experts or develop the fair value internally by using appropriate valuation
techniques which are generally based on a forecast of the total expected future net discounted cash flows. These evaluations are
linked closely to the assumptions made by management regarding the future performance of the related assets and the discount rate.
Contingent consideration is measured at fair value using a discounted cash flow model.
Development costs
Development costs are recognized as intangible assets and are amortized over their useful lives when they meet the criteria for
capitalization. Forecasted revenue and profitability for the relevant projects are used to assess compliance with the capitalization
criteria and to assess the recoverable amount of the assets.
Impairment of non-financial assets
Our impairment test for goodwill is based on internal estimates (level 3) of fair value less costs of disposal calculations and uses
valuation models such as the discounted cash flows model. Key assumptions which management has based its determination of fair
value less costs of disposal include estimated growth rates, post-tax discount rates and tax rates. These estimates, including the
methodology used, can have a material impact on the respective values and ultimately the amount of any goodwill impairment.
Likewise, whenever property, plant and equipment and intangible assets are tested for impairment, the determination of the assets’
recoverable amount involves the use of estimates by management and can have a material impact on the respective values and
ultimately the amount of any impairment.
See Note 21 of our consolidated financial statements for further details regarding assumptions used.
Revenue recognition
The percentage-of-completion method requires us to estimate the work performed to date as a proportion of the total work to be
performed. Management conducts monthly reviews of its estimated costs to complete, percentage-of-completion estimates and
revenue and margins recognized, on a contract-by-contract basis. The impact of any revisions in cost and revenue estimates is
reflected in the period in which the need for a revision becomes known.
Defined benefit pension plans
The cost of defined benefit pension plans and the present value of the employee benefit obligations are determined using actuarial
valuations. Actuarial valuations involve, amongst others, making assumptions about discount rates, future salary increases and
mortality rates. All assumptions are reviewed at each reporting date. Any changes in these assumptions will impact the carrying
amount of the employee benefit obligations and the cost of the defined benefit pension plans. In determining the appropriate discount
rate, management considers the interest rates of high quality corporate bonds that are denominated in the currency in which the
benefits will be paid, and that have terms to maturity approximating the terms of the related pension liability. The mortality rate is
based on publicly available mortality tables for the specific country. Future salary increases and pension increases are based on
expected future inflation rates for the specific country.
Other key assumptions for pension obligations are based, in part, on current market conditions. See Note 15 of our consolidated
financial statements for further details regarding assumptions used.
CAE Annual Report 2016 | 43
Management’s Discussion and Analysis
Government assistance repayments
In determining the amount of repayable government assistance, assumptions and estimates are made in relation to discount rates,
expected revenues and the expected timing of revenues. Revenue projections take into account past experience and represent
management’s best estimate about the future. Revenues after a five-year period are extrapolated using estimated growth rates,
ranging from 5% to 15%, over the period of repayments. The estimated repayments are discounted using average rates ranging
from 7% to 9.5% based on terms of similar financial instruments. These estimates, along with the methodology used to derive the
estimates, can have a material impact on the respective values and ultimately any repayable obligation in relation to government
assistance. A 1% increase to the growth rates would increase the royalty obligation at March 31, 2016 by approximately $4.5 million
(2015 − $9.9 million).
Share-based payments
We measure the cost of cash and equity-settled transactions with employees by reference to the fair value of the related instruments
at the date at which they are granted. Estimating fair value for share-based payments requires determining the most appropriate
valuation model for a grant, which depends on the terms and conditions of the grant. This also requires making assumptions and
determining the most appropriate inputs to the valuation model including the expected life of the option, volatility and dividend yield.
Income taxes
We are subject to income tax laws in numerous jurisdictions. Judgement is required in determining the worldwide provision for income
taxes. The determination of tax liabilities and assets involves uncertainties in the interpretation of complex tax regulations. We provide
for potential tax liabilities based on the weighted average probability of the possible outcomes. Differences between actual results and
those estimates could have an effect on the income tax liabilities and deferred tax liabilities in the period in which such determinations
are made.
Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against the losses that can be
utilized. Significant management judgement is required to determine the amount of deferred tax assets that can be recognized, based
upon the likely timing and the level of future taxable profits together with future tax planning strategies. The recorded amount of total
deferred tax assets could be altered if estimates of projected future taxable income and benefits from available tax strategies are
lowered, or if changes in current tax regulations are enacted that impose restrictions on the timing or extent of our ability to utilize
future tax benefits.
Leases
The classification as either finance or operating lease is based on management’s judgement of the application of criteria provided in
IAS 17 – Leases and on the substance of the lease arrangement. Most of our arrangements accounted for as operating leases are in
relation to buildings and flight simulators. With regards to certain aircraft used in our live training operations, management has
concluded that the undiscounted lease rental payments in the amount of $265.1 million associated with the lease convention to these
aircraft should be accounted for as an off balance sheet arrangement as it is offset by a reciprocal arrangement with a third party and
is non-recourse to CAE.
13. 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.
13.1 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 and ensure that information is recorded, processed, summarized and reported within the time periods specified
under Canadian and U.S. securities laws.
Under the supervision of the President and CEO and the CFO, management evaluated the effectiveness of our disclosure controls
and procedures as of March 31, 2016. 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, 2016.
13.2 Internal control over financial reporting
Management is responsible for establishing and maintaining adequate internal controls over financial reporting. Internal control over
financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting, and the
preparation of consolidated financial statements for external purposes in accordance with IFRS. Management evaluated the design
and operation of our internal controls over financial reporting as of March 31, 2016, based on the framework and criteria established
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) on Internal Control – Integrated Framework
(2013 Framework), 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 2016 that have materially
affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
44 | CAE Annual Report 2016
Management’s Discussion and Analysis
14. 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.
15. 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.
CAE Annual Report 2016 | 45
Management’s Discussion and Analysis
16. SELECTED FINANCIAL INFORMATION
The following table provides selected quarterly financial information for the years 2014 through to 2016.
(amounts in millions, except per share amounts and exchange rates)
Fiscal 2016
Revenue
Net income
Equity holders of the Company
Continuing operations
Discontinued operations
$
$
$
$
Non-controlling interests
$
Basic and diluted EPS attributable to equity holders of the Company $
$
Continuing operations
$
Discontinued operations
Earnings per share before specific items
$
Average number of shares outstanding (basic)
Average number of shares outstanding (diluted)
Average exchange rate, U.S. dollar to Canadian dollar
Average exchange rate, Euro to Canadian dollar
Average exchange rate, British pound to Canadian dollar
Fiscal 2015
Revenue
Net income
Equity holders of the Company
Continuing operations
$
$
$
$
Discontinued operations
Non-controlling interests
$
Basic and diluted EPS attributable to equity holders of the Company $
$
Continuing operations
Discontinued operations
Average number of shares outstanding (basic)
Average number of shares outstanding (diluted)
Average exchange rate, U.S. dollar to Canadian dollar
Average exchange rate, Euro to Canadian dollar
Average exchange rate, British pound to Canadian dollar
Fiscal 2014
Revenue
Net income
Equity holders of the Company
Continuing operations
$
$
$
$
Discontinued operations
$
$
Non-controlling interests
Basic and diluted EPS attributable to equity holders of the Company $
$
Continuing operations
Discontinued operations
Average number of shares outstanding (basic)
Average number of shares outstanding (diluted)
Average exchange rate, U.S. dollar to Canadian dollar
Average exchange rate, Euro to Canadian dollar
Average exchange rate, British pound to Canadian dollar
$
Q1
Q2
Q3
Q4
Total
557.0
44.5
616.8
69.2
616.3
56.9
722.5
59.7
2,512.6
230.3
44.9
(0.5)
0.1
0.17
0.17
-
0.19
267.4
267.8
1.23
1.36
1.88
75.3
(6.5)
0.4
0.26
0.28
(0.02)
0.18
268.6
268.9
1.31
1.46
2.03
57.9
(0.2)
(0.8)
0.21
0.21
-
0.22
269.3
269.7
1.33
1.46
2.02
61.2
(2.4)
0.9
0.22
0.23
(0.01)
0.27
269.9
270.2
1.38
1.52
1.97
239.3
(9.6)
0.6
0.85
0.89
(0.04)
0.86
268.8
269.2
1.31
1.45
1.98
526.2
41.6
529.4
42.5
559.1
52.9
631.6
67.7
2,246.3
204.7
43.8
(2.0)
(0.2)
0.16
0.17
(0.01)
263.9
265.0
1.09
1.50
1.84
42.0
0.9
(0.4)
0.16
0.16
-
264.7
265.6
1.09
1.44
1.82
52.1
0.9
(0.1)
0.20
0.20
-
265.5
266.4
1.14
1.42
1.80
63.3
0.8
3.6
0.24
0.24
-
266.4
267.4
1.24
1.40
1.88
201.2
0.6
2.9
0.76
0.76
-
265.1
266.0
1.14
1.44
1.83
520.1
45.4
478.2
38.2
503.9
47.6
575.7
59.9
2,077.9
191.1
44.7
0.9
(0.2)
0.18
0.17
0.01
260.2
260.2
1.02
1.34
1.57
38.2
0.1
(0.1)
0.15
0.15
-
261.0
261.5
1.04
1.38
1.61
45.5
0.6
1.5
0.18
0.17
0.01
261.5
262.3
1.05
1.43
1.70
59.9
0.1
(0.1)
0.23
0.23
-
262.7
264.0
1.10
1.51
1.83
188.3
1.7
1.1
0.73
0.72
0.01
261.3
261.9
1.05
1.41
1.68
46 | CAE Annual Report 2016
Selected segment information
(amounts in millions, except operating margins)
Q4-2016
Q4-2015
FY2016
FY2015
FY2014
Management’s Discussion and Analysis
Civil Aviation Training Solutions
Revenue
$
393.0
$
367.6
Segment operating income
Operating margins (%)
Defence and Security
Revenue
Segment operating income
Operating margins (%)
Healthcare
Revenue
Segment operating income
Operating margins (%)
Total
Revenue
Segment operating income
Operating margins (%)
Restructuring
Operating profit
Selected annual information for the past five years
(amounts in millions, except per share amounts)
Revenue
Net income
Equity holders of the Company
Continuing operations
Discontinued operations
Non-controlling interests
Average exchange rate, U.S. dollar to Canadian dollar
Average exchange rate, Euro to Canadian dollar
Average exchange rate, British pound to Canadian dollar
Financial position:
Total assets
Total non-current financial liabilities(2)
Total net debt
Per share:
Basic and diluted EPS attributable to equity holders
of the Company
Continuing operations
Discontinued operations
Dividends declared
Total equity(3)
75.0
19.1
293.7
38.1
13.0
35.8
3.5
9.8
$
$
$
722.5
116.6
16.1
$
$
(16.8)
99.8
$
$
$
$
$
$ 1,429.1
237.4
16.6
$ 1,294.6
210.5
16.3
61.8
16.8
234.7
39.5
16.8
$
970.1
119.8
12.3
$
857.4
115.6
13.5
29.3
4.1
14.0
$
113.4
7.2
6.3
$
94.3
6.7
7.1
$ 1,176.7
179.8
15.3
822.0
107.8
13.1
79.2
1.7
2.1
$
$
631.6
105.4
16.7
-
105.4
$ 2,512.6
364.4
14.5
$
$
(28.9)
335.5
$ 2,246.3
332.8
$ 2,077.9
289.3
14.8
-
332.8
$
$
$
$
13.9
-
289.3
2016
$ 2,512.6
230.3
2015
2014
2013
$ 2,246.3
204.7
$ 2,077.9
$ 1,993.7
191.1
140.7
2012 (1)
$ 1,821.2
182.0
239.3
(9.6)
0.6
1.31
1.45
1.98
201.2
0.6
2.9
1.14
1.44
1.83
188.3
1.7
134.3
3.4
1.1
1.05
1.41
1.68
3.0
1.00
1.29
1.58
180.3
-
1.7
0.99
1.37
1.58
$ 4,996.7
1,318.6
787.3
$ 4,656.9
1,427.3
949.6
$ 4,236.7
1,340.2
$ 3,691.3
1,209.3
856.2
813.4
$ 3,183.7
869.0
534.3
$
$
$
0.89
(0.04)
0.295
7.22
0.76
-
0.27
6.36
$
0.72
0.01
0.22
5.76
$
0.52
0.01
0.19
4.51
0.70
-
0.16
4.14
(1) Figures have not been restated to reflect the adoption of IFRS 11 and IAS 19 which was effective fiscal 2014 and the classification of our
mining business as discontinued operations in fiscal 2015.
(2) Includes long-term debt, long-term derivative liabilities and other long-term liabilities meeting the definition of a financial liability.
(3) Comparative periods have been restated to reflect the retroactive deferred tax revision. See Note 1 of our consolidated financial statements
for more details.
CAE Annual Report 2016 | 47
CAE INC.
CONSOLIDATED FINANCIAL STATEMENTS
Management’s Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements
Consolidated Statement of Financial Position
Consolidated Income Statement
Consolidated Statement of Comprehensive Income
Consolidated Statement of Changes in Equity
Consolidated Statement of Cash Flows
Notes to the Consolidated Financial Statements
Note 1 – Nature of Operations, Summary of Significant Accounting Policies and
Revision to Prior Period
Note 2 – Changes in Accounting Policies
Note 3 – Net Assets Held for Sale and Discontinued Operations
Note 4 – Business Combinations
Note 5 – Accounts Receivable
Note 6 – Inventories
Note 7 – Property, Plant and Equipment
Note 8 – Intangible Assets
Note 9 – Other Assets
Note 10 – Accounts Payable and Accrued Liabilities
Note 11 – Contracts in Progress
Note 12 – Provisions
Note 13 – Debt Facilities
Note 14 – Government Assistance
Note 15 – Employee Benefit Obligations
Note 16 – Deferred Gains and Other Non-Current Liabilities
Note 17 – Income Taxes
Note 18 – Share Capital, Earnings per Share and Dividends
Note 19 – Accumulated Other Comprehensive Income
Note 20 – Employee Compensation
Note 21 – Impairment of Non-Financial Assets
Note 22 – Other Gains – Net
Note 23 – Finance Expense – Net
Note 24 – Share-Based Payments
Note 25 – Supplementary Cash Flows Information
Note 26 – Contingencies
Note 27 – Commitments
Note 28 – Capital Risk Management
Note 29 – Fair Value of Financial Instruments
Note 30 – Financial Risk Management
Note 31 – Operating Segments and Geographic Information
Note 32 – Related Party Relationships
Note 33 – Related Party Transactions
Note 34 – Event After the Reporting Period
48 | CAE Annual Report 2016
49
50
51
52
53
54
55
56
69
69
70
71
71
72
73
74
74
75
75
76
78
78
82
83
85
86
86
87
87
88
88
92
92
92
93
93
96
101
103
105
106
Consolidated Financial Statements
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 provide reasonable
assurance regarding the reliability of financial reporting and the preparation of the Company’s consolidated financial statements for
external reporting purposes in accordance with IFRS, as issued by the International Accounting Standards Board (IASB).
As of March 31, 2016, management conducted an assessment of the effectiveness of the Company’s internal control over the
financial reporting based on the framework and criteria established by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) on Internal Control – Integrated Framework (2013 Framework). Based on this assessment, management
concluded that the Company’s internal control over financial reporting as of March 31, 2016 was effective.
M. Parent
President and Chief Executive Officer
S. Lefebvre
Vice-president, Finance and Chief Financial Officer
Montreal (Canada)
May 19, 2016
CAE Annual Report 2016 | 49
Report of Independent Registered Public Accounting Firm
To the Shareholders of CAE Inc.
We have audited the accompanying consolidated statement of financial position of CAE Inc. and its subsidiaries as of March 31, 2016
and March 31, 2015 and the related consolidated income statement, statement of comprehensive income, statement of changes in
equity, and statement of cash flows for the years then ended. We also have audited CAE Inc. and its subsidiaries’ internal control over
financial reporting as of March 31, 2016 , based on criteria established in Internal Control - Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management is responsible for these
consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the
company’s internal control over financial reporting based on our integrated audits.
We conducted our audits 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 the consolidated financial
statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all
material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall consolidated financial statement presentation. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.
Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
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 assets 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 changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
CAE Inc. and its subsidiaries as of March 31, 2016 and March 31, 2015 and the results of their operations and their cash flows for the
years then ended in conformity with International Financial Reporting Standards as issued by the International Accounting Standards
Board. Also, in our opinion, CAE Inc. and its subsidiaries maintained, in all material respects, effective internal control over financial
reporting as of March 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
1
Montreal, Quebec
May 19, 2016
1 CPA auditor, CA, public accountancy permit No. A123498
50 | CAE Annual Report 2016
Consolidated Statement of Financial Position
Consolidated Financial Statements
Notes
March 31
2016
March 31
2015
As at March 31
(amounts in millions of Canadian dollars)
Assets
Cash and cash equivalents
Accounts receivable
Contracts in progress: assets
Inventories
Prepayments
Income taxes recoverable
Derivative financial assets
Assets held for sale
Total current assets
Property, plant and equipment
Intangible assets
Investment in equity accounted investees
Deferred tax assets
Derivative financial assets
Other assets
Total assets
Liabilities and equity
Accounts payable and accrued liabilities
Provisions
Income taxes payable
Contracts in progress: liabilities
Current portion of long-term debt
Derivative financial liabilities
Liabilities held for sale
Total current liabilities
Provisions
Long-term debt
Royalty obligations
Employee benefit obligations
Deferred gains and other non-current liabilities
Deferred tax liabilities
Derivative financial liabilities
Total liabilities
Equity
Share capital
Contributed surplus
Accumulated other comprehensive income
Retained earnings
Equity attributable to equity holders of the Company
Non-controlling interests
Total equity
Total liabilities and equity
5
11
6
29
3
7
8
32
17
29
9
10
12
11
13
29
3
12
13
15
16
17
29
18
19
The accompanying notes form an integral part of these Consolidated Financial Statements.
$
485.6
500.0
339.1
278.3
86.3
34.5
24.2
1.6
$ 1,749.6
1,473.1
929.2
345.1
46.8
19.8
433.1
$ 4,996.7
$
832.8
30.0
11.3
174.7
119.3
24.7
0.1
$ 1,192.9
10.2
1,153.6
135.3
168.0
172.7
213.1
10.6
$
330.2
468.0
309.8
237.3
81.8
43.9
30.3
61.2
$ 1,562.5
1,461.2
844.7
318.0
33.2
21.1
416.2
$ 4,656.9
$
732.7
17.5
10.6
154.6
55.5
54.0
14.2
$ 1,039.1
4.6
1,224.3
158.4
185.7
165.1
176.1
17.2
$ 3,056.4
$ 2,970.5
$
601.7
18.3
220.7
1,048.0
$ 1,888.7
51.6
$
559.0
19.1
177.3
879.8
$ 1,635.2
51.2
$ 1,940.3
$ 1,686.4
$ 4,996.7
$ 4,656.9
CAE Annual Report 2016 | 51
Consolidated Financial Statements
Consolidated Income Statement
Years ended March 31
(amounts in millions of Canadian dollars, except per share amounts)
Continuing operations
Revenue
Cost of sales
Notes
31
Gross profit
Research and development expenses
Selling, general and administrative expenses
Other gains – net
After tax share in profit of equity accounted investees
Restructuring costs
Operating profit
Finance income
Finance expense
Finance expense – net
Earnings before income taxes
Income tax expense
Earnings from continuing operations
Discontinued operations
(Loss) earnings from discontinued operations
Net income
Attributable to:
Equity holders of the Company
Non-controlling interests
Earnings (loss) per share from continuing and discontinued
operations attributable to equity holders of the Company
Basic and diluted – continuing operations
Basic and diluted – discontinued operations
22
31
12
23
23
17
3
18
18
The accompanying notes form an integral part of these Consolidated Financial Statements.
2016
2015
$ 2,512.6
1,816.7
$ 2,246.3
1,642.6
$
695.9
87.6
311.5
(24.2)
(43.4)
28.9
$
603.7
64.1
264.6
(20.3)
(37.5)
-
$
335.5
$
332.8
(9.5)
84.7
75.2
260.3
20.4
$
$
(9.8)
80.7
70.9
261.9
57.8
$
$
$
239.9
$
204.1
(9.6)
0.6
$
230.3
$
204.7
$
229.7
0.6
$
201.8
2.9
$
230.3
$
204.7
$
0.89
(0.04)
$
0.76
-
$
0.85
$
0.76
52 | CAE Annual Report 2016
Consolidated Statement of Comprehensive Income
Consolidated Financial Statements
Years ended March 31
(amounts in millions of Canadian dollars)
Net income
Items that may be reclassified to net income
Foreign currency translation
Net currency translation difference on the translation of financial
statements of foreign operations
Net loss on certain long-term debt denominated in foreign
currency and designated as hedges of net investments in foreign operations
Reclassification to income
Income taxes
Share in foreign currency translation difference of equity accounted investees
Net change in cash flow hedges
Effective portion of changes in fair value of cash flow hedges
Reclassification to income(1)(2)
Income taxes
After tax share in net change of cash flow hedges of equity accounted investees
Net change in available-for-sale financial instruments
Net change in fair value of available-for-sale financial asset
Items that are never reclassified to net income
Defined benefit plan remeasurements
Defined benefit plan remeasurements
Income taxes
Other comprehensive income
Total comprehensive income
Attributable to:
Equity holders of the Company
Non-controlling interests
Total comprehensive income (loss) attributable to equity holders of the Company:
Continuing operations
Discontinued operations
Notes
2016
2015
$
230.3
$
204.7
17
17
29
15
17
$
62.3
$
100.9
(12.5)
(18.1)
(2.4)
2.8
(68.1)
2.5
(3.3)
29.5
$
32.1
$
61.5
$
(22.5)
38.9
(4.4)
0.7
$
(39.2)
25.6
3.6
0.4
$
12.7
$
(9.6)
$
$
$
$
$
$
$
0.1
$
0.1
$
-
-
34.5
(9.3)
$
(66.0)
18.0
25.2
$
(48.0)
70.1
$
3.9
300.4
$
208.6
298.3
2.1
$
201.6
7.0
$
300.4
$
208.6
$
312.6
(14.3)
$
200.7
0.9
$
298.3
$
201.6
(1) Fiscal 2016 includes net losses of $36.4 million reclassified to revenue (2015 – net losses of $35.9 million) and net losses of $2.5 million reclassified to finance
expense – net (2015 – net gain of $10.3 million).
(2) An estimated net amount of $48.5 million of losses is expected to be reclassified from other comprehensive income during the next 12 months. Future
fluctuation in market rate (foreign exchange rate or interest rate) will impact the amount expected to be reclassified.
The accompanying notes form an integral part of these Consolidated Financial Statements.
CAE Annual Report 2016 | 53
Consolidated Financial Statements
Notes
2016
2015
Consolidated Statement of Cash Flows
Years ended March 31
(amounts in millions of Canadian dollars)
Operating activities
Earnings from continuing operations
Adjustments for:
Depreciation of property, plant and equipment
Amortization of intangible and other assets
After tax share in profit of equity accounted investees
Deferred income taxes
Investment tax credits
Share-based compensation
Defined benefit pension plans
Amortization of other non-current liabilities
Other
Changes in non-cash working capital
Net cash provided by operating activities
Investing activities
Business combinations, net of cash and cash equivalents acquired
Proceeds from disposal of discontinued operations
Proceeds from partial disposal of interests in investments, net of cash
and cash equivalents disposed
Capital expenditures for property, plant and equipment
Proceeds from disposal of property, plant and equipment
Capitalized development costs
Enterprise resource planning (ERP) and other software
Net proceeds from (payments to) equity accounted investees
Dividends received from equity accounted investees
Other
Net cash used in investing activities
Financing activities
Proceeds from borrowing under revolving unsecured credit facilities
Repayment of borrowing under revolving unsecured credit facilities
Proceeds from long-term debt
Repayment of long-term debt
Repayment of finance lease
Dividends paid
Common stock issuance
Repurchase of common shares
Net cash used in financing activities
Effect of foreign exchange rate changes on cash
and cash equivalents
Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, beginning of period,
related to discontinued operations
Cash and cash equivalents, end of period
Supplemental information:
Dividends received
Interest paid
Interest received
Income taxes paid (net)
7
17
24
15
25
4
3
7
8
8
13
13
13
13
13
18
The accompanying notes form an integral part of these Consolidated Financial Statements.
$
239.9
$
204.1
121.5
96.3
(43.4)
25.0
(40.5)
8.3
9.7
(42.9)
(25.0)
(3.1)
345.8
$
108.1
81.0
(37.5)
37.2
(21.7)
7.5
6.4
(35.8)
(11.5)
(69.2)
268.6
$
$
13.9
30.4
$
(2.0)
-
-
(117.8)
1.8
(35.6)
(15.6)
3.4
18.5
(4.1)
$ (105.1)
8.5
(144.2)
7.6
(41.5)
(19.9)
(0.3)
8.9
4.1
$ (178.8)
$
$
516.3
(539.3)
27.7
(25.8)
(21.4)
(56.7)
15.9
(7.7)
(91.0)
$
$
5.7
$
155.4
330.2
524.7
(554.0)
37.0
(18.9)
(28.2)
(46.3)
12.7
-
(73.0)
8.8
25.6
312.3
$
$
$
$
$
-
485.6
(7.7)
330.2
$
$
18.5
65.1 1
9.8 1
18.5 1
8.9
54.9
11.0
34.1
CAE Annual Report 2016 | 55
Notes to the Consolidated Financial Statements
Notes to the Consolidated Financial Statements
(Unless otherwise stated, all tabular amounts are in millions of Canadian dollars)
The consolidated financial statements were authorized for issue by the board of directors on May 19, 2016.
NOTE 1 – NATURE OF OPERATIONS, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
REVISION TO PRIOR PERIOD
Nature of operations
CAE Inc. and its subsidiaries (or the Company) design, manufacture and supply simulation equipment, provide training, and develop
integrated training solutions for defence and security markets, commercial airlines, business aircraft operators, helicopter operators,
aircraft manufacturers and for 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 a
database of airports, other landing areas, flying environments, mission-specific environments, and motion and sound cues. 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 with locations around the world.
The Company’s operations are managed through three segments:
(i) Civil Aviation Training Solutions – Provides comprehensive training solutions for flight, cabin, maintenance and ground personnel
in commercial, business and helicopter aviation, a range of flight simulation training devices, as well as ab initio pilot training and
crew sourcing services;
(ii) Defence and Security – Is a training systems integrator for defence forces across the air, land and naval domains, and for
government organizations responsible for public safety;
(iii) Healthcare – Designs, manufactures and markets simulators, audiovisual and simulation centre management solutions, offers
consulting and courseware for training of medical and allied healthcare students as well as clinicians in educational institutions,
hospitals and defence organizations.
The Company’s mining division known as Datamine was sold during the second quarter of fiscal 2016 (see Note 3).
CAE is a limited liability company incorporated and domiciled in Canada. The address of the main office is 8585 Côte-de-Liesse,
Saint-Laurent, Québec, Canada, H4T 1G6. CAE shares are traded on the Toronto Stock Exchange and on the New York Stock
Exchange.
Basis of preparation
The key accounting policies applied in the preparation of these consolidated financial statements are described below. These policies
have been consistently applied to all years presented, unless otherwise stated.
The consolidated financial statements have been prepared in accordance with Part I of the CPA Canada Handbook – Accounting,
International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB).
The consolidated financial statements have been prepared under the historical cost convention, except for the following items
measured at fair value: contingent consideration, derivative financial instruments, financial instruments at fair value through profit and
loss, available-for-sale financial assets and liabilities for cash-settled share-based arrangements.
The functional and presentation currency of CAE Inc. is the Canadian dollar.
Revision to prior period financial statements
In preparing the consolidated financial statements for the year ended March 31, 2016, the Company identified an error related to the
reassessment of unrecognized deferred tax assets. Upon transition to IFRS, certain transitional adjustments had resulted in the
computation of additional deferred tax assets. Given that IFRS imposes restrictions on the full recognition of deferred tax assets by
requiring that they be recognized only to the extent that their realization is probable, certain deferred taxes had not been recognized at
that time. The revision recognizes that as deferred tax liabilities arose in fiscal 2012 and 2013, certain additional deferred tax assets
should have been recognized in the consolidated financial statements as per the requirements of IAS 12 - Income Taxes.
The following table presents the effect of this revision on each line of the Company’s consolidated statement of financial position for
the comparative period:
(amounts in millions)
Deferred tax liabilities
Retained earnings
March 31, 2015 Adjustment
$
$
198.6 $
857.3 $
(22.5)
22.5
56 | CAE Annual Report 2016
March 31, 2015
Revised April 1, 2014 Adjustment
(22.5)
22.5
166.1 $
775.1 $
176.1
879.8
$
$
$
$
April 1, 2014
Revised
143.6
797.6
$
$
Notes to the Consolidated Financial Statements
In accordance with accounting guidance in SEC Staff Accounting Bulletin No. 99 - Materiality, the Company assessed the materiality
of that error and concluded that it was not material to any of the Company’s previously issued consolidated financial statements. In
accordance with guidance in SEC Staff Accounting Bulletin No. 108 - Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements and with guidance in IAS 8 - Accounting Policies, Changes in
Accounting Estimates and Errors, the Company revised its comparative consolidated financial statements to correct the effects of
these matters. These non-cash revisions do not impact cash flows for any prior period.
This revision has no effect on the consolidated income statement and on the earnings per share for the years ended
March 31, 2016 and March 31, 2015.
Basis of consolidation
Subsidiaries
Subsidiaries are all entities over which the Company has control. Control exists when the Company is exposed to, or has the rights to,
variable returns from its involvement with the entity and has the ability to affect those returns through the power over the entity.
Subsidiaries are fully consolidated from the date control is obtained and they are no longer consolidated on the date control ceases.
All intercompany accounts and transactions have been eliminated.
Joint arrangements
Joint arrangements are entities in which the Company exercises joint control as established by contracts requiring unanimous consent
for decisions about the activities that significantly affect the arrangement’s returns. When the Company has the rights to the net
assets of the arrangement, the arrangement is classified as a joint venture and is accounted for using the equity method. When the
Company has rights to the assets and obligations for the liabilities relating to an arrangement, the arrangement is classified as a joint
operation and the Company accounts for each of its assets, liabilities and transactions, including its share of those held or incurred
jointly, in relation to the joint operation. The Company does not have any joint operations.
Under the equity method of accounting, interests in joint ventures are initially recognized at cost and adjusted thereafter to recognize
the Company’s share of the profits or losses and movements in other comprehensive income (loss) (OCI) of the investee. When the
Company’s share of losses in a joint venture equals or exceeds its interests in the joint ventures, the Company does not recognize
further losses, unless it will incur obligations or make payments on behalf of the joint ventures.
Unrealized gains resulting from transactions with joint ventures are eliminated, to the extent of the Company’s share in the joint
venture. For sales of products or services from the Company to its joint ventures, the elimination of unrealized profits is considered in
the carrying value of the investment in equity accounted investees in the consolidated statement of financial position and in the share
in profit or loss of equity accounted investees in the consolidated income statement.
Business combinations
Business combinations are accounted for under the acquisition method. The consideration transferred for the acquisition of a
subsidiary is the fair value of the assets transferred, the liabilities incurred and the equity interests issued by the Company, if any, at
the date control is obtained. The consideration transferred includes the fair value of any liability resulting from a contingent
consideration arrangement. Acquisition-related costs, other than share and debt issue costs incurred to issue financial instruments
that form part of the consideration transferred, are expensed as incurred. Identifiable assets acquired and liabilities assumed in a
business combination are measured initially at their fair value at the acquisition date. If a business combination is achieved in stages,
the Company remeasures its previously held interest in the acquiree at its acquisition-date fair value and recognizes the resulting gain
or loss, if any, in net income.
Contingent consideration classified as a provision is measured at fair value, with subsequent changes recognized in income. If the
contingent consideration is classified as equity, it is not remeasured until it is finally settled within equity.
New information obtained during the measurement period, up to 12 months following the acquisition date, about facts and
circumstances existing at the acquisition date affect the acquisition accounting.
Non-controlling interests
Non-controlling interests (NCI) represent equity interests in subsidiaries owned by outside parties. The share of net assets of
subsidiaries attributable to non-controlling interests is presented as a component of equity. Changes in the Company’s ownership
interest in subsidiaries that do not result in a loss of control are accounted for as equity transactions.
The Company treats transactions with non-controlling interests as transactions with equity owners of the Company. For interests
purchased from non-controlling interests, the difference between any consideration paid and the relevant share acquired of the
carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals of non-controlling interests are also
recorded in equity.
CAE Annual Report 2016 | 57
Notes to the Consolidated Financial Statements
Financial instruments and hedging relationships
Financial instruments
Financial assets and financial liabilities
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of
another entity. Financial assets and financial liabilities, including derivatives, are recognized on the consolidated statement of financial
position 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. When there is a difference between the fair value of the consideration given or
received at initial recognition and the amount determined using a valuation technique, such difference is recognized immediately in
income unless it qualifies for recognition as some other type of asset or liability.
Subsequent measurement of the financial instruments is based on their classification as described below. The determination of the
classification depends on the purpose for which the financial instruments were acquired and their characteristics. Except in very
limited circumstances, the classification is not changed subsequent to the initial recognition.
Financial instruments at fair value through profit and loss
Financial instruments classified at fair value through profit and loss (FVTPL) are carried at fair value at each reporting date with the
change in fair value recorded in income. The FVTPL 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).
Cash and cash equivalents, restricted cash and all derivative instruments, except for derivatives designated as effective hedging
instruments, are classified at FVTPL.
Embedded derivatives are recorded at FVTPL separately from the host contract when their economic characteristics and risks are not
clearly and closely related to those of the host contract.
Loans and receivables
Loans and receivables are carried at amortized cost using the effective interest method. Interest income or expense is included in
income in the period as incurred. Accounts receivable, contracts in progress, non-current receivables and advances are classified as
loans and receivables except for those that the Company intends to sell immediately or in the near term, which are classified at
FVTPL.
At each reporting date, the carrying amounts of the financial assets other than those to be measured at FVTPL are assessed to
determine whether there is objective evidence of impairment. Impairment losses on financial assets carried at amortized cost are
reversed in subsequent periods if the amount of loss decreases and the decrease can be related objectively to an event occurring
after the impairment was recognized.
Available-for-sale
Available-for-sale financial assets are non-derivative financial assets that are designated as available-for-sale or that are not classified
in any of the preceding categories. The portfolio investments are classified as available-for-sale.
Financial assets classified as available-for-sale are carried at fair value at each reporting date. Unrealized gains and losses, including
changes in foreign exchange rates for non-monetary financial assets, are recognized in OCI in the period in which the changes arise
and are transferred to income when the assets are derecognized or impairment occurs. Objective evidence of impairment of an equity
investment includes a significant or prolonged decline in the fair value of the security below its cost. If a reliable estimate of the fair
value of an unquoted equity instrument cannot be made, this instrument is measured at cost, less any impairment losses. Dividends
are recognized in income when the right of payment has been established.
Other financial liabilities
Other financial liabilities are carried at amortized cost using the effective interest method. Accounts payable and accrued liabilities and
long-term debt, including interest payable, as well as finance lease obligations and royalty obligations are classified as other financial
liabilities.
Transaction costs
Transaction costs that are directly related to the acquisition or issuance of financial assets and financial liabilities (other than those
classified at FVTPL) are included in the fair value initially recognized for those financial instruments. These costs are amortized to
income using the effective interest method.
58 | CAE Annual Report 2016
Notes to the Consolidated Financial Statements
Offsetting of financial assets and financial liabilities
Financial assets and financial liabilities are offset and the net amount is presented in the consolidated statement of financial position
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 simultaneously.
Fair value hierarchy transfers
For financial instruments that are recognized at fair value on a recurring basis, the Company determines whether transfers have
occurred between levels in the fair value hierarchy. The assessment is based on the lowest level input that is significant to the fair
value measurement as a whole at the end of each period.
Derivative financial instruments and hedge accounting
Derivative financial instruments offering economic hedging without being eligible for hedge accounting are accounted for at FVTPL.
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 and strategy, 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 and
can be reliably measured. 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 in relation to the hedged risk.
Cash flow hedge
The effective portion of changes in the fair value of derivative instruments that are designated and qualify as cash flow hedges is
recognized in OCI, while the ineffective portion is recognized immediately in income. Amounts accumulated in OCI are reclassified to
income in the period in which the hedged item affects income. 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
recognized 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 income 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,
when the designation is revoked, or when the hedging instrument expires or is sold. Any cumulative gain or loss directly recognized in
OCI at that time remains in OCI until the hedged item is eventually recognized in income. When it is probable that a hedged
transaction will not occur, the cumulative gain or loss that was recognized in OCI is recognized immediately in income.
Hedge of net investments in foreign operations
The Company has designated certain long-term debt as a hedge of CAE’s overall net investments in 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 and is limited to the translation gain or loss on the net
investment.
Derecognition
Financial assets
A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognized when:
−
−
The rights to receive cash flows from the asset have expired;
The Company has transferred its rights to receive cash flows from the asset and either has transferred substantially all the risks
and rewards of the asset or has neither transferred nor retained substantially all the risks and rewards of the asset, but has
transferred control of the asset;
The Company is involved in a program in which it sells undivided interests in certain of its accounts receivable and contracts in
progress: assets. The Company continues to act as a collection agent. These transactions are accounted for when the Company
is considered to have surrendered control over the transferred accounts receivable and contracts in progress: assets.
−
Financial liabilities
A financial liability is derecognized when the obligation under the liability is discharged, cancelled or expires.
When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an
existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and
the recognition of a new liability, and the difference in the respective carrying amounts is recognized in income.
CAE Annual Report 2016 | 59
Notes to the Consolidated Financial Statements
Foreign currency translation
Foreign operations
Assets and liabilities of subsidiaries that have a functional currency other than the Canadian dollar are translated from their functional
currency to Canadian dollars at exchange rates in effect at the reporting date. Revenue and expenses are translated at the average
exchange rates. The resulting translation adjustments are included in OCI. When designated as hedges of net investments in foreign
operations, 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, are also included in
OCI.
Transactions and balances
Monetary assets and liabilities denominated in foreign currencies are translated at the prevailing exchange rate at the reporting date.
Non-monetary assets and liabilities, and revenue and expense items denominated in foreign currencies are translated into the
functional currency using the exchange rate prevailing at the dates of the respective transactions. Foreign exchange gains and losses
resulting from the settlement of such transactions are recognized in income, except when deferred in OCI as qualifying cash flow
hedges and qualifying net investment hedges.
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 the date
of purchase.
Accounts receivable
Receivables are initially recognized at fair value and are subsequently carried at amortized cost, net of an allowance for doubtful
accounts, based on expected recoverability. The amount of the allowance is the difference between the asset’s carrying amount and
the present value of the estimated future cash flows, discounted at the original effective interest rate. The loss is recognized in
income. Subsequent recoveries of amounts previously provided for or written-off are recognized in income.
Inventories
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 cost, determined on a specific identification basis, and net realizable value.
Work in progress is stated at the lower of cost, determined on a specific identification basis, and net realizable value. The cost of work
in progress includes material, labour and an allocation of manufacturing overhead, which is based on normal operating capacity.
Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the
estimated costs necessary to generate revenue. In the case of raw materials and spare parts, the replacement cost is the best
measure of net realizable value.
Property, plant and equipment
Property, plant and equipment are recorded at cost less any accumulated depreciation and any accumulated net impairment losses.
Costs include expenditures that are directly attributable to the acquisition or manufacturing of the item. The cost of an item of property,
plant and equipment that is initially recognized includes, when applicable, the initial present value estimate of the costs required to
dismantle and remove the asset and restore the site on which it is located at the end of its useful life. Purchased software that is
integral to the functionality of the related equipment is capitalized as part of that equipment. Subsequent costs, such as updates on
training devices, are included in the asset’s carrying amount or recognized as a separate asset only when it is probable that future
economic benefits will flow to the Company and the cost of the item can be reliably measured; otherwise, they are expensed.
A loss on disposal is recognized in income when the carrying value of a replaced item is derecognized, unless the item is transferred
to inventories. If it is not practicable to determine the carrying value, the cost of the replacement and the accumulated depreciation
calculated by reference to that cost will be used to derecognize the replaced part. The costs of day-to-day servicing of property, plant
and equipment are recognized in income as incurred. Gains and losses on disposal of property, plant and equipment are determined
by comparing the proceeds from disposal with its carrying amount, and are recognized net within other gains and losses.
60 | CAE Annual Report 2016
Notes to the Consolidated Financial Statements
The different components of property, plant and equipment are recognized separately when their useful lives are materially different
and such components are depreciated separately in income. Leased assets are depreciated over the shorter of the lease term and
their useful lives. If it is reasonably certain that the Company will obtain ownership by the end of the lease term, the leased asset is
depreciated over its useful life. Land is not depreciated. The estimated useful lives, residual values and depreciation methods are as
follows:
Buildings and improvements
Simulators
Machinery and equipment
Aircraft
Aircraft engines
Method
Straight-line
Straight-line (10% residual)
Declining balance/Straight-line
Straight-line (15% residual)
Based on utilization
Amortization rate/period
2.5 to 10%/3 to 20 years
Not exceeding 25 years
20 to 35%/2 to 10 years
Not exceeding 12 years
Not exceeding 3,000 hours
Depreciation methods, useful lives and residual values are reviewed and adjusted, if appropriate, on a prospective basis at each
reporting date.
Leases
The Company leases certain property, plant and equipment from and to others. Leases in which substantially all the risks and rewards
of ownership are transferred are classified as finance leases. All other leases are accounted for as operating leases.
The Company as a lessor
With regards to finance leases, the asset is derecognized at the commencement of the lease. The net present value of the minimum
lease payments and any discounted unguaranteed residual value are recognized as non-current receivables. Finance income is
recognized over the term of the lease based on the effective interest method. Income from operating leases is recognized on a
straight-line basis over the term of the corresponding lease.
The Company as a lessee
Finance leases are capitalized at the lease’s commencement at the lower of the fair value of the leased item and the present value of
the minimum lease payments. Any initial direct costs of the lessee are added to the amount recognized as an asset. The
corresponding obligations are included in long-term debt. Finance expense is recognized over the term of the lease based on the
effective interest method. Payments made under operating leases are charged to income on a straight-line basis over the term of the
lease.
Sale and leaseback transactions
The Company engages in sales and leaseback transactions as part of the Company’s financing strategy to support investment in the
Civil Aviation training Solutions and Defence and Security segments. Where a sale and leaseback transaction results in a finance
lease, any excess of sales proceeds over the carrying amount is deferred and amortized over the lease term. Where a sale and
leaseback transaction results in an operating lease, and it is clear that the transaction is established at fair value, any profit or loss is
recognized in income. If the sales price is below fair value, the shortfall is recognized in income immediately except if the loss is
compensated for by future lease payments at below market price, it is deferred and amortized in proportion to the lease payments
over the period the asset is expected to be used. If the sale price is above fair value, the excess over fair value is deferred and
amortized over the period the asset is expected to be used.
Intangible assets
Goodwill
Goodwill is measured at cost less accumulated impairment losses, if any.
Goodwill arises on the acquisition of subsidiaries. Goodwill represents the excess of the aggregate of the cost of an acquisition,
including the Company’s best estimate of the fair value of contingent consideration and the acquisition-date fair value of any previous
held equity interest in the acquiree, over the fair value of the net identifiable assets of the acquiree at the acquisition date.
Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.
Research and development (R&D)
Research costs are expensed as incurred. Development costs are also charged to income in the period incurred unless they meet all
the specific capitalization criteria established in IAS 38, Intangible Assets. Capitalized development costs are stated at cost and net of
accumulated amortization and accumulated impairment losses, if any. Amortization of the capitalized development costs commences
when the asset is available for use and is included in research and development expense.
CAE Annual Report 2016 | 61
Notes to the Consolidated Financial Statements
Other intangible assets
Intangible assets acquired separately are measured at cost upon initial recognition. The cost of intangible assets acquired in a
business combination is the fair value as at the acquisition date. Following initial recognition, intangible assets are carried at cost, net
of accumulated amortization and accumulated impairment losses, if any.
The cost of an internally generated intangible asset comprises all directly attributable costs necessary to create, produce, and prepare
the asset to be capable of operating in the manner intended by management.
Gains and losses on disposal of intangible assets are determined by comparing the proceeds from disposal with its carrying amount
and are recognized within other gains and losses.
Amortization
Amortization is calculated using the straight-line method for all intangible assets over their estimated useful lives as follows:
Capitalized development costs
Customer relationships
ERP and other software
Technology
Other intangible assets
Amortization period
(in years)
5 to 10
3 to 15
3 to 10
3 to 10
2 to 40
Amortization methods and useful lives are reviewed and adjusted, if appropriate, on a prospective basis at each reporting date.
Impairment of non-financial assets
The carrying amounts of the Company’s non-financial assets subject to amortization are tested for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be recoverable. Goodwill and assets that are not yet available for
use are tested for impairment annually or at any time if an indicator of impairment exists.
The recoverable amount of an asset or a cash-generating unit (CGU) is the greater of its value in use and its fair value less costs of
disposal. The recoverable amount is determined for an individual asset; unless the asset does not generate cash inflows that are
largely independent of those from other assets or groups of assets. In such case, the CGU that the asset belongs to is used to
determine the recoverable amount.
For the purposes of impairment testing, the goodwill acquired in a business combination is allocated to CGUs or groups of CGUs,
which generally corresponds to its operating segments or one level below, that are expected to benefit from the synergies of the
combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.
An impairment loss is recognized if the carrying amount of an asset or CGU exceeds its estimated recoverable amount. Where the
recoverable amount of a CGU to which goodwill has been allocated is lower than the CGU’s carrying amount, the related goodwill is
impaired. Any remaining amount of impairment exceeding the impaired goodwill is recognized on a pro rata basis of the carrying
amount of each asset in the respective CGU. Impairment losses are recognized in income.
The Company evaluates impairment losses, other than goodwill impairment, for potential reversals at each reporting date. An
impairment loss is reversed if there is any indication that the loss has decreased or no longer exists due to changes in the estimates
used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does
not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been
recognized. Such reversal is recognized in income.
Borrowing costs
Borrowing costs that are directly attributable to the acquisition or construction of a qualifying asset are capitalized as part of the cost of
the asset. A qualifying asset is one that takes a substantial period of time to get ready for its intended use. Capitalization of borrowing
costs ceases when the asset is completed and ready for its intended use. All other borrowing costs are recognized as finance
expense in income, as incurred.
Other assets
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 combination arrangements.
Deferred financing costs
Deferred financing costs related to the revolving unsecured term credit facilities, when it is probable that some or all of the facilities will
be drawn down, and deferred financing costs related to sale and leaseback agreements are included in other assets at cost and are
amortized on a straight-line basis over the term of the related financing agreements.
62 | CAE Annual Report 2016
Notes to the Consolidated Financial Statements
Accounts payable and accrued liabilities
Accounts payable and accrued liabilities are recognized initially at fair value and subsequently measured at amortized cost using the
effective interest method.
Provisions
Provisions are recognized when the Company has a present legal or constructive obligation as a result of past events, it is probable
that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. Provisions are not
recognized for future operating losses. Provisions are measured at the present value of the expenditures expected to be required to
settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to
the obligation. The increase in the provision due to passage of time is recognized as a finance expense. When there are a number of
similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as
a whole.
Long-term debt
Long-term debt is recognized initially at fair value, net of transaction costs incurred. They are subsequently stated at amortized cost.
Any difference between the proceeds, net of transaction costs, and the redemption value is recognized in income over the period of
borrowings using the effective interest method.
Fees paid on the establishment of loan facilities are recognized as transaction costs of the loan to the extent that it is probable that
some or all of the facility will be drawn down. In these cases, the fee is deferred until the drawdown occurs. To the extent that there is
no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalized as a pre-payment for liquidity
services and amortized over the period of the facility to which it relates.
Share capital
Common shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in
equity as a deduction, net of tax, from the proceeds.
When share capital recognized as equity is repurchased, the amount of the consideration paid, which includes directly attributable
costs, net of tax, is recognized as a deduction from equity.
Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable. Revenue is recognized when the amount can be
reliably measured, when it is probable that future economic benefits will flow to the Company and when specific criteria have been
met for each of the categories, as described below.
Multiple component arrangements
The Company sometimes enters into multiple component revenue arrangements, which may include a combination of design,
engineering and manufacturing of flight simulators and other products, as well as the provision of training services, spare parts and
maintenance. When a single sales transaction requires the delivery of more than one product or service (multiple components), the
revenue recognition criteria are applied to the separately identifiable components. A component is considered separately identifiable if
the delivered item has value to the customer on a stand-alone basis and the fair value associated with the product or service can be
reliably measured.
The allocation of the revenue from a multiple component arrangement is based on the fair value of each element in relation to the fair
value of the arrangement as a whole.
The Company's revenues can be divided into two main accounting categories: construction contracts and sales of goods and
services.
Construction contracts
A construction contract is a contract specifically negotiated for the construction of an asset or of a group of assets, which are
interrelated in terms of their design, technology, function, purpose or use. According to its characteristics, a construction contract can
be accounted for separately, be segmented into several components which are each accounted for separately, or be combined with
another construction contract in order to form a single construction contract for accounting purposes in respect of which revenues and
expense will be recognized.
Revenue from construction contracts for the design, engineering and manufacturing of specifically designed training devices is
recognized using the percentage-of-completion method when it is probable that the economic benefits associated with the contract
will flow to the Company, the revenue, contract costs to complete and the stage of contract completion at the end of the reporting
period can be reliably measured and when the contract costs can be clearly identified and reliably measured so that actual contract
costs incurred can be compared with prior estimates. The stage of completion is measured by reference to the contract costs incurred
up to the end of the reporting period as a percentage of total estimated costs for each contract. When the criteria to use the
percentage-of-completion method are not met, construction contract revenue is recognized to the extent of the contract costs incurred
that are likely to be recoverable.
CAE Annual Report 2016 | 63
Notes to the Consolidated Financial Statements
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.
The cumulative amount of costs incurred and profit recognized, reduced by losses and progress billing, is determined on a
contract-by-contract basis. If this amount is positive it is classified in contracts in progress: assets. If this amount is negative it is
classified in contracts in progress: liabilities.
Post-delivery customer support is billed separately, and revenue is recognized over the support period.
Sales of goods and services
Standardized training devices
Revenue from contracts for the construction of standardized training devices is recognized primarily on the training devices’ date of
completion when the significant risks and rewards of ownership associated to the training devices are transferred to the customer and
the Company retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control
over the training devices sold.
Software arrangements
Revenue
fixed-price software
arrangements and software customization contracts that require significant production, modification, or customization of software is
recognized using the percentage-of-completion method.
from off-the-shelf software sales is recognized when delivery has occurred. Revenue
from
Spare parts
Revenue from the sale of spare parts is primarily recognized upon shipment to the customer. Upon shipment, the significant risks and
rewards of ownership of the goods are transferred and the Company retains neither continuing managerial involvement to the degree
usually associated with ownership nor effective control over the goods sold.
Product maintenance
Revenue from maintenance contracts is generally recognized on the basis of the percentage-of-completion of the transaction.
Training and consulting services
Revenue from training and consulting services is recognized as the services are 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 income on a straight-line basis, while during the live aircraft flight phase, revenue is recognized
based on actual flight hours.
Other
Sales incentives to customers
The Company may provide sales incentives in the form of discounts and volume rebates, these incentives are recorded as a reduction
of revenues.
Non-monetary transactions
The Company may also enter into sales arrangements where little or no monetary consideration is involved. The non-monetary
transactions are measured at the more reliable measure of the fair value of the asset given up and fair value of the asset received.
Deferred revenue
Cash payments received or advances currently due pursuant to contractual arrangements, with the exception of those related to
construction contracts, are recorded as deferred revenue until all of the foregoing conditions of revenue recognition have been met.
Employee benefits
Defined benefit pension plans
The Company maintains defined benefit pension plans that provide benefits based on length of service and final average earnings.
The defined benefit asset or liability comprises the present value of the defined benefit obligation at the reporting date less the fair
value of plan assets out of which the obligations are to be settled. The defined benefit obligations are actuarially determined for each
plan using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the
estimated future cash flows using the interest rate of high-quality corporate bonds that are denominated in the currency in which the
benefit will be paid and that have terms to maturity approximating the terms of the related pension obligation. In countries where there
is no deep market in such bonds, the market rates on government bonds are used.
64 | CAE Annual Report 2016
Notes to the Consolidated Financial Statements
The value of any employee benefit asset recognized is restricted to the present value of any economic benefits available in the form of
refunds from the plan or reductions in the future contributions to the plan (asset ceiling test). Minimum funding requirements may give
rise to an additional liability to the extent that they require paying contributions to cover an existing shortfall. Plan assets can only be
used to fund employee benefits, are not available to the creditors of the Company, nor can they be paid directly to the Company. Fair
value of plan assets is based on market price information.
The Company determines the net pension cost of its Canadian defined benefit plans utilizing individual discount rates derived from the
yield curve used to measure the defined benefit obligations at the beginning of the year. For the other defined benefit plans, the
Company utilises a single weighted average discount rate derived from the yield curve used to measure the defined benefit
obligations at the beginning of the year.
Actuarial gains and losses arising from experience adjustments, changes in actuarial assumptions and the effect of any asset ceiling
and minimum liability are recognized to OCI in the period in which they arise. Past service costs are recognized as an expense as
incurred at the earlier of when the plan amendment or curtailment occurs and when the entity recognizes related termination benefits.
Defined contribution pension plans
The Company also maintains defined contribution plans for which the Company pays fixed contributions to publicly or privately
administered pension insurance plans on a mandatory, contractual or voluntary basis. The Company has no legal or constructive
obligation to pay further amounts if the fund does not hold sufficient assets to pay the benefits to all employees. Obligations for
contributions to defined contribution pension plans are recognized as an employee benefit expense in income as the services are
provided.
Termination benefits
Termination benefits are recognized as an expense when the Company is demonstrably committed, without realistic possibility of
withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date, or to provide termination
benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are
recognized as an expense, if the Company has made an offer of voluntary redundancy, based on the number of employees expected
to accept the offer. Benefits falling due more than 12 months after the reporting date are discounted to their present value.
Share-based payment transactions
The Company’s share-based payment plans consist of two categories: the Employee Stock Option Plan (ESOP), which qualifies as
an equity-settled share-based payment plan; and the Employee Stock Purchase Plan (ESPP), Deferred Share Unit (DSU) plan,
Long-Term Incentive Time Based plans and Long-Term Incentive Performance Based plans which qualify as cash-settled
share-based payments plans. Time Based plans include the Long-Term Incentive – Deferred Share Unit (LTI-DSU) plan and the
Long-Term Incentive – Time Based Restricted Share Unit (LTI-TB RSU) plan. Performance Based plans include the Long-Term
Incentive – Restricted Share Unit (LTI-RSU) plan and the Long-Term Incentive – Performance Share Unit (LTI-PSU) plan.
For both categories, the fair value of the employee services received in exchange is recognized as an expense in income. Service
and non-market performance conditions attached to the transactions are not taken into account in determining fair value.
For the equity-settled plan, the cost of equity-settled transactions is measured at fair value using the Black-Scholes option pricing
model. The compensation expense is measured at the grant date and recognized over the service period with a corresponding
increase to contributed surplus. The cumulative expenses recognized for equity-settled transactions at each reporting date represents
the extent to which the vesting period has expired and management’s best estimate of the number of equity instruments that will
ultimately vest. For options with graded vesting, each tranche is considered a separate grant with a different vesting date and fair
value, and each tranche is accounted for separately. When the options are exercised, the Company issues new shares and the
proceeds received net of any directly attributable transaction costs are credited to share capital.
For cash-settled plans, a corresponding liability is recognized. The fair value of employee services received is calculated by
multiplying the number of units expected to vest with the fair value of one unit as of grant date based on the market price of the
Company’s common shares. The fair value of the ESPP is a function of the Company’s contributions. Until the liability is settled, the
Company re-measures the fair value of the liability at the end of each reporting period and at the date of settlement, with any changes
in fair value recognized in income for the period. The Company has entered into equity swap agreements with three major Canadian
financial institutions in order to reduce its earnings exposure related to the fluctuation in the Company’s share price relating to the
DSU, LTI-DSU and LTI-TB RSU programs.
Current and deferred income tax
Income tax expense comprises current and deferred tax. An income tax expense is recognized in income except to the extent that it
relates to items recognized in OCI or directly in equity, in which case it is recognized in OCI or directly in equity, respectively.
Current tax is the amount expected to be paid or recovered from taxation authorities on the taxable income or loss for the year, using
tax rates enacted or substantively enacted at the reporting date in the countries where the Company and its subsidiaries operate and
generate taxable income, and any adjustment to tax payable or receivable in respect of previous years.
Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is
subject to interpretation. It establishes provisions, where appropriate, on the basis of amounts expected to be paid to the tax
authorities.
CAE Annual Report 2016 | 65
Notes to the Consolidated Financial Statements
Deferred tax is recognized using the balance sheet liability method, providing for temporary differences between the tax bases of
assets or liabilities and their carrying amounts in the consolidated financial statements.
Deferred income tax is provided on temporary differences arising on investments in subsidiaries, and jointly controlled entities, except
where the timing of the reversal of the temporary difference is controlled by the Company and it is probable that the temporary
difference will not reverse in the foreseeable future.
Deferred tax is measured on an undiscounted basis at the tax rates that are expected to be applied to temporary differences when
they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.
Deferred tax assets are recognized for all deductible temporary differences and carry forward of unused tax losses. The recognition of
deferred tax assets are limited to the amount which is probable to be realized.
Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that a recognized
deferred tax asset will be realized. Unrecognized deferred tax assets are reassessed at each reporting date and are recognized to the
extent that it has become probable that an unrecognized deferred tax asset will be realized.
Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they
relate to income taxes levied by the same tax authority on the same taxable entity, or on different taxable entities which intend to
settle current tax liabilities and assets on a net basis or if their tax assets and liabilities will be realized simultaneously.
Taxes on income in the interim periods are accrued by jurisdiction using the effective tax rate that would be applicable to expected
total annual profit or loss of the jurisdiction.
Investment tax credits
Investment tax credits (ITCs) arising from R&D activities are deducted from the related costs and are accordingly included in the
determination of net income when there is reasonable assurance that the credits will be realized. ITCs arising from the acquisition or
development of property, plant and equipment and capitalized development costs are deducted from the cost of those assets with
amortization calculated on the net amount. Investment tax credits expected to be recovered beyond 12 months are classified in Other
assets.
Earnings per share
Earnings per share is calculated by dividing the net income for the period attributable to the common shareholders of the Company by
the weighted average number of common shares outstanding during the period. 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 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. Only the Company’s stock options have a dilutive potential on common shares.
Government assistance
Government contributions are recognized when there is reasonable assurance that the contributions will be received and all attached
conditions will be complied with by the Company. Government assistance related to the acquisition of intangible assets is recorded as
a reduction of the cost of the related asset while government assistance related to current expenses is recorded as a reduction of the
related expenses.
The Company benefits from investment tax credits that are deemed to be equivalent to government contributions. Contributions are
received for Project New Core Markets from Investissement Québec (IQ) for costs incurred in R&D programs. Contributions were
received in previous fiscal years for Project Phoenix from Industry Canada under the Technology Partnerships Canada (TPC)
program and from IQ.
Project New Core Markets and Project Phoenix require the Company to pay royalties. The obligation to pay royalties, recognized as
royalty obligations, is recorded when the contribution is receivable and is estimated based on future projections. The obligation 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 current portion is included as part of accrued liabilities. The
difference between government contributions and the discounted value of royalty obligations is accounted for as a government
assistance which is recognized as a reduction of related expenses or as a reduction of the cost of the related asset.
The Company recognizes the Government of Canada’s participation in Project Falcon and Project Innovate as interest-bearing
long-term debt. The initial measurement of the accounting liability 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.
66 | CAE Annual Report 2016
Notes to the Consolidated Financial Statements
Use of judgements, estimates and assumptions
The preparation of the consolidated financial statements requires the Company’s management (management) to make judgements,
estimates and assumptions that affect the application of accounting policies, the reported amounts of assets and liabilities and
disclosures at the date of the consolidated financial statements, as well as the reported amounts of revenues and expenses for the
period reported. It also requires management to exercise its judgement in applying the Company’s accounting policies. The areas
involving a high degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated
financial statements are disclosed below. Actual results could differ from those estimates. Changes will be reported in the period in
which they are identified.
As at April 1, 2015, the Company has refined the method to estimate the cost of the Canadian defined benefit pension plans and the
present value of the employee benefit obligations. In prior years, the net pension cost was estimated utilizing a single weighted
average discount rate derived from the yield curve used to measure the defined benefit obligations at the beginning of the year. Under
the refined method, individual discount rates are derived from the same yield curve, which reflect the different timing of benefit
payments. This change in accounting estimate is accounted for prospectively. This change does not significantly affect the
measurement of the employee benefit obligations and the total net pension plan cost compared to the previous method.
Business combinations
Business combinations are accounted for in accordance with the acquisition method. The consideration transferred and the acquiree’s
identifiable assets, liabilities and contingent liabilities are measured at their fair value. Depending on the complexity of determining
these valuations, the Company either consults with independent experts or develops the fair value internally by using appropriate
valuation techniques which are generally based on a forecast of the total expected future net discounted cash flows. These
evaluations are linked closely to the assumptions made by management regarding the future performance of the related assets and
the discount rate. Contingent consideration is measured at fair value using a discounted cash flow model.
Development costs
Development costs are recognized as intangible assets and are amortized over their useful lives when they meet the criteria for
capitalization. Forecasted revenue and profitability for the relevant projects are used to assess compliance with the capitalization
criteria and to assess the recoverable amount of the assets.
Impairment of non-financial assets
The Company’s impairment test for goodwill is based on internal estimates (level 3) of fair value less costs of disposal calculations
and uses valuation models such as the discounted cash flows model. Key assumptions which management has based its
determination of fair value less costs of disposal include estimated growth rates, post-tax discount rates and tax rates. These
estimates, including the methodology used, can have a material impact on the respective values and ultimately the amount of any
goodwill impairment.
Likewise, whenever property, plant and equipment and intangible assets are tested for impairment, the determination of the assets’
recoverable amount involves the use of estimates by management and can have a material impact on the respective values and
ultimately the amount of any impairment.
See Note 21 for further details regarding assumptions used.
Revenue recognition
The percentage-of-completion method requires the Company to estimate the work performed to date as a proportion of the total work
to be performed. Management conducts monthly reviews of its estimated costs to complete, percentage-of-completion estimates and
revenue and margins recognized, on a contract-by-contract basis. The impact of any revisions in cost and revenue estimates is
reflected in the period in which the need for a revision becomes known.
Defined benefit pension plans
The cost of defined benefit pension plans and the present value of the employee benefit obligations are determined using actuarial
valuations. Actuarial valuations involve, amongst others, making assumptions about discount rates, future salary increases and
mortality rates. All assumptions are reviewed at each reporting date. Any changes in these assumptions will impact the carrying
amount of the employee benefit obligations and the cost of the defined benefit pension plans. In determining the appropriate discount
rate, management considers the interest rates of high quality corporate bonds that are denominated in the currency in which the
benefits will be paid, and that have terms to maturity approximating the terms of the related pension liability. The mortality rate is
based on publicly available mortality tables for the specific country. Future salary increases and pension increases are based on
expected future inflation rates for the specific country.
Other key assumptions for pension obligations are based, in part, on current market conditions. See Note 15 for further details
regarding assumptions used.
CAE Annual Report 2016 | 67
Notes to the Consolidated Financial Statements
Government assistance repayments
In determining the amount of repayable government assistance, assumptions and estimates are made in relation to discount rates,
expected revenues and the expected timing of revenues. Revenue projections take into account past experience and represent
management’s best estimate about the future. Revenues after a five-year period are extrapolated using estimated growth rates,
ranging from 5% to 15%, over the period of repayments. The estimated repayments are discounted using average rates ranging from
7% to 9.5% based on terms of similar financial instruments. These estimates, along with the methodology used to derive the
estimates, can have a material impact on the respective values and ultimately any repayable obligation in relation to government
assistance. A 1% increase to the growth rates would increase the royalty obligation at March 31, 2016 by approximately $4.5 million
(2015 − $9.9 million).
Share-based payments
The Company measures the cost of cash and equity-settled transactions with employees by reference to the fair value of the related
instruments at the date at which they are granted. Estimating fair value for share-based payments requires determining the most
appropriate valuation model for a grant, which depends on the terms and conditions of the grant. This also requires making
assumptions and determining the most appropriate inputs to the valuation model including the expected life of the option, volatility and
dividend yield.
Income taxes
The Company is subject to income tax laws in numerous jurisdictions. Judgement is required in determining the worldwide provision
for income taxes. The determination of tax liabilities and assets involves uncertainties in the interpretation of complex tax regulations.
The Company provides for potential tax liabilities based on the weighted average probability of the possible outcomes. Differences
between actual results and those estimates could have an effect on the income tax liabilities and deferred tax liabilities in the period in
which such determinations are made.
Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against the losses that can be
utilized. Significant management judgement is required to determine the amount of deferred tax assets that can be recognized, based
upon the likely timing and the level of future taxable profits together with future tax planning strategies. The recorded amount of total
deferred tax assets could be altered if estimates of projected future taxable income and benefits from available tax strategies are
lowered, or if changes in current tax regulations are enacted that impose restrictions on the timing or extent of the Company’s ability
to utilize future tax benefits.
Leases
The classification as either finance or operating lease is based on management’s judgement of the application of criteria provided in
IAS 17 – Leases and on the substance of the lease arrangement. Most of the Company’s arrangements accounted for as operating
leases are in relation to buildings and flight simulators. With regards to certain aircraft used in the Company’s live training operations,
management has concluded that the undiscounted lease rental payments in the amount of $265.1 million associated with the lease
convention to these aircraft should be accounted for as an off balance sheet arrangement as it is offset by a reciprocal arrangement
with a third party and is non-recourse to CAE.
68 | CAE Annual Report 2016
Notes to the Consolidated Financial Statements
NOTE 2 – CHANGES IN ACCOUNTING POLICIES
New and amended standards adopted by the Company
The amendments to IFRS effective for the fiscal year 2016 have no material impact on the Company’s consolidated financial
statements.
New and amended standards not yet adopted by the Company
IFRS 9 - Financial Instruments
In July 2014, the IASB released the final version of IFRS 9 - Financial Instruments replacing IAS 39 - Financial Instruments:
Recognition and Measurement. IFRS 9 introduces a revised approach for the classification of financial assets based on the
characteristics of the contractual cash flows of the financial assets and the business model in which financial assets are held. IFRS 9
also introduces a new hedge accounting model that is more closely aligned with risk-management activities. The new standard
supersedes all previous versions of IFRS 9 and completes the IASB’s project to replace IAS 39. IFRS 9 is effective for annual periods
beginning on April 1, 2018 for the Company, with earlier application permitted. The Company is currently evaluating the impact of the
new standard on its consolidated financial statements.
IFRS 15 - Revenue from contracts with customers
In May 2014, the IASB released IFRS 15 - Revenue from Contracts with Customers. The core principle of the new standard is to
recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the
company expects to be entitled in exchange for those goods or services. The new standard also intends to enhance disclosures on
revenue. IFRS 15 supersedes IAS 11 - Construction Contracts and IAS 18 - Revenue and related interpretations. IFRS 15 is effective
for annual periods beginning on April 1, 2018 for the Company, with earlier application permitted. The Company is currently evaluating
the impact of the new standard on its consolidated financial statements.
IFRS 16 - Leases
In January 2016, the IASB released IFRS 16, Leases. The new standard eliminates the classification of leases as either operating or
finance leases and introduces a single accounting model for the lessee under which a lease liability and a right-of-use asset is
recognized for all leases with a term of more than 12 months. IFRS 16 also substantially carries forward the lessor accounting
requirements; accordingly, a lessor continues to classify its leases as operating leases or finance leases. IFRS 16 supersedes
IAS 17 - Leases and related interpretations. IFRS 16 is effective for annual periods beginning on April 1, 2019 for the Company, with
earlier application permitted for companies that also apply IFRS 15. The Company is currently evaluating the impact of the new
standard on its consolidated financial statements.
NOTE 3 – NET ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
The Company decided to divest of its mining division following the decision to focus its resources and capital investment in targeted
growth opportunities in its three core markets: Civil Aviation Training Solutions, Defence and Security and Healthcare. The related
assets and liabilities have been presented as held for sale.
On July 24, 2015, the Company completed the sale of its mining division known as Datamine for an amount totaling $31.2 million
including the finalization of the working capital adjustment and excluding a potential consideration of up to $10.0 million that is
contingent on certain financial results being met. Remaining as held for sale are certain net assets excluded from the transaction,
consisting mainly of inventories.
The assets and liabilities classified as held for sale are as follows:
Current assets(1)
Intangible assets
Other non-current assets
Assets held for sale
Current liabilities
Other non-current liabilities
Liabilities held for sale
Net assets held for sale
(1) Includes cash and cash equivalents.
2016
1.4
-
0.2
1.6
0.1
-
0.1
1.5
$
$
$
$
$
2015
15.8
42.9
2.5
61.2
12.9
1.3
14.2
47.0
$
$
$
$
$
CAE Annual Report 2016 | 69
Notes to the Consolidated Financial Statements
Analysis of the result of discontinued operations is as follows:
(amounts in millions)
Revenue
Expenses
(Loss) earnings before income taxes and measurement to fair value and disposal
Income tax (recovery) expense
(Loss) earnings before measurement to fair value and disposal
Loss on measurement to fair value and disposal
Income tax recovery on measurement to fair value and disposal
(Loss) earnings from discontinued operations
(amounts in millions)
Net cash provided by (used in) operating activities
Net cash used in investing activities
Net cash used in financing activities
NOTE 4 – BUSINESS COMBINATIONS
$
$
2016
9.7
10.9
(1.2)
(0.7)
$
(0.5)
(10.4)
1.3
$
$
$
2015
34.6
31.4
3.2
1.7
1.5
(1.0)
0.1
$
(9.6)
$
0.6
$
2016
4.0
(0.7)
(0.1)
$
2015
(1.6)
(2.6)
-
On September 30, 2015, the Company acquired the assets of Bombardier’s Military Aviation Training business (BMAT), a defence
training system integrator for a total purchase consideration of $19.8 million, excluding purchase price adjustments. This acquisition
strengthens CAE’s core capabilities as a virtual and live training system integrator and further expands its offering into support for live
flying training of future military pilots. Total acquisition costs relating to BMAT amount to $1.3 million and were included in selling,
general and administrative expenses in the consolidated income statement.
The preliminary determination of the fair value of the identifiable assets acquired and liabilities assumed is included in the table below.
The fair value of the acquired identifiable intangible assets and goodwill of $68.8 million is provisional until the valuation for those
assets are finalized. The preliminary goodwill of $49.2 million arising from the acquisition of BMAT is attributable to the advantages
gained, which include:
− Expansion of CAE’s offering into support for live flying training;
− Know-how as a training system integrator;
− Experienced workforce with subject matter expertise.
The fair value and the gross contractual amount of the acquired accounts receivable were $2.6 million.
The revenue and segment operating income included in the consolidated income statement from BMAT since the acquisition date is
$52.0 million and $6.1 million respectively. Had BMAT been consolidated from April 1, 2015, the consolidated income statement
would have shown revenue and segment operating income of $93.5 million and $8.8 million respectively. These pro-forma amounts
are estimated based on the operations of the acquired business prior to the business combination by the Company. The amounts are
provided as supplemental information and are not indicative of the Company’s future performance.
Net assets acquired and liabilities assumed arising from the acquisition are as follows:
Current assets (1)
Current liabilities
Non-current assets
Intangible assets (2)
Deferred tax
Non-current liabilities
Fair value of net liabilities assumed, excluding cash and cash equivalents
Cash and cash equivalents acquired
Fair value of net assets acquired
Purchase price adjustment receivable
Total purchase consideration, settled in cash
Additional consideration related to previous fiscal years' acquisitions
Total cash consideration
(1) Excluding cash on hand.
(2) This goodwill is partially deductible for tax purposes.
The net assets, including goodwill, of BMAT are included in the Defence and Security segment.
70 | CAE Annual Report 2016
Total
$
20.0
(63.1)
5.7
68.8
17.9
(69.3)
$
$
$
$
(20.0)
37.4
17.4
5.4
22.8
0.7
23.5
Notes to the Consolidated Financial Statements
NOTE 5 – ACCOUNTS RECEIVABLE
Accounts receivable are carried on the consolidated statement of financial position net of 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
situation 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 are as follows:
(amounts in millions)
Current trade receivables
Past due trade receivables
1-30 days
31-60 days
61-90 days
Greater than 90 days
Allowance for doubtful accounts
Total trade receivables
Accrued receivables
Receivables from related parties (Note 33)
Other receivables
Total accounts receivable
Changes in the allowance for doubtful accounts are as follows:
(amounts in millions)
Allowance for doubtful accounts, beginning of year
Additions (Note 31)
Amounts charged off
Unused amounts reversed (Note 31)
Exchange differences
Transferred to assets held for sale
Allowance for doubtful accounts, end of year
NOTE 6 – INVENTORIES
(amounts in millions)
Work in progress
Raw materials, supplies and manufactured products
The amount of inventories recognized as cost of sales is as follows:
(amounts in millions)
Work in progress
Raw materials, supplies and manufactured products
2016
2015
$
187.8
$ 170.6
35.7
20.2
17.5
48.9
(15.7)
$
294.4
110.2
42.6
52.8
$
500.0
52.9
10.9
12.8
58.9
(15.6)
$
290.5
103.0
28.7
45.8
$
468.0
2016
2015
$
(15.6)
(3.5)
1.9
2.1
(0.6)
-
$
(13.8)
(7.4)
1.5
3.5
0.3
0.3
$
(15.7)
$
(15.6)
2016
$
154.6
123.7
$
278.3
2015
$
137.2
100.1
$
237.3
$
2016
64.2
91.7
$
2015
110.4
79.8
$
155.9
$
190.2
CAE Annual Report 2016 | 71
Machinery Aircraft and
aircraft
engines
and
equipment
Assets
under
finance
Assets
under
lease construction
Land improvements Simulators
$ 26.5
0.1
-
$
192.2
0.4
(0.6)
$
739.6
31.2
(0.6)
$
52.4
16.6
(0.3)
$
16.8
6.6
(5.8)
$
157.6
-
-
$
156.1
89.3
-
-
(3.8)
-
-
1.2
-
-
(1.4)
(15.5)
16.2
10.5
-
-
(0.3)
(58.4)
124.9
44.7
-
-
-
(15.5)
0.1
0.3
(1.3)
-
(0.9)
(2.2)
4.6
-
-
17.8
-
(16.5)
3.2
12.2
-
-
-
-
(141.9)
5.1
-
Total
$ 1,341.2
144.2
(7.3)
17.8
(6.4)
(108.1)
7.1
74.0
(1.3)
$ 24.0
$
201.8
$
881.1
$
52.3
$
19.1
$
174.3
$
108.6
$ 1,461.2
-
-
-
-
-
-
0.1
8.1
-
-
(16.4)
-
3.4
2.7
12.1
-
(4.5)
(67.4)
(1.7)
82.4
23.9
12.9
0.4
(0.1)
(17.5)
-
1.2
1.5
5.5
-
(0.1)
(2.4)
-
-
-
-
-
(3.2)
(17.8)
-
(5.7)
5.9
79.2
-
-
-
-
(91.0)
0.4
117.8
0.4
(7.9)
(121.5)
(1.7)
(9.7)
34.5
$ 24.1
$
199.6
$
925.9
$
50.7
$
22.1
$
153.5
$
97.2
$ 1,473.1
Notes to the Consolidated Financial Statements
NOTE 7 – PROPERTY, PLANT AND EQUIPMENT
Buildings
and
(amounts in millions)
Net book value at March 31, 2014
Additions
Disposals of subsidiaries
Acquisition of assets under
finance lease
Disposals
Depreciation
Transfers and others
Exchange differences
Transferred to assets held for sale
Net book value at March 31, 2015
Additions
Acquisition of subsidiaries
Disposals
Depreciation
Impairment (Note 21)
Transfers and others
Exchange differences
Net book value at March 31, 2016
(amounts in millions)
Cost
Accumulated depreciation
Buildings
and
Machinery Aircraft and
aircraft
engines
and
equipment
Land improvements Simulators
$ 24.0
-
$
356.1
(154.3)
$ 1,214.7
(333.6)
$
226.6
(174.3)
Assets
under
finance
Assets
under
lease construction
$
$
$
23.6
(4.5)
19.1
29.8
(7.7)
$
292.2
(117.9)
$
174.3
$
287.3
(133.8)
$
$
$
Total
$ 2,245.8
(784.6)
108.6
-
108.6
$ 1,461.2
97.2
-
$ 2,363.9
(890.8)
Net book value at March 31, 2015
$ 24.0
$
201.8
$
881.1
$
52.3
Cost
Accumulated depreciation
$ 24.1
-
$
372.3
(172.7)
$ 1,316.4
(390.5)
$
236.8
(186.1)
Net book value at March 31, 2016
$ 24.1
$
199.6
$
925.9
$
50.7
$
22.1
$
153.5
$
97.2
$ 1,473.1
As at March 31, 2016, the average remaining amortization period for full-flight simulators is 11.4 years (2015 – 11.6 years).
As at March 31, 2016, bank borrowings are collateralized by property, plant and equipment for a value of $59.7 million
(2015 – $13.6 million).
The Company leases some of its property, plant and equipment to third parties, the future minimum lease payments receivable under
these non-cancellable operating leases are as follows:
(amounts in millions)
No later than 1 year
Later than 1 year and no later than 5 years
Later than 5 years
2016
2015
$
16.3
45.2
29.3
$
18.6
45.9
25.8
$
90.8
$
90.3
As at March 31, 2016, the net book value of simulators leased out to third parties is $38.0 million (2015 – $31.8 million).
72 | CAE Annual Report 2016
Assets under finance lease, by category, with lease terms between April 2016 and October 2036, are as follows:
Notes to the Consolidated Financial Statements
(amounts in millions)
Simulators
Cost
Accumulated depreciation
Net book value
Buildings
Cost
Accumulated depreciation
Net book value
Total net book value
NOTE 8 – INTANGIBLE ASSETS
(amounts in millions)
Net book value at March 31, 2014
Additions – internal development
Additions – acquired separately
Disposals of subsidiaries
Amortization
Transfers and others
Exchange differences
Transferred to assets held for sale
Net book value at March 31, 2015
Additions – internal development
Additions – acquired separately
Acquisition of subsidiaries (Note 4)
Amortization
Loss on measurement
to fair value (Note 3)
Transfers and others
Exchange differences
Net book value at March 31, 2016
(amounts in millions)
Cost
Accumulated amortization
Net book value at March 31, 2015
Cost
Accumulated amortization
2016
2015
$
221.3
(113.3)
$
108.0
$
66.0
(20.5)
$
$
45.5
153.5
$
228.3
(100.9)
$
127.4
$
63.9
(17.0)
$
$
46.9
174.3
ERP and
other
software
$
64.4
19.9
-
-
(13.1)
(2.3)
0.9
-
Technology
$
22.5
-
0.7
-
(3.9)
(0.1)
2.1
(2.3)
Other
intangible
assets
$
32.2
-
0.5
(1.3)
(2.7)
(0.4)
0.6
(0.7)
Total
$
870.7
61.4
2.9
(6.6)
(50.8)
(8.4)
18.4
(42.9)
Customer
costs relationships
$
Capitalized
Goodwill development
(Note 21)
$
502.5
-
-
(2.2)
-
-
14.0
(26.9)
134.0
41.5
-
-
(16.7)
(5.4)
0.9
(10.5)
$
115.1
-
1.7
(3.1)
(14.4)
(0.2)
(0.1)
(2.5)
$
487.4
$
143.8
$
96.5
$
69.8
$
19.0
$
28.2
$
844.7
-
-
49.2
-
-
-
20.0
35.6
-
-
(18.7)
-
1.9
15.4
(16.1)
15.6
-
-
(15.1)
(4.3)
0.4
0.4
-
(0.2)
3.2
-
(0.2)
0.1
-
-
4.2
(6.4)
-
(0.2)
0.7
-
0.8
-
(2.8)
-
-
1.0
51.2
2.7
68.8
(59.1)
(4.3)
(0.2)
25.4
$
556.6
$
157.2
$
100.7
$
70.2
$
17.3
$
27.2
$
929.2
Capitalized
development
Customer
costs relationships
Goodwill
ERP and
other
software
487.4
-
$
212.9
(69.1)
$
158.4
(61.9)
$
149.3
(79.5)
Other
intangible
assets
$
55.4
(27.2)
Total
$ 1,109.2
(264.5)
Technology
$
45.8
(26.8)
487.4
$
143.8
$
96.5
$
69.8
$
19.0
$
28.2
$
844.7
556.6
-
$
241.9
(84.7)
$
179.4
(78.7)
$
159.4
(89.2)
$
50.6
(33.3)
$
57.8
(30.6)
$ 1,245.7
(316.5)
$
$
$
Net book value at March 31, 2016
$
556.6
$
157.2
$
100.7
$
70.2
$
17.3
$
27.2
$
929.2
For the year ended March 31, 2016, amortization of $38.5 million (2015 – $34.1 million) has been recorded in cost of sales,
$19.0 million (2015 – $15.3 million) in research and development expenses and $1.6 million (2015 – $1.4 million) in selling, general
and administrative expenses.
As at March 31, 2016, the average remaining amortization period for the capitalized development costs is 6.4 years
(2015 – 5.8 years).
The categories of capitalized development costs and ERP and other software both primarily consist of internally generated intangible
assets.
The Company has no indefinite life intangible assets other than goodwill.
CAE Annual Report 2016 | 73
Notes to the Consolidated Financial Statements
NOTE 9 – OTHER ASSETS
(amounts in millions)
Restricted cash
Prepaid rent to a portfolio investment
Investment in a portfolio investment
Advances to a portfolio investment
Non-current receivables
Investment tax credits
Deferred financing costs
Other
2016
2015
$
27.0
22.7
1.6
46.9
122.6
199.1
2.4
10.8
$
23.7
55.0
1.6
47.7
117.2
159.5
3.1
8.4
$
433.1
$
416.2
The present value of future minimum lease payment receivables, included in the current and non-current receivables is as follows:
(amounts in millions)
Gross investment in finance lease contracts
Less: unearned finance income
Less: discounted unguaranteed residual values of leased assets
Present value of future minimum lease payment receivables
$
2016
174.9
72.7
5.2
2015
$
164.0
69.1
4.0
$
97.0
$
90.9
Future minimum lease payments from investments in finance lease contracts to be received are as follows:
(amounts in millions)
No later than 1 year
Later than 1 year and no later than 5 years
Later than 5 years
2016
2015
Gross
Investment
Present value of
future minimum
lease payments
Gross
Investment
Present value of
future minimum
lease payments
$
11.0
39.5
124.4
$
5.2
16.4
75.4
$
7.2
35.9
120.9
$
3.9
14.3
72.7
$
174.9
$
97.0
$
164.0
$
90.9
NOTE 10 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
(amounts in millions)
Accounts payable trade
Accrued liabilities
Deferred revenue
Amounts due to related parties (Note 33)
Current portion of royalty obligations
2016
$
304.5
327.5
172.0
20.1
8.7
$
832.8
2015
$
276.0
305.3
128.8
13.9
8.7
$
732.7
74 | CAE Annual Report 2016
NOTE 11 – CONTRACTS IN PROGRESS
(amounts in millions)
Contracts in progress: assets
Contracts in progress: liabilities
Contracts in progress: net assets
Details of contracts in progress are as follows:
(amounts in millions)
Aggregate amount of costs incurred plus recognized
profits (less recognized losses) to date
Less: progress billings
Contracts in progress: net assets
Notes to the Consolidated Financial Statements
2016
339.1 $
(174.7)
2015
309.8
(154.6)
164.4 $
155.2
2016
2015
3,581.1 $
3,416.7
3,411.9
3,256.7
164.4 $
155.2
$
$
$
$
Advances received from customers on construction contracts related to work not yet commenced amounts to $18.4 million at
March 31, 2016 (2015 – $11.4 million). Construction contracts revenue recognized in fiscal 2016 amounts to $888.9 million
(2015 – $824.4 million).
NOTE 12 – PROVISIONS
Restoration and simulator removal
In certain situations, simulators are installed at locations that are not owned by the Company. In some of these cases, the Company
has an obligation to dismantle and remove the simulators from these sites and to restore the location to its original condition. A
provision is recognized for the present value of estimated costs to be incurred to dismantle and remove the simulators from these
sites and restore the location. The provision also includes amounts relating to leased land and building where restoration costs are
contractually required at the end of the lease. Where such costs arise as a result of capital expenditure, these restoration costs are
also capitalized.
Restructuring
Restructuring costs consist mainly of severances and other related costs.
Legal claims
The amount represents a provision for certain legal claims brought against the Company. The corresponding charge is recognized in
income within selling, general and administrative expenses or other gains – net. Management’s best estimate is that the outcome of
these legal claims will not give rise to any significant loss beyond the amounts provided at March 31, 2016.
Warranties
A provision is recognized for expected warranty claims on products sold based on past experience of the level of repairs and
returns. It is expected that most of these costs will be incurred in the next financial year. Assumptions used to calculate the provision
for warranties were based on current sales levels and current information available about returns based on the warranty period of
products sold.
Contingent consideration
A provision is recognized for contingent consideration arising from business combinations when the proceeds include a contingent
consideration arrangement.
Changes in provisions are as follows:
(amounts in millions)
Total provisions, beginning of year
Additions
Amounts used
Unused amounts reversed
Exchange differences
Total provisions, end of year
Less: current portion
Long-term portion
Restoration
and removal Restructuring
Legal Warranties
Contingent
consideration
Other
Total
$
$
$
5.9 $
0.4
-
(0.6)
(0.1)
5.6 $
0.3
5.3 $
4.7 $
30.1
(11.3)
(1.2)
0.1
22.4 $
18.1
4.3 $
0.5 $
1.9
(0.1)
-
0.1
2.4 $
2.1
0.3 $
5.3 $
9.7
(8.2)
-
0.1
6.9 $
6.9
- $
1.5 $
-
(1.0)
-
0.1
0.6 $
0.3
0.3 $
4.2 $
-
(2.1)
-
0.2
2.3 $
2.3
- $
22.1
42.1
(22.7)
(1.8)
0.5
40.2
30.0
10.2
CAE Annual Report 2016 | 75
Notes to the Consolidated Financial Statements
NOTE 13 – DEBT FACILITIES
Long-term debt, net of transaction costs is as follows:
(amounts in millions)
Total recourse debt
Total non-recourse debt (1)
Total long-term debt
Less: current portion of long-term debt
Less: current portion of finance leases
2016
2015
$ 1,214.5
$ 1,225.8
58.4
$ 1,272.9
98.5
20.8
54.0
$ 1,279.8
33.7
21.8
$ 1,153.6
$ 1,224.3
(1) Non-recourse debt is a debt in a subsidiary for which recourse is limited to the assets, equity, interest and undertaking of such subsidiary and not CAE Inc.
Details of the recourse debt are as follows:
(amounts in millions)
(i)
Senior notes ($125.0 and US$225.0 maturing between December 2019 and December 2027), floating
interest rates based on bankers’ acceptances rate plus a spread on $50.0 million and interest rate ranging
from 3.59% and 4.15% for remaining $75.0 and US$225.0
(ii)
(iii)
Senior notes ($15.0 and US$45.0 maturing in June 2016 and US$60.0 maturing in June 2019), average
blended rate of 7.16% payable semi-annually in June and December
Senior notes (US$100.0 maturing in August 2021 and US$50.0 maturing in August 2026), average
blended rate of 4.47% payable semi-annually in August and February
(iv) Revolving unsecured term credit facilities maturing in October 2018
(v) Obligations under finance lease, with various maturities from April 2016 to October 2036, interest rates
(vi)
from 2.75% to 10.68%
Term loan maturing in June 2018 of US$26.3 and £5.1 (2015 – US$36.9 and £7.1)
Combined coupon rate of post-swap debt of 7.98% (2015 – 7.98%)
(vii) R&D obligation from a government agency maturing in July 2029
(viii) R&D obligation from a government agency maturing in July 2035
(ix)
Term loan maturing in January 2020 of €2.6 (2015 – €3.2), floating interest rate of EURIBOR plus a
spread
Credit facility maturing in January 2020 of INR 114.2 (2015 – $0.4 and INR 274.2), bearing interest based
on floating interest rates in India prevailing at the time of each drawdown
Term loan, maturing in October 2020 of US$10.0 (2015 – US$11.9), bearing interest at a fixed rate of
4.14%
(x)
(xi)
(xii) Other debts, with various maturities from September 2016 to March 2024, average interest rate of
approximately 0.94%
Total recourse debt, net amount
2016
2015
$
416.8
$
410.4
149.2
145.9
194.6
-
166.4
42.6
153.1
58.2
3.7
2.2
13.0
14.7
190.2
22.8
181.2
58.8
145.8
29.3
4.2
6.0
15.1
16.1
$ 1,214.5
$ 1,225.8
(i)
(ii)
Represents unsecured senior notes for $125.0 million and US$225.0 million by way of a private placement.
Represents unsecured senior notes for $15.0 million and US$105.0 million by way of a private placement.
(iii) Represents unsecured senior notes for US$150.0 million by way of a private placement.
(iv) Represents revolving unsecured term credit facilities. The available facility amount is US$550.0 million with an option, subject
to the lender’s consent, to increase to a total amount of up to US$850.0 million. The facility has covenants requiring a minimum
fixed charge coverage and a maximum debt coverage. 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.
(v)
These finance leases relate to the leasing of various buildings, simulators, machinery and equipment.
(vi) Represents senior financing for two civil aviation training centres repaid in quarterly instalments of principal and interest.
(vii) Represents an interest-bearing long-term obligation with the Government of Canada relative to Project Falcon, an R&D
program that ended in fiscal 2014, for a maximum amount of $250.0 million. The aggregate amount recognized at the end of
fiscal 2016 was $250.0 million (2015 – $250.0 million). The discounted value of the debt recognized amounted to $153.1 million
as at March 31, 2016 (2015 – $145.8 million).
(viii) Represents an interest-bearing long-term obligation with the Government of Canada relative to Project Innovate, an R&D
program extending over five and a half years, for a maximum amount of $250.0 million. The aggregate amount recognized in
fiscal 2016 was $110.9 million (2015 – $58.7 million). The discounted value of the debt recognized amounted to $58.2 million
as at March 31, 2016 (2015 – $29.3 million).
76 | CAE Annual Report 2016
Notes to the Consolidated Financial Statements
(ix) Represents a loan agreement of $3.7 million (€2.6 million) (2015 – $4.2 million (€3.2 million)) for the financing of one of the
Company’s subsidiaries.
(x)
Represents the financing facility for certain of the Company’s operations in India. The financing facility is comprised of a term
loan of up to $9.2 million (INR 470.0 million) and working capital facilities of up to an aggregate of $2.4 million
(INR 125.0 million). Drawdowns can be made in INR or any other major currencies acceptable to the lender.
(xi) Represents a term loan to finance simulators.
(xii) Other debts include bonds for which US$11.0 million (2015 – US$11.0 million) of letters of credit have been issued to support
the bonds
is 0.85%
(2015 – 0.90%). Other debts also include an unsecured facility for the financing of the cost of establishment of an 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 outstanding amount of
loans. The combined
these bonds
interest rate
the
for
for
Details of the non-recourse debt are as follows:
(amounts in millions)
(i)
(ii)
Term loan maturing in October 2016 of £0.5 (2015 – £0.8), interest rate of LIBOR plus 1.05%
Term loan maturing in March 2028 of US$44.6 (2015 – US$41.7), interest rate of LIBOR plus 2.50%
Total non-recourse debt, net amount
$
2016
1.0
57.4
$
2015
1.5
52.5
$
58.4
$
54.0
(i)
The credit facility to finance the Company’s MSH program for the MoD in the U.K., includes a term loan that is collateralized by
the project assets of the subsidiary and bi-annual repayments required until 2016. The Company has entered into an interest
rate swap totalling £0.3 million as at March 31, 2016 (2015 – £0.5 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, 2016 is £58.6 million (2015 – £75.6 million).
(ii)
Represents collateralized non-recourse financing for a term loan to finance a training centre in Brunei. The subsidiary may also
avail an additional amount of up to US$12.0 million in the form of letters of credit.
Payments required to meet the retirement provisions of the long-term debt are as follows:
(amounts in millions)
No later than 1 year
Later than 1 year and no later than 5 years
Later than 5 years
Total payments required
Less: transaction costs
The present value of the obligations under finance lease are as follows:
(amounts in millions)
Gross future minimum lease payments
Less: future finance charges on finance leases
Less: discounted guaranteed residual values of leased assets
Present value of future minimum lease payments
2016
2015
$
99.3
253.7
757.0
$ 1,110.0
3.5
$
34.3
388.1
680.4
$ 1,102.8
4.2
$ 1,106.5
$ 1,098.6
$
2016
236.8
62.6
7.8
$
2015
260.5
70.9
8.4
$
166.4
$
181.2
The future minimum lease payments of the obligations under finance lease are as follows:
(amounts in millions)
2016
2015
Gross future Present value of
future minimum minimum lease
lease payments
payments
Gross future Present value of
future minimum
lease payments
No later than 1 year
Later than 1 year and no later than 5 years
Later than 5 years
minimum lease
payments
$
30.0
120.3
86.5
$
236.8
As at March 31, 2016, the Company is in compliance with all of its financial covenants.
$
20.8
88.1
57.5
$
166.4
$
31.9
114.1
114.5
$
260.5
$
21.8
77.9
81.5
$
181.2
CAE Annual Report 2016 | 77
Notes to the Consolidated Financial Statements
NOTE 14 – GOVERNMENT ASSISTANCE
The Company has agreements with various governments whereby the latter funds a portion of the cost, based on expenditures
incurred by the Company, of certain R&D programs for modeling, simulation and training services expertise.
During fiscal 2014, the Company announced Project Innovate, an R&D program extending over five and a half years. The goal of
Project Innovate is to expand the Company’s modeling and simulation technologies, develop new ones and continue to differentiate
its service offering. Concurrently, the Government of Canada agreed to participate in Project Innovate through a repayable loan of up
to $250 million made through the Strategic Aerospace and Defence Initiative (SADI).
During fiscal 2016, the Company amended and extended its Project New Core Markets, an R&D program, for an additional four years.
The aim is to leverage the Company’s modeling, simulation and training services expertise in healthcare. The Quebec government,
through Investissement Québec, agreed to participate up to $70 million in contributions related to costs incurred before the end of
fiscal 2020.
See Notes 1 and 13 for explanations of the royalty obligations and debt.
The following table provides aggregate information regarding contributions recognized and amounts not yet received for the projects
New Core Markets and Innovate:
(amounts in millions)
Outstanding contribution receivable, beginning of year
Contributions
Payments received
Outstanding contribution receivable, end of year
The aggregate contributions recognized for all programs are as follows:
(amounts in millions)
Contributions credited to capitalized expenditures:
Project New Core Markets
Project Innovate
Contributions credited to income:
Project New Core Markets
Project Innovate
Total contributions:
Project New Core Markets
Project Innovate
2016
$
8.8
28.3
(29.4)
$
7.7
2015
$
5.0
31.7
(27.9)
$
8.8
2016
2015
$
0.9
7.0
$
0.9
10.2
2.9
17.5
2.2
18.4
$
3.8
24.5
$
3.1
28.6
There are no unfulfilled conditions or unfulfilled contingencies attached to these government contributions.
NOTE 15 – EMPLOYEE BENEFIT OBLIGATIONS
Defined benefit plans
The Company has three registered funded defined benefit pension plans in Canada (two for employees and one for designated
executives) that provide benefits based on length of service and final average earnings. The Company also maintains funded pension
plans for employees in the Netherlands and United Kingdom that provide benefits based on similar provisions.
The Company’s annual contributions, to fund both benefits accruing in the year and deficits accumulated over prior years, and the
plans’ financial position are determined based on the actuarial valuations. Applicable pension legislations prescribe minimum funding
requirements.
In addition, the Company maintains unfunded plans in Canada, Germany and Norway that provide defined benefits based on length of
service and final average earnings. These unfunded plans are the sole obligation of the Company, and there is no requirement to fund
them. However, the Company is obligated to pay the benefits when they become due. As at March 31, 2016, the unfunded defined
benefit pension obligations are $76.6 million (2015 – $75.8 million) and the Company has issued letters of credit totalling $58.4 million
(2015 – $51.3 million) to collateralize these obligations under the Canadian plan.
The funded plans are trustee administered funds. Plan assets held in trusts are governed by local regulations and practices in each
country, as is the nature of the relationship between the Company and the trustees and their composition. Responsibility for
governance of the plans, including investment decisions and contribution schedules, lies jointly with the Company and the board of
trustees.
78 | CAE Annual Report 2016
Notes to the Consolidated Financial Statements
In fiscal 2016, the Company discontinued its Norway defined benefit plans and transferred its employees to defined contribution plans
resulting in a gain on curtailment and settlement of $1.1 million. In addition, upon the acquisition of BMAT, the Company assumed a
funded defined benefit plan and a post-employment benefit (OPEB) plan, resulting in additional pension obligation of $4.4 million and
$1.0 million respectively. In addition, the Company assumed a defined contribution plan.
In fiscal 2015, the Company amended its maximum eligible salary and accrual rate for its Netherlands funded pension plan due to
changes in local legislation. As a result, a gain on past service cost of $1.6 million was recognized in income.
The employee benefit obligations are as follows:
(amounts in millions)
Funded defined benefit pension obligations
Fair value of plan assets
Funded defined benefit pension obligations – net
Unfunded defined benefit pension obligations
Employee benefit obligations
2016
$
521.2
429.8
91.4
76.6
$
168.0
$
2015
$
520.9
411.0
109.9
75.8
185.7
The changes in the funded defined benefit pension obligations and the fair value of plan assets are as follows:
(amounts in millions)
Pension obligations, beginning of year
Current service cost
Interest cost
Past service cost, settlements
and curtailments
Actuarial loss (gain) arising from:
Experience adjustments
Economic assumptions
Demographic assumptions
Employee contributions
Pension benefits paid
Acquisition of subsidiaries
Exchange differences
Pension obligations, end of year
Fair value of plan assets, beginning of year
$
$
Interest income
Return on plan assets, excluding amounts
included in interest income
Employer contributions
Employee contributions
Pension benefits paid
Settlements
Acquisition of subsidiaries
Administrative costs
Exchange differences
Canadian
Foreign
$
450.8
25.8
15.5
$
70.1
2.7
1.3
2016
$
Total
520.9
28.5
16.8
Canadian
Foreign
$
349.8
18.5
16.0
$
57.1
1.9
1.9
2015
$
Total
406.9
20.4
17.9
(0.3)
(7.1)
(7.4)
-
(1.6)
(1.6)
(7.8)
(32.2)
-
5.5
(18.0)
29.6
-
468.9
356.2
12.5
(19.2)
21.6
5.5
(18.0)
-
25.2
(0.9)
-
$
$
(3.4)
(14.0)
(0.7)
0.3
(1.2)
-
4.3
52.3
54.8
1.0
(6.9)
1.3
0.3
(1.2)
(6.0)
-
(0.1)
3.7
$
$
(11.2)
(46.2)
(0.7)
5.8
(19.2)
29.6
4.3
521.2
411.0
13.5
(26.1)
22.9
5.8
(19.2)
(6.0)
25.2
(1.0)
3.7
6.0
70.0
-
5.5
(15.0)
-
-
$
$
450.8
308.1
14.1
29.1
15.1
5.5
(15.0)
-
-
(0.7)
-
$
$
(2.9)
20.8
(0.2)
0.4
(1.1)
-
(6.2)
70.1
49.3
1.7
8.0
1.9
0.4
(1.1)
-
-
(0.1)
(5.3)
3.1
90.8
(0.2)
5.9
(16.1)
-
(6.2)
$
$
520.9
357.4
15.8
37.1
17.0
5.9
(16.1)
-
-
(0.8)
(5.3)
Fair value of plan assets, end of year
$
382.9
$
46.9
$
429.8
$
356.2
$
54.8
$
411.0
CAE Annual Report 2016 | 79
Notes to the Consolidated Financial Statements
The changes in the unfunded defined benefit pension obligations are as follows:
(amounts in millions)
Pension obligations, beginning of year
Current service cost
Interest cost
Past service cost, settlements
and curtailments
Actuarial (gain) loss arising from:
Experience adjustments
Economic assumptions
Demographic assumptions
Pension benefits paid
Acquisition of subsidiaries
Exchange differences
Canadian
Foreign
$
62.2
2.9
2.0
$
13.6
-
0.2
$
2016
Total
75.8
2.9
2.2
Canadian
Foreign
$
53.6
1.9
2.4
$
12.4
0.1
0.4
$
-
-
-
0.2
(0.1)
(0.9)
(1.1)
-
(3.2)
1.0
-
0.2
(0.7)
-
(0.7)
-
1.1
(0.7)
(1.8)
-
(3.9)
1.0
1.1
(0.6)
7.2
-
(2.5)
-
-
0.3
2.5
-
(0.7)
-
(1.3)
2015
Total
66.0
2.0
2.8
0.1
(0.3)
9.7
-
(3.2)
-
(1.3)
Pension obligations, end of year
$
62.9
$
13.7
$
76.6
$
62.2
$
13.6
$
75.8
The net pension cost is as follows:
Years ended March 31
(amounts in millions)
Funded plans
Current service cost
Interest cost
Interest income
Past service cost, settlements
and curtailments
Administrative cost
Net pension cost
Unfunded plans
Current service cost
Interest cost
Past service cost, settlements
and curtailments
Net pension cost
Total net pension cost
Canadian
Foreign
Total
Canadian
Foreign
2016
$
25.8
15.5
(12.5)
(0.3)
0.9
$
29.4
$
$
$
2.9
2.0
-
4.9
34.3
$
$
$
$
$
2.7
1.3
(1.0)
(1.1)
0.1
2.0
-
0.2
-
0.2
2.2
$
28.5
16.8
(13.5)
$
18.5
16.0
(14.1)
(1.4)
1.0
-
0.7
$
31.4
$
21.1
$
2.9
2.2
-
$
$
5.1
36.5
$
$
$
1.9
2.4
0.2
4.5
25.6
$
$
$
$
$
1.9
1.9
(1.7)
(1.6)
0.1
0.6
0.1
0.4
(0.1)
0.4
1.0
2015
Total
$
20.4
17.9
(15.8)
(1.6)
0.8
$
21.7
$
$
$
2.0
2.8
0.1
4.9
26.6
For the year ended March 31, 2016, pension costs of $13.5 million (2015 – $10.6 million) have been charged in cost of sales,
$4.5 million (2015 – $1.9 million) in research and development expenses, $11.9 million (2015 – $6.8 million) in selling, general and
administrative expenses, $5.5 million (2015 – $4.9 million) in finance expense and $1.4 million (2015 – $2.4 million) were capitalized.
In fiscal 2016, a curtailment and settlement gain of $0.3 million is included in restructuring costs.
As at March 31, 2016, the total cumulative amount of net actuarial losses before income taxes recognized in OCI was $169.4 million
(2015 – $134.9 million).
80 | CAE Annual Report 2016
The fair value of the plan assets, by major categories, are as follows:
Notes to the Consolidated Financial Statements
(amounts in millions)
Canadian plans
Equity funds
Canadian
Foreign
Bond funds
Government
Corporate
Other
Cash and cash equivalents
Other
Total Canadian plans
Foreign plans
Equity instruments
Debt instruments
Government
Corporate
Other
Property
Cash and cash equivalents
Other(1)
Total Foreign plans
Total plans
$
$
$
$
$
Quoted
Unquoted
Total
Quoted
Unquoted
Total
2016
2015
-
-
-
-
-
-
-
-
$
96.3
104.1
$
96.3
104.1
$
114.7
33.3
-
-
34.5
114.7
33.3
-
-
34.5
$
382.9
$
382.9
2.5
$
-
$
2.5
0.9
1.1
0.6
-
-
-
5.1
5.1
-
-
-
0.1
0.1
41.6
0.9
1.1
0.6
0.1
0.1
41.6
41.8
$
$ 424.7
46.9
$
$ 429.8
$
$
$
$
-
-
-
-
-
-
-
-
$
114.8
93.9
$ 114.8
93.9
110.7
33.2
-
3.6
-
110.7
33.2
-
3.6
-
$
356.2
$
356.2
2.9
$
-
$
2.9
0.9
4.3
0.5
-
-
-
8.6
8.6
-
-
-
1.0
1.1
44.1
0.9
4.3
0.5
1.0
1.1
44.1
46.2
$
$ 402.4
54.8
$
$ 411.0
(1)Includes an insurance policy to cover a portion of the defined benefit obligation.
As at March 31, 2016 and March 31, 2015, there were no ordinary shares of the Company in the pension plan assets.
Significant assumptions (weighted average):
Pension obligations as at March 31:
Discount rate
Compensation rate increases
Net pension cost for years ended March 31:
Discount rate
Compensation rate increases
2016
3.97%
3.50%
3.63%
3.49%
Canadian
2015
2016
Foreign
2015
3.63%
3.50%
4.50%
3.50%
2.26%
2.86%
1.82%
2.92%
1.82%
2.92%
3.47%
3.03%
Assumptions regarding future mortality are based on actuarial advice in accordance with published statistics and mortality tables and
experience in each territory. The mortality tables and the average life expectancy in years for a member age 45 and 65 are as follows:
As at March 31, 2016
(in years)
Country
Canada
Canada
Canada
Netherlands
Germany
Norway
United Kingdom
Mortality table
at age 45
Life expectancy over 65 for a member
Female
at age 65
at age 45
Male
at age 65
CPM private tables (employees)
CPM private tables (designated executives)
CPM private tables (CMAT)
AG2014
Heubeck RT2005G
K2013
S1PA
22.4
23.9
22.7
23.7
21.6
22.7
23.1
21.3
22.8
21.5
21.3
19.0
22.0
21.3
24.6
25.3
25.0
25.7
25.6
26.3
25.6
23.6
24.4
24.0
23.5
23.1
25.3
23.6
CAE Annual Report 2016 | 81
Notes to the Consolidated Financial Statements
As at March 31, 2015
(in years)
Country
Canada
Canada
Netherlands
Germany
Norway
United Kingdom
Mortality table
at age 45
Life expectancy over 65 for a member
Female
at age 65
at age 45
Male
at age 65
CPM private tables (employees)
CPM private tables (designated executives)
AG2014
Heubeck RT2005G
K2013
S1PA
22.3
23.8
23.5
21.5
23.5
23.0
21.2
22.7
21.2
18.9
21.3
21.3
24.6
25.3
25.6
25.5
26.8
25.5
23.6
24.3
23.4
22.9
24.4
23.6
The weighted average duration of the defined benefit obligation is 18.37 years.
The following table summarizes the impact on the defined benefit obligation as a result of a 0.25% change in the significant
assumptions as at March 31, 2016:
Discount rate:
Increase
Decrease
Compensation rate:
Increase
Decrease
Canadian
Funded plans
Foreign
Canadian
Unfunded plans
Foreign
Total
$
(20.6)
22.1
$
(2.6)
2.8
$
(2.0)
2.2
$
(0.4)
0.4
$
(25.6)
27.5
9.0
(7.9)
0.2
(0.2)
0.4
(0.4)
-
-
9.6
(8.5)
Through its defined benefit plans, the Company is exposed to a number of risks, the most significant being the exposure to asset
volatility, to changes in bond yields and to changes in life expectancy. The plan liabilities are calculated using a discount rate set with
reference to corporate bond yields, if plan assets underperform against this yield, this will create a deficit. A decrease in corporate
bond yields will increase plan liabilities, although this will be partially offset by an increase in the value of the plans’ bond holdings.
The plans’ obligations are to provide benefits for the duration of the life of its members, therefore, increases in life expectancy will
result in an increase in the plans’ liabilities.
Contributions reflect actuarial assumptions of future investment returns, salary projections and future service benefits. The expected
contribution for the next fiscal year is as follows:
(amounts in millions)
Expected contribution – fiscal 2017
Funded plans
Foreign
Canadian
Canadian
Unfunded plans
Foreign
Total
$
17.2
$
1.3
$
2.6
$
0.7
$
21.8
NOTE 16 – DEFERRED GAINS AND OTHER NON-CURRENT LIABILITIES
(amounts in millions)
Deferred gains on sale and leasebacks (1)
Deferred revenue
Share-based compensation obligations (Note 24)
Licence payable
Purchase options
Other
(1) The related amortization for the year amounted to $3.6 million (2015 – $3.8 million).
$
2016
26.4
86.0
40.0
-
1.5
18.8
$
2015
29.7
73.7
36.1
0.3
1.4
23.9
$
172.7
$
165.1
82 | CAE Annual Report 2016
NOTE 17 – INCOME TAXES
Income tax expense
A reconciliation of income taxes at Canadian statutory rates with the reported income taxes is as follows:
Notes to the Consolidated Financial Statements
Years ended March 31
Earnings before income taxes
Canadian statutory income tax rates
Income taxes at Canadian statutory rates
Difference between Canadian and Foreign statutory rates
Losses not tax effected
Tax benefit of operating losses not previously recognized
Non-taxable capital loss (gain)
Tax impact on equity accounted investees
Non-deductible items
Prior years' tax adjustments and assessments
Impact of change in income tax rates on deferred income taxes
Non-taxable research and development tax credits
Other tax benefits not previously recognized
Income tax expense
2016
2015
$
260.3
26.95%
$
261.9
26.95%
$
70.2
(8.9)
5.6
(2.6)
0.5
(10.6)
0.6
(29.0)
0.4
(2.3)
(3.5)
$
70.6
(3.5)
3.2
(1.9)
(0.8)
(10.0)
13.9
(0.2)
(0.7)
(2.8)
(10.0)
$
20.4
$
57.8
The applicable statutory tax rate is 26.95% in fiscal 2016 (2015 – 26.95%). The Company's applicable tax rate is the Canadian
combined rates applicable in the jurisdictions in which the Company operates.
Significant components of the provision for the income tax expense are as follows:
(amounts in millions)
Current income tax expense (recovery):
Current period
Adjustment for prior years
Deferred income tax (recovery) expense:
Tax benefit not previously recognized used to reduce the deferred tax expense
Impact of change in income tax rates on deferred income taxes
Origination and reversal of temporary differences
Income tax expense
2016
2015
$
23.5
(28.1)
$
25.2
(4.6)
(6.1)
0.4
30.7
(11.9)
(0.7)
49.8
$
20.4
$
57.8
During fiscal 2016, a net income tax recovery of $29.4 million was recorded in income for the settlement of tax oppositions in Canada
with respect to the tax treatment of the sale of certain simulators, for certain tax audits and the changes in exchange rates that gave
rise to deferred tax liabilities.
Income tax recognized in OCI
During fiscal 2016, a deferred tax expense of $16.1 million was recorded in OCI (2015 – tax recovery of $18.3 million). No current
income tax expense (recovery) was recognized in OCI for fiscal 2016 nor fiscal 2015.
CAE Annual Report 2016 | 83
Notes to the Consolidated Financial Statements
Deferred tax assets and liabilities
Deferred tax assets and liabilities are attributable to the following:
(amounts in millions)
Assets
Liabilities
Non-capital loss carryforwards
Intangible assets
Amounts not currently deductible
Deferred revenue
Tax benefit carryover
Unclaimed research & development
expenditures
Investment tax credits
Property, plant and equipment
Unrealized losses (gains) on foreign exchange
Financial instruments
Government assistance
Employee benefit plans
Percentage-of-completion versus
completed contract
Other
Net deferred income tax assets (liabilities)
$
2016
49.4
0.5
34.3
25.4
5.7
24.1
-
15.5
0.6
1.0
-
41.7
0.7
0.4
$
2015
50.8
1.5
26.3
7.2
0.4
11.6
-
10.0
-
10.3
-
46.2
1.8
0.5
$
199.3
(152.5)
$
166.6
(133.4)
$
46.8
$
33.2
2016
2015
2016
$
-
(74.6)
-
-
-
$
-
(75.5)
-
-
-
$
49.4
(74.1)
34.3
25.4
5.7
-
(56.7)
(147.1)
(16.7)
(2.0)
(24.9)
-
-
(44.5)
(119.3)
(13.1)
(2.8)
(16.5)
-
24.1
(56.7)
(131.6)
(16.1)
(1.0)
(24.9)
41.7
Net
2015
$
50.8
(74.0)
26.3
7.2
0.4
11.6
(44.5)
(109.3)
(13.1)
7.5
(16.5)
46.2
(41.3)
(2.3)
$ (365.6)
152.5
$ (213.1)
(35.5)
(2.3)
(40.6)
(1.9)
$ (309.5)
133.4
$ (166.3)
-
(33.7)
(1.8)
$ (142.9)
-
$ (176.1)
$ (166.3)
$ (142.9)
Movements in temporary differences during fiscal year 2016 are as follows:
Recognized in
Balance Recognized Recognized discontinued Acquisition of
in OCI
Balance
Exchange
subsidiary differences end of year
in income
operation
beginning of year
Non-capital loss carryforwards
Intangible assets
Amounts not currently deductible
Deferred revenue
Tax benefit carryover
Unclaimed research and
development expenditures
Investment tax credits
Property, plant and equipment
Unrealized gains
on foreign exchange
Financial instruments
Government assistance
Employee benefit plans
Percentage-of-completion versus
completed contract
Other
$
$
50.8
(74.0)
26.3
7.2
0.4
11.6
(44.5)
(109.3)
(13.1)
7.5
(16.5)
46.2
(33.7)
(1.8)
$
$
(3.1)
4.8
7.5
(2.3)
5.4
12.5
(12.2)
(20.2)
(0.6)
(4.1)
(8.4)
3.2
(6.7)
(0.8)
-
-
-
-
-
-
-
-
(2.4)
(4.4)
-
(9.3)
-
-
Net deferred income tax (liabilities) assets
$ (142.9)
$
(25.0)
$
(16.1)
$
-
-
-
-
-
-
-
-
-
-
-
-
-
0.7
0.7
$
$
-
(4.1)
0.3
20.5
-
-
-
-
-
-
-
1.2
-
-
1.7
(0.8)
0.2
-
(0.1)
-
-
(2.1)
-
-
-
0.4
$
49.4
(74.1)
34.3
25.4
5.7
24.1
(56.7)
(131.6)
(16.1)
(1.0)
(24.9)
41.7
(0.2)
-
(40.6)
(1.9)
$
17.9
$
(0.9)
$ (166.3)
84 | CAE Annual Report 2016
Movements in temporary differences during fiscal year 2015 are as follows:
Transferred to
Notes to the Consolidated Financial Statements
(amounts in millions)
Non-capital loss carryforwards
Intangible assets
Amounts not currently deductible
Deferred revenue
Tax benefit carryover
Unclaimed research and
development expenditures
Investment tax credits
Property, plant and equipment
Unrealized (gains) losses
on foreign exchange
Financial instruments
Government assistance
Employee benefit plans
Percentage-of-completion versus
completed contract
Other
Balance Recognized Recognized assets held Disposition of
in OCI
Balance
for sale subsidiaries differences end of year
in income
Exchange
beginning of year
$
$
54.0
(72.8)
26.7
8.7
0.4
$
(3.8)
(5.4)
(1.0)
(1.3)
(0.1)
10.5
(40.3)
(79.9)
(6.1)
8.0
(11.1)
27.3
(31.9)
(5.3)
2.1
(4.2)
(14.2)
(3.8)
(4.2)
(4.8)
1.3
(1.9)
4.1
-
-
-
-
-
-
-
-
(3.3)
3.6
-
18.0
-
-
$
(0.6)
3.6
(0.1)
(0.7)
-
(1.0)
-
(0.3)
-
-
(0.6)
-
-
(1.1)
$
-
1.5
(0.4)
-
-
-
-
0.2
-
-
-
-
-
-
$
1.2
(0.9)
1.1
0.5
0.1
$
50.8
(74.0)
26.3
7.2
0.4
-
-
(15.1)
0.1
0.1
-
(0.4)
11.6
(44.5)
(109.3)
(13.1)
7.5
(16.5)
46.2
0.1
0.5
(33.7)
(1.8)
Net deferred income tax (liabilities) assets
$ (111.8)
$
(37.2)
$
18.3
$
(0.8)
$
1.3
$
(12.7)
$ (142.9)
As at March 31, 2016, taxable temporary differences of $931.4 million (2015 – $758.3 million) related to investments in foreign
operations, including subsidiaries and interests in joint ventures has not been recognized, because the Company controls whether the
liability will be incurred and it is satisfied that it will not be incurred in the foreseeable future.
The non-capital losses expire as follows:
(amounts in millions)
Expiry date
2017
2018
2019
2020
2021
2022
2023 – 2036
No expiry date
Unrecognized Recognized
$
1.7
2.3
5.6
3.4
2.9
0.2
39.0
130.8
$
-
-
-
-
0.1
-
71.3
106.9
$
185.9
$
178.3
As at March 31, 2016, the Company has $268.6 million (2015 – $242.7 million) of deductible temporary differences for which deferred
tax assets have not been recognized. These amounts will reverse during a period of up to 30 years. The Company also has
$0.7 million (2015 – $0.4 million) of accumulated capital losses carried forward relating to its operations in Canada for which deferred
tax assets have not been recognized. These capital losses can be carried forward indefinitely.
NOTE 18 – SHARE CAPITAL, EARNINGS PER SHARE AND DIVIDENDS
Share capital
Authorized shares
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.
CAE Annual Report 2016 | 85
Notes to the Consolidated Financial Statements
Repurchase and cancellation of common shares
On February 19, 2016, the Company announced that it received approval from the Toronto Stock Exchange (TSX) to purchase, by
way of normal course issuer bid (NCIB), up to 5,398,643 of its common shares, representing 2% of the 269,932,164 issued and
outstanding common shares as of February 12, 2016. The NCIB began on February 23, 2016, and will end on February 22, 2017 or
on such earlier date when the Company completes its purchases or elects to terminate the NCIB. These purchases will be made on
the open market plus brokerage fees through the facilities of the TSX and/or alternative trading systems at the prevailing market price
at the time of the transaction, in accordance with the TSX’s applicable policies. All common shares purchased pursuant to the NCIB
will be cancelled.
As at March 31, 2016, the Company had repurchased and cancelled a total of 515,200 common shares, at a weighted average price
of $15.01 per common share, for a total consideration of $7.7 million. The excess of the shares’ repurchase value over their carrying
amount of $6.6 million was charged to retained earnings as share repurchase premiums.
Issued shares
A reconciliation of the issued and outstanding common shares of the Company is presented in the consolidated statement of changes
to 269,634,816
in equity. As at March 31, 2016,
(2015 – 266,903,070).
the number of shares
fully paid amount
issued and
that are
Earnings per share computation
The denominators for the basic and diluted earnings per share computations are as follows:
Years ended March 31
Weighted average number of common shares outstanding
Effect of dilutive stock options
Weighted average number of common shares outstanding for diluted earnings per share calculation
2016
2015
268,804,733 265,135,046
870,587
269,196,346 266,005,633
391,613
As at March 31, 2016, options to acquire 1,645,600 common shares (2015 – 1,377,800) have been excluded from the above
calculation since their inclusion would have had an anti-dilutive effect.
Dividends
The dividends declared for fiscal 2016 were $80.1 million or $0.295 per share (2015 – $71.6 million or $0.27 per share).
NOTE 19 – ACCUMULATED OTHER COMPREHENSIVE INCOME
As at March 31
(amounts in millions)
Foreign currency
translation
2015
2016
Net changes in
cash flow hedges
2015
2016
Net changes in
available-for-sale
financial instruments
2016
2015
2016
Total
2015
Balances, beginning of year
OCI
$
207.9
30.6
$
150.5
57.4
$
(31.2)
12.7
$
(21.6)
(9.6)
Balances, end of year
$
238.5
$
207.9
$
(18.5)
$
(31.2)
$
$
0.6
0.1
0.7
$
$
0.6
-
0.6
$
177.3
43.4
$
129.5
47.8
$
220.7
$
177.3
NOTE 20 – EMPLOYEE COMPENSATION
The total employee compensation expense recognized in the determination of net income is as follows:
(amounts in millions)
Salaries and other short-term employee benefits
Share-based payments, net of equity swap (Note 24)
Post-employment benefits – defined benefit plans (Note 15)
Post-employment benefits – defined contribution plans
Termination benefits
Total employee compensation expense
86 | CAE Annual Report 2016
2016
2015
$
786.9
22.5
35.1
9.5
23.0
$
706.2
15.2
24.2
8.4
8.4
$
877.0
$
762.4
NOTE 21 – IMPAIRMENT OF NON-FINANCIAL ASSETS
Goodwill is monitored by management at the operating segment level.
The carrying amount of goodwill allocated to the Company's CGUs per operating segment is as follows:
Notes to the Consolidated Financial Statements
Net book value at March 31, 2014
Disposals of subsidiaries
Exchange differences
Transferred to assets held for sale
Net book value at March 31, 2015
Acquisition of subsidiaries (Note 4)
Exchange differences
Net book value at March 31, 2016
Civil Aviation
Defence
Training Solutions and Security
$
204.1
(2.2)
(18.6)
-
$
150.6
-
14.5
-
Healthcare
$ 147.8
-
18.1
(26.9)
$
Total
502.5
(2.2)
14.0
(26.9)
$
183.3
$
165.1
$ 139.0
$ 487.4
-
14.3
49.2
2.6
-
3.1
49.2
20.0
$ 197.6
$ 216.9
$ 142.1
$ 556.6
Goodwill is allocated to CGUs or a group of CGUs, which generally corresponds to the Company’s operating segments or one level
below.
The Company’s impairment test for goodwill is based on level 3 fair value less costs of disposal calculations and uses valuation
models such as the discounted cash flows model. The cash flows are derived from the projections approved by management for the
next five years. Cash flow projections take into account past experience and represent management’s best estimate about future
developments and form part of the Company’s strategic plan approved annually by the Board of Directors. Cash flows after the five
year period are extrapolated using a constant growth rate of 2.5%. For fiscal 2016, the post-tax discount rates were derived from the
respective CGUs’ representative weighted average cost of capital, which range from 7.0% to 10.0%.
In fiscal 2016, an impairment loss of $1.7 million was recognized in Civil Aviation Training Solutions cost of sales following the
decision to sell an asset. The recoverable amount of $1.8 million was estimated using its fair value, based on a level 3 market price,
less costs of disposal. There were no impairment losses in fiscal 2015.
NOTE 22 – OTHER GAINS – NET
(amounts in millions)
Net foreign exchange gains (losses)
Partial disposal of interests in investments
Termination of customer agreements
(Loss) gain on litigation
Reversal of royalty obligations
Other
Other gains – net
2016
2015
$
4.6
-
(2.4)
(1.9)
20.0
3.9
$
(4.9)
13.9
-
4.6
4.0
2.7
$
24.2
$
20.3
During fiscal 2016, the Company realized a gain of $20.0 million from the revaluation of royalty obligations resulting from amendments
to certain government assistance agreements. The amendments include adjustments to the royalty rates, extension of the term period
and the treatment of business acquisitions and disposals.
CAE Annual Report 2016 | 87
Notes to the Consolidated Financial Statements
NOTE 23 – FINANCE EXPENSE – NET
Finance expense:
Long-term debt (other than finance leases)
Finance leases
Royalty obligations
Employee benefits obligations (Note 15)
Financing cost amortization
Provisions and other non-current liabilities
Other
Borrowing costs capitalized (1)
Finance expense
Finance income:
Loans and finance lease contracts
2016
2015
$
55.8
10.5
8.0
5.5
1.4
1.2
6.0
(3.7)
$
55.5
10.0
7.9
4.9
1.4
1.4
4.0
(4.4)
$
84.7
$
80.7
Other
Finance income
Finance expense – net
$
(1) The average capitalization rate used during fiscal 2016 to determine the amount of borrowing costs eligible for capitalization was 4.00% (2015 – 3.79%).
75.2
$
$
$
$
$
(7.9)
(1.6)
(9.5)
(7.5)
(2.3)
(9.8)
70.9
NOTE 24 – SHARE-BASED PAYMENTS
The Company’s share-based payment plans consist of two categories: the Employee Stock Option Plan (ESOP), which qualifies as
an equity-settled share-based payment plan; and the Employee Stock Purchase Plan (ESPP), Deferred Share Unit (DSU) plan,
Long-Term Incentive Time Based plans and Long-Term Incentive Performance Based plans which qualify as cash-settled
share-based payments plans. Time Based plans include the Long-Term Incentive – Deferred Share Unit (LTI-DSU) plan and the
Long-Term Incentive – Time Based Restricted Share Unit (LTI-TB RSU) plan. Performance Based plans include the Long-Term
Incentive – Restricted Share Unit (LTI-RSU) plan and the Long-Term Incentive – Performance Share Unit (LTI-PSU) plan.
The effect of share-based payment arrangements in the consolidated income statement and in the consolidated statement of financial
position are as follows as at, and for the years ended March 31:
Compensation
cost
2015
Recognized in the consolidated
statement of financial position
2015
2016
Cash-settled share-based compensation:
ESPP
DSU
LTI-DSU
LTI-TB RSU
LTI-RSU
LTI-PSU
2016
$
6.3
1.9
1.7
2.5
2.8
5.0
$
6.1
1.7
1.9
1.1
0.4
2.7
Total cash-settled share-based compensation
$
20.2
$
13.9
Equity-settled share-based compensation:
ESOP
Total equity-settled share-based compensation
Total share-based compensation cost
$
$
$
3.7
3.7
23.9
$
$
$
3.1
3.1
17.0
$
-
(10.5)
(19.4)
(3.6)
(7.0)
(7.7)
$
(48.2)
$
$
$
(18.3)
(18.3)
(66.5)
$
-
(9.4)
(22.6)
(1.1)
(7.7)
(2.7)
$
(43.5)
$
$
$
(19.1)
(19.1)
(62.6)
For the year ended March 31, 2016, share-based compensation costs of $0.4 million (2015 – $1.1 million) were capitalized.
The Company entered into equity swap agreements with three major Canadian financial institutions in order to reduce its earnings
exposure related to the fluctuation in the Company’s share price relating to the DSU and Long-Term Incentive Time Based plans (see
Note 29 and Note 30). The recovery recognized in fiscal 2016 amounts to $1.0 million (2015 – $0.7 million).
The share-based payment plans are described below. There have been no plan cancellations during fiscal 2016 or fiscal 2015.
Employee Stock Option Plan
Under the Company’s long-term incentive program, options may be granted to key employees to purchase common shares of the
Company at a subscription price of 100% of the market value at the date of the grant. Market value is determined as the weighted
average closing price of the common shares on the Toronto Stock Exchange (TSX) of the five days of trading prior to the effective
date of the grant.
88 | CAE Annual Report 2016
Notes to the Consolidated Financial Statements
As at March 31, 2016, a total of 6,954,014 common shares (2015 – 8,608,019) remained authorized for issuance under the Employee
Stock Option Plan (ESOP). The options are exercisable during a period not to exceed seven years (six years for options issued before
March 31, 2011), and are not exercisable during the first 12 months after the date of the grant. The right to exercise all of the options
vests over a period of four years of continuous employment from the grant date. Upon termination of employment at retirement,
unvested options continue to vest following the retiree’s retirement date, subject to the four year vesting period. However, if there is a
change of control of the Company, the options outstanding become immediately exercisable by option holders. Options are adjusted
proportionately for any stock dividends or stock splits attributed to the common shares of the Company.
Outstanding options are as follows:
Years ended March 31
Options outstanding, beginning of year
Granted
Exercised
Forfeited
Expired
Options outstanding, end of year
Options exercisable, end of year
2016
Weighted
average exercise
price (CAD$)
$
11.46
15.13
9.61
13.41
14.66
$
$
13.30
11.90
Number
of options
5,027,316
1,747,400
(1,654,005)
(281,336)
(4,650)
4,834,725
1,098,075
2015
Weighted
average exercise
price (CAD$)
$
10.13
14.65
9.60
11.17
-
$
$
11.46
9.33
Number
of options
5,424,582
1,447,100
(1,309,201)
(535,165)
-
5,027,316
1,527,276
Summarized information about the Company's ESOP as at March 31, 2016 is as follows:
Range of
exercise prices
(CAD$)
$9.41 to $10.20
$10.77 to $12.65
$14.05 to $15.34
Total
Number of
options
outstanding
Weighted
average remaining
contractual life (years)
557,940
1,376,210
2,900,575
4,834,725
3.17
3.93
5.75
4.93
Options Outstanding
Weighted
average exercise
price (CAD$)
$
10.09
11.18
14.93
$
13.30
Number of
options
exercisable
284,340
536,460
277,275
1,098,075
Options Exercisable
Weighted
average exercise
price (CAD$)
$
10.04
11.45
14.65
$
11.90
The weighted average market share price for share options exercised in 2016 was $15.04 (2015 – $14.88).
For the year ended March 31, 2016, compensation cost for CAE’s stock options of $3.7 million (2015 – $3.1 million) was recognized
with a corresponding credit to contributed surplus using the fair value method of accounting for awards that were granted since
fiscal 2012.
The assumptions used for the purpose of the option calculations outlined in this note are presented below:
2016
2015
Weighted average assumptions used in the Black-Scholes options pricing model:
Weighted average share price
Exercise price
Dividend yield
Expected volatility
Risk-free interest rate
Expected option term
Weighted average fair value option granted
$
$
14.86
15.13
1.89%
20.12%
0.85%
4 years
1.91
$
$
14.86
14.65
1.61%
22.03%
1.47%
4 years
2.59
$
$
Expected volatility is estimated by considering historical average share price volatility over the option's expected term.
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 a lump-sum payment plus employer contributions.
The Company and its participating subsidiaries match the first $500 employee contribution and contribute $1 for every $2 of additional
employee contributions, up to a maximum of 3% of the employee’s base salary. Compensation cost with respect to employer
contributions under the plan of $6.3 million was recorded in fiscal 2016 (2015 – $6.1 million).
CAE Annual Report 2016 | 89
Notes to the Consolidated Financial Statements
Deferred Share Unit Plans
The Company maintains a Deferred Share Unit (DSU) plan for executives, whereby an executive may elect to receive 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 DSU 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. DSUs 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.
The Company also maintains 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 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 non-current liability in deferred gains
and other non-current liabilities. The cost recorded in fiscal 2016 was $1.9 million (2015 – $1.7 million).
DSUs outstanding are as follows:
Years ended March 31
DSUs outstanding, beginning of year
Units granted
Units redeemed
Dividends paid in units
DSUs outstanding, end of year
DSUs vested, end of the year
2016
633,693
104,514
(49,726)
12,724
701,205
701,205
2015
551,933
98,441
(27,710)
11,029
633,693
633,693
The intrinsic value of the DSUs amounts to $10.5 million at March 31, 2016 (2015 – $9.4 million).
Long-Term Incentive Time Based Plans
The Company maintains two Long-Term Incentive Time Based plans. The plans are intended for executives and senior management
to promote a greater alignment of interests between executives and shareholders of the Company. A unit under these plans is equal
in value to one common share at a specific date. One of these plans is no longer granted.
Long-Term Incentive – Deferred Share Unit Plan (LTI-DSU)
The LTI-DSUs are entitled to dividend equivalents payable in additional units in an amount equal to dividends paid on CAE common
shares. 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. Effective fiscal 2015, this plan was replaced by the
LTI-TB RSU plan.
The plan stipulates that granted units vest equally over five years and that following a change of control, all unvested units vest
immediately. The cost recorded in fiscal 2016 was $1.7 million (2015 – $1.9 million).
Long-Term Incentive – Time Based Restricted Share Unit Plan (LTI-TB RSU)
The LTI-TB RSU plan under which units are currently granted. Eligible participants are entitled to receive a cash payment equivalent
to the fair market value of the number of vested LTI-TB RSUs held at the end of the vesting period. For participants subject to loss of
employment other than voluntarily or for cause, a portion of the unvested LTI-TB RSUs will vest by one third for each full year of
employment completed during the period from the grant date to the date of termination. If termination of a participant is due to
resignation or for cause, all unvested units are forfeited. Upon termination of employment at retirement, unvested grants continue to
vest in accordance to their vesting 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.
LTI-TB RSUs granted pursuant to the plan vest after three years from their grant date and following a change of control, all unvested
units vest immediately. The cost recorded in fiscal 2016 was $2.5 million (2015 – $1.1 million).
90 | CAE Annual Report 2016
Notes to the Consolidated Financial Statements
Long-Term Incentive Time Based units outstanding under all plans are as follows:
Years ended March 31
Units outstanding, beginning of year
Units granted
Units cancelled
Units redeemed
Dividends paid in units
Units outstanding, end of year
Units vested, end of year
2016
1,677,005
-
(19,459)
(343,074)
27,603
1,342,075
1,294,208
LTI-DSU
2015
1,955,285
-
(78,890)
(232,551)
33,161
1,677,005
1,549,336
2016
182,450
227,520
(21,884)
(2,206)
-
385,880
241,172
LTI-TB RSU
2015
-
189,380
(6,930)
-
-
182,450
77,007
At March 31, 2016, the intrinsic values are $19.4 million (2015 – $22.9 million) and $3.6 million (2015 – $1.1 million) for the LTI-DSUs
and the LTI-TB RSUs respectively.
Long-Term Incentive Performance Based Plans
The Company maintains two Long-Term Incentive Performance Based plans, one of which is no longer granted. The plans are
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.
Long-Term Incentive – Restricted Share Unit Plan (LTI-RSU)
LTI-RSUs granted pursuant to this plan vest over three years from their grant date as follows:
(i) One-sixth of the total number of granted units multiplied by a factor vests every year. The factor is calculated from the one-year
Total Shareholder Return (TSR) relative performance of CAE’s share price versus that of the S&P A&D index for the period
April 1 to March 31, immediately preceding each of the first, second, and third anniversary of the grant date, according to the
following rule:
Annual TSR relative performance
First quartile (0 – 25 percentile)
Second quartile (26 – 50 percentile)
Third quartile (51 – 75 percentile)
Fourth quartile (76 – 100 percentile)
Factor
-
50% – 98%
100% – 148%
150%
(ii) One-half of the total number of granted units multiplied by a factor vests in the final year. The factor is calculated from the
three-year TSR relative performance of CAE’s share price versus that of the companies listed on the S&P A&D index for the
period April 1, immediately preceding the grant date, to March 31, immediately preceding the third anniversary of the grant date,
according to the same rule described in the table above.
Participants subject to loss of employment, other than voluntarily or for cause, are entitled to the units vested. The cost recorded in
fiscal 2016 was $2.8 million (2015 – $0.4 million). Effective fiscal 2015 this plan was replaced by the LTI-PSU plan.
Long-Term Incentive – Performance Share Unit Plan (LTI-PSU)
In fiscal 2015, the Company added a Long-Term Incentive Performance Share Unit (LTI-PSU) plan under which units are currently
granted. Eligible participants are entitled to receive a cash payment equivalent to the fair market value of the number of vested
LTI-PSUs held at the end of the vesting period multiplied by a multiplier which ranges from 0% to 200% based on the attainment of
performance criteria set out pursuant to the plan. For participants subject to loss of employment other than voluntarily or for cause, a
portion of the unvested LTI-PSUs will vest by one third for each full year of employment completed during the period from the grant
date to the date of termination. If termination of a participant is due to resignation or for cause, all unvested units are forfeited. Upon
termination of employment at retirement, unvested grants continue to vest in accordance to their vesting date.
LTI-PSUs granted pursuant to the plan vest after three years from their grant date and following a change of control, all unvested units
vest immediately. The cost recorded in fiscal 2016 was $5.0 million (2015 – $2.7 million).
Long-Term Incentive Performance Based units outstanding under all plans are as follows:
Years ended March 31
Units outstanding, beginning of year
Units granted
Units cancelled
Units redeemed
Units outstanding, end of year
Units vested, end of year
2016
805,380
-
(186,297)
(240,163)
378,920
370,760
LTI-RSU
2015
1,143,697
21,960
(176,977)
(183,300)
805,380
689,439
2016
504,280
495,400
(62,544)
(2,636)
934,500
617,234
LTI-PSU
2015
-
523,080
(18,800)
-
504,280
202,111
CAE Annual Report 2016 | 91
Notes to the Consolidated Financial Statements
At March 31, 2016, the intrinsic values are $7.0 million (2015 – $7.9 million) and $7.7 million (2015 – $2.7 million) for the LTI-RSUs
and the LTI-PSUs respectively.
NOTE 25 – SUPPLEMENTARY CASH FLOWS INFORMATION
Changes in non-cash working capital are as follows:
(amounts in millions)
Cash (used in) provided by non-cash working capital:
Accounts receivable
Contracts in progress: assets
Inventories
Prepayments
Income taxes recoverable
Accounts payable and accrued liabilities
Provisions
Income taxes payable
Contracts in progress: liabilities
Changes in non-cash working capital
NOTE 26 – CONTINGENCIES
2016
2015
$
(19.0)
(29.0)
(6.0)
3.7
15.2
(6.8)
18.4
1.9
18.5
$
(15.5)
(42.3)
(15.5)
1.7
(12.2)
34.0
(12.3)
4.9
(12.0)
$
(3.1)
$
(69.2)
In the normal course of operations, the Company is party to a number of lawsuits, claims and contingencies. 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.
The Company is subject to audits from various government and regulatory agencies on an ongoing basis. As a result, from time to
time, authorities may disagree with positions and conclusions taken by the Company in its filings.
During fiscal 2015, the Company received a reassessment from the Canada Revenue Agency challenging the Company’s
characterization of the amounts received under the SADI program. No amount has been recognized in the Company’s financial
statements, since the Company believes that there are strong grounds for defence and will vigorously defend its position. Such
matters cannot be predicted with certainty, however, the Company believes that the resolution of these proceedings will not have a
material adverse effect on its financial position.
NOTE 27 – COMMITMENTS
The future aggregate minimum lease payments under non-cancellable operating leases are as follows:
(amounts in millions)
No later than 1 year
Later than 1 year and no later than 5 years
Later than 5 years
Rental expenses recognized in fiscal 2016 amount to $77.2 million (2015 – $73.3 million).
Contractual purchase commitments
The total contractual purchase commitments are as follows:
(amounts in millions)
No later than 1 year
Later than 1 year and no later than 5 years
Later than 5 years
$
$
Commitments to joint ventures
The Company’s total commitments to its joint ventures amount to nil as at March 31, 2016 (2015 – nil).
2016
$
49.9
119.9
73.4
$
243.2
2015
$
54.7
129.0
90.3
$
274.0
2016
$
106.7
127.3
2.0
$
236.0
2015
$
23.2
45.3
-
$
68.5
92 | CAE Annual Report 2016
Notes to the Consolidated Financial Statements
NOTE 28 – CAPITAL RISK MANAGEMENT
The Company’s objectives when managing capital are threefold:
(i) Optimize the Company’s cost of capital;
(ii) Maintain the Company’s financial strength and credit quality;
(iii) Provide the Company’s shareholders with an appropriate rate of return on their investment.
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 capital structure, the Company may adjust the amount
of dividends paid to shareholders, return capital to shareholders, issue new shares, use cash to reduce debt or repurchase shares.
To accomplish its objectives stated above, the Company monitors its capital on the basis of the net debt to capital. This ratio is
calculated as net debt divided by the sum of the net debt and total equity. Net debt is calculated as total debt, including the short-term
portion (as presented in the consolidated statement of financial position and including non-recourse debt) less cash and cash
equivalents. Total equity comprises share capital, contributed surplus, accumulated other comprehensive income, retained earnings
and non-controlling interests.
The level of debt versus equity in the capital structure is monitored, and the ratios are as follows:
(amounts in millions)
Total debt (Note 13)
Less: cash and cash equivalents
Net debt
Equity
Total net debt plus equity
Net debt: equity
2016
$ 1,272.9
485.6
$
787.3
1,940.3
$ 2,727.6
29:71
2015
$ 1,279.8
330.2
$
949.6
1,686.4
$ 2,636.0
36:64
The Company has certain debt agreements which require the maintenance of a certain level of capital. As at March 31, 2016, the
Company is compliant with its financial covenants.
NOTE 29 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is determined by reference to the available market information at the reporting 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 are taken into account in estimating the fair value of all financial assets and financial liabilities.
The following assumptions and valuation methodologies have been used to measure the fair value of financial instruments:
(i) The fair value of accounts receivable, contracts in progress, accounts payable and accrued liabilities approximate their carrying
values due to their short-term maturities;
(ii) The fair value of derivative instruments, which include forward contracts, swap agreements and embedded derivatives accounted
for separately, is determined using valuation techniques and is calculated as the present value of the estimated future cash flows
using an appropriate interest rate yield curve and foreign exchange rate. Assumptions are based on market conditions prevailing
at each reporting date. Derivative instruments reflect the estimated amounts that the Company would receive or pay to settle the
contracts at the reporting date;
(iii) The fair value of the available-for-sale investment, which does not have a readily available market value, is estimated using a
discounted cash flow model, which includes some assumptions that are not based on observable market prices or rates;
(iv) The fair value of non-current receivables is estimated based on discounted cash flows using current interest rates for instruments
with similar terms and remaining maturities;
(v) The fair value of provisions, long-term debts and non-current liabilities, including finance lease obligations and royalty obligations,
are estimated based on discounted cash flows using current interest rates for instruments with similar terms and remaining
maturities.
CAE Annual Report 2016 | 93
Notes to the Consolidated Financial Statements
The carrying values and fair values of financial instruments, by class, are as follows at March 31, 2016:
(amounts in millions)
Financial assets
Cash and cash equivalents
Accounts receivable
Contracts in progress: assets
Derivative financial assets
Other assets
At
(1)
FVTPL
Available-
Loans &
for-Sale Receivables
(2)
DDHR
Total
Carrying Value
Fair Value
$
485.6
-
-
9.0
(4)
27.0
$
-
-
-
-
1.6
(5)
$
521.6
$
1.6
$
(3)
(6)
-
481.3
339.1
-
163.7
984.1
$
$
-
-
-
35.0
-
$
485.6
481.3
339.1
44.0
192.3
$
485.6
481.3
339.1
44.0
213.7
$
35.0
$ 1,542.3
$ 1,563.7
Carrying Value
Fair Value
At
FVTPL
(1)
Other
Financial
Liabilities
(2)
DDHR
Total
Financial liabilities
Accounts payable and accrued liabilities
Provisions
Total long-term debt
Other non-current liabilities
Derivative financial liabilities
$
-
0.6
-
-
13.1
$
(7)
603.1
32.8
(8)
1,276.4
(9)
144.2
-
$
-
-
-
-
22.2
$
603.1
33.4
1,276.4
144.2
35.3
$
603.1
33.4
1,363.5
146.9
35.3
The carrying values and fair values of financial instruments, by class, were as follows at March 31, 2015:
$
13.7
$ 2,056.5
$
22.2
$ 2,092.4
$ 2,182.2
(amounts in millions)
Financial assets
Cash and cash equivalents
Accounts receivable
Contracts in progress: assets
Derivative financial assets
Other assets
At
(1)
FVTPL
Available-
Loans &
for-Sale Receivables
(2)
DDHR
Total
Carrying Value
Fair Value
$
330.2
-
-
15.2
23.7
(4)
$
-
-
-
-
1.6
(5)
$
369.1
$
1.6
$
(3)
(6)
-
451.1
309.8
-
155.1
916.0
$
$
-
-
-
36.2
-
$
330.2
451.1
309.8
51.4
180.4
$
330.2
451.1
309.8
51.4
197.2
$
36.2
$ 1,322.9
$ 1,339.7
Carrying Value
Fair Value
At
FVTPL
(1)
Other
Financial
Liabilities
(2)
DDHR
Total
Financial liabilities
Accounts payable and accrued liabilities
Provisions
Total long-term debt
Other non-current liabilities
Derivative financial liabilities
$
-
1.5
-
-
16.0
$
(7)
556.5
15.1
(8)
1,284.0
(9)
181.2
-
$
-
-
-
-
55.2
$
556.5
16.6
1,284.0
181.2
71.2
$
556.5
16.6
1,406.2
216.5
71.2
$
17.5
$ 2,036.8
$
55.2
$ 2,109.5
$ 2,267.0
(1) FVTPL: Fair value through profit and loss.
(2) DDHR: Derivatives designated in a hedge relationship.
(3) Includes trade receivables, accrued receivables and certain other receivables.
(4) Represents restricted cash.
(5) Represents the Company's portfolio investment.
(6) Includes non-current receivables and advances.
(7) Includes trade accounts payable, accrued liabilities, interest payable, certain payroll-related liabilities and current royalty obligations.
(8) Excludes transaction costs.
(9) Includes non-current royalty obligations and other non-current liabilities.
94 | CAE Annual Report 2016
Notes to the Consolidated Financial Statements
The Company did not elect to voluntarily designate any financial instruments at FVTPL; moreover, there have not been any changes
to the classification of the financial instruments since inception.
Fair value hierarchy
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 in markets that are not active) or indirectly (i.e. quoted prices for similar assets or liabilities);
Level 3: Inputs for the asset or liability that is 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.
The following table presents the financial instruments, by class, which are recognized at fair value:
(amounts in millions)
Financial assets
At FVTPL
Cash and cash equivalents
Restricted cash
Forward foreign currency contracts
Embedded foreign currency derivatives
Available-for-sale
Derivatives designated in a hedge relationship
Forward foreign currency contracts
Foreign currency swap agreements
Financial liabilities
At FVTPL
Contingent consideration arising on business combinations
Forward foreign currency contracts
Embedded foreign currency derivatives
Equity swap agreements
Derivatives designated in a hedge relationship
Forward foreign currency contracts
Interest rate swap agreements
Changes in Level 3 financial instruments are as follows:
(amounts in millions)
Balance, beginning of year
Total realized and unrealized gains:
Included in income
Issued and settled
Balance, end of year
Level 2
Level 3
Total
Level 2
Level 3
Total
2016
2015
$
$
$
$
485.6
27.0
6.3
2.7
-
16.9
18.1
556.6
-
12.6
-
0.5
20.9
1.3
35.3
$
-
-
-
-
1.6
-
-
$
$
485.6
27.0
6.3
2.7
1.6
$
330.2
23.7
12.4
2.8
-
16.9
18.1
18.0
18.2
-
-
-
-
1.6
-
-
$
330.2
23.7
12.4
2.8
1.6
18.0
18.2
$
1.6
$
558.2
$
405.3
$
1.6
$
406.9
$
$
$
0.6
-
-
-
-
-
0.6
12.6
-
0.5
20.9
1.3
$
-
15.5
0.1
0.4
52.7
2.5
$
1.5
-
-
-
-
-
1.5
15.5
0.1
0.4
52.7
2.5
$
0.6
$
35.9
$
71.2
$
1.5
$
72.7
2016
2015
$
0.1
$
(2.7)
(0.1)
1.0
$
1.0
$
0.1
2.7
0.1
CAE Annual Report 2016 | 95
Notes to the Consolidated Financial Statements
The following table presents the fair value of the financial instruments, by class, which are recognized at amortized cost:
(amounts in millions)
Financial assets
Accounts receivable
Contracts in progress: assets
Other assets
Investment in finance leases
Other
Financial liabilities
Accounts payable and accrued liabilities
Provisions
Total long-term debt
Other non-current liabilities
Level 2
Level 3
Total
Level 2
Level 3
Total
2016
2015
$
-
-
$
481.3
339.1
$
481.3
339.1
$
-
-
$
451.1
309.8
$
451.1
309.8
108.7
51.4
-
25.0
108.7
76.4
97.3
54.2
-
20.4
97.3
74.6
$
160.1
$
845.4
$ 1,005.5
$
151.5
$
781.3
$
932.8
$
-
-
1,276.4
-
$ 1,276.4
$
603.1
32.8
-
144.2
$
603.1
32.8
1,276.4
144.2
$
-
-
1,406.2
-
$
556.5
15.1
-
216.5
$
556.5
15.1
1,406.2
216.5
$
780.1
$ 2,056.5
$ 1,406.2
$
788.1
$ 2,194.3
NOTE 30 – 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. The Company’s exposure to
credit risk, liquidity risk and market risk is managed within risk management parameters documented in corporate policies. These risk
management parameters remain unchanged since the previous period, unless otherwise indicated.
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 accounts receivable 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 assets. Credit risks arising from the Company’s normal commercial
activities are managed in regards to customer credit risk.
The Company’s customers are mainly established companies, some of which have publicly available credit ratings, as well as
government agencies, which facilitates risk assessment and monitoring. In addition, the Company typically receives substantial
non-refundable advance payments for construction contracts. The Company closely monitors its exposure to major airline companies
in order to mitigate its risk to the extent possible. Furthermore, the Company’s trade receivables are not concentrated with specific
customers but are held with a wide range of commercial and government organizations. As well, the Company’s credit exposure is
further reduced by the sale of certain of its accounts receivable to third-party financial institutions for cash consideration on a limited
recourse basis (current financial assets program). 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 mainly in place with a diverse group of major North American and European
financial institutions.
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 enters into contracts with counterparties that are of
high credit quality. The Company signed International Swaps & Derivatives Association, Inc. (ISDA) Master Agreements with the
majority of counterparties with whom it trades derivative financial instruments. These agreements make it possible to offset 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 Note 5 and Note 29 represent the maximum exposure to credit risk for each respective financial
asset as at the relevant dates.
96 | CAE Annual Report 2016
Notes to the Consolidated Financial Statements
Liquidity risk
Liquidity risk is defined as the potential risk that the Company cannot meet its cash obligations as they become due.
The Company manages this risk by establishing cash forecasts, as well as long-term operating and strategic plans. The management
of consolidated liquidity requires a regular monitoring of expected cash inflows and outflows which is achieved through a forecast of
the Company’s consolidated liquidity position, for 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 a revolving unsecured credit facility of
US$550.0 million, with an option, subject to the lender’s consent, to increase to a total amount of up to US$850.0 million. As well, the
Company has agreements to sell certain of its accounts receivable for an amount of up to US$150.0 million (current financial assets
program). As at March 31, 2016, $105.9 million (2015 – $113.3 million) of specific accounts receivable were sold to a financial
institution pursuant to these agreements. Proceeds were net of $1.2 million in fees (2015 – $1.1 million). The Company also regularly
monitors any financing opportunities to optimize its capital structure and maintain appropriate financial flexibility.
The following tables present a maturity analysis based on 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:
Carrying Contractual
Amount Cash Flows
0-12
Months
13-24
Months
25-36
Months
37-48
Months
49-60
Months Thereafter
As at March 31, 2016
Non-derivative financial
liabilities
Accounts payable
and accrued liabilities (1)
Total provisions
Total long-term debt (2)
Other non-current liabilities (3)
Derivative financial
instruments
Forward foreign
currency contracts (4)
Outflow
Inflow
Swap derivatives on total
long-term debt (5)
Outflow
Inflow
Embedded foreign currency
derivatives (6)
Equity swap agreement
$
603.1
33.4
1,276.4
144.2
$ 2,057.1
$
10.3
(16.8)
(2.7)
0.5
$
(8.7)
$ 2,048.4
$
603.1
35.0
1,731.5
410.1
$
603.1
23.3
165.9
-
$
-
2.8
88.8
20.7
$
-
0.5
71.4
20.2
$
-
0.4
248.7
19.0
$
-
0.4
77.3
19.0
$
-
7.6
1,079.4
331.2
$ 2,779.7
$
792.3
$
112.3
$
92.1
$
268.1
$
96.7
$ 1,418.2
$ 1,235.8
(1,246.9)
$
994.4
(998.3)
$
180.7
(184.8)
$
45.3
(47.3)
$
11.2
(12.3)
$
3.6
(3.6)
$
0.6
(0.6)
90.5
(93.4)
(2.7)
0.5
14.8
(15.2)
(1.1)
0.5
13.8
(14.5)
(1.3)
-
9.8
(10.2)
(0.3)
-
8.7
(8.9)
-
-
8.7
(8.9)
34.7
(35.7)
-
-
-
-
$
(16.2)
$
(4.9)
$
(6.1)
$
(2.7)
$
(1.3)
$
(0.2)
$
(1.0)
$ 2,763.5
$
(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 and excludes transaction costs.
(3) Includes non-current royalty obligations and other non-current liabilities.
(4) Outflows and inflows are presented in CDN equivalent using the contractual forward foreign currency rate and include forward foreign currency contracts either
presented as derivative liabilities or derivative assets.
(5) Includes interest rate swap and cross currency swaps contracts either presented as derivative liabilities or derivative assets.
(6) Includes embedded foreign currency derivatives either presented as derivative liabilities or derivative assets.
787.4
106.2
266.8
96.5
89.4
$
$
$
$
$ 1,417.2
CAE Annual Report 2016 | 97
Notes to the Consolidated Financial Statements
As at March 31, 2015
Non-derivative financial
liabilities
Accounts payable and
accrued liabilities (1)
Total provisions
Total long-term debt (2)
Other non-current liabilities (3)
Derivative financial
instruments
Forward foreign
currency contracts (4)
Outflow
Inflow
Swap derivatives on total
long-term debt (5)
Outflow
Inflow
Embedded foreign currency
derivatives (6)
Equity swap agreement
Carrying Contractual
Amount Cash Flows
0-12
Months
13-24
Months
25-36
Months
37-48
Months
49-60
Months Thereafter
$
556.5
16.6
1,938.7
358.2
$
556.5
12.1
113.7
-
$
-
0.4
178.0
13.6
$
-
0.3
104.5
15.0
$
-
0.1
108.9
16.3
$
-
-
262.7
17.7
$
-
3.7
1,170.9
295.6
$ 2,870.0
$
682.3
$
192.0
$
119.8
$
125.3
$
280.4
$ 1,470.2
$ 1,372.3
(1,332.8)
$ 1,063.8
(1,036.9)
$
226.3
(218.7)
$
54.9
(51.8)
$
19.8
(19.0)
$
7.5
(6.4)
$
-
-
$
556.5
16.6
1,284.0
181.2
$ 2,038.3
$
37.8
(15.7)
118.9
(109.2)
17.7
(15.3)
16.8
(15.3)
15.5
(14.7)
11.2
(10.3)
9.8
(9.0)
47.9
(44.6)
(2.7)
0.4
(2.7)
0.4
(1.6)
0.4
(0.5)
-
(0.4)
-
(0.2)
-
-
-
-
-
$
19.8
$ 2,058.1
$
46.9
$
28.1
$
8.6
$
3.5
$
1.5
$
1.9
$
3.3
$ 2,916.9
$
(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 and excludes transaction costs.
(3) Includes non-current royalty obligations and other non-current liabilities.
(4) Outflows and inflows are presented in CDN equivalent using the contractual forward foreign currency rate and include forward foreign currency contracts either
presented as derivative liabilities or derivative assets.
(5) Includes interest rate swap and cross currency swap contracts either presented as derivative liabilities or derivative assets.
(6) Includes embedded foreign currency derivatives either presented as derivative liabilities or derivative assets.
282.3
710.4
200.6
123.3
126.8
$
$
$
$
$ 1,473.5
Market risk
Market 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 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.
Derivative instruments are utilized by the Company to manage market risk against the volatility in foreign exchange rates, interest
rates and share-based payments in order to minimize their impact on the Company’s results and financial position. The Company’s
policy is not to utilize any derivative financial instruments for trading or speculative purposes.
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 exchange rate variability primarily in relation to certain sale
commitments, expected purchase transactions and debt denominated in a foreign currency, as well as on the net investment from its
foreign operations which have functional currencies other than the Canadian dollar (in particular the U.S. dollar (USD), euro (€) and
British pound (GBP or £). In addition, these operations have exposure to foreign exchange rates primarily through cash and cash
equivalents and other working capital accounts denominated in currencies other than their functional currencies.
The Company also mitigates foreign currency risks by having its foreign operations transact 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. These transactions include forecasted transactions and firm commitments denominated in
foreign currencies.
98 | CAE Annual Report 2016
The consolidated forward foreign currency contracts outstanding are as follows:
Notes to the Consolidated Financial Statements
Notional (1)
Amount
2016
Average
Rate
(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
EUR/USD
Less than 1 year
Between 1 and 3 years
GBP/CDN
Less than 1 year
Between 1 and 3 years
Between 3 and 5 years
CDN/GBP
Less than 1 year
Between 1 and 3 years
CDN/USD
Less than 1 year
Between 1 and 3 years
GBP/USD
Less than 1 year
Between 1 and 3 years
USD/EUR
Less than 1 year
Between 1 and 3 years
SEK/USD
Less than 1 year
Other currencies
$
541.8
128.6
14.8
13.1
-
104.7
23.9
1.8
2.7
37.7
8.4
1.7
2.1
0.1
135.8
15.6
52.4
27.0
12.2
0.9
15.5
Notional (1)
Amount
$
572.1
160.4
12.8
30.7
8.2
81.7
16.1
62.3
1.8
36.0
8.8
-
15.1
1.0
149.8
22.8
20.5
28.1
11.4
-
0.78
0.81
0.84
1.42
-
0.69
0.70
0.86
0.85
0.51
0.50
0.51
1.84
1.89
1.29
1.31
0.67
0.67
1.11
1.13
8.48
41.7
-
-
-
66.9
18.3
15.5
$ 1,382.0
2015
Average
Rate
0.85
0.87
0.93
1.43
1.40
0.71
0.71
0.86
0.80
0.58
0.54
-
1.84
1.68
1.21
1.25
0.68
0.63
1.14
-
6.65
-
-
-
Less than 1 year
Between 1 and 3 years
Between 3 and 5 years
Total
(1) Exchange rates as at the end of the respective fiscal years were used to translate amounts in foreign currencies.
76.1
8.5
16.5
$ 1,241.9
The Company has entered into foreign currency swap agreements related to its June 2007 senior collateralized financing, 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 one (2015 – two) USD to GBP foreign currency swap agreement as cash flow hedge. The currency swap agreement has
an outstanding notional amount of US$10.2 million (£5.1 million) (2015 – US$14.3 million (£7.1 million)) and is amortized in
accordance with the repayment schedule of the debt until June 2018.
In fiscal 2013, the Company entered into interest-only cross currency swap agreements related to its multi-tranche private placement
debt issued in December 2012, to effectively fix the USD-denominated interest cash flows in CDN equivalent. The Company
designated two USD to CDN interest-only currency swap agreements as cash flow hedges with outstanding notional amounts of
($100.7 million)
US$127.0 million
(2015 – US$98.0 million ($100.7 million)) corresponding to the two tranches of the private placement until December 2024 and
December 2027 respectively.
($130.5 million) (2015 – US$127.0 million
($130.5 million)) and US$98.0 million
The Company’s foreign currency hedging programs are typically unaffected by changes in market conditions, as related derivative
financial instruments are generally held until their maturity, consistent with the objective to fix currency rates on the hedged item.
CAE Annual Report 2016 | 99
Notes to the Consolidated Financial Statements
Foreign currency risk sensitivity analysis
The following table presents the Company’s exposure to foreign currency risk of financial instruments and the pre-tax effects on net
income 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)
2016
2015
USD
Net
Income
$
$
(0.7)
(2.4)
OCI
$ (11.1)
$ (22.1)
€
Net
Income
$
$
-
2.7
OCI
(1.1)
(2.3)
$
$
GBP
Net
Income
$
$
-
0.9
$
$
OCI
(0.9)
(1.0)
A reasonably possible weakening of 5% in the relevant foreign currency against the Canadian dollar would have an opposite impact
on pre-tax income 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
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 has a floating rate debt through its revolving unsecured credit facility and
other asset-specific floating rate debts. 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 manage interest rate exposures are mainly interest rate swap agreements.
As at March 31, 2016, the Company has entered into three (2015 – four) interest rate swap agreements with two different financial
institutions to mitigate these risks for a total notional value of $20.4 million (2015 – $29.6 million). After considering these swap
agreements, as at March 31, 2016, 90% (2015 – 88%) 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 until their maturity to establish asset and liability management matching, consistent with the
objective to reduce risks arising from interest rate movements.
Interest rate risk sensitivity analysis
In fiscal 2016, a 1% increase in interest rates would decrease the Company’s net income by $1.3 million (2015 – $1.3 million) and
decrease the Company’s OCI by $0.5 million (2015 – $0.4 million) assuming all other variables remained constant. A 1% decrease in
interest rates would have an opposite impact on net income and OCI.
Hedge of share-based payments cost
The Company has entered into equity swap agreements with three major Canadian financial institutions to reduce its income
exposure to fluctuations in its share price relating to the DSU, LTI-DSU and LTI-TB RSU programs. Pursuant to the agreement, the
Company receives the economic benefit of dividends and share price appreciation while providing payments to the financial
institutions for the institution’s cost of funds and any share price depreciation. The net effect of the equity swaps partly offset
movements in the Company’s share price impacting the cost of the DSU, LTI-DSU and LTI-TB RSU programs and is reset quarterly.
As at March 31, 2016, the equity swap agreements covered 1,950,000 common shares (2015 – 1,900,000) of the Company.
Hedge of net investments in foreign operations
As at March 31, 2016, the Company has designated a portion of its senior notes totalling US$417.8 million (2015 – US$417.8 million)
and a portion of the obligations under finance lease totalling US$12.1 million (2015 – US$14.2 million) as a hedge of its net
investments in U.S. entities. 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 the financial statements of those U.S. entities.
Letters of credit and guarantees
As at March 31, 2016, the Company had outstanding letters of credit and performance guarantees in the amount of $212.3 million
(2015 – $218.8 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 the Company’s 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 the Company and to the customer’s requirements. The customer releases the Company from these
guarantees at the signing of a certificate of completion. The letter of credit for the lease obligation provides credit support for the
benefit of the owner participant on a sale and leaseback transaction and varies according to the payment schedule of the lease
agreement.
100 | CAE Annual Report 2016
(amounts in millions)
Advance payment
Contract performance
Lease obligation
Financial obligations
Other
Notes to the Consolidated Financial Statements
2016
2015
$
67.8
17.5
33.0
89.4
4.6
$
76.8
22.5
31.3
82.5
5.7
$
212.3
$
218.8
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 $14.4 million (2015 – $14.5 million), of which $10.3 million matures in fiscal year 2020 and
$4.1 million in fiscal year 2023. Of this amount, as at March 31, 2016, $10.2 million is recorded as a deferred gain
(2015 – $11.7 million).
Indemnifications
In certain instances when the Company sells businesses, it 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 that
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 defences, 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, net income or cash flows.
NOTE 31 – OPERATING SEGMENTS AND GEOGRAPHIC INFORMATION
The Company elected to organize its operating segments principally on the basis of its customer markets. The Company manages its
operations through its three segments. Operating segments are reported in a manner consistent with the internal reporting provided to
the chief operating decision-maker.
Results by segment
The profitability measure employed by the Company for making decisions about allocating resources to segments and assessing
segment performance is operating profit (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. The method used for the allocation of assets jointly used by operating segments and costs and liabilities jointly incurred
(mostly corporate costs) between operating segments is based on the level of utilization when determinable and measurable,
otherwise the allocation is based on a proportion of each segment’s cost of sales.
Year ended March 31, 2016
(amounts in millions)
External revenue
Depreciation and amortization
Property, plant and equipment
Intangible and other assets
Impairment of non-financial
assets – net (Note 21)
Write-downs (reversals of write-downs)
Civil Aviation
Training Solutions
2016
2015
$ 1,429.1 $ 1,294.6 $
Defence
and Security
2015
857.4 $
2016
970.1 $
Total
Healthcare
2015
2015
94.3 $ 2,512.6 $ 2,246.3
2016
2016
113.4 $
103.5
30.3
93.5
26.6
15.1
54.7
11.9
43.8
2.9
11.3
2.7
10.6
121.5
96.3
108.1
81.0
1.7
-
-
-
-
-
1.7
-
of accounts receivable – net (Note 5)
2.1
1.5
(0.8)
2.3
0.1
0.1
1.4
3.9
After tax share in profit of
equity accounted investees
Segment operating income
38.5
237.4
27.8
210.5
4.9
119.8
9.7
115.6
-
7.2
-
6.7
43.4
364.4
37.5
332.8
During fiscal 2015, one of the Company’s joint ventures in the Civil Aviation Training Solutions segment recognized a deferred tax
asset following the approval of an investment tax allowance from the Malaysian Investment Development Authority. The Company’s
share of the deferred tax benefit amounts to $9.4 million and is included in the after tax share in profit of equity accounted investees.
CAE Annual Report 2016 | 101
Notes to the Consolidated Financial Statements
Capital expenditures which consist of additions to non-current assets (other than financial instruments and deferred tax assets), by
segment are as follows:
(amounts in millions)
Civil Aviation Training Solutions
Defence and Security
Healthcare
Total capital expenditures
Operating profit
The following table provides a reconciliation between total segment operating income and operating profit:
Total segment operating income
Restructuring costs (Note 12)
Operating profit
$
2016
126.6 $
40.5
4.6
2015
151.9
49.3
7.3
$
171.7 $
208.5
$
2016
364.4 $
(28.9)
2015
332.8
-
$
335.5 $
332.8
Assets and liabilities employed by segment
The Company uses assets employed and liabilities employed to assess resources allocated to each segment. Assets employed
include accounts receivable, contracts in progress, inventories, prepayments, property, plant and equipment, intangible assets,
investment in equity accounted investees, derivative financial assets and other assets. Liabilities employed include accounts payable
and accrued liabilities, provisions, contracts in progress, deferred gains and other non-current liabilities and derivative financial
liabilities.
Assets and liabilities employed by segment are reconciled to total assets and liabilities as follows:
(amounts in millions)
Assets employed
Civil Aviation Training Solutions
Defence and Security
Healthcare
Assets classified as held for sale (Note 3)
Assets not included in assets employed
Total assets
Liabilities employed
Civil Aviation Training Solutions
Defence and Security
Healthcare
Liabilities classified as held for sale (Note 3)
Liabilities not included in liabilities employed
Total liabilities
Products and services information
The Company's revenue from external customers for its products and services are as follows:
Years ended March 31
(amounts in millions)
Revenue
Simulation products
Training and services
2016
2015
$ 2,627.9 $ 2,587.8
1,079.3
250.1
61.2
678.5
$ 4,996.7 $ 4,656.9
1,234.1
253.6
1.6
879.5
$
610.8 $
513.8
47.6
0.1
603.6
403.8
43.6
14.2
1,884.1
1,905.3
$ 3,056.4 $ 2,970.5
2016
2015
$ 1,146.1 $ 1,064.7
1,181.6
1,366.5
$ 2,512.6 $ 2,246.3
102 | CAE Annual Report 2016
Geographic information
The Company markets its products and services globally. Sales are attributed to countries based on the location of customers.
Non-current assets other than financial instruments and deferred tax assets are attributed to countries based on the location of the
assets.
Notes to the Consolidated Financial Statements
(amounts in millions)
Revenue from external customers
Canada
United States
United Kingdom
Germany
Netherlands
Other European countries
United Arab Emirates
China
Other Asian countries
Australia
Other countries
(amounts in millions)
Non-current assets other than financial instruments and deferred tax assets
Canada
United States
Brazil
United Kingdom
Luxembourg
Netherlands
Other European countries
Asian countries
Other countries
2016
2015
$
233.7
887.3
277.5
98.5
77.5
336.4
66.5
161.1
230.9
59.7
83.5
$
167.3
753.6
245.4
81.0
62.5
298.7
71.8
123.8
275.3
75.2
91.7
$ 2,512.6
$ 2,246.3
2016
2015
$ 1,002.8
880.7
100.7
245.8
186.7
121.6
265.3
114.0
70.6
$ 2,988.2
$
852.4
872.3
90.7
292.6
170.3
116.1
261.8
113.5
90.0
$ 2,859.7
NOTE 32 – RELATED PARTY RELATIONSHIPS
The following tables include principal investments which, in aggregate, significantly impact the results or assets of the Company:
Investments in subsidiaries consolidated in the Company’s financial statements:
As at March 31
Name
CAE (UK) plc
CAE (US) Inc.
CAE Aircrew Training Services plc
CAE Australia Pty Ltd.
CAE Aviation Training B.V.
CAE Aviation Training Chile Limitada
CAE Aviation Training Peru S.A.
CAE Brunei Multi Purpose Training Centre Sdn Bhd
CAE Center Amsterdam B.V.
CAE Center Brussels N.V.
CAE Centre Copenhagen A/S
CAE Centre Hong Kong Limited
CAE Centre Oslo AS
CAE Centre Stockholm AB
CAE Civil Aviation Training Solutions, Inc.
CAE Delaware Buyco Inc.
CAE Electronik GmbH
Country of incorporation
United Kingdom
United States
United Kingdom
Australia
Netherlands
Chile
Peru
Brunei
Netherlands
Belgium
Denmark
Hong Kong
Norway
Sweden
United States
United States
Germany
% equity
interest
2016
% equity
interest
2015
100.0%
100.0%
76.5%
100.0%
100.0%
100.0%
100.0%
60.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
76.5%
100.0%
100.0%
100.0%
100.0%
60.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
CAE Annual Report 2016 | 103
Notes to the Consolidated Financial Statements
Investments in subsidiaries consolidated in the Company’s financial statements (continued):
Country of incorporation
Luxembourg
Malaysia
Mexico
Portugal
Canada
United States
United Kingdom
India
Australia
Hungary
Canada
Luxembourg
Luxembourg
Luxembourg
Luxembourg
Dubai
Canada
United States
Netherlands
United States
Italy
Spain
China
United States
India
Canada
Singapore
Brazil
United Kingdom
Belgium
United Kingdom
Norway
United States
Germany
Canada
United Kingdom
Ireland
Ireland
Ireland
Canada
France
United States
Spain
Spain
% equity
interest
2016
% equity
interest
2015
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
49.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
80.0%
80.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
49.0%
-
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
80.0%
80.0%
Name
CAE Euroco S.à r.l.
CAE Flight & Simulator Services Sdn. Bhd.
CAE Flight Training Center Mexico, S.A. de C.V.
CAE Global Academy Évora, SA
CAE Healthcare Canada Inc.
CAE Healthcare, Inc.
CAE Holdings Limited
CAE India Private Limited
CAE Integrated Enterprise Solutions Australia Pty Ltd.
CAE International Capital Management Hungary LLC
CAE International Holdings Limited
CAE Investments S.à r.l.
CAE Luxembourg Acquisition S.à r.l.
CAE Luxembourg Financing S.à r.l.
CAE Management Luxembourg S.à r.l.
CAE Middle East L.L.C.
CAE Military Aviation Training Inc.
CAE North East Training Inc.
CAE Oxford Aviation Academy Amsterdam B.V.
CAE Oxford Aviation Academy Phoenix Inc.
CAE Services Italia S.r.l.
CAE Servicios Globales de Instrucción de Vuelo (España), S.L.
CAE Shanghai Company, Limited
CAE SimuFlite Inc.
CAE Simulation Technologies Private Limited
CAE Simulator Services Inc.
CAE Singapore (S.E.A.) Pte Ltd.
CAE South America Flight Training do Brasil Ltda.
CAE STS Limited
CAE Training & Services Brussels NV
CAE Training & Services UK Ltd.
CAE Training Norway AS
CAE USA Inc.
CAE Verwaltungsgesellschaft mbH
Flight Simulator-Capital L.P.
Oxford Aviation Academy (Oxford) Limited
Parc Aviation Engineering Services Limited
Parc Aviation Limited
Parc Interim Limited
Presagis Canada Inc.
Presagis Europe (S.A.)
Presagis USA Inc.
Servicios de Instrucción de Vuelo, S.L.
SIV Ops Training, S.L.
104 | CAE Annual Report 2016
Investments in joint ventures accounted for under the equity method:
As at March 31
Name
Asian Aviation Centre of Excellence Sdn. Bhd.
Aviation Training Northeast Asia B.V.
CAE Flight and Simulator Services Korea, Ltd.
CAE Flight Training (India) Private Limited
CAE-LIDER Training do Brasil Ltda.
CAE Melbourne Flight Training Pty Ltd.
China Southern West Australia Flying College Pty Ltd.
Embraer CAE Training Services (UK) Limited
Embraer CAE Training Services, LLC
Emirates-CAE Flight Training LLC
HATSOFF Helicopter Training Private Limited
Helicopter Training Media International GmbH
HFTS Helicopter Flight Training Services GmbH
JAL CAE Flight Training Co. Ltd.
National Flying Training Institute Private Limited
Rotorsim s.r.l.
Rotorsim USA LLC
Zhuhai Free Trade Zone Xiang Yi Aviation Technology Company Limited
Zhuhai Xiang Yi Aviation Technology Company Limited
Notes to the Consolidated Financial Statements
Country of incorporation
Malaysia
Netherlands
Korea
India
Brazil
Australia
Australia
United Kingdom
United States
United Arab Emirates
India
Germany
Germany
Japan
India
Italy
United States
China
China
% equity
interest
2016
% equity
interest
2015
50.0%
50.0%
50.0%
50.0%
50.0%
50.0%
47.1%
49.0%
49.0%
49.0%
50.0%
50.0%
25.0%
50.0%
51.0%
50.0%
50.0%
49.0%
49.0%
50.0%
50.0%
50.0%
50.0%
50.0%
50.0%
47.1%
49.0%
49.0%
49.0%
50.0%
50.0%
25.0%
50.0%
51.0%
50.0%
50.0%
49.0%
49.0%
In fiscal 2016, the unrecognized share of losses of joint ventures for which the Company ceased to recognize when applying the
equity method was $1.2 million (2015 – $0.7 million). As at March 31, 2016, the cumulative unrecognized share of losses for these
entities was $10.6 million (2015 – $9.4 million) and the cumulative unrecognized share of comprehensive loss of joint ventures was
$12.3 million (2015 – $11.9 million).
NOTE 33 – RELATED PARTY TRANSACTIONS
The following table presents the Company’s outstanding balances with its joint ventures:
(amounts in millions)
Accounts receivable (Note 5)
Contracts in progress: assets
Other assets
Accounts payable and accrued liabilities (Note 10)
Contracts in progress: liabilities
2016
2015
$
42.6
34.5
21.9
20.1
4.3
$
28.7
28.1
29.2
13.9
3.9
Other assets include a finance lease receivable of $14.8 million (2015 – $17.0 million) maturing in October 2022 and carrying an
interest rate of 5.14% per annum, loans receivable of $0.6 million (2015 – $5.7 million) maturing in December 2017 and August 2018
and carrying respectively interest rates of 11% and 5% per annum, and a long-term interest-free receivable of $6.5 million
(2015 – $6.5 million) with no repayment term. As at March 31, 2016 and 2015 there are no provisions held against the receivables
from related parties.
The following table presents the Company’s transactions with its joint ventures:
(amounts in millions)
Revenue
Purchases
Other income
2016
2015
$
95.3
2.9
2.3
$
120.6
10.9
2.9
In addition, during fiscal 2016, transactions amounting to $2.2 million (2015 – $2.4 million) were made, at normal market prices, with
organizations of which some of the Company’s directors are officers.
CAE Annual Report 2016 | 105
Notes to the Consolidated Financial Statements
Compensation of key management personnel
Key management personnel have the ability and responsibility to make major operational, financial and strategic decisions for the
Company and include certain executive officers. The compensation of key management for employee services is shown below:
(amounts in millions)
Salaries and other short-term employee benefits
Post-employment benefits – defined benefit plans(1)
Share-based payments
(1) Includes net interest on employee benefit obligations.
NOTE 34 – EVENT AFTER THE REPORTING PERIOD
Lockheed Martin Commercial Flight Training
2016
2015
$
$
4.8
1.0
8.6
4.6
1.5
4.6
$
14.4
$
10.7
On May 2, 2016, the Company completed the acquisition of Lockheed Martin Commercial Flight Training (LMCFT), a provider of
aviation simulation training equipment and services for a purchase consideration of $25.7 million. The transaction excludes debt and
includes cash remaining in the company at closing. With this acquisition, the Company will expand its customer installed base of
commercial flight simulators and obtain a number of useful assets including full-flight simulators, simulator parts and equipment,
facilities, technology and a talented workforce. Management considers it impracticable to disclose information about the fair value of
the net assets acquired since the findings of the valuation exercise are not yet available.
106 | CAE Annual Report 2016
Board of Directors and Officers
BOARD OF DIRECTORS
OFFICERS
Marc Parent
President and Chief Executive Officer
CAE Inc.
Montréal, Québec
Katharine B. Stevenson
2
Corporate Director
Toronto, Ontario
The Honourable Michael M. Fortier,
P.C.
3
Vice Chairman
RBC Capital Markets
Montréal, Québec
Alan N. MacGibbon
2
Vice-Chair
Osler, Hoskin & Harcourt LLP
Toronto, Ontario
1, 2
Andrew J. Stevens
Corporate Director
Gloucestershire, UK
James F. Hankinson
Chairman of the Board
CAE Inc.
Toronto, Ontario
Brian E. Barents
1, 3
Corporate Director
Andover, Kansas
Margaret S. (Peg) Billson2
President and Chief Executive
Officer
BBA Aviation Aftermarket Services
Dallas, Texas
Paul Gagné
1, 2
Chairman
Wajax Corporation
Montréal, Québec
The Honourable John Manley,
P.C., O.C.
1, 3
President and Chief Executive
Officer
Business Council of Canada
Ottawa, Ontario
Gen. Peter J. Schoomaker U.S.A.
(Ret.)
1, 3
Corporate Director
Tampa, Florida
James F. Hankinson
Chairman of the Board
Marc Parent
President and
Chief Executive Officer
Nick Leontidis
Group President
Civil Aviation Training Solutions
Gene Colabatistto
Group President
Defence & Security
Sonya Branco
Vice President, Finance and
Chief Financial Officer
Mark Hounsell
General Counsel,
Chief Compliance Officer and
Corporate Secretary
Constantino Malatesta
Vice President and Corporate
Controller
Mario Pizzolongo
Treasurer
1
Member of the Human Resources Committee
2
Member of the Audit Committee
3
Member of the Governance Committee
CAE Annual Report 2016 | 107
Shareholder and Investor Information
CAE SHARES
DUPLICATE MAILINGS
TRADEMARKS
CAE’s shares are traded on the
Toronto Stock Exchange (TSX)
and on the New York Stock
Exchange (NYSE) under the
symbol “CAE”.
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.
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.
2016 ANNUAL MEETING
The Annual Shareholders Meeting will be
held at 11 a.m. (Eastern Time),
Wednesday, August 10, 2016 at CAE
(Entrance 4 - Auditorium), 8585 Côte-de-
Liesse, Saint-Laurent, Québec. The
meeting will also be webcast live on CAE’s
website, www.cae.com.
AUDITORS
PricewaterhouseCoopers LLP
Chartered Professional Accountants
Montreal, Québec
TRANSFER AGENT
AND REGISTRAR
Computershare Trust Company
of Canada
100 University Avenue, 8th 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 or go to
www.cae.com/dividend.
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.
www.cae.com/dividend
108 | CAE Annual Report 2016
Trademarks and/or registered
trademarks of CAE Inc. and/or
its affiliates include but are not
limited to CAE, CAE Medallion
6000, CAE Simfinity, CAE
Fidelis Lucina, CAE VIMEDIX,
CAE Vïvo, Dynamic Synthetic
Environment (DSE), CAE
7000XR Series, CAE 3000
Series. All other brands and
product names are trademarks
or registered trademarks of their
respective owners. All logos,
tradenames and 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.
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 Officer
− 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. Significant 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 significant
respects.
FORWARD-LOOKING STATEMENTS
This annual report includes forward-looking statements about our activities, events and developments that we expect to or
anticipate may occur in the future including, for example, statements about our vision, strategies, market trends and
outlook, future revenues, capital spending, expansions and new initiatives, financial obligations and expected sales.
Forward-looking statements normally contain words like believe, expect, anticipate, plan, intend, continue, estimate, may,
will, should, strategy, future and similar expressions. By their nature, forward-looking statements require us to make
assumptions and are subject to inherent risks and uncertainties associated with our business which may cause actual
results in future periods to differ materially from results indicated in forward-looking statements. While these statements 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 reasonable and appropriate in the circumstances, readers are
cautioned not to place undue reliance on these forward-looking statements as there is a risk that they may not be accurate.
Important risks that could cause such differences include, but are not limited to, risks relating to the industry such as
competition, level and timing of defence spending, government-funded defence and security programs, constraints within
the civil aviation industry, regulatory rules and compliance, risks relating to CAE such as product evolution, research and
development (R&D) activities, fixed-price and long-term supply contracts, procurement and original equipment
manufacturer (OEM) leverage, warranty or other product-related claims, product integration, protection of our intellectual
property, third-party intellectual property, loss of key personnel, environmental liabilities, claims arising from casualty
losses, integration of acquired businesses, our ability to penetrate new markets, information technology systems including
cybersecurity risk, length of sales cycle, continued returns to shareholders and our reliance on technology and third-party
providers, and risks relating to the market such as foreign exchange, political instability, availability of capital, pension plan
funding, doing business in foreign countries including corruption risk and income tax laws. Additionally, differences could
arise because of events announced or completed after the date of this annual report. You will find more information in the
Business risk and uncertainty subsection of the Management’s Discussion and Analysis section of this annual report. We
caution readers that the risks described above are not necessarily the only ones we face; additional risks and uncertainties
that are presently unknown to us or that we may currently deem immaterial may adversely affect our business.
Except as required by law, we disclaim any intention or obligation to update or revise any forward-looking statements
whether as a result of new information, future events or otherwise. The forward-looking information and statements
contained in this annual report are expressly qualified by this cautionary statement.
CAE Annual Report 2016 | 109
Corporate profile
Corporate profile
CAE is a global leader in the delivery of training for the civil aviation, defence and security, and healthcare markets. We design
CAE is a global leader in the delivery of training for the civil aviation, defence and security, and healthcare markets. We design
and integrate the industry’s most comprehensive training solutions, anchored by the knowledge and expertise of our 8,000
and integrate the industry’s most comprehensive training solutions, anchored by the knowledge and expertise of our 8,000
employees, our world-leading simulation technologies and a track record of service and technology innovation spanning seven
employees, our world-leading simulation technologies and a track record of service and technology innovation spanning seven
decades. Our global presence is the broadest in the industry, with 160 sites and training locations in more than 35 countries,
decades. Our global presence is the broadest in the industry, with 160 sites and training locations in more than 35 countries,
including our joint venture operations, and the world’s largest installed base of flight simulators. Each year, we train more than
including our joint venture operations, and the world’s largest installed base of flight simulators. Each year, we train more than
120,000 civil and defence crewmembers, as well as thousands of healthcare professionals.
120,000 civil and defence crewmembers, as well as thousands of healthcare professionals.
www.cae.com
www.cae.com
Follow us on Twitter @CAE_Inc.
Follow us on Twitter @CAE_Inc.
Check out our first web-based Activity Report
Check out our first web-based Activity Report
We are pleased to inform you that we have prepared a web-based Activity Report. It consolidates information on our company
We are pleased to inform you that we have prepared a web-based Activity Report. It consolidates information on our company
strategy, performance and corporate social responsibility (CSR) into one document. Integrating our reporting in this way enables
strategy, performance and corporate social responsibility (CSR) into one document. Integrating our reporting in this way enables
us to provide stakeholders with a single source of information in key areas. It also signals that CSR is inseparable from our core
us to provide stakeholders with a single source of information in key areas. It also signals that CSR is inseparable from our core
business strategy and activities.
business strategy and activities.
www.cae.com/ActivityReport
www.cae.com/ActivityReport
We are proud to present this consolidated and interactive content about our company!
We are proud to present this consolidated and interactive content about our company!
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S h a p i n g t h e f u t u r e o f t r a i n i n g
As an eTree member, CAE Inc. is committed to meeting shareholder needs while
As an eTree member, CAE Inc. is committed to meeting shareholder needs while
being environmentally friendly. For each shareholder that receives electronic
being environmentally friendly. For each shareholder that receives electronic
copies of shareholder communications, CAE will plant a tree through Tree
copies of shareholder communications, CAE will plant a tree through Tree
Canada, the leader in Canadian urban reforestation. To date CAE has helped
Canada, the leader in Canadian urban reforestation. To date CAE has helped
plant 5,264 trees.
plant 5,264 trees.
Contains FSC® certified post-consumer and 70% virgin fibre
Contains FSC® certified post-consumer and 70% virgin fibre
Certified EcoLogo and FSC® Mix
Certified EcoLogo and FSC® Mix
Manufactured using biogas energy
Manufactured using biogas energy
CYAN
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BLACK CAE
L16303
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Follow us on Twitter @CAE_Inc.
Follow us on Twitter @CAE_Inc.
cae.com
cae.com
ANNUAL REPORT Fiscal year ended March 31, 2016
ANNUAL REPORT Fiscal year ended March 31, 2016
Follow us on Twitter @CAE_Inc.
cae.com
CYAN
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BLACK CAE
L16303
ANNUAL REPORT Fiscal year ended March 31, 2016