cae.comCAE Financial Report Fiscal year ended March 31, 2018Financial ReportFiscal year ended March 31, 2018 Training partner of choice.
CAE is a global leader in training for the civil aviation, defence and
security, and healthcare markets. Backed by a record of more than
70 years of industry firsts, we continue to help define global training
standards with our innovative virtual-to-live training solutions to
make flying safer, maintain defence force readiness and enhance
patient safety. We have the broadest global presence in the industry,
with over 8,500 employees, 160 sites and training locations in
over 35 countries. Each year, we train more than 120,000 civil and
defence crewmembers and thousands of healthcare professionals
worldwide.
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Check out our Annual Activity and
Corporate Social Responsibility Report!
Our Annual Activity and Corporate Social Responsibility Report
is available online. It consolidates information on our company
strategy, fiscal year 2018 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 business strategy
and activities.
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while being environmentally friendly. For each shareholder that receives
electronic copies of shareholder communications, CAE will plant a tree
through Tree Canada, the leader in Canadian urban reforestation. To date
CAE has helped plant 5,267 trees.
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Message from the Chair of the BoardStronger than everIn fiscal 2018, CAE’s management once again strengthened the company’s financial and operational performance. This included new records in order intake and backlog, as well as solid growth in our return on capital employed. We also raised our shareholder dividend for the seventh consecutive year. The evidence is unequivocal—we have a strong management team implementing the right strategy.A winning strategyOur strategic focus on delivering innovative end-to-end training services on a global scale generated significant results in fiscal 2018. With the support of CAE’s more than 8,500 professionals worldwide, we won contracts with an increasing number of customers. Our end markets are benefiting from secular growth tailwinds and we foresee sustainable, profitable growth and an expanded market reach in training across all CAE segments.As a pure-play training company, we heightened our ability to spearhead industry innovation and our customers’ ability to deliver on their mission, safely and efficiently. Our next-generation pilot training solution CAE Rise™ represents an exciting step change in the way operators train their pilots and in how we help them keep the world’s skies safe. Our reputation as a leading training systems integrator for defence forces is growing as is global interest in our healthcare simulation solutions. James HankinsonChair of the BoardStrengthening governanceIn fiscal 2018, we continued to reinforce our governance practices and take steps to ensure excellence in ethics and compliance. These steps included making our Code of Business Conduct more accessible and user friendly. Also, we have made substantial progress in evolving our culture and corporate social responsibility.We also enhanced our enterprise risk management policy and framework to help mitigate risks related to privacy, aviation safety, and cyber security, a major threat for companies today. To keep pace with our increasingly agile culture, we also improved our talent management review and succession processes.Diversity and Board renewalToday two of eleven CAE directors are women. As a Board, our target is to reach at least 30% by 2022. This is a key element of the renewal process underway.As part of this process, I would like to thank outgoing corporate director General Peter J. Schoomaker, who is retiring consistent with our director age limit requirements, for his invaluable contributions over the past years. I am also pleased to welcome Michael E. Roach, former CEO of CGI Group, who joined the Board in November 2017. Michael brings deep business expertise to the Board.Looking back as I step downDuring my 23 years on CAE’s Board, I have seen this remarkable company evolve and mature beyond many people’s expectations. As testament to this success, our share price and market capitalization more than doubled in the last five years alone and our workforce grew by approximately 1,000 employees to more than 8,500. We secured major training partnerships with world-renowned airlines such as Japan Airlines and AirAsia. Also, we signed on to deliver comprehensive defence training programs around the globe.It has been an honour to lead a Board of this calibre and I am extremely proud of what we have accomplished together. For the last time as Chair, I would like to thank our shareholders for their trust in CAE’s ability to generate meaningful economic, social and environmental benefits for stakeholders. I feel confident that, with your ongoing support, an even brighter future awaits this great company. Opening up new horizons in trainingThanks to our talented employees, we delivered a strong performance in fiscal 2018. Our year-over-year revenues grew by 5%, earnings per share by 8% and return on capital employed increased to 12.3%*. We achieved two new annual records: a $3.9 billion order intake and a $7.8 billion backlog. The momentum of our strategic pivot from products to training services is stronger than ever. So are the fundamentals and secular tailwinds in our three core businesses.Marc ParentPresident and Chief Executive OfficerMessage to shareholdersA noble purpose that thrivesDriving this success is CAE’s noble purpose and employees’ commitment to it. What we do generates true societal benefits. We help make air travel safer, defence forces mission ready and medical personnel better able to save lives. Our mission resonates with customers too; their confidence and trust in us translated into new and expanded contracts last year.In Civil Aviation Training Solutions, we retained a 70% global market share in full-flight simulator sales and expanded our leading share of the industry’s training market. Our simulators remain best in class and, following an extensive process improvement program, are more cost competitive than ever. We signed comprehensive long-term training agreements with AirAsia, Jazz Aviation, Air Transat and Virgin Atlantic Airways. We also won long-term training contracts with business aviation customers worldwide, including Elit’Avia and Flexjet.With our longstanding partner AirAsia, we launched CAE Rise™ (Real-time Insights and Standardized Evaluations), a game-changing, next-generation pilot training solution. CAE Rise™ puts real-time evidence-based insights in instructors’ hands. It fast-tracks each pilot’s development and boosts operators’ ability to deliver standardized training. It also gives us one more way to help keep the world’s skies safe.Our Defence & Security teams signed $1.4 billion in orders, a record high for the second consecutive year, and generated a $3.9 billion backlog. The Royal Australian Air Force, the U.S. Navy and the U.K. Ministry of Defence extended their training contracts with us. Signing on to deliver comprehensive helicopter training systems for both the Brazilian Navy and the Qatar Emiri Air Force, and an end-to end training centre for remotely piloted aircraft for the UAE Air Force, reinforces our reputation as a leading training systems integrator.In Healthcare, achieving strategic milestones and winning prestigious awards strengthened our position as a leader in innovative simulation-based healthcare education and training. CAE Juno, a purpose-built, mid-fidelity clinical skills manikin for nurses, the sector’s largest market, rapidly gained traction. Other innovations launched in fiscal 2018 include CAE LucinaAR, the world’s first childbirth simulator with augmented reality. *Adjusted before U.S. tax reform impact and net gains on strategic transactions relating to our Asian joint ventures. driving innovation, bolstering talent and optimizing
our capital.
At CAE, we are focused on elevating our customers’
experience to ensure that all touchpoints serve to
delight them. Our new digital strategy and roadmap
support our ambition to be the go-to training
partner of choice worldwide. Digital represents the
latest horizon in our long history of innovation. We
are seizing its tremendous potential to elevate the
customer experience by making it easier to interact
with us. It will also help reinforce our service mindset,
differentiate our training and create new revenue
streams.
Bolstering our talent means recruiting, developing
and retaining not only the best but also very diverse
talent. Building a more agile, progressive culture
and implementing our new diversity and inclusion
initiatives are pivotal to achieving our strategic
priorities.
And finally, we will use our strong financial position to
pursue growth opportunities. This includes deploying
capital to generate growth by investing in more
training centres, accelerating airline outsourcing and
securing more long-term defence training contracts.
We will also focus on achieving double-digit growth
in Healthcare and on improving our overall capital
efficiency.
As we continue to live our values, all these actions are
opening up new horizons in training for CAE. This, in
turn, creates new opportunities to act on our noble
purpose and make a world of difference for all our
stakeholders.
New partnerships with professional medical
associations and institutes increase our reach and
ability to help improve patient outcomes worldwide.
Driving our culture and CSR evolution
For the past three years, we have taken decisive and
significant steps to evolve our culture. You can read
more about these steps in our culture change feature
story. Suffice it to say that the shift underway in CAE’s
culture is tangible, far reaching and empowering for all.
Employee feedback is front and centre in these
changes, from our new company values to engaging
new workspaces, from our streamlined performance
management system to short, frequent and fun
employee engagement pulse surveys. We are becoming
a more agile, open and people-centric company where
the employee experience is just as important as that of
the customer.
Corporate social responsibility (CSR) has also been
evolving, step by step, along with our culture over the
past three years. Last year, we invested in taking our
CSR commitment to the next level. We refined our
materiality matrix, revisited our CSR pillars, developed
a new roadmap and objectives, and empowered our
CSR Committee to pursue more challenging goals and
objectives.
Our focus in CSR is now on improving our impact and
performance in four areas: Ethics and integrity, People
and safety, Innovation and customer experience and
Community and environment.
Maintaining our leadership and growth
While we have significant headroom in large markets,
competition from many corners continues to
intensify. We are turning these challenges into growth
opportunities as we bring the full weight of our
competitive advantages to bear. These advantages
include our reputation as a globally credible,
innovation thought leader and the industry’s only
pure-play training company. Our independence from
all original equipment manufacturers is also a key
strength, as is having the highest quality, best-value,
end-to-end training solutions.
Our strategic imperatives— ‘protect’ and ‘grow’—will
continue to guide us in maintaining our leadership
and growth momentum. Four strategic priorities will
support these imperatives: delighting customers,
Table of Contents
Management’s Discussion and Analysis
1. HIGHLIGHTS
2. INTRODUCTION
3. ABOUT CAE
3.1 Who we are
3.2 Our mission
3.3 Our vision
3.4 Our strategy
3.5 Our operations
3.6
Foreign exchange
3.7 Non-GAAP and other financial measures
4. CONSOLIDATED RESULTS
4.1 Results from operations – fourth quarter of fiscal 2018
4.2 Results from operations – fiscal 2018
4.3 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 participation
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. BUSINESS RISK AND UNCERTAINTY
9.1 Risks relating to the industry
9.2 Risks relating to the Company
9.3 Risks relating to the market
10. RELATED PARTY TRANSACTIONS
11. CHANGES IN ACCOUNTING POLICIES
11.1 New and amended standards not yet adopted
11.2 Use of judgements, estimates and assumptions
12. CONTROLS AND PROCEDURES
12.1 Evaluation of disclosure controls and procedures
12.2
Internal control over financial reporting
13. OVERSIGHT ROLE OF AUDIT COMMITTEE AND BOARD OF DIRECTORS
14. ADDITIONAL INFORMATION
15. 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, 2018
1. HIGHLIGHTS
FINANCIAL
FOURTH QUARTER OF FISCAL 2018
Revenue from continuing operations higher compared to last quarter and the fourth quarter of fiscal 2017
– Consolidated revenue from continuing operations was $780.7 million this quarter, $76.3 million or 11% higher than last quarter and
$46.0 million or 6% higher than the fourth quarter of fiscal 2017.
Total segment operating income1 higher compared to last quarter and the fourth quarter of fiscal 2017
– Total segment operating income was $141.1 million this quarter, $28.3 million or 25% higher than last quarter and $20.2 million or
17% higher than the fourth quarter of fiscal 2017.
Net income attributable to equity holders of the Company from continuing operations lower compared to last quarter and higher
compared to the fourth quarter of fiscal 2017
– Net income attributable to equity holders of the Company from continuing operations was $100.1 million (or $0.37 per share) this
quarter compared to $117.9 million (or $0.44 per share) last quarter, representing a decrease of $17.8 million or 15% and compared
to $67.4 million (or $0.25 per share) in the fourth quarter of last year, representing an increase of $32.7 million or 49%;
– As there were no restructuring, integration and acquisition costs or one-time tax items this quarter or last quarter, net income before
specific items1 was equal to net income attributable to equity holders of the Company from continuing operations, compared to net
income before specific items of $82.4 million (or $0.31 per share) in the fourth quarter of fiscal 2017;
– Last quarter's results include impacts of the income tax recovery resulting from the enactment of a lower U.S. federal income tax rate
and the gain on the remeasurement of the previously held Asian Aviation Centre of Excellence Sdn. Bhd. (AACE) investment net of
reorganizational costs. Excluding these elements, earnings per share would have been $0.28.
Positive free cash flow1 from continuing operations at $117.3 million this quarter
– Net cash provided by continuing operating activities was $137.8 million this quarter, compared to $187.6 million last quarter and
$197.5 million in the fourth quarter of last year;
– Maintenance capital expenditures1 and other asset expenditures were $22.8 million this quarter, $17.7 million last quarter and
$26.8 million in the fourth quarter of last year;
– Cash dividends were $22.5 million this quarter, $23.2 million last quarter and $20.5 million in the fourth quarter of last year.
FISCAL 2018
Higher revenue from continuing operations compared to fiscal 2017
– Consolidated revenue from continuing operations was $2,830.0 million, $125.5 million or 5% higher than last year.
Total segment operating income higher compared to fiscal 2017
– Total segment operating income was $461.0 million, $60.8 million or 15% higher than last year.
Higher net income attributable to equity holders of the Company and diluted earnings per share from continuing operations
– Net income attributable to equity holders of the Company from continuing operations was $347.0 million (or $1.29 per share) compared
to $252.0 million (or $0.93 per share) last year, representing a $95.0 million or 38% increase;
– As there were no restructuring, integration and acquisition costs or one-time tax items in fiscal 2018, net income before specific items
was equal to net income attributable to equity holders of the Company from continuing operations, compared to net income before
specific items of $278.4 million (or $1.03 per share) last year;
– Fiscal 2018 results include impacts of the income tax recovery resulting from the enactment of a lower U.S. federal income tax rate,
the gain on the remeasurement of the previously held AACE investment net of reorganizational costs and the gain realized from the
disposal of our equity interest in the joint venture Zhuhai Xiang Yi Aviation Technology Company Limited (ZFTC). Excluding these
elements, earnings per share would have been $1.11.
Positive free cash flow from continuing operations at $288.9 million
– Net cash provided by continuing operating activities was $403.3 million this year, compared to $464.3 million last year;
– Maintenance capital expenditures and other asset expenditures were $77.6 million this year, compared to $68.3 million last year;
– Cash dividends were $89.9 million this year, compared to $80.6 million last year.
1 Non-GAAP and other financial measures (see Section 3.7).
CAE Financial Report 2018 I 1
Management’s Discussion and Analysis
Capital employed2 increased by $184.3 million or 7% this year, ending at $3,016.0 million
– Return on capital employed2 (ROCE) was 14.4% this year compared to 11.2% last year. Excluding the impacts of the income tax
recovery resulting from the enactment of a lower U.S. federal income tax rate, the gain on the remeasurement of the previously held
AACE investment net of reorganizational costs and the gain realized from the disposal of our equity interest in the joint venture ZFTC,
our ROCE would have been 12.3% this year;
– Non-cash working capital2 decreased by $12.1 million in fiscal 2018, ending at $180.9 million;
– Property, plant and equipment increased by $221.3 million;
– Other long-term liabilities increased by $26.9 million;
– Net debt2 decreased by $101.3 million this year, ending at $649.4 million.
ORDERS2
– The book-to-sales ratio2 for the quarter was 1.30x (Civil Aviation Training Solutions was 1.20x, Defence and Security was 1.50x and
Healthcare was 1.00x). The ratio for the last 12 months was 1.36x (Civil Aviation Training Solutions was 1.44x, Defence and Security
was 1.29x and Healthcare was 1.00x);
– Total order intake this year was $3,855.0 million, up $661.6 million over last year;
– Total backlog2, including obligated, joint venture and unfunded backlog was $7,849.1 million at March 31, 2018, $318.9 million higher
than last year.
Civil Aviation Training Solutions
– Civil Aviation Training Solutions obtained contracts with an expected value of $2,339.5 million, including contracts for 50 full-flight
simulators (FFSs).
Defence and Security
– Defence and Security won contracts valued at $1,400.3 million.
Healthcare
– Healthcare order intake was valued at $115.2 million.
BUSINESS COMBINATIONS
– During the second quarter, we acquired a portfolio of training assets in North America and Europe from a full-flight simulator leasing
business for cash consideration of $24.7 million. With this transaction, we obtained fully operational full-flight simulators and various
customer contracts;
– During the third quarter, we completed the acquisition of the remaining 50% equity interest in AACE from AirAsia, for a cash consideration
of $114.8 million [US$90 million] and long-term contingent cash consideration payable of up to US$10 million if certain criteria are
met.
OTHER
– During the second quarter, we signed a Memorandum of Understanding with Singapore Airlines, to establish a joint venture for pilot
training in Singapore. The joint venture will initially focus on primarily providing simulator training for Boeing aircraft types, supporting
Singapore Airlines, its subsidiaries and other operators' pilot training needs in the region. The closing of the transaction is subject to
customary closing conditions;
– During the second quarter, we concluded a sale to China Southern Airlines of our 49% equity interest in the joint venture ZFTC for
US$96 million, excluding post-closing adjustments. As part of the transaction, both companies reached an agreement on the
outsourcing to CAE of third-party airline training conducted at China Southern Airlines’ ZFTC facility;
– During the third quarter, we purchased a 45% interest in Pelesys, forming a joint venture with a global leader in the provision of aviation
training solutions and courseware;
– On February 9, 2018, we announced the renewal of our normal course issuer bid (NCIB) to purchase, for cancellation, up to 5,349,804
of our issued and outstanding common shares over a one year period ending February 22, 2019.
2 Non-GAAP and other financial measures (see Section 3.7).
2 I CAE Financial Report 2018
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 2018 mean the fiscal year ending March 31, 2018;
– Last year, prior year and a year ago mean the fiscal year ended March 31, 2017;
– Dollar amounts are in Canadian dollars.
This report was prepared as of May 25, 2018, and includes our management’s discussion and analysis (MD&A) for the year and the
three month period ended March 31, 2018 and the consolidated financial statements and notes for the year ended March 31, 2018. We
have prepared it to help you understand our business, performance and financial condition for fiscal 2018. Except as otherwise indicated,
all financial information has been reported in accordance with International Financial Reporting Standards (IFRS) as issued by the
International Accounting Standards Board. 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 financial
report for the year ended March 31, 2018. 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 mission;
– 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;
– 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 financial 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. Holders of CAE’s securities may also request a printed copy of the Company’s consolidated
financial statements and MD&A free of charge by contacting Investor Relations (investor.relations@cae.com).
CAE Financial Report 2018 I 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, strategic partnerships and long-term contracts, procurement and original equipment manufacturer (OEM)
leverage, warranty or other product-related claims, product integration and program management, protection of our intellectual property,
third-party intellectual property, loss of key personnel, labour relations, environmental matters, claims arising from casualty losses,
integration of acquired businesses, our ability to penetrate new markets, U.S. foreign ownership, control or influence mitigation measures,
length of sales cycle, seasonality, continued returns to shareholders, information technology systems including cybersecurity risk, data
privacy risk and our reliance on technology and third-party providers, and risks relating to the market such as foreign exchange, availability
of capital, pension plan funding, doing business in foreign countries including corruption risk, political instability 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 I CAE Financial Report 2018
Management’s Discussion and Analysis
3. ABOUT CAE
3.1 Who we are
CAE is a global leader in training for the civil aviation, defence and security, and healthcare markets. Backed by a record of more than
70 years of industry firsts, we continue to help define global training standards with our innovative virtual-to-live training solutions to make
flying safer, maintain defence force readiness and enhance patient safety. We have the broadest global presence in the industry, with
over 8,500 employees, 160 sites and training locations in over 35 countries. 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 mission
Through the training we provide, our mission is to make air travel safer, defence forces mission ready and medical personnel better able
to save lives.
3.3 Our vision
Our vision is to be the recognized global training partner of choice to enhance safety, efficiency and readiness.
3.4 Our strategy
We address safety, efficiency and readiness for customers in three core markets: civil aviation, defence and security, and healthcare.
We are a unique, pure-play training company with a proven record, of more than 70 years, of commitment to our customers’ long-term
training needs.
We offer the most innovative and broadest range of comprehensive training solutions across a global network by incorporating a
combination of live training on actual platforms, virtual training in simulators and extended reality applications, and constructive training
using computer-generated simulations. Our strategic imperatives focus on the protection of our leadership position and growing at a
superior rate than the underlying markets.
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 regulations that require them to train on a recurrent basis. As well, we have good visibility owing to a large
order backlog and high success rate of renewing existing customer contracts.
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 segments. We focus on providing an excellent end-to-end customer experience and 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 3.7% annually over the next decade. In defence and
security, we see renewed defence investment as a positive catalyst and an increased focus on training for mission readiness. 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. Each of our three core markets is characterized by a scarcity of critical personnel for which we are in a prime position to
help customers meet their needs for highly trained professionals.
CAE Financial Report 2018 I 5
Management’s Discussion and Analysis
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. Backed by more than
70 years of industry firsts, we continue to help define global training standards with our innovative virtual-to-live training solutions to make
flying safer, maintain defence force readiness and enhance patient safety. We design and deliver the industry's most sophisticated training
systems, employing the latest in simulation, extended reality and digital, including data-enabled technologies. As well, we have a
demonstrated flexibility by engaging customers under a variety of partnership models.
3.5 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 have the unique capability to 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 experience and thought leadership, large 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 more than 30 countries and through our broad global network of more than 50 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 255 FFSs, including those operating in our joint ventures. We offer industry leading
technology, and we are shaping the future of training through innovations such as our next generation training systems, including
CAE Real time Insights and Standardized Evaluations (CAE RiseTM), which will improve training quality, objectivity and efficiency through
the integration of untapped flight and simulator data driven insights into training. As the industry leader in training, we continue our strategy
to recruit, develop and retain the best instructors, who represent our second largest employee group after engineers. In the formation of
new pilots, CAE operates the largest ab initio flight training network in the world. 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, reliability and innovation 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. 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.
Our global reach enables us to provide best-in-class support services such as real-time, remote monitoring and also enables us to leverage
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 and business aircraft operators;
– Expected long-term global growth in air travel;
– Growing active fleet of commercial and business aircraft;
– Demand for trained aviation professionals.
6 I CAE Financial Report 2018
Management’s Discussion and Analysis
Pilot training and certification regulations
Civil aviation training is a largely 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) in the U.S.
In recent years, pilot certification processes and regulatory requirements have become increasingly stringent. Simulation-based pilot
certification training is taking on a greater role internationally with the Multi-crew Pilot License (MPL), with the Airline Transport Pilot (ATP)
certification requirements in the U.S. and with Upset Prevention and Recovery Training (UPRT) requirements mandated by both EASA
and the FAA.
Safety and efficiency imperatives of commercial airline and business aircraft operators
The commercial airline industry is competitive, requiring operators to continuously pursue operational excellence and efficiency initiatives
to achieve satisfactory 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 environments, and on-going aircraft programs. 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.
Our newest innovation in pilot training systems, CAE Rise™, is well positioned to elevate the pilot training experience. Backed by
industry leading technology, this system enables instructors to deliver training in accordance with airlines’ Standard Operating Procedures
and enables instructors to objectively assess pilot competencies using live data during training sessions. Furthermore, CAE Rise™
augments instructors’ capability to identify pilot proficiency gaps and evolve airline training programs to the most advanced aviation safety
standards, including Advanced Qualification Program and Evidence Based Training methodologies.
Expected long-term global growth in air travel
The secular growth in air travel is resulting 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
3.7% annually over the next decade. For calendar 2017, passenger traffic increased by 7.6% compared to calendar 2016. For the first three
months of calendar 2018, passenger traffic increased by 7.2% compared to the first three months of calendar 2017. Passenger traffic in
Asia and Europe grew by 9.0% and 7.7% respectively, while Latin America, North America and the Middle East increased by 7.3%, 5.3%
and 5.2% respectively.
In business aviation, training demand is closely aligned to business jet travel. According to the FAA, the total number of business jet flights,
which includes all domestic and international flights, was up with 3.2% growth over the past 12 months. Similarly, according to Eurocontrol,
the European Organisation for the Safety of Air Navigation, the total number of business aviation flights in Europe has improved by 4.8%.
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.
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, oil price volatility or other major world events.
Growing active fleet of commercial and business aircraft
As an integrated training solutions provider, our long-term growth is closely tied to the active commercial and business aircraft fleet.
The global active commercial aircraft fleet has grown by an average of 3.1% annually over the past 20 years and is widely expected to
continue to grow at an approximate average rate of 3.5% annually over the next two decades because of increasing emerging markets,
low-cost carrier demand and fleet replacement in established markets. From March 2017 to March 2018, the global commercial aircraft
fleet increased by 6.6%, growing by 9.3% in Asia Pacific, 6.3% in Europe, the Middle East and Africa (EMEA) and 4.6% in the Americas.
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 6X and Gulfstream’s 500/600.
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.
Our strong competitive moat in the civil aviation market, as defined by our extensive global training network, best-in-class instructors,
comprehensive training programs and strength in training partnerships with airlines and business aircraft operators, allows 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, CAE 400XR, 500XR,
550XR and 600XR Series Flight Training Devices (FTD) and CAE Simfinity™ ground school solutions, in delivering training equipment
solutions that address the growing training needs of airlines, business jet operators, and helicopter operators.
CAE Financial Report 2018 I 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 fulfill this growing capacity.
Our Airline Pilot Demand Outlook, released in June 2017, identifies a global requirement for 255,000 new pilots over the next 10 years to
sustain and grow the commercial air transport industry. Rapid fleet expansion and high pilot retirement rates create a further need to
develop 180,000 first officers into new airline captains. These numbers mean that over 50% of the pilots who will fly the world’s commercial
aircraft in 10 years have not yet started to train. To support this growth in demand, the aviation industry will require innovative solutions
to match the learning requirements of a new generation of trained aviation professionals, 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 (iLVC) training solutions for defence
forces. Most militaries leverage a combination of live training on actual platforms, virtual training in simulators, and constructive training
using computer-generated simulations. CAE is skilled and experienced as a training systems integrator capable of helping defence forces
achieve an optimal balance of iLVC training to achieve mission readiness. Our expertise in training 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. Increasingly, we are leveraging our training systems integration capabilities in the naval domain to provide naval training
solutions, as evidenced by the program to provide the United Arab Emirates (UAE) Navy with a comprehensive Naval Training Centre.
We offer training solutions for land forces, including a range of driver, gunnery and maintenance trainers for tanks and armoured fighting
vehicles as well as constructive simulation for command and staff training. We also 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 efficiency. As such, we have been increasingly pursuing programs requiring the integration
of live, virtual and constructive training and these tend to be larger in size than programs involving only a single component of such a
solution. We are a first-tier training systems integrator and uniquely positioned to offer our customers a comprehensive range of innovative
iLVC solutions, ranging from academic, virtual and live training to immersive, networked mission rehearsal in a synthetic environment.
Our solutions typically include a combination of training services, products and software tools designed to cost-effectively maintain and
enhance safety, efficiency, mission readiness and decision-making capabilities. We have a wealth of experience delivering and operating
outsourced training solutions across different business models, including government-owned 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.
We have delivered simulation products and training systems to approximately 50 defence forces in over 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. We continue to increase our support for live flying training, such as the live training
delivered as part of the NATO Flying Training in Canada and the U.S. Army Fixed-Wing Flight Training programs, 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:
– Growing defence budgets;
– Attractiveness of outsourcing training and maintenance services;
– Desire to integrate training systems to achieve efficiencies and enhanced preparedness;
– Need for synthetic training to conduct integrated, networked mission training, including joint and coalition forces training;
– Explicit desire of governments and defence forces to increase the use of synthetic training;
–
– Relationships with OEMs for simulation and training.
Installed base of enduring defence platforms and new customers;
8 I CAE Financial Report 2018
Management’s Discussion and Analysis
Growing defence budgets
In March 2018, the U.S. Congress finalized the U.S. federal budget for fiscal year 2018, which included the authorization of a defence
budget for approximately USD $700 billion. In addition, the majority of the 29 members of NATO have expressed plans to increase defence
spending in the coming years, and this includes Canada, which plans to grow annual defence spending from approximately $19 billion
to $33 billion by 2027. NATO and allied nations continue to confront the immediate challenges posed by the war on terrorism and have
been increasingly renewing and augmenting their strategic defences in view of emerging and resurgent geopolitical threats. Growing
defence budgets in the U.S and much of NATO, as well as other regions such as Asia and the Middle East, will create increased opportunities
throughout the defence establishment. Training is fundamental for defence forces to achieve and maintain mission readiness and growth
in defence spending is expected to result in corresponding opportunities for training systems and solutions.
Attractiveness of outsourcing training and maintenance services
Another driver for CAE’s expertise and capabilities is the efficiency gained by our customers from outsourcing training and support services.
Defence forces and governments continue to find ways to reduce costs and increase readiness, while allowing 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 our 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 for training support required to meet the demand for producing aircrews and achieve desired readiness levels. For example, we are
delivering fixed-wing flight training to the U.S. Army at the CAE Dothan Training Center in Dothan, Alabama. At this training centre, we
offer comprehensive classroom, simulator and live-flying training and we believe this type of training service delivery program will become
increasingly attractive to defence forces globally.
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 and has positioned the Company globally as a platform-independent
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. As a training systems integrator, CAE can address the overall iLVC
domain to deliver comprehensive training, from undergraduate individual training all the way through to operational, multi-service and
joint mission training.
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 to
integrate and network various training systems so military forces can train in a virtual world. Simulation-based 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 for 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 U.S., U.K., Australia, Canada and others all have plans and strategies to leverage iLVC domains within a
networked common synthetic environment. According to the U.K. Ministry of Defence, they will be establishing and acquiring a simulation
architecture designed to better enable networked training while shifting more training from the live to the synthetic environment. We are
actively teaming with other industry partners, as evidenced by our November 2017 announcement of a collaborative agreement to develop
iLVC training solutions. We are also promoting open, standard simulation architectures, such as the Open Geospatial Consortium Common
Database (OGC CDB), to better enable integrated and networked mission training.
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
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, the desire
to save aircraft for operational use, and the advanced simulation technologies delivering more realism are several 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. An example of this shift is the U.S. Navy P-8A program, which is replacing the P-3C Orion. CAE has
been contracted to design and manufacture a total of 18 P-8A operational flight trainers for the Navy. The training curriculum for the P-3C
was made up of approximately 30 percent synthetic training, while the P-8A training program leverages synthetic training for approximately
70 percent of the training curriculum. This level of rebalancing of live and virtual training is representative of the desire of governments
and defence forces around the world to increase the use of synthetic training.
CAE Financial Report 2018 I 9
Management’s Discussion and Analysis
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 U.S. 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 (USAF) KC-135 Aircrew Training System and 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-8, C295, MH-60R and MQ-9 in global defence
markets, thus creating opportunities to provide new training systems and services for platforms where CAE has significant experience.
Relationships with OEMs for simulation and training
We are an important partner to OEMs 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-8 maritime patrol aircraft and has subcontracted CAE to design and develop P-8 operational flight
trainers for the U.S. Navy and other international customers. Boeing continues to market the P-8 internationally, which will create further
opportunities for CAE. Other examples of CAE’s relationships with OEMs on specific platforms creating opportunities for training systems
include Airbus Defence & Space on the C295, which was selected by Canada for the Fixed-Wing Search and Rescue program; Leonardo
on the M-346 lead-in fighter trainer; Lockheed Martin on the C-130J Super Hercules transport aircraft, which is being acquired by several
branches of the USAF as well international militaries; and General Atomics on the Predator family of remotely piloted aircraft. We are 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.
HEALTHCARE MARKET
We design and manufacture simulators, audiovisual and simulation centre management solutions, develop courseware and offer services
for training of medical, nursing and allied healthcare students as well as medical practitioners 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 medical errors. We are leveraging our experience and best practices in simulation based aviation training
to deliver innovative solutions to improve the safety and efficiency in the delivery of patient care. The healthcare simulation market is
expanding, with simulation centres becoming increasingly more prevalent 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 as well as courseware for simulation-based healthcare
education and training. We have sold simulators to customers in approximately 90 countries that are currently supported by our global
network. We are a leader in high-fidelity patient simulators that are uniquely powered by advanced models of human physiology to
realistically mimic human responses to clinical interventions. For example, our high-fidelity childbirth simulator, Lucina, was designed to
offer exceptional realism for simulated scenarios of both normal deliveries and rare maternal emergencies. In June 2017, we introduced
CAE Juno, the first contemporary clinical skills manikin that meets requirements for fundamental nurse training, currently the largest
segment of the healthcare education market. Juno allows nursing programs to adapt to new realities of more complex conditions of hospital
patients, liability concerns in healthcare, and thus, decreased access to live patients for learners.
Through our Healthcare Academy, we deliver peer-to-peer training at customer sites as well as 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
courseware packages for our customers. Our Academy partnered with the International Nursing Association for Clinical Simulation and
Learning (INACSL) to develop a fellowship program based on international best practices in healthcare simulation with cohorts in the
U.S., U.K. and UAE.
We offer turnkey solutions, project management and professional services for healthcare simulation programs. We also collaborate with
medical device companies and scientific societies to develop innovative and custom training solutions. In September 2017, in collaboration
with the American Society of Anesthesiologists (ASA), we released Anesthesia SimSTAT, a virtual healthcare training environment for
practicing physicians. This new platform provides continuing medical education for Maintenance of Certification in Anesthesiology (MOCA)
and has allowed us to expand access to simulation-based clinical training among the anesthesia community. Furthermore, through an
industry partnership with a medical device company, we developed a specialized interventional simulator to train physicians to implant a
new generation of pacemakers. In January 2018, we announced that in collaboration with the American Heart Association (AHA), we will
establish a network of International Training Sites to deliver lifesaving AHA courses in countries that are currently underserved. The first
authorized site operated by CAE Healthcare has opened within the CAE Brunei Multi-Purpose Training Centre in Brunei Darussalam.
10 I CAE Financial Report 2018
Management’s Discussion and Analysis
Limited access to live patients during training;
Market drivers
Demand for our simulation products and services in the healthcare market is driven by the following:
–
– Medical technology revolution;
– Broader adoption of simulation, with a demand for innovative and custom training approaches;
– Growing emphasis on patient safety and outcomes.
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 training programs complements traditional learning and allows students to
hone their clinical and critical thinking skills for high risk, low frequency events. In 2014, the U.S. National Council of State Boards of
Nursing (NCSBN) released a ground-breaking study on the effectiveness of simulation training in pre-licensure nursing programs. Among
the findings, nursing students who spent up to 50 percent of clinical hours in high-quality simulation were as well-prepared for professional
practice as those whose experiences were drawn from traditional clinical practice. In the U.K., the Nursing and Midwifery Council announced
in April 2018 that it has lifted the cap on the number of hours nursing students can spend in simulation-based training in place of clinical
hours.
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 Vimedix ultrasound simulator offers more than 200 patient pathologies for cardiac, emergency
and obstetrics and gynaecology medicine. The training and education model is evolving, as evidenced by 22 NATO countries prohibiting
the use of live animals in military medical training. CAE Healthcare simulators provide a low-risk alternative for practicing life-saving
procedures, interprofessional team training and major disaster response.
Medical technology revolution
Advancements in medical technology are driving the use of simulation. New medical devices and advanced procedures, such as
intra cardiac echocardiography, 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 training partner of choice with leading OEMs, we continue to collaborate to deliver innovative and custom training for the introduction
of new interventional procedures. We were the first to bring a commercial Microsoft HoloLens mixed reality application to the medical
simulation market with the release of the CAE VimedixAR ultrasound simulator. In January 2018, we launched a new mixed reality
application, LucinaAR, the world's first childbirth simulator that integrates modeled physiology and augmented reality.
Broader adoption of simulation, with a demand for innovative and custom training approaches
The majority of product and service sales in healthcare simulation involve healthcare education. We estimate the total healthcare simulation
market at approximately USD $1.1 billion. North America is the largest market for healthcare simulation, followed by Europe and Asia.
Together with our more than 55 distributors worldwide, we are reaching new and emerging markets and addressing the international
demand potential for simulation-based training. CAE segments the healthcare simulation market by virtual, augmented and mixed reality
simulators, 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. There is a growing body of evidence
demonstrating that medical simulation improves clinical competency, patient outcomes and reduces medical errors, which can help
mitigate the rate of increase in healthcare costs.
Growing emphasis on patient safety and outcomes
CAE expects increased adoption of simulation-based training and certification of healthcare professionals as a means to improve patient
safety and outcomes. We believe this would result in a significantly larger addressable market than the current market which is primarily
education-based. According to a study by patient-safety researchers published in the British Medical Journal in May 2016, medical errors
are the third-leading cause of death in U.S. hospitals. Training using simulation can help clinicians gain confidence, knowledge and
expertise for improving patient safety in a risk-free environment. As the Medicare and Medicaid reimbursement structure in U.S. hospitals
shifts from being based solely on quantity of services to the quality of services, including safety and patient outcomes, CAE expects more
hospitals to implement simulation-based training to improve performance and reduce the risk of medical errors.
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 and Advanced Trauma Life Support. Moreover, the Accreditation Council
for Graduate Medical Education is evolving towards outcome-based assessment with specific benchmarks to measure and compare
performance which favours the adoption of simulation products and training.
CAE Financial Report 2018 I 11
Management’s Discussion and Analysis
3.6 Foreign exchange
We report all dollar amounts in Canadian dollars. We value assets, liabilities and transactions that are measured in foreign currencies
using various exchange rates as required by 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)
2018
1.29
1.59
1.81
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)
2018
1.28
1.50
1.70
2017
1.33
1.42
1.67
2017
1.31
1.44
1.71
Increase /
(decrease)
(3%)
12%
8%
Increase /
(decrease)
(2%)
4%
(1%)
For fiscal 2018, the effect of translating the results of our foreign operations into Canadian dollars resulted in a decrease in revenue of
$3.8 million and a decrease in net income of $0.5 million, when compared to fiscal 2017. We calculated this by translating the current
year’s foreign currency revenue and net income using the average monthly exchange rates from the previous year and comparing these
adjusted amounts to our current year reported results.
You will find more details about our foreign exchange exposure and hedging strategies in Business Risks and Uncertainties.
Sensitivity analysis
We conducted a sensitivity analysis to determine the current impact of variations in the value of foreign currencies. For the purposes of
this sensitivity analysis, we evaluated the sources of foreign currency revenues and expenses and determined that our consolidated
exposure to foreign currency mainly occurs in two areas:
– Foreign currency revenues and expenses in Canada for our manufacturing activities – we hedge a portion of these exposures;
– Translation of foreign currency of operations in foreign countries. Our exposure is mainly in our operating profit.
First we calculated the revenue and expenses per currency from our Canadian operations to determine the operating profit in each
currency. Then we deducted the amount of hedged revenues to determine a net exposure by currency. Next we added the net exposure
from foreign operations to determine the consolidated foreign exchange exposure in different currencies.
Finally, we conducted a sensitivity analysis to determine the impact of a weakening of one cent in the Canadian dollar against each of
the other three currencies. The table below shows the expected impact of this change on our annual revenue and operating profit, after
taxes, as well as our net exposure:
Exposure (amounts in millions)
U.S. dollar (US$ or USD)
Euro (€ or EUR)
British pound (£ or GBP)
$
Revenue
16.2
4.5
1.3
$
Operating
Profit
4.2
0.3
0.1
Net
Hedging
Exposure
$
(3.5)
(0.2)
(0.1)
$
0.7
0.1
—
A possible strengthening of one cent in the Canadian dollar would have the opposite impact.
12 I CAE Financial Report 2018
Management’s Discussion and Analysis
3.7 Non-GAAP and other financial measures
This MD&A includes non-GAAP and other financial measures. Non-GAAP measures are useful supplemental information but may not
have a standardized meaning according to GAAP. 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.
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, integration and
acquisition 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, integration and acquisition 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.
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, integration
and acquisition 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, integration and
acquisition 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).
CAE Financial Report 2018 I 13
Management’s Discussion and Analysis
Operating profit
Operating profit is an additional 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.
Order intake and Backlog
Order intake
Order intake is a non-GAAP measure that represents the expected value of orders we have received:
– For the Civil Aviation Training Solutions segment, we consider an item part of our order intake 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 order intake 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 order intake 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.
The book-to-sales ratio is the total orders divided by total revenue in a given period.
Backlog
Obligated backlog is a non-GAAP measure that represents the value of our order intake not yet executed and is calculated by adding the
order intake of the current period to the balance of the obligated backlog at the end of the previous fiscal year, subtracting the revenue
recognized in the current period and adding or subtracting backlog adjustments. If the amount of an order already recognized in a previous
fiscal year is modified, the backlog is revised through adjustments.
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. When an option is exercised, it is
removed from the unfunded backlog and is considered order intake in the period that it is exercised.
Total backlog includes obligated backlog, joint venture backlog and unfunded backlog.
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.
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.
Total segment operating income
Total segment operating income is a non-GAAP measure and is the sum of our key indicator of each segment’s financial performance.
Segment operating income gives us an 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 total segment operating income by taking the operating profit and
excluding the impact of restructuring, integration and acquisition costs.
Utilization rate
Utilization rate is one of the operating measures we use to assess the performance of our Civil simulator training network. While utilization
rate does not directly correlate to revenue recognized, we track it, together with other measures, because we believe it is an indicator of
our operating performance. 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 I CAE Financial Report 2018
4. CONSOLIDATED RESULTS
4.1 Results from operations – fourth quarter of fiscal 20183
Management’s Discussion and Analysis
(amounts in millions, except per share amounts)
Q4-2018
Q3-2018
Q2-2018
Q1-2018
Q4-2017
Revenue
Cost of sales
Gross profit3
As a % of revenue
Research and development expenses3
Selling, general and administrative expenses
Other (gains) losses – net
After tax share in profit of equity accounted investees
Restructuring, integration and acquisition costs
Operating profit3
As a % of revenue
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 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
$
$
$
%
$
$
$
$
$
$
%
$
$
$
%
$
$
$
$
$
$
$
$
$
780.7
520.2
260.5
33.4
22.8
112.3
(4.3)
(11.4)
—
141.1
18.1
24.0
117.1
13.7
12
103.4
—
103.4
100.1
—
100.1
3.3
103.4
704.4
488.7
215.7
30.6
29.8
98.6
(15.1)
(10.4)
—
112.8
16.0
16.9
95.9
(24.0)
(25)
119.9
—
119.9
117.9
—
117.9
2.0
119.9
646.0
458.0
188.0
29.1
30.0
75.1
(18.3)
(8.1)
—
109.3
16.9
17.5
91.8
24.8
27
67.0
—
67.0
65.2
—
65.2
1.8
67.0
698.9
486.2
212.7
30.4
32.3
94.8
0.3
(12.5)
—
97.8
14.0
17.8
80.0
14.6
18
65.4
—
65.4
63.8
—
63.8
1.6
65.4
734.7
499.7
235.0
32.0
31.3
109.5
(12.3)
(14.4)
20.0
100.9
13.7
16.3
84.6
14.8
17
69.8
(0.7)
69.1
67.4
(0.7)
66.7
2.4
69.1
0.37
0.44
0.24
0.24
0.25
3 Non-GAAP and other financial measures (see Section 3.7).
CAE Financial Report 2018 I 15
Management’s Discussion and Analysis
Revenue from continuing operations was 11% higher than last quarter and 6% higher compared to the fourth quarter of fiscal 2017
Revenue from continuing operations was $76.3 million higher than last quarter. Increases in revenue were $41.5 million, $27.6 million and
$7.2 million for Civil Aviation Training Solutions, Defence and Security and Healthcare respectively.
Revenue from continuing operations was $46.0 million higher than the same period last year. Increases in revenue were $37.4 million,
$7.7 million and $0.9 million for Civil Aviation Training Solutions, Defence and Security and Healthcare respectively.
You will find more details in Results by segment.
Total segment operating income4 was $28.3 million higher than last quarter and $20.2 million higher compared to the fourth
quarter of fiscal 2017
Operating profit this quarter was $141.1 million or 18.1% of revenue, compared to $112.8 million or 16.0% of revenue last quarter and
$100.9 million or 13.7% of revenue in the fourth quarter of fiscal 2017. There were no restructuring, integration and acquisition costs
recorded this quarter or last quarter compared to $20.0 million in the fourth quarter of last year. Total segment operating income was
$141.1 million this quarter compared to $112.8 million last quarter and $120.9 million in the fourth quarter of fiscal 2017.
Total segment operating income was $28.3 million or 25% higher compared to last quarter. Increases in segment operating income were
$17.1 million, $6.0 million and $5.2 million for Civil Aviation Training Solutions, Defence and Security and Healthcare respectively.
Total segment operating income increased by $20.2 million or 17% over the fourth quarter of fiscal 2017. Increases in segment operating
income were $11.9 million, $5.7 million and $2.6 million for Civil Aviation Training Solutions, Defence and Security and Healthcare
respectively.
You will find more details in Results by segment.
Net finance expense was $7.1 million higher than last quarter and $7.7 million higher than the fourth quarter of fiscal 2017
Net finance expense was higher this quarter compared to last quarter. The increase was mainly due to higher other finance expense
resulting from a change in presentation of the classification of certain cumulative finance costs previously accounted within income taxes,
following clarification issued by the IFRS interpretation committee during fiscal 2018, as well as higher interest on long-term provisions.
The increase was also due to higher finance expense on royalty obligations and higher interest on long-term debt.
Net finance expense this quarter was higher compared to the fourth quarter of fiscal 2017. The increase was mainly due to higher other
finance expense, as mentioned above, lower finance income and higher finance expense on royalty obligations.
Income tax rate was 12% this quarter
Income taxes this quarter were $13.7 million, representing an effective tax rate of 12%, compared to a negative effective tax rate of 25%
last quarter and an effective tax rate of 17% for the fourth quarter of fiscal 2017.
The increase in the tax rate over last quarter was mainly due to the third quarter's adjustment resulting from the enactment of a lower
U.S. federal corporate income tax rate and the non-taxable portion of the net gain on the remeasurement of the previously held AACE
investment. The increase was partially offset by a change in the mix of income from various jurisdictions mainly from the recognition, this
quarter, of deferred tax assets not previously recognized in Europe. Excluding the effect of these deferred tax assets, the income tax rate
would have been 23% this quarter.
The decrease in the tax rate from the fourth quarter of fiscal year 2017 was mainly due to a change in the mix of income from various
jurisdictions from the recognition, this quarter, of deferred tax assets not previously recognized in Europe, partially offset by an audit
settlement in Canada last year.
4 Non-GAAP and other financial measures (see Section 3.7).
16 I CAE Financial Report 2018
4.2 Results from operations – fiscal 2018
(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, integration and acquisition costs
Operating profit
As a % of revenue
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 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 - continuing and discontinued operations
Diluted - continuing and discontinued operations
Management’s Discussion and Analysis
$
$
$
%
$
$
$
$
$
$
%
$
$
%
$
$
$
$
$
$
$
$
$
$
FY2018
2,830.0
1,953.1
FY2017
2,704.5
1,893.3
876.9
31.0
114.9
380.8
(37.4)
(42.4)
—
461.0
16.3
76.2
384.8
29.1
8
355.7
—
355.7
347.0
—
347.0
8.7
355.7
1.29
1.29
811.2
30.0
111.0
364.4
(12.7)
(51.7)
35.5
364.7
13.5
72.4
292.3
35.2
12
257.1
(0.5)
256.6
252.0
(0.5)
251.5
5.1
256.6
0.94
0.93
Revenue from continuing operations was $125.5 million or 5% higher than last year
Revenue from continuing operations was higher than last year. Increases in revenue were $72.8 million, $48.2 million and $4.5 million
for Civil Aviation Training Solutions, Defence and Security and Healthcare respectively.
You will find more details in Results by segment.
Gross profit was $65.7 million higher than last year
Gross profit was $876.9 million this year, or 31.0% of revenue compared to $811.2 million, or 30.0% of revenue last year. As a percentage
of revenue, gross profit was higher when compared to last year.
Total segment operating income was $60.8 million higher than last year
Operating profit for the year was $461.0 million or 16.3% of revenue, compared to $364.7 million or 13.5% of revenue last year. Restructuring,
integration and acquisition costs of nil were recorded this year compared to $35.5 million last year and total segment operating income
was $461.0 million this year compared to $400.2 million last year.
Total segment operating income was $60.8 million or 15% higher compared to last year. Increases in segment operating income were
$51.3 million, $7.3 million and $2.2 million for Civil Aviation Training Solutions, Defence and Security and Healthcare respectively.
You will find more details in Results by segment.
CAE Financial Report 2018 I 17
Management’s Discussion and Analysis
Net finance expense was $3.8 million higher than last year
(amounts in millions)
Net finance expense, prior period
Change in finance expense from the prior period:
Decrease in finance expense on long-term debt (other than finance leases)
Increase in finance expense on royalty obligations
Decrease in finance expense on amortization of deferred financing costs
Increase in finance expense on accretion of provisions
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
Increase in other finance income
Increase in finance income from the prior period
Net finance expense, current period
FY2017 to
FY2018
72.4
(0.2)
1.3
(0.1)
0.4
5.0
(0.5)
5.9
(1.7)
(0.4)
(2.1)
76.2
$
$
$
$
$
$
Net finance expense was $76.2 million this year, $3.8 million or 5% higher than last year. The increase was mainly due to higher other
finance expense resulting from higher interest on long-term provisions and higher interest from a change in presentation of the classification
of certain cumulative finance costs previously accounted within income taxes, following clarification issued by the IFRS interpretation
committee during fiscal 2018. The increase was also due to higher finance expense on royalty obligations, partially offset by higher finance
income.
Income tax rate was 8% this year
This fiscal year, income taxes were $29.1 million, representing an effective tax rate of 8%, compared to 12% for the same period last year.
The decrease in the tax rate compared to last year was mainly due to an adjustment resulting from the enactment of a lower U.S. federal
corporate income tax rate, the non-taxable portion of the net gain on the remeasurement of the previously held AACE investment and a
change in the mix of income from various jurisdictions mainly from the recognition of previously unrecognized deferred tax assets in
Europe. The decrease was partially offset by the impact of audits in Canada, last year's recognition of deferred tax assets in Brazil and
the sale of our equity interest in the joint venture ZFTC during the year.
Excluding the effect of the adjustment resulting from the enactment of a lower U.S. federal corporate income tax rate, the recognition of
deferred tax assets this year, the remeasurement of our previously held AACE investment and the sale of our interest in ZFTC, the income
tax rate would have been 21% this year.
4.3 Consolidated orders and total backlog
Total backlog up 4% 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
The book-to-sales ratio for the quarter was 1.30x. The ratio for the last 12 months was 1.36x.
You will find more details in Results by segment.
18 I CAE Financial Report 2018
FY2018
5,530.0
$
3,855.0
(2,830.0)
67.2
FY2017
5,064.9
3,193.4
(2,704.5)
(23.8)
6,622.2
$
5,530.0
366.7
860.2
7,849.1
$
543.7
1,456.5
7,530.2
$
$
$
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.
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)
FY2018
FY2017 Q4-2018 Q3-2018 Q2-2018 Q1-2018 Q4-2017
Civil Aviation Training Solutions
Defence and Security
Healthcare
Total segment operating income (SOI)
Restructuring, integration and acquisition costs
Operating profit
Capital employed5
(amounts in millions)
Civil Aviation Training Solutions
Defence and Security
Healthcare
$
$
$
$
$
%
$
%
$
%
$
$
$
324.5
19.9
127.7
11.8
8.8
7.6
461.0
—
461.0
273.2
17.5
120.4
11.6
6.6
6.0
400.2
(35.5)
364.7
95.7
21.0
38.7
13.3
6.7
19.1
78.6
19.0
32.7
12.4
1.5
5.4
77.1
22.1
30.0
11.2
2.2
7.8
141.1
112.8
109.3
—
—
—
141.1
112.8
109.3
73.1
17.8
26.3
10.0
(1.6)
—
97.8
—
97.8
83.8
20.1
33.0
11.7
4.1
12.0
120.9
(20.0)
100.9
March 31
December 31
September 30
2018
2017
2017
June 30
2017
March 31
2017
2,096.4
1,998.9
1,850.6
2,073.4
1,985.3
982.4
955.5
965.5
924.6
881.2
211.5
3,290.3
205.0
3,159.4
206.4
3,022.5
213.4
3,211.4
224.3
3,090.8
5 Non-GAAP and other financial measures (see Section 3.7).
CAE Financial Report 2018 I 19
Management’s Discussion and Analysis
5.1 Civil Aviation Training Solutions
FISCAL 2018 EXPANSIONS AND NEW INITIATIVES
Acquisitions and Divestitures
– We concluded a sale to China Southern Airlines of our 49% equity interest in the joint venture ZFTC. As part of the transaction, both
companies reached an agreement on the outsourcing to CAE of third-party airline training conducted at China Southern Airlines’ ZFTC
facility;
– We acquired a portfolio of training assets in North America and Europe from a full-flight simulator leasing business for cash consideration
of $24.7 million, where we obtained fully operational FFSs and various customer contracts;
– We completed the acquisition of the remaining 50% equity interest in AACE from AirAsia, for a cash consideration of $114.8 million
[US$90 million] and long-term contingent cash consideration payable of up to US$10 million if certain criteria are met;
– We purchased a 45% interest in Pelesys, forming a joint venture with a global leader in the provision of aviation training solutions and
courseware.
Expansions
– We signed a Memorandum of Understanding with Singapore Airlines, to establish a joint venture for pilot training in Singapore. The
joint venture will initially focus on primarily providing simulator training for Boeing aircraft types, supporting Singapore Airlines, its
subsidiaries and other operators’ pilot training needs in the region. The closing of the transaction is subject to customary closing
conditions;
– We announced the extension of our North American training footprint in Minneapolis-Saint Paul, U.S. Through this centre, we have
extended our ability to support regional airline customers and have the capacity to train more than 20,000 pilots every year;
– We, together with Korea Airports Corporation, inaugurated a new training facility at Gimpo Airport, Seoul, Korea, to support the growing
pilot training needs of Korean carriers;
– We announced the expansion of our North American pilot training capacity with the addition of a new CAE-built Bombardier CRJ900
FFS and an Embraer ERJ-145 in Phoenix, U.S., and the deployment of one Airbus A320 FFS in Montreal, one Airbus A320 FFS in
Mexico and one Bombardier Q400 FFS in Vancouver to be delivered throughout the year;
– We inaugurated an ATR 72-600 FFS at our training centre in Madrid, Spain;
– We announced, together with Abu Dhabi Aviation Training Center (ADA), a new Embraer ERJ-145 pilot training program with Falcon
Aviation. Training will be delivered to Falcon Aviation's pilots and other regional operators at ADA's brand-new training facility in
Abu Dhabi, UAE.
New programs and products
– We achieved Level D qualification for the world’s first CAE-built Bombardier C Series FFS, located at the Bombardier Training Centre
in Montreal, Canada and Interim Level C qualification for the world’s first airline operated Boeing 737MAX FFS, located at Air Canada’s
training centre in Toronto, Canada;
– We launched the CAE Master Pilot Training Program, a badge of honor dedicated to further elevate the experience of business aviation
pilots throughout their career, raising pilot levels of platform knowledge, safety awareness and situational response capabilities;
– We launched our newest pilot training innovation, the CAE RiseTM training system, with longstanding partner AirAsia;
– We launched the CAE 600XR Series FTD, the latest addition to CAE's innovative XR Series training equipment suite.
FISCAL 2018 ORDERS
Civil Aviation Training Solutions obtained contracts this quarter expected to generate future revenues of $544.5 million, including contracts
for 5 FFSs sold to customers in all regions. This brings the total civil order intake to $2,339.5 million and 50 FFSs for the year.
Notable contract awards for fiscal 2018 included:
– An exclusive 10-year long-term training contract with Virgin Atlantic Airways;
– An exclusive long-term training contract extension to 2036 with AirAsia;
– An exclusive 12-year long-term training contract with Air Transat;
– An exclusive 8-year long-term training contract extension with Jazz Aviation LP;
– An exclusive long-term pilot training contract extension with Flexjet;
– An exclusive long-term contract renewal with Elit'Avia for business aviation pilot training to include UPRT.
20 I CAE Financial Report 2018
Management’s Discussion and Analysis
FINANCIAL RESULTS6
(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
SEU6
FFSs deployed
Utilization rate6
$
$
$
$
%
FY2018
1,629.7
324.5
19.9
136.6
FY2017
1,556.9
273.2
17.5
140.2
Q4-2018
Q3-2018
Q2-2018
Q1-2018
Q4-2017
455.2
95.7
21.0
33.7
413.7
78.6
19.0
35.9
349.0
77.1
22.1
31.8
411.8
73.1
17.8
35.2
417.8
83.8
20.1
33.3
143.7
124.8
50.2
38.9
21.9
32.7
52.5
18.3
2,096.4
3,975.9
206
255
76
20.5
1,985.3
3,288.9
210
269
76
4.1
2,096.4
3,975.9
212
255
82
6.3
1,998.9
3,822.3
205
252
75
1.9
1,850.6
3,106.6
199
249
70
6.0
2,073.4
3,225.0
209
269
78
5.4
1,985.3
3,288.9
210
269
77
Revenue up 10% over last quarter and up 9% over the fourth quarter of fiscal 2017
The increase over last quarter was mainly due to higher FFS utilization in the Americas and Europe, higher revenue from our manufacturing
facility due to the timing of production milestones and the integration into our results of the revenues from AACE following the acquisition
last quarter of the remaining 50% equity interest. The increase was also due to a favourable foreign exchange impact on the translation
of foreign operations.
The increase over the fourth quarter of fiscal 2017 was due to higher FFS utilization in the Americas and the contribution of newly deployed
simulators in our network in Europe and in the Americas, the integration into our results of the revenues from AACE, as mentioned above,
a favourable foreign exchange impact on the translation of foreign operations and higher revenue recognized from simulator sales due
to higher deliveries.
Revenue was $1,629.7 million this year, 5% or $72.8 million higher than last year
The increase over last year was mainly due to higher FFS utilization in the Americas and the contribution of newly deployed simulators
in our network in Europe and in the Americas, the integration into our results of the revenues from AACE, as mentioned above, a favourable
foreign exchange impact on the translation of foreign operations and an increase in demand for our crew sourcing business. The increase
was also due to higher revenue recognized from simulator sales due to higher level of deliveries.
Segment operating income up 22% over last quarter and up 14% over the fourth quarter of fiscal 2017
Segment operating income was $95.7 million (21.0% of revenue) this quarter, compared to $78.6 million (19.0% of revenue) last quarter
and $83.8 million (20.1% of revenue) in the fourth quarter of fiscal 2017.
Segment operating income increased by $17.1 million, or 22%, over last quarter. The increase was mainly due to higher FFS utilization
mainly in the Americas and in Europe, higher revenue from our manufacturing facility, as mentioned above, and gains on the sale of
existing simulators from our network to our customers. The increase was partially offset by higher selling, general and administrative
expenses and a gain, recorded in the previous quarter, on the remeasurement of the previously held AACE investment net of
reorganizational costs.
Segment operating income increased by $11.9 million, or 14%, over the fourth quarter of fiscal 2017. The increase was mainly due to
higher FFS utilization and newly deployed simulators, as mentioned above, and higher revenue from our manufacturing facility. The
increase was partially offset by higher selling, general and administrative expenses and an unfavourable foreign exchange impact from
the revaluation of non-cash working capital accounts.
Segment operating income was $324.5 million, 19% or $51.3 million higher than last year
Segment operating income was $324.5 million (19.9% of revenue) this year, compared to $273.2 million (17.5% of revenue) last year.
The increase was mainly due to higher FFS utilization and newly deployed simulators, as mentioned above, gains realized in the second
quarter from the disposal of our equity interest in the joint venture ZFTC, a favourable foreign exchange impact from operations and the
net gain on the remeasurement of the previously held AACE investment following the acquisition in the third quarter. The increase was
partially offset by higher selling, general and administrative expenses.
6 Non-GAAP and other financial measures (see Section 3.7).
CAE Financial Report 2018 I 21
Management’s Discussion and Analysis
Property, plant and equipment expenditures at $50.2 million this quarter and $143.7 million for the year
Maintenance capital expenditures were $20.9 million for the quarter and $54.7 million for the year. Growth capital expenditures were
$29.3 million for the quarter and $89.0 million for the year.
Capital employed increased $97.5 million over last quarter and $111.1 million over last year
The increase in capital employed over last quarter was mainly due to higher property, plant and equipment and intangible assets mainly
as a result of movements in foreign exchange rates, a higher investment in equity accounted investees and higher non-cash working
capital.
The increase in capital employed over last year was mainly due to higher property, plant and equipment and intangible assets and a lower
investment in equity accounted investees resulting from the acquisition of AACE. This increase was partially offset by a lower investment
in non-cash working capital, mainly due to higher deferred revenue and lower inventory, partially offset by higher accounts receivable.
Total backlog was at $3,975.9 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
FY2018
$
2,823.9 $
2,339.5
FY2017
2,623.3
1,698.8
(1,629.7)
(1,556.9)
148.2
58.7
3,681.9 $
2,823.9
294.0
465.0
3,975.9 $
3,288.9
$
$
Fiscal 2018 adjustments includes $224.1 million added as a result of the acquisition of AACE, positive foreign exchange movements and
the revaluation of prior year contracts. An adjustment was made to the joint venture backlog to reflect the removal of the AACE contracts
that were transferred to obligated backlog.
Fiscal 2017 adjustments includes $117.8 million added as a result of the acquisition of Lockheed Martin Commercial Flight Training, the
revaluation of prior year contracts and the cancellation of an order from a previous year.
This quarter's book-to-sales ratio was 1.20x. The ratio for the last 12 months was 1.44x.
22 I CAE Financial Report 2018
Management’s Discussion and Analysis
5.2 Defence and Security
FISCAL 2018 EXPANSIONS AND NEW INITIATIVES
Expansions
– During the year, we began offering the new Initial Entry Fixed-Wing course at CAE's Dothan Training Center. A total of 56 U.S. Army
students have since graduated from the program to become Army fixed-wing aviators.
New programs and products
– We upgraded the C-130 Aeromedical Evacuation Training System for the USAF at Dobbins Air Reserve Base with a motion platform,
a first-of-its-kind in the world for an aeromedical fuselage trainer;
– We supported the Royal Australian Air Force’s (RAAF) participation in the Diamond Thunder distributed mission training exercise,
which saw the RAAF network various simulation assets across the country as part of its inaugural Air Warfare Instructor Course;
– Our CAE 7000 Series C295 FFS and CAE 3000 Series SW-4 FFS were accepted into service by the Polish Air Force at the 8th Air
Base Krakow-Balice and 41st Air Base School in Deblin, Poland respectively, where they will play a key role in the training of Polish
Air Force aircrews and cadets;
– Our Predator Mission Trainer was accepted into service by the Italian Air Force at Amendola Air Force Base in Italy.
FISCAL 2018 ORDERS
Defence and Security was awarded $434.5 million in orders this quarter and $1,400.3 million in total for fiscal 2018, including notable
contract awards from:
– Leonardo Helicopters to provide the Qatar Emiri Air Force with a comprehensive NH90 helicopter training solution that includes
simulators, training devices and long-term training services;
– The U.S. Navy under a U.S. foreign military sale program to provide the Brazilian Navy with a comprehensive S-70B Seahawk helicopter
training system;
– The Royal Australian Air Force to continue providing King Air 350 simulator services through 2024;
– The U.S. Navy exercising contract options as part of the MH-60R/S Tech Refresh and Procurement of Simulators program;
– The U.K. Ministry of Defence to continue providing aircrew training services at CAE's Medium Support Helicopter Aircrew Training
Facility (MSHATF);
– The General Headquarters of the UAE to provide the UAE Air Force with a comprehensive training solution for the
RQ-1E Predator remotely piloted aircraft.
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
$
$
$
$
FY2018
1,085.1
127.7
11.8
49.9
27.6
21.6
982.4
FY2017
1,036.9
120.4
11.6
57.8
95.8
26.9
881.2
Q4-2018
Q3-2018
Q2-2018
Q1-2018
Q4-2017
290.4
38.7
13.3
10.8
262.8
32.7
12.4
10.3
268.7
30.0
11.2
14.0
263.2
26.3
10.0
14.8
282.7
33.0
11.7
14.3
6.8
3.4
2.3
15.1
19.7
9.2
982.4
3.6
955.5
5.2
965.5
3.6
924.6
12.6
881.2
3,873.2
4,241.3
3,873.2
3,546.0
3,607.0
4,101.2
4,241.3
Revenue up 11% over last quarter and up 3% over the fourth quarter of fiscal 2017
The increase over last quarter was mainly due to higher revenue from North American programs partially offset by lower revenue from
Middle Eastern and European programs.
The increase over the fourth quarter of fiscal 2017 was mainly due to higher revenue from North American programs partially offset by
lower revenue from European, Australian and Asian programs resulting from a higher level of activity in the prior year and an unfavourable
foreign exchange impact on the translation of foreign operations.
Revenue was $1,085.1 million this year, 5% or $48.2 million higher than last year
The increase was mainly due to higher revenue from North American and Middle Eastern programs partially offset by lower revenue from
European and Australian programs and an unfavourable foreign exchange impact on the translation of foreign operations.
CAE Financial Report 2018 I 23
Management’s Discussion and Analysis
Segment operating income up 18% over last quarter and up 17% over the fourth quarter of fiscal 2017
Segment operating income was $38.7 million (13.3% of revenue) this quarter, compared to $32.7 million (12.4% of revenue) last quarter
and $33.0 million (11.7% of revenue) in the fourth quarter of fiscal 2017.
The increase over last quarter was mainly due to higher volume on North American programs, higher margins on Australian programs
and lower net research and development expenses, partially offset by higher selling, general and administrative expenses.
The increase over the fourth quarter of fiscal 2017 was mainly due to higher margins on European programs and lower net research and
development expenses, partially offset by lower margins on Asian programs.
Segment operating income was $127.7 million this year, 6% or $7.3 million higher than last year
Segment operating income was $127.7 million (11.8% of revenue) this year, compared to $120.4 million (11.6% of revenue) last year.
The increase over last year was mainly due to higher margins on European programs, lower selling, general and administrative expenses
and higher volume on North American and Middle Eastern programs. The increase was partially offset by lower margins on Australian
programs.
Capital employed increased $26.9 million over last quarter and increased $101.2 million over last year
The increase over last quarter was mainly due to movements in foreign exchange rates and a higher profitability in our joint ventures,
partially offset by a lower investment in non-cash working capital.
The increase over last year was mainly due to a higher investment in non-cash working capital as a result of higher contracts in progress
assets and lower accounts payable and accrued liabilities, partially offset by a decrease in prepayments. The increase was also due to
a higher profitability in our joint ventures.
Total backlog down 9% 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
FY2018
$
2,706.1 $
1,400.3
FY2017
2,441.6
1,383.9
(1,085.1)
(1,036.9)
(81.0)
(82.5)
2,940.3 $
2,706.1
72.7
860.2
3,873.2 $
78.7
1,456.5
4,241.3
$
$
Fiscal 2018 adjustments include the removal of the Initial Entry Rotary-Wing Instructor Support Services contract following a protest which
resulted in the client's decision to award the contract to the incumbent and the revaluation of prior year contracts.
Fiscal 2017 adjustments include the cancellation of two orders and the revaluation of prior year contracts, partially offset by a contract
amendment related to the acquisition of Bombardier's Military Aviation Training, acquired in fiscal 2016.
This quarter's book-to-sales ratio was 1.50x. The ratio for the last 12 months was 1.29x.
In fiscal 2018, $283.3 million of unfunded backlog was transferred to obligated backlog and $262.1 million was added to the unfunded
backlog. An adjustment was made to the unfunded backlog to reflect the removal of the Initial Entry Rotary-Wing Instructor Support
Services contract.
24 I CAE Financial Report 2018
Management’s Discussion and Analysis
5.3 Healthcare
FISCAL 2018 EXPANSIONS AND NEW INITIATIVES
Expansions
– We hosted our first expanded Human Patient Simulation Network (HPSN) U.K. conference, expanding our potential customer base
and simulation market to include specialties outside of nursing;
– We formed a partnership with the AHA to establish a network of International Training Sites to deliver lifesaving AHA courses in
countries that are currently underserved. We began delivering courses in the fourth quarter for clinicians at our first training site, the
CAE Brunei Multi-Purpose Training Centre.
New programs and products
– We launched CAE Juno, a new clinical skills manikin for nursing programs designed to help bridge the gap between classroom and
hospital settings, in the first quarter of fiscal 2018 at the INACSL annual conference;
– We, together with ASA, launched the Anesthesia SimSTAT - Trauma, the first in a series of interactive screen-based anesthesia
simulation modules, which has been approved by the American Board of Anesthesiology for MOCA credits;
– We delivered a Microsoft Hololens augmented reality training solution for the Abiomed Impella, a heart pump system;
– We developed a physics-driven simulator for the Medtronic MicraTM Transcatheter Pacing System, that offers an augmented reality
training solution for up to 12 simultaneous learners;
– We developed the LucinaAR, the world's first augmented reality childbirth simulator, which was launched at the International Meeting
on Simulation in Healthcare. This high-fidelity patient manikin allows clinical teams and learners to practice emergency labour and
delivery manoeuvers while guided by 3D holograms;
– We signed a distributor contract with WorldPoint to sell CAE Juno manikins to simulation centres in the U.S., which will give us access
to WorldPoint's unique network of customers.
Innovation Awards
– Evidencing our thought leadership in healthcare simulation, Anesthesia SimSTAT earned the .orgCommunity Innovation 2017 Award;
– We received the Unity Impact Award for our CAE VimedixAR ultrasound simulator, which integrates real-time interactive holograms
of the human anatomy.
FISCAL 2018 ORDERS
CAE Healthcare sales this year included large orders for patient and ultrasound simulators and centre management solutions sold to
customers in North America directly and internationally, through distributors, as well as patient and interventional simulators sold to military
customers.
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
$
$
%
$
$
$
$
FY2018
FY2017
Q4-2018
Q3-2018
Q2-2018
Q1-2018
Q4-2017
115.2
110.7
8.8
7.6
13.1
2.6
7.4
6.6
6.0
13.9
2.3
3.7
35.1
6.7
19.1
3.2
0.4
2.1
27.9
28.3
1.5
5.4
3.2
0.7
1.5
2.2
7.8
3.1
0.2
2.3
23.9
(1.6)
—
3.6
1.3
1.5
34.2
4.1
12.0
3.8
1.4
—
211.5
224.3
211.5
205.0
206.4
213.4
224.3
Revenue up 26% over last quarter and up 3% over the fourth quarter of fiscal 2017
The increase over last quarter and the fourth quarter of fiscal 2017 was mainly due to higher revenue from centre management solutions
and patient simulators, primarily driven by higher sales to North American and military customers. The increase was partially offset by
lower revenue from interventional simulators.
Revenue was $115.2 million this year, 4% or $4.5 million higher than last year
The increase was due to higher revenue from centre management solutions as a result of higher sales to North American customers and
higher revenue from interventional simulators sold to military customers. The increase was partially offset by lower revenue from key
partnerships with OEMs.
CAE Financial Report 2018 I 25
Management’s Discussion and Analysis
Segment operating income higher over last quarter and the fourth quarter of fiscal 2017
Segment operating income was $6.7 million this quarter (19.1% of revenue), compared to $1.5 million last quarter (5.4% of revenue) and
$4.1 million (12.0% of revenue) in the fourth quarter of fiscal 2017.
The increase over last quarter was mainly due to higher revenue, as mentioned above, the benefit recognized this quarter from a
remeasurement of long-term royalty obligations and a more favourable product mix. The increase was partially offset by higher selling,
general and administrative expenses.
The increase over the fourth quarter of fiscal 2017 was mainly due to the benefit from a remeasurement of long-term royalty obligations
and lower research and development expenses.
Segment operating income was $8.8 million this year, $2.2 million higher than last year
Segment operating income was $8.8 million (7.6% of revenue) this year, compared to $6.6 million (6.0% of revenue) last year.
The increase over last year was mainly due to higher revenues, as mentioned above, and the net benefit from a remeasurement of
long term royalty obligations less non-recurring selling, general and administrative expenses for investments to support product launches,
an expansion to the sales force and marketing. The increase was also due to lower research and development expenses.
Capital employed increased by $6.5 million over last quarter and decreased by $12.8 million from last year
The increase over last quarter was mainly due to higher intangible assets as a result of movements in foreign exchange rates. The increase
was also due to higher non-cash working capital, resulting primarily from an increase in accounts receivable from higher revenues.
The decrease from last year was primarily due to lower intangible assets as a result of amortization and lower non-cash working capital.
26 I CAE Financial Report 2018
Management’s Discussion and Analysis
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.
6.1 Consolidated cash movements7
(amounts in millions)
FY2018
FY2017
Q4-2018
Q3-2018
Q4-2017
Cash provided by continuing operating activities*
Changes in non-cash working capital
Net cash provided by continuing operating activities
Maintenance capital expenditures7
Other assets
Proceeds from the disposal of property, plant and equipment
Net (payments to) proceeds from equity accounted investees
Dividends received from equity accounted investees
Dividends paid
Free cash flow from continuing operations7
Growth capital expenditures7
Capitalized development costs
Common shares repurchased
Other cash movements, net
Business combinations, net of cash and cash
equivalents acquired
Net proceeds from disposal of interest in investment
Effect of foreign exchange rate changes on cash
$
$
$
$
446.4
(43.1)
403.3
(68.5)
(9.1)
27.0
(11.5)
37.6
(89.9)
$
$
435.2
29.1
464.3
(62.8)
(5.5)
6.6
(10.6)
16.5
(80.6)
$
$
$
$
130.8
7.0
137.8
(25.9)
3.1
10.6
0.2
14.0
117.4
70.2
187.6
(13.9)
(3.8)
0.5
(7.7)
6.5
116.9
80.6
197.5
(24.5)
(2.3)
4.1
(1.2)
7.3
(22.5)
(23.2)
(20.5)
$
288.9
$
327.9
$
117.3
$
146.0
$
160.4
(105.4)
(160.1)
(32.5)
(44.8)
12.8
(124.4)
117.8
(37.8)
(41.7)
13.4
(5.5)
—
(31.5)
(13.5)
(0.4)
1.9
—
—
(29.1)
(6.9)
(21.8)
1.4
(99.7)
3.8
(49.1)
(14.0)
(3.0)
2.3
—
—
and cash equivalents
15.0
(4.9)
15.4
4.0
(0.1)
Net increase (decrease) in cash before proceeds and
repayment of long-term debt
$
127.4
$
91.3
$
89.2
$
(2.3)
$
96.5
* before changes in non-cash working capital
Free cash flow from continuing operations was $117.3 million for the quarter
Free cash flow was $28.7 million lower than last quarter and $43.1 million lower compared to the fourth quarter of fiscal 2017.
Free cash flow was lower compared to last quarter and the fourth quarter of fiscal 2017 mainly due to a higher investment in non-cash
working capital, partially offset by an increase in cash provided by continuing operating activities, higher proceeds from the disposal of
property, plant and equipment and higher dividends received from equity accounted investees.
Free cash flow from continuing operations was $288.9 million this year
Free cash flow decreased by $39.0 million, or 12%, compared to last year.
Free cash flow was lower compared to last year mainly due to a higher investment in non-cash working capital, partially offset by higher
dividends received from equity accounted investees and higher proceeds from the disposal of property, plant and equipment.
Capital expenditures were $57.4 million this quarter and $173.9 million for the year
Growth capital expenditures were $31.5 million this quarter and $105.4 million for the year including strategic purchases of existing FFSs
in the market. 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 $25.9 million this quarter and $68.5 million for the year.
7 Non-GAAP and other financial measures (see Section 3.7).
CAE Financial Report 2018 I 27
Management’s Discussion and Analysis
6.2 Sources of liquidity
We have a committed line of credit at floating rates, provided by a syndicate of lenders. We and some of our subsidiaries can borrow
funds directly from this credit facility to cover operating and general corporate expenses and to issue letters of credit and bank guarantees.
The total amount available through this committed bank line at March 31, 2018 was US$550.0 million (2017 – US$550.0 million) with the
option, subject to lender’s consent, to increase to a total amount of US$850.0 million. There was no amount drawn under the facility as
at March 31, 2018 (2017 – nil) and US$46.4 million was used for letters of credit (2017 – US$92.0 million). The applicable interest rate on
this revolving credit facility is variable, 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. During the year, the maturity date of our revolving unsecured term
credit facility was extended to September 30, 2022.
We have an unsecured Export Development Canada (EDC) Performance Security Guarantee (PSG) account for US$225.0 million
(2017 – US$125.0 million). This is an uncommitted revolving facility for performance bonds, advance payment guarantees or similar
instruments. As at March 31, 2018 the total outstanding for these instruments was $163.6 million (2017 – $115.9 million).
We manage a program in which we sell interests in certain of our accounts receivable (current financial assets program) to a third party
for cash consideration for amounts up to US$300.0 million (2017 – US$150.0 million) with limited recourse to CAE. As at March 31, 2018,
the Canadian dollar equivalent of $168.3 million (2017 – $141.6 million) of specific accounts receivable were sold to a third party.
As at March 31, 2018, 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, repurchase of common shares and 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
As at March 31
2018
1,260.9 $
2017
1,255.4
35.2
17.0
31.2
20.7
1,208.7 $
1,203.5
$
$
As part of our acquisition, in fiscal 2018, of a portfolio of training assets from a full-flight simulator leasing business, we acquired a term
loan for the financing of a simulator. This represents a loan obligation of $5.3 million as at March 31, 2018.
As part of the acquisition of the remaining 50% equity interest in AACE, we acquired loans in the amount of $28.9 million as at
March 31, 2018.
28 I CAE Financial Report 2018
Management’s Discussion and Analysis
6.3 Government participation
We have agreements with various governments whereby the latter contribute a portion of the cost, based on expenditures incurred by
CAE, of certain R&D programs for modeling, simulation and training services technology.
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.
During fiscal 2017, we announced our participation in Project SimÉco 4.0, an R&D project under the SA2GE program. The aim of this
project is the development of new products or processes which will further contribute to greenhouse gas emissions reductions. The
government of Quebec, through the Ministry of Economy, Science and Innovation, and SA2GE have committed to contribute amounts up
to 50% of eligible costs incurred by CAE to fiscal 2020.
You will find more details in Note 1 and Note 13 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)
2019
2020
2021
2022
2023 Thereafter
Total
Long-term debt (excluding interest)
$
35.6 $
195.9 $
34.1 $
176.7 $
43.5 $
631.7 $
1,117.5
Finance leases (excluding interest)
Non-cancellable operating leases
Purchase commitments
17.0
44.4
132.0
30.7
37.9
70.5
27.4
32.5
19.5
11.0
26.1
0.2
11.9
22.4
0.5
47.4
76.7
0.5
145.4
240.0
223.2
$
229.0 $
335.0 $
113.5 $
214.0 $
78.3 $
756.3 $
1,726.1
We also had total availability under the committed credit facility of US$503.6 million as at March 31, 2018 compared to US$458.0 million
at March 31, 2017.
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, 2018, 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 Financial Report 2018 I 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
Current liabilities
Less: current portion of long-term debt
Non-cash working capital8
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 debt8
Equity attributable to equity holders of the Company
Non-controlling interests
Source of capital
As at March 31
As at March 31
2018
2017
$
$
$
$
$
$
2,060.8
$
(611.5)
(1,320.6)
52.2
180.9
1,803.9
1,854.5
(823.3)
3,016.0
52.2
1,208.7
(611.5)
649.4
2,298.2
68.4
3,016.0
$
$
$
$
$
1,919.7
(504.7)
(1,273.9)
51.9
193.0
1,582.6
1,852.5
(796.4)
2,831.7
51.9
1,203.5
(504.7)
750.7
2,020.8
60.2
2,831.7
Capital employed increased $184.3 million, or 7%, over last year
The increase over last year was mainly due to higher property, plant and equipment, partially offset by an increase in other long-term
liabilities and lower non-cash working capital.
Our return on capital employed8 (ROCE) was 14.4% this year compared to 11.2% last year. Our ROCE this year was impacted by the
income tax recovery resulting from the enactment of a lower U.S. federal income tax rate, the gain on the remeasurement of the previously
held AACE investment net of reorganizational costs and the gain realized from the disposal of our equity interest in the joint venture ZFTC.
Excluding these impacts, our ROCE would have been 12.3% this year.
Non-cash working capital decreased by $12.1 million
The decrease was mainly due to higher deferred revenue and lower inventories, partially offset by higher contracts in progress assets,
lower contract in progress liabilities and accounts payable and accrued liabilities.
Net property, plant and equipment up $221.3 million
The increase was mainly due to capital expenditures and the integration into our operations of the fixed assets acquired from AACE,
partially offset by depreciation.
Other long-term liabilities up $26.9 million
The increase was mainly due to higher employee benefit obligations resulting primarily from a decrease in the discount rate used to
determine our defined benefit pension plan obligations and higher deferred gains and other non-current liabilities, partially offset by lower
deferred tax liabilities.
Net debt lower than last year
The decrease was mainly due to the impact of cash movements during the year, partially offset by the addition of loans obtained as part
of the acquisition of AACE.
8 Non-GAAP and other financial measures (see Section 3.7).
30 I CAE Financial Report 2018
Change in net debt9
(amounts in millions)
Net debt, beginning of period
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
Impact from business combinations
Other
Decrease in net debt during the period
Net debt, end of period
Net debt-to-capital9
Management’s Discussion and Analysis
$
$
$
$
%
FY2018
750.7
$
FY2017
787.3
(127.4) $
(22.9)
37.7
11.3
(101.3) $
649.4
$
21.5 %
(91.3)
14.0
25.8
14.9
(36.6)
750.7
26.5
Total equity increased by $285.6 million this year
The increase in equity was mainly due to net income of $355.7 million and a favourable foreign currency translation of $80.5 million,
partially offset by cash dividends of $89.9 million, common shares repurchased and cancelled of $44.8 million and defined benefit plan
remeasurements of $24.1 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 267,738,530 common shares issued and outstanding as at March 31, 2018 with total share capital of
$633.2 million. In addition, we had 6,155,525 options outstanding under the Employee Stock Option Plan (ESOP).
As at April 30, 2018, we had a total of 267,604,005 common shares issued and outstanding and 6,137,450 options outstanding under the
ESOP.
Repurchase and cancellation of shares
On February 9, 2018, we announced the renewal of the normal course issuer bid (NCIB) to purchase up to 5,349,804 of our common
shares. The NCIB began on February 23, 2018 and will end on February 22, 2019 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.
In fiscal 2018, we repurchased and cancelled a total of 2,081,200 common shares under the previous and current NCIB (2017 – 2,490,900),
at a weighted average price of $21.53 per common share (2017 – $16.73), for a total consideration of $44.8 million (2017 – $41.7 million).
An excess of $39.9 million (2017 – $36.1 million) of the shares’ repurchase value over their carrying amount was charged to retained
earnings as share repurchase premiums. Included in the above amount were 600,000 common shares that were repurchased under a
private agreement with a third-party seller at a discount to the prevailing market price of the Company's common shares at the time of
purchase.
Dividends
We paid a dividend of $0.08 per share in the first quarter and $0.09 per share in the second, third and fourth quarter of fiscal 2018. 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 annually
based on the cash requirements of our operating activities, liquidity requirements and projected financial position. We expect to declare
dividends of approximately $96.4 million in fiscal 2019 based on our current dividend and the number of common shares outstanding as
at March 31, 2018.
Guarantees
As at March 31, 2018, we have a total of $223.4 million outstanding letters of credit and performance guarantees which are not recognized
in the consolidated statement of financial position, compared to $238.2 million last fiscal year.
Pension obligations
We maintain defined benefit and defined contribution pension plans. Subsequent to recent legislative changes, the defined benefit pension
plans are considered sufficiently funded. We expect to contribute $23.7 million in fiscal 2019.
9 Non-GAAP and other financial measures (see Section 3.7).
CAE Financial Report 2018 I 31
Management’s Discussion and Analysis
7.2 Off balance sheet arrangements
In the normal course of operations, we use off-balance sheet activities through operating leases for building, land, simulators, aircrafts
and other equipment. These leases are non-recourse to us.
You can find more details about operating lease commitments in Notes 1 and 26 of our consolidated financial statements.
In the normal course of business we also manage a program in which we sell interests in certain of our accounts receivable (current
financial assets program) to a third party for cash consideration with limited recourse to CAE.
You will find more details about our financial assets program in Sources of Liquidity.
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 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. 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 cash and cash equivalents, 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 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. The fair value of 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 risks and remaining maturities;
– The fair value of 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 risks and remaining maturities;
– The fair value of the contingent consideration arising on a business combination is based on the estimated amount and timing of
projected cash flows, the probability of the achievement of the criteria on which the contingency is based and the risk-adjusted discount
rate used to present value the probability-weighted cash flows.
A description of the fair value hierarchy is discussed in Note 28 of our consolidated financial statements.
32 I CAE Financial Report 2018
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 4 and Note 28 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 and agreements to sell certain of our accounts receivable. 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.
CAE Financial Report 2018 I 33
Management’s Discussion and Analysis
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 mitigate foreign currency risks by having our foreign operations transact in their functional currency for material procurement, sale
contracts and financing activities.
We use forward foreign currency contracts and foreign currency swap agreements to manage our exposure from transactions in foreign
currencies. 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.
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 88% fixed-rate and 12% floating-rate at the end of this year (2017 – 90% fixed rate and 10% 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.
Hedge of share-based payments cost
We have entered into equity swap agreements with four (2017 – two) 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.
Hedge of net investments in foreign operations
As at March 31, 2018, we have designated a portion of our senior notes and a portion of the obligations under finance lease 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 28 of our consolidated financial statements for the classification of financial instruments.
A sensitivity analysis for foreign currency risk and interest rate risk is included in Note 29 of our consolidated financial statements.
34 I CAE Financial Report 2018
Management’s Discussion and Analysis
8. BUSINESS COMBINATIONS
Acquisition of a portfolio of training assets
During the second quarter of fiscal 2018, we acquired a portfolio of training assets in North America and Europe from a full-flight simulator
leasing business for cash consideration of $24.7 million. With this acquisition, we obtained fully operational full-flight simulators and various
customer contracts.
The determination of the fair value of the identifiable assets acquired and liabilities assumed are as follows: $24.7 million of property plant
and equipment, $4.6 million of goodwill, $1.4 million of non-current assets and $6.0 million of non-current liabilities.
Asian Aviation Centre of Excellence Sdn. Bhd.
During the third quarter of fiscal 2018, we completed the acquisition of the remaining 50% equity interest in Asian Aviation Centre of
Excellence Sdn. Bhd. (AACE) from AirAsia, for a cash consideration of $114.8 million [US$90 million] and long-term contingent cash
consideration payable of up to US$10 million if certain criteria are met.
As a result, our interest in AACE increased from 50% to 100%, obtaining control over AACE’s three training centres located in Malaysia,
Singapore and Vietnam, as well as its 50% joint control of Philippine Academy of Aviation Training, a joint venture training centre between
AACE and Cebu Pacific, located in the Philippines. With this acquisition, we own a customer installed base of commercial flight simulators
and own assets including full-flight simulators, simulator parts and equipment, facilities and a talented workforce.
Before the transaction, our 50% ownership interest in AACE was accounted for using the equity method. The net gain resulting from the
remeasurement to fair value of the previously held interest in AACE was included in Other gains – Net in the consolidated income statement.
The goodwill arising from both acquisitions is attributable to the expansion of our customer installed base of commercial flight simulators,
market capacity and expected synergies from combining operations.
The net assets acquired, including intangibles, are included in the Civil Aviation Training Solutions segment.
You will find more details in Note 3 and 21 of our consolidated financial statements.
9. BUSINESS RISK AND UNCERTAINTY
We operate in several industry segments that have various risks and uncertainties. Management and the Board of Directors (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.
9.1 Risks relating to the industry
Competition
We sell our simulation products and training services in highly competitive markets. New participants have emerged in recent years and
the competitive environment is intense, with aerospace and defence companies positioning themselves to try to take greater market share
by consolidating existing commercial aircraft simulation companies and by developing their own internal capabilities. 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.
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 an independent training provider and 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.
CAE Financial Report 2018 I 35
Management’s Discussion and Analysis
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.
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 the prime and/or
subcontractor. 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 reductions to defence spending by mature markets such as the U.S., Canada, Germany, U.K. and Australia or a significant
delay in the timing of defence procurement 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.
Lower jet fuel prices generally have a positive impact on airlines’ profitability; however, the long-term ramifications on the commercial
aviation industry are more complex. 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 economically unviable. 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.
Regulations 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.
36 I CAE Financial Report 2018
Management’s Discussion and Analysis
9.2 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 and service 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 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 contribution of governments, including the Government of Quebec through
Investissement Québec (IQ) and the SA2GE program, and the Government of Canada through its Strategic Aerospace and Defence
Initiative (SADI). The level of government financial participation 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 can 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.
Strategic partnerships and long-term contracts
We have long-term strategic partnerships and contracts with major airlines, aircraft operators and defence forces around the world. These
long-term contracts are included in our backlog at the awarded amount but could be subject to unexpected adjustments or cancellations
and therefore do not represent a guarantee of our future revenues. Additionally, we cannot be certain that these partnerships and contracts
will be renewed on similar terms, or at all, when they expire.
Procurement and OEM leverage
We secure data, parts, equipment and many other inputs from a wide variety of OEMs, subcontractors 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. Additionally, we may purchase simulators or obtain simulators in
a business acquisition. These simulators may contain defects that are difficult to detect and correct and if they 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.
CAE Financial Report 2018 I 37
Management’s Discussion and Analysis
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.
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. Our training systems may also involve the collection and
analysis of customer performance data in connection with the use of our training systems. We may not be able to obtain access to these
multiple data sets 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 and services 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 the technical, pilot instructor and general management domains.
Labour relations
Approximately 1,700 of our employees are represented by unions and are covered by 42 collective agreements. These differing collective
bargaining agreements have various expiration dates, including that of an employee group in Montreal, Canada which is expiring in
June 2018 and is currently in the process of being renewed. While we maintain positive relationships with our respective unions, the
re negotiations of the collective bargaining agreements could result in work disruption including work stoppages or work slowdowns.
Should a work stoppage occur, it could interrupt our manufacturing or service operations at the impacted locations which could adversely
affect service to our customers and our financial performance.
Environmental matters
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.
Additionally, the potential impacts of continued climate change are unpredictable. The occurrence of one or more natural disasters or
weather-related events could result in a disruption of operations, property damage and adverse effects to the cost or availability of materials
and resources. 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 claims.
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 claims.
38 I CAE Financial Report 2018
Management’s Discussion and Analysis
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.
U.S. foreign ownership, control or influence mitigation measures
CAE and certain of its subsidiaries are parties to agreements with various departments and agencies of the U.S. government, including
the U.S. Department of Defense, which require that these subsidiaries be issued facility security clearances under the U.S. Government
National Industrial Security Program. This program requires that any corporation that maintains a facility security clearance be insulated
from foreign ownership, control or influence (FOCI) via a mitigation agreement. As a Canadian company, CAE has entered into FOCI
mitigation agreements with U.S. Department of Defense that enable these U.S. subsidiaries to obtain and maintain the requisite facility
security clearances to enter into and perform on classified contracts with the U.S. Government. Specifically, these mitigation agreements
are a special security agreement (SSA) for CAE USA Inc. and a proxy agreement (Proxy Agreement) for CAE USA Inc.’s wholly owned
subsidiary, CAE USA Mission Solutions Inc. (Proxy Company). If CAE fails to maintain compliance with either of these FOCI mitigation
agreements, the facility security clearances for each entity may be terminated. If this occurred, CAE’s U.S. subsidiaries would no longer
be eligible to enter into new contracts requiring a facility security clearance and would lose the right to perform its existing contracts with
the U.S. government to completion.
A separate board of directors has been established to oversee the management and operations of the Proxy Company. Under the Proxy
Agreement, CAE and its board of directors are restricted in their oversight over the Proxy Company’s separate board of directors and its
management. In addition, under U.S. Department of Defense rules and procedures, subject to a limited number of restricted matters (such
as the sale or disposal of the Proxy Company’s assets; corporate mergers, consolidations, or reorganizations relating to the Proxy Company;
pledges, mortgages or other encumbrances on the capital stock of the Proxy Company for purposes other than obtaining working capital;
the dissolution of the Proxy Company; and the filing of a bankruptcy petition with respect to the Proxy Company) the Proxy Company
board of directors acts independently and has sole authority to make all decisions regarding the management of the proxy company and
its business. The actions taken or not taken by the management or the Proxy Company board of directors could have an impact on CAE’s
growth, reputation and profitability.
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.
Seasonality
Our business, revenues and cash flows are affected by certain seasonal trends. In the Civil segment, the utilization rate is driven by the
availability of pilots to train, which tends to be lower in the second quarter as pilots are flying more and training less and thus resulting in
lower revenues. In the Defence segment, revenue and cash collection tend to be higher in the second half of the year as contract awards
and availability of funding are influenced by the federal government’s budget cycle, which in the U.S. is based on a September year-end.
We expect these trends to continue in fiscal 2019.
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 Financial Report 2018 I 39
Management’s Discussion and Analysis
Information technology systems
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
belonging to CAE, our employees, or our business partners, including aircraft OEMs and Defence and Security customers, expose us to
regulatory investigation, litigation or contractual penalties or cause reputational harm. 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. 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
The cyber threat landscape is becoming more complex and prevalent and represents a rapidly evolving risk to our information technology
infrastructure and systems and to our proprietary or sensitive information. Our dependence on information technology infrastructure and
systems and our business relationships with aircraft OEMs and defence and security customers may increase the risk of such threats.
Our customers, suppliers, subcontractors and joint venture partners may face similar security threats, as well as 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.
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. 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. To address the challenges of the evolving cyber threat landscape, we continuously review our security measures. We
have implemented and enhanced security controls, policy enforcement mechanisms, management oversight and monitoring systems in
order to prevent, detect and address potential threats, though we may find it necessary to make further investments to protect our data
and infrastructure. The Audit Committee of our Board of Directors is responsible for the oversight of our cybersecurity risk mitigation
strategy. 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.
Data privacy
If we fail to comply with applicable domestic and foreign laws regarding privacy and security of employee, customer and other data
(including the recently enacted European Union General Data Protection Regulation), or as a result of a cyber-attack or other security
breach, we could be subject to regulatory penalties, experience damage to our reputation or a loss of confidence in our products and
services. We may also incur additional costs for remediation and modification or enhancement of our information systems to prevent
future occurrences, all of which could adversely affect our business, operations or financial results.
9.3 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.
Three areas of our business are exposed to fluctuations of foreign exchange rates; our network of foreign training and services operations,
our production operations outside of Canada (Australia, Germany, India, U.K. and U.S.) and our production operations in Canada. 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 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 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.
40 I CAE Financial Report 2018
Management’s Discussion and Analysis
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. We generally hedge the milestone payments of sales contracts
denominated in foreign currencies to mitigate some of the foreign exchange exposure.
Availability of capital
We have various debt facilities with maturities ranging between April 2018 and October 2036, and we cannot provide assurance that
these facilities will be refinanced at the same cost, for the same duration and on similar terms as were previously available.
Pension plans
Economic and capital market fluctuations can negatively affect the investment performance, funding and expense associated with our
defined benefit pension plans. Pension funding for these plans is based on actuarial estimates and is subject to limitations under applicable
regulations. Actuarial estimates prepared during the year were based on, amongst others, assumptions regarding the performance of
financial markets, discount rates, inflation rates, future salary increases, estimated retirement ages and mortality rates. The actuarial
funding valuation reports determine the amount of cash contributions that we are required to make into registered retirement plans. There
can be no assurance that our pension expense and the funding of these plans will not increase in the future, negatively impacting our
earnings and cash flow. We seek to mitigate this risk by implementing policies and procedures designed to control investment risk and
through ongoing monitoring of our funding position.
Additional cash contributions, if required, to fund our defined benefit and defined contribution pension plans may have a negative effect
on our operations, financial results and reputation.
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 2018. 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.
Changes to the political and regulatory environment in countries in which we do business may lead to higher tariffs or stricter trade policies
that may have a negative impact on our sales, financial results and business model.
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, or the expropriation of assets, in which we have invested significant resources,
particularly when the customers are state-owned or state-controlled entities. Geopolitical 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 could result in a higher effective tax rate on our
earnings which could significantly impact our financial results.
CAE Financial Report 2018 I 41
Management’s Discussion and Analysis
10. RELATED PARTY TRANSACTIONS
A list of principal investments which, in aggregate, significantly impact our results or assets is presented in Note 31 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
$
$
2018
39.5
14.5
25.4
9.7
3.9
2017
54.0
14.2
27.4
15.3
25.9
Other assets include a finance lease receivable of $9.3 million (2017 – $12.4 million) maturing in October 2022 and carrying an interest
rate of 5.14% per annum, a loan receivable of $8.9 million (2017 – $8.4 million) maturing June 2026 and carrying a fixed interest rate of
ten years Euro swap rate plus a spread of 2.50% and a long-term interest-free account receivable of $7.2 million (2017 – $6.6 million)
with no repayment term. As at March 31, 2018 and 2017 there are no provisions held against the receivables from related parties.
The following table presents our transactions with joint ventures:
(amounts in millions)
Revenue
Purchases
Other income
$
2018
65.2
$
2.6
1.5
2017
71.5
4.0
1.8
In addition, during fiscal 2018, transactions amounting to $0.8 million (2017 – $1.4 million) were made, at normal market prices, with
organizations for 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 CAE 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 benefits obligations.
$
$
$
2018
7.0
1.8
17.8
26.6
$
2017
7.1
1.3
16.8
25.2
42 I CAE Financial Report 2018
Management’s Discussion and Analysis
11. CHANGES IN ACCOUNTING POLICIES
11.1 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 how an entity manages financial assets and the
characteristics of the contractual cash flows of the financial assets replacing the multiple rules in IAS 39. Most of the requirements in
IAS 39 for classification and measurement of financial liabilities have been carried forward in IFRS 9. IFRS 9 also introduces a new hedge
accounting model that is more closely aligned with risk-management objectives as well as a new expected credit loss model for calculating
impairment on financial assets replacing the incurred loss model in IAS 39.
IFRS 9 is effective for the fiscal period beginning on April 1, 2018 for CAE. We have completed our assessment and have concluded that
the adoption of this standard has no impact 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, which supersedes IAS 11 - Construction Contracts
and IAS 18 - Revenue and related interpretations. The core principle of the new standard is to recognize revenue to depict fulfillment of
performance obligations to customers in amounts that reflect the consideration to which we expect to be entitled in exchange for those
goods or services. Revenue is recognized when, or as, the customer obtains control of the goods or services. The new standard also
provides guidance for transactions that were not previously addressed comprehensively, improves guidance for multiple-element
arrangements and enhances revenue related disclosures.
IFRS 15 is effective for the fiscal period beginning on April 1, 2018 for CAE. We have elected to apply IFRS 15 retrospectively and thus
will restate our 2018 results, with an opening adjustment to equity as at April 1, 2017. We have elected to use the following practical
expedients:
– No restatement for contracts that were completed as at, or prior to April 1, 2017; and
– Reflecting the aggregate effect of modifications to contracts that occurred prior to April 1, 2017 in identifying the satisfied and unsatisfied
performance obligations and in determining the transaction prices to be allocated thereto.
We have reviewed our revenue contracts to evaluate the effect of the new standard on our revenue recognition practices. Based on our
assessment, the adoption of the new standard will have the following impacts:
– Revenue recognition for certain performance obligations currently accounted for using the percentage-of-completion method will no
longer meet the requirements for revenue recognition over time. Revenue for these performance obligations will instead be recognized
upon completion. As the performance obligations for these devices are met and manufacturing advances, the costs to build will be
recognized as inventory. Payments received from customers that were previously applied as a reduction of the contracts in progress:
assets will now need to be presented as contract liabilities;
– Contracts in which we receive significant payment in advance now require a portion of the contract consideration to be allocated to
a significant financing component, when certain criteria are met;
– A change in the identification of performance obligations for certain multiple-element arrangements.
The following table presents the impact of IFRS 15 on our consolidated statement of financial position as at April 1, 2017 and March 31, 2018:
As previously reported
IFRS 15 As restated
April 1, 2017 Adjustments April 1, 2017
As currently reported
As restated
March 31, 2018 Adjustments March 31, 2018
IFRS 15
(amounts in millions)
Assets
Total current assets
Total long-term assets
Liabilities
Total current liabilities
Total long-term liabilities
Shareholders' Equity
Equity attributable to equity
holders of the Company
Non-controlling interests
$ 1,919.7
3,435.1
$ 5,354.8
$ 1,273.9
1,999.9
$ 3,273.8
$ 2,020.8
60.2
$ 2,081.0
$
$
$
$
$
$
45.4
(2.5)
42.9
$ 1,965.1
3,432.6
$ 5,397.7
137.2
(25.6)
111.6
$ 1,411.1
1,974.3
$ 3,385.4
(68.7)
$ 1,952.1
—
(68.7)
60.2
$ 2,012.3
$
$
$
$
$
$
2,060.8
3,658.4
5,719.2
1,320.6
2,032.0
3,352.6
2,298.2
68.4
2,366.6
$
$
$
$
$
$
62.5
(1.5)
61.0
153.5
(23.4)
130.1
(69.1)
—
(69.1)
$
$
$
$
$
$
2,123.3
3,656.9
5,780.2
1,474.1
2,008.6
3,482.7
2,229.1
68.4
2,297.5
CAE Financial Report 2018 I 43
Management’s Discussion and Analysis
For fiscal 2018, the impact of adopting IFRS 15 is a decrease to revenue of $6.5 million, an increase to operating profit of $1.8 million and
an increase to finance expense - net of $1.0 million.
While these changes will impact the timing of contract revenue and profit recognition, there will be no change to cash flows from the
contract.
We have updated and are finalizing the implementation of revised procedures and controls in order to meet the requirements of IFRS 15,
as well as expanding disclosures which will be required under the new standard in fiscal 2019.
IFRS 16 - Leases
In January 2016, the IASB released IFRS 16 - Leases, which will replace IAS 17 - Leases and related interpretations. The new standard
introduces a single lessee accounting model and eliminates the classification of leases as either operating or finance leases. It requires
the lessee to recognize a right-of-use asset and a lease obligation for all leases. Lessors will continue to classify leases as operating
leases or finance leases as IFRS 16 substantially carries forward the current lessor accounting requirements.
IFRS 16 will be effective for the fiscal period beginning on April 1, 2019 for CAE. We are currently evaluating the impact of the new standard
on our consolidated financial statements. Where we are the lessee, for leases that are considered operating leases under IAS 17, the
adoption of IFRS 16 is expected to result in the recognition of assets and liabilities on the consolidated statement of financial position.
The change to the recognition, measurement and presentation requirements from the adoption of this standard is expected to result in a
decrease of our operating lease expense and an increase of our finance and depreciation expenses.
IFRIC 23 - Uncertainty over income tax treatments
In June 2017, the IASB released IFRIC 23 - Uncertainty over Income Tax Treatments, which addresses how to determine the taxable profit
(loss), tax bases, unused tax losses, unused tax credits and tax rates, when there is uncertainty over income tax treatments under
IAS 12 - Income taxes. It specifically considers whether tax treatments should be considered independently or collectively and assumptions
for taxation authorities’ examinations in regards to taxable profit (loss), tax bases, unused tax losses, unused tax credits or tax rates.
IFRIC 23 is effective for the fiscal period beginning on April 1, 2019 for CAE. We have completed our assessment and have concluded
that the interpretation has no impact on our consolidated financial statements.
11.2 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.
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 of fair value less costs of disposal calculations and uses valuation models
such as the discounted cash flows model (level 3). 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 20 of our consolidated financial statements for further details regarding assumptions used.
44 I CAE Financial Report 2018
Management’s Discussion and Analysis
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. Individual discount rates are derived from the yield curve and are used to determine the service cost and interest cost of the
Canadian defined benefit pension plans at the beginning of the year. The present value of the employee benefit obligations for these
Canadian plans is determined based on the individual discount rates derived from the yield curve at the end of the year.
Other key assumptions for pension obligations are based, in part, on current market conditions. See Note 14 of our consolidated financial
statements for further details regarding assumptions used.
Government royalty repayments
In determining the amount of repayable government royalties, 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 6% to 15%, over
the period of repayments. The estimated repayments are discounted using average rates ranging from 6% to 10% 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 participation. A 1% increase to the growth rates
would increase the royalty obligation at March 31, 2018 by approximately $4.0 million (2017 - $4.4 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 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.
CAE Financial Report 2018 I 45
Management’s Discussion and Analysis
12. CONTROLS AND PROCEDURES
The internal auditor reports regularly to management on any weaknesses it finds in our internal controls and these reports are reviewed
by the Audit Committee.
In accordance with National Instrument 52-109 issued by the Canadian Securities Administrators (CSA), certificates signed by the President
and Chief Executive Officer (CEO) and the Chief Financial Officer (CFO) have been filed. These filings certify the appropriateness of our
disclosure controls and procedures and the design and effectiveness of the internal controls over financial reporting.
12.1 Evaluation of disclosure controls and procedures
Our disclosure controls and procedures are designed to provide reasonable assurance that information is accumulated and communicated
to our President and CEO and CFO and other members of management, so we can make timely decisions about required disclosure
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, 2018. 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, 2018.
12.2 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, 2018, 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 2018 that have materially affected,
or are reasonably likely to materially affect, our internal controls over financial reporting.
13. OVERSIGHT ROLE OF AUDIT COMMITTEE AND BOARD OF DIRECTORS
The Audit Committee reviews our annual MD&A and related consolidated financial statements with management and the external auditor
and recommends them to the Board of Directors for their approval. Management and our internal auditor also provide the Audit Committee
with regular reports assessing our internal controls and procedures for financial reporting. The external auditor reports regularly to
management on any weaknesses it finds in our internal control, and these reports are reviewed by the Audit Committee.
14. ADDITIONAL INFORMATION
You will find additional information about CAE, including our most recent AIF, on our website at www.cae.com, or on SEDAR at
www.sedar.com or on EDGAR at www.sec.gov.
46 I CAE Financial Report 2018
15. SELECTED FINANCIAL INFORMATION
The following table provides selected quarterly financial information for the years 2016 through to 2018.
Management’s Discussion and Analysis
(amounts in millions, except per share amounts and exchange rates)
Fiscal 2018
Revenue
Net income
Equity holders of the Company
Non-controlling interests
Basic and diluted EPS attributable to equity holders of the Company
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 2017
Revenue
Net income
Equity holders of the Company
Continuing operations
Discontinued operations
Non-controlling interests
Basic EPS attributable to equity holders of the Company
Continuing operations
Discontinued operations
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 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
Q1
Q2
Q3
Q4
Total
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
698.9
65.4
63.8
1.6
0.24
268.6
269.8
1.35
1.48
1.72
651.6
69.3
68.7
(0.1)
0.7
0.25
0.25
—
0.25
0.25
—
0.26
269.3
269.6
1.29
1.46
1.85
557.0
44.5
44.9
(0.5)
0.1
0.17
0.17
—
0.19
267.4
267.8
1.23
1.36
1.88
646.0
67.0
65.2
1.8
0.24
268.7
269.9
1.26
1.47
1.64
635.5
48.9
48.3
0.1
0.5
0.18
0.18
—
0.18
0.18
—
0.21
268.7
269.6
1.30
1.46
1.71
616.8
69.2
75.3
(6.5)
0.4
0.26
0.28
(0.02)
0.18
268.6
268.9
1.31
1.46
2.03
704.4
119.9
117.9
2.0
0.44
268.1
269.5
1.27
1.49
1.68
682.7
69.3
67.6
0.2
1.5
0.25
0.25
—
0.25
0.25
—
0.26
268.5
269.7
1.33
1.44
1.66
616.3
56.9
57.9
(0.2)
(0.8)
0.21
0.21
—
0.22
269.3
269.7
1.33
1.46
2.02
780.7
103.4
100.1
3.3
0.37
267.6
269.0
1.26
1.55
1.75
734.7
69.1
67.4
(0.7)
2.4
0.25
0.25
—
0.25
0.25
—
0.31
268.3
269.6
1.32
1.41
1.64
2,830.0
355.7
347.0
8.7
1.29
268.2
269.5
1.28
1.50
1.70
2,704.5
256.6
252.0
(0.5)
5.1
0.94
0.94
—
0.93
0.93
—
1.03
268.7
269.6
1.31
1.44
1.71
722.5
59.7
2,512.6
230.3
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
CAE Financial Report 2018 I 47
Management’s Discussion and Analysis
Selected segment information
(amounts in millions, except operating margins)
Q4-2018
Q4-2017
FY2018
FY2017
FY2016
Civil Aviation Training Solutions
Revenue
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 (%)
$
455.2
$
417.8
$
1,629.7
$
1,556.9
$
1,429.1
95.7
21.0
83.8
20.1
324.5
19.9
273.2
17.5
$
290.4
$
282.7
$
1,085.1
$
1,036.9
$
38.7
13.3
33.0
11.7
127.7
11.8
120.4
11.6
237.4
16.6
970.1
119.8
12.3
$
35.1
$
34.2
$
115.2
$
110.7
$
113.4
6.7
19.1
780.7
141.1
18.1
$
4.1
12.0
734.7
120.9
16.5
$
8.8
7.6
6.6
6.0
7.2
6.3
$
2,830.0
$
2,704.5
$
2,512.6
461.0
16.3
400.2
14.8
364.4
14.5
(28.9)
335.5
Restructuring, integration and acquisition costs $
— $
(20.0) $
— $
(35.5) $
Operating profit $
141.1
$
100.9
$
461.0
$
364.7
$
Selected annual information for the past five years
(amounts in millions, except per share amounts)
2018
2017
2016
2015
2014
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(1)
Total net debt
Per share:
$
2,830.0
$
2,704.5
$
2,512.6
$
2,246.3
$
2,077.9
355.7
256.6
230.3
204.7
191.1
347.0
—
8.7
1.28
1.50
1.70
252.0
(0.5)
5.1
1.31
1.44
1.71
239.3
(9.6)
0.6
1.31
1.45
1.98
201.2
188.3
0.6
2.9
1.14
1.44
1.83
1.7
1.1
1.05
1.41
1.68
$
5,719.2
$
5,354.8
$
4,996.7
$
4,656.9
$
4,236.7
1,380.6
649.4
1,370.8
750.7
1,318.6
787.3
1,427.3
949.6
1,340.2
856.2
Basic EPS attributable to equity holders of the Company
Continuing operations
Discontinued operations
Diluted EPS attributable to equity holders of the Company
Continuing operations
Discontinued operations
Earnings per share before specific items
Dividends declared
$
1.29
$
0.94
$
0.89
$
0.76
$
—
1.29
—
1.29
0.35
—
(0.04)
0.93
—
1.03
0.315
0.89
(0.04)
0.86
0.295
—
0.76
—
0.76
0.27
0.72
0.01
0.72
0.01
0.72
0.22
(1) Includes long-term debt, long-term derivative liabilities and other long-term liabilities meeting the definition of a financial liability.
48 I CAE Financial Report 2018
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 and Summary of Significant Accounting Policies
Note 2 – Changes in Accounting Policies
Note 3 – Business Combinations
Note 4 – Accounts Receivable
Note 5 – Inventories
Note 6 – Property, Plant and Equipment
Note 7 – Intangible Assets
Note 8 – Other Assets
Note 9 – Accounts Payable and Accrued Liabilities
Note 10 – Contracts in Progress
Note 11 – Provisions
Note 12 – Debt Facilities
Note 13 – Government Participation
Note 14 – Employee Benefits Obligations
Note 15 – Deferred Gains and Other Non-Current Liabilities
Note 16 – Income Taxes
Note 17 – Share Capital, Earnings per Share and Dividends
Note 18 – Accumulated Other Comprehensive Income
Note 19 – Employee Compensation
Note 20 – Impairment of Non-Financial Assets
Note 21 – Other Gains – Net
Note 22 – Finance Expense – Net
Note 23 – Share-Based Payments
Note 24 – Supplementary Cash Flows Information
Note 25 – Contingencies
Note 26 – Commitments
Note 27 – Capital Risk Management
Note 28 – Fair Value of Financial Instruments
Note 29 – Financial Risk Management
Note 30 – Operating Segments and Geographic Information
Note 31 – Related Party Relationships
Note 32 – Related Party Transactions
50
51
53
54
55
56
57
58
70
72
73
73
74
75
76
76
76
77
77
79
80
83
84
86
87
87
87
88
88
89
93
93
93
94
94
96
100
102
104
CAE Financial Report 2018 | 49
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, 2018, 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, 2018 was effective.
M. Parent S. Branco
President and Chief Executive Officer Vice-president, Finance and Chief Financial Officer
Montreal (Canada)
May 25, 2018
50 | CAE Financial Report 2018
Report of Independent Registered Public Accounting Firm
To the Shareholders of CAE Inc.
Opinions on the consolidated financial statements and internal control over financial reporting
We have audited the accompanying consolidated statement of financial position of CAE Inc. and its subsidiaries, (together, the company)
as of March 31, 2018 and March 31, 2017, and the related consolidated income statement, consolidated statement of comprehensive
income, changes in equity and cash flows for the years then ended, including the related notes (collectively referred to as the consolidated
financial statements). We also have audited the company's internal control over financial reporting as of March 31, 2018, based on criteria
established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial
position of the company as of March 31, 2018 and March 31, 2017, and its consolidated financial performance and its consolidated cash
flows for the years then ended in conformity with International Financial Reporting Standards as issued by the International Accounting
Standards Board (IFRS). Also in our opinion, the company maintained, in all material respects, effective internal control over financial
reporting as of March 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for opinions
The company's 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 opinions on the company’s consolidated
financial statements and on the company's internal control over financial reporting based on our audits. We are a public accounting firm
registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect
to the company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to
error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. 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.
CAE Financial Report 2018 | 51
Definition and limitations of internal control over financial reporting
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 consolidated 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 consolidated 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 consolidated 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.
Montréal, Canada
May 25, 2018
We have served as the company's auditor since 1991.
_____________________________________________________________________________________________
1 CPA auditor, CA, public accountancy Permit No. A119714
52 | CAE Financial Report 2018
Consolidated Statement of Financial Position
Consolidated Financial Statements
Notes
2018
2017
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
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
Deferred revenue
Contracts in progress: liabilities
Current portion of long-term debt
Derivative financial liabilities
Total current liabilities
Provisions
Long-term debt
Royalty obligations
Employee benefits 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
4
10
5
28
6
7
31
16
28
8
9
11
10
12
28
11
12
14
15
16
28
17
18
The accompanying notes form an integral part of these Consolidated Financial Statements.
$ 611.5
568.4
401.6
375.3
50.0
40.7
13.3
$ 2,060.8
1,803.9
1,055.6
244.5
60.9
11.5
482.0
$ 5,719.2
$ 669.6
32.1
15.3
371.5
161.8
52.2
18.1
$ 1,320.6
39.5
1,208.7
140.8
200.6
229.9
208.1
4.4
$ 3,352.6
$ 633.2
21.3
262.3
1,381.4
$ 2,298.2
68.4
$ 2,366.6
$ 5,719.2
$ 504.7
548.4
337.5
416.3
63.8
25.6
23.4
$ 1,919.7
1,582.6
944.0
378.4
42.8
16.0
471.3
$ 5,354.8
$ 695.2
43.2
9.6
266.6
191.9
51.9
15.5
$ 1,273.9
39.1
1,203.5
138.5
157.7
217.8
238.6
4.7
$ 3,273.8
$ 615.4
19.4
193.7
1,192.3
$ 2,020.8
60.2
$ 2,081.0
$ 5,354.8
CAE Financial Report 2018 | 53
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
Gross profit
Research and development expenses
Selling, general and administrative expenses
Other gains – net
After tax share in profit of equity accounted investees
Restructuring, integration and acquisition costs
Operating profit
Finance expense – net
Earnings before income taxes
Income tax expense
Earnings from continuing operations
Loss from discontinued operations
Net income
Attributable to:
Equity holders of the Company
Non-controlling interests
Earnings per share from continuing operations
attributable to equity holders of the Company
Basic
Diluted
Notes
30
21
30
22
16
17
17
The accompanying notes form an integral part of these Consolidated Financial Statements.
2018
2017
$ 2,830.0
1,953.1
$ 876.9
114.9
380.8
(37.4)
(42.4)
—
$ 461.0
76.2
$ 384.8
29.1
$ 355.7
—
$ 355.7
$ 347.0
8.7
$ 355.7
$ 2,704.5
1,893.3
$ 811.2
111.0
364.4
(12.7)
(51.7)
35.5
$ 364.7
72.4
$ 292.3
35.2
$ 257.1
(0.5)
$ 256.6
$ 251.5
5.1
$ 256.6
$
$
1.29
1.29
$
$
0.94
0.93
54 | CAE Financial Report 2018
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 gain (loss) on certain long-term debts denominated in foreign
currency designated as hedges of net investments in foreign operations
Reclassification to income
Income taxes
Net change in cash flow hedges
Effective portion of changes in fair value of derivatives
designated as cash flow hedges
Reclassification to income (1)(2)
Income taxes
Net change in available-for-sale financial instruments
Net change in fair value of available-for-sale financial asset
Share in the other comprehensive income of equity accounted investees
Share in the other comprehensive income of equity accounted investees
Reclassification to income
Items that are never reclassified to net income
Defined benefit plan remeasurements
Defined benefit plan remeasurements
Income taxes
Other comprehensive income (loss)
Total comprehensive income
Attributable to:
Equity holders of the Company
Non-controlling interests
Notes
2018
$ 355.7
2017
$ 256.6
16
16
28
14
16
$
75.6
$
(16.9)
15.2
(11.6)
1.3
80.5
(0.3)
(1.1)
0.9
(0.5)
0.1
0.1
2.3
(15.0)
(12.7)
$
$
$
$
$
$
$
$
(33.0)
8.9
(24.1)
$
$
43.3
$ 399.0
$ 391.5
7.5
$ 399.0
(12.1)
(4.3)
1.5
(31.8)
1.8
13.6
(4.1)
11.3
(0.2)
(0.2)
(6.7)
—
(6.7)
$
$
$
$
$
$
$
$
18.6
(5.1)
13.5
$
$
(13.9)
$ 242.7
$ 238.0
4.7
$ 242.7
Total comprehensive income (loss) attributable to equity holders of the Company:
Continuing operations
Discontinued operations
$ 238.5
(0.5)
$ 238.0
(1) Fiscal 2018 includes net gain of $1.0 million reclassified to revenue (2017 – net losses of $17.9 million), net gain of $2.6 million reclassified to finance expense –
$ 391.5
—
$ 391.5
net (2017 – net gain of $3.0 million) and net losses of $2.5 million reclassified to other gains - net (2017 - net gain of $1.3 million).
(2) An estimated net amount of $5.0 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 Financial Report 2018 | 55
Consolidated Financial Statements
l
t
a
o
T
y
t
i
u
q
e
3
.
0
4
9
,
1
$
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$
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2
.
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4
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56 | CAE Financial Report 2018
Consolidated Statement of Cash Flows
Consolidated Financial Statements
Notes
2018
2017
$ 355.7
$ 257.1
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
Derivative financial assets and liabilities – net
Gain on disposal of interest in investment
Remeasurement of investment, net of reorganization and other costs
Other
Changes in non-cash working capital
Net cash provided by operating activities
Investing activities
Business combinations, net of cash and cash equivalents acquired
Net proceeds from disposal of interests in investment
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 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
Other
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, end of period
Supplemental information:
Interest paid
Interest received
Income taxes paid
6
16
23
14
21
21
24
3
21
6
7
7
12
12
12
12
12
17
The accompanying notes form an integral part of these Consolidated Financial Statements.
120.8
78.8
(42.4)
(35.7)
(6.8)
23.1
7.6
(32.8)
7.3
(14.3)
(4.0)
(10.9)
(43.1)
$ 403.3
$ (124.4)
117.8
(173.9)
27.0
(32.5)
(14.8)
(11.5)
37.6
5.7
$ (169.0)
$ 106.0
(106.0)
37.8
(33.4)
(25.0)
(89.9)
15.7
(44.8)
(2.9)
$ (142.5)
$
15.0
$ 106.8
504.7
$ 611.5
$
56.0
12.9
36.4
122.8
89.1
(51.7)
26.4
(18.2)
29.2
9.4
(67.8)
14.5
—
—
24.4
29.1
$ 464.3
$
(5.5)
—
(222.9)
6.6
(37.8)
(13.1)
(10.6)
16.5
7.6
$ (259.2)
$ 667.5
(667.5)
50.9
(98.8)
(24.3)
(80.6)
12.7
(41.7)
0.7
$ (181.1)
$
$
(4.9)
19.1
485.6
$ 504.7
$
58.5
11.9
24.8
CAE Financial Report 2018 | 57
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 25, 2018.
NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 and manufactures simulators, audiovisual and simulation centre management solutions, develops courseware
and offers services for training of medical, nursing and allied healthcare students as well as medical practitioners worldwide.
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 and
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.
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 arrangements 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.
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.
58 | CAE Financial Report 2018
Notes to the Consolidated Financial Statements
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 long-term liability 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.
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, contingent consideration assumed in a business combination 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.
CAE Financial Report 2018 | 59
Notes to the Consolidated Financial Statements
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.
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.
60 | CAE Financial Report 2018
Hedge of net investments in foreign operations
The Company has designated certain long-term debts as a hedging item 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.
Notes to the Consolidated Financial Statements
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 interests in certain of its accounts receivable. The Company continues to act
as a collection agent. Under the program the Company transfers some significant risks and rewards of the accounts receivable it
sells and retains others. The accounts receivable are derecognized up to an amount corresponding to the extent of the Company's
continuing involvement, which represents its maximum retained exposure.
–
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.
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 a Company has a long-term intercompany balance receivable from or payable to a foreign operation for which settlement is not
planned in the foreseeable future, such item is considered, in substance, a part of the Company’s net investment in that foreign operation.
Gains or losses arising from the translation of those intercompany balances 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.
CAE Financial Report 2018 | 61
Notes to the Consolidated Financial Statements
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.
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
Amortization rate/period
Straight-line
2.5 to 10%/3 to 40 years
Straight-line (10% residual)
Not exceeding 25 years
Declining balance/Straight-line
20 to 35%/2 to 10 years
Straight-line (residual not exceeding 15%)
Not exceeding 25 years
Based on utilization
Not exceeding 3,500 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.
62 | CAE Financial Report 2018
Notes to the Consolidated Financial Statements
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.
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 20
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.
CAE Financial Report 2018 | 63
Notes to the Consolidated Financial Statements
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.
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.
64 | CAE Financial Report 2018
Notes to the Consolidated Financial Statements
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.
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 from off-the-shelf software sales is recognized when delivery has occurred. Revenue from 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.
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.
CAE Financial Report 2018 | 65
Notes to the Consolidated Financial Statements
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.
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. For the other defined benefit plans, the Company utilises a single weighted average discount rate derived from the yield curve.
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: an equity-settled share-based payment plan comprised of the
Employee Stock Option Plan (ESOP); and cash-settled share-based payments plans that include the Employee Stock Purchase Plan
(ESPP), the Executive Deferred Share Unit (EDSU) plan, the Deferred Share Unit (DSU) plan, the Long-Term Incentive Time Based plans
and the Long-Term Incentive Performance Based plans. The Long-Term Incentive – Deferred Share Unit (LTI-DSU) plan and the
Long-Term Incentive – Time Based Restricted Share Unit (LTI-TB RSU) plan are time based plans while the Long-Term Incentive –
Restricted Share Unit (LTI-RSU) plan and the Long-Term Incentive – Performance Share Unit (LTI-PSU) plan are performance based
plans.
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.
66 | CAE Financial Report 2018
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 two major Canadian financial institutions in order
to reduce its earnings exposure related to the fluctuation in the Company’s share price relating to the EDSU, DSU, LTI-DSU and
LTI-TB RSU programs.
Notes to the Consolidated Financial Statements
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.
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 participation
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 participation related to the acquisition of intangible assets is recorded as
a reduction of the cost of the related asset while government participation related to current expenses is recorded as a reduction of the
related expenses.
CAE Financial Report 2018 | 67
Notes to the Consolidated Financial Statements
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 participation 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.
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.
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 of fair value less costs of disposal calculations and uses
valuation models such as the discounted cash flows model (level 3). 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 20 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.
68 | CAE Financial Report 2018
Notes to the Consolidated Financial Statements
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. Individual discount rates are derived from the yield curve and are used to determine the service cost and interest cost of the
Canadian defined benefit pension plans at the beginning of the year. The present value of the employee benefit obligations for these
Canadian plans is determined based on the individual discount rates derived from the yield curve at the end of the year.
Other key assumptions for pension obligations are based, in part, on current market conditions. See Note 14 for further details regarding
assumptions used.
Government royalty repayments
In determining the amount of repayable government royalties, 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 6% to 15%, over
the period of repayments. The estimated repayments are discounted using average rates ranging from 6% to 10% 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 participation. A 1% increase to the growth rates
would increase the royalty obligation at March 31, 2018 by approximately $4.0 million (2017 - $4.4 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 $119.4 million (2017 - $192.3 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.
CAE Financial Report 2018 | 69
Notes to the Consolidated Financial Statements
NOTE 2 – CHANGES IN ACCOUNTING POLICIES
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 how an entity manages financial assets and the
characteristics of the contractual cash flows of the financial assets replacing the multiple rules in IAS 39. Most of the requirements in
IAS 39 for classification and measurement of financial liabilities have been carried forward in IFRS 9. IFRS 9 also introduces a new hedge
accounting model that is more closely aligned with risk-management objectives as well as a new expected credit loss model for calculating
impairment on financial assets replacing the incurred loss model in IAS 39.
For the Company, IFRS 9 is effective for the fiscal period beginning on April 1, 2018. The Company has completed its assessment and
has concluded that the adoption of this standard has no impact 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, which supersedes IAS 11 - Construction Contracts
and IAS 18 - Revenue and related interpretations. The core principle of the new standard is to recognize revenue to depict fulfillment of
performance obligations to customers in amounts that reflect the consideration to which the Company expects to be entitled in exchange
for those goods or services. Revenue is recognized when, or as, the customer obtains control of the goods or services. The new standard
also provides guidance for transactions that were not previously addressed comprehensively, improves guidance for multiple-element
arrangements and enhances revenue related disclosures.
For the Company, IFRS 15 is effective for the fiscal period beginning on April 1, 2018. The Company has elected to apply IFRS 15
retrospectively and thus will restate its 2018 results, with an opening adjustment to equity as at April 1, 2017. The Company has elected
to use the following practical expedients:
– No restatement for contracts that were completed as at, or prior to April 1, 2017; and
– Reflecting the aggregate effect of modifications to contracts that occurred prior to April 1, 2017 in identifying the satisfied and unsatisfied
performance obligations and in determining the transaction prices to be allocated thereto.
The Company has reviewed its revenue contracts to evaluate the effect of the new standard on its revenue recognition practices. Based
on its assessment, the adoption of the new standard will have the following impacts:
– Revenue recognition for certain performance obligations currently accounted for using the percentage-of-completion method will no
longer meet the requirements for revenue recognition over time. Revenue for these performance obligations will instead be recognized
upon completion. As the performance obligations for these devices are met and manufacturing advances, the costs to build will be
recognized as inventory. Payments received from customers that were previously applied as a reduction of the contracts in progress:
assets will now need to be presented as contract liabilities;
– Contracts in which the Company receives significant payment in advance now require a portion of the contract consideration to be
allocated to a significant financing component, when certain criteria are met;
– A change in the identification of performance obligations for certain multiple-element arrangements.
70 | CAE Financial Report 2018
The following table presents the impact of IFRS 15 on the Company’s consolidated statement of financial position as at April 1, 2017 and
March 31, 2018:
Notes to the Consolidated Financial Statements
(amounts in millions)
Assets
Total current assets
Total long-term assets
Liabilities
Total current liabilities
Total long-term liabilities
Shareholders' Equity
Equity attributable to equity
holders of the Company
Non-controlling interests
As previously reported
April 1, 2017
IFRS 15
Adjustments
As restated
April 1, 2017
As currently reported
March 31, 2018
IFRS 15
Adjustments
As restated
March 31, 2018
$
$
$
$
$
$
1,919.7
3,435.1
5,354.8
1,273.9
1,999.9
3,273.8
2,020.8
60.2
2,081.0
$
$
$
$
$
$
45.4
(2.5)
42.9
137.2
(25.6)
111.6
(68.7)
—
(68.7)
$
$
$
$
$
$
1,965.1
3,432.6
5,397.7
1,411.1
1,974.3
3,385.4
1,952.1
60.2
2,012.3
$
$
$
$
$
$
2,060.8
3,658.4
5,719.2
1,320.6
2,032.0
3,352.6
2,298.2
68.4
2,366.6
$
$
$
$
$
$
62.5
(1.5)
61.0
153.5
(23.4)
130.1
(69.1)
—
(69.1)
$
$
$
$
$
$
2,123.3
3,656.9
5,780.2
1,474.1
2,008.6
3,482.7
2,229.1
68.4
2,297.5
For fiscal 2018, the impact of adopting IFRS 15 is a decrease to revenue of $6.5 million, an increase to operating profit of $1.8 million and
an increase to finance expense - net of $1.0 million.
While these changes will impact the timing of contract revenue and profit recognition, there will be no change to cash flows from the
contract.
The Company has updated and is finalizing the implementation of revised procedures and controls in order to meet the requirements of
IFRS 15, as well as expanding disclosures which will be required under the new standard in fiscal 2019.
IFRS 16 - Leases
In January 2016, the IASB released IFRS 16 - Leases, which will replace IAS 17 - Leases and related interpretations. The new standard
introduces a single lessee accounting model and eliminates the classification of leases as either operating or finance leases. It requires
the lessee to recognize a right-of-use asset and a lease obligation for all leases. Lessors will continue to classify leases as operating
leases or finance leases as IFRS 16 substantially carries forward the current lessor accounting requirements.
For the Company, IFRS 16 will be effective for the fiscal period beginning on April 1, 2019. The Company is currently evaluating the impact
of the new standard on its consolidated financial statements. Where the Company is the lessee for leases that are considered operating
leases under IAS 17, the adoption of IFRS 16 is expected to result in the recognition of assets and liabilities on the consolidated statement
of financial position. The change to the recognition, measurement and presentation requirements from the adoption of this standard is
expected to result in a decrease of the Company’s operating lease expense and an increase of its finance and depreciation expenses.
IFRIC 23 - Uncertainty over Income Tax Treatments
In June 2017, the IASB released IFRIC 23 - Uncertainty over Income Tax Treatments, which addresses how to determine the taxable profit
(loss), tax bases, unused tax losses, unused tax credits and tax rates, when there is uncertainty over income tax treatments under
IAS 12 - Income Taxes. It specifically considers whether tax treatments should be considered independently or collectively and assumptions
for taxation authorities’ examinations in regards to taxable profit (loss), tax bases, unused tax losses, unused tax credits or tax rates.
For the Company, IFRIC 23 is effective for the fiscal period beginning on April 1, 2019. The Company has completed its assessment and
has concluded that the interpretation has no impact on its consolidated financial statements.
CAE Financial Report 2018 | 71
Notes to the Consolidated Financial Statements
NOTE 3 – BUSINESS COMBINATIONS
Acquisition of a portfolio of training assets
During the second quarter of fiscal 2018, the Company acquired a portfolio of training assets in North America and Europe from a
full-flight simulator leasing business for cash consideration of $24.7 million. With this acquisition, the Company obtained fully operational
full-flight simulators and various customer contracts.
The determination of the fair value of the identifiable assets acquired and liabilities assumed are as follows: $24.7 million of property plant
and equipment, $4.6 million of goodwill, $1.4 million of non-current assets and $6.0 million of non-current liabilities.
Asian Aviation Centre of Excellence Sdn. Bhd.
On November 17, 2017, the Company completed the acquisition of the remaining 50% equity interest in Asian Aviation Centre of Excellence
Sdn. Bhd. (AACE) from AirAsia, for a cash consideration of $114.8 million [US$90 million] and long-term contingent cash consideration
payable of up to US$10 million if certain criteria are met (Note15).
As a result, the Company’s interest in AACE increased from 50% to 100%, obtaining control over AACE’s three training centres located
in Malaysia, Singapore and Vietnam, as well as its 50% joint control of Philippine Academy of Aviation Training, a joint venture training
centre between AACE and Cebu Pacific, located in the Philippines. With this acquisition, the Company owns a customer installed base
of commercial flight simulators and owns assets including full-flight simulators, simulator parts and equipment, facilities and a talented
workforce.
Before the transaction, the Company's 50% ownership interest in AACE was accounted for using the equity method. The net gain resulting
from the remeasurement to fair value of the previously held interest in AACE was included in Other gains – Net in the consolidated income
statement (Note 21).
The preliminary determination of the fair value of the net assets acquired and liabilities assumed arising from the acquisition are as follows:
Current assets(1)
Current liabilities
Property, plant and equipment
Investment in equity accounted investee
Intangible assets
Deferred tax
Non-current liabilities
Fair value of net assets acquired, excluding cash and cash equivalents
Cash and cash equivalents acquired
Total purchase consideration
Fair value of long-term contingent cash consideration payable
Settlement of pre-existing relationship
Fair value of previously held interest in AACE
Total cash consideration
(1) Excluding cash on hand.
$
Total
16.2
(21.3)
103.0
8.4
114.9
(5.3)
(16.8)
$ 199.1
15.1
$ 214.2
(10.7)
(0.9)
(87.8)
$ 114.8
The fair value of the acquired identifiable intangible assets amount to $114.9 million and mainly consists of customer relationships of
$61.6 million and goodwill of $53.0 million (non deductible for tax purposes).
The fair value and the gross contractual amount of the acquired accounts receivable were $14.0 million.
Total acquisition costs incurred during fiscal 2018 relating to AACE were included in Other gains - Net in the consolidated income statement
(Note 21).
The goodwill arising from both acquisitions is attributable to the expansion of CAE's customer installed base of commercial flight simulators,
market capacity and expected synergies from combining operations.
The net assets acquired, including intangibles, are included in the Civil Aviation Training Solutions segment.
72 | CAE Financial Report 2018
NOTE 4 – 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.
Notes to the Consolidated Financial Statements
Details of accounts receivable are as follows:
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 32)
Other receivables
Total accounts receivable
Changes in the allowance for doubtful accounts are as follows:
Allowance for doubtful accounts, beginning of year
Additions
Amounts charged off
Unused amounts reversed
Exchange differences
Allowance for doubtful accounts, end of year
NOTE 5 – INVENTORIES
Work in progress
Raw materials, supplies and manufactured products
The amount of inventories recognized as cost of sales is as follows:
Work in progress
Raw materials, supplies and manufactured products
2018
$ 187.9
2017
$ 207.5
52.1
40.9
15.6
69.9
(20.9)
$ 345.5
116.1
39.5
67.3
$ 568.4
2018
(14.5)
(13.6)
6.7
1.5
(1.0)
(20.9)
$
$
56.8
14.5
13.0
56.4
(14.5)
$ 333.7
105.8
54.0
54.9
$ 548.4
2017
(15.7)
(6.1)
5.4
1.4
0.5
(14.5)
$
$
2018
$ 226.2
149.1
$ 375.3
2017
$ 270.0
146.3
$ 416.3
2018
$ 204.2
106.9
$ 311.1
2017
$ 141.6
131.7
$ 273.3
CAE Financial Report 2018 | 73
Notes to the Consolidated Financial Statements
NOTE 6 – PROPERTY, PLANT AND EQUIPMENT
(amounts in millions)
Net book value at March 31, 2016
Additions
Acquisition of subsidiaries
Disposals
Depreciation
Transfers and others
Exchange differences
Net book value at March 31, 2017
Additions
Acquisition of subsidiaries (Note 3)
Disposals
Depreciation
Transfers and others
Exchange differences
Net book value at March 31, 2018
Cost
Accumulated depreciation
Net book value at March 31, 2017
Cost
Accumulated depreciation
Net book value at March 31, 2018
Buildings
and
Land improvements Simulators
$ 925.9
$ 199.6
24.1
34.6
14.9
—
22.5
1.9
—
(3.1)
(1.3)
—
(68.9)
(15.9)
—
113.8
(1.4)
—
(12.1)
(1.7)
(0.5)
$ 1,012.7
$ 196.1
23.6
27.8
13.3
—
87.0
7.8
—
(18.0)
(0.1)
—
(66.8)
(15.4)
—
114.0
(1.4)
—
29.2
2.5
0.3
$ 1,185.9
$ 202.8
23.9
Buildings
and
Land improvements Simulators
$ 1,427.2
$ 375.4
23.6
(414.5)
(179.3)
—
$ 1,012.7
$ 196.1
23.6
$ 1,683.9
$ 401.1
23.9
(498.0)
(198.3)
—
$ 1,185.9
$ 202.8
23.9
$
$
$
$
$
$
$
$
Machinery Aircraft and
aircraft
engines
22.1
$
41.3
—
(4.7)
(3.6)
—
0.1
55.2
5.6
—
(0.5)
(3.8)
(0.4)
(0.7)
55.4
and
equipment
50.7
15.2
0.4
(0.1)
(17.1)
(0.2)
(0.3)
48.6
16.5
0.4
(0.1)
(18.3)
2.3
0.9
50.3
$
$
$
$
Assets
under
finance
$
Assets
under
lease construction
97.2
116.9
—
—
—
(118.9)
1.1
96.3
110.7
32.5
—
—
(78.0)
2.9
$ 164.4
$ 153.5
—
13.7
(0.2)
(17.3)
(1.6)
2.0
$ 150.1
—
—
(2.2)
(16.5)
(7.1)
(3.1)
$ 121.2
$
Machinery Aircraft and
aircraft
engines
62.2
$
(7.0)
55.2
64.4
(9.0)
55.4
and
equipment
$ 218.9
(170.3)
48.6
$
$ 223.4
(173.1)
50.3
$
$
$
$
Assets
under
finance
$
Assets
under
lease construction
96.3
—
96.3
$
$ 164.4
—
$ 164.4
$ 291.5
(141.4)
$ 150.1
$ 276.1
(154.9)
$ 121.2
Total
$ 1,473.1
222.9
38.5
(9.4)
(122.8)
(8.3)
(11.4)
$ 1,582.6
173.9
127.7
(20.9)
(120.8)
29.4
32.0
$ 1,803.9
Total
$ 2,495.1
(912.5)
$ 1,582.6
$ 2,837.2
(1,033.3)
$ 1,803.9
As at March 31, 2018, the average remaining amortization period for full-flight simulators is 10.6 years (2017 – 10.8 years).
As at March 31, 2018, bank borrowings are collateralized by property, plant and equipment for a value of $121.3 million
(2017– $82.2 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:
No later than 1 year
Later than 1 year and no later than 5 years
Later than 5 years
$
2018
34.7
98.3
20.5
$ 153.5
2017
19.3
47.1
22.9
89.3
$
$
As at March 31, 2018, the net book value of simulators leased out to third parties is $114.8 million (2017 – $56.5 million).
Assets under finance lease, by category, with lease terms ending between April 2018 and October 2036, are as follows:
Simulators
Cost
Accumulated depreciation
Net book value
Buildings
Cost
Accumulated depreciation
Net book value
Total net book value
74 | CAE Financial Report 2018
2018
2017
$ 207.9
(127.9)
80.0
$
$ 222.4
(117.8)
$ 104.6
$
68.2
(27.0)
$
41.2
$ 121.2
$
69.0
(23.5)
$
45.5
$ 150.1
NOTE 7 – INTANGIBLE ASSETS
Notes to the Consolidated Financial Statements
(amounts in millions)
Net book value at March 31, 2016
Additions – internal development
Additions – acquired separately
Acquisition of subsidiaries
Amortization
Transfers and others
Exchange differences
Net book value at March 31, 2017
Additions – internal development
Acquisition of subsidiaries (Note 3)
Disposal and remeasurement of
interest in investment (Note 21)
Amortization
Transfers and others
Exchange differences
Net book value at March 31, 2018
Cost
Accumulated amortization
Net book value at March 31, 2017
Cost
Accumulated amortization
Net book value at March 31, 2018
Capitalized
Goodwill development
costs
(Note 20)
$ 157.2
$ 556.6
37.8
—
—
—
—
4.9
(24.3)
—
(2.6)
—
0.1
(1.5)
$ 168.2
$ 560.0
32.5
—
—
57.6
Customer
relationships
$ 100.7
—
0.2
23.6
(19.6)
(0.4)
1.8
$ 106.3
—
61.6
(10.9)
—
—
18.8
$ 625.5
—
(25.8)
(1.0)
(0.2)
$ 173.7
—
(20.0)
(0.1)
6.7
$ 154.5
Capitalized
development
costs
$ 276.0
(107.8)
$ 168.2
$ 306.8
(133.1)
$ 173.7
Customer
relationships
$ 202.9
(96.6)
$ 106.3
$ 273.8
(119.3)
$ 154.5
Goodwill
$ 560.0
—
$ 560.0
$ 625.5
—
$ 625.5
ERP and
other
software
70.2
$
13.1
—
0.6
(17.3)
(0.8)
—
65.8
14.8
0.3
$
—
(16.2)
0.3
(0.1)
64.9
$
ERP and
other
software
$ 171.4
(105.6)
$
65.8
$ 186.2
(121.3)
64.9
$
$
Other
intangible
assets
27.2
—
0.8
—
(3.1)
7.4
(0.6)
31.7
—
—
$
$
Technology
17.3
—
—
—
(4.8)
(0.8)
0.3
12.0
—
—
$
—
(2.5)
—
(0.3)
9.2
$
—
(3.8)
(1.1)
1.0
27.8
$
$
Other
intangible
assets
55.6
(23.9)
31.7
54.4
(26.6)
27.8
$
$
$
$
Technology
50.7
(38.7)
12.0
49.7
(40.5)
9.2
$
$
$
Total
$ 929.2
50.9
1.0
29.1
(69.1)
2.8
0.1
$ 944.0
47.3
119.5
(10.9)
(68.3)
(1.9)
25.9
$ 1,055.6
Total
$ 1,316.6
(372.6)
$ 944.0
$ 1,496.4
(440.8)
$ 1,055.6
For the year ended March 31, 2018, amortization of $41.8 million (2017 – $44.5 million) has been recorded in cost of sales, $25.0 million
(2017 – $23.2 million) in research and development expenses and $1.5 million (2017 – $1.4 million) in selling, general and administrative
expenses.
As at March 31, 2018, the average remaining amortization period for the capitalized development costs is 5.1 years (2017 – 5.5 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 Financial Report 2018 | 75
Notes to the Consolidated Financial Statements
NOTE 8 – OTHER ASSETS
Restricted cash (Note 28)
Prepaid rent to a portfolio investment
Advances to a portfolio investment (Note 28)
Non-current receivables
Investment tax credits
Other
2018
31.8
31.7
38.1
131.8
225.7
22.9
482.0
$
$
2017
26.0
28.5
39.7
134.8
223.1
19.2
471.3
$
$
The present value of future minimum lease payment receivables, included in the current and non-current receivables is as follows:
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
2018
182.0
71.3
6.2
104.5
$
$
2017
185.0
76.3
5.8
102.9
$
$
Future minimum lease payments from investments in finance lease contracts to be received are as follows:
No later than 1 year
Later than 1 year and no later than 5 years
Later than 5 years
Gross
Investment
13.2
$
48.3
120.5
182.0
$
NOTE 9 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable trade
Accrued liabilities
Amount due to related parties (Note 32)
Current portion of royalty obligations
NOTE 10 – CONTRACTS IN PROGRESS
Contracts in progress: assets
Contracts in progress: liabilities
Contracts in progress: net assets
Details of contracts in progress are as follows:
Aggregate amount of costs incurred plus recognized
profits (less recognized losses) to date
Less: progress billings
Contracts in progress: net assets
2018
Present value of
future minimum
lease payments
10.7
23.4
70.4
104.5
$
$
Gross
Investment
10.0
$
47.1
127.9
185.0
$
2018
306.0
344.0
9.7
9.9
669.6
2018
401.6
(161.8)
239.8
$
$
$
$
2017
Present value of
future minimum
lease payments
7.9
22.5
72.5
102.9
$
$
2017
317.1
353.3
15.3
9.5
695.2
2017
337.5
(191.9)
145.6
$
$
$
$
2018
2017
$
$
2,694.6
2,454.8
239.8
$
$
2,800.1
2,654.5
145.6
Advances received from customers on construction contracts related to work not yet commenced amounts to $15.1 million at
March 31, 2018 (2017 – $20.2 million). Construction contracts revenue recognized in fiscal 2018 amounts to $851.7 million
(2017 – $983.6 million ).
76 | CAE Financial Report 2018
Notes to the Consolidated Financial Statements
NOTE 11 – 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, 2018.
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 between 1 to 10 years. 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.
Changes in provisions are as follows:
Total provisions, beginning of year
Additions
Acquisition of subsidiaries
Amounts used
Unused amounts reversed
Exchange differences
Total provisions, end of year
Less: current portion
Long-term portion
$
Restoration
and removal
7.1
—
1.6
(0.2)
(0.2)
0.3
8.6
1.6
7.0
$
$
NOTE 12 – 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
$
Restructuring
21.2
—
—
(5.6)
—
1.2
16.8
6.8
10.0
$
$
Legal
2.9
1.0
—
(0.8)
—
0.2
3.3
2.6
0.7
$
$
$
$
Warranties
41.2
12.0
—
(15.3)
(0.1)
2.2
40.0
18.9
21.1
$
$
Other
9.9
3.2
0.6
(11.1)
(0.1)
0.4
2.9
2.2
0.7
$
$
$
Total
82.3
16.2
2.2
(33.0)
(0.4)
4.3
71.6
32.1
39.5
$
$
$
2018
$ 1,174.9
86.0
$ 1,260.9
35.2
17.0
$ 1,208.7
2017
$ 1,192.8
62.6
$ 1,255.4
31.2
20.7
$ 1,203.5
(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.
CAE Financial Report 2018 | 77
Notes to the Consolidated Financial Statements
Details of the recourse debt are as follows:
2018
2017
Unsecured 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 rates ranging from
3.59% and 4.15% for remaining $75.0 and US$225.0
$
415.0
$
424.0
Unsecured senior notes of US$60.0 maturing in June 2019 (2017 - US$60.0), interest rate of 7.66% payable semi-
annually in June and December
Unsecured 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
Obligations under finance lease, with various maturities from April 2018 to October 2036, interest rates from 3.49%
to 10.68%
Term loan maturing in June 2018 of US$2.9 and £0.6 (2017 – US$14.6 and £2.8), combined coupon rate of post-
swap debt of 8.01% (2017 – 7.97%)
R&D obligation from a government agency maturing in July 2029 (i)
R&D obligation from a government agency maturing in July 2035 (ii)
Term loan maturing in January 2020 of €1.3 (2017 – €2.0), floating interest rate of EURIBOR plus a spread
Term loans, with maturities between October 2020 and December 2021, of US$14.5 (2017 – US$18.7),
average blended rate of 3.31%
Other debt of US$11.0 maturing March 2024, floating interest of 0.80%
Term loan maturing in December 2021 of US$4.1, average blended rate of 3.28%
Total recourse debt, net amount
75.7
193.4
145.4
5.1
167.7
132.6
1.8
77.9
199.3
173.3
23.6
160.5
92.0
2.7
18.7
14.2
5.3
1,174.9
$
24.9
14.6
—
1,192.8
$
(i) 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 discounted value of the debt recognized amounted to
$167.7 million as at March 31, 2018 (2017 – $160.5 million);
(ii) Represents an interest-bearing long-term obligation with the Government of Canada relative to Project Innovate, an R&D program
announced in fiscal 2014 and extending over five and a half years, for a maximum amount of $250.0 million. The aggregate amount
recognized in fiscal 2018 was $226.5 million (2017 – $169.9 million). The discounted value of the debt recognized amounted to
$132.6 million as at March 31, 2018 (2017 – $92.0 million).
Revolving credit facility
The Company has access to a revolving unsecured term credit facility maturing in September 2022. 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 credit
facility is variable, 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. As at March 31, 2018 and 2017, the Company had no outstanding borrowings under its
revolving credit facility.
Details of the non-recourse debt are as follows:
Term loan maturing in April 2018 of £0.7 (2017 – £0.2), interest rate of 13.50%
Term loan maturing in March 2028 of US$43.5 (2017 – US$47.1), interest rate of LIBOR plus 2.50% (i)
Term loans, with maturities between June 2021 and December 2025, of US $22.3, floating interest rate of
LIBOR plus a fixed spread
Total non-recourse debt, net amount
2018
1.3
55.8
28.9
86.0
$
$
2017
0.4
62.2
—
62.6
$
$
(i) 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:
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
78 | CAE Financial Report 2018
2018
35.6
450.2
631.7
1,117.5
(2.0)
1,115.5
$
$
$
2017
31.9
414.8
638.2
1,084.9
(2.8)
1,082.1
$
$
$
Information on the change in liabilities for which cash flows have been classified as financing activities in the statement of cash flows is
presented below.
Notes to the Consolidated Financial Statements
Balance at beginning of year
Changes from financing cash flows
Proceeds, net of transaction costs
Repayments
Total changes from financing cash flows
Additions through a business combination (Note 3)
Non-cash changes:
Effect of foreign currency exchange differences
Others
Interests
Total non-cash changes
Balance at end of year
Revolving
Unsecured Credit
Facilities
—
$
106.0
(106.0)
—
—
—
—
—
—
—
$
$
$
Long-term
debt
1,082.1
$
37.8
(33.4)
4.4
37.7
(19.2)
(1.3)
11.8
(8.7)
1,115.5
$
$
$
The present value of the obligations under finance lease are as follows:
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
The future minimum lease payments of the obligations under finance lease are as follows:
Finance
Leases
173.3
—
(25.0)
(25.0)
—
(3.7)
—
0.8
(2.9)
145.4
2018
201.8
47.2
9.2
145.4
$
$
$
$
$
$
Total
1,255.4
143.8
(164.4)
(20.6)
37.7
(22.9)
(1.3)
12.6
(11.6)
1,260.9
2017
240.4
58.3
8.8
173.3
$
$
$
$
$
$
No later than 1 year
Later than 1 year and no later than 5 years
Later than 5 years
2018
Gross future Present value of
future minimum
lease payments
17.0
81.0
47.4
145.4
minimum lease
payments
25.8
$
105.8
70.2
201.8
$
$
$
Gross future
minimum lease
payments
30.1
123.3
87.0
240.4
$
$
2017
Present value of
future minimum
lease payments
20.7
92.0
60.6
173.3
$
$
As at March 31, 2018, the Company is in compliance with all of its financial covenants.
NOTE 13 – GOVERNMENT PARTICIPATION
The Company has agreements with various governments whereby the latter contribute a portion of the cost, based on expenditures
incurred by the Company, of certain R&D programs for modeling, simulation and training services technology.
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.
During fiscal 2017, the Company announced its participation in project SimÉco 4.0, an R&D project under the SA2GE program. The aim
of this project is the development of new products or processes which will further contribute to greenhouse gas emissions reductions.
The government of Quebec, through the Ministry of Economy, Science and Innovation, and SA2GE have committed to contribute amounts
up to 50% of eligible costs incurred by the Company to fiscal 2020.
See Notes 1 and 12 for explanations of the royalty obligations and debt.
CAE Financial Report 2018 | 79
Notes to the Consolidated Financial Statements
The following table provides aggregate information regarding net contributions recognized and amounts not yet received for the projects
New Core Markets, Innovate and SimÉco 4.0:
Net outstanding contribution receivable, beginning of year
Contributions
Payments received
Net outstanding contribution receivable, end of year
The aggregate contributions recognized for all programs are as follows:
Contributions credited to capitalized expenditures:
Project New Core Markets
Project Innovate
Project SimÉco 4.0
Contributions credited to income:
Project New Core Markets
Project Innovate
Project SimÉco 4.0
Total contributions:
Project New Core Markets
Project Innovate
Project SimÉco 4.0
$
$
$
$
2018
6.3
29.0
(29.1)
6.2
2017
7.7
33.3
(34.7)
6.3
$
$
2018
2017
1.9
2.8
1.8
2.2
16.8
3.5
4.1
19.6
5.3
$
$
2.3
4.1
1.1
2.4
23.2
0.2
4.7
27.3
1.3
There are no unfulfilled conditions or unfulfilled contingencies attached to these government contributions.
NOTE 14 – EMPLOYEE BENEFITS 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 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, 2018, the unfunded defined benefit
pension obligations are $85.8 million (2017 – $79.1 million) and the Company has issued letters of credit totalling $60.3 million
(2017 – $59.1 million) to collateralize the 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.
The employee benefits obligations are as follows:
Funded defined benefit pension obligations
Fair value of plan assets
Funded defined benefit pension obligations – net
Unfunded defined benefit pension obligations
Employee benefits obligations
80 | CAE Financial Report 2018
2018
$ 612.0
497.2
$ 114.8
85.8
$ 200.6
2017
$ 541.3
462.7
78.6
79.1
$ 157.7
$
The changes in the funded defined benefit pension obligations and the fair value of plan assets are as follows:
Notes to the Consolidated Financial Statements
Pension obligations, beginning of year
Current service cost
Interest cost
Actuarial loss (gain) arising from:
Experience adjustments
Economic assumptions
Demographic assumptions
Employee contributions
Pension benefits paid
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
Administrative costs
Exchange differences
Fair value of plan assets, end of year
Canadian
$ 487.4
22.3
16.7
Foreign
53.9
$
1.5
1.2
0.3
27.1
4.8
6.0
(17.8)
—
$ 546.8
$ 415.9
14.1
3.8
20.1
6.0
(17.8)
(1.2)
—
$ 440.9
0.2
3.0
—
0.2
(1.2)
6.4
65.2
46.8
1.1
2.9
1.1
0.2
(1.2)
(0.2)
5.6
56.3
$
$
$
The changes in the unfunded defined benefit pension obligations are as follows:
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
Pension benefits paid
Exchange differences
Pension obligations, end of year
$
The net pension cost is as follows:
$
Canadian
66.2
2.3
2.0
Foreign
12.9
$
—
0.2
—
0.3
3.8
0.4
(2.8)
—
72.2
—
0.1
(0.3)
—
(0.8)
1.5
13.6
$
Funded plans
Current service cost
Interest cost
Interest income
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
$
$
$
$
$
22.3
16.7
(14.1)
1.2
26.1
2.3
2.0
—
4.3
30.4
$
$
$
$
$
1.5
1.2
(1.1)
0.2
1.8
—
0.2
—
0.2
2.0
2018
Total
$ 541.3
23.8
17.9
0.5
30.1
4.8
6.2
(19.0)
6.4
$ 612.0
$ 462.7
15.2
6.7
21.2
6.2
(19.0)
(1.4)
5.6
$ 497.2
2018
Total
79.1
2.3
2.2
—
0.4
3.5
0.4
(3.6)
1.5
85.8
2018
Total
23.8
17.9
(15.2)
1.4
27.9
2.3
2.2
—
4.5
32.4
$
$
$
$
$
$
$
Canadian
$ 468.9
22.0
16.5
1.4
13.5
(19.1)
5.7
(21.5)
—
$ 487.4
$ 382.9
13.6
19.1
17.2
5.7
(21.5)
(1.1)
—
$ 415.9
$
Foreign
52.3
1.2
1.3
0.3
1.8
0.5
0.2
(1.1)
(2.6)
53.9
46.9
1.1
0.3
1.7
0.2
(1.1)
(0.1)
(2.2)
46.8
$
$
$
Canadian
62.9
$
2.2
1.9
$
Foreign
13.7
—
0.2
—
1.1
1.0
—
(2.9)
—
66.2
$
0.1
—
0.3
—
(0.7)
(0.7)
12.9
$
Canadian
Foreign
$
$
$
$
$
22.0
16.5
(13.6)
1.1
26.0
2.2
1.9
—
4.1
30.1
$
$
$
$
$
1.2
1.3
(1.1)
0.1
1.5
—
0.2
0.1
0.3
1.8
2017
Total
$ 521.2
23.2
17.8
1.7
15.3
(18.6)
5.9
(22.6)
(2.6)
$ 541.3
$ 429.8
14.7
19.4
18.9
5.9
(22.6)
(1.2)
(2.2)
$ 462.7
2017
Total
76.6
2.2
2.1
0.1
1.1
1.3
—
(3.6)
(0.7)
79.1
2017
Total
23.2
17.8
(14.7)
1.2
27.5
2.2
2.1
0.1
4.4
31.9
$
$
$
$
$
$
$
CAE Financial Report 2018 | 81
Notes to the Consolidated Financial Statements
For the year ended March 31, 2018, pension costs of $15.6 million (2017 – $12.5 million) have been charged in cost of sales, $5.9 million
(2017 – $4.9 million) in research and development expenses, $4.7 million (2017 – $8.2 million) in selling, general and administrative
expenses, $4.9 million (2017 – $5.2 million) in finance expense and $1.3 million (2017 – $1.1 million) were capitalized.
The fair value of the plan assets, by major categories, are as follows:
(amounts in millions)
Canadian plans
Equity funds
Canadian
Foreign
Bond funds
Government
Corporate
Cash and cash equivalents
Other
Total Canadian plans
Foreign plans
Insured annuities
Equity instruments
Debt instruments
Corporate
Other
Other
Total Foreign plans
Total plans
Quoted
Unquoted
$
$
$
$
$
—
—
—
—
—
—
—
—
2.6
3.1
—
—
5.7
5.7
$
52.2
191.8
100.1
66.4
4.4
26.0
$ 440.9
$
50.1
—
—
—
0.5
$
50.6
$ 491.5
2018
Total
$
52.2
191.8
100.1
66.4
4.4
26.0
$ 440.9
$
50.1
2.6
3.1
—
0.5
$
56.3
$ 497.2
Quoted
Unquoted
$
$
$
$
$
—
—
—
—
—
—
—
—
2.4
1.5
1.2
—
5.1
5.1
$ 110.0
122.3
116.4
34.6
—
32.6
$ 415.9
$
41.3
—
—
—
0.4
$
41.7
$ 457.6
2017
Total
$ 110.0
122.3
116.4
34.6
—
32.6
$ 415.9
$
41.3
2.4
1.5
1.2
0.4
$
46.8
$ 462.7
As at March 31, 2018 and March 31, 2017, 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
2018
3.48%
3.66%
3.78%
3.50%
Canadian
2017
3.78%
3.50%
3.96%
3.50%
2018
1.88%
2.86%
2.05%
2.82%
Foreign
2017
2.05%
2.82%
2.26%
2.86%
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:
Male
Life expectancy over 65 for a member
Female
at age 65
24.0
24.8
24.4
23.9
23.3
25.5
25.0
at age 45
25.4
26.1
25.7
26.3
25.8
26.8
26.9
at age 65
21.5
23.1
21.9
21.7
19.3
22.2
22.6
As at March 31, 2018
(in years)
Country
Canada
Canada
Canada
Netherlands
Germany
Norway
United Kingdom
Mortality table
CPM private tables MI 2017 (employees)
CPM private tables MI 2017 (designated executives)
CPM private tables MI 2017 (CMAT)
AG2016
Heubeck RT2005G
K2013
S1PA
at age 45
23.0
24.6
23.3
23.9
21.9
23.1
24.4
82 | CAE Financial Report 2018
Notes to the Consolidated Financial Statements
As at March 31, 2017
(in years)
Country
Canada
Canada
Canada
Netherlands
Germany
Norway
United Kingdom
Mortality table
CPM private tables (employees)
CPM private tables (designated executives)
CPM private tables (CMAT)
AG2016
Heubeck RT2005G
K2013
S1PA
at age 45
22.4
23.9
22.7
23.8
21.8
22.8
24.3
Life expectancy over 65 for a member
Female
at age 65
23.7
24.4
24.0
23.8
23.2
25.4
24.9
at age 45
24.7
25.4
25.0
26.2
25.7
26.5
26.8
Male
at age 65
21.3
22.9
21.6
21.5
19.3
22.1
22.6
The weighted average duration of the defined benefit obligation is 19.15 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, 2018:
Discount rate:
Increase
Decrease
Compensation rate:
Increase
Decrease
Funded plans
Canadian
Foreign
Canadian
Unfunded plans
Foreign
Total
$
(24.9)
26.7
$
7.1
(6.7)
(3.2)
3.5
0.2
(0.2)
$
(2.4)
2.6
0.5
(0.5)
$
(0.4)
0.4
$
(30.9)
33.2
—
—
7.8
(7.4)
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
employer contributions and expected benefits paid for the next fiscal year are as follows:
Funded plans - Expected contributions in fiscal 2019
Unfunded plans - Expected benefits paid in fiscal 2019
Canadian
18.6
$
2.6
$
Foreign
1.8
0.7
$
$
Total
20.4
3.3
$
$
NOTE 15 – DEFERRED GAINS AND OTHER NON-CURRENT LIABILITIES
Deferred gains on sale and leasebacks (1)
Deferred revenue
Share-based compensation obligations (Note 23)
Contingent consideration arising on business combinations
Interest payable
Purchase options
Other
(1) The related amortization for the year amounted to $3.7 million (2017 – $3.7 million).
$
2018
19.6
99.7
75.4
11.0
9.5
6.2
8.5
$ 229.9
$
2017
23.1
116.9
62.5
—
5.1
1.6
8.6
$ 217.8
CAE Financial Report 2018 | 83
Notes to the Consolidated Financial Statements
NOTE 16 – INCOME TAXES
Income tax expense
A reconciliation of income taxes at Canadian statutory rates with the reported income taxes is as follows:
Earnings before income taxes
Canadian statutory income tax rates
Income taxes at Canadian statutory rates
Difference between Canadian and Foreign statutory rates
Unrecognized tax benefits
Tax benefit of operating losses not previously recognized
Non-taxable capital 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
Gain resulting from the remeasurement to fair value of the previously held interest in AACE
Other tax benefits not previously recognized
Income tax expense
2018
$ 384.8
26.85%
$ 103.3
(14.3)
3.1
(8.4)
(2.0)
(10.4)
4.6
4.4
(32.8)
(1.2)
(6.9)
(10.3)
$ 29.1
2017
$ 292.3
26.95%
$ 78.8
(10.6)
10.3
(7.7)
(1.3)
(12.3)
0.7
(13.0)
0.4
(0.6)
—
(9.5)
$ 35.2
The applicable statutory tax rate is 26.85% in fiscal 2018 (2017 – 26.95%). The Company's applicable tax rate is the Canadian combined
rates applicable in the jurisdictions in which the Company operates. The decrease is due to a change in the jurisdictions it operates.
The US tax reform introduces other important changes to US corporate income tax laws that may significantly affect CAE in future years.
Under the Tax Cuts and Jobs Act, which was enacted on December 22, 2017, the U.S. statutory federal income tax rate was reduced to
21% from the previous rate of 35%. The impact of the change in tax rate resulted in a reduction of $33.1 million of the net deferred tax
liability position at the time of enactment.
Significant components of the provision for the income tax expense are as follows:
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
Income tax recognized in OCI
2018
53.8
11.0
(18.7)
(32.8)
15.8
29.1
$
$
2017
$
21.0
(12.2)
(17.2)
0.4
43.2
35.2
$
During fiscal 2018, a deferred tax recovery of $11.7 million (2017 – deferred tax expense of $7.7 million) and current income tax expense
of $0.6 million (2017 – nil) was recorded in OCI.
84 | CAE Financial Report 2018
Deferred tax assets and liabilities
Movements in temporary differences during fiscal year 2018 are as follows:
Notes to the Consolidated Financial Statements
Balance
$
beginning
of year
50.5
(84.1)
48.5
25.8
6.0
Recognized
in income
(5.4)
$
12.5
(6.4)
(6.1)
(2.8)
$
Recognized
in OCI
—
—
—
—
—
20.2
(60.0)
(148.9)
(16.0)
(3.0)
(27.4)
39.6
17.2
(4.6)
33.1
1.0
1.3
0.1
3.1
—
—
—
1.3
1.5
—
8.9
(45.4)
(1.6)
$ (195.8)
(7.1)
(0.2)
35.7
$
—
—
11.7
$
$
Recognized in
discontinued
operation and
transferred
from assets Acquisition of
subsidiaries
held for sale
—
—
(14.5)
—
5.9
—
0.3
—
—
—
$
$
—
—
—
—
—
—
—
—
—
—
—
—
4.5
(0.1)
—
—
—
—
—
(3.9)
$
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 participation
Employee benefit plans
Percentage-of-completion versus
completed contract
Other
Net deferred income tax (liabilities) assets
Movements in temporary differences during fiscal year 2017 are as follows:
Balance
$
beginning
of year
49.4
(74.1)
34.3
25.4
5.7
Recognized
in income
0.6
$
(3.0)
14.0
(10.2)
0.2
$
Recognized
in OCI
—
—
—
—
—
Recognized in
discontinued
operation and
transferred
from assets Acquisition of
subsidiaries
held for sale
—
0.4
(7.1)
—
—
—
10.5
—
—
—
$
$
24.1
(56.7)
(131.6)
(16.1)
(1.0)
(24.9)
41.7
(3.9)
(3.3)
(17.5)
(1.3)
2.1
(2.5)
3.1
(40.6)
(1.9)
$ (166.3)
(5.0)
0.3
(26.4)
$
$
—
—
—
1.5
(4.1)
—
(5.1)
—
—
(7.7)
—
—
—
—
—
—
—
—
—
0.4
$
—
—
3.3
—
—
—
—
—
—
6.7
$
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 participation
Employee benefit plans
Percentage-of-completion versus
completed contract
Other
Net deferred income tax (liabilities) assets
$
Exchange
differences
0.6
(1.7)
(0.4)
0.3
(0.1)
$
Balance
end of year
45.7
(87.8)
47.6
20.3
3.1
—
—
6.7
(0.1)
(0.1)
—
—
(0.1)
—
5.1
$
37.4
(64.6)
(104.6)
(13.9)
(0.3)
(27.3)
51.6
(52.6)
(1.8)
$ (147.2)
$
Exchange
differences
0.1
0.1
0.2
0.1
0.1
$
Balance
end of year
50.5
(84.1)
48.5
25.8
6.0
—
—
(3.1)
(0.1)
—
—
(0.1)
0.2
—
(2.5)
$
20.2
(60.0)
(148.9)
(16.0)
(3.0)
(27.4)
39.6
(45.4)
(1.6)
$ (195.8)
As at March 31, 2018, taxable temporary differences of $2,113.6 million (2017 – $1,990.4 million) related to investments in 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.
CAE Financial Report 2018 | 85
Notes to the Consolidated Financial Statements
The non-capital losses incurred in various jurisdictions expire as follows:
Expiry date
2019
2020
2021
2022
2023
2024
2025 - 2038
No expiry date
Unrecognized
Recognized
$
1.8
2.4
0.5
1.1
6.2
4.9
45.4
67.1
$
0.2
4.5
3.8
—
—
—
41.5
144.6
$ 129.4
$ 194.6
As at March 31, 2018, the Company has $243.5 million (2017 – $292.6 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 $0.9 million
(2017 – $0.9 million) of accumulated capital losses carried forward for which deferred tax assets have not been recognized. These capital
losses can be carried forward indefinitely.
NOTE 17 – 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.
Repurchase and cancellation of common shares
On February 9, 2018, the Company announced the renewal of the normal course issuer bid (NCIB) to purchase up to 5,349,804 of its
common shares. The NCIB began on February 23, 2018 and will end on February 22, 2019 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.
In fiscal 2018, the Company repurchased and cancelled a total of 2,081,200 common shares under the previous and current NCIB
(2017 – 2,490,900), at a weighted average price of $21.53 per common share (2017 – $16.73), for a total consideration of $44.8 million
(2017 – $41.7 million). An excess of $39.9 million (2017 – $36.1 million) of the shares’ repurchase value over their carrying amount was
charged to retained earnings as share repurchase premiums. Included in the above amount were 600,000 common shares that were
repurchased under a private agreement with a third-party seller at a discount to the prevailing market price of the Company's common
shares at the time of purchase.
Issued shares
A reconciliation of the issued and outstanding common shares of the Company is presented in the consolidated statement of changes
in equity. As at March 31, 2018, the number of shares issued and that are fully paid amount to 267,738,530 (2017 – 268,397,224).
Earnings per share computation
The denominators for the basic and diluted earnings per share computations are as follows:
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
2018
268,235,077
1,219,713
269,454,790
2017
268,693,589
903,690
269,597,279
As at March 31, 2018, options to acquire 1,941,200 common shares (2017 – 46,700) have been excluded from the above calculation
since their inclusion would have had an anti-dilutive effect.
Dividends
The dividends declared for fiscal 2018 were $93.9 million or $0.35 per share (2017 – $84.6 million or $0.315 per share).
86 | CAE Financial Report 2018
NOTE 18 – ACCUMULATED OTHER COMPREHENSIVE INCOME
Notes to the Consolidated Financial Statements
Balances, beginning of year
OCI
Balances, end of year
Foreign currency
translation
2018
$ 148.6
81.7
$ 230.3
2017
$ 180.0
(31.4)
$ 148.6
$
$
Net changes in
Net changes in
available-for-sale
cash flow hedges financial instruments
2017
2018
0.7
(4.3) $
(0.2)
(0.5)
0.5
(4.8) $
2017
(15.6) $
11.3
(4.3) $
2018
0.5
0.1
0.6
$
$
Share in the other
comprehensive
income of equity
accounted investees
2017
55.6
(6.7)
48.9
2018
48.9
(12.7)
36.2
$
$
$
$
2018
$ 193.7
68.6
$ 262.3
Total
2017
$ 220.7
(27.0)
$ 193.7
NOTE 19 – 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 23)
Post-employment benefits – defined benefit plans (Note 14)
Post-employment benefits – defined contribution plans
Termination benefits
Total employee compensation expense(1)
(1) Certain members of key management may have employment agreements with clauses for payment in case of termination without cause and payment in case of
termination of employment following a change in control. All such employment agreements are for an indeterminate term.
2018
$ 908.2
46.9
31.1
12.8
5.6
$ 1,004.6
2017
$ 838.4
40.4
30.8
12.4
11.2
$ 933.2
NOTE 20 – IMPAIRMENT OF NON-FINANCIAL ASSETS
The carrying amount of goodwill allocated to the Company's CGUs per operating segment is as follows:
Net book value at March 31, 2016
Acquisition of subsidiaries
Exchange differences
Net book value at March 31, 2017
Acquisition of subsidiaries (Note 3)
Disposal and remeasurement of interest in investment (Note 21)
Exchange differences
Net book value at March 31, 2018
Civil Aviation
Training Solutions
$ 197.6
3.3
(6.9)
$ 194.0
57.6
(10.9)
26.1
$ 266.8
Defence
and Security
$ 216.9
1.6
2.0
$ 220.5
—
—
(3.0)
$ 217.5
Healthcare
$ 142.1
—
3.4
$ 145.5
—
—
(4.3)
$ 141.2
Total
$ 556.6
4.9
(1.5)
$ 560.0
57.6
(10.9)
18.8
$ 625.5
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 performed the annual impairment review for goodwill during fiscal 2018 and the estimated recoverable exceeded the
carrying amounts of the CGUs. As a result, there was no impairment identified during the year.
The Company determined the recoverable amount of the Civil Aviation Training Solutions, Defense and Security and Healthcare CGU's
based on value-in-use calculations.The value-in-use is calculated using estimated cash flows derived from the Company's five year
strategic plan approved by the Board of Directors. Cash flows subsequent to the five-year period were extrapolated using a constant
growth rate of 2% to 3%. The post-tax discount rates used to calculate the recoverable amounts reflect each CGUs’ specific risks and
range from 6.5% to 9%.
CAE Financial Report 2018 | 87
Notes to the Consolidated Financial Statements
NOTE 21 – OTHER GAINS – NET
Disposal of property, plant and equipment
Net foreign exchange gains
Net loss on litigation
Disposal of interest in investment
Remeasurement of investment, net of reorganization and others costs
Other
Other gains – net
2018
9.7
2.5
—
14.3
12.2
(1.3)
37.4
$
$
2017
7.7
0.1
(1.1)
—
—
6.0
12.7
$
$
Disposal of interest in investment
During the second quarter of fiscal 2018, the Company disposed of its 49% interest in Zhuhai Xiang Yi Aviation Technology Company
Limited, an equity accounted investee, for a net cash proceeds of $114.0 million. Upon disposal of this investment, $6.3 million of goodwill
was derecognized and an impairment of $7.0 million was recognized with respect to a related investment in an equity account investee.
The Company realized a net gain on disposal of $14.3 million.
Remeasurement of investment and reorganization costs
During the third quarter, the Company’s interest in AACE increased from 50% to 100%, obtaining control of AACE (Note 3). Before the
transaction, the Company’s 50% ownership interest in AACE was accounted for using the equity method. The remeasurement to fair value
of the previously held interest in AACE generated a gain of $34.7 million. In addition, $4.6 million of goodwill was derecognized, costs of
$8.5 million, including acquisition costs of $1.5 million and a write-down of assets for $9.4 million were incurred. Accordingly, the Company
recognized a net gain upon remeasurement of $12.2 million. Also in the quarter, reorganization and other costs of $8.2 million were
incurred resulting in a gain upon remeasurement net of overall costs incurred in the amount of $4.0 million.
NOTE 22 – FINANCE EXPENSE – NET
Finance expense:
Long-term debt (other than finance leases)
Finance leases
Royalty obligations
Employee benefits obligations (Note 14)
Financing cost amortization
Other
Borrowing costs capitalized (1)
Finance expense
Finance income:
Loans and finance lease contracts
Other
$
$
$
Finance income
$
Finance expense – net
$
(1) The average capitalization rate used during fiscal 2018 to determine the amount of borrowing costs eligible for capitalization was 4.33% (2017 – 4.37%).
$
$
2018
2017
53.5
9.0
11.9
4.9
1.4
12.9
(3.7)
89.9
(9.9)
(3.8)
(13.7)
76.2
$
$
$
53.7
10.5
10.6
5.2
1.5
5.7
(3.2)
84.0
(8.2)
(3.4)
(11.6)
72.4
88 | CAE Financial Report 2018
Notes to the Consolidated Financial Statements
NOTE 23 – SHARE-BASED PAYMENTS
The Company’s share-based payment plans consist of two categories: an equity-settled share-based payment plan comprised of the
Employee Stock Option Plan (ESOP); and cash-settled share-based payments plans that include the Employee Stock Purchase Plan
(ESPP), the Executive Deferred Share Unit (EDSU) plan, the Deferred Share Unit (DSU) plan, the Long-Term Incentive Time Based plans
and the Long-Term Incentive Performance Based plans. The Long-Term Incentive – Deferred Share Unit (LTI-DSU) plan and the
Long-Term Incentive – Time Based Restricted Share Unit (LTI-TB RSU) plan are time based plans while the Long-Term Incentive –
Restricted Share Unit (LTI-RSU) plan and the Long-Term Incentive – Performance Share Unit (LTI-PSU) plan are performance based
plans.
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:
Cash-settled share-based compensation:
ESPP
DSU
LTI-DSU
LTI-TB RSU
LTI-PSU
Total cash-settled share-based compensation
Equity-settled share-based compensation:
ESOP
Total equity-settled share-based compensation
Total share-based compensation cost
Compensation
cost
2017
Recognized in the consolidated
statement of financial position
2017
2018
$
$
$
$
$
6.8
5.5
7.2
4.5
23.5
47.5
3.7
3.7
51.2
$
$
$
$
$
—
(16.2)
(27.1)
(10.0)
(40.7)
(94.0)
(21.3)
(21.3)
(115.3)
$
$
$
$
$
—
(14.1)
(23.9)
(8.1)
(31.1)
(77.2)
(19.4)
(19.4)
(96.6)
2018
7.4
5.4
4.8
5.2
27.6
50.4
4.9
4.9
55.3
$
$
$
$
$
For the year ended March 31, 2018, share-based compensation costs of $0.4 million (2017 – $0.3 million) were capitalized.
The Company entered into equity swap agreements with four 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 28 and
Note 29). The recovery recognized in fiscal 2018 amounts to $8.0 million (2017 – $10.5 million).
The share-based payment plans are described below. There have been no plan cancellations during fiscal 2018 and fiscal 2017.
Employee Stock Option Plan
Under the Company’s long-term incentive program, options may be granted to key employees to purchase common shares of the Company
at a subscription price of 100% of the market value at the date of the grant. Market value is determined as the weighted average price of
the common shares on the Toronto Stock Exchange (TSX) of the five days of trading prior to the effective date of the grant.
As at March 31, 2018, a total of 14,677,714 common shares (2017 – 15,924,289) remained authorized for issuance under the Employee
Stock Option Plan (ESOP). The options are exercisable during a period not to exceed seven years (six years for options issued before
March 31, 2011), and are not exercisable during the first 12 months after the date of the grant. The right to exercise all of the options vests
over a period of four years of continuous employment from the grant date. Upon termination of employment at retirement, unvested options
continue to vest following the retiree’s retirement date, subject to the four year vesting period. However, if there is a change of control of
the Company, the options outstanding become immediately exercisable by option holders. Options are adjusted proportionately for any
stock dividends or stock splits attributed to the common shares of the Company.
Outstanding options are as follows:
Options outstanding, beginning of year
Granted
Exercised
Forfeited
Options outstanding, end of year
Options exercisable, end of year
2018
Weighted
Number average exercise
price (CAD$)
$ 14.51
22.15
12.58
18.52
$ 17.31
$ 14.12
of options
5,541,625
2,044,900
(1,246,575)
(184,425)
6,155,525
1,744,125
Number
of options
4,834,725
2,073,600
(1,029,725)
(336,975)
5,541,625
1,483,450
$
2017
Weighted
average exercise
price (CAD$)
13.30
16.19
12.25
14.50
14.51
12.57
$
$
CAE Financial Report 2018 | 89
Notes to the Consolidated Financial Statements
Summarized information about the Company's ESOP as at March 31, 2018 is as follows:
Range of
exercise prices
(CAD$)
$9.60 to $11.02
$12.65 to $14.66
$15.00 to $16.15
$20.86 to $22.26
Total
Number of
options
Weighted
average remaining
outstanding contractual life (years)
1.87
3.06
4.78
6.20
4.81
415,900
813,625
2,947,000
1,979,000
6,155,525
Options Outstanding
Weighted
average exercise
price (CAD$)
$ 10.76
14.60
15.74
22.15
$ 17.31
Number of
options
exercisable
415,900
529,525
798,700
—
1,744,125
Options Exercisable
Weighted
average exercise
price (CAD$)
$ 10.76
14.58
15.58
—
$ 14.12
The weighted average market share price for share options exercised in 2018 was $22.15 (2017 – $17.14).
For the year ended March 31, 2018, compensation cost for CAE’s stock options of $4.9 million (2017 – $3.7 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:
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
2018
2017
$ 22.14
$ 22.15
1.45%
18.39%
0.86%
4 years
2.75
$
$ 16.43
$ 16.19
1.83%
19.65%
0.75%
4 years
$ 2.20
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 contribute $1 for every $2 of employee contributions, up to a maximum of 3% of the employee’s base
salary.
Deferred Share Unit Plans
In fiscal 2017, CAE adopted an Executive Deferred Share Unit (EDSU) plan. The purpose of the plan is to attract and retain talented
individuals to serve as officers and executives of the Company and to promote a greater alignment of interests between the executives
and shareholders of CAE. Under this plan, Canadian and U.S.-based executives can elect to defer a portion or entire short-term incentive
payment to the EDSU plan on an annual basis. Such deferred short-term incentive amount is converted to EDSUs based on the volume
weighted average price of the common shares on the TSX during the last five trading days prior to the date on which such incentive
compensation becomes payable to the executive. The EDSU is equal in value to one common share of CAE. The units also accrue
dividend equivalents payable in additional units in an amount equal to dividends paid on CAE common shares. EDSUs mature upon
termination of employment, whereupon holders are entitled to receive a lump sum cash payment equal to the number of EDSUs credited
to their account as of that date multiplied the volume weighted average price of the common shares on the TSX during the last five trading
days prior to the settlement date.
The Company also maintains a Deferred Share Unit (DSU) plan for executives, under which units are no longer granted, whereby an
executive elected to receive cash incentive compensation in the form of deferred share units. A DSU is equal in value to one common
share of the Company. The units were 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, determined as 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 settlement
date, of the equivalent number of common shares, net of withholdings.
90 | CAE Financial Report 2018
Notes to the Consolidated Financial Statements
The Company also maintains a DSU plan for non-employee directors. A non-employee director holding less than the minimum required
holdings of common shares of the Company receives the Board retainer and attendance fees in the form of deferred share units. Minimum
required 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 required
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.
DSUs outstanding are as follows:
DSUs outstanding, beginning of year
Units granted
Units redeemed
Dividends paid in units
DSUs outstanding, end of year
DSUs vested, end of the year
2018
691,698
99,632
(143,560)
27,327
675,097
675,097
2017
701,205
86,599
(107,524)
11,418
691,698
691,698
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.
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 certain participants in the United States, 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.
Long-Term Incentive Time Based units outstanding under all plans are as follows:
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
2018
1,193,723
—
(1,768)
(74,783)
17,569
1,134,741
1,128,464
LTI-DSU
2017
1,342,075
—
(13,246)
(156,072)
20,966
1,193,723
1,177,529
2018
551,210
179,440
(21,640)
(155,087)
—
553,923
420,247
LTI-TB RSU
2017
385,880
211,030
(42,090)
(3,610)
—
551,210
400,183
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.
CAE Financial Report 2018 | 91
Notes to the Consolidated Financial Statements
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. Effective fiscal 2015 this
plan was replaced by the LTI-PSU plan.
All award under the LTI-RSU plan were paid out and there are no awards outstanding.
Long-Term Incentive – Performance Share Unit Plan (LTI-PSU)
Eligible participants of the LTI-PSU 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 factor which ranges from 0% to 200% based on the attainment of performance
criteria set out pursuant to the plan. In relation to 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 for incentives issued in fiscal years 2016, and will vest by one-sixth after year one, one-third after year two and one-
half after year three for incentives issued in fiscal 2017 and 2018 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.
Long-Term Incentive Performance Based units outstanding under all plans are as follows:
Units outstanding, beginning of year
Units granted
Units cancelled
Units redeemed
Units outstanding, end of year
Units vested, end of year
2018
—
—
—
—
—
—
LTI-RSU
2017
378,920
82,731
(5,698)
(455,953)
—
—
2018
1,308,063
819,566
(50,376)
(846,537)
1,230,716
933,977
LTI-PSU
2017
934,500
490,270
(108,727)
(7,980)
1,308,063
956,057
92 | CAE Financial Report 2018
NOTE 24 – SUPPLEMENTARY CASH FLOWS INFORMATION
Changes in non-cash working capital are as follows:
Notes to the Consolidated Financial Statements
Cash provided by (used in) non-cash working capital:
Accounts receivable
Contracts in progress: assets
Inventories
Prepayments
Income taxes recoverable
Accounts payable and accrued liabilities
Provisions
Income taxes payable
Deferred revenue
Contracts in progress: liabilities
Changes in non-cash working capital
NOTE 25 – CONTINGENCIES
2018
2017
$
$
0.3
(58.5)
2.2
19.7
(6.5)
(58.2)
(21.0)
11.1
99.0
(31.2)
(43.1)
$
$
(35.9)
(3.7)
(55.5)
1.2
4.4
16.2
(2.1)
(1.0)
79.2
26.3
29.1
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 26 – COMMITMENTS
The future aggregate minimum lease payments under non-cancellable operating leases are as follows:
No later than 1 year
Later than 1 year and no later than 5 years
Later than 5 years
Rental expenses recognized in fiscal 2018 amounts to $68.2 million (2017 – $72.5 million).
Contractual purchase commitments
The total contractual purchase commitments are as follows:
No later than 1 year
Later than 1 year and no later than 5 years
Later than 5 years
$
2018
44.4
118.9
76.7
$ 240.0
$
2017
55.3
125.6
82.0
$ 262.9
2018
$ 132.0
90.7
0.5
$ 223.2
2017
$ 118.4
119.0
1.7
$ 239.1
CAE Financial Report 2018 | 93
Notes to the Consolidated Financial Statements
NOTE 27 – 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, issue new shares or debt, 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:
Total debt (Note 12)
Less: cash and cash equivalents
Net debt
Equity
Total net debt plus equity
Net debt: equity
2018
$ 1,260.9
(611.5)
$ 649.4
2,366.6
$ 3,016.0
22:78
2017
$ 1,255.4
(504.7)
$ 750.7
2,081.0
$ 2,831.7
27:73
The Company has certain debt agreements which require the maintenance of a certain level of capital.
NOTE 28 – 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. Counterparty credit risk and the Company’s own credit risk are taken into account in estimating the fair
value of 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 cash and cash equivalents, 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 and is calculated as the present value of the estimated future cash flows using an appropriate interest rate yield curve
and forward foreign exchange rate. Assumptions are based on market conditions prevailing at each reporting date. The fair value of
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 risks and remaining maturities;
(v) The fair value of 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 risks and remaining maturities;
(vi) The fair value of the contingent considerations arising on business combinations are based on the estimated amount and timing of
projected cash flows, the probability of the achievement of the criteria on which the contingency is based and the risk-adjusted
discount rate used to present value the probability-weighted cash flows.
94 | CAE Financial Report 2018
Notes to the Consolidated Financial Statements
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 are not based on observable market data (unobservable inputs).
Each type of fair value is categorized based on the lowest level input that is significant to the fair value measurement in its entirety.
The carrying values and fair values of financial instruments, by class, are as follows at March 31, 2018 and 2017:
Financial assets (liabilities) carried at FVTPL(1)
Cash and cash equivalents
Restricted cash
Embedded foreign currency derivatives
Equity swap agreements
Forward foreign currency contracts
Contingent consideration arising on business combinations
Derivatives assets (liabilities) designated in a hedge relationship
Foreign currency swap agreements
Forward foreign currency contracts
Interest Rate Swap Agreements
Financial assets classified as loans and receivables
Accounts receivable(2)
Contracts in progress: assets
Investment in finance leases
Advances to a portfolio investment
Other assets(3)
Financial assets available-for-sale(4)
Financial liabilities carried at amortized cost
Accounts payable and accrued liabilities(5)
Total long-term debt(6)
Other non-current liabilities(7)
Level
Carrying Value
Total
2018
Fair value
Total
Carrying Value
Total
2017
Fair value
Total
Level 1
Level 1
Level 2
Level 2
Level 2
Level 3
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 3
Level 2
Level 2
Level 2
$
$
611.5
31.8
0.9
1.5
(2.1)
(11.0)
10.6
(8.7)
0.1
532.5
401.6
93.8
38.1
30.8
1.5
$
611.5
31.8
0.9
1.5
(2.1)
(11.0)
10.6
(8.7)
0.1
532.5
401.6
101.4
38.4
30.8
1.5
$
504.7
26.0
1.8
3.0
(2.4)
(0.1)
16.4
0.8
(0.4)
526.4
337.5
95.0
39.7
32.9
1.4
504.7
26.0
1.8
3.0
(2.4)
(0.1)
16.4
0.8
(0.4)
526.4
337.5
109.8
40.6
32.9
1.4
(588.4)
(1,262.9)
(156.5)
(274.9)
$
(588.4)
(1,322.8)
(177.4)
(347.8)
$
(615.0)
(1,258.2)
(146.5)
(437.0)
$
(615.0)
(1,340.3)
(169.0)
(525.9)
$
(1) FVTPL: Fair value through profit and loss.
(2) Includes trade receivables, accrued receivables and certain other receivables.
(3) Includes non-current receivables and certain other non-current assets.
(4) Represent the Company's portfolio investment.
(5) Includes trade accounts payable, accrued liabilities, interest payable, certain payroll-related liabilities and current royalty obligations.
(6) The carrying value excludes transaction costs.
(7) Includes non-current royalty obligations and other non-current liabilities.
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.
Change in level 3 financial instruments are as follows:
Balance, beginning of year
Total realized and unrealized (losses) gain:
Included in income
Included in other comprehensive income
Issued and settled
Balance, end of year
2018
1.3
(0.3)
0.1
(10.6)
(9.5)
$
$
CAE Financial Report 2018 | 95
Notes to the Consolidated Financial Statements
NOTE 29 – 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 4 and Note 28 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 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$550.0 million
(2017 – US$ 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 interests in certain of its accounts receivable for an amount of up to US$300.0 million
(2017 – US$150.0 million) (current financial assets program). As at March 31, 2018, the Canadian dollar equivalent of $168.3 million
(2017 – $141.6 million) of specific accounts receivable were sold to a financial institution pursuant to these agreements. Proceeds were
net of $2.4 million in fees (2017 – $1.2 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:
96 | CAE Financial Report 2018
Notes to the Consolidated Financial Statements
Carrying Contractual
Amount Cash Flows
0-12
Months
13-24
Months
25-36
Months
37-48
Months
49-60
Months Thereafter
$ 588.4
1,262.9
167.5
$ 2,018.8
$ 588.4
1,643.5
422.7
$ 2,654.6
$ 588.4
88.3
—
$ 676.7
$
— $
— $
— $
— $
262.1
18.8
$ 280.9
91.6
18.6
$ 110.2
212.2
43.0
$ 255.2
75.8
30.9
$ 106.7
—
913.5
311.4
$ 1,224.9
As at March 31, 2018
Non-derivative financial
liabilities
Accounts payable
and accrued liabilities (1)
Total long-term debt (2)
Other non-current liabilities (3)
Derivative financial
instruments
Forward foreign
currency contracts (4)
$
10.8
Outflow
Inflow
Swap derivatives on total
long-term debt (5)
Embedded foreign currency
derivatives (6)
Equity swap agreement
As at March 31, 2017
Non-derivative financial
liabilities
Accounts payable and
accrued liabilities (1)
Total long-term debt (2)
Other non-current liabilities (3)
Derivative financial
instruments
Forward foreign
$ 1,351.4
(1,339.0)
$ 1,146.5
(1,136.7)
$ 162.0
(160.2)
$
22.4
(22.1)
$
12.8
(12.5)
$
$
6.7
(6.4)
1.0
(1.1)
(10.7)
(12.7)
(2.2)
(1.8)
(1.8)
(1.8)
(1.7)
(3.4)
(0.9)
(1.5)
(2.3)
$
$ 2,016.5
(0.9)
(1.5)
(2.7)
$
$ 2,651.9
(0.9)
(1.5)
5.2
$
$ 681.9
—
—
— $
—
—
(1.5)
$ 108.7
$
$ 280.9
—
—
(1.5)
$
$ 253.7
—
—
(1.4)
$
$ 105.3
—
—
(3.5)
$
$ 1,221.4
Carrying Contractual
Amount Cash Flows
0-12
Months
13-24
Months
25-36
Months
37-48
Months
49-60
Months
Thereafter
$ 615.0
1,258.2
146.6
$ 2,019.8
$ 615.0
1,683.1
393.3
$ 2,691.4
$ 615.0
99.3
—
$ 714.3
$
$
— $
— $
— $
— $
79.8
19.7
99.5
258.2
18.2
$ 276.4
85.7
17.9
$ 103.6
215.4
26.6
$ 242.0
—
944.7
310.9
$ 1,255.6
currency contracts (4)
$
1.6
Outflow
Inflow
Swap derivatives on total
long-term debt (5)
Embedded foreign currency
derivatives (6)
Equity swap agreement
$ 1,380.4
(1,375.8)
$ 1,140.5
(1,139.3)
$ 167.1
(165.7)
$
63.9
(62.2)
$
$
8.2
(8.1)
$
0.7
(0.5)
—
—
(16.0)
(19.0)
(4.1)
(2.6)
(2.1)
(2.1)
(2.1)
(6.0)
(1.8)
(3.0)
(19.2)
$
$ 2,000.6
(1.8)
(3.0)
(19.2)
$
$ 2,672.2
(1.5)
(3.0)
(7.4)
$
$ 706.9
$
$
(0.3)
—
(1.5)
98.0
—
—
(0.4)
$
$ 276.0
—
—
(2.0)
$
$ 101.6
—
—
(1.9)
$
$ 240.1
—
—
(6.0)
$
$ 1,249.6
(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.
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.
CAE Financial Report 2018 | 97
Notes to the Consolidated Financial Statements
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 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.
The consolidated forward foreign currency contracts outstanding are as follows:
(amounts in millions, except average rate)
Currencies (sold/bought)
USD/CDN
Less than 1 year
Between 1 and 3 years
Between 3 and 5 years
CDN/EUR
Less than 1 year
Between 1 and 3 years
EUR/CDN
Less than 1 year
Between 1 and 3 years
Between 3 and 5 years
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
Other currencies
Less than 1 year
Between 1 and 3 years
Total
2018
Notional
Amount
(1) Average Notional
Rate Amount
2017
(1) Average
Rate
$ 572.2
131.6
20.2
40.1
—
125.6
2.5
0.2
72.4
19.4
—
33.4
—
132.3
5.8
31.0
12.8
139.6
12.3
$ 1,351.4
0.79
0.78
0.80
1.57
—
0.65
0.63
0.59
0.56
0.57
—
1.80
—
1.28
1.29
0.71
0.76
$ 567.7
158.5
8.6
33.3
15.2
79.7
4.9
—
116.3
9.9
0.1
25.7
3.1
130.0
8.7
76.8
11.1
—
—
111.1
19.6
$ 1,380.3
0.74
0.77
0.77
1.45
1.45
0.69
0.67
—
0.58
0.55
0.51
1.73
1.74
1.32
1.33
0.76
0.69
—
—
(1) Exchange rates as at the end of the respective fiscal years were used to translate amounts in foreign currencies.
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 (2017 – one) USD to GBP foreign currency swap agreement as cash flow hedge. The currency swap agreement has an outstanding
notional amount of US$1.1 million (£0.6 million) (2017 – US$5.7 million (£2.8 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 US$127.0 million
($130.5 million) (2017 – US$127.0 million ($130.5 million)) and US$98.0 million ($100.7 million) (2017 – US$98.0 million ($100.7 million))
corresponding to the two tranches of the private placement until December 2024 and December 2027 respectively.
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.
98 | CAE Financial Report 2018
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.
Notes to the Consolidated Financial Statements
2018
2017
USD
Net
Income
4.6
$
(3.3)
$
OCI
$ (17.3)
$ (10.6)
€
Net
Income
0.6
$
0.2
$
OCI
(1.6)
(0.8)
$
$
GBP
Net
Income
(0.3)
$
(0.5)
$
OCI
(1.6)
(1.7)
$
$
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, 2018, the Company has entered into two (2017 – two) interest rate swap agreements with one (2017 – one) financial
institution for a total notional value of $2.2 million (2017 – $10.7 million). After considering these swap agreements, as at March 31, 2018,
88% (2017 – 90%) 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 2018, a 1% increase in interest rates would decrease the Company’s net income by $1.2 million (2017 – $1.3 million) and decrease
the Company’s OCI by $0.3 million (2017 – $0.5 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 four (2017 – two) 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, 2018,
the equity swap agreements covered 2,150,000 common shares (2017 – 1,850,000) of the Company.
Hedge of net investments in foreign operations
As at March 31, 2018, the Company has designated a portion of its senior notes totalling US$372.8 million (2017 – US$372.8 million)
and a portion of the obligations under finance lease totalling US$8.6 million (2017 – US$9.9 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, 2018, the Company had outstanding letters of credit and performance guarantees in the amount of $223.4 million
(2017 – $238.2 million) issued in the normal course of business. These guarantees are issued under the Revolving Credit Facility and
the Performance Securities Guarantee (PSG) provided by Export Development Corporation (EDC).
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.
CAE Financial Report 2018 | 99
Notes to the Consolidated Financial Statements
Advance payment
Contract performance
Lease obligations
Financial obligations
Other
$
2018
56.7
39.6
36.2
88.7
2.2
$ 223.4
$
2017
64.3
47.7
35.3
88.1
2.8
$ 238.2
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 $11.2 million (2017 – $11.6 million), of which $7.2 million matures in fiscal year 2020 and $4.0 million
in fiscal year 2023. Of this amount, as at March 31, 2018, $9.2 million is recorded as a deferred gain (2017 – $10.0 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 30 – 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.
Civil Aviation
Training Solutions
2017
$1,556.9
2018
$ 1,629.7
Defence
and Security
2017
$ 1,036.9
2018
$ 1,085.1
2018
$ 115.2
Healthcare
2017
$ 110.7
2018
$ 2,830.0
Total
2017
$ 2,704.5
99.1
37.5
2.6
102.6
37.6
2.5
19.1
30.8
0.8
17.6
40.2
1.4
2.6
10.5
—
9.2
3.6
—
—
(0.1)
31.4
324.5
39.6
273.2
11.0
127.7
12.1
120.4
—
8.8
2.6
11.3
0.1
0.4
—
6.6
120.8
78.8
3.4
122.8
89.1
4.0
9.1
4.0
42.4
461.0
51.7
400.2
External revenue
Depreciation and amortization
Property, plant and equipment
Intangible and other assets
Write-downs of inventories – net
Write-downs (reversals of write-downs)
of accounts receivable – net
After tax share in profit of
equity accounted investees
Segment operating income
100 | CAE Financial Report 2018
Capital expenditures which consist of additions to non-current assets (other than financial instruments and deferred tax assets), by
segment are as follows:
Notes to the Consolidated Financial Statements
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, integration and acquisition costs
Operating profit
Assets and liabilities employed by segment
2018
$ 162.0
49.2
10.0
$ 221.2
2017
$ 145.3
122.7
6.0
$ 274.0
2018
$ 461.0
—
$ 461.0
2017
$ 400.2
(35.5)
$ 364.7
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:
Assets employed
Civil Aviation Training Solutions
Defence and Security
Healthcare
Assets not included in assets employed
Total assets
Liabilities employed
Civil Aviation Training Solutions
Defence and Security
Healthcare
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:
Revenue
Simulation products
Training and services
2018
2017
$ 2,988.2
1,437.9
253.5
1,039.6
$ 5,719.2
$ 891.8
455.5
42.0
1,963.3
$ 3,352.6
$ 2,821.1
1,363.6
264.0
906.1
$ 5,354.8
$ 835.8
482.4
39.7
1,915.9
$ 3,273.8
2018
2017
$ 1,281.7
1,548.3
$ 2,830.0
$ 1,208.7
1,495.8
$ 2,704.5
CAE Financial Report 2018 | 101
Notes to the Consolidated Financial Statements
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.
Revenue from external customers
Canada
United States
United Kingdom
Germany
Netherlands
Other European countries
United Arab Emirates
China
Other Asian countries
Australia
Other countries
Non-current assets other than financial instruments and deferred tax assets
Canada
United States
Brazil
United Kingdom
Luxembourg
Netherlands
Other European countries
Malaysia
Other Asian countries
Other countries
2018
2017
$ 253.6
1,049.7
232.8
95.6
95.8
337.6
102.8
220.0
289.5
52.7
99.9
$ 2,830.0
$ 269.9
981.3
270.2
83.8
88.7
320.4
70.5
158.5
321.2
65.0
75.0
$ 2,704.5
2018
2017
$ 904.6
946.1
118.1
250.3
194.1
223.6
324.8
197.1
149.2
82.1
$ 3,390.0
$ 1,051.1
988.1
124.9
218.0
182.9
159.0
274.0
0.1
109.0
74.2
$ 3,181.3
NOTE 31 – 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:
Name
AACE Vietnam Limited Liability Company(1)
CAE Kuala Lumpur Sdn Bhd(1)
Asian Aviation Centre of Excellence (Singapore) Pte Ltd(1)
CAE (UK) plc
CAE (US) Inc.
CAE Aircrew Training Services plc
CAE Australia Pty Ltd.
CAE Aviation Services Pte 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 CFT B.V.
102 | CAE Financial Report 2018
Country of incorporation
Vietnam
Malaysia
Singapore
United Kingdom
United States
United Kingdom
Australia
Singapore
Netherlands
Chile
Peru
Brunei
Netherlands
Belgium
Denmark
Hong Kong
Norway
Sweden
Netherlands
% equity
interest
2018
100.0%
100.0%
100.0%
100.0%
100.0%
76.5%
100.0%
100.0%
100.0%
100.0%
100.0%
60.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
% equity
interest
2017
50.0%
50.0%
50.0%
100.0%
100.0%
76.5%
100.0%
100.0%
100.0%
100.0%
100.0%
60.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
Investments in subsidiaries consolidated in the Company’s financial statements (continued):
Notes to the Consolidated Financial Statements
Name
CAE CFT Korea Ltd.
CAE Civil Aviation Training Solutions, Inc.
CAE Electronik GmbH
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 Holdings Limited
CAE Luxembourg Acquisition S.à r.l.
CAE Luxembourg Financing S.à r.l.
CAE Maritime Middle East LLC
CAE Middle East L.L.C.
CAE Military Aviation Training Inc.
CAE New Zealand Pty Ltd.
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 Limited
Parc Aviation Engineering Services Ltd
Parc Aviation UK Ltd
Parc Interim Limited
Presagis Canada Inc.
Presagis Europe (S.A.)
Presagis USA Inc.
Servicios de Instrucción de Vuelo, S.L.
SIM-Industries Brasil Administracao de Centros de Treinamento Ltda.
SIV Ops Training, S.L.
(1)These entities became subsidiaries during the third quarter of fiscal 2018 (Note 3).
Country of incorporation
Korea
United States
Germany
Luxembourg
Malaysia
Mexico
Portugal
Canada
United States
United Kingdom
India
Australia
Canada
Luxembourg
Luxembourg
United Arab Emirates
United Arab Emirates
Canada
New Zealand
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
United Kingdom
Ireland
Canada
France
United States
Spain
Brazil
Spain
% equity
interest
2018
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%
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%
100.0%
80.0%
100.0%
80.0%
% equity
interest
2017
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%
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%
100.0%
100.0%
80.0%
100.0%
80.0%
CAE Financial Report 2018 | 103
Notes to the Consolidated Financial Statements
Investments in joint ventures accounted for under the equity method:
Name
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, LLC
Emirates-CAE Flight Training LLC
Flight Training Alliance GmbH (JV)
HATSOFF Helicopter Training Private Limited
HFTS Helicopter Flight Training Services GmbH
JAL CAE Flight Training Co. Ltd.
National Flying Training Institute Private Limited
Pegasus Ucus Egitim Merkezi A.S.
Pelesys Learning Systems Inc.
Philippine Academy for Aviation Training Inc
Rotorsim s.r.l.
Rotorsim USA LLC
Zhuhai Free Trade Zone Xiang Yi Aviation Technology Company Limited
Zhuhai Xiang Yi Aviation Technology Company Limited
Country of incorporation
Netherlands
Korea
India
Brazil
Australia
Australia
United States
United Arab Emirates
Germany
India
Germany
Japan
India
Turkey
Canada
Philippines
Italy
United States
China
China
% equity
interest
2018
50.0%
50.0%
50.0%
50.0%
50.0%
47.1%
49.0%
49.0%
50.0%
50.0%
25.0%
50.0%
51.0%
49.9%
45.0%
40.0%
50.0%
50.0%
—
—
% equity
interest
2017
50.0%
50.0%
50.0%
50.0%
50.0%
47.1%
49.0%
49.0%
50.0%
50.0%
25.0%
50.0%
51.0%
49.9%
—
20.0%
50.0%
50.0%
49.0%
49.0%
Acquisition of 45% interest in Pelesys
The Company purchased 45% of the shares of Pelesys, a global leader in the provision of aviation training solutions and courseware, for
a cash consideration of $7.7 million. This joint venture investment is accounted under the equity method. The transaction includes a series
of put and call options over the remaining 55% equity interest. The options are exercisable on pre-determined dates, at fair value subject
to a pre-defined cap and floor.
In fiscal 2018, the unrecognized share of losses of joint ventures for which the Company ceased to recognize when applying the equity
method was $7.0 million (2017 – $1.7 million (profits)). As at March 31, 2018, the cumulative unrecognized share of losses for these entities
was $15.9 million (2017 – $8.9 million) and the cumulative unrecognized share of comprehensive loss of joint ventures was $17.1 million
(2017 – $10.5 million).
NOTE 32 – RELATED PARTY TRANSACTIONS
The following table presents the Company’s outstanding balances with its joint ventures:
Accounts receivable (Note 4)
Contracts in progress: assets
Other assets
Accounts payable and accrued liabilities (Note 9)
Contracts in progress: liabilities
$
2018
39.5
14.5
25.4
9.7
3.9
$
2017
54.0
14.2
27.4
15.3
25.9
Other assets include a finance lease receivable of $9.3 million (2017 – $12.4 million) maturing in October 2022 and carrying an interest
rate of 5.14% per annum, a loan receivable of $8.9 million (2017 – $8.4 million) maturing June 2026 and carrying a fixed interest rate of
ten years Euro swap rate plus a spread of 2.50%, and a long-term interest-free account receivable of $7.2 million (2017 – $6.6 million)
with no repayment term. As at March 31, 2018 and 2017 there are no provisions held against the receivables from related parties.
104 | CAE Financial Report 2018
The following table presents the Company’s transactions with its joint ventures:
Revenue
Purchases
Other income
Notes to the Consolidated Financial Statements
$
2018
65.2
2.6
1.5
$
2017
71.5
4.0
1.8
In addition, during fiscal 2018, transactions amounting to $0.8 million (2017 – $1.4 million) were made, at normal market prices, with
organizations for which some of the Company’s 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:
Salaries and other short-term employee benefits
Post-employment benefits – defined benefit plans(1)
Share-based payments
(1) Includes net interest on employee benefits obligations.
2018
7.0
1.8
17.8
26.6
$
$
2017
7.1
1.3
16.8
25.2
$
$
CAE Financial Report 2018 | 105
Board of Directors and Officers
BOARD OF DIRECTORS
OFFICERS
James F. Hankinson
Chair of the Board
CAE Inc.
Toronto, Ontario
Margaret S. (Peg) Billson
2
Corporate Director
Albuquerque, New Mexico
The Honourable Michael M.
Fortier, P.C.
1*
Vice Chair
RBC Capital Markets
Town of Mount Royal, Québec
Alan N. MacGibbon 1, 2*
Corporate Director
Toronto, Ontario
The Honourable John Manley,
P.C., O.C.
1, 3
President and Chief Executive
Officer
Business Council of Canada
Ottawa, Ontario
François Olivier
2
President and Chief
Executive Officer
Transcontinental Inc.
Montréal, Québec
Marc Parent
President and Chief
Executive Officer
CAE Inc.
Montréal, Québec
Michael E. Roach
2
Corporate Director
Montreal, Québec
Gen. Peter J. Schoomaker U.S.A.
(Ret.)
1, 3
Corporate Director
Tampa, Florida
Andrew J. Stevens
1, 3*
Corporate Director
Gloucestershire, UK
Katharine B. Stevenson
2, 3
Corporate Director
Toronto, Ontario
James F. Hankinson
Chair 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
(*) indicates Chair of the Committee
106 | CAE Financial Report 2018
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 financier, s’adresser à
investisseurs@cae.com.
2018 ANNUAL MEETING
The Annual Shareholders Meeting will be
held at 11 a.m. (Eastern Time), Tuesday,
August 14, 2018 at the CAE Head Office
(Entrance 4 - Auditorium), 8585 Côte-de-
Liesse, Saint-Laurent, Québec, Canada.
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
Registered shareholders of
CAE Inc. who are resident in
Canada or the United Kingdom
and 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
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 VimedixAR,
CAE Juno, CAE Lucina AR,
CAE Rise, CAE Vïvo, Dynamic
Synthetic Environment (DSE),
CAE 7000XR Series, CAE 3000
Series, CAE 600XR Series FTD.
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
charters
− Position descriptions for the Board
Chair, the Committee Chairs and
the Chief Executive Officer
− CAE’s Code of Business Conduct
− Corporate Governance Guidelines
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.
CAE Financial Report 2018 | 107
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, strategic partnerships and long-term contracts,
procurement and original equipment manufacturer (OEM) leverage, warranty or other product-related claims, product
integration and program management, protection of our intellectual property, third-party intellectual property, loss of key
personnel, labour relations, environmental matters, claims arising from casualty losses, integration of acquired businesses,
our ability to penetrate new markets, U.S. foreign ownership, control or influence mitigation measures, length of sales
cycle, seasonality, continued returns to shareholders, information technology systems including cybersecurity risk, data
privacy risk and our reliance on technology and third-party providers, and risks relating to the market such as foreign
exchange, availability of capital, pension plan funding, doing business in foreign countries including corruption risk, political
instability 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 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.
108 | CAE Financial Report 2018
Training partner of choice.
CAE is a global leader in training for the civil aviation, defence and
security, and healthcare markets. Backed by a record of more than
70 years of industry firsts, we continue to help define global training
standards with our innovative virtual-to-live training solutions to
make flying safer, maintain defence force readiness and enhance
patient safety. We have the broadest global presence in the industry,
with over 8,500 employees, 160 sites and training locations in
over 35 countries. Each year, we train more than 120,000 civil and
defence crewmembers and thousands of healthcare professionals
worldwide.
cae.com
Follow us on Twitter @CAE_Inc.
Check out our Annual Activity and
Corporate Social Responsibility Report!
Our Annual Activity and Corporate Social Responsibility Report
is available online. It consolidates information on our company
strategy, fiscal year 2018 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 business strategy
and activities.
cae.com/ActivityReport
As an eTree member, CAE Inc. is committed to meeting shareholder needs
while being environmentally friendly. For each shareholder that receives
electronic copies of shareholder communications, CAE will plant a tree
through Tree Canada, the leader in Canadian urban reforestation. To date
CAE has helped plant 5,267 trees.
FSC® Mix certified paper containing 30% post-consumer and 70% virgin fibre
Contains FSC® certified post-consumer and 70% virgin fibre
Certified EcoLogo and FSC® Mixed Sources
Certified Ecologo
Manufacturing using biogas energy
Manufactured using biogas energy
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